When the great Anglo-French loan of $500,000,000 was first discussed as a possible American financial feat, people over here began to wonder why Great Britain and France, whose combined wealth exceeds that of all the other nations at war, should want overseas assistance.  Since the reason for this loan as well as the disposition of proceeds are practically the same as that of most of the other Allied issues in this country in which thousands of our investors have participated, it is well worth explaining because it also carries with it a lesson in international barter.  Here it is: 

Before the war our foreign trade was growing fast.  England and France, in particular, were good customers for our wheat and other foodstuffs, iron and cotton manufactures, oil and automobiles.  In exchange we imported the product of many European factories.

Business relations between nations are not settled like transactions between individuals and firms, that is, with checks or cash.  They are settled by balances.  England’s imports from the United States, for example, are paid by her exports to us.  Usually exports and imports so nearly balance that the difference is paid by gold or with the temporary use of bank credit.  Therefore it is not a question of actual money but of exchange and this foreign exchange is a commodity whose value fluctuates with supply and demand.

Along came the war.  Millions of artisans in France and England were withdrawn from lathe and loom to fight in the battle line.  What workers remained at their posts had to produce war supplies.  Yet civilian and soldier needed food, clothing and arms.  The demand for our products increased and the United States suddenly became the work-shop and the granary of the world.

The Allies, in control of the seas, became our principal foreign customers.  American exports soared:  those of France and England declined correspondingly.  A huge balance of trade—­the biggest in our history—­swung to our favour.

This balance of trade had to be settled, but on an abnormal basis.  What was ordinarily a comparatively trivial matter of a few millions suddenly became an item of many millions and it was all owed on one side.  The demand for exchange on New York greatly exceeded the supply and the inevitable dislocation happened.  England and France had to pay a drastic premium on the American dollar.  The English pound, normally rated $4.86, dropped to $4.50; the franc, ordinarily worth 19.29 cents, fell to 16.94 cents.  This shrinkage in values was not due to any impairment of the resource or wealth of the Allies but because the machinery of international payment works automatically and unsentimentally.

Here was a crisis that without aid from us might have eventually cost us dear.  Rather than submit to the terrific drain on the exchange value of the pound and franc, England and France could have set about emulating the example of Germany and become self-sufficient.  It was not a month’s work or even a year’s work, but ultimately it would have made these countries more independent of the United States after the war is over.