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Cl^e ^nnalsi 


January, 1920 

Editob: CLYDE L. KING 

AsasTANT Editob: G. H. CRENNAN 

AaaociATB Editob: J. H. WILLIT8 

Editorial Couxtcil: THOMAS CONWAY, Jb., A. A. QIE8IECKE, A. R. HATTON, AMOS S. 




Editor in Charge qf 
tkii Volume 

ROY 0, BLAKEY, Ph,D., • 
AinsUmt Professor qf Economics, Univ, of Minnesota, 
and Recently Associate Director, Savings Division, United States Treasury Department 

The Amb hican Academy of Political and Social Science, 
Street and Woodland Avenue,' 


Digitized by 


G>pyTigfat, 1920, by 
Thx Amebican Academt of PounCAL AND Social Sciencb 
All rights reserved 


ENGLAND: P. S. King & Son, Ltd., 2 Great Smith St, Westminster, London, S. W. 
FRANCE: L. Larose, Rue Soufflot, 22 Paris. 

GERMANY: Mayer & MfUler, 2 Prinz Louis Ferdinandstrasse, Berlin, N. W. 
ITALY: Giomale Delgi Economist!, via Monte Savello, Palazzo Orsini, Rome. 
SPAIN: E. Dossat,.9 Plaza de Santa Ana, Madrid. 

Digitized by 





The New American Thrift 





JANU'ARV. 1,920 

The American Academy 


Political and Social Science 



U S. ROWE, Ph.D., University of Pennsylvania 


University of Pennsylvania 


University of Cincinnati 


University of Pennsylvania 

- ■ - ■ leli 

Federal Reserve Bank, Philadelphia 


University of California 



North American Buildingi Philadelphia 

University of Pennsylvania 

General Advisory Committee 


Madrid, Spain 

Montevideo, Uruguay 

London, England 

Oxford, England 

Buenos Airea, Argentina 

Unlversliy of Louvain 

Royal University, Padua, Italy 

University of Illin is 

New York Universiiy 


Johfls Hopkins University 

Paris, France 

University of Cambridge 


University of Cambridge 


Madrid, Spain 

Santiago, Chile 

University of San Marcos 

Lima, Peru 

London, England 




Assistant Editor: C. H. CRENNAN 
Associate Editor: J. H. WILLITS 
Editorial L^ouncil: THOMAS CONWAY, Jr., A. A. GIESIECKE, A. R. HAT- 

Aii-xiamw vnuMo *»j 



Editor in Charge, Rot G. Blaket, Reoentiy Asaociate Director, Savings Division, Treasury Depart- 
ment, Washington, D. C. 



Editorial Foreword. 

Thomas Nixon Carver. Harvard University, Cambridge, Mass. 

William Mather Lewis, Director Savings Division, U. S. Treasury Department, Washing- 
ton, D. C. 



GETS 11 

B. R. Andrews, Teachers College, Columbia University, Assistant Director, Savings 
Division, U. S. Treasury Department. 


John A. Lapp, Managing Editor Modem Medicine, 50 East Washington St., Chicago, 01. 



Frank L. McVey, President of the University of Kentucky, Lexington, Ky. 

David Friday, University of Michigan, Ann Arbor, Mich. 

A. H. Hansen, Associate Professor of Economics, University of Minnesota, Minneapolis. 
MENT 50 

Frank E. Wolfe, of the American Alliance for Labor and Democracy, 1810 Cunard Build- 
ing, Chicago, 01. 

George W. Dowrie, Dean of the School of Business University of Minnesota, Minneapolis. 

A. C. Miller, Federal Reserve Board, Washington, D. C. 

Charles Wallace Collins, Advi^r to Senate and House Budget Committees, Washington, 



David Snedden, Teachers College, Columbia University, New York City. 

Holoombe Parkes, Associate Editor, Railway Age, Chicago, 111. 


E. H. Thomson, President Federal Land Bank, Springfield, Mass. 

Digitized byLjOOQlC 

iv Contents 


Francis H. Sisson, Vice-President, Guaranty Trust Co. of New York. 

Thomas W. Lamont, J. P. Morgan & Co., New York City. 

Herbert Hoover, Director Allied Relief Administration, Stanford University, California. 



Robert W. Woolley, Interstate Commerce Commission, Washington, D. C. 
FOOD THRIFT. . . : 118 

Raymond Pearl, Department of Biometry and Vital Statistics, The Johns Hopkins Uni- 
versity, Baltimore, Md. 

H. L. Baldensperger, Sometime Executive Officer, Salvage Division of U. S. Army, Uni- 
versity of Pennsylvania, Philaddphia. 

George W. Sherman, Manager Salvage Department, B. F. Goodrich Co., Akron, Ohio. 

W. R. Conover, General Electric Co., Schenectady, N. Y. 



Albert W. Atwood, Princeton, N. J. 

Theodore H. Price, Editor of Commerce and Finance, 65 Broadway, New York City. 

J. E. Cummings, University of Minnesota, recently of the U. S. Treasury Dept. Minne- 
apolis, Minn. 

Milton W. Harrison, Executive Manager, Savings Banks Association of the State of New 
York, 56 West 45th Street, New York City. 

James B. Morman, Assistant Secretary, Federal Farm Loan Board, Washington, D. C. 

S. S. Huebner, Professor of Insurance, University of Pennsylvania, Philadelphia, Pa. 



S. W. Straus, President of American Society for Thrift, 160 Broadway, New York City. 


William Schooling, C.B.E., National War Savings Conmiittee, London. 


George F. Zook, Head of Department of History, Political Science and Economics, Penn- 
sylvania State College, recently with U. S. Treasury Department, State College, Pa. 



Edward L. Thomdike, Teachers College, Columbia University, New York City. 


W. H. Carothers, Professor of Education, State Normal, Emporia, Kansas. 

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Contents v 


Hartley Withers, Editor of The Eoonomisly London. 

Alvin Johnson. Editor New RepMie, 421 West 21st Street, New York aty. 

TWO THRIFT TABLES (Mathematical) 289 

Miles M. Dawson» 141 Broadway, New York City. 


George F. Zook, PennsyWania State College. 
INDEX 246 

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America's New Conception of Thrift 


FOR many years prior to the Great 
War the term thrift carried to 
the minds of many Americans several 
unfortunate connotations. It was fre- 
quently associated with parsimony, 
niggardliness, miserUness and other 
traits which every liberal and generous- 
hearted American properly thought 
very unbecoming to one who shared 
the bounteous resources, the great 
opportunities and freedom of the 
Western World. But the tremendous 
struggle which threatened not only to 
shackle the Old World, but even to rob 
the New World of its cherished Uber- 
ties brought home to our people a new 
conception of thrift, in fact, an appre- 
ciation of true thrift and a realization 
of the fatal consequences of clinging to 
old misconceptions. 

Many realized for the first time that 
it was a matter of life and death to 
thousands of soldiers and of civilians 
also, whether they wasted or whether 
they conserved food and fuel; whether 
by demanding non-essentials they 
diverted labor, materiab and machin- 
ery to making these non-essentials, or 
whether they freed this labor to fight 
in the trenches or to supply those who 
fought, or to feed and clothe those who 
supplied the fighters. We learned of 
our economic unity and interdepen- 
dence as never before, we saw that the 
real army consisted not only of the 
men in uniform, but of the entire peo- 
ple who supported them. Anybody 
who wasted or misdirected the use of 
labor or materials or machinery or 
land or any other productive factor 
was a public enemy for, by so doing, 
he weakened the forces in the front 

lines or, what was just as important, 
the great civilian army behind the 

Food that went to the garbage pail 
and labor that was idle represented 
only the most obvious kind of waste. 
Brain, brawn, material and equipment 
that were misdirected, that were used 
for second-class purposes when they 
could have been used for first-class 
purposes, were to that extent wasted. 
On the proper use of these capacities 
and resources hung not only the life 
and death of the soldiers and civilians 
but, also, the progress of civiUzation 

Thrift was thus impressively shown 
to Americans in its true Ught. In- 
stead of suggesting stinginess, it came 
to connote proper uae^ the use of means 
in such a way as to achieve the greatest 
results. It was closely associated with 
effectiveness, loyalty, patriotism, vic- 
tory. It took a new place, an exalted 
place, its true place in popular esti- 

Though the call for thrift, that is, 
the proper use of capacities and re- 
sources, was more dramatic and insis- 
tent during the war than it is in peace 
time, nevertheless, its importance for 
the long run happiness of the race was 
no greater then than it is now. It is 
true that economies and sacrifices that 
were needed then would not be justi- 
fiable now. Proper use always implies 
adjustment and adaptation to existing 
circumstances and conditions, and this 
requires that an eye be kept on the 
future all the while. 

Man is so constituted that he has a 
recurring series of wants. Regardless 

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The Annals of the American Academy 

of how much food he may have on 
hand he cannot eat enough today to 
satisfy his hunger for all time. He 
requires a constant stream of income 
in the form of food, clothing and fuel, 
to satisfy his needs. As certain primal 
needs are satisfied, other desires make 
themselves felt and he is stimulated 
to produce more things to satisfy these 
desires also. For all practical pur- 
poses, man's wants seem capable of 
indefinite expansion. The satisfaction 
of all of them requires an indefinite 
expansion of production, not an indef- 
inite increase in the production of 
bread for any one man, but after suffi- 
cient bread, then better bread, better 
clothes, better houses, automobiles, 
aeroplanes, music, painting, literature, 
leisure to philosophize, to think on 
higher things. 

That individual, that family or that 
nation which consumes daily or yearly 
all that it produces can never progress. 
If it considers today only, if it takes no 
thought of the future, it is doomed to 
stagnation if not to death. But by 
devoting part of current energy to 
producing tools and other equipment, 
the productive capacity of following 
years is increased, and it soon becomes 
possible to satisfy more and more cur- 
rent w^ants and at the same time to 
devote more energies each year to the 
increase of equipment. This process 
is cumulative. 

The increase of productive capacity 
through the improvement of health, 
technical skill and education is just as 
important as the increase of machine 
equipment or land fertility. In fact, 
the piling up of highly perishable 
goods can not go very far and the 
accumulation of durable consumption 
goods like clothing, houses, and even 
machinery, can conceivably be pushed 
beyond practical limits for any given 

set of conditions. We are at present, 
however, far distant from such limits. 
In truth, they are beyond our present 
horizon, so that no one has cause to 
fear that we may become over-thrifty. 
It is true, however, that real thrift 
means devoting more and more atten- 
tion to the development of the capaci- 
ties of the human machine, not only 
its capacities for producing material 
goods but also its capacities for pro- 
ducing and enjoying the highest things 
of life. 

In our careless thought and speech 
much passes for thrift that is not thrift. 
The Italian inmiigrant who starves his 
wife and takes his fourteen-year old 
boy from school to put him in a factory 
that he may help pay for a new home 
little knows the meaning of thrift. 
The father who sends to college his son 
who does not have the capacity to take 
advantage of his opportunities does 
not practice true thrift. The state 
which has an educational system 
poorly adapted to the needs of its chil- 
dren is not thrifty. The nation or 
society which, through lack of fore- 
sight, allows its governments to spend 
money recklessly, its railroads — ^the 
arteries of its industrial organization — 
to become almost hopelessly clogged, 
its great mass of working humanity 
and its captains of industry to get at 
such cross purposes that only 50 per 
cent to 75 per cent of possible produc- 
tion is realized while millions want and 
thousands actually starve for the neces- 
sities of life — ^that nation, society, or 
world certainly has some lessons to 
learn about true thrift. 

We are so busy with the day's work 
that we neglect the future. The busi- 
ness man who is most intent upon mak- 
ing money, the banker who is popu- 
larly thought of as being most thrifty, 
the educator and the so-called states- 

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America's New Conception of Thrift 


man who have no real vision are all 
akin to the thriftless fellow who is 
happy if he has a supper tonight, re- 
gardless of what the morrow may bring. 
In fact, most of us are so absorbed 
with the things immediately before us 
that we do not have time to attend to 
our most important concerns. Every 
two years we elect to Congress and our 
legislatures men nominated by inter- 
ested parties, or hale fellows well met, 
rather than take the time to attend 
the primaries and see that properly 
qualified men are nominated. Our 
civilization with its industrial, political 
and social organization has become so 
complex that our old machinery will 
not function efficiently and we are too 
busy to study the problems seriously 
and too short sighted to put in posi- 
tions of responsibility men who are 
best qualified to guide us. After we 
elect our representatives, we do not 
let them concentrate their energies 
upon matters of moment. We fritter 
away their time by making them petty 
servants to look after pensions, allot- 
ments, appointments, post office build- 
ings, river and harbor improvements 
and other matters of local interest. As 
a result they do not have time to con- 
sider duly how that this legislation or 
that legislation, or the lack of it, will 
stir the nation or the world from its 
foundations. For example, they do 
not see until it is too late, that the easy 
loan policy of financing a war carries 
with it the risk of upsetting standards 
of hiring, wages, and the whole indus- 
trial organization. The lack of a little 
foresight and judgment may easily 
nullify a generation of thrift education. 

it may even throw the world into 

Little wonder that domestic affairs 
run amuck, that civilization barely 
escapes annihilation. Possibly those 
who profess to be our leaders should- 
receive the greatest censure. To them 
we look for guidance, but all of us are 
too much inclined to shift the blame. 
We ourselves are all responsible for 
selecting our leaders and hence for our 
leadership. Because of our lack of 
vision in the past the world has run 

But we are awaking to a realization 
of our plight. We are still groping to 
find our way out, but we are getting 
new ideas of industrial and social effi- 
ciency. We are coming to see that for 
a nation to prosper, to thrive in the 
true sense, thrift must mean much 
more to us than it has in the past. We 
are coming to learn that the essence of 
thrift lies in seeing the present and the 
future in their true relations, and then 
using all available means in such ways 
as to attain the greatest sum total of 
human welfare. This implies fore- 
sight, an appreciation of relative values 
and consequently of things most worth 
while, as well as some conception of 
practical methods of attaining them. 
We are coming to appreciate as never 
before that, "Where there is no vision 
the people perish." And so America 
has a new conception of thrift. Her 
people are less concerned about saving 
per se, but they are more concerned 
about conservation and proper utiliza- 
tion as a means to greater service, 
greater welfare and greater happiness. 
Roy G. Blakey. 

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The Relation of Thrift to Nation Building 

By T, N. Carver 

Harvard University 

THE problem of the eflS^cient use of 
the laborer's time and working 
energy has not been without interest 
to business managers, and even to 
statesmen. To find easier and quicker 
ways of domg whatever the laborer 
has to do is to increase the national 
production and prosperity. All this 
is as true qt every factor of production 
as it is of the laborer himself. 

Direction of Productive Power 

It is just as important that produc- 
tive agents should be doing the right 
things as that they should be doing 
whatever they happen to be doing with 
the utmost speed and facility. To 
misdirect our productive power, caus- 
ing it to produce things of little impor- 
tance, is quite as great a loss, and quite 
as great ^ hindrance to our prosperity, 
as to allow it to do things in a wasteful 
and slip-shod manner. To direct it 
wisely, so that it is always producing 
the things of greatest permanent value, 
is to increase and perpetuate our 
national prosperity. ' 

Important as this problem is, it has 
not yet attracted much of the atten- 
tion of business managers. They are 
generally more intent upon the volume 
of the output than upon the character 
of the things produced. 

One of the most important things 
we can possibly do with our productive 
power is to make it add to itself, so 
that it may grow from year to year. 
This can only be done by setting a part 
of it at work producing producers' 
goods, instead of keeping it all at work 
producing consumers' goods. If very 

little of it is directed toward the making 
of tools, machinery, buildings, fences, 
irrigation ditches, and other forms of 
productive equipment, our means of 
production will increase very slowly or 
not at all. If our means of production 
does not increase, our productive 
power cannot. If, however, a large 
enough share of our productive power 
is engaged in producing producers' 
goods, we shall, of course, find our- 
selves in possession of more producers' 
goods, larger and better equipment of 
all kinds, and that, consequently, our 
productive power is increasing from 
year to year, and from decide to 
decade. If, for example, 50 per cent 
of our productive power is engaged in 
making tools, machinery, and equip- 
ment, these things will obviously in- 
crease more rapidly than if only 10 per 
cent of our productive power is so 
engaged while 90 per cent is producing 
things for inunediate consumption. 

Production and Demand 

In the present state of civilization, 
with our money economy, men gener- 
ally try to produce what people are 
willing to buy. If very few people are 
willing to buy tools, machinery, and 
equipment; or if very little money is 
spent for such things, very few will be 
produced. If much money is spent for 
such things, many will be produced. 
If half the money spent in the country 
were spent for tools, machinery, and 
equipment, approximately half of our 
productive power would be engaged in 
making such things. If only one tenth 
of the money is spent in purchasing 

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Thrift and Nation Building 

such things, not much if any more than 
one tenth of our productive power 
would be engaged in making them. It 
would be a very thrifty nation half of 
whose purchases consisted of instru- 
ments of production; it would be a 
rather thriftless nation one tenth of 
whose purchases consisted of such 
things. The former would advance 
rapidly in productive power, the latter 
slowly. The former would have much 
more to spend from year to year, the 
latter little, if any more. 

It is, therefore, just as important 
that the people of this country spend 
their money wisely, as that they utilize 
their labor power efficiently. To 
throw money away, or dump it into 
the sea, is no great loss to the nation, 
however much of a loss it may be to 
the individual who owns the money. 
The material is lost, and that is all. 
When it is spent, however, instead of 
being thrown away, it virtually hires 
men to make the things for which it is 
spent. If it is spent wastefully, it 
virtually wastes the working energy of 
the men whom it hires. That wasting 
of man power is a much more serious 
thing than the mere loss of money. 

The Natube of Thrift 

There is a widespread fallacy to the 
effect that extravagance gives employ- 
ment to labor. This fallacy is prob- 
ably due to the opinion that thrift 
consists in hoarding money or hiding it 
away. This, however, is not thrift at 
all. To hide money away, and keep it 
out of use, is a very thriftless thing to 
do. The thrifty person is not a miser. 
He is one who spends money just as 
freely as the extravagant man, but he 
spends it wisely instead of imwisely. 
He spends it for durable things, in- 
stead of for transient things. He 
spends it for things which increase his 

strength, physically, mentally, morally 
or financially, instead of for things 
which add nothing to his strength in 
any way. 

When we realize that thrift consists 
in spending money wisely, instead of 
unwisely, we shall very easily see that 
the thrifty man spends exactly as much 
money as the thriftless man, provided 
he has as much money to spend. 
Moreover, in the long run, the thrifty 
man will spend more, because he will 
have more to spend than the thriftless 
man; and the thrifty community will 
be a community in which more money 
is spent than in the thriftless com- 
munity. If anyone doubts this state- 
ment, let him ponder the following 

Let us suppose that there are two 
communities which we will call Thrift 
Town and Spendthrift Town, and that 
these two communities start even, 
that is, that they have equal numbers, 
equal resources, and equal prosperity 
at the beginning of the comparison. 
Let us suppose that in each community 
there is, this year, a total income of 
$1,000,000. This $1,000,000 repre- 
sents all that the community produces, 
and consequently all that it has to 
spend. Thrift Town finds that it can 
live comfortably and efficiently on nine 
tenths of its income, that is $900,000, 
and decides to spend $100,000 for 
permanent improvements, — improve- 
ments that will add to its productive 
power next year and the year after. 
Spendthrift Town, however, decides 
to spend its whole $1,000,000 on con- 
sumers* goods. It will be noticed that 
the same amount of money is spent in 
both towns. The difference is solely 
in the class of things for which the 
money is spent. Spendthrift Town 
spends $1,000,000 for consumers' goods. 
Thrift Town spends $900,000 for con- 

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The Anxals of the Amebican Academy 

sumers' goods, and $100,000 for build- 
ings, machinery, tools and live stock, — 
a total of $1,000,000 spent for goods. 
Next year, however. Thrift Town will 
produce more than Spendthrift Town. 
That is. Spendthrift Town will have 
its $1,000,000 worth of product,— its 
people will have $1,000,000 to spend. 
The buildings, tools, machinery, live 
stock, etc., which Thrift Town added 
to its equipment will add to its pro- 
ductive power and to the income of its 
people during this year. If this $100,- 
000 produces an average of 5 per cent 
on the investment, the total income of 
Thrift Town during the second year will 
be $1,005,000. There will be $5,000 
more spent during the second year in 
Thrift Town than in Spendthrift Town. 

If Thrift Town continues living on 
nine tenths of its income, spending the 
other tenth for permanent equipment 
during the third year, there will be a 
still greater difference in the amount 
spent in the two towns. Thrift Town 
will have a little over $1,010,000, 
whereas Spendthrift Town will still 
have its $1,000,000 to spend, and so on, 
year after year, the difference will grow 
greater and greater. It will not be so 
very many years under this pohcy 
before the young men and women from 
Spendthrift Town will be leaving that 
town and emigrating to Thrift Town, 
because business is more active and 
there b more employment at better 

If the figures for Thrift Town and 
Spendthrift Town are too large for us 
to grasp easily, we can simplify the 
problem by taking two individuals, A 
and B. Assume that they have equal 
incomes at the beginning, but A is 
thrifty and B is thriftless. Let us 
suppose that this year they have 
incomes of $2,000 each. A finds that 
he can Uve comfortably and efficiently 

on $1,800 and that he can invest $200 
in some productive enterprise. If he 
is a farmer, he can buy an additional 
cow or horse, or some improved tools 
and machinery. If he is a business 
man, he can add somewhat to his stock 
or equipment. If he is a salaried man, 
he can deposit his $200 in a savings 
bank and receive 4 per cent on it. 

The savings bank, however, cannot 
pay interest on this money unless it 
uses the money or lends it to somebody 
who can use it. Suppose it lends $200 
to a farmer or a business man who buys 
additional equipment with it. In this 
case that $200 is spent just as truly as 
it would have been if A had spent it 
directly for luxuries. There are only 
two differences. In the first place, he 
spends it indirectly through the bank 
instead of directly. In the second 
place he spends it for producers' goods 
instead of for consumers' goods. In 
either case, next year A will have not 
only his $2,000 salary, but $8.00 inter- 
est on his investment, making a total 
of $2,008 to spend, whereas B will have 
only his $2,000 to spend, and so on. 
The difference grows greater every 
year. A will have more and more 
money to spend every year. He will 
do more for business and give more 
employment to labor than B will give. 

This difference becomes enormous 
- if we multiply the A's and B's by a 
hundred million. In other words, if 
our total population is made up of men 
like A, there will be a vast increase 
year by year in the amount of money 
we have to spend. But if our total 
population is like B, there will be no 
such increase in the amount of money 
we have to spend. Business will not 
expand; there will not be additional 
employment, calling for more and more 
men. It is for the average citizen to 
decide which kind of a nation this is to 

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Thioft and Nation BmLDiNG 

be; that is, whether it is to be a nation 
of A*s or a nation of B's, — ^whether 
our nation is to be an enlargement 
of Thrift Town or an enlargement of 
Spendthrift Town. 

If , however, the thrifty man were 
sly and unprincipled as well as thrifty, 
he might, consistently with his slyness 
and lack of principle, discourage thrift. 
Being thrifty himself, he is not buying 
consumers' goods but investing in 
means of production with which to 
supply the demands of others for con- 
sumers' goods. The fewer there are 
doing as he is doing, the fewer com- 
petitors he will have. The more there 
are who spend all their money for con- 
sumers' goods, the more inunediate 
customers he would have. Therefore, 
he might very consistently, though 
short-sightedly, argue as follows: 

"There is already capital enough in 
the country (at least there is as much 
as I want to compete with my capital 
in my business), what we need is more 
consumers. If all the people of the 
United States should suddenly resolve 
to follow the course you have marked 
out and should carry out their pmpose, 
the results would be disastrous in 
the extreme. What is left of the 
liquor business would be wiped out. 
The manufacture and the sale of all 
forms of tobacco would cease. The 
same fate would befall a multitude of 
other lines of business producing or 
dealing in luxuries or non-essentials of 
various kinds. 

''As a consequence of these first 
effects many others would follow in 
their train. A situation somewhat 
like that which now prevails in this 
country by reason of the cancellation 
of government orders and contracts 
and the demobilissation of the army, — 
only many times as serious, — ^would 
speedily develop. Merchants would 

go into bankruptcy by the thousands, 
manufacturing plants would close and 
millions of employes would be thrown 
QUt of employment. Of course, it 
would be possible to support the unem- 
ployed by taxing the rest of the com- 
munity or by sale of bonds, using the 
proceeds as a temporary unemploy- 
ment insurance fund. This would be 
a more or less demoralizing process, 
however, and the waste of it would be 

''In the course of time, factories and 
stores could be adjusted to other lines 
of production or use, though the waste 
of specialized construction and equip- 
ment would be enormous. During a 
considerable part of the transition 
period, all the savings effected by the 
changed habits of the people would be 
consumed in supporting an idle popu- 
lation and in making necessary changes 
in the production instruments. Even 
when these physical changes had been 
made and opportunities for employ- 
ment had been provided, it would take 
a long time to train the workers to 
their new jobs, if, indeed, many of 
them had not through idleness and 
dependency become unemployable. In 
any case, there would be a tremendous 
loss in the way of acquired skill ren- 
dered useless by the changes in the 
habits of consumers." 

All this, however, would be obvi- 
ously nonsensical because, as we have 
already seen, thrift consists in buying 
wisely rather than unwisely, and wise 
buying enables the people to spend 
more money than unwise buying. To 
buy something that does you no real 
good, does not put any more money 
into your pocket next month, next 
year, or the next generation. To buy 
something that is of permanent bene- 
fit, will give you or your children more 
money to spend in the future and you 

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will spend quite as much now as you 
could possibly spend if you bought 
foolishly. He who spends a dollar 
wisely does just as much for the labor 
and the business of the present moment 
as he who spends a dollar wastefully. 
Next year, however, the man who 
spent his money wisely this year, will 
have more dollars to spend, on the 
average, than the man who spent his 
money wastefuDy . Therefore, the wise 
spender will do more next year for 
business than the wasteful spender 
and quite as much this year. 

The thrifty man is, in the long run, 
the man who buys and buys largely. 

The thriftless man is the man who 
never buys very much, because he 
never has very much money with which 
to buy. The way to insure large 
buying, on an increasing scale from 
year to year, a steady expansion of 
business, and a continued increase of 
employment, is to get behind the thrift 

Remember that thrift consists in 
buying, but in buying wisely. Urge 
every one, if you please, to buy and to 
buy now, but URGE HIM TO BUY 

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Freedom Through Thrift 

By William Matheb Lewis 

Director Savings Division, United States Treasury Department 

Y\^0 won the Great War? Think- 
▼ ▼ ing men are beginning to 
believe that the real answer to this 
question may not be forthcoming for 
ten or twenty years. They are realiz- 
ing the fact that in the final reckoning 
success in reconstruction is a factor well 
nigh as important as that of success in 
battle. America may yet be the loser 
if she does not learn from the titanic 
conflict lessons that will make all she 
has suffered worth while. 

Where there is no vision the people 
perish. America today faces the might- 
iest problems of her existence. Her 
chances of solving them lie in the power 
of her people to think straight and to 
act wisely and to see clearly through to 
the end. Her destiny lies in her vision. 
Nothing in all our history has revealed 
the American people to themselves as 
did the Great War. Then it was that 
we glimpsed the elements that go to 
make, a mighty and enduring nation. 
One of these elements was revealed in 
the achievement of the nation in the 
great conservation movement directed 
by Herbert Hoover. We supplied our 
armies and our suffering allies with 
ample food by diverting to good pur- 
poses material ordinarily wasted or at 
best extravagantly used. 

Again we found another element of 
strength in the popular financing of the 
war by millions of our people, the 
great majority of whom, before they 
patriotically interested themselves in 
Liberty Bonds, never realized that 
they could set aside any portion of their 
incomes for investment. 

In the achievements of Herbert 

Hoover and in the success of the Lib- 
erty Loans, we see the sign-posts point- 
ing to established victory, to national 
and individual freedom, and these sign- 
posts are marked Thrift. The vast 
majority of the American people have 
not been free; they have been weighed 
down with the shackles which make 
progress toward the goal of success 
painful and slow. Overhanging obU- 
gations, fear of old age, monotonous 
toil: these things have hampered us; 
these things have kept us strangers to 
freedom. Longfellow's " village black- 
smith " typifies personal freedom : " He 
looks the whole world in the face for 
he owes not any man.'' 

America, foimded on the principle 
of freedom, has never made a concerted 
effort to interpret that word into 
terms of financial independence. Thus 
it has come about that while our indi- 
vidual earnings have averaged the 
highest of any nation in the world our 
average savings have been proportion- 
ately small. Set down in a land of un- 
equalled natural resources we have, 
because of the ease of production, be- 
come criminally wasteful. Forests 
have been razed and no effort has been 
made to replace them; fields have been 
half cultivated, plows have been left 
to rust in the furrow. Thrift has been 
impopular because we have felt that 
it was not necessary and because it 
has been confused with stinginess and 
smallness, qualities which our people 
hate. But in reality how different it 
is from the popular conception: thrift 
is care and prudence in the manage- 
ment of one's affairs, the foundation 

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upon which every successful and en- 
during business enterprise is based. 
Thb great principle has, however, 
been nationally ignored, despite the 
fact that a vastly increasing population 
has reduced our national resources to a 
startling degree. 

During the war we caught the vision 
of the power of thrift. We accustomed 
ourselves to doing without; to buying 
carefully and using economically. To- 
day the reaction from that poUcy is 
wide-spread and disturbing. A veri- 
table orgy of extravagant buying is 
going on — ^reckless spending takes the 
place of saving; waste replaces conser- 
vation; demands for shorter hours and 
greater profits increase; and all this in 
the face of an appalling shortage of 
goods throughout the world. 

One hope of righting these conditions 
Ues in adopting the principle of thrift, 
whose value the war impressed upon 
us. Suppose that for a year, the 
American people would insist on get- 
ting a dollar's worth for eveiy dollar 
they spent; suppose they used the 
material bought with care and intel- 
Ugence; suppose that the first dollar 
out of every pay envelope was saved 
instead of being spent in thoughtless 
purchases, what would be the result? 

Production would be given a chance 
to catch up with consumption, the high 
cost of living would be materially re- 
duced, debts would be paid and every 
phase of our economic situation would 

be improved. More than that, we 
would be well on the road to winning 
the war by showing a strength and 
stability and intelligence which our 
enemies now believe lacking — a lack 
which they are coimting on to enable 
them to win commercial victories over 
us in the markets of the world. 

The Treasury Department in ad- 
vocating national thrift is doing more 
than bettering individual conditions; 
it is strengthening the hands of our 
government — ^it is going far to complete 
the victory. That man who saves 
must learn to put his money aside in 
safe, productive investments. He 
must learn the principles of finance or 
his saving will profit him little. The 
Treasury Department, through its 
savings stamps and Treasury Certifi- 
cates and Liberty Bonds, offers a 
means of investment sound and sure 
and profitable. More than that, it 
offers a means for every one of our citi- 
zens to become a stockholder in the 
govenmient. A stockholder will not 
throw a brick through the window of 
his company or apply the torch to the 
warehouse. He will work to strengthen 
and to make it more prosperous. 
National thrift culminating in the 
steady purchase of govenunent securi- 
ties will go far toward answering the 
question. Who won the Great War? 
It will also put America well on the 
way to the realization of the finest 
conception of freedom. 

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Thrift as a Family and Individual Problem 
Some Standard Budgets 

By Benjamin R. Andrews 

Teachers College, Columbia University; Assistant Director, Savings Division, United States 

Treasury Department. 

THRIFT is a means to the best 
life for individual and family 
as it insures that considered use of 
resources which will promote well- 
being. There is a current idea that the 
thrifty man is stingy and penurious 
but rightly understood thrift means 
intelligence, forethought and plan in 
the use of resources, so as to promote 
personal well-being. In practice thrift 
calls for effective functioning on the 
part of the individual in the following 
economic relations: 

1. As one who earns, by increasing 
skill or output so as to enlarge 
money income or its equivalent. 

2. As one who spends, by studying 
one's present needs so as to secure 
goods and services bringing the 
greatest possible satisfaction at 
the least possible cost. 

8. As one who saves, by examining 
one's future needs so as to set 
aside funds liberally for all its con- 

4. As one who invests, by consider- 
ing the placing of savings so that 
they will grow by interest or by 
increase of value and yet so that 
principal and interest will be se- 
cure against loss. 

5. As one who conserves whatever 
he has, by considering its wisest 
use so as to secure the greatest 
possible satisfaction from it, by 
avoiding waste, and by treating 
what is bouffht with money as 
though it had money's value. 
Thus there arises a five-fold 

thrift problem of the individual 
and family as regards earning, 
spending, saving, investing and 

Thrift and Income 

Thrift seeks to increase personal and 
family income, which fully considered 
involves several factors. 

Money Income 

Money currently received, whether 
from wages, salary, rentals, interest, or 
profits, is usually the only thing con- 
sidered under the term "income," and 
these current money receipts are the 
most important element to consider in 
income. It is these which have atten- 
tion in drafting a budget schedule 
of income and proposed expenditure 
which is, perhaps, the most efficient 
single measure for promoting personal 
thrift. Thrift asks certain questions 
concerning money income such as: 
Am I earning all the money I reason- 
ably can? How can I increase my 
skill or output so as to receive more? 
Is there a possibility of additional 
money income not yet realized by 
members of our family? Ought we to 
be receiving an income on investments? 
Would it be economy to invest capital 
in education or special training to in- 
crease earning power? 


RedL Income 
'real" income, or the flow of 

satisfaction enjoyed from day to day, 
includes important elements not pur- 


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chased through current expenditure 
and meriting attention in any attempt 
to increase income. These additional 
factors in income include specifically: 

(a) Use-income, or the equivalent of 
money income arising from the use of 
permanent consumption goods owned, 
such as the home and its furnishings, 
clothing, and other personal property, 
the pleasure car, etc. Thrift would 
seek to increase our use-income by 
asking and answering such questions 
as: Can we by directing expenditure 
toward better permanent consumption 
goods increase our real income through 
all the future? Shall we own our own 
home? Does it require diflferent fur- 
nishings ? What do we possess that our 
parents or grandparents by wise pur- 
chase secured as a satisfaction lasting 
for generations? Have we ever bought 
anything that similarly can be happily 
"handed down?" 

(b) Social income received by indi- 
vidual and family through the use of 
goods and services furnished by the 
commimity and state, is another factor 

real" income. It includes such 


items as education, public health 
service, public recreation faciUties. 
Some of these items are actually bought 
by expenditures in the form of tax pay- 
ments, but many of them have long 
since been paid for, yet are still yield- 
ing social use-income to the individual 
and family. With regard to this factor 
in income, thrift asks: Do we realize 
the possibilities from available com- 
mimity services and goods, making 
them replace in part personal expendi- 
tures, for example, as regards music 
and books? Can the community sup- 
ply us with other goods more cheaply 
than we can do it individually? 

(c) Labor incom^y or the equivalent 
money value of unpaid services ren- 
dered by one's self and other members 

of one's family, particularly by the 
housewife, is an important contribu- 
tion to the real income of a family. It 
often increases by 100 per cent or more 
through household processes the value 
of materials bought for household con- 
sumption. A family is supported in 
reality often as much by the unpaid 
useful work of the household as it is 
by the money brought in by the out- 
side wage-earner. Thrift raises such 
questions as these: Have we regarded 
this factor of income at its real value? 
Can its value be increased by better 
housekeeping skill, by an investment 
in better household working equip- 
ment, by training children to cooperate 
in the household? Or in families where 
there are no children, is it possible to 
increase the family income by reduc- 
ing or eliminating the contribution 
made by the housewife's work and 
substituting for it wages which the one 
so employed might secure through out- 
side employment? Is it possible to 
increase the income by taking on cer- 
tain productive activities in connec- 
tion with the household, as a garden? 
In short, the principles of thrift ap- 
pUed to the problem of income suggest 
a critical examination of all sources of 
income whether in the form of money, 
or of money's worth. Such an exami- 
nation can best be made by a written 
schedule listing sources of income and 
amounts now received, including not 
alone money income, but also use- 
income, social income and labor in- 
come. Such a complete income sched- 
ule is a useful thrift device, in and of 
itself; the items of money income will, 
of course, be carried over into the 
budget of income and outgo. 

Thrift and Expenditure 

In an urban civilization money b 
given in exchange for practically all 

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Thbift a Family and Individual Problem 


satisfactions so that rational spending 
means rational living. Thrift in spend- 
ing seeks to increase the satisfaction 
from the use of money having in view 
all the interests of life and its future as 
well as its present needs. Much spend- 
ing is done in a haphazard way on the 
impulse of the moment save as income 
limits expenditure and the relative 
costs of food, clothing, housing, etc., 
force an adjustment of spending along 
certain lines. Thrift substitutes a plan 
based on foresight and a candid exam- 
ination of needs for an impulsive ill- 
considered spending. 

General Suggestions for Em- 
ciBNCT IN Spending 

Written Budget Plans,— The study of 
standards of expenditure as found in 
the experience of others is helpful. 
Engel stated certain economic laws .of 
consumption, the more important of 
which are that the smaller the income 
the larger the proportion of it which 
must go for food and that as income in- 
creases food expenditure relatively de- 
creases and the allowance for miscel- 
laneous culture wants increases. A 
widely quoted American standard for 
middle class incomes is ''the ideal 
budget" of the late Ellen H. Richards 
which allows one-fourth of the income 
for food, one-fifth for rent, one-seventh 
for household operating expenses, one- 
seventh for clothing and one-fourth for 
culture wants or the "higher life." In 
the appendix are printed certain sug- 
gested standard budgets, but the in- 
dividual must remember that such 
standards are suggestive only and that 
he must work out his own best division 
of incorne. Written budget plans for 
expenditure are a natural result of 
studying standard allowances. They 
should be based upon all the available 
facts as to one's own past experience 

in spending, modified by standard bud- 
gets so as to secure better distribution 
than one has been following. 

