Hew ^nrk Hntt (BaUtgt of J\.gnc«ltu« At QforneU IniUErBitH JItlista. N. g. HG 4923.047'" """"'"'""■"•^''^ ''"•'°"ias Gibson's special marl4, in 1900 at $115 and is now ap- proximately $300 a share. Chesapeake & Ohio, one of the lower-priced properties, sold in 1895 at $12,50' a share, in 1900 at 24 a share and is now around $85 a share. Chicago, Burlington & Quincy in 1895 sold at 69, in 1900 at 119 and is now out of the market, so current prices cannot be given, but they would be much above the highest price men- tioned in 1900. Chicago, Milwaukee & St. Paul sold in 1895 at 53^, in 1900 at 108^ and is now- about 146, and this latter price includes valuable rights which have been given to stockholders. Chicago & Northwestern, which is one of our gilt edge invest- ment securities, sold in 1895 at 87 J^ and is now XSTYz. This corporation has also issued valuable rights which add to the dividei.ds received by stockholders. Delaware & Hudson sold ten years ago at 106^2, and is now about 177. Illinois Central sold in 1895 at 81, and is now about 143. Louisville & Nashville sold in 1895 at 39, in 1900 at 68^^, and is now around 150. Missouri Pacific sold in 1895 at 18§^, in 1900 at 38j^ and is now about $70 a share. Norfolk & Western sold in 1895 at \% dollars a share, in 1900 at 22^ and is now about $100 a share. North- ern Pacific sold in 1895 at $2.50, in 1900 at 45^4 and is now say $136 a share. Reading sold in 1895 at 1654, in 1900 at IS and is now around $170 a share. Southern Pacific sold in 1895 at 16^4, in 1900 at 30)^ and is now about $126 a share. Union Pacific sold in 1895 at $4 a share, in 1900 at 44^^ and is now about $185. "I am only giving you a few examples of the rail- road stocks and the great possibilities which have been given to the investor or speculator in those securities during the last ten or fifteen years. There have been very few cases where any railroad securi- ty, properly managed and properly exploited, has failed to enrich the man who purchased it a few years ago. 34 "The industrial stocks are a newer proposition, but they are beginning to come into favor. At first they were viewed with considerable suspicion, be- cause of the flexibility of their business and the danger of disastrous competition which was not to be measured by territory as is the ctse in railroad securities. "However, I will mention a few of them. In 1904, American Car and Foundry sold at 14J4 a share. It is now about 62. The preferred stock of that cor- poration sold in the same year as low as $67 a share, and has never missed a full seven per cent, dividend since the inception of the corporation. "American Locomotive sold in 1903 at $10.50 a share and is now about $50 a share. The preferred stock of that corporation sold at about 67 in 1903, and this security has never skipped a seven per cent, dividenfl since the inception of the corporation. "American Smelting & Refining sold at $37 a share in 1903, and is now about $85 a share. The pre- ferred stock of that corporation sold as low as $80 a share in 1903, and here again we find an un- broken dividend record of seven per cent, on the preferred stock since the inception of the corpora- tion. "General Electric sold at $20 a share in 1895, at $89 a share in 1907, and is now about $156 a share. There is no preferred stock here, but the common stock has steadily maintained a dividend of eight per cent, since 1900. "National Lead sold at $17.50 a share in 1895, at about $16 a share in 1900 and is now around $80 a share. This stock sold as low as $10.50 a share in 1903. The preferred security has been better held than most of the industrial preferences; the lowest price reached since 1900 being $95 a share, but the dividend has been held on the preference at seven per cent, steadily since 1900, and the factor of safety and the amount carried to surplus has always been large. "United States Steel sold in 1900 at $24 a share; in the scare in 1903 it declined sharply, and in 1904 reached a price of 8^-^ dollars a share in May of that year. The stock is now selling around $80 a share. The preferred stock sold as low as 49^ in 1903, but a dividend on that preference has always been paid since the inception of the corporation in 1901. 35 "These are a few instances of the best rails and industrials, and they prove pretty conclusively that the bull has had the best of the game in the stock market. "In bonds it has been decidedly different. The high cost of living and the necessity for larger income return has forced many people out of the more stable securities into the ones with better speculative chances and the higher income returns. Most of the dividends, of course, have been good. The premier investment security of the world (Brit- ish Consols) has been declining right along for this reason. Of course, we are offered different ideas as to what the cause of this decline is, but personally I have accepted the theory of our increasing supply of gold, for want of a better. We run into a good many non-conformists on this theory, and I cannot pretend in the time limits which I feel I must ob- serve to-night to attempt to enlarge upon the sub- ject, but I believe it is worth while to look the matter over carefully, and' see if gold is not the real reason. I am personally convinced that it is. "Looking at the question of commodity prices we find that here also the bull has had much the best of it in every branch of the speculative com- modities. "Cash wheat in Chicago sold in 1895 at 4854i in 1900 at 6154 and is now around $1.15. Cash corn in Chicago, in 1895, sold at 25 cents, in 1900 at 30 cents and now is around 65 cents. Cash oats in Chicago sold in 1895 at about 17 cents, in 1900 at about 21 cents, and the present price is about 47 cents. Cash cotton on the New York Cotton Ex- change sold in 1895 at a little over 6 cents a pound, in 1900 at 7 cents a pound, and the pres- ent price is about 15 cents a pound. "The advance in commodity prices is not nearly so satisfactory nor cheerful a showing as the ad- vance in the security values. The high cost of liv- ing is represented by these high prices for the commodities, and the high cost of living is one of the big problems which we face today. The higher our securities go the better; the higher our cost of living, the more we have to contend with; but as my discussion is confined to what has happened to 'bulls and bears,' I will not attempt to discuss the merits of the case. 36 "Mr. J. P. Morgan made the statement recently that his father told him always to be bullish on the United States. Of course, he referred particularly to securities, and Mr. Morgan has made a great for- tune by following that advice. In fact I feel safe in saying that almost all the great fortunes which have been, piled up in the United States have been made by speculation on the bull side. In using that much abused word 'speculation.' I do not confine myself to speculation in stocks, or in grain, but to speculation in real estate, or in any tther quarter. The Vanderbilts have made a huge fortune by speculating in railroads on the bull side. The Goulds derived their fortune in the same way. Jay Gould was known as a wrecker, but he wrecked that he might buy cheaply, with a full belief in the fu- ture of the United States. We can name a hundred bulls who have reaped great returns, and we can number the bears who have died rich on the fingers of the right hand. In most cases, the only reason they did die rich was because they happened to die at the right time. "The constitutional bear never seems to do an}' good for himself. I do not mean to say that there are not periods in which he may reap profits by intelligent observation of conditions, but I use the word 'constitutional' advisedly. Mr. Cammack was one of the constitutional bears who died with con- siderable money. But he died just in time. In speak- ing of Mr. Cammack as a constitutional bear I am reminded of a story that Mr. Henry Clews tells about him. Mr. Clews met him on the street one night and remarked to him, 'Mr. Cammack is not that a beautiful moon.' Mr. Cammack replied, 'Yes sir; that is a pretty nice moon, but it is too high.' "I do not know who invented the terms 'bulls and bears,' but they are very apt. I like the bull mucli better than the bear. He is a pretty good fellow. He is not afraid of anything, and if you get into his pasture lot he will come up and look at you and usually act pretty good natured about it, but if you shake a red rag in his face he will snort and paw the ground and switch his tail, and if you don't get out of that pasture lot pretty quick, he will help you. "The bear by contrast is a sort of a sneaking fel- low. He is always cross and always nervous and 37 he is the biggest coward on earth when it comes down to the scratch. "Of course, there are a good many things we can apply to these words 'bull and bear.' We can be bullish and bearish on many things besides the stock market or the cereal markets, or the cotton markets, and I believe, taking the matter from one end to the other, that it is better to be bullish on everything, not foolishly bullish, but reasonably bullish. Bull- ishness means optimism, and optimism means im- agination, and imagination means genius, and it is by imagination and genius and optimism that we have built our bridges, and our railroads, and our steamships. The men who did those things had to be bulls. They bulled the country, they bulled the future and they won. "We can also be bullish on other and bigger things; bullish on kindness, on honesty and on charity, and when I speak of charity I do not mean that form of charity which builds monuments to itself. I do not refer to the man who builds libraries and puts his name in letters a foot high, over the central arch, and modestly flanks it on both sides with the names of Shakespeare, Milton and Goethe. Th'ere is not a man here in this hall tonight who has given twenty-five dollars, or twenty-five cents, to relieve suffering, or distress, wherever he found it, ac- cording to his means, who is not a greater philan- thropist than the man who rides roughshod over the rights of others until he has accumulated an undue amount of money and then begins to perpetu- ate his name in piles of masonry under the name of charity. "I don't want anyone to draw the conclusion from the remarks I have made above that I object to a man having money. I think it's a mighty good thing to have — plenly of it; but we want it acf'^.rding' to our necessities and our tastes. It is all right for a man to have a million dollars, or ten million dollars, if he can use it properly, but even a chipmunk has better sense than to carry more corn into his hole than he can eat. "In conclusion I will moralize a little further and say that I will give the young men here a tip on one thing to be bullish on all the time, and I believe most of you will remember it, and that is to be bullish on yourselves. You can't lose. The man who squares 38 back his shoulders and believes in himself is bound to win. You want to be bullish on yourself at all times. Declare dividends every few days. Buy your own stock whenever it is in the market. It may react a little now and then and you may need margins, but you can protect it and you will win out. Be bullish on yourself and if some pessi- mist gets in your pasture lot and shakes a red rag at you just snort and paw the earth and switch your tail and if he doesn't get out make it your business to boost him out. There is no room in the United States for a pessimist. There is no room on God's foot-stool for a pessimist. Be bullish on yourselves and you cannot lose." ■£/ 'w'. '^ ^^ m2 > ^'MGEM'^ 39 EUROPEAN CAPITAL INVESTMENTS. By ARTHUR SELWYN-BROWN. March 8, 1910. The development of corporate enterprises has enormously extended investment facilities and pro- vided the means for every man possessing health and energy to invest his surplus earnings so that in a comparatively few years, with the exercise of foresight, and the judicious choosing of his invest- ments, he can raise himself from the ranks of the wage earners and take a high position among the capitalistic classes. The truth of these statements is everywhere recognized and, as a result, we find among the shareholders in the large corporations in Europe representative people of all classes of so- ciety. We even find single shares of certain bank- ing companies held by trustees who represent very poor people who have clubbed together to purchase the shares. This is particularly seen in looking over the stock books of French, Swiss and Dutch companies. The stimulation of national thrift is not the least benefit the corporate form of enter- prise has bestowed upon the countries possessing en- terprise and good company laws. Statistics are considered by the ordinary man as the driest of all things, and as a result the aver- age politician is usually adverse to public appro- priation for purposes of compiling national statis- tics. It is impossible to adequately show the growth of corporate enterprises in the leading commercial countries in recent years, and to make compara- tive studies, on account of the lack of statistical data. The growth of British corporations, how- ever, can be perfectly measured, by reason of the accurate financial statistics compiled by the British 40 Government, by the income tax collectors, and by private statisticians in London. British corpor- ate activities are sooner or later reflected in those of other countries; so, for this reason, British cor- poration statistics may be taken as representative of European corporation statistics. Whatever dif- ferent tendencies are found in them will be similarly found in those of the principal European countries. It is proposed in this article to review present day tendencies in European investments and to indicate their effects upon American security prices. GROWTH AND POPULARITY OF BRITISH CORPORATION SECURITIES INVESTMENTS. In the past three centuries the amount of English savings invested in corporate enterprises in foreign countries is estimated at several thousand mil- lion pounds sterling. Investments in home cor- poration securities in the same period were even larger. Much of the British prosperity to- day is undoubtedly due to the reinvestment of the income received from investments in for- eign corporate enterprises. According to the in- come tax returns, the British people are at present receiving an income of £36,000,000 from invest- ments in the bonds of Indian, Colonial and foreign governments, railways, and municipal corporations. The returns from investments in industrial and min- ing companies exceeds £58,000,000 per annum. In- vestments in Colonial, railroad and transportation company shares yield an annual income of £82,- 777,000. The aggregate annual income from British company investments in foreign countries and in loans is over £172,000,000. Capitalized on a 5% basis, this would indicate a foreign investment of over £3,400,000,000. According to statistics compiled by Mr. Paish, 41 editor of the "Statist," London (*). British capital invested in Indian, Colonial and foreign loans and companies, and the income derived therefrom in the year 1907-8 vs^as as follows: Capital. £ Indian Gov. Loans . . . 156,369,000 Colonial Gov. Loans. 375,190,000 Foreign Gov. Loans. 167,000,000 Colonial and Foreign Municipal Stocks 58,901,000 Indian Railways 123,341,000 Colonial Railways... 188,950,000 American Railways.. 600,000,000 Foreign Railways 286,700,000 Banks 54,101,000 Breweries and Distil- leries 17,205,000 Canals and Docks... 5,974,000 Commercial and In- dustrial 77,610,000 Electric Light and Power 7,686,000 Finance. Land and Investment 187,027,000 Gas 16,419,000 Rubber 5,433,000 Tea & Coffee 21 ,399,000 Telegraph, Cables & Telephones 34,235,000 Street Railroads 35,289,000 Water Supply Com- panies 6,352,000 Mines. Coal & Iron 12,956,000 Copper 38,525,000 Diamonds and Gems. 14,646,000 Gold 161,178,000 Silver, Lead & Zinc. 10,513,000 Tin & Miscellaneous. 5,568.000 Nitrate 10,903.000 Oil 14,268,000 Income. £ 5,017,000 13,933,000 8,338,000 Rate % 3.21 3.71 4.75 2,650,000 4,774,000 7,598,000 27,000,000 13,467,000 7,353,000 4.50 3.87 4.00 4.50 4.70 13.60 732,000 1,174,000 4.20 19.60 4,863,000 6.30 321,000 4.20 6,233,000 1,194,000 436,000 1,794,000 3.20 7.30 8.20 8.40 2,233,000 1,809,000 6.50 5.10 438,000 6.90 505,000 5,074,000 4,468,000 14,947,000 843,000 308,000 1,637,000 42,000 3.90 13.20 30.50 9.30 8.00 5.50 15.00 4.50 Total 2.693.738,000 139,791,000 5.20 ♦Journal of the Royal Statistical Society, Septem- ber, 1909. 42 It will be seen from the figures in the taljle that the average dividend returns of British foreign and colonial security investments is about S.2% per an- num. The largest amount of capital is invested in Ainerican rails which yield 4.5% per annum. Co- lonial and foreign government loans come next in order of importance with a yield of 4.7%. Mining in- jVestments absorb about £270,000,000 and yield about 10%. Diamond mining is the most profitable in- vestment. Canal and dock, nitrate, copper mining, bank, gold mining, tea, coffee and rubber plantation company shares come next in order of yield. When we follow the history of English foreign investments year by year we find that they naturally seek the best stocks in the most prosperous coun- tries where they are likely to win the best returns compatible with comparative security of principal. GEOGRAPHICAL DISTRIBUTION THEORY. In considering the advisability of making new long-term investments a careful European investor studies: (1) The capital security a proposed stock affords. (2) Its income producing power and prospects. (3) The prospects of an increase in capital value by appreciation. (4) Market stability as shown by small angle of annual fluctuation. The most potent factors influencing stock values in any particular country are the saving and spend- ing powers of the people of that country. These, in turn, depend upon the political, financial and commercial conditions existing in that country. The resultant force of the various factors influencing the values of securities in any country is termed the "Market Influence" of that country. When we chart the average market values of the various classes of securities of the principal commercial countries, we will find that the main swings are roughly the same, but that in some stock markets, like those of England and France, the movements are more sen- sitive and orderly than in others. The angle of fluctuation is different in each country; being greater in countries like the United States, Argentina, and Japan, than in England, France, Belgium and Hol- land. These peculiarities of geographical stock movements are due to the idiosyncracies of the 43 "Market Influence" in each country concerned. On an understanding of these facts the investment theory known as geographical distribution of capital theory has been developed. *It is contended by the advocates of this theory that by means of invest- ment of capital by careful distribution in various selected countries in conformity with the principles of geographical distribution, the best investment results will be obtained with the minimum risks. GEOGRAPHICAL DISTRIBUTION RULES. The main principles governing the distribution of capital in foreign countries are as follows: (1) The realisable values of all stock exchange securities whose markets lie chiefly in any one country are under the dominant influence of the trading conditions in that country. This is a simple proposition as stated, and will be accepted by every experienced investor. Politi- cal, industrial, commercial, climatic,- sanitary and other conditions in any country may at any time become so abnormal as to distort and vary the "Market Influence" of the stock exchanges in that country and to depress or advance stock values out of all proportion to those ruling on the stock ex- changes in other countries. (2) Every investor who places his money ev- clusively in the investments of any one country speculates on the future trading profits of that country. Should an investor have reason to believe that Argentina or Brazil are destined within the next few years to maks such rapid developments in com- merce as to outstrip the progress made in the same period by any other country, he would, of course, find it best to invest his capital in sound invest- ments in Argentina and Brazil. By doing this, assuming his predictions are fulfilled, he would gain by receiving large income returns and by the ap- preciation in his capital value. (3) As the trade prosperity of each country dif- fers from that of all others, so the price movements of the stocks of each country differ from those in all other countries. The principal shares dealt in on the Hong Kong (*) See "Investment an Exact Science." By Henry Lowenfeld. 44 Stock Exchange, for instance, are industrial, ship- ping and dock yard, banking and insurance com- panies. Should the shipping trade be dull, or any accident interfere with the rubber, tea, rice, tapi- oca, tobacco, sugar, or fibre industries of the Orient, stocks of the industrial companies owning plantations in the affected areas, or otherwise in- terested, would be depressed. In other words "The Market Influence" of the Hong Kong Stock Ex- change would be lowered. (4) When an investor divides his capital equally among a number of stocks, every one of which is under a different trading influence, each of these divisions of his capital will constitute a distinct investment risk, and a true system of averaging in- vestment risks is thereby established. This is simply an application of well-established insurance principles to stock market investments. (5) The fluctuations in prices on the world's stock exchanges are never exactly in unison, and it is, therefore, impossible for geographically distributed investments to show simultaneous depreciation to the same extent. The history of stock movements show that the principal factors influencing stock values through- out the world are generally recognized in London, Paris and other European financial centers before they affect stock values on the local exchanges. Consequently, by watching the barometrical fluctua- tions of foreign stocks on an important European exchange ample warnings may be noticed of im- pending changes in stock values in the country con- cerned. When a stock investment in any particular coun- try has increased in value owing to favorable mar- ket influences, an investor is often able to realize on it and reinvest the proceeds in stocks in another country that are below their normal or intrinsic values, but which promise to soon advance. The judicious management of stock investments in foreign countries enables the investor, by the realization of one profit, to start a fund for the accu- mulation of further profits. The world-wide distribution of capital enables in- vestors to: 1. Realize an accrued profit in one or more geographical divisions. 4^ 2. Purchase, or average the depreciating invest- ments in another geographical division with profits earned in more prosperous countries. 3. Increase the capital of the whole investment list b}' balancing investments in different countries, and by pyramiding through the investment of profits and credits as they accrue. THE WORLD'S STOCK EXCHANGES. The enormous extension of corporate enterprises has necessitated the multiplication of stock ex- changes for the marketing of corporation securities. Consequently, we find a large number of exchanges in every important commercial country. These ex- changes are either general or special. That is to say, they deal in stocks generally like the London, Paris and New York stock exchanges, or they deal in stocks of particular classes of corporations such as mining and pastoral corporations. The principal stock exchanges, where all classses of securities are handled, are as follows: 1. BRITISH HOME EXCHANGES. London, Birmingham, Liverpool, Manchester, Leeds, Bradford, Cardiff, Edinburgh, Glasgow and Dublin. 2. BRITISH EMPIRE. Canada — Montreal, Toronto, and Vancouver. Australia — Sydney, Melbourne, Adelaide, Perth, Kalgoorlie, Hobart, Lauceston, Ballarat, New- castle, Brisbane, Maryborough, and Charters Towers. New Zealand — Christchurch, Wellington and Dunedin. Straits Settlements — Singapore. India — Calcutta, Bombay, Madras and Rangoon. 3. UNITED STATES. New York, Boston, Philadelphia, Pittsburg, Chicago, St. Louis, Kansas City, Denver, San Francisco, Los Angeles, Seattle, New Or- leans, and Baltimore. 4. CENTRAI AMERICA. Mexico City. 46 5. SOUTH AMERICA. Argentina — Buenos Ayres. Brazil — Rio de Janeiro, Sao Paulo. Chili — Santiago and Valparaiso. Peru — Lima. Uruguay — Montevideo. 6. AFRICA. Cape Colony — Cape Town and Port Elizabeth, Egypt — Cairo, Alexandria. Natal — Durban. Transvaal — Johannesburg, Pretoria. 7. ASIA. Japan — Tokio, Yokahama. China — Shanghai, Hong Kong. 8. EUROPE (southern). Austria — Vienna, Prague, Trieste. Bulgaria — Sofia. France — Paris, Lyons, Marseilles, Bordeaux, Lille. Greece — Athens. Italy — Milan, Genoa, Turin, Rome. Hungary — Buda-Pesth. Portugal — Lisbon. Roumania — Bucharest. Spain — Madrid, Barcelona. Servia — Belgrade. Turkey — Constantinople. 9. EUROPE (northern) Belgium — Brussels and Antwerp. Denmark — Copenhagen. Germany — Berlin, Hamburg, Frankfort, Bre- men, Breslau, Munich. Holland — Amsterdam and Rotterdam. Norway — Christiania. Russia — St. Petersburg, Warsaw, Moscow, Odessa. Sweden — Stockholm. Switzerland — Geneva, Basle, Berne. The modern systems of long-distance telephony, telegraphy, and cabling have made it possible for investors to trade on any of the above-named stock markets at will. Investors living in London, Paris and New York have, of course, some advantage over 47 those living in country towns like York, Winches- ter, or Carlisle, in England, and Springfield (Mass.), Spokane (Wash.), or Reno (Nev.), in the United States. Residents in the larger cities have fuller in- formation supplied them daily by their news ser- vices of the latest movements in international trade, and they can easily consult authorities upon finan- cial movements in any particular country. Never- theless, the affiliation of banks, bankers, stock brokers, and arbitragers doing international busi- nesses are so intimate that it is almost as easy for a resident of Carlisle (Eng.), Reno (Nev.), or Flor- ence (Italy), to deal in stocks on the Russian, Aus- tralian and Chinese stock exchanges as it is for them to trade on the stock exchanges in London, New York and Rome. British investors have had long experience in trading on foreign stock exchanges at long range, and German, Dutch and French investors are follow- ing their example at an increasing rate. This ten- dency of capitalists to look upon the whole world as an investment field, instead of the narrow limits of the locality in which they live, is rapidly increas- ing with the recognition of the theory of the geo- graphical distribution of investment risks and is a factor in the development of international trade. CONCLUSION. The table given above shows the geographical dis- tribution of British capital in foreign countries, and objectively represents the judgments of the best financial authorities in Europe regarding security values. The figures show the income returns of the cream of the world's corpora- tions securities. The high regard in which Ameri- can railroad securities are held is well demon- strated by the amount of British capital invested in them. Over £600,000,000 of English gold are in- vested at this moment in our railroads, and are re- turning an annual income of over £25,000,000. A large amount of British capital is also invested in our industrial and mining corporation securities, in addition, of course, to the capital invested in Ameri- can realty. This great foreign investment is a very important factor contributing to the stability of -A^merican security prices. It is placed on long terms, 48 and is not scared out of the market by seasonal ripples. It also contributes to the extension of our security markets by setting a large amount of local capital free for enterprises of a speculative charac- ter that are the usual forerunners of more substan- tial investments. The foreign investments of capital in other Euro- pean countries are not so good as the British, but they are similarly distributed. Europeans, generally, are showing a growing inclination to patronize for- eign in addition to home investments. The invest- ing in securities is undergoing the same interna- tionalizing as commerce. The effects of this will be noticed in the improvement in international trade, credit, banking, and political comity. The finan- cial effects will be observed in the wider field for the placing of securities in new corporations, in simplifying corporation finance and, consequently, in the increased facilities afforded for undertaking important works of an industrial and economic nature. An appreciation of these facts will show the ne- cessity for each country to so improve its corpora- tion laws and stock exchange services as to raise as high as possible its "Exchange Influence," so that the securities dealt in on its exchanges will become increasingly attractive to foreign investors. The "Exchange Influence" of the New York Stock Exchange at present ranks very high, as is indicated by the large amount of European capital invested in its securities. The influx of European capital to the United States that has set in since the decline in our security prices in February is indicative of the 'optimistic views of our imme- diate industrial outlook held in Europe. We should bear in mind, however, that the European investor has the whole world as a field for his investments, and endeavor to conserve the high repute of our "Exchange Influence." 49 REPORT ON A NEW METHOD OF COMPIL- ING INDEX NUMBERS ON THE SAUER- BECK SELECTION OF COMMODITIES MODIFIED WITH THE DUN SYS- TEM OF WEIGHTING. By PROF. J. PEASE NORTON. Prepared for Thomas Gibson. March 17, 1910. Two motives have been responsible for the index numbers of the past and present, namely, the scien- tific motive to measure the depreciation or apprecia- tion ai the standard of value in terms of commodities, and the political motive to prove that some class or classes in the population are injured by changes which have taken place in prices during a period under consideration. These purposes require totally different methods in compilation of the statistics of prices, inasmuch as in relative betterment studies the conditions must be adjusted to the special problems under investi- gation. To illustrate the effects of general rising prices on the comfort of artisans, having $500.00 net family income, in cities, we must deal with budget distribution of expenditures, retail prices in the neighborhood and income statistics. Since the ex- penditures for food, clothing, shelter and luxuries greatly change in percentage of total income with the given income, it necessarily follows that a uni- versal index number for measuring social better- ment is impossible. Such problems must be ap- proximated as separate studies. On the other hand, the scientific problem of de- termining the fluctuations of average prices may be approached from a broader standpoint. We may imagine whether prices in the average are uniform or are moving in a general way to higher or lower levels. To obtain an index of prices, we need to know the prices of commodities which are repre- sentative. The characteristics of representative commodities are several, principally large volume of transactions, wide and free markets, accurate grading, primary values, recorded quotations for years past, statistical 50 knowledge of the importance of the commodity in the national consumption and production, and con- tinuous quotations during all months of the year. If your problem is to measure the stability of the standard of value it is plain that staple representative commodities will reflect changes more quickly and accurately, especially when the volume of trans- actions in these commodities is far more than fifty per cent of the total, than the non-competitive com modities which are sold on a monopoly basis in each retail store. Further, representative commo- dities are primary in value and the raw material is a part of the price of derivative commodities. Index numbers such as those of the Bureau of Labor are based on commodities of primary and derivative value, the latter in turn greatly overweighting cer- tain industries. In the Aldrich investigations, by quoting prices on twenty grades of pocket knives, which had fallen in price the entire average was in- fluenced and campaign material was manufactured to show the truth of the prevailing program. Dun's series of index numbers was based on a large number of commodities, but on account of the fact that the methods of compilation were kept secret, the problem of continuing the numbers has been difiicult. But a method of reproducing Dun's figures is shown in subsequent pages. The signal advantage in bringing the statistics down to date lies in the possibilities of comparison over a long range of years. The index numbers were stopped at a time when they were showing results which ap- parently were unpopular with certain classes. The last number was May, 1907. A small number of representative commodities form a more suitable measure of the standard than a larger number of less carefully selected articles, just as in the stock market Gibson's average of 23 railroad stocks is a better index of the stock market than the average of three or four hundred issues which have narrow markets. The system, once adopted, should be continued without change. To select the commodities of primary value, the use of a system in high repute abroad is excellent policy, since a tried selection is assured. After care- ful consideration, Sauerbeck's selection of primary commodities has met with the general approval of 51 scientists with several minor criticisms of some of the commodities in the light of recent developments, such as for instance, indigo, now a relatively unim- portant commodity. Such articles may be omitted from a new series for American prices. To apply Sauerbeck's selection of commodities with adapta- tions to American prices is the ideal solution. The scientific value of the Gibson series of index numbers, therefore, based on the Sauerbeck selection and the Dun weighting, becomes doubly important, (a) because the Gibson numbers may be compared with Dun's, which go back to I860, (b) because the selection of commodities theoretically commands the highest scientific approval. The Sauerback series of index numbers is based on the following commodities, forty-five in number. COMMODITIES USED IN SAUERBECK'S INDEX NUMERS. 1. Wheat, English Gazette 2. Wheat, American 3. Flour, town-made white 4. Barley, English Gazette 5. Oats 6. Maize, American mixed 7. Potatoes, good English 8. Rice, Rangoon cargoes 9. Beef, Prime by the carcase 10. Beef, Middling 11. Mutton, Prime 12. Mutton, Middling 13. Pork, average (large and small) 14. Bacon, Waterford 15. Butter, Friesland, finest 16A. Sugar, West Indian refining 16B Sugar, beet, German, 88 p.c. f.o.b. 17. Sugar, Java, floating cargoes 18A. Coffee, Ceylon plantations, low middling 18B. Coffee, Rio, good 19A. Tea, Congon common igB. Tea, average import price 20A. Iron, Scotch pig 20B. Iron, Cleveland pig 21. Iron Bars, common 22. Copper, Chile bars 23. Tin, Straits 24. Lead, English pig 52 2$. Coals, Wallsend Hetton in London 26. Coals, average export price 27. Cotton, middling- American 28. Cotton, fair Dhollerah 29A. Flax, St. Petersburg 29B. Flax, Russian av. import 30A. Hemp, Manilla fair roping 30B. Hemp, St. Petersburg clean 31. Jute, good medium 32A. Wool, merino P. Phill., av. fleece 32B. Wool, Merino Adelaide, av. fleece 33. Wool, English, Lincoln half-hogs 34. Silk. Tsatlee 35A. Hides, River Plata, dry 35. B. Hides, River Plata, salted 3SC. Hides, av-. import 36A. Leather, crop hides 36B. Leather, average import 37A. Tallow, St. Petersburg Y. C 37B. Tallow, town 38. Oil, palm 39. Oil, olive 40A. Oil, linseed 40B. Seeds, linseed 41. Petroleum, refined 42. Soda, crystals 43. Nitrate of soda 44. Indigo, Bengal good consuming 45A. Timber, hewn, average import 4SB. Timber, sawn or split To understand the principles upon which Sauer- beck's selection is based, it is sufficient to say that the commodities represent the leading articles oi primary value for the English people. The groups are Vegetable Foods, Animal Foods, Textiles. Min- erals and other materials. The following table dis- closes the weighting of the groups in the final average. Articles as Group. numbered. Vegetable Foods . .1-8 and 16-19 Animal Foods. . . . g-15 Textiles 27-34 Minerals .... 