The World Situation
THE situation of the world, especially of the European world, is that of a man who has just come out of a deep and consuming fever. This time it has been the fever of war. During the height of the malady the fever itself was so violent as to yield an artificial strength; and then, too, the sick man was kept alive with great doses of stimulants. But now that the fever is gone, the patient is lying weak and prostrate. There are some rather faint-hearted doctors who pronounce that he is too far gone ever to recover; that, even if he succeeds in getting off a sick bed, he will, for a half-century to come, be crippled and useless.
It is, to be sure, not easy to be cheerful over the situation; but after spending five consecutive months in Europe, during most of that time in intimate contact with leaders of all the great and small powers, I am one of those who are sanguine, who believe that the patient is going to recover, and recover more quickly perhaps than any of us imagine.
In order, however, to discuss the situation intelligently we must first look at the worst: we must pick out one by one the patient’s bad symptoms. Then, after we have them all docketed, we can discuss what remedies are to be applied to them.
What then, are these bad symptoms in Europe? Here is the list as I make it: greatly impaired moral; slackness of labor; shortage of food; shortage of raw material; disorganized transportation facilities; demoralized currency systems; huge bank-note inflation; great war debts; shortage of working capital; lack of capital for permanent reconstruction; Germany’s huge indemnity; difficulty of changing from economic control to economic liberty; heavy taxation; a spirit of imperialism; and, finally, Russia.
Greatly impaired moral — with a tendency to social debauchery, as evidenced in the antics of the Bolsheviki and their threats to spread their doctrines throughout Europe. The answer is that war always saps vitality, both physical and moral. The permanent values which we place upon life become distorted. But those changes are due largely to the fevered fancies of the patient. When his fever is gone, his fancies vanish, too. Just as the physical body regains its vigor, normal standard of conduct will come back into strength. And as for Bolshevism, that phenomenon is already on the wane. In Russia it is still hanging on; but over the rest of Europe, which that dreaded spectre once threatened, it is beginning to grow dim.
Slackness of labor. In many countries government allowances and general war-weariness have got the laboring man in a mood where he would rather idle than work. But these government allowances (chaumage is the technical name) will soon be cut off and the men will be compelled to work or starve. It is the business of industry to see that there is work for them to do.
Shortage of Food. Owing to the loss of man-power and the devastation of agricultural regions, Europe’s food-production is far below normal; far less than that required to keep the community vigorous, and strong enough to work to the full. But Mr. Hoover says that, taking the world as a whole, there will be food to go round, provided it can be distributed and paid for. It will become, for the next food-season, the business of those people who have food to spare and to sell, to see to it that those other people who are short of food and who have not the gold wherewith to buy are enabled to purchase food on credit. This is where America comes in.
Shortage of raw material. Stocks of cotton, steel, copper, etc., are well-nigh exhausted. Original stocks of these commodities have been used for war purposes. Now, when there is urgent necessity for such stocks for peace purposes, in order to get European factories humming again and labor fully employed, the raw materials are not there.
On the other hand, the world-supply of raw materials is ample. The commodities which Europe needs most, in order to get started anew on her economic life, are cotton, steel, copper, and coal. America has large supplies of all these commodities, and she would like to sell them. In order to effect large sales, America must extend liberal credits. If she does not grant, credits, she cannot sell the goods. But America will grant credits; she will sell the goods; Europe will obtain them; she will thus secure the necessary raw materials, and she will be able to start her life afresh in the near future.
Disorganized transportation facilities. On the ocean, submarine warfare has made great gaps in the world’s tonnage. On land, railway systems in almost all the countries of Europe are in bad shape. Yet the shortage in shipping is much less serious than most people think. Shipbuilding, especially in the United States and Great Britain, has been going on at a furious pace. Already the wastage by submarine has been largely repaired. Figures show that the world’s tonnage is already only eight per cent below that of 1913. (Of course, normally there would have been a substantial increase.) By 1920 the world’s tonnage will be normal, or even a trifle above that.