Written accounts of expenditure^ at 
least during periods of readjustment, 
are desirable. Needs for expenditure 
should have critical examination. The 
classical division of wants into neces- 
sities, comforts and luxuries gives a 
starting point. Another useful classi- 
fication divides wants into those of 
self -existence, self-gratification, self- 
improvement and self-denial, or the 
provision for the future. Thrift would 
provide adequately for self-existence 
but only to a limited extent for self- 
gratification before making provision 
for self-improvement and saving. 
Future needs project themselves into 
the present whenever one thoughtfully 
considers the expenditure problem and 
lead to the provision for saving dis- 
cussed below. Needs may well be 
classified also as regards the different 
members of the family group. For ex- 
ample, children need allowances for 
education, recreation, etc., and a nice 
allotment of available funds to meet 
the particular needs of each person in 
the family requires careful balancing 
of the factors involved. 

IntelligerU direction of spending will 
increase its efficiency. This function 
naturally centers in the housewife but 
often certain responsibilities may be 
wisely assigned^ to others. Increased 
special knowledge on the part of the 
spender is now possible when shopping 
information is available in printed form 
and courses in marketing are a part of 
extension teaching for adults. In a 
matter like the purchase of food, cloth- 
ing, shelter and other goods in the 
market with which every individual 
has life-long contacts, it is astonish- 
ing that the general level of intelli- 
gence is not higher. 

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Social organization for thrift in ex- 
penditure is always possible and is be- 
ing constantly tried in the form of 
neighborhood marketing clubs, coop- 
erative stores and similar undertak- 
ings. As agricultural cooperation 
failed until the agricultural colleges 
began to train managers for shipping 
associations and other cooperative en- 
terprises, so it is possible that con- 
sumers' cooperation lyill meet with 
success when better leadership is af- 
forded. Economic conditions cer- 
tainly favor such enterprises now as 
never before. 

Thrift in Special Objects of Expenditure 

The special objects of expenditure 
may well be examined in terms of the 
usual family budget divisions, food, 
clothing, shelter, household operating 
expenses and culture wants^ Under 
each of these headings a few questions 
are given which may bring suggestions 
to the person reviewing his own ex- 
penditures with a desire of securing a 
better distribution of income and in- 
creased saving. Other problems will 
readily occur to such a person. 

In food expenditure, thrift requires 
that the purposes of nutrition be ade- 
quately met, including the growth and 
maintenance of the body and the pro- 
duction of energy^ and that this be 
done at a reasonable cost. It asks 
such questions as: Does each growing 
child have a pint or more of milk each 
day? Are necessary mineral constitu- 
ents and growth-promoting vitamens 
provided? Is variety of diet guaran- 
teed by including food from all five 
groups, — grain products, fruits and 
vegetables, meats, sugars and fats? 
Is there an adequate quantity to sup- 
ply the calories for energy? Is there 
sanitary care and storage for food? 
Are there preventable food wastes? 

Do finicky food habits add to cost? 
Is food cost reasonable? Is quantity 
buying followed where practicable? 
Are stores selected for economy as well 
as convenience? 

In clothing costs, thrift promotes 
economy by such queries as these: Is 
clothing chosen so as to promote health 
and secure length of service as well as 
"for looks?" Does fashion increase 
clothing costs beyond reason? Have 
you found the economy of choosing 
fabrics of intrinsic quality and stand- 
ard designs and garments made up in a 
moderate mode which permit their use 
through several seasons until their en- 
tire value is secured? 

In housing, thrift stands for ade- 
quate provision as to space, light, air, 
arrangement of rooms for ease in 
house work as well as to meet the per- 
sonal and social needs of the family 
group. It raises such questions as: 
Is there any better investment than 
owning one's own home? Are we 
spending unnecessarily for display in 
the house? Have the children's hous- 
ing needs had as full recognition as the 
social standards of the adults? 

In household operating expenses, 
thrift demands adequate heating, light- 
ing, water-supply and housekeeping 
supplies. It justifies hired service 
where the housewife has other useful 
employment or is unable to do all the 
work. It raises such questions as: 
Can supplies be bought cheaper in 
quantity? Is the heating and lighting 
system efficient and economical? Is 
the telephone justified, and if so, is 
postage a cheaper substitute for many 
toll calls? Do the members of the 
household cooperate fully in reducing 
the burden of daily household tasks 
which come upon the housewife or her 
hired substitute? 

In culture wants, thrift emphasizes 

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Thkift a Familt and Individual Problem 


their importance as compared with 
materia] wants and asks full provision 
for education, for personal develop- 
ment and for health, and reasonable 
provision for physical and mental rec- 
reation, for necessary expenses for per- 
sonal care and for incidental needs. 
But thrift asks : Are large personal in- 
dulgence expenditures justifiable ? Do 
th^ not give special treatment for one 
or more members of the family as com- 
pared with others? Is special musical 
or art instruction to an ungif ted person 
wise? Should recreation expenditures 
exceed cultural expenditures of the sort 
which, for lack of a better term, are 
called educational and ethical? 

Thrift and Savings 

Saving may be simply spending in 
the future — setting aside present in- 
come for future con<Srete needs which 
overshadow lesser present concrete 
needs. Or, saving may accumulate a 
sum such that its income alone may 
be used in the future, or even the in- 
come from savings may itself be saved 
and invested. Individual savings as a 
matter of fact are in large part per- 
manently invested and never spent 
so that savings are a large source of 
the nation's capital, but in individual 
economy saving is ordinarily abstain- 
ing from expenditure now in order to 
make possible later spending. You 
would rather have an income in old 
age than go to the theatre every night 
now and so potentially recreative ex- 
penditure is transferred to the retire- 
ment fund. 

Demands Which Encoxtraoe Saving 

Thrift requires a definite facing of 
the chief future demands for which 
present saving is desirable, a deter- 
mination of the amounts necessary to 
be saved, and definite plans for regular 

saving. Some of the chief needs for 
saving are the following: 

Family group life brings occasional 
demand^ which call for previous sav- 
ing, for example: the initial cost of 
setting up hou^keeping; the special 
costs connected with children, their 
birth, their up-bringing, their educa- 
tion, launching in life and marriage; 
severe sickness of members of the 
family; care of dependent relatives; 
funeral costs. 

Life in industrial society brings cer- 
tain situations that require larger 
funds than current wages will supply 
and hence require saving. Such sit- 
uations are entrance into trade or busi- 
ness; changing one's employment; 
interruption to earning through finan-. 
cial or industrial depression, through 
labor conditions, industrial accidents 
and other causes; the need of capital 
for use in independent enterprise, or 
industrial disability due to old age. 

Saving to pay debts may be necessary : 
debts for past living expenses; mort- 
gage payments on home or other real 
estate; payment of personal loans and 
debts as for education, sickness, etc. 
Debt paying in many cases is the ob- 
verse of saving. In saving we abstain 
from present spending to provide the 
cost of supplying future needs; in 
debt paying, we abstain from spend- 
ing to provide the cost of supplying 
past needs. Debt paying for which 
one gets a permanent good in return, 
for example, paying a mortgage on real 
estate, is, however, really a form of 
investment. Saving for investment in- 
come may be undertaken for economic 
security, or to improve one's social con- 
dition by establishing a family fortune. 

Expensive consumption goods may 
furnish the goal that stimulates sav- 
ing, for example: buying a watch; 
expensive wearing apparel such as furs 

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The Annals of the American AcADEBir 

or jewelry; special house furnishings, 
such as furniture of finer quality, 
pianos, phonographs, paintings, etc.; 
articles of recreation, bicycle, motor- 
cycle, auto, horse, boat, guns and 
other sports equipment; special vaca- 
tion expenditure as for travel, the pur- 
chase of the summer cottage; unusual 
gifts or contributions to church or 
philanthropic undertakings. 

A general reserve fund^ or saving for 
undesignated emergencies, is univer- 
sally desirable. We have hit this need 
precisely by the old saw, "Save for a 
rainy day, " and a modern philosopher 
has added, "Save, also, for the sunny 
opportunity." As a matter of fact 
everyone needs a reserve fund which is 
not pledged to any single need but is 
ready for any draft made upon it. 
Business men* have come to recognize 
the absolute necessity of a reserve fund 
. kept outside their regular business 
funds, usually invested in bonds, 
which can be used at once as collateral 
or cashed for funds in an emergency. 
The individual and the family need a 
similar reserve fund for it will con- 
tribute a sense of security and also the 
power to turn about in business affairs 
or in personal matters whenever the 
need may arise. The imdesignated 
surplus or reserve should be the first 
great goal in saving. Its importance 
b not yet recognized by most people, 
but a moment's reflection shows the 
part it can play in living on a rational 

Savings and Insurance. — Some of the 
goals for individual or family saving 
are emergencies which can also be pro- 
vided against by the joint method of 
insurance, for example, meeting the 
expenses due to sickness, or death. 
Sickness insurance is available, at 
rather high prices, it is true, for the 
person of small means; "burial insur- 

ance" or industrial insurance at 5 
cents or 10 cents or more a week per 
person is now carried for children and 
adults alike by large numbers of fami- 
lies in narrow circumstances, and un- 
wisely so, many critics believe. Insur- 
ance, when available, is usually con- 
sidered to be a more economical pro- 
vision than that of saving, — ^but each 
case merits separate examination; it 
may be cheaper, for example, for the 
wage-earner to carry burial insurance 
on himself alone, and to substitute for 
insurance on other members of his fam- 
ily a general reserve fund in which he 
makes deposits weekly. Individual 
saving and individual insurance are 
supplementary protective measures, 
both of which must be applied by the 
individual family to secure adequate 
financial protection and progress. 

Social Insurance. — Compulsory so- 
cial insurance to be provided at the 
joint cost of employer, employe and 
the state will, we are sometimes told, 
make individual saving unnecessary. 
A comparison of the social insurance 
program, namely, protection against 
the "four fears," of accident, sickness, 
unemployment and old age, with the 
partial Ust of goals for saving given 
above, disproves such an assertion. 
The progressive character of human 
wants, which will develop new future 
needs as fast as old ones are provided 
for, gives further fundamental testi- 
mony that individual saving will al- 
ways be necessary. 

A Program of Savings 

A thrift program of savings should 
be drawn up by each individual and 
family, preferable as a written memo- 
randum, in which after honestly facing 
the above and other needs, a decision 
is reached as to amounts whic£i should 
reasonably be saved for such and such 

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Thrift a Family and Individual Problem 


purposes to be available at such and 
such times. This should be estimated 
as a certain requirement per week 
or month which should thereupon be 
made the first charge upon income 
whenever the pay envelope or salary 
check is received. By establishing 
the habit of saving regularly and of 
setting aside the savings in a bank ac- 
count or elsewhere before one begins 
spending, one can become a successful 
saver. "How much can I save?'* 
An answer for incomes of various 
amounts and famiUes of various sizes 
is suggested by the savings allowances 
which appear as the first item in the 
standard budgets given in the appen- 
dix. Saving is a habit easily made 
automatic. The fact that life insur- 
ance premiums are met with compar- 
ative ease by most people because 
they are a regular recurring charge 
points the way to success in saving. 
In family economy thrift in saving as 
in spending can often wisely be made 
a family problem in which all members 
of the family participate in making the 
necessary plans and helping in their 

Thrift and Investment 

The successful investment of savings 
requires continued attention as well as 
does the accumulation of savings. A 
few points regarding thrift and invest-, 
ment may be suggested here: 

Use local investment institutions 
and opportunities; make your banker 
your adviser; patronize your local 
building and loan association, and your 
local savings bank; local real estate 
where you know conditions is a safer 
investment than distant property. If 
you do invest elsewhere use only es- 
tablished institutions such as invest- 
ment houses which your local banker 
will recommend. 

Plan a progressive investment pro* 
gram. Start savings in government 
savings stamps or in your local savings 
bank. When you have $50 to invest, 
put it in a government bond. When 
you have $500 to place, government 
bonds may still be your best choice, or 
some other safe bond that pays slightly 
more. Stop paying rent and begin 
buying a home, through partial pay- 
ments to a building association, if nec- 
essary, thus capitalizing rent payments 
gradually into house ownership. 

If you invest in securities, buy only 
safe investments such as high class 
bonds. The average man should not 
invest in stocks. Be content with a 
lower income from an established safe 
undertaking rather than chance your 
savings in untried enterprises. Gov- 
ernment bonds will be the backlog to 
personal investment for the present 
generation. Hold all your own and 
buy more. Do not sell securities be- 
cause of an emergency need for money; 
rather borrow on them as collateral 
and then save and reclaim your securi- 

Do not invest in a friend's business. 
Friends should find accommodations 
through banks and other established 
channels; you should put out your 
money through similar channels. Do 
not involve your life insurance in busi- 
ness or other investments by borrow- 
ing upon it. By curbing your desire 
to speculate and investing only in safe 
enterprises you can certainly accumu- 
late a competence. If you are not 
willing to take this safe path, adopt the 
safety first principle of keeping 75 per 
cent of your personal capital in safe 
investments and restrict speculative 
investment to the remaining 25 per 
cent of your accumulation. 

Watch interest returns carefully. 
Do not lose possible interest, for exam- 

Digitized by 



The Annals of the Abcerican Acadebcy 

pie, by withdrawals from a savings 
account before the interest date or by 
delaying deposits beyond that date. 
Redeposit interest as soon as received 
so as to compound it. Determine the 
actual yield upon the proposed invest- 
ment and change investments when 
you can legitimately take advantage 
of an increased yield, but remember 
that a guaranteed average rate as on 
bonds is better than a possibly higher 
rate of interest as on stocks. 

Take care of your securities. A safe 
deposit box is cheaper than possible 
loss. A written record of securities 
reviewed occasionally is a stimulus to 
increasing your investment. Follow 
expert advice but do not follow tips. 
Learn to discount fraudulent financial 

Thrift and Conservation 

Things bought with money are a 
storehouse of services which they can 
render to their owner. Skill in earn- 
ing, saving, investing and spending, 
does not completely guarantee eco- 
nomic well-being unless there is added 
to it intelligent and thrifty use of 
property owned. Thrift in the use of 
things excludes personal waste in con- 
sumption. War required the conser- 
vation of food and all objects of per- 
sonal use, and such standards widely 
adopted and made permanent are an 
additional basis for individual welfare, 
since everyone wastes enough to pro- 
vide some other thing desired but not 
yet secured. 

Thrift demands the application to 
personal property of business stand- 
ards for repairs and replacements nec- 
essary to maintain efficient service. 
For example, a car well kept up not 
only renders better service, dollar for 

dollar, to its owner but maintains its 
investment value. Thrift requires the 
covering of possible loss by insurance 
as fire, burglar, and other types. 
Thrift in conservation emphasizes the 
importance of good quality in mer- 
chandise or other material things ac- 
quired. The cost per unit of service 
secured decreases as length of service 


Suggested Standard Budgets for Fami- 
lies and Individtials 

The following standard budgets were 
recently prepared under the general 
direction of the present writer for the 
Savings Division of the United States 
Treasury Department. The chief 
credit for them is due to Mrs. Ahce P. 
Norton, editor o^ the Journal of Home 
Economics^ who was ably assisted by 
Miss S. Maria Elliott of Simmons Col- 
lege. Acknowledgment should also be 
given for the advice and suggestions of 
many of the foremost home economists 
in the United States. 


TO $5,000 A YEAR 

$1,200 A Year— $100 a Month 

Number in 

the family 
























Clothmg r 


Housekeeping ex- 


Church, charities. . 

Health, recreation, 

Persona], miscel- 


Total for month 





Digitized by 


$1,800 A Ybaii^-$150 a Month 

Number in the family 












' 12 















Housekeeping ex- 


Church, charities . . 
Health, recreation, 


Personal, miscel- 





Total for month 





$2,400 A Year— ^00 a Month 


Taxes (Federal in- 




Housekeeping ex- 

Church, charities. . 

Health, recreation, 

Personal, miscel- 

Total for month 

Number in the family 





























$8,000 a Year— ^250 a Month 

Number in the family 



Taxes (Federal in 

oome) , 




Housekeeping ex- 

Chuich, charities 
Health, recreation, 


Personal miscel- 

Total for month 




























$5,000 A Yba»-$416.66 

A Month 

Number in the family 






Taxes (Fed- 
eral income) 




expense. . . 

Church, char- 

Health, recre- 
ation, edu- 
cation .... 






















Total for 
month . . 






A WEEK TO $1,800 A YEAR 
$15 A Week, or $65 a Month, or $780 a Year 


Room and board 


Carfare to business 



Church, charities, gifts . . . 
Health, recreation, educa- 



A year 




$17.30 A Week, or $75 a Month, or $900 a 


Room and board 


Carfare to business. . . . 



Church, charities, gifts. 
Health, recreation, educar 




Balance for extra Thrift 

A week 










A year 





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The Annals of the American Academy 

$23.08 A Week, or $100 a Month, or $1,200 a $34.60 a Week, or $150 a Month, or $1,800 a 
Year Year 


Federal income tax 

Room and board 


Carfare to business 



Church, charities, gifts. . . 
Health, recreation, educa- 



A month 






A year 







Federal income tax. . . . 

Boom and board 


Carfare to business .... 



Church, charities, gifts . 
Health, recreation, educa- 
tion . .* 



A month 








A year 








Digitized by 


The Insurance of Thrift 

By John A. Lapp 

Managing Editor of Modem Medicine; Educational Director, National Catholic War Council 

THERE is probably no one viho 
doubts the value of saving 
both for its results in character 
and the material security which it 
brings to the individuals who have 
succeeded in accumulating property. 
The thrifty individual is more likely 
to be a good citizen than the unthrifty, 
and he is more likely to be able to 
take care of himself and his family 
in the ordinary course of life. On the 
other hand, it is equally clear that 
the narrow type of thrift advocated 
by some, does not always make good 
citizens, nor result with certainty in 
the safeguarding of the individual 
and his family particularly in the 
emergencies of life. 

The Natube of Real Thrift 

Thrift which develops selfishness, 
and which sacrifices the physical 
and moral welfare of the individual 
will increase the hazards of life, 
especially those of sickness and de- 
pendent old age, and decrease the 
relative power to overcome them. A 
recent advertisement in one of our 
large cities flared forth the message 
to the working man that the first 
payment from the weekly wage should 
be made to the savings account. This 
statement plainly ignores fundamen- 
tals and gives an erroneous idea of 
what thrift really is. It is axiomatic 
that the worker and his family must 
be sustained in vigorous health as the 
first consideration. If wages are high 
enough to allow savings after the 
needs of the family are met, it is an 
act of thrift to put money into a 

savings account, otherwise it is the 
negation of thrift. To encourage 
men to save at the expense of milk 
for the babies, or adequate nourish- 
ment for the worker and his family is 
to encourage destructive selfishness 
which should be condemned by those 
who put permanent social interests 
above present pseudo-thrift. 

This observation will help to define 
thrift as used in this article. Mere 
accumulation of property is not 
thrift as here used. A savings ac- 
count or the purchase of a home is not 
necessarily a sign of thrift as here 
understood. If a worker has bor- 
rowed from his fund of physical 
energy to put money in a savings 
account, it is a disastrous form of 
thrift; he has merely taken a part 
of his vital resource and turned it 
into property. If a worker saps his 
physical power for the sake of a 
money savings, he will soon exhaust 
his physical bank account. 

Thrift is broader than mere saving. 
It is to the individual what conser- 
vation is to the nation. It does not 
consist in hoarding resources, but 
rather in their wise use. The weekly 
wage properly spent is thrift, even 
though not a penny may have been 
put into a savings account or the 
purchase of a home. 

The thrifty person will spend his 
income to meet certain definite needs 
in about the following order: 

First, he will provide for himself 
and his family the necessities of 
life and such comforts and lux- 
uries as will sustain himself and 


Digitized by 



The Annals of the American Academy 

his family in the best physical 
condition, and will take ad- 
vantage of opportunities which 
will increase his competence. 
Second, he will look after the health 
and moral welfare of himself and 
his family, and expend such sums 
as will safeguard them against 
physical and moral decay. 
Third, he will provide against the 
calamities of life, namely unem- 
ployment, accidents, sickness, old 
age and dependency of his family 
in the case of his death. Then, 
if there is anything left over, it 
may properly be used for what 
is generally denominated as 
thrift, and for such additional 
pleasures as he may choose. 
Absolutely nothing can be spared 
from the first necessity as stated 
above. To sustain the working 
power of the individual and the 
physical welfare of his family are 
paramount to every other considera- 
tion. Scarcely of less importance, 
although materially not so pressing, 
is the safeguarding of the morals of 
the worker and his family. It may 
be said that thrift is specially de- 
signed to meet the third requirement, 
namely protection against the haz- 
ards of life. It will be the purpose of 
this paper to show that thrift by 
itself cannot provide for the rank 
and file of men against these hazards. 

Thrift and the Hazards of Life 

The advocates of individual saving 
as a means of providing against the 
hazards of life seem to go on the 
theory that these hazards confront 
every one in like degree. They ignore 
the unequal distribution of the bur- 
den which the contingencies of unem- 
ployment, sickness, accident, old age 
and death throw upon certain people. 

They seem to conceive of life from 
the standpoint of those few individ- 
uals who escape the serious disasters 
which these contingencies of lite 

If we could assume that all human 
beings were bom with equal physical 
and mental stamina; that they were 
given an adequate preparation for 
life; that they never had to go with- 
out work for a great length of time; 
that they never had sickness of more 
than a few days duration; that they 
could hold their positions as long as 
they lived; that they will not live for 
an extended time beyond the point 
when they are compelled by advanc- 
ing years to quit work; and that 
they will not die at a time when small 
children call for protection, we could 
rely upon individual thrift to provide 
for our wants throughout life. But 
life is not lived that way by the ma- 
jority of people. Some are bom 
with physical or mental weaknesses; 
some are handicapped by accidents 
or diseases in early life; some have 
sickness either of the worker or mem- 
bers of the family lasting months or 
years; in periods of depression som^ 
may be out of employment for 
months; large numbers live many 
years beyond the time when they can 
earn their living; while thousands 
die in the prime of life, leaving help- 
less dependents. Still others, from 
one calamity or another, such as fire, 
business failures, bank failures, and 
stock swindlers, lose the accumula- 
tion which they may have saved to 
meet life's contingencies. Mere sav- 
ing by itself cannot provide safe- 
guards against the overwhelming 
character of one of these many 
disasters that may come to the thrifty 
and. thriftless alike. Individual 
thrift, as usually understood, cannot 

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The Insubancs of Thkift 


provide for these calamities because 
none of these calamities can be 
measured in the life of an individual. 

No one can tell the extent to which 
one of these calamities may affect 
him. One cannot tell whether he is 
to be sick six days or six months 
during the coming year, or how many 
months unemployment may be forced 
upon him by business depression, or 
know the length of his years beyond 
working life. These are uncertain- 
ties which can be measured for a large 
group of people but which cannot 
even be approximated for a single 

A man may, by saving, accumulate 
$10,000 and see it all swept away by 
a single prolonged illness. A thrifty 
couple may provide themselves with a 
home, but at sixty-£ve they cannot 
be assured that it will protect them 
for the three or the thirty years 
which they may yet live. 

Causes for Economic 

Sickness, — liCt us examine some of 
the hazards of life in greater detail. 
Sickness is the most calamitous of 
the hazards of life. A large part of 
our troubles find their roots in sick- 
ness. More people are doomed to 
economic dependence and destitu- 
tion by sickness than by any other 
cause, or in fact by all other causes 
combined. Sickness picks its vic- 
tims at random, sparing neither rich 
nor poor, thrifty nor thriftless. Yet 
the total amount of sickness is easily 

We know from innumerable sta- 
tistical data that the average sickness 
for all working people will be about 
nine days every year. Now, if the 
total sickness were distributed evenly, 
nine days to each person, ordinary 

thrift could take care of the prob- 
lem. If each man expects to lose 
nine days by sickness each year, he 
could lay aside a sum equal to nine 
times his daily wage and an equal 
amount to pay for medical care and 
he would thereby have a fund equal to 
the amount which he loses on account 
of sickness. It is absurd, however, 
to talk in terms of average amounts of 
sickness, and draw conclusions there- 
from. Sickness does not distribute 
itself nine days to each person. 
Many escape entirely; a large part 
of those who are sick are disabled 
from working for only a few days. 
Some are sick for weeks, others for 
months, while a considerable number 
are disabled for years. 

Instead of being distributed nine 
days to each person, the distribution 
in an ordinary year will be as follows: 
80 per cent of the workers escape 
serious sickness; 20 per cent suffer 
the entire loss in a given year. Of the 
20 per cent who are sick, 65 per cent 
are sick for less than four weeks; 20 
per cent are sick from four weeks to 
eight weeks; 7 per cent are sick from 
eight to twelve weeks; 6 per cent from 
twelve to twenty-seven weeks, S per 
cent for more than six months, and 
1.3 per cent for more than a year. 
Applying these figures to the United 
States we find that of the thirty- 
eight million people engaged in gain- 
ful employment, the chief burdens 
of sickness for a year, excluding the 
insane, defective, and institutional 
classes, are borne by 7,600,000 work- 
ers. Of these, 4,940,000 are sick for 
less than four weeks; 1,520,000 are 
sick from four to eight weeks; 532,000 
are sick from eight to twelve weeks; 
456,000 are sick from twelve to twenty- 
six weeks; 228,000 are sick for more 
than six months, while 98,800 are 

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The Annaia of the American Acadebit 

sick for more than a year. The 
existing figures do not show us the 
number who are sick for more than 
two years or who are permanently 

The distribution of medical cost 
tells exactly the same story. The 
bulk of families escape, while the 
burden falls disastrously upon those 
who happen to be sick for the longest 
periods and, of course, it falls at the 
time when the victim is least able to 
bear it. The conclusion from these 
figures is obvious. Ordinary in- 
dividual thrift may provide against 
sickness for those who are disabled 
for short periods. It cannot pro- 
vide against the calamity of a three, 
six, nine, or twelve months' sickness, 
which the figures indicate is suffered 
by more than three-quarters of a 
million working people every year. 

Unemployment. — ^The same story 
may be repeated with regard to unem- 
ployment, particularly in the great 
centers of population. Men cannot 
know whether the wheel of fortune is 
going to bring them continuous em- 
ployment or whether they will be 
compelled to wait for weeks or months 
for the chance to earn a living. Peri- 
ods of depression such as those of the 
winter of 1908 and the years of 1914 
and 1915 compel thousands in indus- 
trial centers to use up the little sav- 
ings which they may have or to de- 
pend upon friends or upon charity. 

The calamity of unemployment is 
not so wide-spread, nor so severe as 
that of sickness. It affects primarily 
the wage earners in the larger centers. 
Rural communities and small towns 
escape acute manifestations. The 
small owner or operator is not immedi- 
ately affected. Moreover the loss is 
merely of wages, whereas in sickness, 
the loss is doubled through the cost 

of medical care. A savings accoihit 
will help in this as in any other 
emergency but it should not be relied 
upon to meet the uncertainty. 

Accidents. — ^The calamity of acci- 
dents falls also at random on the 
workers but the need for the distri- 
bution of the burdens, and the need 
for the distribution of the employer's 
liability have been so obvious that 
42 states have already passed work- 
men's compensation laws for indus- 
trial accidents, under which the eco- 
nomic burden is taken from the backs 
of the injured workers and distributed 
over all of the people. Thrift failed 
to meet the calamity of accident 
because the individual risk was not 
measurable. Insurance was applied 
to measure the risk for the group and 
ease the burden for the unlucky 
individual who was injured. 

Old Age. — ^When we come to the 
discussion of individual thrift as a 
provision for old age, we consider a 
hazard far more indeterminable for 
the individual than sickness, unem- 
ployment, or accident. The hazard 
of old age really involves all of the 
other hazards. If a man escapes 
serious illness and accident through- 
out life, both of himself and his 
family, and escapes long periods of 
unemployment, and has been thrifty 
and likewise possessed of business 
ability enough to safe-guard his 
thrift, he may have enough to meet 
the hazard of old age whether he lives 
one or thirty years beyond the time 
that failing physical powers compel 
him to quit work. Few, however, 
do escape one or another of the calam- 
ities of life, and the great majority 
approach old age with the necessity 
of relying upon their children or 
upon private or public charity to take 
care of them in their last years. 

Digitized by 


The Insurance of Thrift 


When a man has worked through 
life for meager wages, perhaps 
scarcely sufficient to maintain physi- 
cal vigor, and from these meager 
wages has been compelled to meet 
individually the cost of sickness, 
accidents, and unemployment, he is 
not likely to be possessed of any 
considerable amount when he reaches 
the age of 65, even though he be 
possessed of unusual qualities of 
thrift. The hazards of life prevent 
the majority from remaining inde- 
pendent in old age. Figures gathered 
by the Ohio Health and Old Age 
Insurance Commission indicate that 
among 500 old people in private insti- 
tutions for the aged, 40 per cent were 
there on account of previous sickness; 
19.6 per cent on account of mis- 
fortune; 12 per cent on account of 
intemperance; 11.8 per cent on ac- 
count of low wages; 10 per cent on 
account of improvidence, and 5.8 
per cent unknown. Similar figures 
for 1,600 inmates of county infirmaries 
indicated that 36 per cent were there 
on account of sickness; 11 per cent 
on account of improvidence; 29 per 
cent on account of intemperance; 11 
per cent on account of low wages, and 
the rest unclassified. 

As indicative of the way in which 
people lose money, it was found that 
among 150 former property owners, 
70 had lost their property by business 
failure; 61 by poor investment; 17 
by bad loans; 2 by illness and 9 by im- 
providence. These figures are merely 
illustrative of the hazards which must 
be met before reaching old age. 

If we could assume that many 
people escfkpe all of these hazards, 
and have at 65 years of age a small 
competence, we then come to the 
real hazard of old age. Most of the 
people at 65 are no longer employed. 

They must depend, therefore, upon 
their savings of former years. A 
few may have small business or farm 
interests which they continue to 
guide; a few skilled and professional 
workers remain in employment be- 
yond .this age; unskilled laborers 
and also many skilled laborers have 
practically no employment. Those 
who have a small competence as well 
as those who have not, are faced with 
the problem of providing for an un- 
certain length of years. 

Half of the people 65 years of age 
will live to be 75 . Of those who reach 
75, half will live to be 81; and of 
those who reach 81, half will live to 
be 85. In a group of 10,000 people at 
65 years of age, 5,000 will live to be 
75; 2,500 will live to be 81, and 1,250 
will live to be 85. It will be observed 
that a large number of aged people 
live more than twenty years beyond 
65. A goodly number live beyond 
90 and 95. The small savings at 65 
must be spread over a possible span 
of one to thirty years to take care of 
the aged person. If the savings are 
large enough so that the income wiU 
provide annuaUy for expenses, he is 
secure for the rest of his life unless 
of course the rising costs of living 
reduce the value of his income. In 
such case, he does not dare use any 
part of his principal because the prin- 
cipal is his safe-guard against de- 
pendency if he happens to live for 
many years. If he uses his principal 
he may later become dependent. If 
he depends upon the income, even if 
it is sufficient for the time being, his 
life is one of uncertain, if not pre- 
carious, independence. The logical 
way for him to manage his affairs is 
to combine with his fellows through 
the medium of insurance to buy him- 
self an annuity for as long as he may 

Digitized by 



The Annals of the Abcerican Acadebcy 

live. The individual cannot measure 
the hazards of old age for himself, 
but the group can measure the haz- 
ards for the whole because it can be 
figured exactly how much money is 
needed to pay a certain sum to the 
survivors in the group. 

Individual Thrift Supported by 

We are faced then in the deter- 
mination of thrift with several other 
important considerations: 

(1) The question of thrift is bound 
up with the question of wages. 
There can be no real thrift without 
adequate wages, (jt) The saving of 
money should not be encouraged to 
the detriment of physical and moral 
stamina. (3) The calamities of life 
for the great majority cannot be 
provided against with certainty by 
individual thrift. (4) The hazards 
of sickness, accidents, unemploy- 
ment, and dependent old age, while 
not measurable for individuals are 
measurable for groups. (5) Indi- 
viduals, by combining together 
through insurance are able to dis- 
tribute the extra burdens of life in 
such a way as to prevent individ- 
ual calamity and thus enable one to 
provide by normal savings against 
abnormal contingencies. 

Individual thrift is building houses 
upon sand unless supported upon the 
foundation of insurance. Individual 
thrift will help in normal contin- 
gencies, but wiU be of slight assist- 
ance, except in rare instances, in 
those serious calamities which should 
receive most careful consideration. 
The application of the insurance prin- 

ciple in the safeguarding of thrift 
is the obvious solution of the problem. 
But thiis cannot be done by relying 
upon private initiative and enter- 
prise. All experience shows that the 
bulk of the people are not forehanded 
enough to see the necessity for insur- 
ance. The great majority are fatalists 
in such matters as sickness, accident 
and dependent old age. Moreover 
private insurance increases the cost 
abnormally because of the expense of 
securing and maintaining business. 
Prom 50 per cent to 60 per cent of the 
premiums from casualty insurance go 
to the private owners for management 
and profit, and even greater per cents 
of premiums in burial insurance go 
for the same purpose. Purchasers 
of old age annuities pay large toll to 
private insurance companies. It is 
entirely wrong to attempt to safe- 
guard thrift by compelling thrift to 
pay tribute to private profit. It is 
plain logic to suggest that thrift be 
safe-guarded by means of public, 
mutual, social insurance. It is the 
practical business-like way. Such 
insurance is collective public thrift. 
Business provides a depreciation fund 
for plant and machinery. Society 
should form a depreciation fund for 
human values. The fact that 
scarcely any of the hazards of old 
age and unemployment, and not two 
per cent of the hazards of sickness are 
provided against by insurance at 
present, indicate that existing insur- 
ance agencies are not solving the 
problem. The example of almost 
universal accident insurance for 
workmen in industries points to the 
proper solution of the problem. 

Digitized by 


The Nation's Call for Thrift 

By Frank L. McVey 
President of the University of Kentucky, Lexington, Kentucky 

IN the older days of railroading a 
sign stood guard at every crossing 
on which were the words, "Stop, Look, 
Listen." Evidently this positive com- 
mand has been forgotten in railroad 
circles, and elsewhere for that matter, 
for the traveller is now informed that 
it is a railroad crossing which he is ap- 
proaching, the "Stop, Look, Listen" 
being taken for granted as part of 
the fimctioning of a reasoning human 
being. Pretty much the same attitude 
appears to be the rule in other depart- 
ments of activity. Everywhere are 
advertisements setting forth the at- 
tractiveness of goods and nicknacks as 
the desirable things to exchange for 
money. So the world goes on piling up 
consumption goods and the people buy 
without thought of the future. It is 
m reality high time to put up the sign 
"Stop, Look, Listen" over every door 
in the land. 

Perhaps such a statement needs 
explanation. It may even appear 
dogmatic — ^it probably is — but the 
purpose of an opening paragraph is 
acknowledged if attention has been 
attracted to the real import of the 
statement. In the face of the demand 
for higher wages, more rents, larger 
prices and all the rest of the phe- 
nomena now familiar to the student, 
every citizen is demanding more in 
order that he may meet the cost of 
every day hving. This in itself is the 
natural way out of personal difficul- 
ties, but when multiplied by thousands 
of instances, the mass of people are 
no nefirer the end of their • troubles 
than before. In fact, new demands 

leave the problem just as unsolvable 
as before. 

Production the Basis of Prosperity 

It hardly seems necessary in the 
Year of Grace 1919, to set forth the 
simple principle that production of 
goods for human needs is the only way 
in which human wants, and as a con- 
sequence, higher wages and better 
living, can be met. Yet all the evi- 
dence points to the conclusion that the 
principle has been forgotten. More 
wages in money will help one person, 
why not the same for all? 

When Robinson Crusoe sat in his 
cave inventorying his possessions, he 
came upon a bag of gold in a great sea 
chest. Looking at the gold sovereigns 
so worth the while in civilized England, 
he gave utterance to the remark, so 
Defoe tells us, " Sorry, worthless stuff." 
And it was to him. He couldn't buy 
anything with it; he couldn't use it in 
any way that he thought worth while; 
there were no human beings who were 
willing to exchange it for goods, be- 
cause other people would take it from 
him for their goods. So it laid in the 
chest forgotten for years. Our civil- 
ized societies are in the reverse condi- 
tions. Men have money, but the 
goods are not there in the quantity 
necessary for the needs of the world. 
Strikes are not Ukely to produce more 
goods, and extravagance in their con- 
sumption will not bring them into 
existence. Where then are we? 

The agencies of production are labor, 
capital, land and management. No 
prolonged endeavor can go on for any 


Digitized by 



The Annals of the American AcADEinr 

great length of time without all of these 
agencies. Labor must have food, but 
food requires labor, land and capital 
for its production. Only in the last 
100 years has the world accumulated 
any great quantity of capital, and no 
inconsiderable amount of that has been 
wiped out by the Great War. The 
disasters of nature dog the steps of 
man, and place heavy burdens upon 
him. The pests destroy his crops, and 
winds drive his fleets on rocky shores. 
Against all of these, he struggles 
bravely and hopefully. The War, 
however, has swept some countries 
bare; billions of capital have been 
destroyed, and millions of lives were 
given over to the god of war. The 
impress of all of this has not yet been 
made upon the world. We must come 
to thrift, economy and hard work to 
restore the world to the place where it 
was in the year 1914. 

