Financial Questions in United States Foreign Policy 9780231882255

Citation preview

F I N A N C I A L Q U E S T I O N S IN UNITED STATES FOREIGN

POLICY

FINANCIAL QUESTIONS IN UNITED STATES FOREIGN POLICY BY JAMES W. GANTENBEIN

NEW YORK

: MORNINGSIDE

HEIGHTS

COLUMBIA UNIVERSITY 1

939

PRESS

COPYRICHT

193g

C O L U M B I A U N I V E R S I T Y PRESS, NEW Y O R K F o r e i g n agents: OXFORD UNIVERSITY PRESS, H u m p h r e y

Milford,

Amen House, London, E.C. 4, England, AND B. I. Building, Nicol Road, Bombay, India; MARUZEN COMPANY, LTD., 6 Nihonbashi, Tori-Nichome, Tokyo, Japan M A N U F A C T U R E D IN T H E UNITED STATES OF

AMERICA

T o M. F. S.

PREFACE T H I S BOOK was written while I was detailed by the Department of State to pursue certain studies in New York University and Princeton University. I think that I should make it clear at the outset, however, that its preparation was entirely of a private, unofficial nature, and in addition to the studies and research that I was assigned to in the institutions mentioned. Statements and views contained in it are not, therefore, to be taken as in any way coming from the Government. My purpose has been to furnish brief summaries and analyses of several of the more important groups of financial matters of an international character to which the United States Government is being called upon to give consideration. No attempt has been made to review all such questions. For example, questions involved in the Government's protection of direct foreign investments of American nationals have not been generally considered; although these often have important financial aspects, as in the case of compensation for expropriated properties, they are usually not in the first instance financial matters. Nor have I discussed international trade problems, including excessive import duties and quotas in many countries, except insofar as they are related to problems which are primarily financial, such as foreign-exchange instability and exchange control. T h e Government's silver-purchase program has been definitely of a financial character, but I have not considered it here at any length for the reason that, notwithstanding its effects on world silver prices and on general economic and financial conditions in other countries, it would not seem to belong primarily to the field of foreign relations. I feel very sincerely and deeply indebted to various individuals and organizations for guidance and assistance in the writing of these pages. A number of persons generously read all or parts of the manuscript in different stages of its preparation and, without sharing in any manner in the responsibility for statements or

viii

PREFACE

opinions contained in the book, gave me much valuable counsel and countless helpful suggestions: they include Dr. Marcus Nadler, Professor of Finance in New York University; Dr. James W. Angell, Professor of Economics in Columbia University; Dr. Edwin W. Kemmerer, Walker Professor of International Finance in Princeton University; Mr. Francis White, President of the Foreign Bondholders Protective Council, Inc.; and Mrs. A. H. Wylie, Secretary and Assistant Treasurer of the Council. In the same group are various officers of departments and agencies of the Government, whose generous assistance added to the already heavy demands upon their time; I regretfully refrain from expressing here my appreciation to them by name, but to do otherwise might seem to imply a degree of official responsibility on their part and at the same time to give the work a semblance of official character, which it does not in fact have. Miss Ida M. Lynn, Assistant Editor of the Columbia University Press, was extremely kind and helpful in assisting with the preparation of the manuscript for publication. I must mention also, among others who have assisted, the Institute of International Finance, in New York, which very kindly gave me access to a number of its files as well as to its library. J . W. G. New York City, July 28, 1939

CONTENTS C H A P T E R I . INTRODUCTION, 3 RECENT DEVELOPMENT OF FINANCIAL P R O B L E M S IN FOREIGN RELATIONS

3

INTEREST OF THE GOVERNMENT IN INTERNATIONAL FINANCIAL MATTERS

4

1. Maintenance and development of the country's foreign trade 2. Protection of American foreign investments 3. Intergovernmental debts arising from the World War 4. Federal revenue 5. General economic and political stability

G

C O N F L I C T S OF A M E R I C A N INTERESTS INTERRELATION

OF

INTERNATIONAL

FINANCIAL

AND

COM-

M E R C I A L QUESTIONS CHAPTER

II.

FOREIGN-EXCHANGE

8 INSTABILITY,

9

SIGNIFICANCE OF "EXCHANGE STABILIZATION" EXCHANGE STABILITY BEFORE I 9 3 I

1. Types of gold standard before the post-war period 2. T h e post-war stabilization period W H Y POST-WAR STABILIZATION PROVED UNSUCCESSFUL

1. 2. 3. 4. 5. 6. 7. 8.

4 5 5 5 6

Reparations and war debts Growth of economic nationalism and of credit control Post-war exchange parities T h e gold-exchange standard Maldistribution of gold Unsound international lending and borrowing T h e economic depression Immediate causes of the 1931 crisis

RENEWAL OF STABILIZATION EFFORTS

1. T h e London Conference 2. T h e revaluation of the dollar 3. Development of exchange-stabilization funds a. General

9 IO

10 12 13

14 14 16 17 18 20 21 21 22

22 24 27 27

CONTENTS

X

b. Functions and general operation of the funds c. T h e United States Stabilization Fund 4. T h e currency blocs 5. T h e Tripartite Declarations 6. Efforts toward Pan American monetary cooperation

29 31 33 36 38

WHY EXCHANGE INSTABILITY IS OF INTEREST T O THE GOVERN-

1. 2. 3. 4. 5.

MENT

42

Extent of existing exchange instability Relationship to exchange control Effect on United States export trade General stability and world peace Excessive gold imports

42 44 45 46 47

POSSIBLE WAYS OF FURTHER STABILIZATION

51

1. General 2. Difficulties of a general return to an international gold standard a. Unstable economic and political conditions b. Excessive trade restrictions c. International debt questions d. Credit activities of central banks and governments e. Existing distribution of gold SUMMARY AND CONCLUSIONS CHAPTER

III.

EXCHANGE CONTROL,

51 52 52 54 55 55 57 6o

66

NATURE OF EXCHANGE CONTROL

66

HISTORY OF EXCHANGE CONTROL

68

1. Before 1931 2. Influence of the monetary crisis of 1931 3. Later influences a. Greater governmental control over economic political activities b. Cheap exchange for governmental uses c. Exchange profits 4. Extent of exchange control in 1939

68 69 73 and 73 74 74 75

KXCHANGE-CLEARING, P A Y M E N T S , AND COMPENSATION AGREEMENTS

1. Relationship to exchange control 2. Exchange-clearing agreements

78

78 79

xi

CONTENTS 3. Payments agreements 4. Compensation agreements

81 82

P R O B L E M S ARISING F R O M E X C H A N G E C O N T R O L

1. 2. 3. 4.

84

Decrease and dislocation of world trade Effects on United States export trade Effects on United States investments Punishment for infractions of exchange laws and regulations

P O L I C Y O F T H E UNITED STATES G O V E R N M E N T

93 96

S U M M A R Y AND CONCLUSIONS IV.

THE

INTERGOVERNMENTAL

91 93

1. General 2. Trade-agreements program

CHAPTER

84 87 90

97 DEBTS,

101

A M O U N T S INVOLVED

LOL

H O W T H E W A R DEBTS W E R E INCURRED

103

1. General 2. Pre-Armistice loans 3. Post-Armistice loans T H E FUNDING S E T T L E M E N T S

1. 2. 3. 4. 5. 6.

World War Foreign Debt Commission Settlements made The capacity-to-pay criterion Degrees of cancellation in the settlements Relationship of reparations to the settlements British policy in war-debt settlements

THE MORATORIUM AND THE DEFAULTS

1. 2. 3. 4. 5.

The The The The The

103 106 107 108

108 109 112 114 115 118 120

moratorium 120 defaults 122 Hungarian and Rumanian proposals 124 questions of the Austrian and Czechoslovakian debts 127 Johnson Act 129

T H E RUSSIAN DEBT

130

PRESENT P O L I C Y O F T H E G O V E R N M E N T REGARDING T H E W A R DEBTS T H E GERMAN DEBTS

1. General 2. T h e Army costs

132 134

134 134

xii

CONTENTS

3. Awards of the Mixed Claims Commission 4. Default on the German debts

135 136

CERTAIN ECONOMIC FACTORS IN P A Y M E N T O F T H E DEBTS

IG6

1. A decrease or inversion of the United States positive trade balance 138 2. An increase in the purchase of services abroad 140 3. Further imports of gold 141 4. Increase in loans abroad 141 5. Purchase or lease of foreign territory 142 S U M M A R Y AND CONCLUSIONS CHAPTER

V.

FOREIGN

DOLLAR

142 BONDS

IN D E F A U L T ,

147

THE UNITED STATES AS A DEBTOR-CREDITOR NATION

1. 2. 3. 4. 5.

Before the World War T h e war period Post-war period Present amount of portfolio investments abroad Dollar bonds of foreign governments

T H E DEFAULT SITUATION REGARDING FOREIGN DOLLAR BONDS

1. Before 1931 2. Since the beginning of 1931 3. Summary of default situation at end of 1938 PARTIAL P A Y M E N T S AND READJUSTMENT SETTLEMENTS CAUSES OF DEFAULTS

1. 2. 3. 4. 5. 6. 7. 8.

T h e economic depression and the transfer problem Uneconomic lending and borrowing Changes of government Increase of armaments Public works projects Example of other governments Public opinion Reasons for default given by foreign governments

147

147 148 149 150 152 153

153 153 155 158 l6o

160 162 165 165 166 167 168 168

FINANCIAL RESULTS OF UNITED STATES FOREIGN LENDING

170

BONDHOLDERS'

172

PROTECTIVE ORGANIZATIONS

1. General 2. Efforts toward a centralized protective agency 3. Title II of the Securities Act of 1933

172 173 174

xiii

CONTENTS

4. The Foreign Bondholders Protective Council, Inc. a. Its establishment b. Functions of the Council c. Its organization d. The Council's policies e. Criticisms of the Council

175 175 176 177 178 183 184

P O L I C Y OF THE GOVERNMENT REGARDING DEFAULTS T H E GOVERNMENT'S CONCERN W I T H NEW ISSUES AND M A R K E T REGISTRATION

190

1. Past policies of the Government 2. Present policy of the Department of State 3. Legal restrictions a. The Securities Act of 1933 b. The Securities Exchange Act of 1934 c. The Johnson Act d. Neutrality legislation

igo 195 196 196 197 198 198

S U M M A R Y AND CONCLUSIONS

CHAPTER V I .

INTERNATIONAL

199

DOUBLE

TAXATION,

205

NATURE AND PROBLEM OF DOUBLE T A X A T I O N HISTORY OF GENERAL REMEDIAL EFFORTS

1. Two kinds of measures 2. Before the World War 3. After the World War a. General b. Efforts of the League of Nations and of the International Chamber of Commerce c. The question of multilateral or bilateral agreements EFFORTS OF THE UNITED STATES GOVERNMENT

1. General policy 2. United States laws 3. Conventions of the United States a. General b. Treaty of 1932 with France c. Convention of 1939 with Sweden S U M M A R Y AND CONCLUSIONS

205 207

207 207 208 208 209 213 2 14

214 216 218 218 219 220 221

xiv

CONTENTS CHAPTER V I I .

G O V E R N M E N T A L F I N A N C I N G OF FOREIGN TRADE,

224

T H E P R O B L E M OF ADEQUATE CREDIT F A C I L I T I E S FOR EXPORTS

224

HISTORY OF GOVERNMENT F A C I L I T I E S IN T H E UNITED STATES

225

T H E E X P O R T - I M P O R T BANK OF WASHINGTON

227

1. O r g a n i z a t i o n

227

2. G e n e r a l p u r p o s e

229

3. D e v e l o p m e n t of the B a n k ' s operations

230

4. P r i n c i p a l fields of activity

231

5 . A v o i d a n c e of c o m p e t i t i o n w i t h c o m m e r c i a l banks

233

6. N a t i o n a l interests involved, other than exports

234

SUMMARY AND CONCLUSIONS

235

BIBLIOGRAPHY, INDEX,

253

239

TABLES Estimated Capital and Surplus of Stabilization Funds

29

Net Capital Movements to the United States, 1934-1938

47n

Balance of Trade of the United States, 1934-1938

48«

Gold Production of the United States, Excluding the Philippine Islands, 1934-1938

48«

Gold Reserves of Central Banks and Governments, 1913— 1938

58

Extent of Exchange Control in July, 1939

77

Amounts Due on Funded War Debts, 1938-1940, Excluding Deferred Payments 102 Principal Amounts of Obligations of Foreign Governments to the United States Government Originally Acquired, 1917-1929, under the Various Acts of Congress 105 Credit Position of the United States, End of 1919

150

International Balance Sheet of the United States, End of 1938 151« Default on Foreign Dollar Bonds, according to Area

155

Default on Foreign Dollar Bonds, according to Country

155

Par Value of Foreign Dollar Bonds, according to Areas and Whether Complete or Partial Defaults; Percentage of Total Defaults; and Ratio of Defaults to Investments 157n

F I N A N C I A L Q U E S T I O N S IN UNITED STATES FOREIGN POLICY

I INTRODUCTION RECENT

DEVELOPMENT FOREIGN

OF F I N A N C I A L

PROBLEMS

IN

RELATIONS

of years economic matters have formed an increasingly important part in foreign relations. T h e development of financial problems with respect to foreign policy, however, has, for the most part, been comparatively recent. T h e r e were, of course, foreign exchange problems during the abnormal war period and in the several years following the hostilities, when currency instability was conspicuous in many parts of the world, but most countries soon returned to a form of international gold standard and remained on that basis until the general monetary breakdown in 1 9 3 1 . T h e existing exchange instability and widespread exchange control, and the international problems to which they have given rise, have been products of the currency crisis of that year. Similarly, before 1931 there was little of a problem of defaults on foreign dollar bonds, for the rise of the United States to a position as an important creditor nation has been a development of comparatively recent years, and there were relatively few defaults on foreign securities floated in the United States before the economic depression. It was not until several years ago that a need was felt for governmental credit assistance to American exporters as a result of the reluctance of commercial banks in many instances to grant credits to exporters because of international commercial restrictions and general economic and political instability. T h e problems of the war debts and the German debt to the Treasury are post-war problems. Double taxation was not a serious international problem before the era of high taxation resulting from the war.

F O R A NUMBER

These various international financial difficulties have devel-

4

INTRODUCTION

oped at a time not only when the United States Government has been confronted with unprecedented problems in other fields, both foreign and domestic, but also when the facilities for coping with them have had but limited time to evolve. INTEREST OF T H E

GOVERNMENT

IN

INTERNATIONAL

FINANCIAL

MATTERS

T h e participation of the United States Government in international financial matters arises chiefly from its interest in (1) the maintenance and development of the country's foreign trade, (2) the protection of American foreign investments, (3) the intergovernmental debts arising from the World War, (4) Federal revenue, and (5) general economic and political stability in relation to international peace. T h e Government is not generally interested, however, in the broad field of ordinary international banking or in the facilitating of profitable investments abroad for American capital. 1. M A I N T E N A N C E AND DEVELOPMENT OF T H E COUNTRY'S FOREIGN TRADE

T h e activities of the Government, particularly through the Department of State and the Department of Commerce, in maintaining and developing the country's foreign trade, more particularly its export trade, have extended over many years. A m o n g the various forms that these activities have recently taken are efforts to reduce the various restrictions on international trade and commerce, including among financial restrictions such measures as exchange control and double taxation. In this connection, Secretary of State Cordell Hull stated in a radio address on February 12, 1939: In recent years, the channels of international commerce have become clogged up by many obstructive and often arbitrary barriers created by governmental action, with the result that individuals engaged in trade have found it more and more difficult to carry on their business operations. T o remove or at least reduce these obstructive barriers to individ-

INTRODUCTION

5

ual enterprise is the task of the Government. Through the negotiation of reciprocal trade agreements and by other means, our Government today devotes to this vital task an important part of its effort in the conduct of foreign relations. In doing this, it is actuated by the firm belief that to give private enterprise in international commerce a freer and wider scope of activity will not only enhance the economic well-being and therefore promote social stability within nations, but will also remove some of the most dangerous causes of international friction and thus strengthen the foundations of world peace. 2 . PROTECTION

OF AMERICAN

FOREIGN

INVESTMENTS

Although the United States Government does not send war vessels abroad to enforce justice with respect to foreign investments of its nationals and does not act as a collection agency for dollar debts of foreign countries, it is a well-established function of the Department of State to extend appropriate protection to the rights abroad of American nationals. Among the forms that such protection takes in the field of finance is protesting against discrimination, facilitating in certain instances negotiations between foreign governments and representatives of American bondholders in regard to the servicing of defaulted bonds, and attempting to obtain relief concerning double taxation. 3. INTERGOVERNMENTAL

DEBTS ARISING F R O M T H E WORLD

WAR

T h e interest of the Government as a direct creditor in the defaults on the war debts, amounting to more than twelve and one half billion dollars, and of Germany on its debt to the Treasury of more than one billion dollars (arising from the war although not a part of the reparations, of which the United States is not a creditor) is, of course, obvious. 4 . FEDERAL

REVENUE

T h e Government naturally has an interest also in the various other factors affecting the Treasury's revenue, and consequently in the international cooperative efforts of the last few years to

6

INTRODUCTION

reduce double taxation and tax evasion (which are often treated together). T h e interest of the Government in double taxation, however, is also motivated by other considerations, more especially the effects on international trade and on American foreign investments. 5 . GENERAL ECONOMIC AND POLITICAL STABILITY

Perhaps more important than the foregoing, from the point of view of the national interests, although less apparent, is the effect of most of these international financial questions on the general economic and political stability of the world. Much of the vicious circle is involved in the subject, but it seems obvious that the existence of such difficulties contributes to the existing general lack of international confidence and also serves to present irritating subjects for diplomatic treatment. T o preserve the peace of the nation is the first and most important objective of the Government's foreign policy, and efforts in this behalf necessarily imply an interest in the various factors affecting the maintenance of peace in different parts of the world. Sometimes this interest takes the form of cooperation in financial affairs as well as in other economic matters. In the public statement of principles of the country's foreign policy issued on July 16, 1937, the Secretary of State declared among other things: This country constantly and consistently advocates maintenance of peace . . . We advocate steps toward promotion of economic security and stability the world over . . . We avoid entering into alliances or entangling commitments but we believe in cooperative effort by peaceful and practicable means in support of the principles hereinbefore stated. C O N F L I C T S OF A M E R I C A N

INTERESTS

In considering financial as well as other economic questions in international relations it seems self-evident that the interests of one group of persons in the United States are not always identical with those of other groups. It is, for example, in the interest of a large part of the country and probably of the general

INTRODUCTION

7

national economy that the country's exports be as large as possible. With respect to imports, certain producers are, or consider that they are, adversely affected by increased imports of competitive goods. Yet the country cannot hope to export more without importing more and thus furnishing other countries with the necessary dollar exchange with which to increase their purchases here. T h e interests of these two groups are not only likely to be inconsistent, but also they have particular significance in relation to the indebtedness of foreign countries owing American nationals and the United States Treasury, for it is obvious that in the absence of more loans we can liquidate indebtedness or receive interest thereon only in the form of a negative balance on foreign trade and services or in the form of further imports of gold. As to gold, the country already has nearly three-fifths of the world's total gold reserves, with the result that its monetary authorities are apprehensive of the influence that these large holdings might produce with respect to price inflation. Few well-informed persons would contend that it would be in the public interest for the country to continue increasing its proportion of the world's supply of the yellow metal. Should we then export less, or import more, or pay more to foreigners for services, or not expect other countries to repay their debts to us? T h e question may be largely answered by the action of other countries, which, if they should decide to make payments on their war debts or to resume substantial payments on defaulted bonds owing American nationals, would necessarily have to limit their uses of dollar exchange for other purposes, more especially for their imports. Such a reduction in their imports might be produced by deliberate measures in the way of further trade barriers designed for that purpose or by the effects of further currency depreciation in their respective countries resulting from the increased demands for dollar exchange. In either event, there would, in the absence of counteracting influences, such as an increase of United States imports or an increase in the United States negative balance on invisible

8

INTRODUCTION

items, be an adverse effect on the export trade of this country. In this regard, it may be said that it is a well-established principle of the Government's conduct of foreign relations to avoid favoring one group of American interests over another, except insofar as the broad national interests are concerned. T h u s while the Government in recent years has been actively endeavoring to increase exports, it has not been lax in applying appropriate efforts toward resumption of service on defaulted bonds owing American nationals and has not neglected to remind debtor governments from time to time regarding the war debts, perhaps on the assumption that debt payments might be made from the proceeds of such items as tourists' expenditures abroad, immigrants' remittances, and freights on foreign vessels, rather than through decreasing exports, or increasing imports out of proportion to any increase of exports. INTERRELATION

OF

INTERNATIONAL F I N A N C I A L

COMMERCIAL

AND

QUESTIONS

It follows from the foregoing that these various international financial questions are closely bound not only to one another but also to other economic matters, especially to trade policy. They should be studied and analyzed in the light of this integral character. As to the policy of the Government, the need for greater coordination in this regard is probably appreciated more today than ever before. Unfortunately, this need has not always been adequately perceived in the past, largely, it would appear, because of the suddenness with which these comparatively new problems have confronted the country: Our economic foreign policy should be marked by close coordination of its different parts. I mean, for example, that we should not repeat such mistakes as those made in the twenties when financial and commercial policy were clearly out of accord with each other.1 i Dr. Herbert Feis, Adviser on International Economic Affairs, D e p a r t m e n t of State, in address before the Economic C l u b of Detroit, March 27, 1939, Department of State press release dated March 24, 1939, p. 9.

II FOREIGN-EXCHANGE SIGNIFICANCE

OF

"EXCHANGE

INSTABILITY STABILIZATION"

is heard today of the possibilities of "exchange stabilization," which means the adoption of measures to reduce fluctuations in the international values of currencies. T h e r e are various kinds and degrees of such stabilization. Most frequently the term is used synonymously with "currency stabilization" to denote the definite fixing of the metallic content of the currency unit of a country, although the stabilizing of a given currency in terms of gold does not, of course, imply exchange stabilization with reference to currencies not on a gold basis. T h e more countries, however, that adopt a gold basis for their currencies, the more extensive becomes the use of gold as a c o m m o n denominator in the value of currencies, and in the same degree there is attained a "stabilizing" of the ratios, or exchange rates, as between different currencies. If, as an example, the gold content of the pound sterling should be fixed, there would necessarily be a fixed ratio between the pound and the dollar, the gold content of which is already established (although it may be further reduced within a certain limit by proclamation of the President), and there would be only a slight fluctuating variation between the "gold points" arising from expenses of shipping gold from one country to another in payment of balances. Degrees of de facto exchange stabilization, however, may be attained by other means, such as stabilization or equalization funds designed largely to smooth out the wrinkles of day-to-day fluctuations of currencies not on a gold standard; exchange control; and the " p e g g i n g " of a currency to a widely-used currency, such as the pound sterling or the dollar.

M U C H

T h e matter of the stabilizing of prices, as contrasted with foreign exchange or monetary units, forms quite another subject,

FOREIGN-EXCHANGE

INSTABILITY

although exchange-rate fluctuations and gold shipments sometimes tend to affect prices. 1 EXCHANGE STABILITY BEFORE

1931

1 . T Y P E S OF GOLD STANDARD BEFORE T H E POST-WAR PERIOD

A t the time of the outbreak of the World War, in 1 9 1 4 , most of the leading countries of the world had for a number of years been on some kind of gold standard. Such a standard has usually been assumed, at least until a few years ago, to have three important characteristics; namely, that legal tender money would be convertible upon demand of the holder into some form of gold, that the government or central bank would buy at a fixed price all gold offered, and that the metal would be used freely to settle international balances (that is, that restrictions would not be placed upon imports and exports of gold). T h e dis1 According to the classical theory of the gold standard, if a country ships gold, the loss of gold will increase the purchasing power of the remaining gold, and prices will decline, with a resultant tendency toward increased exports and decreased imports and a return of the gold previously lost. (See League of Nations, Report of the Gold Delegation of the Financial Committee, 1932, p. 10.) Another influence of gold movements that is corrective if permitted to exert itself, is that of interest rates. If gold flows out of a country, credit resources become diminished and interest rates tend to advance. This means that foreign investors may find it profitable to lend their money in the country with the higher interest rates, while investors within that country will tend to recall some of their funds abroad and to take advantage of the higher rates at home. This influence will tend to stop the export of gold and to start a new gold inflow. (Luthringer, Chandler, and Cline, Money, Credit and Finance, 1938, pp. 205-206; Madden and Nadler, The International Money Markets, 1935, p. 9.)

