Paper for presentation at Economic History Society Annual Conference, 28-30 March 2008, University of Nottingham Britain and the end of the first globalization: ‘financial crisis’, contagion and the British financial system authors

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Billings and Capie, March 2008

Paper for presentation at Economic History Society Annual Conference, 28-30 March 2008, University of Nottingham
Britain and the end of the first globalization: ‘financial crisis’, contagion and the British financial system
Mark Billings (corresponding author), Lecturer in Accounting and Risk, Nottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham, NG8 1BB

tel: + 44 (0) 115 846 6362, fax: + 44 (0) 115 846 6667

Forrest Capie, Professor of Economic History at Cass Business School, London, currently seconded to the Bank of England.
preliminary draft: please do not quote without permission of authors

The current era is sometimes described as one of unprecedented globalization. An earlier era of globalization is variously argued to have ended with World War One or with the dislocations of the late 1920s and 1930s. Certainly at the beginning of the 1930s the UK economy and some British financial institutions experienced various problems. Contributing factors included: currency crisis and abandonment of the gold standard; payment difficulties of international borrowers, especially those in Germany and central European countries subject to standstill agreements; struggling domestic borrowers in traditional industries; and the background of growing international economic and political tensions.
This paper brings together a variety of evidence to present a coherent picture of the impact of financial stresses on the British banking sector in the 1930s. We combine new evidence on the clearing banks, which played a key role in the UK financial system, with data on a variety of other banking institutions from existing studies. Data on asset structures, deposits, capital, profitability, risk concentrations and bad debts are examined, and we consider the links by which ‘contagion’ might have been spread and assess the impact of ‘crisis’ on Britain’s financial system.
The impact of the problems affecting the banking sector in the 1930s varied greatly across the different types of institution. While some merchant banks and British overseas banks were particularly hard-hit, the clearing banks, the largest financial institutions and the key element in the payments system, proved to be sound. The performance of these banks in the twentieth century has been subject to many criticisms, many of these unjustified or exaggerated. However, the resilience of these banks contributed greatly to the stability of Britain’s financial system at a time when severe problems were found in many other countries. We argue that the range of evidence now available provides more comprehensive support for this view than has been accepted previously.
Key words: globalization; British banks; the 1930s; contagion; crisis; stability.

1. Introduction
Globalization, the gold standard, financial crises and ‘contagion’ in the 1930s remain topics which continue to attract the attention of business, economic and financial historians. In this paper we re-examine the question of financial crisis in Britain in 1931. We use a basic theoretical framework to consider how ‘crisis’ should be defined and then consider how the financial system might have been at risk. Our argument is that the major British commercial banks were sound, in contrast to many merchant banks. But there would need to be sufficiently strong links between the two sectors leading to threats to the commercial banking system that would endanger the payments system before a financial crisis could develop. In any event, even if the commercial banking system were to have been at risk, there was a ready solution in the key role of the Bank of England (‘the Bank’) as lender of last resort (LLR), something it had more or less perfected in the course of the nineteenth century.
Globalization, the increasing integration of markets and economies around the world, generally leads goods, services, capital, and even labour, to flow in increasing quantities and numbers. The economic theory that predicts convergence in trade and factor prices also predicts resistance to the increased openness since there will be winners and losers in the process. The outcome depends upon the relative strengths of these groupings and on the prevailing institutional environment. Not surprisingly there are crisis points.
The origins of globalization lie in the eighteenth century and its real beginnings in the nineteenth century. It came to a halt in 1914 and then went into retreat in the period between the two world wars before beginning to revive soon after 1945. A challenge to this chronology has been advanced together with an analysis of what brings an end to globalization. In a justifiably highly acclaimed book, the distinguished historian Harold James argued that the first experience of globalization in the world economy, which began to accelerate around 1870, came to an end in the years between the two world wars (James, 2001). This is a major revision to the most commonly-held view, mostly implicit, that this had happened with the outbreak of war in 1914.