The Consumption of Wealth 

Gromng Demand for Consumption Goods 

With some danger of repeating what 
has already been said, it is worth while 
to rub the lesson in. We must grasp 
the idea that man is not free to go on 
indefinitely consuming; he soon en- 
counters powerful influences, which 
work against the increasing of product 
without increased labor, effort, more 
capital, and better organization. " The 
more food and clothing, fuel, and other 
material goods we require, the further 
we have to go for the material, and the 
harder it is to get; we must plow in- 
ferior lands yielding smaller crops, we 
must sink deeper shafts for our coal 
and iron. As our population grows 
ever larger, and this larger number 
wants more and more pieces of the 
earth to feed its machines and turn out 
the increased quantity of goods, the 
drain upon the natural resources is 

constantly increasing. The material 
world is limited; in time, nature will 
become exhausted, and long before this 
happens, the quantity of human labor 
required to raise the increased supply 
of raw material in the teeth of the Law 
of Diminishing Returns will far exceed 
the economies attending large-scale 

The population of the United States 
is now more than 100,000,000. Prom 
the point of view of consumption and 
the supplying of wants, this means a 
great and growing demand for food- 
stuffs, higher land values, smaller ex- 
ports of food products, and larger im- 
ports of materials for manufacturing. 
Progressing at this rate the growth of 
population in the United States will 
necessitate the taking up of the waste 
places and the introduction of an era of 
intensive cultivation with higher ef- 
ficiency in production. Conservation 
of natural resources also must reach the 
stage of an economic necessity, and 
interest in that subject will no longer 
be deemed a fad as is often the case 
at present. But against this necessity 
of labor is the constant retarding forces 
of nature, and the fooUsh tendencies of 
men to fritter away their patrimony. 

Consumption by Forces of Nature 

Prom time to time a vast amount of 
wealth is destroyed by storm, fire, and 
flood. A tornado on the Great Lakes 
and the east coast of the Atlantic not 
long ago drove hundreds of vessels 
ashore, drowned many men and de- 
stroyed valuable cargoes. In 1913 a 
storm on the Japanese coast, accom- 
panied by a volcanic eruption, killed 
thousands of people and destroyed the 
property of many more. The report 
of the engineering division of the War 
Department states that the annual loss 
from floods in the United States aver- 

Digitized by 


The Nation's Call fob Thrift 


ages ^0,000,000, and in the Ohio flood 
in 1913, the loss to railroads, cities, and 
private indidduals amounted to hun- 
dreds of millions. 

Losses by fire add to the appalling 
aggr^ate of wealth destruction. In the 
year 1916 the fire losses in the United 
States amounted to $168,905,100, 
and despite the efiPorts of the insurance 
companies and other agencies to limit 
the siase and frequency of fires, the ab- 
solute amoimt of waste has declined 
but slightly. The newness of some 
parts of the country, the absence of 
regulations for building in many places 
and the failure to provide first-class 
protection against fires, gives the 
United States a per capita fire loss 
which is from five to six times as large 
as that of any of the leading European 

Irving Fisher, in estimating the cost 
of the annual charge against the coim- 
try for illness, places the figure at 
$1,000,000,000. Probably $660,000,- 
OOO of this cost is attributable to tu- 
berculosis alone. Dr. L. O. Howard, 
Chief of the Federal Bureau of Ento- 
mology, says that malaria alone costs 
the country $100,000,000 annually, 
while Dr. George M. Kober of George- 
town University, thinks that $350,000,- 
000 is a conservative estimate of the 
annual loss from typhoid. Diseases 
of plants and animals cause losses of 
millions of dollars every year by de- 
stroying products or impairing their 

Consumption by Acts of Man 

It is essential that some conunent 
be made upon the acts of men them- 
selves which affect the consumption 
of wealth, as distinguished from the 
acts of nature. The European war 
furnishes the most forceful instance in 
all history of the destruction of wealth 

through force. Among the direct costs 
of the war are to be enumerated loss of 
property, cost of the army, seizure of 
raw materials, and other direct losses 
to governments and cities. The in- 
direct costs include losses of agricul- 
tural and industrial production, of 
interest on investments, of earnings 
from shipping and banking and of 
profits of insurance and mercantile 
houses amounting to biUions of dollars. 

An economic depression due to the 
destruction of capital and wealth in- 
variably follows war and causes a 
scarcity of food that brings about more 
deaths than the actual fighting. The 
fact is that even in civiUzed lands the 
resources of many are so scanty that 
an increase in the price of bread falls 
heavily upon the population. 

In direct contrast to the expendi- 
tures for war are the amounts which 
are spent by governments, individuals 
and private associations for social 
amelioration and betterment. These 
comprise two classes; compulsory and 
voluntary expenditures. 

The first class includes the outlay 
for expenses incurred by the different 
divisions of the government for serv- 
ices, such as the salaries of civil serv- 
ants, police, soldiers, and judges and 
those for the general conduct of govern- 
ment. Mihtary and naval defense is 
included in this group. Postoffices, 
telegraph lines and railroads, when 
owned by the government, supposedly 
pay for themselves, since the users 
return the cost of service. 

Voluntary expenditures include the 
outlay for countless social and philan- 
thropic agencies, both public and pri* 
• vate. At one of the meetings of the 
American Academy of Political and 
Social Science, according to the Ameri- 
can Year Book, for 1913 (p. 46), the 
art of giving was discussed as in exact 

Digitized by 



The Annals of the American Academy 

science. The reader pf the paper de- 
clared that in 1912, perhaps the most 
notable year, gifts totaling nearly 
$267,000,000 were reported by the 
press, and that for the twelve years 
preceding, the annual total of nota- 
ble gifts had exceeded $100,000,000. 
This statement tells something of 
the extent to which consumption 
for social purposes may be carried 

The latest estimates of the yearly 
consumption of liquors and tobacco 
in the United States reach the enor- 
mous figure of $2,830,000,000. Of this 
sum $1,200,000,000 is spent for tobacco 
and $1,630,000,000 for malt and spirit- 
uous liquors. The total gives an al- 
most incredible per capita figure of 
$28.00. In the fiscal year 1916, there 
were withdrawn for consumption in 
the United States 136,000,000 gallons 
of distilled liquors and a little more 
than two billion gallons of fermented 
liquors. Our consumption of cofiFee, 
tea and sugar has come to surpass that 
of any other nation, and they have 
been made a part of every family's 
diet. By unthinking individual con-» 
sumption the magnitude of the 
social burden is materially increased. 
When a goodly portion of the in- 
dividuals' consumption is governed 
by habit, the charge becomes prac- 
tically fixed. 

The nation's drink bill is often com- 
pared with the cost of government, 
but the nation's tobacco expenditures, 
while not so large as the liquor cost, 
were four times the amount spent on 
the Army and Navy before the war, 
and then, too, through the carelessness 
of smokers, thousands of dollars worth • 
of property is destroyed each year. 
The amount spent annually for tobacco 
is three times the cost of the Panama 

Factors Afpectinq Individual 

Social Custom — ^The standard of 
dress affects taste and cost. YlhsX is 
termed fashion has come to set stand- 
ards of living in food, clothes, and hous- 
ing. Conformity to these standards is 
looked upon as a test of social stand- 
ing, and thus the modem society is 
bound in many ways by the restric- 
tions and limitations it places upon 
itself, which in turn affect individual 

For several years the public prints 
have been filled with comments upon 
the rising cost of living. The cartoon- 
ists have exercised their skill in depict- 
ing in humorous fashion, the ideas 
in vogue about living and its costs. 
The higher cost of living as compared 
with earlier days is due to a rising 
standard in the common life of the 
people, seen in better housing, more 
attractive clothing, higher qualities of 
food, and in the larger variety of 
amusements demanded by every class 
of the population. 

Pressure of Popvlaiion on Food 
Supply — In addition to the rise in the 
standard of living, there is another and 
more immediate cause for the increase 
in the cost of living, which is to be 
found in the pressure of the population 
upon food supply. Agricultural prod- 
ucts have not grown in quantity com- 
mensurately with the needs of the 
population. The number of cattle has 
decreased not only in proportion to the 
population, but absolutely; in the past 
five years the increase in tilled acreage 
was 9 per cent and the increase in popu- 
lation 14.5 per cent. The United 
States, once a great wheat exporting 
country, now uses in normal times' 
practically all of its grain for home 
consumption. These facts point to a 
rising demand without a corresponding 

Digitized by 


The Nation's Call fob Thrift 


growth in product. The result is, as a 
matter of course, higher prices. 

Change in Value of Money — ^Besides 
the influence of under-production upon 
supply, there is another, that of the 
money standard, which during the past 
twenty years has been changing in 
value under the influence of increasing 
supplies of gold and securities. In Uke 
manner an enlarged credit, due to the 
material growth of the basis of credit, 
gold, has had its influence upon the 
purchasing power of the dollar, with 
the result that the dollar is not now 
able to command in return as 
great an amount of commodities 


The Need for Increase in Capital 

Read in the light of the present, this 
is an overwhelming category of con- 
^sumption in a civiUzed society. It is 
bad enough in normal times. To it 
has been added individual prodigality, 
the refusal of labor to work as of old, 
and the very discouraging burden of 
war expenditures. In a recent speech 
before the House of Commons Lloyd 
George said: ''The aggregate direct 
cost of the War was $200,000,000,000. 
If 40,000,000 able-bodied young men 
were to take holiday and be withdrawn 
from the task of production for four 
years, and if during that period £1000 
were placed at the disposal of each, you 
would have some sort of notion what a 

war on this gigantic scale means." 
Dr. Rowe, formerly assistant Secretary 
of Treasury, said: "It is evident to 
every student of the world situation, 
that the sum total of productive goods, 
raw materials, tools, implements, ma- 
chinery, etc., is today insufficient to 
meet the pressing needs of mankind. 
The amount of available capital at any 
one time is limited, and at no period in 
the life of this generation has it been 
limited as at the present moment." 
"The fate of Europe is balanced on a 
knife edge, " wrote Mr. Frank Vanderlip 
recently. There is only one way out, 
and that is saving, and with the capital 
so created, produce, produce, produce. 
The world is poorer, much poorer 
than it was in 1880. The generation 
now coming on, faces a less pleasing 
prospect than the one that is passing. 
What is more disturbing is the lack of 
habits in the new generation for hard 
work, and thrift. Faced with the most 
serious problems, the hope of the world 
is to be found in a productive people, 
who know how to produce, who ap- 
preciate the great power of thrift, and 
who are wiUing to forego the pleasure 
of the present because they know that 
capital is the result of saving, and that 
labor without capital is a blind man 
groping in the dark. The times call 
for all of us to "Stop, Look, Listen," 
and having done that, to work and 

Digitized by 


Wealth, Income and Savings 

By David Friday 
Univenity of Michigan, Ann Arbor, Michigan 

The Measuhe of National Thrift 

THE thrift of a nation is measured 
by the excess of its production 
over its consumption. This excess 
constitutes the nation's savings. In 
arriving at any statistical measure- 
ment of the ability of the nation to 
save, the starting point must, therefore, 
be the nation's product. This is com- 
monly called the national income. It 
consists of all commodities and services 
brought forth within the country 
during the period chosen as the statis- 
tical time unit. The excess of this 
product over the customary minimum 
of living measures the ability to save. 
What we need, then, in arriving at a 
statistical estimate of the saving 
power of a nation is first of all as exact 
a notion as possible concerning the 
size of the national income ; and second 
a comparison of our present national 
income with that of the past. 

National Wealth 
Unfortunately, at least from our 
point of view, much greater attention 
has been given to statistics of wealth 
than to those of income. The figures 
of national wealth are by no means as 
important for the purpose in hand as 
are the figures of national income. 
They are of some importance, however, 
as bearing upon the nation's productive 
capacity. The wealth of the nation 
consists largely of its technological 
equipment — of the things, that is, 
which assist the people in bringing 
forth the national income. Other 
things being equal, the larger this 
equipment the greater will be the 

income out of which new capital can be 

National Income 

The best evidence as to the amount 
of the national income which can be 
saved without impinging upon our 
standard of living is to be found by 
comparing the amount saved in the 
past with the national income of the 
past, and thus arriving at the normal 
consumption of the people. If there 
were an actual inventory of all the 
goods and services produced within 
the year and we had definite facts 
showing the disposition of these prod- 
ucts through consumption or addi- 
tion to our industrial equipment, then 
it would be possible to state the excess 
of production over consumption and 
the use of the amount saved. Or if 
we had an inventory of all goods in 
existence within the nation at the end 
of each year which we could compare 
with a similar inventory at the begin- 
ning of the same period, we could 
calculate the excess of production over 
consumption from the increase in 
physical wealth. 

To the increase as shown by such 
inventories it would be necessary to 
add the amount of goods loaned to 
foreign nations and those used in pay- 
ing off our foreign indebtedness. We 
should then have to deduct the goods 
in the inventory which represented 
loans to^us by foreign nations or repay- 
ments by them of debts which they 
had formerly owed in this country. 
Such statistics manifestly could not be 
obtained except by taking a census on 

Digitized by 


Wealth* Income and Savings 


practically the same scale as the 
national decennial census. Since 
there are no statistics compiled for 
this express purpose* it is necessary 
to utilize data which have been gath- 
ered for other purposes by various 
public and private agencies, and to 
interpret them in such manner as to 
throw light upon the problem here 
under investigation. 

We have an index of the savings of 
the past in the statistics of wealtii at 
various times. The best evidence of 
thrift is to be found in the capital 
actually accumulated. By comparing 
produced wealth in existence within 
a country at various dates we can 
arrive with a fair degree of accuracy at 
the savings of the people during the 
period which intervenes between the 

two summations of wealth. If we can 
arrive at the growth of wealth which 
was effected through savings in the 
pre*war period and at the national 
income then and now we will be in 
position to judge of the possible accu- 
mulation of capital at the present 

Increase in Value op National 

The fountain head of practically all 
information on the subject of our 
national wealth is the Census Bureau 
at Washington. In its volume 
entitled "Wealth, Debt, and Taxa- 
tion" (1913) it shows the comparative 
wealth for 1912, 1904, and 1900. 
Table I is compiled from the data 
which that volume contains. 

Table I 
Egiimaie9 of Capital Wealth in the United States, 1912, 190k and 1900 






Real estate 













Live stock, fann imple- 


Manufactmisg tools, ma- 
chinery, etc 


Gold and silver coin and 


Railroads and their equip- 

Street railways and other 
public utilities 


All other, not induding per^ 
sonal clothing, furniture, 







Total other than real estate 





From this table it appears that the 
wealth of this comitry, other than real 
estate and personal belongings used 
for current consumption, increased 
by $^8,000,000,000 during the period 
1904 to 1912, or an average of $3^- 


500,000,000 per annum. Real estate 
increased $48,000,000,000, or about 
$6,000,000,000 per annum. The total 
increase was, therefore, at the average 
rate of $9,500,000,000 per annum. 
But by no means all of this was the 

Digitized by 



The Ankalb of the American Academy 

result of capital accumulation. Much 
of this increase in the value of our 
national wealth was the result of 
price changes of things in existence at 
both dates. 

Factors Affecting Increase in Total 

Increase in Land Values. — ^Real 
estate consists of land and improve- 
ments. Only the improvements, such 
as new buildings, draining, clearing, 
fence and road building, and the plant- 
ing and cultivation of orchards, are 
the result of production and savings. 
It is necessary, therefore, to eUminate 
from the $6,000,000,000 per annum 
increase in real estate, that portion 
which represents merely increase in 
value of land as distinguished from 

Change in Price Level. — In the valua- 
tion of the improvements, also, the 
change in the price level manifests 
itself in a higher valuation in the latter 
years. A correction must be made for 
this element. The same is true of 
many of the items other than real 
estate, especially those which were 
valued by a process of applying prices 
to inventories rather than by taking 
their cost of construction. 

Causes for Increase in Land Value 

Improvements. — ^The whole increase 
in the value of land, considered as an 
economic category, must be eUminated. 
Unfortunately we have no index num- 
ber of land values in the United States. 
The most practicable method of pro- 
cedure is, therefore, to estimate as best 
we can the percentage of the total 
value of real estate which consists of 
land as distinguished from improve- 
ments at each date. An examination 
of the real estate assessments of twenty- 
four states which separate improve- 

ments from land values shows that 
approximately 40 per cent of the total 
real estate values are to be credited 
to improvements. The communities 
which make up this group are of a 
widely diverse nature, including as 
they do Arizona and Idaho on the one 
hand and Greater New York on the 
other. They may, therefore, safely be 
taken as representative of the general 
situation in the United States. The 
dates of the valuations are all much 
nearer to the year 1912 than to 1904, 
however; in fact, the mean date of all 
the assessments would be 1912. It is 
quite possible that the ratio in 1904 
may have been somewhat different. 
But it seems unlikely that this differ- 
ence was very great. 

Grovjth of Population. — ^The general 
profitableness of the farming industry 
and the growth of population in our 
industrial centers have no doubt led 
to a very rapid rate of increase in the 
value of real estate diuing this period. 
But it is equally true that there has 
never been in all our national history 
such a rapid investment in buildings of 
all kinds as during the decade 1904- 
1914. Indeed the absorption of capi- 
tal by building operations was one of 
the chief sources of the increased de- 
mand for capital and the rise in interest 
rates which has characterized this 

Increase in Capital Accumulations 

We cannot be seriously in error, then, 
if we take the value of improvements 
in 1904 at 40 per cent of total real 
estate values. This gives an average 
annual increase in the value of real 
estate improvements of $2,400,000,000 
during the period 1904-1912. This 
added to the $3,500,000,000 increase 
per annum in other wealth gives 
$5,900,000,000 as the total increase in 

Digitized by 


Wealth, Income and Savings 


wealth other than personal clothing, 
furniture, etc., during this period. A 
portion of this increase, however, is 
due to a rise in the price level and not 
to additional production and savings. 
Some of the items like street railways 
and other public utilities, which are 
included on the basis of their cost, and 
like gold and silver bullion, call for no 

According to the Bureau of Labor 
wholesale price index number, the 
price level rose 17 per cent for all com- 
modities between 1904 and 1912. The 
prices of metals and lumber rose 18 per 
cent. Taking all the items of capital 
wealth together, a 10 per cent allowance 
for increases in values must probably 
be made in the 1912 valuation. If the 
latter be adjusted for this price change, 
we find that the average addition to 
the wealth of the nation through 
capital accumulation and investment 
was approximately $5,000,000,000 per 
annum, exclusive of clothing, furniture, 
etc. But the accumulation of capital 
in the latter part of this period and in 
the years just before the outbreak of 
the European war was undoubtedly 
more rapid, and reached a figure some- 
what over $6,000,000,000. 

This amount is less than the figure 
of $7,500,000,000 arrived at by George 
E. Roberts of the National City Bank 
of New York.^ Mr. Roberts uses 
practically the same method as the one 
employed here. He, however, makes 
no deduction for the increase in the 
price level from 1904 to 1912. It is 
also sUghtly lower than Sir George 
Paish's estimate published in the Lon- 
don Statist, May 24, 1918. He places 
the annual growth of wealth in the 
United States at $1,400,000,000. 

^ AnnaU of the American Academy, Novem- 
ber, 1916, p. 287. 

Amourd of National Income 

What was the size of the national 
income out of which this capital was 
accumulated? The best estimate of 
income during the pre-war period is 
that of Professor W. I. King in his 
book entitled The Wealth and Income 
of the People of the United States. He 
places the total income in 1910 at 
$30,500,000,000. This figure may be 
brought forward to 1913 by taking the 
growth in railway gross revenues as the 
best available index of the increase in 
national product. These revenues in 
1913 were 114 per cent of those of 1910. 
A proportionate increase would make 
the total income in 1914 $34;700,000,- 
000. If the national savings be taken 
at $6,500,000,000 they constitute ap- 
proximately 19 per cent of the national 
income. The consumption of the 
people for the year 1913, was, on the 
basis of these figures, slightly in 
excess of $28,000,000,000. 

After we had recovered from the 
de])ression into which industry and 
finance were thrown by the outbreak 
of the European war, our national 
income grew rapidly. During the latter 
part of 1915 and throughout 1916 and 
1917 there was a steady increase in 
the output of goods as measured in 
physical terms. This acceleration of 
productive activity probably reached 
its height sometime in the autiunn of 
1917. Thereafter the rigor of the 
winter of 1917 and 1918, with its coal 
shortage and the withdrawal of men 
from industry through the selective 
draft prevented a further increase in 
productive output. The extent of this 
increase in production has been va- 
riously estimated, but an increase of 
20 per cent expresses the fact within 
narrow limits of error. 

Digitized by 



The Annals ot the American Academy 

Increase in Money Value of National 

This increase of output coupled with 
the increasing prices in which that 
output was measured increased the 
money value of our national income at 
an amazing rate. Thus the total per- 
sonal and corporate income reported 
to the Commissioner of Internal Reve- 
nue in 191S amounted to $8,614,000,- 
000,000. In 1916 it amounted to 
$15,066,000,000, and in 1917 to 
$24,882,000,000. It is true that in 
1917 over 3,000,000 persons reported 
who had made no reports of personal 
income in the previous years, but even 
after these are eliminated the corpo- 
rate and personal incomes remaining 
amount to $17,700,000,000. 

The following table (Table II) , show- 
ing the number of income tax returns 
by persons with incomes of $3,000 and 
over, shows the effect upon personal 

Table II 

Number of Personal Income Tea Hdums for the 

United States, 19U and 1917 

Income class 



3,000 to 5,000 



5,000 to 10.000 



10,000 to 25,000 



25,000 to 50,000 



50,000 to 100,000 



100,000 to 150,000 



150,000 to 300,000 



300,000 to 500,000 



500,000 and over 






National Income for 1917 
The value of farm products increased 
from $9,849,512,511 inl91S to $19,443,- 
849,881 in 1917. These figures fur- 
nish striking evidence of what hap- 
pened to national income during this 
period. In another place* I have esti- 
mated that the national income for 
1917 totaled $65,515,000,000, divided 
as follows: 

Table III 

Total National Product for 1917, by Industries 

Extractive, manufacturing, and public utilities: 

Farmers and farm laborers, including the members of their 

families $14,500,000,000 

Manufacturers and manufacturing laborers 25,800,000,000 

Mine operators and miners 8,675,000,000 

Steam railroads and their employes 3,040,000,000 

Public utilities and their employes 2,750,000,000 

Subtotal $49,765,000,000 

Mercantile and professional activities: 

Wholesale merchandisers $2,250,000,000 

Retail dealers 2,000,000,000 

Professional services 2,500,000,000 

Services rendered by others, including government employes 9,000,000,000 

Subtotal $15,750,000,000 

Total national income $65,515,000,000 

Since that estimate was made the 
Commissioner of Internal Revenue has 
published his Statistics of Income for 
1917. The analysis of income from 
business (personal returns) on page 16 
of that volume and of corporate returns 

on page 19 convinces me that the esti- 
mate presented above is somewhat 
excessive for manufactures and manu- 

* The Taxable Income of the United SUtes, 
Journal of Political Economy, December, 1918, 
p. 954. 

Digitized by 


Wealth, Incobcb and Savings 


facturing laborers and for mine oper- 
ators and miners; but that it is very 
much understated for wholesale and 
retail dealers. The total of $65,515,- 
000,000 is pretty well supported, how- 
ever, by the Statistics of Income. The 
personal services rendered by people 
other than those engaged in extractive, 
manufacturing, transportation, public 
utility and trading industries still re- 
main the doubtful element in the esti- 
mate. But this is also the element in 
the national income which is of least 
importance in capital formation. Cap- 
ital consists of produced goods and 
not of services rendered. 

This estimate, while made entirely 
independently of Professor King's com- 
putation of national income, neverthe- 
less confirms it. This is shown in the 
estimate of B. M. Anderson, Jr., of the 
National Bank of Commerce of New 
York City, who places the national 
income for 1917 at $68,000,000,000 in 
an article in the New York Times 
Annalist, January, 1918. Dr. Ander- 
son arrives at this figure by taking as 
a point of departure King's estimate 
for 1910 and increasing it by a factor 
which expresses the increase in the 
quantity of physical product multiplied 
by the rise in the general price level as 
shown by Dun's index number. 

Incrrase in National Savings 
Dttbing 1917 

This increase in national income 
presented the possibility of largely 
mcreased savings. Thus if the na- 
tional income increased 20 per cent 
through higher productive activity, 
it amoimted to $41,400,000,000 in 

1917 even when measured in terms of 
the price level of 1913. If the 28,000,- 
000,000 units of consumption of 1913 
increased by 10 per cent, then the 
nation's consumption, as measured in 

1918 prices, would have been 30,800,- 

000,000 units. The excess of pro- 
duction over consumption in 1917 as 
measured in the 1913 price level woidd 
then have been 10,600,000,000 units, 
an increase of over 60 per cent in capi- 
tal accumulation measured in physical 
terms. Measured in terms of money, 
the increase would of course have been 
much greater. 

The level of wholesale prices, as 
shown by the Bureau of Labor Statis- 
tics index, by Bradstreet's index, and 
by the unusually comprehensive index 
number of the Price Section of the War 
Industries Board, was 175 in 1917, as 
against 100 in the period immediately 
preceding the war. If our 10,600,- 
000,000 units of savings be translated 
into 1917 doUars, our annual savings in 
that year stood at $18,550,000,000. 
The increase in production made it 
possible to raise the percentage of 
savings from 19 per cent in 1913 to d8 
per cent in 1917 in the face of an abso- 
lute increase in consumption. The 
volume of savings was maintained dur- 
ing 1918 and was probably somewhat 
increased through the constant pres- 
sure brought upon all classes to de- 
crease consumption in the interest of 
war finance. 

These figures show that, given an 
increase of 20 per cent in productive 
output, it was possible to increase sav- 
ings enormously without any increase 
in felt abstinence. The figures of 
savings here presented for 1917 are so 
stupendous and the assumptions of 
fact employed in reaching them are so 
broad that they must be tested by 
more direct and dependable evidence 
before any reliance can be placed in 

Total Volume op Savings 
All wealth produced and not con- 
sumed is disposed of in one of three 
ways. It has been paid to the govem- 

Digitized by 



The Annals op the American Academy 

ment in taxes, it has been reinvested in 
additional plant, working capital, or 
some form of physical property by the 
individual or business organization 
which saved it, or it has been brought 
to some investment market. In the 
latter case evidences of proprietorship 
or indebtedness in the form of secu- 
rities of corporations or bonds of state 
and municipal governments or of the 
federal government are issued in re- 
turn. An estimate of the growth in 
government taxes, reinvested surplus 
and new securities issued will give a 
reasonably accurate picture of the 
total volume of savings. 

The Investment Market 

Table IV sets forth the statistics 
which are available for the years 1913- 
1918 concerning securities marketed, 
together with gold and securities re- 
purchased from abroad. The figures 
here given for industrial and railroad 
securities are those listed by the Jour- 
nal of Commerce; there are no pub- 
Ushed figures for other securities. 
These are considerable in volume, as is 
shown by a comparison of the figures 
given by the Journal of Commerce with 
the actual increase in capital stock 

and bonded and other indebtedness 
available in the reports of the Com- 
missioner of Internal Revenue for the 
years 1909-1913. 

During this period the Journal of 
Commerce reports the new securities 
issued as $7,157,084,000, while the 
actual increase for all corporations 
reporting to the Bureau of Internal 
Revenue was $17,501,954,000. Even 
allowing for the refundings in the 
Journal of Commerce figures and for 
discounts in the Internal Revenue 
figures, it is reasonable to put the vol- 
ume of other corporate securities 
issued at a minimum of $1,000,000,000 
per annum for ordinary years. In 
1916 the volume of corporate financing 
was far in excess of the ordinary year, 
and no doubt ran as high as $1,500,- 
000,000 in excess of the Journal of 
Commerce figures. In 1918 the needs 
of war finance absorbed nearly all the 
available funds, and the issue of secu- 
rities was materially reduced. When 
we add these estimates of additional 
securities issued, to the subtotal, which 
includes only the published figures, 
we arrive at a grand total of $3,053,- 
000,000 for 1913; $7,563,000,000 for 
1916; and $14,510,000,000 for 1918. 

Table IV 
Capital Increase Skoion by InoestmenU During 1913 and 1916-1918 
(in Millions of DoUars) 







Industrial and railroad securities* 


















Government securities 

Foreign » 


United States 


State and municipal bondsf 


Gold and securities repurchased from abroad 







Other securities, less deductions for refunding and 
for discount ........ 








* Reported in the Journal of Commerce. 
t Reported in the Bond Buyer. 

Digitized by 


Wealth, Income and Savings 


This table shows that a very sub- 
stantial amount of savings came to the 
mvestment market in 1913; that this 
amount had trebled by 1917; and had 
more than quadrupled in 1918. But 
it does not express the total volume of 
capital accumulation in the United 
States in the respective years. In a 
normal pre-war year less than two- 
thirds of our capital accumulation 
came to the market. 

Industrial and AgricvUural Profits 

Two of the principal sources of 
capital accumulation in America which 
do not appear on the investment mar- 
ket are industrial and agricultural 
profits. One of the reasons why the 
rate of interest fluctuates so little under 
the stimulus of the demand for capital 
in times of prosperity and high profits 
is that in such times the supply of capi- 
tal accumulated out of these profits is 
unusually large. To a considerable 
degree the industries supply their 
needs for capital out of Uieir own 
profits. The failure to realize this 
fact has led to an underestimation of 
the volume of capital accumulation in 
this country, and is in no small meas- 
ure responsible for the derogation in 
which we have held ourselves in this 
matter of thrift. In addition to this 
lack of attention given to certain 
sources of accumulation, there has 
been a rather common failure to dis- 
tinguish between accumulation and 

Capital Accumidations in Industry 

In a country like Prance, for example, 
which is less industrialized than the 
United States, where the corporate 
form of organization is less common 
and where there are fewer opportu- 
nities within the country calling for 

capital, a much larger part of the 
annual accumulation of capital comes 
to the investment market. Savings 
there are largely in the form of invest- 
ment in securities, often of foreign 
securities. Savings of this character 
become evident and are easily meas- 
ured in statistical terms. In France 
we have nothing which corresponds to 
the great mass of corporate savings 
which are accumulated in the United 
States. These do not usually come to 
the investment market, and, therefore, 
attract little attention, but they are 
none the less real, and must be taken 
into consideration in any comparison 
between the United States and other 
countries. The railroads and indus- 
trial concerns in the United States 
have grown very rapidly, and in recent 
years they have added largely to the 
capital accumulations of the country 
through their additions to surplus. 
Practically all of this surplus was 
reinvested in extensions to plant and 
working capital made necessary by the 
large expansion of industry during 
these years. Table V shows this 
increase in surplus during the years 
1911-1918 for all corporations in the 
United States. 

Table V 

Corporate Income, Dividends, and Surplus, 


(in Millions of Dollars) 

















" Estimated. 

Digitized by 



Thb Annals of the American Academy 

The method of arriving at these 
figures I have set forth in an earlier 
paper.' It is not necessary to repeat 
the details here. One sample will 
suffice to show the striking nature of 
the statistics. An examination of the 
published reports of mining, manufac- 
turing and mercantile corporations 
shows that their net earnings, after 
interest and taxes, amounted to $900,- 
000,000 in 1915, of which they retained 
$497,000,000, or 55 per cent as surplus. 
Their earnings in 1916 had increased 
to $1,883,000,000 of which they re- 
tained $1,219,000,000, or 65 per cent, 
as surplus. In 1917 these 363 corpora- 
tions earned $2,316,000,000, and their 
surplus for the year, before deduct- 
ing income and excess profits taxes 
amounted to $1,585,000,000. The 
reports of only 224 of these corpora- 
tions are available for the period since 

Figures showing their earnings 

and surplus, which are set forth in 

Table VI, show that in the earlier 

years, 1911 to 1914, they retained 

only 33 per cent of a much smaUer 


•War and Supply of Capital, Proceedings 
American Economic Association, 1918, p. 85. 

Tab£b VI 

Statisties cf Income, Dividends, and Surplus for 

i^4 Corporations 

(in Millions of Dollars) 





to net 













Corporate Savings and Taxes 
It must be evident, therefore, that 
no accurate comparison can be made 
of the volume of savings in the differ- 
ent years without including corporate 
surplus. In 1917 and 1918, a large 
part of corporate savings was paid as 
taxes to the government; the same is 
true of a portion of individual savings. 
It is, therefore, necessary to add war 
taxes paid or reserved in order to make 
a complete summary of the savings of 
these latter years. Table VII sets forth 
a more complete statement of savings 
for the various years than was given 
in the table of investments given above. 

Table VII 
Capital Increase Shown by Investments, Surpltu and War Tax Reserves During 1913 and 1916-1918 

(in Millions of Dollars) 



1915 1916 1917 


Industrial and railroad securities 

Other securities, less deductions for refunding and 

for discount 

Government securities 


United States 

State and municipal bonds 

Corporate surplus after taxes 

Gold and securities repurchased from abroad. . . 
War taxes paid or reserved 




























Digitized by 


Wbai/th, Income and Savings 41 

The figures in this table are a pretty tion. Most mining and manufactur- 

accurate index of the capital accumu- ing is carried on by corporations, but 

lation from these sources during 1915 the great mass of mercantile and 

and 1916. But for 1917 and 1918 they professional activity is still under the 

overstate the matter for two reasons, private or copartnership form of 

After the United States entered the organization. The savings of these 

war, considerable portions of corporate establishments are large and no 

surplus were invested in government doubt increase in somewhat the same 

securities. Since this table includes ratio as do those of corporations, 
both of these items, there b some 

double counting. Then, too, we must Samngs of Famusrs 
take account of the fact that corporate The other important omission from 
savings are here expressed in terms of the table is the savings of farmers, 
money, and in times of rising prices These no doubt increased enormously 
and increased inventories the surplus in 1917 and 1918. In the former year 
does not represent a commensurate only a small part of these were brought 
excess of physical production over to the investment market by the farm- 
consumption, ers themselves. Agricultural savings 

Furthermore, there was a very were invested, as they normally are, 

considerable purchasing of securities in the extension and improvement of 

with bank loans. These must be de- farm machinery and farm buildings 

ducted from the evidences of capital and in the increase of live stock; or 

investment above in arriving at the in the payment of indebtness such as 

savings of the people. The total of mortgages, bank loans and notes to 

such loans on December 31, 1918, to- manufacturers of farm machinery, 

gether with the investments of the The farmer's capital accumulation 

banks themselves in war obUgations depends more largely upon his product 

and war paper, amounted to $4,300,- than upon any other single factor. 

O00,000for the members of the Federal The expenditures of his family are 

Beserve System. These items for all rather constant, and increases in the 

banks in the United States were, there- value of his product constitute in 

fore, not far from $6,000,000,000. large part a savings fund. The 

The three items may amount to as increased value of farm products in the 

much as eight billion dollars in 1917 United States during the war made it 

and 1918. If we deduct four bilhon easy for the farmers to save without 

dollars from the figures for each of any additional abstinence. The 

these years, the remaining totals will Department of Agriculture gives the 

be as follows: following figures for value of farm 

Table VIII products, 1911-1918, based on prices 

1918 $4,522,000,000 at the farm. (See Table IX.) 

1915 7,921,000,000 Previous to the war farm savings as 

^^^^ 12,645,000,000 evidenced by the increase in agricul- 

^^^'^ 13,812,000,000 tural wealth were at the rate of $1,200,- 

1918 17,510,000,000 ^^^!:^ r^ \^ \ x' 

000,000 per annum. The best esti- 

This table includes nothing for the mate I have been able to make is that 

reinvested savings of enterprises not these savings rose to over $4,000,000,- 

under the corporate form of organiza- 000 in 1917, while in 1918 they 

Digitized by 



The Annals of the American Academy 

Table IX 

Value of Farm Products, 1911-1918 
(in Milliona of Dollars) 

1911 $8,819 

1912 9.S4S 

1918 9.849 

1914 9,896 

1915 10,775 

1916 13,406 

1917 19,881 

1918 «1,886 

exceeded $5,000,000,000. During this 
period fanners were paying off their 
mortgages and other indebtedness at a 
rapid rate. A large volume of these 
real estate mortgages had been held by 
life insurance companies which brought 
the funds to the general investment 
market when the farmer extinguished 
his indebtedness. A portion of the 
farmer's savings, therefore, came to the 
general investment market in 1915, 
1916 and 1917. This movement of 
funds was in. part responsible for the 
abundant volume of capital available 
in the investment centers for the 
repurchase of American securities from 
abroad and for the absorption of 
government issues. Insofar as the 
farmers' savings foimd their way to 
the investment market they have 
already been included in our estimate 
of savings. But the greater portion 
of these savings of 1915 to 1917 went 
into farm improvements, and must 
therefore be added to the figures of 
savings already given. 