In recent years, however, there have come into play so many extraneous factors, including excessively large bank reserves, large and rapid capital movements due to speculation and unsettled political conditions, excessive trade restrictions, and artificial measures designed by governments and central banks to prevent gold movements from influencing internal credit conditions, that the theory of the automatic corrective operation of the gold standard has been permitted to apply in only a restricted manner, if at all. See the Report of the Committee on Finance and Industry, presented to Parliament by the Financial Secretary to the Treasury, J u n e , 1931, hereafter cited as the "Macmillan Report," pp. 83-84; Charles R . Whittlesey, International Monetary Issues, 1937, pp. 14-22, 47-67; Gustav Cassel, The Downfall of the Gold Standard, 1936, pp. 2-5; Ray B. Westerfield, Money, Credit and Banking, 1938, p. 559; Arthur D. Gayer, Monetary Policy and Economic Stabilization, 2d ed., 1937, pp. 9 - 1 3 , 18-25; Hugh B. Killough, International Trade, 1938, pp. 3 1 1 - 3 2 7 ; and Charles P. Kindleberger, International Short-Term Capital Movements, 1937, pp. 44-45.

FOREIGN-EXCHANGE INSTABILITY

11

tinguishing features of the "gold-coin standard" or "gold-specie standard" were that conversion was in the form of gold coins or certificates and that these circulated freely. 2 In the case of the "gold-bullion standard," legal tender money was convertible into gold bullion or bars, sometimes in only m i n i m u m quantities. Another general category was the "gold-exchange standa r d , " under which, although its nature varied somewhat in the different countries e m p l o y i n g it, the distinguishing characteristics were that the gold reserves included foreign gold exchange (that is, sight drafts, short-term securities, and currency of and deposits in countries on a gold-coin or gold-bullion standard) and that legal-tender money was redeemable in drafts on a gold-coin or gold-bullion-standard country. 3 T h e s e three general classifications 4 have been often referred to categorically as " t h e gold standard," although the term has sometimes been employed in a restricted manner to mean only the gold-coin, or gold-specie, standard. D u r i n g the W o r l d W a r the gold standard was for most purposes generally abandoned as embargoes were placed u p o n gold exports and as legal or de facto prohibitions were placed u p o n convertibility. A t the close of hostilities in 1918 various belligerent countries, i n c l u d i n g Great Britain, that had " p e g g e d " 2 T h e United States had been on such a basis since 1879, although it was not until the Gold Standard Act of 1900 that the standard was formally and definitely recognized by the Government. T h e country remained on the gold-coin standard, with certain qualifications during the W o r l d W a r , until 1933. (Edwin W . Kemmerer, Money, 1938, pp. 257-260; Luthringer, Chandler, and Cline, op. cit., p. 225; and John Donaldson, The Dollar, 1937, p. ign). For the present status of the dollar, see postea, p. 26. 3 For definitions and descriptions of these various terms see Bogen, Foster, NadIer, and Rodgers: Money and Banking, 1937, pp. 38-39; Edwin W . Kemmerer, op. cit., pp. 154-169, and with particular reference to the gold-exchange standard, pp. 69-81; Luthringer, Chandler, and Cline, op. cit., pp. 178-185; Leo Pasvolsky, Current Monetary Issues, 1933, pp. 7-12; Ray B. Westerfield, op. cit., pp. 60-65; John Donaldson, op. cit., pp. 2-5; and with reference to the gold-exchange standard, League of Nations, Report of the Gold Delegation . . . 1932, p. 54. * T h e r e should be mentioned also the so-called " l i m p i n g standard," which implied convertibility in either gold or silver at the option of the monetary authorities. France was on such a standard before the W o r l d War, and technically, the Netherlands has been on the limping standard even in recent years, although the central bank has in practice maintained the currency on a gold basis. (Madden and Nadler, op. cit., p. i n , and p. 433.)

FOREIGN EXCHANGE INSTABILITY their currencies discontinued doing so, with the result that these currencies depreciated rapidly, and several years of general monetary instability ensued which was tantamount to financial chaos in several countries. A number of countries confronted with severe fiscal and industrial problems, and at the same time deprived of the former cooperative support of their allies or associates, attempted to limit the flight of capital by various restrictions. The world had had at that time, however, relatively little experience with exchange control, which has become so conspicuous since the general monetary breakdown in 1931, and the expedients adopted in the several years following the war proved generally inadequate against the movements of new speculative forces. In Germany, for example, intervention in the market failed completely to avert the financial collapse in that country in 1923. 5 2 . T H E POST-WAR STABILIZATION

PERIOD

T h e need for restabilization of currencies became increasingly apparent after the war, and a general return to the gold basis was considered the soundest and most logical way of achieving this. T h e monetary reconstruction period that followed is often cited as the "period of stabilization." International cooperative efforts, including large loans by New York banks, played an important part in this post-war currency stabilization. Between January, 1920, and June, 1924, the currencies of El Salvador, Lithuania, Latvia, Colombia, Sweden, and Austria were placed on a gold basis. In October, 1924, Germany stabi6 Paul Einzig, Exchange Control, 1934, pp. 22-30: Madden and Nadler, op. cit., pp. 5-6; Ray B . Westerfield, op. cit., pp. 533-535, who commented with respect to the budgetary and inflationary factors: " T h e failure of many countries to balance their budgets and thus to remove the cause of issuing more and more loans and paper money was a prime factor in driving down the value of their currency. T h e notion of recovering the cost of the war from the defeated countries, the psychological effect of heavy taxation in impeding industrial activity, the necessities of repairing the devastated areas, the extension of state activities, and the creation of public works with a view to giving employment to the returning soldiers,—all made for heavy borrowing by the governments, equaling if not exceeding the annual amount borrowed during the war, and having the same inflationary effect on the currency."

FOREIGN-EXCHANGE

INSTABILITY

13

lized its currency, followed in April and May, 1925, by Great Britain, Australia, New Zealand, South Africa, the Netherlands, the Dutch East Indies, Hungary, and Danzig. Between July, 1925, and July, 1927, the list included Chile, Finland, Canada, Belgium, Denmark, Czechoslovakia, Guatemala, and India; and in the next few months there followed Ecuador, Argentina, Poland, Italy, Estonia, Norway, Greece, and France.8 With stabilization there was a general return to the gold basis in some form. In this stabilization movement a number of countries placed themselves upon the "gold-exchange standard." At the international economic conference held at Genoa in 1922 there was a feeling that owing to the maldistribution of gold following the World War and to the belief (now generally held to be erroneous) that there was a gold shortage in the world, many countries would be unable to return to the pre-war gold standard, and to meet this situation the conference recommended the wide adoption of the gold exchange-standard.7 As will be observed in a later section, the extensive adoption of this recommendation produced certain difficulties which contributed to the general monetary breakdown. WHY

POST-WAR S T A B I L I Z A T I O N

PROVED

UNSUCCESSFUL

The currencies that were stabilized during the years following the war probably seemed to operate more smoothly than was inherently the case. In 1931 the world experienced the most sudden general financial breakdown that has ever occurred in modern monetary history. In order to understand the functioning of the post-war stabilized currencies and to appreciate some of the factors involved in any future general return to a gold basis, consideration should be given to certain important in« Annual Report of the Secretary of the Treasury, . . . Year Ended June 30, 1928, p. 78. See also chronological summary in the Federal Reserve Bulletin, August, 1928, p. 562. * Ray B. Westerfield, op. cit., pp. 555-557; Madden and Nadler, op. cit., pp. 8688.

14

FOREIGN-EXCHANGE I N S T A B I L I T Y

fluences that were asserting themselves prior to 1931 and that contributed to the ensuing monetary crisis. 1. REPARATIONS AND WAR DEBTS

T h e World War, aside from its influence on trade by reorganizing political maps and creating unusual industrial problems, and besides its immediate effects on most currencies and on the distribution of gold, produced a far-reaching financial problem in the reparations and the war debts. From the beginning of 1925 to the middle of 1931 the United States alone is reported to have received $1,362,000,000 from the war debts. For a number of years payments on these, as well as on the commercial debts, were met largely by new loans, but with the development of the business "boom" in the United States and its high interest rates, most American investors preferred to lend their money in the United States, with the result that American lending abroad declined substantially before the beginning of the economic depression. 8 2 . G R O W T H O F E C O N O M I C N A T I O N A L I S M AND O F CREDIT C O N T R O L

Closely related to the international debt problem was the conspicuous growth of economic nationalism. Ironically, this movement was gaining momentum at the very time when newlyestablished and reduced nations of Europe were struggling against the consequences of finding their previous domestic markets now separated from them by political frontiers. Many governments held that the soundest economic course lay in the protection not only of the numerous domestic industries born of the war but also of new or increased industrial production which would absorb unemployment and make for general prosperity. Without adequately perceiving that one country's imports were another's exports, creditor and debtor nations alike were making every effort to encourage exports and to curtail imports. 8 See League of Nations, Report of the Gold Delegation . . . 1932, p. 19; also Madden and Nadler, op. cit., pp. 16-26, and Arthur D. Gayer, op. cit., pp. 98-103.

FOREIGN-EXCHANGE INSTABILITY

15

T h i s widely-adopted trade policy had especially unfavorable effects upon the payments of reparations and war debts. Creditor countries by placing obstacles in the way of imports of goods, which formed the most important ultimate way of receiving the stipulated payments from their debtors, were thus attempting to pursue contradictory policies. T h e tariff policy of the United States played no small part in this movement both directly and by stimulating the adoption of similar policies by other countries. A t the same time central banks were increasing their control over credit conditions within their respective countries and in a manner which as a general rule had little regard for the smooth operation of the international gold standard. 9 Before * Prior to the war London held a dominant position in world finance and was thus enabled to exercise a large coordinating influence on credit and monetary policy. Although a measure of this influence was retained in the post-war period, the former dominance had been destroyed, and it became necessary to share financial leadership with New York and Paris. (See Royal Institute of International Affairs, The Future of Monetary Policy, 1935, pp. 125-126 and 128.) Regarding the new role of the United States, Dr. Arthur D. Gayer (op. cit., p. 3 1 ) has commented: "From the point of view of both her own interests and those of the world at large the United States showed herself a most unsatisfactory creditor country. She has functioned vigorously in this respect only intermittently, unlike London in pre-war days, which could be relied upon to distribute capital throughout the world in a fairly steady flow." (See also ibid., pp. 29-30.) Notwithstanding cooperative efforts in the stabilizing of currencies, the lack of unity in monetary policy after the war was an important factor in the situation that led to the monetary breakdown. T h e Bank for International Settlements has even characterized the post-war operation of the gold standard as anarchic "in that, speaking broadly, each country considered that the mere fact that its currency was tied to gold with effective gold import and export points was all-sufficient to make it part of the international system, and that in every other respect it could freely disregard its neighbors and the effect upon them and their currencies of a succession of violent changes in tariff policy, in credit policy, and even in the gold content of the national currency itself." (Fourth Annual Report, 1934, p. 8.) T h e effects of this absence of coordination were intensified by the material increase during post-war years of speculation and speculative practices in foreign exchange and of movements of capital, including the development of a forwardexchange market. These activities largely accounted for the amount of so-called "bad money," or "hot money," which became so conspicuous in roaming from country to country with unwholesome effects upon stability. They were also applied to raids, which constituted a continuous threat against all currencies. See Royal Institute of International Affairs, op. cit., pp. 150-158; Paul Einzig, Foreign Balances, 1938, pp. 10-37; a n d Madden and Nadler, op. cit., pp. 50-51.

16

FOREIGN-EXCHANGE INSTABILITY

1914 central banks had influenced gold movements to a certain extent by increasing and decreasing the discount rates, but the use of such important devices as open-market operations and the changing of bank reserve requirements as instruments of credit control, often applied to influence gold movements or to neutralize the credit effects of gold movements, was a post-war development. 10 Such practices, as well as nationalistic trade restrictions, were inconsistent with one of the underlying principles of the gold standard, namely, that gold movements should freely accompany changes in balances of payments and that as such movements took place they should automatically influence credit conditions and prices, which in turn would tend to "correct" any loss or gain of gold. With respect to trade restrictions, when nations on a gold basis have their foreign markets reduced by trade barriers, not only are they likely to be obliged to ship large amounts of gold owing to the adverse effects on their trade balances, but also they are deprived of opportunities of having the metal returned by the so-called corrective influences, for decreases in the prices of their export commodities will not necessarily increase their sales abroad. 11 3 . POST-WAR EXCHANGE

PARITIES

Owing largely to the failure to appraise more accurately the changes produced by the war and to the difficulties of readjustments, several of the exchange parities established in the postwar period are now generally held to have been placed at points which hindered the striking of equilibria in international trade. 12 T h e pound sterling and the lira, for example, are usually considered to have been overvalued in relation to purchasing JO Ante, p. ion. 1 1 Madden and Nadler, op. cit., pp. 16-17; Arthur D. Gayer, op. cit., pp. 44-47; Ray B. Wester field, op. cit., pp. 561-562. 12 League of Nations, Report of the Gold Delegation . . . . 1932, p. 17, observed: "In the actual restoration of stable currencies, it had been extremely difficult to gauge accurately the level at which stabilisation should be effected. In considering this problem, many different and often conflicting factors had to be esti-

FOREIGN-EXCHANGE I N S T A B I L I T Y

17

power, while the French franc was perhaps undervalued. The margins between these established exchange parities and purchasing-power parities, or between the external and the internal currency values, had pronounced effects upon trade balances. Thus, Great Britain, while profiting by lower sterling prices for import requirements, found it impossible to reduce wages and other operating costs sufficiently to compete satisfactorily in world markets. Consequently, the disproportionately high exchange parity of the pound, as well as of the lira in Italy, contributed to an outflow of funds from those countries, while the undervaluation of the franc served to encourage a flow of gold into France. Ultimately, in the absence of artificial counteracting forces, these margins would have been corrected by gradual adjustments of costs, prices, and interest rates to the exchange parities. The lack of flexibility of the post-war economic system, however, did not facilitate such an adjustment. 18 4 . T H E GOLD-EXCHANGE STANDARD

Another weakness in the post-war monetary system was the operation of the extensively-adopted gold-exchange standard. The Genoa Conference of 1922 in recommending for the stabilization of currencies the broad use of the gold-exchange standmated. Any level which might have been chosen in a particular case involved some measure of subsequent readjustment of dependent economic factors. T h e relation of internal to external prices, the balance of commodity trade, the level of wages in relation to prices both retail and wholesale, were never exactly right at any stabilisation level. The choice actually made, in this country or in that, involved, therefore, the necessity of readjustments which in some cases have proved more difficult than was anticipated." T h e Bank for International Settlements in its Seventh Annual Report, 1937, p. 8, commented: ". . . certain of the main currencies were stabilized in the years 1924-1930 at rates which were 10 or 15 percent out of keeping with their inherent values as measured by relative cost and price levels. T h e task of necessary adjustment might not in itself have been too difficult had it not been for the decline in world prices which, at first gradual, became more accentuated after the turn of affairs in 1929." See also the "Macmillan Report," op. cit., pp. 106-107; Royal Institute of International Affairs, op. cit., pp. 134-141; and Gustav Cassel, The Downfall of the Gold Standard, 1936, pp. 42-48. 13 See Arthur D. Gayer, op. cit., pp. 34-54.

18

FOREIGN-EXCHANGE INSTABILITY

ard, which had been employed in a few instances before the war, saw in such a plan, as has been already noted, a means of economizing in gold. 14 In the adoption of this standard by a number of countries, however, a system was built up that proved extremely vulnerable. While the proportion and nature of gold exchange permitted to be held as monetary reserves varied in different countries, a common weakness was that the system interfered with the proper functioning of corrective movements of gold, for such gold exchange as gold-exchange countries received from positive balances of payments was not necessarily converted into gold, and therefore the country that normally would have shipped gold, retained it. Besides thus contributing to further maldistribution of gold, this practice tended to cause a pyramiding of credit on gold, with an unnatural expansion of bank credit and resultant inflation. Also, the gold-specie or goldbullion-standard country was rendered particularly vulnerable in case of a panic because of the demand obligations and shortterm securities held against it. This was one of the principal difficulties in London in the summer of 1931. A further disadvantage was that the fall of a gold-specie or gold-bullionstandard currency, as of sterling in 1931, automatically pulled gold-exchange currencies down with it, at the same time producing losses in terms of gold to the countries on the goldexchange standard. 15 5.

MALDISTRIBUTION

OF

GOLD

A result of the various foregoing factors, rather than a direct cause of the monetary breakdown, was the increased concentra" Gustav Cassel, op. cil., pp. 26-33. T h e gold-exchange standard, besides requiring less gold, is also economical in that the country maintaining such a standard is able to derive interest on the foreign short-term securities or bank deposits abroad held in place of gold itself, which would not yield such a return. i s See League of Nations, op. cit., p. 55; also Madden and Nadler, op. cit., pp. 7-13; A r t h u r D. Gayer, op. cit., pp. 24-25; Ray B. Westerfield, op. cit., pp.

555-561.

Despite the difficulties created by the operation of the gold-exchange standard, various monetary authorities continue to favor it as a means of returning to the

FOREIGN EXCHANGE

INSTABILITY

19

tion of the world's gold in the United States, despite the large loans that the country was making abroad, and in France. A t the beginning of the post-war period the subject of the maldistribution of gold resulting from the war was one frequently discussed in financial circles; but while the United States increased its share of the world's gold reserves from 26.6 percent at the end of 1 9 1 3 to 3 3 . 9 percent at the end of 1920, the proportion had increased to 38.8 percent by the end of 1 9 3 0 . T h e proportion held by France increased from 9.5 percent at the end of 1 9 2 0 to 19.3 percent at the end of 1930. 1 0 In other words, two countries which had together held about 43.4 percent of the central gold holdings of the world at the beginning of the post-war period had increased this share to approximately 5 8 . 1 percent at the beginning of the world depression. O n the eve of the general monetary collapse in 1 9 3 1

the " M a c m i l l a n

Report"

in

gold basis. T h u s , the C o l d Delegation of the League of Nations, a f t e r enumerating weaknesses in the functioning of the post-war gold-exchange standard, including the instability created by the rapid transfer of large amounts of shortterm foreign balances from one financial center to another, commented in its 193s report, p. 55: " W e do not, however, regard this development as inherent in the goldexchange standard, as it was practised, for example, by many countries before the war. W e regard the gold-exchange standard in this f o r m as a useful system for many countries, for whom it still remains the most economical and efficient monetary mechanism available. " I t is obvious that recent events and particularly the depreciation of sterling upon which so many gold-exchange standard systems were based have entailed heavy losses upon many countries. Such of those countries as are in a position to do so will m a k e every effort to avoid f u r t h e r losses a n d it is probable that the gold-exchange standard will in the f u t u r e be much more restricted than it was in the years before 1 9 3 1 . . . . " T w o possibilities have been suggested. T h e first is that such countries will choose carefully among the principal financial centers those which offer the greatest promise of f u t u r e stability. T h e other is that an endeavour should be made to spread the risks of losses by utilising such an international institution as the B a n k f o r International Settlements as the agency through which the system shall be administered. In the latter case, the reserve assets of the goldexchange standard country would be deposited with the International B a n k which would in turn spread its deposits among its constituent Central B a n k s . " See also monetary report of the Agenda Committee of the 1933 London Conference, quoted in L e o Pasvolsky, op. cit., A p p e n d i x A, p. 140. " • F r o m figures of Federal Reserve Bulletin, J u n e , 1933, pp. 3 6 8 - 3 7 1 . For holdings of various countries, 1 9 1 3 - 1 9 3 8 , see postea, p. 58.

FOREIGN-EXCHANGE INSTABILITY Great Britain 1 7 observed that "the present distribution of gold is very generally held to be unsatisfactory: a maldistribution to which is to be attributed a large measure of responsibility for the heavy fall in prices in recent years." 6 . UNSOUND I N T E R N A T I O N A L LENDING AND BORROWING

Not only were numerous international loans after the war attracted by high yields to economically unsound purposes,18 but also there developed an extensive practice of applying shortterm credits to long-term uses. This practice was the result of a number of factors, including the difficulty of various European countries in obtaining long-term loans; the preference of certain countries, such as France, for short-term lending after the repudiation of Russian bonds; the opportunities offered by the call-loan market in New York prior to the stock market collapse in 1929; discrepancies in interest rates in different international centers; the holding of sight balances and short-term securities as monetary reserves of gold-exchange countries; and the advent of the economic depression, which served to limit materially the making of long-term investments. The extensive employment of short-term lending was, like the use of the gold-exchange standard as maintained in the postwar period, a fair-weather practice. During the comparatively prosperous years preceding the monetary collapse in 1931, it could be pursued with little difficulty, but once confidence was threatened and general liquidation began, its unsoundness became grimly apparent. 18 i t op. at., p. 67. i 8 In this regard the League of Nations, op. cit., p. 18, observed: "Very large sums have been invested, not only in the development of countries whose natural resources were largely untapped, but also in European countries where financial reconstruction was necessary. Much of this investment was not carefully controlled. Debts both on short and on long term have been incurred which impose an undue burden, not only on the immediate debtors, but in their aggregate on the whole country in which those debtors reside. "Insufficient care has been taken by lenders to ensure that the credits extended should be employed productively and in a manner to increase the capacity of the borrower to repay . . . When prices and the volume of trade fell off, the margin of safety in many cases proved to be too slender for the borrowers, and difficulties were inevitable."

FOREIGN EXCHANGE I N S T A B I L I T Y 7 . T H E ECONOMIC

21

DEPRESSION

T h e economic depression could perhaps more logically be considered a severe test of the world's post-war monetary system than a basic cause of the financial breakdown, but it nevertheless was an important factor. T h e fall of prices meant that foreign debts contracted in the years shortly after the war had, as measured in the values of goods with which they could be repaid, become by the summer of 1931 far more burdensome than when contracted. Added to this were the decreased international demands for merchandise and services. Another important consideration was the influence of the depression in curtailing foreign loans, particularly by the United States, although, as already noted, this curtailment began earlier in the United States with the increased demands of the New York call market for stockexchange purposes. 8 . I M M E D I A T E CAUSES OF T H E

1931

CRISIS

T h e immediate causes of the general monetary breakdown were a series of events, beginning with the news in May, 1931, that the old and highly-regarded Credit Anstalt of Vienna had had to apply to the Austrian Government for assistance.20 The revelation of the difficulties of this bank not only disclosed the weakness of the financial structure of Austria, whose financial See also Henry Parker Willis, The Theory and Practice of Central Banking, 1936, p. 388; Madden and Nadler, op. cit., pp. 88-91; and postea, pp. 162164. ib T h e warning of the "Macmillan Report" (June 23, 1931). op. cit., pp. 1491 5 1 , is of interest. T h e report concluded in this regard (p. 151) that "the normal level of the Bank of England's liquid international assets should be materially higher than it now is" and that "at present the disparity between London's liquid resources and those of other large international countries is too great and should be diminished." See also Arthur D. Gayer, op. cit., pp. 25-29, and Madden and Nadler, op. cit., p. 91. 20 A number of countries outside Europe, however, began to experience monetary difficulties some months earlier: ". . . the Argentine and Uruguay suspended gold payments in December 1929, and their exchanges were allowed to depreciate; Canada introduced temporary restrictions at the end of 1929, and in 1930 the exchanges of Brazil, Chile, Venezuela, Paraguay, Peru, Australia and New Zealand fell and remained below export gold point." (League of Nations, op. cit., p. 9; see also Gustav Cassel, op. cit., p. 61.)

22

FOREIGN-EXCHANGE INSTABILITY

rehabilitation had been considered one of the outstanding achievements of the post-war period, but also sounded an alarm for liquidation of credits throughout Europe. Serious repercussions were immediately felt in Germany, where the financial situation had been rendered particularly vulnerable by heavy withdrawals in 1929 and 1930, the Government's mounting indebtedness, and unsatisfactory trade conditions. T h e German banks were unable to withstand the avalanche of withdrawals, and by the middle of July various restrictive measures had been adopted, including a partial transfer moratorium. T h e German financial collapse gave, in turn, the signal for recalling extensive short-term balances in London, which had become confronted with large frozen credits in Germany and other countries of central Europe. Various expedients proved inadequate in London as the situation became aggravated by the publication of the "Macmillan Report," exposing the weakness of the international position of the London market, and the mutiny, however unimportant in itself, within the British fleet, with the result that Great Britain was obliged to suspend the gold standard in September. Various other members of the British Empire and the Scandinavian countries quickly followed suit. By the end of 1931 a majority of the countries of the world had abandoned the gold basis either expressly or in effect, and a large number had adopted various kinds of exchange restrictions.21 R E N E W A L OF STABILIZATION I. THE LONDON

EFFORTS

CONFERENCE

At the Economics Conference in London in 1933 the question of monetary stabilization was one of the important subjects on 2 1 Madden and Nadler, op. cit., pp. 92-99; Paul Einzig, Exchange Control, 1934, pp. 48-50. Current exchange restrictions of various countries are briefly described in circulars issued from time to time by the Guaranty T r u s t Company of New York and in bi-monthly bulletins of the B a n q u e Nationale française du Commerce extérieur, of Paris.

