Readings in Money and Banking Part 89

The campaign to collect gold from the public and from h.o.a.rds was remarkable. It was successfully made a test of patriotism to hand in gold in return for Reichsbank notes, and a house-to-house canva.s.s in many places resulted in providing the gold which so signally increased the reserves behind the notes. Of course, the usual international operations for obtaining gold were denied to Germany. It was this campaign which was imitated by France. At the present time, certainly, no thought has ever occurred to Germans that they would not go back to a gold basis.

Nevertheless, Germany has clearly fallen into the same confusion of mind which characterized our own policy in regard to the issue of greenbacks in the Civil War. We confused the monetary with the fiscal functions of the Treasury. So has Germany. Thinking the war would be short and decisive, to be followed by large indemnities levied on her enemies, she had expected to finance her expenditure by temporary expedients. That is, the Government was led into the policy of borrowing through the increase of monetary forms.

It does not change the principle that this increase of paper money was not made solely by Imperial Treasury notes, but by a very large addition to the circulation in the form of Reichsbank notes and _Darlehnska.s.sen_ notes. It was the loans by the Reichsbank to the Government which undoubtedly caused the main increase in the notes of this bank (just as was true of the Bank of France), and the reduction of these issues, and their redemption in gold, will depend directly on the power and readiness of the Government to pay off its obligations to the Reichsbank after the war.

The amount of borrowing by processes which led to an increase of the circulation was necessarily limited; and very soon borrowing through issues of paper money had to be followed by regular fiscal operations in the form of long- or short-term bonds which would not affect the quant.i.ty of the circulation. Expenses could not well be met to any extent by current taxation, because taxes were already high, and in the few years before the war, no doubt in antic.i.p.ation of it, some four or five hundred million dollars in taxes over and above normal taxation had already been levied. In 1913 a non-recurring tax of $250,000,000 had been imposed on the wealthier cla.s.ses.

In addition a bonded debt, since the war, has been floated to the amount of $10,000,000,000 over and above the existing public debt before the war of about $1,200,000,000. But all these fiscal operations should be, for our present purposes, separated from monetary operations. The carrying of these heavy government debts is a question of the future production of goods, of commerce, and of saving.

Whatever the burden of debts, the gold question is concerned with the mechanism of exchange by which taxes, subscriptions to loans, payments by the Government for munitions and supplies, current purchases of goods by the public, payments to and by banks, are made. At present this medium is paper money depreciated, as in the case of the Reichsbank notes, by nearly 30 per cent. Of course, the Darlehnska.s.sen issues would follow the value set by the notes of the Reichsbank.

It is interesting to mention that the increase of paper money has not been in answer to any need of the public for additional media of exchange; for ordinary business transactions have decreased, and would require a less quant.i.ty of money. It was an error not to separate borrowing entirely from monetary issues.

Moreover, as bearing on the maintenance of the gold standard after the war, it is worth noting that the rule requiring the Reichsbank to keep one-third of its note issues covered by gold has not been violated. At last reports (February, 1916) the gold item stood at $613,750,000, as against $1,612,500,000 notes, or about 38.1 per cent. That is, the greatest efforts have been made to concentrate the gold holdings of the nation, including the "war chest" of about $30,000,000, in the reserves of the Reichsbank.

At the same time no gold is paid out in redemption of notes, nor is it allowed to be exported. Some sums have been sent to Holland in a vain attempt to support German exchange in that country; but the difficulty in exchange rates lies deeper than the relative supply of and demand for bills, since the depreciation of German paper money determines the general level about which the fluctuations of exchange due to demand and supply range. In fact, wherever gold is not freely moved in international exchange there are no s.h.i.+pping points, and hence no limits to which exchange can fall short of the discount of the paper in terms of gold.

III

As regards Great Britain, the gold standard is yet preserved for all practical purposes. To her credit be it said that she has not fallen into the error of borrowing by excessive issues of paper money; so far she has not confused the fiscal with the monetary functions of the Treasury. She resorted at once to fiscal operations in the form of heavy taxation and loans in the form of short-time Treasury bills and longer-term bonds. The issue of government paper money is, indeed, a new departure; but its purpose has been more distinctly monetary than fiscal.

The currency notes are emergency notes, issued under the act of August 6, 1914, directly by the Treasury, and not by the Bank of England, although authorized by the same act which suspended the Bank Act in regard to additional issues of bank notes not covered by gold. In other crises the act of 1844 has been suspended to allow more notes based on consols than permitted by the act (_i. e._, above the 18,750,000). In August, 1914, such a suspension was in the future made legal, if authorized by the Treasury, thus avoiding the old resort to a bill of indemnity by Parliament.