Capital Accumulations 1913 
TO 1918 

When agricultural savings reinvested 
in farms are taken into consideration, 
and when due allowance is made for 
the reinvested earnings of individuals 
and partnerships, the capital accumu- 
lation for the years 1913 to 1918 may 
be conservatively put as follows: 

Table X 

1913 $6,500,000,000 

1915 9,000,000,000 

1916 14,500,000,000 

1917 18,000,000,000 

1918 22,000,000,000 

The savings of 1918 were made out 
of a national income which in physical 
terms was barely maintained at the 
1917 level. The price level was, how- 
ever, higher. The Bureau of Labor 
Statistics index shows the relative 
prices of 1918 as 197 per cent as 
against 175 for 1917; this was an 
advance of 12.6 per cent. The general 
pubUcity campaign which had for its 
object the reduction of consumption 
as a war measure resulted in increasing 
savings expressed in money terms over 
SO per cent. In 1918 approximately 
30 per cent of our national income 
appears to have been saved. 

Factors in Capital Accumula- 

Several important generalizations 
concerning the factors which determine 
capital accumulation can be drawn 
from our experience during the last 
five years. The volume of capital 
accumulation is affected first and 
foremost by the volume of productive 
output. Every increase in production 
leads quite directly to an increase 
in capital accumulation. Conversely 
every fall in productive output will 
reduce it. Second, other things being 
equal, capital accumulation is likely to 
be largest when the share which goes 
to profits is large. The organization 
of our industry under the corporate 
form and the principles of financial 
management which dominate the cor- 
porate institution inevitably work to 
that end. Third, it is possible to stim- 
ulate thrift by popular education. 

Digitized by 


Wealth, Income and Savings 


Volume of Savings fob 1919 

In 1919 the volume of capital 
accumulation will be decidedly less 
than in previous years, even when 
reckoned in terms of money. This is 
true despite a further increase in prices. 
The level of wholesale prices for the 
year 1919 will average at least 210. 
But production has fallen off by more 
than 10 per cent, and with the con- 
tinuation of the coal shortage may be 
as much as 15 per cent below that of 
1917. This decrease in output would 
naturally lead to a serious curtailment 
of savings as compared with the high 
point reached during the war. With 
the higher standards of consumption 
to which the great mass of our people 
have become habituated, and with the 
smaller profits and larger dividends 
of our corporations, the volume of 
savings measured in physical quanti- 
ties will fall to the pre-war level. 

The farmers of the country are 
enjoying unprecendented prosperity, 
and are probably contributing as much 
to our supply of capital as they did 
during the war. But we cannot hope 
to maintain the rate of capital accumu- 
lation of the last four years in the face 
of falling production. The one practi- 
cal method of increasing it is by the 
encouragement of thrift. The ideal 
method of increasing it would be 
through the maintenance of that high 
level of productive output of which we 
found ourselves capable during the 
war. But with capital and labor in 
their present moods and with a woeful 
lack of statistical and other informa- 
tion necessary for the proper coordina- 
tion of production and demand, the 
admonition to increase production is a 
coimsel of perfection. The encourage- 
ment of thrift remains, then, the one 
practical method for increasing the 
supply of capital at this time. 

Digitized by 


Thrift and Labor 

By Alvin H. Hansen, Ph.D. 

Associate Professor of Economics, University of Minnesoto 

THE central problem of the present 
discussion may be stated as 
follows: Is a nation with a high 
standard of living, or in other words a 
nation that spends freely, more or less 
prosperous than a nation which re- 
stricts consumption, lives simply and 
saves thriftily? 

Banking Theory vs. Business 

This question at once raises an 
antagonism between bankers on the 
one hand and business men on the 
other. Bankers are always busily 
engaged preaching the homely virtue 
of thrift. To them the volume of 
savings accoimts is the prime index of 
the prosperity of a community. Busi- 
ness men on the other hand are con- 
stantly engaged in a huge propaganda 
to make spenders of us aU. It is prob- 
able that not far from a billion doUars 
are spent annually in the United 
States for advertising. The business 
man does not want us to save; he 
wants us to spend. He measures 
prosperity not by the average family 
savings but by the average family 
scale of expenditure. 

The Thrift School vs. the Spend- 
ing School 

The labor movement is a record of 
a similar antagonism. The Schulze- 
Delitzsch and Raiffeisen Credit Socie- 
ties, the Rochdale Consumers' Co- 
Sperative Societies, now constituting 
nearly one quarter of the consumers of 
England, Russia, Belgium, Germany, 
Austria and Denmark,^ find the solu- 

1 See Monthly Labor Review, March. 1919. 

tion of the labor problem essentiaUy 
in saving. Through saving and the 
petty accumulation of property on the 
part of large masses of people not only 
does the individual prepare the way for 
an enlarged future income and pro- 
vision for old age, but the working class 
as a whole prepares the way for the 
cooperative ownership of the whole 
means of production, and the complete 
elimination of the profit system. This 
working class movement thus moves 
forward in the firm beUef that it is 
gradually staking out for itself the 
cooperative commonwealth through 
the program of collective saving. The 
social revolution will be accomplished 
not through violence and class struggle 
but through the homely virtue of per- 
sistent and constant saving. This 
may be called the thrift school of social 

On the other hand is the spending 
school. Beginning with Sismondi, and 
running through the writings of Rod- 
bertus, Ira Steward and John A. Hob- 
son (to mention only one representa- 
tive from each of the four great modem 
nations) we have a group of thinkers 
who contend that labor must find the 
solution of its problems not in saving 
but in spending. The underpaid work- 
ing man barely living from hand to 
mouth will not find the way out of his 
difficulty in a thrift pohcy which com- 
pels him to tighten his own belt, to send 
his children off to school ill-nourished 
and unfit for study, and finally to set 
them to work in the factory at the 
earliest possible age handicapped in 
their equipment for life. Rather he 


Digitized by 


Thbift axd Labor 


will find the solution in the struggle for 
a larger share of the product, shorter 
hours, more leisure, a higher standard 
of living, better education, better hous- 
ing, better food, better clothes, more 
comforts and luxuries. Ira Steward, 
constant exponent of this theory, 
even looked forward to the ultimate 
elimination of both interest and profits 
through the gradual acquisition on the 
part of labor of a larger and larger 
share of the product of industry. 
Shorter hours, more leisure, higher 
standards of living, the demand for a 
larger life and the constant struggle to 
attain it would ultimately make every- 
one at once both worker and capitalist. 
The cooperative commonwealth would 
be reached not through saving but 
through spending. 

Harmony op Interest Theory 

But the argument for spending does 
not always or necessarily extend to the 
extreme of the ultimate elimination of 
interest, profits and the capitaUst 
system, (jeorge Gunton, disciple and 
hterary heir of Ira Steward, sought to 
establish the principle that capital 
itself would be benefited by the en- 
larged spending of the masses. If the 
masses live high and spend freely, the 
great demand for consumption goods 
gives rise to remunerative employment 
for capital goods. Hence business is 
prosperous, profits are good, large sur- 
pluses are retained in businesses in 
order to expand the equipment, and 
wealthy people are induced to enlarge 
their fortunes through saving because 
of the profitable rate obtaining in the 
employment of capital. Thus a har- 
mony of interest theory is developed. 
Spending on the part of the general 
masses becomes an advantage for those 
who are in a position to save large 
fortunes. On the other hand saving 

on the part of the wealthy becomes a 
benefit to the spending multitudes in 
that it supplies them with the equip- 
ment requisite for wide-spread employ- 
ment, and the satisfaction of their 
high standard wants. A division of 
labor is thus effected which is mutually 

If the masses did not spend there 
would be no profitable employment 
for capital, and if the wealthy did not 
save there would be no equipment' 
with which to obtain employment, 
incomes and want-satisfying things. 
Thus the thrif tlessness of the masses 
makes possible the accumulation of 
huge fortunes. Says Professor H. G. 
Moulton : " If everybody attempts to 
make adequate provision for old age 
through saving and investment there 
is certain to follow in good time a cur- 
tailment of production that results in 
unemployment and part-time work, 
and this not only prevents the masses 
from making adequate provision for 
the future, but leads to reduced con- 
sumption and often to real privation. "* 
Speaking of the extravagance of Amer- 
icans, their high standard of living, 
and the rapid expansion of American 
industry he says further: "Perhaps 
most significant of all, it has intensified 
the concentration of ownership and the 
development of an aristocracy of 
wealth. The enormous expansion of 
capitalistic industry was profitable 
only, so long as consumption continued 
high. The thrif tlessness of the masses 
of American people gave the impetus 
to an ever expanding capitalistic pro- 
duction . . . while more thrift on 
the part of the masses would have re- 

* It should be noted that Professor Moulton 
finds another source of capital equipment in the 
expansion of bank credit. See J. of Pol. £con. 
for May, June, July and November, 1918. 

» J. of Pol Econ.. Nov., 1918, p. 880. 

Digitized by 



The Annals of the American Academy 

tarded the rate of capital formation as 
compared with the rate we have had 
under the impetus of high consump- 
tion. . . . This large consumption 
on the part of the masses has made it 
profitable for corporate industry con- 
tinually to expand through the process 
of putting funds directly back into the 
business; it has thus given us vast 
fortunes for the relatively few and 
little if any provision for old age for the 
many. "* 

The Relation or Saving and Spend- 
ing TO THE Cycle or Prosperity 
AND Depression 

But this alleged harmony of interest 
does not run a imif ormly smooth course. 
Modem business is always being dis- 
turbed by the wave-like cycles of pros- 
perity and depression. Why does not 
this mutually satisfactory spending 
and saving work out in continuous 
prosperity? The reason, we are told 
by John A. Hobson, is that the rich 
save too much and the masses spend 
too little. The fundamental cause of 
depression may be foimd in the exist- 
ence of surplus incomes. Wealthy 
people desire to increase their fortunes. 
They do so by saving instead of spend- 
ing. These fresh savings are rapidly 
translated into additional capital equip- 
ment. This extension of capital equip- 
ment soon results in an enlarged output 
of consumers' goods. The masses of 
people with their limited incomes are 
unable to purchase this enlarged out- 
pouring of consumers' goods. The 
recipients of surplus incomes have am- 
ple purchasing power to take off this 
surplus of production but they are 
unwilling to spend enough of their 
incomes to prevent the over-production 
of consumers' goods. No matter how 
much production is directed toward 

* J. of Pol. Econ., Nov., 1918, p. 874. 

the things that would appeal to the 
rich, even their ostentatious wants are 
so amply provided for that they always 
will desire, in periods of prosperity, to 
invest and save too large a proportion 
of their incomes. 

Since they are themselves unwilling 
to spend the proper proportion of their 
incomes on consumers' goods the new 
investment must necessarily produce 
goods intended for the masses. Be- 
cause of the limited incomes of the 
masses and their inability to purchase 
this new outpouring of goods the in- 
evitable result is a congested market, 
depression, lower prices, smaller profits 
and smaller incomes for the rich. 
Since the wealthy class would be un- 
willing to have their established scale 
of expenditure reduced they wiU con- 
tinue to maintain the same standard, 
despite the reduction of incomes. The 
result is that less is saved and invested 
in capital equipment. Thus consump- 
tion is given a chance to catch up with 
the capacity of the industrial equip- 
ment, surplus goods are worked off and 
prices again rise. 

With the return of higher prices, 
profits are increased, incomes are 
greater, a larger and larger proportion 
of the surplus incomes are invested in 
capital equipment, and production 
again outruns consumption. 

Surplus incomes, therefore, produce 
excessive saving and result in an inces- 
sant attempt to employ capital in ex- 
cess of the demand of the ultimate con- 
sumer. Thus Hobson explains the 
ever recurring cycle of depression. 
Surplus incomes must be reduced by 
taxation, spending must be increased 
by raising wages, shortening the work 
day, and increasing the general stand- 
ard of expenditure. 

Such a solution of the problem of 
depression appears to the writer to be 

Digitized by 


Thrift and Labor 


not only chimerical, but to be based 
on a completely erroneous analysis of 
the cycle of prosperity and depression. 
The writer hopes to publish elsewhere 
a detailed study of business cycles 
based on monthly data for Great 
Britain, Grermany and the United 
States. While it is impossible to go 
into detailed arguments in this paper 
it is his conclusion that neither under* 
consumption or over-production pro- 
duce the economic cycle. In brief the 
solution of the problem of the business 
cycle must be found in the movements 
of money, credit, prices and profits. 
Leading exponents of this view, it will 
be at once recognized, are Fisher, 
Veblen and Mitchell, there being, how- 
ever, wide differences in their theories 
particularly as to the number of factors 

The various financial and industrial 
indices relating to the business cycle 
fall into three groups in point of syn- 
chronous movement. The first may 
be called the Banking Groupy including 
such indices as bank reserves, bank 
deposits, bank loans and discount rates. 
The second may be called the Invest- 
ment Groupf which includes stock 
prices, shares traded on the stock 
exchange, liabiUties of business failures 
and bank clearings. The third may be 
called the ^Industrial Group. This 
group includes wholesale prices, pro- 
duction of pig iron, railroad gross 
earnings, imports, unemployment and 
immigration. The series in each group 
are almost completely synchronous. 
The Banking Group precedes the Li- 
vestment Group in point of time by 
two or three months, while the Invest- 
ment Group precedes the Industrial 
Group by from six to twelve months. 
Substantially similar results were 
found for Great Britain, Germany and 
the United States, the movements 

being practically synchronous in all 
three countries. 

The casual relation runs through the 
sequence of bank reserves, discount 
rates, bank credit, issue of securities, 
purchasing power of business indus- 
tries, prices, production and profits. 
The movement of the Banking Group 
presently affects the Investment 
Group, and the combined influence of 
these two work out in due time their 
influence on industry, prices, produc- 
tion and profits. The inevitable in- 
abiUty of the banking credit, of all the 
advanced nations combined, to expand 
indefinitely puts a halt to the period of 
prosfperity. Ensuiag depression re- 
leases the strain on banking credit, and 
the freshly accumulated reserves soon 
give rise to another period of expansion 
and prosperity. 

The evidence for the support of the 
above more or less dogmatic state- 
ments cannot here be presented, but 
it is believed that there is ample justi- 
fication for the statement that under- 
spending and over-saving are not 
among the forces that produce the 
cycle of prosperity and depression. 
Enlarged spending is not the solution 
for this modem evil which so vitaUy 
affects labor. 

High Consubiption and Thrift 

But the position taken by Professor 
Moulton in his recent articles on Com- 
mercial Banking and Capital Forma- 
tion in support of high consumption 
has nothing inherently to do with the 
fluctuating business cycle. May it not 
be that a nation, which spends freely 
and indulges in high consumption, 
will have always, both in prosperity 
and depression, more employment, 
larger production, higher well-being 
and a greater supply of capital equip- 

Digitized by 



The Ansaib of the American Academy 

ment than a nation cloaely parsi- 
monious and thrifty? This is an 
entirely different matter. We are 
again faced squarely with the question 
as to which policy will bring the great- 
est wealth and well-being to a nation, 
the policy of universal thrift or the 
policy of high consiunption and free 

With regard to this question the 
writer is in agreement with Professor 
Moulton. Entirely apart from the 
surface waves of the business cycle, 
universal high consumption makes for 
a deeper, more permanent body of 
prosperity, larger production, more 
capital equipment and greater wealth 
and well-being. 

But it must be noted that high con- 
sumption does not mean wasteful con- 
sumption. Thrift and a high scale of 
living are by no means antithetical. 
Thrift and saving do not necessarily 
result in capital formation, or in an 
addition to the industrial equipment. 
Thrift and saving may just as likely 
result in an enlarged stock of durable 
enjoyment goods. Herein lies in part 
the reconciliation between spending 
and saving. A thrifty workman by 
means of a niggardly scale of living is 
accumulating a good sized savings 
account. The bank invests his sav- 
ings in railroad seourities from the 
proceeds of which the railroad en- 
larges its equipment. Another equally 
thrifty workman, but with a more 
generous scale of living is making grad- 
ual payments on his house until he be- 
comes the full-fledged owner of a com- 
fortable home. Thrift in the first case 
results in capital formation. In the 
latter case it results in an addition to 
the stock of durable enjoyment goods. 
One type of thrift involves a low scale 
of living, while the other implies a high 
standard of living. In the one case 

thrift adds to the supply of industrial 
equipment; in the other it increases 
the demand. Effective demand is 
fundamental as a basis for national 

France is an excellent example of a 
universally thrifty nation. But she 
has not been a model of prosperity. 
Would not the French nation have 
been more prosperous if her people had 
invested less of their income in the 
securities of Russian and Balkan rail* 
road, mining and industrial concerns, 
and had spent more of their income on 
a higher standard of efficiency, better 
homes, education, comforts, etc.? 
The result would have been a tre- 
mendous boom for her industries, 
more employment for ' her working 
class, and a richer life for her now too 
niggardly peasants. 

A Thrift Program and an American 
Standard op Living 

A universal national thrift policy 
which results in large overseas invest- 
ments and financial imperialism is not 
the sort of thrift which will be of 
benefit to labor. Neither is a thrift 
program desirable which results in an 
un-American standard of consumption. 
We would not be pleased if American 
labor generally should adopt that sort 
of thrift practiced by certain low stand- 
ard immigrants who live on a miserable 
scale while acciunulating a small for- 
tune to carry back to their own countiy . 
Such a thrift policy not only makes Hf e 
miserable for the individual family and 
lowers the nation's standard of living, 
but at the same time brings stagnation 
to industry and forces the investment 
of surplus savings abroad. 

But there is a national thrift policy 
which would be of benefit to labor. It 
must not be a thrift policy which leads 
to financial imperialism, industrial 

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Thbitt and Labor 


stagnation and niggardly consumption 
standards. It must be a thrift pro- 
gram which results in generous but 
judicious expenditure, high standards 
of living, large production and general 
industrial prosperity. 

The co5perati ve movement is a thrift 
producing movement. But it should 
be noted that it does not inculcate the 
kind of thrift which results in low 
standards of living and reduced con- 
sumption. A Scottish co5perator us- 
mg the dividends received on his wife's 
purchases at the cooperative store to 
meet payments on his house laughingly 
complains that his wife does not spend 
enough, for the more she spends the 
sooner will the house be paid for! The 
cooperative movement as a thrift 
movement does not merely result in the 
accumulation of considerable capital in 
the form of retail stores, wholesale 
houses, manufacturing plants, stocks 
ci goods, etc., but it uses its credit and 
its profits as a means whereby con- 
sumers with small incomes may come 
to possess durable enjoyment goods 
and thus raise their standard of Uving. 

The cooperative movement recon- 
ciles saving and thrift with high con- 
sumption in another fashion. On the 
continent of Europe, particularly in 
Belgium, it has been made a device for 
cooperative saving by means of which 
provision is made for sickness, unem- 
pIo3rment, invalidity and old age. 
Here again is an agency for thrift 
which does not unduly depress con- 
sumption during the saving period, 
and which protects the standard of 
consumption throughout the vicissi- 
tudes of life. Individual saving on a 
scale sufficiently large to protect the 
family against the contingencies named 
is not only exceedingly wasteful, but 
requires of necessity a niggardly and 

narrow scale of consumption and a low 
standard of life. Such thrift and sav- 
ing not only doom the individual fam- 
ily to fearful sacrifices, but if carried on 
universally would deprive the nation 
of that general industrial prosperity 
that goes with high consumption. 

But a national program of thrift 
which is not to sacrifice high consump- 
tion cannot rely on or wait for a volun- 
tary cooperative movement, especially 
in America where it has made such 
meager headway. There should be a 
national program of thrift which does 
for its citizens what the cooperative 
movement does for its membership. 
Social insurance in all its aspects — ac- 
cident, sickness, invalidity, old age and 
unemployment — ^is clearly a part of an 
economical, worth-while thrift program. 
Above all a thrift program should in 
some way seek to increase home owner- 
ship. The Federal Farm Loan Act 
makes provision for the utilization of 
the cooperative credit of the nation 
for the laudable purpose of helping 
farmers to become land owners. Why 
should not the nation's credit be mobi- 
lized in some similar fashion for the 
purpose of assisting our citizens to be- 
come home owners. President Emeri- 
tus Eliot of Harvard University con- 
tends that two of the reforms most 
urgently needed in America lie in the 
fields of housing and public health. A 
national home loan measure would 
stimulate state activity along the same 
line, as has been true in the case of the 
Federal Farm Loan Act. A national 
housing program would stimulate 
thrift, that kind of thrift which does 
not lower consimiption, which raises 
the standard of living, and which 
makes for employment, productive 
activity and industrial prosperity. 

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Organized Labor's Attitude Toward the National 
Thrift Movement 

By Frank E. Wolfe 
Of the American Alliance for Labor and Democracy 

DURING the past year hundreds 
of thousands of workers who 
have spent a large portion of their 
years working for others have suddenly 
become employers. They have made 
a discovery and it is bringing results. 
They have employed their dollars, 
their savings, and put them to work 
earning an income. It has become a 
fixed habit with these thousands of 
workers, men and women, to devote a 
part of each week's wages to a certain 
stipulated saving and to put it where 
it makes a certain and safe investment. 

The second discovery made by 
these workers was that as their savings 
grow, the dollars, their first saved 
dollars, earned in their work were 
in turn immediately employed — that 
their accrued interest, the wages their 
working dollars were earning, was 
willing to work for them and to their 
continued and growing benefit. 

To many of the workers their newly 
acquired knowledge was such a won- 
derful thing that they wanted others 
to know the wonder of it. Out of this 
has grown savings clubs among labor 
groups and it has always made smooth 
the way for resolutions endorsing war 
savings and thrift stamps. 

To most of these workers the dis- 
covery came by reading in the labor 
press something about war savings 
stamps. Many times this came 
through resolutions passed by the 
convention of his or some other union 
wherein there was the heartiest and 
most wholesouled endorsement of 
thrift stamps 

The great benefit to labor, through 
regular purchase of war savings stamps, 
was early apparent to leaders of 
organized labor in America. Samuel 
Gompers, president of the American 
Federation of Labor, early recognized 
the value of war savings stamps and he 
expressed this in a statement, issued to 
be sent broadcast through the labor 
press, in which he said: 

Let not tlie great issues and events of today 
take our thoughts wholly away from those 
small and quiet duties without the perfor- 
mance of which the larger scheme of things 
may be endangered. 

The great wheels often must be turned by a 
silent power that exerts its force where there 
is no limelight and no great acclaim. But the 
great wheels must be turned. 

The sale of war savings and thrift stamps 
helps to keep the great wheels of the American 
government turning at their proper speed. 
With the high pitch of war excitement almost 
gone, this work is one of perseverance in the 
line of duty. The men and women who sell 
and the men and women who buy are doing 
a work no less worthy than it was when our 
troops went charging over the Hindenburg 
line. It is no less worthy now than it was 
when the drums were beating. And it is no 
less needed. 

To the 165,000 secretaries of war savings 
societies may I say that theirs is a fine work, 
a necessary work and one to which every 
thoughtful person will wish to bring them 

But there is another side to the sale of these 
little stamps. While it helps our government, 
it also helps those who buy. It helps them to 
be careful of their money. It helps them to 
lay by a little which will stand to their credit 
as a resource. This is surely a worth while 
thing to do. 

And so the work of selling war savings 
stamps does two things: 


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Organized Labor and National Thrift 


It helps get money for our government at a 
time when it needs money. 

It helps the purchaser of stamps to accumu- 
late a little money that he may need at a later 

It is good work. A grateful Republic 
cannot fail appreciation of the toil and sacri- 
fice of every person who has a part in this 
wonderful process of gathering in the mites of 
the people until they bulk large in great totals 
that go to keep the machinery of democracy 
in order. ' 

Later the American Federation of 
Labor, at the annual convention at 
Atlantic City in 1919, passed a resolu- 
tion warmly supporting the National 
Thrift Movement, which, after a 
strong preamble, resolved, ''that this 
convention do approve of the continu- 
ation and extension of the war savings 
and thrift stamp institution as a neces- 
sary peace time institution or the 
substitution of a national savings 
institution akin in character and 
method which shall prove helpful to 
safeguard the earnings of the toiling 
masses of our country." This act of 
unqualified approval of the chosen rep- 
resentatives of nearly four millions of 
organized workers greatly stimulated 
interest in war savings stamps as a 
safe and wise investment for organized 
labor, either as individuals or through 
their organizations. 

Frank Morrison, Secretary of the 
American Federation of Labor, who 
has always shown a deep interest in 

war savings, wrote to the director of 
the Savings Division of the Treasm-y 
Department transmitting the Atlantic 
City resolution and added: 

This campaign, the outgrowth of a pro- 
gram of war 6nance, we believe to be essential 
as a permanent peacetime institution. I am 
confident that the officers and members of the 
unions affiliated with the American Federa^ 
tion of Labor will oodperate in the movement. 
The government savings securities are safe 
and profitable and may be converted into 
cash at a profit on short notice. 

Many other labor organizations, 
local, state and international, at their 
conventions passed strong resolutions 
advocating the investment in war 
savings stamps as an excellent thing 
for the members of their organization. 
Labor recognized in war savings 
stamps an opportunity to extend and 
strengthen its power by making each 
worker more independent, more self 
reliant, dependable and safe in any 

Any financial secretary will unhesi- 
tatingly say that the man who buys 
war savings stamps regularly is the 
surest one to come up promptly and 
pay his dues. These secretaries have 
become strong advocates of systematic 
purchase of thrift stamps. They know 
that the worker who has his dollars 
working for him has made a dis- 
covery that leads on to security and 

Digitized by 


Thrift and Business 

By Geobge W. Dowrie 
Dean of the School of BusineM* University of Minnesota 

Post-Wab Conditions 

FIGURES for the first nine months 
of 1919 show the smallest num- 
ber of mercantile and industrial failures 
for any like period since 1881 . A very 
large volume of trade is being handled 
at satisfactory rates of profit. The 
present volume of sales of any given 
retail or wholesale establishment seems 
to depend quite largely upon its abiUty 
to secure an adequate supply of goods 
from wholesalers or jobbers and manu- 
facturers respectively. The manu- 
facturer in his turn is Umited by his 
success in obtaining raw materials from 
an under-supplied market. If one is to 
judge by the usual indicia such as bank 
clearings, volume of trade, demand for 
loanable funds and for labor, we are 
enjoying a period of great prosperity 
in spite of the almost universal pre- 
diction to the effect that a period of 
depression would set in imimediately 
after the cessation of hostiUties. 

In spite of the fact that the most 
optimistic entrepreneurs expect the 
usual post-war decline in prices, this 
decline has not set in to any marked 
degree, in fact, the prices of many com- 
modities have continued to rise. A 
heavy demand for every sort of com- 
modity continues and, in some cases, 
unheard of prices are being asked and 
obtained. The high price level has 
compelled constant increases in wages, 
which seeming additions to his well- 
being have in many cases resulted in a 
falling oflf in the worker's efficiency as 
a producer and a greater liberality in 
his scale of expenditures. This latter 
has been considerably accentuated by 

the feeling of "letting down" after the 
deprivations of the war period. After 
two years of restricted consumption, 
either voluntary or imposed by the 
government, the natural reaction is in 
the opposite direction. 

Notwithstanding the fact that the 
business outlook continues good, save 
for labor troubles in certain industries, 
a period of falling prices, contraction of 
credit and general economic readjust- 
ment is bound to come. It is the pur- 
pose of this discussion of thrift and 
business, therefore, to point out some 
tendencies which have been developing 
during this abnormal period and which 
should be eradicated from our economic 
life if they are not to prove a decided 
menace in the period which is likely to 

Thrift in the Process op Saving 

True Saving. — ^The industrial sys- 
tem, in order to function in a proper 
manner, should furnish the maximum 
amount of satisfaction to society. 
Such a result can be attained only by 
certain lines of conduct on the part of 
both consumers and producers. On 
the consumer's side, a highly efficient 
productive system — efficient in the 
sense of achieving the highest amount 
of satisfaction of wants — cannot be at- 
tained unless his consumption is prop- 
erly ordered. This involves habits of 
thrift not only with regard to abstain- 
ing from spending but with respect to 
the spending process itself. "Spend- 
ing makes business good" can be ac- 
cepted only with the most careful 
qualifications. Mere abstinence from 


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Thbift akb Business 


spending, of course, is not good for 
business. The miser who hoards his 
surplus in a hiding place is making 
no contribution toward a satisfactory 
economic order. 

On the other hand, the individual 
who '* wastes his substance in riotous 
living " has done no better. Our pres- 
ent roundabout method of production 
involves large advances of spendable 
funds on the part of a thrift practising 
public. If we are to substitute for 
simple direct methods of production 
the far more eflfective but time con- 
suming process of "making a machine 
to make a machine to make a machine " 
to turn out a given consumable com- 
modity, abstinence must be practiced 
by lajrge numbers of individuals. If 
they were to spend all of their respect- 
ive incomes for consmnptive goods hke 
shelter, clothing, food and amusements, 
the provision of capital goods like fac- 
tories, railroads and mines would be 
cut off and mankind would have to 
revert to primitive methods of satis- 
fying its wants. Not only, then, must 
there be abstinence, but the resulting 
surplus must be placed at the disposal 
of business directly or through com- 
monly established media hke savings 
banks and investment companies. If 
this supply of Uquid capital for the 
replacement of and additions to the 
stock of capital goods is not forthcom- 
ing, the productive mechanism is 
seriously hampered and the consuming 
public, in as much as it is deprived of 
an adequate supply of goods and serv- 
ices, is the real sufferer. 

Personal Thrift. — The present period 
has not been characterized by habits of 
personal thrift on the part of the Amer- 
ican public. Enormous sums invested ' 
in government securities of various 
sorts under the stress of war have been 
squandered subsequently by their ex- 

change for high-priced luxuries or for 
the more or less worthless securities of 
speculative enterprises. Savings de- 
posits have increased but not in pro- 
portion to the general increase in the 
prices of the things which form the 
usual objective of saving. A consid- 
erable part of the government's war 
issues are still in the hands of the banks, 
having never been absorbed by the 
investing pubUc. Here, they have 
aggravated hving costs by their use as 
collateral for advances for loans at the 
Federal Reserve Banks, the proceeds 
of which were used for speculation. 

Relation of Savings to Bitsiness. — If 
business is to be adequately financed, 
there must be, therefore, a constantly 
dependable flow of new capital from 
the savings of the pubUc. Systematic 
habits of thrift must be inculcated 
throughout all classes of the people. 
The well-to-do class, in spite of its 
relatively large earnings, is an entirely 
inadequate source of supply of new 
capital. The great masses must be 
depended upon on the strength of the 
old sa3ring that "many a mickle makes 
a muckle.** It is not the province of 
this article to paake a disquisition upon 
the direct benefits of or, better, the 
necessity of "rainy-day" saving. We 
are here concerned with the relation of 
the saving process to the conduct of 
business. The two go hand in hand, 
however, for the man who invests his 
surplus earnings in an enterprise whose 
product makes for the real welfare of 
the consuming pubUc does much more 
than add to his yearly income in the 
way of interest or dividends and creates 
a permanent principal as a guaranty 
against an impecunious old age. He 
is also benefiting himself and his fel- 
lows indirectly by contributing a neces- 
sary factor to the industrial process 
which is providing for their well-being. 

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The Annals of the American Acadebiy 

As was pointed out earlier, not only 
must there be a properly directed 
abstinence from spending but there 
must be a properly directed spending 
as well. The maximum degree of 
satisfaction, which is the goal of a 
properly conceived economic system, 
cannot be attained without intelligent 
expenditure. A properly nourished, 
well-housed and adequately trained 
citizenry cannot be realized unless 
expenditures are directed along lines 
which are capable of achieving this 
end. The demand for goods and 
services is the motivating factor in 
industrial activity. Consequently, 
where this demand consists largely of 
luxuries, to that extent the eco'nomic 
process is perverted and to that extent 
our summum honum cannot be ob- 
tained. The thriftless spender, there- 
fore, injm'es business in two ways: 
first, by his failure to aid in providing 
adequate working capital for business 
activity, and second, by his unwise 
demands being responsible for the 
diversion of business activity into 
lines which will not result in the 
achievement of a maximum of social 

A nation-wide thrift policy both as 
regards saving and spending would 
undoubtedly result in great immediate 
hardship to many businesses which 
cater to the harmful or at least less 
justifiable desires of human beings. 
Processes which involve considerable 
economic readjustment are always 
painful and somewhat costly, but 
society will be incalculably better ofif 
in the long run. 

Thrift in Conduct of Business 

On the side of thrift in the conduct of 
business itself, quite as much needs to 
be said. Granted that the individual 
consumer did his part in devoting a 

portion of his income for furthering 
production, and that his demands were 
such as to insure the best use of the 
productive mechanism, stiU, if this 
mechanism were not operating on a 
high plane of economy and efficiency 
his eflForts would to that extent be lost. 
We have undoubtedly inherited from 
the war period some industrial and 
business standards and conditions 
which are not consistent with the 
highest thrift in the conduct of an 

Necessities of war compelled the 
sacrifice of economy and efficiency to 
quantity and speed. Cantonments, 
ship yards, ships, munition plants, 
warehouses and an endless variety of 
other structures had to be rushed to 
completion at the earliest possible date. 
The farm resources of the country had 
to be pushed to new limits if we were to 
feed our own people and have an ade- 
quate surplus to send to our allies. 
The output of mines and forests had to 
be increased to the highest possible 
point in order that the various agencies 
concerned in winning the war should 
not be hampered by a lack of materials. 
Resort was had to methods which 
ordinarily would be condemned as 
wickedly extravagant in order to speed 
up the production of food and raw 
material and the completion of neces- 
sary construction work and manu- 
factured articles. 

It is estimated that in one way or 
another we succeeded in increasing the 
output of our industries by at least a 
fourth over that period preceding the 
war. But this result was achieved at 
a great sacrifice in money and stand- 
ards of business efficiency. Prices of 
essential commodities Uke wheat, iron 
and copper were fibced at so high a price 
that the maximum supply would be 
forthcoming. As a result a large 

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Thrift and Business 


number of establishments which were 
fonnerly conceded to be submarginal 
because of their prohibitive operating 
costs were enabled to operate and add 
their contribution to that of their more 
fortunate rivals. Although the war 
has been over for a whole year and the 
justification for uneconomical methods 
no longer exists we are still far short of 
our pre-war standards of economy and 
efficiency so far as the conduct of our 
business activities is concerned. 

With the signing of the armistice 
and the withdrawal of artificial stimuli, 
the unprecedented volume of produc- 
tion began to fall off. For the time 
being the decline has been checked by 
the fact that the advent of peace has 
been attended by a period of unnatural 
prosperity due to the vicious circle in 
which high prices are followed by 
higher wages which in turn result in 
higher costs of production and a larger 
demand for goods, which in their turn 
result in still higher prices, and so on 
until a crisis is reached. The crest 
has not yet been attained but it is 
quite universally agreed that it is 
close at hand. 

When the reaction sets in it is bound 
to be attended by a curtailment of 
production and industrial disorders 
much more serious than is usually the 
case, unless our productive efficiency 
is enhanced. The wasteful business 
methods justified by the haste and size 
of war preparations must now be elim- 
inated. They have left behind them 
in the case of both employers and 
employees a certain highly undesirable 
influence. The sort of "easy money" 
atmosphere which has pervaded all 
lines of business and resulted in excess- 
ive profits in the case of one group and 
unheard of rates of wages in the other is 
proving to be detrimental to thp main- 
tenance of high standards in industry 

and congimerce. Its existence is bound 
to make the suffering in the period of 
readjustment much more acute. Fur- 
thermore, the high standard of living 
which American workmen have been 
able to maintain during the war in 
spite of high living costs will be seri- 
ously impaired by a decided decline in 
production and a consequent sharp 
reduction in wages, or worse, by actual 

The world is being stirred at present, 
as never before, by serious economic 
and social unrest. Yi^en prices go 
down, industrial activity is severely 
curtailed and labor's standard of hving 
impaired, we may expect to see the 
present unrest turn into an irresistible 
demand for the overthrow of the pres- 
ent economic order, unless the loss in 
productivity of labor can be success- 
fully offset. If the present prevailing 
methods of wage payment do not stim- 
ulate in the worker an interest in his 
job and, therefore, do not result in the 
maximum of product consistent with 
good workmanship and a proper regard 
for his well being, methods will have to 
be devised to secure this result. No 
economic system can survive if the 
tens of millions of individuals who 
are chiefly responsible for its func- 
tioning are mere "servants of the 

On his side, the entrepreneur can do 
much to increase the efficiency and, 
therefore, the productivity of his busi- 
ness. During these days of lavish 
spending and high-speed production 
he has reaped large profits in spite of a 
pretty general neglect of certain "loose 
ends." It is comparatively easy to 
make money in a regime of rapidly 
rising prices . Farmers, merchants and 
manufacturers whose methods are no- 
toriously unbusinesslike will have what 
normally would be a deficit offset by 

Digitized by 


56 Thb Annals of thb Amebican Academy 

unexpectedly large receipts due to ought to be preached as we near 

higher prices. the end of such a period as the present. 

Inadequate financing of enterprises, Business can endure the burden of 

unwisely directed purchases of equip* carrying along the inefficient enterprise 

ment, raw material, or merchandise, when times are prosperous, but this is 

wasteful marketing methods, and inef- a load which the consuming public 

ficient direction of the labor force are a , ought not to bear. Inefficiency ought 

burden upon the consumer and unless to be eliminated by means more lasting 

artificially bolstered by rising prices and less cruel than the collapse of the 

sooner or later come to an untimely end. unfit establishment in times of financial 

The gospel of better business methods, stress. 

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Thrift and the Financial Situation 

Bt a. C. Miller 

Federal Reserve Board, Washington, D. C. 