As to the railroad situation in Europe, things are badly down at the heel. During the pressure of war it has been possible to find neither the time nor the labor for necessary repairs. But now both those commodities are available. Hence the question resolves itself into a matter of securing railroad material and equipment. As to the material, I have just pointed out that America has for sale enough and to spare. As to equipment, America again can furnish plenty of locomotives and cars. Construction, to be sure, will take time; but six months, which is a short period in the convalescence of a patient who has been desperately ill, ought to see heavy shipments of railroad material and equipment, and a decided improvement in the whole European transportation situation.
Demoralized currency systems. While expansion of the currency is something of a problem in Great Britain, and more of a one in France and Italy, this symptom is most serious in the regions which were until recently under German occupation. The German armies printed hundreds of millions of paper marks and forced them into circulation in Belgium, Poland, Roumania, and Serbia. It is impossible to compel Germany to redeem these notes in the near future. They are hopelessly mixed up with the old domestic issues. For instance, in the regions formerly a part of the AustroHungarian Empire the old Austrian kroner, normally at par with the French franc, is now worth not more than one fourth as much. In these countries and in Belgium it may take several years to clean up the old and debased currencies and to retire from circulation a lot of the worthless paper which Germany and Austria forced on them. But some of the new governments are already tackling this problem manfully, and are getting rid of the old paper. In Czechoslovakia, for instance, a new standard, the franc, has been adopted in place of the kroner, and one new franc is being issued for three or four of the old kroner. Still, it must be admitted that, even with measures like these, the currencies of Central and Eastern Europe will be a bad drag upon commercial activity and upon all exchange operations unless some scientific measure is adopted to establish new and sound currency systems. The proposition was put forward at Paris, and discussed with great earnestness, that the United States should join Great Britain, and perhaps France, in furnishing to countries like Poland, for instance, a certain amount of gold or credits upon which could be based a moderate new issue of currency. In discussing this matter at Paris we figured that the total amount of gold that might be required for the purpose of reestablishing all these countries of Eastern Europe on a sound currency basis would not need to exceed $250,000,000 to $300,000,000.
In this connection, I venture to prophesy that for the next generation the amount of gold cover required for the currencies of the European countries, large as well as small, will be nothing like so high as that in use before the war. The countries have not got the gold, in any event; they cannot get it in large volume; and we shall see, therefore, that, with a modicum of the yellow metal, they will be able to adapt their currency systems to commercial uses.
Huge bank-note inflation. In all the countries the issues of bank-notes for war purposes have been enormous. In France, almost $7,000,000,000 is outstanding; in Germany, $8,700,000,000; in Italy, a little under $2,000,000,000. So long as these issues stand at anything like these figures, prices are bound to remain inflated. The greatest menace from the present huge bank-note inflation characteristic of all of the belligerents, is that it inevitably means continued inflation of prices and high cost of living. For this reason, and because of the unrest which follows high costs, the governments are all exceedingly anxious to prick the bubble of inflation as soon as possible. But they must be cautious about it, or they may have a dangerous collapse. In the case, moreover, of some of these governments, it will be difficult to prevent still further inflation within the next twelve months.
America’s case is, of course, the least serious and the most readily handled. In fact, the total stock of money in circulation in the United States was on May 1, 1919, almost $300,000,000 less than on December 1, 1918, which was the high peak.
Great Britain has just been engaged in a vigorous effort to consolidate her short-term indebtedness in a funded loan, and the temporary borrowing of the British Treasury from the money market should begin to come to an end within the next six months.
The difficult situations are found in France and Italy. The French Treasury insists that for still another year it will be obliged to stay in the money market as a heavy short-term borrower from the Bank of France. This inevitably means the issue of additional banknote circulation — inflation instead of contraction. The government is considering the issue of a popular loan, to be paid for by investors, not by check, but in actual currency. Let us suppose the amount of this loan to be fixed at $5,000,000,000, and this amount to be paid over to the government entirely in currency. The government could then turn about and retire an equivalent amount of circulation.
