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                           Foreign Exchange

                                  BY
                          HON. ROBERT L. OWEN

                   UNITED STATES SENATOR OF OKLAHOMA
            CHAIRMAN OF THE UNITED STATES SENATE COMMITTEE
                        ON BANKING AND CURRENCY

                            [Illustration]

                               NEW YORK
                            THE CENTURY CO.
                                 1919

                  Copyright, 1919, by Robert L. Owen




FOREIGN EXCHANGE

THE FEDERAL RESERVE FOREIGN BANK


PUT THE AMERICAN DOLLAR AT PAR IN FOREIGN EXCHANGE

Because of war conditions the American dollar is at a serious discount
in all of the neutral countries of Europe and throughout the world,
notwithstanding the fact that the United States had a favorable balance
of trade of over three thousand millions last year, and ten thousand
millions since the war began.

It is important that American business men, American bankers, American
importers and exporters should understand this problem and the remedy
for it.

The problem is not really a difficult one. It is the purpose of this
little book to explain the problem; to show the factors entering into
it; to show the remedy and point the path and mechanism by which
to maintain the American dollar at par, and make it the medium of
international exchange and of international contracts.


THE U. S. DOLLAR IN SPAIN

The American dollar should buy 5.18 pesetas, lire or francs on a gold
par basis, but at present (August, 1918) will buy 8.90 Italian lire and
about 3.5 Spanish pesetas, although the gold value of the Italian lira
and the Spanish peseta is identical. The reason for this is that Italy
has an urgent demand for dollars in America to pay for the purchases of
the Italian Government and of the Italian people, and the credits being
extended to Italy for this purpose are being furnished at enormously
high rates by private banks and capitalists, while Spain is selling
more commodities than she is buying, is an international creditor,
has no need for dollars, and pesetas in Spain are being sold at an
artificial high price by private banks and capitalists. The Allies
requiring Spanish pesetas are being charged enormously high rates for
the pesetas required in Spain, which means that the pesetas are selling
for 28 cents apiece instead of 19 cents and that the gold dollar
measured in pesetas is at a heavy discount and only worth 67 cents.

The gold dollar in New York instead of buying 67 cents’ worth of
Spanish gold currency should buy 50 per cent. more than it does, and
American and Allied purchasers of Spanish goods suffer this 50 per
cent. loss with the added penalty of war prices which makes the 50
per cent. loss probably 100 per cent., to which must be added the
merchants’ profit.

It is obvious, therefore, that the loss to the United States and to the
Allies from a condition of this character ought to be promptly met.
It can be done. It is necessary to understand foreign exchange, the
factors entering into it, the means by which to economically settle
international commodity trade balances and to provide the mechanism
under Government control through which the steps can be taken to obtain
the desired results.

I desire, therefore, to explain the factors entering into foreign
exchange, the steps required to bring the dollar to par, the steps
required to keep the dollar at par, and the mechanism necessary to make
effective the proposed policy.


FOREIGN EXCHANGE DEFINED

Foreign exchange is a broad term referring to the business of
international bills of exchange. These bills of exchange take the form
of drafts representing an evidence of debt in the form of a negotiable
instrument, the drawer or maker constituting the creditor, the drawee
the debtor, and the title to such bill being vested in the payee.
These drafts take the form of acceptances, often endorsed by acceptance
banking companies. When drawn against merchandise exported they are
often accompanied by documents—such as the receipt of the transportation
company, or bills of lading, certificates of insurance, certificates of
inspection, weight, etc. These foreign bills of exchange may be drawn
against securities which are sold as merchandise. They may appear as
authorized commercial or banking credits or as finance bills.

They may be drawn against actual cash funds or credits in banks, but,
whatever they are, they comprise at last merely the order of the drawer
or maker upon the drawee or debtor to pay to a payee a certain amount of
money in the currency of the country upon which they are drawn, in
pounds sterling in London, in pesetas in Spain, in francs in France,
in lire in Italy, in dollars in New York. The forms of these bills are
well established and can be found in any of the many comprehensive
works on international exchange.

