GOLD EMBARGO AND DOLLAR PARITY
The reason of the gold embargo in Great Britain and in France, in the United States and in Germany at this time is that it is of recognized importance that there should be available a sufficient supply of gold to safeguard the paper money issued by these nations. For unless the paper currency is always freely exchangeable for gold the people would be unwilling to receive the paper money on a par with gold. When the paper money is not on a par with gold the people immediately would pay their debts in terms of the cheaper currency, and every contract in the country would be disturbed by the standard measure of value of contracts being thus suddenly impaired. People in the United States, for example, enter into millions of contracts measured in terms of dollars and they do not say a gold dollar, unless it be in some formal important contract, so that if the dollar in paper money should not be equal in value to a dollar in gold, all those owing dollars in such current business would meet their debts in the paper dollar. All business people recognize the importance of maintaining the American dollar at par in domestic transactions. It was a day of triumph after the Civil War when the United States reached a point at which “resumption of specie payment” occurred; a never-to-be-forgotten day in America’s financial history. The American people would not submit for a moment to have their paper money worth ninety-nine cents on the dollar; they demand it shall be worth a hundred cents on the dollar, yet we are faced with the astonishing condition that an American gold dollar in New York, under embargo, is worth only 67 cents in Spain at 28.50 cents per peseta normally 19.30 cents.
In other words, a gold dollar in New York worth sixty-seven cents in Spain must have fifty per cent. added to it to buy one hundred cents’ worth of Spanish oil in Barcelona. It takes three such gold dollars in New York to be worth two gold dollars by weight in Spain.
WHAT IS THE EFFECT OF THE AMERICAN DOLLAR
AT A DISCOUNT IN SPAIN?
The effect is that we pay three dollars in gold in New York and get two dollars of gold credit in Spain. Our money buys fifty per cent. less than it ought to. The same thing is true, of course, of a British pound sterling and of the French franc. It is perfectly obvious that this rate of exchange is imposing a ruinous cost upon the United States and the Allies—just to the extent that they are compelled to buy pesetas at this rate for the purpose of making purchases in Spain. It must be remembered also that the prices in Spain are on a war basis—in other words, that commodities have nearly doubled in price, even in terms of Spanish money so that the fifty per cent. extra which we pay in gold for Spanish currency is in reality doubled, and this exchange is thus actually costing us nearly one hundred per cent. In the meantime to correct this our country has adopted the questionable policy of imposing an embargo on the shipment of Spanish goods to the United States, or the buying of Spanish goods by American merchants. The effect of this is that olive oil has gone from two and a fraction dollars a gallon to eight and ten dollars a gallon, as every American business man should know. The commodity embargo policy is undesirable, for there is a much better policy available which I wish to point out.
THE CAUSE OF THE DEPRECIATION OF
THE AMERICAN DOLLAR ABROAD
The imports and exports from the United States in 1917 amounted to over nine billion dollars. The exports amounted to six billion, two hundred and thirty-one million; the imports to two billion, nine hundred and fifty-two million, with a favorable balance of trade to the United States of approximately three billion, one hundred and eighty million. I submit on the following pages a table of these imports and exports:
Department of Commerce,
Bureau of Foreign and Domestic Commerce,
Washington, February 4, 1918.
Imports and Exports, by Grand Divisions and Countries.
Total values of merchandise imported from and exported to each of the principal countries during December, 1917, and the 12 months ended December, 1917, compared with corresponding periods of the preceding year, were made public to-day by the Bureau of Foreign and Domestic Commerce of the Department of Commerce, as follows:
It will be seen from this table that our commodity trade balance with Spain was in our favor by fifty-five million, five hundred eighty-seven thousand, six hundred and ninety dollars. Therefore, Spain needed fifty-five million dollars more than was due her on the difference of shipments to Spain from the United States of commodities, and the shipment of commodities by Spain to the United States. Why, then, was not the dollar at a premium instead of the Spanish peseta being at a premium? The reason was that the United States had loaned to her Allies two billion dollars more than the favorable “trade balance” of the United States, and these loans in terms of dollars had been used by our Allies to settle their debts with Spain, as an international commodity trade creditor to an approximate amount of over a hundred million of dollars in value, who did not need these dollars, or pounds sterling, or francs. The Spanish banks did place substantial balances in Paris, London and New York, but there was still due to Spain for commodities a large amount which had to be settled in some way. Great Britain, France and the United States had an embargo on gold and we could not settle these balances by gold because of the gold embargo. If we had settled the balances in gold the dollar would have gone to par and so would have the pound sterling and the French franc, but we were compelled, because gold was not available, to borrow this money from Spain in some form or other, and it was borrowed in some form or other from Spanish merchants, business men, and Spanish banks in many ways, but those who borrowed the pesetas from Spain, or those who loaned our people the pesetas in Spain, sold those pesetas to the citizens of the United States at a tremendous price. The credit extended is taking advantage of war conditions to extort an unendurable price for the use of this Spanish credit during the war, and fully justifies adequate steps being taken to correct it.