William Frederick Spaulding and Henry Parker Willis

“ Fashion, the desire to out-bid other institutions, the element of self-preservation, banking evolution, the convenience and gain to trade to be secured by an extension of bank areas—all such factors, however, pulled their weight in what during 1918-9 offered to be a struggle for supremacy between the leading institutions. Probably the most naive reason advanced in justification for amalgamation was that of the chairman of one of the great banks, who said that “combination must come.” ”

“ In the monetary stringency that befell Europe on the outbreak of war, and brought many of the European bourses on the verge of disaster, it was borne upon the public what a useful function is performed by the great banks of the United Kingdom in averting banking crises and creating confidence in British financial methods. ”

“ All the Bills of Exchange Act of 1882 says is—“A banker includes a body of persons whether incorporated or not, who carry on the business of banking”—a definition which has never had the slightest use in preventing scandals that have arisen in connexion with such concerns as the Charing Cross or Farrow's Bank. ”

“ The South African Bank, it is held, indicates a very hopeful road towards reform, and the system is certain to receive serious consideration from Australia and most other parts of the Empire. Critics have laid stress upon the advantages which the South African Reserve Bank will secure for the internal finance of the Union, and that really is what is wanted in Australia. The establishment of the South African Reserve Bank opens the door to imperial coöperation in banking and currency matters in a form and on a scale which had been difficult, if not impossible, up to 1921. ”

“ An interesting recent development in Canadian banking has been the establishment of branches or the forming of alliances in and with outside countries. With a view to giving the Canadian exporters every assistance, connexions have been sought in every place in the British Empire that promises a profitable field for Canadian products. The experience of Canadian bankers is, that instead of foreign branches cutting into the banks' capital and drawing funds away from local use, such branches have been instrumental in drawing in more deposits than have been given out in commercial loans. ”

“ As had been the case with the American market throughout its whole history, the movement of interest and discount rates was by no means uniform, call loans on many occasions shooting up above the general level, while even commercial paper and bank rates tended to fluctuate sharply at different seasons. The tendency, however, was on the whole downward, and after the financial disorders attendant upon the opening of the World War had subsided and the new reserve banks had become thoroughly organized interest and discount rates fell to an extremely low level. ”

“ The banking and credit system, like that of the United Kingdom, is thus under the supervision of large banks with tried heads, and just as the “big five” in England are able to keep in close touch through their wonderful branch system with commerce in every part of the United Kingdom, so in Canada the chartered banks very efficiently collate the information needed concerning credit, commerce and industry. ”

“ The Bank Reserve Fund is available for the liabilities of the bank, while the Redemption Fund may be utilized for repayment of any money advanced to the Australian Treasury or in the redemption of stock issued by the bank, but there is a proviso to the effect that if the fund exceed the amount of debentures or stock in existence, the excess may be used for the purpose of the redemption of any Commonwealth or State debts taken over by the Commonwealth. ”

“ Besides acting as the bank for the Government, the Imperial Bank is permitted to have an office in London, and to rediscount bills for the Exchange Banks and other banks. It does not, however, compete with the Exchange Banks in ordinary exchange business. The appointment of the bank as the Indian Government's sole bank in India will make for economy, for it will enable the Government to abolish the expensive Reserve Treasuries in India, and the business hitherto conducted in that connexion by the Government will be done by the Imperial Bank. ”

“ It has become one of the recognized financial institutions of the Commonwealth, and it has not only been a steadying influence to the Australian financial and banking position, but has given added stability to the banks in the Commonwealth, and has certainly strengthened the Commonwealth's position. It was, of course, the first State bank in the British Empire, and it is owned entirely by the Australian Commonwealth Government. The bank has no share capital and all its obligations are guaranteed by the Government. ”

“ This was a new variant of the old petitio principii, “it is coming because it must come and it must come because it has come.” The remark, no doubt, truly reflected a sense of the inevitability of a further stage of evolution. ”

