# Great Speeches of the War/Holden

SIR EDWARD HOLDEN
[Speech of the well-known financier on the economic measures adopted by Germany to stand the strain of war, and on the influences of economic factors on the duration of the War, made on January 30, 1915.]
In view of the attention now being paid to the influence of economic factors on the length and result of the war, it may be well to look at Germany's economic preparations for war, and the prospects of the measures adopted by them to stand the strain of a war which so far has proved far different from the expectation of the German Government.
Economic events in Germany immediately before and after the outbreak of war were significant. On July 18 last, the Dresdner Bank caused a great commotion by selling its securities and by advising its clients to sell their securities. This was recognized as the first semi-official intimation of a probable European conflagration and Berlin became apprehensive. War was declared between Austria and Servia on the 28th, people were seized with panic and great runs took place on the Reichsbank for gold, and on the Joint Stock Banks of Germany for gold or notes. The Reichsbank lost 10 millions sterling of gold or thereabouts, and to prevent further loss a measure was passed prohibiting the bank from paying any more of its notes in gold. To meet the difficulties of the other banks, the Reichsbank discounted during the month of August about 200 millions sterling of bills. Of this amount 117 millions were drawn out in notes, with which the banks were enabled to meet the runs.
Germany next proceeded to establish War Loan Banks, War Credit Banks, and War Aid Banks all over the country under the patronage of Corporations, Municipalities, and private financiers, and to make use of the Mortgage Banks already established. The Reichsbank had the right to issue notes to any amount, provided it held as cover practically one-third in gold and two-thirds in bills of exchange. As the ​Reichsbank was to play an important part in war finance, they were careful to keep down the issue of their notes as much as possible, as they knew that criticism would be directed against them. They, therefore, proceeded to issue, and were continuing to issue, notes through the various war and credit banks. Government securities, other securities, and produce are pledged with the war banks, advances to the extent of 75 per cent, being made on the first-named, and on the other classes to the extent of 45 per cent. These advances were made in war bank notes, which were legal tender and perform all the functions of money. The mortgage banks were under the control of Chambers of Commerce and Municipalities, and made advances on the mortgage of properties by an issue of notes which were legal tender and performed all the functions of money.
In this way the country was gradually being supplied with the currency required for carrying on the war, but, knowing that the eyes of the world would be fixed on their gold position, they were careful to maintain a difference between the Reichsbank notes and the notes of the two other classes of banks. The Reichsbank note, although it is no longer payable in gold, was issued on the basis of gold and bills of exchange, while the notes of the war and credit banks had no relation whatever to gold, and were issued on the basis of securities and properties.
The mobilization of the German Armies was financed by the notes of the Reichsbank for from four to six weeks, so that by the end of August, with the war and other demands, the total discounts and loans of the Reichsbank amounted to about 243 millions sterling and the total notes issued to about 212 millions. By this time the pressure on the bank was becoming too great, the war loan was issued and a sum of about 223 millions, partly on Bonds and partly on Treasury Notes, was raised. By the end of the year the whole of the loan was paid up and the debt to the Reichsbank discharged. This first loan was subscribed for to the extent of about 40 millions sterling by persons who obtained loans through the war banks, and 40 millions by depositors in savings banks, leaving about 143 millions to be subscribed by Joint Stock Banks and other people. Thus they saw people pledging their securities and properties and with the proceeds taking up the loan.
The Reichsbank at the end of December, on the basis of its gold, was able to issue a further 200 millions sterling of notes. The money for financing the war would therefore be obtained ​again from the bank until the pressure became too great, when a new loan of 250 millions sterling, already sanctioned, would be issued. The operations of the war and mortgage banks would then again take place; new loans would be created, new securities and new properties pledged, and when this loan was taken up the Reichsbank would a second time be paid off. This would carry on the war up to June, when no doubt the Reichsbank would once more be required to provide funds. New loans would be issued and further properties pledged, so we might expect an evil day by and by, when this huge pledging would have to be paid off, and heavy depreciations must inevitably result.
One might well ask the question. How often could this operation be repeated? The cost of the war to Germany was somewhere about two millions per day, so that by the end of twelve months there will have been a drain on the people, either of liquid resources or securities, properties, or produce, amounting to over 700 million sterling.
