Читать книгу Economics and the Public Welfare - Benjamin M. Anderson - Страница 16
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The Armistice, November 11, 1918, was followed by a sharp reaction in business and in commodity prices at wholesale. The general average of commodity prices fell from 204 in September 1918 to 193 in February 1919. The first symptoms of this reaction came to the bankers’ attention in New York about the middle of November, when currency—$1 bills, $5 bills, $10 bills, as well as subsidiary coins—was pouring into the New York banks from correspondent banks in many parts of the country, especially from the Pittsburgh region. There were not enough clerks in the currency departments of the banks to count this money, despite overtime work, and the cashiers were going around from department to department to find additional clerks who could be spared to help.
The Brief Postwar Reaction. With the Armistice there was immediately a cessation or sharp reduction of a great deal of production for war purposes. Payrolls were falling off, retail trade in manufacturing centers was falling off, cash was piling up in the interior banks, and they were sending it to their New York correspondents to build up their balances or to reduce their loans. A very substantial liquidation of bank credit took place as businesses, no longer needing large loans for current purposes, proceeded to reduce them or to pay them off. The money market eased. The rate to prime borrowing customers in the great New York banks dropped to 4 percent in the early part of 1919, though customers’ loans in general remained well above this, and though bankers’ acceptances stood at about 4.25 percent. The Federal Reserve rediscount rate meanwhile held at 4 percent.
Commodity Price Reaction. Certain commodities broke sharply in price. There had been during the war a suspension of the antitrust law, accompanied by price fixing, rationing, and allocation. The government controls promptly relaxed, but in a good many cases prices remained fixed by informal agreement among producers. In one such case the fixed price was
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held to despite a drastic reduction in demand.1 One great smelting company had a contract to take and refine all the lead that a number of important mines could produce. It was being overwhelmed by the lead which they were producing and which it was unable to dispose of at the fixed price. The company thereupon notified the other interested firms that the next morning, beginning at nine o’clock, it was going to sell lead, and was going to make a price that would move the lead. What that price would be it did not know. The other companies felt that the great smelting company was very decent to give them advance notice and stood aside and watched the procedure. The next morning lead was down ¼¢, down another ¼¢, down another ¼¢, the reduction finally amounting to 4½¢, with no increase in buying. Another ¼¢ reduction met some speculative buying. The selling company promptly raised its price ¼¢ and then encountered trade buying. It raised its price another ¼¢ and the trade buying fell off. It dropped its price ¼¢ and the trade buying was resumed. Then the other companies got into the game and began to sell lead, and a free and open competitive market was established at which lead moved within a range of ½¢ at about 4½¢ below the previously prevailing fixed price. The reduced price discouraged lead production. Supply and demand were equated. Right prices are prices that move goods. Right prices cannot be foreseen in advance. They must be found out experimentally in the open market.
Business and Prices Turn Upward in Late March 1919. There was a drop in employment and there was a great deal of apprehension as to what would happen to employment as the soldiers in the army on our side of the water were released. The apprehension was short-lived. The tide turned in late March and early April. The average of commodity prices at wholesale stiffened and began to advance again. Businessmen began to report a great increase in orders.
Heavy Exports. The export and import figures for the early months of 1919 showed a continuance and even a growth in the volume of exports and in the size of the export balance. The month of January showed an export surplus exceeding $400 million. Foreign orders for goods, first of all European orders, came in increasing volume.
The expectation had been that with the end of the war, Europe would resume her manufacturing activities, and that, while she would need a great deal of food and raw materials from the United States, she would reduce very sharply her buying of manufactured goods. But orders from her for manufactured goods continued on a great scale. The export trade went on and business revived rapidly in the United States on the basis of this export trade.
Continued Government Loans to Allies. An explanation of the financial
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basis of this export trade was readily at hand. The United States government had been authorized by Congress to lend $10 billion to our Allies in Europe during the war. The war was not yet technically over and the loans continued to be made. Something like $7 billion had been loaned down to the time of the Armistice. In the post-Armistice period, down to the end of June, nearly $3 billion more was loaned. The burden put upon the foreign exchanges by the heavy shipments of goods to Europe was offset by purchases made in the foreign exchange market, with dollars provided by these loans. J. P. Morgan & Company acted as the principal agent to the British and French governments in these exchange transactions.
