Frank Albert Fetter.

Source book in economics, selected and ed. for the use of college classes online

. (page 27 of 30)
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§ 56. The National Eeserve Association shall pay to the
Government a special franchise tax of li/o per cent, annually
during the period of its charter upon an amount equal to the
par value of such United States bonds transferred to it by the
subscribing banks.

§ 57. Banking in foreign countries. Banking corpora-
tions for carrying on the business of banking in foreign coun-
tries and in aid of the commerce of the United States with
foreign countries and to act when required as fiscal agents of
the United States in such countries may be formed . . . under
prescribed regulations, but shall not be authorized to receive
deposits in the United States nor transact any domestic busi-
ness not necessarily related to the business being done in for-
eign countries or in the dependencies of the United States.
[Authority and power conferred; conduct regulated.]

§ 58. [Congress reserves right to alter or amend at the end
of any decennial period.]

§ 59. [Acts inconsistent repealed.]


[Among tlie valuahle papers puhlislicd by tlic National Monetary
Commission is one of the foregoing title by George Paish, editor of
The Statist (part of Senate Document 579, 61st Congress, 2d session,
1010, pp. 151-213). The following extracts serve to epitomize the
argument which is developed in much greater detail and which, in a
very convincing way, exposes the error of the popular view that
balances of accounts for merchandise exports and imports are settled
by corresponding gold imports and exports. The figures given are
mostly for the years 1008-09.]

On trade balances [page 153]. The term "trade bal-
ance" is generally used for the purpose of indicating the
excess value of a country's exports of merchandise over the
value of its imports of merchandise or the excess value of a
country's imports of merchandise over the value of its ex-
ports of merchandise. lu monetary circles the term is em-
ployed to denote the ability of a country to import supplies
of the precious metals. If the rate of exchange of one coun-
try upon other countries is at the level Avhich permits of gold
imports, it is said that the balance of trade is in favor of the
country importing the gold. On the other hand, if the rate
of exchange of any country is at a level which admits of gold
exports, the balance of trade is said to be against the country
exporting the gold. In the sixteenth, seventeenth, and
eighteenth centuries a favorable trade balance was a matter of
great concern to statesmen and to financiers. At that time it
was supposed that any country which imported goods of
greater value than the goods it exported would be seriously
injured by having to make payment in the precious metals
for the difTerence between the value of the goods imported
and the value of the goods exported, and that any country

22 337


which persisted in purchasing goods of greater value than the
goods it exported would be totally drained of its stock of
the precious metals and would be ruined. The theory of the
supreme importance of a balance of exports over imports was
known as the "Mercantile system." . . .

The great change in the theory of comm.eree that has taken
place in modern times is due to the recognition of the fact
that the volume of trade which any country enjoys quickly
adjusts itself to the needs of that country, and that the
effect of a sudden disturbing influence to trade — such as a
crop failure, labor troubles, etc., which temporarily reduce
a nation's exporting power — can be got over by financial
operations in the great international money markets, and
that excessive drains of the precious metals are not now to
be apprehended. Experience has shown that apart from sud-
den catastrophes the foreign trade of every country is of a
very elastic character, that the volume of imports or of exports
quickly responds to the necessities of the case, and that no
country can have an adverse balance of trade except for a
short time and as a consequence of some unexpected disaster
which temporarily diminishes its power to make payment for
goods imported. Even at such times countries in good credit
have no difficulty in borrowing temporarily or permanently
the sums required to settle the balance due to other coun-
tries for commodities purchased or obligations incurred prior
to the disturbing event — a process which averts any excessive
denudation of the stock of the precious metals possessed by
the country experiencing the disaster. . . .

