THE OUTLOOK FOR CAPITAL

One of the questions that are now most keenly agitating the minds ofthe investing public and of financiers who cater for its wants, andalso of employers and organisers of industry who are trying to seetheir way into after-the-war conditions, is that of the supply ofcapital. On this subject there are two contradictory theories: oneconsiders that owing to the destruction of capital during the war,capital will be for many years at a famine price; the other, thatowing to the exhaustion of all the warring powers, that is, of thegreater part of the civilised world, the spirit of enterprise will bealmost dead, the demand for capital will be extremely limited, andconsequently the supply of it on offer will go begging to find a user.It seems likely that, as usual, the truth lies somewhere between thesetwo extreme views; but we shall best answer the question if we firstget a clear idea of what we mean by capital.

On the subject of the definition of capital, economists differ withall the consistency that they only show in differing. One of theearliest descriptions of capital was given by Turgot, who thought thatcapital meant "valeurs accumulees." In this wide sense the word coversall goods which have value, that is, can be exchanged into othergoods. From this point of view, the schoolboy who invests sixpence inmarbles is a capitalist, because he has bought an asset which is notimmediately consumed, but can, later on, if his fancy urges him, beexchanged into white mice or any other object of his desire. On theother hand, the schoolfellow who at the same time spends sixpence oncherries and eats them has put his money into immediate consumption,his asset is digested, and he has no capital in any sense of the word.

Later, the definition was narrowed by John Stuart Mill, for instance,into the sense of wealth set aside to increase production. From thispoint of view capital practically means the equipment and tools ofindustry in the widest sense of the word, including agriculture andtransport. Lately economists have shown a tendency to go back to thewider application of the word, and an American economist, Dr Anderson,who has just published a book on the Value of Money, goes so fartherein as to state that a "dollar is capital." The language of theCity generally uses the word in the narrow sense adopted by Mill, andthere is very much to be said for this view of the real meaning ofcapital. Marbles to play with, houses to live in, motor-cars to gojoy-riding in--all these are assets which can be disposed of, and so,in a sense, may be called capital. But the businesslike meaning of theword is the tools and equipment of industry, because it is only bytheir possession that the wealth of mankind not only increases man'spresent enjoyment, but enhances his future output of the goodsnecessary for his existence.

If we take the word in this sense it becomes at once apparent that thetheory is exaggerated which maintains that war is destroying capital,so that capital will long be at a famine price. The extent to whichwar is actually destroying the tools and equipment of industry isquite limited. On the actual battlefield that sort of destructionproceeds apace when factories are shelled into shapeless lumps ofbricks, and when the surface of the earth, that man's skill haddeveloped into great productive fertility, is torn into craters andcovered with rubbish. There is also rapid destruction of a veryimportant part of the equipment of industry owing to the submarine campaign, which is sinking so many fine ships that were meant tocarry goods from one country to another. But, apart from this actualdestruction on the battlefield and on the sea, the tools and equipmentof industry over the greater part of the earth remain untouched. It istrue that, owing to the preoccupations of the war, not so much workas usual is being put into the upkeep and repair of our railways,factories and other industrial tools. But at the same time an enormous amount of new machinery is being created for the manufacture ofmunitions and other stuff needed for the war, and a large part of thisnew machinery ought to be available as industrial capital when the waris over. Those people who talk so glibly of the enormous destructionof capital by the war are surely making a mistake common to mindswhich look at economic questions through a financial telescope,mistaking money for capital. They see that an enormous amount of moneyis being spent on the war, and they jump to the conclusion that thismoney, if not spent upon the war, would have been put into capitalinvestments and so have increased the tools and equipment of industry.In fact, a great deal of the money now spent upon the war wouldhave been spent, if there had been no war, not upon increasing theequipment of production, but upon purely frivolous and extravagantconsumption. There is no need to dwell on the effect of war inreducing many kinds of expenditure on which hundreds of millionsmust have gone in peace time, and this restriction of extravagantconsumption has to be deducted before we even admit, not that allmoney spent upon the war is destroyed capital, but even that all themoney spent upon the war is destroying what might otherwise havebecome capital.