FOREIGN EXCHANGE

INSTABILITY

23

t h e a g e n d a . " T h e r e p o r t of the A g e n d a C o m m i t t e e , in January,

published

1 9 3 3 , stated:

. . . the restoration of a satisfactory international m o n e t a r y

stand-

a r d is c l e a r l y of p r i m a r y i m p o r t a n c e . T h e W o r l d C o n f e r e n c e , i n t h e a b s e n c e of a n o t h e r i n t e r n a t i o n a l s t a n d a r d l i k e l y to b e

universally

acceptable, will have to consider h o w the conditions for a successful r e s t o r a t i o n of a f r e e g o l d s t a n d a r d c o u l d b e f u l f i l l e d . 2 3 A s to the C o n f e r e n c e itself, there w a s m u c h discussion of possible currency stabilization, b u t o w i n g largely

to the fact

that

t h e U n i t e d States w a s not then p r e p a r e d to establish a definite g o l d c o n t e n t of t h e d o l l a r a n d t h a t it b e l i e v e d t h a t it w o u l d

be

u n w i s e to a t t e m p t c u r r e n c y stabilization p r e m a t u r e l y , n o agreements on the subject were reached. T h e

U n i t e d States

m e n t considered that the increase a n d s u b s e q u e n t

Govern-

stabilization

of prices w e r e at the t i m e m o r e i m p o r t a n t t h a n , a n d i n fact a p r e r e q u i s i t e to, m o n e t a r y s t a b i l i z a t i o n . I t a l s o c o n s i d e r e d t h a t a t e m p o r a r y stabilization w o u l d be unwise u n d e r the then

conditions

existing.21

22 T h e L e a g u e of Nations had shortly before published the aforecited final report (dated J u n e , 1932) of the Gold Delegation of its Financial Committee, which since 1929 had been studying the gold problem, and this report recommended a general return to the gold basis (pp. 23-25). 23 Quoted by L e o Pasvolsky, op. cit., A p p e n d i x A , p. 1 3 5 , citing L e a g u e of Nations Document No. C. 48. M. 18. 1933. II. (Conf. M.E.I.). 24 In a message to the United States delegation on J u l y 3, 1933, the President stated: " T h e world will not long be lulled by the specious fallacy of achieving a temporary and probably an artificial stability in foreign exchange on the part of a few large countries only. " T h e sound internal economic system of a nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other nations. " I t is for this reason that reduced cost of government, adequate government income, and ability to service government debts are all so important to ultimate stability . . . L e t me be frank in saying that the U n i t e d States seeks the kind of dollar which a generation hence will have the same purchasing and debtpaying power as the dollar value we hope to attain in the near f u t u r e . " (Leo Pasvolsky, op. cit., p. 83.) T w o days later, the American Delegation declared: " T h e revaluation of the dollar in terms of American commodities is an end f r o m which the government a n d the people of the United States cannot be diverted. We wish to make this perfectly clear: we are interested in American commodity prices. What is to be the value of the dollar in terms of foreign currencies is not a n d cannot be our

FOREIGN-EXCHANGE

INSTABILITY

2 . T H E REVALUATION O F T H E DOLLAR

Despite temporary threats in the fall of 1 9 3 1 , when other currencies were fast tumbling, the dollar emerged from those chaotic months seemingly as strong as previously. It is true that there were substantial exports of gold at the end of 1932, but there were net imports of the metal in January and February, 1933. 2 5 When the Executive Order of April 20, 1933, prohibited gold exports except under license, which climaxed a series of measures beginning at the time of the bank holiday in early March serving to take the country off the gold standard," there was apparently no serious threat to the country's monetary reserves, and the measure, as contrasted with the more or less force majeure suspension of gold payments by other countries due to foreign-exchange emergencies, has been usually attributed to desire to stimulate the domestic price level.27 Provision for revaluation (as contrasted with simple depreciation) of the dollar was made in the so-called Thomas Amendment, embodied in Section 43, Title I I I of the Agricultural immediate concern. T h e exchange value of the dollar will ultimately depend upon the success of other nations in raising the prices of their own commodities in terms of their national moneys and cannot be determined in advance of our knowledge of such fact. There is nothing in our policy inimical to the interest of any other country and we are confident that no other country would seek to embarrass us in the attainment of economic ends required for our economic health." (Ibid., Appendix A, p. 161.) 25 Net imports of gold amounted to $128465,000 in January, 1933, and $17,776,000 in February, 1933, and despite the closing of the banks in March, the net outflow was only $82,081,000 in that month and $9,973,000 in April. (Federal Reserve Bulletin, June, 1933, p. 373-) 2« "At just what stage in this series of events the United States 'went off' the gold standard is disputed. T h e Secretary of the Treasury, at the time the banking holiday was proclaimed, emphatically declared that the United States had not gone off the gold standard on account of the proclamation . . . By the historical and ordinary definition of the gold standard our country was 'well off that standard when, as was the fact after that proclamation, free exportation, free coinage, free redemption, and free payment, sale and transfer of gold were all stopped by government edict." (Ray B. Westerfield, op. cit., p. 788.) " This was evidenced not only by the aforementioned position assumed by the United States delegation at the London Conference in 1933 but also by radio addresses of the President in that year declaring the Government's objective of restoring commodity price levels. (Ray B. Westerfield, op. cit., pp. 823824.)

FOREIGN-EXCHANGE INSTABILITY

25

Adjustment Act of May 12, 1933, empowering the President, among other things, to reduce the gold content of the dollar by not more than 50 percent "to stabilize domestic prices or to protect the foreign commerce against the adverse effect of depreciated foreign currencies." 28 Although the dollar was not legally devalued until the President's proclamation following the enactment on January 30, 1934, of the " G o l d Reserve Act of 1934," a number of de facto valuations were established during the interim period as a result of gold prices set by the Treasury, the Reconstruction Finance Corporation, and the Federal Reserve Bank of New York. 29 28 Annual Report of the Secretary of the Treasury, . . . Year Ended June 30, '9J3, PP- 191-19*29 Annual Report of the Secretary of the Treasury . . . Year Ended June jo, 19)4, p p . 189, 199. For chronological table of t h e different valuations, see ibid., p- 205. A J o i n t Resolution of Congress approved J u n e 5, 1933. declared that "every provision contained in or made with respect to any obligation which p u r p o r t s to give t h e obligee a right to require payment in gold or a particular kind of coin or currency, or in an a m o u n t in money of t h e United States measured thereby, is declared to be against public policy; a n d no such provision shall be contained in or m a d e with respect to any obligation hereafter incurred"; a n d t h a t every "obligation, heretofore or hereafter incurred, w h e t h e r or not any such provision is contained therein or m a d e with respect thereto, shall be discharged u p o n payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public a n d private debts." T h i s resolution was m a d e applicable to obligations of as well as to the United States. (Annual Report of the Secretary of the Treasury . . . Year Ended June 30, 19)}, p. 194; see also A r t h u r K. K u h n , in American Journal of International Law, April, 1934, P- S i 2 ) In the case of Perry vs. the United States, the Supreme Court of the United States held on February 18, 1935, that Congress exceeded its legal powers in setting aside the Government's obligations to holders of Government bonds calling for p a y m e n t in gold, but that inasmuch as the purchasing power of legal tender paid instead of gold to t h e plaintiff had not changed in a way to cause damage, the plaintiff could not show damage such as to sustain a suit before the Court of Claims. (See C. G. Fenwick, in American Journal of International Law, April, 1935, pp. Sio-3'3)- A Joint Resolution of Congress signed by the President on August 27, 1935, m a d e it impossible for the Government to become liable with respect to the gold clause in its securities or its currency after J a n u a r y 1, 1936. (Annual Report of the Secretary of the Treasury . . . Year Ended June jo, 19)6, p. 266; see also Ray B. Westerfield, op. cit., p. 803, a n d James D. Paris, Monetary Policies of the United States, 19)2-1958, 1938, p. 32. An international question that has arisen from this Joint Resolution of J u n e 5- 1933- pertains to the treaty of 1903 between t h e United States and P a n a m a providing for an a n n u i t y to the latter country of $250,000 in "gold coin of t h e United States" in compensation for rights relative to the P a n a m a Canal. Since

26

FOREIGN EXCHANGE INSTABILITY

Section 12 of the Gold Reserve Act of 1934, in amending Section 43 of the act aforementioned, provided that the weight of the gold dollar should not be fixed at more than 60 percent of its then legal weight. The President's powers with respect to devaluation therefore consisted of authority to devalue between 40 and 50 percent. On January 3 1 , 1934, the President fixed the gold content of the dollar at 59.06 percent of the former content, the price of gold being established at $35.00 per ounce (in comparison with $2O.67).S0 Although the President's powers of further devaluation expired June 30, 1939, an act approved July 6, 1939, purports to have revived them for a period to June 30, 1941. The character of the dollar provided for by the Gold Reserve Act of 1934 has been sometimes described as a modified form of the gold-bullion standard. Since, however, there is permitted neither a free gold market (although the Treasury buys all the gold offered at the established price less a small service charge) nor the export of the metal except upon authorization of the Treasury, and inasmuch as the President may within the prescribed limits alter the gold content, the position of the dollar, even aside from the silver aspect, is an anomalous one. Its position has been rendered the more difficult to define as a result of the act of July 6, 1939, which, in providing for the unlimited coinage of domestically mined silver with a fixed seigniorage of 45 percent, places the country on a statutory bimetallic basis insofar as domestic silver production is concerned." the Joint Resolution, the Government has periodically offered Panama the annuities in current dollars, which have been declined by the Panaman Government. In a treaty between the two countries signed March 2, 1936, it was provided that the United States should each year pay to Panama 430x100 Panama balboas, equivalent to $430,000 and approximately the value of 250,000 old gold dollars revalued at $35 per ounce, but the treaty contains various provisions, and the increase in the dollar annuities in terms of current dollars implies no recognition by the United States Government of any such obligation under the treaty of 1903. Although the United States Senate did not give its consent to ratification until July, 1939, ratifications were exchanged July 27, 1939. so Annual Report of the Secretary of the Treasury . . . Year Ended June jo, TO PP- «8, 199. si U. S. Congress, Public-No. 165-76111 Congress (H. R . 3325). In March, 1939, Secretary of the Treasury Henry Morgenthau, Jr., stated: "Our present

FOREIGN EXCHANGE INSTABILITY 3.

DEVELOPMENT

OF

EXCHANGE-STABILIZATION

27

FUNDS

a. General.—An important development in the foreign-exchange situation since the monetary crisis of 1931 has been the establishment of a number of exchange "stabilization" or "equalization" funds. In a sense this is not an entirely new phenomenon. Before the World War, central banks of certain countries used their resources in intervening at times in the foreign-exchange market for the purpose of preventing or minimizing fluctuations in rates as a result of seasonal factors.32 During the war several of the Allied countries, including Great Britain, France, and Italy, maintained credits in New York or London for "pegging" their respective currencies, and the pegging device involved intervention of some character in the monetary system differs from the pre-ig33 gold standard in three respects other than gold content. First, our currency is not convertible into gold coin, secondly, there are government controls over the movement of gold in and out of the country, and thirdly, there is executive authority to change the gold content of the dollar." (Letter to Senator Robert F. Wagner, March 22, 1939, Treasury Department press release No. 16-83, March 23, 1939, p. 23.) T h e advisability of further delegating to the Executive Power the authority to change the gold content of the dollar had been questioned by a number of economists. A statement signed by 55 leading economists of the country and released by the Economists' National Committee on Monetary Policy, New York, on February 27, 1939, commented: " T h e r e are no adequate reasons for further extension of the President's power to change the gold content of the dollar. Since the devaluation of the dollar in January 1934 was close to the minimum specified in the Gold Reserve Act. any further alteration in the weight of the dollar would necessarily be in a downward direction. Further devaluation would be opposed to the best interests of the country and should not be permitted. Continuance of the President's authority to devalue the dollar still further implies that there are sound reasons for a better or stronger currency pursuing a weaker one in its downward course, whereas no such sound reasons exist." (U. S. Congress, Senate, Hearing before a Subcommittee of the Committee on Banking and Currency on S. 910, March 2, 1939, pp. 24-25. See also testimony in hearings before the same Subcommittee, March 14, 15, 16, and 22, and May 10, 11, and 18, 1939.) T h e position of the Government, however, as expressed by Secretary of the Treasury Morgenthau on March 22, 1939, is as follows: " T h e power to change the gold content of the dollar should be lodged in an authority which can, in case of necessity, act swiftly and in a manner which will minimize the disturbances resulting from any change. T h i s power should always be available; its existence contributes to the maintenance of stable exchange relationships, which make the exercise of the power unnecessary." (Letter to Senator Robert F. Wagner, op. cit., p. 23.) 32 See Paul Einzig, Exchange Control, 1934, p. 12; also postea, p. 68.

28

FOREIGN-EXCHANGE

INSTABILITY

e x c h a n g e market. A l t h o u g h this w a r t i m e measure was discont i n u e d shortly after the cessation of hostilities, t h e post-war decade witnessed intervention on a considerable scale b y central banks i n the exchange market. B e f o r e the various depreciated currencies were restabilized, efforts were m a d e i n certain instances to influence exchange rates by i n t e r v e n t i o n , as i n Germ a n y f r o m 1919 to 1923 and in France b e t w e e n 1924 a n d 1926; a n d f o l l o w i n g the stabilization of the different currencies, funds, derived in a n u m b e r of instances f r o m so-called " s t a b i l i z a t i o n " loans or credits, were e m p l o y e d to m a i n t a i n the n e w parities. 83 T h e distinctive characteristics of the exchange-stabilization f u n d s that have been set u p since 1931, however, have b e e n their separate organization, their large resources, a n d the

continuous,

active, and secret manner w i t h w h i c h the m o r e i m p o r t a n t ones operate. 3 4 T h e first of these funds to be established was the British " E x change Equalization A c c o u n t , " which was set u p in A p r i l , 1932, a few months after Great Britain a b a n d o n e d the g o l d standard in 1931. T h e Stabilization F u n d of the U n i t e d States was created in c o n j u n c t i o n w i t h the devaluation of the dollar b y the G o l d Reserve A c t of January 30, 1934. T h e B e l g i a n f u n d (which existed as a separate entity for only a year) was established i n 1935, at the time of the de facto devaluation of the belga. T h e f u n d s of France, the Netherlands, and Switzerland w e r e occasioned by the devaluation or depreciation of their currencies in the latter half of 1936. In the case of the C h i n e s e f u n d , the plan of w h i c h was a n n o u n c e d in March, 1939, provision was made for the capital to be furnished half by the two banks of the P a u l E i n z i g , op. cit., p p . 18-47. T h e r e a p p e a r to be several reasons w h y the f u n d s were set u p as separate o r g a n i z a t i o n s instead of b e i n g i n c o r p o r a t e d w i t h t h e assets of t h e v a r i o u s central banks. O n e reason is the greater secrecy p e r m i t t e d w h i c h e n a b l e s t h e f u n d s to o p e r a t e w i t h greater efficiency in w i t h s t a n d i n g s p e c u l a t i v e efforts inconsistent w i t h their objectives. T h e r e has p r o b a b l y also b e e n a r e l u c t a n c e o n t h e part of t h e various g o v e r n m e n t s to t u r n over the a d m i n i s t r a t i o n of these l a r g e f u n d s to n o m i n a l l y p r i v a t e a n d p r o f i t - m a k i n g central b a n k i n g institutions, a l t h o u g h in at least several instances t h e f u n d s are c o n t r o l l e d b y the c e n t r a l b a n k s e i t h e r directly or indirectly. L e g a l a n d b o o k k e e p i n g c o n s i d e r a t i o n s h a v e b e e n o t h e r factors. 33 34

FOREIGN-EXCHANGE INSTABILITY

29

Chinese Government and half by two British banks with the guarantee of the British Government. Estimates of the capital and surplus of several of the principal funds 35 are given below: ESTIMATED CAPITAL AND SURPLUS OF STABILIZATION FUNDS

Country

Amount in National Currency

Approximate Dollar Equivalent at Rate of Exchange in July, 1939

Great Britain 575,000,000 p o u n d s s t e r l i n g " $2,700,000,000 U n i t e d States 2,017,524,096 d o l l a r s 6 2,017,524,096 France 14,000,000,000 F r e n c h f r a n c s c 370,000,000 Netherlands 300,000,000 g u i l d e r s d 160,000,000 Switzerland 5 3 8 , 5 8 3 , 6 5 3 Swiss f r a n c s e 120,000,000 China 10,000,000 p o u n d s s t e r l i n g 47,000,000 » T h i s is w i t h o u t profits a n d losses, t h e a m o u n t s of which a r e not k n o w n . T h e o r i g i n a l a m o u n t of t h e f u n d was £175,000,000, w h i c h was increased by £200,000,000 in May, 1933, a n d by a n o t h e r £200,000,000 in J u l y , 1937. & According to t h e b a l a n c e sheet as of M a r c h 31, 1939, m a d e p u b l i c J u l y 27, 1939. (New York Times, J u l y 28, 1939.) c E s t i m a t e as of t h e m i d d l e of September, 1938, a f t e r r e p a y m e n t s to the F r e n c h T r e a s u r y a n d to t h e R e n t e s F u n d , according to R o b e r t M a r j o l i n , " T h e F r e n c h E x c h a n g e F u n d , " in t h e L o n d o n Banker, O c t o b e r , 1938, p. 27. T h e same e s t i m a t e is given in t h e B a n k for I n t e r n a t i o n a l Settlements, Ninth Annual Report, May 8, '939- P- 7°d O r i g i n a l a m o u n t (Paul B a r e a u , " T h e Belgian, D u t c h a n d Swiss E x c h a n g e F u n d s , " in t h e L o n d o n Banker, October, 1938, p. 35). It is not k n o w n w h e t h e r t h i s a m o u n t has increased o r decreased. e O r i g i n a l a m o u n t (ibid., p. 28). I t is not k n o w n w h e t h e r this a m o u n t has increased or decreased.

b. Functions

and general

operation

of the funds.—It

is diffi-

cult to generalize regarding the functions of these various funds. 35 A m o n g o t h e r instances, a f o r m of stabilization f u n d was established in Czechoslovakia in c o n n e c t i o n with t h e second d e v a l u a t i o n of t h e Czech c r o w n in October, 1936 ( M i d l a n d B a n k , Monthly Review, M a r c h - A p r i l , 1937, p. 4), a n d legal provision was m a d e in 1935 for such a f u n d in C a n a d a (ibid., F e b r u a r y - M a r c h , 1937, p . 7). I n C u b a a decree a n n o u n c e d o n J u n e 10, 1939, r e q u i r e s e x p o r t e r s to e x c h a n g e a p r o p o r t i o n of t h e proceeds of t h e i r sales for C u b a n silver money, t h e f o r e i g n exchange t h u s derived to be used for t h e m a i n t e n a n c e of a f u n d to stabilize t h e e x c h a n g e value of t h e C u b a n silver peso, which h a s been selling at a d i s c o u n t in relation to t h e U. S. dollar (S'ew York Times, J u n e 11, 1939). Also, a n u m b e r of central b a n k s a r e fulfilling in some d e g r e e t h e f u n c t i o n s of e x c h a n g e f u n d s , as, e.g., t h e C e n t r a l B a n k of A r g e n t i n a (Morgan Stanley a n d Co., et al., Prospectus—fj^poopoo Argentine Republic Sinking Fund External Conversion Loan 4% Bonds, April 22, 1937, p p . 27-29) a n d t h e central b a n k s of B e l g i u m (Société de B a n q u e Suisse, Fonds d'égalisation des changes et bénéfices de réévaluation, B u l l e t i n No. 2, M a r c h , 1939, p . 25) a n d of Italy.

3o

FOREIGN-EXCHANGE INSTABILITY

Sometimes it is said that their purpose is primarily to minimize day-to-day fluctuations in the foreign-exchange rates but not to interfere with underlying trends. Official statements would indicate that such has been the chief function of the British Exchange Equalization Account. In France, however, the fund has at times been used to maintain rigid parities in relation to gold or to the pound sterling, and the Swiss fund has been employed to hold the Swiss franc within comparatively narrow limits in relation to gold. T h e United States Stabilization Fund, having no need to keep the dollar at its gold parity, is used to stabilize the external value of the dollar by assisting in the minimizing of the fluctuations of other currencies in terms of gold and thus of the dollar. There must be mentioned also the important credit-control functions of certain funds. The British Exchange Equalization Account has been used extensively to insulate the domestic money market from the effects of capital movements. In the United States, the Government, as will be noted later, considers that the Stabilization Fund has a potential use in minimizing the effects of any future large outflow of gold upon the country's economy. T h e operation of the funds varies considerably in the different countries. T h e initial resources of the individual funds have been an important factor in this regard. The funds that began with the gold resources resulting from devaluation profits have at times not been in a position to repel appreciation movements, while the British fund, whose initial resources consisted chiefly of treasury bills, did not have the necessary gold and foreigncurrency assets with which to check a downward movement of the pound in the latter part of 1932. T h e general theory of operation, however, insofar as exchange stabilization is concerned, is that a fund will, if it is in a position to do so, buy foreign exchange or gold to weaken the national currency when the demand for the latter is strong, and, conversely, will sell foreign exchange or gold to strengthen the currency when it needs support; in other words, that it will sometimes absorb unusually heavy demands for the national currency and at other times

FOREIGN-EXCHANGE I N S T A B I L I T Y

31

will act as a reservoir for the meeting of heavy demands for foreign exchange. Since the Tripartite Declarations of 1936, described in a subsequent section, the principal funds have cooperated in their operations. 38 c. The United States Stabilization Fund.—The United States Stabilization Fund was established, as already noted, in pursuance of the Gold Reserve Act of 1934, and its original resources, derived from the increment accruing to the Treasury from the decrease in the weight of the gold dollar and consequent increase in the value of the gold held by the United States, consisted entirely of gold. T h e working capital thus far has been confined to $200,000,000 plus the small profit from the operation of the fund, the balance of $1,800,000,000 being kept intact in its original gold form. Authority for the fund, after two extensions since its establishment, lapsed on June 30, 1939, but the act of July 6, 1939, granted powers for its operation until June 30, 1941, unless the President should sooner declare the existing emergency ended. 37 T h e Gold Reserve Act of 1934 indicated that the fund was 3« T h e functions and operation of the British f u n d are discussed in: N. F. Hall, The Exchange Equalisation Account, 1935; Paul Einzig, T h e " T e c h n i q u e of Exchange Control." the London Banker, October, 1938; W . M a n n i n g Dacey, " T h e T e c h n i q u e of Exchange Control," ibid.; unsigned articles, "Exchange Stabilisation Funds," M i d l a n d Bank, Monthly Review, February-March, 1937 and " T h e Progress of Official Exchange Funds" ibid., October-November, 1938; and Alzada Comstock, " T h e Defense of Sterlingaria," Current History, March, 1934, pp. 692-698. Concerning the United States Stabilization Fund, see postea, pp. 31-33. T h e creation of the Chinese f u n d is discussed in U . S . Department of Commerce, Far Eastern Financial Notes, A p r i l 4, 1939. pp. 75-76, and April 19, 1939, p. 93. W i t h respect to other funds, see the aforecited articles in issues of the Midland Bank, Monthly Review, also issue for M a r c h - A p r i l , 1937, containing article, "European Exchange Funds"; Robert Marjolin, " T h e French Exchange Fund," in the L o n d o n Banker, October, 1938; Paul Bareau, " T h e Belgian, Dutch and Swiss Exchange Funds," ibid.; and Société de Banque Suisse, bulletin, March, Fonds d'égalisation des changes et bénéfices de réévaluation, 1939. Interesting references to the development of exchange stabilization funds appear also in the Bank for International Settlements, Sixth Annual Report, 1936, p. 16; Seventh Annual Report, 1937, pp. 19-20; Eighth Annual Report, 1938, pp. 56-60; and Ninth Annual Report, 1939, pp. 32, 61, 70. 3 7 See Statement of Secretary Morgenthau, before the Committee on Coinage, Weights and Measures of the House of Representatives, February 28, 1939, pp. 1-2; and U. S. CongTess, Public—No. 165—76th CongTess (H. R . 3325).

