.P4 Hollinger Corp. pH8.5 Effects of World War on Central and South America BY WALTER SCOTT PENFIELD Address delivered at the International Peace Congress, held at San Francisco October 10-13, 1915 ^^ ^ y^iK Effects of World War on Central and South America It is unfortunate that International Peace Con- gresses do not interest the average business man to any appreciable extent. This is largely because his time is engrossed in commercial pursuits. If ques- tioned, he will admit that war is an abnormal state, causing great injury and entailing enormous economic loss. But, as a general rule, he will think of Peace Congresses as an aggregation of impractical indi- viduals engaged in the agreeable pastime of discussing theoretical problems in an abstract manner, without gaining any concrete result, unless it be in having passed concise resolutions reciting that war is an evil and ought, therefore, to be forever abolished. It is for this reason, as well as because the American business man is today more greatly interested than ever before in the development of trade and in the capturing of markets in the countries to the south of us, that I have selected as my topic "Effects of World War on Central and South America." One who has never studied carefully the commer- cial relations existing between Latin America and some of the present warring nations of Europe, and the economic dependence of the southern continent on Europe, would be likely to conclude that the countries of Latin America are independent economically, thriv- ing by trade among themselves. At least, it would be hard to conceive how these nations, located as they are thousands of miles from the seat of belligerent opera- tions, would be likely to suffer to any perceptible degree. But the statistics show the opposite to be true. The economic and financial depression produced in the civ- 1 ilized world by the gigantic war that at present dis- turbs Europe has made itself felt with especial force in the Iberian Republics. The export and import trade has fallen, and with it the customs revenues, from which Latin America draws almost entirely for the payment of governmental expense. With the diminish- ing of foreign commerce has come hand in hand the slackening of domestic trade. The supply of European made goods has been or is being rapidly exhausted, and those depending on this trade have been made to suffer. Correspondingly the European demand for domestic products has decreased, and those dependent on such sales have been compelled to retrench. As the citizens of a state prosper, so prospers the state, and as they suffer economically, so suffers the state. Thus the treasuries of governments have be- come impoverished, and, in order to replenish them, foreign loans have been resorted to and additional taxes have been levied, all of which add to the weight which the already overburdened business man is compelled to bear. THE A. B. C. REPUBLICS In the short space of time allotted to me, it would be impossible to discuss in detail all the effects of the war on these countries. Witness the decline of the export and import trade in the three countries known diplomatically as the A. B. C. Republics, namely, Ar- gentine, Brazil and Chile. Before proceeding, I should call your attention to the fact that the statistics for this year are not yet available and that my comparison will be made between the years 1913 and 1914. Also, it should be borne in mind that the war began in August, 1914, and that the figures which I give would tell a still different story if it had started in January of that year. A The Argentine gold peso is worth 97 cents in United States money. In 1913, the Argentine Republic im- ported goods of the value of 421,000,000 pesos In 1914, these figures fell to 271,000,000 pesos, or a total loss of approximately 35 per cent. In 1913, her exports amounted to 483,000,000 pesos, which were lowered in 1914 to 349,000,000 pesos, or a total loss of about 28 per cent. As the milreis paper currency of Brazil has a vary- mg rate, it would perhaps be better to quote her trade in pounds sterling. While in 1913 Brazil imported goods worth £67,000,000, in 1914 this amount was low- ered to £35,000,000, or a total loss of about 48 per cent. On the other hand, her exports fell from £64,000 000 m 1913 to £46,000,000 in 1914, or a total loss of ap- proximately 28 per cent. The Chilean gold peso is worth 35i/o cents in United States money. In 1913 the import trade of Chile amounted to 329,000,000 pesos; in 1914 it fell to 269,- 000,000 pesos, or a distinct loss of about 30 per cent. In 1913, her exports amounted to 391,000,000 pesos- m 1914 they fell to the sum of 294,000,000 pesos, or a loss of about 25 per cent. These figures show clearly the great trade loss which these countries have suffered by reason of the Euro- pean war. They do not, however, show the resultant evils which have followed, namely, industrial depres- sion, reduction of private incomes, diminution of pub- lic revenue, and placing of governmental loans and taxes. But these have come, and all as the result of the war. The sufferers have been innocent neutrals having nothing to do directly or indirectly with the instigation, beginning, or continuation of the war, but, nevertheless, made to bear the burden of many of its consequent evils. THE ''BUG'' COUNTRIES Since the joint conferences held recently concerning Mexico between the Secretary of State and the Diplo- matic Representatives of the A. B. C. Powers, Bolivia, Uruguay, and Guatemala, the last three named coun- tries have become popularly known as the ''Bug" countries, the name being formed by placing together the initial letters of the three words. These three nations have been affected by the war. Like most Latin-American countries, Bolivia ob- tains her public revenues from export and import duties. As tin and rubber are the principal articles of export, and as the exportation of each has almost