lated largely by speculative anticipations and by competitive buying, supported by credit. The banks respond to the appeals of their customers, who say they want credit for legitimate needs in production and trade, but if production already has reached the capacity of the industries, additional credit simply finances competition for labor and materials, and drives wages and prices higher and higher. This is inflation; the use of credit as purchasing power in excess of the productive capacity of the industries. It does not increase production; it simply raises wages and prices until the bubble collapses.

The Present Situation

If comparison is made with the situation before the war, conditions are now inflated, but this is not chargeable to the slight expansion which has taken place in the last few weeks. As compared with the standard of value, wages and the general price level are high, although all prices are not above the pre-war level.

The present discussion, however, is not about the relation of credit and prices to the pre-war level, but their tendencies at present and in the near future. Prices have had a very considerable fall from the top, and a slight recovery from that fall, but this gain cannot be called secondary inflation. It looks like the recovery that always comes when the old stocks are exhausted and industry gets fairly under way again. The fall of prices was uneven and in some cases too precipitate, and the curtailment of industry was too great to permit of supplying the necessary demands.

Although the war-time was anything but a period of depression, some of the effects were similar to those resulting from a period of depression. Industry in some lines fell behind the normal growth of the country, creating a deficit of supply, or accumulation of demand. This is true in housebuilding, in the construction of railway equipment, and in some other lines, and a revival has occurred in those lines. It is due to imperative needs rather than to a belief that the bottom has been finally reached in construction costs, although the feeling doubtless prevails that prices are not likely to go lower until the existing shortage is in large part made up. The advance of wages is due in part to the revival of industry, but in large part to the immigration act.

It is quite evident abnormal conditions in some of the industries are directly influencing

prices at this time. The rise of iron and steel is mainly due to the coal strike, which has affected all industrial costs. There is nothing about the attitude of buyers of general merchandise that indicates a desire to anticipate future wants. They are buying cautiously, for immediate needs only, and fighting advances, which is just the opposite of the common attitude when inflation is under way. Buyers, at least, are not contributing to inflation.

The increase in the demand for credit has been chiefly to carry stocks and securities. The list as a whole was very low a year ago, and with the decline of interest rates many of them could be carried at a profit on the basis of their earnings, and those which represent properties constructed before the war show very high intrinsic values as compared with the cost of constructing similar properties at present prices of labor and materials. The rise of stocks and bonds signifies that capital is accumulating, and also that there is faith in the country's stability and progress, despite depressing world conditions.

Conditions Favorable to Inflation

But even though inflation is not yet manifest, do not indications forecast it, and are not conditions so favorable to it as to make it almost inevitable? That is the question in the minds of many careful observers.

It is true that conditions are very favorable to any inflation of credit. All the machinery and equipment necessary for the manufacture of a great supply of credit are at hand. We have a great number of independent banking institutions, actively competing with each other for customers, and the most effective way that ever has been found for winning customers is by liberality in granting credit. These banks, as we have shown above, have liquidated a great amount of credit in the last two years, and while they have shifted a large part of it into securities, they will be glad to sell the securities as fast as the market will take them, if they can employ the funds in the service of their banking customers and to bring new custom

ers.

Furthermore, the Federal Reserve banks are now liquidated down to very small holdings, with their gold reserves at the highest point in their history, and have the capacity to grant more credit than ever before. And, finally, gold is steadily flowing to this country from the new production of the world, and will continue to do so as long as exchange rates are in our favor as now.

These are the conditions that make for easy money, and we have never yet had easy money in this country that inflation did not come out of it. There is no such central control over bank credit in this country as in countries where the banking business is handled by a comparatively few corporations operating numerous branches. The Federal Reserve banks have no control over the member banks until the latter begin to rediscount, and then only by means of the discount rate, and popular pressure is always strong for a low rate.

There seems to be nothing in sight to save us from inflation, but an indisposition of the public to borrow. The mere presence of ample gold reserves in the vaults of the Federal Reserve banks will not cause inflation. It only serves as the possible basis. Somebody must borrow the available credit and use it in buying things to such an extent as will produce the conditions that characterize inflation..

Those who say that inflation is imminent bank upon the belief that the American people never have permitted such an opportunity to go long unutilized, and that it is not possible with their optimistic mentality for them to do so.

