Great Britain.
While the continuance of the war pushed expenditure, debt and taxes to new records, the efficiency of the British effort in both civilian and military directions gained from the experience of 1940; so that despite the severe air-raids of the spring, the national position was probably stronger at the beginning of 1942 than at any previous time — a result to which the manifold aid of the United States made an increasing contribution.
By the close of 1941, Government expenditure was absorbing about 75 per cent of national income according to official estimates of the latter item. The budget presented by Sir Kingsley Wood in April was accompanied by a White Paper containing an analysis of the national income — a welcome innovation; though the figure of 'net national income' for the calendar year 1940, £5,586,000,000, was somewhat lower than that shown by other reputable methods of compilation. Estimated expenditure for the fiscal year ending March 1942 was £4,206,957,000 against revenue of £1,786,360,000. These figures compare with realized total expenditure for 1940-41 of £3,884,300,000 and revenue £1,408,900,000. Actual expenditure in August 1941 was running at the rate of £12,200,000 a day, as compared with £7,400,000 in the second quarter of 1940. The total national debt, which stood at about £9,000,000,000 on March 31, 1940, rose to well over £13,000,000,000 at the close of 1941. The floating debt included in this total stood at £3,428,100,000 on Nov. 29, 1941, as compared with £2,440,500,000 on Nov. 30, 1940. A satisfactory feature of the year was the success of the 'small savings' campaign — the national effort to drain off consumer purchasing power into Savings Certificates and Defense Bonds of small denominations and attractive yields. The second accounting year of this plan, ending on Nov. 21, 1941, showed a total subscription of £633,262,731 — an increase of 30.8 per cent above the first year, and well over the 'target.' Whether the rate of subscription could be maintained, however, in view of tax changes, was somewhat doubtful.
Evidence of the extent to which British capital has been mobilized for the war effort was contained in the figures for new security issues in 1941, which stood at the record low of £2,326,000. The previous year showed new issues of £4,096,000. The scope of the restriction may be gauged from the comparable figures of £66,294,000 for 1939 and £118,098,000 for 1938. The industrial share index stood at 70.0 as 1941 began, touched 83.2 at the beginning of December, and closed the year at 79.7. The bond index started at 126.1, touched 132.5 early in December, and finished at 132. Observers discerned a noteworthy expression of confidence in these records.
The budget for 1941-42 relied for new money entirely on addition to the income-tax. The standard rate, applying to all taxable income after £165, was raised to 50 per cent, the initial rate was raised from 25 to about 33 per cent, and the exemptions and allowances were further reduced. The combined effect of income tax plus surtax was to place a practical limit on personal incomes, inasmuch as only about one thousand people in Britain would have gross incomes large enough to yield a net income of as much as £4,000. The most interesting feature of the 1941 budget was the adoption in modified form of the Keynes principle of deferred consumption. The Chancellor stated that one-fifth of all sums paid as excess profits tax will be returnable after the war for expenditure devoted to reconstruction, and that new money received as a result of the reduction in income-tax allowances will likewise be returned in the form of credits in the Post Office Savings Bank.
While subscriptions to various open government issues were well maintained, with funds continuing abundant, the monetary situation reflected the widening gap in war finance. The limit of the fiduciary issue of the Bank of England was three times raised during 1941, bringing the new total to £780,000,000 at the year's end. The note circulation expanded from £592,000,000 in October 1940 to £693,000,000 in October 1941 and £716,848,000 on Dec. 3. Deposits at the Bank of England showed no major changes; securities held advanced slightly from £153,300,000 in October 1940 to £163,300,000 a year later.
The commercial banks maintained a steady rate of expansion, deposits increasing from £2,661,000,000 in October 1940 to £3,115,000,000 in September 1941. Against these liabilities cash reserves increased in the same period from £270,000,000 to £330,000,000, securities held from £723,000,000 to £939,000,000, and Treasury Deposit receipts from £180,000,000 to £531,000,000. Discounts dropped from £373,000,000 to £315,000,000, and loans to customers continued the decline noted in 1940, falling during the period under review from £948,000,000 (corrected figure) to £839,000,000.
