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REPORT ON THE OFEMTIOHS OF THE DIVISION OF FOREIGN EXCHANGE
OF THE FEDERAL RESERVE BOARD
Fred I. Kent, Director
Division of Foreign Exchange
December 2> 1918
n
t>
1
1W U i U ill
REPORT OH THE OPT— - -
^
THE DIVISI^ - ^ FOREIGN EXCHANGE
The Division of Foreign Exchange of the Federal Reserve
Board was organized to carry out the provisions of the Executive Order of the President of January 26, 1918, and to co-oper-te ?d.th the
Treasury Department of the United States in meeting the unusual problems in foreign exchange ere tad by the war.
The work has been carried on under three divisions, Admini s t r a t i v e , Research and S t a t i s t i c a l *
Th#re are 98 employees In the
Division, beside the Director and Assistant Director whose time has
been given to the government without compensation.
Admini strative Department•
All *dealers" in foreign exchange* including bankers, broke r s , exporters and Importers, who carry accounts in foreign countries,
or carry accounts for foreign correspondents, are reoulred tinder the
Executive Order to register with the Division of Foreign Exchange of
the Federal Reserve Boa d, through the Federal Reserve Banks of t h e i r
d i s t r i c t s , in order to do a foreign exchange business*
Under the sys-
tem of reports required, together with the close relationship which
has been developed with the Cable Censorship and the Postal Censorship
In connection with -communications covering financial transactions,
i t has been possible to exercise a control over the consummation of
a l l foreign financial operations, and at the same time leave necessary
freedom of action to "dealers' 1 •
While the headquarters of the Division were established in
the Treasury Building in
i n Hew York City*
r
ashirf-ton, yet the nmin office was opened
This WEIS necessary in order to place the Division
in position to ?lve linmediate replies on applications of "dealers*
fok permission to carry out certain operations required under the Ex*
ecutive Order and the regulations issued in connection with i t , as
-2probably 95^ of such applications are made by New York ^dealers11*
Although this necessitated a weekly t r i p between Washington and New York
by the Director, yet the speed of service required* because of the
nature of the financial operations involved, could not have been prlven otherwise*
Upon receipt of their Registration Certificates, ^dealers*
were authorized to carry on their foreign exchange transactions without reference to the Division of Foreign Exchange, with a few exceptions, provided reports were made on regular forum*
As the war went
on, however, i t was found necessary to require the approval of the
Director before a number of operations could be carried out, such
as transactions in certain exchanges, the Issuance of Letters of
Credit or the making of transfers of funds to cover the shipment of
goods from orie foreign country to another* foreign country, the issuance of Travelers 1 Letters of Credit in excess of $5*000, the Issuance of credits to cover goods to be warehoused, which could not be
exported or imported because licenses were unobtainable from the
ar
Trade Board, the investment of American funds In foreign countries,
action upon confirmations of cablegrams where the cables themselves
had never been received, arbitrage In certain exchanges and a number
of other matters*
At the outset, rulings under the Executive Order were required in great number, which needed immediate decisions in order to
allow the continuance of legitimate business without interruption*
As these requests also came largely from New York institutions, the
#stabll*iment of the main office in New Yortc 01ty was found to be fully warranted.
^Dealers" desiring to consummate transactions where approv-
ml i s required beforehand* imlm application by l a t t e r , lm duplicate,
through the Federal Bmmvwm Batik® of their districts* or direct to
the Division of Foreign Exchange* fh#re aprroviil can be given, i t i s
stamped upon the dt^plleate l e t t e r , which i s returned by the messenger
from the ^dealer* presenting the application*
As siidi a larr*e per*
centage of applications are imde in Hew York, and practically a l l of
such applications cotm from "dealers11 situated in c i t i e s itiere there
mre Federal Beserre Banks which can eom tmlcate witlt the Dii^ector by
telephone or tel©|pm|ti# this system has enabled the carrying out of
a l l transactions withmit friction* where stTOiwai could tern given
without extended investigation mde necessary fey the Interests of the
cotatry«
When enendesor a l l i e s of enemies have bean involved, de-
lays have t>een neeessary, btit even In stieh eases# where the Interests
@f the UnitcMl States were not jeopardised, nor the enemy benefited
through the carrying out of the transactions apt&ied for, a net itihen
I t has been of value to our Hatlonals to have them consumm&ted, au*
thorlty to operate has been e^ctanded after receipt of license from
the far Trade Board or proper release from any other department of the
government that ndftit be concerned*
Research
A Research Departmnt has been built up, as an aid to a l l
baric©rs and otl^r ^dealers^ w!io have been intent upon following the
l e t t e r and spirit'of the Bsseeutlve Order of the President and of the
Trading 11th the Enemy Actf and vfoo othei^is© would have b«en unable
to determine with certainty in many cases Whether i t war in order for
them to transact business with m&rqr foreign ^id Jta»rlcan housee 4
apnroaclied then# or whei^ ti^nsactions for tmknown persons \-;v
through thess*
To protect such Me&lers**
and also
the
Interests of the country, the Research Department has been developed
as a sort of Clearing House for a l l other governmental Kese&reh Bureaus* in so far as the work of su&i Bureaus covered persons or i n s t i t u tions attempting to carry out financial transact ion s*
Oftentimes re-
ports In the files of different government Bureaus* when brought together, have been found to be contradictory»
In all such eases en-
deavor has been made to ascertain which report has been correct, and
to see that the Bureau haying t£m wrong Information was notif led*
The Research Bureau has access to a l l source books published by the Allied %^®rmmntB, wlzt
Cable Censor's Handbook
Military Intelll&me*
Who's vjho
Brltl^i Statutory List
Confidential Black Lists
British White List
Cloak List
France •
Liste
Postal Bulletin
Italy -
Llsta Hemlea
United States -
Enemy Trading List
Cloak List
Confidential Consignors Liot
Daily Reports
The Bureau is also in direct touch with all United States government
departments of information and research, viz:
I*
2*
S»
4#
5*
6*
7*
tar Trade Intelligence.
