BANK FOR INTERNATIONAL SETTLEMENTS EIGHTH ANNUAL REPORT 1st APRIL 1937 —.. 31st MARCH 1938 BASLE 9th May 1938 TABLE OF CONTENTS Page I. Introduction 5 II. Exchange Rates, Price Movements and Foreign Trade , 19 III. From Dehoarding to renewed Hoarding of Gold 37 IV. Capital Movements and International Indebtedness 61 V. Trend of Interest Rates 74 VI. Developments in Central and Commercial Banking 100 VII. Current Activities of the Bank: (1) Operations of the Banking Department . 106 (2) Trustee and agency functions of the Bank 109 (3) Net profits and distribution . 111 (4) Changes in Board of Directors and Executive Officers 112 VIII. Conclusion 114 ANNEXES I. Central banks or other banking institutions possessing right of representation and of voting at the General Meeting of the Bank. II. Balance sheet as at 31st March 1938. III. Profit and Loss Account and Appropriation Account for the financial year ended 31st March 1938. IV. Trustee for the Austrian Government International Loan 1930: (a) Statement of receipts and payments for the seventh loan year (1st July 1936 to 30th June 1937). (b) Statement of funds in the hands of depositaries as at 30th June 1937. V. Trustee for the Austrian Government International Loan 1930 — Interim statement of receipts and payments for the half-year ended 31st December 1937. VI. International Loans for which the Bank is Trustee or Fiscal Agent for the Trustees — Funds on hand as at 31st March 1938. EIGHTH ANNUAL REPORT TO THE ANNUAL GENERAL MEETING OF THE BANK FOR INTERNATIONAL SETTLEMENTS Basle, 9th May 1938. Gentlemen : I have the honour to submit to you the Annual Report of the Bank for International Settlements for the eighth financial year, beginning 1st April 1937 and ending 31st March 1938. The results of the year's business operations - differing but little from those of the preceding year - are set out in detail in chapter VII. After careful provision for contingencies, the Board recom- mends to this General Meeting an annual dividend of 6 per cent, and the statutory allocation to reserves. The recovery in the world's economy, of which the first signs were seen in the summer of 1932, continued through the years up to 1936, with only minor setbacks and hesitations in some countries, with a definite lag in others. It was not before the second half of 1936 that the progress, which had shown such marked differences both in rhythm and in pace, became almost general, creating at last the feeling that the great depression was over. The advance in prices and production, commerce and consumption reached its highest point in the first half of 1937. Its impetus in the last phase was very marked; many of the characteristics usually associated with boom conditions were present. The period of more intense activity especially in the United States was, however, of comparatively short duration, and it is, therefore, not surprising that public opinion was unprepared for the abrupt reversal that was to come. If there were misgivings, they had their origin rather in the prospects of a further uncontrolled development of the boom. There was some apprehension that the extraordinary growth of gold pro- duction might produce an exaggerated monetary expansion all over the world. The continuance of government expenditure on armaments and public works, when business no longer needed its stimulating effect, seemed liable to lead to overdevelopment of certain aspects of economic activity. In the United States, government measures intended to stimulate business activity were dis- continued in the expectation that business would develop of its own impetus. Monetary policy aimed rather at putting a brake on the upward movement, and President Roosevelt's declaration that certain prices were too high was also meant to put a stop to speculative increases of prices. — 6 — Steel production of the world. The sudden break Monthly figures in million tons. in the United States in the second half of 1937 took the world by surprise. Indications of business activity ceased their upward trend, declines in some cases being veryslight, in others so marked that a parallel can be found only in the most acute depressions ever known. The conse- quent disruption of a more or less uniform 1935 1936 1937 pattern into a con- geries of conflicting tendencies introduced great uncertainty into the business outlook and in particular affected the investment of new capital. World industrial production achieved a high record in the spring of 1937, reaching a peak about 20 per cent, above that of the previous boom year 1929. The retrogression in the latter part of the year was, however, very marked, particularly as the United States showed an almost vertical drop; the Federal Reserve index of industrial production (base 1923-25) fell from 117 in August to 84 in December. This decline was greater than in the autumn of 1929, when the index fell from 121 in September to 103 in December, and, if not quite so great, it was more rapid than in the post-war collapse when in fourteen months the index fell from its peak of 95 in January 1920 to its nadir of 64 in March 1921. No other country experienced anything like this setback. In Canada, the neighbouring country, industrial production was well maintained up to November 1937, and in those European countries where economic life was not dominated by special conditions (as in France and Germany) the recession was more in the nature of a somewhat intensified seasonal decline. As, however, the United States alone accounts for nearly 40 per cent, of the world's consumption of primary goods, a steep decline in business in the United States has a very pronounced effect on the raw material markets and thereby on the economic development of the rest of the world. The varying tendencies during the year are clearly reflected in the move- ment of the prices of primary products, there being four distinct phases during the year, each covering about three months. (i) Continuing the upward swing of 1936, there was in the first quarter a steep rise, due to exaggerated expectations of the increased demand which would result from the larger purchasing power in the hands of consumers _ 7 — Price Index of Primary Products (Week ending 19th Sept 1931 =100). 200 200 - - 180 180 - 160 160 U.S.A. i - +£* 140 140 ] / Gr Britain 120 120 r - V\J 100 A, 100 - \ 80 J 60 1 i i1! 1>111 M. Mil 11 1111 i iiiii I, 1 11 1> 1 1111111i i 1 i IMIi M 1 1 I 1 1 1931 B.R.I132. 1932 1933 193<f 1935 1936 1937 1938 and from government orders for armament purposes. Industrial companies, anxious to cover themselves against the advances in the prices of their raw materials, bought more — in many cases much more — than their normal needs would justify. There was thus a general accumulation of inventories and a depletion of visible stocks, accompanied not unnaturally by purely speculative buying. (ii) This movement was followed by an equally sharp fall in the second quarter, reflecting a general change of outlook and a liquidation of speculative transactions. The rapidity with which prices of some commodities had risen far beyond the actual cost of production at a time of great opportunity for extended output was, in itself, sufficient to create hesitation as to the future. Then, after (Mi) a period of relative stability of prices in the third quarter, (iv) a sharp decline set in in the last three months of the year when the arrival on the market of more abundant supplies coincided — as is often the case when business reaches a turning-point — with a contraction of demand following the change in economic outlook. In response to the rise in prices at the end of 1936 and the beginning of 1937 and under the influence of favourable weather conditions, world pro- duction of primary commodities expanded considerably and reached record di- mensions. Producers of internationally-controlled commodities, such as rubber and tin, decided upon a further increase of output and export quotas. These increased supplies became available on the markets mostly in the latter half of the year. When, however, prices turned and visible stocks began to ac- cumulate, producers became apprehensive and production and export quotas were again reduced. There was, thus, a complete reversal, within the space of twelve months, of the previous line of production policy. The following graph shows for thè whole period from 1929 to 1937 the changes that have occurred in the production of the most important primary commodities, in visible stocks and in prices. _ 8 • — Supply and Prices on the That the produc- International Raw-Material Markets (1929= 100). tion index in the year 160 160 1932 shows so relativ- - - ely slight a decline is 150 150 due to the inclusion - - \ 140 of agricultural pro- LI - / "\Stocks " - duction, which never .130 / 130 > varied very much. In - - 1937 production was 120 / 120 - - higher and stocks / \ 110 lower than in 1929. As - a result of the rise -7 1929-100 \ 100 *'•'•'•*• *.r-' "T. TTT7T 100 1 in the first quarter of 1937, prices came to 90 -Produ ^ion-2- 90 - a peak about 20 per \ 80 cent, below 1929, but \ - \ /A- the subsequent de- \ \ 70 \ clines brought them \ 60 at the end of 1937 Price: to about the same po- \ - A 50 sition as in the early l - v\ autumn of 1936, i. e. ilnlnln I I I IN il Mti Ini til nr'liiln lilnlnlnl iliilnli illnlnln nlnlnln 1929 1930 1931 1932 1933 193^ 1935 1936 1937 about halfway between 1929 and the lowest 1) Index of the German Institute for Business Research - twelve months' moving average.