Is it not more than probable that there is an immense section of moderate though patriotic opinion in the great German people which at heart deprecates the extreme doctrines of conquest and world supremacy in pursuit of which the great, the wonderful achievements of the German race in science, in industry, in the extension of commerce, are being rashly risked?
CHANNING OF WELLINGBOROUGH.
40 Eaton Place, London S.W., Oct. 29, 1914.
TO A COUSIN GERMAN.
By Adeline Adams.
My Hans, you say, with self-applausive jest, "When Albert gave his Belgians Caesar's name-- 'Bravest of all the Gauls'--surely 'twere shame The King, unthorough man, forgot the rest:
"'Bravest because most far from all the best Provincial culture.'"[2] Friend, if now your aim Be that fine thoroughness your people claim, Read on: "Such culture's wares, it stands confest,
"Oft weaken minds." And Caesar's word was just.
If men, bedeviled under culture's star, Have left Louvain a void where flames still hiss, Speared babes, and stamped the world's own Rose to dust, God grant that Belgium's soul may dwell afar Forever, from a culture such as this!
[Footnote 2: "Propterea quod a cultu atque humanitute provinciae longissime absunt."]
What the Economic Effects May Be
By Irving Fisher.
Professor of Political Economy at Yale University; member of many scientific societies.
When the future historian chronicles the facts of the present great world struggle and attempts to analyze its causes and effects the economic losses, gains, shiftings, and dislocations will form an important part of the story. It is, of course, quite impossible at this time to know, in any detail, what all the economic results will be. Much will depend on how long the war lasts, how many people and how much property are destroyed, what financial devices are resorted to in order to finance it, and which side is finally victorious.
The most palpable and the most fundamental effects will be a partial stoppage of earnings in the nations directly concerned, i.e., a reduction in the "real income," which consists of enjoyable goods. All the other important results follow from this.
The cost, however reckoned, is sure to be stupendous. Prof. Richet is quoted as reckoning it at $50,000,000 a day. This is probably more than half the total income of all the inhabitants of the warring countries.
The highest estimates of the total income of the United Kingdom, France, and Germany, estimates of Bowley, Laverge, and Buchel, respectively, total up less than $70,000,000 a day. Russia and Austria are poor countries per capita, and would scarcely bring the grand total to $100,000,000 a day. Moreover, the loss of real income to Europe is, I imagine, in reality much greater than Richet's estimate, chiefly because he takes little account of the indirect costs, which may well be the greatest of all. The cost to the fiscal departments of Government is probably only a small part of the total cost which the people will have to bear. The killing and disabling of the men engaged will cut off the financial support of European families to the tune of hundreds of millions of dollars per year. The physical destruction of capital through the devastation of crops, the burning and demolishing of merchant ships and buildings, the crippling of industry through the sudden withdrawal of labor and raw materials, the introduction of new trade risks, and the cutting off of transportation, both internal and foreign, make up a sum of items which cannot be measured, but which may exceed those which can. Last, but not least, is the impairment of that subtle but vital basis of business, commercial credit.
In short, the central effect is a vast impairment of Europe's current income and of the capital from which her future income will flow. It means a veritable impoverishment of vast populations. The great burden will bear heaviest, of course, on the poor. It will impinge very unequally and will cause a great redistribution of wealth. As always happens, some people, mostly lucky speculators, will come out of the melee wealthier than before. This fact will not serve to lessen the discontent of the masses, which their impoverishment is sure to create.
Food prices will be high, the earnings of labor will be low, and after the war unemployment will be great, due to the impossibility of quick absorption into the industrial system of returned soldiers, as well as other maladjustments which the war is sure to bring.
The victor may secure indemnity for part of the loss, but not for all; he will, in spite of himself, be a net loser. Taxes will be a crushing burden, merely to secure funds with which to pay high interest on vast new war debts, to say nothing of funds with which to purchase new armaments--if again the nations are forced, by lack of international control, to resume the stupendous folly of racing each other in military equipments.
Bankruptcy and Revolution.
It may well be that among the economic consequences of the war there will be some national bankruptcies, and that among the political consequences will be revolutions. High prices, high taxes, low wages, and unemployment make an ominous combination. We may be sure that discontent will be profound and widespread. This discontent is pretty sure to lead, especially in the defeated nations where there is no compensating "glory," to strong revolutionary movements just as was the case in Russia after her defeat by Japan. Whether or to what extent these movements, in which "Socialism" in the various meanings of that word is sure to play a part, will succeed, depends on the relative strength of opposing tendencies which cannot yet be measured. One possible if not probable result may be, as I suggested in THE TIMES two weeks ago, some international device to secure disarmament and to safeguard peace.
Though part of the losses to Europe will be permanent, her chief loss will be coterminous with the war. She will, therefore, seek ways and means to fill in this immediate hole in her income in order to "get by."
