Popular Science Monthly/Volume 86/April 1915/Effect of the War Upon the Rate for Capital

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EFFECT OF THE WAR UPON THE RATE FOR CAPITAL
By CHARLES A. CONANT

NEW YORK CITY

THE most obvious effect of the European war in the field of finance is the rise in the rate of return upon capital. This is the natural result of the great destruction of wealth by the contending armies, which will have to be financed from savings which would otherwise be applied in meeting the usual annual demand for the extension and improvement of railway and industrial plants. It is evident, from the reports received from time to time, that early estimates of a total cost for the war of fifteen billions of dollars for one year were not excessive. As the war has already lasted six months, there is little doubt that at least this sum would be consumed, even if peace should be made soon, because the armies could not be immediately disbanded and large contract obligations would, for some time, have to be met.

The amount usually available for investment in securities having a general market is shown by the computations of the Belgian financial publication, Le Moniteur des Intérêts Matériels, to be about $4,000,000,000 per year. This does not represent the entire sum of savings applied to the improvement and extension of private enterprises, some of which is represented by securities which are closely held, and some of which does not take the form of securities at all.

In dealing with the question how large a proportion of the total fund of capital available for investment will be absorbed by war loans, and how much can be diverted to its old mission of building up and extending the machinery of industry, there are many factors to be considered on both sides of the problem. Undoubtedly the patriotic spirit of the peasant, the mechanic and the small shop-keeper in France, Germany and England will lead them to dip into their little hoards of actual currency and other savings to make subscriptions to the national loans in amounts which would not be applied ordinarily to the purchase of railway and industrial issues. Undoubtedly, also, many sums which would be applied to improving and extending the facilities of the farm, the tool-box and the shop, will be applied to the purpose of saving the national credit and meeting the public obligations. From these sources will come considerable amounts which will be added to the net fund available for investment.

On the other hand, it can not be assumed that the entire amount which is available for investment will be applied to the new public loans. Where new capital issues are made essentially for keeping pace with industrial development, for enlarging mills whose product is in increased demand, and especially for meeting the growth of equipment for new population in the countries which have not been decimated by war, considerable sums will be applied to investments other than the national loans. This will be especially true of those small and closely-held corporations whose securities are distributed among the original holders and where the direct profit on the output makes the market rate for money a factor more or less negligible.

What part the railways will be able to play in wresting a portion of the world's savings from the outstretched hands of the powers which have been blowing away thousands of millions in powder and ball, becomes an interesting consideration. They must come into the open market and bid against the greatest states in the world for some scanty portion of the supply of investment capital.

In this connection, the fact must not be overlooked that the war has practically brought to a standstill, for the present, in many parts of Europe, any saving of capital for investment. If the war should soon end, and the men now employed in trying to kill each other were able to return promptly to the ranks of industry, a considerable stimulus would be given to the renewal of effective production, and a margin of savings for investment might emerge. On the other hand, there will be delay and considerable cost in re-establishing the important textile and other industries of northern France, of Belgium, and of other sections which have been the victims of hostile armies.

This great demand upon the world's saving for investment will make it difficult to obtain capital for industrial purposes except at a high rate. The credit of the strongest governments is usually at least ½ per cent. higher than that of private corporations. While England has succeeded in borrowing at a rate slightly under 4 per cent., Germany is paying 5 per cent. and France practically the same. The most severe pressure upon the market for capital is likely to be felt, however, after peace is made, during the distribution among investors of the large amounts of the loans which are being carried temporarily by the banks. This demand for capital will probably reduce the price of even the best bonds to the level of the new rate of return. Bonds might have a preference in certain cases over stocks, but, on the other hand, only those corporations which were able to pay a high return would be able to issue additional stock for the extension of their plants.

A high rate of return upon capital will not in itself be inconsistent with great industrial activity and certain types of commercial expansion. It is usually the experience after a war that the efficiency of labor is increased by the disposition to repair the waste of the conflict, and that the return of many thousands of men to peaceful industry not only restores, but increases the previous capacity for production. The prevalence of unusual economies also, both in Europe and the United States, will probably do something to offset the abnormal demand for investment capital for war purposes, and aid in the restoration of industry.