amenable to the law as any other form of profiteering or unfair practices.

When capital has violated the public interest, our legislative bodies have been quick to lay the hand of Government upon it, and, by regulation and punitive provision, quick to force it to recognize the paramount general interest. This rule should apply with equal definiteness to labor. Capital has been made responsive to public regulation, and labor should be equally so. Capital is compelled to abide by its contracts and fulfill its obligations. Labor cannot rightfully claim exemption from such laws, nor is it true that labor can claim the unfettered right to strike and cripple industry in its fundamental services to the public. We do not permit our soldiers to strike, nor would we patiently submit to a strike of other public employees, such as firemen or postal employees. A doctor would not be permitted to strike in the midst of an operation affecting human life, nor a lawyer to shirk his duty in a crucial

case, nor a banker to close his doors to public demand. Over the rights of any class or any interest lies the supreme right of society to act in its own protection, and to deny that right is to challenge the very basis of proper human relations. There must be fair and orderly methods devised by which the differences between conflicting interests can be adjusted without paralyzing the public interest. That is simple economic and social necessity. Labor is entitled to its just share of the wealth which it helps to create, but when labor invokes the word justice, as it may rightfully do, it must recognize that justice implies consideration for the rights of all.

These are fundamental facts, which labor and all our people should understand thoroughly. Let us hope that 1920 will contribute much toward such understanding, and then we may hope for the beginning, at least, of a solution to our serious labor problems, and for all that that will mean in the way of greater general prosperity and happiness.

The unsettled condition of affairs which characterized business, commerce and finance during the past year, has bred a spirit of living merely for the day and leaving the morrow to take care of itself, so that at a time when saving and economy are a crying need, a large section of our population has indulged in indiscriminate expenditure and speculation to an almost unprecedented extent. This has caused the Federal Reserve Board to issue warnings at various times to member banks to restrict their loans to non-speculative undertakings. A sudden rise in the discount rate of the Federal Reserve banks and discriminatingly high rates imposed by the banks in New York on speculative borrowing brought about a stock exchange panic which compelled much liquidation there. Thanks to the Federal Reserve system, however, the panic was confined to stock exchange speculators and did not, as was too often the case prior to its organization, spread to general business, which proceeded in the even tenor of its way unaffected by the disturbance in Wall Street. The raising of the Federal Reserve discount rates was for the purpose of restricting rediscounts and thereby bringing about a deflation of both the credits granted

and the circulation issued by the Federal Reserve banks. It must be borne in mind, however, that much of the inflation is due to the Government financing caused by the war. Banks, members of the Federal system, during most of the year had under rediscounts with the Federal Reserve banks, bills secured by Government war obligations to the extent of one billion and a half or two billion dollars, while all other bills usually did not exceed a quarter of a billion dollars.

The ultimate hope for a speedy return to more normal conditions depends on the capability of our people to produce more and save more, and thus gradually absorb the outstanding war obligations. The Federal Reserve Board can only assist such a movement; it cannot by its own power produce a sudden and complete change. Our country is possessed of enormous resources in all directions, and our people showed during ne war that in times of crises they are able to make all sacrifices asked of them. It is not to be doubted that we shall pass safely through the present crisis. There is no need of despairing and becoming impatient. The experience of Napoleonic Wars and of our own Civil War shows that it takes a long time for nations

to overcome the effects of great wars as regards finance, industry and commerce. The war through which we have just passed has been a so much greater cataclysm than any other that has preceded it that we must not expect a complete return to normal for several years.

The demand for bank credit has been steady and strong all through the year and discount rates have ruled high. Banks therefore have again had an opportunity to make

large profits. Contraction and deflation of credits have not yet commenced and business failures with resulting losses to the banks have been few and unimportant. It will be the part of prudence and good banking for the banks having excess profits, after setting aside their excess profits taxes, to provide liberally for losses which though not discernible now are likely to occur in the process of contraction and deflation which must sooner or later take place.

