The Value of Money Part 10

They are "double counting" from the standpoint of Professor Fisher's equation. They are, however, speculation. An official in a great New York banking house, in charge of the foreign exchange department, writes that in times when exchange rates are fluctuating, enormous quant.i.ties of drafts on Europe will be bought and sold, during a period of a couple of weeks or months, whereas under other conditions such transactions might amount to little with the same volume of imports and exports. The part of this which is between banks, a very big item, would not count in the 245 billions, but to the extent that foreign exchange brokers outside the banks partic.i.p.ate, their activity helps to explain our 245 billions.

If it be true that speculation, including all manner of readjustment to dynamic changes, makes up the overwhelming bulk of trade in the country, then Fisher's _indicia_ of variation in trade, weighted as they are, are totally misleading. The same is true of Kemmerer's _indicia_ of "growth of business."[283] These are: population, tonnage entered and cleared, exports and imports of merchandise, postal revenues, gross earnings of railways, freights carried by railways, receipts of the Western Union Co., consumption of pig iron, bituminous coal retained for consumption, consumption of wheat, consumption of corn, consumption of cotton, consumption of wool, consumption of wines and liquors, market values of reported sales on the New York Stock Exchange. Only the last of these is in any sense an index of speculation. It is swallowed up by being put on a par with the other fourteen items. Its influence on the final index, made by averaging the others is, as inspection shows, virtually _nil_.

Out of the twenty-six years his figures cover, the general index moves counter to the share sales 14 times! Utterly random figures would have come nearer to the facts in the case. It is particularly striking that Professor Kemmerer, whose total figures, as Professor Fisher's, rest for their absolute magnitude on Kinley's investigation,[284] should a.s.sign 89% of his estimated trade (183 billions in 1890) to wholesale commodities,[285] (with 3% to wages, and 8% to securities), when Kinley's figures show that wholesale deposits are a minor fraction of the total!

The constancy in the figures of these two writers for trade from year to year, a general steady, upward growth, does indeed suggest that trade is determined "by physical capacities and technique," and that it does stand as a great, independent, inflexible factor, independent of money and deposits, const.i.tuting a real causal coefficient with them in determining prices. If, however, speculation is as big a factor as our a.n.a.lysis would indicate, then trade is a highly flexible thing, varying enormously from year to year, moved by a multiplicity of causes, among them _fluctuations_ in particular prices, and the ease and tightness in the money market--the quant.i.ty of money and deposits.

But quite apart from speculation, it is not true that trade is a mere matter of physical capacities and technique, a pa.s.sive function of production. Rather, one would almost have to reverse the relation.

Production waits on trade!

Production, as now carried on, is primarily conducted in the expectation of _sale_, and of profitable sale. Trade does not go of itself, automatically. Rather, it is a highly difficult matter, calling for the highest order of ability, and the labor of innumerable men. In general, I think it safe to say that in ordinary times, the manufacturer loses vastly more sleep over the question of how he shall market his output, than he does over the question of how he shall produce it. A clerk in the Westinghouse Air Brake Company, engaged in the accounting department, spoke recently to the writer of the "productive end" of the business. On inquiry, it developed that he meant the selling department!

He stated that the manufacturing department also, in the language of the employees, in that corporation, would also be termed "productive," but that the selling department was _the_ productive department.

If one reflects a little as to the proportion of "costs" that go into selling, as compared with technical "production," I think my point will be clearer. Advertising has developed so enormously that it needs little discussion. It has been stated that the "Sapolio" people once tried, after their reputation seemed thoroughly established, to stop advertising, with such disastrous results that very extraordinary efforts were required to reestablish the brand. Number 2 wheat is not advertised, in the great magazines, but innumerable brands of flour get newspaper and magazine advertising,--some of them in such a periodical as the _Sat.u.r.day Evening Post_, and even those which are locally consumed are commonly advertised in the local press. Nor is it only finished products, of the sort that must be sold to the fickle public, that involve these heavy selling costs. The writer has in mind a corporation producing a high-grade type of glazed retort, in the production of which it has virtually a monopoly, since the clay with which it is made does not coexist with the skill to make it in any other place. The particular product is an indispensable part of many important technical processes. Subst.i.tutes made of other clays, and by other companies, are known by the trade to be unsatisfactory. The buyers are all highly trained business men. Here, if anywhere, selling costs should be slight. But the chief selling agent of the corporation has found it necessary, in order to keep the business going, to incur huge expenses for entertaining his customers, finds it necessary to incur great travelling expenses, to use only the most expensive hotels, and, incidentally, to drink a great deal more than his personal inclinations would call for, in keeping the business for his house. I waive discussion of the extraordinary fees which a trust promotor makes, in effecting a consolidation of big business units,--a process of exchange.