ceased since the war began, the Government has found it necessary to retrench in every possible way. This has been accomplished by stopping public utilities work, by reducing the salaries of all government offi- cials 30 per cent, and by suspending all legations ex- cept those in the United States and South America. It supplemented its revenues by adopting a stamp tax, decreed moratoria, and, as the price of foodstuffs began to ascend, imported large quantities of flour. Shortly after the war began, Uruguay enacted a law providing temporary banking regulations in order to prevent the withdrawal of deposits from private banks and the conversion of bills at the Bank of the Republic. Among other things, this law provided that the Bank of the Republic was authorized to abstain from con- verting its bills for a period of six months, which was later extended to a period of three months after the termination of the European war; that private banks could make use of their gold reserves by depositing the same in the Bank of the Republic up to $4,000,000 and receiving its bills in exchange; that there would be a postponement for a period of two months for the fulfillment of judgments for public sales in all pro- ceedings, and of one month for the dispossession of those who delayed payments ; and that the exportation of gold was prohibited. In 1913, the total trade of Uruguay amounted to $100,000,000; in 1914 it fell to $89,000,000, or a loss of about 11 per cent. It purchased less iron and lumber because the erection of buildings decreased in impor- tance, and less machinery and steel because its indus- tries did not increase their volume of production. In 1914 it bought goods from the United States of the value of $5,000,000, or almost $2,000,000 less than in 1913. For example, the purchase of iron and steel, ma- chinery and implements decreased from $1,500,000 in 1913 to less than $1,000,000 in 1914; unfinished and fin- ished lumber from $1,000,000 to $850,000 ; vehicles and their parts from $551,000 to $423,000 ; implements and agricultural machinery from $491,000 to $278,000 ; sisal grass and twine from $213,000 to $105,000; rosin and turpentine from $260,000 to $130,000; iron and steel wire from $88,000 to $55,000, and manufactured cotton from $146,000 to $102,000. As soon as war was declared, the custom house re- ceipts began to fall. From July, 1913, to March, 1914, the total receipts amounted to $20,000,000. During the corresponding period of the following year they amounted to $16,000,000, or a loss of about 20 per cent. In September, 1914, a law was passed authorizing the floating of an internal loan of $4,000,000, part of which was intended to meet the decrease in the current expenses of the budget. To take care of the interest on this loan, taxes were imposed on the export of live stock and there was an increase in the inheritance tax and in that on wine. In order to provide for new general revenues, new taxes were levied on spirits, cigars, cigarettes and to- bacco. To meet pressing budget requirements, an additional internal loan of $6,000,000 was sanctioned. Interest on this loan is met by means of a 5 per cent duty on general imports, including foodstuffs, articles imported free of duty, and those which are not taxed higher than 8 per cent. The public revenues of Guatemala, which consist largely of duties on imports and an export duty on coffee, were affected by reason of the reduction in the foreign trade. The import duty on many necessities was reduced and that on flour was abolished. Steps were taken to keep down the ordinary expenditures of the Government by means of economy in adminis- tration and by limiting the expenditures for public buildings and public works. At the same time the Government increased its expenditures by purchasing flour to be supplied to the poorer classes below cost. Coffee is one of the principal products of Guatemala, the prosperity of the country being largely dependent on it. The principal market has been in Germany. The outbreak of the European war caused a reduction in the demand for this article and a consequent fall in price. While the external transactions of Guatemala are carried on in gold and the duties in part are imposed on a gold basis, yet the actual currency of the country is paper, consisting of notes of six banks of issue, the value of which has varied from about 50 per cent ten years ago to about 5 per cent today of its face value in gold. Needless to say, when war was declared, ex- change increased and the rate fluctuated, causing thereby additional financial losses. THE THREE C.'S OF THE CARIBBEAN The war has also affected the three C. 's of the Car- ibbean, namely, Colombia, Costa Rica and Cuba. In the past the Republic of Colombia has depended principally upon European credit for financing her foreign trade. Therefore, when the declaration of war in Europe was followed by the temporary interrup- tion of these credit facilities, by the demands for the repayment of loans, and by the declaration of mora- toria in Europe and in some of the countries of South America, there was considerable dislocation of the course of trade. The largest resources of the Government come from the custom houses, which yield about 75 per cent of the total yearly revenues. Customs duties are only charged on foreign merchandise, since the export tax is so small on the two or three Colombian products liable to duty that it cannot be taken into account. When the European war broke out, trade with Ger- many practically came to an end, and commerce with England and France was greatly limited ; consequently the national revenues decreased and have continued to ( do so, to the point that the Government felt com- pelled to pass two decrees in order to reduce expenses, one being issued October 20, 1914, for $2,257,000, and the other February 6, 1915, for $3,575,000. A banking house of Europe had submitted to Co- lombia two plans, one to