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B A N K F O R

I N T E R N A T I O N A L S E T T L E M E N T S

T H I R T E E N T H A N N U A L R E P O R T

1st APRIL 1942 —31st MARCH 1943

BASLE

Autumn 1943



T A B L E O F C O N T E N T S

Page

I. Introduction 5

II . Exchange Rates, Foreign Trade and Commodity Prices:

(1) Exchange Rates 39

(2) Foreign Trade 60

(3) Price Movements . 83III. Production and Movements of Gold:

(1) Supply of Gold 113

(2) Movements of Gold 118

IV. Lend-Lease, British Disinvestment and European Clearings 132

V. Government Finance, Money and Capital Markets and the Stock Exchanges:

(1) Government Finance, Money and Capital Markets 170

(2) Share Markets 280

VI . Central Banking and Currency Developments 291

VII. Current Activ ities of the Bank 321

VIII. Conclusion 328

A N N E X E S

I. Balance sheet as at March 31, 1943.

II . Profit and Loss Account and Appropriation Account for the financial year ended

March 31, 1943.



T H I R T E E N T H A N N U A L R E P O R T

OF THE PRESIDENT OF THE

BAN K FOR INTER NATIO NAL SETTLEMENTS

announced at the

ANNUAL GENERAL MEETING

held at

Basle, 16th June 1943.

The President has the honour to submit herewith the Annual Report ofthe Bank for International Settlements for the thirteenth financial year, beginning

1st A pr il 1942 and end ing 31st March 1943. The results of the year's businessoperations are set out in detail in Chapter VII. Net profits, after provision forcon tingen cies, am ount to 4,508,953.89 Swiss gold fran cs . Aft er the alloca tionto the Legal Reserve that is required by Article 53 of the Statutes, to an amountequal to 5 per cent, of the net pro fits , i. e. 225,447.69 Swiss gold f ran cs, thereremain 4,283,506.20 Swiss gold francs available towards the payment of adividend. This sum together with the balance in the Dividend Reserve Fundamounting to 1,626,940.33 Swiss gold francs — in all 5,910,446.53 Swiss goldfrancs — permits the distribution of a dividend of 29.55 Swiss gold francs pershare. A t the end of the financ ial year the balance-sheet tota l was 483.4 millionSwiss gold francs, as compared with 476.6 million Swiss gold francs on

31st March 1942.Although the total of the Bank's balance sheet has thus risen slightly,

there has again been some curtailment in current business after the substantialreductions which occurred in the first two years of the war. Such operationsas are still possible, including the management of the Bank's investments onvarious markets and certain trans action s for the Red C ros s, now usually callfor much more detailed work than in the past, on account of the great massof new regulations to which international payments have been subjected andother difficulties wh ich have to be overcom e. In its a ctivities , the Bank hascontinued to adhere to the principles of scrupulous neutrality which it laid downfor itself in the autumn of 1939, avoiding all trans action s whereby any questioncould possibly arise of conferring economic or financial advantages on abelligerent nation to the detriment of another.

From the very outbreak of hostilities it was generally realised that warin modern conditions demands the utmost effort, both civi l ian and mil i tary,from belligerent nations and that state direction of economic life was involvedon a scale surpass ing anything known in the past. It wo uld even be anunderstatement to say that in matters of government control the present warstarted where the last one left off, since in many fields lacunae which were



still embarrassing the administrations of 1918 were this time dealt withimmediately the war began, one notable example being the early imposition

of exchange control. W hile the present struggle was thus a t o t a l wa r fromits very beginning, with each year that it has been prolonged and with eachextension of its compass there has been a further intensification of effort,through which, so to speak, higher and higher degrees of totality have beenat ta ined.*

In the f ie ld of fo re ig n co m m e rc e government direction is everywheresupreme, trade being subject to priorities, import and export permits, rationingof foreign exchange and allocation of transport facil i ties, while premiums andspecial charges have been introduced to "equalise" prices at home andabroad and thus assist the movement of goods in directions where otherwisethe price differential would be prohibitive or would exert an undesirableinfluence on the price structure. The methods of control are many but theresult is one: private business, tied by governmental restrictions, is made tofunc tion more and more for official account. Throu gh economic warfare — theblockade, the counter-blockade and all the measures supplementary thereto —the world has become divided into quasi-watertight compartments, with onlya few trickles of trade being allowed to pass through the barriers, as, forinstance, imports and exports to and from Sweden via Gothenburg and toand from Switzerland via Portuguese, Spanish and Ital ian ports, these ship-ments requiring permits from the bell igerents on both sides.

In the winter of 1941-42 the pattern of world trade was suddenly changedin a large measure by the extension of Japanese domination in the southand south-western Pacific. This made it necessary for many countries eitherto seek alternative sources of supply, for instance in Latin America, or toembark upon the production of substitutes at home; an outstanding exampleof such production is the manufacture of artificial rubber in the United Statesat a rate estim ated at 250,000 to 275,000 long ton s in 1943, com pared withpeacetime requirements of natural rubber amounting to 410,000 long tons in1938. Another important change in the international movement of goods hasbeen the increase in lend-lease deliveries, not less than 60 per cent, of thetotal exports of the United States in 1942 being on lend-lease account. On theother hand, foreign trade inside the continent of Europe showed little changein 1942, credits through the clearing mechanism being on about the samescale as in the previous year.

In its economic policy each bell igerent country must aim at a maximumut i l i sa t i on o f i t s hum an a nd m ate r ia l re so ur ce s . Under the in fluenceof cost and price changes in markets still comparatively competitive, the man-power of a nation could in peacetime be left more or less free to distribute

* The war has brought the suppression of a number of statistical series, in particular those relating tocommodity stocks and other matters on which information might be considered of value to the enemy;and, for much the same reasons, the greater part of the new material collected for official purposes connectedwith the war effort has not been published. But a considerable volume of reliable statistical material hasremained, although not always easily available: especially as regards monetary and financial developmentsis much of the information normally received in peacetime still to hand; indeed, in a number of cases,regular publication has been resumed after an initial suspension, e. g. of certain central-bank returns.



y

i tself among the various occupations open to it; but, in time of war, thegovernment itself must necessarily determine what groups have to be drafted

for service in the armed forces and it must further try to prevent, or atleast to limit, the rise in prices which would normally be the result of itsown increased demand for goods and services. In some countries higherprices and pay have no doubt been helpful factors in the transformationof production, including the regrouping of labour; but, with the intensifi-cation of the war effort, the driving force has increasingly been supplied bygovernment direction, exerting its influence through a whole series of economicmeasures: •

( i) The m ob i l i s a t i o n o f the l as t res e rve s o f m anp ow er i nc ludes ( inaddition to the use of foreign workers, which has been important inGermany), the reabsorption of the unemployed, the lengthening of hours

of work, the postponement of retirement, the earlier active employmentof young people and — as not the least important measure — thegreater empjoyment of women in all kinds of occ upa tions . Experience inmore than one industry has shown that women often equal men inefficiency and sometimes even surpass them . In Germany, where 50 percent, more women were working in trade and industry in 1939 than in1932, the war at first brought a decline in the employment of women(mainly as a result of the many m arriages) ; but the figure began to riseagain in 1940, so that by 1942 1.3 million more women were employedthan at the outbreak of war (and early in 1943 there was a furtherenlistment in order to set more men free for active service or armamentpro duc tion) . By the end of 1942 foreign w orkers (inc luding prisone rs ofwar) represented 17 per cent, of those employed in industry in Germany,it being estimated that the effective yield of foreign labour was on anaverage about 80 per cent, of that of German workers.

That in times of heavy rearmament and war there is an urgent needfor manpower is but another way of stating the fact that at such timesunemployment has ceased to be a problem. In the United States, forinstance, there were about 7 million more people employed in the autumnof 1942 than in the sum mer of 1939 and during the same interval theactual working week in manufacturing establishments had been lengthenedby about one-s eventh. In this as in other countries heavy new orders

by the state, financed to the extent of one-half or more by additions tothe public debt, provide a definite outlet for productive capacity; commodityprices — whether strictly con trolled or not — are fixed so as to allowfull remuneration of cos ts ; and the redundant p urchasing power in thehands of the public makes it possible to sell almost anything, while thestandard of living in civilian life is necessarily pressed down. The fewremaining neutral countries, with a smaller proportion of their manpowerdrafted for service in the armed forces, have from time to time fearedthat lack of raw materials and curtailment of export facilities would causeextensive unemployment; but they too have found, not without some



— 8 —

surprise, that, thanks to the production of substitute articles and materialsand to the general hunger for goods, the number of unemployed has

been kept at well-nigh the lowest figure ever recorde d. It is one of thetragic aspects of life that some pro blems — and notably the problemof employment — can be more easily solved in periods of increasingscarcity and international conflict than in periods of peace and abundance.But, although in times of plenty a mounting production of a variety ofgoods certainly brings with it the risk of many maladjustments, it is,none the less, at such times that man's material welfare is increased.It makes all the difference whether the work done produces goods andservices actually wanted by the people (what they are willing to buythemselves with their earnings) or whether full employment is attainedonly by virtue of government purchases and at a reduced standard ofl iv ing, ending in scarcities all round.

(ii) Hand in hand with the better utilisation of existing manpower there havebeen g re a t e f fo r ts to ra t i o na l i s e p r od uc t io n — .no t leas t in thecivi lian sector — the aim being to simplify ou tput, in accordance withwartime principles, by a standardisation of models, concentration ofproduction and curtailment of the apparatus of distributio n. In the UnitedKingdom a vast and far-reaching scheme for the purpose of concentratingprod uction was put into effect in the spring of 1941, with the result that,from May of that year up to March 1943, 235,000 workers were releasedfor service in the armed forces or for war work and 61 million squarefeet of factory space was given over to war production or made availablefor storage purposes; this involved the closing of 2,800 establishments,while 5,800 were designated "nucleus firms" (and, as such, usuallycarried on manufacture, on a commission basis or against direct payment,for the firm s which had been close d). In each coun try the character ofthe measures taken depends, of course , upon local cond itions . In Germanythe existing cartel system has been modified in several respects, newforms of association being introduced to carry out tasks allotted to thevarious branches of industry and trade; and in the autumn of 1943 theMinister of Armaments and Munitions was given the direction of thewhole of German production (including, from then onwards, the civi l iansec tor). In Japan also the government has taken drastic measu res,concentration of industrial production being fol lowed in the autumn of

1943 by the suppression of a great number of enterprises not essentialfor the war effort.

All this economic transformation has, of course, been primarily plannedin the interests of the all-out war effort, but some of the resulting changeswill no doubt have a lasting effect on industrial life. Such countries as havenot taken the same stern measures of industrial concentration have begun toask thems elves whether th ose w ho have done so will not benefit greatly froman enduring improvement in efficiency, thanks to the increased interchangeof technical knowledge and the many new inventions which have formed part



— 9 —

of the almost irresistible impulse towards rationalisation caused by an acutelabour shortag e. It is naturally in the armament ind ustries that the advance

has been most pronounced and the results thereof should be felt particularlyin the produ ction of durable goo ds. Peace will presumab ly bring back —though probably not at once — the right of the consum er to determine wh athe will buy, and much of the present manufacture according to standardisedpatterns will then no doub t go by the board ; but, within many fields and fora large number of articles, production according to more standardised speci-fications provides such great advantages that it will certainly be continued evenwhen the war is over, and this will make it possible to charge much lessthan would otherwise be the case. On the other hand, there is a certaindanger that the strong industrial and commercial associations formed duringthe war may seek to retain monopoly positions conferred upon them underwholly exceptional circumstances, endeavouring to l imit competition and resist

change and thus fai l ing to adapt themselves to peacetime conditions, therebymaking it exceedingly difficult to ensure work for those returning from activeservice or no longer occupied in armament industries.

The l im i ta t i o n o f ou tp u t f o r c i v i l i a n pu rp os es has been app liedmost drastically to the production of durable consumer goods (dwell ing-houses,automobiles, refrigerators, radios, etc.), since the industries and trades engagedin their production are those which can most easily be switched over tothe manufacture of war materials, the bulk of which consist of guns andmun itions, tanks and lorries, aeroplanes and ships . In the United States thefirst curtailment in the supply of finished civi l ian goods came in the autumnof 1941 ; the fo llowin g table show s that from the middle of that year to

the middle of 1942 the entire rise in the aggrega te indu strial produ ctionwas caused by the rapid expansion in the output of durable manufacturesand that very much the same held good for the fol lowing twelve monthsup to the middle of 1943.

In the spring of 1943it was estimated that nearlytwo-thirds of the current in-dustrial output in the UnitedStates was for war purposes;for the first half of 1943 theindex of industrial productionshowed little change in thetotal, thus apparently indicat-ing that a more or less finalstage of economic mobil isationhad been reached, marked,inter alia, by an acute short-age of manpower.

I n d e x o f I n d u s t r i a l P r o d u c t i o ni n t h e U n i te d S ta te s .

Base 1935-39 = 100

Durable manufactures . . .Non-durable manufactures.Minerals (except gold) . . .

Total index

June 1941

198138131

160

June 1942

246136132

177

June 1943

303147121

203

The increase between June 1942 and June 1943 in the indexfigures for non-durable manufactures reflects mainly higheroutput In the chemical industry, the products of which consistmore largely of munitions than those of any other Industry inthe non-durable group. The decline in minerals in June 1943would seem to have been largely temporary (a result of labourconflicts In the coal industry).

Industrial production in Canada has increased even more rapidly thanin the United States, Canada having become, after the great powers, by farthe largest armaments producer in the world. This spectacular increase is



— 10 —

partly due to improvements in technical efficiency; but the main reason is ashift in employment from occupations with a low rate of productivity to others

with very high productivity (the value of a man's output will rise fast if hemoves from a "marginal" farm to an aeroplane factory equipped with all thelatest machinery). War demand would seem to be in the main for goodswhich can be produced on a conveyer belt or with the aid of other appli-ances of modern mass production, while the peacetime requirements of theordinary consumer are largely of a different character, including an in-creasingly high proportion of services (restaurants, holiday resorts, medicalattendance, beauty treatment, etc.) which cannot benefit to the same extent from

the use of labour-saving devicesor large-scale produ ction. This —be it said in passing — wouldseem to be one of the reasons

why for the satisfaction of peace-time needs there cannot be thesame spectacular rise in the natio-nal output as has been achievedduring the war.

Indexes of Industrial Productionon base 1936 = 1ÖO.

(*) New index, with a new method of weighting.

Apart from Finland, none ofthe belligerent countries in Europeregularly publishes an index ofindustrial production, and indi-cations of the general trend aregiven but rare ly. It is likely tha tfor most of them the proportionof war production to the totalindustrial output is very much thesame as in the United States.The rate of total output varies,however, considerably from countryto co un try. For France in 1942 itis estimated to have been abouttw o- th ird s of the 1938 volume.The sharp decline in Finland'sindustrial production, as shown in

the graph, is due partly to lackof raw materials and partly to thehigh percentage of the populationon active service — for longperiod s, up to 18 per cen t. ' Fromthe spring of 1940 lack of normallyimported raw materials affectedthe volume of industrial pro-duction in Sweden and Denmarkalso, the loss of markets being



- 11 -

another factor. If, in spite of the fal ling-away of the important A nglo-Sa xonoutlets for the Swedish pulp, paper and timber industries, the total industrial

produ ction in that country has kept up relatively well (at about the 1936 level),this has been due partly to armament work and partly to substantial invest-ments for the production of substitutes.

The yield of industrial production is usually the most important, but stillonly one, of the comp onent p arts of the national inco me . In a number ofcountries current estimates are compiled (but not always published) not merelyof the net but also of the gross national income, the latter including thewhole flow of go ods and services produced during a year and thu s alsothe cost of maintenance and replacement of the nation's capital.* Onceestimates are available covering the maintenance and replacement charges,

the total private consumption and the amounts of domestic and foreigninvestments (or disinvestments), it is possible to set out more or lessfully the yield of the r e a l s o u r c e s f r o m w h i c h c o n t r i b u t i o n s t ot h e c o s t s o f t h e w a r a r e d e r i v e d . T he se c os ts may be m et,firstly , by an increase in production ; secon dly, by a reduction in one ormore of the fol lowing items: private consumption, government expenditureother than for war purposes, maintenance and replacement charges, provisionfor new dom estic cap ital ; an d, third ly, by a draft on foreign resources(foreign disinvestment).

For four countries, fairly complete estimates of the national income in 1942have become available and some of the main figure s are rep roduced on the

following pages, it being understood, however, that full comparability between thedata for different countries cannot be expected, considering the rather widemargin of error to which such estimates are subject and the possible employmentof varying m ethods of com puta tion. Even within one and the same countrya true comparison between the figures for different years cannot be ensuredwitho ut a reduction of these figu res to a unit representing stable prices (say, 1939dollars for the United States, for instance). Such a reduction is, of course,a somewhat hazardous undertaking, since it is most difficult to take intoaccount the price changes of the many heterogeneous elements which makeup the earnings of a nation or on which the government and the publicat large spend their money. It is, however, hoped that the results may givesome idea of the proportions involved.

The f i rst two columns in the table regarding the U n it ed S ta te s give theactual figures for 1939 and 1942 respectively and the third column the figuresfor 1942 recalculated in terms of "1939 dollars" on the basis of a price indexregistering a rise of 14 per cent, fro m 1939 to 1942. The difference betweenthe figures for 1942 in "1939 dollars" and those for the year 1939 shows thereal sources contributing to the cost of the war. Thus, war expenditure rose by$41.8 milliard (in 1939 dollars) but the increase in the gross national product was

• The net as well as the gross national income is often calculated both at prices including and at pricesexcluding the increase due to indirect taxation.



- 12

R e al S o u r c e s o f C o n t r i b u t i o n sto Wa r Exp e n d i tu re i n t h e U n i te d S ta te s

in 1942 in compar i son w i th 1939 .

Sources ofcontribution

Gross national productDeduct :

Private consumption . . .Private gross capital

formationNon-war government

expenditure*Total deductions

Leaving for :War expenditure*

1939

88.6

61.7

10.9

14.687.2

1.4

1942

in milliards151.6

81.9

8.0

12.5102.4

49.2

1942in 1939dollars

of dollars133.2

72.0

7.0

11.090.0

43.2

Differencebetween

1942(in 1939dollars)

and1939

+ 44.6

+ 10.3

— 3.9

— 3.6+ 2.8

+ 41.8

This table has been prepared on the basis of data given in an articleon the "National Income and National Product in 1942" by Milton Gilbertand George Jazzi, appearing in the "Survey of Current Business" forMarch 1943, issued by the U. S. Department of Commerce.* For goods and services, i.e. without such transfer expenditure as interest

on the public debt, pensions, etc.

R e a l S o u r c e s o f C o n t r i b u t i o n st o W a r E x p e n d i t u r e i n t h e U n i t e d K i n g d o m

in 1942 in compar i son w i th 1938 .

Sources ofcontribution

Gross national incomeAdd:

Overseas disinvestment .Total available . .

Deduct:Private consumption . . .Maintenance and increase

of private domestic ca-

pitalTotal deductionsLeaving for:Government expenditure*

1938

5,587

555,642

4,035

7624,797

845

1942

in millions <9,078

6329,710

4,800

3025,102

4,608

1942in 1938pounds

}f £ sterling6,700

4857,185

3,408

2323,640

3,545

Differencebetween1942(in 1933pounds)

and1938

+ 1,113

+ 430+ 1,543

— 627

— 530— 1,157

+ 2,700In a British Government White Paper, presented to Parliament in April

1943, an analysis was given of the sources of war finance and for thatpurpose an estimate was made of the national income and expenditure In1938, 1940, 1941 and 1942. On the basis of the figures thus presented, "TheEconomist" In an article of 27th April 1943 made a recalculation of the1942 figures in terms of "1938 pounds", assuming a rise of 30 per cent, inprices from 1938 to 1942. In the above table account has been taken of thefigures in the White Paper and in "The Economist".* For goods and services, i.e. without transfer expenditure.

0) Footnote see opposite page.

even greater — $44.6mil l iard — and, with a

decrease of $3.9 mil-liard in the privategross capital forma-tion and of $3.6 mil-liard in non-war ex-penditure, was suff i-cient to enable privateconsumption to attainin 1942 a figure of$10.3 milliard over andabove the 1939 level(i . e. allowance being

made for the rise inprices).In terms of "1938

pounds" governmentexpenditure in theU n i t e d K i n g d o mincreased by £2,700million between 1938and 1942 and thisincrease was coveredby a rise of £1,113million in the grossnational income, by areduction of £627 m il-lion in private con-sumpt ion, by a com-pression of £530 mil-lion in the sumsdevoted to mainten-ance and increase ofdomestic capital and,finally, by a draft of£430 million on for-

eign assets. (Over-seas disinvestment of£55 m illion in 1938 pro -bably represented thereinvestment in GreatBritain of amountsreceived from abroadas amortisation onlong-term loans pre-viously granted (1 ).)



- 13 -

Because of the increase in Hu n g a ri a n territory since 1938, per-capitafigures are the best basis of comparison, but even they need some fur-

ther adjustment owingN at io na l Inc om e in H un ga ry 1938-39 and 1942-43. to the rela tive pover ty

of the newly-incor-porated areas. TheInstitute for EconomicResearch estimatedthat, of the declineamounting to 17 percent, in the nationalincome per head ofpopulation, 12 per cent,was due to this cir-cumstance and onlythe remaining 5 percent, represented areal decline, which inits turn was largely aresult of the bad har-vest in 1942 as com-pared with the excellent

harvest in 1938. But heavier government expenditure and a higher export surplusabsorbed more of the national income in 1942^43 than in 1938-39 and privateconsumption (measured in stable prices) fe l l , therefore, within the Trianon

frontiers, by 11 per cent, per head of population, a percentage which maybe taken as a measure of th e reduction in the s tandard of living as com -pared with pre-war conditions.

0) In order to find a mode of comparison which is not obstructed by the difference in the size of the United Statesand the United Kingdom and In the value of their currencies, "The Economist" has expressed the (partiallyregrouped) figures for the two countries as percentages of their pre-war gross Income, i.e. the Britishfigures are calculated as percentages of £5,587 million (the British gross national income In 1938) and theAmerican figures as percentages of $88.6 milliard (the gross national product of the United States in 1939).The percentages thus obtained give a real indication of the magnitude of the changes brought about bythe war: thus for 1942 the cost of the war to the United Kingdom, as measured by the increase in govern-ment expenditure, comes to 48.4 per cent, of the gross national income, and this means that in that yearthe British Government devoted to the war a quantum of goods and services equal to nearly one-half ofthe total output of the British community before the war.

Costs of the War and Sources of Contributions to Costsin the United Kingdom and the United States

as Percentages of the Pre-war Gross National Income.

Groups

Total national incomeDeduct:

Private consumption . .Leaving for other pur-

poses, i.e. for govern mentexpenditure on goods andservices, and for the ex-port surplus

National income per headof population

1938-39within theTrianonfrontiers

The wider territory1942-43

incurrentvalues

in1938-39prices

DifferencebetweenColumn 3

andColumn 1

in millions of pengöCD

5,192

4,450

742

(2)-12,461

9,917

2,544

(3)7,029

5,594

1,435

in pengö

572 840 474

W+ 1,837

+ 1,144

+ 693

% change

-17%

The above table has been constructed on the basis of estimates of thecurrent national income, in comparison with pre-war figures, published inJuly 1943 by the Institute for Economic Research in Budapest. In Itscalculations the Institute has assumed a price rise of 77 per cent, between1938-39 and 1942-43.

Pre-war Gross National Income = 100Costs of the war

(increase in government expenditure)Derived from:

Increased production (increase in gross national income) . . . .Reduced consumptionReduced provision for private capital and disinvestment, if any .

United Kingdom

48.4

20.011.217.2

United States

46.5

51.2— 8.7

4.0

In the two countries the increase in government expenditure has thus been in very much the sameproportion to the pre-war output : but in the United States the higher costs have been met wholly by a riseIn production — 50 per cent, in three years — while in the United Kingdom the increase in productionamounted to 20 per cent, in four years, the difference being explained (at least to some extent) by theexistence of large unused resources in the United States before the war.

For 1943 it has been estimated that about one-half of the national product in the United States is absorbedby the war effort. In 1918 the proportion so absorbed was about one-fourth.



— 14 —

In terms of "1939 pric es " the central-government expenditure on goodsand services in Sw e d e n was in 1942 twice as high as before the war. No

con tributio n to th e increased costs of the governme nt wa s, however, receivedfrom an expansion in total production, which on the contrary fel l by about7 per cen t, between

E xp en di tu re on G oo ds and S er v ic es in Sw ed en 1939 and 1942 (pariin 1939 an d 1942. passu with the "total

gross expenditure", asshown in the table).That being the case,the increased outlayof the central govern-ment and the fall inproduction led to a

decline of 14 to 15per cent, in privateconsumption, a re-duction of nearly one-third in private in-vestment and a cer-tain contraction inthe effective volumeof local governmentexpenditure.

Groups

Total gross expenditure(public and private) . . .

Deduct :Private consumption . . .Private investments . . .Local government expen-

Total deductions .Leaving for:

Central-governmentexpenditu re . . . .

1939 1942 1942In "1939prices"

Differencebetween

1942(in 1939prices)

and 1939in millions of S.Kr.

10,891

7,5881,481

9279,996

895

13,930

9,0871,354

1,02311,464

2,466

10,200

6,5001,050

8508,400

1,800

— 700

— 1,100— 400

— 100— 1,600

+ 900

The figures given in the first two columns of the above table are takenas they stand from an analysis of "Income Developments and the Excessof Purchasing Power during the War Years", published in May 1943 by the"Koniunkturlnstitut" In Stockholm. The figures in the last two columns haveon the other hand, been calculated on the basis of certain percentages andother indications given by the Institute. For the reduction of private consump-tion to "1939 prices", the Institute has assumed a rise of about 40 per cent,in prices between 1939 and 1942.

Taking into a ccount other inform ation than that given in the above tables,developments during the war up to 1942 in the four countries under reviewmay be summarised as fol lows: in "constant prices" the total (central andlocal) government expenditure on goods and services rose in Hungary andSweden by about one-half*, while in the United Kingdom and the UnitedStates it more than trebled ; tota l productio n increased by 50 per cent, inthe United States and by 20 per cent, in the United Kingdom, but is esti-mated to have fallen by 5 to 7 per cent, in Hungary and Sweden ; tota l privatecons um ption in the United States was 16 per cent, higher in 1942 than in1939 (thanks mainly t o the steep rise in Am erican p rod uct ion) , while in theUnited Kingdom and Sweden there was a reduction by 15 per cent, and in

Hungary by 10 per cent, below the pre-war level.

For Germany no similar data are available, but it has been estimated thattotal government (central and local) expenditure on goods and services rosefrom RM 36 milliard in 1938 to RM 70 milliard in 1941, and that during the sameperiod the amount available for civilian expenditure (private consumption andinvestments) increased from RM 59 to 71 milliard, a rise which reflects, on

* If account were taken not only of expenditure on goods and services but also of transfer expenditure, I. e.of interest on the public debt, pensions, and subsidies granted to keep down prices, the increase in thetotal (central and local) government expenditure in Sweden and Hungary would, It seems, be higher thanthe proportion given in the text.



— 15 —

the one hand, the incorporation of new provinces in the east and west and,on the other, higher remun eration and higher prices in certain sectors . Theavailable statistics do not make it possible to establish the share ascribable

to each of the main sources contributory to the war effo rt: increased work,curtailed consumption and drafts on capital; but it may be regarded as certainthat all three have helped to make possible the redirection of resources forthe prosecution of the war.

It is the shortages in men, machines and materials which set the finallimits to the war effort in its economic aspects; but, in order to exercisecommand over real resources, the governments as a rule need to make paymentsin money at home and abroad, and this raises the question of the financialso u rc e s of t he wa r ef fo rt .* W hen able to apply modern methods of f iscaland credit policy, governments seem to master financial l imitations with com-

parative ease — at least on their dom estic markets ; and in relation to othercountries various means (lend-lease, reciprocal agreements, clearing arrangementsand payment of occupation costs) have been employed to prevent a lack offunds from hampering the flow of goods. The methods of financing whichwere worked out during the firs t two or three years of the war haveremained essentially unchanged, such modifications as have been made beingdesigned to ensure that the economic and financial structure would stand thestrain of heavier war liabilities and the piling-up of buying power in thehands of the public. While the figures of national income and consumptionindicate a considerable amount of diversity between different countries, a highdegree of parallelism is found in fiscal developments; in matters of taxationand borrowing, governments show no hesitation in availing themselves of the

experience gained in other cou ntries — whether frie nds or enemies"; in anycase, the choice open to the governments is not very wide, an element ofcompulsion entering into the picture.

In last year's Annual Report (pages 13-15) th e v a ri o u s m et h od s ofra i s i ng mon ey to mee t g ov er nm en t e xp en d i t u r e were considered f romth e p o i n t o f v ie w o f t h e i r e f f i ca cy i n r e s i s t i n g i n f l a t i o n , a nd a"h ierarchy" was formula ted, which may be summar ised as fo l lows:

(a) taxation (and other current receipts),(b) borrowing of genuine current savings,(c) expansion of commercial-bank credit, and

(d) expansion of central-bank credit.

The first two methods — taxation and the borrowing of genuine currentsavings — were shown to be the " so un de st " fro m a monetary point of viewand it is in many respects the total of the two together that is really important.

' Government financing In wartime exerts a dominant influence on the monetary system and in the differentchapters of the present Report more space has, therefore, been devoted to this subject, including thepresentation of statistics of government revenue and expenditure, of public borrowing and of such mattersas lend-lease, clearing balances and the payment of occupation costs. To facilitate comparison with earlieryears, and to provide a background against which the wide and rapid changes of the war years may be set,the statistical tables include a number of figures relating to the immediate past — a feature which is partlyresponsible for the exceptional length of the Report.



- 16 -

While for most countries lack of statistical data makes it impossible todraw up exact f igures grouped according to the "hierarchy", an approximationcan be made in some cases. In Germany and the U nited Kingdom private

credit operations un connected with the war have practically come to an end , andthe total of government borrowing on the internal market has thus becomeapproximately equal to the so-called "money-cap ital form ati on ". For thesetwo c ou ntries tables in Chapter V (page 269) set out in some detail themeans whereby government expenditure was financed in the years 1940-42,the sources being arranged roughly in conformity with the "hierarchy"; andan analysis on somewhat similar lines is made for the United States also. Some

of the principal facts and conclusionsA n a l y s i s o f g o v e r n m e n t f i n a n c i n g ,

a v e r a g e s f o r p e r i o d 1 9 40 -4 2 :G e r m a n y a n d t h e U n i t e d K i n g d o m .

are given here in an abbreviated form.

The construction of these tableshas necessitated certain estimatesand adjustments which are mentionedin the notes on page 269. By andlarge, the differences and errors donot appear great enough to vitiate abroad comparison of the f igures, andthe main points brought out by thetables are these:

(i) In both countries the propor-tion of government expenditure(internally financed) raised bytaxation and other current internalrevenue averaged just under

50 per cent, in the years 1940-42(the highest level being in thethird year, 1942);

(ii) similarly, borrowing from other sources than the commercial and centralbanking system, at 34-35 per cent., was approximately equal for the twocoun tries. T he propo rtion covered by taxation and other internal revenue, plusborrowing outside the banking system, was thus 84 per cent, in both countries;

(ii i) the prop ortion covered by borrow ing from the comme rcial banks w as10-12^2 per cent, for the whole period (with a marked tendency to d e c li n efrom year to year) ; from the banking system as a whole (central andcomm ercial banks) 16 per cent, was borrow ed, also w ith a declining tre nd .

Judged on these lines the similarity of war finance in the two countriesis truly remarkable; after three full years of war the relative importance of thesources of internal financing was so nearly the same in Germany and theUnited Kingdom that the differences in the percentage figures are well withinthe margin of error due to the unavoidable inaccuracies of the data.*

Sources of fundscovering governmentexpenditure

1940-42

Taxation and other currentrevenue

Borrowing other than fromthe central and commer-cial banks

Total . . .Borrowing from thecommer-

cial banksBorrowing from the central

bank

Total . . .Total expenditureinternally financed .

GermanyUnited

KingdomAs percentages

of total expenditureinternally financed

48.9

35.184.0

10.2

5.8

16.0100.0

49.9

34.284.1

12.5

. 3.4

15.9100.0

* It should be remembered that the comparison given in the text is based on tables covering the situationup to the end of 1942, while the intensification of the war in 1943 has led to many changes in the scope ofthe government's command of goods and services in the different countries — changes which are likelyto be reflected in the financial accounts.



— 17 —

A n a l y s i s o f g o v e r n m e n t f i n a n c i n g

th e U n i te d S ta te s , 1 9 4 0 -4 2 .n

Besides similarities, however, the sources of financing show somedifferences. One of these — brought out by the tables — is that the pro-portion borrowed from the central bank was somewhat larger in Germanythan in the United Kingdom, reflecting the greater importance of the com-mercial banks in the latter country. On the other han d, in the U n it e d S ta te sthe proportion borrowed from the commercial banks was considerably largerthan in either of the two European countries, as may be seen from thefollowing table.

The pro portion of expenditure covered by taxation and other c urrentinternal revenue fell in the United States fro m over 60 per cent, in 1940 to under30 per cent, in 1942, and , conversely, total borrow ing and movements of official

balances rose from 40 to70 per cent, of expenditure.

Actual new governmentborrowing from the FederalReserve Banks was compa-ratively small but from thecommercial banks it wasvery considerable, notwith-standing the fairly success-ful efforts made in 1942to sell securities to pur-chasers other than banks.One reason for the high pro-portion of borrowing fromthe banks was the rapiditywith which government ex-penditure increased after theUnited States had becomeinvolved in the war ~ arapidity which also helps toexplain why a smaller pro-portion of government ex-penditure has been coveredby taxation in the UnitedStates than in the United

Kingdom or Germany.

Sources of funds coveringgovernment expenditure

Taxation and other currentrevenue

Government securitiestaken by:

Investors other than banksTotal . . .

Government securitiestaken by :

Federal Reserve Banks . .Total . . .

Movements of officialbalances

Total exp e nditure . .

1940 1941 1942 Total1940-42

In percentages of total expenditure

60.4

22.182.5

15.1(— 3.1)

12.0

5.5

100

46.4

48.995.3

21.20.3

21.5

(—16.8)

100

29.3

43.472.7

34.97.0

41.9

( - 14.6)

100

36.7

42.278.9

29.54.4

33.9

(-12.8)

100

There are two main reasons why it has not been possible tocompile for the United States a table in the same form as for Germanyand the United Kingdom. Firstly the formation of money capital couldnot in the United States be taken as equal to government borrowing,since private credit operations were still very important, especially in1940 and 1941 before the entry of the country into the war; and,secondly, large purchases of government securities by the Federal ReserveBanks in earlier years had led to an accumulation of latent central-bankcredit by the way of excess reserves of the member banks. The abovetable has been based on the budget figures and on the statisticsregularly published regarding the principal holders of governmentsecurities.

Averaging 34 per cent, for the years 1940-42, the proportion of governmentexpenditure financed by the banks of the United States is twice that of suchfinancing in Germany and the United Kingdom. But the danger of governmentfinancing by an extension of bank credit cannot be measured primarily by itsratio to the total of government expenditure; it depends essentially on the rateof expansion in the volume of credit and currency and must thus be relatedto the s i ze o f the co m m er c ia l ba nk in g sy s t em , wh ich , in terms o fthe budget and the national income, varies from country to country.



Years 1938 and 1942

1938Credit volume

CurrencyCommercial-bank deposits.Total credit volume . . . .

Net national income . .1942

Budget expen ditureinternally financed

The credit volume in 1938as percentage ofthe net national income in1938the budget expenditure in-ternally financed in 1942 .

Germany UnitedKingdom

in millions ofRM | £ stg

10,50019,50030,00080,000

90,000

6002,8003,4004,500

4,500

UnitedStates

dollars

6,80043,70050,50064,500

56,000

Percentage proportions

37%

33

75

75

78

90

- 18 -

T he im p or ta nc e These percentagesof the ba nk ing sy st em in G er m an y, show that , in relat ion to

the Un i te d K ing do m and the Un i ted S t a te s , nat ional income and war-time budgets, the bankingand currency structurewas on a smaller scalein Germany than in thetwo Anglo-Saxon coun-tr ies, the ratio beingabout 1:2 in relationto the United Kingdomand somewhat higher inrelation to the UnitedStates ; this would seem

to reflect a profounddifference of habit withregard to the main-tenance of amounts inthe l iquid form of cashand bank deposits.

A system with a more restricted mass of liquid claims outstanding may in somerespects have its advantages; but, with regard to the problem of war financing,it is obvious that recourse to the credit system covering, say, 15 per cent, ofbudget expenditure (internally financed) must provoke a greater relativeexpansion of bank credit in a country with a smaller initial volume than inother cou ntries .* The expansive movement is, by its nature, cumulative, thedanger of government financing by an extension of bank credit lying in thefact that annual war expenditure is of a very large order compared with theoutstanding volume of bank-notes and bank credit dictated by the usualrequirements of a peace economy. Th us, if a certain proportion of governmentwar expenditure is financed by borrowing from the banking system, the expan-sion of bank credit will be relatively much greater.

D e ve l o p m e n ts i n t h e U n i te d K i n g d o m d u r i n g th e l a s t w a r m aybe taken as an example. If not only the actual war years but the whole periodfrom August 1914 to March 1921 be considered, 44 per cent, of the internallyfinanced expenditure amounting to £11,050 million was covered by taxation,

5 per cent, by other current receipts and 51 per cent, by borrowing. Of theamounts borrowed internally, some £350 million appears to have been in theform of "central-bank credit" (including issues of Treasury notes) while theexpansion of commercial-bank deposits amounted to £1,350 million. The totalincrease in currency and credit — equivalent to the government's financingby the banking system as a whole — was thus £1,700 million, representing15 per cent, of government expenditure internally financed — a proportion veryclose to that of 1940-42. Although this does not seem a high percentage, its

* In actual practice, of course, account has also to be taken of changes In the area in which the bankingsystem operates and thus, as regards Germany, of the widening of that area In recent years.



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uninterrupted influence on the volume of notes and bank deposits for nearlyseven years was very considerable. Owing to the circulation of gold coins

before 1914 and to other factors, it is not possible to state exactly the amountof currency in circulation on the outbreak of war, but it appears to have beenabout £120 million ; with a volume of com mercial-bank dep osits am ounting tosome £1,100 million, the total of circulating media was, say, £1,220 million.Thus , an expansion of £1,700 million, although covering only 15 per cent, ofgovernment expenditure, represented 140 per cent, of the total of currency andbank credit outstanding before the war; as a matter of fact, commercial-bankdeposits more than doubled and the currency in circulation rose to four timesits pre-war level.*

In this as in the last war no government has been able wholly to avoid

borrowing from the banking system . Indeed, apart from the necessity ofresorting to the banks when the flow of funds from other sources has becomeinsufficient, it is fair to say that some expansion of the currency and creditvolume has been helpful-— perhaps indispensable — as a means of facilitatingthe collection of taxes and the placing of government securities. But theconsequence has been an in cr ea se in th e b uy ing po we r o f th epublic at a time when such an increase was being stimulated in other waysalso (good employment all round, etc.). Rising note circulations and bankdeposits are outward signs of growing money surpluses; and estimates ofnational income point the same way. Thu s, the U. S. Department of Commercehas calculated that the national income for the second quarter of 1943 was19 per cent, above the level in the third quarter of 1942, that is, just before

the inception in the United States of the anti-inflation programme. At the rateattained in the second quarter of 1943, the a n n u al national income would be$146 milliar d, i. e. $37 milliard more than the sum of (i) the tota l value of goodsand services available for consumption and (ii) the amount of taxes paid byprivate individuals and co rpor ation s. In September 1942 the difference inquestion — the so-called "inflationary ga p" — was just short of $29 mil l iar d;it has thus been growing at a relatively more rapid rate than the nationalincome itself.

For Sweden, also, an attempt has been made to calculate the excess ofbuying power in the hands of the public, the term being given, in this case,a somewhat different meaning in that an amount corresponding to the normal

rate of savings is also deducted from the gross inc om e. In the Swe dish senseof the term, the excess of buying power was found to represent, in 1942,about 10 per cent, of the total income in the hands of the public.

Could the principles of a war economy be carried to their logical con-clusion, there would presumably be no "free sector" of goods and services

The more rapid increase in the note circulation during the war caused a permanent change in the ratioof currency and bank deposits; while in 1913 the value of commercial-bank deposits was eight to nine timesthat of notes and gold coins in circulation, the proportion had fallen to five and a half times by 1919. Thisexpansion of currency and credit in the United Kingdom was illustrated by a graph on page 214 of thetwelfth Annual Report; the graph also showed that the volume attained during the war remained outstandingwhen the war was over, a phenomenon found also in the United States, although In that country a fairlylarge part of the war debt was repaid by 1931. See also page 279 of this Report.



- 20 -

left, but all purchases would have to be authorised either by the possessionof coupons or by some special permit. Money wou ld then have no pu rchasing

power in itself but only within the framework of these authorisations; and whatcould not be spent would have to be saved (the supposition being that, withfully effective control, no black market could emerge). Total consumption beinglimited to the supplies officially available, any amounts paid out by thegovernment in excess of what was required to purchase the authorised volumeof consu mp tion goods wou ld take the form of taxes and savings ; and , ifhoarding of bank-notes could be prevented, the amounts saved, when notinvested in government securities, would lead specifically to an increase inbank dep osits, which would in its turn be lent to the government. This processis often described as a "mo ney cir cu it" , but it wou ld work adequately, i.e .witho ut inflatio n, only in so far as the newly-created moneys paid out by thegovernment (that is to say the amounts borrowed from the banking system)

were effectively brought back by taxation or genuine savings. T h e a u th o r i t i e sh a v e , a s i t w e r e , t o p u r s u e a n d c a p t u r e t h e ne w p u r c h a s i n g p o w e rw he re ve r i t m akes i ts ap pe ar an ce . In deal ing wi th th is problem, threedirect methods have been employed to check inflationary developments:

(i) taxation ;(ii) forced and semi-forced saving, and

(iii) stimulation of direct investment in government s ecurities.

Since these steps, however, have proved inadequate, a series of furthermeasures, designed to limit the expansive effect of government outlay and thusto curb indirectly the pressure of unbalanced demand, has been necessary:

(iv) restricting the resort to loanable funds of commercial and central banksand preventing their use for other than war purposes;(v) measures to avoid credit creation in financing surplus exports;

(vi) price control as a m eans of comba ting the inflationary spiral ;(vii) checking an increase in prices of capital assets.

These various steps are considered in the following paragraphs:

(i) Taxation has been described by the German Finance Minister to be"the most important means of combating inflationary dangers, while, at atime of deflationary stagnation in business, credit policy would take the primarypla ce ."* During the present war, steep increases in income and profit taxes,coupled with the effects of such measures as restrictions on the payment of

dividends, have, in a number of co untries, am ounted to even m ore than thewhole additional money income of the better-situated classes. The increase inbuying power, as revealed, for instance , by the rise in the figures of nationalincome, seems to have been spread for the most part over the broad mass of thepopulation as a result of increased employment, longer working hours, higherrates of pay per hour and a transfer of labour to better-paid occupations —not forgetting a substantial increase almost everywhere in the income of theagricultural population. Of the growth in the national income in the United States

In an article in "Europa-Kabel" of 17th September 1943 on "Volkswirtschaftliche Aufgaben der Finanzpolitik" .



— 21 —

from the third quarter of 1942 to the second quarter of 1943 the farmers wereproportionately the main beneficiaries, with a rise in net income (on an annual

basis) by $3.7 milliard to $13.6 milliard. Wage and salary earners had anincrease by $17 milliard to $103.2 milliard, while profits on business enterprisesrose by $0.9 milliard to $8.7 milliard and interest yields and pensions etc. by$1 milliard to $9.5 milliard (these figures representing income before paymentof direct taxes). Acc ording to data given in the W hite Paper submitted withthe budget in A pr il 1943, the private incom e of British individuals w ith £1,000or m ore a year amounted to a total of £930 million in 1941-42. A t the taxrates in force in 1938-39 the amount retained after payment of income taxand surtax wo uld have been £668 m illio n, b ut at the 1941-42 rates it cameonly to £450 million ; th us , direct taxes in wartime absorbed well over o ne-halfof the original income.

While the application of increased rates to the higher income groupshas presented few technical difficulties, the absorption of a substantial pro-portion of the new buying power from the mass of consumers has everywheregiven rise to many difficu lt problem s. The solu tions foun d have generallyincluded sharp increases of indirect taxation, most typically, perhaps, by theintroduction or augmentation of turnover taxes, the yield of which rises alongwith an increase in commodity prices — an excellent attribute from a fiscalpoint of view. In judg ing the burden of these taxes on the poorer classesand particularly on larger fam ilies, acco unt has to be taken of other gove rn-ment measures including subsidies granted to hold down the prices of neces-sities such as bread and m ilk; amo unts thu s u tilised may fairly be regardedas a set-off to mitigate the effects of increased indirect taxation. Steps have

also been taken to extend income tax to brackets formerly exempt, and toapply the principle of "pay-as-you-go", together with deduction at the source(called in the United States "withholding") by the employer of a part ofsalaries, wages and other earnings. Such extensions of the incidence ofincome tax have, in particular, been characteristic of the fiscal policies of theAnglo-Saxon countries, where before this war the free limit was relatively high,especially as compared with countries on the continent of Europe. Thenumber of actual taxpayers with gross incomes below £500 a year rose, forinstance , in the U nited Kingdo m from 3 million in 1938-39 to 9% millionin 1941-42. The "pay -as- you -go" p rinciple, whereby the tax is collected onthe basis of current earnings, was adopted in 1943 both in the UnitedKingdom and in the United States; it ensures that the amounts due arepaid promptly instead of at a later period, and it also helps taxpayers(particularly the new ones, many of whom are likely to have only smallreserves) to discharge their tax liability in a not too burdensome way.

(ii) In addition to and in conjunction with ordinary taxation, some countries(notably the United Kingdom and the United States) have adopted measuresof f o r c e d sa vi n g with repayments when the war is over (or, in certainspecial cases, at an earlier date), while other countries (notably Germany)have m ade a r ra n g e m e n t s f o r o rg a n i se d vo l u n ta r y sa v i n g s , un de rwhich certain percentages are deducted from current wages, the amounts



- 22 -

being credited to savings-bank accounts or invested in government securitiesfor the benefit of the income-earners. The proceeds obtained from such

schemes and arrangements may not as a rule be very important comparedwith the great needs of wartime financing, but these measures help to someextent to absorb purchasing power from the mass of income-earners and theyalso "tie up" savings in a form which wil l render them less dangerous whenthe war is over.

A further form of savings containing a certain element of compulsion isrepresented by the reservation for the state of the periodic payment of insurancepremiums and the regular contractual amortisation of mortgage and similarloans. In most belligerent and some other countries the granting of newprivate credit, unconnected with the war effort, has generally been forbidden,so that mortgage banks, building societies and similar institutions have hadtheir normal lending business severely curtailed. In these circumstances, debtrepayments have become an important element in current savings; insti-tutio ns which regularly receive repaym ents on loans outstandin g have — oftenas part of a concerted scheme — devoted such incoming funds to the purchaseof government securities, which thus come to constitute a growing item amongtheir a ssets . In neutral countries also similar measures have often been taken :in Switzerland the granting of new mortgage loans to agriculture has beensubjected to a strict control, amounting in practice to a prohibition, a measureprimarily designed, however, to prevent a repetition of the speculative borrowingcharacteristic of the last war and ending in disastrous consequences for land-own ers. On the other hand, a measure more directly aiming at the reservationof available funds for the government has been the curtailment of instalment

lending in the United States, the outstanding volume of which was reducedby two-thirds between the end of 1941 and the summer of 1943.

(iii) In general, success in financing may be judged by the degree tow hic h i n v e s t m e n t s in g o v e r n m e n t s e c u r i t i e s a r e " t i e d u p " — acriterion the value of which may not be fully evident until after the war; inthis respect long-term borrowing is better than short-term; non-marketablesecurities are better than marketable; and direct purchases of governmentsecurities by the public are better than commercial-bank deposits.

In the issuing of loans the technique differs from country to country butth e te n d e n c y i s t o p ro v i d e a w i d e r a n g e o f l o n g a n d s h o r t -te rm s e c u ri t i e s suited to the most varied kinds of funds. Marketable loans,

both at long and short term, are favoured by the banks and other large marketinvestors in all cou ntries . Non-marketable long-term sec urities are issued tosavings banks, insurance companies and social funds, which are often of anofficial nature — the so-called "Liqu idity loa ns " in Germany and "spec ialiss ue s" in the United States are typical examples. Non-marketable sh ort-termissues in the form of tax certificates, which are designed to absorb liquidfunds held in readiness for taxation payments, have recently proved popularin several places where they have been introduced.

In some countries the governments have organised intensive propagandacampaigns to stimulate personal savings and the direct purchase of government



- 23 -

securities by others than banks. For many reasons particular attention has beenpaid to "small" savers (who become "large" in the aggregate) and special

types of non-marketable securities have been created to meet their needs.It is characteristic of German war financing, however, that no such specialsavings issues have been made, reliance being placed on the attractiveness ofsavings deposits; of the RM 44 mil l iard accumulated on savings deposits inthe three years 1940-1942, RM 1 milliard was in the form of "iron savings",which are tied up un til after the war. Th is is in contrast to E ngland and theUnited States, where savings deposits have been of considerably less im-portance than special savings issues in the financing of the war, as is shownin Chapter V, which also gives indications of the various proportions frnancedby market and non-market issu es, long and short-ter m borrow ing etc.

(iv) In so far as governments have been unable to borrow from the public

and from such financial institutions as insurance companies and savingsbanks , they have tu rn ed to t he co m m er c i a l bank s an d , as a l as tre s o rt , to t he ce nt ra l ba nk ; by keeping str ict ly to this order they havehoped to lessen the inflationary effe cts. Th is is true particularly of the largercoun tries w ith a highly developed banking system ; and in certain of the smallercountries also this principle has been followed, e.g. in Hungary. But it mustbe expected that part of the amounts borrowed from the commercial banksand paid out by the government will be withdrawn in cash by the public. Tomeet the public's demand for currency, the commercial banks may alreadyhave ample cash reserves at their d isposa l (that was the case, for insta nce,in the United States when the rearmament period began) or cash reservesmay accrue to the banks from an influx of funds from abroad (as happened

in Switzerland during 1940 and 1941). O ften , however, the com mercial bankswill have to borrow from the central bank, or sell to it (directly or indirectly)part of their gove rnment pa per; or the central bank may by its ow n opera-tions (including direct lending to the government) furnish the banks withsufficient funds. Thus, credit is extended by the central and the commercialbanks concurrently, in proportions dependent upon the ratio of the notecircula tion to bank depos its ; an d, generally, attem pts are made to provide fora harmonious parallel expansion.

The pursuance of a well-balanced policy requires, on the one hand,skilful maintenance of a high degree of liquidity on the money and capitalmarkets (as a condition, inter alia, of continued low interest rates) and, on

the other hand, reaction against a superabundance of l iquid funds l iable toproduce inflationary lending for speculative and other purposes. The questionhas sometimes arisen as to the steps which could and should be taken bythe authorities to regain control over the money and capital markets; in theUnited States the minimum cash requirements of the commercial banks wereincreased before the entry of that country into the war, but later somewhatrelaxed for banks in New York and Chicago, which were exposed to an out-flow of funds to other districts; in Denmark minimum cash requirements wereintroduced in 1942 for the first time and funds received from special governmentissues were not used to meet current expenditure but were sterilised by being



— 24 —

left on deposit at the central bank; and in Sweden the Riksbank was authorisedto obtain, at its request, government securities from the Public Debt Office

with a view to absorbing excess funds from the market when it thought fit.Monetary action to cope with the liquidity problem has thus taken the

form of open-market operations and of changes in minimum cash requirements,while interest rates have been kept down in continuation of the cheap-moneypolicy pursued before the war. So long as the war lasts, the Treasuries havepractically been given a monopoly position to enable them to borrow the hugeamou nts they need at favourable rates . Indeed , it has been foun d that creditcontrol is not difficult to apply when war needs must be given preference overeverything else; in peacetime, the task is different, it being then a case ofselect ing, among a vast number of possibilities, those which best provide forthe variety of civilian needs. The earning power of different businesses will

then regain its importance as a test of usefulness and a guide to pro duction ;and, presumably, credit conditions will again be related to the profit marginsof those actually using the credit facilities which can be made available.

(v) A problem of particular importance in the present war has beenth e f i n a n c i n g o f su rp l u s e xp o r t s a n d o th e r e xce s s b a l a n c e s inre la t io n to fo re ig n co un tr ie s. The f inancing o f lend-lease exports in theUnited States has been put on a par with that of other war expenditure andthe same is true with regard to the "reverse lend-lease" of countries withinthe British Empire. In a similar way the Swiss Government has provided fromits own funds the amounts advanced to meet clearing "Spitzen", thus reducingthe risk of a creation of new buying power and also carrying the credit riskof the clearing arrangements (which were of course concluded by the government

itself). In other European countries the task of financing clearing surpluses hasgenerally devolved upon the central bank, with the result that the note circula-tion and commercial-bank reserves have together increased by an amountcorresponding to the clearing advances. In some Latin Am erican countriesproblems of a similar nature have arisen under the influence of substantialexport surplu ses . It may be added that the intervention practised by exchangeequalisation accounts before the present war was mostly in respect of fundswhich the owne rs intended to maintain as capital assets (e. g. short-te rm moneymoving from one market to ano ther). It is a more difficult matter to insu latea credit structure from the impact of advances in the clearing, since the greaterpart of the balances then to be offset represents sums which are employedfor wage payments, purchases of materials etc., and thus effectively utilisedin payment of goods and services.

(vi) Whatever efforts have been made to raise taxation and to borrowgenuine savings, no country has been able to avoid the emergence of excessbuying power, side by side with shrinking supp lies of cons um ption go ods. Inthe last war also there was an overflow of buying power, but c o m m o d it yprices Were then mostly determined by the interplay of supply and demand,with the result that prices rose far above the pre-war level. The rise didno t lead, however, to the attainment of a new equilibrium but tended tocontinue as long as the financial needs of the government brought further



— 25 —

additions to the volume of buying power already in the hands of the public.There was a disposition to regard continued price increases as well-nigh

inevitable and in such a situation higher discount rates or other purely monetarymeasures could but be ineffective as a check on the price rise. This timethe governm ents of the most importa nt co untries have adopted a completelyd i f fe ren t l i ne o f ac t i on , i ns t i tu t i ng a comprehens ive p r i ce con t ro l , wh ichh a s g ra d u a l l y b e e n e x te n d e d to w a g e s a n d o th e r f o rm s o f i n co m e .

In Germany, price control, which had been in operation since 1936, wasvery much reinforced in the autumn of 1939, particularly by the addition of aform al wage stop . Most other countrie s proceeded step by step to build upa comprehensive c ontrol. A t first, price increases emanating from abroad weregenerally allowed to exert their full influence on the domestic price structures;the reduction in the exchange value of sterling by 14 per cent, in the autumn

of 1939 thus broug ht about an advance in British p ric es ; and adjustm ent tothe higher German price level (as calculated at the official exchange rates)was one of the most characteristic features of price developments on thecontinent of Europe up to the spring of 1942, while increased transport andinsurance charges had a considerable influence on the cost of imported goods.By arrangements between different governments, however, steps were taken tofix the prices of goods exchanged between their respective countries and thesearrangements soon became fairly effective (thanks, in some measure, to stricterprice control internally). But in relations with countries subject to clearlyinflationary tendencies more far-reaching measures proved necessary to preventundesirable price influences and, indeed, to keep trade going at all. Examplesof such measures are the special organisations established to carry on trade

between Germany and Greece, and, in the Far East, between Japan andNanking China. By these and other measures it became pos sible, if notwholly to eliminate, at least greatly to reduce price-raising influences fromabroad — an essential condition for a successful handling of price problemsat home.

In their internal affairs, governments have carefully controlled the pricespaid by them for their own requirem ents. Considering the importance of thearmaments sector, this control has as a rule covered the major part of theindustry of a belligerent power and has thus gone a long way towards preventingthe enormous demand by the state from immediately becoming a price-raisingfactor. With the continuance of the war, improved methods of price-fixing

have been elaborated (e. g. in Germ any, by the adoption of uniform or groupprices , which have given an incentive to individua l firm s to rationalise the irproduction in order to be able to increase — or, in some cases, merely tomaintain — their profits).

By this and other forms of price control, profit margins were alreadyl imited, but increased gross profits have often still been realised as a result oflarger turnov ers, reductions in costs etc. A considerable part of theseincreased profits has no doubt been absorbed by higher taxation and theremainder usually finds its way back to the state as a result of a limitation ofdividends (observed de facto even in countries where there has been no legal



- 26 -

Obligation) and a control imposed upon investments, either directly or byrestricting the supply of essential materials (iron and steel, timber etc.).

Individual firms have thus been given no choice but to keep their remainingundistributed profits chiefly in the form of money savings, which in one wayor another must be lent to the government.

The introduction of a wage and salary stop has served a double purpose:besides bringing the most important cost element for the economy as a wholeunder con trol, it has helped to keep down the effective demand fo r goodsand services emanating from wage and salary earners. In order to makesuch a measure acceptable, however, some guarantee was required as tothe stability of living costs; the introduction of a wage and salary stop wasin fact bound up with the question of agricultural prices, so important forthe level of the cost of living. But in dealing with these problems the govern-ments usually found themselves in a dilemma: on the one hand, it wasnecessary to stimulate agricultural production by the granting of remunerativeprices (as politically strong groups w ere prone to insist) ; on the other hand,the c ost of living c ould not be permitted to rise too much .

G o v e r n m e n t s u b s i d i e san no un c e d i n 1942 -43 t o k eepd o w n p r ic e s o f c o m m o d i t i e s .

Countries

Argentina . . . .Canada

CroatiaEireFinlandFranceGermany . . . .Great Britain . .ItalyJapanSlovakiaSweden

In millionsof national

currency units

Pesos 240Can.$ 70

Kunas 2,000£ 3.6FM 1,600Fr.fcs 3,000RM 1,000£ 180Lit. 12,000Yen 400Ks. 300S.Kr. 220

In millions ofSwiss francs

230260

17060140300

1,7303,1002,700

40050

230

A solution has been found in morethan one country by the granting of sub-sidies designed to reduce prices for theconsumer; but here again the govern-ments were faced with a di lemma: sub-sidies add to the budget deficit andnaturally the last addition is the mostdifficult to meet without resorting to

inflationary finan cing . In his report tothe general meeting on 31st March 1943the Governor of the Banca d'Italia ob-served that subsidies, together with otherindirect costs of the war, were thensuch a substantial item in the Italianbudget that any further increase would

defeat its own end, since recourse by the Treasury to the bank of issuewou ld in the long run frustrate the attemp t to keep down the general levelof prices.

(vi i) F inal ly , mention should be made of the m ea su re s ta ke n to pr ev en t

un de s i r ab le i nc r ea s e s i n t he p r i c es o f c ap i t a l as s e t s , liable t o exe rta dangerous influence as a sym ptom of, and a further incitement to, aninflationary orientation of economic life. The pursuance of a cheap-moneypolicy is to some extent a handicap in dealing with these problems, but theoverwhelming influences are no doubt the hopes and fears entertained withregard to the intrinsic value of each individual currency when the war isover. The different measures taken to counteract a strong u pward movementin share quotations are mentioned in Chapter V, 2. of this Report; wherefixed prices have been prescribed, the result has usually been that thevolume of transactions has shrunk to a minimum.



- 27 -

Indexes of Wholesale Prices.

January-June 1939 = 100240

220

200

180

160

140

120

100220

200

180

160

140

120

100

-

-

-

Den

t'

: t£Z.....

- \ f \ ^-JffA

i ^Finland/^

mark,.—•-, - - - J ^

-

/

Norwav

'"'Sweden

---Japan-

Germany

-

J I

1939 1940 1941 19« 1943-

-

-

-

-

"niir̂ m.̂ ry

/

Bulgaria/

/rlungar

/ ;

y-

-

-

1942 1943

240

220

200

180

160

140

120

100220

200

180

160

140

120

100

1940 1941 1942 1943

T h i s l i s t o f p o s s i b l e r e -a c t i o n s a g a i n s t a r e d u n d a n t

p u rc h a s i n g p o w e r is by n om e a n s co m p l e te b u t i t sh o w sw h a t a va r i e t y o f o f f i c i a la g e n c i e s h a v e t o c o o p e r a t ei n t h e ta sk o f r e s i s t i n g i n -f l a t i o n . The central bank is oneof these agencies, being speci-ally concerned with maintaining aproper degree of liquidity in thecredit system and collaboratingwith official and other institutionsin regard to all questions having

â monetary significance. In war-t ime, of course, the requirementsof the government must pre-dominate. A id must be given to

. make b orrow ing at cheap ratespossible even if the central banksare thereby debarred from curtail-ing the amount of cash furnishedby them to th e markets (howevermuch such action would have beennatural and requisite in times ofpeace). In this, as in other fields,the needs of the war must beallowed to take first place. Theprice control, so to say, takesover the task of maintaining "theintegrity of the currency" (theexpression used in the Act estab-lishing the Central Bank of Irelandin 1943); for that purpose a vastnew administrative machinery hasto be instituted . After four yearsof war the general principles which

should govern the price controlare well known ; but principles arenot eno ugh ; their application isof equal importance ; and it is noteverywhere that a sufficiency ofcapable and trustworthy personscan suddenly be found for adminis-trative purposes, especially sincemany suitable candidates are likelyto be called to the armed forces.



— 28 —

Another problem is that of coordinating the work of the different agencies; thegovernments themselves wi l l , for instance, have to decide questions which for

one reason or another have assumed imp ortant political aspe cts. Thu s govern-ments (with or without the assent of parliaments) seem to have invariablyreserved for themselves the fixing of prices of agricultu ral pro duc ts, partlybecause of the importance of these prices for the cost of l iving, and thusfor the general wage level, and partly because the farmers' organisationspractically everywhere exert considerable political influence.

The essence of price control is to prevent the new buying power in thehands of the public from raising prices by being translated into effectivedemand, "official" prices taking the place of the quotations previously deter-mined by supply and dem and. In so far as the control is success ful, thevalue attached by the consumer to the goods he is still able to buy tends to

rise above the official price. There is thus a divorce between "value" and" p r i c e " , and official prices cease to indicate (by their relation to one another)the respective degree of scarcity of different goods and services. Someelasticity in the price structure may still be part of the official policy; it is,as a matter of fact, often forced upon countries by a rise in import prices orby strong pressure from domestic producers ; but there normally comes apoint when fear of inflationary developments and fear of social unrest (thetwo go together as living costs increase) induce the authorities to adopt,if possible (and mostly with the aid of such props as government subsidies),a policy of more rigid price control, virtually amounting to a "price stop" forconsumers' goods.

The tables showeffectively arrested orstricter control being

P e r c e n t a g e I n c r e a s e i n C o s t o f L i v i n g .

Countries

Germany . . . .Argentina . . . .New Zealand . .United States . .Australia . . . .United KingdomJapanSwedenSwitzerland . . .Portugal . . . .NorwayHungary . . . .Denmark . . . .IndiaBulgariaRoumania* . .

Percentage increase fromJune 1939 to

December1941

December1942

June

1943

5

11

12

12

12

28

+ 24

+ 34

+ 34

+ 35

+ 43

+ 39

+ 51

+ 24

+ 65

+ 138

* Retail prices.

h o w i n s e v e r a l c o u n t r i e s t h e r i s e i n p r i c e s w a sv e r y m u c h s l o w e d d o w n i n t h e c o u r s e o f 1 9 42 , t h e

i n s o m e i n s t a n c e s a i d e d b y a c e r t a i n r e l u c t a n c e o f

t h e p u b l i c t o b u y , a t e n d e n c y a l s o

a f f e c t i n g t h e b l a c k m a r k e t s . W i t h

t h e g r e a t e r s t a b i l i t y o f p r i c e s , w a g e

m o v e m e n t s h a v e b e e n m o r e e a s i ly

h e l d in c h e c k . B u t a l l t h i s h a s

m e a n t a n i n c r e a s e in t h e n u m b e r

o f f r o z e n p r i c e p o s i t i o n s , r e -

f l e c t i n g t h e s i t u a t i o n a t a g i v e n

m o m e n t i n t h e p a s t i n s t e a d o f t h e

e v e r - c h a n g i n g c o n d i t i o n s o f c u r r e n te c o n o m i c l i f e , a n d f o r t h a t v e r y

r e a s o n f a i l i n g t o f u l f i l t h e n o r m a l

f u n c t i o n s o f t h e p r ic e s y s t e m . T h i s

f a i l u r e i s , h o w e v e r , l e s s f r a u g h t w i t h

d a n g e r i n w a r t i m e , w h e n t h e m a i n

p u r p o s e i s o b v i o u s l y t o c o n c e n -

t r a t e m a x i m u m e f f o r t o n t h e p r o s e -

c u t i o n o f t h e w a r , a n d t h e r e i s ,

m o r e o v e r , g o o d e m p l o y m e n t .

+ 7

+ 11

+ 14

+ 22

+ 22

+ 28

+ 29

+ 41

+ 46

+ 47

+ 48

+ 52

+ 56

+ 81

+ 104

+ 252

+ 10

+ 15

+ 27

+ 28

+ 35

+ 41

+ 48

+ 54

+ 50

+ 55

+ 54

+ 129

+ 332



- 29 -

Relating control to positions in the past seems, indeed, to be a matter ofintrinsic neces sity; the practice extends to many fields, including the distribution

of scarce raw materials, a llocation of export and impo rt quo tas, the gran tingof compensation when busine sses are close d, etc. In all these cases themeasuring rod is usually the peacetime turnover of the individual trader orproducer, which means that preferential treatment is given to firms alreadyestablished. And very soon, as part of the wartime regulations, workers aredebarred from changing their place of employment withou t perm ission froman official agency subord inate to a national m anpower com miss ion or sim ilarcontrol organ.

The freezing of posit ions is also found in the f i e ld of fo re ig nexchange: there the outstanding feature of the war has been the maintenance— with few exceptions — of practically stable exchange rates, thanks to theintervention of central banks, stabil isation funds or exchange institutionsoperating in high ly-con trolled markets. Du ring the war of 1914-18 a nucleusof s tability was established th roug h the pegging of sterling in relation to thedollar and of the French franc in relation to sterling (effective from the springof 1916 until the end of the war) ; but other exchange rates sh owed cons ider-able movements despite an increased application of exchange control. Thecurrencies of neutral countries appreciated in relation to other currencies, onereason being that these countries refused at times to accept gold uncondition-ally in payment from abroa d. Outs ide the range of the pegged exchan ges,to which the lira was added in the summer of 1918, the currencies of mostof the belligerent countries became increasingly depreciated as the war wenton, being subject from time to time to sudden declines.

In the present war, pegging of exchange rates being universally adopted,the authorities have obtained the resources required partly from existingmonetary reserves, partly through the mobilisation of privately-owned foreignassets and, finally, from foreign credits or other forms of foreign assistance.In the " l e n d - le a s e " and " r e c ip ro c a l a i d " ar rangements the main emphas ishas been laid on the actual supply of goods and services, less importancebeing attached to the cred it or m oney aspect of the trans action s (whichshows, incidentally, the exceptional wartime character of these new forms of" l end ing" ) .

In Europe, clearings have largely ceased to serve their original purposeof equalising incoming and outgoing foreign payments and have become a credit

device by which a government advances the funds necessary to enableits country's export trade to continue even when no adequate countervalue isobtained from the importing country. In the various coun tries on the continentof Europe involved in the war, virtually the whole foreign trade is settled viaclear ings ; in addition to the "t ra d e" transac tions, there are, however, certaindeliveries of a military nature not entered in the clearing a cco unt s. Nearly75 per cent, of the foreign trade of Sw itzerland and over 80 per c ent, of th atof Sweden are paid for via clea rings. Th is means th at ' these tw o neutralcountries, like the belligerents, settle an overwhelming part of their foreignpayments outside the ordinary exchange markets. Among the belligerent



- 30 -

countries all the world over, most of the trade being handled by the stateitself, the ordinary exchange market tends to disappear altogether. In the

end, the foreign exchange control not only excludes all forms of arbitrageoperations but increasingly differentiates between the payments for which eachparticular kind of money may be used . (The regulations may presc ribe, forinstance, that goods exported must be paid for by the foreign purchaserthrough the delivery of foreign exchange or that certain kinds of depositsmay only be used for investment in government bonds; the examples couldeasily be multiplied.) Under these circumstances money no longer constitutesgeneral purchasing power; the stock of circulating media becomes dividedinto different categories, each with its particular use.

These restriction s on the use of money apply especially to balances andcash of foreign holders and thus affect, in particular, international monetaryrelations. In actual practice, m u lt i l a te ra l c le a ri n g so far has had l it t le moreto show than permits, given in isolated cases, to employ certain limited amountsfor payments in third countries. And the reason is obvious: a real multi lateralclear ing, in which balances in one currency co uld, without serious restrictions,be used for settlements in other countries, presupposes an approach to equili-brium in the balances of payments and in the exchange structure — a state ofaffairs very different from the growing disequilibria which characterise inter-national relations under a war economy. It has been said that the conditionsunder which a multilateral clearing would work satisfactorily are very much thesame as those under which the whole system of clearings could be dispensedwith. This may be too sweeping a statement* but it at least draws attentionto the need of fundamen tal e quilibrium in any currency system if it is to be

capable of rendering adequate service as a vehicle for multilateral trade andthe settlement of current financial obligations. The essence of the system ofclearings is, indeed, to be found in the fact that it permits a measure ofdiscrimination in regard to certain countries (purchases or sales by one partnerbeing related to the purchases or sales by the other partner) and in regardto groups of co mm odities (" us ef ul " or "e ss en tia l" purchases being given apreference over purchases of other commodities). If a system were reallymulti lateral, there would be l i ttle possibil i ty of maintaining discrimination ofthe kind indicated.

The universal pegging of exchange rates in the present war has remainedthe policy of the authorities even when it has become clear that the existing

rates no longer correspond to the underlying realities of the relative cost andprice structures. When the war is over, governments wil l have to cope withth e t w o c l o s e l y c o n n e c t e d p r o b l e m s o f e x c e s s i v e b u y i n g p o w e ri n t h e h a n d s o f t h e p u b l i c a n d a d j u s tm e n t o f t h e e xch a n g e sto th e i n t r i n s i c va l u e s o f t h e va r i o u s c u r r e n c i e s . M uch tho u gh t

* A particular danger may arise from the fact that the huge public debts contracted during the war havegreatly increased the proportion of assets of a liquid nature held by the public. In discussions regarding theproblems created by these debts, such questions as the internal "burden" of the debt, its annual servicein the budget etc. have often been given primary importance. But it must not be overlooked that the massof outstanding public obligations, an artificial kind of wealth, is liable to exert a disturbing effect on thewhole capital structure ; while shares and other forms of real wealth may be allowed to fall in price if offeredto an increasing extent on the market, such a fall in the quotations of government securities would at leastimperil the uninterrupted maintenance of a cheap-money policy.



- 31 -

has already been given to these problems, past experience being ransackedwith a view to avoiding a repetition of old mistakes, especially those committed

after the last war. Much will depend upon the success with which eachparticular government is able to master its own internal problems, and inparticular to prevent uncovered budget deficits from producing a "gallopingin f la t ion" (such as occurre d in several coun tries after the last wa r). In thedifferent se ctions of Chapter II of this Report dealing with exchange s, for eigntrade and prices, some aspects, chiefly international, of the post-war problemsare discusse d ; here a few general obse rvations are briefly set down :

( i) I t i s sometimes tak en fo r gr an te d th at a t the en d of th ep r e s e n t w a r p r i c e s w i l l t e n d t o f o l l o w t h e s a m e c o u r s eas af te r th e la st w ar , i .e. that after a br ief period of hesi tation abrisk demand will set in to make up for shortages suffered during the

war, and that a slump in prices will come only after a few years, whenimmediate post-war needs have already been satisfied. Ups and downsof this kind being undesirable, it has been suggested that the wartimesystem of control, rationing and subsidies should be maintained forsome time after the end of hostilities, in order to check the impulsetowards an immediate post-war boom and, by doing so, to assist inpreventing a subsequent severe slum p. Thu s the British Chancellor of theExchequer in his budget speech on 12th April 1943 declared that it was theintention of his government to control supplies and restrict private con-sumption for some time after the war; two months earl ier (in February1943) he had explained that it was the policy of the government to main-tain commodity prices at the level which had been reached during the war.

Wh en forecasts are made of post-war fluctua tions, account s houldbe taken of the prob ability that bu siness men and other s, remem bering

300

200

150

100

50 i ilnliihi

Movement of Wholesales Prices 1914 to 1925.Indexes 1913 or 1914 = 100.

ir

CssaafSf

I iJ nil ill I

Swirzer

/

/ js *

• il'ihih i

land..../

1

iilniiili

United

1915 1916 1917 1918 1919

A

H

Sfahes "

Illllllllll1920

jrear Br

\

I llllllllll1921

tain

iiliilnhi

^ ^ :

iiiiiiiiin1922 1923

|jlllllllll1924

. • r i • 11 • 1111925

300

250

200

150

100

•ifl



— 32 —

how the profit boom of 1919-20 was followed by heavy losses in 1921-22,may be much more careful in their purchases this time and may, in

particular, decide to keep stocks down to a minimum until, in theiropin ion, a more settled price situation has been reached. Should sucha cautious attitude be adop ted, there w ould be much less risk of aviolent rise of prices in the first phase of the post-war cycle and alsoless need for the maintenance of the whole apparatus of wartimecontrol. After the last war lack of shipping facilities (aggravated bydelays in ports) was among the factors contributing to the highprices in 1919-20; and it remains to be seen whether in this respectsimilar scarcities and delays will occur again. In general it may be hopedthat present planning will not be based too slavishly on the assumptionthat the after-effects of the last war must necessarily recur, but willremain sufficiently flexible to enable measures, in practice, to be adapted

to varying circumsta nces. Nor shou ld planning be made an end initself; in exaggerated zeal to avoid upheavals, governments must notregard it as their paramount duty to perpetuate controls, the maintenanceof which may delay necessary adaptation and hamper more dynamic forceswhose contribution is vital for the employment of the millions returningto civilian work. Care should be taken lest, in too much concern aboutthe transition period, the world loses the benefit of an upward swingsuch as that which, after the last war and in spite of all vicissitudes,had by 1924-25 brought production back to the 1913 level and, in a greatnumber of countries, lifted the average of real wages to well above thepre-war standard.

(ii) W hile it is often assumed that e x ch a n g e rates are determined byrelative costs and prices (according to the theory of purchasing-powerparit ies) it is frequently found in pract ice that so m e ge ne ra l id ea ast o t h e f u t u r e e x c h a n g e r e l a t i o n s h i p p l a y s a p r e d o m i n a n t r ô l e .After the last war, for instance, actual exchange movements were greatlyinfluenced by the belief that it was the settled policy of many countriesto re-establish the gold standard at the old pre-war par ity; andthis belief also affected the trend of commodity prices, both directly andindirectly through the movements in the exchange rates. For some timeafter this war exchange rates will presumably remain subject to officialcontrol and current beliefs will accordingly have less influence, officialaction being decisive, especially when government finances are in order.

If that is the case, the most important single factor in determining theprice level, particularly of smaller countries, will undoubtedly be the moreor less deliberately chosen foreign exchange rates; and it is to behoped that the larger countries will soon succeed in establishing andmaintaining relatively stable prices, to w hich the others could link theireconomies.

The importance of the exchange problem is, of course, fully realised,and curren cy plans under d iscus sion in the summ er of 1943 envisaged asituation in which, by consultation and, if need be, financial assistance,



- 33 -

countries wil l be in a position to maintain orderly exchange conditions.It will certainly not be an easy task to find the right levels for stabilisa-

t ion , considering the profound changes to which different economies andtheir currencies and cre dit structure s have been expose d. W hen in thenineteenth century one country after another linked on to the goldstandard they did so at rates of exchange which had already establishedthemselves in the market and could fairly be regarded as equilibriumrates. The different countries then had a good chance of maintainingthose rates, provided that in other respects they applied the principlesof the gold standard, which at that time were accepted as almost self-evident precepts of monetary policy. A s it fun ctio ned before 1914, thegold standard meant, of course, much more than the maintenance ofstable exchanges and the settlement of international balances by ship-ments of gold. It provided a number of semi-automatic correctives

designed to remedy the causes of monetary disequil ibrium at their veryinception, and it presupposed a code of behaviour, with regard tobudgets, borrowing, credits, interest rates and readjustments of costs,which had slowly become the common doctrine of well-nigh the wholewor ld. A later generation may have found some of the "acceptedprinciples" too restr ict ive, involving too many f inancial "taboos"; but,while the old system lasted, a comparatively uniform financial policy waspursued in the different countries and, in commercial matters thegovernments refrained from imposing too cramping restrictions. Withoutidealising the past, it may be said that the gold standard up to the lastwar gave the world a uniform monetary system, with its internationalcredit centre in London, while since 1914 it has proved impossible tore-establish a monetary community equally comprehensive and smoothlyworking.

When a country contemplates measures with a view to influencing themovement of domestic prices, it will have to take into account the probablep s yc h o l o g i ca l r e a c t i o n s o n th e p a r t o f t h e g e n e ra l p u b l i c . A f te r t helast war the cost of living in certain countries remained permanently at alevel fully 50 per cent, above that of 1914, yet the public did not attributethis increase to unwise monetary management but simply to the effects of thewar; holders of money claims such as government bonds and insurance

policies did not feel that they had been unjustly treated as compared with thosewho had invested their money in shares and other real assets (" Sa chw ert e") .Nor had they any grievance when currencies depreciated in the 'thirtiessince prices and living costs did not mount above the level attained in theyears 1926-29. In the countries in question the public continued to take outinsurances and to practise other forms of saving in terms of money. (InSweden and Switzerland — countries in which the cost of l iving had risen totwice the figure fo r 1914 — the am ount of subscriptions to new l ife assurancein 1942 was an all-time record — a sign of unshaken confidence in thecurrency.)



— 34 —

In some other countries, however, a point was reached beyond the limitwithin which a unit of the currency was still regarded as retaining the same

value, notw ithstand ing th e rise in prices . In France the franc of 1926-28 became"le franc à quatre sous" while a Swiss franc remained unquestionably aSwiss franc. When people begin to feel that money claims may be subjectto special risks, their attitude towards savings in money form necessarilychanges and it may then prove difficult indeed to re-establish a sufficiencyof real monetary confide nce. The se distinc tions — vague thou gh they maybe — are not without their importance and the governments will probably bewell advised to take them into account when they proceed to rebuild thecurrency system after this war.

This does not mean, however, that a country must subordinate its wholeeconomic and monetary policy to the attainment of some former parity or

some definite price level. Both foreign exchange rates and commodity pricesmay alter within a fairly wide margin before a reduction in the purchasingpower of the currency unit is felt as a positive grievance; within that margina government may seek a level conducive to a high degree of production witha satisfactory volume of employm ent. But, if it shou ld thu s be possible toavoid a deflationary fall in prices, there must, even so, be some sectors inwhich costs will have to be reduced from high wartime levels; and then itwill be well to remember that a sharp cut is often preferable to a long-drawn-out adaptation, since the former is more likely to establish a proper basisfor recovery and will thus hasten the advent of a more satisfactory level ofemployment.

I n t h e l i g h t o f p a s t e xp e r i e n c e , t h e r e s to r a t i o n o f a t r u eb a l a n ce in t h e co s t a n d p r i ce s t r u c tu re a p p e a rs to p ro v i d ethe on ly re l i ab le b as is fo r an eco no m ic reco very cha racter ised bya high degree of activity in the investment industries, and with profit and lossas a guide to produ ction and a gauge of efficiency. Such a balance canhardly be attained without some adjustment of costs ; but reductions in wagerates and other cost elements are generally not by themselves sufficient as abasis for recovery since they may simply result in successive contractions indemand, with a tendency to cumulative deflation — a tendency which, however,may be counteracted by a financial expansion designed to restore and evento aug ment th e volume of de man d. In the years 1929 to 1932 hourly wage ratesin the manufacturing industries in the United States were reduced by about

20 per cent.; but this adjustment, being accompanied by a contraction ofdemand and an even more rapid fall in comm odity prices, failed to bring abouta recovery and the result was a feeling of frustration and useless suffering.In a number of other countries (including Aus tralia, the United Kingdom ,Sweden and also Germany) co st adjus tmen ts we re, however, supplemen ted bya policy of financial expansion, costs and prices being balanced within eachnational economy and vis-à-vis other countries, after which signal success wasachieved in reviving industrial activity. In this proces s a cheap-money policyplayed a part, both by reducing the cost of capital and by providing a stimulusto new borro wing . Deprec iation of currencies was likewise a fact or, helping





- 36 -

wil l be of primary importance. But those m ore fortunate coun tries which arein possession of adequate monetary reserves will also be greatly concerned

about the future trend of world trade, since each one of them will have todecide how far it should integrate its own economic life with that of the restof the world. The end of the war wil l find almost all countries applyingintricate systems of exchange control which, as much as any tariff policy,may stand in the way of a recovery in intern ational trade. Such measuresas can be taken to replenish monetary reserves or provide foreign creditsfor a resumption of the flow of merchandise may be particularly helpful inwidening one of the obvious bottlenecks in the post-war situation, not leastbecause they will facilitate a relaxation of exchange restrictions.

Demands for protection wi l l , no doubt, be put forward by both mastersand men in industries expanded during the war beyond the scope of ordinaryrequirements (the shipbuilding industry is, for instance, reported to haveattained in the Anglo-Saxon countries a capacity ten times as great as islikely to be needed in times of peace). A s it will be difficult to find employmentat once for those no longer occupied in the typical war industries, there maybe a strong temptation to try to relieve the situation by measures representedas detrimental "on ly to the foreig ner ". Much wil l then depend upon the leadgiven by the larger countries. After all the obstacles to world trade which werebuilt up during the great depression — the tariff increases in the U nited Statesin 1930, the introd uctio n of exchange contro l in Germany in 1931 and, in thefollowing year, the adoption of a tariff in Great Britain, together with the con-clusion of the Ottawa agreements — some equally important and strikingmoves, but in the opposite direction, would seem to be needed to convince

the world that a turning-point in the realm of commercial policy had indeedbeen reached.

It has been feared that industrialisation, especially of extra-Europeancountries, wil l seriously curtail the future volume of international trade; but theexperience already gained in the older industrial countries themselves seemsto indicate that this is by no means a necessary consequence: as long as thetrade policies adopted by individual countries are followed by an increase intheir standard of living, with new wants and new activities, there will in allprobability be an expanding market for the products of other countries also.The composition of foreign trade wil l , however, tend to change somewhat, inthat the countries which are in process of industrialisation will come to import,

instead of mass-produced goods, a larger quantity of highly finished articles,including those they need for their capital equipment, namely, tools andmachines of all kinds. Such a change in character may be entirely com patiblewith an increase in the aggregate volume of world trade, though it raises foreach exporting country the problem of attaining the highest efficiency, especiallyin those industries which stand to profit from the change in the pattern ofworld trade.

Turning to activities on the domestic market, the outstanding importanceof the bu i l d in g tr a de is, perhaps, best shown by the fact that in t imes ofgood business this trade is normally responsible for fully 50 per cent, of all



- 37 -

current capital investments, a proportion found even in the nineteenth centuryat a time when railway con struc tion in the United States was at its peak.

In the present emergency the private building trade has been greatly con-tracted since sp ecial permits are needed for new con stru ction s and areusually granted only for purposes connected with the war effort. Ac cord ingto the official index figures, building costs have risen by 20 per cent, inGermany, and even more in other countries, though the exceptional characterof wartime b uilding makes it difficult to calculate reliable index num bers ofthese cos ts. Rents, on the other hand , have not been allowed to go up ; inmany countries they have not risen at all, and everywhere the increase has beenless than in other items on which the cost-of-l iving indexes are based (com-pare the table in Chapter II , page 107). Here are the elements of a seriousmaladjustment which, no doubt, will have to be corrected before privatebuilding activity can again expand. Experience after the last war proved

conclusively that those countries which were the first to abolish their rentrestrictions were also the first to benefit from a recovery in building activity,followed by a general revival. As there is little prospect of bringing buildingcosts back to the pre-war level, an increase in rents would seem to berequired. Socially and politically, however, it will be anything but easy toallow rents to rise and thus to establish in practice the balance in the costand price structure which is more and more recognised as a necessary con-dition for a sound recovery.

In order to be .prepared for s uch diffic ult s ituatio ns as may arise whenthe war is over, many governments have had lists drawn up of suitable pro-jects for p u b li c w o rk s . One of the main tasks of the transition period after

the war will obviously be to shift workers from industries having undergonea great wartime expansion to those which cater for ordinary peacetime needs.The problem wil l then be essential ly one of industrial flexibi l i ty and, as such,it will be affected not only by the existence of powerful economic organisationsbut also by a number of other circumstances, including the readiness ofindividual workers to change their occupations and, maybe, to find new homes,despite the wrench of such an upro oting. Sometimes one is almost des-pairingly driven to the opinion that the more modern communicationsdevelop the less can reliance be placed upon the voluntary migration ofworkers in response to economic dema nds. Hence the need for we ll-organise dlabour exchanges.

Unfortunately, public works are apt to reduce still further the mobility oflabour and the capacity for adjustment in industry generally. The financingof such works might easily absorb a good part of current savings and itwould thus reduce the amount of capital in search of new investments(ordinarily one of the mainsprings of industrial expansion). By the relief whichpublic works w ould provide, they wo uld tend to diminish the inducement —weak as it already is — to seek new em ployme nt. In these d ifferent ways th eexecution of a vast programme of public works might impede and delay thecorrection of maladjustments which had arisen in the course of the war.These dangers are all well known and, in order to eliminate them as far as





- 39 -

II . EXCHANGE RATES, FOREIGN TRADE AND COMMODITY PRICES.

1. EXCHANGE RATES.

The maintenance of stable official rates has continued to characterise theexchange pos ition in most parts of the wo rld. Con sidering the unequal risein prices in the different countries, the consequence has been that, in a numberof instances, rates continue to be quoted which are out of touch withunderlying conditions; and this state of affairs undoubtedly acts as a brakeon the exchange of goods and services despite all efforts made to removethe obstacles by a comb ination of export charges and im port prem iums (orvice versa). The com petent auth orities have feared that by an alteration in

the rates they might release psychological and other forces, bringing intheir train consequences w hich could not be foresee n. It has, moreover,proved difficult in practice to modify rates agreed upon in commercial andpayments arrangements, since often more than two countries have beeninvolved, which has made it hard, if not impossible, to arrive at a positiveresult. The maintenance of the stable rates by countries obtaining a largeimport surplus usually involves some sort of credit arrangements, e.g. ad-vances and other payments by occupied countries, aid between belligerentcountries on the same side and special credit arrangements with the fewremaining! neutrals^ ! ,

There have, however, been some except ions to exchange stab i l i ty .

In January 1942 (as mentioned in the twelfth Annual Report) the Danish crownwas a ppreciated by 8.2 per cen t., after nego tiations with Germa ny, the mainpurpiose being that of counteracting a further rise in the Danish price level.More directly in response to market developments, the currencies of someSouth American countries have risen in exchange value. In these countriescurrent supplies of dollars have exceeded the demand, exports being mostlywell maintained, wh ile difficulties are experienced in obtaining deliveries frombelligerent countries,^ includ ing the United State s. In Iran the im provem entin the value of the rial, which set in after the occupation of the country byBritish and Soviet" troo ps in the a utumn of 1941, has con tinu ed , the effectivequotation of the pound sterling having been reduced by stages from Rials 174before the occupation to Rials 129 in May 1942. But the most spectacular

currency changes have takeri place in the Far East, invo lving, inter alia, amonetary unification in relation to the yen. Thus the currency units of thePhil ippines, Hong Kong, Thailand, the Straits Settlements, Burma and Javahave all been made equal to the yen, which has entailed varying degrees ofdepreciation for the local currencies.

By these measures the division of the world into se p ar at e c u rr e nc yar ea s has been further ac centua ted; other moves in the same direction arethe attachment of the territories of North Africa to the sterl ing and the dollarareas. The official dollar-sterling rate itself has been maintained practically



- 40 -

unchan ged at $4.03 = £1 since t he autum n of 1939; measures taken in 1942to simplify the sterl ing accounts held by residents in the United States maybe regarded as one of the signs of an increasingly close connectionbetween the two Anglo-Saxon currency blocs.

The remaining neutral countries on the continent of Europe cannot besaid to belong exclusively to any of the different currency areas. They main-tain monetary relations with countries on both sides in the war and theycombine fixed official quotations for the pound and the dollar with the main-tenance of stable rates for the Reichsmark, which, in the various clearingagreements, retains its ful l gold value.

Apart from the appreciation of the Danish crown mentioned above, nochange has been made during the year under review in the rates between

the Reichsmark and other European currencies. The process of br ingingthe exchange valuation of the Reichsmark in the Danubian and Balkan areainto l ine with the quotations of the dollar, the Swiss franc and other "freecur ren cies " came to an end in 1941, the only exception to the uniformitybeing R o u m a n ia , w here a 90 per cent, prem ium is applied to the Swedishcrown and the Swiss franc; for the Reichsmark the rate quoted correspondsto a premium of 50 per cent., while for a number of other currencies thepremium is only 38 per cent.

In this connection it may be mentioned that for the French franc alsothere is a difference in the valuation. In the Franco-Swiss clearing the agreedrate of Fr.fcs 100 = Sw.F cs 10 practically con form s t o the officia l rate for thedollar a t Fr.fcs 43.80 = $1 , whic h has been maintained by the Bank of Francesince the autumn of 1939. On the other hand, the clearing with Germany isbased on the rate of Fr.fcs 20 = RM 1, wh ich represents for the French franca depreciation of 12.4 per cent, compared with the official rate of the dollar.In addition, there is an exchange market in Switzerland for "free" Frenchfrancs, with regular transactions in French francs held in the so-called"S wis s foreign acc ou nts " by persons resident in Switzerland . Up toNovember 1942 the rate in this market was kept in the proxim ity of theofficial clearing rate, but after the events in November 1942 it fell sharply —for a time to less than S w.fcs 3 for Fr.fcs 100. Steps w ere taken to rendersupport to the market, however, and the rate recovered at the beginning

of 1943 to Sw .fcs 4 and later on exceeded Sw .fcs 5. Th e market is in anycase very narrow, since it comprises only transfers outside the clearing, thelatter including in particular al l commercial transactions. The "free" marketseems to be used mainly for certain financial transfers such as payments ofinsurance and reinsurance premiums e tc. But, in spite of this l imitation ,the quotations for "free" French francs in Switzerland have attracted muchattention, althou gh, of course, similar markets exist for a number of othercurrencies whenever particular quotations are allowed for special purposes.(As regards the quotations of the French franc in the territories outside thehome country, see page 44.)





42

of 1941. Under the regulations in force Swiss assets in the United States canpractically only be used for payments within the dollar area, the Swiss National

Bank mentioning in its last annual report that the difficulties rather increasedduring 1942. As in the previous year, the National Bank has in the mainlimited its purchases to dollars originating from exports of merchandise, traveland payments in connection with insurance, or concerned with payments tothe Diplomatic Corps, the International Red Cross and persons domiciled inSwitzerland whose sole income consists of their dollar receipts. On the otherhand, the bank has, in principle, refused to accept dollars resulting fromtransfers of or income from capital, being anxious to safeguard, above all,the country 's foreign trade. In view of the l imited p ossibil i ties of uti l isingdollar assets, the National Bank has been obliged to accept — but only withgreat reluctance — blocked d ollars and g old in the United State s, since thedemand for dollars from importers of goods has been insufficient to absorb

the exporters' offers of dollars and it has been practically impossible to utilisedollars in third countries. Consequently the bank's monetary reserves have greatlyincreased. The agreement concluded with the commercial banks in September1941 regarding purchases and sales of dollars has remained in force; each weeka balance is struck between the banks' purchases and sales of dollars for therecognised purposes, and the surplus which then generally arises is takenover by the National Bank at agreed rates of exchange. Over an extensivef ie ld, including all commercial uses, a stable dollar rate is thus ensured; but,outside that f ie ld, Swiss francs are dealt in on the New York market atrates differing widely from those official ly applied in Switzerland. While theofficial rate for th e d ollar in Switzerland is Sw.fcs 4.30 = $ 1 , rates as Io w a sSw.fcs. 3 = $1 have occasionally been quoted in New York.

In 1938 about one-third of Swiss foreigntrade was carried throughclearing accounts; in 1942the proportion had risen toabout three-quarters, thereasons for this develop-ment being that, apart fromsettlements with Portugaland Sweden, paymentswithin Europe could no

longer be freely madeand that the share of thecontinent of Europe inSwitzerland's foreign tradehad risen as a result ofthe increased difficultiesin the way of commercialrelations with overseascountr ies. Transactionswhich pass through the

Quotationsas

of Foreign Bank-Notes in Switzerlandpercentage of clearing or official rate.

1939 1941 1942 1943



— 43 —

clearing are settled at the official rates agreed upon by the clearing partners,and these rates are of great practical importance for the currents of trade and

the trend of prices, being certainly more significant in these respects than, fo rinstance, the rates quoted for bank-notes or for currency balances availableonly for special purpos es. Qu otatio ns for bank-no tes may be said to havelittle or no relation to the volume of trade and are as a rule unaffected byofficial supp ort, the repatriation of notes b eing, on the contrary, forbidden inalmost all countries, as part of the standard exchange regulations. The graphon the opposite page shows the quotations on the Swiss market for thenotes of five countries as a percentage of the clearing or official rates forthe currencies in question.

The Portuguese exchange market continued to be of considerableimportance in 1942, being free from restrictions but feeling to some extentthe effects of the more incisive regulations to which the country's foreigntrade had been sub jected . Th e sterling rate remained unch anged atEsc. 99.80—100.20, while certain slight adjustm ents were made in the ratesfor the dollar, the Sw edish crown and the Swiss franc. The stabil i ty thusattained has been ensured through continued purchases of gold and foreigncurrencies by the Banco de Portugal, which increased its holdings of theseasse ts in 1942 by no less tha n Esc. 4,530 m illio n.

Spain also would seem to have strengthened its foreign exchangeposition d uring 1942. From 26th July of that year the so -called "vo lun tar y"rates, which had been quoted in addition to the official exchange rates, wereabolished. For sterl ing the "voluntary" rate had been Pesetas 46.55, the officialrate, wh ich st ill rem ains, being Pesetas 40.50. For the d ollar the red uction

was from the "v olu nt ar y" rate of Pesetas 12.56 to 10.95 and for the S wiss francfrom Pesetas 2.91 to 2.53. Dealings in U.S. ba nk-notes have been for bid de n.Towards the end of the year there was some increase in the demand forpesetas in foreign markets. Th is development would seem to reflect the reduc-tion in the budget deficit and also the relative improvement in the "pu rcha singpower parity", caused mainly by a more rapid rise in foreign costs and prices.

The Turkish pound has been subject to varying influences in recentyears. There has been a good demand for certain Turkish export products,such as iron ore and chromium, while difficulties have been experienced insecuring imports, and this has contributed to the maintenance of a relativelyfirm exchange position vis-à-vis other countries; on the other hand, commodity

prices have risen rapidly on the domestic market, affecting the internalpurchasing power of the currency. In order to counteract the persistentadvance of prices, the government decided in May 1942 to suppress the 40 percent, premiums on exports paid for in "free" currencies (the Swiss franc, theSwedish crown and the dollar) and in August reduced from 48 to 35 per cent,certain exchange premiums burdening imports paid for in dollars and otherfree currencies (a measure w hich w ould seem to be equivalent to an appre-ciation of the Turkish pound ). Rates fixed in clearing agreements, however,remained una ltered. Notwithstanding the favourable export pos ition, measureswere introduced in the autumn affecting the conversion of Turkish pounds



- 44 -

into other curre ncies . A decree issued in Se ptember 1942 blocked allbalances belonging to persons or firms, whether Turkish or foreign, domiciled

outside Turkey, including all sums from the sale of commodities, rents fromreal estate and dividends from Turkish and foreign stocks and shares. Nocredit may in future be opened in Turkish pounds for any person or concerndom iciled abro ad. The Minister of Finance may in some cases g rant exem ptions.The blocked amounts can be used only for buying and exporting certainTurkish goods specified in the decree or enumerated in the various com-mercial agreements.

The European neutral countries are gaining what would normally beregarded as a strong exchange position by the additions to their monetaryreserve s; but the s urplu s exp orts (visible and invisible) w hich give rise tothese additions involve payments which have to be financed on their domestic

markets; in arranging this financing care has to be taken not to provoke adangerous m onetary expa nsion. For the neu trals such prob lems of financinghave arisen in relation to countr ies on both sides in the war. Alth ou ghSweden and Switzerland are debarred from merchandise traffic with theUnited Kingdo m and the United States to a greater extent than are Po rtuga l,Spain and Turke y, the current a ccou nts of their balances of payments stillcontinue to show a substantial turnover with the monetary centres in thesterling and dollar areas.

The British foreign exchange control, which had gradually been perfectedduring the first two years of the war, underwent no important amendments

during 1942. Perhaps the most significant new move was a simplification inrelation to the dollar, by which three different types of sterling accounts heldby residents in the United States were merged into "registered accounts",the balances of which could, if desired, be converted into dollars at the officialrate. Th is put an end to the market for free sterling in New York. A similarmeasure Of unificatio n was not applied in relation to Sw itzerland — the onlyother country for which the system of "registered accounts" had been inforce. Since the beginning of 1943, however, it has been permissible to open"registered accounts" in favour of private persons and firms domiciled inSwitzerland, whereas previously such accounts had only been allowed betweenbanks (with the authorisation of the Bank of England).

Foreign exchange quotations in London showed hardly any variation during1942, official rates being applied vis-à-vis practically all countries whosecurrencies were quoted. New rates, applicable to the territories in North Africa,were, however, fixed for the Italian and French curren cies. For Cyrenaica andTrip olitan ia the rate was fixed at Lit. 480 to the pound ste rling , in line withthat which had previously been adopted fo r Eritrea and Ab yss inia, while forSicily a rate of Lit. 400 to the pound s terling was an nounced in July 1943togethe r with a rate of Lit. 100 = $ 1. For French N orth Af rica the fir st ratesto be applied were F r.fcs 300 to th e p ound and F r.fcs 75 to the dollar b ut,in response to representations from various quarters, these rates were changed



- 45 -

in F ebruary 1943 to Fr.fcs 200 and Fr.fcs 50 respectively. Thes e new ratesrepresent a depreciation of the French fran c by abou t 12 per cent, in relation

to th e o fficial rates of Fr.fcs 176.625 t o the poun d a nd F r.fcs 43.80 tothe dollar, established in the autumn of 1939. Since, however, the rate ofFr.fcs 176.625 has been maintained in the territories of "F ree Fra nce " underagreements with the British authorities, the result is that two rates are nowquote d in the French overseas te rrito ries : one rate, based on Fr.fcs 200 tothe pound, applicable mainly to North Africa and to French West Africa,and the other rate, based on Fr.fcs 176.625 to the pou nd, applicable toFrench Equatorial Africa, Syria, Lebanon, Madagascar, French Cameroons,New Caledonia and other South Sea possessions as well as to French India.

In September 1942 the Brazilian m ilreis and the Uruguayan peso wereadded to the l ist of "specified" currencies which must be surrendered to the

Treasury if held by any resident in the United Kingdom — indicating a sharpreversal in the position of these two currencies, which had previously beenconspicuous by their weak tendency.

(n relation to the U n it e d S ta te s the maintenance of a stable ster ling-dollar rate has been much facilitated by the lend-lease arrangements, underwhich war deliveries are precluded from exerting an influence on the exchanges.Although the American foreign exchange market as such is not subject tocontrol, this market is affected, on the one hand, by the exchange regulationsin force in other countries and, on the other hand, by the Foreign FundsControl applicable to more than $7 mil l iard of foreign-owned assets held in the

United States and to the transactions of more than 35 countries, including thewhole of Continental Europe (except Turkey), China, Japan and the countriesoccupied by Japan. The "frozen" assets consist not only of bank deposits,gold and securities but also of a great number of business enterprises, aswell as merchandise, patents and other forms of property; and the controlcovers all financial and commercial transactions in which the countries affectedor their nationals have an interest, whether such transactions are purelydomestic or come under the heading of foreign exchange or foreign trade.After the United States became involved in the war, the Control was madean agency of econom ic wa rfare and its objectives and powers were definedaccordingly. The control is carried out by an organisation created withinthe Treasury Department, major policy decisions being frequently considered

by inter-departmental groups . Much of the field work concerned with licencesto effect transactions subject to the control has been delegated to theFederal Reserve Banks, which in this respect act as agents of the TreasuryDepartment.

To provide the information necessary for the administration of the control,a census of al l foreign property subject to the jurisdiction of the UnitedStates was taken by the Treasury Department. The total value of the propertyreported in the censu s was in excess of $13 millia rd, and more than $7 milliardof this total was reported as the property of blocked countries or their nationals.



— 46 —

Property reported as owned or held for Latin American Republics or theirnationals amounted to more than $1.2 mil l iard. The followin g table shows

property holdings classified according to the principal types of property.

P r i n c i p a l F o r e i g n - o w n e d A s s e t s in t h e U n i t e d S t a t e sin the middle of 19410).

Groups of countries

Enemy countriesEnemy-occupied countries (

2) . . . .

Other blocked countries (3)

Other American republicsAll other countries

Total . . . .

Goldear-

marked

Depositsand otherbankingassets

Stocks ofregistered

bondsDirectinvest-ments

Otherinvest-ments

Total

in millions of dollars24

1,269848322

4

2,467

1601,225

975605

1,115

4,080

50625540225

1,690

3,160

10536512020

1,340

1,950

12550020050

650

1,525

4643,9842,6831,2224,799

13,152

(') Table reproduced from a memorandum published by theTreasury Department, Foreign Funds Control, In June 1942.(2) Including Finland and the part of France not occupied at that time. (3) Including China.

Apart from the "war debts" of 1917-19, the foreign assets owned bythe United States at the end of 1940 were estimated by the Departmentof Com merce to be slightly over $11 milliard . If only those cou ntries arecounted which are subject to the Foreign Funds Control, the claims of theUnited States at the end of 1940 would be as follows*:

Direct business investments $1,051 millionDollar bonds 613 „Short-term banking funds 80 ,,

Total . . . . 1,744 million

In the course of 1942 a number of stabilisation agreements were concludedby the United States, with the granting of credits through the ExchangeStab ilization F und. Under an agreement con cluded in July 1942 the cred itline of $60 million w hich the Brazilian Gov ernment had already obtained in1937 was increased to $100 m illion , for the purpos e of s tabilisin g the value ofthe m ilreis. In the same month an agreement was concluded with the CubanGovernment, under which the latter became entitled to acquire gold on creditin the United States, the credits to be repaid within twenty days and in nocase to exceed $5 m illion . By the use of this fa cility the Cuban monetaryauthorities would be able, if they so wished, to acquire gold in advance ofactual paym ents in dollars due to the m. Earlier in the year the Ecuador

Governm ent received a credit up to $5 million fro m the U .S. Stab ilization F und,to enable it to stabilise the rate between the sucre and the dollar; and, underan agreement with Iceland, the Stabil ization Fund was authorised to provideup to $2 million to en sure a stable relation ship between the Icelandic crow nand the dollar. Arrange men ts were also made to p rolong , to the end ofJune 1943, the agreement concluded with the Chungk ing Government in A pri l1941, under which the Stabilization Fund extended credits up to an amountof $50 million in order to secure the value of the yuan.

* From an article by Judd Polk on the "Future of Frozen Funds" in the American Economic Revew for June 1942.



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Loans to several Latin American countries were -< g ranted in the courseof the year by the Export-Import Bank and some countries were also recipients

of lend-lease assistan ce. The expend iture of large sum s by the Un ited Statesand other gove rnme nts, in payment for materials and .services required inconnection with the war, also helped to provide Latin American countrieswith substantial dollar balances, only a part of which was, as a rule, usedto pay for imported go ods. Some of the countries received, in addition, anInflux of private refugee capital, which l ikewise added to the foreign resourcesin the hands of their central banks and Treasuries.

In the course of 1942 the gold reserves of B ra z il increased from theequivalent of U.S. $70 to 115 million (as comp ared with $34 million in Ju ly1939). The quotations of the Brazilian currency in New York showed increasing

firm nes s up t o the end of the year, the average free rate being 5.1427 centsin 1942 as aga inst 5.0705 cen ts in the pre vious year. Du ring the early partof 1943, however, the strong tendency was not maintained; in February theBank of Brazil was vested with fresh powers of monetary control and tooksteps to prohibit imports and exports of Brazilian currency as well as un-authorised sales and holdings of foreign exchange. On 1st November 1942 theofficial designation of the unit of the Brazilian currency was changed from milreis(divided into 1,000 reis) to cru zeiro (divided into 100 centa vos). In September1942 the exchange rate in the "S pec ial Ac co un t" w ith the United Kingdom wasaltered from M ilreis 78.570-79.570 to 83.648 = £1 . For transactio ns other th anthose fall ing under this account, the existing regulations provide that 30 per cent,of the value of sig ht export bills must be sold by the exporters at the offic ial

rates of Cr. 16.50 for the dollar and Cr. 66.49% for the pound, the remaining70 per cent, being sold at the free market rates of Cr. 19.47 for the dollar andCr. 78.46 7/i6 for the pound. The buying rates for importers in the free marketare slightly h igher, viz. Cr. 19.63 for the dollar and Cr. 79.59 9/i 6 for the pound.In addition, there is a special free market for cheques and mail transfers inU.S. cu rrency w ith rates of C r. 19.70-20.50 for the dollar, the purchase ofdollars from the banks being subject to a 5 per cent, exchange tax.

In Venezuela the different sell ing rates of dollars to importers wereunified in May 1942. Before this unification there were two different rates:the o fficial rate at Bs. 3.35 = $1 , applicab le to payments fo r es sential impo rtsduly au thorise d in ad vance, and the free rate, varying between Bs . 3.42 and

4.00 for the dollar, applicable to payments for other imp orts. The new uniformrate was fixed at Bs. 3.35, involving a sub stan tial appreciation of the bo livarfor a great number of transactions. Different rates, involving, in some cases,considerable subsidies, are still applied to the sales of foreign exchange byexporters; in view of the rise in the foreign price for coffee and cocoa, thepurchase rates for export bi l ls for these commodities were, however, some-what reduced in 1942. While the current budget is usually balanced witha su rplu s, the governme nt arrang ed in 1942 for loans am oun ting to $20 millionfrom the Export-Import Bank to be used for development works. B o li v ia alsoobtained loans from the Export-Import Bank and, as a result of the great



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foreign demand for some of its export products, especially tin, the foreignreserves increased substantially and the official rate of exchange was lowered

in February 1943 from Bs. 46 to Bs. 42 for $1 . Than ks to an improveme nt intheir exchange posi t ions, Mexico and Paraguay were able to resume a part ia lservice of their foreign debts. In Nicaragua the Exchange Commission as anautonom ous institution w as abolished in the summer of 1942 and its functionsentrusted to the central bank. Similarly in Chile the powers of the ExchangeControl Commission were transferred to the central bank from the end of 1942.

The exchange posi t ion of the A rg e n t in e has been influenced by anexport surplus of Pesos 702 million in 1942 as compared with 363 million inthe preceding year, and also by a continued inflow of capital from abroad.No ch ang e has been m ade in the o fficia l buying rate of Pesos 335.82 = $100(Pesos 13.50 = £1), applicable to abou t 90 per cen t, of the cou ntry 's expo rts,

or in the preferential s elling rate of P esos 373.13, applicable to governm entpayments and imports of certain essential com mo dities . But in Ap ril 1943 thebuying rate applicable to other exports than those classified as "regular" wasreduced from Pesos 421.82 to 397.02, corres pon ding to a decline in the freemarket rate from Pesos 424.75 to 398 (with a corresponding reduction fromPesos 16.96 to 15.96 = £1). Financial p ayments contin ued to be effected at theold rates, a claim by British holders of Argentine railway shares for remittancesat a better rate than Pesos 16 = £1 being refuse d.

In consequence of decisions reached at the Pan-American Conferencein Rio de Janeiro in 1942, steps had been taken by the Argentine Governmentto control capital movements in relation to other than American countries.

In A pr il 1943 the con trol thus introduc ed was extended to all coun tries inorder to protect the Argentine market from the harmful repercussions of anexcessive inflow of funds from abroad. Any import of capital would in futurerequire a permit, which would be granted only if the import in questionserved productive purpose s, it being held that the capacity of the Argen tinemarket to absorb unproductive refugee funds had already reached its limit.

The main purpose of the monetary policy of Japan since the beginningof 1942 has been the establishment of a yen area comprising the whole ofthe Fa r E as t. Different aspects of this policy have been (i) the monetaryunification of the occupied parts of China, involving a gradual elimination ofthe military yen and a strengthening of the position held by the Nanking yuanand the Peiping yuan; (i i) the establishment of the South Seas DevelopmentBank, provided with the privilege of note issue (of which it began to makeuse on 1st Ap ril 1943); (iii) the co nfirm ation of the yen as the b asic currencyfor all the other currencies in the area.

The main instrument for the extension of the monetary power of Japanhas been th e gum pyo, i. e. the military currency issued by the Japaneseoccupying authorities. While in China the mil i tary yen had from the beginningthe same value as the yen of the mother country, elsewhere the gumpyo was,in each area, given the same value as the local currency, with which it was



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thus made interchangeable; only later was it to be brought into a fixed relationwith the yen. A n e xception was m ade, however, in Hong Kon g where, on

account of the close economic relations with China, the military yen was alreadyintroduced as a new currency on 5th January 1942, but the Hong Kong dollar wasallowed for the time being to continue in circulation. The rate of exchange betweenthe military yen and the Hong Kong dollar was originally fixed at Hong Kong$2 = Military Yen 1, but was soon altered to Hong Kong $4 = M ilitary Yen 1.By the adoption of the latter rate the Hong Kong dollar was subjected to adepreciation of more than 75 per cent, (the value of the military yen beingtaken as fully equal to that of the Japanese yen itself). In the spring of 1942all holders of Hong Kong dollars were told to exchange them for military yenbefore 31st May 1943; all liab ilities in H ong Kong dolla rs w ou ld be repayablein military yen, including bank deposits, which were to be converted intomilitary ye n; and from 1st June the Hong Kong dollar ceased to be legal

tender. To give supp ort to these measures the Nanking Government prohib itedwithin its jurisdiction the holding and use of Hong Kong dollars, English poundsand U.S. dollars (the Japanese military autho rities in China had already inJuly 1942 prohibited all transactions in these currencies).

In the other occupied areas the gumpyo was, as mentioned above, atfirst made equivalent to the respective local currency. But, in settlemen tswith Japan, the gumpyo was, without exception, put on a par with theJapanese yen, which involved an indirect attachment of all the local currenciesto the yen at a rate of 1:1. Apart from the adoption of the decimal system forthe subdivision of the Burmese monetary unit, there have so far been no formalcurrency changes in the different areas, but the de facto introduction of a new

parity with the yen has amounted to a depreciation of the local currencies:The rupee in Burma was depreciated by 22 per cent.The baht in Thailand by 37 „ ,,The Straits dollar in British Malaya, North Borneo and Sarawak . . . by 50 „ „The peso in the Philippines by 53 „ „The guilder in the Dutch East Indies by 56 „ ,,

The Thailand baht was defined in February 1942 as equal to 0.32639 grammesof fine gold (instead of being linked to sterling at the rate of Bahts 11 asprevio usly). By thi s defin ition Bahts 100 were equal to Yen 155.70, but alreadyin April 1942 the link with gold was broken and the baht was given the samevalue as the Japanese yen . In January 1943 it was agreed tha t, in relationto Japan, F re nc h In d o - C hi na would accept "spec ia l ye n" ins tead of , as

previously, gold or certain foreign currencies, in settlement of balances arisingfrom commercial payments, expenses for stationing Japanese forces and allpayments on service account (the new mode of settlement being applied alsoto the various areas under Japanese domination). Simultaneously the relationshipof the piastre to the yen was slightly altered from Yen 98.12% to Yen 97.60 =Piastres 100. The new rate, calculated via the last yen-sterling quotation of1s.2d. = Yen 1, corresponds to a rate of Fr.fcs 175.64 = £1. The piastre beingthus equal to Ye n 0.976, the currency unit has become practically the same forall the southern Pacific areas dominated by Japan; the new relationship hasbeen so fixed as to give a high purchasing power to the Japanese yen.