In Italy, where the unfunded debt is almost $7,000,000,000, the situation is analogous to that in France, although the figures are not so large. Of all the belligerents Belgium seems to be best off, for under the treaty provisions she is to be fully restored as to the physical and material damage which she has suffered, and all her war-debts are to be canceled. Further, she is to receive priority to the amount of $500,000,000 in reparation. Belgium will still have the burden of the 5,000,000,000 marks or thereabouts of circulation which the German occupation forced upon her; but she will probably be able gradually to get rid of this, even though at some loss. On the whole, therefore, Belgium will start with a pretty clean slate, and with no favors to ask of anybody. Her credit will be good, and when she comes to the people of the United States to borrow money, they will lend it to her.
Great war debts. The total debts of the countries lately at war now aggregate about $207,000,000,000, against pre-war figures of hardly more than $25,500,000,000. When one considers the interest item alone on this great total, — about $11,000,000,000 per annum, without figuring on sinking-funds, — one gets some conception of the burden.
Of course, nobody will be rash enough to predict how this huge mountain of war debts is to be handled. It looms so great and so menacing, that one would like to shut one’s eyes to it all and simply let it stand as a monument to the folly of a world that could beget such a criminal as the German military system. But there it is: interest running up night and day. And in one way or another, when the patient has grown a little stronger and is fairly on his feet, he must tackle in earnest the problem of war debts.
In America this problem is comparatively simple. Our total debt will be between $25,000,000,000 and $30,000,000,000. Of this amount there will be $10,000,000,000 owing to us from our allies and associates. Now, even if we allow these debtors to postpone their interest payments, or to cancel them to a certain extent, still the bulk, if not the whole, of the principal sums due will finally be paid. Thus, we may consider that the total debt which the citizens of the United States must meet will not exceed $20,000,000,000.
If the United States follows its traditional policy of generous sinking-fund payments, and of levying taxation designed to meet such payments readily, this indebtedness will be rapidly reduced, and very likely within a generation or earlier cleared off entirely.
Great Britain’s case is not so readily solved; yet those who have studied England’s fiscal traditions and have noted the comparative ease with which she cleared off what seemed to be the intolerable burden resulting from the Napoleonic wars, are confident that within five years the financial position of both the government and the people will be on the whole as strong as ever before.
Of the great nations (outside the enemy states) the most concern is naturally felt as to France and Italy. Can they meet interest on their war debts, not to mention sinking-fund for principal? In my judgment the interest on these domestic loans in France and Italy will be paid only in case these government bonds are themselves subjected to rather heavy taxation. Some people will at once exclaim that taxation levied on the bonds themselves is just so far tantamount to repudiation. Repudiation is an ugly word. It is not necessary to use it. It is legitimate to tax these bonds in so far as they were not issued free from taxation. Italy has already adopted a pretty vigorous policy of taxation, and France shows every sign of tackling the question, perhaps not as promptly as she should, but in the end as thoroughly. In any event, the domestic war debts of these countries, while presenting grave questions, are domestic rather than world-problems. The main thing to be desired is that each country shall adopt a courageous policy with respect to the reduction and ultimate payment of its war debts. If they all do that, the rest of the financial world can afford to be phiosophical.
Shortage of working capital. Europe, as I have pointed out, is short of raw materials. These can be purchased. Unfortunately, however, there is a great lack of available liquid capital. Such capital has been largely diverted to war purposes, to the manufacture of nonproductive commodities like munitions, and so forth.
To meet such a situation, there are two ways of accumulating new working capital. One is slowly to build it up out of current profits; the other way is to borrow it. Europe will adopt each of these methods. She will borrow working capital from America; that is to say, she will obtain from America time in which to pay for food and raw materials with which she is planning to get back to work. And because liquid capital is at such a low ebb in Europe, we in America must give longer time than usual for European purchasers to pay for goods which they buy from us. If, on this point, we exhibit enlightened self-interest, Europe will soon have enough immediate working capital to make a start with. After she has made the start, she will rapidly accumulate herself.