If, then, it is true that the war is not making a very terriblysubstantial inroad upon the mass of existing capital, how is it goingto affect the supply of capital in the future? To answer this questionwe have to see how capital is created. The answer to this question isvery simple, very obvious, and very dull. Capital can only be createdby saving.

Saving is such an entirely unpopular virtue that it seems at firstsight a disastrous conclusion to arrive at, that if we want toincrease the supply of capital it can only be done by stimulatingthis unattractive habit; and there is a further question to beasked--whether it will be necessary or desirable to have a greatincrease in the supply of capital. As was pointed out above, onetheory of after-war needs maintains that the world will be soexhausted by this great struggle that it will have no enterprise andno energy left, and that capital will go begging. If this be so, weneed not trouble to inquire as to whether the supply of capital can bemade plentiful. But I venture to think that this view is very probablywrong, though it is very dangerous to prophesy concerning the purelypsychological question of the state of mind in which the citizens ofthe warring Powers will end the war. It is, however, at leastprobable that the prices which are then likely to rule will stimulateenterprise all over the world; that every one will see that there isa great work to be done in getting industry back on to a peacebasis, and a great profit to be made by those who do this work mostsuccessfully, and that the demand for capital is likely, for someyears at least, to clamour for all that can be produced.

To go back, then, to the statement that only by saving can capitalbe created. The man who saves, instead of spending money on his ownenjoyment, hands it over to some company or Government to be spent onsome industrial or national purpose. When it is put into industryit builds a factory or a ship or a railway or a canal, or clears awilderness for cultivation, or does one of the innumerable otherthings which are necessary for the production and transport of thegoods which mankind enjoys. And it is only by this process of handingover buying power, instead of using it for our own amusement andenjoyment, to others who will use it for furthering production thatthe tools and equipment of industry can be multiplied.

Something can be done by banks and financiers in supplying credit inthe form of advances and acceptances; but this method is only likeoiling the wheel of industry, the real driving power of which has tobe saved capital. Creating credits simply means that a certain amountof buying power is manufactured and handed over to those to whom thecredit is given. It does not set free any labour or goods to beput into industry. That is only done by the man who abstains fromconsumption and saves money by restraining his desire to spend it onhimself, and puts it at the disposal of industry. The man who savesmoney, who has always hitherto been rather despised by his companionsand resented by a certain class of social reformer and many otheruneducated people as a capitalist bloodsucker, is thus, in fact, theperson who leaves the world richer than he found it, having put hismoney, the product of his own work, into increasing the world'soutput, instead of spending it on such forms of enjoyment as heavylunches and cinema shows.

The man who does this beneficent work, increasing mankind's output ofgoods, and providing employment as long as the factory or railway thathe helps to build is running, is induced to do so, as a rule, by thepurely selfish motive of providing for his old age or for those whocome after him by earning the rate of interest that is paid to him forhis capital. What is this rate of interest going to be, and how mucheffect does it have upon the creation of capital?

