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that involved in this ten billion dollar loan. They may compromise with their own people, or they may even go to the extent of epudiation; but to do anything that would suggest repudiation or unwillingness to pay their external debts would blacklist them for all time in other countries.

If the weight of that ten billion dollar debt could be taken off the foreign exchange market; and if in addition to that some means could be found—and I think the means could be found easily among the banking and commercial interests of this country—for the funding into a five-year loan, let us say, of the floating debt of three or four billion dollars, so that these two debts which hang over the foreign exchange situation could be taken out of the way, I believe that within less than one year we would be back to something approaching normal conditions.

There is no short cut from the financial and economic troubles with which the world is today beset. Bankers, lawyers, doctors, economists and business men have been looking for some cure, some panacea for the financial ills which have surrounded us for the last year. There is nothing, however, but the old-fashioned way out-namely, hard work. In other words, the cure is not to be found in this nostrum nor in that, but only in the gradual and probably painful convalescence of the entire world through hard work, industry, thrift.

A return to normal conditions need not be expected for some time. There are too many reasons why the world cannot get back at once to normal.

Russia, for example, a great wheat-producing and consuming country, is not functioning at present. It has vanished from among us as though it had never been, and its place as a consumer and producer may not be filled for many a day to come. Russia will recover in time. Bolshevism will wear itself out, for it is in principle economically unsound.

Germany, one of the greatest industrial countries in the world, and a large consumer of Brazil's rubber and coffee, of America's cotton and grain, is temporarily out of the market, and it will be some time before she is able to resume her place.

There seems to my mind little doubt that Germany is émerging from the state of financial and economic chaos in which the end of the war found her. The Germans are a resourceful people. The one great mistake they made was in bringing on the late war. They

were conquering the world by peaceful penetration but they threw away their chances when they engaged in the world war. Commercially their country was growing more rapidly than any other. The Germans have a natural genius for developing new fields. Before the war commercial Russia was German Russia. So thoroughly had the German business man penetrated into that country that nine-tenths of Russian industries were directly under German control. The two countries, Germany and Russia, lie side by side, and it is natural in view of all that has gone before that they should trade together again in the future as the United States and Canada, being close neighbors, trade together today.

None of us can say what will happen in the future-prophecy is always a dangerous thing—but it need not surprise any of us if within a few years Germany again gains control of commercial Russia. This, of course, is what France fears; but it is open to question whether the world has not more to fear from a Russia and a Germany in their present condition than it would have to fear from a Germanized Russia, prosperous, industrious and contented.

The German people have to overflow somewhere, and the logical outlet for them is into Russia. Before the war Germany was England's greatest customer and England was Germany's greatest customer. Until trade relations are re-established on something approaching a normal scale between these two great countries, the world's trade will continue to be dislocated.

England, the country whose affairs today are perhaps more nearly normal than the affairs of any other country, barring our own, is suffering acutely from many of the disabilities from which we suffer, including an acute lack of working capital. England is not at present able to discharge her former function as the world's principal banker. No longer can we or other foreign countries repair to the London market for cheap loans, for the British government itself is borrowing on a six per cent basis, and the English banks are paying five to five and one-half per cent on foreign deposits.

The prosperity of England, which is an industrial country, depends upon her ability to produce and manufacture more cheaply than can the countries to which she sells. England's prosperity

therefore hinges almost completely upon her ability to keep down the cost of production.

Many countries throughout the world are facing changes and far-reaching readjustments in their economic and financial life, and my opinion is that depression and perhaps hard times, not only in Europe but in this country, are not very far away. Deflation is under way and deflation is always painful.

Customs tariffs will no doubt be revised both here and abroad. At any rate, they will be up for serious consideration and discussion, and the problem before the American people will be to decide whether we should permit foreign goods to come in as they have been coming in, and in that way enable the impoverished countries of Europe in some measure to offset their obligations to us, or we should go further and by reducing our tariffs on certain imported articles thereby stimulate the flow of European merchandise to this country.

The war, fortunately, is over-although some of our rulers at Washington do not as yet seem to be aware of it. Deflation and contraction have set in. The dollar will buy a bigger loaf of bread and get a better day's work done in the future than it has in the past. The time has come when the fiddler must be paid and there is only one way in which we can pay. That is by practising strict economy, working hard and saving our money.

Published monthly for the American Institute of Accountants by
The Ronald Press COMPANY, 20 Vesey Street, New York, N. Y.
Thomas Conyngton, , president; L. G. Henderson, secretary;

Hugh R. Conyngton, treasurer

A P. RICHARDSON

Editor

EDITORIAL

Publication Notice

Arrangements are being made at the suggestion of the Ronald Press Company for the termination of the contract between the American Institute of Accountants and that company relative to the publication of THE JOURNAL OF ACCOUNTANCY. For nine years past the business affairs of this magazine have been managed by the Ronald Press Company, although the magazine has been the property of the American Association of Public Accountants and later the American Institute of Accountants during the entire life of the contract.

The American Institute of Accountants expects, beginning with the April, 1921, issue, to undertake the production of the magazine, with the exception of the mechanical processes, and attention is drawn to the matter now in order that readers may have due notice of the proposed change.

All correspondence relative to advertising, subscriptions, etc., subsequent to the issue of March, 1921, should be addressed to 135 Cedar street, New York.

The ground floor of the institute's building at that address will be used for publication purposes and is admirably suited therefor.

Classification of Profits on Investments The question involved in the case of Brewster vs. Walsh in which a decision was recently handed down by the Connecticut district court is one of far-reaching importance and great inter

est to accountants. That question is whether profits realized on investments are capital or income.

We shall not attempt to deal with the legal aspect of the question, but in the business and accounting world such profits would, we think, ordinarily be regarded as income. The average man also doubtless thinks that he can properly spend such profits without laying himself open to the charge of dissipating his capital: indeed he is likely to regard them as a peculiarly appropriate basis for expenditures on luxuries as being what is sometimes called "velvet."

There is a group of economists whose views are in accord with those of the district court that such profits are not income. This group includes those economists who solve the problem of living within one's income for everyone by holding that whatever is spent is ipso facto income. We are very far from saying that this concept is useless or uninteresting, but we feel that it is so far at variance with the commercial concept of income that the economists in question would be well advised to adopt for it some name other than income. Fortunately there is a larger body of economists whose concept of income does include such profits as were involved in this case and is more closely in harmony with the accounting and commercial interpretation of the phrase.

We should be sorry to see the meaning of the word "income" restricted by the courts either on legalistic grounds or on the basis of an interesting but unpractical economic concept in such a way as to limit the ability of congress to tax anything that is ordinarily regarded by the average citizen as being income. If a taxpayer by choosing investments, the fruits of which are to be expected in the form of the return of a larger sum at the end of a period of years rather than in annual income, can thereby escape the income tax altogether in respect of such investments, the opportunities to the rich taxpayer now offered by tax-exempt securities will be immensely enlarged and dissatisfaction with the tax will correspondingly increase.

In our view it is desirable that the broadest possible interpretation should be given to the term income, leaving the determination of the forms of income to be taxed to be considered by the legislative bodies.

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