Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

Germany, with characteristic system and detail, provided different kinds of banks to deal with different phases of the situation. War credit banks were designed to aid Germans whose credits became unavailable, owing to the exigencies of the war, as for instance those who had sold and shipped goods abroad (the enemy's country), whose accounts would be temporarily uncollectible, and those who might be otherwise embarrassed in their foreign trade because of the interruption of business caused by the war. War credit banks were more general in their dealings than war loan banks. In Germany, business is largely done upon credit, and especially so by small concerns and individuals, who possess no extended bank credit nor available collateral, and hence are not in position to make use of the Reichsbank or other commercial banks, or the Darlehnskassen.

A German banker says: "It was deemed advisable to create an institution of an intermediary character which would bear the greater share of the risks involved. The so-called war credit banks are designed to serve this purpose. They were established throughout the country, have their own capital, and the obligations undertaken by them are guaranteed, and losses, if any, refunded by the respective municipalities and commercial associations. The war credit bank of Greater Berlin, for instance, was established with a capital of 18 millions of marks, of which 25 per cent. are fully paid in. In addition thereto, there is a liability of 11.5 million marks by official bodies of commercial organizations."

Still another kind of war credit bank was created on the co-operative plan to assist the middle and lower classes.

Through the instrumentality of these institutions, a large amount of credit instruments, possessing a currency function, was brought into existence in Germany....

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.