Interesting information was released by the United States Treasury in September 1941 as to the gold and dollar resources of Britain (or more correctly the sterling area) in America. At the outbreak of war these amounted to $4,483,000,000 comprising $2,038,000,000 in gold, $950,000,000 in marketable securities and the rest in dollar balances and direct investments. By Sept. 1, 1941 the total had shrunk to $1,527,000,000, gold falling to $151,000,000 and securities to $227,000,000. The approaching stringency was relieved by a 15-year loan of $425,000,000 from the Reconstruction Finance Corporation granted in July 1941 against securities and direct investments providing ample coverage for service and amortization; and the help provided under the Lend-Lease plan obviated most of the burden of future cash payments. There remained an estimated call for disbursements through February 1942 of over $1,000,000,000, half of which was to pay contracts placed prior to the Lend-Lease scheme. It was expected that most of this could be raised by sales of merchandise and gold, shipping, interest and other service credits, without entailing further heavy realizations of the remaining dollar assets.
The official exchange rate for sterling remained at $4.0350, and the free rate showed very narrow fluctuations in the twelve-month period ending with October 1941, from a high of $4.0356 in November 1940 to a low of $4.0310 in May 1941. Exchange controls were considerably tightened during the year, mainly to check the flow of money to dependents evacuated from Britain. Considerable inconvenience resulted in many such cases.
British Dominions.
War finance has, generally speaking, tended to produce similar results in the banking systems of all affected countries; namely, an increase in deposits arising from Government disbursements, a fall in commercial discounts and advances — either absolute or relative — due to the shrinkage of free industry, and a compensatory increase in investments, chiefly in government obligations. Canadian banks, however, showed a brighter picture, loans and discounts in the second half of 1941 attaining their highest totals for over a decade while security holdings showed only a slight advance over October 1940. Note circulation remained practically stationary, as did reserves. The situation reflected the 'pay-as-you-go' policy of the Canadian government, which resulted in war expenditures for 1941 being more than covered by revenue. The reduced total of non-war services, plus advances against British purchasing requirements, was met in part by increased taxes. A feature of the year was the war loan of June 1941 in which $730,000,000 was raised by 968,000 individual subscribers. The current tax system, at the close of 1941, included a 5 per cent defense tax on income above $660 in addition to the sharply graded income tax, a minimum of 40 per cent on business income, and an excess profits levy of 79 per cent.
In South Africa the predominant factor in the financial situation has been the high price of gold, resulting in a very favorable balance of payments, a large increase in deposits and a strong cash reserve position. Commercial advances showed a continued decline, possibly in consequence of the bulk purchases of wool and corn by the British government. Defense expenditures for the year 1941-42 called for a 20 per cent increase, of which more than half was to be raised by internal borrowing in which the banks were expected to participate heavily. The situation in Australia, for the year ending in June 1941, showed a steady expansion of bank deposits along with declining commercial advances. The percentage of deposits covered by advances in the Commonwealth Bank dropped from a 1940 average of 28 to 17.5 in June, 1941; for commercial banks the decline was from a 1940 average of 81 to 79. Advances have been carefully limited to enterprises of value for war purposes, and new investment is under strict control. A determined effort has been made to finance war expenditure out of taxes and savings. In New Zealand the rise in deposits and in note circulation was accompanied by a general strengthening of the financial situation due in part to exchange and import controls established before the war, also to the favorable British market for New Zealand exports. The budget presented in July 1941, while imposing no new normal taxation, counted on a higher yield of existing taxes to offset new war expenditure, together with internal borrowing sufficient to balance the account, including some expansion of the numerous social services.
France.
While publication of all regular statistical information ceased in 1940, some indication can be given of the financial situation with which the French government has had to cope. Short-period budget estimates have been issued showing a total expenditure of 40,000,000,000 francs for the first, and 33,000,000,000 for the second quarter of 1941, the decrease being due to cuts in the extraordinary budget and in the public debt service. From May 10, 1941 the item for costs of occupation was reduced from 400,000,000 to 300,000,000 francs a day. Since most of this is spent by the Germans in France, an abundance of cheap money is in evidence; bank deposits and savings have increased and Treasury bills have been easily absorbed. Despite continued advances by the Bank of France, and the prospect of a considerable deficit at the year's end, gold cover for the franc stood at 24.5 per cent in December and no runaway inflation had developed.
Following the last devaluation of the franc in March 1940, gold held by the Bank of France remained steady at 84,600,000,000 through August 1941 — the latest available date. At the close of that month note circulation stood at 244,000,000,000 francs as compared with just under 200,000,000,000 a year earlier. Advances to government for occupation costs rose in that period from 27,200,000,000 francs to 117,500,000,000. Private deposits of the Bank were up slightly from 28,200,000,000 to 29,100,000,000.
