1938: World Economics

September Financial Crisis.

The outstanding feature of 1938 was the financial crisis which accompanied the war scare of September. The movement of short-term funds was unprecedented. Many countries withdrew deposits from affected centers, while others moved into dollars, and the gold flow to the United States was at a maximum. Security markets broke all over the world, and in most countries currency expansion was rapid to meet the heavy demands upon the banks. The cost of mobilization and the speeding up of armaments, which followed, deranged government finances. Although the crisis itself lasted only three weeks in September, tension had been sufficient during the summer months to interfere with business activity. Afterward, the immediate economic recovery was rapid.

Course of Revival.

Otherwise, the year might well have shown a considerable revival. In the United States, the recession spent itself in the spring. Changes in Government financial policies undertaken in April and the heavy gold imports tended to strengthen the financial position of the banks, and interest rates were at a minimum. In the summer, the security markets revived, and new capital issues were in substantial volume. Residential building appeared in greater volume than for many years. The effect of the war crisis was very brief. Production and trade increased with remarkable rapidity in the fall. Under normal circumstances, such a movement would have spread to other countries. But, instead, in Great Britain business activity, which had declined in the spring, recovered hardly at all during the fall. The export trade remained depressed, although the pound declined in value. England at last is attempting to meet German competition for foreign markets. If political conditions warrant, recovery might be substantial early in 1939.

Conditions in many continental countries were similar. In Holland, Belgium, the Scandinavian countries, and Italy, on the whole, production fell during the year. In France, there were two political and economic crises. One, in May, was followed by a reduction in the value of the franc and certain other changes which were favorable to a return of capital. Some repatriation of funds did take place, but the international crisis soon counterbalanced the movement. The second French crisis came in November. The primary difficulty was the level of Government expenditure relative to the level of incomes. The low incomes, in turn, arose from the shortage of capital and the impossibility of utilizing what capital there was effectively, with the legal limitations on hours of work. New economic decrees again reduced the value of the franc, reduced Government expenditures, increased taxes, and relaxed the provisions with regard to the working week. The new decrees led to internal dissention, but at the end of the year the Government was stable and capital was returning. Germany continued to operate at a high level of industrial production, with no unemployment. Rigid economic controls made most of the familiar indexes of industrial activity worthless. Although the note circulation of the Reichsbank had expanded rapidly, and production of consumption goods had declined, the official indexes showed little rise in prices. Export surpluses available for purchases of foreign goods had declined, and new and ingenious methods of exchange manipulation were pushing trade, especially with Latin America and Southeastern Europe. In the Orient, the Chino-Japanese war continued. Rising prices and falling exchanges accompanied a serious curtailment of foreign trade with China. The interference of Japan with American trade brought unavailing protests from the United States Government. In Japan, the cost of the war is taking its toll on the standard of living. Prices are rising, and the banking situation is becoming more difficult. In South America, conditions were adversely affected by the depression of agricultural prices. Mexican exchanges weakened seriously after the confiscation of the oil lands. In the international field, the trade treaties between the United States and Canada and the strengthening of Pan-American relations through the Lima Conference are the brighter aspects of an otherwise discouraging year.

Gold Movements.

The war scare manifested itself in financial circles in an attempt to move funds into forms which would be safe. First in importance were movements of gold. Imports of gold into the United States, which had been nearly negligible at the beginning of the year, expanded after the German annexation of Austria. In March itself, there were imports of $53,000,000 net, and this level was maintained until August. In the nine weeks from August 5 to October 6, $787,000,000 came to this country. Three quarters of this gold or £127,000,000 came from or through London, most of it from the Exchange Equalization Account. Transfers of continental funds were responsible for much of the movement; but such transfers caused a technical weakness of the pound, which induced even further transfers. Some continental centers called their funds home. Thus £6,000,000 went to Switzerland; £1,000,000 to Holland: £7,000,000, to Sweden; £1,000,000 to Canada; and £2,000,000 to Eire. Still other countries transferred funds to London. Belgium sent £33,000,000; France £9,000,000; and, strangely enough, Germany, £4,000,000. South Africa, which usually sends large stocks of new gold to London each week, cut the amount to almost nothing at the height of the crisis, because war risk insurance became so expensive.

