% ,# "■=^. . /% - ^ ., ^ 1 « * "^^p^^ ,\' -r. S'- * . c- '- ■> ' " ,. '^ v FINANCIAL CHAPTERS OF THE WAR FINANCIAL CHAPTERS OF THE WAR BY ALEXANDER DANA NOYES AUTHOR OF "forty YEARS OF AMERICAN FINANCE" NEW YORK CHARLES SCRIBNER'S SONS 1916 Copyright, 1916, by CHARLES SCRIBNER'S SONS Published September. 1916 0CT-4l9i6 'CI.A4387l'j PREFACE The purpose of this book is to describe clearly, and explain without technicality, the remarkable financial and economic episodes which have at- tended the European War. The general public understood perfectly, from the very first days of the conflict, that its economic results were cer- tain to be as momentous as its political results. But the most experienced financiers were at loss to say beforehand what the financial character of the war would be. When it began, they found it equally impossible to measure the real signifi- cance of the first economic occurrences. It is hardly surprising, therefore, that the general pub- lic shoiild have been unable to understand what had actually happened. Financial events were in fact so extraordinary and complicated as to leave the mind of many readers of the news in complete bewilderment. It is my hope that these chapters may serve to clear up that perplexity. Perhaps no questions have been asked more frequently since July, 19 14, than the questions how the fighting nations have been able to raise the $100,000,000 per day which vi PREFACE they are spending on war ; why the seemingly con- vincing prophecy of the shortening of war be- cause of economic exhaustion has not been ful- filled; what was the meaning of that "deprecia- tion in the foreign exchanges" of which we have heard so much; whether Europe has lapsed into irredeemable paper currency like that of our Civil War; by what means the United States — ^largely dependent on Europe, in a financial way, before the war — should so suddenly have acquired the power of paying off its foreign indebtedness, fi- nancing neutral nations from its own resources, and lending even to belligerent Europe larger sums than Europe itself had raised for its earlier wars. Along with these considerations came the further inquiries : Is this American war-time pros- perity -unreal, temporary, and fictitious ? Will the conditions of 191 5 and 1916 be instantly reversed when war is over ? Has New York actually dis- placed London as the financial centre of the world ? On these questions I shall endeavor to throw some light. It would be presumptuous for any one to claim ability to answer all of them. One reason why this book bears its present title, instead of being described as a financial history of the war, is that the actual and relative importance of many eco- nomic phenomena of the period cannot be deter- mined conclusively until the war itself is over. PREFACE vu But it is possible at least to give to the general public the means of understanding exactly what has happened already. Every reader of history will agree with me that the lack of clear contem- poraneous exposition of the financial events of our own war from 1861 to 1865, or, even more par- ticularly, of the great Napoleonic wars, is one of the greatest obstacles to the full historical com- prehension of those episodes. I have drawn freely in this book on my previous discussion of the same subjects in Scribner's Maga- zine, and have also utilized an article written by me last autumn in the Yale Review. But with the recent rapid movement of events, economic as well as military and political, it will readily be understood that all previous comment had to be rewritten, and that the greater part of this book should be made up of previously unpub- lished matter. A. D. N. New York, September, 1916. CONTENTS CHAPTER PAGE I. Precedent and Prediction . . i Financial consequences of a great European war, as the experts foretold them — ^The experience of other wars — Economic side of the American Civil War — Of the Napoleonic conflict — Analogies and contrasts — ^The world's mistaken expectations when this war began. 11. The War Panic 20 Outbreak of the war and the resultant financial situation — How far the markets were caught im- prepared — The world-wide economic crisis — Run on the Bank of England — Closing of the stock ex- changes — Suspension of gold payments — A week of financial chaos. III. Emergency Expedients ... 37 Protective measures of financial Europe — ^The Bank of England rate — Nature of the crisis in in- ternational credit — ^The moratorium on debts — England's new paper currency — Guaranteeing non-collectible loans — The financial world on a war footing. IV. Financing the War .... 53 Enormous cost of the conflict — Early expedients of the governments to raise money — European capital restricted to the war loans — England's new taxes and the attitude of Germany — ^The ques- tion of "economic exhaustion." CONTENTS V. Financial America and the War 75 What results were expected in the United States — Our economic relations with the belligerents — Fear of a financial collapse — Europe's sales of American securities — Recall of foreign capital from America — The "emergency currency" — Na- ture of the New York crisis. VI. The New York Market's Action 06 Question of meeting foreign obligations — Ameri- can bankers and the demands of Europe — Volim- tary gold exports in the face of panic — Passing of the financial crisis — Removal of the emergency expedients — The new banking system and its bear- ing on the situation — Reopening of the stock ex- change. VII. The Second Period . . . . 115 Course of events preceding the economic changes of 19 1 5 — Incidents in European finance — Accu- mulation of gold by belligerent governments — The gold imports at New York and their cause — Wheat crop of 1914 — Spectacular movement of foreign trade — New York as a world money centre — The great revival of American prosperity. VIII. Currency Inflation . , . . 144 Paper-money issues of England and the Conti- nent during the present war — Reasons for exces- sive issues in war time — ^The disputed question of depreciation — The United States and its new cur- rency — "Federal Reserve notes " and the Ameri- can money supply. IX. The Foreign Exchanges . . . 163 Meaning of depreciation in exchange rates — The extraordinary fall in New York exchange on Eu- CONTENTS xi rope — Influence of our export trade — Of the shift- ing of capital to America — London's gold exports to New York — The $500,000,000 Anglo-French loan — British Government and English investors in American securities. X. When the War Ends .... 184 Futile suggestions for peace negotiations — Atti- tude of American markets toward the question — Our financial interest in continuance of war or re- turn of peace — Political and economic sequel to other wars — ^The world after other great inter- national conflicts. XI. The Economic Aftermath . 198 Belligerent Europe when the war is over — Finan- cial future of France — Of England — Of Germany — London and the "World Market" — Relations of the European states — The question of an eco- nomic war between Germany and the Allies. XII. Europe and America . . . . 227 Uncertainties as to our own financial outlook on return of peace — ^The question of "Preparedness" — Post-bellum competition in the world's trade — Industrial Europe's predictions — Two sides to a. disputed question — New conditions of the eco- nomic future after this war. Index 245 CHAPTER I PRECEDENT AND PREDICTION BEFORE the European War broke out, the most familiar answer of the banking com- munity, to predictions of such a war, was that the economic consequences would be so terrific as to deter any statesman or ruler from committing his country to them. After the fight- ing had begun, prediction was quite as general to the effect that the war must necessarily be short, because none of the belligerents would be able to endure the financial strain. In concrete terms, this forecast usually shaped itself in the statement that economic exhaustion could not fail to reach, by the end of 191 5 at any rate, so acute a stage as to compel the ending of hostil- ities. Both predictions we now know to have been entirely wrong, and they were not more promptly and completely refuted by the course of events than were the prophecies of specific phenomena, military or financial. These facts cannot well be ignored in attempts to forecast the still weightier problems which will arise on return of peace. Prediction of those later results, whether based on 2 PRECEDENT AND PREDICTION experience of history or on particular circum- stances of the day, has no greater presiunption of inf allibiHty than the predictions of immediate re- sults in 1 9 14. Certainly no more baffling and be- wildering question has been presented for a cen- tury past, in the field of political and economic history, than the question what is to be the after- math of the present war. Politically, problems are involved of so complicated a nature that the forecast even of the most experienced European statesman could not be better than a guess. As a matter of fact, statesmen have risked no such pre- dictions, but have restricted themselves to general expressions of their hope or purpose, such as "the insuring of permanent peace in Europe" or "the ending of the burden of militarism." As to pre- cisely what measures would or could insure these wished-for consummations, on any supposition re- garding the military outcome of the war, the public men were silent. The post-bellum territorial read- justment, post-bellum conditions in the internal politics of the states now indulging in so imparal- leled sacrifice of blood and treasure, were sure to be powerful factors in determining the future; yet even as to these, we had only such vaguely formulated suggestions as the "realizing of Rus- sia's aspirations in the Bosporus," the "creation of an autonomous Poland," or the "recovery by France of her lost provinces." THE FORCES AT WORK 3 As with the political sequel to the war, so with its financial and economic sequel. In both directions forces of incalculable magnitude had been set loose in this epoch-making conflict, and their effect on the political and economic structure of Europe was rendered more utterly novel a problem by the extremely complicated character which international relations of every sort have assumed in the past generation. When the ag- gregate daily military expenditure of the bellig- erent powers had become ten times as great as in any previous war of history ; when the European states, already bitrdened with the accumulated public indebtedness of the past half-century, doubled or trebled that debt within two years; when the mere annual interest charge on the new indebtedness may presently exceed the total yearly public revenue of the several belligerent states in the year before the war, it is scarcely surprising that the financial community itself should have listened to any theory promul- gated as to conditions after the war. Even in the plans and discussions of practical business men, this unknown future gradually assumed the aspect of something terrible because it was un- known. The formula of Preparedness, which very soon occupied a front place in legislative controversy, with neutral states even more than with belligerents, embodied the popular concep- 4 PRECEDENT AND PREDICTION tion, not of conditions which must in the nature of things arise when the war is over, but of con- ditions which the imagination pictured as pos- sibilities. Seeing that high experts either dis- agreed diametrically in their predictions, or else confessed their inability to predict at all, it was perfectly natural that imagination should have drawn some startling pictures, yet that the pic- tures should have differed absolutely from one another. Financial as well as political observers had, it is true, the voluminous history of the world's great wars on which to base conclusions. Among other precedents, the financial sequel to the outbreak of our own Civil War was not without possible suggestions. Delegates from the seceding States had, on February 8, 1861, met at Montgomery and formed the Southern Confederacy. It was not, however, until after Lincoln's inauguration on March 4, when the certainty of war began to be recognized, that the banking crisis actually developed. In April banks at all the Northern cities temporarily deferred cash payments; in May the Southern banks suspended specie pay- ments altogether, and the new Confederate Gov- ernment officially forbade payment of debts by Southern to Northern houses. The Northern dry-goods trade fell into panic; merchants' paper being discounted at the banks for as high a rate WHEN OUR CIVIL WAR BEGAN 5 as 3 per cent a month. Yet the crisis seemed to have been overcome until the gold of the country began to be rapidly drained away on export in the autumn. On December 17 the New York banks concurred in a formal resolution that the situation gave "no reason, justification, or neces- sity for a suspension of specie payments"; but less than a fortnight later they took precisely that action, and the country was soon committed to the irredeemable government paper currency, for which redemption in coin was not provided until seventeen years later, more than thirteen years after the ending of the war. One or two of these incidents had a bearing on the possible course of economic events in the European War, and we shall find some interesting analogy ia the manner in which, contrary to all prediction of financial markets, the enormous war loans of our Civil War were floated. But with those points of very general resemblance, the economic parallel ends. The war of 1861 was a purely domestic struggle; the commerce of the United States was imimpeded; we raised money freely by the sale of our new securities to the outside world. No real analogy with the circimi- stances under which this present war broke out could in fact be found, short of the Napoleonic conflict of a century ago. Twelve nations were simultaneously at war in 181 5; twelve were at 6 PRECEDENT AND PREDICTION war exactly a hundred years later; nothing ap- proaching a contest with such scope had occurred in the intervening period. In none of the wars since Waterloo had campaigns been simultane- ously fought by European colonists on other con- tinents, and in remote parts of the world. In none of them had sea fights on the coast of South America or Australia divided interest with battles in the centre of Europe. At the very beginning of the present war was duplicated that episode which has so often seemed incredible, and which even the historians describe as a "barbarous decree" — Napoleon's seizure and imprisonment, for a dozen years after his dec- laration of war in 1803, of 10,000 English tour- ists and residents in France. The struggle of the small neutral states of Europe, after 1805, between the upper and nether millstone of the powerful belligerents reads like a chapter from last year's history of southeastern Europe. Nel- son's bombardment of Copenhagen and its fleet in 1809, at an hour when Denmark was not at war with either side, but merely balancing be- tween alliance with the English or the French, can nowadays be better understood by those who have watched the recent predicament of Greece. For a hundred years, readers of history have looked back with astonishment to the 10 per cent tax levied on English incomes at the opening of ANALOGIES OF HISTORY 7 the nineteenth century. To-day incomes of Eng- lish citizens pay 25 per cent and upward to the government. "Pitt's subsidies" have reappeared on an immensely expanded scale in the $1,500,- 000,000 advanced for war purposes by England to her allies in a single twelvemonth. Since July, 1 9 14, the world has again, for the first time in more than a hundred years, seen captured cities in the heart of Europe deliberately given to the flames, citizens held for hostage, tribute imposed on non-resisting towns occupied by the enemy — occurrences which were supposed, with the civilized world's formal adoption of a hu- mane code of international relations, to have been relegated to the limbo of other centuries. Even the chapter in the story of Napoleonic Paris at which later generations have smiled — the hys- terical outcry over the "English lies" to which was ascribed unpleasant news about the war — has been reproduced to an admiring world by twentieth-century Berlin. In no respect was the parallel more startling than in the great collision over the rights of neu- tral ships, which repeated, step by step, the story of the "Orders in Council," the "Berlin Decree," and the "paper blockades" of the Napo- leonic conflict. During the whole of 191 5 the greatest of the neutral Powers lived over again, with remorseless coincidence of causes and yet 8 PRECEDENT AND PREDICTION with the most impressive contrast of circum- stance, the long series of episodes which led up to our War of 1812; the historical parallel lying not only in the fact of two European antagonists, in the earlier period, interfering with our com- merce in order to injiire one another, but in the further fact that both of them on that occasion, like one of them in the present instance, con- ditioned their own suspension of unlawful attacks upon our vessels on our government's inducing the other belligerent to stop blockading its Eu- ropean enemy — a proposal of which President Madison, anticipating President Wilson's atti- tude, bitterly remarked to Congress that it was tantamount to "asserting an obligation on a neu- tral Power to require one belligerent to encourage by its internal regulations the trade of another belligerent." With political, military, and finan- cial events repeating with such dramatic accuracy the story of the Napoleonic wars, it might surely have been assumed that even the economic his- tory of the present war, during the period of hos- tilities and afterward, might have been foretold from the records of a century ago. One reason, recognized from the very start, why this process of analogy was boimd to fail, lay in the prodigious cost of war to-day. As to what that cost would be, political statisticians and military experts had for years been busy estimat- THE COST OF MODERN WAR 9 ing. Out own War of Secession cost the United States Government $1,000,000 per day in its early stages and $3,000,000 daily during and after 1863. An official French report of January, 187 1, reckoned the current daily expenditure of France for the war with Prussia at $3,200,000. The little Transvaal War, lasting from October, 1899, to June, 1902, cost England $1,085,000,000, or a million dollars a day. Japan and Russia spent between them $3,500,000 daily on the Manchurian War of 1904. When the question of a possible "general war" came into anxious controversy in the last-named year, a well-known French stat- istician, M. Jules Roche, calculated that in a conflict involving two or three great Powers the average daily cost for all combined would be about $6,000,000, but that a war in which France, Russia, Germany, and Austria were all engaged would cause a total average expenditure, for purely military purposes, of $18,000,000 per day. The somewhat earlier estimate of an Austrian economist had figured that participation in a European war would cost France $5,100,000 per day, Russia $5,600,000, Germany $5,000,000, and Austria $2,600,000. In 1913, when the Balkan War once more revived speculation as to the pos- sibilities of a general conflict. Doctor Charles Richet, of the University of Paris, on the basis of a very elaborate calculation, estimated that if lo PRECEDENT AND PREDICTION Germany, England, France, Russia, Italy, Aus- tria, and Rumania were all to engage in war, the actual average expense of the campaign per day would be $54,100,000. This estimate, it will be observed, came very close to naming the actual belligerents of 19 14. Even when republished at the outbreak of the present war, the figure was commonly regarded as incredible. Yet exactly a year after hostilities had begim, the German im- perial chancellor told the Reichstag that the daily cost, to all the Powers involved, was $75,000,000. The daily expenditure of England and Germany alone in the middle of the present year was greater than Doctor Richet's estimated outlay for all seven belligerent Powers, and the estimate of inter- national bankers in June, 19 16, as to the total daily outlay by all the European belligerents com- bined, was $103,000,000. Now, the average daily cost to England of the entire Napoleonic War was less than $2,000,000, as against the $25,000,000 average which it has reached this present year. It is true that the national wealth has increased at an almost equal rate. But, on the other hand, when Pitt placed his 10 per cent tax on English incomes in that earlier period there had been no income tax at all in England, whereas English incomes, early in 19 14, were already paying what was traditionally called a "war rate" of taxation. The cost of war IN THE DAYS OF NAPOLEON ii to Napoleon was trifling compared with the ex- penditure of continental belligerents to-day. It was possible for him to tell the Directory at Paris that the $4,000,000 "contribution" imposed on Lombardy in his Italian campaign, and the $2,- 400,000 exacted from Parma and Modena, had paid the cost of war. The $8,000,000 indemnity exacted from Vienna after Austerlitz came very near to serving a similar purpose in the campaign of 1805. The imitation of this procedure hy the German generals, in their Belgian campaign of 1 9 14, was not even mentioned at Berlin as a help toward paying war expenses. It had no effect whatever, except to expose the authors of the ^ cruel exaction to the scorn and contempt of the outside world. But the vastly larger cost of present-day war- fare was not the only consideration which pre- vented drawing of confident analogies from the economic results of war a century ago. When the treaty of Amiens between France and England was broken in 1803, international finance and in- ternational foreign trade were in their infancy. Judged by its scope and methods of to-day, for- eign commerce was conducted in a fashion which may fairly be described as primitive. Inter- national banking and investment were hardly in their beginning; the house of Rothschild, for ex- ample, dates its origin from the days of disordered 12 PRECEDENT AND PREDICTION continental finance and great English public loans which came with the Napoleonic wars. No bel- ligerent state, therefore, was confronted with enormous sales, on its stock exchanges, of secur- ities held in the enemy markets. As a matter of fact, the London Stock Exchange remained open during the whole of the Napoleonic wars ; not even such precaution as arbitrary "minimtmi prices" was imposed by government. The price of Great Britain's 3 per cent consols did indeed decline from 80 or 90 to the neighborhood of 50; but it was lowest at the beginning' of the war. There- after, notwithstanding the then unprecedented output of new government securities by England, the price of consols rose and fell purely in response to news from the campaign; in general, the price was considerably higher than at the beginning of hostilities. Government bonds were indeed almost the only quarter in which the rapidly accruing capital of Europe could be invested; at London, the only alternatives of real importance were the very limited field provided by shares of the Bank of England and the East India Company, and the very speculative and precarious field provided by joint-stock ventures in merchant ships and car- goes. The extremely intricate problem, created in 1 9 14 by the enormous mass which every strong belligerent country held of securities and floating OLD-TIME WAR EXPERIENCES 13 loans of foreign, including enemy, communities, did not therefore exist at all. But, on the other hand, the strain on the gold reserves of the fight- ing nations was most formidable. At London al- most the first financial event in the long French war of a century ago was suspension of gold pay- ment on its circulating notes by the Bank of England. An open premium of 20 to 40 per cent on gold was the necessary consequence; then a discoimt of 16 per cent or more on English drafts presented in the foreign exchange markets of such great commercial cities as Amsterdam and Ham- burg. Merchant vessels sailing for other destinations than these banking centres carried gold and silver in their strong boxes, and, though they commonly moved in convoy, escorted by ships of war, they were the rich prizes of the maritime campaign. An extensive smugglers' trade, with headquarters in the Channel Islands, largely defeated the block- ade of France and its possessions by the British fleet. One of the incidents of that war was the establishment, from the unguarded seaports in Finland or Dalmatia, of a land route through which, in wagons or sledges drawn by relays of horses, contraband merchandise was carried from England across the Continent to Germany and France — at a cost said to have been fifty times the freight rate, then existing, from London to Cal- 14 PRECEDENT AND PREDICTION cutta. In short, the confusion into which the present war plunged international finance, di- rected itself a century ago to ocean trade. Such international banking problems as existed were created wholly by this exchange of merchandise. When the British Government, dining the Na- poleonic wars, paid its famous subsidies to the German states, the most efficient means of doing it was found to be through a three-cornered opera- tion, based on the foreign trade of the United States. With neither of the great belligerents in control of the sea, and with French and English frigates cruising along the ocean routes to cap- ture enemy merchant ships, the merchants of neutral America, whose export trade in products of the United States was small, developed a lucrative business in carrying West Indian prod- ucts to England and continental Europe and bringing back English manufactures for home consiimption. On the English markets, these merchants bought far more than they sold; on the Continent they sold far more than they bought. The British Government therefore bought from the London merchants their claims on American importers and sent them to the German money markets, where the American traders' claims on German merchants were ac- cepted in payment; such mercantile drafts on Germany being then used for payment of the WHAT WAS EXPECTED IN 1914 15 British exchequer's subsidies to the German princes. It was not difficult to see, even in August, 19 14, how httle of sure analogy as to probable economic results in the new European War could be based on these experiences of the last great conflict of a similar scope. The immense expansion of inter- national trade and banking which had marked the century since the battle of Waterloo; the complete change which had occurred in the in- vestment of capital; the enormously complicated machinery of debits and credits, assets and lia- bilities, as between all of the great financial mar- kets — these were aspects of the situation such as could only confuse and bewilder the financial mind. It was perfectly evident when this war began that, whatever were to be the actual eco- nomic phenomena created by it, they would not be the comparatively simple problems of 1793 and 1803 and 18 12, but something vastly more difficult for the financial markets to surmoimt without world-wide collapse of credit. Since, then, we have seen how little light history could throw on the probable economic events of the war of 19 14, it will be interesting to inquire what experienced financiers expected to occur as an immediate consequence of its outbreak. Minds of the greatest bankers, in every market of the world, had been absorbed in this question for i6 PRECEDENT AND PREDICTION a generation. Despite their incredulity as to the willingness of any government to provoke such a war, the possibility was never absent from their calculations. The largest financial interests in the world were at stake in their judgment as to the immediate economic sequel. The question, what results they actually looked for, is not at all difficult to answer. It was well understood beforehand that, in the economic as well as in the military field, forces would be called into play such as would test with the utmost severity the financial endurance of the belligerent communities. But, as regards specific results, the coiu-se of events in the world's economic history since the war began, as in the strategy of the war itself, has been a chapter of surprises. With a single exception — the French calculation, already referred to, that a war involving six European Powers would cost at least $50,000,000 per day, which has been more than realized — every predic- tion of the immediate financial and economic se- quel hit wide of the mark. First, general insolvency would be inevitable, with bankruptcy of the most important inter- national houses — owing to the sudden embargo on collection of the enormous mass of credits out- standing to their account in other countries. That prophecy has not been fulfilled at all; there have been fewer of such bankruptcies, either in bellig- SIR EDWARD GREY'S PROPHECY 17 erent or neutral states, than in an ordinary "panic year" like 1866 or 1873. Second, outbreak of general European war would break down inter- national trade completely; partly because of the crumbling away of credit, partly because of hos- tile navies on the sea. As late as July 23, 19 14, only a week before the German ultimatimis, Sir Edward Grey predicted to the British ambassador at Vienna that "if four great Powers — say Aus- tria, Russia, France, and Germany — engaged in war, the war would be accompanied or followed by a complete collapse in European trade and in- dustry." All of the designated great Powers, and with them England and Italy, have been for two years at war; yet, except for the foreign com- merce of Germany and Austria, the prediction is unfulfilled. The problem of the commercial world to-day is a problem, not of available supply and demand for merchandise in foreign trade, but of available ships to carry it. Third, liquidation of Europe's investments in neutral countries, with a view to raising money for the war loans, would proceed on such a scale as to force a 20 or 30 per cent break in the price even of American securities (of which the outside world held something like $4,000,000,000), with all the financial consequences which such sudden change in basic values would involve. With the un- precedented war-time output of new government 1 8 PRECEDENT AND PREDICTION securities in Europe, demand on the whole world's investment capital would so immensely exceed available supply as to make this decline in exist- ing securities progressive, even in the markets of neutral states. The prediction has wholly missed fulfilment. Belligerent Europe has in actual fact sold back to the United States during the progress of the war more than $1,500,000,000 of American securities; yet prices for American stocks and bonds, after eighteen months of fighting, were higher than when the war broke out, and, instead of the predicted panicky break on the stock ex- changes, the second year of the European War was distinguished on the American markets by an exceedingly violent speculation for the rise. Finally — and this belief persisted during sev- eral months of the war itself — the wholesale re- call of belligerent Europe's capital from neutral markets, and especially the throwing back upon them of the securities previously sold by them to Europe, would result in drawing all the gold of neutral states into the European banks, with re- sultant collapse of bank reserves in such neutral markets, complete upsetting of their credit, and extreme advances in their money rates. None of the prophecies has been so amazingly falsified as this. Not only was the American market's im- portation of gold, in 1915, larger by $300,000,000 than in any previous year of its history, with UNLOOKED-FOR RESULTS 19 the inflow continuing during 19 16, but the accu- mulation of gold in such other neutral states as Holland and Sweden was so abnormally rapid that, reversing all previous financial practice, measures were actually taken by the banks of those two countries to discourage further imports, lest the mere fact of overflowing bank reserves should provoke unwholesome speculation. Re- serves of the American banks passed far beyond their previous maximum. As for the money market, New York was destined to be confronted, after 19 14, with one of the longest consecutive periods of extremely low money rates in its his- tory. Such was the series of erroneous and misleading expectations with which the whole financial com- munity of the world, and especially that of Eng- land, entered the period of war. It will now be our task to survey the actual course of economic events; to inquire why results imexpected by the most competent financiers actually came to pass and why the expected results did not, and then to see how far, on the basis either of past or present experience, we can map out the horoscope for the aftermath of war. CHAPTER II THE WAR PANIC WITH what spectacular suddenness the great European War, for whose possible occurrence financial Europe had during forty years been watching apprehensively, at last broke out at the end of July, 19 14, no one who lived through that period is likely to forget. The sense of incredulity; the insistence that such a thing was not possible in our time ; the final be- wildering whirl of events, remembered by most people only as a cloud of confusion until the Ger- man advance on Paris, with the French and Eng- lish armies retreating before the triumphant invader, emerged as a concrete fact — ^what aU this signified in America it signified in Europe also, and in the great financial markets of Eiu"ope as well as among the people at large. Except for a general sense that events crowded on one another's heels with such rapidity that the latest bulletin of the newspaper "extra" went far toward blotting out recollection of what had gone before, few people even to-day remember what actually happened in that period of confusion. This was, and is, as true of the financial com- ON THE EVE OF WAR 21 munity as of the community at large. Austria's ultimatum to Servia created, in the hasty view of the reader of the despatches, the sense that a crisis had arisen which, because of its very gravity, must somehow be surmoiinted. In another week both Austria and Servia were lost to sight in the rush of larger consequences elsewhere on the map of Europe. For a single day the firing by the troops on the Dublin rioters seemed to be the event of paramount significance; then it was for- gotten for a year. The predicament of American tourists, imable to get away from the area of fighting, held the centre of the news for a period only a little longer. How slowly the compre- hension of what was actually happening swept over even the financial mind may be forcibly re- called by the episode of the North German Lloyd steamer Kronprinzessin Cecilie, whose departure from New York for a German port on Tuesday, July 28, with $10,000,000 gold on board, con- signed one-half to London and one-half to Paris, was discussed on Wall Street with more amuse- ment than concern, as proving the imreality of the talk of war, tmtil the news arrived of her sud- den turning back in mid-ocean and of her race to reach an American port before the English cruis- ers should intercept her. The French invasion of Lorraine; the declara- tion of war by England, at which, somehow, no- 22 THE WAR PANIC body seemed to be surprised; the expectant wait- ing for an Anglo-German sea fight; the general confidence in the Belgian army's resistance; the vague expectation of another epoch-making battle on the historic field of Waterloo ; the early details of the German army's outrages; the fall of Na- mur and Brussels and the swift forward move- ment of Von Kluck — ^no such bewildering pano- rama had been presented to the eyes and mind of this generation. Only when the American community awoke to its full discovery of the powerful and unanimous sentiment of abhorrence at the German Government's performances — a sentiment destined to grow vastly stronger as the war progressed — did oiu* own people begin to see the chapter of events in its true relations. To the great financial markets, usually the keenest and most accurate judges of the meaning of events, this awakening to the facts of the situation brought, first, a practically unanimous conviction that, with England ranged on the side of France and Russia, Germany's ultimate defeat was cer- tain, and that therefore every German victory must be considered a calamity, not only because of the methods and practises which it might seem to vindicate, it meant prolongation of the war. But even before arriving at this positive conclusion (from which Wall Street has not turned at any subsequent moment of the war) the finan- CAUSES FOR THE CRISIS 23 cial markets had to pass through what was un- questionably the most formidable panic of history. Financial panic, as defined by all previous ex- perience, arises from one or more of four main causes — doubt over the solvency of great fidu- ciary institutions; sudden withdrawal of the credit on which business men were relying for their ordinary engagements; acute apprehension of a collapse in value of investments ; or complete loss of confidence in the currency. The first, if not immediately checked, leads to runs of de- positors on banks, to a frantic call by creditors on debtors, and to stopping of payments; the second to a desperate struggle of merchants and bankers to realize on their assets; the third to wholesale cancellation of loans based on stock exchange securities; the fourth to such hoarding of gold as causes the actual circulating money of a whole community to disappear. As we shall see, and as was quite inevitable from the nature of the crisis of 1914, all four causes operated in- stantly and on a scale never previously witnessed in financial history. The great panics of the past have been violent in their immediate phenomena, in proportion as the shock caught financial markets off their guard and without a chance to adopt precautionary measures. They have been destructive in their economic results, in proportion as it was difficult 24 THE WAR PANIC to remove the real cause of alarm, or to obtain for one hard-pressed community the help of others which had escaped the panic. The panic of August, 1914, arose from the European War it- self, whose formidable consequences were only beginning. Every market in the world fell under its immediate influence; instead of financial relief obtained from foreign countries each panic- stricken community was confronted by the most urgent measures elsewhere to prevent such re- course. Above all, the shock of war and war panic came on an almost completely unprepared and unsuspecting business world. That no such news as that of July 31 could possibly have been anticipated by the German, French, or English financiers, the $10,000,000 gold shipment of the 28th was striking proof. But there is other evidence to the same effect. What purposes were secretly entertained by the Austrian cabinet and the German general staff, during the two or three weeks (and possibly the two or three years) before the declaration of war, will probably remain a matter of dispute when the in- side history of this war is being written half a century hence. The diplomatic communications published by some of the belligerent countries, the obvious suppression of diplomatic documents by others, and the later disclosures by Italian states- men of the diplomatic suggestions of 1913, cer- ATTITUDE OF THE MARKETS 25 tainly threw sinister light on the attitude of the two central European Powers. But these were considerably later revelations. In August, 1914, the shock came upon the world's great financial markets with as complete a violence and sudden- ness as it is possible, in an event of such im- mense importance, to imagine. This fact had very much to do with the character of financial events at the beginning of the war. Financial markets have had a long experience in preparing for the most formidable contingencies, provided they only have had reasonable notice. But it is probable that no other war in modem times— with the possible exception of the Franco-Prussian War of 1870, the circumstances of whose begin- ning were somewhat like those of 19 14 — has taken the great financial communities of the world so absolutely off their guard. Yet the very recent history of the markets gave a curious aspect to the complete surprise with which the outbreak of this war caught finan- cial Europe. The stock exchanges had at inter- vals been discussing, during at least four decades, a "general European war" as a possible factor in financial calculations. The discussion had for the most part been vague and academic; but in the two or three years before 19 14 the apprehen- sion had begun to take something like concrete form. This phase of the matter began in Jime, 26 THE WAR PANIC 191 1, when Germany, with the evident enough purpose of provoking trouble, sent a gunboat to Morocco, where France was engaged in protecting the concessions allowed to her by the Algeciras conference of the Powers; that action being ac- ' companied by a menacing attitude at Berlin, and followed by Sir Edward Grey's declaration to the German ambassador, on July 21 of the same year, that, if the negotiations between Germany and France should fail, "Great Britain would be obliged to take some step to protect British in- terests." This was a veiled threat of war — by Germany on France, by England on Germany. Paris bankers had been lending money heavily in Ger- many; the estimates ran to the hundreds of millions of francs. They began that autumn to recall those loans, with severe money stringency in Germany as a result. Simultaneously, the com- mon people of France began to hoard gold in their old stockings and chimney-pieces; a historic evidence of their belief that war might be inevi- table. The "Morocco scare" passed over, but in the autumn of 191 2, when the Balkan War began, distinct signs of financial apprehension were renewed. European statisticians estimated that not less than $350,000,000 gold was hidden away by the people of Germany, France, and Austria, even before 19 14. PREMONITIONS 27 During the whole of 19 13 money rates were abnormally high, both on the Continent and at London — ^largely as a result of this drawing away of gold from bank reserves. But it was evident, especially in London, that capital also was being hoarded. The large bankers and in- vestors showed immistakable preference to keep their accruing resources and savings on deposit or within easy reach, instead of investing them on the former scale in stocks or bonds of foreign com- munities, which could not be turned into cash so readily. It happened repeatedly, during 19 13, that new issues of foreign public securities of the highest grade, offered by Lombard Street bankers to investors at unusually low prices, were simply not taken at all by the public, but left on the bankers' hands. This phenomenon, which was ascribed at the time to the "world's scarcity of capital," is better understood to-day than it was then. The truth, as the next two years proved unmistakably, is that the world's free capital available for investment was as abundant as it had ever been before, but that its owners, in the prevalent atmosphere of vague political appre- hension, chose to keep it uninvested until the political horizon cleared. All this might seem to mean that financial Europe was looking for this war two or three years before it came. Yet it is equally easy to 28 THE WAR PANIC show that, when the war actually broke out, every European market (possibly with the exception of Vienna and Berlin) was taken completely by sin-- prise as it is to prove that the people at large did not expect it. When war is expected rates for money always rise. But in January, 1914, money rates were reduced at the great state banks of England, Germany, France, Austria, Belgium, Denmark, Sweden, and Switzerland to the lowest figures touched since the Balkan War began in October, 191 2. The movement was most unusual for its emphatic unanimity. This was not all. An even more infallible sign of a financial market's belief in coming war is heavy selHng of outstanding government bonds and a rapid fall in their price. The reason is obvious; all experience teaches that the enor- mous borrowings of a government at war will flood the market with new public loans and beat down the price of older issues. Yet during those opening weeks of 19 14, prices for the government bonds of Germany, France, England, and Russia advanced 2 to 6 per cent, German and English markets leading in the movement, and the buying demand for all such securities being extremely active. This extraordinary incident