Lending and borrowing countries [page 169]. There is
practically no country which neither exports nor imports
capital with the exception of Thibet. . . . The chief coun-
tries which supply capital to other lands are Great Britain,
Germany, France, Holland, Belgium, and Switzerland. . . .
Great Britain has about $15,000,000,000 of capital invested
abroad and is adding to its colonial and foreign investments
at the rate of upwards of $500,000,000 a year. Germany

Till; TKADK I'.AI.ANCE 330

ami F'raDi'o coiiie next with invest mculs of about $8,000,000,-
000 oacli. 'riic investments of Holland, Belgium and Switzer-
land arc of iniu'li smaller amount, but are nevci'theless con-
siderable. The imports of all these five countries largely
exceed their exports in consequence of the receipt of interest
and of tourist expenditures. In the ease of Great Britain
the excess of imports over the exports is further largely in-
creased by the earnings of British ships, the tonnage of which
forms so large a portion of the world's international ship-
jnng facilities. The fleets of other countries are not nnich
more than suflficient to take care of their own trade in the
aggregate ; indeed, in most cases they are insufficient for
tills purpose, and the deficiency is made good by the British
mercantile marine.

The principal countries whose exports exceed their imports
in consequence of the large amount of interest they have to
pay on capital borrowed from other lands are the United
States, the Australasian colonics of Great Britain, British
India, Argentina, Brazil, and JMexico. Several other coun-
tries whose imports now exceed their exports will eventually
come into this category. At the present time Canada's im-
ports largely exceed her exports in consequence of the vast
amount of capital — about $200,000,000 a year — which she is
borrowing from other lands — almost entirely from Great
Britain. In the course of time tlie Canadian indebtedness
to other countries and the expenditure of her tourists, etc.,
will be so great that her exports will exceed her imports,
although large amounts of capital will continue to flow into
the country each year. Of course Canada Avill have no dif-
ficulty in making these interest payments, having regard to
the rapid growth in the annual amount of wealth created by
means of the capital she is importing. China, Japan, and
Chile are other instances of the inflow of large amounts of
foreign capital. . . .

Europe's capital investments in the United States [pages
174-1 76J. Great Britain possesses about $3,500,000,000 of


American securities. . . . The French investments in the
United States, including the Pennsylvania Railroad and other
loans placed in Paris since 1902, amount to nearly $500,000,-
000. . . . German bankers place the amount of the German
investments in American securities at about $1,000,000,000.
The amount of Dutch capital in the United States is about
$750,000,000. American securities are also held in Belgium,
Switzerland, and in other countries. In the aggregate the
amount of European capital invested in "permanent" se-
curities in the United States is approximately $6,000,000,000.

Beyond the fixed capital invested by Europe in the United
States, account has to be taken of the floating loans made by
Europe to America. These floating loans are mainly incurred
in the spring and summer months in anticipation of the pro-
duce shipments from the States in the fall months and they
are then largely liquidated. The amount of the floating debt
of the United States to Europe in the form of produce bills,
finance bills, loans against securities, overdrafts, etc., averages
about .$400,000,000, reaching a larger sum in July and early
August and falling to a much lower sum at the end of De-
cember. The rate of interest paid upon this floating debt in
so far as it consists of produce bills is a very low one, the
rate of interest charged on this class of loan being less than
that on any other kind of security.

Including both the fixed investments and the floating loans,
the amount of capital borrowed by the United States from,
other countries is about $6,500,000,000, the annual interest
charge upon which is about $300,000,000.

An otfset to the large amount of capital invested in the
United States is the capital invested by American citizens in
other countries, more especially in Mexico, Canada, in the
Southern American States, in the Philippines, in Cuba, etc.
. . . The amount of American capital invested in other lands
in this manner both publicly and privately is probably $1,-
500,000,000 yielding am income of about $75,000,000 a year.
By deducting the interest — $75,000,000 — received upon


American capital placed abroad rruiu the interest — $300,-
0(X),000 — which the United States pay upon capital supplied
t^ them by other lauds, 1 arrive at a net payment oi" $225,-
000,000 by the United States to other countries for interest
and dividends upon capital. This sum the United States has
to remit eaeh year by exports oC produce.