Germany has a population of about 70 millions of people to be fed, clothed, and largely provided with employment. In 1913 imports into Germany amounted to about 535 millions sterling, and of this 228 millions came from the Allies and their Colonies. The war reduced Germany's imports at one stroke to about 307 millions sterling. A considerable amount of these imports consisted of food products, a large proportion of which came from the Allies. Having regard to the control which the Allies have over the seas, and further to the fact that the Allies' ships as well as German ships are no longer available for the carrying of freight to Germany, one may ask whether the whole of this amount of 307 millions might still find its way into Germany, always remembering that German importers will be prepared to offer greatly enhanced prices to secure what is absolutely necessary for them. For example, it is alleged that cotton, which costs from 6-8 cents per lb. in America, is being sold at from 18-20 cents per lb. in German ports. These imports must be paid for, either by exports, securities, or gold. It is feared that securities held by Germans may find their way on to the London Stock Exchange, but restrictions of such a nature have been placed on transactions there that this will be prevented, and it would appear that restrictions have also been placed on other Stock Exchanges, although perhaps not to so great an extent as in London. Assuming, therefore, that ​the difficulties placed in the way of the realization of securities held by Germans are insurmountable, the only two ways remaining of paying for her imports are by exports and by gold.As one of England's objects in taking part in the war has been to prevent the annihilation of small States, the action of such countries in assisting our enemies with food and other commodities appeared ungrateful and suicidal. The exports of Germany in 1913 amounted to about 500 millions sterling, and of this the Allies and their Colonies took about 200 millions, leaving a balance of 300 millions. What proportion of this 300 millions would Germany be able to export? Taking again into consideration that she has neither the same number of ships nor the same number of men engaged in her industries as she had in 1913, and, further, that such proportion of those exports which contain imported raw material will be increased in price, there can be no doubt that her exports will fall off to a much greater extent than her imports, and that the balance will have to be paid in gold. Almost superhuman efforts have been, and are being made, to increase the gold in the Reichsbank. The increase has hitherto been at the rate of about i½ millions per week, apparently from circulation and from other sources. The gold now reached about 106 millions sterling. But in order to pay for their imports through Scandinavia and Holland they have already had to export about 5 millions sterling of gold to those countries. Thus the maintenance of the financial position of Germany will depend on the balance of her imports over exports being small, and on the increase of gold exceeding or being equal to the export of gold. I am of opinion that there be will no cessation of this war on account of the gold position in Germany, at all events within twelve months, and it may be longer. But there might be a cessation of hostilities for other reasons. I should say that the weakness would first show itself, if it has not already done so, in Austria and Hungary.
Austria and Hungary are poor countries in comparison with Germany, and have suffered great losses and great lockups of resources in consequence of the Balkan Wars. The Austro-Hungarian Bank performs the same functions for these countries as the Reichsbank does for Germany. For a considerable time the Dual Monarchy has been in the position that its imports have been larger than its exports; consequently, their exchanges have been against them, and although there has been a tendency for their gold to diminish rather ​than to increase, yet they have succeeded in maintaining it during the last few years at between 50 and 52 millions sterling. According to law, the Austro-Hungarian Bank is empowered to issue notes so long as two-fifths of the issue is covered by gold and silver. At the beginning of the war there were in the bank about 50 millions sterling of gold. It is difficult to say what gold is held at present, as the bank has ceased to issue a balance-sheet, and one would conclude that the amount of gold must have fallen and not increased, otherwise there would be no necessity for discontinuing to make known their financial position. Assuming, however, that the gold has not diminished and that no alteration has been made in their law, the bank would be able to assist in the financing of the war to the extent of an additional 70 millions sterling. Like Germany, Austria also established war banks for the same purpose, but not to the same extent, but we have no record of the Austro-Hungarian Bank financing the war in the same way as the Reichsbank did. A war loan was issued in November, and to the surprise of most people the subscriptions reached the relatively large total of about 130 millions sterling. Of this about 60 per cent, was subscribed through the joint stock and other banks of Austria-Hungary, leaving about 40 per cent to the general public.
