" TWO PER CENT."
WE strongly advise such of our readers as have cash to read carefully and ponder well the article in the Edinburgh Review just out called " Two per Cent." They will not find in it what would most interest them, a speculation as to the moment at which the present paralysis of enterprise is likely to end, a point upon which the reviewer scarcely gives a hint, but they will find the next best things, an exhaustive analysis of the causes and an accurate description of the extent of the present depression in speculation, trade, and values. They will see, and see clearly, why their property is depre- ciated, why " business " languishes so feebly, why profits are so small, why, above all—for this is the exceptional fact of the situation—with money at two per cent. it is so very nearly impossible to borrow. Much of the information thus conveyed, and conveyed, it is rumoured, by a writer who has undisputed claims to be heard, will strike them as new. For example, very few men outside the inner financial circle are, we suspect, aware that of the enormous sum in deposit in the Bank of France only a moderate quantity is available for loans ; that of the increase of gold in its vaults a large proportion is due to an extraordinary increase in its note circulation, an increase attributed to the growing confidence of the peasantry ; that of the ridiculous sum, forty millions or so, which the Bank is presumed to hold, twenty-seven millions is already in circulation in the shape of notes. The note circulation even of England, where the gradual expansion produced by a gradual increase of country confidence in notes is not so operative as in France, is three millions sterling above its usual level, the three millions being, it is to be presumed, a country bankers' hoard. The enormous stock supposed to be held in the two Banks is therefore reduced from sixty millions to twenty-six, a very large or, as the writer says, a very " lamentable " reserve, but still one not beyond the resources of speculation to absorb. But why is it not absorbed? Because its owners are waiting, content without interest, or if they deal with banks which give interest, content with one per cent. until "safer " times, times in which risks appear less extreme than at present. Every kind of marketable security seems to them more or less unsafe. Every Government stock, except English Consols and French Rentes, which are unnaturally high, and Peruvian and Chili= bonds, which have, for reasons understood on 'Change and nowhere else, remained stationary, has gone down heavily ; limited liability companies are distrusted ; Railway securities are regarded with utter disfavour ; and the largest investment of all except Consols, foreign business, has seriously declined. It has not declined, it is true, by the sum casual observers imagine, for our trade with three-quarters of the world, Europe, Asia, and Africa, is increasing ; but it has declined, our commerce in North America and Australia together showing a deficiency which changes the usual increase on the year into a total decline of six millions sterling. Under these circum- stances nobody trades boldly, for, as merchants are men, mer- cantile depression or elation is not accurately measured by the Trade returns, and there is actually no outlet for disposable capital except dealing in bills, the Discount market, as it is termed. This discount market is not much approached by the public, except through bankers, who are bound by the first conditions of their trade to exercise over-caution, and who, therefore, deal only in "good bills," for which there exists of course a real, and even a severe, competition. Everything else is distrusted, the great channel of foreign trade is choked, and while money is nominally at two per cent., the great mass of mankind cannot borrow on any terms whatever short of a deposit of real securities, and even on that deposit only at the old rates. " Two per cent." is, in fact, for commercial or speculative purposes, not the market rate.
