^^e^ T J^^iur:)^MYi^^^^^ THE EUROPEAN WAR AND OUR . OPPORTUNITY IN FOREIGN TRADE Address by WILLARD/ STRAIGHT Bcfote the Illinois Manufacturers* Association Chicago, Illinois, October 27th, 1914 NEW YORK 1914 THE EUROPEAN WAR AND OUR OPPORTUNITY IN FOREIGN TRADE Address of Mr. Willard Straight before the Illinois Manufacturers* Association, Chicago, Illinois, October 27th, 1914. It is a privilege to be able to meet and to be permitted to address the members of the Illinois Manufacturers Association. Your progressive spirit and the interest in foreign trade which prompted you to send a delegation to study South American conditions will, I am sure, result to your own profit, just as your example already has been beneficial to the entire country. The able report on South American banking and credit made to the Government by the Chairman of your Foreign Trade Committee, Mr. Hurley, contains information, and is published at a time, which will render it one of the most valuable contributions ever made to the literature of the com- merce of South America. Mr. Glenn, your Secretary, in inviting me to be present on this occasion, suggested that you would expect, perhaps, a discussion on Far Eastern trade conditions. I shall be pleased, in so far as I am able, to answer any questions you may to- day care to ask regarding this subject. At a time such as this, however, one is tempted to search for the fundamentals of a problem rather than to elaborate on any of its phases. At the risk of appearing here under false pretenses, therefore, I will not touch upon the commercial or political situation in the Orient, but, if you will permit me to do so, shall attempt to analyze our general foreign trade prob- lem as affected by the European war. Prior to the outbreak of hostilities in Europe, the pressure of increasing production in this country and the enactment of a competitive tariff had forced some of our merchants and manufacturers seriously to consider the possibility of widening ••» #^ y> r> /-~> ^-v their markets. The terms of the Federal Reserve Act, permit- ting the estabhshment of branch banks abroad and making provision for the creation of a discount market for commercial paper in this country, promised some of the financial facilities, the absence of which has handicapped our people heretofore, while to the popular imagination the opening of the Panama Canal marked the inauguration of a new commercial era, and aroused an increasing interest in the possibilities of developing our foreign trade. Despite the broad views and the keen appreciation of our needs on the part of some of our great manufacturers, mer- chants, bankers and railway men, and the efforts of organiza- tions such as the Illinois Manufacturers Association, and the Chicago Association of Commerce, however, the mass of our people and the majority of their representatives in Washington, have believed that we in this country were very little concerned with world commerce and the questions of international politics arising therefrom. The producers of our great staples — grain and cotton — realized perhaps that their goods were destined eventually to go abroad, but their experience was confined to their relations with middlemen and bankers who purchased and financed their crops for delivery at, and ship- ment from, the seaboard. The war has been responsible for a great awakening. Our friends in the southern and central states, who have heretofore little heeded the fact that their real markets were not Phila- phia or Galveston, New Orleans or New York, have suddenly found their interests directly affected by the conflict on the other side of the Atlantic. Grain shipments have been de- layed, complicated by difficulties regarding settlement due to moratoria , or questions of exchange or neutrality. The bumper cotton crop, instead of being a blessing to the South, has be- come a pressing national problem. Manufacturers who have depended upon materials or articles imported from abroad, have found it impossible to obtain supplies necessary for the continuance of their industries. Producers, farmers, mer- chants and manufacturers, who for years past have been deaf to the agitation for the up-building of an American Merchant Marine, are now conscious for the first time that shipping facilities, regarding the existence of which they were comparatively indifferent but on which they nevertheless relied, are of vital import to the entire country. Bankers who have been innocent of any knowledge of foreign exchange are now rather resentfully aware that credit is an international commodity and the maintenance of normal exchange rela- tions with Europe, particularly with London, has a direct bearing upon their day to day transactions. This situation has produced a nation-wide realization, rather than an appreciation, that the United States has a certain, well-defined place in the mechanism of world-trade, and as a natural corollary has evoked a general feeling that since our competitors are handicapped by the European struggle the United States should have a splendid chance to supply the demand hitherto filled by European exporters. During the past two months, therefore, we have heard great exultation over the wonderful opportunities for the extension of American commerce, and much enthusiastic comment as to the possibili- ties of capturing British and German trade. As a matter of fact, aside from the sudden demand for mili- tary supplies, which has brought large orders to some of our industries, the great proportion of our merchants and manu- facturers actually engaged in foreign trade have found their sales decreased, rather than increased, by the war. Exchanges have been disorganized ; shipping was for a time interrupted and is now carried on under rather abnormal conditions, and mora- toria have actually, or in effect, been declared on every side, making collections extremely