Chapter SVII Prices in the United States

CHAPTER XVII Prices in the United States No subject in the course of the war has been more eagerly discussed, whether by economists or by the masses of the people, than that of rising prices. There is a school of economists who have seen the whole cause of rising prices in the policy of the governments in borrowing instead of taxing, and in the policy of the banks in lending to the governments or to the holders of government war securities. This process, called "inflation," has been treated by many writers as an unmixed evil, and a very considerable part of the literature of war economics has con sisted of invective against the stupidity of those whose policies led to "inflation." The economic problems of a great war would be beautifully simple if this sort of analysis were really fundamental! To writers of this school, the terms "rising prices" and " depreciation of money" have been synonymous and the funda mental causation has been sought in monetary and banking phenomena.

To the present writer, it seems perfectly clear that the funda mental causation involved lies in the field of production and consumption and in the fields of public policy and social psy chology, and that so far at least as the United States are con cerned the phenomena of money and banking have been largely secondary and derived, adjusting themselves to, rather than causing, the more fundamental factors. This is not to deny that banking policy has had and has a considerable influence on the course of prices. It is rather to assert that the major influence is to be found in something more fundamental. The fundamental explanation lies on the surface. Fifty to sixty million men, an enormous proportion of the labor force 196 THE UNITED STATES lSl7 of the civilized world, have been taken out of industry and put to work in the most destructive kind of consumption of the products of industry. Another and larger number of men have been diverted from the production of goods for ordinary civilian consumption to the production of munitions and army supplies, to the production of shipping to replace the waste of the U-boat campaign, to the building of airships and of elaborate plants for the production of airships, and so on. The process began first, of course, in the belligerent countries, where also it has gone farthest, but no neutral country remains unaffected by the demands for war materials and supplies, and in the United States, first as a neutral and now as a belligerent, the process has gone very far indeed. The following quotation contains the best estimate the writer has found of the extent to which the resources of the United States have been diverted from the production of ordinary civilian goods to the prosecution of the war: An examination of reports of the general participation of the American people in the war leads to the conclusion th.at of the American population, normally engaged in gainful occupations, fully one-half are devoting their energies to the prosecution of the war, either by bearing arms or working in industries charged with the production of war materials and performance of war service.

According to the 1917 census estimate, the latest available, the number of men engaged in gainful occupation in the United States was 30,091,564 and the number of women so engaged 8,075,772, or a total gainfully employed of 38,167,336. The military establishment now numbers approximately 5,000,000 men. This includes army, navy and marine corps. On the government railroads there are 2,300,000 employed and in the shipyards under government control 386,000. The list of civil service employes has sprung from 166,000 in 1917 to approximately 500,000. This makes a listed total of 8,186,000. The government has taken over bodily many munitions plants and other industrial enterprises. In addition, it has awarded contracts to many plants in which 75 per cent and in many cases 100 per cent of the workers are solely engaged in turning out government material. With the aid of the Department of Labor-and the United States Employment Service, it is esti mated that the number of persons enlployed in these industries, operating for government account, amounts to about 12,000,000.

A total of approximately 20,000,000 persons engaged in war work there fore is obtained. The men drafted into or enlisted in the military service must be subtracted from the total of those normally engaged in gainful occu pations. On the other hand, the stress of war has caused many persons to enter gain fut occupations not previously so employed.

198 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING It is believed fair and conservative to conclude that these elements equalize-if they do not increas,e-the proportion of war workers to more than 50 per cent. 1 In these facts, we have an adequate explanation of the rise in commodity prices without ascribing it to the stupidity of the fiscal policy of the Treasury, without assigning it to the stupidity of the banks and without attributing it to monetary depreciation. Outside the United States monetary depreciation has been substantial in many countries and very great indeed in some. There has been a collapse in the value of Russian money which has sent prices to u~heard of heights. The same is true in Austria, Germany and Italy, in less degree and to no small extent in France, as we have found reason to believe. In all of these countries the paper money has depreciated, to greater or less degree, below the value of its nominal gold equivalent. The extent to which monetary depreciation is a fqctor in Great Britain, however, can not be so great, while in Canada the ele ment of monetary depreciation is probably very slight.

