LONDON'S FINANCIAL POSITION

October, 1917

London after the War--A German View--The Rocks Ahead--Our RelativePosition secure--Faulty Finance--The Strength we have shown--TheNature and Limits of American Competition--No other likely Rivals.

Will the prestige of the London money market be maintained when thewar is over? This is a question of enormous importance, not onlyto every one who works in and about the City, but to all who areinterested in the maintenance and increase of England's wealth. Likeall other questions about what is going to happen some day, the answerto it will depend to a very great extent on what happens between thepresent moment and the return of peace. To arrive at an answer we havefirst to consider on what London's financial prestige has been basedin the past, and on this subject we are able to cite in evidence theopinion of an enemy. Our own views about the reasons which gave usfinancial eminence may well be coloured by national and patrioticprejudice, but when we take the opinion of a German we may be prettysure that it is not warped by any predisposition in favour of Englishcharacter and achievement.
A little book published this year by Messrs. Macmillan and Co.,entitled "England's Financial Supremacy," contains a translation ofa series of articles from the Frankfurter Zeitung, and from thiswitness we are able to get some information which may be valuable, andis certainly interesting.

The basis of England's financial supremacy is recapitulated as followsby this devil's advocate:--
"The influence of history, a mighty empire, a cosmopolitan StockExchange, intimate business connections throughout the whole world,cheap money, a free gold market, steady exchanges, an almost unlimitedmarket for capital and an excellent credit system, an elastic systemof company legislation, a model Insurance organisation and the help ofGermans, these are the factors that have created England's financialsupremacy. Perhaps we have omitted one other factor, the errors andomissions of other nations."

Coming closer to detail, our critic says, with regard to theinternational nature of the business done on the London StockExchange:--
"In recent years London had almost lost its place as the busiest stockmarket in the world. New York, as a rule, Berlin on many occasions,could show more dealings than London. But there was no denying theinternational character of its business. This was due to England'sposition of company promoter and money lender to the world; to the wayin which new capital was issued there; to its Stock Exchange rules,so independent of legislative and Treasury interference; to theinternational character of its Stock Exchange members, and to thecosmopolitan character of its clients,"

On the subject of our Insurance business and the fair-mindedness andquickness of settlement with which it was conducted, we can cite thesame witness as follows:--
"Insurance, again, represented by the well-known organisation ofLloyds, which in form is something between a stock exchange and aco-operative partnership, is nowhere more elastic and adaptable thanin London. It must be said, to the credit of Lloyds, that anyoneasking to be insured there was never hindered by bureaucraticrestrictions, and always found his wishes met to the furthest possibleextent. The agencies of Lloyds abroad are also so arranged that boththe insured and the insurer can have their claims settled quickly andequitably."

But one of the most remarkable tributes to a quality with whichEnglishmen are seldom credited, and one of the frankest confessions ofa complete absence of this quality in our German rivals, is containedin the following passage:--

"A further bad habit, harmful to our economic development, isnarrow-mindedness. This, too, is very prevalent in Germany--andelsewhere as well. And this is not surprising. Even among thegeneration which is active to-day, the older members grew up at a timewhen possibilities of development were restricted and environment wasnarrow. With commendable foresight many of these older men havefreed themselves from this petty spirit, and are second to none inenterprise and energy. Germany can be as proud of its 'captains ofindustry' as America itself. But many commercial circles in Germanyare still unable to free themselves from these shackles. The relationsbetween buyer and seller are still often disturbed by petty quibbling.In those industries where cartels and syndicates have not yet beenformed, too great a role is played by dubious practices of many kinds,by infringements of payment stipulations, by unjustifiable deductions,etc., while, on the other hand, the cartels are often too ruthlessin their action. In this field we have very much to learn from theEnglish business man. Long commercial tradition and internationalbusiness experience have taught him long ago that broad-mindedness isthe best business principle. Look at the English form of contract, themethods of insurance companies, the settlement of business disputes!You will find no narrow-mindedness there. Tolerance, another qualitywhich the German lacks, has been of great practical advantage to theEnglishman. Until recently the City has never resented the settlementof foreigners, who were soon able to win positions of importancethere. Can one imagine that in Berlin an Italian or a South American,with very little knowledge of the German language, would be not onlyentrusted with the management of leading banks and companies, butwould be allowed in German clubs to lay down--in their faultyGerman--the law as to the way in which Germany should be developed?Impossible! Yet this could be seen again and again in England, andthe country gained greatly by it. If the English have now developeda hatred of the foreigner, it only means that the end of England'ssupremacy is all the nearer."

