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X-3323 • tJ .··.'. ,~I" -;._" F E D E B AL BE S E R VE B 0 A RD STt.TEli1ENT FOR TFE ?:HESS For release in Morning ?apers, lf'ednesday, Febru?.ry 8, 1922. The following is a digest of the Review of the Month as contained in the forthcoming issue of the Feder~ Reserve Bulletin. In the Review of the ~onth contained in the Feder~l Reserve Bulletin for February a general discussion of the European economic and financial situation is afforded with special reference to the problems which are likely to be presented at the Genoa Conference. The Beview calls attention to the fact that the Genoa Conference is the outcome of the increasin~l~ serious economic cattditions abroad, and after sketching the ~agertda" which have bsen proposed for Genoa quotes the explanation offered by ·.Premier Lloyd-Ge6:-ge with reference to the reasons for the inclusion of Russia and Germany in tr e conference. Russian and German problems are treated as being practically inevitable elements in the existing economic situation. The Review remarks: The inclusion of Russia has already been the subject of discussion because of the view that her participation in the conference at which Russia was represented would imply a recognition of the present Russian Government or an assent to its 1')olicy by other participating Governments. Premier Poincare, of France, in succeedinP" M. B!'iapd, has awaron'tly held to tre view that Frar.ce could not well be represented at the conference without a previous undertaking on the par·iJ of Russia to allow full faith and credit to her prewar debts. On all these points the issues at stake X-J323' - 2 - 177 a.re "'l;loli tical 1' in the broad sense of that term rather than economic. But the !)Osition of trose who regard the conference as likely to be \ successful in the economic sense., only as issues affecting the rehabilitation of Bussia, Germany. ll.ustria, and Southeastern Europe generally, can be disposed of, is that the plan 1.'/hich may be adopted is not very likely to succeed on account of the natural Hmita:tions to wb.ich it would be subject.· Somewhat the same position is taken as regards the 7 sug~estion ,th~t no reference be made at the Genoa conference to the que' ti"On of German repa.ratione. Within the past month or more it has been contended more positively tran ever before that the reparations problem is an almost inevitabie element in any discussion whicn aims to develop a general solution for European questions at large." The Review then turns to the reparations situation and calls attention to the unsatisfactory position in which the reparations <fu.estion has been left. The Review then considers the question whether the best way of ' settling with France durinq ' the next few years may not be an extension of the plan provided in the Wiesbaden agreement. As to this it remarks: "It sl3ems to be more and more admitted th:~.t· the best way of paying -'ranee in the next few years will be by an extension of the method provided in the Wiesbaden agre.gmen t, a.l though the use of German labor in the ;devastated .· f re~ioris, to be practicable. , the French which 1qas contemplated in that agreement, may not prove t:»qrnents in kind will not, hol"lever, ultimately solve situation~ Speakin'Sl then of because of the ~he lar~?"e French :public debt," ch.e.nlles which have occurred since the Brussels conference the Review cqlls attention to. the fact that· at· the time of the 'Brussels conference business depresdon had not begun to .itevelop to any ~ considerable extent. ·It then says: l [ X-3323 .. 3 - 178 "Since that t.ime, however, the demoralizing effect. of the conditions in eastern 1£Urope has reactE\)d very irectly'upon trade elsewhere, w:i:th the result that recently tr-ere have rehabili~tion of the purchasing piwer '\lol~d, Austria, etc~ I' several pro-posals looking to the r buying capacity of Russia, The proposal .whie }. appeal's to have been officially C~~il accepted by the SUpreme Economic corporation of an intemat1on.aJ. or@.'anilat t Cannes provides for the in- on. based upon private capital,. the -participants to include representat.iv a of Great Britain, Frsncei Italy, Bel~:\:um, desire. United States~ possibly others if they so Germtmy, The declared purpose of this org~ization . is the rebuilding of I railroads and other means of comtrunieat~ in Russia·--~~---~~~ !)lan_ .. c9ntemplates the creation not.anly of a central international co~oration 1JIIi th headquarters in London but of .affiliated corporations in the -participa- ing countries as well. .~ Cantribu.tions to the capitalization of the corpora- tian are to be made in the currencies of the several contributing countries. but control is to be exercised by the central orga:nization~ 11 The reeent developments in connection with the T3r Meuien seheme are outlined and a cantrast is drawn between that plan an~ the recOmmendations laid before l='arliament by Mr. Lloyd-George after the close of tre Cannes conference. The Review then comr:ents upon the savings to result from naval 11mitation, as foilows: "The savings wh~ch will result from the limitation in armaments decided upon at the Washington conference will, unfortunately, affect immediately onl7 tr.