“ Several of the states in which banking had assumed the greatest development made a similar change in their legislation at about the same time, so that at the opening of the World War, with its great impetus to American foreign trade, the banking system, both national and state, was in position to finance business on the acceptance plan. ”

“ Further, the considered opinion of the committee on financial facilities in 1917 was, that to achieve the reconstruction of trade and industry on sound financial and economic lines, it would be necessary to reëstablish a sound financial basis by means of an effective gold standard; to check any undue expansion of credit, and to take steps to reduce to more normal proportions the inflation of credit due to the war. ”

“ Such discussion, how- ever, became general about the middle of 1919, and at that time it seemed to the Federal Reserve Board that a plan of action modelled upon the British investment trust might serve as a basis for the general long-term financing of American exports. This export financing was regarded as essentially a problem which involved the shipment of goods upon long-term credit, it being recognized that much time must elapse before foreign countries could send to the United States enough goods to keep their American trade in current balance. ”

“ The banks also rendered invaluable service to the Government in making available their credit facilities with the Bank of England. “To increase their clients' ability and their own ability to invest in Government issues they would borrow from the Bank of England. These loans would increase their deposits with the Bank of England, which, as reserves, would increase their ability to grant to their own clients loans equivalent to, say, five times such deposits” (English Public Finance) . ”

“ Only through an enlarged use of cheques and other credit substitutes or through additions to the basic monetary circulation itself was it possible for the United States to add to its circulating medium. Another factor which had assumed very great importance during the preliminary period referred to, was the growth of trust companies, involving as it did sharp competition with national banks. Subsequently to the year 1890 there had been a rapid development of trust companies in many parts of the United States as well as extension and improvement of legislation affecting them. ”

“ The subject, however, of financing foreign trade was unavoidably thrown into the background by the advent of the war and the conditions growing out of it. Foreign countries financed their purchases of American goods upon what was practically a cash basis prior to the time that the United States itself entered the war and after that date practically the whole export trade of the United States was financed upon the basis of Government credits for which the U.S. Treasury furnished the means. ”

“ The most important of the early undertakings under the Edge enactment was a corporation projected by the committee representing the American Bankers' Association, whose capital was to be $100,000,000 and whose stock was offered to the public early in the year 1921. The Edge Act may be summarized in the statement that it was in effect a plan to provide for the financing of foreign trade apart from domestic banking operations, and with a very much greater latitude in respect to the granting of credit than could properly be allowed to domestic institutions. ”

“ Subsidiary to the central board, forming the main governing body, there were to be local boards, the latter being the existing boards of the amalgamated institutions in the three presidency towns. The central board was to function much in the same way as the Bank of England does in England. It deals with matters of general policy, “such as the movement of funds from one part of India to another, the fixation of the Indian Bank rate, which will in future be uniform for the whole of India, and the publication of the weekly statement.” ”

“ The reserve regulations make the expansion of the note issue dependent on trade demands, and when the system is properly functioning it is expected there will be a much greater elasticity of the currency than formerly in South Africa.
For a period of 25 years from its inception the bank will have the sole right of issuing notes within the South African Union. The other banks are not ignored; they are given time to make arrangements regarding their own note issues ”

“ The bank shall not discount or buy, or advance and lend, or open cash-credits on the security of any negotiable instrument of any individual or partnership-firm, payable in the town or at the place where it is presented for discount, which does not carry on it the several responsibilities of at least two persons or firms unconnected with each other in general partnership. ”

“ Growth of a Discount Market.—The use of the acceptance function to which reference has already been made progressed comparatively slowly during the early years of the Federal Reserve system, being retarded by the various disturbing conditions attendant upon the war. The expansion of the acceptance proceeded most rapidly and reliably in connexion with foreign trade, where this type of paper speedily assumed a position of some importance. Its growth was, however, greatly restricted as a result of the lack of branch banks maintained by American institutions in foreign countries. ”

