The rate at which foreign gold has moved to the United States in recent years has been a fairly accurate measure of the explosive potentialities of political developments in Europe. The inward gold movement, serving chiefly as a vehicle for the transfer of capital funds, assumed extremely large proportions in the autumn of 1935, when Italy undertook the subjection of Ethiopia. It reacted sensitively to the shifts from one financial and political crisis to another in France during the first 9 months of 1936, became highly accelerated at the time of the Munich conference in September 1938, and finally in 1939 reflected a flight of capital from Europe of such proportions as only the apparent inevitability of war could induce. Heavy net receipts by the United States from trade and service transactions contributed significantly to the inpouring of gold in 1938 and 1939. As a result of this conjunction of forces, the inflow in the latter year reached $3,040,000,000,16 an amount far in excess of the previous record movement of $1,739,000,000 in 1935. In six of the months of 1939, receipts of gold exceeded $250,000,000; in two, March and September, they exceeded $300,000,000; and in two, April and August, they exceeded $400,000,000. The periods of maximum flow in the spring and late summer coincided with the wholesale transfers of capital to the United States at the time of the Czecho-Slovak crisis and at the outbreak of the war.

Total receipts of gold from foreign sources in the years 1934-39 amounted to more than $10,000,000,000. (See table V.) During each of the years of this period, the inflow from abroad exceeded world production outside the United States, although output was considerably increased. Nearly three-fourths of total imports of gold into the United States in 1939 came from accumulated reserves or from new production in the United Kingdom, Canada, and other British countries, which together control two-thirds of the world's output. Receipts from the European neutrals were exceptionally heavy during the year, and those from Japan and from producing areas in Latin America continued large."

Table V.-Movements of Gold and Silver Into the United States and Production of Gold and Silver Outside the United States, 1934-39

1 Net gold imports less gold placed under carmark for foreign account or plus gold released from earmark for foreign account.

16 Monthly data on gold imports, exports, and carmarking operations are given in appendix B, table 26. The figures in this paragraph include earmarking operations.

17 Monthly data on gold movements between the United States and selected foreign countries in 1939 and annual data on imports of gold into the United States from selected countries are given in appendix B, tables 27 and 28.

In addition to shipments of gold to the United States for immediate conversion into dollar balances in 1939, large amounts were imported to be placed under earmark for foreign account during the months preceding the outbreak of the war in Europe and again in December. These deposits of gold for safekeeping or for future conversion into dollar balances raised the total amount of gold held in this country under foreign ownership from $629,000,000 at the end of 1938 to $1,288,000,000 on July 31. These resources were drawn down during the succeeding 4 months by $325,000,000, but further additions in December brought the aggregate to $1,163,000,000 at the end of 1939. Both the heavy inflow of gold after August (aggregating almost $1,000,000,000), against which there was no visible accumulation of dollar balances, and the building up of earmarked stocks in December revealed the extremely heavy requirements, either current or prospective, for dollar exchange to meet commitments in the United States by foreign governments and others.

Net imports of silver in 1939, amounting to about $71,000,000, were the smallest in 6 years and only a third of net receipts in 1938. Cumulative net imports since the beginning of 1934, representing for the most part purchases by the Treasury in accordance with the terms of the Silver Purchase Act, reached nearly $1,000,000,000 by the end of 1939. In effect, as indicated by the data in table V, these receipts of silver from foreign sources absorbed the whole of silver production outside the United States as well as very substantial sums coming out of existing stocks in other countries.

The decline in imports of silver into the United States in 1939 as compared with 1938 was attributable in small part to a reduction in world output, as reflected in smaller shipments from a number of important producing countries, 18 and in part to a decline in the Treasury buying rate from 43 cents an ounce at the beginning of the year to 35 cents for the period from July 10 to the end of the year; but the major factor was the great curtailment of supplies coming onto the open market as a result of demonetization and the release of government stocks. This major influence affected particularly imports from the United Kingdom, through which silver of Chinese origin has come in large amounts in recent years; from Spain and France, from which Spanish pesetas to a substantial value were received in 1938; from Siam, which shipped practically all of its holdings of silver to this country in 1938; and from Mexico, which disposed of its accumulated stocks to the United States Treasury by an arrangement concluded early in the same year. On the other hand, imports from Hong Kong and from Japan were larger in 1939 than in 1938, as a result of the sale of demonetized coin and the export from these countries of silver originally from Chinese sources.

The increase in exports of silver in 1939 over those in the preceding year was accounted for principally by shipments of nearly $6,000,000 to the United Kingdom. Additional consignments of coined pesos to the (bullion) value of $4,200,000 went to Cuba, and other exports to Canada, British India, Sweden, and Portugal were reported.

18 Silver imports by selected countries and by months for the years 1934-39 are given in appendix B, table 29.

CAPITAL MOVEMENTS AND FOREIGN INVESTMENTS

CAPITAL MOVEMENTS

Capital transactions affecting United States international investments during 1939 resulted in a net inflow of $1,416,000,000, as is shown in table VI. This was more than four times the net inflow in 1938. The much larger import of capital was not the result of a larger weekly_volume of flow as much as it was of an uninterrupted movement. In 1938, a net outflow of the first 7 months was offset by a still larger inflow during the last 5 months of the year, whereas in 1939 there was no large outflow at any time.

