Finance—Public & Private

The Recovery in the

I THINK that the man in the street, and, indeed, even the better-informed investor, must sometimes be puzzled to discover the true meaning and significance of the variations in the value of the sterling exchange. Six months ago he was told that the heavy withdrawal of foreign balances had driven us off the gold standard. To-day he hears that there is a scramble on the part of foreigners, and particularly on the part of Americans, to send their unemployed balances to London for " safety," and that as a consequence the value of the £ has risen. He may well ask, What does this mean ?

I think I can best explain the main underlying causes of the present feverish fluctuations in .the Foreign Exchanges and in the value of the £ by calling attention for the moment to the cause of the steadiness of the EZehanges before the War. The steadiness was due to the fact that all the leading exchanges were linked to gold, which meant that excessive fluctuations in the exchanges were pre- vented by the fact that, if necessary, indebtedness could be settled by „gold shipments. This, however, in its turn was due to the fact that there was a sufficient equilibrium in the exchange of goods and services between the • different countries to ensure that the outstanding balance in any particular country was of reasonable dimensions.

EFFECT OF THE WAR.

The financial earthquake represented by the Great War completely destroyed this trade equilibrium. It was destroyed in the first instance by the fact that for four years European productive activities were con- centrated upon war munitions and a colossal debt to the United States was built up. After the War that debt to America was increased by the fixing of colossal War Debts andIteparation Payments, all of which, let it be remembered, had to be arranged through the exchanges, and all of which involved increasing financial tribute to the United States. And at this time, when the inter- national trade equilibrium had been thus gravely dis- tuebed, -the - situation was aggravated by the- -chief creditor nation, the United States, impeding the task of its debtors.paying through an .eigiort of goods and services by imposing high tariffs on all imports into America. Similarly, many of the countries in ''central Europe restricted their own progress by inMeding_ the further exchange of trade by ever-increasing tariffs. Finally, the situation was aggravated by the United States, after capturing the world's gold. supplies, failing completely to fulfil London's former role of banker to the world. Indeed, so far from taking up that great responsibility, America used her prosperity to force home- production and 'home consumption beyond all legitimate bounds and finish up with a colossal specula- tion in Wall Street, the disastrous effects of which have been felt not only by America but by the whole world.

HUGE SURPLT:S BALANCES.

One of the consequences of this complete dislocation of pre-War normal economic conditions was to bring about an unprecedented fall in commodity prices and a world trade depression of unprecedented dimensions. This, in its turn, as can easily be imagined, has resulted not only in the unemployment of many millions of individuals, but in the unemployment of some hundreds of millions of money. These funds, which are for the most part under the control of bankers, have to find employment (so as to earn interest) in one direction or another, and one of the reasons for the great oscillations in the exchanges is to be found in the manner in which these balances move from country to country, either according to the rate of interest offered in the different countries or according to the confidence which exists in the respective countries as a depository for savings.

CONDITIONS IN AMERICA.

A year or eighteen months ago- French balances, and, indeed...foreign balances generally, such as - were not

employed in the country of origin, were about equally deposited in the United States and in this country: Largely as the result, however, of our two ..),ears' orgy of Socialist finance and Budget deficits, confidence in this 'count=ryand in the soundness 'of - the £ began to occasion such heavy withdrawals of foreign balances as finally to drive this country off the gold standard because of our inability to meet the drain of gold. Since last September, however, when we went off gold, conditions in other countries have given reason for grave dis- quietude, and especially has this been so with regard to the United States.

RECOVERY AT HOME.

Meanwhile, in this country, although industry has been slow to recover there has been a material improve- ment -in the conduct of the national finances, thanks to the change of Government. last year and the cutting down of some part of the extravagant expenditure. At a moment, therefore, when as a consequence of the conditions I have already referred to the United States Government is faced with a huge prospective deficit, there is a reasonable hope of our own fiscal year closing (the actual figures will have been published by the time this article appears in print) with a small realized surplus, or at worst a trifling deficit. This improvement in conditions in this country, or at all events this improvement in the national finances of this country, has now captured the imagination of other countries, and especially the people of the United States, with the result that foreign money is being poured into London on the hope of combiffing remuner- ative employment with safety. Moreover, a moment's thought will show that this impetus in the direction of placing money here is 'naturally increased by the fact that sterling is still at a low level. In other words, those who sent their money here believe that our economic position will improve further, that sterling will rise higher, and that as a consequence they will be able to take back their money at a profit.

ABNORMAL CONDITIONS.

Now the main point which should be noted with regard to this inflow of foreign-money into this country is the abnormal character of the operation. The effect of the inflow is to cause a rise in the sterling exchange, and in normal periods such as those which prevailed before the War I should have had to refer to such a movement as a favourable one, indicating that as a conse- quence of our satisfactory trade foreign countries were owing - us money, . and that the remittance of such money was moving the exchanges in our favour. That, however, is not- the position to-day. It is simply a case of these huge floating balances of money being sent here temporarily for employment at a moment when we have practically no use for funds in trade because our own industries are still inactive, and while no doubt the inflow of the money into the stock markets will for the time being occasion a rise in high- class investment securities the movement will be largely based upon borrowed money which may be taken from us again at any time.

INTERNATIONAL CO-OPERATION..

While, therefore, on the face of things • it may be flattering to our national vanity that the countries which were hurriedly withdrawing their balances from England a few months agoshould now be hurriedly placing them here again, I cannot regard the development as inherently a favourable one, whatever its temporary effect may be upon the stock markets. It can only be hoped that the trying conditions through which America is now passing—and I am afraid they must be more trying before the recovery comes—will do something to stimulate the movements in the direction of inter- national financial agreement and cooperation, without which I am afraid there can be no world termination to the widespread depression in finance and trade. With such co-operation, however, it should soon be possible to take a more hopeful view of the outlook.

ARTHUR W. KIDDY.

(For Financial Notes see page vi.)