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334 BULLETIN MAY, 1927

FOREIGN BANKING AND BUSINESS CONDITIONS ANNUAL REPORT OF THE GERMAN REICHSBANK The annual report of the German Reichs- The passing of the economic crisis is clearly bank for 1926 contains the following account of seen in the number of dishonored drafts at the economic conditions in Germany during the Reichsbank during 1926; in comparison with year: the total domestic bills accepted by the bank, During 1926 the German currency situation they stood at 4.25 per cent in January, as on the whole remained satisfactory, notwith- against an average of 0.72 per cent in 1913 and standing the continued difficulties of the eco- 2.23 per cent in 1925, and declined slowly to nomic situation. The Reichsbank throughout 3.07 per cent in March, 1.57 per cent in June, the year sold for its own notes or other means 0.91 per cent in September, and 0.82 per cent of payment any required amount of foreign in December. exchange, and was able also to purchase to The price which had to be paid for the re- their full amount all foreign exchange bills organization and reform of the German eco- offered to it. No demand was made on the nomic system was by no means small. The Reichsbank for for payments abroad, but actual number of workers out of employment the bank will, of course, not hesitate to make at the end of the year—2,000,000 as compared gold available for such purposes if the exchange with 1,500,000 at the end of 1925—including situation should require it. those unemployed persons whose term of un- In the economic crisis, which had reached employment relief had expired, serves as a its climax in Germany during 1926, the weed- striking illustration of the seriousness of the ing-out process under way ever since the stabili- difficulties, uncertainties, and dangers which zation of the currency made still further prog- have not yet been overcome. To one looking ress during the year under review. The crisis more deeply into the situation, the basic facts reached its peak during the first third of the must still seem uncertain in spite of all the year, then moderated gradually, until toward apparent progress, both because any disturb- the end of the year there was a slight business ing factors growing out of the unsettled politi- revival in various lines. The necessary meas- cal situation affect the economic situation; ures for reconstruction and reorganization, as and because the reconstruction of European well as for adjustment to consumption de- trade, after 10 years' interruption, continues to mand, were carried through with decision and be obstructed by the protective tariffs and the foresight—a fact which bears witness to the industrial nationalism of both old and new sustained vigor of the German people. A countries. Furthermore, there can be no series of events, some transitory and some last- doubt that the problem of reparations, which ing, undoubtedly helped business to weather weigh heavily on German industry, and repa- the severe crisis; most important of all was the rations payments and deliveries flowing out of English coal strike; there were also the con- Germany into the rest of the world, and di- tinued support which German credit obtained rected not by economic considerations but by from abroad; the decline, as a result of foreign political motives, will inevitably be the source currency reforms, in the dumping of com- of increasingly serious disturbances to the free modities on the German market by countries international exchange of commodities and to with depreciated foreign exchanges; and the the prosperity, built thereupon, of economically increased purchasing power of the world mar- interdependent nations. ket. Mention should be made here of certain The trend of economic development put upon signs of progress in the restoration of friendly the Reichsbank heavy tasks and responsible relations between European countries accom- decisions in the matter of its credit and dis- panied by international economic agreements. count policy. The bank's constant concern was There were also the lower tax rates adopted necessarily to encourage the tendency toward during the year under review, the program of a further lowering of interest rates which was providing employment, other measures of beginning to be apparent on the market, and assistance, and, finally, the progress made in thus to make it easier for the increasing supply meeting reparations payments out of the pro- of capital to provide a most effective stimulus ceeds of taxation. to activity in agriculture, industry, and com-

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merce. When, at the beginning of 1926, it which still remained between rates in the money became possible definitely to discard the tem- market and in the capital market showed that porary expedient of credit rationing, the only partial success had been achieved in Reichsbank, having due regard to the condition removing the difficulties which continued to of the market, set about a further gradual obstruct the development of a rightly propor- reduction of its discount rate: on January 12, tioned allocation of available funds to the long- to 8 per cent; on March 27, to 7 per cent; on term and the short-term credit market. The June 7, to 6J^: per cent; on July 6, to 6 per average rates were as follows: cent. The rate for loans on collateral was reduced from 11 per cent to 7 per cent durin; the year; the rate for credit at the GoL Discpunt Bank from 6 per cent to 5 per cent. The interest and commission rates of the private Per cent ! Per cent banks and other financial institutions fol- Call money rate 4.12 i 5.30 Private discount rate 4.98 4.73 lowed—at first, partly under pressure from the Reichsbank discount rate _ 5.88 6.0 Interest paid on mortgage and loans (about) 4.50 8.20 Reichsbank, which entered into negotiationii s Yield on stocks __ 3.97 3.11

PER CENT INTEREST HATES The course of interest rates was closely con- n 1928 nected with the great abundance of short-term money. This abundance was further increased during the first half of the year by the business depression; by the clearing out of stocks of Actuo/V/'e/d of all Go/d and ffelcfismarh Loans ' commodities, which later on was aided by the and of Mortgages English strike; the increase of reserves in the hands of industry; the accumulation of new capital; the continuous import of capital from abroad; and chiefly the increasingly large sums of public funds held by government institutions. Another important factor was that the majority of banking firms and other lenders, in view of the short maturity of the funds put at their disposal, especially of the still unused portions of the loans floated both abroad and at home, and being still under the influence of the recent crisis, were most eager to invest their funds at the shortest possible maturities. The abundance of short-term money was so great at times that considerable JAN. FEB. M/\R. APR. MAY JlME JULY AUG. SEPT. OCT. NOV. DEC. amounts, for lack of investment opportunities? to this end w th the local institutions as well sought employment abroad, especially on the as with the .various associations. With the London bill market. The decline of interest exception of the rate on monthly money, money rates in the money market began to slow down rates in the open market, which had continued only when, after the middle of the year, the to move in unison with the bank rate during depression was relieved by a moderate revival 1925, declined sharply during the past year and in various branches of industry. In connection at times reached rather low levels. with the raising of the redemption fund install- At the same time rates on long-term credits ment of 293,000,000 , which, in began to decline, as is indicated by the curve conformity with the law providing for the on the accompanying diagram of actual interest liquidation of the Rentenbank, was payable at paid on mortgages and loans; and during the the end of November for the liquidation of first quarter of the year, the yield of these mitenmark circulation, there came a slight securities declined by about one-sixth in the tightening of the money market toward the course of a few weeks. This decline continued end of the year. during the entire year, although at a more On the long-term capital market the Reichs- moderate rate. Similarly, the rate on long- bank intervened at the opportune moment at term money throughout the country showed a the beginning of the year to aid the latent decline. Nevertheless, the considerable spread tendency toward improvement by means of

