THE dawn of the year 1908 was strongly influenced throughout the commercial world by the crisis whose acute phase had hardly passed with the passing of 1907. Although the storm centre was in the United States, every country engaged in international trade was more or less affected at the time, and most of these countries have been even more seriously affected since. In the beginning of the year money was still dear in all the great centres. The destruction of credit in the United States at once checked imports into that country very seriously, and with great rapidity, through international trade and international finance, the influence of falling credit diffused itself, and wholesale prices of staple commodities fell sharply. The index number of the Economist, which had been 2,601 in June, 1907, the highest point it had reached since the date of the collapse of the “boom” of 1876, fell continuously from June, 1907, until June, 1908, losing altogether 413 points, or 16 per cent. of the higher figure. From June, 1908, prices have not altered materially; but this has probably been due to considerable shrinkage in manufactures. This shrinkage, while it has caused, and while it is still causing, great distress through unemployment in all industrial regions, has, nevertheless, contributed to bring the financial situation in all countries within the limits of control. So long as the total amount of capital demanded for all purposes continued to increase, credit continued to be unstable and money dear. The fall of prices alike of commodities and of stocks; and the check imposed upon the current demand for capital, together with gradually returning, although restricted, credit, resulted in the increase of the available supply of money in the market in proportion to the demand for it. The return to low rates for money was so very rapid (normal rates were reached in England and France in February, 1908), as to suggest that the recent crisis was due chiefly to inflated values. At a lower range of prices there was no scarcity of available capital. Prices of stocks have largely re-acted; but the prices of commodities have not done so as yet, and thus the actual business of commerce has demanded a smaller volume of funds.
The falling off in imports of the United States, which began to take effect seriously in December, 1907, has continued up till the present time. Still more important is the general restriction of credit and diminution of international trade. These conditions have had as inevitable concomitants a period of industrial depression, especially in Germany, Holland and the United Kingdom. Germany has up till now been able to avoid a commercial crisis by means of heroic measures, and now it is engaged in providing by artificial means for its masses of unemployed. Holland is suffering also for like reason. Great Britain has adopted quite unusual measures, at considerable national and local cost, for dealing with the problem of industrial unemployment. The statements of some politicians and of some newspapers are not sustained by the official reports; but there can be no doubt that the proportions of unemployment are greater than they have been since the winter of 1892-93.
The year of a Presidential election is traditionally regarded as one of caution and not of expanding trade. This year there was added to the uncertainty of the outcome of the election, never very serious, it is true, the effect of the recent crisis. In the beginning of the year the panic had subsided; but the hoards which had been formed while credit was falling were emerging very slowly into circulation. The currency premium, although abating in consequence of this emergence, still existed. Clearing house certificates were still largely unredeemed. As the month of January drew to a close these conditions changed with almost startling rapidity. The cash deficits of the New York banks were replaced before the end of the month by a surplus of $40,000,000. The discount rate in London and Paris fell to normal. Stocks began to recover, and, in spite of occasional reactions, some of them have made enormous advances. February was, however, a month of anxiety. Railways found it hard to obtain funds, and some financially weak lines passed into the hands of receivers. All railways cut down wages, and other expenses. At least one railway reduced the interest upon its bonds. The price of cotton fell sharply. In the early days of March, enforced economies in railways and industrial enterprises led to anticipations of improved net earnings, and from this stocks received their first impetus. “Vigorous advances” and “violent breaks” alternate throughout the month. Money became easier. The fall in the value of money and the increased availability of it, stimulated borrowing, and issues which had been hanging over for some time were effected at comparatively favorable rates.
A wave of economy, dictated evidently by economical rather than ethical considerations, seemed to be passing over the United States. Luxuriousness of living, which is held by some to have been an important factor in the situation, appears to have been checked. The New York theatres are said to be empty, and other forms of luxury are understood to be equally in disfavor. Mr. Roosevelt has instituted a commission for the purpose of investigating national extravagance in respect to the exploitation of natural resources. The crisis has at least administered a blow to unthinking optimism. Apart from these indications of “the state of mind,” there were during the year more important signs of diminished employment in the return to Europe of large numbers of emigrants, and in the diminution of the working force in many extensive industrial establishments. Unemployment assumed grave proportions, especially in the Eastern States, e.g., in Massachusetts, where the percentages of trade unionists out of employment were much higher than the similar figures for Great Britain.
