BANKING AND INDUSTRY

Waikato Times, Volume 114, Issue 19125, 9 December 1933, Page 11 (Supplement)

BANKING AND INDUSTRY

(A. W. Kiddy In Spectator.)

IN THE ROOSEVELT PLAN for bringing about better economic conditions In the United States there is muoh which Is of supreme interest to the whole world and not least to the banking community. The tendency to associate industrial depression with a laok of sufficient banking and credit facilities, and to assert that in monetary policy and credit expansion lies the way to restore prosperity, is by no means confined to Socialist critics in this country. In the United States these assertions, indeed, gain some foroe by the fact that bankers are believed to have ministered In some degree to the gamble In Wall Street which resulted in 1929 in the great collapse both in finance and Industry though the extent to which the Federal Reserve system in America is supervised, if not controlled, by the State suggests that the faults may not have been entirely with the rank and file of the hanking community. Inasmuch, however, as the advent of President Roosevelt to power -coincided With a Complete Temporary Collapse of the banking system In America, It is only natural, perhaps, that banking in the United States should for the moment be more vulnerable to orltloism—however 111-In-formed—than 1s the case in this country. In an article which recently appeared in the Economist the writer, when contrasting banking praotice in this and in other countries, and especially in contrasting it with hanking in the United States, expressed the situation admirably when he said: “If the traditions of British hanking had to be summed up in a sentence it would be that the interests of the depositor come first. British bankers always take the view that’ they are dealing with other people’s money, and It is a cardinal rule not only that no risky venture should be embarked upon but that no loan should be made for more than a limited period, which Is measured in months. Bankers say deliberately that It Is not their duty to provide their customers with long-term capital, nor are they willing to risk their customers’ money in the stock markets.” The writer then contrasts this tradition with that of American banking practice, showing, among other things, that whereas Jn England banking Is governed by the Unwritten Law of Banking Praotice, American banks have to comply with the complex provisions of numerous State and Federal laws. The weakness of this, says the writer In the Economist Is “that it tempts bankers to conform to the letter and not to the spirit of the law.” Even as regards American banking, however, it must he remembered that there are a number of sound and well-managed hanking institutions in that great country, and only la the latest issue of the Monthly Bulletin of the National City Bank of New York will be found an excellent defence against the criticism of hankers which has been so freely made during the recent years of financial and industrial depression. Indeed, from some of the expressions used one might almost fancy that the writer had been looking over the shoulder of the contributor to the Economist. It seems desirable, says the National City Bank Bulletin “to recall some of the first principles of commercial banking—to wit, that loans should be of comparatively short maturity, be based on strictly commercial transactions, and be self-liquidating in character. Commercial hanks, whose liabilities are Largely Payable at Short Notice are not In a position to tie up their funds for long periods. Nor does It accord with sound hanking practice for them to accept loans involving any considerable element of risk . . . The complaint that bankers are unwilling to make loans except on a ‘sure thing’ Is founded on Ignorance of the proper function of banking. ‘Sure’ loans are precisely the only kind of loans that banks ought to have in their portfolios.” And, later, the National City Bank states with a certain amount of courage, “It is not in the interest of the business community to have credit made too easy. If bank credit is used to supply mercantile and Industrial capital there is danger that it will foster over-development and intensify destructive competition.” The Interesting point about this controversy concerning banking and industry is that if present indications are to bo relied upon, we are likely to see the theory of those who maintain that a Permanent Genuine Trade Revival on sound lines can be brought about by credit expansion, and even inflation, tried out on a big scale In the United States. Indeed, it almost looks as though, In addition, the experiment might also be tried out to the accompaniment of some interesting experiments in the matter of State Socialism, inasmuch as it is part of the National Recovery Administration programme that there- should bo something like a legal fixing of conditions affecting wages

BRITISH AND AMERICAN METHODS.

and hours of working. It is true that one of the objects of the Rocsevelt plan, by raising commodity prices throwexpanded credit, Is to enable farmers and other debtors to discharge some portion of their liabilities; but If the result is to be achieved along the lines of some forced lending by financial institutions, it is rather difficult to see how the debtor position In its entirety can be relieved, inasmuch as the lessening of liabilities on loans In -one direction seems likely to be offset by -the transference of those loan obligations to other sections of the community. At the moment of writing there seems to be a likelihood of some recognition of the Soviet Government by Washington leading to Increased buying orders from Russia in the United States, thereby giving a stimulus to Industry; hut, even so, It would seem that the idea Is to allow Russia to make her purchases out of special credits granted, and not only have o-redits ultimately to he repaid, but as a matter of fact the huge obligations of Europe to the United States, and the large trade halanoe in favour of that country, constitute one of the most formidable obstacles to the restoration of anything like an Equilibrium In the Foreign Exchanges. Meanwhile, it Is Instructive to note that in this country, where no question of currenoy Inflation has arisen, and where there has been no ehange In hanking methods or in banking practice, a greater feeling of confidence, together with reliable indications of -some recovery in trade, has been notioeable during recent months. To what cause then must he attributed such improvement as has taken place—an improvement reflected in the better figures of unemployment, In the trade returns themselves, in the traffics of English railways and in the actual results of many Industrial ooncern-s? It is always as difficult to place the finger confidently upon any one definite oause of Improvement as It is to dogmatise with regard to a main cause of depression. Nevertheless, I suggest that there are one or two undisputed facts which may at least acoount, to some extent,-for the rather better state of things, and they certainly have nothing to do with any change In-our banking methods, concerning which it must he said in passing that -the soundness of our banking system, as tested during some Years of Exceptional Distress in many parts of the world, is one explanation of the feeling of -confidence here, a confidence reflected not merely in looal sentiment hut in the extent to which foreign countries have endeavoured to place balances in London. In the first place, however, I think that thei slight recovery which has taken place In industry -here, and indeed In some other countries, must be attributed to the natural upward reaction from the conditions of extreme depression. A rally, Jn fact, was overdue. In the second place and in view' of the fact that our improvement has been marked during the past two years, it is impossible to forget that this period has coincided with a recovery in our national finances and the ro-establishment of a balanced Budget. In the United States Budget deficits have been stupendous, and in. France and some other countries they have been sufficiently serious. In the third place, there is no doubt that much has been done here in establishing greater efficiency in industry, In -bringing about more economical working relations between -competitors in some of the stap'ble industries and in cutting out dead wood in the shapd of excessive -capital. In the fourth place, -however, some recognition must perhaps also be made of what may be termed Legitimate Credit Expansion In this country. The expansion has been legitimate in the sense that It has been largely natural and the result of easy money following upon the prolonged trade depression. This, together with the British Government’s successful conversion operations of debt, has had the effect -of raising prices., of Investment securities, which, In -turn, has enabled many borrowers, including Industrial companies, to convert high Interest debt charges Into lower interestbearing obligations, thereby, of course, reducing working costs in industry. Conditions have, -of -course, been wholly unfavourable to the banks from the profit-earning point of view, and have Involved a larger measure of employment of their resources In long-dated Government investments than is usually desirable. Nevertheless, and because there has been no departure from sound banking practice, the balancesheets of the banks not only show sufficient liquidity to satisfy tho depositor, but also -give assurance -that the banks are in a position to' -supply all loan facilities that might be required in connection with any expansion of trade activity. If only we could be sure of undisturbed international political relations and of the minimum amount of interference by Governments in all countries with individual industrial and financial enterprises, wo might reckon with some -confidence upon a steady cumulative improvement in world trade.