on the mar- kets occurred only six months before Germany declared war. It is an equally striking fact that as late as the middle of July — two weeks before the AUSTRIA'S ACTION 29 ultimatum to Russia and two weeks after the murder of the Austrian archduke — money rates were reported as growing still easier, both in Paris and London. The Austrian stock market, it is true, had fallen into a panicky condition; but even at Berlin the weekly report of a financial joiuTial, as late as July 9, made the interesting comment that "as usual, the Norway voyage of the Kaiser marks the beginning of the dead sea- son in German politics." When Austria, on Thursday, July 23, sent her note to Servia, making acceptance within forty- eight hours of every one of a series of insolent demands, an ultimatimi, prices on the Vienna stock exchange, already very low, declined with something like panicky violence. This of itself was not taken as of great significance; because, whatever might be the possibility of larger com- plications, Austria was evidently about to make war on Servia and was threatened with war by Russia, and every one at all familiar with the facts knew that the Austrian Empire was in no financial condition to endure the strain of war. When, therefore, on Monday, the 27th, the Vienna stock exchange closed its doors, followed by the govern- ment's declaration of war on Servia next day, the outside financial community was still suspending judgment. Its attitude was not long left in doubt. It is 30 THE WAR PANIC the commonplace of financial philosophy that the stock market moves as much by instinct as by private information, and the closing of a stock exhange is an evidence of apprehension far more convincing than a fall in prices. It was not imtil Friday, July 31, that the German Government sent its ultimatum to Russia and France, followed by actual war next day. But on the 27th the Brussels stock exchange had formally suspended business; on the 28th the Paris Bourse shut down; on the 29th the exchanges at Saint Petersburg and Amsterdam closed their doors; and on the same day Berlin itself forbade all further dealings on credit, limj.ting stock-market operations wholly to cash transactions. During all this seven-day pe- riod, sales of securities by Berlin on every foreign market (notably New York) seemed to be limited only by the supply available to sell and the capac- ity of brokers to execute the orders. Private cables told of the published recommendation, by some of the largest German banks, for their clients to sell at once what they could of their investments. British consols fell from 75 to 6g}4, and all other international securities fell with them. On Au- gust 5, the German army having in the mean- time invaded Belgium, England declared a state of war with Germany. At London, the world's financial centre, finan- cial crisis did not wait for this action by the British Government. It was Germany's ultimatiims of ON THE STOCK EXCHANGES 31 July 31 which made the war inevitable. The first financial result at London was the closing of the stock exchange on that day for an indefinite period. The obvious reason for this sudden action was that markets of every belligerent state on the Continent, realizing the urgent need for ready capital in the coming economic crisis, were selling in London what foreign securities they held — ^in quantities running high up in the millions of sterling, and at any price obtainable. Government bonds of the South American states, of Russia, Japan, and China, railway stocks of the United States and Canada, were being thrown on London's market by the Continent at declines running in many cases from 10 or 30 per cent within a very few days, the declines becoming more violent every day. On Lombard Street these securities are pledged in immense amounts as security against loans obtained from banks. Although probably less than usual was outstand- ing in these so-called "stock-exchange loans" when the war began, the subsequent report of a Lombard Street bankers' committee reckoned the total at $400,000,000. Much longer continuance of such a decline in prices would have reduced the borrowers to bankruptcy, because they could not keep the security up to the face value of their loans, and would have crippled the banks because they could not collect the loans. Back of this stood the further fact that London 32 THE WAR PANIC could not allow Berlin, whose own stock exchange had already virtually suspended operations, to accumulate sinews of war by raising cash on the English market. These various possible results could be averted only by closing the stock exchange entirely; for only through the machinery of such an organized exchange could the huge mass of securities thus offered find a market. London's example was promptly followed by every other stock exchange in the world which had not al- ready closed. New York's shut down an hour after London's, though most reluctantly and in spite of the previous night's formal decision to the contrary. Nothing was more certain than that the closing at London, with New York still open for business, would converge on the American market the whole violence of the Continent's forced sale of securities with equally heavy selling by London itself. This closing of the stock exchange was in its way a dramatic testimony to the magnitude of the financial crisis; for at London no such action had ever before been taken — not even during the Napoleonic wars. The Paris Bourse had closed down for several months during the Prussian invasion of 1870 and the New York Stock Ex- change for ten days in the panic of 1873; but even with those markets it was a very temporary incident of bygone history, whose repetition no THE CRISIS AT LONDON 33 one had predicted. This unprecedented action at London, however, was only the beginning for a series of events which equally marked new prece- dent. The two events which would probably have seemed to the financial world most inconceivable, only a week or two before, would have been a run on the Bank of England and a breakdown of public confidence in the English currency. It is true, the history of other countries had proved that when great wars break out, a run on the banks will usually be started by people who want to turn their bank-notes or government paper into gold, and hoard the gold. The teaching of experi- ence, as well as instinct, warns holders of paper money that its value may be heavily depreciated through increased issues of such paper for war ex- penses, whether by the government or the banks. The run on the Bank of France in 1870, leading to its suspension of gold payments on the currency, and the concerted refusal of the New York banks in December, 1861, to pay out gold to customers any longer, were noteworthy modem instances. In 1797, when the long war between England and France began, the Bank of England itself sus- pended specie payments; that is to say, it ceased to guarantee redemption of its notes in gold, and did not resume such full and free redemption during the twenty-four succeeding years. In 34 THE WAR PANIC August, 1 9 14, almost the first financial act by official Germany was a similar suspension of gold payments. On Saturday, August i, a nm began on the Bank of England. The circumstances immediately surrounding that event were, however, so peculiar as to render it impossible even now to say whether the episode was or was not really in line with the usual phenomena of a bank run. During the summer season England sets apart the first Mon- day of every month as a business holiday. The news of Germany's ultimatimi to France and Russia arrived on the very Saturday when Lon- don people, preparing for their two-day midsum- mer outing, were going to their banks to draw the requisite pocket money. The English currency provided no unit of general circulation of a value between the silver half-crown piece worth slightly over 60 cents and the £5 Bank of England note worth $25, except the gold sovereign and half- sovereign. Therefore, without any necessary pur- pose of hoarding gold, the London people, planning for the holiday, brought their five-pound notes to their banks to be exchanged into gold. A few private banks, frightened at the war situation, refused to give out gold (it is usually such action of bankers themselves which starts a panic), and holders of the notes thereupon went to the Bank of England, which could not refuse. RUN ON THE BANK 35 All such bank runs grow from the very fact that they have begun. How many of the appli- cants for gold were merely prospective holiday- makers nobody can know; one of the English writers on the episode, himself a "City man," has said that the crowd at the bank was "bruited abroad as a novel spectacle," and was watched "by a throng of amused spectators, mostly straw- hatted and in holiday attire, gathered on the steps of the Royal Exchange." But a run im- doubtedly existed, and we shall never know to what proportions it might have risen but for the fact that the bank was open only for two hours on that Saturday, and that a two-day holiday followed. Even as it was, withdrawal of gold from the Bank of England, both by individual holders of notes and by other banks, was so great that in its next weekly statement the institution had to report the enormous loss of $52,500,000, and a fall in its ratio of reserve to deposit liabili- ties to the startlingly low figure of 14^ per cent, whereas 40 per cent is the bank's traditional minimimi of safety. The ratio had been 40^^ per cent a week before, and 56 per cent at the same date a year before. No such showing of depleted gold reserve had been made by the bank since the panic of 1866. Nor was this the end of the "currency panic," even for the period of English holidays. The 36 THE WAR PANIC warning word that English paper money might possibly be no longer exchangeable for gold spread instantly throughout the community. People with gold coin in their tills or pockets refused to give it up, and within twenty-four hours English- men found it impossible to make purchases with Bank of England notes, if the amount of the pur- chase compelled the seller to make change. As the sense of unreasoning panic spread, house- holders began to accumulate and hoard provisions as well as gold. On the Continent, for similar reasons, Eng- lish bank-notes were refused when tendered in payment, and, what was much more disturbing, continental banks refused to cash letters of credit or bankers' drafts made payable at London. During nearly a week after the panic had begun, gold was the only available medium of exchange. For a time, indeed, even gold coin of another country was refused. When business closed for the day at the Bank of England on August i, 1914, it is perfectly safe to say that no one, how- ever experienced in the course of economic crises, knew what would be the financial case of Eng- land, or of Europe as a whole, when the next business day should begin. CHAPTER III EMERGENCY EXPEDIENTS THERE were two traditional measures of protection for the Bank of England in such emergencies as I have just described. Both had been utilized in preceding London panics. The bank may advance its official rate for loans; an action which in ordinary times, by forcing up also the rate bid for money by the general London market, will cause a transfer of capital to London from other markets whose rate had remained un- changed, and, along with such transfer of capital, will start import of gold. The governors of the bank may also, with the British Government's permission, suspend the Bank Act which requires the bank to issue no new notes, unless specifically secured by the same amount of gold on hand in the institution's vaults. The purpose of that action, as applied in the London panics of 1866 and 1857, is to provide currency wherewith to maintain or increase reserves of cash at the pri- vate English banks, without waiting for the Bank of England to accumulate gold. As we shall see, neither expedient could ade- quately have met the situation of 19 14. Yet the 37 38 EMERGENCY EXPEDIENTS bank applied the first expedient at once. On July 30 its official discount rate was 3 per cent; it was raised to 4 that day, to 8 on the 31st, and to 10 on the ist of August. The 10 per cent rate was the highest ever fixed by the Bank of Eng- land; it had never been approximated since the great London money panic of 1866. At the same time the government authorized suspension of the Bank Act — a step taken since the act was passed in 1844 only on two occasions, in the panics of 1857 and 1866. The bank did not make use of the government's authorization in August, 19 14, nor did it retain for more than a few days its 10 per cent discount rate. That rate was reduced on August 6 to 6 per cent, and on August 8 to 5 — at which it remained during practically the whole of the two succeeding years. It would probably not be imfair to say that both of these first incidents were in actual fact the result and symptom of panic on the part of bank and government themselves. It has, indeed, been quite invariably true of every sudden and grave financial crisis — notably of 1907 and 1893 and 1873 in the United States and of 1890 and 1866 at London — that unreasoning consternation got possession momentarily of the very people and institutions whose business it is to allay the panic of others. That this should have happened on August I, 1 91 4, when the financial crisis threaten- LOMBARD STREET'S PROBLEM 39 ing London (all the circumstances considered) was undoubtedly the most formidable in the his- tory of the world, and when, moreover, outright collapse of credit at London would have sent Great Britain into the war financially crippled in advance, was certainly no matter for surprise. But during Sunday, August 2, and Monday, a legal holiday, England's statesmen and financial leaders had a very useful breathing space in which to decide how really to meet the coming crisis. The problem could not be solved on the lines of financial precedent, yet it had to be solved at once. It must be remembered that England had not yet declared war on Germany. The govern- ment and the great financiers undoubtedly knew, on August I, that Germany was invading Belgium and that England would have to go to war. But the people at large did not know it. As a matter of fact, formal declaration of war was not made until Wednesday, August 5. Then was the time, according to all experience, to look for the crisis of financial panic. The stock exchange, tradition- ally responsive to such influences in advance of the rest of the community, had already suspended business, thereby confessing publicly that it could not face the shock. What was to happen next, and how were the consequences to be averted ? There were three portentous possibilities which, in the absence of protective measures of imprece- 40 EMERGENCY EXPEDIENTS dented character, were reasonable certainties. The first was another run on the private banks for cash and on the Bank of England for gold — a run vastly more dangerous in its probable scope and consequences than the run of Friday and Saturday. The second was a sudden call by creditors for instant payment in cash of all sums due them on notes or bills or contracts; such de- mand being made at the moment when the banks were shaking, when money could not be raised by sale of securities on the stock exchange, and when, therefore, the demand for payment would mean bankruptcy of the debtors. These two possibil- ities had been familiar in previous financial pan- ics, though perhaps never before in more alarming shape. But the third possibility was something with which no great financial market had ever been confronted since the modem credit system was established. To London — the banking centre of the world, the lender of capital to every other country, the market which provides credit facili- ties to all foreign markets to finance the world's international trade — the indebtedness of foreign markets when the war began was of stupendous magnitude. At first glance, this fact might seem to have been a strong point in the situation; and so it was rather generally considered by the com- munity at large, before the war began and for a ENGLAND'S FOREIGN LOANS 41 very short time after its outbreak. But financial London soon learned better. It was one thing to have, on the books of London bankers, credits for hundreds of millions sterling in the shape of loans to foreign countries; it was a very different matter to collect them. If these foreign credits were in the form of stocks and bonds issued by borrowing companies or governments and held by London capitalists, the stock exchanges of the world were closed against the sale of them. If they were short-term loans granted to merchants by London for the piirpose of conducting the out- side world's immense international commerce — ^to pay the expense of production, manufacture, and transportation of the goods, with the two or three months' note of the ptu-chaser turned over as security for repayment when the goods should have been sold to the actual consumer — no such indebtedness would be repaid by countries with whom England should be at war, and it was prob- able that, in the world-wide collapse of credit, it could not be paid by England's allies or by neu- tral countries. Had the problem merely involved delay in collection by English bankers of what was owing to them — if nothing but their own capital had been at stake — the situation would have been awk- ward, perhaps embarrassing, but not necessarily critical. It would doubtless have necessitated 42 EMERGENCY EXPEDIENTS postponement of other business plans with the further result, in some instances, of pecuniary- hardship. But the system of international bank- ing was such as to put a far darker color on the consequences of non-payment by such foreign borrowers. It was the proceeds of these short- term loans, as they matured from time to time, on which the London houses relied for payment of other short-term loans raised by themselves from banks or other banking-houses in Great Britain. The immense sums owed to Lombard Street bankers on current accoimt by Germany and Austria, for example, were offset by almost or quite as large obligations of those bankers to home institutions. The machinery of finance was so arranged that these home obligations would be met, when they matiired, through pay- ment of simultaneously maturing indebtedness by the foreign markets. But the instant that war was declared with Germany, payment of all such indebtedness to Lombard Street would end; yet the home obliga- tions set against it would fall due as usual, and the credit of other English firms and institutions was staked on the payment of them. What was to be the consequence? It was easy on August I, 19 14, to imagine coming announcement of in- solvency by the most powerful banking-houses in Great Britain. The condition of things which THE "SPECIAL HOLIDAYS" 43 had arisen explains why the German financiers and statesmen, then and during the progress of the war, reiterated in a triumphant manner the seeming paradox that one of Germany's most powerful advantages over England lay in the fact that the German market's loans to the outside world were so much smaller than those of London. There was a good deal of fallacy in the argtiment; Germany's own international finance was in a tangle, and the later financial chapters of the war were destined to prove the real value of England's position in regard to the outside commercial world. But the embarrassment of financial Lon- don at the start was very critical. The protective measures taken by the banks and government in England were four in nimiber. All of them were imprecedented in the history of English finance. Each of them amounted to confession that the existing credit system had broken down. None of them would have been considered, two or three weeks before, as a con- ceivable occurrence in London's financial history. First, the government declared the two days following "bank hoUday," Monday, August 3, to be special legal holidays; which meant that de- positors could not draw money from the banks during that three-day period, and that payment of maturing notes and bills could not be required until Thursday. For London this was a startling 44 EMERGENCY EXPEDIENTS innovation. Its only precedent was the similar declaration of "special holidays," during our panic of 1907, by the legislatures of California, Nevada, and Oklahoma — an action taken to avert the threatened bank runs of the period, and discussed in Europe, at the time, as illustrating the primitive methods and impulsive action of our Western communities. But the London "special holidays" of August, 1 9 14, were designed not only to prevent a run on the banks, or to give the financial com- munity as a whole a chance to recover its wits. The three-day respite was instantly utilized for the second protective measure; preparation of an "emergency currency" to be issued under govern- ment auspices. This was something which had never been done before in English history. But a moment's reflection had convinced both statesmen and financiers that neither a 10 per cent Bank of Eng- land rate, nor permission for the bank to issue notes not "covered" with gold in the institution's vaults, would meet the situation. No bid for money could be high enough to draw gold from foreign markets whose own banks had already suspended gold payments. No additional issue of £5 notes, the lowest denomination permitted to the Bank of England, would prevent the draw- ing out of gold. We have seen how the people of England, during the three-day holiday, were WAR CURRENCY IN ENGLAND 45 unable to make small payments with Bank of England notes. The "change" for such pay- ments would have been gold, and gold was al- ready being hoarded. What the treasury did, then, as the second of the protective expedients, was to issue, in de- nominations of 10 and 20 shillings, legal- tender paper currency. These so-called ' ' currency notes ' ' were issued through the Bank of England to other banks, which pledged against the notes an equiv- alent amount of commercial paper, British Gov- ernment securities, or credits with the Bank of England. At the end of August, $125,500,000 of this new cturency was in circulation; at the end of 1914, $192,300,000; at the end of 1915, $515,- 600,000; and it increased more than $134,000,000 in the next eight months. As for the economic character and economic results of this remarkable experiment, for the present it need only be said that the hurried is- sue of this currency in the "war panic" ended the run on the banks, that it provided the requisite small money for the people, and that it apparently stopped the hoarding of gold. It is highly in- teresting to observe that these emergency paper issues, although an absolute innovation in English financial history, closely resembled in some re- spects our own old national bank currency se- cured by United States Government bonds, in 46 EMERGENCY EXPEDIENTS others the so-called "Aldrich-Vreeland emer- gency currency," authorized by our law of 1908 and based on securities and commercial assets. It was an irony of circumstance that English financial opinion had heartily disapproved of both of these American systems; each of which has in fact been now superseded by the new Federal Reserve system. The menace of a general "bank run" being thus averted, there arose the problem of dealing with a sudden and general demand of creditors for payment of money owing to them. When the Balkan War of 191 2 broke out, the business com- munities of western Europe were interested and considerably annoyed by receiving, from the chambers of commerce in Bulgaria and Servia, formal announcement that, since all the business men were at the front and since their earning capacity was therefore interrupted, a "mora- torium" on debts had therefore been proclaimed. The debts, whether owed to home or foreign creditors, were not repudiated; but, no matter when their payment properly fell due, they would not be paid until after the war. The great finan- cial markets of the world looked upon that an- nouncement much as it did on the news of the "special holidays" in our Western States in No- vember, 1907. But in the one case as in the other, London had to follow in 19 14 the example THE "MORATORIUM" 47 of these other humble financial markets. This was the third expedient to meet the crisis. On Thursday, August 6, a royal proclamation declared that all payments due on August 4, or falling due on September 4 under a contract drawn before August 4, "shall be deemed to be due and payable on a day one calendar month after the day on which the payment originally became due. ' ' This * ' moratorium ' ' (the word now became familiar in European high finance) was ex- pressly stated not to apply to wages and salaries, or to indebtedness below £5, or to rates and taxes, or to interest and dividends on securities, or to government payments, or to bank-notes, or to ocean freights, or to indebtedness due by indi- viduals, firms, or institutions doing business out- side the British Islands. With some alterations and amendments, the original proclamation was twice extended, carrying the date of the mora- torium forward to November 4, 1914. By that time — and, indeed, in the case of most institu- tions by September — panic conditions had so far disappeared that business houses with maturing obligations relinquished the privileges of the proclamation voluntarily. Meantime, however, although the threatened chapter of bankruptcy was averted, the machinery of financial London, as of financial Europe generally and of financial America, came almost to a halt. When pay- 48 EMERGENCY EXPEDIENTS ment of indebtedness due to a business house is arbitrarily postponed by law, the creditor might protect himself by demanding similar postpone- ment of what he owed to some one else. But such a condition of things would certainly not encour- age him to embark on other business under- takings. His eye would be fixed almost exclusively on the problem of disentangling himself from his embarrassing and humiliating position. It was instantly perceived that long continuance of that situation would very possibly cause paralysis to England's home trade and foreign commerce. Nor, indeed, was this the only danger. The mora- torium, applying as it did to "all payments due on August 4," covered indebtedness of English firms to foreign creditors. It was a matter of far more serious concern to London's prestige as the money centre of the world that financial England should suspend payments to the foreign markets, than that payments of Englishmen to English- men should be deferred. We shall presently meet, in our narrative, some very tangible and very grave results of this international moratorium. As it stood it distinctly menaced London's eco- nomic position, and the next and fourth expedient adopted was directed to avert that imminent calamity. The problem was how to untie the hands of bankers and banking-houses who, un- ENTANGLEMENTS OF BANKERS 49 able to collect and use the huge sums owed to them in connection with their foreign business, could not stir. The moratorium had averted the immediate consequences, because the bankers were relieved from paying the equally great sums which they themselves owed at home. But this only shifted the burden to the shoulders of other houses; and moreover the moratorium, as we have seen, ran only for a month at first, and even its prolongations were known to be purely tem- porary. It could not be extended throughout the war; yet its final termination would leave these banking-houses with their home liabilities as press- ing as on August i, with the stock exchange still closed against sale of their securities and with their foreign assets equally beyond their reach. The result inevitably was that the great lending firms and institutions dared not increase their loans. They had their own position to fortify, and the market in which the drafts were discounted for the conducting of England's foreign trade began to shrink alarmingly. It was then, on August 13, that a very bold and remarkable step was taken. The government announced that the Bank of England was pre- pared to take over from these international bankers all the "approved bills of exchange" for which they were liable on transactions prior to August 4. The bank would provide the funds so EMERGENCY EXPEDIENTS requisite to pay off these bills at maturity. The bankers would still remain ultimately responsible for payment, and that liability may cut a figure in London's financial history after the war. Furthermore, to stimulate earlier repayment by the. bankers, the rate of interest charged by the Bank of England for its services was to be 2 per cent above the official bank rate; and, although that official rate had been reduced from 10 per cent to 5, even that change left the rate for "re- discount" very heavy. But the Bank of England agreed not to claim repayment from the bankers for a period of one year after the close of the war, and the government of Great Britain "agreed to guarantee the Bank of England from any loss it may incur" in discounting such bills of exchange, "either home or foreign, bank or trade, accepted prior to August 4, 19 14." The chancellor of the exchequer subsequently stated to Parliament that between $1,500,000,000 and $2,500,000,000 of such bills were believed to have been outstand- ing when the war began, and that of this total $600,000,000 had been taken over by the Bank of England. As was to be expected, this arrange- ment had some extraordinary results in the oper- ations of the Bank of England. Wholly apart from advances made by the bank to the govern- ment, its loan account rose from $236,500,000 on July 30 to $609,100,000 as early as September 3. THE OUTSIDE WORLD 51 On July 29, 1 91 5, it reached its maximum of $960,900,000. From that time forward, chiefly because the "moratorium bills" were being so rapidly paid off from the accruing resources of the banking-houses, the Bank of England's huge loan account was gradually and progressively reduced. By the first week of June, 191 6, it was down to the lowest total since the war began. I have reviewed in this chapter the expedients by which financial London and the British Gov- ernment met the crisis. Adopted as they were in the central money market of the world, where each and all of them were previously unheard-of innovations, and where each was a measure in- conceivable to the financial mind a very few months before, this story of England's action in the war crisis sufficiently indicates the experience of the whole financial world. To set forth in equal detail the similar decrees and policies of the other belligerents and of the neutral countries would extend this narrative too far. No state other than England adopted the extraordinarily sweeping plan for assumption of bankers' non- collectible debts by the central banking institu- tion. But almost every belligerent, and with them so financially powerful a neutral state as Holland, resorted in some way or another, tem- porarily or permanently, to an "emergency cur- rency." Germany did not officially declare a 52 EMERGENCY EXPEDIENTS moratorium on debts, though the government intervened to render the action of the courts sufficiently lenient to achieve the same ends. France extended its moratorium even to rents, with inevitable after-complications. Practically all of the moratoriums expired of- ficially, early in 191 5. But nothing could better illustrate the world-wide scope of the financial shock which came with the outbreak of the war, than the array of countries and markets which resorted to this postponement of payments through governmental decree. It was not only the European belligerents which had recourse to it. A formal moratorium was proclaimed at once in Denmark, in Italy, in Norway, in Egypt, in Greece, in Portugal, in Rimiania, in Sweden (where it continued with certain limitations up to the autumn of 191 5). Holland decreed special measures for extension of time to debtors. That Argentina, New Zealand, Paraguay, Nicaragua, Peru, and South Africa should have suspended such settlements from July, i9i4» i^P to a date frequently fixed well into 191 5, was a demonstra- tion, partly, no doubt, of the enormous shock precipitated by the London panic, but chiefly of the extent to which the European War itself had deranged the entire economic system of the world. CHAPTER IV FINANCING THE WAR EMERGING from the financial, commercial, and industrial panic of August, 19 14, bel- ligerent Europe was confronted with the problem of meeting the war expenditure. Into the complete and very intricate details of the fiscal operations involved in this stupendous task I shall not undertake to go. But the immediate and the later achievements are of special eco- nomic interest from their conclusive demonstra- tion of the extent to which the world's resources of available capital were underrated when this war began, as indeed they have been on every similar occasion in modem history. The nature of the task which at once confronted public exchequers in the fighting states may be judged from the fact that, whereas the British Government's average daily expenditure for all purposes, in the official twelvemonth ending March 31, 19 14, was $2,750,- 000, daily expenditure for war alone reached $10,000,000 even in August, 19 14, and averaged $25,000,000 before the second year of war was ended. A year after the outbreak of the war the German finance minister, when announcing S3 54 FINANCING THE WAR in the Reichstag the third imperial war loan, stated that the daily cost of war to all the fighting Powers had risen to $75,000,000; the monthly- cost to more than $2,000,000,000; the yearly cost to something like $25,000,000,000. The speech containing those estimates was made, moreover, before Bulgaria had entered the war and before the Balkan campaign of 191 5 had begtm. Germany alone, this ministerial speech pro- ceeded, was now spending in a single month more by one-third than the total cost of her Franco- Prussian War. At the daily rate of war expendi- ture then prevailing, it was possible to say that England would have paid out, within six months, more than the United States Government spent for military and naval purposes in all the four years of the American Civil War. It is commonly estimated that the war with France in the Na- poleonic period, from 1793 to 181 5 inclusive, cost England in the aggregate $4,150,000,000. But the chancellor of the exchequer declared to Par- liament at the end of 191 5 that England's ex- penditure, during only the twelvemonth period ending with the ensuing March, would amount to $7,950,000,000; and the average daily rate of outlay was progressively increasing. These figures of the actual waste of capital in war were so large that to most minds they were merely bewildering. Some of the most experi- THE FIRST VOTES OF CREDIT 55 enced international bankers ventured the posi- tive prediction, at the beginning of this year, that the belHgerent governments would not be able to continue raising the necessary funds after 191 5. This prediction, like so many others made in the earlier months of war, received a sufficient answer from the progress of events. But the problem was of the highest economic as well as political influence, exactly how the various bellig- erent governments managed to raise these wholly imprecedented sums of money. In 1907, explain- ing the strain on credit and resources which had caused the world-wide economic crisis of that year, an eminent French statistician had estimated that the whole civilized world could provide annually for investment in new securities only $2,400,000,- 000, or less than one-tenth of what the belligerent states, according to the German minister's esti- mate, were actually spending on war alone in 1915- A few days after war had begun, the British Parliament voted to the government a prelimi- nary war credit of $500,000,000; the German Reichstag authorized an expenditure of $1,250,- 000,000; the other belligerents granted similar powers to their governments. These votes were merely a formality ; they left to the several finance ministers the practical task of obtaining the stupendous sums. By the middle of 1916, the S6 FINANCING THE WAR Parliamentary votes of credit had amounted to $14,000,000,000, and the German, French, and Russian appropriations kept step with them. The resources of the great slate banks were neces- sarily drawn upon at the start in the shape of huge advances of credit to the government. Eng- land began by placing with London bankers, ev- ery week or fortnight, the temporary obligations known in Lombard Street as "treasury bills." They had only six months to run, were issued in lots of $90,000,000, and carried very low rates of interest; but recourse to long-term funded loans soon became unavoidable. Until 19 14, the largest single loan ever issued by the British Government was the $300,000,000 Boer War loan of 190 1. In November of that year Great Britain offered to subscribers, payable in fixed instalments during the next five months, a thirteen-year funded loan of $1,750,000,000, sold at 95 and bearing 3^^ per cent interest, as against the 2^ per cent rate on the outstanding British Government bonds — which, however, were then quoted on the market below 69, The next loan, that of Jiily, 191 5, was for $2,900,000,000 in 4)4 per cents. Germany came earlier into the market for long- term bonds, offering to investors a ten-year 5 per cent loan at 971^, for which $824,000,000 was subscribed; she borrowed $2,100,000,000 more the next February, and $2,800,000,000 in the following THE NEW FISCAL BURDEN 57 September, France relied longer on the national bank, which advanced $580,000,000 to the govern- ment for initial war expenses and $1,200,000,000 in all during the first six months of war, issuing note circulation against the government obliga- tions deposited in its vaults, with results of which I shall have something to say later on. But the French treasury also sold to the public, at varying fates, the 5 per cent "national defense bonds" with short maturities, which reached $1,500,000,- 000 before 1916, having by that time been supple- mented by a $2,762,000,000 sixteen-year 5 per cent loan, placed with investors late in 191 5, at the low rate of 88. In addition to the outlay by the belligerent states for their own war expenses, the powerful belligerents made advances of money to their financially weaker allies in sums which would alone have served to finance the whole of a great war a generation ago. The British finance minister has shown that England, during the two first years of war, had loaned upward of $3,000,- 000,000 to its allies and colonies. France, in the face of her own economic troubles, has au- thorized advances of nearly $800,000,000 to such allies as Belgium and Servia. At the beginning of 1 916 it was possible to state that the national debt of England, as compared with its debt when war began, had risen from $3,500,000,000 to 58 FINANCING THE WAR $11,155,000,000; of Germany, from $5,200,000,- 000 to $11,613,000,000; of France, from $6,600,- 000,000 to $13,197,000,000; and of Russia, from $4,500,000,000 to $8,655,000,000. This indebted- ness had considerably more than doubled in a year and a half, the increase being the prodigious sum of $24,820,000,000 for only four of the twelve belligerents. How was it possible for the people or the banks to provide such unheard-of sums? The first answer is the answer which the financial history of all great wars has given — that the actual re- sources of available capital, in a prosperous modem state, are always underestimated. An in- teresting calculation, by an international banker, is that the whole debt of England at the begin- ning of 19 16 was only equal to one year's total income of the English people, and that whereas the increase in the debt, as compared with that at the end of the Napoleonic wars, was 145 per cent, the estimated annual income of the people had increased more than 800 per cent. Such estimates are not easily susceptible of absolute proof; but they show at least what factors are really operat- ing in the problem. Capital, after all, is the whole world's accumulated wealth and property; the real problem of borrowing governments is how to get in touch with it. Almost the first step taken, by all the Powers RESTRICTIONS ON MARKETS 59 confronted with these enormous requisitions for the war, was to stop the subscribing of home in- vestment capital to other new securities. The English market had in a single twelvemonth, during the decade preceding 19 14, invested as much as $1,337,000,000 in all sorts of new se- curities, home and foreign, and that was its highest record. In the whole of 19 15 its total subscriptions to new securities footed up $3,426,- 000,000, but only $76,000,000 of that enormous sum was placed in ordinary investment enter- prises. The $3,350,000,000 balance was entirely made up of British war loans, or of loans for war purposes, made to England's allies and colonies. At Berlin and Paris the story was the same. This concentration almost exclusively on home war loans, of the accruing capital heretofore an- nually invested in other securities, provided part of the capital needed for the war loans, but by no means all. The war loans actually placed at home by England in the first twelve months of war finance, amounting to $4,750,000,000, were at least twice as large as the largest sum ever previously invested by the English market, dur- ing a corresponding period, in all new securities combined. Germany's $6,100,000,000 war loans were probably five or six times as large as her best previous record in absorbing new securities. From what source, then, were the remaining cash 6o FINANCING THE WAR subscriptions drawn ? Some of them represented proceeds of foreign investments (such as Amer- ican securities) sold back to the coimtries of their origin. A very large contribution came from de- posit-banks, savings-banks, and all kinds of fiduciary institutions, which used their resources to the utmost limit in taking the new war bonds into their assets. Much of the money must have come from use for loan subscriptions, by merchants and manu- facturers, of business profits which they would usually reinvest in their own enterprises. Part came undoubtedly from drawing down closely the idle balances of bank depositors ; part (and in Germany a very substantial part) through huge subscriptions virtually forced by government from lucrative war-munition enterprises like the Krupps. "No new enterprises are planned," a Vienna financial correspondent wrote in 19 15, discussing the successful war loans of Germany and Austria. "No journeys are undertaken. Nobody builds himself a house or lays out a park." All of the money once devoted to such pur- poses went, under the new conditions, to the war- loan subscriptions. Only a little reflection will be needed to convince the average man of the prodigious available fund which all these sources combined, if simultaneously drawn upon in a rich and thrifty country and under patriotic impulses, SOURCE OF THE WAR FUNDS 6i would provide for the public loans. "Every citizen," one of the highest officers of the British treasury declared to the House of Commons, in a debate on the finances a month ago, "ought to be prepared to put at least one-half of his current income at the disposal of the state." He might do this through subscribing to a loan, or through paying higher taxes ; as to which last-named recourse I shall presently have a word to say. But no one, at all familiar with a thrifty community's rate of private income and expenditure, should need much argument to con- vince him of how enormous a war fund would be provided by such a process. It was after an American secretary of the treasury, in 1863, had found that sufficient war loans ' ' could not be dis- posed of to capitalists without serious loss," that Jay Cooke and his army of canvassers, peddling the 6 per cents on commission, like book agents, from village to village, placed nearly $400,000,- 000 with the people at large. Instances such as this are perhaps the simplest answer to the famil- iar prophecy of the "economic ruin of Europe." A Europe with greatly depleted capital and greatly diminished financial power, after the war is over, is a natural supposition. But that bel- ligerent Europe is to be "economically ruined," in the sense that it will forever lose its old-time power in production, consumption, home and 62 FINANCING THE WAR foreign trade, and accumulation of wealth, is an absurd supposition. The world is dealing, in this episode, with an aggregate reserve of capital which is at least as much greater than that of the Napoleonic period, for instance, as the burden of war expenditure and war indebted- ness is greater than what it was in the decade end- ing with 