Effects of the War on the Money Banking in France and the United States Book

Effects of the War on the Money Banking in France and the United States Book
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    Carnegie Endowment for International PeaceDIVISION OF ECONOMICS AND HISTORYJOHN BATES CLARK, DIRECTORPRELIMINARY ECONO"MIC STUDIES OF THE WAREDITED BYDAVID KINLEYProfeslor of Political Economy. University of IllinoisMember of Committee of Research of the EndowmentNo.15EFFECTS OF THE WAR ON M...

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    COPYRIGHT 1919BY THECARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE2 JACKSON PLACE, \VASHINGTON.D C.

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    EDITOR'S PREFACEProfessor Anderson's study of " Effects of the War on Money,Credit and Banking in France and the United States" needs nocommendation.It is full both of information and of suggestions,and will be valuable not only to bankers but to other business- men, to students, and to...

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    IVEDITOR'S PREFACEtime in our history we have had an organization powerful enoughto control the disturbing factors of the credit situation.Thewar leaves us the strongest country in the world in the matterof gold holdings and in the extension of our credit.N everthe-less, we must not draw too opti...

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    FORE~WORDA four year period in the history of money, credit andbanking in France and the United States might ordinarily becovered satisfactorily in a slender essay, easily written in a shorttime.Almost every week of the war period, however, hasbrought events of the first rrLagnitude in both count...

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    CHAPTERIIntroductionCON~rENTSPAGE3PART I--FRANCEIIMoney, Credit and Banking in France . . . . . . . . . .19IIIThe Outbreak of theVvr ar in France43IVDepression and" Reprise des Affaires" .. . . . . . . .56VPrices of Commodities in France during the War71VIThe Effects of the War on the M...

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    EFFECTS OFTHI~ WARON MONEY,CREDIT ANDBA1~KING IN FRANCEAND THEUl~ITED STATES

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    CHAPTER IIntroductionIn its details, the effect of the war upon money, credit andbanking is bewilderingly complex.It is, therefore, necessary atthe outset to sketch in broad olltline certain of the main move-ments and tendencies as a skeleton about which some of thedetail~ may be grouped.This out...

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    4EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGmuseums and art galleries, and the like, are not available fordirect consumption, and with the stoppage of the current flowof goods from farms and factories, fisheries and mines, theworld is speedily placed on short rations.It was, therefore,vitally...

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    INTRODUCTION5worth while to point out that in the ordinary course of tradebefore the war a considerable volume of American goods wassent first to the Free Port of lIamburg and subsequently trans-shipped to the Scandinavian countries.When Hamburg wasblockaded, these goods were shipped directly to ...

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    6EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGfirst as German bankers, as early as1912, began to take stepsto increase their gold supply.In order to take gold out of thehands of the people and carry it to the reserves of the Reichs-bank, fifty and twenty mark bank notes were issued tot~ke thepl...

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    INTRODUCTION7ties, and the efforts to realize upon these investments finallyforced even fara~ay New York to close its stock exchange onJuly 31, a few hours after the London stock exchange closed.In connection with this effort to get wealth into the mostliquid possible form, there manifested itsel...

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    8EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGto London and the world was unable to meet its debts.Londoninstitutions, unable to collect from their various debtors, weresimilarly unable to pay their creditors.The credit situation wasnecessarily demoralized.The declaration of war, moreover, aton...

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    INTRODUCTION9"tthe last session.With the certainty that stock exchange priceswould go indefinitely lower if the stock exchanges remainedopen, there was also the certainty that the margin of protectionwhich the bankers require in connection with collateral loanswould be more than wiped out.Th...

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    10EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGthe notes or deposits of the central banks.In New York, wherethere was no central bank, there was still an informal pooling ofbank resources and .close cooperation among the banks.Another remedy applied very generally was the issue in oneform or an...

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    INTRODUCTION11the fiscal operations of the sta'te and apparently has been issued 'by the government to the banks to meet the needs of circu-lation.On the whole, Great Britain and the United States have madelarge use of long time loans and taxes, and have called on thebanks chiefly in connection w...

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    12EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGand exports as occur.Balances still unmet are commonly settledwith small shipments of gold.The credit resources of France, England and other Europeanbelligerents have been strained in meeting such an adverse tradebalance as' the past four years hav...

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    INTRODUCTION13rise of commodity prices, the inevitable consequence of a world-wide scarcity of commodities, due to the fact that 50,000,000men have been withdrawn from industry and have been put towork in the most destructive kind of consumption of the productsof industry, to the fact that transp...

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    14EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGbeing in credits to the state, the other banks have, on the whole,contracted their lending operations and their volume of depositssubject to· check or draft, at least through most of the war period.In Great Britain, France and the United 'States, ...

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    INTRODUCTION15huge profits resulting from the rising prices connected with thewar have in large degree buried the financial difficulties which theoutbreak of the war occasioned.The credit system has come tolife again, moratoria have largely been dispensed with, andpending insolvencies largely ave...

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    PART IFRANCE

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    CHAPTER IIMoney, Credit and Banking in FranceIt would be hard to find a sharper contrast among the greatbanking systems of the world than that between France and theUnited States.The difference is so great that it is 'not alwayseasy for trained students whose background is primarily French,and tr...

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    20EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGthese reports as to their actual operations.Take, for example,the statement of the Credit Lyonnais of December 31, 1905.Thestatement of assets is as follows:ACTIF DU CREDIT LYONNAISDecember 31, 1905Especes en caisse et dans les banquesFr. 171,554,0...

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    FRANCE21the item contains discounted commercial bills of exchange, withshort maturities, but critics of the great private banks havesuggested that many other things may be there, including securi-.ties owned, and paper drawn in connection with stock marketoperations.In any case, a subdivision of ...

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    22EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGFrench banking.The term "current accounts" appears alsoon the liability side-in the statement of the date in question itstands on the liability side at 856,272,484.76 francs.It is aform of deposit, with overdraft privileges.The active bus...

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    FRANCE23On the liability side, three items aggregate the great bulk ofthe whole:Depots et bonsa vueFr.705,650,500.36Comptes Courants...856,272,484.76Acceptationsf • • • • • • • • • • • • • • •180,559,616.46Fr.1,742;482,601.58Of total liabilities of 2,176,736,614 fran...

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    24EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGwise to reveal them! 1But probably the fundamental reas<?n isone which great private bankers in many countries would sympa-thize with: banking is a delicate matter; it is not well for theuninitiated to know too much about it; secrecy and privacy...

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    FRANCEI25times of emergency-this feature of French banking, whollylacking in 1914in the United States, is familiar enough to Amer-ican students.But French centralization goes far beyond that.Apart from the Banque de France, there are some four or fiveother great private banks which do most of the...

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    26EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGthe deposits of certain great corporations in whose securities itdeals, etc.Most of these institutions are supposed to bebo~nd togetherby close understandings, and to work in close harmony.Nosuch charges of a "money trust" have ever been ...

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    FRANCE27N ext to its highly centralized character, we should perhapsmention the important role of bank notes in French banking asafeature marking it off from American banking.Notes of theBanque de France have been the main means of making paymentsin France.Checks draw'n against deposit accounts h...

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    28EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING(liability) 1in Paris and branches amounted to 695,000,000francs.This looks small when compared with the 5,845,000,000francs of note issue shown by the same statement of the Banquede France, and would make it appear that the main form in whichthat ...

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    FRANCE29the small tradesman would commonly have nothing to do withchecks.To be sure, the general practice, in paying house rents,in paying retail bills, in paying wages, in paying taxes, and inmany other places where an American would unhesitatingly drawchecks, was to pay with bank notes or coin....

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    30EFFECTS OF THE WAIt ON MONEY, CREDIT AND BANKINGspeculation and finance, notably New York City itself.1Franceis also a country where financial and speculative operations arecarried on on a vast scale, and the men who carry them onare by no means ignorant of the convenience of the checkingsystem...

