CHAPTER XXVI

BANKING IN SOUTH AMERICA

[196]The special interest in South American banking which exists at this time is the product of at least four distinct factors:

First. It has been evident for some years that the trade between North and South America is rapidly developing. In the ten years, 1903-1913, the exports from the United States to the ten Republics of South America increased 274 per cent. against an increase of all our exports during the same period of 73 per cent. In spite of inexperience, crude methods, lack of banks and of ships we have made notable gains in South American trade. There seems to be no reason to question the probability of a continued rapid increase during the next few years.

OUR GROWING SURPLUS FOR FOREIGN INVESTMENT

Second. Other forces have gradually been bringing this country more and more into the position of looking for investment opportunities abroad. While it is true that the United States is a debtor nation in the sense that a large amount (estimated at $3,000,000,000 to $6,000,000,000) of European capital is invested here, it is also true, on the other hand, that the national income has for some years been sufficient to meet annual payments abroad, to make large fresh investments in our own enterprises, and still to leave a considerable surplus for investment in neighbouring countries. It is estimated that American capital in Mexico and Canada amounts approximately to $1,500,000,000. In South America there are already American investments of perhaps $300,000,000 to $400,000,000.

As the national income and savings expand and as the opportunities for exceptionally profitable investment within this country decrease, it is clear that there must be a stronger and stronger tendency toward investment abroad. The immense sums, for instance, that have been flowing into railroad construction and rebuilding will not be needed to so great an extent in future. A considerable proportion of this overflow of capital may certainly be expected to spread into South America.

GREATER LENDING POWER OF BANKS

Third. The adoption of the federal reserve system has made a remarkable improvement in the handling of gold and of credit. It has released and made available for other forms of financing great sums which were formerly tied up in scattered reserves. We have only to look at the monetary history of the German Empire during the last forty years to see how powerful an influence on industry, trade, and investment is exerted by the centralisation and control of bank reserves. The London _Statist_ has calculated the ultimate increased lending power of American banks, under the federal reserve system, at $3,000,000,000.

EUROPEAN WAR

Fourth. The European war has suddenly stimulated the tendencies which were previously evident. It has temporarily cut off a considerable amount of European trade in South America, thus leaving an opening for even more rapid development of our trade than would otherwise have taken place. It has deprived South America for a period of several years of the steady inflow of European capital. It has enormously increased the exports and decreased the imports of this country, thus placing suddenly at our disposal greatly enlarged financial power, possibly as much as $1,000,000,000 per annum above normal. Its ultimate effect, we may safely assume, must be to increase considerably rates of interest the world over, thus stimulating the tendency toward an enlarged outflow of capital from the United States into neighbouring countries.

By reason of the war the same kind of a situation that would otherwise have developed slowly in a period of years now confronts us suddenly when we are as yet in a state of financial unpreparedness. The new machinery provided by the federal reserve act is not yet fully utilised or adjusted in its final form. It will require careful study, combined with prompt action, to utilise the financial opportunities now before us with greatest advantage to all concerned.

ENGLISH BANKS IN SOUTH AMERICA

Although English interests have share holdings in other institutions, there are only five banks in South America that stand out as unmistakably British. In the order of their development, these are the London and River Plate, London and Brazilian, British Bank of South America, Anglo-South American Bank, and Commercial Bank of Spanish America. Each institution, with one exception, has concentrated on one country, in which it has established most of its branches and to which it has devoted its first efforts. The exception is the British Bank of South America, which has followed the contrary policy of having only a few branches strategically located in important cities; in other words, this bank has concentrated on selected cities rather than on a given territory.