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Of the four currencies circulating in C hi na p ro p e r, three — themilitary yen, the Nanking yuan and the Peiping yuan — are attached to the

Japanese yen, and the fourth — the Chungking yuan — is the currency of th eChungk ing G overnment. In these circumstances of great diversity the monetarydevelopments present a double aspect: within each area the authorities haveto cope with the problem of maintaining some measure of currency order inspite of the strain and stress of a prolonged war; at the same time, betweenthe currencies attached to the yen, on the one hand, and the Chungking yuan,on the other, they are pursuing a kind of monetary warfare parallel with thearmed struggle.

A slight lowering of the official exchange rates for sterl ing and theU.S. dollar was announced from C h u n g k in g in July 1942. In place of therates of 3 6/32d. for Yuan 1 and $59/s2 for Yuan 100 the central bank quote d

new selling rates of 3d. and $5 respectively; the fixing of these quotationswould seem to be a sign that the Chinese Currency Stabil isation Fund,backed by the British and United States Governm ents, is continuing to fun ction .According to information given by the Finance Minister, the circulation of notesexpressed in Chun gking yua n, whic h in Ju ne 1937, i. e. at the be ginning ofthe so-called China incident, stood at Yuan 1.6 milliard, had attained an amountof Yuan 22% milliard by the autum n of 1942, or abo ut 8% milliard more th ana year earlier. At the rate of $5 for 100 Chungking yuan, the latter currencyretains only 17 per cen t, of the value it had in the su mm er of 1937.

Among the Japanese-sponsored currencies, a determined effort has beenmade to bring support to the N an ki ng yu an — the currency issued by the

Central Reserve Bank in Nan king, opened on 6th January 1941. The notecirculation of this bank, which by the end of its first business year hadreached abou t Yuan 300 m illion , sto od at ab out Yuan 1,000 million in the earlysumm er of 1942 and reached Y uan 1,700 million in the a utumn of the sameyear. Th is increase is at least partially conne cted with the measures takento oust the Chungking yuan from the areas under the Nanking Government.

Originally, the Nanking yuan was given the same value as the Chungkingyuan but on 31st March 1942 a rate of Chungking Yuan 100 = Nanking Yuan 77was fixed, the Nanking Government announcing at the same time that thelink between the two currencies was officially broken. Tw o mo nths afterwardssteps were taken in specified provinces (including Shanghai) for the withdrawal

of Chungking yuan and their conversion into Nanking yuan at a rate of twoto one . To avoid a large expansion in the note circulatio n of the C entralReserve Bank in Nanking it was decided to issue so-called "stabilisationbonds" in exchange for the large amounts of Chungking notes held by thebanks, while the public were to receive Nanking notes in exchange for suchnotes. Gradually, the area in which the Nanking yuan was to be the solecurrency was extended: after the first stage, comprising the important districtsof Nanking and Shanghai, the Nanking yuan was introduced in the provincesof Kiangsu, Chekiang and Anhwei; a further move aimed at i ts introductionin the province of Hupeh, with Hankow as the leading city. The Finance



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Minister of the Nanking Government announced in the autumn of 1942 thatall Chungking notes still in private hands on 1st December 1942 in the provinces

of Kiangsu, Chekiang and Anhwei would not only be banned and debarredfrom circulation but the carrying or hoarding of such notes would be severelypunished. This order also applied to the cities of Nanking and Shanghai. Thepopu lation in these various distric ts were at the same time offered a lastopportunity to exchange Chungking for Nanking notes. Continuing the samepolicy, the Nanking Government in January 1943 announced similar measuresapplicable to the Hankow area and such districts in Kwangtung as werecontrolled by the said government (in particular the city of Canton ). The timelimit for the exchange of Chungking notes for Nanking notes was 14th February1943 in the case of Ha nkow, but as early as 25th January for the Cantondistricts.

The Central Reserve Bank in Nanking has received support from theJapanese auth orities in several ways. In July 1942 the Japanese G overnm entgranted the Nanking Government, through the Bank of Japan, a five-yearbook credit of Yen 100 millio n, carrying interest at 3% per cen t., fo r thepurpose of forming a reserve in yen as cover for the notes issued by theCentral Reserve Bank. A t the same time it was reported that credits grantedby the Japanese to the Nanking Government in June 1941 amounted toYen 300 m illion . In this conn ection it may be mentioned tha t the CentralReserve Bank in Nanking has transferred the execution of ordinary bankingbusiness to the Bank of China and the Bank of Communications, these twoinstitutions having dissociated themselves from the Chungking Governmentand become private banks under the control of the Nanking Government.

The Central Reserve Bank in Nanking has announced that from the begin-ning of 1943 it will confine its own operations to those of a government bankof issue.

On 9th March 1942 the rate of the Nanking yuan in relation to the militaryyen was fixed at 5 : 1 , but on 22nd June of the same year the rate was alteredto 5.55 : 1 (or M ilitary Yen 18 = Nanking Yuan 100), involving a further depre-ciation of the Nanking yuan by 10 per cent. Since com mod ity price s, howe ver,were much higher in Nanking China at the official rate of exchange than inJapan, it was rumou red th at the relation between the yen and the Nankingyuan wou ld be radically revised. To allay the fears which had thus a risen, theJapanese Economic Adviser to the Nanking Government explained, on a visit

to T okio in March 1943, that , on the one hand, measures would be taken tocounteract the price rise in Nanking China but, on the other hand, the presentrelation between the military yen and the Nanking yuan would be maintained.The price discrepancy, however, seems to be considerable: in January 1943the wholesale price index in Tokio stood at 249, while in Shanghai theindex had attained 3,518 (on the basis of the level obtaining before the out-break of the Sino-Japanese con fl ict). A price equalisation system which hadbeen introdu ced before 1939 for im ports and exports , in order t o bridge overthe difference between Japanese and Chinese commodity prices, was super-seded in September 1941 by a system providing for "special yen" rates for



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a number of goods, the rates varying, according to the type of goods, betweenYen 18, 10 and even 3 = Yuan 100. This system was discontinue d in the spring

of 1943, whe n the exchange rate of Yen 18 = Yuan 100 was fixed f or all c om -modities. Its place has been taken by a Barter Trading Corporation, throughwhich losses ensuing from price differences between Japan and China arecompensated (in virtue of a law on Trade Equalisation Special Accounts).During the current fiscal year the new corporation may obtain from the Treasuryup to Yen 750 million to compensate for losses from price differen ces; inaddit ion, it pays into the Trade Equalisation Special Account the profits onits own barter deals.

At the end of March 1943 it was announced by the Japanese military andcivil authorities in China that no further issues of military yen would be madein the area under the control of the Nanking Government, nor were any new

payments, deposits etc. to be made in military yen, but Nanking yuan wereto be employed to the greatest possible degree. The military yen would,however, remain in circulation and there was no immediate intention ofconverting liabilit ies in that currency into Nanking yuan. The process of with-drawal of the military yen would be gradual; no change would be made inHong Kong, where the military yen was to remain the basic currency.

The so-called Tientsin or Peiping yuan issued by the Fe de ra l Re se rveBa nk o f N or th C h in a , with head office in Peiping, was also unaffected

by the announcement relating to the military yen.Fe de ra l Re se rve Ban k The note c irculat ion of this bank, which began

of N o rt h C h in a : operations in March 1938, has developed as shownNo te C i r c u l a t i o n . in t he t ab le .

The Peiping yuan is theoretically linked to theJapanese yen at the rate of 1: 1 . It has, however,been influenced by the movements of the otherChinese currencies . Up to the spring of 1943 afree market rate was quoted between the Peipingand the Nanking yua n, but on 1st Ap ril 1943 anofficial rate was fixed of Nanking Yuan 3.8 =

Peiping Yuan 1 (a cross rate w hich incidentally does not tally with theofficial rates of the two currencies in relation to the yen). The recentgrowth of the Federal Reserve Bank of North China reflects, in particular,the taking-over of certain foreign banking institutions which were liquidated

after the outbreak of war between Japan and the Anglo-Saxon countries.

By recent measures the network of fixed exchange rates between thedifferent parts of the yen bloc has been well-nigh completed. The rates thusin force do not correspond, however, to the relative purchasing power of thedifferent currencies; the arrangements which have been introduced for priceequalisation entailed, indeed, an open admission of substantial price discre-pancies existing between the different areas. In this respect, however, con di-tions in the Far East do not differ materially from developments in many otherparts of the wo rld. A n example of the increased control exercised by official

End of month

1938 December1939194019411942

Millionsof yuan

162458715ÌTOD

1,593



agencies in the field of foreign exchanges is provided by the transfer to theBank of Japan, in the spring of 1943, of the foreign exchange business pre-

viously carried out by the Yokoham a Specie Bank. In return the latter bankhas been able to develop its banking business rapidly throughout the southernterritories , the Phil ippines, Malaya, Java and Burma . In these various areasthe currency units, as mentioned above, are equal to the Japanese yen, butconversions of these foreign currencies into the yen of the home countryare permitted only in exceptional cases and to l imited amounts, a rule whichalso applies to the gumpyo circulating in these areas.

In the discussions of fu tu re ex ch an ge po l ic y i t is possible to discerntwo distinct — in some ways contradictory — tendencies, both arising out ofthe experience gained d uring the interval between the two wa rs. First of

all, there is a profound realisation of the disadvantages connected with over-valued and undervalued currencies and, therefore, gr ea t e m p h a si s is la ido n th e n e e d o f b r i n g i n g e x ch a n g e ra te s i n to l i n e w i t h t h e u n d e r -l y i n g e co n o m i c c o n d i t i o n s i n t h e r e s p e c t i v e co u n t r i e s (a r es to ra tio nof "purchasing power parities" being a somewhat simplified version of theprinciple involved). Countries have found by dire experience how harmfulit is to cling to rates which make a currency overvalued, since this upsetstheir export trade, endangers the current account of the balance of pay-ments, and, what is often more serious, exerts a downward pressure onprices, while costs remain high. To remedy the situation, some countries,of which Germany was the chief example, decided in 1931 and the followingyears to submit their national economies to a comprehensive control, offsetting

the disequil ibrium on foreign account by a system of export subsidies andimport charges and stimulating domestic activities by extensive state in-vestm ents. Elsewhere, the usual result of an uncorrec ted overvaluation waswidespread unemployment, with much suffering and grave dangers froma s ocial point of view, while the burden of public and private debts wasaggravated by a contraction of the national income.

Undervaluation of a currency, on the other hand, might appear — for atime at least — to bring some adv antages, as a means of ensu ring remunerativeprices (i . e. prices well above costs ) both in export trade and in dom esticactivities, including agriculture (the undervaluation acting as a form of protec-tion combined with export premium s). But this is not the end of the story.

Countries with undervalued currencies have usually found the terms of tradeaffected to their disadvantage, foreign firms and individuals being able to buygoods and services from them too cheaply. Should reliance upon undervalua-tion become a habit (as the use of artificial stimuli is apt to do) monetarysecurity would soon be impaired, with consequences which would not beimmediately revealed in all the ir for ce. Labour c ircles in a number of cou ntrieswould seem to have realised more and more that, without monetary stabil i ty,efforts towards social improvement may soon be null i fied, the real value ofcontractual wage rates and social benefits being diminished by rising prices.In relation to foreign markets, the advantages which at first seemed promising



have often proved short -live d: since every undervaluation subjects other cou n-tries in some degree to the difficulties of overvaluation, these countries maybe expected to take steps to protect themselves by special duties and quanti-tative restrictions, or may themselves enter the depreciation race and tryperhaps to go one better. The net result is a restriction of trade all round,curtailing the openings for useful employment, and leading ultimately to areduction in the standard of l iving.

The conclusion drawn from all this has been that speedy adjustment ofexchanges must indeed be a desideratum for the post-war world, overvaluationand undervaluation of currencies being harmful to e conom ic progress and themaintenance of peaceful relations.

The world has, however, also learnt to value ex ch a ng e s t a b i l i t y ,having found by bitter experience how disturbing a period of instability can

be to international trade, and especially to foreign capital investments involvingpayments to be spread over a number of years. When there is no certaintythat the exchanges will remain stab le, the individual produce r or trader hasnot only to study conditions on his own market but, since the result of anexchange transaction will often make or mar the profitability of a businessdeal, he must try to forecast the futu re tren d of the exchanges — frequentlywith no better result than a sheer loss of time . (Covering forward might atbest relieve h is anxieties w ith regard to payments already contracte d for ashort time ahead but not with regard to the general effect of currencychanges on the trend of the market).

The wider aspects of instabil i ty may, however, be more serious: it is

not easy to limit adjustments to those cases which really call for them or torestrict the degree of adjustment to what is necessary to constitute a newequil ibrium. In departing from an established rate, there is often a great tempta-tion to try to secure some com mercial advantage from a change which cannever be wholly agree able; but, whenever th at happ ens, the fatal spiral ofcompetitive depreciation is easily set in motion; and the ultimate effects ofsuch a development may not be confined to the economic s phere. Sincemodern monetary system s are mainly based on c redit, i .e . on a beliefthat the system itself will remain stable, a prolonged period of instabilityundermining that belief has often been followed by a period in which an over-careful — not to say retrograde — credit policy has been pursued in orderto restore lost confidence (indeed, the monetary history of both France and

Germany provide examples of such a sequence of eve nts). In view of allthese dangers and difficulties, maintenance of exchange stability appearsalmost an end in itself, well worth attaining even at the cost of someimmediate sacrifices.

Experience thus urges, on the one hand, the imperative nee d of a d -ju st m e nt and, on the o ther , the ad va nt ag es o f s t a b i l i t y . Th is is not anew discovery, indeed, an attempt to reconcile these two apparently confl ictingdes ide ra ta was made in the Tr ipa r t i te Agreement o f Sep tember 1936 :exchange adjustments were not to be ruled out — the agreement itself was



— 55 —

concluded for the immediate purpose of facil i tating an alignment of theFrench franc with the dollar and sterl ing — but the adjustments were to be

kept within proper l imits, the parties to the agreement trusting that no countrywould "attempt to obtain an unreasonable exchange advantage and therebyhamper the effort to restore more stable economic re latio ns" . The hopesthat the agreement would lay the foundation for other necessary adjustments,and thus for a world-wide exchange stabil i ty based on appropriate parities,were, however, disap poin ted; with in three years the exchange rates betweenthe three original s ignatories had all been subjected to major mod ifications.

When this war is over, similar problems will present themselves and newattem pts will be made to find a reasonable way out of the difficu lties . Each ofthe two Anglo-Saxon currency plans published in the spring of 1943 set outto provide for reasonable exchange adjustments and safeguards against un-necessary departures from the rule of exchange stability. From the experienceòf the trou ble d years 1919 to 1939 it seems p ossible to extract c e r ta ingeneral pr inciples which may command a fair measure of agreement forthe future.

1. There can be l i tt le di fference of opinion as to th e n e ed , w h ic hw i l l b e c o m e m o r e e v i d e n t a f t e r t h e w a r , f o r e x c h a n g e a d j u s t m e n t sa s a r e s u l t o f u n e q u a l i n c re a se s i n co s ts a n d p r i ce s in d i f f e r e n tc o u n tr ie s . For the t ime being off ic ia l quotations are maintained by a com-plicated system of trade and exchange control (often tempered, however, bypall iatives such as premiums and subsidies designed to span gaps whichwou ld otherwise prove unbridgea ble). Prestige in currency matters will probably

play less of a rôle in the future than it did after the last war, since thequestion of returning to old time-honoured parities wil l rarely arise. But withinthe different countries and in their relations with one another it will probablybe impossible to rule out entirely those clashes of interest which often makeit difficult to arrive at agreed solutions and to work out an objective formulacapable of universal application. In fixing relative exchange rates, attentionmust no doubt first be paid to the factors most resistant to change, namelythe level of wage rates, agricultural prices, and the volume of domestic andforeign indebtedness. The great difficulty wil l be to find a relationship whichwill not only answer immediate requirements but will also prove tenable inthe years to come.

2. On one point agreement in principle may perhaps be taken for granted;a ll w il l con cu r in co n d e m n i n g cu r re n c y m a n i p u l a t i o n a s a n i n s t r u m e n to f c o m m e r c i a l p o l i c y a n d a f o r t i o r i c o m p e t i t i o n i n d e p r e c i a t i o n(or appreciation). While it may be accepted that exchange rates should beadjusted to fit relative cost and price levels and the volume of indebtedness,a country which resorts to manipulation would provoke new disequil ibria; and,although such disequil ibria might procure the country in question sometemporary commercial advantage, they would for that very reason expose othercountries to corresponding disadvantages and tend to provoke retaliatorymeasures.



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The dist inct ion between "adjustment" and "manipulat ion" is not easy toestablish either in theory or in practice; but the line of argument put forwardto support a change in the rate may possibly reveal the intention of thoserespon sible for the decision . Perhaps the be st practical test is willingn ess orreluctance to accept some immediate sacrifice as a contribution to generalexchange stability. According to the Keynes Plan, the main advantage of amonetary reserve is "to allow time and method for necessary adjustments anda comfortable safeguard behind which the unforeseen and the unexpected canbe faced with equanimity". Thus, this Plan (and perhaps this is even truerof the W hite Plan) presupp oses, as part of the monetary machinery to beused in the future, a willingness to rectify an internal disequilibrium.

In the twelfth Annual Report of this Bank the opinion was expressedthat major maladjustments would probably have to be corrected by alterationsin exchange rates; reductions of wages by anything like 20 or 30 per cent,

might expose the social fabric to too great a strain and too heavily increasethe burden of pub lic and private indebtednes s. If, on the other hand , thenecessary reduction of co sts we re limited to som ething like 10 per cent., itmight well be possible to re-establish equilibrium by a policy of internal costadjustm ent. The monetary authorities alone, however, have no longer themeans of giving full effect to such a policy, and it was therefore suggestedthat a solution might be found by associating labour organisations in theresponsibility for monetary decisions and in that way arriving at a method ofcost adjustmen t with a minimu m of fr ictio n and waste of resource s. If it weremade a rule that minor disequilibria should be adjusted by changes in priceand cost levels, an important step would have been taken towards the reali-sation of general exchange stability.

3. Even in cases where a mod ification of exchange rates is unavoidable,i t wil l usually prove essential to success to co m b in e such a st ep w it ha d i re c t a d j us tm en t o f c os ts a nd pr ice s . F ir st o f a l l , such a com-bination would ensure a less extensive modification in the rate of exchangethan would otherwise be necessary; the r isk of establishing a new disequi-librium by too great a swing in the exchange rate would thus be materiallydim inishe d. The adjustment of a currency to its proper equilibrium rate doesnot really produce any harmful effects for other countries but, since it eliminatesan obstacle to trade, is in the interests of all, provided, of course, that altera-tions in the rates do not become so frequent as to destroy all sense ofstability. If exchange adjustm ents were to be regarded as part of a pe rmissible

policy to be applied whenever a currency found itself in an unbalanced position,and if such adjustments involved no loss of monetary prestige, it wouldprobably be impossible to prevent their use for improper purposes; the attitudewhich the world in general adopts towards currency changes most cer-tainly influences the amount of effort which each individual country maybe willing to expend in order to rectify its position by other means thanmodifying its exchange rates.

Secondly, by the combination referred to above the problem of a traderevival would be attacked from both the financial and the economic angle; and



— 57 —

this would mean, inter alia, that the business world could not sit back and waitfor the results of some official action but each individual firm would be ex-pected to take the measures necessary to put its own affairs in order. Experiencehas proved that a double attack of this kind, involving an intensification ofindividual efforts, offers the best chance of success (see Introduction, pages 34-35).

Finally, a policy of combining cost adjustments with a modification ofexchange rates probably holds out the greatest hope of restoring confidencein the currency, since it gives reason to believe that the modification of theexchange rate is definitive, being part of a comprehensive plan to secure alasting eq uilibrium . Not every mo dification of exchange rates has in the pastproduced the results hoped for; experience has proved that no automaticresults can be expected but that monetary reforms are successful only ifcertain condit ions are fulf i l led, foremost among them being a strengtheningof p ublic and private cred it. If the ch oice of the new rate appears to bereasonable; if costs are not too high for the level of prices and the budgetis properly drawn up; and if the new arrangements consequently give theimpression of being more than a mere makeshift, the credit position ofboth the government and the business world will be sure to improve. Inthis way a firm basis will be laid for a more confident outlook, soon to bereflected in the rate of investment and the turnover of trade. Wherever,in the pa st, the authorities allowed important problems c once rning the budgetor th e cost and price structure to rem ain un solved, not even a very con -siderable depreciation was able to produce the desired recovery.

4. A particularly nasty kind of depreciation overtook a number of countriesa fte r 1918: i n a d v a n c e o f a c t u a l i n t e r n a l i n f l a t i o n a r y d e v e l o p m e n t s ,

t h e e x c h a n g e r a t e s o f a n u m b e r o f c o u n t r i e s w e r e a f f e c t e d inresponse to heavy sales, especially of ba nk-notes, on foreign m arkets. It didnot take long for the p recipitous fall in exchange values to intensify therise in domestic prices: for instance, during the wild post-war inflation inGermany, prices fo r vegetables in small country tow ns came to be raiseddaily and even several times a day, to c onform with the latest Markquo tation for the dollar as received from Am sterdam or Zu rich . If thereis no com plete collapse of the system now in force , a continu ation ofwartime controls during the critical period is likely to rule out this typeof price-raising influence at the end of the present war. But a continuedsuppres sion of the free foreign exchange market will then prevent the ex-changes from findin g the ir own level, and this is not wholly satisfactory either.In the period immediately after the war, market influences, if allowed to makethemselves freely felt, would be so formidable that control would appear tobe the lesser evil. Nevertheless, it would be dangerous to believe that anyfundamental disequilibrium had been cured by attending to what is after allonly a symptom — the weak tendency of the currency. A n d , if an unbalancedposition were to remain uncorrected, preventing a relaxation of the restrictionsimposed, the whole system of control would act as a brake upon thosedynamic forces whose freedom to operate probably provides the best chanceof restoring business activity and ensuring a healthy demand for labour.



58

5. Ano the r danger may a rise f rom the im pe r fe c t sy n ch ro n is a t io no f t h e s ta b i l i sa t i o n m e a su re s i n d i f f e re n t c o u n t r i e s . In t he p er io d1920-29 the leading countries did not stabilise their currencies at even approximatelythe same time, and the late-comers often adopted new rates of exchange whichproved to be out of keeping with the conditions already firmly established inthe other cou ntries. Ag ain , after 1931, when one country after the otherdeparted from the parities which they had adopted in the previous decade,there was not much coordination between the currency changes of theimportant cou ntries: England took the step in 1931, Japan l ikewise, the UnitedStates in 1933, France and Italy (with the remaining countries of the goldbloc) in 1936, while Germany continued to apply the old gold parity as abasis for the official rate of the Reichsmark in its different clearing andpayments agreem ents. It is to be hoped that when measures of monetaryreconstruction are undertaken after the present war they will be more nearly

simultaneous, whether this be the result of concerted action or the outcomeof parallel endeavours by individual cou ntrie s. There can be little doubtthat concerted action may help to restore a fair measure of monetary orderat an earlier date than would otherwise be poss ible. Many coun tries willhave insufficien t reserves in gold and foreign exchange to pay for theimport of essential raw materials, foodstuffs, machinery and manufacturedgoods; and these countr ies wi l l , moreover, need to strengthen their monetaryreserves in order to be able to relax their wartime restrictions on exchangeand foreign trade at an early date. If the countries themselves were to

Exchange Rates in Switzerland — in percentages of par.

130

1914- 1920 1921 1922 1923



— 59 —

attempt, by some ingenious technical device, to mobilise the amounts offoreign exchange which they wo uld need, they might easily expose their

monetary mechanism to an excessive strain. Whatever ou tside a ssistancebecomes available, it is almost an essential condition for success that thisshou ld be given as part of a comprehe nsive plan aiming at financialand economic equilibrium in the country benefiting from the aid — at least,that is one of the main conclusions which may be drawn from the recon-struction work after the last war.

6. Whatever policy th e la rg er c o u n tr ie s may adopt to organisefinancial assistance on an international basis, there can be litt le doubt thato n e o f t h e g r e a t e s t s e r v i c e s w h i c h t h e y c o u l d r e n d e r th e p o s t -w a r w o r l d w o u l d b e t h e s p e e d y e s t a b l i s h m e n t o f s t a b l e c o n d i -t i o n s w i t h i n t h e i r o w n e c o n o m i e s a n d i n t h e i r r e l a t i o n s w i t h

on e a n o th e r; a lack of balance in their exchange posit ions or a fai lure ontheir part to bring about a revival in business will not leave other countriesunaffected. It is not the interests of the larger countries which are least servedby a restoration of monetary stability. A smaller country will usually find iteasier than a larger one to derive a stimulus from currency depreciation. Thesmaller country can often assume that prices on world markets will be litt leaffected by an alteration in its own exchange rates and that the larger countrieswill not alter their commercial policy because of an added difficulty in whatmay be, for them, only a minor sector of their foreign trade. But suchan added difficulty is nevertheless real and, if several small countries wereto adopt the same course, the combined effect might be acutely felt by thelarger countries. They themselves have not the same possibility of deriving

benefits from exchange alterations, since world prices are often determinedby the quotations on their own markets; and, when great disparities arisebetween the price levels of the larger countries as a result of currencychanges, it will be difficult to avoid a restrictive twist to commercial policy.For a country with a leading position in economic and financial activities it isnatural to stress the advantages inherent in the principle of exchange stability,since a departure from this p rinciple is likely to be at its own expense. Theaction taken by U.S. Cong ress in Ap ril 1943, when it decided n ot to prolon gthe President's powers to alter the gold content of the dollar within the limitsof 60 and 50 per cent, of the old parity, was in many respects ty pica l.

The maintenance of a fixed relationsh ip between g old and the U.S. dollar

does not, of course, in itself constitute a sufficient safeguard against fluctu-ations in comm odity p rices. From 1914 to 1933 the go ld content of the dollarremained unchanged, but American commodity pr ices ( together with world-market prices on a gold basis) varied widely during these years, with reper-cussions on the price level in other countries and particularly in those whichkept their currencies in a fixed relation to the dollar (or to gold , which up to1933 amounted in practice to the same thing).

When one or other of the larger countries insists on the advantages ofexchange stability, it must not be forgotten that under a system of stable







- 62 -

Inform ation available re garding It a ly 's foreig n trade in 1942 gave anindication that this trade, although l imited to Continental Europe, passed the

pre-war level and showed an export surp lus. In com parison with the pre-warperiod account must, of course, be taken of the increase in prices. Germany'sshare in Italy's foreign trade would seem to have risen to 80 per cent, in1942*. Since the greater part of the trade with Germany was subject to a pricestop, the general increase in prices probably played less of a rôle in Italy'sforeign sector; and it may thus be concluded that, in volume, foreign tradewas fairly well maintained in 1942. Moreover, the statistics published by anumber of other countries, such as Hungary, Bulgaria, Sweden, etc., revealthat Italy in 1942 ranked second after Germany in their foreign trade. Italianforeign trade took two main directions: f ro m th e n o r th , besides thesupplies of Danish dairy products and of Swedish and Finnish pulp, Italyreceived (principally from Germany) coal, mineral ores and products of the iron

and steel industries in exchange for foodstuffs and minerals (such as sulphur,bauxite, quicksilver, etc.), while wi th th e ea st the exchange was mainly ofpetroleum, timber and oil-seeds against texti les and other finished products.In a trade agreement between Italy, Croatia and Hungary arrangements weremade for a settlement by triangular clearing, under which Italian surplusimports from Croatia would, up to a certain amount, be paid for via Hungary,against which country Italy had a clearing claim, while Hungary had an activebalance in relation to Croatia.

The s welling of the figures fo r the three countries in the table on the next page— the only ones in the Danubian basin which published trade statistics in 1942 —largely reflects the rise in prices which has occurred in this region in spite of

all the efforts of the price control. In Bulgaria (and the same applies toHungary) there has been further progress in transforming the composition offoreign trade to an increased export of goods of higher value and less bulk.T hus , Bulgaria's importance as a great cereal-exporting country has considerablydeclined. Bad harvests during the last three years, together with increaseddomestic requirements consequent upon enlargement of territory, have necessi-tated not only a drastic cut in exports but also a curtailment of home con-sumpt ion. As sole exception, exports of rice to Roumania would seem tohave been kept at a high level in order to obtain, in exchange, essentialimports of petrol. On the other hand, there has been a continued increasein the exports of tobacco (notably from Greek territory recently attachedto Bulgaria), dried products, jams and fruit juices. The prices of severalBulgarian products — especially tobacco — rose during 1942 above the limitsfixed in various trade agreem ents. Fresh efforts were made from time totime to adhere more closely to the price relations agreed upon, but it wasfound that strict price fixing in the foreign sector tended to make producersand traders more interested in supplies for the home market, with a consequentneglect of the export trade.

* The n u m b e r of Italian export transactions with Germany in 1942 was only 50 per cent, of the total as shown by thestatistics given in Chapter IV ; but this percentage applies to Italian exports only and it is probable that theaverage value of Italian export transactions with Germany was greater than that with other countries.



- 63 -

In millions ofnational currencyunits

Bulgaria :193819411942

Hungary:193819411942

Slovakia:19411942

1 m ports

4,93410,23912,979

411730923

3,4913,900

Exports

5,5799,234

13,418

522791

1,144

3,1823,300

Balance

+ 645—1,005+ 439

+ 111+ 61+ 221

— 309— 600

Fo re ig n Tr ad e In Hu ng ary too , in sp ite o fo f H un ga ry , B u l ga r ia and Slo va ki a , pr ice-stop agreements, expor t prices

were allowed to rise, but not tothe full extent of domestic priceincreases. Hungary no longer pub-l ished details of the distributionof its foreign trade among differentgroups of commodities, but it isknown that the export of manu-factured articles continued to ad-vance at the expense of farm pro-ducts, which up to a few yearsago represented over one-half oftotal exports. Wheat, which was sti l l

the leading export commodity before the war, has lost i ts old pre-eminence,while tinned fruit and vegetables have gained in importance. In view of thedecline in imports of raw materials and semi-manufactured products, effortshave been made to promote the importation of ready-made articles.

In 1942 Slovakia increased its imports more than its exports, doublingthe imp ort su rplus from Ks . 309 to 600 million . But the clearing claim onforeign countries still increased, mainly as a result of remittances from Slovakworkers in Germany, expenditure by Germans evacuated into Slovakia fromparts of the Reich subjected to aerial bombardment, and revenue from transittraffic — all active items in Slovakia's balance of paym ents. Dealing withSlovakia's balance of payments in 1941, the Governor o f the Na tional Bank

stated that incom e from a broad (in cludin g Ks. 3,180 million in respect of go odsexported) amounted to Ks. 5,568 million and that payments abroad (includingpayments for imports of Ks. 3,490 million) amounted to Ks. 4,810 million, thusleaving an active balance of over Ks. 750 m illion. In order to tighte n thecontrol of prices in the foreign sector, a special department was establishedin the Ministry of Commerce in the spring of 1943. This department wasentrusted with the task of examining whether the prices agreed upon betweenSlovak nationals and foreign firms corresponded to those fixed by the com-petent authorities in the respective countries.

In the years immediately before the war Continental Europe suppliedabout 80 per cent, of the imports and absorbed about 75 per cent, of the

exports of Roumania. 60 to 70 per cent, of the exports consisted of cereals,petroleum and petroleum products; the balance of trade was active to theextent of several milliard lei a year. Af ter the outbreak of hos tilities the shareof Continental Europe rose to 100 per cent., exports of cereals falling as aresult of the loss of territory, bad harvests and shortage of manpower, whileIn value, if not in volume , exports of oil increased con sidera bly. The on lyofficial indication concerning the country's foreign trade in 1942 has beenfurnished by the annual report of the National Bank, in which it was statedthat the export surplus was again very large and that oil, wheat, cattle andother foodstuffs constituted the main export i tems.



- 64 -

During the ten years up to 1940 Roumania's oil production amounted tojust over 3 per cent, of the world output but, according to the published

statistics, production declined from a peak of 8.7 million tons in 1936 to5.5 m illion to ns in 1941, being in the latter year only 1.8 per ce nt, of w orldprod uctio n. Roumania exports, however, as much as 70 per cent, of its ou tput,ranking fifth among the oil-exporting countries of the world, after Venezuela,the United States, Iran and the Dutch Indies. (In 1939 the country's oilexports covered 1.6 per cent, of world consumption and 6.5 per cent, ofEuropean co nsum ption.) By the end of 1942 the export price for crude o ilhad risen 400 per cent, and for oil products 500 to 600 per cent, above thepre-war level.

No s ta t is t i cs a re ava i lab le fo r Bohemia and Morav ia , A lban ia andSerbia, but for Croatia f igures have been published for the year ended

30th September 1942, showing an import surplus of about Kunas 1,500 million,mostly in respect of the two m ajor trading partners, Germany and Italy. Onthe clearing account with these countries, Croatia has, however, an activebalance, due to such items as transit traffic and remittances from w orkers inGermany.

For the first seven months of 1942 Greek imports are reported to havetota lled Dr. 4,700 millio n and e xports Dr. 2,100 m illio n, but the se figu res are oflitt le significance owing to the peculiar conditions of the country's foreigncom me rce. In normal times Greek exports usually covered about two -thirdsof imports, the passive trade balance and other current payments being metby a number of active items, such as emigrants' remittances, shipping revenue,

tou rist traffic, etc. During 1941, however, these sources of revenue dried u p ;at the same time the rise in Greek prices made it impossible to export at theofficial rates of exchange. In order to overcome the consequent deadlock,the occupying authorities imposed a strict control over foreign trade by meansof two special monopoly companies ( the "Degriges" (1 ) for German-Greek relationsand the "Sac ig" ( 2 ) for Italian-Greek relations) whose function it was to fix pricesof goods entering foreign trade and also to determine the use to be made ofimported com mo dities. A Price Equalisation Fund was authorised to raise theselling prices for imported goods and to collect the difference between theseprices and the amount of the invoice in Reichsmarks or lire converted at theofficial rate o f exchange, part of the said difference being available for thelowering of Greek export prices so that the export trade could stil l be continued

to some extent. Early in the year, moreover, an agreement was signed betweenItaly and Greece whereby the Italian Treasury advanced Lit. 100 million for thetaking-over of all Italian claims in the Italo-Greek clearing account, the advanceto be redeemed gradually by charges on a new account opened on 1st January1943. This arrangement benefited other foreign creditors of Greece also,especially Hungarian and Roumanian exporters, who, for want of a directclearing between their own countries and Greece, in many cases settled theirexport claims via the Italo-Greek account.

0) Deutsch-Griechische Waren-Ausgleichs-Gesellschaft. (2) S. A. Commerciale Italo-Greca.



- 65 -

Regular returns of foreign trade are not published for France but, withthe aid of the custom s sta tistics, the inform ation about the Treasu ry's advancesagainst clearing accounts and various other data, it has been possible tocompile certain general figures of imports and exports.*

F r enc h Im po r t s 1938 and 1942 .

Imports

Value :

Weight:FoodstuffsIndustrial materials . . .Finished pr od uc ts. ...

Total . . .

1938 1942

In milliards of Fr.fcs46.0 25.8

in thousands of tons5,846

39,6631,645

47,154

1,5985,404

5147,516

Percent-age

decline

— 44

— 73— 86— 69— 84

From 1938 to 1942 the shrin k-age in the weight of importswas much more pronouncedthan the decrease in value, onereason for this disparity beingthe considerable rise in importprices and another the particu-larly sharp fall in the heavyitems among industrial materials.

But, even if allowance is madefor the shif t to foodstuffs andfinished products at the ex-

pense of materials, the fact remains that French imports in 1942 sank to thelowest level for well over a century.

It is more difficult to obtain correct figures for the export trade becauseit is often impossible to separate commercial transactions from other deliveries,such as those made under the provisions of the armistice conve ntion. It has,however, been estimated that the value of France's fore ign trade turnoverin 1942 was close to the figur e fo r 1938, i.e. Fr.fcs 76.5 m illiar d. If th is est i-mate is accepted, it may be concluded that French exports in 1942 were

in the neighbourhood of Fr.fcs 50 milliard. This gives an export surplusof about Fr.fcs 25 mil-l iard. The increase during1942 in the Treasury'sadvances to the Franco-German clearing wasFr.fcs 33 milliard, buta part of this amountcorresponds to pay-ments of a non-com-mercial character (forinstance, remittances

from French workers inGermany). The changedgeographical distr ibu-tion of French foreigntrade is shown by thefirst table on the fol low-ing page.

France: Foreign Trade and Custom Receipts.

Foregn Trade15000

Monthly, in millions of Fr.fcs.

12500

10000

7500

5000

2500

llnllllll Miniili Illlll 111••1111111111 111111111111111 r 11 111 111111 1111 ?

Cusoms1500

1250

1000

750

500

250

1937 1938 1939 M0 19*1 .. 1942 19«

* See an article by Albert Algoud In the "Revue de lEconomie Contemporaine" for April 1943 on "Le Com-merce Extérieur de la France depuis l'Armistice".



- 66 -

F r a n c e : D i r e c t i o n o f F o r e i g n T r a d e(Value).

Percentage distributionof imports from orexports to :

The French Empire . .

Other countries . . . .

Imports1938

273439

1942

48502

Exports1938

275617

1942

22780

Since the armistice, sup-plies from the Empire, al-though almost entirely confined

to North Africa, have consti-tuted a higher percentage ofFrance's import trade.

The loss sustained throug h separation from North Afric a was reflectedin a 40 per cent, drop in France's total foreign trade during the first twomonths of 1943, as compared with the corresponding period of the previousyear. France's commercial relations with foreign countries were regulatedby clearing agreements, except in the case of Portugal, with which tradewas on a very limited scale and was settled by payments in free currencies.

During 1942 France had anFr en ch T ra de w i t h th e Em pi re . import surplus in rela tion to

Bulgaria, Croatia, Denmark,Spa in , Finland, Greece,Hungary and Turkey but anexport surplus in trade withGermany and Belgium.

Ac co rdin g to a Franco-German agreement of 14th Ap ril 1942 Frenchexport prices remained free but charges were to be levied on the differencebetween the prices actua lly quoted for exports and those fixed for the

same commodities on theFre nc h Fo re ign T ra de Pr ice s. internal market, the charges

in question being creditedto an equalisation fund(Caisse de Péréquation) fromwhich subsidies were tobe granted to impo rters ofessential commodities.

In milliardsof Fr.fcs

193819411942

1 mportsfrom the Empire

12.514.312.4

Exportsto the Empire

8.45.36.5

Index figures1938 = 100

Food .Industrial materials .Finished products .

Import Prices

1941

194257235

1942

272259345

Export Prices

1941

140180161

1942

168141224

The publication of foreign trade statistics has not yet been resumed inHolland, Belgium and Norway. In so far as B e lg iu m is concerned it has beenunofficially stated that by 1942 the foreign trade turnover had fallen in valueto abo ut 50 per cent, of the pre-war level. Figures have also been disc losedshowing the geographical distribution of the country's foreign trade. While,before the war, overseas trade accounted for 51 per cent, of Belgium'simports and 42 per cent, of exports, the three neighbou ring countries, France,Germany and Holland, absorbed in 1942 as much as nine-tenths of thetotal turnover, Germany occupying by far the m ost important pos ition. In theyear before the war Belgian exports covered imports to the extent of 90 percen t., but this ratio rose to 261 per ce nt, in 1942, the e xport su rplus being



— 67

for the most part accumulated in Berlin in theBelgian trade with all countries in Continental

B e l g i u m : D i r e c t i o n o f(Value)

Percentage distributionof imports from or

exports to:

GermanyFranceHollandAll other countries* .

F o r e i g n

Imports

1938

11149

66

1941

66111211

1942

56219

14

T r a d e

Exports

1938

12151261

1941

7210135

1942

781345

form of clearing claims.Europe, except Spain,Portugal and Turkey,

was regulated by clearingagreements but, in viewof the large proportionabsorbed by Germany,France and Holland,very little margin wasleft for commercial re-lations with other coun-tr ies.

* In 1938 overseas countries were shown separately and represented 51 percent, of imports and 42 per cent, of exports.

In spite of the wartime increases in prices, Denmark's foreign trade

turnover fell in value by 30 per cent, between 1938 and 1942; in volume thefall was to one -third of the pre-war figu re. Shortage of fodder has nece ssitatedwholesale slaughterings, reducing the output and export of eggs, butter andmilk. There have, however, been increased deliveries of industrial goods toGermany, the raw materials and semi-manufactured products being furnished

by that country . Never-

Fo re ig n Tra de o f Den m ark , F in lan d and Sw ed en , the less, Germany 's sha rein Danish foreign tradefell from 80 to 70 percent, during the year.It is calculated that in

1942 Swedish deliveriesto Denmark as counter-part for Danish exportsof foodstuffs to Finlandamounted to aboutKr. 40 mil l ion, and furtherarrangements for suchdeliveries have been con-cluded for 1943.

In volume, Finnish exports were reduced by about two-ihirds and importsby about one-half between 1938 and 1942. In value, exports likewise decreasedduring the same period while imports rose; there was thus a high importsurplus, which, nevertheless, slightly declined in 1942 (the statistics includecivilian goods impo rted for the army but n ot impo rts of war materials). Onlya part of the import surplus, however, constitutes a net charge in the balanceof payments; in Finland, as in most other countries, export values are countedf. o. b. and import values c. i . f. and , since about two-t hirds of the foreigntrade is carried by Finnish ships, the import surplus is to a large extent offsetby income from shipping and from Finnish insurance companies. It may bemen tioned that in 1942 Finnish clearing indebtedness dou bled , from FM 1,500 m il-lion to FM 3,000 million.

In millions of nationalcurrency units

Denmark: D.Kr.193819411942

Finland: FM1938 .19411942

Sweden: S. Kr.193819411942

Imports

1,6251,3111,210

8,60710,20111,724

2,0821,6741,770

Exports

1,5351,2781,053

8,3984,3225,989

1,8431,3451,313

Balance

— 90— 33— 157

— 209— 5,879— 5,735

— 239— 329— 457



- 68 -

Before the war Finland supplied about 85 per cent, of its own require-ments of foodstuffs, importing cheap raw materials from overseas and finishedgoods from all over the world, while forestry products accounted for about

four-fi fth s of the country 's exports. During the war domestic production offoodstuffs has been hampered by mobilisation, shortage of fertilisers and, in 1940

and 1941, by excep tionallyF i n l a n d : D i r e c t i o n o f F o r e i g n T r a d e

(Value) .

Percentage distributionof imports fromand exports to :

Great Britain . . . .United States....GermanyItaly . . . . . . . .

Sweden . . . . . . .DenmarkOther countries . . .

Imports

1938

229

201

135

30

1941

_*532

187

20

1942

*723

889

Exports

1938

449

152

53

22

1941

_#

546

61024

1942

*645

41215

* Included In other countries.

unfavourable weather con-ditions. In 1942 the harvestwas somewhat better anddomestic supplies werefurther imp roved by in -creased imports fromGermany and credits fromSweden, avai lableforfoodpurchases in Denmark.The changes in the geo-graphical distribution ofthe country's foreign tradeare shown in the table.

In Sweden import prices in December 1942 were 165 per cent, and exportprices 77 per cent, above the pre-war level, but here too import prices (quotedc. i.f.) have been swollen by high transportation cos ts, the index of s hippingfreights in the Baltic showing a rise of fully 200 per cent, between August1939 and 1942.

A leading official in the Swedish Foreign Office, charged with commercial

neg otiation s, wrote in the autumn of 1942 that "t he most diffic ult foreign tradequestions are the price questions", special attention being devoted to the taskof checking the advance in import prices. While, for instance, in earlieragreements with Germany the price stop applied only to the more importantcommodities, i t was gradually extended to encompass more and more goodsuntil it covered almost 90 per cent, of the commercial exchanges between

Germany and Sweden.S w e d e n : D ir ec t i o n o f Fo re ign Tr ad e After prolonged negotia-

( V a l u e ) - tions it became possiblein the sp ring o f 1941 toresume trade with certain

overseas countries, parti-cularly in South America,ships provided withGerman "Gelei tscheine"and Anglo-Saxon" navi-cer ts " being able to enterand leave Gothenburg.

Thanks partly to higher imports from overseas countries, the importsurp lus increased f rom S. Kr. 329 million in 1941 to S. Kr. 457 m illion in 1942.

Percentage distributionof imports fromand exports to:

Northern countries* .Other countries of

Continental EuropeOverseas countries . .

Imports

1938

2410

2442

1941

528

2218

1942

467

2522

Exports

1938

1816

2145

1941

4124

2312

1942

4020

2812

Norway, Denmark and Finland.



- 69 -

Index: 1936-38 = 100

19381939 . . . . . . ; .19401941 . . . . . . . .1942

Imports

103122744948

Exports

93102555041

V o lu m e There was, however, a further fa l l in theof S w e de n ' s Fo re ign Tra de , aggregate vo lume of Swedish trade, the to ta l

turnover in 1942 being about 45 per cent, ofthe pre-war figure.

There was a further contraction in theforeign trade of Switzerland in 1942. Mea-sured by 10-ton railway trucks, the weightof the cou ntry 's impo rts fe ll by 10 per cen t.

in comparison with the previous year, registering a total reduction of 40 percent, below the pre-war level. For exports, the corresponding reductionswere 20 and 35 per cent. In value, both im ports and exports showed higherfigures than before the war, import prices in 1942 being 116 per cent, andexport prices 61 per cent, above the pre-war level. The high import pricesare partly due to heavy transportation costs; before the war, freightpayments to foreign shipowners amounted to Sw.fcs 40-50 mil l ion a year; for1942 these payments are estimated to have been well over Sw.fcs 100 million,although Switzerland has acquired a mercanti le marine of i ts own, with atonnage of 58,600 and with Genoa, Barcelona and Lisbon as its principal portsof call in Europe. While in 1914-18 prices of raw materials rose more andfoodstuffs less than the general index figure, foodstuffs have risen most inprice this time — an increase which is the more felt since the domestic output(even with the increased cultivation achieved during the war) covers less than40 per cent, of the cou ntry's fo od req uirem ents. But, even if high prices havebeen paid for foreign goods and for their transportation, essential supplies have

been procured. While in the years 1915-17 the traditional Swiss import surpluspractically disappeared (in 1916 there was even an export surplus), the surplusof imports in this war has been actually above the pre-war rate. Difficu ltnego tiations have been undertaken with the belligerents on both side s. Forseveral months in 1943 payments in relation to Germany and some of theoccupied territories were no longer governed by commercial agreements but weresubject to autonom ous regulation by the clearing offices in Berl in and Zu rich.

With Italy a new quota andF or ei gn T ra d e clearing agreement was signed

o f Sw i t z e r l a n d , P o r t u g a l a n d S p a i n . in N ovem be r 1942, co ntai nin g ,inter al ia, a so-called "securityclause", under which Switzer-

land was authorised to reduceits exports to Italy if Swissexporters were called upon towait more than four monthsfor their payments through thec lear ing; on the other hand,Switzerland undertook to in-crease its expprt quotas shouldthe waiting period becomeless than four months.


Switzerland: Sw.fcs193819411942 . . .

Portugal: Esc.1938 . . .1941 .1942

Spain: gold pesetas1935 . . . . . . . . . .19411942

Imports

1,6072,0242,049

2,3062,6432,457

879550610

Exports

1,3171,4631,572

1,1462,8963,898

588521631

Balance

— 290— 561— 477

— 1,160+ 253+ 1,441

— 291— 29+ 21



- 70 —

A striking feature in Portugal's foreign trade during 1942 was the un-precedented export surplus, amounting to Esc. 1,441 million, as compared with

Esc. 253 million in the previous year and an unfa iling impo rt su rplus in. thedecade up to 1940. Moreover, the to tal tra nsit trade reached a peak figureof Esc. 2,511 million in 1942, as com pared with Esc. 412 million in 1938.Portugal, indeed, continued to benefit from its geographical position and alsofrom certain features of i ts national produ ction. Before the war farm andforest products furnished about two-thirds of total exports, minerals and metalscontributing only 7 per cent., while the import surplus was met by such activeitems as Income from foreign investments and emigra nts' remittances. By1942 the share of minerals had jumped to 40 per cent, of total exports, owingchiefly to the spectacular rise in the price of tungsten to 30 times the pre-warf igure. On the other hand, difficulties were experienced in maintaining thevolume of imports, which was distinctly smaller in 1942 than in the previous

year. A n agreem ent with S pain , concluded early in 1943, provided for aconsiderable increase in the exchanges between the two coun tries. Ab ou t one-third of the total transit trade in 1941 was with Switzerland, and in the sameyear Portugal had with that country an export surplus of about Esc. 400 mil-lion instead of the small import surplus registered in the three years up to 1940.

Fo re i g n T ra d e o f Po r tu g a l a n d Sp a i n(Volume).

In thousandsof. tons

PortugalSpain

1935

2,48811,440

1938

3,924

1941

2,5054,066

1942

1,9453,552

In weight, the total foreigntrade turnover of Portugal fell byone-half fro m 1938 to 1942. InSpain the shrinkage was evengreater—to one-third of the weightin 1935, before the civil war began.

The value figures in the foreign trade sta tistics of Spain are givenin gold pesetas, and these show a reduction in the total turnover by about15 per cen t, between 1935 and 1942. By 1942 Spa nish e xport price s hadrisen by 184 per cent, above the 1935 level, while impo rt prices s toodat 66 per cent, above that level. Thanks mainly to favourable prices forSpanish pro duc ts, an export surplus of 21 million gold pesetas was attainedin 1942, as compared with an import surplus of 29 million gold pesetas in theprevious year and 292 million gold pesetas in 1935. Of Spain 's foreign trade ,

about 500 million gold pesetasS p a i n : out of a total of 1,241 million

D i r e c t i o n o f F o r e i g n T r a d e i n 1 94 2 g o | d p e s e t a s w a s t h e s h a r e o fContinental Europe, Germanyoccupying the first place withdeliveries to Spain for 117 mil-lion gold pesetas and purchasesfor 137 million gold pesetas, ascompared with 51 million and162 million respectively in theprevious year.

(Value).

Trade partner

AM countries . . . .of which:

Germany . . . .United KingdomItaly. . . . . . .Switzerland . . .United States . .

Spanish imports Spanish exports

in millions of gold pesetas610

11730242316

631

13772484424



— 71 —

On the other hand, the importance of Latin America has declinedsomewhat: the combined imports from the Argentine, Brazil, Chile, Cuba and

Mexico amounted to 114 million gold pesetas in 1942, as compared with151 million gold pesetas in the previous year, while exports to these countriestotalled only 15 million gold pesetas — the same figure for the two years.

Of the neutral countries on the continent of Europe, Turkey is the onlyone which (since April 1941) has suspended the publication of its foreigntrade returns. Like Portugal, Turkey has benefited from its geographicalposition and from the production within its borders of a mineral of a highstrategic value (in the world production of chromium Turkey ranked first in1938 with a share of about one-fifth). While maintaining with the continent ofEurope a trade which, apart from armament deliveries, was expected to exceed£T 100 million in 1943, Turkey has been able to develop its com mercial relations

with the Anglo-Saxon countries, being also a beneficiary of lend-lease facil i ties.The total turnover with these countries was valued for 1942 at £T 130 million,the bulk of which passed through the United Kingdom Commercial Corporation.The trend of Turkish foreign trade in the course of the war is reflected in asubstantial increase in the monetary reserves.

Acc ording to Am erican statistics the U. S. S. R. received lend-leasedeliveries from the United States in 1942 for an amount of $1,314 million, whileother (cash) exports to the U. S. S. R. were given as $65 million and impo rtsfrom the U. S. S. R. as $25 m illion . Th is means that ordinary trade is at a verylow level, as indeed it was already before the war. During the s econd Five-

Year Plan (1933-37) th e fore ign trade of th e U. S. S. R. represented about1 per cent, of total world trade, having been 2 to 2% per cent, in the early'thirties (the high-water mark after 1917), while before 1914 Russia's foreigntrade accounted for about 4 per cent, of world trade. It may also be mentionedthat the percentage of exports in proportion to Russian production is reportedto have fallen fro m 3.5 per cent , in 1930 to less tha n 1 per cen t, in 1936 —another measure of Soviet Russia's progressive withdrawal at that time fromthe sphere of international trade.

T r a d e b e t w e e n t h e B r i t i s h I s l e sa n d t h e U n i t e d S t a t e s .

In millions of dollars

U. S. exports:Lend-lease deliveries . .Other (cash) exports * . .

Total . . .U.S. impor ts * . . . . .

1938

—548548119

1941

5721,0701,642

139

1942

1,867495

2,362135

' Including Eire; separate trade statistics have not beenmade available for 1942. In 1938 U.S. exports to the UnitedKingdom alone amounted to $521 million and importsfrom the United Kingdom to $118 million.

In no country has the banon the publica tion of foreign

trade statistics been more strictlyobserved than in the UnitedKingdom. The on ly in format ionfurnished by the British authoritieswo uld seem to have been astatement in April 1943 by theChancellor of the Exchequer to theeffect that "recently the volumeof exports available to be soldabroad had fairen to about a



- 72 —

quarter of what it was before the war". Some further information may, however,be gathered from American trade statistics.

A partial offset against the American lend-lease deliveries is providedby the reverse lend-lease of the United Kingdom, about which information isgiven in Chapter IV, pages 132-133 and in footnote (2) to page 133.

In the first half of the nineteenth century British recorded exportsregularly exceeded imports, but from 1853 an import surplus appeared, reflectingthe g row th of Brita in's cre ditor pos ition . In the period from 1920 to 1939the passive trade balance fluctuated between a minimum of £179 million anda maximum of £463 million, exports amounting by the end of the period toabout one-half of the import total. In the course of the war the gap between

imports and exports must have been further widened, efforts being made tomaintain such exports as are necessary to meet the war requirements of theUnited Nations — a task which for the mom ent has taken precedence over thenursing of foreign markets with an eye to the revival of trade after the war.The United Kingdom Commercial Corporation, which was created in 1940 (withan initial capital of £0.5 million later raised to £5.0 million) to foster tradewith the Balkan countries, has had to limit its work in that area to Turkey;on the other hand, it has been active in Spain and Portugal, in the Middle Eastand in conne ction with British non-m ilitary supp lies to the U. S. S. R.

After the customary trend of Eire's foreign trade had experienced a

short-lived reversal, when in 1941 exports exceeded imports by £2.3 million, in1942 there was once more an impo rt surplus am ounting to £2 m illion. Stric trationing and increased tillage made it possible to solve, to a large extent, thedifficult problems of the country's food supply, but the shortage of shippinghas continued to make itself felt in connection with supplies of fuel forheating and transport and the import of essential raw materials for industry.

The only other member of the British Commonwealth which has continuedto publish its foreign trade statistics regularly is New Z e a la n d . In value,

imports for 1942 were at theFo re ign T ra de of Ei re and New Ze ala nd , pre-war leve l but , in vo lume,

they declined by one-third, andwhat remained was largely forwar purposes. On the otherhand, exports rose 40 per cent,in value and even somewhat involume. At the request of theBritish Gove rnment, New Zealand'sdairy farmers changed over theirproduction during the season1941-42 from butter to cheese,

In millions ofnational currency

units

Eire: £193819411942

New Zealand: £N.Z.193819411942 . . . . . . . .

Imports

41.429.534.7

55.449.253.7

Exports

24.231.832.6

58.467.580.9

Balance

— 17.2+ 2.3— 2,1

+ 3.0+ 18.3+ 27.2





- 74 -

statistics are available, shows that the import surplus in relation to the UnitedStates was more than outweighed by the export surplus in relation to

countries of the British Empire.

The foreign trade of the United States was influenced in 1942 by threemain factors: a steep increase in lend-lease exports, concentration of avail-

able tonnage on shipmentsFo re ign T ra de of th e Un i te d S ta t es . essentia l fo r the war e f for t ;

and loss of trade with theFar East. Nevertheless, asstressed by the U. S. Com-merce Department, exporttrade was "maintained ata surprisingly high levelin spite of mounting ob-stacles to international com-merce" .

In value, total exports (including lend-lease but excluding shipmentsto the armed forces overseas) were 50 per cent, greater in 1942 than inthe previous year, reaching a total of $7,826 million, a higher figure than inthe years 1917-18, although below the record of $8,228 million reached in1920 (when, however, prices stood at a higher level). Sti l l , exports in 1942did not constitute more than 5 per cent, of U.S. gross national income.Lend-lease shipments at a rate of $4,668 million were responsible for

60 per cen t, of tota l exports and w ere equal to 92 per cent, of th e y ear'sexport surplus, amounting to $5,083 million. The excess of cash exportsover cash imports was $415 million.


Exports

Cash exports

Total importsBalance . . .

Balance between cashexports and cash imports .

1938

3,0943,0941,960

+ 1,134

+ 1,134

1941

7414,4065,1473,345

+ 1,802

+ 1,061

1942

4,6683,1587,8262,743

+ 5,083

+ 415

United States: Lend-Lease and Cash Exports.Monthly, in millions of dollars.

1200 i • 1 1 11200

1000 1000

800

600

400

200

1941 1942 1943

Total imports fell by$602 million from 1941 to1942; the reductions causedby the acute shipping short-age and the loss of majorsources of supply in theFar East were only partially

offset by larger importsfrom the British Empire,especially Canada. Emphasishas been laid more and moreon the maintenance of im-ports essential for the war,typical commodities beinggraphite, industrial diamon ds,jute, mica splittings, beryl-l ium, tungsten and bauxite.



- 75 -

U n i t e d S t a t e s : D i r e c t i o n o f F o r e ig n T r a d e .

In millionsof dollars

United Kingdomand Eire . . . .

Canada 0)U.S.S.RLatin America . .Asia and Oceania?)Rest of the world .

Total

Imports1938

11926824

485557507

1,960

1941

13957530

1,0861,199

3163,345

1942

13573525

1,022520306

2,743

Exports1938

54847670

564575861

3,094

1941

1,6421,019

1081,035

719624

5,147

1942

2,3621,3671,379

836880

1,0027,826

Balance1938

+ 429+ 208+ 46+ 79+ 18+ 354+ 1,134

1941

+ 1,503+ 444+ 78— 51— 480+ 308+ 1,802

1942

+ 2,227+ 632+ 1,354— 186+ 360+ 696+ 5,083

(1) Including Newfoundland, Labrador, St-Pierre and Miquelon, Greenland and Iceland.(?) Including the Far East, India, Australia and New Zealand, but excluding the Near East.

Of total exports in 1942, 68 per cent, were sent to the British Empire(including large consignments to Egypt for the British armed forces stationedthere) and 18 per cent, to the U . S. S. R., which sudden ly rose to secon d placein the l ist of countries receiving American exports.

Latin America is the only area withthe trade of the United States fell more

Foreign Trade of U. S. A .Monthly, In millions of dollars.

12001100

1000900800700600500400300200100

MIMIIIIM

. A

ihilrlii

V\ A,,

iilnliilii

A

hlhl

E

1

iilnlnlii

xportsi

l

Dports

ilHhilll Ml

--

--

:

-•

i. [. i r 17

12001100

1000900800700600500400300200100

1936 1937 1938 1939 1940 1941 19*2 1943

1936 1937 1938 1939 1940 1941 1943

which trade declined. Exports inthan imports, leaving an import

surp lus of .$186 million — al-most four times as large asin 1941. The foreign trade ofthe United States has graduallybeen subjected to more effect-

ive control in order to ensureas far as possible that exportsto friendly countries are re-stricted to goods necessaryto maintain their war economyand essential domestic struc-ture and to commodities whichhave to be supplied in ex-change for strategic materials.On these l ines an agreementwas concluded between theUnited States and Canada,

providing for a coordinationof the two countries' exports toLatin America as from 1st July1943. Earlier in the year, undera new control plan aiming atdecentralisation, special officeshad been set up in the variousLatin American countries toexamine demands for importsfrom the United States.



— 76 —

In 1938 S o u th A m e r ic a as a whole drew about one-half of i ts importsfrom Europe and shipped to that continent a proportion of its exports rising

from one-third for some of the northern and western countries to three-quarters for the basin of the River Plate. Most European countries boughtfrom South A merica more than they sold there. It was largely with its su rplusexports to Europe that South America paid for i ts surplus imports from theUnited States. The interchange of goods between the South Americancoun tries was of little im portanc e. In 1938 only 6 per cent, of the exports ofSouth Am erican republics went to and 9% per cent, of their imports came fr om 'Latin American countries.

As a result of the war, trade with Continental Europe has declined to avery low level, Portugal, Spain, Sweden and Switzerland being the only customerswith which a certain amount of trade has still been carried on. The share ofthe United Kingdom has also fallen, it being particularly difficult for the Britishto m aintain the volume of their exports to the South Am erican co untries. Onthe other hand, the share of the United States has risen and trade betweenSouth A merican countries has also gained in importance. For the United Statesand Canada, South America has become an important source of supply forsome greatly needed raw materials no longer available from the Far East orother blocked areas. Alt ho ug h the volume of trade was affected by lack ofshipping and the concentration of North American production on the wareffort, with a consequent dearth of finished articles and machinery for export,the decline in volume in 1942 was offset by higher prices and by sale agree-ments with the United States.

F o r e i g n T r a d e o f L a t i n A m e r i c a n

Countries

Argentina . . . . . .BrazilChileColombiaCosta Rica

Dominican RepublicEcuadorHaitiMexicoPanamaParaguayPeru

SalvadorUruguay

In millions of

Pesos pap.CruzeirosPesos orrPesos .ColonesPesos .U.S.$ .Sucres .GourdesPesos .Balboas$ m/n .Soles .

ColonesU.S.$ .

Imports

1941

1,2775,514

52517010013412

15038

9153312

358

2163

1942

1,2744,644

62210569

14512

20041

7533717

339

2164

C o u n t r i e s .

Exports

1941

1,6406,729

76817657

21216

20042

7304

15494

2871

1942

1,9767,495

86319259

18220

29941

9922

16495

4558

Balance

1941

+ 363+ 1,215+ 243+ 6— 43+ 78+ 4+ 50+ 4— 185— 29+ 3+ 136

+ 7+ 8

1942

+ 702+ 2,851+ 241+ 87— 10— 37+ 8+ , 99+ 0+ 239— 35— 1+ 156

+ 24— 6

The above table shows that in 1942, with few exceptions, imports intoLatin American countries either fell in value or kept about level with the previousyear, while exports as a rule rose in value. The result was in m ost cases anincreased export surplus, providing the Latin American countries with a largersupply of liquid foreign reso urces than they had ever had before. There beinglittle opportunity for the employment abroad of funds, these countries wouldseem to have used only some 20 per cent, of such credit facilities as had beenplaced at their d isposal in the United States . Cred its granted under lend-lease



- 77 -

arrange me nts, being mainly for defence pu rpose s, were not published ; but,according to statistics of the Export-Import Bank available early in 1943, as

much as $743 m illion, out of tota l c redit autho risations of $1,099 m illion , wasgranted to Latin American countries, although actual disbursements did notamo unt to more than $137 millio n, the chief beneficiary being B razil. TheNational City Bank in New York has calculated that the combined reserves ofgold and foreign currencies of eleven Latin American countries increased from$775 million in 1940 to $1,325 m illion at the end of 1942 and to abo ut $1,500 m il-lion at the end of March 1943 — a rapid rate of expansion.

As far as individual commodities are concerned, the picture presented bythe export trade is in no way unifo rm . Exports of some of the mos t traditionalLatin American commodities, such as coffee, cocoa, wheat, maize, l inseed,etc., though sti l l representing a high percentage of foreign trade, continued to

decline, while others, such as meat, cotton, nitrates, mineral ores, etc., eitherheld their own or gained in importan ce. The interest of the United States was,as a matter of fact, concentrated upon metals and minerals and upon certainagricultural products, such as rubber, sugar, wool, cotton and meat, which areeither important for the war effort or no longer obtainable from the formersources of supply. As regards other products, such as coffee and cocoa,which are of secondary importance for the war effort but of which theUnited States is normally a large consumer, Washington fol lowed the policyof arranging for large-scale purchases over a number of years, even if shippingspace should not be available. In other agricultura l prod uct s, such as whea t,maize, etc., North America, being itself a producer, has less interest; largestocks of such commodities accumulating in the producing countries were

bought by their own governments, which thus assumed a heavy financialburden. With the growing necessity of concentrating industrial effort in theUnited States on war production, preference was given in the course of 1942to semi-finished products (metals, texti les, tinned meat, instead of ore, rawcotton and frozen meat), i.e. to goods of higher value in relation to bulk;this has contributed to the tendency of Latin American exports to fall belowthe 1941 level in physical volume, although the aggregate value was considerablyhigher. In March 1943 the Inte r-Am erican Coffee Board decided that, for thequo ta year endin g 30th Septem ber 1943, the 1940-41 basic q uota of U . S. coffeeimpo rts sho uld be increased by about 100 per cen t., m aking a tota l of 27.9 mil-lion bags (of 60 kilogrammes) to be imported into the United States duringthe quota year 1942-43 against the 19.7 million bags previously fixed, themajor beneficiaries being Brazil and Colombia.

International trade within South America has in the past been hindered,and is to a great extent still hindered, by the economic structure of theindividual countries (whose production is competitive and, where diversified,not complementary) and by lack of tran spo rt facilitie s. The greater part ofsuch trade is still carried on between Brazil and the Argentine or betweenneighbouring countries. A number of trade agreements have, however, beenconcluded between the various republics, and trade between them is increasing.Thus Brazil is supplying cotton texti les to the whole of South America;



- 78 -

Colombia is exporting coal to the Argentine, which has agreed to buy all theavailable coal for ten years; the Argentine is selling wheat to Bolivia and

Brazil and has agreed to buy all the oil produced in certain districts of Boliviafor the next ten yea rs, plans having been made for a pipe-line between thetwo countries. Furthermore, the increased measure in which finished or semi-finished products appear in the foreign trade returns reflects the progressmade in the process of indus trialisation ; but the rate of advance is relativelymoderate since, apart from the difficulties — psychological and other — whichsuch a transformation necessari ly encounters, there are particular obstaclessuch as scarcity of shipping and the temporary inabil i ty of the supplyingcountries to keep pace with the continent's demand for industrial equipment.

The r ise in the export surplus of the Argentine from Pesos 363 mi l l ionin 1941 to Pesos 702 million in 1942 was due to higher prices for certain

agricultural commodities, such as meat, wool and hides, and to increasedsales of finished produ cts, especially texti les. Owing to reduced shipments ofwheat, maize and linseed and to a shrinkage in supplies of raw materials(especially coal and iron) and of machinery, both exports and imports declinedin volum e, the latter falling to the lowe st level for the last fifty years. Thatin 1942 exports of industrial goods were nearly as large as those of cerealsconstitutes a great change in the Argentine's foreign trade, and one whichwill probably no t be limited to the duration of the war. The Arg entin e is thecountry on the South American continent whose foreign trade has sufferedmost from the effects of the war. In 1938, the con tinent of Europe absorbedover 40 per cent, of the Argentine's exports, while 8 per cent, was takenby the United States, which, owing to the competitive character of the two

countries' agriculture, offered only a l imited market for the principal agriculturalproducts. The loss suffered through the severance of commercial relationswith the continent of Europe has found only partial compensation in theincreased turnover with the United States and in the intensified trade withother South American countries, whose share rose from 10 per cent, in 1938to about 20 per cent, in 1942.

No official foreign trade returns have been published in Brazil sinceApril 1942, but it has been reported by the Central Bank that there was anexport surplu s in 1942 of a little less than Cruzeiros 3,000 millio n, or some130 per cent, more than in the previous year. Shipm ents of coffee, coco a andcotton declined, but some of these reductions were compensated by higher

prices . Rubber and manganese were exported in larger volume. In con trastto the A rgen tine, Brazil 's products had better oppo rtunities on the U. S. market,which already before the war absorbed more than one-third of Brazilian exports.The country's mineral wealth has facilitated industrial development and the risein the output of cotton has placed it fourth among the cotton producers of thewo rld ; Brazil is incidentally the only country w hich can ma intain cotton pro-duction thro ugh out the year, i. e. alternately in the n orth and in the s ou th,being, in addition, able to produce every quality of cotton. The textile industryhas also made great progress, the output increasing from 823 million metresin 1940 to 1,500 million in 1942.



- 79 -

U ru gu a y' s balance, though active w ith the United States, is passive in theaggregate, owing to difficulties in the disposal of the country's wool surplus.

Chile has benefited from large exports of copper, nitrates, wool and frozenmeat and Peru has shipped sugar as the most important of i ts export goods,followe d by co tton , oil and metallic ores . To com pensate for the loss of theJapanese market, which was of great importance for the sale of Peruviancotton, the United States has agreed to buy cotton from Peru, as well asminerals and rubber.

The value of international trade accounted for by the territories in theFar Ea st which have come more or less directly under Japanese dom inationamounted in 1938 (including Japan but excluding China) to $4,800 million, ora little over 10 per cent, of total w orld trade in that year. Since 1940 the

publication of foreign trade statistics has been suspended in one countryafter another in this area and few other indications of their trade are avail-able, but some observations may be made on the commercial principles whichthe authorities have sought to apply in the different territories. In M a n c h u k u othe development in the 'thirties of heavy industries, based on the country'srich deposits of coal and i ron, was carried on almost wholly with the aid ofJapanese capital and equipment, exports to Japan consisting of raw materialsfor heavy industries and of agricultural prod ucts. Th us, for instance, in thefirst Five-Year Plan, covering the period 1937 to 1942, the direct participation ofJapanese capital amounted to Yen 4 milliard, as part of a total investment ofYen 6.7 millia rd. In order to lessen dependence on Japan a new F ive-YearPlan was adopted early in 1942, restricting the investment of Japanese capital

and arranging for larger exports of minerals and semi-manufactured productsto Japan. At the same time steps were taken to accelerate the developmentin Manchukuo of light industries capable of producing articles in daily useand also to augment the agricultural output w ith a view to exporting anincreased proportion of the surplus to Japan.

Until its establishment as a separate country in the year 1938In ne r M o n g o l i a , w i th a surplus in i ts external balance, formed part ofthe economy of North China. This relationship was largely changed by thepolicy of the independent government, which founded the Central Bankof Mengchiang to aid in the financing of new investments, principally theexploitation of iron and coal resources and the encouragement of the country's

traditional activities: agriculture and cattle breeding. But difficulties arose,owing partly to devastating floods in the summer of 1939 but partly also to the

large imports of indus-In du s t r i a l P ro du c t io n o f Inne r M on go l ia . t ri al equ ipmen t needed

for the new investments.In 1941, however, con-dition s changed again ;the balance of paymentsin that year producedan estimated surplus of

Indexes1941 = 100

1938193919401941

Milling

901261041CO

Hats andclothing

74356

100

Chemicals

1263

100

Metals

53120100

Processingof

minerals

4093

100



- 80 -

Yuan 34 million and in the first quarter of 1942 a surplus of Yuan 8 million.The central bank sponsored an investigation into the development of light

industries and helped to find the necessary funds. The indexes given in thetable on the preceding page show the development of a number of industriesup to the outbreak of the Pacific war.

In N o r th C h in a a Five-Year Plan was in preparation in 1941 but itsexecution was affected by the outbreak of the Pacific war. The ptan aimedat increased production of coai, iron and industrial salt and the use of theseproducts in further manufactures. Foodstuffs are imported, payment being facil i-tated by remittances from workers who have found employment in Manchukuo.According to the customs statistics, the foreign trade of North China had avalue of Yuan 332 million in 1936, and in the twelve-month period fromNovember 1940 to October 1941 the trade turnover was Yuan 1,383 million.The increase must not be taken to reflect a larger volume of trade since by1941 most commodities in the trade of North China had risen to three or fourtimes their 1936 price.

In the other parts of the Japanese-controlled area of China there arethree principal economic centres : Shanghai, Canton and Hanköw, of w hichShanghai is the most important and the most closely connected with theNanking Go vernment. By the outbreak of the Pacific war Shanghai was largelycut off from its ordinary markets and sources of supply. With the supportof the Japanese Government, local industries were encouraged to resume workand barter agreements were concluded with North China, Manchukuo andInner Mongolia. In the region of C a n t o n , which with Hong Kong as thegreat outer seaport is the commercial centre of South China, trade was muchdisturbed by the war; si lk exports, vital for this region, were almost reducedto nil, efforts being made, however, to stimulate domestic consumption.Immediately after the occupation of Hong Kong the Japanese authoritiesarranged a series of barter agreements between this town and Canton,Suw atao, A m o i, Hainantao and the Ph ilippines . In June 1943 a barter agree-ment was concluded with Central China, under which Hong Kong was toexport goods to the extent of Yen 17 million and receive imports amountingto Yen 25 million during the year April 1943 to March 1944. By these agree-ments Hong Kong has become a centre for the barter trade system betweenChina and the south-western Pacific area.

In May 1941 two commercial agreements were concluded between Japanand French Indo-China, granting reciprocal faci l i t ies for establ ishment ofbusine sses , naviga tion, etc. In September 1942 a barter agreement was signedwith Manchukuo and North China and in March 1943 a new barter agreement(the second of its kind) with Japan, providing for increased exports fromFrench Indo-China of resin, timber, yellow flax, rice, cowhides, bones etc.against the import of consumption goods from Japan.

Communiqués published by Japanese military and naval authorities haveannounced the initiation of a large-scale revision of the economic system ofthe south -wes tern Pacific area. In the past this area greatly developed its



- 81 -

primary production, while importing most of the industrial articles needed indaily Hfe from distant cou ntries . The war, causing a severance of comm ercial

relations-: and a lack of s hipping fac ilities , led to surp luses of som e co m -modities and scarcities of others and, in order to cope with these difficultiesbut also for more permanent reasons, the policy was adopted of- establishingin this région a certain number of light industries designed to meet essentiallylocal requirements. ;

Under a Five-Year Plan for production of cotton in the southern area(including Burma) cotton plantations have been greatly extended in thePhil ippines and Sumatra. As regards other agricultural products, the authoritiesadopted the principle that the production of foodstuffs shou ld be "encouragedin so far as it helped to establish current consumption on a basis of greaterself-su fficiency . Plans have been made, for insta nce, to replace some of theplantations of sugar-cane by production of other more urgently needed food-stuffs. It is also proposed to explore and develop the cou ntries' mineral andindustrial resources as ful ly as circumstances permit.

The tendencies discernible in the Far East provide a telling example notonly of the difficulties resulting from a disruption of long-established com-mercial ties but also of the measures which may be planned to attenuate thesedifficulties . Of the new production of consum ers' goods, which in the courseof the war has been started in differen t: parts of the w or ld, something w ill pre-suma bly remain evert after the em ergency has passed ; but there can be littledoub t" tha t ^the broad" currents of trade as determined* by na tu ra l ad va nt ag esw i l l a s s e r t t h e m s e l v e s a s a n d w h e n c o m m e r c i a l i n t e r c o u r s e i s

re su m ed on a m ore no rm al ba si s . The present war may have shownlhat a government (able to tax and borrow) can obtain most of the commoditiesit needs (or serviceable substitutes for them) as long as it is willing to pay thepr ice, however high. But, when it is no longer possible to disregard the manifoldheeds of ordinary consumption and the financial burdens on the state, theproblem wil l assume a different aspect: the price paid and the quantityobtainable at that price wil l once more become a consideration, and alongwith them the question of the most favourable conditions for production.

For a period immediately after the cessation of hostilities it may beexpected that government agencies > will continue to handle a large part ofinterna tional trade. Dem obil isation wil l take time and there wil l presumably

be deliveries of badJy needed supplies to coun tries in distre ss, on terms notstrictly commercial. A-part of this movement of goods wil l no doubt be ofa temporary character, fill ing the gap until normal sources of supply have•been reopened; but another part ought to be fol lowed by a continuous flowof trade, which wil l need to be put on a commercial basis as soon as possible.It is of great importance-that payments should again be made in the ordinary

ìcoùrse of affairs, for i f that were not the case the flow of goods could hardlycontinue for long (and à stoppage would be to the disadvantage both of theproducer and of-h is cu stom er). Government agencies themselves have, indeed,every reason to assist in creating the conditions for a st ea dy f l o w of tr a d e .



- 82 -

Trading on official account has often been accused of introducing an arbitraryelement into international trading by making abrupt transfers of orders from

one market to another, not on account of economic calculations but for politicaland other reasons. Private com me rce, on the other han d, has striven to buildup direct contacts between business firms in different countries, usuallyestablishing a relationship characterised by a large measure of continu ity. Insuch conditions, the business partners, although still exposed to competitionas regards price and quality of goods, could assume that considerations of anextraneous and arbitrary character would not be allowed to break an establishedcon nec tion. If, in certain sections or in relation to certain countrie s, trade in thefuture remains subject to official directio n, it w ill become more impo rtant thanever to recognise that steadiness is a prerequisite of successful foreign trade.

No country can confidently embark upon a line of production for foreignmarkets if it has reason to fear that the demand may suddenly be diverted forcauses unconnected with price and quality of the goods prod uced . Indeed ,it has long been a favourite protectionist argument that foreign trade is subjectto exceptional risks which are not fully taken into account by businessmen in the management of their affairs, and which thus compel thegovernment to provide special safeguards. To lessen the force of thisargumen t it is necessary to be able to h old out some prospe ct of areasonable degree of steadiness in the international exchange of goods andservices. Besides calling for assurances from government agencies with regardto their own trade activities, the attainment of greater steadiness presupposesthe pursuit of a commercial and monetary policy with guarantees againstsudden changes in currency rates and sudden additions to tariff barriers.

From 1925 to 1929 consid erable progre ss was m ade in the maintenance ofexchange stability and in freeing international trade from quantitative restric-tions; but the success was short-lived. The tariff increases and currencydepreciations of 1930 and the following years can be understood only if con-sidered as a reaction against the wide — and wild — fall in commodity prices,which deranged world markets and the economies of many countries after1929. Steadiness in foreign trade is thus in a large measure dependent uponstability in the general level of prices.

To achieve such a stability is not easy; many problems will arise, notonly of a monetary character; some of them will best (perhaps only) be solvedby concerted international action. One such problem will be how to ensure an

expansion in effective demand pari passu with the increase in production, andhow to do that without indulging in a dangerous credit inflation liable to befollowe d by a setback. In the period imm ediately after the war, the abundanceof pent-up buying power will be likely, it may be hoped, to ensure a strong de-mand for goods and services, which — after a relatively brief period of shakingdown — may make it less difficult to develop the po st-war export trade than isoften feared; after the 1914-18 war, international trade had by 1929, in spite of allobstacles, risen in volume nearly 30 per cent, above the level of 1914. For thefirst few years after the present war the main tasks in the fie ld of foreigntrade will presumably be to find some practical system of financing shipments



- 83 -

of raw materials and to eliminate from the monetary system such measuresas are apt to exert an arbitrary influence on the currents of trade, among them

certain forms of exchange con trol. Here again, the aim must be to establishan order permitting a steady advance in the international exchange of goodsand services and thus in those sectors of the national economies which aredirected towards intercourse with other countries.

The foreign trade of small countries normally constitutes a greater partof their economic l i fe than is the case in larger countries; the former maytherefore be said to be more dependent upon conditions abroad. This higherdegree of dependence is bou nd to have an influence on their economic policy ;it forces them, for instance, to adapt their cost and price structures morereadily to changes on world m arkets. In some respects this com pulsion mayhave its disadvantages (just as for small countries the narrowness of the homemarket may con stitute a handicap) ; but, at the same time , regard for for eigntendencies leads to a higher degree of flexibility than would otherwise benecessary. It makes it less likely that these countries w ill remain for longin an unbalanced position; they cannot afford to forget that intell igent adapta-tion to changed conditions is one of the requisites for progress. As in otherfields of human activity the principle of conservation has to be supplementedby the principle of change, so in foreign trade attention has to be given tothe need both for steadiness and for flexibi l ity — two requirements which mayappear contradictory but which in actual practice can and must be reconciled.

3. PRICE MOVEMENTS.

While in ordinary times price indexes used to reflect current price move-ments with a high degree of accuracy (as could be seen, for instance, froma comparison of indexes covering different numbers of commodities or indexesweighted differently), the present situation, with a large number of pricesofficially fixed but not always effectively imposed, makes it much more difficultto arrive at an adequate expression of actual changes in the price level.Moreover, it should be borne in mind that a price index, as such, gives noindication of the extent to which the commodities and services entering intothe calculatio n are available on the m arket. Even so , the cos t-of-liv ing indexin an increasing number of countries has acquired an enhanced importance,in that wage rates and other forms of remuneration are adjusted to changes

in tha t index - if not by law or con trac t, at least by de facto rec ogn ition . Inthese circumstances, the calculation of each index number becomes a matterof general interest, and such questions as whether indirect taxation should bereckoned in the price quotations collected for the index become a subjectof discussion even for the public at large.

While the purpose of a cost-of-l iving index is to measure changes inoutlay required to maintain an unchange d standard of living for a certainincome group, attempts are often made to calculate subsidiary indexes witha different object in view. Th us , in several c oun tries indexes have been



— 84 —

compiled to show the change in income which is needed to enable a particularincome group to acquire a constant proportion of the goods and services

available, i . e. al lowing for the wartime contraction in su pplies, as indicated,for instance, in the rationing system. These subsidiary indexes are sometimesthought capable of giving a direct indication of the increases which shouldbe allowed in wage rates for different income groups; a case in point is the"expense index" in Switzerland, designed to measure the changes in theamounts needed to acquire the reduced supply of goods and services actuallyavailable. In som e other coun tries th e degree of compe nsation has been fixedas a percentage of,the increase in the price index, a method which is perhapsmore a rbitrary! although in practice it very often gives the same result as inSwitzerland, i.e. compensation averaging about one-half of the rise in prices.In yet.other countries the ! wage policy has been less : closely related to changesin l iving costs, .the ^tw o extremes being Germany, where a "wa ge st op " has

been.rin fprce since the beginning of the war (indeed, actually since 1933) and,fo r a tim e, the United State s, whe re, up t o th e autum n of 1942, wage increasesof varying magnitude served as .a means of attracting workers to essentialb/anch es of produ ction — in the first place the all-important war industries.But,, even when the rate of compensation has been based on a "sc ien tifica lly"calculated expense index, the s am oun t, of incom e earned by the public hasalmost invariably exceeded, the curren t supply of goods, and services that couldbe bought by consum ers! -the reason, for this being the considerable additionalincome produced by increased employment of men and women, longer hoursand more piece-work, and by other outlay, such as the allowances paid to wivesand children of men serving in the armed forces , etc. Am ong the measurestaken to prevent the excessive buying power in the hands of the public fromexerting too strong an upward pressure on the price level, price control is,of course, one of the most important.

In order to avoid ä rise in the cost-of-fiving index liable to occasion anincrease in wages and thus to augment both the volume of buying powerin the hands rof the public and the cost of production, the authorities havenaturally tried to keep all increases in prices of commodities affecting theregularly' published cöst-oWiving statistics within as narrow l imits as possible.Wheri collecting the basrc price quotations, those responsible for the indexeshave obviously in many instances omitted to take account óf any deteriorationinequality to which the products available in the market have been subject.There are, however; other methods of Stabilising the index: one of them is togrant Subsidies to keep tìoWn thé prices of goods with a marked influenceori the co st o f living ; another is to absta in fro m impo sing excise or otherindirect taxes on goods and services included in the range of i tems on whichthe cost-o f-l iving index is calculate d. . ;: ;

In order to solve certain technical problems which arise when goods areno longer available in the same quantities or qualities, the so-called "chain"method h as been increasingly adopted in calculating the index. Germany wasone of the first còuntrieè to introduce this rnöthod during the present war,and its example was afterwards fol lowed by a considerable number of countries.



85 —

— In G e rm an y the system of price control was applied in 1942 on verymuch the same lines as in the previous year an d, in spite of gro wing diff i-

culties, comparatively stable prices were maintained for commodities subject torat ioning, while for armaments and other products required by the governmentthe prices paid would seem to have been kept completely under control, andeven reduced in several instances, as in the case of cartel prices.

P r i c e a n d W a g e R a te s in G e rm a n y .

' Index figures1928 =100

1928, average . . .1932, December . .1936, December . .1939, January-June1942, December . .1943, June . . . . .

Wholesaleprices

10066.075.076.182.482.9

Costof living

10077.981.983.189.591.9

Hourlywage rates

10084.283.584.285.9•

From the low level reachedin 1932, wholesale prices wereraised in the four (.following, yearsby about 15 per cent, and thecos t of living by 5 per cen t.,the purpose being to lessen thèdisparity between agricultural and

industrial prices and generally tobring about a better balance in, _ , , . . . the cost and pr ice structure ,

wage rates being maintained at the level to which they had fallen in theyears 1928 to 1932. (but owing to more em ploymen t and longer hours thetota l earnings of labour increased con sidera bly). In the autumn of 1936the process of price adaptation may be said to have come to an end withthe introduction of the "price stop", later supplemented by the formally pro-claimed "wage stop", which has been applied in Germany more strictly thanin any other coun try. The disadvantage s inheren t in a system of more orless immovable prices are, however, realised in Germany — and not merelythe danger that such a system will inhibit the helpful influence of prices in

determining the direction of production, but also the probabil i ty that i t maylead to waste of effort, etc. There is a con vict ion, however, that in wartimeno other system can prevent a cum ulative upwa rd surge of prices. In certainrespects an attempt has been made so to adapt the system that it will pro^dupe at least some of the useful effects obtained in ordinary times from theinterplay of costs and prices. The guiding principle has been to increaseefficiency through rationalisation or, in otfter words, to bring about a re-duction in costs by appealing to the profit motive, while leaving prices moreor less unchanged. This was the purpose of the system of uniform andgroup prices ("Einh eits- und Gruppe npreise ") introduced at the end of 1941.The salient features of the system may be summarised as fol lows: (i) pricesare based on perform ance and not on costs ; (ii) they are not the result ofnegotiations with the interested parties but are fixed by an official agencymostly after consultation with representatives of the branch of economyconcerned; and (i i i) they are imposed uniformly throughout the country orwithin certain groups, thus greatly simplifying the mechanism of control.Applied originally to armament contracts, the system hes covered manythousands of articles, efforts being made to extend it to civi l ian consumptiongoods.

During 1942 a growing disproportion between internal and external pricescreated a difficult situation. Only in relation to Roumania have adjustments



- 86 -

of clearing rates offset, to an appreciable extent, the steep price increases inthe countries which are G ermany's p rincipal trade partners in the Danubian

region.It has been calculated that in Germany expend iture on foo d represents

about 50 per cent, of the outlay of an average family (against 15 per cent,for rent and 10 per cent, for clothing); imports of foodstuffs amounted beforethe war to a l i ttle more than one-quarter of total German imports ; the greatadvance in prices in the agricultural exporting countries, together with thenecessity of stimulating home production, induced the authorities to grantcertain price increases (affecting milk, butter, pigs, potatoes and vegetables),but the consequ ences for th e con sume r w ere to a large extent avoided byincreased subsidies.

Moreover, as in previous years, steps have been taken to fix, by commer-

cial negotiations, the prices of the most important commodities exchangedbetween Germany and other cou ntries . A price stop applicable to theirmutual trade had already been agreed upon in principle between Germanyand Italy in October 1941 and through negotiations between these two countriesa whole series of p rices were fixed for different grou ps' of com modities inMarch 1942. Similar agreements covering à varying range of commodities havebeen concluded by Germany with a number of other coun tries. Price-fixingof this kind may, however, involve certain dangers, in that producers in thecountries exporting to Germany may find that prices are kept lower for theirexport goods than for other products; this may discourage production andmake exporters more reluctant to sell abroad (not only because the profitsfrom exports tend to be lower but also because the time lag between saleand payment is generally much longer than in the case of the home market).In the winter of 1942-43 a Price Equalisation Fund was instituted in Germany,initially provided with a sum of RM 1 milliard to bring down prices ofimported goods. Thanks to the system of subsidies, the rise in the officialcost-of-living index was limited in 1942 to 2.6 per cent., with only slight changesin all but the prices for textiles, which are shown to have risen by 10.5 per cent,from 1941 to 1942. W hile rents have been kept u ncha nged , building cos ts havecon tinu ed to rise and by 1942 were 20 per ce nt, above the level in 1936.

In Italy price statistics have not been published regularly since the warbegan but it is known that by June 1942 wholesale prices had risen about

50 per cent, above the pre-war level. Between 1939 and 1941 prices of dom esticgoods had increased by 25 per cent., while prices of imported goods hadgone up by 40 per cent. Up to the spring of 1943, impo rt prices w ou ld seemto have been maintained without any appreciable rise (thanks to the price-fixingthrough commercial agreements, affecting, inter al ia, the price of coal, which,toge ther with textiles , show ed the steepest rise of all in the 1914-18 wa r), butprices of domestic goods have continued to mount. Great difficulties in applyingan effective control were encountered owing to the existence of a large numberof medium-sized and small enterprises which produce a variety of productsnot easily brought into a general scheme of standardisation. Some measure



- 87 -

of price supervision was adopted in Italy as early as 1927 and tightened upin 1940, but it was not until January 1942 that an attempt at a uniform

and extensive control was made through the creation of an InterministerialCom mittee under the chairman ship of the head of the governm ent. It prove d,however, impossible to prevent the emergence of an extensive black marketwith high prices, although the authorities again and again denounced thepractice of illegal transactions as disturbing the system of rationing and im-pairing the value of the currency . The neces sity of encou raging an increasedoutput, especially of foodstuffs, led to several upward adjustments, the differ-ence between the price paid to the producer and that at which the commoditywas sold being, in the case of primary prod uct s, mostly borne by the statethrough a sytem of subsidies, varying according to the quality of the product,the place of pro du ctio n, etc. From Lit. 175 per quintal in 1942 the p rice ofwheat was , for instance , increased in 1943 to L it. 235 in northern and central

Italy, Lit. 280 in southern Italy and L it. 310 for the islands S ardinia and Sic ily.This policy of subs idising, however, entailed a heavy financial burden, theannual outlay having, in the financial year 1942-43, reached about Lit. 12 mil-l iard, of whic h Lit. 2.5 milliard represen ted the cos t of premiums allocated forthat year's wheat campaign. A revision of prices for war supplies was initiatedearly in 1943, when a special committee was set up to enquire into war con-tracts for amounts exceeding Lit. 3 mil l ion.

A wage and salary stop had been introduced in 1940 but a number ofspecial increases were permitted, often taking the form of family allowances.In the spring of 1943 comprehensive measures of adjustment were applied firstto wages and later on to c ivil servan ts' sa laries, with increases up to 30 per cent.

In the D an ub ia n an d Ba lka n c o u n tr ie s the steep r ise in pr iceswhich characterised the year 1941 continued, although not quite at the same rate,

P r i c e M o v e m e n t s i n D a n u b i a n a n d

Percentage price Increase during:

Bulgaria:Wholesale pricesCost of living

Hungary:

Wholesale pricesCost of livingRoumania:

Retail pricesSlovakia:

Cost of living (foodstuffs)Turkey:

Wholesale prices OWholesale prices («)Cost of living

Yugoslavia:Cost of living

19392nd half

+ 5+ 2

+ 5+ 1

+ 14

+ ' 8+ 6

+ 13

1940

0//o

+ 26+ 17+ 22

+ 15

+ 25

+ 180)+ 51 (3)+ 25+ 13+ 32

B a l k a n C o u n t r i e s .

1941

+ 27+ 37

+ 26+ 21

+ 67

'+ 25

+ 46+ 42+ 22

+ 46R

1942

+ 19+ 24

+ 16+ 9

+ 48

+ 17

+ 134

+ 94

+ 104(5)

June 1939to

Dec. 1942

+ 101+ 104

+ 88+ 52

+ 252

+ 74

+ 415(3)

+ 184+ 364ß

(') January 1939 to December 1940. (2) Index of the Ministry of Trade. (3) Compared to average of 1939.(4) Chamber of Trade and Industry of Istanbul. (5) Refers to Croatia, Agram (Zagreb).



— 88 —

during 1942. Generally speaking, this rise was, of course, connected with warcharges, including the surplus exports to all ied c ountries — in the f irst'p lace

Germany, thou gh Italy also participated to some exte nt; bu t the;, peculiardifficulties which the countries in south-eastern Europe have met with in theirattempts to combat inflation are partly due to the size of their agriculturalpopulation, which, with their present methods of administration, makes a systemof effective rationing almost impossible, and partly to absence, in most cases,of fully-developed financial markets and modern fiscal practices.

B u l g a r i a : P r i c e I n d e x e s .

BaseJanuary-June1939 =100

1939 January-June . .1940 December . . . .1941 June . . . . . . .

December . . . .1942 June .

December . . . .1943 June

Generalwhole-sale

prices

100132139168179201224

Importgoods

100163174188203202206

Exportgoods

100113108134150169183

Domesticproductsfor home

con-

sumption100136149181192219249

Costof

living

100124132156177197223

The extent towhich the "' upwardsurge of prices inthe Danubian areahas, of late, reflected

mainly domestic in-fluences may be i l lu-strated by develop-men ts i n Bu lga r ia .

While up to June1942 the rise in im-port prices above the

January-June 1939 level was higher than the rise in prices of domestic pro-ducts for home consumption, the order had already been reversed by the endof 1942, when a rise of 102 per cent, in impo rt prices compa red w ith a riseof no t less than 119 per cent, in prices of dom estic produ cts for home con -

sumpt ion. Apart from the effectsof a bad harvest (the third insuccession), the price increasewas accelerated by a considerableadvance in wages, which in mostcases were almost doubled duringthe year, thus adding to the costof production. The consequencewas another sharp rise in the costof living, which in Bulgaria, unlikemost countries, has kept pace withthe rise in wholesale prices. A

Price Equalisation Fund was insti-tuted in 1942 to reduce disparitiesbetween import and domesticpric es . Early in 1943 the M inistry ofTrade pointed out that the majori-ty of Bulgarian commercial agree-ments contained a price clauseunder which an increase introducedby one of the partners would entaila parallel measure by the other.

Cost of Living in Turkey, Bulgaria and Hungary,Indexes January-June 1939 = 100.«

3001 1 1— : 1 1 1300

100 19« 19«



- 89 -

In Turkey the experiment of al lowing a greater degree of freedom to themarkets was t ried in the seco nd half of 1942, it .being hoped that a relaxation

of the regulations in force would lead to an increased supply of goods andthus bring about a price level which, if not as low as the former official prices,would at least fall short of the highest quotations attained in the black market.But by these changes the basic causes of the price rise were not elim inated ;and in the winter of 1942-43 special measures had to be taken to reduceprices of foodstuffs and clothing for the poorer classes.

In no country has the rise in prices and wages assumed such an in-flationary character as in Greece. The rise practically put a stop to all normalexpo rts, while such importe rs as were able to buy foreign exchange at officia lrates could not help making unduly large profits. One of the measures adopted

to mend the situation was the introduction of a special fund charged withthe task of subsidising exports, whereas in other countries price equalisationfunds have usually owed their origin to the need for stimulating im ports.A series of foreign trad e measures (see page 64) and the arrival offoodstuffs under the aegis of the Red Cross would seem to have somewhatimproved the p osition. A sign of this improvement was that workerswere once more beginning to prefer cash to payment in kind. I n C ro a t i aand S e rb ia , sharp price rises have also occurred , although not on ascale comparable with that in Greece. The official index in Agram (Zagreb)shows a trebling of the cost of living between the summer of 1939 andthe end of 1942. To reduce prices of vital foodstuffs, a Price Equalisation Fundof Kunas 2 milliard was set up and the proceeds from increases in certain

consumption taxes were also allocated to this fund. Official price statisticsceased to be published in Roumania in the middle of 1941 but calculationsby the economic journal "Argus" put the level of retail prices in the spring of1943 at 448, as compared with 100 in the summer of 1939. The developmentof agricultural prices since the beginning of the war may be seen from thefollowing table.

R o u m a n i a : A g r i c u l t u r a l P r i c e s .

Products

Wheat . . . .Maize . . . .Barley . . . .Oats . . . . .Rye . . . . .

Lei per quintal in July

1939

427407315445274

1940

560525380653560

1941

1,100720750770900

1942

2,2001,0501,4001,5001,600

1943

2,6001,8001,6601,9001,870

The price ofwheat doubled from1940 to 1941, andagain from 1941 to

1942, but in 1943 theincrease was only atthe rate of 18 percent., as a result ofan excellent harvest.

At the end of 1942 a price increase of about 100 per cent, wasallowed to the oil industry, agreement having been secured, as from1st May. 1942, to a price rise of over 40 per cent, in respect of oil exportedto Germany.





— 91 —

Germany, the degree of rationalisation being less uniform in the industry of theProtecto rate tha n in Germ any. A s from 1st Octo ber 1942 the maximum prices

for goods exported from or imported into the Protectorate were to be thosecharged on the home market, any deviation from this rule requiring specialperm ission . The wage and salary stop at the level prevailing on 15th January1942 has been renewed, higher wages being allowed only in cases of increasedefficiency.

Base:

August 1939 = 1001939 August. . . .

December . .1940 December . .1941 December . .1942 December . .1943 August. . . .

Wholesale prices

A100126157190227245

B100121148174204222

Retail

prices100110132151178200

Cost of

living100111

• 130154184202

* Indexes calculated by "La Conjoncture Economique et Financière".A = weighted according to consumption 1938.B = weighted according to consumption 1942.

In France the price indexes*, revised to take account of the real consump-tion in 1942 and based exclusively on regulated prices, showed an increase

of 120 per cent, in whole-F r a n c e : P r i c e I n d e x e s . * s a | e prices and of 100

per cent, in f!he cost of

living between August 1939and the summer öf 1943,the rate of increase in 1942in both index numbersbeing practically the sameas in the two previousyears (amounting to about20 per cent, per annum).An attempt has alsobeen made to calculate a

general index of al l prices, including those for goods bought in the b l a c km a r k e t or acquired in other ways, e. g. by barter transactions or trading

in country districts or by parcels sent from one member of a family toanother. Ac cor ding to these calculations, the index (with the pre-war levelas 100) amoun ted to 210 by the end of 1941, 280 by the end of 1942and 290 for Au gu st 1943. Th e upward tende ncy has s ubsis ted in 1943but has been offset to som e extent by a sharp fall in some of themore speculative prices. It sho uld be borne in mind that these prices arequoted in what are mostly very narrow markets and that they are as arule extremely sens itive, being influence d "by changes not only of an econom icand monetary character but also by political and military events regarded asproviding an indication of the probable duration of the war. It is hardlynecessary to add that these prices are not at all representative of the levelat which commercial exchanges would se ttle down on a return to normal

conditions, the point of equil ibrium being probably nearer to the official thanto the black market prices.

In France, as elsewhere, the authorities have been faced with a shortageof goods in conjunction with an abundance of money. It has proved impossibleto withstand price increases even in the official sector, the maintenance ofstabil i ty in food prices, for instance, being inconsistent with the need toefrcourage agricultural pro ductio n. In the autumn of 1942, when prices were

* The Office of General Statistics has resumed the publication of a large number of wholesale and retailprices and, on the basis of these and other data, various institutions have proceeded to calculate generalprice Indexes.



= 92 -

f ixed f o r the next year's w h ea tc ro p, a comprehensive system of premiumswas introduced, which had the effect of raising the price of wheat 33 per cent,above the 1940-41 level. Since by 1942 the price of bread had risen by only17 per cent, as compared with 1939, a charge of about Fr.fcs 3 milliard hadto be provided for in the budget to make the official bread price possible.Transport and other difficulties have resulted in a considerable degree ofautarky in the different "départements", the price divergencies already existingbefore the war having been much accentua ted. Up to 1942 wages andsalaries would seem to have risen by rather more than 25 per cent.,, laggingconsiderably behind" trie increas e in the cost of l iving. Special family allow-ances have, however, been generally introduced arid other forms of assistancehave been devised, such as the provision of meals in factories; further wagefricreaëes were announced by the government as from June 1943.

No price indexes are avai lable in Hol land, whi le in Belgium the publ i -cation of official price indexes has been resumed for a number of importantcommodities, such as wheat, barley, rye, sugar, coal and steel; by June 1943these quotations showed an increase above the pre-war level varying between30 and 90 per cent., except in the case of sugar, which had risen by 138 percent. Before the w ar the Dutch price level was 30 to 40 per cent, below that ofGermany, but by the end of 1942 it had been completely adjusted to the heightof German p rices. Since 1940 Dutch ag riculture has undergone an extensivestru ctura l ch ange , the area under c ultivation having been considerably extendedat the expense of pasture land. The resulting increase in cereal production hasnot been sufficient, however, to make good the drastic fall in imports, and theshortage has been progressively aggravated by the exhaustion of sto cks . P riceshaving soared to high levels on the black market, the powers of the PriceCon troller were extended late in 1942. Dutch wag es do not seem to have beenincreased pari passu with the adjustment of official prices to the German level.

P r i c e m o v e m e n t s :D e n m a r k , F i n l a n d , N o r w a y , S w e d e n a n d S w i t z e r l a n d .

1 Percentage price increase during:

Denmark:Wholesale prices

Cost of livingFinland:Wholesale pricesCost of living

Norway:Wholesale pricesCost of living

Sweden :Woleshale pricesCost of living

Switzerland:Wholesale pricesCost of living . . .

19392nd half

%+ 30

+ 10+ 19+ 8

+ 19+ 6

+ 21+. 5

+ 18+ 4

1940

%+ 34

+ 28+ 28+ 21

+ 26+ 22

+ 21+ 15

+ 31+ 13

1941

%+ 10

+ 7+ 19+ 15

+ 16+ 10

+ 12+ 11

+ 21+ 15

1942

%+ 2

+ 3+ 25+ 20

+ 3+ 4

+ 9+ 5

+ 8+ 9

June1939to

Dec. 1942

%+ 95

+ 56+ 127+ 82

+ 79+ 48

+ 79..+ 41

+ 103+ " 46



- 93 -

With the exception of Finland, engaged in active warfare, the differentcountries shown in the above table all managed to slow down the price

increase during 1942 and to bring it almost to a standstill in thè latterhalf of the year. The firmer ho ld which the authorities had thu s been ableto keep upon price movements was secured not merely by a strengtheningof the price control — important though that was — but by a whole seriesof measures adopted in the different countries, an additional factor beinga distinct weakening in the price-raising influences from abroad. Thus, inD e n m a rk import prices rose by 1.6 per cent, during 1942 as compared with12 per cent, in the preced ing year. The greater part of Den mark 's foreig ntrade has been regulated under agreements stipulating fixed prices for thegoods exchanged and;- in addition , the resistance to price rises in the foreignsector was strengthened by the revaluation of the Danish crown by 8.2 percent, in January 1942. At home, maximum prices have been fixed for nearly

90 per cent, of all food stu ffs, most of them more readily available thanks tobetter crops. Owing to the persistent shortage of fodder (due to the cessationof imports from overseas) agricultural output of different kinds of foodstuffshad, by 1942, shrunk to abou t one-half of the pre-war vo lum e; àt thè endof the year the stock of cattle had fallen by 13 per cent., pigs by 62 per cent,and poultry by 65 per cent, of the pre-war numbers. In order to help smallagricultural producers "whose situation had improved very slightly in comparisonwith that of the larger farm ers, a rise of 24 ore per kilogram me in the priceof pig meat was allowed in the s pring of 1943, the greater" part of thé resu ltingburden being assumed by Germany, anxious to encourage this line of produc-t ion . Wages and salariée were increased during the year, at the cost of afurther Kr. 100 million on the national wage-bill, the increase being extendedto workers under twenty-three years of age, i.e. to a category which had notbenefited by the previous increase in February 1940. Less in N o r w a y than inthe other Scandinavian countries do the official indexes, based primarily onthe prices fixed for rationed commodities, seem to reflect the actual changesin living costs." If allowance is made for deteriora tion in quality and for theneed of supplementing the official rations by outside purchases, the actualrise in the cost of living by the end of 1942 was well above the 48 per cent,show n officially. Before the war N orway covered a subs tantial p art of its foo drequirements throu gh imports paid for mo stly with the income from ship ping ,the" Norwegian mercanti le marine ranking fourth among the world's commercialfleets. Now that this equil ibrium has been disturbe d, the heavier cost of

procuring necessary supplies has contributed much to the difficulties on thedomestic market.

two great obstacles which the authorities in Fi n la n d have encounteredin at te m p tin gt o master ih e j price problem have been the price increases inthe foreign sector (affecting, in particular, imported goods) and the declinein '-hoiire pro duc tion (up to 18 per cent, of th e Finnish p opulatio n be ing forlong[-'periods oil active service at the fron t). In the autum n of 1942 a co m -prehensive financial programme was adopted, combined with a tightening ofthe pride contro l, U n d e r th e new provisions , a gricultural prices were not to



- 94 -

be increased during the ensuing harvest year, although certain premiums wereto be granted to the producers; and prices for domestic industrial articleswere to be adjusted upwards only in consequence of a rise in the cost ofmaterials (while a rise in costs due to a decline in production or in turnoverwould not justify an increase in the price of the finished article). In con-formity with the principles previously adopted, according to which an increasein the cost of living w as to be comp ensated to the extent of two -third sby a rise in wages, it was laid down that each new advance of 10 pointsin the official cos t-of-living index beyon d the fig ure of 160 (1938-39 = 100)would entail a 4 per cent, increase in wages. Originally the provisions regardingthe degree of compensation did not apply to farm workers; but by the middleof 1943 agricultural prices had been raised (an increase in retail prices beingavoided by means of government sub sidies am ounting to FM 1,600 m illio n) ;and in that connection the same right to compensation was granted to workers

employed in agricu lture. It may also be mentioned tha t, contrary to the prac-tice in most countries, a certain increase in rents has been allowed in orderto offset th e rise in m aintenance and other charg es, the am ount of theincrease authorised from 1st September 1942 being 20 per cent.

Since the middle of 1942 a high degree of stability has characterisednearly al l branches of Sweden's economic l i fe, including the volume ofindustrial production, wholesale prices, cost of l iving, etc. The magnitudeof government expenditure, necessitating borrowing at the rate of aboutS.Kr. 150 million a mo nth , has con tinued to p rovide an excess of buyingpow er, it being estimated that the gros s income of the population roseby 32 per cent, between 1939 and 1942, while at the same time the

available volum e of con sum ption goods fell by 17 per cent. In the autum nof 1942 the government entrusted an outside expert (not a state official)with the negotiations and investigations required to determine the futureecon omic policy best calculated to counteract a harmful rise in price s. W hile

negotiations were beingconducted with represen-tatives of various econo-mic groups regarding theprices to be paid for the1943 crops, stabilisation ofwages, etc., a temporaryprice stop was imposedon 31st October 1942. Afew weeks later, agreementwas reached with regardto a conditional wages t o p : as long as theofficial cost-of-living index(1914 = 100), standing inOctober 1942 at 239, didnot reach the level of 249,

Sweden: Import and Export Prices.Indexes January-June 1939 = 100.

280

2G0

240

220

200

180

I BO

140

120

100

s*" Import goods

„J Export goods

1939 19*0 1941 1942 1943

280

260

240

220

200

180

160

140

120

100



- 95 -

S w i t z e r l a n d : P r i c e M o v e m e n t s .

wage rates wo uld remain u ncha nged , but they wo uld be increased by5 per cent, if the cost of living rose to a point between 249 and 257; should

the latter limit be attained, new negotiations were to take place betweenthe interested parties. In point of fac t, however, it proved possible to ho lddown the cost of living (partly as a result of governm ent subsidies cos tingS.Kr. 220 million a year) ; in the spring of 1943 the e ost- of-livin g index m ovedaround 240 and was thus well below the critical margin.

The slackening in the upward movement of pr ices in Switzerland maybe seen from the fol lowing table. The Swiss economy, being particularly de-

pendent upon foreigntrade, has been muchaffected by price-rais-ing influences fromabroad, including ahuge increase in thecosts of transport fromoverseas countries (in1938 about two-thirdsof total Swiss importsconsisted of raw ma-terials and foodstuffs).

The upward thrust from abroad, however, made itself felt less strongly in 1942,partly because the rise in the prices of imported goods was not so markedas previously, and pa rtly because of the furthe r shrinkage by 10 per cent,in the volume of imports (to about 60 per cent, of the pre-war figure) with

the result that the proportion of imported goods in total consumption wasmaterially reduced.

Mainly in order to prevent exaggerated price increases and undue profits,about sixty Price Equalisation Funds have been set up in Switzerland,

covering such products aswindow glass, hides andleather, base metals and

Percentage price

increase during:

Wholesale general indexImported goodsHome-produced goods .Cost of living

1939

2nd half%

+ 18+ 30+ 10+ 4

1940

%+ 31+ 44+ 21+ 13

1941

%+ 21+ 27+ 16+ 15

1942

%+ 8+ 9+ 7+ 9

June1939 toDec. 1942

%+ 103+ 159+ 65+ 46

Switzerland : Wholesale Prices.Indexes January-June 1939 = 100.

1939 191-0 1941 19*2 1943

a number of foodstuffs.These funds receive pay-ments from exporters andproducers (in a few cases

also contributions from theFederal Government) andthey grant subsidies to pro-ducers and importers whowould otherwise be work-ing at a los s. In the earlymonths of 1943 steps weretaken to bring greater uni-formity into their organisa-tion and methods of working.



ÒR

On the basis of the specially prepared "expense index", the GovernmentCommission appointed to advise on wage problems recommended, in the

spring of 1943, that wag es sho uld be increased by varying percentagesranging from 38 per cent, for the lower income groups to 24 per cent, fortho se with a n incom e of Sw .fcs 6,000 or mo re. By the end of March 1943the average mcrease obtained by industrial workers since the beginning ofthe war came to about 29 per cent., as compared with a rise of 47 per cent,in the official cos t-of-living index. Between Aug ust 1939 and the end of1942 agricultural prices rose by 64 per cent.; it has been calculated thatthe income received for agricultural work (as distinct from the income arisingout of ownership of land or capital) increased by about 50 per cent, between1938 and 1942, this increase being allow ed in order to stim ulate agricu lturalproduction during the emergency and also to compensate farmers for thelower rate of their pre-war income.

240230220210200190

180170160150HO130120110100

Spain: Price Movements.Indexes January-June 1939 = 100.

19*2 19«

200190180170160150m

130120

110100

Portugal: Price Movements.Indexes. January-June 1939 = 100.

- . • ••

-

-

-

-•.. ,

i il M hi Ì M

Wh

• t i l l I r 1 I • L

Desae prces

/

Cos of living

n Ini ill ii

-

i i 1 nin i il1939 1940 . .1941 1912 1943

210230220210200190180170160150WO130120110100

Price movements inS p a in during 1942 werecharacterised by a relativelyhigh degree of stability,supported by a slow butsteady increase in the cur-rent supplies of both rawmaterials and foodstuffs.Owing to keen competitionbetween the belligerent coun-tries to secure certain vital

Spanish products (mainlymetals), export prices haveon the whole been favour-able to Spain.

Por tuga l a lso hasbeen able to charge highprices for its export goods(especially tungsten, FarEastern output being nolonger available). While in1942 prices of national pro-

ducts rose by 10 per cent.,those of imported productswen t up by 27 per cen t,and prices of export goods(other than foods) by 35 percent. The favourable exportposition not only added tothe reserves of gold andforeign exchange but at thesame time increased the



- 97 -

buying power of the public and was an important factor in bringing aboutthe marked rise in prices and cost of living during 1942. By the end of that

year the official cost-of-|iving index showed an increase of 46 per cent, abovethe pre-war level, but the real increase was probably somewhat higher, sincethe index only takes account of national products. Wage adjustments, rangingfrom 20 to 50 per cent, above pre-war earnings, had been allowed in 1942and rationing was extended in the spring of 1943.

