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PREFACE By Professor H. S Foxwell

MR. POWNALL has asked me to write a few words of preface to this issue in printed form of three lectures delivered by him at the London School of Economics last February. Such a request, coming from a colleague and an old friend, it was impossible to refuse. Of course, Mr. Pownall requires no introduction to the men of his own generation who are interested in banking questions; and if he did, he could easily obtain it from more influential quarters. All I propose to do here is to remind younger readers of Mr. Pownall’s long services to English banking; and to add a few remarks on points in the lectures which have specially interested me, or which have a special bearing on the extraordinary financial situation in which we now find ourselves.

Mr. Pownall has for over forty years past been a prominent figure in the English banking world. The greater part of his banking career was spent in Manchester; but later he became manager of the London office of his bank,and he has thus enjoyed the very valuable double experience of industrial banking and high finance. At least as far back as 1876, he began a series of valuable contributions to the Manchester Statistical Society, of which he was honorary secretary; contributions mainly upon banking subjects, but also upon questions of local government and social interest. On the foundation of the Institute of Bankers he became a frequent contributor to its papers and discussions, and afterwards a member of its Council.

Like everyone else who tries to make a careful study of English banking, Mr. Pownall seems to have been impressed at the outset with the very defective state of our banking returns. Two of his early papers are devoted to banking statistics. One of these, the famous census of banking currency, published in 1881 in the Journal of the Institute of Bankers, may fairly be termed a  banking classic. It was based on a wide and laborious investigation, and for the first time gave us definite knowledge as to the actual composition of the commercial currency in this country. I must add, with regret, that it is not only the first, but the last return of the kind that we have for the United Kingdom. In France, similar returns are annual’ and compulsory. English banking returns generally are still deplorably incomplete; inferior to those of most great commercial countries, quite inadequate as a basis for really scientific study of the position. Perhaps, as Mr. Asquith hinted on his first appearance in the City as Chancellor of the Exchequer, the Government may be obliged to enforce official returns, as in the case of the railways. Many of us would prefer that the form of return should be left to the voluntary action of expert bankers. But in any case, as Mr. Pownall says of the Census, it is high time that the matter was taken in hand.

Other papers by Mr. Pownall have dealt with the relation of banks to trade, and the very difficult questions connected with the financing of industry. As everyone knows, these questions still await satisfactory settlement. There is no other country in the world where so much of the financing of industry is done by way of the company promoter and the Stock Exchange; and it can hardly be doubted that the public savings would be more judiciously lent by the banker. Mr. Pownall has a good deal to say on this matter of bank advances in these lectures; and his wide experience gives special weight to his suggestions.

It is very clear, however, that the main pre-occupation of Mr. Pownall in all his banking work has been the question of the reserves. He has written several papers on this matter, notably one in 1892, when the Baring crisis was fresh in banking memory, and another in 1899; and the present lectures are largely concerned with the same theme. While Mr. Pownall always expresses himself with the caution natural to a banker, he has never pretended to conceal his opinion that our cash reserve was dangerously weak. ” We are spinning a top on a needle-point,” he told us in 1899. It seems fairly obvious now; though we shall still be told that the ” economy of gold ” which we deplore is the supreme triumph of the art of banking. The blunt fact is that the question of reserve is a question of s. d. In such cases men will only learn from experience : an effective but costly form of persuasion.

Turning more particularly to these lectures, we find them full of suggestive passages. Mr. Pownall has much that is interesting upon the subject of the financing of limited companies, upon the growth of the Clearing, and upon banking evolution generally. In dealing with bank amalgamations, he rightly lays stress on possible difficulties in securing a succession of capable managers for the modern super-bank. Incidentally he remarks that there would be no reason for surprise if some predominantly northern bank were to amalgamate with a southern bank. Parr’s had already absorbed Stuckey’s Bank; soon after the delivery of the lectures, Lloyds absorbed the Wilts and Dorset. Mr. Pownall would like to see a more complete organisation of the banks by the fusion of existing bodies; and it certainly seems that a more effective unity in matters of discount policy is to be desired. Again he advocates the creation of a redeemable State Security, a suggestion often made since the heavy fall in Consols. This would depreciate existing Consols, no doubt; but as we shall have to raise huge new war loans, it may be necessary to put up with this inconvenience. If the new loans were made redeemable, say in 15 years’ time, not only would the money be raised on easier terms, but the banking value of the security would be greatly increased. The new Consols, with their price thus steadied, would soon become what the old used to be, the finest of banking securities.