Aspects of the Crisis.

Exchange rates naturally reflected the disturbance. The London-New York rate had been declining slowly throughout the year. From $5.00 in January it had reached $4.88 in August. During the crisis it dropped to $4.61. At this rate, the Exchange Equalization Fund furnished dollars and then shipped gold to cover its commitments. Although war-risk insurance rates had been raised sharply, profits to the fund must have been substantial. Other exchange rates broke similarly. The franc, which had been 2.73 cents in August, went to 2.64 cents. Even the rates of Switzerland, Netherlands, the Argentine, and Japan showed considerable declines. The countries with rigid controls were, of course, unaffected. That such enormous transfers of funds could take place with no greater breaks in rates shows the success with which the equalization funds work.

Other markets, too, were affected. Interest rates in London rose on most classes of funds. The Bank of England rate remained unchanged. In France, the rate of the Bank of France was raised from 2.5 per cent to 3 per cent, and market rates rose similarly. The German short-term market was little disturbed, and so also the New York market.

The desire to realize liquid assets caused waves of selling in the security markets of most countries. For London, the Financial News Index for common stock prices dropped from 100 at the beginning of August to 86 on September 28, and that for bonds from 131 to 120. In France, the drop was from 100 to 94; in Germany, from 100 to 95.5; in Italy, to 94.5; in Holland, to 84; in Sweden, to 87; in Switzerland, to 93; and in the United States, to 91. Certain issues of bonds on the London market are of special interest. Thus consols dropped from 79 (1938 high) to 66 on Sept. 28; German 4 1/2 per cent, from 46 to 15; and Czech 8 per cent, from 105 to 23.

Another aspect of the crisis was the expansion of bank-note issues. Here England made a better showing. Notes increased by only 4.4 per cent. In France, the increase was 25.6 per cent; in Germany, 16.8 per cent; in Belgium, 20.8 per cent; in Holland, 12 per cent; and in Switzerland, 24 per cent. In Scandinavia, there was an actual contraction of issues; and in the United States the rise of 1.8 per cent was occasioned probably by causes unconnected with the crisis. The necessity for the currency increases arose in part from demands for hoarding and in part because of government borrowing to meet the expenses of mobilization. No direct statements of these expenses are available. However, for Great Britain, they are estimated at £30,000,000. In France, advances to the Government by the Bank of France rose from 40,000,000 to 50,000,000 francs. At the Reichsbank, though holdings of Treasury bills did not increase, 'other bills' jumped by 1,500,000 marks during September.

Trade Comparisons.

Status in United States.

A crisis of such severity must inevitably have a paralyzing effect on the trade of the countries involved. Indications of the extent of this effect are given by comparisons with the state of trade in the United States. In the first quarter of the year, it is true, the recession continued. Production continued to decline, but the amount of the decline was small. The index of the Federal Reserve Board (1923-25 = 100, adjusted for seasonal variation) dropped from 80 to 76. In April, conditions began to improve, at first in the banks, later in general business. Several factors led to this change. In the first place, there was a revival of residential building. In part, this was stimulated by a change in the Federal Housing Act. Then, too, the banking policy changed. The gold which had accumulated after the inauguration of the sterilization program in 1936 was returned to the reserves of the Federal Reserve Banks. Since the Government drew against this fund for current expenses, it not only provided reserves for the Federal Reserve Banks and later for the member banks, but also it relieved the investment markets of the necessity of absorbing large amounts of Treasury bills. Thus, investment funds had to seek other outlets. Excess reserves of member banks piled up. Besides, the Board of Governors of the Federal Reserve System lowered reserve requirements for the member banks and further increased the excess reserves. A plethora of loanable funds was provided. Money rates were, of course, very easy. While loans from the banks did not respond quickly, the security markets began to show the effects by early summer. Security prices moved upward. The New York Times average for fifty stocks moved from its low point of 72 in April to 104 in July. Offerings of new securities, especially of securities for new capital purposes, became heavy during the summer. Though the volume was not so great as in pre-depression days, this was chiefly because of the absence of public utility and railroad financing. That these did not materialize was an outcome of special circumstances — the continued financial difficulties of the railroads with a strike imminent and the uncertainty of the relation of the Government to the public utilities. The improvement was temporarily cut short by the crisis in September. Prices fell, and new security offerings disappeared. But this recession was short-lived. Within a few days after the crisis, prices had rebounded and remained at a high level for the rest of the year. New security offerings increased again in volume.