It is more than a year since the armistice was signed, but we still have many unsolved problems. Fortunately the financial condition in the United States is sound, the Federal Reserve system and the banks being abundantly able to meet every legitimate requirement, but it might better be understood now than later that the time to curb speculation in land, commodities, farm products and securities is at hand. In many of the European countries the monetary condition is anything but encouraging. To say nothing of their enormous public debts, the balance of trade has been against those countries so long as to leave them badly in debt on merchandise account, and they have issued such large sums of currency as greatly to cheapen their money. However, with sane treatment and patience the business affairs of the Old World can be put in order in time.

Our foreign trade will undoubtedly suffer a decline. Any other outcome, considering the extraordinary totals attained the last few years, with the balance of trade so much in our favor, and the strained condition of foreign exchange resulting therefrom, would be surprising. The thought of a recession ought to spur us on to organized, systematic efforts to hold our fair share of international commerce in the future. Here the problems of labor and other costs, ocean shipping and foreign financing, especially the latter, loom large.

One of the big difficulties is labor unrest. It is reasonable to expect that the turning point will be reached some day; let us hope it will be in the year 1920, and that employers and employees will be able to adjust their troubles more readily than in 1919.

A veritable stampede of buying characterized the year 1919. Under pressure of unpre

cedented demand, the products of farm, furnace and factory have remained at fancy prices, and the volume of trade has been restricted only by the lack of supplies and the inadequacy of transportation facilities. Producers and industrial laborers especially have profited greatly.

All year there have been complaints of the high cost of living. Every one must begin to realize that there are only two ways of cheapening food, fuel, clothing and luxuries. One is by the practice of sensible economy; the joy ride of the spenders causes prices to soar higher and higher. The other way— and both are imperative-is to increase production. There cannot be much lowering of prices until more goods are made and more food is produced in the world.

Bank deposits have been high throughout the year. The gratifying growth in savings accounts indicates that, contrary to the general rule, some people wisely are laying aside part of their earnings. There has been a strong demand for loanable funds at remunerative rates. Rising quotations for securities and the volume of mercantile and industrial operations at extreme valuations both contributed to the full employment of available bank credits.

Rediscounts at the Federal Reserve banks showed a variable tendency, up one week or month and down the next, until early in October, when a considerable and progressive increase set in. The Federal Reserve Board very properly sounded warnings against further expansion, and rates at the Federal Reserve banks have been raised in the hope that thereby the drain upon reserves may be checked. The situation here and abroad is such that cheap money may not be expected in the near future.

Very early in the Civil War (1861-2) gold went to a premium. During the period of Union army reverses the premium was so high that the United States note (greenback) was worth only 40c. in gold to the dollar. Exchange was very much against this country but we heard nothing about equalizing exchange on the part of European nations. They were quite content with the situation. The exuberant spirits, the speculative mania that possessed our people in 1865 convinced them that the then level of prices would be maintained; that a new era had dawned and that we never would go back, approximately even, to pre-war prices. The country lived in this fool's paradise until 1872-3 when a severe panic and general cataclysm taught people that economic laws were bound to assert themselves in the end. They may be trifled, with, defeated for a time, but readjustment is inevitable.

We hear the same comments now. The world has advanced; men have come into their own; the present high level of prices has come to stay. Do you think wheat will continue to sell for over $2 per bushel? Do you think carpenters, bricklayers, etc., will continue to be paid $1 an hour for a short day and 50 per cent. increase for overtime? A reaction from the present high level of all things is inevitable. The only question is, whether experience in the past and knowledge of economic laws will teach people to bring about this recession gradually, whether it will go on as it did following the Civil War until the credit fabric bursts and a debacle ensues. The borrowings of the Government, the high price of everything, the craze to go ahead and do things with a rush regardless of cost just as we did during the war in order to win the war, these and other influences have subjected credit to a very

or

great strain; it is under a very great strain all over the country at the present time. Think what the railroads will require to put them in condition when the Government restores them to their owners; think of the additional financing of so many corporations; think that three billions of new securities were offered to the public during the first eleven months of this year.

