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THE ANGLO-FRENCH LOAN 
 
 Conditions Necessitating a Foreign Credit and Its Effect 
 
 on Our Commerce 
 
 NATIONAL SHAWMUT BANK 
 ' 40 WATER STREET 
 
 BOSTON 
 
 te. W15 
 
Digitized by the Internet Archive 
 
 in 2008 with funding from 
 
 Microsoft Corporation 
 
 http://www.archive.org/details/anglofrenchloancOOshawrich 
 

 -I 
 
 COPYRIGHT 
 NATIONAL SHAWMUT BANK 
 
SEPTEMBER was one of the most eventful periods in 
 American finance. On the first day of the month sterl- 
 ing exchange fell to $4.50, indicating a shrinkage of more than 
 36 cents in the pound sterling. The decline was not confined 
 to bills on London but extended in equal if not greater measure 
 to those on other European centres. A number of causes 
 contributed to this result. Europe was then making, as she 
 still continues to make, extraordinary demands upon us both 
 for the necessities of life and for innumerable products for 
 direct and indirect use in war. Hand in hand with this 
 movement was a highly exceptional falling off in our imports, 
 occasioned by the decline in European production, and the 
 inabihty to get goods through from certain great markets. 
 
 These two sets of facts constituted a situation in this 
 country bordering upon the perilous. The productive 
 capacity of our farms and of many of our manufactories is 
 considerably in excess of our own demands. The growth in 
 our population has been so great that a market for this excess 
 is necessary in order to insure the people of the United States 
 the standard of living to which they have become accustomed 
 in the past. The decline in imports was in itself a matter of 
 no great importance. A year or two of economy in our mode 
 of living, far from being a bad thing, might be a very good 
 thing, provided our industrial activity continued normal. 
 It would mean among other things, that we were putting 
 aside for a rainy day what otherwise we might needlessly 
 spend. But that was not the situation that was confronting 
 us a month ago. 
 
 In order to sell, a nation must buy. It must take back a 
 fair equivalent of what it send? out, and this equivalent must 
 be in the form of goods or gold. A month ago we did not 
 
 3 
 
 341308 
 
want more goods of the kind we could get, and we could not 
 get more of the kmd we wanted. The great drop in exchange 
 on Europe showed us, however, that we might not be able to 
 get gold much longer in amounts that would induce us to 
 export our commodities freely. Many of the war orders were 
 made payable in dollars, which means that the American 
 sellers received their money at the face value of the contracts, 
 the foreign buyers standing the loss in exchange. Large, 
 however, as were the war orders, there remained a great 
 export business that was conducted without this recourse. 
 The sellers received their pay in bills on Europe which they 
 could sell in the exchange market only at a heavy discount. 
 In other words, exporters were confronted by two dilBSculties, 
 that of coming out whole on goods which they had sold when 
 exchange was at higher figures than the current figures, and 
 that of figuring out what the course of exchange might be in 
 the event of their doing new business with foreign countries. 
 
 Prior to the war these difficulties did not exist, — to be 
 more exact, they existed only to a negligible extent. The 
 main curve of the fluctuations in exchange rates had long 
 been clearly ascertained; exceptional conditions might arise 
 from time to time, but they were seldom of a character to 
 impose lasting hardship on any considerable number of those 
 engaged in foreign trade. The difficulty and cost of importing 
 gold at the periods of high merchandise exports and of export- 
 ing it at the periods of high merchandise imports were not 
 sufficient to embarrass trade between this and foreign coun- 
 tries. The past thirteen months, however, have radically 
 transformed the situation in this respect. For the last 
 fiscal year our exports exceeded our imports by about a 
 thousand milHon dollars. For the thirteen months subsequent 
 to the first of August, 19 14, there was an excess of exports 
 amounting practically to $1,500,000,000. Trade conditions, 
 therefore, impose upon us no necessity of exporting gold. 
 On the contrary, there is a very great necessity of our import- 
 ing gold or some other form of wealth to cover the present 
 huge excess in our merchandise exports and to insure the 
 
continuance of our foreign business on a normal scale. To 
 make the situation even clearer, it should be added that the 
 figures relating to our excess of exports are very much nearer 
 real figures than they have been at any time in the last 
 generation at least. The intangible elements in them have 
 been greatly reduced. Since the war began we have taken 
 back from Europe American securities to an amount sufficient 
 to effect a heavy reduction in our annual interest payments 
 abroad. Prior to the war it was estimated that American 
 tourists and commercial travelers spent hundreds of millions 
 annually in foreign countries; the major part of that expendi- 
 ture has ceased in the last fourteen months. It would be 
 interesting to know how far the reduction in these intangible 
 exports has offset the payment we have made Europe since 
 the war began for the American securities we have bought 
 back. These purchases have been variously estimated at 
 upward of $500,000,000. If we may accept this figure as 
 anywhere near correct, it has obviously been measurably if 
 not fully covered by the customary expenditure abroad 
 which this year we have eHminated. 
 