ENGLISH TRADE AND BANKS DEVELOP TOGETHER

The development of commercial banking by British interests has everywhere gone hand in hand with the development of British investment and British trade. The accounts of the railways, mercantile firms, steamship lines, public utilities, and other enterprises conducted by their fellow countrymen form the great bulk of the business of the four leading institutions; the Commercial Bank of Spanish America is, however, operating under different conditions. Indeed, it may even be said--again speaking in broad terms--that the English banks have made comparatively little effort to secure the accounts of domestic enterprises. It is certainly safe to say that they have not made efforts in this field at all comparable with the efforts of the German, Spanish, French, and Italian banks. It is interesting to note also in this connection that the management and even the clerical force are, with few exceptions, brought over from England. After more than fifty years the three leading institutions remain as distinctively British as they were at the beginning.

GERMAN BANKS IN SOUTH AMERICA

To understand the energetic development of German banks in South America during the last forty-five years we must consider the conditions prevailing in Germany during that period and the strong forces working toward industrial and banking expansion.

Beginning immediately after the Franco-Prussian War of 1870-71, German industrial interests, with the strong support of the German Government, began to struggle more vigorously and more effectively than ever before for a larger share of trade in international markets, particularly in the Far East and in South America. It was clearly realised that Germany needed a large and rapidly growing export trade in order to maintain her own prosperous development. In order to get this trade it was necessary to follow a definite programme which included the provision of better shipping facilities and of better facilities for financing. Up to that time Germany had been fully as dependent as the United States is to-day upon foreign ships and foreign banks.

It was also clearly realised that the tendency was toward large scale production in most industries and that those concerns which could secure large sales in the world-wide markets would soon come to enjoy an overwhelming advantage over smaller competitors. The German industries, in conjunction with the great German banks, began to follow, therefore, a programme of concentration, which has since gone steadily forward.

These two forces--expansion in foreign markets and concentration at home--have had a controlling influence on Germany's foreign trade, and incidentally on her foreign banking.

OTHER INFLUENCES IN BANK EXPANSION

Another influence of importance is the fairly well-marked division of German industrial interests into a small number of groups, each one of which centres about and is allied to one of the great banks. To some extent this is true in other countries, especially where banking is centralised--notably in Canada, for instance--but it is especially clear and well recognised in Germany. Hence each one of the great banks is under especially strong pressure to foster and develop the interests of its important clients, even at the expense of some temporary risk or sacrifice for itself. This is doubtless the primary motive which has induced the great German banks one after another to enter foreign fields.

There is a wide-spread notion outside Germany that the German Government has itself actively intervened for the purpose of stimulating foreign trade expansion and has brought pressure to bear on German banking interests, leading them to push ahead more rapidly than their private business interests would have required. This idea may or may not be correct; so far as the writer is aware there is no special evidence pertaining to South American banking development to sustain it. At any rate, it is easy to explain the policy of these banks as being based upon purely business considerations.

As a matter of fact, there has probably been much exaggeration of the thought that the German banks are primarily self-sacrificing instruments of an ambitious national programme rather than ordinary business enterprises. The statement is frequently repeated that the English banks in South America aim first and all the time for profits, while the German banks aim for development of their national interests.

Of the four large German banks in South America only one is remarkable for energetic and successful expansion. The others have been moderately successful. The difference is to all appearances chiefly due to management.

Although these four banks were presumably designed primarily to advance the business interests of the banks which organised them, they have incidentally had a powerful influence on investment of capital and on trade. The German manufacturers of machinery, steel products, and the like, have been especially helped by the ability of the German banks, both in South America and at home, to help in finding capital and in financing.

The German banks have not found political or economic conditions in South America which were insuperable obstacles to sound or profitable banking.

OTHER BANKING INSTITUTIONS

Other nationalities besides the English and the Germans have invaded the banking field in South America. The French, the Italians, and the Spanish have all been active, particularly on the east coast, and are represented by large institutions.

AMERICAN BANKS

Only after the federal reserve act went into force in November, 1914, was it possible for any bank organised under the national-bank act of the United States to establish branches abroad. The act restricts this privilege to institutions having capital and surplus of $1,000,000 or more, and gives the Federal Reserve Board discretion to withhold its consent. Up to this writing the only institution which has taken advantage of the powers granted by the federal reserve act to enter South America is the National City Bank of New York, which has established branches in Buenos Aires, Montevideo, Rio de Janeiro, Santos, and Sao Paulo. Other branches will probably be established in the near future. Especial attention is being given to the collection of credit information. The bank also maintains a foreign trade department, which gives information and advice to its depositors as to building up business abroad. This department is now equipped to make specific reports on trade openings in Argentina, Uruguay, Brazil, Colombia, and Venezuela.

