Chapter XIV Gold, Foreign Trade, and Foreign Exchange

reserve cities. Shipments of gold to the depository of the Bank of England at Ottawa by this pool proved sufficient to ease the situation greatly and to bring sterling exchange down to a reasonable figure. But it was less these emergency measures than it was the . tremendous volume of foreign demand for American products for war purposes which brought relief from the critical situa tion. In October the United States lost $44,000,000 of gold; in November they lost $7,000,000; in December, the tide turned and the United States gained about $4,000,000 net excess of imports over exports of gold. The explanation is of course the very heavy shipments of commodities on European account. From December, 1914, to May, 1917, the United States gained 153 154 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING o :--+--+--+--+--t-~ If) -+--+--+-+-~m _"'--+--+-+--1 rl ,...-;--+-+--+--+-+--I---It' 1-+- i--+--+--+-+--I---I m -+-+-+--+--+-+-+--frl ~ a:::o>~W I-+--+--+--+--+--+-~ ~ Z -+--+--+--+--+--+--+-~ mZ __-+--+---+--+--+-+--1 .-( W !< 0:: -I -J <{ U to ~ lN3~ ~3d H-t--r--+--;-;-I-t-+-+--+--t-+-t-i-+-+-;--+--I-H-+--+--+-+-~f-+--I--+--I--+-~--IOO ..... t-1H-t-r-r-r-t-t-rH-t-lm ~+-+-t--lr-t-+-+--+--+--+--f--~I-.J~--'--IM THE UNITED STATES 155 gold at a rate never dreamed of before. In 1915 the excess of . imports over exports of gold was over $420,000,000; in 1916 over $520,000,000 and in 1917 over $180,000,000, a net gain for the three years, 1915-1917 inclusive, of $1,111,000,000 in gold, and a gaIn of more than a billion from the outbreak of the war.

On A'pril 1, 1917, the general stock of gold coin, including bullion in the Treasury, was estimated at $3,089,000,000. The United States have lost gold somewhat since that time, the figures standing on Aprit'1, 1918, at $3,043,000,000-a figure which has been changed little since, owing to the rigorous control of gold shipments under the Federal Reserve Board's gold policy, later to be discussed. The most significant consequence of this huge flood of gold is to be found in the money rates in the New York market, illus trated by the accompanying chart for call rates. During the period when the stock exchange was closed and when th~ drain· on New York for gold was heaviest, the call rates went up to 8 per cent, though favored customers were charged only 6 per cent. These rates were of course not, strictly speaking, call rates. Since the stock market was closed and the banks could not sell the collateral on which the loans were made, it was impossible to call the loans. They were in fact undated time loans. With the turn of the tide of gold in Dec~mber, however, and with the reopening of the stock exchange, the rates dropped rapidly and for over a year from January, 1915, to May, 1916, New York enjoyed a period of the easiest money rates ever known in the history of the Street. The" high" on call rates at the "money post" of the stock exchange was 2 ~ per cent, the " low" was 1 per cent, and the general range was from 1% to 2 per cent. It was not until the heavy financial operations of the government in the summer of 1917 that call money got as high as 5 per cent again. This easy money undoubtedly facilitated greatly the in dustrial recovery which followed, accelerated the volume of pro duction and enormously accelerated the volume of exchanges, made easier the financial transactions required in the starting of new enterprises to meet the war demands and was a potent factor 156 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING in the marvelous mobilization of the industrial resources of America.!

Foreign demand, directed first toward grains and munitions in the fall of 1914, gradually spread over a wide range of Ameri can products; while domestic d'emand from the industries made prosperous by European demand quickened every field of Ameri-_ can industry. The story of the industrial recovery and expan sion of the United States will best be told in the following table indicative of physical volume of production in which the physical production in 1910 is counted as 100 per cent: . Per cent 1910 100.0 1911 99.0 1912 106.9 1913 ' 112.5 1914 104.5 1915 110.0 1916 129.0 1917 131.3 2 1918 124.8 The rising volume of production was accompanied by and in deed largely caused by rising prices (the explanation of which ,ve shall take up in a later section) and the combination of rising phys~cal volume of production and rising prices led to a w'holly extraordinary increase in the income of the people of the United States, as indicated by the following table: 1910 $30,500,000,000 1911 29,600,000,000 1912 33,800,000,000 1913 .. , , .. ,........................... 34,800,000,000' 1914 32,600,000,000 1915 .', .. , ,........................... 35,400,000,000 1916 ., , .. ,........................... 49,200,000,000 1917 ,.................................... 68,600,000,000 1918 ,..... 73,400,000,000 The comparative importance of foreign and domestic trade as .1 But it is possible to question this. London was losing gold heavily during this same period, and yet London discount rates were kept low on the whole. See charts, infra, appendix·, London, however, was not on a strict gold basis.