But in spite of the usual suspension of the Bank Act, no use was made of it. That is, a demand for more currency in the hands of the public could have been supplied by the bank, but was not. In truth, the Lloyd George currency notes need not have been issued. Nevertheless, when once issued, they made unnecessary any resort to additional Bank of England notes. There was no need of both. But in one respect the currency notes helped to maintain the country's gold standard. By issuing them in small denominations of one pound, and ten s.h.i.+llings, they replaced the gold in general use for these denominations, and allowed it to be used as reserves. Yet, it must be remembered that sound policy required a gold reserve (which has been generally kept at about 40 per cent.) behind these currency notes, so that the whole amount of gold replaced was not, in fact, a gain.

As all know, the question of gold for Great Britain pivots on the reserves of the Bank of England, which is the agent for the Government, receiving its taxes and paying out its expenses, as well as the holder of reserves for other banks--being thus a bankers' bank, as well as a national agent. Moreover, the reserves mentioned, and which are of prime importance, are those of the banking department--and these are chiefly Bank of England notes (not gold). The percentage of reserves to deposits, which marks the safety line for England, refers to the items in the banking department. These notes, however, are protected (except the bottom layer of 18,750,000 covered by consols), pound for pound, by gold in the issue department. Hence, they can be turned into gold at any moment.

Then, to what do these facts lead us? Simply that gold has increased just in proportion to the issue of bank notes. In addition, the currency notes of the Government served in the place _pro tanto_ of the Bank of England notes. Hence, at the end of the war, the provision for redemption of Bank of England notes will work automatically. Nor can there be any question as to the gold being there to redeem them; for they cannot get out without a previous deposit of gold. Indeed, the questions of difficulty cannot arise regarding the basic currency of Great Britain; they will arise, if at all, in connection with the a.s.sets in the loan item of the banking department, since they will determine the safety of the deposits chiefly created as the result of loans. The bank discounted large sums of pre-moratorium acceptances and paper; and yet even in these a.s.sets it is protected by the guarantee of the Government.

DARLEHNSKa.s.sEN AND OTHER FINANCIAL NOVELTIES IN GERMANY

[319]Germany, at the outbreak of the war, removed the limit of notes issuable by the Reichsbank without tax; created about 1,800 Darlehnska.s.sen (loan banks), located throughout the Empire, wherever the Reichsbank maintained a branch; they were started without capital, in lieu of which they issued _Darlehnska.s.sen Scheine_ (Imperial Loan Bank notes) in denominations of one mark and upwards, the aggregate amount being limited to 1,500,000,000 marks; these banks made loans against stocks, shares, produce, any personal property of a non-perishable character, as collateral, and issued certificates, having the quality of bank notes, to the borrowers; the loans ran for three and sometimes six months; the minimum loan was 100 marks; a very wide margin of safety was required, making the loans good beyond question; these certificates were receivable for public dues and by the Reichsbank; the smaller denominations circulated as money, the Reichsbank received the larger, giving its notes in exchange; these certificates were not legal tender, but were given the quality of gold and "may be considered by the Reichsbank as gold cover, which means that against 100 marks of these Scheine in its vault the Reichsbank is allowed to issue 300 marks of its own notes." (I. De Bruyn.)[320]...

Sir Edward H. Holden, president of the London City and Midland Bank, in a speech to his board of directors, January 29, 1915, said:

Germany proceeded to establish War Loan Banks, War Credit Banks and War Aid Banks under the patronage of corporations, munic.i.p.alities and private financiers, and to make use of the Mortgage Banks already established....

The Mortgage Banks are under the control of Chambers of Commerce and munic.i.p.alities, and they make advances on the mortgage of properties by an issue of notes....

Germany made greater use (than of the Darlehnska.s.sen) of the Mortgage Banks, the notes of which are identical in power and use with the notes of the Darlehnska.s.sen. Another part of their scheme was to relieve the pressure on insurance companies (life), by forming an insurance bank, which advanced 40 per cent. on the value of policies. These advances were paid on notes which were exchanged for Reichsbank notes in the same way as the notes of the Darlehnska.s.sen and Mortgage Banks.

