FOREIGN-EXCHANGE MARKETS IN 1937 18 The realignment of the gold-bloc currencies in September 1936 ushered in a period of comparative stability in foreign-exchange market conditions which continued, except for the further unsettlement in the French situation, through 1937. Even with this notable exception, international trade in goods and services was carried on under more generally stable exchanges in 1937 than at any time since 1930. Stability was achieved, however, only by virtue of almost continuous intervention on the part of the monetary authorities of various countries; and it often obscured potent forces which otherwise would have resulted in marked fluctuations in rates of exchange. Nevertheless, even though changes in spot quotations were kept within narrow limits, these forces were usually apparent in the market for forward exchange. In 1937, as in 1936, major developments in the foreign exchange markets centered around the relation of the dollar to the pound sterling and to the French franc. In terms of monthly averages, the dollar-pound rate ranged between $4.8851 in March and $4.9964 in December (see table 2). The Swiss franc and the florin also reached their lows early in the year and their highs near the end of the year and the range of fluctuation was of similar degree. On the other hand, except for a slight recovery in November, the fall in the exchange value of the franc continued throughout the year and brought the dollar-franc rate from an average of 4.67 cents in January to 3.35 cents in October. These major fluctuations in quotations for the principal European currencies reflected in general the massive movement of capital and of gold to the United States during the first three quarters of the year and the extraordinarily heavy outflow of shortterm funds during the fourth quarter.19 The inward movements during the first of these periods were related in particular to a renewed efflux of capital from France under the influence of persistent political and financial difficulties. During the first 2 months of the year, there was clear evidence that the movement of capital funds from France was proceeding in considerable volume. Although the spot rate for francs was maintained by means of official supporting operations, the discount on futures widened significantly. On January 28, the discount rate of the Bank of France was raised from 2 percent, to which it had been lowered after the devaluation of the franc in 1936, to 4 percent; and the statement of the Bank of France issued on February 4 showed that gold to the 18 In the discussion which follows, the summaries in the Monthly Review of Credit and Business Condi tions of the Federal Reserve Bank of New York were drawn upon freely. Basic information on foreign currencies is available in Trade Promotion Series No. 164, Handbook of Foreign Currencies, issued in 1936 by the Finance Division of the Bureau of Foreign and Domestic Commerce. Current developments in foreign-exchange markets are reported by the Division in semimonthly European, Latin American, and Far Eastern Financial Notes; and foreign-exchange rates, including quotations for Latin American currencies not elsewhere available, are published in Commerce Reports, issued weekly by the Bureau of Foreign and Domestic Commerce. 19 See sections "Capital Transactions" and "Gold Movements" for detailed discussions of these transfers of capital funds and of gold. value of 3,000,000,000 francs had been resold by the Bank to the stabilization fund.20 Although the resources available in London for the defense of the franc were augmented in February by the receipts of the proceeds of the French railway credit of £40,000,000 obtained in London, the pegging of the sterling-franc rate nevertheless entailed the sale of gold to the British authorities in quantity. Furthermore, an extensive demand in France for sterling and dollar banknotes indicated the widespread fear of a further depreciation of the franc.21 [Spot rates are averages of noon buying rates for cable transfers in New York and forward rates averages of quoted discounts (-) or premiums (+) from cable rates, both in cents per unit of foreign currency] The pressure on the franc was emphasized by a sharp break in spot. quotations early in March. There followed the announcement by the French Government of corrective measures, which included the flotation of a national defense loan with exchange guaranties, the purchase of gold by the Bank of France at the world price without identification of the owner, the curtailment of Government expenditures, and the appointment of a committee of experts to manage the stabilization fund. Despite the successful launching of the loan, the return flow of funds to France in response to these measures was of modest proportions. Nevertheless, the gold and foreign-exchange See appendix A for chronology of events affecting foreign-exchange markets in 1937. resources of the stabilization fund were probably temporarily increased. In January and February, when capital funds and gold were moving from France to the United Kingdom, European purchases of securities from the United States were producing a movement of capital funds to this country, augmented by an inflow