THE

Emerging from a Financial Crisis

autumn season-traditionally a time of year which outlines in sharp relief the character of a financial situation previously uncertain and obscure-has arrived on this occasion with the mind of the business community divided between conflicting impressions. Every statement from responsible financial sources agreed in declaring that the worst of the industrial and financial crisis was past, but none of them pretended to foresee the exact manner of return to economic equilibrium, and many of them indicated that the perplexities of the immediate future were in some respects more intricate even than those which had arisen in the recent period of acute distress.

In dealing with actual financial crises, whether open or disguised, the banking community has had abundant experience. But restoration of normal conditions, when the new conditions cannot be what they were before the war, is a vastly more complicated matter. Whether the problems of Europe, reflected in the extravagant fluctuations of exchange, would solve themselves or would have to be solved by new expedients of financial or governmental machinery; how unemployment could be corrected without revival of industry and how such revival could come with the world's consuming power thus reduced; in what way a dwindling export trade could be rebuilt when foreign markets were finding it difficult to make payment for the goods exported-these questions seemed to baffle the financial intellect. It will not be very long before the actual unfolding of events throws at least some light upon them.

Two

Two Typical Incidents

WO recent incidents typified in a striking but at the same time perplexing way the character of the economic depression and the means which are being employed to struggle out of it. The earnings of the country's railways for July showed gross receipts which, despite the higher freight rates, were 13 per cent below those of the same month in 1920; but this result of business paralysis and trade reaction was far more than overcome by reduction of no less than 29 per cent in working expenses. The cotton crop, as a consequence first of the heavy curtailment of planted acreage and then of an almost unprecedentedly bad summer season, was estimated by the government in September as smaller by 47 per cent than the crop of 1920, with a yield probably less than in any year since 1892.

But all this happened when the American railway system had been returned to private operation in need of exceptionally large expenditure on its deteriorated plant and equipment, and when this was the kind of expenditure which was being cut to the bone. It happened when the outside world, though its purchases had been greatly reduced by the pinch of hard times, was probably in greater actual need of a full supply of textile goods than on any previous occasion in our time. Still, on the other hand, the drastic railway economies brought earnings after payment of fixed charges to a surplus instead of the ominous deficit which had prevailed for many months, and the short cotton crop opened the prospect for relieving the South of its accumulated unsold cotton, inability to market which had brought the credit system to a dead

WITH

ITH the beginning of this autumn season, it is at any rate probable that the world is passing into a new phase of the economic experience which was bound to follow termination of the most wide-spread, costly, and dePossibilistructive war in history. ties of the Future Made more cautious by past misjudgments, financial opinion is now willing to recognize several alternate possibilities-that the world in general and the United States in particular may be entering an era of gradual recovery which unforeseen events will retard or accelerate as the case may be; or that economic inertia may continue to prevail for a prolonged period, or even that, after a short space of uncertainty and partial recovery, downward readjustment of prices and industrial activity will be resumed.

Financial markets recognize that, both in this country and in Europe, the movement of financial and industrial revival proceeds with discouraging slowness, yet that, on the other hand, the fall in prices, after bringing the general average down to barely one-half what it was in the spring of 1920, has been checked; that abnormally high money rates have been reduced to something like reasonable figures; that supply of most products is no longer in excess of real requirements; and that in nearly all important industries cost of production, especially labor cost, has been brought into practicable relation with the lower market price for the goods produced. These four facts are sufficient to justify the statement that the recent chapter of excessively violent economic readjustment has ended, and that the next chapter must be different in many of its basic phenomena. But the facts do not tell us much more than that.

Looking back at the experience through which the industrial and financial world has already passed since November, 1918, it is not difficult to perceive the logic of the present economic situation-in fact, the inevitableness of what has happened during the past year and a half. Every one can understand to-day that the wartime inflation of industry, the forcing of

twenty years of war which followed the French Revolution, the prodigious and artificial expansion of credit, the abnormal demand for an apparently insufficient labor supply, were phenomena which could not possibly be permanent. Similar conditions had existed after all other exhausting wars, and they had invariably been followed by an exceedingly trying period of downward readjustment. The economic aftermath of this war, which, in its waste of capital, of resources, and of human life, was admittedly the most exhausting of all, should reasonably have been severe in proportion.

NOWADAYS it would seem superflu

since the

ous to insist on this remorseless logic of recent economic events, were it not for the fact that the whole world, and the American business community most of all, had indulged for twelve months in so wild and fan- History tastic illusion on the subject. Armistice But the extravagant speculative mania, which nearly unhinged the minds of business men from the spring of 1919 to the spring of 1920, has already taken its place in history as a curiously unreal and isolated economic episode. The full reason for that episode, in the form it took, will probably remain a matter of economic dispute for a very long time to come. But nobody is any longer likely to describe it as anything more than an interlude, with little permanent significance in the history of the period.

Probably most people would classify, as particularly logical results of so huge a political and economic catastrophe as the European War, the coming of hard times; the world-wide derangement of credit; the 40 or 50 per cent fall of prices from the artificial level to which they had been carried; the shrinkage of their market, in the case of industries whose plant had been doubled during war-time, to a smaller magnitude than was reached after the panic of 1907; the displacement of labor and the lowering of inflated wages; the demand, at a time when merchandise was selling at lower prices, for settlement of debts contracted at the highest prices; the inability of heavily indebted mer

chants and markets to meet such engagements; the consequent virtual moratorium established in many quarters of the commercial world because the creditors had no alternative; and at last the pouring of all their hoarded gold into the hands of the chief creditor nation by other nations who, through their accumulated debt

during the war and had been looked upon, when the war ended, as the source of supply for an all but unlimited demand for products of which Europe had run desperately short in the four-year conflict.

right or power to retain it.