It was reported that the people were so patriotic and so desirous of assisting their country that small farmers sent the proceeds of their crops, country waiters sent their £5 notes, and servants in country houses sent their savings. In 1913 her imports amounted to about 140 millions sterling, and of these she took about 40 millions from the Allied countries, leaving a balance from other countries of about 100 millions. A large amount of her imports came from her neighbours, and she was not, therefore, to such an extent as Germany dependent on sea transport. She would, of course, curtail all luxuries, but it seems probable that she would be able to keep up her imports to about 100 millions sterling. Her exports in 1913 amounted to about 114 millions, and of these the Allies took about 25 millions, leaving a balance of about 90 millions. In this balance there might be a shrinkage of about one-half, leaving her with exports of, say, between 45 and 50 millions; thus the difference between her imports and exports might amount to the latter figure. She might, therefore, be called upon to pay for her foreign purchases to the extent of between 40 and 50 millions sterling after she had used her exports ​in part payment. Even if she pledged her properties and securities as Germany has done, and found sufficient gold to pay for the balance of her imports, one has difficulty in coming to the conclusion that she will be able to continue the war for any great length of time unless she receives financial assistance from Germany.
A German financier, a director of the Deutsche Bank, has made a comparison between the financial condition of Germany and of this country. He contends that Berlin has passed through the financial crisis better than London, inasmuch as we in England had to introduce a Moratorium and they had not. He might also have said: "See how we in Germany have been preparing to meet this crisis, while you in your simplicity have done nothing! At the beginning of 1910, the year before the Agadir difficulty, we Germans had only about 30 millions sterling of gold in the Reichsbank; in January, 1911, the year of the Agadir difficulty, we had about 36 millions; in January, 1912, the year after the trouble, we had about 40 millions; in January, 1913, we had about 45 millions; in January, 1914, we had about 60 millions; we commenced the war with about 68 millions; and at the present time we have about 106 millions. We have increased our gold during these years by keeping up our bank rate to 5 and 6 per cent.; by selling exchange on London to prevent gold leaving us; by threatening our bankers with a blunderbuss if they dared to export gold; by taking from England large amounts of South African gold, even at a loss; by putting out small notes in order to drive gold into the bank; by coining silver and putting that into circulation to drive in the gold; by paying State employees in small notes instead of gold; and since the outbreak of war our supply has been further augmented—by stopping people at the frontiers, taking their gold from them and giving them notes; by clerics preaching to the people to give up their gold and take notes; by melting down gold ornaments and sending the gold into the Reichsbank in exchange for notes; by giving soldiers certain leave of absence if they could collect ten-mark gold pieces and longer leave for twenty-mark pieces, also in exchange for notes." In fact, he might have summed up the whole position in the words of an American writer who said: "When the pinch arises Germany will organize herself economically as thoroughly and as ruthlessly as she organized her armies," and he might have said, in the words of another German banker, "Every mark ​will be squeezed until it shrieks." He might continue: "It is true we had runs on the Reichsbank and on our Joint Stock Banks; it is true we lost ten millions of gold from the Reichsbank (which we have now got back), but our Joint Stock Banks met all their liabilities, because our currency system is better than yours. We discounted about 120 millions sterling of bills and issued to our banks and the public 120 millions of notes. You could not have done this, because your law prevented you. If you had issued notes based on one-third gold and two-thirds of securities, you need not have had a Moratorium, that is, of course, if you had had the foresight to alter your law before the crisis was upon you." The German financier might further call our attention to what President Havenstein said on September 9 last: "The plans for the financial mobilization of the country, thought out and prepared down to the final details by all the institutions concerned, have proved extraordinarily efficient. There was no breakdown, no leakage, or none that could have been foreseen in time of peace,"
Of what did this "financial mobilization" in Germany, "by all the institutions concerned," consist? The war banks created in all important towns, with capitals varying with the populations, were really all "annexes" of the Reichsbank, and the Government gave them the power of discounting. The discounts or advances were to be covered by different kinds of securities. The majority were to be made for six months (on the presumption, I suppose, that the war would be finished by that time). When the advances were made, special currency notes, different in appearance from the notes of the Reichsbank, were issued for the amount of the advance. These notes were of denominations as low as the equivalents of one shilling, two shillings, and five shillings. Their connection with the Reichsbank was most important, inasmuch as the notes could be paid into that institution to take up the War Loan, or for credits for other purposes. These notes had greater power than Reichsbank notes, because when they were paid into the Reichsbank they formed a part of its cash balance or reserve upon which Reichsbank notes could be issued, thus giving the war bank notes practically the same qualities as gold. The object of issuing Reichsbank notes on the basis of war bank notes was to enable them to increase the issue of Reichsbank notes in case of necessity, and further because the latter had a better status among the people than the former.