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    FRANCE31In America, Kinley's studies,l referred toabov\.~, would show thatwholesale trade is about twice as great as retail trade, in pecuniarymagnitude, if payments are a test.If this should be true alsoof France, the total of French wholesale and retail trade beforethe war could not exceed nine...

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    32EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGment, draws a bill on the retailer, either" at sight" or on thirty,sixty or ninety days' time, and this bill, "accepted" by theretailer, becomes the latter's promise to pay.It may then beused by the wholesaler in making payments...

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    FRANCE33is a very substantial body of real bank credit, growing out ofbank loans, serving as the counterpart of our own elastic bankdeposits.But this is not the whole story.To an extent that is almostincredible at first blush to the American student, it is true inFrance that "deposits" ...

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    34EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGseeking investment abroad.In France, the bankers do reallylend out their deposits, instead of chiefly creating their depositsby lending.Indeed, the deposits of French banks in general arevery much like the deposits of our savings banks.The activebu...

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    FRANCE35For many years before the war, the French banks were market-ing to their customers, through their numerous branches, enor-mous quantities of securities, largely foreign securities.It isnot easy to get exact figures of the extent of this, but that abillion and a halff~ancs of French saving...

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    36EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGwas the redoubtable Lysis-a pseudonym which many have sup-posed represents the distinguished editor ofLa Revue) JeanFinot.At all events, Finot stands sponsor, in a preface, for thebook (( Contre l' 0ligarehie final1eiere en Franee," 1whichfi r...

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    FRANCE37Officials of the Credit Lyonnais, testifying before the Ameri-can National Monetary Commission, had this to say:A. There are two kinds of~uch operations; first when the Credit Lyonnaisis alone interested in the operation; and second, when others of the Parisbankers are interested with us....

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    38EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGeighty-three for a bond which the banks sold the people ateighty-eight.But the Russian Government received only eighty-two in reality, since it had to pay 1per cent of the par value asa further commission to an intermediary of the banks! 1Doubtless...

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    FRANCE39Russian securities have been bought in enormous quantities.Bulgarian state issues have been bought in large amounts.Brazilian issues, not alone of the central government, but evenof the municipalities, ha.ve been largely bought.!These w.ere apoor resourcefor France when the great war came...

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    40EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGnot been increasing.The people are by tradition conservative ineconomic matters.Canada has not found that branch bankinghas stifled her rapid expansion.Canada borrows from herbanks, instead of investing through them.Her people are will-ing to take ...

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    FRANCE41monly do not buy the securities of small manufacturing corpora-tions, but they do lend to them heavily, often for the purchase offixed capital, and give them a great deal of supervision andadvice.In France the local independent banks and the provincialbanks with branches have done this, b...

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    42EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGGerman industry more generously, and led to the building offactories in Germany which could not otherwise have been built,which Germany has turned to good account in the present war.When France recalled these loans at the time of the Moroccotrouble...

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    · CHAPTER IIIThe Outbreak of the War in FranceThis long discussion of French banking before the war hasbeen necessary for an .understanding of the course of eventssince the war began.And it has been particularly necessarysince much of what has been written in America about Frenchbanking has been...

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    44EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGparties were insisting on bringing in the dreaded income tax,and additionalta~es on securities, asa: means of financing newsocial legislation wi thout further reliance on public loans.It isnot easy for an American or English student to understand h...

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    FRANCE45bankers took a ribald joy in this episode, recalling a similar occa-sion in 1911, when the Reichsbank had had to perform a similarservice for certain of the German houses!Bank shares in Francewere very weak during this episode and continued weak, suffer-ing heavily in the quasi-collapse t...

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    46EFFECTS OF THE WAR ON MONEY, CREDIT AND' BANKINGmitted, frightened sellers sought to turn their securities intoready money at whatever price they would bring.The phenom-enon was worldwide, and it will be more convenient to describemany of the international phases of it in connection with ouracc...

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    FRANCE47forming an official duty.But French financial papers continuedfor a time the discussion of their local problems, particularlythe new taxation on securities and incomes, and the causes otherthan Sarajevo affecting the bourse.On July 20Vienna had afurther heavy decline in stocks.It was July...

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    48EFFfCTS OF THE WAR ON MONEY, CREDIT AND BANKING7, represented a large enough volume of transactions to bereally significant.The following Paris figures will sho\v theeffect of the outbreak of the war on certain leading securities:June 25Three per cent rentes . . . . . . . . . . . ..83.65Russian...

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    FRANCE49was in serious danger.Industries of all kinds were furtherdemoralized. throughout France by the mobilization throughoutof a large portion of the labor force and by the commandeeringof railways for troop movements.It was impossible that theordinary processes of credit should go on under su...

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    50EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGalways a liquid asset, in better plight.Industry was demoralized;commerce ·at a standstill. Few merchants indeed-not to mentionthose in occupied territory-could liquidate their acceptances atmaturity.The pressure was most immediately felt at the b...

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    FRANCE51Banque de France (and the note issuing Banque de l' Algerie) ,raised the limit of note issue for the former from 6,800,000,000francs to12,000,000~000 and of the latter from 300,000,000francs to 400,000,000.These legal limits are always kept well.in advance of the actual issue.So far as th...

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    52EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGon deposits.They were weakened and they were frightened.Protected from the public by the moratorium, they still turnedfor additional safety to the Banque de France and turned theirrediscountable assets into cash on a great scale.The followingfigure...

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    FRANCE53that they can borrow what they need to meet their obligations,they will not try to borrow in excess of their needs.It isprecisely in such situations that more rather than less bank creditis needed.The banks of America in panics, hampered by absurdlegal reserve laws and lacking a central b...

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    54EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGhumbly and have profited by them.Surely we have little tobe proud of -in this matter prior to 1914.But it is exceedinglyinteresting to see a distinguished French financial authority pro-posing as a means of mitigating the absolute tie-up of Frenchd...

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    FRANCE55One obvious evil growing out of the moratorium, with itscomplete lock-up of deposits and of the bourse, was the inabilityof the government to rely on the usual machinery of securingloans.The funds needed for the war came for many monthseither from the Banque de France directly or else fro...

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    CHAPTER IVDepression and "Reprise des Affaires"In tracing the history of money, credit and banking in Franceduring the war, we shall give attention to certain large topics,some of which can be treated with considerable detail.Amongthese are the following: (1) The economic depression tha...

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    FRANCE57There are two main ways of guiding and controlling produc-tion and consumption.One is the method of private enter-prise, under which individuals and corporations, each seekingindividual advantage, move under the stimulus of rising pricesto those lines of industry where profits are greates...

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    58EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGcase under the system of private enterprise.Under the lattersystem the prices, summarizing the influence of many individualactivities, give a clue whose guidance the individual can followwith a good deal of confidence.The prices are wiser than anyi...

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    FRANCE59Among measures which have been used to greater or lessextent by all of the European belligerents, and most of whichhave been applied in the United States, we may mention thefollowing: moratoria, or informal substitutes for moratoria,twhich practically means a temporary pooling of assets a...

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    60EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGway with reference to international exchange rates, involvingcooperation of all the agencies concerned with gold shipments,imports and exports and ·public loans, as well as the diplomaticservice, and great private banking houses concerned with int...

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    FRANCE61German writers 1have made much of the contrast betweenGermany, the" labor state," and France, the" capitalist state,"the former living by her daily toil, resting on the firm foundationof goods and services currently provided, and the latter seekingvainly to live on pas...

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    62EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGlabor of virtually the \\Thole world would be needed to repairthe terrible wastes of the gigantic war.But this made serioustrouble for France in time.With the industrial recovery andwith the large earnings of women who had hitherto had theirexpendi...

