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Fr/m |L R. 131

BOARD OF
or

V

GOVERNORS
THE

FEDERAL RESERVE

O f f i c e
Xo

C o r r e s p o n d e n c e

SYSTEM

Date October

7,1939

Chairman Eccles
ym

Subject; T e n t a t i v e A p p r a i s a l o f t h e E f f e c t

Emile Despres

o f European War Upon t h e U n i t e d States

T h i s has undergone o n l y s l i g h t r e v i s i o n , but
suggest t h a t you s u b s t i t u t e i t f o r the t y p e w r i t t e n
copy p r e v i o u s l y sent t o you.

(Three copies)




I

/

September 30, 1939

MEMORANDUM TO:

Chairman Eccles

FROM:

Etaile Despres

RE:

Economic E f f e c t s o f European War
Upon t h e U n i t e d S t a t e s

I n accordance w i t h your r e q u e s t , a study o f t h e economic
e f f e c t s o f European war upon t h e U n i t e d S t a t e s has been undertaken,
and t h e f i r s t i n s t a l m e n t o f a memorandum on t h i s s u b j e c t i s a t t a c h e d .
The memorandum w i l l c o n t a i n t h r e e main s e c t i o n s and two appendices,
as f o l l o w s :
1.

The Present S i t u a t i o n

2.

Short Term and Longer Term Prospects
(a)
(b)
(c)
(d)
(o)

3.

Inventories
F o r e i g n Trade
Federal Government Receipts and Expenditures
Domestic and C a p i t a l Outlays
Conclusion

Implications for Policy

Appendices:

1.
2.

F i n a n c i a l Capacity o f F o r e i g n Countries t o
Purchase American Goods
Shipping Capacity

The f i r s t i n s t a l m e n t covers s e c t i o n 1 , 2(a) and 2 ( b ) ; subsequent
p o r t i o n s o f t h e memorandum v i l l i bo sent t o you upon completion.
The study as a whole i s designed t o
f i r s t , t e n t a t i v e survey of the v a r • o economic
f o r economic p o l i c y i n t h e U n i t o d S t a t e s . I t
framework from which more d e t a i l e d s t u d i e s o f
be r e a d i l y undertaken i n t h e f u t u r e .

p r o v i d e merely a
e f f e c t s and i m p l i c a t i o n s
should f u r n i s h a
p a r t i c u l a r t o p i c s can

Simultaneously w i t h your request t o me t o prepare a g e n e r a l
survey o f t h i s s o r t , Governor Ransom asked t h a t a study along
s i m i l a r l i n e s be undertaken by t h e D i v i s i o n as a whole. The memorandum o f which t h e f i r s t i n s t a l m e n t i s a t t a c h e d i s being prepared
w h o l l y i n t h i s s e c t i o n , but m a t e r i a l f u r n i s h e d by t h e business and
f o r e i g n s e c t i o n s i s b e i n g draxm upon i n i t s p r e p a r a t i o n .




TENTATIVE APPRAISAL OF THE ECONOMIC EFFECTS OF
EUROPEAN WAR UPON THE UNITED STATES
The Present S i t u a t i o n

The buying rush which immediately f o l l o w e d the outbreak
o f war d e f i n i t e l y assures a considerable s p u r t i n a c t i v i t y and
incomes i n t h e next few months.

This buying movement may be

broken down i n t o s e v e r a l components:




1.

The l a r g e s t element consisted o f orders from
domestic manufacturers and dealers f o r the purpose
o f expanding i n v e n t o r i e s .

2.

Advance consumer buying o f sugar and o t h e r s t a p l e
foods was evident f o r a b r i e f p e r i o d .

3.

Domestic orders f o r i n d u s t r i a l , r a i l , and u t i l i t y
equipment are being placed i n l a r g e volume. The
b u y i n g wave i n i n d u s t r i a l l i n e s has been centered
most s p e c t a c u l a r l y i n the machine t o o l i n d u s t r y .
I t i s understood t h a t machinery orders c h i e f l y
r e f l e c t delayed replacement and modernization o f
e x i s t i n g i n d u s t r i a l c a p a c i t y , r a t h e r than c r e a t i o n
o f a d d i t i o n a l c a p a c i t y , and t h a t t h e buying i s
based upon t h e e x p e c t a t i o n o f l a r g e r business
volumes. Orders f o r r a i l r o a d and e l e c t r i c power
equipment, on the o t h e r hand, are l a r g e l y f o r t h e
purpose o f expanding c a p a c i t y .

4.

A considerable volume o f f o r e i g n i n q u i r i e s f o r
American goods, p a r t i c u l a r l y from Canada and L a t i n
America, has been r e p o r t e d , b u t few o f these i n q u i r i e s , a p a r t from Canadian i n q u i r i e s f o r machinery,
are b e l i e v e d t o have r e s u l t e d as yet i n t h e p l a c i n g
of orders. 4

The f e v e r i s h pace o f the buying movement r e f l e c t e d

speculative

and p r e c a u t i o n a r y o r d e r i n g f o r i n v e n t o r y , b u t t h e movement a l s o
has i n c l u d e d p l a c i n g o f s i z a b l e o r d e r s f o r c e r t a i n types o f

capital

goods.
T h i s b u y i n g r u s h emphasized s t r i k i n g l y t h e c o n t r a s t between
business and f i n a n c i a l e x p e c t a t i o n s a t t h e outbreak o f war i n 1939
and such e x p e c t a t i o n s i n 1914.

A t t h e b e g i n n i n g o f t h e l a s t war>

market e x p e c t a t i o n s were guided by a r e c o l l e c t i o n o f t h e e f f e c t s
upon business o f t h e numerous l o c a l wars, u s u a l l y o f b r i e f
which had o c c u r r e d d u r i n g t h e hundred years a f t e r 1815.

duration,

These wars

had i n t e r f e r e d i n g r e a t e r o r l e s s degree w i t h o r d i n a r y business, and
i t was b e l i e v e d t h a t a g e n e r a l European war would depart from
precedent o n l y i n t h a t i t would i n t e r f e r e f a r more s e r i o u s l y w i t h
business.

The l o n g d u r a t i o n and t h e i n f l a t i o n a r y consequences o f

t h e war were e n t i r e l y unforeseen.

