THE question which is forcing itself home upon every civilized people to-day is, where openings are to be found in the future for the productive investment of their saved capital. For a score of years there has been a tendency toward higher prices for first-class securities, and a diminishing return upon investments. Only within the past year have higher discount rates appeared in Germany and other Continental countries, raising the hope that new fields for investment were absorbing a part of surplus capital. The vital question was discussed with much learning at the January meeting of the Society of Political Economy at Paris, whether this relief was permanent, or was only an eddy in the downward course of the rate of interest. It was pointed out by Professor Clément Juglar that, while many European securities were selling at prices lower than when they were issued a few years ago, indicating a rise in their interest - paying value, the return upon Australian and American securities had permanently fallen from six to four per cent.
The discussion of the small returns upon saved capital and the absolute necessity for new opportunities for its investment marks an important turning point in economic history. It is not the first time that the supply of capital has outrun the limits of effective demand in sound investments, and has by its excess forced down the interest rate to a point which has caused heavy losses and alarm among the owners of capital. The economic history of the world has afforded several periods of congestion of this sort, when it seemed that savings must be relaxed or new outlets for them found, unless the point of saturation was to be reached for saved capital, and state socialism was to supersede the system of private saving. The congestion has on previous occasions reduced interest rates as low as those of the last few years, but never before has the accumulation of capital been so enormous, nor have so many millions of individuals — those of modest means as well as the typical “capitalist ” of socialistic dreams— been confronted by the condition that their savings must be greatly multiplied in order to afford the old return, and that even such savings as they had could with difficulty find safe lodgment in productive enterprises.
The essential question of the future, regarding the great accumulations of saved capital, is whether they shall continue to depress interest rates to the vanishing point, and at the same time create such a competition for safe investments that a large proportion of the world’s savings will be stolen by company promoters and swallowed up in unproductive enterprises. The mere reduction of the returns upon saved capital offers in itself a serious social problem, independent of the danger of unsound investments and the loss of savings. If the savings of a lifetime have heretofore been just sufficient, with interest at six per cent, to afford a comfortable maintenance for old age, they will prove pitifully insufficient with interest reduced to three per cent, and inadequate to avert destitution if interest should fall to one or one and a half per cent, as has seemed among the possibilities of the future. The necessary saving in capital would be four times greater, in order to obtain a comfortable maintenance, with interest at one and a half per cent than with interest at six percent. While the increased earning power of civilized men by means of machinery would bridge a part of this chasm, it would not solve the problem. If it should become practically impossible for persons of small and moderate earnings to save enough during their years of active life to provide for their years of decline, the civilized world would confront the problem whether saving for investment, among the laboring masses at least, should not be abandoned, and the support of old age derived entirely from current taxation. Such a moderate step as this in state socialism — already well under way in Germany, and seriously discussed in Great Britain — might avert for many generations the congestion and consolidation of capital without shaking the pillars of the existing social system.
It is proper to inquire, however, whether there is not a prospect that new openings will be found for saved capital in the future without the reconstruction of society. An answer in the affirmative can probably be given as to the immediate future, and perhaps as far into the future as human foresight can penetrate. It is necessary that these new openings should be important enough to absorb considerable amounts of saved capital beyond the demands for the mere maintenance of existing means of production, and the incidental improvements in them which are required from time to time. It is not probable that the new openings will be sufficient to raise permanently the rate of interest in the near future ; but they may stay its downward course. M. Paul Leroy - Beaulieu, in discussing this subject in L’Economiste Francais of January 28, 1899, calls attention to the fact that there were interruptions in the downward course of interest when steam came to be generally employed as a motive power, between 1850 and 1865, and again after the great destruction of capital in the FrancoPrussian war. But, he declares, “ after each of these interruptions, the rate of interest again tended to decline to a level lower than before ; so that, in taking as the point of departure the beginning of the last quarter century or that of the last half century, — the year 1874 or the year 1850, — it may be noted that the rate of interest has considerably fallen, not in a straight line, it is true, but in a broken line, and that never in our history was it as low as in 1897.”
