We are too nearly self-supporting to be prostrated. Our foreign trade is and always has been a trifling matter compared with our internal commerce. The internal commerce paid for by money and checks annually in the United States amounts to nearly five hundred billions of dollars, which is more than a hundred times as much as our combined exports and imports.
Almost all of what has been said so far had grown out of the prospect that the prices of foods and other materials needed in Europe will be high, while the prices of securities which Europe does not need and cannot afford will be low. Other prices will rise or fall according to special circumstances. Like a bomb-shell, the effect of the war will be to disperse or scatter prices at all angles of rises and falls. The prices of luxuries will be lowered. The prices of chemicals will be raised. The same article will fall in price in one country and rise in another if the transportation from the former to the latter is interfered with. This is true today of cotton.
There has already been a speculative movement to anticipate these changes and arbitrarily to mark some prices up and some prices down. But as this is guesswork, and will be subject to frequent revision, one of the striking phenomena will doubtless be an increase in the variability of prices. The general level of prices will tend to rise. The rise will probably be greatest in little countries like Belgium, which are in the war zone and largely dependent on foreign trade. The rise will be less in England and in the United States than on the Continent. In fact, it is conceivable that in England the hoarding of money and the shock to credit, which is as predominant there as it is here, may actually lower the general level of prices during the war, especially if we could include in the index number the prices of securities, luxuries, and articles of English internal trade. If any nation tries the old experiment of paying its bills in irredeemable paper money, that desperate expedient will have the same result that it did with us during the civil war. Inflation of the currency will expel gold from that country and raise its price level higher than elsewhere.
After the war is over prices will probably not retreat, but will move upward even faster than before. There may then come the familiar "boom"
period, which may culminate in a commercial crisis in a few years after the close of the war, as was true after the Crimean war, the American civil war, and the Franco-Prussian war. The rebound will probably be fastest in England. Statistical price curves of many nations usually show an upward turn when war begins and another when it ends. The war will thus aggravate a rise of prices already in prospect.
It would take considerable space to give, completely, the reasons for these prognostications, but I have tried to justify them in a brief addendum to a book to be issued this week on "Why Is the Dollar Shrinking?"
The sudden lightning bolt of war produced as one of its first economic effects a general dislocation of credit machinery in Europe and to some extent in this country. We heard at once that letters of credit of travelers in Europe were uncashable. Gold was hoarded everywhere. It is estimated that about $30,000,000 in gold was hoarded in New York in the first week in August. Runs on banks were frequent. Bank reserves were depleted.
The moratorium was resorted to to avoid a general cataclysm of bankruptcies which might have occurred--not from actual insolvency but from mere insufficiency of cash.
To me one of the most striking phenomena was the promptness and effectiveness of the co-operative actions by which, so far, any business cataclysm has been avoided. The closure of Stock Exchanges perhaps saved us from general financial panic. Most striking of all is the manner in which the Governments of the world have come to the rescue of business.
Those of us who were brought up in the old laissez-faire school have to rub our eyes. Had the world been guided by laissez-faire ideas, in this emergency we should in all probability have witnessed by this time the greatest collapse of credit the world has ever seen. Almost all the large and effective measures to meet the many emergencies arising were taken by Governments. The moratorium must be counted among the Governmental acts which, so far at least, have saved the day for business credits. In England the Government permitted suspension of the Bank act, (not of the Bank, as many Americans seem to imagine.)
Improvised Accounting Methods.
The Bank of England has been enabled to rediscount a great mass of acceptances by the guarantee of the British Government against loss in so doing. These in the end will amount to several hundred millions of dollars. Emergency notes were issued by Governmental authority on both sides of the Atlantic, and in the arrangements made for special gold funds in Canada and in France the Governments of England and France played the important parts. Thus have been improvised methods of international accounting by which the transportation of gold balances may be deferred and largely dispensed with. Our own Government has co-operated in the currency exchange and credit situation in many ways.
It made provision for sending gold to Europe for our stranded countrymen. It promptly revised the banking and shipping laws.
Whether further instability will be found to need such bolstering we cannot be sure. The present outlook is that business conditions are fairly sound and stable. In which direction across the Atlantic the title to gold will tend to change cannot as yet be foreseen. It will depend largely on how much Europe wants our products and how large a sacrifice she is willing to make in selling us her securities. It will also depend on possible issues of paper money. Fortunately, we are the happy possessors of over $1,500,000,000 in gold, and it is inconceivable that any large part of this should flow out--unless we should be so insensate as to inflate the currency.
If we keep our heads, we shall at the end of the war be in the proud position of being the only great nation whose economic resources have not even been strained.
Effects of War on America
By Roland G. Usher.