I am speaking now of the ordinary costs involved in ordinary trade. The army of travelling salesmen, the body of stenographers, who write letters, with various "follow-ups," in the effort to get more business, the growing complexities of such letter writing, in which all suspicion of "circularizing" must be allayed, one-cent stamps being absolutely taboo!--these things are the commonplaces of business. They are in the primers in the "commercial colleges" and "schools of commerce." Only the orthodox economist, with his doctrine of the impossibility of general overproduction, is ignorant of them!

This feature of modern business has been much elaborated in a recent book which has not received the attention it merits--though its strength is rather in criticism than in constructive doctrine. I refer to Dibblee, _The Laws of Supply and Demand_.[286] Dibblee makes an interesting contrast between commercial and manufacturing cities, maintaining that the former necessarily outgrow the latter--a contention which London, New York, Chicago and other places strikingly ill.u.s.trate.

He presents a truly remarkable fact about London:[287] a recent report of the Commission on London Traffic states that there were in London 638 factories registered as coming under the Factory Acts, with an average horse-power of 54. The total power employed within the London area under the Factory Acts, chiefly used in newspaper printing, was 34,750 horse-power--just one-half of what is required for the steams.h.i.+p, Mauretania! This is the greatest city in the world. What do its millions do for a living?[288] The town of Oldham,[289] he a.s.serts, with 100,000 inhabitants, has spindle capacity enough to supply more than the regular needs of the whole of Europe in the common counts of yarn. To _market_ the output of Lancas.h.i.+re, "the merchants and warehous.e.m.e.n of Manchester and Liverpool, not to mention the marketing organization contained in other Lancas.h.i.+re towns, have a greater capital employed than that required in all the manufacturing industries of the cotton trade."

Accurate estimates of the proportion of "selling costs" to costs of technical production are doubtless impossible, for the general field of trade, and precision is unnecessary for my purposes. Dibblee's conclusion, after contrasting retail and wholesale prices, and a.n.a.lyzing the expenses incurred in selling prior to the wholesale stage, is that the cost of marketing is at least equal to "real cost of production,"

occasionally only slightly below it, and often far above it (62).[290]

If one considers how large the item of "good will" often bulks in the value of "going concerns"[291]--good will being in large degree often just a capitalization of prior costs of this nature--Dibblee's estimate need not be exaggerated. Trade connections, trade-marks that have reputation, etc., often represent enormous output in thought, work, and expense. Selling costs may, like other costs, be divided into "prime"

and "overhead" costs. Some of the latter lead to long-time consequences, pay for themselves only in the long run. These may be "capitalized" in "good will."[292] Of course, not all good will is got at a cost. Much of it is advent.i.tious.

In the light of the doctrine that trade is independent of money and credit, one wonders why it should be thought necessary to extend branches of American banks to the South American markets which we are now reaching out toward. And why have Americans, from the beginning, been constantly increasing commercial banks?[293] It is easy to sneer at the efforts of the successive frontiers in our history to provide themselves with banks of issue as based on a delusion, the delusion that bank-notes are "capital," and to say that their real need was, not more bank-credit, but more real capital. They needed more tools and live-stock, doubtless, but is that the whole story? And were their banks of no a.s.sistance in getting the additional capital of various sorts? And was it a matter of no consequence that they had an abundant medium of exchange? It seems almost childish to put such questions, but the quant.i.ty theory has as its logical corollary that to multiply banks is quite useless and wasteful, since the only result is to raise prices. If increasing bank-credit cannot increase trade or production, this corollary is inevitable. Indeed, the case may be more strongly stated.