According to our German critic the great fabric that has been built upon these characteristics and qualities is threatened with ruin by thewar; and the heritage which we are supposed to be losing is to fall,by some process which is not made very clear, largely into the handsof Berlin. In order that we may not be accused of taking the laudatoryplums out of this German pudding and leaving out all criticisms andaccusations, let us quote in full the passage in which he dances inanticipation on London's corpse:--

"Let us sum up. England's reputation for honest business dealing andfor trustworthy administration has suffered. Her insular inviolabilityhas been put in question. The ravages of war have undermined theachievements of many generations. Her free gold market has brokendown. The flow of capital towards London will fall off, for those whocannot borrow there will no longer send deposits. The surplus shownin her balance-sheet will contract. Foreign trade will also decrease.Hand in hand with this fall, free trade, that mighty agent in thedevelopment of England's supremacy, will, in all probability, giveplace to protection. Stock Exchange business will grow less. Rates ofinterest will be permanently higher."

How much truth is there in all this? Has our reputation for honestdealing and for trustworthy administration suffered? Surely not in theeyes of any reasonable and unprejudiced observer. In the course of thegreatest war in history, fought by Germany with weapons which haveinvolved the violation of the most sacred laws of humanity andcivilisation, England has acted with a respect for the interests ofneutrals which has been severely criticised by impatient observers athome. As for our "insular inviolability" having been put in question,it certainly has not, so far, suffered any serious damage. Our Fleethas defended us from invasion with complete success, and the damagedone by marine and aerial raiders to our property on shore isnegligible. Our free gold market is said to have broken down. Theproof of the pudding is in the eating. Germany, when the war began,immediately relieved the Reichsbank from any obligation of meetingits notes in gold, and frankly went on to a paper basis. England hasalready shipped well over 200 millions in gold to America to financeher purchases there and those of her Allies.

It may be true that capital will not flow to London if London is notin a position to lend, but we see no reason why London should not beable to resume her position as an international money lender, notperhaps immediately on the declaration of peace, but as soon as theaftermath of war has been cleared away and the first few months ofdifficulty and danger have been passed. The prophecy that foreigntrade will decrease may also be true for a time owing to thedestruction of merchant shipping that the war is causing. Thispossibility, however, may be remedied between now and the end of thewar if the great programmes of merchant shipbuilding which have beenundertaken by the British and American Governments are duly carriedout. In any case, even if foreign trade decreases, there is no reasonwhatever to expect that England's will decrease faster than that ofother nations.

In all these problems we have to look for the relative answer and toconsider not whether England has suffered by the war, for it is mostobvious that she has, but whether she will have been found to havesuffered more than any competitor who may threaten her after-warposition.
"Free trade," says our German Jeremiah, "that mighty agent in thedevelopment of England's supremacy, will, in all probability, giveplace to protection." We venture to think that it will be recognisedthat the Free Trade policy of the past gave us a well-distributedwealth which was an invaluable weapon in time of war, and that anyattempt to impose import duties when peace comes will be admitted,even by the most ardent Tariff Reformers, as untimely when there islikely to be a world-wide scramble for food and raw materials, and theone object of every nation will be to get them wherever they can andas cheaply as they can.

If Stock Exchange business will be less, though this does not by anymeans follow, there is no reason why it should be relatively lesshere than in other centres. As to rates of interest being permanentlyhigher, the same answer applies. It may be true, but there is noreason why they should be relatively higher in London than elsewhere;and, if they are high, it will be because there will be a great demandfor capital, which will mean a great trade expansion; both in theprovision of capital and in meeting the demands of trade expansionEngland will be doing what she has done with marked success in thepast and can, if she works in the right way now and after the war, doagain with equal and still greater success.

There is, however, a danger that threatens our financial positionafter the war, on the subject of which our German critic is discreetlysilent, because that danger threatens the position of Germany verymuch more emphatically. It consists in the way in which our Governmentis at present meeting the needs of war finance, not by compellingeconomy on the civilian population through taxation and borrowingdirect from investors, but by manufacturing currency for the purposesof the war by means of the printing press and the banking machinery.The effect of this policy is seen in the enormous mass of Treasurynotes with which the country has been flooded. Their total is nownearly 180 millions or perhaps 100 millions more than the gold whichthey were originally designed to replace.

It is also to be seen in the great increase in banking deposits whichhas been a feature of our financial history since the war began. Somepeople regard this feature as a phenomenal proof of the growth of ourwealth during the war. I am afraid there is little foundation for thispleasant assumption, for these new deposits have been called intobeing by the banks subscribing to Government securities, whether WarLoan, Treasury Bills, Exchequer Bonds or Ways and Means advances orlending their customers the wherewithal to do so. By this processthe balance-sheets of the banks are swollen on both sides, by theGovernment securities and advances to customers among the assets,against which the banks create new deposits, so giving the communityas a whole the right to draw more cheques.

