New York's growth as a leading international financial center

New York's growth as a leading international financial center dates only from about 1914. Prior to that time, most of the international financial transactions of the United States were carried out through London, which had been for over a century the undisputed capital of world finance. The chief reasons for the rapid growth of New York as an international center were as follows:

1. The establishment of the Federal Reserve System in 1913, which, among other things, made possible the creation of a broad market in bankers' acceptances.
2. The outbreak of the First World War, which reduced the importance of most of the European financial centers and changed the United States from a debtor to a creditor nation.
3. The currency chaos prevailing in a number of countries, and the wide fluctuations of the pound sterling from 1919 to 1925, which made the old established financial centers unattractive.
4. The rise of the United States to the rank of the foremost industrial nation of the world.
5. The rapid growth of New York's financial institutions.
6. The acquisition of large amounts of gold by the United States, which gave the dollar a monetary backing unequaled by any other important currency.
7. The vast accumulation of capital and the favorable balance of payments of the United States, which made possible the export of capital from this country on a large scale.

All these factors combined made the dollar an important international medium of exchange and shifted to New York many financial transactions formerly carried out elsewhere. New York's history as a major international financial center may be divided into the following periods:

FROM 1914 TO 1921. This period was marked by a sharp expansion of the foreign trade of the United States and the emergence of New York as a leading international center. However, the collapse of commodity prices in 1920 caused a drastic decline in United States foreign trade, accompanied by severe losses sustained by financial institutions. The principal reasons for the losses were:

a. Inexperience with foreign credits and international transactions in general.
b. Overlending for speculative purposes, notably in commodities.
c. The depression which started around the middle of 1920 accompanied by the depreciation of many currencies and substantial losses in all financial centers.

FROM 1922 TO 1933. The second phase, too, was an unhappy one. Again it was characterized by large-scale credit expansion and an aftermath of heavy losses to American financial institutions, and this time to thousands of individual investors as well. It is noteworthy, however, that contrary to the general impression and despite the severe losses incurred in a number of cases, foreign investments made during this period eventually paid this country a substantial net return.This period was marked by: a. Unsound economic policies followed by the United States and by a number of other countries. Although during this period the United States became the foremost creditor nation of the world, it twice raised its tariffs to record high levels, thus making it difficult for foreigners to obtain dollars through exports for paying for imports from this country and principal and interest on their obligations outstanding in the United States. Other countries also adopted restrictive trade policies, partly in defensive retaliation against this country's actions.
b. Overlending abroad and disregard of the possibility of transfer difficulties. Many experienced bankers believed that an international transfer problem could not arise because an increase in interest rates by a central bank of a country on the gold standard would immediately attract funds from abroad. What was overlooked was the fact that American and other banks which had made substantial commitments abroad-in Germany, for example-might be unwilling to increase them, regardless of the rate of interest.
c. The existence of reparations and interallied war debts. It was apparent from the beginning that Germany would not be in a position to pay the amount of reparations imposed after World War I. Similarly, it was evident that the repayment of war debts to the United States could not be achieved unless the United States was willing to accept much larger quantities of goods and services from abroad or was willing to absorb a large volume of foreign securities indefinitely.
d. The extensive lending by American banks of short-term funds to foreign countries to finance their internal transactions, and the abuse of acceptance credit principles.
e. The abrupt cessation of foreign lending after 1929. This greatly aggravated the transfer problem and made financial difficulties inevitable for many nations.
f. The poor choice of investment risks, especially in the field of long-term loans, by inexperienced investment houses.
g. The sharp curtailment of American imports which accompanied the decline of business activity after 1929.
h. These factors intensified the world-wide economic depression and led to the abandonment of the gold standard by Great Britain in 1931, by the United States in 1933, and ultimately by the gold bloc countries under the leadership of France in 1936.

FROM 1934 TO 1941. This period was marked by some revival of international trade, by the gradual reduction of American direct investments abroad, by the huge inflow of foreign capital to the United States, chiefly in the form of gold, and by the establishment of bilateral trade arrangements which restricted the normal operation of the international money centers. From the official devaluation of the dollar on January 30, 1934, to the outbreak of World War II in September, 1939, there was a net inflow of gold to the United States of over $10 billion (not including $1.1 billion of earmarked gold), caused chiefly by the flight of capital from Europe. From 1939 until the enactment of Lend-Lease in March, 1941, large amounts of foreign funds flowed to this country to pay for war supplies.