- 1 O 
 
 ItfAU 
 
 ^Fo reign Exchange 
 
 and 
 
 foreign Business Outlook 
 
 Address by 
 
 ALLEN WALKER 
 Manager Foreign Trade Department 
 Guaranty Trust Co. of New York 
 
 THE UBRflHt OF !Ht 
 AUG 2 9 1924 
 
 UNIVERSITY o* ILLINOIS 
 
 Distributed by 
 
 Illinois Manufacturers’ Association 
 76 West Monroe St. 
 Chicago 
 
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 LUNCHEON 
 
 of the 
 
 Illinois Manufacturers Association 
 
 Louis XVI Room, 
 
 Sherman Hotel, Chicago, Illinois, 
 Tuesday, February 24, 1920. 
 
 Speaker: Mr. Allen Walker, New York City. 
 
 Subject: Foreign Exchange and Foreign 
 Business Outlook. 
 
 Mr. William Nelson Pelouze presided. 
 
 President Pelouze: Members of the Il¬ 
 linois Manufacturers Association: There is per¬ 
 haps no subject that is attracting the attention 
 of the financial world today more than that of 
 foreign exchange. Our foreign export has be¬ 
 come mightily affected by the existing abnormal 
 ratio of that exchange. They have both at the 
 present time become inseparably interwoven to 
 the extent that one has a large influence upon 
 the other. 
 
 Our distinguished guest today, because of his 
 prominent connection with what is known to be 
 the largest international institution of its kind in 
 the world, has had every facility and opportunity 
 to study these great questions. He has kindly 
 consented to address our members today on 
 foreign exchange and on the foreign business 
 outlook. 
 
 It is with very great pleasure that I present to 
 you Mr. Allen Walker, of the Guaranty Trust 
 Co. of New York. 
 
 Mr. Allen Walker: Mr. Chairman and gentle¬ 
 men : It is a very great pleasure to have the op¬ 
 portunity to come and meet with business men 
 oi your activities and your standing in the mid¬ 
 die west, and it is particularly pleasurable just 
 now to get awav from New York, which has had 
 much more snow than you have, and is rather 
 impossible to get around in. I cannot give you 
 a better example—• to indicate what condition we 
 have been in down there—of the difficulties of 
 transportation and traffic than to relate a little 
 incident which happened in regard to our own 
 institution the other day. A small boy called up 
 one of the managers during the big storm there 
 
 
 4 
 
and said, ‘.‘Say, Boss, 1 won’t be down today, if 
 you don’t mind; I haven’t yet got home yester¬ 
 day !” 
 
 The state of the boy and the boy’s mind is 
 not unlike the whole international credit situa¬ 
 tion at the moment. It has not found its bear¬ 
 ings. And businessmen everywhere are saying: 
 “What is going to happen? What underlies the 
 present exchange situation? What are the fac¬ 
 tors tor which we must watch in order to be able 
 to base our activities and our business judgments 
 upon those tangible things which shall guide 11 s 
 in laying out our business, programs for the 
 ensuing year or two?” 
 
 The whole credit and domestic business sit-' 
 nation is so closely interwoven with that of the 
 foreign situation, that it might be serviceable if 
 I dwelt for a moment in the general business 
 situation here, and what is likely to happen. I 
 have said that the country never has been so busy 
 and prosperous in all its history as at the present 
 time. Despite the decreased purchasing power 
 of Europe, and the unprecedentedly adverse ex- 
 - change rate, we have piled up a colossal trade 
 balance in our favor of $4,000,000,000 in a single 
 year—1919. This has been, of course, a tremen¬ 
 dously potent factor in keeping our industrial 
 fields operating continuously and profitably. It 
 has involved an unparalleled call for capital and 
 a demand for credit that has broken all records. 
 
 Few of us have stopped to realize the problems 
 which our very prosperity has been creating for 
 us. With continued high prices and the conse¬ 
 quent need for more capital with which to trans¬ 
 act business of every character, we are now 
 called upon to answer the question as to whether 
 or not there is going to be money enough to 
 finance the great volume of trade at prevailing 
 prices. We are reaching the limit of our na¬ 
 tional credit resources, and the financial author¬ 
 ities have seen the need for quick and effective 
 conservation. The business men of the country 
 —our customers among the rest— must help re¬ 
 medy the serious situation for their own protec¬ 
 tion and for their own profit. None of us with 
 any of our agencies can do it alone. It is a 
 question of team work and co-oneration between 
 business men and financiers. 
 
