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Home -> H. S. Foxwell -> Papers on current finance -> The Financing Of Industry And Trade - continue

Papers on current finance - The Financing Of Industry And Trade - continue

1. Contents

2. Introduction

3. British War Finance

4. British War Finance - continue

5. Ways And Means

6. Ways And Means - continue

7. The Nature Of The Industrial Struggle.

8. The Nature Of The Industrial Struggle - continue

9. The Financing Of Industry And Trade

10. The Financing Of Industry And Trade - continue

11. The Banking Reserve

12. The Banking Reserve - continue

13. The American Crisis Of 1907

14. The American Crisis - continue

15. The American Crisis - continue

16. Inflation

17. Inflation - Continue

18. Appendix

19. Appendix II

The two systems differ still more in the character of their business. Where we confine ourselves to
short loans, they go in for finance. The German
system has always been in the closest relation with
German enterprise. The late President of the In-
stitute of Bankers, Mr. Pownall, voicing the general
banking tradition in this country, says : " A banker
ought never to be a partner." Rightly or wrongly,
this is exactly what the German bank is. German
banks are partners, often controlling partners, " pre-
dominant partners/' in many of the largest and
most successful German enterprises. Many of these
have been nursed from their earliest beginnings by
the banks, and largely owe their success to guidance
received from them. Georges Lachapelle tells us
that in 1911 the Deutsche bank was represented on
134 different boards, the Disconto on 114, and the
Dresdner on 112. Their all-pervading influence is
well described by Mr. W. R. Lawson. " German
banking does not stand aloof from industry and
commerce as ours does. . . . The men who direct
the German banks are all the time in close touch
with the iron and coal industries, the manufacturing
and trading classes, and the ocean steam lines. With
them finance, industry, and transportation go hand
in hand, and are regarded as integral parts of the
same problem. . . . The German banker has a finger
in everything that is going on. He is represented
directly or indirectly on the boards of manufacturing,
trading, shipping, and mining companies. He has


his eye on all the staple markets. The Bourse is
an essential part of his domain. Underwriting is
one of his recognised functions, and Germany is
thereby spared many of the scandals of British com-
pany promoting. He has correspondents in every
foreign city of any consequence. . . . These are no
trifling advantages in the coming struggle for inter-
national business. What have our London banks
to set against them ? Simply the old Lancashire
maxim of ' Every man to his own job.' " 1 As the
Economist puts it, " The German banks . . . are stock,
bill, and exchange brokers and dealers, banker-
merchants, trust, financial, and promoting com-
panies, etc. What may be described as their chief
merit and defect is their intimate connection with
German industrial life. There are few commercial
or industrial German ventures, be they private
concerns or joint-stock companies, which do not
have at their disposal a fixed credit uncovered
(Blanko Kredit) or covered by very unliquid
securities with one or more banks. Not only
have the banks promoted most of the industrial
joint-stock companies, and retained part of their
share capital, but their managing directors remain
members of the boards of these companies, and
draw personally large incomes for their services
in this capacity." 2 Owing to this remarkable

1 Bankers' Magazine, July, 1906.
a The Economist, October 21st, 1911.


variety in their activities, the German banks have
been styled " allerlei Enterprisen" maids of all work,
a kind of financial Universal Providers. It is easy
to jibe at their combination of functions which it
is the practice with us to specialise ; but it is possible
to carry specialisation too far, unless it receives its
necessary supplement in organised reconstitution.
The intimate connection of German banking with
German industrial life, while it has elements of
danger for the banks, is undoubtedly the main cause
of the success of modern German enterprise.

In the descriptions of German banking just quoted
stress is laid on the important part it plays in the
business of issue and flotation. Here we have one
of the most striking contrasts with English practice.
This delicate business, which we leave to the com-
pany promoter, is the special care of the banks in
Germany, where the- company promoter scarcely
-exists. The banks, with their large staff of in-
dustrial experts, not to speak of the highly trained
men they have on their boards of directors, are
able to give the most intelligent examination to all
schemes put before them ; and to insist, before they
accept any new proposition, that the necessary
provisions are made, whether as to capital resources,
management, or scientific assistance, to ensure that
the undertaking shall have a fair prospect of success.
The company promoter, like Gallio, cares for none
of these things. His concern is simply with the