2 This index of physical volume of production is based on railroad gross receipts for the years 1910 to 1916, inclusive. For 1917 and 1918, a different method is employed. For the method of this computation, see the present writer's Value of !J;/oney, appendix to chapter 13, and Annalist, January 6, 1919, pages 5-6 and 61.

THE UNITED STATES 157 this rapid expansion went on is indicated by the following table showing the ratio of foreign to domestic trade: 1 Per cent 1910 9.9 1911 11.4 1912 11.6 1913 '. . . . . . . . . . . . . . . . . . . . . . . ... 11.5 1914 11.7 1915 ; 11.4 1916 17.9 1917 13.7 1918 13.4 The apparent decline in the ·ratio of foreign to domestic trade in 1917 and 1918 does not mean that the volume of physical exports was comparatively reduced in these years. An enormous volume of exports was sent on account of the American Govern ment itself to France which did not get into th~ export figures. . The heavy foreign purchases in the United States led to in creasing difficulties in making payments. It was impossible for the belligerent countries to pay for the goods we sent them with goods produced by them exported to us. The balance of trade grew ever greater. From July 1, 1914, to July 31, 1918, the total excess of our merchandise exports over imports was $10, 110,000,000, virtually all of which represented a debt of the European belligerents, as our increasing exports to various neu trals were largely offset by exports from those neutrals either to us or to Europe. Part of the consequence of this heavy trade balance we have already seen in the enormous shipments of gold which we received. An early consequence of it was a decline in the exchange rates of the leading belligerents in the New York foreign exchange market, as shown by the chart opposite page 158. The decline in'the pound sterling in the summer of 1915 to something like $4.50 per pound, though less dramatic than the de cline in many other rates, was still the subject of perhaps most comment in view of the importance of sterling exchange. A detailed account of the exchange rates in New York for the various countries during the war would be fascinating, but lies beyond the scope of the present discussion. We shall content 1 The basis of this estimate is contained in the "same sourc~s.

158 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING ourselves with an effort to estimate the main factors involved in protecting the exchanges in New York and in paying for the great excess of American exports and with comment upon ·some of the more interesting episodes in the history of these rates. The charts themselves will supply further details. In an address before the national convention of the American Institute of Banking in Denver, in September, 1918, Mr. John E. Rovensky, Vice President of the National Bank of Commerce in New York, undertook to cast a balance showing how we have been paid for our exports, as follows: Here it may be interesting to analyze how our huge favorable trade bal ance was financed ; in other words, what did we receive in exchange for the commodities we. exported? The merchandise trade balance plus the silver export balance amounted to a little over ten billion dollars. In return for this we received gold to the extent of about one billion dollars; we had returned to us about two billion dollars of our own securities that had been held abroad; and we arranged to loan our allies and other foreign countries about 7~ billion dollars. This makes a total of about 10~ billion dollars. The difference between this figure and the export balances mentioned above amounts to a quarter billion dollars. This amount is probably represented by loans that have been made to allies and others and have not yet been used, increase in cash balances of foreign banks in the United States, merchandise paid for and not yet exported, etc.

