D 
 
 G6-3 
 
 116 
 
GIFT or 
 
 1 
 
AFTER-WAR 
 READJUSTMENT 
 
 A. C. MILLER 
 
 Published by 
 FEDERAL RESERVE BANK 
 
 OF SAN FRANCISCO 
 
Digitized by the Internet Archive 
 
 in 2008 with funding from 
 
 IVIicrosoft Corporation 
 
 http://www.archive.org/details/afterwarreadjustOOmillrich 
 
Address 
 
 By K. C. Miller 
 
 MEMBER 
 
 ^it'^ 
 
 . -.1. i . 
 
 FEDERAL RESERVE BOARD >i-» ^ fe^<m»^>J«<J ^ 
 
 delivered at Philadelphia^ 
 
 Saturday evening, December 21, 1918, 
 
 before the 
 
 American Academy of Political 
 
 and Social Science 
 
 PUBLISHED BY 
 
 FEDERAL RESERVE BANK 
 OF SAN FRANCISCO 
 

 i ■ 
 
AFTER-WAR READJUSTMENT 
 RECTIFYING THE PRICE SITUATION 
 
 By A. C. MILLER 
 
 NOW that the war has been fought and 
 won Svhat next' is the question every- 
 body is asking and for lack of some 
 other sounding word or phrase, nearly every- 
 body is answering ^reconstruction.' It is 
 our national habit when we have to move on 
 from one position to another to help our- 
 selves along with a word or a phrase; so it 
 was during the war, when we heard much of 
 ' unification, ' ' coordination, ' and ^ conserva- 
 tion.' Now that we have left the war behind 
 and are looking forward to after-war prob- 
 lems, we hear much of ^reconstruction.' We 
 have borrowed the word from Europe where 
 the war has left them with conditions very diff- 
 erent from those obtaining here. It is just as 
 well that we should recognize the differences. 
 The war has left us with some difficult financial 
 and economic problems but it has not left us 
 
 392625 
 
with any sucK problems of reconstruction as 
 it iias Enrope, unless we are going to embark 
 upon the venture of trying to ^make the world 
 over. ' 
 
 It will help much, I believe, to put us in the 
 right frame of mind toward our after-war 
 problems if we substitute for the word 're- 
 construction' the less ambitious but neverthe- 
 less suggestive phrase used by the President 
 the other day in his address to Congress, of 
 'economic and industrial readjustment.' 
 
 Europe's Problem: RECONSTRrcTioN 
 
 Contrast for a moment our situation with 
 that of the European belligerents, which have 
 had four years of war. Sixty millions of men 
 at one time or another have been drawn to the 
 front. Two or three times that number have 
 been drawn into work so closely related to 
 operations on the front that they were virtu- 
 ally in the line of battle, so far as the normal 
 processes of economic and industrial life were 
 concerned. Ten millions have been killed, 
 fifteen or more millions are left so maimed 
 and diseased that they will be of doubtful in- 
 dustrial value, unless or until they are 're- 
 
 [6] 
 
constructed.' These killed and maimed and 
 diseased represented much of the flower of 
 the industrial population of Europe. They 
 represent a heavy and grievous loss to their 
 countries' industries. Their loss must some- 
 how or other be made good through finding 
 and training others to take their place. Until 
 this is accomplished, the industries which de- 
 pended upon their skill will limp. Here is a 
 problem of reconstruction. The lands in many 
 of the choicest and most fertile districts of 
 Europe were laid waste by the war; farm- 
 steads burned, tools and live-stock gone; the 
 very soil itself destroyed. Here is work of 
 veritable reconstruction. Factories, mills and 
 foundries in France's busiest work-shop dis- 
 trict have been destroyed or so badly injured 
 or dismantled that much must be done before 
 they can again take their place in the industry 
 of the world. Here again is reconstruction. 
 It is clear, also, that much work must be done 
 not only in the f ought-over and devastated dis- 
 tricts of Europe to repair the work of ravage 
 and destruction, but also even in those where 
 the sound of a gun was never heard. There 
 has everywhere in Europe been such deterior- 
 
 [7] 
 
ation of industrial equipment through en- 
 forced neglect of upkeep that much must be 
 done before factories and mills are gotten 
 back into good working order and able to 
 turn out products which can be used by their 
 own people or sent into the markets of the 
 world in payment of needed supplies and 
 materials. This also means reconstruction. 
 
