ABSTINENCE AND PRODUCTION 1. Dynamic movement of saving. § 2. Orderly government favorable to saving. 4 3. Private property favorable to saving. § 4. Opportunities for investment. § 5. Get-rich-quick schemes. § 6. Slower and safer plans. 4 7. Relation of the interest rate and saving. § 8. Bountiful in come and abstinence. § 9. The interest rate and waiting. 110. Dupli cate agents and slower processes. § 11. Lower interest rate stimulating invention. § 12. Time-price determining the selection of processes. § 13. Newly discovered process; effect upon interest rate. I 14. Railroad betterments and the rate of interest. 115. Effect of war upon the in terest rate.
§ I. Dynamic movement of saving. Let us, finally, ex amine the influence for dynamic change that is exerted by man's choice and use of goods with relation to time. We have already considered time-preference from the individual stand point (Chapter 24), and have seen how with varying de grees of abstinence the individual's fortune may be main tained, or decline, or advance. In the community as a whole, individual time-choices more or less neutralize each other. Prodigality versus abstinence, spending versus saving, of all the members of the community taken together, have, as a re sultant, the maintenance or the reduction or the accumulation of economic agents. Accompanying this movement more or less closely, now ahead and now lagging behind, go changes in the rate of time-price as shown in the rate of interest. Let us look first at some conditions favorable to saving, and then at some adverse movements, making for the lowering of the economic environment.
Abstinence varies from man to man and from one period to another, but there are certain general conditions that appear to be favorable to the development of abstinence as a wide spread habit of mind in society, and that contribute up to a certain point, to a general state of accumulation.
§ 2. Orderly government favorable to saving. As saving results from a comparison of the future with the present, any lack of certainty regarding the future decreases the appeal it makes. The theory of probabilities applies roughly in this matter, and a use is only half as great when there is but one chance in two of ever getting it. Political security against foreign aggression is favorable to saving. War is not only destructive of wealth and of industry in the zone of conflict, but it weakens the motives of thrift in the citizen. The energies of the people are given to fighting and to preparation for fighting, and the national resources are used regardless of the future need. Domestic order is favorable to saving. Where there are frequent revolutions as in some countries and periods in South America, and where brigandage is common, as it has been in Italy, Macedonia, and Bulgaria, the motive for saving is greatly weakened. Oppressive government, es pecially when it takes the form of irregular taxation, decreases the certainty of income and in that proportion weakens the motive for the accumulation of property. While the miserable subjects of the state live from hand to mouth, the very sources of the public revenue disappear. Improvidence grows upon such a people into a prevailing national custom ; ambition is wanting; industry is the sport of chance; economic order and economic prosperity are impossible.
§ 3. Private property favorable to saving. Social institu tions that give a motive to the individual seem to be essential to effective and continuous saving. Among these institutions the most important are the family and, closely connected with it, the institution of private property. The effect of this in its best manifestations is to fix the responsibility for each per son's economic welfare upon himself or upon his family. Through the institution of private property the state says to men : "Save if you will ; the wealth and its future fruits shall be yours. But if you spend in the present, you alone will suffer the consequences." The institution of private property never is found in an ideal form. Corrupt public officials weaken its working, dishonesty in business and the oppressive monopolistic power of a few exaggerated private fortunes reduce its benefits. Every propertyless family marks a partial failure in its purpose. These limitations, pretty generally admitted, have made private property a favorite object of attack by radical reformers. Its abolition has been advocated from the days of ancient Greece to our own days, as the remedy for all the great social ills. We are not concerned here with the moral judgment of the question, but with the pure economic aspect. Private property gives men an in centive to subordinate their present desires to the future. Private property has served to fix responsibility for waste and improvidence and to multiply the rewards of abstinence. His tory shows as yet no communities where any other motive has been effective in inducing large numbers of men regularly to conserve economic agents and in maintaining a progressive economic state.