profits of the promotion. As soon as he has con-
trived to get his issue quoted at a premium, and his
underwriters have unloaded at a profit, his interest
in the enterprise ceases. " To him," as the Times
says, " a successful flotation is of more importance
than a sound venture." When it is remembered
that our company law is less exacting in its safe-
guards than that of any other great business com-
munity, except perhaps the State of New Jersey,
the result of this type of promotion can easily be
imagined. Here is a German estimate of the situa-
tion. " English banks furnish the money for the
flotation and stock-exchange business without
thereby securing the slightest control for themselves
over the business of speculation. Up to this time
the English deposit banks have not suffered much
from this, but it is well known that English specu-
lation is in a very bad way because no influence is
exerted upon it by the banks. Nowhere are so many
extravagant speculations launched as on the London
Stock Exchange. . . . Our banks have been the
pioneers of industrial development . . . for this our
thanks are due chiefly to our system of mixed banks,
and to the proper use of this system." l The German

1 Dr. Jaffe, 3rd German Bankers' Convention, Hamburg, September,
1907. There is always a certain arrogance in Dr. Jaffe's criticisms,
but there is more truth than usual in this one.

Cf. Adolf Weber. " Wohl kaum ein Land hat hinsichtlich der
Folgen einer ungesunden Kreditgewahrung so reiche, aber auch so
bittere Erfahrungen gemacht, wis gerade England." Some of his


bank issues have been enormous. From 1885 to
1900 they issued on the German market securities
for more than 1,200,000,000. The Deutsche alone
made fifty-eight issues in 1907. In 1906 the banks
placed 33,000,000 in industrial issues, besides deben-
tures to the amount of from 5,000,000 to 15,000,000
annually. That this direct co-operation of expert
financiers with the promotion of industrial enterprise
is of the greatest value to industry hardly admits
of doubt. The German banks have rendered in-
valuable service in this way.

In another direction German banking has not
been so well advised. Not content with undertaking
the business of issue, which may be called the manu-
facture of securities, the German banks are also the
principal dealers in securities. The big banks are
themselves small stock exchanges. They do not
use the market, as our banks do, through their
brokers, but they make a market themselves, dealing
directly with their own customers. By these en-
croachments on the proper business of their Stock
Exchange, already the victim of unintelligent legis-
lation, they further weaken it very seriously. Their
Stock Exchange is out of all comparison inferior to
our own. But an efficient stock exchange is abso-
lutely essential to financial and banking supremacy.

examples, however, relate rather to bill finance than to the .financing
of industry by company promotion. Depositeribanken u. Spekvlations-
lanken, p. 109, 1902.


It was largely owing to the efficiency of the English
Stock Exchange that London took the place of
Amsterdam as the chief financial centre of Europe.
No doubt Germans were always able to use the
London Stock Exchange through the London branches
of their banks. They may not find the same facilities
there after the war. German stock-exchange policy
has been a marked weakness of their system. Our
own banks are not altogether blameless in this respect.
In so far as they finance speculative operations
outside the market, the existence of which is not
revealed at the usual fortnightly settlements, they
make the market uncertain and apprehensive. The
jobbers become timid, uneasy until they have evened
their books. Thus their work and the efficiency of
the market generally are impaired. 1

The German system has many strong points
which I must only glance at. Their banks have a
remarkable network of alliances with foreign bank-
ing houses ; as, for instance, their powerful New
York connections with firms like those of Morgan,
Speyer, and Kuhn Loeb. Again, there are many
important foreign banks which they have either
founded or brought under German control. This
was the case with a famous Italian bank, through
whose agency German banks obtained immense

1 It was given in evidence, before the Stock Exchange Commission of
1876, that 300,000 of Consols had been sold, just before closing,
without putting down the price one-eighth against the seller. Could this
have been done of late years ?


power over Italian business. It was much the same
with the Banco Aleman Transatlantico at Buenos
Ayres, the Deutsche-Asiatische Bank for the Far
East, and the Orient Bank for the Near East. In
every Balkan State there was an institution of this
kind, working in the closest harmony with Germany's
financial and political aims. A mere list of these
institutions would occupy a large folio. In all their
foreign work, too, the Germans have shown singular
ingenuity in carrying out their schemes with foreign
capital. " Germany," says Professor Hauser, " has
effected the surprising tour de force of securing her
financial supremacy in foreign countries while lock-
ing up very little of her own capital." Of the
5,200,000 capital of the Banca Commerciale Italiana
in 1914, 1 only 180,000 stood in German names, or
less than 3| per cent. Yet Germany, at that time,
held practical control of the bank (the situation has
since been happily altered). So far as industrial
undertakings are concerned, it has been estimated
that Germany contrives to obtain control by an
investment of not more than one-eighteenth of the
capital controlled.

