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what principles it is based. Of one thing the critics can be assured. To be adventurous is the easy thing, to be prudent the difficult.
English joint-stock banks have been established upon the principle of a comparatively small paid-up capital, the shares, however, bearing a large uncalled liability. Thus it is common to find bank shares of some such denomination as £50, with only some such proportion actually paid up as £10, the whole of the remaining balance of £40 being a liability of the shareholder upon which the depositor with the bank can count as a security for the repayment of the moneys he entrusts to its keeping. In addition to the capital paid up and this very large uncalled liability of the bank's shareholders, every bank of standing has kept back from time to time from the distribution of its profits considerable amounts in order to build up a reserve fund, not infrequently as large in total as the amount of its paid-up capital. This security for the depositor is the outstanding feature of the English joint-stock banking system.
But above and beyond this is the use to which the depositor's moneys are put. When it is considered that three English banks have deposits of well over £100,000,000 each, and two others of slightly under that figure, it will be seen that the employment of such moneys is a vital consideration, not only for the domestic management of the banking institutions themselves, not only—though this is the paramount considerationfor the due repayment, as and when required, of its depositors' moneys, but for the support of traders by way of accommodation. It is just as such support is wise and safe that it is justified from the point of view of the bank, of its depositors, of the traders to whom loans are given, and from the point of view of the general good of the community. These are the most elementary considerations—bankers, at least, have them ever in mind.
The criticism that has been directed against the management of English banks is not that they are insufficiently safe, but that they are too safe! In their conduct of their business—and by this is connoted their loanings to traders --they are said to have been too timid. A little more adventure would have been desirable. Now this may be a perfectly fair criticism. It is at least gratifying that the fault of the banks, if fault there be, is allowed to be on the side of care and prudence ; but it may be admitted that even care and prudence can be carried to such lengths that they become a fault. It is the main object of this article to examine this particular charge.
There are two main trade divisions with which bankers are concerned, home and foreign. The nation's imports and the home trades are included in the first or 'home' division ; its exports in the second or 'foreign.' This is a very broad definition, and only accurate in a broad sense. A trader may, for instance, be both an importer and an exporter. A manufacturer may import as well as manufacturing and exporting. But for the most part, though with many exceptions, the importer, the manufacturer, and the exporter are different persons. The manufacturer, so far as he is engaged in the home trade, belongs, with the importer, to the home division ; so far as he is manufacturing for export he belongs, with the exporter, to the foreign division.
Let us deal firstly with the supposed failure of English banks to finance the exporter, for this has been made by many critics the gravamen of their charge. It is alleged that while the German banks have done everything necessary to support their nationals' export trades, similar business has been checked or prevented in this country by lack of banking facilities. Strange to say, this charge, though made in numberless newspaper and review articles, has never, so far as the present writer is aware, been supported by any evidence whatsoever. No individual, no firm, no joint-stock company, engaged in export trade, who may have required banking facilities and been refused, has ever brought forward a case in point. It may quite well be that such a case could be stated and even made good. Bankers are not infallible, and advances are sometimes refused, as they are sometimes given, unwisely. But it is significant that it is always as a general proposition, and not with the aid of specific evidence, that the charge is made. The charge, let it be said quite bluntly, is ludicrously untrue, and can be proved so. To justify this statement it is necessary to examine somewhat exhaustively what is done day by day, the year round, up to great amounts in total, in the precise business which, according to the accusation, is hindered by lack of banking support.
Our principal export trades are coal, cotton and woollen goods, and hardware—the last a very inclusive title. We will first consider the case of exporters alone—that is, persons who buy these commodities in this country with the object of selling them abroad thereafter, often, of course, upon orders received. Firms and individuals in such export business range, as in all businesses, from wealth to very moderate means. But, none the less, banking accommodation may be required by all, at times and seasons, according to the magnitude of the trade undertaken. As purchases from the home manufacturer of the goods to be exported can be more profitably made for cash than for credit, it may pay an exporting house to employ its own capital in the first instance and in addition, if necessary, to borrow from its banker for the ready money to make such purchases. The proceeds of the sales, when received from abroad, eventually repay the bank advance and recoup the capital—in times of peace. This process applies both to the strong and to the less wealthy firms—accommodation being extended to both in their degree. More will be said upon this point later, as upon the very important considerations of the terms of sale and the status of the foreign buyer.