The value to the United States of loans of capital by other
lands [page 177]. The capital obtained by America from
other lantls, mainly from Great Britain, was chiefly for the
purpose of extending and improving the railway system of
tile country. No one can survey the remarkable growth in the
production, wealth, and population of the United States with-
out expressing his appreciation of the great part played
by railway extensions in bringing about that growth. The
extension of railways alone made it possible to bring into
cultivation the vast tracts of virgin lands that are now under
the plow. Without railways the United States could not now
produce annually agricultural wealth of the value of about
$8,000,000,000. Again the extension of railways alone made
it possible to reach and to develop upward of $2,000,000,000
of mineral wealth per annum. It is the railways that enable
the people of the United States to reach and to obtain for
their use the vast quantity of luml)er annually cut from the
forests. Lastly, the immense manufacturing industries of the
States which now distribute over $3,000,000,000 in wages
could never have been built up but for the construction of

The provision of some $0,500,000,000 of capital to the
United States by older countries, mainly for railway construc-
tion, has enabled the American people to devote their rapidly
growing savings to the building and furnishing of homes, to
the eciuipment of manufactories, to fitting out retail estab-
lishments, and to other purposes to a much greater extent than
otlierwise would have been possible, and in this way the for-
eign capital has greatly accelerated the growth of population,
production, anil wealth. By tiie use of the $6,500,000,000 of


capital obtained from other countries the annual production
of wealth by the United States has, I calculate, been increased
to a nearly corresponding extent and the accumulated wealth
of the country has been increased by many times the amount of
the capital borrowed. The additional value given to land
alone by the construction of railway's is so vast and so ap-
parent that it needs no demonstration. The increase in the
annual production of wealth by the United States rendered
possible by the importation of capital has been at least twenty
times greater than the sum paid for interest. The investment
of this capital by the older countries in the United States has
thus brought advantages which cannot easily be exag-
gerated. . . .

Tourist and other expenditures [page 179] . The number
of American citizens visiting other lands in the course of the
year is now upward of 200,000. The data I have been able
to obtain as to the expenditures of these tourists shows that
the sum expended by them approximates to $1,000 per per-
son. This sum includes merely the passage money and the
sums expended in other countries for food, transportation, and
other miscellaneous expenditures. It does not include the
sums expended upon works of art, jewelry, clothing, etc.,
which are declared at the customs and are included in the
value of the goods imported into the United States. In the
aggregate, tourist expenditures for the purposes I have men-
tioned reach a total of about $200,000,000. On the other
hand, a number of foreign tourists visit the United States
and their expenditures should be placed against those of
American citizens. . . . Apparently the number of visitors,
other than immigrants passing through to Canada, was about
30,000. The expenditures of visitors to the United States
may be taken at about $1,000 per person, excluding all ship-
ping transportation, or an aggregate sum of visitors' ex-
penditures in the United States of $30,000,000. On balance,
therefore, the United States has to pay to other countries

Tin; TitAni; r.Ai-.wci: 343

a sum of about $170,000,000 a yviw to cover tourist expen-
ditures. . . .

[Page 182] For all practical purposes I calculate that the
money brought into the country by immigrants about coun-
terbalances the money taken out of the country by emigrants
returning to their native lands and by "other than cabin pas-
sengers" visiting other countries.

Remittances to friends. The great prosperity of the
United States enables many of its citizens who have come
from other lands to make gifts of large sums of money in
the aggregate to friends in the old countries. The remittance
of this money means that the United States has to send con-
siderable quantities of produce abroad for which there is no
corresponding item on the import side of the account, as the
produce goes for the purpose of providing the funds neces-
sary to cash the postal money orders and other drafts re-
mitted to friends. The amount of these remittances is ex-
ceedingly ditficult to calculate, but that it is large every one
admits. . . .