The extent to which Canada has been able during the past year to induce the investment of capital, especially from Great Britain, is encouraging. The uncertainty of conditions in the United States is probably one of the most conspicuous reasons for the diversion to Canada of capital which might otherwise have been employed in the United States; but the favorable opportunity for investment which this country now offers is perhaps the most important reason. Estimates of the amount of capital invested in Canada during the year vary; but the total amount is probably fully $220,000,000. Of this sum, about $100,000,000 has been invested in Dominion, Provincial and Municipal securities, and the remainder in railways and industrial and financial undertakings. It is true that the rates paid have in some cases been rather high, but some of the flotations were made before the fall in the rate of interest and some were relatively high owing to special causes. Many new Canadian issues brought the issuing bodies into the London market for the first time. For example, the new Provinces of Alberta and Saskatchewan have just placed, each of them, $2,000,000 of 40-year debentures in the London market at a rate favorable for them. The rate with commission is a fraction over 4 per cent.
The most important financial event of the year has been the liquidation of the Sovereign Bank. This operation has not been without its anxieties to the banks; but the lesson which its misadventures have conveyed has been salutary. In this connection it is appropriate to notice the acquisition by an English syndicate of a controlling interest in the important industrial enterprise at Sault Ste. Marie in which the Sovereign Bank had an interest, and the payment, by this syndicate of a large sum to the liquidators of the bank. Although this enterprise has involved its original promoters in heavy losses, it is to be hoped that the sacrifices which have been made to sustain it as a going concern may prove to have been not altogether in vain, and that now, with effective management and a sufficiency of capital, it may have a prosperous career.
The considerable sums obtained from abroad, as above noted, together with the slackened demand for industry, have contributed to increase the deposits in the hands of the banks, and to prevent a corresponding increase in the advances for commercial purposes. The increase of the deposits and the probable extensive drafts upon them for industrial and other enterprises as soon as the revival of trade makes itself evident, suggest the expediency of providing by amplitude of reserves for such a contingency. If the conclusions above noted with regard to the coming gold situation are sound, the banks will find it comparatively easy as well as advantageous to increase their metallic reserves. Up till now Canada has not been, and perhaps for some time to come will not be, obliged to carry a gold reserve of great magnitude; but her increasing commerce and the corresponding increase of the liquid funds engaged in it must render the progressive accumulation of a reasonable gold reserve an absolute necessity.
The development of Cobalt and the discoveries of a new mining field also in Northern Ontario were among the more exciting features of the year. Large quantities of Cobalt stocks have changed hands in the course of the year, and savings have been drawn from all quarters to buy these.
During the year, adverse monetary conditions notwithstanding, new railway construction has been vigorously undertaken by all the three great railways.
During the last quarter of 1908 wages in some industries appear to have been reduced in the manufacturing districts in the Province of Quebec and in New Brunswick. With unimportant exceptions, they do not appear to have fallen in Ontario. In the City of Quebec the wages of street railway employes and of carpenters have been increased.
The numbers of workmen employed in the leading centres were, however, sharply diminished during the height of the crisis in the fall of 1907. The following winter was for many industrious families a period of sharp distress. Relief agencies were for a time seriously taxed. Partly through improvement in manufacturing industries, and partly through emigration, to other centres of the bulk of the workmen remaining unemployed, the problem this winter is not by any means so serious as it was last year.
The crop return of the past year, though not uniformly good in all parts of the country, was, on the whole, above the average, and coming as it did after a low return, enabled the farming community, especially in the Northwest, to meet its obligations well, and enabled those who had recently arrived in the country to establish themselves on their homesteads.
Immigration has, as might be expected, diminished somewhat. This circumstance need not be regretted, because the power of absorption of population by a rapidly developing country is, excepting in the agricultural regions, after all, not unlimited. In almost all industries, manufacturing during the past year has been kept in restraint. Extensions have been avoided, owing to absence of demand, and overstocking has been practically impossible owing to the difficulty of obtaining funds which manufacturers have experienced during the past eighteen months.
In Europe the political situation has become somewhat clearer during the past two months. The bloodless revolution in Turkey, effected by the Young Turk party, which had made skilful use of disaffection in the army; the declaration of independence by Bulgaria, and the annexation of Bosnia and Herzegovina by Austria, have passed with almost astonishing silence. The pre-occupation of Russia and the reluctance of Germany to embroil herself in minor disputes account for the equanimity with which the Powers have observed these highly significant events. There seems little likelihood now of a European war within any readily measurable distance of time, although a bolt often comes out of the blue. The catastrophe in Sicily and Calabria, though costing a deplorable loss of life and a considerable loss of capital, is, nevertheless, excepting in certain affected trades, unlikely to influence international commerce to a material extent, on account of the highly self-contained economic character of the populations affected.
