This PDF Is a Selection from an Out-Of-Print Volume from the National Bureau of Economic Research

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The International Gold Standard Reinterpreted, 1914-1934 Volume Author/Editor: William Adams Brown, Jr. Volume Publisher: NBER Volume ISBN: 0-87014-036-1 Volume URL: http://www.nber.org/books/brow40-1 Publication Date: 1940 Chapter Title: Book III, Part V: The Impact of the World Economic Depression on the International Gold Standard, 1929-1931 Chapter Author: William Adams Brown, Jr. Chapter URL: http://www.nber.org/chapters/c5947 Chapter pages in book: (p. 808 - 1047) PART V The Impact of the World Economic Depression on the International Gold Standard, 1929-1931 S CHAPTER 22 The International Distribution of Credit under the Impact of World-wide Deflationary Forces For about twelve months after the critical decisions of June 1927 the international effects of generally easy money were among the most fundamental causes of a world-wide upswing in business.1 Though prices in gold standard countries were falling gradually, increasing productivity would probably have forced them much lower had it not been for the expansion of credit. There was an upward pressure in many price groups. Profits from security and real estate speculation stimulated demand for many commodities. Low interest rates made it easy to finance valorization schemes and price arrangements and promoted the issue of foreign loans, par.. ticularly in the United States. Foreign loans in turn helped to maintain prices in many debtor countries and also pre- vented the growth of tariffs from checking the expansion of international trade.2 The continued extension of international credit was a dam that was holding back the onrushing torrent of economic readjustment. The strength of this darn depended upon the continued de facto cooperation of the center countries in reinvesting their currently accumulating credits in debtor countries. It did not long survive the com- pletion of the gold standard facade. The End of De Facto Cooperation by the Nucleus Until the end of 1928 the principal stock exchanges of the world were enjoying a common upward trend in security 1 League of Nations, Course and Phases of the World Economic Depression, prepared by Bertil Ohlin (rev. ed., Geneva, ,p.127.Thissource will becited below as 'Ohlin.' 2 League of Nations, World Economic Survey, 1931/2,pp.111—2, 152—3. 809 8io EXPERIMENTATION prices. The amount of capital exports from most creditor countries was consequently curtailed by the attractions of- fered speculators and investors at home by local booms. The new issues market in London was no exception to this rule, though Professor Ohlin has drawn from the British balance of payments figures for 1928 the inference that the reduction in the outflow of capital from Great Britain by new issues TABLE 63 .Wew Foreign Capital Applications in London 1928-1929,monthly(thousands of pounds) 1928 1929 January ig,6i6 29,372 February 5,245 6,864 March 23,043 9,007 April 7,978 6,ori May 13,523 8,833 June 15,968 11,387 July 17,705 8,325 August 984 1,378 September 10,731 1,205 October 10,883 4,055 November i 1,009 6,673 December 6,699 1,237 SOURCE: Midland Bank figures was replaced by other forms of capital export.3 For the first seven months of 1928 average monthly new foreign issues placed in the United Kingdom were £14,725,000 and for the last four months only £9,830,000 (Table 63)andthrough- out the year new foreign issues in London were a progres- sively declining proportion of total new issues. In the United States new foreign issues also declined in the second half of when they were only $409 million as compared with $842 million in the first six months. As in Great Britain they were a declining percentage of total new issues. Here also there was an offsetting factor, for "during the second half of the year foreign borrowers were able to draw upon their Ohlin, cit., pp. 200, 210. 4 seasonally low total for August distorts the comparison and is omitted. THE IMPACT OF THE DEPRESSION deposits in American banks consisting largely of the proceeds of loans previously floated." The beginning of a contraction in total international ing in 1928 was accompanied by a phenomenon far more serious in its implications for world stability—a diversion of this lending from debtor countries. The superior attractions of the New York market from a speculative point of view diverted a portion of the reduced long term capital exports of other creditor countries to New York, and shifted to London, and to other creditor markets in less degree, the burden of short term advances needed by debtors. Professor Ohlin has described this process (op. cit., p. 205) "In the second quarter of 1928 the (American) boom gathered strength, bond yields began to rise and continued to do so the autumn of 1929.Theconsequence was an increase in the tual interest rate necessary to induce lenders to take up issues of