With the data at my disposal I do not feel justified in
placing the amount of money remitted by American citizens
to friends in other countries at a larger figure than $150,000^-
000. This is still a very large sum, and is a factor of very
great importance in calculating the trade balance of the
United States and the amount of produce which has to be
remitted for various purposes other than to pay for goods

Freights [page 186]. The United States possesses a mer-
cantile marine large enough to convey but a small portion of
the produce they export and import, and considerable pay-
ments have to be made for shipping services. In 1907-8
the imports into the United States by sea were valued at $1,
12:3,000,000. Of tills amount $152,000,000, or 13.5 per cent.,
was carried in American vessels and $971,000,000, or 86.5
per cent., in foreign vessels. In the same year the exports


from the United States were valued at $1,670,000,000, of
which amount the produce conveyed in American vessels was
valued at $120,000,000, representing a proportion of only
7.2 per cent, and the balance of $1,550,000,000, or 93.8 per
cent., was conveyed in foreign vessels. The sum which the
United States had to pay to other lands for marine trans-
portation is much smaller than is usually calculated. . . .
After taking all these factors into consideration I calculate
that the net sum which the United States pays to other coun-
tries for the transportation of merchandise is about $25,000,-
000 per annum. Payment of this sum has also to be re-
mitted to other lands by exports of produce. . . .

Insurance [page 190]. A large amount of fire insurance
is written each year in the United States by English and
other offices and the sums payable to those officers in respect
of insurance reaches a considerable figure. On the other
hand, the fire losses of foreign officers in the United States
are heavy and the profit which alone accrues to other coun-
tries is not a large item, at any rate it has not been a large
item in the recent past. On the other hand, American life
assurance offices transact a fairly large business in foreign
countries. . . . On balance, if all kinds of insurance and as-
surance are combined, America probably has to pay very little
to other lands and the factor of insurance in calculating the
trade balance may consequently be ignored.

Summary of remittances for interest; tourist expend-
itures, gifts to friends, and freight charges. Thus I arrive
at the conclusion that the United States have on balance to pay
other countries a net sum ... of about $595,000,000 for pur-
poses other than for the purchase of goods from other coun-
tries. In other words, the exports of merchandise, gold, and
silver from the United States must exceed the aggregate value
of the merchandise gold and silver imported by nearly $600,-
000,000 in order that payment may be made for interest, tour-
ist expenditures, etc. That is to say, America requires an
excess of exports over imports of nearly $600,000,000 per an-


nuin iu order to settle her trade balanee. If she has a hirger
balance of exports over imports than this figure, she is repaying
a portion of her obligations to other lauds. If she has less than
this sum, she is borrowing additional eapital from other lands.
It should, however, be clearly understood that this amount is
subject to wide fluctuations, and is by no means a hard and fast
obligation. . . . Taking all these circumstances into account,
I calculate that in a year of depression the obligation of the
United States to other countries for interest, tourist expendi-
tures, remittances to friends, freight, etc., is about $500,000,-
000 and that iu years of normal trade activity it is about

Perhaps the situation will be more clearly realized if I set
it out iu tabular form :

fobeig.x trade of the united states, 1908-9.

Domestic $1 ,638,000,000

Foreign 25,000,000

Total 1,663,000.000

Imports 1,312,000,000

E.vcess of merchandise ex-
ports over imports $351,000,000


Exports 92.000.000

Imports 44,000.000

Excess of gold exports

over imports 48,000,000


Exports 56.000.000

Imports 44,000.000

Excess of silver exports

over imports 12,000,000

Total excess of mer-
chandise, gold, and sil-
ver exports over im-
ports $411,000,000


Remittances fob Interest,


Interest i $250,000,000

Tourist expenditures 170,000,000

Remittances to friends 150,000,000

Freight 2 25,000,000

Total remittances $595,000,000

Excess of sum remitted
for interest, tourists,
to friends, and for
freights over trade bal-
ance $184,000,000

1 [A discrepancy appears here ; for above the interest payable abroad
is put at $300,000,000 and that coming from abroad at $75,000,000, leav-
ing a balance of $225,000,000 payable. Ed.]