Quite apart from the wasted labor of bank-clerks and the waste of banking capital, the effect of increasing bank-development, on quant.i.ty theory reasoning, is harmful. If increasing bank-credit is to raise prices without increasing trade, then, on quant.i.ty theory reasoning, it must _depress_ business. The reason is that rising prices in a given region make that region a bad place to buy in, and so curtail its exports. This is, indeed, the quant.i.ty theory explanation of international trade, to which attention is later to be given. The country which is expanding its banking facilities most rapidly will suffer most in compet.i.tion in the world markets. This is why the United States have so little foreign trade! It also explains the rapid strides that China and Central Africa have recently made in capturing the world's markets. I submit that there is no flaw in this argument, if the premise of the independence of volume of trade and volume of bank-credit be granted. It follows from the quant.i.ty theory. That it is no caricature of Fisher's argument will appear, I think, from the following quotation,[294] which very nearly states what I have just been saying, though it does not draw the conclusion that banking is a bad thing: "The invention of banking has made deposit currency possible, and its adoption has undoubtedly led to a great increase in deposits and consequent rise in prices. Even in the last decade the extension in the United States of deposit banking has been an exceedingly powerful influence in that direction. In Europe deposit banking is in its infancy."[295] Happy Europe, troubled only by war! It is greatly to be hoped, in the interests of American agriculture, that the efforts to increase agricultural credit facilities will fail!

We are driven to one of the most fundamental contrasts in economic theory, which appears under various guises and in different forms: statics _vs._ dynamics; transition _vs._ equilibrium, theory of prosperity _vs._ theory of goods; normal tendency _vs._ "friction."[296]

Perhaps Professor Fisher, and the quant.i.ty theorist in general, would dismiss many of these considerations as not applicable to the general principle, which is a "normal" or "static" or "long run" law, not subject to considerations of this sort. It is scarcely open to Fisher to defend himself this way, because of his exceedingly uncompromising statement regarding even "transitional" relations between volume of trade and money and credit. I shall not reply to anyone who offers such an objection by a general tirade against "static economics." I believe thoroughly in the method of economic abstraction, and in reaching general principles by ignoring, provisionally, in thought the "friction"

and "disturbing tendencies" which often make the first approximations look somewhat unreal. But I raise this question: to what feature of our economic order do we chiefly owe it that we can make such abstractions?

By virtue of what does friction disappear? What is it that makes our abstract picture of economic life, as a fluid equilibrium, with its nice marginal adjustments, its timeless logical relations, correspond as closely as it does to reality? The answer is: MONEY and CREDIT.[297]

It is the _business_, the _function_, of money and credit, as instruments of exchange, to bring about the fluid market, to overcome friction, to effect rapid readjustments, to give verisimilitude to the static theory, to make the a.s.sumptions of the static theory come true.

Where exchange is easy and friction slight, there will not be two prices for the same good in the same market. Speculators, seeking profits of fractions of a point, will prevent that. By multiplying exchanges, they will level off values and prices. Because money and credit have done their work so thoroughly in the "great market," it is possible for men to talk about static theory, and to work out economic laws in abstraction from friction, transitions, and the like.

In the static state, all speculation is banished. There are no price-fluctuations to be smoothed out, no new prospects to be "discounted," no uncertainties to be guarded against by "hedging."

Seasonal goods will, of course, have to be carried over from one season to the next, but this will involve merely warehousing and the use of capital--"time speculation," involving many sales, does not come in. One sale to the capitalist who carries the seasonal goods, with a sale by him to the man who means to use them, will suffice. It has been shown before that the great bulk of trade is speculation. But speculation is banished from the static state. Speculation is a function of dynamic change, waxing and waning with the degree of uncertainty that exists, the new conditions to which readjustments have to be made, the "transitions" that have to be effected. In other words, the laws governing the volume of trade are dynamic laws, laws of "transition periods," and so the whole notion which underlies the quant.i.ty theory, of "normal periods," "static" relations, etc., is here irrelevant.

Volume of _trade_, as distinguished from volume of _production_, is controlled by the number and extent of the "transitions" that have to be made. The chief work of money and credit is done _in_, and _because of_, "transition periods." a.s.sume a normal equilibrium accomplished, and you have little trading left to do. It will still be necessary, if you have the division of labor, and private enterprise, for goods to pa.s.s through as many different hands as there are different independent enterprisers in the stages of production, and on, through merchants, to the consumer.

It will still be necessary to pay wages, rents, dividends and interest.

But there will be no selling of lands, of houses, of factories, of railroads, or of securities representing these. By hypothesis these are already in the hands best qualified to hold them. The "static equilibrium" presents "mobility without motion, fluidity without flow."[298] The static picture is a picture of completed adjustment, where no one has an incentive to change his work, or his investments, because he has already done the best that he can for himself. It is, therefore, a picture of a situation where there is little incentive for those exchanges which make up the great bulk of the volume of trade in real life.

