GERMANY'S WAR FINANCE

Dominion, Volume 8, Issue 2415, 22 March 1915, Page 6

GERMANY'S WAR FINANCE

WAR LOAN BANKS EXTENSIVE NOTE ISSUE MASTERLY ANALYSIS OF THE POSITION Sir Edward H. Holden. Bart., the chairman of the London City and Midland Bank, is one of the leading financiers of Great Britain, and at the general meeting of the shareholders of the bank towards the end of January, Sir Edward gave a very close and very interesting analysis of the financial position, and dealt particularly with Lhe war finance of Germany and Britain. He recalls that ou July 18 last the Dresdner Bank caused a great commotion by selling its securities, and by advising its clients to sell their securities.; This was recognised as the first semi-official intimation of a probable European conflagration, and Berlin became apprehensive. War was declared between Austria and Serbia on tl.e 28th; people were seized with, panic, and great funs took place on. the Reichsbank (the Imperial banking Institution) for gold or notes. The Reichsbank lost teii millions sterling of gold or thereabouts, and to prevent further loss a measure was passed prohibiting the bank from paying any mors of its notes in gold. To meet the difficulties of other- banks the Reichsbank discounted during the nwnth of August about 200 millions sterling of bills. Of this amount 117. millions were drawn out in notes.- with which the bank were able to meet the runs. War Loan Banks In Cermsny, They next proceeded to establish v.ar loan banks, war credit bauk3. ni=d war aid banks all over the country, under the patronage of corporatijns, municipalities, and private financiers, and to make use of the mortgage banks already established. The Iler.hsbank had the right to issue notes to any amount, provided it held as cover practically one-third in gold and tworthirds in bills of exchange. As the Reichsbank was to play an important part in war finance it was careful to keep down the issue of its notes as much as possible, as it knew criticism would bo directed against it. It therefore proceeded to issue, and is continuing to Issue, notes through the media of the various war and credit banks. Government securities, other securities ana produce are pledged with the war banks, advances to the extent of 75 per cent, being. made on the firstnamed class of security, and on the other classes fa the extent of 45 per cent. These advances are made in war bank notes, whicn are legal tender, auJ peifoim all the functions of money. In this way we see how the country is gradually being supplied with the currency required for carrying on the war, but knowing that the eyes of the 'world would be fixed on their gold position, they were careful to maintain a difference between the Reichsbank note and the notes of the two other classes of banks. _ The ' Reichsbaiis note, although it is on longer payable in gold, was issued on the basis of gold and bills of exchange; while the notes of the war and credit banks have no relation whatever to gold, and are issued on the basis of securities and propoities.

The mobilisation of the German armies was financed by the notes of the Reichsbank for from four to six weeks, so that by the end of August, with the war and other demands, the total discounts and loans of the Reichsbank amounted to about 243 millions sterling, and the total notes issued to about 212 millions. By this time the pressure oh the bank was becoming too great, the War Loan was issued, and a sum of about 233 millions, partly. on bonds and partly on Treasury notes, was raised. By the end of the year the whole of the loan was paid up, and the debt to the Reichsbank discharged. The first loan was subscribed for to the extent of about 40 millions sterling by persons who obtained loans through the war banks and 40 millions by depositors in savings banks, leaving about 143 millions to be subscribed by joint stock banks and other people. Thus wo see people pledging their securities and properties, r.nd with the proceeds taking up the loan. Financing of the War. After December the financing of the war enters on a second stage. The Reichsbank, at the end of December, on tho basis of its gold, woe able to issue a further 200 miliums sterling of notes. The money for financing the war will, therefore, be obtained again from the bank until the pressure becomes too great, when a new. loan of 250 millions sterling, which has already been sanctioned, will be issued. The operations of the war and mortgage bank will •again take place; new loans will be created, now securities and new properties will be pledged, and when the loan •is taken up the'Reichsbank will a second time be paid off. This w;ill carry on the war for another six months, and will bring us up to June, when no doubt the Reichsbank will ones more be required to provide funds. New loans will be raised and further properties will bo pledged, so we may expect an evil day in Germany bv and by when itliis huge pledging will have to be paid ofl' and heavy depreciation must inevitably result. The question arises, how often can this operation be repeated? We know the cost of the war to Germany is somewhere about two millions per day, so that by the end of twelve months there will have been a drain on the people either of liquid resources or securities, properties, or produce, amounting-to over 700 millions sterling. The International Side,