§ 4. Opportunities for investment. Opportunities for the investment of small savings favor the spread of a spirit of saving. The institution of small property, peasant propri etorship, has worked powerfully in this direction in many parts of Europe ; and the same effects have resulted in America from the wide diffusion of property in agricultural land. If the decline in the number of small independent farmers has somewhat weakened this influence in America, other agencies are effectively performing the same functions in other ways. Savings-banks, penny banks, building and loan associations, penny-provident funds, and other convenient means of invest ing small sums, encourage men to reduce their tobacco bills, their candy bills, their saloon bills, and to lay aside for the winter's coal, for the children's education, for houses, for busi ness investments, or for old age. The French government, by the sale directly to the people of national bonds in small de nominations, both recognized and helped to strengthen a cus tom of thrift in the small investor that has probably become more widespread in France than in any other country. Prob ably no one thing has given a greater stimulus to saving than has the development of insurance and the endowment policies in connection with it. The modern systems of compulsory accident and sickness insurance, and of pensions for old age, are accumulating large funds (invested in securities) and are collective saving on a large scale (whether it be deemed the saving by employers or by employees). Great modern cor porations have displaced many small business enterprises into which so much of the saving of the past was put, but have opened up other large fields of choice for investors in notes, bonds, and stocks. Of late some American corporations and governments have begun to issue bonds in denominations of less than $1000, known as "baby bonds," especially of $100 and $500, and their sale is steadily increasing.
§ 5. Get-rich-quick schemes. Nothing discourages absti nence more than the example of the loss of hard-won savings through unfortunate investments, as happens with many mil lion dollars of small capitals every year. A large part of these losses would be avoided if certain simple truths were generally recognized and certain maxims observed. Security against loss of principal is more important than promises of a large interest rate. It is well to remember that the prevailing rate of capitalization in the community sets the outside limit of safe investment to the investor without special knowledge and judgment of the conditions. Unusual percentages of in come (over 4 or 5 per cent) are bought by the small investor at the cost of disproportionate chances of loss. Buying stocks on margin, real estate on options, or anything partly on credit, is not true investing; it is speculation, and the chance is large that it will end in disaster to the "outsider" and the "lamb." The stranger offering remarkable returns on small investments has almost certainly a flaw either in his judgment or in his morality. There are now and then good inventions which need but capital to develop them, but to judge their practical merits requires expert knowledge and business experience or influence which few possess. Only with the advice of trusted friends with these advantages should the inexperienced venture to in vest outside of accustomed lines in the hope of unusual returns. "Get-rich-quick schemes" mean get-poor-quick for every one but their promoters. Patents from washing machines to chro matic printing, new processes from burning ashes to extracting gold from sea water, lead mines and gold mines which prove only to be "salted" mines, rubber plantations with elastic pos sibilities, electric "air line" roads destined ever to remain in air—these projects yearly lure millions of small savings from the trusting.
§ 6. Slower and safer plans. The average man investing outside of his own business should travel the well-marked roads: government, state and municipal bonds; stocks, or pref erably bonds, of the more conservative corporations bought outright at other than times of booming business and high capitalization ; real-estate mortgages in the neighborhood or placed through reliable agencies; shares in building and loan associations; deposits in savings banks; life insurance for breadwinners, first and mainly on the "ordinary life" plan or with payments limited to the earning years; and finally, old age pensions and life annuities. Carefully selected invest ments along these lines will yield to the average man in the long run much more than more active investments with the alluring promises of large dividends. If the small savings of the masses were more safe and remunerative, a wonderful stimulus would be given to industry, and the general welfare would be enhanced. In part no doubt this most desirable end can be furthered by public regulations in protection of inves tors, in part it must be brought about by the progress of sound principles of investment among persons of small means.
§ 7. Relation of the interest rate and saving. A question much debated is: should a rate of interest be looked upon as the cause of saving. Some persons might be willing to save somewhat were the rate of interest much lower, just as (on the hypothetical sellers' curve) some sellers might have been willing to sell for less than the market price if they had not found buyers willing to pay the actual price. In every loan market the price comes to equilibrium at a point lower than some borrowers would have consented to pay, and higher than some lenders would have consented to take. If the rate were much lower there would be many more borrowers and many fewer lenders. A higher rate reduces the number of borrowers and increases the number of lenders; borrowing is by so much discouraged and abstinence is given a larger premium, a reward for waiting.' A. high interest rate does not insure a high degree of cumu lative abstinence in a community; it is indeed nothing but the visible index of a low degree of abstinence (a high rate of time-preference), and interest will remain high till abstinence grows. The rate of interest marks the point of equilibrium in the market between present and future value of incomes, 1 A man carries a dollar in his pocket on a journey without getting interest, but he (now) values the future purchase more than the present purchase. Likewise, by persons ignorant of banks, dollars are some times laid away for sickness, old age, and other needs without the inducement of interest. The owner might even be imagined to pay for the safekeeping of the money in the meantime. Some have made much of these cases, have called hoarding a case of zero interest, and the payment of storage charges a case of negative interest. These are not oases of interest at all by our definition, they are cases of time preference for future money. The zero rate of time-preference does not extend to goods generally, for this would mean an absolutely indif ferent choice between present and future uses, gratifications and goods, and an infinite capital value for the smallest permanent series of incomes. (See above, under time-value.) These acts of saving money occur at a time when the individual is showing time-preference for the present in numberless ways. In these cases the money is for the time being withdrawn from its use as a medium of exchange and is turned to its use as a storehouse of saving. Like fruit in a plentiful season and ice stored in winter it is kept because it is relatively plentiful now, and a part of it if kept will provide necessities for a time of relative scarcity.