The First World War was hugely disruptive for trade and capital flows, trade policy, migration, international monetary arrangements and much else. The postwar Treaty of Versailles was destructive of international relations as a consequence of the imposition of punitive reparation payments on Germany. These problems were exacerbated by squabbling among the allies over the repayment of debts accumulated in the war. James argues that globalization carried on its path after this interruption, coming to an end only when the financial systems of the world crumbled in the Great Depression years between 1929 and 1932. He goes on to argue that at the end of the twentieth century weak financial systems appeared similar to those of the 1930s and therefore signalled likely doom.
As the current experience of globalization begins to come under understandable strains it is vitally important that the correct lessons are learned from the past. It is with this aim in view that we try to bring some corrective to an important part of the James thesis. Our focus is on Britain, in the interwar period one of the leading economies of the world, a country with a large empire over which it had considerable influence, with an important, albeit weakened, currency, Sterling. We concentrate mainly on the principal commercial banks, the joint-stock clearing banks, a group of institutions small in number but of key importance.
James devotes considerable attention to central European economies but the essence of his thesis is that in the 1920s and 1930s governments were unable to be influential in the domestic economy because ‘... financial and banking systems were volatile and vulnerable to panic’ (James, 2001, p.31). This is essentially what brought globalization to a halt, but which we dispute in relation to Britain. Our argument is that the British financial system was remarkably robust and this provided stability for the British economy and indirectly much of the Empire. James is of course correct in pointing to the weaknesses in central European finance, but contrary to his assertions (for example ‘... the vulnerability of the British financial system’, James, 2001, p.69) we will show that the British financial system - still one of the most important in the world - was not vulnerable, but in reasonably sound condition. Equally, it was misguided monetary policy in the US - which might have been reversed at many points - that brought the worst of the depression there. But James considers that: ‘As an explanation of the US economy after 1929, the Friedman and Schwartz [1963] account is inadequate ... their argument is somewhat slippery as to causality ...’ (James, 2001, pp. 76-7).
The paper is structured as follows. The next section considers the nature of financial crises, and whether there was a ‘financial crisis’ in Britain in 1931. Section three outlines the operation of commercial banks in Britain and assesses some of the criticisms of them. This is followed by a section on the possible routes by which ‘contagion’ could have been spread to the British financial system, notably from central Europe. Section five reviews a range of evidence on the commercial banks in the 1930s, including new material from archival sources. In two brief sections we discuss the Bank’s role as LLR and contrast the nature of banking problems in Britain to those in Germany and the United States. Finally some conclusions are drawn.

2. Britain in the Interwar Period
2.1 Was there a Financial Crisis in Britain in 1931?
The idea of a financial crisis in Britain first entered the economic history literature with the article ‘London and the 1931 Financial Crisis’ (Williams, 1963). This article confused the different elements of crises and labelled them ‘financial crisis’. Nevertheless, so deeply did the idea of crisis take hold, no doubt partly because there were indeed financial crises in many other countries, that it is still commonly asserted that there was such a crisis.
A framework is needed within which to examine more rigorously whether or not there was a financial crisis. Bordo (1992, pp. ix-xiv) discusses alternative explanations and definitions of financial crisis, but we consider that the most satisfactory definition is provided by Schwartz (1986). A ‘real financial crisis’ is defined as being circumstances when the money stock is under threat - only when there is a threat to the payments system should we talk of financial crisis. A collapse in the money stock in the face of sticky wages and prices leads to a collapse in real output, for which reason the money stock should be preserved as a high priority. A ‘pseudo-crisis’ is where, for example, a large financial institution fails, or perhaps a major company or municipality. Such a crisis may create problems for shareholders and taxpayers but not for the financial system.