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carefully planned purchases of mortgage bonds For the Reichsbank, the development of con- for its own and for depositors' account, and by ditions on the money market and on the capi- purchases of mortgage securities through the tal market brought about a progressive decrease Gold Discount Bank. This was referred to in in its domestic discount business. The steady, the report of last year and will be discussed copious stream of foreign credits caused the further on. The easing of the tension hitherto bank to be called upon more for the purchase prevailing on the capital market then began to of foreign exchange bills than for rediscounts. show marked progress. Capital issues revived The accompanying chart shows the increasing to a degree hardly anticipated; foreign capital also began to take an active part in the German GOLD AND FOREIGN EXCHANGE HOLDINGS security market. In spite, however, of the AND MONEY IN CIRCULATION remarkable increase of capital issues, one must MILLIONS OF RCICHSMARKS be careful not to overestimate either the actual 6000 power of absorption of the German capital market or the creation of new capital at home, all the more so because the reparations deliv- eries provided for in the continue to absorb a large part of the newly created sav- ings. Large amounts of the new capital 50Q0 issues, as well as of securities purchased on the fieichshank Motes and stock exchange, have been bought not for /n C/rcufation 7 ermanent investment but temporarily with funds available for only a short time, and generally with the expectation of being able by this means to make a profit on the market or 4000 to obtain a higher rate of interest. Cer- 3000 tainly, the development of the capital market during the past year, influenced as it was by the abundance of funds on the money market, Gold arid should not delude anyone as to the necessity Fore/go Exchange Moldings of employing available long-term capital very 2000 sparingly for current business purposes; be- cause, as developments show, the demands for capital by central governments, municipali- ties, and other public bodies are very large, and the assistance of foreign capital which at N Holdings of Bifls times is indispensable can not always be 1000 counted on. That the development of a sound M- 700 consolidation of capital requirements is still J. F. M. A. M. J. J. A. S. 0. N. D. far from being realized is clearly shown by the above-mentioned changes in the yield of stocks divergence, especially noticeable in the early and securities which bear fixed rates of return, months of the year, between the development especially if one compares them with their pre- of the domestic bill portfolio and that of the war conditions. While during 1913 the actual gold and foreign exchange holdings of the yield on capital invested in securities bearing K-eichsbank. a fixed rate of interest was about one-half of 1 In this respect even the economic improve- per cent higher than the actual yield of stocks, ment which began in the last four months of which at that time stood at about 4 per cent, the year, and from which a contraction of the this difference at the end of 1926 was about 5 money market might have been expected, per cent, since the yield on stocks was about 3 brought no change. Not until December did per cent and the yield on securities bearing a the demand for rediscounts and loans on col- fixed rate of interest was 8 per cent. Thus, lateral show a passing accession of strength in although the nominal yield on stocks was connection with the above-mentioned tighten- considerably lower than in 1913, the average ing of the money market. level of the yield on securities bearing a fixed While the gold and foreign exchange hold- rate of interest was considerably higher than ings of the Reichsbank rose from 2,230,600,000 the level at the end of 1913. reichsmarks at the end of 1925 to 2,794,500,000

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MAY, 1927 FEDERAL RESERVE BULLETIN 337

reichsmarks at the end of 1926, the total do- In order to safeguard agriculture from a mestic rediscounts granted by the Reichsbank recurrence of the great injury which had re- declined from 1,826,600,000 reichsmarks at the sulted the year before from forced sales of the end of 1925 to 784,300,000 reichsmarks on grain harvests and from the accompanying August 23, then fluctuated between 800,000,000 fall of prices on the grain market, the Reichs- and 950,000,000 reichsmarks until the middle bank announced its willingness to extend of December, and at the end of the year showed credits for financing crops. This action en- a sharp temporary rise to 1,412,900,000 reichs- abled the farmer to pledge his crops as security marks. The stream of foreign exchange bills for loans of six months* maturity at the agri- flowing into the Reichsbank resulted in an ex- cultural cooperatives; the commercial bills pansion of the circulation; the circulation of resulting from these transactions could be sold Reichsbank notes and Rentenbank notes to- by the cooperatives to the Prussian Central gether rose from 4,436,200,000 reichsmarks at Cooperative Association, to which the Reichs- the end of 1925, with some fluctuations to bank had given an extensive rediscount privi- 4,899,600,000 reichsmarks at the end of 1926. lege. The abundance of funds on the money The total monetary circulation, including market enabled cooperatives sometimes to Reichsbank notes, Rentenbank notes, notes of retain these credits for their own account; the private banks of issue, and subsidiary cur- furthermore, the large volume of mortgage rency, rose from 5,208,000,000 to 5,829,800,000 loans made to agriculture during the year, the reichsmarks. rise of grain prices, and the various measures In the above-mentioned total of domestic of assistance taken by the Government im- rediscounts at the end of 1925 were included proved the agricultural situation so much in 473,100,000 reichsmarks, representing such comparison with the previous year that the amounts as had been rediscounted with public Reichsbank was called upon for only the most bodies in order to furnish them with interest- moderate amounts in carrying out the above- bearing investments for their liquid funds. mentioned policy. This kind of rediscounting, since from the first Agriculture was also greatly benefited through it was a measure intended for only a short purchases of agricultural mortgage bonds transition period, was discontinued in the course made by the Reichsbank during the year to a of the first half year, partly because the cash nominal value of 55,300,000 reichsmarks with reserves available for investment by the public resources provided out of the pension reserve, bodies concerned had declined, and also be- and to a nominal value of 113,800,000 reichs- cause with the reduction of the domestic bill marks in trust for public administrative bodies. portfolio that part of the note cover which, These purchases contributed greatly to the according to section 28b of the banking law, revival of the mortgage-bond market. This must consist of bills and checks, came on revival was further strengthened by the an- •several occasions perilously near to its legal nouncement of the Gold Discount Bank that minimum. Moreover, the Reichsbank was it was prepared to accept agricultural mortgage continually obliged to employ a considerable bonds of the Rentenbank Kreditanstalt, which part of the foreign exchange bills presented to were issued at a rate considerably lower than it—so far as these were not converted into the customary interest rate—for example, at gold—for the purchase of bills on the foreign 7 per cent on their par value and at a maturity market in order to maintain the required note of from three to five years. The issue of these cover in bills and checks, either in domestic mortgage bonds brought about a general or in foreign bills. Not only did the supply of lowering of interest rates on the mortgage domestic bills eligible for note cover decline in market. Moreover, this short-term interim amount, but the maturity of the paper offered form of credit made it possible for agriculture for rediscount constantly became shorter; in to defer the final satisfaction of its long-term the second half of the year it averaged only capital requirements to a time when the pro- about 30 days as against 38 days at the begin- gressive building of new capital would in all ning of the year; bills presented for rediscount probability have made interest rates more by the financial houses, as a rule, ran scarcely normal and more bearable for the farmer. more than 22 days, while those of the For reasons of currency policy, the possibility banks had a maturity of only about 13 days. of attracting foreign capital to finance these Thus, a great part of the bill portfolio con- interim credits was not considered. The sisted of paper discounted shortly before its distribution of credits to agriculture was car- maturity. ried on by the various private and public