P r i c e M o v e m e n t s : U n i t e d K i n g d o m , E i r e , B r i t i s h I n d i a , A u s t r a l i a ,N e w Z e a l a n d , C a n a d a a n d U n i t e d S t a t e s .

Percentage price increase(or decrease) during:

United Kingdom:Wholesale pricesCost of livingEire:

Cost of livingBritish India:

Wholesale pricesCost of living

Australia:Wholesale pricesCost of living

New Zealand :Wholesale pricesCost of living

Canada:Wholesale pricesCost of living

United States:Wholesale pricesCost of living

19392nd half

%+ 25+ 12

+ 12

+ 36+ 9

+ 5+ 1

+ 5+ 3

+ 11+ 3

+ 5+ 1

1940

%+ 22+ 13

+ 11

— 12+ 2

+ 9+ 6

+ 14+ 4

+ 3+ 4

+ 1+ 1

1941

%-+. 5+ 2

+ 11

+ 28+ 12

+ 4+ 4

+ 9+ 4

+ 11+ 7

+ 17+ 10

1942

/o+ 3— 1

+ 15

+ 55+ 46

+ 15+ 9.

+ 7+ 2

+ 4+ 3

+ 8+ 9

June 1939to

Dec. 19420/So

+ 64+ 23

+ 59

+ 136+ 81

+ 38+ 22

+ 39+ 14

+ 32+ 18

+ 34+ 22:

In the Un it e d K in g d o m the same price pol icy has been pursued asin the previous year and the official indexes of wholesale prices and cost ofl iving show only sl ight changes. Among the principal groups which make upthe wholesale price index the largest advance is registered by "c er ea ls" —an increase of 123 per cent, fr om Au gu st 1939 to March 1943. A cc ord ingto the cost-of-living index, however, the price of flour rose by only 26 percent, and of bread by 9 per cen t., the divergence in the price tren ds revealedby the indexes being largely due to subsidies granted as part of the price-

stabil isation policy, which is estimated to cost the government £210 mil l ionin 1943 as compared with £180 million in 1942, £125 million in 1941 and£100 million in 1940. The stability in the cost-of-living index is also dueto an extension of the "uti l i ty" class of goods; 80 per cent, of al l newclothes are made of standardised materials and practically all new furnitureproduced falls within the uti l i ty category. In addition, the purchase tax wasremoved from utility cloth and wearing apparel in August 1942. In the samemonth the output of luxury articles was suspended altogether, w ith the . resultthat, apart from food , drinks and tobacco, the production of consumption goodsother than uti l i ty goods fel l to about 20 per cent, of the pre-war volume.



- 98 -

There has been much discussion of the extent to which the officialcost-of-living index gives a true picture of the actual increase in living costs.Even before the war the index took account of only a part of the currentexpenses included in an average household budget; since 1939 a number ofarticles on which it is based have ceased to be available, while certain goodswhich have since become more or less indispensable are not taken into con-siderat ion. Thanks to the general increase in wages, some of the lower incomegroups are now prepared to pay, for unrationed goods, prices which haveoften doubled and which were formerly beyond their means. The White Paperpublished in co nnection with the budget in Apr il 1943 came to the co nclusionthat, apart from price increases deliberately brou ght about by higher indirecttaxes, the whole volume of consumption goods and services, including luxurygoods and other non-necessities, had not risen in price by more than 36 percent., against the rise of 28 per cent, registered by the official index.

A corresponding stability does not seem to have been attained withregard to w age s. From the summ er of 1939 to th e end of 1941 the index ofaverage weekly wages (i. e. wage ra te s) had risen by about 25 per cent, andto the end of 1942 by 30 per cent., but the increase in earnings had been muchgreater, owing principally to overtime and night work and probably to a relativeincrease in piece-work. Statistics of actual earnings, collected by the Ministryof Labour at six-monthly intervals, showed that, for 6,250,000 workers employedin manufacturing industries, average earnings rose by 65 per cent, betweenOctober 1938 and January 1943, while the average level of rates of wages foran ordinary week's work, exclusive of overtime, increased by 26 or 27 percent.And for coal-mining (not included in the above figures) information collected by

the M inistry of Fuel b roug ht out the fact tha t, from the last quarter of 1939 tothe corresponding quarter of 1943, for all classes of workers (including boys)engaged in or about mines, the average earnings per shift had likewise in-creased by approxim ately 65 per cent. In g ene ral, how ever, the figures fordifferent industries vary widely, the largest increase in earnings (by more than75 per cent.) being foun d in the metal, engineering and sh ipbuildin g gro up s.

In Eire a further advance in prices reflected the great difficulties inobtaining supplies from abroad (the country possessing practically no merchantships of its own) but it was also to some extent connected with an increaseddemand due to the presence of American troops in Northern Ireland. Thecost-of-living index continued to rise, reaching , by the end of 1942, a po int60 per cent, above the pre-war level, while the index of agricultural prices bythe same date stood at 75 per cent, above that level. In presenting the budgetfor the fiscal year 1942-43, the Minister of Finance estimated at £3.6 millionthe expenditure to be incurred on subsidising food and peat fuel in order tokeep down the cost of living.

In other countries of the British Empire, as in most parts of the world,local factors have assumed increased importance in the determination of pricedevelopments. In B r i t i s h In d ia com modity pr ices rose again sharply dur ing1942, it being almost impossible in this vast country to introduce a compre-



hensive price control combined with an effective system of rationing, and thusto neutralise the excess of buying power engendered by the swollen war

expenditure. In A u s t r a l ia a series of new measures fixed all prices for goo dsand services at the level prevailing on 16th A pr il 1943; in order to keep livingcosts down to that level, increased government subsidies were granted andthe purchase tax was reduced as regards clothes and other texti les. In N ewZealand an arrangement had been in force for some years under which wagerates were allowed to rise if prices increased by more than 2.5 per cent. Acomprehensive stabil isation scheme was inaugurated in December 1942, withthe object of pegging wages, salaries, rents and the prices of farm products,the Prime Minister having declared that the national income had increasedby about £50 million since 1939, while the supply of consumption goods haddecreased by more than 40 per cent. — a disparity which made stricter controlof the price structure a matter of particular urgency.

The price movements in Australia and New Zealand are of very muchthe same proportions as those in C an ad a and the U n it e d S ta te s. Beforethe outbreak of war in 1939 there was an abundant production in all thesecountries and substantial stocks of foodstuffs, which it was difficult to sellat remunerative prices. For a wh ile, the wartime hindrances to export tradeintensified the a ccum ulation of surp luses ; but, as prices began to rise, thestocks constituted valuable reserves to meet the growing demand for domesticconsum ption and war purposes. These countries had also large unusedresources of other kinds to draw upon and were thus able, at comparativelyshort notice, to increase their war production on a considerable scale.

In November 1941 a rather elastic system of price ceilings had been intro-duced in Canada, retail prices being brought down to the level prevail ingfrom 15th Septemb er to 11th Octo ber 1941. Who lesale trade was not m adesubject to ceilings, but it was expected that the prices fixed for retail saleswould react on the prices paid for goods bought wholesale and would ult i-mately affect prod uce rs. In certain cases the governmen t intervened withsubsidies. In the shoe trade, for instance, the retail prices charged when thecontrol became effective were found to be about 15 per cent, above the levelobtaining from 15th September to 11th Oc tob er; the producer and the retailerthereupon each undertook to reduce prices by 4 per cent., and the governmentagreed to pay the remaining 7 per cent, on condition that within a certain

time it should be relieved of this necessity by further measures of rationali-sation. The system was effective in slowing down the increase in prices, buta shifting of workers to highly-paid branches of the war industries and therecord crops of 1942, which exclusive of subsidies brought Canada's farmersa 20 per cent, increase in their income, added to the abundance of buyingpower in the hands of the public. To prevent a further rise in the cost ofliving and a consequent increase in wages, a number of retail prices werereduced by such means as subsidies, the removal of duties or taxes, anddirect sell ing at a loss through a government agency. The first reductionswere applied in December 1942 to tea, coffee, milk and oranges, and it was



- 100 -

estimated tha t these measures co st the governm ent C an. $40 million perannum, total price subsidies amoun ting to Can. $68 mil l ion for the fiscal

year up to the end of March 1943 and being expected to reach Can . $120 m il-lion ir> the follow ing year.

Wage rates have not been subject to ceilings, properly speaking, buthave been linked to prices in that employers are bound to pay their employeescost-of-living bonuses adjusted quarterly at a rate of 25 cents per week foreach full po int of change in the cos t-of-livin g index. W ith a rise of 18 pointsbetween the outbreak of the war and December 1942 this made a total bonusof Ca n. $4.5 o r, in th e case of employees receiving C an. $25 a week, 18 percent, of the wages received.

W hile in the U n it e d S ta te s the level of wholesale prices rose by 17 percent, in 1941, the rise in the follow ing year was only 8 per cent. On the

other hand, the cost of living continued its steady advance at the rate of10 per cent, in 1941 and 9 per cent, in 1942; and the rate of progress wasfully maintained d uring the f irst half of 1943, with a rise of nearly 1 percent, a month. The basic influences have been a rapid increase in buyingpower (income payments to individuals running, by the end of 1942, at anannual rate in the neighbourhood of $125 milliard, as against an average of$65 milliard for the period 1935 to 1939) and a gradual curtailme nt in p ro-duction for civi l ian uses. The sharpest cut in production was imposed ondurable consumer goods (automobiles, refrigerators, etc.), since in this fieldproduction could most easily be converted to war purposes. Otherwise therestrictive measures were a pplied principa lly to ca pital equipm ent, and theoutput of finished articles for civilian purposes was thus affected onlyindirectly and with a certain time lag. A ll throu gh 1942, moreover, con sum erswere able to draw on substantial stocks previously accumulated in the hands of

users and distributors.Finally, the output offarm products availablefor civilian requirementsin 1942 was close uponthat of the 1935-39 periodand in some lines reach-ed record levels, whileimports of a number of

materials, notably wool,were larger than hadbeen expected. Includ-ing the use of housesand other durable andsemi-durable goods whichconsumers possessedwhen the controls wereimposed, aggregate civi-l ian consumption in the

United States: Wholesale Prices.Indexes 1926 = 100.

M III I I II939 1940 1941 19« 19«

140

130

120

110

10090

80

70

60

50



— 101 —

spring of 1943 was not far below the pre-war level. There had, however, beena shift to increased food purchases, the amount actually expended on food

being fully 60 per cent, larger by the autumn of 1942 than in 1939. Because ofthis shift in dem and, con ditions became pro pitious for an increase in the priceof farm products and, that being the case, political pressure for higher pricesmade itself stron gly fe lt. By the end of 1942 farm prices had reached 110 percent, of " pa rit y" (i . e. the range of agricultural prices which gives the farmerthe same buying power in relation to non-farm products as he had in 1909-14).For wheat and maize the so-called "loan rates" were maintained at 85 percent, of parity in order to prevent an increase in the cost offodder for l ivestockand poultry, but for cotton, tobacco, rice and peanuts the loan rates earlyin October 1942 were raised from 85 to 90 per cent.

In conformity with the Emergency Price Control Act adopted in January

1942, the Office of Price Administration proceeded in May of the same yearto stabilise the prices of a great number of goods at the highest level reachedin March. In October the contro l was extended, on the basis of the levelsexisting on 15th September, to other com mod ities, including agricultural p ro-ducts, and a Director of Economic Stabil ization was appointed. Quotas wereestablished for the purpose of restricting future deliveries for civi l ian con-sumpt ion, which, according to a Presidential statement, would have to bereduced by 25 per cent, below th e reco rd year of 1941; plans for ration ingmeat, cheese, tinned and dried fruits and vegetables, fats and oils weredrawn up and these were put into effect in the early months of 1943. Aftersome lively controversy, it was decided later in the year that governmentsubsidies might be paid for the purpose of keeping down the cost of l iving.

It is probable that the considerable increase which is found in the volumeof genuine savings to some extent reflects the influence of rationing and theinabil i ty to buy goods which are no longer available; but the current supplyof consumers' goods is sti l l so considerable (and not merely in comparisonwith conditions in other countries) that rationing and similar forms of restrictioncan play only a minor rôle, greater importance attaching to direct limitation ofincomes, e. g. by wage co ntrol. Many more workers being employed in indu stryand a 50 per cent, increase being paid for overtime (i . e. for wo rk in excess óf40 hours), the national wage-bill increased from $61 milliard in 1941 to $80 milliardin 1942. Hourly earnings in manufacturing industries advanced from 78.3 centsin December 1941 to 90.7 cents in December 1942, or by fully 15 per cent. The

jurisdiction of the War Labor Board was extended to all wage-scale changesfor workers not on farms, including changes agreed upon between employersand employees. The Board adopted the policy of rejecting requests entailingincreases in excess of compensation for the 15 per cent, rise in the costof living between January 1941 and May 1942 (in accordance with the "littlesteel formula", so called because it had been worked out as a fair solutionin a confl ict involving the smaller steel com panies). Further wage increaseswere, however, al lowed in a number of cases: for instance, where previousincreases had been less than 15 per cent., or wages had remained at sub-standard levels, or it was considered necessary for certain industries to admit



— 102 —

improve men ts in wages essential to encou rage the war effort . In A pr il 1943further stabil isation measures were adopted, workers being, inter al ia, prohi-

bited from changing their employment in favour of better-paid work. With thefreezing of certain sections of the price structure, a more deliberate directionof economic life of the country became necessary in the United States, aselsewhere, the War Manpower Commission being charged with the task ofproviding manpower both for the armed forces and for essential industries.From the middle of 1939 to the spring of 1943 earnings per hour in thema nufac turing industries increased by about 50 per cent. ; wage rates of farmlabourers, which have remained free of control and which in 1939 were at alow level, would seem to have risen by an even higher percentage.

In millions of bushels*

1934—1938, average19391940194119421943 (estimate)

UnitedStates

717751812946981835

Canada

263521540312593615

Total

9801,2721,3521,2581,5741,450

* 1 bushel of wheat = 60 pounds = 27.2 kilogrammes.

In N or th A m e r i c a the w he at ha rv es t in 1942 was the best on

record, with the single exception of the year 1928. Canada's large harvestin 1942 was obta ined

W he at P ro d u c t i o n f rom a smaller area thanin the U ni te d S ta te s and Ca na da . that sown wi th wheat in

either 1928 or 1941 andwas thus primarily due toa higher yield per acre.The carry-over of wheat on1st August 1943 was estima-ted at 680 million bushels,only slightly above the es-timate for the carry-over ofwheat in the United States

on the same date. Owing to a record consumption the carry-over in theUnited States rose very little between A ug us t 1942 and A ug us t 1943, inspite of the ab undant harvest. A t 1,013 million bush els, o r some 80 per cent,above the normal level, the estimated figure of total wheat consumption reflectsan increased use of wheat in industry (manufacture of alcohol for wartimepurpose s) and as fo dde r, particularly for pigs , the U. S. pig stock havingrisen from about 50 million at the beg inning of 1939 to a pproximately 75 m il-lion at the beginn ing of 1943. For the U nited State s, Canada, Au stra liaand the A rgen tine the t ota l carry-over of wheat on 1st Au gu st 1943 isestimated at 1,750 million b ush els. Com pared with normal cond itions (the

corresponding figure forC ar ry -o ve r o f W he at . Augus t 1938 was 280 mi l -l ion bushels), this repre-sents a very large accumu-lated supply but, consider-ing the higher level ofconsumption of wheatfor purposes other thanhuman food, there seemslikely to be a continuous

Estimates

1938,1st August1939,1940,1941,1942,1943,

U. S. A. Canada Argen-tina

AustraliaTotal

of fourcountries

in millions of bushels

153253282385632650

25103300480424688

7223075

180198245

3443

10955

122165

284629766

1,1001,3761,748



- 103 -

Wheat Prices, In cents per bushel.

lulu nliiliiln nliilii il uhi nln iihiliiln M hi uh M nliilii ululimi n n JilI929 I930 I93I I932 I933 193* 1935 1936 1937 1938 1939 1910 19*1 19« 19«

decrease in stocks until the end of the war. The change which hasoccurred is reflected in a stiffening of wheat prices both in Canada and inthe United States.

The maize crop in the United States was also at a high level in 1942,reaching 3,175 million bushels*, as compared with 2,673 million bushels in thepreceding year. In the A rge ntin e, however, the severe drought caused excep-tional damage to the growing maize, entirely destroying the crop in someprovinces. As a result, the total production of maize in the Argentine fell from356 millio n bush els in 1941-42 to 76 millio n bus hels in 1942-43, and s tocks ofmaize, which had been estimated at 280 million bushels at the beginning ofMay 1942 and for want of storage room had then caused the authorities greatconcern , suddenly shrank to less than norm al prop ortio ns. The price ofmaize in Buenos Aires, which had been down to 83 cents per bushel inNovember 1942 (government support alone preventing it from falling still

further), suddenly recovered to 98% cents per bushel at the beginning of 1943and 105 cents in April.

The Conference on Food and Agriculture held at Hot Springs in May-June 1943 dealt with questions of nutrition standards, the expansion of agri-cultural production and its adaptation to consumption needs, as well as themeans of improving distrib utio n. It decided to set up new internationalmachinery in the form of an Interim Commission to function in Washingtonuntil such time as a permanent food organisation could be estab lished . This

* 1 bushel of maize = 56 pounds = 25.4 kilogrammes.



- 104 -

Commission was charged with the promotion and coordination of researchand with the collection and dissem ination of information ; i t is to s ubm it to

the individual governments recommendations for action along the l ines agreedupon by the conference and, further, examine such questions as the develop-ment of agricultural resources, commodity arrangements, consumer cooperatives,land development and other subjects considered at the conference.

P r i c e m o v e m e n t s in v a r i o u s L a t i n A m e r i c a n c o u n t r i e s .

Percentage price increase(or decrease) during :

1939

2nd half

%

+ 18

+ 4

+ 38 0)

+ 2

+ 7+ 5

— 2

1

— 2

— 1+ 1

+ 11+ 3

+ 4

- 7 0)

1940

%

+ 2— 3

+ 15

+ 7

+ 5+ 10

g

— 6— 2

+ 1+ 1

+ 9+ 9

+ 2

+ 7

1941

%

+ 37+ IO

+ 35

+ 12

+ 37

+ 23

+ 4

+ 19+ 9

+ 14+ 14

+ 27+ 11

2

— 6

1942

%

+ 130

+ 29

+ 5 B

+ 23

+ 26

+ 14

+ 40+ 31

+ 8+ 11

+ 19+ 9

+ 4

+ 16

June 1939to

Dec. 1942

%

+ 86+ 12

+ 178

+ 28 P)

+ 90. + 77

+ 10

+ 55+ 38

+ 24+ 30

+ 82+ 36

+ 8

+ 9

Argentina:Wholesale prices . . . .Cost of living

Bolivia:Cost of living

Brazil:Cost of living

Chile:Wholesale prices . . . .Cost of living

Colombia:Cost of living

Costa Rica:Wholesale prices . . . .Cost of living

Mexico:Wholesale prices . . . .Cost of living

Peru:Wholesale prices . . . .Cost of living

Uruguay:Cost of living

Venezuela:Cost of living (foodstuffs)

0) June 1939 to January 1940. «December 1941 to August 1942. (3) June 1939 to August 1942.

More than in other parts of the world* the price movements in the variousLa t in A m e r i ca n c ou nt r i es have been a resul t o f market forces. Govern-ment intervention through control or subsidies has exerted an influence onlyin particular sections of the national economies, typical cases being the coffee

agreement between fourteen countries, including the United States, and thesup port given to the prices of cereals in the Ar ge ntin e. In both these casesthe object was to prevent too disastrous a fal l in the prices paid to the pro-ducers, exports having practically ceased as regards the continent of Europeand being impeded by lack of shipping even as regards countries in theAm erican hemisphere. It is hardly possible to discern any uniformity in thetendencies revealed by the statistics of the Latin Am erican co untries. In somethe cost of living, mainly reflecting the price of food, has risen very little,while in others there are distinct signs of inflation produced by uncovereddeficits in the budgets.



- 105 -

A r g e n t i n e :m o v e m e n t s o f w h o l e s a l e p r i c e s .

on base 1926 = 100

1939 August . . .December . .

1940 December . .1941 December . .1942 December . .

Agri-culturalproducts

7994

738078

Non-agri-culturalproducts

109129

138194224

Generalwholesale

prices

103122

124170193

In the Argentine the cost-of- l iv ing index showed no change on balancein 1942 but wholesale prices rose by 13 per cent, and, as the following table

shows, this was due to higher quotations for non-agricultural products (mostlyindustrial articles either imported or dependent for their production on im-ported raw materials).

The price level of agriculturalprod ucts at the end of 1942 wasbarely as high as in August 1939.Minimum prices were again fixedfor wheat, linseed and maize, thegovernment continuing to rendersupport to the farmers ; acc ordingto the report of the Banco Centralefor 1942 the amount borrowed bythe government for the financing ofthe crops totalled Pesos 242 mil l ionin that year, as com pared with

505 million in the preceding year, bringing the total of government outlay forthe purchase of crops to about Pesos 1,000 million. As already mentioned,the severe and prolonged drought in the harvest year 1942-43 (the worstfor over twenty years) suddenly altered the price situation for maize; thegovernment, fearing a shortage even for domestic requirements, prohibitedexports for the time being, in striking contrast to the policy previouslyfo l lowed. Prices for meat products had already risen by 10 to 25 per cent, in1942, no direct government subsidy being necessary since higher internal con-

sumption absorbed three-quarters of the production. Several increases in wagerates were allowed, which, together with the lengthening of the working weekin industry , raised average ea rnings by 13 per cent, as com pared with theprevious year. In the spring of 1943 the cost-of-living index showed a suddenadvance and the government then proceeded to fix maximum prices for anumber of consumption goods, including butter, potatoes, rice, flour, breadand cheese.

No statistic s of general price movements have been available in B r a z ilsince the summer of 1942, the cost-of-living index then showing a rise of28 per cent, above the level of June 1939. In the hope of withstanding furtherincreases , a price stop was decreed for the retail trade on the basis of the

quotations ruling on 1st December 1942; wages, which had been fixed in May ofthat year, were allowed to rise by 25 to 30 per cent, as compensation for theincrease in the cos t of l iving during the period May to December. Tran s-port d ifficulties had been experienced in obta ining the normal quantu m ofwheat from the Argentine, shipping space being the key to the situation forBrazil as for othe r Latin Am erica n c oun tries. In 1941 the United S tatesdid not take over coffee up to the full quota previously agreed upon but,under a subs equen t arrangem ent, un dertook to purchase [from Brazil 12% millionbags out of the 1941-42 and 1942-43 crops whether or not shipping wasavailable. This arrangement helped to maintain prices in conjunction with



- 106 -

various domestic measures, including official loans up to 80 per cent, of the valueof coffee way-bills, and payments of Cruzeiros 2 per bag of coffee destroyed.

In the Far East there has been a great diversity of price movementsas between different areas. The most pronounced increase appears to haveoccurred in the territories uti l ising the Chungking yuan as their currency. Butalso in the huge and heterogeneous areas brought together by Japan underthe denomination of Greater East Asia the price variations have been con-siderable. Thu s between June 1937 and June 1942, for instan ce, the level ofwholesale prices in Tokio rose by 49 per cent., in Hsinking by 112 per cent,and in Tien tsin by 401 per cent. For J a p a n thi s unequal rise in prices createda series of difficult problems: on the one hand, it became necessary to findmeans of overcoming the resulting hindrances to trade and, on the other,to ensure that the Japanese price level should not be raised by expensive

imports from overseas. To achieve the desired results equalisation funds andspecial trading corporations were introduced, furnished with subsidies from theJapanese budget (for further particulars regarding these measures, see pages 51-52).

Another difficult problem was to prevent the wartime industrial expansionand the continuously increasing volume of buying power in the hands ofthe public from producing too precipitous a rise in prices on the domesticmarket. A price stop for certain important classes of commodities wasintrodu ced in September 1939; but, by the end of 1942, the indexes calculatedby the Bank of Japan showed an increase amounting to 33 per cent, forwholesale prices and 29 per cent, for the cost of living above the level pre-vailing in June 1939.

A new turn wasgiven to price policyin the spring of 1943when a number ofmeasures were takento stimulate the pro-duction of essentialgoods while prevent-ing a rise in the costof living by means of

governm ent subs idies. The maximum prices under the system inaugurated inSeptember 1939 had often barely covered costs and frequently acted as a brake

on production ; under the new system Price Equalisation Funds were created andthese were in a position to take over certain goods from the producer at morethan the official maximum price, the margin covering the higher productioncosts. Thanks to the subsidies, the price charged to the consumer remained thesame. In addition, a system of premiums was introduced, designed to givea stimulus through the profit motive and thus to increase the efficiency ofpro duc tion . Sub sidies had already been granted some time before , in orderto encourage certain types of agricu ltural prod uction ; the M inister of Financestated at th e beginning of 1943 that for this purpo se about Yen 400 million hadbeen provided in the current budget.

P r i c e m o v e m e n t s i n J a p a n .

Percentage price increase(or decrease) during:

Wholesale prices . . . .Cost of living

19392nd half

0/To

+ 17+ 9

1940

%— 1+ 9

1941

0//o

+ 11+ 3

1942

%+ 3+ 2

June1939 to

Dec.1942

0/To

+ 33+ 29



— 107 —

As a resu l t o f the war, there are marked pr ice d ivergencies, not on lybetween different cou ntrie s, but also between different section s of the price

structure within each country, as may be seen from the fol lowing table, givingfor a number of countries the percentage rise of different groups in thecost-of-l iving indexes.

C o s t o fof different groups

l i v i n g : P e r c e n t a g e i n c r e a s efrom January-June 1939 to December 1942.

0) Increase compared to the average of 1939.

a rule, however,close to the pre

The headingsdo not cover exactlythe same items fromcountry to country,but differences inthis respect areprobably not toopronounced and

certainly do not al-together rule out acomparison. Cer-tain features arecommon to most ofthe countries con-cerned (includingGermany, where as

the retail prices for rationed commodities have been keptwar level).

Percentage increase(or decrease)

Bulgaria ('). . . .Denmark

FinlandGermanyHungarySwedenSwitzerland . . .United Kingdom .U.S. A

Food

+ 135+ 57

+ 89+ 6+ 73+ 42+ 61+ 21+ 41

Heatingand

lighting

+ 50+ 112

+ 123— 2+ 31+ 67+ 33+ 33+ 8

Clothing

+ 112+ 84

+ 127+ 32+ 78+ 72+ 87+ 82+ 25

Rent

0/To

+ 35

+ 7+ 1200

+ 20

+ 2+ 4

Others

+ 42+ 47

+ 81+ 6(2)

+ 41P)

+ 53+ 12

Total

+ 101+ 56

+ 81+ 8+ 52+ 42+ 46+ 30+ 22

(?) Not available.

In six out of the nine co untries covered by the table the cos t of

c lo t h in g shows the highest rise of any group , but even in the three remain-ing cou ntrie s, Bulga ria, Denmark and the United State s, the increase is largerin the cost of clothing than in the general index number. The prono unce drise in the price of clothing reflects a scarcity of textile materials (wool andcotton) and the necessity of resorting to substitutes, of which the cost ofprod uction is naturally higher. Several coun tries have even issued de tailedregulations to restrain prices in the market for second-hand clothes.

Rents have, with few exceptions, been kept down almost to the pre-warlevel, an effective price stop being imposed by the authorities, who cancon trol the supply price of houses already built and, as regards the buildingof new hous es, have usually made con struc tion subjec t to a licence , in order to

reserve financial resources, material and labour for the prosecution of the war.The ban upon rent increases has been facilitated by the cheap-money policy,under which interest charges on mortgage debts, etc. have remained practicallyunchanged (which was not the case during the 1914-18 war). But other chargeshave undoubtedly increased, and in several countries the question is underdiscussion to what extent rents might be raised in order to meet the increasein daily expenses and the higher maintenance costs which will arise afterthe war. Here and there some attention has been given to the diff icult problemof how to re-establish a free rent market after the war, so that private buildingof houses can be set going once more (see Introd uction , pages 36-37). The



- 108 -

degree of adjustment which would then have to be made in the existing rentlevel would vary from country to country, according to the extent to which

the general price level still exceeded the pre-war mark after things had settleddown again, with one proviso, however: there are evidently great possibilitiesof reducing building costs by the introduction of new technical methods(such as p re-fa brica tion); -and, in so far as these pos sibilities are fully utilised(which often means the scrapping of certain trade-union and other regulations),a market equilibrium for rents may be found at a lower level than wouldotherwise be necessary.

So long as the war goes on, the authorities endeavour to establish ap ri c e h ar m on y sui ted to wartime condit ions. On the one hand, they mustensure that essential production is not discouraged by prices too low in

comparison with other l ines of production and, on the other hand, they mustremember that the prices paid determine the basic distribution of income andthat — not least in wartime — considerations of justice and of social orderare of primary impo rtance. Much of the social tension toward s the end ofthe 1914-18 war can without doubt be traced to extravagant movements ofwholesale and retail prices, bringing high profits to some and penury toothers. The strict control which a number of governments have this timebeen able to impose, together with the higher taxation of war profits and themore effective aid granted, for instance, to the families of men called up formil i tary service, constitute important elements of social, and consequently ofeconom ic, stabil i ty. Some sacrifices must, even so, be accepted and, whenthe reasons are understood, they are usually borne without strong opposition.

Industrial workers have (in some cases with astonishing equanimity) acceptedfar-reaching price rises designed to stimulate agricultural production and togive farmers a fairer remuneration than they had been able to obtain beforethe war. Serious discontent seems only to arise when conditions of fairnessare disregard ed ; moreover, if that happen s, it is likely that a violent reversalwill set in when peace com es; for a particular branch to obtain a very pro-nounced rise in prices would probably be unwise even from its own pointof view.

Many di fferent inf luences wi l l affect agricul tural pol icy after th is war:in some respects this policy may be found to reflect the degree of collaboration

established within certain groups of countries and in the world as a whole;efforts may also be made to lower the cost of food and thus to improve realwages without diminishing export capacity by a rise in costs. The difficultieswhich wil l be encountered in finding a solution of these problems wil l no doubtvary from country to country. A lowering of agricultural prices may for instancebe facilitated by cost reductions when it once more becomes possible to importfodder from abroad. The fact that during the present war farmers have not onlyabstained from increasing their indebtedness but have even repaid debts shouldhelp to ensure a greater flexibility in carrying through cost and price adjust-ments. In North America the demands of mobil isation and the needs of the war



— 109 —

industries have drawn young men from country districts (in the United Statessome 3 million had thus left the farm s by the b eginning of 1943), and many

of them may never return to their o ld oc cupa tion ; but a permanent reduc tionin the number of agricultural labourers, whatever difficulties it may cause toindividual farmers, would seem to constitute a certain safeguard against anearly recurrence of agricultural production in excess of current demand. Ano thersafeguard in the same connection may be found in a raising of nutritionstandards, which would widen the consumption of basic food products. Theseand other developments may help to alleviate the strain of adjustment; but,even so, any proposed or threatened changes will probably meet with muchresistance, since, apart from the question of daily bread, various aspects ofthe traditional economic and social structure are usually affected by changesin agricultural policy.

The following table shows the great difference which exists between thewheat prices on the continent of Europe and in the overseas countries.

W h e a t p r i c e s .Official prices per 100 kg.

Countries

ArgentinaCanada (Winnipeg) (

2)

Great Britain . . .(5)U.S.A. (Chicago) ODenmark <f )BelgiumSwedenHollandGermanySlovakia (•>)Norway («)Spain («)FranceHungary (*)Bulgaria (•>)Serbia («)Italy . .(«)Switzerland . . . .(<)Roumania . . . .TurkeyCroatia (<)

1942-1943

in nationalcurrency

units

m$n 6.75$ 2.95£ 1.579

$ 4.34D.Kr. 28.-Fcs 200.—S.Kr. 27.—FI. 13.625RM 21.—Ks. 250.-N.Kr. 35.—Pts. 84.-Fcs 375.—Pengö 30. —Leva 620.—Din. 600.—Lit. 175.-Fcs 51.50Lei 2,200.—£T 20.- (?)Kunas 600.—

InSwiss francs

(')6.30

11.3927.3218.6625.2227.6827.7231.2836.3337.2534.4033.2137.5031.2633.1151.9039.6951.5050.3866.8051.72

1943-1944

in nationalcurrency

units

m$n 6.75$ 3.71£ 1.480

$ 5.29D.Kr. 28.—Fes 200.—S.Kr. 27.50FI. 13.875RM 2 1 .-Ks. 250.—N.Kr. 38.—Pts. 94-104.—Fes 410.—Pengö 40.—Leva 820.—Din. 600.—Lit. 235-310.-Fes 53.50Lei 2,600.—£T 20.-Kunas 1,200.—

InSwiss francs

0)

6.6314.3825.60

22.7525.2227.6828.2331.8536.3337.2537.35

37.16-41.1141.—41.6843.7951.90

53.30-70.3053.5059.5466.80

103.44

Percentageincrease

(in nationalcurrency

units)

0%+ 26— 6+ 22

00

+ 2+ 2

00

+ 9+ 12-24

+ 9+ 33+ 32

0+ 34-77

+ 4+ 18

0+ 100

0) Converted at official rates for Argentina, Canada, Great Britain, Sweden, U.S.A. and for the other countriesat clearing rate. (2) June market rate. (3) Average of ten weeks ending October 9th.(") Price paid to producers. (5) This price occasionally raised to £T 26.

As mentioned in several sections of this Report, a number of govern-ments spend large amounts on subsidies designed to keep down the costof living in spite of the high prices paid to domestic producers or forimports. When, with the return of peace, present rations are increased andrestrictions eventually removed, a maintenance of the system of subsidisingmay entail increased costs for the Treasuries, especially in countries with alarge domestic production, while countries importing a substantial part of



- 110 -

their food supplies may benefit from lower prices abroad and, in particular,from lower freight rates. In framing its wartime policy, Switzerland has granted

subsidies only in respect of imported commodities, in order to be in a positionto discontinue the payment as and when the foreign goods can be procuredmore cheaply.

Various adjustments of wages may also prove necessary in certaincountries to restore a proper balance both in the domestic price structureand in relation to other countries. After the experience of the twenty yearsbetween the two wars, i t is a commonplace to state that there must besome degree of correspondence between cost and wage levels and exchangerates. One difficulty in dealing with these problems internationally arisesfrom the fact that increases in "wages" may mean different things. In the

United Kingdom, for instance, from the summer of 1939 to the end of 1942there was an increase, amounting to 30 per cent., in average wage ratesof all workers for a full week's work, exclusive of overtime, and at thesame time an increase in average earnings (taking into account the longerhours wo rked , higher overtime pay, etc.) amou nting to fully 60 per cent. Eitherof these percentages may be of importance. The volume of buying powerin the hands of the public, which in a large measure determines the magnitudeof current demand (and thus becomes of importance if it is a question ofpreventing prices from fall ing), is closely related to the figure for earnings(and perhaps even more to a figure calculated in the Bulletin of the Instituteof Statistics, Oxford, giving the rise in average earnings, less income tax,as 40 per cent.). For the dete rmination of the correc t exchange rates between

different countries, average wage rates may, however, be more truly relevant,since they measure by far the most important element in the cost of produc-tion for the economy as a whole, besides representing, in the cost and pricestructure, the factor which is most resistant to changes. In Sweden theavailable statistics furnish figures giving wage rates which seem, on the w hole,to be comparable with the British figures, and which show an increase ofapp roxim ately 27 per cerit. between the su mm er of 1939 and the end of 1942.In the United States, however, there are no general statistics of wage ratescorresponding to the British or Swedish data; but there is an index of "fac-tory average hourly earnings", which naturally takes into account higher payfor overtime and also reflects increased efficiency, and therefore may registerhigher pay even when piece-work rates, for ins tanc e, have not cha nged . Fromthe summer of 1939 to the end of 1942 the index in question shows a riseof 40 per cent.

Attempts have sometimes been made to find a formula in the fieldof foreign exchanges for the calculation of "correct parities" but it isdoubtful whether a universally applicable formula can be found. So muchis ce rtain , howe ver: in any such calcu lation a com parison between relativewage levels will always be an important element. It would therefore be ofgreat help if those concerned with national and international labour statisticswould arrange for a compilation of wage statistics on a uniform basis for



- 111 -

the various countries, taking account of different aspects of the wageproblem s. In doing so they wo uld provide material of great value not only

in their own field but also for the monetary discussions which will benecessary after the war.

It seems to be generally agreed - at least in theory - that, in order toarrive at a basis for a sustained recovery after the war, a proper balance mustbe established in the domestic price and cost structure of the differentcoun tries and in their relations with each other. But there can be little dou btthat it will often prove hard in practice to put through the necessary adjust-ments in rents, agricultural prices and wages, since these adjustments wil lusually affect the real income of som e grou ps of person s ; and those at w hosecost the adjustments would be made will not easily be persuaded that asubsequent improvement in the level of production wil l compensate them for

whatever temporary reduction of their income would be required.



- 112 -

I . PRODUCTION AND MOVEMENTS OF GOLD.

In two respects the year 1942 will remain noteworthy in the history ofgo ld : after a slight decline in 1941 the o utput of gold fell sharply in c omp arisonwith the previous year and for the first time since 1931 there was noincrease in the monetary gold stock of the United States.

From 1930 to 1940 the world output of gold had risen at an average rateof 7 per cent, per annum, or more than twice as fast as in the period 1860-1914.The turn of the trend came in 1941 and in the following year the output fellby about 7 per cent, in those countries for which reliable statistical informa-tion is stil l available (about three-quarters of the gold production of the

world); the rate of decline, however, varied greatly from one area to another,from 1.8 per cent, in South Africa to 22 per cent, in the United States. Thevolume of production was increasingly affected by higher working costs,shortage of labour and difficulties in obtaining materials and machinery; ina number of countries (and notably the United States, Canada and Australia)an additional factor came into play, viz. government intervention to cur-tail the mining of gold in order to set men, materials and machinery free forthe all- important war production. Gold has, however, continued to be acceptedas a universal means of payment and has held its own in this respect moresuccessfully than in the last war; there is now no example of a gold-refusalpolicy similar to that applied intermittently by Holland and Sweden in the years1916 to 1918.

From 1934 to 1940 the mone tary go ld stock of the U nited S tates increase dby an amount equivalent to the whole current output of gold , which for theseven years may be estimated at $8,500 m illio n, plu s $6,500 millio n represe ntinggold ou t of hoards and shipm ents from reserves of central ban ks. In 1941only one-half of the newly-produced gold was taken by the United States and

in 1942 the U.S. goldstock actually declinedby $11 mill ion. Sti l l , atthe end of the year,the United States pos-sessed $22,700 million

or about 70 per cent,of the total monetarygold stock of theworld . Gold continuedto be sold to theU. S. Treasury fromdomestic production($126 million in 1942)and from neighbouringcountries, especially

United States: Gold held under Earmarkby Federal Reserve Banks for Foreign Account,

in millions of dollars.3500

3000

2500

2000

1500

1000

500

3500

3000

2500

2000

1500

1000

500

. y//?w//y//////7j/////77>*- i | -—**77X////////Y///////!('////.V/Y///'S/W A,5! l 1931 1932 1933 1934 1935 1936 1937 1938 1939 19W 19*1 19« 19«



- 113 -

Canada and Mexico. Since the gold reserves of the United States declinedduring the year, more than all the gold newly acquired went to offset the

sales of gold an d, in pa rticular, the increase of $458 million in the am ountof gold earmarked for account of foreign central banks and governments. TheSwiss National Bank and the Sveriges Riksbank converted a considerable partof their dollar holdings into gold , the former increasing its gold reservesin 1942 by $159 million and the latter by $112 m illion. Bra zil, Cuba and someother Latin American countries are also known to have increased the amountof gold held by them under earmark in the United States.

The total of gold produced in 1942 outside the U.S.S.R. and the areasdom inated by Japan wou ld seem to have been between $1,000 and 1,100 m illion .Of this tota l some $458 million are accoun ted fo r by earmarkings in the U nitedStates. The South African Reserve Bank increased its gold holdings by

$268 million — probably all held in the vaults of the bank. Suffic ient inform a-tion is not available to indicate th e destina tion of the remaining $300 to400 million but it is likely that a sub stantial part of it was abs orbed by themonetary authorities in the gold-producing areas, as was also probably thecase with regard to most of the gold produced in the U.S.S.R. and in theterritories dominated by Japan.

1. THE SUPPLY OF GOLD.

The table on the fol lowing page shows the outpu t of gold in the main

producing areas in so far as relevant statistics are available or reliableestimates can be made. For the wo rld as a whole a figure is also tentativelygiven, but, being partly based on estimates, it is subject to a fairly widemargin of error and merely indicates the general tendency of the currentgold supply.

The output of gold in S o u th A f r ic a during 1942, al though below thelevel of the previous year, was still somewhat higher than in 1940, there beingno abrupt change in the conditions of production or the policy of the govern-ment. The South African economy has been closely dependent for over fiftyyears on the fortunes of the gold indu stry. In spite of efforts made to attaina greater variety, the country's output of minerals is still largely identical

with the Transvaal gold output; of total commodity exports amounting to£160 m illion in 1941 not le ss tha n £119 million was go ld ; nearly 70 per cent,of the profits of the gold mining companies are absorbed by taxes and othercontributions (including some payments to the government, which in theaccounts of the companies are counted among working costs), and of budgetrevenue in the financial year 1941-42 the mining industry contributed directlyover 30 pe rc en t., and sti l l more indirectly. A t the meeting of the Chem ical,Metallurgical and Mining Society in Johannesburg in September 1942 theFinance Minister declared that he regarded the maintenance of gold productionas essential not only to South Africa's war effort but also to that of the



— 114 —

WorldGold Production

Union of South Africa . .CanadaUnited States 0)AustraliaMexicoBritish West Africa . . .RhodesiaColombiaBritish IndiaNicaragua (

3)

ChileRoumania

TotalOther countries (

4) . . . .

of which :U.S.S.R

Philippine Islands . .KoreaJapanTotalWorld Production . .

Value of TotalWorld Production . .

1929 1932 1939 1940 1941 1942

In thousands of fine ounces10,4121,9282,056

42665220856248

364122671

16,7652,427

707

152138335

19,192

11,5593,0442,219

710584293581248330

1438

11019,7304,524

1,938

230276402

24,254

12,8225,0954,6211,636

84484080057031890

325154

28,11510,872

4,500

990975850

38,987

14,0475,3114,8631,653

883930830632290140341131

30,05110,649

4,000

1,1401,0250925 O

40,700 (i)

14,3865,3284,7801,458

80092679465528619326696

29,96810,032

*

1,196*

40,000 (4)

14,1214,8003,7411,216

850 (2)83576360526022118282

27,6768,824

*

•**

36,500 («)

in millions of dollars (5)

672 849 1,365 i ,425 m 1,400 m 1,280 (<)

(1) Without Philippine Islands. (?) Estimated.(3) Estimates for 1939 to 1942 (production being taken to equal 90 per cent, of the country's gold exports).C) Partly estimated. (5) Dollars of present-day value of $35 per ounce of fine gold. * Not available.

United Nations. "Th ere are pe ople ", he con tinued , "w ho urge that we mustcurtail the production of gold and intensify our war effort, but I believe thewar effort will decrease if this is done. The maintenance of gold production

has a stabilising effect not only on our economic affairs but also in relationto our po litics. Because we have not got a homog eneous public op inion onnational matters we are much more sensitive to economic shock than othernations would be".

The difficulties to which the decrease in the gold output is attributablehave arisen from the fol lowing two factors — both connected with the war:scarcity of materials and redu ction in the number of workers available. Inorder to overcome these difficulties the mining companies have adopted aconcerted policy. Thus, through the intervention of the Transvaal Chamberof Mines, the Rand mining companies agreed towards the end of 1941 topool their stores of scarce materials (steel, other metals, rubber, etc.), the

stores department being charged with the distribution of these materialsaccording to the production programmes and certain advantages being accordedto comp anies with insufficien tly developed reserves of ore. Under the sameagreement, development work was generally curtailed from the beginning of1942 and in this way certain economies were effected, among them a reducedconsum ption of m ining stores. As the chairman of one of the larger com-panies pointed out, however, there was bound to be a deterioration in theore position, which would have to be rectified at some future date, and workingcosts wo uld then rise accordingly. The savings due to the curtailment ofdevelopment work have not been applied to an increase in dividends or higher



— 115 —

allocation to financial reserves but have been used to enable still poorer oresto be m ined. In 1942 the average gold co ntent of ore crus hed was reduced

to the lowest figure ever recorded: 4.053 pennyweights compared with 4.127pennyweights in the previous year and about 6% pennyweights before theincrease in the S outh Afr ica n gold price at the end of 1932, wh en , after adelay of fi fteen months, the South African pound followed the depreciationof the English pound.

The mining industry has also taken measures to assist in the war effort.Up the autumn of 1942 7,000 European employees had been granted permissionto join the forces, with half or quarter pay according to whether they haddependents or not . Other employees have been released for esse ntial warwork , e. g. in base metal mines and co llieries , and these mines have alsobeen supplied w ith native labo ur; in addition , m unitions are manufactured in .

the workshops of the companies. A t the end of 1942 the Rand mines em ployed299,000 native w ork ers , com pare d w ith 376,000 at the end of February 1942 —the highest figure ever reached. In spite of the fall in the number of workersemployed, the quantity of ore crush ed was 66.98 million to ns in 1942 — onlyslightly less than the record figure of 67.26 million tons for the previous year.Working costs remained unchanged per ton crushed but rose per ounce offine gold from 102s.6d. in 1941 to 104s.4d. in 1942, the gold price being, asbefore , 168s. (less certain so-called re alisation charg es). The tota l grossprofits of the mining companies fell from £45.9 million in 1941 to £43.7 million in1942 and the am ount paid as dividend s f rom £19.4 million to £17.5 millionrespectively, dividends being reduced at about the same rate as profits.

The following table shows the fluctuations in the South African goldproduction during and after the 1914-18 war and in the present war.

In the war of1914-48, even morethan in the presentone, the gold indus-try was affected byincreased costs ofmining supplies, acuteshortage of labourand restrictions on theconsumption of explo-

sives. After a spurtin the second year ofthe war the gold out-put began to fall —

just as it did this time — during the third year. The introduction of a premiumon gold in 1919, tho ugh it saved many mines fro m clo sin g, did not preventa continu ed decline in outp ut until 1922, when it was 20 per cen t, below thepre-war level. That level, however, thanks to fal l ing com modity prices andthe consequent reduction in working costs, was regained and even surpassedin 1923. From then onwards the output of gold remained fairly stable up to

G o l d P r o d u c t i o n i n S o u t h A f r i c a .

Year

19131914191519161917191819191920192119221923

Inthousandsof ounces

8,7988,3949,0949,2979,0188,4188,3318,1588,1297,0109,149

Index:1913 = 100

70095

10 310 61039695939280

10 4

Year

19381939194019411942

.

Inthousandsof ounces

12,16112,82214,04714,38614,121

.

Index:1938 = 100

70070511 611 8116



- 116 -

Gold Production in South Africa and United States.Monthly production In thousands of fine ounces.

WOO

1200

.800

1929, by wh ich year it had risen to o nly 10,412,000 oun ces. For the wo rld as awhole, gold production was likewise comparatively stationary from 1923 to 1929,

rising at an average rate , for th ose six years, of only 1.3 per cen t, perann um - and then came t he great advance f rom 1930 to 1940 wit h an averagerise per annum of 7 per cent., as mentioned at the beginning of this chapter.

In 1941 Canada and the United States, the two largest gold-producingareas after South Af rica , had together a gold outpu t of 10.1 million ounces,or 70 per cen t, of the 14.4 millio n ounces extracted in that year from the Sou th

African mines. In thecourse of 1942 theproduction of goldwas largely curtailedin both Canada and

the United States.At f irst, the curtai l-ment was the resultof general trends andmeasures: the volun-tary transfer of work-ers to war industries,the calling-up of mento the armed forcesand the directiongiven to productionby the system ofpriorities in the allo-cation of materials

and machinery; but there was still a shortage of workers in non-ferrousmines and towards the end of the year more direct methods were applied.On 8th October 1942 the War Production Board in Washington publisheda decree, under wh ich , within one week, i.e . by 15th October, the go ld m ineswere to stop breaking new ore and within sixty days, i.e. by 7th December,all operations at the mines except maintenance work w ere to cease. The ordercovered all mines in the United States and overseas possessions, includingAlaska. There were only two exceptions: (i) mines which, owing to theiroutput of strategic minerals, had been given a preference rating and (ii) mines

which in 1941 produced less than 1,200 tons of commercial ore (in the caseof lode mines) and treated less than 1,000 cubic yards of material (in thecase of placer mines). For these small mines a future production limit wasfixed at 100 ton s of ore or 100 cub ic yards of materials a mo nth . It wasfurther provided that any person who considered that the order would subjecthim to exceptional and unreasonable hardship might appeal to the WarProduction Board. Over one-half of the American gold output has in recentyears been derived from mines pro duc ing more than 1,200 ton s of ore a year;and m ines producing gold as a by-product only — chiefly copp er mines —sup plied ab out 10 per cent, of the gold outp ut.

I I I 11 I I 11 I I

1400

1200

1000

800

600

200

1939 1940 1941 19«



- 117 -

In Canada also, gold production was deliberately cut down, the Ministerof Labour declaring in October that i t was the intention of the govern-

ment gradually to transfe r 10,000 gold miners to base-metal mines and warindustr ies.

These measures, entering into forc e only toward s the end of the year,could not produce their ful l effect before 1943. In this connection it shouldbe observed that in the past the production figures for the United Statesincluded the new gold received from the Phil ippine Islands. Since receiptsfrom these Islands ceased near the end of 1941, sta tistics given in the formhitherto custom ary (e. g. in the F ederal Reserve Bulletin) show a decline inthe gold prod uction of the U nited S tates from $209.2 million in 1941 to$130.9 million in 1942, i.e. by as much as 38 per cent.

In a number of other gold-p roduc ing areas also, produc tion has beencurtailed by government measures and by the difficulty of obtaining a suff i-cient supply of labo ur, m aterials and ma chinery. From 1940 to 1941 goldproduction in A u s t r a li a was reduced by 12 per cent, and between 1941 and1942 by 17 per cent. In the sprin g of 1943 the Colonial Office in L ondo ntook steps to curtail production in the Cr o w n C o lo n ie s , a scheme being

put into effect in West AfricaEs t i m a t e s o f W o r l d Go l d P ro d u c t i o n . by w hich p ro du ct io n w a s

concentrated in the handsof seven large companies.As a result of the relativelysustained production in SouthAf r i ca , however, the shareof the British Empire in thetotal world output rose in1942, as it had done everyyear since the beginning ofthe war.

It should be remembered that the percentages given in the table canonly be approxim ately corre ct since little is known — especially for the year1942 — about the trend of gold production in the U.S.S.R. and in the FarEast. It may, however, be surm ised that in both thes e areas scarcity ofmachinery and tools has made itself felt and that gradually the supply ofworkers has also been reduced, even though, with the exception of the Phil ippines,the gold-producing centres in Asia are situated far from the actual battlefields.In March 1943 the Manchukuo Government and in the fol lowing month theJapanese Government made it known that gold production would be suspendedfor the duration of the war, except in so far as it was l inked to the productionof other metals required for the war effort, in particular copper.

Although curtailment of production is the general rule, some countrieshave sti l l continued to encourage the output of gold. T hu s, in December 1942the National Bank of Roumania increased the premium on go ld , with retro-

In thousandsof fine ounces

Total for the world . . .British Empire

Percentage share of theBritish Empire . . .

Percentage share ofSouth Africa . . . .

1939

38,98722,475

58

33

1940

40,70024,000

59

35

1941

40,00024,150

60

36

1942

36,50022,500

62

39



- 118 -

active effect fr om 1st January 1942. The basic price of Lei 211,111 per kilo -gramme was not changed but the maximum premium allowed was raised to

Lei 656,389 per kilogram me instead of Lei 318,889. The difference betweenthe official and the real gold price is borne by the government.

Generally speaking, monetary authorities have sought to strengthen theirreserves of gold, having found that it stil l offers advantages compared withother means of payment for the acquisition of goods and settlement ofbalances. To that end they have cut down deliver ies to ar ts an d in d u s tr ie smaking it obligatory for purchasers of gold and silver objects to furnish anequal amount of the m etals in some other form (scra p, coin s, etc.). In manycountries there are signs of an increased demand for objects made of gold ,silver and platinum, as well as for jewels, indicating a flight into real values.The purchase of bars or coins for hoarding purposes has, with few excep-

t ions, been prohibited and is, as a matter of fact, being suppressed withconsiderable success.

2. MOVEMENTS OF GOLD.

The table on the fol lowing page shows the changes which occurred dur ing1941 and 1942 in the reported gold reserves of ce ntral banks and gove rnm ents.

In 1942 there were two important new features compared with previousyears: first, the appearance of the United States in the group of countries

which, on balance, had their gold holdings reduced and, secondly, the move-ment of South Africa to the top of the table as the country with the largestincrease. Switzerland and Sweden continued to add to their gold reserves,followe d by Roum ania, Brazil, Venezuela, Turkey, etc. Am ong the countriesin the table there is no great power shown as having increased its goldreserves during 1942, but it may be presumed that both the U.S.S.R. andJapan absorbed domestic output into their reserves.

In the foreign trade of S o u th A fr i c a gold normally plays the rôle ofa commodity the export of which is needed to pay for the country's importsand to meet other charges in the balance of paym ents. In the course of thewar South Africa has, however, accumulated substantial credit balances abroad,

whic h have only partly been drawn upon to repatriate securities. Co nside ring,inter alia, the increased transport r isks, there was no immediate call to speedup exports of gold . For the time being the current gold output has beenacquired by the South African Reserve Bank, of which the second table onthe next page gives the m ain ba lance-shee t items at th e end of 1938, 1941and 1942 respectively.

In the balance sheet of the South African Reserve Bank acquisitions ofgold are booked at the old standard price of £3.17.10% per fine ounce underthe heading "gold coins and bullion", while the difference between the actual



- 119 —

S o u t h A f r i c a n R e s e r v e B a n k .

End-of-year figures

Assets:Gold coins and bullion . .Investments and all other

assetsLiabi l i t ies:

Notes in circulation . . . .DepositsOther liabilities

Total of the balance sheet .

1938 1941 1942in millions o f £ S A

27

25

19294

52

44

61

30714

105

77

76

40108

5153

price paid to the mines andthe old price is included under

"other assets". The increasein the assets of the balancesheet during 1942 seems tobe wholly a result of largergold holdings, which arematched on the liabilitiesside by an increase of£ S.A . 10 mil l ion in notes and£ S.A . 37 mil l ion in depo sits.

ReportedGold Reserves

Group 1 : South Africa . . .Switzerland . . .SwedenRoumania . . . .BrazilVenezuela . . . .TurkeyColombia . . . .Chile

CanadaBelgium (

2). . . .

Bulgaria

TotalGroup 2 : Argentina . . . .

Bohemia andMoravia

British India . . .Denmark

FranceGermanyHungary . . . . .New Zealand . . .PortugalUnited Kingdom (3)

Total

United States» .

UruguayHolland

Total

TotalReported Reservest5) .

End of1940

En d of1941

En d of1942

Lossgain

during 1941

-)o f

+)during 1942

In millions of dollars (at $35 per fine ounce)

3675021601585129881730207

73424

2,18735358

2745252

2,0004240242359

12,978

4721,995

90140617

22,889

29,000

3666652231827041921630215

73424

2,46935461

2744452

2,0004240242359

12,974

4722,737

100235575

23,694

30,000

63482433524111568

1142536256

73525

3,18335461

2744452

2,0004240242359

12,974

3922,726

8920 0 (')506

23,560

30,500

— 1+ 163+ 63+ 24+ 19+ 12+ 4

0+ 1— 2

00

+ 282-COOOOOOOOOOOO

— 4

0+ 742

+ 10+ 95— 42+ 805

+1,000

+ 268+ 159+ 112+ 59+ 45+ 27+ 22+ 9+ 6+ 4+ 1+ 1+ 1

+ 714o ooooooooooo0

— 8— 11

— 11— 3 5 C )— 69— 1 34

+ 500

Note: These are "reported gold reserves". Additional gold Is known to be held by several central banks, Interalia those of the Argentine, Portugal and Spain.

(') Partly estimated. (!) Not Including $17 million held by the Treasury.(3) Not including gold held by the Equalisation Fund, i.e. $292 million in December 1940 and $151 million

for 1s t September 1941.f>) Not including gold held In the Exchange Stabilization Fund: $48 million in December 1940; $25 million

in December 1941 and $7 million in September 1942.(-•) Partly estimated and including other countries also (but not the U.S.S.R.).



— 120 —

End-of-month figures

Swiss National Bank Sw.fcs1940 December1941 „1942 „ . . . . . .

Sveriges Riksbank S.Kr.*1940 December1941 „ . . . . . .1942 „ . . . . . .

Gold ForeignExchange Total

in millionsof national currency units

2,1732,8793,565

672938

1,407

99767963

839873640

3,1703,5583,628

1,5111,8102,047

* At current quotations for gold and foreign exchange.

Recent increases in the gold hold ings of Switzer land and Swedenhave been partly due to a net gain of monetary reserves and partly to con-

version of foreign exchange — largely dollars — into gold .During the year 1942 gold and foreign exchange holdings of the Swiss

N a ti o n a l Ba nk rose by Sw.fcs 70 mil l ion and in the f irst s ix months of thefollowing year by a further Sw.fcs 184 million, so that within eighteen monthsthe monetary reserves had risen by Sw .fcs 254 m illion. This increase — all inthe form of gold — may be taken mainly to reflect a surplus in the balance

of payments with theM on et ar y Re se rve s countr ies in the dollar and

o f S w i t z e r l a n d a n d S w e d e n 1 9 4 0 - 4 2 . s t e r | i n g a r e a s A t p r e s e n t

the balance of paymentsof most countries has to

be split up into differentcompartments for differentmonetary areas, sometimeseven for different countries,there being only limitedpossibilit ies of employingbalances in one compart-ment for settlement withcountries in another com-

partme nt. For Sw itzerland — a country for which information is available toillustrate the general rule — the classification would seem to be as fo llo w s:

A . W i t h i n t h e c o n t i n e n t o f E u r o p e .(i) Germany, Italy and most of the occupied countries,(ii) The Balkan countries.(iÜ) France (a special clearing arrangement having been concluded with this country).(iv) Portugal, Spain and Sweden.

B . O u t s i d e t h e c o n t i n e n t o f E u r o p e .(i) The dollar area,

(ii) The sterling area.(iÜ) The Arg enti ne an d Brazil (with which countries certain special problems arise).

In 1942, Switzerland had an active balance in relation to Germany, Italyand the occupied countries and to the dollar and sterling areas but a passive

balance in relation to the Balkan countries and to Portugal, Spain and Sweden.The Swiss National Bank mentioned in its last annual report that "the passivebalances have to be settled for the most part in gold since the dollar canno longer be utilised to the former extent as an international means ofpayment. Gold operations between the National Bank and other banks ofissue have from time to time been fairly substantial; Switzerland has to payin gold not only for imports of commodit ies but also for transport".

Up to the summer of 1942 dealings in gold coins had been freely per-mitted on the Swiss market, prices fluctuating considerably, as may be seenfrom the fol lowing graph.



- 121 —

Gold Prices in Switzerland.Market prices given per kilogramme of fine gold, In Sw.fcs.

7 0 0 0

6 5 0 0

6 0 0 0

5 5 0 0

5 0 0 0

Price of U.S. Eagles

Price of 20 francs-J-GpJd_Co_n i

Price of God Bars_

IGod Price in U.S.A.

Convered in o Swss Fancs-. t . . t . . I . , i9«

700C

6500

6000

5500

5000

4500

In August1942 the Swiss

National Bank c o n -cluded a gentle-men's agreementwith the otherbanks concern-ing transactionsin gold, bu tthis agreementdid not producethe desired ef-fect, partly be-cause consider-

able dealings tookplace outside thebanks. At theinstigation of theNational Bank,

the Federal Government regulated trade in gold by a decree of 7th December1 9 4 2 , under which the right to trade in gold coins or gold bars was l imitedto specially l icensed firms, and imports and exports of gold required a permitfrom the National Bank, which might be granted only on special conditions andwas subject to recall at any time. The Price Control, acting in conjunctionwith the National Bank, was authorised to impose maximum prices applicable

to domestic gold transactions and also to the import and export of gold. Theprices fixed amount to Sw.fcs 4,970 for one kilogramme of fine gold, Sw.fcs 30,50for the 20-franc piece and Sw .fcs 15.25 for th e 10-franc piece (with the de-valuation of the Swiss franc by 30 per cent, the price for the 20-franc gold coinwould be Sw.fcs 28.57). For foreign go ld coins, correspon ding maximum priceshave been fixed. Each transaction is further subject to a commission of % percent, and also to the 4 per cent, turnover tax, since gold coins, whetherSwiss or foreign, have lost their rôle as means of payment and are con-sidered as a commodity.

The Swiss National Bank emphasised in its annual report that these measuresin no way affect the country's foreign payments nor the principles of Swiss

monetary policy. They were introd uce d in order to prevent harmful reper-cussions for Switzerland from such abuses as might arise in connection withcommercial transactions and arbitrage operations in gold. The National Bankplaces monthly quotas of gold at the disposal of domestic firms for industrialand handicraft purposes and in August 1943 it began to sel l , from i ts ownstock, gold coins on the domestic market (the prohibition to export goldwithout a special permit remaining in force).

In 1942 the net acqu isition s of gold and fore ign exchange by theS ve rig e s R ik sb an k and the Swedish commercial banks amounted to aboutS.Kr. 253 m illion , compared with S.Kr. 174 million in the previous year. It is



— 122 —

Swedish Balance of Payments

Current account:Trade deficitIncome from shippingInterest and dividendsPayments for ships sold, proceeds

of sales of commodities pre-viously stored abroad, amountsreceived as insurance, compen-sation for war damage, etc. . .

Surplus on current account . . .Capital account:

Purchase of securities abroad . .Net shift in the clearing and in

the position of trade credits . .Total export of capital . .

Balance

1941 1942

in millions of S.Kr.

— 321+ 350-400+ 75-100

+ 250+ 390

— 40

— 300— 340+ 50

— 457+ 325-375+ 75-100

+ 250-300+ 260

+ 10-20

— 55— 40+ 220

of interest to compare theseamounts with the results of

the balances of payments forthe same two years.

For 1942 the activebalance of S.Kr. 220 millioncorresponds fairly well to thenet increase of S.Kr. 240 mil-lion in the holdings of goldand foreign exchange. Thedifference of about S.Kr. 20mil l ion is due to incomplete-ness of the data and to un-

certainties of calculation.Among the countries in the old world which increased their gold reserves

in 1942 mention m ust also be made of T u rk e y with a net gain equivalent to$22 m illion , due at least in part to trade with the U.S.S.R. A free goldmarket has been preserved in Istanbul but the export of gold is forbidden.In 1939 the average rate of the gold pound in terms of paper pounds was£T 14.32; in 1940: £T 21 .06 ; and in 1941: £T 25.57. A t the beginn ing of 1942

there was a sharp rise inthe quotations to a peak of£T 40.50. Af ter the PrimeMinister had denounced gold

speculation, the quotation fel l

Turkey: Gold Price.Monthly average price of the Turkish Gold Pound

on Istanbul Market,in Turkish Pounds.

M3750

353250

302750

252250

20

175015

125010

750

5

250

0i

inhi I1:'illMINI ili 'ill

—̂y

inln

J

inln

' I

iliiliiln

A

\1

Hill

N;

Inllilr

1y A

IIWM INIIIIII, 1931 193? 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943

3750

35

3250

30

2750

25

2250

20

175015

1250

10

750

5

250

0

to £T 33 and even to £T 23.50in December 1942 but therewas a rise up to a maximum of£T 37.70 in the spring of 1943.

In Portugal an enti relyfree market for gold hadbeen maintained up to June1942, when it was decreedthat the import, export andre-export of gold bars and

gold coins could be effectedonly throu gh the Banco dePortugal. As a result theprice of gold fe l l , but lateron rose again ; and in theautumn all purchases andsales of gold in bars andin coins were made subjectto the authorisation of thecentral bank.



— 123 —

End-of-monthfigures

1939 December194019411942

Goldreserves

Gold hold-ings abroadand netholdingsof foreigncurrencies

Total

In millions of escudos921

1,2391,3431,391

7001,3224,7269,207

1,6212,5616,069

10,598

Ba nco de P o r t u g a l . In the ba lance sheet o f theBanco de Portugal gold is shown

under the heading "Gold reserves"and as an unspecified part of "Goldholdings abroad and net holdingsof foreign curren cies". The rapidincrease since 1939 in the assetsshown under these two headingsmay be seen from the accompany-ing table.

B r a z i l , Ve ne zu e la , C o l om b ia , Ch i l e and Per u a ll increased thei rgold holdings in 1942, being able to sell their export products usually at higherprices, but finding it difficult to arrange for a satisfactory volume of imports.

T he A r g e n t in e also would seem to have increased i ts gold holdings sub-stantially in 1942. In the balance sheet of the Banco Central the gold reservewas shown at the figure of about Pesos 1,075 million at the end of both1941 and 1942, but the item "other gold and foreign exchanges", which probablyincludes, inter al ia, gold earmarked abroad, increased from Pesos 467 mil l ionat the end of 1941 to Pesos 934 million at the end of 1942 and continuedto increase in the first half of 1943.

In Japan the holdings of gold and foreign exchange are no longer shownseparately in the balance sheet of the central bank. The combined holdingsincreased from Yen 550 million at the end of 1941 to Yen 681 million at theend of 1942, the increase prob ably being largely accounte d for by the inclus ion

in the monetary reserves of the yield of the domestic gold production.Among those who lost gold on balance during 1942, the gold reserves

of the Ne d e rl a n d s c h e Ba nk decreased from FI. 1,026 mi l l ion at the endof 1941 to FI. 903 millio n at the end of 1942, or by abou t 12 per cen t, of theamount held at the beginning of the period. The decrease in the gold reservesof the U n it e d S ta te s , though smal l in itself and sti l l more so in relationto the country's total gold stock, may be said to have a symptomatic valuein that it was the first sign of a redistribution of gold, the yield of the world'scurrent gold production having been absorbed in 1942 by other countries.This development would seem to have been welcomed by the authorities ofthe United States. When foreign-owned dollar assets were made subject

to freezing regulations, the necessary l icence to convert dollars into goldwould seem to have been granted by the Treasury whenever asked for, andspecial arrangements have been made with certain Latin American countriesunder which dollars acquired by them through ordinary trade or with theproceeds of credits could be converted into gold.

It was, however, in relation to Central and South America that theUnited States developed a deficit in the balance of payments, having thelargest export balance on record with other countries to which deliverieswere largely determined by the various lend-lease arrangements. Thu s nopermanent change in the fundamental position is as yet in sight; on



- 124 -

Percentage of World's Gold Stock held in the United States.

10

1860 1870 1880 1890 1900 1910 1920 1930 194-0 1950miss.

the contrary, the demand which may be expected for American productsafter the war may easily bring the problem of one-sided movements of

gold to the fore again.Altho ugh it is not possible to calculate exactly the pe rc e n ta g e sh ar e

o f t he w o r l d ' s mo ne ta r y go ld wh ic h i s now in t he po s s es s io n o fth e U n it e d S ta te s (certain important holdings, e. g . those of the U.S.S.R.,being undisclosed), it is probably safe to say that it cannot be far from 70 percent. As sum ing this figure to be correct, the total m onetary gold stock would

amount to $32-33 mil-l iard, of which $22%milliard would be heldby the United Statesand about $9% milliard

outside that country.For the sake of com-parison it may be in -teresting to recall thatin 1913 the world'smonetary gold stock,including the thensubstantial amountsof coins in circula-t i on , was estimatedat $14.8 millia rd (the

dollar being counted at the new price of $35 equal to one ounce of fine

gold), with holdings in the United States of $3.2 milliard and a total goldstock outside the United States of $1 1% milliard . Of the latter amount$8 1/3 milliard represented central-bank reserves, the rest being, in the main,gold in circulation. The massive additions to the gold holdings of the UnitedStates since 1914 have, on balance, been more than covered by newly-producedgold and the reduction which has occurred in the amount of gold coins incirculat ion. The amount of gold held outside the United States as monetaryreserves by central banks and, to a minor extent, by governments is in itsaggregate somewhat larger than before the 1914-18 war, but it is now lessevenly distributed, some European countries having more, others much less,than in 1914.

The Ban k of E n g la n d , though the central bank of the London market,i.e. the world's financial centre in pre-1914 days, never amassed a large goldreserve. A t the end of 1914 the bank's g old stock amou nted to £35. millio n,but there was, in addition, a circulation of gold coins and other reserves inthe United Kingdom estimated at £120 million, which served as an additionalline of defence. Most of the gold coins were collected from the pub lic duringthe 1914-18 war, when in part they went to increase the bank's gold reserve,which by the end of 1918 had risen to £108.5 million. The strong positionwhich London held in the foreign exchange markets before 1914 was, indeed,less dependent upon the magnitude of the gold backing than upon the wide-



- 125 -

M o n e t a r y G o l d S t o c k .

Countries1913«

ReservesOtherstocks Total

1929 0) 1938

in millions of dollars (at $35 per fine ounce)

1942

Europe:- Austria . Ï •;--.- . . . .

Belgium . . . . . . .Bohemia and MoraviaDenmarkFranceGermanyGreeceHollandHungary

. ItalyNorway

PolandPortugalRoumania' Russia

SpainSwedenSwitzerlandUnited Kingdom . . .Yugoslavia

America:ArgentinaBrazilCanadaChileUnited StatesUruguayVenezuela

Asia:

British IndiaDutch IndiesJapanTurkey . .

Africa:EgyptSouth Africa . . . . .

Australasia:AustraliaNew Zealand

World Total <5). . . .

42581

(2)34

1,150501

8103

048820

(3

)1549

1,3321574656

28819

381152272

2,184183

2101711325

1759

3741

8,373

7434

(2)2

1,7281,183

519

o30

25430

134

1,016

10225

1,0737

32215

1725

2988

6,481

499115

(2)36

2,8781,684

13122

o51822

(3)1554

1,7621574790

1,30419

483152274

53,257

253

21017145240

3484

33549

14,854

412766378

2,761948

13330

4946266

1341593249838112256

1,21730

75325425615

7,25311729

2189591825

32108

31347

18,927

5818353

2,4304027

99837

19394

8569133

321701

2,69057

43132

19230

14,5126952

2748016429

55220

323

27,000

7356144

2,00040

50624

59«241

42 (4)

335824

1

354 «115

636

22,7268968

274216*

114

52634

23

32,500

0) From estimates of the League of Nations Gold Committee. O Included In Austria.(3) Included in Austria, Germany and Russia.(4) Published reserve only; an additional amount is known to be included in other items in thè central-bank return.

(5) Estimated. * Not available.

spread commercial lending, largely in the form of acceptances, which mademost other markets in the world indebted to London. These markets hadregularly to procure sterl ing resources for the payment of maturing sterl ingliabil i ties, and a sl ight shift in the amount of acceptances financed via London(as the result, maybe, of an alteration in discount rates) could as a rule beexpected to influence the supply of and demand for sterl ing and consequentlyits exchange value. It has been estima ted that in Au gu st 1914 the am ountof acceptances outstanding was between £300 and 350 mil l ion, of which at



- 126 -

least two-thirds were met in the regular way in spite of the disturbance on theexchange markets and the declaration of moratoria on the continent of Europe.

The pound appreciated in relation to the dollar in the late summer and autumnof 1914, which shows how strong London's position then was.

The S terling-Do llar Rate - 1914 to 1943.

i i i i i i i i i

3.00WSS7.

I I I I I I

I I I I I I I

I V

I I I I I I ! I I IM1915191B19171818191919201921192219231924- 1925192613271328192913301931193Z19331934-1905193619371938193919401941M219« 1

6.00

5.75

5-50

5.25

5-00

4.75

4.504.25

4.00

3.75

3.50

3.25

3.00

It is sometimes said that in the days of its undisputed financial leader-ship the City of London "m an ag ed " the gold standard. If by that word ismeant a conscious attempt to influence the trend of commodity prices, therewas certainly no management; at that time the Bank of England neversought to prevent the variations in the output of gold from producing theirnormal effect on the currency and credit structure and consequently on prices.Neither can it be said that the Bank of England or other central banks regarded itas their task to control the business cycle, except that, in accordance with theircustomary practice, they would react against speculative excesses by increasinginterest rates and, conversely, lower their rates when, in times of depression,the demand for credit became less acute . But the internationa l credit org an i-sation which had gradually been built up over the greater part of a century,with its apex in London, was an elastic system, performing cheaply and effi-

ciently its primary function of financing a rapidly expanding international trade.The banking houses in London, having connections of long standing withcustomers all over the world, avoided sudden withdrawals of credit; and afree trade policy, adhered to equally in good times and in bad, and combined,as it was, with wil l ingness and abil i ty to lend, facilitated the maintenance ofequilibrium, not only in the British balance of payments but also in the balancesof other countries.

After 1920 there was no longer any paramount financial centre in theold sense, New York having strengthened its position and increased the scopeof its activities but being still engaged in building up the necessary machinery



- 127 -

and extending its knowledge in the sphere of international lending. Moreover,there were in most corners of the world, but particularly in Europe,

unbalanced positions left unadjusted and contradictory policies pursued, aswhen heavy financial obligations were piling up at the charge of debtorcountries while at the same time the movement of goods was being increas-ingly obstructed. In the end, the international gold standard, as it had beenestablished in the 'twenties, was_ cjisrujgted_jn_an_era of comprehensiveL ex-change controls and depreciating currencies, with a persistent flow of goldto the United States.

Monetary Gold Stock of the United States.At end of month, in millions of dollars.

1914 1916 1918 1920 1922 192* 1926 1928 1930 1932 193* 1936 1938 19*0 19« 19*4N?62S.

If the development since 1914 is reviewed in broad outline it will befound that the go ld ac qu isi t io ns of the Un it ed States can be dividedinto three periods of approximately ten years each:

(i) During the first period from 1914 to 1924 the monetary gold stock ofthe United States (including gold coins in circulation) increased from $3,200to 7,400 million (the dollar in this and the following paragraphs being con-sistently taken at the present price of $35 per ounce of fine gold). Apartfrom a temporary flow of gold from the United States in 1919 and 1920,the general characteristic of this period was that Europe's great requirementsof imports from overseas markets and instability of exchanges in manyEuropean countries diverted the stream of gold to the Federal Reserve System.

(ii) During the second period from 1924 to 1933 the gold holdings of theUnited States changed little on balance, being $7,400 million at the beginning



— 128 —

and $6,900 million at the end of the p eriod . By 1925-26 monetary order hadbeen restored in most European countries, which then set about replenishing

their reserves, utilising for that purpose any surplus they managed to achievein their balances of payments, or the proceeds of loans and credits grantedlargely by the United States. In conform ity with recomm endations made bythe Genoa Conference in 1922, many central banks came more and more toinclude foreign exchange in their monetary reserves. This no doubt helpedto relieve the pressure on gold for a time; but, when the depression came,with its monetary anxieties, the conversion of currencies into gold exposeda number of countries to an additional stra in which was felt also by theUnited States.

(iii) Durin g th e th ird period f rom 1933 to 1942 the.. U. S. gold stock hadits most specta cular increa se, treb ling from $6,900 million in 1933 to $22,750 mil-

lion in 1942. Gold was received partly in payment for goods and services, partlyfor the amortisation of debts and partly also as a vehicle for funds movingto the New York market.

Much has been written in analysis of the causes which brought thisstupendous flow of gold across the Atlantic. It is generally agreed thatsuch factors as lack of economic balance, together with political fears inEurope and a high-tariff policy in the United States, played a rôle, but it ismuch more d i f f icu l t to say whether , as is somet imes assumed, s ter i l i sa t iono f g o l d i n t h e Am e r i ca n c re d i t s ys te m w a s a l so a fa c to r i na t t r a c t i n g g o l d t o t h e U n i t e d S t a t e s .

In 1914 the Federal Reserve System began to function and introducedinto the credit machinery of the United States a degree of elasticity neverknown before, making it possible, as it happened, to finance the war muchmore easily than would otherwise have been possible. As may be seen fromthe graph, the volume of deposits expanded up to and including 1920. Inthe fol lowing year, during the first sharp post-war depression, there was a

decline in the volumeof credit, but it is aremarkable fact that inthe United States, asin practically every othercountry, the reduction

in the amount of bankdeposits from the highlevel reached during thewar was comparativelyslight and of shortduration. Already inthe course of 1922the volume of depositswas back at the figureof 1920 and from then

Volume of Deposits in the United States.End-of-June figures, in milliards of dollars.

80

70

6050

40

30

i i i t

/

• ^ ^ /

i i i i l T n i

/

All banks/

***•/

/

/ê/

'••./Member banks

Note circulation .'" " • " " " " " t " , ,7 i i i i

80

70

6050

20

10

1905 1910 1915 1920 1925 1930 1935 1940 1945



— 129 —

onwards a marked expansion continued without a break to the middle of 1930.It is tru e that f or some yea rs, especially 1923 and 1924, the Federal Reserve

Banks met the demand for additional currency by issuing gold certificatesrequiring a cover of 100 per cent, instead of Federal Reserves notes towhich the ordinary cover regulations applied. But this practice did not preventthe inflow of gold from increasing the funds at the disposal of the memberbanks and thus in no way limited their pow er to extend credit. It simplyreduced the excess goJd reserves of 4h e Federal J5eserve J3anks ^theraseJv esbelow what they otherwise would have been, it being doubtful, however, whetherthis more cautious policy of the monetary authorities had any psychologicaleffect in restraining the market as to the granting of cred its* . In the follow ingyears, from 1924 to 1930, there was, on balance, no addition to the goldreserves of the United States and, considering the great expansion of creditwhich then took place, the question of a steri l isation of gold hardly arises.

Indeed, much may be said for the co ntentio n tha t during t his phase thecredit system failed to react against the speculative boom or to discriminatesufficien tly between different uses of cr ed it. In the sphere of foreig nfinancing the American market began to lend abroad both on short and onlong-term account almost as soon as the war was over, and the total offoreign loans and credits reached very large am oun ts. But here again itmay be contended that a more judicious selection of borrowers and methods,and in several cases also a greater moderation in the amount lent, would havebeen a better policy, especially since far too much credit could be recalledat short notice — a right of which, unfortunately for the general system,extensive use was made when the trend changed.

After 1930, with the great depression and the many currency changes,foreign lending came to a standsti l l ; and internally in the United States thevolume of credit was exposed to a sudden contraction, together with a violentfall in prices — which, it may be said t came as a painful surprise to the manywho had thought that there could be no real danger of a destructive slump,seeing that there had been no rise in the level of commodity prices or inthe note circulation during the preceding b oom . By a continuou s reduction ofinterest rates and by open-market operations, attempts were made to counterthe contraction in credit; but the results were not sufficient to offset thepersisten t shrinkage intensified by bank failures all over the countr y. It wassoon obvious that so violent a depression could serve no useful purposeeither as cutting out dead wood from the commercial and industrial structure

or as achieving a better balance between costs and prices.In retrospect, most people would probably agree that it would have been

wise to riposte by a variety of measures and.with much greater energy againstthe depre ssion . In the United States, as in several other coun tries , a moredecisive expansionist credit policy necessitated an easing of existing cover

* The influence exerted on the credit position by issues of gold certificates in the United States is not tobe compared with the sterilisation effected in the following decade on the London market by the BritishEqualisation Account: through the operations of this Account an inflow of funds was actually preventedfrom enlarging the credit base of the banks and thus restricted their power to lend. It is often said thatexperience from 1919 to 1939 should be utilised In forming the credit policy after this war and it is thereforeimportant to submit the credit measures adopted during these twenty years to careful examination, it beingimpossible in this Report to do more than refer, in passing, to some of the main problems.



— 130 —

and collateral requ irements*. In a way this may be said to have involved a"desterilisation" of gold, i.e. a freer utilisation of already accumulated reservesas part of an anti-depression policy. During this period, comprising the years1930 to 1932, the current of gold changed direction several times but there wasno net increase in the gold stock of the United States.

With the inauguration of a new policy in 1933 various financial measureswere adopted at successive stages as a stimulus to recovery: the dollar wasdepreciated, bank deposits were guaranteed, cheap money was made stillcheaper and spending power was placed in the hands of the public throughincreased budget expenditure covered by borrowing. As can be seen from thegraph on page 128, there was an expansion in the volume of deposits up to themiddle of 1937, sustained all the time by gold coming from abroad. In the winterof 1936-37, when the upward movement suddenly took on too nervous andtoo speculative a bent, the authorities began to tighten the reserve require-ments of the banking system, preventing, inter alia, part of the inflowing goldfrom widening the credit base; and more by force of circumstances than bydesign the Federal budget was made to balance for a short while. This policywas meant to give an orderly character to the recovery; so much the greater wasthe disappointment when the longed-for improvement in business was suddenlyinterrupted by the severe setback in the autumn of 1937. There is still livelydiscussion as to what caused this setback; some believe that it was dueto the (in any case rather mild) credit measures, including the short-livedestablishment of budget equilibrium, while others lay stress upon the increasein costs — and especially in wage costs — which went on at a rapid ratefrom 1936 contrary to the careful credit policy. The true explanation is perhaps

that there arose a contradiction between the credit measures on the one handand the cost and price changes on the other. For a moderative credit policy tobe effective it must be allowed to act as a signal, making people abstain fromtoo sudden advances in costs and too rapid increases in inventories — butthat is the opposite of what actually happened in the boom of 1936-37.With the return of depressed conditions an expansionist credit policy wasagain adopted, with a stronger accent, however, on the spreading of purchas-ing power through the budget.

It is indeed easy to place too much reliance on financial measures asan aid to recovery and the maintenance of stability in an international monetary

system. It was not so much sterilisation of gold by any measure of creditpolicy as failure to establish a proper balance in the economic structure thatcreated difficulties for other countries in their relations with the United States.For that country to accept a volume of imports sufficient to relieve the rest

* The easing was effected partly by taking gold certificates out of circulation. Under the existing regulationssuch certificates could be counted as collateral and as reserves against notes but not as reserves againstdeposits. This particular restriction was, however, of little importance since the gold holdings of the FederalReserve Banks furnished a sufficiency of "cover". But the provisions regarding "collateral" (I.e. the 100 percent, backing of notes and deposits by gold and eligible paper) proved too restrictive in that they limitedthe power of the Federal Reserve Banks to purchase additional government securities until the Glass-SteagallAct, passed in February 1932, permitted the use of such securities as collateral against Federal Reservenotes for the period of one year — a permission which has been extended by subsequent legislation.



- 131 -

of the world from a strain on the balances of payments, i t must in particularabstain from tariff increases in times of depression, since at such times the

strain can easily go beyond breaking-point; and it must also achieve a suff i-cient degree of domestic activity and employment to furnish a steady marketfor foreign materials and articles, a question of great importance consideringthat the U nited States abso rbs fully 40 per cen t, of the world outp ut of indus trialraw materials and thus, by the state of its industry, has more influence than any

-öther-GO-untrT-ofrthe^rtees-^-sueb-pF^power of large areas of the wo rld . A s said above, the presen t cessa tion of g oldacquisitions by the United States, notwithstanding a record export surplus, isexplained by the lend-lease and other credit arrangements that are part of thespecial war measures.

In t he ye a r s i m m e d i a te l y a f t e r t h e w a r , w h ich w il l b e taken up

with all the problems of reconstruction and development, many countries wil lfind it difficu lt to meet the resulting f oreign charges out of their curre ntexport proceeds or existing reserves. Special measures will presumab lybe required to cope with this situatio n and inter alia to assist differentcountries in their efforts to replenish their monetary reserves, thus enablingthem to join in an increased exchange of goods and services. When thesetransitional problems have been more or less completely solved, there willstill be the permanent task of building up a system of stable exchanges witha sufficiency of credit for domestic and international trade; and in the executionof this task, as in the earl ier reconstruction period, it should be remembered,as one of the lessons from the achievements and failures between the twowars, that no amount of financial facil i ties wil l procure a smoothly working

currency and credit system, whether based on gold or not, without careful atten-t io n to t he more d e e p -s e a te d e c o n o m i c f a c to r s . Ap a rt f ro m the in flu en ce sof purely erratic capital movements, a one-sided flow of gold , l ike an abnormalaccumulation of debit or credit balances in a country's foreign account, shouldbe regarded as a signal of some lack of equil ibrium requiring correction; andone of the more important functions of monetary reserves is to afford timefor the necessary adjus tme nt. There are several ways in whic h central banks— either directly or through an international institution — can assist one anotherin providing cred it facilities to supplement existing re sourc es. In the m onetarysystem the currency and credit functions are closely connected and it wouldindeed be short-sighted not to use the system's latent credit powers to eliminatesome of the hindrances blocking the flow of goods and, at the same time,

to give an impulse to increased activity. But stimulus is not enou gh ; basiccond itions must be such as to allow free scope for a self-sustained comm ercialand industrial activity, capable of resisting more effectively than in the pastthe hard blows to which economic l i fe is from time to time exposed.



— 132 —

IV. LEND-LEASE, BRITISH DISINVESTMENT AND EUROPEAN CLEARINGS.

The large international movements of goods and services to which theconduct of the war has given rise are reflected, although not fully, in the activeor passive balances, as the case may be, on the financial accounts of thecoun tries conce rned. Three great movements stand ou t: the lend-lease aidof the United States, with a "reverse" flow growing in importance; the receiptand distribution by Great Britain of provisions from the Empire and othercountries; and Germany's hold on the resources of Continental Europe throughthe mechanism of clearings and the imposition of occupation costs and othercontr ibutions.

During 1942 the le nd -l e as e sy st em was supplemented by the UnitedNations Declaration of 1st January 1942, pledging the employm ent of their fullresources fo r the p rosec ution of the war, and by an agreement of 23rd February1942 applying "reverse lend-lease" terms to aid given by Great Britainto the United States. Since that date identical agreements with the United Stateshave been signed by China and the U.S.S.R., as also by the refugee governmentsof Belgium , Czecho-Slovakia, Greece, Holland, Norway and Yugoslavia. Further,an exchange of letters on 3rd September 1942 between the British Ambassadorin W ash ingto n and the U.S. Secretary of State laid down the principle that"as large a portion as possible of the articles and services which each

governm ent may authorise to be provided to the other shall be in the formof re c ip ro c a l a id , so that the need of each government for the currencyof the other may be reduced to a minimum". To this the U.S. President, in hissixth quarterly lend-lease re port in September 1942, added the rider that "n ocountry should grow rich from the war effort of i ts al l ies". On 3rd September1942, Australia, New Zealand and La France Combattante* also became partiesto the reciprocal lend-lease a rrangem ents, while Canada decided to make itscontribution to the common war effort outside the lend-lease system.

The lend-lease proc edure , which had originally been designed as amethod f or a neutral cou ntry to give aid to one of the belligeren ts, was thusmerged in the total war effort of the United Nations and by its extension

as reciprocal aid became, in effect, a pooling of resources amongst belligerentswith a common aim. Lend-lease retains an element of quid pro quo in theprovision for some return in kind, if not in cash, as distinct from the freegift or "mu tua l ai d " formula adopted by Canada.

How far re ve rs e l en d- le a se has worked i t is not possible to say, thekeeping of complete accounts having been dispensed with in the United

By a new agreement concluded in October 1943 between the United States and the French Committee ofNational Liberation the United States provides war material to the French troops on lend-lease termsand French deliveries are made to American troops on reverse lend-lease. American deliveries to theFrench civil population in North Africa are made for cash ; some $56 million had been paid on this accountup to the end of November 1943.



- 133 -

King dom , but it has gathered m omentum as the U.S. armed forces overseasand their needs have grown in importance and it is known to constitute a

considerable charge on the current budgets of the United Kingdom, Australiaand New Zea land, as does mutual aid for Canada (1) . As regards the UnitedKingdom, the Chancellor of the Exchequer said in his budget speech in April1943 that "th e largest a mount of our reciprocal aid went to the Am ericans .Much of this aid took the form of services whos e value neither they norwe sought to reckon . . . The am ount of lend-lease aid which we receivedfrom the United States was no greater than we ourselves were affording toall our all ies without charge" (2 ).

L e n d - l e a s e A i d f r o m U.S.A. — va l u e o fg o o d s t r a n s f e r r e d a n d s e r v i c e s r e n d e r e d * .

The original Le n d -L e a s e A c t was passed on 11th March 1941 and hassince been renewed unt il Jun e 1944. Up to the end of 1941, $13,000 million (3 ) of

expend iture was autho rised and c ontra cts for some $10,000 million w ere made.But these vast sums merely indicated the extent of the aid contemplated andof preparations made; totallend-lease aid to the end of1941 was little over $1,200 mil-l ion, of which three-quarterswas furnished in the form ofgoods, the remainder being inrespect of services rendered(ship repairs etc.). But bythe time the United Statesitself became a belligerent,

in December 1941, war pro-duction had got well underway and lend-lease aid in

Quarterly

January-MarchApril-JuneJuly-SeptemberOctober-DecemberTotal for year

1941 1942 1943


136408690

1,244

1,1781,5511,7982,4827,009

2,0672,6033,600**

•

* From the reports of the Lend-Lease Administration.** Preliminary round figure; July 1943 was $1,050 million andAugust $1,262 million. The total up to the end of August 1943 was$15,235 million, of which 45 per cent, went to the United Kingdom,25 per cent, to the U.S.S.R. and 30 per cent, to other allies.

the first quarter of 1942 was nearly equal to that for the whole of theprevious year. An d the acceleration has continued : from a monthly averageof $100 million in 1941 the aid given rose to nearly $600 million a month in1942 and since J une 1943 it has exceede d $1,000 millio n mo nthly .

(') The cost of reciprocal aid in the Australian budget for 1942-43 was £A 59 million and for 1943-44 wasestimated at close on £A 100 million, one-sixth of total war expenditure. In the New Zealand budgetof 1942-43 reciprocal aid amounted to £NZ 7 million and for 1943-44 it was estimated at £NZ 20 million,about one-seventh of total war expenditure. The cost of mutual aid as booked in the Canadian budgetis indicated in Chapter V.

(2) Further information regarding reciprocal lend-lease was furnished in November 1943 in the U.S. President's

eleventh lend-lease report to Congress and in a British Treasury White Paper, both of which stressed theimpossibility of assessing in monetary terms the benefits given and received. But as some indication of theorder of magnitude involved, the U.S. President gave the following figures: up to June 1943, $1,171 millionhad been received on lend-lease terms from the British Empire, $871 million from the United Kingdomand about $300 million from the three countries Australia ($196 million), New Zealand ($51 million) and India(about $57 million); estimates based on the first six months of 1943 placed the annual rate of reverse lend-lease rendered to the United States by the British Empire at $1,250 million. The British Treasury WhitePaper estimated that the net contribution of the United Kingdom to the common pool of the United Nationsup to the end of June 1943 totalled £2,250 million, of which £216 million went to the United States asreciprocal aid and £180 million to the U.S.S.R. The figure of £2,250 million represented "payments madeto other members of the United Nations in excess of the sums received from them" or, in other words,an amount measuring the extent to which the United Kingdom has "burdened her future commerce byparting with gold and other capital assets and by incurring liabilities to other members of the United Nations".

(3) The first appropriation of $7,000 million was made on 27th March 1941 and the second of $5,985 millionon 28th October; a third appropriation of $5,425 million became law on 5th March 1942, making a totalof $18,410 million. These were appropriations made directly to the President of the U.S. A. Since theUnited States' entry into the war no further direct appropriations for military items or for merchant shipshave been made, but authorisations have been given for transfers under lend-lease of articles and servicesincluded in regular military or naval budget appropriations. Up to the spring of 1943, $35,970 million ofsuch transfers had been authorised.



- 134 -

U . S . F o r e i g n T r a d e : L e n d - l e a s e a n d C a s h .War period to December 1942.


British Empire

UnitedKing-dom

Canada Egypt India

Au -stralia

andNew

Zealand

Others TotalUSSR.

Allothercoun-tries

Totalall

coun-tries

1939(Sept.-Dec.)1940 . .19411942

Total . .

5721,8672,439

12110122

Lend

89446535

-lease «

8287

1 295

ÌX ports

15274289

10128138

7063,1123,818

11,3141,315

34242276

7414,668

5,409

Cash exports.1939(Sept.-Dec.)194019411942

Total .

1991,0181,070

4952,782

210728

1,0071,2573,202

520

161137323

21789091

280

2894

10788

317

45170338108661

5082,1082,7732,1767,565

3087

10765

289

7431,8261,526

9175,012

1,2814,0214,4063,158

12,866

Total exports.

1939(Sept.-Dec.)194019411942

Total .

1991,0181,6422,3625,221

210728

1,0191,3673,324

520

250583858

217898

378575

2894

122362606

45170348236799

5082,1083,4795,288

11,38311

3087

108,379,604

7431,8261,5601,1595,288

1,2814,0215,1477,826

18,275

Imports.

1939(Sept.-Dec.)194019411942

Total . .

56158139135488

144440575735

1,894

37

122244

29134132105400

934

154219416

89366500216

1,171

3301,1391,5121,4324,413

821302584

5411,4651,8031,2865,095

8792,6253,3452,743

9,592

Surplus Of exports or imports (—) for cash.

194019411942

Total

143860931360

2,294

66288432522

1,308

213

149115

279

(- 8)(- 56)(- 42)(- 14)(-120)

1960

(- 47)(-131)

(- 99)

(- 44)(-196)(-162)(-108)

(-510)

178969

1,261744

3,152

22667740

205

202361

(-277)(-369)

(- 83)

4021,3961,061

415

3,274

Total surplus of exports or imports (—).

1939(Sept.-Dec.)194019411942

Total . .

143860

1,5032,227

4,733

66288444632

1,430

213

238561

814

(- 8 )(-56)(-34)273

175

1960

(-32)143

190

(- 44)(-196)(-152)

20

178969

1,9673,856

(-372) 6,970

226678

1,354

1,520

20 2361

(-243)(-127)

193

4021,3961,8025,083

8,683

"N o te : Revised figures up to the end of 1942 place the total exported at $5,959 million; this total does not,however, include airplanes which were flight-delivered and ships sailing under their own power, valuedat approximately $700 million . Only about 90 per ce nt, of the goods "tra ns ferr ed " were actually exported.

(') Including Eire. (2) Including Newfoundland, Labrador, St-Pierre and Miquelon, Greenland and Iceland.(3) A lthough not forming an integral part of the Empire, it is convenient to class Egypt here. The figures include

the Sudan as well as Egypt proper. (4) Including Burma and Ceylon.<•) Of the total lend-lease exports of $276 million to "other cou ntries ", $38 million went to Latin Am erica and

$85 million to China (in addition to direct financial assistance).



— 135 —

Categories

War materialIndustrial goods . . .Agricultural produce .Services

Totals. . .

U.K. U.S.S.R. Others Total

In millions of dollars1,3011,1001,229

8014,430

1,028379128290

1,826

1,96560992

7103,3760

4,2942,0881,4491,8019,632

(1) From the report of the Lend-Lease Administration published inMarch 1943.

(2) Africa and the Middle East received $1,573 million, China, India,Australia and New Zealand $1,344 million and "others" $460 million.

A n a l y s i s o f l e n d - l e a s e a l l o c a t i o n s 0 . Lend-lease aid representsMarch 1941 to February 1943. as sis tan ce given to all ied and

friendly countries and doesnot include shipments to U.S.armed forces abroad. The ac-companying table reproducesan analysis of the first twoyears of len d-lease , March 1941to February 1943. Of nearly$10,000 million expenditure inthese two years over 80 percent, was for various formsof goods and under 20 per

cent, for services; and of the goods 55 per cent, represented war materials(36 per cent, of the total allocated to the United Kingdom but 67 per cent,of the total sent to the U.S.S.R.); 85 per cent, of the agr icultural produce(including tobacco) was sent to the U nited Kin gdo m. From February 1943tobacco was no longer sent to the United Kingdom on lend-lease terms,except for the armed forces.

Up to the end of 1942 the Britis h Empire and th e U. S. S. R. toge therreceived 95 pe rce nt, of the U.S. lend-lease e xports, as is show n by the tableon the op posite page, which gives an analysis of the direction of U. S.foreign trade since the war and d istinguish es lend-lease from o ther expo rts.Towa rds countries other than the British Empire and th e U. S. S. R. theUnited States had a passive balance in 1941 and 1942, so that the supply ofgoods on lend-lease terms tended to increase the amount in cash to be paidby the United States; thus no transfer problem arose for these countriesas a whole. Nor was there any transfer problem for the U .S .S .R .: lend-leaseexports accounted for nearly 90 per cent, of tota l U.S . exports to tha t countryduring the tw o years an d o nly a little over $100 million was due to theUnited States on balance to be paid in cash.

Towards the British Empire, however, U.S. exports for cash were maintainedon a very large scale and constituted well over one-half of total exports for1941-42; du ring these tw o years som e $2,000 million had to be paid on balance-of-trade account in cash . But the various parts of the Em pire fared differentlyand, for purposes of analysis, it is convenient to divide it into three parts: theUnited Kingdom, Canada, and the rest of the Empire, including in thisconnection Egypt.

For special reasons, lend-lease material was sent to Egypt on a verylarge scale, especially in 1942, in all over $530 million during the two years; butnet cash im ports w ere also large, the passive ba lance of about $260 million for1941 and 1942 being cared for by the United Kingdom. O th e r p a rt s of th eEmpire, particularly Australia, New Zealand and India, received lend-lease aidam ounting to $720 m illion ; by this aid a passive trade balance of $220 mil-lion in 1941-42 was changed into a surplus of $500 million in the two yea rs.



- 136 -

Lend-lease exports from the U.S.A.Monthly distribution, in millions of U.S. dollars.

19*1 19«

United Kingdom

/ y l l l

19«L

£L J |

1941 19« 1943

----- U.S.S.R

In principle, such surplus dollars(in so far as not absorbed by

invisible items of the balance ofpayments) passed over to theUnited Kingdom and the pro-ceeds went to swell the sterlingresources of these countries.

Canada occupies a spec ia lposition between the United Statesand the United Kingdom, partlyfor geographical reasons, butalso because Canada has notaccepted lend-lease aid from the

United Sta tes. The $120 millionshown as lend-lease exports toCanada in the table on page 134probably went to Iceland and othercountries classed with Canadain the statistics. Canada's cashimports from the United Stateswere therefore very high; in1942 they were well over doublethose of the United Kingdomand more than one-half ofthe total for the whole Empire.

Canada's balance of paymentsshowed a persistent surplus to-wards the United Kingdom (andthe sterling area as a whole)and a persistent deficit towardsthe United States, as shown inthe table on the opposite page.

This deficit of $720 millionin the period 1939-41 was coveredfrom three sources: ( i) overCan. $300 million gold and dollars

were mo bilised in 1940 by the Foreign Exchange C on trol Boa rd (Ca n. $325 millio nbeing borrowed directly from the Bank of Canada for this purpose); ( ii) someCan. $250 m illion was paid in gold by the U nited K ingdo m in 1940 to cover thecost of materials bought in the United States to carry out British Governmentcon tracts; and (iii) by an agreement made in Ap ril 1941, comp onent partspurchased in the United States for use in carrying out British contracts inCanada were supplied under lend-lease terms on United Kingdom account.In 1942 and 1943 the po sition appears to have been eased by the con side rableam ounts of U. S. dollars w hich became available as a result of increasing U. S.purchases from Canadian war production.

7 5 07 0 0

6 5 0

6 0 0

5 5 0

5 0 0

4 5 0

4 0 0

3 5 0

3 0 0

2 5 0

2 0 0

1 5 0

10 0

5 0

0

3 5 0

3 0 0

2 5 0

2 0 0

15 0

1 0 0

5 0

0

2 5 0

2 0 0

1 50

1 0 0

5 0

0

1 5 0

1 0 0

5 0

0

1 50

1 00

5 0

0

1 0 0

5 0

1941 1 9 4 2 1 9 4 3

China, India, Aus tral ia,New Zealand

194-1 1 9 4 2 1 9 4 3

O r n e r

7 5 0

7 0 0

6 5 0

6 0 0

5 5 0

-500

4 5 0

4-00

3 5 0

3 0 0

2 5 0

2 0 0

1 5 0

1 00

5 0

0

3 5 0

3 0 0

2 5 0

2 0 0

15 0

1 0 0

5 0

0

2 5 0

2 0 0

15 0

1 0 0

5 0

0

15 0

1 0 0

5 0

0

1 5 0

1 0 0

5 0

0

1 0 0

5 0

19*1 19« 19«



- 137 -

Ca na da 's Ba lanc e o f Pa ym en ts . The aggrega te sur-plus of Can. $1,206 mil-

lion in 1939-41 vis-à-visthe United Kingdomwas brought up toCan. $1,770 million byBritish investments inCanadian war plantand the expansion ofair training facil i ties.Excluding the gold

transfe r in 1940, the financ ing of the war expen diture of the United Kingdo min Canada was shown as fol lows in the Canadian budget statistics for thefour financial years to March 1943.

Calendar years

193919401941

Totals. . .

United Kingdom

Credits Debits Creditbalance

United StatesCredits Debits Debit

balance

in millions of Can. dollars371636

1,0932,100

245289360894

126347733

1,206

775827

1,0422,644

8641,1281,3723,364

89301330720

F i n a n c i n g o f U n i t e d K i n g d o m w a r e x p e n d i t u r e

i n C a n a d a .

Financial years

Repatriation of securities (1) . . .

Accumulation of sterling balan-ces«

Loan to U. K. Government(non-interest-bearing) . . . . .

Gift to U. K. GovernmentTotal . . .

Y

1940

ear end

1941

in millions79

16

95

181

190

371

ng Marc

1942

h

1943

Fouryears'total

of Canadian dollars365

687

1,052

72

(-893)

7001,000

879

697

7001,0002,397

0) Dominion Government and C. N.R. securities held In United Kingdom.In addition, some Can.$130 million of private repatriations have taken place.

(2) By the Foreign Exchange Control Board.

In the four yearsto March 1943 Ca n.$2,400 million of Britis hwar expenditure wasfinanced in Canada,in three ways: Can.$700 million by therepatriation of Domi-nion Government andCanadian National Rail-

way securities held inthe United Kingdom,the conversion ofCan. $700 millionaccumulated sterl ing

balances into a loan with out interest and , lastly, a free gift of Can. $1,000 m il-l ion. Th is free gift, made for th e financial year to the end of March 1943to cover c urrent British expend iture in Canad a, was fully utilised by the endof December 1942.

To meet the need for Ca nadian dollars to March 1943, the U nited K ingdomsold to Canada certain British balances in the United S tates and the CanadianGovernment repurchased war production plants (valued at some Can. $200 mil-lion) erected in Canada by the British Government soon after th e outbreak ofthe war. In add ition, from 1st Apr i l 1943, the C anadian Government assumedfull financial responsibil i ty for the Canadian Air Force serving abroad, thusrelieving the United Kingdo m of expen diture of about Can . $340 million ayear. Early in the financial year 1943-44 the Canadian Government appro-priated a furth er Can . $1,000 million fo r mutual aid to cover deliveries of warmaterial to the United Kingdom and other members of the United Nations.A new War Supplies Allocation Board was set up with functions somewhatsimilar to those of the U. S. Lend-Le ase Ad min istra tion.



— 138 —

The Un it e d K in g d o m has received aid on lend-lease terms from theUnited States, has benefited from Canada's free gift, has realised its reserves

of gold and dollars, mobilised securities in dollars and other currencies tomake "cash -and-ca rry p aym en ts", run up sterling and other d ebts, and otherwise"dis invested" abroad; on the other hand, the United Kingdom has givenmu nitions to the U. S. S. R. estimated by the Chance llor of the Exchequer inAp ril 1943 at £170 million (in add ition to non-m ilitary goods of over £50 m illio n 0 ) ,it has supplied the U. S. troops stationed in the United Kingdom (2) and in theColonial Empire, it has passed on lend-lease supplies to other countries, hasitself given aid on lend-lease terms or as free gifts to its allies and otherwisecontribu ted to the commo n effort of the United Na tions. It is not possibleto draw up a "balance sheet" or "prof i t and loss account" of al l these opera-t ions, but certain indications have been given which throw light on the magni-tude of some of the transactions involved.

British cash payments to the United States since the outbreak of warwere stated by the C han cellor of the E xchequer in Ap ril 1943 to have totalle d£1,500 million for supp lies, m unitions and the prov ision of cap ital equipm entfor the prosecution of the war. C ash-and-carry procedure did not cease whenthe Lend-Lease A ct came into operation (3 ); in fact, payments in cash con-tinu ed for 65 per cent, of tota l U. S. exports to the United K ingdo m in 1941 andfor 21 per cent, in 1942, as the table on page 134 sho ws . In dee d, the mostdifficult period for the United Kingdom was precisely when the Lend-LeaseAct had been passed but lend-lease exports had not yet got into theirstr ide; lend-lease procedure was not made to apply to pre-lend-lease contractsand large sums in dollars had to be provided to m eet cash-and-carry com -mitments already made. At this time the liquid gold and dollar reserves of theUnited Kingdom had been exhausted. Several emergency steps were taken:93,000 kilogrammes of gold (value about $105 million) of the reserves of theNational Bank of Belgium were borrowed from the Belgian Government inLondon in M arch 1941 for tw o years; a credit of $425 million was obtainedfrom the Reco nstruction Finance Corporation in July 1941; and gold to thevalue of about $130 million was bought from the Government of the Unionof South Africa (against the mobilisation and sale of South African securitiesin London).

The first two of these operations constitute the creation of debt and

represent d irect external indebtedness of the B ritish Governm ent. The debtsto the Canadian and Indian Governments as well as part of the debtsto the colonial administrations (included under "all others" in the next table)

(1) In April 1943, it was stated semi-otficially that the value of non-military supplies sent to Russia exceeded£50 million; these supplies were bought by and shipped through the services of the United KingdomCommercial Corporation.

(?) In eighteen months of the war of 1914-18 the United States spent £500 million on supplies for its troopsin the United Kingdom, an average of nearly £28 million a month; in 1941 and 1942 it spent an average ofonly £6,250 a month, the rest being provided by the United Kingdom as reverse lend-lease.

(3) According to the report of the Lend-Lease Administration for the period up to the end of 1942, the totalvalue of all supplies exported under lend-lease for the period March 1941 to December 1942 was$5,959 million;exports to lend-lease countries paid for in cash by the recipients amounted to $6,900 million. Only sinceMarch 1942 have monthly lend-lease exports exceeded non-lend-lease exports.



- 139 -

U n i t e d K i n g d o m E x t e r n a l D e b ta r i s i n g f r o m t h e w a r .

In millions of £ sterling

Reconstruction Finance Corporation,at 3 per cent. 0)

Belgian Government (2)

Canadian Government, interest-free(3)Indian Government, at 2% percent.(')All others

Total outstanding . . '.

End of March

1941 1942 1943

95

15110

9125

1573021

324

represent accum ulated sterl ingbalances converted into direct

British Government obliga-t ions. In April 1943, afterthe gold loan from the BelgianGovernment had been re-paid, the United KingdomExternal Debt contracted dur-ing the war amountedtoa round£300 million.

(1) The total credit made available was $425 million, the equivalent _ . . . . . ,. ...of£106 million. The se de bts , toge ther with

(2) This loan was actually made in March 1941 but was specified .•, _ • .. x _±- M_publicly only In March 1943; it was repaid in gold In April 1943. trie a ccu mu lation OT Sterling

(3) The equivalent of Can.$700 million. halan roc h\; Fm niro an d nthp rm The explanation of this loan is given on page 143. Balances DV tmpire ana Otnercountries and their repatriation

of sterling securities plus the utilisation of gold and dollar resources, accountfor the "o ve rs ea s d is in v e s tm e n t" , or draf t on fore ign resources, madeby the United Kingdom as indicated in the bu dget W hite Papers. In the threeyears 1940-42 this disinvestment (which thus includes both the reduction of

foreign assets and the increase of foreign liabilitiesbut excludes lend-lease and the Canadian gift)amou nted to £2,185 m illion ; for the wh ole war periodup to the end of 1942 the tota l was probably abou t£2,350 m illion. A nd for the finan cial year 1943-44 afurthe r £600 million was fores een. The distr ibutio nof the British overseas disinvestm ent has change d :whereas in 1940 it was principally in dollars andgold , i t is now largely in the form of accum ulationof sterling balances and repatriation of sterlingsecurities.

U n i t e d K i n g d o m" o v e r s e a s

d i s i n v e s t m e n t " .

Calendaryears

1940 . . . .1941 . . . .1942 . . . .Total . . . .

£millions

756797632

2,185

Canad a's ste rling balances were converted into a direct loan to the BritishGovernment in March 1942, but other Empire countries continued to repaytheir earlier indebtedness in England and to hold , and generally to increase,their sterling reserves, usually in the form of bank balances, Treasury billsand investments in British Government securities. Quarterly increases of the

st e r l in g h o ld in g s o f f iv e c ou n tr ie s o f importance in th is respect areshown in the table on the next page.

The five countries, Eire, India, Australia, New Zealand and Egypt, heldsterling resources tota lling some £660 million at the end of 1942, of w hichabou t £230 million was accu mulate d d uring the year, in addition to conside rablerepatriations of sterl ing securities. India accounted for two-thirds of the accumu-lation of sterling in the war period up to the end of 1942; £150 million wasacquired in 1942 alone and a further £120 million was added in the first halfof 1943.



- 140 -

S t e r l i n g R e s o u r c e s o f B r i t i s h E m p i r e .Quarterly increases or decreases (—) and totals outstanding.

In millions of £ Sterling

1939 January — MarchApril — JuneJuly — SeptemberOctober — December

1940 January — MarchApril — JuneJuly — September . . . .October — December



1943 January — MarchApril — June

Year 1939194019411942 . .

Total increases foryears 1939 — 42

Total increases for periodend August1939 to December 1942

Approximate totals outstanding

end 1942 .

Eire(')

1%(-3%)

1%51%

(-2 )25%4%34%6

4%2%494%4

4%7

1820

49%

52%

120

India(2)

9%(- 4 )

7%26%12161117

(-45 )20%2564

729704522

102%

39%5664%

151

311

310

360

Australia(3)

(- 6%)(- 5%)(- 9 )

12943 •

136

(- 5 )(- 18 )(- 2 )

(- 4 )73

10(- 5 )

6%

(- 9 )29

(- 19 )16

17

36

70

NewZealand

(4)

2O

(- %)5%63%

(-4 )151

(-4%)O

4%52%O

(-2%)5

76%I H '

12

27

26%

30

Egypt(5)

(-1 y2>

%3%1%

(- %)52%5

(- %)4%5%8

(- %)16%581

10

41217%29

62%

62%

80

Total

5(- 12%)

350%2826%14%41%

(- 30 )2412%76

11 >26084%7220

128

46110%82%

228

467

486%

660

(1) The sterling reserves of the Currency Commission (from February 1943 the Central Bank of Ireland) plusthe excess of sterling assets over sterling liabilities of the banks in Eire.

(2) The sterling reserve of the Reserve Bank of India plus the sterling assets of the Silver Redemption Fund.(3) Australia's London funds, i. e. the sterling reserve and money at short call in London of the Commonwealth

Bank plus an estimate of the net sterling assets of the trading banks.(4) The net overseas assets of the Reserve Bank of New Zealand and of the trading banks.5) The sterling reserves of the National Bank of Egypt.

Other parts of the Empire have considerable sterling resources in theaggregate, the largest single holding being perhaps that which Malaya accumu-lated before the Japanese occu pation and which was as high as £60 million inJuly 1941. Other countries with currency boards operating in sterling havealso increased their reserves, the principal holdings being those of West Africa,

Palestine and Irak. Some Empire governments have converted their accum u-lations of sterling into direct loans to the British Treasury, generally interest-free; the chief of these appear to be Newfoundland, Ceylon, East Africa andSouthe rn Rhodesia (included under " al l ot he rs " in the table on page 139).

