United States—World Banker and Commercial Leader

By John K. Barnes

[The World's Work, March 1918]

The position of world banker has been virtually thrust upon the United States. That is an outstanding feature of probably the most romantic story in economic history. In less than three years, the war transferred the United States on the international balance sheet from a debtor to a creditor nation. Never before has the credit position of a country been so altered in as short a time.

Our own entrance into the war may be indirectly a factor of great importance. Everyone knows how France, after her defeat in the Franco-Prussian War, recuperated so fast that she was the marvel of the world. The billion-dollar indemnity with which Bismarck expected to keep her in subjection for many years was paid before it came due; and France became a nation of savers and investors who have ever since given her a place in world finance out of all proportion to her natural resources and production. We now have, in the necessity for raising funds to pay our own and part of our allies' war costs, an incentive to thrift such as the people of this country have never before known. The personal economy that the situation requires is as yet realized by few, but will have to be by all if the war continues. The results of it should outlast the war and become a great national asset.

What the war has already done for us commercially can be summed up in a few round figures, which would be interesting because of their size, if for nothing else. When the war clouds broke over Europe at the close of July, 1914, we owed abroad something like five billion dollars. Only a small portion of this—notably eighty million New York City revenue bills—was due soon, but a good part of the rest was in the form of corporate securities that could be thrown on our markets. Accurate figures compiled by L. F. Loree showed, for instance, that $2,704,000,000 par value of railroad securities, were held abroad on January 31, 1915. More than half of these were bought back by us in the next two years and it is safe to assume that our debt abroad has now been reduced by more than $2,500,000,000. And after the ice of our investment provincialism was broken with the Anglo-French loan in the fall of 1915, we became liberal lenders to foreign countries. Before our own entrance into the war these loans totaled another $2,500,000,000. Thus our debt abroad was cancelled. At the same time Europe sent us more than $1,000,000,000 worth of gold to pay for war materials and to facilitate her war financing here. A check on the conservation of these figures, and in fact the reason for them, is to be found in the foreign trade balance in our favor in the three years ended June 30, 1917, of $6,865,000,000—a most remarkable figure when compared with a $1,674,000,000 trade balance in the three years before the war. Six months since June 30 have added $1,566,000,000 to our favorable trade balance.

Since our entrance into the war the Government has taken over the problem of credits for our allies, and at this writing more than $4,000,000,000 has been thus directly loaned from the Federal Treasury. Provision has so far been made by Congress for $7,000,000,000 of such advances. This means that instead of being $5,000,000,000 in debt to Europe, as we were in 1914, we will have a credit on the international balance sheet of more than $7,000,000,000 in our favor. Not only have we gotten out of a century of debt, but the rest of the world will soon owe us more than we owed it before the war.

The result of this, as measured in its smallest terms, will be that instead of paying Europe approximately $250,000,000 a year in interest and dividends, we will be receiving from foreign countries more than that amount net annually. The larger meaning, however, is that we will be world bankers and will know the great commercial advantages that naturally gravitate to nations holding that position. Banking is only the machinery of economics. In foreign trade the extension of credit is an important factor, but it is only to accomplish a much more valuable economic end that it is granted. It took a James J, Hill to come out of the West and convince many of our bankers that it was good business to loan half a billion dollars to Great Britain and France in 1915, so they could buy supplies here; but in the crowded years since, the training of American business men and investors in the important lesson he taught has been intensive. The foundation at least has been well laid for this country to continue as a world banker.

One of the most encouraging developments looking toward that end and holding clearly to the more important view of establishing this country as a great commercial nation has been the opening of branches of American banks abroad. Service is rendered to the foreign markets as well as our own. One obstacle in the way of establishing these branches has been the lack of trained men willing to go abroad. The National City Bank started a school to train its own men.

To the Federal Reserve Act must be given full credit for much of the progress we have made in international banking. This law, which has been of invaluable service in helping us pay our debts abroad and become a lending nation, made it legal for our national banks to establish foreign branches. It even permits the combination of banks for this purpose. (The word 'combination' will be less a term of condemnation in this country after the war.) The Act has done more than this "to prepare the way for America as a world banker. By its provisions for acceptance by the banks of foreign trade drafts or bills of exchange it has made dollar exchange possible. We are indebted to the framers of this law for much more than we realize. Before the war probably half of the foreign trade of the world was financed through London by sterling bills of exchange. Goods which we bought or sold in South America were paid for in British exchange. British bankers took from us annually between twenty and thirty million dollars toll in banking commissions. The Federal Reserve Act, with the aid of the war, has changed this. The sale of Brazil's coffee crop is now financed largely with dollar exchange. The trade in hides from Argentina is also so financed. Dollar exchange has grown from nothing three years ago until now it amounts to approximately $400,000,000. As the amount of sterling bills normally afloat in the financing of foreign trade was about £500,000,000, it can be roughly stated that the United States has attained a position in the world's commercial banking field about one-sixth as important as that held by Great Britain before the war. Although the criticism of some authorities, that the banks in the Federal Reserve system have not extended into foreign fields as rapidly as they should, may be just, yet a good deal has been accomplished, by those who have seen the possibilities of this business, and American manufacturers are now assured of banking aid and support in attempting foreign markets.

And, according to those most interested in the growth of our foreign trade, American business interests generally are recognizing the advantages of foreign markets and realizing the importance of developing a demand for our goods abroad as a bulwark against depression when the demand for war materials ceases. Several companies have been chartered to carry on foreign trade; the largest being the American International Corporation, capitalized at $50,000,000 and having on its board of directors the most prominent business, men of the country. But it is the manufacturers as well who must reach out for the foreign trade if we are to become established as a great commercial nation.

That 65,000 different American houses availed themselves of the foreign trade facilities of the National City Bank in two years and a half indicates that they are doing this. Other banks with foreign trade departments all report the same growing interest. An increase in our exports to South America, which is not war business, of 130 per cent since the war started shows the result. There were before the war substantial American interests in the foreign trade field. These fully realize the value of the present opportunity; they also know the obstacles this country faces.

When the fighting ends, we will lose the war business, but materials will be needed for the reconstruction of Europe. After that our prosperity will depend to a large extent on the amount of foreign trade we will be able to command as an outlet for our increasing production. Since 1910 this has grown as fast in one year as our population in five. This is the problem to which farsighted American business men and bankers are now directing their attention.

© J. Fred MacDonald, 2013

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