The purpose of these continuing loans was to give our Allies in England time to set their houses in order to meet the shock of demobilization and to feed their people while the process of demobilization was being put through. A further purpose was to enable them to meet their commitments to American manufacturers and others on canceled war contracts.
The 1919 Bretton Woods Experiment—Morgan Unpegs Sterling, March 20. On March 20, 1919, the announcement was made that J. P. Morgan had unpegged sterling and would cease to make the purchases needed to sustain the rate. Sterling promptly broke, and all the other European exchanges broke. This was the end of the first phase of our Bretton Woods experiment following World War I. From the Armistice on November 11, 1918, to March 20, 1919, we did precisely what the International Monetary Fund under the Bretton Woods legislation is expected to do, namely, we stabilized the exchange rates of our European allies with funds drawn from the United States Treasury.
The second phase following March 20, 1919, represented continued support, though not absolute stabilization of these exchange rates with funds drawn from the United States Treasury until the loans ceased with June 30, 1919, and for a little time further until the proceeds of these loans were exhausted. The exports went on and the exchange rates went lower. But there came no backflow of goods from Europe. The continent of Europe had been so shattered by the war that it was not going back to work. It was living on imports received from the outside world. Public finances were out of hand, fiscal deficits were growing. The Continental governments were relying increasingly on loans from the central banks of issue, which were printing banknotes to cover governmental expenditures. Currencies were in disorder. As long as the outside world would take these currencies, Europe could buy imports and live upon them. Weak finance ministers had no incentive to tax the people or to place funding loans while the outside world was giving them such generous credits.
In the autumn of 1919 Frank Vanderlip, then president of the National City Bank of New York, returned from Europe where he had made a rapid but pretty fundamental survey, and, in an address at a public dinner in New York, gave an explanation of what was happening on the other side. His
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diagnosis was correct. His prescription was very inappropriate. His proposed remedy was that we should loan the European governments a billion dollars. But we had just loaned them nearly $3 billion since the Armistice and it had done little or nothing toward rehabilitating them. Much more fundamental remedies were needed. It is the duty of a lender to an embarrassed debtor to see to it that the debtor mends his ways and reorganizes his affairs so that the loan may be a good loan. We were lending to Europe overgenerously, but we were not performing the duty of a lender with respect to these other matters. Had we from the beginning insisted that the governments of Europe which received the loans from us should set their financial houses in order and straighten out their currencies as a condition for the loans, we should have accomplished a great deal with the loans. The governments later had to do it under much less favorable conditions and after the financial disorders had progressed much further.
The month of June 1919 represented the climax of our exports. In that single month we exported over a billion dollars’ worth of goods. In that single month we had an export balance of $635 million, of which $601 million represented our excess of exports with Europe alone. The exports continued, however, month after month in enormous volume. Goods were going not only to England, which was solvent and strong, but also to France, Belgium, and Italy, which were slipping badly financially, and in great volume also to Germany, which was going to pieces financially. How were they being paid for? Who was standing the risk of these shipments? Who was providing the money?
Sterling Goes Down with the Continental Exchanges. A clue came in one strange fact—England alone among the European belligerents had her financial home in order. England alone was showing industrial revival. And yet sterling exchange was weakening rapidly along with the other exchanges. That the foreign exchange markets should reflect the internal financial weakness of France, Belgium, Italy, and Germany was reasonable. But that sterling also should be going low, despite the strong financial and industrial position of England, called loudly for explanation.
London Stands Between United States and Continent. A careful study of the actual operations in foreign exchange in the late summer and autumn of 1919 revealed the fact that while there were enormous holdings of sterling in New York, there were very small holdings of francs, lire, and Belgian francs and of the other Continental exchanges, except for German marks. German marks were being bought by a great many speculators in the United States, by a great many people who had never before speculated in foreign exchange. But there were small accumulations of the other Continental exchanges. The market in New York for these Continental exchanges was narrow. Large sums could not be sold in New York without a break in price. The good market was in London, and New York banks and other exchange dealers buying francs, lire, Belgian francs, Greek drachmas, and so on, promptly resold them in London.
