The Neutrals

In World War II, if it comes, some nations may avoid fighting. But they will certainly not go untouched. Just as modern warfare is no respecter of lives, soldier or civilian, so it is no respecter of the pocketbooks of neutrals. To every neutral nation that has risen above the level of primitive handicrafts, a world war is an economic explosion. As a neutral such a nation enjoys the traditional lot of innocent bystander.

World War I proved it. In 1914 many nations refused to stake their political fate in the quarrel between the Triple Entente and the Triple Alliance. But one & all--Switzerland, the Scandinavian countries, Holland, Spain and notably the U. S.--found their economic destiny involved. For World War I profoundly altered every important economy in two hemispheres.

War Babies v. War Orphans. Before German troops marched into Belgium the tramp of their boots could be heard in neutral stock exchanges. Investors in Great Britain and France in a financial panic dumped securities indiscriminately. On July 31, 1914, four days before England declared war, the New York Stock Exchange closed its doors to keep the bottom from dropping out of the market.

Commodity price levels began at once to get out of whack. Countries which had wheat to spare--particularly the U. S., which was blessed with a bumper crop in 1914--suddenly discovered themselves in a strong seller's market, with the price per bushel rising from 85-c- in July to $1.28 in December. Rye went up; so did lard; so did sugar. But no general inflation of prices occurred immediately. It was as if someone had turned on a strange magnetic current which attracted certain commodities, repelled others.

Among commodities that rose in price were most of the metals. Copper soared from 13-c- a pound in early 1914 to 35-c- in 1917. But as wheat, sugar and copper went up, cotton (little of which was used for gun cotton) fell from 13-c- a pound to 8-c- in six months. Coffee and tobacco followed the price pattern set by cotton. Cotton piled up in U. S. warehouses, coffee clogged the docks of Santos in Brazil.

There were two reasons for this: 1) The warring nations were forced to get along with old clothes, to drink coffee substitutes, to cut down smoking. But they desperately needed food and war supplies. The relative demand for various goods had completely changed. 2) The costs of transportation changed just as radically. There were few ships available to carry cotton, coffee and tobacco. More important, the cost of insuring these staples in transit through mine-and-submarine-infested waters rose to affect commerce in the same way as if new tariff barriers had been erected. Rubber, for example, zoomed to 90-c- a pound in New York during the War, but in Singapore, it brought growers only 20-c- wholesale.

European Bystanders. The economic life of Europe's neutral nations was partly strangled not only by these changes but by force of arms. Switzerland, completely surrounded by combatants before the War was over, found itself on the verge of starvation for lack of foreign wheat. Only the end of the War in 1918, plus an exceptionally good harvest, saved the Swiss from famine. But armies eat chocolate, and Swiss chocolate manufacturers did a thriving business, for the Allies saw that they obtained raw materials. Swiss peasants who owned woodlots found they had a good market for fuel. Electric power derived from Swiss waterfalls was sold to both sides for use in making explosives. Meanwhile, the Swiss did a curious broker business. Germany needed French carbide-cyanamide for saltpeter, French bauxite for aluminum; France needed German iron and steel for emergency railroad tracks and barbed wire entanglements. Swiss dummies arranged the exchange of these commodities, with the tacit consent of the belligerents. The governments did not care whether German soldiers died on barbed wire that originated in a German factory, or whether British ships were torpedoed by German submarines made, in part, of aluminum from French bauxite, so long as the war was fought to a finish.

Holland, which had access to the sea, was never close to starvation. But the British, fearful that the Dutch would pass goods on to Germany, limited Dutch imports. Dutch exports of bulbs and diamonds fell along with needed imports. Meat exports increased in 1914 and 1915, dropped in 1916 and 1917 as Germany ran out of gold. Shipping was the great Dutch source of profit during the war; even though submarines and mines sank 199.975 tons of Dutch shipping, the total merchant tonnage of The Netherlands increased from 1,297,409 to 1.574,000 between 1914 and 1919. In 1915 the Holland-America Line paid 50% in dividends; in 1916, 55%. Gross profits of 17 largest Dutch steamship companies were 32,400,000 florins in 1913; 141,147,000 in 1916. Gold flowed into Dutch banks (as it also piled up in Swedish, Norwegian, Swiss and Spanish banks). But taxes went up. It cost the Dutch $600,000,000 to keep half a million men idle for four years along the German and Belgian frontiers and to intern prisoners from both sides, etc.