like the pointer on the spring balances. A fall in the rate of interest is not so much the cause of lessened saving in the community as a whole as it is the effect of increased saving.
The causal order is from the growth of the spirit of saving in large classes to a falling interest rate, which continues to fall as long and as far as the cause is operative or is not offset by the acts of others. The truth in the view that a fall in the interest rate decreases saving is this: that a fall in the rate of interest may cause some individuals to save less. The fall is the resultant of the acts of other individuals who are willing to go on saving at a lower rate of interest than some other individuals are.
True, custom, example, and training have so fixed the habit of saving in many individuals that they would continue to accumulate just as much after the rate of interest fell. It is even conceivable that a few, in middle life, with a pretty definite idea of the amount of money income needed for a com petence in old age, or to leave to their children, might be spurred to yet greater efforts when the investment premium fell. But this must be confined to a peculiar group of persons at a particular stage in their lives and is not characteristic of the whole community. Abstinence may, like jealousy, grow by what it feeds on, but only in some few older natures, not in the ever-renewing generations. It is not true of men in general that the longer they have to wait for income the easier they find it to wait.
Lending at interest was formerly very generally prohibited and the rate of interest was always high in those times. Well-meaning reformers are always proposing the prohibition of interest as a remedy for social ills. If this were done those savers who could buy and manage the agents themselves would still have strong motives for abstinence, but those who could not be active managers themselves would be deprived of the stimulus of a premium for saving. In itself the mere prohibi tion of contract interest would tend toward a lowering of the quality of the environment, and this would result in a higher rate of time-preference.
§ 8. Bountiful income and abstinence. Another question that has proved puzzling is as to the relation between the amount of income a man enjoys and the degree of abstinence. For if, as income increases, abstinence becomes easier, then improved methods of industry should have cumulative effects— not only making possible a larger sum of goods to enjoy now, but multiplying the amount of saving to produce other goods, and constantly lowering the rate of interest.
True, it is easier for a man with habits of life somewhat fixed to save more when his income rises. (See above, Chapter 24.) But it is not safe to say as much of men altogether, where the younger generation has time to adjust its tastes to the larger income. A community does not grow old in the same way that an individual does. (See above, under statics and dynamics, Chapter 32, section 2, on renewal of the gen erations.) "The children are always new" and each genera tion starts where its fathers left off. For this reason there appears to be little relation discoverable in history between the bountifulness of incomes in successive generations (through the discovery of richer lands, the use of better tools, ma chinery and methods) and the rate of time-preference. Such differences in the interest rate as appear can be explained through the changing conditions more or less favoring saving, rather than by the productiveness of industry in a community. Amount of production is only one factor in determining the rate of time-preference from generation to generation, and not the primary factor. And so, while interest was less in the seventeenth century in some European countries than it had been for centuries before, it does not seem to have fallen much, if any, in the chief commercial centers during the last two centuries, while enormous strides have been made in the pro ductiveness of industry. It has been a matter of wonderment to social students that the rate of interest continued so high in the United States (higher than in Europe) in the last half of the nineteenth century, when the general level of incomes was so much higher than in the countries of Europe, or in any other country in the world theretofore. In fact, a very large portion of the American people have not been contributing in any degree to cumulative saving; rather they have been heed lessly consuming fully their own comparatively large incomes made possible by and drawn from the consumption and destruction of the natural resources of the country. (See Chapter 35.) The premium on the present as compared with the future may thus be just as high or higher when many men are living in great bounty as when all are in a meager environment. When they have large incomes they may save a smaller proportion of what they have, and yet possibly continue to accumulate more rapidly than when their incomes were smaller. Moreover, a large part of recent progress has been through the invention of simpler and better methods rather than through mere multiplication of old ap pliances. Time-preference is a psychological factor, which can not be explained by physical productivity. The attitude of men toward their environment has tremendous economic consequences.
