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Secrecy on the part of the Divisenstellen was ensured by an edict rendering anyone guilty of betraying any information obtained liable to a substantial fine or imprisonment.

The business of German money changers was very much hampered and restricted by emergency legislation. Money changers were certainly permitted to buy and sell foreign currencies against their equivalent in German marks, but the total amount so exchanged for one and the same person or firm by one or more money changers on one single day could not exceed 1,000 marks, nor in one calendar month 3,000 marks, unless special permission had been granted by the State Bank. Certain exceptions were made. For instance, it was not necessary to obtain permission to send funds abroad for the purpose of providing for the necessary disbursement of ships, nor for the purchase abroad of German war bonds or exchequer bonds. That part of Belgium occupied by German troops was treated in an exceptional manner and its exchange could be purchased or sold to any extent. Still, even in Germany, a very large export and import business could be carried on with Holland, Switzer- land and Scandinavia. That trade was practically impossible with more distant countries was due to the blockade and not to foreign exchange restrictions.

In order .to appreciate the effect produced by the war on the mechanism of dealings in foreign exchange, it is necessary to bear in mind the position previously occupied by the sterling bill throughout the world. Owing to the fact that London had been, for a far longer period than any other country, an absolutely free market for gold, and that the Bank of England had been willing to cash its notes on presentation, in gold to any extent, both for internal use and for export, the " exchange " of the whole world centred round the sterling bill, which had come to be regarded as actual interest-bearing gold. Nearly every foreign state bank was in the habit of keeping a certain portion of its reserve in sterling bills, which were renewed from time to time, as they became due, and only " melted " when and as these banks desired to replenish their stocks of gold.

Another thing to be remembered is the facility with which the Government banks of England, France, Germany, Belgium, Holland and other countries, could, until the outbreak of war, control their exchanges by raising or lowering their official discount rates. If, for instance, the rate of exchange between London and Paris was such that gold was being sent in incon- venient quantities from England to France, the Bank of England would raise the bank rate (and thus the value of money) in London to a sufficient extent to make it profitable for French banks to leave their money in England, or English bankers would draw three-months bills on France, in order to meet the demand for remittances to that country. Such bills, being almost invariably of the highest quality, were eagerly sought for by French banks and readily discounted in Paris.

The immediate effect of the outbreak of hostilities at the open- ing of Aug. 1914 was to break down the whole fabric of foreign exchange throughout the world. Credit, as regards foreign ex- change, for the time being ceased to exist, and in' every country there was a rush on the part of bankers and merchants to bring home their credit balance from abroad and to " melt " all their foreign bills. The movement of exchanges at the beginning

of Aug. 1914 was most interesting. In America, for a short time, it was quite impossible to obtain exchange to meet indebtedness by remittances to London, and the value of the pound sterling in New York in consequence rose in one day as much as 30 per cent. On the other hand, in Paris the value of the pound depreciated 4 per cent. And this was in spite of the fact that, contrary to what prevailed in other countries, no prohibition was then put on the export of gold from the Bank of England.

In London, during the Aug. 1914 bank-holiday interval, which was prolonged by Royal Proclamation from Monday the -3rd until Friday the 6th, in order to avoid a panic, one of the most important problems before the British Treasury was the re- establishment of foreign exchange, since it was recognized that, until this was accomplished, it would be quite impossible to carry on the foreign trade of the country. It was necessary in the first instance to reestablish the position of the sterling bill. For this purpose two things were necessary: (i) to induce English accepting houses to continue to grant legitimate trade credits, and (2) to induce banks and discount houses to discount these acceptances when created. The accepting houses realized that an unknown but probably a large proportion of their acceptances would not be provided for by the drawers at due date, while the discount houses believed that many of the bills bearing their endorsements or guaranteed by them might not be met by the acceptors. Neither acceptors nor endorsers therefore felt them- selves justified in adding to their liabilities.

These two apparently insuperable difficulties were overcome by the Treasury, with the assistance of the Bank of England. The Government, by a series of proclamations, relieved the endorsers of all approved sterling bills of their liability as endorsers, and authorized the Bank of England to advance at interest to all approved English acceptors, who, for reasons connected either directly or indirectly with the war, should not receive the money necessary to meet their acceptances at maturity, loans to meet these bills, repayable on or before one year after the termination of the war. Almost immediately these measures had the desired effect, and so far as the import trade of the United Kingdom was concerned exchange very soon resumed more or less its normal position. All trustworthy export houses abroad were sure of being able to finance their exports to Great Britain, and could rely on finding a ready market in London for their sterling bills. Cash payments, owing to the irregularity of the post, were usually made by telegraphic transfers. Exchange operations resulting from British export trade were not found so easy to carry out, and it was in this connexion that the mechanism of exchange underwent most change. No belligerent country other than England had been able in the early days of the war to maintain a free discount market; and throughout Europe, in those coun- tries where gold had hitherto been obtainable, its export was prohibited. The result was that, in continental rates of exchange on London, although there was a limit as to the extent of a fall, owing to there still being a free gold market in England, there was no limit as to a rise. As a result, no prudent bank or exchange dealer in London kept any substantial balance abroad, and portfolios of bills in foreign currency (formerly held to the value of tens of millions of pounds) were no longer maintained. Their place in the business was taken by Treasury bills.

TABLE D. Official Rates of Exchange in Berlin.

Holland.

Denmark.

Sweden.

Norway.

Switzerland.

Vienna.

Madrid.

Bulgaria.

Constanti- nople.

Parity : Fl. 100 equals M.I68}

Parity : Kr. 100 equals

M.II2*

Parity: Kr. 100 equals

M.II2}

Parity : Kr. 100 equals

M.II2J

Parity : Fr. 100 equals M.8i-

Parity: Kr. 100 equals M.8 5 -

Parity : Pts. too equals M.8i-

Parity : Leva. 100 equals M.8i-

Parity : i (Turkish) equals M.i-

1916 Highest Lowest 1917 Highest Lowest. 1918 Highest Lowest.

239i 217

3I4|

22OJ

364 215*

164

H8f

233 161}

225*

152*

i;i| i49i

259! 171!

250} 162}

I6 7i I 4 8J

234} i65i

238! I59i

n6|

lOlf

I5 fi

Il6j 178!

II2J

71-57 63-95

64-45 63-95

66-25

5.V95

136* 124!

141 103

79i 7 6i

8o| 79i

80 79

2 1 '05

19-90

21-10 I8-85