In Denmark the price level rose 111%. Breeders of livestock made money by selling meat to Germany and Austria in 1914, 1915 and 1916. Fodder shortages slashed production of butter and milk upon which a majority of the Danes live. Real wages in Copenhagen failed utterly to keep pace with the rising cost of living.

In Sweden, trade hummed; there was a mad rush to get rich in war industries and in shipping. But the industrial population, which depended on imported foodstuffs, found their wages inadequate to buy meat, which rose in price as the Government rationed it. Malnutrition and influenza contributed to raising the death rate in Sweden by a third in 1918-19. Norway did well with fish and lumber to export to the belligerents. Norwegian steamship lines cashed in, paying big dividends and purchasing about a million tons of new shipping from the U. S. as German mines and submarines sent 829 Norwegian merchant vessels to the bottom.

Spain, comfortably distant from the sound of guns, profited enormously from high prices and increased production of grain, olive oil, beet sugar. Shipping companies made killings. But by strengthening the industrial and financial power of the Basques and the Catalans, who were separatist in their politics, this war prosperity helped to undermine the monarchy. Spanish laborers drifted over the Pyrenees to France to work for war-time wages and sent money home. Yet with ownership of land and capital heavily concentrated in a few hands, peasants and stay-at-home workers failed to share in war profits.

Italy, while her politicians coyly debated which side to join, did not suffer greatly in 1914 and 1915 except from the rising cost of food. In Rumania and Bulgaria peasants suffered less than townspeople in the first years of the War as both groups of belligerents tried to buy foodstuffs, but both governments had finally to fix prices.

Rumania, her trade reduced to a mere exchange of goods with the Central Powers by the closing of the Dardanelles, approached crisis before she threw in her lot with the Allies. The peasants--a great majority of the population in each country--unable to buy industrial goods, finally ceased to produce crops for the market, practically fell back on subsistence farming.

American Offstanders. All the Latin American nations* had their manufactured imports from Europe reduced to a small fraction by the exigencies of war, and were forced to buy from the U. S. How this affected them depended on what they had to export.

Brazil's coffee and rubber business went to pot. She made an enforced about-face and began to export kidney beans, sugar, beef, manganese. Before the end of the War her foreign trade had contracted 22% in dollar volume and 46% in physical volume but she had an export balance of $70,000,000 to $100,000,000 a year.

Argentina's meat and wheat had a war market, but her inability to obtain her customary imports handicapped her industry, and deprived her Government of its chief revenue, customs duties. She had desperately to borrow money and launched on a still-continued effort to become self-sufficient.

Far different was the war experience of Chile. Her big exports were nitrates (essential for explosives) and copper, another important war necessity. After the first disruption of the War gave her a bad setback in the fall of 1914, she rode on the crest of the wave. Her Government, which depended largely on export duties, was flush. Her mines prospered. Her export balance, which amounted to $300,000,000 in 1913, jumped to over $1,500,000,000 in 1917. In the four years of the War her export balances reached $5,500,000,000.

Cuba had a similar experience. England no longer wanted her Havana cigars but it wanted her sugar as never before. France and Belgium had once raised their own sugar beets, and England had bought considerable sugar from Germany in the pre-War period. To supply these markets, Cuban production jumped from 10% of the annual world supply to 25%. Havana blossomed out as a boom city, its real-estate prices spiraling dizzily. All through eastern Cuba woodcutters cleared thousands of acres of forest. Negroes from Haiti and coolies from China planted sugar cane between blackened tree stumps. To move the sugar crop, American banks opened subsidiaries in Havana, with the Chase National Bank and the National City Bank of New York taking the lead.