§ 9. The interest rate and waiting. Let us now review some familiar facts to see the interrelations of abstinence, capitalization, and the rate of interest, and the dynamic effect that the choice of technical methods of production eventually has in a community.
Individual rates of time-preference unite into a market rate of time-price expressed primarily, in the case of durative agents, by the capitalization of the series of incomes. The
capitalization of a series of incomes treated as perpetual is exactly in the ratio of the years' purchase. The rate of in terest that arithmetically corresponds with this is the recip rocal of the years' purchase (e.g., = .05). Practically by the law of substitution as applied to investments, interest rates and capitalization rates are brought into correspondence.
With each reduction of the time-price goes an identical arith metic change in the rate of interest and a reciprocal increase in the capital sum, and a proportional decrease in the frac tion of capital investment coming to the owner as income. The greater the degree of abstinence, the smaller the fraction of investment value that owners must take as income, the longer they must wait for an income bearing a given propor tion of the capital, or equal to it, to accrue. The number of years' purchase, therefore, might well, in this connection, be called the waiting time, or waiting-period. (See Figure 60.) Now let the time-price rate be twelve and corresponding with that would be a rate of interest on money loans of twelve, and a capitalization of $8.33 for each $1 of income. If the spirit of abstinence grows and extends in the community from whatever combination of favoring conditions, so that the time price rate of 10 (or any lower figure) results, the change is registered in a corresponding rate of interest of 10 per cent and the capitalization of each dollar of income at $10. This shows itself first in the capitalization of all existing incomes (capable of capitalization), and would do so if there were no technical, productive process whatever, merely a limited num ber of incomes. All future durative uses attributable to agents are marked up in present price. There are "takers" for cap ital now that will yield incomes but of its face, or what is the same thing, that are willing to have the same income spread over longer time (1% years more, instead of 8%). This must cause some transfers of capital, for not all indi viduals have reduced their time-preference rate, and they will yield to the temptation to get $10 of present capital, whereas they could have resisted the offer of $8.33. The lower the interest rate the greater the temptation for the less abstinent members of the community to relinquish to the more abstinent the guardianship of future incomes with its task of wait ing.
§ 10. Duplicate agents and slower processes. Another effect must show itself in the technical methods of production. The time-price signals that there are investors ready to wait longer for the same income from a given investment. There are investors willing to divert more present goods into future uses, and to impart to future uses still more of futurity. This adjustment at once begins in the economies of all individuals where time-preference is in accord with the new rate. One mode of adjusting productive processes is to multiply the tools and agents already used. Duplicates are placed wherever it will be most convenient. Where formerly the use of a second agent did not justify its cost of making, now it can be made to earn the smaller income 2 needed to balance its capital value.
Another mode is to let the old processes go on a little longer, 2 This is a net income, of course. The new tool yielding less urgent (marginal) uses than the first one, yet requires some shelter and re pairs, and has as great or greater liability to rust, decay, go out of style, etc. With the multiplication of like tools, the added units are less often used, and for less urgent purposes, yet the cost of repairs and maintenance grows greater, leaving a smaller net income with each increasing agent (see above, under usance). The more duplicate agents one has, the greater the forethought, punctuality, and watchfulness re quired to keep them in good condition. If the farmer has but one hoe and one ax, they rarely rust; if a woman has but one dress it can not be eaten by moths. The point of best economic equilibrium, however, is shifted by the change of time-price here under consideration.
with no appreciable change in the form of equipment, where this will bring an increase either in quantity or value of product and therefore enough more income to repay the larger period of waiting for its arrival. Unless other possible proc esses and kinds of tools and machines are already known (have been discovered and invented) duplicating and slow ing-up are the only two ways of adjusting production to a lower time-price. And nowhere and in no time before the modern period of science and invention (say 1700 A.D.) does there seem to have been any crowd of unemployed processes, waiting, so to speak, just outside the gates of industry. So it might happen that a large fall in the interest rate would not be quickly followed by any noticeable change in the ex ternal forms of production, either the machines or the methods. Such a change had to await the slow process of discovery and invention, to occupy this new territory which abstinence had opened up for settlement. Great changes came about by slow adaptations and by accretions of new ideas. The simple truth must not be forgotten that until a better technical process be comes known it can not be adopted even if the rate of interest were to become zero.