Hence the curious phenomenon that very much of static theory has been developed in abstraction from _money_ and _credit_. Mill's theory of international values, for example, abstracts from money. "Since all trade is in reality barter, money being a mere instrument for exchanging things against one another, we will, for simplicity, begin by supposing the international trade to be in form, what it is in reality, an actual trucking of one commodity against another. So far as we have hitherto proceeded, we have found the laws of interchange to be essentially the same, whether money is used or not; money never governing, but always obeying, those general laws."[299] Other writers have similarly held that money is a mere cloak, covering up the reality of the economic process. Schumpeter, for example, holds that money is, in the static a.n.a.lysis, merely a "Schleier," and that "man nichts Wesentliches ubersicht, wenn man davon abstrahiert."[300] _On the static a.s.sumptions_, of the fluid market, with friction, etc., banished, money is, indeed, anomalous and inexplicable. It is a cloak, a complication, a vexatious "epi-phenomenon." There is nothing for it to do, and there can be, consequently, no "functional theory" developed for it. Static theory may be ungracious in ignoring its own foundation. But static theory is grotesque when it seeks to support its own foundation! Static theory is possible only on the a.s.sumption that the work of money and credit has been done. What, then, shall we say of static theory which seeks to explain the work of money and credit? Yet precisely this is what is undertaken by the quant.i.ty theory, with its "normal" or "static" laws of money and credit. A functional theory of money and credit must be a dynamic theory. To talk about the laws of money, "after the transition is completed" is to talk about the work money will do after it has finished working. For a functional theory of money and credit, we must study the obstacles that exist to prevent the fluid market. We must study friction, transitions, dynamic phenomena.

To this problem we shall come in Part III. For the present, I am content to have disproved the quant.i.ty theory contention that the volume of trade is independent of the quant.i.ty of money and credit.

APPENDIX TO CHAPTER XIII

THE RELATION OF FOREIGN TO DOMESTIC TRADE IN THE UNITED STATES[301]

The word, "trade," as used in connection with statistics of foreign and domestic trade has been irritatingly ambiguous. Few writers, in speaking of domestic trade, have meant the same thing by trade that they have meant by the word when speaking of foreign trade, and hence we have had many pointless efforts to inst.i.tute comparisons between the two, and some very misleading statements about the matter. Thus, figures have been offered which would show that the foreign trade of the United States is only a fraction of 1% of the domestic trade. This conclusion is reached by taking the figures for banking transactions discussed in Chapters XIII and XIX as representative of domestic trade, and comparing them with the annual figures for exports and imports. This procedure is fallacious for several reasons:[302] the figures thus reached for domestic trade exceed even the total trading within the country, as shown in Chapter XIX. In the second place, as shown in Chapter XIII, the bulk even of these deposits which do represent real trading grow chiefly out of speculation. Even in ordinary trade, goods are counted several times before reaching the final consumer. It is clear, therefore, that even an accurate figure for total trading within the country would have little relevance when we are seeking a figure to compare with exports and imports. Nor, if a comparison of the actual trading in which foreigners partic.i.p.ate with the trading exclusively between Americans is sought, can we take the export and import figures as representative of the foreign trading--they do not include a mult.i.tude of highly important transactions in which foreigners partic.i.p.ate. Very much of the business of the New York Cotton Exchange, the New York Stock Exchange, the Chicago Board of Trade, and other speculative markets represents foreign buying and selling, especially arbitraging transactions, and the other "invisible items" of foreign trade need merely to be mentioned for the economist to recognize the fallacy of a comparison which omits them.

What figures are relevant when we wish to compare foreign and domestic trade? First we must make clear the purpose for which the comparison is to be made. If we are concerned with the calls made by foreign and domestic trade on the money market, we should make use of a different method of comparison than that which will be here employed. The purpose of the comparison here undertaken is to determine how much of our American labor, land and capital is at work producing for the foreign consumer, as compared with the land, labor and capital in America producing for the American consumer. The comparison here undertaken is concerned with the question which is usually uppermost in the minds of those who undertake such a comparison, namely, _how important_ is our foreign market to us? Obviously, for such a comparison as this, we should not count a given case of eggs twelve times merely because it changed owners.h.i.+p twelve times in getting from farm to breakfast table.

Items of export and import count only _once_ in the figures for export and import. We must find a figure for domestic "trade" in which items count only once, allowing no turnovers of the same goods to swell the total, if we wish to make our figures comparable.