 From this it is clear that the real balance of trade is at 
 the present time so strongly in favor of this country as to 
 make us debate two questions: first, whether we desire to 
 import gold, and, secondly, whether Europe can afford to 
 export to us enough gold to keep our foreign trade on the 
 basis which our well-being requires. 
 
 No one can view with favor the importation of gold at this 
 time. The receipt of one or two hundred million more for 
 the purpose of rectifying the exchanges, however necessary 
 circumstances might make it, would be extremely regrettible. 
 Too much gold is about as harmful as too little. An insuffi- 
 ciency restricts the basis of mercantile credit and therefore the 
 industrial activity of the nation. A redundancy, if continued 
 very long, is almost certain to result in over-expansion of 
 credit, unhealthy speculation, and financial collapse. The 
 willingness evidenced in past months that the metal should 
 pile up in this country has only one explanation. The 
 
normal expense of importing gold from London is only a few 
 cents on the pound sterling, whereas to sell a bill of exchange 
 at the quotation of the present moment would mean the 
 sacrifice of something over 14 cents on the pound. That 
 gold has not come this way during recent months in very 
 much heavier amounts may be attributed to a great decrease 
 in the available supply on the other side of the Atlantic and 
 to a hope that foreign governments would eventually take 
 extraordinary measures to restore to par their public and 
 private credit in this country. Their delay in doing so has 
 had some unfortunate results. It has undoubtedly fostered 
 speculation in exchange in a way to make the situation for 
 those having debts to pay abroad harder than it would other- 
 wise have been. It is alleged that there was short seUing of 
 exchange and also that there was a marked absence of buyers 
 even aroimd the lowest quotations. Such conditions could 
 not last very long without vitally affecting the exports of 
 American commodities. 
 
 The time had come for drastic measures. It was obvious 
 that our foreign trade could not much longer flourish under 
 such conditions as were witnessed during the summer of 19 15. 
 And it was equally clear that Europe would not, and probably 
 could not, export sufficient gold to this country to keep 
 exchange approximately at par. The month of September 
 opened with the well established belief that Great Britain, 
 either alone or in conjunction with other European powers, 
 would soon effect an arrangement for rehabihtating our 
 foreign exchange situation. This arrangement has, as a 
 matter of fact, just been perfected, an Anglo-French com- 
 mission, composed of bankers of international repute and 
 headed by the Lord Chief Justice of England, having reached 
 this country during- the first half of September for that pur- 
 pose. The commission entered at once into conference with 
 bankers from all parts of the United States, and with their 
 aid has evolved a plan for restoring the foreign exchange 
 situation to^ as near a parity as practicable by means of a 
 credit to Europe, in place of gold exports from Europe. The 
 
credit will be in the form of a $500,000,000 note issue, to run 
 for five years at 5 per cent, repayable in cash or convertible 
 at the option of subscribers, into 4 J^ per cent joint Anglo- 
 French bonds redeemable in ten to twenty years by the two 
 governments jointly and severally. The bonds will be issued 
 in denominations as low as $100, and payment for them may be 
 made by installment. They will be sold to investors to net 
 better than 5% per cent. 
 
 The wisdom of the loan is admitted fully as much by those 
 whose natural feelings are opposed to England and France 
 as by those whose S3anpathies are with the Allies. The pur- 
 chase of the bonds will not be made with any regard for the 
 interests of these two nations, but wholly to protect our own 
 interests, which at the present moment are very seriously 
 menaced. As previously intimated, we cannot sell to Europe 
 unless we buy from Europe. We must buy either goods, or 
 gold, or securities. We have been disabused of the idea 
 that Europe needs our resources and cannot get along without 
 them. We have an historic instance of how she got along 
 without our cotton during the Civil War. In the past year 
 she has bought extraordinary amounts of our cereals and 
 provisions, but these are not indispensable to her. There is 
 no reason to suppose, for example, that the United Kingdom 
 would starve if it did not have our wheat. The wheat )deld 
 of the world for 191 5 has been estimated as substantially 
 500,000,000 bushels larger than that of 19 14. It is estimated 
 that for next year England will require about 240,000,000 
 bushels, France 85,000,000, and Italy 75,000,000, a total of 
 400,000,000 bushels. It is also estimated that Canada will 
 this season have a surplus for export of 175,000,000 bushels, 
 Agrentine 130,000,000, Australia 60,000,000, and India 
 50,000,000, or a total of 415,000,000 bushels. 
 