I have referred in a former lecture to the various
agencies, none too scrupulous, by which Germans
promote their export trade. The banks furnish the
necessary financial support, and at the same time
they utilise the influence thus acquired to capture

1 Now, July 3rd, 1917, 8,628,000.


insurance business for the German companies and
to place in foreign hands shares in the German
undertakings they have floated. The credit policy
of German traders is a well-known means by which
they have contrived to establish themselves in already
occupied foreign markets. Here, too, it is by the
aid of their banks they have been able to relax the
sound but somewhat severe rules of credit practised
by rivals. Last, but not least, they have in all
their work the assistance of an elaborate system of
publicity, usually based on the subsidising of local
publications and the local Press.

The machinery thus planned by the banks, and
in which they play the leading role, is clearly admir-
ably adapted to its purpose of fostering German
trade. Suppose a railway is wanted in China. The
Asiatische Bank, supported by its powerful German
group, is able to provide the necessary funds, stipu-
lating that the contract must be placed in German
hands. The Deutsche, or some other German bank
with a special railway connection, will take care that
the contract is placed in competent hands. The
whole business will have been astutely written up
in the local Press, and every available means used
to obtain the concession. The railway may be half
built before we could have floated a company to
raise the capital ; and so a valuable contract, with
all the incidental business connections, is lost to
Germany. With Germany finance and trade go hand


in hand. The banks never forget to insist on the
quid pro quo. The placing of business in German
hands is the invariable condition of German financial


What provision have we in London, or are we
making, to do the sort of work which has been de-
scribed ? Nothing, it must be said, that is at all
adequate. Of course, it is true in a sense that every
kind of financial business can be put through in Lon-
don, if not by what we call " banks," yet by other
financial machinery ; and nowhere in the world do
financial institutions of the highest class abound as
they do in London. A glance at the Bankers 9 Almanac
or any similar work will show that the financial
resources of London are absolutely unrivalled. Any
kind of finance might be managed in our market,
most kinds are. The real question is whether the
business is being done in the best way, on the neces-
sary scale, with the necessary promptitude, with the
best use of available experience, and with the proper
co-ordination of energies and resources.

The fact is that we had carried specialisation to
an extreme. Foreign exchange was relegated to special
firms, largely foreign houses, or, if English houses,
managed by foreigners ; or else carried on by foreign
and colonial banks. Bill discounting, again, was mostly
left to a special body of bill-brokers, hardly to be found


elsewhere. Foreign trade was largely catered for
by colonial and foreign banks and by the exchange
houses. Issue business was principally done by
merchant bankers or issuing houses, and was for the
most part on account of foreign countries. Home
industry was left to the company promoter and the
various finance and trust companies ; l assisted, no
doubt in many cases by some of the larger stock-
broking firms, and particularly by certain firms of
provincial brokers. 2 I do not say that there was
not a certain amount of informal co-operation between
these independent agencies. But in general there
was no systematic and regular co-ordination of their
operations. The system, if it deserves the name,
suffered from excessive specialisation and almost
complete lack of organisation.

We have made some progress of late years. Our
regular banks have greatly enlarged the scope of
their activities. They have developed foreign ex-
change departments, often very large and important.
They are taking a large share in acceptance business,
as to which much might be said. They have begun
opening branches, or controlled establishments, in
foreign countries, notably in France, Spain, and
Kussia. Better still, they are entering into intimate

1 Sir George Touche suggests that these latter companies should b
organised, so as to secure some " unity of action." Mr. Robert Fleming
puts their aggregate capital at 100,000,000.

* For instance the firm of George White & Sons, Bristol.


relations with foreign banks, as, for instance, with
the two great Italian banks, the Banca Commerciale
and the Credito. Again, many new banks for foreign
trade have recently been established, as, e.g. for the
Russian and Scandinavian trades.

