Part 2
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.
PENALTY OF APPRECIATED CURRENCY
In fact the natural laws of economics impose at once a severe penalty upon Spain, for example: America has quit buying Spanish oil; America is substituting peanut oil, and the world is finding means to get along with a minimum use of Spanish commodities. In the meantime it is dislocating Spanish business, which will reappear later as a very substantial loss to Spanish commerce.
The Allies are buying only essentials in Spain, and the non-essential business of Spain is going through commercial depression.
Spain lost almost her entire grape crop, her tomato crop and other perishable articles because there was no adequate market.
Because Spain was piling up credits not properly employed in being loaned at acceptable interest she was led to purchase non-essentials at war prices, doing Spain a commercial injury. While certain individual banks or bankers might profit by the sale of pesetas at the high rate, it has the effect of permanently diverting trade from Spain, stimulating exports to Spain of commodities at high prices and depressing exports from Spain to other countries, lowering the status of the commercial life of Spain so that Spain pays a serious penalty under the economic law.
It would have been much better for Spain to buy Spanish securities held by foreign countries, to make temporary loans to countries compelled to buy in excess from Spain, or to the nationals of such countries against adequate securities—better for Spain and better for her commercial customers. True commerce in its highest and best form serves equally well both parties to such commerce.
Spain also adopted the policy of refusing to take foreign gold except at a discount, on the theory that she did not desire to expand her currency, and in that way cause a rise in the price of labor and commodities in Spain. The effect of this was to deprive other nations of a fair means of settling commodity trade balances with Spain, and had the effect of automatically raising the prices to foreigners of Spanish commodities, thus serving to dislocate Spanish trade.
These unfavorable conditions in Spain have also led many people in the Entente Allied Countries to believe the Spanish policy was swayed, if not controlled, by German influences and after this war this opinion may prove commercially injurious to Spain.
HOW TO PUT THE DOLLAR AT PAR
What are the possible remedies for this discount of the American dollar in Spain?
1st. The shipment of gold in such volume as to meet the international commodity trade balance in favor of Spain would at once put the dollar, the pound sterling and the French franc to par, but in order to safeguard the currencies of the nations during the war it is not deemed expedient to ship gold at this time. When the war closes Spain, having depleted itself in commodities and having accumulated for these commodity shipments large volumes of credits, will be in a position immediately to buy from other countries and she will become almost at once a commodity trade debtor, which will bring Spanish currency down to par and bring the currency of other countries up to par in Spain;
2nd. Cutting off purchases from Spain of commodities and expanding the shipment of commodities to Spain would be another factor of importance in bringing Spanish currency down to par and other currencies up to par, but is injurious both to Spain and to the countries driven to adopt this policy.
[This remedy is only partially available because the Allies for war purposes need available Spanish commodities and are only cutting off non-essential goods, depressing Spanish commerce engaged in what are not necessities for war and unduly stimulating Spanish business in commodities required for war. The undue stimulation of one line of commodities and the depreciation of another line of commodities is injurious to the normal business of Spain and at whatever price will be corrected with the revival of peace by an injurious reaction of the industries engaged in commodities required for war, while other industries not required for war which have been impaired must be rehabilitated.]
3rd. The remaining and most available and economical factor by which this unhealthy condition of a highly appreciated Spanish currency and severely depreciated Allied currency in Spain can be corrected, is _by credits extended_ by Spanish _banks_ and Spanish _merchants_ and Spanish _business people_ during the period of the war to the extent of their favorable trade balance. This can be accomplished in various ways:
(a) Spanish banks can leave balances in New York, London and Paris. They are doing this but not on a basis of a fair rate of interest, superficially, because these balances in New York, for example, are only paying two or three per cent. However, since the Spanish pesetas are sold for American dollars, selling on the exchange for but sixty-seven cents in New York, the Spanish banks buying such dollars will make a profit of fifty cents when the war ends and the dollar reacts to par.
The same thing is true of United States banks that buy pesetas in Spain at an acceptable rate of interest there for the period of the war. This is being done to a certain extent and American banks thus buying American dollars at sixty-seven cents, thro Spanish loans will make a profit of fifty per cent. on such dollars when the dollar reacts to par and gold can be freely shipped.