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    FRANCE63and consciously planned industrial reorganization which Ger-many put into effect at the very· beginning. There was enough ofgovernmentalinterferenc~, as we have seen, at the very begin-ning, especially in connection with the moratorium.But themovement that followed was a reaction, an eff...

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    64EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGprice.Through December business was very inactive.Therewas much unemployment from the very outbreak of the war.The government as quickly as possible organized relief workand a free distribution of food-which was complicated byrefugees from northern...

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    FRANCE65per cent more persons were employed.January, 1915,showed43per cent more firms open than August, and 83per cent morepersons employed.Moreover, in August those firms which con-tinued open were at ·work only a few days in the week and afew hours a day.By January they were working full time ...

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    66EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGMeanwhile, scarcity of labor had been seriously felt at manypoints.Female labor was being largely utilized, especiallyinthe munitions factories.By the middle of1915 there was arecognition that~any more men were nee.ded in industry thanat the front....

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    FRANCE67of business after early 1915.The following figures are for them~nth of September for five leading roads (Etat, A.R., Ouest-Etat, P.L.M., Orleans, Midi) for 1913,1914,1916and 19).7:19130••••••••0••••••••••••••••••••••Fr.128,250,00...

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    68EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGLater figures for these items are:Unmatured1917billsJuly28Fr.559,000,000December6802,000,0001918February141,335,000,000August81,002,000,000MoratoriumbillsFr.1,194,000,0001,146,000,0001,124,000,0001,068,000,000These figures, especially when taken in...

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    FRANCE69but as a necessity, and this fact when viewed from that stand-point need not appear strange.It is somewhat strange, however,to find the French Ministry of Public Works appointing late in1916 a "Conseil Superieur du Tourisme," preparing for therush of sightseers after the war to ...

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    70EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGcredits to agriculture and industry has been carried further inFrance than in England and America because of the inability orunwillingness of the ordinary banks in France to extend suchcredits and that an appreciable part of the "advances to t...

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    CHAPTER VPrices of Commodities in France during the· WarGeneral index numbers, covering a wide range of com-modities, have not so far as the writer can discover been workedout forFranc~ for the first two years of the war.Beginningwith the third quarter of 1916the Bulletin de la StatistiqueGener;...

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    72EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGThe end of October, 1914,shows little rise in prices, exceptfor certain commodities where there had developed an abnormalscarcity.Chief among these were coal and sugar, both of whichcame largely from territory occupied by the Germans.The coalsupply...

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    FRANCE73April 24it states that wine had become cheap again through themarketing of the excellent 1914vintage.1Real estate prices werethreatened seriously by the protracted rent moratorium.Theprice of wheat was giving occasion for concern in May of 1915,and government control of supplies and price...

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    74EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGgeneral estimate of the rise of cost of living in its issue ofNovember 27 1as about 30 per cent-50 per cent in some partsof France.By early January, 1916, the sugar situation was really acute.2Official quotations of sugar were suppressed and the ac...

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    FRANCE75370384258297315339215229ing our average, and exports by one, we shall not be exaggeratingimports.The average rise in prices of exports and imports onthis basis then would be 80per cent, as compared with 1914prices, for the first three quarters of 1916.This tal\es noaccount of internal pri...

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    76EFFECTS OF THE WAR ON MONEY, CREDIT ANDBAN~INGOatsQuintals51,54151,82646,20634,62540,22334,462BarleyQuintals11,014-10,4379,7586,920 .8,3318,980Yearalso of the extent to which economies in consumption have beenmade use of, voluntarily or otherwise, by the French public.Weshall give some account ...

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    FRANCE'17far as she could.America with a short wheat crop had not theability to do as much'a~ in previous years, despite the restric-tions in America and the vigorous efforts of Mr. Hoover.Thenormal wheat consumption in France is 500 grammes per dayper person.As a result of desperate efforts, it ...

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    78EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGluxury in France.Throughout, the peasants appear to have beenthrifty.There are constant references to 'the hoarding of banknotes in France throughout the war as a matter involving bil-. lions of francs.Numerous other classes, particularly therentie...

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    FRANCE·79The question of causation involved in these price changes neednot detain us long here.We shall discuss the £eneral theor.yofwar time prices briefly in connection with American prices, wheredata are more abundant.The present monograph is chiefly con- .cerned with history, rather than wi...

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    80EFFECTS OF THE WAR ON MONEY, .CREDIT AND BANKINGThere is a further possibility that gold itself may havedepr~­ciated during the war, which would add a third cause to the risein French prices.This possibility should be entertained, sincecompetent writers have suggested it, but we shall elsewher...

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    FRANCE81Professor Charles Gide, writing in April, 1916,places the risein French prices at 35per cent, against a rise of 50per cent inEngland and a rise of 100per cent in Germany.Gide does notgive his sources.11For Gide's discussion, see Kirkaldy:Labour, Finance and the War, Lon-don, 1916, pages 2...

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    CHAPTER VIThe Effects of the War on the Medium of Exchange inFrance: Coin, Bank Notes and ChecksAt the outbreak of the war, gold money in France quicklydisappeared from circulation.France had had a large circula-tion of .gold coin and also a large volume of silver.The silverfranc and five franc p...

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    FRANCE83of the people.1Levy is undoubtedly one of the very best authori-ties on French money and banking.Giving no estimate for theamount of silver in circulation, Levy points out that the Banquehad about 700 million francs in silver at the beginning of thewar, of which it had let half, or 350 mi...

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    84EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGthat the bank notes fell in value below the value' of the bullioncontent of the silver coins, which at this time were worth asbullion much less than their nominal gold equivalent.Duringthe maintenance of the gold standard, the silver in France hadb...

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    FRANCE85that the bank notes depreciated ,at the beginning of the warbelow the value of the bullion content of the silver coins.The" metallist" theory probably gives a virtually correct accountof the greenback episode, though there are complications eventhere.The" metallist" th...

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    86EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGresources to enable them to sleep at night.They needed some-thing which was instantly convertible in the market into any-thing which they might happen to need-food, railway ticketsif flight should be called for, or, if they chose, unusual bar-gains...

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    FRANCE87knowledge in France.Indeed, it is not strictly a'matter of legaltheory in France.The silver is not redeemable by law in gold.Indeed the notes of the Banque are legally redeemable in silveror gold at the option 'of the Banque and the Banque does even inordinary times sometimes protect its ...

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    88EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGand partly in legal tender currency notes. The chambers of com-merce in various parts of France issued early paper currency indenominations of fifty centimes and one franc, which took theplace of small silver.These chamber of commerce notes weresec...

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    FRANCE89already been made to the proposal of Raphael-Georges Levy in1914shortly after the outbreak of the war that bank depositsbe mobolized by means of checks" good only through the clear-ing house" accompanied by the use of clearing house certificatesto be used in payments between the...

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    90EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGquite as dangerously as notes when banks cease to meet theirgold obligations and when they surrender their lending policyto the fiscal needs of the state.There is no magic in the checkand deposit system.It is not a substitute for sound finance.The ...

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    'FRANCE91instrument.Le Temps proposed toext~nd the law againstwithdrawing funds after giving a check to cover the case ofstopping payment on checks, making stopping payment a fraud.!There is sufficient evidence in this new legislation and in thisnaive attitude ofLe Temps that the check is not a f...

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    92EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGEnglish and American banks, and in July, 1917, this was consoli-dated with the old organization in the new Chambre de Compen-sation, which includes all the important banking houses in' Paris.Its operations are limited, however, and the overwhelming...

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    CHAPTER VIIFrench Fiscal Methods during the WarThe financial expedients of a state in war time may be listedunder five main heads:I. TaxesII. Long time bond issuesIII. Short time Treasury loans issued in anticipation ofreceipts from taxes and long time loansIV.' Direct advances to the state by a ...

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    94EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGthe demand of the state for goods and services increases.Thedifficulty in applying this plan grows out of the pre-existingfabric of debts and credits which would promptly be thrown intochaos by any such drastic reduction of private incomes as theta...