As a r e s u l t o f gloomy business

e x p e c t a t i o n s and o f t h e w o r l d - w i d e banking and f i n a n c i a l

crisis

which accompanied d e c l a r a t i o n o f war i n 1914, b u s i n e s s , which was
a l r e a d y i n a semi-depi*essed s t a t e i n most c o u n t r i e s , t u r n e d s h a r p l y
downward i n t h e l a t t e r p a r t o f 1914.
Business e x p e c t a t i o n s a t t h e outbreak o f xvar i n 1939 were
based d i r e c t l y upon memories o f t h e p o w e r f u l i n f l a t i o n a r y
e x e r t e d by t h e war o f 1914-18.

stimulus

I n f o r m i n g business judgments,

l i t t l e weight was g i v e n t o the p o s s i b l e e f f e c t s upon our economy




-3o f the d i s r u p t i o n o f peacetime t r a d e i n European c o u n t r i e s , and
t h e r e t r o s p e c t i v e view of t h e war o f 1914-18 seemed to be one i n
which t h e developments o f those years were telescoped i n t o a
s i n g l e episode.

I t was a p p a r e n t l y f o r g o t t e n t h a t the increase i n

our exports which got under way l a t e i n 1914 was a t f i r s t based
i n considerable p a r t on t h e combination o f h i g h crop y i e l d s
t h i s country and r a t h e r poor y i e l d s elsewhere, t h a t

in

industrial

a c t i v i t y i n t h e U n i t e d States d i d not t u r n up u n t i l w e l l i n t o 1915,
and t h a t t h e upward sweep o f commodity p r i c e s d i d not begin u n t i l
l a t e i n that year.

Moreover, l i t t l e thought was given t o the

d i f f e r e n c e between c o n d i t i o n s now and c o n d i t i o n s d u r i n g the l a s t
war.

This was most s p e c t a c u l a r l y i l l u s t r a t e d i n the sugar market,

where memories o f wartime shortages and h i g h p r i c e s l e d , d e s p i t e
e x i s t i n g l a r g e s u p p l i e s , t o a b r i e f rush o f buying by both p r o f e s s i o n a l t r a d e r s and consumers.
The business and f i n a n c i a l community, b y b a s i n g i t s

expectations

i n 1914 on t h e assumption t h a t the experience o f e a r l i e r wars was
d i r e c t l y a p p l i c a b l e , completely misjudged t h e economic impacts o f
t h e Great War.

I t i s u n l i k e l y t h a t i t s l o n g d u r a t i o n and i n f l a -

t i o n a r y e f f e c t s could i n any event have been foreseen, but i t seems
a p p r o p r i a t e t o suggest t h a t business and f i n a n c i a l

expectations

a t t h e outbreak o f war i n 1939, founded upon a simple p r o j e c t i o n
o f our l a s t previous wartime experience, may t u r n out to have been




as misguided i n many respects as t h e e x p e c t a t i o n s which p r e v a i l e d
i n 1914.

I t would s u r e l y be dangerous t o assume t h a t the behavior

o f our commodity and s e c u r i t y markets f o l l o w i n g t h e outbreak o f
war r e f l e c t e d a c a r e f u l a p p r a i s a l o f t h e probable impacts o f war
upon our economy.

Short Term and Longer Term Prospects

A p p r a i s a l o f t h e s h o r t t e i m and longer term e f f e c t s o f t h e
European war upon t h e American economy w i l l be based upon the
assumptions t h a t t h e wtkr w i l l continue f o r s e v e r a l years and t h a t
t h e scale of a c t u a l h o s t i l i t i e s w i l l grow; t h a t the U n i t e d States
w i l l not enter the war; and t h a t our embargo on arms exports to
b e l l i g e r e n t s w i l l be repealed.

None o f these assumptions can be

regarded as c e r t a i n .




(1) The f a i l u r e o f Great B r i t a i n end France t o f u r n i s h
d i r e c t m i l i t a r y a i d t o Poland and the i n s i g n i f i c a n t scale
o f t h e f i g h t i n g i n t h e neighborhood o f the French-German
border g i v e some substance t o t h e view t h a t t h e war may
perhaps be brought t o a quick close a f t e r German m i l i t a r y
o p e r a t i o n s i n Poland have been completed. I n t h a t event,
most o f the economic tendencies considered below w i l l f a i l
to materialise.
(2) The assumption t h a t t h e U n i t e d States w i l l not e n t e r
t h e war provides a f a i r l y s a f e b a s i s f o r a n a l y z i n g the
s h o r t term e f f e c t s o f European war upon our economy, but
t h i s assumption becomes l e s s c e r t a i n i n a p p r a i s i n g the
l o n g e r term impacts of war. I f the U n i t e d States
e v e n t u a l l y p a r t i c i p a t e s as a b e l l i g e r e n t , much of the
a n a l y s i s here presented o f the l o n g e r term economic
e f f e c t s o f the European war upon t h e U n i t e d States w i l l
require modification.

-5-

(3) Wfcether t h e arms embargo w i l l be promptly l i f e d
depends upon t h e d e c i s i o n t ^ k e n by Coii^r*©© a t i t b
p r e s e n t session* I I ' t n e enDursro i s n o t r e p e a l e a ,
inoreusea e x p o r t s o f i n u u s t r i ^ l ju eninery e^na o f
bej .i-x'inifchea ^oous o n l y one s t e p renoveu froiri f i n i s h e d
dn.icaj iBiita w i l l serve t o replace is\ p u r t p i ^ o h i o i t e d
e x p o r t s t o b e l l i t j e r e i - t f c , but thife o f f s e t w i i l n o t
be complete.

These assumptions, d e s p i t e the u n c e r t a i n t i e s which surround
t h a n , r,re in accord w i t h t h e o f f i c i a l d e c l a r a t i o n s o f t h e
ent governments and o f t h e P r e s i d e n t o f the U n i t e d S t a t e s .

belligerThey

p r o v i d e , t h e r e f o r e , t h e most s u i t a b l e p r e s e n t b a s i s f o r a n a l y s i n g
t h e impacts o f war upon our economy.
I n a n a l y s i n g s h o r t t e r m p r o s p e c t s , a t t e n t i o n w i l l be d i r e c t e d
t o an a p p r a i s a l o f the p r o b a b l e coxirse o f business d u r i n g t h e
next n i n e months.

Whether the immediate expansion i n business

volumes induced by i n v e n t o r y b u y i n g w i l l be f o l l o w e d by a p e r i o d
o f s u s t a i n e d a c t i v i t y a t the h i g h e r l e v e l o r by a r e a c t i o n toward
e a r l i e r r a t e s o f a c t i v i t y depends upon ( l )

the s i z e o f t h e present

i n v e n t o r y s p u r t , and (2) t h e speed e t which l e s s t r a n s i t o r y

factors

o f demand become o p e r a t i v e .
I n a p p r a i s i n g l o n g e r t e r m p r o s p e c t s , a t t e n t i o n w i l l be focused
upon (1) t h e probable c h a r a c t e r o f d i r e c t wartime demands,

in

r e l a t i o n t o our p r e s e n t s t r u c t u r e i f p r o d u c t i o n ; and (2) the probable
magnitude o f t h e d i r e c t end i n d i r e c t e f f e c t s o f wartime demands
upon t o t a l economic a c t i v i t y , i n r e l a t i o n t o our p r e s e n t volumes
o f unused p r o d u c t i v e power.