1
Chief Cable Censor
s o f f i c e , and a l l s u b - o f f i c e s *
9
P o s t a l Censor s o f f i c e f and a l l sub-offices*
napartment of J u s t i c e *
^ l l l t a r f I n t e l l i g e n c e Bureau*
Haval I n t e l l i g e n c e Bureau*
Alien Property Custodian*
&* Custom House*
Direct private telephone and telegraph wires connect the
Departraent with several of t*ie Bureaus tuentionedj ami personal
sentatives of the Division of Foreign Exchange are stationed with the
War Trade Intelligence, office of Kaval Intelligence and the Postal
Censor*s office• The Division also has personal representatives in
all of the Gable Censorship offices in the country*
The representa-
tive of the Division in the Mew York office of the Cable Censor is
also the Head of the Financial Division of the Censorship, and he ia
called into conference in the Division of Foreign Exchange daily*
In addition to these regular connections* consultation has
been had, when necessary, with the shipping Board, the War Industries
Board, the War Trade Board and the Departments of State and Treasury;
also with the British Embassy and the French High Commission*
With these connections the Research Bureau has been in position at all times to obtain immediately up-to-date information bearing on persons or institutions in all parts of the world* whose transactions have been brought before it»
This has enabled the Administra-
tive Department to make prompt decisions on important financial transactions in all cases except where further research wets necessary before suspected parties could be cleared, or proved to have enemy connections or interest•
.
.
.
The information received from all other governmental departments is brought together in the Research Bureau of the Division of
Foreign Fxchange* and filed*
Under this system it has been possible
to stop many transactions which might have been of value to the enemy,
and to afford constant protection to bankers and other "dealers'* in
the United States who might otherwise have inadvertently carried out
transactions for enemy account.
It has also been possible to turn over many matters to the
Allen Property
When cablegrams are suppressed, it is essential, if such
suppression is to be effective, that their confirmations also be sup-*
pressed, and all confirmations of cablegrams from '•dealers" in the
United States have been censored through the Research Department•
Suoh confirmations average about 2,000 a day*
Under the regulations
"dealers*1 in the United States are obliged to apply to the Director
of the Division of Foreign Exchange for approval, before they can act
upon any conf irrnations of cablegrams whieh are received by them, and
that refer to cablegrams that have ne^er reached them*
Copies of all suppressed cablegrams concerning financial
matters are delivered to the Head of the Research Bureau each day,
and all names of senders, receivers, beneficiaries or others mentioned in the cablegram are researched at once*
Application is made to
the proper department for release of cablegrams before receipt of the
confirmations, if it is found that the transactions themselves cannot
be harmful to the Interests of the country, even though some of those
connected with the transfers may have been of doubtful standing, and
the machinery to obtain proof in doubtful cases is well under way
long before "dealers" receive their confirmations and apply for permission to act under them*
Through this system it has been found pos-
sible to release great numbers of cables covering important transactions, whose temporary suppression might have been thoroughly justified,
but where later investigation showed that their delivery was not incompatible with the interests of the country•
The bringing together in the Research Bureau of intercepted letters received from the Postal Censorship, and intercepted cables
from the Gable Censorship, together with information from the other
sources outlined, has been of great value in determining the status
of many persons and institutions whose names have come up through
taking some part In foreign financial transactions•
In eases where those concerned in a cablegram cannot be
cleared, 90 dav postponement notices are served on
rt
dealer sff applying
for permission to consummate the transactions, and if before the
maturity of the 90 days it is still impossible to clear all names, a
prohibition notice is issued by the Federal Reserve Board*
The activity of the Administrative and Research Departments is
partially shown In the fact that an average of 400 pieces of mail is
handled in the filing room each dayf and that something over 20,000
letters of correspondence and 10 f 000 letters concerning credits or
remittances are on file*
Under the Executive Order, all foreign correspondents of
American "dealers11 are obliged to sifm a declaration agreeing not to
carry on any business through or for their American corx^espondents
for account or benefit of an enemy or ally of enemy•
