Popular Science Monthly/Volume 36/January 1890/Two and a Half Per Cent

by George Iles

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TWO AND A HALF PER CENT.

By GEORGE ILES.

THE fall in the rate of interest is one of the most striking facts in the financial history of this generation. At times the price of money has risen, and investors have hoped that the good old rates were to be a permanency; but interest has soon declined again, vibrating about a point a little lower than the center of its former seesaw.

Last April, the city of New York, in purchasing certain up-town parks, sold stock bearing 21/2 per cent per annum, maturing in twenty years, and exempt from city and county taxation. The stock, $7,457,000 in amount, brought on an average 1003/10. High as the credit of the metropolis stands with investors, still higher stands the credit of the United States. Its bonds last April netted a return at current market prices of but 2·07 per cent. During the decade ending with January, 1889, the average rate realized on a United States Government bond was 2·72 per cent; during the preceding ten years it was 4·06 per cent, very nearly one half more. Comparing the nine years and nine months ending October 31, 1889, with the decade preceding, the rate of discount charged on prime commercial paper by the banks of New York city declined from an average of 6·23 to an average of 5·29 per cent. The Bank of England's rate concurrently compared shows the relatively small diminution of from 3*40 to 3·28 per cent.*

As far as concerns the manufacturing and trading public who obtain credit at banks in the United States, the decline in the rate of interest has been slight. It has been very different with regard to returns obtainable from investments of the highest class, such as those offered on the bonds of the United States Government, and of the great cities with credit unsmirched by traditions of bankruptcy or repudiation. An investor in a Government bond has certainly a form of property wherein the cares of ownership are brought to the vanishing-point. His security is absolute; his bonds are registered, so that he need fear no thief; he can sell all or any part of them at pleasure; and, should he desire to pledge them for a loan, no operation is simpler and easier. Still, two things remain to be desired the perpetuity of the obligation, and a larger supply of the securities. In a term of years, all too brief, the bonds will be paid, and the question of reinvestment will come up, perhaps to be settled by heirs and assigns who may be tempted by a shrinking rate of return to accept securities which are no securities. Railroad financiers have noted the demand for permanency in investments, and have profited in supplying it. For example, certain permanent debenture stock issued by the Canadian

*	Rate realized on U. S. Government bonds at average January prices.	Rate of discount charged by banks in New York city |for prime commercial paper; average for year.	Bank of England's rate of discount; average for year.
	Per cent.	Per cent.	Per cent.
1870	4·86	8·08	3·44
1871	5·28	6·13	2·88
1872	5·06	6·38	4·09
1873	4·50	9·92	4·89
1874	4·58	5·98	3·69
1875	3·94	5·51	3·23
1876	2·28	5·12	2·61
1877	2·40	5·21	2·91
1878	3·69	4·81	3·78
1879	4·00	5·19	2·50
1880	3·75	5·33	2·76
1881	3·25	5·19	3·48
1882	3·00	5·67	4·15
1883	2·87	5·56	3·57
1884	2·60	5·40	2·96
1885	2·63	4·18	2·92
1886	2·50	4·95	3·05
1887	2·23	5·79	3·34
1888	2·28	4·87	3·30
1889	2·07	• • •	• • •
1889, January 1 to October 31	• • •	5·91	3·25

Pacific Railway Company, is quoted at 123; certain other of its bonds, equally well secured, but payable in 1937, are quoted at 110; both bear five per cent. Investors of the wealthiest class prefer investments which, while absolutely secure, may be subscribed for in blocks of a quarter to a round million a desideratum which further restricts their choice. An electric current may be so intense as to become an obstacle in its own path; a vast volume of capital in the hands of an individual has somewhat the same effect.