hazardous. The urgent question at the present time, therefore, is not the extension of our com- merce but the retention of that which we heretofore have had. The Administration at Washington with commendable promptitude has endeavored, as far as possible, to meet the ■emergency. Congress has adopted measures designed to en- 4 courage American owners to transfer to American registry, ships heretofore operated under foreign flags. A Government Bureau for war-risk insurance is already in operation and under the auspices of the Treasury Department bankers have been and are attempting to relieve the exchange situation by underwriting the New York City notes and the establishment of a gold pool. Plans are now being discussed, with the patriotic cooperation of Chicago bankers, which, it is hoped, will enable the Southern farmers to cany that portion of the cotton crop which they are unable to export because of the war. American Branch Banks Abroad. Even before the outbreak of hostilities, the National City Bank had decided to open branches in South America and this institution, in so far as it has been able, has granted accommo- dation to our merchants engaged in the South American trade. National banks which have signified their intention of entering the Federal Reserve System are now permitted to accept bills of exchange and an earnest effort is being made to facilitate trade movement by the gradual creation of a discount market. There has been a pressing need for the establishment of a direct dollar exchange with South America and the Far East. It was proposed to establish a merchants' clearing house for matching South American credits, in the hope that, by virtue of this mechanism we might be able to settle for our large purchases of South American goods by increased exports to that region, rather than by transmitting funds or goods to Europe to liquidate our South American balances as has here- tofore been the practice. The suggestion, however, upon careful investigation was found to be impracticable. Our exporters to South America and the Far East are hampered, therefore, not only by the difficulty of making collections, but by the impossibility of securing adequate accommodation in this country from American banking institutions, while importers, who have heretofore settled through Sterling credits, have been penalized by the prevailing price of London exchange, or greatly em- barrassed by the moratorium in England. The present emergency, however, cannot continue indefi- nitely. Our Export trade may be materially lessened; it is inconceivable that it should entirely cease. As the situation more nearly approaches normal, therefore, trade will tend to revert to its old accustomed channels, or will continue to avail itself of such new facilities growing out of present needs as may economically justify their permanent operation. Eminence of Sterling Exchange. It is folly to hope that, as some enthusiasts have predicted, the United States will soon become the financial center of the world as the result of the war. London has held this position for many years. Commercial bills, covering imports from, and exports to, every comer of the globe, are accepted by London houses and discounted in the London market. China, Japan, Australia, South Africa and South America have been developed chiefly by British capital and must each year pay their toll of interest settlements in London. British merchants are everywhere; British ships on every sea, and although the necessity of maintaining gold reserves and settling balances by gold shipments still persists. Sterling exchange, not gold, in reality to-day constitutes the credit basis for the world's trade. There are undeniable advantages in the maintenance of one world credit center. It may be disastrous, however, to be without supplementary credit machinery which may be used in times of emergency. Therefore, while we shall undoubtedly, as in the past, continue in the future to transact a large portion of our foreign business by means of Sterling credits, there would seem to be a chance at the present time to build up exchange relations which may, to a certain extent and for a certain proportion of our trade, render us independent of London credits and the London discount market. This, however, cannot be done in a day, or a week, a month or a year. It will require the development of an American international banking system, a thorough study of foreign credit conditions and commercial custom, and the education of our own mer- chants and manufacturers in business methods with which they are now generally unfamiliar. Characteristics of Our Foreign Traee. Our foreign trade should be classified in two general divisions; First, our trade with Europe, which is mainly made up by the exchange of raw for manufactured products, although a consid- erable portion of this trade consists of both the import and ex- port of finished articles, and. Second, our trade with the rest of the world which, it may generally be said, consists of the export of manufactured goods and the importation of raw products. The balance of our trade with Europe is heavily in our favor. The balance of our trade with South America, Turkey, India and Japan is against us. They must all make large payments in London each year. While taking into consideration European investment in American securities the annual remitt- ances of aliens in the United States to foreign countries and the expenditures of American tourists abroad, it may be generally stated that our trade balance, favorable as far as Europe is concerned, unfavorable as regards the rest of the world, in a way offset each other. In other words, that our large excess of exports to Europe is in reality utilized to meet our own obligations and the interest payments due in London from certain other borrowing nations to which we ourselves are indebted. Our attention