THE AMERICAN PLAN

Rotorua Morning Post, Volume 3, Issue 714, 14 December 1933, Page 7

THE AMERICAN PLAN

BANKING 8c INDUSTRY A COMPARISON OF METHODS REVEALS INTERESTING FACTS. CREDIT EXPANSION. In the Roosevelt plan for bringing ahout better economic conditions in the United States there is mueh which' is of * supreme interest to the whole world and not least to- the banking community, writes A. W. Kiddy in the Spectator. The tendeney to associate industrial depression with a lack of sufficient banking and eredit faeilities, and to assert that in monetary poliey and eredit expansion lies the way to restore prosperity, is by no means confined to Socialist critics in this country. In th'e United States these assertions, indeed, gain some force ;by the faet ithat 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 through 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 land file of the banking communityf 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 criticism — however ill-inf ormed — than is the case in this country. In an article which recently appeared in the Economist, th'e writer, when contrasting banking practice in this and in other countries, and especially in contrasting it with banking in the United States, expressed the situation admirably when he said: "If the traditions of British banking had to be summed up in a sentence it would be that th'e 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 qardinal rule not only that no risky venture should he 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, sh'owing, among other things, that whereas in England banking is governed hy the unwritten law of banking practice, 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 be remembered that there are a number of sound and well-managed banking institutions in that great country, and only in the latest issue of the Monthly Bulletin of tfie National City Bank of New York will be found an excePent defence against the criticism of ha.ukers 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 th'e 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 banks, 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 banking 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. 'P.ure' 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 eredit made too easy. If bank eredit is used to supply mercantile and industrial capital there is danger that it will foster over-development and initensify destructive competition."

Trade Revival. The interesting point about this controversy concerning banking and industry is that if present indications are to be relied upon, we are likely to see th'e theory of those who mainitain that a permanent genuine trade revival on sound lines can be brought about by eredit expansion, and even inflation, tried out on a big scale in 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 be something like a legal fixing of conditions affecting wages and hours of working. It is true that one of the objects of the Roosevelt plan, by raising commodity prices through expanded eredit, is to enable farmers and other debtors to dis charge 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 enitirety can be relieved, inasmuch as he 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 wriiting there seems to be likelihood of some recognition of the Soviet Go^ vernment by Washington leading to increased huying orders from Russia in the United States, thereby giving a stimulus to industry; but, even so, it would seem that the idea is to ah low Russia to make h'er purchases out of special credits grantted, and not only have credits ultimately to

be repaid, but as a matter of fact the huge obligations of Europe to the United States, and the large trade balance in favour of that country, eonstitute one of the most formidable obsteles to the restoration of anything like an equilibrium in the foreign exchanges. Feeling in Britain. ;Meanwhile, it is instructive to note that in this country, where no question of currency inflation has arisen, and where there has been no change in banking methods or in banking practice, a greater feeling of confidence, together with reliable indications of some recovery in trade, has been oticeable during recent months. To what cause then must be 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 concerns? It is always as difficult to place the finger confidently upon any one definite cause 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 account, 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 be 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 local sentiment but in the extent to which foreign countries have endeavoured to place balances in London. In the first place, however, I think that the 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, in fact, was overdue. In the second place and in view of the fact that our improvement has been marked during the last two years, it is impossible to forget that this period has coincided with a recovery in our national finances and the re-establishment of a balanced Budget. In the United States Bud" get defieits 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 staple industries and. in cutting' out dead wood in the shape of excessive capital.

Credit Expansion. In the fourth place, however, some recognition must perhaps also be made of what may be termed legitimate credit expansion in this country. Th'e 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 eonversion oper,ations 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 in-terest-bearing 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 th'eir resources in long-dated Government investments than is usually desirable. Nevertheless, and because there has been no departure from sound banking practice, the balance-sheets of the banks not only show sufficient liquidity to satisfy the depositor, but also give assuranee that th'e banks are in a position to supply all loan facilities that might he 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 intererence hy Governments in all countries with individual industrial and financial enterprises, we might reekon with some confidence upon a steady cumulative improvement in world trade.