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    FRANCE95loans, issued in anticipation of taxes, to be taken largely by thebanks.The advantage of such short time financing is, first, that'Ithe state gets its money at once and so may take its time in pass-ing tax laws and collecting taxes; and second, that an easy moneymarket is created by the e...

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    96EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING1916 and 1917 this was clearly true in the lJnited States, asshown by figures for railroad gross receipts, bituminous coalproduction and other indicia, but by the middle of 1917 progressslowed down decidedly.The country had nearly reached itsmaximu...

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    FRANCE97By the end of 1914the yield of existing taxes was 38%0per cent below normal.Monthly figures for many months there-after show heavy deficits.September, 1916,was the firstmonth in which the tax yield got above normal.The revenuesfor September, 1916,were 346,000,000francs, 49,000,000abovenor...

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    98EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGta:¥:ation in the United States, the showing is very poor.1Forthe first two years of the war a valid defense for it exists in thefact that nothing else was politically or economically possible.Beginning with the summer of 1916,however, it would se...

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    FRANCETHE LONG TIME LOANS99Early in 1915 provisions were made for the issue of long time"stock," but it was not until the fall of 1915that long timefinancing on a large scale was undertaken.In November of thatyear, a great loan was floated.This was a 5per cent issue andwas marketed at e...

  • Page 108

    100EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGof the French Government.The next great loan was in Novem-ber, 1917.This time a 4per cent perpetualrente was issuedat 68.60.The total subscription was 10,250,000,000francs orabout $2,051,000,000.As before, a substantial part of the loanwas paid in...

  • Page 109

    FRANCE101Following the loan of November, 1916, the advances to thestate in the Banque's balance sheet were reduced from 8,600,-000,000to 6,600,000and notes were also somewhat reduced.The effect 'of the loan in the fall of 1917upon the Banque'sbalance sheet was less clearly marked, but there was a...

  • Page 110

    102EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGThe following tables, prepared by Professor E. L. Bogart,!are the most authoritative summary the writer can find of themain elements of French war financial history:EXPENDITURES IN FRANCE, AUGUST 1, 1914-DECEM·BER 31, 1917(In millions of francs)S...

  • Page 111

    FRANCE103interest charge alone would make up a large fraction of the pre-war national income while a rapid reduction of the principalwould seem to be an impossibility.We have~ere presented inthe case of France a problem that all the belligerents and manyof the neutrals are considering very solemn...

  • Page 112

    104EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGmade by France during the war to her allies are much less thanher borrowings in other countries unless it should develop thatFrench advances to the United States Government in 1918and1919turn the scale.It is far from safe of course to abstract fro...

  • Page 113

    CHAPTER VIIIThe Banque de France during the WarAt various points in the foregoing chapters· reference hasbeen made to the part played by the Banque de France in thefinancial drama of the war. It may be well at this point, however,to summarize some of these points and to deal with the mattersomew...

  • Page 114

    106EFFECTS OF THE WAR ON ¥ONEY, CREDIT AND BANKINGforced to exercise control over external shipments of gold hasapparently never refused to meet lawful calls for gold over itscounter. The Banque de France, however, following what seemsto be not only the French but the general continental traditi...

  • Page 115

    FRANCE107States.This gold is still counted, however, in large part atleast, as part of reserve of the Banque, though separately men-tioned in the statements of the Banque since June 8, 1916,as"gold held abroad."On June 8, 1916,the reserve stood:silver, 350,000,000;gold in vaults, 4,676,...

  • Page 116

    108EFFECTS OF THE W ARON MONEY, CREDIT AND BANKINGseems not wise to use the gold reserve freely to protect theforeign exchanges.He suggests, but does not state that theeffect would be insufficient.There may have also been in the minds of statesmen andfinanciers, not only in France but in Germany ...

  • Page 117

    FRANCE109stood on the day in question at 34,477,000,000 francs or nearly$7,000,000,000.To many writers this great expansion of the notes of theBanque de France and this huge figure for advances by theBanque to the state have seemed portentous of shipwreck forFrench finances and have seemed to rep...

  • Page 118

    110EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGin France has been in the form of notes, as we have in part seenin the section dealing with the outbreak of .thewar, and as willbe made clearer in the section on private banks in France.Everyprivate bank whose accounts the writer has examined, wit...

  • Page 119

    FRANCE111been paid off, declining from a maximum of 3,771,000,000onNovember 12, 1914,to 1,068,000,000francs on August 8, 1918.The unmatured bills or commercial discounts have risen froma low of 244,000,000on January 28, 1915,to a high of1,335,000,000onFebruary14,1918,decliningagainto1,002,000,000...

  • Page 120

    112EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGThe maximum of advances of the Banque to the state on the1 per cent interest basis was raised to 21,000,000,000francs inJune, 1918.1Since early in 1917 the question of the renewal of the exclusiveprivilege of the Banque de France to issue notes in...

  • Page 121

    SELECTED ITEMS FROM BALANCE SHEET OF BANQUE DE FRANCE,1914 TO 1918(In millions of francs)191419151916191719180ex>aQt-oao~0':)~?'"1?""4~~~~t-~?""4t-eo~t-eo~.0Q)>.cl'i:Q)...>.dQ)...>.0Q)i>.0Q)~~s::0-s::frs::s::Q)~"3~0-~Q)0v~0v~v0v~::s~......................

  • Page 122

    CHAPTER IXPrivate Banks and Savings Banks in France during the WarIn earlier sections we have described in detail the characterand operations of the great French private banks.We haveseen that to a large extent their deposits represent actual savingsby their depositors instead of being the conseq...

  • Page 123

    FRANCE1158206896188069911,1911,6711,5582292281981924324064504332,5632,6533,0403,1006997058839641,2061,2461,4971,465182021183297432,8972021,567ASSETSCash in vaults and in thebanks.Portfolio.Portfolio and national de-fense bonds.Advances on collateral andreports.Current accounts.Total assets.LIABIL...

  • Page 124

    116EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGCOMPTOIR D'ESCOMPTE(In millions of francs)3341,3491541552,2403601,3381541582,2652789161391251,7554065981721311,4913863552241791,3471379662351481,826191319141915191619171918ASSETSJan. 31 Dec.31 Sept. 30 Dec. 31 Dec. 31 Mar. 31Cash in vaults and in ...

  • Page 125

    FRANCE117July 31, 1917Fr. 34,000,00040,000,00027,000,00073,000,00023,000,000250,000,00010,000,00013,000,00028,000,00059,000,00024,000,00028,000,00031,000,00038,000,00075,000,00079,000,000117,000,000 169,000,00040,000,00055,000,00061,000,00078,000,00036,000,00044,000,00054,000,00071,000,00052,000,...

  • Page 126

    118 EFFECTS OF TH,E WAR ON MONEY, CREDIT AND'BANKINGIn only one respect do these bank figures resemble those ofthe other private banks considered and that is in the decline ofacceptances.Bank acceptances, so prominent in France beforethe war, have evidently become a matter of minor importance.It ...

  • Page 127

    FRANCE119prices at the same time that the securitie,s held by these institu-tions were declininghea~ily in price on the bourse.Whateverthe causes involved, the clear tendency in France, the UnitedStates and Great Britain has been for commodity prices to riseand for securities of a fixed yield to ...

  • Page 128

    120 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGIn' June, 1915,it was still necessary to limit withdrawals tofifty francs per book per fortnight, and withdrawals still sub-stantially exceeded deposits.In May, 1917,deposits and with-drawals were substantially equal, deposits being 16,563,000fra...

  • Page 129

    FRANCE121come from the mortgages in occupied territory has been of courseshut off.1On the whole, however, the Credit Foncier has seemedto weather the storm.I ts profits in 1916were 12,594,000francsand its dividend 25francs.In 1917its profits were 15,805,000francs and its dividend 30francs.2Early ...