1815. Economic progress throughout Europe will unquestionably be arrested, prob- ably for many years; with what accompanying phenomena, it is not easy to foreshadow; and any forecast of economic conditions in any or all of the belligerent states, when the war is over and the long process of financial readjustment begins, must depend in large measure on the duration of the war itself. If the theory were correct which was at first so widely held, that Europe in general or Germany in particular would break down eco- nomically under the strain of military expendi- ture, it would have been possible to imagine one or more of the belligerent countries reduced to a state of collapse, even before the progress of the military campaign had brought the conflict to any decisive conclusion. Economic exhaustion, however, is a formula considerably more difficult to reduce to terms of concrete phenomena even than the other familiar theory of "government bankruptcy." One would expect to define the nature of such a process by "ECONOMIC EXHAUSTION" 63 reference to the precedent of other wars. But miHtary history throws Httle or no Hght on the question. If the other great wars of modern times prove anything in this regard, it would seem to be that behigerent states are not beaten purely by economic exhaustion. It is apparently the teaching of such history that governments can fight on, often against seemingly overwhelm- ing military odds, long after the puzzle has become inscrutable, where they could raise the money to carry on the war, how they could maintain their home and foreign credit, and by what means they could continue to feed both their non-combatant population and their armies. It has been unfail- ingly characteristic of all great wars, especially when they were prolonged beyond previous ex- pectation, that even financial experts have pre- dicted financial exhaustion, probably during the war, but in any case after it, as an inevitable con- sequence. Macaulay has a passage much in point, on the public debt of England. At the end of the war with Louis XIV, that debt, he said, was con- sidered, even by competent thinkers, "as an en- cumbrance that would permanently cripple the body politic." Nevertheless, "trade flourished, wealth increased, the nation became richer and richer." The prediction was repeated, with the same result, during England's other wars of the 64 FINANCING THE WAR eighteenth century. Hume argued, after the wars of the elder Pitt, that "all the revenues north of the Trent and west of Reading were mortgaged"; Adam Smith warned England against repeating the hazardous experiment. Yet the public debt, which was then £140,000,000, rose to £240,000,- 000 at the end of the American War, and to £800,- 000,000 at the end of the conflict with Napoleon. Had an enlightened man of 1792 been told, Macaulay continues, that "in 181 5 the interest on £800,000,000 would be duly paid to the day at the bank, he would have been as hard of be- lief as if he had been told that the government would be in possession of the lamp of Aladdin or the purse of Fortunatus." But the subsequent economic history of England we all know. Macaulay was writing primarily concerning after effects. But predictions have also been made early in such conflicts, and seemingly on the basis of sound reasoning, to the effect that financial ex- penditure on the scale required could not possibly last beyond a stated period. This was freely pre- dicted regarding Japan in 1904, and not alone by pro-Russian financial prophets. The country was too poor to keep up such war expenditure ; it had no adequate reserve of accumulated capital at home; the time must come when its government would no longer be able to raise funds abroad. The Manchurian war was cut short after a year and a half of fighting, through America's medi- OLDER PRECEDENT 65 ation, and therefore It may doubtless still be ar- gued on general principles that another year or two would have given Japan her financial coup de grace. But the evidence which we do possess is embodied in the facts that Japan kept on raising public war loans at home, chiefly through popular subscription, and that her series of foreign loans were placed at London and at New York on progressively more favorable terms, after the first six months of warfare. What even the London banking community, in the disastrous days of 1797, predicted regarding England's power to finance a continued war, did not greatly differ from what the New York bank- ing community predicted regarding the United States in 1861, when the government at Wash- ington found difficulty in placing a loan for a few millions with Wall Street bankers at 7 per cent. Yet England fought for the seventeen sub- sequent years, and raised something like $2,000,- 000,000 on its loans to pay the cost of it, while the United States raised and spent $3,000,000,000 purely for military and naval operations during the four years after Bull Run. The unsuspected sources of taxation discovered in these historic instances, and the unimagined reserves of private capital, reached by ingenious appeals from the government, might properly make the financial prophet cautious during the present war. The same considerations, and others with them, 66 FINANCING THE WAR have bearing on another popular theory as to this huge economic burden. This takes the form of prediction that belHgerent Europe will "re- pudiate" its war debt — a word understood in vari- ous ways by the various people who use it. But nothing is more improbable than refusal of any great European government after the war to pay interest on that debt or the principal at maturity. The reason is that the present belligerents must borrow heavily, even after the war, to meet the continuing public deficit, and that a policy of bad faith in relation to the war loans would at once destroy the public credit. The erratic President Andrew Johnson, in his annual message of 1868 to Congress, described it as "just and equitable that the 6 per cent interest now paid by the gov- ernment should be applied to reduction of the principal," because "holders of our securities have already received upon their bonds a larger amount than their original investment, measured by a gold standard." The overwhelming indigna- tion with which Congress instantly voted down this fantastic proposal showed that they not only clearly recognized the moral character of such action, but foresaw its financial conse- quences. Our legislators of that day voted down also the more insidious proposal to pay interest and principal on the war debt, not in gold, but in de- GERMAN GOVERNMENT'S POLICY (y-j predated paper money. It is a striking fact, illustrative of the conditions possibly foreshad- owed for financial Europe after peace, that on the continental money markets discussion has been heard of the plan to pay in paper money the interest on war loans, so far as the bonds are held by the people of those countries. But nobody has suggested payment of anything but gold for interest due to foreign creditors. Europe is well aware how far it must rely, after the war, on good financial relations with such powerful neutral communities as the United States. Some interesting light has been thrown on this aspect of the question by another series of inci- dents in the financing of the war. I have thus far spoken only of the recourse to public loans to meet the war expenditure. Six months after the beginning of the war, Doctor Karl Helflerich, im- perial finance minister, formally annotmced to the German Reichstag that the Empire would make no attempt to meet the cost of war through new taxes. *'We do not," he declared, "desire to increase by taxation the heavy burden which war casts on our people." This was enunciating a principle practically new in the history of pro- tracted modem wars. It amounted to asserting that the economic interest of a belligerent state would be served by meeting the whole war expen- diture through public loans, thereby shifting the 68 FINANCING THE WAR entire fiscal burden upon the shoulders of future generations. Doctor HelfTerich, being an experienced banker and economist, was undoubtedly aware of the dangerous doctrine to which he was committing the German Government. Therefore, in a subse- quent speech to the Reichstag during August, 1 91 5, he explained that "we owe it to the future of our people" that "the future development of their lives shall be freed from the appalling bur- den caused by the war." How was this appar- ently inconsistent end to be achieved ? Through the fact, so announced the finance minister, that "those who provoked the war, and not we, de- serve to drag through the centuries to come the leaden weight of these thousands of millions." In this remark were embodied two strong pre- possessions of the German mind in the earlier months of war — first, that England, France, and Russia "provoked" the war which Austria made imminent by her insolent demands on Servia, the averting of which was blocked by refusal of official Berlin to join in England's proposals for mediation, and which Germany precipitated by her high-handed ultimatums and her unlaw- ful invasion of Belgium; second, that Germany, having won the fight, would impose on her antag- onists a cash indemnity running upward of $10,- 000,000,000. THE NEW ENGLISH TAXES 69 Evidently conscious of the absurdity underly- ing these calm assumptions — especially with the enemy in possession of Germany's colonies, with England controlling the sea, and with the whole civilized world outside of Germany in agreement that reparation to Belgium was the sine qua non of the final reckoning — the minister added, in a rather obvious anticlimax, that "the dreadful financial exhaustion of our opponents may seem to make this difficult of attainment." But at all events, so far as concerned the plan of paying for war exclusively by borrowing, "the force of cir- cumstances has made England do the same." A slight increase in the English income tax and excise duties during 19 14 "covered only 5 per cent of the English war bill." A subsequent at- tempt to increase the British income tax had "roused such lively opposition that its success is more than dubious." Therefore, with Germany, as with the other belligerent Powers, "the only method seems to be to leave the settlement of the war bill to the conclusion of peace and to the period after peace has been concluded." But the German Government was presently to learn that it had misjudged the temper of Eng- land actually at war and confronted with rising taxes, as completely as it had misjudged the temper of England on the verge of war and con- fronted with Irish insurrection. When the first 70 FINANCING THE WAR "war budget" of 19 14 had, as the German finance minister asserted, introduced only sHght changes in the tax bill, the British taxpayers them- selves insisted that their own immediate burden be increased. In September, 191 5, the new chancellor of the exchequer annoimced a very extraordinary series of new imposts. The income tax, already exceptionally high before the war began (owing to the government's extensive plans for social and industrial betterment), was raised nearly one-half beyond its previous figure. The tax on moderate incomes from investments rose to i7>^ per cent of the income — a wholly unprece- dented height, and nearly three times what it had been before the war — ^with a graduated "super-tax" on large incomes which raised the total exaction from incomes of $500,000 or over to no less than 34 per cent. Excise or import taxes ranging from 30 to 100 per cent were im- posed on a number of articles in constant use. Rates for postage, telephone, and telegraph mes- sages were heavily increased. Out of all profits from manufacture of war material, the govern- ment was to take one-half in taxes. Roughly speaking, the total annual revenue from taxation, which was $800,000,000 in the twelvemonth be- fore the war began, was estimated now at very nearly $1,500,000,000. The absolutely new requi- sitions for the coming year footed up $510,700,000. A HUGE WAR REVENUE 71 No such increase in a single season had ever been witnessed in the history of taxation. Even so, only 24 per cent of the annual British war expenditure was being paid from taxes, whereas the common estimate of history had been that 40 per cent of England's costs in the Na- poleonic War had been thus met. Early in 1916, however, another and even more startling budget of new taxation was presented to Parliament by the exchequer. The income tax went higher still; incomes of $10,000 a year, for instance, paying 25 per cent to the government. Other taxation then imposed brought the sum total of annual revenue of all descriptions up to $2,500,- 000,000, as against $1,130,000,000 in the twelve- month ending with March, 1915, and $990,000,000 for the similar period ending with March, 1914. The percentage of increase was not so great as the rise in the United States Government's revenue from $41,400,000 in 1861 to $322,000,000 in 1865; but our Federal taxation when the Civil War began was negligible, whereas England's national tax rev- enue in the year before the war was the largest of any nation in the world. It was now possible for the British ministry to say that something like 27 per cent of the annual war expenditure was be- ing paid from taxes, and that new revenue from that source was already providing in fiill for in- terest on the debt and a future sinking fund, 72 FINANCING THE WAR whereas Germany was paying interest on its later war loans with the proceeds of the earlier ones. It should be remarked that this notable achieve- ment was the achievement of England only. France made little or no attempt to meet the cost of war from taxes. Russia had decreased rather than increased public revenue through her em- bargo on the state-controlled sale of spirits. But the English budget and the remarkable una- nimity of approval with which the taxpayers received it threw at least considerable light on the theory of "financial exhaustion." Even as regards the policy of Germany (which responded to England's new announcements by a not very significant new taxation yielding $120,000,000 per annum), it is fair to keep in mind that in 1 9 13, when increasing her standing army, pre- sumably in preparation for the war of 19 14, the Empire had imposed what is usually the last word in taxation — a heavy percentage tax on property of every sort, to be paid in three instalments as a "contribution to imperial defense." In view of what England actually did, it may safely be assumed that the power to raise money for the war by other means than loans had by no means approached exhaustion. Indeed, a very striking fact of the European situation was that the very familiar recourse of former wars — the UNTRIED EXPEDIENTS Ti issue of paper money directly by the government and the use of it to meet the government's ex- penses, was practically rejected by all of the bel- ligerents. The expedient of "government notes" not redeemable in coin was employed on an ex- tensive scale in our Civil War; the economic meaning of them is that the government pays its current bills with its own promises to pay at an indefinite future date, forcing its creditors at home to accept such promissory notes as money. Under this contrivance a government may at least appropriate the services and property of its citizens, as bankrupt revolutionary France did after 1789, without the necessity of procuring actual money for the purpose. The incidental and very formidable evils arising from such in- flation of the currency with irredeemable and un- secured paper are well known. Prices of com- modities rise to heights entirely out of touch with those of the world at large, and in the end the currency thus created may become virtually worthless on the markets, like the assignats of France, the continental currency of our own Revolutionary War, and the paper money of the Confederate States. These very familiar con- siderations easily explain why the European belligerents of this war should not have employed the recourse. But the fact, nevertheless, remains that the recourse might have been employed and 74 FINANCING THE WAR that it would have served to carry on the war. Therefore the absence of attempts to revive the old experiment of fiat money proved at least that economic exhaustion was not yet at hand. CHAPTER V FINANCIAL AMERICA AND THE WAR OF all the surprises which have marked the financial history of the war, none was more complete than what happened with the United States. After twelve months, in which, with increasing rapidity, the world had become politically and financially disorganized by the epoch-making conflict, this coimtry immistakably reached, in its relations with all other countries, a pinnacle of economic power and prestige never previously attained by it, and never imagined, in the form it actually assumed, imtil long after the outbreak of the war. The historian of the futiire will probably say that this was the quite inevitable result of the war itself. The six greatest European nations, includ- ing all of this coimtry's richest and most aggres- sive commercial rivals, were engaged in wasting their own resources and crippling the resources of one another. In one European country of high financial rank, the banks had been seized by the invading enemy and their resources virtually confiscated. From Paris $900,000,000 gold and 75 76 FINANCIAL AMERICA silver, the reserve of the Bank of France, had been hurriedly removed to a distant port to escape impending capture. Bombs were dropped from air-ships in the neighborhood of the Bank of England. Berlin was cut off, commercially and financially, from the rest of the financial world. What result more natural, under such circum- stances, than that money of foreign countries, seeking a surely guarded resting-place, should pour into the banking institutions of the greatest neutral state ? What other outcome was to be expected than that the foreign trade of this pow- erful neutral nation should expand to previously unimagined proportions ? Such, indeed, is to-day admitted by the whole financial world — now that we know what actually happened — to have been the inevitable logic of the situation. Yet there were several highly im- portant contributory causes which could hardly have been predicted in advance, and which cer- tainly were not predicted. Furthermore, this sud- den rise to overshadowing economic power and prestige is precisely what the high financial ex- perts, at the beginning of the war, had declared could not possibly happen. The United States was believed to be in great measure economically dependent on Europe. Two years before, it had been declared on well-known banking authority that even in normal times our annual dues to OUR INDEBTEDNESS TO EUROPE Tj Europe — for interest and dividends on American securities held by foreign investors, for payment of freights on foreign ships, and for remittances cov- ering expenditure by Americans Hving or travel- ling abroad — were so enormous as to exceed by more than $500,000,000 our normal excess of merchandise exports over imports. The difference had to be met through Europe's investment of capital in this country. Europe, the inference proceeded, could if it chose, even in an ordinary year, have called for payment of this $500,000,000 debit balance in gold. Probably the estimate much exaggerated the actual situation. Still, it was based on facts which did exist. It is true that, during one remarkable episode of our financial history, fifteen years before this war, New York had indulged for a few months in the dream of becoming shortly the independent financial centre of the world — "displacing Lon- don" was at the time the favorite way of putting it. The course of events which led to that prema- ture expectation provides a curious parallel of cir- cumstance (though on a far smaller scale of opera- tion) with that of 191 5. England, in 1901, had been for a year at war with the Transvaal Repub- lic. London's financial markets were gravely dis- turbed; even that little conflict was costing the British exchequer a million dollars per day. The United States, in the half-dozen years after the 78 FINANCIAL AMERICA panic of 1893, had been economizing and saving; it had put its currency in order and had estabHshed the gold standard beyond dispute. It had raised the two largest grain crops in its history at the very time when Europe's harvests failed; had thereby increased its exports to a figure in those days ut- terly amazing, and had witnessed such financial and industrial prosperity at home as promised unbounded possibilities. When, under all these circumstances, continental Europe began to clamor at the capture of its markets by our manufacturers, and when this was followed by the subscription of our bankers to $208,000,000 of the British war loans — the first ever sold by the exchequer to foreign subscribers — it was not strange that pre- diction of New York's coming supremacy in the financial world should have been the watchword. Reviewing that episode, after the later inci- dents in our economic history during the Euro- pean War, there is much in the nature of economic coincidence. But whatever, in the longer sequel, is to be the outcome of our country's rise to inter- national power after 19 14, the predictions of 1901 turned out very soon to be illusions. A few ex- citing months, and our own most ambitious finan- ciers admitted reluctantly that at the height of our economic prestige we had really been using European capital, which came to New York of its own accord, because of America's temporarily BEFORE THE WAR 79 great prosperity. Long before 1907, Wall Street was once niore openly borrowing by the hundreds of millions, and in every European money market, France and England had to help us out of that year's financial pitfalls. In the ensuing half-dozen years our financial markets continued to draw on Europe's capital, at a rate which suggested that such help was an immediate necessity. The spectacular incident in our markets of 1909 was the effort to induce the Paris Bourse to take over part of the capital stock of our largest joint-stock company, the United States Steel Corporation. In 1 9 10 our most powerful railways sold to the Paris market more than $50,000,000 of new se- curities. Between that year and 19 14 the reluc- tance of Europe to support our markets (for reasons of its own, already explained) caused great financial depression in this country. Even a borrower in such high credit as the city of New York, hesitating to press new bond issues on the American market, placed no less than $100,000,- 000 of its short-term obligations with European bankers, and had to pay a high interest rate to get them placed. We shall hear of these New York City obligations again in the course of our present narrative; the great bulk of them hap- pened, unluckily, to fall due in the autumn of 1914. Such was the position which, at the outbreak of 8o FINANCIAL AMERICA the war, American finance seemed to occupy with relation to Europe. It was siirely no matter for astonishment — even when the logic of the situ- ation might have been plainly reasoned out on the lines suggested at the opening of this chapter — that the gloomiest forecasts of all, regarding the American outlook, should have come from conservative and experienced financiers. The most that even Wall Street ventured to predict of a hopeful nature, in the first two or three months of the European War, was that American exporters might capture the South American and Asiatic markets lost by Europe. The most that financial London had to say, by way of encourage- ment, was that when the war should end the United States might be brought, through its previous neutrality, to a position of high financial power. It must now be our task to answer the question, why every one of these high experts was wrong in his prediction, to see just what actually happened, and to determine why it happened. What happened first was of a character to con- firm the most unfavorable judgment. The New York Stock Exchange closed its doors on Friday, July 31, the day of London's closing. There was strong opposition to such action, on the stock ex- change itself, but it was silenced by evidence, presented to the officers of the exchange, that selling orders from Europe, already placed with CLOSING THE STOCK EXCHANGE 8i bankers and brokers for execution as soon as the exchange should open Friday morning, were of a magnitude and character such as to threaten the gravest consequences. Houses through which Europe's investing communities commonly made their purchases or sales on the New York Stock Exchange reported that every market in the world seemed to be making ready for the sale to New York at once of all the American securities that they could dispose of. It must be remembered that, with war now recognized as inevitable but with no protective financial measures yet adopted, there was a double motive for such sales at al- most any sacrifice. First, not a banking-house in Europe was sure of its own continued solvency; therefore the instinct which always governs the financial mind in time of panic — to convert in- vestments instantly into cash — operated with un- precedented violence in this greatest of all finan- cial panics. But, second, the European banking community's knowledge of the prodigious coming demand for capital by the belligerent govern- ments urged immediate preparation of the neces- sary free resources. Closing of all the European exchanges had put a stop to liquidation on those markets. Had the New York Stock Exchange reopened on July 31, it would have been the only great market in the world available for such sales; and foreign in- 82 FINANCIAL AMERICA vestors held at the time, as subsequent expert in- vestigation pretty clearly proved, hardly'less than $4,000,000,000 of American securities. Of the great mass of foreign selling orders, awaiting exe- cution at the New York opening of the 31st, a very large number explicitly provided for ac- ceptance of bids as much as 15 or 20 per cent under the previous day's market. Some fixed no limit whatever on the price. When it is further stated that prices of such securities had already fallen 10 to 20 per cent in the few preceding days, and that the New York banks had loans out- standing in the hundreds of millions, based on pledge of these securities at their previous valu- ations, the reason why the board of governors closed the New York Stock Exchange is evident. The fact that after the exchange had reopened, five months later, this European selling was re- sumed on an extensive scale, yet without seriously disturbing the course ■ of prices, has occasionally raised the question whether New York might not safely have left its official market open after July 30, purchased the American securities thrown over by Europe, and thereby gained at once the international prestige which was actually achieved only after long delay. No one can absolutely prove a negative. Theoretically, at least, the thing might have been done. But it would iin- questionably have been done at the cost of far- THE NEXT TURN 83 reaching insolvency. The New York Stock Ex- change at the end of July confronted world-wide panic. When it reopened in December, Europe as well as America had applied the necessary pro- tective measures; panic, at least, was over. The foreign selling of our stocks and bonds during 1 91 5 was orderly and deliberate; only as much was sold from day to day as the market would take without break in prices. The banks, as we shall presently see, were able then to facilitate the process. But the immediate course of events, after July 30, 19 14, showed how ill-prepared they were for such service at the time. Even supposing New York to have surmoimted the "war panic" of midsummer, 19 14, without shutting the doors of its stock exchange, the failures which must have followed could scarcely have been limited to Wall Street brokers. If deposit banks had also closed their doors in the frantic rush of stock- market liquidation, the shock would have reached the bank-depositing public and the domain of general industry. It was, in fact, immediately evident that the crisis had by no means been averted by the clos- ing of the stock exchange. Nobody knew what would be the next turn of international finance. Nobody knew whether panic would not break out among bank depositors. Whatever protection the closing of the stock exchange may have given in 84 FINANCIAL AMERICA other directions, the banks at any rate had lost through it the opportunity of selHng their own securities, and thereby fortifying their cash re- sources. With the situation thus obscure and menacing, the banks of New York, followed by those in other American cities, promptly adopted two emergency expedients. One had never been employed except in time of panic; the other had never previously been employed at all. The first was the issue of what were called "clearing-house loan certificates." This expedi- ent (originally designed solely to enable one or more embarrassed banks to protect their own cash reserve) permitted such institutions to use interest-bearing due-bills instead of cash, when paying for checks drawn against them, deposited with other banks for collection, and presented for payment by such other banks. But the plan never worked within those limits. Since every bank in a given clearing-house had an equal right to "take out clearing-house certificates," and since every bank was confronted with a possible "run," the process soon came to mean that all the banks of a given city would suspend cash payments to one another. This in ttun in- variably caused suspension of cash payments to depositors, or at least restriction of their cash withdrawals to small sums. The consequence had been, in each of our greater panics, that employers CLEARING-HOUSE CERTIFICATES 8^ of labor could not draw from their bank-accounts the cash required to meet their weekly pay-rolls. In the panics of 1907 and 1893, currency was bought and sold on Wall Street at a premium as high as 4 per cent, the $104 asked by the brokers for $100 actual money being paid in certified bank checks. During the panic of 1907, there were outstanding, in the various cities of the United States no less than $227,114,000 clearing- house loan certificates; they remained in use at New York during twenty-two successive weeks, and the "premiimi on currency" lasted two full months. In 19 14, the maximum amount at any time outstanding was $195,754,000. The suspension of cash payments at the banks, and the currency premiimi at New York, would presimiably have occurred again in Au- gust, 1 914, but for the second and novel expedient adopted by the banks. Such conditions might, indeed, have lasted longer even than in 1907; for in that year the crisis was reHeved by immedi- ate import of almost $100,000,000 gold from Europe, whereas the five months after war broke out in 1 9 14 were marked, as we shall see, by ex- port of an exactly equal simi. Simultaneously, however, with the recourse to clearing-house loan certificates the so-called "Aldrich-Vreeland Law" of 1908 was put into operation. That law passed Congress a few months after 86 FINANCIAL AMERICA the panic of 1907; its purpose was to establish machinery for rapid increase of the currency in panic time, and thereby to avert such hoarding of money, drawn from bank reserves and other or- dinary channels, as locked up from circulation, toward the end of 1907, no less than $296,000,000. A properly elastic currency-issue system, such as exists to-day, would have served the purpose; prospective money hoarders would have got noth- ing but new bank-notes. But long discussion and debate were necessary before a law with the requisite scope and detail could be framed, and the "emergency-currency law" of 1908 was en- acted to bridge over the intervening period. The older law permitted national banks to issue notes only on pledge of United States bonds with the government; this was a slow and greatly re- stricted process. The "Aldrich-Vreeland Act" authorized instantaneous issue, within carefully prescribed limitations, of currency based on the pledge of other assets of the banks, such as ap- proved notes of mercantile borrowers. In the six years up to August, 19 14, no bank had applied for such "emergency currency"; but the notes were engraved, held by the government, and kept ready for immediate delivery. They were put out without delay in 19 14. By the 3d of August $46,000,000 of them were in the hands of New York banks. Depositors who asked for cash were " ALDRIGH-VREELAND LAW 87 paid in this new currency (which in form was hardly distinguishable from the old-time bank- notes), and the banks retained the gold and legal- tender currency in their reserves. This machinery, then, provided without any fresh legislation that immediate relief which Europe obtained only through new and hastily contrived expedients. It is a highly interesting fact that English bankers were at work on plans for a similar special currency at the very moment when the war broke out. It was to have provided for additional note issues in time of stress, secured one-third by gold and two-thirds by negotiable securities. The private London banks and the British Government had favored it; the Bank of England opposed it, "The bankers," one of the committee subsequently wrote, when describing the August bank panic at London, "iinderstood that the opposition either was or would be with- drawn ; but it was too late. ' ' The alternative plan of "currency notes" had to be adopted. The results of the application in this country, of the statute of 1908, were most important. But so violent was the shock of panic that they were slow in operation. In the three weeks between the end of July and the middle of August, 19 14, actual money in the reserves of New York banks decreased $83,000,000; nearly all of the decrease being gold. Under the old national bank law 88 FINANCIAL AMERICA then in force, city banks were required to keep on hand in "lawful money" (a technical term which did not apply to the new "Aldrich-Vreeland notes") 25 per cent of the amount of their de- posits. On July 25 they held $25,127,000 more than that requirement; on August 15 the actual deficit below the 25 per cent was $47,992,000. Nevertheless, it soon appeared that no induce- ment for continued hoarding existed any longer, when banks were freely providing customers with the currency issued under the law of 1908. So much had been accomplished; yet after all it had only served to check one symptom of the panic. There was little in the situation, during the three or four months which immediately followed the outbreak of the war, to foreshadow any other favorable change. It was during those few months that prediction as to the influence of the European War on this country's economic posi- tion was most hopeless. Between July and No- vember, 1 9 14, the outlook for American prosper- ity seemed, even to trained and practical financial observers, to be altogether dark. There was abundant reason for misgiving. Quite apart from the disturbing possibiHty that Europe would call for instant repayment of the enormous sum of capital invested in the United States — an achievement as impossible for our mar- ket as a bank's immediate payment in cash of all IN THE FIRST MONTHS OF WAR 89 the deposits on its books — the entire framework of finance, commerce, and industry had been shat- tered by this mighty blow. During the first few weeks of war, the country's maritime export trade came almost to a halt ; ships with cargoes already on board were afraid to risk the chance of seizure by cruisers of the belligerent powers. When England had chased the hostile cruisers from the sea and the ocean highway was reopened, our lucrative trade with Germany had disappeared. In the five last months of 19 13 we had exported $186,000,000 worth of merchandise to that coun- try. In the same five months of 19 14 we shipped only $2,200,000. This country's total export trade in August decreased $77,000,000 from the year preceding; for September and October com- bined, the decrease was $138,000,000. This was no favorable omen for the payment of our ac- cruing foreign dues, as usual, in merchandise. Not only, in fact, were shipping facilities sud- denly and heavily reduced, but the shock to inter- national credit had instantly impaired the buying power of neutral coimtries, while the question what belligerent Europe could purchase from America was entirely obscure. It is true that the wheat market is traditionally stimulated by war, and that the wheat crop just reaching harvest in the United States, when war began, was the largest which we had ever harvested. In that branch of 90 FINANCIAL AMERICA export trade we shall encounter highly interesting developments later in our narrative. But the cotton-growing industry, though that crop also produced in 19 14 the second largest harvest of our history, found itself for that very reason in a dangerous predicament. More than half of our yearly crop of cotton is sold and shipped to Europe, the value of that ex- port having risen as high as $600,000,000. But Germany was our cotton trade's second largest foreign customer; her market was cut off, while the textile industry in the rest of Europe, along with other manufacturing activities, was para- lyzed by the shock of war. In September, Octo- ber, and November, normally the months of large shipments from the newly grown cotton crop, the country's cotton export footed up in 19 14 less by $218,000,000 than in the corresponding months of the year before. The prospect seemed to be that possibly one-third of our crop of 19 14 would be left on the planters' hands. Now the South not only depends on its sales of cotton for its income of the season, but it had spent large sums, often of borrowed money, for wages, rent, and materials. An outcry arose at once that the South was facing ruin. Excited congressmen proposed that the national treasury lend $500,000,000 to the plant- ers; that currency be issued on the security of cotton; that the government guarantee a profit- COMMERCIAL DIFFICULTIES 91 able price for cotton, which was then falling rapidly on the market. Efforts were made to start a nation-wide canvass for the purchase of a bale of cotton apiece by charitable citizens, and in the end a fund of $135,000,000 was conditionally pledged by banks throughout the country to lend against cotton and save the South from ruin. As was shown by the event, this cotton-market panic was unreasonably exaggerated; the South shared fully in the country's later war-time pros- perity. Still, it was one discouraging sign of the early autimin of 19 14. While this was going on, our manufacturing industry was beginning to discover that many hitherto indispensable raw materials, such as dyestuffs and chemicals, were apparently cut off from access to our markets. Production slackened rapidly in the steel and cot- ton-spinning trades. Bank checks drawn in the whole United States during August decreased 19 per cent from the year before; in September and October the decrease was 25 per cent. This pointed to such shrinkage in actual business ac- tivities as had been familiar only in periods of severe depression. With foreign trade and home industry thus de- ranged, there remained the question of our in- debtedness to Europe. The protective measures already taken in the banking and currency situa- tion dealt solely with the financial crisis at home. 92 FINANCIAL AMERICA The closing of the stock exchange merely pro- tected us, temporarily, from Europe's sales of American securities. Neither guarded against the sudden and urgent recall of capital in other forms. Our markets were heavily in debt to Europe, not only through American stocks and bonds held by foreign investors but through loans coming to maturity almost daily. England, our largest creditor, was calling for instant payment, and we could not blame her for it. Her own necessities were lu-gent. Loans due to her from the Euro- pean Continent were non-collectible because of the war; loans due from nearly all other neutral countries were non-collectible because of the mora- toriums. There was no war and no moratorium at New York, and London called on the New York market to pay what it owed. It seemed inconceivable that New York could meet the call. In the last week of July $42,- 000,000 gold was taken for export to Europe; no outgo on such a scale could continue very long without eventually exhausting the available gold reserve of both banks and government. New York's "par of exchange" with London is $4.86^, which means that an English gold sovereign is intrinsically worth that amount in American cur- rency. The usual cost of freight and insurance, with the temporary loss of interest on the money, is such that the rate of exchange may rise, say to THE HIGH EXCHANGE RATES 93 $4,885^ or $4.89 in the pound sterling, before it will be profitable to send gold from New York to London. Ordinarily the rate can go no higher, since at that figure the gold may be obtained and shipped. But during the five last days of July, when financial London was falling into panic, New York exchange rose successively to $4.91^, to $4.95, to $5, to $5.50, and, finally, on August 4 — the day of Great Britain's ultimatimi to Ger- many — to $7 in the pound sterling. No rate anywhere near to this had ever been reached in the history of the New York market. Since the rate of exchange thus touched was im- possible with gold shipped freely to London, to pay the balance of international indebtedness against New York, and since $4.86^^ to the pound sterling was the intrinsic parity of exchange, the $7 rate meant, theoretically, that the American currency was depreciated 4H per cent on the foreign market. We shall encounter this measure- ment of currency depreciation again in the later chapters of the economic history of the war. Of this particular episode, it is enough to say that the depreciation was quite artificial, for two rea- sons. A treasure ship could not be trusted to make the passage from America to England; there was therefore no limit to the price in dollars which might have to be paid by a New York banker whose obligations in London were falling 94 FINANCIAL AMERICA due, for a draft redeemable at London in pounds sterling. But it was also an artificial depreciation because the treasury continued freely to redeem the American currency in gold. But, on the other hand, it soon began to ap- pear, even after the British fleet had driven Ger- many's ships from the sea, that the New York banks were not disposed to give up gold for ex- port. The loss of the $42,000,000 gold for that purpose, at the end of July, had shaken the financial community's nerves. If, in response to London's calling in of its foreign credits, shipment of gold had continued at that weekly rate, the $308,900,000 gold in the vaults of New York's banks on August 15 would have been exhausted in less than two months. A run on the treasury reserve, to get gold in exchange for government legal-tender currency, would apparently have fol- lowed. Furthermore, the New York bankers pointed to the fact that the moratorium on debts, pro- claimed by the British Government, applied to indebtedness due by English bankers to American creditors. Why, therefore, should gold be sent to London to pay what New York bankers owed in that city ? On the face of things, the American money market seemed to be on the verge of join- ing Europe in her confession of financial helpless- ness. New York had almost established, auto- PROBLEM OF NEW YORK 95 matically and without governmental sanction, a moratorium of its own on foreign obligations, and among those obligations were the short-term bonds of the city of New York, falling due and payable in Europe before the end of 19 14. CHAPTER VI THE NEW YORK MARKET'S ACTION THE decision which the New York banks were now compelled to make was of crit- ical importance; but the true nature of the crisis was imperfectly understood. In the highest financial circles, opinion divided sharply. Should New York, tmder the plausible pretexts of the moratorium on London's own external debts and of the danger threatening this country's gold supply if we met the instant claims of foreign cred- itors, postpone payment of its own maturing for- eign indebtedness ? Or should such payment be made on the spot, regardless of consequences ? There was much to say for either alternative. Prob- ably, during the first few weeks of war, the pre- vaiHng judgment, even among experienced bank- ers, favored the first-named policy. Much that is clear to-day, in the light of subsequent events, was altogether obscure in August, 19 14. Ideas regarding both present and future were still col- ored deeply by the conviction that the basis of credit had been absolutely broken down; that the catastrophe involved in Europe's political 96 LONDON'S