Some people argue that a low rate of interest makes people save morebecause it is necessary for them to save more in order to acquireindependence. Others maintain that a high rate of interest inducespeople to save because they can see the direct advantage of doing so.Both these arguments are probably true in some cases. But, as a rule,people who have the instinct of saving will save, within certainlimits, whatever the rate of interest may be. When the rate ofinterest is low they will certainly not reduce their saving becauseeach hundred pounds that they put away brings them in comparativelylittle, and when the rate of interest is high the attraction of thehigh rate will also deter them from diminishing the amount that theyput aside. Moreover, we have to consider, not only the money paymentinvolved by the rate of interest, but its buying power in goods. In1896 trustee securities could only be bought to return a yield of2-1/2 per cent. for the buyer; now the investor can get 5-1/4 percent. and more from the British Government. And yet the power thatthis 5-1/4 gives him over the goods and services that he wants for hiscomfort Is probably not greater, and very likely rather less, than thepower which he got in 1896 from his 2-1/2 per cent. One of the fewfacts which seem to stand out clearly from a study of the movement ofthe prices of securities, and consequently of the rate of interest tobe derived from them, is that the rate of interest is high when theprice of commodities is high, and vice versa. So that the answer tothe question: What is the rate of interest likely to be after the war?may be given, in Quaker fashion, by another question: What will happento the index number of the prices of commodities? It seems fairlyprobable that both these questions may be answered, very tentativelyand diffidently, by the expression of a hope that after a time, whenpeace conditions have settled down and all the merchant ships of theworld have been restored to their peaceful occupations, the generallevel of the price of commodities will be materially lower than it isnow, though probably considerably higher than it was before the war.If this be so, then it is fairly safe to expect that the rate ofinterest, as expressed in money, will follow the movement of prices ofgoods. But it must be remembered that by rate of interest I mean thepure rate of interest, that is to say, the rate earned on perpetualfixed-charge securities of the highest class. It may be that, owing tothe very large amount of gilt-edged securities created in the courseof the war by the various warring Governments, the rate of profit tobe earned by the man who takes the risks of industry from dividendson ordinary shares and stocks will have to be made relatively moreattractive than it was before the war.

If, then, capital can only be created by saving, how far will the warhave helped towards its more plentiful production?

Here, again, we are faced with a psychological question which can onlybe answered by those who are bold enough to forecast the state of mindin which the majority of people will find themselves when the war isover. If there is a great reaction, and everybody's one desire is tothrow this nightmare of war off their chests and go back to the timesas they were before it happened, then all that the war has taught usabout the production of capital will have been wasted. But I ratherdoubt whether this will be so. Saving merely means the diversion ofa certain proportion of the output of industry into the furtherequipment of industry. The war has taught us lessons which, if weuse them aright, will help us to increase enormously the output ofindustry. So that if these lessons are used aright, and industry doesnot waste its time in squabbles over the sharing of its product, itsoutput may be so great that a comparatively smaller amount of savingin relation to the total output may produce a larger amount of capitalthan was made available in days before the war. There is a furtherpoint, that the war has taught a great many people who never saved atall to save a good deal. It was estimated before the war that we inthis country were saving about four hundred millions a year. Thisfigure was necessarily a guess, and must be taken for what it isworth. There can be no doubt that the amount of real saving now inprogress, voluntary, owing to the patriotic effort of people who thinkthey ought to restrict their own consumption so that the needs ofour fighters may be provided, and enforced through the action of theGovernment in taking taxes and inflating the currency, is very muchgreater than it was before the war; probably at least twice as muchwhen all allowance has been made for depreciation of the currency.Some people think that this saving lesson will have been learned, willhave become a habit, will continue and will grow. If so, if peoplesave a larger proportion of their income than they did before, andif the total output of goods is increased, as it easily may be, itbecomes at once evident that there is a possibility of a freer supplyof capital for industry than has ever been seen. But in looking atthis hopeful and optimistic picture, we must never forget that it canonly be painted by those who are prepared to leave out of the canvasall the danger of industrial strife and dislocation, and all thedanger of reaction to the old habits of luxurious spending which areso strong a possibility in the other direction. The war has shown ushow we can, if we like, increase production, reduce consumption, andso have a larger margin than ever before to be put into providingcapital for industry. Whether we really have learned these lessons andwill apply them remains to be seen.

There is also a possibility that some people may recognise that savingmoney and applying it to the re-equipment of the world for peaceindustry is a patriotically praiseworthy object not less than savingin time of war for the equipment of the Army. It may be that thebenefit conferred by those who save, in increasing the output ofmankind, will be more generally recognised, and that the supply ofcapital may, when the war is over, be increased on patriotic grounds,or on grounds even wider than mere patriotism--a desire to help agreat stride forward in the material welfare of mankind.

