CHAPTER VIII
CONCLUSIONS AS TO PRESENT EUROPEAN CONDITIONS
Formulating a Conclusion
We have completed the discussion of the several measures of European economic conditions—the foreign exchange, foreign trade, national debts, and national budgets, and the reserves of banking systems. It remains to draw together the different threads of the analysis and to formulate some general conclusion about the situation as a whole.
Can it be said that conditions are on the whole better, or are they worse than they were a year ago? The answer is not altogether simple. If, for example, one regards the condition of bank reserves and the degree of monetary inflation as the truest measure of fundamental economic conditions, he will doubtless conclude that the situation is now measurably improved so far as western Europe is concerned. Many people have based their conclusion that conditions are very much better now than they were twelve months ago, mainly on the improvement in bank reserves that has occurred. But, on the other hand, if one finds in the status of national budgets the clearest picture of economic conditions, he will doubtless conclude that the situation this year is appreciably worse than at any time hitherto. The meaning of the data presented in the preceding discussions is therefore still somewhat confused. Further analysis is necessary before a final judgment can be reached.
The significance of the data on national budgets, monetary inflation, foreign trade, and the foreign exchanges, may best be understood by considering the post-war era as one composed of two distinct periods: (1) beginning in the spring of 1919 and continuing until the summer of 1920, there was a business boom that influenced the situation in certain definite ways; (2) beginning in the summer of 1920 and continuing without abatement to the present, we have been in the midst of a period of depression, which has produced results of a very different nature. It will serve to clarify the situation if we note the precise effects of each of these periods upon the condition of national budgets, monetary inflation, exchanges, and foreign trade. The statements which follow are based upon data assembled in preceding pages.
The Boom Period and Succeeding Depression
The boom period of 1919-1920 was accompanied by a great inflation of the currency and by rapidly mounting prices. During this period many students of economic conditions pointed out that the ultimate results of this process would prove disastrous and that the foundations of real prosperity were being undermined. From the monetary point of view the boom period was clearly unfortunate; the situation appeared to be growing rapidly worse. But during the depression of 1920-1921920-1921 there has been a substantial deflation of the currency in the United States and Great Britain, and at least a cessation of inflation in the continental countries of western Europe. From the monetary viewpoint the period of depression has therefore been beneficial; the situation appears to be steadily improving. But this is not true—it must be emphasized—as regards central and eastern Europe. And even in western Europe, only one form of inflation has ceased—that resulting from commercial or business borrowing. Government borrowings are as great, or greater, than ever.
Can we conclude from this—as many have concluded—that commercial deflation is indicative of fundamental improvement in European economic conditions? The trend of trade and production will throw some light upon the issue involved. During the boom period of 1919 and 1920, foreign trade and the volume of production expanded—in physical quantity as well as in values. It was during this period, it will be recalled, that the commercial press and the financial community alike were proclaiming to the world in the most extravagant language the marvelous rapidity with which Europe was coming back. England could boast of her rapidly increasing output and expanding foreign commerce; France could congratulate herself over the phenomenal progress that had been made in restoring her devastated areas; and plucky Belgium could point with honest pride to her unparalleled industrial and commercial achievements.
There were flies in the ointment, it is true, even aside from the perils of inflation. Labor and management were inefficient. Industrial warfare was a perpetual menace. Extravagant consumption and inordinate waste were universal phenomena. Basic industries, such as transportation, public utilities, and housing, were neglected. And the rapidly mounting prices were responsible for much of the social and political unrest which characterized the entire period. But wealth production in Europe nevertheless increased. The figures of expanding foreign trade show it, as do also the statistics of domestic production in the several countries.
But beginning with the deflation period of 1920-1921, Europe can boast only of improving banking conditions; and not all countries, as we have seen, can even do this. Production—save in agriculture—is steadily declining, unemployment is becoming a world menace, and foreign and domestic trade alike are languishing. The price of the boom period of 1919-1920 was inflation; the price of the deflation and depression period of 1920-1921 is, thus far at least, reduced production and lowered standards of living.
Foreign Exchange as an Index
Viewed from the angle of the foreign exchanges, however, we do not find such distinct differences in the two periods under consideration. With one exception, foreign exchange rates are, as we have seen, lower at this period of 1921 than they were a year ago. But the period of business depression has not resulted in a sharp decline of foreign exchange quotations, for a variety of reasons. So far as the bills of exchange which arise out of actual trade operations are concerned, the depression cannot be said to have increased the disproportion between supply and demand. Indeed, in the case of France, as we have seen, the collapse of American exports to France has served materially to reduce the supply of bills and has thus tended to raise French exchange rates.
