VI

FOREIGN EXCHANGE

The success attending these measures has failed to be appreciated in foreign countries, because of the undue importance ascribed to the rates of foreign exchange. The financial status of a country is customarily judged by the rates prevailing in other countries for its exchange. The unfavorable movement of the German exchange since the outbreak of the war was regarded abroad as a sign of weakness in Germany's financial status. Such an opinion, however, does not pay adequate attention to the various causes of the decline in the German exchange rates in foreign countries. It must be considered that, like all other European countries with an active industrial and commercial life, Germany already had an international "debit " balance of trade in times of peace. During the last five years, the export and import figures compare as follows:

It will be seen that despite considerably increased export figures in the year 1913, imports still exceeded exports by 673 millions of marks. The fact that German exchange was nevertheless quoted abroad at comparatively favorable rates must be attributed to her invisible balance of trade, which, in addition to regular interest and profit earnings out of foreign investments, consisted mainly of the enormous amounts due for

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freight, mail and passenger traffic on her mercantile marine. At the outbreak of the war, this very important item of Germany's international trade balance was at once wiped out. Moreover, her exports decreased heavily, while she was still dependent upon foreign nations to furnish raw products and materials necessitated by the war. Thus her indebtedness to foreign nations was constantly increasing. For political reasons, the government could not permit gold exports to any considerable amount, and consequently the rates of foreign exchange are ruling strong in the German market. Despite these facts, however, the balance of trade cannot be looked upon as the sole cause for the important rise in the exchange rates. It may reasonably be assumed that sentiment has influenced the situation to a certain extent. It seems that in neutral countries, and particularly in the United States, which is at present leading in the international money market, the opinion and the belief still prevail that the final outcome of the European war will be in favor of the Allies. This consideration, tho but a psychological one, plays an important part in the fluctuations of the rates of exchange. The situation should not be underestimated, in view of the fact that the credit of a country is judged on the basis of its exchange quotations. If the bankers in the United States were to feel thoroly confident that Germany would be victorious, the low rate for German exchange would certainly induce them to buy German Reichsmarks, which in turn would mean an improvement in the exchange quotations. It is necessary to point out these facts in order to explain the apparent inconsistency between the above description of Germany's financial strength and the opinion thereof entertained abroad. If in foreign countries the judgment of Germany's financial status is a matter of per

sonal sentiment which only the course of events will rectify, the fact remains that the financial measures here described produced in every respect the desired effect and put the country in a position to bear the burden of the terrible struggle with comparative comfort and ease.

We believe, in conclusion, that, just as the organization of the Reichsbank in time of peace has already for years been considered a model, Germany's financial measures in anticipation of this war and brought about by it will also set a standard for other countries, if events of such weight as Europe is passing through at present should ever occur again.

LUDWIG BENDIX.