FOREIGN-EXCHANGE INSTABILITY to be for "the purpose of stabilizing the exchange value of the dollar," and the Secretary of the Treasury on February 28, 1939, defined the purpose in the same language. In amplifying this definition of purpose, the Secretary declared that "sometimes it is called upon to prevent violent fluctuations in exchange rates induced by acute political developments which cause flights of capital from one country to another," 38 although the occasions calling for the operations of the magnitude in the fall of 1938 are sporadic, and normally "the Stabilization Fund is concerned with hour-to-hour and day-to-day fluctuations in the dollar exchange rate." 39 T h e Secretary said that there were also occasions, as in the case of China, when "the exchange rate between the dollar and the currency of a country with small gold holdings is subjected to pressure because of unfavorable political or economic developments" and that the fund "can be employed, and has occasionally been employed in such circumstances, to help stabilize the dollar exchange." 40 A further use of the fund, according to the Secretary of the Treasury, has been "to assume in times of stress in the foreign exchange market the functions normally performed by private operators, who, because of the risk involved, may not be willing to act at the very time when there is the greatest need for exchange facilities." 41 With respect to the potential use of the fund in neutralizing or limiting possible unfavorable effects produced by a large outflow of gold, the Secretary of the Treasury has said: It may be expected that, with the restoration of normal conditions abroad, gold may leave the United States in large volume. In such 38 Ibid., p. 3: "Such . . . was the situation created in the fall of last year when as a consequence of the Czechoslovakian crisis a large volume of funds sought to leave Europe for the United States. T h e outflow of funds was so large that the amount of gold which it was necessary to ship from Europe to provide dollar balances was far greater than could be taken care of through normal commercial channels. If there had been no Stabilization Fund to cooperate with the other funds, the dollar exchange would have fluctuated so violently as to disrupt trade. International chaos might have ensued." so Ibid., p. 4. 936 143,900,000 >937 146400«*) >938 $628,600«*) 89

See letter of Secretary of the Treasury Henry Morgenthau, Jr., March 22, 1939, op. cit., pp. 4-6; U. S. Department of Commerce: Status of United States Investigations in Foreign Dollar Bonds, End of 1938, by Paul D. Dickens and Robert L . Zellman, May 1, 1939 (mimeographed), pp. 5-8; and Securities and Exchange Commission (Research and Statistics Section, Trading and Exchange Division), press release dated May 15, 1939. Federal Reserve Bulletin, May, 1939, p. 434. 71 Gold reserves of central banks and governments of fifty-two countries at the end of 1938 as given in the Federal Reserve Bulletin for May, 1939, p. 434, aggregated $26,244,000,000, and on the basis of this figure and allowing for in-

FOREIGN-EXCHANGE I N S T A B I L I T Y

49

T h e r e was a time when large gold imports into a country were almost invariably received with great satisfaction, and under the mercantilist theory such movements were hailed as a criterion of increase of national wealth. Today, however, monetary authorities not only look with concern upon imports of gold representing movements of nervous or speculative capital (sometimes called "hot money"), which may be suddenly withdrawn with unfavorable effects upon credit and other economic conditions, but also recognize that a serious problem is presented when gold imports become so large that they threaten possible price inflation.' 2 T h e United States, being confronted with these problems, has at times resorted to the costly expedient of "sterilizing" gold, that is, preventing increases of the country's gold holdings from entering into excess reserve balances of member banks in the Federal Reserve System and from thus forming a potential base for dangerous credit expansion. 73 creased world production since the end of 1938 (amounting to about $100,000,000 a month), the monetary stocks of the United States at the end of June, 1939, would represent approximately 60 percent of the world's total. T h e figure for the 52 countries, however, does not include the holdings of the U.S.S.R. (which as of June, 1933, according to the Fourth Annual Report of the Bank for International Settlements, p. 25, amounted to approximately $650,000,000); nor does this figure include unreported central gold holdings, as those in the stabilization funds of France, the Netherlands and Switzerland, a m o u n t i n g to at least several hundred million dollars. For the central gold holdings of various countries 19131938, see postea, p. 58. « See Federal Reserve System, Annual Report of the Board of Governors . . . for 19)8, pp. 18-22; also letter of Secretary of the Treasury Henry Morgenthau, Jr., to Senator Robert F. Wagner, March 22, 1939, Treasury Department press release, March 23, 1939, p. 16. W h e n the Treasury sterilizes gold, it pays for the incoming or newly-mined gold either by (1) issuing Treasury bills, in which case it must normally pay interest, instead of paying for it by non-interest-bearing gold certificates turned over to the Federal Reserve banks, or (2) transferring deposits of the Treasury in the commercial banks to the central Federal Reserve banks. Another form of sterilization occurs when the Federal Reserve authorities increase required bank reserves, thus neutralizing the effects upon excess reserve balances of the newly-acquired gold. Still another method is through open-market operations, i. e., the sale in the open market of Government securities held by the central Federal Reserve banks, which serves to reduce excess reserve balances. Sterilization is costly to the Government if done by issuing Treasury bills against the gold sterilized, and it is costly to the banks when done by increasing noninterest-bearing required bank reserves; similarly, the central Federal Reserve banks lose an important source of income when they sell Government securities

50

FOREIGN-EXCHANGE INSTABILITY

There does not, however, appear to be merit in the contention sometimes made that since the United States is constantly increasing its share of the world's gold while currencies and foreign-exchange systems in a large part of the world give the appearance of becoming less connected with gold, the country may ultimately find itself with a vast gold supply having a greatly reduced value for the reason that the rest of the world may decide to divorce gold entirely from its monetary and exchange systems. In the first place, gold continues to play a more important role for these purposes than is often assumed; in Great Britain, for example, at the head of the "sterling bloc," gold performs the important functions of being instrumental in the exchange and credit control operations of the Exchange Equalization Account, of forming the backing of Bank of England notes, with the exception of the so-called fiduciary portion, and of being used to settle the country's international balances. Indeed, it is probable that the countries of the world prize gold as much in 1939 as ever before, and, whether on or off a gold monetary base, they generally recognize the importance of gold as a means of settling international balances as well as for other monetary purposes. Also, many countries, notwithstanding the increase in the United States share, continue to have substantial gold stocks, and these countries would naturally not wish to see the values of these stocks diminished as a result of the demonetizing of the metal. Another consideration is the importance of the gold-production industry in a number of countries, including the members of the British Empire, which have been supplying more than half the world's annual production.74 in the open market. See Institute of International Finance: Managed Currency in the United States, November 7, 1938, pp. 7 - 1 3 , and United States Government Obligations and the Banks, September 12, 1938, pp. 1 1 - 1 4 ; Ray B. Westerfield, op. cit., pp. 881-886; James D. Paris, op. cit., pp. 37-40; Paul Einzig, Will Gold Depreciatef 1937, pp. 72-74; and letter of Secretary of the Treasury Henry Morgenthau, Jr., op. cit., pp. 2-3. " Bank for International Settlements, Seventh Annual Report, 1937, p. 40. See letter of Secretary Morgenthau, op. cit., p. 19. Adverting to the contention that gold is becoming obsolete for monetary purposes, Secretary Morgenthau, op. cit., p. 18, said:

FOREIGN-EXCHANGE I N S T A B I L I T Y

51

T h e advantages of greater currency and exchange stabilization would lie in the partial overcoming of these various disadvantages of the existing situation and in the providing of a further constructive measure in general economic rehabilitation. POSSIBLE W A Y S OF FURTHER 1.

STABILIZATION

GENERAL

There are obviously various ways by which further monetary and exchange stabilization might be effected. If Great Britain should return to a form of the gold standard, a long step would be taken in this direction, even if a number of members of the sterling bloc should continue to maintain exchange control. Another way of achieving greater stability might be through the extension of the Tripartite Agreement, although it would seem that since the currencies of most other countries are linked to those of the countries subscribing to the arrangement, the possible further progress through this approach might be of a limited character. O n the other hand, were more countries to " S o m e countries (operating with very little gold or foreign e x c h a n g e assets) have been pointed to as illustrations of the p h e n o m e n o n that countries can carry on foreign trade a n d settle international transactions without resort to g o l d , and that gold is rapidly becoming obsolete even for this monetary role. T h o s e w h o m a k e this claim completely misread the experience of these countries. T h e s e very countries d o in fact need and prize gold more and seek it more anxiously, than do countries that use gold freely to settle balances of international payments. It is their inability to obtain gold w h i c h forces them to adopt a far less satisfactory alternative method of adjusting their balance of international payments,—namely, the adoption of strict e x c h a n g e control, of clearing agreements, of barter schemes, and the imposition of severe penalties against evasion and all the other business and liberty destroying procedures necessary to m a k e the system work. T h e r e is no o n e thing which demonstrates more effectively the superiority of gold as a means for settling international balances than the experience of these countries that have tried to get a l o n g without it. " W i t h o u t either gold or exchange controls, e x c h a n g e rates would be very unstable. A n y change in the balance of payments w o u l d have to be taken care of by international borrowing or lending, or the e x c h a n g e rates w o u l d have to move to the point where t h e sums to be paid and the sums to be received were equated." See also Paul Einzig, Will Gold Depreciate? 1937, p p . 74-81, and James D . Paris, op. cit., p. 108.

52

FOREIGN-EXCHANGE I N S T A B I L I T Y

return to a form of gold standard, the kind of cooperation envisaged in the agreement might be materially extended. Monetary and exchange stabilization, however, would probably be most effectively achieved by an extensive return to some kind of gold standard, were that practicable under existing conditions, and, as already noted, it is this that is usually contemplated when one refers to the stabilizing of currencies. It is not possible to discuss here the pros and cons concerning a general return to the international gold standard or the various plans that have been advanced for following such a course. Distinguished economists, as well as various financial and commercial institutions and associations, from time to time advocate the ultimate return to an international gold standard, 75 but they more often confine their expressions to the advantages of such an achievement than explain how it could be made practicable under present conditions. Several of the difficulties involved in a general return to an international gold standard are summarized in the following paragraphs. 2 . D I F F I C U L T I E S O F A GENERAL RETURN T O AN

INTERNATIONAL

GOLD STANDARD

a. Unstable economic and political conditions.—It is generally held that a prerequisite to any advanced degree of currency stabilization is economic and political stability. Lack of this is widely felt to be the chief hindrance to such stabilization under present conditions. Among the factors in this regard are the following: (1) Fear of war in some quarters, actual war in others, and internal political and economic instability cause flights of capi™ See, e. g., League of Nations, Report of the Gold Delegation of the Financial Committee, 1932, a n d Enquiry into Clearing Agreements, 1955, especially p. 23. See also t h e various a n n u a l reports of the Bank for I n t e r n a t i o n a l Settlements, a n d various resolutions of t h e International C h a m b e r of Commerce. W i t h respect to t h e last-named, the Council of the Chamber, according to t h e New York Times of October 22, 1938, at a meeting in Paris on October 21, 1938 (said to have been attended by eighty-seven delegates representing business interests of twenty-three countries) adopted a resolution declaring: " N o t w i t h s t a n d i n g an increase in gold

FOREIGN-EXCHANGE INSTABILITY

53

tal from country to country with unpredictable effects on balances of payments and internal credit conditions. Were currencies definitely stabilized today, these large and sudden movements of funds would be likely to produce severe monetary shocks in many of the countries whose currencies had been reestablished on a gold basis. T h e Bank for International Settlements, in its Eighth Annual Report (May 9, 1938), commented with respect to the relationship of the existing lack of confidence to a general stabilization of currencies: But above all, that general confidence which is essential to international stability is not present. A fundamental condition for monetary order is that within each individual country the domestic monetary arrangements should inspire confidence, for unrest is apt not only to affect the smooth working of the internal market but, by its repercussions, to impair the international monetary structure also.78 (2) Many national budgets are out of balance, owing to a variety of factors, including expenditures for national defense and large public works programs. T h i s tends to produce an inflationary effect and at the same time to cause an outflow of capital from many countries. (3) Armament purchases, besides being important factors in keeping government budgets out of balance, tend in themselves to interfere with normal balancing of payments, and in view of the prevailing political instability of the world it cannot be anticipated to what extent armaments will be further increased in the future. Some countries off the gold standard have been finding it necessary to pay for armaments with gold, while others are resorting to exchange manipulation (which sometimes has the effect of further currency depreciation). (4) Close cooperation of central banks is usually considered a production and an accumulation of large gold reserves in certain countries, the International C h a m b e r of Commerce reaffirms its faith in the ultimate restoration of gold as an international measure of v a l u e and in the f u n d a m e n t a l eco nomic function of the gold standard." 76 page 14.

54

FOREIGN-EXCHANGE

INSTABILITY

necessary factor in any r e t u r n to an i n t e r n a t i o n a l g o l d s t a n d a r d , a n d this in turn r e q u i r e s considerable m u t u a l c o n f i d e n c e . " Despite the m o n e t a r y

cooperation

provided

in t h e

Tripartite

A g r e e m e n t , the possibilities of w i d e s p r e a d i n t e r n a t i o n a l m o n e tary c o o p e r a t i o n are distinctly l i m i t e d by t h e e x i s t i n g i n s t a b i l i t y in the i n t e r n a t i o n a l political situation, w i t h the f e e l i n g of distrust w h i c h accompanies it. b. Excessive

trade

restrictions.—The

concept

of a n

inter-

national g o l d standard is based largely o n the h y p o t h e s i s t h a t t h e r e w i l l be a c o m p a r a t i v e l y h i g h d e g r e e of f r e e d o m i n t h e e x c h a n g e of goods a m o n g nations. A s l o n g as g o v e r n m e n t s see fit to impose excessive trade restrictions i n c o n t r a d i c t i o n of t h e p r i n c i p l e of division of labor or to m a i n t a i n b a r t e r arrangem e n t s such as c o m p e n s a t i o n a n d c l e a r i n g a g r e e m e n t s

often-

times f o r c e d u p o n r e l u c t a n t countries, a n d p a r t i c u l a r l y as l o n g as this c o n t r i b u t e s to instability t h r o u g h u n c e r t a i n t y as to w h a t n e w restrictions m a y be imposed in the f u t u r e , it w o u l d b e difficult to m a k e substantial progress in e x t e n d i n g the e m p l o y m e n t of the g o l d basis for currencies. T h i s does n o t , of course, i m p l y that an i n t e r n a t i o n a l g o l d standard r e q u i r e s a n y t h i n g l i k e a c o m p l e t e f r e e d o m of trade and c o m m e r c e . For m a n y decades b e f o r e the war, w h e n the gold standard was o p e r a t i n g s m o o t h l y , a n u m b e r of c o u n t r i e s p r o v i d e d for v a r y i n g degrees of i n d u s t r i a l p r o t e c t i o n in their i m p o r t tariffs, b u t the e x t e n t to w h i c h this p r o t e c t i o n h i n d e r e d international trade was small i n c o m p a r i s o n w i t h the far-reaching effect of the c o n t i n u a l l y c h a n g i n g measures 7 7 In this connection, the League of Nations, Report of the Gold Delegation . . . , 1932, commented: " T h e r e can never be any hope of establishing a monetary system that will function smoothly and efficiently in the promotion of economic cooperation between the nations until the nations are prepared to cooperate. T h e fundamental necessity for the creation of a more effective international monetary system is the reestablishment, not so much of the technical processes of monetary interchange, as of the willingness to use these processes. T h e working of an international monetary system such as the gold standard presupposes the interdependence of nations. If, however, political conditions are such that nations hesitate to commit themselves to too great interdependence one upon the other, but impose rigid restrictions upon international trade in their efforts to attain economic self-sufficiency, there will be little scope for any international monetary mechanism."

FOREIGN-EXCHANGE INSTABILITY

55

of the present day, which include, besides high tariffs and exchange control, such expedients as import quotas and import control. c. International debt questions.—The war debts and publiclyheld foreign government bonds in default are also contributing to lack of confidence and economic instability and at the same time are rendering it impossible, until it is determined what the f u t u r e payments on them will be, to establish any definitive exchange parities. Resumption of such payments would in many cases involve large items in the balances of payments, and whether a country's currency should be stabilized, for example, at the rate of 20 to the dollar or whether it should be 25, might depend upon the amount of such debt service to be maintained. A s will be noted in Chapter V, debt readjustments, some of which are intended to be of a permanent character, are gradually being made with respect to publicly-held dollar bonds of foreign governments, and the same is true of external bonds of various governments payable in sterling, French francs, and other foreign currencies. d. Credit activities of central banks and governments.—In recent years central banks have exercised an increasing control over credit conditions. T h i s has included not simply changes in discount rates but also devices such as open market operations (that is, the buying and selling in the open market of government securities and bankers' acceptances) and increasing and decreasing required bank reserves. T h e s e operations have a twofold effect: they ease or tighten credit conditions within the particular country, and in doing this and thus altering interest rates, they tend to affect gold shipments; for, all other things being equal, easier credit conditions, with lower interest rates, will serve to send gold from the country to foreign countries where funds may be placed at higher interest returns and vice versa. T h e s e activities which artificially tend to direct the course of gold movements are likely to be inconsistent with the smooth operation of an international gold standard, under which the freedom of gold to enter and to leave countries and the auto-

56

FOREIGN-EXCHANGE INSTABILITY

matic, highly sensitive corrective influences of gold movements on prices and interest rates have been usually regarded as prerequisites to the satisfactory functioning of such a monetary system.78 On the other hand, if the central banking organizations of the leading countries would cooperate to a greater extent in the exercise of these functions insofar as they exerted a substantial influence on gold movements, much of this difficulty might be overcome. In this connection, however, there should be mentioned certain implications of the comparatively new political phenomenon of the so-called "totalitarian state." T h e governments of several of the large countries, in establishing an unprecedented control over various forms of activity which had previously been regarded as belonging outside of the governmental sphere, have among other things coordinated and directed toward major objectives credit conditions and foreign-exchange operations. T h e high degree of regimentation involved in these activities would, even more than the credit operations of central banks in other countries, be inconsistent with a smoothlyoperating international gold standard. How permanent this extensive form of governmental control in the several countries in which it is now established will prove to be; whether those governments would be disposed to relax control over credit and exchange operations, or to cooperate with other countries in the exercise of such control, sufficiently to permit the functioning of some form of international gold basis; and whether a general international gold standard could be readopted independently of these governments are questions which are difficult or impossible to answer, but which are necessarily involved in the subject.79 " 8 See "Macmillan Report," 1931, pp. 83—84; Madden and Nadler, op. cit., pp. 13-16; Arthur D. Gayer, op. cit., pp. 18-25; a r , d ante, pp. ion, 15-16. The Bank for International Settlements has commented in its Eighth Annual Report, 1938, p. 115: "Adherence to a common currency system does not mean that individual countries will no longer be able to pursue internal policies of many different patterns. It does mean, however, that in doing so they will have to observe certain general principles with regard to their cost and price structure and their credit conditions, without which no monetary stability can be secured.

FOREIGN-EXCHANGE I N S T A B I L I T Y

57

e. Existing distribution of gold.—Should there be a will on the part of a sufficient number of countries to cooperate in economic rehabilitation and the re-establishment of an international gold standard and should this be accompanied by a better outlook for general economic and political stability in the world, there would still remain a problem in the redistribution of the world's gold. With the development of the United States as a creditor nation during the war and the post-war periods, there was, as has been already noted, a large flow of gold into the United States, and the country's share of the total gold reserves of the world has continued to increase, this share amounting to nearly three-fifths in the middle of 1939.80 T h i s has, of course, meant that the proportionate gold stocks of the rest of the world have suffered correspondingly. Although in many instances the national holdings are larger in 1939 than in 1920 or in 1925, even if calculated in ounces or old gold dollars, the fact remains that while the United States is preoccupied with credit problems arising from excessive gold imports, represented in part by flights of capital from less stable parts of the world, other countries are worried by losses of gold reserves or find that they cannot relax exchange restrictions because of lack of adequate gold holdings with which to balance international payments. There are given below the approximate gold reserves of central banks and governments, 1913-1938. In comparing the figures for 1938 with those for 1913-1930, consideration should, of course, be given to the approximately 40 percent devaluation of the dollar in 1934, which accounts for a substantial part of the increases appearing in most instances in the figures for 1938T h e l i m i t a t i o n s they must t h u s impose u p o n t h e m s e l v e s are in t h e direct of their o w n p e o p l e , since t h e p u r p o s e is to s a f e g u a r d t h e m a i n t e n a n c e of c u r r e n c y at h o m e a n d t h e e s t a b l i s h m e n t of s u c h m o n e t a r y a n d credit w i t h o t h e r countries as w i l l e n a b l e industry a n d t r a d e to b e p u r s u e d t h e c r i p p l i n g effect of i n c a l c u l a b l e m o n e t a r y risks." «0 See ante, p p . 18-20, 48.

interests a sound relations without

G O L D RESERVES OF C E N T R A L BANKS AND GOVERNMENTS,

1913-1938

Amount in millions of dollars at the end of each year I I

Argentina Belgium Brazil Bulgaria Canada Chile China Colombia Czechoslovakia Denmark Egypt France Germany Greece Hungary India, British Italy Japan Java Mexico Netherlands New Zealand Norway Peru Poland Portugal Rumania Spain Sweden Switzerland Turkey U n i o n of South Africa U.S.S.R. (Russia) U n i t e d Kingdom U n i t e d States Uruguay Yugoslavia O t h e r countries Total 50 countries

9i B 256 48 9° 11 117 1c

. ..*• ...

d

1920

0

474 5» 33 7 »»3 33 d

...

... d

1925* 45» 53 54 8 »57 34 d

...

19JO • 412 >9» 11 10 110 7

I938» 43» 581 3« «4 192 S» 18 »4 »S 53 55 2-435 29 27 37 274 >93 164 80 »9 995 23 94 »9 85 69 »33 525 321 6 99f 29 220

»5 »7 46 «7 20 46 56 10 so »7 679 711 2,100 288 528 279 5d >3 7 d ... 10 ... 28 109 124 116 128 267 206 222 279 412 556 65 576 10 88 73 56 ... d ... d »7 4 61 256 178 171 38 25 37 33 12 39 39 39 d ... 21 22 18 d 26 ... 3 63 8 9 9 9 29 56 49 35 e 474 489 9« 47» 62 27 76 65 105 »384 9° 33 d d d ... ... . .. ... 44 34 5° d 33 786 ... ... d 249 94 165 718 754 695 3.449 1,290 14,512 3.985 2-45» 4.225 60 11 57 57 69 11 12 >5 »9 57 291 »38 »9» »43 »54 10,917 26,244 e 8.974 4.857 7.239 o Federal Reserve Bulletin, June, 1933, pp. 368-371. » Ibid., May, 1939, p. 434. Figures do not include unreported central gold holdings, such as those of the stabilization funds of France and the Netherlands. «•For end of 1914. ' N o figure given in Federal Reserve Bulletin cited. e For April, 1938. / Not including $14,000,000 of Bank for International Settlements. s Figure for 52 countries, excluding the U.S.S.R. See "b" above.

...

d

5 61 »7 686 260 11

FOREIGN-EXCHANGE INSTABILITY

59

T h e gold distribution problem is closely allied with various other problems already mentioned, such as political and economic instability, excessive trade restrictions, and large armament purchases abroad. T h e overcoming of the latter obstacles to a more normal flow of gold, even if accompanied by a general return to the gold standard, would not, however, necessarily mean any appreciable redistribution of the metal. It seems unlikely that the United States balance of trade will in the near future shift from positive to negative to an extent sufficient to produce an outflow of gold. It may be assumed, however, that more settled conditions abroad will in time result in a return to foreign countries of at least a part of the funds placed in this country for safe keeping fin addition to the gold earmarked in the United States for foreign account, which is not included in the country's monetary stocks) and for investment, and this may cause a gold outflow of several billion dollars. 81 Another consideration with respect to a redistribution of gold lies in the future of the international capital market, that is, in the possible revival of long-term international lending. T h e existing paralysis of this market, which formed an important aspect of international finance in the past, has been due to various factors, including foreign-exchange instability, exchange control, prevailing uncertainties in international relations, and disillusionment resulting from the depression-period defaults. It is to be assumed, however, that as world conditions become more settled in the future and as monetary and exchange conditions improve, investors in the United States, as well as in other countries with large gold holdings, will again place substantial funds abroad (perhaps on the same reckless scale as in the post-war decade), thus tending to produce a flow of gold into debtor countries having comparatively little gold. A similar effect might be produced by an increase, due to the same improved conditions, of direct foreign investments. As to possible foreign "purchase" of gold from the United States, the Tripartite Agreement makes provision for such pur»1 For net capital movements to the U n i t e d States in p. 47n.