There is another point raised by a remark of Mr.Pownall’s, on which Sir Edward Holden has frequently laid stress. ” It is a moot question in my own mind,” he says, ” whether a great bill case is not better than investments, and I incline to plump for bills.” This is especially true, I think, in regard to the national reserves. The fact that the Bank of England originated in a State loan, and the way in which the indefensible Act of 1844 has set its seal upon the holding of securities in the note reserve, have caused English practice to differ in this respect from the banking tradition of most other great commercial countries. It is a matter which deserves attention.

Mr. Pownall deals at some length with the very interesting question of a possible financial attack by a hostile Power, and here his conclusion has been borne out in a remarkable way by the experience of the war crisis. He shows, contrary to what many of us had supposed, that there was no reason to apprehend heavy withdrawals of gold from our market as a part of a concerted system of hostile measures by an enemy; and, in fact, no such manipulated withdrawal of gold appears to have taken place. But this, as he also points out, in no way weakens the argument for a stronger reserve, which has other objectives in view. Again he insists on the serious nature of the liability on acceptances, which English bankers do not even include under ordinary banking liability, regarding it as practically set off by the certainty of the bills being met at maturity. To many observers, the acceptance seems far more dangerous than the average internal liability, especially if we are considering the solvency of the system as a whole. As Mr. Goschen said in 1890, the short loan market is the danger spot. Here again we have had our object-lesson on a sufficiently largescale.

In his references to the vital question of the Cash Reserve, Mr. Pownall renews his protests as to the inadequacy of the actual metallic basis upon which English bankers are accustomed to work. It is, indeed, only a fair weather provision, and barely that; if we exclude till-money, it can hardly be put at more than 3 per cent, of the total liabilities. Mr. Pownall repeats his former proposal that bankers should keep their reserves (his italics) in Bank of England notes, thus creating a central reserve in the Issue, and not, as now, in the Banking Department. If the separation of the departments,  unexampled elsewhere, is to be continued, there is much to be said for this proposal. But the greater part of the deposits at present left by bankers at the Bank represent only the minimum credits required in order to carry on their clearing transactions. These would have to remain in their present form. They may be compared to the current account of a business firm ; from the point of view of the banks they are till-money, not reserve. Probably this was the inner meaning of Mr. Pownall’s italics. Mr. Pownall is all for a Central Reserve, as against the many suggestions that the great banks should keep their own reserves. In his view the real problem is ” how best to unite  and maintain in one central reserve the many smaller reserves of the individual banks.” Here we are strongly in agreement with him. It seems almost to follow from the very meaning of a banking reserve that its efficiency is increased in proportion to its concentration; every step in the dissipation of the reserves must impede that averaging of liability upon which banking solvency depends. On a minor point, the question whether the State ought to make a contribution to the Central Reserve on Savings’ Bank account, it is not so easy to follow Mr. Pownall. The whole history of these banks, which has been admirably summarised by Mr. A. H. Gibson, seems lo show that no large gold reserves need be held on Post Office Savings’ Bank account, and that the Government is amply provided with the means of meeting any demand on these banks which experience would lead us to expect. But it does not follow that the State should make no contribution to the proposed Central lleserve. I have always strongly urged that a Reserve Contribution should be made by the State ; primarily for war emergencies, but available for other acute crises at the discretion of the Treasury. Bankers can hardly be expected to make complete provision for the exceptional pressure on the market caused by the mobilisations and the destruction of credit incident to a declaration of war.