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mortgage credit banks, which granted credit j various offices, and the management of their to the ultimate borrower at a rate of interest funds was centralized in the treasury of the slightly above 73^ per cent. The actual pay- and of the various States respectively, so ment of these credits to the borrower unfor- that it was possible to operate with a minimum tunately suffered many delays because the of reserves, there is now to be observed an land registry offices were too overburdened to almost independent division of funds and of be able always to record individual claims fiscal organizations. The centralization of promptly in the register. This was the result funds and of fiscal agencies corresponding to of greater difficulties and a greater burden of the pre-war system would not only make their work growing out of the legislation in respect administration more consistent and more to currency revaluation. At the end of the rational and avoid the existing disadvantages, year altogether about 300,000,000 reichsmarks but would also obviate the accumulation of of mortgage bonds were issued, of which such large cash holdings, and thereby would 200,700,000 reichsmarks were in the account release more resources to productive business. of the Gold Discount Bank. It deserves to be It is especially desirable that the cash reserves mentioned in this connection that during the of the Reich treasury—according to the year under review, in the collateral loan busi- principles of administration approved in pre- ness of the Reichsbank, the margin of lending 1 war times as well as according to the example against the nominal value of and of other great countries—should flow regularly gold mortgage bonds rose in rapid succession through the local branches of the Reichsbank from 50 per cent to 66% per cent and again to to the central treasury of the Reich, which 75 per cent, and an increasing number of should again be administered by the Reichs- securities new to the collateral loan business bank. Continuous streams from such great of the Reichsbank have been admitted to sources of accumulated wealth as the treasury rediscount. of the financial administration and the public departments represent, permit a larger part In the matter of influencing the relation of the circulating medium to return to the between monetary supply and demand there bank more quickly, by this means cause a were two highly important problems with general decline of notes in circulation, and thus which the Reichsbank had been deeply con- increase the effective influence of the central cerned, even during previous years; the com- bank of issue. Understood in this way, the plete lack of unity, the shortsightedness and coordination of public reserves in the giro mismanagement in the administration of the account of the Reichsbank does not mean, as so-called public funds, and the excessive de- is often mistakenly asserted, a centralization mands for foreign credits; both being primary of investment on the Berlin market; on the causes of the unnatural and exaggerated contrary, in the extensive network of Reichs- liquidity of the money market. The amounts bank branches throughout the country, the belonging in the strict sense to public funds, moist complete decentralization and redistribu- over which the Reich, the States, and the tion of funds is guaranteed. municipalities have control, and the revenues of the Reich administrations, such as the postal If the financial administration of the Reich and railway systems and the funds arising should, so far as possible, reduce its own out of social legislation, have been in very large working capital, it must on the other large volume since stabilization; they have hand be in a position to obtain temporary constantly fed the money market and have working credits in case of need. The au- tended to interfere with an accurate appraisal thority which is granted the Reichsbank in of the position of the market. In many cases section 25 of the bank law, to extend credit to the administration of these funds has been the Reich, is inadequate because of its limita- devoted to profitable investment for purely tion to a maximum of 100,000,000 reichsmarks. private industry. It is regrettable that through The Reichsbank therefore suggested that the force of circumstances the great public depart- Reich, in case of emergency, might again re- ments, especially the State railways and postal sort to the sale of treasury bills on the open system, should be separated financially from market. In order to facilitate the sale of these the Reich, and should thus have been compelled bills, the bank offered to admit them to redis- to create and maintain separate cash and count at the Reichsbank in a limited amount. working reserves. Whereas before the war By the law of July 8, 1926, dealing with the there was perfect cooperation among the revision of the bank statutes, it was provided that treasury bills issued by the Reich, which i That is, the percentage of the par value which the Reichsbank lent. mature in three months at the latest, and for

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MAY, 1927 FEDERAL RESERVE BULLETIN 339 which another guarantor of unquestioned finan- holdings have remained at about the level cial standing besides the Reich has assumed shown at the end of the year; according to the responsibility, can be presented for rediscount, balance sheets, at the end of 1925 they amount- according to section 21, article 2; likewise, by ed to 1,022,500,000 reichsmarks and at the end section 21, article 3, their eligibility as collateral of 1926 to 963,100,000 reichsmarks. In accord- for loans has been established. The amount ance with the principles explained in last year's of treasury bills offered for rediscount and as report, the Reichsbank, as a matter of cur- collateral together can not exceed 400,000,000 rency policy, has endeavored to provide the reichsmarks. No occasion arose for the prac- gold and foreign exchange note cover required tical application of this regulation during the by the bank law not only for its own note cir- past year. culation but for the circulation of the Renten- In regard to foreign credits, the Reichsbank bank as well. found itself obliged during the period under Beginning August 23, 1926, it was found review, as also during the preceding year, to possible to give up the policy regarded neces- issue emphatic warnings against the rapidity sary by the Reichsbank up to that time, of and the amount of foreign loans flowing into binding the reichsmark closely to the currency the country, and to do everything possible of the of America through the without injuring legitimate German business purchase and sale of dollars at the fixed rate interests to check the too extensive and sharp of 4.20 reichsmarks per dollar. The quotation demand for foreign credit. German loans dur- of the reichsmark accordingly became inde- ing the year were negotiated abroad in a nomi- pendent of the dollar quotation; with some nal value of almost 1,750,000,000 reichsmarks fluctuations between the gold points it showed (against 1,250,000,000 reichsmarks in 1925); a slight premium over the dollar until October, of this about 600,000,000 reichsmarks (as and during the next few weeks until toward the against 500,000,000 reichsmarks in 1925) repre- end of the year, it moved in a course slightly sented public loans—loans issued by states below dollar parity. Some time before this^ and municipalities as well as those issued with by the edict of May 1, 1926, the legal restric- state or municipal guaranty. Statistics for the tions still in force on foreign exchange operations corresponding amount of short-term foreign were almost entirely removed. The last re- credits are not available. maining provisions, which concerned the so- Aside from the possible serious consequences called foreign exchange banks, have mean- to the currency and the economic situation, the while also been revoked by a decree of Febru- extensive employment of foreign credits has ary 22, 1927. Toward the end of 1926 the a bearing also on the reparations situation. Reichsbank established an international clear- Foreign exchange bills arising out of foreign inghouse business with foreign banks of issue, loans can not be regarded as the proceeds of an which permits the direct transfer of funds economic surplus resulting from the produc- between the offices of the Reichsbank and tivity of our country, as contemplated by the those of foreign note-issuing banks; by the end Dawes plan for the execution of reparations of the year relations of this kind were estab- payments (I, V). Most certainly no conclu- lished with the Austrian National Bank, the sions as to the existence of funds available for National Bank of Czechoslovakia, the Hunga- transfer can be drawn from the gold and foreign rian National Bank, the , exchange holdings of the Reichsbank so far as and the Bank of Danzig. This new arrange- these holdings arise npt from a surplus of pro- ment came into effect at the beginning of 1927; duction but from foreign credits. The suspen- our experience with this and its further de- sion of foreign credits during the first months velopment will have to be discussed in next of 1927 and the consequent extensive decline year's report. in the foreign exchange holdings of the Reichs- Gold imports, which accompanied the im- bank have proved this. port of capital into Germany, amounted dur- The gold and foreign exchange policy of the ing 1926 to 586,300,000 reichsmarks, from Reichsbank is, of course, strongly influenced which must be subtracted a small export of by each phase of the foreign credit situation. 9,700,000 reichsmarks, leaving a net import of The growth in gold and foreign exchange hold- 576,600,000 reichsmarks. Of this about 546-, ings is shown in the chart on page 336. This 000,000 reichsmarks came into the Reichs- increase took place entirely in gold holdings, bank; 274,200,000 reichsmarks, it is true, had which have risen from 1,208,100,000 reichs- their origin in gold deposits maintained marks at the beginning of the year to 1,831,- abroad, where the bank had been in the habit 400,000 reichsmarks, while the foreign exchange of placing such amounts of gold as were ac- 44484—27—5

