THE FINANCIAL
CONSEQUENCES OF THE WAR
By Francis Delaise,.
From the Revue des Vivants
Translation
May 4th, 1933
No., 4195S
The British and French Treasuries
were called upon during the first year of the Great War to finance not only
their only their own armies, also the else the armies of their poorer allies.
Towards the end of 1915 France was obliged to pledge all her
gold withdrawn from circulation and all her best shares, both French and
foreign, at New York in order to pay the United States for goods furnished.
The British Treasury was then forced to shoulder the whole burden: it
too, became exhausted and in March 1917 was unable to meet a call of 50
millions.
Fortunately
the United States came into the War in April of that Year; from that moment on
the American Treasury became the sole and unique banker of the World War.
Soaking up by means of the Liberty and Victory Loans, the
capital returned to the American citizens by the allies, the American Treasury
used it to pay for the goods with which it continued to supply the belligerent
countries. We now come to a
remarkable reversal of positions: at
the beginning of War (1914) the American Treasury was Europe’s debtor to an
amount £5 milliards (1000 million (Brit)); at the end of the War the American
Treasury was Europe’s creditor to an amount of $10 milliards.
The
victorious allies settled down to dividing up the booty in 1919: the
Austro-Hungarian Monarchy was split up politically and Germany was dismembered
economically. Uncle Sam
generously refused to exact anything from the vanquished, he had no use for
territorial gains. All the same
he did not let a chance of business slip through his fingers. “Business usual".
At
that time the U.S.A. had a foreign trade equal in volume and expanse to that of
Great Britain and the Empire. The
U.S.A. also were the possessors of all the best shares and bonds, made over by
Britain and France at an earlier date. At
the same time the U.S. had short-term credits on all the towns, governments
and public utility services throughout the world. The United States had accumulated in the vaults of the banks two thirds
of the entire gold stock in the world. Nothing
lay in the way of seizing the monetary leadership held by Britain for over a
century. London and Paris were
only able to maintain their currencies at par with the direct co-operation of
the United States. In March 1920
Washington suddenly denounced the "Exchange Agreement" concluded
in1917.
The immediate consequences were:
(1)
that the Bank of England, unable to pay gold, allowed sterling to drop; and
(2)
the franc itself started on its downward course.
America had
visions of Wall Street as the international clearing centre. This proved a mere figment of the imagination.
The City, in spite of the fall of the pound, remained the principal
currency market and the South African Mines continued to sell their gold in
London.
The Central
Banks were able to create an international currency with the help of the
mechanism of "acceptance". The
reason why New York never rose to take London’s position as a Clearing
Centre can be explained by the fact that the American Banks had no foreign
branches (before the War they imported capital and did not export any). Great Britain alone had been able during a century of expansion to
weave an intricate net of banks over the entire g1obe. In the records of each bank included in this net is kept the history of
all concerns of any importance in international trade.
The
American
Offensive: Wall Street quickly realized that the key to London's position was to
be found in the system of acceptance.
The
Acceptance Council was founded at the end of 1918 on the initiative of Paul
Warburg to educate American bankers. Suddenly
the magnificent branch offices of the Guaranty Trust, Bankers Trust, National
City Banks, etc. sprang up in all the important centres throughout the two
hemispheres. It is easy enough to
erect a magnificent building in six months time but it is another matter when
it comes to experience and an intelligence service. In order to speed up operations the co-operation of certain
large French and Swiss banks was sought and the International Acceptance
Company formed.
France,
though for over fifty years she had been the World’s second-largest exporter
of capital had never bothered about organising a system similar to the
British. At the very eve of the
World War France’s largest deposit bank was carrying out exchange operations
at London through the Deutsche Bank! 1924
saw the stabilisation of the German mark under cover of the Dawes Plan. German capital, which had sheltered from the storm in Swiss and Dutch
Banks, now returned to the Reich Banks (on short term).
London with
an unstable currency was suddenly faced with a redoubtable coalition. It was hurriedly decided to stabilise the pound; and as America might
at any moment cause a fall in the pound by exacting the repayment in a lump
sum of the enormous floating debt contracted during the war, Mr. Baldwin
rushed off to New York to consolidate the British debt. Without consulting his co-debtors Baldwin accepted the most onerous
terms. British supremacy on the
exchange market must be saves at all costs.
The pound
was re-established at the old gold parity in 1925. A sharp struggle now broke out.
Wall
Street, profiting from the uncontested stability of the dollar, had recourse
to long-term loans, which it was able to offer cheaply on account of the
excessive abundance of capital. Wall
Street won over Canada and the South American States to pay back part of their
loan on London, and come to the American market. Even South America and Australia began to borrow on New York.