While the rate of interest on Government bonds, and city and railroad debentures has been steadily falling within the past two decades, the rates payable on real-estate mortgages have declined in sympathy. This year, in New York and Boston, liens on the best city property have been placed at four per cent, two per cent less than the rates current in 1869. In other large cities of the Union a similar decline is observable; and, as between newly settled States and Territories and the financial centers of the nation, the disparity in the rates payable on well-secured loans is much less to-day than it was twenty years ago. The significant point in the matter under consideration is not so much that the rate of interest has been falling as that interest has become distinctly separated from the wages of superintendence and the premium for incurred risk, which used to be combined with it. The return on a Government bond represents the bare remuneration of capital employed, without hazard or care. An investor in first-class city mortgages receives a larger income than if he had bought Government bonds with his money, but he has not so easy a time of it. He must have titles carefully and responsibly examined; his creditors may be unpunctual; occasionally he may have the trouble of a foreclosure on his hands. His investments are for comparatively short terms of years, and, between one investment and another, part of his capital may be unproductive; or, in reinvesting, he may be obliged to accept a reduced rate. Hence the competition for securities eliminating hazard and bother, which is one of the notable facts in the modern world of finance. Many causes have been at work in bringing down the return on a New York debenture to five eighths as much as can be obtained on a Fifth Avenue or Broadway mortgage. First of all, of course, must count the enormous growth of American wealth within recent years; and, next, the fact that a good deal of it is in the hands of comparatively few men. A multi-millionaire's income, even at the lowest current percentage, is so much more than his outgo that, if he can be relieved from care and anxiety in looking after his possessions, he is often content to buy securities paying but half as well as the best properties did twenty years since. Another prime cause for the fact under notice is the steady approximation to European rates of interest which has been going on since the close of the war. With trade restored to its normal channels, and a steadyreduction in the national debt, have come a constant appreciation in national securities. Ever-improving means of intercourse "by steam and telegraph have brought about a better knowledge in Europe of other leading American investments, and a competition for them which makes the London demand in substantial sympathy with that of New York. Meanwhile, too, European rates of interest have fallen; in 1887 Germany was able to convert her 31/2's into 3's; last year Great Britain refunded a large portion of her debt, which had borne 3 per cent, at 23/4, with a liability for but 21/2 after a certain term. Among the consequences which have followed the diminution of income from secure European investments has been the invasion of the American industrial field by European capital. This invasion, partly prompted by the fear of continental war, in seeking to add profit to interest, must both tend to increase commercial competition in America and contribute to further lower the rate of interest. A fact recently presented by Mr. M. A. Neymarck, the French economist, is worth mentioning in this connection: when the existing redeemable debts of France, of Paris, and of the French railway companies are paid, the redemption prices will exceed the issue prices by $1,300,000,000.

While the progress of science, applied to developing the resources of this country, has prodigiously increased its capital, the ratio of it offered for safe investment has increased at the same time. Savings-banks, trust companies, building associations, insurance companies diverse in type, afford, as it were, a thorough system of conduits to bring every tiny rill of saved earnings to some great reservoir of accumulation. Despite America's increase of population, there are now, probably, fewer hoards of money in its old stockings than ever. When tenders for city, county, State, or railroad bonds are opened, it is usual to find that the majority of competitors are trust companies, savings-banks, and other concerns representing small investors, whose demand first and chiefly is that their security shall be unquestionable. To this numerous class a vitally important inquiry is, Are we to expect a rise or a fall in the rate of interest? In considering this question it will be enough, in passing, to say that abnormal influences affecting the rate of interest are the remote contingencies of foreign war or civil commotion; the normal influences are chiefly four:

First, the comparative efficiency or reproductive power of capital; next, its security, depending on the character and ability of those who handle it; third, its supply and demand; lastly, the soundness of the currency, assuring the repayment of loans in un-depreciated money. With respect to the first factor, a glance is enough to show it to be two-sided. In the new South and new West, virgin forests, prairies, and mines offer as splendid opportunities to enterprise as enterprise has ever known; so far, therefore, the demand for capital to develop these new resources will tend to raise, or at least to conserve, the rate of interest. While this is true, it must be remembered that a given amount of capital is more efficient now than it ever was, that its efficiency increases; which means lessened demand for it, tending to reduce the terms paid for its use—unless new and profitable applications of capital can be made. As invention after invention is perfected and introduced, the outlay for machinery required to make a million pairs of shoes steadily diminishes. Quick and cheap railroad transportation enables a country merchant to keep his stock at a minimum by constantly "sorting-up"—reducing the capital needed for his business. Telegraphic purchases and payments now exclude the necessity for locking up capital while correspondence goes on through the post-office. In the vast stores of capital, set free in these and similar ways, arrives the opportunity for inventiveness, taste, and skill to create new wants, to supply them and some old wants as well which have long gone hungry—to increase the quantity and improve the quality of life. In so far as such new applications of capital are not commercially reproductive, they tend to maintain the rate of interest.