The p o l i c i e s adopted by t h e F e d e r a l

Government and i t s agencies w i l l c o n s i d e r a b l y i n f l u e n c e t h e l o n g e r
terra e f f e c t s o f war demands upon our economy.

I f one set o f p o l i c i e s

i s adopted, wartime demands w i l l r e s u l t i n an e x o r b i t a n t

distor-

t i o n o f our s t r u c t u r e o f p r o d u c t i o n combined w i t h an inadequate
l e v e l o f u t i l i z a t i o n o f our t o t a l p r o d u c t i v e power; under d i f f e r e n t
p o l i c i e s , the d i s t o r t i o n o f our s t r u c t u r e o f p r o d u c t i o n could be
somewhat moderated, and the r a t e o f t o t a l economic a c t i v i t y considerably raised.

Inventories
P r i o r t o t h e outbreak o f war, i n v e n t o r i e s o f h i g h l y f a b r i c a t e d
goods appeared, on t h e basis o f t r a d e r e p o r t s , t o be somewhat low
i n r e l a t i o n t o p r e v a i l i n g and p r o s p e c t i v e r a t e s o f a c t i v i t y ,

while

s u p p l i e s o f f o o d s t u f f s and i n d u s t r i a l raw m a t e r i a l s were abundant.
S t o c k i n g o f f i n i s h e d goods by r e t a i l e r s and j o b b e r s , and o f semif a b r i c a t e d goods by manufacturers o f f i n a l p r o d u c t s , vma expected
t o c o n t r i b u t e t o a continued, gradual expansion o f business volumes
d u r i n g t h e autumn.

The f e v e r i s h buying which immediately f o l l o w e d

t h e outbreak o f wax g r e a t l y exceeded, however, a n y t h i n g which might
have been expected on these grounds.

T h i s buying movement, based

upon memories o f t h e p o w e r f u l i n f l a t i o n a r y s t i m u l u s exerted by t h e
l a s t war, r e f l e c t e d an a n t i c i p a t i o n b o t h o f p r i c o increases and
o f #0£fdiblc r u t u r e d i f f i c u l t i e s i n o b t a i n i n g d e l i v e r i e s .




-7-

Tlie more roc en t b e h a v i o r o f commodity and s e c u r i t y markets
suggest r. t h a t the s t r o n g l y o p t i m i s t i c i n i t i a l e x p e c t a t i o n s conc o r n i n g *mr demands may bo undergoing some m o d i f i c a t i o n , and t h a t
t h e f i r s t wavo o f f e v e r i s h i n v e n t o r y buying has subsided.

Despite

t h i s t e n t a t i v e i n d i c a t i o n t h a t t h e i n i t i a l mood o f buoyant o p t i m i s m
i s g i v i n g way t o a soberer a t t i t u d e , t h e p o s s i b i l i t y o f

further

e x t e n s i v e b u y i n g f o r i n v e n t o r y purposes s h o u l d not bo r u l e d o u t .
I n t h i s c o n n e c t i o n much depends upon t h o i n d u s t r i a l
p o l i c i e s Y & i c h are adoptod.

price

I f i t becomes e v i d e n t t o purchasers

t h a t p r i c e i n c r e a s e s a r c b e i n g put i n t o o f f o o t i n a number o f

linos,

a n t i c i p a t o r y b u y i n g ; v i l l bo f u r t h e r accentuated u n t i l t h e p o i n t

is

reached a t which i n d u s t r i e s have become loaded up - 1 t h goods and
increases i n a d m i n i s t e r e d p r i c e s have becazno g e n e r a l .

Prico

in-

creases i n such commodities a s , f o r example, s t e e l , copper, g l a s s ,
and lumber, r;ould b o t h encourage a resumption o f buying f o r

inven-

t o r y and weaken t h o impetus t o needed c a p i t a l oxpondxturu i n housing
and o t h e r f i e l d s '-vhich r i s i n g a c t i v i t y and incomes m i g h t othor?«iso be
expected t o p r o v i d e .

I n t h e ovont o f such p r i c e i n c r e a s e s , a

sharp r e a c t i o n i n business volumes i n l a t e 1939 o r o a r l y 1940, a f t e r
t h s i n v e n t o r y s p u r t has r u n i t s course, scoius s t r o n g l y p r o b a b l e •
I f , ho.vovor, f u r t h e r p r i c e increases o f t h i s c h a r a c t e r can be
avoided, t h o q u e s t i o n a r i s o s as t o t h o p r o b a b l e course o f business
a f t e r t h o s t i m u l u s o f i n v e n t o r y a c c u m u l a t i o n has ceasod.

Tho main-

tenance o r f u r t h e r expansion o f business volumes w i l l then depend




-s-

upon t h e emergence o f l o s s t r a n s i t o r y f a c t o r s o f demand.

Possible

sources o f increased demand may be considered under t h r o e main
classes:

e x p o r t s , expenditures o f the Federal Govornmont, and

private capital outlay.

A p p r a i s a l o f these t h r o e items suggests

t h a t over the next n i n e months t h e c o n t r i b u t i o n t o income made by
export sales - . / i l l increase o n l y moderately, and t h a t t h i s increase
may bo n e a r l y o f f s e t by a s m a l l d o c l i n o i n t h o Federal Governments
c o n t r i b u t i o n t o incono *

Consoq.uantly, ovon though p r i v a t e c a p i t a l

o u t l a y s are l i k e l y t o increase c o n s i d e r a b l y , business a c t i v i t y may
bo expected t o drop br.ek towards e a r l i e r l e v e l s i n tho e a r l y months
o f 1940, a f t o r i n v e n t o r y accumulation her. r u n i t s course»

Unless

tho Government, through i t s monetary and p r i c o p o l i c i e s and through
d i r e c t encouragement t o c a p i t a l ou.tlc.yn i n c e r t a i n l i n o s , makes a
v i g o r o u s e f f o r t t o cushion t h e d e c l i n e i n i n d u s t r i a l volumes, the
r a t o o f i n d u s t r i a l a c t i v i t y , f o l l o w i n g i t s present s p u r t , v d l l p r o bably d e c l i n e , d u r i n g tho f i r s t q u a r t e r o f 1940, t o a l e v e l o n l y
moderately above t h a t o f August, 1939*
F o r e i g n Trade
Tho b a s i s f o r Sic c o n c l u s i o n t h a t f o r e i g n t r a d e i s l i k e l y t o
e x e r t only a moderate expensive e f f e c t upon our economy i n t h e next
e i g h t o r nine months may best be i n d i c a t e d by c o n c i d o r i n g aeparateiy




1„

t h o e f f e c t s o f the n a v a l ulockado imposed by Great B r i t a i n
and France upon our t r a d e w i t h o t h e r European c o u n t r i e s ;

2.

t h e o f f e c t s o f the European war upon our t r a d e w i t h Great
B r i t a i n and France;

3.

the e f f e c t s o f the war upon our trade r a t h non-European
countries.

