Auditoría propiamente dicha

VARIABLE PERIOD ON TENDENCY

OF £

REASON

K1 Dec. 1931-Feb. 1932 weak Fears of inflation; rush of imports to beat the tariff.

K2 Jan.-Feb. 1933 strong Capital inflow.

K3 May-Aug. 193*+ weak Temporary factors; fears of inflation; reports of the pound's vulnerability.

K4 Mar. 1935 weak Loss of confidence in the

pound (various reasons).

The Americans reacted quietly (though with some surprise) to

Britain leaving gold; they took the view that Britain's position justi­ fied her action and consequently there was no great tendency to criticise. That is not to say that the British action did not have consequences for the dollar: on the fall of the pound, attention shifted to dollar and in October there was a large drain of gold from the US.(particularly to France), as numerous European currencies converted from a gold exchange to a gold bullion standard and consequently began to change devisen into gold at a great rate. There were also other reasons for the dollar to weaken including a loss of confidence in the American banks - "It is true that in certain respects the American banking position

(2 1)

has been causing misgivings" - and a belief that Hoover's new economic proposals, particularly the formation of the National Credit Corporation,

"represent^ed7 the administration of a mild dose of inflation". The outflow of gold (to Europe) continued until the end of the year but October was the month when the dollar seemed under the greatest pressure

and, to some extent, the outflow to Europe was being offset by an inflow from Japan by November. Thus October, 1931 marks the first

(23) American speculative dummy.

The year 1932 was one of two halves for the dollar which tended towards weakness until mid-June and then recovered in the second half of the year. The beginning of the U.S. policy of credit expansion

(Hoover's version) in January and the passing of the Glass-Steagle Act, which permitted a further expansion of Federal reserve credit, in February led to some misgivings about the dollar, but the real weakness seems to have developed in April-May after it had been revealed that the American budget was unbalanced. This appears to have led to a minor run on the dollar and therefore April-May, 1932 marks the second American speculative dummy. The dollar then recovered in mid-June and maintained its position due to a combination of the balancing of the budget, low British interest rates (the cheap money policy) and seasonal demand for dollars - the latter two influences being picked up by other variables in the model - and also the fact that the process of running down her New York balances, which had been undertaken by France in the first half of the year, came to an end. This recovery was interrupted in October when Hoover revealed that the U.S. had come close to abandoning the gold standard in the spring but the consequent speculative movement of funds against the dollar was short-lived and recovery was swift.

The next five months cover the interregnum between Roosevelt's election and his taking office. This was a period of some uncertainty aggravated by the lack of co-operation between the President and President­ elect over the two major problems of the period — the war debt defaults and the banking failures - with the latter apparently causing the dollar

- 146 -

to weaken in January-February 1933» Thus, there is a case for

treating the whole period as one of expected dollar weakness although it may be argued that, given the extent of Roosevelt's electoral

victory, a period of dollar strength in anticipation of hi6 eventually taking power might have occurred. Either way, a dummy variable for the November, 1932 to March, 1933 period is appropriate with the probability

(though not certainty) of it being associated with dollar weakness.

On April 19th, 1933 the gold standard was formally suspended in the U.S. In spite of the banking crises, the dollar was not forced off gold, as the pound had been before it, but rather it was a conscious

(24)

act of policy. A nine month period of depreciation then took place until the dollar was restabilised in January, 193^5 the depreciation was a rather uneven affair and was particularly rapid in the period immediately following the suspension of the gold standard and again in the October-November (1933) period, but with a pause in the early autumn and even a slight recovery in December. The rapid depreciation of the dollar in the April-June period was undoubtedly related,to some extent, to rises in U.S. prices (particularly wholesale prices although the cost-of-living index also rose) and to the rise in employment indices

(which proxy income). However, the tendencies encouraged by the movements of these indices were aggravated by capital movements: there was a flight of U.S. capital out of the country, a withdrawal of foreign capital

invested in American securities, a widespread failure to repatriate the proceeds of American export sales and also an element of purely "speculative" capital outflow. This continued until the early autumn when the depreciation came to a temporary halt due partly to bears of dollars covering their position and also the beginning of seasonal

purchases of dollars but mainly because of rumours of impending stabili­ sation of the dollar.