 America's Problem: Readjustment 
 
 No such fundamental economic and physi- 
 cal problems as these are left to us as a heri- 
 tage of war. Our situation has been one of 
 comparative immunity and safety. Our losses 
 of life have fortunately been few and our 
 losses of property negligible. The main cost 
 of the war to us, apart from the pecuniary 
 cost which is reckoned in the amount of our 
 national war debt and taxes, is to be found 
 in the disorganization of industry through 
 the necessary shift from a peace basis to a 
 war basis. It has been estimated that, includ- 
 ing the men who went into the armed service, 
 some eighteen million persons have been in- 
 volved in war work of one kind or another, 
 mainly in industries producing for the sup- 
 
 [8] 
 
port of our armies and the supply of our 
 European associates. Some of these and in 
 some cases many will have to be shifted from 
 their present employments. Places will also 
 have to be found for the returning soldiers. 
 But it would be a mistake to exaggerate the 
 extent of the redistribution of the labor force 
 of the country that will be thus occasioned. 
 It must not be overlooked that many of the 
 basic industries, such as steel, copper and the 
 metal trades generally, which were speeded 
 up or enlarged for the purposes of war pro- 
 duction, are normally very large industries 
 and it is altogether probable that they will 
 remain permanently enlarged to meet the 
 heavy after-war demands for their products 
 and that consequently many of those who first 
 found emplo5rment in these industries, as a 
 result of the war, will remain with them. At 
 the most, taking the situation by and large, 
 our after- war conditions will present a prob- 
 lem of reemployment, or, reorganization, 
 rather than a problem of reconstruction. It 
 is a problem that we may well believe will 
 find its own solution in due course — indeed 
 is already finding its solution — if the process 
 
 [9] 
 
of economic and industrial readjustment is 
 kept measurably free from unnecessary inter- 
 ference on the part of the Government, and 
 if good temper, forbearance, and a spirit of 
 accommodation are shown by all interests dur- 
 ing the period of transition. Government help 
 there may have to be in stabilizing industrial 
 conditions from time to time through employ- 
 ment on public works, but the intervention 
 of the Government should be by way of sup- 
 plement to, rather than substitute for, normal 
 business agencies. The problem is mainly a 
 business problem to be handled by business 
 men. 
 
 ErROPE's Economic and Financial Need 
 
 It is even likely that in Europe the process 
 of reconstruction and recuperation will be 
 speedier and more complete than many now 
 fear. The parts of Europe that have borne 
 the brunt of the war are those whose people 
 are possessed of the greatest economic capa- 
 city — energy, ambition, inventiveness and de- 
 termination. They are impatient to wipe out 
 the traces of war and get themselves back 
 into working order. Much assistance will be 
 
 [10] 
 
needed by them from the outside world in the 
 first steps of the process and that means 
 chiefly from us. But with that assistance, the 
 repair of waste and the accumulation of new 
 capital may be expected to go forward rapidly 
 in Europe in the next few years. Indeed the 
 rapidity of Europe's industrial recovery is 
 likely to be one of the economic marvels of all 
 time. 
 
 Europe will need goods and credit from us 
 if she can get them on a reasonable basis. The 
 goods she will need are mainly food-stuffs, 
 raw materials of industry and the basic ma- 
 terials of construction. Provided she can get 
 these at reasonable prices, she will take them 
 in large amounts, and trade and industry may 
 be expected to be active in the United States 
 for a few years and our problem of economic 
 and industrial readjustment may be expected 
 to find much of its solution in this way. 
 
 The credits Europe will need will be both 
 short-term or commercial and long-term or 
 investment. The former we can easily pro- 
 vide through the further development of ac- 
 ceptance credits and the aid of the Federal 
 Reserve Bank. Long-term or investment 
 
 [11] 
 
credits present a different problem; they call 
 for capital and capital must first be accumu- 
 lated or saved before it can be loaned or in- 
 vested. It may confidently be expected, how- 
 ever, that if Europe finds in the American 
 market the goods it needs at reasonable prices, 
 ways will be found of financing the purchases 
 and investments with the aid of our bankers 
 and the investing public. The main pivot of 
 the after-war economic situation, particularly 
 in its international aspects, is prices. Europe 
 cannot afford to buy much from us on the 
 basis of present war prices without endanger- 
 ing her economic solvency and it may well be 
 doubted whether it will be to our permanent 
 interest, if we undertake to finance her re- 
 construction, to encourage her to buy much 
 at war prices if her solvency is thereby 
 threatened. Much will, therefore, depend, 
 both for us and Europe, on the course that 
 prices take during the coming months and 
 years as to whether the period of transition, 
 readjustment or reconstruction, whichever it 
 may be, is to be a short and satisfactory one 
 or a long and wearing one. 
 
