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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  Towards the end of 1915 France was obliged to pledge all her gold withdrawn from circulation and all her best shares, both French and foreign, at New York in order to pay the United States for goods furnished.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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