In the first week of January 1942 the Vichy government promulgated, for the first time since the armistice, budgetary estimates for the complete calendar year. Estimated receipts are set at 80,000,000,000 francs, nearly 18 per cent above 1941; ordinary expenditures amount to 105,500,000,000 francs, an increase of about 8 per cent, due to increased pay and pensions for state employees voted in 1941. The supplementary budget shows expenditures of fr. 33,000,000,000, a decrease of 4,300,000,000. These expenditures consist mainly of sums due for settlement of war contracts and credits for public works; they include also certain social expenditures, and a sum of fr. 3,000,000,000 to cover the deficit between the cost of wheat and the fixed price of bread. Beyond both the ordinary and the supplementary budgets lies an amount of from fr. 115,000,000,000 to fr. 120,000,000,000, being the sum the government will have to pay Germany for costs of occupation and certain additional charges.
Out of the estimated receipts for 1942, about 23 per cent is to be collected from direct taxation; a considerable increase over 1941 being expected from higher returns on existing taxes rather than higher rates. Indirect taxation is increased by new duties on wines, alcohols and the sale of business properties, and the state plans to collect higher revenues from postal, telegraph and telephone services which have been run at a loss.
The estimates show that in 1941, total surplus expenses over receipts, including sums paid to Germany, amounted to fr. 200,000,000,000, while the increase in advances to the state by the Bank of France was fr. 70,000,000,000. The Treasury was evidently able to place its obligations without difficulty notwithstanding that the rate on two-year Treasury bonds was cut from 3 to 1 per cent. It is also stated that during the past two years the foreign debt of France has been reduced by 50 per cent.
The financial year in France was marked by the abundance of funds available at low interest rates. The Bank of France reduced its rate on March 17, 1941 from 2 to 1 per cent, and the government took advantage of the situation to effect wide conversion operations, as did many private concerns. Fixed interest securities showed a corresponding rise, the 3 per cent rentes going from 70 in 1940 to 96 at the end of 1941, and the 4 per cents from 82 to over 103. Stocks responded to the combination of easy money with rising industrial activity in a spectacular rise — based however on a very narrow market. The index for thirty leading issues, which stood at 229 in 1939 and 261 in 1940, reached 706 in October 1941, when restrictions were imposed. While Finance Minister Yves Bouthillier, in reporting his budget, claimed that France had 'escaped the danger of monetary collapse,' the fear of inflation was not entirely banished at the close of the year.
French industrial concerns in many cases expanded considerably during 1941, much of the new capital coming from abroad; and in the dye and chemical industry, the heavy metals, the insurance business and other fields, close integration with German enterprise was established (see World Economics). Food and fuel remained tragically scarce, owing not only to German purchases and requisitions but to low productivity.
Nazi-Dominated Europe.
In Germany proper the outstanding financial event of 1941 was the stock market boom, which raised the share price index from 133 at the outbreak of war to 217 on Aug. 31, 1941. This represents the pressure of spare funds seeking investment coupled with the shrinkage of free markets, the severe restrictions on new issues, and a possible inflation hedge. Meanwhile government revenue, derived as to about 70 per cent from income tax, corporation tax, and turnover tax, increased by 19.7 per cent for April-September 1941 over the corresponding period of 1940; total revenue for the financial year 1941-42 was expected to be about 17 per cent higher than for 1940-41. Government borrowing, however, increased at a higher rate, and despite a 25 per cent increase in the corporation tax in August, 1941, somewhat more than half the war cost was carried by Treasury bills. The Reichsbank's note circulation on September 30, 1941, was 16,917,876,000 marks, approximately double the pre-war figure.
In the occupied countries note circulation has everywhere increased, with price advances running from 30 to 80 per cent in the first two years of war. Strict German control of currency exchange rates has been used in favor of the occupying forces and the import requirements of the Reich, and the central banks have thus acquired large amounts of blocked reichsmarks which serve in effect as note cover. A marked extension of German commercial banking, especially in south-eastern Europe, has played an important part in the attempted reintegration of the European economy with Germany as the focus. While inflationary tendencies were everywhere latent, the strict controls imposed on prices, wages, the movement of labor and the foreign exchanges have so far kept the financial situation in hand.
Latin America.