A similar influence has been in evidence in all Europe. The large exports of gold to the United States in recent months, while bad, very bad, from the point of view of long-run international financial readjustment, has nevertheless temporarily helped to stiffen exchange rates. At the same time the large American tourist travel abroad has tended to the same end through increasing the demand for foreign money. These factors, together with the sentimental effects of the reparations settlement upon Allied finances, explain why French exchange is slightly higher than a year ago and why other Allied exchanges have not fallen more than they have. On the whole we must conclude that the movement of exchange rates during the past year throws very little light upon fundamental conditions abroad.
Burden of National Debt
The condition of national budgets is also interestingly related to the two different periods in question. During the boom year, while government expenditures increased in most countries, the inordinate profits of business made it possible also to increase the revenues from taxation. Although the situation was anything but satisfactory, the view was widely held in the early months of 1920 that if government expenses were restricted through the institution of rigid economy and if taxes were courageously increased, European governmental finances would soon be on the highroad to recovery. As a matter of fact, however, the result of depression in every country has been to reduce enormously the profits of business, and in consequence, to reduce the government receipts from existing taxes. On the other hand, the depression has tended to increase expenditures through enlarging the requirements for unemployment insurance.
It appears to be a practical impossibility for any nation greatly to reduce expenditures this year—and this will remain true so long as the depression lasts. Therefore, national budgets in Europe are likely to go from bad to worse. The burden of national debt will be rapidly augmented; that most pernicious type of inflation, namely, the kind that results from government or bank issues of paper money for non-productive purposes, will be steadily increased, and in consequence the whole economic organization will progressively deteriorate.
The conclusion, therefore, seems definitely to be that, all things considered, the European economic situation is today worse—substantially worse—than a year ago. The basic requirement is always increased production; wealth that has not been produced cannot be consumed. Reduced wealth production means inevitably reduced standards of living; and reduced standards of living mean social deterioration.
The improvement in banking conditions—in some countries—cannot be said to weigh heavily against the factors of deterioration which we have been considering. In this connection it is of interest to observe that the two countries of Europe that now boast of the least disturbed trade conditions, namely, Italy and Germany, are the nations in which commercial inflation has been least checked; while the nations that are most distressed are the ones in which deflation has been the most pronounced.
Let there be no misunderstanding in this connection. It is not for a moment being contended that the inflation of last year was desirable or that it should not have been checked. For the boom of 1919- 1920 was not laying the foundation for continued economic prosperity. The increased production was too largely in non-essential or relatively unimportant lines of enterprise. Fundamental industries, as we have seen, were being neglected. Moreover, continuation of the process of inflation could ultimately lead only to financial disaster. What is contended for here is merely that deflation has not yet brought any tangible measure of economic recovery to stricken Europe.
Intangible Results
But what of the intangible results? Is not the period of deflation a blessing in disguise? Are we not thereby gradually proceeding toward a condition from which a genuine and constructive economic revival may be started? Did the situation not have to become worse than it was before it could become better than it is? In fine, are we not now rapidly passing through the period of deflation and are not brighter skies immediately ahead?
It is undeniable that deflation was a necessary prelude to better days; and it is equally undeniable that deflation could not be accomplished without an interregnum of business depression, more or less severe. There are those who believe that it has been much more severe than is necessary, that it might have been controlled and made at once more gradual and less disturbing to business operations. Others doubt the possibility of controlling world-wide deflation any better than it has been controlled on this occasion. But be this as it may, it is agreed that some measure of business depression was inevitable before prices and finances could be readjusted to a basis from which prosperity could once again be started on firmer foundations.
If, therefore, there was assurance that the depression would now soon be over, it might indeed be concluded that the situation is now very much better than it was twelve months ago. But is there any sound reason for believing that we have reached the bottom of depression, and that having reached the bottom we shall shortly begin a new ascent to business prosperity? Of such paramount importance is this issue to any trustworthy conclusion as to the economic condition of Europe today, that it requires more than a passing comment; we must, indeed, devote an entire chapter, the one following, to the consideration of this subject.
Subsidence of Industrial Unrest
It is often argued that the social neurasthenic of the early post-Armistice period has now passed away and that neither economic nor political unrest any longer constitutes a serious menace to European recovery. It is undoubtedly true that in many countries labor has been placed upon the defensive by the events of the past year; and it is also true that the chances of political upheaval are at the moment decidedly less than they were last year or the year before. One cannot for a moment seek to underestimate the importance of the change in popular psychology that has occurred. Labor is more inclined—speaking generally—to work hard for its daily sustenance than last year; and less inclined to industrial turmoil. So far so good; but the good would be much better if so many millions were not now denied the opportunity to work.