Fuch declara-
tions, when received by American "dealers"t have been turned in to
the Division of Foreign Exchange, and all names have been researched
for the purpose of checking up the standing of the foreign correspondents of American "dealers* in connection with their attitude toward
transactions for account of enemies or allies of enemies*
150,000
of such declarations have been received, checked and filed for ready
reference•
A large nmnber of foreign correspondents did not forward
declarations•
Prom Intercepted correspondence and reports received
from "dealers*1, it was found that In a large percentage of cases the
declarations were not signed because the foreign correspondents were
Allies themselves, and Beamed to look upon the matter as one not con~
earning them, apparently not understanding that this requirement
had been written Into the law of the United states*
Steps have been
taken to correct this misunderstandingt in order that no Injustice
may be done to any who may have Ignored the request of
fl
dealers* for
declarations in good faith, base# on tht3 thought that they were not
concerned•
Another form of declaration has been required from foreign
holders of American securities who might wish to collect dividends,
interest or maturing principal, or sell their securities in the
United ftates #
In addition to covering the usual statement regard-
ing non-interest of enemies or allies of enemies, this form Included
the statement that foreign held securities had not been enemy owned
since February 3, 1917.
These declarations are also filed with the
Division of Foreign Exchangef and the names of the signers of the
declarations are researched In the same manner as those of the foreign correspondents of American n dealers n #
This requirement unques-
tionably deterred many enemies owning American securities from endeavoring to sell thernf or collect Income upon them*
Another regulation which required careful checking In the
Research Department covered deposits made with American banks In dol~
lars f for account of foreign correspondents*
'transfers of funds for
enemy account could be accomplished so easily through the deposit of
money to the credit of foreign correspondents with American banks or
other Hdealersflf for account of some neutral cloak in a foreign country, that all such deposits must be accompanied with information as to
the name of the original party requesting the deposit, the purpose of the
deposit, the name of the foreign beneficiary and the party for whose
account it is to be received in the foreign country.
This inforraa-
tion hae been filed with the Division of Foreign Exchange daily by
American "dealersflt and the names of all persons concerned are researched for the purpose of uncovering enemy connections or interest,
in case of their existence.
While there is no doubt but that through the use of cover
names, and other means, enemy transfers have been constantly made, yet
there is every reason to believe that the regulations of the Division
of Foreign Exchange have resulted in their being reduced to a minimum,
and that any extended operations for enemy account have been made impossible •
Through its Ambassadors and Ministers the State Department
has been constantly informed of the operations of American "dealers"
with foreign institutions, where enemies or allies of enemies have
been involved*
All such operations have been investigated through
the Research Department, after which proper action has been taken by
the Administrative Department*
It speaks well for bankers and other
"dealers" in the United States to be able to report that in practically all such cases investigation has shown conclusively that since the
United States entered the war there has been no intent or purpose on
the part of Americans involved to act contrary to the letter and spirit
@f the law, nor to carry out transactions which might be of benefit to
the enemy*
Statistical Department*
"Dealers* holding Begistration Certificates authorizing them
to do a foreign exchange business ax*e obliged to make weekly reports
at the close of business each Wednesday night of all their foreign
exchange operations, giving balances due them from each country of
the world, and balances held by them for account of each country of the
world*
-10Records of "dealers" registrations are made in the
Statistical Department.
On December 1,1918, 13,653 banks, bankers,
exporters and Importers, and others had applied for «.nd received
Registration Certificates.
Class A,
Of this total 10,208 are "dealers" of
: o are authorized to do a regular foreign exchange
business with the public.
2,087 are "dealers" of Glass B, under
which authority is extended to carry accounts with foreign correspondents, but not to sell exchange or deal with thes public.
1 # 358 are "d©alors* of Class 0, who are authorized to c a n y accounts in the United States for foreign correspondents, but are
aot authorised to trada with the public.