§ 11. Lower interest rate stimulating invention. But on the other hand, a fall in the rate of interest (and the condi tions of saving it reflects) must give a new stimulus to in vention by opening up a new zone of waiting time, or in other words, by embodying a definite offer of investors to back any new method (whether more indirect or not) that can be found by experience to lie between the old standard and the new standard of' waiting time. The lower the rate of interest, the greater the change in waiting time that corresponds with a further fall of 1 per cent. When interest falls from 10 per cent to 9, it means a lengthening of the waiting time by only 1% years; but when interest falls from 5 to 4, it means a lengthening of the waiting time by full 5 years. With each further fall of 1 per cent in the rate of interest the extension of waiting time goes on at an accelerating rate. At an in terest rate of 1 per cent the waiting time would be a hundred years, and at an interest rate of zero (only abstractly conceiv able) the waiting time must be infinity. If the interest rate were to fall to 3 and again to 2 per cent it would bring within the range of the economic an almost inconceivable number of technical processes which can not now be used. Viewed in this light, the remarkable outburst of practical invention and of new industrial processes in western Europe (particularly in England) in the eighteenth century, seems to have been partly due to a lower rate of interest (as compared with former centuries) following the more settled conditions, the growth of commerce, of banks, and of more regular investment mar kets in the financial centers.
This development of invention has been in turn greatly aided by the progress of the pure sciences since the seventeenth cen tury, brought about by investigators in universities and out side, who have continued to heap up a great mass of knowledge of nature from which the practical arts can increasingly draw. To-day it is a matter of common knowledge that there are many better technical ways of doing things in every craft, ways which "do not pay" under present conditions. Many of these lie just outside the border of practical, profitable utilization. A fall in the rate of interest now makes possible the adoption of many technical processes that were formerly too slow in yielding the income on the investment. Partly this means the making of new and better instruments which call for a larger initial outlay to secure a certain income, partly it means the choice of chemical, botanical, mechanical, electrical, or other methods that yield larger results by tying up the equipment for a longer a This change is often said to be one "to more time-consuming processes." This phrase is easily misleading. It can not properly refer to the length of the technical process itself, but merely to what we here call the waiting-time for a certain income to mature on a certain invest ment. One technical process may require only a few days from the § 12. Time-price determining the selection of processes. Take now a situation where there is a prevailing interest rate with its corresponding equilibrium of investment, and consider what is the effect of the discovery of a new method of produc tion known to every one,' and of the invention of a machine that calls for a smaller investment (even after paying royalty to the inventor). Among many new methods and new ma chines, all degrees of advantage will be found in all varieties and combinations, ranging from those that require actually less equipment, use less material, require less labor for their operation, shorten the time for the process, reduce the number of technical steps, increase the quantity, and improve the quality of the product, to the opposite in each of these respects. Regarding the change from the old to these new methods and machines, two questions occur : (1) What determines where the line is drawn in making these changes from old to new methods? (2) What is the effect of the new methods upon the existing degree of abstinence ? So far as this change is rationally and wisely made, any new method will be adopted that will yield an income falling within the waiting-zone corresponding with the interest rate. Of course all of the extremely advantageous kinds just men tioned would be adopted, and others up to the limit of paying investment. Beyond that lie many processes which are tech nically possible but not economically possible. All of the ex making of the first machine to the finishing of the product, it may per mit a turnover several times a year (the making of new machines to be rapidly worn out) and yet "not pay," because it is a slow income yielding process. Whereas a machine, that lasts and a process that goes on for years until the product is ready, may yield income at such a rate that it is economic when interest is very high. (See ch. 21 on the relation of technic to time.) If the term time-consuming be used at all it must be taken in an income-ripening sense, not in a tech nically productive sense.
4 Trade secrets, patents, and temporary monopoly privileges, where the better process is limited to one enterprise or to a few, affect individual profits at first rather than the general economic level.
isting factors—labor and material resources—are taken up, put into use, before these are reached. The limit is set by the existing rate of time-price, reflected in the rate of interest. As the rate of time-preference in the individual's choice, so the rate of interest in the community, draws a line among the vari ous technical processes analogous to the isothermal line, mark ing off those that yield incomes at a lower from those that yield at a higher time-rate .° § 13. Newly discovered process; effect upon interest-rate. What effect would the adoption of a newly discovered process have upon the time-price rate? ° If it takes a smaller equip ment than the old, its effect is that of releasing some produc tive agents for other processes before excluded; that is, it enables a community with the same abstinence to resort to longer processes and thus lower the time-price. Or if the new method gives increase in product with the same invest ment, the result is a fall in the price of the product, and a recapitalizing of the sources of the materials, etc., to bring in come and capital value into accord with the prevailing rate. Then the question becomes: What effect will this have on the prevailing rate of time-preference? As the total income of the members of the community increases with the more bountiful 5 Among the processes always waiting on the borders of utilization, known but not adopted, must always be many which are technically more indirect than those before in use; but they have been rejected not at all because of their technical indirectness, but because they involved either too large or too long an investment. If the indirectness involves initial cost—as for materials to make the complex parte then that influences time-choice by increasing the investment; if it involves cost of operation because of complexity of parts and difficulty of repairs, this influences time-choice by reducing the net income expected. Given a certain investment, and a certain income in the future, and time-difference is the only factor that influences choice; technical indirectness is a merely incidental element.