U. S. on the Sidelines. For the last 18 months of World War I the U. S. was a combatant and all the effects of the War on domestic economy are often traced to that fact. Actually almost as much economic history was made during the 32 months that the U. S. was a neutral.

Four months after the War broke out the New York stockmarket reopened. At their highs of 1915, machinery and machine equipment company stocks had appreciated 458% over their pre-War level. General Motors stock appreciated 452%. Stocks of steel and iron companies, exclusive of U. S. Steel, rose 293%; chemical concerns, 117%. At the other end of the table, gaining little, were the railroads and utilities, whose price structures were under the supervision of the Government. Tobacco and cigaret manufacturing stock appreciated only 4%.

Meantime in the U. S., as in every manufacturing country, unemployment was rapidly disappearing, for capital and labor flowed into war industries. Immigration dwindled, but U. S. cotton exports to continental Europe dropped from 4,600,000 bales a year to 1,400,000. In 1915 and 1916 thousands of Negroes quit the fields of the South to take jobs in New York City, Chicago, Detroit--and there were jobs for them in the booming war industries.

U. S. farmers outside the South were far from unemployed. Food prices rose even higher than the prices of industrial goods. As more and more wheat lands went out of production in Europe, wheat reached a dizzy $2.33 a bushel, and U. S. farmers borrowed heavily to increase their acreage; the total farm mortgage debt for the U. S. increased from $3,320,470,000 in 1910 to $7,857,700,000 in 1920. And during this same War decade the average value of farm land in the U. S. rose from $39.60 an acre to $69.38.

The war had hardly started when the Allies had to appeal to the House of Morgan for help in financing their huge purchases in the U. S. First, J. P. Morgan & Co. advanced credits of a few millions. Then, when the Wilson administration gave its consent, Allied loans were floated publicly to a total of about $2,500,000,000--mostly through Morgan auspices.

The House of Morgan was not merely an Allied fiscal agent. Its partners, notably J. P. Morgan himself, the late Henry P. Davison and Thomas W. Lamont believed, long before the public did, that a defeat for the Allies would have been defeat for the U. S. (Said Partner Davison later: "Some of us in America realized that this was our war from the start") and bent their energies to help. When Allied purchasing agents in the U. S. began fruitlessly bidding against one another, the Morgans became central purchasing agent to the Allies, and Morgan Partner Edward R. Stettinius (whose Son Edward was to become chairman of U. S. Steel 21 years later) bought $3,000,000,000 worth of U. S. goods for shipment to England and France.

A quarter of a century ago $3,000,000,000 was three times the U. S. national debt. The effect of such huge purchases was stupendous. Of the whole period, 1916 was the bonanza high point; common stocks of sixty-eight major U. S. industrials paid a total of $724,900,000 to investors during that year. Du Pont, Hercules Powder Co., Remington Arms, Savage, and Winchester Arms all got big Allied orders for munitions. U. S. Steel converted a deficit of $1,700,000 before common dividends in 1914 to a net for common of $50,600,000 in 1915 and $246,300,000 in 1916. Copper went to 28-c- a pound in 1916 (it was stabilized in the fall of 1917 at 23-c-). The automobile industry which in 1913 put out 461,500 passenger cars in 1916 built 1,525,578.

The U. S. chemical industry developed rapidly. With German dyestuffs cut off by the British blockade, hundreds of small chemical companies sprang to life after 1914. New capital poured in--$16,838,000 in 1914, $65,565,000 in 1915, $99,244,000 in 1916, $146,160,000 in 1917.

The chemical industry got a further boost when the U. S. entered the War: German patents were confiscated and turned over to U. S. firms. But after the U. S. entered the War, prices for many commodities were fixed below their neutrality highs and although war profits were bigger on bigger volume, neutrality's profits were not eaten into by high war taxes.

Dollars & Men. Had the U. S. not entered the War quite a number of U. S. citizens might have made far more money. On the $500,000,000 British and French loan of October 1915 a group of American bankers headed by the House of Morgan made $9,000,000 on the spread between the purchase price (96) and the selling price (98). Of this sum the Morgan firm received $66,000. From its 1% commission as purchasing agent for England and France Morgan & Co. got $30,000,000. All that ended when the U. S. entered the War, when Davison became chairman of the Red Cross War Council, and Stettinius became second assistant Secretary of War, when the U. S. Treasury took over the job of Allied banker.

