The prohibition against selling stock-exchange securities owned by foreigners on the London market, and the difficulty in the way of selling securities held in England on any other market except that of New York, combined with the British Government having assumed practical control of all credit operations, resulted in the very early days of the war in foreign exchanges being swayed almost entirely by actual trade transactions. Thus, the American sterling exchange (London on New York) after the first month or so of the war remained at a rate then considered low, because Great Britain was importing vast quantities of food and muni- tions from the United States and a large adverse balance of trade was being created. On the other hand in countries like France and Italy, who made large purchases in England, the exchange rose (i.e. depreciated in value) to heights that had not hitherto been reached. The same thing occurred even to a greater extent with regard to the Russian exchange (rubles). Russia in pre- war days had met its large indebtedness to England to a con- siderable extent by the export of food-stuffs, but owing to the closing of the Black Sea and the Baltic ports it was unable to carry on its export trade to anything like the normal extent. Heavy as was the depreciation in these rates of exchange, it would have been much heavier were it not for the fact that the British Government assisted its Allies to obtain large credits in London and in other markets.
In the case of countries like Brazil, Argentina and Chili, it had become almost impossible to obtain exchange on London. This was especially the case in Brazil where the export trade is seasonal. Before the war it had been the custom for South American banks to obtain financial credits in London during the periods when trade bills were not forthcoming, and by means of bills drawn against these credits their debts to Europe were tided over. These credits were eventually liquidated by means of trade bills created during the export season. In the early stages of the war European creditors either had to wait for their money or to accept very unfavourable rates.
Nevertheless, chiefly owing to the action taken by the British Government, the mechanism of foreign exchange was less seri- ously affected on the whole than might reasonably have been expected. Only for a very short period and between very few countries was trade held up altogether on account of exchange difficulties, but the fluctuations of rates of exchange between most countries became so great that the cost of exchange soon became a very important factor and had to be reckoned with, even in transactions on which the margin of profit was considerable.
During the first year of the war the pound sterling had main- tained its value fairly well in all neutral countries and particularly so in the United States, which was neutral until April 1917.
At the end of 1915 the leading exchange rates with countries open to business on the London market were as follows:
Montreal . 4'74j Christiania . I7' 2 5
New York 4'74j Stockholm . 17-10
Paris . 27-73 Copenhagen 17-35
Amsterdam 10-83 Petrograd . 159
Italy . 3I-45 Calcutta . 1/4 "
Madrid . 25-05 Rio de Janeiro 12
Lisbon . ' 34d. Buenos Aires 49
Switzerland 2 4'9O
England however had been pouring money into America in ever-increasing amounts, to pay not only for those commodities for the supply of which England in normal times depends to a large extent on America, such as cereals, cotton, etc. and these at very high prices but also for the vast quantities of war mate- rial of all kinds which were being manufactured at high pressure and even higher cost both for England and for its Allies. Ex- change to meet the payments for these articles as they became due was provided partly by the export of gold. Between Oct. i and Dec. 31 1915, gold to the value of over seventeen million pounds sterling was withdrawn from the Bank of England for export to New York alone partly by the proceeds of the sale through ordinary channels of the bulk of what may be described as the floating stock of American securities held in England, and partly by the calling in as they became due of all the short-term loans that had been made by English investors to America. In-
deed, at the very beginning of the war, the city of New York was called upon to repay 13,500,000 that happened to fall due at that time; and as this large sum had to be found very quickly on a panicky and depleted exchange market, as high an exchange as $6.75 had to be paid per British pound for prompt cable payment. It must have been evident at the time that, owing to the fact that England had just become involved in a life and death struggle with a desperate and powerful antagonist, whereas America could not but profit through its neutrality, the pound must depreciate and the dollar appreciate. But the demand in New York had to be met regardless of cost.
It is a curious and interesting fact that when the dollar was at its worst, i.e. $6.75 to the pound on Aug. 3 1914, the premium on the pound in New York was $1.79, whereas when the British pound was at its lowest value, about $3.19 in Feb. 1920, it was at a discount of only $1.64!.
Very soon after the outbreak of the war, the principal foreign exchanges tended to group themselves into four divisions on the London market. These became known as the " Allied exchanges," the " Enemy exchanges," the " Neutral exchanges " and the " Eastern exchanges." Whether we take as a basis the pound sterling or the United States dollar (to which, in fact, the pound was steadily linked in value from the commencement of 1916 till four months after the Armistice was declared), we find, speaking generally, that the Allied exchanges were at a discount, the Enemy exchanges at a greater discount, and the Neutral and Eastern exchanges at a premium.
The reason is not far to seek. Of the Allies, only England and France could be described as wealthy; and partly because the war on the western front was waged mainly on French territory so that not only the most fertile part of France but also the chief centres of French industry were devastated, and also because the French were very inadequately taxed during the whole period of the war French international credit was not main- tained on the same level as that of England. The other Allies were lacking in accumulated wealth, and very soon became financially dependent, primarily on England and to a smaller extent on France. But the leading neutrals, who in Europe comprised Holland, Spain, Switzerland and the three Scandina- vian kingdoms and in S. America the Argentine Republic, were in a very favourable financial position. The European neutrals could trade to their great pecuniary advantage with both groups of belligerents, and could take full advantage of the great demand that sprang up for their produce. Spain could supply France with textiles and metals, Norway and Sweden could meet the demand for timber and paper (which was much increased by the closing of the Baltic ports), and Denmark and Switzerland were able to supply both sides with dairy produce. In addition to these advantages the important mercantile fleets of Holland, Scandi- navia and Spain were able to earn large profits because of the great rise that took place in freights. Indeed, throughout the war, preference was generally given by shippers to ships owned by neutrals, because the risk of their being sunk was considered somewhat less and the rates of insurance on their cargoes were therefore materially lower.
The eastern countries, China, India and Japan, were, it is true, belligerents, but their financial burdens were but slight com- pared with those of their European colleagues; and since China and India were large exporters of raw materials, while Japan assumed gradually the position of Germany as the chief supplier of the less costly manufactured articles, all three countries profited greatly by the war.
It may be asked why, although the United States was a free gold market and the pound was " pegged " (see below) to the dollar, both the sterling and dollar exchanges should have been for so long a period at a considerable discount in Spain and in Scandinavia. Indeed, on one day in Nov. 1917 the pound sterling was worth no more than Kr. 9-90 in Stockholm, and in April 1918 it was only saleable at Kr. 11-90 in Christiania and Copenhagen. The explanation is that, fearing the evils that might arise from " inflation," these four countries, one after another, announced that they would no longer purchase gold in