The table on the following page presents an interesting com parison of various index numbers covering not only the United States, but Great Britain, Canada and Austria, as well. For comparison, the figures of the Bulletin de la Statistique Generale de la France are repeated from our chapter on French prices: FRANCE 258 370 297 384 315 ......... 339 ......... 1917 1918 ........ ..... .... 223 255 240 260 240 ......... 249 ......... UNITED KINGDOM rs~ti~~a~~;:o~ ~~~~~~~~~\ 1~? .. 1 1 .. ?~~1 :: :l:~l:~ :: 2d quarter . \" . 3d quarter 181 . 4th quarter '._." _. . . . . . . 203 . fs~ti~~a~~;;o~. :::: ~~~~~~~~Ol ...1~~..•••?t{... :: :1t: 1 : 6 ::: ...1.~1~...•.. 1.9.1.~ .. 2d quarter , I' .........•................ 3d quarter .. . :......... 2~5 4th quarter . :......... 229 1 Federal Trade Information Service, Wednesday, October 23, 1918, page 197. It is proper to reduce this estimate somewhat, in that not all of the railway employes are to be counted as doing war work. On the other hand, it is very questionable if the soldiers have been fully replaced by people •not previously employed.

THE UNITED STATES 199 WHOLESALE PRICES IN THE UNITED STATES AND CERTAIN FOREIGN COUNTRIES 1 (Index numbers expressed as percentages of the index number for 1913) b 100 b 102 h 109 b 113 b 127 b 153 b 167 b 142 b 138 b 137 b 138 b 139 b 140 101 101 99 102 103 108 111 112 127 132 132 138 154 160 163 169 177 179 179 181 179 179 183 187 190 194 199 199 204 207 219 220 221 223 225 226 98 96 104 106 118 125 126 134 149 157 157 175 187 193 199 203 205 211 208 207 207 212 214 218 97 96 95 101 215 216 218 221 223 227 112 124 122 125 143 156 156 171 184 188 197 200 201 210 208 210 209 212 214 217 100 99 101 108 111 117 111 103 113 123 124 141 150 156 166 188 204 197 200 203 206 207 206 209 205 210 217 225 216 211 103 99 99 102 103 ]03 ]03 105 114 121 120 126 140 146 154 157 172 176 175 181 178 182 183 182 184 188 189 191 188 186 97 95 94 100 99 106 107 108 119 128 125 131 149 151 154 158 164 168 175 178 181 184 185 191 195 196 196 200 205 206 102 101 104 107 108 109 IDS 101 110 118 121 136 151 159 170 188 203 198 189 190 195 200 199 200 200 204 204 207 207 201 United States United Aus_~!!g_~~ ~ tralia ,-.... en I~ ::s en en .~ en en en "+-f E~ en en .~ .~ ...., .~ .~ .~ 00.- 5;,;.~ ~ .. ~ ~ ~ .. ~ .. ~ ~~~;> U.~.~o ~o EO 0 ~o ~o .... '~ '+-4~~ •• Q) "'. u e Q) r-.- '-" 0'- 0 ...., E Q) E E .- e eN en ~ E ~ E ~ e § ~ e § e ~ e ~ ~ ·z ::s ~ E~ 0 ""Cj 0 •• U 0 0 $=: 0 Q) 0 C'd 0'- ~(/) 0 ~ () C'd U ~ 0 ~ U 0 U ::s U ~~ ~o ~ ~ U $=:m ~~ ::So '-N u~ C'd~ -w ~ ~N ~~ ~N ~N ~v (/)v O~8 ~§~ ~ ~ 8:"75- &75 asJ -ss --8-1 --97 68 70 a 67 I 72 72 73 71 70 71 86 77 76 82 88 80 82 79 88 83 81 81 85 84 84 98 98 98 102 90 92 I 92 92 100 100 100 100 100 100 I 100 100104 97 101 105 99 100 100 106 106 107 105 110 123 127 110 147 126 128 123 129 160 160 134 138 187 170 169 191 204 205 174 .

