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.