The improvement in the security markets reflected an improvement in general business. The Government did not confine itself to increasing bank reserves; it also acted directly by increasing spending, chiefly on work relief. Whether from this cause, from the new capital flowing into industry, or from natural recovery attendant upon the depletion of stocks, production and trade improved. The turn came earliest in the consumption-goods industries, but spread rapidly to the durable-goods industries. Improvement was slow at first, but in the fall the upturn was exceedingly rapid. By the end of November, the production index of the Federal Reserve Board was 96, about 85 per cent of what it had been before the recession began.

While this recovery was spectacular, certain aspects of uncertainty remained. The condition of agriculture was precarious. In spite of the Government crop-curtailment program, farm income had decreased. Prices of most products fell during the recession, but agricultural prices particularly, as is usually the case. Coupled with small crops, this made incomes low. Even at the end of the year, in spite of improving conditions, prices even at wholesale were still declining. Rises in sensitive prices, however, indicated that with the increase in trade this condition could not long continue.

Great Britain.

Such marked changes in activity should have spread to other countries. In the early months of the year, the recession did. In Great Britain, for instance, the first half of the year was one of mild recession. The extent of the recession appears from the index of production (Board of Trade, 1920 = 100) which stood at 127.3 in the last quarter of 1937 and at 113.7 in the second quarter of 1938. Unemployment increased, and foreign trade declined. Prices of commodities declined a little, the index of wholesale prices (1930 = 100) dropped from 108 in January to 101 in June. The index of security prices (1926 = 100) declined from 86.5 in January to 78.9 in March, rallied in April to 81.7, but was 78.5 in June. During the early summer, conditions improved. Prices of securities rose, moving to 82.1 in July and 81.1 in August. Production declined a little, the index falling to 103.3. Unemployment decreased. No offerings of new securities, however, appeared. During September, the crisis put an end to all possibility of improvement. Recovery from the crisis, though rapid in the money markets, was slower in the security markets. After the initial rebound, security prices drifted slowly downward for the rest of the year. Production declined — the index for the September quarter was only 108. New issues of securities for the first 11 months of 1937 amounted to only £295,000,000, compared with £518,000,000 for 1938. Foreign trade settled down to a stable, but low, level. For the first 11 months of the year, imports amounted to £847,000,000, compared with £936,000,000 in 1937, and exports to £489,000,000 compared with £548,000,000 last year. In the late fall, more vigorous measures were taken to meet the German competition. The Government voted credits to be used in the financing, under advantageous circumstances, of foreign buyers of British goods. The American Trade Treaty was another measure designed to help trade. The increased expenditures on armaments, which nearly doubled the previous amounts, were sufficient to provide some stimulus to the industries concerned. But financial conditions at the end of the year were unsatisfactory. Although the foreign exchange value of the pound recovered after the crisis, it proceeded to fall. At the end of 1938 it stood at $4.62. The reasons for this decline seem to lie partly in the pressure for transfer of funds to France, partly because of the loss of prestige arising from the Munich agreement and the political troubles in the East, and partly because of the obvious losses of gold from the Equalization Fund. In December, the Government asked the banks to restrict speculation through the forward markets and loans against gold. In this way they hoped to steady the value of the pound.

Finland; Belgium: Italy.

