SOME FINANCIAL PROBLEMS OF WORLD

RECONSTRUCTION*

BY THOMAS CONWAY, JR.

Professor of Finance

Fourteen months have passed since the signing of the armistice brought to an end the most costly war in the history of the world. While the armistice marked the end of actual fighting, yet the expenses of the war have since continued on a diminishing ratio. We have reached the point, however, where it is possible to make a general estimate of the cost of the war and to outline the financial problems which it has left as a legacy. The cost of the struggle is so great that it almost passes comprehension. Professor Bogart, in his monograph "Direct and Indirect Costs of the Great World war," (prepared for the Carnegie Endowment for International Peace) estimates the expenditures of the belligerent governments, exclusive of duplications resulting from advances by one belligerent to another, to have been $186,334,000,000, while another eminent commentator reaches the conclusion that the total governmental war expenditures, excluding duplications resulting from loans from one belligerent to another aggregated $210,935,000,000.

We have become so used to speaking of billions of dollars in connection with war financing that it is difficult to measure the immensity of this great sum. It is over nine times the aggregate of the stocks, bonds and other corporate obligations of the railroads of the United States, and is much greater than the total investment of the entire world in railroads and public utilities.

From a financial point of view, the direct cost of the war has yet to be paid by the people of the belligerent nations. Less than $15,000,000,000 of the cost of the war was derived from taxation, practically this entire amount being raised by Great * Delivered January 17, 1920.

Britain and the United States. While Italy and Germany nominally raised several billions of dollars from taxation as contributions to the expenditures of the war, yet the budget deficits in these countries, as well as in France, more than offset the sums so raised. With the exception of the $15,000,000,000 raised from taxation in Great Britian and the United States, the war was conducted almost entirely on credit, and the important and pressing problem confronting every country is how to secure the funds necessary to meet interest payments and to provide for the amortization of the gigantic debts which have been incurred.

Thus far, we have not taken account of the indirect costs of the war, such as the destruction of property; loss of production; interruption to trade, and other similar items: nor of the economic consequences of the great loss of human life and of caring for and supporting the maimed, and the dependents of soldiers killed or incapacitated, which will burden every belligerent nation for at least a generation. The aggregate of such indirect costs is difficult to estimate.

Thirteen million men lost their lives in the conflict, while more than twenty million were wounded. Of the wounded, it has been estimated by competent authorities that over fifty-five per cent. are either totally disabled or have suffered an impairment of faculties which will materially reduce their productive power. Upon this basis, it would appear that the belligerents, in addition to a total loss of thirteen million men, have over eleven million maimed and crippled men, most of whom will be a constant drain upon the revenues of their governments, and whose misfortune will materially reduce the productive power of these countries.

It is even more difficult to form an accurate estimate of the property losses resulting from the war. We all know that war propaganda greatly exaggerated the extent of the devastation in certain regions, but on the other hand, our knowledge is imperfect concerning the destruction of property in the Near East and in certain other sections visited by the great scourge. The best estimates which have thus far been made of the extent

of property losses place them in the neighborhood of $30,000, 000,000, not including the loss of shipping, aggregating some $7,000,000,000.

In order to ascertain the total cost of the struggle, there should be added to the above items the expenditures for war relief, aggregating approximately $1,000,000,000; the known losses to neutrals, aggregating approximately one and threequarter billions, and the loss of production suffered by the belligerent nations during the war period, which has been estimated to equal forty-five billion dollars, on the basis of an average productive capacity of $500 per man for those included in the armed forces of the several nations. If these sums be added to the total known direct costs of the war, it will be seen that the gigantic struggle has cost the world over $330, 000,000,000. A portion of this enormous total represents losses which can never be made good and which, therefore, do not have to be provided for in the financial plans of the world for the coming years, but the war debts incurred by the belligerents, the loss of shipping and the destruction of private property must be made good, and they aggregate over $230, 000,000,000,-a sum approximately equal to the estimated total wealth of the people of the United States.

Largely because of the fact that over ninety per cent. of the direct cost of the war to the belligerent governments was financed on credit, there has followed a tremendous inflation of prices. Wholesale prices in the United States have increased since July 1914, approximately 123 per cent. while the cost of living, as determined by various investigations, has increased approximately 75 to 90 per cent. (dependent upon the sections of the country) during this period. The incerease in prices in other countries has been substantially similar. Wholesale prices in England have increased some 158 per cent. since the summer 1914, while prices on the Continent have increased as much or more. The cost of living of the average family of England, France and Germany has, in general, kept pace with the advance in prices. Bank deposits in every country have been very

largely expanded as the result of war borrowing. Of all of the belligerent nations, the United States alone is on a gold basis. The enormous issues of paper money-now actually inconvertible-which have been put out in England, France and Germany have aggravated the financial and industrial situation and constitute a most serious problem in connection with the necessary financial readjustment.

The war has completely revolutionized the trade relations of the European nations with the rest of the world. A few illustrations will suffice to show what has happened. In 1913, prior to the outbreak of the war, Great Britain imported £769,000,000 of merchandise and exported £635,000,ooo, or an excess of imports over exports of £134,000,000. Great Britain, like most of the continental countries, had, for many years prior to the war, imported more than she exported, being in the fortunate position of a creditor nation to whom payments on account of interest on investments in foreign countries were due, which payments were made in large measure indirectly in the form of merchandise. For the first ten months of 1919, Great Britian's imports aggregated £1,319,000,000, while her exports mounted to £738,000,000;—an excess of imports over exports of £581,000, ooo, or at the rate of approximately £700,000,000 per annum. A closer analysis of the results for the first ten months of 1919, compared with the business of the year 1913, taking into account the changes in price levels which have occurred in the interval, discloses the fact that if the 1913 imports had been figured at 1919 prices, they would have slightly exceeded in value the total imports of Great Britian in the year 1919. The difficulty is primarily that Great Britian's exports have greatly declined. Her 1913 exports at present prices would be worth approximately £1,428,000,000, or about 60% in excess of the exports in the year 1919.

The unfavorable shift in the foreign trade situation of France and Italy is even worse, while the Central Powers, cut off for four years by the blockade from the rest of the world, are under the necessity of entirely rebuilding their foreign trade.