To do this she must borrow; that is, she must secure her present bread and butter from us and other nations and arrange to repay later out of the fruits of peace. She can stint herself, but not enough to meet the situation. She must borrow. And in one way and another she will satisfy this necessity by borrowing in the United States.
Most of the strange and unprecedented phenomena which we have witnessed in the last month, in rapid succession, are due to this pressing necessity of the belligerent peoples to cash in now and trust to good fortune to pay later. As soon as the war became even probable Europe tried to cash in on our securities. The pressure for our gold pushed it toward Europe faster than it could move. Exchange jumped to the gold-shipping point of $4.89 per pound sterling, and did not stop. In some cases it reached $7. This was partly due to the desire to get our gold and bolster up a credit structure, tottering before the deadly blow of war; but it was also partly due to the need of ready money for supplies of all kinds. This need applies not only to the Governments, but to the individual people. To obtain this ready money they threw back on us the securities they had purchased of us in former years. They wanted us to take back these titles to future income and give them instead titles to present income. Had they secured our gold their next step would have been to spend part of it for supplies, and this would have caused any foreign dealers to whom they applied to place orders with us. The gold then might have turned the exchanges and have been brought back to us in return for our wheat and other products.
This double transaction is in essence one--a barter of present income in the form of our wheat to Europe for future income in the form of investment securities. It was interfered with by the refusal of the insurance companies to insure the gold and by the closing of Stock Exchanges against the inundating flood of securities. The first difficulty, as to transporting gold, has been largely removed by arranging for drafts against stocks of it kept on both sides of the Atlantic. This will save the need of sending it on risky voyages back and forth, and any final net balances can be liquidated after the war.
The second obstacle, the closure of the Stock Exchanges, is more formidable, but cannot completely or permanently prevent the transactions which so many people on both sides are anxious to consummate. Curb markets and limited cash sales on the Exchanges themselves are doing some of this business, and, sooner or later, much more will be done, whether the Exchanges are open or not. Europe needs our wheat and cannot pay for it except with securities, partly because her own industry is paralyzed, partly because ocean transportation is difficult.
What Dumping Securities Means.
Few people seem to realize that the dumping of securities on our shores and the efforts of foreign Governments, such as France and Switzerland, to borrow money in our markets are at the bottom very much the same thing. They are simply two forms of securing present supplies from America in return for future supplies, the dividends and interest on securities from Europe.
It does not much matter whether we buy Government bonds or other securities. If we buy of French capitalists their holdings in American railway securities we simply provide them with the wherewithal to take the French Government loans themselves. They virtually become, without our knowledge, the go-between through which we lend, as it were, to the French Government, in spite of ourselves. It is doubtless well, as a matter of policy, to refuse to loan directly to France, but we must not for a moment conclude that France or any other nation will have to finance the war without our aid. We shall not be consciously helping any particular nation, but we shall be actually helping any nation which can trade with us. Evidently England will get more of our help than any other nation because her shores are more accessible. Germany is more isolated. Unless she possesses a larger food stock than commercial statistics indicate she will be pressing for our food supplies, which may reach her indirectly, we selling to Holland and Holland to Germany; also reversely, via Holland or via Austria and Italy, Germany may sell a stream of securities the other end of which we receive. Whether directly or by devious routes there will inevitably be, so far as I can see, a vast exchange of commodities passing to Europe for securities coming from Europe. In this interchange will be found the dominant economic effect of the war on the United States.
Foreign nations will get their much-needed loans on better terms, even if less promptly, by the circuitous process mentioned than if they could borrow directly in our markets; for their own citizens will pay higher prices than we would, even if, to get the money, they have to sell their other investment securities to us at a considerable sacrifice. England has sold Treasury bills for seventy-five millions of dollars on as low a "basis" as 3-3/4 per cent.
In this virtual trade of this year's crops for titles to future years'
crops we shall get a high price for the former and pay a low price (in present valuation) for the latter. Investment securities are, and will be, a drug on the market. In other words, the rate of return to the investor will be high; the rate of interest on long-time loans will be high and stay high, that on short-time loans may fluctuate greatly. The rise in the rate of interest on long-time investments is one of the most vital and far-reaching effects of the war. At bottom, interest always arises from the exchange of present and future goods. The rate of interest, as I have tried to show in my book of that title, is simply the crystallization, in a market rate, of the impatience of the human race for its bread and butter. War has now produced such impatience in populations of hundreds of millions. It is this impatience which dumps the securities upon us, sends down their price, and sends up the rate of interest. As Byron W. Holt has said, there is no moratorium for hunger.
The fall of securities in Europe produces the like fall in this and other countries.