of short-term funds on Latin American account. Both the security transactions and the transfer of liquid balances involved the exchange of sterling for dollars, and the pound was permitted to decline slowly in January, February, and early March. Throughout this period, substantial supplies of dollars were made available through private purchases of gold in the London market for shipment to the United States. During the second quarter of 1937, the inflow of short-term funds and of gold into the United States reached spectacular proportions in conjunction with an extensive dishoarding of gold on private account in London. These developments were apparently touched off_by rumors of an impending decrease in the dollar price of gold. The immediate response, in early April, was a heavy speculative demand for dollars in London; but, following official denials of a prospective change in the gold policy of the United States, the pound advanced against dollars. "This rise was due to a rather abrupt and substantial increase in the demand for sterling against both gold and foreign currencies. Apart from the President's denial of rumors regarding American gold policy, several additional factors were responsible for this increased demand for sterling. The movement of French capital to London was resumed and the British turned sellers of American securities. Moreover, the customary supplies of gold coming upon the London market were augmented by Russian sales and private dishoarding, and sellers of gold in London apparently were inclined to retain a somewhat larger portion of the proceeds in sterling instead of converting them into francs or dollars. Under these conditions, the British authorities, in order to hold sterling steady, would have been obliged to purchase gold extensively from the American and French funds, and in the London bullion market. British purchases of gold evidently were not sufficient to absorb the abnormally heavy offerings in London, and the remainder was taken chiefly for shipment to this country. Under existing conditions, it was possible to obtain sterling for these gold purchases only by bidding the exchange value of sterling up to a level high enough to induce a transfer of balances from London to New York." 22 The dishoarding of gold in London, chiefly on Continental account, continued during May and reached its peak in early June. There were, at the same time, an accelerated influx of short-term funds into the United States from Europe and extraordinarily heavy imports of gold from the United Kingdom and, in relatively small quantities, also from Belgium, France, and Switzerland. These gold movements and gold purchases by the Netherlands served to hold fluctuations in rates of exchange within comparatively narrow limits. In the absence of firm support from official operations, the French franc drifted lower in terms of dollars during April, May, and June. The repatriation of capital in response to the financial measures taken in March did not last, and, beginning in April, there were clear indications of a renewed outflow of funds from France. The exchange "Monthly Review of the Federal Reserve Bank of New York, May 1, 1937, p. 37. crisis at the end of June was foreshadowed by an increase in the discount rate of the Bank of France from 4 to 6 percent effective June 15, by the resignation of the Blum Cabinet on June 20, and, in the exchange market, by the widening discount on forward francs.23 Even more significant was the loss of 2,500,000,000 francs of gold reported by the Bank of France on June 24 (followed by a reported loss of 6,000,000,000 francs in the next week).24 At the end of the month, the monetary law of October 1, 1936, was amended by a decree which removed the permissive limits to fluctuations in the exchange value of the franc. Quotations for the franc in New York fell abruptly to below the parity of 3.92 cents existing before the devaluation of the dollar, and there was some further decline in July. The pressure against the Swiss franc, florin, and belga which attended the break in franc exchange was quickly countered by official intervention. In the case of the belga, however, the weakness persisted throughout the third quarter of the year, and substantial shipments of gold to the United States became necessary. In the meantime, gold engagements in London for American account dwindled to relatively small proportions in July and August. This development reflected both the stronger position of sterling and the decrease in the offerings of gold on the London market. Of these influences, the first was attributed to Japanese purchases of sterling with the proceeds of gold shipments to the United States and to a moderate transfer of French capital from New York to London; the second was the direct consequence of the abatement of gold dishoarding. "The demand for sterling arising from these two sources was chiefly responsible for the upward movement in the rate. This movement led, in turn, to private purchases of dollars against sterling in anticipation of future commercial requirements. Owing to the comparative narrowness of the fluctuations in the dollar-sterling relationship over the past two or three years, commercial concerns