These bills may be at sight, payable on presentation, or thirty,
sixty, or ninety days; they may be with documents attached or without
documents attached; they may be acceptance bills or payment bills. The
scope of this book does not permit of an elaborate discussion of the
mere forms of such bills or the mechanism employed by the banks in
handling such bills or the mathematics of converting one currency into
another.


BALANCE OF TRADE

When a country is shipping more goods in the form of commodities
than she is receiving, it is said that the _balance of trade is
favorable_. The term “balance of trade” is apt to be misleading. It
is a convenient phrase relating to commodity shipments alone as they
appear on the record of outgoing and incoming ships, which are always
subject to Government inspection and from which a definite and accurate
compilation can be made and is made. If such “balance of trade” runs
against a country the actual balance of commodity _indebtedness_ must
be made up by shipments of gold, securities or transfer of credits.
Outside of commodities which appear in making up the balance of trade
there are a number of invisible factors, not of statistical public
record, which go to determine the extent to which the citizens of
one country may be indebted to those of another, and by which the
international debts are actually settled. These elements are not
absolutely available in the form of statistics and can be only roughly
estimated. Taking the United States as an example, there are certain
factors not tabulated by the Bureau of Statistics at Washington because
their proportions are unknown to the officials. These are the elements
which comprise the invisible factors in determining the settlement of
international debts. The transfer of money or credit from the United
States to other countries (outside of commodities) is accomplished in
the following ways:


FACTORS AFFECTING INTERNATIONAL EXCHANGE

    1st. The purchase by citizens or corporations in the
         United States of securities or properties of any
         kind (outside of commodities actually shipped,
         otherwise accounted for) in other countries;

    2nd. The payment of interest or dividends on American
         securities and properties owned by foreigners;

    3rd. The payment of loans due foreigners;

    4th. The payment of passenger and freight rates to
         foreigners owning foreign vessels;

    5th. Money expended by Americans touring abroad;

    6th. Remittances by foreigners in the United States to
         their friends or dependants abroad;

    7th. Loans by the United States to foreign countries,
         which during this war are reaching gigantic
         proportions, or loans by U. S. banks or citizens
         to foreigners;

    8th. Remittances from the United States to pay for
         foreign securities marketed in the United States,
         which have reached very large proportions during
         this war.

In like manner all of these unrecorded factors or any of them may apply
to any of the foreign countries and transfer money or credits to the
United States. For instance:

    1st. The purchase by foreign banking corporations or
         individuals of American securities or properties;

    2nd. The payment of interest or dividends on foreign
         securities or properties held by American
         capitalists;

    3rd. The liquidation of loans negotiated by Europe or
         foreign bankers in America;

    4th. The payment to Americans of passenger and freight
         service on American ships by foreigners;

    5th. The money expended in America by foreign persons
         traveling in America;

    6th. Remittances to persons within the United States
         from foreign friends or relatives;

    7th. The lending of money to the United States, or
         to citizens, bankers, or corporations of the
         United States by foreign Governments, bankers, or
         citizens who might make loans on American bonds or
         American evidences of debt;

    8th. The payment for insurance due to American
         Insurance companies.

The “balance of trade” relates only to commodity shipments. When a
country ships less commodities than it receives it must make up the
difference by shipping gold, shipping securities, transferring bank
credits, or rendering service, such as insurances, passenger and
freight, wharfage and dockage, or entertaining travelers.


COMMODITIES PAY FOR COMMODITIES

If the term “commodities” were broad enough to cover all of these
factors, then it might be properly said that the debts of the citizens
of one nation to the citizens of another nation were all covered by
exchange of commodities.

This is so far recognized that it is a common expression to say that
all imports are paid for by exports, because no nation can except for a
limited time pay its commodity trade balance in gold without exhausting
the gold upon which the credit of its currency is based.