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quired outside the country; the remainder sterling at that time, the quotation of the came for the most part directly from the hands pound in relation to Germany declined re- of arbitrage dealers. The arbitrage purchases peatedly to the gold export point, so that gold assumed considerable importance, especially exports from England became a profitable during the last five months of the year. With operation. the weakening of the exchange value of ANNUAL REPORT OF THE BANK OF POLAND The annual report of the Bank of Poland, reduction was effected. The importance of presented to the meeting of stockholders on the economies introduced in the budget ap- February 10, 1927, contains the following pears clearly when one considers that the index account of economic and financial developments of prices rose rapidly following the deprecia- in Poland during the year 1926: tion of the currency unit. It is true that the At the beginning of 1926 the crisis brought nominal amount of actual expenditures by the about by the depreciation of the zloty in the State during 1926 showed a slight increase course of 1925 reached its culminating point. over the year before, but the real value of The year began under very difficult economic these Government expenditures showed a con- conditions. Unemployment, amounting to siderable decrease, the level of prices on the about 35 per cent of all industrial workers, con- market having risen during this period by 30 tinued as a disquieting symptom. The acute per cent. Expenditures during the first six crisis had dissipated the general optimism which months of the year exceeded receipts by had grown up since the period of inflation, 71,400,000 zlotys. Thereafter, beginning with checked economic activity, and developed a spirit July, receipts ran continuously in excess of of economy which was imposed rigorously expenditures. throughout every domain of life. The favorable One may attribute the more favorable situa- harvest and the crisis in exchange furnished a tion of the treasury to improvement in general check to importing and encouraged exporting. conditions, to the measures taken by the After September, 1925, the merchandise bal- Government in respect to an increase of 10 ance became favorable. This favorable balance per cent in taxation, to the rise in prices for strengthened the position of the Bank of monopoly products, and finally to the vigor- Poland and aided in sustaining monetary sta- ous effort in the direction of reorganizing bility, while it also furnished the money market public enterprises. As a result, the budget of with funds provided out of savings. These 1926 closed with a surplus of 53,600,000 zlotys, developments made it possible gradually to although for preceding years there were modify financial difficulties and to mobilize deficits amounting to 235,500,000 zlotys for capital for industry, and they contributed to 1925 and to 189,400,000 zlotys for 1924. The decrease unemployment and to increase fiscal surplus of receipts made it possible for the receipts. After June the budget deficit, which treasury to repay outstanding foreign debts, had been considerable at the beginning of 1926, to effect a considerable reduction in paper no longer appeared. For the first time since currency, to repay 25,000,000 zlotys of ad- its independence, the Government was able vances of the Bank of Poland, and finally to to achieve a balanced budget. build up cash reserves, which are indispensable Finances of the Government.—The budget for a more rational management of finance in had been too high during 1924 and 1925 and the future. not proportioned to the actual resources of the Agriculture.—After the difficulties caused by country. The budget for 1924 showed a the poor harvest of 1924, the excellent harvest deficit of 12 per cent, that for 1925 of 13 per of 1925 had an exceedingly beneficial influence cent of the receipts, these deficits being on the agricultural situation. This improve- occasioned by the issue of token currency and ment coincided with the exchange crisis. The by loans which had not been provided for in prices of grain were almost perfectly adjusted the estimates. Through a series of measures to the fluctuations of the dollar and to the level taken by the Government toward the end of of international prices. This circumstance 1925 and during 1926, including a sharp re- neutralized the disastrous effects on the Polish duction of governmental expenses, it has been market of the fall in the world price of wheat possible to control this situation. during the second half of 1925—a price decline During 1926 not only was the increase in which resulted from abundant harvests. Dur- governmental expenses checked, but some ing 1926 the level of world prices for wheat

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FOREIGN BANKING AND BUSINESS CONDITIONS ANNUAL REPORT OF THE GERMAN REICHSBANK The annual report of the German Reichsbank that only actual developments could determine for 1927 was presented to the general meeting whether the new rate should be regarded as of shareholders on March 14, 1928. The full established for any considerable period. At text of the report is given herewith. the same time a lessening of the inflow of for- General economic improvement.—In the eign funds was expected because of the decline German business situation the gradual im- of German interest rates. This expectation provement which began in the second half of proved correct until the beginning of the sec- 1926 became more and more marked until the ond half of February. From that time on open- second half of 1927, and thereafter for the re- market interest rates advanced, the increase mainder of the year maintained its level. It being induced by a rapidly growing demand on exhibited in general the character of a domestic the domestic capital market arising out of the development, and in all its phases was effected floating of public loans, particularly the sur- by extensive use of foreign capital loans. prisingly well received great loan of the Reich; Although "rationalizing" of business enter- induced, also, by continuous improvement of prises was prosecuted with all possible energy, the business situation, and especially by a vig- the number of employed persons continued to orous expansion of speculative business on the rise. Unfortunately the improvement achieved bourse financed largely by credit. Interest was not always consolidated; and it will not be rates paid for funds on the bourse reached such consolidated so long as the restraints imposed a height that, with substantially lower rates by foreign politics create in German business prevailing at the same time in the bill market, circles that uncertainty which we now find foreign short-term funds flowed into the Ger- everywhere. To enable her to live, Germany man banking and stock-exchange business in requires not only freedom from foreign political large amounts. This development showed that fetters but also, in consideration of her repara- the level of the Reichsbank rate was effective in tions obligations, a willingness on the part of only one section of the money market, namely, foreign countries to receive relatively larger that occupied with dealings in bills, and ex- amounts of products and deliveries in kind erted no effective influence over the inflow or from her than Germany receives from them. outflow of foreign funds. In order, therefore, Changes in Reichsbank discount rates.—Im- to prevent undue extension of bank credit for provement in the general situation was a pri- various activities which escaped the normal mary cause of the activity in the money market influence of the Reichsbank rate, the Reichs- which began at the end of February, 1927. A bank repeatedly took occasion to impress upon superabundant inflow of foreign loans, under the private banks the necessity of maintaining conditions of business depression and of a cor- their assets in liquid condition. After this ad- respondingly moderate demand for capital, had vice had been heeded to the extent of contract- brought about a very considerable lowering of ing stock-exchange credit operations in particu- interest rates during 1926 and had brought the lar, an advance in the discount rate from 5 to Reichsbank out of touch with the money mar- 6 per cent followed on June 10. On October ket in spite of successive reductions in the dis- 4 the increasing demands of commerce and count rate from 9 to 6 per cent. As early as industry necessitated another advance to 7 November or December of 1926 it would have per cent. been possible to reduce the discount rate still At the time of reduction of the discount rate further, except that it seemed advisable to wait on January 11, the Lombard rate was still until after the year-end settlements. As inter- maintained at 7 per cent in order to check the est rates in the open market, after the usual extensive borrowing on collateral which had tension at the end of the year, declined rapidly taken the place of earlier month-end bill offer- during the early days of January, and a strong ings. It was possible still to maintain the return flow of funds to the Reichsbank set in Lombard rate unchanged when the discount during the first week of January, a reduction rate was raised on June 10, 1927, and not until of the discount rate from 6 to 5 per cent was October 4 was it raised to 8 per cent. made effective on January 11, 1927. On this The money market.—The movement of occasion the Reichsbank stated emphatically interest rates in the open market in comparison

