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
mêlée 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 rôle 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.
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.