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bonds and other securities, since over a period of years commercial rates and investment rates tend to move together. Commercial rates average less than bond rates over a period of years, the difference amounting to about 12 of 1 per cent.

Two important observations may be made on the long-time trend: first, the average of interest rates was much higher in the earlier years of the country's history than in the later years; second, there has been a marked reduction in the extreme fluctuations above and below the average. With regard to the first observation, the explanation lies largely in the fact that interest involved a heavy risk factor during the early speculative and undeveloped stages of economic history. High rates are characteristic of a country passing through the early stages of industrial development. A further explanation lies in the fact that banking organization was uncertain and the mechanism of a money market undeveloped. This condition hampered the supply of capital funds, since people will not freely offer their savings unless the channels of investment promise a high degree of security and permanence. The second fact noticeable in long-time trend, namely, the lessening of extreme fluctuations, is particularly due to the development of improved banking organization. The establishment of the national banking system during the Civil War was an important step toward ironing out extreme fluctuations, and the establishment of the Federal Reserve System in 1914 carries this stabilizing tendency to a higher degree of completeness.

The chart shows the year 1894, with an average rate of 3 per cent, to be the lowest in our financial history. During this period, prime railroad bonds sold to yield only 3 per cent, and 2 per cent New York City bonds sold at a premium. The general opinion at the time seems to have been that the country had developed to a point where a permanent low interest rate was inevitable. But shortly thereafter began an outburst of technical progress calling for new capital in the automobile and electrical industries, in a broad building program of better residences, and bigger offices and factories, in expansion of railway and other public utility equipment, and in improved highway construction. At the same time profit margins increased and the prospect of profits gave a new impetus to demand for capital. Moreover overseas wars added to demand for capital at the same time that the destruction due to these wars increased the scarcity of capital. This new outburst of demand set in motion an upward trend which lasted until 1920, and which brought about practically a doubling of interest rates over the low point of 1894. The trend since 1920 has been downward, with supply of capital outstripping demand. Our productive capacity runs well in excess of consumption. Whether the decline of interest rates will continue until a new low point is reached is a question impossible to decide now, but the possibility of such a decline deserves to be kept in mind.

This possibility raises further the question: How low can the interest rate fall? If the interest rate can fall to zero, the supply and demand of capital must undergo revolutionary changes. Gustav Cassel examines this problem in some detail, and holds that the rate cannot fall below 21/2 or 2 per cent at the lowest. Any lower rate would result in a tendency for people to live off their capital by the purchase of annuities. This consumption of capital would create a scarcity of capital, and the scarcity would tend to push interest rates upward again. There appears no likelihood that the long-time trend will fall to a 2 per cent level in the near future, but if it should the check which Cassel mentions would probably be effective, although it is impossible to predict with absolute certainty that this would be the case. It is chiefly significant for present purposes that in developed countries interest fluctuations seem to keep usually within a range of about 3 to 6 per cent. These rates are the approximate upper and lower limits to interest trend in such countries as the United States or England. Backward countries, fiat money countries, warring countries, countries in the throes of inflation exhibit higher ranges, but normal developed countries adhere closely to the 3 to 6 per cent range.

International variations in the interest rates are illustrated in the following table: 8

REDISCOUNT RATES OF BANKS OF ISSUE IN TWELVE COUNTRIES, MARCH, 1925

Rediscount Rates
Name of Country

Per Cent
New York

312
Holland

4 England

5 Sweden

512 Italy

6 Denmark

7 France

7 Japan

8 Germany

9 Poland

10 Hungary

1212 Austria

13

Capital Accumulation by Various Income Groups.-An important question in this field is: What saving is done by different classes and groups of people? One income classification is: employees, farmers, business men. King's studies indicate the following savings for each of these groups, stated as an annual average for the decade 1909 to 1918:49

27,000,000 employees, with average income of $690 each, made average savings of $40 each, a total of slightly over $1,000,000,000, or about one-fifth of the total national savings.

6,400,000 farmers, with average income below $850 each, made average savings of over $100 each, a total of slightly over $670,000,000, or about oneeighth of the total national savings.

? A Theory of Social Economy, pp. 224-248. 8 From Monthly Review, Federal Reserve Bank of New York, April, 1925, p. 3. 9 Journal of the American Statistical Association, Volume 18, p. 468.

3,300,000 entrepreneurs and other property owners, with an average income of $3,400 each, made average savings of $1,100 each, a total of a little less than $4,000,000,000, or about two-thirds of the total national savings.

Employees, representing over 70 per cent of the income receiving population, and receiving more than one-half of the national income, saved only onefifth of the national savings. The average employee saved only about six cents out of every dollar of income. The average farmer saved about twelve cents out of every dollar of income. The average entrepreneur and property owner saved about thirty-three cents out of every dollar of income.

It is obvious that the bulk of saving in the United States is done by property owners and business men. And yet it does not follow that the sacrifice made by this class in saving is as onerous as the sacrifice of the employees in putting aside their relatively small savings. The burden, abstinence, sacrifice and self-denial borne by the employees in saving a small fund out of their small individual incomes is commonly very heavy. Although the business groups, for the most part, must undergo some self-denial and forego some pleasures of spending, nevertheless their thrift is not of a sort which constantly eats into the minimum necessities or comforts of life.