Illogical Results

the very great curtailment of production in industries for whose products, even in greater quantity than before, there is visibly urgent need in Europe. Central Europe is not adequately supplied with clothing, yet the acreage for this year's American cotton crop, from which the world's spinners must obtain most of their material, has been reduced nearly 30 per cent. Steel and iron might appear to be required in almost unprecedented quantity if the ruined buildings and railroads of northwestern Europe are to be brought back to their pre-war condition, and our own producers might have seemed to be specially favored by the stoppage of coal production in England during the recent three months' strike, which reduced Great Britain's monthly output of steel to less than 15 per cent of the rate of 1920. Yet production of iron in the United States during the first six months of 1921 fell to little more than half what it was in the corresponding period a year ago, and to less than in any previous halfyear since 1908.

In July it was the smallest of any month in eighteen years, and barely one-quarter of the amount produced in the month after the armistice. Pretty much the same story ran through every productive industry. It seemed on its face to indicate the greatest possible effort to restrict production of such necessaries, in almost immediate sequel to the greatest waste of them which the world had ever seen. equally illogical phenomenon, in view of Europe's needs, would apparently seem to be the acute economic distress that has seized on industry and finance in countries which, like the South American republics, had been neutral

An

The Cur

anomalies lies partly in the war and the economic conditions created by the war, but perhaps quite as largely in events since the armistice. In so far as curtailment of industry has resulted from Europe's inability to purchase our goods in quan- tailment of tity sufficient to maintain even the Production pre-war rate of production, it may fairly be said to measure the poverty which the war has caused. Nations are no more able than are individuals to escape the consequences when savings have been dissipated or impaired, property destroyed, and cost of living increased. In either case there is necessarily a far smaller margin than before for purchases with cash. When a nation whose resources, like those of France or Italy or Belgium, had been thus depleted by the war, there were two considerations which would determine the question of their purchases of home and foreign merchandise-the capacity of individuals to buy for their private uses, and the capacity of governments to buy for the benefit of the community at large.

That neither potential purchaser possessed the actual money resources to provide for purchases on the pre-war scale, was evident. Private incomes were cut down by actual losses of the war and by the unprecedentedly heavy taxation which continued after the war. Public expenditure for interest on the war debts, for pensions to disabled soldiers and for the higher cost of the whole machinery of government, had so far outstripped the increased public income from the larger taxes that, except for England, every one of the former belligerent governments was contending with the largest annual deficit in its history. Clearly, therefore, the alternative for both government and individual lay between greatly reduced purchases of goods and continuance of large purchases on credit. During 1919 and most of 1920 the goods were bought on credit and the credit was granted lavishly both by home and foreign producers. In the calendar

(Financial Situation, continued on page 55)

(Financial Situation, continued from page 53) year 1919 our own exports to Europe increased $1,300,000,000 over the preceding year, and $3,500,000,000 over 1913—an expansion of 230 per cent over the pre-war year, of which only the smaller part could be accounted for by the 100 per cent rise in average prices during the eight-year interval.

FRANCE was the outstanding illustration of these increased purchases. Her total import of merchandise rose from 22,300,000,000 francs in 1918 to 35,800,000,000 in 1919, her import of manufactured goods alone increasing 70 per cent. Her excess of imports over exports was 22,900,000,000 francs in 1919, or actually more than the total imports of 1918, and, although her own export trade nearly doubled in 1920, the surplus of imports even in that year remained at the prodigious sum of 12,900,000,000 francs.

Buying on Credit in 1919

It is true that, during the three or four decades before the war, imports into France had uniformly exceeded exports, the excess being balanced by the income from foreign invest

ures.

ments previously made by her thrifty people; but the annual excess of that pre-war period was trifling compared with the war-time figIn the half-dozen years which preceded 1914 it had never gone above 104,000,000 francs, and had been as low as 21,000,000. The figure to which it had risen even in 1918 was, therefore, of a portentous nature, and the progressive increase of 1919 made the position exceedingly difficult to grasp.

Every other European country which was emerging from the devastation of war followed a similar policy. But since France was not exporting gold at all in 1919 to pay for this vast accumulating debit on trade account, and since her sale of securities to foreign investors did not reach a tithe of her obligations on that year's merchandise account, it followed that in some form this yearly purchase of ten to twenty billion francs more of foreign goods than were paid for in exported merchan'dise, or in securities sold abroad, or in proceeds of foreign investments, must have been financed through the consent of foreign merchants to defer payment by the French import

(Financial Situation, continued on page 57)

UND

comes

NDER the proposed revision of the surtax schedules of the Federal Income Tax Law the surtax on large inwill be somewhat modified, but the tax exemption of Municipal Bonds will still be most attractive to the investor. For example, under the new bill: To Equal A Municipal Bond Yielding 5%

An individual with a net income of $25,000 would have to hold taxable securities yielding 6.48%.