In fact 6uch rumours proved to be totally incorrect, since in late October Roosevelt announced a new policy of official gold purchases with the stated objective of depreciating the dollar and,

for the next six weeks, deliberate government policy and a fresh flight of capital combined to cause a second phase of rapid dollar depreciation until it was stabilised at 59*06 per cent of its old value (in terms of gold) in January, 193*+. There was no rise in the American price indices or income proxies during this second phase of rapid depreciation which suggests that it was due wholly to "non­ economic fundamental" causes. Consequently, according to many

(25)

sources, the dollar entered into a period during which it was considerably undervalued which lasted (approximately) until the end

(26

of 193*+. This undervaluation of the dollar overshadows any tendency of the dollar to fluctuate (for speculative reasons) in 193*+ although it should be pointed out that fears of inflation did cause the dollar to weaken slightly in three months - April, August and October. ' Thus it is clear that the whole of the April 1933

to December 193*+ period was one of dollar undervaluation at least in part because of speculative factors, although this applies less to the first phase of rapid depreciation (April-June, 1933) than the second (November, 1933 to January, 193*0» Therefore it seems plausible to construct two dummy variables - S k (April-October, 1933) and S5

(November, 1933-December, 193*+) - to allow for the implication of thi6 which is that the degree of undervaluation may well have differed between the two sub-periods (being less for the first that the second).

In the next two years attention in the foreign exchange shifted to the gold bloc and therefore much of the speculative influence on the dollar i6 picked up elswhere. Nevertheless, there are two periods

- ii+8 -

which would seem to merit an American speculative dummy. Firstly, there was the uncertainty caused at the beginning of 1935 by the

(

)

impending Gold Clause Judgement. Had the decision gone against the government, there was a widespread feeling that the dollar would have been revalued (in terms of gold) and, consequently, speculative funds flowed into New York. On February 18th, the Supreme Court ruled narrowly (and controversially) in favour of the government and this removed any likelihood of revaluation. However, there was surprisingly no reaction against the dollar in the second half of the month:

"...contrary to previous expectations, there was no great rush to sell dollars..." (29)

"...there was comparatively little selling of dollars.... This suggests that there has been a genuine movement of funds from Europe to the United States..." (30)

(31)

Indeed, according to one source, the tendency of the dollar to appreciate continued until April (encouraged by the belga devaluation in 1935) and consequently, the sixth American dummy runs from January to April, 1935.

There were then a series of months during which the dollar may have been affected by speculative capital flows caused by various "non-economic fundamental" events: the American silver purchases in July, the nervousness in Europe in autumn caused by the Italy-Ethiopia conflict, fears of inflation in January-February, 1936 stemming from the passing of the Veteran's Bonus Bill with the consequent emergence of a budget deficit and the tendency of the dollar to weaken against the pound in sympathy with the franc in mid-1936. However, none of these events seem to have exerted a strong enough effect to merit

a dummy variable or, in one case (the Italy-Ethiopia war), the influence is likely to be picked up elsewhere. In fact, other than the Gold Clause Judgement, the only incident that would seem to require a speculative dummy in the 1935-56 period is the large inflow of "hot

(32 ) money" in October-November, 1936 which was of "a non-recurrent nature" and, to some extent, even this is more a gold bloc phenomenon than an American one.

In December, 1936 a programme of gold sterilization was intro­ duced to prevent further gold inflows from creating excess reserves and in January, 1937 the Federal Reserve Board raised reserve

requirements. However, the gold inflow continued in the first three months of 1937 and reached its height with the gold scares of

(particularly) April and late May/early June. These "gold scares" involved rumours of a cessation of gold purchases and a drop in the dollar price of gold (and hence a dollar appreciation). This would seem to suggest a dummy variable for the whole of the January-June, 1937 period to take account of dollar strength.

In late 1937, however, the tendency of the dollar reversed itself:

"This second 'gold scare' reversed itself into a ^dollar scare' late in the same year, after the stock market and business activity had slumped in the United States and some fear had arisen that the dollar might be devalued against gold as an antirecession measure. The speculative outflow of funds from the United States continued through the first half of 1938 and in the ten months up to July amounted to nearly ^1 billion". (33)

This trend in the dollar was accelerated in April (1938) by Roosevelt's announcement of a new programme of "pump-priming" which was felt by

(

3*0

^ 0 -

"The general feeling on the Continent is that Booner or later the dollar will once more be devalued. Early

in the week there were strong rumoure to this effect..." (35)

All this would suggest a further dummy variable for the October, 1937 to July, 1938 period to reflect dollar weakness.

The last five months of 1938 marked a political crisis in

Europe and a consequent flow of funds to America. It began in August when "a world-wide rush into dollars and gold"^'^^ was reported which extended into September and reached its peak in early October when it was observed that:

"It is no longer a question of the flight of hot money. Instead balances which have been held in London for years are now migrating to New York". (37)

The nervousness in Europe (and capital outflow) was apparent throughout October even after the Munich Agreement and "continued at a slackened

/ - i g \

rate in November and December". Therefore a final American dummy

will be constructed for the August-Becember, 1938 period to reflect dollar strength. The American speculative dummies are summarized in Table

5.2 below.