It is obvious that American commerce and Allied commerce and Spanish commerce is being subjected in this way to a serious injury with compensatory benefits to the Spanish and American bankers who are selling credits in Spain.
METHOD OF PLACING CREDITS ABROAD
It ought to be possible for American banks, for British banks, for French banks against adequate securities to borrow in Spain at an acceptable rate of interest Spanish credits necessary to liquidate the comparatively small favorable Spanish commodity trade balance. This amount is in the neighborhood of a hundred million dollars per annum. This might be accomplished by vigorously campaigning in Spain with the consent, sympathy and assistance of the Spanish Government officials for the sale in Spain of the War Finance Corporation Bonds, payable in terms of pesetas running five years, of liberty bonds payable in pesetas, etc., etc., using every available agency to correct the condition so injurious to Spain and to the Allies.
I insisted when the War Finance Corporation Bill passed the Senate upon putting in an authority that these bonds might be issued in terms of foreign currency to accomplish this very purpose, and it became a part of the Act, and later a like provision was made a part of the Act authorizing bonds for the Third Liberty Loan. These bonds could be bought by American importers, or by British and French importers and sold in Spain if necessary at a sufficient discount to obtain Spanish credits against the necessary purchases of the Allies or of the merchants in the Allied countries. In this way the Spanish business men would have a security bearing a satisfactory rate of interest, payable in terms of their own money, and would thus be assured of receiving their own money on a gold par basis with a satisfactory rate of interest. This would suffice, if properly carried out, in bringing the American dollar to par in Spain, and to bring the British pound sterling and the French franc to par in Spain. To accomplish it, however, requires a mechanism making it somebody’s business to do this, to carry on an adequate campaign to place these securities.
As it is we have no adequate mechanism with which to handle it. American or Spanish banks who place credits in Spain and carry credits in Spain till the war ends will make fifty per cent. on every gold dollar at 67 cents they buy in the United States, into Spanish pesetas at 28.50. They have no public interest to serve in preventing such conditions. They are themselves engaged in profiteering on American commerce and on Allied commerce. We have seen men trained as American bankers deliberately advocating that it was best for the United States to have its dollar at a discount, contrary to reason, contrary to common sense, and most injurious to the United States, to Great Britain and to France, interfering with the successful prosecution of the war and actually serving the interest of Germany by indirection. I am willing to assume that these gentlemen advocating the dollar at a discount are not moved by unpatriotic purposes, but the result is injurious to America and favorable to Germany and is contrary to the public interest, while it is highly favorable to profiteering by private interests.
DUTY OF GOVERNMENTS
The United States, Great Britain, France and Italy should use the firm strong hand of organized government to prevent such harmful imposition of usurious rates on the resources of the Allies now engaged in deadly war. Exchanges are commodities, and governments able to fix prices on commodities and fair interest rates on bonds can fix reasonable exchange and interest rates on international bills, and prevent the sale of pesetas above 19.30 or gold par and prevent the sale of lire at 11 cents and then buying the offerings at 19.30 and refusing to allow the sale at any other rate. American, English and French banks refusing to buy pesetas except at gold par would end the false values put arbitrarily on pesetas as far as exchange is concerned on the loan of pesetas.
In order to sell pesetas there must be both a seller and a buyer. If the Governments of Great Britain, France, Italy and the United States can control the banks of those countries and prevent their buying pesetas at an exorbitant rate the market for pesetas would be measurably controlled. The selling of pesetas at a grossly usurious rate is against public policy. It is against the interests of the Allies. It is a gross injustice because it has the effect of taxing the Allies fifty per cent. for the use of Spanish credit which ought to be extended, if extended at all, on a reasonably decent basis. Therefore, the Governments of the United States, Great Britain, France and Italy would be justified, as a war measure, in forbidding the banks of the great belligerents from buying pesetas except on terms of reasonable interest charges, considering war conditions.