Lack of capital for permanent reconstruction — for repair of railways and the rebuilding of houses for farmers and laborers. Practically the same remarks apply to this system; but the methods of meeting the situation will have to be varied somewhat. It will probably be necessary for us to purchase considerable quantities of long-term bonds, municipal and otherwise, with which the cities of Belgium and Northern France can restore themselves; or perhaps bonds of government-owned railways, with which these railways wall construct for their lines new bridges, to be built of steel made in and purchased from America.
Germany’s huge indemnity. Germany should, in all justice, be made to foot the total bill of the war which she forced on the world. But unfortunately Germany has not the capacity to pay the full bill. The total amount of what she can and must pay has not yet been fixed. Until that is settled and the limit of Germany’s liability is determined, this unknown figure adds weakness to the world’s credit structure. Moreover, until the amount has been determined, it will be impossible for Germany herself to secure international credit upon any considerable scale.
It will be equally impossible for the nations that are to receive reparation, especially France and Italy, to address themselves intelligently to their own schemes of taxation and fiscal policy. The investment markets of many countries will be timid and hesitating until the nature of Germany’s liability has been made clear in dollars and cents. Germany herself cannot arrange her industrial programme until she knows what is facing her.
It was for all these reasons that the American delegation at Paris for months urged the reasonableness of naming a fixed sum for Germany to pay in reparation. This idea was, however, finally postponed by consent. But an urgent effort will be made to hasten the decision; and I hope that before the end of this year the amount will be fixed and all these indeterminate, and therefore unsatisfactory, factors in this problematical reparation situation will be cleared up.
We may, perhaps, assume that the amount for reparation determined upon will not exceed forty billion dollars. It may prove as low as twenty-five billion, to be paid out in the form of annual installments, covering interest and sinking-fund, over a long period of years. It goes without saying that the annual payments will be so large as to have an effect upon all the European exchanges. In fact, I look to see the Reparation Commission that is to be established wield an extraordinary power over the financial markets of Europe, affecting materially even those of America. For this reason the Reparation Commission must be made up of men of the highest capacity and wisdom, working together with a view, not simply to the interests of the particular governments they represent, but to the situation of the world as a whole. Only in that way can this matter of German reparation be so handled as not to menace the credit structure of the whole world. If so handled, and with due regard for Germany’s domestic and economic life, there is no reason, in my opinion, why Germany should not bring about a satisfactory discharge of her obligations within a period considerably shorter than that arranged for in the Treaty of Peace.
Difficulty of changing from economic control to economic liberty. Under the forced draft of war it has been necessary to socialize industry, to swing almost everything to government control, in order to mobilize the whole community to the one great end of war. Such a control has manifestly all the disadvantages of bureaucracy. It means loss of initiative. It spells paralysis for new enterprise. A change back to the normal life of industry and commerce must be brought about. To make this change without serious dislocation and loss will be difficult.
Several months ago the French representatives on the Supreme Economic Council submitted a memorandum to emphasize their idea that the change in industry from state control back to private control should be brought about at the earliest possible moment. The British expressed themselves as in accord with this view. Certainly America is strongly in favor of this principle, and has already undertaken to act upon it by the abolition of all sorts of warboards, the abandonment of price-fixing, the early turning back of the wire lines and of the railroads to private ownership, leaving only the handling of wheat to be kept under government control for another year.
These changes from public to private control have up to date been handled in America with a minimum of friction and dislocation; but in the case of the railroads we at once discover a problem of the greatest complexity and magnitude, Just how the roads are to be turned back, and with what, if any, fresh liabilities incurred during the time that government control attached to them, is a grave question. Just how they are to be financed, following the end of government management, is a collateral problem of great gravity. To what extent shall they finally remain under government supervision? The wise solution of these questions is likely to bring prosperity to the whole country, just as a faulty working-out means distress for American commerce and industry; for the railroads seem to be the backbone of the country’s business. They must continue to furnish quick and reasonable transportation, or else we shall fall into a bad way.