100 98 99 99 98 99 101 101 110 116 J19 133 150 155 160 171 181 184 185 184 182 180 182 181 185 187 188 191 191 193 81 70 80 86 100 100 99 100 123 175 Year and month 1890 . 1895 . 1900 .. 1905 . 1910 . 1913 .. 1914 . 1915 . 1916 . 1917 . 1914 January . April . July . October . 1915 January . April . July . October . 1916 January . April . July October ..... 1917 January . February . March April . May June . July August September . October . November . December ..• 1918 January . February . March April . May . June . a Average for January and July. b Quarter beginning in specified month. 1 Monthly Labor Review, U. S. Bureau of Labor Statistics, September 7, 1918.

200 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING The agreement between the two index numbers for Great Britain is startlingly close. The divergence among American index numbers is somewhat greater, Gibson's showing the great est rise by June, 1918, and Dun's the least increase by that date. The Annalist index number is based solely on foods and is thus less representative than the other index numbers. On the whole, the writer prefers to use the Bureau. of Labor Statistics' index number, though it moves more slowly than Bradstreet's, and in the chart which follows that index is em ployed. We may continue the table for this index number through July and August; reaching 193 in June, 1918, it grows to 198 in July and to 203 in August. 1 Commodity prices at wholesale in the United States have thus doubled since the outbreak of the great war, at the same time that the labor force available for producing ordinary civilian goods and service in the United States has been, as shown above, practically cut in two. The writer attaches no sig nificance to this fortuitous exact coincidence of ratios. Social phenomena rarely obey the law of simple quantitative propor tionality between any two factors. But the writer does maintain that in the enormous reduction of available goods and services for civilian consumption, we have an adequate explanation of the 100 per cent rise in the wholesale commodity prices, and that no further recondite explanation based on a "quantity theory of money" is called for as an additional principle.

It is not necessary for present purposes to undertake to show the relation between the reasoning of those who see the explana tion of price changes primarily in monetary and banking phe- . nomena, and the reasoning employed in the present chapter. In part, the two methods of reasoning deal with the same funda mental factors, using different langqage and different modes of presentation. For detailed discussion and defense of the theory underlying the present chapter, the reader is referred to the writer's Value of Money. 1 I am informed by a careful student in the Bureau of Labor Statistics, who has watched in detail the elements entering into the index number, that the rise in the summer of 1918 is directly and obviously due primarily to the increase in railway freight rates.

THE UNITED STATES 201 We shall distinguish four ideas which have been to a considerable extent confused in current discussion of price changes: (a) A general rise in prices (b) A rise in commodity prices at wholesale (c) A rise in "cost of living" (d) A fall in the value of money Before one can assert that there has been a general rise in prices, one must take account not only of commodity prices, but also of stocks and bonds, real estate and other long time income bearers. The country ·has seen a great rise in commodity prices, but it has also seen a fall in stocks, bonds and real estate. Cost of living has not risen as high as commodity prices at wholesale. Cost of living is concerned with retail prices and with certain other items, as house rents, which enter into the budget of a family. Commonly, one has the family of a laborer in mind when speaking of cost of living, which still further limits the items that will enter. Retail prices have risen much less than wholesale prices. House and apartment rents, taking the country as a whole, have risen little if at all, and the general rise in cost of living was estimated in the middle of the summer of 1918 at rather less than 50 per cent by a government official peculiarly qualified to give an estimate on this point. The best general figures to be found dealing with cost of living are those pub lished by the United States Bureau of Labor Statistics in the Monthly Review} covering the shipbuilding districts of New York, Philadelphia and various south Atlantic and Gul f ports.

