"Not Yet"

One afternoon last week Secretary of the Treasury Morgenthau sat in bland conclave with the Press. Deluged with questions about how the U. S. dollar and U. S. economy were faring in the worst war scare since 1914, he finally remarked: "I think we are proving to the world that the U. S. is the financial centre of the world and we can resist the kind of nervousness which people who have money are feeling at this time."

With that remark Mr. Morgenthau hit two nails upon the head: 1) The nervousness of people with money had just produced the sharpest break in the stock-market since last spring, commodity prices were fluttering, and throughout the nation businessmen were absorbed with one question--how would a major European war affect U. S. business? (Even if no war came at once, it was clear that the threat was likely to remain.) 2) How the U. S. was affected in 1914 is a matter of record. But since then there have been several enormous shifts in the status of the U. S. Secretary Morgenthau mentioned the most significant. In 1914 the U. S. was a second-rate nation financially, its markets peewee, its banking system immature, much of its industry financed from Europe. Now the New York Stock Exchange is the world's No. 1 securities market, the U. S. holds 55% of the world's gold and the nation, no longer a debtor, is the world's creditor.

Securities. War in 1914 took the world's markets by surprise. There was enormous liquidation on the New York Exchange, finally forcing it to close for four months after a slump in one week of some 11% in stocks. Last week, the Exchange cautiously declared that this time it would do its best to remain open. This would obviously be easier than in 1914-- margins are 40% now against about 10% then and volume of sales has increased some eight times, making foreign holdings and trading less relatively important. Last week the SEC and the Exchange had their heads together on methods of cushioning the inevitable shock that war liquidation would bring. Day after the Sudeten ultimatum to Czechoslovakia, volume rocketed to 2,800,000 shares and prices broke to new lows since June (132 on the Dow-Jones Industrial scale).

Gold. The flight to the dollar by frightened European capital last week tumbled the pound to a four-year low of $4.78 5/8 and the franc to a twelve-year low of 2.68 3/8. Upon the U. S. Treasury thus devolved the enormous responsibility of supporting the world's foreign exchange in order not to let the dollar go to a premium against currencies that would cut off U. S. foreign trade. Secretary Morgenthau refused to let this worry him. Declaring that the U. S. is standing by its tripartite agreement with Great Britain and France, he professed satisfaction with the way the U. S. stabilization fund was meeting the emergency.

The stabilization fund is among the most secret of Government bureaus. Its job in such an emergency is to sell enough dollars to iron out violent exchange fluctuations. Secretary Morgenthau is nominally in charge of its complex operations, but the actual brains that run them are inside the heads of 45-year-old Archie Lochheed (pronounced La-head') and his confrere, Dr. Harry White. These two relatively unknown Treasury officers have at their disposal some $2,000,000,000 which now rests in the stabilization fund. Last week they sopped up $100,000,000 in gold in support of foreign exchange; another $84,000,000 was added to U. S. gold stocks primarily by private imports. Every incoming ship was loaded with bullion to the maximum that marine insurance (at war rates) would underwrite.*

In 1914 Britain and France had gold reserves of $1,228,000,000 (in old dollars). Now they have $6,428,000,000. If Europe's gold supply begins to run low, and the U. S. stabilization fund has to take depreciating pounds and francs instead of gold for the dollars it sells, the U. S. will have to decide when to stop supporting pound and franc. For as Great Britain and France spent their gold for war, their currencies might depreciate to a point where further U. S. support would be tantamount to a loan if not a gift. If such support were denied, U. S. exports might suffer. Asked if this danger loomed, Secretary Morgenthau last week declared: "Not yet."

Borrowing. Besides liquidating securities and spending gold, Europe in the last war floated enormous U. S. loans. The Johnson Act now forbids U. S. loans to nations which are not repaying the loans made to them by the U. S. Government in the last war. But in the event of war the U. S. public may be willing to modify the Act or wink at its evasion (for the Johnson Act does not forbid loans by Government-controlled corporations or agencies such as the Export-Import Bank). If, for example, Europe becomes eager to buy wheat and U. S. farmers have a surplus, a loan to finance its sale would have considerable political support.

Exports. When war broke out in 1914, U. S. exports slumped for four months, then in the following two years expanded 300%. Prior to 1914 Europe took nearly two-thirds of U. S. exports. Now it takes only 40%. So the first economic shock of war should be less. In 1937 U. S. exports amounted to $3,345,000,000, of which the chief items were: cotton, $450,000,000; machinery, $524,000,000; petroleum products, $376,301,000; meat, $24,666,000; automobiles and accessories, $346,848,000; tobacco products, $147,700,000; iron and steel, $428,000,000. Chief European customers: United Kingdom, $534,000,000; France, $164,000,000; Germany, $124,000,000; Belgium, $95,000,000; The Netherlands, $94,000,000; Italy, $76,000,000; Sweden, $64,000,000; Poland, $26,000,000; Norway, $22,000,000; Denmark, $17,000,000; Czechoslovakia, $13,000,000.

Wheat was one of the few commodities that profited soon after the declaration of war in 1914. Cotton suffered severely and its price fell from above 13-c- to 11-c- a pound in a few days (eventually it rose to 43.75-c-). Today with cotton prices pegged by Government loans and Europe taking a smaller fraction of the U. S. crop (25% as compared to 50%), the effect of war should be less startling. In 1915, however, when exports to Europe picked up, the demand for manufactured goods far exceeded that for raw materials (because European factories were converted to war uses). Royal Typewriter Co. recalled last week that there was immediate demand for typewriters by general staffs. Automobile makers, who have virtually eaten off their export trade this year, hoped that if passenger-car sales disappeared, truck sales might increase. Tobacco men pointed out that the World War created the big modern cigaret business. In compensation for the loss of German trade ($124,000,000), U. S. exports could at least expect a substantial gain in South America where European competition would be much curtailed. The World War caused industrial havoc in the U. S. because Germany was the source of many chemicals. Now, however, about the only vital U. S. imports are coffee, tin and rubber, none of which is likely to be cut off.

Boom or Depression? The experience of 1914 was that the onset of war produced several months of trade recession in the U. S. followed by two years of boom. In 1938 a great many factors would alter the case. Now a debtor instead of a creditor of the U. S., with most nations still financially enfeebled by the last war and depression, Europe's buying power is more restricted and its borrowing power is a question mark. Thus if a war boom came, it might be distinctly smaller. However, it is estimated that foreigners have assets of $10,000,000,000 in the U. S. of which Great Britain and France probably own a third. Liquidation of these assets could finance a war on the scale of the last for about two years.

Chief question mark over another war boom is the application of the Neutrality Act (see p. 9). Only direct sufferer from literal application would be the aviation industry, which provided $1,603,000 of the $1,777,000 shipments of "arms, ammunition and implements of war" in the last three months. But if Franklin Roosevelt chooses, a neutrality embargo could be extended to almost anything, might hurt U. S. shipping and U. S. overseas trade enough to produce more depression than boom. In any event, U. S. trade would certainly receive an initial setback and no boom would be likely until many a question of U. S. policy and the purchasing power of belligerents had been settled by a fresh experiment with wartime economics.

* Lloyd's of London last week insured London-New York bullion shipments at about 60-c- per $500. Rates on merchandise were upped to a war risk basis, from about one-fortieth of one per cent of value to between one-half of one per cent and two per cent.

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