It does not much matter whether we buy Government bonds or other securities. If we buy of French capitalists their holdings in American railway securities we simply provide them with the wherewithal to take the French Government loans themselves. They virtually become, without our knowledge, the go-between through which we lend, as it were, to the French Government, in spite of ourselves. It is doubtless well, as a matter of policy, to refuse to loan directly to France, but we must not for a moment conclude that France or any other nation will have to finance the war without our aid. We shall not be consciously helping any particular nation, but we shall be actually helping any nation which can trade with us. Evidently England will get more of our help than any other nation because her shores are more accessible. Germany is more isolated. Unless she possesses a larger food stock than commercial statistics indicate she will be pressing for our food supplies, which may reach her indirectly, we selling to Holland and Holland to Germany; also reversely, via Holland or via Austria and Italy, Germany may sell a stream of securities the other end of which we receive. Whether directly or by devious routes there will inevitably be, so far as I can see, a vast exchange of commodities passing to Europe for securities coming from Europe. In this interchange will be found the dominant economic effect of the war on the United States.
Foreign nations will get their much-needed loans on better terms, even if less promptly, by the circuitous process mentioned than if they could borrow directly in our markets; for their own citizens will pay higher prices than we would, even if, to get the money, they have to sell their other investment securities to us at a considerable sacrifice. England has sold Treasury bills for seventy-five millions of dollars on as low a "basis" as 3-3/4 per cent.
In this virtual trade of this year's crops for titles to future years' crops we shall get a high price for the former and pay a low price (in present valuation) for the latter. Investment securities are, and will be, a drug on the market. In other words, the rate of return to the investor will be high; the rate of interest on long-time loans will be high and stay high, that on short-time loans may fluctuate greatly. The rise in the rate of interest on long-time investments is one of the most vital and far-reaching effects of the war. At bottom, interest always arises from the exchange of present and future goods. The rate of interest, as I have tried to show in my book of that title, is simply the crystallization, in a market rate, of the impatience of the human race for its bread and butter. War has now produced such impatience in populations of hundreds of millions. It is this impatience which dumps the securities upon us, sends down their price, and sends up the rate of interest. As Byron W. Holt has said, there is no moratorium for hunger. The fall of securities in Europe produces the like fall in this and other countries.
One of the consequences to America of being forced to play the rôle of money lender and one of the consequences of the rise in the rate of interest here, or what amounts to the same thing, the fall in the prices of bonds, will be an increased difficulty of financing our own enterprises. Only the most promising enterprises will be able to sell their securities. This means that we shall be neglecting, to some extent, our own enterprises, to finance the European war instead.
This general depreciation of investment securities will doubtless lead to many bankruptcies, if not to a genuine crisis. It will also give tempting opportunities to investors. The likelihood of a genuine panic is lessened by the fact that every one recognizes the real cause of the disturbance and that insolvency is not suspected. According to the best commercial observers, the previous liquidation had been fairly well completed. Unless they are mistaken, disaster will not be likely to follow.
We repeat that since the necessities of Europe have forced her to buy our food in return for her investments, it is evident that during the war food prices will be high and security prices, especially bonds, will be low. These are the two facts of greatest economic significance to us. To the country as a whole they defer some of our pleasures till after the war. Uncle Sam will cut down for the present on his eating and drinking, his clothes, shelter, and amusements in order to share his rations with Europe. Instead of the pleasures foregone he will invest—not in new enterprises at home, but in old ones—American and possibly European also—purchased of Europe. We can never have our cake and eat it too. In this case we shall let Europe eat some of it on condition that she in turn shares hers with us after the war. Moreover, we shall trade off a relatively small piece of our present cake for a relatively large piece of Europe's future cake. In other words, Europe will fill up the great breach in her income now impending by inducing us to make a small breach in ours. The result will be that the course of our real income, that is, economic satisfaction or enjoyable consumption, will imitate in some degree that of Europe. This is, reduced to its lowest terms, the chief economic result of the war.
But to many the question is, do we gain or lose, as compared with what might have been the case if there had been no war? I do not think any one can answer that question with certainty. Europe is willing to mortgage its future to us on terms very advantageous to us; but when the future comes, the purchasing power of money will probably be so much lessened as to have absorbed all our advantage. Probably we shall lose slightly on the whole. But it is not economically impossible that there will be a net gain. In either case the net effect will, I believe, be small.
Of more importance will be the various effects on various classes. Certain people will be greatly benefited by the rise in food prices and the fall in security prices. The farming classes will profit by the former; the investing classes by the latter. Those who have the good fortune to belong to both classes will grow rich. The farmer who is in a position to save money will both make more money to save and be able to invest it more advantageously after he has saved it. If he lends to his neighbors he will find the market rate of interest high. Even if he buys more land the purchase price will be restrained from the great rise we might expect from the prosperity of farming by the fact that the "number of years purchase," as the phrase is in England, will be small, or, in other words, that the interest basis, which enters into every land price, will be high.
Labor Will Not Suffer Much.
On the other hand the general consumer of farm products will suffer from another advance in that part of his cost of living, while the debtor classes will suffer from the fall in bonds or rise in interest. Many speculators on the Stock Exchange, those who have speculated for a rise, are in effect undoubtedly ruined already, and many borrowers at banks on collateral security will feel the pinch from the depreciation of their property and the hard terms of renewing their loans.