​One of the objects of the war bank notes was to drive gold from circulation into the Reichsbank. Any one examining the statement of the Reichsbank during the last three or four months would see that these notes formed a considerable amount of the bank's reserve. It was to be presumed that in this plan of mobilization the war banks would be able to increase their advances and their issues on the creation of every new War Loan. The charge to be made for the accommodation granted was from ½ per cent, to 1 per cent, over the Reichsbank rate, which was 6 per cent, up to December 15, and has been 5 per cent, since that date. The fact that there were to be margins of 25 per cent, on Government securities and of 45 to 55 per cent, on other securities showed that the "mobilizers" realized that they must provide against the possibility of heavy depreciations. The Reichsbank had 486 offices throughout the country, and each office, no doubt, would have the faculty for taking in the war bank notes and putting out Reichsbank notes. This meant nothing more nor less than an issue of Reichsbank notes on the basis of the securities of all these war banks. A most important feature of this mobilization scheme was that from August 1 the Reichsbank declined to pay its notes in gold. They made greater use of the mortgage banks, the notes of which were identical in power and use with the notes of the war banks. Another part of their scheme was to relieve the pressure on insurance companies by forming an insurance bank, which advanced 40 per cent, on the value of policies. These advances were paid in notes, which were exchanged for Reichsbank notes in the same way as war and mortgage bank notes. All these banks were authorized, in the first instance, to issue in the aggregate about 70 millions sterling of currency notes, but this amount was afterwards increased to about 140 millions. There was one great defect in these mobilization schemes. They may have for the time supplied all the currency needed for the wants of the people and for subscriptions to the War Loans, but the defect was that the Reichsbank note, which had hitherto been paid in gold, had now become inconvertible. This caused the note to fall to a discount.
To see how this depreciation in the note was brought about, I examined the exchange between Amsterdam and Berlin. If the imports into Germany from Holland were equal to the exports from Germany to Holland, we should have what is ​called the par of exchange—i.e., 59.26 florins would be equal in value to 100 marks. There would be debts in Amsterdam due to Berlin equal to the debts in Berlin due to Amsterdam. These would be settled by the merchants in Berlin, who had sent goods to Holland, selling cheques on Amsterdam to merchants in Berlin, who had purchased goods from Holland. Suppose the goods which were shipped to Holland from Germany were less in value than the goods shipped from Holland to Germany, then, evidently, there would be more buyers in Berlin of exchange on Amsterdam than sellers, the price would begin to move from par, and the buyer in Berlin would have to take less florins in Amsterdam for his 100 marks. The only check to this fall would be the export of gold. If he could not obtain gold, the exchange would fall further, and the merchant who bought the exchange would have to give more notes to the seller. Consequently the cost of the commodities would be higher, and the note would buy less than it would have bought if it had been exchangeable for gold. Since the beginning of this war the merchants in Berlin had to pay 100 marks for 54.20 florins on an average, showing a loss of over five florins per 100 marks, or about 8½ per cent. The exchanges show during the whole period of the war that the exports from Germany to Holland have been less than the imports from Holland to Germany. The exchanges have continuously been below par, the prices of the goods have increased correspondingly and the consumers have had to give more notes. Consequently, during the whole time, the notes have been at a discount. In the case of the Scandinavian imports and exports to and from Germany we find the same thing. The exchanges with Stockholm, Christiania, and Copenhagen have all fallen, showing in each case that merchants in Germany have not been getting par value for their goods. The par of exchange between New York and Berlin was 95.28 cents for four marks. There were more sellers of exchange in respect to goods shipped to Germany from America than buyers of exchange for goods shipped from Germany to America, and four marks had been worth as little as 86 cents in New York, which meant a loss of about 9½ per cent. If there was a rise in price for any other reason it would cause a still larger loss on the note.
These are the inevitable results of refusing to pay out gold, but the designers of these schemes knew that, whatever happened, they must economize their gold. Nevertheless, they ​have been compelled to send gold to Holland and the Scandinavian countries to the extent of about 5 millions. For this and other reasons I cannot agree with the Director of the Deutsche Bank that Germany has got through the crisis better than we have done. The proper time to test the soundness of the schemes comprised in President Havenstein's "financial mobilization" will arrive only when all those securities which have been pledged are redeemed. It is easily conceivable that enormous losses will then occur to all those people who have been unfortunate enough to have become indebted to the war banks, the mortgage banks, or any other of those societies which have taken securities and goods in pledge.