Germany, with characteristic system and detail, provided different kinds of banks to deal with different phases of the situation. War credit banks were designed to aid Germans whose credits became unavailable, owing to the exigencies of the war, as for instance those who had sold and s.h.i.+pped goods abroad (the enemy's country), whose accounts would be temporarily uncollectible, and those who might be otherwise embarra.s.sed in their foreign trade because of the interruption of business caused by the war. War credit banks were more general in their dealings than war loan banks. In Germany, business is largely done upon credit, and especially so by small concerns and individuals, who possess no extended bank credit nor available collateral, and hence are not in position to make use of the Reichsbank or other commercial banks, or the Darlehnska.s.sen.

A German banker says: "It was deemed advisable to create an inst.i.tution of an intermediary character which would bear the greater share of the risks involved. The so-called war credit banks are designed to serve this purpose. They were established throughout the country, have their own capital, and the obligations undertaken by them are guaranteed, and losses, if any, refunded by the respective munic.i.p.alities and commercial a.s.sociations. The war credit bank of Greater Berlin, for instance, was established with a capital of 18 millions of marks, of which 25 per cent. are fully paid in. In addition thereto, there is a liability of 11.5 million marks by official bodies of commercial organizations."

Still another kind of war credit bank was created on the co-operative plan to a.s.sist the middle and lower cla.s.ses.

Through the instrumentality of these inst.i.tutions, a large amount of credit instruments, possessing a currency function, was brought into existence in Germany....

THE WAR AND THE WORLD'S FINANCIAL CENTRE

[321]With the end of the moratorium on November 4, it may be said that the crisis produced by the outbreak of war was over. When peace comes and prices [of securities] adapt themselves to the new price of capital that the present destruction of some eight to ten millions of it a day will bring about, and creditors begin to try to collect debts from impoverished debtors in war-wasted countries, then there will be a new set of problems, the acuteness of which will largely depend on the length of the war and the extent to which the fighters are worn out.

These problems will exercise all the ingenuity and strength that Lombard Street can muster. For the present it is enough to see how we stand at the end of the opening period of the war, and what have been the effects of the financial tornado with which its beginning was heralded....

The crisis of last August was the greatest evidence of London's strength as a financial centre that it could have desired or dreamt of. It was so strong that it did not know how strong it was. Consequently, being a little fl.u.s.tered by the suddenness of the outbreak of war, on a scale that mankind had never seen before, it made the mistake of asking its debtors to repay it, not the thousands of millions that it had lent in the form of permanent investment, but the comparatively trifling amount--perhaps 150 or 200 millions--that it had lent in the shape of bills of exchange drawn on it, and other forms of short credits.

Thereby it put the rest of the economically civilized world, for the time being, into the bankruptcy court, and so, finding that none of its debtors could pay, it thought itself obliged to ask for time from its own creditors at home. Foreign creditors it had none, except Paris. It sent gold to Paris as fast as it could be s.h.i.+pped and insured, and so seems to have liquidated its debt. For when a market in exchange reopened after the first shock of war, the Paris cheque soon steadied itself at a more or less normal level, above the point at which gold could be sent to France as an exchange operation. It is possible, however, that London was still in debt to Paris, and that Paris preferred for obvious reasons to leave its money on this side of the Channel.

Of the three possible rivals to London as a financial centre, Paris was the only one that gave any evidence of real financial strength. Behind Paris stands the enormous power of the thrifty French investor, who probably acc.u.mulates a greater proportion of his income than anybody in the world, except, perhaps, some cla.s.ses of Scotsmen. This acc.u.mulating power of the French gives the Paris money market a position of first-rate importance in the financial world, because capital has to be saved, and a saving people has capital to lend. The advantage that London holds in its more elastic credit system is partly balanced by the advantage given to Paris by the thrifty habits of the French people. If Paris adopted a more businesslike policy with regard to her huge store of gold, which she has. .h.i.therto seemed to regard as a precious a.s.set to be sat on and protected by the charge of a premium to audacious people who want to withdraw a bit of it, she might, in normal times, be a much more dangerous rival to London than she is. But it need hardly be said that Paris, as a financial centre, was soon wrapped in the cloud of war and invasion, and had no chance of making any effort to oust London from her pride of chief place.

Berlin was equally cut off from compet.i.tion, for Berlin had to devote herself to the task of financing war for Germany. Moreover, the rapid depreciation in the value of the mark that took place before the war began showed that Germany was still a debtor country in the short-loan market. The Berlin exchange, while war was as yet only a dreaded possibility, rose from 20 m. 50 pf. to 20 m. 60 pf. Germany invests money abroad, but she seems to borrow as much, and more, in the discount markets of London and Paris. So it came to pa.s.s that, in spite of the big sales of securities that she had thrown on the markets of New York and London, she still had to pay when the big day of settlement came, and to pay so fast that she had not a bill on London left to pay with.