 This is significant in view of the fact that we have an 
 exceptionally large wheat yield this year. Briefly, we are 
 likely to have between 400,000,000 and 500,000,000 bushels 
 for export. If the Dardanelles are opened Russia will have 
 a surplus from this year's crop, to which must be added a 
 
very considerable portion of last year's yield, which, owing 
 to the war, was unable to get to market. As the total world 
 demand for wheat, aside from England, France and Germany, 
 is not in excess of 150,000,000 bushels, it is easy to conceive 
 conditions which would make it difficult, if not impossible, 
 to market more than a relatively small portion of our surplus. 
 As Mr. James J. HilLhas recently declared, even if we should 
 cut our wheat production in two it would require two or three 
 years to work off the surplus. The price of the whole crop 
 would, of course, be fixed by the price of the unusable surplus, 
 and Mr. Hill probably does not go too far in saying that 
 wheat will be sold below the cost of production and our farm 
 interest be involved in a disaster from which it could not 
 recover for many years. In different degrees this would be 
 true of our cotton, meat products and provisions generally. 
 If this is a correct forecast, and there is every reason to beheve 
 that it is, we should be confronted, in the event of a failure 
 of the Anglo-French loan, with a situation which would be 
 little, if any, short of staggering. There is ground, however, 
 for considering the success of the loan as assured, in which 
 event we may regard the prospect just outlined as a night- 
 mare. The chances are that we shall not only retain all that 
 we have already gained in the way of trade advantage, but 
 add thereto. 
 
 There is one advantage to be gained from the new note 
 issue about which very Httle has yet been said. One of the 
 most objectionable things to a banker or a merchant is a 
 rapidly fluctuating market. Frequent and violent changes 
 in foreign exchange markets point to increasing difficulty on 
 the part of the industrial world in transacting its affairs. 
 If such an exchange market as has been witnessed in this 
 country for some months past should be long continued, our 
 merchants and manufacturers would find themselves in a 
 position very similar to that of merchants and manufacturers 
 doing business with a silver standard country in a period of 
 violent fluctuations in the white metal. Such an outcome 
 must be far from everyone's desire. 
 
 8 
 
It has been assumed by some that the Anglo-French loan 
 would work to the disadvantage of this country by depriving 
 it of a large amount of its working capital. Such persons 
 would no doubt admit that the maintenance of our foreign 
 trade, which the loan is designed to effect, is, in itself, a very 
 good thing. But can that end be gained if we hand over 
 $500,000,000 of our capital for use by England and France? 
 If England and France were to take the $500,000,000 and use 
 it elsewhere, some importance might be attached to this 
 question. But the whole amount of the loan will remain on 
 deposit in the banks of this country and will be used for the 
 purchase of American commodities. The situation that has 
 been created is about as follows. The English and French 
 governments acting as a unit borrow half a billion dollars in 
 the United States and deposit the proceeds in the banks of this 
 coimtry. They are in position, therefore, to offer half a 
 billion dollars of exchange (or an amount equivalent to that 
 sum in pounds and francs) in the London and Paris markets 
 for foreign exchange. A merchant in London, we will say, 
 places an order for goods in New York. To make payment 
 he buys a bill on New York. On receipt his creditor in New 
 York deposits the bill at his bank and the bank, directly or 
 indirectly, draws upon one or another of the banks holding 
 the deposit of the English and French governments, thereby 
 diminishing the credit balance of these governments by the 
 amount owed the New York merchant by the London mer- 
 chant. In other words, the bank account of the two govern- 
 ments has been decreased and that of the New York merchant 
 increased by the transaction. But the New York merchant 
 owes a St. Louis manufacturer a sum equal, let us say for the 
 purpose of keeping the illustration as clear as possible, to 
 that paid him by the London merchant. He therefore sends 
 him his check, by which means this portion of the credit of 
 the English and French governments is transferred to the 
 use of the St. Louis merchant, who promptly transfers it to 
 somebody else, and he to another. What this means is this: 
 owing to the credit obtained in the United States by the two 
 European governments a vast amount of American products 
 
 9 
 
which might otherwise, owing to reduced demand at home, 
 be very slow of sale is marketed at satisfactory prices, the 
 credit instruments by which the goods were got out of one 
 set of hands into another being immediately available for new 
 transactions. 
 
