Money Must Work

by JONATHAN C. ROYLE

GOVERNMENT financing during the first half of the 1931-1932 fiscal year which started July 1 will provide at least temporary jobs for about two billion dollars. But this will give employment to only a minor part of the capital of the country. And money must work, just as labor must work. Unless each is employed at a fair compensation, there can be no lasting prosperity for the country.

Capital has accepted a drastic cut in wages in the last eighteen months. This has been more severe, in most cases, than the reductions in the wage levels of workers. Many dollars have been out of employment entirely, just as many workers have been without occupation. The position of both capital and labor has an equally potent effect on the condition of business. If dollars are idle, it means that men will be thrown out of employment. If men are idle, it means that dollars will flow in business channels less freely.

Each must work, but where labor, in some instances, has had to endure wage reductions of 10 to 12 per cent, capital returns have been cut in certain cases from 40 to 50 per cent when absolute safety was assured. Money has been looking for security in its employment in the last year rather than for high rate of interest. That explains fully the eagerness with which offerings of United States Government securities have been snapped up even at extraordinarily low interest rates.

THE main factor which has produced this situation has not been solely the state of business. It has been ‘a state of mind’ which has placed emphasis on liquidity rather than on earning power of investments. In other words, capital has felt that United States Government Securities were subject to only narrow price fluctuations and could be turned into cash instantly with only slight danger of loss. Capital has not had the same confidence that other investments might not be subject to further fairly wide declines. It was not that investors contemplated liquidating, but that they wished to feel they could do so if necessity arose.

The elements which threaten the security of well-chosen investments to-day are almost entirely psychological. There has been no panic developed from the depression, but there has been fear. Panic is merely fear, raised to the nth power. It is a notorious trait of human nature that the ordinary individual never wants to sell when everybody else wants to buy, although sure profits would result. It was this trait which shoved security prices in 1928 and 1929 to absolutely unwarranted heights.

The investor is equally loath to buy when the majority of others wish to sell. It is worthy of note that when Great Britain sought to buy silver during the war and the price rose to $1.23 an ounce, none of the billions of ounces hoarded in India was brought out, but when the price this year dropped to around a quarter of that level, millions of ounces were dug up and thrown on world markets.

THE main threat to the security of money at the present moment is lack of confidence in their own judgment by holders of money, Confidence in the stability of the government of a foreign nation has always brought investment to the securities and industries of that nation. The same is equally true to-day of domestic business.

Money is notoriously timid. When possessors of money saw quotations for stocks and bonds, in which they had had their dollars working, decline steadily, they became frightened and many turned their holdings into cash that they either put into government securities or allowed to lie idle. Some went so far as to hoard their coin in safety-deposit boxes or other modern equivalents of the sock hidden in the mattress. The trend was emphasized when some mumnicipaland state bonds defaulted on their interest and old-established industrial concerns reduced or passed their dividends. This policy lowered the American standard of living as effectively as any labor wage cuts or industrial unemployment could do.

So far, the chief beneficiary of the low money rates has been the government. The treasury has been able to refund its maturing indebtedness and raise money for current needs at a figure so low as almost to be absurd. Some of this money, so loaned by the people, has been passed on for use in Federal construction projects, but the sum total of such work has not been sufficient to change the employment status of either capital or labor.

The two, once enemies, now are inevitably interlocked by mutual interests, for every laborer in this country also is a capitalist or a potential capitalist, and every dollar is a working unit, or should be. ‘ Easy money,’ ‘cheap money,’ and low interest rates have not inspired business activity or expansion. The banks to-day are full of money which they cannot lend on what they feel is safe security, even at the lowest interest rates in years.

The banks want to lend money, but they desire to lend it to people who they are absolutely sure will repay it without a chance of failure. Clients of that character have not bad to borrow money and have not wished to do so until business conditions improved. A stalemate resulted which raised a huge demand for government securities.

The banks of the Federal Reserve System, according to recent figures, have roughly $36,000,000,000 on deposit. They have to put that money to work in order to make profits for themselves and their stockholders. How difficult this has been is indicated by the notification of banks to depositors that interest on demand deposits would hereafter be one half of one per cent per annum. There is over $27,250,000,000 in the savings banks of the country. Not only have the savings banks cut down their rates of interest on deposits, but they are declining to receive more deposits. In some instances they have put a limit of $1000 a quarter on the amount any single customer may deposit. This all means that billions of dollars of capital in the United States are idle. They will not be allowed to remain idle. Since the days of the parable of the talents, the business man who buried his talent has been an object of scorn and derision.