having dollar requirements to cover against sterling customarily time their purchases of dollars to coincide with periods of temporary firmness in the pound. Moreover, commercial requirements for dollars to pay for autumn exports from the United States appear to be considerably heavier than in other recent years. For these reasons an upward rate movement in sterling of about one percent during July led to a substantially increased anticipatory commercial demand for dollar exchange. This demand operated principally through the forward market, and the premium on forward dollars in London therefore remained at a sufficiently high level to make it relatively remunerative for British banks to increase their New York balances against sales of forward dollars to commercial customers. During the past two years at least, forward operations in the dollar-sterling market undertaken at the initiative of commercial concerns and others, and the resulting flow of bank balances between New York and London, have been a growingly important influence in narrowing the range of movement in the dollar-sterling rate." 25 23 In June, shipments of paper currency from the United States to Europe, consisting of Federal Reserve notes of large denominations, were $7,000,000. The demand from the Continent for Bank of England notes was much heavier. 24 The depletion of the sterling resources of the British Exchange Equalization Account through the acquisition of French gold led to an increase in its borrowing powers from £375,000,000 to £575,000,000 late in June. 25 Monthly Review of the Federal Reserve Bank of New York, Aug. 1, 1937, pp. 60–61. In September the European currencies were weakened by a sudden movement of funds to the United States growing out of the sharpening of the political tension in the Mediterranean area. Perhaps because of the failure of a marked improvement in the internal situation to appear, the French franc in particular was affected; quotations in New York reached the lowest levels since 1926. The reversal, during the fourth quarter of 1937, in the prevailing movements of capital funds and of gold was signalized by the reappearance of gold hoarding in London early in October. The basic factor in this turn of events in the foreign exchange markets was the spectacular reduction in the short-term foreign liabilities of the United States during the last quarter of the year, amounting to approximately $575,000,000. The outward movement of liquid funds, which took the form of a conversion of dollar balances into gold on an extensive scale, was apparently produced in part at least by rumors of a further reduction in the gold content of the dollar. Symptomatic of the psychological influences at work was the return of dollar banknotes from Europe in extraordinary volume. The distrust of the stability of the currency value of gold accounted also for the resumption of hoarding in London. The increased demand for gold on private account, coupled with a firm rate for sterling, resulted in a rise in the effective price of gold in the London market to a point at which shipments to the United States were no longer profitable. The French franc, which had fallen to 3.285 cents on October 2, strengthened considerably during the remainder of the month; and the higher level was maintained during November and December. At the same time, the Swiss franc, belga, and florin advanced against dollars and, along with sterling, reached their highs for the year. The orderly character of the reduction in foreign balances during this period was attributable in considerable degree to relatively heavy commercial requirements for dollars growing out of the mounting surplus of merchandise exports from this country. The reduction partly represented, in turn, the drawing down of balances accumulated as the counterpart of earlier forward buying of dollars on commercial account. Nevertheless, with the continued rise in quotations for sterling, shipments of gold from the United States became necessary to arrest the advance. In November and December, gold was exported both to France and the United Kingdom, and the export of gold during these 2 months (the first of any consequence since February 1936) was augmented by transfers through earmarking operations.26 The counterpart of gold losses by this country was gains by other adherents of the Tripartite Accord. During the week ended November 10, the French stabilization fund sold gold valued at 3,127,000,000 francs to the Bank of France,27 and the reported gold holdings of the Netherlands, Belgium, and Switzerland were also increased during the last 2 months of the year. Among the non-European exchanges, the rigid pegging of the Chinese and Japanese currencies on the one hand and the exceptional strength of the Argentine peso on the other were particularly note 26 Gold losses by this country actually began in October. See Twenty-Fourth Annual Report of the Board of Governors of the Federal Reserve System, p. 18. 27 Effective Nov. 13, the Bank of France reduced its discount rate to 3 percent. Successive reductions had brought the rate from 6 percent, effective on June 15, to 5 percent on July 7, to 4 percent on Aug. 4, and to 31⁄2 percent on Sept. 3. |