  • Page 130

    CHAPTER XThe Moratorium in FranceIn an earlier chapter dealing with the outbreak of the war wehave seen how rigorous a moratorium was established in Franceand have seen something of the difficulties occasioned thereby.A distinguished French financial authority expresses the opinionthat in the abs...

  • Page 131

    FRANCE123bank clearings, of shifting of loans and of checks betweenbrokers and brokers or between bankers and brokers.There aretimes when it may be characterized almost as a nuisance in thesheer physical magnitude of the mechanical operations whichbank clerks, stock exchange clearing house clerks...

  • Page 132

    124 EFFECTS OF THE WAR ON MONEY, CREDIT ANDBANKINGquarter paid in), which should supply the third signature forreports.Nothing seems to have come of this.By July, 1915, the difficulties had become greater through thedecline of therente} which had dropped to 69.95, and of theRussian 5's of 1906, w...

  • Page 133

    .FRANCE125August 29,this was raised to 250francs plus 20per cent of thesurplus; on September 27, to 250fr~ncs plus 25 per cent ofthe surplus.By Ribot's new statement, it was raised to 1,000francs plus 40per cent for November, and 1,000francs plus 50per cent for December.This decree represented, o...

  • Page 134

    126 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGIn our section dealing with the outbreak of the war, theopinion was expressed that at every stage the moratorium legis-lation went too far, that, even granting the necessity of extraor-dinary remedies, no such rigid restrictions were called for.C...

  • Page 135

    CHAPTER XIThe French Bourse during theWarIn our chapter on "France at the outbreak of the war,"attention was centered on the bourse. The list of securities dealtin there had been weakened by prewar speculation and depres-sion.We have seen how largely they consisted of second rateissues ...

  • Page 136

    128 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGIJ:'li.I:; r i'I\IIIJIiC3SC 1)DN '.. 01<3>tOO.l"EII1/~I)1'\0800000000(:)000coao~C't)C'iI:3~VHS ~3d SONV~.:Iooo....(:)

  • Page 137

    "%J~Znt%JIe'~ICII~,""L~..-'--'-J:.._'-I,,~~.~IA~"-~L.TISff.;~("iiiOo"-~-·I-r-TR.....,.,.-100•.DtLtJ=I I IJ: I I I I I I J I I I I I I 101 I I I I I I I I 1·1 I I I I I I I Ir--........"'-1/_l7¥uoW<IIIIII1III1IIIII1III1I1IIIIIIIIIIIIIII~'~."I'c~I~-II...

  • Page 138

    130 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGneither of which has been seriously affected directly by theGerman invasion.On the whole, the rails show less decline thanthe private banks.Rio Tinto, a famous Spanish copper, dealt in on the Londonexchange as well as on the Paris bourse, is fair...

  • Page 139

    FRANCE131known authority on French securities, gave out a reassuringstatement on the inability of a great state to remain bankrupt.Lloyd George made the British Government responsible for theRussian Treasury bonds and commercial bills discounted underthe commercial treaty of 1915between the Bank ...

  • Page 140

    132 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGpoor people.The Russian loan of January, 1914,had beenexpressly sanctioned by the Finance Ministry on the ground thatit was to be used for strategic railways.The total burden ofinterest on Russian securities would be about a billion francs ayear,...

  • Page 141

    CHAPTER XIIFrench Foreign Trade and Foreign ExchangeIn a large way we have already outlined 1the course of theforeign trade relations of France during the war.From thebeginning of the war, France has bought increasingly from for-eign countries more than she has exported, and there has been aconti...

  • Page 142

    134 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGOn April 14, 1916,there was an agreement made between theFrench and English Governments dealing with foreign exchange.The Banque de France through the Treasury was enabled to takecontrol of the situation and it steadily improved.The chieffactors ...

  • Page 143

    FRANCE135her imports.Relying on foreign trade to supply her with thenecessities of the war instead of seeking early to make herselfself-sufficient in those matters, she had had a revival of theproduction and export of luxuries with which to· pay for~heimport of necessities.This policy, seemingly...

  • Page 144

    136 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGTo this 23,342,605,000francs must be added large sums placedwith English investors both through private agencies and directlyby the French Government in connection with the great loans,and various smaller loans in Norway, Spain and other countrie...

  • Page 145

    FRANCE137its low point at about the same time.The problem of Russianexchange has been a serious concern for France from the be-ginning.In February, 1915,the finance ministers of GreatBritain, France and Russia met in Paris for the purpose ofuniting the financial resources of the Triple Entente, c...

  • Page 146

    138 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGthe American armies in France have made large expenditures inthat country which have necessitated the securing of Americancredits in France.The details of this operation can not atpresent be stated.It is probable, however, that the rapid ex-pansi...

  • Page 147

    FRANCE139tribute both to the prestige of the French financial system andto the loyalty of Lombard Street.France has perforce leanedheavily on England in dealing with the exchange problem.SinceMarch, 1917, of course, it has been almost wholly Americancredits which have sustained both the pound and...

  • Page 148

  • Page 149

    PART IITHE UNITED STATES

  • Page 150

  • Page 151

    CHAPTER XIIINew York at the Outbreak of theWarThe outbreak of the war found the United States with a verysafe credit position.Trade was dull, merchants and bankerswere moving under shortened sail, no great newent~rprises hadrecently been un.dertaken and the general situation was thor-oughly solve...

  • Page 152

    144 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGEuropean investors were becoming more cautious in their pur-chase of American securities and the United States were increas-ingly obliged to provide their own capital for industrial develop-ments.As a debtor country accustomed to borrowing largel...

  • Page 153

    THE UNITED STATES145ing finance time bills on London in payment for imports whichthey liquidate later by documentary bills 1drawn on London,connected with our. heavy autumn exports.During July, 1914,the usual volume of these short term finance bills had been drawnand there was a large volume ·of...

  • Page 154

    146 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGLondon and of the necessities of urgent purchasers anxious tohonor their obligations in London.In this unprecedented situation, the New York stock exchangewas forced to close. . In all its long history this institution hasbeen closed but once bef...

  • Page 155

    THE UNITED STATES1471905, 263,000,000; in 1901, 266,000,000.A number of otheryears had approached 1909in magnitude.One must go back to1897to find a year in which share sales were as low as 1913.The volume of stock collateral loans on /June 30, 1914,inNew York City banks was substantially larger t...

  • Page 156

    148 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGThe general averages also showed startling declines.Twenty-five typical railway stocks had an average price of 78.18at theend of June, 1914.They declined to 6u.78for their closing pricein July.Twenty-five typical industrial stocks which had a clo...

  • Page 157

    THE UNITED STATES149further cause for a drain placed the banks in a difficult positionwhen it came to providing funds to sustain the market.The closing of the stock exchange was necessary.Had itremained open another day, the break in prices would have beendisastrous.The margins protecting collate...

  • Page 158

    150 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGcash reserves in addition to the calls from Europe for gold.During the week ending J'uly 31,the clearing house banks andtrust companies in New York lost $56,000,000in cash reserve,of which $20,000,000represented withdrawals by American andCanadia...

  • Page 159

    THE UNITED STATES151they were accepted readily by the people.Banks paying themout were enabled to retain their gold and" lawful money" asreserve.In all, 2,197of the 7,600national banks became mem-bers of the currency associations which issued these notes.Thetotal amount of the Aldrich-V...

  • Page 160

    152 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGThe general situation regarding commercial credit in theUnited States has been on the whole surprisingly satisfactoryduring the war.The outbreak of the war led to a substantialincrease in failures, as was to be expected-22,000 in 1915 asagainst 1...