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London had long been the center for international speculation. In the days before the war there were always active speculative markets in London for practically anything: elephants, ships, beeswax, carved ivories from China, paintings of old masters, to say nothing of standard commodities, foreign exchange, stocks and bonds, and the like. A large body of London speculators stood ready to buy virtually anything at a concession in price. London banks, relying on the active speculative markets which made all manner of things liquid, were ready to finance, and did finance, these speculative transactions. London was usually safe in this, since London was full of experts who knew where the proper outlets were for all manner of unusual commodities, securities, or bills of exchange. After the Armistice London revived this speculative activity, so far as foreign exchange was concerned, on a great scale.
The Dove from Noah’s Ark. Ordinarily such speculation had been safe because the London speculators knew their outlets. In 1919 and 1920, however, there were no outlets for any large quantity of Continental exchanges. The outside world did not owe money to France, Italy, or other belligerent countries of the Continent on net balance and consequently had little need for Continental exchange. London was thus placed in a difficult position. She could keep the mass of Continental exchanges moving through active speculation. She could move them about through Switzerland, Paris, New York, and other centers. But, like the dove that Noah sent out from the Ark, they found no resting place for their feet, and they returned to London.
The magnitudes grew, moreover, as London found it necessary steadily to buy the new exchange continuously being created in order to protect the price of what she already held.
New York-London Rate Becomes New York-European Rate. The explanation of the decline in sterling along with the other exchanges is thus to be found in the fact that the London-New York rate had in effect become a Europe-New York rate. London was interposing her vast financial strength and prestige between the stricken Continent and the United States. In part, as suggested in the foregoing, this was unintentional, but in large part it was intentional. London was not merely buying Continental exchanges and holding them in growing volume, she was also making great extensions of credit to the continent of Europe and she was buying from the United States in order to sell on credit to the continent of Europe.
On a great scale strong business houses, particularly export and import houses in England, were borrowing from New York banks on the guarantee of British banks, and British banks of first rank and undoubted solvency were large direct borrowers from New York banks and, for that matter, from large banks in other great American financial centers.
Exports Go on Unfunded Credits—Bank Expansion, 1919-20. The exports were going on the basis of unfunded credits. Government credits had ceased. Private credit took its place. Long-term credits had ceased. Unfunded
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credits took their place. American exporters were giving long credits to European buyers, were selling on undated open accounts. They were tying up their working capital in the process and borrowing from their banks to replenish it. The reflex action of all this on the American money market was very great. In the single year, from April 11, 1919, to April 9, 1920, the loans and investments of the reporting member banks of the Federal Reserve System increased 25.4 percent.
This expansion of bank credit occurred despite the fact that there was a reduction during this period in the holdings of government securities by the American banks. It was not government borrowing which did it.
Even Greater Rate of Bank Expansion in London, 1919-20. A similar story, intensified, appeared in England. From June 1919 to June 1920 there was an expansion of forty-one percent in “bills discounted” and “advances” of the twenty leading banks of the United Kingdom, despite the fact that their holdings of Treasury bills during this period were reduced. We were expanding to export to Europe, relying primarily on the credit of England. England was expanding bank credit in an even greater percentage as part of the same process, and also for the purpose of exporting British goods to the Continent.
The $3.5 Billion Unfunded Debt of Europe to Private American Creditors in September 1920. The unfunded debt of Europe to private creditors in the United States grew to an astounding total. The present writer estimated in October 1920 that on the fifteenth of the preceding September this unfunded debt stood at $3.5 billion. The following table, prepared at that time,2 shows the elements that entered into the growth of the unfunded debt.
