一路 BBS

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发表于 6-28-2014 07:17:59 | 显示全部楼层 |阅读模式
(2) Liaquat Ahamed, The Road to Depression. Wall Street Journal, June 21, 2014.


“European governments also came under pressure to expand the welfare state after the privations of the war years. Unable to raise taxes because of deep postwar social and political divisions at home, most of them (with the exception of Britain) resorted to [printing money, which caused] high inflation. This destroyed the middle class's financial savings and helped undermine European political stability for a generation.

“The Great War also created a seismic shift in the global balance of economic power. * * * the US emerged with an even stronger economy—and went from being the world's largest debtor to a major creditor. At the Paris Peace Conference of 1919, Britain and France failed to persuade the US to forgive their war debts and sought, disastrously, to balance their books by imposing punitive reparations on Germany.

“Germany was only able to pay reparations and finance its recovery by borrowing large, unsustainable amounts from the U.S. When these capital flows came to a sudden halt after the 1929 Wall Street crash, Germany defaulted on its debts, and the economies of Central Europe collapsed.

My comment:
(a) hyperinflation in the Weimar Republic
(section 1 Background)

(b) US “went from being the world's largest debtor to a major creditor”
(i) net international investment position
(NIIP’s unit is US dollar ($); IIP is a financial statement--a piece of paper)
(A) Bureau of Economic Analysis (BEA) of US Department of Commerce presents IIP (1976-present). But we are interested in 1914.
(B) My June 14, 2014 posting--titled “In 2013 Taiwan Remains World's 5th Largest Creditor”--concerned none other than NIIP.
(ii) Barry Eichengreen and Marc Flandreau, The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914-1939. Bank for International Settlements, July 2010, at pp 3-4
("US exports grew faster than those of any other nation in the decades leading up to World War I. By 1912 the United States was the leading trading nation. It is thus striking that virtually no trade credit was provided by US banks or denominated in dollars. Instead, American banks seeking to provide these services did so through correspondent banks in London. These acceptances were denominated in sterling * * * This trio of factors – Britain’s early start as a trading nation, resulting in the [British] merchant banks’ first-mover advantage; a large and active secondary market; and a market-maker of last resort – made for low costs and strongly increasing returns")

* Bank for International Settlements
(BIS; based in Basel, Switzerland; established in 1930)

(iii) Before 1914 US was world’s largest debtors, as is now/ But the reasons then and now differ vastly. Then US maintained a huge trade surplus (perhaps world’s largest, but I will do more research on it). “Since 1976, the US has sustained merchandise trade deficits with other nations * * * The nation's long-standing surplus in its trade in services was maintained, however, and reached a record US$231 billion in 2013.”  Prior to 1914 foreign investments in US (shadowing US trade surplus in merchandise) brought about US being world’s largest debtor, whereas for past several decades the twin trade and budget deficits underlie the same title. For the former, see

Mira Wilkins, Foreign Investment in the US Economy Before 1914. The Annals of the American Academy of Political and Social Science, 516: 9-21.
("Whereas before the Civil War, railroad securities were frequently transferred abroad in exchange for the iron rail purchases, this was uncommon after the Civil War, as Americans began to manufacture their own iron and then steel rails." at p 14)
(A) The quotation tells you when Americans built ironworks.
(B) Pp 10-11 (the first two pages of the text) is a must read (click “Full Text PDF” in the right column). Skip the rest of the text (except the quotation, that is).
(C) Mira (given name)
(iv) Mira Wilkins, The History of Foreign Investment in the United States, 1914-1945. Harvard University Press, 2004
("The world economy at the start of 1914 was well integrated. Major nations were on the gold standard. * * * Capital controls were virtually nonexistent, The dollar was as good as gold. There was a global economy. Yet globalization creates vulnerability. And this book to a great extent deals with that vulnerability." Preface at page i)
(v) Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. Princeton University Press, 1963, at pp 198-199
("The reason for the altered emphasis is the wartie change in the character of international trade and financial arrangements. In the belligerent nations, private individuals reacting to price incentives were largely replaced as the major traders on international markets by governments controlling their own financial machinery. They [governments] exercised an insistent and pressing command for American goods; created an excess of exports for the United States over imports; and paid for the excess during the period of US neutrality by shipping more than $1 billion in gold, selling for dollars $1.4 billion of American securities owned by their citizens by $0.5 billion short-term loans by their citizens to the United States, and by borrowing about $2.4 billion in US financial markets, a total of no less than $5.3 billion. After US entry into the war [WWI], the excess of exports continued but was financed primarily by credits which the US government extended to its Allies rather than by either gold or the liquidation of privately held dollar securities. Those capital movements transformed teh international investment position of the United States from a net debtor on short- and long-term of $3.7 billion in 1914 to a net creditor of the same amount by the end of 1919")

* The “private individuals reacting to price incentives” refers to citizens of those warring states in Europe, who pinched pennies and bought cheaper products. The governments confiscated their wealth, with which bureaucrats used to purchase from US.