Head of Department of History at Washington University; author of "Pan-Germanism," "The Rise of the American People," &c.
_From The Boston Transcript, Sept. 2, 1914._
The events of the last few days of July, 1914, showed the Americans the far-reaching effects of a state of war. There are now few who would say, as used to be so common, that a European war would make no difference to us. The closing of the New York Stock Exchange, the great shipments of gold and its consequent scarcity in the United States, the closing of the New England cotton mills, the cessation of export to Europe and of transatlantic communication with the Continent were instantaneous effects of a war 3,000 miles away obvious even to the apathetic and the heedless. With these we have not here to do; such are already past history. There is, however, a legitimate field for speculation as to the probable effects on the United States of the continuation of the state of war in Europe for months or years. The permanent results of a war naturally cannot be predicted in advance, but in the light of the history of the past, certain changes and developments in the United States appear so probable if the war continues as to reach almost the realm of certainty.
Needless to say, the European war will not involve the United States in actual hostilities. It is highly improbable that either our army or our navy will see service. We are too distant from the seat of war; too entirely devoid of interests the combatants might seriously injure which a resort to war could remedy; too completely incapable of aiding or abetting one or the other in arms to cause them to assail us. Even were we not as a nation of a peaceable disposition, even had we not a President blessed with a singularly clear head and able to keep his temper, we should still stand little chance of going to war. One eventuality alone might affect us--Japan might attempt some measures of aggression in the Far East which would interest us as possessors of the Philippines, but that is practically foreclosed by her official announcement that she will side with England. The effects of the war upon the United States will be indirect effects; they will be economic in character, though far-reaching and significant for every man, woman, and child in the country.
The economic structure of the United States rests today upon the assumption of the interdependence of international trade, upon an international division of labor, where England makes some things, Germany others, and we still more, all of which are exchanged. In a sense each country manufactures and produces for the whole world, and in turn expects the rest of the world to buy its products and to manufacture and produce things for its consumption. While something of this sort has always been true in international trade, the process reached during the nineteenth century an unprecedented development which actually made countries interdependent, or, if you will, actually dependent for the necessities of life upon each other's prosperity and continued activity. Hand in hand went the expansion of the international credit structure, based upon public confidence in the mutual honesty of merchants, until finally personal checks have begun to be exchanged (between the United States and England at least) at par and without investigation or previous indorsement by the banks on which they were drawn.
With the outbreak of war a striking and artificial change, a totally uneconomic and unnatural factor, came to transform the situation and leave the United States for all practical purposes in contact with only two of her really large customers. We have no merchant marine and cannot therefore avail ourselves of our neutral status to trade with the belligerents. We shall be compelled (for a time at least) to ship in English bottoms to such ports as English ships can make--which will practically be limited to England, France, Portugal, Spain, and the Mediterranean ports. The ordinary commercial roads to Russia through the Baltic are automatically closed by the location of the German fleet, and probably England and France, deprived of other outlets for their own trade, will nearly monopolize the trade with Russia through the Mediterranean and the Black Sea.
On the other hand, the mobilization of armies and fleets in Europe will draw millions of men from the field and factories where they have been accustomed to make what we have usually bought. The war will vastly diminish and in many cases stop altogether the stream of imports to the United States. These millions of men in the field and on the sea will not possess most of the economic wants they had in time of peace and will become conscious of many which they usually did not feel. The war will diminish and in many cases entirely stop the stream of ordinary American exports to Europe. Because of the stoppage of the European supply of things we have usually bought of them, and the cessation of a European demand for things we have usually sold to them, the conditions of the home market, both in regard to what we must buy in it, and to what we must sell in it, will be vitally changed. When our present supplies of European importations are exhausted, we shall be obliged to make for each other and buy from each other the things which we happen to be no longer able to import or export. A great readjustment of the economic fabric in the United States will take place if the war lasts longer than a comparatively short time.
How long a time that must be will depend entirely upon the sharpness of the break in the economic life of Europe, and the amount of supplies they have on hand, which, as they will not now need them at home, they will be anxious to sell in the United States. Indeed, it would not be surprising if there was for a short time a glut of English and French manufactured goods in the United States market.
Europe May Depend On Us.
Of late years the commercial relationship between the United States and Europe has changed very greatly. For centuries we were a debtor community, buying largely from Europe, possessed only of crude staple products for export, and scarcely able by a series of expedients and exchanges to pay for what we bought. Tobacco for many decades, then cotton, were the only commodities of which much was exported direct to Europe. Then came, during the European famines of 1846, 1861, and 1862, an enormous demand for American grain. Yet only during the last few decades have we been able to export largely manufactured products or been able to deal with Europe on an equality of terms. We are no longer a debtor nation; we are no longer dependent upon Europe; the United States is an integral and essential part of the interdependent international economic fabric. Indeed, if the war continues ten years, Europe may be dependent upon us.