20-26 Other materials. . 35-45 45 53 No. of articles. P. C. 12 26.7 7 15.6 8 17.8 7 15.6 II 24.4 The two groups, Vegetable and Animal Foods, receive a weighting of 42.3%, clothing 17.8%, min- erals 15.6% and other materials 24.4%. The following table is a classification of Sauer- beck's commodities by groups: VEGETABLE FOODS. 1. Wheat, English 1 2. Wheat, American I 3. Flour 4. Barley 5. Oats 6. Maize 7. Potatoes 8. Rice 16. Sugar I 17. Sugar 1 18. Coffee 19. Tea ANIMAL FOODS. 9. Beef 10. Beef, Middling 11. Mutton, prime 12. Mutton, Middling 13. Pork 14. Bacon 15. Butter TEXTILES. 27. Cotton, middling American! 28. Cotton, fair Dhollerah ' 29. Flax 30. Hemp 31- Jute 32. Wool 33. Wool 34. Silks MINERALS. 20. Iron, pig 21. Iron, bars 22. Copper 23. Tin 24. Lead 25. Coals, London 26. Coals, average export price OTHER MATERIALS. 35. Hides 36. Leather 54 37- Tallow 38. Oil, palm 39. Oil, olive 40. Oil (linseed) 41. Petroleum 42. Soda, crystal. 43- Nitrate of Soda 44. Indigo 45. Timber. The Department of Agriculture estimates the value of the products of the farms at $7,848,000,000 for 1907. To show the importance of the commodities in this list, the principal products of the farm are entered below with the estimated value for 1907. In millions. Wheat $554 Barley 102 Oats 335 Corn 1,337 Potatoes 184 Cotton 701 $3.-'i3 In other words, the above six articles represent more than 40% of the total products of the farms. Again in the case of minerals, the Geological Sur- vey makes the total value of 1907 about $2,069 mil- lions. The following principal articles in Sauer- beck's classification amount to more than 65% of the total: Iron $530 Copper 174 Lead 39 Coal 615 $i,3S8 The Bureau of the Census in 1905 estimated the total net manufactures at $9,821 millions in value, of which the subdivisions were roughly: Products of the Farm . . .44% Products of the Mines . .28% Products of the Forest . . 8% Other materials 20% Dun's system of index numbers was classified into groups as follows: Breadstuffs, Dairy and ss Garden, Other Food, Meats, Textiles, Minerals and Miscellaneous commodities. To discover the weight- ing of the groups, I have averaged the numbers for ten years 1890-1899, with the following results: Sauerbeck's weight. Animal food 10% 15.6 Other than animal food 40% 26.7 Textiles 18% 17.8 Minerals 16% 15.6 Miscellaneous 16% 24.4 Dun's system underweighted meat food and over- weighted other foods, and miscellaneous commodi- ties are underweighted, in comparison with Sauer- beck. The following table roughly indicates the import- ance of the products of the United States, when classified as below. The statistics are estimates and probably inaccurate to a considerable extent. 1907 190S Av. P. C as raw. as manuf'd. of total. Farms 7,848 4,281 60% ]\Iines 2,069 2.731 24% Forests 667 805 7% Others .... 2,004 9% 10,584 9,821 100% Sauerbeck's numbers are based on articles which may be classified as follows: ' Articles. P. C. Farms 32 72 Mines 10 22 Forests . . ... 2 4 Others i 2 100 For the United States, Sauerbeck's figures weight the products of the farms (the total primary and derivative products) at 72%, mines 22%, forests 4%, and others 2%. For America, it would appear that we should reduce the articles of the farms to a limited extent and increase imported articles and forests, but only slightly. In fact, if we shall sub- stitute for several unimportant commodities in Sauer- beck's list other articles of greater importance in 56 the United States, bringing the total number up to fifty, the selections used by Sauerbeck practically will be unchanged, although the articles will be adapted to American conditions. The following articles in Sauerbeck's list may be dropped to advantage: Flax Hemp Tin Tallow Palm oil Olive oil Soda crystals Nitrate of soda Indigo This reduces Sauerbeck's list to 36 commodities. This list may be taken as important commodities to which fourteen should be added to bring the number up to 50. Forbes has suggested substituting for Sauerbeck's list as follows: VEGETABLE FOOD. 16. 17. 18. 19. Wheat, English Gazette Wheat, American Flour, town-made white Barley. English Gazette Oats, English Maize, English mixed Potatoes, good English Rice, Rangoon cargoes r Sugar, B. W. Indian re- 4 fining I Sugar, beet, 88% f. o. b. Sugar, Java, floating car- goes Coffee, Ceylon, low mid- dling Coffee, Rio, good Tea, common congon Tea, av. import price 12 weights Wheat contract cash. Wheat flour, spring patents Wheat flour, winter patents Barley, by sample Oats, cash Corn No. 2, cash Corn meal, fine white Corn meal, fine yellow Potatoes Burbank Rye No. 2 Sugar 89 deg. fair refining Sugar 96 deg. centrifugal Coffee Rio, No. 7 Tea, Formosa fine 14 weights ANIMAL FOOD. 9. Beef, prime 10. Beef, middling 11. Mutton, prime 12. Mutton, middling 13. Pork, av. large and small 14. Bacon, Waterford 15. Butter, Friesland fine to finest 7 weights Beef, steers Beef, fresh native sides Beef, salt Mutton, sheep Mutton, dressed Pork, hogs Baoon Butter 8 weights 57 TEXTILES. Cotton, Cotton, Cotton, yarns, cones 22 /I 27. Cotton, Middling uplands Cotton, Middling uplands 28. Cotton, fair Dhollerah Cotton, yarns, cones 10 /I 29A. Flax, St. Petersburg besc 29B. Flax, av. import 30A. Hemp, Manila fair roping 30B. Hemp, St. Petersburg clean Jute, raw 31. Jute, good medium Wool, Ohio fine fleece 32A. Wool, merino, Port Phil- lip av. 32B. Wool, merino, Adelaide av. Wool, Ohio, medium fleece 33. Wool, hnglish Lincoln Df Worsted yarns 2.40 Austra- hogs Hans Worsted Yarns 2.40s Silk, Italian 34. Silk, Tsatlee Silk Japan filatures 8 weights 10 weights MINERALS. 20 A. Iron, Scotch bar Pig iron 20B. Iron, Cleveland pig 21. Iron, bars 22. Copper, Chile bars Bar iron, Pittsburg best refined Copper, ingot, lake Copper, sheet, hot-rolled 23. Tin, Straits Tin, pig 24. Lead, English pig Lead, pig 25. Coal, Wallsend Coal, anthracite 26. Coal, av. export price Coal, bituminous 7 weights 8 weights OTHER MATERIALS. 35A. Hides, "River Plata, dry Hides, green salted B. Hides, River Plata, Salted Leather, sole hemlock, B. A. C. Hides, av. import 36A. Leather, crop hides 30 /45 Leather, sole, oak yards B. Leather, av. import Tallow 37A. Tallow, St. Petersburg Y.C. Tallow 37B. Tallow, town Oil, Cotton-seed 38. Oil, Palm 39. Oil, Olive Oil, Linseed 40A. Oil, Linseed Seeds, Flaxseed No. 1 B. Seeds, Linseed Petroleum, crude 41. Petroleum Petroleum, refined 42. Soda, crystals Manila rope 43. Nitrate of soda Rubber, Para Island 44. Indigo, Bengal good Tiratrer, snruce 45A. Timber, hewn, av. import Timber, white oak, plain B. Timber, hewn or split. Timber, yellow pine Tar Wood Alcohol n weights 16 weights 58 RECAPITULATION. Vegetable Foods Animal Food Textiles Minerals Other materials Sauerbeck Forbes 12 14 7 8 8 10 7 8 II i6 45 S6 After careful consideration of the various problems involved, such as importance of article, continuous quotations, group weighting, etc., the following fifty commodities seemed the more desirable. VEGETABLE FOOD. I. — Wheat contract cash 2. — Wheat flour, spring patents 3.- — Wheat flour, winter patents 4. — Barley, by sanjple 5. — Oats, cash 6. — Corn, No. 2, cash 7. — Cornmeal, fine yellow 8.— Rye No. 2 9. — Potatoes 10. — Sugar, 89° fair refining II. — Sugar, g6° centrifugal 12. — Coffee, Rio, No. 7 13. — Tea, Formosa fine 13 weights. ANIMAL FOOD. 14. — Beef, steers 15. — Beef, fresh native sides 16. — Beef, salt 17. — Mutton, sheep 18. — Mutton, dressed 19. — Pork, hogs 20. — Bacon 21. — Hams 22. — Butter Articles 9, total food 22. 59 TEXTILES. 23. — Cotton, middling uplands 24. — Cotton, yarns, cones lo/l 25.— Cotton, yarns, 22/1 26. — Jute, raw 27. — Wool, Ohio fine fleece 28. — Wool, Ohio, medium 29. — Worsted yarns, 2.40 Australians 30. — Silk Italian 31. — Silk, Japan, filatures 9 Articles. MINERALS. 32. — Pig Iron 33 34 35 36, Z7 38. 39 40 Bar iron, Pittsburg best refined , — Cement , — Copper, ingot, lake — Copper, sheet, hot rolled — Lead, pig — Coal, anthracite — Coal, bituminous. East — Coal, bituminous, West 9 Articles. OTHER MATERIALS. 41. — Hides, green salted 42. — Leather, sole, hemlock, B. A. 43. — Oil, cottonseed 44. — Oil, linseed 45. — Petroleum, crude 46. — Petroleum, refined 47. — Rubber, Para Island 48. — Timber, spruce 49. — Timber, yellow pine 50. — Paper. 10 Articles. 60 The following table discloses the nature of the selection by products of farms, mines and forests. Number of Per Articles. Cent. Products of Farms of U. S 27 54 Import 9 18 Total 36 72 Products of Forests 3 6 Products of Mines 11 22 SO 100 In order that the exact changes in the Sauerbeck list may be recorded, the following table has been prepared to show the corresponding numbers, sub- stitutions, omissions, etc. The Sauerbeck list of 45 articles has been increased to 50 commodities. VEGETABLE FOODS. SAUERBECK. NEW GIBSON. 1. Wheat, English Gazette 1. Wheat, contract price 2. Wheat, American S 2. Wheat flour, spring patents 3. Flour, town made, white 3. Wheat flour, winter patents 4. Barley, English Gazette 4. Barley, by sample 5. Oats, English ^ 5. Oats, cash 6. Maize, English mixed 6. Corn, No. 2, cash A 7. Corn meal, fine yellow 7. Potatoes, good English 9. Potatoes, Burbank 8. Rice, Rangoon cargoes S 8. Rye, No. 2 16. Sugar, 2 grades 10. Sugar, 89 deg. fair refining 17. Sugar, Java, f. c. 11. Sugar, 96 deg., centrifugal 18. Coffee, 2 grades 12. Coffee, Rio, No. 7 19. Tea, 2 grades 13. Tea, Formosa fine ANIMAL FOOD. 9. Beef, prime 14. Beef, steers 10. Beef, middling 15. Beef, fresh native sides A 16. Beef, salt 11. Mutton, prime 17. Mutton, sheep 12. Mutton, middling 18. Mutton, dressed 13. Pork, av. large and small 19. Pork, hogs 14. Bacon, Waterford 20. Bacon A 21. Hams 15. Butter, Friesland fine and 22. Butter finest 61 TEXTILES. 27. Cotton, middling uplands 28. Cotton, fair Dhollerah 29. Flax, 2 grades 30. Hemp, 2 grades 31. Jute, good medium 32. Wool, 2 grades 33. Wool, English Lincoln 34. Silk, Tsatlee 20. Iron, 2 grades 21. Iron, bars 23. Cotton, middling uplands 24. Cotton, yarns, cones 10/1 A 25. Cotton, yarns, cones 22 /I Omitted Omitted 26. Jute, raw 27. Wool, Ohio, fine fleece 28. Wool, Ohio, medium A 29. Worsted yarns, 2.40 Aus- tralians 30. Silk, Italian A 31. Silk, Japan filatures MINERALS. 22. Copper, Chile bars 23. Tin, Straits 24. Lead, English pig 25. Coal, Wallsend 26. Coal, av. export price 32. Pig iron 33. Bar-iron, Pittsburg best re^ fined. A 34. Cement 35. Copper, ingot, Lake A 36. Copper, sheet, hot-rolled Omitted 37. Lead, pig 38. Coal, anthracite 39. Coal, bituminous. East A 40. Coal, bituminous, West 35. OTHER MATERIALS. Hides, 3 grades 41. Hides, green salted 36. Leather, 2 grades 42. Leather, sole, hemlock B. A. 37. Tallow Omitted 38. Oil, Palm Omitted 39. Oil, Olive Omitted A 43. Oil, Cottonseed 40. Oil, Linseed 44. Oil, Linseed A 45. Petroleum, crude 41. Petroleum 46. Petroleum, refined 42. Soda crystals Omitted 43. Nitrate of soda Omitted 44. Indigo, Bengal blue Omitted 47. Rubber, Para Island 45. Timber, 2 grades 48. Timber, spruce A 49. Timber, yellow pine A SO. Paper In summary, the following changes have been made in addition to the necessary adaptations to American prices. 62 SAUERBECK. NEW GIBSON. 2. Wheat, American Substituted by 2. Wheat flour, spring paten Added 7. Corn meal, fine yellow 8. Rice, Rangoon cargoes Substituted by 8. Rye, No. 2 Added 16. Beef, salt Added 21. Hams 28. Cotton, fair Dhollerah Substituted by 24. Cotton yarns, cone 10/1 Added 25. Cotton yarns, " 22 /! 29. Flax, 2 grades Omitted 30. Hemp, 2 grades Omitted Added 29. Worsted yarns, 2.40 Aus- tralians Added 31. Silk, Japan, filatures Added 34. Cement Added 36. Copper, sheet, hot rolled 23. Tin, Straits Omitted Added 40. Coal, bituminous West 37. Tallow Omitted 38. Oil, Palm Omitted 39. Oil, Olive Omitted Added 43. Oil, cotton-seed Added 45. Petroleum, crude 42. 43. 44. Soda crystals Nitrate of soda Indigo, Ben- gal blue Omitted Omitted Omitted Added 47. Rubber, Para Island Added 49. Timber, yellow pine Added 50. Paper IN RECAPITULATION. Omissions, 9 Additions, 14 Substitutions, 3 To devise a method, which will continue the Dun series of index numbers, requires a selection of rep- resentative commodities to represent the groups and the proper weighting of the groups. No at- tempt has been made to reproduce the Dun series from the eight groups, inasmuch as better results are obtained by the following method of weighting the assembled groups: All Foods 5°%. Textiles l8%, Minerals i6%, other commodities i6%. This is the system of weights used in the prepara- tion of the Dun series. Basing the numbers on the 63 prices of the fifty commodities selected and using the Dun weights, the Gibson series is as follows: Jan. 1907 106.55 Feb. 1907 . . ... 108.01 Mar. 1907 . 109.38 Apr. 1907 110.56 May 1907 . . . . 113.41 During these months we are able to make com- parisons with actual Dun numbers. Gibson Old Dun Numbers. Numbers. Jan., 1907 106.55 107.26 Feb., 1907 108.01 107-37 March, 1907 109.38 109.91 April, 1907 110.56 (107.90) May, 1907 11341 (109.00) Average differences first three 0.63, or about one- half of 1%. The Gibson series is slightly more sensitive than the old Dun numbers, because there, are more primary values in the former. Dun's, with a large number of derivative values, moves less rapidly. No comparison is made with Dun's for April and May, inasmuch as it is probable the Dun calculator changed his system of weighting. Now to see how the method of reproducing the riumbers will work over many years and at the extreme of low prices, I have calculated the Gib- son numbers for 1896. Gibson. Dun. 1896 72.22 74.32 We note that the Gibson numbers are slightly more sensitive, falling slightly lower than the Dun number. To bring the Gibson numbers down to date, I 64 have calculated the figures until December, 1908. The numbers are as follows: 1907. Jan '106.55 February 108.01 March 109.38 April 110.56 May 113.41 June 113-39 July 111.77 August 110.22 September . . . .112.35 October . . . .111.97 November .... 106.23 December .... 103.79 1908. Jan 105.00 February .... 102.83 March . . April . . May . . June . . . July . . . August . . September October . November December . 103.88 . 105.38 .105.29 . 106.20 . 107.30 . 106.66 . 106.27 . 105.97 .105.51 . 104.72 In conclusion it would appear that the above system combines the principles of the Sauerbeck sys- tem in selection and the Dun system in weighting, and reproduces the Dun series within 2% on the average. Further, the Gibson series is more sensi- tive, and on the whole more representative of the commodity markets. Finally, it is probable that the addition of fifty more commodities, bringing the total number up to one hundred, would reduce the percentage of difference to a considerable extent. The numbers would become less sensitive and the cost of compiling the numbers would be increased to a considerable extent. As we increase the num- ber of commodities, we unconsciously overweight by derivative values in the selection. In the following selection I have shown the method of compiling the index number for Jan. l, 1907, together with a description of the quotations. 65 4) _> oj CJ a "u 'oJ Oh P^ o 0^ bo a) § cu o > 0^ < 00 o id 00 o ■* 00 m m ■<4- vo 00 Tf N to d d 8, o M 00 IN o d 4 00 to ,««»WHS"«»» 'OtOtOCO'*'*"*'*'*>"u,,OtNtN N ^ 0, ^^«! oBoooooq«««M,-,u5«,.r,.ri ^•^'^'SS I >^i >^'-l -i -I a ^H ,.5 .so I a c/i ^1 fU CO >. >^ -3 (O a> 2 3 H a ^' •o l^' 3 («" H •*-» J2 uT bo "« 'rt tH (i "!= •s'^ ^S -M s- ^,,1 M -ss- §o ^ 60 C a 3 J3 CJ O X IB W -M rt ID V CJ J3 3 > •9 |H 1^ 1^ .aH ^« ^ 66 00 o 00 d 00 ^ t-t 0^ v5 o\ CI 00 c^ CO CO ■* O o d d d fO Tl- -^ Tf \o vo vo ^ vo MD^O OOOOOiovO OOOOO cofOf^foqqq qq ©oQ qq dddddddodd o -•a . 3 oH oH U 0-3 ^■3 o j"^ 1, " n) " c '^ -a -5^ ^11 oU o V U Pi d^ O - ^^ U bo C c ^ C3 >i O P < *^ o in , O t- ^ 5 O p t-t +^ Ot/3 5 li S • " >. c bo "r 5 .•= = E^ ""!> P _ ho C^ bit/) u wi u CO -' o, ui tn bo (u dj «J >, c " M tl 'O 1— > I.- "o «£ S bo (U r^ t/) VO 67 > . q 00 ^0 pi u O . > o\ o rr> tN* 1 O ■* W m CO r^ 1 IT) ^1 bo f*l rt ts. O > d < o d 6 00 00 VO lO o o 01 -I o o r^ !<. t<. t<. \0 VOO 'O ■-»■' "Tk^ "^^ r^^ •OOOO OiOQiOO 1-..-.5-. qqooo vosdvdo do" odd OOidO vot^t^t^t^ •^■^ro-^ qqqoq inioinuS ddddd Q O O < _ 1- o N p C m o ° d °.5 •si I OJ Ix u te o « o w "a _- c.S O S •— . 3 *-* — .0 a - o tn -a ""* o aj ^ 1-, > o c 5 (J - u 2 F o «*^- rt m 3 :3 H -2 'u ^'■ H i- c >, >< rt S:Q e ^ >^ rH tn ^ 4J > 2; A ^ C 12 u .^ U) — ' «+-" >, u 4/ nl V «j-o a. pa 68 d l-l o 00 "^ to lO m 00 00 CO fO In. ro o o tN LO O lO O 00 vo in 8 lO Q lO »q 00 tN. IT) IT) in m in o o d d §99 6 6 6 o O lO in lO OJ o o o o o tN tN !N o o o 00 00 d\ d\ ^ -f ^ -r -^ ■* Tt- Tt ■ 3> 3d 005: 3 S."* OQ o d ■O 'O \d MD "O VO ^ ^ ^ "O CO «'' c^ c^- CO l-( M M 00000 LO 10 Ul CO ro ^ inoO CO Tj- Lovq CO •-WcWD r+Oi-W •4« «N. 'rt >; Q o C/5 o o o < ^.H rt J3 I" ho 10 o o o to r^oo i-i in COMD U H 0. 4J U 3 JO t"* *tn . izi CO m 3 !>> g !=^ d '3) ■a l3 "rt •a a w V o3 -□ 3 3 ■^ H >^ H OJ 3 •a c o s rt" o a B rt 3 o C S o & Pi 3 1 1 « C/2 -4-. in ,- ^ 3"^ •a o c ^ 14 n 00 d o H 71 The foregoing shows the calculation to obtain the weighting for goods. The statistics are taken from Bulletin of the Department of Labor, March, 1908. The above tabulation shows the amount of work in- volved in making up one weighting for meat and other foods, when quotations must be collected from the original records. The following weightings for textiles, minerals and other commodities, simply describe the quota- tions and give the relative prices. TEXTILES. 23. — Cotton, middling, uplands .... 139.9 24. — Cotton, yarns, cones lo-i 136.8 25. — Cotton, yarns, cones 22-1 127.0 26. — Jute, raw 237.1 27. — Wool, Ohio fine fleece 125.1 28. — Wool, Ohio, medium 115.5 29. — Worsted yarns, 2.40 Australians . . . 127.7 30. — Silk, Italian 125.6 31. — Silk, Japan filatures . . . 127.3 1264.0 MINERALS. 32. — Pig iron 190.3 33. — Bar-iron, Pittsburg best refined . . 132. i 34. — Cement 94.9 35.— Copper, ingot, lake 193.5 36. — Copper, sheet, hot rolled . . 174-8 37- — Lead, pig 165.4 38. — Coal, anthracite 132.7 39. — Coal, bituminous. East 116.7 40. — Coal, bituminous, Pittsburg . . . . 124.4 13248 72 41 42, 43 44 45 46. 47. 48. 49. SO. OTHER MATERIALS. -Hides, green salted -Leather, sole, hemlock, B. A. . . -Oil, cotton seed -Oil, linseed -Petroleum, crude -Petroleum, refined -Rubber, Para Island . . -Timber, spruce .... -Timber, yellow pine -Paper Foods . Textiles Minerals Other . . 2422.1 1264.0 .1324.8 . 1408.7 Multipliers, 1-9159 1.6860 1.4987 1.3488 173-6 135-4 133-0 90.4 173.6 130.9 147-4 174.2 165.2 85.0 1408.7 Weighted Product. 46.4050 21.3010 19-8548 19.0005 Gibson Index Number . 106.5613 Dun's Index Number 107.2640 (For same month.) Difference 000.7027 The multipliers are obtained from the formula W.xD. for each grouping, in which W=: the Dun weighting, 0.50 for foods, 0.18 for textiles, 0.16 for minerals and 0.16 for other commodities, D=: aver- age 1890-99, Dun numbers, namely 0.843, and C= number of commodities in the group. 73 THE INVESTMENT VALUE OF U. S. STEEL. By CARL SNYDER. Author of "American Railways as Investments." March 22, 1910. Anyone who submits the reports of the U. S. Steel Corporation to a fairly careful scrutiny gains a rather different notion of the position of that com- pany than from the rainbow calculations which ap- pear with such unflagging and reassuring regularity in the financial journals. An instance in point is the searching and illuminative review of the Steel Company's affairs prepared by Mr. Garet Garrett for Mr. Gibson last year and published as a special letter in his service on October 7, 1909. In particular one gains a distrust of some of the company's figures, and this is very apt to lead to un- favorable conclusions. A few illustrations will suffice. The "'gross volume" of business for last year is stated in the annual report which has just appeared at $646,000,000. If these figures have any meaning, they would appear to correspond to the "gross sales" or, "gross income" of ordinary reports. The net earnings, after "ordinary maintenance and repairs" were $131,000,000. This, in ordinary parlance, would mean an "operating ratio" of 80%, which would im- ply either a very low margin of profit in the Steel Company's business, or else very low efficiency in operation. Yet neither conclusion would be true. Again, "ordinary maintenance" is stated at $35,- 000,000, which would mean only 5% of gross in- come. The ordinary percentage for maintenance on a well managed railway is 25 or 30% of the gross income, and it cannot be vastly less for a corporation of such diversified character as U. S. Steel. A rail- way accountant would conclude from this figure of 5% of gross that maintenance was being shamefully neglected. Even if we add to this $35,000,000, given above, the entire sum set aside during the year for new construction, renewal and sinking funds and the 74 like, we should still have only $46,000,000 more, which would only bring maintenance and deprecia- tion up to about 12% of the gross income. These would not be reassuring figures. As a matter of fact it is perfectly clear from operating results that U. S. Steel is conducted with a very high degree of efficiency and a quite excep- tional grade of business talent. It is also clearly demonstrable from the steady growth in the pro- ductive capacity of the corporation since its organi- zation that maintenance and depreciation charges, so far from having been shamefully neglected have been, though hardly so lavish as usually represented, at least very liberal. And it is a matter of general, and verifiable impression that the business of the company is not conducted on a low margin of profit. Evidently, then, the figures are misleading, and this is clear when actual production is compared with gross sales. The shipments of all kinds of products to customers outside of the organization for 1909 were: domestic, 10,500,000 tons; export, 1,000,000 tons, or 11,500,000 tons in all. If the figure for "volume of business" be divided by this sum we should have an average value of $57 per ton. In point of fact it seems improbable that the average sale price was much over $35 or $40 per ton. If we take the higher figure and compare this with average profits of about $14 per ton it will be seen that the actual gross sales or income was probably nearer $450,000,000 than $646,000,000, and that the actual "operating ratio" was probably much under 70%. We still have the mystery of the maintenance ac- count. With the addition of about $100,000,000 to its actual capital the Steel Corporation has been able to increase its capacity at least 50% or more since its formation in 1901. This $100,000,000 repre- sents only about 6% of the original nominal capi- talization. Either then the original capitalization had an extremely remote relation to the actual value of the properties, or the outlays in maintenance, renewal, new construction, etc., have been sufficient fully to maintain and increase the company's ca- pacity. Even if we estimate that one-half of the original capitalization, or all the common and nearly all the preferred stock, was clear water, we may 75 still conclude for the latter interpretation of the figures. Maintenance has been adequate, and more than adequate. But the logic of this conclusion is that the actual profits of the company are much higher than the rough estimate made above, in other words, that they are very much in excess of 30% of the actual selling value of the commodities manufac- tured. As the item of maintenance is basic to any esti- mate of the real earnings of any company, it will be worth while to compute what the Steel Company's maintenance may have averaged in the last three years. In the remarkable, not to say enthusiastic inven- tory of the Steel Company's assets, published a year or two ago by Mr. Munsey in his magazine, evi- dently with the co-operation and presumably with the most cordial approval of the Steel Company's management, the manufacturing properties of the corporation were entered' at about $400,000,000 and the transportation properties at about $160,000,000. Probably the coal, coke, limestone and gas proper- ties, even after deducting idle lands, would add $100,000,000 or more to this, giving a round figure of $650,000,000 for the active plants of the company. These figures lack painfully that exactitude dear to the truly calculating mind. Mr. Munsey's experience as a manufacturer in various lines enabled him to state the values with much more precision, even to the last dollar, as for the ore properties, $738,866,017. Doubtless like the discriminating readers of Mun- sey's Magazine, I was always deeply impressed with the final $866,017 of this imposing figure, particularly as the "value" of these properties might easily, from a good year to a bad, or from a conservative mind to that of a connoisseur in pyramids vary by a trifle of perhaps $250,000,000. As already noted, the entire sum devoted last year to "ordinary" and "extraordinary" maintenance, re- placements and new constructions, counting into this the sinking fund appropriations, was $81,000,000. This is about VlYiJo of the above valuation of plant, surely not a high figure. Supposing that Sj4% of the esti- mated replacement value of the properties was suf- ficient for "ordinary maintenance and repairs," this 1(i would mean only about 7% for total depreciation charges of all kinds, including in this latter figure the appropriations for the Gary plant and all other "new construction." The customary depreciation charges of a conserv- ative industrial company are around 10% of the replacement value of the plant. Taking the steady increase in capacity as prima facie evidence that maintenance has been more than adequate we may conclude, therefore, that the valuation quoted above was absurd and that the actual values were prob- ably under $500,000,000 rather than above. On this valuation, the $46,000,000 set aside from earnings last year would represent somewhere near the customary 10% for depreciation. How does this figure compare with previous years? It was only about $22,000,000 in 1908, the post-panic year. It was nearly $87,000,000 in the record year of 1907. The average for the three years would be above $50,000,000 per annum, and we may take it as evi- dent that this is an adequate figure. It is probably not very much more. It is generally understood that when the Gary plant is in full operation some of the older properties will be "scrapped," so that the net increase in productive capacity will not be so large as is assumed in times of great Wall Street activity. We are now in a position to make some sort of an estimate of the actual percentage earned on the common and preferred stocks of the company in recent years. The present interest charges are a little less than $25,000,000 and have increased but little in a number of years. If to this we add the $50,000,000 above estimated as adequate depreciation charges, we have a basic figure of $75,000,000 which must be met by net earnings, over and above "ordi- nary maintenance and repairs." In the last five years the lowest net earnings shown by the company were $91,000,000 in 1908; the highest $160,000,000 in the previous year. The average for these five years was about $130,- 000,000. For the last four years, including two "boom" years, with production practically at maxi- mum, one panic, and one year of very rapid recov- ery, the average was $134,000,000. This means suf- ficient for interest charges, adequate maintenance and depreciation, the full dividend on the $360,000,000 n of preferred stock, and 6 or 7% additional for the common. The net earnings last year, $131,000,000, were just about the average. For the present year, unless we should experience an unexpected setback, they promise to run probably beyond the record year of 1907. Beyond that it is not given to many men to look with excessive perspicuity. We may take it then that Steel common may, this year, actually "show" perhaps 12% over adequate depreciation charges, or about the same as in 1907, How far does this justify the expected increase of the dividend to a 5% basis in April? If an average of about $85,000,000 a year repre- sents adequate "ordinary" maintenance and adequate depreciation charges, and the company pursued a con- sistent dollar for dividend, dollar for improvement policy, it is obvious that to pay $25,000,000 on the preferred and another $25,000,000 on the common the average net earnings ought to run a good deal over the $134,000,000 average cited above. In other words, if the company earned at a maxi- mum about an actual 12% in a boom year, and if this may fall to considerable below zero in a bad year like 1908, it would seem as if about 4% would represent a consistent rate for the dividend for the common stock, unless that dividend is to slide up and down with the violent fluctuations characteristic of the steel business always. Supposing now that the company is in a position to earn 6 or 8% on the $500,000,000 common stock steadily every good year and bad, this would mean a handsome margin of safety for the preferred stock. The latter requires for its 7% $25,000,000 per annum. All of this probably was not earned in 1908, and it certainly was not earned in 1904, when the net earn- ings fell to $73,000,000. The average for the last four or five years, over and above what is here esti- mated as a basic requirement, was equal to consider- ably more than twice the preferred dividend. If then the Steel Company's business is on a fairly solid basis. Steel preferred ought to be a solid 7% stock likely to weather anything short of a pro- longed depression like that of '93-'97. If this is true. Steel preferred has been selling and is now selling rather below its solid investment value. On the other hand it seems difficult to reconcile 78 the computations made here with the high prices of Steel common reached in the Fall of 1909, when »lie dividend was raised to 4%. In any consideration of the investment value of Steel common the following facts should not be lost from view: 1. The Steel Corporation has been in existence only nine years, and has not yet seen a trade depres- sion lasting much over twelve or fifteen months, and neither of these were very serious. 2. The decline in the net quarterly earnings from the maximum in 1902 to the low in 1904 was 46%, and from the high of 1907 to the low of the follow- ing year 44%. 3. In four consecutive quarters from the Fall of 1903 to the Fall of 1904, the net fell to a rate of $67,- 000,000 per annum. This, according to the estimate made above, was insufficient to meet full interest and depreciation charges. 4. A four years' depression, like that of '93-'97, would probably have left the preferred stock (cumu- lative) several years in arrears of dividends. 5. The company escaped this. The production must now be 50% greater, so that the company ought to show about $180,000,000 earnings in a boom year. The record quarter was for June, 1907, $45,- 000,000, but this fell in the quarter for March of the following year to $18,000,000, a decline of 60%. 6. To all intents and purposes, the surplus for the common stock, and hence its dividend, and roughly its selling price, is a matter of Congressional enact- ment. It depends largely, if not entirely, upon gov- ernmental favor. If the present policy of high pro- tective duties for steel and iron products were to be entirely reversed, and the duties abolished, this would, for the time being, and possibly for some years to come, entirely wipe out any equity for the common stock whatever, sand might seriously en- danger the dividends on the preferred. This last is a most important item to consider, as a rough computation suffices to disclose. The aver- age net earnings of the corporation, according to its reports, for several years have been closely around $14 per ton. Mr. Byroli W. Holt in his estimate made a year ago as to the effective "pro- tection" in the duties on steel and iron products, estimated that for the Steel Corporation's products 79 this might average $6 or $7 per ton. Even if we estimated it at as low as $5 per ton, and the pro- portion of effective protection was entirely elimi- nated from the tariff duties, this would, for the time being, reduce the net earnings of the company by more than 33%. It might do much more than this, and for this reason: With a Chinese Wall of absolute protec- tion, the Steel Corporation is, in this country, prac- tically able to fix the prices of its products at the maximum figures which the "traffic" will bear. Producing 45% of the total amount of steel and iron output in the country, it has as efficient a control of the steel industry in the United States as the Union Pacific has of the South- ern Pacific with its ownership of 45% of Southern Pacific stock. And because it can thus command the highest possible domestic prices for its products, and because its capacity, at the prices which it thus fixes, is somewhat in excess of the domestic demand, it is in a position to dump its surplus products on the European market at ruinous prices if it so chooses. The result of this is that it is able to prac- tically force a Steel Trust, that is, an agreement as to prices. The steel market of the United States is the great- est in the world, and if this market were free the Steel Corporation could exert no such control over prices, and any kind of trade agreement, or "trust" would be practically impossible to maintain. In other words, the corporation would have to meet free competition prices instead of trust prices. It is conceivable that this might reduce its net earnings a good deal more than 33%. The prospects for the reduction of steel and iron duties, or at least of the protective part of them, is then a prime consideration to the holders of steel stock. What is the outlook? The general feeling at the present time is that the next House will be Democratic. Even if it is not, it seems probable that there would be enough of Western insurgents among the Republicans to unite for a i-eduction of duties. Whether such a bill could get through the Senate would very likely depend upon the result of the Fall elections. If this result were to be heavily against the Republicans, ana a tariff reduction bill were passed, it does not seem very likely that it would be vetoed by President Taft, but it is rather doubtful that it would mean the complete abolition either of the duties or the pro- tective part of them. In view of this uncertainty, it does not now seem as if the Steel Corporation could, consistent with its past conservatism, pay more than 4 or 5% dividend on the common. With this uncertainty, it does not seem as if the stock would justifiably sell for much more than any other 4 or S% industrial of good prospects, but subject to violent fluctuations in its business. Over against this uncertainty is, of course, to be set as an asset the enormous coal and iron holdings and other properties of the company and their steady increment in value. It is these factors which will probably lend a roseate hue to the stock when the market is booming and the rainbow calculator has the field. For this reason it seems likely that Steel common will tend to sell considerably over any actual or potential value which it may possess. It is the public favorite par excellence. A member of the pool which so daringly boosted the price of the stock from $22 per-share following the panic of $95 per share last year, was quoted as saying that he had never known a stock to "bull so easily" as United States Steel. Parenthetically this fabulous rise in a widely held stock of such relatively large volume as United States Steel is probably without a precedent in the history of the New York Stock Exchange. Invariably a violent rise is followed sooner or later by an almost equally violent fall. In the stock market, as elsewhere, action and reaction iend to a certain vague equality. Even if Steel common has a fairly solid invest- ment value of from $60 to $80 per share, which would be the equivalent price if it could be main- tained through a series of years on a 4 to S% divi- dend basis, it need surprise no one to see it sell far below these figures, as it has and may readily sell much above them. There is no stock on the list which looks quite so good when times are good and quite so bad when times are bad. But in the hour of superlative confidence, when the Wall Street butter mill is being churned with 81 spectacular vigor and a flare of trumpets announces a new increase of dividends with each quarterly meeting, it may be well to recall two facts. One is- that in the nine years since the Corporation was organized the average price of iron ore, pig iron, coal, coke and iron and steel products has not risen greatly, which would not imply any such tre- mendous increment in the value of the ore and coal properties, either in this nine years nor in the next, as is so insistently assumed. The second is that the net earnings last year, a fairly prosperous year, were the same as in the first full year of the company's operations. 