 [12] 
 
The Price Situation 
 
 Of all the financial difficulties confronting 
 the country at the close of the war the price 
 situation is, in a business way, the most seri- 
 ous and the one calling for the most immediate 
 correction. Fortunately for the United States, 
 this situation is not confined to us. The whole 
 commercial world has been involved in a series 
 of extraordinary price disturbances growing 
 out of the war. While the situation is worse 
 in some countries than in others, it is serious 
 in all. The general dimensions and the gravity 
 of it are sufficiently disclosed in the broad 
 statement that, in the course of the four years 
 of war, the world level of prices has risen 
 by one hundred per cent. In some countries 
 prices mean depreciated paper prices, in 
 others gold prices, but in all an increase has 
 been experienced that makes the problem of 
 price rectification one of urgency everywhere. 
 
 It cannot be emphasized too insistently that 
 economic life can never be normal and that 
 business conditions can never be safe, until 
 prices in leading world markets work their 
 way back to some sort of a stable or normal 
 level adjusted to conditions of national and 
 
 [13] 
 
international demand and supply, as these 
 will be when industry and trade among the 
 nations have recovered from the shattering 
 effects of the war and have resumed some- 
 thing that can be called a normal course. How 
 quickly this process will be worked out will 
 determine how long the world will be in the 
 uncertainties and difficulties of a period of 
 transition. Periods of transition are always 
 periods of strain. To shorten them by such 
 means as can be foreseen to have a desirable 
 effect is the part of good economic and finan- 
 cial policy, both for the individual business 
 man and for the nation and the commercial 
 world at large. 
 
 There is already much welcome indication 
 that the more foresighted of the American 
 business community are looking ahead to the 
 falling of prices as something that is inevit- 
 able in the normal course and, instead of wait- 
 ing, are anticipating and assisting the process 
 of readjustment by voluntary price reduc- 
 tions. Such was the action recently taken by 
 the steel trade, the greatest of the country's 
 barometers of industry, an action that is 
 bound to have a decisive effect in many re- 
 
 [14] 
 
lated fields. Many merchandising establish- 
 ments, also, are looking ahead and taking 
 such precautionary measures as they can to 
 prevent being involved in avoidable loss in 
 the transitional period of price readjustment. 
 Bankers are scrutinizing credit statements 
 and are advising clients to be careful not to 
 be caught with large inventories on a falling 
 market and the advice meets many prepared 
 minds and much ready acceptance. 
 
 Such mental preparation paves the way 
 and thereby hastens and makes safe the pro- 
 cess of price readjustment. But when all is 
 done in this way that can reasonably be ex- 
 pected of the business man, it will still remain 
 true that much of the readjustment of prices 
 must come about through other action in 
 which the community at large must have a 
 principal part. 
 
 What is it that has driven prices to the 
 dizzy heights that have prevailed during the 
 past four years? In general, the answer of 
 course must be war — the economic and finan- 
 cial disturbances the war has produced. It is 
 difficult enough, even under normal condi- 
 tions, to specify the factors which determine 
 
 [15] 
 
the level of prices. The price situation, as we 
 find it in any given country at any given time, 
 is the result of a complexity of forces in which 
 the production and costs of goods, market 
 demands, the saving and investment of cap- 
 ital, the state of credit, and the volume of 
 money and currency, all have their measure 
 of influence. These have all been at work dur- 
 ing the war, but they have been so complicated 
 in their action by the war that no simple ex- 
 planation of the movement of prices in our 
 own or other countries is adequate fully to 
 explain the causes of what has been taking 
 
 ^ ' Scarcity and High Prices 
 
 From the very beginning, the war caused 
 a great intensification of the demand for a 
 great variety of materials and supplies needed 
 in modern warfare. With all the efforts that 
 have been made to adjust the productive or- 
 ganization of the different countries to the 
 supply of these much-needed things, there 
 has, until quite recently, been a relative short- 
 age of many of the primary materials and 
 basic commodities of war. To that extent, 
 they have commanded ^scarcity values' and 
 
 [16] 
 
their prices would have ruled high even had 
 there been no alteration in general monetary 
 conditions. Much patient and methodical sta- 
 tistical investigation will be needed to deter- 
 mine the exact extent to which high prices 
 during the past four years can properly be 
 regarded as 'scarcity values.' 
 
 To the extent that the prevailing high 
 prices have been 'scarcity values' we may ex- 
 pect the situation to right itself in due time as 
 industry shifts from war production to peace 
 production and the vast numbers of able- 
 bodied workers, who have been withdrawn 
 from productive industry to military service, 
 are reinstated in the industrial army of the 
 country. The production of many basic ma- 
 terials and commodities, which have been in 
 short supply, will gradually catch up with the 
 demand and values be brought back more 
 nearly to normal. This movement has already 
 begun. 
 
