Thus the City of London became the central market for bills of exchange, securities, and gold. It became the financial capital of the world, and every government or banker who wanted to settle an account abroad and could not find the means to do so in his own country came to London, where he found every kind of commercial and financial paper as well as gold. The pound sterling became the solid symbol of commerce. If Denmark or Sweden wanted to buy something from South America, the contract was made out in pounds sterling although the goods never came to London.
This was a tremendously profitable business for England, for the whole world paid some tribute to her for this service. There were the direct profits; and then foreign business houses kept balances or receipts on deposit in English banks with a view to future payments. These deposits were profitably lent out by these banks to other clients for short periods. The English banks also got to know all about the business of foreign industrialists. From the bills of exchange that passed through their hands they found out the prices charged by German or other foreign businessmen, and even the names of their clients in foreign countries. This information was very useful to British industry, for it enabled it to cut out its foreign competitors.
To increase and strengthen this international business, English banks opened branches and agencies all over the world. Apart from helping to bring foreign countries under the influence of British industry, these banks performed another very useful service from the British point of view. They made inquiries and kept records about all the well-known local firms and businesses. So that when such a local firm issued a bill of exchange, the British bank or agent on the spot knew the worth of this bill, and could guarantee it if he thought it safe. This was called “accepting” it, as the bank wrote “accepted” on it. As soon as the bank assumed responsibility for it, the bill could easily be sold or transferred, as it had the bank’s reputation behind it. Without such a guarantee or acceptance the bill of exchange of an unknown foreign firm would not find any buyers in a distant market like London or elsewhere, as no one would know the firm. The bank accepting the bill took a risk in doing so, but it did so after full inquiry through its branch offices on the spot. In this way this system of “acceptances” helped to facilitate the transfer of bills of exchange and business generally, and at the same time tightened the grip of the City of London on world trade. No other country was in a position to do this acceptance work on a large enough scale, as none had many branches abroad.
Thus, for over a hundred years London was the financial and economic capital of the world, and all the strings of international finance and trade passed through her hands. Money was abundant there, and, because of this, could be had on cheaper terms. This attracted all bankers there. To the Governor of the Bank of England came all the information about trade and finance from the four corners of the world, and, by a glance at his books and papers, he could tell what the economic condition of any country was. Indeed, he sometimes knew more about it than the government of that country. And by little dodges of buying or selling securities in which a foreign government was interested, or by the way short-term loans were given, pressure could be brought to bear on the political policy of this foreign government. High Finance, as this was called, was, and still is, one of the most effective of the methods of coercion of the imperialist Powers.
Such was the state of affairs before the World War. The City of London was the seat and symbol of the power and prosperity of the British Empire. The war brought many changes and upset the old order. It brought a great victory, but a victory which cost London and England dear.
What happened after the war I shall tell you in my next letter.
187
The Dollar, the Pound, and the Rupee
July 237, 1933
The World War cut up the world into three parts: the two warring parts and the neutral countries. No trade or other contracts were left between the rival warring areas, except the secret traffic of spying on each other. International trade was, of course, wholly upset. Owing to their command of the seas, the Allies could carry on some trade with neutral countries and colonies, but even this was greatly restricted by the German submarine campaign.
All the resources of the warring countries went into the war, and huge sums were spent. For nearly a year and a half England and France financed their poorer allies, both of them borrowing money from their own people as well as running up bills in America. Then France was exhausted and could not help others. England carried on the burden for another year and a quarter, and in its turn became exhausted in March 1917, when it was unable to meet a payment of £50,000,000 due to the United States. Fortunately for England and France and their Allies, America entered the war on their side at this critical moment, when no one else had any financial resources left. From then onwards till the end of the war, the United States supplied the funds for the war to all their Allies. They raised prodigious sums from their own people in “Liberty” and “Victory” loans, and spent these lavishly themselves and lent them to the Allies. The result was, as I have told you, that when the war ended, the United States were the world’s money-lenders, to whom all the nations owed money. When the war began, the American Government owed Europe five thousand million dollars; when the war ended Europe owed America ten thousand million dollars.
This was not the only financial gain of America during the war. American foreign trade had grown at the expense of English and German trade, and now equalled British trade. The United States had also accumulated two-thirds of the world’s gold, and an enormous amount of foreign government stocks and bonds.
The United States were thus in an overpowering financial position. They could reduce any of their debtor countries to bankruptcy by simply demanding payment of their debts. It was natural therefore that they should envy London’s old position of financial world capital and desire it for themselves. They wanted New York, the richest city in the world, to take the place of London. Thus began a fierce struggle between the bankers and financiers of New York and London, backed by their governments.