A general summary of these results would indicate slight if any rise in house rents (with actual decline in many of the southern centers) down through 1917, with· a considerable rise in house rents in a number of them during 1918, as congestion at these points increased .• Satisfactory general studies of cost of living, however, covering the country as a whole, have not yet been made. ·Under ordinary conditions,.a marked rise in commodity prices may be taken as an index of a fall in the value of money. Under ordinary conditions if the value of money is constant, the proba bilities are that the general average of commodities will bear a 202 EFFECTS OF THJ;: WAR ON MONEY, CREDIT AND BANKING fairly constant relation to money. Some commodities may fall in value and consequently in price, but other commodities will be likely to rise in value and consequently in price, and, in the great average, changes on the part of one commodity will be offse't by opposite changes on the part of other commodities. It is more probable that three hundred commodities will, on the aver age, remain stable in value than that one commodity, gold, will do so. But this reasoning may very well be upset by the condi tions of a great war. Commodities in general may grow scarce and increase in value, and under such circumstances a general rise in' commodity prices indicates, not a fall in value of money, but a rise in the value of goods. Where goods are as abundant for ordinary civilian consumption as they were before 1914, they have not risen in price. Coffee is a case in point. Coffee sold for 13 cents in 1913; it has sold for less' than 9 cents through 1915, 1916, 1917 and the greater part of 1918. India rubber is another illustration. H,ouse and apartment rents would illus trate the same proposition. In certain sections, like Washington, where there has been a great increase in population, rents have naturally risen, and in many growing cities there has been some tendency to a rise in the fall of 1918, since building operations had been suspended for a considerable period preceding that.

There had been, however, little if any rise in house and apart ment rents through the country down to the early part of 1918, despite the check in building operations, and in those communi ties where the population has remained stationary there has been no rise at all. Had the rise in prices been due to depreciation of money, house and apartment rents would have risen with other prices. It can not be said that the failure of rents to advance earlier was due to any inertia or to a failure of landlCirds to take quick advantage of opportunities. The writer has made rather care ful investigation in certain centers, notably the East Side of New York, and is assured by real estate men that the situation is a fluid one, that landlords are quick to take advantage of opportunities to increase their rents. There has not even been a general rise in prices. What has THE UNITED STATES 203 happened rather is a transformation in the price system, under which certain prices have risen and other prices have fallen.

Labor and its current products, scarce and dear, have risen markedly under the pressure of war demands; stocks, bonds and real estate and other long time income bearers have fallen dras tically, as men and governments have sacrificed them to obtain the vitally needed present goods. The future has been rut~lessly sacrificed to the present. Coming with this change, and part and parcel of it, has come a marked rise in the long time rate of interest, symptomatic of the emphasis on the present and the discount on the future. These three changes: (1) a rise in present goods and services; (2) a fall in -long time income bearers; and (3) a rise in the long time interest rate, are merely different aspects of the same general fundamental fact. In the midst of these changes, gold has remained fairly stable in value, and has proved itself a good measure of values, an accurate monetary yardstick. It has correctly regist~red the rise in present goods and services; it has correctly registered the fall in long time income bearers. We may picture the situation by the figure of a seesaw, at one end of which are pl~ced labor and commodities currently produced, at the other end, stocks, bonds and real estate, while gold stands at the center. In 1914 our seesaw was in equilibrium. The war has tilted the plank, raising labor and commodities and depressing stocks and bonds. Gold stands in the center, where it stood before, substantially un changed in value.

The United States have gained, as we have seen, over a billion dollars in gold during the war. Under ordinary conditions, such an increase in the gold of the country, if expected to be perma nent, would lead to a great decline in the value of gold. But the conditions are extraordinary. Emergencies of the war have led, as we saw in an introductory chapter of this monograph, to a greatly increased significance of one function of gold, namely, the "bearer of options" function. Ready gold, the one sure liquid asset to which men can alway's turn in times of stress and emergency, has been more eagerly sought for during the war than in the years preceding. The increased value coming to gold 204 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING from this war time cause, has offset the tendency to decline in the value of gold in the United States, caused by the increased quantity of gold. Parenthetically, it may be noticed that price changes in dif ferent parts of the world seem to have had no close cC?nnection with the actual movements of gold. Gold came to the United States and prices rose in the United States, but gold left Eng land and France, and prices rose in those countries even more.