Conditions in most continental countries followed a similar course. A decline in productive activity during the early months was followed by a period of stagnation at a low level. Finland was, perhaps, especially adversely affected because of the great fall in the price and demand for timber products. In most countries, the financial position was strengthened after the crisis and there were some signs of incipient recovery. In Belgium, at last, pressure on the belga disappeared, and conditions were propitious. Spain, of course, continued to be so wracked by war that no estimate of her real condition was possible. Czechoslovakia cannot be expected to reorganize itself economically for some time. In Italy, the level of production was below that of 1937 and moved slowly downward. Wholesale prices moved within narrow limits. Prices of securities declined during the early part of the year, but improved later. Interest rates remained high at 5.25 per cent for commercial banks and 4.50 per cent at the Central bank. Gold reserves have not been reported since March, when they were $210,000,000 as they were at the end of 1937. The exchange rate was pegged at 5.2608 cents throughout the year. The import and export trade showed some improvement after midsummer.

France.

Two countries do stand out from the general pattern: France and Germany. In France, there had been no real recovery even in previous years. The problems of France are peculiar, for political and financial crises follow one another in rapid succession. In 1938, the early months were relatively undisturbed. Industrial production declined slowly, the index (1929 = 100) dropping from 80 in January to 74 in April. Security prices followed the pattern of other countries, while wholesale prices were steady. Retail food prices and the cost of living, however, moved upward rapidly, the index for the latter (1914 = 100) rising from 658 in December 1937 to 688 in March 1938. Banking conditions were relatively stable until the time when Germany annexed Austria. This political factor showed again the necessity for increased armaments and emphasized the weakness of the financial position. In March, the Government again increased its borrowings from the Bank of France. The advances by the Bank had been 31,904,000,000 francs in February and jumped to 38,574,000,000 francs in March. The note circulation changed similarly from 92,740,000,000 francs to 98,095,000,000. Immediately a political crisis ensued. The Government asked for broad decree powers on financial and economic matters, but the Senate refused. As a result, a change in government followed.

On April 13, the new Government was empowered to take the steps necessary to restore financial confidence in France. New decrees were promulgated on May 3. The first of these established a lower limit for the value of the franc at 179 to the pound sterling. Investors were assured that this limit would be maintained. All taxes except custom duties were raised 8 per cent, and surtaxes were added on profits of munitions works. Supplementary expenditures of 4,713,000,000 francs were authorized for national defense. In order to strengthen the international position, tax reductions were granted to manufacturers who increased exports, and special inducements were made to foreign tourists. Immediately, the effect of the decrees appeared in the lower rate for the franc, 2.815 cents instead of 3.102 cents. Capital which had been drained from France, thus reducing production, began to return, probably in all some $400,000,000 to $500,000,000. Most of this money came from London, but apparently Switzerland lost some $30,000,000 in gold. Belgium some $132,000,000, and the Netherlands and the United States also contributed a share. This movement was, however, short-lived. The fundamental conditions in France still remained unsatisfactory. Production continued to decline, the index dropping from 73 in May to 65 in August. The upward movement of prices was checked, however. Exchange rates, instead of remaining steady, declined slowly to 2.733 cents in August. Then came the September crisis, making the financial problems acute again.