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with the Reichsbank discount rate is shown in of May amounted almost always to more than the accompanying chart. From this chart it 2,000,000,000 reichsmarks; at the month's end may be seen that the rate for month-to-month in August, September, and October to more money showed a rising tendency from the end than 2,500,000,000 reichsmarks; and at the end of February throughout the year. For day-to- of 1927 it had advanced to almost 3,000,000,000 day money the same tendency is unmistakable, reichsmarks. (Chart II.) Examination of the although sharp fluctuations are shown—for gross increase in domestic bills (Chart III) this reason among others, that very often as a shows very clearly the extent of the demands result of large end-of-month settlements a tem- made on the banks. The largest part of the porary but great abundance of day-to-day money was created, the effect of which was MONEY IN CIRCULATION AND that rates were depressed for a brief period. REICHSBANK HOLDINGS OF GOLD AND FOREIGN EXCHANGE Funds available in the private discount market AND DOMESTIC BILLS at no time reached any considerable amount. BILL.ft.M. ( END OF MONTH F/GUfiES ) Acceptances of the Berlin "great banks/' for example, amounted to 263,800,000 reichs- Total money \ marks at the end of October, 1926, and to in Circulation 386,600,000 reichsmarks at the end of October, 6.0 1927, as compared with 1,260,200,000 reichs-

MONEY RATES 5.5 IN THE BERLIN MARKET PEJFt CEjjT ( MONTHLY AVERAGBS ) Re/chsbank and ft en fen bank Notes 9 - 5.0

8 4.5 3.0 J To reign Exchange 2.5

5 -' 2.0

1.5

marks on October 31, 1913. The demand for private discounts arose chiefly in connection 1.0 with public funds administered by the Reichs- CHART II bank. The rate fluctuated for the most part bill offerings was made through the agency of slightly below the Reichsbank rate, or now and banks and other financial institutions, while then even reached that level for a short time. direct offerings by industry, handicrafts, com- The rate for commodity bills with bank in- merce, agriculture, and other borrowers, in dorsement, which was often a merely nominal spite of a similar tendency to increase, declined rate, was lower than the Reichsbank rate until in relative importance. The average maturi- about the middle of the year, and thereafter ties of discounted bills from the time of their above it. purchase, moreover, were longer as compared Domestic bill portfolio.—The volume of with maturities of discounted bills in the year domestic bills, which during 1926 averaged 1926. 863,000,000 reichsmarks, rose considerably The credit operations of the Reichsbank after February of last year, and since the end were supplemented in a sense by the export

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credits granted by the Gold Discount Bank. Nevertheless a unified management of all these Since April, 1927, the latter bank has held balances for the benefit of the country as a bills in reichsmark currency as well as sterling whole continued to be essential. Unfortu- and dollar bills. On the whole, however, the nately this matter is not yet seen by everyone discount operations of the Gold Discount Bank in its true light. Short-term funds tend for were somewhat curtailed for the reason that the most part to seek investment in a central the bank is gradually approaching its appointed money market for the sake of the interest to end. It must also be borne in mind that the be earned; the result is that even such impor- cooperation of the Gold Discount Bank in tant places as Frankfurt and Hamburg try the administration of public funds will be with good reason to establish close relations discontinued within a measurable period of with the Berlin money market. Only a cen- time after the plan of the Reichsbank to take tral money market is in a position to distribute over the management of these balances shall its available balances to all parts of the coun- have received the general approval of the try. The Reichsbank has contributed to make parties concerned. The business undertaken this possible, especially through the establish- by the Gold Discount Bank at the beginning of ment of clearing facilities by telegraph. By this means all unemployed balances are made avail- PURCHASES BY THE REICHSBANK able to the whole German business world; the OF DOMESTIC BILLS entire administration of public funds is more rationally organized; and excessive hoarding M ILL. R. M. (AMOUNTS PURCHASED MONTHLY ) and dissipation of reserves is avoided. This does not mean the withdrawal of funds from 2400 less important districts, but quite the reverse— namely, the possibility of placing at any time otherwise idle funds of the business world and of the Government wherever they are needed; in this way enabling local markets to partici- pate in the advantages of the great central market. Germany is not rich enough to permit herself the luxury of uncoordinated employ- ment of capital. Foreign credit policy.—Considering the dearth of capital in Germany, the necessity of seeking foreign credits is admitted without further argument. So far as a satisfactory increase in production is the aim in seeking the assistance of foreign loans, no objections can be raised. This assumption can generally be ac- cepted in the case of private business, which is 1926 1927 faced with the necessity of calculating profits CHART III very closely. Naturally many objections arise 1926—namely, the acceptance of 360,000,000 in the case of private loans if they are employed reichsmarks of agricultural 7 per cent mortgage to excess or in unproductive ways, especially bonds of the Rentenbank-Kreditanstalt with a in consideration of possible future changes in maturity of three to five years—was almost price levels and conditions of production. In completed at the close of the year under the case of public organizations the same con- review, after a further sum of about 65,000,000 siderations do not always apply, owing to the reichsmarks had been appropriated for agricul- special character of most of their operations ture in 1927, and the statutory limit had thus and owing to the interplay of political factors. been almost reached. Of these mortgage A most economical financial policy in general, bonds, 118,400,000 reichsmarks will mature and most careful management of public under- on July 15, 1929; 118,600,000 reichsmarks on takings in particular, must therefore be con- July 15, 1930; and 118,700,000 reichsmarks on stantly demanded. The effort which the Bera- July 15, 1931. tungsstelle (Loan Advisory Committee) under The volume of public funds declined con- the direction of the Finance Minister of the siderably during the past year, and accordingly Reich has been making in the direction of stern their importance for the money market and the self-denial in respect to seeking new public discount policy of the Reichsbank diminished. loans abroad has strengthened the confidence

