Within a country at war, the changes in its economic life are pronounced and permanent. From the economic standpoint, the human life that is sacrificed by war either permanently or for the period of the conflict reduces the pro ductive power of the nation by the amount thus sacrificed. With regard to capital the same principle holds true. Land, labor power and capital united,into working units are the produc ing agencies in every stage of economic activity. War has a double effect upon all these. It de stroys and it diverts. It uses land for war pur poses, thus preventing its use for productive ones. Land devoted to camps, cantonments and aviation fields cannot at the same time grow corn and wheat; land over which a battle has raged for some length of time is thereby ren dered temporarily unfit for agricultural pur poses, as witness northern France and parts of Belgium. War first diverts a considerable por tion of the labor power from the work of creation to that of destruction, and during the process the labor power thus diverted is ac tively engaged in destroying the labor power of the enemy and the capital of both. With capital the same general conditions prevail. A considerable portion of our capital is and for the past four years has been exclusively em ployed by and devoted to the claims of war. An excellent illustration is furnished by the cotton situation. The 1914 crop was an un usually heavy one and the sudden interruption of industry caused by the war lessened the normal demands of the trade so much that a cotton pool was formed for the purpose of loaning $135,000,000 to those wishing to hold their cotton and thus prevent the ruinously low prices that would be likely to result. As soon as the war was well under way the de mands for cotton for war purposes become sufficiently urgent to counteract the lessened demand from the ordinary trade so that the pool was dissolved after having loaned only $2.8,000.* Since 1915 the price of cotton, owing to its use for explosives as well as for clothing, has risen to new high levels and the problem has become one of furnishing cotton rather than of providing an artificial market to prevent prices falling below the cost of production.
When land, labor and capital are working together in proper proportions and the units thus formed are wisely directed, not only is pro duction at a maximum, but, what is almost if not quite of equal importance, the three factors of production share the results of their joint efforts in fairly equitable proportions. War as a destroyer does not always act impartially. Sometimes it destroys men faster than it de stroys capital. Sometimes the reverse is true. In almost every case, land as a factor of pro duction suffers less than either of the other two factors. When men and consequently labor power is destroyed faster than capital, the labor element in production becomes deficient in quantity and hence in response to the urgent demand for more labor power, wages rise rela tively to the rate of interest; conversely, when capital is destroyed or diverted from produc tive uses faster than labor power embodied in man, then the interest rate rises faster than the rate of wages. Attention should be called to the fact that it is always the net available supply of labor and capital that is referred to. If the productive power of the laborers is augmented by an increase of speed, if machines are operated more continuously, each of these methods of increasing efficiency will counteract the absolute loss of men and machines. During the present war, the diversion and destruction of men and capital has caused both wages and interest to rise, while rents in relation to wages and interest. except in areas crowded as a re sult of peculiar conditions, have fallen. Whether wages have risen more rapidly than interest or the reverse has not yet been demonstrated owing to the inherent difficulties of determin ing the rate of wages.
A. The direct effect of the unprecedented destruction of capital is reflected in the rate of interest. A somewhat less direct but none the less important effect may be observed in the speeding up of industrial establishments and the increased efficiency with which capital is used. A third effect is found in the various
expedients adopted to prevent the investment of new capital in any industries except those which are essential to the successful prosecution of the war.
(1) Immediately after the outbreak of the war interest rates were not only high but were also unduly fluctuating and as a result various means of stabilizing the rate and preventing its rise to abnormal heights were discussed and some attempts to control the rate were in a measure successful. In general, however, the fears of financiers and the large borrowers were never realized, for while the rate of interest has advanced as a result of the destruction of capital by the war, the advance has been much less than was early predicted. Take for ex ample the discount rate of the Federal Re serve Board; 31 Dec. 1914, the New York rates were as follows: for 30-day paper, 4.4 per cent, for 60- and 90-day paper, 5 per cent ; on 24 May 1918, the rates were: for 16- to 90-day paper, 4y, per cent. In the commercial paper market the advance has been somewhat marked especially during the past year. In August 1917, the rate for standard commercial paper was 5 per cent; one year later, it was 6 per cent. The bond market also shows a gradual increase in the interest rates. In December 1915, 40 stand ard bonds, selected for comparison by the Wall Street Journal, were selling at an average price of 94.03 per 100. In December 1916, the same bonds were selling at 94.97, a slight advance. In October 1917, they had fallen to 86.73 and on 29 April 1918 to 83.61. During the same period, the return on standard government bonds has advanced from an average of less than 4 per cent to an average of nearly 5 per cent.
(2) It is at this date quite impossible to make any quantitative estimate even of the increased productivity of industrial establish ments resulting directly or indirectly from the threatened shortage due to the destructive effects of the war. It is, however, easily demonstrable that during the present great war, as during those of preceding generations, our own in dustries as well as those of Germany, Austria, Italy, France and England have renewed their youth as it were and in many cases increased their productive power rapidly enough to more than neutralize the loss of capital resulting from the war. When the second great English war loan was floated, at that time called the greatest financial transaction in history, it was generally assumed in England and feared in this country that a flood of American securities held in England for investment would be thrown upon the market and that as a result our own security market would be thrown into con fusion and values established by years of favor able earnings would be suddenly sacrificed. As a matter of fact the loan was floated at 4% per cent and sold at par without seriously af fecting the domestic or international market. So great was the productive power of the people of the United States that during the year 1916 they not only financed their own industries at a fairly reasonable rate of interest, but in addition purchased approximately $1,000,000,000 of foreign securities and repurchased a much larger amount of securities* of American cor porations formerly held in European countries. And since the United States has been a partici pant in the war, she has financed her own loans and assisted her allies without at the same time disturbing either her savings bank deposits or her investment in foreign enterprises. Indeed so much had the net income of the United States increased during the war largely as a result of increased efficiency of capital and labor and their more harmonious co-operation that when the third Liberty Loan of $4,170, 079,065 was taken in May 1918 by over 17,000,000 subscribers it was generally remarked that the money market was scarcely ruffled while the price of standard bonds was quoted as firm and advancing.t In addition to the repurchase of securities and the subscriptions to foreign and domestic loans, the American investment market absorbed during the year 1916, according to the tables compiled by the Journal of Commerce, over $3,500,000,000 par value of domestic capital issues.