1 9 3 4 - 1 9 3 8 see

ante,

60

FOREIGN-EXCHANGE I N S T A B I L I T Y

chases. A foreign country, however, can, in the absence of borrowing, buy gold only with foreign exchange, and if such exchange is available, there should be a balance of payments such as would naturally cause an inflow of gold from countries that do not prohibit gold exports. In the last analysis, therefore, a "purchase" of gold implies a foreign-exchange surplus. It is doubtful whether most countries that would need additional gold for currency stabilization are, or would be, in a position, apart from borrowing abroad or the obtaining of foreign gold credits as contemplated in the agreement with Brazil in March, 1939," to make adjustments in trade and other items such as to alter their balances of payments sufficiently to permit the purchase of much foreign gold. With respect, however, to the adequacy of the present gold supply of the world to enable a general return to the gold basis, the preponderance of well-informed opinion appears to be that there is in the aggregate at least a sufficiency of the metal. 83 Some authorities go further and see in the existing huge idle gold stocks, such as those in the United States Stabilization Fund and the British Exchange Equalization Account, and in the increasing production of gold a problem of too much gold for the world's needs should there be a return to an international gold standard, and they point to the inflationary effects that might be produced in the event that this idle gold should be employed for credit expansion. 8 * SUMMARY AND CONCLUSIONS

T h e monetary systems of the world, most of which were on the gold standard (including the gold-exchange standard) during the last quarter of the nineteenth century and up to 1914, suffered a severe shock during and immediately after the World 82 See ante, pp. 40-41. See League of Nations, Report of the Gold Delegation . . . 1931, p. 3*. 8 4 See, e. g., Charles O. Hardy, Is There Enough GoldT 1936, pp. 83-89; Madden and Nadler, op. cit., pp. 24-26; and Arthur D. Gayer, op. cit., pp. 71-74.

FOREIGN-EXCHANGE INSTABILITY

61

W a r , and the gold standard was generally abandoned. A general restabilization of currencies on a gold basis, however, took place in the period 1 9 2 2 - 1 9 2 8 , although mostly at new gold parities. T h e monetary breakdown of 1 9 3 1 , due to a series of far-reaching factors that had been exerting themselves for some years combined with the immediate effects of the economic depression, again carried the majority of countries off the gold basis. For several years following the 1 9 3 1 crisis, a few currencies stubbornly adhered both to gold and to the predepression values, but these, with the exception of the G e r m a n mark (which became in effect largely depreciated by compensation currency sold at a discount and by export subsidies) were substantially devalued or depreciated before the end of 1 9 3 6 ; and in most of these instances the former free operation of the old gold standard gave way to a new form of gold basis subject to a high degree of management by governments or central banking authorities. A l t h o u g h a return to an international gold standard is often implied in referring to currency and exchange stabilization, there are in fact various kinds and degrees of stabilization. E x change control, with all of its disadvantages, sometimes serves to hold exchange rates at given points, and the stabilization funds maintained by a number of countries serve to minimize day-to-day

fluctuations

although not necessarily to maintain

fixed rates. T u r n i n g to another device, the conclusion of the so-called " T r i p a r t i t e A g r e e m e n t " in 1 9 3 6 between the United States, Great Britain, and France, to which Belgium, Switzerland, and the Netherlands adhered, has sometimes been considered as marking the beginning of a new stabilization period. W h e t h e r other nations will see fit to join the flexible arrangement thus established remains to be seen; that the agreement presents an important nucleus around which many other currencies may directly gather is undeniable, and public statements have indicated that new parties to the arrangement would be welcomed. A certain amount of stability has also been effected by the

62

FOREIGN-EXCHANGE I N S T A B I L I T Y

development of the so-called "sterling bloc"; that is, the group of currencies, including those of the British Empire, excepting Canada, and also Scandinavia, certain of the Baltic countries, Portugal, Egypt, various South American countries, and Japan. By maintaining their currencies in terms of sterling these countries keep their exchanges more or less constant with relation to one another. Similarly, those of the American republics whose currencies are tied to the dollar have in a number of instances been able to keep their money fairly stable in terms of the dollar. These two groups, as well as several non-sterling currencies of the Continent of Europe, are connccted through the Tripartite Agreement. However, a high degree of exchange control is often required to keep rates constant with the pound or the dollar, and furthermore there are often, despite the operation of equalization funds and the "Tripartite Agreement," considerable fluctuations in the exchanges between the sterling and the dollar groups. As to a general return to some form of gold standard, it is quite probable that this will come eventually, but a number of factors would seem to render it extremely difficult, if not impossible, under existing conditions. Among these factors there might be mentioned the prevailing political and economic instability in the world, excessive trade restrictions, unsettled international debts, the trend toward increasing credit control by central banks and governments, and the maldistribution (although not shortage) of the world's gold supply. The chief of these obstacles would seem to be the existing political instability. When the bad feeling that prevails today among a number of countries gives way to a renewed spirit of international confidence and cooperation, the world may find it practicable to overcome the other difficulties involved in going back to a common monetary standard. It is doubtful whether most governments and central banking organizations will give up the instruments of credit control that they have discovered in recent years, but if these powers could be used,

FOREIGN-EXCHANGE INSTABILITY

63

insofar as international gold and capital movements are concerned, with greater cooperation, an international gold standard might still be feasible. Already a degree of such cooperation has been developed among a few countries, partly through the media of the Tripartite Agreement and the Bank for International Settlements. As to a redistribution of gold, this may be automatically effected, at least in part, when renewed international confidence produces a repatriation and redistribution of funds involved in recent flights of capital and a revival of international investments. Also on the more optimistic side is the fact that currencies and international prices are becoming adjusted to each other much more closely than they were during the years immediately preceding the monetary crisis of 1 9 3 1 , and this fact should facilitate a general return to the gold standard when other conditions become less unfavorable. In the meantime, it is possible that some kind of gold standard might be devised in the Western Hemisphere, where the difficulties encountered would not be the same as in various other parts of the world and where greater monetary stabilization would contribute to the development of Pan Americanism. Such an American monetary system could, as is the American dollar at present, be connected with the pound sterling and the currencies of other cooperating European and perhaps Far Eastern countries through the existing mechanism of the Tripartite Agreement. Official attempts have been made as far back as the Montevideo Conference in 1933 to provide some form of Pan American stabilization of currencies, but while there has been a sentiment among a number of the American nations to hold a monetary conference, the Governments of the United States and of several other American countries have not as yet considered the time opportune. T h e United States Government, however, has stated that it was willing to discuss monetary questions directly with any American governments that might desire to do so. Also a recommendation approved at the Pan American Conference at Lima in 1938 calling for periodic in-

64

FOREIGN-EXCHANGE INSTABILITY

formal conferences of treasury representatives may result in substantial monetary cooperation among the nations of the Western Hemisphere. T h e problems of the United States Government with respect to the existing lack of greater stability in international monetary exchange are concerned with the country's export trade and investments abroad and with the relationship of currency instability to the unsettled economic and political conditions that are prejudicial to world peace. Some of these problems arise from exchange control, which certain governments have felt obliged to resort to because of the absence of any other stabilizing devices. T h e present policy of the United States Government in the whole question of stabilization would seem to be reflected in the Tripartite Agreement, in the position which it assumed in December, 1937, relative to the proposed Pan American monetary conference and in the cooperative financial arrangements made with Brazil in March, 1939, and subsequently with other countries to the south. T h e Government is fully aware of the advantages of exchange stability and appreciates the fact that substantial benefits to the interests of the country would result were a greater degree of stability to be obtained. Among other advantages that the Government may be assumed to recognize are the wholesome effects that general currency stabilization would have upon the widespread regime of exchange control. It is undoubtedly fully appreciated that with fewer international trade restrictions and with general economic improvement there would be exerted a favorable influence upon political relations among the countries of the world. On the other hand, there is reason to believe that the Government feels now, as it did at the London Conference of 1933, that it would be a serious mistake for the nations of the world to attempt a rigid monetary system at a time when there is so little stability in other aspects of international relations and in the internal economic life of many countries. While there appears to be much of the vicious circle involved in the whole matter, with some logic behind the often-heard contention that

FOREIGN EXCHANGE I N S T A B I L I T Y

65

world economic recovery is awaiting upon the return of greater monetary stability, the Tripartite Agreement is presumably predicated on the belief that efforts toward greater monetary and exchange stability could under prevailing conditions be most effectively applied through the flexible kind of mechanism contemplated in that arrangement.

Ill E X C H A N G E NATURE

OF

C O N T R O L

EXCHANGE

CONTROL

o NE OF the most difficult problems with which the U n i t e d States G o v e r n m e n t has had to contend in the last few years in its relations with other countries has been the governmental control of foreign exchange by a number of foreign countries and the injury that this comparatively new development has caused to the trade and investment interests of the United States. In the broad sense exchange control may be defined as those various activities of governments, governmental agencies, or central banks designed to interfere with the free functioning of foreign-exchange markets, whether by restrictions, interventions in the markets, regulations, or simply monetary policies. 1 T h e most conspicuous direct forms are restrictions placed upon the obtaining of exchange or upon the export of monetary metal, including such measures as requirements that foreign exchange be bought and sold through a central agency, transfer moratoria, embargoes on gold and silver exports, exchange-clearing arrangements, various banking regulations regarding foreign exchange, and intervention in the market designed to influence exchange rates, notably through "stabilization" and "equalization" funds. A m o n g the indirect kinds of control there may be mentioned monetary policy and action such as the imposing of quota or tariff restrictions, or of systems of import licensing, when these measures are designed to protect the national currency rather than to protect domestic production or to raise revenue. 2 Accord1 D r . Paul Einzig, in Exchange Control, 1934, p. 9, states: " I n o u r d e f i n i t i o n ' E x c h a n g e C o n t r o l ' is every f o r m of i n t e r v e n t i o n on the part of the m o n e t a r y authorities ( G o v e r n m e n t , C e n t r a l B a n k , or special organization created for that purpose) a i m i n g at i n t e r f e r i n g w i t h the tendencies affecting e x c h a n g e rates." See also C h a r l e s R . W h i t t l e s e y , " E x c h a n g e C o n t r o l , " American Economic Review, D e c e m b e r , 1932, pp. 586-387. 2 R e g a r d i n g indirect measures of c o n t r o l , D r . Einzig (op. cit., p. 10) is of the o p i n i o n t h a t " i t is the i n t e n t i o n in t h e m i n d of the a u t h o r i t i e s w h i c h de-

EXCHANGE

CONTROL

67

i n g to this broad definition, almost every country is maintaining exchange control in at least some form and degree. Even the U n i t e d States, by placing restrictions on the export of gold and by intervening in the market with its stabilization fund, has been employing exchange control in the broad sense. T h e term is more generally used, however, in the narrower sense as limited to the series of restrictions that many governments have within the last several years imposed upon foreign-exchange transactions, mainly in attempts to prevent further depreciations of currencies that have departed from the gold basis. A n important feature of exchange control as used in this more restricted sense is that persons within a country obtaining foreign exchange such as dollars or pounds sterling must, unless the transactions are handled through exchange-clearing or similar systems, sell this exchange, or at least a part of it, to the central exchange authorities at a certain rate and that persons wishing to buy foreign exchange must do so through the same agency. It is this kind of exchange control, interfering with the liberty of action in individual exchange transactions and representing a high degree of national regimentation, that presents particularly difficult problems to other countries, largely because, in attempting to bolster up rates, exchange authorities often find that at the arbitrary rates maintained the demand for foreign exchange exceeds the supply. As a result it is found necessary to place restrictions on the allocating of exchange to the various applicants, and this in turn frequently results in long delays and sometimes in even complete prohibitions on the supplying of foreign exchange for payment of imports, more especially imports of goods regarded as nonessentials. In many instances the t e r m i n c s w h e t h e r or not the measures m a y be r e g a r d e d as E x c h a n g e C o n t r o l . " " F o r instance," h e states, "if a G o v e r n m e n t introduces q u o t a s 011 i m p o r t s it may d o so in o r d e r to s a f e g u a r d internal p r o d u c e r s — a s in the case of British agric u l t u r a l q u o t a s — i n w h i c h case t h e m e a s u r e c a n n o t be r e g a r d e d as E x c h a n g e C o n t r o l . It m a y , 011 the o t h e r h a n d , be p r o m p t e d p r i m a r i l y by t h e tlesire to s a f e g u a r d t h e c u r r e n c y — s u c h was t h e case of q u o t a s established bv t h e F r e n c h G o v e r n m e n t — i n w h i c h case the m e a s u r e s may safelv be classed a m o n g those of E x c h a n g e C o n t r o l , e v e n t h o u g h they affect internal t r a d e p r i m a r i l y a n d the e x c h a n g e s o n l y at o n e r e m o v e . "

68

EXCHANGE C O N T R O L

burdens that are thus imposed upon the export trade and foreign investments of the United States are rendered particularly trying by the more favorable treatment accorded the interests of other countries which have entered into preferential agreements with the exchange-control countries concerned. According to this narrower and more commonly used meaning of exchange control, countries which simply place restrictions on the export of gold, or maintain stabilization or equalization funds, or require importers to pay the price of their foreign purchases to the central bank pursuant to a clearing arrangement instead of directly to the foreign exporter are not usually regarded as employing exchange control. For example, it is not generally considered that either the United States by prohibiting the export of gold except upon governmental authorization and by maintaining a stabilization fund or Great Britain by virtue of its equalization fund is within the exchange-control regime." HISTORY OF E X C H A N G E

CONTROL

I. BEFORE 1 9 3 1

A t the outbreak of the World War, in 1914, the monetary systems of most of the western nations were, as already noted, on some form of gold standard. Costs and prices had become adjusted to exchange parities over a considerable period of time, and speculative forces had not, relatively speaking, reached a high degree of development. Under these favorable conditions, there was little or no need for exchange control. Interference in exchange was limited principally to such relatively mild measures as the discount policies of the Bank of England in influencing gold movements and the so-called "Devisenpolitik" practices of certain central banks in buying and selling exchange to combat seasonal fluctuations, although occasionally measures were adopted to combat more serious difficulties. « For a good discussion of the various methods of exchange controls see League of Nations, Report on Exchange Control, July g, 1938 (submitted by a committee composed of members of the Economic and Financial Committees), pp. 13-88.

EXCHANGE

CONTROL

69

D u r i n g the W o r l d W a r , however, a certain degree of exchange control was adopted in most of the belligerent countries, b u t it was of a m i l d form in comparison w i t h the systems that have developed since 1931. Such measures as gold embargoes for p r e v e n t i n g loss of gold reserves, restrictions to prevent trading w i t h the enemies, and " p e g g i n g " operations for maintaining exchange rates generally seemed to suffice. N e e d for greater control apparently did not arise as patriotic considerations a n d somewhat corresponding uncertainties in other countries tended, in the absence of more highly developed speculative practices, to restrict large capital movements. 4 In the period of several years immediately f o l l o w i n g the war, d u r i n g which there was general monetary instability tantamount i n several countries to financial chaos, Great Britain and the other A l l i e d nations discontinued " p e g g i n g " operations, b u t various restrictions were employed by most of the former belligerent countries in efforts to limit the flight of capital. W i t h the general stabilization of currencies in the period 1922-1928, however, there was a return to the gold basis, and as this implied comparative freedom of exchange transactions, restrictions were for the most part discontinued. Intervention in the exchange market, on the other hand, was employed by a n u m b e r of European central banks in efforts to maintain the new parities. 5 2.

INFLUENCE

OF THE

MONETARY

CRISIS O F

1931

It was with the general monetary crisis in 1931, however, that the prevalent new regime of exchange control began. 6 T h e countries that departed from the gold basis as re-established duri n g the post-war stabilization period were able largely to meet the problem of protecting what gold reserves they had left by simply placing embargoes on the export of gold, although of * Ibid., pp. 8-9: Paul Einzig, op. cit., pp. 18-30; Madden and N'adler, The International Money Markets, 1935. pp. 4-6; A r t h u r D. Gayer, Monetary Policy and Economic Stabilization, 2d ed., 1937, pp. 2-9. 5 League of Nations, op. cit., pp. 8-9: Paul Einzig, op. cit., pp. 31-47; Madden and Nadler, op. cit., pp. 6-7; Arthur D. Gayer, op. cit., pp. 17-25. «For the causes of the monetary breakdown see ante, pp. 13-22.

7°

EXCHANGE CONTROL

course this did not necessarily prevent smuggling or hoarding. In addition to the need for the protection of the national gold reserves, these countries were obliged to face the twofold problem of preventing further depreciation, with possibly serious repercussions on their imports and on domestic prices, and at the same time preventing wide day-to-day fluctuations.7 Not all the countries that departed from the gold basis, however, have adopted this restricted form of exchange control. Great Britain, for example, notwithstanding its large imports of foodstuffs, not only did not attempt, after leaving the gold standard in 1 9 3 1 , to maintain a rate higher than the supply-anddemand rate, but, after perceiving the advantages which depreciation of the pound gave to the British export trade, is said to have used its large equalization fund for a time to keep the pound from appreciating, although this has been denied in some quarters. 8 Various members of the British Empire, Sweden, Norway, and Peru (the only country in South America that has not imposed exchange restrictions) are other examples of countries that left the gold standard, but permitted a free foreign-exchange market. 9 Nor is it to be inferred that exchange restrictions have been adopted only in countries officially off the gold standard. Germany, for example, has remained nominally on the gold basis, but has maintained a high degree of exchange control. It will be recalled that the German financial situation, which had been weak for several months in 1 9 3 1 , became acute at the time of 7 In Great Britain this influence on prices was less pronounced than might have been expected for the reason that that country purchased most of its imported foodstuffs from countries that were members of the sterling area and whose currencies also depreciated in degrees corresponding more or less to the depreciation of the p o u n d ; this fact served to prevent the increase in the prices of imports that would otherwise have resulted f r o m the depreciation of the pound. s See S. F.. Harris, Exchange Depreciation, 1936, pp. 27-28, 401-420; also Alzada Comstock, " T h e Defense of Sterlingaria" Current History, March, 1934, 6g2-6g8; and N. F. H a l l , The Exchange Equalisation Account, 1931;, pp. 34-83. » L e o Pasvolsky, Current Monetary Issues, 1933, p. 8; U . S . Department of Commerce, Exchange Restrictions in European Countries, Special Circular No. 4 2 1 , April 1, 1937, and The Exchange Situation in Latin America, Special Circular No. 423, J u n e 15, 1937; Madden and Nadler, op. cit., p. 230.

EXCHANGE CONTROL

7»

the Credit-Anstalt crisis in Austria in May of that year, and various expedients, including the general one-year moratorium on the payment of intergovernmental debts, proved inadequate to check the heavy withdrawals of funds from Germany. In J u l y , 1 9 3 1 , the German Government closed the banks for two days, and meanwhile it established a rigid system of exchange control. 10 At the same time, there was developed a system of "blocked currency," or German marks that could be used only for certain purposes and were thus sold at discounts, as distinguished from the "free currency"; that is, the regular reichsmarks that could be converted into foreign exchange at par and used for any purpose. 1 1 T h i s system was subsequently implemented by compensation agreements, which will be described in later paragraphs, and these, as well as the blocked-currency system, have been used to stimulate and give competitive advantage to German export trade as well as to protect the balance of payments and insure sufficient imports. Other instances of countries that remained nominally on the gold basis but maintained parities through official exchange control were Austria (which later abolished exchange control), 12 Bulgaria, Czechoslovakia, Estonia, Hungary, Latvia, 10 A n o t h e r i m p o r t a n t m e a s u r e was t h e series of so-called " s t a n d - s t i l l a g r e e m e n t s " m a d e b e g i n n i n g in A u g u s t , 1 9 3 1 , b e t w e e n c e r t a i n G e r m a n o r g a n i z a t i o n s a n d a c o m m i t t e e of r e p r e s e n t a t i v e s of n u m e r o u s f o r e i g n b a n k s w h i c h h a d ext e n d e d s h o r t - t e r m c r e d i t s to the G e r m a n concerns. T h e s e c r e d i t s a m o u n t e d to a b o u t 6,300.000,000 r e i c h s m a r k s in 1 9 3 1 , b u t the a m o u n t s h a v e b e e n g r a d u a l l y r e d u c e d in a c c o r d a n c e w i t h the terms of the a g r e e m e n t s , w h i c h h a v e served to a v o i d technical d e f a u l t s . ( R e p o r t of the Foreign Creditors' Standstill Committee, B e r l i n , J a n u a r y 2 3 , 1 9 3 2 ; New York Times. F e b r u a r y 16 and 17, 1935: M a d d e n a n d N'adler, op. cit., p p . 1 0 3 - 1 0 4 . ) T h e total credits o u t s t a n d i n g a s of F e b r u a r y 28, 1939, a r e r e p o r t e d to h a v e a p p r o x i m a t e d S276,000.000, w i t h a d d i t i o n a l u n used lines of $34.000,000, the U n i t e d States s h a r e b e i n g a b o u t S67.000,000 of t h e a m o u n t o u t s t a n d i n g a n d a b o u t $14,000,000 of t h e u n u s e d lines. (Nciu York Times, M a y 16, 1939.) 11 M a d d e n a n d N a d l e r , op. cit., p p . 9 3 - 9 5 , 1 0 3 - 1 0 6 : P a u l F.inzig, Exchange Control, 1 9 3 4 , p p . ">1-52, 1 2 3 - 1 3 3 . T h e use of f r e e m a r k s , o r r e i c h s m a r k s , bec a m e l i m i t e d i n t e r n a t i o n a l l y largely to g o v e r n m e n t a l p u r p o s e s , s u c h as f o r e i g n debt service a n d to certain k i n d s of i m p o r t s not o b t a i n a b l e b y p a y m e n t in blocked currency. 12.See a r t i c l e by O s k a r M o r g e n s t e r n , " R e m o v a l of E x c h a n g e C o n t r o l — t h e E x a m p l e of A u s t r i a , " International Conciliation, N o . 3 3 3 , O c t o b e r , 1 9 3 7 , p. 678.

78

EXCHANGE C O N T R O L

Rumania, and Yugoslavia." Italy, which like Germany remained nominally on the gold basis, for a time maintained unofficial restrictions through the banks in the country, but established restrictions officially on May 26, 1934." By the beginning of 1933 thirty of the fifty principal commercial countries of the world had departed from the gold basis and had depreciated their currencies, and of these, fourteen had official exchange restrictions; nine countries were nominally on the gold basis, but maintained their old parities through official exchange restrictions; and eleven countries were on a gold basis with no official restrictions. 15 Export interests naturally welcomed depreciation, for it meant not only higher prices obtainable in terms of the local currency but also competitive price advantages in foreign markets. Debtor classes also benefited, for depreciation tends to increase prices with the result that debtors repay their loans in money of less value. On the other hand, importers and consumers had to pay more for imported articles, and if the population of the country concerned was dependent largely upon foreign goods for the necessities of life, such as foodstuffs, there were likely to be political repercussions. Labor elements of various countries have often been strongly opposed to permitting the currencies of their respective countries to seek their supply-and-demand levels, for there is always a tendency for wages and salaries to lag behind increasing prices. Just as debtors within a country are likely to profit by depreciation, so creditors and persons with fixed incomes such as life-insurance beneficiaries and recipients of pensions, are likely to lose because of receiving payment in money of lower purchasing power. Governments, in efforts to hold down costs of living and to protect investors, have often tried to bolster up the exchange value of their currencies through the medium of exchange re13 Leo Pasvolsky, op. cit., p. 8. 14

U . S. D e p a r t m e n t of C o m m e r c e : Exchange

tries, April 1, 1937, p . u .

1« Leo Pasvolsky, op. cit., p. 8.

