The War and the World's Financial Centre

[321]With the end of the moratorium on November 4, it may be said that the crisis produced by the outbreak of war was over. When peace comes and prices [of securities] adapt themselves to the new price of capital that the present destruction of some eight to ten millions of it a day will bring about, and creditors begin to try to collect debts from impoverished debtors in war-wasted countries, then there will be a new set of problems, the acuteness of which will largely depend on the length of the war and the extent to which the fighters are worn out. These problems will exercise all the ingenuity and strength that Lombard Street can muster. For the present it is enough to see how we stand at the end of the opening period of the war, and what have been the effects of the financial tornado with which its beginning was heralded....

The crisis of last August was the greatest evidence of London's strength as a financial centre that it could have desired or dreamt of. It was so strong that it did not know how strong it was. Consequently, being a little flustered by the suddenness of the outbreak of war, on a scale that mankind had never seen before, it made the mistake of asking its debtors to repay it, not the thousands of millions that it had lent in the form of permanent investment, but the comparatively trifling amount—perhaps 150 or 200 millions—that it had lent in the shape of bills of exchange drawn on it, and other forms of short credits. Thereby it put the rest of the economically civilized world, for the time being, into the bankruptcy court, and so, finding that none of its debtors could pay, it thought itself obliged to ask for time from its own creditors at home. Foreign creditors it had none, except Paris. It sent gold to Paris as fast as it could be shipped and insured, and so seems to have liquidated its debt. For when a market in exchange reopened after the first shock of war, the Paris cheque soon steadied itself at a more or less normal level, above the point at which gold could be sent to France as an exchange operation. It is possible, however, that London was still in debt to Paris, and that Paris preferred for obvious reasons to leave its money on this side of the Channel.

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

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

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

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

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

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

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

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

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

As to finance bills, it has already been admitted that much credit was given by their means which was used for purposes with which bills of exchange ought not to be associated. The essence of a bill of exchange is that it has to be met at its due date, and so it should only be drawn to finance some commercial operation that will mature before the bill falls due, or to provide means of remittance when they are scarce, owing to seasonal causes which will have passed before the bill's maturity. When rolling credits, as they are called, are established, which go on from year to year, each bill being met by drawing another, and the money so raised in the borrowing country is put into bricks and mortar or machinery or other forms of fixed capital, the uses of the bill of exchange are being strained. When a jolt comes to the machinery and the rolling credit stops rolling, it is not possible to sell the factory or plant to provide a means of remittance. But there is no doubt that for a time, at least, this kind of finance bill is likely to be scarcer than it was; in fact, as we have seen, it was the excessive suddenness of the fit of virtue that seized Lombard Street on this subject that made the crisis more acute than it need have been, by reducing the means of remittance and so keeping the exchanges at an abnormal point.

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

MR. WITHERS A GOOD ENGLISHMAN

[322]Mr. Withers is a very good Englishman indeed and points out with pardonable pride how the London market stood the shock which rocked the rest of the financial world to its very foundations. What would have been his attitude had the book been written a little later, however, when the pound sterling had fallen to a discount of over 2 per cent. as compared with the dollar, is an interesting subject of speculation. London financing the world is, from the Englishman's point of view, an inspiring sight, but the pound sterling obtainable in New York for $4.76 ... is something which it would be interesting to hear Mr. Withers explain. War and Lombard Street treats only with the beginning of a very big subject. It is sincerely to be hoped that a little later we shall have a continuation of the work from Mr. Withers' pen.

America's Chance of Holding World Purse-Strings [323]

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

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

By the beginning of 1914, therefore, it may be said, that the way was opened for our financial metropolis, New York, to play an increasingly important rôle in the international money market, and that there was already a movement in that direction.

To this movement the European war gave a strong impetus, and to-day New York clearly holds the premier position in the field of international finance, although at a time when national finance in the leading countries of Europe has assumed proportions never before dreamed of. The European exchange markets have been demoralized, and specie payments among the belligerent countries of Europe have become little more than a name. On the other hand, "dollar exchange" is now quoted in the principal cities of Latin America, the Orient, and Australia; and the American trade with those sections, which was formerly financed chiefly through London, is now being financed directly, and in dollars....

The United States has brought back home from a billion to two billion dollars' worth of the six billion dollars' worth of its securities estimated to have been held abroad, and is preparing to take more, either by purchase or as security for loans. It has loaned upwards of a billion dollars to the belligerent countries, and has had a net importation of gold during the year just closed greater than that of any five years of its history. Our banks are carrying heavy surplus reserves, those of the New York Clearing House banks alone on December 31 having amounted to $143,000,000, and the gold reserve against net liabilities of the twelve federal reserve banks on December 23 having amounted to 86 per cent.; and this, at a time when the large gold reserves of the European banks are strained to the breaking point by the tremendous liabilities placed upon them.

