The Effects of the War with Special Reference to the Central Banks of France, Germany, and England
I
[318]In France the gold held by the Bank of France (February, 1916) is, in actual quantity, larger by about 25 per cent. than that held in normal times before the war. Instead of former gold reserves of about $800,000,000, they are now well over $1,000,000,000. The percentage of gold to the notes—the main demand liability—has, of course, fallen from about 65 to 35 per cent. because of the increase of notes from about $1,200,000,000 to $2,800,000,000.
This increased supply of gold has come from hoardings and private holdings which have been placed at the disposal of the bank in return for bank-notes. There has been no reduction of this gold fund through demands from note-holders, since the bank was freed from redemption in gold at the very beginning of the war. That is, notes of the Bank of France are inconvertible. As contrasted with the dollar of the United States, when expressed in bills of exchange between New York and Paris, the Bank of France note has depreciated nearly 14 per cent. Any paper money not having immediate redemption will depreciate. As regards the future it is a question of ultimate redemption.
With so large an available gold supply, there can be little question as to the future intention or probability of redeeming the notes in gold. It looks very much as if the same policy adopted in the war of 1871-3 had been consciously followed. Then, also, the cours forcee was declared, and the gold carefully retained in the vaults of the bank. The presence of a large gold fund was an assurance of the ability to return to specie payments after the close of the war. The war was short, and the notes were not seriously depreciated, bearing a discount as compared with gold of 1-1/2 to 4 per cent. In the present war, the same steps have been taken; but this war is extending over a much longer time than the former one, and the depreciation has already become much greater.
It is equally clear, however, that if the gold were now to be paid out for redemption uses, it would become scattered, exported, and might even pass through Holland or Switzerland into Germany. The increase and preservation of this large fund of gold is the strongest evidence of the ability of the bank to resume the gold redemption of its notes soon after the close of the war. The actual time, however will depend upon the rapidity with which the Government can repay some of its large loans from the bank, since the excessive note issues have been largely due to loans to the State.
II
In Germany, likewise, every effort has been made to accumulate gold, even though the notes of the Reichsbank were made inconvertible at the beginning of the war. Not only was the requirement to redeem the notes in coin removed, but the regulations regarding a tax upon all notes uncovered by a specie beyond a specified Kontingent were suspended. Thus, restrictions on the limit of note issues do not exist; and they have risen from about $500,000,000 before the war to about $1,500,000,000 (February, 1916), while the stock of coin and bullion has changed from about $300,000,000 to over $600,000,000. That is, the coin, which is mostly gold, is about 40 per cent. of the notes. Here, again there is an obvious tendency to increase and maintain the gold reserves so that Germany may have the means of resuming gold payments at no great time after the close of the war.
The campaign to collect gold from the public and from hoards was remarkable. It was successfully made a test of patriotism to hand in gold in return for Reichsbank notes, and a house-to-house canvass in many places resulted in providing the gold which so signally increased the reserves behind the notes. Of course, the usual international operations for obtaining gold were denied to Germany. It was this campaign which was imitated by France. At the present time, certainly, no thought has ever occurred to Germans that they would not go back to a gold basis.
Nevertheless, Germany has clearly fallen into the same confusion of mind which characterized our own policy in regard to the issue of greenbacks in the Civil War. We confused the monetary with the fiscal functions of the Treasury. So has Germany. Thinking the war would be short and decisive, to be followed by large indemnities levied on her enemies, she had expected to finance her expenditure by temporary expedients. That is, the Government was led into the policy of borrowing through the increase of monetary forms.