The writer has certainly proved this part of his ease com- pletely, and we only wish he had been equally exhaustive in his proof of the deduction which we understand him to make, and in which, if we interpret him correctly, we heartily coin- cide. He is guarded on this point to obscurity, but we con- ceive him to think that the present state of affairs is temporary, that the reservoir is not nearly so full as it seems, the supply being concentrated rather than abundant, that the moment confidence revives the cisterns will begin to empty, and that the permanence of the new law, previously explained by him, which tends to raise the English rate of interest is in no way affected by what seems so total a break-down. He is dreadfully cautious on this point, but we need not be, and may say out, at the risk of being thought very silly, that nothing which has occurred since November, 1866, has tended to depress our confidence in the view we explained during that year, that there was no longer a national, but only an international rate of interest for money, that all reservoirs of capital were be- coming merged in a single reservoir, that the English reservoir was consequently emptying and not filling, and that the new junction reservoir would not be full for years. In less metaphori- cal language, America, which pays habitually eight per cent. for sleeping capital on perfect security ; Asia, which pays ten ; the Continent, which pays five ; and England, which pays three
and a half per cent., were all equally customers for the same• fund, the savings of a world, and the rate of hire must there- fore be an average among them. Nothing has occurred among all the catastrophes of the year to modify this process. The• nations are just as closely connected, the profit of reproduc- tive work in foreign countries is just as great, the interdepend- ence of all enterprise is just as complete. England, and for that matter the whole world, has suffered immensely by the• suspension of industry produced by the collapse of credit ; but the moment credit revives, industry will work again under its new condition, namely, that everybody has the whole world before him as a field for the investment of surplus capital, and will therefore want and receive the international instead of the national average rate. We no more believe, for instance, in the permanency of the present price of English Consols,. than we believe in the permanence of Two per Cent. Every English security must and will tend to the price at which am equally good foreign security oan be purchased ; if Germany, for instance, or India can afford six, seven, or eight per cent.- for mortgages, money will not long be obtainable on English mortgages at four. Those who think otherwise are deceived by a temporary state of affairs, arising partly from the depres- sion produced by a grand sweeping away of nominal or un- real wealth—as, for instance, of Railway incomes paid out of- capital instead of profits—partly from a temporary restriction of trade, and partly from a suspension of credit due mainly to fear of the immediate European future. The argument which proves that the return for English capital cannot again be- limited by English enterprise seems to us in 1868, as in 1866,. unanswerable.
As to the time at which the rebound is to occur the- Edinburgh reviewer gives us no hint whatever, and probably no man can do more than state some of the conditions. To• make the rebound complete three conditions at least ought to- be fulfilled, and we doubt if there are three men in the world who can clearly foresee whether they will be fulfilled at all, or one yho will affix to that fulfilment a certain date. We- can but guess more or less erroneously. In the first place, there ought to be some reasonable prospect or, to speak as- speculators speak, a certainty of European peace, which does- not exist at present, and will not exist until it has in some way been made sufficiently clear that France will permit the completion of Germany without an exertion of her whole- strength to resist that revolution. It is highly probable, in our judgment almost certain,—but still any judgment must be- a calculation from half-known data,—that this question will be- settled one way or another before next September, and uncer- tainty at least will be at an end. If this is so, the second chance of war, the Eastern Question, as it is called, need not interrupt the rebound, for with Germany and France at peace„ whether without war or after war, any struggle arising out of that question will be localized as to its commercial effects. Them the American financial "crisis " ought to be over, an event on. which prediction is very vain. The unscientific Revenue system, which is the root of mischief in the United States, may be re- organized in December, 1869, when the new Congress comes. into power, or may last two years longer, the latter being the more probable calculation. But whether reorganized or not, a, year ought to suffice to create sufficient trade elsewhere to the effect of the loss even of so great and permanent a customer as the United States, more especially as the Canadas, and Australias, now included by the reviewer in the " Ameri- can " account, always recover quickly. And in the third place, confidence requires some further time to recover. Men have been hit very hard, and are still a little dazed, still unable to- distinguish clearly between real and fictitious values, still willing to wait and see things get a little more settled. Many signs, however, concur to prove that the holders of spare capi- tal are wearying greatly of this pause ; that the first appearance. of returning activity or of settled peace will be taken as a sign that prosperity is all coming back ; that with it there will be- a rush—it may be, though that is improbable, a slightly wild rush—for investments. The probabilities are, therefore, that if- peace is maintained or war fought out there will be a reaction in the end of summer or beginning of autumn, which will go- on and on in ever increasing force until the world is once more before the investor, and the rate of interest once more inter-- national, that is, for this generation at least, higher than what has been considered for many years the normal English level- There will be no lack of capital seeking to earn this rate, for though the reviewer seems to believe that the savings of one or two years have been swept away, a large proportion of them. have merely been transferred to different hands, and when he
says no kind of industry has escaped great loss, he forgets the greatest industry of all, the cultivation of the land.
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