Table VII.-Net Movements of Capital in Short-Term Banking Funds and in Security Transactions, by Countries and by Areas, 1935-39 1 NOTE.-In millions of dollars; plus sign indicates net inflow of funds and minus sign indicates net outflow Short-term banking funds 2. Total.. 1935-39 +1, 116 3-2 +79 +87 +25 +15 +129 +156 +264 +76 +93 +134 +58 Short-term banking funds 2. +663 +324 +156 +33 +214 +370 +505 +245 +292 +201 +454 +119 +8 +23 +256 +388 +248 -14 +213 +99 +1, 117 +443 +164 +56 +470 +758 +753 +231 +505 +300 +71 +3,074 +263 +1, 820 +97 +4, 894 Total. These data were published quarterly in Statistics of Capital Movements Between the United States and Foreign Countries and of Purchases and Sales of Foreign Exchange in the United States, Reports Nos. 1-9 (U. S. Treasury Department, Division of Research and Statistics), covering the period from January 1935 to September 1938, and monthly since September in the Bulletin of the Treasury Department, Office of the Secretary, Treasury Department. The detailed statistics made available in these reports have been conveniently summarized in the Federal Reserve Bulletins for May 1937, April 1938, April 1939, and April 1940. In the May 1937 issue, p. 396, it was pointed out that changes in brokerage balances are closely related to security transactions and that it is thus desirable, for some purposes, to consider them as part of the net movement of capital in security transactions. ? The movement of brokerage balances is included. The totals represent the net movements of capital in security transactions as reported by the Treasury Department. The same data, adjusted to show certain types of transactions as separate items and to include transfers of direct investments, are shown in detail in appendix C-I, table 30, for the years 1937, 1938, and 1939. Second Period of Tension-Polish Crisis. While a vast rush of European capital to the United States was the first effect of the March crisis, its political effects were still greater. They were the ostentatious dropping of the appeasement policy by the British Government and the formulation of a system of European alliances and guaranties by England and France. After early May, capital movements, instead of being almost entirely an inflow of private funds, were dominated by the increase of foreign-government Total and central-bank funds in this country. From May 3 to July 26, central-bank funds in the Federal Reserve Banks and in banking institutions in New York increased $96,000,000 and "other funds" in the United States decreased $49,000,000. The development of the PolishGerman affair during August caused a renewed inflow of "other funds" amounting to about $158,000,000 and the continued inflow of centralbank funds amounting to $110,000,000. This process of strengthening the dollar position of European countries, of both the potential belligerents and the neutrals, took the form, also, of an increase in gold earmarked for foreign account in the sum of $368,000,000 from May to August, inclusive. Between December 28, 1938, and August 30, 1939, the reported banking and brokerage balances of Great Britain, France, and Canada increased $408,000,000, or 45 percent. Similar balances of European neutral countries increased $313,000,000, or 54 percent; in both instances the increases were larger than for other areas and point to a policy of building up dollar reserves. Germany and Italy drew down their balances by $20,000,000, or more than 46 percent. In August, as relations between Poland and Germany approached a crisis and war fears became acute, a flight of capital to the United States again occurred. This time, in order to conserve gold resources and penalize the export of capital, British official support was withdrawn from the exchange market. As a result, sterling fell from $4.60 on August 25 to $4.12 on August 28, recovering by the end of August to $4.40 only to fall again, upon and after the opening of the war, to $4.00 and below. As in other periods of developing international tension, a heavy inflow of foreign-owned funds, some return flow of American-owned funds, and net foreign sales of domestic securities preceded the peak of this crisis. The reported data regarding foreign purchases and sales of foreign securities for the year as a whole, revealed the continued repatriation of foreign dollar bonds. In just 2 months, April and August, there were net foreign sales, and in both instances sales of new Canadian issues to Americans were the cause. Total new foreign issues publicly offered in the United States during 1939, all of which were Canadian, amounted to $82,000,000.20 WAR MONTHS, SEPTEMBER-DECEMBER Contrary to the reaction to the opening of the war in 1914, the stock market experienced a substantial rise in September, the first month of the present war. Stock prices advanced 14 percent during the month. This reaction of the stock market was based largely on the assumption that there would be no extensive immediate liquidation by foreign countries and upon the feeling that the war would mean increased production and greater profits for American corporations. Large-scale buying of commodities, chiefly from domestic sources, gave further impetus to the boom. The reported data subsequently released revealed large net sales of domestic securities by the United Kingdom, and almost as large net purchases by neutral European countries, the Far East, and Latin America. It was apparent as early as July 1939 that the British Government appreciated the importance of long-term investments in the United 20 See appendix C-II, table 31. States as a war reserve of purchasing power and would take measures to insure an orderly liquidation in the event of war. It was at that time that the Government instituted a study of the holdings of British investing institutions. This was followed, on August 27, by Figure 8.-Movements of short-term banking and brokerage funds between the United States and foreign countries, 1930-39. Figure 9.