In the world of finance the evils which are generally anticipated seldom come to pass. Perhaps we may find a partial explanation of this seeming anomaly in a working out of the timehonored maxim, "forewarned is forearmed," but the principal reason why the anticipated dangers of the last eighteen months have failed to materialize is because they never existed, actually or potentially. The European war, being a new experience, has bewildered people and given birth to many false conclusions.

At present there is much trepidation over the assumed inflation of a large group of securities popularly known as the war stocks and the dangers which may attend the liquidation, enforced or voluntary in this class of securities. This is to state the problem in its immediate and visible form. But as we seek the solution it leads us into a number of collateral and, in some cases, more important economic reflections; pursuing the matter to a logical conclusion, it finally resolves itself into a concrete inquiry as to what influence the cessation of hostilities in Europe will have upon our general business and upon our financial and credit machinery.

"War Stock" Speculation Discouraged by Banks

To begin at the beginning, the fear of a crash due to liquidation of war stock is largely the result of two faulty assumptions. The first is that our bankers, the wisest and most conservative class of men in the country, have unduly expanded collateral credits having these securities as a basis. In this connection, it may be stated that the evidence points the other way. At no time in the history of the stock market have the banks demanded larger margins. This being the case, it is the inevitable corollary that the brokers must demand

large margins. Sequentially, the speculators, who constitute the real danger point, have found it impossible to over-extend themselves in the usual free and easy way. We have already witnessed some rather severe deflation in war stocks without even a ripple in the banking world. There are no doubt fugitive exceptions to the policy of conservatism, but, generally speaking, it would require a most severe and unexpected decline to in any way disturb our banking conditions.

The second false assumption lies in the propensity of many people to look upon the greatly increased prices of the war stocks as being wholly unjustified. There is no doubt whatever that a few issues have been pushed rapidly upward by means of rumors or manipulation, and there is no doubt that some, if not a majority, of the better issues have reached an altitude which discounts or over-discounts all the profits their sponsor corporations will secure. On the other hand, it is equally certain that profits have been enormous and that the undistributed increment has greatly enhanced the tangible value of the securities.

Closely related to the two delusions mentioned is the tendency to assume, or to fear, that European buyers will default on payments for materials purchased here and that such default will bankrupt many manufacturers. This theory is on all fours with the assumption that our bankers do not know how to protect themselves. It may be stated from first-hand knowledge that most of the large contracts made have been nailed down with iron-clad provisions and agreements which abrogate the possibility of extensive embarrassment from this source. The men at the head of great manufacturing establishments are not fools. For that matter, their bankers would not permit them to make fools of themselves if they would.

Danger of Collapse in Security Market Remote We may next inquire briefly into the ordinary causes and physical characteristics of severe dcclines in security prices. If we go back to 1903 and 1907 we find in both cases that a strain on money and credits was the agent which precipitated the trouble. This fact is so well known that it requires no extended confirmation. It may be pointed out, however, that in January, 1903, the percentage of loans to deposits had risen to 101 per cent., while the percentage of specie to loans was only 17.70 per cent., with call money as high as 15 per cent. and 4 months' funds at 6 per cent. In January, 1907, conditions were even worse. The percentage of loans to deposit was 104.96 per cent., and specie to loans 16.49 per cent., with call money as high as 45 per cent. and 4 months' funds 7 per cent. In both cases we were trying to finance a business and a stock market boom simultaneously without enough money to go around. One or the other had to go, and of course the stock market went first.

Danger of a crash in prices from the same cause as in our last two panics is now absent, or at least remote. The recent augmentation of our supply of gold and the as yet unexercised functions of the new banking law have placed the credit and money factors on a basis which admits of no comparison with 1903 or 1907.

The physical characteristics of a liquidating period following inflation in any group of securities is more to the point at present. We find a most satisfactory parallel in the great industrial stock flotations of 1898 and 1899. In that period our great combinations of industrial capital were formed and the public went industrial-stock-mad. We were just entering an era of prosperity which endured for about four years.

In 1899 the industrial stocks reached their apex and there was a sharp decline. The volume of undigested industrial securities was enormous, but there was no "crash" in prices. During the years 1900, 1901 and 1902, the liquidation and absorption of hundreds of millions of new industrial stocks went on quietly. On Jan. 1, 1900, the average price of industrial stocks was, according to the Wall Street Journal's averages, 68.13; on Jan. 1, 1901, it was 70.44; on Jan. 1, 1902, 64.32, and on Jan. 1, 1903, 64.60. Curiously enough, the railroad stocks in these years broke away from the sympathetic influence of the industrial group entirely, the average price on Jan. 1, 1900, being 78.17, and on Jan. 1, 1903, 119.06.