82 CO (T) o !-t (K? to 1 — 1 q hH s (T) ^ en ^ fti '—' si tr^ cr* o a> (T) n JU a O ►n O •-t o o o. a. rr o o o Ml > ' I- ii . 3 1 / W Alt. , MM 1 !• 7 PI/fK ^ 7 If 111 ii. / M ■"1,3530 ho Jl. _. r . ' lo^ / 1 "^''"^^ El^ic"! ft 1 UifyJ - ,LL«k*J = D lot. J J} ■-f - -1x7- •^ / CV \AC : J ^^-^ . 9 ^K< 1 1 IH ThjtL '?o? Pt<. — »• 1 I 2. SHo W/W<^ «( Jrt " 'R(C£ 5 / ( f 1 9 P«e C€«/ ^Cr- ,T epR }SSIIi N A 1 lo C ~~' ^\ f /« V X>i>(V r^i/n iraeA s /S yo-i ?o6 i /oa. C/«r \ 2, ?«• -J- \ J 7V J" ■ 1 1 / •J* 7a. 'v ( 70 "" Diagram n.- ? ? i-? V- ? 6 ? r /? ID t J, y 6 ? /f ^© 6Y ./-i ■ /vi w Ci ris<, e^iT ?D HiC-M fz- r« P F »?ice s OK >l SR EflD+ MEAT te' \tif^k} 4o 0--0" .OTf 6 1 '^ , s-x J / yl^ .Cf ro n / V o y- H9 A A r^ 'L^'' Vc '/\ ,,^ .c/ 'V' "^f "\ _/ 47.' t ■ V ''/ 4 o - ,'/ ■■ 3» ^. i A 3 6- / 3W TH EfJ ] u «!— peRio P t>F iWR PlU u KR? bx 3:2. THE COPPER METAL SITUATION. Specially prepared for this service by Frank Fayant. May 26, 1910. in the copper boom year 1906, when the metal was marked up from 18 to 26 cents a pound, we produced in America nearly 500,000 tons of copper, and the world's consumption rose above 700,000 tons. Then came a disastrous collapse. Now our American output has risen to 625,000 tons, and the world is consuming upwards of 800,000 tons, but the copper market is in a blue funk. At a Wall Street luncheon table the other day, were gathered a group of the leading American copper capitalists. Nearly all agreed that the cop- per market was in a bad way. But one copper man didn't agree, and he was the biggest copper man of them all — the head of the world's greatest copper company. "You all talk about the enormous production of copper," said he, "but you forget to look on the other side of the picture — the enormous con- sumption. Despite the fact that the copper manu- facturing industries are not booming, the consump- tion of copper is now far beyond our highest re- cords. It's this record consumption that makes me a bull on coppers." Three adverse factors have been working against the market for copper shares: 1. The heavy output of the metal. 2. The accumulation of surplus stocks. 3. The aevelopraent of low-cost porphyry deposits. The late Georges de la Bouglise made an interest- ing calculation, showing that, from 1840 to 1900, the average annual increase in the output of the lead- ing commercial metals — iron, copper, lead, tin and zinc — -was about 65^ per cent, for cch. This re- markably regular increase in the output of the mines, due to the world's yearly increasing de- mand for the metals, makes it possible to forecast with some degree of accuracy the probable con- sumption of the leading metals over a period of years. Especially in copper mining has the yearly in- 92 crease been of striking regularity. During the past twenty years, a chart showing the world's output of copper gives a regularly ascending line with only trifling divergences. This line, of course, has been pushed upward by the steadily increasing American production. The output of copper, during the past forty years, shows an average annual increase of nearly 6}4 per cent. During the last century the increase averaged 4 per cent., but the opening of the age of electricity accelerated the consumption. The actual increase in the world's output, as compared with the theoretical 65^ per cent, yearly increase, is shown for the decade since the flotation of the Amalgamated Copper Company: Theoretical Actual Output. Output. Tons. Tons 1899 458,000 458,000 1900 487,000 487,000 1901 517,000 519,000 1902 o48,000 553,000 1903 585,000 589,000 1904 641,000 627,000 1905 695,000 668,000 1906 712,000 711,000 1907 709,000 757,000 1908 745,000 806,000 1909 824,000 858,000 Average 646,000 657,000 That the present large production of copper is only in line with the regular increase year by year during this period of world industrial expansion is plain from this percentage calculation, and perhaps still plainer from a glance at the accompanying chart showing the rising line of the world's copper output. The world's copper consumption last vear ran behind production, as the accumulation of foreign stocks shows, but this is a temporary affair. This has repeatedly happened in the copper trade. Stocks rise and fall, with falling and rising prices, but the consumption always manages to keep pace with the production over a period of years. The narrow-visioned pessimists who see only dis- aster in the big copper production are like the 93 sour-faced fellows who see ruin in the sudden ex- pansion of the automobile business. The remark- able thing about the hundreds of millions of dol- lars Americans are putting into motor cars is the fact that they have the millions to spend. Likewise the big fact that sticks out of the present copper situation is the enormous consumption. The monthly figures of surplus copper stocks, combining the London visible supply and the Cop- per Producers' surplus, look very large to unthink- ing people who forget that "de world do move." "The copper stocks ar? as large as they were when the Secretan Syndicate collapsed," is the solemn warning you may hear any day uttered by the ticker-wise hangers-on of the Street. It would be just as absurd to compare the present iron or gold output with that of twenty years ago. The world is now producing four times as much gold, three and a third times as much copper and two and a half times as much iron as twenty years ago, and comparisons of surplus stocks are correspond- ingly absurd without taking account of the steady growth of the world's needs. The Secretan Syndicate, the bugaboo of the cop- per pessimists, accumulated about 175,000 tons of the metal from 1887 to the spring of 1889. At that time the world's output had reached 260,000 tons a year; so the Parisian speculators had bought up two- thirds of a year's production. That was why the syndicate collapsed. It bit off more than it could chew, and copper dropped from £100 to £3S a ton in the London market. The artificial cornering of eight months' output of the world's copper mines, by a speculative syndi- cate, forcing the price to an absurd level, is hardly to be compared with a natural accumulation by the trade, at low prices,' of a ten weeks' surplus of the metal, as an insurance against higher prices. For the present stocks of copper in Europe and America, while equal to the Secretan holdings of two decades ago, are only a fifth of a year's out- put. The Amalgamated "umbrella holding" of a de- cade ago resulted in an accumulation of about 90,000 tons, or nearly 30 per cent, of the Ameriacn output. Now our home stocks amount to 63,000 94 tons, or only 10 per cent, of our annual output. In other words, our surplus supplies are only five weeks ahead of our production. The Amalga- mated's holdings of 1901 were as large, in com- parison with the output at that time, as the entire present stocks of copper in Europe and America. As the chairman of the Rio Tinto recently pointed out, the present ten-weeks-ahead stocks of copper are no greater, compared with the copper trade's consumption, than were the normal stocks ten years ago or twenty years ago. Europe has been taking our copper in large quan- tities, but, relatively, in no abnormal quantities, as the export figures show: American Exports. Percentage of Tons. Amer. Output. 1899 110,000 40% 1900 155,000 52% 1901 100,000 31% 1902 160,000 45% 1903 140,000 36% 1904 248,000 55% 1905 240,000 49% 1906 205,000 41% 1907 230,000 49% 1908 290,000 60% 1909 300,000 48% Average 48% Wall Street has an idea that the development of porphyry mining will soon flood the market with countless mines producing copper for next to noth- ing and depresses the price of the metal for years to come — thus putting the old deep-level mines out of business. But this is a nightmare bred of ignorance. Por- phyry deposits are not found every day. Not one new one, in fact, has been discovered in this genera- tion, and the development of but one new porphyry has been begun in the past three years. All the porphyries now under development have been known for years, and mining engineers have been searching the world over for new ones without success. 95 The enthusiasm for low-grade ore deposits is being carried to absurd limits. A disciple of Mr. Dooley shrewdly tells about it in the "Mining and Scientific Press": "Th' big thing in th' copper business nowadays is th' low-gra-ade ore body. Ye see th' la-ads in /..rizona, Nevaday, an' Utah have bin makin' such a foine demonstrashun iv its value la-ately, that th' peopul ar-re gittin' hold iv th' idea, an' th' lower the gra-ade now, th' betther they like it. A man with a tin percint proposishun cuddn't git a look in at a foive cint piece be wa-ay iv promoshun nowa- days, but if 'is ore shud only run wan percint he'd be smothered in granebacks. " 'Twill not be long before me friend Channing 'r Mudd 'r Yeatman will be writin' raypoorts an' sa-ayin': 'I have th' honor an' th' pleasure, gintle- min, t' raypoort that ye-er engineer has most care- fully examined th' Consolidated Double Cross Mine, and riccominds it f'r immajiate purshase. 'Tis a most pheenominal ore body. Fr'm th' looks iv it ye'd think there wasn't a pound iv copper within a thousand miles. 'Tis th' hungriest lookin' rock I iver saw; and without a parthical iv exaggerashun I c'n sa-ay it is th' lowest gra-ade yet discovered. It is so low I am forced t' th' use iv mathematical an' phixical ter-rms t' properly describe it. From an averidge iv all me assa-ays I c'n sa-afely sa-ay that th' ore carries minus thray an' wan half percint iv metal. In other words, ther is a copper vacuum. I c'n sa-ay no more, f'r languidge fails t' express me emo-oshun. I c'n only urge ye t' raise th' money at wance an' close th' dale without de- lay, befure th' chanct is lost. It shud be th' most succeessful promoshun iv th' a-age.' " Popular belief overestimates the cost of mining copper in the deep-level mines and underestimates the cost of porphyry copper. The idea that the old mines cannot put copper in the market under II cents, while the new low-grade mines can turn out the metal in unlimited quantities around 7 cents, is far from the truth. The actual difference in cop- per costs in the two classes of mines is very much smaller than generally believed. Take the copper costs in the Butte camp. They are constantly spoken of as being above 11 cents, % and the company reports seem to show these high costs. But it can be stated on the highest authority that the 215,000,000 pounds of copper produced by the mines in the Anaconda-Amalgamated merger now cost 8.9 cents a pounds. The Amalgamated cost sheets contain very liberal depreciation charges. The great Washoe smelter, for example, has cost $10,500,000. More than $5,500,000 of this has been charged into operating expenses, the amount charged last year having been $1,600,000. Millions of dollars have been taken out of earnings year after year by the Amalgamated management as extraordinary depreciation charges. That Amalgamated could put its copper into the market for 5 cents for several years is the belief of engineers who have known the Butte camp through all its dramatic history. But this would mean treating only the high-grade ores, and cutting depreciation charges to a minimum. The policy of the Amalgamated management has been to con- serve its resources. That the Butte mines were petering out was feared for a time, but recently rich ore bodies have been developed in the deepest levels, and Butte seems destined to be the world's greatest copper camp for many years to come. The stupendous development of the porphyry de- posits of Utah and Nevada, and more recently of Arizona, is a signal achievement in American min- ing, but the porphyries are not going to revolution- ize the copper market. The extremely low costs promised for these mines are a myth. The great steam-shovel porphyry at Ely, Nevada, is the one marvelous low-cost producer. Nevada Consolidated has taken rank as one of the world's great mines, and is putting copper on the market around 7 cents. But Utah, the Bingham Canyon wonder, where the steam-shovels are tearing down a mountain, shows costs around Syi cents. These two mines are putting 70,000 tons of copper into the market, more than all the mines of the country produced a quar- ter of a century ago. The cost of copper in the new Arizona porphyries is estimated at 9 cents. But these porphyry mines costs, it is to be noted, are still to have the test of years of operation. That strenuous efforts have been made at Ely and Bingham to produce record cost sheets there can 97 be no doubt. And there is every reason to believe that the copper costs will rise in these camps. Butte mining men believe that if the porphyry mines were as liberal in depreciation charges as Amalga- mated, their cost sheets would not make so fine a showing. The porphyries are putting their best foot forward now. The life of these low-grade ore bodies is also to be determined. Under rapid steam-shovel mining the profitable ore is likely to be speedily exhausted in all but the largest deposits. But for the American porphyry mines, which have suddenly added 80,000 tons of copper to our output, and are likely to add as much more in the course of four or five years, the world would soon be facing a copper famine. The big low-grade de- posits have been opened up to meet the world's expanding consumption in the same fortunaie way that the Minnesota iron ranges saved us from an iron famine. If the world's copper output continues to increase as it has in recent years, the mines willhave to turn out more than 1,500,000 tons ten years hence, and there will be need for all the porphyries and deep- level mines that can be developed. The copper problem is not the limiting of output, but the open- ing up of new ore bodies. One feature of the big American production of copper is not to be overlooked. Our output is now running at the rate of $180,000,000 worth of the metal a year, figuring on a 13-cent basis. This is not far from double the value of our gold out- put. This copper is almost as imperishable as gold. It will not decay or burn up. It will be of per- manent usefulness to the world, whether it is manu- factured to-day or to-morrow. Better an over-production than an under-produc- tion. For a temporary over-production of a great metal, by lowering the price, stimulates new uses, and thus opens the way for a permanent accelera- tion of its consumption. Cheap iron gave us our great steel boom; cheap copper means an enormous electrical expansion. 98 CENTRALIZED CONTROL OF BANK LOANS. By G. C. SELDEN. June 8, 1910. The following interesting letter was received from Mr. Selden some weeks ago and as the matter is pertinent at present, the letter is reproduced in full. While the communication contains some warn- ing notes, it would appear now as a bullish argument for two reasons. First, that the Morgan interests are bullish on stocks, and second, that the long- drawn-oujt controversy between the railroads and the Government bids fair to be amicably and justly settled. T. G. One of the most notable features in the financial history of the past eight months has been the in- creasing "paternal control" of the New York bank statement. Very little has been said about this mat- ter by the newspapers. Once in a while a casual item like the following creeps into a financial coluTO' " : "Three large private banking firms — J. P. Morgan & Co., Kuhn, Loeb & Co. and Blair & Co. — have taken over a large number of bank loans and in this way have played no small part in bringing about the contraction m loans recently reported by the banks. It is said that the transactions of these threp banking firms in the call money market during the past week t-ppresent a total in excess of $15,000,000, thereby bringing about the recent decline in money rates." To the well informed student of present financial conditions such an item furnishes a text for pro- longed reflection. What degree of control over the banking position and the money rate does it indi- cate? Are we entirely in the hands of that "'money power" which has figured from time to time in political speiches, or are such transactions merely incidential and unimportant? And how are we to interpret the bank statement under these conditions? Centralization of Banking Power, The following private banking houses, banks and trast companies work in sue 99 that they may be almost said to represent a "money trust": J. P. Morgan & Co., Kuhn, Loeb & Co., First National Bank. National Bank of Commerce, Chase National, Liberty National, National City, Hanover National, Colonial (with branches), Irving Exchange. New Yoi k. County, Citizens Central, Fidelity, Columbia, Second National, Bank of the Metropolis, Lincoln National, Greenwich (with branches). Bankers' Trust Company, Astor Trust, Morton Trust, Guaranty Trust, United States Mort- gage and Trust, Equitable Trust, Mercantile Trust, Manhattan Trust, New Amsterdam Trust, Farmers' Loan & Trust, United States Trust, New York Trust, Standard Trust, Brooklyn Trust. In addition to these, the Equitable Life Insurance Co. is controlled through ownership of stock by J. P. Morgan & Co., and the New York Life is in close relationship with that firm. Outside New York, many other banks are closely connected with the above controlling group — Drexel, Morgan & Co. of Philadelphia, the First National Bank of Chicago, Riggs National Bank of Washing- con, D. C, American Exchange National Bank of Seattle, Industrial Trust Company of Providence, Newport Trust Company of Newport, Fidelity Trust Company of Kansas City, etc. The control of this banking group over the great corporations of the United States is practically im- possible to determine. Certain railroads and indus- trials are commonly known as Morgan enterprises; but this does not begin to indicate the power, direct and indirect, wielded by the New York financial group in the business of the country. The Comptroller of the Currency reckons "banking power" by adding together capital, profits, surplus, deposits and circulation. On this basis a rough estimate may be made up as shown in the table herewith: Estimated Centralization of Capital. Banking Power (including two insur- ance companies mentioned) $3,500,000,000 "Morgan" Railroads (capitalization).. 2,585,000,000 "Morgan" Industrials (capitalization). 1,836,000,000 Total $7,921,000,000 100 Suggestive Comparisons. All U. S. National Banks (banking power) $6,768,000,000 Other U. S. Banks (.banking power) . . 10,260,000,000 British Empire (banking power) 11,157,000,000 Continental Europe (banking power). 5,472,000,000 Total $33,657,000,000 In a general way we may say that this centralized banking power is equal to halt that of all United States national banks, one-fifth of the total banking power of the United States, or one-tenth that of che entire commercial world. If we include in this American ce'^tralization of capital, the capitalization of sc^called "Morgan" companies, the total is half that of the entire banking power of the United States, over two-thirds the banking power of the British Empire, or one-quarter of that of the whole commercial world. Even this, however, does not give an adequate idea of the power of the "money trust," for this banking group forms the nucleus around which is gathered, in more or less friendly relationship, the financial control of nearly all the great corporations of the country. It is scarcely too much to '■^ay that no great financial undertaking can now be carried out in the United States without at least the tacit consent of this central banking power. The North- ern Pacific corner in 1901 seems to have been the death agony of real competition among the great financiers. George Gould's "ocean-to-ocean" am- bitions failed for lack of this banking support. Concentration of Money. An almost equally important consideration is the concentration of cash in New York City. The fol- lowing figures were recently presented by the Monthly Bulletin of the New York Chamber of Commerce: 101 Distribution of Monev in U. S., 1908. Per Cent. In banks — of whole. New York $493,000,000 14.59 Rest of Country 869.900,000 2S.7S Total in banks $1,362,900,000 40.34 In Treasury , .. .. 340,800,000 10.08 Outside of banks and Treasury 1,675,100.000 49.58 Total United States ..$3,378,800,000 100.00 That is, of the total cash held by all the banks of ihe United States in 1908, thirty-six per cent, was in New York City. Cash is the basis of credit and credit is the foundation of business. The entire in- dustrial activities of the country may be imagined as a sort of inverted pyramid standing- upon the cash reserve — of which thirty-six per cent, is found in New York banks. A quiet transfer of $10,000,000 cash from reserves o; New York national banks to the vaults of one of the great private banking houses would mean a contraction of $40,000,000 in loans. Credit, of course, is passed on from one business concern to another through long, intricate and intermingled channels. If the banks call $40,000,000 of loans, this means that the borrowers are forced to call in loans which they have made to others, and the contrac- tion goes spreading through the country like ripples from a stone dropped into a pool. It is a trifling matter for this unified bankinsr power to shift $10,000,000 or $20,000,000 of loans from national banks to trust companies, to theii private banking houses, or to banks or trust com- panies in other cities, and back again, as their neces- sities may require. Thus the immediate bank posi- tion, and through it, to a certain extent, the business activity of the country, may almost be said to rest in the hollow of Mr. Morgan's hand. Limitations of this Control. It is doubtful if a greater power has ever been thus centralized in the history of the world; but it is far from being irresponsible or even autocratic. 102 Great power brings great responsibilities, and if it is to be maintained these responsibilities must be, in the main, wisely met. The strongest guaranty against the abuse of this control of the banking position doubtless lies in the character of the men in charge. They have risen to their present authority because they command the confidence and respect of other capitalists. It would be folly for them to forfeit this conndence by an arbitrary exercise of power. Another limitation lies i-i the fact that the pros- perity of all thf. enterprises in ■>vhich high finance is interested rests, in the last analysis, upon that elusive individual who has so recently leaped into the lime- light — the ultimate consumer. Morgan is able to sell bonds to a savings bank, for example, because em- ployees in some of the industrial companies which he controls have depositedtheir wages in that bank. Morgan's railroads haul flour and pork to the em- ployees of the Steel Corporation, and use the money thus obtained to buy steel rails from that Corpora- tion, which again pays the money out as wages. By calling loans unnecessarily, and thus checking busi- ness activity, the controlling financiers would be cutting down their own profits all the way around the ring of the gigantic business enterprises which they control. The very unity and cohesion of the interests involved is a guaranty agaiuLt hasty action. Another check is to be found in the natural desire to avoid giving publicity to the shifting of loans or cash reserves from one institi .ion to another for the purpose of influencing the money market, a general belief among the people that this control ol the banks was being directly used for the purpose of milking the stock market would be likely to kill the goose which lays the golden egg. Thp public will not seriously object to a moderate use of such powers for promoting bull speculation, but if they were to be openly used on the bear side of the market, a reverberating howl would rise to heaven. The worst phase of the situation seems to be the political influence that will be almost automatically wielded through control of the banks. President Taft, or any other president, proposes measures which the controlling raoitalists believe will lessen the profits of capital. These capitalists have been 103 nursed, reared, educated and trained to look at matters from the viewpoint of the investor. To them, whatever lessens the returns on capital is bad. They are perfectly honest about it — it would look bad to them if they did not own a share of stock or a dollar in the bank. They have the capitalistic mind. Since things look bad to them, they become cau- tious. They hesitate to prosecute new enterprises. They begin to draw in their capital rather than to branch out wider. They call in loans and in some cases might even withdraw gold from the banks. This cuts the basis from under credit, and thus from under business activity. Less money is paid out as wagcB. We are less prosperous — and this is plainly the result or rne proposed legislation. It is a politi- cal argument more eloquent than tne tongues ot » thousand Bryans. Yet it has been brought about merely by the personal opinions of a few powerful men. Interpretation of the Bank Statement. The student of the financial situation must recog- nize this condition and be guided accordingly. The New York ba'ik statement cannot be taken too liter- ally. Greater weigni than heretofore should be placed on the condition of all national banks in the United States as revealed by their reports to the Comptroller, and on the broader features of the investment situation. On the other hand, the iMew York bank statement may often give important in- dications as to the attitude of the great banking interests towards the market. Different persons will, of course, have different ideas as to the political, economic and social effects of this centralization ot the control of capital, now far more complete than ever before, and as to its connection with the recent history of the stock market. For practical purposes, the important th'ng is to bear in mind that the banks are now under the control of centralized "big business" to a greater extent than heretofore. 104 IMPORTANCE OF SCIENTIFIC INDEX NUMBERS. June 23, 1910. Some time ago, in attempting to supplement cer- tain statements and conclusions by reference to index numbers which would correctly indicate the changes in the cost of living, I found that all the compilations were faulty in some regard. The Dun number had been suddenly stopped, the Sauerbeck number did not reflect true conditions, because of our tariff, and the compilations of the Bureau of Labor were not properly weighted. As a study of these figures is of primary importance in forming our economic conclusions I decided (or rather was forced) to take the matter up myself. As Professor Norton had made an exhaustive study of this sub- ject, I arranged with him to undertake the vast amount of calculation necessary to bridge the gulf between the discontinuance of Dun's number and the present time, and to keep the figures up to date from week to week. After Professor Norton's plan was formulated, I submitted it to a committee of experts and economists and the changes sug- gested were given careful consideration and in some cases adopted. The result has been, in my opinion, a new index number which is better and more co- herent than any other published. Shortly after the plan appeared, Mr. F. C. Crox- ton, the expert of the Senate Committee on the cost of living, criticised the plan through the col- umns of the New York Journal of Commerce (June 1, 1910). Mr. Croxton did not attack the plan but confined himself to statements that it was no better than the Government figures. Later Professor Nor- 105 ton, in the same organ replied to expert Croxton (June IS, 1910). As the matter is of interest I am reproducing both articles by permiission of the Editor of the Journal of Commerce. The two articles speak for themselves and com- ment is unnecessary, but I would like to refer to Professor Norton's remarks in the next to the last paragraph in which he suggests that he does not think wood screws and quinine are quite as im- portant in the living expenses of an ordinary family as are wheat, beef and mutton — nor do I. T. G. HOW INDEX NUMBERS ARE MADE. BY F. C. CROXTON. Washington Expert of the Senate Committee on Cost of Living. A "Report on a new method of compiling index numbers" was presented in a special market letter issued by Thomas Gibson, of New York, on March 17. This report was prepared for Thomas Gibson by Professor J. Pease Norton, of Yale University. Professor Norton has selected fifty commodities from the United States Bureau of Labor wholesale price list of 258 commodities and proposes to "Com- pile index numbers on the Sauerbeck selection of commodities modified with the Dun system of weighting." Professor Nortoa has divided the fifty commodities into four groups, as follows: All food 22 commodities Textiles 9 commodities Minerals 9 commodities Miscellaneous 10 commodities He proposes to give to each group a certain weight rather than to obtain an index by taking a simple average of the relative prices of the fifty 106 commodities. Tlie weight he proposes to give to each group is as follows: All food 50 per cent Textiles 18 per cent Minerals 16 per cent Miscellaneous 16 per cent This follows in a general way the weighting used by Dun in his index number, which was discontinued in May, 1907. Sauerbeck in his study of English wholesale prices computes his index by taking a simple average of his relative prices for the forty-five commodities included in his study, but tests the accuracy of the index numbers by taking into consideration the quantities consumed in the United Kingdom. The United States Bureau of Labor computes its index of wholesale prices by finding the simple average of the relative prices of the 258 commo- dities; while each of the commodities is treated as being of equal importance, a certain weighting is roughly made by using a greater or less number of quotations according to the general importance of the commodity, as determined by its consumption, thus wheat is quoted as the raw material, and also enters into two descriptions of wheat flour, two descriptions of crackers, and three descriptions of loaf bread; butter of three descriptions is carried, while coffee of only one description, and tea of one description is quoted. Dun's method of arriving at a conclusion regard- ing the proper weight to give the various commodi- ties or groups of commodities has never been dis- closed. Professor Norton has simply followed the Dun plan so far as it was disclosed by "averaging the Dun index numbers for ten years, 1890 to 1899," so that no satisfactory explanation of the method of weighting has been made. The Norton index, with its elaborate attempt at elimination and weighting, departs but very little in its results from the Bureau of Labor index of 258 commodities and also to but a trifling extent from the index resulting from taking a simple aver- age of the relative prices of the fifty commodities selected by Professor Norton. The following comparison is of interest: 107 Norton Index of Weighted Relatives Compared With Simple Averages. (Average price for 1890 to 1899 equals 100.0) •2!. H-O 3 1 » td — . en- —t- o 0) ? • X is ;au of mple o o 3 3 3 S S-.o a. o tl. B P -1 a o* 5+^" J' l-H >< pi o ii or in modi ages, If) • o T N en 1 ■ tr.o. ■ " 2 • ax : 00 1900. . 110.5 111.9 ■ 110.5 +1.4 .0 1901. . . 108.6 109.3 108.5 + -7 — .1 1902. . . 116.1 116.3 112.9 + -2 —3.2 1903. . 114.3 115.3 113.6 + 1.0 — .7 1904. . . 115.9 116.3 113.0 + -4 —2.9 190S. . 117.4 118.0 115.9 + .6 -1.5 1906. 121.9 123.4 122.5 +1.5 + .6 1907. . 130.4 131.7 129.5 + 1.3 — .9 1908. . . 