A useful way of thinking about the problem is by means of the money multiplier model, in which the money supply is determined by the actions of the monetary authorities, the banks, and the non-bank public. The latter two hold currency and deposits in certain proportions. When the public fears banking difficulties they move out of bank deposits and probably into currency. The banks too would raise their cash reserves in order to accommodate that demand. Banks in fractional reserve systems take deposits and make loans and by doing so they multiply the stock of money. When they fail, or take steps to reduce their assets, they reduce the stock of money. But in the economy wages and prices are sticky to varying degrees and when the money stock falls abruptly it has a damaging impact on the real economy. The monetary authorities therefore need to inject the appropriate amount of monetary base into the system to keep the money supply growing at its normal rate given the different ratios now existing. That is, in the face of a need for liquidity the monetary authorities need to know how to act and to do so quickly.
In Britain, the Bank of England had learned over a long period from as early as the beginning of the nineteenth century how best to act in providing the necessary liquidity. So much so that there had been no ‘real financial crisis’ since 1866. Even under the gold standard it became well understood that if necessary there would be a temporary suspension that allowed the Bank to inject the needed liquidity. It would begin to do this as soon as it detected fears of illiquidity. Its antennae were carefully attuned.
Capie et al. (1986) showed that there was no ‘real financial crisis’ in 1931. There was quite clearly an exchange-rate crisis for Sterling as the pound was forced off the gold standard and the exchange rate declined precipitately in the closing months of that year. The restoration of the gold standard in 1925 had been unsatisfactory in terms of the various rates adopted by different countries in the following few years. The pound was overvalued and by 1931 there were simply insufficient reserves to sustain the rate without the support of damagingly high interest rates. Pressure mounted on Sterling through the summer of 1931 and it became clear that soon there would be no way of defending the parity. In September the link with gold was broken.
There may not have been a financial crisis in Britain in 1931, but was the system nevertheless at risk? Certainly part of James’ story is that the merchant banks with close links to continental Europe were exposed to the severe liquidity and solvency problems experienced by the universal banks in Germany and elsewhere in continental Europe which developed rapidly in the first half of 1931. Debate has continued on the precise causes of these problems and how the sequence of events unravelled (for example, Balderston, 1991 and 1994, and James, 1984). We are interested in how this crisis could transmit itself elsewhere in order to examine the possibility of contagion. We argue that the routes for contagion were limited, and that the system was not at risk for reasons on which we elaborate.
2.2 The British Economy in the Interwar Period
The picture that is often presented of the interwar years in Britain (and elsewhere) is one of unremitting gloom - the General Strike, unemployment, deflation, exchange-rate shame, the Jarrow March, and a number of other such features. Space precludes a comprehensive assessment of interwar economic performance (see, for example, Crafts, 2004), but in fact the British economy performed well in aggregate. After the First World War boom, per capita GDP fell, before rising again to reach its 1913 level in the mid-1920s. The next peak was in 1929, and while there was a recession, there really was no Great Depression in Britain - output fell significantly in just one year (1931) and was static in two others between 1929 and 1932, with an overall fall in GDP per capita of around seven and a half per cent from the peak. This trough was followed by the strongest ever upswing in British economic history between 1932 and 1937, with GDP per capita rising by more than 22 per cent from its 1931 level (Feinstein, 1976, Table 17). This was after all the decade of ring roads and ‘interwar semis’, a huge construction boom and all that went with that.
There was a sharp increase in unemployment in the recession years from around 1 million in the 1920s to the peak of around 3 million. This unemployment is best explained in terms of rising real wages, the consequence of falling prices and fixed labour contracts (Beenstock et al., 1984). Changes in the benefit system also played a part. Real wage behaviour encouraged the supply of labour and dampened the demand for it. But unemployment began to fall quite quickly as economic growth rose sharply in the 1930s, although significant regional variations remained (Hatton, 2004, p.350, Table 13.1).
The principal explanation for the good performance after 1932 was the abandonment of the gold standard (experienced by other countries which also abandoned) and the freedom that gave to use monetary policy flexibly. Interest rates were low from 1932 through to the war. All of this took place in the face of collapsing international trade to which the British economy was more exposed than most.