Let us examine the international side. In considering this side we must remember that Germany has a population of about seventy millions of people, who have to be fed, clothed, and largely provided with employment. In 1918 imports into Germany amounted to about 535 millions sterling, and of this 228 millions came from the Allies and their colonies. The war reduces Germany's imports at one stroke to 307 millions sterling. A considerable amount of these imports consisted of food products, a large proportion of which came from tbe Allies. Having regard to the control which the Allies hold over the seas, and further to tlio fact that the Allies' ships as well as German ships are no longer available for the carrying of freight to Germany, will the whole of this amount of 307 millions still find its way into Germany, always keeping before. us the fact that German importers will offer greatly enhanced prices to secure what is absolutely necessary for them? For example, it is alleged that cotton, which costs from 6_to 8 cents per lb. in America, is being sold at from 18 to 20 cents per lb. in German ports. These imports cannot be paid for by the notes of the war banks and the credit banks, or even by the notes of tie Reichsbank, and they must be paid for either by exports, securities, or gold. It was feared that securities held by Germans might find their way on to the London Stock Exchange, but restrictions of such a nature have been placed on transactions there that such a contingency will bo prevented. Assuming, therefore, that the difficulties placed in the way of the realisation of securities held by Germans are iiisurmeuntnbloj the only two ways remaining of paying for her imports are by exports anil by gold. As one of our objects in taking part in the war. has. been to prevent the annihilation of small States, tlio aotion of such couutriw as Don-

mark, Sweden, Norway, Holland, Italy, Bulgaria, and Rumania in assisting our enemies with food and other cortfnodities appears both ungrateful and suicidal. Cermany's Cold Position. The exports of Germany in 1913 amounted to about 500 millions sterling, and of this total the Allies and thoir colonies took srbout 200 millions, leaving a balance of 300 millions. Wliat proportion of this 300 millions will Germany be able ta export? Taking again into consideration that she has neither the advantage of the same number of ships nor of the same number of men engaged in h?r industries, as she had in 1913, and further that such proportion of those exports which contain imported raw material will be increased in price, thero can be no doubt that her exports will fall off to a much greater extent than her imports, and that the balance will have to be paid in gold. Almost superhuman efforts have ueen and are being made -to increase the gold in the Reichsbank. The . increase ha 6 hitherto been at the rate of a million and a half per week, apparently from circulation and othor sources. The gold has now reached about 106 millions sterling. But :n order to pay for their imports through Scandinavia and Holland they have already had to export about five millions sterling of gold to those countries. The mamtenanco of the financial position of Germany will depend on the balance of her imports over exports being small, and on the increase of gold-exceedingor being equal to the export .of gold. It is necessary for us to make up our minds, that there will be no cessation of this war on account of the gold position in Germany at all events within twelve months— and it may be longer. Finanblal Mobilisation. President Havenstein said on- September 0 last : "The plans for the financial mobilisation of the country, thought out and prepared down to the. final details by all the'institutions concerned have proved extremely efficient. There was no breakdown, no-leakage, or none that could have been foreseen-in time of peace."■ Of what did:this "financial mobilisation" consist? The waT banks created in all important towns, with capitals varying with the populations, were really all "annexes" of the Reichaflank, and the Government gave them the power of discounting, and as already stated, the discounts and advances were to be covered by different kinds of securities. The majority of these advances wore to be made lor six months, o;i the presumption, no doubt, that the war would be finished by that time. When the advances were made, special currency notes different in appearance from the notes of the Reichsbank, were issued for the amount of the advance. These notes were of denominations as low as the equivalent of one shilling, two Bhillings,_ and five shillings. Their connection with the Reichsbank wa6 most important, inasmuch as the notes could he paid into that institution to take up the war loan, or for credits for other purposes. These notes have greater power than Reichsbank notes, because when they are paid into the Reichsbank they form a part of its cash balance or reserve upon which Reichsbank notes can be issued, thus giving the war bank notes practically the same qualities as gold. The object of issuing Reichsbank notes on the basis of war bank notes was to enable the bank to increase the issue of Reichsbank notes in case of necessity, and, further, because the latter had a better status among the people than tho former. Ono of the objects of the war bank notes was to drive gold from circulation into the Reichsbank and to take the place of the gold so drawn in.' It is tc;be presumed that in this plan of mobilisation' tho war banks will oe able to increase their advances and their issues on the creation of every new war loan. The charge to be made for the accommodation granted was from half per cent, to 1 per cent, over the Reichsbank rate, which was 6 per cent, up to December 15, and has been. 5 per cent, since that date- The fact that there were to bo margins of 25 per cent, on Government securities, and of 45 per cent, to 55 per cent, on other securities show that the "mobilisers" realised that they ihust provide against the possibility of heavy depreciations. The, Reichbank has 486 offices throughout the country, and each office, no doubt, would have the faculty for taking in the war bank-notes and puttingout Reichsbank notes. This . means nothing more nor less than an issue of Reichsbank notes on the basis of the securities of all these war banks. . A most important feature of this mobilisation scheme was that from August. 1 the Reichsbank declined to pay its notes in gold.