"IXTHAT is the financial situation 
V V of the United States? More 
particularly, what does our financial 
situation disclose that makes the prac- 
tice of thrift and saving a matter of 
very great national urgency at the 
present time? The great outstanding 
facts in a sunmiary view of oiu* finan- 
cial situation, which are pertinent to 
this inquiry, are: 

1. The prodigious scale of our pub- 
lic expenditures; 

2. The imprecedented weight of our 
direct tax levies; 

3. The excessive volume of our gov- 
ernmental borrowing. 

Extraordinary expenditures occa- 
sioned by the war thus far amount to 
over thirty billions of dollars with the 
prospect that the figure will be raised 
to thirty-five billions by the end of the 
current fiscal year. Direct tax levies 
on individual incomes and the earn- 
ings of industry are running at the 
rate of about six billion dollars a year. 
The money borrowed by the Treasury 
to finance the public requirements, 
since the beginning of the war, amounts 
to twenty-five billions of dollars. 

These are stupendous figures. 
Events and conditions since the armis- 
tice are beginning to bring home to 
many of us for the first time the eco- 
nomic meaning to the nation and to 
the life of the average citizen of the 
financial situation thus developed by 
the war and left after its close. 

Magnitude of Wak Expenditures 
Levy on Capital Accumvlaiions 
Expenditures of the magnitude of 
those incurred by the United States 
for the war unquestionably mean 
some considerable impairment of the 
rate of the nation's capital accumula- 
tions during the past two and one-half 
years. No country is rich enough to 
stand such a drain upon its economic 
resources as the United States has been 
subjected to during this period without 
suffering an appreciable impairment of 
its capital account. The extent to 
which the huge expenditures of the 
government have cut into the capital 
acciunulations of the country can not 
be determined, but common observa- 
tion ahd complaint bear evidence that 
it constitutes a very important item 
in the economic cost of the war. The 
circumstance that, during the war the 
whole thought and energy of the na- 
tion was concentrated on the problem 
of increasing production facilities for 
the production of war supplies, re- 
sulted in less that the normal provision 
being made for the upkeep and exten- 
sion of such of the country's industrial 
equipment as was not primarily needed 
in war-time, however important it 
might be in peace-time. 

Deferred Capital Replacements 

The run-down condition of the 

transportation system of the country, 

particularly the street-car service, and 

the great shortage of dwelling house 


Digitized by 



The Annals of the Aboibican Acadeict 

accommodations are striking examples 
coming within the experience of most 
people of the way in which the war and 
the insistent and voracious demand it 
made for first call upon the productive 
capacity and resources of the country, 
interrupted the up-keep of many of the 
productive facilities of the country not 
clearly essential to the prosecution of 
the war. There are many other evi- 
dences here, there and elsewhere 
throughout the country, of the fact 
that the war has left the capital equip- 
ment of the nation — ^that is, buildings, 
tools, machinery, etc. — ^in many im- 
portant fields of industry in such a con- 
dition that much must be done to 
bring it up to a normal state of ade- 
quacy and eflSciency. More buildings, 
more machinery, more trackage, etc. 
must be built. These things are a part 
of the industrial equipment of the 
community-^they are its capital. On 
them depends the productivity of 
American industry and American labor. 
Impairment in the rate of growth of 
capital means impairment of our in- 
dustrial capacity. The productivity 
of American industry and labor de- 
pends, more than can be said of any 
other community in the world, upon 
the character and the extent of the 
industrial equipment with which they 
are provided. Our rapid industrial 
progress in the past, it has long been 
recognized, was due largely to the fact 
that abundant provision was always 
made out of the product of industry for 
its further extension and development 
and improvement. 

Before the war about one-sixth of 
our productive power, as nearly as can 
be estimated, was devoted annually to 
the improvement and extension of the 
industrial equipment and plant facili- 
ties of the country, to the development 

and exploitation of its natural re- 
sources, to the building of roads and 
houses, and to many other things, 
which added much every year to the 
capital resources and productive capa- 
bilities of the country. In brief, before 
the war about one-sixth of the wealth, 
which we annually produced, was 
saved and practically all accrued to the 
nation's industrial- and financial-capi- 
tal account. 

During the war much, if not most, 
of our customary industrial expansion 
was suspended, despite the fact that 
there was a notable increase in the in- 
dividual savings of the American peo- 
ple. All of the new savings and most 
of the normal savings during the period 
of the war were absorbed by the gov- 
ernment and were used directly or 
indirectly in furtherance of war produc- 
tion. No doubt much of the new in- 
dustrial equipment called forth by war 
production will, also, be found useful 
for peace-time production and, to that 
extent, will not be lost altogether to 
the capital accoimt of the country. 
Nevertheless, most of the savings ap- 
propriated for pubhc use in the time 
of pur war emergency represent some- 
thing which, from the point of view of 
the nation's peace-time economy, must 
be regarded as unproductive expendi- 
ture and economic waste. There is, 
therefore, a shortage in the capital 
equipment of the country due to the 
diversion of the bulk of the country's 
savings during the war from the pro- 
duction of peace-time facilities to war- 
time facilities, which must somehow 
or other be made good if American in- 
dustry is to maintain its normal pro- 
ductivity. There is but one known 
economic method by which this result 
can be accomplished and that is the 
method of saving. 

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Thbift and the Financial Situation 


Capital Replacements Made 
Thbough Saving 

How is saving related to the all- 
important matter of restoring and im- 
proving and increasing the industrial 
equipment or capital of the country? 

To most people saving is thought of 
as laying aside money, or as giving up 
something which has customarily been 
consumed or which might be con- 
sumed. This is, however, merely the 
first step of the saving process, as a 
brief illustration will disclose. Per- 
haps I am on the point of buying an 
automobile. Heeding the injunction 
to save, I decide to give up my pur- 
chase of an automobile, at any rate for 
the present, and until the present na- 
tional and world emergency is meas- 
urably over. What does my action in 
foregoing the purchase and use of an 
automobile do to help industry.? Spe- 
cifically, how does it result in an 
addition to the industrial capital of the 
country and thus help to make indus- 
try more productive? So far as I can 
trace my action all that I save is the 
dollars which the automobile would 
have cost and which the gasoUne, tires 
and other requisities for the operation 
of the automobile would have cost. 
What do my saved dollars do to im- 
prove the economic situation — ^to re- 
pair or build factories and otherwise 
expand production facilities? I can 
see what rily saved dollars do to give 
me dollars against the contingencies of 
a rainy day sometime in the future by 
assuring me of something in the bank 
with which to buy food and clothing, 
but I have still to be shown how my 
refraining now, for example from the 
purchase of an automobile, increases 
the productivity of industry, makes 
goods more abundant, and thus helps 
. to bring down prices and improve the 
financial situation generally. 

When you save dollars, Mr. Reader, 
you save what dollars will buy. In the 
case in question, your going without 
an automobile either saves that auto- 
mobile for some more important use 
than your pleasure or, what is more 
likely, supposing that others are doing 
as you are doing, it saves industry the 
necessity of devoting as much labor 
and material and machinery to the 
production of automobiles as would 
otherwise be necessary and thus re- 
leases that labor and material and 
machinery for something else, which, 
in the existing circumstances of. the 
country and the world, is more nec- 
essary. In brief, when you save money 
by cutting down your current con- 
sumption, you save more than dol- 
lars and you save more than the 
goods that you go without. You save 
the labor that it costs to produce 
those goods and you liberate the labor 
and productive power thus saved for 
the production of other things — such 
as, machinery, buildings and other 
much needed requisites of production 
— ^which it is most urgent the country 
and the world should have more of at 
the present time. 

Dibect Taxes and Capital Accu- 

Diversion of Cajntal from Channels 
of Industry, — ^The need of a great in- 
crease in individual savings, in order 
to provide the requisite capital for 
expansion of our industries, gets much 
additional emphasis from the circum- 
stance that a large part of the tax 
revenues, now being collected by the 
government under the new methods 
and the high levels of taxation which 
were developed with the war, are un- 
doubtedly eating into the current sav- 
ings and, therefore, the current capital 
accumulations of a very important 

Digitized by 



The Annals of the American Acadeio^ 

section of the nation's saving class. 
The tax revenues, which it is esti- 
mated will be collected by the govern- 
ment for the fiscal year 19^, aggre- 
gate six and a half billions of dollars. 
The great bulk of this revenue comes 
from surtaxes on the higher grades of 
income and from excess profits taxes 
on business. Large incomes and the 
earnings of business are, also, the 
source from which has hitherto come a 
principal, if not the principal, part 
of the savings of the country and 
the new capital, which from year to 
year became available for the use of 

Receivers of large incomes for the 
most part do not spend all their income 
for current consumption but invest a 
considerable proportion, probably the 
greatest portion, in industrial under- 
takings. The stream of saved income 
that fiowed from this source into in- 
dustry, supplying it with new capital, 
now flows, to a large extent, into the 
pubUc treasury, supplying it with the 
means of meeting its current disburse- 
ments. The current expenditures of 
the government are not to any ap- 
preciable extent to be regarded as 
economic expenditures. It is . only 
indirectly, as the income of the govern- 
ment is used in liquidating war con- 
tracts, etc., and thus "flows back into 
the channels of business, that any con- 
siderable portion of it will be saved and 
accrue to the capital account of the 

While it is impossible to estimate 
the extent to which the diminution in 
the flow of savings from the incomes of 
those who bear the main burden of 
high taxation is thus offset, it does not 
seem likely to be suflScient to invalidate 
the proposition that the extremely 
high direct taxes, which are being 
levied by the government of the United 

States, are eating into the current capi- 
tal accumulations of the country to a 
degree that is considerable. The ef- 
fects will be serious unless the loss 
thus arising is made good by increased 
saving on the part of all those in the 
conununity whose ability to save has 
not been impaired as a result of the 
financial situation occasioned by war. 
This means, to put the matter briefly, 
that the increased savings of the many 
must make up for the diminished sav- 
ings of the few, so long as the financial 
needs of the government, or other con- 
ditions, or considerations of social 
poUcy, make it necessary to keep direct 
taxes at their present high levels. 

Affect of Taxes on Produdion. — 
Questions of direct taxation are com- 
monly regarded only from the points 
of view of fiscal expendiency and dis- 
tributive justice. In ordinary circum- 
stances these points of view may suf- 
fice, but in the present extraordinary 
circumstances of our country and the 
whole world, a more fundamental point 
of view must be taken. With the cap- 
ital account of all the leading countries 
of the W^estem World seriously de- 
pleted, as a consequence of the great 
war, and with the burden of direct 
taxation reaching a point never before 
thought possible, the effects of taxa- 
tion upon the productive economy of 
the several countries must be given 
thoughtful study. The writ and every 
experience, which has followed since 
the armistice, has taught us to think 
in terms of production. A considera- 
ble section of the population of Europe 
— ^the most highly organized part of 
the world — ^is and has been in a state 
of want with destitution and, in some 
parts, starvation threatening, because 
of insufficient production . Production, 
more production, more efficient pro- 
duction, is an urgent need of the world 

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Thbift and the Financial Situation 


in the throes of this» the most severe 
after-war crisis ever experienced. 

Scanng and Prodvctian, — In these 
circumstances fiscal and financial ques- 
tions must be looked at from the point 
of view of national economic interest, 
as well as from the point of view of 
social justice. Looking at the scale of 
our present direct taxation from the 
economic point of view, it does not 
admit of question that the rate of 
growth of capital in the United States 
will be seriously affected unless, to re- 
peat the statement, the savings of the 
many make up for the decrease in 
the savings of the few. Dependent as 
the growth of industry and production 
is upon the stream of capital with which 
it is fed, saving is the urgent need of 
the hour. Saving is producing. More 
of us must make our dollars produce. 
Things, which are now scarce and dear 
because production is inadequate, will 
then become more abundant and prices 

Saving and the Price Level. — ^But 
saving will do more than this to im- 
prove the financial situation. Saving 
will not only bring down prices by in- 
creasing the production and supply of 
goods but will bring down prices by 
reducing the supply of money. The 
most troublesome feature of our finan- 
cial situation is the high and rising 
level of prices. Recent events are 
showing that high and rising prices 
present more than a financial di£5culty . 
They are the cause of our acute cost of 
living problem and the industrial un- 
rest and general unsettlement of mind 
and the financial instability which in- 
variably attend great price disturb- 
ances. Reasonable stability of value 
in the monetary standard is necessary 
to a good state of mind in a highly 
organized industrial community. In- 

stability inevitably breeds unrest and 

Until the upward movement of 
prices is arrested and the dollar begins 
to recover its lost value, we may ex- 
pect to have an unsatisfactory and 
troublesome financial situation with 
the evil economic and social conse- 
quences, which such a situation inva- 
riably entails. To correct the existing 
financial and price situation is, there- 
fore, tantamount to taking the most 
important step toward the correction 
of our current social and industrial 
unrest. People are everywhere uneasy 
and apprehensive because of the de- 
clining value of the dollar. To restore 
the dollar to something more nearly 
approaching its normal value and to 
reduce prices may, therefore, be said 
to be the most important financial 
problem before the country. 

Factors Controlling Price Level. — 
That there is no way of handling the 
problem that does not involve the 
practice of thrift and saving by all 
sections and classes of the country 
upon an intensive scale becomes clear 
on examination of the financial factors 
that have helped to bring prices to 
their present levels. 

Increased Currency and Underpro- 
dvction. — Speaking in broad tenns, 
changes in prices proceed from changes 
in the relation of the volume of pur- 
chasing media (what, in common 
speech, is called money) to the vol- 
ume of goods offered for sale. When 
people, generally, have more money 
in their pockets, or more credit at their 
banks, with which to buy, than there 
are goods on the shelves of shop- 
keepers, which can be bought, goods 
get dear and money gets cheap. In 
other words, when there is more money 
seeking to buy goods than there are 

Digitized by 



The Annals of the American Academy 

goods seeking to buy money, prices 
rise and their rise will go on as long as 
the increase in the supply of purchas- 
ing media or money proceeds at a 
faster rate than the increase in the 
supply of purchasable goods. 

Governmental Borrowing 

That excessive supply of credit and 
currency has been one of the principal 
influences in putting up and keeping 
up prices in the United States is in- 
contestable. That excessive borrow- 
ing by the government has been the 
main occasion of the excessive in- 
crease in the volume of purchasing 
media seems pretty clear, if, by ex- 
cessive borrowing be understood, not 
borrowing in excess of what the gov- 
ernment has required to defray its ex- 
penditures, but borrowing in excess of 
the current savings of the country. 

Extent of Government Borrowing. — 
The Treasury of the United States has 
borrowed, during the past two years 
and a half, over $25,000,000,000. Of 
this amount about $£1,500,000,000 
have been borrowed by the issue of 
bonds. The remaining three and a 
half bilUons have been borrowed by the 
issue of short-dated certificates of in- 
debtedness. Twenty-five billions in 
the course of two years and a half is an 
extraordinary amount of money to 
raise, even for a country as rich as the 
United States. It averages about 
$1,250 for every American family. It 
is an average of $500 per year for each 
such family. That such an amount 
could be taken out of the average in- 
come of the American people, except 
as they greatly reduced consumption 
and greatly increased savings, needs 
no demonstration. 

Extent of Loans from Savings. — ^Peo- 
ple of moderate means who did their 
full duty in subscribing to the loans of 

the government by actually cutting 
down their current expenditures and 
paying for their bonds in dollars actu- 
ally saved out of their incomes know 
from their own experience that there 
is no method by which such vast loans 
can be taken up and paid for except by 
the practice of severe economy. It was 
because all of the people did not prac- 
tice economy to the requisite degree 
that the savings of the country were 
not adequate to take up the securities 
issued by the Treasury as genuine 
"savings loans." To the extent that 
the borrowings of the government were 
in excess of what were paid for by 
savings, the loans became '* credit 
loans " and, as such, resulted in a great 
increase in the volume of the country's 
circulating credit and its currency. 

Expansion of Banking Credit. — ^The 
following table shows for selected dates, 
under the heading of "Deposits," the 
increase which has taken place in the 
volume of credit extended by the banks 
(national and state banks and trust 
companiei^) and, under the headings 
"Loans and Discounts" and "Invest- 
ments," the operations against which 
the newly created credit was extended. 
The dates selected are: (1) the eve of 
our entry into the war; (2) the armis- 
tice; and, (3) the most recent date for 
which data are available: 



Loans and 


(In millions of dollars) 

March. 1917 

November 1, 1918 
October, 1919 


The above figiu*es, which are partly 
official and partly estimated, show 
that, between March, 1917, and No- 
vember 1, 1918, 3,999 millions of 

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Thrift and the Financial Situation 

new banking credit in the shape of 
so-called deposits were created — an in- 
crease of 16.1 per cent. Similar com- 
parison for the item "Loans and Dis- 
counts" shows that between the same 
two dates there was an increase of 
2,77£ millions — ^an increase of 16.8 per 
cent; and that, for the item "Invest- 
ments" for the same dates, there was 
an increase of 3,954 milUons — or 79.8 
per cent. 

It will be noted that the most strik- 
ing increase of percentage is foimd in 
the item "Investments" between the 
dates March, 1917, and November, 
1918, when an increase of close to four 
billions of dollars is shown in the in- 
vestment holdings of the banks. This 
was the period when the government's 
great bond-issuing operations were at 
their height: The banks were under 
pressure to make heavy investments of 
their credit in subscribing for govern- 
ment loans; they were also extending 
credit accommodation on liberal terms 
to their customers for the like purpose. 
This was also the period when the total 
currency in circulation was increasing 
most rapidly — the increase between 
March, 1917, and November, 1918, 
amoiuiting to over one billion and a 

But the expansion of banking credit 
did not come to a stop with the armis- 
tice. Figures given in the table above 
show that expansion has continued at 
an alarming rate since then. And the 
end is not yet assuredly in sight. Be- 
tween the dates November 1, 1918, 
and October, 1919, 4,297 millions of 
dollars of new credit have been created; 
loans have increased 2,483 millions of 
dollars; and investments 842 millions 
of dollars. 

It thus appears that for the whole 
period, March, 1917, to October, 1919, 
8,296 millions of dollars of new bank- 

ing credit have been created, most of 
which was undoubtedly occasioned by 
the exigencies of government financing. 

It has recently been estimated {Fed- 
eral Reserve BvUetin for October, 1919, 
page 942) that the banks of the coim- 
try hold among their investments over 
four billions of dollars of government 
war securities (Liberty Bonds, Victory 
Notes or Certificates of Indebtedness) 
and, among their loans and discounts, 
two and a half billions or more repre- 
senting loans made to customers se- 
cured by government obligations and 
made, presumably, for the most part, 
in aid of customers' subscriptions to 
government loans. Altogether then, it 
appears that the banks are carrying, 
directly or indirectly, between six and 
seven biUions of government war obli- 
gations against which has been ex- 
tended newly created credit in the 
form of deposits or currency. 

Influence of Bank Credit on Prices, — 
This newly created credit, like the new 
currency, constitutes an addition to 
the supply of the country's purchasing 
media. It is for all practical purposes 
to be regarded as money. It is accepta- 
ble as a means of purchase and pay- 
ment. It acts on prices substantially 
the same as money. It is the new and 
large addition to the country's circu- 
lating media, resulting from the place- 
ment of so large a portion of the Gov- 
ernment's loans in the form of "credit 
loans" — that is, in excess of what the 
current savings of the people would 
support — ^that is largely responsible 
for that feature of our financial situa- 
tion which has resulted in the continu- 
ing high prices, of which there is so 
much complaint. 

The best way to improve our price 
situation is to improve our credit sit- 
uation. Indeed, no great improve- 
ment in the price situation need be 

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Thb Annals of thb American Academy 

looked for until the credit situation is 
materially improved. The banking 
and credit situation will improve as 
the large amount of war loan paper 
and investments now carried by the 
banks is liquidated. There is only one 
way to liquidate them and that is out 
of the proceeds of savings. Those who 
are debtor to the banks for credit ac- 
commodation in aid of subscriptions to 
government loans must be made to 
take up their obUgations to the banks 
out of their individual savings, if it is 
at all possible for them to do so. If 
they can not do it» or, rather, to the 
extent that they can not do it, others 
must in effect do it for them; others 
must save and out of their savings buy 
Liberty Bonds in the market. Thus 
will the market for goveriiment bonds 
be improved and thus will it be made 
possible for the banks to liquidate by 
selling in the market bonds, which they 
have bought on credit, and their cus- 
tomers, the bonds which the banks 
fire holding as collateral. Such liquid- 
ation will at once reduce the loan and 
investment accounts of the banks on 
the one side and their deposit liabilities 
on the other; and it will, in addition, 
bring a return flow of currency to the 
banks. It is thus that there will result 
from the process of saving, reduction 
in the volume of purchasing media and 
decline of prices. 

Reduction of Inflation by Saving. — 
If everyone had done his full duty dur- 

ing the war by voluntarily rationing 
himself and saving to the requisite de- 
gree, most of the expansion of credit 
and currency and inflation of prices, 
from which we are suffering, would 
have been avoided. Because there 
were financial slackers who did not do 
their duty, expansion of credit and 
currency was carried to the point of 
inflation. The evils of inflation, of 
which the President warned the nation 
in his War Message of April 2, 1917, 
are now upon us in the shape of high 
cost of living, profiteering, speculation, 
reckless extravagance and industrial 
unrest and strife. These evils are to 
be reckoned as a part of the cost of the 
war. They are the cost of inflation. 
That cost must now be met. Until it 
is met, those evils will remain to plague 
us. Indeed, there is danger that they 
will grow worse through postponement 
or through national self-delusion that 
they can be escaped. Recent months 
have given dramatic evidence that the 
appetite for inflation, like most other 
appetites, grows by what it feeds upon. 
Inflation is breeding inflation. A halt 
must be called. Saving must again 
become the order of the day. We have 
too much credit and too much money 
outstanding in the United States — 
above all, too much unproductive 
credit. Its voliune must be reduced. 
There is but one sure method: that is 

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Governmental Thrift Through a National Budget 

By Charles Wallace Collins 

Author of National Budget System and American Finance 

THE American government is the 
greatest spender in the world. 
In the past, before the war, expenditure 
of public money attracted little or no 
attention in this country. Our vast 
sources of national wealth had hardly 
been touched. The money for the 
running of the government was raised 
largely by indirect taxation and the 
people did not feel that they were really 
supporting the government. Many 
times in the quarter century preceding 
the late war the treasury received more 
money than was necessary to meet 
appropriations by Congress. In other 
words we were often embarrassed by a 
surplus in the treasury. This situa- 
tion was due largely to a tarifiF policy 
which was formulated and put into 
effect not primarily with the idea of 
supporting the government but for 
other reasons ordinarily described 
under the term "protection." The 
revenue side of financial administra- 
tion was not directly related to the 
expenditure side. 

During this period there was no de- 
mand for economy in the administra- 
tion of the government made by the 
people. The question of financial pol- 
icy from the standpoint of government 
economy never entered into political 
discussions either in the congressional 
or presidential elections. No empha- 
sis was laid on the method of procedure 
in arriving at the financial needs of the 
government or on the method of pro- 
cedure of Congress in granting funds 
for this purpose. We felt that we were 
too rich to bother about these matters. 
The expenditure of a few hundred 

million dollars or even a billion dollars 
appeared of no great consequence to a 
strong young nation in possession of 
the richest country in the world. 

Thus grew up without studied adap- 
tation a system of financial procedure 
which is peculiar to this government. 
It was not based upon a scientific 
study of the problem of budgetary pro- 
cedure but represents accidental accre- 
tions and circumstantial adjustments 
from time to time without coordina- 
tion. The method has never at any 
time proven satisfactory to either the 
executive or to Congress but neverthe- 
less, being a practical people, we were 
able to make it work. We even financed 
the war under it without plunging the 
government into bankruptcy, but 
surely no other nation could have 
stood the strain. 

National Financing in the Past 

A brief description of this system, or 
lack of system, may be in point. In 
the first place the bureau chiefs, or such 
other heads of the various organization 
units which have disbursing oflBcers 
who spend the money appropriated out 
of the public treasury, make estimates 
embodying their requests for the ex- 
penditure of money for the coming 
fiscal year. These estimates are drawn 
up in the early fall and are required to 
be transmitted to the Treasury Depart- 
ment by October the fifteenth. They 
represent the plans and ambitions of 
the bureau chief. He is, if he is a good 
official, naturally interested in the ex- 
pansion and development of the service 
under his jurisdiction. The greater 


Digitized by 



The Annals of the Amebican Academy 

his service the more honor to him. He 
does not make his estimates with a 
view to the total expenditure of the 
govei'nment. He is interested in his 
own bureau. According to the prac- 
tice of Congressional committees there 
is a strong likelihood that some reduc- 
tion will be made in his estimates. In 
anticipation of this the practice has 
grown up of estimating rather liberally 
so that if cuts are made ample funds 
may be left to carry out the plans of 
the bureau. 

The heads of the departments have 
the legal authority to revise the esti- 
mates of the various bureaus under 
them. In fact it is the assumption of 
the law that these bureau estimates are 
really the estimates of the head of the 
department. But the head of the de- 
partment has no special organization 
to enable him to make this revision and 
he certainly has no time to do it him- 
self, in some cases he may order cer- 
tain reductions in tile estimates of a 
bureau but this is exceptional. There 
is no systematic attempt to supervise 
and restrict the demands of these vari- 
ous bureaus for money out of the 

According to law these estimates for 
all of the departments and establish- 
ments of the government are sent in to 
the Secretary of the Treasury. He is 
required to classify them and have 
them printed in what is known as the 
Book of Estimates. The Secretary of 
the Treasury has no power to review 
the estimates nor can he make or sug- 
gest reductions. His relationship to 
them is mechanical and formal. 

The Secretary of the Treasury trans- 
mits the Book of Estimates to the 
House of Representatives. He does 
not include in it an estimate of the 
revenues and suggestions for new taxa- 
tion if necessary. When the estimates 

reach the House they are parcelled 
out to a number of independent appro- 
priating committees. These commit- 
tees hold hearings on the estimates 
relating to the particular services over 
which they have jurisdiction. They 
call before them the various officers of 
the government responsible for the 
preparation of the estimates in the 
first instance. They are submitted to 
a rather lively examination the pur- 
pose of which is to discover the facts 
upon which such estimates are based. 
It is customary at these hearings for a 
contest to arise between the bureau 
chief and the committee — the bureau 
chief, on the one hand, trying to sustain 
his position in order to secure the 
amount estimated and the conimittee, 
on the other hand, trying to find the 
weak spots in the position of the bu- 
reau chief. The bureau chief has the 
advantage, in that he alone is in pos- 
session of the intimate knowledge of 
the operations of his bureau upon which 
knowledge alone a correct basis for an 
intelligent estimate can be found. It 
sometimes happens that committees, 
in utter despair of getting at the real 
situation, will make arbitrary cuts 
in the estimates in order to reduce 

Each of these appropriating com- 
mittees of the House, after the close of 
the hearings, reports out one or more 
appropriation bills; and these, fourteen 
in number followed by one or more 
deficiency bills later in the year, make 
up the sum total of the appropriations 
out of the public treasury for the 
annual support of the government. 
These committees do not consult with 
each other in the course of their work 
nor do any of them attempt to gain 
a view of the finances of the govern- 
ment as a whole. When the House has 
passed an appropriation bill it goes 

Digitized by 


Thrift Through a National, Budget 


to the Senate where the same process 
is followed as to the hearings and 

The defects in this system of finance 
are readily seen. The observer is 
struck with the astonishing lack of 
control both in the executive depart- 
ments and in Congress. At no stage, 
from the preparation of the estimates 
to the final passage of appropriation 
bills, is there any fixing of definite re- 
sponsibility or any view of the total 
demands which are being made upon 
the national treasury. There is no 
plan and no real financial policy. No 
one knows until near or after the close 
of a session of Congress how much 
money must be raised in taxation from 
the people to meet the. needs of the 

Where the Fault Lies 

Who is to blame for this state of af- 
fairs? It has become popular of late 
to criticize Congress for our system 
of finance. Many writers are indulg- 
ing in wild statements about the 
extravagance of Congress and the 
supposed orgy of "pork-barrel" and 
"log-rolling "legislation. Someofthese 
writers are even attempting to dis- 
credit Congress before the American 
public. This crusade against Congress 
is based upon a misconception of the 
real facts of the situation. Congress- 
men are not reformers. There are, 
indeed, always a few reformers in Con- 
gress but that is not their business. 
The American congressman is elected 
by a local constituency and he is sent 
to Washington to represent primarily 
the interests of his district. He is, 
it is true, a national legislator and the 
opinion of Congress as a whole will al- 
ways conform very closely to the pub- 
lic opinion of the American people. 
But if he fails to represent the local 

interests of his district another man 
will be elected who will do so. 

Congress is to blame for not provid- 
ing a modem and business-like budget 
system for the administration of na- 
tional finance only in the sense that 
Congress alone can change and correct 
the existing system, — and who can say 
that there has been a nation-wide de- 
mand for such a reform? Out in the 
various congressional districts there has 
not been in the past any considerable 
agitation over the necessity for a bud- 
get system. The demand for action 
along these lines has come chiefly from 
academic sources, from writers inter- 
ested in the science of public finance, 
and from certain highly organized com- 
mercial organizations in the eastern 
part of the United States. 

Furthermore it seems not to be gen- 
erally understood that Congress, under 
the present system, is the only branch 
of the government which has consist- 
ently fought for economy in the ad- 
ministration of the government. It 
has always cut the estimates turned in 
by the executive branch of the govern- 
ment. There has not been a single 
year within our recent history in which 
the appropriations made by Congress 
were not less by several millions than 
the executive climates for the support 
of the government. 

Great emphasis has been laid on the 
extravagance and wastefidness of Con- 
gress through "pork-barrel" and "log- 
rolling" methods of appropriating 
money for public buildings and river 
and harbor improvements. The fact 
is, that appropriations for these pur- 
poses amount to a very small per cent 
of the total appropriations, — ^probably 
not more than 1 or 2 per cent in the 
past and for the future they will be 
perhaps less than 1 per cent. But even 
these appropriations are not made 

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The Annals op the American Academy 

without official estimates in each ease. 
Criticisms could be directed at the 
executive braach of the govermnent 
with better grace. The executive 
bureaus are constantly reaching out 
for more money and sending estimates 
in to Congress for greater and greater 
demands upon the public treasury. 
There has been no really concerted 
effort on the part of the executive 
branch for economy in expenditures. 
It is nobody's business there to take 
this point of view and the tendency, 
therefore, of the executive departments 
is wholly towards greater expansion 
and greater demands for money. 

War and National Finance 

Our entry into the war has com- 
pletely changed the financial situation. 
We have emerged from the conflict 
with a public debt of about $26,000,- 
000,000 calling for an annual expendi- 
ture for interest, of more than $1,000,- 
000,000. We are further faced with a 
vastly increased current annual ex- 
penditure and it is doubtful if our 
total appropriations for the support of 
the government will be less than $5,- 
000,000,000 for several years to come. 
This means for the American people a 
continuation of high taxes in order to 
furnish the necessary revenue and the 
continuation to a considerable extent 
of the high cost of living. 

For the first time in our history the 
people are interested in financial policy 
and financial reform. There is an in- 
creasingly strong demand for economy 
in financial administration in order to 
protect the Treasury. The people are 
realizing as never before that it is they 
who are supporting the government. 
The idea of a budget system is begin- 
ning to gain wide prevalence. The 
Sixty-Sixth Congress almost immedi- 
ately upon convening began to take ac- 

tion looking toward the reorganization 
of our financial system. The House 
and the Senate each appointed a select 
committee to devise a budget plan and 
the plan reported out by the House 
committee was adopted by the House 
October £2, 1919. This plan is embod- 
ied in the so-called "Good Bill" intro- 
duced by Chairman Good in May, 
1919. Chairman McCormick of the 
Senate committee has also introduced 
into the Senate a budget bill similar to 
the plan introduced by him into the 
House in 1918. 

Plans fob Budgbtaby Refobm 

Both of the plans embody the gen- 
eral principles of budgetary reform as 
advocated by economists and students 
of finance for many years past. They 
include the installation of machinery 
insuring centralization of executive 
responsibility and control. The Presi- 
dent is to submit to Congress at the be- 
ginning of each session a national bud- 
get which shall contain on the one hand 
a revised and coordinated statement of 
the financial needs of the government 
in the form of estimates of expenditure, 
and on the other hand an estimate of 
the revenues of the government with 
recommendations for new taxation 
when the estimated revenues appear 
insufficient to meet the estimated ex- 
penditures. The detailed work of the 
revision and the coordination of the 
estimates will be done through abudget 
bureau situated either in the office of 
the President or in the Treasury De- 
partment. This bureau is to have a 
permanent personnel of highly trained 
financial experts and economists who 
will be protected in their positions by 
the civil service rules. 

These plans provide also for an inde- 
pendent audit of the government ac- 
coimts which is to be accomplished by 

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Thrift Through a National Budget 

consolidating the existing audit forces 
which are now under the executive and 
putting theni under an independent 
establishment at whose head shall be a 
Controller-Auditor General. The pur- 
pose of this is to furnish an independent 
instrument of criticism of the executive 
expenditures and a report upon them 
to Congress. 

Such in brief , is the kind of budget 
system which is likely to be adopted in 
the near future for the federal govern- 
ment. Its beneficial effects, can be 
readily seen. It will abolish nearly all 
of the vicious practices so loudly com- 
plained of at the present time. It 
would be a step of the greatest impor- 
tance in the direction of national thrift. 
The bureau estimates would be scru- 
tinized and controlled at their source. 
They would be made with reference to 
the needs of the bureau in its relation 
to the. needs of the government as a 
whole. When the ^timates reached 
Congress in the form of a business-like 
financial program, — ^that is a budget, — 
they would have already been reduced 
to the bona fide needs of the govern- 
ment. They would not be as now a 
conglomeration of unrevised depart- 
mental requests but would be a scien- 
tific presentation of a well thought out 
plan embodying in one single, simple 
and intelligible statement the financial 
policy for which the President is willing 
to assiune responsibility before the 
American people. The treatment of 
this budget by Congress in the same 
centralized way insures here also a 
definite fixing of responsibility and a 
unity of legislative action. 

The independent audit completes the 
circle of control by providing a con- 
stant and alert critical organization 
which will report to Congress and to 
the public any deviation by the execu- 
tive spending officers from the letter 

or the spirit of the appropriation laws. 
The taxpayer may rest assured that 
in the near future there will be in vogue 
in the federal government a system of 
financial administration, known as the 
budget system, which will, as near 
as system can guarantee that no 
money shall be taken from the people 
except that it be to meet a real need 
of their government. The stream of 
revenue which must be poured into the 
national treasury, in many cases at a 
sacrifice by the taxpayer, for many 
years to come, will be protected from 
wild and extravagant demands of over- 
reaching executive bureaus. 

Limitations of a Budget System 

No system, however, no matter how 
well thought out will produce in itself 
absolutely satisfactory results. It will 
be necessary for the American people 
to lend their strong moral support to 
Congress in the working out of this 
great reform. They must abandon 
whatever is left of their local point of 
view of spending money out of the na- 
tional treasury. A national financial 
policy looked at from the point of view 
of national betterment is possible only 
through the cooperation of the rank 
and file of our vast citizenship who con- 
trol the activities of the membership 
of the two houses of Congress. 

It is not to be expected that a bud- 
get system will cause any considerable 
reduction in the total expenditures of 
the government. It is not claimed 
that this reform will bring the amoimt 
of appropriations anywhere near to 
where they were at the outbreak of the 
war. Expenditures depend upon the 
policy of the party in control of the 
government for the time being. If it 
be one of retrenchment, expenditures 
naturally would be reduced. If on 
the other hand it be a policy of ex- 

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The Annals of the Amebican Academy 

pansion, causing the government to 
enter into new fields of service they 
will be proportionately greater. 

The budget system as a means of 
financial administration does not an- 
swer the question as to what services 
the government shall undertake year 
by year. That is a question of poli- 
tics and one the decision of which 
must be made by the people at the 
polls. An extravagant government in 
the political sense may be a govern- 
ment which has the approval of the 
majority of the voters. The only pro- 
tection from this sort of extravagance 
is the inevitable criticism which arises 
from an alert minority, a criticism 
which if well founded may result in an 
overthrow of the majority at the next 

What the budget system is intended 
to do, whether und^ a policy of 
expansion or under a policy of re- 
trenchment, is to guarantee that the 
estimates presented to Congress are 
economical and are properly coordin- 
ated with each other in their relation 
to the total proposed expenditure, and 
further, to the estimated revenue to 
be raised by taxation. It is possible, 
therefore, to have sound business-like 
estimates under what might be re- 
garded as an extravagant financial 
policy. The budget system has done 
its part when it has given this protec- 
tion and when it has presented a pic- 
ture of the finances as a whole to the 
people and to Congress each year be- 
fore any legislative action has been 

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Capital Needs for Education in the United States 

By David Snbddbn 

Teachers College, Columbia University 

EACH of the writers invited to 
contribute to the Academy's vol- 
ume on Thrift has probably found the 
difficulties of his task multipUed by the 
fact that mon^ values, in which we 
must perforce define our conceptions 
of expenditures, savings and capital, 
are themselves now in process of extra- 
ordinary flux. This difficulty is espe- 
cially evident in discussing investments 
in education where capital needs are 
increasing almost proportionately with 
commodity and wage prices while the 
growth of assessment values, on the 
basis of which these needs must largely 
be met, has decidedly lagged. The 
writer of this paper will therefore ask 
that his readers always interpret his 
statements on the assumption that 
money values as of June 80, 1914, have 
remained stable. When we shall have 
gotten over the confusion produced by 
the war and the darkening of coun- 
sels engendered by those bent on ex- 
ploiting their particular theories of 
safety and progress we shall doubtless 
find ourselves able to make increases 
in teachers' salaries, in valuation of 
property for assessment, and the like, 
in such a way as to distinguish intel- 
ligently between those adjustments 
which must be made because of depre- 
ciation in nominal money values and 
those that should represent permanent 
changes in terms of real values. 