-Long-term capital movements between the United States and foreign countries, 1928-33. a ban on the sale of certain foreign securities, including those payable in dollars, and by an order that all investors report their holdings to the Bank of England. On September 17 the French Government decreed that French holders of funds or property abroad must declare them to the Government by December 1.21 Canada and other parts of the British Empire adopted similar measures in September. These orders or decrees did not amount to actual mobilization of foreign security holdings. They were preliminary to such action taken at a later date. The mobilization of investments did not take place in 1939 and was only partially decreed by the British Government on February 17 and April 14, 1940. Orders were issued by the British Government on September 3, and by the French Government on September 9, 1939, instituting control of all exchange operations, placing import trade on a license basis and requiring that the proceeds of any sales of securities be turned over to official agencies. Under these conditions of control, the principal capital movements to the United States during the last 4 months of 1939 (the first 4 months of the war) were clearly divided into two parts-first, those affecting belligerent countries, principally the United Kingdom, France, and Canada; second, those affecting neutral countries. Capital Transactions of Belligerent Countries. As a result of the exchange controls instituted by the various parts of the British and French Empires, the capital-movement statistics affecting those areas were dominated during the last months of the year by the changes in official balances. The banking and brokerage balances were the reservoir into which the proceeds of the sale of gold, securities, or other assets were poured and from which expenditures were made. During September the balances of the United Kingdom, France, and Canada increased slightly. From that time on they declined sharply and amounted on December 27 to $1,035,000,000$255,000,000 less than on the opening of the war. The reduction in the short-term balances of the United Kingdom, France, and Canada did not begin to measure the extent to which dollars had been utilized. Additions to their dollar assets from September to December were made through gold imports into the United States (the latter amounting to $805,000,000) and net foreign sales of domestic securities, amounting to $117,000,000. The assets were drawn upon in part for certain known or reported transactions: (1) For net purchases of foreign securities totaling $42,000,000; (2) for the net reduction of American-owned balances abroad amounting to $28,000,000; and (3) for net merchandise imports from the United States of $275,000,000. The sum of the net reduction of short-term balances and the current additions to the short-term assets during the first 4 months of the war exceeded the known or reported expenditures-namely, gold imports and sales of domestic securities by $832,000,000. Part of these unknown or unreported expenditures may be accounted for by the advance payments on military supplies ordered in the United States. and by the necessity, under the Neutrality Act, for exports to be paid for before leaving this country, whereas previously much of the trade had generally been on a credit basis. Other parts may be gold imported from belligerent countries but for the account of neutrals, gold placed under earmark in this country, expenditures in nonbelligerent countries which were paid for in dollars, and net payments. by the belligerent countries for services received from the United States. 21 This date was later changed to January 15, 1940. According to the reported data, capital transactions between the United States and Germany during the first 4 months of the war amounted to $14,500,000. Germany reduced its balances here by $3,500,000, and American-owned funds in Germany were reduced by $19,000,000. Net German sales of domestic securities amounted to $1,000,000. Capital Transactions of Neutrals.22 The position of neutral European countries became more hazardous as the war approached and as it progressed. It was clearly to the advantage of individuals in those countries and an act of foresight on the part of the governments to transfer their assets outside their own countries to the greatest extent possible. The reported capital movement and gold data indicate that they acted rather effectively. The large transfers of neutral funds to the United States during the first 8 months of the year has already been noted. The reported data show that, during the war months of 1939, Netherlands, Switzerland, and "Other Europe" 23 increased their balances in the United States by $222,000,000 and their holdings of domestic securities by $40,000,000. United States banking assets in those countries increased somewhat, probably representing a shift of funds from belligerent countries. The same group of countries shipped gold to the United States to the amount of over $110,000,000, part of which may have gone into the short-term balances and part placed under earmark. Capital flowed from the United States to Latin America during the September-December period. This movement took the form of a withdrawal of Latin American balances in this country and of additions to American-owned balances in Latin America, offset partially by net purchases of domestic and foreign securities. Far Eastern and "All other" areas exported capital to the United States in the amount of about $60,000,000. Balances in this country were increased, as also were American-owned balances in those areas. Part of the increase in Far Eastern deposits in United States banks resulted undoubtedly from the proceeds of Japanese gold shipments, which for the 4 months from September to December totaled over $58,000,000. FOREIGN INVESTMENTS POSITION OF THE UNITED STATES AS CREDITOR AND DEBTOR Capital movements during 1939 furthered the trend that has been in progress since 1930-namely, the reduction of the net creditor position of the United States.24 Although the tendency to reduce the net creditor position of this country has been in evidence in United States long-term and short-term investments abroad and in foreign long-term and short-term investments in the United States, it has been most noticeable in the increase in foreign banking and brokerage balances in this country. The net excess of long-term investments abroad over similar foreign investments in the United States was 1939. 22 The classification of a country as belligerent or neutral was based on its legal position as of the end of 23 "Other Europe" as used in the reported data includes principally the Balkans, Belgium, Scandinavian countries, and Spain. 24 Capital movements during 1937, 1938, and 1939, as they affected United States investments in foreign Countries and foreign investments in the United States, are shown in table VI, in figures 8 and 9, and in appendix C-I, table 30. 246233-40--3 |