EXPECTATIONS 97 and economic crisis was imminent, worid-wide, and unavoidable; that imless peremptory pro- tective measures were adopted, reversion to prim- itive methods of international exchange would force every debtor country to the wall when creditor countries grasped at its resources. The United States was one of these debtor countries. Why, then, did not its only rational policy lie in imitating belligerent Europe and suspending pay- ment of international debts ? What would have been the outcome in the country's immediate economic future, if that poHcy had been adopted, it is somewhat difficult to say. We have evidence of what financial Europe thought. Writing when the actual de- cision was still hanging in the balance, a well- known London financial expert, later appointed special adviser to the British exchequer, declared that the existing crisis "was the chance of a cen- tury for New York." A neutral market which had promptly paid its own international bills in gold, and had granted credit to other hard-pressed debtor countries, "would have stepped straight onto London's financial throne and set London a very difficult task to regain it after the war was over." But America "feared to use its gold, and held on to it as tightly as it could, fearful of in- ternal trouble and a nm on its banks if too much of the metal went abroad." The result was "the 98 NEW YORK MARKET'S ACTION depreciation of the American dollar as compared with the pound steriing." "It was the chance of a century; but New York could not take it." A month or two later, this London expert would hardly have thus described the policy of financial New York. Four months later, he might have been compelled to draw a different con- clusion as to the possibility of New York's dis- placing London. But what the London critic obviously meant was that if the American mar- ket had surrendered, had followed the rest of the neutral world in suspending international pay- ments, it would thereby have publicly proclaimed, at the very outset, its inability to stand alone, and would have joined the long list of banking and in- vesting centres in whose custody foreign capital could not be placed with any certainty of getting it promptly back again when needed, or of re- covering it at all, except at a rate of exchange which would not recover its original face value. We shall presently see what moral effect was pro- duced on foreign depositors, both by the action of Great Britain in proclaiming a moratorium and by the action of the American commimity in rejecting any form of that expedient. For the policy of arbitrary debt suspension was rejected — not by edict, nor even by general consultation and consideration, but by bold and courageous grappling with the first concrete case. THE NEW YORK CITY BONDS 99 It was fortunate that this case presented a clean-cut issue. At London, there were about to fall due £13,494,000 in notes of New York City; at Paris, 61,500,000 francs. Payment in gold at those cities, on the stipulated date, was nomi- nated in the bond. Two or three New York bank- ers accepted this situation as the crucial test, and called on the banks of the city to provide for the payment. Their task was not easy. No one institution could provide single-handed the $80,- 000,000 gold required for export; if done at all, the work must be done by joint action of all the largest banking institutions. So great was the hesitancy of responsible bank officials that the only argument which eventually broke down op- position in some important quarters was the blunt declaration that "if the credit of New York City goes by the board, all the rest might as well go with it." But the credit of New York City did not go by the board. The New York banks subscribed to a new $100,000,000 bond issue of the city, each bank agreeing not only to pay the stipulated price for its allotments, but to provide, in the ratio of its individual subscription and in gold or in bills of exchange convertible into gold at London, its share of the $80,000,000 European obligation. With a view to avoiding the still-existent risks of ocean transit, the Bank of England established a 100 NEW YORK MARKET'S ACTION branch at the Canadian Government depository, Ottawa, agreeing to accept gold payments at that point as made in London. To that destination, something Hke $35,000,000 gold was exported from New York as the city's European loans came, one after another, to maturity. As always happens in such circumstances, the smoothness with which this large transaction was completed paved the way for further concerted action on the problem of international payments. The "New York City loan pool" went into opera- tion in the middle of September. By the close of the same month arrangements were under way, on a very much larger scale, for shipment of gold to meet the remaining balance of international indebtedness against us. This was a far less simple operation than the financing of New York City's debt. Since in this instance it was impossi- ble to measure the full scope of the foreign claims beforehand, it woiild clearly have been imprudent to begin by trusting to unregulated export of gold, whose increasing magnitude might, in the prevalent uncertainty, have ended by throwing the subscribing bankers into panic. The course pursued, therefore, was the inviting of banks throughout the United States to sub-, scribe (as nearly as possible in the ratio of their cash resources) the sum of $100,000,000 gold; from which fund the gold required for export, GOLD PAYMENT MAINTAINED loi in order to adjust the unfavorable balance of ex- change, should be drawn and shipped to Ottawa for account of London. This remarkable opera- tion was directed by a committee of bank officials with nation-wide reputations, who were to call up the subscriptions of gold pro rata, as fast as actual export needs developed. Beginning at the open- ing of October with an actual shipment of $io,- 000,000 to Ottawa, this undertaking made clear to all the world the meaning of the newly adopted attitude of American financiers. Its moral effect on international opinion was very great. It is an axiom of banking that the way to stop a "run" is to give public and tangible evidence of readiness to pay. The bank depositor who rushes to the paying-teller's window, insist- ing that his balance be paid at once in cash, and who finds that official with a pile of gold or cur- rency at his elbow, cheerfully handing out the cash to applicants, is extremely apt not alone to change his mind about withdrawing his deposit, but to pass along to the receiving-teller's window with a new deposit. That very human instinct, entirely familiar in the case of humble individuals, displays itself as invariably in the larger field of banking operations; with capitalists, commu- nities, and nations. The action of the "bankers' pool" was closely watched, in Europe as in New York. When it was seen that $8,000,000 to $10,- 102 NEW YORK MARKET'S ACTION 000,000 gold per week was quietly being drawn from the banks and shipped to Ottawa, exactly that result ensued which occurs when the paying- teller promptly meets all demands of bank de- positors in a "run." In this larger instance of what had seemed to be a run by Europe on the gold reserve of the United States, the American bankers' systematic shipment of gold to the Bank of England's branch in Canada — the total gold ex- port from this country between August i and December 31 being no less than $104,900,000 — had the visible effect, first of reducing Europe's de- mands for immediate payment of our interna- tional indebtedness; then, in due course, of draw- ing capital from abroad to the United States. Under these various influences New York ex- change on London had returned, by the last week of October, 19 14, to the rate of normal times. But New York had not yet been disentangled from the complications in which the whole finan- cial world had become involved when war began. American bank reserves and American currency were still imder artificial influences. Clearing- house loan certificates were only gradually aban- doned ; new issues of the sort were made by New York banks as late as the middle of October, and at that same date the "Aldrich-Vreeland" bank- note issues, confessedly an emergency expedient, were almost at their maximum. What was possi- POSITION IN OCTOBER 103 bly even more to the point in its bearing on our international financial prestige, the New York Stock Exchange was still closed for business. Foreign capital, whether from belligerent or neu- tral markets, might doubtless now be deposited in American banks, with confidence that it would be returned on demand in gold. But conversion into cash of foreign capital invested in American stocks and bonds, or conversion of cash into such securities, continued to be impracticable. We are now to see in what way these three impediments — the emergency bank-reserve money, the emergency paper currency, and the emergency embargo on sales of stocks and bonds — were next to be re- moved. The clearing-house loan certificates disap- peared automatically, as they have always done when panic has disappeared, hoarding of cur- rency has ceased, and cash in the bank reserves has risen to normal proportions. Before the end of October, notwithstanding the large export of gold from New York since July, the sum total of gold and United States notes in New York bank reserves (which had at one time fallen $61,000,- 000 below the figure of August i) was within two millions of the August figure, and the "surplus reserve" was restored, for the first time since that date; by November 28, all of the loan certificates that the New York banks had issued were re- 104 NEW YORK MARKET'S ACTION deemed and cancelled; by December 14, none of them was left outstanding in the United States. The "emergency bank-notes" of the law of 1908 — of which $384,500,000 were in circulation in the later autumn of 19 14 — were subject to a tax which increased gradually as time went on and the notes were not redeemed. The tax had not yet arrested the employment of this currency; for the banks were still surrendering gold for ex- port, financial judgment as to what would happen next was doubtful and suspicious, and no one was disposed to give up so serviceable a safeguard against another shock to public confidence. But at the moment when the financial ship was be- ginning in many other ways to right itself, an achievement of the first importance settled the question of the currency. It is fair to describe what happened as a remarkable coincidence — a windfall of the most timely and extraordinary good fortune to the United States. Long before war in Europe had been discussed in America as a present possibility — as far back as the later months of 19 13 — the Wilson adminis- tration had devoted all its energies to effecting the passage of a proper currency and banking law. I shall not attempt to describe the numerous and complex provisions of this statute, or to narrate the somewhat confused phases through which the act, very imperfect as originally framed, was THE FEDERAL RESERVE LAW 105 at last amended into shape insuring a scientific modem system. The essential aspects of the law which received the President's signature in De- cember, 1 9 13, were these: Instead of leaving every bank to use or misuse its own reserve of cash in a time of stress or panic, it established twelve cen- tral institutions in as many districts of the coun- try, each "reserve bank" to hold in its own vaults the bulk of the cash reserves of banks within its district. Thus held, the "gold and lawful money" could still be counted as part of the reserve of every "member bank." In return for such surrender of cash reserves, each central institution was bound to rediscount on request loans already carried by member banks; in other words, to lend to a member bank, at a fixed rate of interest and on security of the merchants' paper which was the basis of the member bank's own loan, the money originally advanced to mercantile borrowers by that member bank. This process meant that when requirements for credit on the part of their busi- ness clientage were greater than the individual banks could meet, in their existing position of reserves, part of the burden might be shifted to the reserve bank of the district. The loan or "rediscount," thus obtained by a member bank from its central institution, was to take the form of a credit balance in the reserve bank. That io6 NEW YORK MARKET'S ACTION credit balance the member bank might count as part of its own reserve; or the member bank, if it so desired, might draw on its balance, receiving the new currency known as Federal Reserve notes. These notes, though not themselves available for bank reserves, were available for all the uses, in hand-to-hand money circulation, belonging to the national bank-notes which they were intended to replace. The nature of the notes and bills rediscounted, and the term for which they were to nm, were carefully prescribed in the statute; the total amount rediscounted for any member bank was not, under ordinary circumstances, to exceed one- half of its capital and surplus, and was never to exceed the whole of those two fimds. Against all deposits credited to member banks, through re- discotmt of their loans or otherwise, the Federal Reserve Bank must maintain in its own vaults 3 5 per cent in specie or government notes. Against all note circulation issued by a Federal Reserve Bank to a member bank, and by it paid out to the public; the reserve bank must maintain a reserve of 40 per cent in gold. Finally, in order that the twelve reserve banks of the twelve al- lotted districts should be held to a harmonious general policy, and in order to insure their tmited action in a financial crisis, a so-called Federal Reserve Board of seven members — two of them A " PSYCHOLOGICAL MOMENT " 107 government officials and five named separately by the President of the United States — ^was cre- ated, with wide supervisory and restrictive powers over the entire system. Such, in its general outlines, is the machinery of the banking and currency system enacted at the close of 19 13. No one imagined, when the law was passed, that urgent necessity for be- ginning its operation was so near at hand. Its actual introduction was in fact accomplished rather slowly. It was three or four months be- fore the prescribed committee had arranged the twelve districts and the location of the twelve reserve banks. Not imtil one week after the out- break of the war was the Federal Reserve Board itself completed, and it was several months more before the new reserve banks were actually or- ganized. At length, on November 16, the new banking and currency system went into force. Its inauguration was followed by retirement of the $384,500,000 emergency bank-note currency, which was taken up so rapidly, through issues of the new Federal Reserve notes, that before the middle of 191 5 it had wholly ceased to exist. It will not have escaped the reader's notice that the new banking system entered on the scene at what may be termed the exact psychological mo- ment. New York had publicly resumed payment of its maturing foreign debts in gold. Foreign io8 NEW YORK MARKET'S ACTION exchange, whose rates had for three months run so abnormally against New York, was back to the normal level. "Loan certificates" at the banks were nearly all called in; "surplus re- serves" at those institutions were restored. Now came that thoroughgoing reform of our banking and currency system, without which, financial Europe had for years declared, the United States could not aspire to high international prestige, and with which it was equally predicted we should win the full jBnancial confidence of the outside world. All this series of propitious events had occurred in that notable month, November, 1914. To remove all doubt and misgiving which might still exist, on the part of other markets, there re- mained only one achievement — the reopening of the New York Stock Exchange to unrestricted transactions by the home and foreign investor. None of the previous efforts to restore normal conditions — not even the decision to export gold in payment of our foreign debts — was surrounded with quite so much uncertainty as this. Of all the gloomy predictions made during August in regard to the war's effect on American finance, the surest and most logical seemed to be that Europe at the first opportunity would sell its three or four thousand millions of American securi- ties at the best price obtainable. It had mani- festly been doing that very thing when the stock WALL STREET AND EUROPE 109 exchanges closed their doors on July 30, before the prodigious war expenditure had begun. Now, however, with 191 4 drawing to a close. Great Brit- ain was preparing to float a war loan of no less than $1,750,000,000, Germany was about to bor- row $1,000,000,000, and the other belligerents had similar plans on foot. War loans of even greater magnitude were immediately impending. No such requisition on Eiu-ope's capital had been wit- nessed in history. The inevitable sequel seemed to be that all investment holdings of the European public, which could be turned into cash on other than European markets, would be sold at once to raise the funds for subscription to the war loans. But if this seemingly certain policy were to be pursued, what could avert a 25 or 50 per cent de- cline in prices on the New York Stock Exchange, with the complete derangement of the credit sys- tem which had apparently been imminent when the stock exchange closed its doors ? Such was even now the reasoning of the stock exchange committee. It was not, however, now accepted imqualrfiedly by the financial commu- nity as a whole. What was suspected at the time, and what has been proved conclusively by subse- quent events, was this: The enormous sales of our stocks by Europe in July had been an incident of panic, and panic was now averted. Even if foreign investors were to sell, they would now sell no NEW YORK MARKET'S ACTION cautiously and deliberately, with a view to getting the highest price obtainable. Finally (and this suggestion, though at the time considered very daring, turned out to be entirely correct) the im- mense financial prestige gained by the United States, in refusing to join the world-wide rush for a moratorium on debts, must so far have con- vinced the foreign capitalist of the soundness of the American situation that he would hold to what he had of them already and, if he sold at all, would sell reluctantly and slowly. The stock exchange proceeded cautiously; but it was not left wholly in the dark. No market in which a large number of people really wish to trade can be absolutely suppressed, and after the stock exchange had closed down on Jtdy 30, it was not long before a group of individuals met on the sidewalk in the neighborhood of Wall Street, to experiment in buying and selling what was no longer bought or sold on the stock exchange. It was an irregular and unrestricted market ; stock- exchange houses were forbidden to deal on it, and both banks and stock-exchange officials did their utmost to checkmate its activities. Nevertheless, the market in the street survived and flourished. Made up at first, perhaps, only of wagers by venturesome gamblers on the probable value of securities, this so-called "outlaw market" pres- ently showed signs that bona-fide buying and sell- THE "STREET MARKET '* iii ing orders were being executed in it. It must be remembered that the pressure for some avenue to trade in investment securities was very great. Estates must be closed out ; holders of stocks and bonds have other uses for the money ; people with an idle fund in bank wish to invest it, without waiting for reopening of a stock exchange. By autumn, even the banking offices were keep- ing on file the daily printed circulars quoting prices of the "outlaw market." During the early auttmin, prices on that market went below even the closing prices of the final panic day, July 30. By the middle of October, important stocks were selling 10 per cent or more under that day's quotations. Then, along with the numerous favoring developments in the financial situation generally, an tuimistakable buying movement showed itself. It grew more active; within six or seven weeks the ' ' outlaw market ' ' had recovered most of the losses previously reported, and prices were again pretty nearly at the end-of-July level. These things had happened in the face of the most vigorous opposition by stock-exchange offi- cials. But meantime the stock exchange itself had not been wholly idle. In the third week of Septem- ber permission was given for members to buy or sell bonds to one another; though all such sales had first to receive the approval of a special commit- tee, and no sales were permitted below a level of 112 NEW YORK MARKET'S ACTION prices fixed arbitrarily a trifle under the closing quotations of July 30. In the middle of October, similar opportimity was granted to deal in a limited list of high-grade stocks. All this was done without the formal resumption of business on the stock exchange. Finally, on November 28, the doors of the exchange — closed during four con- secutive months, whereas never before in Wall Street history had such suspension of business lasted longer than ten days — were officially re- opened. The date itself was interesting. It was six weeks after the surplus in New York bank re- serves had been restored; not quite two weeks after the new banking system had gone into operation; aknost exactly a week after exchange on London had returned to normal parity, with consequent cessation of gold exports. It was also, by an appropriate coincidence, that very day on which the last of New York's clearing- house loan certificates was cancelled. Even now the stock-exchange officers proceeded with some misgiving. At first, open trading was permitted in bonds alone; a list of "minimimi prices," close to actual prices of July 30, was published, no sales were allowed below that minimimi, and speculative purchases or sales were rigorously forbidden — only transactions involving immediate cash payment being admitted. It was also stipu- STOCK EXCHANGE REOPENS 113 lated that every sale made on foreign account vshould be so stated to the stock exchange com- mittee. These extreme precautions showed that apprehension of a "20 per cent all-around de- cline" had not yet been removed. But prices quoted, on this resumption of official trading, gave no indication of a downward tendency. They did not even stay at the arbitrary "mini- mums"; instead, a gradual advance ensued. After two weeks, therefore, stocks as well as bonds were admitted to this limited open trad- ing, though with the same restrictions. The re- sult surprised all Wall Street; for prices, instead of hesitating around the "minimums," began at once a vigorous advance, and before the month was ended had moved up in many instances 8 per cent or more. This advance continued into the new year, 191 5. On April i all special re- strictions of whatever sort on stock-exchange trading were removed. Home and foreign hold- ers of American securities were invited to sell what they should see fit on the New York market. This announcement was the final expression of financial America's full confidence in its own position. It removed from the New York mar- ket the last protective expedient of the war panic of 1 9 14. Considered along with the notable in- cidents which had preceded the stock-exchange resumption, and with the further fact that no 114 NEW YORK MARKET'S ACTION investment market in the world, outside the United States, had returned to normal and un- restricted business, the effect on foreign financial sentiment was profound. A new and very ex- traordinary chapter in our economic history had begun. CHAPTER VII THE SECOND PERIOD WE have now reached a point in our sur- vey of the period where it is possible to see as a whole, and in their relation to one another, the makeshifts through which the civilized world, eastern and western hemispheres, belligerent and neutral states, struggled out of the convulsion which shook the economic firma- ment when the war broke out. Expedients, the suggestion of which would have been met with scornful incredulity a few weeks before August, 1914, and policies which, even when formally proclaimed, seemed merely to be the snatching at momentary support to escape complete financial shipwreck, had now — such was the logic of the events which had crowded on one another — taken their place as a consistent chapter in economic theory and practice. This series of preliminary episodes may perhaps be best characterized as the fight of the civiHzed world to avert the greatest panic in economic history. The general insolvency which had been so widely predicted in advance was escaped, as we have seen, partly through the support, on a IIS ii6 THE SECOND PERIOD quite unheard-of scale, of private by public credit ; partly through temporary suspension of payments, not on the part of individual banks or markets but of communities, nations, and, for a moment, of the entire financial world. Recourse to these expedients had also helped to avert that complete collapse of international trade which the British foreign office had foretold on the eve of war. But the time had now arrived at the end of 1 914, as it arrives in all great financial panics, when the sense of relief at escaping the seemingly imescapable catastrophe was superseded by a sense of the great and possibly lasting change in the world's economic relations. The "emergency expedients" had broken the force of panic, but they could not restore pre-existing conditions. When they had accomplished their specific task, the real economic influences called into being by the war began to exert their unhindered power. It had, in fact, required nearly all of this five months' lapse of time for bewildered Europe to realize what this war was to be, even in its polit- ical and military aspects. Expectation that it would end with a short and triumphant German march on Paris, or with a crushing counterblow by the Allies, was no longer tenable, in or out of the financial markets. During this period the Belgian resistance had broken down. Liege and Brussels had fallen. The German army had EVENTS OF THE WAR 117 swept almost to the gates of Paris. The French Government had removed to Bordeaux. The Ger- mans had been defeated at the Mame ; Paris had again become the seat of government. Retreating far to the northward, Germany's soldiers had be- gun the trench fighting on the western front, which was destined to create a military deadlock of nearly two years' duration. Russia had invaded Germany and been driven back. England had swept the seas of German shipping and blockaded the Teutonic ports. Turkey had joined the war and closed the Dar- danelles, German cruisers and Zeppelins had bombarded unprotected English coast towns, and the shameful story of German brutality and plunder in unhappy Belgium had become known to the civilized world. That this would be a long war, a destructive war, a war costly beyond the furthest previous flight of imagination, and a war in which international bitterness and hatred would reach unparalleled intensity, was now plain to the least experienced observer. The second economic chapter of the war was about to begin. It was marked by a distinct and rapid change in the actual position of both belligerent and neu- tral markets, but it was notable beyond all else in the completely altered relations which it in- troduced between Europe and the United States. This chapter of events began with 1915. Ii8 THE SECOND PERIOD The European moratoriums had by the end of 1 9 14 been in large measure abandoned; the ma- chinery of the credit system was at work again. Except for Germany and Austria, whose coasts were blockaded by the British fleet, and Russia, whose ports were closed on the Baltic by Germany and on the Black Sea by Turkey, the larger bel- ligerent states had resimied activities in foreign trade, though on a greatly restricted scale; ex- port of English products during the whole of 191 5, for instance, being cut down more than one- fourth from the last full year of peace. From the financial point of view, the alignment of the vari- ous fighting Powers was now highly interesting. The results of the crucial economic test through which each had passed were in many respects startling, and in some quite unexpected. England, although she had successfully averted a collapse of credit, had been shaken in prestige by the moratorium, and was about to relinquish volun- tarily, for the period of war, her position as the central market of the world. France, which a few years before had been lending money to Ger- many, to the United States, and even to England, fotmd herself in a seriously crippled financial position, in which (partly because the enemy was still on French soil) her government was unable to place long-term loans either abroad or at home. Germany's success in raising enormous sums NEW DEVELOPMENTS 119 through domestic loans, in the face of the em- bargo of her international commerce and finance, had amazed the world. But her currency was depreciating; a premium was bid on gold until the Bimdesrath imposed prison sentences on all who repeated the exploit; the foreign exchanges were moving rapidly against her, and she had to contend, in her economic as well as her political relations, first with the gradually tightening grip of the blockade on her food and supplies, and next with the overwhelming condemnation visited on her conduct by the neutral world, and the firm be- lief of that outside world in her eventual defeat. These new aspects of belligerent Europe's eco- nomic position had much to do, as we shall pres- ently see, with the altered course of events finan- cial in the United States. Two new and very striking incidents of the period had immediate bearing on the situation in both Continents. One was the action of the European Powers in regard to their gold supply, in which some en- tirely new economic precedent of war time was established ; the other was the discovery of what they would have to buy from producers in neu- tral states. Experience in former wars had taught the financial world that, in a conflict of larger magnitude, a belligerent coimtry would rapidly lose its gold through export. Such a movement always indicated either transfer of capital from I20 THE SECOND PERIOD the uncertainties of a fighting state to the refuge of a neutral market, or inflation of paper currency, which, in the famiHar machinery of finance, would drive out gold, or both influences com- bined. Both were reasonably sure to operate in the existing case of Europe. In former wars they had operated notwith- standing suspension of gold payments at the banks and .public treasuries, such as was publicly announced in Germany during August, 19 14, and tacitly put into effect by France. Yet the gov- ernment, first of Germany and then of France, took this time the quite unprecedented step of calling on its citizens to surrender voluntarily, in exchange for paper money, the gold in their pos- session. It must be remembered that in previous great wars, payment of gold by citizens to the government had always ceased. It became, actually or prospectively, worth more than other forms of currency. Merchants who had to use it in their foreign payments paid a premiimi to get it. Even the public treasury, when it needed gold for remittances to foreign countries or for interest on its debt, had to bid a premium, paid in its own depreciated paper. The exodus of gold from the United States in our Civil War was so well- known a phenomenon that politicians who de- sired to perpetuate the depreciated paper currency, and who opposed return to specie redemption of EUROPE AND ITS GOLD 121 it after the war was over, were accustomed to refer in their campaign speeches to the "blood- stained greenbacks" which had stayed with the armies and the people while the gold was making its cowardly flight to Europe. The natural order of events in continental Eu- rope of 1 9 14 would have been the same. But the German Government, having by law forbidden export of gold or the bidding of a premiimi for it, issued a proclamation urgently insisting on the exchange for imperial bank-notes, at face value, of all the gold held by its citizens. This proclama- tion rested its demand partly on grounds of pa- triotism, but partly also on the argument that gold was of no use to a private citizen and that paper currency was all that he had a right to ask for. It ended with the curious assurance that the imperial post-offices, at which gold would be re- ceived in exchange for bank-notes, woiild make no charge for the conversion. I have already re- ferred to the hoarding of gold in enormous sums which had occurred in continental Europe during the "war scare" after 191 1. Responding to this appeal, the gold emerged from its hiding-places. In the autumn months of 1914 nearly $20,000,000 a week was thus turned over to the German Government. During the first seven months of war, no less than $250,000,000 gold was added to the imperial bank's reserve, and of this only $50,- 122 THE SECOND PERIOD 000,000 came from the government's own "war chest," maintained since 1871 at Spandau Castle. In the middle of 191 5 the French Government made a similar appeal to its citizens, basing its request for exchange of gold on the plea of pa- triotism, and, after a fashion characteristically French, bestowing on every citizen who brought in his gold an official certificate of service to his coimtry. Within seven weeks, $100,000,000 gold had been received by the Bank of France. It could have come from nowhere but the hoards of private citizens, and upward of $150,000,000 more came in before the end of 191 5. Since neither the French nor the German Government was paying out gold, the upshot of these remarkable opera- tions was that the gold was still being hoarded, but by the public treasury, not by individuals. What will eventually be done with these immense accumulations — by far the largest ever held by the two state banks — remains to be determined later. The gold might conceivably be used, at the end of war, to pay indemnities. It might serve to facilitate return to gold redemption of the paper currency. It might be used exclusively for payment of interest and principal on foreign indebtedness incurred during the war. The sali- ent fact is, that the world had witnessed an abso- lutely new achievement in economic history. The course of the British Government was dif- TURN IN THE SITUATION 123 ferent. Gold payments had not been suspended at the Bank of England; the government's early proffer of authority for that step had been re- jected. As we have seen, the early months of war were marked by large gold exports from New York for account of London. Shipment of this American gold to the Bank of England's newly established branch in Canada, and the deposit with its South African branch of the $14,000,000 gold produced on the average each month from the Transvaal mines, increased the total gold holdings of the bank from the $138,000,000 of August 7, 1 914, to $362,500,000 in the middle of November; this, like the holdings of the French and German banks, being much the largest gold reserve in the institution's history. But we have also seen that November, 1914, marked the turn in America's economic fortunes. The New York market had paid its maturing Habihties to Eu- rope, had protected its own credit, had given plain evidence to the outside world of its confi- dence in its own position. At the very moment when an English commission had arrived at Wash- ington, with the belated purpose of helping to remove our difficulties on the international mar- ket, the whole situation altered. Exchange on London had fallen to the normal parity, and our gold exports to England or Can- ada had ceased. In another month or two, ex- 124 THE SECOND PERIOD change was moving so rapidly in this country's favor that the gold previously sent from New- York to Canada was coming back again, and be- fore the middle of 191 5, all of it had returned. During the whole of 191 5 the United States im- ported no less than $451,900,000 gold, or nearly $300,000,000 more than in any previous year. Of this huge sum, two-thirds came from England and Canada, the Bank of England's Ottawa re- serve giving up $218,000,000, Despite the new supplies received by it from the Transvaal mines, the bank's gold holdings fell from the $362,500,- 000 of November, 19 14, to $251,000,000 at the end of the next year. We have next to ask what were the causes of this extraordinary reversal of conditions. Our enormous export of wheat was the first. That influence had not been overlooked before- hand; for war, which often means the blockade of belligerent producers, affects the wheat trade first among all industries. Food must be had at any cost, and the uncertainties of war therefore created abnormal demand, even in such minor conflicts as the Franco- Prussian War and our Spanish War of 1898. The Napoleonic period was marked by two memorable famines, in one of which, wheat at Liverpool reached the highest price ever known. Circumstances in the world's grain trade, when this war broke out in 1914, were THE AMERICAN HARVEST 125 somewhat unusual. The United States was about to harvest the greatest wheat crop of its history. The 891,000,000-bushel yield of the season ex- ceeded by 127,000,000 bushels, or nearly 17 per cent the country's previous maximum. Before war began, the price of wheat was falling; the grain trade doubted its ability to sell, except at greatly reduced prices, the surplus which would be left after meeting the needs of home consumers. But this aspect of the situation soon changed in a very dramatic way. In face of the unprece- dented American harvest, the crop of 19 14 in the whole wheat-producing world, outside the United States, turned out to have decreased 367,000,000 bushels, or II per cent, from the preceding year. This was only one of the offsetting considerations. Not only was the wheat crop of Europe, Canada, and Australia so much below the normal average as to have caused a troublesome shortage in grain- importing states, even without the war, but the area of battle at once extended over some of the most fertile granaries of Europe, and meantime Russia, one of the two largest wheat-producing countries of the world, was instantly cut off from the export market. In the twelve months end- ing with June, 191 5, as a result of these remark- able coincidences, the United States exported 180 per cent more wheat than in the year before, the value of the export increasing $245,000,000. The 126 THE SECOND PERIOD American harvest of 191 5 reached 1,000,000,000 bushels. It was in December, 19 14, that our huge grain export so far counterbalanced the decreased ship- ments of other commodities that our total out- ward trade, for the first time in the war, ran be- yond that of the same month a year before. Early in 191 5, another and a yet more powerful influence was thrown into the scales. The dead- lock of the military campaign in western Europe had convinced the Allies that only through over- powering superiority in artillery could they beat back the German army. England and France set to work at once "mobilizing" their own in- dustrial plants for manufacture of ammunition; but this was not enough. Orders in prodigious quantity were placed with American contractors, by whom the machinery in manufacturing plants of every sort was adjusted to making shells, rifles, powder, and bullets. As yet it is merely a matter of estimate what the total of such orders was. Wall Street at one time figured it at $1,000,- 000,000. On the basis of official reports, it has been shown that, in the twelve months after the shipments began, $500,000,000 of such material was exported from the United States, and a very great part of the purchase price was paid by Eu- rope in advance. Under such varying influences, the country's OUR WAR-TIME EXPORTS 127 total exports rose to stupendous magnitude. This result was one of the unexpected economic phe- nomena of the war ; history gave no precedent for it. It is true that the United States, during the early years of the Napoleonic conflict, enlarged its foreign trade in a spectacular way. In 1801 we exported $94,000,000 worth of goods — a very substantial increase from the previous decade; in 1807 they had reached $108,000,000. But this older war-time increase was not at all made up from larger shipments of our home products to belligerent Europe. It arose almost exclusively from the fact that the activities of European war-ships, in capturing enemy cargoes on the ocean, threw over to the neutral American ship- masters the immensely lucrative trade of the West Indies. Eventually, the bulk of such shipments were consigned to American ports, whence they were promptly reshipped to Europe. Whereas, in 1792, this total of "foreign merchandise re-exported" from the United States was reported by our gov- ernment as only $2,109,000, in 1799 it had risen to $45,523,000, and in 1806 to $60,283,000. How extraordinary that achievement was, judged by the period itself, may best be judged by the fact that the total of such re-exports in 1806 was not duplicated until 191 5. But the main influence on our trade of 191 5 was altogether different. Our 128 THE SECOND PERIOD merchandise shipments of that year to such out- lying continents as Asia, Africa, and AustraHa did indeed run $42,000,000 beyond the largest previous yearly total, while the exports to South America rose $54,000,000 above 19 14, and ex- ceeded all other years but one. This was itself a consequence of the war and of the war's paralysis of Europe's industrial activities. But how rela- tively small a part this trade with other neutral countries played in the total increase of our exports on this occasion, is clearly shown by the fact that otir outward trade in merchandise dur- ing 1915 ran $1,433,000,000 beyond that of the preceding year and $1,063,000,000 beyond the largest previous yearly total in our history. Two- thirds of the increase over 19 14 was ac- counted for by consignments to England and France, and it was a peculiarly interesting fact (not without diplomatic significance) that whereas our direct exports to Germany and Austria de- creased $158,000,000 — in fact, disappeared almost entirely — nevertheless, our exports to Holland, Denmark, Norway, and Sweden increased $154,- 800,000 over 1 914, and exceeded even the last full year of peace by $182,800,000. Prior to 1915 the highest figure ever reached by our total surplus of merchandise exports over imports was the $691,- 000,000 of 1 9 13. The surplus for the calendar year 191 5 was $1,768,000,000. In the twelve NEW YORK IN LONDON'S PLACE 129 months ending with June, 191 6, it was $2,136,- 000,000. I have already quoted the comment, made at London in the autumn of 1914, that New York had "missed the chance of a century" to take London's place as the financial centre of the world. Only two or three months later, Lombard Street itself was admitting that, for the period of war at any rate, New York had already gained that position. It was early in January, 191 5, when the British Government officially announced that English capital must be reserved for the war financing of Great Britain and her allies, and that no new loans of outside communities or govern- ments were thereafter to be floated in London without the government's consent. From this plain declaration of policy it was instantly in- ferred, first, that London had ceased for the period of war to be the active money centre of the world; second, that no other market could tmdertake that work except New York; and, third, that the financial shoulders of the United States were now broad enough to bear the biu:- den. The task, thus transferred to the American market, of providing money for the urgent finan- cial necessities of outside communities, was per- formed cautiously. It was a new experiment for us, and began under unusual conditions. But our I30 THE SECOND PERIOD bankers underwrote loans in the hundreds of millions to the South American republics, to Canada, to Switzerland, and the Scandinavian states, and in return New York undoubtedly be- came for the time the money market of the world. The "central money market" must be that market to which the rest of the world applies for credit. It must discount, for the merchant con- ducting foreign trade in one community, and for the period of the business season, drafts sent forward by merchants in another community against goods sold to him, and must therefore provide the working capital for international commerce. It could not have been expected that the New York banks would be able on the spot to do this on the scale of London's activities be- fore the war. But international trade had been greatly reduced in voliune by the war