Pesrlstared'dealers" divided as to Federal Reserve
districts are as follows:
DISTRICT
CLAS-
CLASS "B*
CLASS "C"
TOTAL
Boston
740
711
376
1827
Sew York
984
820
812
2616
Philadelphia
473
37
20
530
Cleveland
710
23
1
Richmond
247
4
Atlanta
211
Chicago
2091
St. Louis
*
734
e
253
8
6
225
315
127
25S3
2
264
•
262
Minneapolis
2491
161
Kansas Citar
742
1
1
744
Dallas
190
3
2
195
1
JJ
1080
1358
13653
San Francisco
1067
23 52
4HMMHMIM
10208
2087
-lilt will be noted in the foregoing table that in
the Minneapolis9 Chicago and San Francisco districts there
are more "dealers* of Glass A than is true in the lew York
district•
This is due to the large number of bankers in
small towns wlio haire arranged with their metropolitan
correspondents to draw drafts against their foreign accounts
over their own names*
About 9t50Q of the 10fS08 Class A
"dealers*1 operate in this manner.
This system enables
bankers in country districts throughout the United
tatesf
as well as in towns and cities, to extend a foreign exchange
service to their customers when there is any demand in
their localities.
exchange business•
708 Glass A "dealers" do a direct foreign
160 of the 708 Class A "dealers" have
such an active foreign exchange business that they are
obliged to turn in reports every week.
Of this number the
foreign business of 65 is confined to Canada and Mexicof
while the other 95 do more or less of a world business.
All of these "dealers" are required to make reports
to the Division of Foreign Exchange covering their financial
foreign exchange operations.
classes
Dealers of the different
are supplied ?#ith forma prepared especially to meet
their business and that will bring together in the Division
of Foreign Exchange such statistics as are desirable.
Banfcwhioh do their foreign exchange business through metropolitan correspondents make their reports through such correspondents.
-32 ~
The reports divide the operations into different classes,
aimed to place before the Administrative Department a clear statement of developing conditions^
The classes of particular interest are
those covering exports and imports and arbitrage. While reports of the
purchase and sale af demand and cable transfers between "dealers" are
interesting in showing the volume, yet as one "dealer" buys and another
"dealer" sells, the relationship between the United States and other
countries of the world is not changed, as is true when exports, imports
and arbitrage transactions are recorded*
A number of other valuable divisions are made, where the amounts
involved are smaller, such as dealings in securities, coupon and dividend
checks, gold and silver shipments, remittances to cover freights and insurance, income taxes, etc*, and purchases of exchange for the use of
travelers•
The causes for the change in balances between tin United State©
and each country of the world as they occur from week to week are clearly
defined, and the trend of conditions is readily followedf
Balances for
and against the United states with the other countries of the world have
never been given out, except to the Treasury Department and the Federal
Heserve Board, for reasons ?$iieh are self-evident*
There are certain
figures of considerable interest, however, that can be referred to without
harm*
The total purchases and sales of demand and cable exchange between "dealers" in the United States from February 20, 1918 {when the
Executive Order went into effect) to October 1, 1918, were |3,636,784,150
mnd of this total |2f601,268,742,
Britain*
, or 71#50^ were for exchange on Great
Trading in demand and cable exchange between American "dealers"
in suoh large totals shows the free competition which exists in this
country in the foreign exchange business, and is most interestirgon
that account*
The total exchange from all sources on all countries of
the world purchased by American "dealers11 f<r th© same period was
#4,564,457,977, and the total sales #4,583,864,305, of which 55^ represented dealings in Sterling.
Ho other figures would seem to be required to show tha relative
world financial position which Great Britain holdsf but the statement of
arbitrage operations is also wonderfully illuminating in this respeet#
Exchange on Great Britain was sold to the United States by foreign
countries to the equivalent of #421f069f000, and exchange on Great Brflain
was purchased from American "dealers11 by foreign countries to the total
$£ #296,079,000#
Of these amounts British banks supplied the United
States with the equivalent of |218t857f000 in Pounds Sterling against
dolli re credited to them, which were undoubtedly largely used to pay for
imports from the United States to Great Britain, whereas British instiAmerican banks
tutions only bought from _/ Sterling with dollars to the equivalent of
1,693,000.
Some of these transactions were undoubtedly carried out at
the instance of foreign banks in other countries which operated through
Great Britain, but proof of this is only available fmm British records*
On balances of Sterling exchange bought from and sold to the United
States by the whole world, excepting through Great Britain itself, the
sale of Sterling exchange by the United st&es
exceeded the purchase of
Sterling exchange by the United States by f25,174,000. The principal
eo&ntrles which purchased raore Sterling exchange from the United Btates
than they sold were France, Greece, Holland, Italy, East Indies, Straits
Settlements, Chile, Colombia, Ecuadort Uruguay, Canada, Central America
and the West Indies. The lorincipal countries selling the United Btates
the greatest amount of Sterling exchange on balance WBTB Norway, Portugal,
Spain, Sweden, Switzerland, China, India, Japan, Argentine, Brasil, Peru,
Africa and Australasia.