 We have here a fine illustration of what the pohtical econo- 
 mists call the "efficiency of money." Money is of no use 
 except when it is effecting trades. The more times a dollar 
 gets around in the course of a year, the greater the business 
 done by the commimity in which it circulates. "Money" is 
 a very broad term. In common usage it means gold, silver, 
 greenbacks, bank notes, checks, drafts, bills of exchange, etc. 
 The great bulk of the money by which the trade of this 
 country is effected is in the form of credits. A credit arises in 
 this way: a merchant or manufacturer, for example, goes to 
 his bank and makes a loan; he does not carry the proceeds of 
 the loan away with him, but leaves them at the bank until 
 the time arrives for him to use them in whole or in part; the 
 bank, therefore, credits him with a deposit corresponding in 
 size with the loan; as soon as he desires he can begin to draw 
 checks against this deposit; and these checks pass current 
 as money. A fundamental fact remains to be mentioned. 
 As soon as the bank credits its customer with a deposit it 
 must begin to keep a legal reserve on that deposit. It will 
 be seen, therefore, that a bank's ability to extend credit to its 
 customers is hmited only by its ability to keep the required 
 reserve. For example, on September 25 the banks of New 
 York had about $200,000,000 of gold above the legal reserve 
 requirement. This means that they could have begun im- 
 mediately to expand their loans by upward of $1,000,000,000 — 
 in other words, that they could have been the means of enlarg- 
 ing the outstanding volume of credits to that amount. Of 
 course they would not have considered it prudent to do that; 
 but if they had had the incHnation to do it, the law would 
 not have restrained them. 
 
 But at this jimcture two of the strongest borrowers in the 
 world come forward and ask for half a billion of credit in the 
 
 10 
 
United States. It is now assured that this large sum will be 
 advanced by thousands of individuals scattered all over the 
 country. These individuals, will draw practically the whole 
 sum from their banks. That is, the banks Will indirectly 
 advance to the English and French governments a simi very 
 nearly half as large as the maximum amount by which the 
 banks of New York, the great reserve centre of the United 
 States, could enlarge their volume of credits on the phenome- 
 nally large gold reserve which they had at this time. Hence 
 we see that the two European governments have found a way 
 to do for us what we have not succeeded in doing for our- 
 selves, namely, putting the latent resources of our banks to 
 work on a very large scale. 
 
 The consequences of the loan to the two contracting 
 nations are of vital importance to us. In fact, this loan 
 cannot be dissociated, in the mind of one who takes a com- 
 prehensive view of finance, from the general question of 
 European indebtedness. A year or more ago it would not 
 have occurred to any one to conceive of an indebtedness as 
 large as that which the nations of Europe have now contracted. 
 By the middle of September the war loans of the Allied Powers 
 (Great Britain, France, Russia and Italy) amounted to 
 $10,563,500,000, divided as follows: $5,715,000,000 for Great 
 Britain, $1,853,000,000 for France, $2,605,500,000 for Russia 
 and $390,000,000 for Italy. To this will soon be added the 
 $500,000,000 of the new Anglo-French loan, and there is 
 forthcoming another large French loan. By the middle of 
 last month Germany had placed $3,390,000,000 of war loans, 
 $10,000,000 of which came to the United States, and Austria 
 Hungary had borrowed $1,755,000,000. Turkey, mean- 
 while, had obtained an advance of $250,000,000 from Germany. 
 In the last half of September Germany offered another loan 
 of $2,500,000,000. Here is a grand total, not including the 
 forthcoming French loan, of $18,958,500,000 of war loans 
 already placed or now in the act of being placed. To this 
 must be added $332,000,380 of indebtedness occasioned by 
 the war on the part of various neutral countries, such as Hol- 
 
 11 
 
land, Roumania, Bulgaria, Egypt, Switzerland, Denmark, 
 Spain, Norway and Sweden. The ability of Europe to take 
 care of this enormous indebtedness is of course, a matter of 
 importance to this country not merely because we have already 
 advanced more than a negHgible portion of the money, and 
 are asked to advance an exceedingly heavy amount in the 
 near future, but also because our future industrial conditions 
 will have a very direct relation to the solvency or insolvency 
 of Europe. 
 