One of the consequences to America of being forced to play the role of money lender and one of the consequences of the rise in the rate of interest here, or what amounts to the same thing, the fall in the prices of bonds, will be an increased difficulty of financing our own enterprises. Only the most promising enterprises will be able to sell their securities. This means that we shall be neglecting, to some extent, our own enterprises, to finance the European war instead.
This general depreciation of investment securities will doubtless lead to many bankruptcies, if not to a genuine crisis. It will also give tempting opportunities to investors. The likelihood of a genuine panic is lessened by the fact that every one recognizes the real cause of the disturbance and that insolvency is not suspected. According to the best commercial observers, the previous liquidation had been fairly well completed. Unless they are mistaken, disaster will not be likely to follow.
We repeat that since the necessities of Europe have forced her to buy our food in return for her investments, it is evident that during the war food prices will be high and security prices, especially bonds, will be low. These are the two facts of greatest economic significance to us.
To the country as a whole they defer some of our pleasures till after the war. Uncle Sam will cut down for the present on his eating and drinking, his clothes, shelter, and amusements in order to share his rations with Europe. Instead of the pleasures foregone he will invest--not in new enterprises at home, but in old ones--American and possibly European also--purchased of Europe. We can never have our cake and eat it too. In this case we shall let Europe eat some of it on condition that she in turn shares hers with us after the war. Moreover, we shall trade off a relatively small piece of our present cake for a relatively large piece of Europe's future cake. In other words, Europe will fill up the great breach in her income now impending by inducing us to make a small breach in ours. The result will be that the course of our real income, that is, economic satisfaction or enjoyable consumption, will imitate in some degree that of Europe. This is, reduced to its lowest terms, the chief economic result of the war.
But to many the question is, do we gain or lose, as compared with what might have been the case if there had been no war? I do not think any one can answer that question with certainty. Europe is willing to mortgage its future to us on terms very advantageous to us; but when the future comes, the purchasing power of money will probably be so much lessened as to have absorbed all our advantage. Probably we shall lose slightly on the whole. But it is not economically impossible that there will be a net gain. In either case the net effect will, I believe, be small.
Of more importance will be the various effects on various classes.
Certain people will be greatly benefited by the rise in food prices and the fall in security prices. The farming classes will profit by the former; the investing classes by the latter. Those who have the good fortune to belong to both classes will grow rich. The farmer who is in a position to save money will both make more money to save and be able to invest it more advantageously after he has saved it. If he lends to his neighbors he will find the market rate of interest high. Even if he buys more land the purchase price will be restrained from the great rise we might expect from the prosperity of farming by the fact that the "number of years purchase," as the phrase is in England, will be small, or, in other words, that the interest basis, which enters into every land price, will be high.
Labor Will Not Suffer Much.
On the other hand the general consumer of farm products will suffer from another advance in that part of his cost of living, while the debtor classes will suffer from the fall in bonds or rise in interest. Many speculators on the Stock Exchange, those who have speculated for a rise, are in effect undoubtedly ruined already, and many borrowers at banks on collateral security will feel the pinch from the depreciation of their property and the hard terms of renewing their loans.
And the laboring man, who forms the majority, what of him? It seems improbable that he will be greatly affected, that is, on the average. He will have to pay more for his food, and food constitutes more than a third of his budget. But some articles he buys will probably fall and he may secure higher wages because of the withdrawal of competing laborers.
Some labor may rise, especially in the industries benefited by the war, such as, for instance, farming and other food industries, canning, flour mills, sugar, &c., the automobile industry and perhaps ammunition and steel. In other industries thrown out of gear for lack of foreign markets or for lack of foreign raw material, the wage earner may lose in wages and employment. In other words, labor will be dislocated in spots, like the other parts of our industrial machinery.
Important dislocations will be felt in the fields of shipping and banking. One consequence is that American enterprise has now the golden opportunity to capture a good share of each. The outbreak of the war and the simultaneous opening of the Panama Canal will tend to divert the course of trade from Europe to South America. Probably our merchant marine can be developed more successfully for this South American trade than it could for the European trade. New York can largely take the place of London as the world's exchange centre for Pan-American trade.
This opportunity is increased by the possibilities in the new Banking act for the establishment of branch banks abroad.
With these opportunities and the rise of interest in Europe, the United States will change to a great degree from a debtor to a creditor nation.
One of the dislocations of the war in the United States will be the cutting off of imports of a large part of our dutiable commodities, and therefore the loss of national revenue. There is an urgent need to compensate for this loss by some other form of tax.
But it is well not to lose perspective, to remember that dislocations are not necessarily losses, that, however loudly they are proclaimed in news columns, they are small in extent, when considered in relation to our whole trade, that this country of ours is a vast one, and that the rank and file of Americans will be but slightly affected by the war--especially by contrast with our friends, now fighting each other, across the sea.