III
It was early understood that the real difficulty and danger in the international situation did not lie in the superficial symptoms of trouble, but were found much deeper, being directly due to the fact that international business had been practically suspended as the result of the war. This was a factor of prime and material importance in the whole situation, because the maintenance of established relations between the United States and foreign countries was directly dependent upon the regular exportation of goods. As was customary during the summer months, there had been large expenditures by American tourists in Europe; and we had become indebted to other countries, particularly Great Britain, for material sums in excess of what we were currently able to liquidate. This was on the assumption, as usual, that such indebtedness would be liquidated through the shipment of agricultural products, particularly of cotton, the country's principal cash crop. The breakdown of trade with Europe through the inability of vessels to run regularly at the outset of the war, and through the reduction of buying power, due to the interruption of all regular industrial, commercial, and financial operations, meant that in the absence of some restoration of the normal course of business it would be necessary to find other means of liquidating our obligations to foreign countries. The first phase of the difficulty was met by investigating the extent of international indebtedness, which, in the absence of other means of payment, would necessitate the draining-away of gold from the United States. Such an investigation was undertaken by the Federal Reserve Board, which, by sending out questions to the principal international bankers of the country, succeeded in forming a more or less trustworthy estimate of the indebtedness on current accounts, these being, of course, of varying maturities extending over several months. The problem thus raised was how to provide for liquidating the debts without losing so much of the underlying gold supply as to impair the convertibility of American securities, and therewith general confidence in American ability to meet obligations. The two chief proposals put forward for bridging over the period of difficulty were the establishment of a joint gold fund by the bankers of the country, and the undertaking of negotiations with Great Britain whereby some relaxation of foreign demands on the United States might be arranged for. These two phases of policy may best be cursorily sketched at this point.
Since the new banks had not yet been established and could not be put into operation for some weeks, it was deemed desirable to furnish a makeshift substitute for the co-operative effort which would have been available for the relief of the situation had the banks been in existence. It was therefore determined to suggest to a number of representative bankers the establishment of a joint gold fund to be used in providing exchange on Great Britain, and to have this joint fund developed at the earliest possible moment. A letter was consequently sent out to the presidents of clearing-house associations throughout the country, under date of September 21, in which request was made for subscriptions to a fund intended to aggregate about one hundred million dollars. This letter had previously been considered and approved at meetings of representative bankers summoned to meet in Washington on September 4 and 19 respectively, and was, therefore, issued with their moral support. The answer to this invitation was prompt and effective, a total of over one hundred and eight million dollars being subscribed and rendered available.
It was almost immediately evident that the operation of this fund was proving decidedly beneficial notwithstanding that only a comparatively small percentage of the amount subscribed was asked for, and that a still smaller percentage was actually used to furnish a basis for gold shipments. Nevertheless, it seemed, during the ten days immediately following the completion of the subscriptions, as if there might be need for still further relief to the situation. Some of those who were closely connected with the administration of the gold exchange fund brought the subject to the attention of the Secretary of the Treasury and he extended an invitation to the British Government to send representatives to this country mainly for the purpose of considering the possibility of further adjustment, in the event that the United States did not succeed in liquidating its indebtedness to Great Britain by the natural movement of commodities within a reasonably early period. The British Government designated Sir George Paish and Mr. B. P. Blackett, who came to the United States and on October 23 held a conference with the Federal Reserve Board. Subsequently another conference, attended by a number of representative bankers, was also held and the situation was discussed in very great detail. Meantime the establishment of a better understanding with reference to commodities to be considered as contraband and the more effective policing of the North Atlantic rendered possible the restoration of trade with European nations, and the development of the export trade proceeded with a speed which showed that current obligations of the United States to Great Britain and other countries would be liquidated at an early date without any necessity for further interference. By the time the reserve banks were ready to open [November 16], exchange sales on London had fallen to normal, and there was, therefore, no danger that when opened the reserve banks might, as was for a time feared by some, find their gold rapidly drawn away from them in order to meet the requirements of the gold export movement.
In another way it was deemed desirable that the Federal Reserve Board should help to facilitate the restoration of customary conditions in the financial market. Almost immediately after the outbreak of war it was seen that, unless hostilities should terminate within a very much shorter period than anyone thought likely, serious injury would be inflicted upon the cotton-producing states. As is well known, the cotton crop is largely grown for export, about two-thirds of the total production of the United States being annually sold abroad. It happened that an unusually large crop had been planted and was approaching maturity at the moment of the outbreak of the war. This would in any event have depressed prices of cotton, even under ordinary conditions. The almost immediate closing of the cotton exchanges of the country was, however, precipitated by reason of the interruption to the movement of cotton and the general understanding that, in view of the great area involved in the hostilities, it would not be reasonable to expect a normal demand for the staple to manifest itself. With the exchanges closed, and with shipments of cotton interrupted, the price was unstable and abnormally low, many sales undoubtedly having occurred at five cents per pound. Inasmuch as the cotton crop is raised very largely upon credit, it was necessary to provide some means whereby the Southern planter could be assisted to such extension of accommodation as he might require in meeting the obligations he would ordinarily have provided for by the sale of his crop in the open market. Various suggestions were brought to the attention of the Federal Reserve Board, one of them being that of Mr. Festus J. Wade of St. Louis, who suggested, both to the Board and to the Secretary of the Treasury, the establishment of a cotton loan fund somewhat similar in purpose and management to the gold exchange fund. After very anxious consideration, the conclusion was reached that some measure of the sort would probably furnish relief to cotton-growers. Various conferences were held with banking interests for the purpose of securing their co-operation and advice in regard to the matter. Ultimately the bankers of New York pledged fifty million dollars in subscriptions to the fund, provided that fifty millions more should be raised from other bankers in non-cotton-producing states. It was understood that to the one hundred million dollars thus raised should be added thirty-five million dollars contributed by the bankers of the cotton-producing states under a special plan devised for that purpose.[314]