Gold Pool—England Accepts Gold in Ottawa. A gold pool of $100 million was organized by the banks of New York and other principal cities under the guidance of the Federal Reserve Board, and arrangements were made with the Bank of England whereby shipments of gold to a depository at Ottawa would be accepted in lieu of gold shipped across the ocean, thus obviating the dangers of capture by hostile warships. Sterling exchange promptly came down to a reasonable figure.
Exports Turned Tide of Gold Toward New York by December 1914. But the exchange situation would have been quickly straightened out in any case by the great increase of foreign demand for American products for war purposes. In October the United States lost $44 million in gold and in November, $7 million, but in December the tide turned and the United States gained $4 million net excess of imports over exports of gold. The explanation is the very heavy shipment of commodities on European account. From December 1914 to May 1917 (we entered the war in the middle of April), the United Stated gained gold at a rate never dreamed of before. In 1915 the excess of imports over exports of gold was over $420 million, in 1916 over $520 million, and in the first four months of 1917, over $180 million—a net gain of $1,111,000,000 in gold. The problem of exchange ceased to be how to protect the dollar, but rather, how to protect the pound and other foreign exchanges. The war crisis in the United States was over by November 1914 and in early 1915 the war prosperity began.
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Our Export Balance, 1915-17. The outstanding fact from the standpoint of the economic life of the United States from November 1914 until our entrance into the war in April 1917 was a great and ever growing volume of exports from the United States to Europe, unmatched by a return flow of imported goods—a great and ever growing export balance of trade. Measured in dollars, the increase is shown by the following table:
| U.S. exports | U.S. imports | U.S. export balance | |
| 1913 | 2483.9 | 1792.5 | 691.4 |
| 1914 | 2113.7 | 1789.4 | 324.3 |
| 1915 | 3554.7 | 1778.5 | 1776.2 |
| 1916 | 5482.6 | 2391.6 | 3091.0 |
| 1917 (4 months) | 2164.8 | 965.5 | 1199.3 |
How Paid for—Gold. This immense unbalance in trade created, of course, a special financial problem. In some way these goods had to be paid for. They were paid for in four principal ways. One was gold. We received gold to the extent of approximately $1,100 million net, from the end of November 1914 to May 1917. This obviously solved only a minor part of the problem.
Return of American Securities—Loans in America. The second major means of payment was by the return of American securities held abroad by foreign investors and especially by British and French investors. The British and French governments both undertook to control this and to make the sale of securities orderly. They corralled American securities held by their own nationals, compensating them by giving them government securities, and disposed of them on the New York Stock Exchange in such a way as not to break prices and to get the best return possible.
The third major source was the placement in the American market of
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foreign government loans through investment banking syndicates, usually headed by J. P. Morgan & Company (which house acted as fiscal agent for the governments of both Great Britain and France). The largest of these loans was the so-called Anglo-French loan of $500 million. There were two great loans to the United Kingdom of Great Britain and Ireland, one for $300 million and one for $250 million. There was one great loan of $94.5 million, collateraled by American securities. There was a loan to the French Republic of $100 million. There were loans of various amounts to various French cities. There was a $25 million loan to the imperial Russian government. The Dominion of Canada borrowed $175 million, much of which was made available to the British government.
Finally, there were unfunded credits of substantial amounts, revolving, but nonetheless growing, as great American banks gave credits to European importers on the guarantee of great European banks, especially British banks, and as American business houses gave long credits to trusted European customers. By the time we entered the war in 1917 the credit of the European belligerents was under very heavy strain.
Few Credits to Germany. It may be said that the overwhelming bulk of the credits thus extended were to the Allies opposed to Germany in the war. There were no public loans floated for Germany. Germany undoubtedly received substantial private credits during the first two years of the war. At the beginning of the war we were, of course, strictly neutral, and so far as governmental policy was concerned, Germany could have had credits here. The great practical obstacle was the fact that Germany promptly lost control of the sea and so could not buy goods here, though she did receive during the first two years of the war a substantial volume of American goods through neutral countries, notably Sweden, Denmark, and the Netherlands—and for that matter, during the first year of the war, through Italy. As the British blockade against Germany became effective, there was a sharp increase in American exports to Sweden and other Scandinavian countries. This was interpreted at the time as representing goods sent to Germany via the Scandinavian countries. But only part of this increase represented American goods going to Germany. Before the war the German free port of Hamburg had been a great distributing point for the whole Baltic region, and a good many American goods regarded as going to Germany in 1912 and 1913 were in fact destined for Sweden and other Baltic countries. With our trade to Hamburg stopped by the war, American goods went directly to Sweden and other Baltic countries instead of via Hamburg.
Cheap Money, 1915-17—Gold. The role of the incoming gold in making these payments is a great deal more important than the foregoing figures would indicate. Relatively small in itself, the incoming gold nonetheless facilitated the placement of foreign loans and the absorption of American securities returned. It made an easy money market. It was easier for bank
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credit to expand. Speculative purchasers could more easily borrow at the banks the funds that they needed to carry the American securities returned and the foreign securities purchased. In fact, there were occasions when shipments of gold seemed to have been deliberately timed so as to make an easy money market in the United States as a favorable condition to the placement of a large foreign loan.
During the period when the stock exchange was closed late in 1914, the call rates on stock exchange loans were held at eight percent, though favored customers were charged only six percent. These loans were not, of course, really call loans. Banks could not sell collateral, and it was impossible to call the loans. They were, in fact, undated time loans. With the turn of the tide of gold in December, however, and with the reopening of the stock exchange, the rates dropped rapidly, and for over a year, from January 1915 to May 1916, New York enjoyed a period of extraordinarily easy money. The “high” on call rates at the money post on the stock exchange was two and one-fourth percent, the low was one percent, and the general range was from one and three-fourths to two percent. It was not until the heavy financial operations of the government in the summer of 1917 that call money got as high as five percent again.
Reduced Reserve Requirements. At the same time that we had this