The fact must not be overlooked that in central and eastern Europe, without considering Russia, industrial unrest has been held in check only by the process of granting all demands for wage advances. In lesser degree this has also been true in western Europe. Nowhere—except in England—has any real effort thus far been made to shoulder the real burdens of war costs. Industrial and political unrest is only in abeyance. It is necessary, however, to let the issue rest for the moment at this point. We shall return to it after considering the probable duration of the business depression.
Agricultural Conditions
But, it may be asked, has not agriculture shown substantial improvement? And, if it be true that the basic industry of all is making steady progress, does it not follow that fundamental economic conditions in Europe are now on the mend?
It is true that another improvement in European conditions is found in agriculture. There is no question but that throughout Europe food production increased in 1920 as compared with 1919, while in some regions there has been further improvement in 1921. According to a member of the Reparations Commission, in the new countries of eastern Europe agricultural conditions were materially better in the spring of 1921 than the year before. The Hoover Relief Organization has found similar improvement.
Another communication from the European representative of the Rockefeller Foundation indicates that health conditions are, in consequence, also materially improved. For the first time since the war the birth rate this year exceeds the death rate.
It was to be expected, of course, that agriculture should be the first industry to improve. For it is free from the labor and other troubles which beset the industries of urban communities, and it is less definitely involved in the complex web of financial relations that make up the modern monetary system. And most important of all, it is little affected by industrial depression—that is, so far as volume of output is concerned. Agricultural production goes on regardless of the business cycle.
French Crops
But, on the other hand, agriculture is peculiarly affected by weather conditions. The relatively good showing of the year 1920 is in no small degree attributable to the generally favorable weather conditions that prevailed in Europe. This year, on the other hand, large sections of Europe have suffered from one of the worst droughts ever known. As everyone knows, it has brought starvation to millions of people in the Volga valley; and it has greatly reduced the agricultural output in all of western Europe. The following indexes of crop conditions in France made public on July 5, 1921, by the Department of Agriculture are significant. The figures are percentages of 100, which means "very good." 1 1 Federal Reserve Bulletin, August, 1921, page 956.
June 1, June 1,
1920 1921
Meadows 76 64
Sugar beets 77 71
Corn 70 71
Potatoes 74 69
Vineyards 75 59
Since the drought continued until the third week of July and was then broken by violent storms which inflicted much damage to crops in southern France, it is altogether probable that the final yields will prove even more disappointing than the June 1 estimates indicate. While no official estimates are given for wheat and the other cereals, it appears from current reports that the damage to these was not so great.
The results of the severe droughts this year may be glimpsed from the fact that the Hoover Relief Organization has this summer again been obliged to render aid in the devastated areas of northern France.
French agriculture may be taken as typical of the best in Europe. Hence, the following comparative data on the yield of leading crops in France before and since the war will prove illuminating:
(In quintaux, 000 omitted)
1920 crops
as compared with
1919
1920
1913=100
49,654
64483
74
7,299
«,76i
69
5,000
8,357
80
24.536
42,208
81
2,534
3,878
71
1913
Wheat 86,919
Rye 12,715
Barley 10,438
Oats 51,826
Corn 5,431
Potatoes 135,860 77,305 116,378 86
The good year, 1920, showed a marked improvement over 1919; but on the average food production was still only about three-quarters that of 1913. This year it will be even less. Potatoes made the best showing in 1920; but the figures in this case include the production of Alsace-Lorraine,
The following table shows the number of farm animals in France in 1919 and 1920 as compared with 1913: 3 3 Federal Reserve Bulletin, August, 1921, page 956. *fn*4 Ibid.
1920 crops
as compared with
1919
1920
1913=100
49,654
64,482
74
7,299
8,761
69
5,000
8,357
80
24,536
42,208
81
2,534
3,878
71
Horses
Mules
Asses
Sheep
Hogs
(000 omitted)
1920 as compared with 1913
1919
1920 1913=100
Cows and beeves 14,788
12,374
13i2i7 89
Horses 3,222
Mules 188
167
181 96
Asses 356
303
298 84
Sheep 16,131
8,991
9,406 58
Hogs 7,036
4,080
4,942 70
Cows and beeves 14,788
Horses
Mules
Asses
Sheep
Hogs
In final conclusion it may be said that the temporary alleviation of industrial unrest and the slight improvement in agriculture that has occurred do not weigh heavily in comparison with the other indexes of fundamental conditions which have been considered. Foreign exchange and foreign trade, monetary inflation and government finances, are the controlling factors in the highly complex and interdependent financial organization of the twentieth century.
1920 as compared with
1919
1930
1913=100
[2,374
13,217
89
2,413
2,635
82
167
181
96
303
298
84
8,991
9,406
58
4,080
4,942
70