From the point of view of high finance, the most important question to consider is the state of the gold reserves is the leading countries and the likelihood of these being increased or diminished.
During the past twenty years, Russia has been steadily increasing her stock of gold, until now she has upwards of 480 millions of dollars in her treasury. During the past year alone France has added to her gold stock about 155 millions of dollars, or more than one-third of the total production of gold for the year 1908. Germany had added during the year about 75 millions of dollars to her reserves. The United States added 85 millions within the same period. Are such operations likely to continue? The answers can only be given in some detail.
RUSSIA.—The primary object of accumulating gold was to establish the value of the rouble. The average annual output of the Siberian mines during the past twenty-five years has only been about 10 millions of dollars. It was, therefore, necessary to devise means of inducing imports of gold. This was managed by encouraging exports, especially of wheat, by means of differential railway rate or grain from the wheat-growing regions to Odessa, and by regulations limiting the price of wheat in the local markets. These artificial means were successful in inducing exports at the cost of the peasant, who was obliged to sell his wheat at a low price, and who sometimes had to beg the Government for seed grain. The importation of commodities other than gold was checked by high tariffs, and thus the treasury replenished itself with the heavy stigma upon its reputation of promoting at once gold imports from abroad and farming at home. Although the finances of Russia can not be said to be in a very flourishing condition, there is no question of national bankruptcy, and further accumulations of gold are probably neither necessary nor advisable at present. The value of the rouble is now fully established, and the building up of a mass of further indebtedness in Western Europe for the purpose of increasing an already unnecessarily large gold reserve is too costly an operation to be continued much longer. The Russian loan, the issue of which has been postponed from time to time, is, it appears, to be issued this month; but the effect of it upon the market is not likely to be important. The purpose of it is chiefly to provide for about 150 millions of dollars of short-period obligations, due in Paris; the remaining 65 millions will probably be retained in Paris and Berlin for financing operations, of which the Russian Treasury is rather overfond; or for the payment of accruing interest upon its external debt. It is unlikely, for the reasons stated above, that it will be employed for the purpose of purchasing gold by way of addition to the already large amount at the disposal of the Fise. Indeed, it seems as though it must now be recognized that the policy of accumulating gold has for the time, at all events, served its purpose, and should now be discontinued. The agricultural interests are suffering to an extreme extent; the most fertile regions even being among the most poverty stricken. So far from restricting the returns to agriculture by the means that have been described, it is urgently necessary that the peasant should be enabled to get the highest return for his labor that the market can afford. Russian credit has withstood the shock of the war and the still greater shock of internal disturbance, there is thus no apparent economical or political reason for accumulating gold at a cost out of all proportion to the benefit which can be derived from it.
FRANCE.—The gold situation in France is different. France is a dealer in gold, selling it or buying it when the market is favorable for one or the other operation; and France keeps a stock of gold in proportion to her business in it, and not at all in consequence of the exigencies of her credit. While it might be profitable for France to increase her stock temporarily with a view to future sales of the metal at a profit, it seems doubtful that there could be any commercial and other advantage in any permanent increase of her reserves under existing conditions. Indeed, if she attempted to increase them disproportionately, the reaction in external markets in which she is interested might be unfavorable to her.
GERMANY.—The gold reserve of Germany is a mere fraction of that of Paris, and thus it may seem that there is a considerable margin for further operations. Her policy for some time has been to increase her reserve, although she has not employed all the artificially regulative measures adopted by Russia. Low railway rates for exports and bounties have, however, had the effect of inducing gold imports, and it seems likely that these will be continued until a considerably greater quantity of gold has been accumulated.
ENGLAND may take the opportunity to increase her gold reserves somewhat; although the immense stability of her credit, the extremely economical use which she makes of her reserve, and the traditional reluctance to impair the fluidity of the stream of bullion out of as well as into her reserves, must tend to prevent any excessive accumulations.
UNITED STATES.—The currency and fiscal systems of the United States involve the accumulation of gold in the treasury to an extent which has been highly embarrassing, not only to other nations, but most of all to the country itself. An excessive reserve is as ineconomical and as likely to prove as costly as an inadequate one. It is not possible to predict what view might be taken at a particular moment by those who direct the financial policy of the United States; and it is, therefore, impossible to determine beforehand what the claims of that country may be upon the gold production of the ensuing year. The exchange situation indicates at present a probable withdrawal of gold to Europe, unless speedily accruing loans or investments from Europe should shortly change a debit into a credit balance. On the other hand, there may be some realization in London of American securities at the present relatively high prices. If this occurs to a material extent, gold shipments may be expected, unless the investment account is very heavy for this country.