Moreover, there should be concerted action by the four belligerents in making representations to the Spanish authorities as to the injustice to the Allies of the Spanish exchange situation, and that the highly appreciated Spanish currency, or Spanish credits, is doing positive harm to Spanish commerce, as I have otherwise pointed out.
If Spain sells the Allies goods and charges fifty per cent. for the use of Spanish pesetas, it has the effect of discriminating against Allied purchases as compared with Spanish purchases to the extent of fifty per cent., which is contrary to commercial justice, and by controlling the exchange rate, through the control of the banks in New York, London, Paris and Rome, an equitable condition might be restored. At the same time it is obvious that credits properly secured and at proper rates of interest ought to be placed in Spain through agencies otherwise pointed out in this brochure.
THE EFFECT ON ITALY
Italy’s purchases in 1914 were five hundred sixty-four millions for imports against which she exported four hundred twenty-six millions; in 1915 her imports were nine hundred and seven millions against four hundred eighty-eight millions exports. When she got fully into the war in 1916 her imports were sixteen hundred and nineteen millions against five hundred and ninety-six millions exports. In 1917 her imports were fourteen hundred and twenty-nine millions; her exports four hundred and thirty-five millions. Italy’s bonds at five per cent. have been selling for eighty-six cents on the dollar, and an American dollar in New York will at current exchange buy about nine lire to the dollar, and one dollar, now (August, 1918) will actually buy ten lire of Italian bonds bearing five per cent., so that such bonds would return the investor ten per cent. payable in lire, which after the war must come back to par, and gives the investor a hundred per cent. bonus besides.
This means that brave Italy, shedding her blood lavishly on the battlefields for the liberty of mankind, is paying a hundred per cent. on top of war prices for the supplies required by her people, except goods sold her on credit by her Allies.
There are several reasons for this:
First.—To the extent that Great Britain, the United States and her Allies are not extending credits on a normal basis to Italy, Italian purchasers are compelled to rely upon private credits extended by citizens of other countries, who may or may not understand the stability of the Italian Government, nor the financial security of loans extended to Italian purchasers. The element of hazard, lack of knowledge and desire for gain of the private creditors of Italy are important elements in determining the enormous cost to Italians of credits for their purchases for war needs. To the extent that the United States, for example, furnishes credits to Italy, Italian purchasers only pay the ordinary war prices, but precisely to the extent that private credit is extended to Italy, Italy at present is paying approximately ten per cent. interest and a hundred per cent. bonus on the credits extended to her. This should be immediately corrected.
This egregious example will demonstrate the importance of obtaining for Italy sufficient credits at fair rates to cover her purchases during the war, and it illustrates precisely and fully the necessity of providing the United States with like credit facilities at fair rates for purchasing from Spain, from the European neutrals and from other nations where there is a depreciation of the currency of the United States.
The United States is paying from fifteen to forty per cent. on her purchases in nearly all the nations except in the countries of Great Britain, France and Italy or their immediate Allies, to whom the United States is extending large credits. It is perfectly obvious that there ought to be immediately organized a scientific, a well-balanced, systematic mechanism for handling this problem, for studying its details in every country in the world. We have no such organism. The Treasury Department through the Federal Reserve Board undertakes to look after the gold and silver embargo. It has a sub-committee passing on licenses to ship gold and silver. This sub-committee passes on applications for the right to ship gold and silver, and is refusing to permit many shipments without providing any means by which the foreign indebtedness intended to be covered by gold shipments can be otherwise covered by gold credits. This imposes a cost of destructive interest rates upon our business men requiring gold or foreign credits with which to settle foreign obligations.
IN THE ARGENTINE
In the Argentine American purchases have exceeded American sales to the Argentine during the last year, or since we entered the war, by about sixty million dollars. The Reserve Board was enabled to effect an arrangement through which Argentine gold credits were placed in New York on satisfactory terms until the war should be over.
This is one of the means by which to adjust our foreign purchases on a basis which requires us only to pay a fair rate of interest for the indebtedness due such country, but it is _not_ the only way; the sale in the Argentine of American securities, of Liberty Bonds, payable in pesos, of War Finance Corporation Bonds, payable in pesos, or secured bank loans there, would suffice to effect the same ends. Such sales would be equivalent to shipping commodities to Argentine in settlement of our trade balance.