2 [The writer does not set forth the debits and credits entering to
produce this balance, but implies that these items are about in propor-
tion to the value of goods carried, $2,521,000,000 by foreign and $272,-
000,000 by American vessels, or about 903 per cent, and 0.7 per cent, of
the total. Proportional freights would be $28,000,000 to foreigners, and
$3,000,000 to American shipowners, to give a balance of $25,000,000,



Iln the tariff act of Aiif,'ust 5, 1000, the President of the United
States was authorized to supply "persons" "to secure information"
rej^nrding the working of tiie tariff laws. He appointed a "Tariff
lioanl" of live nienilHrs. witii 11. C. Emery, professor of economics in
Vale University, as Chairman, The Board has made reports on the
Pulp and news-print paper industry (i)reliniinary ) Feb., 1011, and
(another report) Maj', 1011; on Wool and manufactures of wool
(Schedule K of the tariff of 1900) Dec. 20, 1011; on Chemicals, oils
and paints (Schedule A) Feb. 7, 1012; and on Cotton manufactures
March, 1012, The report on Wool, the most voluminous of these,
contains 12S0 pages of painstaking and detailed information. Tlie
main findings of the investigation are compressed in the letter of
submittal to the President, from wiiich we here extract nearly one-
half, retaining tiie jwrtions dealing with costs and prices, but omitting
the discussion of tariff duties.]

Wool costs [pnye 10]. The result of the raw-wool in-
vestigation establishes the fact that it costs more to grow
wool in the United States than in any other country; that the
merino wools required in such great volume by our mills
are the most expensive of all wools produced ; that the high-
est average cost of production of such wool in the world is in
the State of Ohio and contiguous territory; and that the
lowest average cost on similar wool is in Australia.

It is not possible to state in exact terras the actual cost
of producing a pound of wool considered by itself, for the
simple reason that wool is but one of two products of the
same operation.

That is to say, flocks produce both fleeces and mutton —
products entirely dissimilar in character and yet produced as
the result of the same expenditure for forage and for labor.
The board has deemed it best, therefore, for the purpose of



this inquiry, to treat fleeces as the sole product and charge
up against their production the entire receipts from other
sources. This method gives an accurate return so far as the
general results of flock maintenance are concerned ; results
which are comparable as between various sheep-growing re-

In order that results from the different sections and from
different countries might be more comparable, the item of in-
terest on investment — which varies from 4 to 6 per cent, in
Australia and from 8 to 10 per cent, in our TVestern States
— was left for consideration in connection with profits. For
a similar reason the actual production cost of harvested crops
fed to flocks was used instead of the market value of same.
On this account the expense charges shown are materially
lower than those commonly quoted in the industry.

Figured in this manner, the board finds:

That after crediting the flock with receipts from all sources
other than wool, the latter product, in the ease of the fine
merino wools of the United States, is going to market with an
average charge against it of not less than 12 cents per pound,
not including interest on the investment.

That the fine wools of the Ohio region are sold bearing an
average charge for production of 19 cents per pound.

That in the States east of the Missouri Eiver wool produc-
tion is incidental to general farming. Here producers, with
the exception of certain-named districts, lay more stress
upon the output of the mutton than of wool, and in such cases
the receipts from the sale of sheep and lambs ordinarily cover
the flock expense, leaving the wool for profit. The position
of the fine-wool producers, however, not only of the Ohio re-
gion, but of the far West, is radically different.

That in the western part of the United States, where about
two-thirds of the sheep of the country are to be found, the
''fine" and "fine medium" wools carry an average charge of
at least 11 cents per pound, interest not included.

That if account is taken of the entire wool production of the


coutih-y, iiiiliidiiiL,' l)otli line niid coarse wools, the average
cluiriio ai:aiiis( the elip is ahout D'/L' eeiits per pound.

Tiiat in South Anieriea the correspondiug cliargc is be-
tween 4 and 5 cents per pound.

That in New Zealand and on tlio favoral)ly situated runs
of Australia it seems clear that at the present range oi' values
for stock sheep and million the receipts from other sources
than wool are carrying the total flock expense. So that taking
Austrahisia as a whole it appears that a charge of a very few
cents per jiound lies against the great clips of that region in
the aggregate. AVhile the board cannot undertake to name an
exact tigure in that case, it is certain that the Australasian

Online LibraryFrank Albert FetterSource book in economics, selected and ed. for the use of college classes → online text (page 27 of 30)