Beaten on
the field of long-term loans, London was better able to defend herself on the
field of short-term loans. The
City resumed the old pre-war relations with the Central Banks on the
Continent, and practically all of these consented now that the pound was
stabilised to replace part of their gold reserve by first-class
interest-bearing bills. As these
bills would have to be repayable in gold on demand, sterling was chosen in
preference on account of the special facilities obtaining on the London market.
The Gold
Exchange Standard gradually took the place of the Gold Bullion Standard.
Very close relations were established between the London and Vienna
Banks. From Vienna the Sterling
credits spread out over the Danube and Balkans.
Naturally
New York did not like to be beaten on this field: second-class banking houses
(Harris Forbes & Co., Blair & Co., etc.) began to specialise in
European transactions and rapidly came to the front.
New stars
appeared on the horizon: Loewenstein of Brussels, Insull of Chicago and Ivar
Kreuger. Kreuger, the good
Samaritan specialised in coming to the help of States in distress, on the
fragile basis of a Match trust.
London and
New York were at this time in keen competition as to which market was to
furnish most capital to the world at large to secure the supremacy of either
the pound or the dollar. There is
no doubt that this competition for the world's monetary hegemony was a
powerful factor in contributing to the recovery of Europe during the period
l924-28.
France's
Hour: Up to the end of l927 the struggle for supremacy lay exclusively
between London and Wall Street but at the end of that year there suddenly
arose an unexpected competition in the shape of the Bank of France.
During the
years 1924-27 hundreds of thousands of French capitalists alarmed at the rapid
denaturisation of the franc, invested practically the whole of their capital
in foreign currencies, foreign bills and foreign securities. But when, in 1927 M. Poincare succeeded in stabilising the franc at
one-fifth of its former value the fortunate possessors of all these foreign
assets hastened to "repatriate" their money, this making a very
substantial profit on the exchange into francs.
Now
although the new revalorised French frame was on a gold basis the Bank of
France obtained leave, by a special law to pay for the great mass of foreign
currencies, and bills handed over its counters by printing notes for the
purpose. These notes were never
accounted as part of the note circulation properly so-called. Thus the French State became legitimate owner of foreign gold assets to
the value of about £280,000,000 by merely setting the printing presses at
work.
The
stabilisation of the franc had re-established French confidence and this
transaction has always been regarded as one of the cleverest financial
transactions ever carried out by any Government, for it enabled the State to
enter into possession of a huge mass of appreciated foreign currencies without
disbursing a single ounce of gold metal.
A portion
of these foreign currencies was used by the French Government of the day to
pay off its immediate foreign indebtedness and the remainder was handed over
to the bank of France on terms. The bank transferred a substantial portion to the French
joint stock banks specialising in exchange business, and it then became
necessary to know what it would do with the remainder.
The
possession of the greatest stock of foreign currencies in the world gave birth
to the ambition to become the universal clearing house in lieu of London,
leaving the dollar to the American continent.
But with
whatever faults the French financial authorities may be criticised by their
foreign competitor, they were not slow to perceive that it is one thing to be
in possession of a huge stock of desirable merchandise, and quite another to
find the customers for such goods. Nobody
thought of going to Paris for exchange facilities, and, as France's share in
the trade of the world does not exceed between 6 per cent. and 7 per cent.,
she found great difficulty in obtaining a market for her mass of foreign
currencies.
The
gigantic American boom during the summer of l929 enabled France to utilise her
foreign assets in contangoes with the Wall Street brokers, but at the first
sign of a lull she was prudent enough to withdraw, so that very little loss
was incurred by French capitalists in the Wall Street October smash.
As these
foreign currencies could not be allowed to remain idle, they were immediately
placed out at about 2 per cent. with the London banks, which lent the money to
Germany with what results we now know. At
the end of 1930 according to an official statement made by the then Governor
of the Bank of France - the French State had something like 17 milliards of
francs, or £l36,000,000 placed out on short-term sterling loans with British
bankers.
Thus,
discarding for the time being her fleeting ambition to become the great
European acceptance market Paris was content to act as a purveyor of foreign
currencies to London, hence giving the London market remarkable support in its
rivalry with Wall Street But the crisis took a turn for the worse.
The
Danubian usurers were unable in the autumn of 1930 to pay back the pounds and
dollars loaned by Vienna owing to the fall in the price of corn. The Credit Anstalt started to totter and an appeal was sent to France
for help.
France
wanted to barter her financial aid against some political advantages and
Tardieu brought forward his Danubian Plan. Tardieu did not succeed in substituting his Danubian Plan for the
Anschluss and the Credit Anstalt went under.
The German
banks were placed in peril by this development, and the gold reserve of the
Reichsbank quickly drained. If
payment of the reparations falling due on June 15th had been exacted it would
have meant the collapse of the mark which would have endangered British and
American capital.
