Last Time

Executive Vice President of the Cleveland Trust Company, Cleveland, Ohio Chairman of the Economic Policy Commission of the American Bankers Association

by LEONARD P. AYRES

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AFTER the First World War, this country made two serious economic errors. The first was that we financed an export boom while this country was still short of goods. The inevitable result was inflation, which we had in 1919 and 1920. The depression of 1921 followed. Our other economic error was that we spent, and lost, billions of dollars in supporting weak foreign exchanges of nations that had not yet made serious efforts to put their economic affairs in order following the war. These experiences warrant our examining with care and caution the proposal that we should try similar experiments following this war.

In 1917 the Congress authorized the Treasury Department to lend the European Allies ten billion dollars. Approximately seven billions of this total had been lent by the time of the Armistice. Nearly all of the remaining three billions was lent by the middle of 1919. During the first four months after the Armistice, the funds that were lent to Great Britain were used to peg sterling exchange. The firm of J. P. Morgan and Company, as agent for the British government, used the dollars drawn from the United States Treasury to buy sterling exchange offered in the market, and by that purchasing held sterling exchange at a fixed rate.

Others of the European Allies also were receiving loans from the United States Treasury, and they were using them to support their currencies in the foreignexchange market. During the first four months following the Armistice of the last war, we had in operation a simple form of International Monetary Fund which stabilized or supported foreign-exchange rates by using funds lent by the strong creditor country, which was the United States. Then late in March of 1919 the British announced that they would no longer continue to peg sterling, and there followed a sharp drop in the price of sterling exchange and of the exchanges of nearly all the European countries.

The exchange rates for nearly all the European currencies, however, continued to be far higher than was justified by the fiscal and economic conditions of the various countries. The reason for their strength was that the loans from our government to the European governments continued to provide funds with which the exchange rates of those countries were artificially supported, even though they were not actually stabilized. The result was that we had an export boom and a serious post-war inflation.

Support of the foreign exchanges by our dollars in the first half of 1919 was a sufficiently powerful factor to check the business decline which had begun here after the Armistice, and to generate a violent boom accompanied by soaring prices. Our exports grew with unprecedented rapidity. This country was short of goods, much as it is now, and we continued to strip it of goods and to ship them abroad. In 1919 our exports amounted to nearly eight billion dollars — an amount far in excess of any previous yearly total. Wholesale prices had been at the time of the Armistice 203 per cent of the pre-war level. By February of 1919 they had declined 10 points to 193, but by December they had soared 30 points to 223.

In 1919 the continent of Europe was prostrate in an economic sense, but it was buying from us, without limit of price or quantity, everything it could get from us with its inflated paper money offered in the exchange markets. The results were boom, then inflation, and then deflation.

In 1920 the value of our exports was nearly eight and a quarter billion dollars, which remained the greatest export figure in our history until the establishment of Lend-Lease. Wholesale prices continued to advance until May, when they reached 247 per cent of pre-war levels.

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THEN deflation began. There was no more support for the foreign exchanges. We were no longer willing to accept the depreciating currencies of Europe, and neither was London, which had retained faith in them longer than we had. Prices which had been 247 in May of 1920 fell to 179 by December, and to 139 by the end of 1921. Wheat, which had sold in New York for $3.35 a bushel in 1920, fell to $1.09 in 1921. Cotton fell from 44 cents a pound to 11 cents.

Our exports, which had been going out at an annual rate of over eleven billion dollars a year in one month of 1919, and of nearly ten billions a year in three months of 1920, fell to a rate of only three and one-half billions by the end of 1921. The dollar had become a scarce currency in the foreign-exchange markets. Foreign exchanges which were stabilized and supported with our funds had generated a boom and an inflation in this country, and these conditions had been promptly followed by deflation and depression. The statistics and the economics of that period are explained in detail in various issues of the Economic Bulletin of the Chase National Bank of New York, written by the bank’s economist, Dr. Benjamin M. Anderson.

At the beginning of 1919 the exchange values of the currencies of England, France, Belgium, and Italy had all been close to their par values. Two years later, at the close of 1920, the exchange value of the British pound was 72 per cent of its par. That of the French franc was 30 per cent of par. The Belgian franc was 32 per cent of its mint par, and the Italian lira was 18 per cent. Our public loans and our private funds that had been used to support the exchange values of their currencies had harmed these countries and had also harmed us.

We should have been much better off if we had taken our post-war readjustment at the end of the war instead of two years later. We were all braced for it then. Our industries and our banks were financially strong. Instead, we spent most of three billion dollars of public funds in supporting foreign exchanges, and a somewhat larger amount of private funds in financing the export boom on credit. We generated an immense real-estate boom and extensive speculation in farm lands.

It would have been better for the nations on the continent of Europe to have faced their problems the hard way. That hard way would have called for cutting expenditures, reducing borrowing, working towards the balancing of budgets with taxes, and stopping the printing of irredeemable paper money. The easy way was to ask the central bank to print bank notes, and to use them for pensions, unemployment relief, and the rebuilding of shelled cities. Then the people could use the irredeemable money to buy foreign goods as long as the foreign-exchange markets would take it.

Most of the continental nations chose the easy way at first, and then the hard way after internal currency disorders had brought about intolerable domestic conditions. The solution of their problems was merely deferred when billions were wasted in 1919 and 1920 in the futile supporting of foreign-exchange rates.

All this may be summed up by saying that we had after the last war an extensive — and very expensive — experience with the workings of an informal but real International Monetary Fund. The strong currencies, which were the dollar and the pound, were used to support the weak currencies in the foreign-exchange markets. The support was given before the nations having the weak currencies had seriously attempted to put their domestic economies in order.

We financed an export boom while we were still short of goods, and brought on inflation here, followed by depression. When we stopped extending credit to the countries of Europe, they had inflations, followed by depressions. The experiment was a complete and costly failure for them and for us.

It is to be hoped that the administration of the Bretton Woods agreements will take into account the unhappy experiences which we and other nations had in the field of international trade following the First World War. Weak foreign exchanges are symptoms reflecting economic maladjustments. No lasting help results from lending funds to support such exchanges unless the maladies causing their weaknesses are in the process of being cured. Each proposed stabilization loan of the Fund and the Bank created under the Bretton Woods agreements should be considered on its merits, with its extension subject to terms directed at alleviating the conditions that made the loan necessary.