In other countries the change from public to private control of industry will be much more difficult than in America, by reason of the fact that those countries across the Atlantic, having been three years longer in the war than we, were obliged to undertake a much more thoroughgoing plan of government centralization. They had to cook the eggs very thoroughly. Now it is going to be correspondingly difficult to unscramble them. In some instances they will undoubtedly leave them scrambled. It looks in Great Britain as if the railroads would remain permanently under government control, and as if all the coal-mines might be nationalized.
Heavy taxation. In the countries on both sides of the Atlantic taxes are already heavily burdensome; and in certain countries, such as France and Italy, they must become even heavier if the governments are to remain solvent.
My general belief is that, while taxation is bound to remain heavy for a long time to come, especially in the countries of Europe, nevertheless it can be so regulated as to avoid an intolerable burden, or a menace to permanently stable business conditions.
A spirit of imperialism. Despite the lessons which one might think all nations had gained from the war, the spirit of imperialism is not completely dead, especially in southern and southeastern Europe. Remnants of this spirit are one of those evil symptoms that still handicap the convalescent patient. Fortunately in the Treaty of Peace there has been set up an instrument which, if properly developed, is capable of curbing this spirit, or of diverting it to wiser ends. That is the League of Nations.
Those statesmen at Paris who drew up the Covenant of the League of Nations regarded it, and regard it to-day, not as a perfect instrument by any means, but as a mechanism which, as the years go by, can be improved and perfected so as to serve as a real force in bringing the nations together and in making them understand each the others’ aims. A mutual understanding of this kind is the only factor that will prevent future wars. The great virtue which the present League of Nations Covenant possesses is that it establishes machinery by which mutual understandings can be reached. It is the world’s only safeguard for the future. Under its workings I look to see this evil symptom of imperialism cleared up in due course.
Russia — the great gaping wound of the world. The Russian question is perhaps the largest single one in the whole list. Certainly it is the symptom most impossible to find a prompt specific for. We continue to receive frequent reports from the interior of Russia, many of them differing as to statement of actual conditions, and almost all as to the remedy to be applied to such conditions. I have talked with representatives of almost all the factions in Russia, ranging from the class of Grand Dukes down through the Milyukoffs, the Cadets, the Kerensky group, and even the Bolsheviki, and I came no nearer the answer. Therefore, I shall not. attempt to say how this wound in the patient’s body shall be made whole, but I must confess that I have a very confident hope that, as these other bad symptoms disappear, as I am sure they will, and as the patient recovers his general health, we shall find this open wound of Russia beginning gradually to heal up. It will be an exceedingly slow and very painful healing. It will leave an angry and terriblelooking scar for perhaps generations to come; but one day in the future, be it ever so far away, we shall see a strong and intelligent, a productive and a wellordered United States of Russia.
Assuming then, that the diagnosis of even so incompetent an observer as myself is correct; assuming that the patient, even though handicapped by all these bad symptoms, is going to get rid of them one by one along the lines that I have discussed — what is in store for American industry and business in the next few years?
Take first our export trade. In the last five years it has risen to almost undreamed-of figures. Our total exports in the five years ending June 30 last have amounted to $26,000,000,000. Our whole export trade in the period referred to has not only been unprecedented in actual volume, but has of course been carried on at inflated prices. Just as sure as the sun rises and sets, this volume of exports is bound to diminish in the next few years, even in the face of the undoubted demand for food and raw materials which we shall have from Europe.
There are several reasons why our exports must decline. One is that the impoverished European countries will, very sensibly, import only the bare necessities of their domestic and industrial existence. American luxuries they will do without. Even though by such curtailment we forego profits, we should be glad to witness such an exhibition of frugality.
Prices in our own country for materials for construction, — which has been postponed during the period of war, — and for many other commodities are likely to remain high for a year or more yet. But I should almost look for a decided tendency toward lower prices in America at the end of a twelvemonth, within which time we shall also face a decline in the volume and value of our export trade. With this falling off, and with this lowering of prices, will come a period of readjustment and slower business. How long this lessened activity will continue, it is idle to speculate. America has within herself such stores of resource, energy, high spirit, and optimism, that here no business depression, unless it is an integral part of the world-situation, will long continue.