“ In view of the fact that European demands for American goods were considerably reduced during the first months of the war, so that industry was temporarily checked and domestic prices were lowered, bank resources were more than adequate to the needs of customers. Later as the requirements of European countries became heavier and export shipments from the United States were increased, the banks entered upon a period of unusual prosperity, and the difficulty in earning dividends which they had experienced during 1915 disappeared. ”

“ The continued importations of gold strengthened the reserve bank holdings, so that there was at all times far more gold in the country than before the war. The net increase in gold holdings was fully $1,000,000,000, but gold coin had practically disappeared from common use. Congress had also provided, in the Act already referred to, for membership of state banks in the Federal system under conditions which permitted them to withdraw whenever so disposed by giving six months' notice. ”

“ However, it was not until the period between 1891 and 1896 that we find anything in the nature of a rush to create bigger banks through the process of absorption or amalgamation. During those five years a very large number of banks in the United Kingdom ceased to be separate entities, and the policy of amalgamation was steadily pursued up to the outbreak of the World War. There was then a slight pause in what we might call the race for supremacy among the larger joint stock banks ”

“ The earlier absorption of local banks by larger and more widely spread joint stock banks had created little more than passing interest among the public, but the policy of combination between the large joint stock banks themselves, many of them already possessed of enormous funds and branches spread over a wide area, caused a certain amount of concern in various directions, doubts being expressed as to its being to the public advantage, and in powerful business quarters the action of the banks was keenly criticized. ”

“ In some cities, notably New York, a majority of the banks rationed in a similar way the stockbroking and speculative community, agreeing to furnish them with a limited amount of funds at a specified and relatively low rate of interest on condition that there should be no effort to use more than this specified amount in stock speculation and that a correspondingly low rate of interest should be charged to customers. Capital was also rationed by the use of analogous methods. ”

“ As has been well said by a Canadian writer, the “credit facilities of the Canadian Dominion, like the Bank Note issues, follow where the need exists and the situation is always under control. It is the case of a few men working together against many individuals working alone.” The total assets of the chartered banks in 1921 exceeded $3,091,500,000; their gold reserve stood at approximately $80,900,000; deposits at $2,319,600,000; notes in circulation $280,700,000; deposits to secure the notes $106,200,000; investment securities $37,100,000; capital $122,300,000, and rest $128,700,000. ”

“ Some bankers gravely asserted that many of the balances which went to swell their deposits represented money awaiting employment in trade, but however true that may have been during the trade slump of 1919-20, the true causes during the war were to be found in the inflation arising out of the Government's war finance ”

“ They said:—
“To enable the banks to do more in the direction of granting long trade credits, we are also of opinion that it is desirable that bankers should make more widely known their willingness to accept deposits for long periods, at fixed rates of interest. We believe that, if they were encouraged to do so, a number of depositors would be willing to deposit their money at fixed rates of interest, for periods of from one to five years, without the right of withdrawal. The removal of the liability to withdrawal would thus enable the banks to grant loans for longer periods.” ”

“ Actually, the public would not appear to have suffered from the fusion of the banks, for if we make a comparison of the figures of the English joint stock banks (the Scottish and Irish banks, except in a minor degree, were not much concerned with amalgamation) , we find that there have been very large increases in capital and reserves; the ratio of total cash to demand liabilities has risen, and deposits show a striking increase. The ratio of paid-up capital and reserves to deposits has, however, fallen considerably, though the 1920 figures showed that the upward movement had recommenced. ”

“ The bank will act as the Government's bankers and financial agents, and will fix discount rates. It is empowered to set up branches in any part of the South African Union, and, subject to the consent of the Treasury, may also open branches outside the Union. ”

“ That the resources of the banks have not suffered by this process of absorption will presently be shown, for the question of resources is ah all-important one. In many respects large banks are certainly preferable, because with large resources they are in a position to make advances on a much more generous scale than the smaller concerns. Moreover, it was clearly desirable that the banks should be prepared to adapt themselves to the entirely new order of things in the financial world brought about by the war. ”