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H' I E


C Ofl P Y


L i S n a ' i V


America's Financial Position as
Affected by the European War
An Address

M e m b e r of the


American Academy Political and Social Science
Philadelphia, Pa.
May 1, 1915




x '.t it




.H4S e n t out with the Compliments of George H. Paine, Philadelphia

B y W . P . G . HARDING.

W e hear a good deal nowadays about dollar exchange
as applied to the financing of transactions arising f r o m our
trade with foreign countries. A year ago this was almost
an unknown expression, and, generally speaking, long bills
drawn against international transactions were in sterling, in
reichsmarks or in francs. Our great incorporated banking
institutions were not permitted to engage in the acceptance
business, and when a cargo of grain or cotton left an American port f o r Liverpool, d r a f t s against the shipment were
drawn in sterling, or when a vessel laden with dyes tuffs or
jute bagging cleared from Bremen or Hamburg for Boston
or Savannah, credits covering the invoices were expressed
in reichsmarks, so that the foreign banker exacted his toll
in both directions. In April, 1 9 1 4 , however, the New Y o r k
Legislature, by statute, permitted banks incorporated by that
State to accept d r a f t s and bills of exchange drawn against
not only shipments of goods to and from foreign countries,
but against domestic transactions as well. T h e Federal Reserve Act, which was enacted by Congress in December,
1 9 1 3 , contained a clause permitting National banks, in transactions involving the importation or exportation of goods, to
accept f o r amounts not exceeding 50 per cent, of their capital
and surplus; and by a recent amendment, this limitation has
been extended to the full amount of capital and surplus.
Figures recently compiled show that trust companies in
N e w Y o r k State, and the National banks have outstanding
$ 1 1 7 , 0 0 0 , 0 0 0 of acceptances.

The development of the American acceptance business
has undoubtedly been promoted by the European W a r , and
the progress already made by a large N e w Y o r k City
National bank toward establishing foreign branches under
the provisions of the Federal Reserve Act, indicates a disposition on the part of the National banks to supplement the
efforts of the trust companies that have already established
foreign branches and engage in financial operations of an
international character. T h e most inviting field f o r foreign
branches at present seems to lie in the West Indies, in the
Canal Zone and in the South American countries. T h e conference of South American financiers soon to be held in
Washington, f o r which Congress has made provision, is an
evidence of the interest that our Government is taking in
the development of closer trade relations with our South
American neighbors. While we have f o r years been large
purchasers of South American commodities, such as coffee,
rubber, nitrate and hides, our exports to those countries have
been negligible as compared with the trade controlled by
European nations. T h e deplorable conditions now existing
throughout Europe have not only given us an opportunity
of taking over a substantial part of this business, but have
almost compelled us to arrange to do so, besides opening the
w a y f o r an extension of our trade with Europe and with
the Orient.
Shortly a f t e r the outbreak of the w a r last summer,
international balances against us 011 current account were
ascertained to be around $450,000,000, and it was estimated
at the same time that the total value of American securities
held abroad was probably not less than $6,000,000,000.
Notwithstanding the serious depression in cotton, which
fortunately proved temporary, the loss in that staple was
more than made up in the total volume of our trade by the
high prices received f o r our exports of foodstuffs. T h e
balance against us was in a few months entirely wiped out,
and large balances in our f a v o r began to accumulate. C e r -

tain lines of industry in this country, such as the manufacture of munitions of war and accessories, have received a
tremendous impetus. Reports to the Department of Commerce indicate, according to a statement made by Secretary
Redfield, total exports f o r the current fiscal year of two and
three-quarter billion dollars, with a resulting trade balance
in our f a v o r of about one and a quarter billions.
balance, however, is due to our smaller volume of imports,
rather than to increased exports. F o r the past nine months
our excess of exports over imports has amounted to
$719,000,000, and it is thought possible that our net trade
balance f o r the calendar year of 1 9 1 5 may be as high as
$2,000,000,000, or about four times what might have been
expected under normal conditions. A s against this all the
belligerent powers have been obliged to float temporary
loans f o r enormous sums, to which there is reason to believe
substantial subscriptions have been made in this country,
and should the war continue for several months longer, it
is thought that American subscriptions will undoubtedly
assume f a r greater proportions. T h e removal of stock exchange restrictions and the notable rise in the market value
of standard stocks and bonds which has been in evidence
f o r some weeks past, together with the breadth of the
market, have given foreigners an excellent opportunity to
dispose of their American securities, and while there may
have been some purchases f o r European account, it seems
certain that sales by foreigners have greatly exceeded their
purchases, some authorities contending that since the beginning of the war net sales have been made in our market f o r
foreign account of about 2,000,000 shares of stock and
possibly $300,000,000 of bonds; these figures, however, are
probably exaggerated. T h e " A n n a l i s t " in its issue of April
5th sums up the situation as f o l l o w s :
" E u r o p e has been selling our stocks and bonds
steadily but only in relatively small amounts. It was
carefully estimated a month ago that European sales
were averaging about $1,000,000 a day. It is believed