But if British merchants and banks, if French merchants and banks, if American merchants and banks were freely furnished the right to buy Liberty Bonds and War Finance Corporation Bonds payable in terms of pesos, thousands of individual adjustments could be made through such securities or with such securities as a basis of credit for the period of the war.
Argentine has a favorable trade balance. Argentine has the money and credits to lend. Argentine cannot otherwise conveniently employ these funds which are in excess of her normal requirements.
Argentine is therefore in a favorable position to make such loans, just as Spain is; moreover, if Argentine does not make such loans she will have her trade injured in a manner which was pointed out above in relation to Spain.
The United States also controls through the War Trade Board the issuance of licenses covering imports and exports. These licenses can be serviceable in bringing the dollar towards par by opposing no obstruction to the export of goods not required for actual war purposes to countries to which America owes a balance of trade.
The Shipping Board, as far as the war permits, should encourage furnishing bottoms to take supplies of commodities to those countries where America owes a trade balance in order to liquidate such balances as promptly as possible.
The Federal Reserve Board, or the Treasury Department, acting under the authority given by Congress to the President, to control the transfer of credits to and from the United States, has a Department under the management of Mr. Fred I. Kent, with offices in New York and in the Treasury Department, which visés transfers of credits to and from the United States. This Department should facilitate in every way possible the placing of American securities, especially War Finance Corporation Bonds and Liberty Bonds, payable in terms of the currencies of the country to which they may be sold, or in which they may be placed as security, and should exercise every effort to place public and private credits in such countries where America or the Allies are in debt to overcome the depreciation of the American dollar and of the Allied currency, and to bring down to par the currencies of such foreign countries in relation to the United States and in relation to the Allies; otherwise the United States and the Allies will continue to suffer the enormous cost of these usurious credits which appear in so egregious a form in regard to Italy, but which in degree applies with equal force to the United States, to Great Britain and to France in their purchases from various other countries.
In 1917 the United Kingdom imported five billion, one hundred and eighty-four million, and exported two billion, eight hundred and ninety-four million; her excess imports were therefore over two billion, two hundred million. France had an excess of imports over exports of over two billion. Italy had an excess of imports over exports of over a billion, but the total imports of the United States, the United Kingdom, France and Italy amounted to over twelve billion dollars, a large part of it from neutral or non-belligerent countries who had a favorable balance of trade, and upon which the exchange rate ran from ten to fifty per cent. The loss of these gigantic war purchases which took place outside of the United States, Great Britain and France, probably exceeded a billion dollars because of the adverse exchange rate.
Such loss can be corrected by the United States, Great Britain, France and Italy by intelligent, comprehensive, co-ordinated employment of credits and government power. It is a question of an orderly arrangement by which to systematically accomplish this end.
The United States has as its only agency the Federal Reserve Board and the Treasury Department. The Secretary of the Treasury, occupied by many cares, being Director General of the Railroads of the United States, charged with the duty of collecting and disbursing the gigantic revenues, framing revenue plans, acting as Chairman of the Federal Reserve Board, of the Farm Loan Board, of the War Risk Insurance Bureau, and in charge of the Public Health Service, besides supervising all of the public buildings of the United States, not to mention miscellany, cannot give it much personal attention.
The Governor of the Reserve Board not only has the supervisory control of the Federal Reserve Banks with thirty-eight hundred millions of resources, supervising also the member banks, exceeding eight thousand, but is in active charge of the War Finance Corporation.
The question of adjusting these exchanges cannot receive the personal attention of either the Secretary of the Treasury or the Governor of the Reserve Board. The members of the Reserve Board are charged with duties of the gravest responsibility, enough to occupy their entire attention.
Mr. Oscar T. Crosby, the very able patriotic Assistant Secretary of the Treasury, is trying to adjust the exchange in Spain and Italy; he is now in Europe engaged in this very important business. Mr. Albert Strauss is acting as adviser of the Treasury in connection with the foreign exchange problem.
BRITISH FINANCIAL POLICY