THE banks have no monopoly of idle money. Those who lived on the interest of their capital, and who saw the securities in which their principal was placed steadily diminishing, liquidated their holdings in many cases. This money has not yet been reëinployed. The same situation is true of the investment trusts which grew up in such numbers after 1927. Their portfolios in many instances are nearly empty.

It applies to the industrial corporations which have placed themselves in such sound financial position that they have excess capital. This they had put into stocks and bonds of other corporations that it might be working until the corporation itself needed it. The selling of these holdings and the decline in dividends of the stocks and bonds retained have materially affected the earnings of many companies and their stockholders. This necessarily must be so in the case of concerns like Du Pont de Nemours, heavy holders of General Motors, and General Electric, which in earlier years obtained no small percentage of earnings from its outside investments.

The insurance companies and trust companies have emphasized safety rather than rate of return, and this in turn has a direct bearing on the policyholders.

All of this idle money must and will be put to work. Money is not lazy; it is merely frightened and timid. Its fear is wearing off and it is ready to go to work again. Capital is beginning to realize that there are still 126,000,000 Americans who must have certain commodities. The concerns which provide such commodities are sure of a market, and as long as they are, there will be well-paid jobs for dollars.

As the factor of insecurity passes, along with business depression, capital is going to seek wages higher than the government security scale. And never were there such opportunities for obtaining these advances, as well as heavy appreciation in prices. There are common stocks of sound corporations to-day selling at prices to yield a high rate of interest and with the practical certainty of increases in value which will mean a doubling or trebling of the investor’s money. Not allcompanies did badly in the last year. Among those which experienced the most profitable annual period they ever had were the Hershey Chocolate Corporation, the Household Finance Corporation, Kirby Petroleum, the American Machine and Foundry Company, and the American Tobacco Company.

Yields of 5 per cent and up have not been infrequent in stocks at various times in the first two quarters of the year. Among such opportunities may be listed American Safety Razor, Hawaiian Pineapple, Industrial Rayon, Chicago and Northwestern, and Warner Bros. Pictures, preferred.

The bonds show opportunities almost equally favorable. The obligations of some of the great railroads which are thoroughly well protected have sold at prices which yielded high rates on the investments. Among such were: Alleghany Corporation 5’s , Baltimore and Ohio 4 1/2 of 1960, Chicago and Northwestern 4’s, Erie Refunding 5’s, and New York, New Haven, and Hartford 4’s.

The great fundamental industries of the country on which securities are based are sound and safe. The present situation is aptly illustrated by Kipling’s story ‘In the Tangi,’ where an entire army corps was blocked in a narrow mountain pass because an elephant lacked confidence in the stability of a bridge. The moment the elephant was induced to cross, the entire force, horse, foot, guns, and commissariat, rolled over safely.

Money is now testing the investment bridge. If it is sound and capital is convinced of its safety, the dollars will roll over in a steadily increasing procession. Investment vision will adjust itself so that the possibilities of gain and the possibilities of loss assume their correct, proportions.

IT has been the seizing of opportunities during and after depressions which has resulted in the start of many great fortunes, and it is sure that there are sufficient investors with enough faith in the future of the United States to grasp the present opportunities and give the more timid a ’lead.’ Corporate security offerings have been exceedingly small for months. These issues will increase as additional money goes back to work, and there undoubtedly will be a new list of offerings in industries now under intensive development which will compare in volume with the output which attended the development of the radio, electrical and gas refrigeration, aviation, and the talking movies.

There surely will be enough timid money to assure oversubscription of all government offerings in 1931. After all, these securities are the safest investment known throughout the world. But when money makes its bid for higher wages, much of the capital put into government bonds and notes will be withdrawn. This does not reflect in the slightest on the value and integrity of government securities, but merely will indicate a normal search for higher interest rates. It has not been forgotten, moreover, that some classifications of Liberty Bonds, probably as sound securities as ever were offered an investor, at one time after the war dropped over fifteen points under par.

But whether money works for the government or a private employer, the lay-off is over. Money will come surging into the mills and factories and punch the time, clock with the rest of the employees. Until it does, and until there is a job for every idle dollar that wants to work, this country will not return to the full heights of prosperity.