TABLE SHOWING NET FOREIGN TRADE BALANCES AND METHOD OF FINANCING SAME SINCE JULY 1, 1914 (In mitlions of dotlars) Excess of merchandise exports over imports, July 1, 1914July 31, 1918 10,110 Excess of silver exports over imports, July 1, 1914July 31, 1918 195 Total . 10,305 Excess of gold imports over exports, July 1, 1914July 31, 1918 1,043 United States securities repurchased January 31, 1915, to January 31, 1917....................................... 1,743 United States repurchased since January 31, 1917 (estimated) 250 Loans by United States Government to Allied countries up to August 1, 1918, less unavailed balances of loans and less $60,000,000 credit by Argentina..................... 6,029 Loans by individuals to foreign countries to August 31, 1918. 1,500 10,565 ---Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 116 112 lO81!~ 104 100 I~N 96 921~18 88 84 I~m~t80 IQIIII~ 76 12 1 aL~ 68 I MILAN64 -0---0--""960 56 1 VIENNA -oo--o-~52 48 44 40 IPETROGRAD 36 ---------32 28 \ EXCHANGERATES IN NEW YORK ON BELLIGERENTCOUNTRIES.

841 1 I 1 I I I 'L r \ 92 0_-----n , 76 " 481 I 1 1 1 I I I I I I I I I f I I I I I I I I I I I I I I I I I I I I I I I\~ I I I I I I I I I I I I I I I I I G8aTIaD=r=W-+-W-l--l---t-~~MffiH:+~-H+H+H-t-t-t-H~tilt1=tt!1JITnJJ 64aTIaD=r=W-+-W-l--l---t--t-l~~--bH--H~A--ftrtffrl-H-r-t-t-HTtij\t1=t=t!nITnJJ 321 I I I I I I I I I 1 I 1 I 1 I I I I 1 I I I I I I I I I I I I I I I I I I I I I '\J I I I I I I I I I I I I I I 6°rrTlIIIHltI--r-r-t-t-r-HfWlH-+N--f-~xJ~k1+++H~+~-+-+-t-l-+iC+~U4-...l-JU-U 56MII1r1IHTi4H---rH-+--H-t--t-t-++H+-+-H-+H~~kt-+-H-+--H~+-W-l--U-L-LU--lJ 52 1 1 I 1 I I I 1 1 1 1 1 1 I 1 I 1 1 1 1 1 I I 1 1 1 1 1 1 1 1 1 1 1 1 1 I'\I 1 1 1 1 1 1 1 1 I 1 I I I 1 1 1 I 1 8°rrTnIHIt1Itl\-H-+H~~~jhf+N~~~~~H-~+-N-+--lA+-W..:hJ-JLL~ULU 361 I 1 I I I I I I I I I I I I I I I I l I I I I I I I I I I I I I I I I I I I I \I I I 1 I I I I I I I I I I I I 28-rrTlIllIrJIH--r-t1--r-HH--t-t-t+H++-t-t--+-H-+H++-l-+--H~\J-W-+-W~DU-LUJ 88~lJ1J._I#ti#rFFFffffFfFFfm=Rfm 96 ~04 lOO~m:mmImffi:Hf~-mm~~mm t1 ...

l12LL.Ll-!-4-.J-.J--+-H~-+-I-++-H+-H+H+-H+-HH-+-t-t+H-r-H-r-Hlltll1rrTrrTn 108UJU.~~-I--W-J-~~-+-~-+~4+H+-H-t--t-f-t+H-++-r-t-r-HT-nIt-r-t1lnt7rTnTl I+M' :Bmu__amm 241 I 1 I I I 1 1 I I I I I I I I I I I I I 1 1 I I I I I I I I I 1 I I I I I I I 1 I I. I I I I I I I I I I 1 1 1 c>-~~g;t..:>u ·aia:a:>-~~c:it..: ~;~~~~g~~~~;~;~~~~g 1Da:a:>-~~ait"':>UZID ~ ; ~ ; ~ ~ ~ ~ g ~ ~. ~ ~ ~~g;t..:> ~~~wuo ... CfnO1914 U zw C Q -r IDa:w C &1.2 1915 1 1916 :- U Zo w C • C ... -I 1917 I ~~;~~~ -1918 ..: . L t; ~ 0 24 >u o ""• Q 1 ~-------- 0 __ "_.1..: __ C" __ .L __ I... __ 1 11\10 0.41 THE UNITED STATES . 159 A different estimate by Mr. O. P. Austin, statistician of the National City Bank of New York, would place the securities brought back from Europe to America at between $3,000,000,000 and $4,000,900,000.1 The following tables prepared by the statistical department of the National Bank 0 f Commerce in New York are believed to be as accurate a statement as it is now possible to make of the loans placed in the United States by foreign governments during the war, either with the United States Government directly or with American investors.