The raising of revenues for pubUc 
pmposes has always taxed the inge- 
nuity of governing authorities. The 
tornadoes of revolution have more 
often been generated under the atmos- 
pheric pressure of excessive or unwise 

taxation than from any other cause. 
When it is recalled that from one-third 
to three-fifths of all revenues raised by 
state and local taxation in America 
goes to the support of public education 
the problems of taxation and of wise 
expenditure confronted by our govern- 
ing authorities on behalf 61 public 
schools are evidently far from simple. 
The conduct of the schools of the people 
now constitutes by far our largest pub- 
lic enterprise. It is obviously an enter- 
prise in which, imlike roads, or fire 
protection, or even poUcing, returns 
must be taken considerably on faith. 
Public schools cannot be made self- 
supporting as can the post-office and 
water supply systems. Only strong 
faith in the permanent values of edu- 
cation can sustain a people in taxing 
itself, and especially its richest and 
most powerful members, heavily and 
persistently for the support of schools 
which are constantly growing more 

In estimating the capital needs of 
education during the next few years 
several factors require separate con- 
sideration: (a) What will be prob- 
able increases along lines of educational 
effort — salaries of teachers, buildings, 
equipment, longer school year, smaller 
classes, etc., in elementary and second- 
ary schools and in state colleges and 
other than special schools — ^already 
securely established and progressively 
developed during the last fifty years? 
(b) What will be probable expendi- 
tures for new types of public education 
— ^vocational, physical, continuation 
— ^now apparently developing? (c) 


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The Annals of the American Academy 

What demands for experimental forms 
of education may be expected? (d) 
What changes may be expected in the 
abiUties of the states (or the nation 
participating) to support public edu- 
cation? (e) In what respects are there 
now preventable wastes in education, 
or in what respect can we, without in- 
creased expenditures, materially im- 
prove the ultimate eflfectiveness of our 
school offerings? 

Anticipations Summaiozed 

We can imagine Uncle Sam as a 
thrifty pater-familias making his de- 
cennial budget. "What should the 
nation plan to spend on its public 
schools?" His advisers submit ob- 
servations and recommendations which 
are first summarized, and then elabo- 
rated, as follows: 

1. During the last half century 
the cost of public education has in- 
creased faster than either population 
or taxable valuation, due largely to 
lengthening of school year, general 
establishment of free high schools, 
extending age of required attend- 
ance, increasing teachers' salaries, 
especially in cities, and provision of 
more expensive supervision. 

2. All present tendencies point to 
the necessity of continued growth in 
rate of expenditure at least equal to 
that of recent decades in order to 
reach adequate minimum standards 
of effective schooling. This means 
more particularly: A school year of 
at least 160 to 180 days in rural dis- 
tricts; a minimum age of compul- 
sory full-time school attendance to 
the fourteenth birthday: provision of 
facilities for all persons seeking high 
school education; more expert super- 
vision; and salary increases sufficient 
to attract and hold properly qualified 

8. AH present tendencies point to 
the acceptance in the near future by 
the public of the following as neces- 
sary expansions of public education: 
provision of some facilities for voca- 
tional education for all; compulsory 
continuation school attendance at 
least to 16 and probably to 18; 
provision of some form of health 
supervision for all schools; and pro- 
vision for some special education of 
adult immigrants. 

4. Certain extensions or modifica- 
tions of public education are now 
much discussed, but their probable 
realization, or, if realized, their 
probable addition to the cost of 
education, are still very problemat- 
ical. The involved problems are 
indicated by these questions: Is it 
likely that kindergarten education 
will be extended? Will junior high 
school education be considerably 
more expensive than the grade edu- 
cation it replaces? Will reorganized 
Uberal secondary education prove 
much more expensive than present 
high school education? Will the 
public demand a much longer school 
year for schools of general education? 
Must the schools retain a substan- 
tial proportion of men teachers? 
Must the schools seek more expen- 
sive service from modem language 
teachers? Must physical training 
be provided in cities? Can voca- 
tional education be made, in part, 

5. Certain redistributions of the 
burdens of supporting pubUc edu- 
cation may well be expected in the 
light of present tendencies: (a) 
Heretofore the major part of the 
cost of schools has fallen in the pri- 
mary instance as a tax on property; 
the present tendency is towards 
utilization of less direct sources, (b) 

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Capital Needs fob Education 


The larger political unit, the town 
rather than the district, the county 
rather than the town, the state 
rather than the county, and as a be- 
ginning, the nation rather than the 
state, tends to become the support- 
ing area for a portion of the cost of 
education; and the contributions of 
the larger area are so exacted and 
distributed as to tend to equaUze 
the burden of school support on the 
one hand and its resulting advan- 
tages on the other. 

6. Education is still far from being 
efficient. In many respects its aims 
are poorly defined, and of course 
here methods may well be ineflfective 
to the zero point. Even where aims 
are fairly concrete and demonstrably 
valid, methods are often bad. Sound 
principles of public poUcy clearly 
point to the desirability of providing 
at public expense for a substantial 
amount of research into aims, meth- 
ods and administration of education 
as a means of reducing waste and 
increasing the value of the returns 
from present and future investments 
in education. 


During the last half century growth 
of expenditures for public education 
has been considerably more rapid than 
growth in population. The statistics 
of the United States Bureau of Educa- 
tion are confessedly neither complete 
nor exact as regards the two or three 
decades following 1870; nevertheless 
they are sufficiently reUable for pur- 
poses of general comparison. 

In 1870 there was expended for all 
pubUc school purposes $1.64 per capita 
of population; in 1915 the amount was 
about $6.03. In 1870 the amount 
spent per pupil in average attendance 

was $15.55; in 1915, it was $40.48. 

During this half century the ratio of 
children of school age (5 to 17 years 
inclusive) has fallen from 81 per cent 
to 26 per cent of the total population, 
due in part to diminishing birth-rate 
and in part to greater longevity of an 
increasingly healthy people. This de- 
crease in a sense tends to lessen the 
burden of supporting schools; but this 
is far more than offset by the lengthen- 
ing of the school year, the operation of 
compulsory attendance laws, and the 
desire of constantly increasing num- 
bers to seek upper grade and high 
school education. In 1870 57 per cent 
of persons 5 to 17 years of age were en- 
rolled in pubUc schools; in 1915 nearly 
75 per cent. In 1870 the average 
length of the school term was 13£ days 
and the average number of days at- 
tendance made by each enrolled pupil 
was 78; in 1915 these figures were 159 
and 121 respectively. 

Some other figures are worthy of at- 
tention as showing progress of schools 
and school expenditure. In 1870, 88 
per cent of all teachers were men; in 
1915 men constituted less than 20 per 
cent in spite of the growth of high 
schools. In 1870 the average monthly 
salaries of all teachers was just under 
$29; in 1915 it was slightly over $68. 
Since 1870 the value of all school 
property has increased more than ten 
fold— from $130,000,000 to $1,567,- 

None of these figures can be consid- 
ered exact, owing to the necessarily 
imperfect methods of reporting used 
by' the states; nevertheless they are 
sufficiently accurate to present a fair 
exhibit of the evolution of the measur- 
able aspects of public education during 
the last half century. Faults of inter- 
pretation are, of course, easily possible. 
Perhaps the best single measure of 

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Thb Annaib of the American Acadebit 

educational expenditures is suggested 
by the fact tliat whereas in 1870 the 
amounts expended per day for each 
pupil enrolled are computed at 7 and 
I£ cents respectively for salaries and 
for all expenses; in 1915 these amounts 
were 14 and 25 cents. 

Viewed in the aggregate, expendi- 
tures for public education seem large. 
But when set in comparison with other 
less useful forms of expenditure they 
seem far from striking. The American 
people now spend upon each of two 
items — ^tobacco, and display advertis- 
ing — sums considerably in excess of all 
outlays for public education. In 
years just passed they spent on alco- 
hoUc beverages at least twice and, were 
proper methods of computation em- 
ployed, probably three times what was 
spent for education from the kinder- 
garten through the university. 

Achievements in Pubuc Education 

Space is not here available for an 
enumeration of our achievements to 
date in pubUc education. Consid- 
ered from the standpoint of the ideals 
of those zealous for the progress 
of education these achievements are 
disappointing enough; but viewed 
historically and comparatively they 
justify sincere admiration. Free ele- 
mentary schools are now practically 
available to all the people; and as 
respects free and accessible high school 
education, America surpasses all other 
countries. State universities, agricul- 
tural colleges and higher technical 
schools are widely available and gener- 
ously supported. Nearly all states 
have free schools, often including free 
boarding accommodations, for the 
deaf, blind, and semi-delinquent. The 
length of school year has reached a sat- 
isfactory optimum in most cities. The 
teaching force of the United States is 

composed usually of persons of good 
native abilities and social endowments. 
Except in rural districts, school build- 
ing has made great advances in the last 
three decades. Most of the states now 
provide text books and other working 
facilities to pupils. Compulsory school 
attendance laws are nearly universal 
and the minimum age at which cessa- 
tion of education is permitted steadily 
rises towards fourteen in all states, 
while in some that goal has been passed. 

It has already been noted that the 
cost of public education has been in- 
creasing faster than population and 
taxable valuation during the last fifty 
years. There can be no doubt that 
such rate of increase in terms of real 
values will continue for many years to 
come unless the nation should be over- 
taken by economic catastrophe. All 
indications are that the people will 
create the demands. The number of 
days of school session will be increased 
in rural schools; the proportion of 
teachers with professional training 
will be steadily greater; teachers of 
inferior personal qualities or training 
will less frequently be employed; sal- 
aries (always speaking in terms of real 
values) will be raised somewhat, as a 
means of attracting teachers of super- 
ior native fitness and equipment; 
buildings and teaching f aciUties will be 
somewhat better; and in some city 
schools, at any rate, size of classes will 
be perceptibly diminished. 

Many campaigns are now under way 
looking to increasing salaries. Most 
of these have been undertaken, prim- 
arily, of course, to aid teachers in 
keeping their nominal salaries some- 
what correlated with rising prices. 
But in a degree these campaigns repre- 
sent something more fundamental. 
In educationally progressive communi- 
ties, school boards, executives, and ex- 

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Capital Needs fob Education 


perienced teachers, as well as no incon- 
siderable part of the public, realize that 
if the general level of teaching is to be 
raised, better compensation must be 
offered as a means of attracting and 
retaining the kinds of service capable 
of giving improved service. 

In many particulars, standards of 
public education are yet far below 
what will be demanded when public 
opinion becomes better informed. Our 
rural schools in general now assure 
literacy, but not enough beyond. 
Curricula of high schools and upper 
grades are still without valid objectives. 
Classes in city schools are often excess- 
ively large. Nowhere is there ade- 
quate provision for experimental work 
looking to the scientific improvement 
of aims, methods, and administration 
of education. 

In terms of money values of 1914 it 
is safe to predict that expenditures on 
public education will so rise during the 
next decade that by 1980 we shall be 
spending $10 annually per capita of 
population on the kinds of schooling 
already generally established, and ex- 
cluding possible developments into 
new fields hereafter to be considered. 

Probable Expansions of Public 

1. Vocational Education. — ^The most 
absorbing and significant movement in 
educational thought and practice dur- 
ing the last decade has centered in 
vocational education. There exists 
a rapidly growing conviction that 
f aciUties for vocational education ought 
to be available for all; but beyond 
this, public opinion has not yet gone. 
Educators themselves are by no means 
agreed as to what constitutes effective 
vocational education. But the best 
informed students are probably agreed 
on the following conclusions : 

a. All adults during all historic 
times have followed vocations. 
Since instincts and childish imita- 
tion give only meagre preparation 
towards meeting the requirements 
of all but a few primitive forms of 
production, it follows that all adults 
have at some time and place been 
trainedy developed or edticated (in the 
broadest sense of the term) for the 
exercise of one or more vocations. 
But such vocational education may 
be the direct and systematized train- 
ing of a vocational school, or the sys- 
tematized by-education of organized 
apprenticeship, or the "pick-up" 
education of actual participation in 
first, simple and then more complex 
phases of the work itself. Now the 
essence of the "current" movement 
for the development of vocational 
schools reflects in reality a social 
conviction that systematized and 
effective vocational training should 
be substituted for the unsystematic 
and wasteful vocational education 
which has been the best available 
for about 90 per cent of all workers. 

b. Apprenticeship vocational edu- 
cation is now available for only a 
small per cent — ^probably less than 8 
— of all workers; and its inher- 
ent characteristics are such that it 
may be expected in the future, as it 
has for many years in the past, to 
decline in effectiveness. 

c. For the large majority of voca- 
tions as now developed and special- 
ized, vocational education cannot 
all be given in some pre-working 
stage, as is now largely the case with 
professional education; nor can it 
consist chiefly, or even largely, of 
more or less abstract studies of the 
technical phases of such vocations; 
nor need it necessarily require ex- 
tended time at any one stage. 

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The Annals of the American Academy 

It is difficult, therefore, as yet to 
estimate the probable cost of an 
adequate system of vocational edu- 
cation. Between the ages of 15 and 
S5 we can assume that there are in the 
United States 2,000,000 persons in 
each year group, all of whom at some 
time, or at diflFerent times, should be 
given opportunity for vocational edu- 
cation. Good vocational training for 
reasons that need not be detailed here 
is more expensive per pupil per hour 
than other forms, ranging from 50 
cents per student-hour for medicine 
and engineering to 20 cents per stu- 
dent-hour for the trades, and reaching 
as low as 10 cents in certain commercial 
and industrial vocations. Some forms 
of vocational education can be made 
partially self-supporting. Nursing edu- 
cation is that now. The best forms of 
secondary agricultural education can 
meet one half their total cost. Up- 
grading industrial education rapidly 
approximates a condition of self-sup- 
port as respects all but instruction and 
overhead charges. 

For the next ten years, taking the 
American people as a whole, it is cer- 
tain that the investment of $50 on each 
of the 2,000,000 persons referred to 
above, somewhere, or at different inter- 
vals, between the ages of 15 and 25, or 
a total annual expenditure of $100,000,- 
000, would give splendid returns in the 
increased economic productiveness, as 
well as the incidental good citizenship, 
of the entire people. 

2. Compulsory ContintuUion Schools. 
— ^The war has given a great impetus 
to the enactment of legislation pro- 
viding for compulsory continuation 
schools. For a nimiber of years before 
1914 American educators had been con- 
vinced that one of the most successful 
featiu'es of German education was its 
continuation schools^ and a few pro- 

gressive states had begun experimental 
work in their estabUshments. Present 
indications are that all states not prim- 
arily agricultural will require continua- 
tion school attendance to 16 or 18 
within a very few years. It is safe to 
predict that such attendance will affect 
at least 1,000,000 children of each year 
age group, or a total of from 2,000,000 
to 4,000,000. Adequate schooling for 
these on the basis of a minimum 
attendance of four hours per week can 
hardly be expected to cost less than 
$8 annually or a total of from 
$20,000,000 to $30,000,000. 

8. Physical EdticaHon. — It is now 
generally agreed by all students of 
education that a school of any type 
offers an excellent center for health 
oversight of a public nature. Already 
it is generally required that instruction 
in hygiene and sanitation shall form a 
part of the offerings of all public 
schoob. It is believed by many ex- 
perts that, given needed facilities and 
instructors, important results could be 
accomplished in physical training in 
most types of schools. Much experi- 
mental work in the general field of 
physical education is now under way, 
and in spite of the vagueness of many 
of the objectives proposed, it seems 
very probable that within ten years all 
progressive states in the Union will be 
expending from two to five dollars 
annually, in addition to present out- 
lays, on the medical inspection and 
physical education of each child in the 
public school — or in round numbers if 
all the states were equally progressive, 

4. Education for AdvU Immigrants. 
— For many years prior to the war 
America freely received and even wel- 
comed millions of immigrants from 
Europe and elsewhere. Recently these 
have come chiefly from countries very 

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Capital Needs for Education 


different from our own in language, 
customs, and political traditions. The 
test of a national crisis showed that 
some of these had become well-disposed 
and useful Americans while others had 
not. Public opinion is now such that 
if extensive immigration hereafter takes 
place, an extensive program of special 
education for the more mature immi- 
grants must be provided. There is 
now before Congress a measure pro- 
viding for a nationally supervised and 
aided program of special education for 
illiterate and imperfectly educated 
adult aliens now here. This bill is 
based on the assumption that a com- 
prehensive program of such education 
would now cost the nation and the 
states togetherapproximately $25,000,- 
000 per year. The future costs of work 
of this character will obviously depend 
upon the extent to which immigration 
is permitted. If work of a thorough- 
going quality is to be undertaken it is a 
fair guess that at least $100, distributed 
over several years, would be required 
properly to " Americanize ' ' each person 
over 14 years of age coming to the 
United States from a non-English 
speaking region. 

Unsettled Problems 

These are a number of unsettled 
problems in American education, the 
solutions of which will probably mate- 
riaUy affect educational expenditures 
during the next twenty years, but the 
actual results of which can only be 
guessed at as yet. 

1. Kindergartens. — ^The actual func- 
tions performed or capable of being 
performed by the kindergarten for 
children normally circumstanced is yet 
very uncertain. Children from poor 
home and street environments clearly 
derive much gain even from a meagre 
600 hours of schooling per year out 

of their more than 4,000 waking and 
playing hours. But there are nearly 
6,000,000 children in the United States 
between 4 and 6. years of age. To 
provide kindergarten education for all 
these will cost at least *$200,000,000 
per year. Of these 6,000,000, . two- 
thirds, certainly, are being reared in 
normal environments, judged by 
reasonable historic standards. Is the 
kindergarten urgently needed for them? 
An influential body of fine sentiment 
today answers, yes! But it is certain 
that much study must yet be given 
1^ the possible functions and actual 
achievements of the kindergarten in 
contributing to real educational val- 
ues before educational authorities can 
reach dependable decisions. 

2. Administration of Secondary 
Schools. — ^There is rapidly taking place 
a readjustment of the administrative 
organization of schools for children 
from 12 to 14 or 15 years of age. This 
is primarily a movement to render 
education for these ages more efficient. 
Whether the reorganized schools will 
cost a great deal more than the present 
upper grade and first year high school 
work is difficult to guess. Certainly it 
will not cost less. 

3. Reorganization of High School 
Courses. — ^Far reaching attempts are 
also being made to so reorganize high 
school courses and methods that the 
resulting education shall be more 
genuinely "functional" as liberal edu- 
cation. Neither of these movements 
specially contemplates reduction in 
size of classes or increases in salaries of 
teachers. The junior high school will 
manifestly require equipment more 
expensive than that now provided 
for the upper grades. Probably in all 
cases some increase in expenditure will 
be necessary to realize the objectives 

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The Annals of the American Academy 

4. To what extent wili men teachers be 
required in the schools of the fiUuref — 
Not only in America but elsewhere men 
have been steadily disappearing from 
elementary schools, and the propor- 
tion of men teachers in secondary 
education is diminishing wherever 
co-education prevails and professional 
standards are rising. The funda- 
mental cause for this of course is that 
men and women cannot compete on 
equal economic terms in teaching or 
in any other calling. The "modal" 
groups of men teachers consist nor- 
mally of those who, in the expectation 
of society, are supporting, or are pre- 
paring to support, families. These 
constitute the "dominant" economic 
demand for compensation which if it is 
not met in teaching, will be sought 
elsewhere. But the modal group of 
women teachers consist of celibates who 
only occasionally have responsibilities 
for the support of others than them- 
selves. Their dominant economic de- 
mands are, therefore, much less than 
those of men. These conditions de- 
velop, of course, in largest measure 
among teachers over twenty-five years 
of age. Under twenty-five the relative 
demands of men and women are not so 
dissimilar. This situation is, of course, 
complicated by some special conditions. 
Where men teachers past the usual age 
of marriage work side by side on equal 
terms with women, the men are apt to 
be of inferior ability and personality to 
the women, for the reason that teach- 
ing ranks for man as a twentieth or 
thirtieth in the order of best vocations, 
whereas for women it is often, apart 
from marriage, the first, or, even in 
large cities, the second or third best. 
Now if women teachers of given native 
abilities, training and maturity can do 
certain kinds of teaching apparently as 
well as men, school authorities must 

employ them since their services can be 
procured at much lower cost. 

A similar problem appears in the case 
of young versus elderly women teach- 
ers. A very large proportion — ^always 
over 60, and often 80 per cent — of all 
women who enter teaching remain only 
from two to five years, after which they 
marry. Hence in rural areas often 
80 per cent of all teachers are in effect 
girls giving service only during their 
pre-marriage years; while in cities at 
least half are frequently of that class. 
But these young women teachers 
make only low economic demands — ^in 
this respect being Uttle different from 
young farmers, clerks and even engi- 
neers and lawyers. They are anxious 
for experience; they are Uttle concerned 
with saving for the future; they are 
inexperienced in bargaining; and often 
they Uve at home all, or part, of 
the year. But women over thirty 
who expect to remain permanently as 
teachers must save for sickness or 
old age. They cannot usually live 
at home. They are, therefore, at a 
perpetual disadvantage in competing 
with the "dominant" mass of young 
teachers. Their compensation under 
the operation of the law of supply .and 
demand tends to be kept down to that 
of the beginners — ^that is, unless it is 
evident that they can render a kind 
of service that these younger persons 
cannot offer. 

Now we possess no satisfactory 
knowledge as yiet of the places and 
conditions which require the more ex- 
pensive of men as against women, or 
of mature, as against young, women. 
Women teachers are entirely right in 
demanding "equal pay for equal 
work." School authorities are en- 
tirely right in prociu*ing service from 
those who, in the long run^ will give it 
for least compensation. On the other 

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Capital Needs for Education 


hand, if in a given position a man of 
equal native and acquired powers to a 
woman, can, by virtue of his "mas- 
culinity," render a grade or kind of 
valuable service which she cannot, then 
of course school authorities must have 
his services even if he holds out for a 
salary that will enable him to support 
two adults and three children. It is 
almost useless to discuss these vexed 
questions without particularizing. Al- 
ways assuming equal native powers, 
training, and maturity, can a man do 
better or worse work than a woman in 
teaching a kindergarten? In direct- 
ing high school athletics? In teaching 
high school girls singing? In teaching 
woodwork to boys of fifteen? In 
teaching all subjects to fourth grade 
children? In teaching citizenship to 
boys of sixteen? In teaching the car- 
penter's trade to boys of seventeen? 

Similar problems appear in connec- 
tion with mature and young women 
teachers. Assuming equal native abili- 
ties and initial professional training, 
how much superior as a teacher for a 
third grade of forty pupils in a subur- 
ban community is a woman of forty 
over a woman of twenty-two? In gen- 
eral do young women of twenty to 
twenty-five succeed well as teachers of 
seventh grade and eighth grades as 
now organized? Are young women 
just out of college acceptable teachers 
of high school subjects? Do we find 
special types of simple work for the 
younger teachers? 

Now it ought to be obvious that if, 
for particular types of schools or 
courses of instruction men teachers, 
the mature as well as the immature, 
are essential, that these will have to 
be paid substantially larger salaries 
than celibate women of the same age, 
general ability and professional prepa- 
ration. Otherwise these men will seek 

employment in fields which will permit 
them to rear their families appropriate 
to the ideals and standards of a people 
not committed to the practice of "race 

5. Cost of Physical EdiicatUm. — ^Ref- 
erence has already been made to 
current discussion of the need and 
feasibility of physical training as a 
distinct phase of physical education. 
If it should prove expedient to embark 
upon expensive schemes of physical 
training, the largest expenditures will 
doubtless first be required for city chil- 
dren. The probable cost of such work 
is still wholly problematical. 

6. Financing Vocational Education. 
— ^There are those who believe that 
good vocational education can be made 
partly self-supporting. Properly or- 
ganized and conducted vocational 
schools can undoubtedly turn out a 
large amount of productive and even 
marketable work. But it is the present 
writer's conviction that it will prove 
much more in accordance with sound 
pubUc policy to apply the net returns 
obtained for such product to a pay- 
ment of a partial wage for the learners 
than towards the support of their 
schools. The psychological and social 
reasons for such action in terms of 
creation of incentives promoting right 
standards of workmanship and the like 
can readily be understood. 

The Support of Public Educa- 

The ecomonic production and accu- 
mulation of wealth from which must be 
taken by taxation the means of sup- 
porting public education have been 
increasing considerably more rapidly 
than population during the last half 
century. In spite of the absorption of 
free lands we have no reason to infer 
that the same proportion of increase 

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The Annals of the American Acadebtt 

will not take place during the next few 
decades, even taking account of the 
destruction of wealth occasioned by 
the war. Demands for good education 
and abilities to support it easily, prob- 
ably increase at faster ratios than per 
capita incomes or accumulations sub- 
ject to taxations, notwithstanding the 
competition of spending for more visi- 
ble and immediate gratifications. But 
the effect of changes in the distribution 
of either larger incomes or accumula- 
tions — ^towards concentration in a few 
hands or distribution among many — 
on the ease with which public revenues 
can be increased seems yet a very 
obscure subject in the Uterature of 

Two tendencies towards equalizing 
among all the members of state and 
nation the burdens of supporting pub- 
lic education and which have been 
moderately operative in the past may 
have accelerated development in the 
near future. The first of these is an 
enlargement of the area of taxation. 
Historically each family paid for the 
education of its own children; then the 
property holders, with or without chil- 
dren, were taxed to educate the children 
of the community; later, the proceeds 
of county or state taxation are used to 
supplement local effort; and now we 
are considering insistent proposals that 
the nation shall contribute. It is real- 
ized that local communities, rich in 
children and poor in taxable resources, 
have already often reached reasonable 
limits in their efforts to support 

The second tendency is towards the 
discovery of taxable values other than 
real property . Already in many places 
the limits of desirable taxation of real 
property have been reached. Fran- 
chises, incomes, and other values will 
increasingly come in for taxation even 

within states and municipalities. If 
the national government is directed to 
contribute to the support of schools 
its revenues for this purpose will, of 
coiu-se, be derived exclusively from 
other than taxation of real estate. 

Prevention of Waste 

There are many kinds of waste in 
current education and these have 
various sources. Fundamentally the 
largest of these today is found in the 
misdirection of teaching effort, a con- 
dition for which teachers individually 
are only slightly responsible. In our 
schools, and especially in those for 
children from 12 to 18 years of age, 
the actual values of the objectives now 
defined are much more matters of 
belief and faith than of knowledge. 
We spend annually, for example, from 
$7,000,000 to $10,000,000 a year in 
teaching French and German in high 
schools. The methods employed are 
not always good; but a far greater 
source of wasted effort is found in the 
fact that there exist no clear cut objec- 
tives of modem language instruction. 
We allow or even encourage superfi- 
ciality in the learning of these lan- 
guages. Nowhere is it clearly indi- 
cated whether the practicable goal 
held in view is a reading knowledge, a 
speaking knowledge or a writing knowl- 
edge or merely an almost wholly 
inserviceable combination of all three. 
A more thoroughgoing knowledge than 
we now possess of the educational 
needs of American society would 
probably show the wisdom of investing 
even more money than we now spend 
on modem language instruction; but 
it should be spent in adequately train- 
ing a relatively small number of persons 
so that the nation would be assured of 
a reasonable diffusion of interpreters 
(in the cultural and social sense) of 

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Capital Needs for Education 


French, Japanese, German, Spanish, 
and Russian Hteratures, history and 
current thought. 

We spend many miUions annually in 
teaching algebra and geometry to girls 
and boys who will never make any 
genuine appUcation of the results of 
their efforts. It would certainly be 
worth while for Americans to spend 
heavily for the teaching of citizenship; 
but it is very doubtful whether the 
history studies now taught in element- 
ary and high schools "function" 
perceptibly in good citizenship. With- 
out doubt a large part of the money we 
now spend on the teaching of manual 
training, music, English language, and 
science is as completely wasted as was 
the money spent for medicine and 
expert healing service in the dark ages, 
medically speaking, of the eighteenth 
and previous centuries. As regards 
objectives, most education is today not 
farther advanced than was medicine in 
1850, agriculture in 1830 or chemical 
industry in 1800. 

But teachers and other educators 
are only partially responsible for this 
apparent "backwardness" of educa- 
tion ( it is not, of course, a real lagging, 
since the sciences on which education 
must eventually rest are only now in 
process of development). Society has 
not collectively reached the point 
where it is ready to devote to scientific 
study and research the means neces- 
sary to define the objectives and im- 
prove the methods of education. 
Mon^ spent in rightly directed re- 
search in education would even now be 
abundantly repaid in increased econ- 
omy and efficiency. 

In some of the literature of propa- 
ganda recently widely distributed there 
are manifested tendencies to demand 
increased expenditures for education 
in a spirit that is the reverse of 

"thrifty." Millions are asked, not 
for research into the possibiUties of 
"physical training" but for the sup- 
port of physical training itself, not- 
withstanding that even those who have 
given the subject fullest consideration 
can as yet offer us only a host of 
aspirations and beliefs as to what such 
training should be designed to accom- 
pUsh. It is insistently urged that 
teachers' salaries should be greatly 
advanced, and reckless and superficial 
comparisons of teachers' salaries are 
made with those of other workers, 
quite regardless of age, sex, family and 
other economic conditions which play 
so large a part in determining the 
operations of the law of supply and 
demand. No convincing evaluations 
have yet been made of the kinds and 
degrees of service that are now given 
or may, under slightly changed condi- 
tions, be reasonably expected from 
that host upon whom we now so largely 
rely for teaching service — ^namely, our 
brightest and best young womanhood, 
giving a few youthful, pre-marriage 
years to teaching. Propagandists, 
ignoring questions of varying optimum 
standards of teaching service for chil- 
dren of 6 to 10 as against those of 16 
to 18, or of the teaching of geography 
as against the teaching of French, 
claim that we must pay much more in 
the future than in the past for all kinds 
of teaching service. Possibly; but the 
public will increasingly want to be 
shown that educational leaders have 
fairly clear ideas of their specific object- 
ives and that they have carefully 
studied the most effective as well as the 
most economical means of realizing 
them. Young workers, 18 to 25 years 
of age, can produce much valuable 
service in this world. Perhaps they 
can long continue to do so in certain 
fields of teaching, but not in all. If so, 

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82 The Annals op the American Academy 

we must discover their places of max- the demands of economy no less than 

imum usefulness and the character those of efficiency demand, on the part 

and amounts of the training necessary of a people devoted to right ideals of 

to produce, not ideal, but "optimum" "thrift," that scientific studies of its 

service. - best objectives and methods and of its 

Now that public education has be- needed personnel should be extensively 

come so gigantic a public enterprise supported and promoted. 

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An Analysis of the Need of Capital for Transportation 

in the United States 

By HoLcoMBE Pabkes 

Associate Editor, RaxLway Age 

THE American railway plant needs 
at least $8,500,000,000 of capital 
investment today. Within the next 
three years it will need at least $6,000,- 
000,000 and perhaps $7,000,000,000; 
it needs this amount to enable it to 
handle the traffic now offered for trans- 
portation and the additional traffic that 
will be offered within the next three 
years. It needs it to give service com- 
mensurate with its place in our national 
life. It must have it if this nation is to 
weather the reconstruction period and 

There has been an insistent cry lately 
for greater and greater production as an 
antidote for the poison of the bolshe- 
vistic doctrines which have permeated 
organized labor's ranks. In theory 
greater production — ^by means of which 
we may be able to return once more to 
the unhampered development of our 
mdustries — ^may be successful. But in 
practice greater production, to such an 
extent as would be necessary to lead 
labor back to the "honest day's work 
for an honest day's pay" basis, would 
more than likely result in national dis- 
aster — ^if our transportation facilities, 
madequate for our present rate of 
production, are not largely developed. 
In other words, greater production 
without still greater development of our 
transportation plant is impracticable. 

These estimates are perhaps appal- 
ling to the layman. Whatever the 
reaction, a few hours of delving into 
railway statistics, will convince even 
the most skeptical that» based upon 

past records of service rendered by 
given facilities, they are really the 
minimum. As a matter of fact, no one 
can state within many millions the 
need of the rajlroads for capital. In 
testifying before the House Committee 
on Interstate and Foreign Conunerce 
recently. Alba B. Johnson, president 
of the Railway Business Association, 
representing between ^,000 and 3,000 
railway supply companies, said: 

So far as we are aware, nobody has estimated 
for you the magnitude of the improvement to 
existing lines which the public interest requires 
to be made within any specified period in the 
future. If you were in possession of such 
estimates, who shall say how far short they 
would fall of the needs which may actually be- 
come manifest? Even if you had the power 
of divination to make approximate guesses at 
the requirements expressed in physical units 
and in units of work performed, what human 
agency can be brought to bear in the year of 
grace 1010 to compute the cost of carrying out 
such projects? Nobody knows what labor 
and materials will cost. How, then, can any- 
body predict within many millions a year how 
much capital would have to be raised to carry 
out projects approved? 

The Inadequacy of Transportation 

It is unquestionably true that our 
present transportation system is in- 
adequate. Its inadequacy is well 
known to the public because of the 
projection of the railroad problem into 
the arena of common topics. The 
consequent question that naturally 
arises in the minds of those upon whom 
this inadequacy has been impressed is, 
''Why have our railroads been allowed 


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The Annals of the American Academy 

to so deteriorate? " And the question 
remains unanswered unless the in- 
terrogator has the patience to review 
years and years of statistical reports 
throughout which the intensifying of 
regulation, the growing inefficiency of 
labor, rising costs of both material and 
labor and other similar conditions are 
so intermingled that condensation is 
practically impossible. However, the 
one man in the United States, who, 
because of his position and because of 
his access to all of the facts, should be 
able to present a brief answer recently 
attempted to do so. Walker D. Hines, 
Director General of Railroads, in a 
recent address said : 

In the year or two preceding federal oontrol 
of the raikoads, the normal additions to cars 
and other transportation facilities were not 
made because prices were very high, labor was 
scarce and financing on the part of the rail- 
road companies was unusually difficult. 
During the first year of government control 
there was a severe limitation on the amount of 
material that could be taken from other war 
purposes to use for providing additional rail- 
road facilities. When the year 1910 began we 
were being confronted with a new difficulty in 
the way of adding to the facilities, and that 
was that federal control naturally was ap- 
proaching its end from the time the armistice 
was signed. More than that the failure of the 
appropriation on the 4th of March last, which 
had been sought by the Railroad Administra- 
tion to enable it to meet its obligations already 
incurred, postponed the construction of even 
the 100,000 cars that had been ordered, because 
they could not be paid for, and the equipment 
companies naturally had to slow down on their 
production. The railway companies were 
unwilling to furnish money for new equipment 
because of uncertainty as to their own future, 
so the result has been that the Railroad Ad- 
ministration since the year of 1919 has not been 
in a position to provide any additional facili- 
ties except those which were needed, as an 
emergency measure, unless the railroad com- 
panies were willing to furnish the money, and 
the result is that at the present time the Rail- 
road Administration has been unable to order 
or obtain authority to order any cars in addi- 
tion to the 100,000 that were ordered last year. 

So that that inadequacy of facilities, which 
were inadequate before federal control began, 
and which have become increasingly inadequ- 
ate since that time, principally accounts for the 
fact that the facilities now are not sufficient to 
handle all of the enormous business which is 
offered to the railroads of the^oountry. 

Transportation Requirements of 
THE Future 
So much for the fundamental causes 
of the present inadequacy of railroad 
facilities. What of the future? The 
cry for greater and greater production 
will undoubtedly be answered. As a 
matter of fact it has already caused 
enormous advances in the tonnage of 
commodities of every description of- 
fered to the railroads for movement. 
The result will be that the public in- 
terest will require that certain stand- 
ards of service, of maintenance and of 
development be adhered to. It is safe 
to assume that these standards will be 
higher than those maintained before 
our unfortunate experience in govern- 
ment control and certainly much higher 
than those maintained during the past 
two years. The absolute minimum 
capital investment that will be re- 
quired in the public interest, therefore, 
will be that sum which will place the 
railroads of the country in a position to 
fill successfully the nation's present 
transportation requirements plus what- 
ever capital is necessary to provide 
facilities for handling any future in- 
creases in production. Computed 
from this viewpoint and on the basis of 
the past annual developments in rela- 
tion to the service rendered, it is pos- 
sible to arrive at a figure which may be 
said to be the minimum amount of new 
capital required by the railroads. 
There are several means of arriving at 
such an estimate. It may be estimated 
(1) on the basis of the increases which 
have occurred during normal periods, 
in the capital investment and in the 

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Capital Needs for Transportation 


amount of traffic handled, and (i) by 
finding the deviation, during the 
period of government control, from 
averages established for capital ex- 
penditures for certain purposes during 
normal periods, to which must be 
added the approximate capital re- 
quired to maintain the averages during 
the coming year and to provide the 
additional facihties necessary to give 
adequate service for increased traffic. 

