Has the World Turned the Corner ?
BY H. P. G
REENWOOD.
NOT long after the beginning of the great depression, a leading figure in international finance was asked his opinion on the prospects of world recovery. He replied, if report is to be believed, that before this was possible reparations and war debts must be cancelled or greatly reduced, England must abandon the gold standard, the Kreuger concern must collapse and the American banking system be reorganized. His prophecies have so far proved remarkably accurate ; but, unfortunately, we do not know whether he left anything out. Does the American collapse mean that the last great bubble of unsound finance has burst, or are there more to come ?
The crisis of 1931 has left the world with a regime of unstable currencies, exchange restrictions and the like which undoubtedly hamper trade. But the effect of all these is to remove in the countries affected the dangers of financial panic. You cannot, for example, start a run on Germany, and it would be difficult to start one on England, armed as she is with the weapon of a free exchange. Only France, Belgium, Switzerland and Holland are ready to pay out their gold reserves on demand. For practical purposes the danger of panics and hoarding is limited to these countries, whose banking and currency position is remarkably strong. There are, in fact, no more unprotected weak spots left in the financial system of the world.
Nevertheless, there is considerable nervousness in the four countries remaining on the orthodox gold standard. Why is this ? Because in face of the American example people fear that in spite of the huge gold reserves a hoarding panic and an international run may force those countries off the gold standard. That is the reason for the "flight into sterling" and the hoarding of gold. If the United States devalorize the dollar in terms of gold this tendency will be accentuated. The tornado may return to Europe and the remaining gold standard cur- rencies be forced to follow the dollar. But if, as the Roosevelt Administration has indicated, the gold value of the dollar is maintained, holders of dollars will suffer no loss but merely the temporary inconvenience of being unable to withdraw them. Holders of francs and guilders will rightly assume that their risk is past. International finance will in effect know the worst and confidence should return.
This restoration of financial confidence is perhaps the major prerequisite of recovery. There are, broadly speaking, two leading schools of thought to-day, one of which believes that the machinery of business revival can only be set in motion by so-called "natural forces," and the other that it can and should be started by a policy of State-aided expansion, preferably international in scope. But the exponents of both schools would agree that without financial confidence neither "natural forces" nor the State can do their work, and recent experience has shown that once the stability of a currency or the solvency of a banking system is seriously ques- tioned, the best way to restore confidence is to go through the mill. England, Germany and even Central European and Overseas countries like Austria, Australia and the Argentine all teach the same lesson.
President Roosevelt has, it is true, got a very tough job to tackle. The United States suffered from an antiquated currency system and an even more antiquated banking system. Since the post-War return to gold she has been the only country on a "full gold standard," where any private individual could withdraw gold for hoarding in coin or in the even more convenient form of gold certifi.- cates. The result was that about a third of her stocks of monetary gold have not been available as a reserve at all. This system, deeply rooted as it was in the habits of the people, has been swept away overnight, and it seems virtually certain that America will adopt the modern "gold bullion standard" under which only gold bars for export can be drawn from the banks. Moreover, the drastic penalties against hoarding seem to be bringing the hoards back to the banks. In short, it looks as though the dollar problem will be solved with remarkable expe- dition.
In the banking problem, too, a good start has been made. But here the process of reorganization will take much longer. It will probably not be long before confi- dence in the sheep—the banks reopening under licence and supplied with virtually unlimited currency—is restored. But something must be done about the goats, the enormous number of really insolvent banks. And before the process is complete there will no doubt have to be at least a partial change-over from the American system of small unit banks to branch banking.
While America is wrestling with these tasks it would be excessively optimistic to expect her to give the world a great impulse towards recovery. But by restoring finan- cial confidence at home—and thus, as we have suggested, abroad—she will at least be removing one of the most serious brakes impeding it. Moreover, the new Adminis- tration has indicated its intention of taking action in another field, perhaps equally important—that of tariffs. The United States is clearly the country which should take the lead in this respect, and she is perhaps the only one which can afford to take it without immediate reci- procity. For she is probably alone in still retaining a favourable balance of payments, in still selling more than she buys—invisible items included—while refusing to invest the surplus. The rest of the world has reached, or at any rate is gradually reaching, equilibrium in this respect, albeit at a low level. At last official America has realized that if the country does not buy more from abroad she will inevitably sell less, and it is perhaps not too much to hope that the malleability of Congress which has apparently resulted from the crisis will strengthen the hand of the President in this direction also.
It may be that, as has been suggested in various quarters, the crisis will have the effect of postponing the decision on War Debts and the World Economic Conference. But the former can scarcely be postponed after June if America wishes to use the debts as an asset, or even as a "gesture," since the otherwise almost inevitable default would destroy that possibility. As for the Conference, it is far better that it should meet late with prospects of success than early without them. The United States occupies a key position particularly towards the two most important items on the agenda, tariffs and monetary policy.
Unfortunately, no discussion of economic prospects is complete in these days without qualifications on the political side. The Far East has been discounted, but all eyes are turned on the "National Revolution" in Germany. Like the American banking crisis, it has long been a menace. It may be better to have it than to keep on fearing it. And since Hitler, being in power, must substitute deeds for words, Germany, like the United States, must show us where she stands. Subject to all that, there is fair reason to interpret what is happening in the United States as the beginning of the turning of the corner,
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