CREDITS EXTENDED BY THE UNITED STATES (To September 26, 1918) Great Britain $3,745,000,000 France ~ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,065,000,000 Italy ,....................... 860,000,000 Russia ,................................. 325,000,000 Belgium '. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157,020,000 Greece 15,790,000 Cuba , ,.......... 15,000,000 Siberia 12,000,000 Liberia , ,.............................. 5,000,000 Roumania '. . . . . . 6,666,666 Total : $7,206,476,666 FOREIGN GOVERNMENT SECURITIES IN THE HANDS OF AMERICAN INVESTORS United Kingdom of Great Britain and Ireland.......... $300,000,000 United Kingdom of Great Britain and Ireland.......... 250,000,000 Dominion of Canada................................... 75,000,000 Dominion of Canada................................... 100,000,000 Anglo-French loan..................................... 500,000,000 American Foreign Securities Co......................... 94,500,000 French Republic 100,000,000 City of Paris........................................... 50,000,000 City of Bordeaux...................................... 12,000,000 City of Lyons.......................................... 12,000,000 City of Marseilles....................................... 12,000,000 Italian 'Government 25,000,000 Imperial Russian Government........................... 25,000,000 Government of Switzerland 0 • • • • • • • • • • • 5,000,000 K,ingdom of Norway................................... 5,000.000 Government of Argentina 25,000,000 Republic of, China , . . . . . . . . . . . . . . ... . . . . . . . . . . . . . 5,000,000 Total 0 •••••••••••$1,595,500,000 The chart for exchange rates in New York on belligerent countries shows virtually all rates adverse to New York at the 1 Economic World, August 17, 1918, page 223.

160 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING outbreak of the war turning favorable to New York in all cases by March, 1915. With the exception of the rate on Yokohama, none of the rates on belligerent countries have been above par since that date. The course of French exchange we have di~ cussed in a previous chapter. The course of London exchange is fairly simply explained. Following the turn of the tide in December, 1914, London exchange sagged heavily through the summer of 1915, when gold shipments to New York and a loan placed in New York brought it back to about 2 per cent below par. This discount was supposed to be not greater than the expense of shipping gold from London to New York when war time insurance rates and other expenses were taken into account. Sterling exchange with the exception of a slight break in November, 1916, has been kept" pegged" at this point. The operations have been largely conducted by J. P. 'Morgan & Co., through whom gold has been brought to the New York market and through whom purchases of sterling exchange have been mad~ in enormous volume. Through much of 1916 and down to the entrance of the United States into the war in 1917, J. P.

Morgan & Co. were purchasing in the New York market ster ling exchange to an average of $10,000,000 a day. With the entran,ce of the United States into the war and the extension of credit by the American Government to the British Goverment, sterling has been in part protected by. different measures. The course of the neutral exchange rates it1 New York has been strikingly different. Interruptions by the British navy of shipments of gold to those neutral states so situated that the gold might go on to Berlin, notably Sweden, led early, as our chart opposite shows, to a premium on neutral exchange in New York. The situation was intensified after the entry of the United States into the war, and particularly after the Federal Reserve Board policy of restricting gold shipments was put into effect. 1 Rates on various points, Valparaiso, Madrid and the northern neutrals, grew very adverse. 1 Really the policy of the Treasury, in which there is no reason to suppose that the Federal Reserve Board concurred. The Board acted merely as the agent of the Treasury in the matter. For a discussion of this policy, see chapter xv, infra, on the Federal Reserve Board.