Apart from the Empire, the all ied governments in London hold sterl ingbalances, particularly those of Holland, Norway (from freights and compensationfor shipping losses) and Belgium (as a result of Belgian Congo exports).A s regards other countries, the recent ac cumulations of sterl ing by Portugal,Turkey and the Argentine should be mentioned.



— 141 —

Sterling Resources of the British Empire.*Monthlyifigures, In millions of £ sterling.

900

850

800

750

700

G50

600

550

500

900

Up to the end of1942 the A rg e n t in e

had repatriated about£7million sterling secu-rities and accumulated£17 million in balancesblocked on specialsterling accounts (withan exchange guaran-tee). In the middleof September 1943,the Argentine FinanceMinistry announcedthat the sterling hold-ing had risen to£42.8 million and wasexpected to be £55 m il-lion by the end of1943. At this timethe Finance Ministrywas authorised toredeem Argentinesterling bonds to atotal of £25 million andraise an internal loan

up to Pesos 500 m il-l ion for this purpose;the sterling requiredwas to be obtainedin the first placefrom the Central Bankagainst Treasury cer-ti ficates. Argentinesterling loans issuedin London amountedin all to £39 million

and £14 million would thus remain when the present operation was completed.This amounts, of course, to only a fraction of the foreign investments in theArgentine, which were estimated at the equivalent of £530 million (at Pesos 17)in 1942, 60 per cent, of them being [British.

All in all, the order of magnitude of the liquid sterling resources of theEmpire (Dominions, colonies and other territories), of direct loans made fromaccumulated sterl ing holdings to the British Government, of sterl ing funds ofallied governments in London and of other countries, largely on special orregistered acc oun ts, may be indicate d at over £1,000 million at th e end of 1942,of w hich perhaps three-qua rters had been accum ulated since the outbreak of

1935 1940 1941 19« 1943

The "five 'other countries" are Australia, Egypt, Eire, New Zealand andSouth-Africa.



- 142 -

war. But these estimates take no account of the repatriation of sterlingsecurities and other forms of British overseas disinvestment in sterling. To

afford an idea of these developments, some details of the situation as regards thefive countries shown in the above table are given in the following paragraphs.

The sterling holding of the banking system in Eire at the end of 1942cons isted of rather over £20 million reserves against the note issue of theCurrency Co mm issio n, and rather under £100 million excess of sterling assetsover liabilities held by the Irish banks, both holdings being invested chieflyin British Government securities (as compared with total holdings of under£70 millio n in the mid dle o f 1939).

India has benefited from profitable exports and very considerable pay-

ments by the British Government, and has been enabled to repatriate theIndian Government's sterling debt and to accumulate a large reserve in sterling.

I n d i a ' s s t e r l i n g r e c e i p t s a n d o u t - p a y m e n t s .

Periods

August 1939 to March 1940Financial year

to March 1941to March 1942to March 1943

Total August 1939 to March1943

Incoming steri i ng

ReserveBanknetpur-

chases(1)

U.K.pay-

ments

O

Total

Outgoi ng ster ling

IndianGovt

require-ments

(3)In millions

64

577492

287

12

33150233

428

76

90224325

715

12

232538

98

Sterlingsecuri-

tiesrepatri-

atedC)

Total

ReserveBank

sterlingholding

(5)

Totalrepatri-ations

plus in-crease inReserveBank re-serves insterling

(6)of £ sterling

14

6882

121

285

26

91107159

383

+ 50

— 1+ 117+ 166

+ 332

+ 64

+ 67+ 199+ 287

+ 617

Sources: Reserve Bank of India's Reports on Currency and Finance, the Reserve Bank's returns and Indianbudget statistics.

0) The net purchases of sterling from the market by the Reserve Bank in India, due largely to the activebalance of commodity exports.

(2) Payments made by the Secretary of State for India in London for British Government purchases In Indiaand expenditure for the defence of India, incurred in India and borne by the British Government. Thesepayments do not take account of deliveries of war material, estimated at £45 million for 1942-1943 alone,nor of lend-lease aid from the United States of $295 million up to December 1942.

(3i Indian Government sterling requirements for debt service, pensions etc. plus the requirements of Burma.(4) Purchases of Indian Government sterling securities on the open market and as a result of compulsorysurrender by British nationals. These figures give the actual cost — the nominal amount repatriated

was higher. Only a relatively small part of the sterling debt was held in India.(5) The increase (+) or decrease (—) of the Reserve Bank of India's sterling reserves.(E) The total "influx" of sterling as shown by the volume of repatriations and the growth of the Reserve Bank's

sterling holding.

The "influx" of sterl ing to India for the war period up to March 1943was over £600 million — and of this 70 per cent, was caused by BritishGovernment payments to meet the cost of Indian defence and for purchasesin India; the balance was a result of the surplus of Indian exports (principallyto the United Kingdom) over Indian Government requirements of sterl ing for



— 143 —

debt service and other paym ents. Nearly one-ha lf of the £600 m illion odd wasuti l ised for the repatriation of the Indian Government's sterl ing debt and the

remainder accumulated as l iquid sterl ing reserves.Under a financial agreement of November 1939, the Indian Government

pays and equips land forces raised in India but the United Kingdom meetsall expenses of Indian troops outside India and capital expenditure incurredin India for the defence of Ind ia itself. On the other hand , India receiveslend-lease aid from the United States* but is paid in full for all war equipmentexported to other parts of the Empire. The 1939 agreement has resulted,particularly since Japan's entry into the war, in a movement of capital on ascale quite unforeseen when the agreement was sign ed. To tal expenditureon the defence of India in 1941-42 was £225 million, of which the IndianGo vernm ent's share was £75 m illion , the balance b eing paid by the United

Kingdom. The estimates for 1942-43 placed the total at nearly £400 million,of wh ich Ind ia was to pay £100 million and the United Kingd om nearly£300 million; actually British payments reached £233 million (in addition to freedeliveries of war materials estimated at £45 million).

In 1939-40 £16 million, in 1940-41 £8 million and in 1941-42 £12 millionof Indian Government sterling bonds were repatriated by purchases on theopen market and, in 1940-41, £2 million w ere pu rchase d under a licence schem eof February 1940. But since the war the major portion of the repatriationshas been the result of compulsory schemes, the British investor being calledupon to surrender his securities to the British Treasury against payment insterling provided by the Indian Government from the holdings of the Reserve

Bank. Similarly, sterling securities held in India were mobilised and repaidin rupees . The firs t com pulsory schem e, of February 1941, covered £73 millionand th e secon d schem e, of December 1941, £74 m illion . In th e three financialyears to March 1942, some £187 million Indian G overnment secu rities wererepaid (the cost of the repatriations from London being £164 million, as shownin the table).

Complete details of the repatriations and repayments in the year to March1943 are not yet available, but they are known to include the following:

(a) In October 1942 an agreement was announced whereby, for a capitalpayment of £30 million by the Indian G overnm ent, the B ritish Treasu ryundertook to make available the instalments necessary to cover certainrailway and other annuities, which would run unti l various dates from1948 to 1959 and had a capital value of abo ut £34 millio n (th e Brit ishliability of £30 million is shown in the table on page 139);

(b) at the end of 1942 the Indian Governm ent took over certain Indianrailway sec urities at a total c ost of some £15% mil l io n;

(c) early in Ja nuary 1943 £78 million 3% per cent, stock was repa id, the lastremaining direct sterl ing obligation of the Indian Government;

* Lend-lease aid furnished to India by the United States amounted to $295 million up the end of 1942;reverse lend-lease by India to the United States was officially estimated on American data to be the equi-valent of $57 million up to the end of June 1943.



- 144 —

(d) later in Ja nuary 1943 certain railway debe ntures guaranteed by theIndian Government were vested in the British Treasury to the extent of

£20 millio n, prior to repurchase by the Indian Government (in March1943), wh ile a further £11 millio n were ca lled for repaym ent in Feb ruary1944.

The programme of repatriation of the direct and indirect sterling debt of theIndian Government has practically been concluded; there remains a smallresidue of a bout £12 million (consisting chiefly of bon ds in the hands of otherthan British holders, which cannot be requisitioned).

The total debt of the Government of India (in both rupees and sterling)on 31st March 1941 was the equivalen t of £936 m illio n, o f w hich £677 millio n or72 per cent, was represented by p rofit-produ cing asse ts: railways, irr igation

wo rks, public utilit ies etc. The total interest payable on the debt was £30 millio n,of which £25 million was covered by fixed interest paid by the railways and othercomm ercial en terprises to the gove rnment, leaving only £5 million as a netinterest charge. The same commercial enterprises paid over profits to theextent of £17 million to th e government, th us giving , all to ld, a net income ofsome £12 millio n. The interest charge of the debt in its widest sense wa s,and is, more than covered from the assets created with the aid of borrowing.A n d , whereas before the war 40 per cent, of th e to tal debt was payable inLondon and required £12 million as interest service, the whole of thegovernment's debt service has now become internal.

This rapid reversal of India's foreign position stands out as one of the

most remarkable happenings in financial history. The Indian Governmentborrowed in London for the first time in 1887; between 1914 and 1919 the debtincreased by £30 million to £230 m illion , while in those years Ind ia made giftsof about £150 million to the British Government as a free war con tributio n;post-1919 borrowing carried the debt (including guaranteed railway debenturesand ann uities) to aroun d £350 million at the o utbreak of the present war. Notonly has the whole of the direct debt, incurred gradually over more than 50 years,been repaid during the first 3% years of the present war, but India's sterlingreserves have increased by £330 m illion in the same p eriod . By the sum merof 1943, India 's sterling reserves had grow n to over £500 m illio n, about doublethe value of the remaining British commercial and industrial investments inIndia, w hich have been estimated at about £250 million .

The financing of these transactions in a country with as narrow a capitalmarket as India has naturally been attended by some difficulties. The table onthe next page shows the evolution of the m ain items of the return of theReserve Bank of India, converted into sterling for purposes of comparison.Of the total " in fl u x" of over £600 million from Au gu st 1939 to March 1943,abou t £180 million has been placed on the internal m arket in th e form ofrupee securities, while £435 million has been taken up by the Reserve Bankthrough the direct acquisition, on the one hand, of sterling balances andsecurities and , on the other, of rupee securities (equivalent to £100 millio n).



- 145

Reserve Bank o f l nd ia ( 1 ) .

Near end of monthAssets

GoldSterling reserve P)

ba-lances

secu-rities total

Indiangovt

rupeesecu-rities

Rupeecoin

Liabil i tiesNotes issued

India Burma

Deposits

Govt banks

in millions of £ sterling1939, March .

August.1940, March .1941, March .1942, March .1943, March .

June . .

33333333333333

116

2132266561

59

45458577

160316426

271

5550

106108186382487

332

24282966

10213189

103

53574226211112

(-46)

134127169180286483550

356

87

101321

15111717152719

16

9201327323540

I n crease s fromAugust 1939 to

March 1943 . . 15(1) Rupees converted at 1s.6d. (2) At pre-1931 par value.(3) The yearly increases of this item do not agree exactly with the previous table, partly owing to the date of the

return (the last Friday and not the last day of March), but the total increase for the whole period corresponds.

The chief counterpart of these acquisitions was the increase of the circulationof notes and c oins by the equ ivalent of £400 million fr om the beginning of thewar to the end of March 1943.

Developments in Australia and New Zealand present a striking contrastto those in India. Each of the two c ountries maintains its own forces overseas,pays for its war equipment other than that obtained on lend-lease terms, andhas entered into the m utual aid agreemen ts. Neither country has been in aposition to repatriate its sterling debt, although each was able to add a modestincrement to its London fun ds in 1942 — but as the resultant of a num ber offactors and not of one-way payments.

As regards Austral ia, the Bri t ish Government continues to purchasemeat, butter and cheese, according to contract; i t also purchases the wholewo ol-clip (with an increase of 15 per cent, in the price in 1942), whether it isshipped or not. On the other hand, Austra lia has had considerable externalpayments to make, including the cost of maintaining Australian forces over-seas and importing war equipment. Some indication of the overseas warexpenditure is given in the budget shown in the table on the next page.

War expenditure "overseas", which totalled £A175 mil l ion up to June 1943,is that part borne directly by Australia; such overseas expenditure as cannotbe met currently without undue depletion of London funds has been bookedin inter-Treasury accounts maintained between the Dominion and the UnitedKingdom; £12 million only was borrowed in this way between July andDecember 1940 and this sum was repaid in October 1943. The larger amountborne by Australia in 1942-43 was due not so much to an increase of theexpenditure as to the ability of Au stra lia to bear a greater b urde n, thesatisfactory position of the balance of payments being in part due to theexpenditure of American forces in Australia.



— 146 —

A u s t r a l i a n

Financial years to30th June

E x p e n d i t u r e :

overseastotal

civil . . .

Total .

R e v e n u e :

totalb o r r o w i n g •

Total . . .

B u d g e t

Closed accounts

1939-40 1940-41 1941-42

Estimates

1942-43 (') 1943-44

in millions of £A

195

2485

109

9022

112(- 3)

109

12743

17089

25 9

12624

150109

259

27 347

32 0101

421

18036

216205

421

48 080

56 0

712

25 230

28 243 0

712

50 070

570145

715

27339

312403

715

(') Revised estimates up to May 1943, including supplementary figures.C) £A 30 million of the increase of civil expenditure Is accounted for by the creation of a National Welfare Fund

as a basis for an extension of social benefits.

Australia has not been in a position during the war to make any appreci-able repayments in excess of contractual amortisations on its external debt,which remains at around £600 millio n, but has undertaken certain conve rsionope rations . In 1941, some £30 million Com mon wealth and State loans wereexchanged for a 3% per cent. 40 to 45-year Commonwealth loan, issued at 99;from December 1941, for nearly a year, Australian loans were practicallyunmarketable at the fixed "m inim um pric es" in Lond on; but in October 1942these loans began to move up and in November it became possible to issue

a 3 per cent. 2 to 4-year loan at 98 to convert the £16% million 2% per cent,bonds of 1939 which matured on 1st January 1943.

Part of the internal budget expenditure has been met by borrowing fromthe Commonwealth Bank and it is the increase of the bank's investments ratherthan fluctuations in sterling holdings which has exerted the chief influenceon the note issue.

C o m m o n w e a l t h B a n k o f A u s t r a l i a .

Weekly returns

near end of month

Assets

Sterlingreserve

Investments

deben-turesCommon-

wealthGovt bondsO

Discounts

andadvances

Totalbalance

sheet

Liabil i ties

Notes

incirculationDeposits

etc.

in millions of £A1938 December1939194019411942

1943 June . . .

4245876079

80

46505668

101112

52513782

158214

151927232022

159173218243370«440W

50556582

123138

8895128135154

178

0) Including money at short call in London. (2) Including a small amount of British and Colonial bonds(the total of which fell from £A18 million in 1938 to £A12 million in 1940).

(3) Issue and banking departments only, as shown by weekly returns. (4) Provisional.



— 147 —

By the Wa rtime Banking Co ntrol R egulations the trading banks wererequired to deposit with the Commonwealth Bank their "surplus investable

f u n d s " , defined as the amount of assets in excess of the average in August1939. Interest is paid at a rate which will make the profits of each bankequal to the average profits of the three pre-war years; this rate may varyfrom bank to bank but a ppears on the average to be % per cent. Thesedeposits may be withdrawn only with the consent of the Commonwealth Bank;further, long-term government securities (as distinct from Treasury bil ls) maybe purchased only with the consent'of the Commonwealth Bank, which alsolays down the banks' policy regarding private advances and discounts.

Quarterly averagesfor quarter ending

1938 December1939 „1940 „19411942 „1943 March

A u s t r a l i a n T r a d in g B an ks .

Assets

Cash Wartimedeposits

Govt SETreasury

billscurities

bondsAdvances

Totalbalancesheet

Liabil i ties

Depcurrentaccounts

ositstimedeposits

in millions of £A353743454745

36489

192341466483

212450636063

291294282279244234

380393433452490518

120128153175231262

198200205203191197

N e w Ze a l a n d B u d g e t 0 5 .

New Z e a la n d also sells meat, dairy produce and wool under contractto the United Kingdom and has an arrangement with the British Treasury

similar to that of Australia;

receipts on this inter-Treasury account are shownin the budget under theheading of "Borrowing fromthe U. K. Government underthe Memorandum of S ecurityAgre em ent". But expen-diture overseas is not givenseparately from other warexpenditure as in Australia;the estimate for 1940-1941included £NZ 19.75 millionfor overseas expenditure ofthe New Zealand army andair force and the amounthas doubtless considerablyexpanded with the growthof total war expenditure.

It has been announcedthat the gross amountborrowed from the United

In millions of £NZ

Expenditurewarsocial securityother . .

Totals (') . . .Current revenue

other currenttotal . . .

Revenuefrom borrowi ng

from United Kingdom .internal war loans . . .Net borrowing (less re-

demptions) .Lend-lease

Totals (2) . . .

Closed accounts

1939-40

8.010.835.754.5

44.57.2

51.7

3.1

3.1

54.8

1940-41

27.112.635.575.2

61.36.2

67.5

6.012.2

14.5

82.0

1941-42

52.413.536.0

101.9

68.110.078.1

8.223.5

24.4

102.5

Estimates

1942-43

133.0(3)16.033.1

182.1

77.814.292.0

46.0C)35.6

81.610.0«

183.6

0) Financial years ending 31st March. Ordinary, war and social securitybudgets combined. There is also a Development Account coveredby borrowing of £NZ 12 million in 1941-42, for which £NZ 4.5 millionwas estimated in 1942-43.

(2) Differences between total receipts and total expenditures are largelydue to fluctuations of cash balances. (3) Final accounts showedactual war expenditure in 1942-43 as £NZ 144 million.

W Final accounts show only £NZ 15.4 million borrowed from the UnitedKingdom but £NZ 26.8 million was received on lend-lease account.



- 148 -

Kingdom totalled £20.2 million at the end of 1942 and of this £11.4 millionhad been rep aid; in March 1943 a furth er £8.0 million was r epaid, leaving only

£0.8 mil l ion sti l l outstanding; these figures take no account of fresh indebtednesswhich may have been incurred during 1943.

New Zealand's external position has been largely determined by the risein exports fro m £NZ 67.5 million in 1941 to £NZ 80.9 million in 1942, increasingthe e xport surplus from £NZ 18.3 million to £NZ 27.2 millio n. A s a resu lt, thesterling assets of the Reserve Bank and tcading banks together have risen from£NZ 25.3 million to £NZ 40.6 million during the year 1942. Adv antage was takenof this development to convert a £6 million sterling loan in December 1942 andto make sundry small repayments in London. The total external governmentdebt remains at about £160 mil l ion ste rl ing; as in the case of Au stralia, noappreciable repayments or repatriations have taken place during the war.

R e se rve Ba n k o f N e w Ze a l a n d .

Near endof month (

1)

1938 December19391940 „194119421943 June. . .

Assets

Gold Sterlingexchange

I nvest-ments

Advancesto

Govt (2)

Totalbalancesheet

Liabil i ties

Notes incircula-

tion

Depositsgovern-ment banks other

In millions of £NZ2.82.82.82.82.82.8

4.77.0

12.513.326.629.7

3.63.63.83.84.5

10.3

16.423.627.025.528.843.2

28.537.447.347.264.789.5

16.619.222.724.630.832.4

2.82.68.09.0

10.819.1

7.213.312.710.718.530.1

0.10.00.40.30.74.6

0) Last weekly return in month. (2) Marketing Department and other government advances combined.

Internally the situation is influenced by the increase in sterling assets andby government borrowing; the note issue rose by 8 per cent, in 1941 and 25 per cent,in 1942. The trading banks took up government securities on a comparativelylarge scale in 1942, while private advances and discounts fe l l ; time depositsstood still but curre nt ac coun ts rose by 31 per cent., com pared w ith Only9 per cent, in 1941. Tota l governm ent borrow ing of £NZ 35.5 million in 1942

N e w Z e a l a n d T r a d i n g B a n k s .

Near endof month (')

1938 December1939 „1940194119421943 March . .

Assets

Cash«Net

overseasassets

Governmentsecurities

Advancesand

discounts

Liabil i ties?)Deposits

demand 1 timein millions of £NZ

11.417.818.615.922.624.4

2.17.1

11.912.014.014.9

8.815.217.523.034.336.2

57.851.148.150.544.044.9

34.241.349.754.070.977.1

29.831.929.429.028.828.6

(1) Last Monday in month. (2) Deposits at Reserve Bank and Reserve Bank notes. (3) In New Zealand only.



— 149 —

was obtained from approximately the fol lowing sources: from the public£NZ 15.5 mil l io n; from government departments £N Z4.2 mil l io n; from the trad ing

banks £NZ 8.3 million and from the Reserve Bank £NZ 7.5 m illion . The amo untborrowed from the banking system was thus about equal to that borrowedfrom the public.

The sterling assets of the National Bank of Egypt rose by nearly£30 million in 1942, almos t as much as in the previous three years takentogeth er. In September 1943 the Egyptian G overnment decided to co nvert th ewhole of i ts public debt, including external, into new issues of internal loans;the external debt consisted mostly of sterling loans totalling somewhat over£90 million, but a large proportion of these bonds were held in France andin Egypt itself, and some repatriations had recently taken place from London;the Finance Minister estima ted the B ritish holding at £E 14 million and o therholdin gs outside Egypt at £E 18 millio n.

The dominating influences have been the considerable expenditure of theforc es of the U nited Nations in the coun try, estima ted at £E 63 million in 1941and at over £E 100 million in 1942, and the official British purch ases of thecotton crop. The absorption of sterl ing has made the market very l iquid andinterest rates are low; the Egyptian budget for 1942 gave a surplus of some£E 10 million and the gove rnm ent's cotto n loans have been greatly ove rsub scrib ed.

N a t i o n a l Ba n k o f Eg yp t C)

Endofmonth

Assets

GoldSterling reserves (

4)

ritiesbalan-ces etc. total

Egyp-tianGovt

securi-ties (=)

Ad-vancesand dis-counts

Totalbalancesheet

Liabi l i t ies

Notecircu-lation

Depositsgovern-ment (

6)

banks(net) O other

in millions of £E (2)

1938 Dec.

1939 „1940 „

1941 „1942 „

1943 June

6.26.26.26.26.2

6.2

14.518.931.845.071.578.5

1.50.60.65.98.6

12.8

16.019.532.450.980.191.3

16.012.929.652.069.9

101.0

10.214.09.16.96.03.7

51.256,481.1

119.4166.7209.0

20.426.437.350.775.382.4

4.82.64.8

21.328.651.3

0.10.72.54.1

12.413.2

17.217.026.433.439.1

48.3

(') Combined balance sheets of issue and banking departments.O The £E is practically at par with the £ sterling; the rate of exchange taken in the 1942 balance sheet is

£100 = £E 97.50. (3) At pre-1931 par value.(4) The securities are held as reserves against the note issue and consist of British Government Treasury

bills and War Loan. Other Egyptian banks increased their surplus holdings of sterling but no regularfigures are available. It has been estimated that all the Egyptian banks accumulated the equivalent of about£E 80 million between the beginning of the war and the end of 1941.

(5) Egyptian government securities and securities guaranteed by the Egyptian Government plus a very smallamount of other investments (1942: £E 1.3 million).

(6) According to the annual report of the National Bank for 1942, "cap ital su ms " are included on this acco untand the increase does not necessarily signify a large surplus of government revenue.

(7) Banker's accounts are included on both sides of the return; the figure given in the table is the net amount.

T h e n o t e c i r c u l a t io n r o s e b y £ E 13 . 4 mil l ion in 1941 and £E 24.6 mi l l ion

i n 1942 ; 45 per cen t , o f the i ncre ase i n the l a t te r year w a s co nc ent ra t ed i n to

t h e m o n t h o f J u n e , w i t h h e a vy w i t h d r a w a l s o f d e p o s i t s f r o m t h e b a n k s . T h e

annua l repor t o f the Nat i ona l Bank fo r 1941 had a l ready draw n a t ten t i on to

t h e f a c t t h a t t h e r i s e in t h e n o t e c i r c u l a t i o n w a s m o s t m a r k e d i n t h o s e m o n t h s



— 150 —

when reverses of the British forces caused apprehension amongst the public(a phenomenon similar to that which may be observed in other countries also).

Part of the increase of the note circulation in 1942 was attributable to thefact that Egyptian notes were employed in occupied territories.

The Union of South Africa has employed its very active trade balance(part of which arises from the British Government's purchase of the wool-cl ip)to accumulate gold and to redeem its sterl ing indebtedness.

R e s e r v e B a n k o f S o u t h A f r i c a .

Near endof month 0)

1938 December19391940194119421943 June . . .

Assets

Gold

(2

)

26.730.244.644.477.070.9

Goldpre-

mium(3)

13.618.132.132.365.259.8

Ster-

ling

8.18.00.80.30.9

12.0

Ad-vances

toGovt

1.7_1.0—2.8—

Invest-

ments

Totalbalancesheet

n millions of £SA

1.82.63.6

28.57.3

28.6

52.159.082.2

105.8153.6172.2

Liabil i ties

Notecircula-

tion

19.120.723.728.639.645.7

Deposits

govt

1.65.42.0

17.42.65.9

banks

24.424.145.647.299.0

108.9

other

3.24.46.37.16.96.4

(') Last return of month. (?) At pre-1931 par value.(3) "Other assets" of the bank, mainly the difference between the purchase and the book price of gold.

The gold holding rose by £S A 33 million in 1942 and the gold premiumaccount by about the same amount; the note issue increased by £SA 11 mill ion,about one-third, while the balance of the commercial banks at the Reserve Bank

more than doub led to £S A 99 mil l ion. Other assets of the comm ercial banks inSouth Africa changed little over the year, but deposits rose by £SA 51 millionto £SA 197 m illion. The sterling holding s of the Reserve Bank, wh ich up to1942 were maintained at the minimum necessary for day-to-day requirements,increased in the first half of 1943 to £SA 12 million.

The external debt of the Union and provinces, which was slightly over£100 million before the w ar, was reduced by a repayment of £8 million in July1940 and by two block repatriations of requisitioned securities, the first of£32 m illion at the end of 1941 and the secon d of £42 million at the end of1942, which did much to mop up the Union's surplus on the balance ofpayments. The expansion of the Reserve Bank's "investments" in December

1941 and in the first half of 1943 reflects these repatriations, the sterlingsecurities being acquired in the first place by the Reserve Bank against paymentin gold in London. Internal loans have been floated in South Africa to enablethe government to repurchase these securities from the Reserve Bank for can-cellat ion; the budget surp lus of about £S A 6 million in 1942 was applied to thesame purpose, it was noteworthy that, in spite of an increase of defenceexpend iture fro m £SA 2 million in 1939 to £SA 80 million in 1942, the budgethad been balanced without borrowing. Eighty per cent, of the total governmentdebt of £SA 380 million in 1942 (internal and external) was represented byinterest-bearing assets (railways, post, telegraph etc.).



- 151 -

Irr addition to the repatriation of the government's external debt, a sub-stantial amount of private indebtedness has been transferred from British to

South African ownership, particularly gold shares. The Governor of theReserve Bank at the annual meeting in July 1942 recommended that munici-palities, public bodies and private firms should also seize the favourableopportunity of using local funds to redeem South African l iabil i ties overseas;the possibil i ties for further repatriations of the Union Governm ent's sterl ingdebt have become very limited since almost the entire debt has been repaid,the only remaining sterling loan being the £5 million 3% per cent, bonds 1954-59issued in May 1939.

The Union of South Africa was a borrower in the London market unti l1939; but, from the outbreak of war up to March 1943, it increased its goldreserves by nearly £80 million (at market p rice), repa id over £80 million of

the government's sterl ing debt and repatriated a substantial volume of goldand other shares.

The following table summarises in round figures the material givenin p receding parag raphs regard ing B r i t i s h "o ve rs ea s d i s in v e s tm e n t "in sterl ing in relation to seven countries in the British Empire (but excluding

, . ' ,. Canada's "fre e g if t" of £225 m il-A c c u m u l a t i o n o f s t e r l i n g , | | o n a g ^ a s t h e u s e m a d e

r e p a t r i a t i o n o f s e c u r i t i e s e t c . » B r i t i s h , h o | d j n g s a n d

September 1939 to March 1943. „ , . , . , . . . ,,the mobil isations of dollarsecurities, etc.). In the three

and a half years to M arch 1943the overseas disinvestment vis-à-vis these seven countries thusamounted to nearly £1,350 mil-l ion, India with £640 millionand Canada with £415 millionrepresenting nearly 80 per cent,of the total disinvestment.This £1,350 million was madeup in almost equal p arts ofsterl ing accumulations (as ba-lances etc. and direct loans)

and of sterling securities re-patriated.

Countries

Canada (')EireIndiaE g y p t . . . . . . . .

New Zealand . . .South Africa (<). . .

Totals . . .

Accumu-lation ofsterling

balancesetc.

Directloan to

BritishGovt

Sterlingsecurities

repatri-ated

Total

in millions of £ sterling

55330603025

(-10)490

155

30

185

260(3)

280

130(5)670

41555

640603025

1201,345

0) Amounts are rounded off to the nearest £5 million.(2) Excluding the payment of £62% million in gold in 1940 and

Canada's free gift of £225 million In 1942.(3) The repatriation of securities (including private) plus $200 mil-

lion utilised to repurchase British interests.

(') In addition, the Reserve Bank of South Africa has addednearly £80 million to its gold reserves.(5) Round figure, including an allowance for private repatriations.

The repatriation of sterl ing securities was, therefore, as great as theaccumulation of sterling balances. But the outlet afforded by the repatriationof debt has its limitatio ns and these limits are clearly in sight for certaincountries. The repatriation of Canadian Dominion Government sterl ing debtwas practically com pleted in March 1942, when the free gift of £225 m il-l ion was granted; British holdings of Canadian securities other than thoseof th e Dominion Government amou nt to the equivalent of fully £250 millionand it was decided that, in the interests of both parties, these investments



— 152 —

shou ld be maintained. An d A ustra lia and New Zealand have entered intothe mutual aid arrangements without ever being in a position to repay any

appreciable part of their indebtedness in Londo n. On the other han d, byMarch 1943 the repatriation of the government sterling debts of both Indiaand the Union of South Africa was practically completed.

The overseas disinvestment of the United Kingdom in st e r l in g v is-à-visall co untrie s fro m Septem ber 1939 to March 1943 must have exceeded£1,500 m illio n; in the same period £1,500 million w as spent in g o ld a ndd o ll a rs in the United States. The total ne t overseas dis investment wasnot, however, in excess of £3,000 million, but was about £2,500 million upto March 1943. The difference gives a rough measure of the gold and dollarscurrently a cquired a gainst sterling from coun tries w ithin the Empire.

On the continent of Europe the main movements of funds have beendetermined by the use made by Germany of other countries' resources throughthe mechanism of clearings and contributions levied to meet occupation costs,e tc . G er m an y 's c le ar in g in de bt ed n es s is represented by the debts o fthe Deutsche Verrechnungskasse but there are certain assimilated liabilit ies,such as the debts of the Reichskreditkassen to central banks, which are oftenshown in conjunction with the clearing claims and for the sake of uniformitymay be grouped together with them.

No regular statistics of the clearing position are published in Germanybut estimates have been made of the volume of foreign balances held at

the Verrechnungskasse and in-In ve st m e nt o f c le a r in g ba la nc es e tc . vested by i t in Reich secur it ies,

i n R e i c h s e c u r i t i e s . w h i | e the debt of the Reich tothe central administration of theReichskreditkassen is given inthe monthly public-debt state-ment. The accompanying tableshows the annual increases ofthese two items and the totalincrease for the three years1940-42; as German clearingdebts were practically extin-

guished in the early monthsof 1940 and the debt to the

Reichskreditkassen dates only from May 1940, the increase in the years1940-42 may be taken as approximately equal to the totals outstanding.

Germa ny's clearing debts proper thus amoun ted to some RM 14% milliardat the end of 1942, nearly one-half of which was accumulated during the year.In addition, the Reichskreditkassen had debts to central banks amounting toabout RM 4 % milliard, while some RM 2% milliard Reichskreditkassenscheinewere in circulation (see page 187); these debts to central banks are on . account

In milliards of RM

Verrechnungskasse ('). . .Reichskreditkassen P) . . .

Total foreign sources . . .

1940

1.51.5

3.0

1941

6.03.0

9.0

1942

7.02.7

9.7

Total1940-42

14.57.2

21.7

(') From an article 'by Dr. Günter Keiser in Bankwirtschaft 1943,No. 5. This item also includes Reich securities held directby the banks in Holland and In Bohemia and Moravia.

(2) This is the debt of the Reich to the central administrationof the Reichskreditkassen äs shown In the public debt return.The corresponding liabilities of the Reichskreditkassen consistof Reichskreditkassenscheine in circulation and Relchskredit-kasse debts to central banks.



— 153 —

of Reichskreditkassenscheine withdrawn (as in Belgium) or of direct advancesmade to the Wehrm acht (as in Denm ark). Excluding the actual circulation of

Reichskreditkassenscheine, which were largely in the eastern occupied territories,the total of German debts on clearing and these other accounts would thusbe abou t RM 19 milliard at the end of 1942, acco rding to German sou rces (partof the debts being, however, in the currencies of the creditor countries).

These figures can be largely confirmed from the side of the foreign creditors.As the German debts are generally to central banks directly, or are financed bythem, statistics can be compiled from the information given regularly in Europeancentral-bank returns. The growth of claims on Germany, as shown by eightcountries publishing such data, is i l lustrated in the graphs on the fol lowing pages;

C l e a r i n g c l a i m s a n d a s s i m i l a t e d a c c o u n t s .

Quarterly (and yearly) increases or decreases (—) and approximate totals outstanding.

Quarterlyand yearly

1941 Jan.-March .April-June .July-Sept. .Oct.-Dec.. .

1942 Jan.-March.April-June .July-Sept. .Oct.-Dec.. .

1943 Jan.-March .April-June .July-Sept. .

Year 1941 . . . .Year 1942 . . . .Approximate totaloutstanding :

end 1942 .Sept. 1943 .

France(1)

Belgium Holland(2)

Denmark(3)

Hungary(4)

Rou-mania

(5)Bulgaria

(e)

Bohemiaand

MoraviaTotal

in millions of Reichsmarks*50

100200250350200500600500750750600

1,650

2,4004,400

14095

255195180310450535485440505685

1,475

2,4153,845

130385375365270(-20)330495510270415

1,2551,075

2,4903,685

9010510512510510585

135165260225425430

1,2451,895

__65208085

(-40)100(-20)11017085

225

310570

1013012510

(-90)808540

(-75)6535

275115

405430

50130SO805570458530**35**35**

340255

695795**

6050

150255(-25)150(-20)335195305375515440

1,5502,425

530995

1,3551,300

925980

1,4352,3251,7902,2352,5104,1805,665

11,51018,045

Note: In general, only clearing claims are shown which have been financed, or refinanced, by the centralbank (in the case of France, by the Treasury). For Belgium, however, certain assimilated claims are included,particularly an account showing Reichskreditkassenscheine withdrawn, amounting to RM 286 million at theend of 1942; and for Denmark, the only country which books occupation costs as a Reichsmark claim, theseare included also and amounted to RM 670 million, rather more than half the total claim on Germany,at the end of 1942. For Bulgaria, the net amount on clearing accounts is shown (assets less liabilities),but the Bulgarian Treasury certificates, denominated in Reichsmarks and purchased by the National Bankfrom its clearing balances, have been added. Since the abolition of the German clearings with Hollandand with Bohemia and Moravia, the central banks of these countries have held Reichsmark claims directly.

The table excludes amounts taken over by Treasuries (e. g. in Holland) and Reichsmark claims of privatebanks (e.g. in Hungary) and of private individuals or firms (for instance, the Belgian National Railways showa claim of B.fcs 2,004 million (RM 160 million) in the balance sheet for 1942 in respect of military transportsand the utilisation of railway stock by the Reichsbahn, while on the other hand the Reichsbahn in its balancesheet for 1942 shows claims of RM 237 million against the railways in the occupied territories).* Figures are rounded off to RM 5 millions. ** Estimates.

0) Advances made by the French Treasury to finance the surplus of exports to Germany. The total for 1941Is known to have been RM 600 million; in the absence of detailed information for that year a rising tendencyduring the year has been assumed.

(2) The Nederlandsche Bank's figures showed a decline of RM 20 million for the quarter ended June 1942 butsome RM 300 million was transferred to the Dutch Treasury at the beginning of April 1942.

(3) Including occupation costs which, In the case of Denmark, are booked as a claim on Germany.(4) The relevant Item of the National Bank of Hungary's return declined by RM 40 million when RM 161 million

was taken over by the Hungarian Treasury in the middle of September 1942; in all, RM 225 million was takenover in this way during the year. The reduction of RM 20 million to the end of March 1943 was followedby a rise of over RM 100 million in the first week in April, when a new credit appears to have been granted.

(5) In the two months to the end of February 1942 the clearing assets fell by RM 135 million of which RM 50 mil-lion was utilised to purchase gold. Similarly in 1943 clearing assets fell by RM 100million in the two monthsto the end of March, of which again RM 50 million reflected a purchase of gold.

(6) In the three months dune-August 1942 the net clearing claims shown by the National Bank of Bulgariafell altogether by RM 50 million compared with an average increase of over RM 30 million in the other monthsof the year, from which it may be assumed that some RM 150 million was utilised for special purposes.



— 154 —

quarterly and yearly figures of theincreases are given in the table

on the previous page. In boththe graphs and the table localcurrencies have been convertedinto Reichsmarks for purposes ofcomparison.*

This table is compiled fromstatistics covering clearing claimsof the countries concerned vis-à-vis all other countries. Generally,individual debtor countries are notdistinguished in these totals but itis known that the preponderatingdebtor in all cases is Germany.Germany accounted for 90 percent,of the Belgian clearing claims atthe end of 1942, 98 per cent, ofHungarian claims, 99 per cent, ofDutc h claims and 100 per cent,of the French to ta l ; and similarproportions are applicable toDenmark and other countries. Thu sno great error would be made if thefigures given were taken as apply-

ing to German clearing debts only.The total Reichsmark claims

outstanding of the eight countriesshown in the table reachedRM 11.5 milliard at the end of1942, about 60 per cent, of thetotal for all countries as given fromGerman sources; the increasefor the eight countries during theyear was RM 5.7 milliard againstRM 4.2 milliard in 1941. In additionover RM 800 million was takenover in 1942 by the Treasuries inHolland, Hungary, Roumania andBulgaria and utilised in part forextraordinary payments in Germany.In 1943, the increase of the clearing

• Almost the whole of Germany's export tradeand thus a great part of European trade Is,In fact, conducted in Reichsmarks. The annualreport of the Golddiskontbank for 1942 statesthat Its exchange-guarantee business haslost much of its importance "since Germanexporters are now invoicing almost exclusivelyin Reichsmarks".

Reichsmark Claims Outstanding.

Monthly, In millions of Reichsmarks.4000 4000

WOO19A-1 19« 19«

4000

19«



— 155 —

Reichsmark Claims Outstanding.

Monthly, in millions of Reichsmarks.1000

500

1000

: HUNGARY

Pengöcafts on Germany -1940 1941 19« 19«

: ROUMANIA

1000

500

01000

500

1000

500

19«

accounts of the eight countrieswas RM 6.5 milliard in the firs t

nine months.Other countries which have

appreciable clearing claims onGermany, but for which no re-gular periodical statistical dataare available, include the fol low-ing : Italy, Switzerland, Spain,Slovakia, Croatia (1 ) and Greece.

Deficits on clearing accountsin Europe other than those of

Germany are mostly of little re-lat ive importance. Only F in la ndappears to be generally indebtedall round (but chiefly to Germanyand largely on account of de-liveries of war materials): thetotal of Finnish clearing debtsrose f rom RM 75 million at th eend of 1941 to RM 150 m illion (2 )

at the end of 1942. Semi-officialestimates made in September 1942placed the French clearing debt

to Switzerland at Fr.fcs 1,000 mil-lion (equivalent of Sw .fcs 100 m il-l ion). Certain Ita l ian clearingdebts are mentioned later. Moredetailed information regarding thedevelopment of the clearings inparticular countries is given inthe fol lowing paragraphs.

The surplus on the French clearing with Germany during the year 1941was less than that of Belgium and only one-half that of Holland; but in 1942

it expanded to considerably more than double its former volume and exceededthese other two principal suppliers of Germany on credit. Some idea of theextent of French exports to Germany can be obtained from the fol lowingestimates: in the first five months of 1942 French exports to Germany amountedto Fr.fcs 14.7 milliard (over 70 pe rc en t, of France's to tal exports) and imp ortsFr.fcs 3.7 m illiard , the Fr.fcs 11.0 milliard surp lus of exports being finan ced bythe French Treasury. The total claim in the clearing with Germany was equi-valent to abo ut RM 2,400 m illion at the end of 1942.

(?) Clearing claims were first shown in the return of the Croatian State Bank on 15th October 1943 when theytotalled Kunas 2,950 million. (2) i.e. the equivalent of FM 3,000 million. There Is, in addition, aforeign short-term debt of a similar magnitude owed partly to Sweden and partly to the United States.



- 156 -

After France, Balgium was the chief exporter to Germany on credit in1942; the figure in the table for 1941 includes, besides the clearing, the with-

drawal durin g th e year of RM 286 million Reichskred itkassenscheine issued in1940; the surp lus on the actual clearing accou nt with Germany in 1942 wastwo and a half times as great as in 1941. The total of the Belgian claim onGermany at the end of 1942 was the equivalen t of abo ut RM 2,400 m illio n.

Holland fol lows closely after France and Belgium. Actually the returnsof the Ned erlandsche Bank sho w an increase of o nly RM 1,075 m illion in 1942,com pared with RM 1,255 m illion in 1941, but, in a dd ition , som e RIVI 300 millionwere purchased by the Dutch Treasury from the bank early in April 1942.According to unofficial reports, similar purchases took place regularly at theend of each month thereafter, but these transactions were for much smalleramounts and, as these Reichsmarks are not shown amongst the assets in the

Treasury returns, it is not possible to make allowance fo r them . A t the endof 1942 the total Reichsmark holding of the Nederlandsche Bank amounted tonearly RM 2,500 m illion (of w hich RM 2,300 m illion was invested in Reichsecurit ies*); taking account of the Treasury 's holding, the total Dutch claimwou ld be about RM 3,000 millio n.

Stat ist ical data regarding the Ital ian surplus in the clear ing with Germanyare lacking but the increase of the Italian Treasury's assets in the pasttwo years leads to the assumption that the total clearing surplus may bein the neighbo urhood of Lit. 15 milliard , say RM 2,000 million, which totalhas been adjusted to the extent of the value of the property of German

nationals repatri-

M ig r a t i on o f G e r m an N a t i o n a l s ^ . a ted f rom the SouthPosition at end of 1942. Tyro l and brou ght

into the clearing in1940. What amounthas been broughtinto the Ital ian-German clearing asa result of thisrepatriation has notbeen revealed butnearly 240,000 per-sons had been

transferred fromthe South Tyrol bythe end of 1942,of whom 62,000

(') From the annual report for 1942 of the Deutsche Umsiedlungs-Treuhand- 'Gesellschaft, formed in the autumn of 1939 to ensure the orderly transfer th e ta ble shows,of emigrants' property.

(2) Including 16,244 emigrants under the later transfer dating from February 1941.

Date of beginning ofemigration

1939 November . .November . .November . .

1940 September .October . . .December . .

1941 January . . .JuneNovember . .December . .

1942 February . .AprilJulyOctober . . .

Territory from whichemigration took place

Estonia and Latvia (2) . . . .

South Tyrol.Volhynia, Galicia etcPolish Governor-GeneralshipBessarabia & North BukovinaDobrudja & South Bukovina .Lithuania

Lai bac h (Ljubljana)

BulgariaUSSRGreece (Herakleia)Slovakia

Totals . . .

Totalnumber ofemigrants

80,076237,802134,95030,756

137,11677,23850,90415,35314,8101,9255,314

144551

18,302

806,106

Numberwith

fortunes

35,00062,00060,0007,000

55,00020,00015,0006,0004,500

6901,5003113

5,000

272,000

* Holland is able to invest Reichsmark balances directly in Reich securities. Other countries hold non-interest-bearing Reichsmark balances at the Verrechnungskasse in Berlin, which Invests these funds in Reichsecurities on its own account.



— 157 —

(The transfer of German nationals, which began in the autumn of 1939,had passed its peak in 1942. Although the last resettlements had not yet

been completed, the work of the Deutsche Umsiedlungs-Treuhand-Gesellschaftthus entered on a new phase during the year, when it became chiefly aquestion of helping settlers in their new economic surro und ings. By the endof 1942 fin al s ettlem ents of p rope rty had been made in 195,000 cases, invo lvingtotal out-paym ents of RM 219 million plus RM 260 million for maintenanc e,advances, etc.)

Denmark is the only country where the costs of maintaining the occupy-ing troops, of forti fications etc. are booked as a claim in Reichsmarks, and thisclaim is include d with the clea ring in the figure s given in the table . In 1941the tota l of RM 425 million was divided equally between the clearing and o ccu -

pation co sts . For 1942 the total increase under the two headings was practicallythe same as in the previous year, but the rise in the clearing figure wasrelatively less, particularly in the third quarter, while the occupation costs,which had been running at an average of RM 17-18 million mo nthly, rose in thelast quarter to over RM 30m illion a m onth . Tow ards th e end of 1942 the restric-tions on purchases by German soldiers and the customs control for Germannationals were lifted. Moreover, the Danish Government agreed that the army ofoccupation s hould be supplied from Danish source s, while hitherto foodstu ffshad had to be either imported or bought in the country through the clearingacc oun t. The tot al D anish claim in Reichsmarks w as about RM 1,250 millionat the end of 1942.

In 1941 the H u n g a ri a n National Bank and the comm ercial banks opened apengö credit in favour of the German clearing office in order to make possiblethe payment of claims of H ungarian expo rters. In view of the furth er increase ofexp orters ' claim s, the H ungarian banks, in the spring of 1942, granted a freshadvance of RM 100 millio n, raising the amo unt of claim s finan ced directly bythe National Bank and the Hungarian banks together to the equivalent ofRM 300 mil l ion . The Hungarian banks, for a considerable part of this advance,had recourse to the National Bank in the form of credits on current account.These credits and the advances of the National Bank were shown separately inthe return of the latter as "Pengö advances made to foreign countries" and it

is this item which is reproduced in the table (in which connection it must beremembered that it does not show the amounts financed by the commercialbanks without recourse to the National Bank).

As the result of an arrangement reached with Germany, the HungarianGovernm ent in September 1942 took over RM 161 million from the National Bankand by the end of 1942 had bo ught RM 225 million with in the Germ an-Hun gariandevisen compensation. The pengö amounts required for this purchase ofReichsmarks were raised by the issue of Treasury certificates which, however,for the most part, were presented by the banks for rediscount at the NationalBank (and booked under the same heading as the refinanced pengö advances,



— 158 —

the tit le of the item being changed as from 7th December 1942 to "advancesmade for international payments").

The Reichsmarks taken directly by Hungary and the pengö advancestoge ther amo unted to RM 540 million at the end of 1942, an increase ofRM 357 million on th e year. In ad ditio n, RM 137 million had been utilis ed bythe Treasury for extraordinary payments. The total claim shown by the NationalBank of Hungary at the end of 1942, and included in the table on page 153,was the equivalent of RM 310 mil lion *.

The rise in the Reichsmark holding of the National Bank of Roumania isshow n in the table at RM 115 millio n for 1942, less than half the increase o fRM 275 million in 1941. A ctua lly the National Bank purchased about the sameamount of Reichsmarks as in the previous year but in the first two months of

1942 the equivalent of RM 50 million was used to buy gold from Germany andRM 85 million was sold to the government for the repurchase of Roumaniansecurities from Germany and for other purposes. Ag ain , in the early monthsof 1943, the clearing claims fell by RM 100 m illio n, of w hich RM 50 millio n wasutilised to buy gold. The National Bank of Roumania twice suspended itspurchases of Reichsmarks for appreciable periods, the first occasion beingfrom the end of October 1941 until January 1942 (before the first purchase ofgold) and the second being from the end of October 1942 until January 1943(immediately before the second gold p urchase). A t the end of 1942 the totalclearing claim was nearly RM 400 millio n.

The Bulgar ian National Bank's holding of Reichsmarks, amounting tonearly RM 700 million at the end of 1942, consisted of some RM 450 million clearingclaim and RM 250 million Reichsmark "in ve stm en ts" . These investments consistof Bulgarian Government Treasury bills denominated in Reichsmarks, given tothe German armaments and heavy industry in advance payment for ordersplaced. They have been repurchased by the National Bank as a utilisation ofReichsmark balan ces. By a later arrangem ent the Nation al Bank providedReichsmarks directly to the government against Treasury bills.

The Reichsmark hold ing of the Nat ional Bank of Bo he m ia an d M or av iaincreased further during 1942 and would be higher stil l but for two factors,the purchase of Reich securities by the commercial banks and the payment of

a "Matr ikular contr ibut ion" by the Protectorate to the Reich. The accumulat ionof Reichsmarks arises not only in trade with Germany but also throug h exportsto south-eastern European countries in so far as these countries are allowedto settle their debts to the Protectorate out of their Reichsmark claims onGerman y. In 1942 certain bo nds of south-ea stern European coun tries in privatehands were called for surrender to the National Bank to be offset againstclearing debts due to those countries.

* Further, clearing assets and the corresponding claims against Hungarian exporters are booked under "sundryassets'" and "sundry liabilities" in the National Bank's returns until out-payment or formal advance is made

. (see footnote (') to the table giving figures of the National Bank's return on page 220).



— 159 —

Gre e k Fo re i g n T ra d e .January-May 1942.

Statistical information regarding the clearings of other countries withGermany is not so comp lete, but certain indications can be given. S lo v a k ia n

claims against Germany rose durin g 1941 from RM 85 million to RM 170 m illion ,and in 1942 continu ed to increa se*. In Novem ber 1942 the Ministry of Financewas autho rised t o purchase Reichsmarks to th e extent of Ks. 700 million(RM 60 million) from the National Bank, Ks. 500 million to be utilise d f or pay-ments to Germany in connection with the emigration of Jews from Slovakia andKs. 200 million to be used to cover deliveries from Germany; in June 1943a further authorisation was given to the Ministry of Finance to purchaseReichsmarks from the National Bank.

Little information is available regarding the Gr ee k situa tion. Exports weresent almost exclusively to Germany and figures issued covering the first fivemonths of 1942 showed the fol lowing position (converted into Reichsmarks).

The surplus of Greek exportsto Germany was running at therate of nearly RM 3 million amonth in the five months to May1942, when Greece had a totalclearing claim of RM 78 millionagainst Germany; at this rate theclearing claim would have reachedsome RM 100 million by the endof the year. But Greece wentthrough a period of violent in-

flation in the second half of Ì942;exports to Germany fell off abruptly and were not revived until after theformation of " D eg rig es " (see pages 64 and 234). Italy, on the other hand, ex-ported m ore to Greece than it received. By March 1943, when the G reek debthad grown to Lit. 100 million (say RM 13 million) and Italian ex porters had250 days to wait for the lira proceeds of their exports to Greece, these Italianexporters were paid by means of an Italian Treasury advance, to be graduallyamortised from a new clearing account, w hich was to be kept in equil ibriumon the Italian side through the co ntrol of export l icences. Other cou ntries,including Turkey, Serbia and Roumania, exported to Greece, in the first fivemonths of 1942, ten times as much as they were able to import from Greece.

According to reports from Spain, the debt to Germany contracted duringthe civi l war has been gradually redeemed by payments to the "Blue Division"(serving on the Russian fron t) and by the taking-ov er by Spain of the rem it-tances of Spanish workers in G ermany. Foreign trade figures published for1942 show a continuation of the Spanish export surplus to Germany; accordingto information from the German side, Spain had a considerable Reichsmarkclaim in the current clearing, so that Spanish exporters to Germany had aboutthree months to wait for the peseta proceeds of their exports to be paid to them.

In millionsof Reichsmarks*

Germany . . . . . . .ItalyAll others

Total

Greekimports

8.44.4

12.0

24.8

Greekexports

22.91.51.2

25.6

Surplus ofexports (+)

orimports (-)

+ 14.5— 2.9— 10.8

+ O.8

• At official rate of Dr. 60 = RM 1.

Only part of the clearing claims are financed by the Slovak National Bank; the balance sheet at the end of 1942shows these claims at Ks. 1,575 million (RM 185 million) against Ks. 845 million (RM 99 million) at the end of 1941.



— 160 —

For most of the countries mentioned above the credits granted to Germanythroug h the clearing mechanism were not limited by agreement as to either

amount or maturity. The Hungarian credits described in preceding paragraphswere limited only as to amount, while the maturity remained indefinite. Somewhatsimilar were the credits granted by Switzer land. In July 1941 it was announcedthat the Swiss Government would guarantee the country's exporters, within thescope of the clearing agreement w ith Germany, credits up to Sw.fcs 400 million( in addit ion to the "n or m al " amount of about Sw.fcs 50 mil l ion outstand ing),while a further Sw.fcs 400 million would be made available for the period up tothe en d of 1942 (formin g a tota l equivalent to about RM 465 millio n at the officia lrate of RM 1 = Sw .fcs 1.76); and the waiting time for Swiss exporters waslimited to three months. Negotiations for the renewal of the clearing agreement,which expired at the end of 1942, led to no definite result; the existing clearingmechanism was, however, maintained and it was decided, inter alia, that the

Swiss exporters to Germany might avail themselves of such balances as hadremained unu tilised on the previous c red it. On 1st Octob er 1943 a new agree-ment was signed, the principle being that the clearing should, in future, bein the main self-supporting without credits; a gradual prolongation of the delay(before Swiss exporters were paid in their domestic currency) was thus to bereckoned with .

Unlike the credits given to Germany by other countries, those granted bySweden have carried interest and have been strictly limited both as to timeand as to amount. In the autumn of 1941 the Swedish Reserve Stocks Officemade a credit of S.Kr. 100 million available to the Clearing Office to financeexports to Germany during the remainder of the year, the credit to be repaidby a first charge on German deliveries of coal, coke and chemical productsdurin g the f irs t half of 1942. S.Kr. 90 millio n had been draw n under this creditby the end of the year; three-quarters of this amount was repaid by the duedate in June 1942 and the balance in the second half of the year.

Credits gran ted directly by Swedish exporters themselves might, moreover,be partially insured through the Government Export Credit Office: in theautumn of 1941 Swedish exporters of ce llulose, timber and paper, on contractsof S.Kr. 59 million, gave credits up to March 1942 of S.Kr. 44 million, ofwhich S.Kr. 22 million was guaranteed; these credits also were repaid. For

1942, new credits of some S.Kr. 115 million, generally up to about one year,were granted by Swedish exporters, of which one-half were covered by officialguarantees. The total of official and private credits outstanding at the end of1942, the equivalent of some RM 70 m illion, was thu s at about the same levelas a year previously. Ap art from the cred its, Germany had a surplus balanceon clearing account of ab out S.Kr. 30 million at the end of 1942, wh ich,follow ing the seasonal movement of trade, grew to over S.Kr. 90 million byMay 1943 but declined in later m onth s. No new cred its, official or private,were granted for the firs t half of 1943, when S.Kr. 8 million of the outstand ingadvances was repaid.



- 161 -

In Italy, material was published weekly, showing the date of the last exporttransaction settled through the clearing and its serial number. These num bers

indicated the volume of export transactions, if not their value, with each clearingpartner separately. They have been uti l ised to prepare the fol lowing table,showing the number of transactions pertaining to the calendar years 1939-42(not necessari ly paid for during the corresponding year).

N u m b e r o f I t a l i a n e x p o r t t r a n s a c t i o n s .

Clearing partner

All othersTotal . . .

1939 194O

Thousands107692

17161356

1156212

1267268

1941 1942

of transactions1465216

1333260

1092816

1252217

1939 1940 1941 1942

Percentage of total30191

545100

43234%

4%25100

56206

51310 0

50137/2

S'A2410 0

* Including Bohemia and Moravia.

The number of Ital ian export transactions through the clearing fel l from356,000 in 1939 (when England was included) to 260,000 in 1941 and 217,000 in1942. The number of exports to Germany increased both absolutely andrelatively until 1941, while those to other countries (with the exception ofHungary) fell off: in 1942 the num ber of export trans actio ns w ith Germanyfell by one-quarter.* The German proportion, which had increased from 30 percen t, in 1939 to 56 per cent, in 1941, dec lined to 50 per cen t, in 1942. The

four coun tries heading the list acco unted for 75 per cent, of Italian exporttra nsac tion s in 1940, 87 per ce nt, in 1941 and 76 per cen t, in 1942. In thelatter year there was a notable increase of export transactions with Roumania,

Bulgaria and Croatia(included under "allothers" in the table).

German-Italian Clearing.Number of days delay before out-payments due to

Italian exporters were.made in lire.HI i

1937 1938 1943

The surplus ofItalian exports toGermany and the re-patriation of savingsby Italian workers in

Germany led to a con-tinuous growth of theGerman clearing debtto Italy. Some indica-tion of this is givenby the graph showingthe number of dayswhich Italian exporters

* It has been stated semiofficially that in value the turnover of Italo-German trade rose from RM 650 millionIn 1939 to over RM 2,000 million in 1941, and in 1942 further increased.



- 162 -

I t a l i a n C l e a r i n g s .

Waiting period for Italian exporters before receivingproceeds in lire, from date when foreign importer paid

domestic currency into his clearing officeC).

had to wait from the date when the German importer made his payment inReichsmarks in Berlin until the proceeds in lire were paid out in Rome. By

agreement this period was limited to 50 days in the first part of 1942; fromSeptember, however, the number of days of waiting rose continuously to over100 at the end of the year but, as a result of new negotiations early in 1943,fell to 50 days again in the middle of April.

A s a result of the politica l events in Septemb er 1943, a number ofdifficulties arose; although the Verrechnungskasse in Berlin continued toaccept payments in favour of Italian e xporte rs, these payments co uld not beconverted into lire since no fully functionin g clearing institution remained on theItalian side — nor cou ld wage savings from Italian workers be transferred. Thelira was devalued from 7.6 to 10.0 to the Reichsmark as from 15th September1943 and Reichskreditkassenscheine were temporarily utilised for German mili-

tary paym ents (see page 188).The accompanying table shows

the number of days which Italianexporters had to wait for the liraproceeds of their exports to variouscountries as at the end of the years1939-42. The number of export trans-actions with Switzerland fell in 1942to little more than one-half of the 1941figure, and the Italian clearing debtincreased; Switzerland still remainedby far the most important partner ofItaly after Germany. With Hungary thenumber of transactions was main-ta ined; Hungary opened a credit inthe clearing with Italy in 1941 butthis was not utilised until December1942, when Pengö 16 million (theequivale nt of, sa y, RM 10 million) wa sdrawn. For neither Switzerland norHungary did the waiting period exceed20 days throughout 1942, and it wasusually 10 or under (i. e. the minimum

time necessary for postal communi-cations and normal administrativeprocedure).

With Sweden, the Italian clearingposition worsened somewhat in thesecond half of 1942; at the end ofthe year, the Italian debt amountedto S. Kr. 12 million and Swe dishexpo rters had abou t six weeks to

Number of daysat end of year

Croatia (2)GreeceGermanyDenmark

BulgariaFranceTurkeyFinlandSpainSlovakiaPortugalSweden . . . . . .RoumaniaHungarySwitzerland . . . .

1939

29131349

598535222011459

7

1940

9

1165

117243221711311088

1941

8

5614

15379722215111142118

1942

20216910570

6342362322221717171513

(') Only the clearings which were still active at the endof 1942 are included. Others are omitted: those withEstonia, Latvia and Lithuania, for instance, weredropped from the official statistics in November 1942when Italian exporters had waited 539, 561 and 1,027

days respectively for payment (the last paymentsreceived applying to May 1941 for Estonia and Latviaand January 1940 for Lithuania).(-) Yugoslavia for 1939 and 1940. The relative importance

of Italy and Germany In Croatian trade is reflectedin the turnover of their currencies on the Agram(Zagreb) bourse:

In millions of kunas

1941 July-September . .October-December .

1942 January-March . . .April-JuneJuly-September . .

RM

416788899777947

Lire

159344547358216



— 163 -

wait for the krona proceeds of their exports. W ith other coun tries trans-actions were on a smaller scale but in September 1942 it was reported

that Roumania had a clearing balance against Italy of Lei 1,000 million(equivalent of, say, RM 17 million); towards Slovakia there was an Italian debtof Ks . 50 million (RM 4% million) at the end of 1942 but Italy was a cred itorof Bulgaria.

The year 1942 was characterised by special efforts made by the creditorcoun tries to utilise their Reichsmark claim s. These effo rts have taken thefollowing principal forms.

a) Pu rch a s e o f g o l d . A s mentione d on page 158, the National Bank ofRoumania has made two purchases of gold, totalling RM 100 million, byuti l ising its Reichsmark holding.

No other repayment of clearing debts in gold has been reported; infact, in some cases gold appears to have been purchased by Germanyagainst Reichsmarks, e .g . som e RM 25 mil l ion from Holland at the end ofAugust 1940.*

At the annual general meeting of the Slovak National Bank on27th February 1943, the Governor stated that the bank had, with theassistance of the German Reichsbank, acquired free devisen for nearlyKs. 200 million (say RM 17 million), the amount required for the purchaseof important raw materials abroad.

b) Re pa t r i a t i o n o f s ec u r i t i es i n G erm an ha nds . In 1941 Germancapital played a large part in investment in Balkan and other countries,local currency being obtained in many cases against Reichsmark clearingbalances. In 1942 this activity appears to have declined con siderab ly, asit had aroused some disquiet in the countries concerned. A census offoreign investments has been undertaken in both Roumania and Bulgaria;in the latter country a new law on share companies was presented, underwhich companies with more than half of their capital in foreign handsmight be l iquidated by order of the court. In Hungary the extent offoreign participation in Hungarian companies has been published for thefirst time. A decree regarding the investment of foreign capital in Italywas transformed into law in October 1942; it was officially stated that it

was not intended to exclude foreign capital altogether but to regulate itsinflux in accordance with national requirements; in particular, the purchasewith foreign capital of buildings or industrial enterprises in Italy or ofshares of Ital ian commercial and industrial companies was to be pro-hibited in the absence of a special permit.

Besides the R o u m a n i a n Government repayments ment ionedon page 158, the repayment of furth er Rouman ian debt in relation to

* Various reductions of the Dutch gold stock over the period August 1940 to June 1943 amounted in all toFI. 250 million, the equivalent of RM 330 million. On 5th July 1943 certain changes were made in the returnof the Nederlandsche Bank and the gold holding rose by FI. 46 million, apparently through a transfer fromthe sundry assets item.



- 164 -

Germany was agreed upon and the mobilisation of certain Roumanianbonds in German hands was called for by the Reichsbank in

May 1943.The H u n g a ri a n Government in 1942 made extraordinary payments

"which under normal conditions would not have taken place"; thesepayments included, in particular, the redemption of the Hungarian quotaof the old government debts of Czecho-Slovakia and Yugoslavia and therepayment of certain Krone and Mark debts of Au stria-H ung ary datingfrom before 1918 and placed in Germany. In A ug us t 1943, a furthermobilisation of Hungarian bonds and coupons in Germany took place.Moreover, it is reported that arrangem ents have been m ade betweenHungarian and German banks for the repurchase of Hungarian shares inGerman hands and that these transactions began early in 1943; the scopeof the arrangement is not yet known but capital participations appear tobe excluded.

In the two and a half months to the middle of August 1942, theReichsmark holding of the National Bank of Bulgaria fel l by someRM 50 m illion , a m ovement d ue, in part at least, to a return of Bulgariangovernm ent sec urities, dating from 1892 to 1909, held in Germ any; themobilisation of these securities was called for by an order of theReichsbank in September 1942.

c) Th e p l a c i ng o f or de rs in G erm an y. A method of speci fy ing theutilisation of existing Reichsmark claims has been the placing of largeorders in Germany fo r delivery after the war, e. g. by the Roumanian

railways (a ccord ing to the ag reement of 4th December 1940). A furthe rimportant agreement of this nature was announced in August 1942:special German deliveries of machinery, tools and raw materials etc.were to be made to the Bulgarian autho rities for a tota l present value ofLeva 12 milliard (RM 360 m illion ); the plans provided f or delivery periodsof 2 to 2 % years, so that the ma terial was expected to arrive in Bulgariaby the end of 1944. By April 1943 it was stated that Bulgarian ordersplaced in Germany had reached Leva 20 milliard (RM 600 millio n). InSeptember 1943, the Roumanian Ministry of Finance was authorised to takeover RM 200 million from the Na tional Bank to s ettle claims in conn ectionwith armament and other orders placed in Germany. The placing ofsimilar orders was also under discussion in Hungary.

Contribution to Germany's war economy was also made by the occupiedcountries in the form of payments to the German (and, to a much smallerextent, I tal ian) authorit ies on account of the c o s ts of o c c u p a ti o n andsimilar charges, such as billeting of troops and requisitions. To give anindication of the importance of this factor also, the table on the fol low -ing page has been prepared for four countries for which data have becomeavailable.



— 165 —

Gr o w th o f C l e a r i n g C l a i m s a n d Pa ym e n t o f O cc u p a t i o n C o s ts 1940-42.*

Country

France . .Belgium .Holland. .Denmark .

Totals . .

Annual amounts1940

Clear-ings

Occu-pationcosts

Total

1941

Clear-ings

Occu-pationcosts

Total

1942

Clear-ings

Occu-pationcosts

Total

TotalsYears 1940 to 1942

Clear-ings

Occu-pationcosts

Total

in millions of Reichsmarks150250160190

750

2,000350500200

3,050

2,150600660390

3,800

600680

1,250210

2,740

5,5001,3001,600

210

8,610

6,1001,9802,850

420

11,350

1,6501,4801,400

170

4,700

8,6001,5002,000

260

12,360

10,2502,9803,400

430

17,060

2,4002,4102,810

570

8,190

16,1003,1504,100

670

24,020

18,5005,5606,9101,240

32,210

* Figures are rounded off to the nearest RM 10 million.

Note: Clearing figures have been brought forward from previously-mentioned data. For Holland an allowancehas been made for the amount taken over by the Treasury in April 1942.As regards occupation costs, the table is compiled from the following material. The amounts actuallypaid on account of occupation costs in France (at the rate of Fr.fcs 400 million daily from 25th June 1940to 10th May 1941 and Fr.fcs 300 million daily from 11th May 1941), converted at Fr.fcs 20 = RM 1, wasRM 4,000 million in 1940, RM 6,075 million in 1941 and RM 5,475 million in 1942. The amounts actually utilised(i.e. drawn off the accounts at the Bank of France) were RM 1,730 million In 1940, RM 5,116 million in 1941and RM 7,861 million in 1942. Requisitions and billeting costs, etc., have been given as RM 375 millionIn 1941 and are booked at RM 750 million for 1942. In the table the amounts actually utilised have beentaken plus requisitions (with an allowance for requisitions In 1940).

For Belgium, the 1941 budget accounts give RM 1,212 million for occupation costs and RM 92 millionfor billeting expenses etc. The Dutch figures for occupation costs are derived from the unofficial estimateof FI. 100 million a month given for 1941. For both Belgium and Holland the figures for 1940 and 1942are estimates based inter alia on the data given for 1941. For Denmark, the statistics show the growth ofReichsmark claims on account of advances to the occupying authorities (booked under "sundry assets"in the Nationalbank's return).

The annual amounts contributed by these four countries — France, Belgium,Holland and Denmark — by way of the clearings and by payment of occupationcosts rose from RM 3.8 milliard in 1940 (last half-year only) to RM 11.3 milliardin 1941 and RM 17.1 m illiard in 1942. Of the tot al of over RM 32 m illiard inthe two and a half years to the end of 1942, three-quarters was on account ofoccupation costs and one-quarter passed through the clearings; two-thirdsof the occupation costs were paid by France, the remaining third by the otherthree cou ntries togeth er. Estimates fo r th e f irst nine month s of 1943 givean annual rate of over RM 20 millia rd, as show n in the tab le below .

Occupation costs are paid by other countries in Europe but informationis fragmentary. The total credits contracted by the occupying authorities at the

Bank of Norway are estimated inG r o w t h of C l e a r i n g C l a i m s a n dP a y m e n t o f O c c u p a t i o n C o s t s .

Estimates for 1943 (nine months).

Country

FranceBelgiumHollandDenmark . . . .

Totals . . .

1943 January-September

Clearings Occupationcosts Total

in millions of Reichsmarks2,0001,4001,200

3004,900

7,8001,3001,600

35011,050

9,8002,7002,800

65015,950

informed circles to have risen fromN. Kr. 1.5 milliard in Decem ber 1940to N. Kr. 3.8 milliard in December1941 an d to over N. Kr. 6 milliard inDecember 1942, that is to someRM 3,500 mill ion; against this is tobe set a small debt on clearingaccount to Germany due, however,to imports made by the army ofoccupation. The advances of theBank of Greece on account both ofthe clearings and of the occupation



- 166 -

costs had risen by the end of 1942 (from April 1941) to some Dr. 200 milliard(which wo uld be RM 3,330 million at the official rate of D r. 60 = RM 1,

an amo unt sw ollen by the co nsiderable rise of prices in Greece). TheCroatian State Bank in its first published return, for Apri l 1943, showed"claims on foreign countries", due( to advances to occupying troops, atKunas 2,750 million; by the end of September 1943 these claims had risento Kunas 9,020 millio n. A nd occup ation costs of unknow n amo unt are alsopaid by Serb ia .

Including the war contributions of the Governor-Generalship of Polandand the Protectorate of Bohemia and Moravia but excluding all levies on theoccupied parts of Russia, Germany would seem to have received in the twoand a half years up to the end of 1942 some RM 45-50 m illiard *, from Europeancountries as a result of recorded transactions on account of occupation costsand throug h the clearings. Of the total about two-th irds represent occupationcosts, while for the remaining one-third a German liability was incurred onclearing account.

The financing of these vast sums has naturally had important monetaryconsequences in the countries concerned. To arrive at the total amount ofofficial financing in each country, payments in respect of occupation costs andclearing advances must be added to the expenditure in the national budget,and the crucial point of the financial problem wil l then be what proportions ofthe total are covered by taxation (and other current revenue), by expansion ofbank credit and by direct calls on the central bank. The proportions varyin the different countries but a dominant part of the charges usually falls on

the central bank. It is therefore of some interest to show the degree ofparallelism obtaining between the payment of occupation costs and the growthof clearing claims, on the one hand, and the expansion of the note circulation,on the o ther, where the items in que stion are recorde d in the balancesheets of the central bank; this is done in the table on the opposite page.

In 1942 there was a very close correspon dence between the grow th of theclearing claims and the rise of the note circulations in Belgium, Holland,Slovakia and in Bohemia and Moravia; for France the parallelism is with thepayment of occupation costs.

In Hungary and Roumania the note circulations rose in 1942 considerablymore than the clearing claim s as show n by the centra l bank — this impliesthat central-bank credit was extended for other reasons also ; the parallelismwould, however, have been greater but for the purchases of Reichsmarks bythe Treasuries in these countries. In Denmark and Bulgaria, on the otherhand, the note circulations have risen less than the clearing claims — in eachof these two countries "other sight liabilities" of the central bank have risenconsiderably, in Denmark the accounts of the banks and in Bulgaria theaccount of the Treasury.

Dr. Günter Keiser in "Bank Archiv" of 15th February 1942 gave a total of RM 15-17 milliard for all countriesin 1941. The four countries shown in the table appear to account for about three-quarters of the total inthat year.



— 167 —

C l e a r i n g c l a i m s , o c c u p a t i o n c o s t s a n d n o t e c i r c u l a t i o n s .

Country

Out-payments onaccount of clear-ing claims or

occupation costs*during year

1941 I 1942

I ncrease ofnote circulation

during year1941 I 1942

In mil I ia rds of national currency units

Out-payments aspercentage ofincrease of note

circulationduring year

1941 I 1942

percentages

Total clearing claims(or occupation costs)as percentage of note

circulationat end of year

1940 I 1941 I 1942

percentages

Belgium 0) . . . .Bulgaria« . . . .Denmark(3) . . . .FranceWHollandHungaryRoumania . . . .

SlovakiaBohemia andMoravia

8.611.00.88

42.00.950.14

16.5

0.455.1

18.48.20.69

116.20.810.376.8

0.734.4

13.66.90.10

49.10.560.60

32.3

0.372.9

19.45.50.14

112.60.920.97

20.7

0.724.7

63

159

880

86

170

23

51

122

176

95149493

103

88

38

33

101

94

951

109

37

a

1

24

101

24

107

20153497

18

42

124

44

119243

55

6217

20

57

114

• In so far as shown by the central bank. 0) Including Reichskreditkassenscheine withdrawn.(2) Including Reichsmark "investments". Without this item the net clearing claims would amount to 80 per cent,

of the note circulation at the end of 1942.(3) Clearing and occupation costs together. (4) Occupation costs (net movement of special advances

of Bank of France and account of Reichskreditkassen during year — see page 195).

By the end of 1942 the total clearing claims exceeded the note issue inDenmark, Bulgaria and in Bohemia and Moravia; in Holland and Slovakiaclearing claims were around 60 per cent, of th e no te iss ue, in Belgium over40 per cent, and in Roumania and Hungary around 20 per cent. Com men ting onthis situation*, one of the Vice-Presidents of the Reichsbank stated that for thepresent each country must do what it could to lessen the strain due to the warand take the necessary measures to prevent h ar m fu l re p e rc u s si o n s on i tsc u rr e n c y . A s mentioned in the twelfth Ann ual Report of this Bank, variousefforts have already been made to offset the undesirable monetary effects ofdirect advances of the central banks to finance clearing claims and occupationcosts. In Denmark, where the rise of the note circulation has been leastpronounced, steps have been taken to tie up the banks' cash reserves and tofloat "ste ri l is at ion " loans. In Bohemia and Moravia the central bank has forseveral years issued interest-bearing Kassenscheine to mop up the surplusfunds on the market; the Dutch Treasury has taken over part of theReichsmark claims against Treasury certificates, which the Nederlandsche Bank

may sell on the m arket. In Hunga ry, part of the clearing claims was finance dby the commercial banks and, in Belgium, an effort has been made to check theexpansion by the payment of exporters' claims in blocked Treasury certificates.Further details of the various credit measures taken are given for the individua lcountries in Chapter V.

To counteract the undesirable monetary effects, efforts have been made tocheck the increase of central-bank advances; thus from time to time the centralbanks in Hungary, Bulgaria and Roumania, for example, have strictly limited the

* In an article In the Südost-Echo, 16th October 1942.



- 168 -

amounts of Reichsmarks they would buy (especially those arising from incomingcap ital). From the po int of view of monetary expansion it is of no use merely

to exchange one central-bank asset for another; the swapping of clearingclaims in the central-bank return for something else, whether it be a Treasurycertificate (as in Holland) or even gold (as in Roumania), involves no monetarycontraction (although it may be desirable for other reasons).

Some effect in checking surplus exports and, with them, the monetaryexpansion has been produced by allowing exporters to wait for their moneyuntil it becomes unfrozen by the natural play of the clearing , i. e. until offsetby im ports . A s m entioned earlier in this chapter, the delay in the payment ofItalian exporters to Germany, which had been limited to 50 days, rose during1942 to over 100 days; and the agreement which limited the waiting time forSwiss exporters to Germany to 90 days lapsed at the end of 1942(1). Spanish

and Slovakian exporters to Germany also had about 100 days to wait for theproceeds of the exports to be paid; and in Sweden and Hungary exporterswere not certain to receive immediate payment in their domestic currencies.Early in 1943 negotiations were undertaken by Germany with both Italy andHungary to speed up domestic out-payments to the exporters in thosecountr ies.

The growth of Germany's clearing debts reflects the surplus of Germanimports including transport and insurance charges etc., payments to contractorsfor armament orders placed by Germany in occupied countries, payments onbehalf of the German army and the repatriation of savings made by foreignworkers 0 in Germany. The accelerated rate of growth of German clearing

debts in 1942 and 1943 is the result not only of the intensification of the warbut, to a large extent, of increased prices in the exporting countries.

There is evidently a conflict of interests between the creditors in theclearing , who w ish to imp ort, i. e. to turn th eir Reichsmark claims into goods,and Germany, which seeks the greatest possible contribution from the Europeaneconomy. To questions on this subject, one of the Vice-Presidents of theReichsbank has replied (3 ) that Germany recognises that its growing clearingindebtedne ss towards other countries has given rise to anxiety. But it mustbe realised, he added, that Germany, in its conduct of the war, is compelledto have recourse to European reso urces, so that, for the time bein g, the estab-

lishmen t of equ ilibrium in terms of goods between the various countries mustnecessarily be postponed.

There is, however, a further and less evident conflict of German interestsamongst themselves. In order that the clearing mechanism should work smoothly

(1) The new agreement signed on 1st October 1943 provided for the gradual prolongation of the waiting periodup to nine months, say 270 days.

(2) The transfers of funds by foreign workers through the German devisen banks amounted to RM 120 millionIn 1940, to RM 383 million in 1941, to RM 606 million in 1942 and RM 230 million in the first four months of1943: in all, RM 1,339 million. These amounts refer only to transfers through the banks by twelve countries,excluding Holland and Bohemia and Moravia (with no devisen frontier) and Roumania, Croatia and the BalticStates, as also the Ukraine and White Russia (for which other methods of payment were used).

(3) In the article in the Südost-Echo already mentioned.



— 169 —

and that payments to foreign exporters be made immediately in their homecurrency (so that the exporters are not hampered in their activity by having

their funds tied up indefinitely in the clearings), the clearings are financed innearly all countries directly by the central bank. This means that central-bankcredit, and generally the note circulation also, rises more or less parallel withthe clearing claim (as has been shown above). Owing to the considerableimportance of these claims measured in the currency of the creditor countriesand to the comparative narrowness of their capital markets, it has becomemore and more difficult to finance any appreciable part of these claims outsidethe central bank. Thus the undesirable monetary effects of the accumulationof clearing claims in the creditor coun tries have become inten sified . Notecirculations expanded to finance clearing claims (and occupation costs), com-bined with fal l ing domestic production and declining imports, have been thecause of soaring prices and quotations, a search for Sachwerte and other

symptoms of inflation. But rising prices throug hou t a great part of Europelead to higher prices for German imports, and the mobil isation of resourcesfor German account may be seriously impaired by the social influences ofcumulative inflation.

The measures taken to meet this situation are the price stop and exchangestab ility. If a European price stop for all prices has proved im pos sible , atleast a price stop for goods entering into foreign trade has been attempted.Most new clearing and commercial agreements (which are often arranged foronly a few months at a time) have clauses fixing the prices of the moreimportant commodities exchanged; and, in addition, measures have been takenfor price equalisation by special funds. Further, as the annual report of the

Reichsbank points out, in spite of loss of purchasing power due to price andwage increases and other causes in a number of countries, foreign exchangerates have not been adjusted, Germany being desirous of assisting thesecountries in their efforts to maintain the value of their domestic currencies.

There are thus two problems arising from the clearing situation whichaffect both Germany and the clearing creditors alike: the much-discussed pro-blem of future repayment and the more immediate problem of present inflation.



- 170 -

V. GOVERNMENT FINANCE, MONEY AND CAPITAL MARKETSAND THE STOCK EXCHANGES.

1. GOVERNMENT FINANCE, MONEY AND CAPITAL MARKETS.

The broad lines of war financing methods have undergone no strikingchanges in the past year, but the long duration of the war imposes con-siderable strains, sign s of wh ich have begun to be evident in certain cases.The ever present problem is the absorption of surplus purchasing powercreated by government spending; in the United States and Japan new andcons iderab le increases in taxation have been made. In England and Germany,where taxation had already more or less reached practicable limits, emphasis

has been placed on other method s of a bso rption : in England (as indeed in theUnited States also) "savings campaigns" have been vigorously pursued; and inGermany measures have been taken to obtain special revenue and to relievethe government of advances of working capital to war industries. In these fourcountries interest rates for government long and medium-term loans haveremained stable during the period under review, at around 3% per cent, inGermany and Japan , 2% per cent, in England and 2-2% per cent, in theUnited Sta tes. Signs of strain were m ore evident in Italy, where a lowerpropo rtion of governm ent expenditure was covered by taxation than in otherbelligerent countries and where early in 1943 a yield of over 6 per cent, freeof tax was offered on a new issue of government paper redeemable in threeyears. Other European coun tries, besides having their own expenditure to

cover, have often had to finance occupation costs and credits to Germanyin the clearings, the most extreme case of inflation being in Greece.

A rough measure of the success of the policy of absorbing surpluspurchasing power is given by the degree of expansion of the note issues,a study of which is made in Chapter VI. In the following paragraphs financialdevelopments in the more interesting cases are recorded in some detail.

In Germany special measures were adopted which somewhat retardedthe expansion of the public debt from the autumn of 1942 to the spring of1943. The measures took two forms: decrease of expenditure by a reductionof advance payments on armament orders, and increase of revenue by a

special composit ion of the "rent tax".From the beginning of the war, a rm am e n t o rd e rs had, up to 60 per

cent, and more, been financed by government advances without interest, thetotal of such advances at times reaching some RM 5,000 million (w hilearmy prom issory notes *, issued for the same purpose, were of much lessconsequ ence, the average amount outstanding being only RM 300 millio n); pa rtialpayments had also been made for partial deliveries.

* These army promissory notes, or Wehrmachtverpflichtungsscheine, which were sometimes used for pre-financing, were in effect non-interest-bearing Treasury certificates with varying currency periods. They werenot eligible for lombarding, but the banks readily discounted them at 3-3% per cent, for industrial concerns.



— 171 —

The system of partial payments was retained, but from 1st October 1942advance payments were greatly reduced, their general abolition being contem-

plated after a tran sitiona l period of six mo nths . Aft er the expiry of this six-month period, contractors were to uti l ise their own resources to th e ful lestextent and to obtain bank credit for the remainder. In future, all claims inrespect of an order might be ceded to a bank in a simplified form asguarantee; if the bank deemed such cession, and other security pledged, in-sufficient collateral for the credit, it might apply for a government guaranteeup to 30 per cent, of the amount of the order (for which the bank wouldpay to the government 1 per cent, on the guaranteed portion outstanding).It was estimated that about one half of the RM 5,000 million could be providedby the contracting firms from their own resources, while the other half wouldhave to be borrowed from the banks.

The gradual abolition of advance payments during six months should havegiven relief to the Treasury of some RM 800 million a month for the transition alperiod. Although no official data have been published, it is reported that,in practice , many exceptions to the rule were m ad e; these app lied particularlyto those branches of industry where advance payments were customary even inpeacetime and to firms which, owing to the smallness of their capital resourcesin relation to their wartime turnover, might find difficulty in obtaining bank credit.The relief to the Treasury was thus less than the figure mentioned above.

The other exceptional measure was the replacement of the rent taxby a com pos ition payment. Th is tax was originally im posed in 1926 on houseproperty, after the inflation had diminished the burden of mortgage debts; i t

was levied by the provinces, or Länder, of the Reich.

By a decree of 31st July 1942 the rent tax was abolishe d from 1st January1943; the Länder were henceforth without any source of revenue from theirown tax ation, and nothing has yet been made known as to compen sation*. By31st December 1942 houseowners had to make to the Reich a non-recurrentdischarge payment in cash amounting to ten times the yearly tax, i.e. to a presentvalue of 13% annual payments, subject, however, to certain alleviations.Special taxation privileges were accorded to taxpayers who paid cash fromtheir own resources (by withdrawing bank deposits, sell ing securities etc.)or borrowed privately from relatives and friends or from banks, or on ordi-nary mortga ge. Otherw ise house holders might cover all or part of the tax

payment by official "composition loans" from mortgage banks and real-estatecredit institutions , from savings banks or from insurance companies ; theseloans would bear interest at 4% per cent, and amortisation charge at 4 percent, of the original loan, so that annual payments would amount to 85 percent, of the previous annual tax and would continue for 17 years. Insurancecomp anies and savings banks were expected to make su ch loans from existingresources and from the normal influx of funds by way of premiums and new

* Total expenditure of the Länder amounted to about RM 3,000 million and net financing requirements afterdeduction of various receipts to RM 2,600 million, so that the rent tax was of considerable relative importance.The last official figures available for the rent tax are those for 1940, when the total was RM 842 million ;Prussia paid RM 511 million, of which Berlin RM 148 million.



- 172 -

deposits. Mortgage banks and real-estate credit institutions, whose receipt ofnew resources was smaller, were permitted to issue new mortgage bonds on

the market.The total proceeds of the composition would have brought in some

RM 8,500 million to the Reich but for the approved exemptions, which tookaccount of war damage an d other factors ; estimates of the actual yield wereplaced at RM 7,750 million*, of which some RM 3,600 million was probablypaid through composition loans and somewhat over RM 4,000 million in cash.The first issue of special mortgage bonds was made in October 1942 andin all some RM 1,100 million of 4 per cent, bonds were issued by the springof 1943 at the fixed price of 102y2.

Although the composition payments had to be made by the taxpayer by31st Decem ber 1942, tech nica l m easures were taken to relieve the money

market at the end of the year, so that a large part of the proceeds (estimatedat RM 4 milliard) was paid over to the Reich by the banks only during thefirst half of January 1943.

B ud ge ta ry a cc o u n ts have not been published in Germany for tenyears although certain information regarding receipts has been available, whichhas made it possible to estimate expenditure with some degree of accuracy.Such estimates, however, became more difficult in the current year: statisticsof ordinary taxation have not been published since March 1942, the paymentof the rent-tax composition was spread over the end of the year and littleinforma tion has been published regarding current receipts other than tax

payments. Such information as is available on taxation, other current receiptsand borrowing has been collected toge ther and an effort made to present apicture as complete as the fragmentary data allow.

By and large, it may be said that the total budgetary receipts of theReich, and, therefore, to ta l e xp e n d it u re , rose from RM 75 mil liard in 1940-41to nearly RM 100 milliard in 1941-42 and to over RM 120 milliard in 1942-43,financial years ended March in each case; in September 1941 civil expenditurewas officially stated to be at the rate of RM 20 milliard a year. Tot al receiptsf rom ta xa t io n and o th er cu r re n t rev en ue rose f rom RM 37 mi ll ia rd in1940-41 to RM 47 milliard in 1941-42 and RM 68 milliard in 1942-43. Ordina ryta x a ti o n receipts in 1942-43 at RM 34.7 m illiard were 7 per cent, above 1941-42,the annual rate of increase having declined from 33 per cent, in the first yearof the war. But the addition of the exceptional receipts from the rent-taxcomposition in 1942-43 gave an absolute increase of RM 10 milliard over 1941-42against RM 5 mil liard the previous year. O th e r c u rr e n t r ev en ue also roseconsiderably, particularly on account of the payment of occupation costs, asthe table shows.

* Some confirmation of this figure is given by the movement of the Reich debt. The total debt rose byRM 5.18 milliard in October and RM 6.59 milliard in November, i.e. RM 11.77 milliard for the two months; theIncrease in December was RM 4.13 milliard, while in January there was a decline by RM 0.08 milliard,so that the net increase for the two months was RM 4.05 milliard. The difference of RM 7.72 milliard forthe two periods corresponds approximately to the rent-tax composition proceeds. In February 1943, theprevious rate of increase of RM 6.4 milliard was resumed, an indication that the rent-tax composition wasterminated.



— 173 —

R e i c h B u d g e t a r y R e c e i p t s .

In milliards of RM

Financial years1940-411941-421942 43

Calendar years194019411942

Taxationreceipts0)

27.232.342.4

26.230.737.8

Other currinternal(2)

3.33.64.0

2.93.43.9

ant revenueexternal(3)

6.511.022.0

4.010.019.0

Totalcurrentrevenue

37.046.968.4

33.144.160.7

Borrowing

37.852.155.8

33.748.957.2

Totalbudgetaryreceipts

74.899.0

124.2

66.893.0

117.9

(') Official quarterly statistics cover the period up to March 1942. For the financial year 1942-43 the figureof RM 34.7 milliard given by the Secretary of State at the Finance Ministry in November 1943 has been taken,plus RM 7.7 milliard from the rent-tax composition. Ordinary taxation for the calendar year 1942 would be aboutRM 34.1 milliard ; to this has been added the estimated RM 3.7 milliard of the rent-tax compositionreceived by 31st December 1942, to give the RM 37.8 milliard in the table. As explained on an earlier

page, part of the rent-tax composition was in fact covered by borrowing, but it is not easy to make anadjustment for this factor.(2) These figures are estimates, based on known figures of internal current revenue for earlier years.(3) These are round figures (based inter alia on the data given in Chapter IV) of occupation costs paid by

the occupied territories, including the war contributions of Bohemia and Moravia and of Poland. Officialfigures of about RM 14 milliard in 1941-42 and RM 26 milliard in 1942-43 for all current receipts (both internaland external) other than taxation have been given by the Secretary of State at the Finance Ministry.

The to ta l b o rr o w in g of the Reich rose from RM 38 mi l liard in 1940-41to RM 52 milliard in 1941-42 and RM 56 milliard in 1942-43. The increase ofthe amount borrowed in 1942-43 was thus lower than previously: this was dueto two factors, the smaller increase of expenditure and the greater rise ofcurrent revenue (from the rent-tax co mpo sition and from occupation costs ).The table on the following page gives an analysis of Reich borrowingover the past three years.

The monthly average of Reich "cash" borrowing, which was RM 4.1 mil l iardin 1941-42 and RM 4.4 milliard in 1942-43, has recently increased more rapidly:it expanded to RM 6.0 milliard monthly in the April-June quarter of 1943 andto RM 6.3 milliard in the July-September quarter. Reich borrowing is in three mainforms: long-term Treasury certificates and Liquidity loans and short-termTreasury b il ls ; the proportion borrowed at short term rose from somewhatover 50 per cent, in 1940-41 and 1941-42 to 60 per cent, in 1942-43, andhas continued to rise, to 70 per cent, in the July-September quarter of 1943.

No new forms of security have recently been introdu ced, but " iro n sa ving s"

and "business-investment deposits", created towards the end of 1941, havebeen continued. Iro n s a v in g s , which are savings deposi ts tied up unti l atleast one year after the war, were made even more favourable to the saver(by increased tax advantages), simplified technically (particularly as to the cal-culation of interest, which had caused much extra work for the banks) andfurther extended (as from 1st January 1943); the minimum m onthly amountwas lowered and the ge neral m aximum of RM 26 was increased to RM 39while the amount of wage bonuses which might be iron-saved was raised toa maximum of RM 1,000 in one year. Iron acc oun ts have, however, tied uponly a small fraction of current savings, some RM 70-80 mil l ion a month



- 174 -

out of a tota l increase of RM 1,750 million a m onth for all savings de pos its in1942; total iron savings at the end of March 1943 slightly exceeded RM 1 milliard.

Bus iness- investment and s imi lar depos i ts at the Treasury , a lso t ied upuntil after the war, produced RM 710 million by the first tranche, paid in up

R e i c h P u b l i c D e b t i n c r e a s e s o r d e c r e a s e s (— ) 0)

Periods

1940 ApriWune .

July-Sept. .Oct.-Dec. . .1941 Jan.-March .1941 April-June .

July-Sept. .Oct.-Dec. . .

1942 Jan.-March .1942 April-June .

July-Sept. .Oct.-Dec. . .

1943 Jan.-March .1943 April-June .

July-Sept. .

Financial years1940-41 . .1941-42 . .1942-43 . .

Calendar years1940 . . . .1941 . . . .1942 . . . .

Long and middle-term

Trea-sury

certifi-cates(net)

2,000

2,3832,7173,7773,4792,7143,6523,8293,7842,6184,3971,1723,4532,895

10,87713,67411,972

7,84113,62214,628

Liqui-dityloans(net)

1,766

1,6962,5971,3121,2512,7212,5532,7452,2351,4612,5583,4702,5832,780

7,3719,2709,724

8,2327,8378,999

Total debt outstanding at endof 1942 . . . . 47,392 32,149

NetTotal

3,715

4,0795,2864,8794,5855,3986,1837,1026,0244,0466,9314,4685.9945,631

17,95923,26821,469

15,88021,04524,103

80,307

Reichs-bank

workingcredit

in370

— 59— 46— 400

719— 139

134— 445

360123

— 933873

— 83— 26

— 135269423

— 205314

- 895

—

Short

Trea-surybills

millions3,726

4,7384,5095,4215,4206,7006,9825,9098,201

10,0039,4145,995

12,02513,365

18,39425,01133,613

17,35824,52333,527

88,742

-term

Taxcertifi-cates

NetTotal

of Reichsmarks— 387

— 59— 9— 2— 1

2— 1— 1— 367—1,144— 823— 28— 7— 5

— 457— 5—2,362

—1,124— 6—2,335

1,206

3,784

4,6204,5145,0196,2036,5597,1155,6138,1948,9827,6586,840

11,93513,335

17,93725,49031,674

16,27924,89630,447

91,089

Totalcashborrow-

ing

7,499

8,6999,8009,898

10,78811,95713,29812,71514,21813,02814,58911,30817,92918,966

35,89648,75853,143

32,15945,94154,550

171,396

Reichs-kredit-kassen-scheine

634

875—411664

1,168764751594788566688361497

1,9203,3472,636

1,5083,0072,699

7,219

Total

8,1339,5749,800

10,30911,45213,12514,06213,46614,81213,81615,15511,99618,29019,463

37,81652,10555,779

33,66748,94857,249

178,615(5)

(1) This table Is based on detailed statistics of the public debt published regularly every month. The quarterlyincreases (or decreases) of the main items are given with some modifications of the official data. Firstly,only the "new" domestic debt, i.e. that contracted from 1924 onwards, has been taken into account. Secondly,to obtain the net borrowing for cash, non-cash issues and those made in compensation have been excluded,particularly issues made to compensate German holders of Austrian Government loans (1939) and Czecho-slovak Government loans (1939 and 1941). It was not possible, "however, to make allowance for theTreasury certificates issued to compensate German shareholders of the Austrian National Bank, the Bank ofDanzig, the former Wertpapjersammelbanken, and for the conversion of the German share of the YugoslavGovernment loans, as no distinction was made between these bonds and other market issues; the amountinvolved appears to be small. Thirdly, some reclassifications have been made. Tax certificates issued in 1939and deposits at the Treasury (business-investment deposits etc.) which are shown officially "under the line",

i.e. outside the published debt totals, are here included in the short-term and long-term debt respectively.The loan from the Rentenbank (against which notes are issued) is in the nature of central-bank credit and,in keeping with the practice adopted in this Report for other countries also, has been transferred to shortterm (from long term in the published statement). On the other hand, the issue of Reichskreditkassenscheine,shown in the official statistics under "sundry loans" at short term, represents a foreign resource and hasbeen excluded from the ordinary short-term debt and placed in a special column. The effect of these changesis particularly great in 1942-43; as the table shows, the exclusion of Reichskreditkassenscheine and theredemption of tax certificates make a difference together of over RM 5,000 million in the year, short-termborrowing, as shown in the table, being lower than the official statement by that amount.

(2) Conversions and redemptions have been deducted from current issues, including the repayment in 1941 ofthe 5 per cent, loan of 1927.

(3) The figures for quarterly and annual borrowing are net, I. e. with certain deductions for amortisation andredemptions of special non-cash-producing loans not included in preceding columns. The total Includesalso, for 1942, RM 765 million of deposits at the Treasury.

f>) Includes also Rentenbank loan: RM 252 million for 1940, RM 65 million for 1941 and RM 150 million for 1942.(5) The total liabilities of the Reich at the end of 1942 were given officially as RM 185.6 milliard; this total

Included RM 2.6 milliard old debts, RM 1.2 milliard foreign debts and RM 3.2 milliard non-cash and specialissues, which are excluded from this table.



- 175 -

to 10th January 1942. A second tranche called for up to 10th A pr il 1942 secureda further RM 50 million odd and no further deposits have been requested.

In 1942, the German system of government borrowing, described onpages 184-185 of the twe lfth An nu al Report, m ade furth er progress towa rdscomplete Stückelosigkei t, or the issue and transfer of Reich loans enti relyby book-entries in the register of the Reich debt without the issue of actualbonds or other securities (i. e. We rtrecht instead of Wertpa pier). The systemwas simplified and further extended during the year.

The Berl iner Kassenverein, which had specialised in the security depositand book-entry transfer business for the banks since 1882, was taken overby the Reichsbank from 1st July 1942, and the special business of the ten otherKassenvereine was also centralised in the Reichsbank. From January 1943 theReichsbank became the only We rtpapiersam melban k in the c oun try, i. e. the

sole centre for the collective deposit and "book-entry security" business ofthe Reich.

Two notable extensions of this business were made in 1942. Firstly, from10th Aug ust, the longer-term T re a s u ry b i l ls (unverzinsliche Schatzanwei-sungen) were brought within the system of collective deposits, the first money-market instrument to be treated in this way. Secondly, the technique ofT re as ur y ce r t i f i c a t e issue was modif ied f rom 17th August. Previously ,subscribers had to state specifically whether they wished to receive actualsecu rities or whether they would be content with a book-entry. For a newseries, which began in A ugu st 1942, all "c ert ifica tes " were issued as com -ponents of book-entries in the name of the Sammelbank, subscribers who

wished to receive actual securities being obliged to make spec ific applicationand to wait for them. Thus, with a few minor exceptions, the whole of this loanstands in the Reich debt register with tjie Reichsbank (Wertpapiersammelbank)as the cred itor; the Reichsbank holds accounts for the banks throug h whichsubscriptions were received; and the banks, in tu rn , credit the individualinvestor in their books with the Treasury certificates they purchased.

It is claimed that, besides a great saving of time, labour and materialsfor the Reich Debt Administration, book-entry securities have for the investorthe advantages of greater convenience, lower cost and better protection againstloss or theft than the old method of issuing bonds and coupons as in othercountries. Further, i t may be noted, the introduction of such book-entry

securities on the stock exchange was speeded up, the Treasury certificates of1942 Series III having been introduced twelve days after the issue was closedwhereas four and a half months had elapsed before Series I was quoted.

A new decree of 22nd Decem ber 1942 made an impo rtant mo dificationin the law of 1937 regarding the d e p o s i t of s e c u r i t ie s ; previously, thespec ific authority of the investo r was req uired before the depo sit of secu ritiesat a particular bank could be centralised in a "collec tive depo sit" . S ince1st February 1943, banks have been authorised to transfer their security depositsfor collective deposit at the Reichsbank (Wertpapiersammelbank) without theprior consent of the investor; this measure "for the simplification of security



- 176 -

business" was particularly recommended to banks in the areas endangered byaerial bombardment, as a safeguard against loss or destruction. As a result of

the present evolution, the Reichsbank is tending to become the sole depositaryfor actual individu al securities as well as the centre for all book-entry securitybusiness.

The German method of issue, transfer, interest payment and redemptionof investments simply by centralised book-entries, which has made enormousstrides since the beginning of the war — the Reichsbank was first given thecharacter of a Wertpapiersammelbank by the new law of 1939 — must not beconsidered merely as a wartime expedient but is the result of a continuo usevolution stretching over ten years and more.

The total of the German Reichsbank return rose by nearly RM 7 mil-

liard in 1942 against RM 6% milliard in the previous year; over two-thirds ofthe increase in 1942 occurred during the last quarter of the year, as thefol lowing table shows.

G e r m a n R e i c h s b a n k .

At end of month

1939 August . .December.1940 December.1941 December.1942 March . .

June . . .SeptemberDecember.

1943 March . .June . . .September

Assets

Reich paper

Reichworkingcredit

(')

TreasurybillsO

Reichsecuri-

ties(3)

Total

Allotherassets

«

Total ofassetsand

liabili-ties

(5)

Liabil i t ies

Notes Depositsetc.

(6)

Allotherliabili-ties

In millions of RM

680785580895450810933

873790765

10,27211,39215,41921,65621,67322,84823,99629,28327,86930,89035,010

1,3081,19738939129822027229712568

106

12,26013,37416,38826,94222,42123,87825,20129,58028,86731,74835,881

1,4211,8201,6021,5241,4021,4681,4161,7671,5671,4941,771

13,68115,19417,99024,46623,82325,34626,61731,34730,43433,24237,652

10,90711,79814,03319,32519,77420,95422,03724,37524,69726,65030,099

1,4802,0182,5613,649

2,7622,9902,9855,292

4,3404,8815,601

1,2941,3781,3961,4921,2871,4021,5951,6801,3971,7111,952

(1) This Item is not shown separately in the return but has been taken from the public debt statement.(2) Including also small amounts of other domestic and foreign bills. The total portfolio of the Relchsbank on the

outbreak of war, at RM 10-11 milliard, corresponded approximately to the outstanding total of old "specialbills" then held entirely by the Reichsbank. The special bills with their prolongations originally had acurrency of five years, but It may be assumed that redemption has been adjusted to the practical needsof the budget and central bank (see also footnote to page 162). As ordinary commercial bills have practically

disappeared, it may be assumed that the increase of the Reichsbank's portfolio of "Bills and cheques,Including Treasury bills" from RM 10 milliard in August 1939 to nearly RM 30 milliard at the end of 1942was entirely due to the taklng-up of Treasury bills.(3) Probably Including a small amount of other securities.(4) Including the free gold cover, which has remained practically unchanged at RM 71 million since before the war.(5) Only the main assets and liabilities are published weekly without addition. The total Is here added for

convenience. (6) Shown as "other sight liabilities".

The rhythm of the expansion in 1942 was greatly affected by the rent-taxcom pos ition. Being decreed at the end of July, it led to some sales of Reichsecurities for liquidity purposes and to a tendency for quotations to decline.The Reichsbank purchased a small amount of these securities on the market,less than RM 80 million in all, up to the end of the year; the whole amount,



- 177 -

and more, was resold early in 1943, and by the end of June the bank's holdingof Reich securities was only RM 68 million, an extraordinarily low figure.

The main expansion in 1942 took place through purchases and discountsof Treasury bills, the Reichsbank's holding rising by RM 7,600 million, of whichRM 5,300 million was in th e last quarter of the year (includ ing RM 3,700 millionin the last ten days of December alone), the usual end-of-year pressure beingincreased by the payment of about RM 3,700 million of the rent-tax composition.The influx of funds to the Treasury was reflected by the complete repaymentof the Reich working credit in December, whereas it is usually at its highestaroun d the en d of the y ear ; and part, at least, of the considera ble increaseof deposits to the record high figure of nearly RM 5,300 million was perhapsdue to the account of the Treasury, which is not shown separately. A re-markable feature of the return is that this item should remain so high in1943. The note issue, which had risen by RM 5,300 million in 1941, increasedby only RM 5,050 million in 1942, of which RM 2,300 million was in the lastquarter of the year. In the firs t quarter of 1943 the circ ulation remainedseasonally steady but increases (RM 1,950 million in the second quarter andRM 3,450 million in the third quarter) raised the total for the first time aboveRM 30,000 million in September 1943, some RM 8,000 million higher than ayear previously.

The errd of 1942 caught the German b a n k in g s y s te m in a period oftransit ion. Taxpayers' accounts had to be debited with the rent-tax compositionpayment by 31st December 1942, but m ost of th e com merc ial banks paidthe proceeds over to the Reich largely during the period 2nd to 16th January1943. On 31st December 1942, when th e balance sheets were made u p, interim

accounts had been opened for the Reich on which a large part of the stilloutstanding tax proceeds were provisionally booked. These interim accountswere not shown separately by the banks, but are included with other depositsin the table on the fol lowing page.

Nin e im p o rt a n t ba nk s showed an increase in the aggregatebalance-sheet total of about one-third in 1942, similar to that in 1941 and 1940.The f iv e G ro s s b a n k e n , on the other hand, have clearly entered upon a"rita rda nd o" as regards the growth of their deposits and balance sheets, andfigures published for one bank show a slowing-up of the turnover since thewar (1) . The ir depo sits were RM 2,300 million higher on the year 1942, but aroun dRM 1,100 million of this was estimated to be on the interim acc ount of th e ,

Reich, so that the real growth of private deposits would be only RM 1,200millio n ( again st RM 2,900 millio n in 1941). Of the RM 1,200 millio n som eRM 900 million was acco unted fo r by an increase in savings d epos its (at thethree banks with a large network of branches). Thus, the savings deposits ofthese banks rose in 1942 by over 40 per cent., while their primary commercial-deposit business stagnated (2 ).

(1) The Deutsche Bank, when publishing its annual report for 1942, gave data showing that from 1933 to 1938the annual turnover was very steady at about 70 times total deposits (excluding banks'), but since the warthe turnover has fallen, relatively, and In 1942 it was only 40 times deposits.

(2) This stagnation of commercial deposits at the Grossbanken is reported to have continued in the first quarterof 1943 but to have given way, since about April, to a further expansion (while business advances wererepaid from the proceeds of industrial bond Issues on the market).



- 178 -

On the other hand, business advances of the Grossbanken have revived ; fromRM 2,750 million at the end of 1940 (the lowest point for many years) they grew to

RM 3,100 million at the end of 1941 and, accelerating, to RM 3,900 million at theend of 1942. This increase seems to be connected mainly with credits given tothe official Reichsstelle and other central bodies for the import and distributionof com mod ities ; these tend to be large credits, as shown by the greateraverage size of new cred its granted. W ith business advances increasing andcommercial deposits practically unchanged, other assets were compressed;

G e r m a n B a n k s ' b a l a n c e s h e e t s .

At end of year

Five Grossbanken (3)19381939194019411942

Bank der Deutschen19381939194019411942

Three special banks(5)19381939194019411942

Total n ine banks(6)19381939194019411942

Assets

Cash

Busi-

nessad-vances

Bills

0)

Reich securities

Trea-surybills

Bondsandcertifi-cates

Total

Totalof

balancesheets

O

Liabil i t ies

Deposits etc.

Total ofwhichsavings

de-posits

in millions of Reichsmarks

751741886

1,0051,084

Arbeit62586395

133

417416495579631

1,2291,2151,4441,6791,848

3,3653,4952,7483,0813,889

(4)171179266410493

90146241323605

3,6273,8203,2553,8144,987

2,1462,0392,1672,1662,366

894597

120223

1,387941

1,407916

1,124

3,6223,0253,6713,2023,713

1,2292,6275,1397,0438,823

57590

1,1081,7442,525

7002,4993,6136,627

11,964

1,9865,7169,860

15,41423,312

603347

1,1711,7911,243

10318

234259282

355356528924

1,160

1,061721

1,9332,9742,685

1,8322,9746,3108,834

10,066

160608

1,3422,0032,807

1,0552,8554,1417,551

13,124

3,0476,437

11,79318,38825,997

9,01210,14312,99515,92718,259

513918

1,7952,6543,681

3,9255,3047,136

10,19816,224

13,45016,36521,92628,77838,164

7,6278,804

11,69914,62316,882

473880

1,7512,5973,606

2,8394,2486,1229,226

15,294

10,94013,93319,57226,44635,782

8661,0831,5162,1783,081

9199

130181280

22245

9591,1841,6482,3633,366

Percen-tage

increaseof

balancesheet onprevious

year

11.712.628.122.614.6

16.S78.995.647.838.7

9.935.134.542.959.1

11.321.734.031.332.6

0) These "b ills" may be taken to be largely Reich paper once removed, i.e. Solawechsel and Mefobescheinl-gungen, which were popular with the banks since they might be shown in the balance sheet as "bills",for window-dressing purposes.

(2) Including other Items besides those shown separately.(3) Deutsche Bank, Dresdner Bank, Commerz Bank, Reichskreditgesellschaft and Berliner Handelsbank.C) The Bank der Deutschen Arbeit, although it now may rank as one of the Grossbanken (coming third, after

the Deutsche and Dresdner Banks, and before the Commerz Bank) owing to the size of its balance sheet,which has grown by five times since 1938 against the doubling of the aggregate of the other Grossbanken,yet may be classed more as a special bank, on account of its structure and activities: it reflects the finan-cial strength of the German Labour Front, of which It Is the "Hausbank", the increased contributionsof members against diminished outgoings, the savings money for the purchase of the Volkswagen, etc.In consideration of the growing volume of its balance sheet, this bank doubled its capital from RM 25 millionto RM 50 million in 1942.

(5) These are the three "Geldzentralen", i.e. the Deutsche Girozentrale (the central bank of the savings banks),the Deutschlandkasse (the central bank of the cooperatives) and the Prussian State Bank (Seehandlung).

(6) The aggregate resources of the nine banks at the end of 1938 amounted to 44 per cent, of those of all the"reporting banks" which published monthly balance sheets until July 1939.



— 179 —

long-term Reich securities were a ctually lower by RM 550 million on the year.The increase of the Trea sury bill hold ing by RM 1,800 million in 1942 reflected

preparations to meet the rent-tax composition payment in January 1943.The Bank der D eu ts ch en A rb e i t continued to grow rela tively to

the Grossbanken, but its development was also slowing down. Unlike the Gross-banken, it transferred the whole rent-tax composition proceeds it had collectedto the Reich before the end of the year, so that the increase of RM 1,010 millionin its deposits is net and compares directly with RM 850 million in 1941. Thisbank also shows a rise of business credits, but by only RM 80 million (20 percent, compared with 26 per cent, for the five Grossbanke n) ; in co ntrast tothe Grossbanken, it slightly increased its holding of long-term Reich securities.

These six ba nk s taken together purchased over RM 2,500 mil lion short-term Reich securities in 1942 and sold over RM 500 million at long term,thus adding some RM 2,000 million net to their hold ings , whic h at the endof the year amounted to RM 12,900 m illion , nearly 60 per cent, of the irtotal assets.

Of the r ise of RM 6,000 mi ll ion in deposi ts of the th re e s p e ci a l b an ks ,RM 4,200 million was in respect of the Deutsche Girozentrale; the annual reportof th is bank states, however, that of this sum RM 2,300 million w as set asidefor payment of the rent-tax com pos ition in the new year. Even allowing forthis payment, the grow th of the Deutsche Girozentrale was far greater thanthat of the Grossbanken, and this reflected the enhanced importance of thesavings banks in the financing of the Reich.

G e r m a n S a v i n g s B a n k s * .

The increase o f sa v in gs de po s i ts a t the sa v in gs bank s (whichaccount for about three-quarters of all savings deposits) was by 10 per cent,in 1937 and in 1938. For the firs t time in 1939 the sa vings d epos its of Au str iaand the Sudetenland were brought into the Reich statistics; were it not forth is , the increa se in 1939 wo uld a lso have been by 10 per cent. The big riseof savings deposits came after the outbreak of war, increases being by

RM 6% milliard in 1940,RM 9% milliard in 1941 andnearly RM 14 millia rd in1942, i.e. by 30, 33 and37 per cent, respectively.

Other deposits at the sav-ings banks are largely giroaccounts in connection withtheir credit business, whichshows a relative decline.In August 1943, as a resultof air bombardments andlarge-scale evacu ations from

1 Total deposits as at the end of September 1943 Jiave been given Certain towns, Special faci-as RM 73.0 milliard, RM 61.8 milliard being savings deposits and .... i ,,_ ... . • rRM 11.2 milliard other (giro) deposits. ll ties to r th e Withdraw al OT

Deposits at end of year

Other (giro) deposits . . .Total deposits . . .

Increase of savingsdeposits during year

In milliards of RM . . . .

1939 1940 1941 1942

in milliards of RM21.5

•

1939

3.821

28.05.6

33.6

1940

6.530

37.37.7

45.0

1941

9.333

51.29.0

60.2

1942

13.937



— 180 —

savings deposits were accorded to people who had been forced to changetheir place of residence, a factor which was not without its influence on

the expansion of the note circulation at that time; in November, somewhatsimilar facilities were accorded by the urban and rural credit cooperativesby the issue of "guarantee cheques", enabling the holder to draw on hisaccount at one cooperative through the services of another.

As a supplement to statistics on government finance and the bankingsystem, the fo rm a t i o n of mo ne y ca pi ta l in Germany is of part icu larinterest, and the following table reproduces estimates for recent years.