3. The British Commercial Banking System
Britain’s commercial banking system had evolved over a very long period from the late seventeenth century onwards. Originally there were many hundreds of unit banks, unable to expand because of limiting legislation. When that was removed in the first half of the nineteenth century the system evolved into a highly concentrated one. By 1920 the extensively branched five largest banks (the ‘Big Five’) dominated the system taking about 80 per cent of all deposits and with around 10,000 branches. These banks were well-diversified across the country geographically and across all sectors of the economy.
A long-standing criticism of this system was that the banks were too conservative and did not lend to new, small and deserving businesses or to any kind of risky venture. Other criticisms include claims that banks failed sufficiently to: support industry through their lack of provision of long-term capital; promote industrial restructuring; charge competitive lending rates or pay competitive deposit rates. Further criticisms are that banks: were too conservative in structuring their balance sheets (through holding excessive amounts of government debt); demanded unreasonable security from borrowers; and used their ‘cartel’ to enjoy a quiet and comfortable life. These criticisms are often made by comparison to banks in continental European countries although Collins (1998) has argued strongly that the criticisms and the differences between British banks and those elsewhere have been exaggerated.
These criticisms have drawn many other responses but to some extent still persist. In some ways the banks contributed to the longevity of these criticisms by failing to contradict them. For example, so keen were the banks to preserve their reputation for sound finance that in their evidence to the Macmillan Committee (1931) they accepted that they did not lend on anything other than a short-term basis, for anything other than working capital. In fact, that was not the case, as many subsequent studies have shown, but the banks could claim that their role in the provision of finance was expected to be a limited one (see, for example, Ackrill and Hannah, 2001, pp. 93-5, Newton (2003) and Ross (1996) ). The distinguished economist Alfred Marshall had defended the banks in 1927 when he said they performed extremely well in the range of tasks they were supposed to cover. His only criticism was that they could venture more adventurously abroad, which on occasions they had done, but not with great success. As we shall see the banks did have certain kinds of foreign exposure in 1931. But underlying this debate on the appropriate role of banks is an implicit trade-off between stability and risk-taking.
An important aspect of British banking in this period was that the banks were not obliged to publish their ‘true’ profits and capital. A number of means were used to obscure their true positions, the most important of which was the use of ‘hidden reserves’. Recent research has shown that their true positions did not deviate in any alarming way from their declared position (Capie and Billings, 2001a and 2001b). Hidden reserves were used to smooth out the worst fluctuations over the business cycle, to help the banks to present a picture of strength and stability. Thus in the depth of a depression when profits were relatively low they would draw from hidden reserves and report higher profits and in the height of a boom when profits were relatively high they would remove some to their hidden reserves and report lower profits. The existence of hidden reserves also ensured that published financial statements understated the banks’ true financial strength. We examine the ‘true’ positions of the clearing banks below, but at a time when many of the developed world’s banks were in difficulty, the British system, or at least that part of the system that mattered for the payments system - the commercial banking part - was in a position of relative strength. On this evidence, the commercial banking system was not at risk.

