The Financial Situation

Approaches to Normalcy in World Business

MERRYLE STANLEY RUKEYSER

IN the drastic trade readjustment of recent months, the attitude of many people has resembled the spirit of a pushball player on the college campus. Pushball is a game, dear to underclassmen at many American universities; it is played with a huge, gaseous sphere, which a mere touch will send floating diffidently on its way. The participants in the contest seek to keep the ball moving in mid-air, each one endeavouring to shove it away from himself.

And so, though the squeezing of water out of commodity prices which deflation involves has received general approbation in theory, each group, like the pushball player, has striven sedulously to shove away the floating globe of deflation when they threatened to touch it. The butcher endorsed the lower price movement in general, but felt that there were special factors which ought to exempt him. And the baker and candlestick maker took the same viewpoint regarding their own activities. And yet the let-down of prices involves sacrifices, the incidence of which cannot be perpetually shifted.

IN the copper industry, the downward revision came early after the armistice. No post-war boom in this field tended to defer an effacement of the price increments that came with the world strife. The decline was swift, yet the hope of producers for a revival of business activity has been long unrealized.

With the productive power at the mines and at the refineries heightened as a result of improvements wrought during the war, the surplus of unsold copper became a distressful factor in the world copper situation. The existence of the surplus constituted a depressing influence on prices and multiplied the tendency of potential buyers to vacillate and delay. Moreover, the task of financing the surplus held off the market became increasingly more burdensome to the banks and to the producing companies.

By a single stroke, 400,000,000 pounds of copper have been removed from the danger of being immediately thrust into the marketplace for what they would bring. A syndicate of bankers, by a unique piece of financing, has arranged to take the financial responsibility of holding this metal from the commercial banks and offered it to investors. Thus the banks were relieved of frozen loans against this copper, which the producing companies kept renewing indefinitely. Under the old arrangement, banking funds involved were congested and illiquid, a most unsatisfactory state, and the borrowing companies were always worried by the realization that the banks might at length require them to dispose of the surplus copper at whatever price it would fetch, in order that the loans might be paid off.

Now the copper companies have deferred the day of reckoning from one to four years by the sale of securities to the public. They borrowed jointly on the credit of the Copper Export Association, Inc., an enterprise in which most of the competing companies are united for the purpose of presenting a single front in the export field. The operation involved the sale of $40,000,000 of one, two, three, and four-year notes. To make the issue attractive, 8 per cent interest was offered.

The financial transaction heightens the market position of copper stocks, because it has supported the copper companies at this critical time. It gives the companies a breathing spell, and ought to impart stability to prices for the metal. In terms of the general deflation movement, the underwriting was a device to mitigate the effect of the readjustment on this industry.

Moreover, copper companies have begun to adjust output to demand by curtailing production, and the approach to an agreement in the matter of war reparations should soon bring Germany into the market as more active buyer.

The copper industry seems definitely to have turned the corner.

THE whole question of financing Europe's needs is thrown into a new perspective by the attempt to reach a decision as to the precise amount of Germany's war bill.

Uncertainty regarding reparations has been one of the most potent influences making for instability. It prevented both victors and vanquished from making plans confidently for the future, and has delayed countless projects for improving economic conditions in theOld World.

A workable agreement as to reparations will be as the zephyrs of Spring to emaciated Europe. It will make it feasible for creditor nations, particularly the United States, to make calculations for loans with great precision. A solution of the issue of war payments, if really practicable, will tend to drive the life blood of credit through the arteries of Europe with new vigour and alacrity. The timid will become more hopeful, and hoarded gold and hoarded energy will be released.

Since the armistice there has been a steadily changing attitude in this country regarding European loans, even among the expert. At first, the emphasis was laid on the fullness of America's opportunity to be of service through extending credit during the period of readjustment. The tendency was to think in general terms without great effort to discriminate.

Now after two and one-half years, without any comprehensive plan for European financing having been adopted, bankers and financial observers generally are more critical in their attitude. They are inquiring for what purposes the money lent will be employed, and many are frank in saying that indiscriminate lending may be even worse than indiscriminate refusal to extend aid.

Those ready to export capital and import promises to pay, are now laying stress on the need of Europeans for placing such funds in productive uses. The careful lender will not permit credit advanced to be dissipated in expenditures for armament, or for the upkeep of a bureaucracy, or for any other purpose that will not create wealth. The desire is to have expeditionary dollars employed in Europein life-sustaining activities.

The engineering mind grasps with unique precision the difference between the proper and improper uses of borrowed funds. Charles Ferguson, who makes articulate some of the thoughts of engineers, has been arguing the need of sending a convoy of technical experts to Europe to safeguard dollars proffered. He would have funds, lent by American investors, spent under the direction of a consortium of American and native engineers in Austria, Poland, and other nations which come into pur money markets in quest of funds. He would create a sounder credit base.