6 Observe that we are considering the case not of a better technical method already known, and now first adopted because of a fall in the interest rate, but the case of a new method adopted while the old rate of interest still prevails.
production, and their present desires are better provided for they should find it easier to abstain. In itself this should result in more saving and a lower interest rate. But the final result so depends on changes in the standard of living, educa tion, etc.,* which are themselves usually elevated by more bountiful production, that the answer is not easy. The ex perience of the past two centuries shows that our progressive economic societies are constantly incorporating into their processes great improvements which raise the total produc tion of objective goods per capita, while they maintain about the same rate of interest from generation to generation. Both present and future expected incomes are more bountiful than they were in the past, but the ratio of their time-valuation re mains substantially unchanged.
§ 14. Railroad betterments and the rate of interest. The railroads in America have given a good illustration of the relation of the interest rate to improvements. In railroad financing, cost of operation is compared with fixed charges, i.e., the interest on the bonds needed to make an improvement that reduces costs. Our main lines in America were built when the interest rate was high (before 1873). Expensive improvements, the straightening of curves, the tunneling of mountains, the reducing of grades, the replacement of lighter by heavier rails, accompanied a fall in the rate of interest. A fall in the interest rate disturbs the equilibrium that has been arrived at, between the cost of operation (the amount paid for wages, coal, etc.) and the income on permanent investment. If the rate of interest has been 5 per cent and falls to 4 per cent, many permanent improvements before unwise become economical. A net gain may result from increasing the cap ital investment in order to reduce the cost of operation per unit of traffic. One thousand dollars paid annually in wages balances a 5 per cent interest charge on a capital investment of $20,000; it balances a 4 per cent interest charge on $25, 000. It thus becomes profitable for the railroad to abandon or 7 See on abstinence, see. 8, above, and ch. 24.
throw aside an enormous capital represented by the old, less perfect roadbed and equipment, and build new with capital borrowed at a lower rate. The changes of this kind one sees in traveling on the great and progressive railroads, reflect in part the growth of traffic, but in part also a change of the interest rate.
§ 15. Effect of war upon the interest rate. The commonly observed fact that a great war calling for much borrowhig raises the interest rate is easily explained as the undoing of the process of saving and loaning. It presents a case of waste on an enormous scale. Waste and destruction are in their nature and in their main effect upon time-preference, interest, and productive processes, just the converse of saving and im proving wealth. In the case of war the borrowing comes first, to get capital with which to buy the many supplies and muni tions needed to maintain armies and navies. Goods are de stroyed in enormous quantities: horses, wagons, gasoline, weapons, ammunition, ships, foods, clothing, etc.; great num bers of men, both combatants and non-combatants, are with drawn from many of the usual productive pursuits and are giving every energy either to producing munitions of war or to destroying the soldiers and the wealth of the enemy—roads, fields, buildings, machinery, stores of all kinds. Within the region of hostilities the economy is reduced well nigh to the stage of savagery. Men become beasts of burden, and are obliged to carry on production with meager equipment. Even were a war in the territory of two modern nations limited to a few months, the destruction would be enough to consume the usual savings for years. The present need of nations at war is for enormous quantities of present goods ; after the war the pressing need to rebuild their houses and their ruined in dustrial equipment will call for great quantities of present goods of another kind. This result is anticipated at the very outbreak of hostilities. The interest rate rises, and the capital value of all existing securities with fixed incomes is reduced accordingly. During the continuance of the war the rising interest rate slackens investment in industries in countries at peace. The unparalleled economies of the people of warring nations, the lowering of their standard of living, the cessation of a large share of the costly entertainments and of social luxuries, and the sacrifices they make to support their govern ments, go far to offset the destruction, and thus to limit the rise of the interest rate. Notwithstanding this, the world's industrial equipment halts its progress and goes backward as, through the medium of international credit, this destruc tive, anti-saving process of war spreads its effects over the nations.