GROWTH OF UNFUNDED DEBT OF EUROPE TO PRIVATE AMERICAN CREDITORS* January 1, 1919, to September 15, 1920 (In millions of dollars)
| Europe debtor | United States debtor | ||
| Commodity trade balance (Europe vs. United States), Jan. 1, 1919-July 31, 1920 | $6,350 | Relevant government advances, 1919 | $2,665 |
| Government advances, 1920, to Sept. 16 | 155 | ||
| Commodity trade balance (Europe vs. United States), Aug. 1, 1920-Sept. 15, 1920 (est.) | 250 | Credits granted by United States Grain Corporation | 60 |
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| Net silver imports from U. S., Jan. 1, 1919-Aug. 31, 1920 | 30 | Credits by United States Shipping Board for sales of ships | 3.6 |
| Net balance on shipping, 1919 | 73 | United States tourists | 75 |
| Immigrants’ remittances | 450 | ||
| Net shipping balance, 1920 | 52 | Insurance balance (small and uncertain) | 000 |
| Ships purchased, 1919 | 20 | New loans to Europe, 1919 | 265 |
| European securities maturing, 1919 | 466 | New loans to Europe, 1920, to Sept. 15 | 216 |
| European securities maturing in 1920, to Sept. 15 | 5 | American securities repurchased | 200 |
| Net interest to private creditors, 1919 | 79 | Internal European securities purchased | 155 |
| Net interest to private creditors, 1920, to Sept. 15 | 135 | Net gold brought in from Europe, Jan. 1, 1919-Aug. 31, 1920 | 50 |
| Interest actually paid to U. S. Treasury, Jan. 1, 1919-Sept. 9, 1920 | 177 | Japanese and Argentine securities purchased from Europe | 89 |
| Repayment of principal to U. S. Treasury, Jan. 1, 1919-Sept. 9, 1920 | 114 | Other securities purchased from Europe | 12 |
| Anglo-French 5’s approaching maturity | 500 | German gold held in custory by Bank of England for account of Federal Reserve bank | 111 |
| Argentine maturity of May 15, 1920, met by Great Britain | 50 | ||
| $8,301 | Gold from Hong Kong on British account, May 1920 | 22 | |
| $4,528.6 | |||
| Growth of the Unfunded Debt of Europe to the United States, Jan. 1, 1919-Sept. 15, 1920 | $3,772.4 | $4,528.6 |
* The explanation of the items in this balance sheet will be found in Chase Economic Bulletin, October 5, 1920.
Europe had, as the result of loans made by the United States Treasury before January 1, 1919, a small credit of $200 or $300 million on current account. The actual credit in bank balances was larger, but a very substantial part of it was needed for meeting canceled war contracts. Subtracting $272 million from the figures for the growth of the unfunded debt January
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1, 1919, to September 15, 1920, gives the actual amount of the unfunded debt, namely, $3.5 billion.
Europe Current Account Debtor to Rest of World Also. Under ordinary conditions it would be pointless to compute relations of this kind between Europe and the United States alone. Under ordinary conditions Europe would have been building up credits in countries other than the United States, against which she could draw in settling her debts here. But in 1919 and 1920 this was not true. Europe was increasing her open account debt to all parts of the world, and nowhere was she building up credits with which to meet debts here. She was even drawing on us to meet some of her current debts in the outside world.
Our Adverse Trade Balance with Non-European Countries—Paid for with Cash. With the rest of the world the United States had an adverse trade balance. We were sending less goods to the non-European world than we were bringing in from it, and we were having to pay for these, not by drawing on European balance, but by sending out cash. The following table, covering a somewhat longer period, exhibits our trade relations with the world outside Europe.3
UNITED STATES TRADE BALANCE WITH COUNTRIES OUTSIDE EUROPE, GOLD AND SILVER SHIPMENTS INCLUDED
From January 1, 1919, to December 13, 1920
| Commodities | Exports | Imports | Balance |
| 1919 | $2,732,759,627 | $3,153,836,543 | -$421,076,916 |
| 1920 | 3,762,104,551 | 4,051,556,066 | - 289,451,515 |
| Total | $6,494,864,178 | $7,205,392,609 | -$710,528,431 |
| Gold | |||
| 1919 | $ 329,590,927 | $ 71,552,305 | $258,038,622 |
| 1920 | 321,737,629 | 97,943,352 | 223,794,277 |
| Total | $ 651,328,556 | $ 169,495,657 | $481,832,899 |
| Silver | |||
| 1919 | $ 212,412,896 | $ 89,268,551 | $123,144,345 |
| 1920 | 108,603,566 | 86,709,641 | 21,893,925 |
| Total | $ 321,016,462 | $ 175,978,192 | $145,038,270 |
| Grand total | $7,467,209,196 | $7,550,866,458 | -$ 83,657,262 |
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From this table it is clear that we met almost all of our adverse trade balance with the non-European world with shipments of gold and silver. We more than made up the rest by shipments of Federal Reserve notes, chiefly to Cuba, although Federal Reserve notes also went to Santo Domingo, some to the northern parts of South America, and in minor amounts to other countries.