During the War period, as during neutrality, the Guggenheims, William Rockefeller (brother of John D.) and John D. Ryan, heavy owners of copper stocks, made big profits. While neutrality lasted so did speculators such as Jesse L. Livermore and Bernard Baruch. But speculative profits in commodities were reduced when the U. S. Government took control of prices as a war measure. Speculator Baruch himself headed the War Industries Board which fixed the prices.

The biggest fortunes--and the shady fortunes--were mostly made outside of the U. S. in countries which remained neutral. Before 1913 the Swedish match business was divided between a great number of small individual match factories and the large combine of Joenkoeping. Just before the War Ivar Kreuger had managed to combine the smaller companies into the United Swedish Match Factories, with a capital of four million kroner. This company, like its rival Joenkoeping, was faced with War-created difficulties in getting raw materials. But Kreuger made deals with belligerents, guaranteeing to supply them with matches in return for raw materials.

In December 1917, the new combine had built itself up to the point of amalgamating with Joenkoeping on very favorable terms. The new trust, called the Swedish Match Company Ltd., was capitalized at 45 million kroner, and Kreuger emerged as boss. Faced with renewed competition after the War, Kreuger took advantage of depreciated currencies to buy up match factories and real estate in Poland, Belgium and Germany. He emerged from the War as the match king of the world--to fail and go crooked in the 1929 depression.

In Spain, the prize War baby was Juan March, who had been born of poor peasants on the island of Majorca. Before the War, March was a small Barcelona trader who sold onions and chickens during the day and smuggled tobacco and silk by night. His smuggling flotilla came in handy as early as October of 1914, when he made a killing by cornering all available pigs on the coast of Spain and selling them to the Entente powers for a fantastic profit. Shortly his smuggling fleet had become the Compania Transmediterranea. This company supplied food to the Entente nations and to German submarines with cool impartiality. By 1916 March had cornered the Spanish oil and petrol business. He sold shoes to the French army, traded coal and munitions to both sides, delivered American wheat in his ships, and built up a spy service that was available to all comers. Some of his profits went into Majorcan real estate, some into the National Sugar Trust. By the time the Spanish revolution broke in 1936 this grasping old man, now an octogenarian, had so compounded his World War profits that he was able to lend General Franco at least $50,000,000, according to an estimate printed last April in the New York Times.

Second Time Around? Those who assume that present economic conditions in the U. S. are surely going to continue for a long time, are inevitably startled when they consider what would happen to the U. S. as a neutral in another world war like the last. Subsidizing merchant shipping is the only way that the U. S. can keep its flag on the high seas. In a world war U. S. shipping might become a highly profitable business. Keeping heavy industry, particularly steel, busy is a No. 1 national problem. In a war steel, copper, chemicals, oil would be due for a boom.

The farm problem is one of the New Deal's gravest. U. S. surpluses of corn and wheat would vanish like magic at ever rising prices. Greatest of all present economic problems is unemployment. During a prolonged war the problem would be to find not jobs but men--WPA would become a fantastic memory of an archaic era. The political as well as the economic problems of U. S. life would be entirely different.

But all this assumes that another world war would be like the last and of that there is no guarantee whatever. The first effect of World War I in every neutral country was confusion and economic setback. The next world war might be short instead of long--there might be no time for profit.

In the next war, U. S. commerce may be circumscribed by a neutrality act. If U. S. ships could not hire themselves out to carry supplies to belligerents, they might have little profit. Part--but only part--of a typical war boom will be absent if the steel industry cannot export weapons, the chemical industry cannot export explosives, the aircraft industry cannot export planes. The Government may deliberately suppress the boom by high taxes. Factories and unemployed alike may make a trek to Canada.

