At the beginning of the war, the majority of the countries of the world found themselves with a large amount of floating and maturing indebtedness to pro vide for in London, and without any machinery for accomplishing it, except at an almost prohibitive loss. So dependent bad the world become on the facilities offered by London and other large European centers for the adjustment of their trade balances between one another, that the complete breakdown in the ex changes left them with no channels whereby they could offset these balances except by direct settlement, either by gold shipments or the purchase of exchange in a debtor country for remittance to a creditor nation, both costly methods. Conditions were further com plicated by the uncertainty of communication and the almost complete cessation of merchant shipping thru out the world owing to internment or commandeering. For these and other reasons, one country after another declared a moratorium of a more or less general na ture. Among these may be mentioned: Country Date Argentina August 12 Belgium ig 6 Brazil " 16 Bulgaria 447 Denmark " 21 Ecuador 44 7 Egypt C49 Greece July 26 —August 4 Italy August 4 Norway CC5 Paraguay " 14 Portugal " 04 Russia July 20 —August 2 South Africa September 15 Sweden August 7 Switzerland " 17 Turkey 443 Uruguay " 15 Great Britain declared a moratorium for bills of exchange on August 2, 1914, in order to protect the credit of the accepting houses until they were able to secure remittances from abroad from the primary obligants. As this limited moratorium was found to affect adversely the position of domestic bills, the mor atorium was made general on August 7 and this action, by affording temporary protection to the community at large, allayed any feeling of panic and possibly prevented runs on the banks. The mora torium was only temporary and was removed before the end of the year. It should be noted that, at no time since the beginning of the war, has the Bank of England ceased to redeem its notes in gold.
Germany declared no moratorium in name, but coolly stopped payment, as far as her foreign debts were concerned, and paid her domestic debts with copi ous additions to her paper money. Immediately on the declaration of hostilities Germany suspended the gold redemption of the Reichsbank's notes and, a few months later, made it a penal offense to buy or sell gold at a premium. These exactions are far more restrictive than a temporary moratorium on private bills, and reflect more seriously on the financial condi tion of a country.
:3. London, and New York.—Under normal condi tions certain of the exchanges tend to fluctuate in groups, but since the war economic conditions have been so altered that these groups have broken up and rearranged themselves into three entirely new groups, namely, Great Britain and her allies, Germany and her allies, and the other neutral countries.
By far the largest and most important exchange operations since the war have taken place between Great Britain and the United States. We shall briefly review the course of exchange beween London and New York since August, 1914.
During the month of July, 1914, New York's ad verse trade balance with Great Britain was still fur ther increased by the abnormal quantity of Ameri can stocks and bonds liquidated on the New York Stock Exchange for European account, and selling grew in intensity with the closing of the European bourses. The climax was reached on July 30, with the closing of the London Stock Exchange, which caused the New York Stock Exchange to close its doors in self-defense on the following day.
At the beginning of the war New York, therefore, found itself with an unprecedented floating indebted ness to Europe estimated at from $250/300,000,000. As a result exchange became utterly demoralized and practically disappeared. Cables on London rose to $5, to $6.50 and finally to $7, and quotations became unworkable.
4. Gold shipments from New had been leaving New York in large quantities during the month of July, and more would have been shipped but for the suddenness of the crisis. Even as late as July 28, 1914, the Kronprinzessen Cecilie sailed from New York with a consignment of gold valued at over $10,000,000, but to avoid capture was recalled when almost in sight of England, and put back into Bar Harbor, Maine, on August 4, 1914.
Gold shipments thru other channels were impracti cable, not only on account of the high war insurance rate of over one per cent but also due to the fact that it was evidently not considered advisable or expedient for even neutral nations to ship gold in war time. Every nation was holding gold for eventualities—they knew not what. Under normal conditions, New York would have been able to correct this abnormal ex change position by anticipating the fall shipments of cotton, grain and other produce by the use of finance bills. This was not possible at the outbreak of the war, tho later on, when the crops were actually har vested and shipping became less disorganized, the vast exports from the United States speedily corrected the exchanges and reversed the position.
5. Payments thrn August 13, 1914. in order to assist the New York exchange situation. the Bank of England signified its willingness to make payments in London on New York account against the deposit of an equivalent amount in gold at Ottawa, thus eliminating the dangers and ex pense of an ocean shipment. This arrangement was equivalent to opening a huge credit in London, lim ited only by the willingness of the New York banks to part with gold. Shipments variously estimated at from $100,000,000 to $150,000,000 were made and under their influence exchange was stabilized until the effect of the fall shipments made itself felt.
The corrective measure referred to above, aided by the constantly increasing volume of American imports to Great Britain and her allies, gradually forced the rate down until par was reached in November and finally passed about the middle of December, 1914. From then exchange went steadily in favor of New York, the lowest point, $4.50 per £, being reached in the following August, equivalent to a discount of 7 per cent.