G e r m a n m o n e y c a p i t a l f o r m a t i o na n d R e i c h b o r r o w i n g ^ .

This table is instructivesince it brings out several

characteristics of German warf inancing. Of the total Reichdebt issued in the periodAugust 1939 to December1942, 15 per cent, was sub-scribed with foreign money —plus probably a part of the" u n k n o w n " sources (whichall toge ther give another 7 percent.).(11) Some RM 114 milliardis known to have been placedinternally: 36 per cent, with

the banking system (centraland commercial banks), thevery high prop ortion of 39 percent, with the savings banksand 12 per cent, w ith insurancecompanies; these inst i tut ions

(1) Based on a table given by Günter Keiser in an article in Bankwirtschaft 1943, No. 5.(2) These are all giro deposits, whether at commercial or savings banks, etc. Foreign deposits have been

deducted for 1941 and 1942 and, in the latter year, also RM 4 milliard held in suspense for paymentof the rent-tax composition.

(3) Savings deposits at all institutions, not only at savings banks.C) Liquidity loans purchased by insurance companies and by local authorities.(5) Treasury certificates bought by the market, I. e. outside banks but including some purchases by in-

surance companies and other institutions.

(c

0 The increase of the Reichskreditkassen loan to the Reich as shown by the official debt statement.0 The investment of clearing balances by the Verrechnungskasse In Berlin and the direct purchasesof Reich securities in Holland and in Bohemia and Moravia.(8) Unknown purchases of Reich short-term paper; in 1939 the greater part of this item consisted of tax

certificates. Keiser in the above-mentioned article says that the fact that a large part of the unknown pur-chases took place in 1942 leads to the presumption that some new source of financing has beenopened up unknown to the public. He also suggests that part of the unknown source may, indeed, be foreign.

(9) The whole of the money capital formation need not necessarily correspond to the increase of theReich debt, but in wartime, when private credit operations are unimportant, the differences are notgreat. The fact that money capital formation was lower than Reich borrowing in the years 1939 to1941 appears to indicate a net repayment of private credit. In 1942 there appears to have been anet increase of over RM 2 milliard, of which part was due to rent-tax composition loans.

(1° According to estimates in the preceding pages, less RM 4 milliard in 1942 on account of the delayedpayment of the rent-tax composition. The figures differ very slightly from those of Keiser, who gives atotal of RM 145 milliard for the whole period.

(11) Of the RM 21.7 milliard on account of the Verrechnungskasse and Reichskreditkassen, RM 2.6 milliard correspondsto the circulation of Reichskreditkassenscheine, without which the total outstanding would be about RM 19milliard; for further details see Chapter IV.

In milliardsof Reichsmarks

Note circulation. . . .Bank deposits(2) . . .Savings deposits (

3) . .

Insurance etc.f) . . .Market«Known internal . . . .

Foreign :Reichskreditkassen (

6)

Verrechnungskasse (7)Known foreign . . . .

Total knownunknown (

e) . . .

Total money capitalformation (9)

Increase of Reichdebt e«)

Aug.-Dec.1939

3.42.20.80.8

7.2

—

—

7.22.1

9.3

10.3

1940

2.38.98.93.63.6

27.3

1.51.53.0

30.31.2

31.5

33.7

1941

5.58.3

14.24.26.0

38.2

3.06.09.0

47.21.6

48.8

48.9

1942

5.05.6

21.04.55.0

41.1

2.77.09.7

50.85.8

56.6

53.2

Total

16.225.044.913.114.6

113.8

7.214.521.7

135.510.7

146.2

146.1



— 181 —

thus account for 87 per cent, of the total, while 13 per cent, only was placedon the market. Indeed, the prop ortion taken up by institu tions was highe r,

since part of the market purchases were also on their account.

The "m arke t" in th is sense is not the same as the "pu bl i c" . The s h o rt -te rm b o rr o w in g of the Reich has been almost whol ly from insti tut ions: theReichsbank and the commercial banks account for a large proportion whilesavings banks and other credit institutions have also taken steps to preservetheir liquid positions; other investors in short-term government paper includethe Verrechnungskasse, the Konversionskasse and banks in Holland and inBohemia and Moravia. Further some interes ting estimates have recently beenpublished regarding the distr ibution of the Reich lo ng an d m id d le -t e rmb o r r o w i n g , to which tax certificates have been added.

D i s t r i b u t i o n o f R e i c h l o n g a n d m i d d l e - t e r m b o r r o w i n g 0)

Calendar years

1940 Treasury certificatesLiquidity loansTax certificates

Total

1941 Treasury certificatesLiquidity loansTax certificatesTotal

1942 Treasury certificatesLiquidity loansTax certificates

Total

Three years 1940-42Treasury certificatesLiquidity loansTax certificates

Total

Credit institutions

Banks Savingsbanks

Co-operatives Total

Otherinvestors Total

(2)In milliards of RM

2.1

0.6

2.7

2.0

2.0

0.5

(-1.2)

(-0.7)

4.6

(-0.6)

4.0

2.43.7

6.1

4.72.8

7.5

6.83.6

10.4

13.910.1

24.0

0.90.50.1

1.5

1.650.25

1.9

1.90.6

(-0.1)

2.4

4.451.35

5.8

5.44.20.7

10.3

8.353.05

11.4

9.24.2

(-1.3)

12.1

22.9511.45

(-0.6)

33.8

2.854.1

(-1.8)

5.15

4.754.85

9.6

5.854.8

(—1.0)

9.65

13.4513.75

(—2.8)

24.4

8.25 P)8.3

(-1.1)

15.45

13.17.9

21.0

15.059.0

(—2.3)

21.75

36.425.2

(-3.4)

58.2

0) Estimates from Bankwirtschaft No. 15, 1943.P) Slight differences between the total figures and those given in the table on page 174 appear to be due tothe adjustments made in the latter table.

(3) Figure adjusted for Reichsbank sales of Treasury certificates in 1940.

Of the RM 58 milliard fo r the three years 1940-42 various credit institut ionstook up nearly RM 34 milliard , of which the savings banks had RM 24 milliard .Insurance companies, the Reichspost and other similar undertakings accountedfor the RM 4-5 mil l iard of Liquidity loans issued yearly to "other investors";this left some RM 1 milliard in 1940 and RM 4% milliard in each of the years1941 and 1942, a net total of approximately RM 10% milliard (Treasury certifi-cates issued less tax c ertificates prese nted), about 7-8 per cent, of tota l Reich



— 182 —

borrowing in the three years. And of this remaining RM 10% milliard a greatpart was, in fact, taken by the municipalities as investment for their reserves and

also by insurance companies, the Reichspost, Reichsbahn and other officialand semi-official bodies; the actual purchase of Reich securities directly by the"public" (as individuals) was thus very small indeed.

On the German money and capital markets interest rates were declininguntil 1941, but, in spite of an extraordinary turnover of money in 1942, ratesdisplayed marked stability, being under the influence of the so-called interests t o p , i.e . the decision of the autho rities to allow no further fall of rates,in order to safeguard the smooth working of the credit system; the rateapplied to communal loans was, however, reduced to 4 per cent. On thesh o rt - t e rm m ar ke t, bank rate has remained at 3% per cent, s ince Ap ri l 1940;the private disco unt rate, low ered three tim es in 1940 and once in 1941,was unchanged at 21/a per cent, throughout 1942.

Three-month Treasury b i l ls (Reichswechsel) , which were issued at theprivate discount rate and might be obtained for any required date, came tothe fore in 1941 and remained in favour in 1942, as specially suitable forl iqu id i ty purposes. Three-month Solawechsel , wi th a s l ight ly lower yield,2 1 /« per cent., were also bought by the banks, largely for window-dressingpurposes at the end of the year; although issued by the Golddiskontbank

against government paper taken overG o ld di sk on tb a n k — from the Reichsbank, they might

is su e of S ol a w e ch se l . legally be included under "b i l ls "(as distinct from Reich securities)in the balance sheets of thebanks. The year 1942 saw a notablegain in importance by the Mefo-be s c he in ig un g* is sued by theReichsbank; RM 2,758 million ofMefobescheinigungen were held by

the banks etc. at the end of 1942 compared with RM 1,985 million at theend of 1941. These bills, although not transferable, had the great advantageof being obtainable for any amount and of any maturity from three monthsto one year and were much employed by the banks in preparation for the

rent-tax composition; they might also be included in the banks' balancesheets as " b il ls ". Whe n the issue of Mefo bills was discontinued at thebeginn ing o f July 1943, the Solaw echsel ag ain grew in im portan ce, the amo unt

End of month

March . . . .

September . .December. . .

1939 1940 1941 1942 1943

In millions of RM1,5071,322

630637

306985

1,2422,524

672539382

1,773

445565557

1,847

382450713

* In the period of German rearmament, from the beginning of 1935 and until March 1938, government armamentorders were paid by six-month bills which were accepted by the Metallurgische Forschungsgesellschaft, theso-called Mefo-Wechsel or Sonderwechsel ; these bills, after three months' currency, were rediscountableat the Reichsbank and became an important investment for the banks. When their issue ceased In 1938,the total outstanding, some RM 12-13 milliard, returned to the Reichsbank, which, until the spring of 1939,issued six-month Blockwechsel to the market in their place. By the autumn of 1939 the total Issue, whichhad then been reduced by redemptions to RM 10-11 milliard, again became concentrated at the Reichsbank.It appears probable that, in the meantime, the Reichsbank passed on the bulk of these bills to the Gold-diskontbank, the Konversionskasse and the Verrechnungskasse, whose investment requirements had con-siderably increased. What remained with the Reichsbank was used until June 1943 as a basis for the issueof a money-market instrument, the so-called Mefobescheinigung, or Sonderwechsel-Bescheinigung.



- 183 -

outstanding rising to RM 2,276 m illion in N ovembe r 1943. The longer-term Treasurybi l ls (unverzinsl iche Schatzanweisungen) are of six months to two years,

with rates which remained unchanged in 1942 at 2 3 /8 per cent, and 27/s per cent,respectively. Daily money showed some narrow fluctuations around theaverage rate of 1.83 per cent.

There was a tendency in 1942 for emphasis to be shifted more toshort-term issues in Reich borrowing as a whole; in this connection it isinteresting to note that over the end of the year the Reichsbank sold aboutRM 500 million Reichswechsel to the banks with the exceptionally short matu-rity of 10-14 days. In spite of the collection by the Treasury of ten years'rent tax within three months, in addition to normal taxation, banking andmarket preparations were adequate and no undue disturbance occurred at themoments of greatest pressure, either at the year's "ultimo" or during the

first half of January 1943.

On the long-term market the interest rate for Treasury certificates wasmaintained at 3% per cent, but through a change in the calculation of com-mission there was, in fact, an increase of the issue price by % to 99% percent, in April 1943. Similarly the issue price for Liquidity loans was increasedby 1/8 per cent. Besides these sm all increases of issue prices, the currencyof Treasury certificates and Liquidity loans was slightly extended.

The year 1942 was remarkable for the first big co n v e r s io n s of pre-warReich loans. The second and third tranches of 4 % per cent. Treasury certifi-cates of 1937 for RM 800 million and RM 850 million were converted in May

and August 1942 respectively; almost the whole amounts were exchanged for3Y 2 per cent, certificates, with small conversions into Liquidity loans and cashrepayments. The four tranches of 4% per cent. Treasury certificates issuedin 1938, amounting in all to some RM 6,800 million, were all called for datesin 1943. After the fourth tranche was dealt with in November 1943 thereremained no more immediate possibilities for conversions of any importance.

As regards other than Reich loans, the general interest stop wasmaintained and, in a decree of 10th August 1942, the Reich Minister ofNational Economy made it obligatory for credit institutions and insurancecompanies to apply for special permission in each case before reducinginterest rates, either generally or on individual loans ; exceptions to t his rule

were made, particularly for the conversion of mortgage and local authorities'bonds, in accordance with the simplified procedure mentioned in the twelfthAnnu al Report. P riv at e c a p i t a l is su e s were higher in 1942: new industr ia lbond issues (with interest at 4 per cent.) rose from RM 540 million in 1941to RM 850 million in 1942 and nearly RM 900 million in the fir st three quartersof 1943; from the outbreak of war up to September 1943, about one hundredindustrial loans were issued for a total of RM 3,200 million, an amount which,although it appears of little importance compared with Reich loans, exceedsthe entire circulation of domestic industrial loans at the end of 1938(RM 2,740 million).



- 184 -

It is not possible to give a review of the budgetary situation in Bohemiaan d M o r a v ia ; neither budget accounts nor statist ics regarding taxation and

borrow ing have been published. A "M atr iku lar" contribution has been paidannually to the R eich, but the amount has not been disclos ed. To raise thefunds for this imposition two loans amounting to K. 5,500 mill ion in all (theequivalent of RM 550 million ) were floated in 1942, K. 3,000 millio n of 3% percent. 50-year bonds at par and K. 2,500 million 3% per cent. 20-year certificatesat 99. In 1943 a furthe r K. 4,000 millio n c ertificates were issu ed on the sameterms in March and K. 2,000 million in September; also, in September 1943,a 3% per cent. Liquidity loan for K. 1,000 million was put on tap in theGerman manner.

The monetary position of the country is dominated by the close relation-ship with Germany and the consequent accumulation of claims in Reichsmarks,

which since 1940 have covered the note circulation by over 100 per cent.

N a t i o n a l B a n k o f B o h e m i a a n d M o r a v i a .

End-of-month figures

Assets

Reichs-mark

claimsInternalcredit

Gold andforeign

exchange

Totalof

balancesheet

Liabi l i t ies

Notecirculation

Currentaccounts

etc."Kassen-scheine"

In millions of Kronen

1939 December1940 December1941 December1942 March . .

June . . .SeptemberDecember


3,7917,816

12,95712,73514,20714,02517,36619,30622,36826,122

1,89624

840840917917845896944

1,202

2,4022,2322,3002,2912,2912,2672,2432,2412,2612,287

10,04611,14016,54816,36317,81017,60520,87922,82425,81630,216

6,3456,4539,3989,755

10,40911,40414,08915,40817,45020,086

1,0541,5602,8002,9433,6792,0151,6662,5742,1371,960

5251,0021,8421,8371,8471,8471,7751,8262,1742,432

0) Shown as "sundry assets" in the return. At the end of 1939 K. 2,831 million out of K. 3,791 million wasspecified as claims on Germany and it may be assumed that the items normally accounted for under thisheading have since remained around K. 1,000 million.

(2) Including other items besides those specified.

The growth of claims in Reichsmarks (by K. 4,400 million in 1942 againstmore than K. 5,000 million in 1941) w ou ld have been greater but for thepayment of the Matrikular contribution and purchases of Reich securit ies

directly by the commercial banks. In previous years, only a part of theincrease of Reichsmark claims was matched by a rise of the note circulation,while part was taken on to current accounts and part absorbed by sales ofKassenscheine by the bank on the market. But in 1942 the note circulationexpanded by K. 4,700 m illion , arou nd 50 per cen t., an amo unt greater thanthe growth of Reichsmark claims. Current accounts reached their peak ofover K. 4,300 million near the end of July 1942, but fell rapidly in thefollowing weeks and were down by over K. 1,100 million on the year, ap-parently owing to the curtailment of advance payments on government orders,as in Germany.



— 185 —

Deposits with the big commercial banks, largely under German control,were reporte d to have risen by K. 5,060 millio n to K. 28,440 m illion at

the end of 1942; an increase of K. 4,450 million in deposits during 1941 wasthe counterpart of purchases of K. 2,970 million Reich Treasury bills andof K. 1,270 million P rotectorate sec urities, while cre dit to the private economyremained unchanged on balance, and in 1942 the same influences were atwork. Depo sits at the savings banks rose by K. 3,840 million to K. 20,863 m il-l ion. The concentration of the banking system by l iquidations and fusions,which had been proceeding in recent years, was completed in the summerof 1943.

In the last quarter of 1942, Reich securities were introduced, for thefirst time, on the Prague bourse. Bank rate has remained at 3% per cent., towhich it was raised in October 1940 to conform to the Reichsbank level, and

other interest rates have been dominated by those ruling in Germany.

Financial year ended March

Expenditure-ordinary . .extraordinaryTotal . . . .

Deficit

1940-41 1941-42 1942-43 1943-44

in millions of zloty

1,0042781,282

974

308

1,7687142,4821,768

714

2,7014773,1782,701

477

3,6566284,2843,656

628

Unlike Bohemia and Moravia, now largely incorporated in the Reich, theG ov er no r - G en er a ls h ip o f Po lan d has rema ined a "Neben land" . The budge testimates are summ arised in the table. Up to 1942-43 expend iture had in-

creased two and aG ov er no r - G en er a l sh ip o f Po lan d half t imes s ince the

Bu dg e t es t im a t es . founda tion o f theGovernor- G eneral-ship, the amounttaken into the ordin -

ary budget, whichin the past twoyears has been co-vered by ordinaryrevenue, increasingeach year. Extra-ordinary expendi-

ture was covered principally by borrowing, the authorisations to borrow amount-ing to Z I. 258 m illion in 1940-41 and to Z I. 461, 372, and 594 million in the th reefollowing years respectively; in addition, an authorisation to draw on the Bankof Issue for an amoun t up to Z I. 100 m illion, as work ing cred it, was grantedin 1942-43. In 1942 the territory of the Governor-Generalship was extended by

the incorporation of the district of Galicia. The Governor-Generalship haspaid an annual "war contribution" to the Reich; the amount has not beendisclosed but it is assumed to be included under ordinary expenditure inthe budget.

A review of monetary developments is not possible as the Issue Bankin Cracow, which opened for business in Apri l 1940, has published no returnor balance sheet. Nor are returns available regarding the po sition of thecommercial banks, whose "old deposits", dating from before the occupation,remained blocked in principle, although some partial out-payments have beenmade; the greater part of the banking business in the country fell to the



— 186 —

subsidiaries of the German Grossbanken. A t the end of 1942 there were57 savings banks operating in Poland with total depo sits of ZI. 578 m illion, of

which ZI . 167 million were "ol d d ep os its" ; the bulk of de posits were on currentaccount, only ZI. 30 million being savings depo sits.

ReichskreditkassenLoan to the Reich and circulation

of Reichskreditkassenscheine.In millions of RM.

90001 1 1 1 1 1 9000

Reichskredi tkassen, which or ig inal ly were merely pay-of f ices for theGerman army and issued what were, in effect, German Government (military)notes, called Reichskreditkassenscheine, extended their activities, particularlyduring the eastern campaign, to become auxiliary central banks in the occupiedterritories and clearing offices between them and the Reich. Stringen t "for eig nexch ang e" regulations were imposed to prevent the issue of Kassenscheinefrom adversely affecting the value of Reichsbank notes in Germany. Indeed,the issue of Kassenscheine was restricted ; as soon as arrangemen ts could bemade for the payment of German troops in the currency of the occupied

country, Kassenscheine werewithdrawn and the Kassen gener-al ly c losed. Thu s, Danish crownswere put at the disposal ofthe German army in Denmarkagainst Reichsmark credits atthe Reichskreditkassen centraladministration in Berlin; and inBelgium, Holland, France and,later, Greece, the payment of

occupation costs in local cur-rencies through the existingcentral banks made the furtherissue of Kassenscheine super-f luous; but in Poland, Croatia,Serbia, the Ukraine and the"Ostland" new central bankswere founded . In the U.S .S.R .rouble currency was obtainedwhen Russian army pay centreswere captured and, later, whensavings were resumed, and the

issue of Kassenscheine wascorrespondingly curtailed.

1942 1943

The policy of restricting the circulation of Reichskreditkassenscheine andsubs tituting local currency as soon as opportunity occu rred was adopted forpractical reason s. Having a fixed relationship to local currencies, Reichs-kreditkassenscheine varied in purchasing power from country to country but,being scarcer than the local currency and having the prestige of beingdenominated in Reichsmarks, they were often preferred to the local currencyand tended to acquire a premium or to be hoarded.



- 187 -

Although there was some further extension of the activity of the Reichs-kreditkassen in 1942, the chara cteristic of the year and of the early mon ths of

1943 was the num ber of K assen clos ed. The ex tensions in 1942 were ch ieflyin the U.S.S.R. and in France, where two new Kassen (at Caen and Reims)were opened and one (at Tours) reopened after the crossing of the demarcationline in November. Further, a special Reichskreditkassen a uthority with fullpowers for the western territories was instituted with headquarters in Brussels(while the central administration of the Kassen in Berlin directed its attentionto the Kassen in the east and sou th-ea st). On the other han d, 10 easternKassen (in occupied Polish and Russian territory) were converted into branchesof the Central Bank of the Ukraine in May and one in September 1942, 2 (inTra nsn istria) were taken over by the National Bank of Rouman ia and 16(including 14 in the former Baltic States) were absorbed into the newly-formedOstland Central Bank in March 1943.

At the end of 1942 there were 52 Kassen in existence: 16 were in westernEurope, one in Holland (Amsterdam), 4 in Belgium (one being in Brussels) and11 in France (one being in Paris); 5 were in south-eastern Europe, one in each ofthe fol lowing countries, Roumania (Bucarest), Bulgaria (Sofia), Greece (Salonika),Croatia (Agram) and Serbia (Belgrade) ; of the 31 in the eastern territories at theend of 1942, about one-half were closed in the early months of 1943. In additionto the 52 Kassen at the end of 1942, the organ isation had 74 furth er exchangeand other offices (including 16 on troop trains). In all territories where Reichs-kreditkassenscheine had been in circulation they remained legal tender at afixed rate to the local currency and they might be reissued at any timeshould the German authorities consider that mil i tary developments made thisdesirable.

No balance sheets of the Reichskreditkassen have been published butcertain data are available, as shown in the table.

R e i c h s k r e d i t k a s s e n .The Reichskreditkassen loan

to the Reich indicates a) the issueof Kassenscheine (in so far asthey are not covered by otherassets, e. g. advances and dis-counts, which are known to bevery small) plus b) the debt of

the Reichskreditkassen to othercentral banks for liabilities incurred

0) The total of "sundry loans" at short term as given in the Reich debt statements, less a small allowancefor other items which may be included under this heading besides the Reichskreditkassen loan. The legallimit of RM 3,000 million was removed in August 1941.

(2) Reichskreditkassenscheine actually in circulation. The figures for the end of 1941 and 1942 were givenofficially in the annual report of the Reichsbank for 1942. For the end of 1940 a figure has been takenhalf-way between the figures given semi-officially by M. Kretzschmann in an article in "Deutsche Geld-politik" (Schriften der Akademie für Deutsches Recht), i.e. a maximum of around RM 1,000 million in theautumn of 1940 and about RM 400 million at the end of April 1941.

P) This is the difference between the two previous columns and includes Reichskreditkassen debts for Kassen-scheine withdrawn against local currency and for local currency issued direct to the German militaryauthorities against Reichsmark credits in Berlin. Of the total at the end of 1942, some RM 300 million wasowing to the Bank of Issue in Brussels and about RM 650 million to Danmarks Nationalbank. In 1941 and1942 the bulk of the new debt was towards the newly-occupied eastern territories but south-eastern Europewas also included.

At end of year

194019411942

Loan toReich

0)

Circulationof Reichs-

kredit-kassen-scheine

P)

Debts tocentralbanks

(3)in millions of Reichsmarks

1,5004,5007,200

(700)1,8002,600

(800)2,7004,600



- 188 -

by the German troops in local currencies. The Reichskreditkassen figuresdo not include the am ounts paid as occupation costs in the various countries

(except Denmark), nor do they include the clearing debts of the Verrechnungs-kasse towards foreign countries. The Reichskreditkassen loan to the Reichrose by RM 2,700 million in 1942, aga inst RM 3,000 million in 1941, and totalle dsom e RM 7,200 million at th e end of 1942; by Septem ber 1943» it had risen toRM 8,760 m illion . The expans ion of the circu lation by RM 800 million in 1942represents, of course, a net figure of total new issues minus withdrawals;a substa ntial prop ortion of the RM 2,600 million Reichskreditkassen scheine stilloutstanding at the end of 1942 were in circulation in the Ostland.

In Sofia and Bucarest, the Reichskreditkassen were opened only as liaisonoffice s. By an agreement reached in January 1942, the loca l currency sup pliedby the Bulgarian National Bank to the German army was limited to a maximum

of RM 100,000 a week. The earlier "canteen money" of Reichskreditkassencoins, which circulated in Bulgaria at ten times their face value, when usedto purchase army stores, was withdrawn from circulation in August 1942 anda new "auxiliary army money" issued in its place; this new currency consistedof 1, 5, 10 and 50 Reichsp fennig notes a nd was also taken a t ten time sits face value in the canteens (but only at its nominal amount if used forpurchases from civilians). In March 1943 auxiliary army money was usedalso in Greece, for the first time.

Before the capitulation, payment requirements of the German armedforces in Italy were financed by virtue of special arrangements which did notburden the clearing or constitute commitments for the Reichskreditkassen; only

a part of German soldiers' pay was made available in lire, the balance beingpaid in Germany in Reichs ma rks. In Septem ber 1943, the German militaryauthorities utilised available balances in lire and began the issue of Reichs-kreditkassensche ine (at the rate of RM 1 = Lit. 10). From 26th Octob er 1943,arrangements for the current supply of lire in the required amou nts came intoforce and the issue of Reichskreditkassenscheine ceased; by 10th NovemberScheine in circulation were withdrawn by the commercial banks and by16th November they were handed over to the Banca d'Italia for redemption in lire.Circular cheques, which had been given out for a time by the German militaryauthorities, were also withdrawn.

Owing to the lack of statistics, it was becoming more and more difficult tofollow the development of the monetary situation in Italy unti l , early in August1943, in a speech after the change of the régime, the Finance Minister madesome of the most important figures public; these figures are incorporated withother available statistics in the following paragraphs. The budgetary positionin recent years is shown at the top of the next page.

Military expenditure, which was less than Lit. 5 milliard a month duringthe financial year ended June 1941, rose to about Lit. 7 milliard a month earlyin 1943 and Lit. 8 milliard a m onth in the summ er. Other exp enditure also



— 189 —

I t a l i a n B u d g e t A c c o u n t s ^ .

Financial yearended June

1938-39. . .1939-40. . .1940-41. . .1941-42. . .1942-43. . .

1943-44. . .

Expenditure

Military Other Total

Taxationand otherrevenue

Budgetdeficit

Credit operations

Borrowing

co

Increase ofTreasury's

netliabilities

(3)

Total

in milliards of lire

15.027.758.971.381.0

100.0

24.932.739.347.354.2

48.0

39.960.498.2

118.6135.2

148.0

27.632.434.241.248.9

50.0

12.328.064.077.486.3

98.0

0.221.114.245648.9

12.06.9

49.831.737.4

12.228.064.077.386.3

0) Closed accounts 1938-39 to 1941-42, provisional results for 1942-43 and estimates for 1943-44. Ordinary

and extraordinary accounts are combined in the table.(') At long and middle term; during the war essentially by nine-year bonds.(3) Including the floating debt and borrowing from the Banca d'Italia, plus unpaid arrears of expenditure outstanding.

increased appreciably for two principal reasons: price subsidies and the ser-vice of the governm ent d ebt. For the year 1942-43 subs idies to keep downprices have been given as Lit. 11.8 milliard, while the deb t service rose f romLit. 4% milliard in 1934-35 to Lit. 14 milliard in 1942-43 and was estimated atLit. 16% milliard for 1943-44 (when it would absorb one-third of ordinaryrevenue). Severe econom ies in expenditure were m ade in 1942-43, includ ingthe abandonment of certain urgent public works for Lit. 3% m il l iard. Totalbudgetary expenditure more than doubled from 1939-40 to 1942-43, the per-centage covered by ordinary revenue falling from 53 per cent, to 32 per cent.;

acco rding t o the Italian Finance Minister, this was the lowest p ercentage forany belligerent country.

Budget revenue, analysed in the next table, rose by Lit. 14.6 milliard from1940-41 to 1942-43; of this increase Lit. 9.0 milliard was due to taxation andother ordinary revenue and Lit. 5.6 milliard to the recovery of amounts paid in

respect of war expenses.I t a l i a n Bu d g e t R e ve n u e . . , , ,

a As shown above, thebudget deficit was coveredby borrowing at long andmiddle term, and by theincrease of the Treasury'snet liabilities, including thefloating debt and unpaidliabil i ties outstanding. Thetotal assets and liabilitiesof the Italian state and theTreasury's net liabilities atthe end of June in recentyears are given in the tableon the fol lowing page.

Financial years ended June

Direct taxesIndirect taxes and duties. . . .Customs duties and indirect

taxes on consumption . . . .MonopoliesLotteriesMain sources of revenue. . . .Repayments and consortiums .Miscellaneous revenueTotal ordinary revenueRecovery of war expenses . . .

Total revenue . . .

1940-41 1941-42 1942-43

in millions of lire

8,9148,954

6,3284,499

51929,215

7004,118

34,033201

34,234

9,54811,127

6,1356,017

58433,412

1,2983,508

38,2183,006

41,224

10,81711,330

6,1328,213

67337,166

1,2174,644

43,0275,857

48,884



— 190 -

193519361937193819391940194119421943

At end offinancial year(30th June)

I t a l i a n S ta te

disposable

24.324.529.427.327.534.441.9

A ss e t s a n d

Assets and Liabilities

Assets

other

72.376.882.789.393.8

103.1103.5

•

total

L i a b i l i t i e s

of the State

Totalliabilities

In milliards of lire96.6

101.3112.1116.6121.3137.5145.4

•

126.0133.4154.0162.9175.2210.4281.8

•

Excessof

liabilities

29.432.141.946.353.972.9

136.4

•

Treasury'snetliabilities

16.422.333.042.454.361.3

110.9142.6180.0

0) Including the assets of the Treasury (last given separately as Lit. 7.3 milliard In 1935) and various real and

other property (last given separately as Lit. 16.9 milliard in 1935). Further, some Lit. 30 milliard of industrialproperty is classed as "disposable" in the official statement.(=) This column, in addition to the Lit. 30 milliard of industrial property mentioned above (practically unchanged

from 1935 to 1941), includes military material (1935: Lit. 24.2 milliard, 1941: Lit. 51.6 milliard), goods destinedfor the service of the state (1935: Lit. 4.8 milliard, 1941: Lit. 7.3 milliard) and scientific and artistic materials(practically unchanged at Lit. 14 milliard from 1935 to 1941).

(3) This column comprises the Treasury's gross liabilities (last given separately as Lit. 23.7 milliard in 1935)plus the government debt (consolidated, perpetual, redeemable and sundry).

(") This is the financial part of the previous column — the gross assets of the Treasury were last given asLit. 7.3 milliard and the gross liabilities as Lit. 23.7 milliard on 30th June 1935, see notes V) and (3) above.The annual increase of the net liabilities of the Treasury represents that part of the budget deficit notcovered by long and middle-term borrowing.

The rapid growth of the Treasury's liabilities is a characteristic ofrecent years. In Italy's three years of war to Jun e 1943, the aggregatebudget deficit of Lit. 228 milliard (as shown by the table on page 189) wascovered as to Lit. 109 milliard by long and middle-term borrow ing and as

to Lit. 119 milliard by an increase of the Tre asu ry's n e t liabilities, which thusrose from Lit. 61 milliard in June 1940 to Lit. 180 milliard in June 1943.

A statement of the government debt and Treasury liabilities for the endof March 1943, which appeared in

I t a l i a n G o v e r n m e n t D e b ta n d T r e a s u r y l i a b i l i t i e s .

At end of March 1943

Nine-year bondsOther funded and redeemable

debt«Ordinary Treasury bills . . . .Advances of Banca d'Italia(2)Other advances on current

account (3)Government notes issued (

4). .

AnnuitiesTotal debt and liabilities

In milliardsof lire

123.7

86.743.359.953.85.8

38.9412.1

0) Including credit certificates for the financingof public works.

O Lit. 1,000 million ordinary and Lit. 58,882 mil-lion extraordinary advances.

(3) Mostly from Cassa dei Depositi e Prestiti,the central body for the savings banks.

(4) The issue of small government notes isdescribed in Chapter VI.

a foreign technical journal (and was thuspublished for the first time since 1935),may be summarised as shown in the table.

The term "annuit ies" appl ies to thearrears of government payments; theseare covered by a system of annuity pay-ments and largely refinanced by the Bancad'Italia through the intermediary of the

Consortium for the support of industrialsecurities, as explained in the twelfthAnnual Report of this Bank. The arrearsgrew from Lit. 2.6 milliard in June 1939 toLit. 16.0 milliard in Jun e 1940; at th e endof March 1942 the Ministry of Finance wasburdened for the next ten years withannuity payments which had a presentvalue of Lit. 29.7 milliard , arising from thedeferred payment of wartime orders (of



- 191 -

which Lit. 10 milliard had been refinanced thr oug h the Co nsort ium by the endof 1941); and by March 1943 the annu ities were booked at Lit. 38.9 milliard .

Italian government borrowing at longer term during the war had beenalmos t who lly by issues of 5 per cent, tax-free nine-year b onds at 97% (yielding5.93 per cent, including prizes etc.); the Lit. 45 milliard of borrowing in 1941-42was effected through two issues of these bonds in September 1941 andFebruary 1942. Amongst other measures taken in 1942 should be mentionedthe creation of special 3 per cent, five-year Treasury bonds as a compulsoryblocked investment for funds from three separate sources a) war profitsretained by the taxpayer, b) 20 per cent, of new funds deriving from privateissues of shares and other capital increases, and c) funds equal in amountto those employed in the purchase of sha res on the bou rses ; as thesebonds were created more for purposes of control than to obtain revenue,the proceeds were not expected to be high. Indeed, early in 1943, thesemeasures were modified, that under c) being dropped altogether.

In September 1942 an effort was made to introduce cheaper money rates,when a nine-year issue was made at 4 per cent., the issue price being loweredto 92 (with prizes etc. the yield was, however, still 5.68 per cent.); Lit. 25 mil-l iard was subscribed. Some other interest rates were also reduced, includingthose for Treasury bil ls, the twelve-month bil ls from 5 to 4 per cent, andothers correspondingly, one to two-month bills being abolished. Early in 1943,however, the effort at cheap money was abandon ed. Alt ho ug h bank rateremained unchanged at 4% per cent, (as it has done since 1936), the rate ofinterest paid on bank dep osits with the Banca d'Italia was raised in M arch 1943from 1 % to 3 per c ent., w ith retroactive effect from 12th December 1942; therate for private deposits on which no interest had been paid so far wasfixed at 1 % per cent. The rates on Treasury bills were restored to wha t theyhad been before September 1942 and the one to two -m onth bills were reinstated(with interes t at 3% per ce nt.). In June 1943 an issue of 5 per cent, tax-free five-year bonds at 97 produced Lit. 12 milliard (not includ ing am ountssubscribed in Sicily and Sardinia); these bonds could be used after threeyears for tax payments and for this period of three years the yield, includingprizes (worth another % per cent, per annum), worked out at well over 6 percent, tax-free. Later, as a result of the deve lopments in July 1943, the g overnme ntbond market weakened and quotations were registered which corresponded toyields of up to 12 per cent, (not counting prizes).

In his speech early in Au gu st 1943 the Finance M inister stated th at thegovernment debt at long and middle term (funded and redeemable) plus theissue of government notes had reached Lit. 256.9 milliard on 30th June 1943, towhich must be added Lit. 168.9 milliard floatin g debt (Tre asury bills and debtsto the Banca d'Italia and Cassa dei Depositi e Prestiti); this gives a totalof Lit. 425.8 milliard , excluding the a nnuities on ac count of a rrears.

In July 1943 current receipts fell off, he said, and the total of Treasurybonds outstanding declined, so that the greatest recourse was had by theTreasury to the Banca d 'Italia in that m onth , am ounting to Lit. 10.4 milliard



— 192 —

and raising the total direct borrowing of the Treasury from the bank toLit. 58.0 milliard. Al low ing , in add ition, for the assistance granted by thebank to the Con sortium for the sup port of industrial secu rities (Lit. 34.2 mil-liard), for cessions in connection with credit certif icates issued by theTreasury and credit claims in respect of military supplies, for the paymentof subsistence allowances to so ldiers' fam ilies and for public w orks, forthe payment of orders for war supplies and services and for the many otheroccasions on which the bank had provided notes, directly or indirectly, forvarious purposes, the growth of the note circulation of the Banca d'Italiafrom Lit. 25.3 milliard on the eve of Italy's entry into the w ar to Lit. 96.5 m il-liard on 20th July 1943 was entirely due to government requirements. (Thedevelopment of the note circulation in Italy as shown by the most recentdata is treated on pa ges 307-308.) In Octo ber 1943 restrictio ns were placedon the withdrawal of bank deposits in the northern section of the country.

As rega rds t he oc c u p ie d c o un t r i e s i n w es te r n Eu r ope , it isgenerally necessary to rearrange the items of the published budget figures, inthe interest of uniformity and to afford a clearer insight into the situationthan is obtainable from the official statistics. In France, both occupation costsand clearing financing are designated extraordinary "armistice expenditure"outside the budg et; in Be lgium, the costs of the occup ation are treated asbudget expenditure, but the clearing is directly financed by the Bank of Issueoutside the budget; in Denmark, both payments to the occupying authoritiesand the financing of the clearing are made directly by the Nationalbankoutside the budget. Clearly, the payment of occupa tion costs and the pre-

payment of clearing claims in national currency (under government guarantee)are, from a monetary point of view, to be assimilated to budget expenditure.The propo rtions raised, for example, by taxation or by drawing on central-bankcredit have a certain significance if applied to the total of official financingundertaken, but not if compared only with ordinary budget expenditure (excludingoccupation costs and the clearing ). Alth ou gh information is not complete and ,in some cases, only fragmentary, yet this principle of uniformity has been ob-served as far as possible in the presentation of statistics in the following pages.

In Fr an ce the b u dg e ta ry p o s it io n in 1942 was dominated by expenditureresulting from the armistice. The monthly Treasury returns, resumed in 1942 afterhaving been suspended since August 1939, show total outlay of Fr.fcs 305% mil-liard in the year, of which Fr.fcs 157% milliard, over one-half, was due to expenseson account of the armistice. To these figures must be added the receipts •and expenditure of the Caisse autonome d'amortissement (which covers thedebt service out of special fiscal revenue), balancing at ap proximatelyFr.fcs 10 milliard (net). Ac tua lly, part of the occu pation costs paid in 1941were utilised only in 1942 and, if account be taken of this fact, the total paidout comes to F r.fcs 353% milliard (again st Fr.fcs 246 milliard in 1941). Tax ationand other current revenue covered 33.6 per cent, of total outlay, includingthat of the Caisse d 'am ortisse m ent, but only 29.2 per cent, if the delayedutilisation of occupation costs be taken into accou nt.



— 193 —

Revenue from taxation increased in 1942; complete returns for the year showreceipts of Fr.fcs 79 milliard aga inst Fr.fcs 64 milliard in 1941. For 1943 high er

rates of taxation have been introduced and estimates were some Fr.fcs 22 mil-liard higher than thos e made for 1942. Budget expend iture proper in 1942, on theother han d, was some Fr.fcs 5% mil l iard below the estimates. A s a result ofthese developm ents, the actual budget deficit in 1942 at Fr.fcs 37 milliard wasabout F r.fcs 20 milliard lower than was forese en. But this d eficit was lessthan one-fifth of the total amount to be financed by credit operations.

F r e n c h B u d g e t a n d T r e a s u r y E xpen diture in c o n n e c t i o nA c c o u n t s « . w i t h t h e a r m i s t i c e as show n

by the Treas ury returns (ex-c luding, e.g., expenses borneby the railways and the P.T.T.)

rose from Fr.fcs 142 milliardin 1941 to Fr.fcs 157y2 milliardin 1942 and for 1943 a totalas high as Fr.f cs 260 milliardseems probable. In point offact, the real increase in armis-tice expenditure from 1941 to1942 was still higher, a largerproportion of the provision forcosts of occupation havingbeen utilised (see table on

page 195), and this remainedthe dominating factor in theFrench Treasury position and,indeed, in the country's mone-tary situation also.

(') Realised results for 1941 and 1942; estimates for 1943.(2) In August 1943 supplementary credits of Fr.fcs 4.7 milliard were approved, largely for government subsidies

to stabilising prices; revenue estimates were also raised by Fr.fcs 2.1 milliard. For the firstith a view ._ . , . . ...nine months of the year budget expenditure amounted to Fr.fcs 96.5 milliard, while taxation and otherrevenue was Fr.fcs 84.7 milliard; the costs of occupation were Fr.fcs 162.6 milliard and the German clearingdeficit Fr.fcs 40.0 milliard.

(3) Ordinary and extraordinary together for 1941 and 1942. For 1943 the distinction was abolished. These figuresdo not include the Caisse autonome d'amortissement.

(4) For 1941, the daily rate of payment to the German authorities at Fr.fcs 400 million a day up to 10th Mayand Fr.fcs 300 million thenceforth would have given Fr.fcs 122% milliard ; other expenses such as the costof billeting raised the total to Fr.fcs 130 milliard. For 1942, the total at the rate of Fr.fcs 300 million dailywould have been Fr.fcs 109% milliard; other charges increased this total to Fr.fcs 123% milliard, as given

in the Treasury return, to which Fr.fcs 1 milliard, the net outlay for requisitions for account of the Germanauthorities, has been added. These figures include also the payments to Italy, which were, however, on acomparatively small stìale; for 1942, they might be estimated at Fr.fcs 2.1 milliard. By law of 9th February 1943a new Treasury account was opened to which were booked advances made by the French Governmentto meet the expenses of the Italian troops In France. For 1943 the rate of payments to Germany has beenincreased to Fr.fcs 500 million a day, less Fr.fcs 200 million a month but plus a total of Fr.fcs 10 milliardin respect of the retroactive application of the rate of Fr.fcs 500 million from 11th November 1942. Thisgives a total of Fr.fcs 190 milliard, to which must be added billeting costs and the new account forpayments to Italy, together makng a supplementary amount of at least Fr.fcs 20 milliard.

(5) Advances by the Treasury to the French clearing office to finance the deficit on the Franco-German clearing.(») Owing to the building-up of the Reichskreditkassen account in 1941 and its withdrawal in 1942, a more

realistic picture is given by taking the utilisation of occupation costs rather than their payment. Takingthe utilisation at Fr.fcs 101 % milliard In 1941 and Fr.fcs 157 milliard in 1942 plus actual billeting costsand requisitions, given under 0) above, these net credit financing figures are obtained.

(?) Taking account of the uti lisation of occupation costs by the German authorities as under (6) and notmerely the date of formal payment.

(8) Including, for 1942, drawing on the Treasury's accounts for Fr.fcs 3% milliard and some Fr.fcs 6 milliardin suspense (partly due to operations with overseas territories cut off from the "métropole").

Calendar year

Expenditure - budget(3) . . . .armistice:

occupation costs (!)

German deficit on clearingOTreasury advances and sundry

Total Treasury outlayTaxation and other ordinary

Total Treasury credit financing

Net credit financing (6) . . . .

Borrowing from Bank of France

netOOther sources - totalof which

long-term borrowing . . . .short-term borrowing. . . .

1941 1942 1943(2)

in milliards of Fr.fcs122

13012

2266

79

187

167

71

51116

1%89%25

133

124%33

15305%

96

209%

257%

68

116141%

16%11312

144

21050

15419

102

317

317

•



- 194 -

In 1942 the total Treasu ry expenses not covered by ordinary revenueamo unted to nearly Fr.fcs 210 milliard , but actual borrow ing brough t in slightlyunder Fr.fcs 200 mil l iard. The m ovement of the p u b li c d eb t since the waris shown in the follow ing table . In the total debt, which has risen to nearlythree times its pre-war level, the proportion at long term has fallen fromover two-thirds to under one-third and the short-term debt has risencorrespondingly.

L o n g -t e rm is su e s of the government and publ ic bodies since thearmistice have been very largely for purposes of con vers ion; these conversionshave covered about Fr.fcs 100 milliard of old loans and brought th e effectiveyields down to a little over 3% per cent. In January 1943 it was possiblefor the Caisse autonom e to make a conversion of old issues into 3% per cent,bonds at par.

M id d l e and sh o r t - t er m is su es , Treasury b i ll s , 4-year sav ings bondsand advances from the Bank of France accounted for about 90 per cent,of the increase of the total public debt in 1942. The most important inno-

vation in govern-F re n ch Pu b l i c D e b t« o u ts ta n d i n g . m en t b or ro win g w as

the introduction of3 per cent. 4-yearsa v i n g s b o n d s i nMay 1942 in deno-minations up to onemill ion francs; in-terest for the first

two years was paidby deduction fromthe issue price andforthelasttwo yearsby premium on re-demption. Prior re-demption might beobtained on certaindefined conditions,which were laterwidened. Savings

bonds were issued at an average rate of ab out Fr.fcs 1 milliard a month and

by March 1943 some Fr.fcs 10 milliard were outstanding. (In February 1943 a lawwas passed making it com pulsory to depos it with the Treasury "reserve s for therenewal of sto ck s" . The system thus introduced differed sl ightly from the Germansystem of "business-investment" and "commodity-stocks-replenishment" deposi ts,the reserves being established at a bank and not directly with the Treasury.They bear interest at 2% per cent., the rate for one-year Treasury bonds).

The or d i na ry ad va nc es by th e Bank o f F ranc e to the government fe llby Fr.fcs 1 % mill iard during 1942, but the s p e c ia l ad va nc es to meet thecosts of occu pation rose by Fr.fc s 68% milliard . The extent to w hich the

At end of month

Long term :fundedredeemable . . . .

Middle andshort term :Treasury bills etc.

Bank of France. .

Total . . .

August1939

Dec.1941 O

Dec.1942

Move-ment In

1942Sept.1943

Move-ment in

ninemonthsof 1943

in milliards of Fr.fcs

55248

10736

446

55278

321227

881

44306

421295

1,066

— 11+ 28

+ 1OO+ 6S(3)

+ 185 m

44344

485382

1,255

+ 38

+ 64+ 87(3)

+ 789(«)

(') Including the Caisse autonome d'amortissement.O Figures published for 1st January 1942.(3) This Item actually covers all banks of issue (Including those of the colonies)

but is, of course, almost entirely concerned with the Bank of France. Accordingto the end-of-year returns, the advances made by the Bank of France rose byFr.fcs B7'/i milliard In 1942.

(4) Not all fluctuations are due to cash disbursements or receipts ; certain factors,such as conversions, fluctuations of exchange rates etc., play a part. In 1942these factors led to a reduction of Fr.fcs 12 milliard, so that total receiptsfrom borrowing were Fr.fcs 197 milliard.



- 195 -

c o s t s o f o c c u p a t i o n have been met by d irec t bo rrow ing f rom the Bankof France is shown in the following table.

F r a n c e — P a y m e n t o f O c c u p a t i o n C o s t s a n d o t h e r e x p e n s e si n c o n n e c t i o n w i t h t h e a r m i s t i c e ^ .

In milliards of Fr.fcs

Total expenditurein connection with the armistice(')

Totalexpenditure

Covered byspecial

advancesof Bank

of FranceTreasury

bills

Of which occupation costsproperly so called

Totalpayments

CO

Of these paymentsamountsutilised

by Germanauthorities

movement ofaccount of

Reichs-kreditkassen

1940 (6)1941 (? )

1942 (

7

)Totals . . .1943 (Jan .-Sept.) . . . (« )

Totals . . .

80.0142.0

157.5

80.761.8

68.5

(— 0.7)80.2

89.0

80.0121.5109.5

35.2101.7157.2

+ 44.8-+ 19.8

( - 47.7)379.5202.6

211.084.8

168.5117.8

311.0144.4

294.1145.8

+ 16.9(— 1.4)

582.1 295.8 286.3 455.4 439.9 + 15.50) The total of occupation, billeting costs etc., plus the financing of the surplus of exports to Germany (as

shown In the budget accounts).(2) Assuming payments at the daily rates given in footnote 0) to the table on page 193, such payments being

made ten days In advance.(3) Actually utilised for payments or for the accumulation of a stock of notes of the Bank of France.(4) Funds were accumulated on the account of the Reichskreditkassen at the Bank of France in 1940 and 1941

(+), but were drawn down in 1942 (—).(5) Period 25th June 1940 to 2nd January 1941. (6) Period from 3rd January 1941 to 31st December 1941.0 Calendar year to 31st December 1942. (8) 1st January to 30th September 1943.

Up to the end of September 1943 the amounts paid totalled Fr.fcs 582 mil-

l iard, the equivalent of RM 29 m illiard, 50.8 per ce nt, of which w as coveredby advances from the Bank of France and 49.2 per cent, by short-term Treasuryloans.

As regards the costs of occupation properly so called, paid to the accountof the Reichskreditkassen at the Bank of France, whereas in 1940 only aboutone-half and in 1941 four-fifths of the amount credited was actually utilised,in 1942 nearly Fr.fcs 50 milliard of the accum ulated balance was with draw n,in addition to the Fr.fcs 109% milliard received during the year. With theincrease of the French payments to Fr.fcs 500 million a day as from11th November 1942, the am ounts utilised by the oc cupy ing autho rities cor-responded approximately to those currently credited, so that the account of

the R eichskreditkassen remained fairly stable between Fr.fcs 7 and 16 milliardin the first three quarters of 1943.

It was in May 1942 that the expenses of the occup ying autho rities beganto exceed considerably the daily payments to the account of the Reichskredit-kassen. This increase appears to have coincided with the commencement ofextensive works by German organisations (the Todt organisation, etc.) andwith big armament orders (in the sum mer, the fig ure Fr.fcs 100 milliard wasmentioned semi-official ly in this connection), while at the same time theoccupying authorities were, no doubt, accumulating larger reserves of notes.



— 196 —

Account of Reichskreditkassen at Bank of Francein milliards of Fr.fcs.

1941 1942 19«

Amount credited per day to account of Reichskreditkassenand moving average of daily amount drawnin millions of Fr.fcs.

Thus it is notthe official dates and

amounts of paymentsas shown by Treasurystatistics but the ac-tual time and methodof u t i l i s a t i o n ofthe proceeds by theGerman authoritieswhich have set thepace of the monetaryexpansion. The fourphases are illustratedin the table on the

opposite page.

Except for thefirst phase, for whichthe increase of thenote circulation cannotbe measured exactly(as the publicationof returns by theBank of France wassuspended from 10thJune) and during

which other credititems were important(especially the ordi-nary advances to theTreasury), the notecirculation has risenalmost exactly parallelwith the financing of

the utilisation of occupation costs through the Bank of France. In the secondphase of twelve months to 30th Ap ri l 1942, the average m o n th ly amount with-drawn by the occupying authorities was Fr.fcs 9.0 milliard: Fr.fcs 4.2 milliard

was covered from the Treasury bill issue and Fr.fcs 4.8 milliard from the Bankof F rance; the note circu lation rose by F r.fcs 4.9 milliard a mo nth . In the thirdphase of eight months to 31st December 1942, the average monthly amou ntutilised was Fr.fcs 14.5 milliard: only Fr.fcs 3.2 milliard was covered from theTreasu ry bill issue and Fr.fcs 11.4 milliard from the Bank of France; the notecircula tion rose by Fr.fcs 11.4 milliard m onthly. T hus th e occupy ing authoritiesutilised Fr.fcs 5% milliard more a month from May 1942 but F r.fcs 1 milliardless was raised by Treasury bills, so that Fr.fcs 6% milliard more was drawnfrom the Bank of France and the note issue rose by nearly Fr.fcs 1 1 % mil-liard a month in M ay-Decem ber 1942, instead of by less than Fr.fcs 5 milliard

600

500

300

ZOO

100

-

-

-

1 1 1 1 1 1

Amoun dr113 weeks

r

i I I i i I i i I i i

l\ A i(l

awn daily W \ A /verages) /

J VAmoun credted day

-

-

-

600

500

400

300

200

100

1940 1941 1942 1943

Note. The account of the Reichskreditkassen has been taken from the weeklyreturn of the Bank of France. The average daily amount drawn has beencalculated by comparing the sums credited with the weekly movement ofthe account.



- 197 -

F r a n ce — U t i l i s a t i o n a n d f i n a n c i n g o f O c c u p a t i o n C o s t s .

Phases in theuti l isation

of occupation costs

Daily average credited . .,, ,, withdrawn .,, „ of excess .

Total amounts credited .,, „ withdrawn

Excess of credits (+)

Of amounts withdrawn:Financed by Treasury bill

Financed from Bank of France :increase of special advances

movement of Reichskredit-kassen account (

5) . . .

Total . . .

Increase of note circulation .

Monthly averages:

Financed by Treasury bill

issueFinanced by Bank of France

Increase of note circulation .

First phase

25th June 1940to

30th April 1941

310 days

Second phase

1st May 1941to

30th April 1942

365 days

Third phase

1st May 1942.to

31st Dec. 1942

245 days

Fourth phase

1st Januaryto

30th Sept. 1943

273 days

Total period

25th June 1940to

30th Sept. 1943

1,193 daysIn millions of Fr.fcs

413 0)226

+ 187

300295

+ 5

300475

— 175

529 (?)534

— 5

382369

+ 13

in milliards of Fr.fcs128.0(3)70.1

+ 57.9

24.3

103.7

— 57.945.8

57.9 (?)

109.5107.7

+ 1.8

50.3

59.2

— 1.857.4

59.3

73.5116.3

— 42.8

25.4

48.1

+ 42.890.9

91.1

144.4 0145.8

— 1.4

59.5

84.8

+ 1.486.2

85.2

455.4«439.9

+ 15.5

159.6

295.8

— 15.4280.4

293.5 TO

in milliards of Fr.fcs

6.9

2.44.5

5.7 0

9.0

4.24.8

4.9

14.5

3.211.4

11.4

16.2

6.69.6

9.5

11.1

4.07.1

7.4 (6)

(1) Payments were made at the rate of Fr.fcs 400 million a day during this phase but the average amountcredited slightly exceeds this figure owing to payment ten days In advance.

(2) Payments were made at a daily rate of Fr.fcs 500 million from 1st January 1943 plus a part of the retroactivepayment as from 11th November 1942. See footnote 0) on page 193.

(3) Including Fr.fcs 4 milliard paid in advance up to 10th May 1941.(4) Including Fr.fcs 5 milliard paid In advance up to 10th October 1943.(5) Accumulation of funds on the account (—) or excess of withdrawals (+ ). (6) From 10th June 1940.

as was previously the case. In the firs t nine m onths of the fou rthphase, which opened a t the b eginning of 1943, the average monthly amo untutilised increased to Fr.fcs 16.2 milliard: Fr.fcs 6.6 milliard was covered from

the Treasury bill issue and Fr.fcs 9.6 milliard from the Bank of France; thenote circulation rose by Fr.fcs 9.5 milliard a month.

The increased expenses of the occupying authorities and the consequentwithdrawal of the balance of the Reichskreditkassen, without any corres pond-ingly increased issue of Treasury bills in the last eight months of 1942,led directly to an expansion of the note issue at more than double theprevious rate. Commenting on this situation, the annual report of the Bank ofFrance for 1942 says: "The bank fully realises the weight of the financial chargesimposed on France, which risk the frustration of al l efforts at recovery".



- 198 -

The stagnation of the business of the B an k of F ra nc e, except forthe drawings on account of occupation costs and the rise of the note cir-culat ion, is shown by the bank's return.

Bank o f France .

Near end of month

Assets

Gold

Temporaryadvances to govt

ordinary special

Othercredititems

Totalof

balancesheet

Liabil i ties

NotesCurrent accounts

Treasury private RKKassen

In milliards of Fr.fcs1939 August . .

December1940 December1941 December1942 March . .



9797

858585858585858585

2135646966626868667070

—72

143159178187211236261296

2717161515151718171717

166171292365375392409435460486522

142151218270286309340383410434468

32121111111

1815272529303330353133

41

6558493217111515

(1) Excluding tne permanent advance of Fr.fcs 10 milliard, unchanged throughout the period.(2) Special advances to the French Government to meet the costs of occupation; the legal limit for these

advances was successively raised to Fr.fcs 321 milliard on 30th September 1943.(3) Bills discounted, 30-day and other advances and bills purchased on the market.« Including the account of the Caisse autonome d'amortissement. (5) Including other sight liabilities.

Gold has remained booked at Fr.fcs 85 m illiard ; the ordinary ad-vances to the governme nt have fluctuated som ewhat below the maximum

of Fr.fcs 70 milliard fixed in June 1940. Developments in North Africa ledto a certain liveliness

Fr en ch Ban k D e p o s i t s . o f cred it in the f i rs thalf of November 1942:as a result of with-drawals of depositsfrom the banks, theBank of France cameunder some pressure,and the total of the"other credi t i tems"

rose from Fr.fcs17

mil-liard on 29th Octoberto Fr.fcs 22 milliardon 12th November;but the emergencywas soon over andby the middle ofDecember the formerposition was re-estab-l ished.

At end of quarter

1941 December (3) . . .1942 March

June .September . . . .December . . . .

1943 MarchSeptember . . . .

Paris banksBig

banks(six)

Banquesd'affaires

(two)

Otherbanks(six) 0)

Provin-cial

banks(ten)

Total 24im-

portantdomesticbanks (

2)

In milliards of Fr.fcs96.498.7

105.1112.1114.9

120.5127.2131.0

8.08.89.49.5

10.9

10.511.8

11.912.212.613.814.7

14.4C)

16.617.718.620.121.2

23.5

132.9137.3«145.7155.5161.8

• m176.9

0) Five banks only on 30th June 1943, a small bank whose deposits haddeclined to Fr.fcs 320 million at the end of 1942 being excluded.

(2) Further, amongst the large banks were four foreign banks with depositsof Fr.fcs 5 milliard at the end of 1942 and one colonial bank with depositsamounting to about Fr.fcs 1 milliard. Amongst the foreign banks themost important was the Aero Bank, under German control, which IncreasedIts deposits from Fr.fcs 1.1 milliard on 30th June 1942 to Fr.fcs 3.0 milliardon 30th June 1943.

(3) The figures given for December 1941 are those established accordingto the old form and are not exactly comparable with those for 1942.

(«) The aggregate deposits of 181 domestic and foreign banks amounted toFr.fcs 155.7 milliard on 31st March 1942 and to Fr.fcs 200.2 milliard on31st March 1943.



— 199 —

The new banking law of 13th June 1941 obl iged al l jo in t - s t o c k ba nk soperating in France to publish balance sheets of a uniform pattern from31st March 1942, banks w ith Fr.fcs 500 million depo sits or more (of which thereare 31) mon thly, and sm aller banks (some 150) quarterly. The agg regatedepo sits of the tw enty-fou r banks show n in the previous table rose byFr.fcs 29 milliard in 1942, i.e. by 22 per cent, (for all com me rcial banks in thecountry the increase was Fr.fcs 44% milliard in the twelve months to March1943, i .e . by 28 per cent.). The m ovement gathered m omentum in the thirdquarter, when the increase was nearly Fr.fcs 10 milliard for the twenty-fourbanks, but slowe d down to Fr.fcs 6 milliard in the last quarter.

For the sake of continuity with the twelfth Annual Report the accom-panying table summarises the balance sheets of fo u r b i g b a n k s with headoffices in P aris. The increase of depo sits at these banks was Fr.fcs 14.5 m il-

liard in 1942 com paredwith Fr.fcs 14.7 milliard in1941 and Fr.fcs 19.9 mil-liard in 1940; proportion-ately, the inerease tn 1942at 19 per cent, was ratherless than that of the totalfor all banks, but it appearsthat the rate of increaseof commercial-bank de-posits in France declinedas the rise of the note

circulation accelerated.In November 1942 someFr.fcs 2% mil l iard depositswere withdrawn from thefour banks shown in thetable (and a similar amountof Treasury bil ls discount-ed or allowed to run off).

F ra n ce —r e t u r n s o f f o u r b i g c o m m e r c i a l b a n k s « .

At end of month

1938 December1939 December1940 December1941 December1942 March . .

June. . .SeptemberDecember1943 March . .

June . . .September

Assets

Cash Discounts(2)

Advancesand

overdrafts

L iab i l i -ties

Depositsand currentaccounts

In milliards of Fr.fcs3.94.96.46.97.2

6.96.98.87.77.57.8

21.329.346.161.662.5

68.173.172.973.879.484.2

7.7e.i8.68.59.7

10.210.210.69.69.38.9

33.642.162.076.778.8

84.489.591.296.3

102.0104.8

0) Crédit Lyonnais, Comptoir National d'Escompte, Société Généraleand Crédit Industriel et Commercial. These four banks accountfor 57 per cent, of the total deposits shown in the previous tableand about 51 per cent, of those of the 181 reporting banks.

O In the discount portfolios of the banks, Treasury bills now pre-ponderate.

Three large banks have recently taken steps to bring their capital moreinto line with their increased deposit liabilities: in the third quarter of 1942

the Société G énérale raised its pa id-up ca pital from Fr.fcs 312% million t oFr.fcs 750 million (and its "a ut ho ris ed " capital to Fr.fcs 1,500 million) and th eBanque Nationale pour le Comm erce et l'Indus trie (not included in the table)from Fr.fcs 350 million to Fr.fcs 525 m illio n; in Janu ary 1943 the Crédit Lyonnaistook powers t o increase its capital fro m Fr.fcs 400 million to Fr.fcs 1,000 millio n.Even with these increases the proportion of capital (and reserves) to depositsremained relatively low.

In 1941 the increase of the T reasury bill po rtfolio ran parallel to therise of depo sits but in 1942 the cash reserve was streng thened (in the last



- 200 -

F ra n ce —m o v e m e n t of s a v i n g s - b a n k d e p o s i t s . *

quarter) while there was some revival of advances and overdrafts (particularlyin th e fir st quarter). If these fou r banks can be regarded as typ ical, then itappears that the comm ercial banks took up only Fr.fcs 23 milliard Treasury bills

in 1942 against about Fr.fcs 31 milliard in 1941. Time deposits at these banksaccou nted for less than one per cen t, of all deposits and their holdings oflong-term government securities were negligible.

In these circumstances the growth of sa vi n gs d e p o si ts became ofeven greater im portanc e. The table show s that the rising ten dency in recentyears was sharply accentuated at the beginning of 1943, when the maximumallowable for individual deposits was raised.

In 1942, as a whole,the increase of deposits atFr.fcs 13.8 milliard was morethan twice as high as in

the previous year. But eventhis relatively large figurewas only 43 per cent, ofthe increase in commercial-bank deposits and 12 percent, of the rise in the notecirculat ion. Nevertheless, thepresent expansion of sav-ings-bank deposits, whichhas been attributed to theagricultural section of thecommunity, is a very signifi-cant change of trend. From

1938 to the middle of 1941 comm ercial-bank depos its more tha n d oub led, whilesavings d eposits roae by only 14 per cent. In 1942 both comm ercial-bank andsavings depo sits increased by around 20 per cent.

For 1942 the m aximum for savings depos its on an individual accou ntwas raised fr om Fr.fcs 20,000 to Fr.fcs 25,000. The basic interes t rate wasreduced f rom 2% per c ent, in 1940 to 2% per ce nt, in 1941; in 1942 this ratewas further reduced to 2% per cent., but an additional % per cent, was paidon those "stable" deposits showing withdrawals of less than Fr.fcs 8,000 duringthe year (making 2 % per cent, in all). From January 1943 the basic rate was

furthe r reduced to 1 % per cent., but an additiona l % per cent, was paid on" s t ab le " deposits, which would thus get 2% per cent. At the same time themaximum deposit was raised to Fr.fcs 40,000 (and the withdrawals permitted on" s t ab le " dep osits to Fr.fcs 10,000).

A feature of the last three years has been the rapid expansion of the postalgiro system. Deposits on private accounts, which were only Fr.fcs 4.0 milliard inAugust 1939, grew to Fr.fcs 13.7 milliard in December 1941 and Fr.fcs 18.8 milliardin December 1942. A factor in the recent growth has doubtless been the lawmaking certain payments by cheque obligatory.

In milliards of Fr.fcs

1940 January-December . . . .19411942 „1942 January-March

April-June

October-December. . . .

April-JuneTotal deposits outstanding

at end of 1942

CaisseNationale

+ O.6+ 3.3+ 6.6+ 1.9+ 1.4+ 1.4+ 2.0+ 3.8+ 2.9

38.4

Caissesordinaires

— 0.6+ 3.5+ 7.2+ 2.5+ 1.3+ 1.3+ 2.2+ 5.3+ 3.0

52.0

Total

0.0+ 6.7+ 13.8+ 4.4+ 2.6+ 2.6+ 4.1+ 9.1+ 5.9

90.3

• Excess of deposits (+) or withdrawals (—).



- 201

Fra n ce — In te re s t R a te s .

Annual averages

19381939194019411942

Rente3 pour centperpétuelle

4.023.954.063.193.14

Bonds

onmarket

6.104.974.793.403.08

newissues

0//o

6.935.715.914.503.73

Shareyields

To4.294.263.991.941.22

Bankof Francediscount

2.702.002.001.801.75

Treasurybills of1 year

3.132.753.002.512.25

There was a further tendency for i n t e re s t ra te s to fal l in 1942. Besidesthe movement of savings-bank rates mentioned above, the rate for two-yearTreasuy bills was reduced by % per cent, to 2% per cent, in May 1942. Thediscou nt rate of the Bank of France remained at 1 % per cent., to wh ich it was

reduced in March 1941. The above table, giving the annual averages of certain ratesand yields, shows how considerable has been the general reduction since 1938.

B e l g i u m — I n B e l g i u m t h eta x a t i o n a n d o f fTci at c r ed i t f i h an c i n g . closed budget accounts

for 1942 (and completeestimates for 1943) havenot been published, butregular statistics of taxa-tion and of the govern-ment debt are availableand from these a fairpicture of developmentscan be obtained.

The total of taxa-t i o n a n d b o r r o w i n g(including the financingof the clearing withGermany) at B.fcs 53 mil-liard in 1942 was fo urtimes as high as in 1939(when it was B.fcs 12% mil-l iard); in 1943 a total ofB.fcs 64 milliard appearsprobable (on the resultsfor the first nine months).

0) From the return of the Bank of Issue. •(2) The increase of the public debt held by the National Bank and Bank of Issue according to the special quarterly

statement (including open-market purchases). The figures do not agree exactly with those given in a later tableof the weekly returns of the two banks, since these returns do not necessarily fall at the end of the month.

(3) The Increase of the total debt less the amounts under p).(4) The exceptional prolongation, to the end of April 1943, of the period for the accounting of 1942 receipts

raised the total to B.fcs 14.4 milliard.(5) These are closed budget accounts for 1940 and 1941 and estimated figures for 1942 and for the firstnine months of 1943.(6) This total is, of course, somewhat higher than the total of taxation and borrowing, as the latter excludes

current revenue other than taxation and certain other Treasury accounts.

Calendar years

Financed:from central bank

clearing account (1) . . . .direct borrowing («) . . . .

Totalfrom market - long term

Total CTTotal official credit financingTaxation revenueTotal receipts from taxation

and borrowing

Occupation costs (6)

Clearing account

Total expenditure^)

Percentage of total taxation andborrowing financed by:central-bank creditmarket borrowingtaxation

1940 1941 19421943nine

monthsin milliards of B.fcs

3.26.1

9.30.5

5.66.1

15.48.2

23.6

4.53.2

16.924.6

39.425.834.8

8.55.8

14.33.55.44.7

13.627.912.3

40.2

16.38.5

20.345.1

35.633.a30.6

18.53.2

21.7(-0.1)10.17.3

17.339.013.8(«)

52.8

18.518.521.058.0

41.132.826.1

17.9(-̂ .2)

13.82.34.4

16.022.736.511.2

47.7

15.017.917.150.0

28.947.623.5



— 202 —

B e l g i a n I n t e r n a l P u b l i c D e b t o u t s t a n d i n g ^(and guarantee).

The percentage covered by taxation has fallen throughout the period shown inthe table, while market borrowing has risen. Expenditure in connection with the

armistice (occupation costs and clearing financing) accounted for over one-halfof the total official outlay in 1941 and nearly two-thirds in 1942 and 1943.

The Belg ian in te rn a l p ub l ic de bt more than doubled f rom 1939 to1942 and by September 1943 reached B.fcs 111 milliard, excluding B.fcs 3 milliarddue to holders of postal cheque accounts and the gove rnmen t's g uarantee onthe National Bank's advance of B.fcs 44% milliard to the Issue Bank (to financethe clearing with Germany).

The bulk of thepublic financing since1939 has been at shortte rm, but in 1942 middle-term securities became

of increasing importance.A 3% per cent. 5 to15-year issue was madeat par in June 1942and produced B.fcs 4.4milliard; these certif i-cates were repayable at101 in 5 years, at 107in 10 years and at 115in 15 years, and thushad a yield rising from3.7 to 4.2 and to 4.5 percent., according to ma-turity; a second tranche

End of quarter




Government debt

Longterm

P)

MiddletermP)

Shortterm(4)

Total(6)

Govern-ment

guaranteetoNationalBank

(6)in milliards of B.fcs

35.236.139.5 (')39.439.339.238.938.942.542.3

O.70.76.87.4

10.713.016.818.720.521.2

4.415.725.730.532.635.836.740.641.247.5

40.352.571.977.382.688.092.498.2

104.2111.0

1.510.611.915.119.726.933.038.544.5

C) Excluding the sight debt of B.fcs 3.1 milliard on account of depositsof the postal cheque system. 0 Of over five years' maturity.(3) One to five years' maturity. (") Under one year's maturity.

(5) There is, In addition to the Internal debt, foreign debt shown asB.fcs 17.0 milliard in September 1943.

(6) On account of advance to the Bank of Issue, which finances theclearing with Germany.

(7) B.fcs 1.3 milliard of the increase of the Internal long-term debt in 1941was due to a conversion of foreign debt.

of the same certificatesissued in December 1942brought in B.fcs 5.2 mil-

from an issue of 3% perthe government of over

Hard. In April 1943, B.fcs 3.6 milliard were obtaine dcen t, tax-free 44-year bond s at 94. Deliveries t oB.fcs 75,000 and to the German military authorities are paid by means of3% per cent. 5-year certificates and these are included in the debt state-ment (for an amount estimated at B.fcs 1 to 2 milliard in the middle of 1942).

The short-term debt is almost wholly in the form of Treasury bills with

a maximum of 120 days to run. At the end of 1942, B.fcs 18.4 milliard, orone-half, was held by the central bank: but the proportion taken by the centralbank decline d; and in the first nine months of 1943 its holding of governmentsecurities actually fell by B.fcs 2.4 milliard. To appreciate the full extensionof c e n tr a l- b a n k credit , however, i t is necessary to take the clearing intoaccount, as is done in the next table.

In 1942 B.fcs 3.6 milliard was lent directly to the governmen t, b ut thefinancing of the clearing and similar accounts demanded B.fcs 18.5 milliard,making the total of credit granted on official accou nt B.fcs 22.1 milliard, com-



— 203 —

B e l g i u m N a t i o n a l Ba n k a n d Ba n k o f I s su e co m b i n e d re tu rn s ( 1 ) .

Near end of month

1940 December1941 December1942 March . .



AssetsClaims on Germany

clearingaccount other

P)total

Credit grantedto

govern-o

private

economy ment

Totalof

balancesheet

Liabilit ies

NotesCurrentaccounts

Postalcheque

accounts

In milliards of B.fcs

0.97.9

10.213.618.224.731.436.842.9

2.33.83.94.75.75.55.35.35.2

3.211.714.118.323.930.236.742.148.1

1.30.90.80.50.40.70.50.40.6

14.019.622.323.023.323.219.117.720.8

41.755.560.465.170.877.679.983.993.4

34.848.552.556.762.467.970.674.580.7

2.62.32.93.53.44.53.83.74.5

3.43.73.83.83.84.04.24.36.6

0) The principal items omitted from this table are the gold holding of the National Bank, which has remainedbooked at B.fcs 21.7 milliard (all but B.fcs 8 million of which Is held abroad), and claims of slightly overB.fcs 1 milliard on the Bank of France. The Bank of Issue is financed by a current advance from theNational Bank, of which it thus forms, In practice, a specialised department. This advance rose fromB.fcs 10.7 milliard to B.fcs 26.9 milliard during 1942 and, further, to B.fcs 44.5 milliard in September 1943.

(2) Bank of Issue, "créance en devises étrangères" and, from February 1943, Treasury certificates allocatedfor payments through the clearing.

F) Bank of Issue, two accòuhts of Reichskreditkassen plus "monnaies et billets étrangers" at National Bank(until December 1942 and then transferred to Bank of Issue).

(4) Almost wholly by National Bank.(5) All from National Bank (including securities purchased on the market) except B.fcs 3,060 million (unchanged)

held by Bank of Issue against postal cheque accounts. Treasury certificates allocated for payments throughthe clearing are excluded — see (2) above. -

(6) Circulation of National Bank, less small amounts held by Issue Bank.(') National Bank and Bank of Issue combined. At the Bank of Issue is an account of the Reichskreditkassen

(B.fcs 231 million on 31st December 1942 against B.fcs 186 million on 31st December 1941).(8) At Bank of Issue.pared with B.fcs 14.1 milliard in 1941; the rise in the note issue wa s almost

parallel — by B.fcs 19.4 milliard in 1942 aga inst B.fcs 13.7 milliard in 1941. Andin the first nine months of 1943 the clearing account rose by a furtherB.fcs 18 milliard.

B e l g i a n C o m m e r c i a l B a n k s « .

At end of month

1939 December1941 December1942 March

SeptemberDecember

1943 March

September . . . .

Assets

Cash

(2)

Credit granted

to privateeconomy

(3)

to goveTreasury

bills

rnmentlong-termsecurities

Totalbalancesheet

Liabil i ties

Currentaccounts

m

Timedeposits

(5)In milliards of B.fcs

1.52.22.21.40.80.82.32.20.91.1

9.07.35.85.75.86.06.56.36.25.7

0.74.39.411.213.316.015.820.723.528.6

3.23.33.93.93.93.83.74.03.93.4

20.022.126.427.228.932.133.538.540.044.2

11.514.818.619.320.522.523.027.127.731.4

1.21.22.22.32.93.64.55.36.06.6

0) Excluding branches and agencies abroad or in Belgian Congo.(2) Including balance at National Bank, shown under "current accounts"(3) Including advances and overdrafts, commercial bills and acceptances.(4) At sight or one month's notice. (5) At more than one month.

in previous table.



— 204 —

The Treasury bi ll holding of the co m m e rc ia l ba nk s rose by B.fcs 6.4 mil-liard in 1942 against B.fcs 5.1 milliard in 1941 (and accou nted for th e bulkof the short-term government securities taken by the market), while long-termgovernment securities declined slightly. In the first nine m onths of 1943 thebanks took up nearly B.fcs 13 milliard Treasury bills, a fact which sheds lighton the decline of direct government borrowing from the National Bank. The year1942 witnessed a reversal of the long-term tendency of s a v in g s -b a n k d e -p o s it s to decline — the s urplus of de posits in 1942 was the firs t since 1937;at the end of 1942 the total of savings-bank deposits was B.fcs 12.8 milliard.

B e l g i u m — m o v e m e n t o fs a v i n g s - b a n k d e p o s i t s * .

Period

1939 January-December . . . .1940 „1941 „ „ . . . .1942

October-December . . . .

April-JuneJuly-September

Total deposits o utstandingat end of 1942

In millionsof B.fcs

— 1,052— 747— 233+ 841+ 175+ 171+ 181+ 314+ 716+ 536+ 681

12,803

Excess of deposits (+) or withdrawals (—)at the Caisse Générale d'Epargne (excludinginterest added at end of year).

Posta l cheque accounts a lso grewin 1942 by about B.fcs 0.8 milliard toB.fcs 5.7 milliard, rather less than in theprevious two yea rs; the postal giro hasgreatly extended since the war and thevolume of accounts has doubled fromth e B.fcs 2.9 milliard shown at the endof 1939.

Short-term market rates remainedpractically unchanged; bank rate has beenat 2 per cent, since January 1940. Theyield òf the government 3 per cent, rentefell from an average of 4.4 per cent, in1940 to 3.7 per cent, in 1941 and 3.5 percent, in 1942, and the decline continuedin the early months of 1943.

B e l g i u m —Ba n k o f I s su e i n B ru sse l s .

From 28th February 1943 the Bank of Issue applied a new proce dure tothe payment of creditors in the clearing. Instead of prepayment in full andin cash, payments for merchandise and services of over B.fcs 10,000 tookplace as to 70 per cent, in cash and 30 per cent, in nominative non-trans ferablecertificates of the Bank of Issue , carrying interest at 1 % per cent. FromJune the proportion paid in certificates was reduced to 20 per cent, and thecertificates were accepted by the Treasury in payment of certain direct taxes;

new regulations in A ug us t 1943 gave thecertificates a maturity of at most one yearand made them transferable by endorse-ment. The counterpart of these certifi-cates was invested by the Bank of Issuein special Treasury certificates and shownseparately in the bank's] return. The rela-tively small amounts thus "steri l ised" areshown in the accompanying table; actuallyin the seven months to the end ofSeptem ber 1943 total clearing claim s of theBank of Issue increased by B.fcs 14,380 mil-l ion, of which B.fcs 13,940 million arose

Near end of month

1943 February . . .March . . . .AprilMayJuneJulyAugust . . . .September . .

Clearing claimsoutstandingpaid incash

paid incertificates

in millions of B.fcs

28,90331,36133,12335,56336,77538,16441,10642,846

116206281326353380435



- 205 -

from payments in cash and under B.fcs 440 million fro m payments in cer tifi-cates (less than 4 per cent, of th e tot al).

H o l l a n d —t a x a t i o n a n d o f f i c i a l c r e d i t f i n a n c i n g .

For Holland also, in the absence of budget statistics, the most com-prehensive view of government finances is gained by compiling the total ofrevenue from taxation and official credit financing. Total expenditure, whichwas FI. 1,000 million in 1939, appea rs to have been abou t FI. 3,700 millio n in1941 and over F I. 4,000 millio n in 1942. In 1942, the clearin g requ ired som eFI. 1,000 millio n, slightly more than in 1941, while the amo unt paid on accou ntof oc cupa tion costs probably rose from the FI. 1,200 million estimated for1941 to som e FI. 1,500 m illion in 1942.

The relative im-portance of ta xation re-venue increased from1941 to 1942 andthe same was thecase with borrowingfrom the central bank,while market borrow-ing declined; in thefir st half of 1943 areverse movement ap-pears to have takenplace.

T h e s h o r t - t e r m

debt is principally inthe form of Treasurybills, the circulation ofwhich on the marketrose fr om FI. 1,670 m il-lion at the end of1941 to FI. 2,710 millionin Oc tobe r 1942, i. e.by FI. 1,040 milli on .Some FI. 330 million ofthese bills were thenabsorbed by a long-

term issue, which al-(2) Estimates based partly on FI.604 million published for the first five months __ « - „ - - i : ja4. Qr i „ t l io r

of 1942 (against FI. 450 million for the same period of 1941). s o COnSOIIdaTed Oinerparts of the floating

debt, notably FI. 400 million borrowed on cu rrent a ccoun t from various officialand sem i-official bodies. By the end of June 1943 the Treasu ry b ill issue hadrisen above FI. 3,000 million and the total short-term debt above FI. 4,000 million.

The lo n g - te r m de bt increased by over FI. 2,000 mil l ion from the outbreakof the war to the end of 1942 (account being taken of amortisations andconsol idations).

Calendar years

Financed:from central bank -

direct borrowingTotal . . .

from market -long and middle term . . .short term: Treasury bills .

otherTotal . . .

Totalofficial credit financing. .

Taxation revenueTotal receipts from taxation

and borrowing

Percentage of total taxation andborrowing financed by:

market borrowing

1940

107168275

448633

(-137)

944

1,219925

2,144

12.844.043.2

1941

n millions

945(-248)

697

875608292

1,775

2,4721,219

3,691

78.948.133.0

1942

of florins

1.O1OC)

1,010

869716

(—129)

1,456

2,4661,600P)

4,066

24.835.839.4

1943six

months

390 (1)

390

(—119)595486962

1,352800 (')

2,152

18.144.737.2

0) The increase of the clearing items shown in the Nederlandsche Bank'sreturn is only FI. 810 million, but some FI. 220 million were transferred tothe government at the beginning of April 1942 in exchange for Treasurybills, the total financing of Reichsmark claims thus amounting to aboutFi. 1,030 million. FI. 20 million of these Treasury bills had been disposedof by the end of the year, so that the net increase at the centralbank was about FI. 1,010 million. The remaining FI. 200 million weresold on the market during the first half of 1943, so this amount has

been deducted from the FI. 590 million increase of clearing claims inthe same period.



- 206 -

D u t c h P u b l i c D e b t o u t s t a n d i n g(and guarantee).

At endof month

0)

1938 Dec.1939 „1940 „1941 „1942 „1943 June

Government debtShort term

centralbank

(2)

Treasurybills(3)

other«

total Long term Total

Governmentguaranteeon accountof clearingadvances

(s).In millions of florins

83251

3199

221426

1,0591,6672,3833,014

553569432724595

1,045

7741,0781,7422,3943,1774,059

3,2123,1403,5884,4635,3325,213

3,9864,2185,3306,8578,5099,272

1101,0501,8602,770

(1) The actual date of the return is the first day of the following month.(2) Direct borrowing, not Including clearing financing. For the end of 1942, the FI. 199 million represented the

balance of Treasury bills placed with the Nederlandsche Bank in exchange for Reichsmarks (and Included

under "clearings" in the previous table).(3) On market only (I.e. excluding those placed with Nederlandsche Bank).(4) Including the debt on current account to various official institutions, the issue of government notes etc.(5) Approximate figures from return of Nederlandsche Bank.

The 1942 loan for FI. 1,000 million was the largest single operation effectedon the Dutch market up to that time; amortisation was to take place by 20 equalannu ities, so that the average maturity w as actually ten years. Some FI. 400 mil-lion w as taken firm by various o fficial institutions to consolidate current-acco unt advances previously granted to the Treasu ry; for the FI. 600 millionplaced on the market, nearly FI. 860 million was subscribed , so that allotmentswere cut down by 30 per cen t. A furthe r FI. 1,000 million loan was floa ted in

July 1943, the issue

D u t c h G o v e r n m e n t l o n g - t e r m i s s u e s . P r i c e b e i n 9 r a i s e d

by Y 4. FI. 300 mil-lion was taken byofficial institutionsand for th e FI. 700million placed onthe market FI. 939million was sub-scribed, allotmentsbeing cut downthis time by 26per cent.

Date of Issue

Before the occupation:1940 January

FebruaryAfter the occupation:

1941 FebruaryNovember

1942 November1943 July

Interestrate%

44

43'A3< A31/2

Issueprice%

100100

10097 '/,99 / ,99%

Maximummaturityin years

3040

10202020

Amountof issue

in millionsof florins

300300

500500

1,0001,000

Alth oug h no forced loan has actually been made in Ho lland, an ele-ment of com pulsion has not been absent. On each occasion when a loanhas been issued since the war, a forced loan has been threatened shouldthe "voluntary" loan be unsuccessful. And on each successive occasion theterms of the forced loan were made less attractive to the investor; thus, in1942, a 2 per cent. 40-year forced loan was held over the market as a threatif the 3y2 per cent, loan was n ot satisfa ctorily su bsc ribe d. Moreover, life as-surance companies, savings banks, pension funds and similar institutions have



— 207 —

been instructed to invest the bulk of their funds in government paper and torestrict their purchases of other securities, real estate and mortgages etc. Forthe 1942 loan certain quotas were laid down which investors were expectedto fulfil if they were to escape a forced loan; individuals were to subscribe2 per cen t, of net fortu ne s of FI. 20,000, up to 5 per cent, of FI. 800,000and 10 per cent, above that sum, share companies 3 per cent, of net businesscapital, and investment institutions (insurance companies, savings banks etc.)8 per cent, of tota l assets. In July 1943, the terms of the threatened forcedloan were made even more severe: a 2 per cent, undated issue at par fordouble the amount of the "voluntary" loan.

The note circulation of the N e d er la n d s ch e Ba nk rose in 1942 at anaccelerated rate as a result of the financing of claims on Germany.

N e d e r l a n d s c h e B a n k .

Near end of month

1939 December . .1940 December . .1941 December . .1942 March . . . .

June . . . . .September .December . .

1943 March . . . .JuneSeptember (').

AssetsClaims on Germany (')

"sun-dry ac-counts"

foreignbills total

Loan togovern-ment

Privatedo-

mesticcredit

Gold

Totalof

balancesheet

Liabil i ties

NotesPrivate

ac—counts

Go-vern-ment

specialaccount

in millions of florins29123153

158161161151

188192159

215

930

1,1281,1091,3601,742

2,0912,2922,623

31138

1,083

1,2851,2701,5211,893

2,2792,4842,778

8326118

(-126)187265176

122

2

238211165

196151143204

150140138

1,0141,1021,026

1,026943925903

886886932

1,4311,7832,357

2,5732,6162,9263,244

3,5063,5783,927

1,1521,5522,116

2,2172,3932,6803,034

2,9982,5963,041

229175182

168160180141

437(6)

34O675

56 8100

(') Except for a small amount indicated by the pre-1940 level of these Item s. The to tal of FI. 2,279 m illionIn the table Is for 29th March 1943. Accord ing to the annual report of the Nederlandsche Bank for thefinancial year ending 31st March 1943, the total of fore ign bills , balances abroad and foreign currency onthe latter date was FI. 2,221 million, of which FI. 2,206 million was in Reichsmarks.

(!) Net, I.e. direct advances, plus Treasury bills placed directly with the bank, less credit on current account;in March 1942 there was a net cred it. Slight differences as com pared with the previous tables are princ i-pally due to the date of the returns.

(3) Excluding Treasury bills placed directly with the bank, but Including the loan to the Dutch East Indies(reduced from FI. 61 million to FI. 53 million over the period shown in the table).

(") Including certain minor items not specified in the table.(6) Account opened in connection with the withdrawal of large bank-notes.(6) The ac tual private accounts probably remained at about FI. 150-200 millio n, but withdrawn bank-notes were

also booked provisionally under th is heading until a new item was included in the return of 19th Ap ril 1943.(7) From 5th July 1943 a number of changes took place in the return; in particular the gold holding rose by

FI. 46 million to FI. 936 million and the "sundry accounts" on the assets side were reduced from FI. 192 mil-lion to FI. 7 million while two new items were shown; "foreign correspondents" for FI. 78 million and

"foreign curren cy" for FI. 28 million. At the end of September 1943, "sundry ac cou nts" were FI. 4 million,foreign correspondents FI. 114 million and foreign currency FI. 41 million ; for purposes of comparison the threeitems have been amalgamated as "sundry accounts" in the table.

C l a i m s o n G e r m a n y ( p r i n c i p a l ly t h e c r e d i t b a l a n c e i n t h e c l e a r i n g , i n v e s t e d

i n Re i ch Tr ea sur y b i l ls ) ros e by F I . 810 m i l l i on i n 1942 , the re be i n g , i n ad d i -

t i o n , a n i n c r e a s e o f g o v e r n m e n t b o r r o w i n g f r o m t h e c e n t r a l b a n k t o t a k e o v e r

R e i c h s m a r k a s s e t s ; i n t h e f i r s t t h r e e q u a r t e r s o f 19 4 3 t h e g r o w t h o f c l a i m s o n

G e r m a n y w a s F I . 8 8 0 m i ll io n c o m p a r e d w i t h F I . 4 4 0 m i l l io n d u r i n g t h e s a m e

per i od i n 1942 . Par t o f the i ncre ase o f c l ear i ng as se t s appe ars to have re l a t i on

to a dec l i ne i n the go l d ho l d i ng by F I . 140 m i l l i on i n the tw e l ve m onths to



— 208 —

March 1943; on the other hand, the gold holding increased by FI. 46 millionin July 1943 as the result of a transfer from "sundry accounts".

The decrease in the note issue and the increase of private accounts inthe fi rst quarter of 1943 were due to the w ithdraw al of bank-notes of largedenominations decreed on 13th March (see pages 310-311), and not to anincrease in the banks' cash reserves, which rose to a much smaller extent.

D u t c h C o m m e r c i a l B a n k s 0)

At end of month



1943 March . .June . . .

Assets

Cash

(2)

Treasurybills

Securi-ties(3)

Credit toprivate

economy(4)

Allotherassets

Totalof

balancesheet

Liabil i t ies

Depositssight

depositsetc. (5)

timedeposits

Allother

liabilitiesC6)

in millions of florins

7651553547625583

110

226547793907965997863916978

363329221614201916

413290223188165165194176165

183168144113111109103103107

9341,0891,2441,2651,3041,3471,2351,2981,376

536699872910942964874917991

405769829399

101109120

358333303273269284260272264

(') Four large banks: Amsterdamsche Bank, Incasso-Bank, Rotterdamsche Bankvereeniging and Twentsche Bank.(2) Including daily money. The increase of this item in March 1943 reflects the withdrawal of large denomina-

tions of bank-notes. (3) Including participations.(4) Advances, overdrafts and commercial bills. (') Shown in the returns as "creditors".(•) Including capital and reserves.

These four banks account for about one-half of the commercial-bank

deposits in Holland. The evolution of their balance sheets is primarily affectedby the repayment of private credit and by government borrowing on Treasurybills (they hold no long-term government securities of any importance).

As the expansion of the note circulation accelerated, the rate of growthof total bank depo sits declined fro m FI. 185 million in 1941 to only FI. 34 m il-lion in 1942 but rose more rapidly in the firs t half of 1943. Enterprisesother than banks have subscribe d to an increasin g propo rtion of the Treasurybill issue and Treasu ry b ills have, inde ed, largely taken the place of bankdeposits in the balance sheets of industrial and commercial concerns.

In the course of 1941, the persisten t excess of withdra wals over dep ositsat the s a v in g s ba nk s came to an end and in 1942 there was an excess

of deposits of FI. 90 million; an increase also of about FI. 90 million indeposits was estimated for the other big group of savings banks, the Boeren-leenbanken. The total of deposits at the post office, the private savings banksand the Boerenleenbanken was a bout FI. 1,600 million at the end of 1942,still som ewha t below the fig ure of FI. 1,640 m illion at the end of 1939. Th esubstan tial increase of savings d eposits in the second quarter of 1943 waspartly due to the withdrawal of large bank-notes from circulation.

The posit ion of the m or tg a g e ba nk s has been dif f icult since thedevaluation in 1936 owing to the competition of insurance companies and



- 209 -

H o l l a n d — m o v e m e n to f s a v i n g s - b a n k d e p o s i t s *

In millions of florins

1939 January-December • . .1940 „ „ . .1941 „ „ . .19421942 January-March

April-JuneJuly-September . . . .October-December . . .

1943 January-MarchApril-June

PostOffice

— 26- 169— 49+ 51+ 14+ 11+ 14+ 12+ 51+ 71

Privatesavingsbanks

— 56— 79— 13+ 40+ 17+ 10+ 10+ 3+ 32+ 35

Total

— 81— 248— 62+ 91+ 31+ 21+ 24+ 15+ 83+ 106

Excess of deposits (+) or withdrawals (—).

other lenders with surplus funds,and the circulation of the mort-gage bonds of 47 Dutch mortgagebanks fell from FI. 1,000 millionin 1934 to FI. 700 million in 1941,parallel with the decline of theirmortgage credits outstanding.Early in 1942 an attempt wasmade to stabilise mortgagerates around 3%-4 per cent.,while the minimum rate formortgage bonds was fixed at3% per cent. To relieve theposition of the mortgage banks,

it was decreed later in the yearnew mortgages w as not to be below 4 per cent,savings banks and pension funds were to

that the interest rate onand that insurance companies,curtail their mortgage lending in favour of investment in government securities.

Interest rates generally remained steady throughout the year. Bankrate has been at 2% per cent, since J une 1941, when it was reduced fr om3 per cent. The bond yield, however, continued downwards from an averageof 4.02 per cent, in 1941 to 3.58 per cent, in 1942.

The Danish budget again closed with a surplus in the financial years1941-42 and 1942-43. But official financing connected with the occupationof the country by Germany, and accounted for outside the budget, rosefro m D .Kr. 890 million in 1941-42 to D.Kr. 935 millio n in 1942-43; the decline infinancing required for the clearing with Germany was more than offset by theincrease in occupation costs (including expenditure for forti fication works).

D e n m a r k —b u d g e t s ( 1 ) a n d o f f i c i a l f i n a n c i n g .

Year ending 31st March

RevenueExpenditu reSurplusClearing accountOccupation costsTotal official credit finan-

Financed -from central bank (net) (

2)

in other ways

1939-40 1940-41 1941-42 1942-43

in millions of D.Kr.648639

9

(-9)

83(-92)

88482757498514

955CM CO

CO CM

O>

93189634476414

856

737119

1,1251,08144

343592

891

443448

0) Closed budgets 1939-40 to 1941-42; provisional results for 1942-43.(2) The increase of the items "clearing accounts" and "sundry debtors" plus

the "adjustment account" and the movement of the government's accountsat the Nationalbank.

In 1942-43, as inprevious years, allpayments to financethe clearing and onaccount of occupationcosts were madedirectly and in fullby the Nationalbank.By virtue of the law of3rd July 1942, however,the Finance Ministryissued debt certifi-cates, Treasury notesand savings bonds,the proceeds of whichwere transferred to a



- 210 -

special (blocked) account of the Finance Ministry with the Nationalbank.Alt ho ug h there is no legal link between these transfers and the financin gof occupation costs and the clearing, there may be justificatio n, from a

monetary point of view, for laying stress on the marked change whichtook place f rom the middle of 1942: 98 per cent, of the to tal official creditfinan cing took the fo rm of borrow ing from the Nationalbank in 1940-41 and87 per cent, in 1941-42, but only 50 per cen t, in 1942-43; and th is chang ewas effected by means of short-term securities sold on the market to offsetthe influence of the increasing credit granted by the Nationalbank.

D a n m a r k s N a t i o n a l b a n k .

Endof month

AssetsClaims on Germany | Internal credit granted

occu-pationcosts

clear'ingaccount

Ototal

to privateeconomy

bonds other

togovern-ment

Goldandforeignassets

Totalof

balancesheet

L iab i l i t i es

Notes

Deposits and currentaccounts

banksetc.

governmentordin-

ary special

in millions of Danish crowns1939 Dec.1940 Dec.1941 Dec.1942 March

JuneSept.Dec.

1943 MarchJuneSept.

47466907975

1,0971,2121,3901,5671,8392,080

412849

9741,0521,1041,181

1,3171,5471,749

47878

1,756

1,9492,1492,3162,571

2,8843,386

3,829

18917414 8

53368088

716256

3948244

43595156

383646

147

—

—

125126125

124114114115

115118117

9521,3092,118

2,2162,4052,6082,877

3,1563,647

4,093

600741842

81 584484798 3

9641,0581,193

134350882

1,0161,1721,0331,002

1,2621,5711,714

148

15614 5193242

229159214

27 7358

416537619

0) The figures given relate to the item "sundry deb tors" in tha Nationalbank's m onthly return . The smallamount normally Included under this heading, generally about the level of December 1939, should be deductedto obtain the actual debt of the Reichskreditkassen to the Na tionalbank. For the sake of continu ity D.Kr. 61 mil-lion has been added from March 1942 onwards, i.e. the book loss on Reichsmarks debited to the "ad-justment account" of the government when the Danish crown was revalued in January 1942. At the endof 1942 the figure of D.Kr. 1,390 million given in the table was made up as follows: the German debton account of payments to the Wehrmacht was D .Kr. 1,284 million, the "adjustment acco unt" was D.Kr. 61 millionand the normal "sundry debtors" was D.Kr. 45 million (according to the annual report of the Nationalbank).

(2) The remainder of the "adjustment account", D.Kr. 64 million, has been added to this item from March1942 onwards . The increase of this item by D.Kr. 332 million in 1942 indicates the Danish su rplus on theclearing during the year. According to the Nationalbank's annual report the turnover on all the clearingsfell from D.Kr. 2,950 million in 1941 to D.Kr. 2,500 million in 1942.

(3) Total of internal credit Items excluding bonds (and shares) and the government overdraft.(4) New account opened by virtue of the laws of 3rd July 1942 and 8th July 1943, as explained in the text.

B y S e p t e m b e r 1 9 4 3 , t h e N a t i o n a l b a n k ' s c l a i m s o n G e r m a n y ( w h i c h a r e

g u a r a n t e e d b y t h e D a n i s h G o v e r n m e n t ) a m o u n t e d t o a b o u t D . K r . 3 ,8 0 0 m i l l io n

a n d c o n s t i t u t e d o v e r 9 0 p e r c e n t , o f t h e b a n k ' s a s s e t s . C o r r e s p o n d i n g t o t h i s

c r e a t i o n o f c e n t r a l - b a n k c r e d i t o n o f f ic i a l a c c o u n t t h e r e w e r e t h e f o l l o w i n g

m o v e m e n t s i n o t h e r it e m s ( f r o m D e c e m b e r 1 9 3 9 t o S e p t e m b e r 1 9 4 3 ) : c r e d i t s t o t h e

pr i va te eco no m y w ere r epa i d to the ex ten t o f D . Kr . 480 m i l l i on , the no te i ssue

e x p a n d e d b y D . K r . 5 9 0 m i l l i o n , t h e c o m m e r c i a l b a n k s ' re s e r v e b a l a n c e s ( a n d

o t h e r p r i v a t e a c c o u n t s ) r o s e : by D . Kr . 1 , 580 m i l l i on , w h i l e the gov ern m en t d re w

b a c k D . K r . 980 m i l l i on i n to the Nat i ona l ban k by rep ay i ng i ts overdra f t and

a c c u m u l a t i n g a l a r g e d e p o s i t . T h e e x p a n s i o n o f t h e c o m m e r c i a l b a n k s ' r e s e r v e

b a l a n c e s w a s t h u s n e a r l y t h r e e t i m e s a s m u c h a s t h a t o f t h e n o t e i s s u e ,

w h i ch i tse lf w a s on l y 16 per cent , o f the c rea t i o n o f c red i t on o f f i c i a l ac co un t .



— 211 —

Although the situation in Denmark compared favourably with other countriesin Europe in 1942, yet the basis for a vast expansion of commercial-bank credithad been laid and the Nationalbank observed the monetary development "withthe greatest anxiety", as it remarked in its annual report. The problem wastwofo ld: to neutralise, or reabsorb, freshly-created central-bank credit and totie up that which had been previously created. The counter-measures recom-mended by the Nationalbank took two lines: (a) to mop up newly-created

•central-bank credit by government borrowing on the market and (b) to tie upthe commercial banks' cash reserves, and thus narrow the basis for an expansionof secondary, or commercial-bank, credit. The result of these recommendationswas the voting of two laws on 3rd July 1942 having the following main lines:

A. The government, through the Minister of Finance, was authorised to issueto investo rs other than banks up to D.Kr. 200 million 2-year debt certificatesat 1 % per cen t; an d, particularly for bank sub scr iptio n, up to D.Kr. 300 mil-lion (later increased to 400 million) 6-month Treasury notes at % per cent.;in addition the authorisation included an unlimited amount of 5%-yearsavings bonds with effective interest at 4.1 per cent.; the proceeds ofthese issues were to be placed to a special accou nt wh ich might be drawnupon only with the agreement of the budget commission of the Rigsdag(or, without agreement, for the purpose of amortising the securities issuedin accordance with the same law).

B. Commercial banks were to maintain reserves in cash and balances at theNationalbank equal to the sum of the fol lowing:

(i) 40 per cent, of the increase of th eir depos its and current acco untssince August 1939,

(ii) 15 per cent, of the total of such deposits and accounts outstanding,(iii) 5 per cent, of savings deposits withdrawable within three months, and(iv) 100 per cent, of the deposit of another bank considered as a reserve

balance.

By the end of 1942 the special blocked accou nt of the governm ent am ountedto D.Kr. 358 million , being the cash proceeds fro m the issue of D.Kr. 98 milliondebt certificates, D.Kr. 250 million Treasury notes and D.Kr. 13 million savingsbonds.

The volume of cash reserves required by the banks under the law of3rd July 1942 is not show n separately, but the Nationalbank 's annual report

states that the total tied up under the law at the end of 1942 was D.Kr. 670 m il-l ion, of which D.Kr. 550 mil l ion was on special "l iqu idit y" accounts (on whichthe Nationalbank pays interest at 34 per cent.) and D.Kr. 120 million on theirordinary non-interest-bearing account at the Nationalbank or as cash in tills.

At the same time as these measures came into force the Nationalbankdeclared itself prepared to open accounts for banks (and savings banks) at6 mo nths ' notice, bearing interest a t % per cent., a nd by Decem ber 1942D.Kr. 199 million had been depos ited on these a cco unts . Thu s by the endof 1942 the "steri l isation" measures taken by the government and by the



- 212 -

Nationalbank together covered D.Kr. 1,227 million of funds (at an annual costof about D.Kr. 4 million ). The President of the Na tionalbank sta ted, however,that the measures taken were insufficient and further steps were foreshadowed.

D a n i s h C o m m e r c i a l B a n k s .

End of month



1943 March . .June • . .September

Assets

Cash Bills

(1)

Advancesandover-drafts

Securi-tiesV )

Totalbalancesheet

Liabil i ties

Private deposits

currentaccounts

timedeposits total

Depositsmade byotherbanks

P)in millions of Danish crowns

211450952

1,044

1,207839889946

1,1301,198

440381280261

273365360359309236

1,671,533,473,406,428,471,482

1,4531,4481,419

615789

1,0061,0631,0701,1671,1681,2091,2861,316

3,5643,7594,4094,461

4,7754,7945,0115,1055,6085,728

843958

1,2581,2461,4381,4071,5171,4291,7081,659

1,6121,6571,8571,951

1,9622,0522,0782,1882,2242,310

2,4552,6153,1153,1973,4003,4593,595

3,6173,9323,969

132243395436

462450487580689806

D e n m a r k — m o v e m e n t o f

s a v i n g s - b a n k d e p o s i t s * .

0) The new Treasury notes appear to have been booked by the banks under both these items. It is probablethat about one-third of the bill portfolio and two-thirds of the securities are government paper, which thusrepresents some 15-20 per cent, of total assets. (2) Including savings banks.

Early in July 1943, a further series of "anti-inflation" measures werepassed by parliament including war-profits taxes and the introduction of com-pulsory savings ; in addition, two new "steri l isa tion loa ns " were floate d:D.Kr. 200 million 2% per cent. 5-year bonds and D.Kr. 200 million 3 per cent.

10-year bonds . In the firs t three qua rters of 1943 central-bank credit creationon official account was on a large scale, some D.Kr. 1,260 million againstD.Kr. 560 million in the same period in 1942; but only 18 per cent, was sterilised

by the net increase on the government'stwo accounts and a further 3 per cent, wasabsorbed throu gh sales of b onds by theNationalbank. A t the end of September 1943the total funds tied up by the "st eri l i sa tion "measures amounted to D.Kr. 2,200 million.

The change which came over theposition of the com me rcial banks in 1942

reflects the "steri l isation" measures of thegovernment; the fall of the cash holding inthe third quarter by D.Kr. 370 million waslargely the result of the purchase ofTreasury notes and other government se-curit ies by the ba nks. But in 1943 the banksagain became very l iquid. S a vi n gs -b a n kdeposits began to rise sooner than inBelgiu m and Holland and early in 1943the increase became more rapid.

Period

1939 January-December . . . .1940 „ „ . . . .1941 „ „ . . . .1942 „ „ . . . .

1942 January-MarchApril-June.July-SeptemberOctober-December . . . .

1943 January-MarchApril-JuneJuly-September

Total deposits outstandingat end of 1942

In millionsof D.Kr.

— 33— 63+ 217+ 255

+ 91+ 49+ 76+ 40+ 123+ 78+ 92

2,589

°r w i thd raw a ls H '



- 213 -

There were few changes in short-term in te re st ra te s during the year,but the "sterilisation" measures of July 1942 were not without influence on

the long-term bond market, which suffered one of the sharpest reversalsof recent years. In the first half of the year bond qu otations had risen verysharply, reaching their highest level in June, when the yield on the 3% percent, government rentes was 3.91 per cent, (the lowest point for many years).The Nationalbank, which had been steadily reducing its bond portfolio byopen-market sales, held only D.Kr. 32 million at the end of July, the smallestholding for over teii years. Then quotations fell abruptly, especially in September-October 1942 and again in January and February 1943, so that the yield on3% per cent, rentes rose to 4.65 per cen t, in February 1943; some relaxationof the p ressure occurred in M arch and , by September 1943, the yield haddeclined to 4.20 per cent.

A number of c o n v e rs io n s were carried out by the government andothers during 1942, repres enting, however, a relatively modest prop ortion ofthe outstanding volume of bonds, which generally carry interest at 4 % - 5 percent. The Nationalbank remarked in its annual report for 1942 that th e

^a ct that certa in conversion operations had not been satisfactory was (J inpart due to the reigning uncertainty as to the development of quotationsof long-term bonds and especially the essentially different attitude of th emarket as regards investments at sho rt term and at long term . Whereasshort-term paper has always been easily ab sorbed by the market, buyerswere more reserved on certain occas ions as to large offers of long-te rm bonds."

Published information is scarce regarding financial developments inN or w ay and regular statistics are practically non-existent. The expenses ofthe Oslo Government in 1942 were about double the budget expenditure beforethe war. The government debt, last given officially as N.Kr. 1,450 million at theend of 1939, was estimated to have risen by some N.Kr. 1,900 million to aboutN.Kr. 3,350 million at the end of.1942 (excluding the debt to the Norges Bankon account of occupation costs). The Oslo Government raised, in all, loansof N.Kr. 725 million and iss ued som e N.Kr. 1,250 millio n Trea sury bills up tothe end of 1942; abou t N.Kr. 675 millio n Trea sury bills and N.Kr. 425 millio nof the loans were floated in 1942, the latter by two issues of 3% per cent.

40-year bonds, taken largely by banks and insurance companies for resellingto the public at 99%. In Ju ne 1943 two more loans were floa ted ; N.Kr. 150 m il-lion 3% per ce nt. 40-year bo nds and N.Kr. 100 million 2 % per ce nt. 7-yearbonds, both at 99%. And at the same time a N.Kr. 50 million 12-year premiumissue was made.

To ordinary budget expenditure must be added o c c u p a ti o n co st sestimated to be running at nearly N.Kr. 200 million a m onth in 1942. Thesefunds have been applied not only for the upkeep of the German troops butfor the maintenance of the German civil administration, for the erection of



N o rg e s Ba n k .

- 214 -

fortifications and for investments mainly in aluminium and water power, theseindustries being financed directly by the Norges Bank. The bank has pub-

lished no returns since March 1940, but avail-able estimates are reproduced in the table. Bythe middle of 1943, the aggregate of occup ationcosts paid reached about N.Kr. 7,000 millio n,of which some N.Kr. 2,000 million had beenfinanced by the Treasury bil l is sue ; togetherwith the direct government debt mentionedin the previous paragraph (including the twoloans floated in June 1943) the total debtmust have exceeded N.Kr. 9,000 million.

End of year

1939194019411942

Aggregateoccupationcosts paid

Notecircula-tion*

in millions of N.Kr.

1,5003,8006,000

5751,0001,5002,000

* The latest figure published in the regularbank returns was N.Kr. 600 million inMarch 1940.

In 1942 the monthly returns previously published by the Norwegian com-

mercial banks were suspended. But balance sheets of the three largest banks,which have about one-half of the resources of all the banks, are availableand have been combined in the table below.

N o rw a y — th re e l a rg e b a n ks * .

End of year

Assets

Cash Securities Bills Loans

Totalbalancesheet

Liabil i ties

Deposits

in millions of N.Kr.

Capitaland

reserves

1939194019411942

24230309238

137

19126528 0

198

153351596

399

322261228

91 0

1,0811,3401,495

457

73 09781,115

102103104105

* Christiania Bank og Kreditkasse, Den Norske Creditbank and Bergens Privatbank.

I t i s n o t e w o r t h y t h a t d e p o s i t s r o s e i n 1 9 42 b y N . K r . 1 3 8 m i l l i o n — o n l y

h a l f a s m u c h a s i n 1 9 41 — w h i l e t h e b a n k s ' c a s h r e s e r v e s f e l l . T h e t h r e e

b a n k s s h o w n i n th e t a b l e w e r e e s t i m a t e d t o h o l d N . K r . 4 65 m i l l i o n T r e a s u r y

b i l l s a t t h e e n d o f 1 9 4 2 ; a l l c o m m e r c i a l b a n k s in t h e c o u n t r y p r o b a b l y t o o k

u p a b o u t N . K r . 5 00 m i l l i o n o u t o f s o m e N . K r . 1,1 00 m i l l i o n g o v e r n m e n t s e c u r i t i e s

i s s u e d ( l o n g a n d s h o r t ) d u r i n g t h e y e a r . N o i n f o r m a t i o n i s a v a i l a b l e a s t o t h e

d e v e l o p m e n t o f s a v i n g s - b a n k d e p o s i t s .

T h e r e h a s b e e n l i tt l e c h a n g e i n i n t e r e s t r a t e s . T h e d i s c o u n t r a t e o f t h e

N o r g e s B a n k h a s r e m a i n e d a t 3 p e r c e n t , s i n c e M a y 1 9 40 . T h e t h r e e b i g

b a n k s , w h i c h i n M a y 1 9 4 1 , h a d a b o l i s h e d t h e % p e r c e n t , i n t e r e s t t h e y p a i d o n

s i g h t d e p o s i t s , w e r e o r d e r e d b y t h e M i n i s t e r o f F i n a n c e t o p a y % p e r c e n t , o n

s i g h t d e p o s i t s o f u n d e r N . K r . 1 m i l l i o n f r o m D e c e m b e r 1 94 1 a n d % p e r c e n t ,

f r o m M a r c h 1 9 4 2. F r o m O c t o b e r 19 43 t h e r a t e o n s i g h t d e p o s i t s w a s a g a i n

r e d u c e d t o % p e r c e n t , b u t t i m e d e p o s i t r a te s w e r e i n t r o d u c e d a s f o l l o w s :

y2 p e r c e n t , f o r f o u r m o n t h s , % p e r c e n t , f o r e i g h t m o n t h s a n d 1 p e r c e n t ,

f o r t w e l v e m o n t h s .



- 215 -

F in la n d was at war with the U. S. S. R. for three and a half months inthe winter of 1939-40 and in June 1941 again became a belligerent. Budgetdeficits of around FM 10 milliard in each of three years 1940, 1941 and 1942,arising entirely from military expenditure, led to a tenfold increase of the publicdebt from FM 3.4 milliard in December 1938 to FM 36.6 milliard in December 1942.

F i n l a n d — P u b l i c F i n a n c e ™ .

Calendar years

193819391940194119421943

Budget revenue and expenditure

Re-venue

P)

Expenditure

civil mili-tary total

Deficit

Public debt increases (3) (or decreases-)

Internal

long-term

Short-term

centralbank other

totalForeign Total

in milliards of FM5.04.56.0

10.917.418.5

3.74.05.27.17.58.5

1.22.7

12.313.819.220.0

5.06.7

17.520.926.728.5

2.211.610.09.3

10.0

Public debt at the end of 1942 (total)

0.10.80.51.83.8

12.6

0.64.95.23.8

14.6

(-0.1)0.14.22.41.1

4.7

1.59.69.48.7

31.9

(-0.2)0.72.00.60.6

4.7

(-0.2)2.2

11.610.09.3

36.6

(<) Statistics up to 1941 from article by Dr Matti Leppo in "Wirtschaftliche Untersuchungen" issued by theBank of Finland ; for 1942, round figures of budget results from official statements and debt figures fromofficial statistics. For 1943, estimates; in the first three quarters of the year military expenditure amountedto FM 14.2 milliard.

(') Ordinary budget revenue plus certain capital receipts, varying from FM 0.3 to 0.5 milliard in the period1938-41, assimilated to ordinary revenue; in 1942 about FM 13 milliard was received from ordinary taxationand FM 4 milliard from other sources.