lJ\unl'\"'~1:". 1"\1'\11;." Irt 1'1;." 1 VI"\l' VI' nl:.u I nl\L. vvun I rUI:.;), f\L.;)V vnll .. t:.I'\l'f ~I'\II:.;) vr LlVL.L.I'\J"'( CJ\",nl\l~UCo VI~ nCoYY IVrU\ , , , , , , , , , , , , , , , , , , , , , , , , , , , i , , , , , , , I 188 184 180 IVALPARAI80176 ........ -0172 168 164 160 156 1 MADRID 152 148 1!!2,.C~H_~~ 144 140 1361 .!.'!.~~ 132 1281A~8T~RD~M 124 120 116IC~~N 112 108 r~!!~~~~8 104 100 96 92 88 84 80 76 72 96 ~' -7;'-;;:--:'~--- ... ,. I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 80 0" . 1," 76 :'... ii' ~...' 72 92mm=a=t=W:l:mm~E1m§iEE~~EHf§ ~flti~;¥;B~I_J:-~'¥9'-~~~LJ;FH::r=r-r:r 1too ,""""0.._ I ~~• ..a.. .-..=c. .a-o'. ]201 I I I I I I I I I I I I I I I I I I I 124 f---f-+ . I I I I 128 U~-!--I-I-4--+--+-~H+-I-.J--f-+++-H++-HH-++-H-t-+-HH--t-+Ti~~tt-H;:r-Yttt7111nT1 132 L-I.--l--l--l-W-l--I--t-.f--.If-+-+--I-+-IH---I-4-~H-++-+-1H-++HH-t--t-Hrl~+-HH*n-i7H-n-:~=r-H--r1i 112 t:t:tO::(X:O++=I=++l=t++-t-hIf\-H--if-~~-H~Y-H~~r-rTfb4-~frj~jLl:t:t::t=I::t:t:O:O 108t:t:zntl::(X:O++=I=++R+-l-I--J-~~*--H~~H::ItH-t;ft-1~~H:it:J1jtt:t:t:t:t::t=Itt:t:O:O 160I I I I I I I I I I I I I I I I I I I I I I I I l I J I I I I I I I I I I I I I I V1\ I I I I /·1 I I I I I I I I 1881-l--l---!--l-I-l-4-+-+-J-+-++~rl--J--t-~-+-+-HH++-H-t-t--I-H-+--+-HH-+;-H--t-r-rH-r-r"HHII 1M U-!--J--!-I-l--4--4-.wH-+-+-~-I--+~I-4++--HH++-H-t--t--t-H++H-++;-H--r-rrH-r;--Hrtli 180L.l-l--l--l-U-l--+-+-HH-+--I-~H-+--I-~H+++-1H+-f--HH-t--t-t--lH-++-HH-t-;-r-H--r-rIH~"I1 17Gl-1--L-l--!-U-l--+-4-~r-+-+--4--l--I4-+--+-+--JH-++HH-++HH++HH-t--t-HH-++t-lH-t1~"-HII1 140D=c=r=U-!-.!-U-l--ww.-+-~-+-t-+--t++H++-H+-Hr-t+-H-++Ht-HH-ttM~41~tt1IIM~rD 164 U-!--l-.u.4-1-+-~-+--+-+--t-+-+--HH--+-4-H-++-H-t--t--Hr-t++-H-+--t-t-t~Ht-t-1r-t-r-r-H~IM---n 11GI I I I I I I I I I I I I I I I I I I I I I I I., - "

156 • N. 152 I '1\ ° . I 9\i' '\ 148 1 'r"'-... ~·I. 'J -{ I I 11\ " ~ 144 ,. • \ II , I I ~ I • I i ~ J 1(M1::JtiZfn\~~l-T-R J7kFFFRu/~:f~Ff~fZR:Jl f~~~~~Jsitj~~"r H=-Fic~ -+~J/l FFFR 136MIIH--r-r-H--t--r-I-t+-Hr-t+-H-f-+H++H++-~-+-~~-+-WWJ4t--U-I~-!-.1U.....L:CDI:CD ::11111111111111111111111 :g~gg~~~~Ii~~fgg~~~~~~*~II~~~~~g~~~IIi!~ggg~~~~~~l*~ =~=tti~8~~=·~=~d$ti:~.~=.~~~.~ti~8 .•=.. ~~~.~ti~=.~=.==~.~ti=d~ ~ C =0 • CI ~ ~ • ~ • ~ ~ =. 0 • CI ~ ~ • ~ • ~ ~ !I 1 0 ••~ ~ • :. • sa :a =-1 0 ••~ ~ • , • sa sa ==0 _. =: 1914 I 1915. I 1916 I 1917 I 1918 "R~rnd".--d Ern", ~~"~rn.l R'_~I!"I~ Rttll,titl_ ·Sentember I. 1918. Daft 843.