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:

  --------------+-------------------------+-----------------------------
                |    Month of December—   | 12 months ended December—
   Exports to—  +------------+------------+--------------+--------------
                |    1917    |    1916    |     1917     |     1916
  --------------+------------+------------+--------------+--------------
  Grand         |            |            |              |
     divisions: |            |            |              |
   Europe       |$323,690,436|$349,558,509|$4,054,362,029|$3,813,278,324
   North America| 155,135,812|  93,285,797| 1,264,688,666|   924,553,649
   South America|  33,700,646|  22,787,859|   312,420,985|   220,266,818
   Asia         |  60,465,901|  42,447,145|   431,149,591|   364,959,155
   Oceania      |  14,591,876|   9,751,896|   117,158,921|   105,572,649
   Africa       |   6,279,609|   5,402,574|    51,464,784|    54,010,506
                |------------+------------+--------------+--------------
      Total     | 593,864,280| 523,233,780| 6,231,244,976| 5,482,641,101
                |------------+------------+--------------+--------------
  Principal     |            |            |              |
     countries: |            |            |              |
   Austria-     |            |            |              |
      Hungary   |    ....    |    ....    |     ....     |        61,771
   Belgium      |       8,400|   6,691,023|    22,628,659|    30,998,928
   Denmark      |     134,363|   4,165,928|    32,388,864|    56,329,490
   France       |  73,564,381|  58,706,507|   940,810,070|   860,821,006
   Germany      |    ....    |   1,142,353|         3,275|     2,260,634
   Greece       |   1,030,494|   1,431,702|     8,477,603|    33,685,689
   Italy        |  46,162,066|  37,974,651|   419,095,473|   303,530,476
   Netherlands  |   7,899,931|  11,345,624|    90,520,301|   113,730,162
  Norway        |   1,668,338|   4,234,745|    62,866,850|    66,209,717
  Russia        |            |            |              |
     in Europe  |     816,462|  23,097,932|   314,639,528|   309,806,581
  Spain         |  10,159,988|   6,577,521|    92,409,320|    64,316,888
  Sweden        |     503,364|   5,900,309|    20,900,854|    47,967,590
  United Kingdom| 177,433,009| 185,209,430| 2,001,031,104| 1,887,380,665
  Canada        | 101,767,255|  60,939,523|   829,972,331|   604,908,190
  Central       |            |            |              |
     America    |   4,861,129|   4,008,658|    52,206,466|    46,531,841
  Mexico        |  15,485,408|   4,415,374|   111,111,541|    54,270,283
  Cuba          |  24,652,166|  18,846,295|   196,350,315|   164,666,037
  Argentina     |  11,553,945|   7,192,128|   107,641,905|    76,874,258
  Brazil        |   6,566,030|   5,210,987|    66,207,970|    47,669,050
  Chile         |   7,586,866|   3,919,899|    57,483,996|    33,392,887
  China         |   6,366,898|   3,645,538|    40,208,612|    31,516,140
  British East  |            |            |              |
        Indies  |   7,290,060|   3,775,091|    42,746,749|    30,799,916
  Japan         |  40,199,201|  14,821,946|   186,347,941|   109,156,490
  Russia in Asia|     525,675|  16,540,391|   109,169,243|   160,701,673
  Australia and |            |            |              |
    New Zealand |   6,474,755|   7,351,503|    76,909,225|    81,305,968
  Philippine    |            |            |              |
        Islands |   7,804,316|   2,268,853|    38,148,726|    22,775,491
  British Africa|   5,215,449|   2,508,294|    39,023,443|    32,448,177
  --------------+------------+------------+--------------+--------------


    -------------------------------------------------------------------
                  _Statement of imports and exports,_
                   _12 months ended December, 1917._
    -------------------------+-------------+-------------+-------------
                             |  Exports.   |  Imports.   |  Balance in
                             |             |             |  our favor.
    -------------------------+-------------+-------------+-------------
    Netherlands              | $90,520,301 | $22,744,504 |  $67,775,797
    Norway                   |  62,866,850 |   6,280,233 |   56,586,617
    Spain                    |  92,469,320 |  36,881,630 |   55,587,690
    Sweden                   |  20,900,854 |  18,069,487 |    2,881,367
    -------------------------+-------------+-------------+-------------