 Looked at from this point of view, the prob- 
 lem of reestablishing a normal price level is 
 a problem in production^ one to be worked 
 out in factory, farm and work-shop. Prices 
 will move toward normal and goods will be- 
 
 [17] 
 
come cheaper as they become more abundant. 
 They will become more abundant as the waste- 
 ful processes of war consumption come to an 
 end and production resumes its normal ways. 
 
 Inflation and High Pkices 
 
 But ^scarcity' is a relative term and there 
 is so much evidence of an artificial abundance 
 of money in comparison with the things that 
 are purchasable by it that the abundance of 
 money must be credited with at least an equal 
 influence in explaining the high prices which 
 have prevailed. Special attention will, there- 
 fore, have to be directed in the process of a 
 return to a normal basis of prices to the con- 
 dition of banking credit and currency, which 
 has promoted or sustained the upward flight 
 of prices. 
 
 The balance sheet of the belligerent world 
 has been swollen by the addition of about two 
 hundred billions of public debt on the liabili- 
 ties side of the account with only partial off- 
 sets in the way of newly created wealth on the 
 assets side of the statement to insure economic 
 solvency among the European belligerents 
 and especially the Central Powers. Not the 
 
 [18] 
 
least of the wonders worked by the war has 
 been the ease with which vast public debts 
 have been contracted, on what must be con- 
 sidered a relatively favorable basis, so far as 
 concerns interest rate and other terms. 
 
 The fact that the war was not merely or 
 mainly a war of armies but a war of nations 
 in which everybody had his part to play does 
 much to explain the unprecedented financial 
 achievement of all the belligerent nations. 
 Patriotism may have run as high in other 
 wars but never before did it so nearly embrace 
 whole communities to the last individual in 
 its magnificent sweep. It has become a matter 
 of commonplace observation in the United 
 States that our people of many different races, 
 creeds and conditions have never before been 
 so nearly one in thought, feeling, spirit, pur- 
 pose and action, as during the war. All of the 
 four great Liberty Loans have given the evi- 
 dence and measure of the people's devotion 
 to the Nation's cause. Twenty-one million 
 subscribers to the Fourth Liberty Loan tells 
 much of the story of our financial achieve- 
 ment. Much, but not quite all ! For the achieve- 
 ment is not quite all that it appears to be and 
 
 [19] 
 
must become. The rest of the story will be 
 found in the expanded condition of the banks. 
 Of the eighteen and a half billions of loans 
 thus far put out by the Government, it 
 may be estimated that six billions are being 
 carried by or in the banks. To the extent 
 that subscriptions to Government borrowings 
 are paid, not out of cash which the subscriber 
 has actually saved out of his income, but by 
 credit borrowed from his bank, the payment 
 of the subscription must be regarded as hav- 
 ing given rise to an expansion of bank credit 
 to approximately an identical amount. Such 
 expansion of credit, unless it sets in motion 
 new forces of saving, results in inflation, first, 
 of credit, then, of currency, and, as a con- 
 sequence of both, inflation of prices. A bank's 
 deposits and currency are the children of its 
 loans and investments. When the loans and 
 investments, therefore, which occasion an in- 
 crease of deposits and currency are not defin- 
 itely tied to the production or saving of goods, 
 they must cause a rise of prices. When the 
 rise of prices resulting from an expansion of 
 credit and currency is not able, or until it is 
 able, to induce a commensurate increase of 
 
 [20] 
 
productive industry to match the increased 
 buying power of the community, the resulting 
 condition is one of inflation, that is one in 
 which there is more purchasing power, in 
 terms of money, afloat in the community than 
 is called for. 
 
 This condition has not been peculiar to the 
 United States. Credit expansion and currency 
 expansion — inflation, for short — ^have every- 
 where played their part in the financing of 
 the war; not as much fortunately in the 
 United States as in other countries, but yet 
 enough to cause concern; not disastrously as 
 in former wars, but not without producing 
 some serious consequences and leaving in some 
 of the belligerent countries grave dangers and 
 in all of them, ourselves included, a trouble- 
 some after-war situation. The great central 
 note-issuing banks of the modern world — 
 such are also our Federal Reserve Banks — 
 have made inflation easy. In the estimation 
 of many they have also made it safe. They 
 certainly have done much to make it technic- 
 ally safe. The theory upon which the great 
 note-issuing banks pretty generally have pro- 
 ceeded is that the test of banking safety is to 
 
 [21] 
 
be found in the reserve ratio. The more gold, 
 the more credit and currency. Such appears 
 to have been their monetary logic. Acting 
 upon this theory, they have scoured their re- 
 spective countries of most of the scattered 
 gold. 
 