-9-

1.

The B r i t i s h - F r e n c h naval blockade w i l l probably be enforced

w i t h f a l l v i g o r from the b e g i n n i n g , and the t r a d e o f European
c o u n t r i e s o t h e r than Great B r i t a i n and France w i t h non-European
c o u n t r i e s w i l l be promptly and sharply c u r t a i l e d .

During the

f i r s t two years o f t h e l a s t war, a considerable volume o f American
goods consigned t o n e u t r a l c o u n t r i e s was allowed t o pass the
blockade, owing t o our repeated and f o r c e f u l p r o t e s t s a g a i n s t
B r i t i s h interference w i t h neutral shipping.

On r e a d i n g between

the l i n e s o f the statement on n e u t r a l i t y p o l i c y issued on September
15 by the Secretary o f S t a t e , the i n f e r e n c e seems f a i r l y

clear

t h a t wo s h a l l n o t again p r o t e s t s t r o n g l y a g a i n s t B r i t i s h i n t e r ference w i t h n e u t r a l t r a d e i n non-contraband goods, and t h i s

in-

ference i s confirmed by the P r e s i d e n t s n e u t r a l i t y message o f
September 21, i n which the recommendation was put forward t h a t
American ships be prevented from e n t e r i n g war zones as a means o f
avoiding incidents.

Although s e v e r a l o f the European n e u t r a l s have

s i z a b l e g o l d reserves which, i n view o f the wartime d i s r u p t i o n o f
t h o i r customary t r a d e channels, they would be w i l l i n g t o u t i l i z e
i n purchasing needed imports from the U n i t e d States and o t h e r nonEuropean sources, the s t r i c t r a t i o n i n g o f shipments t o these c o u n t r i e s
by the B r i t i s h and French f l e e t s w i l l prevent a n y t h i n g more than an
extremely g r a d u a l expenditure o f a v a i l a b l e i n t e r n a t i o n a l reserves i n
payment f o r imported goods.

As i s shown i n the t a b l e on the next

page, our exports t o countri.es whose t r a d e i s l i k e l y t o be a f f e c t e d




-10-

FOREIGN TRADE OF THE UNITED STATES I N 1938
(In millions of dollars)

Countries A f f e c t e d
by Naval Blockade
Germany
Poland
U.S.S.R.
ItalyNetherlands
Belgium
Switzerland
Scandinavian c o u n t r i e s
Other B a l t i c c o u n t r i e s
Balkan c o u n t r i e s
U n a l l o c a t e d g r a i n shipments
t o Canada

Exports

Imports

$133.7
24.7
70.1
58;4
98;4
76.7
10.6
111.6
15.7
20.0

$ 92.0
13.4
24il
41.3
31; 4
41 ;6
23.0
64.1
20.8
26.9

63.8

—

Net Exports
Or Imports {
t

41.7
11; 3
46.0
17.1
67.0
35;1
-12.4
47.5
- 5;1
- 6.9
63.8

683.7

378.6

305.1

533.1
133.8

113.2
54.1

403.9
79.7

655.9

172.3

483.6

411.8
264.5
299.7
256.7
55.9
92.2
86.4
35.8
8.9
244.1

267.0
223.0
262.5
128.4
50.5
15.3
94.3
58.5
112.3
197.8

144.8
41.5
37.2
128.3
5.4
76.9
- 7.9
-22.7
-103.4
46.3

TOTAL

1,756.0

1,409.6

346.4

GRAND TOTAL

3,095.6

1,960.5

1,135.1

TOTAL

U n i t e d Kingdom and France
U n i t e d Kingdom
France
TOTAL

Non-European Countries




Canada
C e n t r a l America
South America
Japan
China
A u s t r a l i a & New Zealand
Philippines
India
B r i t i s h Malaya
Other

-11-

by the blockade amounted i n 1938 t o #684 m i l l i o n s , or 22 percent
o f our t o t a l e x p o r t s ; our export s u r p l u s i n t r a d e w i t h these
c o u n t r i e s was #305 m i l l i o n s , or 27 percent o f our t o t a l export
surplus.

The d i r e c t l o s s i n our exports t o c o u n t r i e s a f f e c t e d by

the B r i t i s h - F r e n c h n a v a l blockade w i l l be p a r t l y compensated, however, by c e r t a i n i n d i r e c t o f f s e t s .

Thus, the u n a v a i l a b i l i t y o f

German and Swedish machinery t o non-European buyers should cause a
s h i f t i n demand t o American p r o d u c t s , and increased B r i t i s h purchases
o f Canadian bacon and b u t t e r t o r e p l a c e former shipments from Denmark
should tend i n d i r e c t l y t o increase Canadian buying o f U n i t e d States
goods.
2.

The speed a t which B r i t i s h and French purchases o f goods from

the U n i t e d States and o t h e r non-European sources w i l l be expanded
i s c h i e f l y a f u n c t i o n o f t h e n a t u r e o f the war and o f t h e i r general
wartime economic p o l i c i e s .

During the l a s t war, increased Govern-

ment expenditure l a r g e l y f i n a n c e d by borrowing served t o enlarge
the incomes o f t h e c i v i l i a n p o p u l a t i o n , w i t h the r e s u l t t h a t the
b e l l i g e r e n t governments were f o r c e d t o b i d h i g h e r and h i g h e r p r i c e s
i n the markets f o r m a t e r i a l s and l a b o r i n order t o compete e f f e c t i v e l y
w i t h r i s i n g c i v i l i a n expenditures.

I n the e a r l y years o f t h e war

B r i t i s h and French imports f e l t t h e f u l l impact o f r i s i n g
o u t l a y s as w e l l as o f governmental requirements.




civilian

As the war

-12-

i n f l a t i o n gained momentum, the growth i n t h e i r imports was l i m i t e d
o n l y by the p r o d u c t i v e power o f non-European sources o f supply and
by a v a i l a b l e s h i p p i n g c a p a c i t y .