If a study of these questions does not teach conservatism it is difficult to determine what kind of a warning would be effective. There is one powerful corrective at work-the exchange market. Exchange on New York is so high as to practically close the European market to all American manufactured goods. They will continue to buy raw material like cotton and foodstuffs, but will of necessity cut out all but the indispensables. Our manufactories running at present speed, war time speed, with the foreign market cut off, will find their goods inclined to pile up and then they will slow down their operations. They I certainly will not pile up goods costing so much to make that they could not hope to break even in any ordinary market. They could not hope to sell in outside markets in competition with other nations, notably England and Japan. Building was suspended during the war. The production of military clothing for the war curtailed clothing for ordinary domestic use, and so with other lines. The accumulated wants thus resulting will be satisfied in one business cycle of about one year, and then only a normal demand will obtain, and abnormal prices must yield to competition. Labor and material must come down to a reasonable level and the commercial enterprise that does not prepare for this logical and natural recession is likely to suffer. It is time to "stop, look and listen."

Measured in terms of dollars, our increase of wealth has been prodigious and our exports staggering. There comes the delusion;

for, measured in terms of goods, our production has fallen far short of the opportunities and needs of the period. If it were really

feasible, as many seem to believe, to abolish natural laws by fiat, then we might decree that the law of reaction should never operate to mar the record of 1919. But this cannot be done. Some time, soon or late, we are to have an era of receding prices; and such an era, whether the price recession be fast or. slow, is going to revive the lost art of looking facts in the face. Many people, who think differently now, will then discover that wealth is accumulated by an increase of goods, and not by an increase of dollars-expressed valuation of goods. There will simultaneously be again brought to light the ancient theory that man must earn his living by the sweat of his brow.

To forecast what is to happen in 1920 is to risk a crude guess. One might make a long list of the favorable factors in the outlook, and an equally long list of the unfavor

able, and then, by alternately considering these lists, might at one moment be the most joyous of optimists and the next moment the most depressed of pessimists. On the whole, it seems that the optimist has a shade the better of the argument, for we have apparently made a start toward social and economic normality. It would be folly, nevertheless, to assume that there is smooth sailing ahead until we solve some, at least, of the problems arising from the following named causes: The unsettled Peace Treaty; European requirements in respect to food and materials; falling foreign exchanges; Mexican unsettlement; impaired credits of railroads, and the need of railroad improvements and extensions; unscientific taxation, discouraging enterprise; radical labor demands; socialistic agitation; high cost of living; currency and credit inflation.

Many of our economists and bankers have very properly been preaching to the country at large the sound gospel of trying to support our export trade by granting liberal credits to Europe. The movement must be shared in by the small as well as the large investor. We have been urging the "gospel of goods and services" as being just as essential now as in war time. In this, however, there are two difficulties; one is, that the incentive for such an appeal as I describe upon grounds of patriotism is now gone, and the second fact is that the investing power of the small buyer cannot be sufficiently mobilized to float large European loans if our large investors find themselves obliged to stay out of the market.

Across the Atlantic our friends must appreciate that the activity and poise of our investment markets govern the range of possibilities here in the way of foreign borrowing. For investment funds must ultimately come from the national savings. The English people understand the "gospel of goods and services" as well as we, much better, in fact, because they were compelled to practice that gospel for a Jonger time. The leaders over there speak of extravagance in Europe. America also confesses the same sin. America cannot help Europe and Europe cannot help herself unless habits of work and thrift are clung to through the difficult days of recon

struction as well as through the hard days of war. Unless America works and saves so as to lend to Europe, unless Europe works and saves so as to help herself, all plans for the restoration of Europe are in vain,