-14While no figures are available previous to the establishment of the gold embargo by the Gold Committee of the Federal Reserve
Board, yet there is reason to believe, fron reports received, that
Starling exchange was sold in this market By foreign countries in
a large way«
Since the embargo, as gold could not be obtained for
Sterling exchange sold in the United States, such operations haire
been confined to more natural channels9 based on current trade rather
than on previously accumulated balances•
This situation is particu-
larly noticeable in connection with the arbitrage of the exchanges
of the neutral countries of Europe, which have ruled at a high premium, and where it ie found that the United States has obtained a
greater total in such "exchangee from Great Britain than it has furnished*
The relative figures for the period given are as follows:
Purchased by United States
from Great BritainiT"^^
'
Sold by United states
to Great BritainT
equivalent
equivalent
$2,062,000
Holland Guilders
$2,6-66,000
2,9*9,000
Borwegian Krcnor
1,669,000
3,345,000
Swedish £ronor
9S4f000
7,447,000
Spanish Pesetas
8549000
£,965,000
Swiss Prance
1,965,000
Instead of our having furnished Great Britain with these high priced
exchanges, Great Britain has actually given ue am excess on balance•
On the other hand we have purchased from these count rjte s
exchange on Great Britain greatly in excess of our sales of Sterling
exchange to such countries*
I t Is largely due to this fact that
the exchange rates on the neutral countries mentioned ruled against
the United states*
for instance, Spain sold the United States
$1291429000 in Sterling exchange, and purchased from t h i s country
-158,531,000 In fterling exchange, a difference of $3,612,000*
This
difference affected the rate for • panlsh Pesetas In the United states,
even though, strange as it may seem, such difference was more than
offset in the case of Spain by the purchase on balance from Great
Britain of the equivalent of #6,593,000 in Pesetas, which, of course,
affected the rate in the opposite manner*
This left an equivalent
of #2,981,000 gained by the United States in arbitrage transactions
with vpain and Great Britain.
The effect of these particular transac-
tions as a whole, therefore, was favorable to the United States dollar*
The two operations are distinct In this respect - in one case
American "dealers11 purchased from British henks neutral exchanges
when they were required to a greater extent than the British banks
bought the same exchanges from American banks, whereas in the other
case the banks of neutral countries sold American banks more Jterling
exchange than they purchased from them*
Buch transactions were not
based upon the attempt of any "dealers*1 concerned to help or injure
the exchange on any country, but were undertaken because of the relation of demand to supply, and both classes of operations affected the
rate for the foreign exchanges in the United States, even though one
was carried out In the monies of the foreign countries, and the other
in American dollars*
By refusing to allow American ^dealers* to purchase Sterling
exchange from other countries, this situation could have been positively controlled, but the harm that would have ensued would have been
far greater than the good accomplished, and such prohibition would
also have been most detrimental to our foreign financial position long
after peace had been declared.
It is most fortunate, therefore, that
it proved possible to meet evsrv emergency without the necessity of
having to restrict
the arbitrage of exchange•
-16As reports were not filed before the Executive Order of
the President of January 28, 1918, it is impossible to determine with
certainty exactly what expansion has occurred in the foreign business of the United states, but from the consensus of opinion of many
of the principal foreign bankers who have been approached in the matterf it ;ould appear as though arbitrage operations, as carried out
by bankers and other "dealers11 in the United states, before the beginning of the war, August 1, 1914, were practically confined to the
three then principal commercial countries of Europe, with the occasional purchase, almost entirely through London, of other exchanges
now and again, when required for special purposes•
{ince the war
American "dealers11 have had arbitrage operations with practically
every commercial country of the world, as shown by figures covering
actual transactions between February 20 and October 1, 1918•
The to-
tal of such transactions shows $645,128,000 in foreign exchanges purchased from other countries by the United States, and $447,360,000 in
foreign exchanges sold to other countries by the united ttates*
Another phase of our foreign financial transactions which
has shown tremendous growth is represented in the activity of the dollar accounts of foreign banking institutions in the United ftates.
During the same period used, combined debits and credits to such accounts from European Allied countries were |16,134,958,424 (these
extraordinary figures were largely due to loans made by the United
rtates Government), from European countries other than those of cur
Allies #1,698,380,023, from /sis -1,961,018,278, J'outh America
Mexico
il,373,084,387, Central ^nierice/and the Went Indies 31,685,077,848,
Africa |5,439,765, Australasia #24,011,018.
Many of these transac-
tions represent the purchase and sale of securities in the United
States for account of foreigners intereeteA in our market•
Other
huge transfers represent payments agrsii^st shipping doouraa&ta or wars*house receipts* as many foreign countries ha¥# been tarring go ode in
th# Uttite& States through tfes payiwBt of dollars «!hioh Umirm
lat#d here, ins tend of through s t e r l i n g , as before the war* 5?he
coeds of exports to tha Uait^l States from conn trie e having balances
with Aaeri«an "dealers" ha^e aiso beam credited to accounts in this
mimtryr.
