Since the establishment of the Federal Reserve System the position of the United States as a member of the world economic family has been completely reversed. At the outbreak of the European war we were a debtor nation. It was estimated that Europeans held about $6,000,000,000 worth of American securities and that there was in addition a floating debt of about half a billion. Before the end of 1916 we had become a creditor nation.

Rumors of war before the outbreak of hostilities caused a considerable liquidation of American securities by foreign investors. The war itself naturally gave tremendous impetus to further liquidation. The closing of the London Stock Exchange threw the whole burden on the New York market, and from July 27 to the closing of the New York Exchange on the 30th, over 3,000,000 shares of stock were sold, mostly on European account.

This threw a tremendous strain on the foreign exchange market. In the week July 20-27 demand sterling advanced 130 points to 4.8825, and by July 27 the market was merely nominal, rates depending upon personal negotiation. Ex-change thereupon soared in an altogether unprecedented manner, cables advancing on August 1 to $7 and demand sterling to $6. Difficulties developed in connection with cables in code, with shipping, and with war-risk insurance% all of which further confounded the exchange situation.! It was virtually impossible for a time to get remittances to stranded Americans on the other side, until finally the government took the unusual step of sending over gold on an American warship.

Little by little the chaotic conditions were overcome. To meet the obligations of the City of New York maturing on the other side 127 New York banks subscribed to a special $100,000,000 loan. The Bank of England authorized the Canadian Minister of Finance to receive deposits in gold in trust on its account. Finally through the leadership of the Federal Reserve Board, a representative committee of bankers organized a $100,000,000 gold pool. The necessary funds were subscribed by banks all over the country, and gold was shipped to Canada to provide credits in sterling to cover maturing obligations in Europe and to stabilize the American rates.

Position of the U. S. transformed

Liquidation of American securities

Remedial expedients

The rapid rise in exchange naturally stimulated gold exports. Large sums were engaged for this purpose by the big dealers. The sum of $10,700,000 shipped on the steamship Kronprinzessin Cecilie was said to be the largest amount ever sent on one vessel. The feverish exportation of gold was stimulated by the rapid rise in the English bank rate, which finally, on August 1 went to the unprecedented level of 10%. From the first of the year to the end of July $122,700,000 in gold, not including shipments to Canada, had been exported. Of this amount $41,850,000 had gone out in one week. This loss of gold aroused such grave fears among the banking fraternity that a moral embargo was placed on further shipments. Engagements of gold for export subsequently made were either for the relief of stranded Americans or as a part of a general plan. The gold sent on the Kronprinzessin Cecilie was returned to New York when the ship, unable to reach Germany, turned about and took refuge at Bar Harbor.

During 1915 recovery was rapid. The export of food supplies, raw materials, manufactured articles, and munitions of war increased so rapidly that the supply of foreign exchange, especially sterling, became relatively redundant. The excess of exports over imports during the year was $1,776,074,152.1 The financing of a large part of all the Entente Allies' purchases having been arranged through England, the burden of almost the whole export movement devolved upon sterling. At the same time that supply was expanding, demand tended to fall off, due to a marked cessation in the selling of American stocks by Europe, to the complete elimination of the normal tourists' demands, to a decline in imports, and to the partial substitution of the dollar for the pound sterling in international exchange transactions. The price of sterling exchange declined rapidly in the New York market, going as low as $4.50 for demand sterling in September.

Gold exports

Recovery during

1 Monthly Summary of Foreign Commerce of United States, December, 1916, p. 4.

During 1916 the position of the United States continued to improve. Exports continued at unheard-of levels, yielding a "favorable balance" by the close of the year of $3,089,769,254. Instead of liquidating debts on the other side our bankers were making loans. According to the report of the Federal Reserve Board it was estimated that from the beginning of the war down to 1917 $2,250,000,000 in American securities were repurchased from Europe, while during the same period about $2,000,000,000 of securities issued by foreign governments and corporations were absorbed by American financial institutions and investors.1 Private bank advances, the amounts of which are not published, were also made in large volume.

As might be expected, gold movements during 1915 and 1916 were toward rather than away from the United States. The practical suspension of gold payments and the embargo put on gold exports by the governments in the belligerent countries interfered with what would otherwise have been the normal flow. Gold was arbitrarily released by the Bank of England and by the Bank of France when it suited their own purposes. Nevertheless, while during 1913 the United States had lost through net exports $28,093,778 in gold, and during 1914 the sum of $165,-228,415, the net imports during 1915 equaled $420,528,672 and during 1916 $530,197,307.2 Total figures of imports and exports of gold as given in the Federal Reserve Bulletin (March. 1917. d. 153) are as follows:

Improvement in 1916

Gold imports

1 1916 Report, pages 1 and 2.

2 Monthly Nummary of Foreign Commerce of United States, December, 1916, p. 4.

While the leadership of the Reserve Board was of importance at the outbreak of the European war, the rapid improvement of the international credit position of the United States rendered unnecessary any concern about our gold reserves. A problem that was much more serious was the prevention of the wild inflation that the huge gold imports made possible. The Board has consistently endeavored to get the new gold into the hands of the reserve banks where its use can be best supervised and controlled.2

Prevention of inflation