The Reichsbank' Notes.

The Reichsbank made greater use of the mortgage banks, the notes of which are identical in power and use with tlie notes of the war banks. Another part of the scheme was. to relieve the pressure on insurance companies . by forming an insurance bank which advanced 40 per cent, on the value of policies. These advances were paid in notes, which were exchanged for Reichsbank notes, in the same way as war and mortgage bank notes. All these banks were authorised in the first instance to issue in ! tbe aggregate about 70 millions sterling of currency notes, but this amount was afterwards increased to'' about 140 millions. There was one great defect in these mobilisation schemes. They may have for the time supplied all the currency needed "or the wants of the people.and for subscriptions to the war loans, but the defect was that the Reichsbank note, Which had hitherto been paid in gold, had now become This caused the note to fall to a discount. It is interesting to see how this depreci. ation in the note has been brought about, and, for this purpose, we' will examine the exchange between Amsterdam and Berlin. If the imports into Germany from Holland were equal to the exports from Germany to Holland, we should have what is called the par of exchange—that is 59.26 florins (Dutch), would be equal in value to 100 marks (German). There would be debts in Amsterdam due to Berlin equal to the debts 'in Berlin due to Amsterdam. These would be settled by the mcchants in Berlin, who had sent goods to Holland selling cheques on Amsterdam to merchants in 'Berlin who had purchased goods from Holland. Suppose the goods which are shipped to Holland from Germany _ arc less in value than the goods shipped from Holland to Germany, then, evidently, there would be more buyers in Berlin of exchange on Amsterdam than sellers, the price would begin to move from par, and the buyer in Berlin would have to take less -florins in Amsterdam for his 100 marks. The only check to this fall would be the export of gold. If ho could not obtain gold, the exchange would fall further, and the merchant who bought the exchange would have to give more notes to the seller. Consequently the cost of the commodities would be higher, and the note would buy less than it would have bought if it had been exchangeable for e °sliice the beginning of this war the merchants in Berlin have had to pay 100 marks for 54.20 florins on an averago, showing a loss of over 5 florins per 100 marks, or about 8i per cent. The exchanges show during the whole period of the war that the exports from Germany to Holland have been less than the imports from Holland to Germany. The exchanges have consequently been below par, tbe prices of the goods have increased correspondingly, and the consumers have had to give more nAtes. Consequently, during the whole time, the notes have been at a discount. Til tlio case of the Scandinavian imports and exports to and from Germany, we find the same thing. The exchanges with-Stockholm, Ohristiania, and Copenhagen have all fallen, showing in each

case that the merchants in Germany have not been getting par value for their goode. The Weak Link. Sir Edward Holdeii is of opinion that weakness will first show itself, if it lias not already done bo, ill "Austria and Hungary. Although those two countries are fighting together, we arc more likoly to seo jealousy and discord arising in their armies tuan in armies composed of men of the same nationality. Austria and Hungary are poor countries in comparison with Germany, and they have suffered great losses and great lock-ups of resources in consequence of the Balkan wars. Like Germany, Austria has established war banks for the same purpose, but not to the same extent, but we have 110 record of the Austro-Hungarian Bank financing t-lio war in the same way as the Reichsbank did. A war loan was issued in November, and to the surprise of most people the subscriptions reached the relatively large total of 130 millions sterling. Of this amount about 60 per cf.nt. was subscribed through the joint-stock and other banks of Austria-Hungary, leaving about 40 por cent, to the general public. Summing up the-financial position of even if she pledges her properties and • securities as Germany has done, and-finds sufficient gold to pay for the .-balance ,of her imports, one has difficulty in coming to the conclusion that she will be able to continue the war for any great length of time unless she receives - financial , assistance from Germany.