124.9 124.9 122.8 .0 —2.1 * These 50 commodities are the same as those used in Norton's index, t Difference between simple average and Norton's weighted average. + Indi- cates above Norton. — Indicates below Norton. No better endorsement of index numbers com- puted from simple averages of relative prices could possibly be given than is thus apparently uninten- tionally given by Professor Norton. The various index numbers are paralleled for nine years in the above table and the difference between Professor Norton's weighted index of fifty commodities and the simple average of relative prices of the same fifty commodities averages only 0.8 of one point and does not exceed 1.5 points in any year. In one year there is no difference, in one year 0.2 of one point, in one year ^.4, in one year 0.6, in one year 0.7, in one year 1.05, in one year 2.1, in one year 2.09, and in one year 1.5 points. When Professor Norton's weighted index of fifty 1C8 commodities is compared with the Bureau of Labor index computed by linding simple averages of rela- tive prices of 258 commodities (including the SO commodities used by Professor Norton), the aver- age difference is only 1.3 points and does not ex- ceed 3.2 points in any one year. In one year there is no difference, in one year 0.1 of one point, in one year 0.6, in one year 0.7, in one year 0.9, in one year l.OS, in one year 2.1, in one year 2.9, and in one year 3.2 points. That such comparatively slight differences are considered unimportant by Professor Norton is con- clusively shown by his statement on page 5 of the Gibson letter, "In conclusion it would appear that the above system (Norton's figures) combines the principles of the Sauerbeck system in selection and the Dun system in weighting, and reproduces the Dun series within 2 per cent, on the average." As has been noted, the Norton index varies on the average only 1.3 per cent, from the Bureau of Labor index and 0.8 per cent, from the index of the fifty selected commodities when computed according to the Bureau of Labor system. The Bureau of Labor did not undertake to weight the commodities entering into its index number of wholesale prices for the reason that no reliable figures are in existence showing even approximate- ly the production or consumption of more than a few of the various commodities. Accurate figures showing production and con- sumption are highly desirable, but the figures used by Professor Norton are the roughest sort of es- timates and even were they approximately correct his method of applying them to groups rather than a weight to each commodity is of practically no value in correcting the fault of simple averages of which he makes so much. For instance, under his food group are twenty-two commodities and each has the same influence as any other one within the group — coffee and tea each has as much influence in changing the index number as has butter. The two descriptions of sugar have as much influence as corn and corn meal. On the basis of the average price for the ten-year period being 100.0, the 1908 relative price of coffee was 47.8, of dressed mutton 114.5, of smoked hams 109 114.'3, and of butter 122.1. Under Professor Nor- ton's system this reduction of 52.2 points in coffee a little more than offsets the advance of 14.5 points in mutton, 14.3 points in haras, and 22.1 points in butter, or a total of 50.9 points in the three com- modities. Similar criticisms arise as to Professor Norton's method of weighting within each of his groups of commodities. In textiles, silk has two-thirds the importance of cotton and cotton yarns and two- thirds the importance of worsted yarn and wool. In minerals, copper has the same weight as iron. There are, of course, similar objections to the system of computing index numbers by the simple average method, but Professor Norton's index es- pecially invites criticism for the reason that it pur- ports to be a scientifically weighted index number or a perfected scheme, and yet he has eliminated practically none of the objections ti an index com- puted from simple averages of relative prices. Even the selection of articles which Professor Norton makes is open to criticism. One can hardly understand his reason for omitting eggs and milk, for instance, as those two commodities have an importance in production and consumption equal to four commodities which he has included, as follows — salt beef, tea, coffee and sugar. The Bureau of Labor index no doubt contains a few too many commodities of certain descriptions, notably undercloths and clothing. The advisability of dropping some commodities has been under con- sideration for several years and the only reason for retaining them is the desire to maintain an index comDarable for as long a period as possible. Dun's index numbers which Professor Norton seeks to parallel and to continue includes 350 com- modities, yet Professor Norton includes but fifty in his index numbers. A large number of commo- dities is preferable to a smaller number for the rea- son that with a small number of commodities a change in the price of one commodity exerts en- tirely too great an influence upon the general index number — thus the reduction of 52.3 per cent, in the price of coffee (price in 1908 compared with the average for the period from 1890 to 1899) by his system of weighting reduces the general index num- 110 ber 1.19 points, while in the Bureau of Labor index number, consisting of 258 commodities, the drop in coffee reduces the general index number only 0.20 point. The advance of 40.4 per cent, in the price of jute (price in 1908 compared with the average for the period from 1890 to 1899) by Pro- fessor Norton's system of weighting increases the general index number 0.81 point, while in the Bur- eau of Labor index it increases the general index number only 0.16 point. In devising a system of weighting both Professor Norton and Dun appear to have established a con- stant ratio so far as the importance of the various commodities is concerned. Such a plan seems very undesirable for the reason that the ratio for pro- duction and consumption of the several commodities does not remain constant but varies materially from year to year and in a much more marked degree from decade to decade. Sauerbeck recognizes this, and the system which he employs in testing his simple averages does not provide for a constant ratio. Summing up, Professor Norton has: First, selected fifty commodities from the Bureau of Labor list of 258 commodities. Second, eliminated to a considerable extent de- rivative commodities, and Third, undertaken to weight according to pro- duction and consumption each of the four general groups into which he divides the fifty commodities. With all these changes his index numbers dififer in no material way from the Bureau of Labor index numbers, which are simple averages of relative prices of 258 commodities, nor does it differ from index numbers found by taking a simple average of the same fifty commodities which he selected for his weighted index. HOW INDEX NUMBERS ARE WEIGHTED. BY PROF. J. PEASE NORTON, In an article in The Journal of Commerce of New York City for June 1, Mr. F. C. Croxton, Wash- ington expert of the Senate Commission on Cost 111 of Living, suggests that the Gibson index numbers, which follow the system formerly used by Dun's Agency in their index numbers, weights "according to production and consumption each of the four general groups into which" I "divide the fifty com- modities." The groups are food, clothing, minerals and other commodities. Evidently the writer is laboring under a misapprehension, inasmuch as neither the Gibson nor the Dun numbers were weighted according to the statistics of production and consumption. "Weighting" is a mathematical term which has been used loosely in discussion of index numbers by general writers, and, indeed, much confusion exists in the minds of some of the financial writers, not familiar with the principles of weighting, in regard to the basis of such com- putations. The Honorable Carroll D. Wright, scientist that he was, under whose direction the index numbers of the Bureau of Labor were developed, clearly appre- ciated the high value of providing accurate figures for raw and relative prices, in order that all parties should be free to use this material for framing index numbers in accordance with that method which might be approved at the time. He confined the in- dex number of the Bureau of Labor to an arithme- tical average of the relative prices of the two hun- dred and fifty or more articles quoted. His inten- tion was to use the index numbers of the group, such as those for the articles of food and farm products for the aiscussion in problems of cost of living. Mr. Croxton assumes that the Gibson numbers are quite arbitrarily weighted in comparison with the Bureau of Labor figures, which are formed by "simply averaging." It is important to point out exactly the difference in the weighting. An arith- metical average of two hundred and fifty articles or more automatically weights the average. Each commodity has an equal chance to influence the average,_ but the groups to which the commodities belong influence the average in proportion to the number of commodities in the groups. From the standpoint of the cost of living, the principal groups are food, clothing, minerals and other com- modities. The following table indicates the essen- 112 tial differences between the weighting of the United States Bureau of Labor index numbers and the Gibson series. The table shows the influence of each group in determining the final index: The table showing the influence of the principal elements of cost of living in the two series of index Slumbers: Bureau of Labor. Gibson. Foods 26% 50% Clothing 29% 18% Other commodities 45% 32% 100% 100% The common purpose of the Dun and Gibson systems is to furnish a trustworthy criterion of the relative cost of living. The salient points are these: 1. The Gibson system, following the Dun weight- ing, weights food at 50 per cent., whereas the Bur- eau of Labor gives food an importance of 26 per cent. 2. Clothing is weighted 18 per cent, in the Gibson numbers, against 29 per cent, by the Bureau of Labor. 3. All other commodities exert an influence of 32 per cent, on Gibson numbers, against 45 per cent, for the Government figures. 4. Clothing, 29 per cent, is made more important than food, 26 per cent, in the Government figures, whereas the Dun and Gibson systems rate at a little more than one-third clothing as compared with food. The basis of weighting of the Dun system of index numbers is the so-called Engel's law of the dis- tribution of expenditures by families of varying in- comes. The general principles of the law are com- monly accepted for all countries. Statistics show a uniformity of the percentages of income expended for food, clothing and other commodities which has sociological interest. The following table illustrates the percentages of income which goes for food, clothing and other articles for families of varying incomes. Similar figures are to be had for various countries abroad. 113 Table showing percentage of expenditures for food, clothing and other commodities by families of different incomes. Ihese data originally appeared in the report of the United States Commissioner of Labor for 1891: Income. Food. Clothing. Other. Under $200 50% 13% 37% $200 to $300 46 14 40 $500 to $600 44 IS 41 $700 to $800 39 16 45 $900 to $1,000 34 17 49 $1,200 up 29 16 -55 The Dun system adopts the figure SO per cent, from Engel's law for families of low income as the constant weight for food. In other words, foods are made equal to all commodities other than food, with 18 per cent, for clothing and 16 per cent, for minerals and miscellaneous articles each. The Gib- son series are computed on the above basis in order to continue the Dun numbers. As a criterion of the cost of living at any given time, the Bureau of Labor Number is defective by reason of this underweighting of the food group. Foods may rise 30 per cent., and, if all other than food commodities drop 10 per cent., there is no change in the index number. According to the Dun system, the index would rise 10 per cent. In the long run it is true that all index numbers agree pretty well, when all the differences are ironed out by yearly averaging. This is necessary, because manufactured articles are bound to go up in price, if there is any sustained rise of consider- able extent in food prices, which determine the cost of living for labor. If the big elements of the cost of living, food, and clothing, rise to an important extent, wages must be advanced, or a considerable percentage of the population will drift back to the farms, producing a shortage in the supply of labor for the manufacturing and mining industries and finally in this way restoring the equilibrium. But, for short periods, weeks and months, index numbers diflfer. The above table indicates that families with in- comes as high as $800 are spending 39 per cent for food and 16 per cent, for clothing, according to the above statistics. Contrast this with the weighting 114 of the Government index, with 26 per cen.. for food and 29 per cent, for clothing. In the week ending June 4, 1910, food prices, according to the Gibson index, fell from the figure of the preceding week 3 per cent., and all other than food commodities fell 0.2 per cent. With the Gibson weighting the final number drops 1.6 per cent. By the Government weighting the final index would drop 1 per cent. Foods are given much too little and clothing far too much importance in the numbers of the Gov- ernment. This is shown by a comparison with the weights adopted by other prominent index num- bers. For all practical purposes the Dun system, which met with the approval of the business world for many years, is excellent, because the two pri- mary necessities — food and clothing — are given weights sufficiently in accord with Engel's law. Although in the long time averages the differences among index numbers are not great, nevertheless proper weighting for a cost of living criterion helps io make the numbers sensitive. They more accur- fitely reflect the conditions at the time. The articles used in framing the Gibson numbers follow closely Sauerbeck's selection of raw materials, which are influenced in price movements by independent causes to a large extent. A greater number of commodities add nothing to be desired, because the quotations of the added commodities become either derivative or untrustworthy to a surprising extent through changes in grades, brands, fashions and customs. It is the classification of stocks into leaders, active issues, inactive issues and "cats and dogs" which is paralleled in commodities. The fifty commodities represent the leaders and the principal active is- sues. The Sauerbeck selection of commodities has the approval of the Royal Statistical Society of Great Britain. The Gibson list is identical with the Sauer- beck list to the extent of 70 per cent, in round figures, and the balance consists of substitutions, because about 20 per cent, ol Sauerbeck's list has become unimportant by lapse of time. The Gibson numbers, far from being an "elaborate attempt at elimination and weighting," simply follow well beaten paths. The commodities selected with slight modifications have the prestige of the Royal Statistical Society of Great Britain behmd them and 115 the international index number compiled by Sauer- beck. The weightings of the groups simply follow the Dun method which had for years the approval of business men and a scientific justification in Engel's law. Finally, the modifications made were submitted for criticism to noted statisticians, econ- omists and financiers, and the suggestions made by Prof. Kemmerer, of Cornell; A. Barton Hepburn, of the Chase National Bank; Prof. Irving Fisher, of Yale; Prof. John Bascom; James Gardin, of the National City Bank, and others were carefully con- sidered and adjusted. It is hard to understand how the Washington expert of the Senate Committee on Cost of Living could have obtained so complete a misunderstanding of the methods of compiling index numbers, as evi- denced by the curious mistake when he writes. "Accurate figures showing productions and consump- tion are highly desirable, but the figures used by Prof. Norton are the roughest sort of estimates and even were they approximately correct his method of applying them to groups rather than a weight to each commodity is of practically no value in correcting the fault of simple averages of which he makes so much." As explained above, produc- tion figures are not used at all. In this connection, it is instructive to compare the weighting for the groups adopted by other index numbers. A glance shows how far out the Bureau of Labor figures for food and clothing really are. Table showing the influence of the groups in various index numbers and incomes: Foods. Clothing. Other. Average for incomes under $600 477r 14^^ 39% Gibson index number (Dun system) SO 18 32 Sauerbeck index number (English prices) 42 18 40 Norton-Sauerbeck for Ameri- can prices 44 I'' 3S Bradstreet's index number... 37 10 ,'3 Bureau of Labor index num- ber 26 29 45 Average for incomes above $700 34 16 50 116 In the long term average Mr. Croxfon is. correct in his statement that the Gibson "Index number differs in no material way from the Bureau of Laboi numbers." This is true because one and two-year averages iron out the variations and differences. But business men are like the captains of sailing vessels. It is more important to know something about the probable height of the waves now than the average height for the past ten years. The business man wants his information nozv. The Gibson num- bers dififer, therefore, in more promptly reflecting the changes in the cost of living for one thing. The last index number of the Bureau of Labor was De- cember, 1908, eighteen months ago. Much dead wood has been eliminated. For example, wood screws and quinine by falling in price 35 per cent. each completely overcame in the Bureau of Labor numbers the rise of 32 per cent, in wheat, 21 per cent, in beef and 15 per cent, in mutton for the year 1908. How the price of wood screws is important in the cost of living for an average family is some- what of a mystery. As for quinine, the druggist will charge all he can get for the pills whether the price rises or falls a hundred per cent. Far from criticising the splendid work commenced iby the Hon. Carroll D. Wright, I sincerely hope that Congress will make sufficient appropriations so that the table of raw and relative prices may be pub- lished weekly, and promptly. To hold back the figures a year and a half greatly impairs the value. Thev become ancient history rather than present news. If the final index number is to be used as a criterion of the cost of living, however, the defec- tive weightinq- of food and clothing should be cor- rected in 'Order to bring the results into line with the more scientific index numbers both here and abroad. 117 THE TRUTH ABOUT OUR TRADE BALANCE Written expressly for this advisory service. By FRANK FAYANT. August 26, 1910. History of Our Foreign Trade. The United States, in the past 120 years, has sent abroad 8,200 million dollars more merchandise and specie than it has received. Of this excess of ex- ports, 6,600 million has been merchandise and 1,600 million specie. What have we got for all this virealth? More striking are our export balances when we divide our foreign trade into two periods — the eighty-four years leading up to the panic of 73 during the greater part of which time we had a large merchant marine; and the 37 years since. During the first period we had a balance of mer- chandise imports of 2,200 million dollars, and an excess of specie exports of 1,100 million — leaving a net excess of purchases abroad of 1,100 million. Since the panic of '73 we have sent out of the country 8,850 million more merchandise and 450 million more specie — in all, 9,300 million dollars — more than has come back to us. And during this second period, despite this huge shipment of wealth from our shores, we have grown enormously in wealth. Here are the figures in detail: Foreign Trade for 120 Years (in millions). Balance of Imports. Exports. Exports, (a) Merchandise 1790-1873 $13,409 $11,191 — $2,218 1874-1910 29,726 38,580 + 8,854 Totals $43,135 $49,771 -f $6,636 (b) Specie 1790-1873 $485 $1,614 -f $1,129 1874-1910 2,784 3,235 -f- 451 Totals $3,269 $4,849 -f $1,580 Total trade $46,404 $54,620 -j- 8,216 118 (c) Merchandise and specie combined. 1790-1873 $13,894 $12,805 — $1,089 1874-1910 32,510 41,815 + 9,305 (d) Total trade . Mdse. Specie. Total. 1790-1873 $24,600 $2,099 $26,699 1874-1910 $c 58,306 6,019 74,325 )2,906 $8,118 $101,024 Only in two years in the past 37 have we im- ported on balance. It is almost a clear sheet of exports. Balance of Trade Since '73. Merchandise and Specie Combined. Excess of Excess of Imports. Exports. 1874 . $ 57,052,197 1875 . 51,668,700 1876 . . 120,213,102 1877 . 166,539,917 1878 . 261,733,045 1879 . 269,363,107 1880 . 91,792,521 1881 . 168,544,068 1882 . 32,847,772 1883 . 103,989,430 1884 . 102,523,037 1885 . 163,651,628 1886 . 77,958,448 1887 . $309,658 1888 . 40,926,410 1889 . 64,948,183 1890 . 86,690,369 1891 . 112,258,809 1892 . 216,227,032 1893 . 86,314,802 1894 . 278,839,605 1895 . 132,736,028 119 Excess of Excess of Imports. Exports. 1896 . 213,531,630 1897 . . 273,023,355 1898 . . 534,624,851 1899 . . . 504,086,295 1900 .. . 569,691,446 1901 . 679,625,475 1902 . . 496,446,285 1903 . 416,617,778 1904 . . 473,848,406 1505 . 461,357,605 1906 . . . 481,080,438 1907 397,111,029 1908 603,790,262 1909 410,346,691 1910 *300,000,000 $41,236,068 $9,356,000,000 Net excess of Exports $9,305,000,000 ♦Estimated. What have we got in pay for this wealth? Not gold or silver, because we have parted with them as freely as wheat and cotton. Nor are the foreigners in debt to us. Far from it. We owe them and have given them title to property close to 5,000 million dollars in excess of what they owe us. But isn't everybody proud of our hu^e balance of exports — this shipment of wealth in merchandise and the precious metals to foreign shores? And hasn't everybody been scared this year because Europe hasn't taken as much away as before? And wasn't everybody glad the other day v.'hen the cables from Paris announced that we were going to increase our debt to Europe? The rich old countries of Europe, that found America and sent their money and their people to it, face no such outflow of wealth. It flows to them and fills their coffers. There is England, drawing merchandise and the precious metals from the rest of the world in excess of what she sends out, at the 120 rate of 1,000 million dollars a year (and nearly 400 million from us). What becomes of all the wealth we so prodigally send abroad? It goes largely into four channels. Being in debt to Europe and having foreigners as partners in our industries, we must pay them a huge sum every year for the use of their capital Then we must pay them for carrying our goods around the world. These are the two great serv- ices they perform for us for the wealth we give them — renting us capital and ships. But that only accounts for half the export balance. The other two principal channels through which our wealth flows away are the result of the abundance of this wealth. Millions of our workers who haven't been here long send back to the "Old Country" a part of their savings to care for the less fortunate ones left behind, to pay past obligations, or else to lay aside something that they may som2 day return to the old home to live in comfort. And then there is the other terge outflow, the enormous ex- penditures of American travelers abroad — the annual American invasion of Europe that has given the Atlantic its wonderful liners and Europe its pala- tial hotels, not forgetting a succession of heiresses. Beyond the shipments on balance of merchandise and specie in the past 120 years, one can only hazard a guess at the amounts of the other items in our trade balance. We do know that the sum of all the other items, less the ship- ments of securities on balance, must equal the sum of these two known items. If the ex- port balance of securities is, say, 4,000 million dollars, there is, with the 8,200 million merchandise and specie balance, a total credit balance rising 12,000 million. Against this, on the debit side, we might venture to guess that we pay for the use of capital, 4,000 million; freights, 1,000 million; tour- ists expenses, 3,500 million; remittances and other items, 3,500 million — in all 12,000 million dollars. But any one is free to make his own guesses, and any laborious attempt to approximate nearer the true figures would be wasted effort. But we can approximate with fair accuracy the size of these items now from year to year. Whether a country has a balance of exports or 121 imports in its merchandise trade depends on various factors. A country imay be very prosperous or very poor with a balance either way. A rich old country normally has an import balance, because other countries are paying it for the use of capital; while a new country may have a balance either way, de- pending on the stage of its advancement. Nor is the magnitude of a country's foreign trade an index of its prosperity. A country might be very pros- perous with no foreign trade at all. The ebb and flow of the gross foreign trade of a country is an index of industrial activity, just as are the fluctuations in its production of the staple commodities, or in its use of banking facilities. The per capita trade of nations in various stages of advancement is here shown: Foreign Trade (Per Capita) of Leading Countries. (Average for three years, 1906-8). Excess Imports. Exports. Total. Imports. United Kingdom . .$68 $43 $111 $25 Germany . ... 29 24 53 5 France 28 26 54 2 Holland 188 149 337 39 Belgium 92 71 i63 21 United States 15 20 35 5* Canada 46 34 80 12 * Excess of Exports. Trade (Per Capita) of Minor Countries (1908). Imports excess, ( — ); Exports excess, (+). Total trade. Balance. Switzerland $137 —$24 Norway . 71 — 15 Denmark 135 —10 New Zealand 172 — 8 Sweden 60 — " Italy 26 — 6 Russia 6 -)-l Chile 65 +6 Australia 130 -1-13 Argentina . ... 101 -|-15 Cuba 97 -flS 122 The chart (No. 1) emphasizes the well-known laws of international trade in a developing, debtor coun- try. After a crisis, the consuming power of a country decreases, prices fall, the foreign trade contracts, and, the home market being a better market to buy in than to sell in, exports rise in proportion to imports. As the country recovers from the crisis, the consuming power increases, prices rise, th* foreign trade expands, and then comes a boom. Toward the top of the boom, with its abnormal consumption and high prices, the pro- portion of imports rises — foreigners finding it a better market to sell in than to buy in. This in- creasing proportion of imports is for awhile a sign of rising prosperity (larger consuming power). When it is continued over a considerable period, at rising prices, with rising rates for money, it is a sure sign of a crisis. In creditor countries, on the contrary, there is normally a rising proportion of exports during a boom — evidence of capital going out to creditor countries, while in depressions there is normally a rising percentage of imports — evidence of the cutting off of the shipment of capital away and the with- drawal of capital invested during the boom. The trade of old, creditor countries is much less fluctuat- ing than that of new, debtor countries. Our Visible Balance of Trade. The progress of our foreign trade since the War, showing for each year the trade in merchandise and in merchandise and specie (per cap'ta), the per- centage of merchandise exports to imports, and the course of commodity prices, is presented in Chart I. 'i le trade figures are for fiscal years. The commo- dity prices prior to 1890 are taken from the Aldrich report on Wholesale Price^ (1891), for Jan. 1, the middle of each fiscal year, while the later prices are yearlylGibson Index Number averages for the calen- dar years ending in the middle of the corresponding fiscal year — that is, the 1909 average is used for the year 1909-10, and so on. The commodity price line in the chart is turned upside down to show its paralleling the export percentage line— illustratiijg the rise and fall of exports with prices. The parallel since '96 (rising prices and declining exports) has 123 been remarkable, as was also the parallel from 73 to 79 (falling prices and rising exports). A study of the chart shows: (a) The rapid expansion in foreign trade preced- ing the panics of 73, '84, '93 and 1907, and the sudden contraction coming with each crisis — 'Ti — '76, '81— '86, '92— '95, 1907— '09. (b) The increasing proportion of exports imme- diately following the panics, and the great increase ir the proportion of exports leading up the succeed- ing booms. (c) The increasing proportion of imports during the booms over a period of several years just before the panics. The growth of our merchandise and specie ship- ments abroad in the past sixty years is shown in Charts II and III. The per capita trade, by decade averages, is shown in Chart II. After the loss of trade in the Civil War, there was a sharp advance in the 70s and a slow advance in the '80s and '90s. In the past decade we have had another big rise. The per capita balance of visible exports, by de- cade averages, and by years in the new century are shown in Chart III. Each decade since the War has shown a rise in the merchandise export balance. The past decade shows a sharp rise over the pre- vious decade, despite the fact that the tendency since 1901 has been a rapid fall in the balance. From a per capita merchandise export balance of $8.50 in 1901, this year we have fallen to a trifle over $2.00, with an abnormally large export ot specie, bringing the total balance up to $3.20. It is worth while noting in passing that in the only two bad years in the decade 1903-4 and 1907-8 were the only two rises in the net export balance, while the boom years were marked by falling export balances, which is rather confusing to those persons who habitually associate fah ing export balances with bad times. This will be dis- cussed later on in this article. The figures on which these two charts are based are as follows: 124 The use of capital (returning interest, dividends and profits). Ocean transportation. Travelers' wants. Various services (brokerage, insurance, financing, etc.). Demands, etc., for remittances. Tribute. The shifting of trade balances in the industrial development of a country, in which a large mer- chant marine is built up, has some such evolution as this: Balance of Balance of Imports Exports First Period Merchandise Securities Gold Freights Second Period Merchandise. Securities Gold Freights Demands for dividends, etc. Third Period Gold Demands for dividends, etc. Merchandise Securities Freights Fourth Period Merchandise Demands for Gold dividends, etc. Securities Freights This summary supposes that the country is not a large gold producer. If it is, then the gold mined beyond its needs is exported like merchandise. It is also supposed that there is a rapid development of merchant shipping. If shipping is made a minor pursuit, then freights will show continuously on the import side, and there will be a larger balance of merchandise exports. The summary also leaves out of calculation such items as tourists' expendi- tures and remittances, which are very large in our trade balance; and various services, which are a large item in the English trade balance. Supplying tourists' wants is largely an export balance in Eu- rope. Demands for remittances tend to be an im- port balance in rich, new countries, and an export balance in old, thickly populated countries. 126 China is a typical country in the first period — essentially a debtor country, with a merchandise im- port balance. The United States in the early part of the last century was in the second period, still with a merchandise import balance; Canada is now, with the substitution of gold mining for foreign shipping, thus reversing gold and freights in the balance. The United States now is in the third period, with a merchandise export balance, and, of course, with a large import balance of freights. England, France and Holland are typical countries in the fourth period, creditor countries, with a merchandise import balance. Although we have seen a decline recently in our merchandise export balances, the time when we will normally import on balance is a long way off. We will continue to pay for many years for the use of foreign capital and ships, and for the pleasures of foreign travel, and the only way we have of paying for them on a large scale is by the sale of our pro- ducts abroad. We have some excess of gold to spare from year to year, but no such proportion as in the California days. In a pinch we can ship securities to Europe as we did before the panic of 73, or as we have this year. But the trouble with securities is that they are likely to be dumped back on the exporting country just when they're not welcome; merchandise isn't so easily sent back — once exported, it is consumed by the foreign buyer. The Gold Movement. Gold exports alarm many people in this country, especially in Wall Street, where the flow of the money metals ought to be best understood. The man in the Street likes to see copper or wheat or cotton leaving our shores, but he wants to see gold coming in. This is one of the Seventeenth Century delusions that will not die. The study of the move- ment of the money metals — gold especially, since it is now the standard of values — shows that each country has its normal share of gold, depending on various causes, as the volume of trade, the cur- rency system, the production of the mines, and the 127 habits and business customs of the people. Gold moves automatically between countries according to their need for it. Gold comes into a country that has no mines of its own; it moves out of countries that produce more than they have use for. The old countries of Europe are constant importers of gold; South Africa exports it. We were heavy importers of the metal before the '49 discoveries. Then we began producing more than we needed, and in the thirty years following the rush to California (up to the resumption of specie payments), we exported on balance nearly 1,000 million dollars of gold. Since then our increasing demand for the metal has kept about all of our new gold at home, and there is a small balance of imports in the past thirty years. If our mine output falls off we will import gold; if it rises rapidly, we will export. In London and Paris, where the theory of the foreign exchanges is more generally understood, there is no alarm over gold exports. If the Bank of France needs gold, the Bank of England lets her have it, and nobody has any nightmares. Our foreign trade in the precious metals for 60 year sis shown on next page. Our gold supply smce 1790 is as follows: Gold production $3,216,000,000 Import 2,150,000,000 Total supply . . . $5,366,000,000 Exports 3,016,000,000 Net supply . .$2,350,000,000 Money stock . . 1,650,000,000 Industrial consumption . . . $700,000,000 An excess of gold exports of 895 million dollars, and of silver exports of 758 million — in all 1,653 million dollars in 60 years — shows the absurdity of the old ideas of keeping the foreigners' hands off the precious metals. We produce more silver than we need and will continue to sell it abroad like 128 WW . c_j oo ^ ^ '"! ^ 13 in ON 2 2 f5! 3i c o •^ £ (A c m (U > o 4-. ^; CD u^ Ch ^ IT) o "r; fu ^ c^ oi o\ -^ \6 0-— ) Tf 1/1 w c/1 . t^ CO ^D lO ^ o !5 c^ ^ i~^ ^ <^i cc o \0 CO CD -^ ^ Ch ,X ^iO« CMy3 ^ CM P t^ 00 «3- ^ 69- ". O O R] "S o SI as (It u c75 ^ in -+ tv. cv> OJ P rsi 00 in CO r^ V^ r^ 00 ooo— '("^ ■;: r^ 00 o oo >-< v^ ° ««-T-l CD Tl- 00 'l •S ■£ ^ tl ^-'o\0^'~ONod^C)Oin Ci .^ I ^ ^O in ^. 'ij- ^ P I — ^-l On '-' C^' NO O I o en en ON en NO NO ^t^ ^/5-T-H 1— I en m t^ On -!t- ON ^ o o ■*-> u- "o ;;; o ca 2 ii T^ m NO t^ CO On o 00 00 00 CO 00 On X O 129 copper; and it is likely that we will be for a time alternate exporters and importers of gold, with no marked trend either way. A large influx of gold into a country raises prices, and thus increases the proportion of merchandise imports. Gold must then go out to settle balances, prices fall, and the proportion of exports increases. This is the cycle we are now going through. Gold exports are a bad sign when they are due to heavy purchases abroad at high prices, or when they are attended by a tight money market; but gold sent abroad to buy commodities at low prices is a good sign. The direction of the flow of gold is not so important as the conditions under which it occurs. The Movement of Securities. International payments are now largely made by the transfer of securities, which often take the place of gold shipments. Sometimes the securities are shipped for the purpose of making specific pay- ments of indebtedness, as when a New York banker buys a million dollars' worth of international se- curities here and sells them at the same moment in London, placing the actual securities in London six days later. He transfers the million dollars just as surely as if he shipped bullion. But more often these payments with' securities are made involun- tarily. For example, in the period of recovery after the panic of '93, our low commodity prices led to heavy purchases of our goods by Europe, with decreased sales of foreign goods here. This created a record excess of exports. Europe sent us some gold, but the greater part of the balance was made up by our heavy purchases of American securities in Europe. In eighteen months in 1898-9 it was estimated that we Isought from Europe 375 million dollars of our railroad securities. The transfer of securities from Europe to New York paid for the American foodstuffs and raw materials sent abroad. Recently we have seen our export of gold stopped and our heavy foreign purchases paid for by the transfer of our railroad bonds to Paris. We haven't sent bonds to Paris for the purpose of paying for our record imports of raw materials, but because we fin4 Paris a better market than our own for capital; 130 and in our searoh for capital we have paid for our imports automatically. This going in debt in Europe always scares the Jingo, but going in debt at 5% for the purpose of making 10% is always good busi- ness — if we are sure there is a natural demand for the contemplated increased production. Panics are caused by going in debt to overproduce. The normal movement of securities is out of the new countries into the old countries. England, Mr. Paish estimates, has sent 12,500 million dollars capital abroad since 1850. She has sent 600 million to Canada in five years. Last year she sent 150 million to Canada and 125 million to Argentina. The public debt of Australia, New Zealand and Canada increased (1895-1907) 880 million, an aver- age of 62 million, a year, and England took the larger part of the bonds. Mr. Wells estimated that during the Civil War period we sent abroad 1,000 million dollars' government bonds and 500 million other securities. Advantages accrue to both new and old countries from this flow of capital. The new countries obtain cheap capital for their rapid development; the old countries profitable investment for their surplus capital. The same advantageous movement occurs between widely separated sections of a new country, as in the United States, between the old East and the new West. The international shipments of securities are as difBcult to trace as the shiftings of stock ownership in the New York market. There is a floating supply of our securities in the international market, just as there is in our own market. Then there is the irregular ebb and flow of investment buying. At times the magnitude of the movement of securities is plainly to be seen, as during the Civil War period just noted; as in the inward movement during the free silver scare and the industrial boom of the '90's, which led Mr. Schiff to tell the Industrial Commission (May, 1901), that "the amount of American securities now held in Europe is ex- tremely small"; and again in the Harriman boom of 1906-7, when foreign bankers were urging their people to "liquidate." And since the 1907 panic we have been large shippers of our securities on bal- 131 ance, especially to Paris, the transfers for the past year reaching, several hundred million dollars. The movement of securities, in and out of the United States, is, therefore, the most irregular item of our trade balance. It has become, even more than the gold movement, the final adjuster of the international balance. The movement of securities is almost automatic. They flow like merchandise. They go out of the country when they are cheap and come back when they are dear, with the usual corrections and exceptions for the psychological phenomena of booms and panics, and the abnormal effects of great economic events. American capital is flowing outward in larger vol- ume than ever before, especially into neighboring countries, not only in search of larger returns (as English capital flows out of England), but because of the propaganda of the Rooseveltians against free- dom of investment within our borders. This Out- ward flow, paralleling a declining percentage of mer- chandise exports, with no larger inward flow of income on investments or gold, could only be remedied as it has recently been in part by ship- ments of our securities to Europe. The trade relations between old (creditor) coun- tries and new (debtor) countries may be illustrated by supposing an old country to supply a new coun- try with 100 million dollars capital each year for 25 years, for which it pays 5%. The movement of capital and interest will be like this (in millions): New Country New Country's Old Country Sends Pays Balance 1st year 10th year 20th year 2Sth year Each year. Total. Interest. of Trade. $100 $100 100 1,000 100 2,000 100 2,500 $5 50 100 125 $95 excess imports. 