unsettle- ment. Our own home demands on credit were relatively light. London, though it had ceased to put its money into the securities of foreign markets, continued to do a discount business for those markets, and New York therefore made its entry into the field without an undue strain. It not only subscribed in large amounts for new securities of Canada and the South American communities, but entered directly on London's business of providing the capital for international trade. At the beginning of 191 5 discount of FINANCING FOREIGN TRADE 131 "acceptances," based on a foreign merchant's export of goods, was practically unknown in New York banking; at the end of the year it was officially stated that $100,000,000 of such bills of exchange were in the hands of American banks. Now, a market which performs these services for foreign communities, like a bank which per- forms them for its own town or city, pays out its capital in loans; but in return it gets back cap- ital in deposits, which is the real source of profit; and this was necessarily the experience of the new money centre. Merchants in other neutral mar- kets transferred from London to New York the balances on which they were accustomed to draw in connection with their foreign trade. American banks and merchants to a very great extent re- called from London the balances previously carried there for the same purpose. This process had an important double influence on the eco- nomic phenomena of the year. It greatly increased the aggregate of payments which England had to make to the United States. It also added a huge amount to the available capital on the American markets. The first in- fluence operated on the rate of exchange between New York and London, with results which we shall presently have to examine. The second went far toward explaining the extraordinary achieve- ment of the American market during 191 5, in 132 THE SECOND PERIOD which year the United States not only repurchased from Europe American securities commonly es- timated at $1,000,000,000, but, in addition, pur- chased more than $1,000,000,000 of new securi- ties issued by belligerent and neutral European countries, by Canada, and by the South Amer- ican republics. This was an innovation. Amer- ican investors had never been in the habit of lending money largely to the outside world; New York's investment in England's war loans during 1900 and 1901, and in Japan's war loans during 1904 and 1905, was of a temporary nature and on a relatively small scale — only a little more than $300,000,000 in all. It was quite inevitable that this tangible display of economic resoiu'ces, in the face of the European War, should have encouraged the movement of capital from outside markets to the United States. The financial community itself was curiously slow to recognize what all this meant to the ques- tion of America's own prosperity. When the European War began, the question asked with special urgency in American business circles was how the United States could be safeguarded from a period of financial adversity. Eight or ten months later, the prospect of immediate financial reaction was conceded to have disappeared, and vague talk began of the business revival which this powerful neutral country might expect after WAR-TIME PROSPERITY 133 the war. Even when, in the autumn of 191 5, the question was put to one of the most eminent of our practical manufacturers, "Is the United States headed for unprecedented prosperity ? " and the reply was, "It is enjoying that prosperity now," the diagnosis was widely disputed, in Wall Street itself. Prosperity, however, is sometimes a matter of definition. What one merchant, banker, or speculator would describe by that title, another would dismiss as not measining up to it at all. If by prosperity we mean such a period as 1901 or 1906, when every one seemed to be making and spending money lavishly, when the word passed current that "nothing can stop the good times," and when the spirit of hopefulness over any and every kind of business imdertaking was apparently under no restraint — then the con- ditions existing in 19 15 would certainly not meet the test. But there is prosperity and prosperity; and it soon became possible to appeal to well- known criteria which had long been accepted, in financial and industrial circles, as indicating whether real prosperity does or does not exist. The London market, as even the English his- tories show, has traditionally made great account of the movement of the foreign exchanges, for or against the coimtry whose prosperity is in ques- tion. If this were to be the test, the prosperity of the United States in 1915 would have stood 134 THE SECOND PERIOD unchallenged; it is doubtful if ever before in eco- nomic history had the rates of exchange on all the rest of the world moved so powerfully in one market's favor as they moved in that year in favor of New York. The economic derangement of Europe by the war, however, made this rather more a test of relative than of actual conditions. The stock market, if its action is sufficiently continuous and emphatic, is another quarter where at least the premonition of prosperity is expected. It is "the pulse," Macaulay said, "which during four generations has continued to indicate the variations of the body politic." It performs this office, chiefly because a prolonged and general rise in prices should reflect expecta- tion, by the best-informed people in the country, of increasing business profits for the transportation and manufactiiring properties whose shares are sold on the stock exchange. For obvious reasons, this is a test which must be cautiously applied. Currency inflation will stimulate advancing prices, measured in paper money, when gold values may even be declining. This made the stock exchange almost a useless criterion in our Civil War. Ex- perienced people would not take one of those outbursts of wild speculative mania, which at in- tervals derange the whole financial organism, as prophetic of sound prosperity. On the stock mar- kets of 191 5, something like that was witnessed TEST OF THE MARKETS 135 in the extravagant rise of shares of companies manufacturing war supplies. But that movement reached and passed its climax; prices of such stocks, after rising 25 to 100 points, lost half of the preceding rise, or more, in a violent collapse. Yet at the same time a long series of railway- stocks, in which prices had risen fully 20 per cent since the early months of 191 5, held stubbornly to their higher values. ' Among these were shares of the most conserva- tive American railway companies, whose fluctua- tion on the market measures the attitude of serious investors. What was not least remarkable, the home demand which served to bid up prices for these stocks was so obstinate as almost wholly to offset the influence of Europe's sales to us of its own holdings of these shares. Europe had been selling back our best railway and industrial bonds also, and it had become a matter of common pre- diction that a violent fall of prices for American bonds must be inevitable as a result of the high European bid for capital. Yet what happened in November was the largest dealing in bonds that the stock exchange had witnessed in half a dozen years, and an advance in prices so rapid as to bring them nearly or quite up to the earlier high level of 1914. These indications showed chiefly what was expected. There were other indications of what 136 THE SECOND PERIOD must actually have occurred. One very familiar test of active and prosperous trade, financial observers find in what are known as the country's clearing-house exchanges. Every bank, receiving as deposit from a client the checks drawn in his favor on other institutions, sends those checks to its district clearing-house, whence they are for- warded for collection to the banks on which their maker drew them. From this process it results that the total money value of the checks thus exchanged, in a given period at all American clearing-houses, indicates accurately the total payments made in connection with the business activities of the period. The actual figures are carefully tabulated. Until the autumn of 191 5, the largest weekly total of such bank exchanges in this country was the huge sum of $4,868,000,- 000 in the first week of 19 10. But in the third week of November no less than $4,903,000,000 checks changed hands — an increase of 74 per cent over the same week in 19 14, of 42 per cent over 1 913, and of 37 per cent over even the very active business season of 191 2. No month in the coun- try's history had ever approached, in the total magnitude of checks drawn for business purposes, the closing month of 191 5. During the first half of 1 91 6, the total rose nearly 40 per cent above the highest record for any previous correspond- ing period. IRON OUTPUT IN THE WAR 137 The monthly statements of the country's iron production are an even more tangible sign of in- dustrial activity. When business in general is reviving and the outlook for active and profitable general trade is bright, orders at once increase with the iron-mills. The reason is, that every other industry has to increase its steel and iron equipment in preparing for an active season. The farmer needs new agricultural machinery. Mer- chants and miscellaneous manufacturers wish to enlarge their working establishments. The rail- ways must have more cars and locomotives and rails; the steel- mills themselves will be adding to their own productive facilities. Active demand for all these prospective purposes will be seen in the steel and iron trade's order-books, even before the signs of visible activity have appeared in the industries which want the new material. These are the reasons why iron is known traditionally as the "barometer of trade," and why a rise in steel and iron prices, and steady increase in steel and iron production, ordinarily mean general trade revival. At the end of 191 2, just before the industrial revival stimulated by what were then our record- breaking crops had been checked by the danger- ous turn taken in the Balkan War, all precedent was surpassed in American iron production. The average daily output of 92,600 tons, reached dur- 138 THE SECOND PERIOD ing February, 1913, remained the maximum of the country's history until September of 191 5. That month ran sHghtly beyond the 19 13 figure; the next month's average daily output crossed for the first time the 100,000-ton mark, and the total monthly output went in October — again for the first time in the trade's records — ^beyond 3,000,000 tons. The monthly average for the year of largest production in our previous history had been barely 2,500,000. "Never before," the Iron Age, a highly conservative organ of the in- dustry, remarked of these October figiu-es, "has the steel trade seen demand so overwhelming, and at the same time its output expanding on such a scale, under steadily rising prices." Yet only six months later, the output was ten per cent greater. One obvious criticism on the testing of pros- perity by the steel and iron situation alone was that orders for war munitions, placed in this country on so great a scale, had been an immense stimulus to that industry, yet were not in the nature of a permanent influence. There was force in this objection; it was largely offset, how- ever, by the fact that these very requisitions for use in war supplies had started up inquiry for other purposes from home consumers. It was their demands which brought the steel trade, in the early months of 191 6, to the actual limit of INCREASED RAILWAY EARNINGS 139 its producing capacity. There was still another test of active trade which always appeals to the financial markets. By the middle of October the railway tracks and terminals, East and West, be- gan to be blocked with freight. No such visible overflowing of transportation facilities by offer- ings of traffic had been witnessed in this country since 1906, and it is doubtful if the strain had been equally severe since the sudden and rapid trade revival of 1899 caught the railways utterly un- prepared. As early as September, 1915, the Pennsylvania Railroad reported the largest total earnings, and the largest excess of earnings over working ex- penses, of any month in its history. If it be said that this, too, may have largely meant the mu- nitions trade (the Pennsylvania runs through Pittsburgh), there were other railways to compare with. When their October statements were given out by railways in the Middle West, in the North- west, on the transcontinental route, all were sub- stantially up to the highest previous record for the month, and a considerable number, like the Penn- sylvania in the month before, svupassed all previ- ous monthly figures. These at least were no matter of war materials. The general manager of one of the largest railways running between Chicago and New York remarked at the end of November : ' ' People who think the war munitions I40 THE SECOND PERIOD are blocking the movement of freight should spend a few minutes in our freight-yards. You will find them blocked with cars loaded with meat, auto- mobiles, locomotive and freight-car parts, and a thousand commodities not used in war, and you will find the freight consigned not only to Europe, but to South America, India, and all the rest of the world." More than this: in the last week of October, deliveries of grain by Western farmers to the railways, at what the grain trade calls the "pri- mary receiving points," not only rose, 10,000,000 bushels above the same week in 1914, but exceeded by not quite 6,000,000 bushels the 30,990,000 bushels delivered in the third week of September, 1 91 2 — which, imtil the auttmm of 1915, were the high mark of the grain trade. This itself reflected yet another traditional weather-sign of reviving industry: the fact that, by the government's final autimin estimate, the yield of the country's five great grain crops was 5,892,601,000 bushels, as against 4,942,613,000 actually harvested in 1914, and 5,532,838,000 in the most abundant previous season — that of 1912. What all this signified should have been plain enough. The tests thus applied covered prac- tically every measure of business prosperity, and each gave emphatic witness to the existence of such prosperity. There still remained, and will "WAR BOOMS" 141 doubtless continue to remain, a body of opinion which, conceding all these evidences, held the position that prosperity was ill-distributed among the different industries and the different sections of the country; but, more than this, that what- ever prosperity existed was precarious, temporary, based on wholly abnormal influences. In other words, the conditions thus suddenly created dur- ing 191 5, and continuing throughout the next year, merely represented one of those "war booms" which history records at the crisis of all great conflicts, even in the belligerent commiuiities — • prosperity of the kind which induced the furious activity of 1809 in England and 1864 in the United States, but which ended in each case in the prolonged reaction of a few years later. Neither of these contentions can be lightly dismissed. Yet it is pertinent to ask whether, even so, they affected the question whether Amer- ican prosperity was actually imder way. There has never been an American trade revival of the past in which some industries and some com- munities, for reasons peculiar to themselves, did not hang back behind the others. There has never been a period of American prosperity — even in the so-called "boom years" of 1872 or 1880 or 1 90 1 or 1906 — which did not have some- thing of the temporary and the precarious about it. 142 THE SECOND PERIOD If, indeed, the American industrial revival of 1 91 5 had as its sole basis the "war orders" from Europe, and especially if it was stimulated by an inflated paper currency at home, there would be something more to say. But neither of these con- ditions actually existed. The fundamental phe- nomena were the soundness of economic conditions in the country on which these imexpected wind- falls descended, and the rapidity with which the movement of expansion extended to industries dependent on domestic orders and on the needs of peaceful trade. It is even possible to construct a theory of the existing situation as a trade re- vival accidentally and artificially postponed. In America the tradition of the "cycle of prosper- ity" is invariable, to the effect that after a great financial panic five or six years (not more) are needed for liquidation and recuperation; after which the great forward movement begins again. It began in 1879, following 1873, and in 1898, following 1893, and many signs indicated resump- tion in 191 2 of such a movement, when the re- action of 1907 had spent its force. In what way this return to American prosperity was arrested by the political apprehensions and disturbances in Europe, every one knows. Sometimes compulsory postponement of so normal a movement of recovery means that the forces making for legitimate expansion at the POSITION OF AMERICA 143 earlier date will have grown stronger for being held in check. At all events, it is under precisely such circumstances that the United States will confront the changed world, with its new financial and industrial conditions, which is to emerge from this war whenever peace actually returns. Noth- ing will then be quite as it has been in the past; all economic relationships between the different nations will be altered. But the position occupied by the United States at the beginning of the new economic era will be something very striking, very unusual, and economically very poverful. CHAPTER VIII CURRENCY INFLATION THAT inflation of the paper currencies of the beUigerent states would be an inevitable in- cident of such a war as this, was the un- questionable teaching of history. Depreciation in such currencies was singularly absent from financial calculations at the outbreak of the war; this notwithstanding the very general prediction of economists, in previous discussion of the prob- able phenomena of a general European conflict, that gold payments could not be maintained tmder such conditions. Yet experience had taught that every prolonged and costly war of the pre- ceding century had been characterized by issue of paper money, in such quantity as to exert far- reaching economic influence on the markets. In the course of our own four-year Civil War par- ticularly, the United States Government issued $450,000,000 of paper money; our actual paper circulation increasing, between 1861 and 1865, no less than 270 per cent. Government calculations of the average prices of commodities in this coun- 144 EUROPE'S PAPER MONEY 145 try showed an advance of 116 per cent during the same period, and that movement was accom- panied by a violent rise on the stock exchanges, and by what seemed to be a notable forward movement of prosperity. There were secondary causes for the war-time rise of prices in the sixties, and for the resultant speculative expansion; among them the War Department's purchases, the blockade of the South, and the rising price of a labor market de- pleted by enlistments in the army. But no in- telligent reader of history doubts that the pri- mary cause was the paper-money inflation. Since the after-results of that inflation were disastrous, it is not unreasonable to ask whether our financial and industrial revival of 191 5 may not have been based on similar causes, and may not be destined to a similar unhappy end. Taking the world at large, there is no doubt whatever as to the fact of paper-money inflation during this present war. Between July, 1914, and the middle of 191 6 Germany's paper cur- rency increased from $473,000,000 to $1,740,000,- 000, or something like 320 per cent. France brought its bank-note issues from $1,336,000,000 to $3,100,000,000, an expansion of 131 per cent. In Russia, the Imperial Bank's note issues alone, which were $930,000,000 at the outbreak of the war, reached $2,650,000,000 at the end of 191 5 and 146 CURRENCY INFLATION $3,100,000,000 three months later. This was an increase of 336 per cent, and there was probably other ciirrency put out. Austria has not ventured to publish the figures of her war-time paper- money issues, but they were certainly very large. The Bank of England's note circulation had increased by the middle of 1916, as compared with July, 1914, only from $148,500,000 to $176,500,- 000, or less than 20 per cent. But the special currency authorized by the British Government when the war began — put out by the treasury for account of the English joint-stock banks, and se- cured by government bonds, commercial paper, and, during 1915 and 1916, by $142,500,000 in gold — ^had risen by the middle of 191 6 to no less than $586,000,000. Including this amount, the increase in England's paper issues, since the war began, was 515 per cent. It is true that these English "currency notes," being secured in part with gold, obtain a character which the $300,- 000,000 or more of " Darlehnskassenscheine " in Germany (against which no gold at all is held) do not enjoy. It should also not be overlooked that while the Continent's currency expansion of war time came on top of bank-note circulations only partly protected with gold, the Bank of Eng- land's own note issues, now as heretofore, are se- cured in gold up to their full face value. Never- theless, we are primarily investigating inflation of INFLUENCE OF WAR 147 European currencies, and the fact of immense ex- pansion appears in all of them. There are three main reasons why every pro- longed war of modem history has been attended by this inflation of paper currencies. One is, that the experience of the race has taught people to hoard gold and silver when their country plunges suddenly into the uncertainties of war. That action makes it necessary to provide a sub- stitute for coin in hand-to-hand payments. An- other is that gold, the international currency, is apt to be sent by its owners, for safe-keeping or as a means of transferring capital, from the mar- kets of a belligerent state to those of a neutral country — which may similarly create a void in the fighting country's circulating medium. The third reason lies in the fact to which I have re- ferred already; that paper currency, created by a government, may be used to meet at least a part of that government's immensely increased ex- penditure during war. All three of these influences had some hand in the war-time inflation of Europe's paper curren- cies. But almost all of the new currency issued by the belligerent states has in this one respect differed radically from that of former war-inflation periods — it was not, like our greenbacks of the Civil War and the assignats of the French Rev- olution, government fiat money, put out directly 148 CURRENCY INFLATION by the national treasury to pay the expenses of government. Most of the new European paper money of 19 14 and 191 5 was issued by the central bank of each respective belligerent, and had to be offset, on the balance-sheet of the issuing institu- tion, by a corresponding sum in commercial loans, or public and private securities, or actual gold and silver. But, on the other hand, the bank could issue its notes to the government, taking new govern- ment bonds as security; and since single war loans of the belligerent states have been made in sums as large as $3,000,000,000, it was possible that the new currency should, by this process, pass directly into the government's hands, and be used for meeting current public expenses — just as an old-time "fiat-money issue" would be used. With the Bank of France, for instance, the $1,525,000,000 increase in its note circulation, be- tween July, 1 914, and the maximum figure of 191 5, was offset on the other side of the account by $1,480,000,000 under the entry, "Advances to the State for the War." As to precisely what has been the effect on Europe itself, of this enormous currency inflation, it is still early to draw conclusions. On the Continent, gold redemption of the paper cur- rency, which was in force in all the important states before the war, was formally or tacitly MEASURING DEPRECIATION 149 abandoned, as soon as the war began. An open premium on gold was not, however, paid in 191 5 or 1 91 6 on any European market; that evidence of ciu-rency depreciation was averted in Germany by penal statute, and in France, apparently, by common consent. But this still left the rate of exchange on the markets of such countries, ciirrent in neutral cities, to measure actual de- preciation. The rate of New York exchange on Paris or Berlin, for instance, merely means what American bankers will give in American money to a merchant for his claim on a solvent French or German debtor, payable in France or Germany in the currency of that coiintry. Since the bankers, under existing conditions, paid gold or its equivalent for the draft, while know- ing that it would not be redeemed in gold in the market on which it was drawn, they could scarcely be expected to pay as much for it as they paid in days when it commanded gold. There have been other causes, presently to be examined, for the depreciation of exchange rates on belligerent Europe at New York. But this cause was so entirely obvious that depreciation in continental exchange would unquestionably have resulted from it, even if the "merchandise trade balance" had remained as it was before the war. The fact, then, that whereas a franc is worth intrinsically 19.3 cents in American money, the New York I50 CURRENCY INFLATION dealer in exchange paid only 15.7 for it early in 1 91 6, and that whereas a German mark, on the specie basis, is valued at 23.8 cents, it brought less than 18 cents, was in very large measure the reflection of a neutral market's effort to measure the difference between gold values and the value of a depreciated currency. But the inflation process has not produced on Eiu-ope's markets the effects which followed it in this country after 1861. It is true that English prices of commodities have risen violently — the London Economist'' s monthly "index number" of average prices had reached 4,319 at the end of May, 1 91 6, as against 3,250 in the middle of 191 5, and 2,565 when the war began. For this, however, as for the similar rise on the European Continent and the striking though less violent advance in the United States, the prodigious de- mand for all kinds of war material, the blockade of producing countries, and the abnormally high ocean freight rates are sufficient explanation. But there was no excited "boom" in European busi- ness, except for the war contractors and the lucky owners of ocean steamers; no enthusiastic specu- lation for the rise on the stock exchanges. That was, perhaps, because the artificial stimulus of in- flation had been only sufficient to counterbalance the crushing financial burdens of the war, avert a general collapse of enterprise and credit, and CASE OF THE UNITED STATES 151 maintain some sort of equilibrium on the mar- kets. This very fact, however, brings up the question whether the markets of the United States, where the burden of war did not exist, might not have owed their condition of aggressive prosperity to inflation. It is true that the fact of a premium, not a discount, on American currency in the terms of foreign money, might be taken as prima- facie evidence that our own currency was in a normal condition, and it is certain that the American paper currency continued to be re- deemed in gold. Nevertheless, it was inevitable, when all the original predictions as to the effect of the European War on American finance had been upset — when actual results had turned out precisely the contrary of what the most sagacious home and foreign opinion had foreshadowed — ■ that some people should presently begin to doubt the reality of the achievement. This country had habitually looked to Europe for the loan of money to meet the expenses of harvesting our crops and sending them to market; the loans, very large in amount, being repaid from the sub- sequent export of our produce. The war and the war loans put an end to such assistance. London no longer had anything to spare for loans to America. Severe stringency in New York's autumn money market was, therefore, not il- 152 CURRENCY INFLATION logically predicted. Yet the largest grain har- vest in our history was financed from home re- sources during 1 91 5, with the American money market unruffled and rates almost the lowest on record. European investors held in July, 19 14, as they had held during many decades, three to four thousand million dollars of American securities. In the half-dozen preceding years we had man- aged to provide for our own industrial necessities only by selling several hundred millions per an- num of newly issued stocks and bonds to Europe. Europe, however, was now not only unable to continue such purchases, but her investors were certain to sell back to us in enormous quantity what they had already, in order to raise money for the $10,000,000,000 or more of war loans is- sued annually by the belligerent governments. It has been calculated by the most careful statisticians that at least $1,000,000,000 of Amer- ican securities were resold by Europe to New York between the reopening of our stock exchange in December, 19 14, and the end of 191 5. Yet not only did the American market take them, but it loaned, on its own accoimt, a sum only slightly less to foreign coimtries which had always here- tofore sold their new securities in France and England; and, in the face of this double burden, prices on our stock and bond markets actually AMERICAN OPINION 153 rose beyond the level which prevailed before the war. It was undoubtedly our enormous export trade, first in grain and then in war munitions, the re- sultant increased command over European cap- ital, and the great amounts of capital which other neutral markets transferred from London to New York, which primarily explained the ability of the United States to perform this bewildering achievement. The unprecedentedly large import of gold from Europe to the United States had a hand in the result; it provided a basis for legiti- mate expansion of bank loans, whereby these large home operations could be easily financed. But the transactions themselves so completely over- topped anything in our previous financial history, and were conducted in such sudden sequence to a period of seeming weakness and reaction, that these explanations did not appear sufficient. It is not therefore to be wondered at that cautious people should have begim to ask if there was not something imreal, something fictitious, and therefore something precarious and tempo- rary, in this display of imheard-of prosperity. A well-known financier, one of the members of our national banking commission, in 191 5 described the attitude of American financiers as embodied in "two schools of thought, one looking into the future with unbounded confidence, and the other 154 CURRENCY INFLATION anticipating drastic reaction and collapse." More specifically, the question began to be put, whether the United States, along with the rest of the world, might not have entered an era of currency inflation. Experience had taught that inflated paper money is the best-known necromancy for creating illogical and impossible conditions in the way of national prosperity — though with after- results which justify all the warnings of the scep- tics. One admitted fact might have been deemed to indicate the existence of that influence; the issue by our banks tinder government supervision, in the first three months after July, 1914, of $380,000,- 000 in "emergency currency." There was yet another possible influence toward such artificial stimulus. Under our new banking system, put into operation four months after the war broke out, the Federal Reserve Banks of the twelve designated districts were empowered to issue cir- ciilating notes on certain prescribed collateral, provided they kept on hand a 40 per cent reserve in gold. The gold in the vaults of these institu- tions at the end of 19 14 bore that percentage to $625,000,000; at the end of 1915 they held in gold 40 per cent of $896,000,000. In theory at any rate, issue of that much in new paper currency was possible. Here was apparently the machinery for such expansion of the American paper currency as OUR OWN PAPER MONEY 155 would cut a respectable figure, even as compared with Europe. Was the Federal Reserve currency, then, a governing influence -in the unexpected chapter of prosperity which began in the middle of 1915, or was it not ? The answer is not difficult, and it is quite the reverse of what a good many people, even those of practical experience, seem to think. That the successful establishment of the new banking sys- tem was an important factor in promoting finan- cial confidence, and thus in clearing the ground for last year's American revival, there can be little doubt. Knowledge that its facilities were such as to meet, effectively and instantly, the necessities either of a "financial boom" or a "financial panic," removed much of the pre-exist- ing apprehension. But, contrary to very general supposition, those facilities remained to all in- tents unused during the great revival of American prosperity in 191 5. Therefore they cannot have been a factor of "inflation." The $380,000,000 emergency currency, issued at the beginning of the war, had all been retired and cancelled before the end of June, 191 5. During that cancellation process, the Federal Reserve Banks were begin- ning to issue notes, and a substantial amount of them is now outstanding. Yet our total bank ciurency, old and new, which aggregated $1,121,- 000,000 on November i, 1914 — just before the 156 CURRENCY INFLATION new banking system was introduced — stood only at $985,400,000 on January i of 1916. It had been reduced to $929,300,000 by the middle of 1916. In other words, the country's paper currency decreased, not increased, during the war-time re- vival in American finance. The point is occasion- ally made that, whatever may have happened since November, 19 14, the sum total of bank-note currency outstanding in the middle of 1916 was, nevertheless, $186,000,000 greater than at the outbreak of the war in August, 19 14. This is quite true, and $176,000,000 of that increase con- sisted of the new Federal Reserve notes. But in that direction also, some very significant facts are commonly overlooked. Under the law, a reserve bank is allowed to issue notes, either secured with commercial paper pledged by individual banks in the district, or secured, dollar for dollar, with gold coin. In the first case, the notes become the elastic credit currency contemplated by the Federal Reserve Act. In the second case, they are, to all intents and purposes, on the footing of the familiar gold certificates, issued by the treasury against an equivalent deposit of gold in the government vaults at Washington. Now, when the $176,000,- 000 Federal Reserve notes, as of July i, 19 16, are analyzed, the remarkable fact appears that THE FEDERAL RESERVE NOTES 157 only $10,200,000 of them were the elastic currency secured by commercial paper, whereas $165,800,- 000 were the circulating equivalent of actual gold. Six months later, the amount of such notes out- standing, based on merchants' credits, was even less. As to why the banks should have preferred to issue notes through pledging gold against them, dollar for dollar, instead of securing them with 40 per cent gold and the balance in commercial paper, the answer is simple. Because of its enormous exports to belligerent Europe, and of its position as a secure neutral custodian of trea- sure, the United States imported during 19 15 no less than $451,900,000 of foreign gold, or nearly $300,000,000 beyond any previous year; and, in addition, it produced from its own gold-mines nearly $100,000,000 more. The banks had actu- ally more gold in their vaults at the end of 191 5 than they had need to use as a basis for their loans to American finance and industry. There- fore they chose, for the convenience of their cus- tomers, to put a considerable part of it into general hand-to-hand circulation in the form of notes. The total stock of money in the United States increased $429,000,000 during 1915. But the in- crease in gold alone, as I have shown, was a very much larger figure. Precisely the same was true of 1 9 16. The paper currency had actually de- 158 CURRENCY INFLATION creased. If we were living under "currency infla- tion," it must have been inflation in the form of gold. But an increase in the proportion of gold to the total currency of a country is commonly accepted as evidence of financial soundness. These very significant statistics prove that Amer- ican finance was not under the influence of such inflated paper currency as existed in belligerent Europe. They prove that, in so far as changes in this country's money supply were a factor in the industrial and financial movement, it was the increase in our stock of gold which did the work. This, however, does not put an end to discus- sion about the future. In the first place, the very fact that the new banking system's large poten- tial facilities for increasing currency and credits had not yet been invoked is proof that the possibility of using them, and conceivably of misusing them, remained. From this we are pri- marily protected, as the conservative central banks of Europe have always been, by the large experience and the sober conception of their duties on the part of the men who direct the Federal Reserve, and by the very great restrictive power over the system's credit and currency facil- ities which the law has conferred upon them. But in the second place, quite aside from the question of actual expansion of paper-money is- sues, there will remain, until the period of post- OUR GOLD SUPPLY AFTER WAR 159 bellum readjustment is well under way, the un- certainty as to the permanency of our present gold reserve. In so far as these huge additions to our stock of gold, like the international capital which they represent, have come to this country for safe-keeping in war time, it cannot be certain how much of it will be retained when the war is over and when Europe will do its best to draw gold from the United States. Theoretically, it could accomplish that purpose by such enormous export of merchandise to Amer- ica as should turn the foreign exchanges against us. It could do it through similarly large sales of its own securities to New York. Or it could get the gold by maintaining such high money rates on European markets, in the face of easy money here, that large amounts of capital, now put out on loan in this country, would be withdrawn and offered at the higher rates in Europe. These are all possibilities; it is therefore a theoretical possibility that so much gold would be drawn away as to deplete our own bank re- serves and disturb our markets seriously. It is ex- tremely doubtful, however, in my judgment, whether these results, in such shape as to create actual embarrassment, can be described as prob- abilities. Europe cannot reverse our balance of trade in merchandise, unless its own need of American products decreases very greatly, or i6o CURRENCY INFLATION unless wages of European labor can be put down again so as to undersell our manufacturers. Eu- rope will undoubtedly succeed in selling large amounts of securities in America after peace; but America is not compelled to buy any more of them than is prudent. As for the question of a high bid through Euro- pean money rates, it is at least an open question whether money will be high or low in Europe when the war is over. Hard times and prolonged industrial depression in the present belligerent communities will follow this war, as they followed the Napoleonic wars, and industrial depression does not favor high money rates. Furthermore, even if London and Paris and Berlin were to bid for our gold in this manner, it would remain to see what response our own money markets would make, under the influence of the Federal Reserve Banks, which have large powers, through their control over our own money markets, to regulate and restrain the movement of our gold. That will possibly be the first occasion when the power of this novel institution in our financial history will be fully tested. The special problems which inflated and depreci- ated currencies will create for Europe, when the war is over, are far more formidable. One of the highest French economic authorities predicted, during 1 91 5, that ten years would probably be PAPER MONEY IN SMALL SUMS i6i needed to bring the currency of Prance back to a normal basis. Germany will be confronted, not only with her hugely expanded imperial bank-note issues, but with the makeshift currency of the "loan banks." In our Civil War, depreciation of the paper currency drove out of circulation, first the gold and then the small silver currency. When our people had been reduced to the use of postage-stamps in making petty payments, the government intervened with issues of paper notes for fractions of a dollar. On the European Con- tinent a precisely similar evidence of depreciation made its appearance during 191 5. In France, for instance, municipalities put out paper notes for a franc or less, convertible into notes of the Bank of France. All this structure of inflated currency must be taken in hand by the Eiu-opean governments when war is over. The process will be economically difficult — ^not only because contraction after inflation is always a trying experience, but because resumption of gold payments on a depreciated currency is usually effected through large governmental loans, whereas the strain on the public credit of the present bellig- erents has been quite unprecedented. To what extent the accumulations of gold, obtained by continental governments through the voluntary action of their citizens, will serve to facilitate or hasten the subsequent return to specie payments, i62 CURRENCY INFLATION is itself a matter of conjecture. These new gold reserves may be needed for other purposes also. The outcome will in all probability be a finan- cial chapter such as will cover many years after return of peace. It will not be the less interesting a chapter in economic history, when it is prac- tically a certainty that at least a great part of the needlessly large war-time accumulation of gold in the United States will in due course, and probably to our own financial advantage, move back to Europe. CHAPTER IX THE FOREIGN EXCHANGES NOTHING in the economic history of this war has been more profoundly interesting than the action of the foreign exchanges. The unprecedented scope of the movements which occurred with such swiftness and violence in 191 5, not only threw fresh light on the principles of economic science, but in the popular view a wide political significance was imputed to them. What was described as the sensational depreciation of exchange on Germany in the neutral markets of the world, those neutral markets accepted very generally as evidence of rapidly increasing weak- ness in Germany's position. When exchange on London at New York, a few months later, suffered a similar spectacular depreciation, the inference was widely drawn that the financial strain of war on England had approached the breaking-point. However much these popular assumptions may have exaggerated the economic situation, and notwithstanding the rejection of them by econ- omists in the nations immediately concerned, the governments showed grave uneasiness. Of- 163 1 64 THE FOREIGN EXCHANGES ficial action, sometimes of a character new to economic history, was taken to arrest the move- ment. Not only was the pubHc credit employed for this purpose, but in two of the most powerful belligerent states, the investment securities of private citizens were taken into control of the national treastiry and sold or pledged by the government to regulate the foreign exchanges. To the ordinary observer of events, the foreign exchange market is always apt to seem a net- work of bewildering technicalities. Most well- informed people know, in a general way, that an emphatic movement of exchange rates against a given country, on the other great money markets of the world, is a sign that financial conditions in that country, and sometimes political conditions, are unfavorable. Such action of the foreign ex- change market is recognized as a sign that in- vested capital is leaving the country. Every one at all familiar with business affairs is also aware that a great increase of a country's export trade, in a given season, helps toward the favorable movement of the foreign exchanges, and that decreased exports will have the opposite effect. But beyond these very general conceptions, the exchange market is quite commonly regarded as an intricate puzzle, which may as well be left for discussion by specialists. Yet the principles which underlie the fiuctu- PRINCIPLES INVOLVED 165 ations of