A reason for believing that openings for saved capital may be found in the immediate future without the reconstruction of society is the fact that such periods of congestion have occurred before, but have been terminated by new demands for capital, caused by discoveries in the field of invention or by territorial acquisition. The world may continue for many centuries to go through the process of capitalization, consolidation, and the shifting to new peoples of commercial supremacy without the abandonment of the institution of private property, which seems so essential to individual ambition and national achievement. The fall in the earning power of capital permits the substitution of mechanical devices for human labor whenever the interest upon the capital required for a new improvement falls below the cost of the labor which it replaces. Thus fields are opened for capital which remained closed while labor was the cheaper instrument, and the labor released is free to seek higher employments. Machinery, which is the fruit of saved capital, thus invades new fields not only with the reduction in the price of its manufacture, but with the fall in the rental cost of the capital invested in it.
The accumulation of saved capital is now so much more rapid than it was even a quarter of a century ago, and the world is so much more completely equipped with the machinery of production, that something more than a new invention or an important war will be required permanently to raise the rate of interest. There are indications, however, of several possible openings which may absorb surplus savings and afford a moderate return for several decades to come. One of these is the universal application of electricity as a motive power; a second is the extension of railways over the undeveloped countries of Africa and Asia; and a third is the equipment of these countries with the machinery of production. These openings for capital promise to absorb many millions within the next ten or twenty years. Prior to the extension of European influence in Africa and recent development in China, society was reaching the state of economic congestion portrayed by Mr. Brooks Adams in his interesting work The Law of Civilization and Decay, and his more recent article in the Fortnightly Review for February last, on The New Struggle for Life among the Nations. The congestion has not, however, as he seems to believe, very much to do with the supply of gold and silver, the mere tools of exchange ; it has to do with the subject of exchange, — the great mass of capital seeking employment, and unable to find it at home.
A congestion of capital of serious proportions was threatened during the third and fourth decades of the century, as the result of the favorable conditions of civil order and the growing use of laborsaving machinery in the textile industries which followed the Napoleonic wars. There came suddenly, however, several great outlets for saved capital. The most conspicuous was the building of railways, which demanded hundreds of millions, first in England and France, then in America, and finally in the countries of Eastern Europe, South America, Australia, and India. Interest rates rose under the pressure of active demand for capital, and the outlook was again rosy for the profitable use of savings, whether of the laborer or the merchant prince. The organization of the credit system by joint-stock banks, and later by savings banks, afforded an opportunity for bringing into productive use the small and scattered savings of the many. This organization and transfusion of small credits into an efficient aggregate by means of banking came as the natural result of great demands for capital, of fortunes made in joint-stock companies, and of the increased openings for the employment of savings in the hands of the organizers of industry and commerce.
Two immensely powerful influences in accelerating the growth of available capital came into operation by the middle of the century, — the full organization of credit and the development of machine production. On the one hand, machine production so increased the power of the individual arm that if savings were possible under the old conditions of hand labor, the capacity for them became many times as great under the new conditions of machine production. But these savings in the early years had lain idle in old stockings and bureau drawers. They were largely made in gold or silver, withdrawing from active use without interest a part of the capital produced by arduous labor in the mines. But the banks of England and France, which had stood almost alone down to 1850, were about that time imitated all over Europe. Belgium was dowered with a national bank ; banks sprung up in Spain, in Italy, in the little states of Switzerland, and all over Germany ; while in England and France the great monopoly banks of issue witnessed the growth of potent rivals in the joint-stock banks and the credit societies. Savings which, under earlier conditions, had lain idle, until perhaps an amount equal to their entire value was consumed in the interest lost, became, under the new system, immediately available for increasing the machinery of production and exchange at home, and swelling the fund to be loaned to new countries for the creation of railways, steamships, cotton mills, and public works. To put into mathematics the greater potency of a given unit of saved capital under the new system, and then to multiply this by the constantly accelerating savings, is hardly within the limits of human capacity ; but it is obvious that the slow accumulations which had gone on in early centuries were now multiplied almost in a geometrical ratio as the increased savings of one year went to develop the capacity for saving by the growth of machine plants and means of communication in the years which followed.