establish a central bank for deposits and discounts, with the right of issuing bank notes and with a capital of $5,000,000, and the other to create a mortgage bank with a capital of a like amount. The terms under which these two banks were to start business were widely discussed, and the bank- ers, after considering the principal objections made to the original proposal, changed these terms for others more favorable to the Government. The pro- jects so modified formed the bases for the bills that were to be submitted to the July session of Congress 8 in 1914. But the European war put a stop to both projects. The Government had entered into contracts with English corporations for the survey of the principal ports on the Pacific as well as on the Atlantic Ocean in order to enlarge and equip them. Surveys were made for public works to cost several million pounds, and even a contract was signed for works to cost £3,000,000 in one of the ports. But the European war left these contracts in abeyance. Some time in 1913, several European Construction Companies, backed up by French, English, and Ger- man banks, planned to submit to the Government a project for the construction of all the railway lines in prospect, furnishing the necessary capital, as well as European engineers and the equipment required, in order to work and manage the lines until the time when the Government should decide to buy them. The Bal- kan war prevented the syndicate from going ahead with the plan; then the European war broke out, and it was found impossible to renew it. It is thus seen that foreign capital was ready to enter Colombia, and that had it not been for the Euro- pean war, strong national and foreign banking insti- tutions would have been established and the country would at present be making rapid financial and eco- nomic progress. In Costa Eica there was a reduction of 60 per cent in the customs revenues on imports during the first three months of this year. During the same period, the income from all sources amounted to 1,500,000 colones, as compared with 2,400,000 colones for the corre- sponding period of 1914. While the normal rate of exchange on New York is 115 per cent, the war caused it to go as high as 185 per cent ; that is to say, while in normal times it takes 2.15 colones to buy a dollar, the high rate caused by the war requires 2.85 colones. The situation thus created caused a lack of exchange on the United States, thereby bringing about a paralysis in the transactions in the markets of the country, and tending further to reduce governmental revenues. Although Costa Rica is on a gold standard, the Gov- ernment was forced to suspend the law of paper con- version, which provided that the bank-note issues of the country must be redeemed in gold. It was imprac- ticable to maintain the operation of the law for the reason that the country would have been depleted of gold if the law had not been suspended, and the banks would have been jeopardized. The breaking out of the war would have had a disastrous effect on the trade of Cuba with foreign countries, if it had not been that the absence of the competitive sugars of European countries in the world's market advanced the prices of Cuban sugars to a considerable degree in comparison with those of the two previous years ; and this has in some measure made up for losses in other branches of trade which have been brought about by the European conflict. As the Pearl of the Antilles depends for the largest portion of her expenditures on the receipts obtained through the customs, and as the latter have been affected by the war, the Government, by introducing economies in administration, has curtailed the expendi- tures wherever it has been possible to do so. EFFECTS IN SOME OTHER REPUBLICS Republics other than the ^'A. B. C." the ''Bug" and the ''three C.*s" have suffered. The revenues of the Dominican Republic, for exam- ple, have been greatly lowered by the war. This is largely due to the fact that the only market for tobacco, 10 its principal product, has been in Germany. Therefore, since the beginning of the war, the merchants of that country have kept their crop in storage, and have thus been deprived of the means of buying what they for- merly secured with their tobacco. This has resulted in depriving the Government of the import duties on goods so bought. Although the war reduced the revenues of the coun- try, no new methods of increasing them were adopted. The Government contented itself with reducing ex- penditures and with doing away with such outlays as were not absolutely necessary. Prior to the outbreak of the war, German vessels constituted 30 per cent of all the tonnage that arrived at Dominican ports. On account of the scarcity of ships of other nationalities, there has been a lack of means for ocean transportation. In this connection, it may be stated that the requisi- tioning of merchant ships by belligerent governments and the general effect of the war have reduced the amount of available shipping in South America and caused an increase in ocean-carrying rates. But the same is not true in regard to the countries of Central America, whose trade is well taken care of by United Fruit Company ships, which are adequate in number, efficient in service, and whose rates of transportation are the same at the present time as before the out- break of the war. Before the war began, the fiscal revenues of Ecuador amounted to about $10,000,000, American gold, made up partly of internal revenue, but chiefly of customs duties. The decrease in the importations on account of the war lowered the revenues about $2,000,000, so that it is estimated that the total income will aggregate about $8,000,000, or an annual loss of about 20 per cent. The only measures adopted to meet the conditions 11 caused by the war were the borrowing of money by the Government from one of the local banks and the tem- porary suspension of gold exports and of the conver- sion