The Buenos Aires branch, which was the one first established, is understood to have done a satisfactory amount of exchange business. It stood ninth in volume of clearings in January, 1915, among the twenty-odd commercial banks of that city. The other branches have not been in operation long enough to show clear results. The branches in Argentina (including the subbranch at Montevideo) and Brazil have each $1,000,000 allocated to them--though this is purely formal, as the bank's whole capital and surplus are behind the obligations of every branch.

The expansion of the National City Bank in South America has been much more rapid than that of any preceding institutions, including even the aggressive German banks. As a natural result, there is apparently less effort at this stage to build up local connections and influence in each city. So far the policy of the National City Bank appears to be to furnish foreign trade facilities to American exporters over as wide a territory as possible, rather than to concentrate its activities in any restricted region.

Other national banks in this country are known to be desirous of aiding in the financing of foreign trade, but have not up to this time found it practicable to take action under the provisions of the banking law as it now stands.

DOMESTIC BANKS

There are many important and successful banks in South American countries which are strictly domestic institutions, not only incorporated under the laws of the country in which they do business, but owned and managed by local interests. The notion sometimes seriously put forward that South American banking is almost wholly in the hands of foreigners is quite unfounded. It is true that trading operations are generally handled either by foreign houses or by houses in which there is a strong foreign influence and that the financing of nearly all foreign trade and of much local trade is likely to go to foreign banks. But the accounts of the rest of the domestic trading firms, of land owners, and of governmental corporations, as a rule, gravitate toward the domestic banks.

Following is an approximate statement of the total of deposits and credits in account current in each South American country on or about December 31, 1913, and an estimate of the distribution between foreign and domestic institutions:

+-------------+------------------+------------------ Countries. | Total bank | In | In | deposits. | European banks. | domestic banks. ---------------------+-------------+------------+-----+------------+----- | | Amount. | Per | Amount. | Per | | |cent.| |cent. | | | | | Brazil | $190,000,000| $78,000,000| 40|$112,000,000| 60 Uruguay | 42,500,000| 14,000,000| 33| 28,500,000| 67 Argentina | 626,000,000| 173,000,000| 28| 453,000,000| 72 Paraguay | 3,500,000| | | 3,500,000| 100 +-------------+------------+-----+------------+----- Total, east coast | 862,000,000| 265,000,000| 30| 597,000,000| 70 | | | | | Chile | 104,500,000| 29,500,000| 28| 75,000,000| 72 Bolivia | 8,800,000| 1,500,000| 17| 7,300,000| 83 Peru | 28,500,000| 7,500,000| 26| 21,000,000| 74 Ecuador | 4,000,000| | | 4,000,000| 100 +-------------+------------+-----+------------+----- Total, west coast | 145,800,000| 38,500,000| 26| 107,300,000| 74 | | | | | Colombia | 5,800,000| | | 5,800,000| 100 Venezuela | 6,200,000| | | 6,200,000| 100 +-------------+------------+-----+------------+----- Total, north coast | 12,000,000| | | 12,000,000| 100 | | | | | Total, South America |1,019,800,000| 303,500,000| 30| 716,300,000| 70 ---------------------+-------------+------------+-----+------------+-----

The great Banco de la Nacion Argentina (Bank of the Argentine Nation) is an official institution, all the shares of which are owned by the National Government. It is a successor of the former national bank, which was driven into insolvency in the great financial crisis of 1890 and was afterwards liquidated. Although it was organised during a period of disaster and there were many prophecies of its certain failure, the Bank of the Argentine Nation has had a wonderful development and to-day ranks as the seventeenth in size among the great banks of the world.