The method proposed for making this comparison, for a long series of years, is a modification of the method used by the writer in an article in the _Annalist_ of Feb. 7, 1916. A figure based on the bank deposits of _retail merchants_ in Kinley's 1909 investigation was there taken as properly comparable with the export and import figures. The final sale to consumer by retailer is "the one far off divine event" toward which the whole productive process moves. Everything else in production and exchange looks forward to this. Ultimately, from the demand of the final consumer comes all the demand that is directed toward the agencies of production, even though the laborer sees his immediate market in the person of the employer, and the capitalist or landlord sees his immediate market in the person of the active business man. The figure reached for retail trade by the method then employed was $34,500,000,000 for 1909. This figure was too high, as shown in Chapter XIII above, and the figure reached now for retail _deposits_ by the same method is $32,000,000,000. Even this figure is too high, however, as I there concluded, to represent retail _trade_, and I shall use it only as a check on King's figure for _the total income of the United States in 1910_, which I shall use as a base figure instead of my own. King's figure for the total income of the United States in 1910 is $30,500,000,000.[303] I take this figure as including all that the American people spend for consumption, with retailers, physicians, hotels, theatres, etc., and also their net savings for the year. Part of this they spent for foreign products. The rest they spent at home. This residue spent at home gives us a figure which we may properly compare with the amount the foreigner spends in America, as indicating the ratio of foreign to domestic trade for the purpose in hand. We subtract, in other words, from the figure for total income the figure for _imports_.

Then we compare the residue with the figure for _exports_, and get our ratio of foreign to domestic trade. The export and import figures must first, however, be reduced to a _retail_ basis. That is, a.s.suming that wholesale prices are two-thirds of retail prices, we add 50% to the figures for exports and imports (which are wholesale figures) before making the subtraction and the comparison. The ultimate consumer, both in Europe and America, pays for imports and exports on a _retail_ basis.[304] This method, applied to the figures for 1910, gives us a ratio of about 10:1 for domestic to foreign trade--the lowest percentage for foreign trade which we shall find for any year in the period investigated, 1890-1916.

This comparison is still unfavorable to foreign trade. Domestic trade, in our figures, includes savings and investments, including investments made by Americans abroad. Import figures are marred by undervaluations, exports are not all counted, and the figures for exports and imports do not include foreign investments in America. American investments abroad should not be counted as part of domestic trade. Moreover, our figures take no account of travellers' expenditures, or of services performed by professional men of one country for men in another, or of certain other "invisible items." But while this makes our percentage for foreign trade too low for all years, it probably does not greatly upset the results for yearly variations in the ratio except for the year 1916, when the figure for domestic trade is left decidedly too high, and the ratio for foreign trade is too low, as compared with previous years.

For years other than 1910, indirect calculations must be resorted to for domestic trade. I have substantial confidence in the rough accuracy of the figure chosen for 1910 in view of the convergence of two widely different sets of data. My figure for retail deposits in 1909 is $32,000,000,000. King's figure for total income is $30,500,000,000 for 1910. King's figure seems to me a better figure to use for the purpose in hand. I use my own merely as a rough check on his. For years other than 1910, the figure for net income is calculated as a percentage of King's figure for 1910, by means of an "index of variation." It is a.s.sumed that the net income of 1905, for example, bears the same relation to the index for 1905 that the absolute figure for net income of 1910 bears to the index for 1910, and net income for 1905 is then computed by "the rule of three." The index of variation chosen is _railway gross receipts_ weighted by _wholesale prices_. I think that railway gross receipts are, on the whole, the most dependable and easily manageable index of physical volume of production that we have, though recognizing difficulties, later to be discussed, in using them for the purpose in hand. Railroads touch virtually every kind of business in the country. Variations in the _pecuniary_ volume of production and consumption, however, if due to rising or falling _prices_, rather than to changing physical volume, would not be indicated by changes in railway gross receipts. The same volume of transportation might represent widely varying pecuniary values of goods transported. Railway rates do not vary from year to year with prices of goods, even though high-priced goods are normally charged higher rates than low-priced goods. The index, therefore, must include _prices_ as well as physical volume of transportation. For 1910, therefore, railway gross receipts and an index of prices are multiplied together, and counted as 100%. The same thing is done for railway gross receipts and prices for other years, and the results reduced to percentages of the result for 1910.