Every time the bank makes an advance it gives the borrower a credit inits books, that is to say, the right to draw cheques to that amount;the borrower draws on the credit and hands it to any one to whom heowes money; but as long as the advance is outstanding there will be adeposit out against it in the books of some bank or another.

It is an easy way for the Government to finance the war by getting thebanks to manufacture money for it. Nobody feels any poorer for theprocess, in fact, those who have new money in their pockets or intheir bank balance feel richer, but the result of thus multiplyingcurrency without any increase in the supply of goods and services tobe bought inevitably helps the rise in prices which makes the warcostly, puts the burden of it on to the wrong shoulders, and likewisecheapens the value of the English pound as measured in othercurrencies. This is why the evils involved by this process become sorelevant to the question now at issue.

If the Government is allowed to go on financing the war by increasingthe currency with the very reluctant help of the bankers, thedifficulties of maintaining our gold standard and keeping theexchanges in favour of London will be very greatly magnified whenthe war is over and our gold reserves are no longer protected by thesubmarines and the high cost of shipping gold that they produce. Ittherefore follows that all who have the true interests of the City atheart should use all the influence they can to force the Government toadopt a sounder financial policy before it is too late.

It is true that our war finance has hitherto been sounder than that ofany other warring Power, but it has fallen very short if we apply therough test of the proportion of the cost of war borne out of taxationand compare our performance with the results achieved by our ancestorsin the Napoleonic and Crimean wars.

If we have done better than France, Italy, Russia and Germany in thisrespect, it must also be remembered that the financial prestige whichthese countries had to maintain was not nearly so great and wellestablished as ours, with the possible exception of France; andFrance, being exposed to the ravages of a ruthless invader, was in aposition which put special obstacles in the way of the canons of soundfinance.

If, then, there are certain dangers that threaten our financialposition when the war is over, we must remember, on the other hand,that the war has already done a great deal to maintain our financialprestige and raise it to a height at which it never stood before.

When the war began we were expected to finance the Allies, to keep theseas clear and put a small Expeditionary Force to support the leftflank of the French Army, and to do these things during a contestwhich was expected by the consensus of expert opinion to last not morethan a few months. All these things we accomplished, and we werethe only Power at war which did actually accomplish all that it wasexpected and asked to do. More than that, we also undertook a greattask which was not in our programme; we created a great army on aContinental scale, and, at the same time, continued to carry out theother tasks which had been assigned to us.

All these things we did, and that we should have done them wasevidence of economic strength and adaptability which have astonishedthe world. To have financed the Allies and ourselves as long as we didwould have been comparatively easy if our population could have beenleft at work to turn out the stuff and services, the provision ofwhich are implied by financing; but for us to have been able to do itand at the same time to improvise an army which is now consistentlyand regularly beating the Germans is an achievement which willinevitably raise the world's opinion of our economic strength, onwhich financial prestige is ultimately based.

But, as it has been said, in discussing this question we have to lookat it all the time from the relative point of view. How will ourprestige be when the war is over, not as compared with what it wasbefore the war, but as compared with what any other rival in any otherpart of the world can show? Here we have to acknowledge at once,freely and frankly, that, as compared with New York, we shall havegone backward.

America will have been enormously enriched by the war, which we shallcertainly have not. America will have been opening up channels ofinternational trade and international finance, and so New York willhave been gaining at the expense of London. It is certain that whenthe war is over America's dependence upon London for credits againstthe shipments of goods to and from her shores will have been verygreatly lessened, if not altogether a thing of the past.

This change would have happened any way, war or no war, but it hasbeen greatly quickened by the war. Before the war America was alreadymaking arrangements, under her new banking system, to promote themachinery for acceptance and discount, in order that goods sent to herfrom foreign countries should be financed by bills drawn on Americanbanks and houses in dollars instead of on English banks and houses insterling.

Apart from this development, which would have happened in any case, itremains to be seen how far New York will be in a position to act asa rival of London as the world's financial centre. The internalresources and potentialities of America are so enormous, and there issuch a vast amount of work to be done in developing them and bringingthem to full fruition, that it does not at all follow that Americawill yet be inclined to take the position in international trade andfinance which will one day surely be hers, when she has done all thework that is waiting to be done in her own back premises.

America has a new banking and monetary system on trial which has metthe difficult problems of the war with great success. These problems,however, are not nearly as complicated and various as those which arelikely to arise in time of peace. When a nation is turning out anenormous amount of goods for which the rest of the world is preparedto pay any price, her finance is a comparatively simple business. Evennow, when America has assumed the duty of financing a large number ofAllies impoverished by three years of war which have been enrichingher, she is still simplifying the problem by restricting her advancesto the payment for goods bought in America.