It was the chance of a century for New York. American ambition has long ago informed the world that the United States, having been the world's granary, is now the world's most progressive manufacturer, and means soon to be the world's banker. This may happen some day, and might have happened already if American policy in currency, financial and fiscal matters had been more enlightened, and if her people had been more thrifty. But they have tied their credit system in the bonds of narrow banking laws and their trade in those of a cramping tariff. These bonds they have just begun to shake off, and if the crisis had happened a few years later they might perhaps have made a bid for London's place as world banker. But it is hardly likely, for the development of the enormous resources of the country still craves for much more capital than its people can provide. The United States is still a debtor to the world at large and seems likely to be so for some time to come, and it is doubtful whether even New York, with all its skill in the jugglery of finance, can make itself a great banking centre as long as its heavy balance of indebtedness is always waiting to turn the world's exchanges against it, whenever the monetary sky is overcast.

It was the chance of a century, but New York could not take it. When London called in its credits from other countries, any centre that could have said to these countries, "We will give you the credit that London has cut off, and lend you the money to pay London," would have stepped straight on to London's financial throne and set London a very difficult task to regain it after the war was over. In spite of the large amounts of gold taken from America to Europe before the war, the United States had still a huge store within its borders--some estimates of it ranged up to 400 millions sterling. If the United States had had the courage to use this mountain of metal and let other countries draw on it, London would have had more gold than it knew what to do with, and New York would have had a big slice of London's business. The United States were at peace, and, with all the chief countries of this antiquated hemisphere engaged in the mediaeval business of killing one another's citizens and destroying one another's property, the United States might have been expected to leap into the position of economic leaders.h.i.+p. But America feared to use its gold, and held on to it as tightly as it could, fearful of internal trouble and a run on its banks if too much of the metal went abroad. In New York, as in most other centres, the question of the moment was, not to take London's business, but to pay what she owed to London and to buy bills on London at skyrocket prices wherever they could be found. The strength of the fat old money-lender, whom the Australian papers, angry with him because he did not lend fast enough, used to call John Bull Cohen, was never more wonderfully made manifest. Strength in money bags is not everything--very far from it--but at least J. B. Cohen can claim that he has made good use of it.

He has peopled and fertilized the uttermost ends of the earth with his sons and his capital, and he alone among the nations has had the courage and the homely wit to throw his ports open to all and to tell all the peoples of the world to send their stuff along if it is worth buying.

Moreover, he has lately shown that, in spite of all his alleged decadence, he can still tuck up his sleeves on occasion and fight at least as well as anybody else.

So far was New York from being able to supplant London that, as we have seen, the United States had to make special arrangements to tide over the difficulty which London's claims on her had produced....

The American Government found it necessary to ask officials of the British Treasury to come over and help it to find ways and means for meeting part of the debt of the United States to England, without s.h.i.+pping any more American gold. This could only be done by England's giving America some sort of credit to take the place of the finance bills and other forms of accommodation which Lombard Street had withdrawn.

At the same time there is no doubt that New York did some of the business for herself that London had formerly done for her. If she was not in a position to finance other countries, she did make a beginning in financing her own imports. Exporters of goods from South America to the United States who had formerly taken payment by drawing bills on London, and were no longer able to do so, drew on financial inst.i.tutions in New York instead. Some of these bills were used to make three-cornered payments from South America to London, and a very costly means of payment they were to the debtor, owing to the high rate of discount in New York, and the depreciation of the American dollar as compared with the pound sterling....

It seems likely that this business of financing American trade New York will keep in her own hands to a greater extent than she did before.

Probably she would have taken more of it to herself even if there had been no war. Her new banking legislation has included in its aim the establishment of branches of American banks abroad, and the development of acceptance business in New York. It could not be expected that New York would always be content to see the greater part of America's external trade financed with English credit. Her next step will be to endeavor to finance other people's trade, and she is already beginning to set about taking it, being a.s.sisted by Lombard Street's shyness in the matter of new acceptance business. If the war should be long continued, its appalling drain on the combatants ought to help her by exhausting the rivals whom she hopes to drive out of the field.