Hoover
proclaimed his Moratorium
Paris
protested and fussed but finally gave in: too late! The Reich in order to save the mark, had to obtain a general
moratorium for private debts. Short-term
credits, amounting to 100 million pounds and perhaps twice that amount of
dollars were "frozen" in Germany.
British
capitalists now took fright in their turn and attempted to withdraw their
deposits. This time the Bank of
France rushed to render aid. Going
halves with the Federal Reserve Bank of Bank of France advanced first 50 then
80 million pounds to its former rival.
Again too
late! Panic had broken out in
London. The pound was divorced
from gold on Sept. 21, 1931 and the Bank of France in spite of its prudence,
lost 2 ½ milliard francs.
The
devalution of sterling cost the Bank of France a little matter of £20,000,000
owing to the fact that the bank had been obliged to take over from the State
sterling currencies in less than six weeks, twelve nations, swept into the
maelstrom of the pound, were compelled to abandon the gold standard. Many other nations, in order to abandon like fate, were constrained to
institute a rigid control of their exchanges and it came about that at a time
when Great Britain and America - the two great purveyors of foreign exchange -
had most of their available credits locked up in Germany
and in Austria, every nation was in want of exchange facilities.
This
fact led to a sudden change in the position for whereas the Bank of France had
been obliged to run after buyers of its bills in London and New York, it now
found itself met with an enormous demand so that it could pick and choose.
Paris,
with its 68 milliards franc stock of gold and 21½ milliard stock of foreign
currencies, suddenly became master of the situation.
It
might have been thought that, in such a widespread catastrophe, which shook
the very foundations of the economic world, the three great rivals
institutions would have come together and united all their efforts in a
strenuous endeavour to repair the broken mechanism. But nothing of the kind occurred.
Each Central Institution thought only of
protecting its own position. The
mistress of the position for the time being, France had only one idea, which
was to derive as much profit as she could from the
universal state of disorder.
Lord
Reading hastened over to Paris on October 6 with proposals for the
“redistribution” of gold and currencies among the various Central Banks to
enable the private banks to return to a common standard.
The
occasion might have been taken to reduce the gold currency to a lower value
which would have lightened burden of the debtors to a considerable extent.
It was only
evident that such a step would have consolidated the international clearing
position which London had just 1ost. Mr.
Laval paid no attention to these overtures.
Through the
Federal Reserve Bank the French banking authorities learnt that President
Hoover was most anxious that France should not listen to the British
suggestion concerning a decrease in gold values. The American Ambassador in Paris had frequent interviews on the subject
with him and these culminated in a personal invitation for a visit to
Washington.
At the
Washington Conference, President Hoover impressed upon his French guest the
absolute necessity - from the point of view of two such gold currency nations
as France and the United States, holding between them two-thirds of the
world's stock of gold of maintaining the existing level of gold values. To this both President Hoover and M. Laval were in agreement.
But they got no further. The
further did President best to induced the French Prime Minister to agree that
the payment of German private debts should for the time being take precedence
of reparation payments.
He also
asked M. Laval to prevent the Bank of France from converting its enormous
dollar deposits in the United State into gold, for this would dangerously
weaken the American gold stock. M.
Laval prudently sheltered his responsibility behind the French Government and
Par1iament. He therefore again procrastinated, as he had done with Lord Reading and also as he had done with
the English statesman - Finally said "No".
Placed as
he was between the two great monetary and financial rivals he pondered how the
situation could be turned to the advantage of French political, financial and
monetary influence. But the
monetary and financial problems which arose out of this question of paramount
influence, which would make France the arbiter of the world, were altogether
beyond his ken. As for his
technical experts, they, too proved to have erred, for they advised M. Laval
that by allowing matters to take their course the English pound would go on
indefinitely losing value and would eventually fall to the subordinate rank of
a mere national currency.
Recovery
of the pound
Agreement was
reached on only one thing at thing Washington Conference: the French and
American Governments came to an agreement to maintain the gold standard at the
current level. Great
Britain abandoned by France and losing all hope of a redistribution of gold
was left to do the best she could with her frail and unstable pound. It was then that Sir Montagu Norman effected unaided the most amazing
recovery in the financial history of our times.
His plan of
action appears to us to-day as clear, straight-forward, and carried to its
logical conclusion. In order to
regain its former position as the world’s Clearing house the City would have
to fulfill the following three essential condition: become a great currency
market once again, keep the mine market, and replenish the gold reserve.
A beginning
was made at the first point, and the pound was allowed to fall.
The
announcement that the Bank of England had cut itself loose from gold caused
all the Central Banks on the Gold Exchange Standard to sell their holding for
metal. The pound was
subject to a 30% fall on the exchange market in the course of a few weeks.
