By the beginning of 1914, therefore, it may be said, that the way was opened for our financial metropolis, New York, to play an increasingly important role in the international money market, and that there was already a movement in that direction.

To this movement the European war gave a strong impetus, and to-day New York clearly holds the premier position in the field of international finance, although at a time when national finance in the leading countries of Europe has a.s.sumed proportions never before dreamed of. The European exchange markets have been demoralized, and specie payments among the belligerent countries of Europe have become little more than a name. On the other hand, "dollar exchange" is now quoted in the princ.i.p.al cities of Latin America, the Orient, and Australia; and the American trade with those sections, which was formerly financed chiefly through London, is now being financed directly, and in dollars....

The United States has brought back home from a billion to two billion dollars' worth of the six billion dollars' worth of its securities estimated to have been held abroad, and is preparing to take more, either by purchase or as security for loans. It has loaned upwards of a billion dollars to the belligerent countries, and has had a net importation of gold during the year just closed greater than that of any five years of its history. Our banks are carrying heavy surplus reserves, those of the New York Clearing House banks alone on December 31 having amounted to $143,000,000, and the gold reserve against net liabilities of the twelve federal reserve banks on December 23 having amounted to 86 per cent.; and this, at a time when the large gold reserves of the European banks are strained to the breaking point by the tremendous liabilities placed upon them.

Our export trade has reached unprecedented heights, and for the year 1915 was approximately equal to twice that of 1906....

This war is likely to leave her [England] still with a secure position, a great and loyal colonial empire, an efficient banking system, and the control of the seas. Her position as a creditor nation will lie greatly weakened, and she may even become a heavy debtor nation, but her foreign trade connections have been so long and so well established that it does not seem likely that they will be permanently impaired in any large degree by the readjustments necessitated by the war. If she disposes of her Latin-American and Asiatic investments to the United States she will doubtless greatly weaken her trade position in those countries, but the present evidence is that these will be about the last foreign investments she will dispose of.

So far we have not made great progress in securing Europe's Latin-American trade. Europe discontinued financing Latin America at the same time that she discontinued her normal trading with Latin America.

For us to take her place it became necessary for us to loan before we could sell and buy. But loaning to European belligerents and selling war supplies offered larger immediate profits; and so our chief efforts have been turned eastward rather than southward. An a.n.a.lysis of our large export trade of last year shows that much of it was of a very abnormal character, and gives promise of being but temporary. The following figures comparing the exports of a few selected commodities for the ten months ended October, 1915, with those for the same period of 1914 will make this point clear:

_Ten Months Ended Oct. 31_ _Commodities. 1914. 1915._

Breadstuffs $212,025,814 $461,074,547 Iron and steel and mfrs. thereof, incl. wire 109,232,270 294,822,223 Meat products 110,180,785 214,212,955 Animals (notable horses and mules) 6,668,121 107,201,175 Explosives 6,439,693 103,527,382 Cars, carriages, etc. 36,844,923 117,366,359 Leather and mfrs. thereof 47,123,910 135,847,788

A glance at these articles will show that most of them were intended chiefly for military uses, and that their heavy exportation presumably will be but temporary.

It is interesting to note that some other articles of customary export showed large declines in 1915 as compared with 1914. During the same ten months' period, for example, our exports of agricultural implements (and parts) declined from $21,028,588 in 1914 to $11,162,609 in 1915; of wood and manufactures thereof, from $68,904,895 to $45,325,146; of fertilizers, from $7,735,613 to $3,758,598; and of sewing machines, from $7,757,421 to $4,902,594.

Viewed from the standpoint of the destination of the articles exported, the significant fact is that the increase in exports was chiefly to Europe, and not to Central and South America and Asia--the places in which we have been strenuously endeavoring in recent years to build up a permanent export trade....

... After the war is over Europe will presumably discontinue, or greatly reduce, her importations from the United States of most of the articles which figured so largely in the great increase of 1915. As her needs tend to become normal again she will immediately endeavor to resume her old-time trade connections, both import and export, at least in so far as the trading centres are in countries that were friendly or neutral during the war. In seeking to re-establish these connections the merchants of the belligerent countries will be strongly backed by their Governments, which the war will have made more socialistic and more aggressive. They will have a great advantage in the fact of long-established business relations, and in the fact that the war trade will have been to such a large extent abnormal, both as regards the products dealt in and the parties to the trade.

Europe's banking machinery in South and Central America, although it may not be very actively functioning in these trying times, still exists, and will be ready to resume its former activities as soon as peace is declared....

On the basis of London Stock Exchange listings British investments in Latin America early in 1914 were computed at nearly $6,000,000,000.

Germany also has a large number of banking establishments in South America and heavy investments.... United States investments in South America are very small as compared with those of England and Germany, while only one American bank has established branches on that continent.