Reasons for Caution

One reason for doubting that the country will swing readily into another inflationary jamboree is that so little time has elapsed since the last one. Wounds are still fresh, memories are vivid and, moreover, there are many people with whom recuperation has not proceeded so far as to enable them to play an aggressive part in a new movement. History repeats itself in matters of this kind, but usually with intervals which pro vide a considerable group of new

actors. There would seem to be reason to believe that most of the business men who passed through the experiences of 1920 and 1921 will want to make a very careful study of future probabilities before they commit themselves to extensive obligations on a level of prices much above the present one. It is one thing to go along doing business within close range of your own capital, able to liquidate rapidly, but that policy does not make for inflation. It takes great borrowing to make inflation.

As an answer to the argument that the importations of gold make for inflation, it is to be said that it would be most unwise

to build a great fabric of credit on a temporary foundation. If this influx of gold should put prices up, by the same logic a efflux of it would put them down. Nothing can be more certain, than that the present situation, in which gold came to the United States last month from 31 countries, is abnormal and cannot be permanent. Like every other excess it will have to be corrected later. If the world ever is to get back to normal trade conditions there must be a redistribution of this gold, to enable currencies and exchanges to be stabilized. If, then, it is necessary to the establishment of permanent prosperity that we shall give up some of this gold, what is to be said of the policy of using it forthwith as the basis of credit? It may be that the speedy way to bring about the redistribution is to have an inflation of credit and prices, thus, curtailing our exports and increasing our imports, but who wants to personally share in creating the indebtedness that this will require? Our imports this year have been increasing and our exports diminishing, and there is no upward tendency of wages and prices abroad corresponding to that which has started here.

If we accept the very substantial revival of business which has taken place this year as a natural recovery from an excessive curtailment of industry in 1921, and a natural result of progress made in restoring, the equilibrium between the several branches of industry, by reductions in some quarters and advances in others; and if we endeavor in a spirit of harmony and co-operation to restore the equilibrium more completely, in order to obtain such a free and full interchange of goods and services that everybody shall be employed and production shall be to the limit of capacity, we may hope to have a better year in 1923 than in 1922. That is the method by which prosperity is achieved.

If the public generally becomes possessed of the idea that a boom is coming, and is willing to borrow and spend upon that belief, it is possible that a short course of inflation may be run. It is always necessary to take into account not only what conditions actually are, but what the majority of people think about them. In the long, run, however, it remains true that only a balanced prosperity, which includes all classes and is based upon economical production and just and reciprocal relations can be. permanent. Wage advances that make the situation more one-sided than before will tend to choke off the distribution of products.

A

GREAT many people think that the European situation does not touch us. Certainly business by and large is good-better perhaps than at any time since the armistice. The proof of the pudding is in the eating. Present conditions speak louder than words. Our exports, though showing diminution, are still substantial. There is a plethora of gold and a plethora of agricultural products, and while wages are high compared with international standards, there is also a corresponding increase in our consuming power. Why should we worry? This seems to be the viewpoint of the average superficial observer as he points to the empty kerosene cans bearing the American trademark strewn over the landscape of Central Thibet, or shows how Paris and Calcutta alike have a preference for the Los Angeles film and boasts that the sun never sets upon the motor cars turned out in Detroit, not to speak of our surplus cotton and copper and food supplies which Europe continues to take with avidity. I am aware that some of us have publicly expressed the view that our export factor plays so small a part in the nation's business as a whole that even a violent disruption of our export business would not affect the nation's prosperity. A very sweeping and assertive statement, which everything in our national economy disproves.

Foreign Trade Before and Since the War

In the year 1913 the world was at peace and international trade was conducted under normal and peaceful conditions. During that year the value of our exports footed up ap

proximately 2 billions of dollars, of which two-thirds was taken by Europe. These exports included 66 per cent. of our cotton crop, 10 per cent. of our wheat and 8 per cent. of our meat products. Such was our trade with a solvent Europe-with a prosperous, thrifty and industrious Europe. The Europe of today is pathetically poor! I need not paint the picture. Potatoes and turnips took the place of American grain in practically the whole of Central Europe during the war, and, alas! it is to be feared that in certain countries potatoes and turnips may again become the fare of the masses.