  • Page 161

    CHAPTER XIVGold, Foreign Trade and Foreign ExchangeWe have seen that New York had been subject to heavy drainsof gold for some time before the war.The excess of exportsover imports ofgq~d in 1913was over $28,000,000;to the endof June, 1914,it was $84,000,000;and for the whole of "1914,$165,0...

  • Page 162

    154 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGo:--+--+--+--+--t-~ If)-+--+--+-+-~m_"'--+--+-+--1rl,...-;--+-+--+--+-+--I---It'-1-+-i--+--+--+-+--I---I m-+-+-+--+--+-+-+--frl~a:::o>-~WI-+--+--+--+--+--+-~ ~ Z-+--+--+--+--+--+--+-~mZ__-+--+---+--+--+-+--1 .-(W!<0::-I-J<{Uto~lN3~ ...

  • Page 163

    THE UNITED STATES155gold at a rate never dreamed of before.In 1915 the excess of. imports over exports of gold was over $420,000,000; in 1916over $520,000,000 and in 1917 over $180,000,000, a net gainfor the three years, 1915-1917 inclusive, of $1,111,000,000 ingold, and a gaIn of more thana bill...

  • Page 164

    156 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGin the marvelous mobilization of the industrial resources ofAmerica.!Foreign demand, directed first toward grains and munitionsin the fall of 1914, gradually spread over a wide range of Ameri-can products; while domestic d'emand from the industri...

  • Page 165

    THE UNITED STATES157this rapid expansion went on is indicated by the following tableshowing the ratio of foreign to domestic trade: 1Per cent19109.9191111.4191211.61913'. . . . . . . . . . . . . . . . . . . . . . . . .. 11.5191411.71915;11.4191617.9191713.7191813.4The apparent decline in the ·ra...

  • Page 166

    158 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGourselves with an effort to estimate the main factors involved inprotecting the exchanges in New York and in paying for thegreat excess of American exports and with comment upon ·someof the more interesting episodes in the history of these rates...

  • Page 167

    116112lO81!~104100I~N96921~188884 I~m~t80IQIIII~7612 1aL~68 IMILAN64-0---0--""9-60561VIENNA-oo--o-~-52484440IPETROGRAD36----------3228\EXCHANGE RATES IN NEW YORK ON BELLIGERENT COUNTRIES.841 1I 1I I I'Lr\920_------n,76"481 I 1 1 1 I I I I I I I I I fI I I I I I I I I I I I I I I I ...

  • Page 168

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    THE UNITED STATES. 159A different estimate by Mr. O. P. Austin, statistician of theNational City Bank of New York, would place the securitiesbrought back from Europe to America at between$3,000,000,000and$4,000,900,000.1The following tables prepared by the statistical department ofthe National Ba...

  • Page 170

    160 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGoutbreak of the war turning favorable to New York in all casesby March, 1915.With the exception of the rate on Yokohama,none of the rates on belligerent countries have been above parsince that date.The course of French exchange we havedi~cussed i...

  • Page 171

    lJ\unl'\"'~1:". 1"\1'\11;." Irt 1'1;."1 VI"\l' VI'nl:.u Inl\L. vvun I rUI:.;), f\L.;)V vnll.. t:.I'\l'f ~I'\II:.;)vr LlVL.L.I'\J"'( CJ\",nl\l~UCo VI~ nCoYY IVrU\,,,,,,,,,,,,,,,,,,,,,,,,,,,i,,,,,,,I188184180 IVALPARAI80176 ........-0-1721681641601561 MADRID1...

  • Page 172

  • Page 173

    THE UNITED STATES161The case of Spanish exchange is particularly interesting.Sofar as our direct trade relation,s with Spain are concerned, thebalance of trade is favorable to us.We export to Spain morethan we import from her.But the British and French Govern-ments were making heavy purchases in ...

  • Page 174

    162 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGto par, as shown by the fact that there was a premium of 5pe'rcent on Spanish exchange in September, 1916,at a time whenit was still possible to ship gold to Spain.It is interesting tonote, however, that French gold coin has currency rights inSpa...

  • Page 175

    -~-"'f1II,,)-- ~I,/I1'I)~IIt\, "'III\<- ..I,~.II,1,\I"'I..!,...-oIJ"II~}.'H-< ...., 11'.....',III["_J.:~II f1"-V .~ 1/, IIiT:1 ,,r/:IJ.J~;ij',1/IJ"/1\1/,1~\vIII11If\1 J,,I,1I)--'-.---,>-- .IJ'/,' .."1\I\.-,.- ,\~I1\I\1~111I\I1\IIIII',/i'IiI\\, fJ '...

  • Page 176

  • Page 177

    THE UNITED STATES163in the London price of silver and the exchange rates on Shanghai,Hongkong and Bombay.The average price of silver in 1913inLondon (60.458cents per ounce, British standard 0.925fine~ 1is taken as 100per cent, and the movements in the London priceof silver, indicated in 'our char...

  • Page 178

    164 EFFECTS OF THE WAR ON MONEY; CREDIT AND BANKINGsecurities.A large volume of these new federal reserve banknotes has appeared in circulation. The act further provides thatthe government shall later repurchase silver and restore the silvercertificates to circulation.Even before the act providin...

  • Page 179

    CHAPTER XVThe Federal Reserve System during the WarThe task undertaken in this study has been to set forth theeffects of the war upon money, credit and banking, rather thanto write a comprehensive history of developments in money,credit and banking during the war.A large volume would berequired t...

  • Page 180

    ·166 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGBut the federal reserve banks in the great financial centers werenot rediscounting enough to enable them to pay dividends throughpractically the whole period prior to the entrance of the UnitedStates into the war.The existence of the system, of...

  • Page 181

    THE UNITED STATES167the federal reserve system, as jocosely suggested by a distin-guished financial writer, in the class of the" profiteers."The following table 1shows the growth of the system:PRINCIPAL RESOURCE AND LIABILITY ITEMS OF THEFEDERAL RESERVE SYSTEM ON SELECTED DATES(In thous...

  • Page 182

    168 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGstrength for the system, is to be found in the increase in goldon the assets side, matched by the growth of federal reserve notesand member bank deposits on the liability side.The total stockof gold coin (including bullion in the Treasury) in the...

  • Page 183

    THE UNITED STATES169as from two to five hundred million, though these figures are .largely guess work.If this view be true, however, then theproportion of gold held by the federal reserve banks is substan-tially greater than two-thirds of the total stock.It representsan accumulation which should ...

  • Page 184

    170 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING. member banks, we have an achievement in the direction of soundbanking of the first magnitude-we have virtually an abandon-ment of the legal reserve requirements, since, it is almost alwayspossible for member banks to get additional " legal...

  • Page 185

    THE UNITED STATES171Treasury the best places wllere government deposits might bemadeto offset heavy drafts.It has also involved the policy ofrediscounting on the part of one federal reserve bank for anotherin such a way as to keep their gold reserve ratios approximatelyequal.The Treasury policy o...

  • Page 186

    17~EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGby the old machinery.It is a supreme vindication of thefederal reserve system.Another important part of the work of the federal reserve'system has been in the control of credits, both in reducingcredits to non-essential industries, and in securing...

  • Page 187

    THE UNITED STATES173Those who have carried out the detailed application of the goldpolicy have been loath to discuss~he matter in detail, and havebeen unwilling that much should be said in public discussion ofit, fearing that their international operations, involving delicatenegotiations with for...

  • Page 188

    1'T4 EFFECTS OF- THE WAR O·N MONEY, CREDIT AND BANKINGthat paper money in the United States has been so far maintainedat par in most places during the past year, but such a basis for thevalue of paper money is insecure.Overnight changes in theattitude of the people or banks might upset it; a dra...

  • Page 189

    THE UNITED STATESalization growing out of fluctuating irredeemable paper moneyor the adoption of the silver standard.It is not a picture toinspire enthusiasm when one sees our federal reserve system,entrenched safely behind over $2,000,000,000of gold, showingless of courage than President Clevela...