The effort to work out any definite correlation between gold and prices on the basis of "normal laws" in these wholly abnormal times appears to the present writer to be futile. Viewed in fundamental, psychological terms, the rise in the values of labor and commodities is inevitable under such condi tions as we have had. In the first place, as we have seen, they have grown scarce. In the second place, they have attained an unusual significance owing to the intensity of our concern over the outcome of the war. All the ideal values of our civilization, dependent on the outcome of the war, have attached themselves to the guns and cannon, powder and shells, food stuffs, carriers and other things, an abundant supply of which is essential to the winning of the war. And al~ the economic values that men and nations could command in the future, ordinarily largely dor mant in their influence at present market values, have been brought in to reinforce the values of these vitally necessary present goods.

To these fundamental changes in the technological and psy chological factors, money, banking and public finance have ad justed themselves, bank credit has expanded as it has been necessary to accomplish the transformations, and as prices ~ave risen. After the war, when commodity prices and wages come down again-as they inevitably will in terms of gold-bank expansion will also diminish. 1 1 No discussion of price fixing is given in this chapter, as the matter is to be dealt with in detail in another monograph in the present series. Vide the present writer's paper" Value and Price Theory in Relation to Price Fixing and War Finance," American Economic Review, Supplement, March, 1918.

THE UNITED S"TATES COMMODITIES AND SECURITIES ~05 The story of price ch~nges in the United States is not complete without an account of the course of the stock market. The following chart exhibits the relation of stock prices to com modity prices during the war. It will be observed that stock prices fell sharply where com modity prices changed little at 'the outbreak of the war; that stock prices recovered markedly and rose high in 1915, before the movement of commodity prices got well under way; that beginning with November, 1916, at a time when commodity prices had still made only a moderate rise, stock prices began their great and drastic fall, during which commodity prices soared to new and unheard of levels.! The two lines crossed in our diagram of April, 1917. It will be observed that while com modity prices start on a base of 100 per cent in January, 1914, stock prices start at the actual average figure of the fifty stocks chosen. It will be noticed too' that the scale for stock prices, indicated in our first vertical column of figures, is twice that of commodity prices. The stock prices run in terms of actual dollars per share; the commodity prices run in terms of per centages of 1913' prices.

A more detailed picture of the course of stock prices during the war is given in our second chart, which distinguishes bonds, railroad stocks and industrial stocks, giving also the combined curve for rails and industrials. The scale of this chart is only half that of the curve for stock prices in the preceding diagram. . Following the sharp drop in stock prices at the outbreak of the war and the closing of the stock exchange, there are no quotations of significance to be had until the stock exchange opened again in November for bonds, and in D'ecember for 1 The great rise from A:1gust, 1916, to June, 1917, in commodity prices over sixty points-constitutes by far the major portion of the rise for the whole wa:. Forty p~ints of this came between December and June, the sharpest rIse of all beIng from March to May. Much of this ,¥as a specu lative rise, in anticipation of war expenditure. All of it preceded the actual getting under way of the main financial operations of the United States Government.

