New-York tribune., 1920-10-04
Lays flight Money! Here
To Europe's Z. S. Debt
bank Economist Attempts to Show Why $780,.
100000 Owed by Nations Abroad to Investors
in America Is Basic Cause of Credit Strngency


if American investors had purchased
European securities during the period
under discussion to this amount. I'm
funded debt, however, due on demand
or short notice, and due, moreover, to
many thousands of independent credi-
tors, presents a real problem.
The primary source from which this
money has been drawn has been
American banks, which have provided
1t directly or indirectly through the
creation of new bank credit. The
major part of this credit has not been
extended directly by American banks.
instance, out of the working capital of
American producers and exporters.
who have thus tied up a great deal of
working capital in indefinite advances
to Europe. This has led them, how
ever, to have recourse to their Ameri-
can banks for the replenishment of
their working capital under ordinary
line of credit" loans, and the banks
have thus indirectly borne the burden
even where they have not directly
borne it.
In the United States the total loans
and investments of reporting member
banks" of the Federal Reserve system
increased 254 per cent from April II,
1919. to April 9, 1920. From May l2,
1919, to May 4, 1920, the loans and dis
counts Of all national banks increased
"a per cent. This increase occurred
despite sharp reduction in the hold
ings by American banks of govern
ment war paper of all kinds and de-
spite very sharp decline in the hold
ing Of Treasury certificates of in
debtedness
Explanation of Expansion
The primary explanation of this tre-
mendous expansion of bank credit in
the United States is our unbalanced
and unfinanced export trade. together
with the rising prices, Fictitious pros
perity and speculation, which have
grown out of the unbalanced export
trade. The view, which even yet con-
tlnues to be expressed, that our bank
expansion has been due to continued
government borrowing of bank money
is demonstrably erroneous for the
period since April II, 1919.
similar but intensified story can
be told of British banks. From June,
1913, to June, 1920, there was an ex-
pansion of Al per cent in bills dis
counted and advances" of the twenty
leading banks of the United Kingdom
exclusive of the Bank of England),
despite the fact that these banks re-
duced their holdings of British Treas
ury bills during this period.
American banks, then, have expanded
because of the growth of the unfunded
debt Of Europe to the United States;
British banks, likewise. have expanded
primarily because of the growth of the
unfunded' debt of the Continent to
London.
This process must not be allowed to
continue longer. Our Federal Reserve
system has inaugurated a policy of
credit control through increasing money
rates. The higher money rates are
necessary, but the most effective faa-
ture of a policy of credit control Viii
be a rigorous discrimination against
bank loans designed to increase this
unfunded European debt. Such policy
will strike al the root of the whole mat
ter. The only sound policy for fnanc-
ing a one-sided flow of goods is one
baseo on the ultimate placement with
investors of longtime loans.
t I