II

LONDON'S FINANCIAL POSITION

_October_, 1917

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


Will the prestige of the London money market be maintained when the
war is over? This is a question of enormous importance, not only
to every one who works in and about the City, but to all who are
interested in the maintenance and increase of England's wealth. Like
all other questions about what is going to happen some day, the answer
to it will depend to a very great extent on what happens between the
present moment and the return of peace. To arrive at an answer we have
first to consider on what London's financial prestige has been based
in the past, and on this subject we are able to cite in evidence the
opinion of an enemy. Our own views about the reasons which gave us
financial eminence may well be coloured by national and patriotic
prejudice, but when we take the opinion of a German we may be pretty
sure that it is not warped by any predisposition in favour of English
character and achievement.

A little book published this year by Messrs. Macmillan and Co.,
entitled "England's Financial Supremacy," contains a translation of
a series of articles from the _Frankfurter Zeitung_, and from this
witness we are able to get some information which may be valuable, and
is certainly interesting.

The basis of England's financial supremacy is recapitulated as follows
by this devil's advocate:--

"The influence of history, a mighty empire, a cosmopolitan Stock
Exchange, intimate business connections throughout the whole world,
cheap money, a free gold market, steady exchanges, an almost unlimited
market for capital and an excellent credit system, an elastic system
of company legislation, a model Insurance organisation and the help of
Germans, these are the factors that have created England's financial
supremacy. Perhaps we have omitted one other factor, the errors and
omissions of other nations."

Coming closer to detail, our critic says, with regard to the
international nature of the business done on the London Stock
Exchange:--

"In recent years London had almost lost its place as the busiest stock
market in the world. New York, as a rule, Berlin on many occasions,
could show more dealings than London. But there was no denying the
international character of its business. This was due to England's
position of company promoter and money lender to the world; to the way
in which new capital was issued there; to its Stock Exchange rules,
so independent of legislative and Treasury interference; to the
international character of its Stock Exchange members, and to the
cosmopolitan character of its clients,"

On the subject of our Insurance business and the fair-mindedness and
quickness of settlement with which it was conducted, we can cite the
same witness as follows:--

"Insurance, again, represented by the well-known organisation of
Lloyds, which in form is something between a stock exchange and a
co-operative partnership, is nowhere more elastic and adaptable than
in London. It must be said, to the credit of Lloyds, that anyone
asking to be insured there was never hindered by bureaucratic
restrictions, and always found his wishes met to the furthest possible
extent. The agencies of Lloyds abroad are also so arranged that both
the insured and the insurer can have their claims settled quickly and
equitably."

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

"A further bad habit, harmful to our economic development, is
narrow-mindedness. This, too, is very prevalent in Germany--and
elsewhere as well. And this is not surprising. Even among the
generation which is active to-day, the older members grew up at a time
when possibilities of development were restricted and environment was
narrow. With commendable foresight many of these older men have
freed themselves from this petty spirit, and are second to none in
enterprise and energy. Germany can be as proud of its 'captains of
industry' as America itself. But many commercial circles in Germany
are still unable to free themselves from these shackles. The relations
between buyer and seller are still often disturbed by petty quibbling.
In those industries where cartels and syndicates have not yet been
formed, 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 ruthless
in their action. In this field we have very much to learn from the
English business man. Long commercial tradition and international
business experience have taught him long ago that broad-mindedness is
the best business principle. Look at the English form of contract, the
methods of insurance companies, the settlement of business disputes!
You will find no narrow-mindedness there. Tolerance, another quality
which the German lacks, has been of great practical advantage to the
Englishman. Until recently the City has never resented the settlement
of foreigners, who were soon able to win positions of importance
there. Can one imagine that in Berlin an Italian or a South American,
with very little knowledge of the German language, would be not only
entrusted with the management of leading banks and companies, but
would be allowed in German clubs to lay down--in their faulty
German--the law as to the way in which Germany should be developed?
Impossible! Yet this could be seen again and again in England, and
the country gained greatly by it. If the English have now developed
a hatred of the foreigner, it only means that the end of England's
supremacy is all the nearer."

According to our German critic the great fabric that has been built up
on these characteristics and qualities is threatened with ruin by the
war; 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 hands
of Berlin. In order that we may not be accused of taking the laudatory
plums out of this German pudding and leaving out all criticisms and
accusations, let us quote in full the passage in which he dances in
anticipation on London's corpse:--

"Let us sum up. England's reputation for honest business dealing and
for trustworthy administration has suffered. Her insular inviolability
has been put in question. The ravages of war have undermined the
achievements of many generations. Her free gold market has broken
down. The flow of capital towards London will fall off, for those who
cannot borrow there will no longer send deposits. The surplus shown
in her balance-sheet will contract. Foreign trade will also decrease.
Hand in hand with this fall, free trade, that mighty agent in the
development of England's supremacy, will, in all probability, give
place to protection. Stock Exchange business will grow less. Rates of
interest will be permanently higher."

