The Financial Situation

Unfinished Business Bequeathed to 1921

MERRYLE STANLEY RUKEYSER

THOSE who believe in miracles— and in the power of the new Administration to banish the last vestige of evil—ought to use their influence toward the effacement of uncertainty from the affairs of men. The question mark attitude retards trade, and is often a heavy item on the liability side of human conduct.

As long as paralyzing uncertainty persists, all efforts toward economy will seem puny. Uncertainty is ,the barrier which prevents folks to-day from taking steps which will seem obvious to retrospective historians of to-morrow. It is the bar which makes it impossible to formulate irrevocable plans for the future. In times of accelerated flux like the present, it reveals captains and privates of industry alike hesitant, skeptical, and lacking in confidence.

If the course of events in the next twelve months was as patent as the developments of the year just closing, millions of foot pounds of human energy that will be wasted could be conserved. Instead of blockades in commerce resulting from the lack of knowledge of men of commerce as to whether prices will tumble lower, the free movement of goods from producer to consumer could be resumed. Instead of visionless wrestling between employers and employees throughout the nation, tentative agreement could be more readily reached if it were definitely known how great the demand for the human element in manufacturing will be.

As 1920 yields to 1921, uncertainty is at the crest of the wave. The reaction away from the balloon-like war time basis of alleged prosperity has set in motion dynamic processes which are fast changing the industrial fabric of the nation.

ALTHOUGH full knowledge regarding the next twelve months seems to be monopolized by the soothsayers, it is legitimate for students of the situation to mark out the problems which are bound to bob up to plague men in responsible places. On the solution of these issues rests not only the route of security price movements, but also the welfare of the nation.

In the first place, the whole question of America's relations with Europe remains in the pigeonhole of unfinished business. Since the suspension of artificial war time expedients, economic contacts with the Old World have been left to laissez-faire. No comprehensive plan of financing, whereby America would export purchasing power overseas in proportion to the need, has been formulated. True enough, the failure to span the Atlantic Ocean with a huge bridge of credit has not yet stopped the flow of commodities eastward. But the trade which has survived has been largely at the expense of the international prestige of the pound sterling, the lira, the franc, and the mark, and also at the cost of clogging the domestic banking machinery with more than $3,500,000,000 of current indebtedness on the merchandise account of European buyers to American sellers. Unless the status is changed, the more impoverished continental countries will approach the stage where they will have nothing to offer to entire American exporters to ship commodities to them. The more robust countries have been narrowing the disparities by increasing their own exports.

Unless foreign debtors remain solvent, their creditors in this country, including the United States Treasury, which holds ten billions of dollars worth of promises to pay from the Allied governments, will be adversely affected. Moreover, the American producers of surpluses of raw materials and of manufactured articles, will lack foreign markets, unless steps are taken which will give foreign customers currency that will be acceptable to domestic sellers.

The question of financing European trade has emerged into a new stage. The impulse to act early in 1919 originated mainly among far-sighted international bankers, but at that time the problem seemed academic to the ordinary man of business, and the ambitious program failed of execution. Now that recession in industry has brought the need, of keeping the export markets open, dramatically to the forefront of the consciousness of the masses at the marketplace, a much wider group of Americans is determined to forge new instruments of finance in the present crisis.

Several such novelties are now brewing. Conversations are going on in various places throughout the land. Out of these exchanges of ideas, important developments are likely to take place early in 1921. The largest project contemplated is the launching of a $100,000,000 corporation under the sponsorship of the American Bankers' Association. The capital for this enterprise, according to the program, is to be subscribed by bankers and business men in all parts of the country, and the corporation which will be formed with a Federal charter under the terms of the Edge Act, will be permitted to accept bills originating from foreign trade up to ten times its capital. Thus far, there has been only one important outgrowth of the legislation prepared by Senator Edge, but the program of the American Bankers' Association and others indicates that the law will soon be put to more considerable use.

These omens showing that business men and bankers are preparing to grapple with the unprecedented situation are significant. It may be that it will still be possible to keep up a steady stream of exports to Europe, but, no matter how successful these efforts prove, the indication is that the volume in dollars, and to a lesser extent in units, may be expected to shrink, instead of further expanding. American industry is likely to try to adjust itself to the new state of affairs in which Europe's buying power is curtailed.

But international bankers assert that it will be impossible for any part of the world to thrive completely, while another continent becomes povertystricken. Some financiers take the view that, if the Allies fix the reparations at a sum that Germany will be able to pay, the promises of the Teutons would form the collateral for credit in the United States. The establishment of real peace in Europe, with a radical curtailment of armaments, would reduce the need of further inflation abroad, and would elevate the credit standing of countries of Central and Eastern Europe especially.

FINANCING schemes can only help during the emergency. Ultimately Europe will have to pay off its current obligations and accumulated debt through the shipment of goods to this country. When European debtors begin to liquidate their merchandise indebtedness in this country, it will tend to ease the domestic banking situation, which is aggravated by the huge floating debt of Europe.