On the general proposition that the cash reserve was inadequate, and ought to have been increased, recent events, on which one does not at this time wish to say too much, have amply justified the warnings given by Mr. Pownall and so many other banking experts. The war which has just burst upon us was not, as some pretend, a bolt from the blue. It had been long planned and prepared, and long expected by careful observers. We had our warning in 1911, and again in March last, when Germany boasted of the completion of the financial preparations for the want of which her hands were tied up in the former year. Everything, one might say, happened according to schedule ;except, indeed, that the actual situation when war broke out was more favourable than we could have dared to expect. The inconceivable diplomatic blunders of the enemy greatly strengthened the position of the  Allies; and securities had already been so heavily sold by the better-informed Continental holders, that the fall in values immediately following the outbreak of war was minimised, whatever the future may have in store for us. Yet we found ourselves confronted with the complete collapse of the short  loan market, and of the Stock and Foreign Exchanges. The appeals made in the last twenty years by such men as our author, the late Viscount Goschen, Sir Inglis Palgrave, Sir Felix Schuster, Sir Edward Holden, the late Mr. Spencer Phillips, Mr. Craminond, and others, had been made in vain. Received in some quarters with cynical indifference, they never obtained more than a lukewarm, platonic assent. So far as published figures go, no appreciable result is traceable. Other nations, on the average, roughly doubled their reserves; we were content to talk about it. Hence the crisis found us, in spite of our quite exceptional international responsibilities as the world’s clearing house, with a smaller proportionate reserve than any other of the great commercial countries. As The Times of October 21st truly observed, ” The war has taken us unprepared all round, as we know only too well.”

The arrangements which had not been made in advance, were hastily  extemporised during a five days’ bank holiday; and though there was a general dislocation of the whole of our financial machinery, we have managed to avoid suspension of payments, and some of the more sinister phenomena of financial crisis. Things, in short, might have been worse : it is safe to say they might have been much better. No one will maintain that a temporary deadlock in the bill-market could have been altogether  prevented, whatever precautions had been taken or provisions made. But this and other difficulties might have been greatly eased. As Mr. Pownall says, ” If the State or the Bank possessed a large central stock of gold, it could look with calmness on the temporary drain of the moment.” We might have been spared the 10 per cent, rate, than which nothing is more calculated to cause wreckage and provoke panic. The exchanges, with the exception of Paris, were generally in our favour : and there was no run on the banks, a fact equally creditable to the banks and to the public whose confidence they had gained. “Would the withdrawal of banking accommodation have been so  stringent as it was, and the paralysis of the markets so complete, if the banking reserve had been, say, half that held by each of our two principal Allies? Other matters might have received attention before the cloud actually burst upon us. It is now nearly 35 years since I heard the then Governor of the Bank of England explain how, in case of a serious war, we should have to issue 1 notes, and so call in gold from the circulation. Mr. Pownall, in these lectures, points out that such an issue was inevitable. It would have cost a mere trifle to have had the issue ready. As to the acceptance business again, as long ago as .1890 Mr. Goschen had called attention to the dangers involved in his famous speeches after the Baring crisis. In short, every important difficulty had been foreseen; but it does not appear, so far as the public can judge, that any sufficient provision was made to meet them.

Why insist on these things? It is true that with our usual English grit and common sense we have managed to get through, and the situation is steadily improving. But we have paid as dearly for our want of financial as for our want of military preparation. We might have been spared much temporary dislocation, not to say some permanent loss of prestige, if we had taken the advice of our more thoughtful bankers and brought up our reserve to something like the world’s normal standard. It behoves us to set our house in order, for as United States banking becomes more scientific in its organisation, we may have keener competition to face. The Bank of England has set an excellent example for a generation past; if the Joint Stock Banks would only come into line, and contribute their fair share, the position of the London market would be all that could be reasonably desired.

Probably this is more than we can expect to see. The habit of ignoring unpleasant facts, and of trusting to ” muddle through. ” when the crisis is upon us, is deeply engrained in the national character. When our present difficulties are forgotten (and the financial memory is proverbially short), we shall no doubt relapse into our incorrigible habit of thoughtless drift. While money can be made, the Englishman has no time to think. In a few years he will again be acclaiming the distinguished economic authorities who prove that war is impossible, and assert that the call to prepare for it is a mere scare faked up in the interest of the armament firms ! There is only too much reason to fear that history may repeat itself; but, at any rate, Mr. Pownall will not be to blame.

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