  • Page 190

    176 EFFECTS OF THE WARON MONEY, CREDIT ANDBANKINGfinancial strength, but is surely showing a lack of financialfinesse and courage, so far as the gold policy is concerned.1In connection with these strictures on what we have called" the Federal Reserve Board's gold policy," it is just to ...

  • Page 191

    THE UNITED STATES177the failure to redeem the money of the government in gold, thepaper money itself should depreciate, that again would lead tohigher prices, to larger expenses for the government, to saynothing of great demoralization in the whole business and finan-~cial fabric.Finally, it is p...

  • Page 192

    178 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGmade.The various federal reserve banks have establishedbranches and agencies at home and abroad.The Banque deFrance and the Bank of England have become agencies of thefederal reserve bank of New yark.The Philippine NationalBank has become the age...

  • Page 193

    $12,725,340,849a1917-18$1,995,886,3598,964,443,4851,609,178,03638,295,75023,739,09993,454,000344,120Daily$2,577,7652,708,4062,347,5452,719,9863,680,7364,776,8016,719,323.8,949,61311,337,76814,904,69017,098,40119,719,272CHAPTER XVIPublic Finance and Bank CreditThe entrance of the United States int...

  • Page 194

    180 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGThe rapid developments in the plans of the American Govern-ment, coupled with the unexpected intensity and magnitude ofAmerican participation in the war in the summer of 1918, hasled to a substantial growth in the expenditures of the government,a...

  • Page 195

    THE UNITED STATES181This table was prepared before the actual revenues were col-lected in 1918.Approximately correct for customs and approxi-mately correct also for actual receipts for internal revenues, asshown in the report of the Treasury Department of September14,1918(when collections of $3,6...

  • Page 196

    182 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGYet another important source of income for the governmenthas been in the sale of war savings stamps and thrift stamps,designed to reach the smallest savings.The total receipts fromthis source/ by October 23, 1918,were $807,222,544.The explanation...

  • Page 197

    THE UNITED STATES183banks the short term ·advances made.In part, too, the Treasurycertificates have been taken by large tax payers or prospectivepurchasers of large blocks of liberty bonds, and these Trea,surycertificates have been accepted by the government in lieu of cashin payment of taxes or...

  • Page 198

    184 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGgreat danger was that taxes would be too light rather than thatthey would be too heavy.1'Among the arguments which have been offered against theemployment of loans and bank credit in financing the war hasbeen the contention that such a policy, le...

  • Page 199

    'ITHE UNITED STATES185ist" theory would have banks do in a great emergency.It iscertain that if banks refused to expand their credits in times ofstress, we should have demoralization and chaos-as has beenabundantly exemplified in our discussion ofw~r time conditionsin France.It will be inter...

  • Page 200

    186 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGextent of over two billion dollars they represent gold transferredby the other banks to the federal reserve banks, and on the lia-bility side, viewed from the standpoint of addition to the circu-lating currency of the country, the only items in t...

  • Page 201

    THE UNITED STATES1871918MEMBER BANKSIN ALL 12 DISTRICTS12(A~\ot=<a:RATIO OF LOANS AND INVESTMENTS (OTHER THANU.S~·GOV'TLO~G TERM SECURITIES)·TO. DEMAND DEPOSITS (INCLUSIVEen OF U.S.GOV'T DEPOSITS) OF REPORTING MEMBER BANKS.z:ac:~:s~~f~:)~gS ~~~~:=0:1C:I....CI#)0Z0.....= ~ "CII~=:llI=::....

  • Page 202

    188 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING1918EARNING ASSETS OF REPORTING MEMBER BANKSAND PROPORTION OF EARNING ASSETSREPRESENTED BY U.S. OBLIGATIO.NS40 12"FENTIRE 12 DISTRICTS~"...,NEW YORK DISTRICT30920 6(E).(A)u.s. BONDB OWNED10 3gB)U.S. CERTIFICATES 0INDEBTEDNESS OWNED~ (C)...

  • Page 203

    THE UNITED STATES181)sions of credit by these banks in connection with war finance hasbeen in the short term certificates of indebtedness, issued by theTreasury in anticipation of loans and taxes.These have risen,as we have seen, to large proportions preceding loan or tax pay-ments, and have decl...

  • Page 204

    190 . EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGwhich would be most objectionable and which would have thegreatest tendency to raise commodity prices.The essential thingin connection with war finance is that it shall provide a mechan-ism whereby the current flo\v of goods and services in the...

  • Page 205

    THE UNITED STATES191Treasury, the banks and the stock exchange has since beenexerted in Great Britain not only over the issues of new corpora-tion securities, but also over ordinary loans at the banks.Thiswas particularly easy in Great Britain since a small' number ofgreat joint stock banks with ...

  • Page 206

    192 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGowned by the United States Government.It has a twofold func-tion.One function is to continue the restrictive activities of theearlier Capital Issues Committee, passing upon and limiting newsecurity issues.The other, supposed to be of special impo...

  • Page 207

    THE UNITED STATES193banks, and would give them in return its own securities whichwere eligible as collateral at the federal reserve banks.Inexceptional cases,t~e War Finance Corporation was authorizedto make advances directly to essential industries, including sav-ings banks and public utilities,...

  • Page 208

    194 EFFECTS OF THE WAR ON MONEY, CREDIT AND' BANKINGhave taken care of itself in view of the extension of such aid aswas necessary by ordinary banks, and in view of the interrup-tion of the downward course of investment bonds since D'ecem-ber, 1917.The too great complexity of the machinery has ma...

  • Page 209

    THE UNITED STATES195October, 1918,and especially by a ruling that banks shouldrequire a margin of 30per cent on collateral loans made to stockbrokers where an average of 20per cent had been previouslyrequired.1There has thus been an admirable dovetailing of efforts onthe part of individual banks,...

  • Page 210

    CHAPTER XVIIPrices in the United StatesNo subject in the course of the war has been more eagerlydiscussed, whether by economists or by the masses of the people,than that of rising prices.There is a school of economists whohave seen the whole cause of rising prices in the policy of thegovernments ...

  • Page 211

    THE UNITED STATESlSl7of the civilized world, have been taken out of industry and put towork in the most destructive kind of consumption of the productsof industry.Another and larger number of men have beendiverted from the production of goods for ordinary civilianconsumption to the production of ...

  • Page 212

    198 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGItis believed fair and conservative to conclude that these elementsequalize-if they do not increas,e-the proportion of war workers to morethan 50 per cent.1In these facts, we have an adequate explanation of the rise incommodity prices without asc...

  • Page 213

    THE UNITED STATES199WHOLESALE PRICES IN THE UNITED STATES AND CERTAINFOREIGN COUNTRIES 1(Index numbers expressed as percentages of the index number for1913)b100b102h109b113b127b153b167b142b138b137b138b139b14010110199102103108111112127132132138154160163169177179179181179179183187190194199199204207...

  • Page 214

    200 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGThe agreement between the two index numbers for GreatBritain is startlingly close.The divergence among Americanindex numbers is somewhat greater, Gibson's showing the great-est rise by June, 1918,and Dun's the least increase by thatdate.The Annal...

  • Page 215

    THE UNITED STATES201We shall distinguish four ideas which have been to a consid-erable extent confused in current discussion of price changes:(a) A general rise in prices(b) A rise in commodity prices at wholesale(c) A rise in "cost of living"(d) A fall in the value of moneyBefore one c...

  • Page 216

    202EFFECTS OF THJ;: WAR ON MONEY, CREDIT AND BANKINGfairly constant relation to money.Some commodities may fallin value and consequently in price, but other commodities will belikely to rise in value and consequently in price, and, in the greataverage, changes on the part of one commodity will be...

  • Page 217

    THE UNITED STATES203happened rather is a transformation in the price system, underwhich certain prices have risen and other prices have fallen.Labor and its current products, scarce and dear, have risenmarkedly under the pressure of war demands; stocks, bonds andreal estate and other long time in...