 ^Goods' Value Versus ^Gold' Value 
 
 As long, therefore, as the great central 
 banks could gather in gold enough to main- 
 tain a suitable mixture of gold in their re- 
 sources and thus clothe their liabilities with 
 a suitable covering of gold, their position was 
 one of technical safety and appearances were 
 good. It may be admitted that appearances 
 count for much in the psychology of credit 
 and banking. But more than appearances 
 and more than technical safety and, there- 
 fore, more than gold, are necessary to the 
 good functioning of reserve and note-issuing 
 institutions. The character of their general 
 assets, as well as the adequacy of their re- 
 serves, determines their real condition. There 
 must be wisdom — great wisdom and, at times, 
 courage, as well as wisdom — ^in the adminis- 
 tration of note-issuing and reserve credit 
 
 [22] 
 
banks if more than a condition of technical 
 banking strength is to be maintained and the 
 world made safe against the costly evils of 
 inflation. That lesson the world is about to 
 learn as a result of the experiences of the past 
 four years. Until it is learned and the credit 
 and currency situations in the leading coun- 
 tries rectified accordingly, the business of the 
 world will be in a state of maladjustment with 
 the industrial unrest and strife that are 
 usually bred of maladjustment and financial 
 confusion. 
 
 The fact that inflation in the United States 
 has not been caused or attended by suspension 
 of gold payments or a discount on paper cur- 
 rency, such as was experienced during the 
 Civil War, should not blind us to the realities 
 of the situation. Suspension of specie pay- 
 ments may take place without producing a 
 state of inflation. (Such was the case in 
 France during the Franco-German War of 
 1870-71, when the Bank of France suspended 
 specie payments but managed its note issues 
 with such care that they were never at any 
 time over-issued and never went to anything 
 
 [23] 
 
more than a nominal discount as compared 
 with gold.) 
 
 Recent events, particularly in the United 
 States and among the northern neutrals of 
 Europe, which like the United States have 
 experienced enormous accessions to their sup- 
 plies of gold during the period of the war, 
 show that inflation may take place without 
 a suspension of specie payments or the oc- 
 currence of a discount on paper. It was the 
 very abundance of gold that helped to advance 
 prices in the United States before our entry 
 into the war. The currency of the United 
 States now, as then, is a gold currency. Prices 
 in the United States are, therefore, gold 
 prices. This fact is incontestable. There is gold 
 enough and more than enough to assure the ab- 
 solute convertibility of our paper currency 
 in gold. The trouble with our situation is not 
 that the paper dollar is not as good as the gold 
 dollar; just the reverse is true: it is. The 
 trouble with our situation is that neither the 
 paper dollar nor the gold dollar will buy as 
 much as they did before inflation of prices 
 began. At prices as they are, the paper dollar 
 buys as much as the gold dollar. The gold 
 
 [24] 
 
dollar is no better than the paper dollar. The 
 two are interchangeable. Our trouble, there- 
 fore, is with dollars, irrespective of their 
 kind. It is one of quantity^ not of quality, or, 
 at any rate, not of quality in terms of gold. 
 Our elastic note issue system has enabled us 
 to place the issue of paper dollars on a quan- 
 tity basis without endangering the integrity of 
 their gold value. The trouble is with the goods 
 value, not with the gold value of the American 
 dollar. Our difficulty is, and therein consists 
 our inflation, that dollars — good financial dol- 
 lars, ^safe' dollars, gold dollars — ^have been 
 created in such abundance in comparison with 
 the amount of goods purchasable by them that 
 they have, as a necessary result, lost in their 
 purchasing power — in other words, the sup- 
 ply of money has become disproportionate to 
 the supply of goods with rising prices as the 
 inevitable result. 
 
 Since the beginning of the European War 
 or between the dates of July 1, 1914 and Sep- 
 tember 1, 1918, the total money in circulation 
 in the United States, as shown by the Treas- 
 ury statement, increased from $3,402,015,000 
 to $5,621,311,000, an increase of $2,219,296,000 
 
 [25] 
 
or 65 per cent. Total deposits of all banks,* 
 between the dates of June 30, 1914, and June 
 29, 1918, the latest date for which complete 
 figures are available, increased from $21,279,- 
 000,000 to $32,589,000,000, an increase of 
 $11,310,000,000 or 53 per cent. Loans and 
 discounts for the same dates show an increase 
 from $15,340,000,000 to $22,059,000,000, or 
 $6,719,000,000, an increase of 44 per cent. 
 Total investments for the same dates show an 
 increase from $20,924,000,000 to $31,982,000,- 
 000 or $11,058,000,000, an increase of 53 per 
 cent. 
 