In a sense we are not ready to meet the crisis. During the last ten or fifteen years the exports of foodstuffs have fallen off greatly, and the supply in this country has actually declined in proportion to population. There has been also a most marked increase in the exports of manufactured goods and a decided increase in the importation of raw materials, including foodstuffs. Now will come an enormous demand from Europe for the very things of which we have not produced so much and exported little or nothing--bacon, eggs, butter, beef. The demand will also be greatly increased for woolen cloth, raw leather, shoes, steel in all its forms, railroad equipment of all sorts, automobiles and machinery, and, in particular, coal and gasoline. To supply this demand old industries will be expanded and new ones created, and a shift of capital and labor will inevitably take place to the industries for which a demand becomes clear in Europe, as soon as it seems reasonably certain that the war will last, beyond the present year.
An American Merchant Marine.
Above all, an American merchant marine is likely to be seen again upon the seas. There will be German ships in plenty for sale, in all probability, unless Germany wins an immediate victory on the sea, and the advantage of an unquestioned neutral status, easily obtained by a bona-fide purchase, will be so great that American capital will probably invest largely in freight steamers and ocean liners. It seems entirely unlikely that England, while she remains mistress of the seas, should recognize as valid the registration in the United States of vessels actually owned by belligerents or regard as anything more than masquerading their appearance under the American flag. England has never recognized any one's "right" to do anything at sea in time of war which did not accrue directly to her own benefit. It is scarcely necessary to say that she will not allow trade with Germany or Austria while she can prevent it. The only refuge will be the sale of the ship by the foreign owner to Americans who will trade with England, her allies, and strictly neutral nations. As always in time of war, privateering and smuggling will be profitable, and trade with Germany, unless she is immediately victorious at sea, will offer to the adventurous plenty of risk and the certainty of huge profits. During the Napoleonic wars the flats and bars of the German coast along the North Sea offered light vessels a great opportunity and the pursuing warships great obstacles. A modern motor-driven light craft will now have an enormous advantage over destroyers or cruisers. Here, as a century ago, many an American will find an opportunity to make a fortune.
The preoccupation of Europe with the war and the opening of the Panama Canal will afford the United States an unrivaled opportunity to develop trade with Canada, South America, Australia, New Zealand, India, China, and the Far East in general. We have never bulked large in the eyes of these countries and there has been much speculation as to the reasons why the German succeeded so well in South America and why the Englishman did so much business in China. Whether from sentiment or from a national habit that prefers English goods, the English colonies have bought more largely of the mother country than they have of us. But now that the war has closed the German factories, called German commercial agents home, and sent German ships racing to neutral harbors; now that the Panama Canal brings us some thousands of miles nearer to Australia and New Zealand than they are to London via Suez; now that England will be busy manufacturing for Europe and will have less to sell her colonies, these particular parts of the world will probably be compelled to look for their manufactured goods to the United States. Indeed, if one were not afraid of being accused of gross exaggeration, he might take heart and proclaim his conviction that a long and really inclusive European war would give the United States a practical monopoly of the South American and Pacific trade, provided always that the United States acquire by purchase a merchant marine and that the Panama Canal becomes feasible in January for large ships.
Foreigners Leaving America
One other effect of the war has already begun to reveal itself in the emigration from America of thousands of Servians, Austrians, Russians, Germans, Frenchmen, going home to take their places in the ranks. While many of these men are brave and honorable citizens, the fact that they respond to such a call proves them not yet Americans. The war will tend to remove a goodly part of the distinctly foreign element in the country, the part not yet amalgamated, and therefore the part most alien to our institutions and the most difficult to place in our social structure. If the war continues, Europe will draw every able-bodied man who can be influenced to go. Far more important, immigration will probably become negligible not only during the war, but for some time after it. Usually the reason for leaving home lies in the crowded population of European States and the lack of opportunity for advancement, plus the glib tongue of some agent of a contractor or of a steamship company. In recent years those who have come have not been desirable additions to our population because they came from nations alien in blood, language, religion and institutions, and were not therefore easily knit into our national structure and absorbed. There will be little, if any, further immigration. The men are wanted for the army and will not be allowed to leave during the war. After peace is restored, they will be imperatively needed in the fields and factories and every effort will be made to retain them. In fact, it does not take any wild stretch of the imagination for one acquainted with the results of the Thirty Years' War and of the Napoleonic wars to conceive that, from the view of economic opportunity and rewards, Europe might become a more favorable scene for the truly capable and ambitious than America is today. The tendency of a war is to absorb the best of a nation and to leave the dregs. For the power of organization and the fire of initiative Europe will at no distant date be ready to pay well.