The analogy of the present with the 19001903 period is not exact, but it serves to show how slowly and quietly liquidation is effected in an inflated group in a period of prosperity,

when there is no strain on money and credits. It is a reasonable assumption that conditions are now such that liquidation could be effected in the next year or two with even less disturbance. These are the more immediate and technical considerations. In order to arrive at a clear long-distance decision as to what dangers menace our banking and credit conditions, it will be necessary to make an excursion into the more remote economic contingencies and to examine briefly the conditions which may reasonably be expected to follow the end of warfare.

Delusions as to the Foreign Liquidation “Bogy"

As has been suggested, the European war has been the prolific mother of more extraordinary popular delusions than any event in our financial history. It was something new. We did not have (or thought we did not have) any precedents to guide us, and in the initial stages of the struggle we were beset by fears and predictions which appear almost laughable in the light of developments. The "avalanche of European liquidation" delusion, which I undertook to expose in the September, 1914, issue of the TRUST COMPANIES Magazine, was popularly supposed to rob us of our gold and put us commercially hors de combat for a long time to come. Our copper and cotton would have to be marketed in our own borders at ruinous prices; ocean traffic would be paralyzed; the foreign exchange machinery would break down entirely, and so on through a long line of dire predictions, all of which happily proved unwarranted. After a little spasm of readjustment the wheels began running smoothly, and a few months later we were entering a period of prosperity and rapid recovery. But even now the croakers refuse to believe in these prosperous conditions and go about proclaiming that they are fictitious and evanescent and that no one can profit from a destructive war.

The European war is a deplorable affair and we may all wish, from the moral point of view, that it had never happened, but what is here discussed is the influence on our temporal welfare. And what we are most concerned with is not the eventual economic backwash of ? destructive war, but what the results of the next few years will be in their bearing on our progress and fortunes.

The same delusion which was responsible for the "avalanche" theory and other alarmist views is still operative. I refer to the ingrained and wholly unfounded popular view of our dependence on European capital and patronage. People cannot or will not see that we are almost, if not quite, independent of both outside capital or commerce-the most self-contained nation in the world. If there was no Europe,

we would continue to grow richer and more prosperous from year to year, for it is what we produce and use and build with that makes our wealth, far more than what we produce to sell abroad or exchange. Our foreign commerce is important at times, as a means of bringing in gold or keeping gold from going out, and it is convenient as a means of exchanging surplus commodities which we do not want for the surplus commodities of other nations which we do want. But its importance is grossly overestimated, and, by the same token, if there was no Europe we would have our periods of inflation and depression just the same.

Economic Aspects of the War Precedent and the teachings of economists have conveyed to the popular mind a simple and decided idea which is summed up in the trite aphorism, "War is waste." From this it is but a step to the conclusion that no good can come from the destruction of capital and that the results of a disastrous war must be felt in some degree by the entire civilized world. This precept, in its essence, is literally and incontrovertibly true, but much misunderstanding comes from accepting the truth in the abstract instead of seeking it in detail. This abridgement leads many people into rank and mischievous errors.

No economist of the first rank has ever pretended to express the foolish opinion that no individual or nation can benefit by the misfortunes of another, or that the after effects must appear in all quarters in exact inverse ratio to the gains. We might as well argue that the Chicago fire or the San Francisco earthquake did not make high profits for the steel, plateglass and other enterprises of Pennsylvania as to argue that the United States can derive no benefit from the European war. The destruction of property in the two disasters mentioned was, it is true, an economic loss, but the loss eventually reacted on the whole country and reached Pennsylvania in diluted form. The same principles applies to the present European situation in its relation to our own affairs.

This phase of the problem, as stated above, may be considered no more than a personal view. I will support it with an authoritative example.

Mr. F. W. Hirst, editor of the London Economist in his book "The Political Economy of War" shows by the records of trade, wealth, etc., that for several years after the close of the Franco-Prussian war, England, as a neutral nation, was a great gainer-even greater than during the progress of the struggle. Mr. Hirst does not, of course, attempt to refute the "war is waste" theory, in fact, he supports

1873

36,709,000

30,196,000 239,857,000

The Franco-Prussian war began in July, 1870, and ended March 1, 1871. It was a brief but very expensive and destructive war, and an indemnity of 5,000,000,000 francs was levied against France. Also it was followed by an even more disastrous internicine uprising in France. Mr. Hirst's general conclusion, for which his figures are merely offered as confirmatory is as follows:

