Degree Of Safety

It is simply impossible to estimate accurately what the per cent of losses has been on investments which have proved disastrous. Nevertheless it may be taken for granted that when laid side by side with the enormous volume of capital which has been invested in securities in this country, it comes to but an infinitesimal part of the whole. As the country grows more settled, the per cent of loss will gradually lessen. Such is the characteristic of every nation as it grows older. Take England, for example; also France and Holland; Germany and Austria, only in a less degree. The resources of each of these nations have been so scraped over by capital in its search for opportunities of profitable employment that they no longer offer the investment possibilities they once did. As a result, the majority of their government and municipal obligations, their railroad securities and their land and real estate mortgages, command, during normal periods, in their leading financial market places, a premium which reduces the average income they yield to about 4 per cent per annum. There is always such a large demand for these securities that they are scarce. Ultra-conservative investors prefer them and are willing to forego a part of the income which is obtainable from securities of lesser safety.

Supply And Demand

Here we may explain briefly a fundamental law governing investments as well as speculations. I refer to the economic law of supply and demand, which is as immutable in influencing the prices of securities as it is in deciding the price of all our leading commodities. Artificial manipulation may stay the operation of this law, but only temporarily; sooner or later it will express itself. The panic of 1907 is a good illustration of the immutability of this law of economics. Security prices had been held up by sheer force for a year previous, against the lessening available supply of capital, only to break at last through the insecure support when all artificial means had exhausted themselves.

It is a natural sequence for investments to rise in price when the demand for them outruns the available supply and to decline when the demand is small and investments glut the market. It is this rising and falling in demand and supply which causes the fluctuation in prices, not only in securities, but in wheat, cotton, hay, barley, oats, and even in the precious metals. Even gold, the accepted standard for coinage among all the principal nations, is subject to the operations of this law. Some of our foremost economists contend that gold in recent years has been mined in such large quantities as to cause the higher cost of living and correspondingly to reduce investors' income.

You will think this a strange theory, but the contention is logical. The more gold there is, the greater is a people 's purchasing power, and as it increases, the demand forces prices up. On the other hand, the income on a secured investment is fixed. A bond or a mortgage may have been purchased some years ago at a price to yield an income of 4 per cent annually, or $40 on each thousand dollars. At the time of the purchase the income may have been attractive. At that time a suit of clothes may have cost only $30, a hat $3, and a pair of shoes, $4. Five years later the same suit of clothes may cost $35, the hat $3.50, and the shoes $5, but the investor holding a 4 per cent bond or a 5 per cent first mortgage derives no greater income, although his purchasing power is considerably reduced.

The peculiar conditions in England, France, and Holland heretofore mentioned are recalled for no other reason than to show that the United States is assuming somewhat the same characteristic. The investors of these countries, for lack of opportunities at home, pour millions of their capital every year into the development of the resources of their colonies and of other countries. While our country is far from exhausting its almost unlimited resources, it has been apparent for some years to keen observers that the wealth of our people is reproducing itself at such a rapid pace as to supply far more fresh capital than is needed at home, so that every year finds us with a great deal of money to spare for investment in other countries. We are taking our place beside England and France as a free and generous lender of capital to smaller but growing nations.

Only since the close of the Spanish War has the United States participated with the much older nations in lending money to Japan, China, Mexico, and the South American republics. In less than fifty years - one might almost say in twenty years - this country has attained that position of affluence which prompts the reference to us as the land of a thousand millionaires.

The latest and most striking evidence of the growing power of the United States in international finance has been disclosed during the European war. Chiefly on account of the large trade balance in its favor, the lessened demand for money in its own industries as a result of the stagnation in business upon the outbreak of the war, and the beneficial effects of the Federal Reserve system, surplus funds piled up to undreamed of proportions. Not only was she able to refinance her own maturities during this period and buy back many million dollars' worth of securities, which were returned from abroad, but she was able also to extend large loans and credits to both the peaceful and belligerent nations of the world.

Beneath this phenomenal growth in wealth must be the intelligent employment of capital. What does this mean but the making of shrewd investments? Were this not a fact, we could hardly have financed the Civil and Spanish American wars, built over 300,000 miles of railroad and twice as many miles of local traction and interurban lines, vast public improvements, splendid harbors, and gas and electric light plants; opened up mines of coal, silver, copper, and gold; built immense refineries and smelting plants; and reared all about us industries which are simply gigantic in the wealth they control and the amount of labor they employ.

If George Washington were to come back to life, he would be lost in amazement at the changes wrought in this country, although little more than a hundred years has passed since he was laid to rest at Mt. Vernon. It would seem to him as if some wizard had visited the land and wrought this remarkable change. Yet this wizard has been none other than capital - money profitably invested. Have we not here a concrete example of the uniform success of intelligent investment? Does it not plainly indicate that where prudence is exercised in the diversification of investments there need be little fear as to the safety of the capital employed?

The Intelligent Employment Of Capital. Test Questions

1. What sort of risks are unpredictable in business affairs?

2. By what means are risks distributed in investment?

3. How do savings banks use the law of averages of risk in the management of their affairs?

4. What is meant by a bond being a legal investment for savings banks?

5. How may an individual investor apply the principle of diversity of investments?

6. What are some of the principles to be observed in diversity of investments?

7. What factors determine the degree of safety of bonds?

8. What effect does, the degree of safety have upon interest rates?

9. How does the law of supply and demand operate in the security market?

10. What effect does the production of gold have upon security prices?

11. What are some of the evidences of the growing financial power of the United States?

12. What does all this indicate with reference to American business ability?