The major part of the capital movement in 1939 was on short-term account. That result was a natural consequence of the international disturbances in March and August and tension throughout the year, followed by the actual occurrence of war in September. The inflow of foreign-owned capital, largely for deposit in United States banks, totaled $967,000,000, while the return of American-owned funds totaled $149,000,000. In addition, as shown in table VI, there was an import of $114,000,000 of long-term capital the net of an outward movement of foreign capital amounting to $103,000,000 and an inward movement of American capital in the amount of $217,000,000.

Table VI. Capital Transactions Affecting United States International
Investments, 1937-39

1 This item consists of security transactions, as reported by the Treasury Department; and certain direct investment transactions as compiled in the Finance Division, Bureau of Foreign and Domestic Commerce. 2 This item consists of movements of short-term banking funds and changes in brokers' credit and debit balances, as reported by the Treasury Department, adjusted to include changes in Philippine deposit accounts with the Treasury Department.

3 This item includes the international credit operations of governmental lending agencies, in addition to changes in exporters' and importers' balances, accounts receivable and payable, and other items. 4 An export of paper currency is equivalent to the sale to foreigners of non-interest-bearing obligations and thus represents, in effect, an inflow of capital. Prior to 1935 this item was carried in the same general balance-of-payments category as gold. For additional data see appendix C-IV, tables 32 and 33.

PRE-WAR MONTHS, JANUARY-AUGUST

Two periods of extreme international tension in the first 8 months of 1939, the latter culminating in war in Europe, caused a "reported" 19 inflow of capital into the United States of $1,114,000,000. More than five-sixths of this inflow took the form of foreign short-term banking and brokerage balances. Most of the remainder was accounted for by the return of American-owned funds from abroad. Net foreign sales of domestic securities were practically the equivalent of net foreign purchases of foreign securities.

It is apparent from the capital-movements data-namely, the continued heavy inflow-that the events of September 1938, culminating at Munich, postposed the opening of war but did not convince many people for any long time that war was not extremely probable. The tremendous rush of foreign capital into deposit accounts in United States banks, which amounted to $430,000,000 in August and September 1938 and to $360,000,000 in September alone, was followed by a $265,000,000 inflow from October to December, inclusive. Net foreign sales of domestic (United States) securities during July and August 1938 gave way to large net purchases during the last 3 months of the year. A $50,000,000 return flow of American-owned funds from abroad occurred in August and September, but there was no net change of importance from October to December. In short, the events leading up to the September crisis induced a heavy movement of short-term capital to the United States and net foreign selling (an outflow of capital) of long-term securities. Following that crisis the inflow of short-term capital continued, and there were in addition large net purchases of securities.

First Period of Tension-Czecho-Slovak Crisis.

The first half of 1939 likewise had its crisis, about the middle of March, brought on by the invasion of Czecho-Slovakia. Just prior to that time foreign short-term funds had moved to this country steadily but not in great volume. From that time until the beginning of May the inflow was consistently in large volume, and in 7 weeks aggregated $450,000,000. It did not in any week rise to the panic proportions of the weeks of September 14 and 21, 1938. During the weeks preceding the March crisis American-owned funds returned to this country in greater volume than in the pre-Munich months; but, again, as after that event, there was no significant movement of these balances after the crisis was past.

In their effect on the movement of short-term funds the two crisis periods proved to be very similar (see fig. 7). Transactions in domestic securities during the March 1939 crisis, however, did not conform to the earlier pattern. Whereas in 1938 large net foreign sales preceded and large net purchases followed the crisis, in 1939 net sales and purchases alternated by months until May, when net sales became the rule. The principal difference was that after Munich Britain was buying American securities on balance, while after the invasion of Czecho-Slovakia, Britain and Canada were substantial net sellers. It seems probable that these net sales were dictated by the needs of

19 The remainder of the section on "Capital Movements" is based on the unadjusted data reported by the Treasury Department and shown in table VII. The unadjusted "reported" data are available on a weekly basis, which makes possible detailed analyses of the capital movements of the period. The adjustments to the reported data are described in some detail in the footnotes to tables VI and VII and in appendix C-I, table 30.

individual investors in preparation for the exigencies of the war which then appeared unavoidable.

The heavy movement of capital to the United States late in 1938 led to definite signs of weakness in sterling exchange. On January 3 the sterling rate dropped to $4.62%, slightly below its November low of $4.63. The British Government took steps to protect sterling exchange by placing informal restrictions on the operations of speculators and by strengthening the position of the Exchange Equalization Account. The latter was accomplished by transferring £200,000,000 of gold from the Bank of England to the Exchange

Figure 7.-International capital mɔvəmən), 1933-39.

Equalization Account on January 6. effective, and over the next 2 months 13, it stood at $4.6916.

The steps taken were quite sterling rose until, on March

Late in January and in February the Dutch guilder was subjected to especially heavy pressure as a result of the outflow of refugee funds and remittances of the proceeds of several foreign loans. Political instability in Belgium, as evidenced by the resignation of consecutive cabinets on February 9 and 21, affected the belga adversely. These difficulties were reflected in the continued heavy United States gold imports from Netherlands and imports from Belgium starting in March. The reported net capital inflow into the United States from Netherlands during the first quarter of 1939 was $59,000,000, compared with $27,000,000 during the second quarter. The reported capital inflow from all foreign countries was substantially larger during the second than during the first quarter.