Although each specific scheme for helping Europe must be examined critically on its own merits, any project that will tend to make the Old World a better business risk will be indeed desirable.

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A REDUCTION during recent months of Europe's unfavourable balance of trade with the United States has been the underlying cause behind the appreciation in worth of francs, pounds sterling, and the other continental exchanges, measured in terms of the dollar. This changing trade situation, reflecting a curtailment of exports to the Old World and a gain in imports, reduces the demand for the dollar across the seas, and tends to reduce its premium. As the premium on the dollar shrinks, the exchange value of the other currencies soar. The expectation of a decision on reparations has also improved the market position of the European exchanges.

Speculators, wishing to profit from fluctuations in the exchange market, where francs and pounds and marks bounce up and down like rubber balls, generally trade either in exchange itself or in internal securities of foreign countries, such as the government or corporate bonds of France, Germany, or Italy. But there is still another vehicle which, though not generally known, eliminates one of the elements of risk.

It is possible, for example, to speculate in francs without taking the securities of the French government or of any French enterprise.

There are still outstanding European loans of American corporations, reminders of the pre-war era when America was a great debtor nation, perpetually borrowing from other peoples, never lending.

The Central Pacific, the New York, New Haven and Hartford, and the Chicago, Milwaukee and St. Paul are three American railroads with obligations outstanding that are payable in francs. The New Haven issue matures in 1922, that of the St. Paul in 1925, and that of the Central Pacific in 1946. Of the three-franc issues, the Central Pacific bonds are, from practically every standpoint, the best. The credit of the road is good, and the safety of the security is guaranteed by the Southern Pacific Company. It is payable in pounds sterling as well as francs. Moreover, it is a long-term security, and,—with every indication that in a few years bond offerings are to be less attractive, as money conditions change,—investors ought to take advantage at present of obligations that run over an extensive period of years.

If interest rates decline, the Central Pacific issue, like all securities of its class, should appreciate in price. Moreover, if francs or sterling move nearer to normal, the dollar worth of these bonds will automatically increase. There is a third opportunity for profit. The bonds may be retired by the company—at a price far in excess of the present market value.

AFTER more than seven years of default on its external government and railroad debt, Mexco is taking steps to improve its standing in the capitals of money. Toward the close of the Carranza regime, conversations were being held looking forward to a rehabilitation of Mexican finances, and now only official recognition of the Obregon government at Washington is necessary to open the way for negotiations between the Administration at Mexico City and international bankers.

Thomas W. Lamont, of J. P. Morgan & Company, and James Speyer, of the international banking firm of Speyer & Company, have already been invited to Mexico to discuss with the Obregon officials financial rehabilitation, which would make it possible for the Mexican government to return to the ranks of the financially responsible. Mr. Lamont represents the International Committee of Bankers on Mexico, and Mr. Speyer is acting independently. Bankers place the amount owed by Mexico for defaulted interest and sinking fund payments at $160,000,000.

For seven lean years, Mexican securities have, to a great extent, been kicking around the gutters of finance. It is too early yet to think of all of them as high-grade investments, but the possibilities of interest resumption before long enormously heighten the speculative appeal of the bonds of the Republic south of the Rio Grande.

Meyerowitz & Company, foreign bond brokers and dealers, of 165 Broadway, New York, have published, in English, a pamphlet on the Restoration of the German Exchange by Mr. Max M. Warburg, Germany's famous international banker.

The booklet represents a discourse delivered by Mr. Warburg at the annual convention of the German Bankers' Association and gives a dear insight into the whole financial position of Germany and the situation of the German exchange.

Canadian Debentures Corporation, Ltd., Toronto, Canada, have prepared a pamphlet entitled Canada As a Field for Investment. It deals with the six essentials in foreign investing and points out that Canada possesses all six in a marked degree.

The Russell Securities Corporation, of 116 Nassau Street, New York City, publishes a weekly Investors' Guide giving the investor and trader a complete review of the market and a detailed analysis of the most active New York Stock Exchange issues.

Bowman, Cost & Company, of 506 Olive Street, St. Louis, Mo., have issued an interesting folder on American War Finance, dealing with the reasons for the decline in Liberty Bonds and the national credit, including an instructive table giving the annual yields of United States Liberty Bonds and Victory Notes, and the outstanding war debt of the United States.

PROFITS on Canadian Exchange: Balfour, White & Company, of 136 St. James St., Montreal, have prepared an extremely interesting circular setting forth the ad$tntages to the American investor in purchasing high grade Canadian bonds, payable interest and principal in New York funds. Actually, by doing this, the individual may really buy Canadian money with American funds at a profit and puts himself in a position to gain, through the tendency of exchange to right itself. This circular will be supplied, without charge, on request.