fixed interest securities, and this increase, though small, was suf ficient to discourage such issues in the United States. Foreign ernments to a large extent turned to other capital markets where conditions, although affected by those prevailing in the United States or by local booms, were generally less unfavourable. hi other cases these governments were able to meet their require. ments for current expenditure or for refunding of matured loans by short term banking advances, thus avoiding the flotation new bonded loans or at least postponing it in anticipation of more favourable conditions in the market." The Independent Course of the New York Market in 1929 Thesemore favorable conditions did not appear in 1929. By about the end of 1928 and the beginning of 1929 the gath- ering forces of postponed economic adjustment had begun to be reflected in most of the world's stock exchanges. Stock prices began to fall in Zurich, Amsterdam, Vienna, Milan, Paris, Brussels, Berlin, and Tokio. On the London Stock Exchange the upward trend in share prices that had been in progress since the autumn of 1925, came to an end in the 5Ohljri, cit., pp.200, 208—9, especiallythe chart on p. 208. 812 EXPERIMENTATION summer of 1928, and in January 1929 share prices began to fall steadily. In these countries a turning point in the cycle had clearly been reached. Exports of capital from most creditor countries were now reduced because their markets were unfavorable for capital flotations in general. In the United Kingdom new foreign loans were on a very small scale after February 1929 (Table 63), but they were no longer a declining proportion of total new issues. New foreign loans in America also declined sharply, as shown in the accompany- ing tabulation. Movement of Long Term Capital Items inthe American Balance of Payments, 1927_19296 Capitalimports +, Capital exports —(millionsof dollars) 1927 1928 1929 Newforeign security issues —1,183 —1,124 Directinvestments (net) —178 —258 —261 Movement of old securities (net) +422 +416 +556 Bond redemption and sinking fund (net) +234 +291 +199 Netmovement of long term capital —705 —675 —141 * Refundingexcluded and after discounts and underwriting commissions are deducted. The reasons for the reduced capital exports from the United States were not the same as those for the reduced capital export from other creditor countries, but are to be found in the independent course of the New York stock market. The general downward turn in the world's stock exchanges at the beginning of 1929 was reflected in New York by a temporary check to the tide of rising stock prices during the first four months, but this was followed by a new and rapid rise in stock prices from June to September. The diversion of international long term funds to New York continued, but there was no offsetting American short term capital export. On the contrary, short term funds moved to 6From unpublished thesis, Some Post-War Balance of Payment Problems of the United States, by E. J. Stone, p. 102.The1928 figures are smaller than those given by Professor Ohlin; they are net after discounts and underwriting commissions have been deducted. THE IMPACT OF THE DEPRESSION 813 New York from all over the worldto take advantage of high interest rates (Chart 49). The dollar was, in consequence, strong on the world's exchange markets, and to support their exchanges central banks in other countries were obliged to raise their rates and to sell some of their balances in New York. This contributed still further to stop capital exports from other creditor markets. In the first half of 1929 America drew gold in large amounts from Germany, Great Britain, Canada, and Argen- tina, while French demand was concentrated first on Ger- many and then on Great Britain, thus undermining the whole basis of the inter-central bank cooperation of 1927. NewYork was continually a competitive bidder for gold in the London bullion market (Chart 50), while at the same time, and as a direct consequence of developments in New York, an increasing demand by other countries for short term accommodation, even for ordinary commercial needs, was concentrated upon London. The traditional British tech- nique of making a cyclical adjustment by cutting down long term foreign lending while shifting a part of the burden to the short term shoulder was made extremely difficult to apply at a time when the New York market was following a course that diverged from that of the London market. For the world as a whole the position was rendered extremely difficult because the two great center countries did not act as a unit at the turn of the cycle according to the precedents set by the single center before the war.8 The American Credit Base and Credit Superstructure June 1928toOctober 1929 Theindependent course of the American market that led to these results was due to the long continued prosperity in the United States under the stimulus of the cheap money policy Cf.

Load more