Pressure from America shook the English pound. The Bank of England was unable to deliver gold on its currency, and the pound sterling (which was thus off the gold standard) began to vary and fall. The French franc also fell. In an unstable world only the American dollar seemed to be firm as a rock.
One would have thought that under these circumstances the money business and gold would have turned away from London and gone to New York. But, strange to say, this did not happen, and foreign bills of exchange and the gold from the mines still went to London. This was not because people preferred the pound to the dollar, but because dollars were not easily available.
You will remember my telling you of the system of “acceptances” which the British banks worked all over the world through branches and agencies. The American banks had no such branches or foreign agencies, and so they had no means at their disposal of getting the foreign bills of exchange by “accepting” them, and naturally the bills drifted to London through the British banks. Coming up against this difficulty, American bankers immediately set about opening branches and agencies in foreign countries, and fine buildings grew up in many places. But there was yet another difficulty. The work of “acceptances” could only be done by a trained personnel who had full information about local conditions and local business. British banks had built up their service in a hundred years of growth, and it was not easy to catch them up in this respect quickly.
The Americans then combined with some French, Swiss, and Dutch banks against London, but with no great success. France, although a very rich country exporting a great deal of capital abroad, had never paid attention to organizing a traffic in foreign bills of exchange. So the tussle between New York and the city of London went on, and on the whole the latter was not affected. In 1924 a new factor in favour of New York appeared. The German mark was stabilized after the great inflation was over, and German capital which had run away to Switzerland and Holland duri
ng the inflation (capital always runs away in times of risk or danger!) returned to German banks. The addition of Germany now to the American financial bloc made a great deal of difference to London. For now vast numbers of American bills of exchange could be exchanged for European bills of exchange without reference to London. And London had still an unstable currency—that is, the pound had no fixed gold value; it was off the gold standard.
The financiers of the City of London were now alarmed. They saw all the good business in international exchange going over to New York and its European allies, and London having only the leavings. The first thing to be done to prevent this happening was to fix up the pound again in relation to gold—that is, to stabilize it. This would again attract good exchange business. So in 1925 the pound was stabilized at the old level. This was a great triumph for the English bankers and creditors, for a more valuable pound meant a bigger income for them. It was bad for English industry, as it raised the prices of English goods abroad, and industrialists found great difficulty in competing with America, Germany, and other industrial countries on the foreign market. But England deliberately sacrificed to some extent her industry to her banking system, or rather to her financial supremacy in the world exchange market. The prestige of the pound went up, but you will remember that this was followed in England by domestic troubles due partly to the blow to industry. There was unemployment and the long-drawn-out Coal Strike and the General Strike.
The pound was stabilized, but this was not enough. The British Government owed an enormous sum of money to America, which was a floating debt and could be demanded back at almost any time. By making such a demand the United States could put England in a very difficult position and force the pound down again. So the leading British statesmen (among them Stanley Baldwin) rushed to New York to come to terms with America about the repayment of the war debt in instalments (“funding”, this process is called). All the European countries were America’s debtors, and the proper course for them would have been to consult together and then approach the United States for the best terms that they could get. But the British Government were so anxious to save the pound and keep London’s financial leadership that they had no time to consult France or Italy and wanted some arrangement with America quickly and at any cost. They got the arrangement, but at a heavy cost, and they agreed to the severe conditions laid down by the United States Government. Subsequently France and Italy got far better terms from the United States for their debts.
These strenuous efforts and sacrifices saved the pound and the City of London, but the struggle with New York continued in all the world markets. Having an abundance of money, New York offered long-term loans at low interest, and many countries which used to borrow in the London money market (including Canada, South Africa and Australia) were thus enticed away to New York. London could not compete in these long-term loans with New York, and it thereupon tried giving short-term loans to the banks of central Europe. In short-term loans the banker’s experience and prestige count for more, and this was in favour of London. So London banks established close relations with Viennese banks and through them with the banks in central and south-eastern Europe (the Danube and Balkan areas). New York also continued to do some business there.
This was a period of frenzied finance when, partly because of the competition of London and New York, money poured into Europe, and millionaires and multi-millionaires cropped up with amazing rapidity. The way things were done was simple. Some enterprising person would get a concession in one of these countries to build railways or other public works, or a monopoly like that of the manufacture and sale of matches. A company would be formed to hold this concession or monopoly, and this would issue stock or shares. On the basis of this stock or shares the big banks in New York or London would give advances. Financiers would thus borrow money in dollars in New York at 2 per cent, and then lend this in Berlin at 6 per cent, and in Vienna at 8 per cent. By this clever shifting about of other people’s money these financiers became very wealthy. One of the most famous of them was Ivan Kreugar, a Swede who was known as the Match King because of his monopoly in matches. Kreugar had tremendous prestige at one time, but it was later proved that he was a thorough fraud and that he embezzled huge sums of money. He committed suicide when he was on the point of being found out. Several other famous financiers of the time also got into trouble because of their shady methods.
