The Financial Situation

An Outline of the Forces that will Sway the Trade Winds in 1923

MERRYLE STANLEY RUKEYSER

INVENTORY taking on January first has become so fixed a habit for Americans that the impulse to assess the relative worth of factors that affect business as a whole becomes almost irresistible as each new year approaches. Of course, business cycles do not begin or end with the calendar year, nor in any direct correlation with the tides of the sea, nor any of the other natural or supernatural influences with which more naive generations used to associate prosperity and adversity.

Business has become so complex, and since the war its course has been so unpreccdented in many particulars, that some of the wisest and most successful practitioners are able to see with confidence only' a few weeks ahead. They are experimental in their method, and tend to feel their way through trial and error. In the lingo of the marketplace, enterprisers are buying from hand to mouth.

And yet there is almost a state of overproduction in the new quasi-science of business forecasting. Foretelling the future in trade and finance is perhaps as feasible as in sports. Sometimes the dope is correct, and sometimes it is not. Any' one who expects for $100 a yrear to buy services which will obviate all the need of individual thinking is indeed an optimist. The worst financial fortune telling media, of which there are a great variety, should be shunned at any' cost. Those conceived in the spirit of science, of which there are a few, should be used only to supplement the observations and studies of the individual business man or speculator. Such services deal primarily with broad generalizations, and the practical man with particular decisions,

IT is with no intention of removing A every' element of doubt and surprise from the flow of economic events in 1923 that we approach the problem of stating some of the primary' predictable influences that will be operative. In a measure, the normal factors can be foreseen, but matters of war, pestilence, and the whole array of accidents are perpetually' recurring to make for uncertainty', which is the stuff out of which speculation and business risk are made.

Credit, the modern banking force which motivates trade, stopped the boom that ended in the Spring of 1920. Subsequent deflation and expansion of the credit basis resulting from an influx of additional gold have created an abundance of loanable funds, and it maybe said with confidence that business revival may continue for many' months without feeling the pinch of a new, fundamental credit shortage. As far as the root of all evil is concerned, there is plenty of it to finance a new and growing domestic prosperity.

The resources of the Federal Reserve system at present are scarcely being tapped, despite the marked increase in borrowing during the Autumn because of seasonal needs associated with the moving of the crops and the growing volume of trade. The new gold, which has flowed into this country because of America's position as the creditor of the Old World, has not yret been used as a base for credit inflation, but would be available if the banking authorities should decide to mobilizeit. In this connection, it seemsobvious that there will be no repetition of the excessive credit inflation of 1919 and 1920, for the lenders have learned their lesson, There is, however, a nascent political movement for easy money', which will try' to make finance a thing of the emotion instead of an instrument of scientific control.

With the exception of the enormous increase in loans to finance speculation in securities, which has been a factor in making the markets irregular of late a remarkable phase of the striking improvement in general domestic commerce since midsummer of 1921, when the bottom of' the depression in many trades was reached, has been the relatively small expansion of loans, particularly since commodity prices have risen during this period. Ordinarily larger trade means greater borrowing at the banks, but this tendency in the period under discussion has been offset in part by two factors. In the first place, business revival has unfrozen loans which were made during the previous lxx>m, and were subject to involuntary renewal during the depression when many borrowers were financially' unable to meet their maturing obligations. As improving trade made it feasible to pay' off such loans, the credit that had been tied up became free and available for new uses. In the second place, close buying of merchandise, because of uncertainty' regarding prices, has reduced the amount of credit accommodations needed. This ty'pe of buying has been rendered necessary' of late even by' the more venturesome because of the shortage of freight cars which slowed up deliveries and restricted trade,

There is a close interaction between credit and commodity'prices. Until commodity prices rise so high that they limit consumption, an upturn in prices makes for good business. On the other hand, when prices fall, business tends to become stagnant, because trade factors are disinclined to load up with merchandise which will depreciate while they are holding it for resale. To the man of business, it makes little difference whether prices are high or low as such, provided they are not unbalanced. Stability is the desideratum. for changing price levels impart elements of uncertainty into the calculations of buyers and sellers, and tend to paralyze activity',

BETWEEN 1900 and 1913, the trend of commodity' prices was almost imperceptibly' upward. Toward the end of 1915, the Vvar boom in the United States carried prices dramatically upward until at the peak of the boom in the Spring of 1920 they' were approximately two and one-half times the pre-war level. The subsequent fall of prices was the most rapid ever recorded, but the decline was checked about midsummer of 1921, since which time they' have rebounded and are now close to 50 per cent above the pre-war level on the average. There is a growing belief on the part of such observers as the Harvard Committee on Economic Research that prices will become stabilized at approximately the present levels. Whatever the long pull tendency may be, the immediate factors are making for stiffness of prices. Rising wages, particularly for common labor, increasing gold holdings, relatively high freight rates, and the tariff, which reduces the competition of cheap foreign goods, are forces contributing to an equilibrium of the commodity price level, if not to further gains.

The shelves of the nation's merchants are not overstocked, as there has been very' little overbuying. There has been underbuying in many' instances. Inadequate movement of freight, because of inefficient loading and because the railroads did not expand sufficiently in recent years, has created an exaggerated notion of shortage, and is likely to lead to some overexpansion of plant facilities by those who do not understand the causes of present inability of supplies to keep up with demand.