 Since our entry into the war, or between the 
 dates of July, 1, 1917 and July 1, 1918, the total 
 money in circulation in the United States, as 
 shown by the Treasury statement, increased 
 from $4,850,360,000 to $5,621,311,000, an in- 
 crease of $770,951,000 or 16 per cent. Total 
 deposits of all banks,* between the dates of 
 June 20, 1917 and June 29, 1918, the latest 
 date for which complete figures are available, 
 increased from $30,443,000,000 to $32,589,000,- 
 000 an increase of $2,146,000,000 or 7 per 
 cent. Loans and discounts for the same dates 
 
 *National, State and private banks and loan and trust com- 
 panies. 
 
 [26] 
 
show an increase from $20,502,000,000 to 
 $22,059,000,000 or $1,557,000,000, an increase 
 of 8 per cent. Total investments for the same 
 dates show an increase from $28,611,000,000 
 to $31,982,000,000, or $3,371,000,000, an in- 
 crease of 12 per cent. 
 
 The index munber of wholesale prices in the 
 United States computed by the Bureau of 
 Labor Statistics shows a rise from 98 in June, 
 1914, to 202 in August, 1918, a rise of over 
 100 per cent. The index number for retail 
 prices for the same dates moved from 99 to 
 171, an increase of about 73 per cent. Since 
 the entry of the United States into the war, 
 the index number of wholesale prices has 
 risen from 171 in April, 1917, to 202 in Aug- 
 ust, 1918, an increase of 18 per cent, the index 
 number for retail prices for the same dates 
 having moved from 145 to 171, an increase of 
 18 per cent. 
 
 These figures certainly reveal a very con- 
 siderable increase in the volume of banking 
 operations in the United States since the be- 
 ginning of the European War in 1914. An 
 aggregate of probably over ten billions (an 
 increase of about 50 per cent) of new pur- 
 
 [27] 
 
chasing power since the beginning of the 
 European War, mainly in the form of bank 
 deposit-currency, has come into existence dur- 
 ing this period. The portion of this increase, 
 which is to be charged to the period beginning 
 with our entry into the war, cannot be ac- 
 curately determined for lack of adequate data. 
 But an indication is supplied by the increase 
 between the dates of June 20, 1917 and June 
 29, 1918 noted above, in the figures for total 
 deposits and money in circulation, an increase 
 of the two together of 8 per cent. It seems 
 within the probabilities that, of the ten bil- 
 lions of new purchasing power which there is 
 good ground for believing have been created 
 in the United States since July, 1914, a fourth 
 may conservatively be regarded as chargeable 
 to the period since our entry into the war. 
 
 To the extent that this increase in the sup- 
 ply of the purchasing media of the country 
 has not been offset by a like increase in the 
 production of goods, it must be regarded as 
 unnecessary and superfluous from the eco- 
 nomic point of view, whatever may be said in 
 justification of it from the point of view of 
 political and general financial expediency. To 
 
 [28] 
 
the extent that it has been offset by increased 
 production, it presents no difficulty. That 
 there has been an enormous increase in the 
 physical output of goods in the United States 
 during the past four years cannot be ques- 
 tioned. Never before has the country come 
 so near to realizing its full productive capa- 
 city; never before has there been so little un- 
 employment or idleness. Some estimates 
 place the increase in the physical products 
 of the country during the past four years 
 as high as 25 per cent. If we take a more 
 conservative figure, of 20 per cent, it would 
 suggest the inference that a commensurate 
 proportion of the volume of credit and 
 currency existing in 1914, or some 4 bil- 
 lions of dollars in the aggregate, was prob- 
 ably legitimately called for by the growth 
 of production in the past four years. 
 
 In estimating the amount of credit and cur- 
 rency contraction that will have to take place 
 before our price situation can be regarded as 
 in a fair way to become normal, these 4 bil- 
 lions should properly be deducted from the 
 statement of the present volume of these 
 items. It would appear probable, therefore, 
 
 [29] 
 
that some 6 billions of credit and currency 
 in the aggregate have been created in the past 
 4^ years that cannot be regarded as having 
 been occasioned by the requirements of in- 
 dustrial growth, as measured in terms of 
 physical units. This is also approximately the 
 amount of war securities and war loan paper, 
 as has already been stated, that the banking 
 system of the United States is today carrying. 
 To this extent the expansion of banking credit 
 and currency would appear to have been 
 occasioned by the banks having assumed 
 the burden of assisting the placement of 
 Treasury borrowings by the extension, use 
 and lending of their credit. Such use of credit 
 is almost of necessity inflationary in its im- 
 mediate effects and in its continuing tenden- 
 cies until corrected. 
 