The Deficit in Capital Investment 

AS Compared with Traffic 


Mr. Hines, in outlining the causes of 
the inadequacy of service at the present 
time, said : "In the year or two before 
this country entered the war, the rail- 
way companies were unable materially 
to increase their facilities because of 
the difficulty of raising new capital." 
The intimation is, of course, that the 
trouble began in 1915. During the 
ten years, prior to this time, or from 
June SO, 1905 to June 30, 1915, freight 
tonnage (ton-miles) increased 61 per 
cent and passenger traffic (passenger- 
miles) increased 36 per cent. During 
the same period the investment made 
in new facilities was $5,300,000,000 
or 44 per cent. Since June 30, 1915, 
the increase in freight traffic has been 
approximately 57 per cent and the in- 
crease in passenger traffic 32 per cent 
and the new investment in facihties 
but $1,900,000,000. The discrepancy 
during the past four and a half years 
can easily be seen. If the investment 
during this latter period had been as 
great in proportion to the increase in 
ifaffie as it was during this ten-year 
period, it woiJd have been approxi- 
mately $5,000,000,000. These figures, 
however, are based upon the purchas- 
ing power of a dollar between 1905 and 
1915. Since that period this purchas- 

ing power has been greatly diminished. 
The 1905-1915 dollar during the 1915- 
1919 period had but approximately 
two-thirds of its former value. 
Equated on this basis the investment 
during the last four and a half years 
has been but $1,300,000,000. Taking 
this last figure as the actual investment 
during this period, it will be seen that 
capital investment in railways has 
fallen behind approximately $3,700,- 
000,000 in four and a half years. At 
the present time, however, the purchas- 
ing power of the dollar has been still 
further diminished and we now find 
that it requires two dollars of capital 
investment to accomplish the same 
results that one dollar accomplished 
during the period from 1905 to 1915. 
If this deficiency in capital investment 
is to be made up now, and on the basis 
of the purchasing power of a dollar in 
1919 or 1920, it will be found that it 
will take twice as much money, or 
$7,000,000,000 to make up the defi- 
ciency in railroad investment which has 
been allowed to accrue since 1915. 

The statement has already been 
made, however, that it would require 
$3,500,000,000 rather than $7,000,000,- 
000 to enable the railroads to provide 
adequate transportation facilities to- 
day. Substantial progress has been 
made during this four and a half year 
period, especially in 1916 and 1917, 
in increasing the efficiency of the 
present transportation plant. Car 
loading has been greatly increased, 
economies have been effected in the 
operation of cars and, since the Rail- 
roads' War Board was organized in 
1917, facilities have been pooled and 
certain advantages accruing from uni- 
fied control have been utilized. For 
this reason it is probable that the 
estimate of $7,000,000,000 is some- 
what exaggerated. In order to be 

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The Annals of the American Academy 

certain that this development of ef- 
ficiency is recognized, one half of this, 
amount of $7,000,000,000 or $3,500,- 
000,000 has been taken as representing 
the existing deficiency of investment. 
This compilation brings us up to the 
present year. Any estimate at the 
present time as to the capital needs of 
railways during the year 1920 will in all 
probability be greatly in error for the 
reason that it is practically impossible 
to foretell what the condition of indus- 
try generally will be and how far 
reaching will be the effects of the cry for 
greater production. As already indi- 
cated the average annual capital in- 
vestment during the years from 1905 to 
1915 was approximately $580,000,000. 
Equating this sum on the basis of the 
present purchasing power of a dollar 
it will be seen that it would require at 
least $1,000,000,000 a year to provide 
the same amount of facilities during 
future years as were provided on an 
average diu*ing each year of this 
ten-year period. Were the existing 
deficiency of facilities to be made up 
during the next three years and in ad- 
dition the normal growth of trafBc 
during these three years provided for, 
the total investment in these years 
would be from $6,000,000,000 to 
$7,000,000,000. This estimate is based 
on the assumption that traffic will 
not increase more rapidly than it did 
during the period from 1905 to 1915. 

PORTATION Faciuties 

To substantiate the estimate al- 
ready made and to indicate why and 
where certain capital expenditures are 
required, it might be well to investi- 
gate briefly the relation of the develoj)- 
ment of certain transportation facili- 
ties during normal periods of years and 
during the past four abnormal years. 

The four items for which a large 
portion of capital expenditures are 
made are: mileage, freight cars, pas- 
senger cars and locomotives. Briefly 
the increase in the railroad mileage of 
the United States between 1905 and 
1915 was approximately 40,000 miles 
or an average of 4,000 miles per year. 
Contrasted with this is the fact that 
during the past four years there has 
been practically no increase in mileage 
at all. It is true that during these four 
years, certain new mileage has been 
built, but the miles of road abandoned 
or torn up during that period have 
fully equalled the total number of new 
miles. K the average number of new 
miles had been constructed during 
each one of these four years we would 
have at the present time approximately 
16,000 additional miles of line. 

Insofar as freight cars are concerned, 
there has been an increase in their 
number in service of only 5 per cent 
during the last four and a half years as 
compared with an increase in the 
freight traffic of 57 per cent in the same 
period. Contrast this increase in traf- 
fic and the number of freight cars in 
service with the records established for 
the ten years ending with 1915 and the 
deficit is only too apparent. During 
this latter period the freight traffic of 
the country increased 61 per cent and 
the number of freight cars in service 
increased 86 per cent. The average 
cost of a freight car today is $3,000, and 
the present deficiency of freight cars is 
at least 300,000. 

Practically the same conditions pre- 
vail in the matter of passenger cars. 
Between 1905 and 1915 the passenger 
traffic was increased 45 per cent and 
the number of passenger cars in service 
36 per cent. Since that time the in- 
crease in passenger business has been 
approximately 32 per cent and there 

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Capital Needs for Tkansportation 


has been practically no increase in the 
number of passenger cars. The de- 
ficiency in the number of passenger 
cars must be 10,000» and the average 
cost per car now is approximately 

In the matter of locomotives similar 
conditions prevail. In the period from 
1905 to 1915 the number of locomotives 
in service was increased approximately 
80 per cent. Since that time» and in 
spite of the enormous increase in 
traffic, there has been practically no 
mcrease in the number of locomotives. 
A locomotive today may be said to 
cost $50,000; and if we take the con- 
servative view that only 10 per cent 
more locomotives are needed, this 
means a deficiency in locomotives of 
about 7,000. 

To make any comprehensive esti- 
mate, it is necessary to compute not 
only the capital requirements for 
these four items, but also for a large 
number of other as important or even 
more important items, such as sidings, 
yards, shops, stations, etc. 

The Field for Capital Investment 

It is not possible to discuss the neces- 
sity for the investment of capital in 
transportation without taking cogni- 
zance of the chances of this investment 
actually being made in the future. 
Whether it will be made or not depends 
a great deal upon the provisions of 
such legislation as will be passed by 
Congress. At the present time the 
Cummins Bill prepared by Senator 
Cununins, chairman of the Senate 
Committee on Interstate Conunerce, 
appears to be receiving the earnest 
consideration of law makers at Wash- 
ington as the basis of whatever legisla- 
tion may be framed. Insofar as its 
relation to the investment of capital in 
transportation is concerned, the bill 

provides that the Interstate Commerce 
Commission shall permit rates suf- 
ficient to produce a net annual operat- 
ing revenue of 5) per cent figured on 
the basis of the property of the rail- 
roads of each territorial group as 
valued by the commission. An ad- 
ditional i per cent may, in the discre- 
tion of theconunission, be permitted to 
be earned and invested in unproduc- 
tive improvements. The vital ques- 
tion that this provision raises is : Will 
capital flow into this field of investment 
under these conditions in sufficient 
quantity to gradually eliminate this 
deficit in development which has ac- 
crued since 1915 and provide an ade- 
quate system of transportation for the 
country in view of the greatly increased 
traffic which will undoubtedly be of- 

Certain interests claim that such 
a provision will enable the more pros- 
perous roads to earn from 6 to 15 
per cent while the less prosperous 
roads will be protected by a minimum 
return of 5i per cent. The provision 
states, however, that if a raiboad re- 
ceives an income of over 6 per cent, al- 
lowing i per cent to be turned to un- 
productive improvements, the excess is 
to be divided between a reserve fund 
and a general railroad contingent fund. 
Therefore, other interests maintain that 
this division of so-called ''excess earn- 
ings" will result in practical financial 
starvation. The result; has been that 
there has been much opposition to this 
portion of the measure and it is not im- 
probable that it will be greatly modi- 
fied, especially in view of the necessity 
for capital investment to again bring 
our transportation system to something 
approaching a state of adequacy. 
Fortunately this phase of the bill will 
not be foreclosed by favorable action 
upon the part of Congress. The rate 

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88 The Annals of the American Academy 

of return can be changed if experience transportation facilities. To provide 

proves that it is inadequate to attract for this greater development of trans- 

the necessary capital. portation facilities enormous sums 

Increased production has been urged must be invested in our transportation 

as the means of successfully combating plant. It rests upon Congress to 

industrial unrest. To make this move- pass such legislation as will attract 

ment succe&sful there must be a still capital into this particular field of 

greater simultaneous development of investment. 

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American Farmers' Need for Capital 

By Edward H. Thomson 
President of the Federal land Bank, Springfield, Mass. 

THE American fanner is too gen- 
erally thought of wholly as a 
laborer. He is both a laborer and a 
capitalist. The returns from capital in- 
vested in the farm business are nearly 
equal to those from his labor. The 
average investment per farm according 
to the 1910 Census is $6,444 which, if 
considered on the basis of 5 per cent, 
would yield an income of $322. Inves- 
tigations by the several State Agricul- 
tural Colleges and by the U. S. Depart- 
ment of Agriculture have shown that 
the average annual labor income de- 
rived by the farmer is from $300 to 
$500 depending upon the region and 
the general conditions covering the 
particular area. In addition to this 
the farmer has the use of the farm 
house to Uve in and those products 
which the farm furnishes towards his 
family Uving. The needs of the Amer- 
ican farmer in the way of capital have 
never been adequately understood and 
in most cases he has been left to get 
along with what money he could secure 
either by unfavorable terms on mort- 
gages, or by paying high interest rates 
on short term loans. 

Capital Invested in American 

Table I shows the total value of 
farm property in the United States in 
1910 and its distribution in th6 way of 
land, buildings, equipment, and live 
stock. The increase in amount from 
1900 to 1910 is 100.5 per cent, the 
increase varying from 118.1 per cent 
in land to 60.1 per cent in live stock. 

The forthcoming Census will un- 
doubtedly show a still greater in- 
crease in all forms of farm property. 
It would not be surprising if the total 
reached $100,000,000,000 in farm prop- 
erty in the United States in 1920, a cer- 
tain percentage of which would be due 
to inflated or depreciated currency 
values existing at this time and the 
consequent inflation in land values in 
some parts of the country. 

The manner in which the farmer has 
his capital invested varies according to 
the kind of farming and the land values 
prevailing in a particular region. For 
instance in the central or corn belt 
states where com, small grain, and hay 
are the prevailing crops, and where live 

Table I 
Value cf Farm Property in the U. S. (1910 Census) 

Value of Farm Property 
in U. S. in 1910 

Per cent of total 
value represented by 

Aver, value 
per farm 

Land $28,475,674,169 







Buildings 6,825,451,528 

Implements and Machinery . . . 1,265,149,783 
Domestic Animals 4,925,173,610 





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The Annals of the American AcADEBir 

stock f onus only a small part of the 
business, fully 90 per cent of the total 
investment is represented by land and 
buildings, and the balance in equip- 
ment, live stock, and supplies. In 
some of the eastern states, particularly 
in the grazing areas where land values 
per acre are comparatively low and 
where the major business is dairying, 
not over 60 per cent to 65 per cent of 
the total investment would be repre- 
sented by land and buildings while 
possibly 20 per cent would be repre- 
sented by Uve stock. Thus the amount 
of money in proportion to the total 
investment that a farmer might borrow 
on the security of his real estate would 
vary somewhat according to the region 
and type of farming followed. 

Relation of Farm Capital to 

There is a distinct relation between 
the amount of capital invested in the 
farm business and the income received 
by the farmer. This means that the 
size of the business has a direct re- 
lation to the income. Data given 

Tablb n 

Capital Rdated to Labor Income — Farms Oper- 
ated by Owners — Northern Lieingeion County, 


No. of 

Aver. Labor 



5000 and less 





















in Table II as shown by Warren in 
Farm Management are for a district in 
northern Livingston County, New 
York. It is noted that the average 
labor income on 87 farms with $5,000 

capital or less is $291 , whereas the aver- 
age income of 62 farms with $15,000 
to $20,000 capital is $1,001 . By labor 
income is meant the sum received by 
the farmer after the farm expenses have 
been paid and after deducting 5 per 
cent interest on the capital invested. 
In addition to this he had the use of the 
farm house and such products as are 
furnished by the farm. Similar inves- 
tigations made in the com belt and the 
cotton belt indicate the same relation. 
This is to be expected, for much greater 
economies of production through more 
efficient use of men, teams, and ma- 
chinery are obtained on the larger 
farms, resulting in greater returns to 
the farmer for his supervision and 
labor. Such data indicate the desir- 
ability of a farmer having adequate 
capital commensurate with his ability 
as a manager. In veiy few instances 
do we find a farmer, even of unusual 
ability, able to make a substantial in- 
come through the efforts of labor alone. 
The small farm intensively cultivated 
is desirable where labor is cheap and 
where markets for such products are 
near at hand. 

The typical American farm is devel- 
oped on the basis of product per man 
rather than product per acre, a basis 
wholly unlike the agriculture of the 
European and Oriental nations. In 
the main, the typical American farm 
has developed since the event of im- 
proved machinery and means of trans- 
portation. In New England and other 
eastern states farms that were devel- 
oped prior to this period and on the 
hand labor basis have been unable as a 
rule to meet the competition of the 
larger and more cheaply operated farms 
in the central and western states. Only 
by completely changing the type 
of farming, in the way of truck crops 
and dairying to supply the large manu- 

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Capital Needs of the Farmer 


fa€turing centers in New England, has 
the eastern farmer been able to suc- 
ceed. Hundreds of thousands of acres 
of land not suited to such a change 
have reverted to woodland and tynber.* 
Capital is even more important to 
the tenant farmer than to the farm 
owner. Data in Table III, also 

Table III 
Capital RdaUd to Labor Income— Forma Oper- 
ated by Tenanie — Northern Livingeton County, 

N. r. 

Capital of 

Number of 

Aver. Labor 




1000 or less 















More than 5000 



taken from Warren's Farm Manage- 
ment, show the relation between the 
tenant's capital and the annual income 
received for his labor. As the tenant's 
capital is wholly invested in equip- 
ment, live stock, and supplies, he 
should be able to operate the same 
sized farm as the farm owner who had 
approximately four times that capital. 
We have noted that the farm owner, 
with from $15,000 to $20,000 invested, 
received an average income of $1,001, 
and from Table III we find that ten- 
ants with $4,000 to $5,000 receive an 
income of $869. The addition of 
$1,000, therefore, to the tenant's capi- 
tal gives him the possibility df the 
same increase in income as the addition 
of from $4,000 to $5,000 to the farm 
owner's capital. Data from several 
sources on the returns to landlords in- 
dicate only a moderate rate of income, 
averaging from 3 to 5 per cent, while 
capital invested in equipment and in 
the hands of an equally competent 
operator returns from 15 to 20 per cent. 

The lesson is plain that a young man 
with a small amount of capital can do 
very much better financially by rent- 
ing than he can by buying, leaving out 
of account the benefits of home owner- 
ship and the prospective rii^e in land 
values. As a matter of fact, this is the 
usual procedure in acquiring a farm: 
first he works as a hired man; second, 
as a tenant; and third, acquires a farm 
' of his own. No land should be held 
continuously for renting purposes, but 
we need some tenant farms in this 
country as stepping stones to farm 

Use of Capital for Farm Improve- 

One of the greatest handicaps to a 
farmer who is an efficient manager is 
the lack of capital to make adequate 
improvements to his land and build- 
ings. Probably no form of investment 
pays better returns than tile drainage 
and yet many farmers have to wait a 
long period of years before they can 
accumulate sufficient funds to warrant 
making such an improvement. If 
funds were available to competent 
farmers they would be able to make 
their farms much more profitable from 
the very outset instead of waiting the 
best part of their lives before making 
these improvements. One of the pri- 
mary factors of successful farming is the 
yield of crops. If it takes thirty bush- 
els of com to pay for growing an acre 
of corn and the grower obtains thirty- 
one bushels, he has a margin of profit 
of one bushel. If by tile drainage he 
can increase this yield to forty bushels 
and the added investment increases the 
cost to only thirty-three bushels, he 
has a margin of profit seven times as 
great. In the same way, by the addi- 
tion of more U ve stock he is enabled to 
market his crops to better advantage 

Digitized by 



The Annals of the Amebican Academy 

and to keep his labor employed through- 
out the year and increase his profits 
generaUy, but so often he is handi- 
capped by insufficient farm improve- 
ments in the way of buildings. 

Large amounts of capital are needed 
for the reclamation of farming areas 
when economic conditions show the 
need for such work. Bringing new 
farming areas into use when the open- 
ing up of these areas will interfere with 
the operation of existing farms and 
make them less profitable is not a 
sound undertaking. But when the 
needs of the people and the nation 
demand an increase in area and addi- 
tional food products, capital can be 
very profitably employed in the way of 
reclamation, drainage, irrigation, and 
the like. In the past when thinking of 
reclamation, attention has always been 
directed to bringing into use new lands 
generally on the frontiers and far re- 
moved from markets. There is a 
possibility that some of the most prof- 
itable reclamation would be in restor- 
ing some of the semi-abandoned lands 
in the eastern and southern states, 
lands which are desirably situated as 
regards highways, transportation, and 
markets, but which are temporarily 
out of the field of production by reason 
of misuse or mismanagement during 
some period in the past. For instance, 
the addition of a ton of limestone and 
a certain amount of tile drainage on 
many hill farms ii\ southern New York 
and northern Pennsylvania would 
work wonders towards putting such 
lands on a profitable paying basis. 

Forms of Capital Needed by 

There are three distinct forms or 
types of loans needed by farmers. 
First, the long term or mortgage loan 
secured by real estate; second, a shorter 

time loan or second mortgage^ based 
partly upon real estate and partly 
upon personal property; third, short 
termy or crop loans. Funds for the 
first t^rpe of loan have been supplied 
through a great many agencies and 
by private investors. Today, the 
Federal Land Banks, are adequately 
meeting the needs of farmers for this 
type of loan and on a basis that is 
most advantageous to the borrower. 
The Land Bank loan is made at a low 
rate of interest, and has a long time for 
repayment, as worked out through the 
amortization plan. The success of 
the Federal Land Banks in the past 
two years is the best proof of the sound- 
ness of the system and the way they 
are meeting the needs of farmers for 
long time mortgage loans. The act 
should be amended to permit a maxi- 
mum loan of $25,000 instead of $10,000 
to one borrower, for at present the 
latter figure is inadequate even for 
the two man farm in most agricultural 
regions. The law under which the 
Federal Land Banks operate permits a 
maximum loan of only 50 per cent of 
the appraised value of the land and 
20 per centof the value of the buildings. 
Altliough this is a most desirable 
feature of the Farm Loan Act, assuring 
as it does a high degree of safety and 
resulting in a low rate of interest, yet 
the Farm Loan Act does not meet the 
needs of the young man with limited 
capital who wishes to begin farming. 
Such a young man usually needs addi- 
tional fimds based on the remaining 
security of the farm and oftentimes 
upon personal property in the form of 
live stock and equipment which he 
himself may own. For instance, a 
farmer buys a farm completely 
equipped for $12,000, of which $8,000 
represents the value of land and build- 
ings. He may have $4,000 in cash 

Digitized by 


Capital Needs of the Farmer 


which he uses to pay for the personal 
property in the form of live stock, 
machinery, horses, etc. He is able to 
secure from the Land Bank, a loan of 
about $4,000 or $4,500 as first mort- 
gage on the farm, valued at $8,000. 
He still is short the $3,500 or $4,000 
necessary to complete the purchase. 
In some instances the seller is willing 
to take back a second mortgage for 
this amount. In other cases very 
capable young men are unable to 
finance a farm by reason of having no 
way to obtain the f imds for this second 
mortgage which would be secured 
partly by the farm itself and partly by 
the personal property which the bor- 
rower owns. This second mortgage 
will carry a higher interest rate and 
will be repaid in larger installments 
than the first mortgage. When given 
by a responsible party, experienced in 
the farm business, it is many times 
almost as good a loan as Ihe first 
mortgage. This second mortgage, 
however, is not of the same nature as 
the first mortgage loan for an essential 
part of its security depends upon the 
mtegrity and management of the 
borrower. Although the personaUty 
of the appUcant is an important feature, 
yet the Federal Land Bank must 
primarily consider the value of the 
farm, in view of the length of time that 
the loan is allowed to nm; the personal 
element must be largely discounted for 
the farm may change hands several 
times before the mortgage is appre- 
ciably reduced by payments. There 
are difficulties in the way of national 
legislation which will provide funds for 
these second mortgages. They par- 
take too much of a local character and 
must be handled by an agency which is 
in active and close touch with the bor- 
rower at all times. There is a possi- 
bility that as farmers become better 

organized and as all their cooperative 
interests become centered through the 
Farm Bureaus some system of provid- 
ing funds on second mortgages may be 

The third type of loan needed by the 
farmer is a short term or crop loan, 
usually for three months or six, or 
even a year. Such loans are based 
largely upon the integrity and ability 
of the borrower and being of a local 
character are almost entirely a function 
of the local banks. In the strictly 
agricultural regions local financial in- 
stitutions are meeting the needs of 
farmers along this line. In those dis- 
tricts where manufacturing and indus- 
trial agencies play an important part 
the amount of funds available for the 
farmer for these short term loans is 
exceedingly limited. Moreover, it is 
often the young man whose ability 
and integrity may be of the best but 
who on account of not having estab- 
lished himself in the region is unable 
to secure this short term credit, who 
is in the greatest need of it. These 
short term loans should not have the 
privilege of a long period of repayment 
for they are made primarily to pay 
current expenses. If a farmer cannot 
meet such obligations at the end of 
each year the chances are that he is 
unsuccessful in his management. The 
short term credit to the farmer must 
be made by an agency which comes in 
contact with the borrower personally 
and who can watch his daily opera- 
tions. The usual procedure in securing 
these short term credits has been for 
the farmer to give the bank a note 
with one or more endorsements. Such 
practice is undesirable in many in- 
stances. Since the farmer has become 
an investor in government securities 
he is in a position to use these as col- 
lateral on a promissory note for short 

Digitized by 


d4 The Annals of the American Academy 

time loans. This practice will encour- few hundred dollars for a short period 

age thrift on the part of the farmer to in his business. In this way he will 

save and be able to purchase Liberty not need to bother his neighbors or his 

Bonds and other government securities friends by asking them to sign his note 

merely for the sake of having such and he will immeasurably improve his 

collateral at hand when he needs a credit by such a procedure. 

Digitized by 


Capital Needs for American Industrial Development 

By Francis H. Sisson 

Vice-President, Guaranty Trust Company of New York 

to the same end. Normal productive» 
constructive industrial enterprise has, 
therefore, suffered; we are far behind 
in our savings, in the proper sente of 
the word. A real deficit in our indus- 
trial equipment has been accumulated. 
With a growing population (and there- 
fore increased consuming power) and 
greatly expanded foreign demand for 
our goods (because of the aggravated 
shortage of savings abroad), our indus.- 
try finds and will find it difficult to 
meet demands upon it, if its need for 
capital cannot be met by a forthcom- 
ing supply. Incidentally, the present 
high price level both appears as a re- 
sult, in part, of this shortage and neces- 
sitates increased investments in terms 
of dollars, for any ' development and 
expansion since everything that must 
be bought must be paid for at the 
high prices that obtain. 

The Building Industry, No better 
illustration of the nature of the situa- 
tion could be given than the building 
industry. Everywhere a shortage of 
buildings of various kinds is evident: 
dwellings, governmental and public 
buildings, industrial plants, and other 
sorts of structures. With the concen- 
tration of industrial activity on work 
of all kinds for the government during 
the greater part of 1917 and 1918, it 
was necessary to forego a large part of 
normal building. The deficit, how- 
ever, must be made up and normal 
development resumed at the earliest 
possible moment, if much personal 
suffering and industrial difficulties are 
to be avoided. 

Building activity reacts, of course, 

PROGRESS is the watchword of 
American industry. The in- 
dustrial development achieved in this 
country during the last half-century 
has been nothing short of miracu- 
lous, and this growth, of course, has 
been accompanied by a general in- 
crease in prosperity, for the increase in 
productive power has stimulated a 
similar increase in consuming power. 
Many things that fifty years ago were 
unheard of — of which the automobile 
is perhaps the most striking example — 
are now articles of the widest use. 
Many luxuries of Civil War days are 
today in the category of necessities, or 
almost necessary comforts, among all 
classes of society. But this wonder- 
ful improvement would not have been 
possible if production had not steadily 
exceeded consumption. The vast 
natural resources of this country have 
been made available because men and 
women have both worked and saved 
and because the surplus created by 
their energy and thrift has made possi- 
ble productive processes, which have 
put these resources at the service of 

The Need for Capital Investment 

Now the world has just emerged 
from an era of concentrated destruc- 
tive activity. Men and materials 
have been destroyed and industrial 
energies turned from normal sorts of 
production to the turning out of 
munitions and other commodities to 
be shot away or otherwise annihilated. 
For the better part of two years this 
country engaged much of its energies 


Digitized by 



The Annals of the American Academy 

on various other industries and affects 
the demand for their products: steel, 
lumber, brick, cement and housefittings 
at once suggest themselves . A spurt of 
building would, therefore, require ex- 
tension of activities in these allied lines 
and force them to seek new capital to 
meet their requirements. 

Motor Vehicles. The war was un- 
questionably destructive in its effects 
but it did teach or emphasize some 
valuable economic and industrial 
truths. One of these was the useful- 
ness and adaptability of motor vehi- 
cles . No country is likely to gain more 
from this than the United States, if 
full advantage is taken of the op- 
portunity at hand. For 1919 the 
estimated production of passenger 
motor cars in this country will be more 
than 2,300,000, or double that of 1918. 

The influence of American partici- 
pation in the war is once more evident 
in the great drop in production from 
1917 to 1918. The probable doubling 
in the following twelvemonth, both 
emphasizes the making up of the deficit 
of production and increased war-time 
consumption and points to the greatly 
increased demand, both domestic and 
foreign, that has resulted from the 
lessons brought home by the war. The 
field for commercial trucks seems 
destined to grow steadily, and the 
need for capital to occupy this field will 
increase proportionately. 

Nor must omission be made of the 
highly important allied line of tractors. 
Here, above all else, the war provided 
a stimulus. The almost superhuman 
feats of "caterpillars" over the battle- 
fields of Europe, on artillery or other 
tractors or, still more, on tanks, 
proved beyond all doubt their great 
adaptabiUty for various uses. 

The world-wide shortage on the one 
hand of man-power and on the other 

hand of foodstuffs, has made it im- 
perative to substitute whenever pos- 
sible in agriculture the marvelous 
powers of tractors for the more Umited 
powers of men and beasts. In this 
same connection should be mentioned 
the inevitable increase of demand that 
will be felt, in the United States and 
abroad, for agricultural machinery of 
all sorts. American products are in 
demand in all countries where agricul- 
ture has passed the primitive stages, 
and here again the replacement of 
man-power by efficient machinery is 
certain to take place as a result of the 
destruction of war. 

A moment's reflection will remind 
the reader of the number of industries 
affected by conditions in the automo- 
bile industry, the diversity of demand 
for the products of these industries, 
created by the production in a single 
year of well in excess of two billion 
dollars worth of motor vehicles, and 
their uses. Here is a demand en- 
tirely new both in quantity and quaUty, 
differing from that for building mate- 
rials in so far as the latter is one that 
has had to be reckoned with in the 
past. Expansion of production facili- 
ties is therefore inevitable to meet this 
growing demand. 

Mineral OH Production. Closely al- 
lied to the remarkable development of 
motor transportation is that in mineral 
oil production. The run of crude oil 
for August, 1919, was 32,362,057 bar- 
rels, or at an annual rate of 388,000,000 
barrels. During October, 1919, there 
were 157 oil companies organized, with 
a total authorized capitalization of 
$613,610,000. No small part of this 
future, to be sure, represented securi- 
ties issued or to be issued to take over 
and hold those of already existing com- 
panies; nevertheless, the magnitude of 
the figures is an interesting index of the 

Digitized by 


Capital Needs fob Industrial Development 


present position of the oil industry in 
the capital market of this country. 

The vast prospecting and producing 
activity in oil is obviously in answer 
to a highly intensified demand. This 
demand is due to a number of causes, 
of which the increased use of motor 
vehicles is but one, although the most 
important. A second is the high price 
of coal, which makes manufacturers 
seek elsewhere for fuel. A third is the 
growing substitution of oil for coal as 
fuel, apart from questions of present 
high prices and based on general con- 
siderations of fuel efficiency. Ships 
and manufacturing and other plants are 
being equipped with oil-consuming 
furnaces in place of coal burners. 
There seems to be little doubt of steady 
growth in this important industry of 
fuel-oil production and of increased 
capital needs for the development of 
the industry. 

The search for a substitute for coal as 
a generator of power has not been con- 
fined to increased use of petroleum. 
More and more a:ttention is now being 
given to the possibilities of the de- 
velopment of the "white coal" re- 
sources of the country; in other words, 
of water power. For a number of 
years the discussions of the whole prob- 
lem of conservation has effected legisla- 
tion in regard to private development 
of water power and this developinent 
has been not a httle retarded by the 
failure to provide for legitimate ex- 
ploitation of the national resources in 
this field. With the industrial situa- 
tion what it now is, living costs high, 
coal shortage world-wide and industry 
impatient to use to the full all available 
means of progress in order to increase 
production, there is a growing demand 
for the harnessing and employment of . 
the tens of millions of horsepower that 
are now annually going to waste. 


More Uberal legislation in the near 
futiu« seems not unlikely, which would 
promptly come into a demand for cap- 
ital to take advantage of the opportu- 
nities thus provided. 

New Industries, The war brought 
into existence or prominence a number 
of industries that were previously either 
non-existent or quite in their infancy. 
There comes to mind at once the dye 
industry. Not only the cutting off of 
German supplies of dyes and other 
chemicals concurrently with a demand 
of great proportions for these products, 
but the development of certain indus- 
tries and manufactures whose chief 
products or by-products are allied to 
those of the dye industry, brought into 
beingafull-fledgedindustry in this field. 
Without going into the possibilities or 
merits of protection for these new man- 
ufactures, it may be said that indica- 
tions point to a very great probabiUty 
of permanence for an American dye 
industry, efficient and self-supporting, 
which will be able to make legitimate 
and increasing demands on capital for 
its continued maintenance and growth. 
Other "war industries," such as the 
manufacture of fibre silk, chemicals 
other than dyes,andglass, for instance, 
have been established and give every 
promise of permanence in our national 
industrial scheme. 

Production of textiles other than 
silk, from both animal and vegetable 
fibres, is constantly increasing in this 
country, and domestic and foreign de- 
mands are increasingly being met by 
the products of American textile manu- 
facturers. The proportion of American 
cotton consumed by our own mills has 
for many years been growing, and 
further increase is the natural expecta- 
tion. Inability of European producers 
to meet demands made on them is fur- 
nishing to this American industry as to 

Digitized by 



The Annals of the American Acadeict 

others an impetus that should bring 
about a permanent and not merely a 
temporary growth. 

IndtLstrial Machinery. Anierican 
machinery, machine tools, and hard- 
ware generally^ have never before been 
so sought after in all parts of the world 
as they are today. The manufacture 
of such articles is obviously not a 
war industry, but the conditions 
that at present obtain are clearly a 
product of the war and of the inability 
of the great European industrial na- 
tions to meet the usual requirements 
put upon them by other nations for 
products of this sort. While this may 
be considered primarily an aspect of 
foreign trade, in so far as it reacts on 
domestic production and needs for 
capital, it deserves to be mentioned. 
It has, further, both domestic and for- 
eign aspects. In this age of steel all 
industrial progress means an intensified 
demand for steel products. Buildings, 
automobiles, power plants, mining 
operations, factory manufacture, rail- 
roads, — all these and almost every- 
thing else that might be mentioned has 
as its basis the use of steel. In this 
country and abroad there is much de- 
ferred maintenance to be taken care of, 
in both industrial plants and railroads. 

The Railroads. The railroads, which 
have been under-maintained during 
and as a result of the war, must have 
hundreds of millions of dollars in new 
capital. It has been estimated, in 
fact, that these arteries of transporta- 
tion will require a billion dollars a year 
for a number of years to purchase 
needed equipment and to expand their 
facilities sufficiently to keep pace with 
the rapid development of the country. 
And it is absolutely essential that this 
new capital be made available to the 
railroads, through the enactment of 
proper legislation which will enable the 

roads to earn a fair return on their in- 
vested capital and thereby re&tablish 
railroad credit. Otherwise, business in 
general throughout the country will 
inevitably suffer and our national pros- 
perity will be impaired. 

American steel plants and machine 
shops will be called on to supply, both 
here and elsewhere, tools of production 
and engines of transportation for the 
reestablishment of normal conditions. 
In the same class is the demand for 
manufactured products of various 
kinds that results from the era of ship- 
building and ship operation upon which 
we have as a nation entered and which 
gives promise of continuance. The 
proportions of our foreign trade and 
its world-wide character afford the 
highest incentive to domestic oi>eration 
of shipping lines that has ever been 
presented to our citizens. 

Foreign Trade, Our foreign trade 
itself deserves mention at this point. 
There is no question as to the desirabil- 
ity of maintaining an extensive foreign 
trade, and at the same time there is no 
question that credit must play a large 
part in the financing of such trade. 
Neither banking institutions nor mer- 
cantile nor manufacturing concerns 
can afford to extend necessary credits 
abroad unless the domestic financial 
situation is such as to warrant the di- 
version of funds to this end. And it is 
clearly not possible for the domestic 
situation to be all that it should be un- 
less the basis for the extension of all 
credit, namely, real thrift and saving, 
is present. 

There looms on the horizon, in con- 
nection with our foreign trade, the 
question not merely of current short- 
term credits for ordinary transactions, 
Jbut the question of long-term credits 
to the European nations; in other 
words, the question of investments in 

Digitized by 


Capital Needs for Industrial DEVELOFBfBNT 


foreign securities. The commitments 
of the United States are such, and its 
interest, both selfish and unselfish, in 
the welfare of our former AUies is such 
that it seems inevitable that we should 
extend to them the financial help which 
they need in order to return to some- 
thing like a normal basis of production 
and a normal balance between produc- 
tion and consumption. This, there- 
fore, affords still another channel for 
the judicious exercise of thrift and 
investment power. 

There have now been suggested some 
of the outstanding probable needs for 
capital for industrial development in 
the United States . The list is far from 
exhaustive, — ^in fact, merely suggestive. 
There is every indication of increas- 
ingly urgent calls for domestic invest- 
ment in every field of industry. New 
records are constantly being made in 

the issues or authorization of new 
securities. Business men everywhere 
are seeing and trying to seize new 
opportuniti^ for the profitable use of 
capital. The incentive wiD be still 
greater when the passing of present 
abnormal financial conditions makes 
possible the removal of some of the 
government taxes which now weigh 
heavily on certain types of undertak- 

Savings and investment must be 
and are the basis of all industrial 
progress. Without them, progress is 
impossible, for unless more is produced 
than is consumed, unless a surplus of 
production is a normal result of human 
endeavor, retrogression in the struggle 
with what has been called the "nig- 
gardliness of Nature" is inevitable. 
Thrift was never more necessary in 
the world's history than it is today. 

Digitized by 


Capital Needs of Foreign Trade 

By Thomas W. Lamont 
New York City 

JUST what the maintenance of our 
normal foreign trade requires is a 
new question for the American people, 
and also one of great moment. It is in 
the fore-front of leading public affairs 
today. Although it is a new question, 
it is not a question that has come upon 
us suddenly. Rather it is a situation 
that has been creeping upon us over 
the last five years, and its proportions 
have been steadily growing greater. 
To be sure, almost everybody has been 
aware of the tremendous expansion 
that has been taking place in our for- 
eign trade, yet only a few people have 
been much concerned with the prob- 
lems growing out of it. Up to a com- 
paratively recent date the American 
seller and the foreign buyer have not 
been much troubled with such terms 
as "balance of trade" and "rates of 
exchange," because the loans made 
by the American Government to 
foreign governments relieved the 
American seller and the foreign buyer 
of much the of biurden of financing 
their transactions. 

Relation op 


TO Foreign 

A brief review of the last five years 
will help us to understand the relation 
of credits to foreign trade, as well as 
show the capital needs of American 
foreign trade during that period. In 
the five years ended June 30, 1919, the 
merchandise exports from the United 
States to all countries amounted to 
$26,586,000,000. They increased from 
$2,364,000,000 in 1914 to $7,225,- 
090,000 in 1919. After offsetting the 

merchandise imports from all coun- 
tries, we still had a.merchandise export 
balance — an excess of exports over im- 
ports — amounting, in this fiye year pe- 
riod, to $13,963,000,000. In addition 
to this merchandise export balance, 
our net exports of silver amounted 
to $382,000,000, making a total bal- 
ance of $14,345,000,000 in our favor. 