The bank pays no dividends, but carries 50 per cent. of its profits to the credit of capital account and 50 per cent. to reserves. Entirely through this process the capital and reserve funds have increased from approximately $22,000,000 in 1892 to over $100,000,000 at the present time. During the same period deposits have grown from $21,000,000 to $205,000,000, and discounts and advances from $47,000,000 to $208,000,000. There are now more than 150 branches.

The bank differs from most other governmental institutions in that it carries on distinctly a commercial banking business more or less in competition with private commercial banks. Until the crisis of 1914 it did no rediscounting for other banks, and even during the crisis its activities in assisting other banks were much restricted.

LAND MORTGAGE BANKS

In several of the South American countries there is a well-organised system of land-mortgage banks following European models. In some cases the banks are owned and operated by the National Government and in other cases receive some special support or guarantee. The plan under which they all operate is the following: The owner of land who desires to raise money on mortgage approaches the bank and requests an investigation and appraisal, the expenses of which he usually pays. If the property is shown to be unencumbered with prior claims and meets other conditions, the bank delivers to the owner the mortgage bonds in convenient denominations up to a given proportion, usually 50 per cent., of the appraised value. These mortgage bonds are part of a series and are themselves secured, not by any specific piece of property, but by all the property covered by the series; they are also backed by the credit of the issuing bank. The owner of the property then offers the bonds for sale through a broker, and in this way obtains the desired funds. He pays the bank a small commission, from one-fourth of 1 per cent. to 1 per cent., for its services.

In Argentina, where this system is developed to its highest extent, these land-mortgage bonds are known as "cedulas," and are issued by the Banco Hipotecario Nacional (National Land Mortgage Bank). At the present time the Argentine "cedulas" tend to sell on a 7 per cent. basis, more or less.

Uruguay, Brazil, and Chile all have similar issues, which sell on bases ranging from 7 to 9 per cent. or even higher. Broadly speaking, and without attempting to assign a definite value to any one of these issues, they are sound, conservatively issued, well protected, and under normal conditions readily marketable. The more important issues have been widely sold in England, France, and Belgium. If they were properly introduced and made well-known in the United States, there is no reason to question their finding a good market here also.

Side by side with the land-mortgage banks there are operating in the Argentine a number of English mortgage companies, which directly invest their own funds in land mortgages and have earned highly satisfactory profits.

In several countries there are state-owned savings banks, a large portion of the funds of which also go into land mortgages.

CONDITIONS OF COMMERCIAL BANKING

A banking business, like any other, must adapt itself to surrounding conditions, including laws, business customs, precedents created by older banks, and the like. In South America these conditions differ in a number of respects from those which prevail in the United States. Probably the first impression of most observers gives an exaggerated idea of the differences. However, they should be fully and carefully considered.

The chief differences that directly affect banking operations are the following: (1) Comparative absence of banking regulation on the part of governments or associations; (2) national colonies; (3) social character of business relations; (4) lack of highly developed economic organisation; (5) relatively high and stable rates of interest; and (6) in some countries fluctuating currencies. The first five of these circumstances call for brief comment.

LITTLE CONTROL OR CO-OPERATION

Not only is there a marked absence of laws directly applicable to banking concerns, but there is also an equally noteworthy absence of control exercised either by the Government or by associations among the banks. Even the large governmental or semi-governmental banks in Brazil, Uruguay, Argentina, Chile, and Bolivia are competitive with the other banks. Whatever influence they exercise is secured through their active and direct competition, not through any special authority over the other banks conferred upon them. In the fall of 1914, for the first time, there was some rediscounting of the paper held by other banks on the part of the Bank of the Argentine Nation and of the Bank of the Republic of Uruguay; but this tendency did not go far. The other banks objected to placing information as to their relations with customers in the hands of the governmental institutions. In other countries there has not been even this much of an attempt toward fulfilling the functions of a central bank of rediscount.