In America, the position of the banksthough far stronger than that of the banks abroad, as measured by gold reserves-is not easy. The ratio of reserves to liabilities of the Federal Reserve banks is some five points lower than a year ago, with business active and strong demand for credit. The tendency here is to husband credit resources for productive purposes; speculation is discouraged; discount rates have been advancing. It is felt that Europe's credit needs are beyond the capacity of the banks to satisfy. Then, too, it is recognized-abroad as well as here-that bank credits would be an aggravation rather than a remedy. In this Britain and America seem in accord; to continue creating bank credits is to drive prices higher and tie tighter an already knotty problem. Neither America nor Europe can help or be helped except with credits created by savings.

America's troubles are of much the same nature as Europe's. Across the water, prices of commodities have been rising higher and higher, currencies have been expanding, gold reserves shrinking proportionately, and Government expenditures continuing. without the limits of revenues. I do not see how it is

going to be in any way posible to expect sterling and franc exchange on America to improve materially until such time as the governments over there are able to stop borrowing for the purpose of fresh expenditures. Until foreign government revenues in Great Britain and France have been brought up to their expenditures, the exchanges cannot sub

stantially improve. When, then, Europe has made a real beginning in the solution of her own problems she will begin to open the way for America's substantial assistance. This statement is made, not in ignorance of Europe's situation, but in full appreciation of her difficulties and in full confidence in her energy and skill to surmount them.

Future conditions cannot be forecast with any degree of assurance because of the preent abnormal situation and also because of the removal of the guide posts by which financial and business concerns are accustomed to steer their course in normal times. We are like a ship in a fog. The disturbing influences on demand and supply, price fixing, Government regulation, operation, and interference, has brought about a condition of great perplexity. After the armistice it was believed by many that there would be a rapid period of recovery. What actually occurred was a short period of letup, which has been succeeded by one of even greater activity than at any time during the war. This makes the business outlook in many respects more certain and at the same time more doubtful than at any time during the past ten years.

Credit cannot be extended safely by the use of working capital, and this has a bearing upon the problem of extending credit to foreign nations. This situation of extending credit to European nations cannot be met by having our business houses go to the banks and get more credit and thus increase the present inflation of bank credit.

To try to persuade the public to cease speculation is perhaps useless, but unless there is a limit to inflation, increased wages, expansion of loans, and speculative commitments. there is great danger ahead. The fundamental economic laws will assert themselves sooner or later. Reaction of some kind must be looked for. When it will come or how serious it will be no one can know. It is even possible at this stage to avoid any serious crash in the industrial and financial machinery, but it will require vigorous and concerted action. All speculative holdings of staple commodities must be checked. Borrowings on the basis of

present prices must be reduced.

Extension of commercial credit to retailer, wholesaler, or others, to enlarge their business or increase their stock should be kept at the lowest possible point.

Too much credit is just as hard on business as too little. We are now experiencing a situation in which our credit and currency facilities have grown beyond the needs demanded by our legitimate growth, and hence prices have been driven to an abnormal level. The world as a whole, and America to a lesser extent, during the war period, has been living not only upon capital but upon an expectation of future capital resources. Normal fixed capital wealth has been made liquid and available for the exchange of consumable commodities out of all proportion to the available supply of currently consumable goods. The normal balance between the volume of credit and the volume of goods has been lost.

Price, it would seem, is no longer a factor in so far as reducing demand is concerned. Purchasing power has exceeded producing power. The present situation will thus apparently continue as long as the pyramiding of credits continues, which is increasing purchasing power out of all proportion to the increase in productive power.

And yet there is no occasion for undue pessimism. The country and its people are sound. We may be impatient opportunists eager to find a quick solution for involved economic problems, which can only be corrected with patience and long continued effort. Indeed, one of our greatest assets is our idealism. Temporarily we are "standing at bay" over our unsolved economic problems, and yet we have unbounded energy in our people and fabulous wealth in our country.