105 210 205 ,100 200 COM~ ODITIES AND STOCKS. "195 V "~ ..95 190 -) 1\ .",.- . '185 Jf'./ II \ ,, . ..... .'90 180 ..... I 1\ , I 175 I,J 1 l/r": Vr". 1/ I"85 170 165 ~ f\ )j\,/ I 'II ,V l'.80 160 rJ , r\155 I , \75 150 , '" ,. ........ I-V145 i'"\ r\ V , 1\ 7"""""'/70 tJ) 140 "'I........t"'---. 7 ,17 , \ L--~ I........UJ 135 1\ 1/ ~ !7 ~65 E130 I \ ) , 0 g 125 , ~60 ~ 120 \ Vf'.V , (J) ~ 115 .- .- ... ,55 o 110 "105 "50 100 ...... ... .... - .... .. ...... .. '""".. - - ..... .... 95 45 90 85 40 80 75 -----COMMODITY PRICES.35 70 (BUREAU OF LABOR STATISTICS 65 INDEX N"UMBE-R.) 30 60 - AVERAGE PRICE OF 50 STOCKS. 55 ( ANNALIST'S LIST OF 25 RAILS 25 50 AND 25 INDUSTRIALS. CLOSING 45 PRICES OF EACH MONTH.) 20 40 35 ~~~f~~~gE~~~~:~~~~~gE~~~~:~~~~~gE~~~~:~~~~~gEti~~~:~~~~~gE~ _~~~~ __ ~~OZQ_~~C2 __ C00ZQ_~2<~ __ ~00ZQ_~~<~~_C00ZQ~~~C2 __ <00 1914 I 1915 I i916 I 1.917 1 1918 ~ o ~ t%j ~ ~ t%j n t-3 00 o ~ 1-1 ::r: t%j ~:> ~ oZ ~ o Z t%j ..~ n ~ t%j tj 1-4 t-3 :>Z tj to :> Z ~ Z Q THE UNITED STATES 207 Id3S • If II "

\ \ '£lnY , , I "1nr ''II \ I 3Nnr ex:> u .. ~ :i \ en \ 1 'YelY ~ 1/ 'YYN I '03.:1, \ 'Nyr '", '33Q \ 'AON :I I ~ .' "'1/ '130 'J I I "ldlS 7// II '£lnY I~ ,nnr '"I~ 1/ ~ 3Nnr en I " ~ ~ 7 1--1-- - "VW \ ~I-1-- 'YdY I' I ~~~] , I--~ 'YVN 1\ ~f-1--1-- '83.:1 f / ~ 11 V ::;)~ ...--...-- 'Nvr LLJ 1/ Q I-CJ .-" ..... ~ J !f-I-- f-- '330 z- ( , if Q~ ...--1-- 'AON « :I: ~f-J:t- \ 11 I--f- '130 U Z ",co f-I-- f- 'ld3Sx O '" ..... " ..J=w:=E f', l ~ C(C( 1--1-- I-- 'snv ~:r: en ~~ f-I- I- "lor t.O U() rJ ~ Oce / ~ C tIJ '" &&.I ~I-- I-- 3Nnr en ... 111 Z-'::;)Z ~ <no:: ~ occ-1-1-I- "vn ~o ma:~; ~I-- I-- 'lielYa:::u. ~ 1 OlnJOO I- 'IIV" ~ ~, , I ~~~() f--I3=~ I 1 I I II--1--1-- '83.:1 I :'-!-- f-- 'NY( ~ff 1,- 'f!' Il/ I , I-1 ,...--1-1- '330 zC' I I O! ~ \ 1 I I I-1-1- 'AON I I I f/) ~ ~ I I I-- 1-1- '130 <nO , .. I LLJ.J "' ~ I" ~ 'U3S (J() '£lnv0::- ~ .~ "1nr LOQ. I " ,~ ~ 1 1 1 " 3Nnr en "v.. ri II /I~~ 'YdV l I'~ , 'IIvn \ ~, , 'I 1/ I 'U3J '\. il \ 1\ 'NYr 1-0 I '330 'AON '130 'ld3S '£lnv "lnr ~ V ~IW ....