It is difficult to secure in most of the South American cities even the most elementary kind of co-operation among the banking institutions. How is it possible that they should continue to stand apart when they would obviously gain so much by coming together? A partial answer is to be found in the peculiarity that has already been pointed out, namely, the fact that many of the more powerful institutions are the offspring of European countries. Each one is fighting to support the trade of a certain well-defined group of clients. The national antagonisms among them are deep-seated and sometimes virulent. All this was true even before the European war. It will be tenfold true for a number of years to follow.

NATIONAL COLONIES

This leads to mention of the second condition, one which operates in favour of European-owned banks to the relative disadvantage perhaps of American banks. This condition is the presence in some of the large South American cities, notably Buenos Aires, of a large colony representing each one of several important European nations. Naturally the tendency of each colony is to support banks of its own nationality.

On the whole, although this matter of national affiliations is undoubtedly a factor to be reckoned with, it appears to be by no means decisive. The German banks, for instance, have been able to expand with much greater rapidity than we should have been justified in expecting on the basis of their national trade and national colonies alone. This is true likewise of the Italian and French banks. A great proportion of the business men of South America, even those of foreign origin, are governed less by their national sentiments than by their business interests.

PERSONAL CHARACTER OF BUSINESS DEALINGS

To an observer accustomed to European or American methods, one of the most striking features of business life in the South American cities is its strongly personal and social flavour. We are accustomed in this country to emphasise the principle that friendship is not a safe guide in business dealings. In South America the contrary is more nearly true. Family ties are apt to be a controlling factor in choosing partners and employes. If one's ultimate object is to have business dealings with a firm, he must first cultivate the personal friendship of the head of the firm. Social relations and business relations become confused, and it is hopeless to expect the purely impersonal view of a business proposition that is considered correct in this country. Like all sweeping statements, this one is subject to exceptions. There are many American, German, and English firms, especially in Buenos Aires, which prefer what we denominate "businesslike methods," but they are not numerous enough to give the tone to business life.

This is a condition which directly affects banking practice. It makes it very difficult, for example, to introduce the custom of securing full financial statements from all applicants for credit. The request for a statement is apt to be construed (as was the case in this country not many years ago) as a reflection on the personal honesty and credit standing of the applicant. For the same reason it is difficult, and may frequently be poor policy, for a bank officer to ask a customer a direct question as to the status of his business. He is likely not to take an impersonal attitude toward the question, but to resent it as if it were an attempt to pry into his purely personal affairs. Consequently, all business men, including bankers, are forced to rely to a great extent in estimating the credit standing of individuals and firms on their personal impressions, on such information as they are able to secure through indirect hints and questions and on the business gossip which they pick up. It must be remembered that, except for Buenos Aires, most of the business communities are comparatively small and isolated. There is little opportunity, therefore, for long-continued fraud. A man who shows traces of dishonesty is much more plainly marked than in larger communities. As a consequence, the lack of the machinery and the customs that we consider indispensable in extending credit does not prevent the formation of correct ideas as to the wealth and character of a business man.

UNDEVELOPED ECONOMIC ORGANISATION

Most of the South American countries, we should keep in mind, are still sparsely populated and have no need for the elaborate machinery of trade and finance which exists in Europe and North America. The region farthest advanced in its economic development, the River Plate Basin, may be roughly compared to agricultural States like Iowa, Kansas, and Nebraska as they were thirty years ago. Farming methods are usually not economical. The small farmers have little money of their own, their lands are heavily mortgaged, and they are "carried" from one crop to another by the local general retailer, who makes advances to them both in goods and in money. The retailer must in turn secure liberal credits from wholesalers, who are in their turn partly "carried" by the banks. There is no clear-cut distinction between dealers in commodities and bankers, for the dealers are forced to finance most of their own sales. Such an arrangement of course favours extravagant credits, high prices, speculation, and crises, just as it did in the United States. It is rapidly giving way to a more complex organisation, in which the farmer has funds of his own, does his short-term borrowing at a bank, and pays cash for his purchases.