Following the crisis, conditions became steadily worse. Prices rose, at wholesale, from an index of 649 for August to one of 663 for October, and at retail from an index of 677, for August, to one of 725 for October. The exchange value of the franc declined to 2.666 cents, and capital left the country. Interest rates remained the highest in Europe. The lack of capital was serious, and the forty-hour week, made necessary by the social decrees, in practice left the plants idle two days a week. The resulting level of productive activity was too low to provide an adequate standard of living. A new crisis ensued in November. The Government became more conservative. It issued a new set of decrees together with a report on economic conditions explaining their necessity. The total income of France was estimated at 220 milliard francs. The Government cost 137 milliard francs or nearly two thirds of this. Of this, 55 milliard are borrowed, and the remainder raised by taxation. Such expense is unendurable at the French level of income. All of the annual savings is absorbed by the Government debt, thus preventing expansion of productive equipment. The report stated that the annual income of the country must be expanded. Two means to this end seemed possible. First, the capital which had taken refuge abroad must be brought home and invested there; second, labor must work more. The decrees embodied the necessary steps. To ensure the return of capital, the Government agreed not to let the franc depreciate from the level it established, not to increase taxes on capital or its income directly, and to abstain from inflation. To provide more labor, the forty-hour week could be abrogated upon application to the Ministry of Labor, though the premiums for over-time work are to remain. Finally, the Government is to try to cut its borrowing by raising direct taxes and curtailing expenditures. It paid for the expenses of mobilization by revaluing the gold reserve of the Bank of France at the current value of the franc. This meant reducing the weight of the franc from 47 to 26 milligrams of gold. Expenses on public works were slashed. This was possible because unemployment in France is not heavy. It had increased somewhat during the year, but only some 350,000 persons were idle at the end of the year. This is no more than is to be expected normally in a country the size of France. These changes met with immediate opposition from Labor. A general strike was called by a large group of labor unions. The Government took action to prevent it, in what developed into a real test of strength. Although strikes were successful for a time in a few industries, notably shipping, for the most part the Government was victorious, and its power thereby increased. By the end of the year, the favorable effects of the program were apparent. Capital began to flow back to such an extent that it added to the embarrassments of the London market.

Germany.

Conditions in Germany were very different and very difficult to appraise. In many ways, Germany appeared a very prosperous country. Production was certainly increasing, and there was no unemployment. By the end of the year, Germany was even calling home from Holland the thousands of serving maids who had found employment there. Yet in many ways the condition of Germany was unsatisfactory. Official indexes give little clue to these troubles. Price indexes, for instance, show little change. The index for wholesale prices (1913 = 100) was 106 for every month of the year except May, when it was 105. It had averaged 106 for 1937. The index of cost of living (1913-1914 = 100) began and ended the year at 125. Yet within the year the production of consumption goods had increased but little. The index (1929 = 100) was 110 in January and 115 in August (latest figure). The rise in total production was occasioned mainly by the increase in 'investment' goods, of which goods for national defense is a category. The index for these goods rose from 113 in January to 142 in August. Coupled with these changes in production has gone a rapid rise in the note circulation of the Reichsbank, from 5,199,000,000 reichsmarks in January to 7,754,000,000 in October. Moreover, deposits both at the Reichsbank and at the commercial banks have multiplied. Such conditions, it would seem, must inevitably have given rise to inflation. Yet the price indexes do not show it. Of course, prices, like everything else, are regulated in Germany, and the indexes are based on the official prices. Under prevailing conditions regulation is rarely successful, but no record of the true prices is possible. Shortages of goods seem inevitable in any case.

In spite of the acquisition of Austria and a large part of Czechoslovakia, Germany still needs to carry on an extensive foreign trade. This year her trade has declined. Imports of merchandise averaged 446,000,000 reichsmarks during the first nine months of 1938, compared with 456,000,000 for 1937. Exports averaged 429,000,000 reichsmarks compared with 493,000,000 last year. Thus the exchange, to provide raw materials on the scale of last year, was difficult to obtain. In the hope of enlarging its supplies, Germany introduced a variety of new measures to stimulate her exports. All countries today use subsidies to some extent, but German methods are more complicated and consist in manipulations of foreign exchanges and of clearing arrangements. The provisions of many clearing agreements make it possible for Germany to bring pressure on the other parties to the agreements to buy German goods. For instance, Germany will offer prices above the market for the products of a country. A balance then accumulates in the clearing account which the country must spend in Germany. Germany will often resell the goods abroad when it cannot sell its own goods. Although it loses on the transaction, it still accumulates a foreign balance. By reselling at low prices it makes it impossible for the country itself to sell except to Germany. This device has been used to help Germany dominate the trade of southeastern Europe. Another device has been tried with Latin America. Here, Germany allows her exporters to be paid with Aski marks. These marks are not sold freely but only by the Government. The rate charged for these varies from transaction to transaction, depending upon the exigencies of the trade situation. As a result, it is possible for the German Government to make the prices of goods in each transaction just low enough for them to obtain the trade, but no lower. In paying for imports, Germany uses reichsmarks at the full rate. Thus she has the stimulus which comes from cheap marks when selling and yet maintains the full value of her currency when buying. Another device used to build her trade is to sell on very long-term credits. Since the terms of the clearing agreements usually provide for credits to the clearing account at the time when the goods cross the border, not when they are paid for, the credit is actually supplied by the country accepting German goods. To be sure, such devices cannot be used indefinitely. Switzerland, for instance, has been supplying funds to German tourists under the terms of her clearing agreement. After three years, it was apparent that all the balances were accumulating in Germany to the Swiss account, for the Swiss were not buying in Germany. As a result, the provision of funds for tourists was terminated, and with it the German tourist trade.

