THE ECONOMIC SITUATION IN ENGLAND AND GERMANY.
WHILE the tide of war rolls uncertainly many people are calculating, and not without good reason, on the ultimate economic exhaustion of Germany. It is therefore worth while to examine in broad outline the relative economic situation in Germany as compared with that of England. In an article last week dealing with the financial machinery of commerce we pointed out how English commerce was blocked by a break- down in the mechanism of exchange. Since that article appeared steps have been taken on sound lines to repair the damage. And here it is well to compliment the Government on the way in which they have attacked these economic problems. Mr. Lloyd George may, perhaps, in accordance with his temperament, have been a little too impulsive on some occasions. Some of the proposals he has made with the object of sweeping difficulties out of the path of English commerce might have involved even greater troubles than those lie hoped to remove. But he has had the good sense not to act upon his own impulses, but to consult the people who know the problems that have to be dealt with and whose advice can be relied upon. One excellent illustration of the spirit in which the Government are acting is afforded by the cancellation on September 3rd of the proclamation issued on Septem- ber 1st prolonging the moratorium. It was necessary that the moratorium should be prolonged, but the proclamation of September 1st had overlooked one or two very important considerations, and the moment they were pointed out the Government without hesitation cancelled the proclamation, and issued another one putting these matters right.
Let us now turn to the steps which have been taken to deal with the difficulties described in our article of last week. These difficulties, in brief, were that the Government guarantee of pre-moratorium bills of exchange did not extend sufficiently far to open the road for post-moratorium business. It was pointed out in the article referred to that the Government guarantee only relieved from liability the last holders of bills, leaving the acceptors of the bills, the endorsers, and, finally, the drawers still liable. Thus there was hanging over all these persons and firms a liability of unknown magnitude, and as long as that liability existed it was impossible for these persons and firms to open up new business on any extensive scale. The plan which has now been adopted, largely, it is believed, on the advice of the accepting houses, is extremely well thought out. It was announced by a circular from the Treasury, dated September 4th, appearing in the news- papers of the following morning. The first essential was to release the endorsers and drawers of bills from their liabilities, so as to set them free to open up new business. This is done by the Government authorizing the Bank of England to provide the funds necessary to pay all approved pre-moratorium bills when they are presented on maturity. This money will be advanced to the acceptors of the bills, who are the persons primarily liable for payment ; in return they are to be under an obligation to collect as soon as possible the funds due to them, and to apply these funds to the repayment of the advances made by the Bank of England. Until the advances are repaid, accepting houses will have to pay interest at the rate of 2 per cent. above the ruling Bank Rate. Needless to say, this high rate of interest will provide a very active motive for prompt repayment. In order to give the acceptors time to recover the debts due to them, out of which they have to repay the advances made by the Bank of England, the Bank undertakes not to claim repayment of its advances until one year after the close of the war, and until then the Bank's claim for repayment will rank after claims in respect of post-moratorium transactions. This means that until twelve months after the close of the war accepting houses can open up new business with their full credit because their liability for the pre-moratorium business will not be pressed upon them. In other words, the guarantee of the Government has in effect been employed to postpone claims arising before the the war until twelve months after the war is ended. At the same time, as above pointed out, a strong motive for clearing off old claims as quickly as means come to hand is provided by the high rate of interest charged on Bank of England advances.
These arrangements for dealing with pre-moratorium liabilities clear the line, if we may use a railway metaphor, and leave it now open for fresh traffic ; but they do not supply the means of moving that traffic. The means are in many cases lacking, because it is at present impossible to make payments in this country on account of money owed here. For example, Stockholm owes money to us for coffee supplied through London. But Stockholm cannot transmit that money in the form of gold because the export of gold from Sweden is prohibited. Nor can she transmit it in the form of produce, because before that produce can be moved it must be paid for by a bill drawn upon London, and owing to the temporary break- down of the discount market in London there is no means of negotiating such a bill. What the Government have therefore done, in co-operation with the joint stock banks and the Bank of England, is to arrange for accepting houses to obtain from their own bankers, or from the Bank of England, the money necessary to pay new acceptances when they mature, in the event of remittances from their clients abroad not reaching them in time. Now that this arrange- ment has been made it is possible for the accepting houses to agree to accept bills drawn against produce —say Swedish iron ore—and thus to promote the despatch of that iron ore to England. Simultaneously the bill drawn against the iron ore can be used for paying Sweden's debt for the coffee she has imported, and would otherwise be unable to pay for. In effect, the iron ore pays for the coffee, but it is only by the intervention of the Government that it is possible to effect this exchange.
Needless to say, precautions are taken against the risks which the Government run in thus organizing the machinery for conducting new business. The first of these precautions is that the banks are to satisfy themselves that the transaction is a bond fide one. That is to say, they are to make sure that the acceptance is required for real business, such as the moving of produce, and that there is good reason why the money to meet this acceptance is not forthcoming from the client. The second precaution is that a high rate of interest is charged—namely, 2 per cent. above the ruling Bank Rate—so that accepting houses will not borrow save for good reason, and will repay as quickly as possible.
As far as can be judged, these arrangements will set the machinery of international commerce again in motion, and thus complete the work which our Navy has done by keep- ing open the seas to British commerce.
Let us now turn to Germany. Our difficulties, as may be seen from what has been written above, have been difficulties of credit and mechanism ; the German difficulties are difficulties of substance. The seas are open to us; they are closed to Germany ; and therefore, even if Germany had, as we soon shall have, the financial machinery of commerce in perfect working order, she still would be unable to carry on her trade because it is blocked by our naval supremacy. Germany can only import or export goods through Holland and Italy. In the same way, it is possible that Switzerland might import goods nominally on her own account and sell them to Germany ; but that again would be an insignificant factor if Italy were a belligerent State opposed to Germany. The realization of these facts accounts for the extreme anxiety of the German Government to avoid any breach of Dutch neutrality, and to prevent Italy going into the camp of her enemies. We on our side have to face the fact that, as long as Italian and Dutch neutrality continues, it is impossible for us to secure an absolutely complete blockade of Germany. It is to be hoped, however, that we shall not on that account take hasty steps to interfere with neutral trade, steps which, though convenient to us at the moment, might recoil upon us in some future war. After all, we can afford to wait, knowing full well that each week that the war is prolonged increases the economic embarrassments of Germany, in spite of such small assistance as she can obtain through Holland and Italy. Germany in a normal year imports no less than .R500,000,000 worth of produce. A large part of this comes from her enemies, and that ceases absolutely. What comes from the rest of the world is necessarily interrupted in its arrival by the disappearance of the German mercantile marine from the seas. More- over, the possibility of moving this produce is largely prevented by the fact that the London money market is now closed to Germany, so that she cannot arrange to pay for goods, as in time of peace, by drawing bills upon London. For these reasons, even though Holland and Italy may still remain open to German trade, there will be such a falling off in the supply of materials requisite to her industry and to her life that in the course of a few months the economic pressure must inevitably become an important factor in bringing the war to an end.
Previous page