It is not surprising that economic crises of the gravest character have grown out of the adjustments to the new conditions. Consumption has far from kept pace with increased production. The average man of small means, content to live from hand to mouth a century ago, has become a capitalist, a contributor toward the construction of railways in South America, Asia, and Africa, and a bidder on the world’s exchanges for national and industrial securities against the sons of the great Jewish bankers of the last century. Capital can be saved only in gold, in consumable goods, or in those permanent contributions to the machinery of production — buildings, tools, and improvements — which are happily described by French economists as installations. The saving of capital in gold has practically ceased. The saving of consumable goods is practiced only to the extent that they are needed for immediate wants and in current processes of production. The saving of capital in permanent works has found an expanding outlet as new methods of machine production have been devised, increasing wealth and demand have developed new wants, and as the state has availed herself of the growing wealth of the community to create highways, bridges, railways, harbors, and public buildings for the benefit of all. But these outlets have threatened for a moment to be choked. The rate of interest, in orderly societies, is the measure of the relation of supply of capital to the demand for it, and this rate has indicated in recent years a constantly increasing supply in proportion to legitimate demand.
The saving of capital in permanent form has been greatly promoted by the issue of negotiable securities. These instruments have given a transferable character, approximating that of money, to property in almost all productive enterprises, because they have, like money, established a common denominator in which such values might be expressed and transferred. So long as new productive enterprises can be created means of stock companies, the capital of the individual flows readily from the reservoirs of his own saving into the great channels of available capital. The difficulty which is disclosed at a certain stage of social development is an excess of saved capital over the opportunities for safe investment. There is little doubt that the owners of capital are intelligent enough, upon the average, to invest their savings chiefly in productive enterprises rather than unproductive ones, while the productive enterprises constitute the chief means of investment. The prevalence of abuses in company promotion, gigantic losses in unproductive enterprises, and the persistent flotation of the stocks and bonds of projects which afford no real promise of adequate returns are not the results of a sudden accession of rascality in human nature, but merely of the great excess of saved capital seeking investment over safe and profitable outlets.
An interesting proof that the supply of capital has become so excessive that it is simply doubling upon itself without profit to its owners is afforded by the conversions of government, railway, and industrial securities in Europe during the last few years. M. Georges de Laveleye, who presents annually in the Moniteur des Interêts Matériels of Brussels a statement of all the issues of negotiable securities for the year, expressed the opinion in 1892 that Europe was capable of absorbing from four to five thousand millions of francs in new securities upon the average each year. The average issues from 1886 to 1890 were 8,070,000,000 francs, and M. de Laveleye came to the conclusion that this was an excessive movement, and would involve losses and liquidations. The issues from 1891 to 1895, inclusive, fell within his limit of the digestive capacity of European capital, but 1896 showed net issues, exclusive of conversions, amounting to 9,129,054,150 francs ; 1897 showed issues of 8,911,870,530 francs, and 1898 issues of 8,902,776,660. It is the conversions which throw the most searching light upon the problem of excessive savings. These conversions amounted in 1894 to 12,641,200,000 francs ($2,450,000,000), or more than double the issues for new enterprises, and they amounted in 1896 to 7,593,013,475 francs ($1,465,000.000). The remarkable fact connected with the conversions of 1894 was that the saving in interest to the issuers of the securities was 119,433,000 francs ($23,000,000) a year, and this saving was sufficient to pay the interest on all the new issues upon a two and a half per cent basis. In other words, the savings of capital in Europe and other civilized countries in 1894, applied to the purchase of new securities to the amount of $1,000,000,000 (5,173,448,035 francs), were absorbed without increasing the earning power of the capital invested. The situation in 1896 was not quite so barren for investors, but the conversions effected afforded a saving to the issuers of securities to the amount of 40,000,000 francs ($7,740,000) a year. The conversions of five per cent obligations to four per cent in 1894 were 3,145,000,000 francs ($600,000,000), and the conversions of four and a half per cent obligations upon a three per cent basis were 7,000,000.000 francs ($1,350,000,000). Most of the obligations of solvent states and corporations have been reduced to four per cent or less, and their actual return to the investor at market prices, in spite of some recent fluctuations, has tended toward two and a half per cent.