These branches are only five in number, and the oldest of them is but a little over a year old.

The conclusion seems clear that the war will need to be very long and very disastrous to England; and American merchants, bankers, and investors will need to be much more active and far-sighted in their exploitation of South American opportunities than they have been in the past, if London is to yield to New York her financial premiership for South America.

Other obstacles to New York's becoming permanently the world's financial centre are its great distance from the financial markets of Europe, America's small merchant marine, its provincial protective tariff policy, the absence of an adequate supply of men possessing the necessary training both in foreign languages and in commerce and international finance to go into these foreign fields and to "tie them up" commercially and financially with the United States, and the slowness with which our recently reorganized banking system and our American discount market must grow, as regards international business, if it is to have roots that are strong and grow deep.

The United States has before it a great opportunity. Much depends upon the foresight with which Americans prepare themselves to meet the tremendous readjustments that will be demanded at the close of the war.

That will be the supreme test. Now is the time to build for the future, and to avoid paying too much attention to immediate profits. New York can hardly be expected to succeed to London's position as the world's financial centre, at least for some time to come; dollar exchange will not at once take permanent rank ahead of sterling, or even alongside it; none the less, if the United States refuses to be blinded by the glamour of large immediate profits from a type of trade that is necessarily abnormal and temporary, and if she seriously turns her attention to the opportunities now open to her in Latin America, she will make a long step forward in the direction of financial leadership.

FOOTNOTES:

[313] H. Parker Willis, _American Finance and the European War_, _The Journal of Political Economy_, Vol. 23, No. 2. February, 1915, pp.

144-165.

[314] A fuller account of the gold fund and cotton loan plans will be found in the _First Annual Report of the Federal Reserve Board_, Washington, January 15, 1915.

[315] _Report of Secretary of the Treasury_, December 7, 1914.

[316] _First Annual Report of the Federal Reserve Board_, p. 16.

[317] _Report of the Comptroller of the Currency_, 1914, pp. 15, 16.

[318] J. Laurence Laughlin, _Will the Gold Basis Survive in Europe?_, _The Annalist_, Vol. 7, No. 162, Feb. 21, 1916, pp. 244, 252.

[319] A. Barton Hepburn, _A History of Currency in the United States_, pp. 463-466. The Macmillan Company. New York. 1915.

[320] Of Boissevain Co.

[321] Hartley Withers, _War and Lombard Street_, pp. 98-111. E. P.

Dutton and Company. 1915.

[322] Franklin Escher, Review of _War and Lombard Street_, _The American Economic Review_, Vol. 5, No. 3, September, 1915, pp. 624-5.

[323] E. W. Kemmerer, _America's Chance of Holding World Purse-Strings_, _The Annalist_, Vol. 7, No. 158, Jan. 24, 1916, pp. 119-121, 144.

APPENDIX A

AN APPROXIMATE FORMULA FOR DETERMINING THE VELOCITY OF THE CIRCULATION OF MONEY

[324]For the purpose of tracing the circulation of money, and measuring it by bank records,[325] we may cla.s.sify the persons who use money in purchase of goods into three groups:

1. Commercial depositors, _i. e._, all engaged in business--firms, companies, and others--who have bank deposits mainly or wholly apart from personal accounts.

2. All other depositors, chiefly private persons.

3. All who, like most wage earners, are not depositors at all.

These three cla.s.ses we shall distinguish as "Commercial depositors,"

"Other depositors," and "Nondepositors," or C, O, and N. The money in the possession of "Commercial depositors" we shall call "till money,"

and the rest "pocket money."

The three groups necessarily include all in the community who circulate money. By circulating money is meant expending it in exchange, not for some other circulating medium, as checks, but for goods....

... The category of "commercial depositors" coincides for all practical purposes with the category of business establishments.

"Other depositors" include most proprietors, professional, and salaried persons. Almost no wage earners are included, and almost no business establishments or business men in a business capacity....

... Although "other depositors" include most proprietors and professional and salaried persons, yet some proprietors and professional men, especially in rural communities, and some salaried persons, chiefly small clerks, are "Nondepositors."...

... "Nondepositors" consist chiefly of those who are cla.s.sed in statistics as wage earners. While there are some wage earners who are depositors,[326] they are rare: and while there are some "nondepositors"

who are not wage earners, especially (as just indicated) the agricultural proprietors (farmers) and small clerks, the amount of money circulated by them is small in comparison with the total circulation.

While the line separating wages and salaries is not definitely marked in theory, it is usually easily recognised in practice....

We may now picture concretely the main currents of the monetary flow, including the circulation of money in exchange for goods.... [The figure here given] ill.u.s.trates the three princ.i.p.al types.

[Ill.u.s.tration]