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CHAPTER XI

BANKING AND INVESTMENT ABROAD

ANKING credit is needed by American busi

ness men, not only in domestic but in foreign trade. In the past we have relied chiefly on foreign banking concerns. Economic changes, some of which had begun before and some of which were caused by the European War, are tending to lessen the dependence of American business men upon foreign banks for assistance in foreign trade, and to promote the establishment of a more adequate American banking system abroad. Before the European War certain American banks acted as correspondents in this country for foreign banks, and these foreign banks in turn rendered a like service for them in foreign countries. The number of agencies established by American banks abroad were fewer than the agencies established by European banks in this country. Gradually American banks were led to deal in foreign exchange, make collections for American exporters, maintain credits for American importers against which foreign producers could draw, and supply credit information. But in by far the majority of cases we were dependent upon foreign banks for information about conditions in foreign countries. While it is true that this

dependence can never be entirely removed, there must go along with the increase of our export trade an extension of our banking machinery into at least the most important trading centres abroad.

European banks, organized with foreign trade in view, have for many years rendered exporters assistance in other than mere banking lines. They have, for example, assisted in discovering new trade opportunities, negotiating foreign contracts, and encouraging investment in foreign enterprises. Foreign investment was prior to the war a large factor in developing German and British foreign trade. The increasing practice of providing in contracts that the materials used in enterprises financed by European capital should be purchased from the country supplying the funds has resulted in many closed markets, from which American merchandise is practically barred. In fact, one of the most prominent factors in the development of international trade during the last fifteen years has been the exportation of capital. It has created preferential markets and proved an effective factor in competition. As long as a large proportion of the foreign banking of the United States is entrusted to the banks of our oversea competitors many of the advantages derived from the trade and investment activities of European banks will not be available to us.

During the period when the greater part of American exports consisted of food-stuffs and raw materials -things which practically sold themselves-the lack of

banking support abroad was not seriously felt. With the increase of the percentage of manufactures in our export trade, however, competition becomes keener, and the need of assistance from banks becomes imperative. Not only does the individual exporter need the benefit of American banking facilities, but we will profit nationally by seeking our share of the large revenue annually paid for banking service in international commerce. It is estimated that in 1912, the value of bills on London (at that time practically the universal currency of international commerce) was more than $9,000,000,000. On every dollar of this amount some profit was made or some commission was taken by a London bank. London has for many years been the most convenient point for settling international accounts. The reason for this is that practically every one extensively engaged in world trade is either a creditor or a debtor there. This explains to a large extent the existence of numerous and powerful British foreign and colonial banks.

We did not awaken in this country to the importance of foreign banking until our steadily increasing foreign trade had exceeded an annual total of four and onehalf billion dollars per annum. The outbreak of the European War disarranged the machinery of international exchange, which rested so largely upon bills on London, and gave to us the opportunity to establish in place of the sterling exchange the dollar exchange in the American trade formerly financed through London. As a result, dollar exchange has

been established to an extent which would have been impossible except for the war conditions. After the close of the war it will divide the field with sterling exchange and its security will depend upon the development of our oversea trade, our industrial efficiency, our investment of capital in foreign enterprises, and the position of the United States in distributing foreign merchandise in transit.

Partly as a result of necessity and partly through wise foresight on the part of business men, American foreign banking has been considerably extended since the war began. The largest national bank in the United States has established a number of branches in South America, has established new agencies in Europe, has taken over the one large American international bank with its branches in Central America and the Far East, and has organized a $50,000,000 finance corporation, the purpose of which is to finance American enterprises abroad. The largest trust company is closely affiliated with a large and active foreign trading company. The largest private banking company, acting as agent for two of the nations at war, has handled hundreds of millions of dollars in war orders and built up an extensive export department. The largest American steamship corporation has recently been organized by banks. Throughout the country, particularly in the chief ports, banks have enlarged their facilities for export trade particularly in the direction of assisting manufacturers in foreign markets. The circulation of foreign trade

information is an important function of certain banks and has stimulated others to acquire a familiarity with oversea conditions which will be useful to their customers.

Foreign loans have been floated in the United States to the extent of more than $1,500,000,000. The greater part of these are governmental issues, but proposed industrial issues are under investigation in all parts of the world. The Federal Reserve Act has recently been amended* to permit national banking associations, under certain restrictions, to establish branches in foreign countries or to hold stock in banks engaged principally in international or foreign banking. Institutions which do not wish to incur the expense of establishing abroad their own branches will be able thus to gain direct foreign banking facilities and have an agency in foreign countries particularly devoted to their needs.

Great Britain has fifty-seven" oversea banks, with numerous branches. Their capital and reserve at the prevailing rate of exchange is more than $500,000,000. Excluding the Bank of England, this amount exceeds by 5 per cent. the capital and reserve of the fifty-six incorporated domestic banks of the United Kingdom with their 8,000 branches. We have one incorporated international bank, with a capital and surplus of $6,500,000, a fraction more than one per cent. of the capital and surplus of the British international banks. Our national *Amendment approved September 7, 1916.