and that many promising enterprises, which might have beer promoted with advantage to the nation, have perished from lack of credit. Bankers, of course, are not omniscient and may sometimes fail to perceive the oak in the acorn, especially in the case of the small businesses. But if a man is refused credit at one bank he goes to another, and in the competition between them it is unlikely that many deserving cases are refused. It is more likely to be the other way. Although the general charge has often been made that industries in this country are being starved for lack of accommodation, it is significant that, so far, no responsible witness has been produced to testify that he has been denied the credit to which he was legitimately entitled.

It is frequently asserted, however, that whatever may be said about the home trade, this limitation of the functions of English banks tends to cramp the growth of our foreign trade, especially as regards the greater enterprises, and that in this respect the banking system of this country compares unfavourably with that of Germany. Financial stability, it is said, may be purchased too dear. Bankers have become over-cautious, too much concerned with their own private interests to the neglect of those of the State. The stimulus of government interference and control is demanded in order to induce them in the national interest to embark on more adventurous banking. Criticism of this kind appears to be based on an inadequate conception of the part the banks already play in the finance of foreign trade.

Apart from government loans, the finance of foreign trade naturally divides itself into two main divisions of short period and long period credits. Short period credits are concerned with the import and export of raw material and manufactured articles to and from this and other countries, transactions which are completed within a few months and are usually financed by means of bills of exchange. The shipping documents are pledged as security to anyone dealing with the bill, which is drawn at so many days after sight, so as to allow time for the acceptor to receive and realize the goods before he is called upon to pay for them. The system, which is capable of infinite variation, has been carried to an extraordinary pitch of organization in this country, and has contributed more perhaps than anything else to make London the world's clearing

house. The goods may not be shipped to or from this country; it may be coffee from Brazil to Holland, or silk from China to America, but the bill will be drawn on London. Bills on London are at a premium because nowhere else can the holder be sure of being able to obtain gold for them readily and freely. The extent to which the foreign trade of this and other countries is financed in London can only be a matter of conjecture. Even if we knew the mass of acceptances it would not help us much. No money passes when a bill is accepted. It is not acceptance that constitutes finance. It is only when bills are discounted, or borrowed against before they become due, that finance proper begins and a loan is created. At the outbreak of war the Chancellor of the Exchequer estimated that the amount of bills carried,' that is, advanced against before maturity, by banks and others was £350,000,000 to £500,000,000, most of which had been discounted. At least £100,000,000 were pledged with the banks as security for loans. At the lowest estimate it is evident that a very large proportion of the available financial resources of the country are employed in the foreign trade, and it is more than doubtful if any government could do more than the competition of banks and accepting houses, native and foreign, is already doing to stretch the credit based on British security to the utmost point compatible with prudence and a due regard for the interests of our domestic industries. It would be no benefit to our foreign trade to close, as has been suggested, the agencies of foreign banks and financial houses established in London, to confine the use of London credit to financing the foreign trade with this country, and to prohibit its being used to finance the foreign trade between two other countries. A large proportion of foreign trade is compounded of three-cornered or more than three-cornered transactions, the silk imported into America from China being paid for by exports of cotton goods from England to China, and indirectly our own trade would suffer if we ceased to finance the trade of other countries. It would suffer also if we suppressed the agencies of foreign banks. A considerable part of their acceptances are employed in financing the export of British manufactures on foreign account, and if there is to be division of labour we should prefer the Englishman to provide the manufactures and to leave the distribution of them to the foreigner.

If the foreign agency accepts bills, its head office has to make provision for their payment at maturity. Accordingly, large foreign balances have to be kept in this country and go to swell the resources of the London money market. When the rate of interest or discounts is high relatively to that of other countries, large sums are remitted here from abroad to be employed in discounting bills. The total varies with the rate of interest, but at times the foreign floating balances available for the use of the London money market are an appreciable factor in the finance of our foreign trade. Any attempt to interfere with what may be called the natural flow of money to this market would undoubtedly tend to restrict our foreign trade by raising the rate of interest, and so increasing the comparative cost of production on which our power to compete in international trade depends. It might also place in jeopardy the financial supremacy of London as the clearing house of the world. A free market means that anyone can send bills here for discount and be sure of getting gold for them when he wants it. Freedom is the breath of life for credit and commerce. To interfere by arbitrary and artificial restriction with their free course and development is to stifle them. The best service government can render the London money market is to leave its management and control to the bankers, whose business it is to understand it.