 Eectification of the Price Sitijation 
 
 There can be little question what form the 
 correction should take. Where there has been 
 inflation^ there must follow deflation, as a 
 necessary condition to the restoration of eco- 
 nomic health. Contraction of bank deposits 
 and currency, through the liquidation of war 
 
 [30] 
 
loan accounts, is clearly indicated as the next 
 and necessary step in the process of bringing 
 the credit currency and price situation back 
 to normal. Those who, in our Liberty Loan 
 campaigns, were persuaded to borrow and buy 
 must now be made to save and pay. ^Save 
 and pay up' should henceforth be our slogan. 
 The problem of correcting a state of banking 
 inflation is mainly a problem in saving. We 
 must either put more goods behind the out- 
 standing voliune of credit and currency — ^that 
 means production — or we must reduce the 
 volume of credit and currency to suitable pro- 
 portions — that means saving. 
 
 Expenses and spending must be kept down ; 
 money must be saved. As it is saved, it must 
 be paid to the banks in liquidation of war 
 loans and other non-productive borrowings. 
 If the money saved is in the form of deposit 
 or checking credits, then the total volume of 
 these in existence and in use will be dimin- 
 ished as they are used to cancel an equivalent 
 amount of loans and thus will the banking 
 structure be contracted and prices be rectified. 
 If in the form of bank notes, the cash hold- 
 ings of the banks will be built up and they 
 
 [31] 
 
will be enabled to reduce their borrowings 
 from their Eeserve Banks and, in this wise, 
 the notes will find their way back to the Re- 
 serve Banks, reducing at once the volume of 
 their outstanding note liabilities on the one 
 side and their holdings of bills discounted on 
 the other. Thus will saving effect the reduc- 
 tion in the volume of outstanding currency 
 and credit. There is no escape from this nec- 
 essity. As long as inflation exists, the nation 
 must continue to practice thrift. Only thus 
 can the capital be created and supplied which 
 will wipe out the inflation that already exists 
 and avoid or minimize such new inflation as 
 may threaten in connection with the great 
 borrowings that must still be made for the 
 use of our Government and the Governments 
 associated with it, to say nothing of the large 
 demands for capital that will be made on the 
 American investment market by Europe in 
 the process of reestablishing her industries. 
 
 The Government's requirements for the re- 
 mainder of the fiscal year have been stated 
 as likely to be not less than seven billions. 
 This amount, added to the six billions of out- 
 standing war securities which, it is estimated 
 
 [32] 
 
above, have not yet been permanently ab- 
 sorbed, gives us a total of thirteen billions of 
 public securities which must be taken up out 
 of genuine savings if our financial and credit 
 system is to be sterilized of the taint of in- 
 flation which at present is upon it. When this 
 is accomplished, prices are likely to be at 
 something that can be regarded as a normal 
 level. Until it is accomplished, there will be 
 an imstable price situation. As it is gradually 
 accomplished, prices will go back to a normal 
 basis in an orderly manner. But if a con- 
 siderable part of the new borrowings, which 
 the Government must make during the fiscal 
 year and until war accounts are finally closed 
 up, are financed by any considerable expan- 
 sion of banking credit, we are likely to have 
 more inflation and an aggravation of a price 
 situation which is already sufficiently serious 
 and burdensome. 
 
 Replenishing Capital 
 
 Europe's post-war financial and industrial 
 requirements cannot even be conjectured. But 
 they are likely to be very considerable if, as 
 has already been suggested, goods can be 
 
 [33] 
 
bought in the American market at reasonable 
 prices and capital obtained on reasonable 
 terms. The destruction, waste and deteriora- 
 tion of plant facilities and other industrial 
 equipment must amount to an aggregate, tak- 
 ing all of the European belligerents together, 
 that it will take some billions of dollars worth 
 of materials and supplies to replace or repair. 
 The amount in which Europe is indebted to 
 the United States on the financial account be- 
 cause of the heavy borrowings that have been 
 made in the American market the past three 
 years, will probably be not far from five hun- 
 dred millions of dollars for interest alone 
 when peace is established. Europe could prob- 
 ably use to good advantage two or three times 
 this amount in the process of replenishing her 
 capital during the next two or three years, if 
 conditions generally were favorable. It may 
 be expected, therefore, that capital will be in 
 strong demand in the post-war period and 
 that much financing of an investment charac- 
 ter will have to be undertaken by America in 
 the process of helping the reconstruction of 
 Europe and the reestablishment of normal 
 conditions throughout the world. The situa- 
 