To take our first example, coal. As can be seen by the export figures of a normal year, say 1913, South Wales alone exported coal to the value approximately of £24,000,000. The principal purchasers were France, who took coal to the value of £5,796,000 ; South America, £4,704,000 ; Italy, £4,452,000. It is impossible, of course, to say to what extent these exports were financed by bankers, but it is certain that such finance was of large amount, for every bank in the ports of South Wales is giving accommodation daily for just such business. This is given in two main ways, among others. First, where the strength of the firm is great, the banker makes a loan without necessarily asking for the actual handing over to him of the shipping documents for the coal exported; secondly, where the capital of the exporting firm is only moderate, the lodgment of these documents is required. Alternative security may be tendered, in either instance, by the lodgment of other cover, such as debentures, guarantees, etc., but we are specially concerned, in explaining the modus operandi of financing exports, with those cases where bank advances for the coal sold abroad are made upon the direct security of the shipping documents--especially the outward bills of lading.
Bills of lading, as perhaps it is unnecessary to explain, are the shipowner's or shipmaster's receipt for the goods he has received and stored in his holds, and which he has undertaken to carry, in exchange for an agreed amount of freight money, to a certain destination—say a Brazilian port. Coal goes in large quantities to such destinations. The Brazilian Government for its railways, and private firms for their own needs or as distributors, import largely from South Wales. The South Wales shipper having paid for his coal, having secured shiproom for his cargo, and having duly received his receipt or bill of lading and arranged the appropriate insurance (if that has not been effected by the South American buyer), and, where necessary, having obtained certain consular and other certificates, attaches the whole of these documents, together with his invoice, to a draft drawn upon his foreign customer. With these documents in his hand he goes to his banker and applies for an advance of the money which he expects to receive, so that he may proceed at once to further buying and further exporting. As has been said, such advances are freely made. To give the further detail which is necessary if the whole process of such business is to be fully understood, it may be stated that the drafts upon the Brazilian coal importer are generally at ninety days' sight. This means that the importer does not pay for his coal cargo in cash, but undertakes to pay ninety days after his acceptance of the draft drawn upon him. Long before the ninety days expire the coal has been delivered, for upon the importer's acceptance of the draft the whole of the accompanying documents are given up to him, and by presenting them upon the arrival of the ship he is able to obtain immediate delivery of the coal. The documents which had been deposited with the English bank were promptly forwarded by that bank to its correspondent bank in Brazil, with instruction to surrender them against the acceptance of the draft. It will be seen that the English bank has parted both with the coal and with the documents. It trusts to the due payment of the Brazilian firm's acceptance at a future date for the means by which its advance is to be repaid. But suppose the Brazilian firm has met with misfortune and fails to meet its liability ; in that event the lending English bank has lost the material security of the coal cargo which has been sold and distributed and consumed long before the acceptance of the draft has fallen due, and has nothing to show for its advance but a worthless piece of paper in its Brazilian agent's hands. The bank, in such case, has recourse to its customer, the exporter, to whom naturally responsibility attaches throughout. If the customer can bear the loss, the bank is repaid-if not, not.
In the case of cotton goods, the process is not dissimilar. There are the same documents, the same or very similar conditions of sale, but certain special features which should be noted. A Manchester shipper to India, Ceylon, and the Far East often, when buying cloth, has to seek bank accommodation to pay for it. But unlike coal, which is shipped as delivered, the cloth may be bought in its roughest form and will require to be bleached or printed. These processes require considerable time before the finished article can be shipped, a bill of lading be obtained, and a draft drawn and despatched by the lending bank to its Indian or Chinese or other Eastern correspondent for collection of the payment due. How then does the lending bank which has given the loan upon the grey cloth preserve to itself a lien thereon when, of necessity, the borrower has himself to part with the goods for bleaching or printing and, possibly, packing ? In practice, a great amount of such advances is made upon the character and standing of the bank's customers until such time as the goods are actually shipped and the bills of lading obtained. In certain cases, what is termed an hypothecation of the rough material is required, and a charge is taken covering the goods from the time they are deposited with the bleachers until the shipping documents are obtained. This is believed to be valid without registration as a bill of sale, as all the time the goods are in the hands of third parties for the various treatments of the goodsa decision of the Courts in a well-known case having established the validity of the banker's lien in such circumstances. When, after such necessary delay, the shipment is in fact effected, there may be a very similar course of collection to that which has been described in connexion with coal exports. But there may be even more elastic terms granted by the shipper to his Eastern buyer, longer specified credit, and even credit for such unspecified time as may elapse until the importer shall himself have sold the goods, and received payment therefor. In such cases it may be stipulated that the goods shall be stored in