How much truth is there in all this? Has our reputation for honest
dealing and for trustworthy administration suffered? Surely not in the
eyes of any reasonable and unprejudiced observer. In the course of the
greatest war in history, fought by Germany with weapons which have
involved the violation of the most sacred laws of humanity and
civilisation, England has acted with a respect for the interests of
neutrals which has been severely criticised by impatient observers at
home. As for our "insular inviolability" having been put in question,
it certainly has not, so far, suffered any serious damage. Our Fleet
has defended us from invasion with complete success, and the damage
done by marine and aerial raiders to our property on shore is
negligible. Our free gold market is said to have broken down. The
proof of the pudding is in the eating. Germany, when the war began,
immediately relieved the Reichsbank from any obligation of meeting
its notes in gold, and frankly went on to a paper basis. England has
already shipped well over 200 millions in gold to America to finance
her purchases there and those of her Allies.

It may be true that capital will not flow to London if London is not
in a position to lend, but we see no reason why London should not be
able to resume her position as an international money lender, not
perhaps immediately on the declaration of peace, but as soon as the
aftermath of war has been cleared away and the first few months of
difficulty and danger have been passed. The prophecy that foreign
trade will decrease may also be true for a time owing to the
destruction of merchant shipping that the war is causing. This
possibility, however, may be remedied between now and the end of the
war if the great programmes of merchant shipbuilding which have been
undertaken by the British and American Governments are duly carried
out. In any case, even if foreign trade decreases, there is no reason
whatever to expect that England's will decrease faster than that of
other nations.

In all these problems we have to look for the relative answer and to
consider not whether England has suffered by the war, for it is most
obvious that she has, but whether she will have been found to have
suffered more than any competitor who may threaten her after-war
position.

"Free trade," says our German Jeremiah, "that mighty agent in the
development of England's supremacy, will, in all probability, give
place to protection." We venture to think that it will be recognised
that the Free Trade policy of the past gave us a well-distributed
wealth which was an invaluable weapon in time of war, and that any
attempt to impose import duties when peace comes will be admitted,
even by the most ardent Tariff Reformers, as untimely when there is
likely to be a world-wide scramble for food and raw materials, and the
one object of every nation will be to get them wherever they can and
as cheaply as they can.

If Stock Exchange business will be less, though this does not by any
means follow, there is no reason why it should be relatively less
here than in other centres. As to rates of interest being permanently
higher, the same answer applies. It may be true, but there is no
reason why they should be relatively higher in London than elsewhere;
and, if they are high, it will be because there will be a great demand
for capital, which will mean a great trade expansion; both in the
provision of capital and in meeting the demands of trade expansion
England will be doing what she has done with marked success in the
past and can, if she works in the right way now and after the war, do
again with equal and still greater success.

There is, however, a danger that threatens our financial position
after the war, on the subject of which our German critic is discreetly
silent, because that danger threatens the position of Germany very
much more emphatically. It consists in the way in which our Government
is at present meeting the needs of war finance, not by compelling
economy on the civilian population through taxation and borrowing
direct from investors, but by manufacturing currency for the purposes
of the war by means of the printing press and the banking machinery.
The effect of this policy is seen in the enormous mass of Treasury
notes with which the country has been flooded. Their total is now
nearly 180 millions or perhaps 100 millions more than the gold which
they were originally designed to replace.

It is also to be seen in the great increase in banking deposits which
has been a feature of our financial history since the war began. Some
people regard this feature as a phenomenal proof of the growth of our
wealth during the war. I am afraid there is little foundation for this
pleasant assumption, for these new deposits have been called into
being by the banks subscribing to Government securities, whether War
Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or
lending their customers the wherewithal to do so. By this process
the balance-sheets of the banks are swollen on both sides, by the
Government securities and advances to customers among the assets,
against which the banks create new deposits, so giving the community
as a whole the right to draw more cheques.

Every time the bank makes an advance it gives the borrower a credit in
its 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 he
owes money; but as long as the advance is outstanding there will be a
deposit 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 the
banks to manufacture money for it. Nobody feels any poorer for the
process, in fact, those who have new money in their pockets or in
their bank balance feel richer, but the result of thus multiplying
currency without any increase in the supply of goods and services to
be bought inevitably helps the rise in prices which makes the war
costly, puts the burden of it on to the wrong shoulders, and likewise
cheapens the value of the English pound as measured in other
currencies. This is why the evils involved by this process become so
relevant to the question now at issue.