~ 3Nnr enI II ~ 1\ \ \ Avn II 'YeiV I I 'IIY" .111/ I : '83.:1 'Nyr 2~~~~~~~~~~~~~g~g~~~~~~~~~~~~~~~~~Q .... .-4.-4.-4~.-49"""4~9"""49"""4~~9"""49"""49"""4 208 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING stocks. Prices remained low until May, 1915, when there began an extraordinary rise in the industrial list, chiefly connected with the "war babies," or stocks of corporations which were bene ficiaries of the European demand for munitions and war sup plies. Among these were Butte and Superior, whose shares rose early on the great demand for zinc, Westinghouse Electric and, most conspicuous of all, Bethelehem Steel. The price of the industrials crossed the price 0 f the rai Is in June, 1915, and the stock exchange thrilled -with the excitement of frequent million share days for a prolonged period. Though the crest for this curve was reached in October, great activity continued through the year, and December 31, 1915, on which day Austria's note to the President acceding to an ultimatum by the United States was received, was a million share day with substantial gains in many securities, notably Mexican Petroleum. In the phrase of one habitue of the ticker, 1915 went out in a "blaze of glory."

. The year 1915 also saw a substantial rise in the rails. The bears controlled the market through the earlier months of 1916, and there was a sharp drop in April of that year over the prospect of war with Germany, at the time of the sinking of the Sussex. The German assurance of cessation of illegal submarine activities restored confidence in some measure, and after a few more months of gloom a rise began in July under the leadership of United States Steel, which carried the industrial list and the whole list to the high peak of the war in November, 1916. In the course of this move, General Motors went to its dizzy high of $800 a share. A substantial rise in the rails during 1916 also took place under the influence of great increase in both their gross and their net earnings. By October, 1916, however, it had become clear to careful students of the railroads that expenses of operation were growing as rapidly as gross receipts, that they would soon be outrunning them, and that a decline in net revenues of the rail roads was in early prospect. This did take place, except for Southern Pacific and one or two other fortunately situated rail roads, by the end of the year.

In December, 1916, rumors of peace led to a sharp break in THE UNITED STATES 209 the price of all stocks, while rumors of the entrance of the United States into the war led to a further drastic decline, and the end of the year saw stocks lower by far than they had been at the beginning of the year. Early in 1917, the renewal of Germany's submarine warfare and the diplomatic break of the United States with Germany led to new low levels. The day on which Ambassador Bernstorff was sent home pre sented a particularly dramatic episode i.n the stock market. All securities fell heavily until suddenly the news ticker announced that the President had handed Germany's ambassador his pass ports. Instantly, flags flew out throughout the financial districts in New York and Boston and in other centers, while bidding for all securities began. It lifted the general list two points or more above the low for the day, and lifted many securities eight or ten points above their low price for the day. It was the stock market's method of giving expression to its patriotism and its confidence in the success and righteousness of the American cause.

For some months following the dismissal of the German am, bassador, there was recovery in the industrials, though the rails continued to sag, but by June, 19.17, as the market began to realize the drastic taxation and heavy bond issues that were com ing and the fundamental readjustments that were to be gone through with, all kinds of securities fell, and fell heavily. The climax was reached in December, 1917. The course of the rails through 1917 is probably as significant as any other feature of the market, although bonds also' took the same course. With rates fixed under legal control and with costs mounting, the railroads of the country were in a desperate plight. By December, their credit was in a very unfortunate condition and railroad prices seemed to have no bottom. A speech of President Wilson to Congress in D'ecember, 1917, announc~ng that the· government would take over the railroads on favorable terms, primarily for the purpose of protecting their credit, though also for the purpose of enabling them to be utilized more effectively for the war emergency, explains the sharp rise indi cated in our stock curves at that time.

210 EFFECTS OF THE WAR ON MONEY, CREDIT AND BANKING In 1918 stocks rose during the early months, were depressed in March, April and May under the influence of the terrible German drive, and subsequently rose fairly steadily to the end of October,. discounting successful peace. The increase of rail way rates in 1918 explains one substantial sharp movement in the railway curve. The decline of bond prices from a high of 90 in December, 1916, to a low of 80 in September, 1917, is significant of the growing scarcity of capital and the rise in long time interest rates. This factor is strongly evidenced in the prices of all securities, especially the rails and preferred stocks of all kinds. In the case of the bond list, however, it constitutes virtually the whole explanation of their course from the beginning of 1917.