Without attempting to comment on intermediate grades of organisation we may consider briefly the manner in which trade and finance are conducted in the north coast countries. An officer of a bank there asserts that banking in the north coast countries is not to any great extent a matter of handling currency or money funds. The intermediary system of brokers, merchants, and other middlemen between the producer and his market, to which we are accustomed, is lacking, and the banker must take the place of all of them. He must himself inspect and sell produce. Loans are made, for instance, secured by growing crops; the bank sends a man to the plantation to look over the coffee or cocoa, or whatever the crop may be, and report on its condition and prospects; to protect itself the bank sees that it is properly prepared for shipment, and takes care of the sale in the New York, London, or Hamburg market. The bank collects the proceeds and credits the customer with his share. Interest rates run from 8 to 15 per cent. and commissions for selling from 1 to 3 per cent.

INTEREST RATES

Interest rates average considerably higher--even making allowance for increased risk--in South America than in the United States. They are, however, much more stable and more uniform over the whole continent. The uniformity is no doubt to be ascribed chiefly to the large English and German banks, with their branches in several different countries and their ready access to European financial centres. The stability in rates over a period of years is presumably due in part to the relatively gradual development of banking, commerce, and production, so that sudden shifts in the demand for and supply of banking capital are not frequent.

There are, however, a number of exceptions to the general stability. In Argentina the crop-moving season creates, though to a much smaller extent, the same kind of extra demand for currency as in the United States, and tends to make some seasonal variations in discount rates. They vary from as low as 6 per cent. to as high as 12 per cent., but do not normally move far from 8 or 9 per cent.

COMPENSATION OF DIRECTORATE

The German, French, Italian, Spanish, and many of the domestic banks, especially in Argentina and Peru, follow the European custom of compensating the home office directorate by allowing them a fixed percentage of the net profits. The president, manager, founder, and others may also be compensated in the same way. The net profits of the Banco Espanol del Rio de la Plata are distributed: 2-1/4 per cent. to certain specified charities, 1 per cent. to the founder, 12 per cent. to the reserve fund, 2 per cent. to the directors and managers, 2-3/4 per cent. to the fund for employes, 80 per cent. to the shareholders for dividends and dividend reserves; those of the Banco de Italia y Rio de la Plata: 1/2 per cent. to charity, 5 per cent. to the reserve fund, 7 per cent. to the directorate, 1-1/2 per cent. to the fund for employes, 86 per cent. to the shareholders. There is apparently no general rule which governs the distribution except possibly that the larger the bank the smaller is the percentage for the directorate and management. In England the directors are more likely to receive a fixed compensation. Whether this plan of having a paid directorate works better than the American method of having a directorate made up usually of some of the larger shareholders, whose payment is purely nominal, is an open question. It is largely a matter of national custom.

CLASSES OF BUSINESS OF FOREIGN BANKS

First. The foreign banks in South America usually start by devoting a large proportion of their energy and capital to operations in exchange.

Second. In this connection they purchase and make advances against commercial bills drawn on importers in the countries where they are doing business.

Third. At the same time the home office in London, Hamburg, or Berlin is probably developing a business in acceptances which involves comparatively little direct expense and allows considerable profits.

Fourth. All South American banks are called upon to handle collection of drafts and sometimes to take care of ordinary mercantile transactions, both on a commission basis.

Fifth. An activity which may be of some importance from the beginning consists of underwriting and selling securities.

Sixth. As quickly as possible the foreign banks build up a local account current and loan and discount business.

Seventh. Some of the banks, especially the German banks, have participations in syndicates and in industrial enterprises.

Eighth. In some branches they receive money and securities for safekeeping or rent safe-deposit boxes.

Ninth. Many banks have savings and mortgage-loan departments.

None of the distinctively foreign banks in South America has as yet issued circulating notes; this is being done, however, by some of the domestic banks in which foreign capital is heavily interested.

There may, of course, be other miscellaneous activities.

FOOTNOTES:

[196] Adapted from William H. Lough, _Banking Opportunities in South America_, Department of Commerce, Special Agents Series, No. 106. Washington. 1915.