THE UNITED STATES 161 The case of Spanish exchange is particularly interesting. So far as our direct trade relation,s with Spain are concerned, the balance of trade is favorable to us. We export to Spain more than we import from her. But the British and French Govern ments were making heavy purchases in Spain for their armies in France and later the American Government also made such pu.rchases for its army-a procedure particularly desirable inas much as the goods crossing the Pyrenees were not exposed to danger from the V-boats. Spanish bankers thus became pos sessed of large amounts of sterling and franc exchange which they sold increasingly in New York, as they could there find the best market for it, in view of the credits which were being used there to protect sterling and French exchange. As a result, Spanish bankers became possessed of an ever increasing amount of dollar exchange in Madrid, and the price of dollar exchange was correspondingly depressed. The natural method of meeting this difficulty would be, of course, to ship gold to Spain. This, however, was not permitted by the Federal Reserve Board and during the summer of 19.18 the premium on Spanish exchange (pesetas) exceeded 50 per cent, declining sharply late in the summer, when the defeat of the German armies in France was assured.

A similar 'tale might be told of South American exchange. 1 The story, however, of the exchange rates on Madrid and Stockholm is not complete. In both these countries a further complication entered; namely, the suspension of the free coinage of gold and the cessation of the purchase by the Bank of Spain and the-Bank of Sweden of gold for bank notes at a fixed rate. In both Sweden and Spain, as a consequence of this restriction of free coinage of gold and free issue of bank notes, the money of the countries rose to a value exceeding that of its nominal gold bullion equivalent. 2 Shipment of gold bullion to Spain, there fore, was not sufficient to bring Madrid exchange in New York 1 See Circular No. 38 of the Latin American Division of the U. S. Bureau of Foreign and Domestic Commerce on "The Chilean Trade Balance and Foreign Exchange," released for publication June 21, 1918. 2 This has been taken by certain adherents of the quaptity theory of money as a proof of the quantity theory. The present writer does not so regard it. See the present writer's Value of Money, chaps. 7 and 22.

162 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING to par, as shown by the fact that there was a premium of 5 pe'r cent on Spanish exchange in September, 1916, at a time when it was still possible to ship gold to Spain. It is interesting to note, however, that French gold coin has currency rights in Spain. Spain has never been a full member of the Latin Mone tary Union, but by convention between Spain and France, con nected with· the organization of the Latin Monetary Union, French gold coin has currency rights in Spain. The most ef fective method of using gold there to protect dollar exchange at Madrid would be to send gold bullion to France and secure in exchange French minted gold, which could be taken to Spain. This operation indeed would not require the actual shipment of gold to France since the Banque de France would in all proba bility eonsent to accepting gold deposi-~ed in America "ear marked" for its use.

By various indirect measures other than shipments of gold, including the efforts to negotiate loans in neutral markets, the authorities in charge of our foreign exchange have endeavored to rectify these adverse neutral rates. By October, 1918, the rates had improved very markedly. The present write:' ventures to express the opinion, however, that the improvement in dollar, sterling and franc exchange in the neutral markets has been chiefly due to the efforts of Generals Foch, Haig and Pershing, rather, than to the financial measures of those who have sought to substitute indirect measures for the direct shipment of gold. . An interesting episode in the foreign exchange relations, during the war has been the rise in the price of silver and the rise in the price of exchange on the countries with tne silver standard, notably China. Exchange rates on India, which has not been supposed to be on a silver standard, but rather on the gold exchange standard, have also been affected, since the silver rupee, redeemable in gold or gold exchange, has, by virtue of its silver content, become worth more than the gold in which it is supposed to be redeemed, and so has become an independent standard.