~. th.ree countries whose finances are already in a relatively sound c.ondl,tion"; It i~ es~imated that t11e reduction decided u'l;)on for the United States will.save about $200,000 1000 on the present 1 building program. · The saving in E;n,~land and Japan· wil1 reach an amount - 4ap~roximately equivalent. In Fr~nce and Italy, however, no increase in naval armaments had been contemplated in the near future, and the savings brought about at Washington will not affect their immediate :problems. "It is particularly important in the present situation not only that P.'overnmental bud1:1ets sro.,_ld be balanced., so that short-time borrowing by I the Government may be discontinued but ale~ that the sum of Government exnenditures should be decreased in order to reduce the tax burden of the J business community. In most countries, ho,vever, curtailment of taxes seems highly problematical at present. Only in the United States has it been attempted. "Any savinl!.s w·h ich result in En,Qland next year from a decrease in expenditures will probably have to be apulied to debt reduction. The situation is .much the sa1-ne in France. "In Italy the difficulty of increasing Government revenue to meet ) expenditures is almost as great. In Germa.ny the balancinf.l' of the bud~e·t is complicated by t"be fluctuatin'? value of the marz, and large increases in taxes are planned for the coming year." Turning to the actual question of work at Genoa, the Beview states that a fund amen tal is sue to be dealt with there wi 11 -undoubtedly be the restoration of the ~old foreign exchange. Discussing the latter 11 standard or some plan for the stabilization of ~uestion, the Beview says: From the preliminary announcements of -unoffici3.l cl':aracter, as well as from the "agenda", it is clear thst discussion at relate in no small measure to tl':e restor'1ti0n of ~he lieu thereof, to the nevelo'!jment of some plan for the foreign exchange. ~ch Genoa is likely to R:Old standard, or, in s~abiJizetion of difference of o:p,.nion exists concerr.inP: the specific means to be ertployed 3Ild the incidental difficul t:i.es likely to be enco-untere · in bringing altout a return to the gold standard in furope, • But there is X-3)23 - 5 a gratifying unanimity 01 o~inion aiTong leading economist~, financiers, and s tatesrren to the effect t'bat any "9errr,anent rehabilitation of credit and currency systerr:s will necessitate a. return to a. s;rold basis of some sort. It is quite obvious, ho>Never, that :r,>riol" to any atterrp,t to reinstate the I gold standard, many complex problems will problems connected with reparations i ~ave p~ents, to be solved. These are with domestic and foreign indebtedness, with the effect of national policies upon the amount and direction of current expenditures. The issues involved necessitate far- reaching international adjustments that are likely to be the subject of prolonged negotiations. Extraterritorial interference •.vi th power to raise money or to spend it is ri¢1tly regarded as an interference with the sovereignty of a State, and can only be justified in extreme cases. On the other hand, a simple ultimatum to insolvent nations to the effect that obligations rr.ust be met and budgets ~t a solution of international difficulties. be balanced, will not bring about The capacity of the several nations to defray recurrent expenditures out of re?Ular sources of income rr,ust be carefully appraised, and exnendi tures in excess of ability to pay must be eliminated before budgets canoe balanced and inflation stopped. conse~uently Until some sort of international agreement based upon recognition of this patent fact has made possible the cessation of deficit financiering no "9rog)'am of currency reform involvin.-z a return to the gold standard has I any chance of success." Retention of the gold standard as an interns tional basis of values is endoreed by the Review as follows: "The argument in favor of the restoration of gold as an international standard of value is twofold - first, that no superior or better basis for ~,-t' -prices has as yet been developed, and, seccnd,. that the use of &!Old as an ·~ (-f _...._ -· X-3323 - 6int~rnational currency or price basis affords~rong pressure to bring about ex"O:msion of credit. In ·international trade the gold standard also constitutes a nexus between the countries, It c~n protection against price levels of varioW" by no means be said to be an ideal means of payment, but under normal conditions it has been very effective in preventing the price ' level of any one country from falling toomarkedly out of of others. "l.oss of ,Q"OlO 1 ~'hen line wi th that currency and credit systems are erected upon a gold basis, following imports tends to check the :process of further credit eX'9ansion 1 and the lmowled!:!e that gold may be wanted for export is under all circumstances a deterrent to indefinite credit expansion. In short, international purchases and sales tend to offset one another except to the extent that occasional adverse balances can be covered by means of gold shipments, However, if there is no attempt to rraintain the gold standard or to link gold in any way with the internal price level, the process of gold denudation can go on to the point of exhaustion. In fact, that is what has virtually happened in a number of countries, Ordinarily the rising intl'lrest rates that would accompany an outflow of gold would check such a movement. , ... of ~aper ~ut if credit expansion by means issues goes ahead unrestricted by the need of redemption, either immediate or ~respective, no effect upon interest rates need ensue. n _.