Therefore my own guess would be that, after a few months or a year of such depression, — in other words, by the middle of 1921 or the beginning of 1922, — we shall witness a new period of business activity and prosperity in America. We shall again see wages and prices rise here. As the prices for our commodities rise, such goods obviously become less attractive to foreign purchasers and our exports will again fall off.
It is equally manifest that the higher prices that we are willing to pay — at any rate, for certain manufactured goods — will attract foreign sellers, and as our exports fall off our imports will increase. The two tendencies working together will swing cash balances against us and will thus reduce, happily enough, the sums which are owing to us from abroad.
The whole situation that I have described will in all probability be stimulated by the working-out of Germany’s situation, especially with respect to her payments for reparation. I figure that, if the present plans for reparation (as provided in the treaty) are carried out, Germany may very probably be obliged to find $1,000,000,000 or upwards every year in foreign exchange. Of course, her only possible means of obtaining this great volume of exchange is to stimulate her exports and to hold down her imports to bare necessities. The German government, which must in the last analysis be charged with the task of remitting the annual reparation payments, will always be a buyer of foreign exchange. Exchange in Germany will always be at the gold-export point, but there will be no gold to export.
In the same manner, in the other European countries, and even possibly in Great Britain, exchange on America will be always at the gold-export point, by reason of the fact that the annual obligations due us will continue to be so heavy. However, our own situation, as has been pointed out so many times in the last year or two, has undergone a vast change during the war. Annual interest, instead of running against us to the extent of at least $200,000,000 to $250,000,000 a year, is actually in our favor to the extent of $500,000,000 per year. Ocean freights, which formerly cost us another $100,000,000 to $200,000,000 per year, are now at least a stand-off, because of our own greatly increased merchant fleet.
On the other hand, however, before another year has gone by our tourist expenditures in Europe are likely to increase, even over the heavy pre-war figures. There will be a great flocking of Americans to Europe. That annual exodus will be made up, not only of the comparatively well-to-do, as in the pre-war days, but of many people of exceedingly moderate incomes, who will be drawn to Europe to visit the graves of their soldiers or to scan the scenes of the Great War.
I look to see material increase also in remittances by immigrants in America to their native countries across the sea. Before the war these remittances amounted to about $250,000,000 per annum — $100,000,000 of this to Italy, $30,000,000 to Poland, and so on. The large total of these remittances has not, I believe, been fully appreciated; and they will increase, because, in my opinion, immigrants will be more saving than ever before, and more anxious to contribute generously to the assistance of their relatives and friends across the water.
Even, however,with these remittances to Europe, there will remain a heavy annual balance in our favor, amounting, I should judge, to upwards of $500,000,000, which cannot be remitted in cash. For a long time to come it cannot be covered with imports. Therefore, it becomes for Americans a matter of the greatest importance to study what forms of payment we shall accept for the balances due us from Europe. Shall they be in the form of the securities of foreign governments, of municipalities in England, France, and Italy; of the obligations of publicutility corporations in the countries just named; or of purchases by us of actual shares in foreign enterprises? Shall we become business partners in a world that will, I believe, be made, under the League of Nations, more secure than ever before — partners of the British, the French, the Belgians, the Italians and the rest?
I am no more competent than anyone else to answer this question. America herself is an enormous field of endeavor, and for a long time to come must furnish us with great opportunities for investment. But we must remember that America is already involved in world-affairs, both political and financial, and she cannot withdraw; rather, she must take a lead in generous thought and in action. Moreover, even private enterprise, which during the period of the war has learned to have a far wider and more enlightened outlook upon affairs in general, must continue to keep in mind the great common interests involved, and must endeavor to regulate the flow of capital and production according to the legitimate urgency of the respective needs, as they show themselves in various parts of the world.
These are the considerations that I would point out as being those necessary to be borne in mind, if we are to solve all these questions with an intent to help along on its way, not America alone, but the whole world.