Strong proof that the United States has reached the state of excessive capitalization, unable to find productive investment at home in new enterprises, is afforded by the recent activity in floating the securities of industrial trusts and by the piling up of unused funds in the banks. The common and preferred stock of trust combinations organized and proposed during 1898 was given by the United States Investor of February 11, 1899, as $1.725,099,200, while additions to the list in the first two months of 1899 of $844,800,000 carried the total for fourteen months to $2,569,899,200. These great combinations and issues of securities are symptomatic of two things, — the economic tendency to arrest overproduction and ruinous competition by limiting production, and the eagerness of promoters to take advantage of the masses of idle capital seeking investment to transfer a part of it to their own pockets.
Let us turn to the three suggested openings for the great mass of saved capital seeking investment, and consider how immense an outlet they afford, and how important it is that they should not be closed to the capital and enterprise of the great producing countries. The three outlets named were the application of electricity to motive power, the building of railways in undeveloped countries, and the further equipment of such countries with the machinery of production and intercommunications It is obvious that capital should be given free entrance into all these fields, in order that it may not be shut up to feeding upon itself, without increased earning power, as is coming to be the case in the great capitalistic countries. Protective tariffs have not heretofore been raised against capital, and the countries most in need of development are not likely to bar foreign capital of their own motion from their limits. But capital as well as trade “ follows the flag” to a large extent, because under the flag of its own government, or that of some civilized and responsible state, it finds the guarantee of security and respect for contracts which make possible safe investments and uninterrupted industrial and commercial growth.
The application of electricity to motive power is likely to absorb a very large amount of capital within the next one or two decades, without involving considerations of national policy. The railways of the world, with a capital estimated by Mr. Mullhall in 1894 at £6,745,000,000, will be called upon to replace that portion of their capital invested in locomotives by new machinery at a cost of several thousand millions of dollars. The creation of electric streetcar lines is already extending over Europe, and M. Fournier de Flaix declares, in the Revue des Banques for November last, that the Paris Exposition of 1900 will draw its chief attraction from the various modes of applying electricity to locomotion and production. Statistics at the beginning of 1898 showed 2289 kilometers (1420 miles) of electric roads in Europe, with 4514 motors. The General Electric Company of Germany now employs 12,000 persons, and during 1898 increased its trackage 329 kilometers, and its cars from 1343 to 1861. The capital for these enterprises has already been obtained without any marked effect upon the existing supply seeking investment; but this is only the beginning, and while the change from steam to electric power will come gradually, and will be met to some extent out of railway and factory earnings, the demand for capital for this purpose may be more potent than any single mechanical change within the present generation.
The building of railways in undeveloped countries seems likely to attain within ,a short time an extension and importance almost equal to the greatoutbreak of railway-building activity between 1850 and 1870. That phenomenon promoted the creation of banks and finance companies, and absorbed capital so rapidly as to raise the rate of interest materially above that which prevailed when Great Britain was loaning her surplus capital, early in the century, to the new countries of South America. The Trans-Siberian railway, already well advanced toward completion by the Russian government, and projected to stretch over 4200 miles from the Ural Mountains to the Pacific Ocean, is the pioneer among the intercontinental lines. The government had already expended upon it, up to the close of 1897, $188,000,000. The construction of the Trans-Saharian across •• the Great Desert,”binding the French province of Algiers to the French colonies in Central Africa, is one of the dreams of French economists and statesmen which is upon the point of being put into practical form. Englishmen in Egypt and South Africa are urging the creation of a line “ from Cairo to the Cape,” which will almost equal the Trans-Siberian in its length, and will surpass it in the savage character of the country through which it will pass. Concessions have been granted by the Turkish government for a line from Tripoli on the Mediterranean to the Persian Gulf, with branches extending into Persia, which will reduce by five days the time between Brindisi in southern Italy and Bombay in the heart of India. Extensions of this line might afford a powerful counterpoise to the Trans-Siberian, and increase the facilities of England for protecting her Indian empire against Russian aggression on the north.
