Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

It was the chance of a century, but New York could not take it. When London called in its credits from other countries, any centre that could have said to these countries, "We will give you the credit that London has cut off, and lend you the money to pay London," would have stepped straight on to London's financial throne and set London a very difficult task to regain it after the war was over. In spite of the large amounts of gold taken from America to Europe before the war, the United States had still a huge store within its borders—some estimates of it ranged up to 400 millions sterling. If the United States had had the courage to use this mountain of metal and let other countries draw on it, London would have had more gold than it knew what to do with, and New York would have had a big slice of London's business. The United States were at peace, and, with all the chief countries of this antiquated hemisphere engaged in the mediæval business of killing one another's citizens and destroying one another's property, the United States might have been expected to leap into the position of economic leadership. But America feared to use its gold, and held on to it as tightly as it could, fearful of internal trouble and a run on its banks if too much of the metal went abroad. In New York, as in most other centres, the question of the moment was, not to take London's business, but to pay what she owed to London and to buy bills on London at skyrocket prices wherever they could be found. The strength of the fat old money-lender, whom the Australian papers, angry with him because he did not lend fast enough, used to call John Bull Cohen, was never more wonderfully made manifest. Strength in money bags is not everything—very far from it—but at least J. B. Cohen can claim that he has made good use of it. He has peopled and fertilized the uttermost ends of the earth with his sons and his capital, and he alone among the nations has had the courage and the homely wit to throw his ports open to all and to tell all the peoples of the world to send their stuff along if it is worth buying. Moreover, he has lately shown that, in spite of all his alleged decadence, he can still tuck up his sleeves on occasion and fight at least as well as anybody else.

So far was New York from being able to supplant London that, as we have seen, the United States had to make special arrangements to tide over the difficulty which London's claims on her had produced....

The American Government found it necessary to ask officials of the British Treasury to come over and help it to find ways and means for meeting part of the debt of the United States to England, without shipping any more American gold. This could only be done by England's giving America some sort of credit to take the place of the finance bills and other forms of accommodation which Lombard Street had withdrawn.

At the same time there is no doubt that New York did some of the business for herself that London had formerly done for her. If she was not in a position to finance other countries, she did make a beginning in financing her own imports. Exporters of goods from South America to the United States who had formerly taken payment by drawing bills on London, and were no longer able to do so, drew on financial institutions in New York instead. Some of these bills were used to make three-cornered payments from South America to London, and a very costly means of payment they were to the debtor, owing to the high rate of discount in New York, and the depreciation of the American dollar as compared with the pound sterling....

It seems likely that this business of financing American trade New York will keep in her own hands to a greater extent than she did before. Probably she would have taken more of it to herself even if there had been no war. Her new banking legislation has included in its aim the establishment of branches of American banks abroad, and the development of acceptance business in New York. It could not be expected that New York would always be content to see the greater part of America's external trade financed with English credit. Her next step will be to endeavor to finance other people's trade, and she is already beginning to set about taking it, being assisted by Lombard Street's shyness in the matter of new acceptance business. If the war should be long continued, its appalling drain on the combatants ought to help her by exhausting the rivals whom she hopes to drive out of the field.

So far, then, from the late crisis having given any evidence of weakness on the part of London, or of any likelihood that she will lose her supremacy as the world's banker, the commanding strength of her portion has been made abundantly manifest. The only weak point was not in her armor but in that of her foreign customers. The question arises whether she was wise in lending so much to debtors who showed such unanimous inability to pay on the due dates. I have heard it contended by a disinterested and well-qualified critic, that the risk run by Lombard Street in allowing bills to be drawn on her from all parts of the world against goods shipped from one country to another, has been shown by the late crisis to be too great to be worth the candle. Bills drawn against goods coming to England are safe enough, for as long as the goods come to port and can be sold for them, the acceptor is sure of his money. But when the goods go from China to Peru, and Peru finds that it cannot remit to meet the bill, the acceptor is inconvenienced, and the bank or bill broker who holds the bill finds that he has got a security which was not quite as gilt-edged as he thought it. This is all quite true, but contrariwise it may be argued that this sort of world crisis is not going to happen again very soon, and that if all finance had to be arranged on the theory that it was likely to recur frequently, there would be very little finance of any kind. These bills drawn against international shipments of goods do much to make the bill on London popular all over the world, and if they are to be frowned on there will be a considerable restriction of international commerce, which will react unpleasantly on England. In ordinary times these bills are safe enough, if due precautions are taken. If mistakes are made they happen rarely and the resources of the accepting houses are easily able to repair the damage.

As to finance bills, it has already been admitted that much credit was given by their means which was used for purposes with which bills of exchange ought not to be associated. The essence of a bill of exchange is that it has to be met at its due date, and so it should only be drawn to finance some commercial operation that will mature before the bill falls due, or to provide means of remittance when they are scarce, owing to seasonal causes which will have passed before the bill's maturity. When rolling credits, as they are called, are established, which go on from year to year, each bill being met by drawing another, and the money so raised in the borrowing country is put into bricks and mortar or machinery or other forms of fixed capital, the uses of the bill of exchange are being strained. When a jolt comes to the machinery and the rolling credit stops rolling, it is not possible to sell the factory or plant to provide a means of remittance. But there is no doubt that for a time, at least, this kind of finance bill is likely to be scarcer than it was; in fact, as we have seen, it was the excessive suddenness of the fit of virtue that seized Lombard Street on this subject that made the crisis more acute than it need have been, by reducing the means of remittance and so keeping the exchanges at an abnormal point.

Lombard Street has thus shown that it has fully learnt the only lesson that the external side of the crisis had to teach it. Too many finance bills of the wrong kind were out, and Lombard Street saw the fact so clearly that for some weeks it rang with the cry that there must never be any more finance bills of any kind at all. This exaggerated view is already discredited, and there is good reason to hope that opinion will settle down to a sensible midway path, taking the finance bill as a quite legitimate and necessary convenience, dangerous only when abused and distorted....

MR. WITHERS A GOOD ENGLISHMAN

[322]Mr. Withers is a very good Englishman indeed and points out with pardonable pride how the London market stood the shock which rocked the rest of the financial world to its very foundations. What would have been his attitude had the book been written a little later, however, when the pound sterling had fallen to a discount of over 2 per cent. as compared with the dollar, is an interesting subject of speculation. London financing the world is, from the Englishman's point of view, an inspiring sight, but the pound sterling obtainable in New York for $4.76 ... is something which it would be interesting to hear Mr. Withers explain. War and Lombard Street treats only with the beginning of a very big subject. It is sincerely to be hoped that a little later we shall have a continuation of the work from Mr. Withers' pen.