Bills drawn on or made payable at the London agencies of foreign banks are discounted after acceptance in the ordinary way, and to this extent it may be said that the trade of foreign countries is financed with London money. The assertion must, however, be qualified by the statement that the 'foreign ' agencies' and foreign domiciles,' as these bills are called, are discriminated against in the rate, that is to say, they fetch a lower price in the discount market than British bills. When bills are plentiful the discrimination may be considerable; when bills are scarce it may be very slight; but in general there is a marked preference in favour of the British bill. It is therefore only the surplus money of the London market which goes to finance the trade of other countries at the higher rate, after the effective demand of British trade at the lower rate has been satisfied. There is also this to be said, that the London agencies of the foreign banks, during the currency of their acceptances, commonly employ the funds provided to

meet them at maturity in competing for British bills, so that if it is true to say that the trade of foreign countries is financed with British money, it is also true to say that, conversely, British trade is financed with foreign money. It is a fallacy to suppose that if these foreign agencies were suppressed more money would be available for British trade. On the contrary, it is the paradox that is true; British trade would suffer. The absolute amount of the short money in the London market would be reduced by the removal of the foreign balances to Amsterdam or New York; the supremacy of London as a financial centre would be weakened; the interests of British trade would be prejudiced by the reduction in the absolute amount of funds available in the London short money market. There may be sound political reasons for suppression; the economic argument is dead against it.

With long period credits we enter upon a different field of finance. It is no longer a question of providing the means of bridging over the comparatively short period required for obtaining the raw material, working it up into the manufactured article and distributing it to the consumer. We have to provide the means whereby the immobile or undeveloped assets of a deserving enterprise may be pledged to secure the money which should be used to extend still further the 'field of beneficent activity.' For this a bond or stock is the appropriate instrument of credit. The exploitation of the latent resources of other countries, the construction of their railways, the development of their mines, the construction of works of public utility, are essential to the continued expansion of our foreign trade. But all these undertakings take time. A long period must elapse before they become remunerative. To finance them, therefore, does not fall within the ambit of our banking system. They involve a lock up of capital, and the essence of British banking is that its funds should be kept liquid. There is good reason for this. The paid-up capital and reserves of the English joint stock banks in 1917 were £84,475,000, and their deposits £1,365,297,000. The banker would thus appear to have enormous resources at his command, but it will be observed that his deposits consist to a large extent of credits created by loans, and not of deposited moneys. To that extent they are not available as cash, and in any case are repayable on demand or at short

notice. They are the bankers' short period credits, and no prudent banker would employ them in other than short period loans. His capital and reserves, which form his long period credits, are no doubt available for more permanent investment, but the amount of paid up capital and reserves held in proportion to the deposits is very small, some people would say too small, only 6.2 per cent. It is a canon of sound banking that a banker must not grant credit, different in kind from the credit he receives. He must not part with the money, such as it is, derived from deposits unless he can see his way to draw it quickly back again.

It may be admitted that the German banker enjoys an advantage over his English competitors in originating and carrying out foreign enterprises. It is easier for a project to obtain a fair hearing and an intelligent examination of the technical and financial merits claimed for it from a German bank, on the board of which both industry and finance are represented, the leaders of industry acting in co-operation with the leaders of finance, than from an English bank where a sharp line of demarcation is drawn between industry and finance. The German bank is not so dependent as the English on deposits. If the time is not propitious for a public issue, its large capital resources enable it to carry the loan until a favourable opportunity occurs for unloading it on the public. The support of its government will smooth the path of the negotiations with the foreigner, and diminish the risk of default. There will be a clause in the agreement stipulating that a part of the loan shall be taken in German material, so that even if the transaction should not be successful financially, the banker may hope to recoup his financial loss out of the industrial profit. Like the showman at the fair, what he loses on the swings he gains on the roundabouts. It is well that all this should be recognized. But at the same time the pessimist may be reminded of the inception and growth of the goldmines, the tea, the rubber, and the oil industries in recent years. This is sufficient evidence that the system of finance which prevails in this country presents no material obstacle, so far as the supply of capital is concerned, to the development of new foreign industries.

C. S. ADDIS.