This Anglo-American competition in central and eastern Europe did one good. The money that was poured in contributed greatly to the revival of Europe during the years before the depression began in 1929.
Meanwhile France had had an inflation in 1926 and 1927, and the franc had fallen greatly in value. Frenchmen with money—and every French petty bourgeois has his savings—sent their money abroad for fear of losing it as the franc fell. They bought a vast quantity of foreign securities and foreign bills of exchange. In 1927 the franc was stabilized again and fixed in relation to gold, but at about one-fifth of its previous value. The French holders of foreign securities were now all keen on changing them for something in francs. They had done a good stroke of business, for now they were getting five times as many francs as they possessed originally, and thus they had not suffered at all from the inflation, as they would have done if they had stuck to francs right through. The French Government decided to profit by the occasion, and it bought up all such foreign bills of exchange or securities, giving instead freshly printed bills in francs. Thus the French Government suddenly became very wealthy in the possession of these foreign bills and securities—in fact, it possessed at that time the greatest number of them. It had no desire or sufficient qualification to become a competitor with England and America for financial leadership. But it was in a position to influence both.
The French are a cautious people, and so is their government. They prefer small profits and safety to the chance of big profits with the risk of losing even what they have. So, cautiously, the French Government lent out its superfluous money to good firms in London at a low rate of interest. Thus they would only charge the British bank 2 per cent interest; the British would pass on the money at 5 or 6 per cent to German banks, who in their turn would advance it to Vienna at 8 or 9 per cent, and finally the money might reach Hungary or the Balkans at 12 per cent! The rate of interest increased with the risk, but the Bank of France preferred to face no risk and to deal with safe British banks. In this way France kept a very large sum of money (consisting of the foreign sterling bills of exchange it had bought up) in London, and this helped London in its fight against New York.
Meanwhile the trade crisis and depression had been growing and agricultural prices falling. Wheat prices fell so low in the autumn of 1930 that banks in eastern Europe could not realize moneys from their debtors, and so could not pay back the money they had borrowed in pounds and dollars in Vienna. This led to a banking crisis in Vienna, and the greatest Viennese bank, the Credit-Anstalt, failed and collapsed. This again shook up the German banks, and a collapse of the mark seemed to be imminent. This would have meant danger to American and British capital in Germany, and it was to avoid this that President Hoover proclaimed a moratorium on debts and reparations. To have insisted on payment of reparations then would have meant the complete financial collapse of Germany. As it happened, even this was not enough, and Germany could not even pay her private debts to other countries and a moratorium for these had also to be given her.
This meant that plenty of English money, which had been given in short-term loans to Germany, was locked up there—“frozen” as it is called. The position of the London bankers became difficult, as they had to meet their liabilities, and they had been counting on getting their money from Germany. France and America came to their help by lending £130,000,000, but this came too late. Panic spread in London financial circles, and when such a panic occurs everybody wants to take out his money. The £130,000,000 vanished quickly. You must remember that the pound was on the gold standard, and anyone who had sterling c
ould demand gold.
The British Government, which was a Labour Government at the time, wanted to borrow more money, and anxiously asked New York and Paris bankers for it. It appears that they agreed to help subject to certain conditions, one of these being that the British Government must economize in labour matters, in social services, etc., and perhaps wage-cuts were also suggested. This was interference by foreign bankers in Britain’s domestic affairs. The situation was exploited against the Labour Government, and Ramsay MacDonald, the Prime Minister and head of that government, betrayed it and his own party, and formed another government with the support chiefly of the Conservatives. This was called the “National Government” formed to meet the crisis. This action of Ramsay MacDonald is one of the most remarkable instances of desertion in the history of the European labour movement.
The National Government had come in to save the pound. It got the promised loan from France and America, but even with its help it could not save the pound. On September 23, 1931, the government was forced to abandon the gold standard and the pound again became unstable currency. The pound fell rapidly and was worth only about 14s. in gold— that is, roughly two-thirds of its former value.
This was the event and the date which produced a great impression in the world. It was looked upon by Europe as a sign of the approaching disruption of the British Empire, for it meant the end of London’s domination of the world money market. These expectations or wishes (for there is little love for the British Empire in Europe or America, not to mention Asia) proved somewhat premature.
The fall of the pound shook up the currencies of many countries which had kept sterling paper money as if it were gold, because it could be changed for gold at any time. Now that sterling could not be changed for gold and had fallen 30 per cent in value, the currencies of some of these other countries fell also, and they were dragged down by England to abandon the gold standard.
Glimpses of World History Page 133