Next, as to security in investment. During recent years there has been an immense growth of American capital in the hands of people unable or unwilling to superintend its application in business, people in the main desirous of thorough security in their investments—many of them executors and trustees. Financiers have not failed to observe this state of things; it has enabled them to obtain vast loans at comparatively low and diminishing rates. Of late years have appeared innumerable issues of bonds, debentures, and mortgages; covering not only railroad property, but mills, elevators, apartment-houses, office and club buildings. When the loans obtained by these wholesale borrowings have been remuneratively applied, the result has been all that the lenders could wish. But, unfortunately, the securities which warrant a buyer in dismissing caution and the necessity for discrimination are few indeed. The popularity of coupon bonds has extended from those of a substantial description to many of little or no value. During the year ending June 30, 1888, twenty-one per cent of the bonds outstanding on American railroads paid no interest; the capital involved being no less a sum than eight hundred and twenty-seven million dollars. Of allied significance is the fact that in 1888 one in every ninety-eight firms in business in the United States became insolvent. Despite improved methods of transacting business, of estimating credits through mercantile agencies, there persists an overtrading which burdens the community with a heavy tax for bankruptcy. That administrative ability is much rarer than opportunities for its exercise is clearly one of the causes for low interest, and for the addition thereto which bankers and other lenders must charge in order to cover commercial risks.

The third influence bearing on the rate of interest is the comparative scarcity or plentifulness of capital. This is determined not only by the amount and efficiency of capital productively employed, but by the ratio of reproduced capital which is saved. Taking it by and large there seems no reason to believe that habits of thrift are losing their hold on the people of this country. As will shortly be seen, the returns of savings-banks bear this out. If persons of small capital are exposed to a reduction of interest from the safest forms of investment, this very liability may lead to greater thrift among those of forecasting mind. Where accumulation is quite too small for its income to yield a living, it is the capital sum that is looked to as a resource against a rainy day.

Lastly, as to the soundness of the currency. While "the consensus of the competent" holds that there is the menace of financial derangement in the legal-tender decision of the Supreme Court of the United States, and in the silver legislation of Congress, neither of these seems as yet to have affected the rate of interest. To provide against the contingency of a depreciated currency, whether fiat-paper or silver, now sought to be artificially bolstered in value, certain loans of large amount have recently been effected in Wall Street with the express stipulation of payment in gold coin. The precaution is significant.

Refraining from any attempt to weigh and balance others of the multifarious influences working for the depression or elevation of the rate of interest, it may be enough to say that the prevailing impression among both economists and men of business is that downward influences will probably continue the stronger in the years of the near future. This means hardship to many worthy people whose time of competence it postpones indefinitely; hardship, too, for the class who, unable to accept business risks or manage business investments, must needs accept less and less return from a little capital. Small comfort for them to hear that prices are falling, so that their loss of income is largely or wholly offset; does not rent rise constantly, and does not the area of "necessities" expand the while with an imperiousness scarcely to be withstood? But, turning from cases of this kind, which are after all comparatively few, the reduction of the rate of interest paid by secure investments is in the main a benefit; it means increase in the shares of produced wealth divisible as wages and profits, if it also means more for rent. It indicates that the growth of large fortunes is likely to be slower in the future than it has been in the past; and the growth of large fortunes is in many quarters regarded as a menace to industrial and political freedom. That wages have in the main risen during the past twenty years is clearly shown in the statistics of the State and National Labor Bureaus. In many trades money-wages have advanced; in others, where they have remained stationary or fallen a little, their purchasing power has increased; in a few trades, superseded by newly devised machinery, and in the case of unskilled labor subjected to competition with hordes of immigrants accustomed to a low standard of living, wages have fallen below the purchasing power of those paid twenty years ago. No State in the Union adds to her population more immigrants of the wage-depressing type than New York; still, on July 1, 1889, her savings-banks held on deposit $536,417,974, due 1,389,907 depositors. The amount had increased $22,000,000 during the preceding twelve months, and $201,000,000 during the preceding nine years. These figures prove a rapid improvement in the condition of the working people of New York; and, since migration from New York to other States is easy and cheap, her advance in general prosperity may be fairly interpreted as gauging prosperity throughout the nation.