foreign exchange are in reality very- simple, and my reason for reviewing them here is that the meaning of the remarkable war-time phenomena of 19 14 and 191 5 can be understood only through clear insight into the actual machin- ery of the market. The intrinsic value of the British sovereign in American money being $4.86^, of the French franc 19.3 cents, and of the German mark 23.8 cents, those values neces- sarily represent the normal parity at which such European currencies may be exchanged for Amer- ican dollars. When payments due from the Amer- ican to the English market, for example, equally balance the payments due from England to the United States, the rate of exchange on the open market will be the intrinsic parity of $4.86^ to the poimd sterling. In such case the total sum of drafts by each market on the other would be exactly equivalent to the credits available in each market for account of the other. But if payments due from one side are greater than from the other, the more largely indebted market must then, in order to make remittances, bid for drafts of in- ternational bankers on their private funds, and the rate asked by them will vary from the par of exchange in proportion as demand for ordinary trade remittances exceeds supply. Such excess of payments due from one market to the other might be met by sending gold. But i66 THE FOREIGN EXCHANGES in sending gold, the banker must reckon up the cost of freight, insurance, and loss of interest on the gold while in transit. He can afford to send it only when the rate bid by merchants, for the drafts on the credit established by the gold, has varied so far from intrinsic parity that the differ- ence will cover the cost of shipment. That rate is known in the market as the "gold point." Whereas the par of American exchange on Lon- don is $4.86^ to the pound sterling, a rate of about $4.83 >^ is the point at which gold can ordinarily be sent from London to New York. The exchange banker contracts to give to his London clients, in the form of a New York "dollar credit," about three cents less, for every pound sterling paid to him at London, than the exported English gold will exchange for at New York. The three cent discount measures the cost of ship- ping it. So long, therefore, as gold is freely sup- plied in ordinary times by banks of a given country to their large depositors, the inequaHty of pay- ments due between two markets cannot force any larger variation of exchange rates from parity. The debit or credit balance, as the case may be, will be adjusted by export of gold from one market to the other. These principles lie at the root of the whole remarkable episode of 1915 in the foreign ex- change market. What happened was that New BREAK IN STERLING RATES 167 York exchange on London instead of stopping at the normal "gold point" of, say $4.83 K (which it reached in January, 1915), fell by the middle of February to $4.79, a figure never reached before, except for a moment in the disastrous panic of 1857. At the end of June it had touched $4.76; at the opening of September it was quoted at the extraordinary rate of $4.50, with some transac- tions reported as low as $4.48. This was the furthest point to which the exchange market went in its abnormal movement against London. But it represented a depreciation of nearly 8 per cent, and was a wholly impossible rate if international credit and international exchange of gold were on the footing of normal times. But, exceptionally violent as was this movement of exchange on London, quoted in the greatest neutral market, the other belligerent states had worse conditions to confront in foreign exchange. As against the 8 per cent depreciation in New York exchange on London, the New York rate on Paris at one time in 1 91 5 recorded a depreciation of 17/^ percent, while the rate on Berlin was quoted 25^ per cent below normal parity. Austrian exchange sold at a discount of 40K per cent, Russian exchange at a discount of nearly 60. What, then, was the actual economic meaning of so remarkable and, for the belligerent countries so general, an adverse movement of exchange ? i68 THE FOREIGN EXCHANGES In the case of England and France, their purchases from the United States, first of grain and then of war munitions, created so huge a surplus of mer- chandise imports over exports that the pendulum of exchange was bound to swing heavily against their markets. Nor did the immensely increased import trade of the two European belligerents from America tell the whole story of the "mer- chandise balance." While such imports, during 191 5, ran something like $700,000,000 beyond 1 9 13, the last preceding year of peace, the export trade of the belligerent coimtries decreased with similar rapidity. Their productive energies were curtailed by the heavy drain on able-bodied labor, first by the army and then by the mimitions fac- tories; so that, from this and other causes, mer- chandise exports from England alone decreased from 1913 no less than $700,000,000, or 26 per cent. The course of events in France was pre- cisely similar. This xmparalleled increase in an- nual payments due on merchandise accoimt to the outside world in general, and to the United States in particular, occurred at the moment when the supply of remittances from America, to pay for the $200,000,000 or more per annum in the expenditure of American tourists, had been sud- denly and almost completely cut off by the war, and when the transfer of capital from London to LONDON AND NEW YORK 169 New York — especially balances owned by mer- chants or bankers with headquarters in other markets — ^was reaching large proportions. We have already seen how London's partial abandon- ment of its functions as the money centre of the world made this shifting of capital inevitable. But every such transfer necessitated further in- crease in the demand for drafts on New York, and emphasized the balance adverse to London in the exchange market. The movement was greatly stimulated by the contrast between the war taxes and restrictions on investment which were imposed on capital at London, and the free opportunity for its use in a prosperous and peaceful market, which New York presented. The "balance of trade" against France and England had never been so great in their history. Still, it will be remarked that in the case of Eng- land (and the same was true of all the other belligerents) the actual rate at which their cur- rency exchanged in 191 5 for that of a prosperous neutral state was a rate which would have been impossible if gold had been exported in such quan- tity as to make good the international balance. It followed necessarily, therefore, either that gold was not thus exported or that it was not shipped in sufficient quantity. As a matter of fact, Lon- don alone continued to export gold at all, to meet its commercial indebtedness abroad. I have I70 THE FOREIGN EXCHANGES shown in a previous chapter how large were these shipments to New York on England's account; in 1915 they exceeded $300,000,000; in 1916 they were even larger. But they were evidently not large enough. The $61,000,000 gold, for instance, imported by the United States in August, 1915, and mostly sent from those two quarters, was far from sufficient to restore the international balance and prevent exchange from touching the most unfavorable rate of all at the opening of September. It is questionable whether gold enough to correct by itself the disparity in ex- change cordd have been obtained in London with- out virtually exhausting the reserve of the Bank of England. Therefore, other means had to be employed to correct the depreciation in exchange. In September the British Government sent to this country a commission of eminent financiers, with the purpose of floating here a loan of large proportions. Originally, the commissioners pro- posed that the American investment markets pur- chase $1,000,000,000 worth of five-year bonds, guaranteed jointly by the English and French Governments. Bankers before whom this pro- posal was laid demurred to the amount. The sum was very large; even the United States Govern- ment had never in its history asked for that much in a single loan from investors of this country. Furthermore, our investors were not familiar with THE ANGLO-FRENCH LOAN 171 foreign securities. The entire proposal was vig- orously opposed by pro-German interests; there was talk even of a protest from the German embassy. The amount applied for was finally re- duced to $500,000,000. On the other hand, the terms of the loan em- bodied remarkable concessions. It was to pay 5 per cent interest, as against the 4/^ per cent rate of the latest British domestic war loan and the 2)4. per cent rate of the old consols; it was offered at 96, as against a price of par for the recent war loan. With five years to rim, the loan was to be payable, interest and principal, in Amer- ican gold coin in this country. Unlike all previous British Government loans, it was to be exempt from the English income tax. When it was con- sidered that, almost within a year, Great Britain had placed a new loan at 3 per cent and France a loan at 3^, the concessions were very note- worthy. Yet they had seemed to be called for by the situation. Even among people who were in sym- pathy with England in the war, there was much discussion of whether so huge a diversion of American capital to a foreign investment might not affect our own markets adversely, and whether the strain on England's financial resources might not impair the soundness of this loan. In many minds, the depreciation of exchange on London 172 THE FOREIGN EXCHANGES was imagined to reflect depreciation of the Eng- lish Government's public credit. It was these apprehensions which, at the out- set, threw on the prospect of a successful public subscription to so great a loan stufficient doubt to make unusually attractive terms an essential re- course. A week or two of discussion cleared up a good deal of misunderstanding. The public began to realize that when the British Government had just raised $3,000,000,000 on a single loan at home, and had added $1,500,000,000 to England's annual budget of taxation, it was hardly to be supposed that it could not, even without the joint guarantee of France, provide for a $500,000,000 foreign loan. That the fall in foreign exchange on London did not mean England's inability to pay its foreign debts, but merely its inability to meet them through gold exports, began to be un- derstood. So did the fact that even suspension of gold redemption for the currency would not signify, with England of 191 5 any more than with the United States of 1865, that the government could not easily pay in gold the interest and prin- cipal on its public debt. The loan was floated successfully during the autumn months of 191 5. It was clearly avowed, while the negotiations were in progress, that the purpose of the $500,- 000,000 loan was to stop the depreciation of ex- change on London. It was not understood by RECOVERY IN STERLING 173 everybody, even then, how the loan could have that effect. The principle involved was, however, plain enough. The violence of the adverse move- ment in exchange had been caused very largely by the payments made from London to New York for the British Government's purchases of war material. The drafts on London for that purpose had completely upset the market for international exchange. Now, with a $500,000,000 credit es- tablished in the United States, as a result of the new loan, the British and French Governments might pay the munition bills up to that amount, not with drafts on London but with checks on the American banks in which the proceeds of the loan had been deposited. To that extent the unwieldy surplus of bills of exchange drawn against Lon- don was bound to be reduced. The rate of ex- change, in fact, moved at once in London's favor, going in a very short time from $4.50 to a fraction above $4.75, around which slightly depreciated level it remained throughout the ensuing twelve- month. From the view-point of exchange on London, then, the Anglo-French loan achieved its purpose. It did not have the predicted adverse effect on our own investment market or on the New York money rate; but for this one reason was, that the proceeds were deposited with American banks until the British Government should draw on 174 THE FOREIGN EXCHANGES them to make its payments, and that when it did thus draw, the money was transferred from Amer- ican deposit banks to American manufacturers. The argument that the loan was not a sure and safe investment, that the borrowing governments might perhaps not be able to pay it at maturity, lasted longer than the other. This notion was a not wholly iinnatural outgrowth from the be- wildering evidence of economic strain, as the war continued. No argument, however, could well have been more absurd. Seeing that interest and principal were expressly made payable in gold and at New York, fulfilment of the contract was necessarily a measure of the international solvency of the two great borrowers. In effect, even if not in form, this loan for $500,000,000 was a first lien, not only on the thrifty French Republic but on the British Empire, and on the total re- sotirces of those English citizens who added $1,- 500,000,000 to their annual tax-roll during the first two years of war. In coiirse of time, the credit balance thus es- tablished in America was drawn down by the accruing payments for munitions. The London bankers provided for this condition in advance by raising a $50,000,000 loan on their own account from New York bankers, and by drawing on this fund also, whenever the rate of exchange showed signs of once more moving against London. A ENGLAND'S INVESTMENTS 175 few months later the British treasury intervened with a very remarkable undertaking. Something of the adverse balance of exchange had been met through sales by English investors of their Amer- ican securities to New York. Up to the middle of 1 916, $1,500,000,000 of these stocks and bonds were believed to have been thus resold. From time to time, however, the selling movement slack- ened; it began to seem as if the English investor was disposed to keep what was left. A thorough and careful estimate by an American railway president, based on investigation of the amount of our railway securities which were reg- istered in foreign names and reported under the income-tax provisions, indicated that $2,223,500,- 000 of them were still owned abroad in the mid- dle of 1915. At least $1,750,000,000 must have re- mained in foreign hands at the end of the year, in addition to an amount of our industrial securities perhaps one-half as great; and English investors undoubtedly owned the bulk of them. Early in 1 91 6 the British Government appealed to such English holders to sell all their American securities to the government at prices close to those of the current market, or to lend them to the treasury, for the period of war and on stipulated terms. The obvious purpose was to place the govern- ment itself in a position enabling it to insure the sale of these securities in New York whenever its 176 THE FOREIGN EXCHANGES New York credit balance needed to be increased, or to use the securities as a basis on which to bor- row in New York. Both expedients were largely utilized. The French Government, following suit, collected from its own citizens a mass of foreign securities, large enough to serve as collateral for a loan of $100,000,000 in New York. So far was the undertaking carried by Great Britain that, later in 191 6, the already very high income tax was increased by 10 per cent in the case of income derived from certain foreign securities ; this for the purpose, plainly avowed by the government itself, of forcing holders of such stocks and bonds to de- liver them to the treasury, whether they wished to give them up or not. The immediate sequel to this action, and to the large deposits of such securities, was the borrowing by the British Gov- ernment in this country, during August, 1916, of $250,000,000, secured by pledge with a New York trust company of $100,000,000 American stocks and bonds, $100,000,000 Canadian securities, and $100,000,000 bonds of neutral states. This series of extraordinary economic measures, applied by England and France to offset the potent influences operating to depreciate their exchange markets, achieved their purpose in the case of England to the extent of cancelling the greater part of that depreciation and holding the exchange rate steady. In the case of France, the effort was THE CASE OF FRANCE 177 less successful; the improvement of exchange, after the most imfavorable rate had been touched early in 191 6, still left the market, in the middle of that year, at a discount of 14 or 15 per cent from parity. The failure to accomplish the desired re- sult may doubtless be ascribed in large degree to the fact that the French market lacked the eco- nomic resources of England ; in particular, that its holdings of American securities, available for sale on the New York market, were trifling in compar- ison with those of England — for years a habitual investor on an enormous scale in our stocks and bonds. But another important influence, which did not prevail at London, operated at Paris to prevent correction of the depreciation in exchange. This was the fact that, since French paper bank-note currency had been prodigiously inflated, and since redemption of that currency in gold had been tacitly abandoned, the foreign exchange rates must have reflected not only the abnormal "trade balance" against the French Republic, not only the flight of foreign capital, and not only loss of the annual drafts on New York banks to pay for American tourists' expenditures, but an actual depreciation of the currency. It was exchange on Berlin, however, whose movement brought this aspect of the economic situation into sharpest controversy. 178 THE FOREIGN EXCHANGES German exchange, as I have shown, was more seriously depreciated than exchange on either London or Paris. As against its intrinsic value of 23^ cents in American currency, the exchange value of the German mark fell to 17^ cents in 1915. Recovering slightly from that very de- preciated level, the rate fell lower still in 19 16, and the market for Austrian exchange moved similarly. The actual situation of Germany's foreign trade, during the war, was such as to make somewhat less simple the explanation for this movement of exchange. Whereas one perfectly obvious reason for the depreciation of English and French exchange was the enormous war-time "balance of merchandise trade" against those nations, the ocean trade of Germany virtually ceased in the early autumn of 19 14, when her ships were driven from the sea and her ports blockaded by the English fleet. It has been a very general contention, on the part of German economists and financiers, that this embargo on the country's foreign trade ac- counts for the fact that exchange depreciated more violently and persistently at Berlin than at Paris or London. A common saying, in the for- eign exchange market itself, was that the absence of international trade in merchandise made the market for New York exchange on Germany purely "nominal," because there were virtually no commercial transactions on which to base the GERMANY'S POSITION 179 rate. But this is scarcely a valid explanation; the exchange was equally depreciated in every other great neutral market of the world. Even supposing Germany's foreign trade to have ceased entirely, bankers' drafts between Berlin and neutral markets (by wireless telegraph or otherwise) would still be feasible. The deter- mining influence on exchange rates would still, therefore, be the excess of payments actually made between Germany and those outside mar- kets. If Germany had in time of peace been ac- customed to export more merchandise than she imported, cessation of that trade would, ipso facto, operate to her disadvantage on exchange. But the case was precisely opposite with Ger- many's foreign trade in time of peace; imports largely exceeded exports. While, moreover, the depreciation in English and French exchange was largely attributable to enormous purchases of war material in America, that influence at any rate was wholly absent in the case of Germany. The Western hemisphere could not have sent mimitions to Hamburg or Bremen, however much it might have desired to do so. To the extent, therefore, that payments for these "mimitions shipments" were a factor in exchange, the New York rate on Berlin shoiild have depreci- ated less, not more, than the rate on London or Paris. Notwithstanding the many cross-currents and i8o THE FOREIGN EXCHANGES unseen influences bearing on international ex- change, it is impossible to escape the conclusion that the depreciation in the German rate measured largely, and in fact primarily, depreciation of the German currency. I have shown in a previous chapter, while discussing the actual status of that currency, the reasons why the currency was depreciated, and why such depreciation was bound to reflect itself in the foreign exchange market. Briefly summed up, the well-known facts are, that Germany's paper currency had been enormously inflated; that redemption in gold, even of imperial bank-note issued, was suspended when the war began ; that an actual premium was apparently at one time bid on gold; that such bids were then made a penal offense by the Ger- man Government; that the American ptirchaser of a draft payable at Berlin knew, therefore, that the draft would be paid, not in gold or its equiva- lent, but in paper currency, irredeemable to-day and with no future date assigned for its redemp- tion. All of these facts being perfectly understood in the exchange market, it would be on its face in- credible that an American banker, purchasing such a draft with American money redeemable in gold, should pay for it what he paid when he could get gold in return for it at Berlin. In a closely parallel historic instance, when the Bank of Eng- AN OLD PRECEDENT i8i land, in the Napoleonic War, had suspended gold redemption of its notes, and when exchange on London at important foreign cities had gone to 20 per cent discount, there were merchants who protested that the whole depreciation was, due to Napoleon's embargo on English trade with northern Europe. A very eminent banker, tes- tifying before a parliamentary committee, thought otherwise. Although the depreciation in ex- change might have originally occurred "in con- sequence of the measures of the enemy," he ascribed "its not having recovered to the circum- stance of the paper of England not being ex- changeable for cash." The committee indorsed this view, despite its impopularity in commercial London; concluding that the "rise in the market price of gold in this coimtry, coupled with so remarkable a depression in oiu" exchanges, . . . pointed to something in the state of our own domestic currency as the cause of both appear- ances." The case of Germany is identical, ex- cept that, imlike the England of 1809, she has suppressed the premium on gold by law. It has been urged, in arguments against this somewhat obvious conclusion, that the blockade had prevented Germany from regulating its ex- change market through exporting gold, like Eng- land, or through placing loans with neutral states, like both France and England. But a govern- 1 82 THE FOREIGN EXCHANGES ment which has formally suspended gold payments does not usually export gold, even if opportunity admits, and Germany's attempt to send gold in moderate amounts to near-by neutral markets, with the view of drawing on the fund thus estab- lished and supporting the exchange rate, met with early failure. As for selling to investors of neutral markets the new government seciuities of Ger- many, the experiment was tried. The German Government actually placed some $25,000,000 of short-term notes in the American market, and efforts were made to interest Amer- ican investors in the large German war loans. But the last-named and larger undertaking failed of success, as an offer by any other belligerent, of neutral participation on a large scale in its domestic war loans, would have failed. Such participation in the German war loans meant that, since interest and principal were payable at Berlin and in current German funds, the American holder would actually receive his interest only after deducting the abnormal discount on ex- change. Our people were sometimes urged to in- vest on the ground that the same depreciation in exchange enabled them to buy the German war bonds at a lower figure than their nominal price of issue at Berlin, and that the post-bellimi re- covery of exchange to normal rates would there- fore amoimt, in the American investor's case, to a PROBLEMS OF THE FUTURE 183 great increase in value of the bonds. But this was clearly enough at bottom a speculation in exchange. No one could surely say what would be the status of the German currency even on return of peace, and therefore nobody could pre- dict with confidence what the rate of exchange would be. But behind all technical and specific causes for the war-time movement of the foreign exchanges on the belligerent countries stands the fact that it must reflect, both actually and relatively, the impairment of their economic resources. The question, how long a time will be required, after peace, before the economic effects of this process of depletion shall have been corrected, is one of the large economic uncertainties of the future. What we know is that France, Germany, Austria, and Russia will have to wrestle with that problem as no other great nations have had to wrestle with it since the United States emerged from the Civil War. CHAPTER X WHEN THE WAR ENDS 10NG before the European War had com- pleted its second year, the question of how it might be ended, of what the terms of settlement would be, of how return of peace would affect the political and economic situation, had been anxiously discussed by the people of neutral as well as of belligerent nations. The question of peace itself had drawn forth official utterances from statesmen of the fighting Powers, as early as 191 5. The British premier, answering Parlia- mentary inquiries on December 8 that year, merely stated that "if proposals of serious char- acter for a general peace are put forth by the enemy governments, either directly or through neutral Powers, they will be discussed by the allied governments." The German chancellor, after an equally non-committal pledge to the Reichstag, on December 9, of his government's willingness to consider the enemy's appeal, com- plained that this enemy "has not approached us with suggestions of peace," a fact presumably due to "self-deception beyond compare"; and that, 184 EARLY IDEAS AS TO PEACE 185 "so long as belief that Germany is approaching collapse continues to be the dominant idea in enemy countries, it would be folly for Germany to take the initiative." This last remark referred to various public utterances of the enemy, but perhaps especially to the declaration of December 5 in the Paris Chamber, by the legislative spokesman of the French War Department, that "there will be no peace until Alsace and Lorraine are won, Belgium and Servia restored, German imperialism and Prussian militarism put beyond the possibility of resurrection." There was left by way of peace proposals, after these not very illuminating utter- ances, the sullen demands of the Opposition party (notably at Berlin) for the government to state its explicit terms, and the performances of the shipload of eccentric philanthropists sent to Europe in the summer of 191 5 by an American millionaire. But people familiar with history recalled, as regards the Opposition protests, that in 1864 even the Republican party's executive committee urged Mr. Lincoln (unsuccessfully) to offer peace to Jefferson Davis on condition that deference to the Constitution be professed. The grotesque incident of the "peace ship" could be matched by the visit to the Confederate capital of a militant Northern clergyman, with a powerful backing, to 1 86 WHEN THE WAR ENDS settle the Civil War through the influence of the Methodist Church. Even the European govern- ments' public attitude of 191 5, in regard to the rumored proposals for peace negotiations, was fairly anticipated when Napoleon, rejecting in 1 813 the only possible policy which could immedi- ately have ended that period's European war, declared that "I wish for peace, it is necessary to the world"; but "I shall never make any peace except one suited to the interests of my empire." In short, the world was merely witnessing the usual order of events. Along with the conflicting public utterances of the statesmen it became increasingly evident, as the war went on, how divergent were the views entertained by the world at large regarding its termination. The great body of humane senti- ment undoubtedly held the ground that war could not be ended too soon; that the civilized world must be relieved from this frightful incu- bus; that peace, however achieved, was a para- mount necessity of civilization. There was also visible, however, even in peaceful neutral com- munities, a feeling that the war ought not to be allowed to end imtil Germany should have been made to suffer the humiliation suited to a govern- ment which, for its own ambitious purposes and under the domination of a military cabal, had provoked such a conflict; whose violation of FINANCIAL OPINION 187 treaty, contempt for the recognized rules of mod- em war, burning of captured cities, exaction of tribute, use of poisonous gases, and murder of non-combatants on the seas, had created a situa- tion in which mere restoration of the status quo ante helium woiild be mockery. Looking at the situation from yet another point of view, financial and industrial markets have seemed to change their attitude repeatedly. During the first five or six months of war, when the whole economic world was paralyzed under the influence of the sudden cataclysm, the single opinion seemed to be that nothing could set things right but speedy return of peace. Presently, however, the powerful neutral states began to discover their own exceptional economic advan- tages. New York received from London its tem- porarily abandoned sceptre of economic leader- ship. The world's supply of capital gravitated to America. Our gold supply, our business activities, our export trade, rose to unprecedented magni- tude. The foreign exchanges moved in a spec- tacular way in favor of New York; then came the notable movement of American prosperity. The word was passed about that this prosperity was bound up with the European War, and that what we had most to fear, by way of a check to that prosperity, was the return of peace. A very exceptional confusion of judgment was the result. 1 88 WHEN THE WAR ENDS On the stock exchange, whose action is commonly supposed to reflect the opinion of inteUigent busi- ness men, prices would advance one day on mili- tary news which seemed to indicate shortening of the war, yet break sharply the next day on rumors of peace negotiations. All this made the stock market as perplexing a measure of the real situation as were the battle news and the several war-offlce bulletins, in a month when the furious fighting around Verdun alternated with reports of tentative proposals to end the war. The "peace rumors" were themselves confusing. In the nature of the case, overtures for peace had to be of the most roundabout and unofficial character; because any government that should publicly and officially ask what terms would be acceptable to its antagonists would thereby sug- gest on its own part military weakness or weari- ness of war. There is little doubt, however, that an effort at opening peace negotiations was made through Austria and the Vatican in August, 191 5, immediately after the Austro- German army had defeated Russia in the Carpathians and had crossed the Russian border. In official Petrograd, it was positively stated at the time that offers of a separate peace had been made by Germany to Russia. The report of simultaneous overtures, through Austria and the Vatican to the other Allies, drew forth the French premier's declara- BERLIN'S INTIMATION 189 tion to the deputies, in August, that recovery of Alsace-Lorraine and Belgium was the irreducible minimum. It is practically certain that in De- cember, when the defeat of Servia had been made complete, Prince von Blilow endeavored to ar- range some basis of negotiation in Switzerland. Nothing resulted from any of these overtures. Nevertheless — partly because of doubts as to what economic conditions would follow return of peace, and partly because of the enormous profits earned by various American companies through Europe's orders for war munitions — the financial markets undoubtedly seemed at times to regard the prospect of a sudden end to war as an unfavor- able influence on values. In particular, the Ger- man chancellor's voluntary intimation to our ambassador at Berlin, of the terms of peace which would be acceptable to Germany, was re- flected unmistakably on the stock exchange, where prices of the "war munitions shares" fell 5 to 40 per cent within a very few days on the re- port of that interview. But when this political incident — followed though it was by reiterated assertions, on the part of German statesmen, of their wish to bring about peace on their own terms — elicited only the reply from the enemy that the terms were not admissible, even the stock exchange lost interest in the matter. Reference to history readily dem- 190 WHEN THE WAR ENDS onstrated that nearly all wars of the past cen- tury had been ended only when one completely defeated belligerent sued for peace. It was recalled that all the efforts of the larger European Pow- ers, to intervene or mediate in the Balkan War of 1 9 13, accomplished no more than a temporary truce between the Balkan states and Turkey; that it was only when the Balkan allies attacked one another, and when Bulgaria, rendered help- less by Rumania's armed intervention on the side of Servia, herself asked peace at Bucharest, that the war was definitely terminated. The Boer War, like our own Civil War, ended with the complete defeat of one antagonist, the disinte- gration of his forces, and the people's acceptance of the terms laid down by the victorious govern- ment. In the Crimean War of 1856, as in the Russo- Turkish War of 1878 and in our own Spanish War of 1898, the defeated belligerent asked for terms. It was the provisional French Government of 1 87 1 that applied for the terms of peace, and had to take what Prussia granted. Even in the case of our government's successful mediation of 1905 between Japan and Russia, with the assent of both belligerents, the financial markets knew that, whatever may have been Japan's economic necessities (and the record has by no means proved them to have been urgent), the larger in- THE HOPEFUL VIEW 191 fluence In promoting a settlement was the pres- sure applied to Russia by the Paris bankers who were financing her war expenditure, and whose growing tmeasiness over the signs, not only of economic difficulties but of coming political col- lapse in Russia — which, as a matter of fact, oc- curred only a few months later — ^was a paramount force in bringing the two antagonists together. There was no one to apply such outside pressure to the present belligerents; they were financing the war themselves. But that the war would have to end at no very distant date, apparently remained a certainty, and as to what its ending would mean to the finan- cial and economic world, a most striking conflict of opinion continued to prevail; the conflicting judgments being framed, in fact, along two wholly divergent lines of reasoning. According to one of them, this war was itself so immense a calam- ity, both political and economic, that its ending must introduce financial recovery throughout the world. To American commerce it would reopen the blockaded ports of Europe; in behalf of American finance it would avert the conceivable forced sale in our markets of the one or two thou- sand millions of American securities still owned in Europe. It would remove at once the overhang- ing possibility of the European conflict taking a desperately destructive turn, or of the United 192 WHEN THE WAR ENDS States itself being dragged into war. This being so, a spontaneous outburst of relief ought to govern events throughout the economic world. Neutral countries would emerge from a period of long suspense, without the prospect of that aftermath of economic exhaustion which bellig- erent Europe must undergo, with abundant ma- terial resources of their own in hand, and with the certainty that Europe must depend on their productive resources for physical rehabilita- tion. As against this cheerfiil forecast, it was asserted by people of the opposite opinion that trade, even in neutral states, had been supported, since the war began, by the military demands of belligerent Europe. Not only must those activities cease instantly with the ending of war, but the fictitious character of the buying demand would at once become evident. European governments would be overloaded with debt and the European peo- ple crushed with taxes. How, then, would either of them be able to pay for American exports, if a large export movement were to continue after war? No European state could long postpone the reform of its inflated paper currency, or the removal of those emergency expedients in credit whereby general insolvency was averted in the preliminary strain on credit when the war began. But that is a process of contraction which, as a ECONOMIC READJUSTMENT 193 good deal of experience has taught, will aggra- vate hard times. Furthermore, although prices of American commodities had not been inflated by depreciated currency in the United States, every one of our products used in war (such as copper, lead, zinc, and probably steel) had been abnormally enhanced in price by the military demand — sometimes 100 or 150 per cent from the prices of 19 14. Those markets would have to face violent readjustment; prices for the same metals fell 30 to 50 per cent in the first year after Waterloo, although their use for munition purposes had been far less ex- tensive then than now. All home industries using such materials would have a more or less similar experience to undergo. Demand for our wheat was undoubtedly kept up by the blockade, during more than two years, of wheat exports from Russia, a country which produces one-fourth of the whole world's wheat crop. But Odessa and Riga would be reopened at once to the wheat-consuming world. Not least of all, our manufacturers, responding to the imprecedented demands of Europe, had invested immense sums of capital in plants to produce munitions of war. That trade would practically end with the war. The companies and their shares (whose prices were in 1915 put up 200 to 1,200 per cent on the stock exchange) must come 194 WHEN THE WAR ENDS back to a normal basis, with great incidental dis- turbance. These considerations, it was usually- pointed out, were independent of the other dis- puted question, What will be the character of Europe's post-bellum competition with our man- ufacturing industries, whether in the home mar- ket or in the export trade ? At the end of 191 5, the main question thus disputed was put categorically by a New York newspaper to 26 well-known bankers, manufac- turers, economists, government officials, railway managers, and capitalists. Of the answers, 14 were to the effect that American prosperity would continue after peace; 10 were of the opposite opinion; 2 were undecided. This distribution of opinion no doubt reflected accurately enough the judgment of the intelligent general public. But all the answers pointed to the inference that a period of great perplexity and unsettlement would inevitably follow the ending of the war, and that it must be left for the longer future to determine what this epoch-making war will have meant to economic history. That history, in the past, undoubtedly teaches that the settlement at the end of some of the world's great wars has had profoimd influence on the future economic position of the nations. Such influence was cer- tainly exerted in the sequel to the Seven Years' War, in which England ousted France from the LESSONS OF THE PAST 195 American and Asiatic continents; making her- self, by the Peace of Paris in 1763, mistress of the Mississippi valley, of Canada and of India, and thereby changing the colonial history of the worid. Something of the enormous economic prestige with which England emerged from that celebrated conflict has at times been thought to attach to Prussia after the war of 187 1. But in that case, larger allowance is necessary than is usually made for the results of the German im- perial unity which followed the victory over France, and which performed for the cumbersome political structure of the German states a good part of what the Constitution of 1787 performed for this country. It is, in fact, easily possible to be deceived in drawing inferences of this character from success- ful wars. The question is not always settled by geography and territorial boundaries. Nobody seriously thinks of ascribing our own country's prosperity, in the half-dozen years after 1898, to the acquisition of the Philippines; it would be much easier to prove that the increased prosper- ity of Spain during the same period was promoted by the loss of them. The addition of the im- mensely valuable Transvaal states to her colonial dominions, as a sequel to the Boer War of 1899, was followed in England by a period of unques- tionably waning economic power. Japan spent 196 WHEN THE WAR ENDS a series of years, after her successful war with Russia, in a state of financial depression. The truth is, that it needs exceptionally favor- ing circumstances to make a great war anything but a calamity, in its industrial sequel, to all the combatants. Politically, the rearrangements in the Peace of Westphalia were of high importance; beyond all else they settled, very largely, the long and seemingly hopeless civil conflict on questions of religion. Yet the Thirty Years' War neverthe- less left the population of Germany reduced, ac- cording to some estimates, by upward of 20 per cent, and it was quite a century before the Ger- man states again cut any large figure in Europe. If the great prosperity of the Northern United States, in the half-dozen years after the Civil War, is reckoned an exception, it must never be forgotten what part was played by the railway construction, the opening up of the new West, the increase in the coimtry's agricultural produc- tion, the immense immigration — a movement which, in the three last years of the war period itself, more than equalled all the losses of the North in battle, and which was larger still on re- turn of peace. None of these influences can possibly be dupli- cated in Europe after this war. They did not affect the whole of our own country, even at the time. So far had the South's economic power IN THE LAST CENTURY 197 been crushed by the four-year conflict from 1861 to 1865, that with all the spur applied through the pressure of hard times, and with all the urgent demand from home and foreign spinners, to re- plenish their almost exhausted supplies of raw material, it was not until 1878 that even the Amer- ican cotton crop again reached the size of that of 1859. "The peace of Europe from the battle of Waterloo to the Crimean War," Thorold Rogers declares in his "Economic Interpretation of His- tory," "was the peace of languor," in which "Eiiropean nations were recovering from the losses which they had suffered for eighteen years of bloodshed." It is not the least of the problems, whether on the present occasion it will again re- quire the greater part of half a century for eco- nomic Europe to get fully on its feet. CHAPTER XI THE ECONOMIC AFTERMATH IF the problem of Europe's political recon- struction when the war is over — the question as to the changes which may be witnessed in the Rhine country, in the Ottoman dominions, in the Balkan states, in Europe's colonial posses- sions, in that jumble of nationalities known as the Austrian Empire' — ^has been beyond the reach of prophecy during the progress of the war, the problem of Europe's economic reconstruction has been quite as baffling. It is a problem which in- volves three distinct considerations — the future condition of each belligerent, taken individually; the place which each will hereafter occupy in the world's economic order, and the economic relations of each to the others on return of peace. All past experience goes to prove that the process of financial readjustment, after the strain of this present war is definitely over, will involve an economic strain of extreme severity, affect- ing every belligerent. Not only will the artificial stimulus of the prodigious government expendi- ture be