Measures o f d i r e c t economic c o n t r o l ,

such as Government p r i o r i t i e s , r a t i o n i n g o f c i v i l i a n requirements,
and p r i c e and wage f i x i n g , were not e x t e n s i v e l y used d u r i n g the l a s t
war u n t i l sheer j>hysical l i m i t a t i o n s upon the volume o f incoming
s u p p l i e s , combined w i t h l o s s o f l i f e and o f p r o d u c t i v e power i n the
b e l l i g e r e n t c o u n t r i e s , made i t impossible t o s a t i s f y b o t h c i v i l i a n
demands and war needs.
The o u t l i n e s o f B r i t i s h and French wartime economic p o l i c i e s
have a l r e a d y become s u f f i c i e n t l y c r y s t a l l i z e d t o make i t

clear

t h a t they w i l l d i f f e r s h a r p l y from those which were f o l l o w e d i n
the l a s t war.

The general c h a r a c t e r o f these p o l i c i e s may be

approximately i n d i c a t e d by enumerating some o f the steps so f a r
taken by the B r i t i s h Government; the French Government f s measures,
d e s p i t e d i f f e r e n c e s i n d e t a i l , have f o l l o w e d a s i m i l a r p a t t e r n .
The steps taken by t h e B r i t i s h Government have i n c l u d e d ( l )

imposi-

t i o n o f exchange r e s t r i c t i o n s and l i c e n s i n g o f merchandise imports
and e x p o r t s ; (2) establishment o f a new Food M i n i s t r y t o c e n t r a l i z e
buying o f imported f o o d s t u f f s , l i c e n s e wholesalers and r e t a i l e r s ,
f i x p r i c e s , and r a t i o n consumption; (3) f i x i n g o f p r i c e s and
r a t i o n i n g o f s u p p l i e s o f key commodities, such as s t e e l , copper,
and g a s o l i n e ; (4) d i r e c t Government c o n t r o l over the a l l o c a t i o n




-13-

o f l a b o r and the s h i f t i n g o f workers; (5) c o n t r o l o f p r i v a t e
capital flotations;

(6) sharp increase b o t h i n e x i s t i n g d i r e c t

taxes and i n i n d i r e c t taxes on consumption, and extension o f t h e
excess p r o f i t s t a x , p r e v i o u s l y confined t o f i r m s working on
Government c o n t r a c t s ; and (7) establishment o f a d o l l a r - s t e r l i n g
r a t e o f s l i g h t l y over $4.00, which a i d s i n c u r t a i l i n g

civilian

consumption, i n c o n c e n t r a t i n g f o o d s t u f f and raw m a t e r i a l purchases
f r o m Qnpire sources, and i n m a i n t a i n i n g the c o m p e t i t i v e power i n
overseas markets o f the t e x t i l e and o t h e r l i g h t consumer goods
i n d u s t r i e s not f u l l y engaged i n meeting war demands.
Measures o f d i r e c t c o n t r o l , designed t o c u r t a i l

civilian

consumption and check n o n - e s s e n t i a l c a p i t a l e x p e n d i t u r e ,

will

p r o v i d e the c h i e f means o f a c h i e v i n g the f u l l e s t ' p o s s i b l e

applica-

t i o n o f p r o d u c t i v e resources t o the f i l l i n g o f war needs.

As has

been revealed by the Gorman experience, t h e system o f d i r e c t
o
c o n t r o l serves the*minimize i n f l a t i o n o f p r i c e s , costs and incomes,
and t o prevent an u n c o n t r o l l e d expansion o f i m p o r t s , a matter o f
s p e c i a l importance i n vie?/ o f the f a c t t h a t Great B r i t a i n and
France base t h e i r prospects o f v i c t o r y upon t h e i r own economic
s t a y i n g power and the gradual d e t e r i o r a t i o n o f popular morale i n
Germany, r a t h e r than upon quick m i l i t a r y successes.

I t was announced

on September 9 t h a t the B r i t i s h War Cabinet "decided to base t h e i r
p o l i c y on the assumption t h a t the war w i l l l a s t t h r e e years o r more."




-14-

One o f t h e c h i e f e l e m e n t s i n B r i t i s h and F r e n c h economic
i n g power c o n s i s t s o f t h e i r a b i l i t y t o o b t a i n needed s u p p l i e s

stayfrom

a b r o a d b y d r a w i n g upon t h e i r s u b s t a n t i a l r e s e r v e s o f g o l d and
mobilizable foreign assets.

C a r e f u l husbanding o f these

reserves

t o keep them f r o m b e i n g q u i c k l y d i s s i p a t e d i n payment f o r

non-

essential imports i s a c e n t r a l f i n a n c i a l objective of the

control

measures w h i c h have been i n t r o d u c e d .

I n this respect,

the

objective

t o w h i c h p o l i c i e s w i l l be g e a r e d i s s h a r p l y d i f f e r e n t f r o m t h a t
the l a s t war.

Owing t o d i r e c t advances f r o m t h e U n i t e d

of

States

Government f o l l o w i n g o u r e n t r y i n t o t h e w a r , t h e c a p a c i t y

of

G r e a t B r i t a i n and F r a n c e t o f i n a n c e t h e i r p u r c h a s e s f r o m a b r o a d
n e v e r became a c r u c i a l p r o b l e m , and g o l d was r e g a r d e d l e s s as a
s o u r c e o f e x t e r n a l b u y i n g power t h a n as an i n t e r n a l r e s e r v e
c u r r e n c y and c r e d i t .

for

M o b i l i z a t i o n o f t h e overseas investments

B r i t i s h and F r e n c h n a t i o n a l s was g r a d u a l and i n c o m p l e t e .

Most

of
of

t h e exchange w i t h w h i c h t o make payment f o r i m p o r t s was o b t a i n e d by
b o r r o w i n g a b r o a d , c h i e f l y f r o m t h e U n i t e d S t a t e s b u t t o some e x t e n t
also from the B r i t i s h Dominions.