While, then, wages have been rising and interest falling, a new method has perforce entered into the management of large properties. It used to be remarked, as a characteristic of American engineering, that it presented not the best thing, but the lowest priced thing that would serve. This is true no longer. Everywhere we find railroads adopting the most substantial types of construction and equipment. Steel rails long since replaced iron rails; now steel bridges are replacing wooden bridges; not only on trunk lines, but on local roads, large outlays are being constantly made for improved curves, gradients and ballasting. Already the increase in the cost of lumber, due to forest destruction, has brought in the experimental use of steel both for ties and for car construction. A steel tie is dearer than a wooden one, but its life is vastly longer. The same principle obtains in mills and factories: net profit can be increased by a judicious increase of capital expenditure, which adds to the account for interest, but deducts a larger sum from disbursements for maintenance, repairs, and accidents. Cheap money for good security has, too, had much to do with the new architecture of our cities—architecture which employs granite instead of sandstone, substitutes sandstone and marble for brick, and demands brick of new durability and beauty. In quite modest dwellings it is now usual to find hot-water or hot air furnaces instead of the heating stoves still general a decade ago; ranges and gas-stoves for cook-stoves; elaborate laundry appliances; electric bells—all intended to minimize service at the expense of an increased original outlay. If the occupant of a suite in a New York apartment-house, who has abandoned a self-contained house, is asked the reason, he will probably say, "I pay just as much rent, but I get along now with fewer servants."

The tendency observable on all hands to provide durability in the stead of flimsiness, the most elaborate and complete machinery for anything short of it, is accompanied by another tendency in no sense economical. When banks and office-buildings display floors of rich mosaic, walls and ceilings of variegated marble, staircases of Mexican onyx, it is evident that luxury brings a price as well as wholesomeness and commodiousness. Throughout the Union every considerable city has its structures of this type discovering the sky, mostly erected by insurance companies who seem to be hedging on the fall in the rate of interest by reaching out after unearned increment.

Rent has been affected in diverse ways by the cheapening of secure loans. In so far as mining privileges and the like can be worked with less cost for the hire of capital than ever, their net income, rent or royalty, has increased. Farming lands of all kinds but the best situated or the most fertile have tended to fall in rent as massed capital has become cheaper. Railroads, in opening up vast tracts of new territory with great rapidity, have kept the values of even the best farming land lower than they would otherwise have been. In the same direction also has operated the lowered rate at which money can now be borrowed on farm buildings and machinery. In the cities and larger towns rents have risen remarkably within twenty years, yet the rise would have been greater still had not the rate of interest dropped. Rent in cities and towns, as elsewhere, depends upon two values—that of land apart from improvements, and that of improvements. The first of these values is determined by the comparative salubrity, publicity, convenience, and beauty of sites; other things equal, it will tend to rise as the income of the average citizen rises—with the increase of ability to compete for advantages desired. The rental value of improvements, of all that capital adds in preparing for a building, constructing it, and fitting it up, will tend to approximate to the rate of interest payable on approved real-estate security. In New York city, where land is usually more valuable than the buildings which cover it, low terms for mortgage interest have not affected rents so much as in smaller cities where buildings are as valuable as or more valuable than their sites. Last spring a block of tenement-houses in New York sold at a price so high as to realize its purchaser but six per cent as a gross return on his investment. If his rents remain unchanged, any further fall in the rate of interest will enhance the price of his property. This incidentally illustrates how as interest falls land values rise, and explains the growing appreciation of home-owning in cities and their suburbs.

