Finance—Public and Private
An Interesting Operation
Tut: repayment on Friday of this week by the Bank of France to the Bank of. England of an amount of £33,000,000 constitutes one of the most interesting financial operations since the War. Moreover, it has a significance from the standpoint of the financial situation which deserves more attention than it has at present received.
Each Friday morning there will be found in the money articles of the daily newspapers a copy of the weekly Return of the Bank of France, and in that statement appears an entry to the effect that in addition to the amount of gold held in the Bank of France vaults there is a total of about £74,000,000 held abroad, and by " abroad " is meant this country. The question, there- fore, not unnaturally arises as to whether this statement means that we have about £74,000,000" of gold which France could take from us at any time. Such is not the position. It is true, however, that France has definitely put aside for her in this country by the Bank of England a little over £18,000,000 in gold, and the circumstances are, roughly, as follows. WAR CREDITS.
Arising out of the Great War, Great Britain gave enormous credits to France, so that at the present moment the debt of the French Government to the British Government is about £676,000,000. At the time we were giving these enormous credits and financing the purchases of our Allies as well as our own in the United States and elsewhere, we were also pouring out gold to Ametica from our own reserves. by reason of the weakness of sterling which, in its turn, was due to our financing these heavy commitments. Accordingly, some large sums of gold were contributed by France for the purpose of being despatched to the United States, and, while the amount was small compared with that which was exported on our own account—to say nothing of the many hundred millions of American securities which we sold to America to save the exchange position—it is this £56,000,000 in gold which the Bank of France chronicles as though it were earmarked to its credit in this country. Such, however, of course, is not the case ; and the only hold which France could have over that gold would be to repay the whole of its debt to this country.
LOAN FROM BANK TO BANK.
On the other hand, there was also another financial transaction represented by a large loan not between the two Governments but made from the Bank of England to the Bank of France, and in connexion with that transaction the Bank of France deposited with the Bank of England a certain amount of gold as collateral. It is that transaction which is being completed this week by the repayment of the outstanding balance of £88,000,000 (the loan was originally nearer to £60,000,000) and the handing back by the Bank of England to the Bank of France of a little over £18,000,000 in gold. This gold, however, it should be understood, in no way lessens the amount published each week by the Bank of England in its Reserve, because the gold has never been included in the general Reserve.
So far I have dealt simply with the facts. Now as to their significance. The first and perhaps the most significant point of all is that France should be in a position to make this large repayment. Less than a year ago both political and financial chaos appeared to reign in France, and amidst this chaos the franc fell to the lowest point touched in French history, namely 250 to the L. Distrust on the part of the French public in its own currency led to what was known as " a flight front the franc," and purchases of sterling securities by Frenchmen were on a big scale. Then came the entry upon the scene of M. Poincare as both Premier and inancc Minister, following upon which an exceptionally strong Ministry was formed and confidence both in the political and financial status . in France began to return. If, however, at that time anyone had pro- phesied that in less than a twelvemonth the franc would have recovered to 124 to the £, and that the authorities would have been able to accumulate sufficient credits in London to anticipate by some four years the time for making repayments to the Bank of England, such assertions would not have been believed.
FRENCH RECOVERY.
This, however, is what has been achieved, and, so far as can be judged, it has been accomplished without drawing upon any of the large credits which France is also known to have in the United States and at sonic other centres, while it is further believed that even when the £33,000,000 has been paid over to the Bank of England this week there will still remain a considerable amount of French balances in the London Money Market. I have already referred to the restoration of general confidence in France following the formation of the Poincare Ministry, but it is quite clear that there must also have been some very skilful handling of the finances both by the French Government and by the Bank of France to have achieved this wonderful alteration in the exchange position.
EFFECT ON OUR SITUATION.
The significance of this repayment by the Bank of France to the Bank of England as regards monetary con- ditions here is also important. It means that the Bank of England, which is the pivot of our monetary system and the controlling influence as regards expansion and contraction of credit, will regain some of the power tem- porarily weakened by the large loan to the Bank of France. Whenever the Bank lets out money, as City folk say, by the purchase of securities or by making loans, credit is automatically expanded ; and when, on the other hand, loans are repaid or securities are sold there is contraction. At stated periods of the year there is always an expansion or contraction going on alternately in connexion with loans to the Money Market and their subsequent repayments. These, how- ever, occur, for the most part, twice a year and last merely for about ten days. Similarly, in the matter of sales or purchases of securities, the Bank is able to regulate its operations strictly in accordance with the requirements of the situation. When, however, neces- sity calls for some special long-dated loan like that made some few years ago to the Bank of France, the Bank of England is then necessarily handicapped for a time in its methods of controlling the situation. Now, however, by this huge repayment the Bank will get back into its more normal condition, though that fact may not become apparent just at the moment. ARTHUR W. KIDDY.
Previous page