of notes. The monetary system of Nicaragua is based on a gold standard. The monetary unit, the "cordoba," is worth a dollar. To maintain the cordoba at par with the American dollar, there is a ''conversion fund" in the United States and Europe against which drafts are drawn. When the war broke out, a panic ensued, and the selling of drafts was suspended in order to prevent the exhaustion of the fund. Then exchange went up, the rate reaching the maximum of 25 per cent premium, that is to say, it took 125 Nicaraguan cordo- bas to buy $100 American gold. Foreign credit was stopped, and to prevent the failure of the principal firms, the Government was forced by public demand to declare a moratorium. The revenue of Nicaragua is small. It decreased notably when the war broke out. With so small an income, the Government could not continue to pay its current expenses. This circumstance resulted in Con- gress enacting a proprietary tax to be in force for only two years. But this was not enough to meet the entire situation, and it was, therefore, found necessary to reduce the national budget to half its former amount. In order to carry on the public administra- tion with so decreased a revenue, the Government entered into contracts with its foreign creditors, sus- pending the payment of the principal and interest of its foreign normal debts. While the revenues of the Republic of Panama have decreased 30 per cent since July, 1914, it is only fair to say that, although the decline is largely due to the Europeon war, it is also partly caused by the establish- ment of commissaries by the Government of the United 12 States in the Canal Zone. Meantime, the expenses of the Government have increased above the normal amount, due to the extraordinary expense in connec- tion with the building of a railroad and the establish- ment of an Exposition to commemorate the opening of the Canal and the discovery of the Pacific by Balboa. To meet the situation thus created, the expenses of governmental administration have been greatly re- duced under the direction of its able President. CONCLUSION Thus we have seen some of the effects of the war on the countries of Central and South America. I have not pretended to enumerate all the effects in the countries mentioned, because all of the statistics for last year and this year are not yet available. Nor have I spoken of the effects in Haiti, Honduras, Mexico, Paraguay, Peru, Salvador, and Venezuela, for the reason that all of these countries have in different degrees been similarly affected. The statistics which I have given do not show by any means all the injuries. The mind of the economist can easily analyze and the brain of the business man can readily grasp the commercial effects of this war on Latin America. Panics have ensued, industrial depressions have followed, commercial failures have resulted, and all as the result of a far-distant war to which the sufferers are not parties. Those of you who are engaged in business and inter- ested in commercial gain can readily understand the injurious economic effects I have described. All of you appreciate the horror of war, the suffering in battle, and the loss of life that goes with it. Although you are interested in the termination of such strife, I am confident that when the unholiness of war is 13 brought closer to your doors in the shape of reduction of demand for your products, lowering of prices on your goods, and the consequent reduction of revenues and that when you are forced to pay increased taxes to provide funds for a treasury depleted by reason of war, then, and then only, can you behold fully its evils. If two men are found fighting in the street, society demands that they immediately cease and the state, acting through the strong arm of the law, seizes them, conveys them to prison, if need be, to prevent their continuing to injure each other, and administers such punishment as will create an example to others who are about to enter into combat. It may be that in the course of the fight an innocent by-stander is injured or the property of a nearby owner is destroyed. If so, then society gives them the right to sue for damages suffered and to enjoin, if need be, their further com- mitment. The civilized world is a society. If several of its members become embroiled in a dispute, they have no inherent right to cause suffering and injury to innocent neutrals. Such international conduct is neither ethical nor lawful. Why should not neutrals be able to say : ' * You have fought long enough. You have no right to continue injuring us. It is true we can sue you for certain injuries you are committing against us — the unlawful seizure and illegal condemnation of non-con- traband goods, the prohibition to export and import from certain neutral countries, the wanton destruction of life by submarines — for all these injuries we may ultimately secure pecuniary awards, but you can never compensate us for the untold distress, undisclosed miseries, and innumerable sufferings you have caused." When this most lamentable war has closed and the day of the opening of the next International Peace 14 Congress has arrived, let us hope that some plan may be proposed, to which all civilized nations will adhere, whereby in case of the prospect of war or of an actual war between two countries, the other members of the world society may take such corresponding steps to control or restrain the belligerents from further un- friendly action as the members of a state take in con- trolling or restraining two belligerent individuals from further combat. Thus only will innocent neutral states be assured that in the future they will not be made to suffer the ill effects of a war to which they are not a. party and for the existence of which they are not responsible. NATIONAL CAPITAL PRESS, WASHINGTON, O. C .:ivv,!'k*vi-^',>'^.-/v.;.'' LIBRARY OF CONGRESS i^l 021 394 584 1 435- .P4 LIBRARY OF CONGRESS ^ 021 394 584 1