50 excess imports. Exports equal imports. $25 excess exports. The Income on International Investments. George Paish, of the London Statist, a few months ago estimated England's investments abroad at 13,000 million dollars, on which her income is 5.2%, or 670 million. In American railroads alone he estimated England's investment at 3,000 million, 132 returning 4.5%, or 130 million. These items alone account for a large measure of the contrast between the trade balances of the two countries. England has what the mercantilists call an "unfavorable balance of trade" of some 1,100 million dollars; but 60% of these excess imports are pay for the use of English capital. With us, with a "favorable" bal- ance running from 200 to 600 million, a good share of our surplus goods shipped abroad is England's American income. Mr. Paish's estimate of the foreign capital in this country is 6,000 million, largely in railroads. Mr. Speare made the same estimate three years ago, crediting England 4,000 million, Germany 1,000, France 200, and Switzerland 100. Ten years ago N. T. Bacon (Yale Review, 1900), estimated Europe's investments here as follows: England, 2,500 million, Holland, 240, Germany, 200, France 50, others 340, in all 3,300 million. He estimated our investments abroad: Canada, ISO million, Mexico, 185, others 165, in all, 500 million. This left a balance held by foreigners of 2,830 mil- lion dollars, on which Mr. Bacon estimated our an- nual payments for interest, dividends and profits were no larger than 90 million, 3.2%. At that time there had been a large return of American securi- ties from abroad, first the foreign liquidation dur- ing the free silver scare, then the American invest- ment buying of the Spanish War boom. The in- vestment tide has since turned several times, but the net result is a largely increased amount of our securities in Europe. These foreign investments are not only in the securities of corporations, but in real estate, agri- culture, business partnerships and various enter- prises. The Waldorf-Astor properties in New York fall under the head of foreign capital; so does the New York Herald newspaper; and so do hundreds of millions of other property here owned by ex- patriated Americans. The income goes abroad in the shape of exports of American products. Taking 6,000 million dollars as the amount of foreign capital here, and 1,500 million as our. invest- ment in Canada (which the Toronto Monetary Times puts at 230 million), Mexico (estimated at 133 700 million by the Bureau of American Republics), and other foreign countries, we have a net balance of 4,500 million, on which we are now paying, say, Ay2% or 200 million dollars. Remittances. Mr. Charles F. Speare, after a detailed investiga- tion, made an estimate (North American Review, January, 1908), of the remittances to the "Old Country" by foreign-born workers in this country. His figures were surprisingly large, even though made on the basis of the industrial floodtide of 1906. He estimated these remittances: Italy, 70 million dollars; Austria-Hungary, 65 million; United King- dom, 25 million; Norway and Sweden, 25 miUion; Russia, 25 million; Germany, 15 million; Greece, 5 million; all other countries, 10 million; total, 225 million dollars. He estimated that a third of this money went through the post office, more than one- half through the small private bankers; a tenth through the express companies; and the remainder through minor channels. These remittances are large in boom years and smaller in years of depres- sion, hut in industrial depressions alien workers go back to Europe carrying their savings with them. The outflow of remittances has been very heavy for five years, judging from the government reports of foreign money orders issued (they reached 89 mil- lion dollars in 1907-8, the panic year), and the pur- chases of foreign exchange by the private bankers who receive the savings of the foreign-born workers. Against these remittances must be set the money brought here by incoming aliens, which the Immi- gration Bureau reports at from 18 to 26 million. From Mr. Speare's figures it is evident that 150 mil- lion a year is a conservative estimate of the present flow of remittances to Europe. Foreign Travel. We have been spending a great deal of money in foreign travel for many years but it is in the past ten years that the real "American invasion" of Europe has taken place, as these figures of the number of United States citizens returning from Europe indicate: 134 1900 120,000 1901 157,000 1902 142,000 1903 140,000 1904 148,000 190S 167,000 1906 177,000 1907 191,000 1908 200,000 1909 217,000 Sir Robert Giffen estimated thirty years ago that we were spending SO million dollars a year in foreign travel, allowing a thousand dollars to each tourist. On this basis now we are spending 200 mil- lion. When it is noted that $300 is an exceedingly small estimate of the cost of the simplest kind of trip across the water, and that thousands of Ameri- can go abroad for months at a time, each spending thousands of dollars, a thousand dollar average ex- penditure does not seem large. Taking $800 as the average expenditure, the expenses of foreign travel are now 160 million a year. Deducting from this the expenses of foreign travelers in this country, and of foreign liners in our ports, 140 million dollars seems a conservative figure for the balance of travel against us. Discrepancies in Foreign Trade Figures. Study of international trade balances reveals some very surprising discrepancies in merchandise valua- tions. These discrepancies are often so large as to make the most careful compilations as to inter- national trade only broad approximations. Edward Atkinson estimated (report of the Indus- trial Commission), that the European -statistics of exports from thij country in 1898-99 showed valua- tions 38% larger than our figures. This large differ- ence arose, he believed, from freight and other charges, and duplications due to transshipments from seaports to interior countries. On the other 135 hand our imports from Europe were valued here 16% greater than there, a discrepancy not so- easily explained, since our import valuations do not include freight Theodore E. Burton (Crises and Depressions, 1902) tabulated American and foreign figures of our trade with the United Kingdom, Germany and France for four years, 1896-99, and found that our exports were valued 16% greater in Europe, while our imports were valued 2% greater there. To show the varying discrepancies in foreign trade statistics, I have compared the foreign figures of our trade with the United Kingdom, Germany and France with our own for the eight years 1901-8. They show in our exports average excess valuations abroad of 5.4% in the United Kingdom, 20% in Ger- many and 2% in France; while in our imports our excess valuations are 31% for the United Kingdom, K% for Germany and 32% for France. In out total trade with these three countries, our exports show an average valuation 9% larger there; our imports, 22% larger here. In our trade with Canada in the four years 190S-8, our exports are valued 9% greater there, and our imports lYzfo greater there. In our trade with smaller European countries, I have compared our figures with theirs for the five years, 1904-8, and find still larger variations. Our imports show excess valuations here of 25% in oui trade with Austria-Hungary and 11% in our trade with Italy, while our imports from Holland are valued 26% greater there. In our export trade, Austria-Hungary reports values 157% above ours, Italy 8%, and Holland 13%. The average for these three countries shows our exports valued 28% greater abroad, and our imports 5% greater here. All six European countries show our exports valued 12% greater there, and our imports 157o greater here, but the variations are so wide between the difEerent countries, and even from year to year in the same countries, that it is plain that inter- national trade statistics are to be used with great caution. 136 The variations in valuations are here shown: Our Totals Their Totals Greater. Greater. United Kingdom . . Imports 31% Exports Sj4% Germany Imports J4% Exports 20% France Imports 32% Exports 2% Austria-Hungary . Imports 2S% Exports 157% Italy Imports 11% Exports 8% Holland Imports 26% Exports 13% Average Imports 15% Exports 12% Mr. Burton's figures: Average Exports 16% Imports 2% Mr. Atkinson's figures: Average Imports 16% Exports 38% These statistics cover nine-tenths of our trade wth Europe. The very wide variation in the export excess valu- ations abroad is probably due largely to the trans- shipments. France credits us only with goods she consumes; we charge her with all goods shipped to her ports. Austria, in the interior, receives much American merchandise from seaport countries, while we only charge her with goods sent directly to her. So France shows only 2% excess valuation, while Austria shows 157%. England alone credits us with all shipments, whether for consumption or the the Continent, and so her 5^4% excess valuation on our exports might be taken as the ocean carry- ing charge to England. The import figures are more puzzlng. Although our valuations are based on the f.o.b. foreign sea- port prices, and should, therefore, more closely tally with the foreign trade returns, we find our figures running far ahead of the foreign. It is hardly to be believed that our imports are overvalued, since nearly half of them p?y the customs tax. We prob- ably credit Europe with transshipments from more distant continents, and there may be, too, an under- valuation at some foreign ports of their exports. Our larger figures for French imports, which are 137 running fairly uniform year to year, may be due to goods brought here by our tourists and buyers, and not reported in French port statistics. No one who has looked into international trade figures believes for a moment that tlie official re- turns of merchandise shipments are ordinarily made from the exact prices on which the international payments are made — the only valuations from which trade balances can be struck. Some critics may say that in the multitude of errors, one way and the other, the true figures are arrived at. But it is not difficult to imagine that flhere might be, say, a 3% overvaluation on one side and a 3% undervaluation on the other. If, for example, our exports were overvalued and our imports undervalued, each to the small amount of 3% (think of the Sugar import fraud!) there would be a difference of 100 million dollars a year in our trade balance. Ocean Freights. Before the Civil War the greater part of our foreign trade was carried in American bottoms. From 1790 to 1873, we had an excess of merchan- dise imports in 69 years and an excess of exports in only IS years. This "unfavorable" balance was due in a considerable measure to the earnings of our merchant ships. We carried nine-tenths of our foreign commerce in the early part of the last cen- tury; two-thirds at the beginning of the Civil War; one-third at the end of the war; and now only one- tenth. Foreign bottoms are now carrying the nine- tenths we once carried. Since 73 we have had "favorable" merchandise balances in 33 years and "unfavorable" balances in only 4 years, due in no small measure to our surrender of the merchant trade to European ships. One of our largest in- visible exports before the War was labor product in the form of ship-hire; now it is one of large in- visible imports. My own impression is that our payment for freights is much smaller than most writers" estimate it. The various estimates are of interest. Bourne (English statistician) estimated (1871) that freight on English imports was 11 % of their value. Newmarch (English statistician) estimated 138 (1878) freights as 5% of imports and 10% exports. Rates were then much higher than now. Sir Robert Giffen made a careful examination (Essays in Finance, 1884) of the earnings of the British merchant marine (1881) and figured that out of the value of the merchant trade, 8% was the cost of freight and 2% miscellaneous charges and commissions. Freight rates now are much lower than then — the rate on wheat to Liverpool, for ex- ample, has fallen 60%. He also estimated that ships spent one-sixth of their earnings in foreign ports. Mr. Wells estimated (1868) a' balance of $24,- 000,000 against us on freights. He apparently estimated freights as 9% of the excess trade carried in foreign bottoms. Osborne Howes, a Boston authority on merchant shipping, estimated in 1901 (Report of the Industrial Commission, Vol. IX) that we were paying foreigners $40,000,000 for carry- ing our imports, or 7% of the value. One of the members of the commission had heard the amount was nearly $200,000,000 evidently figuring 10% on both imports and exports. Four years later Mr. Howes made an estimate of the export trade of 1903, based on the rates on half the tonnage, show- ing freights of $60,000,000, or 414% of the value, and he guessed import freights to be $40,000,000, or 414 of the value; $100,000,000 for all freights on a gross trade of $2,400,000,000. The Merchant Marine Commission (190S) stated that the freights earned by foreign ships in our trade were $150, JOO.OOO, basing the estimate on Giffen's English calculations (8% of the gross trade) made some years pre- viously when rates were considerably higher. Sena- tor Gallinger, chairman of the Commission, put the figure as high as $200,000,000. A Harvard professor of economics writes me that he believes freights run from $120,000,000 to $150,- 000,(K)0. Other recent estimates are: C. F. Speare, $75,000,000; Alfred S. Heidelbach (1895), $100,000,000; Frank W. Vanderlip (1901), $75,000,000; the Indus- trial Commission (1902), $50,000,000 to $150,000,000. Mr. Gardin, of the National City Bank, puts (1901) freights, insurance and premiums at $300,000,000 to 139 $400,000,000, evidently figuring 10% to 12% on the total trade, which is as absurd a guess as has ever been made in Wall Street. For the past five years our merchandise imports by sea have averaged 1,260 million dollars a year, and an average of 1,080 million (86%), has been carried in foreign ships. Estimating 5% for freight and 2% for other charges, paid by our importers, we have 54 million and 25 million, respectively, for these two items, a total of 19 million. Deducting an eighth for foreign ships' expenses in our ports, there is 69 million dol- lars — our average payment for five years on account of foreign import charges. On this year's imports the payment would be 80 million. If any consider- able portion of our export trade was carried under our flag, the earnings of our ships abroad should be deducted, but these earnings are too small to be of any consequence. Our export sea trade has averaged 1,550 million dollars the past five years, of which 1,420 million has been carried in foreign bottoms. If we charge ourselves for freight on imports, we must charge the foreigner for export carriage, so that export freights do not enter into the international trade balance. Foreign ships and agents earn (on a 7% calculation) 1(X) million a year in our export trade, but this we must charge to foreign irnporters. We may credit this country, however, with an eighth of this revenue, or 12 million, as the port expenses here. So we have a net balance against us, in the ocean carrying trade for the past five years, of 69 million, less 12 million, or 57 million dollars a year. This figure may be raised, to suit one's fancy, by charging ourselves with some proportion of the 100 million earned by foreign ships and agents ex- port trade, or by reducing the estimate of port ex- penses, but it seems impossible, by any combination of reasonable calculations, to make any such figures as some of our finanrial statisticians have been giv- ing us in recent years. Mr. Gardin's estimate of 300 to 400 million is plainly absurd, since the entire gross revenue received by foreign ships and agents, from us and foreign nations, has averaged only 180 million in these five years, on a very liberal allow- ance for freight and charges. VO Many of the large estimates made of our payments for ocean transportation not only make allowances for freights on the high tariffs of twenty or thirty years ago, before the days of the big steel, cargo ships, but ignore the facts that our own ships have been carrying from 250 to 300 million dollars worth of our foreign trade, and that our foreign trade by rail (Canada and Mexico) accounts for as much more. These estimates also make us pay nearly all the freight going and coming. Summary of the Trade Balance. Our total international trade balance for this decade (1901-10) may be roughly sketched from known and estimated items as follows (in millions): DEBIT ITEMS. CREDIT ITEMS. (3) Dividends, etc $1,500 ( 1 ) Merchandise $4,590 (2) Travel 1,200 (1) Silver 180 (2) Freight 500 (3) Remittances 1,000 (1) Gold 60 (4) Securities 510 $4,770 $4,770 (1) Known items from official returns. (2) Probably fair approximations. (3) Largely guesswork. (4) This might be a credit item, if the other estimates, (2) and (3), are too small. The trend of securities early in the decade was into this country, and again in 1905 and 1906. Securities since the panic have been a credit item. For the past three years — the period smce the collapse of the Harriman boom — our average yearly trade balance may be guessed as follows (in mil- lions) : CREDIT ITEMS. Merchandise $400 Silver 12 Gold 25 Securities 113 DEBIT ITEMS. Dividends, etc $200 Travel 140 Remittances 150 Freight 60 $550 $550 Looking over this international balance sheet, it is seen that, with the debit items continuing to grow, as they are likely to do, our merchandise (and silver) export balance must continue to aver- age at least up to the average of the past decade — rising 460 million dollars. For, unless we largely 141 increase our gold output, we will have little to spare for export. We are likely to import the metal heavily on balance before the year is out. If we don't ship merchandise, we must ship securities, as we have done this year. But there is a limit to Europe's demands for our securities, and ao abnormal load of American securities abroad must inevitably lead, in any great European crisis, to a return flood to our markets. So long as we are prosperous, our expenditures abroad for travel and remittances will continue to grow. Freights surely will advance with the increase in trade so long as we do not build a merchant marine. It is conceivable that, in the course of time, we will become a creditor nation, with a credit balance for the use of capital, but that is a long way off. Our outgo for divi- idends, interest and profits to foreign owners might be considerably reduced, in a long period of prosperity, by large investments of our own capital abroad (especially North and South America and the Orient) or by repur- chase of our securities from 'Europe, as happened in the industrial boom after the Spanish War. When we can bring our Amercian securities back from Europe and supply capital to other countries, then we can be contented with a smaller merchandise export 'balance. It is also conceivable that, in the course of time, with declining immigration from Europe, and an obliteration of the family ties now making our alien workers look back to the "Old Country" as a place for their savings, our remittances to Europe will cease to be a large item in our trade balance. And it is also conceivable that foreigners may some day spend their money lavishly in this country in the pleasures of travel, thus reducing another large debit item. Our hire of foreign ships will cease to be a debit item when American capital finds it as profitable to carry goods across the ocean as it now does to carry them between our own states. These considerations lead one to the conclusion that we will some day have regularly an import merchandise balance, but that the time is still far off. A 1,000 million dollar import balance, such as England now has, is too remote to be thought of. It is of interest to compare the estimates of the in- visible items in our trade debits, as made at various times by vsrious writers. Some interesting calculations are here shown : — 142 David A. Wells (1868): Dividends, etc. . . $80,000,000 Tourists 25,000,000 Freights 24,000,000 $129,000,000 Sir Robert Giffen (1881): Dividends, etc. . . . $150,000,000 Tourists .... 50,000,000 to 75,000,000 Freights 45,000,000 $245,000,000 to $270,000,000 Alfred S. Heidelbach (1895): Dividends, etc. .$75,000,000 Tourists 100,000,000 Freights 100,000,000 Other items 75,000,000 $350,000,000 Frank W. Vanderlip (1901): Tourists $75,000,000 Freights 75,000,000 N. T. Bacon (1900): Dividends, etc $90,000,000 Tourists 50,000,000 Expatriation 10,000,000 Vice-President Gardin of the City Bank (1910): Dividends, etc "Enormous'' Tourists $400,000,000 Freights 300,000,000 to 400,000,000 Charles F. Speare (1907): Dividends, etc $100,000,000 Tourists 100,000,000 Freights 75,000,000 Remittances 225,000,000 $500,000,000 143 Professor of Harvard (1910): Dividends, etc. . . . $100,000,000 to 110,000,000 Tourists . 100,000,000 Freights . 120,000,000 to 150,000,000 Remittances . 50,000,000 to 75,000,000 Smuggling . . . . 25,000,000 Exports over-valued . 25,000,000 to 50,000,000 $420,000,000 to $510,000,000 England's Trade Balance. The present English trade balance may be roughly approximated as follows (in millions) : DEBIT ITEMS. Merchandise $1,100 Gold 30 Securities 400 $1,530 CREDIT ITEMS. Interest $680 Freights 500 Services 200 Remittances 150 $1,530 The item of freights seems to be very high, where the English foreign trade is only 5,000 millions, but it must be noted that the statistics of English im- ports include the cost of carriage, and that this cost, although paid to home ships, must therefore be set down as a credit item; also, that England's mer- chant marine is also engaged all over the world earning money in the foreign trade of other coun- tries. England's average international trade balances for the years 1898-1902 vv'ere recently estimated by the Journal of Commerce as follows: (Millions) Merchandise imports balance . . $845 Gold balance 25 $870 Dividends, etc., balance .... $480 Ocean freights balance 450 $930 144 This estimate leaves out security shipments and other less important items. The popular fallacy that a "favorable" balance of merchandise trade, along with an excess of gold imports, is the foundation of national prosperity, is a relic of the Mercantile System of the Sixteenth and Seventeenth Centuries, that was reduced to an economic absurdity by Adam Smith and his followers. The Mercantilists preached that a country should endeavor to sell to for- eigners much more goods than it bought, and hoard the precious metals. To this end European countries for- bade the export of coin, levied taxes on merchandise imports and decreed that all imports must be brought in home ships. England, France, Holland and Ger- many, in the Seventeenth Century, vied with each other in raising walls to keep their gold at home and keep foreign goods from coming in. The re- action against the false tenets of Mercantilism was slow, and today it still has its followers, especially among American Jingoists, who "point with pride" to our huge merchandise export balances and shiver every time a ship leaves New York with a few mil- lions of specie. Alexander Hamilton said that "To preserve the balance of trade in favor of a nation ought to be the leading aim of its policy" — but during the first 84 years of the Republic there was such a balance in only i3 years, and the balance "against" us ran up to 2,200 million dollars. During this time there was, despite Mr. Hamilton's fears, such a growth in national wealth here as the world had never before seen. The Gain in International Trade. Our American Mercantilists, who want us to do all the selling and none of the buying, have for years condi cted a propaganda for a merchant marine. "An adequate ocean fleet would mean the saving to this country of $100,000,000 a year which now goes to build up the commercial power of Europe and Asia," announced our Merchant Marine Commission. The Mercantilists, like their European ancestors of two centuries ago, begrudge the few millions paid abroad for carrying our commerce. They seem to have an idea that if we bought nothing abroad and sold shipload after shipload of our goods 145 under our flag, we would make the world pay trib- ute to us and incidentally draw in all th« gold of Europe. It is hardly worth while to point out to our Amer- ican Mercantilists that the gain in all trade is mutual, and especially so in international trade; and more- over, that the law of comparative costs governs the exchange of products between countries. We sell abroad products in which we have the most ad- vantage, and buy abroad those in which we have the least; and, though we might have an advantage in the production of all goods, we would continue to devote our chief energies to those in which we had the largest advantage, buying abroad those in which we had the least. The reason for this is plain to see. Suppose two men are on adjoining islands out of tTie track of commerce, and that the man on one island has an advantage over the other in the production of two necessities of their simple life. The more fortunate islander, we will say, can produce a certain measure of commodity A in three days, while his neighbor takes six days in the same work. To produce a cer- tain measure of commodity B the first man takes three days to the other's four. The one islander has an advantage over the other in both kinds of work, but it will be to his advantage to devote his energies to A, while the other will find it profitable to produce B. Twenty-four days' labor on the first island will produce 8 A or 8 B; on the second island the same labor will produce 4 A or 6 B. If the first man takes his 8 A to his neighbor he will find it worth there as much as 12 B, and the second man will consent, we will say, to give 10 B for the 8A. Now the first man, with his twenty-four days' labor has obtained as much B as it would take him thirty days to produce, while the second man, with forty days' labor has obtained as much A as it would take take him forty-eight days to produce. The first man, although he can produce B cheaper than his neighbor, saves 20% by buying it from him; while the second man makes a profit in the same trade "of 16 2-3 on the cost of A. It was this reasoning that led the classical econo- mists to evolve the theory stated by Mill: "The only direct advantage of foreign commerce consists in 146 the imports, because these are the things bought cheaper than they can be produced at home" — that is, they sa^•e labor. Free trade heresy this is, to be sure, because the governing policy in this country has long been to make foreign goods as dear as possible by making them climb over a customs tax wall. It is a remark- able evidence of the strength of this country that it has built up the import trade it has, considering that it struggles under a burden of from 260 to 330 mil- lion dollars a year, nearly a quarter of the value of all the goods imported. INIore than half of all im- ports are taxed. Such is the modern theory of international bargain- ing and the distribution of industrial activity. The United States does not sell ocean transportation be- cause we find we have greater advantages in other industries, and so we buy transportation with the products of these other industries. We make a profit and so do the foreigners. If we put half a billion dollars capital into ships we should have to divert it from other industries where it can earn larger profits. There is no more incentive for American capital to go into the ocean carrying trade than into the raising of coffee. The Mercantilists who cry about the "drain on American capital," because of our payments for the cheap transportation sold us by foreign ships, might as well be alarmed over our hundred million dollars spent abroad this year for hides and skins. Heavy purchases of raw materials are the chief items of our record imports this year. Of hides and skins, india rubber, wool and tin, the imports run up to 1100 million pounds, costing 300 million dollars, as compared with last year's record quantity of 890 million pounds, and a record cost of 220 million dol- lars three years ago. The average prices are about 18% higher than last year, due in a considerable measure- to the great rise in rubber, but they are about 8% lower than those of three years ago. Eating Our Food and Selling Our Manufactures. Our declining exports of foodstufifs, especially wheat, are worrying many short-sighted people who have long held that one of the foundation stones of American 147 prosperity has been our wheat exports. The sudden shrinkage of wheat shipments from 155 million bushels in 1901-2 to 4 million in 1904-5 was looked upon by many good folk as in the nature of a na- tional calamity. Again this year the sharp decline in our foreign grain trade has aroused public sentiment, and, as has been the case for many years, all the blame for the unwelcome results of misunderstood economic "changes is heaped on the money-lustful speculators. High-browed statesmen have been call- ing down the wrath of the government on the "gamblers of Wall Street." One is reminded of all the stormy career of the English Corn Laws. England, at one time and an- other, made lanrs against wheat exports and against imports, gave bounties for exports and then for im- ports and finally entered the age of manufacture with duties on imports. When England found she couldn't raise enough wheat to feed her factory workers she took down the bars against foreign wheat (1846). The nation turned from agriculture to manufacture as its chief industry, and became the world's workshop. We are passing through the same sort of tran- sition period in this country. For years we have been the world's granary, but we will soon cease to be. We are experiencing, just as did England years ago, the effects of the flow of the workers from farms to factories. These figures show the drift to the cities, and the increasing output of manufactures: Manu- Percentage facturing Population Output in Cities. Per Capita. 1790 . . . . 3.3% 1800 . . 4.0% 1810 . . . . . 4.9% 1820 . . 4.9% 1830 . . 6.7% 1840 . . . 8.5% 1850 . . . 12.5% $44 1860 . . 16.1% 59 1870 . . . 20.9% 110 1880 . 22.6% 107 1890 . . . . 29.2% 150 1900 . 33.1% 170 1905 .... 200 148 This year's census returns ought to show a large gain by the cities, A third of the population lived in cities of 8,000 and over, ten years ago, and 4% more in towns of 4,000 and over. It is probable that 42% of the population is now in towns of 4,000 and over. The percentage of population engaged in all forms of agricultural pursuits had declined to 13% in 1900, and only a fraction of these were en- gaged in the production of foodstuffs. Our coun- try is still too new and too thinly settled to com- pare it with present-day manufacturing England, but as Mr. Hill of the Great Northern has-been pointing out, we are very near the limit of acreage that may be sown profitably to wheat. We are likely any year to see the wheat balance turn against us in the foreign trade. We are going to eat our food and sell our manufactures, instead of selling our food and buying our manufactures as we did some years ago, before the industrial boom. This industrial transition i.. clearly shown in the changing proportions of foodstuffs and manu- factures in our foreign trade for the past 60 years (charts IV and V). Merchandise Imports (Chart IV). (Percentages). Raw Mate- rials and Unfinished Manufactures Manufactures Food 1851-60 51.2 21.3 26.7 1861-70 . . . . 40.5 26.4 32.6 1871-80 . . 32.7 28.0 37.3 1881-90 . . . 30.8 34.4 32.9 1891-00 25.7 39.5 34.0 1901-10 24.9 50.2 45.6 24.0 1901 . . 24.9 28.7 1902 . . 25.6 49.9 23.8 1903 25.1 51.2 23.0 1904 25.5 48.5 25.2 1905 22.6 50.7 26.0 19P6 . . 25.1 51.7 22.4 1907 . 25.4 52.3 21.5 lOOR . 27.8 46.8 24.5 19P9 . 22.8 51.3 25.1 1910 . . . . 23.9 55.3 20.0 149 Merchandise Exports (Chart V). (Percentages.) Raw ^^anufactures. Materials. Food. 1851-60 . . . 16.7 61.5 21.7 1861-70 . . . 21.8 38.2 39.5 1871-80 19.9 38.5 41.0 1881-90 20.9 35.5 43.0 1891-00 26.4 29.4 43.5 1901-10 37.9 30.5 27.2 30.7 1901 31.8 39.9 1902 33.4 27.5 37.9 1903 . 33.6 29.3 36.5 1904 36.4 32.2 31.0 1905 . 41.0 31.7 26.9 1906 . 39.9 29.1 30.5 1907 . . 39.9 32.0 27.7 1908 40.9 30.3 28.4 1909 41.0 31.8 26.7 1910 .... 43.0 34.4 ::,o Foodstuffs were our largest export3 in the last three decades of the Nineteenth Century; manu- factures were the smallest. In the industrial boom of the past few years, manufactures have risen to first place and foodstuffs have fallen to third place. Manufacturers' raw materials were ■ the bulk of our exports before the War; now we are keeping a larger proportion of them at home for our own factories. The same story is told by the imports. Manu- factures were our chief imports forty years ago, and materials for manufacture our least important. Now more than half our imports are materials for vise in our factories, while our purchases of foreign- made wares are our smallest item. Foodstuffs are coming in, too, in much smaller relative vol- ume, due to the magnitude of the trade in factory products. Our foodstuffs export balance averaged 265 milb'on dollars, or $4.70 per capita, during the '80's; during the past ten years it has averaged only 209 million, or $2.40 per capita. During the past two years our surpUis of food sold abroad has been only $1.90 per capita. 150 CHART IV. MAKE UP OF MERCHANDISE IMPORTS by Decade Averages 1850-1910 {Percenlage of Total) 60% 50% 40% 30% 20% o o o o o o ,..ii' OOOOOOOOO^ — Manufactures (finished). - Raw materials and unfinished manufactures. , Food. _J51 CHART V. MAICE UP OF MERCHANDISE EXPORTS by Decade Averages 1850-1910 {Percentage of Total) 60% 50% 40% 30% 20% ■••■ / \ ^ / '\ \ \ \ \ \ \ \ \ \y / V / / / /\ y / fX " • *, K \ '•.^ '. 