Economics and The Public Welfare
3: The War Prosperity
Chapter 3
The War Prosperity
Our Export Balance, 1915-1917. The outstanding fact from the standpoint of the economic life of the United States from November, 1914, until our entrance into the war in April of 1917, was a great and ever growing volume of exports from the United States to Europe, unmatched by a return flow of imported goods—a great and ever growing export balance of trade. Measured in dollars the increase is shown by the following table:
| U.S. Exports | U.S. Imports | U.S. Export Balance | |
|---|---|---|---|
| 1913 | 2483.9 | 1792.5 | 691.4 |
| 1914 | 2113.7 | 1789.4 | 324.3 |
| 1915 | 3554.7 | 1778.5 | 1776.2 |
| 1916 | 5482.6 | 2391.6 | 3091.0 |
| 1917 (4 months) | 2164.8 | 965.5 | 1199.3 |
How Paid For—Gold. This immense unbalance in trade created, of course, a special financial problem. In some way these goods had to be paid for. They were paid for in four principal ways. One was gold. We received gold to the extent of approximately 1100 million dollars net, from the end of November, 1914, to May, 1917. This obviously solved only a minor part of the problem.
Return of American Securities—Loans in America, The second major means of payment was by the return of American securities held abroad by foreign investors and especially by British and French investors. The British and French governments both undertook to control this and to make the sale of securities orderly. They corralled American securities held by their own nationals, compensating them by giving them government securities, and disposed of them on the New York Stock Exchange in such a way as not to break prices and to get the best return possible.
The third major source was the placement in the American market of foreign government loans through investment banking syndicates, usually headed by J. P. Morgan and Company (which house acted as fiscal agent for the governments of both Great Britain and France). The largest of these loans was the so-called Anglo-French loan of 500 million dollars. There were two great loans to the United Kingdom of Great Britain and Ireland, one for 300 million dollars and one for 250 million dollars. There was one great loan of $94,500,000, collateraled by American securities. There was a loan to the French Republic of 100 million dollars. There were loans of various amounts to various French cities. There was a 25-million-dollar loan to the Imperial Russian Government. The Dominion of Canada borrowed 175 million dollars, much of which was made available to the British Government.
Finally, there were unfunded credits of substantial amounts, revolving, but none the less growing, as great American banks gave credits to European importers on the guarantee of great European banks, especially British banks, and as American business houses gave long credits to trusted European customers. By the time we entered the war in 1917 the credit of the European belligerents was under very heavy strain.
Few Credits to Germany. It may be said that the overwhelming bulk of the credits thus extended were to the Allies opposed to Germany in the war. There were no public loans floated for Germany. Germany undoubtedly received substantial private credits during the first two years of the war. At the beginning of the war we were, of course, strictly neutral, and so far as Governmental policy was concerned, Germany could have had credits here. The great practical obstacle was the fact that Germany promptly lost control of the sea and so could not buy goods here, though she did receive during the first two years of the war a substantial volume of American goods through neutral countries, notably Sweden, Denmark, and the Netherlands—and for that matter, during the first year of the war, through Italy. As the British blockade against Germany became effective, there was a sharp increase in American exports to Sweden and other Scandinavian countries. This was interpreted at the time as representing goods sent to Germany via the Scandinavian countries. But only part of this increase represented American goods going to Germany. Before the war the German Free Port of Hamburg had been a great distributing point for the whole Baltic region, and a good many American goods regarded as going to Germany in 1912 and 1913 were in fact destined for Sweden and other Baltic countries. With our trade to Hamburg stopped by the war, American goods went directly to Sweden and other Baltic countries instead of via Hamburg.
Cheap Money, 1915-1917—Gold. The role of the incoming gold in making these payments is a great deal more important than the foregoing figures would indicate. Relatively small in itself, the incoming gold none the less facilitated the placement of foreign loans and the absorption of American securities returned. It made an easy money market. It was easier for bank credit to expand. Speculative purchasers could more easily borrow at the banks the funds that they needed to carry the American securities returned and the foreign securities purchased. In fact, there were occasions when shipments of gold seemed to have been deliberately timed so as to make an easy money market in the United States as a favorable condition to the placement of a large foreign loan.
During the period when the Stock Exchange was closed late in 1914, the call rates on Stock Exchange loans were held at 8%, though favored customers were charged only 6%. These loans were not, of course, really call loans. Banks could not sell collateral, and it was impossible to call the loans. They were, in fact, undated time loans. With the turn of the tide of gold in December, however, and with the reopening of the Stock Exchange, the rates dropped rapidly, and for over a year, from January, 1915, to May, 1916, New York enjoyed a period of extraordinarily easy money. The “high” on call rates at the money post on the Stock Exchange was 2 1/4%, the low was 1%, and the general range was from 1 3/4% to 2%. It was not until the heavy financial operations of the Government in the summer of 1917 that call money got as high as 5% again.