Many of the immtiml countries of luropa hmrm ueed balance8
which bave accumulated her© for the purdiase of British securities,
emit in large emau&ts«
frmding in aeomritiei in United states narkets %y foreign
interests 9 both througSi AollBra mo& foreign monies, has been large, .
and for the period ooirered piiarflhaees w^r# made for foreign aooeiint
to the value of |298,57S,000 t and sales for forelpi acoount to the
Telme of f81698S4,000«
The e^coss in paxcliases was of AMMriUMUft*
British sad l^renoh Bocuritioi?*
Stcmrlties held irt America for foreign account at the olose
of hmsinass Se^vMiber 6, 1918 aaofimteA to |l t 8g0,04? t 000 t and securit i e s hold abroad for ilj»ri«n aceount \ 106,0S8f000#
GeoHftditlee held in ^mxehouse in the United states a t th©
olo^a of busi^es^ Set)teialier 26, 1918, ifciah had hoan pnT&km
placed in ^trehoiiee tor foreign account to©fere July 1, 1318, in
eases exteaAii*g fcaek almost to the bogiiming of the war,
amounted to
tNMI9ti8t0979 a»a oonmodities wMeh had been iaported to th@ United
States for foreign amount previous to J&ly 1# 1918# kwfc idbtleh ware
s t i l l held in wazehouse undistributed 9 either in ttiis country or
through re-export, amounted to *[;31,078,641, or a t o t a l of (100,336,tS8#
After the report for tJi® final quarter of the year i s ae~
-18ceived, and the figures for the whole year can be brought together
against estimated averages for the first few weeks of the year before the Executive Order went into effect, the foreign business of
the United States can be analysed as a whole very completely, and
the trend of operations before and since the armistice can be uncovered, that should be of great value in determining whether we are
to hold the world-wide financial development made possible by the warf
A further analysis of these reports for a few quarters following the signing of the Peace Treaty should give an even clearer
idea of the part this country is to play in the worldfs finances during the period of world reconstruction, and possibly afterward,
Before undertaking any operations in foreign exchange with
persons in the United States other than * dealersff, it is necessary
for such * dealers'1 to re mire their customers to sign the following
statement:
fl
This transaction is made under representation by the undersigned that there is not Involved in connection therewith any
trading, directly or Indirectly, with, to, from, for, or on
account, behalf, or benefit of any enemy or ally of enemy of
the United States, or any transaction vlolative of the Tradingwith-the-Enemy Act of the United States•"
All transactions covered in the reports of ttdealers* to the Statistical Department of the Division of Foreign Exchange must have been
consummated against such statements, when the operations have developed in this country, or against non-enemy declarations of foreign correspondents when they have originated outside of the United States•
A statement of non-enemy interest, therefore, has hud to stand before
the creation and at the consummation of every transaction between
the United States and every foreign country*
Co-operation flith the Treasury Department,
The Administrative Department has constantly co-operated
with the Treasury Department of the United States in carrying out
foreign exchange operations, and supervision or regulation made necessary to protect the intereBts of the United States. Many such matters have been handled in conjunction with the Federal Reserve Bank
of New York, which has acted, when necessary, for account of all of
the Federal Reserve Banks#
Under the Argentine agreement, deposits made with the Fed•ral Reserve Bank had to be approved by the Federal Reserve Board,
and such approval has been extended by the Board through the Division of Foreign Exchange*
These transactions amounted to |J59,996,189•45.