~...- ., ·-~q -~'._;r-.-.;.J - 7- • X-3323 Discussion of the inflation now existing in Europe leads to the question whether a so-called gold exchange standard migd not be employed and the Review urges tr1at artificial methods of controlling exchange operations are of no permanent value: "Their inadequacy as a means of correcting funda;r.sntal ::alaJjustments of trade balances nas been made so obvious by experience ahd. nas been a subject of such lengthy comment that it does net require further elucidation. It is, however, conceivable that the stabili;ation of exchange and the reestablishment of a satiilfactory system of internal payments could be accomplished by a rigorous c cntrol over credit and currency without return to the gold standard. 3ut it is highly unlik.;lly that such control wculd be sufficiantly rigorous and discriminating to prevent exchange fluctuations from continuing to be of a magnituje sufficient to constitute a serious interference with foreign trade. It may be that the use of the discount rate as a means of price stabilization could with wise manipulation1 t.mi1ampered by political pressure) be effective in some countries. Chan~es in discount rates wouli then act as a means of encouraging the expansion or forcing tna contraction of credit-created currency without either an inflow or outflow of ~old. 3ut such a scheme presupposes a centralized control over money markets that was by no means assured even in prewar times, and it also presupposes a sensitive response to variations in- the interest :rate that implies the existence of highly organiztU international no longer exist·" \ mar~ets which - 8 - X-3323 The statement is plainly :nade that the great accumulation of gold in the United States at tne present time is gravely dangerous> the Review stating tne case as follows: "It is evident fro:n all that has been said that the United States nas an interest irJ. tne introduction of some form of gold standard as a meani.·:. to the resumption of trada relationships through tha effective stabilization of exchange. At present} furthermore 1 the abnormal concentration of gold in this country is a source of danger, because it is a false guide in matters of credit policy - no longer an index of the outside limit of legitimate credit expansion. Considerations of national interest alone areJ therefore 1 a sufficient reason for a careful weighing of pro.,.,osals looking to a redistribution of the gold ) sup1;lies of the world and involving a return of sorr,e part of the gold held by the United States for use elsewhere. No proposals of any sort should, however 1 be entertained until far-reaching guaranties o! fiscal refor,n have bean secured from the countries tnat require aid. Otherwise the assistance would be detrimental to the extent that it • ' would lead to the postponement of the necessan fiscal reforms wnich must be made preliminary to the rehabilitation of c~rrencj systems and the reestablishment of .stabilized excnange relationships. 11 The Review closes witn a sketch of the present international balance situation ir:.. wnich it is shown t;1at: "In November, 1921J a detailed estimate of tha net unfunded balance due to the United States from abroad was presented, Exclusive of the war-time debts of foreign Governments to the United States Govern- ·'_,_,.,_,! .r·v~. ..J.., - 9 men t, which amo'Qll t to :tl 0, 000,000 , 000, roughly speaking, it was estimated that on October 1, 1921. there was owing to private creditors in the United States a net unfunded balance of $3,408,000,000. 'During October, i~orts N·ovemb~:r, end December exports of merchaneise exceeded by a little less than $300,000,000; and for the same period net imports of ~old and silver were but slightly short of $125,000,000, leaving a net addition to our unfunded balance from "visible" sources of $175,000,000. When, however, the remaining or "invisible« items in the balance are taken into consideration and sunned up, it is likely that they constituted a. net debit for the three months of between $175,000,000 and $200,000,000. durin~ The result is that the visible items these three months ha?ebeen fully offset or possibly a little more than offset by the invisible elements in the balance, leaving the former estimate substantially unchanged and if anything sli?"htly reduced at the close of 1921. In view of all the available facts, therefore, it seems fair to take $3,4oo,ooo,ooo as the approximate amount of" our unfunded international balance on January 1, 1922. · ') ) •
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