  • Page 218

    204EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGfrom this war time cause, has offset the tendency to decline in thevalue of gold in the United States, caused by the increasedquantity of gold.Parenthetically, it may be noticed that price changes in dif-ferent parts of the world seem to have had ...

  • Page 219

    THE UNITED S"TATESCOMMODITIES AND SECURITIES~05The story of pricech~nges in the United States is not completewithout an account of the course of the stock market.Thefollowing chart exhibits the relation of stock prices to com-modity prices during the war.It will be observed that stock prices...

  • Page 220

    105210205,100200COM~ ODITIES AND STOCKS."195V"~..95190-)1\.",.-. '185Jf'./II\, ,. ......'90180.....I1\,I175I,J1l/r":Vr".1/I"85170165~f\ )j\,/I'II ,Vl'.80160rJ,r\155I,\75150,'",.........I-V145i'"\r\V,1\7"""""'/70 tJ)140"'I.........

  • Page 221

    THE UNITED STATES207Id3S• IfII"\\'£lnY,,I"1nr''II\I3Nnrex:>u .. ~:i\en\1'YelY~1/'YYNI'03.:1,\'Nyr'"-,'33Q\'AON:II~.'"'1/'130'JII"ldlS7// II'£lnYI~,nnr'"I~1/~3NnrenI"~~71--1---"VW\~I-1-- 'YdYI'I~~~],I--~'YVN1\~f- 1--1--'83.:1f/~11V::;)~...--...-- 'Nvr...

  • Page 222

    208 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGstocks.Prices remained low until May, 1915,when there beganan extraordinary rise in the industrial list, chiefly connected withthe "war babies," or stocks of corporations which were bene-ficiaries of the European demand for munitions an...

  • Page 223

    THE UNITED STATES209the price of all stocks, while rumors of the entrance of theUnited States into the war led to a further drastic decline, andthe end of the year saw stocks lower by far than they had beenat the beginning of the year.Early in 1917, the renewal ofGermany's submarine warfare and t...

  • Page 224

    210EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKINGIn 1918stocks rose during the early months, were depressedin March, April and May under the influence of the terribleGerman drive, and subsequently rose fairly steadily to the endof October,. discounting successful peace.The increase of rail-way r...

  • Page 225

    APPENDIX

  • Page 226

  • Page 227

    APPENDIX213LONDON· STOCK EXCHANGE VALVES 1(In thousands of pounds sterling)289773o6289128919469126°22938755623753o9261438715BritishBritishBritishComm.ShippingSouthTotal ofandRy.Ord.BankInd.Shares.Africanall Se-IndianStocks.Shares.Shares.(ParMines,curities.Funds.(Par(Par(ParValueetc.(Par(ParValu...

  • Page 228

    214APPENDIXPRICES OF BRITISH WAR LOANS 1IJ~2%4lh%5ro4%CONSOLS1925-281925-45'1929-471929-42Jan.31, 1914"""'T""'.... · .........••••••II••••••II••••75%-76Feb. 28, 1914..................••IIII••••••••II••••••...

  • Page 229

    GOLD IN VAULT, BANK NOTES IN CIRCULATION ETC.,ILOFTHE BANK OF ENGLAND, SINCE THE OUTBREAK OFTHE: WARIL0(1)Oenen a::en a::z<~~0.J-.J-..J.Jo..Jo:0:0~I:IElloeI \1100I\I\1000\1000\j"-. /900/I\900\I\,\I\800I,,800II\.v\./~/.........I1\,"I'\./,- --700il\...:-.\.--'"700,.,II\J\,~\./\.\I...

  • Page 230

    664321.,j~-II\~~ ~iIII..,~~,......... ,-~'""I\II~...'" -~~-\1\1/\\r......\J~1I,............1I",~J .......J~\IIJ~, ",r, \/~J\I, ,tv~~>~~t%jZtjH:><o1914STATISTICAL DEPARTMENTBANKERS TRUST CO.,N. Y.19151916LONDON MARKET RATE(90 DAY BILLS)19171918

  • Page 231

    11-~J~~~;~~~~-InluI."JI1l""I \ III, ,I \1'.,.4'!I,~•.-r876~5~4321o19148TATISTICAL DEPARTMENTBANKERSTRU~aT CO~. N.l.1.915~916LONDON CALL RATi'19171918>~~~Zt:1H)<~~~~

  • Page 232

    GOLO IN VAULT, BANK NOTES IN CIRCULATION, ETC.,enOF THE GERMANREICHSBANK~ SINCE THE OUTBREAK OF THE WARenD:enZc{enD:0-'Zc{--'0-'-'0--'~o"'0:ELL.:00:ElL040004000"11\I3500II \I35001\I\ /J ,J \.II,I,3000,I\II30001\I\.~1\V/-.......-I\~.........2500I\2500~II\/-..~'I \~,'I..'I\11\1/.~2000I,I\...

  • Page 233

    •104EXCHANGE RATES IN SWITZERLAND ON BERLIN AND VIENNA104100100.~~96~ ~96~,, l"""'o.'",-9292\'V'.88"-88~.',r'\.8484\\.,8080'..~~76....,,.- -:--.~)~76..,)...~72r"721\68__ 10-1\)r"o68\~l".\,'\64":4..~I6460't;1'.-0:1I1\60...1\11-,56.,\II56BERLIN,I~52..\...

  • Page 234

  • Page 235

    INDEXUnitedStatesfederalreservesystem,165-178.Banks: efforts to Increase gold reserve. 6;central. suspend gold redemption, 0; IHO·tected by closll1g of stock exchanges,8·9;central, aid in meetmg collapse of credit5ystem, 9; issue of emergency currency,10-11; character of French banks,19, 27,28;...

  • Page 236

    222INDEXpanded,110; premoratorium bills,110,111; agency for federal reserve banks,178.Banque de l'Algene: a bank of Issue,27;limit of note Issue raised,111.Banque Nationale de Credit: credit exten-sions,110; cllaracter,117; assets andliabilities, table,117; benefited by populardistrust of great c...

  • Page 237

    INDEX223vasion,64; labor situation,64-66; pricesof c..:rtain commodities significant,72.Economicreadj ustment:substitutionofpublic for private control,France andGermany,60-61; "reprise des affaires,"61, 70; a false economic philosophy,62;phases of the doctrine,68; revival ofbusiness in ...

  • Page 238

    224INDEXFrance, 82; efforts to convert bank cred-its into,5-6; to increase gold reserve,France andRussia, 6; depreciationinrelation topr~c~c, 13,80, 203, 204; re-serve, Franct:, 35; hoarded, France, 45,85, 106, 107; control of shipments, 50-60, 106; holdings of Banque de France,82; estimated amou...

  • Page 239

    •INDEX225curities by foreign investors,147, 148 ;closing of stock exchange,146-149; drainupon "banks for cash reserves,149, 150;emergency currency provisions of Aldrich-Vreeland Act adopted,150, 151; cottonexchanges,151; commercial credit situa-tion,152.Noble, H. G. S.,149.Noyes, A. D.,143...

  • Page 240

    226INDEX•France, Great Britain and United States,14;funds deposited with centralstateinstitution, France. 26; French, a prob-lem at outbreak of war,118; depositsand withdrawals,figures of Caisse desDenotsetConsiguations,11 U-120;policy of investment criticized, 120; lawincreasing maximum deposi...

  • Page 241

    INDEX22796-98; for meeting payment on war debt,104.Temps, Le, nO-tHoThery, Edmond,82, 131.Thomas, Albert, GG.Trade-see ForeIgn trade.Treasury certificates ot indebtedness,11,171,182, 183, 189.Treasury notes, France, 86.Trust companIes,response toPresident'sappealto JOInfederalreservesystem,177.Un...