The p r i n c i p a l i t e m s i n o u r b a l a n c e

o f i n t e r n a t i o n a l payments f o r t h e p e r i o d f r o m t h e m i d d l e o f 1914 t o
t h e end o f 1918 wore as f o l l o w s :




( I n

b m i o n s

o f

Excess o f m e r c h a n d i s e e x p o r t s
Payment e f f e c t e d t h r o u g h :
Gold imports
A m e r i c a n s e c u r i t i e s r e t u r n e d f r o m Europe
Foreign loans sold to p r i v a t e investors
i n the U.S.
D i r e c t advances o f U . S . Government
a f t e r A p r i l , 1917
TOTAL

d o l l a r s )

11.8
1.0
2.0
1.5
7.3
11.8

-15-

B r i t i s h and French g o l d reserves were a c t u a l l y l a r g e r a t the end
o f the war than they had been a t the beginning, and the marked
increase i n the volume of means o f payment was b e l i e v e d t o necess i t a t e the h o l d i n g o f l a r g e r gold reserves i n order t o p r o t e c t
the "soundness" o f the currency.
The changed present-day a t t i t u d e i n Great B r i t a i n and France
r e g a r d i n g the r o l e o f i n t e r n a t i o n a l reserves i n wartime i s
r e f l e c t e d i n the measures already taken.

clearly

I n both countries m o b i l i -

z a t i o n o f f o r e i g n balances, s e c u r i t i e s and p r i v a t e l y h e l d g o l d has
been ordered, and i n Great B r i t a i n g o l d reserves held by the Bank
o f England as backing f o r the note issue have been t r a n s f e r r e d t o
the E q u a l i z a t i o n Account t o make such g o l d a v a i l a b l e as a source
of e x t e r n a l purchasing power.

Although these i n t e r n a t i o n a l reserves

w i l l doubtless be drawn upon from the s t a r t t o pay f o r

essential

i m p o r t s , t l i e c u r t a i l m e n t o f imports f o r c i v i l i a n consumption w i l l
serve f o r a considerable p e r i o d t o o f f s e t t h e growth i n imports r e l a t e d s p e c i f i c a l l y t o war needs.

The r a t e a t which i n t e r n a t i o n a l

reserves are used up w i l l t h e r e f o r e be q u i t e gradual d u r i n g t h e
e a r l y months o f the war, but w i l l bo increased a t an a c c e l e r a t i n g
r a t e as a widening o f the scale o f h o s t i l i t i e s , consumption o f war
m a t e r i a l , l o s s o f l i f e , and impairment o f p r o d u c t i v e

facilities

through enemy bombing and o r d i n a r y d e p r e c i a t i o n , make necessary a
l a r g e r dependence on overseas sources o f supply.




-16-

I f t h i s reasoning i s v a l i d , B r i t i s h and French purchases
o f goods from the U n i t e d States and o t h e r non-European c o u n t r i e s
w i l l increase o n l y moderately over the next n i n e months, but
w i l l show a p r o g r e s s i v e l y l a r g e r expansion as the war proceeds.
Forced c u r t a i l m e n t o f c i v i l i a n consumption and unneeded c a p i t a l
o u t l a y , l e n g t h e n i n g o f working hours, and t r a n s f e r o f workers
from d i s t r i b u t i v e and s e r v i c e occupations t o p h y s i c a l p r o d u c t i o n
w i l l c o n s i d e r a b l y r e s t r i c t the growth o f imports i n the e a r l y
stages o f the war.
I n a d d i t i o n , i t i s already apparent t h a t Groat B r i t a i n and
France w i l l seek t o l i m i t f u r t h e r the d r a f t s on t h e i r

inter-

n a t i o n a l reserves by o b t a i n i n g t h e i r s u p p l i e s as l a r g e l y as p o s s i b l e
from Empire sources and from c o u n t r i e s w i l l i n g t o take B r i t i s h
o r French goods i n r e t u r n .

A consoquonco o f t h i s p o l i c y i s t h a t

the b u l k o f B r i t i s h and French purchases o f f o o d s t u f f s and raw
m a t e r i a l s w i l l be made elsewhere than i n the U n i t e d S t a t e s .

Since

t h e p r o d u c t i v e c a p a c i t y o f o u t l y i n g c o u n t r i e s i n f o o d s t u f f s and
raw m a t e r i a l s has g r e a t l y increased since the l a s t war, B r i t i s h
and French xvar demands f o r American goods w i l l be much l e s s d i v e r s i f i e d than i n 1914-18 and w i l l be c h i e f l y concentrated i n heavy
i n d u s t r i a l p r o d u c t s , such as m u n i t i o n s , chemicals, petroleum
p r o d u c t s , a i r p l a n e s , s h i p s , motor t r u c k s , machinery and s t e e l .




-17-

I n s t e e l , motor t r u c k s , petroleum products, and machinery o t h e r
t h a t machine t o o l s , American i n d u s t r y can now handle en enlarged
f o r e i g n demand, b u t the remaining i n d u s t r i e s mentioned above are
a l r e a d y working a t c a p a c i t y o r n e a r - c a p a c i t y l e v e l s t o f i l l

existing

f o r e i g n and domestic o r d e r s , and t h e i r a b i l i t y t o meet enlarged
f o r e i g n demands w i l l be governed by the r a t e a t which they can
expand o r convert t h e i r p r o d u c t i v e

3.

facilities.

The o u t l o o k f o r U n i t e d States t r a d e w i t h non-European c o u n t r i e s

i s c o n d i t i o n e d by the f a c t t h a t reserves o f g o l d and f r e e f o r e i g n
exchange h e l d by these c o u n t r i e s are g e n e r a l l y q u i t e l i m i t e d .

Al-

though a temporary wave o f i n v e n t o r y buying by i m p o r t e r s i n c o u n t r i e s
whose e x t e r n a l t r a d e i s not s u b j e c t t o r i g i d c o n t r o l s i s an immediate
possibility,

the magnitude o f such a movement i s l i m i t e d by the

i n a b i l i t y o r d i s i n c l i n a t i o n o f most c o u n t r i e s i n t h i s group t o
a l l o w t h e i r e x t e r n a l reserves t o become depleted i n payment f o r
imports.

Leaving aside the p o s s i b i l i t y o f a b r i e f spurt i n inven-

t o r y buying from abroad, tho growth i n our net exports t o nonEuropean c o u n t r i e s w i l l t h e r e f o r e be governed p r i m a r i l y by tho r a t e
a t which Great B r i t a i n and France f i n d i t e s s e n t i a l t o increase t h e i r
net imports from these c o u n t r i e s .

The f r e e exchange which t h e y

r e c e i v e f o r f o o d s t u f f s and raw m a t e r i a l s shipped t o Gr-*at B r i t a i n
and France can be used to buy American goods.




Thus, i n a d d i t i o n

-18-

t o t h e d i r e c t e f f e c t upon our t r a d e balance o f increased B r i t i s h
and French purchases here, our net sales t o non-European c o u n t r i e s
w i l l be s t i m u l a t e d as an i n d i r e c t r e s u l t o f l a r g e r B r i t i s h and
French net purchases from them.
The growth i n our net exports t o non-European c o u n t r i e s x v i l l
not f u l l y keep pace, however, w i t h the expansion i n t h e i r net
exports t o Great B r i t a i n and France, and the gap x v i l l be p a r t i c u l a r l y
marked d u r i n g the e a r l y stages o f the war.