4. Crisis in Central Europe and Contagion
4.1 Central European Problems
The ‘crisis’ of 1931 began with the failure of the Austrian Credit Anstalt, the country’s largest bank, but poorly managed in the 1920s, which was shown to be insolvent in May 1931 (Schubert, 1991). Attention quickly shifted to the closely connected German universal banks, which survived initial scrutiny. They operated on very low cash and reserve ratios, which began to fall further in June and July 1931. Panic started to spread as depositors cashed in their deposits in the six large banks. One of these was the Darmstädter-und Nationalbank (Danat), which failed due to its large exposure to the large textile company Nordwolle which itself had failed (Balderston, 1994). The Reichsbank’s limited experience as a central bank led it to behave as the LLR, and to lend freely to the market. Indeed given the practices of the universal banking system and the size of the leading banks it was not easy for the Reichsbank to act (Capie et al., 1986). The difficulties of the banks and Germany’s international payment position, against the wider background of World War One reparations and political, economic and social problems, led to much of its international debt becoming subject to a partial moratorium after the July 1931 London Conference, which was formalised in the September 1931 German Credit Agreement (‘the German Standstill’). This agreement covered short-term debt, with around £54 million due to British banks. The international debts of Austria and Hungary were also subject to similar standstill arrangements, although British banks’ exposures to these were a small fraction of their German exposures.1
The potential sources of ‘contagion’ are illustrated by the range of sources from which British banks’ exposures to German Standstill debt could arise: bills directly discounted - although the clearing banks favoured Treasury rather than commercial bills; advances direct to German borrowers; balances held with German banks; bills issued by German borrowers but guaranteed by the clearing banks; advances by clearing banks to merchant banks holding or guaranteeing bills subject to the Standstill; money at call with discount houses which held discounted bills subject to the Standstill; investment holdings of German securities; and indirect exposures through subsidiaries or affiliates. In addition, there was German debt outside the Standstill - a separate agreement covered municipal debt and further debt fell outside these agreements.2
For merchant banks and the discount market there were strong parallels between 1931 and 1914, when substantial short-term German credit was frozen on the outbreak of war (Fletcher, 1976, p.33; Roberts, 1992, pp. 153-4; Scammell, 1968, pp. 194-5). The exposures of the much larger clearing banks to Standstill debt accounted for only around one-third of the total outstanding when the Standstill was agreed. The clearing banks had much experience of dealing with ‘frozen advances’ in the 1920s to customers in traditional industries such as textiles, iron and steel, coal mining, and shipbuilding. The German Standstill would therefore have had elements of familiarity for most banking institutions.
Lloyds’ chairman commented at length to the bank’s 1932 Annual General Meeting, refuting suggestions that German business had been inherently high-risk and therefore lucrative, tempting British banks to be imprudent in their exposures.3 He emphasised both his own bank’s small exposure and that it had been reduced from earlier years (Lloyds Bank, 1932, pp. 4-5). Indeed, before the Standstill Agreement many bankers, both clearing and merchant, had been reducing their German exposures, especially those arising from acceptance business (Barclays, Martins Board Minutes, 38/573, no. 17, 22 October 1929; Diaper, 1986, p. 67; Roberts, 1992, p.264; RBS, WES/1174/187 and 249).
The initial six-month Standstill Agreement was renewed annually from 1932-39. It came to be seen by some as economic appeasement, while others considered that it reflected pragmatism or resigned realism (Forbes, 1987 and 2000). The Bank of England, with the approval of the Treasury, emphasised the need for British banks to remain engaged and took a lead role, extending loans to the accepting houses (at commercial rates) as bills of exchange covered by the Standstill were progressively withdrawn from the discount market to appear as loans in the balance sheets of merchant banks.
4.2 The Merchant Banks
Several of the major British merchant banks were European in origin and their strong European contacts had seen as a great advantage.4 Much of Germany’s short-term international debt arose from trade finance and German acceptance business had become a mainstay for those merchant banks heavily involved in acceptance business (the ‘accepting houses’) such as Kleinworts (Diaper, 1986, pp. 64-6) and Schroders (Roberts, 1992, pp. 188-9).5
The Bank exercised ‘moral suasion’ in asking commercial banks to provide support for the merchant banks to allow them to continue in business (Roberts, 1992, pp. 252-3). Such support provided sufficient funding to allow the merchant banks (and discount houses) to survive, despite exposures to Standstill debt well in excess of their capital. Schroders, for example, enjoyed support from its family partners and its main clearing bank, Westminster (Roberts, 1992, p. 266). Some banks had dangerously large German exposures. For the two banks with the largest Standstill exposures, Kleinworts’ exposures represented three times the partners’ capital (Diaper, 1986, p.68)6, and Schroders’ approximately 1.3 times partners’ capital and bad debt reserves (Roberts, 1992, p.264). Lazards were also heavily exposed.7 [INSERT TABLE 1 HERE]
But not all merchant banks had large exposures to German debt. Morgan Grenfell, for example, had largely avoided private German business, not even attempting to undertake acceptance business there until 1926 (Burk, 1989, p. 85). Indeed, the Morgan banking houses were largely antipathetic to German business (Burk, 1989, pp. 146-7), despite heavy involvement in the Dawes and Young plans and the related fund-raisings (Burk, 1989, pp.141-5).