----------------------------------------------------------------------
                                               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:
   -----------------+-----------------------+---------------------------
                    |   Month of December—  | 12 months ended December—
     Imports from—  +-----------+-----------+-------------+-------------
                    |    1917   |    1916   |     1917    |     1916
   -----------------+-----------+-----------+-------------+-------------
   Grand divisions: |           |           |             |
     Europe         |$40,617,322|$59,107,818| $551,144,599| $633,316,886
     North America  | 56,506,340| 47,686,900|  871,982,524|  658,438,120
     South America  | 49,669,439| 43,786,488|  598,818,532|  427,609,562
     Asia           | 62,142,195| 45,422,209|  758,237,165|  516,704,047
     Oceania        | 12,792,804|  4,827,542|   99,221,196|   93,673,382
     Africa         |  6,183,397|  4,003,231|   73,063,939|   61,893,338
                    +-----------+-----------+------------+-------------
       Total        |227,911,497|204,834,188|2,952,467,955|2,391,635,335
   -----------------+-----------+-----------+-------------+-------------
   Principal        |           |           |             |
        countries:  |           |           |             |
     Austria-Hungary|   ....    |     27,980|       64,937|      631,251
     Belgium        |   ....    |    156,835|      158,022|    1,479,342
     France         |  8,662,632| 10,488,210|   98,639,653|  108,893,119
     Germany        |        451|    138,269|      159,352|    5,819,472
     Italy          |  3,219,301|  4,789,202|   36,480,807|   60,235,172
     Netherlands    |    747,674|  3,689,940|   22,744,504|   43,602,076
     Norway         |    261,481|    844,802|    6,280,233|    6,430,316
     Russia         |           |           |             |
         in Europe  |  2,661,145|     83,848|   12,350,179|    4,478,990
     Spain          |  3,496,232|  3,675,167|   36,881,630|   32,577,377
     Sweden         |    329,403|  5,505,941|   18,069,487|   18,856,638
     Switzerland    |  1,826,252|  1,927,928|   19,834,668|   22,414,383
     United Kingdom | 16,874,793| 25,765,390|  280,080,175|  305,486,952
     Canada         | 36,232,364| 23,753,953|  413,674,846|  237,249,040
     Mexico         |  9,858,406| 10,399,693|  130,434,722|  105,065,780
     Cuba           |  5,053,741|  9,108,597|  248,598,199| 243,728,770
     Argentina      | 17,560,443| 12,509,181|  178,245,833|  116,292,647
     Brazil         |  8,233,119| 14,286,609|  145,274,931|  132,067,378
     Chile          | 13,618,362|  5,914,498|  142,597,929|   82,123,995
     China          |  8,402,995|  6,352,337|  125,106,020|   80,041,851
     British East   |           |           |             |
          Indies    | 20,992,304| 17,138,997|  259,629,897|  201,190,844
     Japan          | 23,692,557| 17,268,621|  253,669,709|  182,090,737
     Australia and  |           |           |             |
        New Zealand | 7,403,284 |  1,682,769|   32,002,203|   55,826,228
     Philippine     |           |           |             |
         Islands    | 4,633,395 |  2,718,912|   62,386,641|   34,162,081
     Egypt          |   ....    |  2,944,041|   27,352,444|   29,533,795
   -----------------+-----------+-----------+-------------+-------------

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

Great Britain, when the United States entered the war, pegged the
pound sterling in New York at $4.76-⁷/₁₆, which means that Great
Britain through Morgan and Company, the agent of the Bank of England,
engaged to buy all drafts on England payable in pounds sterling at
$4.76-⁷/₁₆ for each pound sterling on the face of such bills. This was
accomplished by the United States Treasury furnishing the money to
Great Britain against British bonds, which enabled Great Britain and
British merchants to buy in the United States the goods she required
without paying usurious rates of interest for such credits. Except for
the backing of the United States Government the pound sterling would
have been most seriously depreciated in the United States and in the
entire world.

Great Britain, the wisest of all financial countries, thoroughly
understood this problem and put the pound sterling within two per
cent. of commercial par—for the purpose of protecting Great Britain
against the gigantic loss due to an adverse international exchange. The
United States must pursue the same policy and make it effective with
other countries. She has no adequate organization by which it may be
accomplished.