withdrawn, and very suddenly, from the 198 CONDITIONS AFTER WATERLOO 199 industries concerned, but there will then arise, in such shape as history has perhaps never before presented, the problem of bringing back to a normal basis the currency and credit systems; inflated and perverted as they have been by the remarkable "emergency expedients" which every government applied at the very outbreak of the war, and has continued to apply in the face of progressive decrease in the stock of accumulated capital. The notion that a prolonged and costly war will be followed ordinarily by prosperity and "boom times," is pure illusion. In the first year after Waterloo the average price of a long list of English commodities fell no less than 30 per cent. Land values came down at a rate which ruined hundreds of owners, speculators, and mortgage- holders. A long series of panicky movements occurred on the stock exchange in the three years after peace. The half-dozen years beginning with June, 1 81 5, were described by a contemporary English historian as a period "of almost unex- ampled adversity." Let it be remembered, first, how stupendous is the mass of current international liabilities, pay- ment of which was suspended on the declaration of war. Had the banking-houses, whose maturing credits at other European cities were thus suddenly made unavailable, been left to themselves, bank- ruptcies on a portentous scale must inevitably 200 THE ECONOMIC AFTERMATH have followed. That result was averted through the use of banking credit, under government guarantee, to an extent never previously known in banking history. But these emergency credits and government guarantees were arranged to end with the period of war. Except where liqui- dation of other assets has enabled the firms in question to anticipate that settlement, return of peace must bring the hour of reckoning. For the assisted houses must repay the bank or the gov- ernment, and must look to recoup themselves from their foreign correspondents, who will them- selves, at that very time, have their own hands full at home. Nor is the case very different with the immensely expanded paper currencies. Note circulation of the Banks of France, Germany, Russia, and Italy was expanded $3,500,000,000 in the first full year of hostilities; an increase of no less than 121 per cent, and this not including new paper currency other than bank-note issues. In the same four states, it increased $2,600,000,000 more in the second year of fighting. If these are to be re- stored to normal proportions when the war is over — if Germany and France especially are to return to a basis of gold redemption for their bank-notes on demand — an extremely trying period will con- front the whole of Europe. What the precise at- tendant phenomena will be, it is not at all easy BELLIGERENT EUROPE 201 to predict. The reasonable certainty is, that the process of readjustment will be long drawn out, and that "emergency expedients" which were to end with the ending of the war will be repeatedly extended. It was six years after the battle of Waterloo before the Bank of England fully re- sumed gold as payments. One of Lloyd-George's predictions to Parliament, when chancellor of the exchequer in 19 14, was that the really acute stage of Europe's economic strain is most likely to oc- cur four or five years after the war is over. Which of the nations will suffer most in this economic reckoning ? How will the economic status, relative and actual, of the principal bellig- erents be affected by the war ? When Europe at last emerges from the tornado of bloodshed and destruction, shall we have before us the same economic world as we had in July, 1914, its con- stituent nationalities occupying the same respec- tive positions as before, and developing their re- spective energies on the same lines as before; or shall we presently discover that economic positions and relationships of the world have been changed fundamentally, and that a different economic era has begun ? These are questions of curious, though as yet little more than speculative, in- terest. How the various nations were ranged in the economic order, when this war broke out, every 202 THE ECONOMIC AFTERMATH one knows. England was still indisputably the world's financial and commercial centre. Ger- many had become an aggressive competitor, however, in the field of home production and foreign trade — so successful a competitor, indeed, as to reduce to outright effrontery Berlin's habit- ual allegation that this war was necessary to "get a place in the sim" and "obtain the freedom of the seas." France, until the shadow of impending war paralyzed financial confidence, had gained through her people's thrift and her bankers' con- servatism a prestige in the world's economic sys- tem probably higher than at any time in the pre- ceding century. Paris had in fact financed even the London money market during the acute strain of the Boer War period; had provided Russia with the financial sinews of war for the Man- churian campaigns; had helped out New York (through very large purchases of our new secur- ities) in a troublesome situation as recently as 1910, and had actually been lending enormous sums to Germany's financiers and merchants, when the menacing attitude of the German Gov- ernment, at Morocco in 191 1, forced as an or- dinary precaution recall of practically all such credits. The United States was more of an economic puzzle. Its economic prestige in the world at large, immediately after 1898, was undoubtedly NEW YORK VERSUS LONDON 203 enormous. Having purchased $200,000,000 of England's Boer War loans direct from the British exchequer after 1899 — a then im.precedented oc- currence — and having reached, two years later, a pinnacle of financial power which seemed unprece- dented, our markets listened in 1901 to the Wall Street prediction that New York was about to dispute the world's financial primacy with Lon- don. How premature, if not permanently illusory, were such expectations, we learned four or five years later, when, to sustain the structure of American speculation, oiur market's outright bor- rowing from Europe rose to the hundreds of mil- lions ; when our financial community was stretched flat on its back in the panic of 1907, and when we seemed, during the three ensuing years, to be chiefly occupied in enlisting European capital to help float new railway securities which our home investors did not show willingness or ability to absorb. But in what position, actual or relative, shall we and the other great states emerge from the epoch-making changes of this war? Of the three belligerents hitherto foremost in financial prestige, it is undoubtedly the prevalent impres- sion that France has given the greatest indication of weakened economic power. For more than a year, her government did not venture to provide for war expenses through important single nego- 204 THE ECONOMIC AFTERMATH tiations of long-term loans. A short-term loan, offered in New York on highly favorable terms to the investor, fell far short of success. A large proportion of the war expenditure was met, as we have seen, through borrowings by the government from the Bank of France. These signs of economic weakness are the more impres- sive in view of the economic position of France during the past three decades. The change to her war-time situation is usually ascribed to the circumstances under which the war began — the invasion of France; the practical certainty that, but for Belgium and England, Paris would have fallen; the fact that one of the richest French industrial districts had been occupied by the Ger- mans since the first month of hostilities, and the well-known intimation of influential German statesmen, on numerous occasions since 1871, that the purpose of Germany, in another war, would be to insure the economic ruin of France. It is true that signs of impairment in French eco- nomic prestige had been pretty plainly visible, even before the fateful last week of July, 19 14. At a time, that year, when even the London Stock Exchange was dismissing as an absurdity the suggestion of a coming European war, the dis- turbance which had begun in European finance was commonly ascribed to the unfavorable con- dition of the Paris market, the hoarding of gold FUTURE OF FRANCE 205 by the French people, and the virtual failure of a French public loan. But there is very good reason to ascribe even this to the growing timidity of capital, which, with the mysterious prescience of the money market, may instinctively have sus- pected after the ominous clash with Germany in 191 1 that actual attack on France could not be long delayed. Be this as it may, we have yet to ask how France will emerge from the terrific economic strain of the present war. On that question we have some historical precedent to guide us. France, three times in the two past centuries, has been completely defeated and left in a state of seeming economic exhaustion — at the end of the long campaign of Louis XIV, at the final over- throw of Napoleon, and at the crushing climax of the Franco-Prussian conflict. In the first, her commercial predominance appeared to have had its coup de grace; in the second, her European empire disintegrated; in the third, a very impor- tant part of her own territory and an enormous ransom were exacted. Yet, after each of these experiences, the world witnessed the extraordinary spectacle of France promptly resuming her place in the economic system, and in the end display- ing a tangible economic power even greater than before. It is impossible that this should have occurred without the possession of national quali- 2o6 THE ECONOMIC AFTERMATH ties and individual resources of which her enemies had failed to take account. Perhaps the peculiar character of the French people — their thrift, their imagination, their aptitude as arbiter of good form and good taste among the nations — explains this remarkable result. If so, it is difficult to imagine the France of the longer economic future occupy- ing in the economic system any different position than she has occupied in the past. What, then, shoiild the enormous strain of the present conflict forebode to Germany ? It is cer- tainly not true, as writers and correspondents have occasionally insisted, that Germany is al- ready "bankrupt." Yet the war has brought to financial and industrial Germany an experience to which no other powerful belligerent has been subjected. Germany's economic prestige of the three past decades has originated, first in her power to produce commodities at low cost and of desirable quality, next in her capture of the ocean trade through which these goods were brought to foreign markets. During more than two years the outlet for this production has been blocked; her commercial fleet has ceased to navigate the seas; the main source of Germany's recent economic prestige has literally dried up. "What we now manufacture," one of the foremost German news- papers declared in the early months of 1915, "is no longer the productive goods which meant new GERMANY'S OUTLOOK 207 value and increasing national wealth. Now we produce only war material ; the work of our hands vanishes in air as powder and lead. We are using up our resources and capital." This has happened in a community whose ac- cumulation of capital as a nation has been an incident of our own times. Even in the half dozen years before the war began, Germany was a borrower of foreign capital, on an extensive scale, to conduct her domestic industries. The process did not mean poverty ; it might mean, and in Germany's case undoubtedly did mean, so rapid an increase in opportunities for profitable industrial expansion that foreign as well as do- mestic capital could be profitably used. But the war which has stopped abruptly this commer- cial activity and the resultant accumulation of new capital, is also depleting with immense rapid- ity the accumulations of the past. If we allow for the financial assistance granted by England to her continental allies, it cannot be doubted that the average daily war expenditure of Germany from her own resources has far exceeded that of any other government in the present conflict. The process of depletion, under these two sets of circumstances, must have been very rapid, even when disguised by the bold credit expedients of the government. Such an experience should lead to a period of very severe economic depression. 2o8 THE ECONOMIC AFTERMATH Meantime, also, the phenomenon of currency de- preciation has appeared in Germany as in no other powerful continental state aside from Russia. Her government has been driven, first to formal suspension of specie redemption of its currency, then to the recourse of prohibiting, under penalty of fine and imprisonment, the bidding of a pre- mium on gold or the offering of the currency at a discount. Revolutionary France of 1789 resorted to the same expedients, yet rose to predominant political and financial power a few years later. But the conditions are not analogous; for the French economic revival, in the earlier years of the Napoleonic regime, was a sign of the orderly utilization of national resources which had never previously been touched, whereas Germany had so far exerted all the powers of scientific taxation, before her resources were subjected to the present strain, that the increase in the army during 1913 (undoubtedly in preparation for this war) was accomplished only by imposing an extraordinary burden, described as the "property levy" or "contribution by property owners," on all the individual wealth of the Empire. A further dif- ficulty in forecasting Germany's power quickly to resume her old position in the race for economic leadership lies partly in the as yet not clearly determined question, how far the country's NATIONAL QUALITIES 209 notable commercial expansion, since the Franco- Prussian War, was due to peculiar national qual- ities of industry, inventiveness, and energy, which other nations could not match, and how far to government favor or other artificial stimulus. The financial and industrial prestige of England has its roots in the habits and qualities of the people, as far back as Queen Elizabeth's reign. France displayed in the time of Louis XIV the commercial traits which insure her present position in the economic world. The natural re- sources and individual qualities which have achieved America's present position among the nations can be traced back at least a century in our history. But Germany is a newcomer; one may almost describe her as a made-to-order industrial state. Half a century ago, few people would have classed the German nation as a leading factor in the world of economic power and prestige. Hamburg, Frankfort, and Bremen, it is true, had even then a financial history almost as old, and fully as respectable, as that of Venice or London; but the entry of Germany as a whole into the field of world finance hardly antedates 1871. Her re- markable economic expansion, since that date, has taken chiefly the two forms of scientific pro- duction and of aggressive commercial develop- ment under government auspices. The intrusion 2IO THE ECONOMIC AFTERMATH of German industry into the competitive field of the outside world, during the three or four past decades, foreshadowed in an extremely in- teresting way her methods of aggressive warfare. It is entirely probable that the "German effi- ciency" which has become proverbial in the his- tory of the war, may find equally vigorous ex- pression in the period of industrial recuperation which must come after the war. Yet the lack of accumulated capital resources at home, the loss of productive laborers in battle, the enormous burden of war-time indebtedness and the new taxation which must come after war is over, will be a peculiarly formidable handicap. Germany will have to meet, in a vastly greater degree than France, the problem of direct industrial and com- mercial competition with countries which will then be far more abundantly equipped with cap- ital for the purpose. One of those competitors, after as before the war, will naturally be England. The problem of the economic aftermath in England gains par- ticular interest from what has happened since the war began. It has hardly yet been possible for the world to realize the stupendous loss in eco- nomic prestige which London has already suffered. In continental Europe, the things which have happened to its financial and commercial machin- ery since July, 191 4— the moratorium, the closing ENGLAND'S PROBLEM 211 of the exchanges, the suspension of gold pay- ments, the recourse to paper currency — had hap- pened before in those communities. But to Eng- land the proclamation of a moratoritim on debts in August, 1 9 14, the closing of the stock exchange, and the issue of special government paper money, were new and startling occurrences, not only in our generation, but in English financial history since the modem credit system was established. Not even during the eighteen years of the ex- hausting Napoleonic War, did financial London resort to any of these expedients. It is true, as I have already recalled, that a great depreciation of sterling exchange occurred in the Napoleonic period on such foreign markets as Amsterdam and Hamburg, and an actual premium on gold at home occurred in the Napoleonic wars. But London had then no rival to dispute its finan- cial primacy; and even so, it was six years after the final fall of Napoleon before the Bank of Eng- land was able to resume gold payments. Still more significant has been the voluntary abdica- tion by London, for the period of war, of its place as the world's financial centre. In the case of no other belligerent, therefore, does the problem of economic after-effects of this present war present more dramatic historical possibilities. The world began to ask in 191 5 if the sceptre of financial leadership might not turn 212 THE ECONOMIC AFTERMATH out to have passed permanently from the hands of London; and the astonishing depreciation of exchange rates on that market encouraged the idea. Lombard Street itself, depressed and be- wildered as it was at the all but unimaginable succession of events already on the record, be- lieved nothing of the sort. It was entirely con- fident that both the commercial and the financial prestige of Great Britain will be resumed when the war is over; that London will again be the im- disputed money centre of the world. This con- fident expectation had its basis in three facts. Nothing had occurred to drive English commerce from the seas. However much England's ac- cumulated stock of capital may be reduced by the prodigious waste of war, the proportionate reduc- tion, in the case of her European competitors in finance and trade, will have been vastly greater. The United States, with development of its own resources certain to absorb the greater part of its own accruing capital, cannot for years to come be fitted economically for the world's central money market. There is force in all three arguments; they are reasonably convincing as to the general question of the ''money centre." On the other hand, only the test of the aftermath of war can show just what are to be the logical results of that loss in economic prestige which the English financial WORLD'S MONEY CENTRE 213 market has had to sustain. It is yet to be deter- mined how much of London's past financial power was due to the supposed invulnerability of the English financial system to any kind of shock. Resale to American markets of more than $1,500,000,000 worth of the American securities held by English investors — perhaps one-third of all that was owned when war began — marked the visible surrender of one highly important factor in the country's prestige as the financial and eco- nomic centre of the world. It is at least a safe prediction that when the war is ended England cannot regain overnight, so to speak, the position which she lost as a consequence of the economic vicissitudes of 19 14. It is an easy possibility that New York will retain many of its war-time func- tions and responsibilities as the central money market for the Western hemisphere. Beyond that possibility, the predictions of peo- ple familiar with the world's economic machinery and economic history are extremely guarded. Undoubtedly, England's primacy has been an out- growth of her financial system's long unchallenged soundness — which is now, perhaps, in a way im- paired. But it is also an outgrowth of her position as the workshop for other nations; of the fact that both her productive facilities and her ac- cumulated capital have for centuries exceeded home requirements; of her free trade with all 214 THE ECONOMIC AFTERMATH the outside world, and of the world-wide pre- dominance of her merchant fleet. Granting that on this occasion the American financial system will emerge from the war-time period with a prestige superior to that of England — as attested by the depreciation on the exchange market, in terms of American money, of the cur- rencies of all the greatest states of Europe, includ- ing England — this country would still hardly duplicate England's position as regards the other attributes. We shall not be, as England of neces- sity is, primarily the workshop of the outside world. A vast field of home development still awaits our manufactiuing output and our capital. We have not dared, and probably shall not dare for many years to come, to try the experiment of free trade. Our legislators have shown no dis- position to free the American merchant marine from the fetters which have held it back from free competitive expansion. The question of future financial relationships between the European Powers which went to war in 1914, brings up other considerations. Pre- dictions were publicly made by European states- men,, almost from the beginning of the war, that those relationships would be settled on the basis of political rancor and resentment. "On the columns of the British Empire," the German finance minister declared to the Reichstag, De- FINANCIAL ENMITIES 215 cember 15, 191 5, at the end of an impassioned denunciation of England, "are written in glowing letters the same words as were written on the wall of Belshazzar's palace," This declaration, some- what rhetorical for a sober and practical bank director, meant on its face that Germany expected to break down Great Britain's colonial system, after if not during the war. "So far as commerce is concerned," the president of the British Board of Trade retorted, in an equally bitter speech to Parliament a week later, "Germany is a beaten nation, and it is for us to see that she does not recover." There seemed to be little ground for taking seriously either of these emotional assertions. So far from the British Empire showing signs of political or economic disruption, the history of the war has indicated on the one hand, that Eng- land's colonial possessions had been drawn in un- precedented loyalty to the mother country, and on the other hand, that England's protection of the ocean trade of her colonies has never in his- tory been so powerfully asserted as in this great war. That trade with Germany may to a certain extent be discountenanced in the immediate aftermath of the conflict, by the people now at war with her, is not impossible. There may be exclusive and preferential tariff alliances, and, in any case, Germany will have a long account to 2i6 THE ECONOMIC AFTERMATH settle for her part in provoking this war and her manner of conducting it. Belgium, the Lusitania, the "air raids," the conspiracy against neutral munitions factories — are episodes which will at least not help the vogue of goods with the label "Made in Germany." Still, the advantages of trade between nations are reciprocal. England, for instance, exported in the last full year of peace $300,000,000 of mer- chandise to Germany, of which $203,000,000 was British produce, and the shrinkage in Great Britain's outward trade, during the period of war, resulted to a not at all inconsiderable extent from the embargo on trade with Germany. A correspondent of the London Economist, writing in a reminiscent vein, lately recalled that when the Franco-Prussian War was visibly near its end in 1 87 1, "French and German commercial trav- ellers were waiting on the frontiers for the mo- ment when peace should be signed, and there was a great inrush for orders, into both France and Germany, as soon as peace was declared." The world's past experience, at all events, points to the conclusion that future financial and business relations of the great countries of the world will not be permanently determined by the hatreds and revengefulness arising from the war. Such doubt as has actually arisen, during and since the above-cited declarations of 1915, based TWO OPPOSITE CONCLUSIONS 217 itself on the question whether the analogies of former wars — the subsequent political and eco- nomic rapprochement of the antagonists of the Napoleonic wars, of our own Civil War, and, to a large extent, even of the Franco-Prussian War — could safely be assumed in the present conflict. The theory of statesmen and writers who answer in the negative has been that the breach has been too wide, the just indignation over the wicked provocation of this war too intense, the resent- ment at Germany's violation of rules of war and dictates of humanity too profound, to make even economic reconciliation possible. This feeling was no doubt rendered more intense because of the prevalent beUef that on this occasion, in a degree perhaps unprecedented in the history of war, the problem of financial and economic re- construction must underlie that of political read- justment. Nothing could better illustrate the formidable part which it may be destined to play than the fact that while the Hps of statesmen were sealed regarding the political and territorial aftermath of war, the Allied Powers came volun- tarily into the open with a plain and definite dec- laration of the most extraordinary sort, regarding their purposes as to economic relations with the present enemy on return of peace. This declaration was made public as a result of the so-called "Economic Conference" of June 21 8 THE ECONOMIC AFTERMATH 17, 1916, at Paris, to which delegates were sent by all of the Allied governments. It set forth, in considerable detail, the general programme which the delegates recommended to their several gov- ernments in regard to economic relations with the enemy, first during the actual period of war, next during the period of post-bellum reconstruc- tion, and finally during the permanent period of peace. The first pledge of the Allied delegates was rightful and magnanimous. Needs of those countries which have been "victims of destruc- tion, spoliation, and abusive requisition" should be recognized at the start, with the view of re- storing "to such countries as a special privilege" their ruined or sequestered "raw material, in- dustrial and agricultural machinery, live stock, and merchant marine." This promise to unhappy Belgium, Servia, and Poland was in line with the highest motives that prevailed, first in Russia's challenge to Austria's reckless behavior regarding Servia, and again in England's entry into war when Germany invaded and plundered Belgium. It was not the less honorable to its authors in that it had no word to say of an indemnity to be paid by Germany to Belgium — a penalty merited on the face of things, as no other similar penalty in history has been merited, by the brutal cynicism with which the German Government trampled on treaties of neu- AT THE PARIS CONFERENCE 219 trality, violated international pledges regarding conduct of modern war, and extorted blood-money tribute in the millions from non-resisting Belgian towns, at the very moment when only the gen- erosity of neutrals was preserving the Belgian people from starvation. But this was not the really noteworthy part of the Allies' economic programme. In general, the proposals (tentative in so far as they had to await approval of home administrations and legisla- tures) seemed to be directed toward the blocking of any effort by the Teutonic Powers after war to gain possession, for their own production and ex- port trade, of the markets of their present enemies. The declaration left it more or less a matter of conjecture how far the programme was offensive and how far defensive. Measures were to be taken which would "assure the independence of the Allies" in matters touching "financial, com- mercial, and maritime organization." The con- tracting governments were "resolved to take without delay the necessary measiu-es to rid them- selves of dependence on enemy countries as re- gards raw material and manufactured articles which are essential to the normal development of their economic activity." This would apparently indicate merely a form of protection to home in- dustries — at least so far as concerned exclusion of, or discrimination against, importations from Ger- 220 THE ECONOMIC AFTERMATH many or Austria. A considerably longer step was suggested by the statement that, in the period of economic reconstruction, and in order to protect their commerce and industries "against an eco- nomic depression resulting from 'dumping' or against any other unfair method of competition," a period should be fixed by the Allies "during which the commerce of the enemy Powers shall be subjected either to prohibition or to a special system which shall be efficacious." Even this proposal was restricted to the period of transition from abnormal war conditions to the normal state of peace; but the next looked to the longer future. Among what were designated as "permanent measures of mutual aid and col- laboration" it was stated that the present Allied governments "may have recourse to subsidized enterprises under the direction or control of the governments," or to "payment to encourage scientific and technical researches," or even to "permanent prohibitions." Finally, as to future relations of the Allied Powers with one another, the conference declared itself united "in pre- serving for the Allied countries, in preference to all others, their natural resources during the period of commercial, industrial, agricultural, and mari- time reconstruction," and agreed for that purpose "to establish special arrangements which will facilitate an exchange of resources." MOTIVES OF THE ALLIES 221 No series of proposals quite like this had ever before been formulated, either during war or in sequence to it. The declaration at once called forth comment as widely divergent in interpre- tation as in criticism. By some European critics, it was assumed that the programme was urged primarily by the continental Allies — Russia and Italy in particular — who wished to be guaranteed against falling again under Germany's financial and commercial domination. But there were also intimations that the programme only formu- lated the British ministerial assertion of the year before that "so far as commerce is concerned, Germany is a beaten nation, and it is for us to see that she does not recover." Against this second theory, the Paris proposals were defended as the erecting of a necessary safeguard against the commercial chaos pictured as a result of Ger- many's desperate economic situation after war. From yet another point of view, it was alleged that England's proposed participation in this sweeping protective policy embodied a clever move by Bonar Law and his English "Tariff Re- formers" to fasten on England, in the stress of war, a tariff system which English voters had steadfastly rejected in time of peace. Even at Washington, the Paris declaration elicited the pointed inquiry whether or not the pledge of the Allies, to preserve by mutual arrangement the 222 THE ECONOMIC AFTEKMATH resources of their countries "in preference to all others," pointed to discrimination against the United States. On the whole, the impression made in neutral communities was that the whole procedure reflected not reasoned conviction based on experience, but the vague apprehension — arising from uncertainty as to what will actually be the world's economic or political situation when war is over — which has colored even our people's judgment as to their own country's situation on return of peace. When experienced statesmen and thinkers were refusing to risk prediction of the economic sequel to this war, no one need have wondered at panicky de- mands to prepare for anything. The compact to resist the imagined inroads of commercial Ger- many, after return of peace in Europe, is at least as logical as the demand for an American army large enough to resist her imagined military in- roads. The two suppositions are indeed not at all dissimilar; for whereas the one would seem to look for unprecedented military aggression from a nation with shattered army and depleted popu- lation, the other assumed an equally unprec- edented commercial competition from a country stripped of raw material, denuded of surplus cap- ital, drained of its able-bodied laborers, and sad- dled with a depreciated currency. All such considerations were left to get a hear- OPPOSING CONSIDERATIONS 223 ing, when the declaration of the Paris conference should come up for debate before the legislative bodies. But in the meantime, outside observers recognized three aspects of the matter which had apparently received scant consideration from the delegates at Paris. In so far as the proposed agreements were defensive, not offensive, they would amount to confessing fear of the very nation which (supposing the defeat of Germany) had just been conquered. That attitude would at least be novel and anomalous for a victorious coalition. In so far as they were offensive and not defensive, they would be public declaration of economic war, to be made a source of future bit- terness, acrimony, and renewed political intrigue, at the very moment when the disastrous military war had been happily concluded. But in the third place, it was difficult to deny that, while what England, France, Italy, and Russia would gain from exclusion of German trade would be highly problematical, what they would lose would be certain. Back of all questions of "dumping," "commercial invasion," and "bal- ance of trade" stood the quite undeniable fact that Germany, with her thrifty population and her enormous import requirements, will continue to be one of the most profitable markets in the world. It will hardly be supposed that exclusion, partial or complete, of German products from the 224 THE ECONOMIC AFTERMATH Allied markets, would not provoke retaliation in kind on the part of Germany. But if so, then the upshot of such attempts to obstruct by arbitrary edict the normal movement of commercial inter- course would necessarily be to transfer such op- portunities, in the rich field of Germany's foreign trade, to neutral markets which were already threatening Great Britain's commercial suprem- acy. A decision of the Allied countries to dispense with German goods would quite as inevitably compel their own recourse to the American pro- ducers on a scale of exceptional magnitude. Even if, under such conditions, English and German exporters should endeavor to find in the American market compensation for their loss of Anglo- German trade, the salient fact would be the fur- ther immense advance in commercial prestige by the United States — at the expense of the Euro- pean markets, yet by the deliberate act of the European Powers. It was not easy to imagine England, at any rate, embarking on so suicidal a commercial policy. When all the surrounding circumstances were considered, it seemed far more reasonable to sup- pose that the English delegates, at any rate, indorsed the Paris proposals as in the nature of a threat to Germany of what might happen if her government did not presently come to terms and end the war. The military policies of the Hohen- TEACHINGS OF HISTORY 225 zollems had more than once been halted or di- verted by pressure from the commercial interests of the Empire. But this whole question, like the multitude of other uncertainties created during the progress of the war, was bound to remain in the realm of conjecture and dispute until the actual hour of international readjustment should arrive. It is conceivable that the bitterest animosities of this war will survive into future generations; yet that is not altogether the teaching of the past. Thackeray's celebrated "Waterloo chapter" con- cluded with a prediction of indefinitely continued political enmity between France and England; but the only two subsequent wars in which both have been engaged have seen their armies fight- ing side by side against a common antagonist. When the reader of history recalls the. Prussian commander's insistence after Waterloo, that Na- poleon be put to death by the victorious Allies, or the demand for the South 's political subjugation after the Confederate armies had surrendered, or the declaration by the London Times in 18 14 (when even the British ministry was planning to settle our "War of 1812 "), that "to be consistent with ourselves, we must maintain the doctrine of 'No Peace with James Madison,' " he will at least be compelled to acknowledge that the last stages of a bitter and angry conflict are not the 226 THE ECONOMIC AFTERMATH hour when the clearest views of future relation- ships may be obtained. No doubt, it was a changed France with which reconciliation became possible to England; a "New South" which opened the way to the Union as this generation knows it, and an altered Eng- land whose present relations with the United States have replaced the underlying animosity which the Revolutionary War and the War of 1812 left behind them. But this means that if we read by the analogy of history, it will be another and a different Germany with which other nations will reconstruct relationships in the longer future. CHAPTER XII EUROPE AND AMERICA PERHAPS it was the very brilliancy of the economic fortune, brought by the war to the United States, which served to intensify misgiving as to this country's possible situation when the war ends. Even in speeches and con- vention declarations of the presidential campaign in 1 91 6, reference was constantly made to the "temporary" character of our war-time prosper- ity. That some essential elements in this sudden prosperity would not outlast the war, nobody de- nied. We could expect no more $2,000,000,000 "excess of exports." Our huge outward trade in war material of every sort was bound to end on return of peace. Prices for metals and com- modities indispensable to war were certain to come down from their extravagant heights. Prof- its of the shipping trade — which, with the driving of Germany's merchant marine from the sea and the drafting of England's into war service, added 500 or 1,000 per cent to freight rates — will be subject to extensive and perhaps early readjust- ment. To what extent the ending of the war, 227 228 EUROPE AND AMERICA and the release of Eiirope's fleets for peaceful commerce, would affect our war-time activities in trade with South America and Asia, was at least a problem to be considered. There were considerations on the other side. Many American industries, cramped for lack of their accustomed raw materials, would be in- stantly benefited by the ending of the war block- ades. The foreign market for our cotton, so largely cut off by the war as to compel reduction of more than 20 per cent in the annual American crop, would be completely reopened. But behind all these generally recognized probabilities there re- mained one great uncertainty; which, as time went on, occupied more of the American business community's attention. That was the question whether Europe — its people impoverished by war, its manufacturers suddenly deprived of de- mands for war material, and, in Germany's case, its whole productive industry in touch again with a foreign market lost since the war began — will not instantly pour into the rich United States so immense a mass of manufactured goods, offered at very low prices fixed by the urgent needs of the European producer, as to cut off our own manu- facturers from the market. This picture seemed on its face convincing; the result appeared to follow the logic of the situation. Our own govern- ment has already begun tentatively to discuss FEELING AS TO THE WAR 229 measures which might be necessary to avert or modify the disorganizing effect on American in- dustry. Platforms of both poHtical parties, as adopted for the presidential campaign of 1916, recognized such an economic sequel to the Euro- pean War as an imminent possibility. Many of the circumstances of the day conspired to emphasize such misgivings. The extraordinary situation which, with the prolongation of the war, had arisen throughout the world; the increasing jeopardy to which (as at the similar jimcture of the Napoleonic wars) the rights of neutral states and people were subjected; the rising emphasis and bitterness which marked, on the one hand, the feelings of the belligerents toward one another, and, on the other hand, the sympathies of neu- trals — all these found expression in the financial as in the political incidents of the day. It is rea- sonably safe to say that nowhere did they influ- ence news and tinge controversy as in the United States. Our State Department's attitude, the momentary clash of the President with Congress over the "submarine dispute" with Germany, the tense public excitement over the battle news, and the recourse to public meetings convened to urge one policy or another, clearly enough reflected these aspects of the situation. So, also, the re- peated agitation and disorder on the stock ex- change have reflected them; it has been a very 230 EUROPE AND AMERICA different picture, since 1916 began, from the un- bounded confidence of 191 5, when the eyes of Wall Street were fixed almost exclusively on this country's own prosperity. The spread of the po- litical and popular movement for "preparedness" was a natural outcome of the surrounding influ- ences. For the sudden vogue of the "military pre- paredness" propaganda, there seemed, in the view of the ordinary calm observer, to be several dif- ferent causes. One, and imdoubtedly the most convincing, was the belief that for actual defensive purposes, our land forces were not such as to admit either of immediate effective resistance or of rapid expansion into an armament which would be effective. This consideration, to be sure, was of itself no more true ini9i5orini9i6 than it was ten years ago, or a quarter of a century ago. Par- ticular incidents of the European War, however, had instilled into the minds of many people the further idea that things may happen in this world of ours whose occurrence we supposed, as recently as the middle of 1914, to be wholly inconceivable. This could not fail to be a powerful secondary influence in the "preparedness" discussion. Yet no one can have missed the third influence : the presence in the United States (and elsewhere throughout the world) of an emotional hysteria, engendered in very infectious form by the contro- " PREPAREDNESS " 23 1 versies of the war. It has not been easy for any individual to keep himself in hand, so to speak, during this clash of strong emotions — ^which, as a matter of fact, could not possibly be avoided, even in the every-day conversation of the office, the club, or the dining-table. Coming on top of the actual events of the present war, this violence of feeling, and the inevitable resultant extrava- gance of inference, rendered peculiarly difficult the sane and sober discussion of problems of na- tional defense. In many respects, it was these same three in- fluences which aroused discussion over what has received the imitative title of "economic prepared- ness" — ^meaning the adjustment of our financial machinery and business methods to whatever con- ditions may be expected to prevail after the war. Fortunately for the usefulness of the discussion, it was not conducted on the emotional pitch which frequently characterizes the "military prepared- ness" propaganda. In the field of world-politics, the imexpected events which have occurred since the war began might be construed into a ground for misgiving as to oiu* own country's position. But the unexpected financial events in our coun- try's trade, finance, and industry, were almost wholly of a character to reassure the American mind. Beyond even this, the questions with which the economic problem had to deal were severely 232 EUROPE AND AMERICA practical, and have to be judged by practical ex- perience — ^in which they differ considerably from discussions based on the hypothetical possibility of invasion of the United States by the German army. For one instance, the very familiar and very much overworked assertion that, at the end of the war, the United States would be left without a friend in the world, did not greatly impress the practical financial mind. The man of some ex- perience in affairs, whether at home or