Even these stimulants to the export trade have proved ineffective, for exports were lower at the end of the year than at its beginning. The resultant shortage of goods and the pressure for foreign credits is generally considered to have been one reason for the attempt to extort such large sums from the Jews and their foreign friends, following the persecutions in November.

Although Germany has not been successful, the introduction of these measures has served to make the development of foreign trade more difficult all over the world. In several countries, Germany virtually monopolizes the market. Great Britain, her chief trade rival, has declared that she will not attempt to oust Germany from her economic position in the Balkans. Yet England has tried some similar methods in Rumania, such as the heavy wheat purchases of November. For the markets in South America, the competition between Germany and England and Germany and the United States may well be keen. At a time when the revival of world trade seems so greatly necessary, the introduction of further handicaps is especially to be deplored.

Meantime, Germany's creditors are becoming restive. When the standstill agreements came up for renewal in November, the creditors extended them only for three months. In February, there will be another conference, and the creditors hope to alter the terms of the agreements in their favor.

The Orient: China; Japan.

Conditions in the Orient are even less satisfactory than in Europe. The continuance of the war between China and Japan has completely broken down the normal course of trade. The capture of Canton in the autumn virtually cuts off China from the outside world by sea. The finances of both countries are subject to severe strain.

In China, information is very meager. Changes in the exchange rate give some indication of the financial strain upon that country. The rate for the yuan (Shanghai) in January was 29.49 cents, practically the same as it had been in 1936 when the break from the silver standard took place. In March, a fresh depreciation was evident with an average price for the month of 28.22 cents. Thereafter, the decline was continuous and rapid. By the end of the year, the yuan was worth only 16 cents. Further evidence of strain is visible in price changes. Wholesale prices, which were 100 in 1929, had dropped to 92 in 1935. In 1936, they averaged only 104; and in 1937, 124. During 1938, the rise has been rapid. In October (latest available figure) they were 160. The cost of living rose similarly. The index (1929 = 100) stood at 129 in October 1937. It was 142 in October 1938. Figures for foreign trade are available only through October. Thus they do not show the effects of the capture of Canton. The monthly average of imports (standard dollars) was $79,000,000 in 1937 and $36,000,000 in October. For October 1938, imports were $79,000,000. Exports averaged $70,000,000 in 1937, were $49,000,000 in October 1937, and $76,000,000 in October 1938. These values are measured in standard dollars which depreciated during the year. Measured in gold values, imports were larger and exports lower than in 1937.