 [34] 
 
tion presents a duty to be undertaken by the 
 people of the United States, as well as an 
 opportunity to be embraced. Investment rates 
 of interest are likely to rule high for some 
 years and to make saving a remunerative sac- 
 rifice. There is no method by which capital 
 can be created except by saving — ^by saving 
 productive power from the production of 
 goods destined for immediate consumption to 
 the production of goods destined for capital 
 equipment. It is essential from every point 
 of view that the depleted capital of the bellig- 
 erent countries shall be restored and the ter- 
 rible gap torn in the industrial structure of 
 Europe by four years of war, filled up. Just 
 as the war taught us to draw with closer ap- 
 proximation and finer appreciation a line be- 
 tween industries and goods according to their 
 bearing on the prosecution of the war — the 
 ^essentials' being those that helped, the ^non- 
 essentiaJs' those that delayed or hindered — 
 so the same principle, in view of the urgent 
 economic condition with which the war has 
 left the belligerent countries, suggests an 
 analogous application of the same principle 
 — after- war essentials being those that helped 
 
 [35] 
 
industrial recuperation, the nonessentials 
 those that hinder or delay. The consumption 
 and, therefore, the production of nonessen- 
 tials must be kept down in order that the pro- 
 duction of the new essentials may go forward 
 at prices that will attract demand. 
 
 Europe cannot afford to buy great quan- 
 tities of goods in the American market, urgent 
 as its need is for materials of post-war indus- 
 trial reconstruction, unless our prices fall, no 
 matter how ready we stand to finance them, 
 because Europe cannot afford to handicap 
 her reconstructed industries with a capitali- 
 zation that will not be warranted by earnings 
 when post-war prices get back to normal, as 
 sooner or later they will. For her industries 
 to do otherwise would be to invite serious 
 losses and possible bankruptcies. 
 
 Indeed, much the same may be said of our 
 own domestic business situation. Increase of 
 the capital account will, in general, be a peri- 
 lous proceeding for any undertaking involv- 
 ing large permanent investment and heavy 
 fixed charges, as long as prices of materials 
 of construction are on an inflated basis. Thus 
 does an inflated state of prices tend to check 
 
 [36] 
 
industrial enterprise and, therefore, to retard 
 industrial recovery. More than that, an in- 
 flated state of prices always adds to the un- 
 certainties and, therefore, to the hazards of 
 business, when once the crest of the move- 
 ment has been passed. Thus is a speculative 
 tinge given to even ordinary business in per- 
 iods following inflation of prices and credit. 
 Such periods, it has frequently been observed, 
 tend to promote speculative activities and to 
 breed business crises. For whatever adds to 
 the uncertainties and hazards of business, not 
 only tends to induce speculation but also, for 
 that very reason, to add to the chances of 
 business miscalculation and, therefore, to the 
 percentage of business misadventure. And it 
 is business misadventure, when the percentage 
 runs high enough, that makes for crisis. For 
 the business crisis is merely to be regarded as 
 a rough and wholesale method of adjusting 
 the capitalization of business to the indubit- 
 able facts of the market — through earnings to 
 prices — when capitalization has gotten out of 
 line with the price trend, the business crisis 
 being little other than a swift and violent 
 method of correcting errors of business mis- 
 
 [37] 
 
calculation, when such errors have been ex- 
 tensively committed. 
 
 Conclusion 
 
 The more the matter is pondered, there- 
 fore, the more, I believe, the heart of our na- 
 tional after-war business and financial prob- 
 lem will be found in the price situation. There 
 are many other factors — such as wages, taxes, 
 interest rates — ^but none that is comparable 
 in its importance to the price situation nor 
 unaffected by it. If our price situation is 
 quickly cleared up by deflation, wages and 
 taxes may be expected to adjust themselves to 
 the altered conditions. Industrial enterprise 
 can then make its calculations on something 
 like a stable or normal basis and the period 
 of post-war readjustment need have little 
 terror for us. The whole world is inflated. 
 A great opportunity, therefore, awaits the 
 country which is the first to be able to begin 
 marking down its prices toward peace levels. 
 The world needs us and what we can pro- 
 duce. It needs copper, cotton, steel, machinery 
 and many other things. Some of these it will 
 take at any prices but it will take much if 
 
 [38] 
 
our prices are such as to invite foreign de- 
 mand and we need give little attention to 
 artificial methods of taking up the slack in 
 the labor market and otherwise stabilizing in- 
 dustrial conditions, if we take up promptly 
 and proceed vigorously with the solution of 
 the price situation. 
 
 [39] 
 
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