Restrictions

in European

Coun-

EXCHANGE C O N T R O L

73

strictions, more particularly by requiring that purchases and sales of foreign exchange be made through central agencies, which determine the exchange rates. By the same mechanism, governments have found it possible to give a certain degree of stability to the foreign-exchange market, although exchangecontrol authorities in many countries have considered it necessary or expedient to alter the rates at frequent intervals as supply and demand have fluctuated as a result of changes in economic conditions. 3. L A T E R

INFLUENCES

T h e existing system of exchange control, which prevails in more than half the countries of the world, is probably still attributable primarily to the same considerations as those which governed in the months following the monetary crisis of 1931, namely, the desire to hold up exchange parities by protecting the balances of payments against heavier withdrawals of funds than the exchange resources are considered to justify and to prevent substantial fluctuations of rates. Other uses, however, have subsequently been found for such restrictions. a. Greater governmental control over economic and political activities.—It has come to be generally appreciated that exchange control gives a powerful instrument to governments for increasing their influence over various economic activities within their respective countries. Reference has already been made to the influence of depreciation on exports, as well as on prices and costs of living and the political factors that are often involved in this situation. Besides these important considerations, exchangecontrol authorities are able, by providing for preferential treatment in exchange allocation for different kinds of imports and even in the allocation of exchange for the same kinds of products in instances where it is desired to favor certain countries or certain individuals, to direct with a minimum of effort trade movements and thus promote trade and industrial policies; while through clearing, payments, and compensation arrangements, preferential treatment may with facility be given in-

74

EXCHANGE CONTROL

dividual countries in a manner consistent with major policy. 18 b. Cheap exchange for governmental uses.—Many governments require substantial amounts of foreign exchange for such purposes as making payments on their external debts, paying for imports of supplies and equipment for their armed forces and public works, and defraying the expenses of their diplomatic and consular offices abroad. Naturally, they wish to pay as little as possible in terms of their own currencies for the dollars, pounds, and other foreign currencies required for these needs. Governments maintaining exchange control often devise means of obtaining their foreign-exchange requirements at especially favorable rates, sometimes called the "official rate," which is not obtainable for any or for all private commercial transactions.17 c. Exchange profits.—Another of the uses found in exchange control is the profits which are obtainable by governmental 18 It has even been said: "Whatever its original objective, exchange control is essentially a powerful instrument for foreign trade and general economic control. Such general control gradually becomes its real purpose, and sooner or later the nature and direction of international commercial transactions tend to be determined by political officials and their bureaucratic assistants. Thus, foreign-exchange control, although originally adopted to meet presumably temporary conditions, has tended to become a fixed feature of national policy in various states." (Herbert M. Bratter, "Foreign Exchange Control in Latin America," Foreign Policy Reports, February 15, 1939, p. 275.) T h e above is a strong statement, however, and it may well be questioned whether the majority of countries maintaining exchange restrictions would continue to do so if they could find some practicable and satisfactory alternative, such as a return to a form of gold standard. Thus, the League of Nations, Report on Exchange Control, July g, 1938, p. 3, observes: " T h e various systems of exchange control adopted by different countries are symptoms of deeper troubles. . . . It is only by remedying the troubles that led to the imposition of exchange controls that the system, as a whole, can be swept away." 17 T h e interests that usually pay the greater part of this premium to a government are the exporters, who would receive more units of the national currency if the government on its part were obliged to pay more units of the national currency for its foreign-exchange requirements by buying at the ordinary commercial rate. However, the importers and consumers also contribute in many instances to the government's premium because if there were no special rate for government uses the ordinary commercial rate for foreign exchange would tend to be lower than it is (owing to the facts that the government might do with less foreign exchange if it had to pay a higher rate, thus making more foreign exchange available for other uses and permitting a lower commercial rate according to the operation of the law of supply and demand, and that exporters might increase their sales of foreign exchange to the control authorities if they could obtain a better rate).

EXCHANGE CONTROL

75

agencies administering such control in maintaining a considerable margin between the buying and selling rates. In Argentina, for example, it is reported that the Government's profits in 1937 amounted to 65,000,000 pesos (approximately §20,000,000), and in the several years preceding they appear to have been considerably larger owing to a wider spread between the buying and selling rates.1" Among other instances there may be mentioned the exchange control of Chile, whose authorities have been purchasing dollars from the foreign-owned copper and iron companies at the rate of 19.37 pesos to the dollar 19 and selling these dollars directly or indirectly to Chilean importers and other parties at rates of 25 pesos and upward. T h e Chilean Government is said to have retired a part of its internal debt with the profit thus derived, which has been tantamount to a tax, and it has contemplated financing the purchase of two new cruisers and possibly other naval units from this source of income.20 4 . E X T E N T OF E X C H A N G E CONTROL IN 1 9 3 9

More than half the countries of the world are maintaining exchange restrictions. These embrace the majority of the other American republics; most of the countries of central, eastern, and southern Europe, including the Balkans; and Japan, China, w " T h e difference between the buying and selling rates is credited to the Exchange Profits Fund. T h e profits of the National Government in connection with exchange control operations credited to the Exchange Profits Fund in 1933 and 1934 amounted to about 1 1 9 million paper pesos, in 1935 amounted to about 118 million paper pesos, in 1936 amounted to about 88 million paper pesos, and in 1937 amounted to about 65 million paper pesos." (New York Stock Exchange Committee on Stock List, Argentine Republic—Ten Year Sinking Fund External Loan 4Y0 percent Bonds . . . January 16, 1939. p. 5: see also Morgan Stanley and Co., Inc., et al.. Prospectus, External Conversion Loan of the Argentine Government. November 19, 1936, p. 26.) Average official exchange rates of the Argentine peso for the years mentioned above were 1933. $0.72801: 193.1. $0.33579: 1935. S0.32659: 1936, S0.33137: and 1937, $0.32959. (Federal Reserve Bulletin, May, 1939. p. H7-) 10 This is the so-called "official rate," which for most purposes, however, is not used. -0 T h e so-called "Cruiser Law" does not appear to have been officially published by the Chilean Government, but the bill as submitted by the Government 011 December 22, 1937, was published in La Sacion, Santiago, Chile, December 23, 1937.

76

EXCHANGE C O N T R O L

and New Zealand in the Far East. T h e principal countries not maintaining such restrictions are the United States; the United Kingdom, and most of the other members of the British Empire; a few of the republics to the south, including Peru, Mexico, Ecuador, the countries of the West Indies, Panama, Guatemala, and El Salvador; and France, Belgium, the Netherlands, Sweden, Norway, Switzerland, Finland, and Portugal. For some months prior to the economic recession beginning in the latter part of 1937, there was a tendency toward relaxation of restrictions in exchange-control countries, but in late 1937 and in 1938, owing largely to the less favorable economic conditions in most parts of the world and to increasing political instability, accompanied by increased demands for foreign exchange for armament purposes, this movement was in large measure checked. 21 T h e League of Nations Report on Exchange Control, however, after commenting upon this tightening of exchange restrictions in 1937 and 1938, observed that "attempts to simplify the procedure of control, to bring it into touch with real market conditions and to make it as little vexatious as possible have achieved notable results, on the whole, in recent years" and added that "it would seem to be in this direction, rather than in the complete liberation of exchanges, that further progress may be expected for the present." 22 T h e situation in most of the countries of the world with respect to the maintenance of exchange restrictions was as follows in July, 1939: 23 2 1 See Henry Chalmers, "Foreign Tariffs and Commercial Policies d u r i n g 1938," Commerce Reports, February 4, 1939, p. 91. 22 Report dated July 9, 1938, p. 12; see also pp. 4-5. 23 Exchange restrictions of various countries are briefly described in circulars issued from time to time by the Guaranty T r u s t Company of New York and in bimonthly bulletins of the B a n q u e Nationale française du Commerce extérieur, of Paris, and charts showing the status of each country with respect to exchange restrictions appear in monthly issues of the Exporters' Digest, published by the American Foreign Credit Underwriters, New York. However, classifications for commercial purposes sometimes make the criterion the existence or nonexistence of restrictions on payments for imports and do not take into consideration other forms of exchange restrictions, such as requirements that exporters sell all or a part of their foreign exchange to the central exchange authorities.

EXCHANGE CONTROL E X T E N T OF E X C H A N C E C O N T R O L IN J U L Y ,

Countries Maintaining Restrictions

Exchange

Afghanistan Albania Argentina Bolivia Brazil Bulgaria Chile China Colombia Costa R i c a Czechoslovakia Danzig Denmark Estonia Germany Greece Honduras Hungary Iceland Iran (Persia) Italy Japan Latvia Lithuania New Zealand Nicaragua Paraguay Poland Portuguese A f r i c a Rumania Spain Turkey U n i o n of Soviet Socialist R e p u b l i c s Uruguay Venezuela 0 Yugoslavia

77 1959

Countries Not Maintaining Exchange Restrictions Australia Belgium British I n d i a Canada Cuba 6 Dominican Republic Ecuador c Egypt El Salvador Finland France Guatemala Haiti Iraq Ireland (£ire) Mexico Netherlands Norway Palestine Panama Peru P h i l i p p i n e Islands Portugal Siam Sweden Switzerland U n i o n of South A f r i c a United Kingdom U n i t e d States

»Exchange restrictions are imposed in connection with exports of certain products but are not at present being applied to payment for imports. ' A decree announced J u n e io, 1939. requires sugar exporters to exchange 20 percent, and other exporters, 10 percent, of the proceeds of their sales for Cuban silver money. (New York Times, J u n e 1 1 , 1939.) «Exchange restrictions are imposed in connection with the export of rice.

EXCHANGE

78

CONTROL

It s h o u l d be m e n t i o n e d that in certain countries not n o m i n a l l y m a i n t a i n i n g e x c h a n g e restrictions m u c h the same objectives are b e i n g a t t a i n e d b y systems of i m p o r t EXCHANGE-CLEARING,

licensing.-4

P A Y M E N T S , AND

COMPENSATION

AGREEMENTS I. RELATIONSHIP TO EXCHANGE

CONTROL

C l o s e l y j o i n e d t o t h e e x i s t i n g e x c h a n g e - c o n t r o l s y s t e m is t h e v a s t n e t w o r k of e x c h a n g e - c l e a r i n g , p a y m e n t s , a n d c o m p e n s a t i o n a g r e e m e n t s t h a t h a v e b e c o m e c o n s p i c u o u s in t h e last f e w y e a r s . T h e s e a r r a n g e m e n t s clo n o t n e c e s s a r i l y e n t a i l e x c h a n g e c o n t r o l in the p o p u l a r sense of the w o r d by both countries

involved;

for e x a m p l e , G r e a t Britain, France, Switzerland, S w e d e n ,

and

N o r w a y have entered into clearing or payments agreements with other c o u n t r i e s w i t h o u t m a i n t a i n i n g real e x c h a n g e restrictions.25 S u c h a g r e e m e n t s a r e m a d e , h o w e v e r , o n l y w h e n a t least o n e of the t w o countries m a i n t a i n s such restrictions,26

a n d these

ar-

r a n g e m e n t s m a y t h e r e f o r e b e s a i d to f o r m d e f i n i t e l y a p a r t o f the exchange-control

system.27

T h e terms " c l e a r i n g , " " p a y m e n t s , " a n d " c o m p e n s a t i o n " agreem e n t s a r e s o m e t i m e s u s e d l o o s e l y in a m o r e o r less s y n o n y m o u s 21

See Herbert M. Bratter. op. cit., pp. 276-277, 280-281. Dr. Paul Einzig, who has defended the exchange clearing-system, has observed (Exchange Control, 1934, p. 147): "Unquestionably, Exchange Clearing constitutes a very high degree of interference with exchanges. In fact, if carried to its logical conclusion, it would amount to the suppression of the foreign exchange market. From this point of view, it differs, admittedly, but little from the extreme form of exchange restrictions adopted by many countries, as a result of which the transaction of foreign exchange business becomes the monopoly of the authorities." Such arrangements have developed extensively in the last few years, but it is noteworthy that "a statistical testing of the situation on the basis of the foreign-trade returns for 1937 discloses that, even with the inclusion of the trade of J a p a n and of all China in the same category with the totalitarian states of Germany, Italy, and Russia and those secondary countries whose trade might be regarded as predominantly controlled, over 70 percent in value of total world trade is still carried on by countries operating predominantly on an open and competitive basis." (Henry Chalmers, op. cit., p. 93.) 28 See League of Nations, Enquiry into Clearing Agreements, April, 1935, Annex I, p. 26. 27 Paul Van Zeeland, Report, "International Economic Reconstruction," January 26, 1938, International Conciliation, No. 338, March, 1938, p. 96. 25

EXCHANGE CONTROL

79

sense. T h e r e is frequently a similarity of objective in the three kinds of arrangements, and another common feature is the fact that it is usually the country having the bargaining power of a negative trade balance with the other country that takes the initiative and at times exerts substantial pressure for the conclusion of such an agreement. Also, compensation arrangements are sometimes combined with exchange-clearing and payments arrangements. T h e r e are, however, basic distinctions among the three general classifications, particularly if one qualifies "cleari n g " as "exchange-clearing." 2.

EXCHANGE-CLEARING

AGREEMENTS

T h e exchange-clearing system arose from the "blocked" or "frozen," balances that followed the widespread adoption of exchange control in 1931 and 1932. When governments saw their gold resources being dissipated by the flight of capital that accompanied the monetary crisis and placed various kinds of restrictions on the withdrawal of funds from their respective countries, foreign exporters, banks, and investors found that they could not transfer their credits from such countries, and they were thus confronted with the problem of blocked accounts. If the creditor country (that is, the country whose nationals held the blocked balances in the other country) had a negative trade balance with the debtor country, the former sometimes regarded it as unreasonable that it should have to continue to pay a balance resulting from its trade relations while it had in the other country credits which it could not use, and it was from this situation that the clearing arrangements emanated. 28 =8 " . . . t h e c o u n t r i e s whose claims a n d goods r e m a i n e d u n p a i d were usually n o t i n c l i n e d to accept increased i m p o r t s of goods f r o m t h e c o u n t r y with a weak currency. " F a c e d by this d i l e m m a , thev sought a system w h i c h w o u l d p e r m i t t h e m : (1) to o b t a i n p a y m e n t for goods already d e l i v e r e d , (2) to c o n t i n u e , as f a r as possible—even o n a r e d u c e d scale—their e x p o r t s to t h e c o u n t r y in q u e s t i o n , and (3) to secure at least p a r t i a l r e p a y m e n t o f t h e i r financial c l a i m s . . . " I n t h e s i t u a t i o n as it in fact developed, t h e c o u n t r i e s w h i c h were e c o n o m i cally a n d financially w e a k e r were led e i t h e r to t a k e u n i l a t e r a l m e a s u r e s particularly h a r m f u l f r o m many points of view or to i n t r o d u c e by j o i n t a g r e e m e n t a system designed to e l i m i n a t e transfers o f f o r e i g n e x c h a n g e so f a r as com-

8o

EXCHANGE A

good

example

Swiss-Hungarian

of

an

exchange-clearing

agreement

s a i d t o b e t h e first of t h e

CONTROL

of

series. 2 9

November

agreement 14,

is

1931, w h i c h

the is

F o l l o w i n g the a d o p t i o n of rigor-

ous e x c h a n g e restrictions by H u n g a r y in the fall of 1931, Switzerl a n d f o u n d itself c o n f r o n t e d w i t h substantial b l o c k e d

accounts

i n t h e f o r m e r c o u n t r y . A t t h e same t i m e , it was p a y i n g H u n g a r y a b a l a n c e o n trade. U n d e r the a g r e e m e n t t h e n n e g o t i a t e d , Swiss importers of H u n g a r i a n products m a d e p a y m e n t into a special a c c o u n t i n t h e Swiss N a t i o n a l B a n k , a n d i m p o r t e r s in

Hungary

o n their side m a d e p a y m e n t s for Swiss g o o d s i n an a c c o u n t

in

the H u n g a r i a n National Bank. T h e funds in the account in Switz e r l a n d w e r e t h u s c h e c k e d off a g a i n s t t h o s e i n t h e a c c o u n t H u n g a r y a n d w e r e u s e d f o r p a y m e n t s b o t h t o Swiss

in

exporters

a n d to holders of " f r o z e n " balances in H u n g a r y , w h i l e those in the account in

Hungary

were

turned

over

to

Hungarian

ex-

porters.30 So q u i c k l y

d i d this system d e v e l o p that o n

March

1,

1935,

modity transactions between the two countries cancelled one another." (League of Nations, Report on Exchange Control, July 9, 1938, p. 11.) 2 9 Paul Einzig, op. cit., p. 134. so Ibid., pp. 134-137. T h e operation of the exchange-clearing arrangement was outlined by the League of Nations, Enquiry into Clearing Agreements, April, 1935, (Annex I, p. 26) as follows: " I n each of the contracting countries, importers of goods from the other country, instead of paying their suppliers direct, remit the value of imported goods in the national currency to a special office or undertake to do so. It is frequently provided that the office shall receive payment, not only of trade debts which fall d u e after the agreement comes into power, but also of debts already due on that date. " F r o m the amounts thus received, the clearing office takes the sums necessary to pay national exporters for goods sent by them to the other contracting country. Exporters therefore are paid for their goods by the clearing office and not by the foreign customer w h o bought them. " A s regards the settlement of payments, direct relations between the exporters of one country and the importers of the other country, parties to the clearing agreement, cease to exist and are replaced by: "(a) T w o triangular sets of relations (importers-clearing office-exporters) occurring within a single contracting country; the sums paid by importers, and therefore paid in national currency only, are no longer used to pay the foreign sellers b u t the domestic exporters, thus linking the same country's imports and exports closely together; "(b) A relationship between the two clearing offices which set off their respective claims and debts."

EXCHANGE CONTROL

81

seventy-four clearing agreements were listed by the League of Nations as in force among twenty-three countries of Europe and South America (although part of these might now be classified as payments or compensation agreements). Among the agreements listed, Germany was a party to nineteen, Turkey to thirteen, France and Greece to eleven each, Bulgaria and Yugoslavia to ten each. 31 3. PAYMENTS

AGREEMENTS

A "payments" agreement differs from an exchange-clearing agreement in that it permits payment for imports into one of the two countries to be made directly to the exporters in the other country. It was designed not simply to liquidate blocked balances, as was the exchange-clearing arrangement, but also to meet the problem of current debt service on international financial obligations, and it has also been employed to give preferential trade treatment. In the Anglo-German payments agreement of November 1, 1934, payments for imports into Great Britain were to be made, without formalities or control, directly to the German supplier with no intermediate clearing agency, but imports into Germany from Great Britain were to be limited each month by the German licensing authorities, generally to 55 percent of the value of German exports to Great Britain in the second preceding month. From the remaining 45 percent the German Government agreed to "unfreeze" the pre-existing British commercial debts in Germany and to provide debt service on the Dawes and Young sterling loans.32 a 1 Ibid., Annex III, pp. 152-154. Regarding the nature and development of exchange-clearing agreements see also the League's Report on Exchange Control," July 9, 1938, pp. 1 6 - 1 7 . There may be mentioned also the so-called "private clearing" arrangement. This is a measure whereby exporters in an exchangecontrol country arc permitted to sell directly to importers at least a portion of the forcign-exchange proceeds of their exports. Austria permitted such a system beginning in February, 1932, and used it as a vehicle for returning to a free exchange market, which occurred in April, 1933. (Oskar Morgenstern, " T h e Removal of Exchange Control—the Example of Austria," International Conciliation, October, 1937, pp. 683-^86.) 32 League of Nations, Enquiry into Clearing Agreements, April, 1935, Annex I, p. 250. Another example of a payments agreement is that between Great Britain

8s

EXCHANGE CONTROL

4 . COMPENSATION

AGREEMENTS

"Compensation," or barter, agreements, which are often of a secret character, have been developed largely for the purpose of stimulating exports and insuring exchange for the importation of essential commodities, although they sometimes provide for the liquidation of frozen balances. They customarily provide for annual importation of certain goods up to specified amounts from the country with a positive trade balance in exchange for blocked currency that may be used only for payment of goods from the country with the negative balance. Sometimes the amount of "blockage" for the enumerated articles is 100 percent, and at other times only a fraction; that is, a certain proportion of free currency is to be given with the blocked currency. "Private compensation trade" is international barter between and Argentina, signed December 1, 1936, which served to renew, with certain modifications, the Roca-Runciman Agreement of 1933. Great Britain has for many yean had a substantial negative trade balance with Argentina, and the 1936 agreement, like that of 1933, "reserved," in the words of the London Economist (Anglo-Argentine Supplement, December 5, 1936), " f o r the British trader and the British bondholder a preferential position in the Argentine." Article 4 of the agreement provided: "(1) Whenever any system of exchange control is in operation in Argentina, the conditions under which foreign currency shall be made available in any year shall be such as to secure that there shall be available, for the purpose of meeting applications for current remittances from Argentina to the United Kingdom, the full amount of the sterling exchange arising from the sale of Argentine products in the United Kingdom after deduction of a reasonable sum annually towards the payment of the service of the Argentine public external debts (national, provincial and municipal) payable in countries other than the United Kingdom. "(2) Subject to the aforesaid provision being first made towards the service of the public external debts, the order in which the sterling exchange so made available shall be distributed among the various classes of applicants for remittances to the United Kingdom shall be settled by agreement between the Argentine Government and the Government of the United Kingdom . . . "(3) T h e Government of the United Kingdom will cooperate with the Argentine Government to the best of their ability in order to secure that the amount of sterling exchange, realised in Argentine by the export of Argentine product» to the United Kingdom, shall correspond as closely as possible with the value realised for such products on the United Kingdom market, due account being taken of the necessary deductions for freight, insurance, etc." (Ibid.) See also League of Nations, Report on Exchange Control, July 9, 1938, pp. 1 7 18.

EXCHANGE

CONTROL

»3

firms or i n d i v i d u a l s not in p u r s u a n c e of c o m p e n s a t i o n agreem e n t s . It has b e e n defined as " t h e d i r e c t e x p o r t a n d i m p o r t of g o o d s b e t w e e n t h e t w o c o n t r a c t i n g parties . . ."; that is,

direct

barter. 3 3 T h e t e r m is also used, h o w e v e r , to a p p l y to the less d i r e c t b a r t e r w h i c h takes place, in the absence of c o m p e n s a t i o n agreements, in e x p o r t i n g goods in e x c h a n g e for b l o c k e d , o r compensat i o n , c u r r e n c y , w h i c h need not be used f o r i m p o r t s by the party that does the e x p o r t i n g ; that is indirect

barter.