Arrangements similar, but for lesser amounts, have been
developed with Bolivia and Peru, and conferences have been held with
representatives of man?/ other countries, which would unquestionably
have developed into active operations had the need for them continued*
Arrangements were made, through the Federal Reserve Bank
of New York, at the request of the Treasury Department, with the Food
Comnission and certain other sources for the proceeds of commodity
shipments made payable in Swedish Kronor, Norwegian Kronor and Dutch
Guilders*
These operations have resulted in the Treasury Department
obtaining certain amounts of these exchanges at the mint par, which
were required for governmental purposes. ?;hile the particular operatlons carried out In this manner were effective, and possibly not
harmful, yet it was fortunate that other means for obtaining needed
exchange made it unnecessary to extend such arrangements*
Lire*
Exchanges throughout the world on Italy had turned so
against that country during the early months of 1918 that the importation of much needed raw material became most difficult*
By June the
-20situ&tion had developed with sntficient seriousness
visahle to take prompt action*
to make it ad~
The Italian Government had organized
an Institute of Exchange in Aprils but Italy's requirements were
so great that the co-operation of the other Allies was needed* As
soon as this situation was realised the United States, Great Britain
and Prance responded Immediately*
An arrangement was then made with
the Director of the Division of Foreign Exchange to assume control
of the Lire market for the Treasury Department of the United States,
in co-operation with representatives of Great Britain, Prance and
Italy*
The Italian Institute of Exchange appointed a Hew York repre-
sentative to be associated with the Division of Poreifpi Exchange for
the purpose of handling the matter*
Active control was assumed on
June 5 f 1918, when a notice was given out over the ticker by the Director of the Division of Foreign Exchange, prohibiting the sale of
cable Lire under 9»10 to the dollar*
The day before, Italian exchange ruled at 9*15 Lire to the
Dollar, and as a fair demand for Lire developed the rate was put up
to 9.00 and then to 8*90 within a few days*
In the meantime the rate
for Lire In Paris was the equivalent of 9*46 Lire to the Dollar, and
in order to prevent American buyers from purchasing Lire in Paris it
was necessary to prohibit the purchase of Lire outside of the United
States by persons or ndealers* in this country*
An immediate effect
was noted in a further demand for Lire in lew York*
The rate was then
arbitrarily moved up by successive steps until it was stabilised at
6»55 Lire to the Dollar*
In the meantime purchases of Lire had been
made from the proceeds of the sales of Lire In the United States, in
London* Parist Argentine* Brazil and other countries9 to help in keeping the Lire rate in other world markets in line* During the same
-Elperiod the Institute in Italy adjusted i t s rates to a parity with
the rate established in New York, and through the co-operation of the
British and French Governments, together with the representatives of
the Italian Institute in London and Paris, the parity was maintained
in those two countries•
An arrangement was also made under which cotton purchased
from the United States by Italy was taken up in Dollars by the representative of the Institute in Hew York*
During the period under which the rate for Lire was brou^it
up from 9t15 to the stabilised point of 6#35, and up to the l a t t e r
part of November, over 400,000,000 Lire were sold by the Eepresentstive of the Institute and the Director of the Division of Foreign Exchange f and the proceeds of such sales were used to purchase Lire
in
other markets of the world and to meet the cost of cotton shipped from
the United States to Italy*
The Lire rate has been entirely within the control of the
Italian Institute and the Division of .foreign Exchange from the day
the situation was taken in hand, and is so to-day«
Spanish Pesetas*.
The Quartermaster's Department of the army required funds
in Spain to meet purchases for the American army in France* Mr*
lormn Davis, as Special Financial Delegate of the United States to
Spain, arranged ft credit with certain Spanish banks of 25G,Q0Gf000
Pesetas.
In order to avail of the credit, it was necessary to form a
group of American banks, an1 the Treasury Department arranged with
the Federal Reserve Board to have this work accomplished through the
Division of Foreign Exchange*
All American banks and Trust Companies
carrying balances in Spain, and having a oapitaL and surplus of
#1,000,000 or moi*e, which ere
-,-i,; _
, — • „aderal Reserve Fystem,
or banks, the stock of which under the law members of the Federal
Reserve Fystem are authorized to hold, were made eligible to take
part in the credit*
The capital and surplus of all such banks was
added together, and each institution was notified that it could participate up to the proportionate amount that its capital and surplus
represented to the whole*
Banks eligible under the ruling were situ-
ated in the following cities:
Boston, New York, Philadelphia,
Pittsburgh, Chicago, Washington and New Orleans*
All except t?;o bank!
eligible under the regulations accepted their participations, and
other members of the group willingly absorbed the allotments of these
two institutions*
Under the arrangement American participants were obliged
to purchase United Ftates Certificates of Indebtedness in Pesetas,
which were deposited with the Federal Reserve Bank of New "rork as security for their 90 day sight drawings upon t>e group of Spanish
banks*
The first transaction under the credit was for 75,000,000
Pesetas as of November 27, 1918, and the balance is subject to call
from time to time at the request of the reeretary of the Treasury.
All the detail of the arrangement with the American group
of banks has been conducted through the Division of Foreign Exchange.
Rupees.
The difficulty of importers of burlap and jute from India
in obtaining Rupees to make payment for their purchases, and the unusual demand for these commodities, due to the war, made it necessary
for a special arrangement to be made under which Rupees could be obtained as required.
The India Council arranged, through the Treasury Department,
-23with the Federal Reserve Bank of New York to ^llow deposits to be
made with the Federal Reserve Bank in dollars for cable payment in
Rupees in India, at a specified rate, covering the importations of
commodities from India to the United States*
lished was 3 3 | cents a Rupee*
The first rate estab-
When the Pittman Act became operative
and the price of silver was stabilized at |l # 01| an ounce 1,000 fine,
the Rupee rate was raised to $*3573, which is the rate now prevailing*
Rupee exchange has been obtained from time to time through the India
Council, as required, and allotments of Rupees have been made through
the Division of Foreign Exchange*
Since this arrangement went into
effect, 182,326,132 Rupees heave been supplied to American importers.
