Economics and the Public Welfare. Benjamin M. Anderson

but on the London acceptance house, a ninety-day bill of exchange, attaching to it the documents giving title to the coffee. The London acceptance house would accept the bill and turn over the documents to the French importer, who would then get the coffee. The Brazilian exporter would discount the bill in the London discount market and would use the sterling proceeds in buying milreis, because he wanted milreis at home for his next turnover.

      London would no longer owe anything to the outside world on this transaction, but the French importer would still owe the London acceptance house, within ninety days, the sterling with which to pay a London bank or discount house when the bill matured.

      In general, in financing international trade, London advanced cash in exchange for short-term obligations, and the world, on balance, was indebted to London on short term in large amounts. This was the situation at the outbreak of the war. All the world owed money to London on short term, and maturities were coming every day. All the world needed pounds sterling with which to pay these daily maturing debts.

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      But Internally Shaken—Weakness of Acceptance Houses. In the ordinary course of events new sterling in foreign hands would be steadily created by transactions similar to the one above described. But the outbreak of the war brought all these transactions to a sudden halt. First of all, with German cruisers on the seas shipments of goods were suddenly arrested. Second, with the shock of the outbreak of the war the position of the London acceptance houses, which had seemed invulnerable, suddenly showed great vulnerability. They had felt safe in giving acceptances up to several times their capital, counting on a steady inflow of funds to match their daily maturing obligations. But suddenly funds ceased to come to them. With the German armies invading France, the French importer of Santos coffee could not easily market his coffee, and even if he sold it for cash, could not certainly convert his francs into the sterling needed to send to the London acceptance house. The foreign exchange markets were suddenly demoralized. An acceptance house was certain that it could not collect the large amounts due it from Germany, and everywhere in the world disorders of one kind or another arose which placed the debtors of the London acceptance house in an awkward position. The acceptance houses were therefore entirely unable to give any more acceptance credits.

      A further resource for obtaining sterling would normally be to ship gold to London, but this again, with hostile cruisers on the seas, was quite impossible. One great German ship, the Kronprinzessin Cecelie, had started out from New York for England and France just before the outbreak of the war with $10 million in gold, but had promptly turned back with the news of the outbreak of the war. The world owed London. The world could not pay in gold or in goods. The world could not get additional credit in London with the demoralization of the London money market. How was the world to pay?

      Sterling Rises to $7.00. The first effect was a startling rise in the price of sterling. Men who had no option about paying their debts in London paid through the nose. Sterling rose from approximately $4.8668 to $7.00, though this $7.00 quotation represented only a few transactions in a nominal market.

      Emergency Measures—Paris and London. Emergency measures of various kinds were employed in the principal centers. Paris was financially weak in any case. Prior to 1913 there had been many bad foreign loans placed in the French market through the great French banks: loans to Russia, loans to Latin America, loans to the Balkans. The weakness of the Balkan loans had been revealed during the Balkan wars in the two or three years preceding the outbreak of World War I. The weakness of the Brazilian loans and of Latin American loans in general had been revealed in the crisis that followed the collapse of the price of Brazilian coffee in 1913. With the outbreak of the war, moreover, France had the added complication that the German armies were beating their way into the richest of the

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      French industrial provinces. The great banks of France were frightened and cowardly. They rediscounted their bills with the Bank of France and hoarded cash. The French bourse was demoralized. The Bank of France showed itself courageous and intelligent. Governmental intervention seemed clearly indicated, but governmental intervention went much too far. Debtors were legally relieved by moratorium from the payment of their debts when due, on a sweeping scale. Bourse transactions ceased, the giving and taking of commercial credits very largely ceased, and governmental credit was extended in many places where private credits had previously been used.

      Governmental emergency measures in England were much more moderate, though some seemed necessary. The Bank of England came to the rescue of the acceptance houses, taking over from the Joint Stock Banks, the discount houses, the bill brokers, and other holders their outstanding bills. The government later gave the acceptance houses, as a means of restoring their power to function, a clean slate on which to write, in that new acceptances would have priority over the old acceptances as a claim upon their assets.

      Emergency Measures—United States. The stories of London and Paris in 1914 are interesting.³ Chief attention is given here, however, to the way in which the shock was met in the United States.

      No Government Intervention in United States. The American financial system met the shock with no formal government aid, although there was good cooperation and good understanding between New York and Washington. The closing of the stock exchange was decided upon by the stock exchange in conference with the New York clearinghouse banks. The banks had large loans made to stock exchange firms against stock exchange collateral. By informal agreement they refrained from calling these loans. These stock exchange loans the banks had ordinarily looked upon as one of their principal sources of liquidity. Any bank needing cash could call brokers’ loans, and the broker must pay before the close of the banking day. The understanding was absolute, and on strict brokers’ loans there was no question about it. The broker could get a loan from some other lender by paying the necessary rate of interest, or the broker could, if necessary, compel his customers to sell securities to pay off their loans to him so that he could pay off his loans to the bank. If the broker did not pay, the bank could sell the collateral on the floor of the stock exchange and turn over the difference between the face of the loan and the proceeds of the sale of collateral to the broker.

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      Frozen Stock Exchange Loans. With the closing of the stock exchange, however, these loans were frozen, and were no longer a source of liquidity to the banks. It did no good to call the loan and try to sell the coliateral if there was no market. The banks contented themselves with seeing to it that the loans were properly margined. In valuing securities as collateral, the closing quotations of July 30, the day before the New York Stock Exchange closed, were taken.

      The timing of the closing of the New York Stock Exchange was skillfully managed. There were some who had urged the closing a day or two before. It is the view of Professor O. M. W. Sprague and H. G. S. Noble, president of the New York Stock Exchange, that it is fortunate the exchange stayed open as long as it did. Stock prices went low, but not so low that the banks and the brokers could not stand the strain. The market was pretty thoroughly liquidated. The reopening of the exchange was then made much easier than would have been the case had stocks remained at a higher level with many sellers anxious to liquidate while the exchange was closed.⁴ The control over selling outside the exchange during the period while the exchange was closed would, moreover, have been much less effective had not the market been thoroughly liquidated. As Noble makes clear in his interesting paper, the closing of the stock exchange was accompanied by a rigorous control over auction rooms, the Curb and all other outside markets, and the volume of security selling was held within very narrow limits indeed during the period the stock exchange remained closed. The break in prices was pretty drastic, as shown by the following table:

      NEW YORK STOCK PRICES

	High, 1914	July 30, 1914	Decline
Atchison	100⅜	89½	10⅞
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