China is on the point of being gridironed with the means of railway transportation. It is the result of inevitable economic tendencies that Great Britain, France, Germany, and Russia have been contending for the privilege of advancing the capital for these great works, and have almost gone to war for the political preponderance and commercial influence which this privilege involves. A recent publication of the Prussian government sets forth that Asia, the greatest of the continents and the most largely peopled, has but 26,890 miles of railway, — about one sixteenth of the mileage of the world. This condition is rapidly changing. A list of operating and projected lines in China, in the Revue des Banques for November, 1898, names six lines under English control, one Anglo-German, one Anglo-Italian, two German, four French, one FrancoBelgian, and four Russian lines, including the sections of the Trans-Siberian. The construction of these lines will call for many millions of British, French, German, and American savings, and will help to postpone the further fall in the rate of interest. It is very doubtful, however, whether all these lines will at once prove remunerative, and whether investors will not suffer again some of the losses which resulted from British investments in South America in the twenties, and from later ventures in American railways, Australian banks and land, and Western farm mortgages.
Those investors are likely to be safest who have a government guarantee, by means of a public loan, for the interest on the investment, whether the particular enterprise for which the loan is placed proves successful or not. An important feature of the present policy for finding safe investments for national capital is the control of the field of investment by responsible governments. Many of the great loans in new countries, early in the century, and even down to recent times, like those in the Argentine Republic and Haiti, have been made chiefly to revolutionary governments, where unwise financiering, official corruption, and the adoption of an irredeemable paper currency have wrecked business and frightened away foreign capital. A new era is opening for such investments, under the protection of responsible powers, whether a direct guarantee of the interest is given by the powers themselves, or reliance is placed upon the governing capacity of the men of the Anglo-Saxon or other European races, who exercise indirectly the control over the finances of the protected country. Already the powers have intervened in Egypt and Greece for the creation of boards of control, which see to it that the taxes are honestly collected, that the interest on the public debt is paid, and that the funds obtained are not diverted from their proper uses to the pockets of corrupt officials.
Egypt was found by the powers a financial wreck in 1881, but under the efficient direction of Lord Cromer, British adviser of the Khedive, Egyptian securities have become among-the safest which are quoted on European bourses. At the close of the war with Turkey Greece found herself practically bankrupt, with her securities depreciated, and her forced paper currency at a heavier discount than before the war. The intervention of Great Britain, France, and Russia, with the appointment of a board of control to supervise the proper collection of the taxes and the payment of interest on the debt, promptly put her upon a solvent basis. A loan of 155,000,000 francs ($30,000,000) was Issued under the guarantee of the three powers, at the rate of two and a half per cent, upon which a slight premium was charged. Notwithstanding this low return upon the capital invested, the amount offered at Paris — 41.500,000 francs ($8,000,000) — was subscribed twenty-three times over by 1387 subscribers. The deposits made on behalf of subscribers at the Bank of France were 196,579,000 francs, and the amounts subscribed for were 987,809.475 francs ($190,000,000). The British government has taken a somewhat different course in regard to its own dependencies by a bill, now pending, to give the guarantee of the home government to the colonial loans of the crown colonies. All these plans have this feature in common, — that they have behind them the moral support of a great civilized state, capable of protecting the interests of its citizens by force of arms, and ready to do so if occasion requires. The government of adventurers and financial freebooters is coming to an end in Europe, Africa, and Asia, and it may yet be the mission of the United States to bring it to an end in portions of Latin America.