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In general, the underlying economic forces point to a continuance of business revival, and the next phase in 1923 should be marked not simply by a gain in employment and in the physical volume of trade but also by a reflection of better business in the net profits of corporations. In the first fourteen months of the rise in the stock market which started at the end of August, 1921, the fountains and springs for the upward spurt were abundant credit and better trade, actual and prospective. Speculators bid up security prices without regard to the current status of the treasuries of corporations. In the future they are likely to discriminate far more closely between those especially efficient units which are earning profits which can be transformed into dividend payments, and the less efficient units. Nineteen twenty-three is likely to be a year marked by extra payments of cash dividends by the conspicuously successful.

In the stock market during the early part of 1923, there will probably be a debate between conflicting groups as to whether speculative prices have discounted every aspect of the return to prosperity. Thus far, the bull movement has failed to attract unlimited outside participation, such as the 1919 market did, when bootblacks, servant girls, and apprentice plumbers turned first to the stock tables in their daily newspapers and furnished sucker money at a time when the astute were ready to sell out and take profits. It is socially undesirable for those unequipped with large capital resources and market intelligence to assume the hazards of speculation. Many unemotional observers, however, will not be satisfied that all the bull ammunition has been fired until the outside participation has been enlargcned, and there is nothing in the precedent of somewhat similar markets to indicate that the broad upward movement will not continue two years. But there are in the present situation factors which will induce the cautious to take profits and be satisfied with present gains. Irrespective of the peaks, there are likely to be sharp reactions.

THE chief debit item in the balance sheet of current economic forces is the European situation. The adverse effect of further deterioration of the financial structure of Central Europe will be softened because it has been anticipated, and comes as no surprise. Already, America's export trade with Europe, judging by the figures for the first eight months of 1922, is at the lowest ebb since pre-war times, and, in the light of existing higher prices, current exports are not substantially in excess of the pre-war trade with the Old World. The great expansion of trade with Europe, which was a basis of the war and post-armistice boom, has already been eliminated. Nineteen twenty-three differs in this important particular from nineteen nineteen. Those industries will succeed most which find their market within the borders of the United States. The price of farm products is directly affected by the shrunken purchasing power of Europe. Grain quotations are therefore relatively low. Cotton prices would be similarly affected, except for the smallness of the crop, which was partly planned by the farmers and in part caused by the machinations of the boll weevil, a bug making for price inflation south of the Mason & Dixon line. Parenthetically, the high cash value of the cotton crop and the enormous yields to the grain farmer have markedly improved the economic position of the agriculturalist who has begun to emerge from the despondency and depression into which the recent deflation tossed him.

THE farmer is an important force in the new progressivism of the West, which played a part in the reshuffling of political forces during the last election. The new liberalism, the revolt against mere normalcy, is of course a challenge to all business enterprises which do not serve public ends. But if it is an intelligent, temperate impulse for change it is not an unhealthy factor, even from the standpoint of the business man and the security holder. For American business is a thing of infinite flux and growth, not of standpattism.

The new political balance of power may mean a readjustment of fiscal matters. High tariff was unsatisfactory to many classes, including bankers. It seems out of harmony with present economic conditions, under which it is desirable for a free influx of goods from debtor countries which have no other way to discharge their obligations completely except through the export of merchandise. Tariff revision downward, which is within the power of the Executive under the new Act, would be a beneficial development, and would hurt only specially protected and privileged industries.

Men of finance fear tinkering with the tax laws. There has been some anxiety lest the new progressivism should put a > punitive element into taxes, and place a larger relative burden on corporate wealth through the restoration of a modified excess profits tax, possibly through an excise tax on stock dividends, and perhaps through a tax on undivided surplus of corporations. There seems to be in the new alignment in Congress a redoubled belief in the principle of taxation according to ability to pay. A biproduct of the election may be a reintroduction of legislation for a cash bonus, which, if passed, would make for inflation. The Treasury, in connection with its program for refunding the war debt, will at any rate be in the money market as a borrower, but, unless a cash bonus is declared, the Treasury will merely substitute one type of obligation for another and will not increase its aggregate debt.

A drift from conservatism in politics might lead to interference with the Transportation Act of 1920, particularly in so far as it authorizes rates which will assure a fair return on the property value of the roads. Under the present wage and rate structure, the earning power of the strong roads seems assured, and, unless the country is willing to continue a system which will give the roads necessary credit and financial soundness, the only possible alternative is government ownership, which, whatever its merits and demerits, would be better than a career of undernourishment and persecution in private hands.

Another possibly vulnerable institution is the Federal Reserve System, which, despite its record for sincere effort and scientific accomplishment, is blamed by the unknowing and the emotional fdr every phase of economic adversity and hardship. Discussion of these matters in Congress will receive attention in the financial world, which, however, is not likely to take parliamentary debatesstoo seriously. Prosperity is not dependent on the relative number of seats in Congress of either of the two major parties.

The preponderance of forces indicate good domestic business in 1923.