So far, then, from the late crisis having given any evidence of weakness on the part of London, or of any likelihood that she will lose her supremacy as the world's banker, the commanding strength of her portion has been made abundantly manifest. The only weak point was not in her armor but in that of her foreign customers. The question arises whether she was wise in lending so much to debtors who showed such unanimous inability to pay on the due dates. I have heard it contended by a disinterested and well-qualified critic, that the risk run by Lombard Street in allowing bills to be drawn on her from all parts of the world against goods s.h.i.+pped from one country to another, has been shown by the late crisis to be too great to be worth the candle. Bills drawn against goods coming to England are safe enough, for as long as the goods come to port and can be sold for them, the acceptor is sure of his money. But when the goods go from China to Peru, and Peru finds that it cannot remit to meet the bill, the acceptor is inconvenienced, and the bank or bill broker who holds the bill finds that he has got a security which was not quite as gilt-edged as he thought it. This is all quite true, but contrariwise it may be argued that this sort of world crisis is not going to happen again very soon, and that if all finance had to be arranged on the theory that it was likely to recur frequently, there would be very little finance of any kind. These bills drawn against international s.h.i.+pments of goods do much to make the bill on London popular all over the world, and if they are to be frowned on there will be a considerable restriction of international commerce, which will react unpleasantly on England. In ordinary times these bills are safe enough, if due precautions are taken. If mistakes are made they happen rarely and the resources of the accepting houses are easily able to repair the damage.

As to finance bills, it has already been admitted that much credit was given by their means which was used for purposes with which bills of exchange ought not to be a.s.sociated. The essence of a bill of exchange is that it has to be met at its due date, and so it should only be drawn to finance some commercial operation that will mature before the bill falls due, or to provide means of remittance when they are scarce, owing to seasonal causes which will have pa.s.sed before the bill's maturity.

When rolling credits, as they are called, are established, which go on from year to year, each bill being met by drawing another, and the money so raised in the borrowing country is put into bricks and mortar or machinery or other forms of fixed capital, the uses of the bill of exchange are being strained. When a jolt comes to the machinery and the rolling credit stops rolling, it is not possible to sell the factory or plant to provide a means of remittance. But there is no doubt that for a time, at least, this kind of finance bill is likely to be scarcer than it was; in fact, as we have seen, it was the excessive suddenness of the fit of virtue that seized Lombard Street on this subject that made the crisis more acute than it need have been, by reducing the means of remittance and so keeping the exchanges at an abnormal point.

Lombard Street has thus shown that it has fully learnt the only lesson that the external side of the crisis had to teach it. Too many finance bills of the wrong kind were out, and Lombard Street saw the fact so clearly that for some weeks it rang with the cry that there must never be any more finance bills of any kind at all. This exaggerated view is already discredited, and there is good reason to hope that opinion will settle down to a sensible midway path, taking the finance bill as a quite legitimate and necessary convenience, dangerous only when abused and distorted....

MR. WITHERS A GOOD ENGLISHMAN

[322]Mr. Withers is a very good Englishman indeed and points out with pardonable pride how the London market stood the shock which rocked the rest of the financial world to its very foundations. What would have been his att.i.tude had the book been written a little later, however, when the pound sterling had fallen to a discount of over 2 per cent. as compared with the dollar, is an interesting subject of speculation.

London financing the world is, from the Englishman's point of view, an inspiring sight, but the pound sterling obtainable in New York for $4.76 ... is something which it would be interesting to hear Mr. Withers explain. _War and Lombard Street_ treats only with the beginning of a very big subject. It is sincerely to be hoped that a little later we shall have a continuation of the work from Mr. Withers' pen.

AMERICA'S CHANCE OF HOLDING WORLD PURSE-STRINGS[323]

Since the outbreak of the war New York has a.s.sumed a position of leaders.h.i.+p in international banking. Will this position be permanent or will its duration be limited practically to the period of the war? Is the mantle of world financial leaders.h.i.+p about to pa.s.s from London to New York, as it pa.s.sed after the Napoleonic Wars from Amsterdam to London? These are questions which many are asking, but which no one can answer positively, because so much depends upon those incalculable items--the duration of the war and the financial strength of the belligerents at its close....

At the end of 1913 our provincial banking system was overhauled by the Federal Reserve Act, and put in shape to meet the needs of our growing trade, both domestic and foreign. By this act American commercial paper, which previously had been essentially local paper, was given an opportunity to a.s.sume a national, or even international, character, through the provisions for bank acceptances, rediscount, and "open market operations." An open discount market began to develop on American soil; and slowly, but surely, short-time paper of an international character and standing began to appear....