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of foreign countries in Germany's financia- activity. It should be larger in periods of policy. Self-discipline and self-denial in finanl keen business activity than in quieter periods. cial matters will be essential in the future also— For this reason the increase in the German all the more since the Agent General for Repa- monetary circulation which took place as a rations in his latest report has revived the ques- result of the improvement in economic condi- tion of a precise definition of German repara- tions during 1927 is a case in point. The fact tion obligations. The close relationship which that the German price level showed a rising the solution of this problem bears to the cur- tendency during almost the whole of 1927—in rency question imposes new tasks of great direct contrast to the price movement in difficulty and responsibility upon the Reichs- England, and except for the last month or two bank. in the United States also—showed the need of Gold and foreign exchange policy.—The gold checking any further expansion in circulation, and foreign exchange policy of the Reichsbank and was a contributory cause of the autumn was deeply influenced during 1927 by foreign rise in the discount rate. credits. Rates of the dollar and of sterling Gold imports.—Gold imports into Germany fluctuated near the gold export point until the during 1927 amounted to 186,000,000 reichs- end of June. The causes for this lay espe- marks and gold exports to 9,000,000 reichs- cially in the temporary decline of the inflow marks, giving a net import of 177,000,000 of foreign capital and in the very unfavor- reichsmarks. Of this amount, 133,700,000 able trade balance; the latter constitutes a reichsmarks came to the Reichsbank—45,- problem of the greatest importance for the 000,000 reichsmarks being acquired by pur- further economic development of Germany. chase during 1927, while the remainder was The delivery by the Reichsbank of almost withdrawn from gold deposits held abroad and 1,000,000,000 reichsmarks in foreign ex- was therefore already in possession of the change—and in gold also to a small amount— Reichsbank. together with the inflow of short-term foreign International clearing facilities.—The inter- credits, could not change the course of the national clearing facilities arranged with cer- exchanges. During the second half year the tain foreign banks of issue toward the end of value abroad of the reichsmark rose again, 1926 were extended to a larger number of for- especially as a result of the larger inflow of eign banks during the past year, so that by foreign loans. When, owing to this develop- the end of 1927 similar arrangements were in ment the exchanges had declined almost to the force with 17 countries—Belgium, Denmark, gold import point, and the possibility emerged Danzig, Estonia, Finland, , Great Britain, that foreign credits might come to Germany in Holland, Latvia, Lithuania, Norway, Austria, the form of gold, the Reichsbank decided to Sweden, Switzerland, Czechoslovakia, Hun- reduce the purchasing price of gold to 2,784 gary, and the United States of America. In reichsmarks. practice the international clearance is used Circulation and the price level.—A con- especially for the transfer of rather small indi- siderable increase in. money in circulation, vidual accounts. During 1927 10,987 clearing even though fully covered by gold, can not operations were put through, in a total value fail to have an unfavorable influence on the of 39,000,000 reichsmarks. course of prices, which seems all the more Security and capital market.—After Febru- serious because an advance in prices, even ary the market for long-term securities with though it may have quite natural causes from fixed yield showed increasing stringency. This the point of view of commodities and produc- was not only closely connected with the activity tion, will be regarded generally among the pop- of the mortgage institutions and public organi- ulation as a sign of inflation because of their zations during preceding months—an activity previous experience. The situation of the re- which, being supported by an expansion in the serves, therefore, can not and ought not to volume of credit, had already to some extent serve as the only standard for the guidance of anticipated future capital accumulation—but the Reichsbank: in such case the Reichsbank was also the result of the business revival. would mislead business by the devious path of Even though figures for the issues for 1927, price advances and wage advances to a miscon- particularly for the first half of the year, ception of profits, and to unsound measures in indicate a fairly considerable supply of funds in the placing of their investments and the conduct the domestic capital market, they were never- of their business. The monetary circulation of theless inadequate to meet the demand. any country should be maintained in well- Interest rates on the capital market continued balanced proportion to the volume of business to be unfavorable for borrowers. The 10 per

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cent agricultural mortgage bonds of East Revision of balance sheets.—Negotiations , , and Schleswig-Holstein could, between the Keichsbank and the banks and it is true, be converted at the beginning of the clearing houses with regard to improving and year at 7 per cent, but the average return of elaborating their published balance sheets led securities with fixed yield fluctuated almost to the following result at the beginning of continuously above 7 per cent; mortgage bonds 1928: Instead of bimonthly, monthly condi- with an interest rate below 8 per cent could tion statements are to be published; thus the scarcely be disposed of during the closing interval between publications is shortened. months of 1927. The demand on a great part The plan of the balance sheet has been revised of the savings of the German people for repara- in several particulars for the sake of more tion deliveries is one of the chief causes of the correct and more precise wording and form. higher level of interest in comparison with The new form has been drawn up in such a other countries which weighs so heavily upon way that it can be uniformly applied in the German business. case of private credit banks, public banks, On the security market the high level of clearing houses, and mortgage banks. At the prices prevailing until May was considerably same time the Reichsbank came to an agree- influenced by the inflow of short-term foreign ment with these institutions that a number balances; but in addition the aftereffects of the of additional items should be included for the inflation psychosis prevalent throughout the clearer interpretation of the entries shown on population and a temporary superabundance the condition statement. of credit facilities available for security pur- chases had the same effect. ANNUAL REPORT OF THE BANK OF JAPAN The annual report of the Bank of Japan for dentally disclosed the insecure position of a few 1927, presented to the meeting of shareholders banks. This was sufficient to arouse suspicion on February 18, 1928, contains the following in the minds of depositors and to start a bank- sections dealing with financial and economic ing panic which resulted in the failure of such developments during the year: banks as the Tokyo Watanabe, the Nakai, the General conditions.—The past year brought Murai, the Eighty-four, the Nakazawa, and the little improvement in general business condi- Soda. Some minor provincial banks also an- tions, which continued to be slack during the nounced suspension of payment. early months. Money had become easier since Meanwhile, the measures under discussion the preceding year with rates tending to decline passed the legislature, and there was a tem- still further, and the prospect seemed more porary lull in developments; but the shock to favorable for proceeding with necessary busi- the credit system was too great to pass so easily. ness readjustments. Foreign-trade conditions Bankers became extremely cautious and were proved less adverse than the year before. A especially on their guard with such firms as marked recovery in the value of the yen brought Suzuki & Co. and affiliated concerns. On exchange rates very near to par, while prices of account of its close business relations with some of the staple commodities were, if only Suzuki & Co., the Bank of Taiwan was soon slightly, upon the upward grade. The nation, called upon to repay its short-term borrowings, however, had not fully recovered from the while banks in the western Provinces suspected economic effects of the crisis of 1920 and the of similar relations suffered heavy withdrawals earthquake damage of 1923; and the persistent of deposits. As the Bank of Taiwan had no fall of commodity prices in 1925 and 1926, re- means of raising funds to meet its short-term sulting from an improvement in the value of the loans, the Government, fearing serious credit yen, made itself keenly felt in our trade and in- disturbances as a consequence of the failure of dustries. Although the probability of the re- this institution, drafted an emergency imperial moval of the embargo on gold exports had been ordinance authorizing the Bank of Japan to increasing since the latter part of the preceding provide the Bank of Taiwan with such funds as year, there were still disquieting factors of no it needed to tide over the situation. The Privy little importance beneath the surface. Council, however, rejected the plan on April \ Banking panic.—Such was the state of affairs 17—an action which was immediately followed until March, when a deadlock in the debates in by the closing of all branches of the Bank of the Diet on the Government measures relating Taiwan on the Main Island, and the subsequent to the liquidation of the earthquake bills inci- failure of the Fifteenth Bank and the Omi