The total production of gold in 1908 was about 425 millions of dollars. Should the gold production reach the same figure in 1909, how is it likely to be distributed?
For the reasons mentioned above, the probabilities seem against any great absorption of gold in the form of reserves by Russia, France or England. Germany may increase its reserves. The United States is an unknown quantity. The above general review of the situation leads to the provisional conclusion that in the coming year there will not be a scramble for gold. This condition may, however, be altered by a rapid advance in prices.
It seems, therefore, appropriate to ask what indications there are of price movements in the ensuing year. The most important commodity of which it is at this moment even barely possible to suggest the course, is wheat. The chief exporting countries are the United States, Argentina, Russia, and Roumania; but it is not possible to do more than make provisional suggestions even as regards the United States and Russia alone.
THE UNITED STATES—The reports of the acreage devoted to winter wheat in 1908-09 show a reduction from last year of about 12 per cent., which would mean a deficiency of the crop of winter wheat approximately of 50 millions of bushels, as compared with the crop of 1907-08. Unless this loss is offset by increased yield per acre, or by an increased crop of spring wheat, there must be a diminution of crop. The result of this shortage in supply, other things being equal, would be slightly higher prices for wheat.
RUSSIA—For the reason above mentioned, and special agricultural reasons, chiefly the progressive exhaustion of the more fertile land, there seems reason to doubt if Russia will have for export a quantity of wheat equal to the quantity exported last year, apart altogether from any question of the risk of the season.
Two important influences, one in America and one in Europe, seem thus likely to make for a shortage in wheat available for export, unless the crops in countries other than those mentioned are much more abundant than they were last year. Thus, so far as wheat is concerned, an advance in price may be anticipated, unless countervailing influences prove stronger than those mentioned. It should be observed in this connection that speculative movements based on anticipation frequently force the price above the point justified by the technical conditions of the market and that reaction may bring the price ultimately below that point, at all events for a time.
It has already been suggested that prices of manufactured goods fell during the first half of 1908; and that during the second half they have been maintained by restriction of output. In the event of revival of trade, owing to the relatively low rates at which money can now be obtained, prices will tend to advance, at least of those goods the manufacture of which had been allowed to fall low during the depression. As trade improves these prices must tend to approach those which obtained prior to the fall. When this point is reached, the special and general causes influencing prices at the time will determine whether the maximum had been again attained or not.
Thus the monetary situation as above analyzed seems to suggest an upward reaction of the prices of staple goods; and the agricultural and industrial situation seems to confirm this. Of course, there are many commodities in which special causes are more influential than the very general causes of price fluctuations, which are alone here taken into account.
It should also be observed that fluctuations in the prices of stocks do not always conform to the general rules upon which this reasoning is based.
The Outlook in Canada.
The reaction upon the country of the external economic situation is not likely to be otherwise than favorable. Advances in the prices of agricultural products cannot but be an advantage to the agricultural interests. On the other hand, advances in manufactured goods may not be so obvious an advantage to the same interests, and might or might not, according to the circumstances in the individual trades, result in a net advance either in profits or wages. The check which has been imposed upon luxurious living in the United States has probably had some influence in this country, although the need for it has not been experienced here quite so much as in the United States. Save in the case of persons with fixed incomes, the pressure of upward prices of commodities in domestic consumption has not been so seriously felt in Canada as in that country. In upward price movements, the wage earning population tends to lose until wages advance in proportion to the advance in the cost of living; while the professional class and those who are living on fixed incomes tend to lose either in money or in comfort until prices fall again.
The requirements of capital on Canadian account during the coming year cannot, of course, at present be estimated even approximately; but the railway expenditure for the year must be large, and may necessitate the incurring of obligations of a serious character. The Dominion Government also must ere long be in the market for further loans. Financial institutions dealing with the West are also likely to require funds for stable investment. Not only do local authorities require money for city, town and village improvement, for roads and bridges, and for education; but the settlers who have been coming into the country within the past two or three years have hardly yet drawn upon the capital which they will require for the full development of their holdings. The average settler does not usually negotiate a loan until he has secured the patent for his land, which he does within two or three years. Thus the loan companies and the banks, even if immigration were checked, must find themselves called upon to furnish capital for farming purposes to a considerably increasing extent during this and the immediately succeeding years. If the crop of 1909 is as favorable as that of 1908, these operations will be greatly facilitated, even if the large advances to the North-West are not materially reduced.
Although the unexpected often happens, there is nothing in the signs of the times at present to justify any gloomy forebodings for the present year.