T h i s gap i s due c h i e f l y

t o the f o l l o w i n g f a c t o r s :




(1) B r i t i s h and French imports o f a number o f
c o l o n i a l p r o d u c t s , such as rubber from B r i t i s h - o w n e d
p l a n t a t i o n s i n Malaya, copper from B r i t i s h - o x m e d mines
i n A f r i c a , and petroleum from B r i t i s h - o w n e d w e l l s i n I r ^ q
and I r a n , i n v o l v e a much s m a l l e r net o u t l a y by Great B r i t a i n
then i s represented by t h e value of the products imported,
since t h e earnings o f these e n t e r p r i s e s are r e t u r n e d as
income taxes t o t h e B r i t i s h Treasury and as dividends t o
B r i t i s h stockholders.
(2) A considerable p a r t of the exports o f l i n p i r e
c o u n t r i e s t o Great B r i t a i n end France w i l l be made on
c r e d i t ; such c o u n t r i e s as Canada, I n d i a , A u s t r a l i a , and
New Zealand, w i l l a l l o w a p o r t i o n o f the s t e r l i n g proceeds
o f t h e i r export shipments t o remain as unspent balances i n
London, i n s t e a d o f demanding f u l l payment by Great B r i t a i n
i n g o l d o r d o l l a r exchange which c o u l d be used by them t o
buy American goods. A l t e r n a t i v e l y , these accumulating
s t e r l i n g balances may e i t h e r be funded i n t o d i r e c t advances
by t h e Dominion Governments t o t h e U n i t e d Kingdom, o r used
t o repay t h e o u t s t a n d i n g e x t e r n a l debt o f the Dominions.
I n any event, the accumulation of unspent s t e r l i n g balances
by the Dominions i m p l i e s a l a r g e r increase i n Dominion exp o r t s than i n t h e i r imports from abroad, and a correspondi n g l y s m a l l e r impact upon American e x p o r t s .

-19-

(3) I n most L a t i n American c o u n t r i e s and o t h e r nonEmpire s u p p l i e r s o f f o o d s t u f f s ana raw m a t e r i a l s t o Great
B r i t a i n and France, t h e process by which an expansion o f
exports i s communicated t o h i g h e r incomes, nnd an enlarged
demand f o r i m p o r t s , always i n v o l v e s some delays, and under
present c o n d i t i o n s t h i s l a g i s l i k e l y t o be accentuated by
d e l i b e r a t e p o l i c y i n t h e c o u n t r i e s concerned, as a means o f
r e p l e n i s h i n g t h e i r depleted g o l d and exchange reserves.
Thus, t h e i r purchases from us w i l l a t f i r s t respond o n l y
s p a r i n g l y t o the growth i n t h e i r export shipments t o Great
B r i t a i n and France,
I t may be concluded t h a t t h e growth i n our expox't balance i n
t r a d e w i t h non-European c o u n t r i e s i s l i k e l y t o be q u i t e l i m i t e d
d u r i n g t h e f i r s t n i n e o r t e n months o f the war, but t h a t i t

will

increase more r a p i d l y as Groat B r i t a i n and Franca are f o r c e d t o
enlarge t h e i r imports o f f o o d s t u f f s and raw m a t e r i a l s , and as L a t i n
American end o t h e r non-European c o u n t r i e s , having b u i l t up comfortable reserves o f g o l d and exchange, become more disposed t o spend
on U n i t e d States products t h e proceeds o f t h e i r increased sales t o
Gre&t B r i t a i n end France.

The non-European demand f o r our goods,

though l i k e l y t o be somewhat more d i v e r s i f i e d than t h a t o f Great
B r i t a i n and France, w i l l be l a r g e l y concentrated i n c a p i t a l goods and
d u r a b l e consumer goods.

I n the f i r s t p l a c e , Germany, now v i r t u a l l y

cut o f f from non-European t r a d e , has beon an important s u p p l i e r o f
machinery, chemicals, automobiles, and o t h e r h i g h l y f a b r i c a t e d
i n d u s t r i a l goods.

I n the second p l a c e , Great B r i t a i n and France

w i l l undoubtedly t r y , through c u r t a i l m e n t o f domestic consumption,




-20t o m a i n t a i n the e x p o r t i n g c a p a c i t y of the l i g h t consumer goods
i n d u s t r i e s , such as t e x t i l e s , but w i l l f i n d i t impossible t o
export any s i g n i f i c a n t volume o f heayy i n d u s t r i a l goods, i n view
o f t h e i r own war requirements.

T h i r d , the war w i l l g r e a t l y a c c e l e r -

a t e i n d u s t r i a l i z a t i o n i n t h e B r i t i s h Dominions and i n South America,
which w i l l i n v o l v e purchases of i n d u s t r i a l equipment here.
Our export s u r p l u s , which r a n close t o $100 m i l l i o n s a month
throughout 1938 and d e c l i n e d a b r u p t l y a f t e r t h e t u r n o f the year
t o an average l e v e l of $57 m i l l i o n s f o r t h e f i r s t e i g h t months
o f 1939, should increese g r a d u a l l y over t h e next e i g h t o r n i n e
months, perhaps reaching t h e 1938 l e v e l by about t h e middle o f 1940.
I f i t i s assumed t h a t the d r a f t s made upon B r i t i s h and French i n t e r n a t i o n a l reserves up t o the middle o f 1940 w i l l bo roughly o f f s e t by
replenishment o f g o l d and exchange reserves h e l d by o u t l y i n g
c o u n t r i e s , t h i s would leave a v a i l a b l e f o r f o r e i g n net purchases o f
goods and s e r v i c e s from us an amount about e q u i v a l e n t t o the new
g o l d produced d u r i n g t h e p e r i o d .

Foreign p r o d u c t i o n o f new g o l d ,

e x c l u d i n g Russian output end a small amount produced i n European
c o u n t r i e s which are a f f e c t e d by the n a v a l blockade, i s r u n n i n g a t
t h e r a t e o f $75 t o $BQ m i l l i o n s a month, and t h i s f i g u r e should not
d i f f e r s u b s t e n t i a l l y from our average monthly n e t exports o f goods
end s e r v i c e s i n t h e n i n e months ending June, 1940.

Although our

export s u r p l u s w i l l increase o n l y s l o w l y a t f i r s t , t h e s h i f t




in

-21-

composltion o f our exports w i l l promptly o x e r t a s t r o n g s t i m u l u s
t o c a p i t a l expenditures i n the i n d u s t r i e s s p e c i f i c a l l y a f f e c t e d
by f o r e i g n demands•
P a r e n t h e t i c a l l y , i t should be added t h a t , although the p r e ceding a n a l y s i s has d e a l t o n l y \ v i t h probable tendencies i n the
f o r e i g n demand f o r American p r o d u c t s , our t r a d e balance a c t u a l l y
depends upon the magnitude o f t h i s demand i n r e l a t i o n t o our
demand f o r f o r e i g n goods.