That New York will be greatly strengthened by the war, which hasbrought masses of American securities back to the country of originand has put into the hands of American bankers and investors largeblocks of European promises to pay, is as clear as noonday; butwhether when the war is over New York will care to be bothered muchwith problems of international finance remains to be seen. In thefirst place, the claims of her own country upon her financialresources will be insatiable and imperative, In the second place, thebusiness of international finance is carried out on very finely cutterms; and the Americans being accustomed to the fat rates of profitwhich business at home has given them may not care to devote muchattention to the international market, in which the risks are big,the turnover is enormous and the profits very finely cut. It hasbeen remarked by a shrewd observer that the Americans will never dobusiness for a thirty-second.

In the third place, it must be remembered that the geographicalposition of London is more favourable than that of New York as a worldcentre, as the world is at present constituted. England, anchored offthe coast of Europe, is clearly marked as the depot for the entrepottrade of the Old and New Worlds. New York is clearly marked as thecentre for the trade of the Western hemisphere, and it is likelyenough that New York and London, acting together as the financialchiefs of the two hemispheres, may be gradually united into what ispractically one market by the growing ties of mutual interest.

With regard to the position of other possible rivals to London'sposition, it need only be said that they have certainly been weakenedmuch more rapidly than has London during the course of the war. Paris,threatened by the near approach of an invading foe, has inevitablysuffered much more severely than London, and is likely to take longerin recovering the great position as a provider of capital which wasgiven to her by the thrift of the average French citizen. Every oneexpects with confidence to see, when the war is over, a miraculousrecovery in France produced by the same spirit which worked miraclesafter the war of 1871, aided and abetted by the subsequent improvementin man's control over the forces of nature, and also by the deep andworld-wide sympathy which all will feel for France as the champion offreedom who has suffered most severely in its cause during the war.But it is impossible to expect, after what France has suffered, thatshe will be, for some time, in a position seriously to challengeLondon as a financial rival. All Englishmen will hope that the daywhen she will be in a position to challenge us again will comequickly.

As to Berlin, the only other possible rival to London in Europe, verylittle need be said. The German authority quoted above has alreadyshown some of the difficulties with which Berlin has to struggle.He spoke of the narrow-mindedness of German finance, of the "pettyquibbling" which often disturbs the relations between buyer andseller, of the "dubious practices of many kinds, infringements ofpayment stipulations, unjustifiable deductions," etc., and the"ruthless" action of the cartels. He acknowledges that though Germanyhad a gold standard "too much anxiety used to be shown when the goldexport point was reached," and that "it was also feared that to exportgold would incur the wrath of the Reichsbank."

With these disadvantages to struggle against, quoted from the mouth ofa German observer, Germany has also succeeded by her ruthless policyduring the war in earning the deep hostility of the greater part ofmankind. Sentiment probably enters into business relations a good dealmore than most business men admit, and for any country to set out togain the leadership in trade and finance by outraging the feelings ofmost of its possible customers is an extraordinary piece of stupidity.

It seems, then, that apart from the relative weakening of London ascompared with New York, there is very little need for us to fear anyserious change in England's financial position after the war as longas the Government's faulty finance is not allowed too seriously toendanger the position of our gold standard. It is true that we shallnot benefit, as much as we undoubtedly have in the past, from the"help of Germans" in developing our finance. But indirectly theGermans will still be helping us by the great stimulus that the warwill have given us towards efficiency and hard work.

What we have to do in order to secure London's position after the waris to restore as soon as we can the system that had established it inthe century before the war. We have to show the world that, far fromany intention to abandon Free Trade, we mean to take a long stepforward along the line of international activity which has been thesource of our greatness in the past. We want, as soon as possible, toget back that freedom from Government control which has given us suchelasticity and adaptability to our money market, our Stock Exchangeand our Insurance business. A certain amount of Government controlwill inevitably have to continue for a time after the war, but thesooner we rid ourselves of it the sooner we shall restore to theLondon money market those qualities which, after the reputation thatit has for honesty, soundness and straight dealing, were most helpfulin building up its eminence.

Above all, we have to work hard both in finance and industry andcommerce. Finance, which is the machinery for handling claims forgoods and services, can only be active and effective if industry andcommerce are active and effective behind it, turning out the goods andservices to meet the claims that finance creates. A great industrialand commercial output, with severe restriction of unnecessaryconsumption so that a great margin may go into capital equipment, willsoon repair the ravages of war, bring down the price of credit and ofcapital and make London once more the place in which these things aremost cheaply and freely to be bought.

Finally, if we want to restore London as a place in which all thefinancial transactions of the world were centred, we must rememberthat we cannot do so if we restrict the facilities given to foreignersto come here and settle and do business. It is not possible to be aninternational centre with an insular sentiment.