 There is an unprecedented demand for money ; 
 there is only a limited supply. That supply must 
 be used wisely to create new wealth and to pro- 
 
 4 
 
mote productivity. It cannot be dissipated, or 
 even partly wasted in speculative, unproductive, 
 or unessential business ventures, enterprises. 
 From now on the bankers of the country must 
 apply a very strict gauge in granting credits. 
 They must. It will be to the ultimate advantage 
 of business interests generally to co-operate fully 
 with the bankers in maintaining this standard. 
 Unless this co-operation is forthcoming, we must 
 all be prepared to face greater credit inflation, 
 still higher prices, and eventually a crisis which 
 may precipitate a reaction with its attendant evils. 
 
 This does* not imply that there is likely to 
 be a serious business recession. The result should 
 be quite the contrary if our national business af¬ 
 fairs are wisely conducted. We cannot, how¬ 
 ever, too strongly emphasize the imperative need 
 for the conservation of credit resources, for con- 
 v centration upon increased production of essen¬ 
 tials, for government and individual economy, 
 and for thrift. 
 
 There is no need for legitimate, essential busi¬ 
 ness to retrench. On the contrary, there is every 
 reason why it should expand to meet the neces¬ 
 sary economic demands,—I mean legitimate, es¬ 
 sential business. But business cannot do that, 
 however, if unessential enterprises are permitted 
 to drain the reservoir of credit and capital. 
 
 The recent action of the Federal Reserve 
 Board in raising discount rates, ranging from 
 five per cent for bankers’ acceptances to six per 
 cent for commercial paper, is the most important 
 attempt yet made by that Board to bring about a 
 contraction of credit. The liquidation of un¬ 
 necessary loans, which would result from this 
 action, ought to bring about a steadily increasing 
 supply of funds for more vital needs. A gradual 
 restoration of normal conditions should ensue. 
 Accommodation for strictly legitimate business 
 requirements should not be denied nor even cur¬ 
 tailed by the bankers. There ought to be more 
 money available than ‘at present for such pur¬ 
 poses. 
 
 There must be, however, a definite discourage¬ 
 ment of unnecessary borrowings, because the 
 margin between the former Federal Reserve dis¬ 
 count rate of 4% per cent and the market rate 
 of 6 per cent no longer exists. When borrowers 
 seek new loans they must expect strict examina¬ 
 tion as to what the money is wanted for. Doubt- 
 
 5 
 
less, recognizing the conditions, they will help in 
 the necessary analysis. 
 
 It has been predicted that the raising of the 
 discount rates by the Federal Reserve Board 
 may mean the beginning of a “break in com¬ 
 modity prices.” It does not seem likely, how¬ 
 ever, that there will be any precipitate drop in 
 prices. AY hatever decline in commodity prices 
 may be effected will be due to the influence 
 which the higher rates may have in diverting 
 money and credit from non-productive ventures 
 into productive enterprises, and thereby increas¬ 
 ing the volume of necessary commodities. 
 
 It probably will take some years before the 
 world production can again become normal. 
 Europe has only 55 per cent of its food require¬ 
 ments today. This means, of course, greatly de¬ 
 creased production of all materials over there, 
 as well as intense sufferings, for factories can 
 not operate and dwellings cannot be heated with¬ 
 out fuel. 
 
 Europe must have these necessities, and since 
 the law of supply and demand is constantly 
 operative, there is seemingly little prospect of 
 materially reduced prices for the immediate 
 future of what we call “necessities.” 
 
 From both European and our own enterprises 
 we must expect heavy demands for capital goods 
 to replace those destroyed or worn out, and until 
 we catch up with these demands productivity 
 must be affected. The foreign trade of the world 
 needs more ships. Building operations have 
 lagged far below normal. Interest rates and the 
 declining bond market reflect the situation in the 
 investment field. There is a growing demand 
 for investment capital and a great shortage of 
 supply. 
 