I n c o n s i d e r i n g t h e probable magnitude

o f t h e s t i m u l u s which f o r e i g n t r a d e w i l l f u r n i s h to the American
economy, i t has seemed a p p r o p r i a t e , however, t o omit c o n s i d e r a t i o n
o f t h i s second f a c t o r because the scale upon -afcich we buy imported
goods i s i t s e l f governed l a r g e l y by the l e v e l o f a c t i v i t y and
incomes i n t h i s c o u n t r y .

The p r o b a b i l i t y t h a t our exports w i l l

increase o n l y moderately over the next n i n e months w i l l

therefore

tend, i n the absence o f p o w e r f u l l y s t i m u l a t i n g domestic i n f l u e n c e s ,
t o l i m i t the expansion o f our purchases o f imported goods.

Never-

t h e l e s s , t h e heavy forward buying which immediately f o l l o w e d the
outbreak o f war w i l l undoubtedly be i n f l e c t e d i n increased raw
m a t e r i a l imports over the next few months.

During t h i s b r i e f

p e r i o d o f i n v e n t o r y accumulation, t h e i n f l o w o f raw products
from abroad should increase more r a p i d l y t h a n our shipments t o
foreign countries.




I n t h a t event, our export surplus may be

-22-

expected t o d e c l i n e somewhat d u r i n g , say, t h e next t h r e e months
and t o begin t o increase a f t e r t h e p e r i o d o f i n v e n t o r y
accumulation has come t o an end.

The preceding a n a l y s i s of t h e impact o f war upon our f o r e i g n
t r a d e may be b r i e f l y summarized.

Our t r a d e w i t h European c o u n t r i e s

o t h e r t h a n Great B r i t a i n and France, which produced an export
s u r p l u s o f #305 m i l l i o n s i n 1938, w i l l probably be s u b s t a n t i a l l y
c u r t a i l e d , owing t o the B r i t i s h - F r e n c h n a v a l blockade.

This

d i r e c t l o s s i n t r a d e w i l l be p a r t l y compensated, however, by
c e r t a i n i n d i r e c t o f f s e t s , such as L a t i n American purchases from
the U n i t e d S t a t e s o f machinery f o i m e r l y imported from Germany.
I n view o f t h e B r i t i s h and French detexmination t o draw s p a r i n g l y
upon t h e i r g o l d and exchange reserves, which c o n s t i t u t e an
important element i n economic s t a y i n g power, t h e i r net imports
from the U n i t e d States w i l l increase o n l y moderately d u r i n g the
e a r l y months o f t h e war as increased i m p o r t a t i o n o f goods r e l a t e d
d i r e c t l y t o war needs w i l l be o f f s e t by f o r c e d c u r t a i l m e n t o f
imports f o r c i v i l i a n consumption.

The increase i n net imports

from t h e U n i t e d States w i l l l a t e r become i n c r e a s i n g l y s u b s t a n t i a l
as a widening o f t h e scale o f h o s t i l i t i e s , consumption o f war
m a t e r i a l , l o s s o f l i f e , and impairment o f p r o d u c t i v e

facilities

through enemy bombing and o r d i n a r y d e p r e c i a t i o n make necessary a
l a r g e r dependence on overseas sources of supply.




Increased

-23-

B r i t i s h and French demand f o r our goods w i l l be l a r g e l y concentrated
i n heavy i n d u s t r i a l p r o d u c t s , f o o d s t u f f s and raw m a t e r i a l s being
obtained c h i e f l y from Enpire sources and from L a t i n A m e r i c a , whose
p r o d u c t i v e power i s much g r e a t e r than i n 1914-18.

S i m i l a r l y , our

net exports t o non-European c o u n t r i e s w i l l increase o n l y s l o w l y
d u r i n g t h e e a r l y months o f t h e war, showing an i n c r e a s i n g l y r a p i d
expansion, however, as Great B r i t a i n and France f i n d i t

necessary

t o enlarge t h e i r imports o f f o o d s t u f f s and raw m a t e r i a l s , and as
L a t i n American and o t h e r non-European c o u n t r i e s , having r e p l e n i s h e d
t h e i r g o l d and exchange reserves, begin t o spend on U n i t e d States
products a h i g h e r p r o p o r t i o n o f the proceeds of t h e i r increased
sales t o b e l l i g e r e n t s .

Non-European demand f o r U n i t e d States

p r o d u c t s , though somewhat more d i v e r s i f i e d than t h a t o f Grest B r i t a i n
and France, w i l l be l a r g e l y concentrated i n heavy i n d u s t r i a l p r o d u c t s ,
and these combined demands w i l l induce a p r o g r e s s i v e expansion o f
p r o d u c t i v e c a p a c i t y i n the i n d u s t r i e s s p e c i f i c a l l y a f f e c t e d .
Combining these judgments concerning our t r a d e w i t h p a r t i c u l a r
groups o f c o u n t r i e s , i t would appear t h a t our t o t a l exports w i l l
show o n l y a moderate expansion over t h e next n i n e months, t h a t
o v e r , say, t h e next t h r e e months the increase i n imports associated
w i t h i n v e n t o r y accumulation i n t h i s country may cause a temporary
c o n t r a c t i o n i n our export s u r p l u s , and t h a t t h e r e a f t e r our excess




o f exports w i l l tend a t f i r s t t o increase o n l y g r a d u a l l y .

Over

t h e l o n g e r t e r n , however, our net exports w i l l expand a t an acc e l e r a t i n g r a t e as t h e war proceeds.

The growth i n e x p o r t s , b o t h

a t once and over the l o n g e r term, w i l l occur p r i m a r i l y i n such
products as m u n i t i o n s , chemicals, a i r p l a n e s , machinery,

steel,

petroleum p r o d u c t s , motor t r u c k s , and passenger automobiles, w h i l e
American a g r i c u l t u r a l products and l i g h t consumers goods, such as
t e x t i l e s , w i l l be comparatively l i t t l e a f f e c t e d by increased f o r e i g n
demands.

The f i n a n c i a l , c a p a c i t y o f f o r e i g n c o u n t r i e s to purchase

American goods, and t h e a v a i l a b i l i t y o f s h i p p i n g c a p a c i t y i n r e l a t i o n
t o wartime t r o d e requirements w i l l be considered i n appendices t o
t h i s memorandum.