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BUSINESS AFTER THE WAR

I

BY RAY MORRIS

COMMERCIAL gatherings, these last twelve months, have been listening to a series of important addresses on the trade and financial conditions which may be expected to prevail after the war ends. If a dozen of these addresses, carefully selected as representing the sober thought of a group of prominent merchants and bankers, should be parallel-columned in journalistic fashion, the differences of opinion would prove not merely fundamental, but laughable, were it not for the immense seriousness of the subject, and the downright urgency of guessing the right answer to at least some of the problems discussed.

Banker A sees the United States entering a series of years of unexampled, golden prosperity, and he bases his thesis on a number of propositions which seem obvious. He points out that this country, relatively free from debt at the beginning of the war, will be in an immeasurably better financial position than Europe at the close of it. We shall suddenly step into the rôle of world's banker; we shall re-stock the belligerent countries with the products of our mines, forests, and workshops. With a prodigious trade-balance in our favor, and with our human resources of trained minds and skilled hands unwasted by war, we shall have a tenyear start on the rest of the world. Becoming South America's creditor, we shall do the business with South America hitherto done by England and Germany, and may placidly contemplate the commercial dissolution of those

powers. We shall say, like Mimi at the dragon's cave, 'Fafnir und Siegfried, Siegfried und Fafnir, brächten beide sich um!' All this, and much more in similar vein, from Banker A.

But Banker B sees it all differently. Europe is bankrupt, and rapidly becoming more so, if the term admits comparative degrees. We are not going to be able to sell goods to Europe, because she will not be able to pay for what she buys; our mushroom prosperity, our hundred per cent profits on war contracts, are making us unfit, not fit, because they are raising wages to a point which makes effective competition impossible, and is of itself unsound. Immigration from Europe will be so closely restricted that we shall lose the abundant supply of unskilled labor which is the foundation of so many of our industries. Instead of replenishing the stocks of the belligerents, the belligerents will dump commodities on our shores, confronted by hard times and low wages at home, and the necessity of restoring their exchange and protecting their gold reserves. We shall not do much business with South America, partly for the above reasons as affecting the price of our goods, and partly because South America must needs buy where she sells, and being a raw-material producer, like the United States, she will sell, not to a rival engaged in the same line of business, but to the European market common to both. In short, following the present inflation, we are in for a severe panic, followed by hard times and a 'long drag.'

It is going to make a good deal of dif

ference to the United States whether Banker A is right, or Banker B, but it would take a bold prophet, in the light of past events, to write down his answer categorically, opposite even the primary points of issue, regardless of the multitude of ramifications, of actions and reactions, that must needs follow each main economic drift. Perhaps no single instance better illustrates the errors of trained commercial observers than the course of security prices in the first twelve months of the war. When the stock markets of the world went out of business, in August, 1914, the real economics of the situation did not matter; the certain thing was that a multitude of individuals and institutions, driven either by necessity or by panic, would liquidate their holdings on any free exchange that remained open, without much regard to prices obtained; that banks and lenders would be forced to recognize quotations and call in weak loans, thereby causing more liquidation and bringing about a protracted panic of great severity. This reasoning was self-evident, and the bourses of the world, in bending all their efforts to block free exchange and prevent quotations, undoubtedly handled the matter correctly and promptly. The transition from the suppressed markets of the later months of 1914 to the optimism and immense volume of trading at progressively higher prices, a year later, was certainly not anticipated by any considerable number of people, or the aggressive buying would have started many months earlier than it did.

The American market was agitated by three principal fears: the re-sale in America of American securities held abroad; the belief that the United States would either be drawn into the war or approach it closely, with attendant financial panic; and the feeling that the exhaustion of wealth and the

necessity for immense and continuing foreign loans would so raise the interest rate that the current return, especially on the best grade of bonds, would prove far out of line. Now, at the beginning of 1916, the first of these contemplated evils is seen to have happened, and to be continually happening, but it has not produced the expected effect. Our securities were held, not by Europe, but by individuals and institutions in Europe, and these individuals and institutions, after the shock of the first few weeks, acted in a normal and conservative manner, in which they were assisted by their respective governments. The selling was both gradual and skillful, and on a rising scale of prices, in a constantly broadening market. The full effect of the marshaling of American securities by the British government, for sale or pledge in this country, cannot yet be stated, but it is fair to assume that the disposition of them will continue to be cautious and intelligent. Our market has not only absorbed a flood of foreign-held securities already, but has been eager about it, our dealers calling on foreign dealers for offerings, especially of high-grade bonds, which are selling to-day not merely on a peace basis, but higher than for several months before the war.