The Standstill contributed to the reshaping of British merchant banking, with most activities acquiring a more domestic focus, a trend established in the 1920s with the informal embargo on overseas capital market loans. The league table of acceptance business (Table 2) shifted in favour of those banks less badly affected by Standstill (Roberts, 1992, p.267), corporate finance activity became more prominent with involvement in industrial restructuring efforts, and the emphasis in new issues business moved further to domestic business (Atkin, 1970; Burk, 1989, pp. 91-8, 160-6; Diaper, 1986, pp. 56-60; Roberts, 1992, pp. 268-72). [INSERT TABLE 2 HERE]
4.3 The Discount Market
Fletcher (1976, pp. 44-5) and Scammell (1968, p. 208) minimise the impact of Standstill on the discount market, placing greater emphasis on the fall in gilt prices before the onset of the ‘cheap money’ policy which was to last until the early 1950s. Fletcher (1976, p. 44) suggests that ‘Although discomforting, the 1931 crisis did not seriously threaten the discount market and no houses failed’. But the 1930s were undoubtedly a difficult period: ‘Times were hard for the Discount market; a principal of one of the smaller houses remembers that they made little or no profit between 1929 and 1939’ (Cleaver and Cleaver, 1985, p.66). This was despite significant changes in the structure and operations of the discount market intended to ensure its survival (Fletcher, 1976, pp. 43-53; Roberts, 1995, pp. 163-4; Sayers, 1976, pp. 536-44; Scammell, 1968, pp. 210-228).
4.4 The Continuing Standstill
Under the Standstill arrangements interest continued to be paid on advances and short-term commercial debt, most of which was in the form of normally self-liquidating bills of exchange, but principal amounts were rolled over. As time passed, attempts to reduce the exposures were made. Some repayments were made, unused facilities were cancelled and the depreciation of Sterling against the Reichsmark reduced the Sterling equivalent outstanding. Other German exposures were reduced: foreign-held German securities and German securities denominated in Sterling and US dollars were liquidated.
As the Standstill continued, creditors broke ranks. A market in distressed debt developed and many American creditors, in particular, sold out.8 Standstill debt could be reduced through the use of various form of ‘blocked marks’ - Reichsmarks convertible at rates lower than the official rate, subject to complex rules, which could be used for purposes such as the finance of additional German exports and travel in Germany (Harris, 1935, pp. 30-5).9 The Netherlands and Switzerland, significant creditor countries10, adopted clearing arrangements (Forbes, 2000, pp. 74-5; Harris, 1935, p.53; also see Neal, 1979, on central and eastern European clearing arrangements).
Schroders’ US operation, J. Henry Schroder Banking Corporation, established in New York in 1923, and known as Schrobanco, was also heavily involved in German trade finance. In contrast to many British banks, Schrobanco aggressively reduced its exposure to Standstill debt from $12.4 million in July 1931 to $495,000 by the time war broke out between the USA and Germany (Roberts, 1992, pp. 240-2). This was largely achieved through liquidating debt at a discount to face value, which London banks were reluctant to do, at least on the same scale.