 There is reason to believe that the European nations are 
 far from the end of their borrowing. No one can foresee to 
 what heights the war debts will rise. With substantially 
 $19,000,000,000 arranged for in the last fourteen months, one 
 may be able to conceive what the end will be if the war is 
 prolonged a year longer, or two years longer, as some predict. 
 Yet it is easy for one, in viewing this situation, to let his 
 apprehensions nm away with him. That the Great Powers 
 will be obliged to increase taxation to a point altogether 
 beyond the knowledge of the present generation, may be 
 taken for granted. And this is the fact in which we are most 
 vitally interested; because excessive taxation is apt to mean 
 reduced purchasing power, and reduced purchasing power on 
 the part of Europe would, other things being equal, have an 
 adverse influence on the trade situation of the United States. 
 
 Some idea of the means by which Europe hopes to take 
 care of her new war indebtedness may be gathered from the 
 last budget speech of the British Chancellor of the Exchequer. 
 He said that Great Britain's debt will soon aggregate $11,000,- 
 000,000, and to take care of this obligation he proposed to 
 add 40 per cent to the existing income tax rate, and to lower 
 the exemption Hmit from £160 ($800) to £130 ($650), besides 
 increasing the super tax on incomes of £8000 ($40,000) and 
 over from 34d to 42d per pound. He also proposed to intro- 
 duce a special tax on profits which had increased during the 
 war. An increase in the sugar duty was announced, and an 
 all around increase of 50 per cent in the duty on tea, coffee, 
 chicory, tobacco, dried fruits and other articles was sug- 
 
 12 
 
1 < •• 
 
 1 < 
 
 gested, as well as an increase of loo per cent on patent medi- 
 cines. The necessity of keeping down expenditures in im- 
 ported luxuries, such as automobiles, moving picture films, 
 clocks, watches, musical instruments, plate glass and hats, 
 was emphasized. 
 
 English publicists have been making careful comparisons 
 of the present situation with those occasioned by great wars 
 of the past. Mr. W. H. Mallock, recently made a comparison 
 in the Fortnightly Review of these times with the period of 
 the Napoleon's War. He found that in the year 1812, after 
 nine years of war, the total interest payable on the national 
 debt was £30,000,000, the debt itself being £940,000,000. 
 If the present war should be continued for another two years 
 the total debt, according to Mr. Mallock, would (the debt 
 existing before the war being included), amount to £3,200,- 
 000,000, and the total interest payable at home and abroad 
 would be perhaps £130,000,000. In the year 181 2 the 
 interest on the debt was about £1 15s per head of the popula- 
 tion, out of a total average income of £22. The average 
 interest per head two years hence, should the war be so far 
 protracted, would be about £3 per head out of an average 
 income of £48. Should we assume, he adds, that £140,000,000 
 were raised otherwise than by loans, the additional burden per 
 head of the population would be about £3. The total average 
 burden would be thus £6 out of £48. In whatever way he 
 looks at the matter he is brought back to the conclusion that 
 if the present war should be protracted to the maximum 
 length for which, according to common computations, either 
 Great Britain or Germany could stand the strain, Great 
 Britain is today far better equipped in point of material 
 resources for maintaining its present struggle against Germany 
 than it was one hundred years ago for maintaining its struggle 
 against Napoleon. 
 
 Mi 
 
 Such utterances are reassuring, so far as the ability of the 
 great powers to take care of their war indebtedness is con- 
 cerned. Other things being equal it would not be so reassur- 
 ing as regards Europe's ability to buy our commodities on as 
 
 13 
 
extensive a scale as in the past. But there is a reasonable 
 expectation that other things will not be equal. Hard cir- 
 cumstances are likely to effect the aim which European states- 
 men have so much at heart and which may be summed up 
 in the phrase "produce more, spend less." Larger production, 
 however, implies larger employment of raw materials and food 
 products; in other words, larger employment of just those 
 resources in which this country most abounds. There is 
 nothing pleasurable in the thought that we shall profit by 
 Europe's misfortunes. It is impossible, however, to ignore 
 the fact that, in the great redistribution of the wealth of the 
 world occasioned by this extraordinary war, we are the nation 
 which, from present appearances, is in a position to gain most 
 and lose least. 
 
 14 
 
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