According to the statistics of the Interstate Commerce Commission, the bonded, share, and floating liabilities of American railroads amounted to $8,129,000,000 on June 30, 1888.^[1] It is not likely that science has any such revolutionary gift for mankind in the near future as the railroad; and as American capital at this time demands new outlets whereby to effect new economies or save noteworthy waste, it may be allowable to note some fields for sound investment as yet unoccupied. Is not the improvement of our towns and cities, as such, a field which capital might well enter? Recent investigations by Captain Francis V. Greene, of New York, and other experts, demonstrate that, were the city's pavements as good as they should be, horses could draw threefold greater loads over them, with an immense abatement of both noise and filth. While the improvement of the metropolis due to individual enterprise and taste has been marvelous of late years, its mansions and business structures vying with the finest in the world, the city as a city is little changed. Its gas, water, and sewer pipes are still laid in the earth beneath its streets, subject to unceasing disturbance for repairs. Its electric wires, for many years a grievous eyesore, a menace to pedestrians and an obstruction often fatal to its firemen, at last have so multiplied in number and deadliness that a beginning has been made in laying them underground—a tentative procedure attended with all the uncomfortable results of an underground piping for gas and water service. Repeatedly the suggestion has been made, echoed at last in the City Hall, that subways be constructed for the accessible disposition of gas, water, and sewer pipes, and for electric wires. Never until this suggestion is acted upon will the city's pavements be free from constant breaks, which, were repair of the carefullest, would never permit New York streets to remain smooth and seemly. Subways of the kind proposed could easily accommodate pneumatic tubes for the conveyance of postal letters and parcels. To-day the mails traverse New York, much as furniture and vegetables do, in common vans. So slow is their delivery that letters from Albany, arriving at the Grand Central Station at 7 a. m., reach Fourth Avenue and Thirty-second Street partly at 10.40 a. m., but in larger part between 12.40 and 1.10 p. m. The point named is half a mile from the station, on the way between it and the Post-Office. The quickest train from Albany to New York travels the distance, one hundred and forty-eight miles, in three hours and thirty minutes; a letter traversing a distance of six miles within the city occupies on an average five hours. Long ago the Western Union Telegraph Company connected its Madison Square branch with its headquarters on Dey Street: written messages are transmitted through its cylinders, two and a half inches in diameter, at the rate of a mile a minute. The tube in its course connects with three branch offices in Broadway—a hint for the pneumatic connection of branch post-offices with the general Post-Office, which, extended to the principal railway stations and ferry-houses in the metropolitan district, would give the postal service a new efficiency. More important than this pneumatic tubing is the question of rapid passenger transit, the inadequacy of existing methods being peculiarly impressive as the great exhibition of 1892 is discussed. Whether by tunnel or viaduct, it seems imperative that New York, at an early day, shall provide itself with transit facilities such as those of the German capital, where trains stopping at all stations, and trains running at high speed stopping only at the principal stations, run on separate sets of tracks.

This continent is, after all, only a larger kind of island, and increase of transatlantic travel has been needed to remove some of its insular complacencies, especially that with which it has hitherto regarded the condition of its streets.

In common with New York, every city and large town in America requires what may be called integration—a thoroughly comprehensive and intelligently planned outlay of capital for every means of welding it into a unit commodious, wholesome, and pleasant to live in; easy and cheap to get about in. There is an art of city design as well as house design: modern house planning not only bestows new comforts and refinements, it makes them all part and parcel of a whole. When cities and towns are treated structurally exactly as a good architect treats the edifice an unstinting capitalist asks him to create, life in them will be much better worth having than it is. And the financial opportunity to do all this appears when New York can borrow money at two and a half per cent—a rate one half as much as her citizens are obliged to pay for individual borrowings. What has been said with regard to cities and towns applies equally to means of communication between them and villages—the common roads, whose badness Prof. Shaler tells us imposes a tax of at least ten dollars a year on the average American household. Road improvement offers scope and verge for the profitable and safe investment of a good many millions now idle.Passing from matters of municipal and county administration to State and national interests, does not cheap and abundant capital make it possible to conserve the Adirondacks as a State park, and as the source of the principal rivers of New York; to establish a national system of afforestation; to reclaim the arid plains of the far West to fertility; to take in hand on broad lines the improvement of the nation's water-ways? Governments, honest and able, can do many things for the common interest which the people as individuals are powerless to do for themselves. Honest and able, there's the rub! The municipal administration of Berlin, a city well-nigh perfect in government, is carried on for a trifle more than the interest on the public debt of New York. Abounding cause is there to fear waste, corruption, and incapacity in any extension of governmental functions which the future may develop. Still, it is not so much fear of this kind which prevents that extension, as a lack of perception by the American people, governing and governed, of the great benefits that can follow the organized action of municipalities, counties, States, and the nation itself. There is much deploring of political degradation and political immorality: may we not reckon in the future, among the forces working for reform, that of capital wrongly excluded from vast fields of usefulness and profit?

 

1. Of this stupendous total, 39 per cent had made no return whatever during the preceding twelve months.