A large part of business savings has now a highly impersonal nature. The main form of such savings is corporate surplus. Corporate surplus is merely a part of net earnings, set aside for purposes of reinvestment in the business. Knauth has estimated the annual savings for a number of years from corporate surplus as follows: 10

1910 1911 1913 1914 1915 1916 1917 1918 1919 1920 1921

Millions of
Dollars
1,200

900
1,000

500 1,600 3,900 3,400 1,700 2,000 1,000

500

The years of high savings from corporate surplus are years of business prosperity, whereas the years of low savings are years of business depression. The main factor in variations of corporate surplus is the business cycle. The years 1914 and 1921 show very low savings in corporate surplus for the reason that these were years of slump and depression. It is a safe conclusion, therefore, that the necessary way to stabilize corporate savings is to stabilize business movements generally and to modify as much as possible the up and down movements of the business cycle. In a normal or average year, the savings from

10 Journal of the American Statistical Association, Volume 18, p. 164.

this source amount to approximately one-quarter of the total savings of the nation.

Although the corporation is the dominant type of business, nevertheless a vast number of individual business concerns are not organized in corporate form. These business concerns do a great amount of direct saving by putting part of their earnings back into the business. Farmers, for instance, save large amounts in the form of earnings put into farm improvements. This direct saving by non-corporate business approximates in normal years about 15 per cent of total national savings, but in years of prosperity much exceeds this average, and in years of depression falls much below it. This form of savings, like corporate surplus, therefore, depends chiefly upon the fluctuations of the business cycle. The combined savings of corporate and non-corporate business, relative to total national savings, are estimated by King as follows: 11

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Year 1909 1910 1911 1912 1913 1914 1915 1916 1917

Per Cent
of Total Savings

46.91
51.57
45.91
51.16
49.21
33.80
44.30
55.52
71.30

The savings of employees and middle class people are reflected largely in insurance assets, savings bank funds, building and loan association funds, independent purchase of dwelling houses, and, to a degree, bonds in the open market. Savings from personal incomes are highly important, and do not fluctuate as severely in the turns of the business cycle as do business savings. Only a minor part of the national savings directly enter the investment markets. Ordinarily probably more than half of the national savings do not pass into the stock and bond open market. This large part of savings is used directly by the saver in his store, his farm, his plant, his household. We must distinguish, therefore, between personal savings and business savings, and further between savings made through the investment markets and savings made outside those markets.

Uses Made of Savings.-Having examined the sources of savings, we may now examine the uses made of savings. Although uses vary from country to country and from year to year, nevertheless it is possible to obtain a fair picture of the situation by studying a sample year in the United States. David Friday estimates the distribution of savings for the year 1923 as follows: 12

11 Journal of the American Statistical Association, Volume 18, p. 470. 12 New Republic, Volume 37, p. 304.

$3,300,000,000 automobiles and trucks

600,000,000 highway construction
500,000,000 garages and expansion of automobile plants

600,000,000 oil development, pipe lines, refineries
4,000,000,000 building outside of automobile industries
1,000,000,000 new railroad equipment
1,250,000,000 telegraph, telephone, electric light and power, etc.

1,000,000,000 gold imports, public works, furniture, etc. Total $12,250,000,000 Estimated savings of the nation in 1923

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The first four items in this list relate chiefly to the automobile and to its allied industries. About $5,000,000,000 of savings were applied to the demand arising from the technical progress represented by the automobile. The next largest item is new building, and this, combined with the automobile, accounts for fully three-fourths of the new capital of the year. The major portion of this capital represented durable goods for gradual consumption and enjoyment. Both the production and the use of these goods require an extended period of time. This involves waiting, or non-expenditure of income for purposes of immediate consumption. The demand for this waiting or saving is the current demand for capital. The demand is met by the excess of production of durable goods over and above present annual consumption. These durable goods may in part be produced goods used in further production, such as machinery, but it is clear from this estimate that the main part of these durable goods are consumption goods which yield their utilities over a long period of time.

The produced goods used in further production are mostly represented in the last three items of the list. Transportation equipment, electrical equipment, public utilities, and public works are salient features of this productive capital. In comparing the totals of new productive and new consumption capital, however, one is impressed by the fact that consumption capital represents decidedly the larger use of current savings. The effect of technical progress upon the uses of capital is illustrated in impressive fashion by the automobile, electricity, and modern housing, and the firm demand for capital at the present time due thereto. It is a fair conjecture that, were it not for technical developments in these fields, the demand for capital would be quite low and the interest rate likewise at a very low point.

Share of National Income Going to Interest.-It would be interesting and valuable to know definitely what share of the total yearly income of the United States is paid out in the form of interest on capital. The problem is an exceedingly difficult one to treat statistically, and yet the estimates which have been made are approximate enough to be highly suggestive. M. C. Rorty estimates that about 16 per cent of the total of all incomes goes to interest on capital.13 Interest is used here in the sense of gross interest rather than of net or pure interest. Rorty also

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13 Some Problems in Current Economics, pp. 29, 63, 103-106.

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