It might be said—why do not the great New York, Chicago and Boston
banks take steps to protect the United States against this loss thro
the depreciated dollar?

The answer is—It is none of their business.

The answer is—They handle these bills as commodities coming over their
counter; they buy them and sell them at the market, and the market is
fixed by persons who appraise the matter purely from a standpoint of
profit, and commissions based on an estimate of implied risk. Banks buy
Spanish pesetas and sell Spanish pesetas to other banks all over the
world; they do not look at the matter from a public standpoint, and it
is not to be imputed to them as a fault because they do not regard this
question from a public point of view.

Since the war arose gigantic volumes of foreign securities have been
placed on sale in the United States which serve to protect them against
an adverse exchange in the United States.

By these means other nations have undertaken to protect themselves
against an adverse balance of trade in the United States due to the
great shipments of goods from the United States. A similar policy is
necessary for the United States to protect itself in turn.

It will thus be seen that the United States has loaned its Allies five
thousand, five hundred and nineteen millions, and that there have been
floated in the United States in addition gigantic volumes of securities
of other nations, amounting probably to a still larger sum. In addition
to this we have bought from Europe and paid for several billion dollars
of American securities held in Europe.

We have also met the cost of conducting the expense of the United
States in preparing for war on Germany and Austria.


THE PRODUCTIVE POWER OF AMERICA

It has been estimated by excellent authority that the productive power
of the United States, including the products of agriculture, of the
mines, of the forests and factories on one turnover, exceeded sixty
billions for last year (1917). The actual resources of the banking
power of the United States, as shown by the tabulated returns, is over
thirty-nine billions, so that the United States is financially the most
powerful nation in the world; its credit is superior to that of any
other nation in the world; its actual gold in the Federal Reserve Bank
amounts to eighteen hundred millions, and in the Treasury it amounts,
with the silver included, to twenty-eight hundred millions. The power
of the United States properly organized and properly directed is
sufficient to put the United States dollar at par throughout the world
and keep it at par.


THE DOLLAR AT PAR

Every intelligent man understands the extreme importance of keeping the
United States dollar at par in the United States, and it is of equal
importance, according to the business transacted, to keep the United
States dollar at par in our foreign business. We bought last year from
other nations nearly three billion dollars’ worth of goods.

If the United States dollar is put at par and kept at par it will
become a stable measure of value in international contracts and will
enable merchants all over the world to use the American dollar as a
standard measure of value. This will lead to international business
being transacted on American dollars and will establish the prestige
of the United States throughout the world according to the actual
financial and commercial strength of the United States.


AMERICAN MERCANTILE MARINE

After the war America will have a gigantic international mercantile
marine, which must be employed in international commerce; otherwise it
will pass into the hands of other nations who will employ such ships in
commerce. As a means of maintaining American commerce and keeping the
American merchant marine employed we must expand our export business,
and one of the factors of vital importance is to have adequate foreign
banking facilities, information and credit furnished our exporters and
our importers.

The banking capital employed in the foreign exchange department of the
American banks probably will not amount to $200,000,000. The usual
bills are 30, 60 and 90 day bills, so that the available American
Capital in this service is by no means adequate to handle the foreign
business. Our imports and exports in 1917 were over nine billions. We
ought to handle a large part of foreign international bills, for we
have the banking power if it were organized and employed. As a means
to this end I have introduced a bill in the United States Senate (Sen.
3928) which I fully explained in the Senate Feb. 25, 1918, to establish
a Federal Reserve Foreign Bank.


FEDERAL RESERVE FOREIGN BANK

The Federal Reserve Foreign Bank proposed by Senate Bill 3928 is
strictly in line with the policy of the Federal Reserve Act in the
powers granted to the Federal Reserve Banks, and is intended to make
effective the principles of the Federal Reserve Act itself.