A much more detailed account of conditions in Japan is possible. The outstanding factor is, of course, the cost of the war. Total cost of government in the year ending March 1937 was 2,272,000,000 yen; for the year 1937-38 it was 5,463,000,000 yen while the budget estimate for 1938-39 is 8,400,000,000 yen. Of the total expenditures for this last year, 81 per cent has been for war purposes; 5,800,000,000 yen is to be raised by borrowing. Such borrowing inevitably leads to a strain on the banking system and eventually to inflation of which signs are abundant. The note circulation of the Bank of Japan in the year from October 1937 to October 1938 (latest available figure) rose from 1,787,000,000 yen to 2,157,000,000 yen, or some 25 per cent. Commercial bank deposits increased from 11,644,000,000 yen in September 1937 to 13,597,000,000 yen in September 1938 or 20 per cent. The index of industrial production on a 1929 base stood in June at 170 compared with an average of 171 for the year 1937. This index, however, conceals the radical changes taking place in the nature of productive activity. An index for the production of consumers goods on a 1930 base indicates that production of such goods fell from an average of 155 for 1937 to 137 for June 1938, while the index for investment goods (including war materials) rose from 262 to 299. With productive activity actually deflected in this manner, prices naturally rose in spite of numerous Government restrictions. The index of wholesale prices of the Bank of Japan (1900 = 100) rose only from 245 at the beginning of the year to 253 in October (latest figure). One prepared by the Oriental Economist, however, shows a 30 per cent increase in the year to July. Certain products show even more increase; e.g., cereals, 13 per cent; textiles, 60 per cent; and metals, 80 per cent. The cost of living has increased also. The Bank of Japan index rose from an average of 96 for 1937 to 114.6 in October 1938. Since earnings have lagged in the rise, the real income of the people of Japan has declined considerably. A large area of Japan was seriously injured also by the typhoon, which struck Japan in September. It was the most disastrous in twenty years, took a heavy toll of life and property and destroyed a large part of several crops.

Not only did domestic production diminish, but so also did foreign trade. In the first half year, imports were reduced by 3.4 per cent and exports by 20 per cent. Although the comparatively heavy decline in imports reduced the adverse balance, it was at the price of a heavy diminution in trade as a whole. The decline in imports has further limited the goods available for consumption purposes. In the fall, trade expanded a little (some 12 per cent), but was still very much below the 1937 level.

The fall in foreign trade was partially a result of the world decline in trade, but it was induced in part by the necessity to conserve supplies of foreign exchange. The gold supply of Japan has dwindled. Imports into the United States from Japan amounted to some $140,000,000 during the first eight months of this year. At the end of July, the Bank of Japan allocated $100,000,000 from its reserves for the use of the revolving foreign exchange account. This left the Bank of Japan with only $163,000,000. As a result of the use of the gold reserves, the yen has not depreciated seriously. In the last year, it has dropped only from 29.2 to 27.5 cents. However, the gold resources are nearing their end. The Bank of Japan has already replenished its stocks both by revaluing the gold stock and by making an intensive campaign to secure gold from its own citizens.

Government borrowings, as already noted, have been heavy this year. The Savings Encouragement Bureau estimates that for the first eight months of the year new savings amounted to 4,744,000,000 yen, or more than for the entire year 1937. With the strict limitation on the use of capital for industrial purposes, this went a long way toward meeting the Government deficit. Although direct loans to the Government by the Bank remained unchanged in amount throughout the year, holdings of Government bonds increased from 554,000,000 yen in September 1937 to 1,254,000,000 yen in September 1938. The price of Government bonds has not sagged materially. The yield in September was 3.83 per cent compared to 3.99 per cent a year earlier. General security prices declined early in the year, but recovered again by fall, as they did in other countries. Money-market rates are obviously controlled, since there has been no variation in the rate on bills in two years. At the end of the year, intensification of Government controls over financial and business activity was expected.

South America; Argentina; Chile; Brazil.

South America has been seriously affected by the decline in agricultural prices. Since these products form the bulk of their production and exports, the effect has been very depressing. For Argentina, for instance, the wholesale price index (1929 = 100) stood at 105 in September 1938, compared with 120 last year. Foreign trade has been low. Imports in September 1938 were 118,000,000 pesos, compared with 157,000,000 in September 1937; exports were 109,000,000 pesos, compared with 158,000,000 September 1937. In mid-November, the Argentina Government resorted to further price-fixing for wheat and for linseed. To raise money to defray the expenses of the scheme, the Government has been raising funds by exchange operations. They raised their selling price for pesos to 17 to the pound sterling while keeping their buying price at 15 to the pound. The free exchange rate declined from 29 cents at the end of November 1937 to 23 at the end of 1938.