(3) The internal debt, which amounted to FM 2.6 milliard at the end of 1938, almost wholly at long term, hadrisen by the end of 1942 to FM 31.9 milliard, of which FM 12.6 milliard was at long and FM 19.3 milliard

at short term (including the central-bank credits). The foreign debt rose from FM 0.8 milliard at the endof 1938 to FM 4.7 milliard at the end of 1942, when FM 3.7 milliard was consolidated and FM 1.0 milliardfloating; the most important part of the increase of FM 2.0 milliard in 1940 was due to credits from theUnited States granted during the winter war of 1939-40 and booked at $23 million; other credits have beenreceived from Sweden and, in the clearing, from Germany.

Revenue has risen as a result of increased yields, new taxes (includinga tax on capital) and higher m iscellaneous receipts . Civil ex penditure hasgrown, largely as a result of increases in interest on the public debt and civilserva nts' salaries (as partial com pensa tion for the higher living costs ). Tota lexpenditure as given in the table excludes amortisation of the public debt andthe indemnity payments to Carelians, originally estimated as requiring aboutFM 12% milliard, but later reduced to not more than FM 7 milliard; theseindemnities were partly paid out in 1943, largely by means of special debt

certificates.

The major part of the budget deficits has been covered by internalb o r r o w i n g ; in the four years 1939-42 the internal debt rose by FM 29.3 mil-l iard, borrowed one-half from the market and one-half from the central bank.Market borrowing in 1942 amounted to nearly FM 5 milliard: FM 3.8 milliardwas raised at long term, principally by the issue, from March 1942 onwards,of the 5% per cent. Fatherland loan, while FM 1.1 milliard was obtained fromtax certificates and other sho rt-term instru me nts. For 1943, with m ilitary ex-penditure running at FM 1.6 milliard a month in the first three quarters of the



- 216 -

year, special measures were considered necessary, owing to the difficulty ofplacing loans with the pub lic; these measures included the issue of a 3% percent. 5-year forced loan based on income and capital and estimated to produce

FM 3.5 milliard.

FM 2.6 milliard of the long-term issues in 1942 appears to have beentaken by the co m m er ci al ba n k s , as indicated by the increase of their bondholdings. The banks' bill holdings, on the other hand, after rising rapidly to

F i n n i s h C o m m e r c i a l B a n k s 0)

At end of month

Assets

Cash Internalbills

Loansand

overdraft Bonds

Totalof

balancesheet

Liabil i tiesCurrent accounts

and deposits

currentaccounts

timedeposits total

In millions of FM1939 December .1940 December .1941 December .1942 March . . .

June . . . .September.December .

1943 March . . .J u n e . . . .September.

8091,8542,0561,5811,5491,9851,6392,0021,8851,784

1,9043,8262,5283,4204,1313,6633,0703,5124,3025,470

7,732

7,1948,1247,9568,1448,2608,7248,9539,3329,469

1,2551,6553,6124,3344,7405,9936,1656,2986,7366,992

13,17816,07618,11318,99520,43721,81521,66822,86924,63626,132

2,4594,6806,0306,3516,9267,0687,2287,7458,2728,605

6,940

7,4707,4087,9208,3078,4488,597

9,39310,16210,622

10,76613,48814,82915,88917,04117,62017,93119,49921,16922,270

(1) All commercial banks. (2) Including Treasury bills etc. (3) Including government bonds.M Including other items than those specified. (5) Including also the accounts of credit institutions.

Jun e 1942, fell by over FM 1 milliard in the secon d half of the year. Depo sitsand current accounts expanded in 1942 by FM 3.1 milliard, more than doublethe increase of 1941, the rise of time de posits being pa rticularly notable afterthe stagnation of this item in previous years.

F i n l a n d —

m o v e m e n t o f s a v i n g s d e p o s i t s .

Calendaryears

194019411942

Newdeposits

With-drawals Movement*

In millions of FM2,2202,4872,993

2,3012,7792,210

— 81— 292+ 783

* Excess of new deposits (+) or withdrawals (—)at ordinary savings banks (excluding interestadded). The total of savings deposits at theend of 1942 was FM 8,856 million; a furtherFM 1,036 million was held at the postal savingsbank.

The acceleration of the increase ofdeposits and current accounts con-tinued in 1943, the rise in the firstthree quarters of the year exceeding thatfor the whole of 1942; amongst theassets, the further expansion of the billportfolio was especially noteworthy,

while the banks' cash reserves declined.A t the o rd inary s a v in g s ba nk s the rewas a surplus of new deposits overwithdraw als in 1942 for the fir st yearsince 1938.

New borrowing by the government from the Ba nk of F in la n d (booked under"discounts" and "sundry accounts" in the returns) declined from FM 5.2 mil l iardin 1941 to FM 3.8 milliard in 1942 but the note circulation expanded more rapidlyas there was a net withdrawal of funds kept at the bank on current account.



- 217 -

Ba n k o f F i n l a n d .

At end of month

Assets

"Sundryaccounts"

Internalbills

discounted

Goldand

foreignexchange

Totalof

balancesheet

L i a b i l i t i e s

Notecirculation

Privatecurrent

accounts

Clearingaccountsand otherforeigndebts

in millions of FM1938 December .1939 December .1940 December .1941 December .1942 March . . .

June . . . .September.December .

1943 March . . .

June . . . .

78228

1,540

382449108

95

914

1,0422,358 P)5,275

12,22513,01014,15314,74615,87317,568

15,635

3,4022,9051,7811,104

973926789667580

499

5,3256,8099,492

14,17815,16816,35916,41717,57619,510

18,230

2,0864,0395,5517,3177,7517,9758,5019,617

10,2069,087 («)

850686834

1,2581,1031,1661,0951,1791,265

1,152

7994

6332,5363,2924,0583,4733,3624,644

4,502C) Government borrowing is booked under these two items and not shown separately; the total borrowed

by the government from the bank rose from nil at the end of 1938 to FM 10.7 milliard at the end of 1941 andto FM 14.6 milliard at the end of 1942; it was reported at FM 16.3 milliard at the end of March 1943. Creditgranted to the private economy of the country was relatively very small.

(2) Including other items than those specified. (3) Including FM 315 million rediscounted bills.C) By September 1943 the note circulation had again risen, to around FM 9,600 million.

After the record increase of FM 2.3 milliard in the note circulation in1942 and a further rise at the same rate in the early part of the new year,there was a reflux of notes in the second quarter of 1943 due to a proposalthat a forced loan should be imposed by stamping the notes in circulation andreplacing them partially by government securities.

In spite of considerable borrow ing by the governmen t from the central bank,the market was not particularly liquid, notes being preferred by the public tobank deposits; the check to the increase of the commercial banks' cash hold-ings in 1942 (and to the current accounts held at the central bank) was evidenceof some tightnes s during the year, conditions whic h continu ed into 1943; bankrate has, however, remained at 4 per cent., unchanged for.ten years. In February1943 the Finance Minister ruled that cred it institu tions might not raise loanrates beyond the level of October 1940 without prior examination of eachindividual case by the Ministry ; and in the same m onth the Bank of Finlandlaid down new guiding principles for credits granted by the banks, particularlyto exclude speculative purchases of real property and shares.

In so u t h - ea s t e r n Euro pe th ree co un t r i e s , Hungary, Bu lgar ia andRoumania, were subject to similar influences; although they did not add totheir te rritory , as was the case in 1941, they con tinued t o be used in varyingdegrees for transit and as operational or merely supply bases for Germantroops, while themselves remaining active bell igerents. Thus, in addition totheir own war expenditure, they had to finance the clearing with Germanyand the outlay in recently attached territories. As their money and capitalmarkets are undeveloped according to western European standards, heavycalls have been made on the central banks.



- 218 -

Although, up to the autumn of 1943, no closed accounts had beenpublished in Hungary since 1939-40, and the budget estimates as presented

to Parliament excluded part of the war and other extraordinary expenditure,yet it was possible to obtain some indication of the execution of the five-yearprogramme inaugurated in March 1938 and intended to provide Pengö 1,000 mil-lion for "inves tment", namely Pengö 600 million from special resources, includ-ing a tax on capital, and the balance from borrowing (the "Investment" loanof 1938-40). In the programme only Pengö 600 million was originally providedfor armaments but the amount was progressively increased, and actual expendi-ture on armaments amounted in all to Pengö 4,500 million, according to astatement made by the Finance Minister in October 1942; other "invest-ments" (roads etc.) originally estimated at Pengö 400 million actually reachedPengö 1,100 million.

Hu n g ar ian Bu d g et Acco u n t s 0)

Financial years

ReceiptsExpenditure

Surplus (+) or deficit (—)

Closed accounts

1938-39 1939-40P)

Estimates

1941 1942 1943(3) 19440

in millions of pengö1,017

930

+ 87

2,0531,822

+ 231

1,5491,769

— 220

2,1992,337

— 138

2,7692,920

— 151

3,9064,180

— 274

0) Excluding the state enterprises and extraordinary expenditure.(0 The budget year was changed from July-June to January-December and the transition budget for 1939-40 was

for 18 months (July 1939-December 1940).(3) The end of the five-year programme, financed through a separate budget, is reflected by the inclusion of a

greater part of war expenditure in the 1943 ordinary budget; the estimated expenditure of the Ministry ofDefence was increased from Pengö 580 million In 1942 to Pengö 845 million in 1943, a fact which explainspart of the rise of total ordinary budget expenditure. Actual receipts in 1943 were well above the estimatesand amounted to Pengö 2,730 million in the first eight months of the year.

(4) Ordinary defence expenditure was included at Pengö 1,513 million in the 1944 estimates.

The net deficit on the ordinary budget from 1938-39 to 1942 amountedto only Pengö 40 million, to which must be added the aggregate deficit ofnearly Pengö 200 million on the state enterprises; but in the same period theinternal public debt rose by nearly ten times to Pengö 3,640 million at theend of 1942. Of the increase of Pengö 3,265 million, Pengö 350 million wasdue to the revalorisation in 1942 of war loans issued in 1914-18 and Pengö500 million represented the debt to the National Bank for the withdrawal ofbank-notes formerly circulating in territories attached to Hungary in the years1938-41; cash receipts thus somewhat exceeded Pengö 2,400 million, an in-

dication of the extraordinary expenditure (mostly for armaments and the war)financed by borrowing over the five-year period.

In 1942 net receipts from borrowing for budgetary purposes amounted toPengö 770 million, the main resources being the 4 per cent. Transylvanianpremium loan for Pengö 100 million and two issues of 4% per cent. Treasurybills of Pengö 200 million and Pengö 500 million, placed chiefly with thecommercial banks (Treasury bills placed with business concerns being alsolargely refinanced by the banks). In addition, the Hungarian Governmentcreated Pengö 750 million 4 per cent. Treasury bills (raised in August 1943 to



— 219 —

H u n g a r i a n P u b l i c D e b t 1 9 4 2'

1942nternal debt - at end ofIncurred prior to 1938: totalIncurred in period 1938-42: total

National BankTreasury bills5 per cent. Investment loan 1938-40 .4'/2 per cent. Transylvanian loan 19414 per cent. Transylvanian loan 1942 .Sundry smaller issuesRevalorisation of war loans 1914-18 .

Total internal debtForeign debt

Millions of pengö

754 P)1,210P)

39523099

227350

3773,265

3,6421,227

Total public debt , 4,869

0) As given by the Finance Minister when presenting the budget esti-mates for 1943.

(2) This figure was given before the amortisation of Pengö 30 million at

the end of the year, which reduced the total to Pengö 724 million, asgiven in the National Banks balance sheet: of this total only Pengö 221 mil-lion represented the direct drawings of the Treasury, the balance beingthe advances made in connection with the withdrawal of bank-notesformerly circulating in recently attached territories.

(3) Pengö 1,120 million Treasury bills placed with banks and industrialconcerns etc. and Pengö 90 million current overdrafts of the Treasuryfrom the banks.

Pengö 1,000 million) toprovide the funds ne-

cessary for taking overReichsmark claims fromthe National Bank; Pengö400 million of these billswere placed in 1942 anda furthe r Pengö 180 mil-lion in the first half of1943. The clearing withGermany has been finan-ced by the Treasury, thecommercial banks andthe National Bank (as

explained on page 157);at the end of 1942 thetotal of the Reichsmarkholding and Pengö ad-

vances to the Germanclearing office was RM 540 million, the equivalent of Pengö 900 million, of whichover Pengö 500 million was financed directly or indirectly by the National Bank,some Pengö 300 million by the com merc ial banks and less than Pengö 100 mil-lion (net) by the government (after utilisation of the equivalent of some Pengö230 million for extraordinary paym ents in Germ any).

In 1942 the commercial banks opened a new credit for RM 200 million

(equivalent of Pengö 330 mil l ion) "for the development of commodity trade"with Germany; in addition, Pengö 300 million of discounts and advanceswere granted to the private econom y of the country during the year and

H u n g a r i a n C o m m e r c i a l B a n k s 0 ' .

At end of month

1940 December1941 December1942 June

December1943 June

Assets

Cash

Credit o privateeconomy

dis-countsand ad-vances

(2

)

secu-rities

Creditin

clear-ingto

Ger-many

(3

)

Governmentpaper

shortterm

longterm

Totalof

balancesheet

Liabil i ties

Depositsetc.

currentac-

counts

savingsdepo-sits

Redis-countsanden-

dorse-ments

in millions of pengö

143152123173186

1,2111,8211,6102,1271,962

288354369386384

278282285

492428576

1,1691,915

100199189189178

2,7483,343

3,5284,7065,240

8481,0451,0821,3091,479

581581597698729

550WO

1,1082,0092,350

(1) Ten banks having about two-thirds of the resources of all the banks. (2) Including bills rediscounted.(3) At the end of December 1942 the ten banks accounted for Pengö 282 million out of the Pengö 330 million

granted by all the commercial banks together. The figures given in the table are gross and include theamount refinanced, which Is booked as a contra Item, given in the table (with other refinancing) under"rediscounts and endorsements".



— 220 —

Pengö 740 million short-term government paper was taken up, total assets thusincreasing by over Pengö 1,300 million in 1942, more than double the increasefor the p revious year. A s cu rrent accou nts expanded by only Pengö 250 millionand savings deposits rose by Pengö 100 million, some Pengö 1,000 millionhad to be obtained in other ways: rediscounts, made directly or indirectly atthe National Bank, doubled to over Pengö 2,000 million, i. e. an amoun t nearlyequivalent to the total portfolio of private discounts and advances; indeed,over two-thirds of the increase of the commercial banks' assets in 1942 wererefinanced at the central bank. The expansion of the National Bank's billportfolio by over Pengö 900 million in the same year was thus due indirectlyto government and other official financing (in spite of some amortisation ofthe direct government debt to the bank); the note issue rose by Pengö 970 mil-l ion. In 1943 an acceleration of the expansion took place, the increase inthe first nine months of the year exceeding Pengö 1,000 million, twice the

amount in the same period of 1942.The policy of placing government securities directly with the commercial

banks, while the National Bank acted in a refinancing capacity, prevented theemergence of an excessive liquidity of a kind found on the market in some

H u n g a r i a n N a t i o n a l B a n k .

At end of month

Assets

Claimson

Ger-many

"Otherassets"

Statedebt

Dis-counts

CO

Goldandgoldex-

change

Totalbalancesheet

L iab i l i t i es

Notes

Currentaccounts

public private

"Otherliabi-lities"

in millions of pengö1939 December .1940 December .1941 December .1942 March . . .

June. . . .SeptemberDecember .

1943 March . . .June . . . .September

140267404339506470653933

329

338

481

412514586685

861905

1,151

312

570

790

760761761724

718690666

585

710

1,196

1,1171,2051,7322,107

2,1962,1832,919

201

159

118

118114101102

104105104

1,486

1,843

2,795

2,7343,0543,5774,178

4,4044,5735,811

975

1,387

1,984

1,9992,1762,4702,958

2,9763,2013,974

100

84

372

316325456448

479370546

86

77

100

647573111

8684103

18 7

16 5

26 7

286408510594798854

1,127

(') Until 30th November 1942 booked as "Pengö advances made to fore ign countries under Para, g) of Ar t. 57of the statu tes"; from 7th December 1942, "Advances made for international pa yments" under same autho-rity. A t the end of 1942 Pengö 490 million of the advances had been made to Germany and Pengö 16 millionto Italy.

Claims on Germany as shown in the table result from three types of operation: (a) the direct pengöadvances of the National Bank, (b) the refinancing of the claims of commercial banks and (c) the rediscountfor commercial banks of the special bills placed with them by the Treasury for the purpose of taking overReichsmarks from the National Bank; the total of all these claims rose in 1942 by Pengö 370 million againstPengö 140 million in 1941. Further, the item "other assets", under which the claims of Hungarian exportersto Germany were booked until a formal advance was made (and balanced by a contra item under "otherliab ilitie s") , rose by some Pengö 200 million during the year. Both items together thus rose by Pengö 570 millionin 1942. In 1943 the increase of the two items amounted to Pengö 890 million in the fir st three quartersof the year — three times as much as in the same period of 1942.

(2) See footnote (').(3) At the end of 1942 Pengö 221 million consisted of direct long and short-term advances to the Treasury

and Pengö 504 million advances in connection with the withdrawal of bank-notes formerly in circulationin recently attached territories.

(") Acco rding to the annual report of the National Bank for 1942, Pengö 941 million discounts at the end of1942 were of government paper, Pengö 428 million of b ills on the Institution for the Regulation of the Moneyand Capital Market and Pengö 109 million of bills on the Institute for Industrial Work Creation: thus 70 percent, of the discount portfolio of Pengö 2,107 million was accounted for by these three classes of paper.

(5) Including some other items besides those specified.



- 221 —

other countries where the government has borrowed primarily from the centralbank. Beside the financ ing of government exp enditure, the war indu stries

and the clearing with Germany, the normal credit requirements of the privateeconomy have been relatively small, although some considerable new creditswere obtained from the banks by Christian firms which took over Jewishbusinesses. In April 1942 the National Bank requested the banks to examinecarefully all applications for new credit and to refuse credits for purposesother than those connected with the war effort and public supply, particularlyruling out credit for speculative purposes. Bank rate has remained unchanged

at 3 per cent, since October 1940; themarket rate for prime com mercial bills had awide spread of 3%-6 per cent., the maximumrate being reduced from 6% per cent, duringthe year. A representative long-term rate

fluctuated as shown in the table, the lowestlevel in 1942 being in June and the highestin December. A noteworthy innovation wasforeshadowed by the Finance Minister inhis budget speech in October 1943: a newlong-term loan was to be raised with itsvalue defined in terms of wheat, 3 per cent.

25-year bonds denominated in 5, 10, 25 and 100 quintals being issued for publicsubscription; the price of issue was Pengö 40 per quintal and this price wasguaranteed as the minimum for the redemption of the bonds: the first tranchewas fixed at Pengö 200 millio n.

H u n g a r y —l o n g - t e r m i n t e r e s t r a t e * .

Years

1939194019411942

Lowest Highest

in percentages6.256.104.905.71

8.337.696.257.09

• The yield of the 5 per cent, forced loan of1924 as published by the Hungarian NationalBank.

In Bulgaria, the Finance Minister stated in a speech early in August1943 tha t, altho ugh the tota ls of the ordinary bud gets f or the six years 1938-43aggregated Leva 69.4 milliard, actual expenditure, including the various special

budg ets, would reach Leva 103Bu lga r ia n Tr ea su ry O u t - p ay m e nt s . m i ll ia rd ; thi s f igu re co rresponds

closely to the total Treasury outlay,as published in the Treasury re-turns for 1938-42, plus an estimatefor 1943, as shown in the table.On the basis of a peacetimebudget of Leva 7 milliard, said the

Finance Minister, the war wouldcost Bulgaria Leva 61 milliard upto the end of 1943.

Internal borrowing, accordingto the Finance Minister, amountedto Leva 21 milliar d, including theproceeds of the forced loan of1941, the issue of Treasury certifi-cates and two or three loans

Calendaryears

1938

19391940194119421943

Totals . . .

Publishedordinarybudgettotals

OtherTreasury

out-payments

TotalTreasury

out-payments

in milliards of leva7.0

7.68.510.114.421.8

69,4

( - 0.3)

(—0.4)0.35.110.318.7

33.7

6.7

7.28.815.224.740.5

103.1

The ordinary budget totals given by the Finance Ministercorrespond to the published figures. The total Treasuryout-payments are published monthly in the Treasury statistics;those for 1943 are based on Leva 10.1 milliard for the first threemonths of the year. This estimate may be exceeded, as out-payments in the second quarter of 1943 were running at anannual rate of over Leva 60 milliard. The second column, com-prising "other Treasury out-payments", is the differencebetween the two other columns and gives some idea of thesize of the special budgets.



— 222 —

B u l g a r i a n I n t e r n a l P u b l i c D e b t /

obtained directly from the Agricultural and Cooperative Bank; these figuresexclude the internal financing of the clearing with Germany, effected throug hthe National Bank.

The official statistics indicate an increase of Leva 18.3 milliard in theinternal public debt in the three years 1940-42, excluding the official borrowingfrom the National Bank.

As mentioned in the twelfthAnnual Report of this Bank, a 5 percent. 15-year loan was placed, on acompulsory basis, in 1941 and producedabout Leva 3.5 milliard in that year;the subscription list was kept openthroughout 1942 and was closed inJune 1943, when the total had reached

Leva 9.5 milliard. A new 5 per cent.25-year forced loan, to which allpersons with a capital in excess ofLeva 100,000 must subscribe, wasauthorised in May 1943; while the firstloan was levied on large institutions,the second was a "popular" loan

and reached far down into the mass of the population. This second forcedloan was made payable in five equal tranches between May 1943 and June1944 and w as expected to am ount in all to Leva 12-15 m illia rd; the first trancheproduced Leva 2.1 millia rd. The Treasury has also put 3 per cent, certif icates

N a t i o n a l B a n k o f B u l g a r i a .

At end of year

1939194019411942

Increase1939-42 . . .

Consoli-dated Floating Total

In milliards of leva5.95.95.9

14.0

+ 8.1

4.27.5

11.114.4

+ 10.2

10.113.417.028.4

+ 18.3

* Excluding guarantees and current government borrow-ing from the National Bank and the financing of theclearings.

The foreign debt was shown as Leva 12.6 mil-liard at the end of 1939 and Leva 12.4 milliard at theend of 1942.

At end of month

1939 December .1940 December .1941 December .

1942 March . . .June . . . .September .December .

1943 February p) .

Assets

Goldand

foreignex-

change

Reichsmark claims

clear-ing

assets(')

invest-ments total

Ad-vancesandbills

"Otherassets"

(2)

Totalof

balancesheet

(3)

Liabil i t ies

Notecircu-lation

(4)

Current accounts anddeposits

govern-ment banks others

in millions of leva2,0102,0102,774

2,7742,9293,0893,095

3,095

1,7822,336

10,447

11,50913,96213,41315,15814,283

8661,8244,731

5,4605,2187,2108,648

10,105

2,6484,160

15,178

16,96919,18020,62323,80624,388

1,4702,2431,693

562504885

1,003580

138488741

2,4403,8043,4142,4512,201

10,53013,22025,075

27,01030,37031,76833,99033,901

4,2456,518

13,467

12,82313,86116,44818,92218,464

1,4791.9345,727

5,4545,2515,3906,222

6,589

1,3281,059

944

2,2503,4942,7441,5532,119

1,028791

1,448

2,0532,3753,5653,026

3,017

0) These are gross assets; the comparatively small clearing liabilities are shgwn on the other side of thereturn: they amounted to Leva 33, 26, 17 and 444 million at the end of the years 1939, 1940, 1941 and1942 respectively.

(2) This column does not give all other assets in the return but reproduces a separate Item called "otherassets".

(3) Including some other items than those specified in the table. An asset called "government debt", atLeva 3,333 million at the end of 1942, is the remnant of older borrowing and is being gradually amortised.

(") There are, in addition, Treasury certificates in circulation (see Chapter VI).(5) 15th February 1943, the last return to be published.



— 223 —

in circulation through the intermediary of the National Bank; these certificatesare equivalent to a supplementary interest-bearing note issue, as describedon page 308.

The main items of the balance sheet of the National Bank are givenin the table at the bottom of the opposite page up to 15th February 1943,from which date publication has been suspended. Of the increase inthe total balance sheet by Leva 8.9 milliard in 1942, Leva 8.6 milliardwas due to Reichsmark claims : Leva 4.7 milliard was added to theclearing balance and Leva 3.9 milliard utilised to repurchase Treasury billsdenom inated in Reichsmarks (previously given by the Bulgarian Governm entto German firms in prepayment of orders), booked by the National Bankas "inv es tm en ts" . The note circulation rose by Leva 5.4 mil l iard but, asexplained in Chapter VI, this is less than the real expansion of circulatingmed ia; the apparent decreases of th e note circ ulatio n early in 1942 and

1943 reflected the issue of Treasury certificates designed to circulate as bank-notes. The increase of the account of the government appears to be partlydue to the placing of such Treasury certificates with the National Bank,which books them under "other assets" unti l they can be put intocirculation.

An interesting feature in 1942 was the considerable expansion of bankdeposits, the increase at the important banks shown in the table amounting

to Leva 9.2 milliard,Bu lga r ian Bank D ep o s i ts . compared w i th only

Leva 3.8 milliard in 1941and Leva 1.6 milliard

in 1940.Bank rate has re-

mained at 5 per cent,and the discount rate ofthe big private banks wasnominally 6-8 per cent.What long-term yieldsmay be is difficult tosay, since governmentsecurities are practicallyunmarketable; i t seems

government bonds would be at leaston the forced loans.

At end of month

1939 December . .1940 December . .1941 December . .1942 March . . . .

JuneSeptember . .December . .

1943 March . . . .June . . . . . .

Agricul-turaland

Coopera-tiveBank

Postalsavings

bank

Popular

banks

Bigprivatebanks

Total

in millions of leva6,2557,0217,9928,4039,1069,645

11,42812,26213,034

3,6134,0475,0615,2365,6056,0606,6326,8526,976

3,2093,6224,9905,3255,6586,2457,0867,1817,192

2,3302,2962,7703,4933,7764,2334,8404,8324,959

15,40716,98620,81322,45724,14526,18329,98631,12732,161

certain, however, that the yield ofdouble the 5 per cent, interest paid

Published information regarding the various budget accounts in Roumaniais presented in such a way that it is difficult to form a clear picture ofdevelopments; thus the figures (reproduced in the table on the fol lowingpage) do not include all war expenditure, for which a separate fund hasbeen set up outside the budget; special budgets have also been openedfor Bessarabia and Bukovina. No recent statistics regarding the public debtare available.



- 224 -

R o u m a n i a n B u d g e t T o t a l s ( 1 ) .

Calendar years

19381939194019411942

Ordinary

(2>

Defence

(3) Totalin milliards of lei

30.332.939.556.899.5

3.66.9

15.017.926.6

33.939.854.674.7

126.1

0) As given in the Bulletin of the National Bank.(2) Ordinary taxation revenue plus the surpluses

of the autonomous Institutions and state enter-prises.

(?) Including Aviation and Navy Fund.

In June 1941 the National Bankundertook to make advances available tothe government up to Lei 12 milliard,to meet the "exceptional needs" of theTreasury. These advances were bookedunder "sundry accounts" among the bank'sassets until June 1942, when they wereshown separately; but "sundry accounts"continued to rise after that date and afurther credit appears to have been granted;for the sake of continuity, the two itemsare amalgamated in the table given below.

The expansion of the balance-sheet total by Lei 48 milliard in 1942 com-pared with Lei 44 milliard in the previous year, but the distribution among the

various items of the return was different: in 1941 three items together, the"sundry accounts" (including advances to the Treasury), advances againstReichsmarks in the clearing and the bill portfolio (consisting largely of Treasurybills rediscounted for armament firms through the Caisse autonome d'amor-tissem ent et de financem ent) rose by Lei 39 milliard and provided the bu lk of theexpansion in that ye ar; in 1942, these th ree items rose by only Lei 25 millia rd. Butthe gold holding increased by Lei 11 milliard (partly as the result of a purchase

N a t i o n a l B a n k o f R o u m a n i a .

Near end of month

Assets

GoldClear-

ingac-

counts

Billsdis-counted(andsecu-rities)

"Sundry ac-counts"

m

Allotherassets

Totalofbalancesheet

Liabil i t ies

Notecircu-lation

Deposits etc.

public private

othersightliabi-lities

Allotherliabi-lities

in milliards of lei1939 December .1940 December .1941 December .1942 March . .


1943 March . .June . . .

September

20.832.234.337.739.642.545.546.449.4

54.5

0.80.6

17.111.8(6)16.721.623.919.5023.3

25.3

20.122.931.833.933.635.640.840.141.3

52.9

8.55.4

21.627.928.530.532.138.9C)40.2

43.2

24.130.430.629.430.237.340.842.341.0

38.9

74.391.5

135.4140.7148.6167.5183.1187.2195.2

214.8

48.864.396.796.097.6

102.8117.4119.0122.5

140.2

1.53.0 '5.65.58.29.26.65.79.4

7.5

7.58.6

16.118.321.522.823.724.025.5

27.5

1.33.46.29.78.9

10.68.4

11.113.1

12.6

15.212.210.811.212.422.127.027.424.7

27.0(') Gold was revalued in May 1940, giving a book profit of about Lei W/2 milliard, which was taken by thegovernment.

(2) "Devises en comptes de clearing, décomptées".(3) The security holding (including participations in banks) amounted to Lei 2.2, 2.4, 4.7 and 6.3 milliard at the

end of the years 1939, 1940, 1941 and 1942 respectively.(4) Including advance to Treasury of Lei 12 milliard shown separately from 20th June 1942.(s) Ministry of Finance, public services and Caisse autonome.(6) A reduction in the clearing accounts from Lei 16.9 milliard on 24th January to Lei 10.4 milliard on 28th February

1942 took place in two steps which corresponded to increases of Lei 3.0 milliard in the gold holding andover Lei 3.0 milliard in the government's advances from the bank. Clearing assets were, therefore, partlyutilised for the purchase of gold and partly transferred to the government for repayment of Reichsmarkdebts or for other purposes.

(') A reduction in the clearing accounts from Lei 23.2 milliard to Lei 19.2 milliard on 20th February 1943 cor-responded to an Increase of a similar amount In "sundry accounts"; clearing assets amounting to Lei 4.0 milliardthus appear to have been transferred to the government against an increase of its advance from the bank.



— 225 —

of gold from Germany) and in other asset items, which had shown litt le move-ment, on balance, in 1941, and are not specified in the table, there was anexpansion of Lei 10 milliard: Lei 6 milliard in assets "corresponding to sundrytime liabilit ies" and Lei 4 milliard in "special provisions of foreign exchange"(both of these items probably include clearing assets set aside for specialpurposes). Thus, although direct lending to the government and advanceson clearing account appear to have slowed down, it is probable that the wholeexpansion of the return in 1942, which was somewhat larger than in 1941,was due directly or indirectly to various form s of official finan cing .

The note circulation increased by Lei 21 milliard in 1942, againstLei 32 milliard in 1941, and private accounts and other sight liabilit ies roseby less than in the previous year. But, here again, other liabilit ies, w hichhad not increased in 1941, rose by over Lei 14 milliard: "time liabilit ies"by Lei 7% mil liard and "sun dry acc ou nts" also by Lei 7% m il l iard; the

annual report of the bank gives no explanation of these increases.In December 1942, the Treasury was a uthorised to put out Treasury bills

which were intended to replace part of the bank-note issue , as explained onpage 309; by March 1943 over Lei 9 milliard of these Treasury bills had beenput into c irculation . In spite of this issue, the note circulation rose by Lei 23 mil-liard in the first three quarters of 1943, nearly four times as much as in thesame period of 1942; on the assets side, the bill portfolio increased by Lei 12 mil-l iard, "sundry accounts" by Lei 11 milliard and the gold holding by Lei 9 milliard.A noteworthy attempt to check the expansion was made in the autumn of 1943when peasants w ere invited to repay their debts (many having been out-standing since 1934) in wheat, the price of which had more than doubled in

two years.R o u m a n i a n C o m m e r c i a l B a n k s .

At end of month

1939 December

1942 March

1943 March

Assets

Cash Bills Debtors Secu-rities

Totalof

balancesheet

Liabil i t ies

Deposits Creditors Re-discounts

in milliards of lei5.46.17.35.68.08.9

11.011.1

3.53.34.75.35.95.96.06.0

9.59.0

15.316.418.221.923.924.7

3.03.83.53.43.03.12.92.7

26.425.635.734.839.644.749.649.3

3.22.95.66.17.6

10.212.012.7

12.212.717.317.218.920.621.922.5

3.83.33.93.34.14.25.04.7

The balance-sheet total of the eighteen large commercial banks rose byLei 14 milliard in 1942 against Lei 10 milliard in 1941, There appears to havebeen, in connection with the rise in prices, a further extension of creditsto trade and industry (booked under "d e bt o rs ") ; the banks played a verysmall rôle in the direct financing of government expenditure — indeed , theirsecu rity hold ings have fallen sinc e 1940. Du ring 1942 the National Bank inform edthe banks that only three categories of new credits would be authorised: those



- 226 -

R o u m a n i a n P o s t O f f i c e B a n k .

End of month

1939 December . . .1940 December . . .1941 December . . .1942 June . . . . . .

December . . .

Savingsdeposits

Postalcheque

accountsTotal

in milliards of lei

3.23.35.46.89.0

10.8

2.12.14.76.49.1

13.8

5.35.4

10.113.118.124.6

granted to assist the war effort, to stimulate industry or to increase agriculturalpro du ctio n. Of the depo sits of Lei 12.0 milliard sho wn at the end of 1942,Lei 10.8 milliard were savings deposits.

Deposits at the Roumanian postoffice have increased considerably, par-ticularly the postal cheque accounts,which by June 1943 had risen tonearly Lei 14 milliard. The investmentof the new deposits at the post office,Lei 8 milliard in 1942 and Lei 6% m il-liard in the first half of 1943, doubt-less provides one of the main sourcesof credit for the government outsidethe National Bank.

Bank rate has remained at 3 per cent., to w hich it was reduced inSeptember 1940, and credits granted by the commercial banks are pegged at4 per cent, above th is level, i. e. at 7 per cent., the yield of governm entbonds on the market being around 9 per cent.

The ordinary budget in Slovakia for 1942 appears to have been wellbalanced; the estimates gave ex penditure at K s. 2,400 million and revenue(including Ks. 1,600 million from taxation) at Ks. 2,200 million; but taxrevenue actually produced Ks. 1,000 million more than the estimates andthe state railways closed with a surplus, instead of an estimated deficitof Ks. 100 million. Any surplus arising on the ordinary budget was doubtless

carried to the so-called investment budget, in which expenditure was otherwisedependent upon the possibility of market borrowing, The government has notborrowed directly from the central bank, monetary conditions being dominatedby the financing of the clearing with Germany; only a part of the total claims,however, was financed by the central bank.

S l o va k N a t i o n a l Ba n k .

At end of month

1939 December . . .1940 December . . .1941 December . . .1942 March

JuneSeptember . . .December . . .

1943 March . . . . .June .September . . .

Assets

"Otherassets" *

Dis-counts

Ad-vances

Statenotedebt

Goldand

foreignexchange

Totalof

balancesheet

Liabil i ties

Notecircu-lation

Depositsetc.

"Sundryliabi-lities"

in millions of Slovak crowns8981,0221,4411,5401,7101,9442,1892,2052,3612,234

333257242132285323484448451580

3260209124108106200110204447

469469469469460460460453453453

571089782746678855056

1,7872,1472,6392,5902,8783,1213,5683,4703,6753,912

1,3921,6572,0231,9572,0692,4162,7422,5832,7523,185

20820714715433491

177236192143

87181364370366505541536616469

End-of-year balance sheets show that the clearing accounts included under this item amounted to Ks. 398 millionfor 1940, Ks. 845 million for 1941 and Ks. 1,575 million for 1942.



— 227 —

Clearing claims (booked under "oth er ass ets" ) increased by Ks. 730 mil-lion in 1942 (against Ks. 450 million in 1941) and discounts by Ks. 240 million,while the note circulation rose by Ks. 720 million. The increase in "sundrylia bi liti es " by Ks. 180 million in 1942 reflects th e partial payment of clearingclaims in Kassenscheine.

The co mm ercial banks increased their advances ("de bt ors ") by Ks. 500 millionand purcha sed Ks. 90 million secu rities durin g the year 1942; but curren t acc oun tsand savings depo sits together rose by only Ks. 140 milli on ; ind eed, currentaccounts actually fell by Ks. 90 million in the second half of the year. In the springof 1942, in order to create favourable conditions for the issue of a governmentloan, the banks had been compelled to reduce the rate on current accounts

from 2% to 1% per cent.,S lo vak Co m m er c ia l Ba nks . wh ile the ra te on sav ings

deposits remained un-changed. The comparativestagnation of depositswhile the banks wereforced to buy governmentsecurities explains the in-crease of rediscounts atthe National Bank.

The relative tightness which developed on the market in 1942 and persistedin 1943 had four main causes: the payment of clearing claims partly inKassenscheine, the withdrawal by the government of the greater part ofconfiscated Jewish deposits from the banks, the obligation imposed upon

share companies to place a certain proportion of their reserves in govern-ment securities and the evident preference shown by the public for notesrather than bank deposits.

In 1942 two government loans were iss ue d: the 4 % per cent. Investmentloan fo r Ks. 600 m illion an d K s. 500 million 3 per cent. K assen schein e. Part ofthe proceeds of these loans was utilised to finance the clearing with Germany.A law was passed in June 1943 authorising the Minister of Finance to takeover a substantial portion of the National Bank's claims in respect of theGerman clearing and to raise the necessary funds by borrowing. Banks andcredit cooperatives have been obliged to invest 22 per cent., and savingsbanks 33 per cen t., of the increm ent o f their dep osits in governme nt paper,

insurance companies the bulk of their premium reserves and all share companiescertain proportions of their reserves.

At end• of year

19411942

Assets

Cash Bills Secu-rities

"Debt-ors"

Liabil i t ies

Currentaccounts

Savingsdeposits

in millions of Ks.

425430

322185

684778

2,5003,000

2,2262,274

1,6711,762

In June 1942 an agreement regulating the partition of outstanding assetsand l iabi li t ies of Y u g o s la v ia was signed in Berl in by the successor states.The internal government debt, which amounted to Din. 3Ò.5 milliard, wasdivided up into quotas corresponding approximately to the area of the terr i-tory taken over, as shown on the next page. The successor states undertook tocall in the Yu goslav debt in their territo ry by 22nd November 1942 with a view



— 228 —

P a r t i t i o n o f Y u g o s l a vg o v e r n m e n t d e b t .

Successor States

ItalyC)Hungary .

Serbia«Croatia

Total . . .

Percen-tages

5888

2942

100

(1) Including Albania and Montenegro.(2) Including 4 per cent, in respect of

the Banat.

to converting it into bonds of their own publicdebt; should the Yugoslav debt withdrawn by anystate fall short of the quota, the difference was to

be paid in cash or national bonds to a clearingoffice set up in Belgrade under German admini-strat ion, which would eventually distribute suchassets amongst those successor states which hadwithdrawn more than their quota. A list of Yugoslavstate debts was appended to the Berlin agree-ment, whic h also made arrangem ents regardingthe external debt and entered into considerabledetail as to the settlement of other assets andliabilities in the partitioned territory; the agree-

ment also contained a provision that a settlement was to be reached be-

tween the successor states regarding the former Yugoslav National Bank,the State Mortgage Bank, the Chartered Agricultural Bank and the Post Officesavings bank, the liabilities of which had been guaranteed by the formerYugoslav Government.

Croatia and Serbia (formed as separate states in 1941) inherited theYugoslav banking system and in both cases the Yugoslav moratorium provisionswere maintained; the assets and liabilities of the old National Bank of Yugoslavia(which was put into liquidation) were taken over by two new central banks;and in both cases occupation costs had to be paid and claims in the clearingwere run up against Germany.

Acc ording to the estimates the ordinary budgets in C ro a ti a balanced atKunas 10.9 milliard in 1942 and Kunas 16.4 milliard in 1943; military expendi-ture (includ ing th e Ustacha troo ps) accoun ted fo r 33 per cent, of proposedexpenditure in 1943 and the Ministry of the Interior (including the police)for a further 25 per cent.

C r o a t i a n B u d g e t E s t i m a t e s .

Calendar years

Expenditure :Defence (

1)

Interior .TreasuryAll other P)

Total . . .Revenue :

Monopolies etc. . , .Total . . .

1942 1943

in millions of kunas

2,874

1,3321,5925,09310,891

3,4464,3283,117

10,891

5,393

4,1132,8284,04116,375

6,2604,7275,388

16,375

0) Including Kunas 2,113 million for the Ustacha troopsP) Including the Ministries of Education, of Health etc.

But these figures exclude the extra-ordinary budgets covered in other ways;for 1943, Kunas 4.75 milliard extra-ordinary expenditure (with Kunas 3 mil-liard for defence) was approved duringthe first four months of the year,Kunas 1.25 milliard to be covered bythe realisation of property confiscatedfrom Jews (by a law of November 1942)and Kunas 3.50 milliard by borrowing.According to a statement of the FinanceMinister in May 1943, total governmentexpenditure in the two years from10th April 1941 to 31st March 1943was covered as to 55.3 per cent, bycurrent revenue and 44.7 per cent, by



— 229 —

C r o a t T r e a s u r y C e r t i f i c a t e s .

Maturity

10 years

Interestrate

3 %

3/4456/a

Issueprice

100.00

99.8599.5098.5097.00

borrowing, so that extraordinary expenditure was probably as great as theordinary budget outlay. An d this excludes the financing of occupation

costs effected directly by the State Bank.Government market borrowing has been in the form of Treasury certifi-

cates, three issues of which have been made. The first issue, in December1941, was fo r about Kunas 2 milliar d, a great part of wh ich appears tohave been covered by the compulsory consolidation of large packets of bank-notes of the former National Bank of Yugoslavia brought in for exchange.

Three months later a second issue forKunas 1 milliard was made. There were nofurther issues until May 1943, when thethird tranche brought in Kunas 3.4 mil l iard;the terms of this issue are shown in theaccompanying table. Although an aggregateof Kunas 6.4 milliard appears to have beenissued, some certificates of relatively shortterm have matured and a total of Kunas 4 mil-

liard outstanding was mentioned in J„uly 1943. In March 1942 bank rate waslowered from 5 to 4 per cent, and the rate for advances from 6 to 5% percent., an attempt to introduce lower market rates being later abandoned.In May 1943 the rate for advances was again increased to 6 per cent,although bank rate was maintained unchanged.

The first business of the Croatian State Bank was the withdrawal andexchange of notes of the former National Bank of Yugoslavia. Difficulties werecaused by a number of factors, including the smuggling of large amounts

of dinar notes backwards and forwards over the practically open frontierbetween Croatia and Serbia according to rumours as to their treatment inone or the other country; for this reason packets of more than Din. 3,000 werenot exchanged for new notes but a receipt was given. (Notes of denomina-

tions of Din . 100 and over were regardedas bank-notes but smaller notes of D in. 50and less were treated as a government issueof divisional currency.) The exchange startedin June 1941 and was reflected in the con-siderable increase of giro obligations of theState Bank. In December 1941 these obligationsfell to one-half, when the first tranche ofTreasury certificates was issued; at the endof December 1941 the note issue was Kunas8,352 million. These figures were given in thereport of the bank for 1941, published in thesummer of 1942,

No statistics for the year 1942 are available but, as mentioned on page 295,the new statutes of the bank prescribed the publication of a fortnightly return;the first retu rn, for 30th Ap ril 1943, and end-of-m onth returns fo r June andthe following months are given in the table on the next page.

C r o a t i a n

End of month

1941 April . . .May . . .June . . .

July . . .August . .SeptemberOctober. .NovemberDecember

S ta te Ba n k .

Notecirculation

Giroaccounts


8,C52

196364

2,277

2,7002,5332,6062,5182,7281,363



- 230 -

C ro a t i a n S ta te Ba n k .

At end of month

1943 April . . . .June . . . .JulyAugust . . .September .October. . ,

Assets

Goldand

foreignex-

change

Ad-vances

tooccupy-

ingtroops

(1)

Clear-ing

claims

Dis-countsandad-

vances(!)

Oldnotesex-

changedetc.00

Over-draft

of Fi-nanceMinis-

try(4)

Allotherassets

Totalof

balancesheet

Liabil i ties

Notecircu-lation

Giro-ac-

counts

Allotherliabili-

ties

In millions of kunas1,2761,2982,0092,1943,136

114

2,7504,2895,5897,8599,0219,978 2,714

14,87613,84915,77618,92520,76422,690

7,7947,8137,8107,8117,8597,859

5001

220310348

1,2111,2601,2341,3161,2591,155

27,90729,00932,41938,32542,34944,858

22,24024,19525,69228,26931,81634,316

3,9763,0864,5677,6607,8487,566

1,6911,7282,1602,3962,6852,976

(1) Shown as advances against claims in foreign countries.

(2) At the end of 1942 only one Agram (Zagreb) bank had rediscounts, which amounted to Kunas 131 million.(3) The Croatian government debt, created to cover the liabilities of the former National Bank of Yugoslavia,taken over by the State Bank; liabilities for notes withdrawn constitute the bulk of this item, which alsoincludes liabilities for deposits and old clearing accounts taken over by the new bank.

(') Credits may be granted to the Finance Ministry up to Kunas 500 million on current account.The total circulation of the NationaJ Bank of Yugoslavia had risen, in the

twelve months to March 1941, by Din. 5.0 milliard to its highest point ofDin. 15.4 m illiard (on 31st March 1941, the last return before the outbreak ofhostilities); the circulation in the territory which was later called Croatia wasestimated at Din. 6.4 milliard. To cover these notes and other liabilities takenover from the former National Bank, the government created a special debtcertificate, which is shown as a separate asset item in the State Bank'sreturn and in the table above.

The circulation of kuna notes in April 1943 was Kunas 22.2 milliard,the increase over two years thus being Kunas 15.8 milliar d, which more thantripled the cir cula tion. The Minister of Finance in a speech on 6th May 1943gave three reasons for this considerable increase: lending to the new govern-ment, advances to the allied troops in occupation and the financing of theclearings with Germany and Italy.

The exact amount of government borrowing from the central bank wasnot, however, given by the Finance Minister in May 1943 and it is not shownas a separate item by the State Bank but, as contact between the bank andthe general economy of the country was reliably reported to have been in-significant, government borrowing is doubtless shown under "discounts and

advances". This borrowing was due, according to the Finance Minister, to theestablishment and organisation of a Croat army, to "public works" includingthe repair of damage done by partisan tro op s, to caring for refugees fromterritories where partisans were operating and to the expenses connectedwith the foundation of the Croat State.

Advances to the occupying troops were made by the State Bank to covermilitary pay and allowances, the building of barracks and sundry otherexpenses; these advances are shown as a separate item in the return. Thethird and least important reason for the increased note circulation, according



— 231 —

t o t h e F i n a n c e M i n i s t e r , w a s t h e f i n a n c i n g o f t h e s u r p l u s i n t h e c l e a r i n g ;

t h e c o m m e r c i a l b a l a n c e o f t h e c o u n t r y w a s p a s s i v e w i t h G e r m a n y a n d I t a ly

b u t a s u r p l u s a r o s e t h r o u g h s u c h s e r v i c e s a s t r a i n a n d o t h e r t r a n s p o r t , r e -

p a t r i a t i o n o f w a g e s f r o m w o r k e r s i n G e r m a n y , e t c . A d e c r e e o f 1 4 th O c t o b e r

1 94 3 m o d i f i e d t h e s t a t u t e s o f t h e S t a t e B a n k , p e r m i t t i n g i n t e r a li a t h e f i n a n c i n g

o f t h e c l e a r i n g s .

I n th e s i x m o n t h s t o O c t o b e r 1 9 43 t h e n o t e c i r c u l a t i o n r o s e b y K u n a s 12 .1 m i l -

l i a r d a n d g i r o a c c o u n t s b y K u n a s 3 .6 m i l l i a r d , t h e i n c r e a s e s b e i n g d u e t o

K u n a s 7 .8 m i l l i a r d g o v e r n m e n t b o r r o w i n g , t h e p a y m e n t o f K u n a s 7 .2 m i l l ia r d

o c c u p a t i o n c o s t s a n d K u n a s 2 .7 m i l l ia r d a d v a n c e s o n c le a r i n g c l a i m s ( w h i c h ,

u n t i l S e p t e m b e r , h a d b e e n b o o k e d u n d e r " g o l d a n d f o r e i g n e x c h a n g e " ) . T h e

e x p a n s i o n h a s t a k e n p l a c e a t a n e v e r - i n c r e a s i n g s p e e d : r i s e s i n t h e c i r c u l a t i o n

o f K u n a s 1 m i l l i a r d i n M a y a n d J u n e w e r e f o l l o w e d b y K u n a s 1 % m i l l i a r d i n

J u l y , K u n a s 2 % m i l l i a r d i n A u g u s t a n d K u n a s 3 % m i l l ia r d in S e p t e m b e r ; i n

O c t o b e r t h e i n c r e a s e w a s a g a i n K u n a s 2 % m i l l i a r d , m a k i n g K u n a s 1 2 m i l l i a r df o r t h e s i x m o n t h s , e q u i v a l e n t t o a n a n n u a l r a t e o f e x p a n s i o n o f o v e r

1 00 p e r c e n t . T h e s e p a r a t e i s s u e s o f n o t e s b y t h e c i t y o f A g r a m ( Z a g r e b )

a n d b y t h e g o v e r n m e n t a r e m e n t i o n e d o n p a g e 3 17 .

T h e b a l a n c e s h e e t s o f t h e m o s t i m p o r t a n t b a n k s in t h e c o u n t r y h a v e

b e e n p u b l i s h e d f o r t h e e n d o f 19 42 a n d a r e s u m m a r i s e d i n t h e t a b l e ; t h e

t o t a l o f d e p o s i t s a n d c u r r e n t a c c o u n t s , i n c l u d i n g s a v i n g s d e p o s i t s , a m o u n t e d

t o o n l y K u n a s 1 3 .8 m i l -

l i a r d , a v e r y s m a l l f i g u r e

c o m p a r e d w i t h t h e n o t e

c i r c u l a t i o n . A n e w b a n k -

i n g l a w o f S e p t e m b e r

1 94 2 c o n t a i n e d p r o v i s i o n s

i n t e n d e d t o e n s u r e t h e

s a f e t y o f b a n k d e p o s i t s .

B u t t h e m o d e s t l e v e l o f

d e p o s i t s i n t h e c o u n t r y

s h e d s l i g h t o n t h e

r e a s o n s w h i c h c o m p e l

t h e g o v e r n m e n t t o t u r n

t o t h e S t a t e B a n k i n

o r d e r t o c o v e r t h e b u l k

C r o a t i a n B a n k s .

At end of 1942

Commer-cial

banks0)

Assets:Cash and liquid resourcesSecuritiesAdvances and overdrafts .Mortgage credits

L iabi l i t ies :Capital and reserves . . .DepositsCurrent accounts . . . . .

Govern-mentbanks

Savings

banksC3)

Total:

18banks


1,1881,0603,228

119

7271,5013,963

2,003

2,1272,629

1,079

634,168

2,409

68169

2946

841,083

689

3,8723,2566,1511,204

8746,7527,061

0) Six Agram (Zagreb) banks.Ö Three state banks: the Post Office savings bank, the Savings Bank of the

Independent State of Croatia and the State Credit Institution (the former

Yugoslav State Mortgage Bank). (3

) Nine ordinary savings banks.o f i t s b o r r o w i n g .

L i tt l e s t a t i s t ic a l i n f o r m a t i o n r e g a r d i n g d e v e l o p m e n t s i n S e r b i a h a s b e e n

a l l o w e d o u t o f t h e c o u n t r y s in c e t h e o c c u p a t i o n . T h e n e w S e r b i a n N a t i o n a l

B a n k h a s i s s u e d n o r e t u r n o r b a l a n c e s h e e t a n d n o f i g u r e s o f t h e c o m m e r -

c i a l o r s a v i n g s b a n k s a r e a v a i l a b l e . A s t a t e m e n t p u b l i s h e d f o r 1 94 2 s h o w e d

t h e b u d g e t i n e q u i l i b r i u m a t D i n . 3 ,4 0 6 m i l l i o n a n d e s t i m a t e s f o r 19 43 w e r e

p u t a t D i n . 5 ,4 8 0 m i l l i o n ; b u t t h e s e f i g u r e s e x c l u d e d e x t r a o r d i n a r y e x p e n d i t u r e ,

t h e p a y m e n t o f o c c u p a t i o n c o s t s a n d t h e f i n a n c i n g o f t h e c l e a r i n g .



- 232 -

In point of fact, a considerable proportion of government expenditure hasbeen met by advances from the Serbian National Bank, the note issue increasingand the m arket show ing s igns of ab norma l liquidity. How great the expansion

has been it is not possible to judge, in the absence of reliable data. It wasreported early in Jun e 1942 that the note c irculation had reached D in. 10 milliard ,of wh ich D in. 6.8 milliard was on ac coun t of the exchange of old Yugoslavnotes , the balance being due largely to the payment of occ upation costs and thefinancing of clearing claim s; further, interest-bearing accounts at the NationalBank am ounted to Din . 1.8 milliard and nearly D in. 1 milliard certificates hadbeen issued by the National Bank.

These certificates were the only Serbian paper on the market in 1942.They were issued by the National Bank from March 1942 onwards to mop upsurplus funds and they originally bore interest from 2 per cent, for threemon ths up to 3 per cent, for on e year. In November 1942 the rates were

raised to 2% and 3% per cent, respectively and in A ug us t 1943 the NationalBank decided to issue two-year certificates at 3% per cent. Certificates issuedby the National Bank were rediscoun table at all times at par.

In 1943, efforts were made to reduce the calls on the National Bank.From April a number of indirect taxes were raised and railway passenger faresdoubled. Special measures were taken against the hoarding of notes and along-term government issue was made for the first time; in March 1943, a4% per cent. 30-year forced loan for Din. 1,000 million, issued at 98%, wastaken up by the State Mortgage Bank in Belgrade and by the Post Officesavings bank. A furthe r Di n. 2,000 m illion loan in July 1943 was issue d in threeforms: bonds with interest at 4% per cent., lottery bonds carrying 2% per cent,

and pure lottery bonds without interest but with higher prizes, the bonds beingissued at 98%.

Bank rate has remained at 4 per cent., to which it had been reduced inDecember 1941. From July 1943, interest rates on commercial-bank depositswere fixed, ranging from 1 per cent, on sight accounts to 3 per cent, for one-year deposits; at savings banks, 2 per cent, was paid for sight deposits andother rates up to 3% per cent, for one year. The moratorium on debts incurredprior t o 6th Ap ril 1941 has been pro longe d until 30th June 1944.

Since the second half of 1942 Greece has suffered a catastrophic inflationsuch as has not been seen in Europe for nearly twenty years. Statistical andother information is somewhat fragmentary but all the available indications go tocon firm the violence of the exp ans ion; N ational Bank shares of Dr. 1,000 werequoted at Dr. 2,000,000 and over when the Athens bourse opened in the middleof December 1942, while the rate for the "g ol d po un d" on the black marketfluc tua ted between Dr. 170,000 and Dr. 600,000 (the h ighes t rate, in Oc tobe r 1942),against a par rate for sterling of Dr. 600. The circulation of the Bank of Greece,which was only Dr. 7 milliard in December 1938, soared above Dr. 300 milliardin December 1942 and continued its upward course to over Dr. 1,200 milliardin September 1943.



— 233 —

Ba n k o f G re e ce .

End of month

AssetsGoldand

foreignex-

change

Advanceto

govern-ment

Claimson

Ger-manyandItalyP)

Invest-ments

Allotherassets

Totalof

balancesheet

Liabil i ties

Notesin

circu-lation

Deposits

govt banks other

In milliards of drachmae1938 December .1939 December .1940 December .1941 March (

4) . .

June (5) . . .December(8)

1942 May p) . . .

JuneC5

) . . .December O1943 March P) . .

September(')

3.84.2

11.920.9

25.9

25.9

9.812.916.515.7

44.7

105.7

—

" "

198.4•

0.50.40.40.5

13.8

m

4.65.97.86.1

•

18.723.436.643.2

7.29.5

15.418.124.048.885.2

100306.0400

1,276

0.50.51.11.7

17Ì2

•

1.00.40.40.6

22.3

8.110.615.217.7

17.8(8)

Note: The war with Italy started in October 1940; hostilities with Germany began In March 1941 and In Aprilthe country was occupied by German and Italian forces.

(1) Gold, sterling and dollars blocked abroad. At the end of 1942. £1 million was held In gold bars and £2.4 millionin gold coin, both blocked in the United States, £43 million was In sterling (from amounts advanced bythe British Government in 1940-41 to cover war expenditure) and $14.5 million in United States banks.

(2) Occupation costs and clearing accounts. By an agreement signed in Rome in the spring of 1942, the Greekstate was burdened with only a part of the occupation costs; any amount spent in excess was carriedon to the Italian-German clearing account, but the Greek state had to advance the extra amount in drachmae.

(3) Including International Financial Commission (1938 Dr. 6.1 milliard, 1939 Dr. 9.0 milliard, 1940 Dr. 11.8 milliardand March 1941 Dr. 12.1 milliard). (») 15th March 1941, the last regular return published.

(5) In June 1942 the Minister of Finance gave these figures of the note circulation for June 1941 and Mayand June 1942. (6) From the end-of-1941 balance sheet of the bank, as published in the Greek press.

(') From information published in the Greek press. The main items of the return were given for 15th December1942 and the note circulation on 25th March 1943 was stated to be "a little over Dr. 400 milliard". Thenote circulation was Dr. 1,276 milliard on 30th September 1943, having risen from Dr. 1,135 milliard on10th September, when other liabilities of the bank were given as Dr. 265 milliard.(8) Circulation of bank bonds.

The occupation cut off the country from its normal overseas suppliesand shortages soon developed, particularly of foodstuffs; at the same timethe currency was expanded by the issue of some RM 10 million Reichskredit-kassenscheine by the German army, which were later exchanged by the Bankof Greece for its own notes. The Italian authorities also issued notes of theMediterranean Bank. Governm ent revenue, largely derived fro m cus tom s dutiesand tobacco taxes, fel l off sharply as imports ceased and the most importanttobac co areas were attached to B ulgaria. In June 1942 the M inister of Financestated that the budget accounts for the financial year 1941-42 closed withrevenue of Dr. 16.5 milliard and expenditure of Dr. 30.3 milliard, excludingoccupation costs.

An acute economic crisis developed, particularly on the foodstuffs market,and exports to Germany dried up . Emergency steps had to be taken by theGreek Government and experts were appointed by the German and Italianauthorities in October 1942. No full account of the proceedings has beenpublishe d but the follow ing measures were reported to have been ado pted ,generally from November 1942 onwards:



— 234 —

(a) Special food imports were made, the contribution of Red Cross institutions beingimportant.

(b) Forced deliveries of agricultural produce from the 1942 domestic crop were paidfor as to 25 per cen t, in cash and 75 per cen t, in Treasury bills due at the endof March 1943.

(c) Rates of taxation were increased considerably to correspond w ith the internaldepreciation of the currency, and 60 per cent, of the taxes due in 1943-44 weremade payable in advance in 1942-43.

(d) Other government revenue was augmented by special measures: in particular,all share companies had to increase their capital by 20 per cent, (banks 10 percent, only) by 15th March 1943, and to make a corresponding revaluation of theirassets; the proceeds were to be paid over without compensation to the government(or the new shares issued directly to the government). This measure was con-

. sidered to have the double advantage of putting pressure on share prices andindirectly taxing shareholders (as owners of Sachwerte) while at the same timeproviding funds for the government.

(e) Government salaries and wages were raised to bring them more into line withcurrent prices.

(f) All unutilised bank credit outstanding on 14th November 1942 was cancelled and

the granting of new credit by the commercial banks in excess of D r. 1 millionto private persons and Dr. 10 million tò companies was put under the controlof a special committee of the Bank of Greece (including German and Italianexperts).

(g) The limit on the withdrawal of bank deposits, which had already been raisedfrom Dr. 30,000 to Dr. 50,000, was further increased to Dr. 100,000 a week from16th November 1942; the moratorium had previously been largely evaded by a systemof discounts for cash payments, amounting at times to nearly 20 per cent. Thedrawing of cheques payable to "bearer" and transfer by endorsement were per-mitted (as was not previously the case). Further, from 19th December 1942, new"fr ee " accounts, with no restriction upon withdrawals, m ight be opened, in-payments being exclusively in bank-notes.

(h) The deposit of funds at the savings banks was encouraged, the upper limit onindividual savings accounts at the post office being raised in January 1943 toDr. 300,000.

(i) A ll banks were compelled to maintain a "reserve", in government paper, of25 per cent, against savings deposits and deposits without fixed maturity, and50 per cent, against fixed deposits.

In addit ion, two monopoly companies were forme d, "D eg rige s" and" S a c i g " (as mentioned on page 64), to look after German and Italian interestsrespectively. Previou sly, a special tax of 100 per cent, of the price had beenplaced on imports to provide the government with funds and to diminishthe excessive profits of importers. This tax was raised to several times itsformer level, made payable to the monopoly companies and utilised partlyto subsidise exports to Germany and Italy and partly to meet the costs ofoccupation. Prices of imports and exports and the use made of imports wereput under the control of the monopoly companies.

Officially the rate of Dr. 60 to the Reichsmark was maintained , althoughGreek share prices had risen ten times and commodity prices a hundredtimes and more above those obtaining when the rate was fixed, since itwas considered that an adjustment to the purchasing power parity wouldadd fuel to the inflationary proces s. Actu ally the technique of Degriges wasto arrange deals largely in volumes, quantities of exports being traded forquantities of imports, so that the exchange rate played a minor rôle; and forcapital transfers from Greece to Germany a supplement of varying amount waspayable (to the German military auth oritie s), generally D r, 540 per Reichsm ark,



- 235 -

the e ffective rate thus work ing out at Dr. 600 = R M. 1. A Greek exchangeexper t 0 stated early in 1943 that the Dr. 26 milliard reserve of gold, sterlingand dollars shown in the balance sheet of the Bank of Greece would.fully cover the note issue when revalued at the new level of the drachmaafter the war; a rate of Dr. 20,000 to the "gold pound", 16 times the rateof Apri l 1941, was suggested.

In the early months of 1943 some provisional stabilisation of the Greekinternal position was reported from German sources as a result of the emer-gency measures. Exports to G ermany were again under way; in three m onthsDegriges had obtained permits, to the equivalent of about RM 120 million,to import from Greece. Bank credit had been curtailed and the quotationsfo r gold, foreign exchange and securities had fallen sharply. But in February1943 the Minister of Finance announced that budget expenditure, excludingoccupation costs, was running at the rate of Dr. 250 milliard per annum,including Dr. 170 milliard for salaries and pensions; and, as further increasesof salaries took place in the f ollow ing mo nths , these figures have furtherexpanded. Moreover, the rise of the note circulation continued at the samerapid pace; th e increase in the last six months of 1942 by Dr. 200 milliardwas fo llowed in the first three months of 1943 by a further increase ofDr. 100 milliard.

In the next six months the expansion again accelerated and the increaseof the note issue was by more than Dr. 800 milliard, the circulation thus triplingin the half-year to September 1943. Further emergency measures were adopted,including the taking-over by the government from the banks of one-half oftheir security holdings and the appointment of government commissioners at

all banks and share com panies to supervise their b usine ss. In Octob er 1943,the Greek exchange expert already mentioned stated (2 ) that the note issue wasstill fully covered by gold , sterling and dollars at an exchange rate of onlyDr. 100,000 to the "gold pound" (instead of the current market rate, whichwas then Dr. 400,000(3)).

In relation to the belligerents and the occupied countries in Europe,the three neutra ls , Swi tzer land, Sweden and Por tuga l , present a s tr ik ingcon tras t; although Sw itzerland and Sweden have had to bear considera bledefence expenditure, this has been financed internally with little or no aidfrom the central banks, the relatively moderate increase of the circulation

in the two countries and the more considerable expansion in Portugal beinglargely against gold. None of the three central banks have made directadvances for the financing of clearings.

In S w it z e rl a n d extraordinary defence expenditure began in 1934 andin the nine years to 1942 amounted to Sw .fcs 4,160 m illion (of wh ich nearlytwo -third s represented expenses of mo bilisat ion); S w.fc s 260 million pertained

0) Monsieur Philaretos, in an article in the Athens press, as quoted by the "Deutsche Volkswirtschaft" 1943,No. 18, and the "Südost-Echo" of 12th February 1943.

(2) As quoted by the "Südost-Echo" of 5th November 1943.<3) In November 1943, the "gold pound" fluctuated between Dr. 800,000 and Dr. 1,900,000.



- 236 -

C e n t r a l b an k r e t u r n s — S w i t z e r l a n d , S w e d e n a n d P o r t u g a l .

Near end of monti




1

IncreaseDecember 1939to December 1942

Switzerland

Goldand

foreignex-

change

Notecircu-lation

Totaldepo-sits0)

in millions of Sw.fcs2,6233,1703,558

3,5773,5843,5723,628

3,7383,8123,930

1,005

2,0502,2732,3372,2382,2462,3402,6372,5792,6422,805

587

7891,1781,2361,4671,4771,3031,2901,3081,3511,455

501

Sweden

Goldand

foreignex-

change(2)

Notecircu-lation

Deposits

govt(3)

banks

In millions of Swedish Kr.,314,214,496,585,622,675,736,789,865,931

422

1,4221,4821,7001,6491,7051,8322,0161,9311,9692,133

594

267380297406375661744653563361

477

153324417631544266161223173307

8

Portugal

Goldand

foreignex-

changenet

Notecircu-lation

Deposits

govt banks

In millions of escudos1,6212,5616,0697,4398,2679,452

10,59811,35811,92512,598

8,977

2,5502,9034,4884,4754,6144,9445,4815,4405,6796,128

2,931

161247325

1,1261,1411,5721,9332,4722,7312,337

1,772

603851

2,4332,9923,5673,9494,1894,4414,5324,977

3,586

(1) The figure given for all deposits is the total of sight liabilities. Government deposits, which are compara-tively small, are shown only in the annual balance sheets; they amounted to Sw.fcs 11, 7, 195 and 14 millionat the end of 1939, 1940, 1941 and 1942 respectively.

(2) Gold at market price (I.e. as booked, plus the premium account) plus net foreign exchange (at the bookprice). Differences between this column and the figures given on the same subject In Chapter III aredue to the fact that in the latter case the foreign exchange also Is given at market price (according to acalculation published only once a year, for December).

(3) Deposits of state Institutions. These are practically balanced by a contra item of "Funds placed at thedisposal of the National Debt Office" by the bank, e. g. December 1942 S.Kr. 675 million.

to the pre-war period and Sw.fcs 3,900 million to the war years 1939-42. Thedeficit on the ordinary budget was small in comparison, an aggregate of

some Sw .fcs 200 million in the years 1939^42, but, apa rt from the budgetacc oun ts, official c redits of Sw .fcs 800 million were granted to G ermany inthe clearing , serving to meet passive balances in 1941-43. For 1943, extra-ordinary budget expenditure was estimated at nearly Sw.fcs 1,500 million.

In 1939-42, some Sw.fcs 940 million was raised in extraordinary taxation (overone-half by a tax on capital called the "defence sacrifice"); Sw.fcs250 mil l ion wastaken in 1940 from the Exchange Fund, this being equivalent to an extension ofcentral-bank credit; and the balance has been borrowed: nearly Sw.fcs 1,700 million

at long term, generally at 3% perC om m er ci a l bank de po s i t s — cent. .over Sw.fcs800 mi ll ion through

5 to 7-year Treasury certificates

and about Sw.fcs 800 mill ion through1 to 5-year Treasury bills. Exceptfor the Sw.fcs 250 mil l ion from theExchange Fund, direct calls onthe National Bank have been smalland temporary. The extension ofcredit by the comme rcial banks inSwitzerland has also been verysmall, as the figures for the de-

0) All deposits at commercial banks, including savings deposits.(2) Including Kassenobligationen and Kassenscheine. pOSltS Of th e GrOSSbanken SnOW.

S w i t z e r l a n d , S w e d en a n d P o r t u g a l ^ .

End of year

1939194019411942

Percentageincrease 1939-42

SwitzerlandP)

Sweden Portugal

in millions of national currency units3,0153,0953,1623,344

11

4,4014,3214,8795,157

11

2,1172,7584,2615,771

17 3



- 237 -

Ordinary budget expenditure in Sweden, plus net expenditure underthe capital b udge t, rose fro m S.Kr. 2,800 m illion in the financ ial- year (endedJun e) 1939-40 to S.Kr. 4,000 million in 1941-42, whe n ab out one-half w as fo rmilitary purpo ses. (T he estima tes o f expend iture for 1942-43 and 1943-44 wereeach for rather more than S.Kr. 4,000 million, over one-half being for defence.)

Total expenditure in the three years 1939-40 to 1941-42 was S.Kr. 10,700 million,of w hich S.Kr. 6,200 m illion was raised by ordinary revenue and S.Kr. 4,500 m il-lion by other means. The pu blic debt rose by S.Kr. 4,300 million to S.Kr. 6,900 millio n;S.Kr. 3,000 million of the increase was in funded debt and S.Kr. 1,300 millionf loat ing. About S.Kr. 1,000 million of the long-term debt was raised in 1941-42by two defence loans at 3% and 3 per cent, respectively. Of the floatingdebt, in June 1942 only S .Kr. 300 million was in the form of Treas ury billsand over S.Kr. 1,000 million was owing to the central bank: the Sveriges Riksbanft

held about S.Kr. 600 million of government securities received in exchangefor deliveries of foreign assets (used by the governm ent to make purchasesabroad), while S.Kr. 380 million were placed at the disposal of the National DebtOffice, as counterpart to the accumulation of deposits by state institutions. Thusthe Riksbank, although not called upon for direct credit to the governmentto cover internal budget requirements, has accepted some government bondsin exchange for foreign assets and has offset any tightening effect on themarket through the accumulation of official deposits.

In certain other countries (the example of Denmark has already beengiven) an accumulation of government deposits at the central bank has beenmade with the express intention of mopping up funds on the market. Some-

thing of this nature also occurred during 1942 in Portugal, where the expan-sion of notes and bank deposits has been much greater than in Switzerlandand Sweden. Altho ugh the tota l Portuguese budget for 1942 was balancedat around Esc. 3,000 m illion, of wh ich nearly on e-third w as for d efence, thegovernment issued two consolidation loans at 3% and 3 per cent, and Treasurybonds at 2% per cen t, to a total of Esc. 1,400 m illion, the proceeds of w hichwere placed to the account of the Treasury at the Bank of Portugal, thusabsorbing part of the funds coming on the market as a result of theintensified influx of foreign exchange during the year.

The mopping-up action in Portugal appears to have had its chief effecton the note issue, which increased in 1942 by a smaller amount than in 1941,

while the expansion in Switzerland and Sweden was then greater than previously.On the other hand, the deposits of the commercial banks in Portugal as well astheir cash reserves rose more in 1942 than ever before, while in Switzerlandthe change was not great and in Sweden the banks' cash reserves declinedconsiderably as a consequence of taking up Treasury bills.

In Switzerland bank rate has remained at \y % per cent, since November1936 and in Sweden at 3 per cent, s ince May 1941, other market ratestending to become stabilised at low levels. In Portugal, however, marketliquidity has continued to increase and rates to decline: bank rate, which



- 238 -

had remained at 4% per cent, from 1936, was reduced to 4 per cent, inMarch 1941, to 3% per cent, in S eptemb er 1942 and again to 3 per cen t, inApril 1943.

During the civil war of 1936-39 the B an k of S p a in was a ctually splitinto two parts, one controlled by the Republican Government and the otherby the Nationalists. With the cessation of hostilit ies, various steps were takento bring order into the currency and banking system, but it was not until13th March 1942 that legisla tion was passed en abling the Bank of Spain tomake a forma l regulation of its accounts. A sim plified statement of theadjustments made in the balance sheet ofthe table. While the advances made to

Bank o f Spa in —

a d j u s t m e n t s t o b a l a n c e s h e e t .

31st Decem ber 1941 is given inthe National Government (Pesetas 7.6

milliard during the civilwar plus Pesetas 2.5 m il-

liard in the following sixmonths) and the resultingnote issues were retainedat their full value, ad-vances made to the oldRepublican Governmentwere written off and theresulting notes in circula-t ion and "red" accountswere repudiated. Furtheradjustments were made forthe gold holding whichhad been utilised by theRepublican Government(the small balance beingrevalued) and to certainminor items in the return,As a result of theseadjustments the balance-sheet total declined byabout one-half: the liabi-l it ies were reduced fromPesetas 46.7 milliard to

Pesetas 24.2 milliard andPesetas 46.7 milliard to Pesetas 19.7 milliard, the re-of Pesetas 4.4 milliard being made up by a spec ial

As at 31st December 1941

AssetsGoldO)Advances to governments:

National (?) . . . .Republican . . . .

Total . .Special Treasury certificate

(law of 13th March 1942)Total . .

Liabil i t iesNote issues:

National Government. . .Republican Government?)

Private accounts:National Government. . .

All other liabilitiesTotal . .

Originalfigures

Writtendown(net)

Adjustedfigures

in millions of pesetas

3,679

10,17023,1588,663

46,670

46,670

13,53612,755

5,51311,5123,354

46,670

3,162

22,7401,045

26,947

26,947

13,991

7,443

1,07522,509

517

10,170418

8,61719,722

4,43824,160

13,536(-1,236)

5,5134,0692,278

24,160

0) The gold stock had been reduced by Pesetas 3,494 million to Pesetas185 million and revaluation increased this remaining stock by Pesetas332 million to Pesetas 517 million, as shown in the table.

(2) Including Pesetas 70 million Treasury bills.(3) Revised estimates, made after 31st December 1941, added Pesetas

1,236 million to the circulation on account of the Republican Government.

the assets fromsuiting deficiencyTreasury certif icate placed with the bank by the government (to be graduallyredeemed from the g overnme nt's share of the p rofits of the bank).

A report on the o peration s of the bank from 1936 to 1941 was presented tothe shareholders' general meeting at Madrid in November 1942 and the balancesheet for 31st December 1941 was published, the first since 1935; later, balancesheets for December 1942, June and September 1943 were also made available.



— 239 —

Ba n k o f Sp a i n .

At end of month

1935 December .1941 December .1942 December .1943 June . . . .

September .

Assets

Reserves

gold

0)

silver

Privatecredit

granted

0

Government debt

ad-vance

toTrea-sury(3) .

specialTrea-surycerti-ficats

sundryTrea-suryitems

Totalof

balancesheet

(4)

Liabil i ties

Notesin

circu-lation

(s)

Accounts

Trea-sury

(5)

private

free"un-block-ed"(6)

in millions of pesetas2,536

487487749C)927(?)

688616624626626

4,8872,8543,067

3,3503,074

10,17010,17010,17010,170

4,4384,4174,4174,417

717441547622

1,088

12,78223,08523,03222,74123,026

4,83713,53615,7-3815,19215,610

2831,6501,0723,2503,114

1,3233,6533,4502,7622,737

2,498769738733

(') Including gold and exchange with correspondents. (2) Discounts, advances and overdrafts.(3) Including Treasury bills for Pesetas 70 million. (4) Including other items in addition to those specified.(5) From December 1941 on account of the National Government only.(') These "unblocked" accounts may be utilised for the purchase of government securities.(7) Including also gold from the Institute de Moneda Extranjera: Pesetas 252 million in June and Pesetas 430 mil-

lion in September 1943.

As a result of the repudiation of the notes issued on account of theformer Republican Government, the active note issue in September 1943 wasonly slightly more than three times as high as at the end of 1935, a situationwhich compares not unfavourably with the expansion in other countries overthe same period. The fall in the gold reserve was greater than it appears, sinceit was booked at par value in 1935; the increase in the first three quarters of1943 was principally due to gold taken over from the Foreign Exchange Institute.In September 1943 two-thirds of the assets consisted of government debt inone form or another, but there were signs of a gradual increase of creditgranted to th e private economy of the cou ntry. A s fro m 1st January 1943the general moratorium, applied since August 1938 to all debts contractedprior to or during the civil war, was lifted.

A step of considerable interest and importance was taken in T u rk e y ,towa rds the end of 1942, throu gh the introduc tion of a lump -sum tax onexceptional war profits, which, by its magnitude, nature and method of im-posit ion, acquired the characteristics of a capital levy on a speciaf sectionof the population.

The osten sible intention of the law of 11th November 1942 was to taxsuch persons and firms as, through the special circumstances of the war,or through trading in the black market or by speculation, had made undueprofits which for technical or other reasons remained outside the normal taxschedules; theoretically all persons and firms were liable to the tax who werein posse ssion of capital or who paid income tax. It was expected that besidesbringing in funds to the Treasury the levy would check speculation, bring downprices and force out hoarded and other hidden stocks of commodities on tothe market.



— 240 —

The law did not prescribe a scale of taxation but merely provided upperand lower limits for payments by certain categories of taxpayers. The actual

levying of the tax was left in the hands of a special commission and of localcommittees formed in every vilayet from representatives of the Finance Ministry,of the chamber of commerce, and of the local authorities. The commissionhad very wide powers of assessment, deciding who was to pay the tax and,in each individual case, the amount to be paid. Taxpayers thus had no formsto fill up bu t m erely received a tax demand for a spec ified am ount. An dagainst the assessment of the commission there was no appeal.

Further, a general prohibition was issued against departure from thecountry, bank accounts were blocked and payment in full was called forwithin two weeks. Tw o furth er weeks (making one calendar month in all)were eventually allowed, subject to payment of a further 1 per cent, for the

firs t week and 2 per cent, for th e second week ( i. e. an am ount equivalentto interest at an average rate of 78 per cent, per annu m). During theprocess of collection, i t was further announced that those taxpayers who paid20 per cent, of the total at once and in cash might raise bank credits for theremaining 80 per cent, against special security and th e payment of interestat 1 % per cent, a month (i .e . 18 per cent, per annum ). Such credits weregranted, however, only against certain specified assets such as real estate,ships, government bonds and commodities in which the government wasinterested (e. g. co tton, hides, minerals and agricultural prod ucts). In spiteof the hard terms, it is probable that without these credits a great part ofthe tax could not have been paid; credits against commodities had beenforbidden a few weeks earl ier as a step in the fight against inflation. A further

month for payment was allowed to persons who deposited government secu-rities for the full amount or furnished a bank guarantee. Persons assessedwho did not pay within the time limit became liable to forced labour in EastAn atolia, and to the confiscation of their property and that of their family.Chronologically the main events were:

1942 11th November Capital levy law passed.12th „ Law came into force.16th ,, Bank balances blocked.17th December List of taxpayers and assessments published; tax became

due for payment.1943 1st January End of period for payment withou t interest.

18th „ End of period for payment with interest.20th ,, End of period of grace for all payments.

Th e levy was origina lly estimated to produce some £T 500 million b utthis estimate was low ered to £T 422 millio n. Istanb ul was assessed at £T 344 millionand the rest of the country at £T 78 mil l ion; but, owing to bankruptcies, theclosing of businesses and other reasons, some &T 40—50 million of the Istanbulassessm ent was can celled. Final assessm ents were thus ab out £T 300 millionfor Istanb ul and some £T 380 million for the co untry as a who le. (Later, som efurther tax demands were sent out but these appear to have been for com-paratively small amounts which probably would not greatly affect the result.)The total assessment for the capital levy was approximately equal to budget



— 241 —

revenue from normal taxation in the current year and equivalent to one-halfof the largely expanded note circulation at the end of 1942.

Actual tax payments received wereBy 1st January 1943 (the end of the period

T u r k i s h C a p i t a l L e v y P a y m e n t s .

published on certain dates,for payment without interest)

less than one-fifth of theamount assessed in Istanbulhad been paid, comparedwith two-thirds for otherparts of the country. Butlarge amounts were col-lected in the fol lowingmonths and by the end ofJune 1943 nearly two-thirdsof the amount assessedin Istanbul had been paid.

The monetary effects of the capital levy cannot be shown completely asno returns are available for the commercial banks, but a reflection of develop-ments in the central bank's return is shown in the fol lowing table.

C e n t r a l B a n k o f T u r k e y .

Total paymentreceived

to date given

1943 1st January. .25th February .15th March . .30th June . . .

1943 1st January. .

25th February .15th March . .3Oth June . . .

Istanbul Elsewhere Total

In millions of £T58

123135190

52576065

110180195255

In percentages of assessment79

414563

67

737783

29

475167

Near end of month

Assets

GoldClear-

ingac-count

Advancesto Treasury

againstTrea-surybills

againstgold

O

Com-mercialbills

Totalbalancesheet

Liabil i ties

Noteissue(net)

Depo-sitsin£T

Goldheld

against

ad-vancetoTrea-suryP)

Clear-ingac-

count

In millions of £T1939 December19401941 „1942 March

JuneSeptemberDecember

1943 MarchJuneSeptember

36108110124136138142179196201

11275773624858676370

141139137137135134134134132132

115168168250250250250250250

217264299339327367487455410430

499745861926

1,0001,0381,1781,1921,1511,177

281404512559591647734717734741

30787888

11893

144182147143

7878

00 00 00 00

00 00 00

47322229272723252236

0) Including gold held abroad. A liability of £T 1 million on account of a gold deposit has been deducted.(2) A new account of advances to the Treasury against a gold deposit was opened In July 1940 by virtue ofthe law No. 3850. (3) Including some Items not specified in the table.

(i) Net, I.e. with a deduction of a small amount of notes held In the bank's tills.

The increase of the note circulation, which was at an average rate of£T 9 million a month in 1941 and £T 13 million a month in the first halfof 1942, accelerated to £T 19 million a month in the three months toSeptember 1942 (part of the expansion may, indeed, have been due to rumoursof the impending tax). The first effect of the capital levy was to intensify thismovement — the increase being £T 29 million a month in the three months to



- 242 -

Decem ber. In January 1943, h owever, there was a decline of £T 44 millio n,while deposits at the bank increased, reflecting the collection of the tax by thegovernment (whose account is not shown separately in the return). By June

1943, however, the circulation was back to the level of December 1942; and inthe three months to September 1943 there was a further small increase.

The most important movement of the central bank's assets was theexpansion of bills d iscoun ted by £T 120 million in the three months t o the endof December 1942, an indication of the tightness of the market as a result ofthe levy; by June 1943 more than one-half of this central-bank credit hadbeen repaid. The increase in the foreign assets of the bank was reportedto be at least partly due to the c ancellation of im ports by firm s which fearedconfiscation of the goods in payment of the levy.

Fiscally, the tax was su cces sful in pro ducing £T 255 million w ithin a fewmo nths. From the monetary point of view, no reduction of the note issue was

attained, but the expansion of the circulation was slowed down and the exceptionalextension of central-bank credit was not great. It is difficult to judge the economiceffects: a fal l ing-off of imports was reported to have caused some scarcitiesand, in the first days of the tax, business was at a standsti l l ; a number ofprices fell, at least temporari ly, and speculation (e.g. in gold) was checked.

Reports in the foreign press have attributed other than purely fiscal andmonetary motives to the application of the capital levy and have pointed to thefact that four-fifths of the total was assessed on Istanbul with its mixed foreignpop ulatio n. Of som e 90,000 persons liable to the tax, 66,000 were in Istan buland it is reported that 4,000 persons paid one-half of the total tax; however,as four-fi fths of Turkish industry and com merce was estimated to be in

non-Turkish hands and largely concentrated in Istanbul, it is not surprisingthat a considerable proportion of the tax should be paid by foreigners inwhat has remained the economic centre of modern Turkey.

Budget expenditure in the U n it e d K in g d o m rose from £4,780 mil l ionin 1941-42 to £5,620 m illion in 1942-43, i. e. by 18 per ce nt, com pared withan increase of 24 per cent, in the previous financial year; expenditure on the"supply services", which may be counted as war expenditure, amounted to94 per cent, of the total, the same proportion in the two financial years.Lend-lease aid from the United States is not shown in the British budget,which includes, however, among the expenditure, the reverse lend-lease or

reciprocal aid, given to the United States and other members of the UnitedNations, although detailed accounts for the different recipients are not kept.Budget expenditure also includes the counterpart of the Canadian contributionof £225 million in 1942-43 and the outlay of £400-500 m illion to meet the localcosts of the war "from Tunis to Burma", this sum being, as explained by theChancellor of the Exchequer in April 1943, borrowed from the countries concerned.(Further information on lend-lease and related questions is given in Chapter IV.)

T a x a t io n receipts rose fro m £1,962 million in 1941-42 to £2,483 millionin 1942-43, i.e. by 27 per cent, compared with 44 per cent, in the previous



— 243 —

U n i t e d K i n g d o m — P u b l i c F i n a n c e s .

Quarterly and yearlyfigures

1940 April-JuneJuly-September . . .October-December .

1941 January-March . . .

July-September . . .October-December .

1942 January-March . . .1942 April-June

July-September . . .October-December .

1943 January-March . . .1943 April-June

July-September . . .Financial years

1940-411941-421942-43


Budget accounts (cash basis) P)

Current revenue

Tax-ation

(2)

Othercurrent

re-venue

(? )

Cana-dian

contri-bution

Total

Expenditure

War

(4)

Other TotalDeficit

WarDam-ageAct

(5)

Netborrow-

ing

in millions of £ sterling180252290637302392454814435511503

1,034524651

1,3591,9622,483

1,2161,7842,263

812102017263038224131201331

50112113

4193

131

985770

225

225

188264300656319418484853555608604

1,053537682

1,4092,0742,820

1,2571,8772,619

613875

1,0121,137

9851,1101,1681,2381,1981,2291,3641,5051,3041,304

3,6374,5025,296

3,0864,4015,029

824086228951924297709863

10092

230274327

247254306

695915,098,159,074,161,260,280,295,299,461,568,404,396

3,8674,7765,623

3,3334,6545,335

507651798503755743776427741690858514868714

2,4582,7022,803

2,0762,7772,716

302

(-12)

1(- 1)

13

20

32(-12)

507651798503755713774439741689859514868701

2,4582,6822,804

2,0762,7452,729

0) Excluding self-balancing items and lend-lease aid from the United States; expenditure also excludes sinkingfunds, i.e. £17.0 million in 1940-41, £12.2 million in 1941-42, and £14.4 million in 1942-43.

(2) Inland revenue, customs and excise and motor-vehicle duties.(3j Miscellaneous receipts (from the profits of the Bank of England and Exchange Equalisation Account, etc.)plus net receipts of the Post Office and other sundry revenue.

(4) Total supply services (excluding Post Office).(5) Net excess of contributions or of payments (—) under the War Damage Act. These contributions, although

very similar in effect to taxation, are accounted outside the budget; but, when payments are made, theyare entered under expenditure in the budget and an amount sufficient to cover them is taken into "miscel-laneous receipts" from the War Damage Accounts. Only the net amounts are shown in this column; thePresident of the War Damage Committee stated in April 1943 that indemnities so far paid exceeded£100 million.

year. For the first time incom e tax produced more than £1,000 m illion, abou t£200 million com ing from seven million wage-earners liable for the tax. Anotable feature in recent years has been the increased proportion produced bydirect taxes — 62.5 per cent, of the total tax rev enue in 1942-43 as aga inst55.6 per cent, in 1939-40.

The bud get e s ti m a te s for 1943-44 put total expend iture at £5,760 millionand cu rrent revenue at £2,910 m illio n, giving a deficit of £2,850 m illio n; C anadian"mutual aid" in 1943-44, which is to be provided for all the United Nations,is excluded from these figures. As full capacity is reached both revenueand expenditure tend to expand more slowly but-the deficit appears to bestabilised at around £2,800 millio n. Two items of expenditure deserve specialment ion: subsidies with a view to keeping down the cost of living rosefrom £70 million in 1940 to-£142 million in 1941, reached £150 million in 1942and were runn ing a t a rate of £180 million in 1943; so cial se rvices, e xcludin g



- 244 -

S o u r c e s o f U . K .G o v e r n m e n t b o r r o w i n g

September 193 9—March 1943.

Long term:small savingslong-term loans

Short term:Treasury billsTreasury deposit receipts •tax-reserve certificates . .

Extra-budgetary funds etc. • .Total

per cent.2134

10115

19100

Including various other sources, such as overseasborrowing and interest-free loans.

unemployment benefit, which came to£160 million in 1938, were estimated tocost £220 million in 1943.

From September 1939 to the end ofMarch 1943 total war borrowing amountedto £8,667 million, which, as stated bythe Chancellor in his budget speech, wasmade up as fol lows: 55 per cent, frompublic long-term borrowing, 26 per cent,from public short-term issues and 19 percent, from extra-budgetary funds, directoverseas borrow ing and interest-free loans.

Public borrowing, as published in the Treasury returns, is analysed

below.U n i t e d K i n g d o m — G o v e r n m e n t B o r r o w i n g .

Quarterly and yearlyfigures

1940 April-June . . . .July-September .October-December

1941 January-March. .

1941 April-June . . . .July-September .October-December

1942 January-March. .1942 April-June . . . .

July-September .October-December

1943 January-March. .1943 April-June . . . .

July-September .Financial years

1940-41 . . . . . .1941-421942-43 . .


Total debt outstandingat end of March 1943

Long and middle-termborrowing

Sav-ings

issuesMarketissues

"Otherdebt"

(')

Total

CO

Short-term borrowing

Waysand

meansad-

vances(?)

Trea-surybills

Trea-sury

depositre-

ceipts

Tax-reservecerti-

ficatesTotal

(2)

Totalborrow-

ing

(4)In millions of £ sterling

888892

182

251174207355173170147282311155

449987772

339814

845

2,706

24679

213129

247143296204184140277179330279

667891780

638816

805

8,210

51587

1038638

181293322

35119216

28118

222

372

334177308315

50635257156353633542347364.1433

1,1341,9921,768

9851,744

1,857

11,288

— 25554536

15605

— 572

34— 2

6010

— 40

1112394

71116

— 23

289

19829523160

145220— 30

741855

1406

18950

784409218

682395

286

2,839

12421492

9081212

— 31595

169206

3— 44

189

43067

473

338474

155

969

17175909693

— 277169

192252

17

453

443

173474490187

250361203

— 12420535443741

227268

1,324690

1,036

1,0911,002

871

4,540

507651798503

755713774439741689859514868701

2,4582,6822,804

2,0762,745

2,729

15,828(5)

(') Including direct external borrowing, as given on page 139. (2) Net, I.e. less sinking funds and amortisations.(3) These ways and means advances are partly from the Bank of England and partly from government departments.

Advances from the Bank of England are interest-bearing, the rate varying between Y2 and 1 per cent, sincethe beginning of 1939; they generally reach their highest point at the end of the year, having been £66 millionon 31st December 1941 and £68 million on 31st December 1942. Advances from the government departmentsare partly interest-bearing and partly without Interest; the rate on interest-bearing advances varied In 1939between "/n and 3'/t per cent, but since 1940 it has been "/„ to 1 per cent.

(4) Including small movements of Treasury balances.

« Excluding the old "war debt" of £1,032 million to the United States, which would bring the nominal totalup to £16,860 million. This figure does not Include the accrued interest on National Savings certificates,estimated at £172 million In March 1942.



- 245 -

Long-term borrowing in 1942-43 amounted to 63 per cent, of total borrow-ing against 74 per cent, in 1941-42. A s regards the so -called savings issues

in 1942-43, £204 million came from National Savings certificates, £111 millionfrom 3 per cent. Defence bonds and £457 million fr om 3 per cent. Savingsbonds, all of these issues being non-marketable. A distinction sometimes madebetween "small" savings and "large" savings includes National Savings certi-ficates, Defence bonds and the increase of savings-bank accounts in the formerwhile Savings bonds are cfassed with other long-term government loans inthe latter catego ry. A s regards the m arket issue s in 1942-43, £535 millio n wasraised by the tap issues of 2 % per cen t. National war b ond s, while £122 million3 per cent. Funding Loan 1959-69 and £124 million 3 per cent. National DefenceLoan 1954-58 were issued direct to the Commissioners of the National Debtfor the investment of savings-bank deposits.

The British borrowing programme is noteworthy for the great variety ofsecurities offered to the investor; fro m January 1943 the maximum of savingscertificates which could be bought by one investor was raised from £500nominal to £750, but for the extra £250 only certificates of a new series, bearinginterest at 1.4 per cent, tax free, could be purchased (against 3.2 per cent,on the ordinary issue). In October 1941 a Treasury regulation suspended theissue of government securities as bearer bonds or as inscribed stock, andintroduce d the principle that all fu ture issues should be in the form ofregistered stock transferable by deed. T he suspe nsion of issues of bearerbonds was understoo d to be a war measure only, but inscribed stock asa form of security was finally abolished by a new regulation made inDecember 1942.

S h or t- te rm bo rr ow in g has been in three main forms, the c lassicmarketable Treasury bill giving way more and more to the two new types ofsecurities introduced during the war: tax-reserve certificates and Treasury

deposit receipts, both of which are non-marketab le . The to ta l o f T re as ur y b i l l soutstanding, £2,840 million at the endof March 1943, still exceeded by over£1,100 million the total of other formsof government short-term borrowing, buttheir importance was declining, only one-fifth of the short-term borrowing in 1942-43

being made in this way. About one-thirdof the total Treasury bil ls outstandingwere issued by tender in 1942 (against tw o-third s in 1938), the remainder being issuedthrough the tap to government depart-ments and other official bodies (in-cluding, since July 1941, Empire cen traibanks); of the bills issued by tenderonly about one-third were allotted tomoney m arket firm s. In absolute figure s,

U .K . T r e a s u r y B i l l s O u t s t a n d i n g••«

End ofFebruary

1938 . . .1939 . . .1940 . . .1941 . . .

1942 . . .1943 . . .

Tender00

TapC3)

Total

In millions of £ sterling532351801845

905980

273500622

1,369

1,6131,830

805851

1,4232,214

2,5182,810

0) This analysis Is made as at the end of Februarysince ' published statistics do not permit theaccurate splitting-up of the total at the end ofDecember or March.

(2) These are bills issued by tenders made eachFriday for the following week, the results of whichare regularly published. All these bills are ofthree months' currency.

(3) Tap bills may be taken up by government depart-ments and other official bodies at any time. Thenormal rate Is Via per cent, below the averageweekly tender rate but in certain special casesonly a nominal rate Is paid. They are issued forthree months or for such shorter periods as maybe convenient.



— 246 —

however, the holding of the discount houses has risen with the total oftender bills. In recent years the structure of the London money market has

been strengthene d by a series of amalgam ations and, in the first half of1943, several firms made relatively considerable increases in their capital inresponse to the wartime growth in the volume of paper handled by them.

T ax -r es er ve c er t i f i c a t es were f i rs t issued in December 1941; theyare not transferable and are intended to absorb ^unds held in readiness fortaxation payments due not less than two months and not more than twoyears from the date of pu rchas e; they carry interest a t 1 per cent, free of tax(about the same as the gross yield on Treasury bills) but, after running for twomonths, may be repaid in advance, on request, without interest. They haveproved very popular, and the total outstan ding grew steadily to £514 millionat the end of June 1943.

U n i t e d K i n g d o m —T a x - r e s e r v e c e r t i f i c a t e s a n d T r e a s u r y d e p o s i t r e c e i p t s .

Issues and redemptionshalf-yearly figures

1940 July-December. . . .1941 January-June

July-December. . . .1942 January-June.

July-December. . . .1943 January-June

Totals . . .

Tax-reserve certificates

Grossissues

Redemp-tions

Netissues

Treasury deposit receipts

Grossissues

Repayments

atmaturity

beforematurity total

Netissues


17271

234253775

6

46209

261

17265

18844

514

386587880638

1,0291,195

4,715

313466534

517866

2,695

4893

122324

137370

1,095

48406588858

6541,236

3,790

338181292

(-220)

375(- 41)

925

Of part icular interest was the growing importance of T re a su ry d e p o s i treceipts as a flexible instrument for the investment of the banks' l iquid fundsin the year under review. These receipts, fi rst introduced in 1940, are givento banks for depos its at the Treas ury for six months at 1VS per cent, interest;the receipts are non-negotiable but carry the right to repayment beforematurity under rebate at bank rate (currently 2 per cent.) and may be usedat any time in lieu of payment in respect of subscriptions to loans for theirown or fo r cus tom ers' ac coun t. Of the £3,520 million issued up to the end

of December 1942, £2,695 million , i. e. over th ree-qua rters of the total, wereheld until maturity; repayments before maturity were on a particularly largescale in th e January to March quarter of 1942 and during the first half of1943, when savings campaigns caused considerable withdrawals from the banksfor investment purpo ses. Treasury deposit receipts have become second inimportance among the assets of the clearing banks, as the fol lowing table shows.

While before the war business advances were the banks' most importantand most remunerative asset, the system of "progress payments" to governmentcontractors has made the war industries largely independent of bank credit



— 247 —

End of month

1939 December .1940 December .1941 December .1942 March . . .

June . . . .September .December .

1943 March . . .June . . . .September .

L on do r C le ar i n g B a n k s « .

Assets

cashre-

serves(2)

274324366347355349390377387389

Liquid

moneyat

callP)

174159141137147127142139165148

assets

billsdis-

counted

334265171163292277198172236209

Trea-sury

depositre-

ceipts

I nvest-ments

In millions of £

314758476543693896884859

1,045

609771999

1,0501,0581,0971,1201,1321,1591,160

Ad-vances

sterling1,002

906807838800774773777744733

Che-quesin

courseof

collec-tionetc.

106117146122129106165125144122

Total

balancesheet

2,6973,050

3,5823,3163,4973,5913,864

3,7763,8683,985

Liabi-

l ities

Depositand

currentac-

counts

2,4412,8003,3293,0723,2633,3583,629

3,5423,6303,737

Liq

ra

jid ity

iosPri- Secon-

mary (*)| dary («)in

percentagesoftotal deposits

and current

; /1211111110

11111110

21263225303334

343538

at

0) June and December figures are at end of month; March and September are on varying days of the month.(2) Balances at Bank of England, plus notes and coin in hand.(3) Money lent to the market at call and short notice.(4) Commercial bills have largely disappeared, the holding of the banks probably declining by some £100 million

over the period shown in the table and being replaced to that extent by Treasury bills.(5) Cash reserves as a percentage of deposits and current accounts.(6) Liquid assets other than cash reserves as percentage of deposits and current accounts.

and the banks have followed the government's directives in curtailing lendingunconnected with the war effort*. Advances in the banks' balance sheets weresurpassed by investments in 1941 and by Treasury deposits in 1942, thusfalling to third place in importance among the assets of the banks.

The tota l governm ent-security holding of the banks at some £2,200 millionthe end of 1942 was alm ost three tim es as great as the banks ' advances

and a mounted to 60 perLo nd on C le a r in g Bank s cent , o f depos its ; and

ne t i nc rea se s o r d e c r e a s e s (—) o f the government secu -o f go ve rn m en t -s ec ur i ty ho ld in g « . r it ies taken up in the

thre e years 1940-42 nearlythree-quarters were Trea-sury deposit receipts. In1942 the government'scall on the banks was

only one-half of whatit had been in 1941and the expansion ofdeposits consequentlyslowed down, being£300 million against£530 million in the pre-vious year.

Calendar years

194019411942Three-year period . .

Total holdingend 1942

BillsTreasurydepositreceipts

1 nvest-ments Total

in millions of £ sterling— 69— 94+ 27— 136

198

+ 314+ 444+ 138+ 896

896

+ 162+ 228+ 121+ 511

1,120

+ 407+ 578+ 286+ 1,271

2,214

0) Assuming bills discounted and investments to be entirely governmentpaper and excluding government securities held indirectly (by way ofcash balances at the Bank of England or money lent at call on themarket). Actually the increase Is somewhat greater, since the commercialbill holding has declined (see footnote (") to the first table on this page).

From 1st March 1943 the Board of Trade prohibited Instalment purchases of all goods subject to pricecontrol, except furniture.



- 248 -

In recent years the expansion of clearing-bank deposits has beenaccounted for by business concerns and not by individuals, a fact which was

brought out in an analysis given in the budget White Paper; this showedthat in the two and a half years from June 1940 to December 1942 personaldepos its rose by £200 million to £820 millio n, i. e. 33 per cent., and businessaceounts by £1,150 million to £2,040 million, an increase of 129 percent. (Besidesordinary banking accounts denominated in money and shown in the balancesheets, the introduction and growth of "coupon accounts" and "couponbank ing" should be mentioned. These services of the banks have arisen fromthe rationing schemes and in 1942 were extended to cover clothes rationing;all transfers of coupons and documents representing coupons, beyond thepurely retail stage, are made through the banks, which honour "cheques",credit or de bit accounts and make tran sfe rs, all denominated in numb ers ofcoupons.)

Concentration on purchases of Treasury deposit receipts has made thebanks very liquid, the ratio of all liquid assets to deposits having risenfrom 32 per cent, at the end of 1939 to 38, 43 and 45 per cent, at the endof 1940, 1941 and 1942 respectively. The primary cash reserve, as published,remained at 11 per cent, in 1942 and 1943, with a temporary dip to 10 percent, in September; actually there is some "window dressing" in thesefigures and the true prop ortion may be as much as 2 per cent, lower. Theexpansion has taken place in the secondary reserve, which had risen as highas 38 per cent, in September 1943.

Since the introduction of Treasury deposit receipts the cash position

of the banks has generally been adjusted through fluctuations of their holdingsof this type of paper, but the p ractice of direct Treasury bill dealings betweenthe Bank of England and the clearing banks has not been discontinued;and Treasury bills may, of course, be allowed to run off. A fu rther elementof elasticity has been available to the bill market through the institution ofopen-market operations more or less "on tap"; although no formal changehas been announced, the bill market knows that in practice the governmentbroker wil l , at times of pressure, purchase Treasury bills for account of theBank of England at market rates.

Whereas the rate of increase of clearing-bank deposits slowed down

from 19 per cent, in 1941 to 9 per cent, in 1942, the note circulation of theBank of England, which is covered over 100 per cent, by government securi-t ies , continued to expand at the same annual rate of around 22-23 per cent.

No other movement in the return is of particular importance; the Bankof England acquired sufficient government securities to cover the expansionof the note issue and to maintain the bankers' cash reserves at about 11 percent, of their total deposits and current accounts, as shown above. Thewithdrawal of the larger denominations of notes from circulation is treatedon page 310.



- 249 -

Ba n k o f En g l a n d .

Near end of month Govtsecurities

Assets

Allotherassets

Total, ofbalancesheet •

Liabil i ties

Notes

Current accounts etc.

Treasuryand

publicdepart-ments

banks other total

In millions of £ sterling1939 December1940 December1941 December1942 March . .



728851

1,019

9311,0151,0181,190

1,120

1,2331,209

33343534373633403433

761885

1,054965

1,0521,0541,2231,160

1,2671,242

555616752759801838923935

946986

30171121111096

109

11718122 0116172136223144

238173

4253545149524957

5555

189251285

188232197281

207

303238

* The combined returns of the issue and banking departments, omitting duplications due to the holding ofa reserve of bank-notes In the banking department.

A s i n r e c e n t y e a r s , t h e r e w a s

1942 , e x c e p t t h a t o n a c c o u n t o f t h e

r e p a y m e n t s w e r e m a d e . A n i n t e r e s t i n g

B u i l d i n g S o c i e t i e s ' A d v a n c e s 0 ) .

In millionsof £ sterling

1938 . . . .1941 . . . .1942 . . . .

Newadvances

44.42.24.1

Repay-ments P)

40.726.429.0

Netmovement

+ 3.7— 24.2— 24.9

(') Seven important socie ties. (2) Including interest.

p r a c t i c a l l y n o c a p i t a l i s s u e a c t i v i t y i n

g o v e r n m e n t , w h i l e a c e r t a i n n u m b e r o f

i n d i c a t i o n o f c o n d i t i o n s i s g i v e n b y t h e

r e v e r s a l o f t h e s t e a d y g r o w t h o f t h e

b u i l d i n g s o c i e t i e s , d u e t o t h e s u s p e n s i o n

o f p r i v a t e b u i l d i n g — t h e i n c r e a s e o f t o t a l

a d v a n c e s b y £4 m i l l i o n i n 1 9 3 8 g a v e w a y

t o a n e x c e s s o f r e p a y m e n t s o f a b o u t

£ 2 4 m i l l i o n i n e a c h o f t h e t w o y e a r s

1 9 4 1 a n d 1 9 4 2 , l e a d i n g t o i n c r e a s e d i n -

v e s t m e n t i n g o v e r n m e n t s e c u r i t i e s .

I n t e r e s t r a t e s h a v e r e m a i n e d p r a c t i c a l l y w i t h o u t m o v e m e n t : b a n k r a t e i s a t

2 p e r c e n t . , u n c h a n g e d s i n c e O c t o b e r 1 9 3 9 ; t h e y i e l d s o n T r e a s u r y b i l l s a t

1 p e r c e n t . , T r e a s u r y d e p o s i t r e c e i p t s a t ^ / s p e r c e n t , a n d 7 t o 9 - y e a r N a t i o n a l

W a r b o n d s o n t a p a t 2 % p e r c e n t , a r e h a l v e d b y t h e d e d u c t i o n o f i n c o m e

t a x a t t h e s t a n d a r d r a t e ; in f a c t n o n e o f t h e c l e a r i n g b a n k s m a d e s u f f i c i e n t

p r o f i t t o b e c o m e l i a b l e t o t h e e x c e s s p r o f i t s t a x .

T h e C h a n c e l l o r o f t h e E x c h e q u e r s t a t e d i n J u n e 1 94 3 t h a t b e f o r e t h e w a r

t h e a v e r a g e r a t e o f i n t e r e s t o n t h e i n t e r n a l d e b t h a d b e e n 3 p e r c e n t , a n d t h a td u r i n g t h e w a r i t h a d b e e n b r o u g h t d o w n t o 2 % p e r c e n t . ; t h e a v e r a g e r a t e o n

a l l t h e n e w w a r b o r r o w i n g i n E n g l a n d w a s 2 p e r c e n t . , w h i c h , a f t e r a l l o w i n g f o r

i n c o m e t a x , r e p r e s e n t e d a c o s t t o t h e T r e a s u r y o f s l i g h t l y o v e r 1 p e r c e n t . I n

h i s b u d g e t s p e e c h i n A p r i l 1 94 3 t h e C h a n c e l l o r s a i d : " W e h a v e d e v e l o p e d a n e w

t e c h n i q u e a n d w e h a v e r e v o l u t i o n i s e d p u b l i c o p i n i o n a s t o w h a t a r e f a i r r a t e s

o f i n t e r e s t o n p u b l i c b o r r o w i n g . W e s h a l l n o t o n l y p a s s f r o m w a r t o p e a c e w i t h

i n t e r e s t a t a l o w l e v e l b u t in t h e r e c o n s t r u c t i o n w h i c h t h e c o u n t r y i s e x p e c t i n g

a f t e r t h e w a r w e s h a l l h a v e t h e b e n e f i t o f c h e a p m o n e y . I t i s t h e g o v e r n m e n t ' s

i n t e n t i o n t o m a i n t a i n i t s p r e s e n t p o l i c y o f c h e a p m o n e y a f t e r t h e w a r . "



- 250 -

Canadian budgets since the war have been considerably influenced byBritish war expenditure in C a n a d a , which has had to be financed in Canadian

dollars, no matter how the settlement with the United Kingdom was made(by Canadian acquisitions of sterling, by repatriations of Canadian securities, bythe free gift from Canada, etc.) and which must be duly taken into accountfor a comprehensive picture of the official financing to be obtained.

C a n a d i a n B u d g e t F i n a n c e 0 .

Financial years ended 31st March

War expenditure

British in Canada(3)

Total . . .Other expenditureLoans and investments

To'tal . . .

Taxation and current receipts . . . .BorrowingDecrease or increase (—) of balances (

5)

Total . . .

1939 1940 1941 1942 1943 1944

In millions of Can. dollars

34

3451525

574

49998

(-23)574

14295

23752643

806

535416

(-145)

806

819371

1,19046330

1,683

85773789

1,683

1,4151,052

2,46751339

3,019

1,4692,027(-477)

3,019

2,994879

3,87359354

4,520

• 2,261 (4)

1,510749

4,520

4,890«

4,890611

5,501

2,752(1)

5,501

(1) Closed accounts to 1942; 1943 provisional and 1944 estimates.(2) Including Can.$ 1,000 million expenditure under the Mutual Aid Act.(3) An analysis of this item is given on page 137.(•>) Of income tax and excess profit tax collected in 1943 and 1944 it was estimated that Can.$ 100 million and

Can.$ 250 million respectively will be refunded after the war.(5) Including certain small miscellaneous items.

In the financial year ended March 1943 total financing requirements wereCan.$ 4,500 million, war expenditure being nearly Can.$ 3,900 million; 50 percent, of total expenditure was covered by taxation and other current revenue.War expenditure continues to expand; the estimates for the financial yearending March 1944 place total expend iture at Can.$ 5,500 millio n, of whichCan.$ 4,900 million is war expenditure, including Can.f 1,000 million for "mutuala id " , a figure likely to be surpassed.

Government securities held by the Bank of Canada rose from Can.$ 232 millionin December 1939 to Can.$ 1,130 million in June 1943, in which are included

the $325 million given to the bank in April 1940, when the gold and foreignexchange holding was transferred to the Foreign Exchange Control Board;the net increase was thu s Can.$ 573 millio n.

As a counterpart to these purchases of government securities stand theincrease of the note issue and of the chartered b anks' reserve balances. Thenote circulation as shown in the fol low ing table includes the comparativelylarge amounts held in the ti l ls of the banks; the "active circulation" of Bankof Canada notes rose fro m Can.$ 156 m illion in Decem ber 1939 to Can.$ 256,372 and 553 million in December 1940, 1941 and 1942 respectively.



- 251 -

Ba n k o f C a n a d a .

End of monthAssets

GoldForeign

ex-change

0

Governmentsecurities (

3)

short long

Otherassets

Totalofbalancesheet

Liabil i ties

NotesDeposits

Govern-ment banks other

Otherliabi-lities

In millions of Can. dollars1939 December194019411942 March . .


1943 March . .June . . .

226 6438

201276

1110

47

182448392387494629807753817

5012721T209322285209276313

51234202622311621

527626843892843936

1,0481,0451,198

233360496509541625694719758

461174

1193119522190

217218232242221246260261301

181066

2725192519

132835162222241929

0) Transferred to Foreign Exchange Control Board In the spring of 1940.(2) From April 1940 this Item consists almost wholly of sterling pledged temporarily from time to time by the

Foreign Exchange Control Board to obtain Canadian dollars. At the end of 1941 Can.$ 201 million was sopledged —a method of short-term government borrowing from the bank; this holding of the Bank of Canadagrew to Can.$ 474 million in March 1942. It was redeemed in two stages: by part of the proceeds of thesecond Victory loan in March and by the sale of Can. $193 million short-term government securities to theBank of Canada in June 1942.

(3) Dominion (and provincial) government securities. Besides securities placed directly with the bank, open-market purchases have been made in order to maintain the cash reserves of the chartered banks.

(' ) Including those held by the chartered banks in their reserves. In addition, notes of the chartered banksare outstanding, the total falling from Can.$ 85 million in December 1939 to Can.$ 60 million In December1942 (see below).

The chartered banks increased their security holdings between December1939 and June 1943 by slightly over Can.$ 1,000 million while demand depositsrose by nearly Can.$ 1,300 million. The banks' loans increased up to the

spring of 1942 but subsequently declined; this was partly the result of thestrict regulation of instalment buying, but also due to the fact that the bankslent freely to subscribers to the first Victory loan of June 1941 but do notappear to have done so on the same scale during 1942.

C a n a d a — C h a r t e r e d B a n k s '0)

End of month

1939 December1940 „19411942 March . .


1943 March . .June . . .

Assets

Cashreserves

CO

Foreignex-

change

Loansand dis-counts

(4)

Securi-ties(5)

Otherassets

Totalof

balancesheet

Liabil i ties

NotesDeposits («)

demand time

Otherliabi-lities

in millions of Can. dollars292323356348327366387377421

132159168166181185231223204

,1411,1481,2011,334,165

1,0771,1991,0271,256

1,6461,5311,7591,8811,8832,3402,2932,6892,687

612570653624639594657599665

3,8223,7314,1374,3524,1954,5614,7674,9155,233

858071717269605449

1,0331,1631,4361,7551,5231,7381,9841,9272,319

1,7411,6411,6691,5501,5981,7481,6731,8901,782

963846962976

1,0021,0061,0491,0441,084

0) Ten chartered banks. (2) Balances at the Bank of Canada and Bank of Canada notes.(3) Security loans abroad and net amount due from foreign banks.(4) In Canada only. (6) Principally government securities (Dominion and provincial).