The next market anxiety, concerned with the possible embroilment of the United States, came measurably near fulfillment when the Lusitania went down, with further shocks on at least half a dozen other occasions, notably at the time of the Arabic affair. But a long period of tense relations, with the daily scarehead in the morning paper, produced an effect that might have been anticipated, although it was not; the market became shock-seasoned, so that each successive threat of danger produced a relatively smaller effect than the preceding one. A comparison of American public apprehension over the

torpedoing of the Arabic and of the Ancona sufficiently illustrates the point.

The third factor, based on the belief that the huge competition for governmental borrowing would upset the rate of return on all American corporation securities, was regarded as fundamental by many of the ablest bankers in the country. There are probably few people to-day who would dare express the doubt that the capital waste of the war and the vast volume of emergency

finance will not eventually produce some such situation as was anticipated, but meanwhile, certain immediate influences have been pulling the other way. The banks of the country are embarrassed with the piling up of surplus funds, individuals have unusually large investment balances, and prosperity is running high. But the investor reasons, quite correctly, that so long as the war lasts, governmental securities will tend to come along in increasing amounts, and probably at increasing rates of return. So he buys American corporation bonds instead of government bonds, and we see the curious comparison of high-grade railroad bonds, earning perhaps five or six times their charges, on a 4.20 per cent basis, while bonds protected by the joint credit of France and Great Britain, constituting substantially the only external debt of those two countries, which have a tax power against surplus annual national wealth amounting certainly to a hundred times the interest, sell on a six per cent basis.

Another rather characteristic example of bad calculation was the shutdown of the English nitrate works in Chile, at the outset of the war. Trade was paralyzed temporarily, and ocean freights were high, so the mines closed, in calm oblivion of the indispensable part which nitrates play in the production of modern high explosives. Needless to say, the mines are now open

again, and are receiving the highest prices in their history.

II

It is certainly a fair question whether we are organizing along the right industrial and commercial lines for the eventual peace; whether we know its raw materials. Presumably we are not organizing along right lines; it would be somewhat more than human and considerably more than American if we were. But there is a good bit of sheer fascination in attempting to reason out some of the tendencies that are just beginning to appear, and in wondering what the missing factors may prove to be, that will doubtless upset the calculation.

Take the shipbuilding industry as an example. It has cost, say, forty per cent more to build an ocean steamer in American yards than in British yards, most of the difference being the labor cost. It has probably cost nearer fifty per cent more to build an American boat than it costs to build a Norwegian boat, yet American shipyards are getting many inquiries to-day from Scandinavia, and, indeed, from many other parts of Europe. The home yards are filled up with admiralty work, or with merchant work driven there by the admiralty work somewhere else, and Germany has temporarily ceased to be a factor. Meanwhile, charters are so prodigious that many a steamer, purchased at full prices, has paid for herself in a few voyages.

Now, it goes without saying that this charter situation will not persist in its present brilliancy after the German fleet takes the ocean again. Will American deep-sea shipbuilding thereupon lapse to its former desperate condition? I think not, but I wish I could weigh some of the factors more certainly. It makes a tremendous difference, in the

first place, whether we have an armed peace or a relatively disarmed peace. If the admiralties of the world scramble for their own urgent tonnage requirements, American yards will be busy for years to come, since the war wastage, although of much less importance than it appears, leaves plenty of work to be done, while the overhauling and refitting of the many Atlantic liners that have been in transport service will cause much temporary congestion of facilities.

For a longer look at American shipyard prospects, however, the wage question is paramount, and the principle involved leads into many lines of industry besides the one cited. We all know that taxes in the belligerent countries and the countries of their armed neighbors are going to reach an after-war scale which it is painful to think about. I cannot imagine that the great estates will escape the major share of the burden; that the process, begun by Lloyd George with his taxation of unproductive land in England, will not be carried immensely further. I cannot see how the Prussian Junker is going to keep together his vast acreage, or how land-poor Russia can persist in her present system.