Only by the firm hand of the responsible governing races, as Mr. Benjamin Kidd has so forcibly pointed out in his thoughtful works on social development, can the assurance of uninterrupted progress be conveyed to the tropical and undeveloped countries. This duty, imposed upon the superior races by the evolution of events, if not by the moral order, affords the opportunity for the absorption of the surplus of savings not applied to current consumption which is going on under the existing social system. Those who do not welcome the responsibilities and the opportunity which this situation creates are fostering the discontent within the old civilized countries which breeds social and political revolution. The excess of production of finished goods over effective demand, the creation of trust combinations to check production, the resulting reductions of wages and of opportunity for the employment of labor,—all these are the consequences of shutting up capital to feed upon itself by closing the fields for new investments. The present production of finished goods far outruns the effective demand, and the investment of saved capital in new manufacturing plants in the producing countries simply divides or destroys the small profits heretofore earned by the existing establishments. The owners of these plants are in many cases widows, orphans, and those of small means who are trying to save for a rainy day. They suffer more by the failure of manufacturing and railway dividends than the princes of industry and finance. The latter are usually able to take care of themselves, by such projects as the present multiplication of trust syndicates, whose securities can be unloaded upon the small investor before their over-capitalization and barrenness of productive power are ascertained. Trust combinations for limiting production and reducing the number and wages of the employed are the only safeguard against destructive competition and the ruin of the less perfected manufacturing plants, so long as outlets cannot be found for saved capital in countries whose producing plant and means of communication are not yet substantially complete. It is useless to say that the capital might be employed productively at home under existing conditions. It could be thus employed if saving were checked, and the money now directed toward investments were applied to the purchase of consumable goods. But such a change in the conduct of the governing races means a reversal of the lessons taught by five centimes of civilization ; it means the serious modification of the present social order, and the adoption of old-age pensions and other devices for applying the results of current production to consumption instead of saving for the future.
The opponents of the intervention of the civilized countries in the undeveloped countries perpetually discuss the position of the supporters of intervention, as if the entire demand on their part were for new markets for finished goods, and point out with truth that the equipment of the new countries with the machinery of production tends to narrow the market for the finished products of the old countries. But this is setting up and knocking down a man of straw. The benefits to the old countries in the control of the undeveloped countries do not lie chiefly in the outlet for additional goods. It is precisely to escape the necessity for the reduplication of the plants which produce the goods, by finding a field elsewhere for the creation of new plants, including not only competing machinery, but the highways of commerce, — railways, roads, canals, and improved harbors, — that the savings of the capitalistic countries are seeking an outlet beyond their own limits. It is not the assurance that more goods can be sold which is needed by the manufacturer so much as the assurance that perpetually increasing savings shall not bid against his present production in his own market, by the creation of rival plants, equipped with every improvement of modern machinery. incidentally and for a time, political dependencies and “ spheres of influence ” afford an enlarged market for finished goods ; but the essential benefit of such openings is the opportunity which they present, under the guarantee of order and the sanctity of contracts, for the productive use of the surplus savings of the masses of the people, — laboring men, small merchants, and professional men, as well as great capitalists.
The question may naturally be asked — and has been asked by those who can make no other answer to this argument — whether this requirement of new countries for the employment of saved capital does not bring the human race to a jumping-off place as soon as Africa and Asia are capitalized by the extraordinarily rapid processes which have marked the capitalization of the western part of the United States. Germany, and Russia. This question looks too far into the future to be capable of a precise answer. It does not necessarily follow, however, from the congestion of capital which appears to exist to-day, that conditions may not arise within another generation which will work a revolution in the conditions of production. It may be suggested, at the risk of penetrating into the domain of the fanciful, that when the food-supplying area of the world becomes circumscribed in proportion to population, — as Mr. John Hyde pointed out, in the North American Review for February, 1898, might be the case in the United States in less than half a century, — great demands for capital may arise for the production of food by chemical processes. Already distinguished chemists are dreaming of an era when chemistry shall banish agriculture from the field and farm, and when the interior heat of the earth and the warmth of the sun shall be utilized to obtain the power now derived from the rapidly shrinking coal supply.
The present generation cannot grapple with those problems, and is not required to. Thus far in the history of the world, mechanical inventions, chemical discoveries, and the development of the mechanism of money and credit have barely kept pace with the imperative needs of human society. Inventions and discoveries which are not yet needed fall upon an unheeding world. The inventors and discoverers go to neglected graves, and wait for later generations to do them justice. The present generation can face only the problems at hand and the opportunities at hand for the maintenance of its own social system. These opportunities embrace the equipment of the whole world with a producing plant, and with means of communication and exchange, which will raise the undeveloped portions as far as may be to the level of comfort, producing power and civilization of the more advanced portions. This is the mission of the great civilized states to-day; and those states which timidly withdraw from competition with powerful rivals, either from defects in their political system or lack of commercial energy, will sentence themselves to the fate of the decadent countries, like Persia, Turkey, and Spain, — once masters of the world, but now the victims of the greater energy and foresight of the northern races.
Charles A. Conant.