— 252 —

Canada's public borrowing has taken two main forms: special issues,generally of Treasury bills, made directly to the banks, and war loans issuedon the m arket. In July 1942 a new form of borro wing fr om the banks wasinitiated with an issue of Can.$ 75 million six-mo nth " de po sit c ert ifica tes " bearinginterest at % per cent., and issues on the same terms were made in sub-sequent weeks, the total outsta nding rising to Can.$ 645 million in O ctober.As the proceeds of the third Victory loan came in, the government redeemedCan.$ 205 million, so that Can.$440 million were outstanding at the end of 1942.

Government borrowing from the public has taken the form of Victoryloans issued as 3 per cent. 14-year bonds and 1 % per cent. 3%-year bo nd s:the second Victo ry loan issued in F ebruary-March 1942 produced Can.$ 840 mil-lion and the third loan, issued in October-November 1942, brought in Can.$ 990 mil-l ion, a tot al of Can.$ 1,830 m illion dur ing th e year 1942. In 1943 tw o fu rthe rVictory loans were issued: the f i f th, in April, brought in Can.$ 1,100 million

and the sixth, in October, 1943 produced Gan.$ 1,200 million.

The year 1942 was for the U n it e d S ta te s a period of transition tofull war activity and this change is reflected in a remarkable way in the budgetaccounts. War expenditure (which includes the outlay for lend-lease) rose byfou r time s fro m $6,300 million in 1940-41 to $26,000 million in 1941-42 with afurther threefold increase to $72,000 million for 1942^43 (financial years endingJun e). Th us , in the latter year, average monthly expenditure had risen to thelevel of a nnual expenditure tw o years previously (i . e. in the firs t year of thedefence programme). At the same time civi l expenditure, although includingthe increased debt service, was slightly compressed. Revenue rose by nearly

70 per cent, from $7,600 million in 1940-41 to $12,800 million in 1941-42 andagain by 70 per cent, to $22,300 million in 1942-43. The resulting budgetdeficit jumped from $5,100 million in 1940-41 to $19,600 million in 1941-42and to $55,900 m illion in 1942-43. Th e revised estim ates for 1943-44 sho wtotal expenditure at $106,000 million, including $100,000 million for war activities,and revenue at $38,000 milli on , giving a defic it of $68,000 million to be coveredby bor row ing. A summary of budgetary revenue and expenditure (on a cashbasis) is given in the table on the following page.

The national defence programme was started in June 1940; and warexpenditure rose in the geometric progression of four from about $3,000 to13,000 and 50,000 million in the calen dar years 1940, 1941 and 1942. From th e

second half of 1942 war activities have accounted for over 90 per cent, of totalexpen diture. Indeed, there is a striking parallel between 1940-43 and 1916—19 :war expenditure in the first half of 1943 was nearly fifty times as great asit was three years previously and a further increase is planned; from 1915-16to 1918-19 war e xpenditure also rose by fifty t ime s, fr om under $290 millionto over $14,400 millio n, and a further increase was planned .

A s a result of the rising national income and increased rates, the pro-ceeds of taxation tripled from 1940-41 to 1942-43. The Revenue Act of 1942,passed in October of that year, imposed supplementary taxation estimated



— 253 —

U n i t e d S t a t e s — P u b l i c F i n a n c e s .

Quarterlyand

yearly

1940 July-Sept. .Oct.-Dec.. .

1941 Jan.-March .April-June .

1941 July-Sept .Oct.-Dec. . .

1942 Jan.-March.April-June .

1942 July-Sept. .Oct.-Dec.. .

1943 Jan.-March.April-June .1943 July-Aug.(6).

Financial years1940-41 . .1941-42 . .1942-43 . .

Calendar years1940 . . . .1941 . . . .1942 . . . .

Revenue(')

TaxationOther

internalcurrent^)

Total

Expenditure

War (? ) Other TotalDeficit

Move-ment ofofficial

balances(')

Totalborrow-

ing(5)

in millions of dollars1,4391,3832,2762,0001,8842,1614,8103,6673,7773,840

6,7656,9784,151

7,09912,52221,360

5,5798,321

16,094

5052

171235606173838469

184585*577*

508277922

256527309

1,4891,4352,4472,2351,9442,2224,8833,7503,8613,909

6,9497,5634,728

7,60712,79922,282

5,8358,848

16,403

6631,1991,9682,4713,4304,8357,121

10,62714,76617,34818,46121,53513,664

6,30126,01172,109

2,77912,70449,862

1,6201,6591,6171,5131,5711,6471,5571,6091,5401,4521,3841,6931,065

6,4096,3866,070

6,8816,3486,158

2,2832,8583,5853,9845,0016,4828,678

12,23616,30618,80019,84523,22814,729

12,71132,39778,179

9,66019,05256,020

7941,4231,1381,7493,0574,2603,7958,486

12,44514,89112,89615,66510,001

5,10319,59855,897

3,82410,20439,617

+ 599— 331+ 989+ 512— 84+ 1,788+ 43+ 425+ 1,437+ 6,301— 5,850+ 5,170— 2,818

+ 1,770+ 2,172+ 7,058

— 531+ 3,205+ 8,206

1,3931,0922,1272,2612,9736,0483,8388,911

13,88221,1927,04620,8357,183

6,87321,77062,955

3,29313,40947,823

0) Net receipts, I.e. total receipts less net social-security employment taxes.(2) Panama Canal dues and other miscellaneous receipts.(3) Before December 1941, National defence. Actually war expenditure was somewhat greater than that shown

in the budget statistics, as $2,200 million war expenditure was borne by government corporations in 1941-42and a further $3,300 million was estimated for 1942-43.(4) Movements of the Treasury's general fund and of the balances held by government agencies with theTreasury. (5) Increase of government securities outstanding, direct and guaranteed.

(e) Two months only; total expenditure in September 1943 was $7,212million. * Preliminary.

to produc e $3,600 m illion gross in a full year, Of wh ich $1,700 millionwil l be returned as post-war credits, so that the net yield would be$6,900 m illion ; besides prov iding f or an increase of $3,000 million in norm alincome tax, the Ac t instituted a new Victory tax (deducted at source fromsalaries and wages) am ounting to 5 per cent, on all income s above $12a week and a ffecting about 40 million taxp aye rs; it is expected to produ ce$3,100 millio n, of wh ich over $1,100 million w ill be returned as post-warcredits. These "p os t-w ar" credits, which amount to 25 per cent, of the

tax paid by single and 40 per cent, of that paid by married taxpayers (withlimits of $500 and $1,000 a year respectively), may, however, be reclaimedin many cases in the following year as tax credits against regular income taxand against the portion of Victory tax not collected at source. Thus taxpayers,when filing tax returns in March 1944, are permitted to deduct purchases ofU. S. government secu rities, life assurance premiums and the repayment ofcertain debts, up to an amount equal to the repayable portion of the Victo rytax on income of the previous year, instead of waiting for the actual refunds.Somew hat similar provisions apply to excess pr ofits ta x; of the $1,900 millionlevied under the new law, $550 million is credited as a post-war refun d, but



- 254 -

may be made available currently for retirement of taxpayers' indebtedness. InOctober 1943, a new tax bill was introduced.

To tal expe nditure in 1942-43 was $78,000 m illion and revenue $22,000 m illio n,leaving a deficit of $56,000 mil l ion to be met by government borrowing; infact, not less than $63,000 million was raised by loans during the financial year,the balance of $7,000 million going to swell the Treasury's general fund . Thefollowing table shows the acceleration of borrowing from under $13,000 millionin the fir st half of 1942 to o ver $35,000 million in the seco rid half o f the yearand its decline, as a result of higher taxation receipts, to $28,000 million inthe first half of 1943.

Some $27,000 million, about 43 per cent, of total borrowing in 1942-43,was raised at s h o r t t e r m ; $13,500 mil l ion was in the form of certificates ofindebtedness, a security particularly suitable to the banks. These certificates,

U . S . G o v e r n m e n t B o r r o w i n g — q u a r t e r l y i n c r e a s e s o r d e c r e a s e s (—)o f i n te res t -bear ing deb t (d i rec t and guaran teed)

a n d t o t a l o u t s t a n d i n g ^ .

Quarterlyand

yearly

1940 July-Sept. .

Oct.-Dec.. .1941 Jan.-March.Apr.-June .

1941 July-Sept. .Oct.-Dec. . .

1942 Jan.-March .Apr.-June .

1942 July-Sept. .Oct.-Dec. . .

1943 Jan.-March .Apr.-June .

1943 July-Aug. (4).

Financial years1940-41 . .1941-42 . .1942-43 . .

Calendar years1940 . . . .1941 . . . .1942 . . . .

Trea-surynotes

1

—206—456— 24

_299

—4261,1181,2691,905— 66—6292,707

— 685991

2,479

— 25— 1813,866

Long

Trea-sury

bonds

680

7251,572683

— 463,1982,5432,1753,3337,850

58,247

—

3,6607,870

19,435

1,0795,407

15,901Total debt outstanding

end of 1942 . . 9,863 49,268

and

Sav-ings

bonds

139

151404715818

1,0082,2961,7522,2912,5712,8413,3651,438

1,4095,874

11,068

9862,9458,910

15,050

niddle

Specialissues

288

307313437538324351552624523972867

1,036

1,3451,7652,986

1,1391,6122,050

9,032

-term

Guaran-teed

bonds(2)

Total

Oin millions of289

1144455569

— 612— 651—1,118

4— 269

67— 258— 158

862—1,812— 456

280416

—2,034

4,283

1,392

1,0851,8332,2621,9284,2234,1234,4807,534

12,6143,850

11,6565,057

6,57214,75435,654

3,43810,24628,751

88,046

Trea-surybills

dollars1

7294J

— 298697

— 350856

2,1112,0082,6072,630

982

301905

9,356

— 145692

4,625

6,627

Short

Certifi-cates ofindebt-edness

———

——

3,0963,1154,323

6275,400

936

. _3,096

13,465

—10,534

10,534

-term

Taxnotes

———

1,3431,128

65479

1,1222,247— 381,149

208

3,0154,480

2,4713,913

6,384

Total

1

7294— 11,0451,825

— 2854,4316,3488,5783,1969,1792,126

3017,016

27,301

— 1453,163

19,072

23,545

Total

1,393

1,0922,1272,2612,9736,0483,8388,911

13,88221,1927,046

20,8357,183

6,87321,77062,955

3,29313,40947,823

111,591

(') At the end of 1942 the gross direct debt amounted to $108,000 million, of which $107,000 million wasinterest-bearing. The legal limit for this debt was raised from $125,000 million to $210,000 million in April1943. In addition, over $4,000 million guaranteed debt was outstanding at the end of 1942.

(?) These are the bonds issued by government corporations (R. F. C. etc.) and guaranteed by the government.Since the last quarter of 1941 these bonds have been systematically replaced by direct government obligations.

(3) Including small amounts of postal savings and pre-war (1917-18) bonds and adjusted service and depositarybonds not shown separately. These may give a plus or, on .account of redemptions, a minus item, in noquarter, however, exceeding about $50 million. (") Two months only.



- 255 -

issued at par (with coupon attached) at a fixed rate of interest and notexceeding one year's m aturity, were first put on the market in A pr il 1942.In ad dition , $9,500 million Trea sury bills and $4,500 million of non-ma rketabletax-anticipa tion notes were issued during the financial year 1942-43. Some$19,000 mil l ion, i . e. over one-half of the lo n g - t e r m borrow ing, was madethrough Treasury bonds with maturities generally up to about twenty years.Of the other half, by far the most impo rtant item was the issue of $11,000 m il-lion non-marketable savings bonds.

The tremendous acceleration of war expenditure in the United States hasthus involved borrowing on a vast scale — the amo unt borrowed in 1942-43was nearly four times as great as the total Federal debt of 1930; and stillgreater sums must be borrowed in 1943-44. In these circumstances considerableefforts have been made to create securities suitable to all classes of investors,

and, in particular, with the aid of a series of sales campaigns, to borrowdi re c tl y fr o m th e p ub l ic , i . e. from investors other than banks. In 1941 twonew securities were introduced, defence savings bonds and tax-anticipationnotes, both of which were non-marketable; in 1942 new series of tax notes weremade to replace the old ones and the maximum for individual subscribers tosavings bonds was raised from $50,000 to $100,000. A further step was takenwith issues in May, Aug ust and December of m ar ke ta bl e Treasury bondsnot available to banks on their own account for a period of ten years; saleswere largely made to life assuran ce com panies . Moreover, the technique ofissue was changed; instead of closing subscription l ists after only 24 or

D i s t r i b u t i o n o f U . S . G o v e r n m e n t B o r r o w i n g ^ .

Calendar years

1940 (twelve months)1941 ,,19421943 (six months) .

Total holdingsat end of 1942 . .

1940 (twelve months)1941 „19421943 (six months) .

Banking System

FederalReserveBanks

Commer-cial

banks(2)

Total

Other investors

MutualSavingsbanks

Insur-ancecom-panies

(3)

Federalagencies

Allothers

(3)

Total

Totalall

investors

in millions of dollars(—300)

703,9401,010

6,190

1,4704,030

19,55010,660

41,340

1,1704,100

23,49011,670

47,530

120480860720

4,560

6001,1003,0001,800

11,000

1,0901,9102,7102,070

12,240

3105,820

17,76011,620

36,260

2,1209,310

24,33016,210

64,060

3,29013,41047,82027,880

111,590

as percentages of total borrowing in each period(—9./)

0.58.23.6

44.730.140.938.2

35.630.649.141.9

3.63.67.S2.6

18.28.26.36.5

33.114.25.77.4

9.443.437.741.6

64.469.450.958.1

10 010 0too10 0

V) These figures are based on statistics of the distribution of interest-bearing securities only (direct and guaranteed).Figures for banks and Federal agencies and for the totals are rounded to the nearest $10 million.

(2) Member banks of the Federal Reserve System accounted for 90 per cent, of the total for all commercialbanks at thè end of 1942.

(3) In the original statistics (see Federal Reserve Bulletins) these two columns are rounded to the nearest$100 million; In this table the original figures are given for insurance companies and the odd tens of mil-lions necessary to make the four columns total correctly have been added to "all others".



— 256 —

48 hours, as was previously the case, new loans were open for subscriptionfor several weeks at a time in order to ensure a better distribution of thesecurities, a method somewhat similar to the continuous tap issues of market-able loans already obtaining in England and Germany. Th is technique wascombined with a number of war-loan "drives" by which a variety of long andshort-term government securities were offered for sale within a limited period:the f irst mixed "war l o a n " of this type in December 1942, comprising sixdifferent types of security, produced $13,000 million, of which the banks sub-scribed $5,000 m illio n; in A pri l 1943, the secon d war loan brought in$18,500 million, again including $5,000 million from the banks; and in September-October 1943 the third drive, from which the banks were excluded, produced$19,000 million.

Altogether the Treasury sold to investors other than banks over $24,000 million

in 1942; but, even so, the need for bank purchases was very great. In 1942m em be r ba nk s of the Federal Reserve System nearly doubled the ir holdingsof U. S. government securities and in 1943 the rise continu ed, as the followingtable shows.

U n i t e d S t a t e s — A l l M e m b e r B a n k s .

End of month

Assets

Reservebalances Loans

SecuritiesU.S. Go-vernment all other

Liabil i t ies

Demanddeposits

0)

U.S. Governmentdemanddeposits

Timedeposits

Totaldeposits

in millions of dollars1940 June . . .

December1941 June . . .



13,75113,99212,95912,39612,29513,07212,093

13,96915,321

16,72918,021

16,928

16,088

14,823

14,722

15,823

18,078

19,539

24,09837,546

46,980

5,760

5,982

5,852

5,961

5,774

5,629

5,352

27,87730,429

32,67833,754

36,966

42,570

48,957

711616

6191,709

1,724

7,923

7,236

11,459

11,687

11,898

11,878

11,673

12,366

13,382

42,03946,007

48,07651,192

53,43467,276

73,465

(') Adjusted, I.e. other than inter-bank and U.S.Government deposits and less cash items In process of collection.(?) Of individu als, partnerships and corpo rations. (3) Gross deposits exclusive of Inter-bank.

O t h e r a s s e t s o n b a l a n c e h a v e d e c l i n e d . B a n k l o a n s , w h i c h h a d r i s e n r a p i d l y

b y o v e r $ 4 , 0 0 0 m i l l i o n f r o m J u n e 1 9 40 t o D e c e m b e r 1 9 4 1 , f e l l b y $ 2 , 0 0 0 m i l l i o n

i n 19 4 2 a n d b y n e a r l y $ 1 , 3 0 0 m i l l i o n i n t h e f i r s t h a l f o f 1 9 4 3 . T h i s w a s t h e n e t

r e s u l t o f c o n t r a r y m o v e m e n t s : t h e F e d e r a l R e s e r v e r e s t r i c t i o n s o f S e p t e m b e r 1 9 4 1

o n c o n s u m e r c r e d i t w e r e t i g h t e n e d u p in M a y 1 94 2 a n d b a n k c r e d i t s f o r

n o n - w a r p u r p o s e s c o n t i n u e d t o d e c l i n e ( i n p a r t , a t l e a s t , r e f l e c t i n g t h e r e d u c e d

n e e d s o f b u s i n e s s f o r s u c h f i n a n c i n g , a s s a l e s o f a u t o m o b i l e s a n d o t h e r

c o n s u m e r s ' d u r a b l e g o o d s f e l l o f f ) ; b u t c o n s i d e r a b l e c a l ls w e r e m a d e o n b a n k

c r e d i t a s a d i r e c t c o n s e q u e n c e o f t h e w a r . A t a l l c o m m e r c i a l b a n k s i n t h e

c o u n t r y t h e n e t d e c l i n e o f b a n k l o a n s e x c e e d e d $ 2, 0 00 m i l l i o n in 1 9 4 2 ; l o a n s

t o f i n a n c e w a r c o n t r a c t s i n c r e a s e d b y s o m e $ 1 , 70 0 m i l l i o n , w h i l e l o a n s f o r

o t h e r t h a n w a r p u r p o s e s d e c l i n e d b y n e a r ly $ 4 , 0 0 0 m i l l i o n .



- 257 -

The provision of working capital(1) to American industry for war produc-tion has taken three main form s. Firstly, under the A ct of 22nd June 1940, the

army and navy were authorised to make direct advances up to 30 per cent,of the amount of the contract (and, later, a further 20 per cent, was allowedfor sub-contractors); these advances were at first free of interest but sub-sequently bore interest at 2% per cent. Secondly, on 9th October 1941, thissystem of "prog ress paym ents" was supplemented by the Assign me nt ofClaims Act, which permitted, for the first time, the assignment of claimson the government; by virtue of this p rovision, contractors could bo rrow fromthe banks on the collateral of a claim on the government. But this Act didnot do mu ch, in reality, to expand the banks' lending facilitie s. Third ly, anexecutive order of the President, made on 26th March 1942, authorised the Warand Navy Departments and the Maritime Commission to guarantee loans forwar produc tion purpo ses; the bank m aking the loan pays for the guarantee

a fee ranging from 10 to 50 per cent, of the interest collected, according tothe size of the guarantee. A number of large bank credits have beenobtained in this way(2).

The counterpart to the increase in the banks' lending to the governmentwas a rise of demand de po sits , in all by som e $16,000 m illion in 1942, therise being relatively greatest in agricultural districts. The distribution ofdeposits at the end of 1942 was very unusual, those of the public havingrisen by $8,800 million to $42,600 million while the governme nt acco unts hadincreased by $6,200 million to the very high figure of $7,900 millio n. Contrary tothe practice in other coun tries, th e U. S. Government has acco unts at the m ostimportant commercial banks throughout the country, to facil i tate the collection

and transfer of the proceeds of governme nt loans — and , at the end of 1942,these accounts were exceptionally high owing to the current flotation of theVictory loan, the largest single borro wing operation in U. S. financ ial historyup to that date. Government deposits with the member banks were drawndown in the firs t q uarter of 1943 to only $2,600 million in Ma rch, and otherdeposits increased; but government deposits rose again and in Apri l andMay 1943, when other government loans were in course of subscription, theywere around $10,000 million, a record high level.

In the fifteen months to March 1943 demand deposits, both businessand personal, at all commercial banks in the country rose by $15,000 millionto $53,000 million . A n e xploratory survey made by the F ederal Reserve System

showed that more than two-thirds of the total demand deposits belonged tobusinesses and less than one-third were personal (including the deposits offarmers); but of the increase of $15,000 million about three-quarters was dueto business deposits and one-quarter to personal deposits; business depositshad grown by one-half and personal deposits by only one-third. A further

0) Fixed capital, on the other hand, has been provided through the Reconstruction Finance Corporation andits subsidiary, the Defense Plant Corporation.

(5) Up to the end of December 1942, $2,700 million guaranteed loans had been authorised; of this amount$800 million were outstanding, $1,450 million were still available and $450 million had been repaid. By August1943, $5,150 million guaranteed loans had been authorised, of which $1,650 million were outstanding and$2,480 million still available while about $1,020 million had been repaid. About 80 per cent, of the loansoutstanding were covered by the guarantees.



— 258 —

survey made of the situation in July 1943 confirm ed these res ults. It wasadded that such evidence as was available indicated that individuals held the

bulk of both the $19,000 million currency and the $31,000 million time deposits(at commercial and savings banks); thus the total "cash holdings" of individualssubstantially exceeded those of businesses.

From their highest poin t of $14,000 m illion at the end of 1940, thereserve balances of the member banks fell until September 1942, when theydipped fo r a few weeks below $12,000 m illion . The principa l reason for thedecline was the withdrawal of currency from the banks (while gold imports,the chief factor bringing about the previous increase, had ceased). On theother h and , the reserves legally req uired , which w ere about $7,000 million at theend of 1940, continued to rise steadily, reflecting the increased deposits atthe member ban ks; and in No vember 1941 the Federal Reserve Bo ard madean all-round increase in the percentage of reserve requirements. The excess ofreserves over requirements was thus squeezed between the decline of totalreserves and the rise of "required" reserves and fell from nearly $7,000 million

at the end of 1940 tounder $2,000 million atthe end of September1942. But these "ex-cess " reserves werenot evenly distributed;the declines had takenplace particularly atNewYorkand Chicago;

in these two "centralreserve" cities sub-scriptions to govern-ment securities hadbeen very consider-able and a substantialportion of the pro-ceeds (and of taxreceipts from thesecentres) was expendedelsewhere.

U. S. Member Banks' Excess Reserves.Weekly averages of daily figures

in millions of dollars.

7000

6000

5000WOO

3000

2000

1000

member banks

8000

7000

6000

5000«00

3000

2000

1000

1936 19«

These central-reserve city banks, although they had suffered an exceptionalfall in their reserves, continu ed to purchase governm ent p aper. But the cashreserves of commercial banks may be affected by action on the part of thecentral bank. And the Federal Reserve Banks had three methods of remedyingthe situation: a) by lowering the reserve requirements, b) by facilitating borrowingand c) by open-market ope ration s. A ll these m easures were applied in 1942.

a) The original reserve requirements for member banks as provided bythe Federal Reserve Act remained in force from 1917 until 1936. The BankingAct of 1935 had empowered the Federal Reserve Board to raise member-bank



— 259 —

U . S . — M e m b e r B a n k s ' R e s e r ve R e q u i r e m e n t s .

Date of change (1)

1917 21st June . . .1936 16th August . .1937 1st March . .

1st May . . . .1938 16th April . . .1941 1st Novem ber.1942 20th August . .

14th September3rd October . .

Reserve requirements^) against:Net demand deposits in

centralreserve

city banksreserve

city bankscountrybanks

Timedeposits

(all banks)

in percentages

1319/222%26•22'A

2624

2220

10

15

17/,20

17/,

20

20

2020

7

1 0 ' / ,

1 2 / 4

1 4

12

14

1 4

1 41 4

0) Date from which new rates were effective (for 1917, original rates).(2) As percentage of deposits.P) New York and Chicago member banks only.(4) Member banks in ten other c ities, where Federal Reserve Banks have seats.(5) All other member banks.

r e s e r v e r e q u i r e m e n t s u p

t o a m a x i m u m o f d o u b l e

t h e o r i g i n a l p e r c e n t a g e s ,a n d t h r e e i n c r e a s e s w e r e

m a d e i n 1 9 3 6 a n d 1 9 3 7

w h i c h r a i s e d t h e p e r c e n t -

a g e s t o t h i s m a x i m u m ;

a f t e r a d e c r e a s e i n 1 9 3 8

r e s e r v e r e q u i r e m e n t s w e r e

a g a i n r a i s e d t o t h e

m a x i m u m in N o v e m b e r

1 9 4 1 . C h a n g e s m a d e t o

t h a t d a t e a p p l i e d t o a l l

t h e b a n k s i n e q u a l p r o -

p o r t i o n s . B u t o n 7 t h J u l y1 9 42 t h e F e d e r a l R e s e r v e

A c t w a s a m e n d e d t o

a l l o w r e s e r v e r e q u i r e -

m e n t s f o r b a n k s i n t h e

t w o c e n t r a l - r e s e r v e c i t i e s

o t h e r r e s e r v e c i t i e s . T h i s p e r m i t t e d

o f t h e s p e c i a l p o s i t i o n o f

34 / ,5%6566

66

t o b e c h a n g e d s e p a r a t e l y f r o m t h o s e i n

a m o d i f i c a t i o n i n p o l i c y w h i c h t o o k a c c o u n t

N e w Y o r k a n d C h i c a g o : f o r t h e s e t w o c e n t r a l - r e s e r v e c i t i e s t h e r e q u i r e m e n t s

f o r r e s e r v e s a g a i n s t d e m a n d d e p o s i t s w e r e r e d u c e d i n A u g u s t , S e p t e m b e r

a n d O c t o b e r 1 9 42 , a l l t o g e t h e r r e l e a s i n g a b o u t $ 1 ,2 0 0 m i l l i o n o f r e s e r v e f u n d s

a n d l e a v i n g r e s e r v e r e q u i r e m e n t s a t a l i tt l e l e s s t h a n o n e a n d a h a l f t i m e st h e o r i g i n a l p e r c e n t a g e s ( a n d a t t h e s a m e p e r c e n t a g e a s in o t h e r r e s e r v e

c i t i e s ) . F u r t h e r , i n A p r i l 1 9 4 3, m e m b e r b a n k s w e r e g r a n t e d e x e m p t i o n f r o m

r e s e r v e r e q u i r e m e n t s i n r e s p e c t o f U . S . G o v e r n m e n t d e p o s i t s r e p r e s e n t i n g

t h e p r o c e e d s o f w a r l o a n s .

b ) B o r r o w i n g b y m e m b e r a n d o t h e r b a n k s w a s a l s o m a d e s i m p l e r a n d

c h e a p e r i n 1 9 42 . W h i l e t h e F e d e r a l R e s e r v e m i n i m u m b u y i n g r a t e f o r 9 0 - d a y

b a n k e r s ' a c c e p t a n c e s , w h i c h r o u g h l y c o r r e s p o n d s t o E u r o p e a n b a n k r a t e ,

r e m a i n e d a t % p e r c e n t , ( u n c h a n g e d s i n c e O c t o b e r 1 9 3 3 ), a r a t e o f 3 / s p e r

c e n t , w a s e s t a b l i s h e d a s t h e b u y i n g r a t e f o r a l l T r e a s u r y b i l l s o f f e r e d t o t h e

R e s e r v e B a n k s f r o m 3 0t h A p r i l 19 42 o n w a r d s . A n d i n A u g u s t t h e R e s e r v e

B a n k s a g r e e d t h a t t h e o r i g i n a l s e l l e r , a t h i s r e q u e s t , m i g h t r e p u r c h a s e s u c h

b i l l s b e f o r e m a t u r i t y , a t t h e s a m e r a t e . F o r m e m b e r b a n k s , t h i s a r r a n g e m e n t

m a d e T r e a s u r y b i l l s p r a c t i c a l l y t h e e q u i v a l e n t o f c a s h .

D u r i n g M a r c h a n d A p r i l 1 94 2 r a t e s c h a r g e d t o m e m b e r b a n k s fo r a d v a n c e s

s e c u r e d b y g o v e r n m e n t p a p e r w e r e l o w e r e d a t a n u m b e r o f F e d e r a l R e s e r v e

B a n k s t o 1 p e r c e n t . , a n d i n O c t o b e r a l l F e d e r a l R e s e r v e B a n k s e s t a b l i s h e d a

n e w r a t e o f % p e r c e n t , f o r a d v a n c e s t o m e m b e r b a n k s o n g o v e r n m e n t s e c u r i t i e s

w i t h l e s s t h a n o n e y e a r t o r u n . T h e s e f a c i l i t ie s w e r e l i tt l e u s e d , h o w e v e r , a n d

t h e p r i n c i p a l in t e r v e n t i o n b y t h e F e d e r a l R e s e r v e B a n k s w a s i n t h e f o r m o f

g o v e r n m e n t - s e c u r i t y p u r c h a s e s .



— 260 —

c) Open-market operations, which had been of minor interest for a numberof years, the Federal Reserve Banks holding of government securities remaining

constant at somewhat over $2,200 million, became of considerable importancewith the entry of the United States into the war. On 8th December 1941 theBoard of Governors issued a statement which contained the following passage:

"The system is prepared to use its powers to assure that an amplesupply of funds is available at all times for financing the war effort andto exert its influence towards maintaining conditions in the United StatesGovernment security market that are satisfactory from the standpoint ofthe government's requirements."

The Federal Reserve Banks thus had two main objectives of open-marketpolicy, (i) to strengthen the member bank's reserves against the increase oftheir deposits and to cover withdrawals of currency and (ii) to maintain orderly

conditions on the government bond market, especially when large issues werebeing made.

In add ition, the Second W ar Powers A ct , approved on 27th March 1942,amended the Federal Reserve Act to permit the Reserve Banks to purchasesecurities directly from the government, a form of transaction hitherto prohi-bited ; but the a mend men t exp ires at the e nd of 1944 and the Reserve Banksmay not hold at any one time more than $5,000 million government securitiesacquired directly. Ac tin g under this autho rity the Federal Reserve Banks have,from time to time, purchased special one-day certificates, which were redeemedthe fol lowing day, in accordance with their ter m s; such certificates werepurchased particularly in June, September and November 1942, the largestpurchase in the year being $422 million on 30th November 1942.

U .S . F e d er al R e se rv e

Quarterlymovements

1941 January-March .April-June . . . .July-September .October-December

1942 January-March . .April-June . . . .July-September .October-December

1943 January-March. .

July-SeptemberC)Totals outstanding

end 1942

B a n ks — m o v e m e n t o f p r i n c i p a l i t em s .

Assets

Increases or decreases (—)of government security

holding

long-term

short-term

(2)total

Liabil i ties

Increases or decreases (—)

memberbanks'total

reservebalances

memberbanks'

excessreserves

FederalReserveNotes

Moneyin

circulation

(3)in millions of dollars

+ 60+ 92+ 71+ 1,732—1,155— 688— 74

4,138

+ 10— 10+ 309+ 852+ 890+ 885+ 1,971+2,076

2,051

+ 70— 10+ 401+ 922+ 2,622— 270+1,283+ 2,002

6,189

— 655— 320+ 176— 777+ 125— 270— 713+ 1,525— 358— 674+ 402

13,117

— 839— 566— 41—2,084— 12— 711— 672+ 298— 470— 306+ 681

1,988

+ 223+ 578+ 497+ 957+ 449+ 723+1,270+ 1,502+ 561+ 1,104+ 1,266

12,082

+ 192+ 688+ 551+ 997+ 406+ 817+ 1,320+1,707+ 840+ 1,171+ 1,293

15,410

0) Treasury bonds (direct and guaranteed) and Treasury notes. (?) Treasury certificates and Treasury bills.(3) Total money in circulation besides its chief item, Federal Reserve notes, also includes Treasury currency, i.e.

principally silver currency and subsidiary coin. (4) Up to 22nd September.



- 261 -

The tab le on the opp osite page shows that in 1941, in pursuanc e of the irmoderative policy, the Federal Reserve Banks hardly intervened in the market

at all, allowing the withdrawals of currency to fall directly on the memberbanks' reserves (and even reinforcing this effect on the excess reserves bythe increase of reserve req uirements on 1st Novem ber).

With the entry of the United States into the war the picture was modifiedbut no big change took place u ntil the second quarter of 1942, when $300 m il-lion odd of short-term securities were purchased, followed by $850 million inthe third and nearly $900 million in the fourth quarter; purchases of long-termgovernment securities (bonds and notes) were of less relative importance untilthe last quarter of the year, when $1,700 million were bought, making a totalof $2,600 million in this q uarte r. But Federal Reserve notes (and other m oneyin circulation) rose considerably, especially in the second half of 1942, and itwas only in the last quarter of the year that the excess reserves of the memberbanks increased somewhat.

In the first half of 1943 the Reserve Banks were able to unload thelong-term securities they had bought in the last quarter of 1942, but theypurchased some $2,900 million of short-te rm paper, thu s adding a furth er$1,000 million net to their holdings of U.S. government securities, whichattained $7,200 million in June 1943. Nevertheless, the excess reserves of themember banks declined by a further $800 million in the half-year to only$1,200 millio n in June 1943, excess reserves at New York an d Chica go havingpractically ceased to exist.

The fact that the New York member banks no longer hold any appreciable

cash reserves in excess of the legal requirements does not mean, of course,that these banks have become

U .S .— New Y o rk M em b er Ban ks . a t a ll i ll iqu id. On the con trarythey have built up large second-ary reserves of Treasury bills,which, as already mentioned,have, since August 1942, becomepractically the equivalent of cash.In addition, since certificates ofindebtedness were first issued,in April 1942, a large reserveof such securities, having at

most one year to run, has alsoformed part of the l iquidity pro-vision of the banks.

In spite of war con dition s, the expansion of currency and bank dep ositsand the vast borrowing programme of the government, int e re s t ra te s didnot vary much during the period under review. S h o r t - t e r m yields havestiffened somewhat since 1941 but remain very low; the reductions of someFederal Reserve rates and the fixing of the new rate for the purchase ofTreasury bills (and the later resale arrangement) were not drives towa rds

Monthly averages

1941 MarchJune . . . . . .September . . .December . . .

1942 MarchJune

September . . .December . . .1943 March

June

Excessreserves

TreasuryBills

Certificatesof

indebted-ness

in millions of dollars3,2032,2381,834

989962556

3024169622

227582495365334391

7351,7371,8142,092

297

9621,4781,9662,539



— 262 —

cheaper money but rather defensive moves against the rising trend of marketrates. The rate for 3-month Treasury bills , which dominates the short-term

market, rose from an average of 0.014 per cent, in 1940 to 0.103 per cent, in1941 and 0.326 per cent, in 1942; the Federal Reserve purchase rate effectivelyprevented a rise above 0.375 per cent, in the first half of 1943.

As regards the rates for c o m m e rc ia l - b a n k lo an s, a survey under-taken by the Federal Reserve Board in the spring of 1942 showed that, whilethe average rate was 3% per cent, for both war and non-war purp oses , largeborrowers (with assets of over $5 million) paid, on the average, rates onlyone-third of those paid by small borrowers (with assets of $50,000 or less),i.e. 1.8 per cent, against 5.5 per cent. App aren t regional differentials werelargely accounted for by differences in size and business of the borrowerconcerns, although some shifting of the rate structure towards relatively lowerrates in the middle west seemed to be evident. A striking fact brough t outby the survey was that, in spite of the persistent cheap-money policy, thecommonest rates were very similar in 1936 and in 1942; for reasons connectedwith the collection of the data, however, it seems probable that there wasactually some slight reduction of rates over the period. Since the spring of1942 there has been evidence of some hardening of conditions: the averagerate for commercial loans by banks in New York City rose from the recordlow level of 1.85 per cent, in March 1942 to 2.70 per cent, in June 1943.

On the long-term market the average rate for tax-exempt Treasurybonds (of more than twelve years' maturity), which had fallen from 2.21 percent, in 1940 to 1.95 per cent, in 1941, rose to 2.02 per cent, in 1942. Butthe best measure of the trend of long-term rates is given by the terms of

recent issues of taxable Treasury bo nds for c ash. Before December 1941the interest rate on these bonds was maintained at 2% per cent., while thematurities were lengthened. An attempt to improve loan conditions was made at

the beginning of DecemberU. S. T re a su ry Bo nd Is su es . 1941 (before the outbreak of

hostilities in the Pacific)with an issue at 2 percent, having 10-14 yearsto run; but this rate wasafterwards maintained onlyin the case of issues for

7-9 years. For longer issues2y2 per cent, was paid.Public cash subscriptionsexceeded the totals issuedby amounts which wereconsiderable in 1941 butless so in 1942. There ap-pear to be three principalreasons for this recession:

(i) A further tranche of the October Issue. (2) Issue not available to banks. a) the loans Were much

Date of Issue

1941 March . . . .JuneOctober . . .December . .0) •

1942 February. . .May('). . . .

JulyAuguste2) • •October . . .December (*).

1943 April P). . . .

Rate ofinterest

per cent.

2'A2'A2'A

22V,2%2%222%22'A

1%2%2

Maturityin

years

11-1315-1726-3110-1426-3110-1320-257-97-9

20-257-9

21-265

21-267-9

Issuedto

public

Publiccash sub-scriptionstendered


1,3105301,070

1,510880

1,2902,1001,2401,9602,8303,0603,7604,930

6,1408,270

10,4504,7306,9804,700

8803,2803,8501,2401,9602,8303,3603,760

12,760



— 263 —

larger b) they w ere so priced as to offer little pro fit on prom pt resales andthus did not attract speculative money and c) the issues, in some cases

(as for the 2% per cent, bonds of May 1942), were not specifically limitedand all subscriptions received allotments. A record oversubscription was madeto an issue available to banks in April 1943.

A Financial Control Asso ciation was set up in J ap an in May 1942 to workin close cooperation with the Bank of Japan and the Ministry of Finance,in the drawing-up of plans for the covering of the government's financialrequirements and the carrying-out of these plans. The Association prescribesthe amounts to be "saved" by various institutions in each quarter of the yearand allocates the amount of governm ent bonds to be taken u p. The plansare based on estimates of the national income, the main lines for the distri-bution of whic h are given in the tab le. Th us , in 1942-43, it was planned to

raise Yen 7,000 mil-Ja p a n e se N a t i o n a l I n co m e — d i s t r i b u t i o n ^ . lio n by ta xa tio n w h ile

Yen 23,000 million(direct governmentborrowing plus theinvestment item) wasto be covered by sav-ings. Actually taxationand other receiptsof the Treasury pro-duced Yen 6,570 mil-

lion in 1942-43 andfigures have beenpublished to showthe amount "saved"at Yen 23,460 million.

Financial yearsending March

1941-42 . . .1942-43 . . .1943-44 . . .

Government needs

Taxationand otherreceipts

C2)

Borrow-ing

(3)

Total

Capitalinvest-ment

(4)

Privatecon-

sumptionTotal

in milliards of yen

57

10

131721

182431

566

171513

404550

0) The method of calculating the national Income Is not known and thefigures are probably not directly comparable with those for western countries.

(2) This Item corresponds approximately to the ordinary budget of the13 ministries, which is, however, partly coveredby borrowing.

(3) This Is the aggregate of military expenditure, spread over some 49 specialbudgets, mostly covered by borrowing.

(') For the strengthening of the war economy and covered by borrowing.

These figures, which apply to "money-capital formation", are repro-duced in the fol lowing table, together with the quotas fixed to cover the

Yen 27 mil l iard consideredJ a p a n e s e " s a v i n g s " ^ ) .

Financial years ending March

Through institutions:

Credit cooperatives

T o t a l . . . . . . . . .Private purchases of securities .

Total "savings" . .

1942-43 1943-44

in milliards of yen

9.213.352.312.87

17.745.72 (2)

23.46

10.34.22.73.5

20.76.3

27.0

0) i.e. money-capital formation (excluding the Bank of Japan).(2) Postal life assurance Yen 0.54 milliard, postal pension fund

Yen 0.29 milliard, trust companies Yen 0.55 milliard, insurance com-panies Yen 1.27 milliard and finance companies Yen 0.22 milliard.

necessary for 1943-44. Forthe first half of the finan-cial year, Apri l to September

1943, total "savings" havebeen given as Yen 13,750mill ion.

The budget estimatesfor 1943-44 show total expen-diture at Yen 40,280 million ;but, of this total, Yen 4,200million represents transfersbetween the budgets ; and



- 264 -

Yen 3,300 million of the military expenditure is to be met by "borrowing"in the oc cupied territories — a term w hich covers the issue of notes by

the South Seas DevelopmentJ a p a n e s e B u d g e t E x p e n d i tu re . Ban k* . R evenue to be raise d

in Japan is thus aroundYen 33 milliard (rather higherthan that shown in the tableon page 263, probably as aresult of the two supple-mentary budgets ; a thirdsupplementary budget, forYen 620 million, was passedin June and a fourth, forYen 129 million, in November

1943).The accumulation of the budget deficit since the opening of the "China

incident" in the middle of 1937 is best shown by the issues of governmentbonds since that time.

J a p a n e s e G o v e r n m e n t i n t e r n a l b o n d is s u e s a n d t o t a l s o u t s t a n d i n g .

Estimates for 1943-44

first supplementarysecond supplementary

Sub-total . . .

Sub-total . . .

Total budget expenditure

In millionsof yen

10,0002,350

93013,28021,00034,2806,000

40,280

Quarterly

April-June

October-December. . . .Issued during year . . .

Total outstandingat end of year

1937 1938 1939 1940 1941 1942 1943

in millions of yen185

7212

1,1091,513

10,585

932905

1,112

1,4014,350

14,935

1,1301,1031,417

1,6695,319

20,254

1,3751,4181,329

2,6336,755

27,008

1,6032,0482,170

3,2719,092

36,101

3,1493,8373,304

3,86614,156

50,256

3,9664,700»3,800*

•

• Preliminary.

The total internal bonded debt has risen from Yen 9,000 million at theend of 1936 to Yen 50,000 million at the end of 1942 and was increasing in 1943at a rate of over Yen 15,000 million a year. Th is vast expan sion of thepublic debt lends interest to the table on the opposite page, which showsthe principal holders of governm ent bonds and indicates how the new issueshave been placed.

Over the six-year period some 70 per cent, of the issues have beenplaced with the various institutions shown (and further amounts with insur-ance and trust companies); the Bank of Japan has taken 12-13 per cent,of the total issues.

Japanese government borrowing has been almost exclusively by the issueof 3% per cent, bonds at 11-17 years. These bonds are taken up in the first

In the course of the budget debate the Minister of Finance stated that a further Yen 1,600 million wouldbe raised in the occupied territories from the sale of requisitioned goods.



— 265 —

J a p a n — p r i n c i p a l h o l d e r s o f g o v e r n m e n t b o n d s .

Yearly figures

Total outstandi1936193719381939194019411942

1 ncrease during193719381939194019411942

Total increase1937-42

Bankof

Japan

ng at enc829

1,3871,8412,4173,9495,3405,842

year558454576

1,5321,391

502

5,013

Percentage] of bond issue193719381939194019411942

Average.for '"period 1937-42

36.910.410.S22.715.33.5

12.2

Otherspecialbanks

of year323342708

1,0821,0841,6342,143

19366374

2550509

1,820

taken by1.38.47.006.03.6

4.4

Other institutionsCommer-

cialbanks

2,5612,5003,6344,6185,9577,944

11,329

(-61)1,1349841,3391,9873,385

8,768

TreasuryDeposit

Bureau (1)

Savingsbanks

in millions of

1,9102,2483,1774,6746,4658,129

11,251

3389291,497

1,7911,6643,122

9,341

various investors_

26.77S.579.627.923.9

21.3

22.321.428.226.518.322.1

22.7

1,0161,1451,4241,8732,5833,3074,712

129279449710724

1,405

3,696

8.56.48.4

10.58.09.9

9.0

Total

yen

5,8106,2358,943

12,24716,08921,01429,435

4252,7083,3043,8424,9258,421

23,625

2S.762.362.156.954.259.5

57.4

Totalinsti-

tutions

6,639!» 7,6221

'10,78414,66420,03826,35435,277

9833,1623,8805,3746,3168,923

28,638

65.072.772.979.669.563.0

69.6

Otherinvestors

2,4332,9634,151j,5,590 *6,9709,747

14,979

5301,1881,4391,3802,7775,232

12,546

35.027.327.120.430.537.0

30.4

Total

9,07210,58514,93520,25427,008

i36,10150,256

1,5134,3505,3196,7549,093

14,155

41,184

100100100100100100

100

(') Recipient and investor of the Postal Savings Bank's funds.(2) Including trust companies and insurance companies, which together held about Yen 1,130 million at the

end of 1939 and for which no later figures are available.

place by-the Bank of Japan, which sel ls them to other investors. Theevolution of the balance sheet of the bank thus depends primarily on theproportion of the bonds issued which are not absorbed by the public butleft remaining in the bank's portfol io.

In 1941, the Bank of Ja pan took up Yen 1,400 million governm ent bondsand the note circulation rose by Yen 1,200 million; in 1942, the bank took up

only Yen 500 million government bonds; but the note circulation rose againby Yen 1,200 million, while the government built up its deposit account bysome Yen 1,200 million odd. The explanation lies in an expansion of central-bank credit mainly to the banks (against discounts or advances) in order thatthey might purchase their quota of government bonds; a noteworthy counterpartto these purchases was the even greater accumulation of government deposits;these two influences continued in the first quarter of 1943. In the six-yearperiod fr om the end of 1936 to the end of 1942 the Bank of Japan tookup Yen 5,000 million government bo nds , while the note circulatio n rose byYen 5,300 million (to nearly four times its former level).



- 266 -

Bank o f Japan (1 ).

Near end ofmonth

AssetsGod andforeign

exchangeDis-

countsand

advances

Govern-mentbonds

Agencies'accounts

Totalbalancesheet

Liabilit iesNote

circu-lation

Govern-ment

deposits

Guaran-teed

depositsCurrentaccounts

In millions of yen1936 December1937193819391940

1941 March . .June . . .SeptemberDecember

1942 March . .


1943 March . .June . . .

599853556553566

593585572550

546

564675566

579602

745628509

1,065819

65257551890 4

497373386

1,586

1,605862

8291,3871,8412,4173,949

3,5724,0254,1195,340

5,0185,8875,6725,842

5,6417,387

3457

110198289

28632 237346 6

411492536

1,001

1,6331,777

2,5123,0393,4774,7256,141

5,6236,0216,0867,751

6,855

7,9508,002

10,306

10,23411,036

1,8662,3052,7553,6794,777

4,1974,2164,4845,979

5,1435,4195,3707,149

6,5687,155

227303286547738

938839877824

8811,2981,6152,045

2,5422,525

———

17020 026 0

22122024530 2

264169

129132131162229

121205121186

166

237244356

378362

(') The December figures in the top part of the table are from the balance sheets made up at the end of theyear. Quarterly figures for 1941 and 1942 are made up from the weekly return s, the nearest available tothe end of the month,

0') Shown as two items, gold coin and bullion and foreign agencies' accounts, up to the end of 1940 and sincethen as one item, bullion and foreign accounts.

(3) "Governm ent b on ds" only In the balance sheets, but the weekly returns give "government bonds andother securities ". The holding of other securities must be very small.

(' ) The reserves of the Banks of Chosen and Taiwan, held up to 1941 in the form of notes of the Bank ofJapan. These two banks had an aggregate note issue of Yen 1,198 million at the end of 1942 againstYen 994 million at the end of 1941.

T h e d e v e l o p m e n t o f t h e s i tu a t io n of t h e J a p a n e s e c o m m e r c i a l

i s s h o w n i n t h e f o l l o w i n g t a b l e .

banks

Japanese bank deposits etc.

End of month

1937 December . . . .1938 „ . . . .1939 „ . . . .19401941 March

JuneSeptember. . . .December . . . .1942 March

September. . . .December . . . .

1943 MarchMay

Commerca banks

Advances I nvest-ments Deposits()

Depositsin otherbanks«

Allbank

depositsMoney

intrust (3)

TreasuryDeposit

Bureau (4)

in millions of yen7,7128,716

11,15213,55413,363

13,72713,81715,14315,27516,33516,59417,65818,44619,020

4,6456,1237,7919,624

10,298

11,71712,15512,78113,64514,86415,29216,97917,31218,108

12,35215,07319,79424,39023,739

26,81826,06929,40628,93932,80031,92635,73836,05837,564

3,3954,0445,2986,8007,1257,7038,0448,3958,7829,622

10,17210,83112,07211,896

15,74719,11725,09231,19030,864

34,52134,11337,80137,72142,42242,09846,56948,13049,460

1,8652,0452,3232,6032,710

2,8612,9433,0473,1503,2803,4063,5183,6903,814

3,9054,7156,0828,1488,6719,2609,81310,169

11,07912,12413,10313,81615,155

0) Of the Yen 37.6 milliard in May 1943, Yen 19.0 milliard were tme deposits bearng interest at 3.3 per cent.(2) Speca banks (excluding the Bank of Japan) accounted for Yen 3350 million and savings banks forYen 7480 million at the end of 1942.

(3) At trust companies, whch are closely connected with the private banks.(") Deposts from Posta Savngs Bank.



— 267 —

In 1942 the security holding of the com me rcial banks rose by Yen4,200 m illion and ad vances, largely t o the armament in dustry , expanded by

Yen 2,500 million; the increase of deposits was by only Yen 6,300 million.Contrary to developments in many other countries, the governm ent's war finan-cing has not led to a high degree of liquidity of the market and repayment ofbusiness credit; this characteristic feature of Japanese conditions is doubtlessdue in a large measure to the fact that the whole of the government's borrowinghas been at long term while the banks have been called upon to satisfy thegrowing credit needs of the war industries. The tightness of the market wasindicated by the borrowing of the banks at the Bank of Japan in order to takeup their quota of government securities at the end of 1942. The commercialbanks have maintained their position with nearly 80 per cent, of all bankdeposits in the country.

Further steps in the large-scale plan of simplification and rationalisationof banking in Japan were taken in 1942; two notable fusions of old-established "banques d'affaires" with modern deposit banks were those of theMitsui Bank with the Daischi Bank and of the Mitsubishi Bank with theDaihyaku Bank. Of the seven leading Japanese banks it is planned that fou rshall survive the process of concentration while many of the small and medium-sized banks will be absorbe d. A decree of 20th May 1943 permitted the ordinarybanks to accept savings deposits and transact trustee business, thus furthertightening the l inks between these classes of business and favouring theconcentration of the banking system. The reorganisation of the YokohamaSpecie Bank is m entioned on page 53.

The W a r t i m e F i n a n c i n g Ba n k wa sfinancing which was vital to the war effort

J a p a n - I n t e r n a l B o n d s I s s u e da n d R e d e e m e d .

Calendar years

193719381939194019411942

193719381939194019411942

Local go-vernment

bondsBankbonds

Corpora-tion

bondsTotal

in millions of yenNew Issues *

252180261227170299

6548455391,391

1,7672,733

337665

1,2851,3252,1052,338

1,2431,6902,0852,9434,0425,370

Internal Loans Redeemed

222147143167148186

206559275256281539

283172191242280357

711878609665709

1,082

Including refunding.

created early in 1942 to undertakebut of a nature unsuited to existinginstitutions. No returns have beenpublished but it was stated inOctober 1942 that the bank hadgranted credits of Yen 400 million,mainly without security; the usualrate of interest for ten-year creditswas 4.8 to 5 per cent. The bank'srequirements of funds for 1943 havebeen placed at Yen 1,500 million,

of which Yen 1,000 million was tobe obtained by the issue of bondsand Yen 500 million from theIndustrial Bank or Treasury DepositBureau; Yen 1,300 million was tobe utilised for advances to theBarter Trading Corporation and tothe principal key industries, andYen 200 million was earmarked forinvestments.



— 268 —

In addition to the huge bond issues of the government the capitalm ar ke t has taken up an increasing amount of private bond issues, particu-

larly those of the banks and industrial corporations as the previous tableshows. In te re st ra tes have remained without any notable changes. Govern-ment bonds of 11-17 years bear interest at 3% per cent, and are issued at 98.Bank rate has been unchanged at 3.285 per cent, since April 1936; at thisrate also the bank lends against the collateral of government bonds, i.e.at a rate below the yield of the bonds themselves. The Central Bank ofManchou lowered its discount rate from 4.2 to 4 per cent, in April 1943(while the issue price of government bonds was raised from 96 to 98).

In a discussion of the financial sources covering war expenditure in theIntrod uction of th is Report (page 15 onwa rds) the different metho ds of m eetingbudgetary expenditure have been arranged as a sort of "hierarchy" from thepoint of view of their efficacy in resisting inflation . T he illus tration of thesemethods by specific examples is attended by some difficulty since "genuinesa vin gs " are not easy to define and still less so to measure directly. But someapproximation can be made. Total government expenditure is known for manycountries and also the amounts covered by taxation (and other current revenue)and by borrowing. Further, the amounts borrowed by the government fromthe commercial banks and from the central bank can generally be found inpublished statistics so that the amount borrowed "from others than banks"may be ascertained.

In normal times the residual item thus obtained does not give even an

approximate measurement of the aggregate genuine savings of a community,as private credit operations are then of considerable importance; this wastrue of the United States, for example, even in the years 1940 and 1941. Butin countries which have been at war for some years, such as the UnitedK in g d o m and G er m an y, pr ivate credit operations unconnected with the wareffort have practically ceased : the increase of th e note circulatio n and ofcommercial-bank deposits can be taken as approximately equivalent to govern-ment borrow ing from th e central and com mercial banks respectively. (It istrue that some repayment of the banks' business advances may continue,but this is to a great extent offset by the larger cash reserves held bythe banks.)

In other words, the total formation of "money capital" is approximatelyequal to government borrowing; this is confirmed by careful estimates of"money-capital formation" made in Germany since the war and reproducedon page 180 of this cha pter. Borrow ing from other investors than banks thengives some approximation to genuine savings in money fo rm *. The additionof taxation (and other current revenue) to these statistics of money-capitalformation and their reproduction in the form of the hierarchy is shown in thedetailed tables, which also give similar figures for the United Kingdom.

* Genuine savings may, of course, also be held as commercial-bank deposits in both England and Germanybut this would hardly affect the comparability of the figures.



— 269 —

U n i t e d K i n g d o m a n d G e r m a n y —A n a l y s i s o f G o v e r n m e n t F i n a n c i n g 1 9 4 0 - 4 2 .

Sources covering government expenditure

Internally financed :Taxation and other current internal

revenueNon-bank borrowing:

savings issuesother (residual item)

Total taxation and non-bank borrowing .Borrowing from savings banksTotal other than commercial banking

systemBorrowing from commercial banks . . .

Total banking systemTotal expenditure internally financed . .Externally financed :

Current revenueBorrowing

Total externally financed

Total expenditure

As percentages of expenditureinternally financedTaxation and other current internal revenueNon-bank borrowing:

savings issuesother (residual item)Total taxation and non-bank borrowing .Borrowing from savings banksTotal other than commercial banking

systemBorrowing from commercial banks . . .

Total banking systemTotal expenditure internally financed . .

United Kingdom

1940 1941 1942 Total1940-42


1,259

316413

1,988128

2,11640562

4672,583

756756

3,339

1940

1,823

"380644

2,852221

3,073

611

135746

3,819

797797

4,616

1941

2,343

3531,0213,717

238

3,955

345171516

4,471

225632857

5,328

1942

5,430

1,0492,0788,557

587

9,1441,361

3681,729

10,873

2252,1852,410

13,283

Average1940-42

Germany

1940 1941 1942 Total1940-42

in milliards of RM

29.1

10.639.78.9

48.68.92.3

11.259.8

5.51.57.0

66.3

1940

34.1

11.946.014.2

60.28.35.5

13.874.0

13.06.0

19.0

93.0

1941

45.7

1.011.958.620.0

78.65.65.0

10.689.2

21.77.0

28.7

117.9

1942

108.9

1.034.4

144.343.1

187.422.812.835.6

223.0

40.214.554.7

277.7

Average1940-42

in percentages48.7

72.216.076.95.0

87.975.72.4

18.1100

47.9

9.976.974.75.8

80.516.03.5

19.5100

52.4

7.922.883.15.3

88.57.73.8

77.5100

49.9

9.619.178.75.4

84.112.53.4

15.9100

48.7

77.766.474.9

87.314.93.8

78.7100

46.7

76.762.279.2

87.411.27.4

18.6100

5 7.3

7.773.365.722.4

88.16.35.6

77.9100

48.9

0.415.464.779.3

84.070.25.8

16.010 0

These statistics are a combination of material regarding government financing and money-capital formation ;although the comparison is particularly of sources covering expenditure internally financed, external sourceshave been added to give a complete picture. For the United Kingdom the figures are mostly based ondata given earlier in this chapter, but with the slight adjustments to revenue and expenditure made in thebudget White Paper analysis. To make comparison with Germany possible, government borrowing from the centraland commercial banks is taken as equal to the increases of currency in circulation and of all commercial-bankdeposits respectively. Savings-bank deposits and savings issues are taken from the Bank of England'sStatistical Summary. "Other" internal borrowing is ' the residual item and therefore comprises errors and

omissions also. External current revenue in 1942 is the Canadian contribution and external borrowing corres-ponds to overseas disinvestment; although the Canadian contribution is similar in effect to United Stateslend-lease (which is excluded), it appears appropriate to include it for the sake of comparability with previousyears (when payments to Canada were included as overseas disinvestment). The German figures are basedon the statistics given earlier in this chapter, including the analysis of money-capital formation as estimatedby Dr. Keiser. To the known internal sources other than banks (insurance companies, market etc.) have beenadded the residual, or "unknown", sources, which, as Dr. Keiser remarks, may, however, be partly foreign ; butthis addition only raises the total infernal borrowing by 3% per cent, and hardly affects the percentages based onthis total. Internal current revenue is taken from the table on page 173 of this chapter; for 1942 the whole of theRM 7.7 milliard of the rent-tax payment has been included as taxation (although a certain part of this totalwas raised by private borrowing) and the RM 4 milliard paid only in the first half of January 1943 has beendeducted from total borrowing and from borrowing from the commercial banks. External current revenueconsists of occupation costs (given on page 173) plus Reichskreditkasse (page 174); external borrowing appliesto the Verrechnungskasse (page 180). The total expenditure corresponds to the table on page 173.

As regards comparability of the figures it should be noted that "borrowing from the commercial banks"for the United Kingdom represents the increase of all commercial-bank deposits (of which the clearing banksaccount for somewhat over 80 per cent.) ; for Germany the figures are the increase of all "giro" accountsat banks, at savings banks and on postal cheque accounts etc. "Borrowing from savings banks" in theUnited Kingdom is the increase of savings deposits at the postal savings and trustee savings banks but forGermany applies to all savings deposits in the country, whether at the savings banks or not.



— 270 —

In making an analysis of this nature a number of difficulties arise, as re-gards both methods and material, and certain reservations must be made which

are evident from the foot note to the table. Thu s for England the Canadiancontribution is included as current external revenue and for Germany thewho le of the RM 7.7 milliard rent-tax com position is classed w ith internalcurrent revenue in 1942 although, for technical reasons, some RM 4 milliardof the tax was finally paid over to the Treasury in January 1943 and a certainfractio n of the funds was actually raised by private bor row ing. However, inspite of such difficulties and of the minor errors inherent in the material used,it is believed that, by and large, the analysis gives a reasonably correct viewof developments up to the end of 1942.

In addition to the broad lines of comparison made in the Introduction,the table brings out a number of interesting features of war financing in the

two c oun tries. In the three years 1940-42, somew hat under one -fifth of totalbudget expenditure was "externally financed" in both Germany and the UnitedKingdom — but this excludes lend-lease aid received by the United Kingdomand German requisitions and other levies in the U. S. S. R.

As regards expenditure "internally financed", the tables point to oneconsiderable difference in financing methods: in Germany, no special issuesof government securities have been made for "small savers", a consequenceof the "n ois ele ss " financing through banks and other institutions — theRM 1 milliard placed under this heading in the table for 1942 represents thevolume of "iron savings", the nearest German equivalent to a savings issue:but in the United Kingdom savings securities accounted for nearly 10 per cent,

of internally financed government expenditure. Ordinary savings deposits arethree to four times more important in Germany, as a source of governmentf inancing, than they are in the United Kingd om. A nd , as these deposits aremade for periods of at most one year, the money is not tied up as it is ina special savings security; savings deposits which may be withdrawn thustend to "deconsol idate" the government long-term debt. Al l "smal l savings"together (savings deposits and savings securities) accounted for 15 per cent,of the total internally financed in the United Kingdom and nearly 20 per cent,in Germany; for "other investors", that is insurance companies, other institutionsand private individuals, the percentages are roughly reversed: 15 per cent, inGermany and 21 per cent, in the United Kingdom.

For reasons already mentioned, it is not possible to make an analysis ofgovernment financing in the Un it e d S ta te s in the same form as for theUnited Kingdom and Germany; but statistics are regularly published regardingthe principal holders of government securities in the United States and thesemay be combined with the budget figures as in the following table.

It will be seen that the expansion of currency and credit in the threeyears, at almost $38 milliard, was appreciably greater than the purchases ofgovernment securities by the banking system as a whole at nearly $29 milliard.But in the three-year period the United States was actually at war for only



- 271 -

U n i t e d S t a t e s — a n a l y s i s o f g o v e r n m e n t f i n a n c i n g 1 9 40 -4 2 .

Sources coveringgovernment expenditure

Govt securities taken byFederal Reserve Banks. .All commercial banks . .

Total . . .Other investors

Total government borrowingTaxation and current internal

revenueMovement of official

balancesTotal expenditure

Expansion ofcurrencyand credit - annuallyMoney in circulation . . .Bank deposits*

Total annual increases . . .

1940 1941 1942 Total1940-42

in millions of dollars

C—300)1,4651,1652,1283,293

5,835

5319,660

704,0304,1009,308

13,408

8,848

(—3,205)19,052

3,93519,55023,48524,33847,823

16,403

(—8,206)56,020

3,70525,04528,75035,77464,524

31,086

(-10,880)84,732

in millions of dollars

1,1346,6327,796

2,4285,9048,332

4,25017,50521,755

7,81230,04137,853

1940 1941 1942 Average1940-42

in percentages

(-3./)

15.112.022.134.1

60.4

5.5100

0.321.221.548.970.4

46.4

(—16.8)

100

7.034.941.943.485.3

29.3

(—14.6)

10 0

4.429.533.942.276.1

36.7

(-12.8)

100

in percentages

14.985.1

100

29.170.9

100

19.580.5

100

20.679.4

100

* All banks except Mutual Savings banks.

one full year. A nd in this year an importan t change took p lace: in 1940 and1941 together $5.3 milliard government securities were taken by the bankingsystem but the expansion of currency and bank deposits was $16.0 milliard —in other words, the extension of credit on private account was still verygrea t; in 1942 the banks bough t $23.5 milliard government secu rities but

currency and credit expanded by only $21.9 milliard — thus private credit wasrepaid on balance in this year. In the firs t six m onths of 1943 the latter tren dcont inued: the banking system took up $1^.8 milliard of government securitiesbut currency and credit expanded by only $9.4 milliard, and there can belittle doubt that net money-capital formation fell well below the figures forgovernment borrowing.

The table given above is somewhat imperfect, since the real utilisation ofcentral-bank credit in the United States was greater than the Federal ReserveBanks' purchases of government securities during the period. Gold acquisitionsand open-market purchases of securities in earlier years had led to anincrease of member-bank reserve balances, greatly in excess of requirements;

central-bank credit was thus created which lay dormant for some years. Theactual utilisation of this previously created credit corresponds approximately to thenet decline of member banks' excess reserves. The table on the following pageshows that in the two years 1941 and 1942 newly created Federal Reserve creditamounted to only $4.4 milliard b ut, in the same perio d, the u tilisation ofpreviously created credit came to $4.6 milliard, giving a total of $9.0 milliard.Together with an increase of nearly a milliard in the gold stock (and themovement of sundry other items) this total utilisation of central-bank creditcovered an increase of the member banks' required reserves by $3.7 mil l iard andan expansion of money in circu lation by $6.7 milliard in the tw o years 1941 and 1942.



272 —

U n i t e d S t a t e s — T o t a l u t i l i s a t i o no f F ede r a l Res e r v e c r ed i t .

Calendar years

1940 (twelvemonths)19411942 „1943 (nine months)(c)

Previouslycreated

P)New(2)

Total

in millions of dollars(—1,410)

2,3302,300

90

( - 320)90

4,3203,040

(—1,730)2,4206,6203,130

(1) The decline, or increase (—), of member banks' excessreserves. An adjustment has been made to this columnto take account of the changes made in the percentagesof required reserves In 1941 and 1942, $1,200 million(the estimated effect of the changes) being deductedfrom 1941 and added to 1942.

(2) Including certain miscellaneous items, in addition to the

With the decline of excess reservesto little over $1,000 million in the

summer of 1943 the total of pre-viously created credit was practicallyexhausted and the commercialbanks became more dependentupon Reserve Bank credit freshlycreated, i.e. upon Reserve Bankpurchases of government securities.

Government borrowing fromthe banks was still running veryhigh in the United States in 1942;one reason for this was the

purchases, or sales (—), of government securities shown verv rapid expansion of Federalin the previous table.

(?) 1st January to 22nd September 1943. ex pe nd itu re . W he reas from 1940to 1942 government expenditure

(internally finance d) rose by 50 per cent, in Germany and 75 per cent,in the United Kingdom, the increase in the United States was at the rateof 480 per cent. But it must be borne in mind that these figures refer tocentral-government expenditure only and that the United States is a federationof States, each with a separate budget. Whereas in the United Kingdom andin Germany the aggregate of local-gove rnme nt expend iture is barely one -twentieth of the central-government expenditure*, in the United States the situationhas been very different: Federal budget expenditure, although having doubledin the years 1932 to 1939, became equal to the aggregate of State and

local authorities' expenditure only in the latter year, and it was from theinception of the defence programme in 1940 that Federal expenditure definitelydrew ahead; although by 1942 State and local expenditure had fallen to only14 per cent, of Federal expe nditure , it was, prop ortiona tely to the centralbudget, stil l three times as great as in Germany and the United Kingdom.

W hile the expan sion of Federal expenditure fro m 1940 to 1942 wasby 480 per cent., the expansion of total government expenditure (central andlocal) was by 250 per cent. only. In the accounts of the Federal Government,

U n i t e d S t a t e s — F e d e r a l , S t a t e a n d l o c a l b u d g e t s .

Calendaryears

Federal . .State

and local

Total . . .

Expend iture

1939 1940 1941 1942

Revenue

1939 1940 1941 1942

Deficit

1939 1940 1941 1942

in milliards of dollars8.9

8.9

17.8

9.7

8.618.3

19.1

8.527.6

56.0

8.064.0

4.9

8.713.6

5.8

9.114.9

8.8

9.518.3

16.4

9.726.1

4.0

0.24.2

3.3

(+0.5)3.4

10.2

(+1.0)9.2

39.6

(+1.7)37.9

This relationship is, of course, largely due to war conditions: since the last complete year of peace, budgetexpenditure in the United Kingdom and Germany has expanded by 4—5% times while local-governmentexpenditure has been compressed; thus local-government expenditure (excluding extra-budgetary funds) hasfallen in relation to expenditure of the central budget in the two countries from around 20 per cent, in 1938to about 4 per cent, in 1942.



— 273 —


1939 December. . .19401941 „ . . .1942 „ . . .Percentage increase

1939-1942 . . . .

England

Eleven

clearingbanks'deposits

2,4412,8003,3293,629

49

Germany

Six

Gross-bankendeposits

9,68413,45017,22020,488

112

UnitedStates

Memberbanks'deposits

39,93046,00751,19267,276

68

current revenue fell from 60 per cent, of expenditure in 1940 to only 29 per cent,in 1942, but total revenue (central and local) declined from 81 per cent, to41 per cent, of total expenditure.

The degree of expansion of currency and credit which government borrow-ing from the banks provokes in a country depends not only on the per-centage of government expenditure financed in this way but also upon there la t iv e s iz e o f the b an kin g sy st em . As shown in the In troduction, thebanking and currency structure is, in relation to budget expenditure, proportionatelytwice as large in the United Kingdom as in Germany*, so that the same per-

centage of expenditure financed byEx pa ns ion o f bank de po si ts 1939-42. borrowing f rom the banks in the two

countries would cause an expansionof currency and credit in Germanytwice as large as in the United

Kingdom. That something of thisnature has actually happened is con-firmed by the accompanying table,which shows that bank depositsfrom 1939 to 1942 rose by nearly50 per cent, in the United Kingdomand more than doubled in Germany.

In the United States, however, the expansion of bank deposits has beengreater than in the United Kingdom, partly because the proportion of budgetexpenditure financed through the banks has been larger and partly as a resultof the expansion of private credit in 1940 and 1941.

The financing of government expenditure through the banking systemraises the question, so vi ta l for the banks, of the ex te nt to w h ic h th ea s s e t s o f t h e b a n k s c o n s i s t o f g o v e r n m e n t s e c u r i t i e s , a fa cto rdetermining their earning power and their power to grant credit to theprivate economy of the country. Government securities held d ir e c tl y bythe com mercial banks represent nearly 50 per cent, of to tal d eposits in theUnited States and over 60 per cent, in England and Germany; but theAmerican percentage is rising more rapidly than that of the other twocountries. If government securities held indirectly (through balances at thecentral bank, lending to the money market etc.) were added, the proportionwould reach two-thirds of deposits in the United States and three-quarters

in England and Germany. And such proportions are not unrepresentative forthe banking systems of the world as a whole; indeed, in certain Europeancoun tries governm ent securities represent as much as 80 or even 90 per cent,of bank deposits. It may be mentioned, incidentally, that the large purchasesof government securities by the banks have everywhere had the result ofconsiderably reducing the ratio of capital and reserves to deposits. Thishas led in many countries to a wave of capital increases by banks in order

* An important reason for the relative smallness of the banking structure in Germany compared with theUnited Kingdom and the United States appears to reside in the fact that In the latter two countries the"money capital" created in 1914-18 remained intact when the war was over, whereas in Germany it wasdestroyed in the post-war inflation and the banking system was reconstructed from 1924 onwards.



— 274 —

Position at end of 1942

Government securities held directlyshort termlong and middle term

total

Total assetsTotal deposits

Government securities as percentage ofdeposits

England

Elevenclearingbanks

Germany

SixGross-banken

UnitedStates

Allmemberbanks

in millions of national currency units

1,0941,120

2,214

3,8643,629

Ir

576?

11,3481,525

12,873

21,94020,488

10,64826,897

37,546

84,91778,277

i percentages

5963

4448

Co m m er c ia l ban k s ' ho ld in gs t o imp rove t he ra tioo f go ve rn m en t se cu r i t ie s . between the banks'

"own resources"and their liabilit iesto the public. Insome cases, wheresuch ratios are fixedby law, a revision ofthe legal provisionshas been made inorder to free thebanks from therestriction whichthese provisions

would otherwiseplace on their pur-chases of govern-ment securities.

A str ik ing dif ference brought out by the table is that, whereas s h o rt - t e rmpa pe r accounts for nearly 90 per cent, of the government securities held byGerman banks, in England the proportion at short term is under 50 per cent,and in the United States under 30 per cent. This difference is evident alsoas regards the total government borrowing in the three countries.

Of the tota l internal bo rrowin g in the three years 1940-42, 34 per cent,

was at sho rt term in the United S tates, 39 per cent, in the U nited Kingdomand 54 per cent, in Germany (excluding the short-term debt to the Reichskredit-kassen); the German percentage increased slowly over the three years, the

American more rapidly;U n i t e d S ta te s — the Br it ish p roport ion

A n a ly s i s o f go ve rn m en t bo r ro w in g 1940-42 dec lined and in 1942in percentages of to ta l bo r r o w in g . was 32 per cent . A

further interesting move-ment is the increase ofthe proportion of non-marketable debt in totalborrowing in the United

Kingdom to 60 per cent,in 1942, the average forthe three years being52 per ce nt. ; in th eUnited States the aver-age was 37 per cent,and in G ermany 17 per

Savings bonds and special Issues etc. (long term) and tax notes (short term).Treasury notes, Treasury bonds and guaranteed securities (long term), Treasury bills andcertificates of Indebtedness (short term).

United States«

Non-marketablelong term . . . .short term . . .

totalMarketablelong term . . . .short term . . .total

Total borrowing . .long.term . . . .short term . . .

1940

64

6440

(-4)36

100104

(-4)

1941

3418

53CM 10

47

1007624

1942

238

31373269

1006040

Average1940-42

2710

37382463

1006634

1943Jan.-June

294

33274067

1005644

* Non-marketable:Marketable :



- 275 -

U n i t e d K i n g d o m a n d G e r m a n y — cen t., b oth sho w in g aA n a l y s i s o f g o v e r n m e n t b o r r o w i n g 1 9 4 0 - 4 2 d ec lin in g tre nd in th e

in percentages o f t o ta l b o r r o w i n g . th re e yea rs , w h il e, co n-versely, the issue of mar-ketable securities rose.

The graphs on thefollowing page show theg r o w t h o f c e n t r a l -g o v e r n m e n t d e b t s inthe United States, theUnited Kingdom andGermany since 1910 ona conventional scale

(£1 = $5 = RM 20) a ndthe proportions of thetotal at short term . Thesegraphs are based on dataapplying to the end ofthe financial years until1927, and thereafter tothe end of the calendaryears. Although theTreasury bil l was in-vented in England in the'seventies of the lastcentury it was utilised ina very sparing way until

1914— before the last war government debt at sh o rt te rm hardly existed. During thewar of 1914-18 all governments had recourse to this type of security and by theend of the war short-term indebtedness represented 14 per cent, of the totalin the United States, nearly 20 per cent, in the United Kingdom and 40 percent, in Germany. In the following years some repayments of short-term debttook place in the United States and the United Kingdom; but as the situationdeteriorated in Germany the proportion rose to practically 100 per cent, in 1923.Aga in , in the present war, Germany has had greater recourse to short-termborrowing than the other two countries and, at the end of 1942, over 50 per

cent, of the total debt, as shown by the official statement, was at short term.As regards the to ta l pub l ic debts, there was an unprecedented r iseduring the war of 1914-18 to $25,000 million in the United States and to nearly

0) United KingdomNon-marketable: Savings certificates, savings bonds, defence bonds and "other debt" (long term), ways

and means advances, Treasury deposit receipts and tax certificates (short term).Marketable: National war bonds and other market securities (long term) and Treasury bills (shortterm).

09 GermanyNon-marketable: Liquidity loans and deposits at the Treasury (long term) credits from the Relchsbank

and Rentenbank, and tax certificates (short term).Marketable: Treasury certificates (long term) and Treasury bills (short term).Note that for Germany the short-term debt to the central administration of the Reichskreditkassen has beenexcluded, a factor which slightly decreases the percentage at short term as compared with the official debtstatement. On the other hand, the credit from the Rentenbank, which is In the nature of central-bank credit,has been included as short-term borrowing, although it is classed as long-term In the official debt statements.

United Kingdom«

Non-marketablelong term . . . .short term . . .total

Marketablelong term . . . .short term . . .total

Total borrowing . .

long term . . . .short term . . .

G e r m a n y (2)

Non-marketablelong term . . . .short term . . .total

Marketablelong term . . . .short term . . .total .

Total borrowing . .

long term . . . .short term . . .

1940

182037

coco

co o

63

100

4753

1940

25(-3)

22

245478

100

4951

1941

342256

301444

100

6436

1941

171

18

295382

100

4654

1942

392160

291140

100

6832

1942

18(-6)

12

266288

1004456

Average1940-42

312152

301848

100

6139Average1940-42

20(-3)

17

265783

100

4654

1943Jan .-June

435

49

371451

100

8119

1943Jan.-June

212

23

156277

100

3664



- 276 -

Total central-government debt in the United States,the United Kingdom and Germany 1910-42.

In milliards of national currency units.£%M\ ! i C 6660 ) ; i : i

1910 1915 1920 1925 1930 1935 I9W 19«0 0

Percentage of central-government debtsat short term.

/ Unitedi Kngdom- 30

20

'U.S.A.

100%

90

80

70

GO

10

1910 1915 1920 1925 1930 1935 1940 19«

How long can this goon? What l imit is there tothe growth of public debts?These questions have beenasked with increasing fre-quency in recent years. Theanswer depends upon anumber of factors, some of

which are variable. Obviously,confidence in the currency isone, but, given this factor, then the "burden", in a fiscal sense, wil l dependupon the size of the debt and the rate of interest, on the one hand, andupon commodity prices and the other components of the national incomeon the othe r. A sidelight on the magnitude of the burden may be obtainedby co m p a r i n g th e i n te re s t p a i d o n th e p u b l i c d e b t w i th t a xa t i o na n d o th e r cu r re n t i n te r n a l r e ve n u e in t h e b u d g e t .

The gcaph opposite shows for the United States, the United Kingdom,Sweden and Italy the proportion which interest payments on the public debt in

£8,000 million (including theforeign "war debt" of about

£1,000 million) in the UnitedKingdom; the German debt atMarks 160,000 million in 1919roughly corresponded to thatof the United Kingdom (at£1 = M 20), but by 1923 it hadrisen to over Marks 6,600,000million and was wiped out bythe inflatio n. By June 1943the British debt amounted to£17,700 million, the UnitedStates debt to $140,000 mil-

lion and the German debt toRM 215,000 million; if, insteadof the conventional rates onwhich the graph is based,the rates of £1 = $ 4 = RM 13be taken, then the Germandebt amounted to almost theequivalent of the British debt,which itself was only one-halfthat of the United States.On a per-capita basis theBritish debt was the greatest,but the others were reducingthe difference.



— 277 —

the national budgets bear to taxation and other current internal revenue in thefinancial years from 1913 to th e present tim e. The increase of the public debtin the United States from 1917 and high interest rates after the war raisedthe p roportion w hich the debt service bore to taxation receipts from 3 percent, in 1916 to 26 per cent, in 1923; there was a further high point at 33 percent, in 1933 (due to the halving o f taxation receipts in the three yearsfrom 1930), from which time the proportion declined, to under 10 per cent,in 1941-42, and to only 8 per cent, in 1942-43. For the U n ite d K in g d o m ,payments on the war debt to the United States from 1924 to 1931 made theproportion about 4 per cent, more than it would otherwise have been; onthe internal debt the interest service amounted at its highest point in 1927to 39 per cent, of current revenue. A continuou s fall brought the percentagedown to little over 12 in 1942-43 and estimates for 1943-44 give about thesame level. For both the United K ingdom and the United States the effect

of the cheap-money policy is very evident fro m the early 'thirtie s; and thefurthe r fa ll sin ce 1940 is strik ing ; taxation receipts durin g the w ar have increasedmore rapidly than public debts, while interest rates have remained u nchang ed.S w e de n is given as an example of a neutral cou ntry: the proportion fluctuated

around 8-12 per cent, over theperiod prior to the wa r; in 1940it wa s exceptionally low at 5 percent, but rose to 7 and 8 percent,in 1941 and 1942 respectively; in1942-43 revenue from public under-takings (state railways, post andtelegraph, forests, etc.), included

in the current budget receipts,stil l more than covered intereston the national debt (although thedebt at the end of 1942 exceededthe book value of the state'sassets for the first time).

Interest on public debtas percentage of current revenue.

% 501 1 1 1 1 1 1 150 %

AO

30

20

10

Unted Kngdom

1910 1915 1920 1925 1930 1935 1940 19«

In Italy the proportion fluctuated between 20 and 30 per cent, before thepresent war: in the year ended June 1940 the percentage fell below 21 for thefirst time since 1926; in 1940-41 and 1941-42 it was 26 per cent, and provisionalfigures for 1942-43 give 32 per cent., based on actual normal revenue includingmiscellaneous receipts; based on taxation alone the percentage in 1942-43was as high as 37 and would be over 40 on the estimates for 1943-44. ForGermany no budget figures are available, but on the total internal debt ofsome RM 160 m illiard in the a utumn of 1942 an average intere st o f 3 per cent,would give an interest cost of about RM 4,800 million, say 12 per cent, ofnormal taxation and internal current receipts totalling RM 38.7 milliard in 1942-43.*In Japan, where the public debt is almost wholly at long or middle term,the interest service absorbs about one-third of ordinary budget revenue.

* The turnover of the Reichsschuldenkasse, which as an office of the Reich Debt Administration effects theservice of the Reich debt as to interest and amortisation, increased from RM 15 milliard in the financialyear 1938 to RM 310 milliard in the financial year 1942.



— 278 —

Ownership of U. S. Government securities(direct and guaranteed).

Yearly, In milliards of U. S. dollars.1301 1 1 1 1 1 1130

120

110

100

90

80

70

60

5040

30

20

10

0GO

"Pjiïl-

-

-

-

-

-

-

-

-

- I A I I

- I Zd&Ti i

• ^ ^ .öfter5**estors-1 ! 1 1 1 1 1

J

/

Tora

J

y

j

^H5ari i i i

king sysi i i i

-

-

-

-

-

-

-

-

Ì -

! -

-

emi i i

1920 1925 1930 1935 1 9 « )

12 0

11 0

1 0 0

9 0

8 0

7 0

6 0

5 0

4 0

3 0

2 0

1 0

0

6 0

Insurance companiesEM Savngs banksÉM Governmenf agencies

1920 1925 1930 1935 1940

1916 1920 1925 1930 1935 1940 19«

In a l l cases the abso lu teamount o f the deb t serv ice has ,o f c ou r s e , i n c r eas ed . C ompa r i ngthe f inancia l year ended in 1943with t hat end ed in 1939, the debtserv ice in the Un i ted King domhas r isen by 50 per cen t, and inthe Uni ted States by 90 per cent. ;in I ta ly and Sw eden i t hasdou b led , wh i le in G erman y , insp i te o f conve rs ions and re -duc t ions o f in te res t ra tes , i t mus thave r isen by four to f i ve t ime s ,s ince the to ta l deb t inc reased

from the compara t ive ly low f igureof RM 30 mi l l iard on the outbre akof w ar in 1939 to over RM 200 mil -l iard in the middle of 1943.

A fu r ther ques t ion wh ich o f tena ri se s i s : H o w f a r w i l l g o v e r n -m e n t i n t e r n a l d e b t s c o n t r a c t -e d d u r i n g t h e w a r b e r e p a i dw h e n t h e w a r i s o v e r a n d h o w f a rcan such repayments be expec tedto reduce the vo lum e o f cur rency

and c r ed i t ou ts tand ing? Aga in ,re fe rence can be made to pas texper ience , though th is may no t beconc lus ive as new fac to rs emerge .A graph given on page 214 ofthe tw e l f th Annua l R epo r t o fth is Bank showed tha t in theU n i ted K ingdom the pu r c has ingpower c rea ted dur ing the war o f1914-18 remained ou ts tan d ing whenthe w ar was o ver . I t may beob jec ted tha t in tha t count ry theamount o f the pub l ic deb t repa idwas very smal l , be ing on ly about£300 m i l l io n, o r less than 5 per cent,of th e tot a l in the ten yearsafter the war, and that i f the debtrepayments had been pursuedmore ser ious ly the reduc t ion o fpurchas ing power c rea ted dur ingthe w ar wo u ld have been g rea te r .



- 279 -

But in this respect the position of the United Kingdom was, in fact, a veryfavourable one. In no other country which was belligerent in the war of 1914-18

was" any debt repayment made at all, except in the United States, which hada budget surplus in each of the eleven years from 1920 to 1930. During thisperiod the aggregate budget su rpluses amou nted to $8,360 million (inc ludingsome $2,000 million received as interest and repayment in respect of war debts)and official balances were drawn down by $950 m illio n; as a conseq uence,$9,310 million of the domestic public debt was repaid. The amount thus repaidover eleven years, however, scarcely amounted to one year's war borrowing($9,270 m illion in 1917-18 and $13,250 m illion in 1918-19). Furth er, th e inci-dence of the repayments was very sign ifican t: $9,450 million was repaid tothe public (including institutions) while the banking system, after some realisa-tions in 1920 and 1921, in c re a s e d its ho lding on balance by a furthe r $140 m il-l ion. Thus, in this case also, the purchasing power created during the war

remained when the

Pu b l i c d e b t i n t h e U n i te d K i n g d o m a n d

U n i te d S ta te s 1 9 1 9 -2 4 .

At endof financial

years *

1919192019211922

19231924

Movement1919-24

United Kingdom

shortterm

longterm

totaldebt

in millions of £ sterling1,4121,3121,2751,025

810775

— 637

6,0236,5176,2996,629

6,9326,866

+ 843

7,4357,8297,5747,654

7,7427,641

+ 206

United States

shortterm

longterm

totaldebt

In millions of dollars3,6252,7692,6991,828

1,032808

— 2,817

21,85721,52921,27721,136

21,31820,443

— 1,414

25,48224,29823,97622,964

22,35021,251

— 4,231

United Kingdom 31st March ; United States 30th June.

war was over.

It is of interestto note, however, thatin both the UnitedKingdom and theUnited States largere p a ym e n ts o f t hes h o r t - t e r m d e b twere made after thewar. In the five years

to 1924, 45 per cent, ofthe British and 78 percent, of the U. S.short-term governmentdebts were paid off.

Also in the following respect past experience is worthy of notice.An nu a l b u d g e t e x p e n d i t u r e in t he U nite d K in gd om ro se f ro m£200 million before the war (1913-14) by thirte en tim es to £2,600 m illionat the end of the war (1918-19), falling to £800 million six years afterthe war (1924-25) and thereafter remaining at four to five times the

pre-1914 figure until the present war. A nn ual budget ex penditure inthe United States expanded more ra pidly; fro m under $750 million beforethe war (1915-16) it rose by twenty-five times to over $18,500 million atthe end of th e war (1918-19), fallin g t o $3,000 millio n after the war (1923-24)and remaining below $4,000 million until 1930-31. In the first year of peace(1919-20) government expenditure in the United Kingdom was reduced bynearly one-third and in the United States by nearly two-thirds from the war-time peak. But in each case, partly as a result of the increased debt service,government budgetary expenditure remained four times and more what it hadbeen before the war.



- 280 -

These experiences of the last war and post-war period may not be con-clusive as regards the conditions which wil l fol low this war, since the methods

of war financ ing and price control have this time been largely different. But itmust not be assumed that the difficulties of effecting repayments of dead-weight l iabili ties or of "tyin g u p" purchasing power wil l be easily overcome;and the history of the past is therefore not without its lesson for today.

2. SHARE MARKETS.

The development of sha re q u o ta ti o n s on a number of markets whereadequate indexes are available is shown in the graphs on page 282, and inthe table below which gives a summary of the data on which the graphs are

based; the original indexes used are those calculated and published officially orsemi-officially and they have been recalculated on a pre-war basis (January-June1939 = 100). International com parisons shou ld be made with caution but it isbelieved that the material presented is as reliable as can be obtained.

I n d e x e s o f S h a r e Q u o t a t i o n s 0)

O n basis ofJanuary-June1939 = 100

Bucarest^) . . . .

ParisC)

BudapestPragueBrussels

LisbonMilan

HelsinkiOslo

Amsterdam . . . .TokioLondon ...Copenhagen . . .ZurichStockholm . . . .

Ne w YorkMontreal

1927-1929highest

(2)

66 9

23 9

31 815438 8

122134

9574

17222 511216299122131

296216

1937highest

115

116

21 420 5168

112108

122112112125114151114106106

152146

1939Dec.

173

116

12914684

100134

9010 210392

126939487

75

108101

1940

Dec.

148

191

13 425 3182

95

151

11 012 0135127105879482

82

9677

1941Dec.

290

353

327342322

121

197

15515814415611998

113102

97

8273

1942

March

441

45 3

299

271

14320 5

197158149

13511 794

116103106

7568

June

38 0

45 3

27 537 529 0

184184

18916515114612396121102108

7669

Sept.

44 2

50 8

30 336 931 5

22 821 2

198179150149123107120108113

8169

Dec.

60 6

594

38436433 9

261216

17917115 214812 011611511 0106

88

78

1943

March

55 3

47 438130 6

25 622 4

18816515316411912111611 0

107

104

87

June

521

48638130 7

234299

198171153167

12 0122122105

106

11491

(') The indexes are classed according to the height of quotations in December 1942.(2) The New York market reached its highest point in September 1929 and most other stock exchanges alsowere strong in the period 1927-29 (when world production and trade had reached an all-time peak, after thesetback during the war of 1914-18, and American cap ital was pouring into Europe). As the period is a longway from the base of January-June 1939 and the calculations, in some cases, involved the joining-up ofvarious indexes, the figures are given by way of indication only and meticulous accuracy cannot be claimedfor them.

(3) No index has been published since December 1942 but the boom continued into the early months of 1943(see table on page 284).

(<) For the period 1940-41, when the Paris market was closed, the index has been based on data available forLyons.

O n l y o n t h e N e w Y o r k a n d M o n t r e a l s to c k e x c h a n g e s w e r e s h a r e

quo ta t i o ns s t i ll b e l ow the p re -w ar l eve l a t the end o f 1942 — an as ton i sh i ng

f a c t , i n i t s w a y , c o n s i d e r i n g t h e u n p r e c e d e n t e d i n c r e a s e s o f p r o d u c t i o n i n



— 281 —

the two countries; but taxation was high and net profitability had generally notincreased; indeed, it had fallen in many cases. In the spring of 1943, how-

ever, the index for New York moved up into the 100-125 range, whic h L o n d o nhad already reached in the summer of 1942. Both these indexes took a definiteupward turn from the spring of 1942 — from March 1942 to June 1943 theindex for the London market rose by 30 per cent, and that for New York bysome 50 per cent.; turnovers*, which in both markets had been exceptionallylow, about doubled fn volume from the first half of 1942 to the first half of 19.43and brokers' loans in New York showed a distinct tendency to rise, for thefirst time in many years.

The only other overseas stock exchange included in the graphs, Tokio,also came within the 100-125 gro'up; rigid control measures prevented anyappreciable'increase (or decrease) of the index after the end of 1941. The

Japanese s tock exchan ges w ere com pletely reorganised under a new law ofMarch 1943. ki place of eleven independent private enterprises in the chieftowns, the stock exchanges were reduced in number by amalgamations andfro m 1st Ju ly 1943 operated as\! branches of th e Nippo n S tock ExchangeCompany, a newly^form'ed public corporation under the supervision of theFinance Minister; the leading officials of this company were appointed bythe government, which also subscribed one-quarter of the capital of Yen200 mil l ion . A lt dealing was••• strictly controlled with the object of ensuringthat purchases represented genuine investment of disposable capital; quotationswere no longer allowed to reflect the weigh t of supply and demand but"reasonable prices" were off ic ia l ly f ixed.

fn Europe, the bourses o f the neutra ls , Zu r ie f t and S to c k h o lm , andoccupied Copenhagen also came within the 100-125 range; l i ttle or nothingwas needed by way of supervision to keep the markets relatively moderatein their valuations.

Severe control imposed in the spring of 1942 held the market of Berlinaround the level of 150, which it had then attained. The rise on the year,almost wholly in the first half, was only 5 per cent, and the highest point,in December, remained slightly below the peak reached in September 1941.Amsterdam, under much the same influences, f luctuated more widely aroundthe 150 lev el; the material fo r dealing had already been substa ntially reducedby the proh ibition on tradin g in Am erican shares impose d in 1940 and , when

Japanese tro ops occup ied Dutch poss ession s in the Far East early in 1942,many market leaders (co lonia l, petroleum and shipp ing shares) became spe-culative in nature. Oslo and Helsinki remained throughout the year withinthe range of 150-200, with an irregular tendency to rise. Ih Oslo a committeehas been formed by the Department of Trade to supervise the market.

Lisbon was outstanding in 1942, having an active boom with risingturn ove rs, wh ich carried the index fro m a level below the pre-war 100 inthe spring an d" summ er of 1941 to nearly 270 in January 1943," an advancedue to the extreme liquidity of the money market and to the considerable



— 282 —

200175

150

125

100

75

50

275

250

225

200

175

150

125

100

75

50

25700

650

600

550

500

450

400

350

300

250

200

150

100

50

Berlin . Â

w..Amste dam

IL

1937

a s

1938

/&**

1939 1940

Zurich"Vi-., ]•—^ £

1941

Lis

- -A

J

1942 1943

\

JDon 1

r

/

tockhi» tIm

Share Indexes, January-June 1939 = 100.

200 175175 150

150 125

125 100

100 75

75 50

50 25

V

T

New Y6F<

* * \v /1

Lordon /

Montreal

1

r

i/

275

250225

1937 1938 1939 1940 1941 1942 1943

-(half

-

-

-

-

--

I

scô/eJ

V

Bi

Pragu

-

carest U"7Ï -

e / / \ A 1

y-

-

-

225

200

175150

200 125

175 100

150 75

125 50

100 150

75 '25

50 100

25 75700 700

1937 1938 1939 1940 1941 1942 1943

Hilsink

/7 c

r^ ctsio

apenheqen

1937

\ '

1938 1939

/

1940 19411

Tokio

1942 1943

1937 1938 1939 1940 1941 1942 1943

175150

125

100

75

50

25

225

200

175150

125

100

75

50

150

12S

100

75

1937 1938 1939 1940 1941 1942 1943 1937 1938 1939 1940 1941 1942 1943



- 283 -

L i s b o n S h a r e I n d e x e s .

Classes ofshares:

1941 MayP) . .December

1942 December1943 January .

July . . .

Banks

7696

156161129

Insur-ance

189280425484477

Mining

91105148156151

Trans-port

76182652670554

Colo-nial

73103253273182

0) Index as published by the Lisbon bourse on basis January1929 = 100. (2) Lowest point of general index.

increase of profits, at least for thetime being, in certain branches —

insurance shares rose by two anda half times and transp ort sharesby nearly nine times between May1941 and January 1943. A reactionsetting in during February, however,carried the general index on whichthe graph is based below 200 inJuly 1943.

Other continental European markets have risen to even higher levels andthe indexes are shown on only ha lf s ca le in the graphs. In these marketsnume rous measures have been taken to check specu lation by making dealing

costly and unprofitable, by limiting daily price increases and in diverse otherways; few of these measures had anything more than passing effect and allthe indexes were higher on the year. M il a n , which rose from under 150 toover 200 during 1941 and fluctuated irregularly between 180 and 220 in 1942,jum ped abruptly in A pr il 1943 to above 300, falling back part of the way inlater months. Amongst many others, one particular measure of control deservesmention because it was effective — by bringing the whole market to a stand-still and reducing activity to a m inimu m. Under a decree of 21st November1942 an amount equal to that utilised for the purchase of shares on the officialmarket had to be invested in special 3 per cent, nine-year Treasury certi-ficates which might not be sold or transferred unti l maturity. The tu r n o v e rof shares on the Milan bourse, at about 53,000 a day in the first six months

of 1942, was already low (less than one-third ofM i l a n B o u r s e T u r n o v e r . t h a t i n t h e first'half of 1941) but, on the publi-

cation of the decree of 21st November 1942, it fellto practically nothing: in eleven out of twenty-twosessions of the bourse in December not a singleshare changed hands and in the whole month theturnover was less than 2 per cent, of what it hadbeen in the previous month. What l i ttle activityremained in December and the fol lowing monthswas largely in options, which were not touchedby the decree — and business outside the stockexchange, which had also been left unaffected,revived conside rably. In A pr il 1943 the linkingof share purchases to purchases of government

securities was abolished and replaced by severe taxation on share turnover,with the result that the market resumed a certain activity with a strong rise.

In Brussels, where several measures of control have been taken onGerman initiative, there was no great advance in 1942, the index remain ing, withsome fluctuations, around 300; in the summer of 1943 a sharp setback tookthe index down towards 250. In Prague also, where measures on Germanlines were in force, the index showed no great rise but fluctuated around 350.

Daily average turnoverduring:

1942 SeptemberOctober. .NovemberDecember

1943 January. .February .March . .April . . .May . . .

July . . .

Numberof shares

30,95038,40043,480

7001,4801,6701,890

14,95023,03018,280

20,050



— 284 —

Budapest fell during the first half of 1942, under the influence of variousmeasures of control adopted up to that time, but became stronger in thesummer; and then came a spectacular rise, by 60 per cent, in four months,from under 300 in October 1942 to 480 in February 1943 with a rapidly risingturnover. The movement wa s, however, abruptly checked , with the indexnot far short of 500 in the latter half of February, when "stop prices" wereintroduced.

But the greatest increases during 1942 occurred in Paris and Bucarest.The index shown in the graph for P a ri s rose from 350 to 600 and continuedits advance to 650 in January 1943; a reaction in later months took the indexback to 520 in June 1943. The bourses in France were reorganised under alaw of February 1942 and a stock exchange committee was set up, headed bythe Governor of the Bank of France and including a government commissioner.All classes of shares have participated in the rise, even "money shares" likethose of banks (with relatively slight Sachwert value) attaining some four timestheir pre-war price, while certain classe s, e. g. construction materials, textilesand navigation shares, increased by ten t imes and more. The B u ca re s t indexmore tha n do ub led , from under 300 in December 1941 to over 600 in Decembe r1942; no index has since been published by the National Bank of Roumaniabut sh are qu otatio ns con tinue d to rise rapidly in January and February 1943,

B u c a r e s t S t o c k E x c h a n g e .

Monthly average figures

1940 December1941 December1942 December1943 January

FebruaryMarchAprilMayJune

Monthly average quotations in lei

NationalBank

5,3087,913

12,58815,28616,57014,10014,31813,88812,857

AstraRomàna

7801,7493,3184,6424,1534,2934,0954,0133,868

SteauaRomàna

382849

1,8992,2981,9272,0322,1132,2182,077

S. T. B.

1,0901,7623,2844,7194,3754,4272,3542,1842,109

S.A.R. detelefoane

8741,5282,0712,4722,0772,4012,3112,3912,306

Shareindex

(Jan.-June1939 = 100)

142E6C

[B)O)6

Turnoverin

millionsof lei

61129750633394481262283221

relapsing somewhat in later months. The share turnover, which averaged some-wha t over Lei 200 millio n a m onth in the firs t ten mo nths of the year (abo utthe same as in 1941), rose to Lei 300 million in Novem ber and Lei 750 million

in December 1942, falling back in the following months; all classes of sharesparticipated in the boom, especially petroleum, mining and heavy industry. Theindex published by the National Bank, with January 1926 equal to 100, hadrisen above 2,000 at the end of 1942.

In these latter countries, with market prices three to six times pre-warquo tations, in a period of generally declining p roduction and profitability andnotwithstanding all efforts at control, the bourses reflect in varying degreesin f l a t i o n a ry de ve lo pm en ts (described in some detai l earl ier in th ischapter). In a few countries inflation has gone even furth er; but either



— 285 —

the security market has not been reopened, as in Agram (Zagreb), or regularstock exchange indexes are not available, as in Warsaw and Bratislava (Pressburg).

For the extreme case of Athens some typical quotations have been collectedin the fol lowing table.

A t h e n s S t o c k E x c h a n g e .

Quotations on certain dates

Government loans(a) Internal Drachmae bonds

8% Refugee indemnity 1926-28 . .

5% Internal loan 1920(b) External "gold bonds"4% Monopoly loan 18875% External loan 19144% Water Works loan 1925

Shares

National BankProd, et Engrais ChimiquesHellenic Electric RailwayMatières Colorantes du PiréeHeracles (construction)Atlas (construction)Etma (artificial silk)

Nominalvalue

Dr. 1,000

Dr. 200GoldDr. 500Dr. 500$ 1,000

Dr. 5,000Dr. 1,000Dr. 100£ 1Dr. 100Dr. 100Dr. 100Dr. 100

Lastmonth of

peaceOctober

1940(average)

Reopeningof bourse

December1940

Secondreopeningof bourseDecember

1942

Quotationsin

June1943

in drachmae

680

1001,6502,150

92,200

7,29058,600

1,120790860

1,060150

720

1102,0502,600

91,800

7,52058,9001,105

800865

1,075155685

5,950

80027,00035,000

1,700,000

135,0001,900,000

35,00032,00028,00035,0003,500

13,000

8,350

1,10062,00080,500

3,400,000

285,0004,150,000

56,00057,00043,00065,5009,600

37,000

Note: The stock exchange was closed on 28th October 1940, when Greece was invaded by Italian troops, butwas reopened on 19th December 1940. With the commencement of hostilities by Germany in March 1941,the stock exchange was again closed and remained so until 16th December 1942, when it was once

more reopened as part of the plan for coping with speculation and inflation, described on page 234.By the middle of 1943 Greek government loans denominated in drachmae

were about 10 times their last peacetime prices (evidently owing to hopes ofrehabil i tation); so-called "gold bonds" were at 30-40 times and shares 40-80times their pre-war prices; National Bank shares were as much as 4,000 timestheir nom inal value. In September and October a furthe r inflationary waveswept over the market, quotations again rising violently and irregularly; "goldbonds" attained fifty times their pre-war prices. The bourse was again closedfor a few days in October 1943; during this interval a decree was issued underwhich all banks and share companies were obliged to surrender one-half oftheir security portfol ios to the government as a non-interest-bearing " l o a n " to

provide the material for official intervention.

All over the wo rld, sh ar e y ie ld s have further declined as a result ofcontinuously rising quotations , accompanied by unchanged or even fall ingdividends. In the U n it e d S ta te s (and in Canada) the average yield sti l lremained above 5 per cent, in 1942 — and the same was true of J a p a n ; bythe end of the year the average yield in England was down to 4% per cent.In all these countries the share yield maintained its usual position above thebond yield; in the United States, the abnormal margin of 5.8 per cent, inApril 1942 had been reduced to 3.6 per cent, by the end of the year.



— 286 —

Yields of Shares and Government Bonds,in percentages.

n I. i r, 11,, i,, I,, 11. i,, i. 11.11111,111111, i,. t, 11.. 1111,. i,. i,. i n, 1938 1939 1940 1941 19«

u

1938 1939 1940 1941 1942

JIII I . I I I I I I I I I IMIMIIII I I I I I I . ill, lull. IIIINIIIIIIIIIIIII (,

, 1938 1939 1940 1941 1942u

anQIIIIMIIIIIII,, III Inlnliilii l.. I I , I I I I I I I I I I I , I III I . I . I I . , IQ

.Bonds.

N?S52.938 1939 1940 1941 1942

Germ any, , 1 , , 1 , , 1 , , IM 1 , , 1 ,, 1 , ,llllllllll

Bonds^Z •!1

s_y-

Shares-

MIMIIIIM I l l l l l l l l l l

n 11 • I , i I iiiiiIi,i•,Ii•Ii.1i•11 111ii••I 111•11i•t.rI •• 1 i • I • 11 i i I n

1938 1939 1940 1941 1942

In Continental Europe the

usual relationship is now very rare

an d a higher yield for shares thanfor bonds is found only in neutralcountries such as Sweden and

Switzerland; elsewhere share yieldshave fallen below, in some caseswell below, bond yields — an

indication of abnormal valuations.I n G e r many the average shareyield was still just over 3 per

cent, at the end of 1942, but in

I t a l y it was nearer 2 per cent,and in F r a n c e 1 per cent., the

lowest level in that country sincerecords have been kept; and in

many continental European coun-tr ies, e. g. Belgium, Bohemiaand Moravia, Hungary, Norway,conditions were not very differentfrom those in France, yieldsbeing often so small as to be

practically non-existent. In suchcases shares were bought on a

speculative estimate of the realvalue of a concern in property

and machinery etc., that is , purelyas Sachwerte.

The wart ime boom on the

share markets of ContinentalEurope has caused considerableanxiety in official circles; from1940 onwards d i rec t con t ro lwas gradually imposed on sharedealing and the fixing of quotationson most continental bourses, and

this control has since been pro-gressively tightened: many of the

measures imposed up to the

middle of 1942 were describedin some detail in the twelfthAnnual Report of this Bank. Noneof these measures was really effect-ive so long as it allowed someliberty for dealing and for the

marking of current quotat ions.



— 287 —

The period now under review was characterised in Germany, by theabandonment of a "dynamic" policy of control and the adoption of a "static"

line: two classes of measures illustrate this change (i) the compulsory declara-tion and eventual sale of large private share holdings acquired since the warand (ii) the fixing of "stop rates" above which quotations were forbidden.

On 26th February 1942 it was decreed that all shares purchased since1st September 1939 in excess of RM 100,000 and not sold by 15th March 1942were to be declared to the Reichsbank on the basis of market prices on31st December 1941. By a further decree of 9th June 1942 declarations were tobe made, on a monthly basis, if new purchases caused this limit to be attained,and the Reichsbank was empowered to call on owners of declared holdingsto sell them to the bank at the price quoted on 31st Decemb er 1941 againstpayment in blocked Treasury certificates. The amount declared was officially

stated to be less than 5 per cent, of all marketable shares; unofficially declara-tions were estimated to have an aggregate value of nearly RM 1 milliard. Outof a total of RM 29 milliard share capital of all German companies only aboutRM 5 milliard were estimated to be in private hands and the amount declaredthus represented a considerable proportion of the actual volume of sharesavailable for market dealings. An d these data showed , moreover, that privateowners have been willing to sell, while neither the big concerns* nor publicholders have parted with their participations.

Towards the end of June 1942 a few of the most important market leadersheld by industrial firms were called for sale to the Reichsbank and, later, certainof the larger holdings in the hands of individuals were also called ; the market

value of the manipulation fund, formed from these called shares and used bythe Reichsbank and Seehandlung to regulate the market, was estimated atRM 100 million. This fund made repeated interventions on a limited and cautiousscale during the second half of the year to amplify the material available onthe market, being in some cases the only source of supply. From 25th February1943 onwards, but without retroactive effect, the limit for the declaration ofholdings was lowered to RM 50,000.

The growth, during the past ten years, of large concerns with an average capital of over RM 100 million isshown by statistics published by "Wirtschaft und Statistik".

German share companies — number and aggregate nominal capital.

Nominal capitalat end of year

Under RM 50 million.RM 50 million and over

Totals . . .

1931numbe

1036671

10437

millionRM

14,7629,891

24,653

1936numbe

714955

7204

millionRM

12,2626,962

19,224

1940numbe

532671

5397

millionRM

12,6268,868

21,494

1942cumbe

5297107

5404

millionRM

14,92014,141

29,061

Decrease

1931-1936numbe

321716

3233

millionRM

2,5092,929

5,429

Increase

1936-1942numbe

(-1.652)52

(-1.800)

millionRM

2,6587,179

9,837

From 1931 to 1942 the large concerns grew in number from 71 to 107; their aggregate capital rose from underRM 10 milliard to over RM 14 milliard while the aggregate capital of all other share companies remained practi-cally unchanged on balance, falling proportionately from 60 per cent, to a little over 50 per cent, of the totalcapital of all companies. Of the increase of RM 7,6 milliard In the nominal capital of all companies in thetwo years 1941 and 1942, RM 3.9 milliard was due to capital increases In connection with the dividend-limitation decree.



— 288 —

These measures represented the dynamic side of the policy adopted,but already in the spring of 1942 a different line was becom ing evident. From

12th May 1942 onwards, the prices quoted on that day were officially regarded as"guiding quotations" (Richtkurse), thus introducing a sort of price stop ofa general and somewhat elastic nature; for certain leading shares, however(e.g. I. G. Farben and Siemens) actual "s to p ra te s" were enforc ed. Brokerswere no longer allowed to raise share prices automatically to bring aboutequilibrium between supply and demand, price increases being permitted onlyfor special reasons (e.g. increase of dividend) and after consultation withthe quotation commissioners.

For eight months these measures appeared sufficient but on 25th January1943 a rigid "stop price" for all officially quoted shares was introduced, anyadvance above the quotations of that day being forbidden; monthly adjustmentswere later permitted in order to take account of the dividend included in the price.Downward movements were, of course, allowed but were very rare. In February1943 it was decreed that all current price quotations would be suspendedon the German bourses from the 13th of that month until further notice. From9th April 1943 the Reich Minister for National Economy was authorised totake measures for the fixing of security prices for the duration of the war; thisdecree applied to all securities, including those not officially quoted, andalso to deals between private individuals. An d on 29th September 1943 upperprice limits were fixed for practically all securities, including bonds, exceptthose issued by the government.

As a consequence of these announcements of guiding and , later,stop quotation s, without regard to the equil ibrium of supply and demand(such disregard being, of course, the essence of al l "price control"), i t soonbecame necessary to resort to partial al locations, or "rationing", in an effortto make an equitable distribution amongst would-be buyers of the inadequatevolume of material on offer.

These drastic German measures were followed in Prague, Budapest andAmsterdam, with some modif ications. In Prague, the declaration of sharespurchased during the war was decreed on 11th May, the limit being lowered fromK. 1 million to K. 500,000 from 23rd June 1942. No guiding prices were introducedin 1942 but fluctuations were allowed only on a sliding scale, declining as thesize of the deal increa sed; stop prices were introduc ed on 26th February1943. In Budapest the declaration of large share holdings (but not their

surrender) was decreed in March 1942: holdings of shares officially quotedbecame liable for declaration by 31st March if they exceeded 2 per cent, of thecompany's capital or had a market value of Pengö 200,000 or upwards; allholdings were notifiable, not only those acquired since the war, and declaredholdings might not be further increased without permission of the Ministryof Finance. S top prices w ere introdu ced on 11th February 1943.

In A m s t e r d a m , a decree was issued in September cal ling for the noti f i -cation by 1st November 1942 of all shares bought after 31st December 1941,if their aggregate market value exceeded FI. 100,000 (a limit which was reduced



- 289 -

to FI. 50,000 in February 1943); the Nederlandsch e Bank was autho rised to requireholders of certain shares to sell them on the stock exchange with in a fixed

period or to surrender them t o the bank at the m arket price of 2nd March 1942(in many cases the lowest for the year) against payment in Dutch Governmentbond s. To prevent evasion of these regulations the provision regarding banksecrecy was suspended in resp ect of bou rse tran sac tions . In November 1942it had been decided to quote only a single price for each share persession, allowing no increases beyond the prices of 9th November; butthis measure, which, in fact, amounted to a general price stop, was ful lyenforced for only a few days: it was maintained for colonial, petroleum andshipping shares, but Dutch home industrial and other securities were releasedon 13th November. From 2nd March 1943, however, the p rice stop was extendedto all shares (and from 11th March to bonds , with the exception of thoseissued by the government and by local authorities). In this instance quotations

weakened for about a month as speculative holdin gs were dispo sed of, themarket afterwards returning to the stop level.

The logical end of stock market control was thus reached in the earlymonths of 1943 with rigid stop prices impo sed for all shares in Berlinin Jan uary, in Prague and Bud apest in February and in Am sterd am in Ma rch.In each case the "co m pe nsa tion " of purchases and sales by banks or brokersoutside the market was fo rbidd en and all deals had to pass thro ugh thebourse.

But on all four markets buying orders largely exceeded sales and

ra ti o n in g of purchases became necessary; in these cases, wherestop prices were in forc e, the upward pressure was indica ted by thesmal lness of the "r at io n" or, in other words, th e d e cl in e of th etu rn o v e r. Altho ugh statistics of turnover have been compiled in Berl inin recent months, they have not been published, but information is availablefor the three other markets. In Prague, where the turnover in 1942 was

only a fraction of the pre-war volume,it fell further, between January andJune 1943, by over 70 per cent.; andin A m s t e r d a m a nd Bu d a p e s t th e fallin the same period was by over 90 percent. For B e rl in there were indications

of similar conditions. Rationing wasintroduced as early as May 1942, whenguiding rates were first fixed; quotationswere suspended if the offer was soS m a N t h a t " ° distribution to purchaserscould be made. It has been officiallyreported that on certain inactive days

the turnover fell to a mere RM 300,000 and distributions to a fraction of oneper cent, of the demand, three-quarters of the shares l isted being, at times,unquoted; indeed, the quotations of some leading shares were suspended

V a l u e o f S h a r e T u r n o v e r s .