internation- ally, does not expect that a neutral state, lifted to high individual prosperity by the incidents of a foreign war, will be regarded with the kindest of feelings by belligerent nations struggling under the burden of the conflict. Though it is not the neutral's fault, he is certainly gaining where they are losing. The practical man remembers, if he is familiar with history, that France and England looked with by no means unconcealed irritation at the "business boom" in this country during the early years of the Napoleonic wars, and that the Con- tinent had much the same feeling with regard to England during 1870 and 1871. But the notion that, whatever might be the individual sympathies of our people in the European War, every one of the European belligerents had come to hate the United States, and would be its enemy hereafter ECONOMIC INVASION 233 because our government, as a government, had not departed from its neutrality and openly- favored one side or the other, could not fail to appeal to intelligent and thoughtful men as a wild absurdity. The slightest reflection on the facts of the situation, as the end of the war drew nearer, would convince him that the financial and political friendship of the United States was cer- tain to be the great prize for which Europe would contend. Still, it was a curious fact that the practical business man, who rejected out of hand the fore- cast of an isolated and friendless post-bellum America, began his own "preparedness" discus- sion with the talk of possible invasion. What he meant, however, was the "dumping" of low-priced European merchandise in this coimtry when the war was over; the "flooding of the American market" with competitive goods; the "economic invasion." Now, invasion of this sort is not a new source of misgiving, even in the minds of statesmen. A quarter of a century ago, not only America but Europe was anxiously discussing a prospective invasion by Asiatic merchandise. When England and the Continent then talked of the "yellow peril," they did not at all mean im- migration from China and Japan, but products of Chinese and Japanese manufacture. It was less than two decades ago when the minister of 234 EUROPE AND AMERICA foreign affairs in a European cabinet, addressing the legislative body, declared that "European nations must close their ranks and fight shoulder to shoulder" if "the vital interests of the Euro- pean people are not to be gravely compromised," and by nothing less than the threatened invasion of American manufactures. The fright to which Count Goluchowski's speech gave expression — at a time when American manufacturers, emerging from the panic of 1893, were setting forth to discover in the export trade an outlet which the depressed home market did not offer — disappeared when reviving prosperity in the United States itself relieved the pressure. A few months, and the "American peril" was as completely forgotten as the "yellow peril," and the fact may not be without bearing on the pres- ent controversy. Yet the incident suggests anal- ogies in both directions. The present belligerent states of Europe will at least repeat, after the war, the case of a depressed home market, and the United States will repeat the case of an inviting objective point for export trade. Is it our busi- ness, then, to begin by raising higher and higher protective tariffs in advance of the post-bellum "European invasion" ? The question might be argued on the basis of this country's ambition to retain its present place as the central money market of the world. On QUESTIONS OF POLICY 235 that ground alone, the proposal to begin our career in economic primacy by protecting our own markets against competing foreign nations is a bit anomalous. London's economic primacy of our day was built up on the absolute free-trade policy of England. There are those who believe that the exigencies of war expenditure are al- ready driving England to the familiar "revenue tariff with incidental protection," and our own national experience teaches that such a tariff is a stepping-stone to a protective tariff with in- cidental revenue. Hypothetically, and as a pure matter of economic strategy, one might suppose that the sceptre of world finance might most surely be grasped by seizing also the weapon with which England won it. Governmental policies are not always settled nowadays, however, on the basis of general prin- ciples. The question must still be answered, whether America will not be "flooded with cheap Etuopean merchandise" after the war, and to answer it we have no precedent to guide us. It is true that, in the year when the long Napoleonic conflict in Europe came to an end, this country's merchandise imports rose to $113,000,000, as against $12,900,000 the year before; and that the next year they broke all precedent. But the United States had itself been at war with a Euro- pean Power, from 181 2 to the end of 1814. The 236 EUROPE AND AMERICA sudden inrush of imported English merchandise, on return of peace, was not then described as an industrial calamity, but as trade revival. The goods were sorely needed ; their arrival in our markets foreshadowed business activity and re- turn of better times. Nevertheless, England un- doubtedly began then to undersell the outside producing world. Why will not both England and continental Europe, when this war ends, set to work at the same task in order to relieve their own economic biirden ? The lesson of the world's experience, thus far in the war, has been that confident prophecy of results from the powerfiil economic causes, visibly at work, is rash. But that same experience has also shown, as we have seen repeatedly in our nar- rative, that prediction has been most imlucky when it arose from impulsive expectation of the worst, and when it was based on assumption that the most alarming economic incidents of older wars were boimd to be repeated. Keeping in mind these reservations, the first answer to be made to the above-stated question is, that the particular conditions which prevailed in the after- math of Waterloo can hardly be duplicated. In the dozen years after 181 5, the economic history of Europe was a tale of production with labor at starvation wages. Tooke, the economic his- torian of the period, describes the interval from A CENTURY AGO 237 1 814 to 1 81 6 as one of "losses and failures among the agricultural and commercial and manufactur- ing and mining and shipping and building inter- ests, which marked that period as one of most extensive suffering and distress." Readers of "Tom Brown" will remember the narrative of the English parish "which had risen into a large town during the war, and upon which the hard years which followed had fallen with a fearfiil weight"; "masters reducing their estabHshments, the fearful struggle between the employers and men; the lowering of wages." The memoirs, the histories, even the fiction of the period, are crowded with such dismal facts. The hard times in Europe will follow this war as they followed that of a century ago; but it is far from being an equal probability that cheap European labor, which was the basis of such "eco- nomic invasion" as occurred after 181 5, will be a sequel to this war. It was England which, in the vernacular of to-day, "flooded the world's mar- kets" with low-priced manufactures. But Eng- land's labor supply had not then been depleted through a continuous, violent, and destructive conflict on the land. The British army's losses in Wellington's Spanish campaign, even if added to the losses at Waterloo, would hardly match the English losses in a single month on the present Western front. 238 EUROPE AND AMERICA With her present loss of available laborers, and with even women's work in factories largely a temporary expedient of war, the natural outcome, all other influences remaining equal, woiild be that employers must bid for labor. All other influences may not be equal ; it is possible that, in the period of financial exhaustion after war, the home de- mand for goods will be as much reduced as the supply of labor. Yet, as against even this con- tingency, there remains the unmistakable fact that the Labor party, even in this time of war, has held the balance of power in the English Parliament, and that, immediately prior to the war, it was dictating minimum wages, through the ministry and Parliament. But this is not the only consideration bearing on the economic sequel. It is recognized, even in the programme of economic policy adopted by the Allies in 1916, that the first necessity of con- tinental Europe after peace will be immense sup- plies of new material for reconstruction of its shattered cities, damaged railways, bridges, har- bors and fortifications, and overworked industrial establishments. To provide this new material, it will find itself with factories whose machinery has been altered to make guns and ammunition, and with the supply of able-bodied laborers enor- mously reduced by loss in battle. Demands on Europe's productive energies for the purpose will LABOR CONDITIONS AFTER WAR 239 be very great ; some of our own most experienced manufacturing authorities hold that the circum- stances insure an export trade from the United States to Europe, after war is over, of abnormally large proportions. It has been publicly stated, by high authority in Germany's productive in- dustry, that a year and a half, after return of peace, will be required "merely to resupply our countries with the things that have been used up during the war." In the early part of 19 16, the Associated Press correspondent at Berlin interviewed numerous high authorities in German industry on the ques- tion, how the German people would be able to bear the heavy burden of taxation, recognized as an inevitable sequel to the war. The director- general of the great Siemens- Halske electrical company replied that the burden would be offset by increased wages. "To-day in Germany," he declared, "wages are unprecedentedly high, and the return of a few million soldier-workmen will not drive them down." A director of the largest private bank in Germany went further, stating it as his opinion that the "heavy taxation following the war will necessitate general advance in both salaries and wages"; a prediction supplemented by a high economic expert with the remark that if the employers will not voluntarily raise wages, then the advance "must be forced by those who 240 EUROPE AND AMERICA need it." But higher wages are not the road to cheap competitive production. As for France and Russia, the task of preparing for large purchases from the United States when war is over — especially of mechanical appliances for use in agriculture and other productive indus- try, has long been under way in its preliminary stages. A careful review of the matter by a well- informed Paris correspondent, at the time, con- cluded that in France, during the period immedi- ately following return of peace, there will be "no chance for either plentiful or cheap labor for surplus production," and that "for some time after war, demands on the United States, so far as France is concerned, will be quite as large and quite as lu-gent as during the war itself." This view of the question was publicly confirmed by members of a commission, sent from France as official representatives of the French Government and the various French industries, with the an- nounced purpose of ascertaining how the needs of industrial France, in the period of reconstruction after war, could best be met from the manufac- turing facilities of this country. Members of this commission estimated that, for machinery alone, the new orders of this nature might reach $i6o,- 000,000. These aspects of the European situation in regard to labor supply, wage scales, and capacity PROBLEMS OF THE FUTURE 241 for production, may not finally determine the nature of transatlantic competition. There would still remain the problem of what conditions will exist when the period of reconstruction is com- pleted, or of what will be the course of wages in this country. Demands for an increase have been greatly emphasized during the more recent months of war. But I have shown at least that the question, whether Europe will not in- stantly "dimip" its products on our home mar- kets and in our export field, at prices with which American industry cannot compete, is by no means one-sided. It cannot be safely determined in ad- vance by the precedent of older wars. How many circumstances peculiar to the present war sur- roimd it, may be judged from the single fact that experienced students of the immigration problem have frankly confessed their inability to decide what will be the probable outcome in that field — an imprecedented rush of European peasants and laborers to the United States, to escape, once for all, the horrors of militant Eiu*ope; or wages in industrial Europe, high enough to retain its la- borers, or, possibly, outright governmental em- bargo on emigration from the countries of conti- nental Europe. That expedient would be new to Europe's history, yet no more unprecedented than many another expedient already actually adopted, in the war period itself. 242 EUROPE AND AMERICA Such are the interesting and unusual elements of uncertainty which surround the question of the conditions which, in our own coimtry as in belligerent Europe, will arise with return of peace. It is undoubtedly fortunate that the American people themselves have lent a readier ear to pre- diction of possible danger than to prediction of unchecked American prosperity. Merchants and manufacttirers who have been gaining the largest profits have been the most conservative in guard- ing their financial position against the possible great reaction. Speculation on the stock exchanges as, not only in shares of war munition manufac- tories but in securities of companies conducting the business of ordinary times, was held in check even at the height of the rise in prices diur- ing 191 5. If the misgivings expressed so widely regarding the economic sequel in the United States were all to be fulfilled in the event, the result would at least not take our financial and industrial community unprepared. The country itself is prepared In still other ways for whatever vicissitudes the aftermath of war may bring to it. The undoubtedly immense expansion of credit has been based on an unprece- dented accumulation of gold. The abnormally great increase of our exports to belligerent Europe has been offset by repurchase of possibly the greater part of the securities representing our A NEW WORLD 243 standing indebtedness to the outside world. If the strain of economic reconstruction in Europe is to affect the American money market, we have the machinery of a sound and scientific banking system, with its facilities ready for instant use and as yet hardly employed. It is these well- known facts which are the basis for the state- ment, by one of the most experienced members of the Federal Reserve Board, that "the United States have so strengthened their economic posi- tion among the nations of the world that, to a substantial extent, they must take the place of the European nations which acted as the world's bankers before the war." Out of the numerous predictions made when the war broke out — most of which, as we have learned in the course of our narrative, turned out to be mistaken — ^the one prediction accepted unan- imously by thoughtful men was that the world which emerges from this epoch-making conflict will not be the world which we knew before 19 14. This prediction was most frequently made of political institutions and relations; sometimes of social institutions. It may be ventured quite as safely in regard to economic institutions and re- lations. The spirit in which the United States will meet the test of these new conditions may reasonably be one of soberness, but of hope and confidence. INDEX Aftermath of war, political problems of, 2; difficulties of, due to war-time paper inflation, 161, 162; probable incidents of, I gi- 194; its character, in other wars, 195,196; in period after Water- loo, 197; conditions governing, on present occasion, 198-201; probable character of, in France, 20s; in Germany, 206-210; in England, 210-215; trade pro- gramme of Germany's enemies regarding, 217-224; possible economic incidents of, 235; in other wars, 235, 236; in the U. S., 242, 243. Aldrich-Vreeland currency law, its origin and purpose, 86; its op- eration in 1914, 87, 88; Eng- land's plans for a similar cur- rency, 87; increase of, during early months of war, 104; final retirement of, 107, 155. American securities, Europe's hold- ings of, predictions of 1914 re- garding, 17; effort of Europe to sell, in 1914 panic, 82; char- acter of seUing, when stock ex- change reopened, 83; New York's repurchases of, from Europe, 132, 135, 152; sales of, to Europe before the war, 152; London's sales of, in first two years of war, 175; estimate of European holdings of, in 1914 , and 1915, 175; EngHsh holdings of, bought or borrowed by British treasury, 175, 176; French Government's purchases of, 176; used in New York as collateral for British Govern- ment loan, 176; effect, on Lon- don's economic future, of their resale to U. S., 213; redemp- tion of, its influence on economic future of U. S., 242. Anglo-French loan of 191 5, commis- sion sent to U. S. to arrange, 170; amount proposed at $1,- 000,000,000, 170; reduced to $500,000,000, 171; terms of, 171; American market's atti- tude toward, 171, 172; its pri- mary purpose, 173; its effect on foreign exchange, 173; pro- ceeds of, how expended, 173, 174; its investment status, 174. Asquith, H. H., British premier, statement of 19 15 on peace proposals, 184, 185; intimates possible terms, 189. Austria, her ultimatum to Servia, 21; financial panic in, 29; de- preciation of exchange rates on, 167. Balkan War of 1912 and 1913, hoarding of gold during, 26; effect of, on European money markets, 27; how terminated, 190. Bank Act, previous suspension of, at London, 37; suspension au- thorized in 1914 but refused, 38. 24s 246 INDEX Bank checks, increased amount of drawn in 1915 in U. S., 135; all records surpassed by, 136. Bank of England, run on, at out- break of war, 34; peculiar cir- cumstances of run, 34, 35 ; loss of gold in panic week, 35; raises its rate to 10 per cent, 38; re- duces it, 38; takes over non- collectible bankers' bills, 49; its loans during war, 50, 51; establishes Canadian branch, 100; increase in gold during early months of war, 123; heavy decrease in gold holdings, dur- ing 1915, 124; slight increase in note circulation, during war, 146; relation of, to London's gold exports in the war, 170; when gold payments were re- sumed by, after Napoleonic wars, 201. Bank of France, war loans to govern- ment and note issues, 148. Banks, European, reduction of rates at, early in 1914, 28; issue of paper currency by, 148; prob- lems of note issues, after peace, 200. Banks of N. Y. City, decrease in re- serves of, during war panic, 87 ; unite to pay the city's European debt, 99; organize to ship gold against our foreign indebted- ness, 100; moral effect of their action, 10 1 ; surplus reserve re- stored, 112. Belgium, possible effect of Germany's action in, on conditions after war, 216; Allies pledge eco- nomic assistance to, 218. Bethmann-Hollweg, German imperial chancellor, statement of 1915 on peace proposals, 184, 185; intimates possible terms, 189. Blockade, in Europe during Napole- onic wars, 8, 13; of Germany ia this war, economic influence of, 206. "Bullion Committee" of 1809; its report on depreciation of ex- change in war time, 181. Canada, gold shipped to, in 1914, by New York, 100; sends gold back in 1915, 124; loans to, by New York, 132. Civil War in America, financial events at outbreak of, 4; eco- nomic character of, 5; cost per day, 9; war loans of, 61, 65; increase of taxation in, 71; gold premium and paper deprecia- tion in, 120; character of stock market during, 134; inflation of currency in, 144, 14s; issue of smaU paper money in, 161; premature proposals for peace in, 185, 186; economic sequel to, in the North, 196; in the South, 197; demand for South's subjugation as result of, 225; reason for reconciliation after, 226. Clearing-house certificates of N. Y. banks, origin and purpose of, 84; issue of, in 19 14, 85; re- tirement of, 108, 112. Consols, British, their decline in Na- poleonic wars, 12; their fall on eve of this war, 30. Cooke, Jay, his method of floating U. S. war loan, 61. Cost of war, influence of, on popidar expectations, 3; estimates be- fore this war, 9; amount of, in this war, 54; Germany's the- ories of meeting, 68; propor- tion met in England by taxes, 71. Cotton, American producers of, dilemma at outbreak of war, 90; expedients to relieve, 91; effect of Civil War on produc- INDEX 247 tion of, IQ7; probable revival in market for, after this war, 228. Currency issues during war, in Eng- land, 44; nature and amount of, 45 ; recourse to, by other na- tions, 51; in Germany, France, and Russia, 145; in England, 146; character of, 147, 148; ef- fects of, on the markets, 140, 150; problem of, after the war, 200. Debts of belligerent states, 57, 58; see also War loans. Duration of the war, predictions re- garding, I. Economic Conference of the Allies at Paris in 191 6; its plans for pohcy after war, 218-225; pledges assistance to Belgium, Servia, and Poland, 218; agrees on defensive economic mea- sures; intimates permanent anti- German policy, 220, 221; Wash- ington's view regarding, 221; motive of its proposals, 222, 224; objections to them, 223, 224. "Economic exhaustion," popular theory of, 61; probabilities re- garding, 62; Macaxilay on, 63; precedent of other wars regard- ing, 65. "Economic invasion," by Europe after war, predictions of, 233- 241 ; of Europe by Asia, theory of, 233; of Europe by America, predicted in 1897, 234; of out- side world by England, after Napoleonic wars, 236. Economic War, see Economic Con- ference. England, attitude of 191 1 toward France and Germany, 26; cur- rency of, in 1 9 14 panic, 34, 44, 45 ; war taxation of 1914 in, 69; enormous increase of taxes in, 70, 71; her shaken economic prestige, 118; commission from, to confer on American situation, 123; increase of paper currency in, during 1915 and 1916, 146; depreciation in exchange on, 167; causes of, 168; places$5oo,- 000,000 Anglo-French loan, 170; its holdings of American securities, 175; government of, buys or borrows foreign securi- ties from English investors, 176; borrows $250,000,000 on col- lateral security at New York, 176; her economic position after Transvaal War, 195; after Napoleonic wars, 199; position of, on outbreak of this war, 202; origin of her financial and in- dustrial prestige, 209; impair- ment to prestige of, during this war, 21 1-2 13; financial history of, in Napoleonic wars and in this one, 211; position after war, compared with other Eu- ropean states, 212; reasons for and against maintenance of former position, 213, 214; polit- ical power of, as shown by this war, 215; her trade with Ger- many before the war, 216; as- pects of her future economic policy toward Germany, 224; relations with U. S. after War of 1812, 226; attitude toward U. S. during Napoleonic wars, 232; Continent's attitude to- ward, in Franco-Prussian War, 232; her large exports, after Napoleonic wars, 236; hard times in, during decade after Waterloo, 237. Europe, political and economic status of, in this war, 2, 3 ; ex- pected movement of gold to, 248 INDEX 18; settlement of American debt to, 102; large loans to, by American markets, 132; war- time currency inflation in, 145- 146; rise of commodity prices in, 150; issue of small paper currency in, 161; estimated holdings of American securities in, 161, i7s; economic condi- tion of, after Napoleonic wars, 197; Lloyd-George's prediction as to post-bellum economic re- action in, 201; futiure relation of nations in, 201-225; finan- cial expedients of 1914 in, not new, 210; possible "dumping" of cheap merchandise by, after war, 228; poUtical attitude toward U. S., on return of peace, 232; its former fears of "economic invasion" by Asia and the U. S., 233, 234; hard times in, after Napoleonic wars, 236, 237; economic needs of, after this war, 238; future atti- tude of, toward immigration to U. S., 241. Export trade, of the U. S., decrease of at beginning of war, 89; enormous increase of, during 1915, 128; destination of, 128; influence of, on the foreign ex- changes, 153; imlikely to con- tinue at war-time size after war, 227; predictions as to character of, on return of peace, 239. Federal Reserve Law, its enactment, 104; its provisions, 105-107; put into operation, 107; its effect on financial sentiment, 108; cmrrency issues under, 155, 156; unexpected character of such issues, 157; possibiUties of future inflation imder, safe- guards against, 158; future in- fluence of, on American money rates, 160; importance of, to economic future of U. S., 243. Fiat money, not largely resorted to in this war, 73 ; reasons against using, 73; wherein currency issues in Eiurope differed from, 147, 148. Foreign exchange, violent movement of in 1914, against New York, 92; rate of $7 touched for ster- ling, 93; economic significance of the rate, 93; turn in favor of New York, 123, 124; Lon- don's view of, as an index to prosperity, 133; effect of Eu- rope's currency inflation on, 149, 150; premium on, in 1915 at New York, 151; violent move- ments of 19 1 5 in, 163; prin- ciples imderlying, 165; action of, in normal times, 166; effect of, on gold exports, 166; spec- tacular dechne of 1915 in, 167; depreciation of, on London, Paris, Berlin, Vienna and Petro- grad, 167; causes of movement of, against London, 168; against France, 168, 169; how affected by return of American tourists, 168; influence on, of transfer of capital from London, 169; effect on, of $500,000,000 Anglo- French loan, 173; recovery of, at London, 177; continued de- preciation of, at Paris, 177; con- tinuous movement of, against Germany, 178; causes for, 178, 181; influence of paper infla- tion on, 180; course of, in Napoleonic wars, i8r. France, hoarding of money in, on eve of war, 26; war loans of, 57, 58; absence of heavy war taxa- tion in, 72; her purchase of American securities before the war, 79; her economic position in the first year of war, 118; INDEX 249 asks her citizens to give up gold, 122; amount received, 122; in- flation of currency in, 145; issue of small paper currency in, 161; depreciation of exchange on, 167; causes of, 168, 169; co- operates in Anglo-French loan, 170; government of, buys or borrows foreign securities from French investors, 176; places $100,000,000 loan at New York, 176; its holdings of American securities, 177; economic con- dition of, in 191 5, 177; views of, regarding terms of peace, 18s; her position in relation to other states before the war, 202; her economic weakness during the war, 203; reasons for, 204; her rapid economic recovery after other wars, 205 ; explana- tion of, 206; economic condi-- tion of, under Napoleon, 208" historical origin of her economic capacities, 209; German trade with, afterFranco-Prussian war, 216; predictions of her re- lations with England after Na- poleonic wars, 225; probable nature of trade with U. S., after war, 240; question of future labor costs in, 240; commission from, on international trade after war, visits U. S., 240. Franco-Prussian War of 1870, cost of, per day, 9; circumstances of outbreak, 25; economic conse- quences of, to Germany, 195; trade between France and Ger- many, at conclusion of, 214; attitude of Continent toward England in, 232. Germany, her exactions from Bel- gium, 11; money hoarding in, on eve of war, 26; threats of 191 1 against France, 26; war loans of, 56, 58; her method of raising them, 60; her ideas as to financing war, 68; her new taxes, 72; her success in raising war loans, 119; asks her citizens to give up gold, 121; amount collected by her, 121; economic problems of, after the war, 161; depreciation of exchange on, 167, 178; influence of blockade on, 178, 179; effects of currency inflation in, 180; places $25,- 000,000 loan at New York, 182; attitude of New York toward loans of, 182; her government's attitude toward peace, 184; war policies of, as obstacle to peace, 186; her government's attitude toward peace, 189; her rise in economic prestige after Franco-Prussian War, 19s; her allegations as to cause of war in 1914, 202; threats of, after 1871, regarding France, 204; origin of her economic prestige, 206; effects of the war on, 206- 208; her use of foreign capital, 207; condition of her currency, 208; her miUtary preparations in 1913, 208; her past economic history, 209; economic prob- lems of, after the war, 210; pre- dictions in, regarding future of England, 214, 215; economic future of, EngUsh threats re- garding, 215; trade of, with England before the war, 216; with France after Franco- Prussian War, 216; bitterness of feeling against, 217; plans of Allies regarding trade with, after war, 217-224; future of her trade, 223, 224; possible change in national character of, after this war, 226; diplomatic clash with U. S., 229; predic- tions of German authorities re- 250 INDEX garding industrial situation after war, 239; question of labor and wages, 239. Gold, international shipment of, in Napoleonic wars, 13; predic- tions of ig 14 as to international movement of, 18; actual re- sults, 19; $10,000,000 ship- ment of, in week of war out- break, 21; hoarding of, after 191 1, in Continental Europe, 26; hoarding of, at London, in August, 1 9 14, 34, 36; export of, in 1914, by New York, 92, 94; use of, in redeeming New York City's European loan, 100; payment of foreign debts in, during war panic, 100; French and German Governments ask for citizens' holdings of, 119- 122; reasons for premium on, in former wars, 120; reserve of, against England's war ciurrency, 146; usual movement of, in war time, 147; absence of pre- miiun on, in this war, 149; use of, as security for oiur new Federal Reserve notes, 157; enormous imports of in 1915, by U. S., 157; possible re- export of, to Europe after the war, 159, 162; European ac- cumulations of, possible use after war, 161; normal influ- ence of exports of, on exchange rates, 166; large exports of in 191S and 1916, by London to New York, 170; premium on, temporarily bid in Germany, 180, 181; premium on, in 1809 at London, 181. Cold payments, suspension of at New York, in 1861, 5; suspension of in 1870 at Paris, 33; at London in 1797, 33; question of main- tenance in 1914, at New York, 94-97; how maintained, 99- 102; question of their resump- tion, by Europe after war, 161. "Gold pool," for adjusting New York's foreign obligations in October, 1914, 100; nature of its operations, 102. Government bonds, European, rise in price of, before the war, 28. Grain crops of the U. S., enormous yield of, during 1915, 140; all records broken in marketing of, 140. Grey, Sir Edward, British foreign minister, prediction of economic effect of war, 17; declaration in igii to German ambassador, 26. Eelferich, Karl, German finance minister, his disapproval of war taxes, 68; his view of England's war finance, 69; predicts down- fall of British Empire, 214, 215. Holland, war-time flow of gold into, 19. Immigration from Europe to U. S., problems of, after return of peace, 241. Income tax, English, in Napoleonic wars, 6, 9; circmnstances of, in 1914, 10; large increase of 1915 in, 70; raised to 25 per cent or higher, 70, 71. Indemnity, war, Germany's predic- tions regarding, 68. Inflation of paper currency, its occur- rence in previous wars, 144; in the American Civil War, 145 ; in the belligerent states during this war, 145, 146; nature of, 147, 148; causes of, in war time, 147; effect of, on foreign exchange, 149; on prices, 150; question as to existence of, in the U. S., 151-158; effect of, on return of peace, 200, 201. INDEX 251 International finance, status of, in Napoleonic wars, 12, 13, 14; ex- pected results of war on, 16, 17. Iron production, a measure of na- tional prosperity, 137; im- mense expansion of, during 191 5 in the U. S., 138. Japan, economic condition of, dur- ing Manchurian War, 64, 65; American loans of 1904 to, 132; how war with Russia was ter- minated, 190, 191; depression in, after war with Russia, 195. Johnson, Andrew, President U. S., his plan for repudiating war debts, 66. Kronprinzessin Cecilie, tiums back with $10,000,000 gold on board at outbreak of war, 21. Labor, problem of, in Europe after the war, 239, 240; influence on, of future immigration to U. S., 241. Lloyd-George, David, chancellor British exchequer, his predic- tion as to economic aftermath of war, 201. London, hoarding of capital in, on eve of war, 27; beginning of war panic in, 3 1 ; sales of securi- ties to, by continental Europe, 31; stock exchange closes, 32; financial position of, at war's outbreak, 40; its foreign credits, 41; effect of moratorium on, 48; investments by, in new foreign loans, prohibited, 59, 129; predictions of, regarding outcome in America, 97, 129; sends back gold to New York, 124; ceases to act as world's central market, 129; continues to discount for outside world, 130; foreign deposits trans- ferred from, to New York, 131; normal foreign exchange market in, 16s, 166; violent break of New York exchange on, 167, 168; transfer of capital from, to New York, 169; gold ex- ports of 191S and 1916 from, 170; places $500,000,000 Anglo- French loan in U. S., 172; bor- rows $50,000,000 from New York bankers, 174; sales of American securities by, in first two years of war, 175; depre- ciation of exchange on, in Na- poleonic wars, 181; position of, after 1815, 211; question re- garding future position of, as world money centre, 212-214; reasons why position may be retained, 212, 214; basis for economic primacy of, 235. London Times, protest against peace with U. S. in 1814, 225. Madison, James, President U. S., remark on neutrals and beUig- erents, 8. Manchurian War of 1904, cost per day, 9. "Minimum prices," fixed in 1914 by N. Y. Stock Exchange, 112; removal of, 113. Money market, of Europe, in year before war, 27, 28; of U. S., effect of Anglo-French loan on, 173. 174- Moratorium on debts, in Balkans during 191 2, 46; proclaimed in England, 47; terms of, 47; effects of, 48, 49; expiration of, in England, 52; recourse to, by other nations, 52; bad effect of, on N. Y. market, 94; gen- eral abandonment of, in Europe, 118. Morocco incident of 1911, financial effects of, 26. 252 INDEX "Munitions orders" placed by Eu- rope in the U. S., 126; value of, 126; not the main influence of IQ15 on railway traflSc, 130, 140; use of $500,000,000 Anglo- French loan in paying for, 174; shares of manufacturing com- panies in, effect of peace rumors on, 189; effect of, on attitude toward peace, 193. Napoleon, war indemnities levied by, 11; rejection of opponent's peace proposals by, 186; Prus- sian demand for his death after Waterloo, 225. Napoleonic wars, analogies with this war, 5-8; economic conditions during, 11-14; proportion of war costs in, paid by England in taxes, 71; harvest shortage and price of wheat in, 124; ex- port trade of U. S. during, 127; depreciation of exchange on London during, 181; problems of 1813 in, 186; course of prices after ending of, 193, 199; dura- tion of economic depression fol- lowing, 197, 201; character of that depression, 199; economic recovery of France after, 205; condition of France during, 208; England's financial position during, 211; prediction of Anglo-French relations after, 225; disputes of neutrals and belUgerents in, 229; Europe's attitude toward American "trade boom" in, 232; large imports by U. S. from England after, 235, 236; hard times in Europe at end of, 236, 237. New York, closing of stock exchange in, 32, 80, 81, 82; its earlier ideas of "displacing London," 77; experiences of 1 90 1, '7 8; of subsequent years, 79; war panic in, 83, 84; export of gold from, at outbreak of war, 92; violent movement of foreign exchange against, 92; crisis in policy re- garding foreign obligations, 94, 95 ; its chance of displacing London, 97; effect of its main- tenance of pajnments, 98; doubts over Europe's resale of Ameri- can securities, 109; the irreg- ular "street market" in, no; takes over London's fimctions as world money centre, 129; provides capital for foreign markets, 130, 131; foreign de- posits transferred to, from Lon- don, 131; its foreign loans of 1901,132; movement of foreign exchange at, during 1915, 163- 169, 177-180; negotiates $500,- 000,000 Anglo-French loan, 171; lends $50,000,000 to London bankers, 174; lends $100,000,- 000 on collateral security to France, and $250,000,000 to England, 176; takes $25,000,- 000 loan from Germany, 182. New York City loan, placed in Europe before war, 79; difficulties of repayment in 1914, 99; method of redeeming, 99-101. Ocean freight rates during war, rise of, 227. Ocean trade, in Napoleonic wars, 13, 14. "Orders in Council" during Napo- leonic wars, analogy of, with 191S, 7, 8. Panic of July and August, 1914, nature of, 24; at Vienna, 29; at Berlin, 30; at London, 31, 34, 3Si 36; critical nature of, at London, 39-42; expedients to allay, 43-50; at New York, 81- 8s. INDEX 253 Peace, discussion of, in igis, by European governments, 184; Asquith's remark on, 184; Bethmann-HoUweg on, 184, i8g; French Government's views of 19 15 on, 18s; German Opposition party on, 185; "Ford party " as an incident of, 185; world's attitude regard- ing, 186; position of financial markets regarding, 187; ru- mors of, in 1915, 189; effect of rumors on stock market, 189; how brought about in previous wars, 190, 191; conflicting views concerning conditions at return of, 191-194; of Paris, in 1763, 19s; of Westphalia, sequel to, 196; incidents on return of, after Napoleonic wars, 199. Pitt, William, analogy of his subsi- dies with this war, 7; his in- come tax, 10. Poland, Allies pledge future eco- nomic assistance to, 218. Predictions, of economic results, before the war, i, 16, 17, 18; of result of war, 22; of previous economic episodes, 233, 234; of economic sequel to the war, 237-240; of wages in Europe after war, 239, 240; of economic future of U. S., 243. "Preparedness," origin of the Ameri- can movement for, 3, 4; anal- ogies to, in attitude of European AlUes, 222; nature of propa- ganda for, in military field, 230, 231; in economic field, 231. Prices, of commodities, influence of currency inflation on, during our Civil War, 145; course of in Europe, during this war, 150; in the U. S., 193; action of, after Waterloo, 193, 199. Prussia, her situation after War of 1870 with France, 195; de- mand of, for Napoleon's death after Waterloo, 225. Railways of the U. S., sudden in- crease during 1915, in traffic of, 139- Repudiation of Europe's war debts, theories regarding, 66, 67. Richet, Charles, estimate of 1904 on cost of a European war, 9. Roche, Jules, estimate of 1913 on cost of a European war, 9. Rogers, Thorold, opinion on period of reaction after Napoleonic wars, 197. Rothschild, house of, its origin, 11. Runciman, Walter, president British Board of Trade, his prediction of Germany's condition after war, 215. Russia, cost of her war with Japan, 9; depreciation of exchange on, 167. Servia, Allies pledge future economic assistance to, 218. Seven Years' War, economic and political results of, 194, 195. Spain, prosperity of, after war with U. S., 195. Special holidays during London panic, 43. Sterling exchange, see Foreign Ex- change. Stock exchange, at London in Napo- leonic wars, 12; closing of, at Vienna, Brussels, Paris and St. Petersburg, in 1914, 20, 30; at Berlin, restricts trading, 30; at London in 19 14, sales by the Continent on, before the war, 31; loans made to, 31; closing of, 31. Stock exchange at New York, closing of, in 1914, 32, 80; why neces- 254 INDEX sary, 8i; reopening of, 82, 83, 109-112; precautionary mea- sures of, no, 112, 113; advance in prices on, after reopening, 113; prolonged rise of 1915 in, 134; advance in bonds on, 135; rise of "war munitions stocks" on, 19s; unsettled market of 1916 in, 230; character of war- time speculation on, 242. Sweden, war-time flow of gold into, ig. Tariff policy, of England after war, 221; possible substitution of, for free trade, 235; question of use of, by U. S. after war, 235. Taxation, Germany's repudiation of, as war expedient, 67; in Eng- land during 1914, 69; English budgets of 19 1 5 and 1916 for, 70, 71; proportion of Enghsh war expenses in 19 16 provided by, 71; in Napoleonic wars, 71; Germany's plans of igi6 for, 72; poUcy of France and Russia regarding, 72. Thackeray, W. M., on relations of France and England after Napo- leonic wars, 225. Thirty Years' War, political and eco- nomic results of, 196. Transvaal War of 1899, cost per day, 9; effect of, on England's eco- nomic position, 195. United States (see also Civil War), in- fluence of war on, 75; economic relations of, before the war, 76; annual indebtedness of, to Eu- rope, 77; predictions as to effect of war on, 80; gloomy outlook of 1914 in, 88; dechne in export trade of, 89; crisis in cotton section of, 90; shrinkage in home trade of, 91; problem of European indebtedness, 92; its wheat harvest in 1914, 125; enormous exports of grain from, 125; mixnitions orders placed in, by Europe, 126; its exports in Napoleonic wars, 127; in the present war, 128; its loans to foreign markets, 129-132; financial and industrial pros- perity of 1915 in, 132-142; ex- change of bank checks in, dur- ing 1915, 136; increased iron production of, during the war, 137, 138; large railway traflic in, 139; great harvests of 1915 in, 140; basis of its war-time prosperity, 141; its traditional "cycle of prosperity," 142; its economic dependence on Eu- rope before this war, 151, 152; previous sales of securities by, to Europe, 152; repurchase of, in 1914, 152; absence of high money in, during second year of war, 152; conflicting views of war-time prosperity in, 153; proof that paper currency was not inflated in, 155-158; de- crease of paper money circula- tion in, during first two years of war, 155-156; enormous im- ports of gold in 1915, 157; sub- scribes in 1915 to $500,000,000 Anglo-French loan, 172; lends $250,000,000 to England, 176; economic condition of, after Civil War, 196, 197; economic prestige of, after 1898, 203; reasons for and against its re- placing London as the money centre, 213, 214; possible future effect on, of economic war by Allies on Germany, 221, 222, 224; war-time prosperity in, question as to duration of, 227; possible European competition with, on return of peace, 228; INDEX 255 probable attitude of Europe toward, after the war, 232; pre- dicted "economic invasion" of Europe by, in 1897, 234; in- crease in imports of, from Eu- rope after 1815, 23s; predictions as to export trade of, after this war, 239, 240; industrial com- mission sent to, in 1915 by France, 240; problems of future immigration into, from Exirope, 241; attitude of its markets during war, 242; eco- nomic future of, 243. Wages of labor, after the war; in England, 238; in Germany, 239; in France, 240; effect on immigration from Europe to America, 241. War, the European, predictions re- garding, 1, 16, 17, 18; precedent for economic results, 4-8; ex- pected cost of, 9, 10; actual cost, 10; its outbreak, 20-22; financial markets on eve of, 25-32; financing of, S3-6i; world's attitude toward, in early months, 116; events of 1914 in, 117; controversy as to influ- ence of, on American prosperity, 141; not the sole cause of re- viving trade in America, 142; suggestions of 19 15 for termi- nating, 184, 185; influence of, on U. S., 187; conflicting views as to effect of its termination, 188, 191, 192. War of 181 2, demand in London that it continue, 225; large ex- ports to U. S. from England after end of, 236. War loans, in England before 1914, 56; in England during this war, 56; in Germany, 56; in France, 57; by England and France to their allies, 57; outstanding total of, 58; how raised, 58-61; of England, during i8th century, 63; question of future repudia- tion of, 66; interest on, paid by Germany through new loans, 72; Anglo-French borrowing of $500,000,000 in U. S., 170-174; French borrowing of $100,000,- 000 from New York, 176; Eng- land's collateral loan for $250,- 000,000, 176. t^Aea/, American harvest of, in 1914, 89; effect of war on price of, 124; in Napoleonic times, 124; world's harvest of, in first year of war, 125; enormous Ameri- can exports of, 126; influence of blockade of Russia on market for, 195- r--\>.,^^ -->SCc= %^'^ -fi li'iw- '/h. ^%^' A-* 'o. •^oo^ .0 ,0 Cl, ^^. .V "\^^^ '<^A * a K " \\^ ' ^r^^:.^>„''^ '^. s- ^ i^/tTTp^'' ^ '"^ Deacidified using the Bookkeeper process. ^^ ^^^ -- ^j\_ ~ "^ Neutralizing agent: Magriesium Oxide '^\i Treatment Date: MAY O^ s'' '^^ '/^ "^ N Treatment Date: |i/|/^Y 2001 %> \' PreservationTechnologies ^ <^^ A WORLO LEADER IN. PAPER PRESERVATION \ . Ill Thomson Park Drive Cranberry Township, PA 16066 .>■ / .\ .^^ ^cO '?,-^~> ^ <■'> s^ \ 1 « ^ 1^: /'^o •? xO°^. v\^^ .^■^ <> ,^^' '^-A. V ,j^ '^ ■''^^ vi •"^0^ oo. ^o