 The cost of money exercises an important in¬ 
 fluence upon prices, and money costs, like com¬ 
 modity costs, are determined by the simple law 
 of supply and demand, which is something that 
 many men do not seem to understand, that money 
 is a commodity just like anything else, and that 
 the law of supply and demand operates in the 
 usual way. Interest rates are not fixed ar¬ 
 bitrarily by bankers, but are based upon the 
 value which the public fixes upon money and 
 upon the price at which security issues will be 
 absorbed. Price of luxuries may fall soon, but 
 prices of the more necessary articles seem likely 
 to continue high, because the consumption of 
 
 6 
 
the whole world has increased so far beyond any 
 one’s pre-war dreams. It is hoped that this may 
 serve to bring about an increased output of the 
 necessities of life, and that is the only real solu¬ 
 tion of the reduced cost of living. . 
 
 Now the question on everybody’s lips is: How 
 about this foreign exchange question ? And there 
 is a very definite connection between the foreign 
 situation and our domestic business, as I have 
 stated. 
 
 In spite, or rather, because of the colossal 
 trade balance referred to, the depreciated cur¬ 
 rencies of European countries are militating 
 against us very decidedly. These countries now 
 are buying heavily from us because they are com¬ 
 pelled to do so; but they are endeavoring now— 
 I believe they are beginning rightly—to restrict 
 purchases to absolute necessities. Even with the 
 application of severe self-denial, however, there 
 must come a time when they will have reached 
 the limit of their immediate buying power and 
 when they must deny themselves even necessities. 
 
 Meantime the present demoralized exchanges 
 are acting in many countries as an invisible 
 tariff against American products. A diminish¬ 
 ing demand abroad for our goods must assuredly 
 menace our prosperity, because in all our history 
 foreign trade has never played so important a 
 part as it does today in turning the wheels of 
 American industry. 
 
 Considered alone from the point of view of 
 what is good business for us, it is imperative that 
 the United States should do two things, namely, 
 take more of Europe’s goods in exchange for 
 American products, and find a way in which to 
 grant Europe adequate credits to finance the 
 purchase of raw materials and other necessities. 
 But at the same time, endeavor to find no ar¬ 
 tificial vehicles for the extension of credit, which 
 ordinary business processes would not demand. 
 
 The stabilization of exchange is contingent up¬ 
 on more than trade balances and credit arrange¬ 
 ment, however. It is dependent, in large measure, 
 upon the credit and currency conditions in 
 European countries. Those countries must de¬ 
 flate and return to the gold standard before their 
 exchange can move steadily upward. Moreover, 
 if Euronean countries plead that credit should be 
 extended to them upon a business basis, then 
 they must expect lenders to discriminate and 
 exercise all proper business precautions in the 
 
 7 
 
extension of credits. On our part, we should not 
 hesitate to let it be known that we hope to see 
 those countries taking immediate steps to adopt 
 sound financial and taxation programs as the 
 primary means of re-establishing their economic 
 stability. 
 
 You may have noticed what Mr. Hoover said 
 last night: 
 
 “Our best assistance in healing Europe’s eco¬ 
 nomic wounds lies in the promise of the great 
 processes of private commerce, not in new loans 
 from our government.” 
 
 There is nothing mysterious whatever about 
 the exchange situation when one has clearly in 
 mind the controlling factors. Eet us take the 
 United States and Germany, for example, in 
 making a comparison of credit standings. In the 
 United States today we have more than one- 
 third of the world’s gold supply, and national 
 wealth of more than two hundred and fifty bil¬ 
 lion dollars, a net national debt less than twenty- 
 five billions, and a national budget of about five 
 billions. In contrast, Germany has a negligible 
 supply of gold, being, in fact, upon a paper basis 
 today, owing fifty billions dollars in national debt 
 and carrying an annual budget of eight billions. 
 Need there be any mystery as to the reason for 
 the depreciated mark, or the appreciated dollar 
 in exchange relations between the two countries ? 
 An examination of the financial condition of 
 other European countries will show that a similar 
 disparity exists between them and the United 
 States, in greater or lesser degree, and readily 
 accounts for the difference in national credit. 
 The note circulation of France (the paper cur¬ 
 rency), more than six times its pre-war level. 
 The note circulation of Italy is over five times 
 its pre-war level. The note circulation of Ger¬ 
 many is about ten times the pre-war level. In 
 each case the disparity between the volume of 
 paper currency and the gold reserve is very great. 
 These factors affect the exchange rates, quite 
 apart from the question of trade balances. 
 