Our export trade has reached unprecedented heights, and for the year 1915 was approximately equal to twice that of 1906....

This war is likely to leave her [England] still with a secure position, a great and loyal colonial empire, an efficient banking system, and the control of the seas. Her position as a creditor nation will lie greatly weakened, and she may even become a heavy debtor nation, but her foreign trade connections have been so long and so well established that it does not seem likely that they will be permanently impaired in any large degree by the readjustments necessitated by the war. If she disposes of her Latin-American and Asiatic investments to the United States she will doubtless greatly weaken her trade position in those countries, but the present evidence is that these will be about the last foreign investments she will dispose of.

So far we have not made great progress in securing Europe's Latin-American trade. Europe discontinued financing Latin America at the same time that she discontinued her normal trading with Latin America. For us to take her place it became necessary for us to loan before we could sell and buy. But loaning to European belligerents and selling war supplies offered larger immediate profits; and so our chief efforts have been turned eastward rather than southward. An analysis of our large export trade of last year shows that much of it was of a very abnormal character, and gives promise of being but temporary. The following figures comparing the exports of a few selected commodities for the ten months ended October, 1915, with those for the same period of 1914 will make this point clear:

	Ten Months Ended Oct. 31
Commodities.	1914.	1915.
Breadstuffs	$212,025,814	$461,074,547
Iron and steel and mfrs. thereof, incl. wire	109,232,270	294,822,223
Meat products	110,180,785	214,212,955
Animals (notable horses and mules)	6,668,121	107,201,175
Explosives	6,439,693	103,527,382
Cars, carriages, etc.	36,844,923	117,366,359
Leather and mfrs. thereof	47,123,910	135,847,788

A glance at these articles will show that most of them were intended chiefly for military uses, and that their heavy exportation presumably will be but temporary.

It is interesting to note that some other articles of customary export showed large declines in 1915 as compared with 1914. During the same ten months' period, for example, our exports of agricultural implements (and parts) declined from $21,028,588 in 1914 to $11,162,609 in 1915; of wood and manufactures thereof, from $68,904,895 to $45,325,146; of fertilizers, from $7,735,613 to $3,758,598; and of sewing machines, from $7,757,421 to $4,902,594.

Viewed from the standpoint of the destination of the articles exported, the significant fact is that the increase in exports was chiefly to Europe, and not to Central and South America and Asia—the places in which we have been strenuously endeavoring in recent years to build up a permanent export trade....

... After the war is over Europe will presumably discontinue, or greatly reduce, her importations from the United States of most of the articles which figured so largely in the great increase of 1915. As her needs tend to become normal again she will immediately endeavor to resume her old-time trade connections, both import and export, at least in so far as the trading centres are in countries that were friendly or neutral during the war. In seeking to re-establish these connections the merchants of the belligerent countries will be strongly backed by their Governments, which the war will have made more socialistic and more aggressive. They will have a great advantage in the fact of long-established business relations, and in the fact that the war trade will have been to such a large extent abnormal, both as regards the products dealt in and the parties to the trade.

Europe's banking machinery in South and Central America, although it may not be very actively functioning in these trying times, still exists, and will be ready to resume its former activities as soon as peace is declared....

On the basis of London Stock Exchange listings British investments in Latin America early in 1914 were computed at nearly $6,000,000,000. Germany also has a large number of banking establishments in South America and heavy investments.... United States investments in South America are very small as compared with those of England and Germany, while only one American bank has established branches on that continent. These branches are only five in number, and the oldest of them is but a little over a year old.

The conclusion seems clear that the war will need to be very long and very disastrous to England; and American merchants, bankers, and investors will need to be much more active and far-sighted in their exploitation of South American opportunities than they have been in the past, if London is to yield to New York her financial premiership for South America.

Other obstacles to New York's becoming permanently the world's financial centre are its great distance from the financial markets of Europe, America's small merchant marine, its provincial protective tariff policy, the absence of an adequate supply of men possessing the necessary training both in foreign languages and in commerce and international finance to go into these foreign fields and to "tie them up" commercially and financially with the United States, and the slowness with which our recently reorganized banking system and our American discount market must grow, as regards international business, if it is to have roots that are strong and grow deep.

The United States has before it a great opportunity. Much depends upon the foresight with which Americans prepare themselves to meet the tremendous readjustments that will be demanded at the close of the war. That will be the supreme test. Now is the time to build for the future, and to avoid paying too much attention to immediate profits. New York can hardly be expected to succeed to London's position as the world's financial centre, at least for some time to come; dollar exchange will not at once take permanent rank ahead of sterling, or even alongside it; none the less, if the United States refuses to be blinded by the glamour of large immediate profits from a type of trade that is necessarily abnormal and temporary, and if she seriously turns her attention to the opportunities now open to her in Latin America, she will make a long step forward in the direction of financial leadership.