1 o o o o o o j,J.jjj,j,-H oooooooooi: iccHSobO aaoaoaooaa virf t-4 vH rH ,H *^ Manufactures. Raw materials. Food. 152 ABILITY OF RAILROADS TO PAY WAGE INCREASES. Digest of Testimony by John Earl Baker on June, 1910, Be- fore the Federal Arbitration Board Sitting to Adjust the Wages of Locomotive Firemen. October 5, 1910. The impression that railways are in a poverty stricken condition and therefore unable to raise wages to their employees (or are under the necessity of raising rates) arises from a comparison of earn- ings with those of the year 1907. This comparison is misleading and unscientific. The year 1907 was the climax of a series of years in which the in- crease in traffic was so rapid as to intoxicate the imagination. Each succeeding year not only sur- passed the preceding in the amount of traffic of- fered, but it also surpassed its predecessor in the rate of gain in the amount. The progress during the past decade is shown in the appended diagram. In seven years the gross earnings of seventeen typi- cal roads more than doubled and the net earnings almost kept pace — and this after several years of rapid recovery from the distress of the early nineties. Such a rate of gain, so many times faster than the growth in population and not caused by any epoch making discoveries or revolution in methods of life or business, in the very nature of things could not continue, much less continue at the same rate of acceleration. In final analysis this increase in busi- ness depends on the human element, on the sinew,* and nerve, and perceiving qualities of the produc- tive population. Under a great incentive or under a newly felt consciousness of power, a man may con- tinue to increase his product and his capacity for a certain length of time. But at last he reaches his limit; not only will he cease to increase in capacity and quality of work performed, but after an unusual effort he will fall back for a time and recuperate his overtaxed powers. If still in the prime of man- 153 hood, he will after a rest again urge himself to greater activity, and day by day surpass the records of the preceding period until he reaches a new limit. During the year 1906 and even in 1905 it was known very well by those occupying advantageous posi- tions that the commercial forces of this country were very close to their limit of strength. Factories had been working overtime so long that overtime was the usual thing; steel mills were two years behind in their orders; congested terminals and car shortages were the despair of general managers. But the financial imagination was excited, the names of big achievements filled the ears, splendid records stimulated to still greater efforts, and as the athlete on his record breaking day can add more inches .to his leap, or clip more seconds from his time than on any other day, so in 1907 the business done out- stripped 1906 even more than that year had out- stripped 1905. On the diagram, not only does 1907 stand at a higher point than all the others after a rapid ascent for years, but the line reaching it shows a steeper incline than any other on the page. Railway officials corroborate the above. The presi- dent of the M. K. & T. stated in the Annual Report to the Stockholders in 1907 (p. 20), "We find our- selves without facilities adequate to handle all the traffic offered for shipment. Our men are over- •worked." In 1908 he stated, not that the year was one of dire calamity, but that "the preceding year was one of extraordinary prosperity." President Ripley of the Atchison, in his annual report for 1908 (p. 8) stated, "During the first six months of the fiscal year the business offered was rather more than could be promptly or economically handled." It will be remembered that the so-called financial depression began in the East and traveled westward. So slowly did it move that many of the western roads did not feel any of its effects until the sum- 154 mer of 1908. On the Southern Pacific it may be traced most markedly in the report for 1909. So severe had been the demands of traffic upon the equipment of that road that the panic was actually a money maker. The following table gives the gross earnings for certain years and the expense for conducting transportation. Conducting Year. Gross Earnings. Transportation, p. 7 p. 67-72. 1909 $120,521,908 $34,916,132 (a) 1908 123,276,920 40,005,617 (a^ 1907 124,942,797 39,238,101 1906 105,632,549 29.683,881 (a) Traffic Expense and Transportation Expense I. C. C. Classification. Comparing 1908 with 1909 — and 1908 is the proper comparison for it reflects the final strain — it will be seen that the "depression" saved in Conducting Transportation about $3,000,000 more than it cost in the falling off of gross earnings. The officers of the company bring out this fact in the report to the stockholders for 1909 (p. 25) in which it is stated, "The congested traffic condition of the pre- vious year had added greatly to the expenses for station and terminal service, but the return to nor- mal conditions enabled the company to effect large economies in this item of expense (transportation expenses)." Mark you, in the opinion of the officers, the conditions in 1908 and 1909 were not those of disaster, but were "normal." There seems to be ample justification for the conclusion that all com- parisons which are to be considered as fair, must go back of 1907 and even beyond. But it is not necessary to go back further than 1906 to have any gloomy forebodings dispelled. The following table gives Gross Earnings and the amount Available for Dividends after all operating expenses and fixed and other charges have been paid, for eight typical and important systems representing approximately 60,000 miles of line. 155 '-•I^iOVOOO'-iirjO . ^'^^'^■.*^^_'^ ^ g* irT oo" ■*" rC r^ o u-T i-T '"^ Th looCoTt-rio 00 o o^'O^s.lO'O0>^Tt■c^^ 1^ 0^ o °i a n\ rsT o 0\5 in ■"•o" ir^ CM •& 0\ r-i ^ ■^ oo ro O '-< O CO 00 o\ o CN CO CNl CM 00 VO -^ ' i/^" ON cm" ^ c" '£;" o^ CO vn ^H \o ■<:r o t^ C^ O ^_ ,-*_ O i^ 00 CO O CO vo" 1— t \o c^ "^ ^ CM Ch r^ _<-~._co_oco "-t^. 00 rC oC oC cm" "^^ ^ O — ' r-( u-> ^ 00 00 (3\ M3 Oa^Tf a< ■* CM_ '"' o cooc5"\r5"od CO C^ MDr^ LO in CM VOCM ooo 00 \d in CM_ vo CO ^CM mOs-^COCMOCMO OOC3nC3\OOOCO — ■* .00vOt1-CM.-.0000I^ 2S oo''oo"oC<-~."oo''oo"ci; tC >- t-H ca ■^\oixcor^^^mco CM^OTj-^H^^Ch .r^incMvoiococvjin fe oo" o" m" oo" o" CM ■<»■' oo" ??rvo^inooioooroON 2 ^. f^. "-l On_ i--_ ^_ t--, vq ^ in CO CO 00 CO Tt-' rC CM r-c^ rt CM o o" O f^-OO'— icoC0"^O\O\ f^ lO MD O 00 --H^ OJ lO 0\ 0_ Th t-j^ '^^ CNJ^ ^_^ 0\_ VJD '"' 00 CO •^"uT''-H"t— r,— Tlo ja o CI) CM ■* •3 o" > o < Chcor^'-i. OCT. Ho?. DEC, JAH. TEB. lUR. APR. Hllf jmiE Revenues) of Steam Roads in"theU.5. 1508 "Year ending June 3o, I905 ISlo 159 The foregoing diagram is stated in the form of tables, as follows: Revenues of Steam Roads in the United States. Monthly average per mile of line. Month. Total Revenues. Net Revenues. 1908. 1909. 1910. 1908. 1909. 1910. July . . . .$1012 $842 $938 $335 $290 $334 August . . . . 106S 891 1002 373 324 383 September . . 1033 944 1040 343 353 403 October . . 1103 1000 1100 368 382 424 November . . . 968 909 1046 291 320 399 December . 852 885 936 227 295 288 January . . 759 785 888 180 216 247 February. . . . 703 747 893 163 211 240 March. . . 801 880 1006 241 298 331 April. . . . . 762 842 933 221 267 282 May . . 759 861 ... 220 281 ... June. . . . 800 898 ■ ■ . 260 317 ... Comparing the particular eight roads in question, their gains are shown to be the same as those for the country as a whole: Gross Revenue. Nine months, ending March 31. 1909. 1910. Road. Gross. Gross. Atchison $70,106,928 $77,817,728 C. & N. W 50,089,308 55,734,553 C. B. & Q 59,991,514 67,147,796 C. M. & St. P. . . . 45,813,300 48,494,369 C. R. I. & P. . . . 46,386,882 50,218,873 M. K. & T 19,617,767 20,455,567 St. L. & S. F. . . . 28,709,288 31,660,411 So. Pac. . . . 86,325,899 97,788,778 Total $407,040,886 $449,318,075 The decrease in Net Revenue so often referred to is abundantly explained hereafter. There seems to be in certain quarters a very firm- ly rooted impression that much of the fund avail- able for dividends in 1908 and 1909 was due to 160 savings, unwise savings, in Maintenance charges. This impression has resulted from the Wall Street habit of taking comparisons back only one year. Compared with 1907 — the year of plethoric treas- uries, of net earnings dangerous in the mouths of political orators, of wails and threats for more cars and faster service — the following years in cer- tain instances do shov/ savings in Maintenance. But as to "skinning the roadbed," nothing of the sort has been done. Eight roads, the same men- tioned above, may be taken as typical. Previous to 1908, when the form of accounts pre- scribed by the Interstate Commerce Commission went into effect, railway companies were at liberty to charge whatever improvement they saw fit to maintenance charges. "Plowing back" now is not permitted, except it be stated in a definite account entitled "Additions and Betterments." In practi- cally every case where the chargeis for maintenance of equipment and for way and structures was greater in 1907 than in later years, it can be traced directly to new equipment purchased or extensive betterments on the line. In some of these instances the fact is explicitly stated in the reports of the companies to their stockholders. In other instances the reports are very silent in all matters of explana- tion and we are left to inference. ATCHISON, TOPEKA & SANTA FE. Expenditures for maintenance on the Atchison were as follows, expressed in round numbers: A. T. & S. F. Maintenance Charges. Way. Equipment. 1906 . $12,575,000 $10,720,000 1907 . 15,286,000 11,779,000 1908 . 14,414,000 14,376,000 1909 12,834,000 13,903,000 1910, nine incnths ending Mar. 31. 13,108,000 11,812,000 The maintenance costs in 1909 are considerably higher than in 1906. The extra high amounts spent in 1907 and 1908 were practically all in the item Roadbed, and on this the report of the President in 1907 is illuminating. On page 12 he says, "Ex- 161 penses for Maintenance of Way were largely in- creased by reason of extensive re-location and re- construction of line in order to reduce grades and curvature." Such work, although the costs of the abandoned portions are charged to Capital, amount to betterments, so the actual Maintenance is in as strong a condition as it has ever been. The decrease in Expenditures for Maintenance of Equipment, is apparent rather than real, also. The explanation is to be found in the items Repairs to Locomotives and Repairs to Freight Cars. Repairs to Locomotives. Freight Cars. 1909 $5,491,292 $6,218,694 1908 6,488,748 5,506,047 1907 . . . 4,697,673 4,415,645 1906 4,401,550 3,984,406 Note: Figures for 1908 and 1909 cover items. Repairs, Renewals, Depreciation. Repairs to Locomotives in 1908 increased over a million dollars in the face of a decrease of traffic. When it is remembered that the President, in a statement quoted later, stated that the freight of- fered in the early part of the year was more than could be promptly handled, the inference that must be drawn is that when the slack time came all locomotives that could be spared were shopped for the repairs which could not be given them before. Thus, 1908 bore a great weight of repair expenses which would have come in part on 1907 if the engines had not been too busy. In the same way repairs to freight cars increased. Repairs and Re- newals in 1908 are a million dollars larger than in 1907, although the charge for the earlier year bears part of the cost of dismantled equipment. This latter feature is covered by the Depreciation charge in 1908 and later years. So when Depreciation charges are added to the actual increase in the cost of repairs, the $2,500,000 increase of Maintenance of Equipment costs in 1908 are accounted for, some- thing more than the entire increase in Operating Expenses in 1908 is accounted for, and the costs in 1909 are seen to be in reality an advance over anything before. If these $3,000,000 extraordinary Equipment costs and the $2,000,000 extraordinary 162 Roadway costs due to re-location had been saved, Atchison would have had a surplus of a million dol- lars greater in 1908 than in 1906. In the nine months ending March 31, of the pres- ent fiscal year this road has already expended more than during the whole of last year on Way and Structures, and in Maintenance of Equipment, her expense for the year will be far above anything hitherto. President Ripley stated in his annual re- port of 1909 (p. 19), "Our gross earnings were $3,647,920.49 in excess of those of the previous year and only $77,590.63 less than those of the banner year ending June 30, 1907, as revised, while our Operating Income was the largest in our history." The month- ly reports of earnings indicate that this road's reven- ues in 1910 will be at least $10,000,000 in excess of those of last year, and that except for unusually liberal maintenance allowances, her net earnings would be proportionately increased. Yet, for some reason, certain quarters have very persistently culti- vated the impression that Atchison is in financial difficulties. The income account of the company does not bear out this impression; the rating of the company's securities upon the market does not bear it out. Perhaps the reason is to be found in the fact that certain state legislatures have been found to have an attitude hostile to certain forms of railroad financing and it is desired to give these a lesson. How assiduously this company itself has striven to give currency to the impression of its difficulties may be gathered from the following quotations from its annual renorts to the stockholders. (An. Rept. 1907, p. 20) "The power of Railway Companies to secure this additional capital has been greatly impaired by the loss of confidence of invest- ors in the stability and security of railway invest- ments; and this loss of confidence has been caused in great measure by the unfriendly attitude of a large part of the public towards Railway Companies, and by the arbitrary action of legislatures and Rail- way Commissions in reducing rates and imposing burdensome restrictions, often without investigation or a consideration of the consequences. The public has apparently failed to appreciate that capital in- vested in railways yields very moderate returns, having regard to the prevailing rates of interest and 163 to the profits upon capital employed in other kinds of business." - (An. Rept., 1908, p. 20) "The-'e are indications that the thinking public has begun to appreciate that the policy of harassing railroad companies has gone too far; and it is to be hoped that this will be reflected in the action of those charged with making and administering the laws. But your directors are still of the opinion that it would not be prudent at the present time to expend more capital in new con- struction, however desirable for the development of the country and for the benefit of the public; and therefore, for the first time in the history of the company there are no plans in hand for the con- struction of extensions. "During the year there have been no advances in rates affecting your property. There have been sundry reductions, some slight, some serious — by order of State and National Commissions, of which a portion are now being contested before the courts." (An. Rept., 1909, p. 17) "The state most in need of development was Texas, and ■■vith but one exception its laws and the administration thereof have been the most severe and unjust; but in the last two years there has been a marked change in sentiment, evidenced by the fact that the last session of the Texas legislature resisted practically all efforts to commit the state to further radical legislation. There are still laws affecting railroads on the statute books of Texas which are not good for either the state or the railroads, but it is hoped that these laws will gradually disappear as their unfairness and injurious character become increasingly apparent. Acting on this hope, and in view of the crying needs of West Texas, your Directors have authorized the expenditure necessary to construct a main line con- necting the Gulf, Colorado & Santa Fe Railway at Coleman with the Eastern Railway of New Mexico at Texico, with sundry branches, etc., etc. In taking this action, your Directors are relying on the ulti- mate good sense of the people of Texas and believe that it is reasonable to expect that the people whose property will be so largely benefited, and whose convenience will be so greatly promoted by this investment, will exert every effort to see that it receives fair treatment at the hands of their law- makers." 164 (An. Rept., p. 20) "During the year it was found necessary to appeal to the courts against the at- tempt of the state of Missouri to enforce a rate of two cents a mile for passenger fares; the appeal was successful and the old rates are restored in that state. In Kansas and Oklahoma the two-cent rate is still in effect, but hopes are entertained that the Courts will afford us the same protection when the cases are tried. It is unfortunate that in such cases the railroads are forced to accept rates that are non- compensatory pending the long process necessary to a fair hearing in the courts. There is no rail- road in the west the passenger traffic of which ap- proximates paying its proper share of the fixed charges and operating expenses of the road even on a maximum rate of three cents per mile; and this can be conclusively shown to the satisfaction of the Courts. "It has also been necessary to appeal to the Courts in the matter of taxes in Oklahoma, where m endeavor has been made to increase taxes on your property to a point beyond reason as compared to other property in the state. Injunctions have also been obtained as to two orders of the Interstate Commerce Commission, and the cases are now being tried." Mark you, the state of Texas must subsidize any extensions of road within her borders, by legislation which the directors of this road may consider suffi- ciently friendly. Does this not account for the bank- rupt condition of the Gulf, Colorado and Santa Fe, the Texas division of the Atchison, owned entirely by the Atchison — which is the one road exhibited to this Commission (the Arbitration Board) as evidence that roads can not afford increases in wages? If there were any financial difficulty in the Atchi- son affairs, it might find an explanation in the freight divisions with the Southern Pacific which ensued after the Harriman interests secured a repre- sentation on the Atchison. This is explained on page 334, 12 I. C. C. Rep. Opinion 943, commonly called the Harriman Inquiry. After 5% dividends, on all stock, and after the liberal Maintenance, outlined above, and unneces- sarily high depreciation charges the Atchison had in 1909, $9,000,000 to be applied to the property, only 165 $4,000,000 of which was needed in that year, the other $5,000,000 being laid aside for future use. CHICAGO & NORTH WESTERN. The Chicago & North Western in 1906, made a distribution of stock worth in "rights" about $20,- 000,000 altogether. In spite of this increase in stock, it paid dividends at the regular 7% rate on all issues, and had balances remaining to the aggregate of $10,045,210 in the two years, 1908 and 1909. Its credit balance in 1909 was $30,672,159. There was no call for the C. & N. W. to "skin" its property and the maintenance charges would indicate that it has not done so. They have been as follows: C. & N. W. Maintenance Charges. Way. Equipment. 1906 $6,864,000 $9,032,000 1907 8,904,000 8,713,000 1908 8,056,000 6,774,000 1909 ... . 8,422,000 7,845,000 1910, nine months ending Mar. 31. . 7,931,000 7,058,000 The 30% increase in Maintenance of Way charges of 1907 over 1906 has been maintained, while the nine months of 1910 have seen expenditures almost equal to those of an entire year heretofore. This explains why the C. & N. W., with so large an in- crease in gross in 1910 will show so small an in- crease in net earnings. The same is true of main- tenance of equipment, for the high figures of 1906 and 1907 must be reduced by nearly a third because of immense orders of new equipment which they contain. Annual Report, 1906, p. 12, contains the following, as basis of the above observation. "The expenditures for Maintenance of Equipment * * * include the cost of new equipment * * * charged to operating expenses: 75 Locomotives . . . $1,047,610 4311 Freight Cars . . . 2,708,273 Total $3,755,883" Greater amounts of track have been relaid with heavier steel than in 1906, more ties have been purchased, as many or more tons of steel bridges 166 have been constructea in the place of wooden struc- tures replaced with permanent work. Ballasting ha3 gone on to the same degree. Practically all of these items contain actual betterments in addition to mere maintenance, and it is worthy of note that, in general, greater amounts of such work were done in 19C9 than in 1908, and in 1908 than in 1907. Thus the unfavorable results in 1908 and 1909 are the result of comparison with the abnormal feverish year of 1907, while if the comparison be taken back to 1906, the panic is seen to have had but little effect upon the finances of the company. CHICAGO, BURLINGTON & QUINCY. In order to get a correct perspective of Main- tenance on the Chicago, Burlington and Quincy, a ten-year comparison is necessary. C. B. & Q. Maintenance Charges. p. S, 25, 29, etc. Maintenance Betterments of Way and Maintenance of Charged Year. Structures. Equipment, to Income. 1910 (a) . $11,083,579 $11,734,726 1909 13;203,214 13,510,265 $2,268,816 1908 . 14,603,476 12,501,460 3,225,993 1907 . . 14,445,866 14,725,632 1906 11,312,711 13,639,941 1905 9,090,499 9,788,193 1904 . . . 10,277,274 8,376,602 1903 . . 7,578,890 7,313,118 1902 . . 7,786,363 7,430,935 1901 . . . 8,676,028 6,094,872 1900 . . 8,109,583 5,499,356 (a) Nine months ending March 31. From 1900 through 1905 expenditures for Main- tenance of Way were from seven to ten millions an- nually. In 1906 a sudden increase of over $2,200,000 over the year before appeared, and in 1907 another increase of $3,300,000 followed. Inside of two years an increase of nearly $5,500,000, or about 60%, was made in charges for Maintenance of Way and struc- tures. During these earlier years there had been no starving of the roadway for it is well known to 167 railroad men that the Burlington had put Mainten- ance on a strong basis and had been steadily im- proving her property. The following from the Fin- ancial and Commercial Chronicle (Oct. 20, 1906, p. 937) is suggestive of the results accomplished: "The company's freight traffic, as measured by the number of tons of revenue freight carried one mile, increased 21.12% in the late year. On the other hand, the train mileage was increased not quite 8^2%. In other words, the train loan was again greatly enlarged, being raised from 327 to 365 tons." It should be remarked that these results were at- tained before the higher level of maintenance charges of the past three or four years was at work. This great improvement has been made out of earnings, for the capitalization of this company has increased during ten years in stock but $12,000,000. These funds were required to finance the 1,700 miles of extensions, to say nothing of additional second track, and increases in equipment, which, in the ten years, approximated 100% in carrying and tractive capacity. In a similar way Maintenance of Equipment had been increasing at a steady rate equivalent to the increase in number and capacity of rolling stock units. But in 1906 a gain of nearly $4,000,000 or about 40% over the 1905 expenditures ensued, and the following year more than $1,000,000 additional was charged to this account. In the two years a very similar increase is to be found in Maintenance of Equipment as in Maintenance of Way and Struc- tures. When the large extensions of line and rapid additions to equipment are contrasted with the rela- tively small increases in capital, the suspicion is aroused that some of the increased equipment was paid for out of Maintenance charges. As to the reason for this, the reports of the Burlington are discreetly silent. No word of explanation encumbers the text of Burlington reports to the stockholders, neither are any details of these expenditures given in tables. Beyond this bare statement of the four subdivisions of Operating Expenses, the student and the stockholder are left to their imaginations. The decrease in these charges in 1908 and 1909 in com- parison with 1907 is very slight and is more than counter balanced by "Betterments charged to In- 168 come," as prescribed by the Interstate Commerce Commission form of accounts. The size of the maintenance charges in the first nine months of 1910 indicates why the Net Earnings of the Burlington are to be only slightly heavier than last year. But even with these excessive Maintenance charges the Burlington earnings for the stockholders have not been scanty. It is to be remembered in this connection that the owners of the Burlington are the Great Northern and the Northern Pacific, the two roads whose earnings the Interstate Com- merce Commission has ofBcially declared to be ex- cessive. (See Opin. No. 879. Spokane Rate Case, p. 418.) That the Burlington is in company of its own class is shown when, after all other charges, in- cluding interest on an increasing funded debt, funds are left for dividends at an 8% rate upon the capital stock with from four to six million dollars left as a surplus for sinking funds and to be applied to the property, an amount averaging half of the divi- dend payment. With a sum of this size left over it is of little interest and not material to the present controversy that the $6,000,000 was in 1907 and the $4,000,000 in 190S, 1908 and 1909. CHICAGO, MILWAUKEE & ST. PAUL. C, M. & St. P. Maintenance Charges. Way. Equipment. 1906 $5,955,000 $5,598,000 1907 5,830,000 8,589,000 1908 6,642,000 7,039,000 1909 . . . 7,288,000 7,270,000 1910, nine months snding Mar. 31 . 6,350,000 5,760,000 The financial depression of 1907-08 had but slight effect upon the Chicago, Milwaukee and St. Paul, diminishing its gross earnings by only about 6%. At the same time, economies in operating expenses were such that the net revenue was only a million and a half lower than in the very prosperous year preceding. These economies were not made in lessened maintenance. In fact, it appears very much as if the St. Paul made hay when the sun shone, 169 and bought when the panic was at its height. Whether this was a method on the part of its principal backers, Standard Oil, to counteract the falling off in business throughout the country and an effort to restore confidence, or whether it was simply good business to get in orders at a time when they were likely to be filled promptly and cheaply, cannot be stated, but, at any rate, the facts to which attention is called forthwith indicate again the sta- bility and credit of this company. From 1905 to 1907 expenditures for maintenance of way had remained rather stationary in amount, but in 1908 an in- crease of over $800,000 ensued, and was followed in 1909 by another increase of over $600,000. In main- tenance of equipment, when a subtraction of $3,346,- 610 for new equipment is made in the total for 1907 it is apparent that charges from 1905 to 1907 inclusive had remained as regular as in the case of way and structures. But in 1908 an increase of $1,500,000 was made, and in 1909 another of $230,000 followed. If these increases had not been made, the balance re- maining after dividends were paid, in 1908 would have been practically equal to that of 1907, and this in the face of dividends $900,000 greater. The unusually high maintenance charges of 1908, and 1909 are to be exceeded in 1910, if the first nine months' operations are any criterion. This and the unusually severe winter account for the decrease in St. Paul net as compared with last year. The two years, 1907 and 1908, brought an aggregate balance over dividends of $7,969,999, and a credit balance of $47,960,895 was in the treasury at the beginning of the present fiscal year. In addition to these earnings, stockholders have been the recipients of the benefits accruing from certain "rights" in connection wit'i the issuance of a vast quantity of new stock. During the fiscal year ending June 30, 1907, $25,000,000 new common stock was issued (see page 13, An. Rept. to Stockholders, 1907). The stockholders were permitted to subscribe to this stock at par at the rate of 23% of their holdings. No item for premiums on stock appears in the report of the company for 1908, which de- monstrates that the entire issue was taken by the stockholders. This stock during no portion of the 170 year sold for less than 147 and was as high as 199 on December 17. The so-called "rights" were quoted at from $32.00 to $35.50 per share. Even ^ the stockholders of the fractional shares had their interest protected, for the company ascer- tained the amount of such fractional shares and offered for sale at public auction the proper propor- tion due to this aggregate, and after subtracting from the sum realized at the sale $100 per share as being the amount due its treasury, it distributed the balance in cash among the fractional sharholders in proportion to their holdings of record on Decem- ber 19, 1906. (Railway Gazette, Jan. 11, 1907.) Again in 1906 the authorization of $100,000,000 new stock was obtained. By 1908, according to the an- nual report of the company, installments to the ex- tent of $65,000,000 had been paid, and the entire amount was paid by March 1, 1909. This stock also was issued at par to the stockholders at the rate of 50% of their holdings of preferred stock and 25% of common stock. That this was almost entirely subscribed by stockholders is attested by the fact that in the annual report of the company to the stockholders for 1909 only $1,532,336 (see Balance Sheet) is reported as premiums. For a short time at the worst of the financial depression St. Paul was quoted but little above par, but during the past year since the stocks have been fully subscribed and issued the prevailing quotation has been in the neighborhood of 40 points above par. Thus the bonus to stockholders during the past four years will approach an amount somewhere between $25,- 000,000 and $40,000,000. CHICAGO, ROCK ISLAND & PACIFIC. C, R. I. & P. Maintenance Charges. Way. Equipment. 1906 $7,362,000 $6,661,000 1907 8,754,000 7,184,000 1908 8,319,000 7,490,000 1909 9,051,000 7,512,000 1910, nine months ending Mar. 31. . 8,153,000 6,474,000 Maintenance charges have increased steadily with no let up for the year of depression. Expenditures 171 for Maintenance of Way and Structures have in- creased during the four years 50%, and those for Maintenance of Equipment about 30%, and the ex- penditures for 1910 will be far above 1909. The Annual Report to the Stockholders 1908 (p. 9) states: "Though the business depression has been met as far as thought advisable by reduction in the Operating Expenses, (there wras no reduction), the integrity and efficiency of the property and duty to the public has been given careful consideration." The following table of tie renewals bears out this statement: Number Number New Ties. Treated. 1905 . . 1,477,151 259,679 1906 . . . 1,824,477 Not given 1907 . . . 1,695,099 915,204 1903 . 2,376,061 927,662 1909 . . .... 2,483,360 1,872,403 Since 1907 the number of ties renewed has been increased by 50%, and the number of these treated has been more than doubled. The change in mileage is not enough to warrant this increase and the in- ference to be drawn is that the road has been putting in a greater number of ties per mile to prepare for a heavier traffic. That such is the explanation is suggested further by the following from the Annual Report of the company to the stockholders, 1909 (p. 38) : "Since June 30, 1904, the number of loco- motives owned has increased 18.39%, while the weight on drivers has increased 41.64%, and tractive powers has increased 40.65%." The Operating Ex- penses cover an increasing amount of reballasting as follows: Miles. Miles. 1906 52.00 1908 52.00 1907 102.19 1909 127.45 Thus, in the ordinary renewals there has been an approach to betterments in that the renewals have been so thorough as to prepare the road for heavier traffic. Besides there has been a certain amount of actual betterment charged to Maintenance. Ties treated replacing ordinary ties are a distinct better- ment, for such ties have a life double that of the 172 untreated tie. The increase in the number of treated ties laid during the year 1909 is almost sufficient to account for the increase in Maintenance charges in 1909 over 1908. MISSOURI, KANSAS & TEXAS. M., K. & T. Maintenance Charges. Way. Equipment. 1906 $3,746,000 $2,044,000 1907 3,467,000 2,914,000 1908 3,109,000 3,039,000 1909 3,370,000 3,379,000 1910, nine months ending Mar. 31 . 2,983,000 2,543,000 In 1906 and 1907 and the years preceding, Addi- tions and Betterments, as was common among all roads, were charged to Operating Expenses; since that time they have been placed in an account of their own. While apparently the expenditures for the Maintenance of Way and Structures have de- creased slightly during the four years, they have in- creased much if the betterments in 1906 and 1907 charged to maintenance be deducted. These Better- ments amounted to something like $500,000. Expen- ditures for Maintenance of Equipment have increased very rapidly. Adding the expenditures for Additions and Betterments and a rapidly increasing amount is shown to be going into the upkeep of the property. The replacements of rail with heavier steel, the purchase of new ties and the increase in equipment \shows that the property has not been allowed to run down. Ballasting has decreased in amount done per year, but this decrease is accounted for by the statement of the officers in the report for 1906 (page 14) : "The ballasting of the main line from St. Louis to Dallas has been completed, with the exception of about IS miles which is now receiving attention. From Dallas to San Antonio there still remains 225 miles to be ballasted. On the Oklahoma line the ballasting has been completed between Parsons and Osage, leaving 85 miles to be completed; and from Oklahoma City to Atoka, 62 miles, all of which is now under way." Thus there was on this new line only 387 miles left to be ballasted, 322 of which was completed by June 30, 1908. 173 ST. LOUIS & SAN FRANCISCO. St. L. & S. F. Maintenance Charges. Way. Equipment. 1906 $4,049,000 $3,803,000 1907 5,406,000 4,699,000 1908 4,822,000 4,607,000 1909 5,094,000 4,638,000 1910, nine months ending Mar. 31. . 4,631,000 4,620,000 The management of this road has been much more liberal of late years in matters of upkeep than in years before. In Maintenance of Way the expendi- ture for 1909, though somewhat lower than in 1907, is about twenty-five per cent, higher than in 1906. In the Maintenance of Equipment there has been a steady and rapid increase so that the expenditure for 1909 is about twenty per cent, higher than in 1906 and higher than any intervening year except 1907. This road has specialized to a certain degree in the improvements and repairs which it has undertaken. In 1907 the unusually high Maintenance of Way ex- pense was due to repairs to Roadway, such as re- ducing grades, widening embankments and cuts, etc. In the same year double the usual amount was spent for new rails and more than double the usual weight of metal was laid. In 1909 the increase in Mainten- ance of Way expense was due to expenditures for ties, nearly double the usual amount being so ex- pended and nearly the usual number of ties being laid. Of these over half were creosoted, in fact, nearly as many were creosoted in this year as were laid together in any year previous. As most of these treated ties are laid in replacement of un- treated ties, and as they have double the life of an untreated tie, this effects a betterment at the expense of Operating Expenses. In the same way much of the rail laid in 1907 was 8S-pound steel rail, which replaced iron in some cases and in probably all cases of lighter weight. This also resulted in a betterment. In the Maintenance of Equipment there has been a very regular increase in expense scarcely at all affected by the depression of 1908. Since 1905 the expense for upkeep of Locomotives and Freight 174 Cars has increased roughly forty and twenty five per cent, respectively, in keeping with the increases in quantity and capacity of these branches of equip- ment. The expenditures for Maintenance during the first three-quarters of 1910 are but little short of the whole year's expenditures during the highest previous twelve months. SOUTHERN PACIFIC COMPANY. So. Pac. Maintenance Charges. Way. Equipment. 1906 . $16,319,000 $14,286,000 1907 .... 16,031,000 15,017,000 1908 . . . 16,936,000 14,927,000 1909 . . . 14,533,000 14,379,000 1910, nine months ending Mar. 31 . 