 Today, there are more than the usual number 
 of questions to be answered by those seeking 
 credit on this side of the water. And because 
 there are not satisfactory answers, as we see 
 them, to those questions, America cannot see her 
 way clear to give the quick, ready, immediate 
 kind of help that Europe has been seeking, ap¬ 
 parently. As a blanket statement, it may be said 
 
 8 
 
that there is no such thing as normal credit in 
 Europe today. When we think of extending 
 commercial credits to Europe at this time, we 
 not only have in mind the ascertainment of reg¬ 
 ular credit information; we want also to feel as¬ 
 sured as to the political stability, the existing 
 social order, the prevailing respect for the rights 
 of property—because property, after all, in one 
 form or another, is the ultimate security back of 
 every credit granted-*—and something as to the 
 soundness of the reconstruction program of the 
 national government of each nation we are seek¬ 
 ing to serve. 
 
 There is no artificial means by which restora¬ 
 tion to normal conditions can be compelled by 
 any sudden process. There isn’t any wav it can 
 be done. Nothing but the natural laws of trade 
 can operate effectively to bring about the neces¬ 
 sary readjustment. Europe somehow must con¬ 
 trive to produce more goods for sale in this 
 market and to get along with fewer purchases, and 
 American producers must make up their minds 
 that fewer purchases fromtEurope are going to 
 take place, and that their buying power being 
 more and more restricted, is going to mean a 
 still further recession of purchases on this side. 
 
 But I would have you manufacturers remem¬ 
 ber that Europe is not the whole world. That 
 the buying power of the rest of the world is 
 greater than it ever was. I have talked with 
 manufacturers, producers, merchants, who have 
 come to my desk to discuss foreign transactions 
 and foreign trade and export. They have been 
 doing business exclusively with Europe for a 
 number of years, and I have sensed that they 
 seem to have no other countries than Europe in 
 mind as a possible field for export of their sur¬ 
 plus product, or any other countries than Europe 
 as the territories in which to lay their plans for 
 future business. 
 
 Why, gentlemen, the Far East today is 
 developing a purchasing power by leaps and 
 bounds, which nothing but a close analysis of the 
 figures can make realizable. The Far East to¬ 
 day, China particularly, offers a prolific market 
 for the American producer in almost every major 
 line of industry. 
 
 In South America the dollar is at a discount, and 
 never was there more reason than today, never 
 was there more good, sound business reason for 
 the American producer to extend his markets to 
 South America. And there is opportunitv galore. 
 
 9 
 
There are three separate and major obstacles 
 to the revival of European trade; a mal- adjust¬ 
 ment between internal prices and international 
 prices; a lack of individual credit wherewith 
 European consumers may buy the raw materials 
 needed to secure the working capital and to re¬ 
 start the circle of exchange; and a disordered 
 currency system which renders credit operations 
 hazardous or impossible quite apart from the 
 ordinary risks of commerce. 
 
 Almost daily we are being asked as to what 
 justification .there is, if any, for statements ap¬ 
 pearing in certain sections of the foreign press 
 to the effect that the United States is displaying 
 economic selfishness and seeking to maintain the 
 dollar premium for her own commercial gain. 
 This kind of comment is not intelligent. Amer¬ 
 ica cannot help the situation, nor is there any¬ 
 thing she can do, within the scope of sound, 
 legitimate business, to remedy existing condi¬ 
 tions. We all realize that unfavorable exchange 
 rates make it almost prohibitive for us to sell 
 goods to Europe, Wno, in America, even from 
 a purely selfish point of view, wants such a con¬ 
 dition to continue ? Existing circumstances 
 simply are beyond our control. 
 
 During 1918 we imported from Europe 
 $318,000,000 worth of goods, and in 1919 we im¬ 
 ported $750,000,000 worth. This proportion is 
 greater than the increase of our exports, to 
 which the imports are really due. In contrast, 
 we have been and are exporting gold to Argen¬ 
 tine, with which we have been contracting our 
 trade. That is the exact reverse of the condition 
 across the Atlantic. We are selling to Europe 
 so much that Europe cannot pay for it. We are 
 buying from Argentine so much that we must 
 pay in gold in order to maintain exchange. The 
 two cases call for opposite remedies. If trade 
 with Europe should be contracted, certainly it 
 should be expanded with any country which now 
 has power to take our gold. 
 