Silver*
In connection with the Rupee arrangement, it became necessary to take control of the silver situation*
This was uone through
the Director of the Division of Foreign Exchange, under arrangement
made by him with the silver producers*
Practically all production in
and importations of silver to the United States are rationed by the
Director, after which export licenses are issued by the Federal Reserve Board*
When the control of silver was assumed, It was found that
a large number of banking institutions had purchased silver for the
purpose of shipping it to China to make exchange* A S such silver
was needed to meet the emergency of the moment, the attention of
bankers was called to the situation, and in every case they willingly gave up the silver which they had purchased to be used for Allied
requirements*
This was done In some cases at considerable expense
to the banks, as exchange had been purchased In China at the same
time that silver was bought in the United States to furnish cover*
The Federal
Reserve Board has been furnished with the names of such
-24banks, and they cannot be commended too highly fer the prompt and
effective manner In which they met the desire of the government*
In recognition of their attitude, their interests were kept constantly
in mind, and as soon as conditions changed sufficiently to warrant
doing eot silver to an amount equal to that turned over by the banks
was given back to them* *
During the period in«&red up to date about 4OfG0OtO0O
ounces of silver have been distributed»
The situation is still euch that it is necessary to continue the control, which in effect means the allotment of silver in
such manner as to beet meet the requirements of the Allies*
OOHgf*odities«
A careful study of the whole world exchange situation, m & e
possible through the reports filed with the Division of Foreign Bx~
change, led to the belief that in view of the restricted shipping
facilities, adjustments in our export trade could be made, that would
be most fcenofieial*
As ships available to obtain needed imports could also be
used for exports to the same countries from Miieh imports were obtained, it was clear that if the average export cargo exceeded in
value the average import cargo, that the exchange would begin to
turn toward the United States, and that an excess of foreign exchanges would be accumulated that could be used to make purchases for
account of our Allies*
With the idea of developing this situation, an arrangement
was made by the Director of the Division of foreign Exchange for
meetings to be held with a representative of the War Industries Board,
a representative of the War Trade Board and the Exports Control Committee of the Hatioaal Foreign Trade Council*
An intensive study was
-25made of the weight and bulk values of such goods as were desired
by foreign countries, those of
outh America being first considered.
As a result, the fear Industries Board agreed to consider requisitions
which might be made by the Treasury Department for commodities for
export, in the same light that was true with requisitions made by th©
War Department and the Navy Department to cover their needs.
The
development of the whole plan was based entirely upon war requirements,
and not upon the expansion of our foreign trade, as it was recognized
that the business of the country at the time was to win the war, and
not to develop commerce•
The co-operation of the Coimnittee of the National Foreign
Trade Council in this connection was most valuable, and if the armistice
had not intervened, there is good reason to believe that in a short
time the trend of exchange might have turned very materially in favor
of the United States in the case of a number of countries where imports for war purposes were required.
Even though an armistice has
been declared, the work accomplished by this Committee,. together
with the vast amount of data compiled by the War Trade Board, should
be most valuable to the country, and should be particularly helpful
after peace has been declared and present restrictions upon the world f s
commerce are removed.
Federal Reserve Banks»
The Federal Reserve Banks of the 12 districts have acted
as local agents for the Division of Foreign Exchange in taking applications for Registration Certificates by banks, bankers and others
who wished to do a foreign exchange business, in collecting weekly
reports of foreign exchange operations, in passing upon applications
of "dealers* for permission to transact business requiring approval,
in obtaining
reports on institutions and individuals when occasion
-26required, and In carrying out many special duties that arose through
the Executive Order and its regulations*
This work, which, in the
case of many of the Federal Reserve Banks, was very exacting, was
carried out with great efficiency, and the co-operation of the Federal Reserve Banks has been thoroughly effective in every particular
since the Executive Order of the President became operative.
Bankers and other "dealers" have at all times shown the
greatest desire to live up to the regulations made by the Division
of Foreign Exchange•
While it is possible and probable that some
"dealers11 were not willing to undertake operations for enemy account,
because of their knowledge that if they did so, and were discovered,
that they would be prohibited from continuing their foreign exchange
business for the period of the war, and while this fact was one of
the important safeguards to the United States brought about through
the Executive Order, yet on the whole the enthusiastic and patriotic co-operation of "dealers'1 has been a constant source of satisfaction«
The great banking institutions which carry on the bulk of the
foreign exchange business of the country have never once put the question of possible profit before their desire to carry on their business in such manner that the interests of our country were protected*
It is a great pleasure to have this opportunity to state
this fact to the Federal Reserve Board, and to so certify to the
patriotism of the foreign exchange "dealers" of the United States•
Respectfully submitted,
Director*, Division of Foreign Exchange•
December 2nd,
@FedFRASER