The Effect of Economic Readjustment.
Unquestionably the economic readjustment which the war will force upon the United States will have an immediate and serious effect on individuals. Some will profit largely and promptly. All who at present possess large stocks of food, leather, oil, woolen cloth will be able to dispose of them at enormous profits. From the greater volume of freight the railroads will benefit directly. But while the farmers and cattle-men, the steel and oil kings are rejoicing in the opportunity, all industries which depend chiefly upon exportation or which manufacture an amount beyond the normal American demand, will be closing the factories or curtailing the output. For a time certain individuals, perhaps a relatively large number of individuals, will suffer inconvenience, loss, anxiety, and even privation. But the vast demand for labor in other industries, and the almost certain extensive demand for relatively unskilled labor ought not to make the period of transition long or the amount of suffering considerable. After all, the vast majority of the people of the United States are connected with farming, with the manufacture or production of the very things for which there will most likely be a great demand, or with the transportation and distribution of both imports and exports to the rest of the community.
In certain industries, like the manufacture of cotton cloth, which is localized in New England to such an extent that whole districts are dependent upon it for a livelihood, the distress will be great, for the factories closed upon the declaration of war and the workers are a long distance from the Western fields, where laborers are only too scarce.
The cheapening of transportation, the rapidity of communication, the superior mobility of the population today over ten years ago, make it probable that these people will soon find new places.
Concomitant with the war came a rise of prices. Foodstuffs especially advanced sharply and will certainly continue to rise until some material increase of the supply is assured beyond a peradventure. The tendency in England and above all on the Continent for the cities to buy great supplies to guard against possible want will increase this tendency.
But, without question, should the war last, a rise in the whole level of prices of everything, including labor, will take place in the United States. It will affect some individuals adversely, but for most will be in the long run almost negligible. For those who actually produce or handle goods which advance in price the result will be a profit, because the price of the commodity they have to sell will almost certainly advance sooner and faster than the prices of the commodities they themselves are compelled to buy. In time the two will equalize and they will be precisely where they were before the war; they will pay out with one hand what they take in with the other. In nearly all cases where the individual produces or shares in the production of an actual commodity a general rise in prices, even to the extent which this war threatens to produce, will be to him only a temporary advantage or disadvantage.
True, wages and salaries in industrial pursuits will not quite keep pace with the rise in foodstuffs, and factory workers and clerks will not benefit to the same extent nor as soon as the farmers will. People whose incomes are derived from stocks in the businesses which prosper will probably receive much more than they pay by reason of the increased prices of other commodities, and certainly cannot be worse off than before.
America's Real Sufferers.
The real sufferers in America will be those who hold stock in the enterprises which fail or cease to operate, and that far larger class who are dependent on a fixed salary. Professors and teachers of all sorts and grades; people living on annuities or small incomes derived from bonds or real estate; those dependent on the rent derived from leases for a term of years of dwelling houses, office buildings and the like, these will lose a material amount, exactly in proportion to the rise in prices. To that extent, the purchasing power of the stated number of dollars they receive will depreciate and that much they will lose beyond a peradventure. In time, some relief will be afforded by a tardy rise in salaries, by the expiration of leases and the payment of bonds, but the actual losses of the intervening years have never been in any way refunded in like cases in the past.
For some individuals, then, the European war will spell strict economy; for a comparatively few, let us hope, ruin. For the country as a whole, considered as a social and economic unit, a long war will introduce an era of astounding prosperity. Never before has the country had, and certainly it will never again have, almost a monopoly of the world's trade thrust into its hands. The United States will have only one real competitor, England, and, should the English Navy prove itself less capable than is expected, or should England and her colonies be forced to order a general mobilization of their armies, the United States might conceivably remain the only great mercantile community to which the world could look for supplies. No such eventuality need be predicated to prove that the continuation of this war or a series of wars will create a demand for manufactured goods such as our merchants have never dreamed of. And they will command war prices. It means employment with rich reward for capital and labor alike--a vastly increased foreign market, a much greater domestic market, high prices, and a steadily voracious demand for the entire output. The result will be the rapid diversification of industry in the United States, the creation of industries never before possible because of European competition, the invention of machines to meet new needs. The normal economic development will be accelerated decades.
After the close of the European war, when manufacturing and production are resumed, America will find herself overproducing and face to face with another economic readjustment necessary to meet the new situation.
Then will ensue a commercial crisis with all its attendant suffering and trouble such as the United States has probably never seen and which will be violent and serious in proportion to the length of the war.
Germany of the Future
AN INTERVIEW WITH M. DE LAPREDELLE.