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208 FEDERAL RESERVE BULLETIN MARCH, 1929 (as compared with 37,994,267 tons in 1927). tions of the bank, to explain as fully as the Taking the franc value of imports and exports, scope of this report would permit, the motives total imports in 1928 amounted to 53,448,- and the facts which justified the highly import- 265,000 francs, an increase of 398,387,000 ant monetary and financial decisions which we francs in comparison with the year before; agreed to and promoted during the past year. exports, on the other hand, which amounted We are fully convinced that these decisions to 51,346,799,000 francs, showed a decline of were inescapable, and that they will benefit 3,577,960,000 francs in comparison with 1927. our entire national economy. This decline in the value of exports, which There is no way in which a nation can coincided with a considerable increase in the achieve permanent recovery and productive quantities exported, seems to be due to price activity except by way of monetary security. reductions to which French producers who sell Delivered from that uncertainty regarding on international markets agreed for the sake of tomorrow which paralyzes great initiative, dis- holding their own in markets which had been courages patient effort, creates the taste for opened to them during preceding years. The speculation to the detriment of the spirit of increased value of exports is due chiefly to enterprise—assured of being able, in short, to manufactured commodities. make either short-term or long-term contracts It must, therefore, be regretfully admitted in francs with complete security, our country that the French trade balance was temporarily can face the future and prepare for it with adverse in 1928; but it should be noted that confidence. since autumn our foreign trade has been making Our task at all times will be to make certain excellent progress, which has been uninter- that the franc of 1928 shall remain, under the rupted during recent months. administration of the bank, a reliable instru- Conclusion.—Gentlemen, we have tried be- ment for the assistance of labor, production, fore presenting detailed statistics of the opera- and savings. ANNUAL REPORT OF THE GERMAN REICHSBANK The annual report of the German Reichsbank lockout in the iron industry of northwestern for 1928 was presented to the meeting of share- Germany, which was finally ended through holders on February 4, 1929.* The portion of intervention by the Government. Once again the report dealing with general economic and for an entire year reparation payments have credit conditions follows:2 been discharged, not out of an economic sur- The halt which occurred toward the end of plus but out of borrowed funds, and the ques- 1927 in the general economic improvement of tion becomes more and more serious how long Germany continued well into 1928, and then this debt-incurring process can be continued was succeeded by a gradual recession. The and how far German business can bear up buying power of the domestic market was under credit conditions which in the course of diminished by price increases, which in certain the year have steadily become more unfavor- branches of industry were made with the able. The continuing high rates of interest primary purpose of holding down export prices. cast their shadows over all German economic In spite of these and other measures tending activity. They are among the principal causes to encourage exports, it was impossible, in the of the difficult situation of agriculture. Fur- face of the unabated protectionism of other thermore, they have been an important factor countries, to overcome the adverse German in impairing credit conditions during the year, trade balance and achieve that substantial as reflected in the growing number of sus- growth in exports which is so essential from pended payments and of protested bills, accom- the point of view of reparations policy. On panied by extra-judicial settlements and reor- several occasions wage disputes disturbed the ganizations which to an increasing extent labor situation and thereby interrupted the affect even the more important firms. If, on steady course of economic development; in the whole, business has hitherto shown remark- November they reached their climax in the able powers of resistance to adverse influences, that is primarily the effect of foreign credits, 1 For earlier reports of the Reichsbank see FEDERAL RESERVE BUL- both long and. short term, which have con- LETIN for May, 1928, 1927, 1926, etc. 2 The full report contains, in addition, accounting details, several tinued to flow into Germany in large volume. charts, and a brief discussion of changes of procedure in the Reichsbank transfer (Giro) system. The 1928 report has been issued in English, as Money rates.—The gradual recession of well as in German. The official English version became available after the accompanying extract, translated from the German, was already in business activity was reflected but slowly in type, and was used in revising it. the condition of the money market. After the

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heavy demands at the end of 1927 the custom- was more than compensated by accessions of ary dullness followed during the first six weeks gold and foreign exchange. the new year. A subsequent revival carried The Reichsbank rate for loans on securities interest rates to a high level, only slightly below remained unchanged throughout the year at that of the last quarter of 1927. Not until 8 per cent. October did another period of inactivity set in. The demand on the Reichsbank for discount Chart I [omitted] illustrates the course of open- of domestic bills was but slightly affected by market rates in comparison with the Reichsbank the ease of the money market at the beginning discount rate. The general trend of the money of the year. The volume of domestic bills held market is reflected most clearly in the rate for by the Reichsbank was maintained with almost month-to-month funds. This rate rose gradu- uniform monthly fluctuations at an average ally from February until September and only level of 2,000,000,000 reichsmarks. In the during the last quarter showed a slight reces- last quarter the volume declined and in sion. The rate for day-to-day money also November fell temporarily below the figure of reflected the general tension of the money mar- 1,500,000,000 reichsmarks. The supply of ket, although subject to frequent fluctuations bills brought to the Reichsbank originated for consequent upon influxes of short-term foreign the most part with the banks and other finan- funds. Throughout the year bank acceptances cial institutions, which were responsible for the were in small volume. On these bills the rate movement in the Reichsbank's holdings of was very close to the Reichsbank rate. From domestic bills, wThile direct applications for March to October the private discount rate discount accommodation from other sources— fluctuated between 6M> and 6% per cent; in commerce, industry, agriculture, manufactures, November it declined somewhat, but remained and other applicants for credit—remained above 6 per cent until the close of the year. almost unchanged in respect to volume and To broaden the scope of the acceptance market, maturity. agreements which had already been in force Public funds.—The so-called public moneys for some time between the Reichsbank and a have become less disturbing as elements in group of important acceptance houses in regard bank policy by reason of the decline in volume to the purchase and sale of acceptances and of the funds involved. The departments con- their rediscount by the Reichsbank were, at the cerned now manage with considerably smaller suggestion of the Reichsbank, extended to a reserves, and have become convinced that the number of other first-class banking firms. wishes repeatedly expressed by the Reichsbank The more liquid condition of the bill market regarding the investment of these funds are in enabled the Reichsbank, acting for the Govern- every way to the interest of the public depart- ment, to place Treasury bills in the market ments and accordingly of the public in general. from February, 1928, on. The rediscounting Reparations and foreign credits.—On August of these bills and their use as collateral for loans 31, 1928, the last of the four transition years with the Reichsbank, as authorized by the under the experts' plan came to an end. The bank-law amendment of July 8, 1926, was in Agent General for Reparations has in each of very limited volume. his reports laid stress upon Germany's punctual In contrast with the greater part of the and loyal execution of the plan. The Reichs- previous year the Reichsbank, by maintaining bank also, to which special tasks were assigned its rate unchanged throughout the year at 7 in respect to reparations policy by the London per cent, found itself almost constantly in close Agreement, can claim on its part that during relationship with the rate situation in the open these four years it has done everything to market. The brief ease of the money market facilitate the functioning of the plan without during January and February was very soon friction. During this period the German bank dispelled again by the customary spring de- rate has at all times been higher than rates of mand for funds. The liquidity of the market, other important banks of issue. Demands for which became evident again after October, foreign exchange made by the Agent General could not be regarded as adequate reason for a have in each case been satisfied by the Reichs- lowering of the Reichsbank rate, although this bank in such manner that the open foreign had been expected in many quarters. The exchange market has been in no way disturbed. demand upon the Reichsbank for credit, it is Moreover, in general financial policy, the true, declined slightly; but total currency in Reichsbank within its prescribed limitations circulation continued to show a gradual up- has worked for economical administration. In ward trend, since the decline in bill offerings particular it has insisted strenuously on the