has been directed toward overseas commerce chiefly owing to our desire to stimulate production in this country. Many of our present troubles are due to the fact that we have been inclined to concern ourselves only with the problem of production, not as a segment in the cycle of foreign trade but as an end in itself. We have in consequence neglected the very vital question of distribution. , Foreign owned and operated transportation and ordinary commercial banking facilities have been available and although it has been frequently asserted that American commerce should not pay toll to such foreign bankers and shippers, the majority of our manufacturers and merchants have been content to let well enough alone. It was to be expected that the war would interfere with our trade with the belligerent nations. Our dependence upon London exchange, however, has in addition seriously pre- judiced our sales to South America and the Far East, with which regions, had proper facilities existed, we might reasonably have hoped that our trade would have increased because of the curtailment or cessation of European exports. The war, therefore, in addition to adversely aff ectingproduction in this country has forced upon us an appreciation of the inti- mate interdependence of the three main elements of foreign trade — Production, Transportation and Financing, — First, of pro- duction; Second, of goods in transit, and. Third, of settlement. If we really wish seriously and effectively to engage in, and extend, our foreign trade, we must study all the factors by which this problem is affected. An American Merchant Marine. Although sufficient bottoms are available at the present time, the complications regarding contraband and neutrality have demonstrated the desirability, if not the necessity, of building up an American Merchant Marine, the existence of which would have done much to maintain uninterrupted shipping facilities with Europe and have enabled us to carry on our trade with neutral countries. I have no desire to enter into a tariff argument, but unless I am misinformed, the reduction of heretofore protective duties has been justified on the general ground that despite our high cost of labor, we would, because of labor-saving devices be able to maintain our wage scale under a lower tariff and still compete with European industries and their cheaper labor. It has been impossible profitably to operate vessels (except under our coastwise monopoly) under the American flag be- cause the cost of labor left no margin of interest return on capital invested. 8 The present navigation laws are designed to maintain the wage scale and living conditions felt to be the due of Americans at sea. There are few labor-saving devices in steam navigation and, even if there were, our owners could not avail themselves thereof, because our navigation laws stipulate that they must employ more, rather than less, men than are required to operate foreign owned vessels. Under such conditions investment in steamship lines has offered little inducement to American capital. Government ownership of ships wo aid seem open to the same objections which have been urged against ship-sab sidles. Those most fa- miliar with this subject (among which number I do not include myself) therefore contend that the most direct and practical way in which to create an American merchant marine would be to so modify our navigation laws that American ship-owners may operate on a labor cost which will enable them to compete with the other maritime nations. Until we do have a merchant marine, our export trade will be dependent upon foreign bottoms and, because of British preponderance in the carrying trade, as at the present time, very largely upon the ability of the British Navy to retain com- mand of the sea. American Discount Market. Our system of commercial banking for foreign trade should be greatly altered and greatly improved by the operation of the Federal Reserve Act and the creation thereunder of a discount market for foreign bills of exchange. The maintenance of this mechanism is so essential and you are so familiar with its purposes, that I shall not venture upon a discussion thereof. I shall, if I may, however, refer particularly to the importance of governmental credits and foreign loans. The financing of the transition from the producer to the consumer is, in the case of ordinary commercial transactions, handled automatically as a matter of banking routine. The purchaser may settle at once or arrange for sixty or ninety days, — or perhaps six months — credit from the merchant, and the merchant, in turn, is either " carried " by his bankers or by the manufacturer who would, in the latter case, also be obliged to rely upon the bank for the necessary accommodation. When the purchaser, however, desires credit for a period of from five to sixty years, it is no longer an ordinary banking transaction; and it becomes necessary for him to obtain funds by the sale, on the market, of stocks or bonds rather than by discounting commercial paper. In other words, the purchaser, instead of obtaining credit from the merchant, the manufacturer or the banker, through the banker as his agent, borrows from the investing public. Foreign Loans Make Foreign Trade. Most of the countries which are now rapidly developing their resources and which cannot themselves finance such develop- ment, must secure money in this way. If we expect to realize the full possibilities of our export trade, we must, by our readi- ness to purchase foreign bond issues, be able to extend to foreign purchasers the accommodation which they now have obtained in the markets of our competitors. This, roughly, is the problem of the foreign loan and foreign trade. Its satisfactory solution, which is of vital interest to our merchants and manufacturers, depends primarily upon the attitude of the American investors who, while they may not directly benefit by the increased sale of particular American commodities, will, in addition to the return on their investment, share in the ensuing general prosperity. A distinction should be drawn between foreign securities, purchased solely as an investment and foreign loans which, in addition to their investment value, bring to the lender certain collateral advantages. Under the first classification should be included, for example, railway bonds or stocks, issued in the United States, but purchased in Europe for investment or for speculative purposes. In the same category would fall bonds issued by the Russian, Spanish or other Governments, which. 