If the Government is allowed to go on financing the war by increasing
the currency with the very reluctant help of the bankers, the
difficulties of maintaining our gold standard and keeping the
exchanges in favour of London will be very greatly magnified when
the war is over and our gold reserves are no longer protected by the
submarines and the high cost of shipping gold that they produce. It
therefore follows that all who have the true interests of the City at
heart should use all the influence they can to force the Government to
adopt a sounder financial policy before it is too late.

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

If we have done better than France, Italy, Russia and Germany in this
respect, it must also be remembered that the financial prestige which
these countries had to maintain was not nearly so great and well
established as ours, with the possible exception of France; and
France, being exposed to the ravages of a ruthless invader, was in a
position which put special obstacles in the way of the canons of sound
finance.

If, then, there are certain dangers that threaten our financial
position when the war is over, we must remember, on the other hand,
that the war has already done a great deal to maintain our financial
prestige 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 the
seas clear and put a small Expeditionary Force to support the left
flank of the French Army, and to do these things during a contest
which was expected by the consensus of expert opinion to last not more
than a few months. All these things we accomplished, and we were
the only Power at war which did actually accomplish all that it was
expected and asked to do. More than that, we also undertook a great
task which was not in our programme; we created a great army on a
Continental scale, and, at the same time, continued to carry out the
other tasks which had been assigned to us.

All these things we did, and that we should have done them was
evidence of economic strength and adaptability which have astonished
the world. To have financed the Allies and ourselves as long as we did
would have been comparatively easy if our population could have been
left at work to turn out the stuff and services, the provision of
which are implied by financing; but for us to have been able to do it
and at the same time to improvise an army which is now consistently
and regularly beating the Germans is an achievement which will
inevitably raise the world's opinion of our economic strength, on
which financial prestige is ultimately based.

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

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

This change would have happened any way, war or no war, but it has
been greatly quickened by the war. Before the war America was already
making arrangements, under her new banking system, to promote the
machinery for acceptance and discount, in order that goods sent to her
from foreign countries should be financed by bills drawn on American
banks and houses in dollars instead of on English banks and houses in
sterling.

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

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

That New York will be greatly strengthened by the war, which has
brought masses of American securities back to the country of origin
and has put into the hands of American bankers and investors large
blocks of European promises to pay, is as clear as noonday; but
whether when the war is over New York will care to be bothered much
with problems of international finance remains to be seen. In the
first place, the claims of her own country upon her financial
resources will be insatiable and imperative, In the second place, the
business of international finance is carried out on very finely cut
terms; and the Americans being accustomed to the fat rates of profit
which business at home has given them may not care to devote much
attention to the international market, in which the risks are big,
the turnover is enormous and the profits very finely cut. It has
been remarked by a shrewd observer that the Americans will never do
business for a thirty-second.

In the third place, it must be remembered that the geographical
position of London is more favourable than that of New York as a world
centre, as the world is at present constituted. England, anchored off
the coast of Europe, is clearly marked as the depot for the entrepot
trade of the Old and New Worlds. New York is clearly marked as the
centre for the trade of the Western hemisphere, and it is likely
enough that New York and London, acting together as the financial
chiefs of the two hemispheres, may be gradually united into what is
practically one market by the growing ties of mutual interest.

With regard to the position of other possible rivals to London's
position, it need only be said that they have certainly been weakened
much more rapidly than has London during the course of the war. Paris,
threatened by the near approach of an invading foe, has inevitably
suffered much more severely than London, and is likely to take longer
in recovering the great position as a provider of capital which was
given to her by the thrift of the average French citizen. Every one
expects with confidence to see, when the war is over, a miraculous
recovery in France produced by the same spirit which worked miracles
after the war of 1871, aided and abetted by the subsequent improvement
in man's control over the forces of nature, and also by the deep and
world-wide sympathy which all will feel for France as the champion of
freedom who has suffered most severely in its cause during the war.
But it is impossible to expect, after what France has suffered, that
she will be, for some time, in a position seriously to challenge
London as a financial rival. All Englishmen will hope that the day
when she will be in a position to challenge us again will come
quickly.

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

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

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

What we have to do in order to secure London's position after the war
is to restore as soon as we can the system that had established it in
the century before the war. We have to show the world that, far from
any intention to abandon Free Trade, we mean to take a long step
forward along the line of international activity which has been the
source of our greatness in the past. We want, as soon as possible, to
get back that freedom from Government control which has given us such
elasticity and adaptability to our money market, our Stock Exchange
and our Insurance business. A certain amount of Government control
will inevitably have to continue for a time after the war, but the
sooner we rid ourselves of it the sooner we shall restore to the
London money market those qualities which, after the reputation that
it has for honesty, soundness and straight dealing, were most helpful
in building up its eminence.

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

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