T h e G e r m a n G o v e r n m e n t has d e v e l o p e d c o m p e n s a t i o n trade to a p a r t i c u l a r l y h i g h degree, largely u n d e r the d i r e c t i o n of D r . H j a l m a r Schacht, for m a n y years P r e s i d e n t of t h e R e i c h s b a n k , a n d f o r a t i m e , M i n i s t e r of Economics. In S e p t e m b e r , 1934, Germ a n e x p o r t s had b e e n decreasing r a p i d l y , w i t h t h e result that the c o u n t r y was c o n f r o n t e d w i t h a n e g a t i v e trade balance. W i t h the d u a l p u r p o s e of s t i m u l a t i n g e x p o r t s a n d also i n s u r i n g the imp o r t a t i o n of a d e q u a t e a m o u n t s of n e e d e d r a w materials, t h e r e was a d o p t e d the so-called " N e w P l a n , " u n d e r w h i c h as large a p r o p o r t i o n of imports as possible was to b e p a i d for by compensation m a r k s , these b e i n g a type of b o o k k e e p i n g c u r r e n c y

that

c o u l d be used o n l y for the purchase of c e r t a i n articles in G e r m a n y . T h e G e r m a n c o m p e n s a t i o n m a r k system is h i g h l y c o m p l e x and varies a c c o r d i n g to the i n d i v i d u a l c o u n t r i e s to w h i c h it is a p p l i e d . T h e s e marks usually sell at a d i s c o u n t of fifteen to thirty percent as a result not only of the l i m i t e d d e m a n d for t h e m , o w i n g to their restricted use, b u t also of t h e c o n t r o l of the system by the G e r m a n G o v e r n m e n t , w h i c h has, b y this means, e f f e c t e d for m a n y purposes a de facto d e p r e c i a t i o n of the r e i c h s m a r k . T h e best-known type of G e r m a n c o m p e n s a t i o n m a r k is t h e so-called "aski m a r k , " the n a m e b e i n g d e r i v e d f r o m the initials of the term " A u s l a e n d e r S o n d e r k o n t e n f u e r I n l a n d b e z a h l u n g e n . " G e r many has c o m p e n s a t i o n (as well as c l e a r i n g and payments) agreements w i t h a n u m b e r of countries, and these are s o m e t i m e s combined w i t h the c o m p e n s a t i o n - m a r k system; b u t the system is also 33

L e a g u e of N a t i o n s , Enquiry

P- 47-

into Clearing

Agreements,

A p r i l , 1935. A n n e x I,

84

EXCHANGE

CONTROL

employed to trade with certain countries with which Germany has no such agreements. 81 PROBLEMS ARISING FROM EXCHANGE

CONTROL

1. DECREASE AND DISLOCATION OF WORLD TRADE

Although it is impossible to say to what extent exchange control has contributed to retarding more extensive recovery of world trade, there can be little doubt that since the system has served to increase trade barriers, including uncertainties and bureaucratic requirements definitely tending to discourage international commerce, its influence has been considerable: . . . the exporter is uncertain of obtaining payment; the importer is uncertain of obtaining exchange allotments. Business men are naturally reluctant to plan for the future when they are uncertain, " See H. Gerald Smith, "German T r a d e Competition in Latin America," Commercial Pan America, No. 53, October, 1936. United Slates trade with Germany was largely on the askimark and direct barter basis in 1935 and the first half of 1936. In June, 1936, however, the Treasury Department imposed countervailing duties on imports of German products under Section 303 of the Tariff Act of 1930 on the ground that the askimark discount constituted a bounty, and on August 3, 1936, the German Government prohibited askimark and barter transactions in trade with the United States. Later, however, imports into Germany of cotton and certain cotton products from the United States were permitted on a barter basis following a ruling of the Treasury Department announced December 33, 1936, to the effect that imports from Germany on a controlled-mark basis would not fall within the purview of Section 303 of the Tariff Act in the following cases: "1—Payment of the purchase price, in whole or in part, with the use of controlled mark credits, provided that the credits so used have been, from the time they became subject to German governmental control, continuously owned by the person for whose actual account the merchandise is purchased for direct or indirect shipment to the United States. "2—Payment of the purchase price, in whole or in part, with the proceeds of the sale in Germany of merchandise exported from the United States, provided that such proceeds, until so used, have been continuously owned by the person for whose actual account the American merchandise is sold in Germany and the German goods are purchased in that country. "3—Combinations of the foregoing two procedures. "4—Exchange of merchandise between single German and American parties without any monetary transaction actually taking place." (U. S. Department of Commerce, Regulations Governing German Trade with the United States under "Inland Accounts" or Cotton Barter System, Special Circular No. 426, July 15, 1938, p. 1, and Exchange Restrictions in European Countries, Special Circular No. 421, April 1, »937, p. 7.)

EXCHANGE C O N T R O L

85

for example, whether they will be able to obtain some essential raw material or machine at a given price, or whether, indeed, they will be able to obtain it at all. T h e discouragement of private business enterprise through the introduction of arbitrary and unpredictable elements into economic life must accordingly be counted as one of the most important indirect effects of exchange control." Such restrictions serve to discourage imports into the exchangecontrol country in much the same way as do protective tariffs. For this very reason the country's exports are depressed, o w i n g not simply to the decreased foreign exchange available in other countries but also to the fact that the protection of domestic industry afforded by such restrictions tends to increase domestic prices and consequently costs of exportable goods. 36 Another i n j u r i o u s effect on exports is the fact that, as a result of the bolstering up of the exchange value of the national currency by exchange control, exporters receive fewer units of the national currency than would be the case if the currency were permitted to seek its true level, and consequently they are discouraged from exporting larger quantities of the national products. 37 Naturally these various adverse effects on the foreign trade of the exchangecontrol country have corresponding effects on the trade of other countries. 38 35 League of Nations, Report on Exchange Control, July 9, 1938, p. 40. M. Paul Van Zeeland, formerly Prime Minister of Belgium, in his scholarly report, "International Economic Reconstruction," January 26, 1938, International Conciliation, March, 1938, p. 93, declared: "In present circumstances, it seems that the continuance of exchange control systems and of 'clearings' constitutes one of the most serious obstacles to the development of international trade." 3® See League of Nations, op. cit., pp. 28-35; a ' 5 0 Charles R . Whittlesey, "Exchange Control," American Economic Review, December, 1932, pp. 596-598. a? In some instances efforts have been made to compensate the exporter to at least a degree by payment of premiums or export subsidies designed to cover or reduce the margin between the exporter's proceeds at the exchange-control rate and what he required in order to sell his goods at a profit in foreign markets. See League of Nations, op. cit., pp. 14-15. as T h e physical volume of goods exchanged in world trade is said to have risen in 1937 to the level of 1929, the previous peak year (Bank for International Settlements: Eighth Annual Report, 1938, p. 31); and, according to the Ninth Annual Report, 1939, of the Bank for International Settlements (p. 7), "Despite the setback on balance in 1938, the volume of the current exchange of goods between different countries still stands, if not quite at a record level, at 15 percent higher than the maximum reached in any year before 1914." W h e n

EXCHANGE

86

CONTROL

In addition to the effects on aggregate world trade, there must be taken into account the influence upon the dislocation and instability of trade. Exporting and importing are most likely to be profitable to a country when maintained in a fairly sustained pace over a period of time. W h e n , however, foreign markets are being constantly shifted as a result of restrictive measures and preferential arrangements, the world is deprived of the full potential value of its international trade, even if there is but little change in the aggregate physical volume. In this connection, there is to be noted the influence of the exclusive bilateral clearing, payments, and compensation agreements and of the system of compensation currencies. T h e J o i n t Committee for the Study of

Clearing

Agreements of the League of Nations, in its report of A p r i l , 1 9 3 5 , estimated that in the aggregate trade of twenty-two countries, representing nearly three-fourths of the world's trade, the percentage ratio of the triangular merchandise trade decreased from 18.3 in 1 9 2 9 to 14.2 in 1 9 3 3 3 " T h i s decline did not, of course, reflect the more recent effects of clearing, payments, and compensation arrangements, which have been considerably

developed

since 1933. 4 0 consideration is given, however, to the growth of population and to the normal increase in standards of living, which should serve to augment international trade, it becomes apparent that the aggregate trade among nations should be considerably over the pre-war and even 1929 figures, with correspondingly increased mutual profit to the various trading countries. 39 A n n e x I, p. 50. 40 T h e J o i n t Committee pointed out f u r t h e r that the clearings system h a d rendered it difficult for certain countries which had entered into such agreements to obtain exchange with which to purchase required raw materials f r o m overseas. (Annex f , p. 44.) It stated also: " T h i s deviation of trade, this artificial canalization of commerce between countries connected by clearing agreements, is moreover anti-economic. It has already been pointed out that, when the exchange rate of the currency of a country with foreign exchange control is kept conventionally at a level other than that at which it would stand if the currency could be freely dealt in, the prices of that country's goods rise, to the detriment of its exports. Again, this same country, being forced to buy from the other party even such articles as it could purchase elsewhere more cheaply (and which it actually used to buy elsewhere), pays more f o r its purchases. Another result is that both parties buy useless or unnecessary goods which they would normally not import, solely in order to liquidate a favorable clearing balance which w o u l d otherwise be left unused." (Annex I, pp. 49-50.) As to the views of the governments that had concluded clearing agreements,

EXCHANGE CONTROL 2.

EFFECTS

ON

UNITED

STATES

EXPORT

87

TRADE

It is becoming increasingly apparent in the United States that this country's foreign trade over any period of time is prosperous or depressed in proportion to the conditions of world trade as a whole, 4 1 and the aforementioned injuries that exchange control has produced upon world trade are necessarily shared by the United States. From the more narrow point of view of the United States alone, however, certain aspects, or problems, become especially evident. T h e United States exporter is continually confronted with the problem of transfer of funds by the foreign importer. So kaleidoscopic are exchange regulations in many countries that frequently goods are in transit when measures are adopted limiting the granting of dollar and other foreign exchange owing to reduced availabilities at the established rate, and payments are often delayed for months with resultant losses to exporters in this country. 42 This element of risk necessarily increases the cost of financing United States exports, and at the same time it tends to restrict the export trade of the country. A particular difficulty in this regard is the element of discrimination that is often present. When exchange-control authorities maintain that they are unable to furnish dollars to all applicants because of a scarcity of dollar availabilities but furnish all the exchange desired for transactions with countries with which it has clearing, payments, or compensation arrangements, such treatment is considered by the United States as preferential t h e L e a g u e r e p o r t d e c l a r e d , u p o n t h e b a s i s of s t a t e m e n t s r e c e i v e d f r o m a n u m b e r of c o u n t r i e s t h a t h a d e n t e r e d i n t o s u c h a g r e e m e n t s : " I f w e e x a m i n e t h e o p i n i o n s e x p r e s s e d o n t h i s m a t t e r b y t h e v a r i o u s g o v e r n m e n t s , w e s h a l l find t h a t they o n e a n d all agree t h a t c l e a r i n g a g r e e m e n t s a r e h i g h l y d e t r i m e n t a l to i n t e r n a t i o n a l t r a d e . " ( A n n e x I, p . 48.) S e e a l s o t h e L e a g u e ' s Report on Exchange Control, J u l y 9, 1938, p p . 1 6 - 1 8 . F o r a r g u m e n t s in f a v o r of e x c h a n g e - c l e a r i n g a g r e e m e n t s , h o w e v e r , see P a u l E i n z i g , Exchange Control, 1934, p p . 1 4 0 - 1 4 9 .

o

O c D

i. ?

O m


8 5 » ; organization, functions, dividends, n 6 n B a n k holiday in the U. S., 24 B a n k of E n g l a n d , 2 i n , 50, 68 Banks, central: control over credit conditions, 1 5 , 55; intervention by, 27, 69; f u l f i l l i n g functions of exchange f u n d s , 29n; need of cooperation by, 53. 56: gold reserves, 1 9 1 3 - 1 9 3 8 , 57 ff.; " D e v i s e n p o l i t i k " practices, 68; relationship of B a n k for International Settlements, n 6 n B a n k s , commercial, export credits, 224; E x p o r t - I m p o r t Bank's avoidance of competition with, 233 f. B a n k s , see also E x p o r t - I m p o r t B a n k ; Federal Reserve B a r t e r , direct a n d indirect, 83 B a r t e r agreements, see Compensation agreements B e l g i u m . 3 3 , 76, 77, 208; exchange stabilization, 13, 28, 29n, 33, 34, 38; Tripartite Declarations, 36; war debts, 102, 103, 1 1 1 , 1 1 3 , 1 1 5 ; reparations to, 104, 1 1 1 Bell, L a i r d , 1 7 8 « Berle, Adolf A., Jr., quoted, 191 B i b l i o g r a p h y , 239-52 Blocked balances, 79, 95 Blocked currency system, 7 1 , 82 Bolivia, 35, 39, 165; bonds, 153, 165 Bondholders' protective organizations, 158, 172-84; efforts toward a centralized agency, 173; T i t l e II of the Securities Act of 1 9 3 3 , 174; see

254

INDEX

B o n d h o l d e r s ' protective o r g a n . (Cont.) also Foreign B o n d h o l d e r s Protective C o u n c i l , Inc. B o n d s , p a y m e n t of g o v e r n m e n t b o n d s in gold, 2571; effect of d e f a u l t e d publicly-held foreign government b o n d s , 55; of foreign corporations, i n c l u d e d in p o r t f o l i o investments, 147; legal restrictions affecting, 196 ff.; U. S. policy r e floating of n e w issues, igo-99; re m a r k e t registration, 196; see also Dollar bonds; Investments B o r r o w i n g , uneconomic, 20, 21, 162-64 B r a t t e r , H e r b e r t M., q u o t e d , 74t! Brazil, 21 n, 165, 2 3 i n ; cooperation of U. S. w i t h , e x c h a n g e of notes. M a r c h 1939, 40, 96, 1580, 231, 23271; bonds, 153. ' 5 8 . >59' i 6 5 - 169 British B o a r d of T r a d e , 225 British E m p i r e , 22, 3471, 35, 50, 70, 76, 77 B r i t i s h E x c h a n g e Equalization Acc o u n t , 28, 29, 30, 50, 60, 68, 70 Budgets, u n b a l a n c e d , 53 B u e n o s Aires, conferences a t , 39, 94 B u e n o s Aires, Province of, 159, 177 B u l g a r i a , foreign exchange, 71,81; reparations, 104, 11571, 11611, 11771; bonds, 154- ' 5 9 . i 6 ° n

Caillaux, Joseph, 117 Calgary, C a n a d a , 155 C a n a d a , currency, 13, 2 i n , 2911, 33, 3 4 " . 35: bonds, 147, 1 5 m , 154, 170; d o u b l e - t a x a t i o n , 218, 22171 C.apacity-to-pay criterion, 1 1 2 - 1 4 , 11871, 180 C a p i t a l , i n t e r n a t i o n a l m a r k e t , 59, 91, 196; transition of U. S. f r o m capitali m p o r t i n g to n e t c a p i t a l - e x p o r t i n g c o u n t r y , 147, 149; see also Gold; Investments; T r a d e C a r i b b e a n area, investments in, 191 ff. C a r l s b a d , City of, 154, 15971 Carroll, Mitchell B„ 20571, 21271 C e n t r a l America, see A m e r i c a n r e p u b lics C e n t r a l banks, see Banks C h a l m e r s , H e n r y , q u o t e d , 7871, 8971 C h a m b e r l a i n , Sir Austen, 202

Chile, 13, » i n , 165, « s i n ; project for m o n e t a r y conference in, 39; e x c h a n g e control profits, 75; b o n d s , 153, 158, 160, 165, i68n, 169, 17871 C h i n a , 28, 29, 32, 75, 77, 7871; b o n d s , 15371, 15771, 158, 177, 191; a g r i c u l t u r a l credits, 226 Clark, J . R e u b e n , Jr., 1760, 17871 Clearing agreements, see E x c h a n g e clearing a g r e e m e n t s C o l o m b i a , 12, 38; b o n d s , 153, 16071, 19571 C o l u m b i a University, Faculty of Political Science, s t a t e m e n t re w a r debts, 11871 C o m m e r c e , see T r a d e Commercial banks, see R a n k s Commercial p r o b l e m s , i n t e r r e l a t i o n of i n t e r n a t i o n a l finance a n d , 8 Commissions, for o r i g i n a t i o n of foreign b o n d business, 163; o n b o n d transactions, 197 C o m m o d i t y prices, raising of, 2371, 2471 C o m p e n s a t i o n a g r e e m e n t s , 54, 7 1 , 78, 82-84; relation to e x c h a n g e c o n t r o l , 78; effect u p o n U . S . t r a d e , 89 C o m p e n s a t i o n marks, 83 C o m p e n s a t i o n trade, see C o m p e n s a t i o n agreements; C o m p e n s a t i o n marks; Private c o m p e n s a t i o n t r a d e Conflicts of American interests, 6-8 Consumers, influence of e x c h a n g e rates u p o n , 72, 7471 Coolidge, Calvin, q u o t e d , 137, 19371 C o r p o r a t i o n of Foreign B o n d h o l d e r s (British), 173, 202, 203 C o r p o r a t i o n of Foreign Security H o l d ers ( T i t l e II of t h e Securities Act of >933). '74 f-> ' 8 3 " . 189" Corporations, A m e r i c a n : t a x a t i o n of foreign subsidiaries, 217, 219 Corporations, foreign; A m e r i c a n holdings, 147, 151, 152 Costa Rica, 38; b o n d s , 153, 160, 16071 Council of t h e C o r p o r a t i o n of Foreign B o n d h o l d e r s , see C o r p o r a t i o n of Foreign B o n d h o l d e r s (British) Courts, lack of access to, proceedings against governments, 152 Credit, d e v e l o p m e n t of control over, by central banks, 14-16, 55; effect of gold m o v e m e n t s u p o n , 16; effects of " t o t a l i t a r i a n s t a t e " activities, 56;

INDEX Credit (Continued) aided by Export-Import Bank, 96, 227-35; facilitating of, for war purposes, 106, 1 0 7 , 1 4 9 ; for Soviet Government, 1 3 1 , 224, 226, 227; governmental financing of foreign trade, 224-37; problem of adequate facilities for exports, 224 ff.; see also Loans Credit Anstalt of Vienna, 21 Creditor nations, U.S., 1 5 « , 147-53; Great Britain, 103, 104, 1 1 8 . See also Debts, intergovernmental Credits, short-term, 20, 195 Crisis of 1 9 3 1 , see Currency crisis of 1 9 3 1 ; Monetary breakdown Cruiser Law, Chile, 75T1 Cuba, 2 9 1 , 38, 165, 227; war debt, 104, 109/1; bonds, 154, 1 5 8 , 160, 1 6 5 , 178/1

255

193/1; established, provisions of, 115/1 Debtor nation, transition of U. S. f r o m , '47 Debts, intergovernmental, 3, 5, 8, 14, 15, 101-46; international readjustments, 55; effect of exchange control upon, 90; amounts involved, 1 0 1 103, 105; Russian debt, 101/1, 104, 109/), 1 3 0 - 3 2 , 2 2 7 , 2 3 0 ; G e r m a n

debt,

103, 134-36; how war debts incurred, 103-108; pre-Armistice loans, 103, 106-107; post-Armistice loans, 103, 107-108; funding settlements, 108-20, 133; capacity-to-pay criterion, 1 1 2 , 118/1; relationships of reparations to settlements, 1 1 5 , 120/1, 1 2 1 ; British policy, 118-20; cancellation

177,

of, 1 1 9 , 1 2 1 , 122; the m o r a t o r i u m , 120-

Currency, crisis of 1 9 3 1 , 3, 1 3 , 1 5 n , s i , 61, 69-73, 160, 1 6 1 , 162; "pegged," 9, 1 1 , 27, 38/1, 69; of American countries, linked to dollar, 38; to pound, 39; effects of depreciation, 45 f., 72, 1 6 1 ; blocked, 7 1 , 82; export of national, forbidden, 9 m ; bond defaults caused by depreciation, 161 Currency blocs, 33-35, 62 Currency stabilization, term, 9; postwar period, 12-13; reasons why postwar stabilization unsuccessful, 13-22; post-war exchange parities, 16-17; renewal of efforts after 1 9 3 1 , 22-42; London Conference, 22; attitude of U. S. toward, 23; a purpose of T r i partite Agreement, 37; Pan American efforts toward, 39 f., 63; policy of U. S., 40, 64; possible ways of achiev-

2 1 ; defaults, 122-24; Hungarian proposal, 124; Rumanian proposal, 126; Austrian debt, 127-28; of absorbed state, assumed by substituted sovereignty, 128/1; Johnson Act restricting financial intercourse with defaulting governments, i2g, 198; present policy of U. S., 132-34; economic factors in payment of, 136-42; payment in goods and services, 137, 138/1; summary and conclusions, 142-46; tradeagreements program not influenced by defaults, 188; see also Dollar bonds Defaults, on intergovernmental debts, 122 ff.; on foreign dollar bonds, 147204; meaning of "interest d e f a u l t , " 157/1; default an act of bankruptcy, 165/1; trade-agreements program not influenced by, 188; State bonds, U. S.,

ing, 51-60; summary,

61

Currency wars, fear of, 43, 45/1 Customs collections, Caribbean

201/1-204

area,

192

Czechoslovakia, 13, 290, 7 1 , 23 m ; debt, 102, 1 1 0 , 123, 129, 154

Danzig, 13 Danzig Port and Water Works Board, >59. Dawes, Dawes Dawes

177 Charles G., 115?» Loan, 154, 159, 187, 193/1 Plan, 104, 116/1, 1 1 7 , 135, 136,

Denmark, 13 Department of State, position in relation to bond defaults, 152, 184 ff.; relations with Foreign Bondholders Protective Council, Inc., 184, 189; with bondholders' organizations in general, 190/1; policy re private loan and investment transactions, 185-90; protests against German discrimination in debt settlements, 187; reasons for influence re defaults, 190/1; consulted by Export-Import Bank, 235 Depreciation of currency, see Currency

256

INDEX

Depression, e c o n o m i c : relation to m o n etary b r e a k d o w n of 1931. s i ; b o n d defaults d u r i n g , 153; as cause of def a u l t , 160 f „ 168 ft. Dietrich, E t h e l B., q u o t e d , 225 Dirksen, Everett M „ 14cm Discrimination, in foreign trade, 87 f.; in e x c h a n g e rates, 89; in d e b t settlements, 187 Dollar, r e v a l u a t i o n o f , 23«, 24-26; President's p o w e r to c h a n g e gold c o n t e n t , 25, 26, 27, 45; as f o r m of g o l d - b u l l i o n standard, 26; A m e r i c a n currencies l i n k e d to, 38; fluctuation in relation to p o u n d , 42; foreign allusions to, 43; effect of d e v a l u a t i o n u p o n g o l d reserves, 57; d e m a n d for, re depreciated currencies and transfer p r o b lem, 161 f. Dollar, C a n a d i a n , 34n D o l l a r area, 34, 62 Dollar bonds, 127, 128, 129«; d e f a u l t situation, 3, 8, 153-57; U . S . as a debtor-creditor nation, 147-53; present a m o u n t of p o r t f o l i o investments abroad, 150; of foreign governments, 152-53; partial payments a n d readj u s t m e n t settlements, »58-60, 179-82; interest, 158, 170 f., 182; causes of defaults, 160-70; reasons f o r d e f a u l t s given by f o r e i g n governments, 168; financial results of U. S. foreign lending, 170-71; b o n d h o l d e r s ' protective organizations, 172-84; p e r m a n e n t vs. temporary readjustments, 179; rep a t r i a t i o n , 179; holdings of small investors, 181; the G o v e r n m e n t ' s p o l i c y , re defaults, 184-90; re new issues, 190-99; a n d m a r k e t registration, 196; legal restrictions, 196-99; s u m m a r y and conclusions, 199-204; status of foreign b o n d s c o m p a r e d w i t h defaulted a n d r e p u d i a t e d State debts, also Portfolio invest2 0 m ; see ments Dollar e x c h a n g e , relation to d e b t payments, 137, i s 8 n , 141 D o m i n i c a n R e p u b l i c , 38, 165; bonds, 154, 158, 159, 165, 168, 177, 1 9 m , 1920; customs collections, 19211 D o u b l e t a x a t i o n , see T a x a t i o n D u t c h East Indies, 13

Economic a n d political conditions, relation of financial questions to, 6, 52, 62; g r o w t h of economic nationalism, 14-16; g o v e r n m e n t a l influence increased by e x c h a n g e c o n t r o l , 73; see also Depression Economic C o n f e r e n c e , G e n o a , 13, 17 Economic factors in p a y m e n t of intergovernmental debts, 136-42; decrease or inversion of U. S. positive trade balance, 138; increase in purchase of services a b r o a d , 140; f u r t h e r i m p o r t s of gold, 141; increase in loans a b r o a d , 141; purchase or lease of foreign territory, 142 Economics Conference, L o n d o n , 22-23, 33. 39 Economists' N a t i o n a l C o m m i t t e e o n Monetary Policy, q u o t e d , 27n Ecuador, 13, 38, 76, 77 E d m o n t o n , C a n a d a , 155 Einzig, Paul, q u o t e d , 66n, 7871 Emergency B a n k i n g Act of 1933, 97n Equalization funds, see E x c h a n g e stabilization Estonia, 13, 71, 102, 110, 114«, 115 Excess-profits taxes, 217 Exchange-clearing agreements, 78, 7981; relation to e x c h a n g e control, 78; e x a m p l e of, 80; n u m b e r , 81; difference between p a y m e n t s agreements and, 81; U . S . attitude toward, i4on E x c h a n g e control, 9, 12, 61, 62, 66-100; A m e r i c a n republics, 40; relation to e x c h a n g e instability, 44; compensation agreements, 54, 71, 78, 82-84, 89; nature of, 66-68; history, 68, 78; as employed by U. S „ 67, 99; effects on investments, 68, 90; countries not e m p l o y i n g , 68, 70, 72, 76, 77; countries e m p l o y i n g , 70 ff„ 75, 77; government influence over economic a n d political activities increased b y , 73; extent of, in 1939, 75; exchange-clearing, 78, 79-81, 1400; payments agreements, 78, 81; p r o b l e m s arising f r o m , 84-92; decrease a n d dislocation of world trade, 84; effects on e x p o r t trade, 87; preferential agreements, 88; discrimination in rates, 8g; p u n ishment for infractions of e x c h a n g e laws a n d regulations, g i ; U. S. policy.