14,105,000 12,588,000 The amount spent in the maintenance of equip- ment in 1909 has been exceeded only by the years 1908 and 1907, and if the same conditions which caused the tremendous increase in Transportation Expense be considered (noted above) it is readily understood that the amount expended in 1909 has been efficacious in maintaining the condition of the equipment as the amount spent in 1907 and 1908. All operating men know that an engine which is put upon a road when only imperfectly repaired or which is kept upon the road after it should have been sent to the shop, as was the case during the years of extra heavy traffic, that the cost of making the repairs when made is very much greater than if the repairs had been made at the proper time. It may not be out of place to call attention to the fact that in the ten years preceding 1909 the cost of main- tenance of equipment has more than doubled. Between 1908 and 1909 a saving in expense for maintenance and structures has been made, amount- ing to approximately $2,400,000, and it may be argued that the condition of the roadway has been allowed to deteriorate in consequence. In this con- nection it may be well to compare the expenditure of the few years previous to 1909. In 1904 the ex- pense for maintenance of way and structure was 175 $12,300,000. This expense covers many items of betterment, as for example as shown on page seven- teen of the annual report of that company, "Expendi- tures for ship machinery and tools increased $149,- 954.27, or 44.47%; this was caused by large additions of machinery to meet increased demands upon shops, etc." This is only a sample of the many ex- penditures in the nature of additions and betterments which were so included, yet in 1906 we find the ex- penditure for maintenance $_3,000,000 higher than in 1904. This increase, however, disappears largely in view of the fact that the report of the company shows that $2,117,286.32 of this was not expended that year, but instead was reserved for future main- tenance. (See An. Rept. 1907, p. 21.) The 1907 and 1908 figures for this item, nevertheless, are on the same level as this 1906 figure, due, somewhat to the Salton Sea crevasse, and it must be concluded, there- fore, that the reduction of maintenance expenses in 1909, has not resulted in a reduction in the actual upkeep of the road, but rather is the result of con- forming to the Interstate Commerce Commission's prescribed form of accounts which require that in the main all additions and betterments be charged to the property rather than to operating expenses. Cer- tainly there was no need for savings, if savings were unwise, for a Balance of $12,239,711 was the aggregate after dividends in 1908 and 1909. At the same time certain other information, which the reports of the company through its stockholders furnish, indicate that the physical standard of the road has ben maintained. In miles of new steel rail laid, the number for 1908 is far in excess of any previous year as shown by the following table: Miles. Miles. 1906 418.95 1908 303.80 1907 355.20 1909 541.07 176 In the number of ties laid also there is no evidence of any starving of the roadbed. Larger numbers both of treated and untreated ties were laid in 1909 than in any year since 1906, which marked the close of the systematic attempt by the Southern Pacific Company to build up its roadway out of earnings. The follow- ing tables will make this fact apparent: No. of Ties. Burnetized. 1906 . . . 3,416,968 1,791,447 1907 2,783,903 1,196,344 1908 . . 3,948,608 1,234,890 1909 ... . 3,277,392 1,551,217 A computation will show that this is at the rate of considerably over three hundred ties per mile of line. In other words, it is apparent from this number of ties per mile of line that the Southern Pacific even in these later years, has been systemati- cally preparing its roadbed for heavier traffic in the future — this at the expense of present operating ex- penses rather than as a future charge against capital. Furthermore, nearly all of the new steel rails laid has been of heavier weight, and to this extent another betterment effected at the expense of operating costs. SIGNIFICANCE OF INCREASED MAINTE- NANCE. If the expenditures of these eight roads indicates anything, they show that without any appreciable increase in mileage during the past two years, the roadways and the rolling stock have had an increas- ing amount spent upon them. Someone may urge that increasing amounts spent may not be equivalent to increasing thoroughness of repair. Such observa- tions do not have reference to conditions such as re- cently have been disclosed regarding Illinois Central shops, but refer to increases in the cost of materials and wages. The increases in wages are well known 177 Their inception and every step attending the negotia- tions for them, have been attended with so much dramatic interest, and the press has given them such currency that much weight is always given to increases in wages. Yet the total annual increase to the pay-rolls of all the roads entering these ne- gotiations, some 112,000 miles of line being repre- sented — nearly half of the mileage in the United States — on account of the increase granted locomo- tive firemen is only $2,000,000. These increases in wages are largely offset by the progress in labor saving machinery, used in shovelling, dumping, lay- ing of ties, laying of rail, etc. One example out of many may be cited from the Rock Island (see Annual Report, 1908, p. 34), "Over 3,300 tons of bridge steel have been placed by the companies' force, with the use of the recently acquired bridge erecting car, at an approximate cost of $6.00 per ton against $15.00 previously paid." COST OF MATERIALS. There is considerable proof that the cost of ma- terials instead of increasing is in the greater num- ber of cases decreasing. The following table of sixty odd commodities was made up from the Bulle- tin of the Bureau of Labor. These sixty are not all the kinds of material that railroads use in mainten- ance or operation, nor in the precise form as when used by railroads. But they represent practically all the commodities given by the Bureau outside of food, forage, clothing, and medicinal drugs, for Which comparisons four years apart are possible. They represent the raw materials, the tools, and the more basic supplies used. The comparison is be- tween the prices of 1506 and those of 1909. The ratio gives the percentage of the 1906 price borne by the 1909 price. 178 . o 4J 0^'^■^O^^O^NO\OQoomOl-^QCMlovo^NO^ f^ ^ ' ' ' 8 >0\ooo\t^o6o\t^t>.o\or^r^o\o\oo 0< vo «M3rqOsco-^N row O\q000t^rO iij ooovo'oo«poto.-i.-i.-io\-*ooooooNTi- •*■ o4 —i ■ ■ csi •*' ^ ^ t< 00 00 CO ro r^ in lou^ONfOOOQ-^moot^ .--. vo t-o o o a\ A a 4^ iJ s B tM 4> o O 6 .u u *** a > o •d a V S 1^ i* n £ o 4-» o (M "ra o [0 e .— 1 •»N o 1 A ace i° > J3 J3 O. O O _ 1- G (U j_, ■7^0 •o£ ^ 4^ 2 « o o u X m rt rt ^ .. X .. « lU c.ts .. O fe in .tl „-s mpQO So" S u C m O o ^E& &5 ; ' ■* 00 ' ' CO vd vd ' '^' ' c> -H ■ «■ oo' T)^ ■ t^; ; <-( --i CMCN (SI rOTt-00 to FM 00m On ;o\>Ort ^t-^ qj >> >i o J- •« m 05 1) O en I 1-1 4) U. O a. ° te S ?3 m P._«"_M JH "J 180 O .22=0' lA- OS o *^ O _ t^ CNl QlOOO OlO lO OO ■* O '-I OiOOO 00(^^t-,A hn ft H Q. bo oT oi u. '. rt ft, C bo bo u "ati'm.S.S 2 i-" O 3 Oj3j3 o. rt PL, fL( K CO t/5 CO H t ho bo ■S2 — < o.S ^ S »; o +-• o s S ^3-g o 3 rt -g o „ o o* c cr 1.H-3 3 l-" 3 CT^ P^ b' (L> "U (U S S E OJ nJ M cd ^ u isi A few commodities have gone up in price, a few have remained stationary, but the great bulk have be- come cheaper by substantial percentages. Some other corroborative evidence may be adduced on this point. The Bureau of Labor figures show steel rails at tihe mill to have remained the same in price since 1902. In the Cattle Shippers Case, evidence made up from reports to the Interstate Commerce Commis- sion shows that the price paid by the Missouri, Kan- sas and Texas, delivered, has remained about the same for a period even longer. The difference between the Bureau price and the price given by this company represents the transporation charges. Average cost per ton at distributing point. Year ending June 30. Rails per ton. 1899 $36.00 1900 27.68 1901 29.39 1902 29.94 1903 30.00 1904 29.40 190S 31.84 1906 31.89 1907 30.26 The Bureau of Labor table shows that compared with 1906, lumber of all the common grades has become somewhat cheaper. Railroad officials on the other hand have been raising a great cry over the increasing cost of ties. Though taken from the same timber lot ties might conceivably show a movement in one direction and lumber in the other. The prices paid for ties as reported to ihe Census Bureau by railroads of the United States indicate a moderate increase in price. Price of Ties purchased by Steam Railroads. 1905. 1906. 1907. 1908. All kinds $ .47 $ .47 $ .51 $ .50 Oak .55 .51 .53 .51 Southern Pine (a) .51 .54 .53 Cedar .44 .47 .50 .50 Chestnut .48 .46 .48 .50 Douglas Fir .33 .41 .47 .45 Cypress .33 .36 .46 .44 Tamarack .36 .34 .49 .50 Hemlock .33 .28 .34 .38 (a) Not quoted separately. 182 At first blush, it looks as if every variety of tie save oak ihad grown dearer rapidly. But the question of im- portance is involved. Oak is the wood of 40 per cent, of all ties and Southern Pine of 22 per cent. more. The woods which show the high increases are those of small relative importance. Comparisons of importance are available for two years only, — 1905 and 1908. In those years the per cent, of the total number of ties from eadb kind of wood was as follows: 1905 1908 Oak 44.5 40.2 Southern Pine. . ..x 23.5 22.3 Cedar 8.9 5.8 Chestnut 6.1 5.1 Douglas Fir 4.6 9.5 Cypress 4.5 4.4 Tamarack 4.0 3.0 Hemlock 2.2 l.S All other 1.7 5.2 Total 100.00 100.00 X Includes three other varieties of Pine. Testimony from the M., K. & T. in the Cattle Raisers case is to the same effect. Tkis exhibit was made up from reports of that company to the Inter- state Commerce Commission. (Brief for Defend- ant, p. 159.) Year. Price per tie. 1899 37.8 cents. 1900 1901 42.6 1902 41.1 1903 39.2 1904 40.4 1905 39.4 1906 38.5 1907 44.7 1908 48.7 The last two years includes cost of a much larger quantity of ties creosoted. Of late years, then, the 183 most numerous class of tie has decreased in price, the mcreases have been in the soft woods desired for treat- ment by creosote. The use of tie plates efifects savings and while the cost of the creosote process is from 11 cents to 25 cents per tie (see Webb, Economics of Railway Construction, pp. 236-237), the life of a tie is on the average doubled. So with the slight increase in the cost per tie has come into practice a large ultimate saving. In addition to this saving in material Webb has the following to say (p. 237) : "The disturbance of the roadbed on account of fre- quent renewals of untreated ties is a disadvantage which would justify an appreciable expenditure to avoid, * * * The annual coS't of a system of ties may be considered as the sum of (a) the interest on the first cost, (b) the annual sinking fund that would buy a new tie at the end of its life, and (c) the average an- nual cost of maintenance for the life of the tie, which includes the cost of laying and the considerable amount of subsequent tamping that must be done until the tie is fairly settled in the roadbed, besides the regular track work on the tie which is practically constant." There are still more indefinite advantages result- ing from the smoother running of trains, and less wear and tear on the rolling stock due to less dis- turbance of the roadbed. The increased cost of railway Maintenance is not particularly impressive. Materials seem rather to be on the decline of late, and wage increases have been over rated. Wage increases have come almost en- tirely to the organized employees; shop mechanics have but feeble unions, track labor is that of the alien element, ignorant alike of language, organiza- tion, and strikes. BETTERMENTS IN THE GUISE OF MAIN- TENANCE. Referring back to C, B. & Q., the suggestion is made that while early maintenance charges of the C. B. & Q. are known to contain large items of better- ments, it must be inferred that the expenditures of later years contain even larger amounts of better- ments. The same appears to be true of many other roads. 184 Maintenance Charges on the Atchison, Topeka and Santa Fe. Maintenance of Way Maintenance of Mile- Year, and Structures. Equipment. age. 1910*. $17,476,000 $15,748,000 1909 . 12,884,406 13,903,897 9794 1908 . . . 14,414,875 14,376,338 9415 1907 .... 15,286,062 11,779,846 9273 1906 . 12,475,407 10,720,040 8433 1905 11,385,418 10,914,864 8305 1904 ... . 9,170,234 10,006,135 8197 1903 9,304,892 8,510,543 7965 1902 6,141,466 7,864,951 7855 1901 . . . 6,433,840 6,257,456 7807 1900 6,354,372 5,267,832 7341 * Estimated on basis of first nine months, ending March 31. On the Atchison, the M. K. & T., and the South- ern Pacific, roads which happen to have been studied the increase in the charge for maintenance of way has been from eighty per cent, approximately in the case of the Southern Pacific, to 300% in the case of the Atchison, and to about 170% in the case of the M. K. & T., although the increase in mileage operated has in no case been more than 33%. On the Burlington, maintenance of way has increased 50%, while the increase of mileage operated was 20%. Attention has already been called to the amount of betterments included in these early Burlington maintenance charges. And on certain other roads, abundant testimony is offered upon the amount of betterments included in maintenance during those same early years. For example, in 1903 (page 13 ) the president of the Atchi- son stated among a whole series of improve- ments which had been made, "No part of the cost of the increased weight of rails amount- ing to upwards of $500,000 was charged to capital account, but as heretofore the whole cost was included in operating expenses." President Fin- ney of the M. K. & T. (pages 14 to 16) stated "We 185 have widened embankments on 219 miles of road. ♦ * * We have ballasted 34S miles." The Southern Pacific annual report of 1902 (page 14), "During the year 201 locomotives were changed to burn oil (a number of other improvements are then recited). The cost of the changes and improvements was charged to op.'rating expenses." Again in 1904 (page 17), "The ■expenditures for shop machinery and tools increased 44.47 per cent.; this was caused by large additions of machinery to meet the in- creased demand upon the shops." These remarks appeared under "Explanation of Maintenance of Equipment." It is unnecessary to recite further examples, or further proof. No railroad man of probity will deny that prior to 1908 large amounts of actual betterments were charged to operating expenses. In view of the fact that with few excep- tions these maintenance charges increased largely between 1905 and 1907, and that with few exceptions the charges since 1907 have been either equal to or in excess of those for 1909, it gives rise to the sug- gestion that in spite of the prescribed system of accounts enforced by the Interstate Commerce Com- mission by means of a large Board of Examiners, ways and means of accomplishing betterments under the guise of maintenance are still found. It must be remembered that the original data are prepared by the railway companies themselves, that all a Board of Examiners can accomplish practically is to ascer- tain that a voucher is present for every item of ex- pense, which is presented, and that this item of ex pense is under the appropriate heading in accordance with the prescribed system. He is unable to go back of the voucher to the material fact, and it requires but little imagination for a layman to understand that great freedom is still allowed rail- way management in the application of the funds at their disposal. It is not our intention to contend that this prac- tice is in any way contrary to good public policy; that is entirely beside the point. But we do contend that when such charges are made and the property of the company is so improved, that these are real earnings and that they also put the road into a condition for still greater earnings in the future; that with the property increased to this extent 186 railroads are in a position to pay wages of a higher grade, (or are not justified in increasing rates) the same as if these earnings had been actually dis- tributed to the stockholders in the form of dividends. At the same time, a certain amount of actual betterments are confessed by the roads, for example, the C. & N. W. in its report to the stockholders in 1908 and 1909 contains the following or similar state- ments: Annual reports to stockhelders 1908, p. 10. "* * * of this amount $8,056,546.36 was for expenditures pertaining to Maintenance of Way and Structures. Included in these amounts is a large part of the cost of 63,754 tons of steel rails, the greater portion of which was laid in replacement of rails of lighter weight in 536.82 miles of track; also the cost of 1,940,409 new ties. "The Expenditures for Maintenance of Way and Structures also include a large portion of the cost of ballasting 7.41 miles of track with crushed stone, 590.17 miles with gravel and 78.01 miles with cinders and slag; the erection in place of wooden structures, of 51 new steel bridges on masonrv and six on pile supports, aggregating 3,868 feet in length and con- taining 2,790 tons of bridge metal, and the replace- ment of other wooden structures with masonry arch and box culverts and cast iron pipes, the openings being filled with earth. The wooden structures re- placed with permanent work aggregate 8,886 feet in length." A form was set for several years in the annual reports to the stockholders of the C. M. & St. P. showing these replacements during each year. They are presented in tabulated form herewith: Built. 1906. 1907. 1908. 1909. Steel Bridges, number . 46 28 31 28 Aggregating, feet . . . 6,297 3,226 4,783 4,267 Replacing Wooden Bridges, feet . 2,390 2,402 3,486 1,484 Embankments, feet . . 23 65 484 Iron Bridges, feet . . . 759 1,505 813 l',278 Wooden culverts replaced with iron, number . . S4S 268 286 470 Pile bridges filled with earth, miles .... 1.53 1.05 .83 1.70 187 On the C, R. I. & P., heavier rails have replaced lighter ones as follows: Miles. Miles. 1906 485 1908 200 1907 172 1909 292 New ballast from year to year has amounted to a .•onsiderable figure and in all cases is an absolute betterment. Furthermore, Roadway has been wid- ened, which also is a betterment. Roadbed Widened. New Ballast. Miles. Miles. 1905 . . 269.3 97.97 1906 547.06 401.30 1907 335.39 232.95 1908 151.79 128.35 1909 . . . . 185.54 128.93 Quoting from the Annual Reports to the Stock- iolders of 1908 and 1909, p. 34 in each case: "All the rail relaid during the year has replaced lighter weight and a corresponding increase in metal has been made in appliances." This betterment charge to Maintenance is not to the same extent in 1908 and 1909 as in the earlier years. Yet any of it is a gain to the property owners in addition to their dividends. Bridges also have been replaced, wooden and iron with steel, steel bridges have been re- placed with heavier ones of the same metal, and wooden trestles have been filled in with earth. All of these enterprises are betterments, and have con- tinued in spite of prescribed accounts which pur- port to charge improvements to the property rather than to Maintenance. The extent is indicated by the following: Bridges Bridges Replaced Replaced Trestles with steel, with heavier metal. filled. Feet. Feet. Feet. 1905 . .2417 1906 . .2417 5053 1208 1907 .6100 2946 14471 1908 .5910 455 6644 1909 . .2244 455 3336 188 The amount of new steel rail laid and the number of treated ties placed by the Southern Pacific indi- cates that this road also is preparing for immense train loads in the future, and this at the expense of present maintenance charges. It seems improbable that, under the prescribed system of accounts, new equipment can be purchased and charged to main- tenance, but this same result can b-- effected by other means. An officer of the Pennsylvania company, in the presence of th" writer, argued that deprecia- tion charges were impracticable on the lines he represented, for the reason that repairs were so complete that equipment was rendered practically immortal. The story of the knife which at the end of forty years, was the same old knife, though, it had received seven new handles and sixteen new blades is being reenacted. Some years ago this completeness of repair was not possible. But shops have been so enlarged and so equipped during the past decade (mostly by charges to maintenance) that now immense future outlays out of capital, equipment, reserves, or depreciation funds are being saved. This will mean a great saving to the public of course, but it will be a saving first of all to the companies. This saving, however, involves larger maintenance expenses at present. Thus these larger maintenance charges during the past three years, in spite of any prescribed classifi- cation of accounts accomplish Betterments, in fact — at least in comparison with the earlier years. There is an unconscious betterment which results from the fact that a roadbed is used longer and more, and that repairs in successive years detect the weak places which are treated in such a way as to prevent a recurrence of the weakness. The constant, use of a roadbed settles the grading, the constant repair of it levels the surface, and hardens the bed. It was brought out in the Minnesota valuation that this item called "adaptation and solidification" was worth in that one state alone nearly $12,000,000. The total mileage of railway lines in Minnesota was 7,596, or less than that of all of the roads hi.re considered except the M. K. & T. Thus this better- ment which results in an increased efficiency of the road is a considerable earning, which would amount from $12,000,000 to $1S,G00,000_ on all of the larger roads involved in this arbitration. 189 INCOME FROM SUBSIDIARIES AND OTHER COMPANIES. Speaking of the Great Northern Railway, the Inter- state Commerce Commission, in its decision in the Spokane Rate Case, stated: "That company also owns the stocks of certain railroad companies, which operate their own property. * * * These com- panies are accumulating a surplus on their own ac- count, and hence the financial statement of the Great Northern does not fairly represent either the operat- ing results from its entire System, or from the mile- age which it operates itself." The Interstate Com- merce Commission then proceeded to point out the holdings of the Northern Pacific Railway through the Northwestern Improvement Co., of coal lands, by the Great Northern Railway of ore property. The division of accumulated surplus of the former is fresh in the minds of all interested in railways, while the gift of the Great Northern ore certificates worth at one time nearly $90 apiece to every share- holder of the company is a similar instance. Prac- tically every railroad in the country has these little side-pockets, as they miay be called, into which streams of revenue are poured and hoarded, or re- invested, for the purpose of greater earnings, until some readjustment, financial necessity, or advantage requires that an accounting be made or permits a melon to be cut. The Northwestern Improvement Company is the pocket for the Northern Pacific. The Lake Superior Company performs the same function for the Great Northern. The impression seems to have gained some currency that with the distribution of the 11.4 extra dividend that the prop- erty of the former had been wiped out. Such is far from the fact, for this was a distribution only of accumulated surplus, while the coal and timber properties which it owns are still intact, and busily at work accumulating another surplus which in the fulness of time await the stockholders of the North- ern Pacific. This company appears on the books of the railway at $5,370,104, while the land commis- sioner of that road testified that its coal properties alone were worth at least $50,000,000 (page 187 testi- mony") (Shepherd vs. N. P. Ry. Co. et al). The ore properties upon which the Great Northern ore 190 certificates were based, when transferred to the Lake Superior Company, involved a deduction from the Great Northern property of only $1,851,364 (Spo- kane Rate Decision, p. 408). In addition to these ore properties, and others of which no record is given, the Lake Superior Company owns the Great Northern Express Co., whose initial investment was $100,000, but which, during the past ten years, has distributed $3,200,000 in dividends, is paying an annual dividend at present of $500,000 and had ac- cumulated a surplus of $1,448,851.58 on June 30, 1909. (Complainant's Brief, Sundberg vs. Great Northern Ex. Co. L. C. C. 2175.) Express company rates are from three to five times as high as freight rates, but the earnings from such rates, going from the express company to the Lake Superior Co., and not entering into the income account of the Great Northern, do not appear in the earnings of the Great Northern, although its em- ployees fire the engines, switch the trains, maintain the tracks, and all of the other work attendant upon transportation. The C. M. & St. P. Ry. has the Milwaukee Land Co., whose latest achievement is that of purchasing the timber and mineral lands along the right of way of the new extensions into the West. How it obtained the capital for this $12,000,000 purchase has not been made public, but ft has been in operation for a number of years, and no doubt its recent suc- cess in the State of Washington and of Montana are not the first instances of profit to its credit. The C, R. I. & P. has the Rock Island Improvement Co., through which it finances its purchases of new equipment. No occasion has arisen as yet to make public its operations. In addition, the company leases a thousand stock-cars from the Mather Hu- mane Stock Car Co., and while no direct connection has been traced between the two companies in a legal sense, yet the name is suggestive. But it re- mains for the Southern Pacific Co. to furnish the crowning example of all. Its holdings in the Asso- ciated Oil Co. are listed at something over $20,000,- 000 on the books of the Southern Pacific Co., com- prising a controlling interest. The Associated Oil Co. already has a record of 23,(X)0.000 barrels of oil marketed per year, or about 10% of the world's 191 supply. In addition, the Kern Trading and Oil Co. is another Southern Pacific subsidiary, and with the Associated Oil Co. has control of the Associated Pipe Line Co., with a capital stock of $7,000,000 and no outstanding debts. This pipe line company owns about 600 miles of pipe-line, with extensive termin- als. Again, the Associated Oil owns all of the out- standing stock of the Associated Transportation Co., which has about 200 miles of pipe line, and five modern tank-steamers, four large schooners, three barges and three tugs. The Amalgamated Oil Co. is another pipe line and refinery company, with a capital stock of $5,000,000, of which the controlling interest is owned by the Associated. The capacity of these pipe lines and refineries is such that it gives the Associated Company control over half of the output of the State of California, which is 30% that of the entire United States; and yet great sections of the Southern Pacific Co.'s oil properties have not been developed. Some opera- tors in the California field have estimated these holdings as worth a billion dollars, while nine figures are used in every estimate which has been made. A certain degree of reliability is to be placed upon these estimates inasmuch as very recently the Southern Pacific listed Associated Oil stock on the New York Exchange, and accordingly submitted a prospectus to accompany their request for such listing. These operations have been entirely un- suspected by investors throughout the country and the development attending the-n has been made possible because of the control of the transportation facilities in those localities. In the Associated Oil Co. and its subsidiaries, we have the example of a pocket within a pocket and these tremendous earn- ings must be considered in any estimate which is placed upon the financial ability of the Southern Pacific Co. to bear additional charges for wages or other purposes. The A. T. & S. F. has the Santa Fe Land Im- provement Co. through which, in 1902 (see annual report, page 18), the entire capital stock of the Pe- troleum Development Co. of California was pur- chased. "This Company controls about 1,500 acres in the Kern River Petroleum Field," which, as shown above, constitutes a large part of the particularly 192 rich holdings of the Southern Pacific. In 1903 (see page 29) the San Francisco and Northwestern Ry. was purchased through it. In 1904 (see page 12) nearly 4J4 million dollars worth of equipment, and the capital stock of the Yosemite Transportation Co., in 1905 the capital stock of the Chanslor-Can- field Midway Oil Co., the Texas and Lumber Pre- serving Co., and the Antioch Warehouse Property, and as late at 1906 $1,000,000 capital stock of the Texas Gulf Road was purchased through this me- dium. Thus while no public hearing, investigation or court proceeding has exploited the extent of this company, it is to be gathered from these statements contained in the Annual Report to the Stockholders that its operations are by no means on a small scale. CONCLUSION. The ability of practically all of the roads in this arbitration to pay such wages has been shown in the comparison of the present earnings with their earnings in the past, by reference to the betterments to their properties which are being effected under the form of increased maintenance charges, by the betterment which results to the property from long continued use, and from the very certain signs of an immediate and increasing prosperity. The earnings of the many subsidiary companies, some of which are not subject to public regulation, and of which the public has no knowledge, are in the end also earnings belonging to the railroad corporation. Thus the real earnings of transpor- tation companies are far ahead in these latter years of any previous and are much in addition to those shown on the income account, 193 SPECULATION AS A FINE ART. By Dickson G. Watts. November 9, 1910. Since De Quincey wrote his essay on "Murder as a Fine Art," many things have been considered under a similar title. We read recently an article on "Invalidism as a Fine Art." If murder and in- validism can be so treated, why not speculation? Speculation is a fine art, and requires a high order of talent in the artist. Before entering on our inquiry, before considering the rules of our art, we will examine the subject in the abstract. Is speculation right? It may be ques- tioned, tried by the highest standards, whether any trade where an exact equivalent is not given can be right. But as society is now organized speculation seems a necessity. Is there any difference between speculation and gambling? The terms are often used interchangeably, but- speculation pre-supposes intellectual effort; gambling, blind chance. Accu- rately to define the two is difficult; all definitions are difficult. Wit and humor, for instance, can be defined; but notwithstanding the most subtle dis- tinction, wit and humor blend, run into each other. This is true of speculation and gambling. The former has some of the elements of chance; the latter some of the elements of reason. We define as best we can. Speculation is a venture based upon calculation. Gambling a venture without calculation. The law makes this distinction; it sus- tains speculation and condemns gambling. All business is more or less speculation. The term speculation, however, is commonly restricted to busi- ness of exceptional uncertainty. The uninitiated be- lieve that chance is so large a part of speculation that it is subject to no rules, is governed by no laws. This is a serious error. We propose in this article to point out some of the laws that govern in this realm. There is no royal road to success in speculation. We do not undertake, and it would be worse than folly to undertake, to show how money can be made. Those who make for themselves or others an in- fallible plan delude themselves and others. Our effort will be to set forth the great underlying prin- ciples of the "art" the application of which must de- pend on circumstances, the time and the man. 194 Let us first consider the qualities essential to the equipment of a speculator. We name them: self- reliance, judgment, courage, prudence, pliability. 1. Self-reliance. A man must think for himself, must follow his own convictions. George Mac- donald says: "A man cannot have another man's ideas any more than he can have another man's soul or another man's body." Self-trust is the foundation of successful effort. 2. Judgment. That equipoise, that nice adjust- ment of the faculties one to the other, which is called good judgment, is an essential to the specula- tor. 3. Courage. That is, confidence to act on the de- cisions of the mind. In speculation there is a value in Mirabeau's dictum: "Be bold, still be bold, al- ways be bold." 4. Prudence. The power of measuring the danger, together with a certain alertness and watch- fulness, is very important. There should be a bal- ance of these two, prudence and courage; prudence in contemplation, courage in execution. Lord Bacon says: "In meditation all dangers should be seen; in execution none, unless very formidable." Connected with these qualities, properly an outgrowth of them, is a third, viz., promptness. The mind convinced, the act should follow. In the words of Macbeth: "Henceforth the very firstlings of my heart shall be the firstlings of my hand." Think, act, promptly. 5. Pliability. The ability to change an opinion, the power of revision. "He who observes," says Emerson, "and observes again, is always for- midable." The qualifications named are necessary to the make-up of a speculator, but they must be in well lialanced combination. A deficiency or an over-plus of one quality will destroy the effectiveness of all. The possession of such faculties in a proper adjust- ment is, of course, uncommon. In speculation, as in life, few succeed, many fail. Each department of life has its language, expres- sive if not elegant, and in dealing with the subject we must perforce adopt the language of the Street. The laws given will be found to apply to speculation of any kind. They are universal laws; but for the sake of clearness we assume the case of specula- 19S tion as conducted in one of our exchanges, where they can be best demonstrated. We divide them into two groups, laws absolute and laws condi- tional. Laws absolute. Never overtrade. To take an in- terest larger than the capital justifies is to invite disaster. With such an interest a fluctuation in the market unnerves the operator, and his judgment be- comes worthless. 1. Never "double up"; that is, never completely and at once reverse a position. Being "long," for instance, do not "sell out" and go as much "short." This may occasionally succeed, but is very liazardous, for should the market begin again to advance, the mind reverts to its original opinion and the speculator "covers up" and "goes long" again. Should this last change be wrong, complete de- moralization ensues. The change in the original position should have been made moderately, cau- tiously, thus keeping the judgment clear and pre- serving the balance of the mind. 2. "Run quick," or not at all; that is to say, act promptly at the first approach of danger, but fail- ing to do this until others see the danger, hold on or close out part of the "interest." 3. Another rule is, when doubtful, reduce the amount of the interest; for either the mind is not satisfied with the position taken, or the interest is too large for safety. One man told another that he could not sleep on account of his position in the market; his friend judiciously and laconically re- plied: "Sell down to a sleeping point." Rules conditional. These rules are subject to modification according to the circumstances, indivi- duality and temperament of the operator. It is better to "average up" than to "average down." This opinion is contrary to the one com- monly held and acted upon; it being the practice to buy and on a decline to buy more. This reduces the average. Probably four times out of five this method will result in striking a reaction in the mar- ket that will prevent loss, but the fifth time, meeting with a permanently declining market, the operator loses his head and closes out, making a heavy loss — a loss so great as to bring complete demoralization, often ruin. 196 But "buying up'' is the reverse of tlie method just explained; that is to say, buying at first moderately, and as the market advances adding slowly and cau- tiously to the "line." This is a way of speculating that requires great care and watchfulness, for the market will often (probably four times out of five) react to the point of "average." Here lies the danger. Failure to close out at the point of average destroys the safety of the whole operation. Occa- sionally ***** a perma- nently advancing market is met with and a big profit secured. In such an operation the original risk is small, the danger at no time great, and when suc- cessful the profit is large. This method should only be employed when an important advance or decline is expected, and with a moderate capital can be un- dertaken with comparative safety. To "buy down" requires a long purse and a strong nerve, and ruin often overtakes those who have both nerve and money. The stronger the nerve the more probability of staying too long. There is, however, a class of successful operators who "buy down" and hold on. They deal in relatively small amounts. En- tering the market prudently with the determination of holding on for a long period, they are not dis- turbed by its fluctuations. They are men of good judgment, who buy in times of depression to hold for a general revival of business — an investing rather than a speculating class. In all ordinary circumstances our advice would be to buy at once an amount that is within the proper limits of capital, etc., "selling out" at a loss or profit according to judgment. The rule is to stop losses and let profits run. If small profits are taken, then small losses must be taken. Not to have the courage to accept a loss, and to be too eager to take a profit, is fatal. It is the ruin of many. Public opinion is not to be ignored. A strong speculative current is for the time being overwhelm- ing, and should be closely watched. The rule is, to act cautiously with public opinion; against it, boldly. To go with the market, even when the basis is a good one, is dangerous. It may at any time turn and rend you. Every speculator knows the danger of too much "company." It is equally necessary to exercise caution in going against the market. This 197 caution should be continued to the point of wavering — of loss of confidence — when the market should be boldly encountered to the full extent of strength, nerve and capital. The market has a pulse, on which the hand of the operator should be placed as that of the physician on the wrist of the patient. This pulse- beat must be the guide when and how to act. 5. Quiet, weak markets are good markets to sell. They ordinarily develop into declining markets. But when a market has gone through the stages of quiet and weak to active and declining, then on to semi- panic or panic, it should be bought freely. When, vice versa, a quiet and firm market develops into activity and strength, then into excitement, it should be sold with great confidence. 