But some British institutions were willing to realise significant losses by accepting settlement in Registered Marks, one form of blocked marks. N.M. Rothschild and Sons, a major Jewish-owned merchant bank, is believed to have used this method to withdraw completely from Germany (Forbes, 2004, pp. 244-5). In October 1934, Westminster’s General Manager Lidbury declined an invitation by a major debtor, Dresdner Bank, to accept payment in Registered Marks, which would have represented settlement at a 50 per cent discount (RBS, WES/1174/248). But Westminster later accepted Registered Marks in settlement of some debts, making losses of approximately £469,000 (RBS, WES/1177/102, note dated 28 November 1957). The larger Lloyds, with smaller Standstill exposures, was more aggressive in using this route, taking losses of approximately £580,000 in reducing its original Standstill exposure of £1.9 million to £433,000 at the outbreak of World War Two (Lloyds, HO/GM/OFF/28/2; Winton, 1982, pp. 88-9).11 National Provincial took approximately £1 million losses on Registered Marks in 1936 (Forbes, 2000, p.183). Those banks that did not take advantage of such opportunities were either well-capitalised (for example Barclays and Midland), and hence could afford to take a ‘long view’, or, as Roberts (1992, p.258) suggests, were so heavily exposed that significant losses from this source would have been very damaging (for example Kleinworts and Schroders).
From a British banker’s perspective, Standstill debt could be preferable to other types of ‘doubtful’ debt in that interest continued to be paid, and, in the early Standstill years at least, at relatively high rates, although these did not necessarily reflect the risk involved - rates were 6 per cent for bank loans in the first half of 1932, cut to 5 per cent from July 1932 (Forbes, 2000, p.43) and on acceptances ‘... just over 4 per cent in the middle of June 1933’ and 3 per cent at the beginning of 1934 (Harris, 1935, p.55). Throughout this period Bank Rate stood at 2 per cent.
But bankers were frustrated at the repeated renewal of Standstill arrangements. By 1935 the British commercial banks (particularly McKenna and Hyde at the Midland and Lidbury at Westminster) were pressing for repayments of principal, as well as expressing concern at the interest rates on Standstill debt (Holmes and Green, 1986, p.187). The deteriorating political situation would have made capital repayments impossible, leaving aside the question of whether Germany had sufficient resources, which was highly unlikely (Forbes, 2000, pp. 183-5). The German banker Schacht, Reichsbank president from 1933-39 and Minister of Economic Affairs from 1934-37, was losing a power struggle, with Göring holding a more important economic role from 1936 (with responsibility for implementing the Third Reich’s Four Year Economic Plan) and the Rhineland recoccupied in the same year. The bankers’ frustrations were encapsulated in comments by Lidbury in his capacity as the clearing banks’ senior representative to the Committee of Short-Term Banking Debtors: ‘We cannot go on like this for ever. It is unthinkable that we, as lenders at short term of other people’s money, can be forced into the indefinite continuance of a semi-permanent agreement which amounts practically to a forced and unrecognized funding ...’ (RBS, WES/1174/168, 11 January 1937).
The reluctance or inability of British banks to extricate themselves from Standstill meant that by 1939 total credit lines extended by British-based creditors had more than doubled from 24 per cent to 57 per cent of the overall total outstanding, which itself had shrunk considerably (Table 3). But the maintenance of ‘normal’ relations with Germany found support in financial and government circles. Indeed, some banks were willing to extend new credits to German borrowers, although the extent of such lending post-Standstill is unclear (Forbes, 2000, pp. 169-76).12 [INSERT TABLE 3 HERE]
The successive Standstill Agreements did create ‘... a kind of fictitious liquidity by “underpinning” the credit of the borrower...’ (Harris, 1935, p. 24). The judgement of many British banks that they would be repaid ultimately proved correct, although they had to wait until the 1950s when the complex 1952 Lancaster House conference led to agreement on the settlement of Germany’s pre-World War Two debts.13 The Standstill arrangements represented a compromise between political and financial interests, a means of maintaining credit lines to Germany to facilitate trade, maintain economic relations and encourage economic stability in Germany, thereby protecting the interests of creditors against the background of the collapse in international trade and rising protectionism and political tensions. Generally, British bankers accepted Standstill reluctantly, on the grounds that the alternatives, such as a complete moratorium, the use of clearing arrangements or extracting themselves with considerable losses, were worse (Forbes, 1987, p.586; Kynaston, 1999, pp. 434-5).14 Some bankers did, however, choose to realise losses in making significant reductions in their exposures, but most bankers allowed the Standstill to take its course, and, in the case of the clearing banks, could afford to do so.

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