If this view happens to be correct; if the tendency is to socialize land holdings through cumulative taxation of great estates, I should anticipate, with the increase of peasant proprietorship, a reduction in the floating supply of agricultural labor, and a consequent wage-increase in that field, accentuated, of course, by the human waste of the war. But the changed conditions, although producing perhaps their most far-reaching effect through revision of land-tenure, will naturally act more promptly in industrial sections. Is it not correct to assume that a perpendicular rise in taxation will keep the cost of living high for a protracted period,

in conjunction with a tendency on the part of each country to turn to protective tariffs to prevent every other country from dumping goods on its shores, especially during the first great efforts to restore exchange?

For Europe is busy trying a currency and credit experiment, to-day, that has far more of Bryanism in it than Europe likes. She is finding out how much, or how little, of a gold 'cover' is really indispensable to stabilize currency under modern credit conditions. The supply of gold in the central banks is abundant, but the ratio of gold to circulating medium is steadily getting lower. Whether England, France, Russia, and Germany - to say nothing of the lesser states can maintain their currencies on a gold parity, all of them, after international trade barriers are let down again, is an exceedingly interesting question. Meanwhile exchange quotations reflect some of this uncertainty, but more of the difficulty of maintaining credit balance between two countries, one of which is doing all the buying and the other all the selling.

Looking at this perplexing question merely from the wage side, and allowing full latitude for the possibility of doing the world's credit business with a smaller gold backing than has heretofore been attempted, are we not justified in surmising that wages paid in a cheapened currency will run relatively high in the terms of that currency; that the cost of living will rise, whether measured in commodities or in currency, and force wages up with it? Add to this the probable tendency to protective tariffs, the imminent changes in land-tenure, new taxes all along the line, and scarcity of labor everywhere, and it seems to me that the case has been made for substantially higher European labor-costs. Nor is it reasonable to expect that the new wage-scale will disappear after the war is ended. The

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prodigious inflation of currency that has already taken place, especially in Germany, is resulting, and must result, in higher living costs (as measured by the depreciated currency), until the state land-bank systems of finance, and all other emergency expedients for capitalizing private earning power into non-gold-secured (or insufficiently secured) currency, are disentangled and wound up again. But thereafter, it will not be an easy matter to get wages back to the same relative purchasing power that they had before the war. In the hard times which may confidently be expected to follow any period of inflation, labor is nowadays more apt to suffer from non-employment than from reduction of nominal wages, just as in 1908, in this country, the labor that was employed at all drew wages that had a higher purchasing power, relative to the price of commodities, than any that had been paid in many years.

However great may be the dilution of gold reserves after the present war, it is not to be thought of that any one class in the community will have any purchasing advantage over any other: the money, such as it is, will be the same for all. And the very perfection of international communications and exchange can, I think, be relied on to accentuate the price of both commodities and labor, as measured in depreciated currency. If labor were to be very abundant, it might well suffer in relation to the rise in commodity prices; there would be plenty of historical counterparts for such a state of affairs. But labor is not going to be abundant. Apart from the actual war wastage, great armies returning from the field are not fully and economically employed at once; there is undoubtedly an adjustment to be gone through with, and just at the time when industrial replacements will be most active.

For a historical case in point, I should

think that Europe would witness an economic condition more like that in England following the Great Plague of 1665, when, for some years to come, land was cheap, labor was scarce, and there was a general and important rise in wages. As a matter of fact, the important rise in wages has taken place already, and an outside observer is inclined to believe that, in England, it might have gone even further than it has, if left to natural adjustment, and not complicated by the curious 'dugin' condition of British employer and employee, each holding his battle-line as best he can in a struggle only second in importance to the struggle on the Continent. The British labor attitude, throughout the war, has been most unfavorable, as compared with the feeling of exaltation in the life-and-death struggle for the common cause which has so clearly ennobled the masses of the people in France and Germany alike. Viewed from this side of the ocean, the coal strikes, for example, are hard to understand in a nation fighting for its life. They suggest a class barrier which holds little promise for the future.

It seems to me that we can safely assume a tendency to high commodity prices and labor costs as well, not only during the war, but for some time afterwards. The vital question is whether European wages, rising easily in bad, or at least doubtful, money, will not tend to stay up after money gets good again, and thereby change their present relation to European commodity values. If it eventually works out this way, it will have a very important effect on certain American industries heretofore handicapped by high comparative labor cost; the shipping industry, as above mentioned, being particularly conspicuous in this respect.

In short, if we focus the discussion of after-war conditions upon American

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