Credit is the next great factor that will condition market developments ir 1921. Since November, 1919, by a succession of increases in discount rates, the Federal Reserve system has led a movement to check inflationary expansion in the United States. This policy has directed the course of the readjustment in industry, and has tended to check mushroom growths started during the post-armistice boom. But, of deflation of credit—actual contraction of the aggregate loans and notes outstanding of the Reserve System— there has been none in 1920. A peak was attained in March, and this high level persisted until the fall, when seasonal crop demands and the requirements of industry required further expansion of credit. I'o make the experience of business men facing sharp declines in the value of merchandise as shock-proof as possible, the banks have made protective loans to industry, which prevented an immediate reflection of lower commodity prices in shrunken bank loans.

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After New Year's Day, a great national movement is scheduled, when customers throughout the land will journey to the banks and exchange ideas as to their standing. Normally, this period marks the time for paying off loans, and it is expected that, even in the present abnormal situation, the tightness which has prevailed in the money marts will be appreciably relaxed. If this anticipation corresponds with the fact, it may have an important bearing on the meanderings of the prices of common stocks, which have been depressed all through this year, partly because of the scarcity of credit for speculative purposes. However, even if the rental charge on money should drop conspicuously, the change would not act as the wand of a good fairy and restore quotations to the fantastic heights attained in the bull market days of 1919, when many securities rose far above their real worth. There is nothing in the situation to warrant the assumption that the era of swollen profits will persist. Where dividends have been passed or where sales have been tremendously reduced, the securities of corporations will be intrinsically less valuable than they were a year ago, when the unprecedented profits of the moment were capitalized for all time by the seemingly endless rise of quotations. Easier money then will not automatically start a bull market.

Moreover, although some easing may be expected, it is unlikely that funds for speculative purposes will be forthwith available for the asking after the first of the year. Even if commercial loans should be compressed as a result of the deflation of prices, which eventually will make it cheaper to finance a given unit of trade, it is likely that the Federal Reserve Banks will urge member institutions to reduce their borrowings and rediscounts at the central reservoirs of credit, instead of placing at the disposal of speculators the funds extracted from industry.

IN this connection, it is interesting to recall these remarks of Benjamin Strong, governor of the Federal Reserve Bank of New York (who is now on a leave of absence), on November 3, 1919, when the first move toward credit deflation was made: "The reason for the advance in rates announced to-day by the Federal Reserve Bank of New York is the evidence that some part of the great volqme of credit, resulting from both government and private borrowing, which war finance required as it is released from time to time from government needs, is being diverted to speculative employment rather than to the reduction of bank loans. As the total volume of the government's loans is now in the course of reduction, corresponding reductions in bank loans and deposits should be made in order to insure an orderly return of normal credit conditions."

In view of this dictum, it is unreasonable to expect the Reserve authorities to permit funds released by industry to go into speculative channels without restraint, before the borrowings at the central banks are curtailed. Since November, 1919, the government debt has been reduced, despite the unexpected expenditures made in connection with the conditions under which the roads were returned to private management, and the aggregate of loans for Stock Exchange purposes has been almost cut in two, according to estimates. But the funds set free were quickly absorbed by industrial borrowers whose appetite for credit was insatiable.

The recession in industry which has been marked since the spring will eventually lessen the credit requirement of business corners. Early in 1921, when men of business have discovered through the taking of inventories where price deflation has left them, and after some of the maturing loans have been paid off, it is expected that the aggregate of credit outstanding will be smaller than at present.

For practical purposes, the inescapable question is how far will deflation go? Will prices (which in many instances soared ISO per cent higher than the 1913 level) have to decline until the pre-war basis is reached? It is unreasonable to think so, as there was nothing uniquely desirable or stable about the price level of 1913.

Usually price swings go to extremes in both directions. It is likely that the prices of some commodities will slump inordinately low, but the interplay of the forces of the ancient twins, supply and demand, may be relied upon to correct inequities.

THE Bache Review, a four-page weekly editorial sheet, published by J. S. Bache & Company, members of the New York Stock Exchange, 42 Broadway, New York, is quoted widely in the press and is said to be read by over 2,000,000 people every week.

The Review treats editorially of the events of the times as they effect business and financial situations. It endeavours to mold public opinion in favor of sound economic and political principles and common sense methods.

In a recent issue the Review treats with the topic "Abolish the Excess Profit Tax; Substitute the Gross Sales Tax", pointing out that with a tax of one per cent on a flat percentage basis against the volume of business, every merchant will be able to estimate his tax accurately, thereby carrying it as an expense item, establishing prices, without profiteering, instead of adding large sums to prices in order to cover the uncertain excess profits tax.

The Bond Department of the International Trust Company, of Denver, Colo., announces that on the first of each month they will publish, in the interest of investors, The Investment Monitor.

The Monitor will contain a brief resume of the investment situation, discussions of current issues, together with a column in each issue devoted to questions, asked each month by readers.

A further purpose of the Monitor will be to act as guide to those unfamiliar with the science of investing and to call attention to certain securities which at the time seem to offer unusual opportunities.