10 though politically and financially independent, have required for their development larger amounts than they themselves are able to supply. Foreign holders of such bonds or stocks have not attempted to share in the management of the American railway corporations and have been powerless to control the action of the Russian, Spanish or other Governments, whose needs they have financed. Such loans, therefore, are judged according to their investment value. Under the second classification would fall, loans issued on behalf of a foreign government or corporation in the markets of the bankers who negotiate the loan and which, besides the interest return to the actual subscriber thereto, assure certain political advantages to the Government, or returns to the industry, of the lending nation, which are shared directly or indirectly by the investing public. Peaceful Influence of Investment France, Great Britain, Germany, the United States, Belgium, Switzerland and Holland, have been the chief lending nations. Switzerland and Holland have been concerned primarily with investing their surplus capital. The British, German and Belgian — even the Russian and Japanese — and particularly the French, Governments, however, have in the past recog- nized the value of their investing power as a political instrument in the great diplomatic struggle in which all have been engaged to secure markets for their foreign trade. A highly efficient mechanism of economic production has only a potential value. The aggressive strength of a nation depends on its political and financial stability, and its inter- national position upon its investing power and the disposition of its government effectively to represent its citizens or sub- jects and to assist in the extension of their trade. The great lending nations have recognized both these facts. They have utilized their investing power as a national asset. By building up weaker nations through financial reorganization 11 and the development of their resources, they have created for themselves a financial and political influence which they have converted to their commercial advantage. In this task Government, ankers, merchants and manufacturers, sup- ported by the investing public, which the Government repre- sents, and of which the bankers, merchants and manufacturers are an integral part, have cooperated for the common good. United States Market for Foreign Securities. The United States, at the present time, is the only country with fully developed banking facilities and great financial re- sources, not involved in the European war. Some of the belli- gerent governments have already attempted to sell their securities in this country, it being understood that the proceeds of such sale would be deposited here for the purchase of supplies in the United States. But upon the cessation of hostilities the question of governmental credits and foreign loans may well become acute, for at that time, it is not at all unlikely that a number of the European nations may attempt to obtain funds in the United States. The American public has not heretofore purchased foreign securities to any great extent. The interest awakened by, and the information acquired as a result of, the war, however, and the interest return which capital will command at its conclusion, may render our people more inclined to widen their investment field. Dollar Exchange. The opening of branch banks in South America and the Far East, by making possible the establishment of a dollar exchange and the creation of commercial paper which should find a market in this country when the provisions of the Federal Reserve Act become operative, should greatly facilitate our trade. Our ability to build up new markets, however, will depend upon the readiness of our investing public to furnish capital for the development of our customers. American in- 12 vestors in loans to European powers or to Japan would derive merely their interest return. There would be no collateral benefits to the country at large and the funds obtained would be utilized by the borrowing nations in building up the very industries with which our own manufacturers must compete. We should, therefore, now begin to consider whether, when the proper time comes, we will utilize our loaning power to assist the recovery of our competitors or to build up customers in South America and the Far East, where the interest to be earned would be attractive to us and at the same time fair to the borrowing nations. Post-Bellum Readjustment. The readjustment which will follow the present struggle will doubtless place the European nations on a stable basis which will be maintained at least for many years to come. Our in- vestors, therefore, may feel a confidence in the position of European countries and Japan, which they may not consider justified in the case of China and some of the South American republics which now require funds. Russia, Chile, Brazil and the Argentine, however, will need money for their development and should offer attractive fields for American investment, and promise large returns for American industry if loans are granted on condition that the proceeds be expended in the purchase of American goods. The willingness to