 The only way to keep trade moving is by a 
 courageous policy—not hesitating to do business 
 because of a feeling that everything is going to 
 the dogs; allowing credits discriminate^ on a 
 basis of liquidating debts of goods with goods. 
 Finance credit cannot be enlarged and should not 
 be contracted too suddenly nor too extremely. I 
 have little patience with those who would seek to 
 
 10 
 
bring about deflation over night, and attempt to 
 remedy things by some sudden process arrived 
 at during a few hours’ consultation. It is im¬ 
 possible to bring about sensible readjustments in 
 any organization, international, national, or cor¬ 
 porate, by any series of violent jerks. It can be 
 done only by a gradual strengthening of the 
 whole economic fabric. 
 
 Let us refer to Canadian exchange for a 
 moment. We have been supplying Canada with 
 an enormous quantity of goods, much in excess 
 of the volume we have been taking from her. 
 This means that Canada has been making a pre¬ 
 ponderant volume of remittances for the goods 
 she has purchased from us and that she has been 
 bidding with the rest of the world for the Amer¬ 
 ican dollar. The volume of her commercial bills, 
 like any other commodity, with the same law of 
 supply and demand operating, in the Amerian 
 market has, by the application of those laws, 
 cheapened the price and lowered her exchange 
 rate. There is no sentiment in the matter at all. 
 Money is a commodity like anything else which 
 is bought and sold in the public market. 
 
 It is impossible for any one to say when 
 foreign exchange will improve, and by what de¬ 
 grees. Conditions would seem to indicate that 
 a normal situation can be reached only by 
 gradual adjustments over a period of from three 
 to five years—perhaps longer. When some form 
 or international peace is consummated by the 
 United States, when European boundaries have 
 been permanently fixed so that the new nations 
 know exactly “where they are at,” when they 
 have been enabled to procure food and fuel, raw 
 materials, and machinery, and seriously start all 
 their neople to work, start their factories going 
 under steady pressure, and produce as in pre¬ 
 war days, then we may all feel that the world is 
 on a sure road towards definite reconstruction. 
 The general feeling of confidence created by this 
 actual knowledge will mean a better business 
 sentiment, easier money, easier credits, and a 
 saner world all around. Business men will be 
 able to watch and judge for themselves as to how 
 these conditions are to be arrived at, step by 
 step. 
 
 Before I conclude, I just want to say a word 
 on the subject of increased production, inter¬ 
 national as well as national, because it is upon 
 
 11 
 
that factor, above every other factor, to my 
 mind, that solid reconstruction depends. 
 
 Increased production, in the United States and 
 the world over, is not a problem confined to the 
 financier or the economist, but is every man’s 
 problem. There never was a time in the history 
 of the world when it was such a vital question 
 as it is with us all today. And when you ask 
 ‘What are we to do about it?’ there is only one 
 answer: ‘Try and make the gospel and the in¬ 
 terpretation of it so clear and so simple that 
 every man whom you employ and every man 
 who is your neighbor shall help develop a pa¬ 
 triotism of peace and insist that a full day’s work 
 for a full day’s pay shall be as much a matter of 
 national pride as is the individual pride in Old 
 Glory itself.” 
 
 A great many thoughtful men have been giv¬ 
 ing their minds to the solution of this problem 
 lately. Every wage earner, every housewife, 
 every home builder is crying out against ab¬ 
 normally high prices for the necessities of the 
 breakfast table. There is but one answer: In¬ 
 crease production. 
 
 We are asked to find means of extending 
 credit to Europe, in order that lives may be saved 
 and the wheels of industry there kept going. 
 There is but one verdict: 'Increased production. 
 
 Under production is not limited to local or 
 even a national malady. It is a world-wide con¬ 
 dition at this moment. Everywhere the demand 
 exceeds the supply. There is little fear of our 
 catching up or of reaching any market where the 
 supply may exceed the demand, for some time 
 to come. 
 