6. In forming an opinion of the market, the ele- ment of chance ought not to be omitted. There is a doctrine of chances- — Napoleon in his campaigns allowed a margin for chance — for the accidents that come in to destroy or modify the best calculation. Calculation must measure the incalculable. In the "reproof of chance lies the true proof of men." It is better to act on general than special information (it is not so misleading), viz.: the state of the coun- try, the condition of the crops, manufactures, etc. Statistics are valuable, but they must be kept sub- ordinate to a comprehensive view of the whole situa- tion. Those who confine themselves too closely to statistics are poor guides. "There is nothing," said Canning, "so fallacious as facts, except figures." "When in doubt do nothing." Don't enter the market on half conviction; wait till the convictions are fully matured. We have written to little purpose unless we have left the impression that the fundamental principle that lies at the base of all speculation is this: act so as to keep the mind clear, its judgment trust- ' worthy. A reserve force should therefore be main- tained and kept for supreme moments, when the full strength of the whole man should be put on the stroke delivered. It may be thought that the carrying out of these rules is difficult. As we said in the outset, the gifted man only can apply them. To the artist alone are the rules of this art valuable. 198 THE SCALE ORDER. December 29, 1910. In a book published about five years ago,* I ex- pressed the opinion after examining dozens of schemes ostensibly forming a mechanical basis for speculation only two presented, in my opinion, any real merit — the scale order and the stop loss order. Since that time I have been in almost constant touch with the outcome of these various systems and noth- ing has been discovered to change the opinion then offered. The stop loss order was referred to in the work mentioned as a much abused method. If it was abused five years ago it is doubly abused now, for its use has greatly increased and, sad to state, the in- crease has been almost entirely on the side of abuse rather than use. Briefly the use of the method is for the purpose of protecting profits, which makes the term somewhat of a misnomer. If a man is long of stocks; his transactions showing large profits and he is waver- ing as to whether to hold on or sell, the stop order is sometimes a good way to settle the matter. It will, in almost all cases, assure him of the bulk of his profits and if the market advances, can be raised gradually with the market advance. Even at its best, as outlined above, its greatest virtue lies in the fact that it fixes an automatic arrangement which the operator himself might be incapable of employing because of his absence from the scene of operations or his human tendency to get bewildered and ex- cited when prices move rapidly in either direction. The method will often prove disappointing. That is to say, the market will decline far enough to re- tire his commitments and then resume the advance. But no one ever went broke taking pro ts. The abuse of the stop loss order lies in the preva- lent method, which grows continuously in popularity, of making a purchase and simultaneously placing an order to sell if the price declines a certain number of points. This is against all logic, not to say against all common sense. It means that the man who fol- *The Pitfalls of Speculation, 1906. 199 lows such tactics is merely gambling on fluctuations or is operating without sufficient means to back up his opinions. There can be but one good reason for buying a security and that is because, after ex- amining it, it is considered cheap. In many cases it may be too cheap. Prices and values are fre- quently divorced, and when they are, our greatest speculative opportunities appear. How ridiculous it seems, that if we buy for that one reason which war- rants buying (because the security is cheap), we should at once introduce an order to sell if it be- comes cheaper. The most astounding feature of all is that a great many people advocate both the stop order as abused and the scale order as used. It is astounding because the two methods are diametri- cally opposed to each other. In one case we buy a stock and give an order to sell if it declines say two points, and in the other we give an order to buy and increase the holdings if it declines two points. This is serving two masters with a vengeance. But the stop order can be employed in connection with the scale order by those who want a fixed manner of placing orders. For example, assume scale order purchases of a certain secur'ty: Bought 100 at 100 100 " 98 100 " 96 103 " 94 100 " 92 Total, 500 shares at 96 Again, assume that the stock recovers from 92 to 100. The scale operator has a profit of $2,000 and the market is Lt the point at which he originally started. He begins placing now his selling orders on a scale up if he is in doubt as to future movements or wishes to secure at least a portion of his profit. Suppose the market advances to 102. He places the stop on the entire 500 at 100. At 104 he raises the stop to 102 and so on. Of course as the market advances sufficiently to dispose of holdings of the stock, the order to stop decreases accordingly. Thus: 200 EXAMPLE. Scale order given to buy 100 shares of a certain security on every two-point decline, original purchase at 100. Market declines to 92 or a little lower. Bought 100 at 100 " 100 " :8 " 100 " 96 " 100 " 94 " 100 " 92 Then: Market advances to 100 and order is given to sell on a scale up— ]00 at 102; 100 at 104; 100 at 106, 100 at 108, and 100 at 110, and simultaneously an order is given to stop loss on all on a two-point decline. Market advances to 110. Sold 100 at 102. Order to stop 400 at 100. Sold 100 at 104. Order to stop 300 at 102. Sold 100 at 106. Order to stop 200 at 104. Sold 100 at 108. Order to stop 100 at 106. Sold 100 at 110. All stops cancelled. The 500 shares have been sold. By this method there is no conflict. We have used the scale and stop orders correctly without in any way impairing the efficiency of either. This may seem a little complicated at first, but on examination it will appear very simple. Returning to the question of the scale order per se it may be stated that the greatest recommendation of this method lies in the fact that it is adopted by many large and important operators. If it did not possess merit this would not be the case. It is dangerous to give the scaling method credit for too much virtue. The principle is excellent but not infallible. There is nothing infallible in specu- lation. At times it is necessary, because of specific developments or changed conditions, to abandon our scale abruptly even at a loss, but this is seldom the case if we operate correctly. With all its merits the scale order would break a man who started it in a poor proposition near the top of a long swing and tried to maintain his position stubbornly. But there is no reason why such a catastrophe should occur. The fundamental principle is that every purchase made on a scale down lowers the general average and the mathematical principle is that an advance of 201 half the preceding decline cancels the losses. In the examples already offered it is shown that purchases made at 100, 98, 96, 94 and 92 would be balanced at 96. Thus: Market declines from 100 to 92; 100 shares purchased on each 2-point decline. Market then advances from 92 to 96. At 96 the showing is as follows: Pro.'it Loss 100 bought at 100 shows .... $400 100 bought at 98 shows 200 100 bought at 96 shows 100 bought at 94 shows $200 100 bought at 92 shows 400 $600 $600 This does not contemplate commissions or interest which are omitted for the sake of simplicity. The scale order should be commenced only when we think prices are low as compared with values. Then if our deductions are reasonably correct, it will succeed. At times we will not accumulate very much stock by this method, as the original purchase will be made near the bottom, but in a majority of cases we will get a pretty good line because of the swing of the market — the inertia. If only the first lot is secured we will have to thank God we got in at the bottom and let it go at that, remembering that the market is always there and that future scale orders will work better. Another fault is' in placing orders to buy on a scale down too clcsely together. There is a sin- gular laclc of discrim-nation in that direction. No cut and dried rules ca.n be laid down as to how far apart such orders should be placed. That depends upon four things, the ruling price of the stock; the stages of the market; the length of the speculator's purse and the character of the stock. Imprimis: A scale order in a stock selling at 200 as compared with a stock selling at 50 is a widely different proposition, for the higher priced stock should naturally move down four points while the lower priced stock moves down one point. We might reasonably place a scale order in Erie on every point decline and under exactly similar con- ditions not be justified in placing a scale order in 202 Union Pacific closer than five points. A little re- flection will show the reason for this. If a stock- selling at $100 per share declines 10 points, it has declined to the extent of 10% of its market value; if a stock selling at $10 a share declines only one point, it has also lost 10% of its market value. It would be absurd to assume that if Union Pacific should break 30 points in a month, Erie would also break 30 points. Second: In an active market with stocks moving rapidly, scale orders should be placed further apart than in a dead market where fluctuations are limited. Third: A man who is prepared to venture a large sum of money and carry out his scaling plan indefi- nitely may place his orders much closer together than the man who has a limited sum at his disposal. Fourth: If we operate on a scale in a standard seasoned dividend payer we may move more boldly than in a "wildcat" or a security the earnings and dividends of which depend on trade conditions. In this last case the mere price comparison does not hold. We can, in ordinary markets, better afford to work on a two-point scale in such a stock as Pennsylvania than on a five-point scale in Steel common or Amalgamated Copper. As has been suggested, we cannot hope to make an exact science of this method, but I will add that at any time clients are confused as to what they should do, and will ofifer the contemplated scale in a specific way, I will gladly write a prescription to the best of my ability. Possibly some surgical operations may be necessary. Lest the views given above may appear wholly theoretical, I will give a few actual illustrations as to the workings of this method. I do not want to pick out specific stocks for these illustrations so I will go back several months and employ as ex- hibits all the recommendations offered in my recent weekly letters and show what the results would have been if the scaling principle had been religi- ously followed. I will begin with September 14, as that is the date on which I recommended selling stocks on recoveries. In taking this date as a basis I have purposely picked out a period which will show that while I was not correct in my views as to immediate market movements, profits could have 203 been made, even in a dull market bythe combined use of the scale order and discrimination as to what to buy or sell. I must necessarily be freed from any imputation of self-advertising at the expense of the subject matter of this article if the letters since the date above mentioned are examined, as I refer to a market which moved against what I sug- gested at that time. I inject this personal noteto forestall the criticisms of that numerous class which cannot accept a propaganda of this chaTacter without searching for ulterior motives which do not exist. Weekly letter of September 17 — Recommended particularly sales of St. Paul. If sold on a two point scale the result would have been as follows: Closing price September 17 ^-0% Highest since September 17 1295-^ Closing December 27 122 Sold 100 at 120 " 100 " 122 " 100 " 124 " 100 " 126 " 100 " 128 Total 500 shares at average price of 124. Profit $1,000 at present market (price has been three point; lower than present market'). Weekly letter of September 24 — Recommended purchase of American Beet Sugar. If bought on a one point scale result would have been as follows: Closing price September 24 38;4 Lowest since September 24 36^4 Closing price December 27 43j.^ Bought 100 at 33 100 " 37 Total 20O shares at average price of 37J. Total profit, $1,100. Weekly letter of October 1, no specific recom- mendation. Weekly letter of October 8 — Recommended pur- chases of Consolidated Gas, Western Union, Penn- sylvania and Erie and sales of Union Pacific (also continued to recommend sales of St. Paul and pur- chases of Beet Sugar, but these have already been referred to). Results would be as follows: 204 CONSOLIDATED GAS. Bought on a two point scale. (Am employing the two point scale for stocks selling above 100 and the one point scale for stocks selling below 100). Closing price October 8 133J4 Lowest since October 8 130 Closing December 27 136 Bought 100 at 133 100 " 131 Total 200 shares at average price of 132. Profit at present market $800.00. Plus dividend $200,* total $1,000. Having shown the form employed in figuring the results I will from now on merely give the prices and results. WESTERN UNION. Closed October 8 at 75'/^ Lowest since that date 70.>^ Closed December 27 at 73 On a one point scale would have bought 500 shares at an average of 73. Dividend, $375.00. Profit, $375.00. PENNSYLVANIA. This stock closed on October 8 at 130. Lowest 126f^. On a two point scale we would have 200 shares at an average of 129. Closing December 27 was 128^ ; loss at market, $150.00. Dividend $300.00, profit $150.00. Here is an illustration of where a scale order could be used closer together in a high- priced stock to advantage. The narrow range and stability of Pennsylvania would warrant this. ERIE. Closed October 8 at 27}i. Low 26?^. No move- ment. Closing price December 27 was 27, at which price first 100 would be purchased. Result neutral. UNION PACIFIC. Closed October 8 at 16754- Highest since that date 179. Closing December 27 was 168^2. On a two point scale six hundred shares would have been *Diviclends paid during tile period of operation are sub- tracted from profits on short sales and added to profits on purcliases. 205 sold at an average price of 173. Profit $2,700. Divi- dend $1,500. Net profit $1,200. Here is a case where a two point scale would not be advisable except with a long purse. I simply use it for the sake of uni- formity in the illustrations. Weekly letter of October IS — Recommended pur- chases of Southern Railway preferred and sales of Interboro Metropolitan preferred and common. SOUTHERN RAILWAY PREFERRED. Closed October IS at 60^. Lowest since October IS at 56. Closed December 27 at 61. 500 shares bought on a one Doint scale at average of 58. Profit $1,500. INTERBORO METROPOLITAN PREFERRED. Closed October IS at 57^. Highest 60^. Closed December 27 at S354- 400 shares sold at average of 58J4, profit $2,000. Weekly letter of October 22 — Recommended pur- chases of Virginia-Carolina Chemical. Closing price October 22 was 655^. Lowest 59^. Would have 600 shares at average of 625^^. Closing price December 27. 61H. Loss $600.00. Dividend $750.00. Net profit $150.00. Weekly letter of November 12 — added to list of good short sales. Baltimore & Ohio and New York Central. BALTIMORE AND OHIO. Closing price November 12 was 107, highest since that date was 108. No stock secured on scale. Orig- inal sale 100 shares at 107. Closing price December 27, 104J4. Profit $275.00. NEW YORK CENTRAL. Closing price November 12, 113. Hi-^hest price smce that date 114^. No stock on scale. Original sale 100 shares at 113. Closing price December 27 110. Profit, $300.00. I will stop with November 12, as it is not thought any fair test of the scale order could be made in a smgle month. In fact, two months is an insufficient period, but let it go as it has been figured. 206 $1,000 1,100 1,000 375 ISO 1,200 2,000 ISO 27S 300 I will add that the profits shown above would have been greatly increased if the advice to cover shorts offered on December 7 had been followed. Let that go also. RECAPITULATION. Profit on St. Paul on American Beet Sugar " on Consolidated Gas " on Western Union " on Pennsylvania " on Union Pacific . . . " on Interboro preferred . " on Virginia-Carolina . . " on Baltimore & Ohio . . " on New York Central . Total profit $7,550 At different times in the period considered we op- erated in 2,600 shares. So subtract, say seven hun- dred dollars for commission and interest, leaving net profits at close December 27 of $6,850. We have, therefore, been operating hypothetically on the scaling principle in hundred share lots in a bad market on both sides of the account and have done well. In bulking the results it is not assumed that a single individual necessarily worked in all the stocks recommended, but assuming that he only worked in ne he would have a profit in any case, whether he purchased the stocks suggested as pur- chases or sold the stocks suggested as sales. The only exception is in the case of Erie where the re- sult is neutral. In spite of the popular fallacy that the "market" always goes homogeneously up or down, we have only to examine the statistics in this article to see that a purchase of one stock and the sale of another simultaneously would have resulted in profits on both. Some people will sniff at this showing because lar- ger profits can, in some instances, be made by taking a larger original amount. True — so can larger losses. The man who started off with a sale nf 500 Union Pacific at 16754 and carried it up to 179 would have had his bad half hour and would have no profit at 207 the present market. On the other hand, if the mar- ket had moved directly with his sale he would have larger profits, but the factor of safety would have been jeopardized just the same. The scale order is a scientific principle. It is logi- cal because it contemplates the possibility of errors in immediate deduction; takes advantage of a hiatus between prices and values; gradually reduces the cost of the line of securities when prices move against the original purchase and affords a semi-me- chanical plan which relieves us of constant attention to fluctuations. But the scaling principle does not afford a purely mechanical plan which relieves us of study and close examination of either individual securities or general conditions, which is a good thing. The success of the method depends upon getting started right. If we are reasonably near the truth, every point or two the market runs against the original commitment is a distinct advantage in the long run. No matter how carefully we may operate, there will be times when a mistake will occur or when changed conditions will warrant abandoning the plan at a loss. There is nothing infallible in speculation, but with proper dis- crimination and strict adherence to the principles involved, the scale order will show a profit every year and the profits will be secured on the safest kind of basis. In a forthcoming letter I will refer in further de- tail to the merits of the method. 208 THOMAS GIBSON'S MARKET LETTERS THIS ADVISORY SERVICE CONSISTS OF: 1.— A daily letter mailed at 3.30 P. M. 2. — A weekly letter covering general business con- ditions, crop conditions, the technical situation and offering suggestions for operations during the coming week. 3. — A special letter weekly covering whatever topic is most vital. 4. — A special letter weekly on crop conditions, dur- ing the season. 5. — Analysis of the i-eports of leading corporations as tliey appear. 6. — A daily table of average stock prices (Rails and Industrials). 7. — Occasional telegrams regarding important changes. 8. — Privilege of a reasonable number of inquiries by mail or telegraph. g Subscribers who file a list of securities in which they are particularly interested will be notified by personal letter or telegram of any developments affecting such securities. 10. — Subscribers are admitted to the statistical library without charge between the hours of lo a. m. and 5 p. m. The subscriber to this service may rest assured that every question affecting future values and prices of securities will be thoroughly covered. These letters deal particularly with securities. Grain and Cotton are also briefly touched on. While 1 at- tempt to gain the most dependable opinions on com- modities, the advice offered is not based on personal investigation. THE PRICE OF THE SERVICE IS AS FOLLOWS: COMPLETE SERVICE \ ^"^ month. . .$10.00 AS DETAILED ABOVE Six months... 40.00 One year 75.00 COMPLETE SERVICE \ °"^ month. .. $5.00 Six months.... 20.00 I (EXCEPT DAILY LETTER) One year 35.00 THOMAS GIBSON Corn Exchange Bank Building NEW YORK *^c4mple and accurate information is the first step toward success. " — J. J. HUI. THOMAS GIBSON'S LIBRARY OF SPECULATION AND INVESTMENT 11 VOLVmBS, its.oo Pitfalls of Speculation Cycles of Speculation The Increasing Gold Supply Thomas Gibson's Market Letters, 1907 Thomas Gibson's Weekly Letters, 1908 (in two voluines) Thomas Gibson's Special Letters, 1908 Thomas Gibson's Weekly Letters, 1909 Thomas Gibson's Special Letters, 1909 Thomas Gibson's Weekly Letters, 1910 Thomas Gibson's Special Letters, 1910 For detailed descriptions of these publications see advertising matter in back of this book. This complete library of eleven volumes, bound in cloth and enclosed in a neat shipping case, will be sent you for $5.00. THE GIBSON PUBLISHING CO. 15 William Street, New York The Pitfalls of Speculation BY THOMAS GIBSON In this volume the author has endeavored to discuss as simply as is possible, the salient factors of speculation and investment. The Table of Contents, following the introduction, treats of: Ignorance. Over-Speculation, etc. Manipulation. Accidents. Business Methods in Speculation. Market Technicalities. Tips. Mechanical Speculation. Short Selling. What 500 Speculative Accounts Showed. Grain Speculation. Suggestions as to Intelligent Methods. Conclusion. Bound in cloth, 146 pages. Price, $1 ; by mail, $1.10. Complete Library (11 vols.) $5.00. Address orders to THE GIBSON PUBLISHING CO. 15 William Street, New York The Cycles of Speculation BY THOMAS GIBSON This book enters a little further into the influ- ences bearing on price changes, than does the "Pit- falls of Speculation," described on the preceding page. The Table of Contents introduces as bearing upon the subject: The Cycles of Speculation. The Gold Supply and Its Effect on Prices. Money. Political Influences. Crops, etc. Puts and Calls. The Question of Dividends. Basing Railroad Values. Effect of Business Depression. Undigested Securities. How to Compute the Value of Rights. Barometer of Averages. Best Method of Trading. Indication of Crisis. The Ordinary Swing of Prices. The Factor of Safety. Borrowing and Lending Stock. Scalping. Crop Damage. Selection of Securities. The Bank Statement. The Cycles of Stock Speculation. The Cycles of Grain Speculation. The Cycles of Cotton Speculation. Conclusion. Bibliography. Bound in cloth, 183 pages; uniform size and bind- ing with "Pitfalls of Speculation." Price, $1.50; by mail, $1.62. Complete Library (11 vols.) $5.00. ADDRESS ORDERS TO THE GIBSON PUBLISHING CO. 15 William Street, New York The Increasing Gold Supply A symposium of special letters on Gold Pro- duction and its probable effects on prices and business by writers well versed on the subject. A correct understanding of this matter is of vital importance to every business man, and particularly to the speculator or investor in bonds, stocks or commodities. The volume contains contributions by such eminent author- ities as Maurice L. Muhleman, Byron W. Holt, Arthur Selwyn-Brown, Professor J. Pease Norton, and W. G. Nichols. Also a chapter on the gold supply, by Thomas Gibson. The principal subjects discussed are "Gold Depre- ciation and Security Values," "Increasing Gold Supply and Stock Prices," "Gold Supply Not Too Great," "Review of the World's Gold Supply," "Gold Depreciation Means Rising Commodity Prices," "Gold Inflation and In- terest Rates," and a general discussion of the World's Gold Supply as an economic factor. Price, bound in cloth, $1.00. By mail, $1.10. Complete Library (11 vols.) $5.00. Published by THE GIBSON PUBLISHING CO. 15 William Street, New York Thomas Gibson's Market Letters for the Year 1 907 This volume includes all the weekly letters and several of the special letters pubished in the year 1907. The vaue of this work lies in the fact that the great decline of 1907 was pre- dicted months before it occurred, and every reason for anticipating such a decline is set forth in the letters. The educational value of the work cannot be overestimated. It has demonstrated absolutely that it is possible to foresee great price changes through the mediums of logic and the study of economic factors. The book contains a number of valuable statistical tables and offers a broad prediction of price movements in the year 1908. Uniform in size with the Pitfalls and the Cycles of Speculation. Price, bound in cloth, $1.00. By mail, $1.10. Complete Library (11 vols). $5.00. Published by THE GIBSON PUBLISHING CO, 15 Williarri Street, New York Thomas Gibson's Weekly Market Letters for 1 908 IN TWO VOLUMES Vol. 1— Weekly Market Letters. Vol. 2— Book of Charts This volume includes all the weekly letters published in the year 1908, together with a number of valuable statistical tables. The letters form a history of the stock market of 1908, not alone a record of prices and movements, but a practical and philosophic discussion of economic causes and effects underlying the broader Sivings and also offers a comprehensive forecast of price movements for 1909. No attempt is made at day to day or week to week prognostications. The intent and purpose of these letters have been to adhere to the original policy which is made clear in the Weekly letters of 1907. Current events of interest in market circles are taken up each week and their relation market-wise discussed in the broadest sense. Ordinary gossip, idle rumors or "inside information" find but little space in these letters, although some of this base currency of the Street cannot be entirely ignored because of its temporary influence upon prices and sentiment. The book of charts, which is more fully described on another page, is an almost indispensable companion work to the weekly letters, being a visible aid to the thorough understanding of the movements discussed and analyzed. Reference is invariably made in the letters to particular pages in the book of charts. Price bound in cloth, uniform in size with Pitfalls and Cycles of Speculation, Si.oo for each volume, or ^1.50 for the two. By mail, $r.io and ^1.62. Complete Library (11 vols.) $5.00. Published by THE GIBSON PUBLISHING CO. 15 William Street, New York Thomas Gibson's Weekly Market Letters 19,08, vol. II, Book of Charts In this volume are reproduced the charts issued in connection with Thomas Gibson's Market Letters for 1908. A few of the various subjects graphically presented in these charts are: Railroad Earnings and Their Immediate Effect on Stock Prices in Years 1893-4, 1903-4 and 1907-8. Effect of Reductions in Iron and Steel Prices in Periods of Depression upon the Common Stock of the United States Steel Corporation. Stock Prices and Total Cereal Crops of the United States by Years since 1885. Market Movements of Stocks in 14 years in which Labor Troubles Occurred. Stock Prices and Cotton Crop of the United States. Average Monthly Stock Movements and Quarter- ly Dividends of Amalgamated Copper for Years 1900 to 1908; also Average Monthly Prices of Electrolytic Copper for the same Period. Average Monthly Stock Market Prices and Divi- dend Payments for Years 1904-08. Average Monthly Movements of 20 Active Rail- way Stocks from January, 1888, to March, 1908; also Dull Months of that Period. Bank Clearings of the Entire United States and Prices of Twenty Principal Railroad Stocks for Twenty-five Years. Total Cereal Crop of the United States and Prices of 20 Principal Railroad Stocks for a Period of Years. Comparison of Earnings and Price Movements of United States Steel Common since 1902. Stock Prices, Crops, Trade Balances and Bank Clearings from 1885 to 1908. Stock Market Movements in Month of June, 1908. Railroad Earnings and Market Movements of Stocks for 6 Years Next Following Panic Years of 1873, 1877, 1884, 1893, 1896, 1903. Market Movements of Industrial Stocks for Seven Years Next Following Panic Years. Price, cloth, $L00. By mail, $1.10. THE GIBSON PUBLISHING CO. 15 William Street, New York Thomas Gibson's Special Market Letters for 1 908 The subjects discussed have been chosen as bearing directly upon the prices of securities, and in all cases the views of men who speak with authority are presented. Probable Effect of Tariff Revision on Securities, by Byron W. Holt, chairman Tariff Committee, Reform Club of New York, editor of The Gold Supply and Prosperity; Increasing Gold Supply and Stock Prices, by Maurice L. Muhleman, ex-Deputy Assistant Treasurer of the United States; A Talk About Cotton, by Katherine M. Giles, cotton expert; The Coal Land Law, a compilation of the con^dential opinions on the constitutionality of the law by leading Senators and Mem- bers of Congress ; The Importance of Fixed Charges, by Carl Snyder, author of American Railways as Investments, New Conceptions in Science, The World Machine, etc. ; The Balance of Trade, by Charles A. Conant, ex-treasurer of Morton Trust Co., author of A ■ History of Modern Banks of Issue, etc. ; Review of the World's Gold Sup- ply, by Arthur Selwyn-Brown, E.M., M.A., B.Sc, consult- ing mining engineer; The Outlook for the Next Six Months, by Professor J. Pease Norton of Yale University, author of Statistical Studies in the New York Money Mar- ket, etc. ; Railroad Earnings and the New Accountmg, by George Bevan Mott, editorial staff The Wall Street Summary; Gold Depreciation and Security Values, by Byron W. Holt; Call Money Rates and Stock Prices, by John P. Ryan, financial writer; Convertible Bonds, by Robert W. Speir, manager bond department of Knauth, Nachod & Kuhne, New York ; The Func- tion of Speculation, by Frank Fayant, writer on financial and eco- nomic subjects ; Mines on the New York Curb, bjr George E. Vi- gouroux, mining editor of the New York Commercial ; Speculation — Its Place in Economics, Speculation vs. Gambling, The Moral Aspect of Speculation, Should Speculation be Regulated by Law — are the captions of an article ably discussed by How- ard Schenck Mott, associated with Messrs. Malcom & Coombe, and on the staff of Harper's Weekly ; The History of Prices for 2508 Years, by Arthur Selwyn-Brown, E.M., M.A., B.Sc, etc, ; Copper, by Frank Fayant. Cloth, Price $1.00; by Mail, $1.10. Complete Library (11 vols.) $5.00. THE GIBSON PUBLISHING CO. 15 William Street, New York THOMAS GIBSON'S Weekly Market Letters For 1909 Including Charts This volume will be found both interest- ing and instructive, being a faithful record of the factors which were influen- tial in shaping the various movements in the stock market during the year. Ability to judge the long turns is vital to successful specu- lation, and a perusal of these letters will demonstrate the value of the use of basic principles and the manner in which they may be applied to daily events in gauging the broader swings. Price, Bound in Cloth, $1 :: By Mail, $1.10 Complete Library, Eleven Volumes, $5 PUBLISHED BY THE GIBSON PUBLISHING CO. 15 WILLIAAV ST., NEW YORK Thomas Gibson's Special Letters, 1909 Following the precedent established in igo8, a num- ber of special letters, written by competent and trust- worthy authorities were sent during the year 1909 to subscribers as part of the regular service. The views expressed and deductions drawn in the various letters are not coincident in all instances, but such divergences add to the value of a work of this kind : discussion of any one sided question is seldom worth while. These essays have been reproduced in book form and are offered to students of financial and economic sub- jects at a popular price. Contents follow. Plentiful Money and Its Market Bearing Gold Exports and Stock Prices John P. Ryar Probable Effect of Government Action on Railroads. The National Momentum W. G. Nicholas Improved Methods in Speculation S. V. White Industrial Mines Destined to a Front Rank in Specu- lative and Investment Circles S. V. White Progress of the Copper Industries Arthur Selwyn-Brown The Open Market for Steel Lest We Forget S. V. White 7>^ BilHon Dollars Needed by Railroads in 15 Years W. C. Brown (Pres. of N. Y. C. R. R.) From Grave to Light, from Pleasant to Severe S. V. White The Industrial Outlook Arthur Selwyn-Brown Outlook for the Metal Industries Arthur Selwyn-Brown The Status of Our Trade Balance John P. Ryan The Truth About the Bank Statement Maurice L. Muhleman The Emergency Law and the Present Situation William C. Cornwall "Industrial Securities Coffee R. C. Pearsall Cottonseed Oil The Beneficiaries of the Advance in Prices Arthur Selwyn-Brown Price, Bound in Cloth, $1.00. By Mail, $1.10 THE GIBSON PUBLISHING CO. J5 "William Street, New York Thomas Gibson's Weekly Market Letters for 1 9 1 Special Market Letters for 1910 These two volumes cover a wide variety of sub- jects pertinent to Stock Market movements and financial and economic conditions, both foreign and domestic, during the year 1910. The Weekly Market Letters furnish an accurate record of events throughout the world which affected security prices. The Special Market Letters deal with the follow- ing subjects: Analysis of the World's Wheat Supply. Present Position in the Trade Cycle G. C. Selden Importance of the Argentine Republic in th-e World's Wheat Trade. Consolidated Gas Company. Business and Financial Outlook. Public Illusions Selwyn-Brown Bulls and Bears. European Capital Investments Selwyn-Brown New ^Method of Compiling Index Numbers Profes^sor Norton Investment Value of U. S. Steel Carl Snyder Xe w Gibson Index Numbers Professor Norton Gibson's Index Numbers Professor Norton Copper ^Metal Situation Frank Fayant Centralized Control of Bank Loans G. C. Selden How Index Numbers Are Made F. C. Croxton How Index Numbers Are Weighted. . .Prof. Norton Truth About Our Trade Balance Frank Fayant Ability of R.R.'s to Pay Wage Increases. J. E. Baker Speculation As a Fine Art D. G. Watts The Scale Order. Each Volume, $1.00; By Mail, $1.10. THE GIBSON PUBLISHING CO. 15 William Street, New York ■ffl!