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      Had the present expanded rearmament effort begun at a
time of weakness and decline in the civilian economy, it
might
have been considered as a fortunate stabilizer. Beginning
at a time of high and rising civilian business, it has
caused scarcities, sellers' markets, higher prices, and
extremely large profits. Moreover, the magnitude of the
rearmament effort should assure good though not necessarily
peak activity, profits and dividends for some time to come.
The prospect is so favorable in its short-term aspects that
it does not need elaboration.
 
      Whether this spurt of great prosperity following four
years
of of high production will persist for many years, or
whether it will become a breeder of further excesses and
subsequent reaction depends more upon Government policies
than it does on natural economic forces. And our Government
policies, in turn, will be substantially influenced by the
policies of the Soviet Government, a factor involving many
uncertainties.
 
       The businessman and investor, therefor, are still
operating
under the necessity outlined in previous memoranda of
determining a course of action
in the light of at least three broad types of possible
developments.
 
Prospects
 
(1) One possibility is World War III. While this risk seems,
     temporarily at least, more remote than it did
nnmediately
     following the outbreak of the Korean war, we believe
that
     it must still be considered a continuing threat and one
     which could materialize at any time. If it should come,
it
     would require diversion of the major part of our
efforts
     and facilities from civilian and peacetime activities
to
     the servicing of large armed forces both here and
abroad.
     It would for the first time carry the risk of
destruction
     of lives and property within the United States.
National
     productive activity would be great but restrictions on
     profits and normal business operations
     would be much more severe than ever before experienced.
     While certain types of securities might not be greatly
     harmed by the outbreak of full-scale war, such an event
     must be viewed as most unfavorable so far as general
     investment operations are concerned. Since the outbreak
of
     war, as well as its ramifications, is unpredictable, it
is
     difficult to provide specific investment protection
against
     it. Our clients' high-grade bonds are their first line
of
    protection against this contingency. Their second is
    careful selection within the remaining common stock
    portfolio to make certain that each portfolio contains a
    reasonable minimum quota of companies most likely
    to benefit from high volume and be least vulnerable to
   increased controls and taxation. All of our clients'
   portfolios have been reviewed from this standpoint since
   the outbreak of the Korean war and, where necessary,
   appropriate action has been taken.
 
(2) A second possibility is that during the next few years
    the world may make real progress toward some form of
    international accommodation leading to relaxation of
    existing world tension. This development probably would 
       not stop our present rearmament program but it could
very     well limit its scope. Although this possibility
would be
    constructive to world sentiment, it could have at least
    temporary deflationary implications of substantial
    proportions as it led