Mr. Cravath, one of our intelligent international observers, recently wrote as follows:

"It will readily be seen what a serious displacement of agricultural effort would follow any permanent, radical reduction in our exports of agricultural products. The shock from this displacement would not be confined to the portion of our population engaged in agriculture. The diminution of the buying power of the agricultural population would automatically reduce production in many other departments of industry. The agricultural population, rendered idle by the reduction in production in the agricultural field, would seek employment in other activities, causing unemployment and reduction in wages. A readjustment would doubtless be accomplished after a sufficient number of years, but no one can measure the loss, distress, suffering and the lowering in the standards of living that would result in the meantime. Even though in the end the world

would again be prosperous the loss to the United States would have been irreparable because other nations would have found means of getting on without, or themselves producing many of the commodities they have been in the habit of buying from the United States."

The question uppermost in my mind is, how long is impoverished Europe going to continue to take our goods, keeping in mind besides that our impoverished foreign customers will practically be forbidden the approach of the American market by the erection of our tariff wall.

For the first seven months of this year, preceding the erection of our latest tariff wall, our excess export balance had already shrunk from 1,361 millions of the previous year, to 455 millions, or approximately 35 per cent., the high of our excess exports balance being 2,671 millions in the year 1919.

There is nothing more fatal for any country than to have on its hands an unexportable surplus-whether that surplus consists of commodities or credits, some of our friends to the contrary notwithstanding.

Surely, on purely practical and selfish grounds, we are vitally interested in the restoration of European solvency, and in the maintenance of her capacity to take from our abundance. It is our plain duty to accelerate the process of her rehabilitation.

Reparations and Inter-Allied Debts

The two great rocks which bar the road— reparations and inter-Allied Debts-have been made the main theme of this convention. Respecting reparations Mr. McKenna in his very able and scholarly analysis yesterday made two practical suggestions:

1st: That the immediate reparations demand be limited to what Germany's present foreign investments and balances may produce.

24: That she be given a breathing space for a few years, and thereafter pay whatever her exportable balance may produce. But this whole question of reparations touches us but remotely, and only to the extent that it is the fundamental element in the stabilization of the European continent.

The United States asked for no reparation and has gotten what she asked for. We have declined official representation upon the Commission. Signor Nitti has called the whole story of reparations "un enorme equivoco"—an enormous comedy of errors. But the denouement seems to be in sight, since M. Poincare has for the moment abandoned his bellicose attitude and has accepted the

latest recommendation of the Reparations Commission.

No one can find fault with Mr. McKenna's clear and logical conclusions-truth-factsexpediency-all these point the way. But the inevitable denouement falls with a heavy hand upon France. France has spent up to now 90 billions of francs on the rehabilitation of her devastated regions, and the deficit of her general budget amounts to upwards of four billion francs. The French people have an admirable way of answering the call of their Minister of Finance, and the new loan which is shortly to be issued will find the same response as its predecessors. But even French thrift has its limitations, and besides the floating of loans does not go without its economic and financial dangers.

Reparation Obligations

Leaving aside what Germany has already paid in kind and in cash, the reparation obligation has taken the following form:

Total-one hundred and thirty-two billion gold marks, divided as follows:

Twelve billions Series "A" bonds with 5 per cent. interest and 1 per cent. amortization.

Thirty-eight billions Series "B" bonds with a like rate of interest and amortization. Eighty-two billion Series "C" bonds. What bearing has the proposed cancellation of inter-Allied indebtedness upon the reparations question?

The funding negotiations with Great Britain will take place, probably, in November. However willing or able Great Britain may be to meet her obligation, we may well find it inexpedient to accept her payment in strict accordance with the terms of the funding bill. Experience has demonstrated that the actual liquidation of so huge an international debt is far removed from an unmixed blessing to the creditor nation. as to her ability to pay there is no doubt. Great Britain can pay, and what is better wants to pay. "The British Empire," the Morning Post wrote lately, "is built upon pride. Take away the Britishers' pride and they are nothing."

But

Speaking of the British indebtedness to the United States. Mr. McKenna tells us that Great Britain is prepared to honor her bond in full.

Gentlemen, British pride and British honor have always been the finest collateral in the world.

Effect of Debt Cancellation As to France and Italy, does anyone really