Capital is a very tender plant, and it will be very easy, if mistakesare made, to frighten those who see the benefits of accumulation forthemselves and others. Labour troubles and industrial unrest areextremely likely to have the effect of destroying capital bypreventing it coming into existence. If we remember that capital canonly be created by being saved, it becomes evident that if those whosave are threatened with too deep an inroad into their reward for sodoing, on the part of labour, they will hesitate to save; and if theaction of labour has this effect, labour will be sawing off the boughon which it sits. For it is new capital that sets new industry going,and it is only by a continual supply of new industry that a continualdemand for fresh labour can be maintained.

There is also at present much mischievous talk about a great tax oncapital for the purpose of redeeming, or hastening the redemption of,war debt. It is clear at once that it is not possible to tax capitalif we remember that capital consists of the tools and equipment ofindustry, or even, in the wider sense of the word, of accumulatedassets which have not been consumed. Unless the Government is preparedto take payment in factory chimneys, railway sleepers, houses andfields, or the securities and mortgages that are claims on theirproduct, it is not possible to tax capital. The only thing that theGovernment can tax is the output, that is to say, the annual incomeof the people. In other words, a tax on capital is simply a form ofincome tax assessed, not according to a man's income, but according tothe assets of which he is possessed. The effect of such a tax wouldbe that he who has spent everything that he has earned on his ownenjoyment would go scot free in the matter of the capital tax, andwould be rewarded for his improvidence by being asked to make nosacrifice; while his thrifty brother who, out of a smaller income, hasset aside a certain proportion during the last twenty or thirty years,would have to hand over a portion of his current income assessedupon the value of the assets into which he has put his savings.Incidentally, it may be remarked that it would take years to make thisnecessary valuation, and that it would probably be done in a veryinequitable manner by untrained and incompetent officials. But theimportant point is this, that if the Government shows a tendency totake the possession of assets as a basis for taxation it will bedirectly encouraging those who spend their whole income in riotousliving and frivolous amusement, and discouraging those who help toincrease mankind's output by adding to the capital available.

Finally, it may be added that the shyness of the saver will be greatlydiminished if he can feel that there is a trustworthy machinery ofcompany promotion, so that he can rely on any savings that he putsinto industry having at least a fair chance of yielding him a fairreward. This subject is too vast to enter into at present, but itis one to which those who are responsible for the management of ourfinancial affairs cannot give too much attention. Every time the realinvestor is swindled out of his money there is more than a chance thathe will look upon all forms of saving as a folly to be left to thecredulous. It is easy to say that it was his own fault, that he oughtto have been more careful, or consulted a better broker; but he will,with equal ease, retort that If honest financiers knew their businessbetter, they would have long ago made things easier for the ignorantinvestor to know whether he was putting his money into genuineenterprise or throwing it down a sink.

Like all other divagations on the subject of what may happen in thefuture, this attempt to forecast has necessarily consisted of "dimglimpses into the obvious," as the undergraduate said of Jowett'ssermon. All that we can be sure of is this: that if the greatopportunities that will lie open to mankind at the end of the warare rightly used, if we use its lessons to increase our production,restrict our frivolous consumption, and put a larger proportion of ourlarger production into stimulating production still further, thereought to be a great increase in the amount of capital available tosupply the great increase which may be expected in the amount ofcapital demanded. The fact that the chief nations of the world willhave enormous debts on which to pay interest is not one that neednecessarily terrify us from this point of view. The arranging andimposition of the taxation necessary for meeting the interest on thesedebts will involve very serious political and social questions; butthe payment of this interest need not necessarily diminish production,and it may probably help in checking consumption. It will not impairthe total wealth of the world as a whole; it will merely affect itsdistribution. And since it will mean that a considerable part of theworld's output will, for this reason, be handed over to the holders ofthe various Government debts, who, _ex hypothesi_, will be people whohave saved money in the past, it is at least possible that they maydevote a considerable amount of the spin so received to further savingor increasing the supply of capital available.