(c) US “went from being the world's largest debtor to a major creditor”

Make it world’s largest creditor. See
Alan Dawley, Changing the World; American Progressives in war and revolution. Princeton University Press, 2003, at page 248
(“Thanks to its wartime credits to British and other European borrowers, the United States had emerged as the world's largest creditor, with some $10 billion in private and public debt outstanding. With Wall Street making ready to challenge the City of London as the headquarters of world lending, * * * ")

(d) Then I started thinking: How much was the British war debt? Why did United Kingdom not print money to pay for it, since pound sterling was probably the reserve currency then? The short answers will be found in the following items.
(e) Martin Wolfe, Lessons From History on Public Debt. How did the UK’s interwar fiscal famine and monetary necrophilia work? Badly. Financial Times, Oct 10, 2012 (columnist)
(“The UK emerged from the first world war with public debt of 140 per cent of gross domestic product and prices more than double the prewar level. * * * [UK slashed government spending and raised interest rates to 7% in 1920. British economy remained/became sick.] Worse, public debt did not fall. By 1930, debt had reached 170 per cent of GDP. By 1933, it had reached 190 per cent of GDP. * * * In fact, the UK did not return to its pre-first world war debt ratios until 1990. Why was the UK unsuccessful in lowering the ratio of debt to GDP? Briefly, growth was too low and interest rates too high. * * * The story is relevant to the eurozone today")
(f) US did not exactly ask UK to repay war debts.

Lend-Lease and Military Aid to the Allies in the Early Years of World War II, in Milestones: 1937-1945. Office of the Historian, US Department of State, undated.

the last paragraph: "The United Kingdom was not the only nation to strike such a deal with the United States. Over the course of the war, the United States contracted Lend-Lease agreements with more than 30 countries, dispensing some $50 billion in assistance. Although British Prime Minister Winston Churchill later referred to the initiative as 'the most unsordid act' one nation had ever done for another, Roosevelt’s primary motivation was not altruism or disinterested generosity. Rather, Lend-Lease was designed to serve America’s interest in defeating Nazi Germany without entering the war until the American military and public was prepared to fight. At a time when the majority of Americans opposed direct participation in the war, Lend-Lease represented a vital U.S. contribution to the fight against Nazi Germany. Moreover, the joint action called for under Article VII of the Lend-Lease agreements signed by the United States and the recipient nations laid the foundation for the creation of a new international economic order in the postwar world.

* But see Anglo-American loan

(The eventual payment of “$7.5bn” might be the face value (you know, money decreases in value with time).

(g) UK eventually repaid US pennies on the dollar for war debts from World War II debts, but did not repay those from World War I (but US has not officially written them--WWI debt--off either).

Finlo Rohrer, What's a Little Debt Between Friends?  BBC, May 10, 2006.


“On 31 December[, 2006], the UK will make a payment of about $83m (£45.5m) to the US and so discharge the last of its loans from World War II from its transatlantic ally.

“Britain had spent a great deal of money at the beginning of the war, under the US cash-and-carry scheme, which saw straight payments for materiel.

“And while the UK dutifully pays off its World War II debts, those from World War I remain resolutely unpaid. And are by no means trifling. In 1934, Britain owed the US $4.4bn of World War I debt (about £866m at 1934 exchange rates). Adjusted by the Retail Price Index, a typical measure of inflation, £866m would equate to £40bn now, and if adjusted by the growth of GDP, to about £225bn.

* Cash and carry (wholesale)en.wikipedia.org/wiki/Cash_and_carry_(wholesale)("In a retail context, the term has a similar meaning: customers pay cash for the goods they purchase (the retailer does not offer credit accounts) and carry them away themselves (the retailer does not offer delivery service)")
* Why was it desirable for the heads of US and UK?

cash and carry (World War II)
(“The purpose was to hold neutrality between the United States and European countries while still giving aid to Britain, exploiting the fact that Germany had no funds and could not reliably ship across the British-controlled Atlantic”--thus circumventing US laws Neutrality Acts of 1935, 1936, and 1937 dictating the embargo on arms and money-lending against countries in conflicts)

(i) Finally pound sterling as a reserve currency was not as powerful as US dollar.

Barry Eichengreen, Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition. National Bureau of Economic Research, May 2005 (Working Paper 11


"In the 17th and 18th centuries when Holland was a leading international commercial and financial power and Amsterdam was a leading international financial center"  p 3

"the emergence of the international gold standard in the decades prior to World War I. With a few important exceptions, the standard in question was a gold bullion standard, not a gold coin standard. A significant share of the monetary circulation of countries on the gold standard was not gold coin, in other words, but token coins and paper convertible into gold bullion under certain circumstances. The gold bullion standard was a 19th century innovation. It presupposed a uniform currency that was difficult to counterfeit * * *  gold was concentrated in the vaults of central banks" pp 3-4

"At the end of 1913, sterling balances accounted for less than half of the total official foreign exchange holdings whose currency of denomination is known, while French francs accounted for perhaps a third and German marks a sixth. (See Table 1.) Over the preceding quarter century [the quarter century prior to 1913], sterling’s share had in fact been falling, not rising, mainly in consequence of the growing share of the French franc. In Europe itself, sterling was a distant third as a form in which to hold official reserves behind both the franc and the mark."  pp 7-8

(ii) By definition, pound sterling was world’s first reserve currency.
(A) Bank of England
(UK's central bank and the model on which most modern central banks have been based; chartered in 1694, it is the second oldest central bank in the world, after the Sveriges Riksbank [central bank of Sweden, formed in 1668]
(B) "The development of the modern concept of a reserve currency took place in the mid nineteenth century, with the introduction of national central banks and treasuries and an increasingly integrated global economy"  Wikipedia

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