One ounce
of gold was sold at up to 122 shillings instead of 84 shillings. The governments companies or private individuals having contracted
loans in Britain before the fall of the pound quickly realised that one ounce
of gold would now repay 122 shillings of the loan instead of the old 84.
India, the
store-house of vast quantities of gold poured forth the gold that had been
hoarded there for centuries,
The
unexpected happened: the inflow of gold to London increased with the
depreciation of the pound.
The British
Government was careful not to increase the volume of currency in circulation
and carefully avoided all forms of credit inflation. Consequently internal prices remained stable.
Foreign
consumers of British products were quick to realise that the purchasing power
of the pound remained the same on the domestic market although the pound had
been subject to a 30% fall on the exchange market.
Now all the
well-informed people began to buy sterling and the British currency began to
rise again from January. That was
when the Equalisation Fund, an entirely new instrument came into play. This Fund was granted a credit of £150 millions (later to be increased
to 175 millions) by the Parliament and was outside the control of either the
Bank of England or the Exchequer. Superficially
this Fund had been formed with a view to avoiding too great fluctuations of
the pound. But so vast a capital
was not required for this.
The real
reason for forming the Fund was rapidly to replenish the gold and currency
reserves of the Bank of England, while at the same time preventing the gold
mines from abandoning the London market in favour of New York.
It was
naturally impossible openly to buy gold against Treasury Bills as that would
only have precipitated the fall of the pound. The indirect way had to be resorted to and foreign currencies were
bought which would later be turned into gold. The problem was how to induce foreigners to exchange their good gold
currencies for an unstable currency. The
outbreak of the banking crisis in America at the beginning of l932 proved a
stroke of luck, provoking a flight of capital from America. Dollars are sold.
The pound is bought as there is scope for appreciation in
view of the stable purchasing power on the domestic market. Dollars are sold against pounds and the Equalisation Fund
pays for them with three-month Treasury Bills. The dollars are then presented at the Federal Reserve Bank of New York
in exchange for gold which is left on deposit at New York (ear-marked). Gold from the mines is also bought with francs or florins and a gold
reserve is built up in this way without causing a fall in the pound.
During the
American crisis in the spring of l932 care was taken that the supply of
sterling bills be slightly below the demand; this explains why the pound rose
from 85 to 96 francs between January and April. The rumour broke cut that the British Government intended to
stabilise at 100. Now the danger
arose that if the rise of the pound continued the supply of gold from India,
Egypt etc., might be stopped. The
Fund now intervened and increased the supply of sterling bills with a view to
producing a downward movement. On
speculation accelerating the downward movement, the Fund had recourse to its
currency reserve and sold dollars or francs against pounds thus causing a rise
in the pound.
What now?
The Bank of England has been able to increase its gold reserve from £120
millions at the end of 1931 to £166,400,000 in March 1933 with the sole aid
of this ingenious device. It is
estimated that the Fund holds in addition to this between £60 and £80
millions in gold.
If all this
gold were placed at the disposal of the Bank, the metal reserve would
certainly exceed 50% of the bills payable on demand. The
stabilisation of the pound can consequently be effected at any moment without
difficulty. This is however only
a secondary result to Sir Montagu Norman.
Owing to
the volume of the stock of gold currencies held by the Fund dollars can at any
moment be sold against francs, French francs against Swiss francs and these
against florins and dollars.
We are now
faced with the phenomenon that London with an unstable currency, daily fixes
the quotations for gold currencies. The
Stock Exchange is faced with this extraordinary paradox which has caused it to
believe in the satanic genius of Sir Montagu Norman.
This clever
policy has enabled London to become the world's largest currency market, to
keep the gold market and replenish the gold reserve.
The three
essential conditions for maintaining world supremacy in the sphere of Clearing
were fulfilled in eighteen months.
New York,
weakened by a banking crisis has been rendered hors de combat. France on the other hand still maintains intact her organisation and
reserves. But if, as might
conceivably be the cases France should one day remain the only country with
convertible currency, the other markets could, by buying francs withdraw gold
from France without paying any in. France
would have to impose a system of exchange restrictions and consequently
abandon the gold standard in practice in order to safeguard her gold reserve.
At the time
of the pending World Economic Conference Britain will be in the dominant
position occupied by France for a brief moment in the summer of 1931.
The three
large monetary institutions have struggled bitterly for over ten years for the
mastery of the mechanism of international exchange, and have finished by
breaking it. The coveted price
has faded into thin air. World
Economic Conference should take upon itself the task of reconstructing this
mechanism. This is not the time
for petty struggles between banks.
The French banks have proved
to the world the strength of their powers destruction. The French banks must give up all vain visions of monetary
hegemony which they can never attain by the very nature of things.
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