BANK FOR INTERNATIONAL SETTLEMENTS ELEVENTH ANNUAL REPORT 1st APRIL 1940 — 31st MARCH 1941 BASLE . 9th June 1941 TABLE OF CONTENTS Page I. Introduction 5 II. Exchange Rates, Foreign Trade and Price Movements 26 III. Production and Movements of Gold . 89 IV. International Capital Movements . 98 V. Government Finance, Money and Capital Markets and the Stock Exchanges . 111 VI. Central Banking Developments 176 VII. Current Activities of the Bank: (1) Operations of the Banking Department 184 (2) Trustee and agency functions of the Bank . 189 (3) Net profits and distribution 189 (4) Changes in the Board of Directors 190 VIII. Conclusion 191 ANNEXES I. Balance sheet as at March 31, 1941. II. Profit and Loss Account and Appropriation Account for the financial year ended March 31, 1941. ELEVENTH ANNUAL REPORT TO THE ANNUAL GENERAL MEETING OF THE BANK, FOR INTERNATIONAL SETTLEMENTS Basle, 9th June 1941. Gentlemen, I have the honour to submit to you the Annual Report of the Bank for International Settlements for the eleventh financial year, beginning 1st April 1940 and ending 31st March 1941. The results of the year's business oper- ations are set out in detail in chapter VII. Net profits, after provision for contingencies, amount to 5,293,909.12 Swiss gold francs. After the allocation to the Legal Reserve that is required by Article 53 of the Statutes, to an amount equal to 5 per cent, of the net profits, i. e. 264,695.46 Swiss gold francs, there remain available for the payment of a dividend 5,029,213.66 Swiss gold francs, corresponding to about 4 per cent, of the paid-up capital. The Special Reserve Fund has been drawn upon to the extent of 2,470,786.34 Swiss gold francs in order to permit the distribution of an annual dividend of 6 per cent. The balance-sheet total has risen from 469.9 million Swiss gold francs to 495.8 million Swiss gold francs on 31st March 1941, the rise being due to higher deposits from central banks. The Bank for International Settlements has been granted all reasonable opportunities for the conduct of its business, which has thus continued notwithstanding the difficulties of the international situation. The Bank has adhered to the principles of scrupulous neutrality which it laid down for itself in the autumn of 1939, confining its activities strictly to transactions whereby no question can possibly arise of conferring economic or financial advantages on any belligerent nation to the detriment of any other. In the period up to 31st March 1940, which was reviewed in the last Annual Report of the Bank, actual warfare in Europe had been limited to certain relatively restricted areas and at the end of the period 50 per cent, of the population of Europe (excluding the U. S. S. R.) belonged to neutral or non-belligerent countries. Trade was still carried on in a substantial volume between most countries in Europe and overseas markets, and over a large area the economic and financial life although increasingly coloured by the state of war did not radically differ from the conditions which had obtained before the autumn of 1939. — 6 — Developments in the spring and summer of 1940 and the hardening of the struggle in the winter extended the area of the conflict, so that at the end of March 1941 the proportion of European population which had not been directly involved in the war was less than 15 per cent, of the total. Actual destruction of life and property had not been on an extensive scale in relation to total population and wealth" but the disruption to which the peacetime economic organisation was exposed, not least through the incisive changes in the customary channels of trade, created a series òf new and difficult problems and, in the areas most exposed, profoundly affected the conditions of daily life. With few exceptions the countries on the Continent of Europe have had their commercial relations with overseas markets reduced to a minimum and as a result this continent has been compressed into an economic group with a population of over 300 million people dependent in the main on its own resources. For the United Kingdom, which for food alone is dependent to the extent of about three-quarters of its requirements on foreign sources, the cutting-off of supplies from Europe has increased the importance of her Atlantic traffic with other continents and necessitated a concentration on the imports of the most vital foodstuffs and materials. The great reduction in the shipments to European countries has been felt keenly in Latin America where surplus stocks have accumulated and the consequent reduction in the income from abroad has led to exchange difficulties, which, however, have been eased to a considerable extent by loans obtained principally from government agencies in the United States and, in the case of the Argentine, Brazil and Mexico, also by the inflow of refugee capital and funds for investment. In the United States rapid increases in spending for armaments have raised the level of domestic production to an all-time record and increased sales to the British Empire and Latin America have, as far as industry is concerned, compensated for the loss of other foreign markets, while surplus agricultural products have been laid up in stocks through government purchases and the granting of loans on easy terms. As regards the Far East, Japanese exports to countries of the yen bloc have expanded so rapidly that in 1940 they surpassed the country's other exports and gave rise to the imposition of government control to ensure a more balanced distribution of the export trade in accordance with the need of foreign exchange. In almost every corner of the world the various countries have more and more been thrown back upon their own resources, which they have been compelled to exploit in the fullest possible measure, leading to an extreme autarky beyond the desires of any government. That in this, respect the present state of affairs is largely regarded as a temporary development to be reversed as soon as peace returns and commercial relations can be resumed may be seen from official declarations in practically all countries, however much opinions may differ as to the most suitable means of attaining a durable trade recovery. If it is not possible for trie time being to speak of "world economy", it follows that a review of actual conditions in the year that has passed must be concerned mainly with the particular conditions within separate groups of —- 7 — countries. There are, however, many features in common in the various groups and some of the most pressing economic and financial problems of the day, e. g., the meeting of heavy budget deficits, reveal a great degree of similarity throughout the world, as also do the solutions adopted, there being many practical arrangements which by force of circumstances impose themselves irrespective of enmities or ideologies. Besides the severance of commercial relations through the blockade and counter-blockade the increase in armament expenditure, first and fore- most in the belligerent but also in other countries, is the outstanding fact which dominates commercial and financial developments. This increase represents the budgetary expression of a great diversion of national effort towards armaments — through the mobilisation of men for active service, the manufacture of arms and ammunition, transport of troops and material, etc. The proportion of public expenditure (central and local) to national income already exceeds that of the last two years of the 1914-18 war. On account of changes which have taken place in prices and earnings since the summer of 1939 it is more than ever difficult to calculate the magnitude of national incomes. But there seems to be little doubt that in Germany, Italy and the United Kingdom total public expenditure in 1941 will amount to 70 per cent, or more of the net national income*; and even in some of the neutral countries, as, for instance, Sweden, public expenditure takes as much as 40 per cent. The state has become the main customer of industry and trade and the main — if not the exclusive — borrower on the money and capital markets. This preponderance of the state must in many ways affect the character of the economic and financial measures, for the state does not "react" in the same way to changes in interest rates, price alterations, etc. as the mass of private businesses and individuals may ordinarily be expected to do. There remains, however, in all economies a certain "free sector", the reactions of which must be taken into account to a degree that depends upon its importance in each case. The concentration of so much of the national effort upon armaments raises two closely related problems: how to put at the disposal of the state, with the least possible disturbance to the monetary system, the financial resources required to meet the increased expenditure, and how to ensure in the most efficient manner the adjustments of production and foreign trade necessary to obtain a maximum of war effort, while still providing sufficient goods for general consumption and other indispensable needs. Financially the problem is one of taxation and borrowing, and economically one of allotting to their right purposes the men and materials available from The high percentages given in the text represent the ratio between total public expenditure and net national income. But other resources than those which form part of the net national income are drawn upon: inter- nally, amounts are released from embodiment in fixed and working capital and, externally, resources may be made available from sales of gold, foreign loans, mobilisation of foreign investments, contributions from other countries for occupation costs, etc.