The figure for net income in any other year is then readily computed as a percentage of the figure for 1910. The results, for the years 1890-1916, appear in the tables below.[305]

It may be noticed that my figures for net income in 1900 and 1890 do not correspond very closely with the figures for the same years as independently estimated by King. My figure for 1900 is $12,900,000,000, where his is $17,965,000,000; for 1890, my figure is $9,300,000,000, where his is $12,082,000,000. I am inclined to the view that the figures in my tables come closer to the facts for these years than do his figures, a.s.suming that _his figure_ for 1910 is correct. It will be noticed that on his figures there was an increase of about 50% from 1890 to 1900, and an increase of only about 66% in the decade following. This seems to be an unlikely relation. One would expect a much greater rate of increase for the decade 1900-10, as compared with the preceding decade, than King's figures show. The period from 1890 to 1900 included the terrible panic of 1893 and the prolonged depression ensuing. The panic in 1907 was trifling in comparison, and recovery, as shown by our index numbers in the tables below, was very much quicker. Moreover, falling prices characterized much of the earlier decade. The highest prices of the whole ten years were in 1891. The period from 1900 to 1910 is a period of rapidly rising prices, on the whole. On the basis of our general knowledge of the two periods, one would expect a greater percentage gain by far for the second decade, and I therefore trust the results of the index of variation here chosen, which show that. Similar results are obtained by applying to the base figure for 1910 an index of variation derived from Kemmerer's and Fisher's figures for trade[306]

and prices. My figure for 1890 may, moreover, be checked by comparison with the figure given by C. B. Spahr in _The Present Distribution of Wealth in the United States_ (p. 105) for the net income of the country for that year: $10,800,000,000. It may be that my figure for 1890 is too low, but I have not sought to "doctor" it by an arbitrary "correction factor" to make it correspond more closely than it does with the other estimates. It is striking enough that a figure derived from an index of variation, twenty years away from its base, should come as close as this to figures calculated from wholly different data.

One brief comment may be made on the significance of these figures. It may be questioned if figures showing the proportions of our industry devoted to supplying goods for the foreign market correctly indicate the importance of the foreign market to us. It may be urged that if we should lose our foreign market, we should merely turn to producing more for the domestic market, and that the loss would not be the whole of our receipts from foreign trade, but merely the cost of transition, and the loss that comes from s.h.i.+fting to production to which we are less suited.

This is, doubtless, true. But the loss reckoned this way may well be greater than the loss reckoned on the basis of my figures! It is equally true, moreover, that our domestic trade is not important to the extent indicated by my figures, since if we lose part of our domestic trade, our producers will turn to supplying more for the foreign market. But one must not regard the cost of transition as a negligible matter! The cost may easily be prolonged depression. Certain parts of our foreign trade are really vital to us, both on the import and (to a less degree) on the export side. The most important practical use to which the figures here given may be put are in connection with short-run problems.

Foreign trade is so important to us that any sudden alteration in its amount may bring great adversity or great prosperity--as the course of the present War abundantly testifies.[307]

An application of our method to the years 1850 and 1860 gives a percentage for foreign trade of 12.7 in 1850, and 16.0 in 1860.[308]

Certain other cautions are needed in presenting these figures. For one thing, variations in railway rates will make a given volume of gross earnings mean different things in different years as to the physical volume of traffic. In the writer's opinion, which is confirmed by Professor W. Z. Ripley, there is no possible way of making allowance for this, as the cross-currents affecting railway rates are altogether too numerous and obscure. Nor has any effort been made to allow for variations in the proportions of freight and pa.s.senger receipts, or of different cla.s.ses of freight traffic.

Again, the proportions of railway traffic connected with foreign trade may vary greatly, and it may happen that a big increase in railway gross receipts is due to increasing foreign trade, primarily. There is reason to suppose that much of the increase of 1916 is to be explained that way. This makes our comparison for 1916 particularly adverse to foreign trade, since we count as domestic trade what is really foreign trade.

The figures, however, are presented as they stand. Moreover, for 1916, the great increase in foreign trade is in _exports_. Merchandise imports are not much greater than in previous years.[309] Our exports have been chiefly paid for by "invisible items," gold and securities, and short term credits. These do not appear anywhere in our figures. A substantial source of error appears from this cause in our 1916 figure. I should think it safe to put the ratio for foreign trade to domestic trade for 1916 at above 20%, instead of the 17.9% our table shows.