The repercussions of the war increased in severity with the extension of its area, and necessitated further exchange controls and trade restrictions in practically all Latin American countries. Changes in the direction of foreign trade were sudden and sweeping, though not in all cases disadvantageous. The energetic British trade drive of recent years was perforce curtailed as Britain concentrated her exports on sources of more urgent military supplies; though British purchases of meat remained heavy. Concurrently, Britain negotiated bi-lateral payment agreements with nearly all the republics on lines similar to those of the Argentine agreement of 1936, with somewhat less option as to the use of sterling for payments to third parties. The Japanese trade drive, which made rapid headway during 1940, was intensified in 1941 in consequence of the increasing uncertainty of relations with North America and the abrogation by the United States of her trade treaty with Japan. Demand was heavy for Argentine meat and wool, copper and nitrates from Chile, cotton from Brazil and Peru, mercury from Mexico, Venezuelan and Mexican oil, scrap iron, mercury and other commodities; but the freezing of Japanese assets by Britain and the United States hampered the financing of these purchases. The blacklisting by the United States of all economic enterprises of its enemies seriously embarrassed considerable areas of Latin American industry and agriculture; and the increased risks of shipping on both oceans diminished the volume and enhanced the costs of maritime trade.
Heavy additional defense expenditures were undertaken by certain countries, notably Uruguay, Brazil and Chile, but the cost of Latin American defense was largely offset by lend-lease aid and Export-Import bank loans from the United States. The conclusion of the reciprocal trade treaty with the Argentine marked the twelfth such agreement negotiated under the Hull program. Several currency stabilization agreements were also concluded during the year; and the successful termination of the discussions for an all-round settlement with Mexico, promising large new loans, a continuance of silver purchases and an early trade agreement, marked a further advance in hemisphere solidarity. Nicaragua continued to profit by its newly discovered gold, exports rising from $1,550,000 in 1938 to $5,700,000 in 1940 with a prospect of possibly $8,000,000 in 1941. In this as in all other cases, the increasing financial and economic dependence of Latin America upon the United States was the outstanding feature of the year.
At the end of 1940 United States holdings of Latin-American bonds amounted to $993,100,000 compared with $1,039,600,000 a year earlier. Of the 1940 total $606,300,000 were in complete default, a proportion somewhat lower than that for Central America only.
Far East.
The war effort of Japan, which reached its crisis in the events of December 1941, has entailed a strict control of every aspect of economic life, including a more severe rationing system than that of any other belligerent. Since the normal standard of living is low, the tax base is narrow, and war expenditures have been carried largely on loans taken up by commercial banks and the great corporations. The internal debt, which stood at about 10,000,000,000 yen in 1937, had tripled by mid-1941. Note circulation of the Bank of Japan rose from 3,636,000,000 yen in October 1940 to 4,484,000,000 in September 1941. Private deposits in that period expanded from 127,000,000 to 321,000,000 yen, and holdings of government bonds rose from 2,923,000,000 to 4,118,000,000. Discounts declined from 755,000,000 to 517,000,000, reflecting the commercial stringency. In the commercial banks deposits increased from 21,885,000,000 in August 1940 to 34,521,000,000 in July 1941. The foreign exchange rate remained pegged at 23.439.
The wholesale price index, based on 1900, advanced from 310 in October 1940 to 337 in October 1941; retail prices, on the basis of 1931 = 100, stood at 196 in May 1941. In both cases the price levels were affected by controls reaching almost all commodities. Japanese wage-rates, on the same 1931 basis, stood at 116 in March 1941, earnings at 167.
Statistics for China are almost entirely lacking, though the expansion of Chinese government banks throughout west and southwest China has been marked. These banks, like the Bank of China itself, are principally engaged in the financing of the many lines of government enterprise in free China; the needs of war and reconstruction, coupled with the progressive inflation, leave little of either demand or supply for private financing. Money rates of the old private banks run in the interior as high as 30 per cent, with rural credit prohibitive; and the extension of government banking is counted on to relieve this situation. Similarly, interior prices are multiplied to several times the Shanghai or Hongkong figures, with speculation, hoarding, and profiteering a constant problem. Yet while lend-lease aid and government loans from the United States and Great Britain have played a major part in the support of independent China, great advances have been made in the utilization of native resources under government control. Mines, power-plants and industrial establishments have been developed and important railroad construction has been undertaken. See also BANKS AND BANKING; WORLD ECONOMICS.
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