Today, as a creditor nation, the U. S. has less to fear from the dumping of securities, particularly because foreigners have large quantities of earmarked gold in the U. S. which they could use until they had time for orderly liquidation. Foreign governments will doubtless try to conscript the U. S. resources of their nationals and dispose of them gradually. So securities exchanges may not have to close.

But foreign governments today have relatively much less gold than they had in 1914. Under present laws they will be unable to float war loans in the U. S. After they have traded their Holdings for war supplies they may be unable to buy more--as in 1917 the Dutch and Danes found their German war market dry up.

In 1914-17 cotton took a beating. In those days the U. S. exported eight to nine million bales of cotton a year. Today it exports about five million. King Cotton's loss of market would not be as great as in 1914.

Modern war is mechanized. It rolls on rubber and is driven by oil. The U. S. also uses six times as much rubber as it did in 1914. The U. S. will have to bid for rubber against desperate belligerents. Driving an automobile may become a luxury--an outcome that would not hurt the railroad business. With heavy war freight movements, U. S. railroads might have a renaissance.

If Japan is a belligerent, supplies of rubber from the East Indies may be greatly reduced, also supplies of silk. With prices for both materials at new highs, the U. S. may turn to substitutes. Both exist now in experimental form. During the last World War the U. S. developed its chemical industry and a full grown automobile industry. From the next world war it might get a synthetic rubber and a synthetic silk industry. To create them may well require several billion dollars of the idle capital for which use is now desperately sought.

What may happen to the U. S. may be far less striking than what may happen to Latin America. South America may become a creditor continent. Another world war may bring the industrial revolution to that continent, may thus work a permanent change in world trade.

Paying the Piper. In every economic overturn a few lucky, greedy or farsighted men have an opportunity to make fortunes. But it does not follow that a community profits by such an overturn. Most of the big economic events produced by war are on the debit side even in the ledgers of neutrals:

> Every major economic change produced by war, even the creation of new industries, is a dislocation which upsets the world for a long time afterward. Every neutral which had a war boom in 1914-18 had a post-War depression when its wartime markets were lost. In the case of the last war, after the first depression of 1921, the neutrals settled down to a decade of struggle with the recovering belligerents for the markets of the world.

Cuba's sugar millionaires in 1919 became sugar paupers by 1921 and Cuba suffered severe depression. Chile's Wartime profits in nitrates and copper were followed by post-War losses that wrecked her economy. U. S. farmers, who during the War period had sold all the grain that they could raise, found themselves in the post-War depression with crops they could not sell and progressively went bankrupt all through the twenties. The depression of 1929 was the culmination of this struggle for markets.

> The money profits of neutrals rose with war-induced inflation but the profits were for the most part taken from them by the high cost of living. Everywhere war produces a shortage of the goods that make for real prosperity in peace. For war is the opposite of free trade. A world war shuts off trade, like shutting the gate of a dam, at one clap, and it may take years for a mutually profitable exchange of goods and services to reestablish itself.

> The labor and capital which war induces neutrals to pour into industrial plants is not wasted--World War I made the U. S. the world's greatest industrial nation. When war ends the markets for war-built industries collapse and those who have built them may lose their investment. But the plants so built are not lost. New markets are eventually found for basic industrial products and the greater part of such industries remain as assets to society, producing real wealth.

Not so are the goods--whether food or cannon--which are exported to belligerents. Experience of the last great war shows that they might as well be burned or dumped at sea, for little if any real wealth is ever received in payment for them. They are paid for only with promises to pay or with gold, which is virtually as useless, so that war-born prosperity remains an illusion. Even after the war, if debtors try to pay by shipping goods, creditors commonly lock them out by tariffs.

War gives neutrals a choice between stimulation and stagnation. They can sit at home and count their losses while trade stagnates and costs of living mount. Or they can ride the crest of an economic wave, feeding and arming belligerents--making a gift offering of their wealth as a subsidy to war. They also suffer who do not fight.

* Eight Latin American countries declared war in 1917 and 1918: Brazil, Costa Rica, Cuba, Guatemala, Haiti, Honduras, Nicaragua, Panama. But practically speaking none of them took part except economically.

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