The Federal Reserve Act authorized the Federal Reserve Banks in
Sections 13 and 14 to receive deposits, discount commercial bills and
acceptances, deal in gold and silver, to exchange Federal Reserve
notes for gold, to contract for loans on gold coin or bullion, giving
therefor when necessary acceptable security, including hypothecation
of United States bonds or other securities which Federal Reserve Banks
are authorized to hold, to buy and sell at home or abroad bonds and
notes of the United States, of foreign Governments, etc., buy and sell
commercial bills of exchange, to issue bank notes and receive Federal
Reserve notes, to open credits at home or abroad, to open and maintain
accounts in foreign countries, appoint correspondents and establish
agencies in such countries wheresoever it may be deemed best for
the purpose of purchasing, selling, or buying bills of exchange or
acceptances, arising out of actual commercial transactions which have
not more than ninety days to run and which bear the signature of two or
more responsible parties, and with the consent of the Federal Reserve
Board, to open and maintain banking accounts for such correspondents or
agencies, etc.

The original Federal Reserve Act also provided, in Section 25, that
any National Banking Association with a capital surplus of a million
dollars, or more, might be permitted to establish branches in foreign
countries for the furtherance of the foreign commerce of the United
States and to act as fiscal agents of the United States.

Such National Banks are also authorized to take stock in banks or
corporations, chartered under the laws of the United States or of any
State thereof, and principally engaged in international or foreign
exchange.

Under Section 25 some of the National Banks have established branches
in foreign countries.

Some of them have taken stock in banks doing a foreign business.

But the Federal Reserve Banks have not exercised the powers
contemplated by the Federal Reserve Act in foreign bills or foreign
business except in a negligible degree.

The Federal Reserve Banks have been intensely occupied in domestic
business, so there is that reason why they have not been disposed to
enter the foreign field. These banks have increased their resources
until now they exceed thirty-eight hundred million dollars. But it is
also true that six of their nine Directors are chosen by the privately
owned banks some of whom fear the competition of the Reserve Banks in
foreign banking.

Congress later amended the Federal Reserve Act, at the request of the
Federal Reserve Board, and gave the Federal Reserve Board authority
to _require_ the Federal Reserve Banks to establish foreign branches,
but practically nothing has been done under this authority granted by
Congress. Senate Bill 3928 proposes to add a new Section to the Federal
Reserve Act as Section 25 A., creating a Federal Reserve Foreign Bank
of the United States, under the supervision of the Federal Reserve
Board to be located in the City of New York, with a capital of one
hundred million dollars, with an initial capital of twenty millions,
the stock to pay five per cent., to be non-taxable, to be offered to
the public and to the banks at par and if not taken by them to be taken
by the United States Government.

The powers proposed for this bank are practically the same as are
given to the Federal Reserve Banks, but the management of the bank is
put into the hands of directors, nine in number to be designated by
the President of the United States. The proposed Act directs that the
members of the board shall be men of tested mercantile experience and
fairly representative of the various parts of the United States. It
does not say that they shall not be bankers, but if they are bankers
they must be bankers who have had tested mercantile experience, such as
is required of the Governors of the Bank of England.


THE PURPOSE OF THE BILL

The purpose of this proposed Act is to establish a publicly controlled
agency in charge of men with tested mercantile experience, who shall
administer the bank in the interest of American commerce, of American
importers and exporters, of American manufacturers and producers, in
the interest of American consumers, and not merely in the interest
of bankers, but in co-operation with the bankers, as the Bank of
England or the Bank of France co-operates with other banks while being
influenced also by the general public interest.

Such a bank would buy and sell international bills of exchange and
acceptances from and to American and foreign banks who desired to sell
or buy such bills.

Such a bank would in this way serve the interests of other banks
handling international exchange, but such a bank being publicly
controlled would furnish American importers and exporters, manufacturers
and producers with credits abroad, with banking facilities and
accommodations at a standardized fair rate of profit, which would serve
the common interest of American business men.

Such a bank publicly controlled would not expose an importer’s business
or an exporter’s business to trade rivals,—a practice known to exist
in certain foreign exchange departments where Germans systematically
conveyed such valuable information to rival German firms.

Such a bank would furnish foreign exchange without profiteering or
speculating.

Such a bank would be concerned to keep the American dollar at par and
in co-operation with the Government of the United States would take the
essential steps necessary to that end, a function which no private bank
could exercise.