Value of turnovermonthly

1943 January. .February .March . .April . . .May . . .June . . .

Amsterdam0)

million florins

5460241895

Budapest(2)

million pengö

64392918166

V) Dutch and colonial shares only; the turnover of



— 290 —

for months, in spite of the intervention of the manipulation fund. With theintroduction of stop prices in January 1943 the turnover shrank still further;

sales were often so small that no distribution could be made, the manipulationfund intervening to take up the amounts offered. At first some 50 out ofthe 450 listed shares remained below the stop rates — particularly those ad-versely affected by war conditions: shipping, colonial and building shares, forexample — and some dealing in these shares continued. But their numberwas gradually reduced : from February to Apr il about three-qu arters of listedshares remained w ithout quotation ; and in the follow ing mo nths the propo rtionunquoted increase d, up to about 85 per cent, in Septem ber 1943.

In all these markets the number of brokers has been severely cut down.In Germany, stock exchanges outside Berlin were allowed to open only onthree days of the week from February 1943 onwards, and the session was cutdown from two hours to one. These measures were extended to Berlin inMarch, and later adopted also in Prague.

The history of the stock exchanges of Continental Europe in 1942 showedthat official control was ineffective in those countries where any activityremained, e. g. in France, Hungary, Italy and Rou mania. The reorganisation ofthe bourses in France and Hungary, the compulsory registration of shares andtaxation of capital gains in France and Italy, increased taxation on dealing andhigher commissions in many countries did not stop the upward movement.Instead there were violent fluctuations, stagnation being followed by a wildthrus t upwards or a temporary cascade of prices downwards — but withquotations always getting higher on balance, generally much higher.

And early in 1943, control tightened into a stranglehold on some conti-nental markets, life becoming practically extinct; as in certain other sectorsof the economy, success in "stabil ising the index" was obtained only bydepriving it of any real meaning, since it no longer had reference to anyappreciable volume of actual transactions. The description given of the Parisbourse in 1941 thus acquired a wider application in Continental Europe, morethan one stock exchange degenerating into "an institution where quotationswere registered for deals which did not take place".



- 291 -

VI. CENTRAL BANKING AND CURRENCY DEVELOPMENTS.

In Europe some changes have been made in the laws governing centralbanks, particularly in Holland; new central banks have been founded in Eireand in Croatia and the Caisse Centrale de la France Libre was set up inLondon. Further east, the Ukraine Central Bank opened for business inJune 1942 and the Os tland Central Bank in A pr il 1943. In the Far East thereform of the Central Bank of Manchou followed that of the Bank of Japan,and the South Seas Development Bank, created early in 1942, was authorisedto issue notes in Apri l 1943. Note circulations throughout the world havecontinued to rise, in some cases at an accelerated pace, and considerableshortage s of divisiona l coin have made themse lves felt. The developm ent of

transfers, or "cashless payments", in Europe has made further progress, thepostal giro deserving particular mention.

Of recent central-banking changes in Europe by far the most importantwere those in H o ll a n d . Towa rds the end of June 1943 a decree, publishedin the official bulletin of the German Commissioner for the Occupied DutchTerritory, declared the former central-bank law of 1937 invalid, made theNederlandsche Bank a public corporation and put the bank on a completelynew footing as from 1st June 1943. The bank came under the direct controlof the German Commissioner, while the President and other members of themanagement were reduced to administrative activities, acting on the instruc-

tions and under the supervision of the German Com missione r; but, in themanagement, decisions rest with the President. Previously, the managementhad four members; the president and the secretary, originally crown appoint-ments, and two members appointed by the shareholders. A t the generalmeeting of shareholders on 29th June 1943 the two Managers appointed bythe shareholders were relieved of their func tions at their own request. By thenew law, an advisory committee, formed by the President, who acts as chairman,took the place of the former board of directors, elected by the shareholders.As regards the business of the bank, the most important innovation was theauthorisation to undertake "open-market operations" through the purchase andsale of long-term securities quoted on the stock exchange; previously, onlybil ls and short-term Treasury certificates could be so purchased. The general

meeting of shareholde rs has no fun ctio ns except to receive the annual balancesheet and report and, on the proposal of the President, to change theauthorised capital. The distribution of profits was considerably modified to theadvantage of the Treasury; the dividend to the shareholders was l imited to5 per cent. New statutes for the bank are to be drawn up by the President.This was the first instance of the German authorities' assuming the supremedirection of an existing bank of issue in an occupied country; in other casesthe existing bank was allowed to continue business (as in France), wassupplemented by a new bank attached to the old central bank (as in Belgium)or was replaced by a new bank (as in Poland).



— 292 —

By a law of 22nd Augu st 1942 the National Bank of R o u m a n ia was madesubordinate to the new Ministry of National Economy, so that the principle of

autonomy, hitherto in force, has been abolished.Wh en P o la n d was invaded by German troops in September 1939 the

leading members of the administration of the Bank Polski escaped with thegold reserves. The bank was then closed and its operations were confined tothe adm inistration of its remaining a ssets ; on 1st Ap ril 1940 the new Bank ofIssue was opened for business and on 26th April 1940 a German Commissionerwas attached to the office of the Bank Polski. A decree of the GermanGovernor-General dated 15th September 1942 contained new regulations concerningthe administration of the Bank Polski; the competence of the general meeting,the president, the board and the audit committee was abolished; control wasassumed by the German head of the banking control office, who was vestedwith far-reaching powers. The new decree gave detailed regulations regardingthe winding-up of the bank's affairs and, in particular, granted a respite inrespect of all l iabilit ies incurred before 5th October 1939*. The liquidation ofthe Bank of Danzig was completed in 1942 and by a decree of 9th October1942 the shares of the bank were exchanged for 3% per cent. Reich certificatesat the rate of RM 95 nominal for Gulden 100 shares.

The Irish Currency Commission was superseded on 1st February 1943by the C e n tr a l Ba nk of Ir e la n d (Bane Ceannais na hEireann). Under theCurrency Act of 1927 the Saorstât pound was covered 100 per cent, by assetsin £ sterlin g, to which it was held at par; by the Central Bank A ct of 1943 thenew bank took over the assets and liabilit ies of the Currency Commission andthe right of note issue, and was given the duty of "safeguarding the integrityof the curre nc y". Three members of the Currency Comm ission were electedby the banks, three nominated by the Minister for Finance, the seventh, thechairman, being elected by the other six; the new bank has a governor,

E i r e — No te I s s ue .

Near end of month

IrishCurrency

Commission

Central Bankof Ireland

1938 December1939 „1940194119421943 January .

1943 February.March . .April . . .May . . .June . . .

Assets

Gold Sterling holdingcash balances securities

balancesheet

Liabilit ies

Notesoutstanding

in millions of £2.02.62.62.62.62.6

2.62.62.62.62.6

0,00.00.00.10.10.1

0.30.10.10.10.1

0.10.31.62.41.60.2

0.91.21.40.91.1

8.89.T10.9

13.419.520.0

18.919.119.319.519.5

10.912.015.218.523.922.9

22.823.023.523.223.4

10.912.015.218.523.922.9

22.823.023.523.223.4

* Members of the administration of the Bank Polski who escaped with some of the assets have continued theactivities of the bank, with an office first In Paris and then In London.



— 293 —

appointed by the President of Eire on the advice of the government, threedirectors appointed by the Minister for Finance from a panel prepared for the

purpose by the commercial banks and a maximum of five further directorsotherwise appointed by the Minister for Finance. The bank, unlike the CurrencyCommission, was given the general central-banking functions of receivingdeposits from the commercial banks and public authorities and extending creditby rediscounts and advances; further, the bank was authorised to conduct open-market operations by the purchase and sale of government securities quotedon the stock exchanges. The capital was subscribed by the Minister forFinance, while that of the Currency Commission, held by the commercialbanks, was repaid.

The former Chairman of the Currency Commission was appointedGovernor of the new bank. A s the table on the opposite page sho ws , thereturns of the bank from February 1943 onwards are in the same form asthose of the old Currency Commission; and the Irish pound has continuedto be maintained at par with sterl ing.

The Ca iss e Ce n t ra le de la Fra nce L ib re was se t up by an "o rdon-nan ce" of 2nd December 1941; it was created as a public institu tion, governedby the laws in force in territories placed under the authority or the mandateof La France Libre and had a capital of Fr.fcs 100 m illion , advanced by theFinance Com missioner of the French National Com mittee. The bank wasempowered to issue its own notes in the above-mentioned territories (as inFrench Equatorial Africa) or to exercise control through existing banks of

End of month

1942 January 0° .March . . .June . . . .September .December. .

1943 March. . . .JuneO1) . • .

C a is s e C e n t r a l e de la F r an c eAssets

Gold

Art 2

0)

atpur-chaseprice

(2)

For-eignex-

change(3)

Noteswith-drawn

(4)

Of-ficesdes

chan-ges(6)

OfficeSy-rien

m

Trea-suryad-van-ces

of ba-lancesheet

(')

L i b r e .Liabil i ties

Notesincircu-

lation

Deposits

go-vern-ment banks

Goldpre-mium

(8)

Capi-taland

reser-ves(9)

in millions of Fr.fcs

727272

105156

42119103128174193

201538980

1,4311,9182,5542,842

152417464498

100100100170215

.200800904624707

2264

4391

204582

1,4712,6643,5434,1354,753

303061

253519569635

73450

1,0322,0182,6142,7103,165

—225238257670675

48484870

104

100100100100102102102

0) Under Art. 2 of the statutes gold is valued at three times the purchase price; the difference between this valu-ation and the purchase price Is carried In the gold premium account amongst the liabilities.

P) Gold valued at the purchase price of 47,700 francs per kilogramme fine.(3) Government bonds, Treasury bills and bank balances.C) Notes of the Banque de l'Afrique Occidentale withdrawn by the Caisse Centrale.(5) Advances to the Offices des Changes in view of the application of the Franco-British agreement of19th March 1941.(E) Advances made to the Office Syrien des Céréales.(7) The return, which is divided into two sections, issue department and banking department, is here combined

(omitting the small duplication due to the holding of notes in the banking department).(») See explanation under (

1). (9) "Dotation" of Fr.fcs 100 million plus reserves. (10) The first return published.

(11) In the May and June 1943 statements, in addition to the items specified, there appeared two new items:a suspense account of Fr.fcs 42.0 million (on both sides of the return) resulting from the reorganisationof the note issue In French Somaliland, the primary liability remaining with the Banque de l'Indochine,

, which still has the privilege of note issue in this territory; and an engagement tn the form of a banker'sguarantee (also on both sides of the return) for Fr.fcs 8.8 million on behalf of the National Committee.



— 294 —

issue (as in Syria). The note cover consists of gold (valued at three timesits purchase price), of foreign exchange, and of notes previously issued bycolonial banks and withdrawn by the Caisse Centrale.

Apart from currency regulation, the chief function of the new institutionis the coordination of the external exchange of payments of the territoriesconcerned and the maintenance of exchange stability with sterlin g. Monthlyretu rns, wh ich are drawn up in French francs at the fixed rate of 176.625 tothe £ sterlin g, are given in the previous tab le.

The Banque de l'Afrique Occidentale, with its head office in Paris (andthus carrying on its administration under the Vichy Government), had a branchin Dakar and agencies in the chief towns of French West and Equatorial Africa.The last complete statement of the note issue was made on 30th June 1940;

in later balance sheets the figures forBa nq ue de l ' A f r iq u e O cc id en ta le the Cameroons and F rench Equatoria l

no te c i rc u la t i o n . Afr ica were repeated unchanged,"communicat ions being inter rupted"with the head office. By ordonnance ofLa France Libre dated 24th July 1942,the Banque de l'Afrique Occidentale wastemporarily deprived of its note-issuingprivilege in the Cameroons and FrenchEquatorial Africa from 1st August 1942and its notes were called in for redemp-tion by the Caisse Centrale, at par, by

1st October 1942, since when only thenotes of the Caisse Centrale have been legal tender in these territories. Thereturn of the Caisse Centrale shows that Fr.fcs 498 million notes of the Banquede l'Afriq ue Occidentale had been withdraw n by June 1943.

The increase of the gold holding of the Caisse is explained by thepurchase of the gold output of the mines in the French Congo; the foreignexchange holding of Fr.fcs 2,842 million at the end of June 1943 was theequivalent of £16 million. (Other currency developments in North Africa aremen tioned in Chapter I I, page 44.) From 24th May 1943, notes of the C aissewere issued in French Somaliland by the Djibouti branch of the Banquede l ' Indochine.

In millions of Fr.fcs

SenegalGuineaIvory CoastDahomeyTogoCameroonsFrench Equatorial Africa.

Total . .

June1940

52010028488

13983

236

1,451

June1941

675136373137134(83)

(236)

1,774

By decree of the German military commander the National Bank ofYugoslavia was put into liquidation from 29th May 1941. On the same day thedecree establishing the Serbian National Bank was issued and statutes for thenew bank, under German auspices, were published, as indicated in the twelfthAnnual Report of this Bank. In Croatia, under Italian auspices, a State Bank wasfounded by a decree of the Chief of the "Independent State" dated 10th May 1941;but the new name was merely applied to the branches of the former NationalBank of Yugoslavia in Agram (Zagreb) and other towns in the new State of



- 295 -

Croatia; the bank had to work without legal statutes, according to the lawsgoverning the old National Bank supplemented by instruct ions from the

Finance Ministry. New statutes for the State Bank were not drawn up andpublished until two years later — on 4th May 1943.

The State Bank was then given the sole right of note issue and organised asa share company with a capital of Kunas300 million.The president and vice-presidentof the bank were appointed for three years by the Chief of State; in addition,the board of directors had three members, two of whom were appointed by theshareho lders. In practice, accord ing to the Finance Min ister, this meant thatthe bank had the rank of a government ministry; the president might sit atcabinet meetings in an advisory capacity. An advisory board of the bank wascomposed of ten members selected by the president among representatives of theeconom ic life of the coun try. The twenty-eigh t articles of the new statutes

gave details regarding the administration and business of the bank; as a matterof fact, its business has been practically confined to the exchange of notes ofthe old National Bank, lending to the government and financing the occupa-tion costs. The bank has published fortnightly returns from the end of April1943, details of which are given on page 230 of this Report; the share capitalwas issued to the public in the first half of August 1943. By a new decreeof 14th October 1943 considerable changes were made in the statutes of theState Bank, which took over the financial business of the various governmentdepartments; in particular, the bank was authorised to purchase and sellclaims in the clearing (and a new item covering clearing claims was openedin the return of 15th October 1943).

In the rear of the area under mil itary author ity, the e a st e rn te rr i to r i e so cc u p ie d by G erm an y were d iv ided into two parts for c ivi l adminis t ration,both in the form of a Reichskommissariat, the Ukraine in the south and theOstla nd in the no rth . By decree of 28th May 1942, all prope rty of the U.S.S.R .in these territories was taken over and administered in the form of atrusteeship.

The creat ion of the U kr ai ne C e nt ra l Ba nk , wi th s tatutes dated5th March 1942, was mentioned in the twe lfth An nu al Report of this B ank;these statutes were mod ified on 25th May 1943 to give the bank wider pow ers.The bank opened for business on 1st June 1942 with 16 branches besides its

head office in R ovno. No returns or balance sheets have been p ublish ed,but some information has been made available from German sources.

Rouble notes and co ins of 3 roubles or less were maintained in circu-lation but all larger rouble notes had their legal-tender status withdrawn andwere exchanged for carbovanez, the new currency introduced by decree of4th July 1942; this operation was comp leted by the m iddle of November 1942,when abo ut R oubles 2,000 million had been withd raw n. Notes deriving fromfunds necessary for the business life of the country were exchanged at oncebut other moneys were blocked on a special account at the bank and only



- 296 —

gradually released. In the middle of November 1942, Roubles 425 million werestill blocked but the greater part was released in two steps, in December 1942and May 1943; the funds of persons considered not politically dependableremained blocked.

Besides the exchange of notes, the bank's business has consisted chieflyof three classes of opera tion: the discount of Treasury certificates 4o meet thewar expenditure of the Reichskommissariat (ordinary expenditure only beingcovered by taxation), the provision of working funds for the railways and thefinancing of the clearing with Germany (and the Governor-Generalship ofPoland). The currency needs of the German army were naturally considerableand, although Reichskreditkassenscheine had been largely withdrawn, somestill remained in circulatio n along side the carbovanez (at the rate of RM 1 =Car. 10) and the sma ll rouble currency (at the rate of Rouble 1 = Car. 1).It was stated from German sources that the circulation had expanded inconnection w ith wartime requirements. Interest rates were practically the sameas those in the Reich.

Contact between the central bank and the private economy of the countrywas comparatively sl ight and consisted principally in accepting the deposit offunds from the Zentralwirtschaftsbank and their investment in Reich certificates.The Zentralwirtschaftsbank was the central institution of the Wirtschaftsbankenor "bu sine ss ba nk s", the only type of bank allowed in this territory, underthe decree of 18th March 1942; by the end of 1942 there were 21 of thesebanks (with German managers) having 330 branches (with Ukrainian managers).The banks derived their deposits for the most part from the industrial and

agricultural enterprises of the U. S. S. R. (under trus tee adm inistration for theGerman Commissioner) and from the German Ostgesellschaften; Ukrainiandeposits were very small. The banks undertook all types of banking businessincluding the granting of long-term credits.

The balance-sheet total of the Zentralwirtschaftsbank, which had its headoffice at Rovno and branches at Kiev and Dnepropetrovsk, had risen fromCar. 1,380 millio n on 30th Ju ne 1942 to Car. 4,683 millio n on 31st Decem ber1942; depo sits then a mo unted to Car. 4,400 millio n, of wh ich Car. 3,390 m illionwere from the Wirtschaftsbanken and Car. 1,010 mil l ion from others, whilesavings deposits reached only Car. 32 mil l ion; on the assets side, Treasurycertificates accounted for Car. 1,820 million, discounts and advances Car. 1,980 mil-

lion and cash reserves Car. 825 million. The capital of Car. 200 million was heldby the German Com miss ioner. In the first half of 1943 the balance-sheet tota lrose further to some Car. 7,000 million.

Developments in the Ostland were slower than in the Ukraine. A nO s tl a n d C e nt ra l Ba nk was created by decree of 30th July 1942. The newstatutes were practically identical with those of the Ukraine Central Bank(including a general mortgage claim on all real estate in the territory), andwere authorised in the same way by the German Minister for the Occupied



- 297 —

Eastern Territories in agreement with the Commissioner for the Four-Year Plan.The new bank started operations only on 1st April 1943 with a Reichsbankdirektor

as President; the head office was at Riga and 26 branches were openedin other towns (generally where Reichskreditkassen had been taken over).Alth oug h the Bank was given the exclusive right to issue bank-notesdenom inated in O stland marks (equal to the Reichsm ark), no new currencywas in fact issued and Reichskreditkassenscheine remained in circulation assole legal tender; the central bank thus conducted its operations in Reichs-kreditkassenscheine, which it obtained by means of a credit from the administra-tion of the Reichskreditkassen. Of the Roubles 900 million circulating inEstonia and Lithuania 650 million w ere exchanged and a subs tantial propo r-tion of the RM 2.6 milliard Reichskreditkassenscheine outstanding at the endof 1942 was on account of the Ostland. Currency and other business trans-actions with Germany, previously conducted directly by the R eichskreditkassen,

were passed through the clearing between the new central bank and theDeutsche Verrechnungskasse in Berl in. As in the Ukraine, the central bankdiscounted Treasury certificates for the German Commissioner and therailways.

But, contrary to developments in the Ukraine, existing savings banks andcooperatives (with the Gemeinschaftsbank as central institution) and also theprivate banks, largely under the control of the German Grossbanken, weremaintained in the O stlan d; and the reintroduction of private property in theBaltic States became the declared policy. The Gemeinschaftsbank Ostland wascreated at the end of February 1942 with its head office in Riga; by July 1943 itsbalance-sheet tota l had reached RM 270 m illion . A s distr ict branches there w ere

the Gemeinschaftsbank of W hite R uthenia, formed in Minsk in September 1942,and the Gemeinschaftsbank Estland, created in Reval from the former EestiPank in January 1943. These Gemeinschaftsbanken differed from the Wirt-schaftsbanken of the Ukraine in that they did not undertake general bankingbusiness but merely combined the activities of giro centres and cooperativebanks.

In Transnistria, under Roumanian civi l administration, the government-owned Ba nk of T r a n s n is t r ia opened for business with a head off ice inOdessa and 12 branches on 1st February 1943. This was the only bank in theterritory, i ts operations being conducted in Reichskreditkassenscheine.

During 1942, the first year of war in the Pacific, further steps were takento organise the "co-prosperity sphere" which, besides Japan, includedManchukuo, the occupied parts of China, Thailand (Siam), French Indo-Chinaand occupied enemy territory in the Phil ippines (U. S. A .) , Burma and Malaya(British) and Java (Du tch). The sweeping reorganisation of the Ba nk ofJa pa n early in 1942, to meet the new cond itions of war and for the super-vision of the newly-occupied areas, was described in the twelfth Annual Reportof this Bank and recent statistics concerning the bank's activities are givenon page 266.



— 298 —

In October 1942 the reorganisation of the C e n tr al Ba nk of M an ch ouwas announced. This bank of issue, with head office at Hsinking, was founded

under Japanese auspices in 1932 (when the Manchukuo yuan was created atpar with the Japanese yen); besides its official business, it has greatly ex-panded its private commercial business in recent years, as the table shows.

C e n t r a l B a n k o f M a n c h o u .

End of year

19351936

19371938193919401941

Assets

Speciereserve

(1)

Advancesto govern-

ment

Govern-mentbonds

Privatecredit

grantedP)

Totalbalancesheet

Liabil i ties

Notesissued

«

Govern-ment

depositsPrivate

deposits

in millions of M. Yuan92

177

20821615465

167

5362

3710939098

185

60189

194324417851

1,222

118135

176310481774573

412514

6699141,5101,8532,219

179254

307426624947

1,262

74114

133165455145210

78112

132222297380465

(') Gold, silver and yen balances. The presentation of the return was changed in 1939 and from that yearthefigures may not be comparable with earlier years.

(2) Including a small amount (in recent years about 10 per cent.) of other securities.(3) Loans, overdrafts and bills discounted.C) The note circulation increased to M. Yuan 1,670 million on 31st December 1942 and M. Yuan 1,686 million

on 30th June 1943; on the latter date the government bond holding was M. Yuan 1,728 million. By themiddle of September 1943 the note circulation had risen to M. Yuan 2,006 million.

The reorganisation, which was expected to be completed by the end of1942, made the bank a purely government body, in close touch with theMinistry of Finance and with wide powers of control over other financial insti-

tutions, on the lines of the reorganised Bank of Japan; the capital was raisedfrom Yuan 30 million (one-half paid up, by private sh areholders ) to Yuan 100 mil-lion (one-quarter paid up, by the government) on 26th October 1942. The bankwas to give up entirely its private banking business, which was to be takenover largely by the Industrial Bank. New statutes and a special charter forthe bank were to be drawn up.

As regards the monetary reorganisation o f the n e w ly -o c c u p ie d so ut h -ern te rr i t o r i e s ,* the treatment of individual countr ies showed simi lar it iesand distinctions. The similarities concerned the general principles appliedthroughout the area of Japanese supervision in economic and monetary affairs,

the closest possible economic relationship with Japan and devaluation of thelocal currencies to parity with the Japanese yen. A distinction was made infavour of the "fr iendly" countr ies which "cooperated" with the Japanese andwhich were, therefore, allowed to retain their own note issues (FrenchIndo-China and Thailand) or given the right to organise a new currency(Burma), while in most of the other territories (Hong Kong, Java etc.) theformer issuing authorities were suspended and note issue activities taken overby the South Seas Development Bank.

Information regarding currency developments in the parts of China occupied by the Japanese Is given onpages 50-52.



- 299 -

The balance sheet of the Bank of Indo-China has expanded consider-ably since the occupation of the country by the Japanese. As presented

to the general meeting in Paris in August 1942 it showed the followingsituation for the end of 1941 compared with earlier years.

B a n q u e d e l ' l n d o c h i n e ( 1 ) .

End of year

193819391940(")19411942(5)

Assets

Corre-spon-dents

Bonsde la

défensenationale

Officedes

changes(piastres)

(2)

Ailotherassets

(3)

Totalof

balancesheet

Liabil i ties

Notecircu-lation

Currentaccounts

Officedes

changes(devises)

(2)

Aliother

liabilities

in millions of Fr.fcs1,6921,614

4,6156,086

2,3913,127

3,341 3,4694,300

767892

956

4,8505,633

12,381

1,8392,2892,9643,6655,148

1,9101,998

3,690 3,8395,600

1,1011,346

1,187

(1) As drawn up by the head office in Paris.O These are Treasury accounts through which the Exchange Office conducts its operations.(3) Including "financial participations" practically unchanged at Fr.fcs 30 million. According to the annual report

for 1941, however, the bank acquired important interests in the capital of the Banque de Paris et des Pays-Bas, of the Caisse Centrale de Réescompte and of the Nederlandsche Handel Maatschappij; these interestswere taken over from Lazard Frères (in liquidation).

(4) It was not possible to draw up a balance sheet for 1940 owing to the fragmentary nature of informationreceived at the head office. The figure for the note circulation in 1940 was given (in piastres) in the annualréport for 1941. (5) Preliminary figures (from annual report published in Paris in November 1943).

The balance-sheet total more than doubled in the two years from1939 to 1941; particularly remarkable was the grow th of "co rre sp on de nts " byFr.fcs 3,000 million (with its coun terpa rt in the note circulation and curre ntaccounts) and the two new items of around Fr.fcs 3,500 million each on

account of the Indo -Ch inese Exchange Office. This o ffice, which workedthrough Treasury accounts but was managed by the bank, obtained advancesin Indo-Chinese piastres for the purchase of foreign curre ncies. Preliminaryfigure s available for the end of 1942 indicate a furth er c onside rable expans ionof the balance sheet.

The annual report for 1941 stated that the bank itself, upon instructionsfrom the French Government, had taken over the functions of a clearing officewith foreign cou ntries . In July 1941 an agreement was signe d between thebank and the Yokohama Specie Bank whereby settlements between Indo-Chinaand Japan took place in yen only through accounts at the two banks. InNovember 1942 it was announced that, owing to the increasingly close economic

relations of Indo-China with Japa n, the bank was opening branches at Tokioand Yokohama; on the other hand, the bank's branches in Hong Kong andShonan (Singapore) have been closed.

The note issue in Thai land, made by the Ministry of Finance, rose fromBahts 177 million in December 1939 to Bahts 215 million in December 1940,i.e. at the monthly rate of Bahts 3 million; on the outbreak of war in thePacific the issue jumped by Bahts 20 million monthly and emergency measureswere necessary, including a restriction on withdrawals from bank deposits.



300 -

mounting budget deficits.

T h a i l a n d B u d g e t R e s u l t s . *

Financial yearended 31st March

RevenueExpenditure . . .Deficit

1941 1942 1943

In millions of bahts13820466

12521893

148278130

By March 1942, when these measures were relaxed, th e note circula tion wasBahts 316 million. Although later figures are not available, it is known that

the circulation increased further in 1942 and 1943, partly as a result of theOn 10th December 1942, a new central bank wasestablished at Bangkok (in the build-ing of the Hong Kong and ShanghaiBanking Corporation), with a capitalof Bahts 20 mil l ion subscribed by thegovernment; the currency had alreadybeen devalued by about one-third inApril 1942, to fall into line with theyen parity, and the yen was admitted asnote cover. Before the occupation thebaht had been covered over 100 percent.,

the reserve being largely depos ited in L on do n; in June 1942 the Japanesefi l led the gap in the note cover with a "book credit" of Yen 200 mil l ion.Exchange payments between the two countries take place entirely in yenthrough accounts at the Bank of Japan. By a decree which came into forcein June 1943, the Central Bank of Thailand was to fix the reserves, in cashand balances at the central bank, to be held by all banks, insurance companiesand other financ ial ins titution s in T hailan d ; an d, in September 1943, the"emergency credit-control law" was promulgated, which, in an attempt toobtain a ful l "absorption" of government borrowing, obliged all banks to hold40 per cent, of their deposits in government bonds.

* Military expenditure accounted for Bahts 102 millionin 1942-43. Estimates for 1943-44 place total expendi-ture at Bahts 400 million.

In the ear ly months o f 1942 the S ou th Sea s D ev el op m en t Ban k wascreated for the exploitation of the newly-occupied enemy countries, as explainedin the twelfth Annual Report of this Bank. At first, this bank acted onlines somewhat similar to those of the German Reichskreditkassen, conductingits business in military notes, or gumpyo, denominated, however, not in yenbut in the currencies of the occupied countries, viz. the Phil ippine peso,the Dutch East Indies florin, the Straits Settlements dollar and the Burmeserupee, military notes being made legal tender at parity with the local curre ncies .For Hon g Kong th e loca l currenc y, the Hong Kong dollar (which also had awide circulation in southern China), was replaced by the military yen and, from1st August 1942, its status as legal tender was cancelled. And in thePhil ippines the c irculation of U . S. dollar notes was p rohibited.

Branches of the South Seas Development Bank were opened in the chieftow ns of the occupied enemy territ orie s, in Sho nan , Ma nila, Batavia etc. Earlyin 1943 it had in all 17 branches and 5 agencies which, except for the threementioned above, were administered by the Yokohama Specie Bank or theBank of Taiwan (Formosa). Commercial business was generally left in thehands of local banks. British, American, Dutch and other enemy banks wereclosed by the Japanese troops when the occupation took place, their entirebusine ss being taken over by the m ilitary autho rities, and passed gradually tonew branches of Japanese banks, in particular to the Bank of Taiwan (in the



— 301 —

neighbouring islands) and the Yokohama Specie Bank (in the remainingterritories); the latter bank thus largely acquired the business of the Hong Kong

and Shanghai Banking Co rporation . Some idea of the rapid expansion of theJapanese banks, as a consequence of these proceedings, is given by the factthat early in 1943 the Yokohama Specie Bank had 50 branches in south-easternAsia as against its previous 6, while the Bank of Taiwan had 17 against 5.The South Seas Development Bank supplied these two banks with the mil i tarycurrency necessary for their business by making short-term credit available.

A new phase was opened when the South Seas Development Bankreceived authorisation to issue its own notes in unlimited amounts as from1st Ap ril 1943. The military currency w ould no longer be issued but notesof former issues would remain temporarily in circulation until exchanged orwithdrawn. The change appears to be merely a form al one, since the new

bank-notes were to be denominated, as were the mil i tary notes, in the currenciesof the occupied territories. No statistics regarding the circulation of mil i tarynotes have been published; the anticipated new issue of South Seas DevelopmentBank notes for the equivalent of Yen 3,300 million has been taken as revenueinto the Japanese budget for 1943-44.

On 20th October 1942 the Japanese military authorities ordered the liquida-tion of the Ba nk of Ja va . This bank, which was founded in 1828, hadoffices in Sumatra, Borneo and Celebes as well as in Java; the head officewas at Batavia. The last w eekly return pu blish ed, on 7th February 1942, show eda gold reserve, of FI. 407 million (known t o be largely held abro ad), c on -siderably in excess of the F I. 345 million no tes in circ ulat ion . The notes were

to remain temporarily in circulation but an eventual exchange for yen currencywas contemp lated. Eight other Dutch Indies banks (includ ing the N ederlandscheHandel M aatschappij, the Ned erlands ch- Indische Handelsbank and theNederlandsch-lndische Escompto Maatschappij), which had been closed sincethe occupation and whose assets had been confiscated, were also put intol iquidation. The moratorium, which had been in force since the occupation,was raised from 20th October 1942.

For the l ime being, regulations regarding the c ov er of t h e no te is s u eof central banks play no very impo rtant rôle. In a few c ountrie s (e. g. theUnited States, Switzerland and Sweden) the cover is so high in relation to thenote circulation (and other sight l iabil i ties) as to place no practical restrictionon the issue. In other cases, where such regulations wo uld have becomerestrictive, they have been suspended (e. g. in Belgium ), a bolished (e. g. inGermany) or adapted to fi t the new situation (e. g. in H olland, so as toinclude Reichsmarks*, or in Roumania, so as to include "claims to g o l d "blocked in enemy countr ies). The "f iduciary issue" in England was raisedfrom £300 million to £580 million on 5th September 1939, when the gold holding

* The Inclusion of Reichsmarks as well as gold raised the "surplus cover", i. e. that above the legal 40 percent., as shown by the Nederlandsche Bank return, from FI. 61 million to FI. 1,218 million in the week to30th March 1942; in other words, the ratio jumped from 42 per cent, to 88 per cent.



— 302 —

Ba n q u e M e l l i é I r a n 0)

was transferred to the Exchange Equalisation Account; since then practicallythe whole issue has been "fid uc iar y" , i . e. issued without gold cover, and the

maximum has been raised from £580 million by nine steps to £1,050 million,from 6th October 1943.

In Bulgaria, where the regulations prescribe that notes and other sightliabilities outstanding must be covered by a reserve of at least 25 per cent, ingold and free foreign exchange (net), a modification of the statutes in May1941 made it possible to count Reichsmarks as a free currency for this purpose.If the entire Reichsmark holding had been included, a cover of about 100 percent, could have been shown. But, as a matter of fact, the National Bank wasvery sparing in the amount of Reichsmarks included in the cover calculationsand throu gho ut 1942 the ratio only jus t exceeded the minim um, fluctuatingwithin the narrow limits of 25.10 and 26.86 per cent.

A more picturesque solution was found for some years in Iran where,by the law of 16th November 1936, the crow n jewels had been depo sited tomake good any deficiency of the metallic (gold and silver) reserve, whichsho uld amount to 60 per cent, of the notes. Until 1940 the m etallic coverexceeded the legal percentage but in 1941 and 1942 it fell below it andthe crown jewels were then valued at an amount sufficient to fill the gap.

The annual report ofthe Banque Mellié Iranfor the financial yearending 29 esfand 1320(20th March 1942) stated

that the legal metalliccover was Rials 670 mil-lion and said "the ratio inrelation to the note circu-lation is 33.59 per cent.,the difference (26.41 percent.) in relation to thelegal minimum (60 per

cent.) being represented by the crown jewels . . . " . Actua lly the whole calcula-tion in Iran was a pure formality as the gold in the reserve was valued at alegal price less than one-half the market price; the real value of the reservedid, in fact, exceed the legal 60 per cent.

A new law was passed on 19th November 1942 whereby notes issue d fro mthat date onwards should have a cover of 100 per cent.: 60 per cent, in goldrevalued at the market price of that day and in sterling or dollars convertibleinto gold , plus 40 per cent, in sterling or dollars guaranteed against depre-ciation in terms of gold. The total note issue rose from Rials 3,500 million on19th November 1942 to Rials 4,647 million on 21st March 1943; the increase ofRials 1,147 million was covered by Rials 1,190 million in gold (831 million),sterling (103 million) and d ollars (256 m illion). The total reserve in March 1943 con -sisted of Rials 2,628 m illion gold and silve r (as revalued) an d Rials 1,006 m illion

End of financial year(20th March)

194019411942

Notesissued

(2)Metallic cover

(3)Crown jewels

(4)

In millions of rials (and percentages)1,1141,3501,995

720670670

%64.649.633.6

140527

%10.426.4

0) Formerly National Bank of Persia.(2) Notes delivered to the bank by the Control Committee, including notes

In circulation and also those in the tills of the bank.(3) Gold and silver placed with the Control Committee.(4) Deposited as cover but not shown In the bank's balance sheet.



— 303 —

in foreign sec urities. It should be mentioned that the total "i ss ue " includednotes held in the bank's ti l ls; excluding these notes, the net circulation

more than doubled from Rials 1,737 million in March 1942 to Rials 3,723 mil-lion in March 1943. In the latter month the convertibility of the notes intosilver was suspended.

There was a lready a ge ne ra l up wa rd t r en d o f no te c i rc u la t i o nsthroughout the world before the war, as described in earl ier Annual Reportsof this Bank; and since 1939 the expansion has gathered m ome ntum *. Theincrease from the average of the first half of 1939 to the end of 1942 rangesfrom a little over 40 per cent, for the Ar ge ntin e to 4,000 per cent, fo r Greece(the index for Greece soaring above 17,000 in September 1943).

I n d e x o f N o t e C i r c u l a t i o n s 0)

Country

Position of index at end of

Dec.1939

Dec.1940

Dec.1941

Dec.1942

June1943

on basis of January — June 1939= 100

Annual percentage increase

Dec.1939to

1940

Dec.1940to

1941

Dec.1941to

1942

June1942

to1943

Greece

IcelandBulgaria . . . .FinlandItalyEgyptTurkey

Hungary . . . .FranceAustralia . . . .Roumania. . . .CanadaBelgiumJapanGermany . . . .HollandPortugal . . . .Denmark . . . .United States. .South Africa . .SwedenUnited KingdomSwitzerland . . .Argentina. . . .

127

118

148

184

128129139113127135130122127163

147112121139111111

139112119102

207

216

228

253

164182199161185156172169158205

174150138172127130

145126132109

657

436

471

334

255247253230226205258223219256

237205213195163161

166154136124

4,118

924

662

439

380367362342321321314313307306

295294260228225213

197189153144

5,383(2)

1,059

41 5

45 042136137 036 438 332 7334 «33 730 6

26 924 525 4246

193194154148

63

83

54

28

41

44

42

46

16

32

3824

26

19

34

14

24

15

16

. 4

12

11

7

217

102

107

32

56

36

27

43

22

31

50

3239

25

36375514

28

24

15

22

3

14

112

41

31

50

49

43

49

42

57

22

41

40

20

25

43

22

17

38

32

19

23

13

16

369 (3)

81

14

44

33

24

47

4046

25

31

32

26

8

23

25

41

35

15

18

18

15

0) Only central-bank note circulat ions are taken Into account, except for the United States for which the

total "money in circu lat io n" is more appropriate. The countries are arranged according to the heightof the index in Dece mber 1942. (=) Ma rch 1943. By Septemb er 1943 the index had risen to 17,172.(3) May 1942 to Ma rch 1943. (") May 1943. (5) June 1942 to May 1943.

A p a r t f r o m t h e g e n e r a l e f f e c t s o f w a r f i n a n c i n g a n d t h e r i s e i n p r i c e s ,

t h e r e a s o n s f o r t h e i n c r e a s e s o f n o t e c i r c u l a t i o n s m a y b e c o n v e n i e n t l y

d i v i d e d i n t o f o u r c l a s s e s : a ) i n c r e a s e d n e e d o f c u r r e n c y , b ) t h e h o a r d i n g ,

* The only exception to this rule would appear to be in the eastern territories occupied by the Japanese, where,owing to special reasons, the circulat ions in some cases are said to have declined. Thus, it was reportedfrom Shanghai that the circulat ion of Straits dollars in July 1942 was only 140 mil l ion against 220 mil l ionbefore the outbreak of war in the East; the reduction was part ly due to destruction caused by the war andpart ly to a " gi f t " of 50 mil l ion Straits dollars made by Chinese merchants to the Japanese mil itary andnaval authorit ies. Similarly In Java, where the circulat ion of notes and co in , including the gumpyo currency,was reported at FI. 400 mil l ion In the middle of 1943 against abou t FI. 500 mil l ion before the o ccup ation.



- 304 -

or saving, of notes, c) larger bank reserves and d) other reasons, varyingin importance from country to country.

a) The chief causes of the increased need of currency are the fullemployment of a greater number of workers, the higher wages they generallyearn and the larger proportion of the national income they receive; farmers too,

' who get good prices in w artime , tend to e ffect a large propo rtion of theirtransaction s in cash. In add ition, the rise in the cost of living, as a resultof more expensive imports, higher costs of transport and other causes, leadsto larger currency requirements.

b) Workers and farmers, with more considerable amounts to save, aresometimes without, or unaccustomed to, banking facilit ies, and their genuinesavings often take the form of holding ba nk-notes. The difference betweensaving and hoarding is difficult to define, but generally hoarding has come

to mean the withh olding of notes beyond the requirements of "po cket m oney "for current paymen ts, sometimes w ith some illegitima te pu rpose in view (e. g.tax evasion).

Saving or hoarding of notes is often taken as a sign of confidence inthe value of the currency. But it also shows a preference for notes to govern-ment securities, a desire to hold money in the most liquid form, and a re-luctance to have savings "tied up" in a more permanent manner; this maybe due, in some measure, to the low rates of interest paid in many partsof the world. But, because people for one reason or another hold morenotes than they need for currency purposes, governments are forced toborrow from central banks; and, the more they borrow in this way, the morethey tend to increase the note issue above the genuine need for currency.

In a few cases, su ch as Swiss francs and U. S. dollars , the h oarding ofnotes outside the country is not without significance.

c) In so far as deposits increase (because industry and trade, as wellas the pub lic, hold larger amounts as bank dep osits), th e banks need to havehigher cash reserves, part of which are in the form of notes. And, becausethe new deposits may be more unstable than the old ones and more subjectto sudden withdrawal, bank reserves may be increased more than propor-tionately to the rise of deposits.

d) Further, there are a number of reasons which have had influenceof very different weight in various cou ntries. Illegitimate transa ctions on theblack markets are generally conducted in bank-notes in order to avoid leavingtraces; and notes may be favoured as facilitating evasion of taxation and foreignexchange restrictions. A reason of quite a different character is an extensionof the territory in which the domestic currency circulates, such increaseshaving been of importance fo r G ermany, Hungary and Bulgaria in 1941, butnot in 1942. Further, in England, as elsewhere, the curtailment of banking faci-l it ies as a consequence of the war has doubtless had some influence: theChairman of the Midland Bank stated in January 1943 that roughly one -fifthof the bank's branches had been destroyed or had suffered appreciable damageas a result of enemy air attacks; most of this damage had been repaired



— 305 —

but, chiefly in order to release manpower, the number of branches had beencut down by one-sixth; this, he added, "may well be one factor among many

in the enlargemen t of the am ount of cu rrency retained in the hands of thepu bl ic. " A n ad ditional fac tor in the expansion of currency in England in 1943was the large number of al l ied troops stationed in the country. Finally,the methods of financing clearings and occupation costs in Europe, andadvances through central banks outside Europe, contributed in particular toan expansion of note issues.

The countries indicated in the table on page 303 and in the graphs onpages 306 and 307 provide representative examples as far as data are available.Some European countries have been omitted owing to lack of statistics, eitherfor the base pe riod in 1939 (e.g. Spain) or for m ore recent dates (e.g. Alb an iaand Norway). The circulation of the Bank of S p a in in June 1943, after the

repudiation of notes issued on accou nt of the Republican Government duringthe civil war, was slightly more than three times as high as it was at theend of 1935; this expansion compared not unfavourably with the increasesin many European countries. But other countries omitted for lack of datawo uld appear high in the tab le. The mon thly return s of the National Bankof A lb a n ia ceased in October 1940 when Italian troops invaded Greece fro mAlb ania n so il ; at the end of Septem ber 1940 the index w ould have s too dat 336, higher than for any country in the table at that time (the notecircu lation being covered over 100 per cen t, by Italian lire). A n d no weeklyreturn or balance sheet for the No rg e s Ba nk has been published sincethe o ccupation of the country by Germany in Ap ri l 1940; the estimate of thecirculation given on page 214 would place Norway on the same level as

Finland at the end of 1942. In Yugoslavia, the index number on the baseJanu ary-J une 1939 w ould have been 220 in M arch 1941, the last month inwhich the National Bank published a return; from this date until September 1943the note issue in Croatia rose by five times, so that the index would haverisen to well over 1,000; on the other hand, no recent information permittinga similar calculation for Serbia is available. And no data are publishedregard ing the note c ircu la t ions in P o l a n d, the O st la n d or the U kr a in e ;the issue of R e ic h s k re d i t k a s s e n s c h e in e is mentioned on pages 186-188.

As regards the position at the end of 1942 of the groups of countries asg iven in the tab le : in the U ni te d K in g do m and the three neutra ls, S w ed e n,

Swi tzer land and the Argent ine, the index was less than 200; but in a l lfour countries the rate of increase was greater in 1942 than in 1941 (in theUnited Kingdom only sl ightly so). Statistics published in the budget WhitePaper showed that in the United Kingdom the note circulation has remainedfairly constant at around 10 per cent, of the national income, as it didbefore the war.

A t the bottom of the 200-300 group are the Union of S ou th A f r i c aand the U n it ed S ta te s , in both of which the rate of increase is com -paratively high and sti l l rising; in Portugal, the total increase is greater thanfor the other European neutrals. ;



— 306 —

Germany is at the top of the200-300 group; the increase in 1941

was partly due to the incorporationof new territory into the Reich. InJune 1943 the President of theReichsbank characterised the slowbut steady expansion of the currencyas being something more than a"Schönheitsfehler"*. During 1942 andearly in 1943, the note circulationof the Reichsbank had, in fact,expanded at an even rate of aboutRM 5 milliard above the figures ofthe previous year; from that time,

the expansion accelerated in speed:the note circulation at the end ofMarch 1943 was RM 4.9 milliardabove what it had been in March1942 — but at the end of Ju ne, J uly,August and September 1943 thefigures were respectively RM 5.7,6.3, 7.2 and 8.1 milliard higher thanat the end of the corres pond ingmonths of 1942. This accelerationwas doubtless connected inter aliawith the freedom accorded as to

withdrawal of savings deposits (men-tioned on pages 179-180), madenecessary by the air bombardmentsand mass evacuation of the popula-tion from towns. This 200-300 groupalso inc ludes Ho i lan d and De nm ar k,which, with B elgium, Roumania,Franceand Hungary in the 300-400 groupand Bu lga r iaand Greece h igher upin the table, are the countries wherethe circulation has been affected bythe payment of occupation costs,the financing of the clearing withGermany, or both together.

The apparent slowing-up of theexpansion in Japan, at the bottomof the 300-400 group, is partly dueto the fact that the Banks of Chosen

* In an article In the "Zeitschrift der Akademiefür Deutsches Recht", Heft 9, 1943.

Index of Note Circulation.January-June 1939 = 100.

(380)



— 307 —

Index of Note Circulation.January-June 1939 = 100.

HOOOlrrpTj TW

I942

and Taiwan no longer hold theirreserves in notes of the Bank of

Japan (which they paid into specialaccounts at that bank). C an ad aand A u s t r a l i a , in the same group,are characterised by increasing ratesof expansion. In T u rk e y a lso, therate of expansion grew until theend of 1942 but, under the influenceof the capital levy, described onpages 239-242, the circulation ac-tually fell in the fir st half of 1943.

At the top of the 3Q0-400 group

is Italy; the Banca d'Ital ia hasissued no weekly returns since1935, but end-of-year balancesheets were published until 1940and material is available on whichcertain estimates, shown in the tableon the next page, are based. Nearthe end of July 1943 the FinanceMinister gave data regarding the cirrculation "on the eve of Italy's entryinto the war" (end of May or earlyJune 1940) and for 20th July 1943(mentioning also the expansion duringthe latter mon th). The trend of theexpansion, as show n by these figures ,indicated an increase of abo ut 50 percent, per annum in 1941 and 1942.This increase appears to have con-t inued, with a sl ight tendency todecline in speed, during the firsthalf of 1943, but a sharp accelera-tion took place in July. (Notes ofthe Banca d'Italia circulated not only

in Italy but in the colonies andthe bank had branches in Eritrea,Aby ssinia , Libya and Rhodes. Theproportion of the note circulationappertaining to the colonies has notbeen made kn ow n. By a decree of25th Novem ber 1942 the notes ofLit. 50, 100, 500 and 1,000 which theBanca d'Italia had prepared for issuein Italian East Africa were made



308 —

N o t e C i r c u l a t i o n o f B a n ca d ' I t a l i a .

End of month

1938 Decomberò) .1939 March (3) . .

June (2) . . .

December (1)

1940 March («) . .June (

!) . . .

December 0)1941 June0 . . .

December 091942 June (2) . . .

December (2)

1943 June (5) . . .July « . . .

Inmillions oflire

18,95517,96719,35024,43222,64327,19031,30636,00049,00060,00073,00086,15896,541

IndexJan. —June1939 = 100

9994

101128119142164190255310380450505

legal tender for circulation in Italyitself.) In October 1943 it was reported

that the commercial banks in Milanwere issuing circular cheques to sup-plement the currency.

Egy p t and I c e land , whe r etroops of the United Nations werestationed, are high up in the tableon page 303 and notable increasestook place in 1942, in Egypt by nearly50 per cent, and in Iceland by over100 per cen t. In b oth cases th e excessof commodity exports characteristic

of earlier years was turned into animport surplus in 1942; and in bothcases the U nited States becamethe chief supplier in place of theUnited Kingdom, large deliveriesbeing made on lend-lease terms,in mind that the army stationed in

the local population (of some 120,000)

0) Figures from published balance sheet. Q Estimates.(3) Last week of March. (4) 22nd March.(5) In July 1943 the Finance Minister gave the figure of

Lit. 96,541 million for 20th July 1943, stating that duringJuly the Treasury had had recourse to note issueto the extent of Lit. 10,383 million; and the circulation"on the eve of Italy's entry Into the war" was givenas Lit. 25,344 million.-

As regards Iceland, it must be bornethat country was larger in proportion tothan in any other occupied country.

F in la n d has been affected by two wars with the U.S.S.R., the winterwar of 1939-40 and the war begun in June 1941 ; the decline of the circula tion

in the second quarter of 1943 was due to the threat o f stam ping the n otesand thu s reducing their value , see page 217. The violent inflation in G re e ce ,which began in the second half of 1942 and continued during 1943, is describedin Chapter V, where more details regarding the factors responsible for theexpansion of circulations in individual countries are given.

It is believed that the indexes shown in the table and illustrated bygraphs give a reasonably correct picture of developments in the countriesconcerned. The only exception is B u lg a r i a . Althou gh by the end of 1942the index, at 662, stood higher than that of any other continental Europeancoun try except Greece, it understates the real expan sion. A s described in thetwelfth Annual Report of this Bank, the Bulgarian Government by decree of9th February 1942 began the issue thro ug h the Nationa l Bank of 3 per cent.Treasury certif icates in small denominations which, although nominally of oneand two years' maturity, were designed to circulate as interest-bearing bank-notes; they could at any time be cashed at the National Bank at par plusaccrued interest* and they were accepted in government offices in paymentof taxes and other debts to th e state. Ac cord ing to a statement of theMinister of Finance in January 1943, some Leva 1,850 million of these Treasury

* To facilitate circulation, the value of the certificates plus accrued interest to the 5th, 15th and 25th of eachmonth was shown in a table printed on the back of each certificate.



- 309 -

certificates were pu t into circula tion in the year 1942*. In Decembe r 1942,the National Bank announced that in future Treasury liabilities exceeding

Leva 200,000 vis-à-vis firms and private individuals would be paid one-halfin cash and one-half in Treasury certificates.

And in 1943 events moved quickly as the expansion gathered momentum.After new issues of these certificates and the suspension of the publicationof the National Bank's return in the middle of February, the certificatesfell to a d iscoun t of 10 per cent, or more on bank-n otes. From 20th May 1943it was decreed that Treasury certificates must not be bought at a lowerprice than that paid by the National Bank itself, nor could acceptance ofTreasury certificates as means of payment at the price paid by the Na+ionalBank be refused; this law practically gave Treasury certificates the status offull legal tender, which they had not previously enjoyed. In June 1943 bankswere authorised generally to make payments entirely in Treasury certificates;in some special cases 50 per cent, might be paid out in note s. In the samemonth the National Bank called in its two highest denominations of notes,those of Leva 1,000 and 5,000, of whic h Leva 15 milliard were in circ ulat ion,two-th irds of the tota l note circulation at that time ; holdings up to Leva 4,000were exchanged in full against smaller bank-notes while Leva 500 notes of anew series were given in exchange for 60 per cent, of larger holdings, theremaining 40 per cent, being paid o ut in Treasu ry c ertifica tes; large notesnot exchanged by 20th September 1943 became invalid and lost th eir statusas means of payment. Towards the end of September the National Bank beganthe issue of a new series of Leva 1,000 no tes .

In Roumania also, the issue of a supplementary currency was prepared.By decree of 16th December 1942 the Ministry of Finance was authorised toput 4 per cent. 6-mon th Treasury bil ls (Kassenscheine) into c irculation upto a m aximum of Lei 10 milliard ; these bills w ere payable to bearer andtransferable without formalities; they might be used for the payment of taxesand other debts to the state; banks and other institutions which were requiredto hold a certain volume of cash among their assets were entitled to includethese certificates in their cash holding s ; the N ational Bank was obliged torepurchase them at any time with accrued interest and they were specificallyintended to replace bank-notes in circulation, especially for large transactions.Their acceptance in payment by private persons was not made obligatory atthe time of issue but the possibility of à forced circulation at a later date

was not excluded.In other countries efforts have been generally directed towards the strict

exclusion of anything which might serve as a supplementary currency. InGermany the issue of army prom issory notes averaged only abou t RM 300 m il-l ion, recourse to this type of instrument being restricted since it was fearedthat a larger circulation of these notes might become a kind of currency. A ndin England postal orders, which were made legal tender on the outbreak of war,

* By March 1943 the total placed was reported to be Leva 2,380 million. In August 1943 the Minister of Financedenied that it was intended to create a supplementary currency and stated that of Leva 28 milliard Treasurycertificates put into circulation Leva 24 milliard had already returned to the National Bank; this appliedto the period before the withdrawal and exchange of large bank-notes.



— 310 —

when a shortage of currency was feared, were deprived of this status aftera few w eeks, when the imm ediate emergency was past. Even in coun tries like

Greece where, in 1942, part of the crop was paid for in discountable Treasurybills, these bil ls might not circulate as currency.

In three coun tries, the United Kingdom , Holland and Brazil, n o te s inc i r c u la t i o n have been w i t h d ra w n wi th the genera l idea o f reducing theamounts in circulation and preventing i l legitimate transactions. But the modesof withdrawal have been very different.

Unti l 1928 the Ban k of E ng la n d issued notes only of £5 and upwa rds;the circu lation of currency notes of 10s. and £1 , firs t issued by the Treas uryin 1914, had grown considerably and constituted 72 per cent, of the totalaverage circulation when the note issue was unified in 1928. The notes of £10

and upwards rose fro m 17 per cent, of the total in 1928 to 23 per cent, in 1938(the latest analysis published) the increase being particularly marked from 1936onwards; by the early part of 1943 such notes probably amounted to at leastone-quarter of the total note circ ulation, say about £250 mil l ion .

Towards the end of April 1943 the Chancellor of the Exchequer announcedthat the Bank of England would issue no further notes of denominations of £10and upwards and would withdraw those already issued, as opportunity offered.The notes were not called in and their legal-tender status has in no way beenimpaired ; but as they come back to the banks in the ordinary course of business

they are not reissued. The circulation of theBank of England will thus eventually be

confined to the three smaller denominations,viz. 10s., £1 and £5. The reasons given bythe Chancellor for the decision includedthe simplification of the note issue andthe desire to place difficu lties in the wayof those who, by utilising the largerbank-notes, might escape exchange controlor other regulations. No information hasbeen published as to the volume of noteswithdrawn but some indication was givenby the contraction of the note circulationby £7 million in the nine weeks from the

end of April to the end of June 1943compared with an expansion of £30 millionin the corresponding period of 1942.

Ba n k o f En g l a n d

n o t e c i r c u l a t i o n .

Wednesday figuresIn millions of£ sterling

Aprïl 2S/29May 5/6.

12/1319/2026/27

June 2/3.9/10

16/1723/2430/1 July

July 28/29 . . .Aug. 25/26 . . .Sept. 30/1 Oct. .

1942

771.2776.9780.2782.5788.6792.9793.7793.2796.0801.6

824.1828.6838.0

1943

953.4953.9951.6947.3945.0946.4946.9949.4947.7946.3

968.1974.9986.5

Before M arch 1943 about on e-q ua rte r of the circulat ion of theN e d e rl a n d s c h e Ba nk was composed of big notes of FI. 500 and 1,000 andthree-q uarters of notes in deno mination s of FI. 100 down to 10. By a decree ofthe German Com missioner for the Occupied Dutch Territory , published on14th March 1943, all notes of FI. 500 and 1,000 were declared invalid and called inimmediately; holders were obliged to deposit them with the fiscal authorities by



D u t c h N o t e W i t h d r a w a l " .

— 311 —

31st March. The Nederlandsche Bank was no longer required to exchange thesenotes on the request of private persons and its obligation to do so for the fiscal

auth orities and the German Com mission er ceased on 15th A pr il 1943. The objectof this decree was to uncover hoarded notes and to check the utilisation oflarge notes on the black market, for tax evasion and for other illegal tran s-actions. Holders, upon surrender of the notes, obtained a receipt; beforethe counterpart was paid out, any taxes due or payable in the current year orany other debts to the government were deducted; and, in cases where theauthorities deemed it desirable, the entire counterpart was retained pendingenquiries into the financial position of the holder and possible liabilities onaccount of tax evasion, charges, fines etc.

In order to simplify the technical procedure, the commercial banks werecalled upon to act as intermediaries for the delivery of the notes to the fiscal

authorities. Their accounts (and other private balances) at the NederlandscheBank jumped from the normal levelof abou t FI. 150 m illion early inMarch 1943 to nearly F I. 780 m illionon 12th Ap ril ; on 19th A pr il atransfer took place to a new specialaccount of the Treasury, whichwas credited with FI. 686 mi llion .This special account later slowlydeclined as the counterpart of thenotes was paid out (but in themeantime the market was tight and

some banks were forced to borrowfunds). By the end of Apri l 1943,when the special account of theTreasury was at its highest, thecirculation had fallen by more thanFI. 700 million from its level in thefirs t half of March : the Presidentof the Nederlandsche Bank statedin June 1943 that of a total ofFI. 870 million in large notes, whenthe invalidation decree was issued,FI. 140 million had not been handed in.

Date of return1943

1943March 8th

15th22nd29th

April Sth12th19th

27thMay 3rd10th17th24th31st

June 7th1Sth21st28th

July 26th .Aug. 30th .Sept. 27th .Oct. 25th .Nov. 29th .

Notes Incirculation

Bankers'balances (

2)

Specialaccount ofTreasury

in millions of FI.

3,2443,2953,2582,9982,6672,6592,520

2,5072,5452,5392,5082,4452,4822,5252,5372,5542,596

2,7382,9053,0413,1563,326

151159155437

728778175

183

202207243327370

318335346340

313

405

675

674

642

686

686

616616616616589

576574570568

454

329

100

100

101

0) Items from the weekly return of theNederlandsche Bank.

(2

) Including other private accounts.

I n B r a z i l , w h e r e n o t e s a r e i s s u e d b y t h e g o v e r n m e n t t h r o u g h t h e B a n k

o f B r a z i l , t h e n o t e c i r c u l a t i o n , w h i c h w a s M i l r e i s 4 ,9 7 0 m i l l i o n i n D e c e m b e r

1 9 3 9 , r o s e t o 5, 18 5 m i l l i o n i n D e c e m b e r 1 9 40 a n d 6 , 64 7 i n D e c e m b e r 1 94 1 a n d

t h e n , m o r e r a p i d l y , t o 8 ,5 0 0 m i l l i o n i n S e p t e m b e r 1 9 4 2 ; t h i s a c c e l e r a t i o n f o l l o w e d

t h e e n t r y o f t h e U n i t e d S t a t e s i n t o t h e w a r a n d a r u n o n t h e B r a z i l i a n

b a n k s w h e n E u r o p e a n b a l a n c e s w e r e p l a c e d u n d e r c o n t r o l . T h e g o v e r n m e n t

d e c l a r e d a m o r a t o r i u m f o r o n e w e e k f r o m 2 9 th S e p t e m b e r 1 9 42 a n d , a m o n g s t

o t h e r m e a s u r e s , a n n o u n c e d t h e s u b s t i t u t io n o f t h e " c r u z e i r o " ( s u b d i v i d e d i n to



— 312 —

100 centavos) for -the form er milreis curren cy. From 1st Novem ber 1942 allpublic accounts, including those of the banks, were to be kept in the new unit(which has the same value as the m ilreis). The notes ou tstand ing may even-tually be replaced by a new issue, but for the time being the old milreis noteshave remained in circulation with an overprint. By December 1942 the circulationhad fallen to 8,240 million and it remained at about this level in the earlymonths of the new year, rising, however, to 9,330 million in June 1943.

Amongst the measures which, in other countries, directly contributedtowards a reduction of the note circulation may be mentioned the capital levyin Turkey and the threatened stam ping of notes in Finland . In south-easternEurope wheat as a measure of value made its appearance in the autumnof 1943: in Hungary a government loan was denominated in quintals of wheat,3V2 per cent. 25-year "wheat bonds" for 5, 10, 25 and 100 quintals being

created which it was hoped would be popular with farmers and succeed inattracting hoarded notes; and in Roumania the repayment, in wheat, of oldagricultural debts was invited.

The increased purchasing power in the hands of the public, as shownby the expansion of bank-note circulations, has led to a s h o rt a g e of d i v i -s i o n a l c o i n , whic h is alm ost u niversa l. An d in 1942 this shortage in manycases became acute. Experience has demonstrated that the circulation ofdivisional co in , in its relation to the circulation of bank-notes, may varyfairly widely from time to time and from country to country; but when the

coin circulation fal ls below a certain minimum proportion, as it is apt to dowhen the bank-note circulation is rising rapidly, shortages of small changeappear which cause tiresome inconvenience in retail purchases and thesettlement of other small transactions.

The evolution of the situation in Sweden, where the expansion of thenote circulation since 1939 has been moderate, compared with other countries(see table on page 303), is illustrated in the graphs on the opposite page.Fluctuations in the circulation of coin are very sluggish compared withthose of the note circulation, partly owing to the time and material neededfor the minting of new co in . As the graphs show, the proportion of coinin Sweden fell during the last war to its lowest point at 6 per cent, of the

note circulation in 1918; in fact, one-krona notes were put into circulationin 1914 and, if they were included with the co in , the proportion for 1918wou ld be raised to 6.7 per cent. One-krona note s, although prin ted , have notbeen put into circulation during this war, and the proportion of coin fel l to6.1 per cent, in 1942.

In other countries similar shortages have appeared and everywhere mintshave been kept busy attem pting to cope with the dem and. In England theRoyal Mint struck 355 million silver, bronze and nickel-brass coins of a totalvalue of over £12 million during 1942; this was a minting record for divisional



— 313 —

Hates2250

2000

mo

1500

1250

WOO

750

500

250

Sweden:Circulation of Notes and Coins4

In millions of Sw.Kr.

-——» — -

1 t 1 I

* ^f*

1 1 1 1

/

1 1 1 111 >1111

Note

(

'A

^Com

i i i i

/

y

1 1 1 1

Coins225

200

175

150

125

100

75

50

25

1905N961S.

1910 1915 1920 1925 1930 1935 1940 1945

Coin Circulation as Percentage of Note Circulation.%20 i 1 1 1 1 1 1 1 1 20%

coin, four times as much invalue as the average for the ten

years before the war and one-fifth higher than the previousreco rd of £10 million in 1918.Early in May 1943 the UnitedStates agreed to send to England3.1 million ounces of silver onlend-lease terms, while Canadaagreed to supply 1.9 million ; ofthe 5 mil l ion ounc es, one-thirdwas needed by England forindustrial purposes and two-thirds for coinage.

Very few countries have,however, minted new silvercoins, such minting being con-fined to countries with homeproduction of si lver (e. g.Sweden), large stocks (e. g.India) or special sources ofsupp ly (e. g. England andAustralia on lend-lease). Ascopper and nickel are also inshort supply for coinage pur-

poses (even in producingcountries), new coins have forthe most part been of suchmetals as iron (in Bulgaria

and Finland), zinc (in Poland and Roumania) or aluminium (in France andHun gary). In the Un ited States the issue of new sm all coins made of plasticmaterial and of glass has been under consideration.

In some cases a higher demand for small coins has arisen for specialreasons, particularly on account of taxes on retail sales. In Switzerland, for

example, the turnover tax, levied as apercentage of the retail sale price, has pro-

voked an enormous demand for "Rappen"and the number of these small piecesminted exceeded that of all other coinstogether in 1941 and 1942.

Whether or not it is necessary toput new sm al l no tes in to c i rcu lat ionnaturally depends to a large extent on the

175

125

10

75

2,5

V

\

\V

1 1 1 11 1 1

\

1 1 1 1

\

175

125

75

2,5

1905 1910 1915 1920 1925 1930 1935 1940 19«NH20.

S w i t z e r l a n d — m i n t i n g o f c o i n so f v e ry s m a l l d e n o m i n a t i o n s .

Number ofpieces in

thousands

1939194019411942

One-centimepieces

103,027

12,79418,000

Two-centimepieces

651,3033,4479,000

* From the Skandinaviska Banken Quarterly Review, April 1943. End-of-year figures — in the first graph thecoinage is on ten times the scale for notes. One-krona notes issued during 1914-1918 are excluded from thenote issue. The coin circulation represents total coinage after deducting coin withdrawn from circulation; it may,therefore, be somewhat on the high side as no allowance has been made for coin melted down or lost.



- 314 -

deno mina tions already in existence . Cen tral-batik practice differs very widelyand, to give an idea of the comparative value of the denominations of bank-

notes outstanding, the fol lowing table has been prepared, which shows, forcertain European countries, the various denominations, converted into Swissfrancs at official rates and given as a percentage of the value of the totalcirculations at the end of 1942.

D e n o m i n a t i o n s o f N o te s o f Eu ro p e a n C e n t ra l Ba n ks i n 1 9 4 2 .The value of the circulation of each denomination as a percentage of the total circulation.

Denominations as convertedinto Sw.fcs

1,000 and over450-500150-25080-12016-6015 and under . . . . . .

Total . . .

Denmark

17

381233

100

France

18

531118

100

Germany

1

21

4038

100

Holland

24

34

537

100

Hungary

702010

100

Sweden

13

461625

100

Switzer-land

278

43202

100

Average

968

422213

100

This table brings out several interesting points: that among these Europeancoun tries only in Sweden and Switzerland are very large notes an appre-ciable part of the circu lation (in Ho lland , the large n otes , of FI. 500 and 1,000,

were withdrawn in March 1943, as already described); that about one-halfof the circulation in many countries comes within the range equivalent toSw.fcs 80-120, etc.

But it shows that there were no central-bank notes the equivalent ofSw .fcs 15 or under in Germany or Holland at the end of 1942 (as therewere practically none in Switzerland before 1939), whereas such small de-nominations amounted to one-quarter of the circulation in Sweden, one-thirdin Denmark etc. The need for small currency in addition to the coinage inthe latter countries is thu s already supplied by the ce ntral bank, whic h caneasily expand its issue of such denominations. In other countries new smallnotes have som etimes been issued by the centra l banks or, more us ually,by the governments.

New ba n k- n ot e s of Sw.fcs 5 were issued by the National Bank ofS w it z e r la n d in 1939 and by the end of 1942 Sw.fcs 56 mil l ion were put-standing, about 2 per cent, of the total note issue, the five-franc silver coin

being the more popular means of payment. The lowes t denom ination of notesissued by the National Bank of B u lg a ri a before the war was Leva 500 (equi-valent to about Sw.fcs 27); in 1940 notes of Leva 250 and in 1941 of Leva 200were put into circulation; and in 1943 it was decided to issue notes ofLeva 100, 50 and 20, i. e. equal to th e highest deno mina tions of divisionalcoin. In July 1943, the Serbian National Bank began the issue of a newDin. 100 note (the equivalent of Sw.fcs 8 at the official rate).

All these examples of new issues of small denominations are in the formof bank-notes and are included in the circulation of the central banks. But in



- 315 -

many countr ies sm al l g o v e rn m e n t no te s have been issued to supplementthe coinage. Some statistics regarding European issues in recent years are

given below.G o v e r n m e n t N o t e I s s u e s .

At endof monthIn millionsof national

currency units

1938 Dec.1939 Dec.1940 Dec.1941 March

JuneSept.Dec.

1942 MarchJuneSept.Dec.

1943 MarchJune

Belgium

totalauthor-

ised

totalcircula-tion 0)

B.fcs

1,5001,5002,2002,5003,000

1,219

1,919

2,729

3,280

3,377

3,748

3,892

Holland

totalauthor-

ised

totalcircula-

tion

FI.100100100100100100150150150150150150400

11

41608697

117120120127138153218

Roumania

totalcircula-

tion

Lei

9072,7934,0114,3974,4834,249

Italy

totalauthor-

ised

totalcircula-

tion

Lit.2,5003,9503,9503,9504,1504,1504,6504,6504,6505,1506,3006,3007,300

4,534

5,762

Germany (2)

totalissue

netcircula-

tion

RM409

1,0831,3351,3351,4001,4001,400,550

1,550,550,550,550,550

382957

1,1021,0441,0681,1171,2521,2271,2851,2421,2641,2181,309

0) Total circulation of the so-called "Fonds monétaire", which, however, Includes some coin but excludesB.fcs 525 million notes circulating directly on Treasury account (since 1940).

(2) The Issue of the government-controlled Rentenbank. The total issue corresponds to the total of Rentenbankloans to the government. The net circulation excludes those Rentenbank notes held by the Reichsbank.

The Belgian issue dates from October 1926, when the Treasury tookover about B.fcs 700-750 million of National Bank notes of the 5 and 20-francdenominations (to be replaced eventually by coin). The l imit to this Treasuryissue was raised from B.fcs 1,200 million to B.fcs. 1,500 million in 1935, whennotes of the B.fcs 50 denomination were also taken over from the NationalBa nk; in 1940 the limit w as raised three t im es, to B.fcs 2,200 million inNovember, and in 1941 twice, to B.fcs 3,000 million in April. In July 1941 itwas decreed that the l imit of the "divisional issue" might exceed the maximaacco rding to needs ; and , in M arch 1943, the lim its were s uspend ed retroactivelyfrom December 1941.

In H o l l a n d , so-called "si lver bi l l s" (government notes of FI. 1 and 2%.theoretically convertible into silver) were first put into circulation in 1914, thelegal maximum being raised from the original FI. 25 million to FI. 100 millionat the end of 1918; this maximum w as m aintained in the years before thepresent war althoug h the circulation was insig nifica nt. A new issue of Silverbills began in 1940 and the maximum was raised to FI. 150 million in September1941. When the large notes of the Nederlandsche Bank were withdrawn inMarch 1943, a shortage of currency made itself felt and the legal maximumissue for silver bills was raised to FI. 250 million in April and again to FI. 400 millionin June 1943.

By a decree of 30th July 1941 the N ational Bank of R o u m a n ia wasauthorised to issue small notes of 1, 2, 5, 20 and 100 lei up to a maximumof Lei 1,000 million, to be utilised for the exchange of roubles; and by a



— 316 —

decree o f 12th Aug us t 1941 a fur the r Lei 3,500 millio n of Le i 100 notes w ereauthor ised, to be given in exchange for coins of Lei 50 and 100, which were tobe withdrawn from circulation: both these issues were for and on behalf ofthe Ministry of Finance and were to be replaced by coin when circumstancespermit ted; they do not figure as part of the circulation of the National Bank.

In I ta ly , the denominations of notes issued by the Banca d'Ital ia wereof L it. 50, 100, 500 and 1,000 on ly ; the need for smaller notes was met by theItalian Treasury, which in 1935 was authorised to issue notes of Lit. 10 andin 1939 notes of Lit. 1 , 2 and 5 als o. The legal maximum , wh ich was fixed atLit. 850 million in 1935, had been raised to Lit. 2,500 million (for all issues) by 1938as show n in the table on the preceding page. In 1941, the maximum was raisedtwice and in 1942 four times, while a further increase to Lit. 7,300 million wasmade in Apr i l 1943. Near the middle of 1943 the actual c ir c u la t io n of Treasurynotes was published as having been Lit. 4,534 million at the end of March 1942 and

Lit. 5,762 million at the end of March 1943, an increase of 27 per cent, on theyear, about half the rate of increase of the circu lation of the Banca d 'Italia.

In G er m an y it was decided in 1939 to supplement the coinage not withReichskreditkassenscheine (which had originally been printed for that purpose)but by extending the issue of the gov ernm ent-c ontro lled Rentenbank. Rentenbanknotes had first been issued in 1923 and their total circulation slightly exceededRM 2,000 million when the Reichsbank was reorganised in 1924 and their with-drawal und ertak en; in 1930, when RM 430 million were s till o uts tand ing, thefinal date for their withdraw al was postpo ned from 1934 to 1942; and inSeptember 1939 the withdrawal was suspended. The issue of Rentenbank notes,which had fallen to RM 409 million (the amount of the outstanding loan to

the Reich) was extended, by a new loan -of RM 400 million made to the Reichin September 1939 and by various additions, to RM 1,141 million in January1942, thus making a tota l loan of RM 1,550 million . The n et circu lation issomewhat lower as some Rentenbank notes are held by the Reichsbank.

Although the total issue of Rentenbank notes has not been raised sinceJanuary 1942, arrangements have been made to increase the volume of smallerissues which supplement the coinage. At the end of 1941 the Rentenbank had

RM 195 million notes outstanding ofR e i c h C u r r e n c y C i r c u l a t i o n

at end of December 1942.

Denomina-

tionsof notes

1,000 RM100 ,50 ,20 ,10 ,5 ,2 ,1

1 to 50 Pf.

Totals

Reichs-

bank

Renten-

bankCoin Total

in millions of RM194

5,1809,7636,8452,393

•——.——

24,375

_.————

747227290—

1,264

———

1,061217—426

1,704

1945,1809,7636,8452,3931,808

444290426

27,343

the same denominations as thoseof the Reichsbank (RM 10 to 1,000);

during 1942 these notes were with-

drawn and replaced by notes of theReichsbank, so that at the end ofthe year the Rentenbank issue wasof RM 1, 2 and 5 only, as shownin the table. The net circulationof the Rentenbank rose only fromRM 1,252 million to RM 1,264 millionduring 1942 but the issue of notes ofRM 1 to 5 rose from RM 1,057 millionto RM 1,264 million. In June 1943



- 317 -

it was decided that the Reichsbank should make a new issue of notes ofRM 5, notes of this denomination of the Rentenbank being withdrawn to

the same exten t, releasing over RM 700 million for the issue of RM 1 and 2notes (the circulation of which could thus be more than doubled) withoutany increase in the total of the Rentenbank's issue.

Other countries besides those shown in the table on page 315 have issuedsmall paper to replace or supplement the coinage, but details are not alwaysavailable or are incomplete . For example, the limit on the issue of governm entnotes of small denominations (Ks. 10 and 20) in Slovakia was raised fromKs. 100 to 200 million in November 1943, but the actual circulation was notpublished. Further, th e iss ue of em er ge nc y no te s o f 1 ore and over hasbeen reported from various places in N or wa y. An d, in Cr o a ti a , the Mayor

of Agram (Zagreb) was authorised in September 1942 to relieve the short-age of divisional coin by issuing Kunas 3 million notes of denominations ofKunas 0.5, 1 and 2, these notes to be legal tender only within the territoryof the c ity o f Ag ram ; th is seems to be the f i rs t " t ow n c u rr e n c y " to havebeen put into circulation during this war. In Octob er 1942 the Finance M inisterof Croatia was authorise d to issue small notes of Kunas 0.25, 0.5, 1, 2 and 5up to a total of Kunas 335 million in all ; in Novem ber the first of these noteswere issued and it was decided that the emergency currency in Agram wasto be gradually withdrawn and replaced by the new notes.

The expansion of the note circulations andcoin have led to attempts, in some countries, tomen t o f payments by cheque , o r "cash less

B a n k o f F r a n c e — N o t e C i r c u l a t i o n .

Denomi-nation

of notes

5,000 Fes1,000 „

500 „100 „

5-50 „

Total

Denomi-nation

of notes

5,000 Fes1,000 „

500 „100 „

5-50 „

Total

1938 1939 1940 1941 1942

At end of year In millions of Fr.fcs2,118

62,49112,22528,3203,625

108,779

12,05383,08616,19933,3634,754

149,455

32,371111,14720,35945,6298,877

218,383

46,589134,58326,61447,75210,109

265,647

68,337202,413

40,44555,68112,026

378,902

Percentage increase from December to December

1938-1939

+ 469+ 33

+ 33

+ ia

+ 31

+ 37

1939-1 40

+ 169

+ 34

+ 26

+ 37

+ 87

+ 46

1940-1941

+ 44

+ 21

+ 31

+ 5

+ 14

+ 22

1941-1942

+ 47

+ 50

+ 52

+ 17

+ 19

+ 43

1938-1942

+ 3,726

+ 224

+ 231

+ 97

+ 232

+ 248

t h e s h o r t a g e o f d i v i s i o n a le n c o u r ag e t he d e v e l o p -

t r a n s f e r s " , w h i c h w o u l d

e c o n o m i s e t h e u s e o f

b a n k -n o t es . T h e F r e n c h

l a w o f O c t o b e r 1 9 4 0 ,

w h i c h m a d e p a y m e n t by

c h e q u e o r t r a n s f e r c o m -

p u l s o r y f o r a l l a m o u n t s

e x c e e d i n g F r . f c s 3 , 0 00 ,

e x c e p t a g r i c u l t u r a l p a y -

m e n t s a t t h e f a i r s a n d

m a r k e t s , w a s m e n t i o n e di n e a r l ie r A n n u a l R e p o r t s

o f t h i s B a n k . T h i s l a w ,

w h i c h p r a c t i c a l l y g a v e

c h e q u e s l e g a l - t e n d e r

s t a t u s f o r l a r g e p a y -

m e n t s , w a s n o t , h o w -

e v e r , s u c c e s s f u l ; a s t h e

t a b l e s h o w s , t h e r e w a s

a f u r t h e r c o n s i d e r a b l e



- 318 —.

increase in 1942 in the volum e of Fr.fcs 5,000 notes ou tsta nd ing , altho ughpayment by means of such notes was restricte d by the law. In February

1943 a new decree raised the limit for cash transfers from Fr.fcs 3,000 toFr.fcs 5,000, so that single payments by means of Fr.fcs 5000 notes became freefrom restrictions. Payment by cheque was, however, encouraged by a seriesof new m easures : cheque form s w ere to be issued free of ch arge, the stampduty of 50 centimes on cheques and transfers was abolished, married womenmight open accou nts withou t the authorisation of their husba nds, etc. Further,various classes of payments were listed for which cheques or transfers werecompulsory.

In H o ll a n d the stamp duty of FI. 0.10 was abo lished on all bankchequ es, transfers and in-payme nts as from 15th A pr il 1943. A n impo rtantstep for the evolut ion of "cashless transfers" in Germany was taken by

the Deutsche Reichsbahn when it was decided tha t from 1st January 1943all salaries and wages without exception would be paid, not in cash, but bytransfers to an account at one of the 29 Reichsbahn savings and loan banks;previously about 75 per cent, of the Reichsbahn personnel had voluntarilyagreed to this m ethod of paym ent. In May 1943, by an agreem ent betweenthe German banks and insurance com panies, extensions were made to thesystem of cashless transfers of insurance p remium s. A nd a decree of 27th July1942 in Roumania made the postal giro obligatory for payments above a certainamount by the government, public bodies and local governments.

The development of the giro mechanism is an essential characteristic of

the evolution of the payments system in Continental Europe, for which there isno parallel in Anglo-Saxon countries; this is true, in particular, of thep o s ta l g ir o , which provides for cashless transfers of small amounts —of great importance in the retail trade and for salaries, p ensions andsimilar payments.

The postal g iro had its origin in Austria in 1883 and was introduced inHungary in 1890, Switzerland in 1906 and Germany in 1909; in 1910 the firstinternational postal giro was formed by these four countries to facilitate trans-fers from one to an other. Later, many other European countries adopted thepostal giro system, including Belgium (1913), Denmark, France, Holland and Italy(1918-19), Sweden (1925), Bulgaria (1931), Roumania (1933) and Finland (1940).

In all countries the postal giro is now completely separated from thepostal savings bank and forms a special department of the post office, utilisingall the facilit ies of the postal system. The postal giro may be likened to thecurrent-account business of a commercial bank, but it is not a bank in theordinary sense of the term . It does not grant credit nor has it any m echanismfor the collection of bills and bank cheques ; it does n ot pe rform trustee workor investment business nor does it provide any of the facilit ies required inlarge-scale trading. I t is essential ly supplementary to the commercial bankingsystem.



— 319 —

From the banking point of view the operations of the postal giro areexceedingly simple and amount to l i ttle more than correct book-keeping. As

advances or loans are not granted and no provision is made for the purchaseand deposit of securities, the large specialised staff of an ordinary bank isnot needed. Generally, a minimum deposit is required from each depositor tocover running expenses, which are low; in most countries deposits arenon-in terest-b earing ; fund s depos ited are autom atically invested directly ingovernment securities, while a small cash reserve is held with the centralbank; postal cheques and giro transfers are mostly free of stamp and othertaxes. The growth of the system on the continent is shown in the fol lowingtable.

P o s t a l g i r o a c c o u n t s i n v a r i o u s c o u n t r i e s .

Year Germany France Switzer-land Belgium Holland Sweden Denmark Hungary

Number of accounts — in thousands — at end of year191019201930

194019411942

6062 299 2

1,3491,5011,629

74497902

1,3140)

103985

137142150

36274462457473

3316839 2427468

—41

128137148

326575962

213735

444850

Ba lan ce on ac co un ts — in m i l l i o n s of national currency units — at end of year

191019201930

1940

19411942

1117,571 (2)

61 6

1,827

2,3532,769

5055,245

16,408

28,701

22140238

64 3

701784

3672,094

5,198

7,5337,717

95119

46 3

56 963 5

55

317

392498

628

105

18621 8

11528119

456

690815

Tu rn ov er of a cc ou nts — in mi l l ia rd s of national currency units — during year

191019201930

194019411942

21.8683 . 90141.4

267.7342.1386.9

56.9440.0

760.6(3)(3)

3.319.928.5

44.450.253.4

34.2334.7

305.2482.4533.1

4.911.6

26.130.532.6

6.6

44.251.962.5

1.44.9

11.313.2

• 15.1

8.81.5

14.8

35.248.268.4

0) January 1943. p) Figures swollen by the inflation of the Mark at that time .(3) The tota! turnover for 1941 and 1942 is not available, but the total non-cash transfers rose from Fr.fcs 597 mil-

liard in 1940 to Fr.fcs 886 milliard in 1941 and Fr.fcs 1,159 milliard in 1942.

T h e r e a r e o v e r a m i l l i o n a n d a h a l f a c c o u n t s i n G e r m a n y , s o m e w h a t

u n d e r a m i l l i o n a n d a h a l f i n F r a n c e , h a l f a m i l l i o n e a c h i n B e l g i u m a n d

H o l l a n d , a b o u t 1 50 ,0 00 i n S w i t z e r l a n d a n d S w e d e n , a n d s o o n . T h e c o n t i n u o u s

e x p a n s i o n o f t h e n u m b e r o f a c c o u n t s a n d t h e i r t u r n o v e r a re i n d i c a t i o n s o f

t h e e v e r g r o w i n g p o p u l a r i t y o f t h e s y s t e m .

T h e d e v e l o p m e n t o f t h e p o s t a l g i r o d u r in - g t h e p a s t t h i r t y y e a r s h a s h a d

a r e v o l u t i o n a r y i n f l u e n c e o n t h e h a b i t s o f p a y m e n t a n d u p o n t h e m e c h a n i s m

o f m o n e t a r y i n t e r c o u r s e in t h e c o u n t r i e s w h e r e it h a s b e e n i n t r o d u c e d . O n t h e

c o n t i n e n t o f E u r o p e t h e p r a c t i c a l l y u n a n i m o u s o p i n i o n h a s c o m e t o b e t h a t ,

c o m p a r e d w i t h t h e b a n k - c h e q u e s y s t e m , t h e p o s t a l g i r o s a v e s c o n s i d e r a b l e

t i m e a n d l a b o u r , e s p e c i a l l y a s r e g a r d s p a y m e n t s o f s m a l l a m o u n t s . S o f a r t h e



— 320 —

postal giro does not exist outside Con tinental Eu rope, except in Japan and incertain territories closely connected w ith Europe, e. g. Tunis and the Belgian

Con go. Incidentally, comparisons of continental European with Ang lo-Saxo nbanking, especially with regard to the development of cheque payments, aregenerally vitiated by lack of attention to the impo rtance of the postal giro inthe form er c oun tries. (It may be recalled th at, in October 1942, the KennetCommittee in England made the somewhat surprising recommendation thatthe use of cheques should be reduced and small payments made in cash.)

In conclusion, the velocity of note c irculat ions should be mentioned.There is no really satisfactory method of measuring the speed of circulationof bank-notes but available evidence generally goes to show a marked slowing-down of the average velocity in most countries as the total issues have ex-panded ; owing to restrictions and other war co nditio ns, people are unableto use their income as they like and when they like, and so notes are hoarded,that is, tem pora rily held off the market. Or they may be placed on cu rrentaccount at the banks, where they have a "waiting rôle" for the time being.*The Kaufkraftüberhang as it is called in Germany (or pu rchasing power"hang-over") poses a question of increasing gravity the longer the warlasts. A n d , when the war is over, the problem of preventing the surplusof spending power from exerting an active influence in raising prices willbecome more acute; in other words, every effort must be made to absorbthe redundant note issues before the velocity shows signs of rising andbefore th e circulations are further augmented by the withdrawal of tem porary

bank deposits.The Deutsche Bank, when indicating the decline of turnover during the war (see footnote to page 177),commented that, at the present time, a large part of the outstanding volume of bank deposits appear to havea "waiting rôle", to be "sleeping" until their owners call for them.



— 321 —

VI I . CURRENT ACTIVITIES OF THE BANK.*

1. OPERATIONS OF THE_BANKING DEPARTMENT.

The balance sheet of the Bank as on 31st March 1943, examined andfound correct by the auditors, is reproduced in Annex I to the present Report.It show s a tota l of 483.4 million Sw iss gold fran cs (of 0.2903 gramme s offine gold) aga inst 476.6 m illion on 31st March 1942 and 495.8 m illion on 31st March1941. As before, the method of conversion of the currencies represented inthe balance sheet is based on the exchange rates quoted for the variouscurrencies against dollars and on the U.S. Treasu ry's official sell ing price forgold on the date of the closing of the Bank's acco unts. Such variations ashave o ccurre d in the exchange rates between 31st March 1942 and 31st March1943 have affected currencies which have very little influence on the accountsof the Bank.

The scrupulous adherence to the principles of strict neutrality appliedby the Bank since the outbreak of hostilities, the course of events during theyear, and the tightening of the economic control exercised by the authoritiesin most countries have led to a further decline in the volume of the Bank'soperations, the total turnover having, in fact, fal len to about two-thirds of thefigur e reached in the previous finan cial year. The m ost marked reduction isin the volume of gold operations, while movements on deposit accounts have

remained on the same scale as last year.

The activities of the Bank have, however, been sufficient to keep it incontact with the various markets and to furnish it with practical experienceof the increasingly complex financial machinery characteristic of the presentt ime.

In the field of economic studies, the regular work of fol lowing monetaryand financial developments in different parts of the world has been kept upin spite of growing difficulties. In addition to the Ann ual Report, the Bankhas continued to publish collections of exchange restrictions and other currentregulations concerning monetary matters, these publications being in great

demand.As in the past, attention has constantly been paid to the maintenance

of the greatest possible l iquidity in the assets of the bank. A t the end ofthe financial year the Bank's assets in gold for its own account reached ahigher figure than at any time except during a short period before the outbreakof war.

During the financial year under review, the movements in the Bank'sstatement of accounts, showing the position as at the end of each month,

This chapter was submitted to the thirteenth Annual General Meeting of the Bank on 16th June 1943.



- 322 -

remained with in narrow lim its. From 476.6 million Sw iss gold franc s on 31st March1942, the to tal rose to its maximum for th e year, 484.8 millio n, on 30th Jun e,fell to its minimum for the year, 472.6 mil l ion , on 31st Au gu st, and thereafterremained in the neighb ourhoo d of 480 millio n, finishin g the year at 483.4 millionSw iss go ld franc s on 31st March 1943.

Earmarked gold , not entered in the balance s heet, tota lled 51.6 millionSw iss gold franc s on 31st March 1942. Since the end of A pr il the figur e hasremained unchanged at 49.3 million.

A comparison of the principal i tems in the Bank's balance sheet on31st March 1942 and on 31st March 1943 calls for the follo win g obs erva tions :

A . L i a b i l i t i e s .

The payment of the dividend for the financial year 1941-42 entailed areduc tion of the reserves from 23.3 million to 21 million Swiss gold fran cs .Apart from certain fluctuations in the item "Miscellaneous", the chief move-ments among the liabilities during the year are found in the volume of short-term and sight deposits.

S i g h t d e p o s i t s o f ce n t ra l b a n k s fo r t h e i r o w n a cco u n t shran kfrom 13.4 million at the beg inning of the financ ial year to a m inimum of11.1 million on 28th February 1943, the figure on 31st March being 11.2 million.

S i g h t d e p o s i t s o f c e n t r a l b a n k s f o r a c c o u n t o f t h i r d p a r t i e sremained more or less stationary round 1.3 mi l l ion. D e p o s i t s of ot h erdeposi tors, consist ing almost exclusively of sight funds, registered a sl ightrise, from 4.6 million to 5.7 million Swiss gold fran cs, between 31st March and30th September 1942. Aft er tha t a steady decline brou ght the figure down t o1.3 million on 31st March 1943.

D ep os i ts ex p re ss ed in a w e ig h t o f go ld show a more ir regu la rmovement. During the two first months of the financial year the figure forthese depo sits remained at abo ut 29 million Sw iss gold fra nc s, rising to 37.7 mil-lion on 31st July to return to 29.1 million on 31st Au gu st . From then onwa rdsa steady upward movement brou ght the to tal to 33.8 million on 30th Septem ber,

35.4 million on 31st December and 39.7 million on 31st March 1943. A recru des-cence of activity in the settlement of international postal payments caused anappreciable increase not only in the volume of business but in the numberof transfers effected during the year. The gold sight deposit accounts servingthis purpose offer the Bank's correspondents special technical advantages,since any fractional amount of fine gold can be transferred by a mere bookentry (viremen t). Thu s the machinery ensures a high degree of flexibility inthe paym ents. During the ten years that the Bank has kept accounts of thiskind there has been a contin ual increase in their num ber. Gold sight depositaccounts are at present in operation for twenty-six different depositors (central



- 323 -

B. I. S. — Liabilities.End of month, in millions of Swiss gold francs.

N9SI6. 19«

banks or international institutions).These accounts seem to meet a

real need in the field of internationaltransactions for which gold servesas a common measure.

In solving the technical ques-tions involved, the Bank has hadto take account of the fact thateach gold commitment has to belocally defined, since gold in onecentre cannot be regarded as exactlyequivalent in value to the same

weight of gold in another centre.A reference to this technical mattermay be of interest now that the ideaof an international unit of accountmore or less connected with goldhas again been put forward.

The accompanying graph showsthe movement of the principal itemson the liabilit ies side, month bymonth from 31st March 1942 to

31st March 1943.

B . A s s e t s .

On the assets s ide, the total of gold in bars held by the Bank increasedduring the year by the equivalent of 33 million Swiss gold francs.

From 42.1 m illion Swiss gold fran cs on 31st M arch 1942 the figure roseto 65.2 million on 31st July, while the corresponding increase in commit-ments expressed in gold w as only from 29 to 37.7 m illion . Conse quently theBank's ow n s to ck of g o ld was more than doubled dur ing that per iod, passingfrom 13 to 27.5 mil l ion gold francs. A reduction of the Bank's go ld comm itments

from 37.7 to 29.1 millio n, in Au gu st, broug ht with it a decrease in gold assetsfrom 65.2 to 56.6 m illion, the Bank's ow n stock of gold b eing u naffected . Duringthe rest of the financial year there was a more or less regular monthly increasein this stock, so that at 31st March 1943 it reached its maximum for the yearwith the equivalent of 35.4 million Swiss gold francs, being the differencebetween total gold commitments at 39.7 million and total gold assets at75.1 million Swiss gold franc s. For an internationa l institutio n who se acco untsare expressed in a weight of fine gold it is naturally of particular importanc eto maintain a proper balance between its assets in currencies and thosein gold .



- 324 -

After an increase from 33 million Swiss gold francs on 31st March 1942to 42.1 mi ll ion on 31st May, the ca sh he ld in d i f f e r en t cu rr en ci es

declined more or less steadily from then onwards, reaching its minimum forthe year at 28.7 million on 31st March 1943. The reduction was very largelydue to pu rchases of gold by the Bank. A t the end of the financia l year theaggregate amount of the Bank's gold and cash holdings was 103.8 millionSw iss gold franc s against 75 million on 31st March 1942 — an increase ofnearly 40 per cent.

The to ta l o f s i g ht f u n d s in ve st ed a t in te re st never exceeded16.8 million Sw iss g old franc s, registered on 30th June 1942; the figure fo r31st March 1943, 15.4 million, is not much higher than the minimum for the year,namely 15.3 million on 28th February.

Aft er having increased from 144 million Sw iss gold fran cs on 31st March

1942 to 149.4 mi l lion on 31st May, the total of the re d is c o u n ta b le p o rt fo l i ofell to 141.5 million on 30th Septem ber, after w hich it rose stead ily, finish ingthe financ ial year at 147.2 m illion . During most of the year, Treasury billstotalled slightly more than 30 million Swiss gold francs; on 31st January 1943the figu re was 31.3 million and on 31st March 28 m illion . The variations inthe total of bi l ls and acceptances were as fol lows:

B. I. S. — Assets.End of month, in millions of Swiss gold francs.

N?eis.19«

114.2 million on 31st March 1942119.1 million on 31st May 1942111.1 million on 30th September 1942119.2 million on 31st March 1943.

As regards t im e fu nd s i n -

ve s te d a t i n te re s t , the re is nogreat difference between the initialand the final figures and there hasbeen little divergence from themduring the year.

There was a reduction in theaggregate f igure for "s un dr y b i l l sa n d i n ve s tm e n ts " a n d a l so i nthe subtotal for securities of thiskind at more than six months. In thefirst case the reduction amounted to

some 24 mil l ion Swiss gold francs,in the second case it was about30 million. These changes are theresult of contractual repayments andthey are also in line with the Bank'sliquidity policy.

The graph shows the movementof the principal items on the assetsside, month by month from 31st March1942 to 31st March 1943.



8.940.6

50.5

15.639.6

44.8

— 325 —

The Bank 's l iq u id i t y p o s i t io n is shown in the fo llowing tab le (inpercentages of the respective balance-sheet totals):

31st Ma rch 1942 31st Ma rch 1943Gold in barsCash, sight funds and rediscountable portfol ioTime funds, sundry bil ls and investments, other

assets

100.0 100.0

In spite of the difficulties referred to at the beginning of this chapter,the Bank has regularly found investments for i ts funds, thanks to the assistanceof all the central banks concerned. As in the preceding year, it has receivedand been able to transfer the interest due on its investments in various

markets, with a single notable exception.The Bank has also received various capital repayments during the

finan cial year. The rede mptions c arried out by the National Bank of Hungaryunder the arrangement concluded in 1940 have had the effect of furtherreducing its debt to the Bank for International Settlements by nearly one-quarter. In a number of other instance s repayments have been obtained as aresult of the transfe r fa cilities procure d for th e Bank by the payment of itsdividend on the various markets.

The volume of gold operations in the year under review registereda further substantial reduction, connected with the present circumstances.

O p e r a t i o n s f o r t h e p u r p o s e o f f a c i l i t a t i n g t h e f i n a n c i n gof international trade are naturally still limited to very small amo unts . Var iousnegotiations have nevertheless been set on foot at the request of the Bank'scorrespondents, and credits placed at the disposal of neutral central bankshave been utilised to more or less the same extent as last year.

The maintenance of such operations even on a reduced scale has beenfound desirable. The credit machinery gradually built up by the Bank beforethe war on the basis of its varied experience in this f ield may be one of themeans of meeting real needs which will make themselves felt when the wartimerestrictions on international trade begin to be relaxed. The principal end inview is to enable central banks to procure for firms engaged in international

trade certain credit facilities which they could not easily obtain in any otherway. "Rec iprocal c red its " arranged by the Bank between different centralbanks along the lines described in the eighth Annual Report may permit thecovering of exchange risks which could not be normally provided for by forwardexchange transactions or otherwise. It is obvious that special arrangementsmay prove particularly useful in a disturbed period before the ordinary creditmachinery has begun to function regularly once more.

The increase in the aggregate amount of gold and cash holdings, theshortening of the average term of investments, the repayments of capital forwhich it is practically impossible to find another employment offering the same



— 326 —

yield, the fact that on one market interest has not been transferred, and thegeneral decrease in the volume of business — all these factors have necessarily

had an effect upon the profits for the financial year, as Section 3 of thepresent chapter shows.

The decision taken by the French M inister of F inance to repay, on 1st July1942, holders in Sw itzerland of the French National S ecurity 4 % % Loan 1937led to the closing of the account kept by the Bank for the purpose of supply-ing funds to the paying offices entrusted with the service of this loan inSwitzerland. Furthermore, in consequence of the conversion or repayment ofthe loan in question, the Bank, which had acted merely as an intermediarybetween the French Treasury and the paying offices in Switzerland, wasrelieved of that function on the same date.

The help given by the Bank to the international Red Cross organisations

operating fro m Switzerland has taken a number of different form s. Besidesacting as banker for these organisations, the Bank has been happy to renderthem technical assistance. In the present circumstances, these activities, beingby their very nature restricted to a plane of absolute neutrality, are amongthose most in harmony with the general aims of the Bank.

2. TRUSTEE AND AGENCY FUNCTIONS OF THE BANK.

During the year under review, there has been no change or developmentin the Trustee and Agency functions of the Bank, which were described onpp. 155 and 156 of the Bank's tenth Annual Report.

3. NET PROFITS AND DISTRIBUTION.

It is for the present General Meeting to consider the declaration of adividend. The net profit for the year, after making allowance for contingencies,is 4,508,953.89 Swiss gold fra ncs , the Swiss gold fra nc being as defined byA rt . 5 of the Bank's Statutes, i. e. the equivalent of 0.290 322 58 grammesfine gold . This compares with a figure of 5,185,685.90 Swiss gold francs forthe tw elfth fisca l year. For the purpos e of the Balance Sheet as at 31st March1943, the foreign currency amounts of the assets and liabilities have beenconverted into Swiss gold francs on the basis of the quoted or official ratesof exchange for the respective currencies on that date, and all assets arevalued at or below market quotations, if any, or at or below cost.

Aft er providing fo r the Legal Reserve that is required by Art icle 53 (a)of the Statutes, to an am ount equal to 5 per cent, of the net profits, i . e.225,447.69 Swiss gold francs (1942:259,284.30 Swiss gold francs), there remain4,283,506.20 Swiss gold francs available towards the payment of a dividend.This sum , together w ith the remainder of the D ividend Reserve Fund amo unting



— 327 -

to 1,626,940.33 S wiss gold fr an cs , is no t s ufficient to pay the dividend of 6 percent, referred to in A rt . 53 (b) of the Statu tes. It would appear tha t in these

circumstances the Statutes must be regarded as requiring that the total amountavailable, i". e. 5,910,446.53 Sw iss gold fr an cs , sho uld be applied to the paymentof a dividend . Consequ ently, the d ividend m ust be fixed at the num ber ofSwiss gold francs per share which can be paid out of the total amount avail-able, subject of course to fractions which, as a practical matter, cannot bedistr ibuted. The maximum amount, therefore, which could be distributed asdividend is 29.55 Sw iss gold francs per share, and after this dist ribu tionthere would remain a surplus of 446.53 Swiss gold francs to be carried for-ward to the fourteenth fiscal year. It is recommended that the GeneralMeeting declare a dividend of 29.55 Swiss gold francs per share in respectof the thirteenth fiscal year and that the remainder of the Dividend ReserveFund, amounting to 1,626,940.33 Swiss gold francs, should be utilised towards

this purpose. After giving effect to these recommendations, the Legal andGeneral Reserves at the end of the thirteenth fiscal year would amount toa total of 19,607,585.27 Swiss gold francs.

The ac counts of the Bank and its thirteen th An nua l Balance Sheet havebeen duly audited by Messrs Price, Wa terhouse & C o., Zur ich. The BalanceSheet wil l be found in Annex I, as well as the certificate of the auditors tothe effect that they have obtained all the information and explanations theyhave required and that in their opinion the Balance Sheet, together with thenote thereon, is properly drawn up so as to exhibit a true and correct viewof the state of the Bank's affairs according to the best of their informationand the explanations given to them and as shown by its books. The Profit

and Loss Accoun t and the Approp riation Acco unt are reproduced in Annex II.

4. CHANGES IN THE BOARD OF DIRECTORS.

The Board, acting by correspondence, unanimously decided to electHerr Ernst Weber, President of the Direktorium of the Swiss National Bank,as Chairman of the Board of Dir ect ors , effective 1st December 1942. HerrWe ber accepted election as Cha irman, under A rticle 39 of the S tatutes, o nthe understanding tha t, i f the Board were able to resume its regular meetingsbefore the expiry of his normal term of office, he would place his appointment

at the disposal of his colleagues.

The term s of office of Dr L. J . A .T r ip and Mr Ivar Rooth having expiredon 31st March 1943, both were re-elected by correspo nden ce f or a furth erperiod of three yea rs. W ith effect from 1st June 1943 the Gov ernor of theBank of Japan reappointed Mr H. Kano for a further term of office as Director.



— 328 -

CONCLUSION.

The expansion of industrial output achieved by the principal belligerentcountries has provided further proof, if such were needed, that the greatadvance in manufacturing technique has continued at a rate fully as high in thepresent century as at any time during the previous hundred years. The warhas stimulated invention which has added considerably to the fund of con-structive ideas — many of the lessons now learnt may bring a lasting contri-bution to the solution of problems of p roduction and distribution in the future.

The lack of basic materials and foodstuffs at present experienced indifferent degrees in practically all countries is a consequence of that deliberateobs tructio n of international trade which form s part of warfare. Before theoutbreak of war in 1939 there was an abundance of supplies on the worldmarkets; thanks to improved methods of extraction and production, materialsand foodstuffs could be obtained with less expenditure of labour than everbefore; but, even so, prices tended, on the whole, to be too low to providethe producer with a fair remuneration, rather than too burdensome for thepurchaser. The cost of materials had, indeed, become progressively a less im-portant factor in production, such articles as motor cars and radios beingtypical e xamples. The tendency for the relative value of materials to decline

is , of course, only the latest phase of a process which has stretched overcenturies. Francis Bacon wrote about the year 1600 that: "it cometh manytimes to pass that materiam superabit opus, that the work and carriage is moreworth than the material and enricheth a state more". The growing importanceof the "va lue added in m anu fact ure" makes it now more than ever beforeimperative to advance the industrial efficiency of the working population andto secure orderly production and distribution — tasks which have becomemore difficult through the increasingly complicated character of modern society.

A hundred years ago it was the confident belief of an age busy with thereshaping of the economic system that a n at ur al ha rm on y w ould resul t ifonly the mass of hampering trade regulations were swept aside so that the

able and active could make their full contribution to the increase in wealth andwelfare. This was, no doubt, the appropriate philosophy for a period of greattransformation, when strong dynamic forces were bringing about a rapidincrease in industrial production and a consequent improvement in the standardof livin g, with a treb ling of real wages between 1850 and 1914. But fu ll freed omfrom regulations was never achieved and as time went on "laissez faire"proved an insufficient precept for economic policy; since 1914-18 it has givenway to a growing measure of governmental intervention, whose proper l imits,however, remain a matter of controv ersy. The state can obviously not escaperesponsibility in matters such as foreign-trade policy and monetary legislation.



- 329 -

And the government (either central or local) has further assumed an increasingnumber of functions in the economic f i e ld : it runs public enterprises, it pro-

vides social services and, as part of its concern with the problem of unem-ploymen t, it intervenes to mitigate the cyclical fluct uatio ns of bus iness . Finally,the heavy burden of modern taxation has given the decisions of governmentsa greater consequence than ever before from an economic point of view.

In all these matters it is , of cours e, of the highes t im portance th at themeasures taken s hould be not improvised b ut well conside red — in otherwords, that there should be proper planning. This may appear sel f-evident,but the very word "planning" has come to be surrounded by a number ofcom plexes. There are some who extol it as the watc hwo rd for a new eco-nomic e ra, wh ile others see in it a cloak for much they consider harmfu l andsusp ect. However one may regard the question , it is of practical impo rtance

to understand some of the reasons for the distrust of p lanning. There are,in the first p lace, certain argu men ts spe cifically political in characte r, as,for instance, that increased regulation will lead to strong concentrations ofeconomic and political power and that these will prove detrimental to themaintenance of ind ividual free dom . There are, furth er, the fears that plannedeconomy wil l in practice amount to l i ttle more than planned spending; andthere are two other objections : that planning wil l be abused for the prom otionof particular group interests at the expense of the community as a wholeand that government intervention wil l be pushed so far that too l i ttle scopewill be left for private initiative and enterprise.

These objec tions cannot all be lightly dism isse d. If planning \s to succeed,

care must be taken to avoid the pitfalls and shortcomings only too often associatedwith it ; in particular, government action cannot with impunity run counter tothe principles of the price system, according to which the real value of goodsand services depends ultimately upon scarcity in relation to utility. That costsand prices should balance; that, whatever measures be taken to prevent violentshort-run fluctuations, supply and demand must in the long run be allowedto determine prices — these are precepts which governme nts themse lves mustobserve if their plans are not to be defeated by hard and obstinate facts.In a sense, planning has no doubt come to stay; but planning itself mustconform to the fundamental requisites of economic progress, if i t is to achievethat harmony of interests between nations and classes without which therecan be no solid basis for expansion and for the welfare that goes with it.

Such harmony is never easily a ttained ; yet there is , even in the midst ofthis war, an unmistakable endeavour to find solutions for the many newproblems confronting our present age. It is, then, well to remember that man'smaterial welfare need be held back neither by lack of technical knowledgenor by insufficiency in nature's gift of basic materials. On the contrary, afterthe war the main difficulty, and therefore the main problem, in this field willbe how to secure a sufficient degree of harmony internationally and sociallywithout stifling initiative and enterprise or impairing the flexibility essentialfor sustained economic progress.



A N N E X E S



B A L A N C E S H E E T

IN SWISS GOLD FRANCS (UNITS OF 0.29032258...

ASSETS

I-GOLD IN BARS

I I -CASHOn hand and on current account

with Banks

HI—SIGHT FUNDS at interest . .

IV-REDISCOUNTABLE BILLSAND ACCEPTANCES1. Commercial Bills and Bankers'

Acceptances2. Treasury Bills

V-TIME FUNDS at interest1. Not exceeding 3 months . .2. Between 3 and 6 months . .

VI-SUNDRY BILLS AND INVEST-MENTS1. Treasury Bills2. Railway, Postal Administration

and Other Bills and SundryInvestments

119,261,524.1727,975,994.11

20,923,430.245,680.95

75,073,006.12

120,818,343.50

VII-OTHER ASSETS

NOTE — The Bank holds assets in gold at each of the places where gold depositsare repayable and in short-term and sight funds in the same currencies asthe corresponding deposits, in all cases substantially greater than thedeposits in question (Items IV and V — Liabilities).

The use of dollar assets and bar gold held in the U.S.A. Is subject,under wartime regulations, to U.S. Treasury license. As regards assetsheld in countries whose currencies are subject to exchange restrictions, theGovernments concerned have, either as signatories of the Hague Agree-ment of 1930 (Article X) or by special measures, declared the Bank to beimmune "from any disabilities and from any restrictive measures such ascensorship, requisition, seizure or confiscation, in time of peace or war,reprisals, prohibition or restriction of export of gold or currency and othersimilar interferences, restrictions or prohibitions". Moreover, after providing

for the German Government Deposit out of investments in Germany, nearly60% of the assets then remaining are covered by special contracts guaranteeingtheir gold value.The Bank's commitment in respect of the Annuity Trust Account

Deposits is not clearly established, but it is stated at its maximum amountin Swiss Gold Francs.

For Balance Sheet purposes the currency amounts of the assets andliabilities have been converted into Swiss Gold Francs on the basis ofquoted or official rates of exchange for the respective currencies.

75,136,419.77

28,675,281.18

15,389,882.95

147,237,518.28

20,929,111.19

195,891,349.62

123,099.66

483,382,662.65

%15.6

5.9

3.2

24.75.8

4.30.0

15.5

25.0

0.0

100.0

TO THE BOARD OF DIRECTORS AND SHAREHOLDERSOF THE BANK FOR INTERNATIONAL SETTLEMENTS, BASLE.In conformity with Article 52 of the Bank's Statutes, we have examined the books and accounts

ation and explanations we have required and that in our opinion the above Balance Sheet, togetherBank's affairs according to the best of our information and the explanations given to us and as showncurrencies concerned.

ZURICH, April 29, 1943.



A N N E X

A S A T M A R C H 3 1 , 1 9 4 3

GRAMMES FINE GOLD - ART . 5 OF THE STATUTES)

LIABILITIES

I-CAPITALAuthorised and issued 200,000shares, each of 2,500 Swissgold francsof which 25% paid up . . . .

II-RESERVES1. Legal Reserve Fund . . . .2. Dividend Reserve Fund . . .3. General Reserve Fund . . .

Ill-LONG TERM DEPOSITS1. Annuity Trust Account

Deposits2. German Government Deposit

IV-SHORT TERM AND SIGHTDEPOSITS (various currencies)1. Central Banks for their own

account:(a) Not exceeding 3 months

(b) Sight2. Central Banks for the accountof others:

Sight3. Other depositors:

(a) Not exceeding 3 months(b) Sight

V-SHORT TERM AND SIGHTDEPOSITS (Gold)1. Not exceeding 3 months . .2. Sight

VI-MISCELLANEOUS

500,000,000.-

6,039,487.451,626,940.33

13,342,650.13

152,606,250.-76,303,125.—

3,968,900.—

11,247,655.36

24,381.011,244,245.17

947,479.3738,764,050.83

VII-SURPLUSProfit fo r the financial year ended March 31, 1943 . . .

125,000,000.—

21,009,077.91

228,909,375.-

15,216,555.36

1,270,259.99

1,268,626.18

39,711,530.20

46,488,284.12

4,508,953.89

483,382,662.65

25.9

4.3

31.615.8

0.8

2.3

0.3

0.00.3

0.28.0

9.6

0.9

100.0

of the Bank for the financial year ending March 31,1943, and we report that we have obtained all the inform -with the Note thereon, is properly drawn up so as to exhibit a true and correct view of the state of theby the books of the Bank, as expressed in the above-described Swiss gold franc equivalents of the

PRICE, WATERHOUSE & Co.



A N N E X II

PROFIT AN D LOSS A C C O UN T

for the financial year ended March 31, 1943Swss god

francsNe Income from the use of the Banks capta and the deposts entrusted to it,

after necessary aowance for contngences 6,389,808.56

Commsson earned as Trustee (or Fiscal Agent to Trustees) for Internatonal Loans 66,000.42Transfer fees 13.67

6,455,822.65Coss of Admnstraton :—

Board of Drectors — fees and travelling expenses 76,576.02Execuves and staff — saares and travelling expenses . . . . 1,507,144.28Rent, insurance, heatng, light and waer 102,754.19Consumabe offce supples, books, pubcatons 113,873.54Teephone, teegraph and posage 36,688.71Experts fees (Auditors, interpreters, etc.) 12,353.98Cantona taxaton 35,421.51Tax on French issue of Banks shares 26,106.89Misceaneous 35,949.64 1,946,868.76

NET PROFT— 4,508,953.89

APPROPRIATION ACCOUNT

NET PROFT FOR THE FNANCAL YEAR ENDED MARCH 31, 1943 4,508,953.8To the Lega Reserve Fund in accordance wth Article 53 (a) of the Statutes,— 5 % of 450895389 225,447.69Avaabe towards a dvdend for the year 4,283,506.20From the Dvdend Reserve Fund 1,626,940.33

5,910,446.53Dvdend of 2955 Swss god francs per share 5910000—Carred forward 446.53

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