that the temptation of rapidly risen prices has led to
somewhat heavier selling than within the last week, but
even if the European liquidation averaged steadily
$2,000,000 a day it would fall f a r short of the current
excess of exports, which f o r the last three months has
averaged about $5,000,000 a day. T h e invisible balance against us is as undetermined as the amount of
Europe's holdings of our securities, but it can hardly
be $2,000,000 a day and may be less than $1,000,000.
If it were $2,000,000 and Europe was selling us each
day that amount of securities, we would still be accumulating net credits at the rate of $1,000,000 a day
through our excess of exports over imports."
It is, of course, impossible f o r the unanointed to predict
the duration of the w a r or its ultimate results, but there are
several elements that will enter into our financial position
at the close of the war. One is the duration of war, and
another is the terms of peace. Should the w a r be brought
to a close in the near future 011 the basis of a draw, the
demands upon capital would, of course, be much less than
would be the case if it is fought to a finish. In that event,
our position would be somewhat different should war settlements be made by cession of territory only, than it would be
should large cash indemnities be imposed by the victors
upon the vanquished, which would involve complicated readjustments of capital.
Some authorities hold that the
European countries have much greater wealth than is generally supposed, and that their recuperative powers are correspondingly greater, but it seems clear that no nation can
withstand for a very long period of time the tremendous
loss of life and property which has characterized the present
conflict. The first effects of a peace that follows a great
war are by 110 means a sure indication of what the ultimate
results will be, and sometimes it happens that the financial
status of nations that have not been engaged in the war is
disturbed almost as seriously as that of the participants.
When the long series of Napoleonic wars had been brought

to a close in 1 8 1 4 by the exile of the French Emperor to
Elba, there was a pronounced trade revival in England,
which came to a sudden halt upon Napoleon's return to
France in March, 1 8 1 5 . H i s final defeat at Waterloo resulted in a great advance in British Consols, but the United
Kingdom entered at the same time into a period of industrial
and commercial depression which lasted several years. A
similar depression was also experienced in this country,
which had, since 1 8 1 2 , been engaged in a war with England.
Our Civil W a r witnessed a destruction of life and property
and an accumulation of debt somewhat parallel to that now
being experienced by European belligerents, and it was also
accompanied by a marked inflation of the currency, under
the stimulus of which the dominant section experienced a
trade revival accompanied by an era of railroad building
which continued until 1 8 7 3 . Our Civil W a r was the source
of serious inconvenience to Great Britain, which country
was dependent upon the South for the greater part of its
cotton supply, yet England was prosperous during the time
of our conflict and during the year succeeding its close, so
that not until the crash which followed the failure in 1866
of the London firm of Overend, Gurney & Company, did she
face the greatest crisis she had experienced in two generations. T h e war indemnity imposed upon France by Germany in 1 8 7 1 of 5,000,000,000 francs, made it necessary
f o r French investors desiring to subscribe to the indemnity
loan to become heavy sellers of securities in London and
British markets, as well as French, were
seriously affected, so that within a few months it became
impossible to sell American securities abroad, maturing
loans were called, and many great railroad enterprises were
halted during their construction. T h u s the indemnity to
Germany was a contributing cause to the great crisis of
Our a f f a i r with Spain in 1898, is, according to
modern standards, hardly worthy of being dignified with
the name of war. It, however, marked the termination of

the years of depression which followed the panic of 1893,
and at its conclusion began one of the greatest expansion
periods of modern history, which, suffering 110 serrous interruption either f r o m the Boer W a r or from Russia's war
with Japan, came to a sudden end in the fall of 1907.
W e should not forget that, although we have passed
through 110 pronounced boom periods since 1907, there is a
strong temptation today towards inflation in this country as
well as in Europe, where inflation is a necessary result of
war financing. The loans of our National banks were on
March 4th, according to reports to the Comptroller of the
Currency, about $ 142,000,000 greater than they were 011 the
same date in 1 9 1 4 , which were in turn greater by about
$232,000,000 than appeared in corresponding statement in
Restoration of peace will necessarily bring about
many readjustments. Demand f o r w a r material will cease,
and in its place will spring up a demand f o r the commodities
of ordinary trade, and particularly f o r those materials used
in construction work and repairs. Great Britain, Germany
and France will use every effort to recover lost trade and
will endeavor to avail themselves of American markets, our
margin of exports over imports will shrink, and as war debts
are permanently funded, securities will doubtless be sold by
citizens of countries lately at war to enable them to subscribe
to their national loans. The volume of these sales will be
governed partly by security prices and by trade balances,
and the effect upon our money market will depend upon the
provision we have made in advance to offset or to finance
these purchases.
While we have now in operation a sound currency and
banking system, we must not permit ourselves to be lulled
into a false sense of immunity f r o m all troubles, or to feel
that we have a license to disregard well established principles. W e must be discreet, we must resist any tendency
toward inflation, and we may be sure, that by avoiding a
wild temporary boom which would certainly result in a

collapse later on, this country will be in a f a r better position
to reap throughout a long series of years to come, the benefits which should accrue to it as the only great world power
not engaged in the war. B y adhering to this course, by
resisting the not unnatural desire to get rich quickly, by
exercising patience and self-control and by adopting a policy
of wise statesmanship in husbanding our resources and applying them only in directions which will tend towards
bringing the best ultimate results, not to the individual, but
to the nation as a whole, our position upon the re-establishment of peace will be f a r stronger than it was before the
w a r began. W e shall be able thereby to hold and to follow
up advantages gained, and should reach ultimately not
merely a prominent, but a commanding place in the field of
international finance.