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employment of foreign funds in the most pro- The gold and foreign exchange situation ductive ways possible. During the transition during the year under review was also deter- years about 7,000,000,000 reichsmarks have mined by the foreign credits. The dollar and come into Germany in the form of long-term the pound sterling were generally below parity foreign loans. Short-term foreign funds bor- as compared with the reichsmark; the sterling rowed by German banking institutions are rate several times and for a considerable estimated at more than 6,000,000,000 reichs- period even fell below the gold import point marks. In addition, other branches of German (to Germany). This situation led to substan- industry have floated short-term foreign loans tial imports of gold, which the Reichsbank to obtain working capital. Finally, a very was obliged to take, inasmuch as the.bank is considerable volume of domestic shares, bonds, legally obligated to convert gold bullion into and other assets have been acquired in the reichsmarks at the rate of 2,784 reichmarks course of these years by foreign purchasers. per kilogram of fine gold. The effects of this foreign indebtedness have The fundamental cause for the continued given a peculiar character to the development inflow of foreign capital is in last analysis of German economy during these transition the high level of German interest rates, which years. It would have been strange indeed if result from the disparity between domestic an artificially induced increase of capital in capital accumulation and capital demand. such considerable amount had not been re- This disparity is made greater by the burden flected in expansion of plant and of consump- of yearly reparation payments in the amount tion, in rising wages, in an increase of deposits of 2,500,000,000 reichsmarks. Germany, hav- with banks and savings institutions, and the ing lost her liquid capital during the inflation like—expansions which are all the more period, had no alternative but to float credits striking if compared only with the years of and loans as quickly as possible both at home extreme distress resulting from inflation, and and abroad if she wished to preserve her eco- not with normal years of peace. It is most nomic existence and at the same time dis- urgent and important to determine whether charge her heavy obligations toward her repa- this foreign indebtedness now and in future ration creditors. This led to interest, amor- will contribute to the creation of an adequate tization, and commission charges which for a German export surplus, from which not only country of such high cultural and economic the interest payments on outstanding foreign development are without precedent, and will, loans—amounting at present to about 1,- if they grow in amount, become intolerable. 000,000,000 reichsmarks per annum—but also These costs have already deprived large the annuity payments under the experts' plan, sections of industry of any opportunity for can be made. Germany has every reason to profit or for capital accumulation, and their be grateful to foreign countries for their as- payment up to the present time has been sistance by means of credits. We are justified possible only because a constant influx of in adding that the credits which have been new foreign capital, accompanied by a steadily extended are, from the commercial standpoint, rising price level, has enabled current obli- perfectly safe. A country possessed of such gations to be met by new indebtedness. So economic resources as those of Germany will long as it remains impossible to strengthen always be able to make available a sum such the productive capacity of industry, and at as these credits represent—if necessary, through the same time reduce costs of production along the sale of liquid assets. So long as the trans- all lines and lower prices, so that Germany fer protection provided in the experts' plan is can by increased exports and decreased imports continued, there need be no fear that private discharge a reparation burden adjusted to credits will be endangered. Transfer of pre- her capacity to pay—after removal of the vious annuities under the experts' plan, how- more onerous tariff barriers—the danger will ever, has been possible only with the help of still remain that capital charges will continue foreign loans. It will, therefore, be necessary to rise in Germany, and will eventually reach now that the four experimental years are past, a level far above any normal earning power of to probe to the bottom of the question whether German industry. the situation will justify further transfers out The capital market.—The German capital of borrowed funds, in view of the fact that the market remained at high tension throughout experts' plan presupposed that transfers would the year. Complete exhaustion of the market be made in the long run entirely out of a surplus was avoided by regular apportionment of balance of payments. demands over stated periods of time. De-

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mands on the market so far exceeded its The Reichsbank lent the market its support capacity that at times even first-class issues by means of various measures during 1928. could be only partly absorbed. Only for In the case of loans against securities up to an mortgage bonds, which enjoy a traditional amount of 50,000 reiphsmarks, the Reichsbank popularity, did the market show some absorp- removed the restrictions as to maturity which tive capacity throughout the year. This, how- had been prescribed for credit institutions, so ever, was undoubtedly due in considerable that loans of this character can now be placed measure to foreign purchases, a statement with maturity up to the legal limit of three which applies similarly to other domestic issues months. Some alleviation was afforded the of the past year. Participation of foreign market for Government securities by the crea- countries was especially marked in the issue tion of a banking consortium with the aid of of Reich railway shares, and later on also in a the Reichsbank, the members of which pledged series of interim loans which were floated by themselves to assume, without cost to the German municipalities under very unfavorable borrower, the guarantee required for the conditions. The unsatisfactory situation of the Reichsbank, under the bank law (section 21, market for securities bearing a fixed rate of subsection 3, last clause). Most important of interest is reflected in the actual yield, which all, it was possible for the Reichsbank, under has risen in comparison with the previous year, authority of the law of December 21, 1927, to and terms of issue were considerably more extend considerably the kinds of securities on unfavorable. Even borrowers of the highest which advances might be made, through the standing had to pay 9 per cent or more for inclusion of a large part of the mortgage bonds their long-term loans by reason of the discount and municipal bonds issued by semipublic credit at which the loan was issued. institutions.

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