INDEX Exchange control (Continued) 93-97, 9g; trade-agreements program, 96; emergency powers of U. S. officials, gyn; summary and conclusions, 97-100 Exchange Equalization Account, British, 28, 29, 30, 50, 60, 68, 70 Exchange instability, 9-65; post-war, 13-22; renewal of stabilization efforts, 22-42; why of interest to the Government, 42-51; extent, 42; relationship to exchange control, 44; effect on U.S. export trade, 45; relation to world peace, 46; excessive gold imports, 47-51; difficulties of return to international gold standard, 52-60; summary and conclusions, 60-65 Exchange profits, 74, 162 Exchange stabilization, meaning of term, 9-10; before 1931, 10-13; postwar, 13-42; development of funds, 27-33; capital and surplus of funds, 29; Tripartite Agreement and stabilization funds, 36, 37 (see also Exchange Equalization Account; U . S . Stabilization Fund); policy of U. S., 40, 64; possible ways of achieving, 51-60; summary and conclusions, 61 65 Export Credits Guarantee Department of British Board of Trade, 225 Exporters, credits to, 3; exchange premiums to governments, 74, 162 Export-Import Bank of Washington, 4 m , 96, 132, 227-37; organization, 227; general purpose and functions, 229; development of its operations, 230; principal fields of activity, 231; avoidance of competition with commercial banks, 233; national interests involved, other than exports, 234; summary and conclusions about, 235 Export trade, maintenance and development of, 4; effect of exchange instability on, 45; burdened by exchange control, 68, 85; influence of depreciation, 72; of special government rate, 7471; effects of exchange control upon U. S. trade, 87-90; relation to war debt payments, 139;

257

plight of countries with one or two important export products, 161; depression influence upon prices, 161; governmental financing of, 22437; see also Trade Far East, bond investments, 154, 170, '9«

Farm Credit Administration, 226 Fear, in financial world, 43, 450, 52 Federal Farm Board, 226 Federal Reserve banks, functions in gold-sterilization process, 49; relation to Bank for International Settlements, n 6 n Federal Reserve System, U. S. transition to creditor position facilitated by. 148 Federal Securities Act, see Securities Act of 1933 Federal T r a d e Commission, 174, 175, 196 Feis, Herbert, quoted, 8n, 138« Ferrocarril del Pacifico de Nicaragua, i26n Finance, see International finance Finance Ministers' Agreement, 135 Financial breakdown, see Monetary breakdown Finland, 13, 76, 77; debt, 102, 110, 1 1 5 , 124 Florida, bonds, 20 m ff. Foodstuffs, credits for, io8n, 125, 148, 226 Foreign Bondholders Protective Council. Inc., 152, 158, 169. 175-84, 202; excerpts from reports, 16771, 175«, 179 ff.; establishment of, 175; functions, 176; organization, personnel, 177, 184; policies, 178-82; criticisms of, 183; relations with the Department of State, 184, 189; contrasted with Title II corporation, i8gn Foreign relations and policy, recent development of financial problems in, 3 ff.; peace as objective, 6; coordination of financial and commercial questions, 8 Foreign Securities Committee of the Investment Bankers Association, 173 Franc, French, 17, 35, 36, 43; Swiss, 30 France, currency and exchange, n n ,

258

INDEX

France (Continued) 13, 17, 20, 27, 28, 29, 30, 33, 35, 36, 43- 49"» 7 6 - 77. 7 8 . 8 ' . ' 7 ' ! g ° l d reserves, 19: Tripartite Declarations, 31. 36-38, 43, 45, 51, 54. 59, 61, 62, 63, 65; debt, 102, 104, 1 1 1 , 1 1 3 , 114, 1 1 5 , 116, 119, 120, 135, i94n; reparations to, 104; treaties re double-taxation relief, 208, 218, 219 Freight and shipping, negative balance of the U.S. on, 140 Funding settlements of war debts, 10820; amounts due on debts under, 102; World War Foreign Debt Commission, 108, 119, 1 2 m ; settlements made, 109; capacity-to-pay criterion, 112, u 8 n ; degrees of cancellation, 114; relation to reparations, 115-18, i2on, 121; British policy, 118; criticisms of, u 8 n ; separate vs. collective negotiations for modification, 133 Gayer, Arthur D., quoted, 15n Genoa Conference of 1922, 13, 17 Germany, debt, 5, 103, 134-36; currency and exchange, 12, 28, 34, 61, 70, 78», 81, 89; financial collapse in 1923, 12; collapse in 1931, 22, 120; blockedcurrency system, 71; payments agreement, 81; compensation trade, 83, 89; reparations, 104, 1 1 5 ff., 141; provisional Lausanne agreement re reparations, 122; attitude toward Austrian debts, 127-28; passive trade balance with U.S., 128; costs of U.S. Army of Occupation, 134; awards of the Mixed Claims Commission, 135; bond defaults, 154, 159, i6on, 176x1, 187, 195«; sale of wheat to, 226 Gold, U.S. reserves, 7, 19, 48, 57, 141; as common denominator in value of currencies, 9; prohibitions during World War, 11; maldistribution, 1820; reserves in France, 19; suspension of payments, 2in, 24; content of dollar, 25, 26; release under Tripartite Agreement, 36, 59; domestic production, 48x1; reserves of central banks and governments, 480, 57 if.; sterilization, 49; important functions, 50; importance of production industry, 50; not becoming obsolete

for monetary purposes, 50; difficulties resulting from existing distribution, 57-60; relation between supply of, and return to gold basis, 60; embargoes, 69; imports of, as debt payments, 141 Gold-bloc countries, 33-35 Gold clause, rulings on, 25*1 Gold-exchange standard, characteristics of, 11; return to, recommended by Genoa conference, 13, 17; operation of in post-war decade, 17-18 Gold movements, and their influence, ion; devices to influence, 16; credit effect of, 16: influence of post-war exchange parities, 17; in and out of U. S., 24; excessive imports into the U.S., 47-51; effect of central-bank activities upon, 55 Gold Reserve Act of 1934, 25, 26, 28, 3 1 , 33" Gold standard, international: postwar, 3; types before post-war period, 10-12; characteristics, 10 f.; abandoned, 11, 22, 24, 34, 61; status in the U.S., n n ; post-war return to, 12; underlying principle re gold movements, 16; effect of gold-exchange standard upon gold-bullion standard, 18; devalued dollar as a modified form of gold-bullion standard, 26; position of gold-bloc countries, 33; possible means of return to, 5 1 , 52; difficulties of a general return, 52-60, 62; exchange practices of countries that departed from, 69 f., 72; of countries nominally on gold basis, 70 ff. Gold Standard Act of igoo, n n Goods and services, payment of debts in, 137, 138« Governments, bondholders' inability to sue, 152; changes of, as cause of debt defaults, 165; example of, as cause of debt defaults, 167; reasons for default given by, 168-70; relation with private foreign creditors, 180 Grady, Henry F„ 96; quoted, 4471, 97 Grain Stabilization Corporation, 226 Great Britain, currency and exchange, 1 1 , 12, 13, 17, 22, 27, 29, 33, 34, 51, 76, 77, 78; Exchange Equalization

INDEX Great Britain (Continued) Account, 28. 29, 30, 50, 60, 68, 70; T r i p a r t i t e Declarations, 31, 36-38, 43. 45. 5>. 54. 59. 6». 62, 63, 65; functions performed by gold, 50; foreignexchange practices, 70; payments agreements, 81, 8 i n , 89; intergovernmental debts, 102, 103, log, 112, 114, 115, 123, 135; as net creditor, 103, 104, 118; loans to its allies, 103, 112n; reparations to, 104; policy in debt settlements, 118-20; sentiment for cancellation of intergovernmental debts, 119; the Balfour Note, 119; relation between war debts and debts of American states, 202 f.; insurance against credit and exchange risks, 225; see also British Empire Greece, 13, 81; debt, 102, 10971, 112, 119, 123; bonds, 154, 159, i6on Guatemala, 13, 38, 76, 77; bonds, 154, 158, 159, i6on Hague agreement of 1930, 11671, 11771 Haiti, 38, 154, 2331; financial arrangements with, 1 9 m , 19271 Harding, Warren G., 109, 19371; on war debts, l i o n Hawaii, 150 n Hoover, Herbert, 122; heads Relief Administration, 10871; proposes moratorium, 121; quoted, 133 " H o t " (or "bad") money, 150, 43, 49 House of Representatives, see U. S. House of Representatives Hughes, Charles Evans, 11571; on Russia, 13171 Hull, Cordell, quoted, 4, 6, 93, 94, 139 Hungary, 13, 71; exchange-clearing agreement with Switzerland, 80; debt, 102, 110, 115, 123; reparations, 104, 11571, 11671, 11771; proposal for new debt settlement, 124-25; bonds, 154, 158, 159, i6on Hyde, Charles Cheney, quoted, 185» illicit exchange market, 92 Immigrants' remittances, see Personal remittances Import trade, effects of currency depreciation, 46, 72; quotas and control, 55; burdened by exchange con-

259

trol, 7471, 85; relation to war-debts payments, 138 f.; see also T r a d e Income tax, 205, 210, 217, 218; methods of allocating, 212 India, 13, 33 Industrial products, credits for export of, 231 Inheritance tax, 205, 210 Instability, see Exchange instability Institute of International Finance, 155 Insurance against credit and foreignexchange risks, 225 Inter-American Conference for the Maintenance of Peace, 39 Interest, influence of gold movements upon rates, i o n ; on war debts and loans, 107, 114 f.; positive balance of the U. S„ war period, 148 f.; meaning of "interest default," 15771; on foreign dollar bonds, 158, 170 f., 182 Interests, conflicts of, in U . S„ 6-8 Intergovernmental debts, see Debts International Bank, see Bank for International Settlements International C h a m b e r of Commerce, resolution re gold standard, 5271; double-taxation relief efforts, 209-14 International Conference of American States, Seventh, 39; Eighth, 41, 4271, 63, 9471 International finance, recent development of problems of, in foreign relations, 3-4; interest of the Government in, 4-6, 8; interrelation of commercial questions and, 8 International Financial Conference, 209 International gold standard, see Gold standard Investment bankers, criticized for activities in flotation of foreign bonds, 163; bondholders' protective organizations, 172, 173; relation of Government departments to, 193-947» Investment Bankers Association, 173 Investments, protection of American foreign, 5; burdened by exchange control, 68, 90; direct, total amounts, 147, 150, 1 5 m ; of American money in American and foreign enterprises, compared, 18171; in other American countries, encouraged by the U. S.

260

INDEX

Investments (Continued) Government, 191; affected by double taxation, 205; see also Bonds; Dollar bonds; Portfolio investments Italy, 78n, 2 3 m ; currency and exchange instability, 13, 17, 27, 2gn, 33, 35, 72; debt, 102, 104, 1 1 1 , 1 1 3 , 114, 1 1 5 , 119, 120, 123; reparations to, 104 Japan, 35, 75, 77, -¡Sn, n 6 n Johnson Act, 129, 1 9 4 1 , 198 Jones, Jesse H., quoted, 2300 King, Eldon P., 2i2n Klein, Julius, quoted, 207 Knox, Philander C., 191 Labor, opposition to currency depreciation, 72 Land, Emory S., 1400, 1 4 m Latin American Bondholders Association, Inc., 173 Latvia, 12, 7 1 , 102, n o , 1 1 5 , 123, 2 3 m Lausanne agreement, 1171», 122 Law, governments may not be sued, 152; default an act of bankruptcy, 165 n; restrictions affecting loans abroad, 196-99 League of Nations, Gold Delegation, quoted, i6n, ign, 20n; recommends return to gold basis, 23n; Report on Exchange Control, excerpts, 37, 7471, 76, 8on, 9 i n ; Enquiry into Clearing Agreements, excerpt, 8on, 86n; Joint Committee for the Study of Clearing Agreements, 86; quoted, Son, 86n; double-taxation relief efforts, 208, 209-14 Lease or purchase of foreign territory re war debts, 142 Liberia, 104, 109 n Liberty Bond Acts, 106, 107 Liberty Loans, 107, 1 1 5 Lima, conference at, 41, 63, 94 Limping standard, n n Lira, 16, 35 Lithuania, 12, 102, 110, 115, 123 Loans, uneconomic, 20, 21, 162-64; influence of depression on foreign loans, 21; for war supplies and expenses, 103-108, 125, 148, 149, 225,

226; pre-Armistice, 103, 106; postArmistice, 103, 107; private, for war needs, 106; loans-to-pay-loans, 141; foreign commercial loans taken over by Export-Import Bank of Washington, 227; see also Bonds; Credit; Debts; Relief loans London, dominance in world finance, «5" London Conference, 1933, 22-23, 33> 39 McKenna, Reginald, 11571 Macmillan Report, 19f., 2 i n ; source, ion; effect of publication of, 22 Mark, 61; reichsmark, 34, 71, 83; blocked-currency system, 7 1 ; compensation, 83 Market registration, 196, 197 Mellon, Andrew W„ quoted, i i 2 n , 1 1 3 , 114n, 1 1 8 , 205ft, 2 I 4 Mendoza, Province of, 159, 177, i8gn Merchant marine, 140, 1 4 m Mexican National Railways, 153 Mexico, 38, 39, 76, 77, 165; investments in, 1 5 m ; bond defaults, 153, i57n, 15871, 1 6 1 , 165, 172 Mississippi, bonds, 20m ff., 202 Mixed Claims Commission, 103, 134, >35-36 Monaco, denied right to sue the State of Mississippi, 203 Monetary breakdown in 1931, 3, 13, 61; causes, 1571, 21, 162; relation of economic depression to, 21; influence in starting regime of exchange control, 69-73; a s cause of bond defaults, 160, 161 Money, see Currency; Gold Monroe Doctrine, igi Montevideo, City of, 159, 177 Montevideo, conference at, 39, 63, 93, 94 Moratorium, the, 120-30; amount of deferred payments under, 102 Morgenthau, Henry, Jr., quoted, 26«, 2 7 " . 3 2 ' 3 3 " . 36> 37". 4 7 " ' 50« Munro, Dana G., 178« National Industrial Recovery Act, 227 Nationalism, economic: growth of, 1416

INDEX Netherlands, exchange, 1171, 13, 28, 29, 33- 35. 49". 7 6 . 77. 1 7 1 : T r i p a r t i t e Declarations, 36; double taxation, 208, 218 Neuilly, Treaty of, 11771 Neutrality legislation and purchase of securities, 198 Newfoundland, 1 5 m , 170 New South Wales, 154 New York, financial leadership, 1571; call-loan market, 20, 21 New Zealand, 13, sin, 33, 76 Nicaragua, 38, 4171, 23271; debt, 104, 10971, 126n; claim for r e f u n d of income taxes, i26n Norway, foreign exchange, 13, 70, 76, 77. 78 "Official rate," foreign exchange, 74 Panama, 38, 76, 77; treaties with U.S., 25n, t6n; bonds, 154, 169 Panama Canal, compensation for rights to, 2571 Pan American countries, see American republics Pan American Union, 39 Paraguay, s i n , 35, 39, 4 m Payments agreements, 78, 81 Peace, first objective of U. S. foreign policy, 6; relation to monetary instability, 46 Pegged currency, 9, 11, 27, 38n, 69 "Period of stabilization," 12 Perry vs. t h e U. S., 25n Personal remittances, 140 Peru, 2 i n , 38, 70, 76, 77, 162; bonds, 153, 158, 160. 165 Peso, Cuban, 2gn; Mexican, 38; of Argentina and Paraguay, 39 Philippine Islands, 15071 Pierson, Warren Lee, 233; quoted, 22671, 234 Poland, 13, 33, 34, 102, 110, 115, 23171; bonds, 154, 158, 160, 177, i8gn Political conditions, see Economic and political conditions Ponsonby, Lord, quoted, 202 Portfolio investments, types included in, 147: post-war increase in the U. S., 149; present a m o u n t in the U.S.,

261

150-52; foreign dollar bonds form principal part of, 151; see also Bonds; Dollar bonds; Investments Portugal, 35. 76, 77, 119 Pound sterling, 16, 42, 70; currencies geared to, 35n, 39 Preferential trade agreements, 87 f. President, powers with respect to devaluation, 25, 26, 2771, 45; to foreignexchange transactions, 9771; to warsupplies sales, 107 Prices, influence of depreciation upon, 7* Price stabilization, g: and increase an objective of U. S. Government, 23 Princeton University, Faculty of, statement re war debts, 11871 "Private clearing" arrangements, 8171 "Private compensation trade," 82 Profits, exchange, 74, 162 Property taxes, 210 Public opinion, relation to debt payments, 168 Public works expenditures in re debt service, 166, 180 Puerto Rico, 15071 Punishment for infractions of exchange laws and regulations, 91-92 Purchase or lease of foreign territory re war debts, 142 Rathbone, Albert, quoted, io6n Readjustment settlements, dollar bonds, 158-60 Reciprocity in taxation, 207, 214, 216 Reconstruction Finance Corporation, 174, 226, 228, 23171 Reconstruction loans, 104 Regimentation, national: exchange control as form of, 67 Registration of bonds, 196, 197 Reichsmark, 34, 71, 83 Relief loans, 104, 107, 112, 121, 124, 127, 18771; see also Loans Reparations, 14, 15, 104, 11571, 141; Dawes Plan, 104, 11571, 11671, 117, 135, 136, 19371; Austrian, Hungarian, Bulgarian, 104, 11571, n 6 n , 11771; relationship to the f u n d i n g settlements, 115-18, 12071, 121; U.S. attitude toward, 115, 12071, 134; Young Plan, n 6 n , 135, 136; functions of

2Ô2

INDEX

Reparations (Continued) Bank for International Settlements, n 6 n ; the moratorium, 121 ff.; Lausanne agreement, 122 Reparations Commission, 11571, 135 Report of the Committee on Finance and Industry, ion; see also Macmillan Report Revenue Act, of 1936, 218«, 2 2 m ; of 1938, 216n, 217, 2i8n Revenue laws, 206, 207; provisions, 216 ff. Revenues, U.S., 101; losses through double taxation, 206 Roca-Runciman Agreement, 82n Rockefeller Foundation, 212 Roosevelt, Franklin D., message to London Conference delegates, 23n, 33; quoted on war-debts policy, 125, '32. 133 Ruhr Valley occupation, H5n Rumania, 71; debt, 102, 110, 119, 123, 126, 15.1 Russia, 20, 490, 780, 165; debt, 101 n, 104, 10971, 130-32, 227, 230; recognition by U.S., 131; trade with, 131 f., 224, 226, 227; bond defaults, 131, 153, '57 n > >58", 161, 165, 172 St. Boniface, Manitoba, 155 Salvador, El, 12, 38, 76, 77; bonds, 154, 158, i6on Santiago, Chile, plans for conference at. 39 Santo Domingo, see Dominican Republic Sayre, Francis B., quoted, 940, 140 Scandinavia, 22, 34?!, 35 Schacht, Hjalmar, 83 Second Export-Import Bank, 227, 230, 234 Securities, sec Bonds; Investments Securities Act of 1933, 196, 197; Title II corporation, 174 t., 1830, 189« Securities and Exchange Commission, 198: quoted, 163, 167, i86n, i8gn; relation to bondholders' protective organizations, 172, 176«, 183 f.; filing of registration statement with, 196 Securities Exchange Act of 1934, 172, 196«, 197 f. Seligman, Edwin R , A., 208, 209

Senate, see U. S. Senate Services, international: U.S. negative balance, 140 Services and goods, payment of debts in, 137, 138/1, 140 Shipping profits, double taxation, 216, 218-21 Short-term credits, 20, 195 Silesia, Province of, 159, 177 South Africa, 13, 33 South America, sec American republics Soviet Government, see Russia Speculation, post-war, 1511 Stabilization, see Currency stabilization: Exchange stabilization; Pricc stabilization Stand-still agreements, y in State bonds, defaulted and repudiated, 20171-204 State Department, see Department of State Sterling area, 3471, 35, 62 Stocks in foreign corporations, 147, 151 Supply-and-demand rate, 67, 72 Sweden, foreign exchange, 12, 70, 76, 77, 78; double-taxation, 218, 220 f. Switzerland, 28, »9, 30, 33, 35, 497», 76, 77, 78, 171; Tripartite Declarations, 36; exchange-clearing agreement with Hungary, 80 Tariff, U.S. policy, 15; effect of currency depreciation, 46; re other present-day expedients, 55 Tariff Act of 1930, 84« Taxation, evasion of, 6, 209, 213; reciprocal, 207, 214, 216; nonreciprocal, 216; assessment and collection, 210; interchange of information, 212, 215 Taxation, double, 3, 4, 5, 6, 205-23; nature and problem, 205-207; history of remedial efforts, 207-14; number of international agreements, 208; efforts of League of Nations, 209; of International Chamber of Commerce, 209; question of multilateral or bilateral agreements, 2 1 1 , 213, 214; efforts of U.S., 214-21; policy, 214; laws, 216; conventions, 218-21; Franco-American treaty, 218, 219; convention with Sweden, 218, 220;

INDEX T a x a t i o n (Continued) with Canada, 218, 2 2 i n ; summary and conclusions, 221-23 Taxation of Foreign and National Enterprises, 212 T h o m a s Amendment, 24 Totalitarian states, effect upon exchange stabilization, 56; upon exchange control, 73 Tourist expenditures, 140 T r a d e , foreign: conflicting interests of export and import, 7, 14; ExportImport Bank of Washington, 4 m , 96, 132, 227-35; U . S . positive balance, 47, 48«, 148; excessive restrictions hinder return to gold standard, 54; exchange control as instrument for directing, 73: amount of international on open and competitive basis, 78n; effect of exchange control in retarding recovery of, 84-86; decrease of ratio, triangular merchandise trade, 86; U. S. trade influenced by conditions of world trade, 87; preferential treatment, 87 f.; passivity of German balance, 128; Russian, 131 f., 224, 226, 227; decrease or inversion of positive balance re debt payments, 138 40; transition from negative to positive balance, 147, 148 t.; affected by double taxation, 205; governmental financing of, 224-37; problem of adequate credit facilities for exports, 224; history of Government facilities, 225-27; summary and conclusions re governmental financing of, 235-37; see also Export trade; Import trade T r a d e Agreements Act of 1934, 188 Trade-agreements program, 96-97, 139; relationship of exchange restrictions, 44n; purpose to revive trade, 188; not influenced by debt defaults, 188 Transfer problem, 137, 161 f., 164 Treasury, Secretary of, exchange-control powers, 97n; war-credits authority, 106 Tripartite Agreement, see Tripartite Declarations Tripartite Declarations, 31, 36-38, 43, 45' 5'> 54' 59' ®2' ®3> ®5: countries participating, 36; purposes, 37; bene-

263

fits to American countries, 38 T u r k e y , 8i Union of Soviet Socialist Republics, see Russia United States, Department of State, see Department of State United States House of Representatives, Committee on Ways and Means, 114 United States Senate, Committee on B a n k i n g and Currency, 163 United States A r m y of Occupation, cost of assumed by Germany, 134 United States Chamber of Commerce, 214; quoted, 2o6n United States Grain Corporation, io8n, 125 United States Maritime Commission, quoted, 140» United States Shipping Board Emergency Fleet Corporation, 105 United States Stabilization Fund, 28, 29. 3°. 3'-S3. Co. 67 Uruguay, 2 i n , 35, 39, 89; bonds, 154, •58, 159, i6on, 168, 177 Van Zeeland, Paul, quoted, 85« Varges, G e t u l i o D., quoted, 169 Venezuela, 2 i n , 38, 2 3 m Versailles, T r e a t y of, 134 Wadsworth Agreement, 135 War, actual and fear of: effect upon return to gold standard, 52 W a r debts, see Debts, inter-governmental W a r Finance Corporation, 226 War-profits taxes, 217 Warsaw, City of, 159, 177, i8gn Welles, Sumner, quoted, 186 Westerfield, Ray B., quoted, i2n, 37n West Indies, 76, 77; investments in, 1 5 m ; financial arrangements with, i g i n , ig2n White, Francis, i78n World W a r , effect upon gold, 11; problem produced by reparations and debts, 14; loans for supplies and expenses of, 103-108, 125, 148, 149, 225, 226; U. S. transition to creditor

264

INDEX

World War (Continued) position an economic effect of, 147, 148 World War Foreign Debt Commission, 108-109, M9> Young, Owen D., 116t»

Young Committee, n6n Young Loan, 154, 159, 187 Young Plan, 135, 136; established, features of plan, 1 i6n Yugoslavia, 71, 81: war debt, 102, 1 1 1 , • 14, 115, 119, 121; bonds, 154, 159, i6on