Reduced Reserve Requirements. At the same time that we had this vast addition through incoming gold to the cash reserves of the banks of the country, we had a decrease in the reserve requirements of the banks through the operation of the new Federal Reserve Act, which had lowered reserve requirements for the central reserve cities from 25% to 18% on demand deposits, with a corresponding lowering of reserve requirements in reserve city banks and country banks. Bank credit was easy. It was easy to float new securities. It was easy for businesses to expand if profits were in sight.
Profits were in sight. Britain and France and their Allies were buying the products of American farms and mines and industries—buying all that they could get and find transportation facilities for. Our own industries were making a great transformation as they turned to the production of munitions, and the easy money market facilitated this.
The response of American industry to this extraordinary stimulus, facilitated by abundant financial resources, was very impressive. The following table tells the story:
| Physical Volume of Production and Construction, 1914-1922 * | ||
|---|---|---|
| Year | Total volume of production | Total volume of construction |
| 1914 | 100 | 100 |
| 1915 | 113.7 | 97.9 |
| 1916 | 120.6 | 111.3 |
| 1917 | 125.5 | 93.8 |
| 1918 | 124.5 | 64.9 |
| 1919 | 116.7 | 88.7 |
| 1920 | 124.5 | 48.5 |
| 1921 | 103.9 | 91.8 |
| 1922 | 121.6 | 139.2 |
* Frederick C. Mills’ Economic Tendencies in the United States, New York, 1932, pp. 188 and 191. Bases changed from 1913 to 1914.
Wartime Prices. The first effect of the great increase in demand from Europe for our goods with the great inflow of gold was, not a rise in prices, but rather a great quickening of industry. The annual averages for the Bureau of Labor Statistics Index of Commodity Prices for the United States, taking 1913 as a base, shows:
100 for 1913
99 for 1914
100 for 1915
At quarterly dates for 1915 the figures show:
| January | 98 |
| April | 99 |
| July | 101 |
| October | 101 |
By November and December of 1915, however, industrial slack in the United States had disappeared, and our labor and resources were fully utilized. Additional production of one kind of commodity could come only as labor and supplies were pulled away from other kinds of production. The pull and haul among competing uses for labor and supplies began, and a great rise in commodity prices came. Prices rose sharply from 100 in September, 1915, to 112.8 in January, 1916, to 152.9 by January of 1917, and to 182.6 by May of 1917. The peak for the year of 1917 was in July, at 187, after we had entered the war; and from then on to the end of the year the price curve flattened out and even reacted a little. Our great increase in prices came before we ourselves got into the war, before the great expenditures of the United States Government, before the vast public loans.
The Wholesale Price Index of the Department of Labor, 1913-1927* (Wholesale Index Numbers, 1913 average = 100)
| Year | Yearly average | Jan. | Feb. | Mar. | Apr. | May | June | July | Aug. | Sep. | Oct. | Nov. | Dec. |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1913 | 100 | ||||||||||||
| 1914 | 98 | ||||||||||||
| 1915 | 101 | 98 | 99 | 99 | 99 | 100 | 99 | 100 | 100 | 100 | 102 | 104 | 108 |
| 1916 | 126.8 | 112.8 | 115.1 | 118.5 | 121.1 | 122.4 | 122.6 | 123.2 | 126.3 | 129.6 | 135.6 | 145.6 | 148.8 |
| 1917 | 177.2 | 152.9 | 156.8 | 162.4 | 172.9 | 182.6 | 185.5 | 187.6 | 189.4 | 187.1 | 182.7 | 183.1 | 182.4 |
| 1918 | 194.3 | 184.3 | 185.7 | 186.6 | 190.0 | 190.1 | 191.4 | 196.1 | 199.7 | 204.0 | 201.9 | 202.9 | 202.2 |
| 1919 | 206.4 | 198.8 | 193.4 | 195.9 | 198.7 | 202.2 | 202.8 | 212.0 | 215.9 | 210.3 | 211.3 | 217.1 | 223.4 |
| 1920 | 226.2 | 233.2 | 232.4 | 234.4 | 244.6 | 246.7 | 243.3 | 240.7 | 231.4 | 226.2 | 211.3 | 196.4 | 179.2 |
| 1921 | 146.9 | 169.8 | 160.1 | 155.4 | 147.9 | 145.5 | 141.6 | 141.0 | 141.5 | 141.5 | 141.6 | 140.7 | 139.8 |
| 1922 | 148.8 | 138.3 | 141.4 | 142.2 | 142.6 | 147.6 | 149.6 | 154.9 | 155.0 | 153.3 | 154.1 | 155.5 | 156.2 |
| 1923 | 153.7 | ||||||||||||
| 1924 | 149.7 | ||||||||||||
| 1925 | 158.7 | ||||||||||||
| 1926 | 151.0 | ||||||||||||
| 1927 | 146.8 |
The figures for the first three years were taken from p. 299 of Statistical Abstract of the United States, 1924, while the figures for the remaining years were taken from p. 317 of Statistical Abstract of the United States, 1928.