loan funds to China and certain of the Latin-American Republics, however, will depend largely upon the American investor's confidence in the readiness of our own Government, not to act as their collecting agent, but by diplomatic good offices to support them in case their interests should be imperiled. Attitude of Government. At the Foreign Trade Convention, held in Washington last May, the Secretary of State said in part as follows: "It is the earnest purpose of the Department of State to 13 promote commerce and close industrial relations with other countries. So far as it is possible to do so, it is our desire to obtain for Americans equality of opportunity in the develop- ment of the resources of foreign countries and in the markets of the world. It is our intention to employ every agency of the Department of State to extend and safeguard American commerce and legitimate American enterprises in foreign lands so far as it can be done consistently with the sovereign rights of other governments. It should be distinctly understood, however, that this Government in its efforts to advance the interests of its citizens abroad will know no favorites. Honesty of purpose and endeavor, and ability to perform obligations assumed will command at all times its hearty support." The assurances given were categorical and should be satis- factory. It has been frequently asserted, however, that our Government has failed to support the interests of American investors in Mexico, and this has been advanced as an argument against any purchase of foreign securities. The Mexican situa- tion is not yet settled. Critics of the Administration, theiefore, are not yet justified in stating that its final solution will not result in the satisfaction of just claims and in the establishment of relations between the United States Government and the Republics of Mexico and Central America which will warrant investors in loaning their capital for the development of these regions. Above all, however, if we are to be successful in extending our foreign trade we must think nationally and act nationally; settle our own differences between ourselves; present a united front to the world and bargain collectively with our customers. The tariff should be recognized as an instrument to protect American industry at home and as a diplomatic currency to be expended in return for concessions calculated to secure for us access to fresh markets abroad. Increased Investing Power It should be realized that our investing power will be in the future, by comparison, greater than ever before, and we should 14 regard it in the aggregate as a national asset, to be utilized for the benefit of the United States as a whole, as well as for the profit of the individual investor. Our Government should not be called upon to protect our fellow-Americans who desire to exploit our neighbors, but sup- port for legitimate enterprises abroad should be assured. Great wars have almost invariably served to stimulate in- dustry. It is ridiculous, therefore, for us to believe that our competitors will be handicapped permanently by the conflict in which they are now engaged. On the contrary, they who are already trained to foreign trade, who have long established connections abroad and a just appreciation of the relations of oversea commerce and domestic prosperity, will be stimulated to new efforts, by the pressing need of recovering from the effects of the present struggle. They will be disciplined by the trials they have undergone; hardened by deprivation; rendered keener by the present crisis. Within but a short space of time their competition will be more effective because more aggressive. They will be satisfied with a smaller margin of profit and will be willing to work harder than before. We in this country have been prodigal ; thoughtless, careless, because of the very magnitude of our national resources. We have developed a remarkable initiative and intelligence, because the scope for our enterprise has been so vast. We are as a nation, however, just beginning to learn the necessity of thinking, not individually, but collectively, of cooperating for the common, instead of striving each for our own, good. A great foreign trade opportunity is to-day presented to us. We are not, however, invited to enter an El Dorado. There is no " New West " opening to our endeavors. Our competitors are less active than they have been in the past. They will, for some time to come, be handicapped by the results of the war, but their recovery from its effects will be more rapid than some of us are now led to believe. Our real opportunity lies in our suddenly awakened con- sciousness; that after all we cannot hold aloof but, whether we 15 will or no, must play our part in a world game. The war has granted us a breathing spell in which to look strange new facts in the face; to take stock of our abilities, to over- haul the existing and to construct new machinery for carry- ing on our foreign trade. The European struggle has not brought us a lottery prize; it has given us a job in which it is up to us to make good. This is our foreign trade oppor- tunity. It is an opportunity which carries heavy responsi- bilities, — responsibilities which you, gentlemen of the Illinois Manufacturers Association have already shown your desire and your ability to assume. RETURN TO the circulation desk of any University of California Library or to the NORTHERN REGIONAL LIBRARY FACILITY BIdg. 400, Richmond Field Station University of California Richmond, CA 94804-4698 ALL BOOKS MAY BE RECALLED AFTER 7 DAYS 2-month loans may be renewed by calling (510)642-6753 1-year loans may be recharged by bringing books to NRLF Renewals and recharges may be made 4 days prior to due date DUE AS STAMPED BELOW SEP 07 ssr AlIC '^ n 1QQR U. C. BERKELEY LI CDM7fl3H' 596880 UNIVERSITY OF CALIFORNIA LIBRARY ^^'-'S.', v-;>;t V? 'ii-"^ ^ ^ ■Si^'*3»