The reader will wish to know for a given year how much of the increase or decrease is due to physical growth of business, as represented by railway gross receipts, and how much is due to changes in prices. To give this information, and to make it easy for a critic to check the results, a table showing the index numbers from which the figures for net income are computed is subjoined.[310]

TABLE I[311]

1 2 3 4 Ratio of Domestic Trade of Foreign Trade of Foreign Calendar Net Income United States = United States = to Years of the Net Income minus Exports at Retail Domestic United Imports at Retail Prices Trade States Prices

1890 $ 9,300,000,000 $ 8,100,000,000 $1,300,000,000 16.1% 1891 10,400,000,000 9,200,000,000 1,400,000,000 15.2% 1892 10,000,000,000 8,700,000,000 1,400,000,000 16.1% 1893 10,100,000,000 8,900,000,000 1,300,000,000 14.6% 1894 8,300,000,000 7,300,000,000 1,200,000,000 16.5% 1895 8,400,000,000 7,200,000,000 1,200,000,000 16.7% 1896 7,900,000,000 6,900,000,000 1,500,000,000 21.8% 1897 8,000,000,000 6,900,000,000 1,600,000,000 23.2% 1898 9,100,000,000 8,200,000,000 1,900,000,000 23.2% 1899 10,900,000,000 9,700,000,000 1,900,000,000 19.6% 1900 12,900,000,000 11,700,000,000 2,200,000,000 18.8% 1901 14,600,000,000 13,300,000,000 2,200,000,000 16.5% 1902 15,600,000,000 14,200,000,000 2,000,000,000 14.1% 1903 17,700,000,000 16,200,000,000 2,200,000,000 13.6% 1904 18,000,000,000 16,500,000,000 2,200,000,000 13.3% 1905 19,600,000,000 17,800,000,000 2,400,000,000 13.5% 1906 21,500,000,000 19,500,000,000 2,700,000,000 13.8% 1907 26,600,000,000 24,500,000,000 2,900,000,000 11.8% 1908 23,000,000,000 21,300,000,000 2,600,000,000 12.2% 1909 27,600,000,000 25,400,000,060 2,600,000,000 10.2% 1910 30,500,000,000 28,200,000,060 2,800,000,000 9.9% 1911 29,600,000,000 27,300,000,000 3,100,000,000 11.4% 1912 33,800,000,000 31,100,000,000 3,600,000,000 11.6% 1913 34,800,000,000 32,100,000,000 3,700,000,000 11.5% 1914 32,600,000,000 29,900,000,000 3,200,000,000 10.7% 1915 35,400,000,000 32,700,000,000 5,300,000,000 16.4% 1916 49,200,000,000 45,800,000,000 8,200,000,000 17.9%

TABLE II. INDEX NUMBERS FROM WHICH THE FIGURES FOR NET INCOME ARE DERIVED

1 2 3 4 Composite Net Income[312]

Dun's Prices R. R. Gross Index, R. R. Gr. of the United Calendar with base Receipts, Rcts. multiplied States in Years in 1910 reduced to by Prices. billions of base of (Column 1 dollars: 1910 column 2.) 100:30.5::(3):$

1890 76.5 39.8 30.8 $ 9.3 billions 1891 81.5 42.0 34.2 10.4 1892 75.6 43.5 32.8 10.0 1893 77.3 42.9 33.2 10.1 1894 71.5 38.1 27.2 8.3 1895 68.0 40.7 27.8 8.4 1896 63.8 40.6 25.9 7.9 1897 62.2 42.4 26.4 8.0 1898 66.4 45.1 29.9 9.1 1899 72.3 49.6 35.8 10.9 1900 78.1 54.0 42.1 12.9 1901 80.6 59.4 47.8 14.6 1902 84.0 62.6 51.3 15.6 1903 83.1 70.1 58.2 17.7 1904 84.0 70.3 59.0 18.0 1905 84.0 76.4 64.2 19.6 1906 88.1 85.0 70.5 21.5 1907 94.0 92.9 86.3 26.6 1908 92.4 81.8 75.6 23.0 1909 99.0 91.7 91.0 27.6 1910 100.0 100.0 100.0 30.5 1911 98.1 99.0 97.0 29.6 1912 104.1 106.9 111.0 33.8 1913 101.7 112.5 114.0 34.8 1914 102.5 104.5 107.0 32.6 1915 106.0 110.0 116.0 35.4 1916 125.0 129.0 161.2 49.2

CHAPTER XIV