This rapid rise in commodity prices caught the country wholly by surprise. Retailers were asleep. In the summer of 1916 one purchased silver spoons in a small Connecticut town for less than the price of bar silver in New York the same day, and purchased cotton batting in the same small town for less than the price of raw cotton on the New York Cotton Exchange.
Wages and Prices. Commodity prices at wholesale rose a good deal more rapidly than wages per hour during the war boom, though wages caught up with commodity prices in the postwar boom and remained far above commodity prices in the crisis and depression which followed in 1921 and 1922. The following table exhibits this.
| Index Numbers of Wages per Hour and Wholesale Prices in the United States * | ||
|---|---|---|
| Year | Wages per hour (exclusive of agriculture) | Wholesale prices (all commodities) |
| 1914 | 100 | 100.0 |
| 1915 | 101 | 102.1 |
| 1916 | 109 | 125.6 |
| 1917 | 125 | 172.5 |
| 1918 | 159 | 192.8 |
| 1919 | 180 | 203.5 |
| 1920 | 229 | 226.7 |
| 1921 | 214 | 143.3 |
| 1922 | 204 | 142.0 |
* Chase Economic Bulletin, Apr. 13, 1937, p. 30.
Security Prices, 1914-1918. Prices of securities, on the other hand, began to rise long before the average of commodities began to rise. The stock market broke badly in July, 1914. Taking The Annalist’s list of twenty-five industrials and twenty-five rails (closing price of each month), we find it at 145 in January, 1914, dropping to about 116 at the end of July when the Stock Exchange closed. When the Stock Exchange reopened in December, the opening prices (partly pegged) averaged 120, and they averaged 120 again in February, 1915. Then began a very rapid rise in the boom of the “War Babies,” led by Bethlehem Steel, and this average reached 185 in October, 1915. The stock market was reactionary until July of the following year, 1916, when another strong upward move led up to the peak price of October, 1916, this time under the leadership of General Motors. The peak price for the 50 stocks was 195 in the closing prices of September and October, though in between higher levels were reached.
This was the top of the stock market for the whole war period. The level broke to 162 as the closing price of February, 1917, and after our entrance into the war it declined rather sharply to 127 for November, 1917, rallying thereafter to 150 as the closing price of October, 1918. The decline in stocks from the October peak of 1916 came long before the rise in commodity prices was ended and well before any decline had manifested itself in general business profits.
Profits of industrial corporations were very great in 1915, 1916, and 1917. War taxes cut into them in 1918, but they were still impressive. Dividends were increased but the corporations, in general, prudently recognized that they were in an extraordinary situation, that war profits could not be expected to last, and that it was well to provide for contingencies. A very large proportion of their profits was therefore retained and added to corporate surpluses, as shown by the following table.
| Additions to Corporate Surpluses* (Millions of dollars) | |
|---|---|
| Year | |
| 1913 | 1,400 |
| 1914 | 585 |
| 1915 | 2,117 |
| 1916 | 4,939 |
| 1917 | 4,732 |
| 1918 | 1,986 |
| 1919 | 4,330 |
| 1920 | 1,397 |
| 1921 | -2,685 |
| 1922 | 1,676 |
* From America’s Capacity to Consume, published by the Brookings Institution, p. 109.
The stock market, in the course of World War I, kept its head amazingly well. Businessmen and men dealing in securities were constantly asking themselves how long the war would last; how much value a new plant that had been created to meet war demands would have after the war; how permanent the higher level of commodity prices was; what kind of losses would have to be incurred in readjustment after the war. And by October, 1916, they concluded that prices of stocks had gone high enough.
Money Market and Capital Market. There was, further, despite the continuance of cheap call money due to the abundant gold in the United States, a progressive pressure on the supply of real capital in the form of investors’ savings; there was a disposition to capitalize earnings on a higher yield basis. It is to be observed, however, that stock prices in 1916 yielded before bond prices did, contrary to previous experience in the movements of American securities prices. The best prices of standard bonds during the whole war period were reached in December, 1916, nearly three months after the peak of stock prices.
Stock Prices and Corporate Profits. It may be noticed, also, that the general average of stock prices had declined a great deal before any real difficulties appeared for any great industry. In 1917 stock prices had a sharp decline late in the year as railroads came under heavy pressure from rising costs unaccompanied by rising rates, and an acute crisis was relieved by President Wilson’s proposal in December, 1917, that Congress put the Government behind the railroads. But none of this was in evidence in October, 1916, when stock prices reached their peak and turned down.
Part of the extraordinary war profits was undoubtedly due to the fact that wages, as shown by our table above, lagged behind wholesale prices in their rise.
Wages and Prices in World War II. In World War II wages rose far faster than wholesale prices, and corporate profits and additions to corporate surpluses were far more moderate in relation to the national income. In World War I the thing was left to the natural play of the markets. In World War II we had elaborate governmental policy designed to hold down corporate profits and to encourage wage increases.