 We cannot find money to help reconstruct the 
 world and simultaneously spend our earnings in 
 luxuries which are beyond the means of the 
 prudent and the thrifty. We cannot listen to the 
 demands for six-hour days and five-day weeks 
 and still hope to produce the materials for our 
 own needs, let alone what the world requires of 
 us. Neutral countries are sending raw materials 
 into Germany with a pledged lien on the finished 
 products, in response to the German request that 
 she shall have the opportunity to employ her 
 people and start her factories going. 
 
 It is reported, and there seems to be good 
 foundation for the report, that the German 
 workers are pledging themselves, through their 
 local organizations, to be satisfied with a ten 
 
hour day, and that in many places they are urg¬ 
 ing a 12 and 16 hour day until the peak of re¬ 
 construction be reached. I, for one, am not an 
 advocate of any speeding up processes calculated 
 to be harmful to the health and general welfare 
 of the individual, but I would ask: If these re¬ 
 ports be true, if Germany does this—and let 
 there be no misconception as to the economic 
 sense and the industrial will of the Germans— 
 and in the meantime we, in America, are content 
 to witness a gradual shortening of working hours 
 and automatically restrict our production there¬ 
 by, who, in the last analysis, will have won the 
 war ? 
 
 There never was a time when the workers of 
 the world may need more money, and they may 
 need better conditions, but the way to get these 
 things is not to do poorer work and less of it. 
 There never was a time in history when the 
 workers, from the girls in the kitchen to skilled 
 producers in the factories produced so little and 
 asked so much as today. I am a worker myself, 
 and I have never seen any intelligent hope of 
 getting a raise in my salary by making my out¬ 
 put less and punker than it is now. I find so 
 much to do that I cannot find any day long- 
 enough. 
 
 In every group of human beings are to be 
 found people who, like quack doctors, have an 
 overnight remedy with a new nostrum to be ap¬ 
 plied for every new sickness. We are having 
 quite a few nostrums presented to us today. I 
 would that our ears might be relieved from the 
 affliction of listening so much to persons who 
 have noises in their heads which they mistake 
 for constructive thought. 
 
 What the country needs more than anything 
 else, gentlemen, is an invasion of common sense. 
 Buying what you don’t need is a pretty short and 
 sure road to needing what you cannot buy. A 
 condition of half-strike, half-producing, a//-con- 
 suming cannot possibly endure. Five minutes of 
 restraint from purchasing what you can do with¬ 
 out at a time like this is worth ten years of 
 cussing the profiteer. 
 
 It has been said that there -has been much 
 gnashing of wisdom teeth over reconstruction 
 problems, but I warrant, not all wisdom teeth. 
 
 During the war universally we were inspired 
 to put every ounce of energy into the raising of 
 men, money and material, and into organizing 
 
 13 
 
the nation to go out and destroy militant life. 
 Now we are called upon to produce in order that 
 we may lend money and send the products of 
 every man’s brains and arms to save life and to 
 preserve civilization. No thoughtful American 
 industrialist that I have met has ever quarreled 
 with high wages, high, let us say, in comparison 
 with wages paid for similar work in other parts 
 of the world. For many years the wages paid 
 to American railroad men have been considerably 
 higher than those paid to railroad employes any¬ 
 where on the face of the globe, and yet we have 
 been able to carry a ton of freight per mile 
 cheaper than any other country in the world. It 
 is the tendency to decrease production that the 
 patriotic American citizen quarrels with to-day. 
 However many be the theories for the solution of 
 * the vexing problems of the hour, I hold that 
 there are two maxims which if universally and 
 effectively applied, will solve most of the dif¬ 
 ficulties both here and in every other part of the 
 world. As I think of the extent to which foreign 
 exchange, foreign trade, domestic prosperity and 
 all the international problems are linked up and 
 based on this one great question, a question 
 which may be interpreted in two simple words, 
 “save” and “produce,” I look, ahead, gentlemen, 
 to the part which I hope America may play in 
 the future, and I say, “Above all, in God’s name, 
 let us produce, and stimulate our fellows to pro¬ 
 duce, in order that we may anticipate the kind of 
 America that we all want America to be. I 
 thank you. 
 
 The President: I know I express the sen- 
 siments of all present when I extend to Mr. 
 Walker our sincere thanks for his very able and 
 instructive address. 
 
 i 
 
 K ' 
 
 14 
 
 
THE UBHAHt Of (B£ 
 AUG 2 9 1924 
 
 UNIVERSITY nc ILLINOIS