All this is very good as far as it goes. But it seems
to me open to a fundamental objection. It lacks
its natural basis in an intimate connection with the
national industries. The proper foundation for over-
seas finance is well-financed home industry. All the
foreign enterprise of the German banks was based
upon an intimate knowledge of the resources and
aptitudes of their own industries, obtained by careful
study in the course of such preliminary financing.
Now our colonial and exchange banks are quite
distinct from our home-banking system, and neither
are in touch with home industry as the German banks
are. The regular banks are always ready to accom-
modate industry with temporary loans on excellent
terms. But they do not regard it as their province
to concern themselves with the original equipment
of large-scale enterprise, whether at home or abroad,
as, for example, a great issue house would. They
have not made a special study of industrial tech-
nique, or industrial problems generally, except so far
as they affect short-loan business. Industry has thus
lost the valuable advice a German bank or an issue
house could offer, advice more valuable often than
the mere capital loan ; while the banks in their turn


lose a certain insight into the industrial and trading
situation which might go far to compensate them
for any risks inherent in the more difficult type of

The loss to our home industry is only too obvious.
It cannot obtain from the banks the means of making
adequate original installations, or the extensions and
reconstructions made necessary by the progress of
industrial technique, or by the developments of rival
firms in other countries ; nor, again, the large loans
which are often, in practice, essential to the securing
of big foreign contracts. Finance of this kind in-
volves a lock-up of resources which our deposit banks,
without special supplementary organisations, cannot
entertain. In most foreign countries this finance
can be arranged by " banks " of some kind. German
banks lay themselves out for it, and so do certain
credit institutions in France.

If our great Issue Houses would take up this
business their help would be invaluable. They are
accustomed to make exhaustive examinations of pro-
positions submitted to them. They employ expert
engineers, accountants, and lawyers ; and every per-
tinent detail in regard to process of manufacture,
plant management, earnings, labour conditions, and
past history is taken into account. But the issue
houses fight shy of ordinary home industrial pro-
positions. They prefer those put forward by foreign
Governments, municipalities, or the very largest


transport companies. As a rule our English indus-
tries are too small in scale to attract the issue houses ;
the securities would not be marketable. Thus we
are involved in a vicious circle which it will want
some courage to break. Our industries are inade-
quately capitalised, because they cannot get properly
financed ; they can't get financed because their
capital is inadequate. Even if this difficulty were
removed, as it must and will be, another would
remain. The English investor does not take kindly
to industrials. The issue houses would not find it
so easy to unload those they had become responsible
for. It seems clear that either by relating them-
selves to large banks, or to credit institutions of a
different type, they must endeavour to distribute
the inevitable risks of having to wait some time
before the issues are completely taken up. Those
who ought to know tell us that even in the United
States issue houses will seldom take up a concern in
its initial stages. They leave this, curiously enough,
to the weaker houses ; in proportion as the house
becomes strong, it tends only to consider going
concerns. The question hardly arises in London,
where the issue houses scarcely cater for home in-
dustry at all.

The small contribution made by the issue houses
to industrial finance is a matter for regret. It is
certain that the experience at the disposal of these
houses is most valuable, and ought not to remain

F.C.F. I


exclusively in the City, to be employed on foreign
enterprise, but should be made available for the
guidance and stimulus of our own industries. We
are told that banks and issue houses alike are waking
up to the fact that in many respects the manage-
ment and plant of our home industries are not nearly
so good as they had assumed them to be ; x and that
if this condition of things is to be remedied there
must be greater co-operation between the City and
Industry than there has been in the past. Banks and
issue houses should keep in closer touch with our
industrial establishments, and associate themselves
to a greater extent with their managements and their
methods. No one has more to gain by such an
association than the so-often victimised investor.
" The real issue/' writes Mr. Lawson (February,
1916), " is, where do we find the best industrial results ?
In the slop-work of the British company promoter,
or in the scientific work of the German bank ? . . .
There is a widely-felt need for some kind of bank
or trust company which could guarantee to the in-
vesting public a reasonable amount of administrative,
financial, and technical skill in the management of
new ventures."

1 As an illustration, a writer in the Round Table for December, 1916,
makes the following almost incredible statement : "A very large
proportion of the coal used in this country is still used in plants involving
a coal consumption from five to fifteen times greater than the best that
can be done to-day," p. 35. I do not know on what authority these
figures rest. But that a large proportion of our industrial plant is
very inefficient is patent to the ordinary observer.