"War, however advantageous to the few, must impoverish the people engaged, although in exceptional cases the victorious govern-· ment may recoup itself from the proceeds of an indemnity. But just as a few speculators and contractors may gain at the expense of the general body of taxpayers, so one or two neutral nations may prosper at the expense of the belligerents. If a neutral country is a great manufacturer, its boot and clothing and ammunition trades may thrive on war orders from the governments of nations whose factories are half closed by mobilization or are in the occupation of the enemy. And during the demobilization and dislocation following a war this same neutral country, with its factories in full efficiency, may get the cream of the restoration orders for iron girders, rails, ships, machinery, and the like, by which the exhausted peoples, with such credits as may be available, will endeavor to prepare themselves for a fresh start in the race of industry and commerce."

This, of course, refers specifically to the case of England as a neutral power, but would it be possible to find anything more definitely and clearly applicable to our own present position? Unwarranted Predictions as to "Dumping" The fact that Great Britain was able to offset the increase in imports by à much greater increase in exports is another point which deserves comment. We are hearing a great deal at present about the European countries "dumping" pauper-made goods upon us after the close of war. This argument appears unsound in practically all its premises. In the first place European labor and products will be pretty fully employed at home for a time in the imperative work of reconstruction. In the second I place a large amount of goods will be preferable to money for a considerable period, so far as we are concerned. Finally, Europe has never been able to embarrass us by shipments of goods. The danger has always been in the return of our securities and, at the end of the war the foreign holdings of our securities will have been so thoroughly liquidated that danger from that source will be negligible. In this connection we find by reference to the Loree estimate of all our railroad securities held abroad as of July 31, 1915 that they had a market value of $1,751,437,912. This was a reduction of $480,892,131 from the previous report as of March 31. If the liquidation has been going on at the same rate since July 31 (and it is believed it has been even more rapid), the total of railroad securities held by foreigners is now a little over one billion dollars market value. Railroad securities are estimated as making up 80 per cent. of all our securities in foreign hands. It is apparent that the greatest, if not the only danger from "dumping" has passed. It may be added that we have a means of checking an influx of cheap goods if we care to exercise it. Probably the alarm over this phase of our future finds its genesis in a renewed protectionist propaganda.

The salient argument in support of the dumping of pauper-made goods runs about as follows: At the close of the war huge armies will be disbanded and the labor markets will be glutted. Also the nations will be impoverished by the cost of a destructive war and the natural consequence will be an over-supply of labor forced by necessity to produce rapidly and sell for whatever price the products will bring. On this subject, I will quote the opinion of Frederick Bastiat in what has been described as one of the clearest and most brilliant of his papers. Allow me to add, parenthetically, that in interpolating the views of the economists there is no attempt to select quotations which dove-tail with personal opinions. The excerpts

"You tell me there will be a surplus of 100,000 workers (when an army was disbanded); that competition will be stimulated and the rate of wages reduced. This is what you see. But what you do not see is this. You do not see that to dismiss a hundred thousand soldiers is not to do away with a million of money, but to return it to the taxpayers. You do not see that to throw a hundred thousand workers on the market is to throw into it, at the same moment, the hundred millions of money, needed to pay for their labor; that, consequently, the same act which increases the supply of hands, increases also the demand; from which it follows that your fear of a reduction of wages is unfounded. You do not see that before the disbanding, as well as after it, there are in the country a hundred millions cf money corresponding with the hundred thousand men. That the whole difference consists in this before the disbanding, the country gave the hundred millions to the hundred thousand men for doing nothing; and that after it, it pays them the same sum for working. You do not see, in short, that when a taxpayer gives his money to a soldier for producing nothing, or to a worker for producing something, all the ultimate consequences of the circulation of this money are the same in the two cases, only, in the second case, the taxpayer receives something, in the former he receives nothing. The result is a dead loss to the nation."

Fallacies as to European Insolvency and
Default

It appears unnecessary in addressing the readers of a banking organ, to refer to the prevalent but foolish talk of European insolvency and default. This error grows largely out of the propensity of the rank and file to confuse in one indiscriminate mass, wealth, money and capital. They scrutinize the figures showing the amount of money expended in conducting warfare and gather the idea that these large sums are in some manner destroyed. It is impossible to convince any large number of lay observers that the actual loss in warfare is confined to what is actually destroyed and that even suspended productivity cannot be properly included in the final estimate. Yet this is a point on which there is little or no disagreement between the economists. With the indulgence of the reader, I will quote briefly from Amasa Walker on this point.

"The finance of war is greatly perplexed in the populár mind by one fallacy, which is