Such a bank through the Federal Reserve Banks could become a means of
extending to every member of the Federal Reserve System foreign banking
facilities and information for the benefit of the local importers and
exporters, so that a member bank could take a draft of a local exporter
on any part of the world and have it cashed whenever the local bank
desired the money.

Such a bank could place these bills with other Federal Reserve Banks
and with member banks who had unemployed money.

Such a bank as a bank of deposit could utilize some of the very large
deposits now placed at two per cent. and could furnish American
importers and exporters banking accommodations at as cheap a rate
as does Lombard Street. Lombard Street in London now finances the
commercial bills of the world, running into thousands of millions at
three and one-half per cent. per annum, while the current New York
and Boston rate is a minimum of four and one-half. The international
exchange business of the world cannot be brought to America unless
America extends accommodations on as favorable terms as London, which
is now the commercial and financial center of the world. America has
the power.

America, as a matter of fact, has loaned Great Britain and Allies since
we entered the war, April, 1917, many billions besides taking over
many billions in foreign securities placed in America—buying billions
of American securities held in Europe, in addition to the gigantic
financing of the war by the United States itself.

Such a bank publicly controlled by having gold deposits in Europe
and Asia could make it unnecessary to incur the economic loss of
transferring gold back and forth across the Atlantic and Pacific.

Such a bank could not only bring the American dollar to par, but what
is more important could fix the American dollar at commercial par and
maintain it there as a standard measure of value for international
contracts throughout the whole world. Unless this is done America
cannot become the financial center of the world.

Unless this is done the gigantic mercantile marine, which America is
now building at great cost, will not be adequately served and supplied
with the export and import business necessary to maintain these ships
under the American flag.

Such a bank would not only furnish foreign banking facilities to every
part of the United States, but would be in a position to furnish
reliable credit information to American importers and exporters,
manufacturers and producers as to foreign buyers and foreign sellers;
reliable information and accommodation with regard to shipping
conditions, storage, insurance and other questions essential to the
convenient, economical and safe transaction of international business.

Such a bank publicly controlled is the mechanism through which
international exchange can be stabilized, the American dollar maintained
at par, American commerce furnished with credit facilities and
adequately promoted throughout the world. It is the one thing needed to
perfect the Federal Reserve System of the United States, now
acknowledged by the banks themselves as enabling them to serve their
customers as never before, enabling them to conduct their business with
a sense of security they never felt before, and enabling them to make
better returns upon their capital than ever before.

I have felt justified in preparing this brochure that I might call
the attention of American business men and of American bankers to
the importance of thus perfecting the Federal Reserve System, in the
hope that with their approval and co-operation, public opinion might
sufficiently crystallize to make itself effective in legislative
enactment. Congress does not go very far ahead of public sentiment.
This question must be determined by public opinion and this booklet
is justified as one of the steps to attract attention and inform the
public on this question.

Some of the banks with foreign exchange departments seem to imagine that
such a bank would compete with them. The fact is the competition for
international bills has taken the very great body of these bills to
Lombard Street, and some American banks give their customers the
Lombard Street rate by sending their bills to Lombard Street instead of
to New York. The bills are issued to the extent of many billions and no
bank need fear not getting all of such business as they may really need
or desire. The trouble is we have not available the capital required
to handle foreign bills and we should take immediate steps to make
American banking capital more available for such purpose.

The available capital of American banks with foreign branches at
present is inadequate to handle international bills. The imports and
exports of the United States alone the last year exceeded nine
billions, and the imports and exports of the world business handling
international bills are very much larger yet. A number of the best
foreign exchange experts engaged in handling such bills have declared
themselves warmly in favor of this measure; they do not fear the
Federal Reserve Foreign Bank; they welcome it, realizing it would
serve the banks in the same way in the foreign field which the Federal
Reserve Banks serve in a domestic way.

Importers and exporters who have studied the question strongly favor
the publicly controlled Federal Reserve Foreign Bank. Preparedness now
for after-war peace problems is urgent—other nations are vigorously
acting. The United States cannot be a Great Leader of the world in
Commerce and Finance unless it leads in fact by concrete steps and by
wise laws providing the mechanism for such leadership.

THE END