In Chile, wholesale price indexes showed a decline from 239 in September 1937 to 228 in September 1938. The production of copper has been running 20 per cent below the level of 1937. Imports amounted to 37,000,000 pesos in September 1938, compared with 38,000,000 pesos in September 1937, while exports declined from 71,000,000 pesos to 56,000,000 pesos. In Brazil, exports of coffee have increased. For August, they were 95,000 metric tons, compared with an average of 73,000 metric tons in 1937. But the price has declined by 40 per cent during the course of the year, leaving a heavy adverse balance of trade. However, exchange rates in both countries have been steady.

Mexico.

The situation in Mexico has been complicated by disputes with the United States and Great Britain with regard to the seizure of the property of foreign oil companies. By the end of the year, no settlement for this difficult question had been reached. A related question, that of expropriated farm lands, which had been pending for many years, was solved. In this case, the Mexican Government is agreeing to compensate the former owners. The foreign oil companies hope for a similar settlement with regard to their property.

Meantime, conditions in Mexico have been unfavorable. Production of petroleum averaged 438,000 metric tons during the first half-year, compared with 578 in 1937. In February 1938, it was 600,000 tons. In March, following the confiscation, it was 134,000 metric tons. Since petroleum is a principal export commodity, foreign trade declined similarly. Exports averaged 70,000,000 pesos during the first six months of this year, compared with 74,000,000 in 1937; imports averaged 39,000,000 pesos, compared with 51,000,000 pesos. With the decline in trade went a decline in the value of the peso. In March, it broke from 27.25 cents, which had been its value for some time, to 22.56 cents. The decline then continued more slowly till it reached 19.46 cents in September. At this point, it remained steady.

Canada.

In Canada, conditions were roughly similar to those of the United States. Business declined during the early months of the year and improved substantially during the fall. The index of industrial production (1926 = 100), for instance, stood at 125 at the end of 1937, declined to 107 in February, and then rose to 121 in September 1938. Since it had been only 128 at its high point in September 1937, the degree of recession was much less for Canada than for the United States. Manufacturing production recovered less than the general index, with an average of 114 for September, compared with 123 last year. The index for mining had been 204 in September 1937 and was 202 in September 1938. The export trade was even better than a year ago, for it amounted to $108,000,000, compared with $95,000,000 for 1937. Wheat production nearly doubled this year, and exports were unusually high. Imports on the other hand declined from $70,000,000 to $56,000,000. As in the United States, a favorable sign was the rapid rise in building construction. This feature was absent from other recent recoveries. Financial conditions in Canada were stable, with no increase in reserves corresponding to those of banks in the United States. Security markets were declining a little, even at the end of the year.

Reciprocal Trade Treaties.

The system of reciprocal-trade treaties was extended during the year to include Czechoslovakia, Ecuador, England, and Canada. The effects of the first two on the volume of trade will not be great. The limits to possible trade expansion with Ecuador are narrow. The German annexation of Czechoslovakia must necessarily curtail the foreign trade of the latter country while Germany is excluded from the benefits of the trade pact. The English agreement, however, should provide for extension of importance. England and Canada are our largest foreign customers. Duties were lowered on hundreds of items, including practically all goods important in the trade between the countries. The United States granted concessions primarily on textiles, liquors, paper pulp, and several agricultural products; while Great Britain and Canada lowered duties on foods and a wide variety of textile products. The chief gainers among the British industries will be the textile industries, especially linen. The United States will not gain in the British market, probably at the expense of British native industries, but will be in a better position to compete with Canada in that market. Canada will gain in her trade in wood pulp and foodstuffs with the United States. Through extensions by most-favored-nation clauses, Germany and France and the Argentine will gain advantages in the British market. Germany, who would have gained in the sale of goods to the United States, will not do so. Because of discrimination against American goods, the United States excludes Germany from the application of the most-favored-nation agreements.

The Pan-American conference, which met in Lima in December, while not concerned primarily with matters of trade, gave encouragement to closer economic relations between American countries. It affirmed the principle of unrestricted trade and endorsed the method of reciprocal trade treaties as a means to that end. In view of the type of foreign-trade tactics introduced by Germany, the new treaties and the attitude of this conference are among the few features of the year which point the way to renewed world trade.