The establishment of the new British Trade Cor-
poration, chartered last April, is the latest response
to this need. Until it has embarked on actual opera-
tions it will not be easy to ascertain the precise
functions it will serve. It is to have an Information
Bureau and an Intelligence Department, much like
the machinery of an issue house or a firm of merchant
bankers. There are representatives of commerce and
industry on its board, and it is to be aided by a staff
of technical experts. The chief appointments hitherto
made have been generally approved. Its own initial
capital is 10,000,000 ; and it hopes to be further aided
by contributions from the banks. It has taken powers
to do acceptance business, and it is stated that it is not
to interfere in any way with the operations of the
British and colonial banks. From these last, and other
statements that have been made, I find it difficult to
conjecture what the precise character of its opera-
tions will be, and criticism can only be hypothetical.

It may be said at once that it is a step in the right
direction, and we hope that its foundation may give
an effective lead to public opinion. There are some
indications that it aims primarily at foreign rather
than home developments. I hope this impression
may prove to be unfounded. If not, as I have
already said, we are beginning at the wrong end.
It was the close union between the financial expert
and the captain of industry that gave German in-
dustry its remarkable efficiency, without which its


foreign trade and overseas competition, however
ingeniously financed, must have failed. We look
in vain for financial institutions in England which
have the knowledge, and are prepared to play the
part, of these German banks. Mr. Brand tells us
that " London knows very little of British indus-
tries " ; that it has " no institutions whose aim it
is, as it is the aim of the German banks, to act as a
kind of general staff to industry " ; and that there
is " a peculiar lack of contact between the chief
financial centre of the world and the industry of
its own country." It did not require the revela-
tions of the war period to show that this isolation of
industry from finance has been most unfortunate.

It seems very unlikely that any one institution,
however ably directed, can do more than a small
part of what is wanted. It is clearly impossible for
it to make an adequate survey of all industries, at
home and abroad. Nor is this necessary. So far
at least as foreign business is concerned, ample and
more than ample machinery already exists in London.
I would rather see the resources of this great cor-
poration devoted to the organisation of our existing
institutions than to the addition of a new compe-
titor with them. So far as home finance is con-
cerned, for which no doubt new machinery is required,
I think Mr. Drummond Fraser's new proposals are
more promising. 1 His idea is to establish local credit

1 See his Finance After the War, February, 1917, pp. 26, 27.


associations at great industrial centres ; for instance,
in such places as Manchester, Bradford, Birmingham,
etc. He thinks such associations might be largely
financed by the banks working in the respective
districts ; and it is believed that a scheme of this
kind is already on foot in the Manchester district.
Local credit associations of this type would have
an intimate knowledge of the industrial conditions
and personnel such as could hardly be expected in
the case of a house working in a great international
market like London.

We are too apt to ignore existing resources. When
the British public gradually begins to recognise the
immense importance of things experts have long been
trying to do with inadequate means, and no intelli-
gent support, the cry is always for a brand-new
institution. It would generally be wiser, and cer-
tainly in this case, to utilise, and extend, and suitably
organise, the vast resources that already exist, but
of which so much more might be made.

Whatever form our industrial finance may ulti-
mately take, it will probably be better to provide
machinery for the purpose outside, though not out
of relation to, the existing system of deposit banks ;
and it will be as well to avoid using the term " bank "
in connection with work of this kind in Great Bri-
tain, because the term has a specially narrow meaning
here. As Sir Francis Piggott suggests, the French
term Credit is more to the point : Credit Fancier


and Credit Mobilier ; we want them both ; we have
neither, at least on the scale required. Whatever
we do, while working in harmony with National
Policy, let us avoid hampering ourselves by State
assistance, or even, so far at least as home finance
is concerned, by State control.

To sum up a rather long exposition, I am con-
vinced that the radical fault of our system lies in
the fact that our financial, as distinguished from our
banking, institutions are out of touch with our in-
dustries, with the natural consequence that these
industries, or the majority of them, are defective in
their organisation and equipment. If this is so,
then the value of any proposed reforms must be
judged by the probability that they will remedy this

A word in conclusion. If I have spoken a great
deal of Germany in this lecture, it is because she
has shown strength precisely where our own system is
weakest ; and there is much to be learnt from her
experience, either for adoption or avoidance. But
I do not fear German rivalry in the future, now that
the world is awake to her unscrupulous use of financial
power, and that we are becoming sensible of our own
deficiencies. There is only one country in the world
that has a financial future at all comparable with
our own. While we have been talking she has been
striding ahead. I refer, of course, to our oldest
colony and latest ally, the United States.

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