The accompanying chart reproduced here from the Federal Reserve Bulletin of September 1, 1918, exhibits developments -~ "' f1 I I,, )-~ I , / I 1 'I )~ II t\ , "' I I I \ <- .. I , ~. II , 1 , \ I "'I..!,...-o I J " I I ~ }. 'H-<.... , 11 ' ..... ' , III [" _J.:~ II f 1"-V .~ 1/ , II iT :1 , , r/: IJ. J ~;i j' , 1/ I J " /1\ 1/, 1 ~ \v II I 1 1 I f \ 1 J,, I , 1 I )--'-. ---, >-- . IJ '/ , ' .. " 1\ I\.-,.- ,\ ~I 1\ I \ 1~1 11 I \ I 1\ IIII I', /i' Ii I \ \ , f J ' I~"'" I \ / \ 'I ~ '" 11! ~, I \ --r ~ . ~ II ./ I 1',' -- I'... I /1\ I ~ ~"0IIIl 'I .......... --~ 1/ , 17 ~... ~ .... ""- I ~~ ...... .... .~.,""" ... '--~ I'.. ~- '. i , ~ , >- ~ , '( I, " V ~ ....... _;to..,. __ 'I " ~.-r--... ~--? 1"".... ~ --' iIoIo.. " ~ ~r;=~=0 •• 196 192 188 184 180 176 172 168 164 160 156 152 148 144 140 136 132 128 124 120 116 112 108 104 100 96 92 88 84 80 76 =~.::1::1::1 __ c =.=.==~.~~.d=·=·==~·~t~d.·=·==~·~t~d .. =.~=~.~_~.,.~~==o:=_~.~.~~==o:~~~.~.~~==o:=~~.~.~~== 196 192 188 184 1 PRICE OF 180 ~ 176 172, ~~~.~ 168 164 160 I'!~~~'t~Q 156 152 148 144 140 I ~ 136 132 128 124 120r~ 116 112 108 104 100 96 92 88 84: 80 76 "':':uUOIIIo..

1916 1917 1918 Reproduced from F,derlll R,I,"" B"ll,'i", September 1, 1918, page 844.

THE UNITED STATES 163 in the London price of silver and the exchange rates on Shanghai, Hongkong and Bombay. The average price of silver in 1913 in London (60.458 cents per ounce, British standard 0.925 fine~ 1 is taken as 100 per cent, and the movements in the London price of silver, indicated in 'our chart, are percentage changes from that basic price. The explanation of the rise in the price of silver involves several factors: (1) the diminution in Mexican production due to unsettled conditions in M.exico; (2) increased coinage of silver by certain of the European belligerents to replace silver which had been hoarded, _which has been true, ,as we have seen, to a considerable extent in France; (3) the favor able trade balances of the far eastern countries, notably China and India, which were settled in part by unusual silver shipments. Other minor factors entered. The shipment of silver instead I of gold in settling foreign balances was" viewed as a desirable circumstance by the federal reserve authorities, and to increase the silver available for for eign shipment, an act was passed by Congress, signed by the President, April 23, 1918, which authorized the retirement of silver certificates which constituted the major part of the small paper money of the United States, and the melting down of the silver dollars held behind these certificates. The banks were asked to seqd in silver certificates when deposited with them and a substantial volume of the Treasury silver was thus released. By November 21, 1918, more than 150,000,000 silver dollars had been taken from the Treasury vaults and had been melted into bullion for export to India and other countries, reducing the Treasury fund of silver securing silver certificates from $490,000,000 -to $338,000,000. 2 To meet the shortage in one and two dollar bills thus created, the act also provided that the federal reserve banks should issue federal reserve bank notes (not federal reserve notes) in denomi nations of one and two dollars. These federal reserve bank notes are issued under the general provisions of the old National Bank Act, and are secured by United States bonds and other approved 1 Federal Reserve Bulletin, September 1, 1918, page 837.

2 New York Evening Post, November 21, 1918.

164 EFFECTS OF THE WAR ON MONEY; CREDIT AND BANKING securities. A large volume of these new federal reserve bank notes has appeared in circulation. The act further provides that the government shall later repurchase silver and restore the silver certificates to circulation. Even before the act providing for the retirement of silver dollars and silver certificates, there had been a shortage of hand to hand money in denominations of one and two dollars, which had been met in part by transforming the old greenbacks (United States notes) of larger denominations into one and two dollar bills.1 1 Vide E. E. Agger: "Our Large Change," Quarterly Journal of Eco nomics, 1917.