Statisticians will, for long years to 
come, find play for their imagination in 
figuring how this balance was settled; 
for no one knows just how much of it 
was settled by the so-called unrecorded 
and invisible items. We know that 
our net imports of gold amounted to 
$993,000,000. It is estimated that 
we also loaned abroad $11,702,000,- 
000 including $9,102,000,000 credits, 
granted by our government to foreign 
governments. These figures indicate 
a balance of $1,650,000,000 that was 
settled by unrecorded and invisible 
items: such as interest and dividends 
of American securities held in foreign 
countries; payment of principal of 
maturing indebtedness; the repur- 
chase from foreigners of American 
securities; the payment of freight 
charges to foreign ship-owners; remit- 
tances to foreign countries by foreign- 
ers resident in the United States; 
expenditures of American military and 
civil estabUshments abroad, and other 
similar items entering into the interna- 
tional balance sheet. We must also 
remember that during the period of 
our participation in the war our govern- 
ment exported great quantities of 
goods not only for its own use but also 
for sale to its Allies. These govem- 


Digitized by 


Capital Neem of Foreign Trade 


ment exports are unrecorded. If they 
had been added to the recorded exports, 
the balance settled by invisible items 
must have been much greater than the 
amount indicated above. 

Now, it is manifest that the great 
bulk of the export balance was settled 
by the extension of credit to foreign 
buyers. It is also a fact that these 
creditsconsisted chiefly of loans granted 
by our government to foreign govern- 
ments. But it is equally true that the 
American people were able to produce 
and to save and to lend large sums to 
foreign buyers, as well as the very much 
greater amounts loaned to our own 
government, to enable it in turn to 
make vast advances to foreign govern-* 
ments, for goods purchased in America 
by them and their nationals. 

Foreign Trade Since the Armistice 

Balance of Trade. — Since the armis- 
tice was signed in November, 1918, 
government control of commerce and 
industry, both here and abroad, has 
been gradually rehnquished, and gov- 
ernment administration of private 
business has been gradually restored 
to private enterprise. What has hap- 
pened as regards our foreign trade? 
With the war over, the excess of our 
merchandise exports over our imports 
for the first eight months of the 1919 
calendar year was $8,012,000,000, as 
compared with $1,948,000,000 for the 
same period in 1918 and $41,000,000, 
for the corresponding period in 1914. 
In addition to this excess of merchan- 
dise exports, the net exports of silver 
and gold amounted to $250,000,000. 
It is estimated that the net repayments 
of private loans abroad in this period 
were $225,000,000, so that the balance 
to be settled for these eight months 
totaled $3,488,000,000. 

How hoe this unprecedented balance 

been settled? Of the total our govern- 
ment granted credits amounting to 
$1,987,000,000. For this period then, 
$1,501,000,000 was apparently settled 
by other than visible items. In these 
it is beheved that the settlement by 
the government of its accounts with 
foreign governments for expenditures 
abroad played an important part. 

In line with the programme of re- 
linquishment of government control of 
private business, our government has 
now practically ceased to lend, and 
foreign governments have practically 
ceased to borrow, the sums needed by 
foreign manufacturers and merchants 
to pay for goods they want to purchase 
in America. 

Effects of Decreased Credit Facilities. 
— Because our government advances 
abroad have been cut off, and Ameri- 
can manufacturers and merchants are 
no longer able to rely upon this re- 
source for the handling of their export 
sales, the foreign trade problem now 
confronting the American people has 
become of the greatest moment. And 
the foreign trade problem becomes a 
new one even to people who have been 
doing a large export business. Such 
people, .who, under government aus- 
pices, have been doing a large volume 
of export business without being much 
concerned with such matters as "bal- 
ance of trade" and "rates of exchange," 
are beginning to find it difficult, if not 
impossible to transact their export 
business. They are beginning to have 
their export orders cancelled, because 
of lack of credit faciUties. 

Causes of Foreign Trade Difficulties. — 
We do not have to go far to find the 
reason. With government control over 
commerce largely removed and govern- 
ment financing of foreign trade practi- 
cally stopped, the tremendous excess of 
purchases over sales in American mar- 

Digitized by 



The Annals op the American Academy 

kets by European countries has brought 
about an extraordinary fall in exchange 
rates. In other words, the foreign 
buyer now needs a much greater quan- 
tity of his foreign money to buy goods 
in American markets, and it has be- 
come increasingly burdensome to him 
to purchase such goods. 

Take the British buyer for example: 
With sterling exchange at par, he f orm- 
eriy had to have £206 to buy $1,000 
worth of goods in the United States. 
At the prevailing rate of exchange (this 
is being written early in November 
1919*) he must now have £240 to 
buy $1,000 worth of goods here. 
Even if the prices of the goods 
were no higher than formerly, the 
British buyer is obliged, owing to 
the fall in sterling exchange, to 
pay the equivalent of $1,170 for $1,000 
worth of goods bought here. Similarly 
the French buyer now has to have 
Francs 8,850 to buy $1,000 worth of 
goods in America, where formerly he 
had to have only Francs 5,180. The 
Italian buyer now has to have 10,820 
Ura where formerly he had to have 
only 5,180 lira. Similar comparisons 
apply to buyers in Belgium, Norway, 
Sweden, Denmark and Finland. And 
in this connection it should be noted 
that in the first eight months of the 
1919 calendar year, 58 per cent -of the 
total exports from the United States 
went to the eight countries mentioned. 

The Future of Our Foreign Trade 

Now, as to the future. No one be- 
lieves that America can go on piling up 
an export balance in its favor of $4,000,- 
000,000 a year. Our exports reached 
their peak last June, with the stagger- 
ing total of $919,000,000 for that one 
month. In that same month our im- 

* Since this was written the premium on the 
American dollar has become much greater. — ^Ed. 

ports were $298,000,000, leaving in our 
favor a prodigious export balance of 
$626,000,000 for the month of June 
alone. It is certain that the turn will 
come soon, if it is not already here. 
Early in the past sununer foreign 
exchange rates fell heavily, making it 
very burdensome to foreigners, as I 
have pointed out, to purchase goods in 
American markets, on account of the 
great premium on the American dollar. 
In September our exports dropped to 
$596,000,000, while our imports rose 
to $485,000,000. So that the export 
balance in our favor for that mpnth was 
reduced to $161,000,000. 

Decline of Our Export Balance. — 
There are several reasons why our ex- 
ports must decline. One is, that the 
impoverished European countries will 
sensibly import only the bare necessi- 
ties for their domestic and industrial 
existence. American luxuries they will 
do without. Even though by such 
curtailment we forego profits, we 
should be glad to witness such an 
exhibition of frugality. On the other 
hand, our imports must increase. 
Neither should this result be deplored. 
We should be glad to see agriculture 
and industry made productive again in 
Europe, and we ought to welcome the 
opportunity to buy in Europe those 
things which the people over there can 
make for us better than we can make 
them for ourselves. 

Foreign Credit Necessary. — Of course, 
the net result of the decrease in our 
exports and the increase in our imports 
will be, that the export balance in 
favor of this country will decline. But 
it is of greatest importance to us that 
this change should come about grad- 
ually and not abruptly. It is vital 
that the people of Europe should be 
able to secure in America the bare 
necessities of their domestic and indus- 

Digitized by 


Capital Nbeds of Foreign Trade 


trial existence. It is equally important 
for America to sell those necessities, 
unless we wish to invite a violent 
change in our industrial conditions. 
H the contraction of our export bal- 
ance is to be gradual rather than 
abrupt, we must continue to extend 
crediis to our foreign customers, for 
there will be a considerable export 
balance for some time to come. We 
can count on only a limited amount 
of gold imports. 

Extent of Foreign Credit. — It is haz- 
ardous, of course, even to venture a 
guess as to the amounts of foreign 
credits that will be required in the next 
year. It is true that our imports from 
Europe have increased from $22,000,- 
000 in January of this year to $89,000,- 
000 in September. In September our 
exports to Europe were the smallest, 
and our imports from Europe were the 
largest, of any month in this year. But, 
even in that month, our exports to 
Europe exceeded our imports from 
Europe by $272,000,000. Even if we 
assume that Europe can reduce her 
purchases from the United States by a 
substantial sum each month, and can 
also increase her exports to the United 
States by asubstantial sum each month, 
it seems likely that the merchandise 
export balance in favor of the United 
States against Europe for the fiscal 
year ending June 30, 1920, will amount 
to about $3,000,000,000. 

No one knows how this balance will 
be settled. No doubt we shall receive 
some gold. Probably some American 
securities still held abroad will be sold 
in our markets. ' It may be that some 
of the indemnities payable by Ger- 
many and Austria will be available for 
our Allies to utilize or pledge in the 
United States. But no one can tell 
how much of our merchandise export 
balance will be offset by the invisible 

items. If we assume that the invisible 
items will amount to $1,000,000,000, 
there will still be a balance of $2,000,- 
000,000, to be settled during the pres- 
ent fiscal year by imports of gold or 
the extension of credit. How is Europe 
going to get these credits in America.^ 
Will America be able to lend $2,000,- 
000,000 to Europe? 

The ABiLrrr or America to Extend 
Foreign Credit 

America's abiUty to lend this sum 
will depend on the willingness of her 
people to produce and to save. To be 
sure, $2,000,000,000 is a great sum of 
money and yet if the average savings 
of every person in the United States 
were only 20 cents per day for 300 days, 
the aggregate savings produced would 
be $6,000,000,000. To be sure, some 
of these savings would be needed by 
the capital requirements of our own 
country, but there would still be a 
large sum that could be loaned to our 
foreign customers in Europe. During 
the last two or three years our people 
have been educated in saving. Twenty 
milUon Americans subscribed to our 
Liberty Loans. Now that the war is 
over, are we going to throw this educa- 
tion "into the discard," because of a 
notion that the necessity for saving 
ended with the defeat of Germany.^ 
Are we going to abandon the new 
habits of thought and action we so 
recently acquired? Wars are never 
profitable to a people. Yet it is true 
that one of the most valuable lessons 
which the war taught us is thrift, and 
President Wilson's words are as true 
today as when he spoke them on April 
15, 1917: 

Let every man and every woman assume 
the duty of careful, provident use and expendi- 
ture as a public duty, as a dictate of patriotism 
which no one can now expect ever to be 
excused or forgiven for ignoring. 

Digitized by 



The Annals of the American Academy 

Europe is doing much to restore her 
own condition. But by. herself Europe 
cannot do all. She cannot return to 
full health without our help, and that 
is where every citizen of America has 
a responsibility. Europe as a whole, 
with certain countries excepted, needs 
food, clothing, and raw materials for 

The tabl which appears below shows 
what have been the principal arti- 
cles exported from this country in 
the first eight months of the 1919 

calendar year. It shows clearly what 
articles Europe is most in need of. 
It shows also that people all over 
this country have a vital interest in 
the problem of our foreign trade and 
international credits. It shows that 
the co-operation and exertion of the 
whole people are needed to produce a 
surplus of goods for export to Europe, 
and to save up the capital that we need 
to lend to Europe to enable her to 
purchase these goods. 
The extension of credit, the render- 

ExpOBTS OF DoMEBTiG Mebchandisb TO All Countbies; Values by Pbincipal Abticles. 
Eight Momthb Ending August, 




Agricultural implements 














20,854,000 * 
















Brass and manufactures of 





Other breadstuffs 


Cars, carriages and other vehicles. . 
Chemicals, drugs, dyes and medi- 


Coal and coke 


Copper and manufactures of 

Cot-ton, unmanxif^ctured 


Cotton, manufactures of 


Electrical machinery, appliances, 




Fibers and manufactures 


Fish and fish oroducts 


Fruits and nuts 


India rubber and manufactures of. . 
Iron and steel, and manufactures of 

Lead and manufactures of 

Leather and tanned skins and man- 
ufactures of 





Meat and dairy products 


Naval stores 


Oil cake and oil cake meal 

Oils, vegetable 


Oils, mineral 


Paper, and manufactures of 

Sugar and molasses 


Tobacco and manufactures of 

VegeUbles T... 


Wood, and manufactures of 

Wool, manufactures of 


Zinc, and manufactures of 


Totals — ^above items 






Percentage of above items to 
totkl exports 


Totals — all exports 


Digitized by 


Capital Needs op Foeeign Trade 


mg of help to Europe, is a work for 
eveiy reader of this volume. If we do 
not do our share, nobody else will. 
Europe wants to buy wheat.- Our 
fanners have wheat to sell. Very well, 
the fanners must sell that wheat on 
credit; not all of it on credit, but a 
reasonable share. The farmer will ex- 
tend that credit, not as t5 a single 
shipment of a hundred bushels, but 
through the method of investing in 
a thousand dollar bond of some solvent 
European country that may offer her 
promise-to-pay for sale here; so that 
with the credit which she established 
her people can buy American wheat. 
And the same formula applies to all 
manufacturers, the same to all mer- 

chants. If we do not want the people 
of Europe to go hungry and cold, we 
will produce and save the wheat and 
the cotton they need, and we will lend 
them the money to pay for it. This 
we will do by concerted saving. Our 
people have proved that they have ac- 
quired the habit of efficient providence, 
of care rather than of carelessness — 
qualities that go far to affect materially, 
and for the better, all our national 

America must be first in generous 
thought and action; first in the confi- 
dence which she shows in her fellow 
nations; first in the heart of all the 
world by reason of her friendliness and 
helpfulness to the world. 

Digitized by 


Memorandum on the Economic Situation 

By Herbert Hoover 

Director General of Belief; Executive Officer of the Siq>reme Economic Council and of the 
American Belief Administration 

Demoralized Production in Europe 

THE rehabilitation of Europe is 
immediately and primarily a 
European task but it is of tremendous 
concern to America and, for that 
matter, to the entire world. K Amer- 
ica and the other coimtries of the 
world are to prosper, if civilization is 
to go forward rather than backward, 
Europe must get on her feet. She 
must rebuild and set up her industrial 
plant and put her men to producing the 
necessities of life. Although the chief 
part of this task of rehabilitation must 
be done by Europe herself, America 
must, temporarily at least, furnish 
her not only with food, raw materials, 
and equipment, but also with credit 
to finance the imports which she needs. 

The economic difficulties of Europe 
as a whole at the signature of peace 
may be almost summarized in the 
phrase '"demoraUzed productivity." 
The production of necessaries for the 
European population of 450,000,000 
(including Russia) has never been at so 
low an ebb as at this day. 

A summary of the data in the records 
of the unemployment bureaus in Eu- 
rope shows that 15 miUion famiUes are 
receiving unemployment allowances in 
one form or another and are in the 
main being paid by a constant infla- 
tion of the currency. A rough esti- 
mate indicates that the population of 
Europe is at least 100 million greater 
than can be supported without im- 
ports and it must U ve by the production 
and distribution of exports. This 
situation is aggravated not only by 

lack of imports of raw materials but 
also by low production of European 
raw materials. Due to the same low 
production, Europe is today importing 
vast quantities of certain commodities 
which she formerly produced for herself 
and can again produce. Generally, 
not only is production far below even 
the level at the time of the signing of 
the armistice but far below what is 
necessary for the maintenance of life 
and health unless there shall be an 
unparalleled rate of import. 

Even prior to the war, European 
peoples managed to produce from year 
to year but a trifling margin of com- 
modities over what was necessary for 
consumption, plus what was necessary 
to export in exchange for essential 
imports. It is true that in pre-war 
times Europe managed to maintain 
armies and navies, together with a 
comparatively small class of non- 
producers, and to gain slowly in phys- 
ical improvements and investments 
abroad, but these luxuries and ac- 
cumulations were only at the cost 
of a dangerously low standard of living 
to a very large number. The produc- 
tivity of Europe in pre-war times had 
behind it the intensive stimulus of in- 
dividualism and of a high state of 
economic discipline, and the density 
of population at all times responded 
closely to the resulting volume of pro- 
duction. During the war the intensive 
organization of economy in consump- 
tion, the patriotic stimulus to exertion 
and the addition of women to produc- 
tive labor largely balanced the diver- 


Digitized by 


Memorandum on the Economic Situation 


sionof man power to war and munitions. 
These impulses have now been lost. 

Cause for Decreased Production 

It is not necessary to review at 
length the causes of this decrease of 
productivity. Chief among them are 
the following: 

(1) The industrial and commercial 
demorcdizaiion arising originally out 
of the war but continued out of the 
struggle for political rearrangements 
during the armistice, the creation of 
new governments, and the inex- 
perience and friction between these 
governments in the readjustment of 
economic relations. 

(2) The proper and insistent de- 
mand of labor for higher standards of 
living and a voice in administration 
of their effort has unfortunately be- 
come impregnated with the theory 
that the limitation of effort below 
physical necessity will increase the 
total employment or improve their 
condition. Nor can it be overlooked 
that this particular line of defense by 
labor — ^no matter what its economic 
results may be — ^is to some degree the 
result of offensives against it. 

(S) There is a great relaxation of 
effort as the reflex of the physical 
exhaustion of large sections of the 
populations from privation, and 
from the mental and physical strain 
of the war. 

(4) To a minor degree, considering 
the whole volume, there has been a 
destruction of equipment and tools 
and loss of organization and skill 
due to war diversions in addition to 
a loss of man power. This latter is 
not at present pertinent in the face of 
present unemployment. 

Results op Decreased Production 
The demoralization in production of 

coal in Europe today is an example in 
point of all these three forces mentioned 
above and promises a coal famine ac- 
companied by industrial disaster unless 
remedied. It is due in part to the 
destruction of man power and the 
physical limitation of coal mines or 
their* equipment. It is due in the 
largest degree, however, to the human 
factor of limitation of effort. 

The continuation of the blockade 
after the armistice has undoubtedly 
destroyed enterprise even in open 
countries, and has of course prevented 
any recovery in enemy countries. 
The shortage in overseas transporta- 
tion and the result of the uncertainties 
of the armistice upon international 
credits have checked the flow of raw 
materials and prevented recovery in the 
production of commodities especially 
needed for exchange for imports from 
overseas. The result of this delay has 
been unemployment, stagnation and 
absorption of capital in consumable 
commodities to some extent all over 

From all these causes, accumulated 
to different intensity in different 
localities, there is the essential fact that 
unless productivity can be rapidly 
increased, there can be nothing but 
political, moral and economic chaos 
finally interpreting itself in loss of life 
on a scale hitherto undreamed. 

Economic Phenomena 

Reaction from strenuous economies, — 
Coincident with this demoralization in 
production, other disastrous economic 
phenomena have developed, the prin- 
cipal one of which is that the very large 
wage-paid special workers and the 
large sums accumulated by speculation 
and manufacture during the war have 
raised the standard of living for many 
individuals from the level of mere 

Digitized by 



The Annaib of ths American Academy 

necessities to a high level of luxuries. 
Among many other classes, abo, there is 
a reaction from the strenuous econo- 
mies against waste andtheconsumption 
of non-essentials in all countries. As a 
result there is today an outbreak of 
extravagance to a disheartening degree. 
Higher . Standard of Living. — ^An- 
other economic change of favorable 
nature from a human point of view, 
but intensifying the problems of the 
moment, has been the rise in the stand- 
ard of living in large sections of the 
working classes through the larger and 
better wage distribution, separation al- 
lowances, etc., during the war. Paral- 
lel with these classes are those of fixed 
income, the imorganized workers, and 
the unemployed upon whom the rising 
cost of living is inflicting the greatest 

Inability op the Western Hemis- 
phere TO Rehabilitate Extrope 

During some short period, it may be 
possible for the Western Hemisphere, 
which has retained and even increased 
its productivity, to supply the defi- 
ciencies of Europe. Such deficiencies, 
if met, will have to be supplied in large 
degree upon credits but aside from 
this the entire surplus productivity of 
the Western Hemisphere is totally in- 
capable of meeting the present defi- 
ciency in European production if it is 
long continued. Nor, as a practical 
fact, can credits be mobilized for this 
purpose for more than a short period, 
because all credits must necessarily be 
simply advances against the return of 
commodities in exchange, and credits 
will break down the instant that the 
return of commodities becomes im- 
probable. Further, if such credits be 
obtained for more than temporary 
purposes, they will result in the eco- 
nomic slavery of Europe to the Western 

Hemisphere and the ultimate end will 
be war. 

Consequently the solution of the 
problem, except in its purely temporary 
aspects, does not lie in a stream of com- 
modities on credit from the Western 
Hemisphere, but lies in a vigorous 
reaUzation of the actual situation in 
each country of Europe and a resolute 
statesmanship based on such a realiza- 
tion. The populations of Europe must 
be brought to a realization that pro- 
ductivity must be instantly increased. 

Demand for EcoNOBflC Change in 
Status of Labor 

The outcome of social ferment and 
class consciousness is the most difficult 
of problems to solve. Growing out of 
the yearning for relief from the misery 
imposed by the war, and out of the 
sharp contrasts in degree of class suf- 
fering, especially in defeated countries, 
the demand for economic change in the 
status of labor has received a great 
stimulus leading to violence and revolu- 
tion in large areas and a great impulse 
to radicalism in all others. In the 
main these movements have not in- 
fected the agricultural classes but are 
essentially an urban phenomenon. 

In this ferment socialism, or com- 
munism has embraced to itself the 
claim to speakfor all the downtrodden, 
to bespeak human sympathy, to pre- 
sent remedies, and to be the lone voice 
of liberalism. Eveiy economic patent 
medicine has been put under this ban- 
ner. Europe is full of noisy denuncia- 
tion of private property as necessarily 
being exploitation. Industrial labor, 
even in non-revolutionary countries, 
hasput considerable reliance upon some 
degree of communism. Extremists are 
loud in asserting that production can 
be maintained by the impulse of al- 
truism alone, instead of self-interest. 

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Memorandum on the EcoNosac Situation 


Too often they are embracing criminal 
support and criminal methods to en- 
force their ideals of human betterment. 
Every country is engaged in political 
experimentation with varying degrees 
of these hypotheses, and thus far every 
trial has reduced production. 

The Western Hemisphere with its 
more equitable division of property, its 
wider equality of opportunity, still be- 
lieves that productivity rests on the 
stimulus from all the immutable human 
qualities of selfishness, self-interests, 
altruism, intelligence and education. 
It still believes that the remedy of 
economic wrong lies not in tampering 
with the deUcate and highly developed 
organization of production and distri- 
bution, but in a better division of the 
profits arising from them. It still 
believes in the constitutional solution 
of these problems by the will of the ma- 
jority, while Europe is drifting toward 
the domination of extremist minorities. 
The Western Hemisphere is still pro- 
ducing a surplus over its own needs. 

The first and cardinal effort of 
European statesmanship must be to 
secure the materials and tools to labor, 
and to see that its men return to work. 
It must also secure a recognition of the 
fact that whatever the economic theory 
or political cry be, it must call for the 
maximum individual effort, for there is 
no margin of surplus productivity in 
Europe to risk in revolutionary ex- 
perimentation. No economic policy 
that does not secure the maximum pro- 
ditction toill bring food to those stomachs 
or fuel io those hearths. There is no use 
of tears over rising prices! They are^ to 
a great degree^ a fnsualization of in- 
sufficient production. 

Need fob Conservation in Con- 

During the period of reconstruction 

and recovery from reduced productiv- 
ity, the conservation in the consump- 
tion of non-essential commodities is 
more critical than at any time during 
the war. The relaxation of restriction 
on imports and on consumption of 
articles of this character since the 
armistice is disheartening. It finds its 
indication in the consumption of 
beverages and articles de luxe in many 
countries, increased even above a pre- 
war normal. Never has there been 
such a necessity for the curtailment of 
luxury as exists today. 

Inflation of Currency 

The universal practice in all the 
countries at war of raising funds by 
inflation of currency is now bringing 
home its burden of trouble. In ex- 
treme cases the most resolute action 
must be taken, and at once. In other 
countries having a lesser degree of in- 
flation, such currency must be re- 
duced and included in the funded debt 
or, as an alternative, the costs of 
wages, living and international ex- 
change must be expected to adjust 
themselves to this depression. The 
outcry against the high cost of living, 
the constant increase of wages and the 
fall in exchange that is going on are in 
a considerable degree due to this inevi- 
table readjustment. 

Effect of Price Control on Pro- 

The stimulation of production lies 
in the path of avoidance of all limita- 
tions upon the reward to the actual 
producer. In other words, attempts to 
control prices (otherwise than in the 
sense of control of vicious speculation) 
are the negation of stimulation to pro- 
duction, and can only result in further 
curtailment of the total of commodities 
available for the total number of 

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The Annals of the American Acadeicy 

human beings to be fed, clothed and 
housed. There still exist in Europe 
great bureaucracies, created from the 
necessity of control of prices and 
distribution by the conditions of the 
war, which are loath to recognize that, 
with world markets open, no such acute 
situation exists and that their contin- 
ued existence is not essential except in 
the control of speculation. 

The argument so much advanced, 
that world shortage may develop and 
that this justifies continued control of 
distribution and prices is based upon 
the fallacious assumption that even if 
the world markets are freed of restraint 
that there is a shortage today in many 
commodities so profound as to en- 
danger health and life. From any 
present evidence, thanks to the high 
production outside of Europe, no 
shortage exists that will not find its 
quick remedy in diminished consump- 
tion or substitution of other commodi- 
ties, through minor alteration and 
price. All attempts at international 
control of price, with a view to bene- 
fiting the population in Europe at the 
cost of the producer elsewhere, will 
inevitably produce retrogression in 
production in other parts of the world, 
the impact of which will be felt most 
in Europe. A decrease of 20 per cent 
of Western Hemisphere wheat would 
not starve the West; it would starve 
Europe. It must never be over- 
looked that control of prices and dis- 
tribution cannot stop with a few prime 
commodities but, once started, its re- 
percussions drive into a succeeding 
chain of commodities and that on the 
downward road of price control, there 
can be no stoppage until all commodi- 
ties have been placed under restriction, 
with inevitable stifling of the total 
production. It b also often overlooked 
by the advocates of price control that. 

whereas the high level of production 
was maintained during the war even 
under a restraint of price, this high 
production was obtained by the most 
vivid appeal to patriotic impulse on 
both sides of the front. This stimulus 
to production and distribution no 
longer obtains and the world must go 
back to the prime motive, which is the 
reward to the individual producer and 

That body of advocates who have 
deduced from war phenomena that 
production and distribution can be in- 
creased and maintained by appealing 
to altruism as the equivalent of patriot- 
ism or self-interest should observe the 
phenomena of Russia where the great- 
est food exporting country is today 
starving. It must be evident, also, 
that the production cannot increase if 
political incompetence continues in 
blockades, embargoes, censorship, mob- 
ilization, large armies, navies and war. 

Public Utilities 

There are certain foundations of 
industry in Europe that, no matter 
what the national or personal owner- 
ship or control may be, they yet partake 
of the nature of the public utilities in 
which other nations have a moral 
right. For instance, the discriminatory 
control of ships, railways, waterways, 
coal and iron in such a maimer as to 
prevent the resumption of production 
by other states will inevitably debar 
economic recuperation and lead to 
local disputes and economic chaos 
with their ultimate infection abroad, to 
say nothing of the decrease in pro- 
ductivity. These abuses are already 
too evident. 

Duty op the Western Hemisphere 

The question of assistance from the 
Western Hemisphere during a certain 

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Memorandum on the Economic Situation 


temporary period, and the devotion of 
its limited surplus productivity to 
Europe, is a matter of importance and 
one that requires statesmanlike hand- 
ling and vision. Although it is im- 
portant, it is but a minor question 
compared to those stated above 
and it is in a great degree de- 
pendent upon the proper solution of 
the factors already touched upon. 
It is a service that America must ap- 
proach in a high sense of human duty 
and sympathy. This service will, 
however, be best performed by the 
insistence that aid will not be forth- 
coming to any country that does not 
resolutely set in order its internal finan- 
cial and political situations, that does 
not devote itself to the increase of 
productivity, that does not curtail 

consumption of luxuries and the ex- 
penditure upon armament and that 
does not cease hostilities and treat 
its neighbors fairly. If these condi? 
tions are complied with, it will be the 
duty of America and all the Western 
Hemisphere to put forth every possible 
effort to tide Europe over this period of 
temporary economic diflSculty. With- 
out the fulfillment of these conditions, 
the effort is hopeless. 

With Europe turned toward peace, 
however, with her skill and labor al- 
ligned to overcome the terrible ac- 
cumulation of difficulties the economic 
burden upon the West should not last 
over a year and can be carried and will 
be repaid. To effect these results the 
resources of Europe and also those of 
the Americas must be mobilized. 

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What Fuel Conservation Means to America 

By Robert W. Woolley 
Member of the Interstate Commerce Commission 

AMERICA is confronted squarely 
with the problem of increasing 
her productivity per man power with- 
out, at least, increasing the cost of 
production per article. This in addi- 
tion to any economies that may be 
effected through national obedience to 
the slogan "Produce more, save more 
and waste less." Such increased pro- 
ductivity per man power must come 
about through more efficient utilization 
of fuel, water power and machinery. I 
propose in this article to deal specific- 
ally with conservation of the two great 
articles of fuel — coal and petroleum— 
and more particularly with coal, for sci- 
entists agree that the days of petroleum 
as a commercial factor are numbered. 
From The Energy Resources of the 
United States: A Field for Reconstruct 
tion^ by Chester G. Gilbert and Joseph 
E. Pogue, volume 1, bulletin 102, of the 
Smithsonian Institution (United States 
National Museum), I quote as follows: 
While it is commonly known that our pres- 
ent utilization of fuel is wasteful, it is not 
generally appreciated how very serious and 
extensive this default has become, how many 
lines of progress the current practice in this 
field is blocking, and how distinctly and 
heavily the whole matter is contributing to 
the cost of living. While the color of sensa- 
tionalism is to be deprecated, the assertion 
cannot be avoided that this country has 
within its reach the means for effecting a sav- 
ing in the matter of its energy supply of well 
over a billion dollars a year. * * * In 
this one direction alone lies a gain sufficient to 
recoup much of the expense of the Great War. 

Decline of Petrolettm and Oil 

Beferring to petroleum, Messrs. 
Gilbert and Pogue say : 

The liquidity of the crude product makes 
petroleum unique among mineral raw mate- 
rials, contributing wide commercial availabil- 
ity through the ease with which the substance 
may be mined and handled; while the magni- 
tude of the resource has given confidence for 
the extensive mechanical developments essen- 
tial to its use. Hence the employment of 
petroleum is deeply rooted among the practices 
and needs of modem life, and any tendency 
toward disuse of its essentia] products, either 
through undue increase in price or from de- 
cline in production, will mark a turning point 
in material comfort and industrial advantage, 
the deferring of which becomes an object of 
universal concern. As the petroleum depos- 
its of the United States have been drawn upon 
with extraordinary rapidity and the sup- 
plies have already suffered serious depletion, 
the matter of their approaching exhaustion 
assumes the li^ht of immediate importance. 
The comforting assertion that such considera^ 
tions may be safely left to future generations 
does not apply to petroleum. 

In a recent widely published state- 
ment, E. Mackay Edgar, a noted 
English authority on oil, predicted that 
in ten years the British Empire will 
be sellmg 500,000,000 barrels of oil 
annually to the United States. Esti- 
mating the value of this oil at $1,000,- 
000,000, he asserts it will be the means 
of restoring and maintaining sterling 
equilibrium. He said : " More oil has 
probably run to waste in the United 
States than has ever reached the re- 
finers. Improvidence, carelessness, a 
blind gambling spirit, have marked all 
except the most recent phases of the 
industry. The great oil fields of the 
United States are nearing exhaustion, 
and it is not believed the new ones 
which are being proved will yield any- 
thing like the old prodigal production. 
America has recklessly, and in sixty 


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What Fuel Conservation Means to America 


years, run through a legacy that> 
properly conserved, should have lasted 
her for at least a century and a half." 
In other words, some fine morning 
not so far distant we are to awake to 
the realization that we have exhausted 
one of our principal sources of indus- 
trial greatness ninety years ahead of 
time, because as a nation we have felt 
it was unsound for the government to 
interfere in any degree with private 
enterprise — ^to curb the get-rich-quick 
promoter or speculator in the interest 
of all the people. As long ago as 1915, 
Secretary of the Interior Lane said in 
his annual report: ''Petroleum is a 
priceless resource, for it can never be 
replaced. Trees can be grown again 
upon the soil from which they have 
been taken. But how can petroleum 
be produced? It has taken the ages 
for nature to distill it in her subter- 
ranean laboratory. We do not even 
know her process. We may find a 
substitute for it, but have not yet.'* 

The Problem of Coal Conservation 

True, we are equally reckless in the 
mining and handling of our coal. In 
their report just referred to, Messrs. 
Gilbert and Pogue say : 

Ib spite of ample supplies in the ground, 
coal inadequately meets its obligations because 
of the competitive manner in which it is 
mined, the unnecessary extent to which it is 
transported, and the improper way in which 
it is used. The first has caused tremendous 
waste, the results of which will be felt heavily 
in the near future; the second has caused a 
coal shortage dining the war and promises a 
repetition at every coming period of sudden 
industrial expansion; the third has imposed 
an excessive burden of cost upon the public. 
To prevent waste, to circumvent shortage, 
and to lower cost, changes in our system of 
ooal economics are necessary. These changes 
must be determined by coal itself — ^by the 
nature of its geographic distribution, geologic 
occurrence, mining technology, and chemical 

The problem may be largely solved 
by coking our high volatile bituminous 
coals.^ A process by which this may 
be done is one of the by-products of the 
war. The results of the government 
test of this process, held under the 
joint auspices of the Bureau of Stand- 
ards and the Bureau of Mines, were 
not deemed by the War Industries 
Board to be suiEciently convincing to 
warrant its adoption as a means of 
increasing the production of benzol 
and other coal products necessary in 
the manufacture of high explosives, 
but upon favorable reports made by 
such distinguished scientists as Dr. 
Alex. C. Humphreys, president of the 
Stevens Institute, Mr. Alex. H.Twom- 
bley, a noted coke engineer and Mr. 
Y. Iwamura, coke expert of the Jap- 
anese government, private capital has 
undertaken its exploitation on a large 
scale. Since the signing of the Armis- 
tice, I am informed that a 10,000,000 
yen company has been formed at 
Tokio, by the Industrial Bank of 
Japan, acting for the government, and 
that the construction of ovens in 
Japan and her dependencies on the 
mainland of Asia, is about to begin. 

The first battery of ovens of formid- 
able size is now being erected at Gran- 
ite City, 111., ten miles out of St. Louis 
at an estimated cost of $15,000,000, 
and other batteries equally potential 
are planned at points in the heart of 
the soft coal regions — ^Jackson, Ohio, 
for instance — ^at such steel manufac- 
turing points as Cleveland and at tide- 
water — ^for example, Bridgeport. It 

^ The beehive oven, which produces only coke, 
and the by-products ovens of German and Bel- 
gian design heretofore in use have only coked 
successfully the so-called, low-volatile^ bitumi- 
nous coals, which represent about 5 per cent of 
our coal supply and are to be found largely in 
the Connellsville, Pocahontas and Birmingham 

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The Annals op the American AcADEBiY 

is only reasonable to suppose that in 
the not far distant future there will be 
other radical developments along this 
line. Now that the ice is broken and 
the possibilities are so glittering we 
we may expect science to "carry on" 
at a rapid pace. One writer, in his 
enthusiasm, speaks of the invention of 
the new by-product oven as being 
even more important than was the 
advent of the sewing machine or the 
cotton gin. Time may prove this to 
be true. 

Waste in Production. — ^Referring to 
the production of coal, Messrs. Gilbert 

It is wastef uUy used due to the lack of by- 
product recovery as an accepted economic 
practice. ♦ ♦ ♦ The wastes in distribu- 
tion may be reduced through the development 
of hydro-electricity and the coal-field genera- 
tion of carbo-electric power, thus relieving 
coal of unnecessary duties, and by improve- 
ments in utilization, thus destroying the 
over-dependence upon high-grade coals which 
now necessitates undue haulage. 

The wastes in utilization may be done away 
with by establishing a method of separating 
the energy-producing constituents of coal from 
the commodity values and using the products 
to their oonmion advantage. The most logi- 
cal point of attack is the municipality, to which 
may be attached a public utility plant con- 
verting raw coal into smokeless fuel — artificial 
anthracite plus gas, or gas alone — ^and valuable 
by-products, ammonia, benzol, and tar. Such 
a plant would supply the fuel needs of the 
community and ship the surplus by-prod- 
ucts to Serve as raw nutterial for a coal-prod- 
ucts industry, developed thereby to propor- 
tions consistent with its importance to social 
progress. ♦ ♦ ♦ 

By-product utilization will give cheaper fuel 
through the advantageous disposition of all 
the values contained. It will also end the 
smoke nuisance, relieve transportation, and 
cause the growth of a great coal-products 
industry with ultimate possibilities ranging 
beyond the grasp of the imagination. 

I have quoted liberally from high 
scientific authority because when the 
railroads were first taken over by the 

government I was asked by the director 
general — each member of the Inter- 
state Commerce Commission under- 
took some special investigation looking 
to the working out of various phases 
of the railroad problem — to conduct an 
inquiry into the question of fuel 
economy. The serious difficulty en- 
countered was lack of uniformity as to 
quality of fuel consumed in locomotives. 
I concluded that if it were practicable 
the burning of powdered coke offered 
the solution. Accordingly, at my re- 
quest President Wilson directed the test 
of the new by-product oven referred 
to above. The results so far as the 
proposed burning- of powdered coke 
was concerned were not satisfactory, 
but that was really of minor impor- 
tance when one considers the big 
result — that most of our high volatile 
coals are available for the manufacture 
of metallurgical and fuel coke and the 
extraction of valuable by-products. 

Results of Coking Our Coal Supply 

The use of this new process is fraught 
with ^'ultimate possibilities ranging 
beyond the grasp of the imagination." 
Some of the potential results are: 

1. That the amount of coal in the 
coimtry from which metallurgical coke 
can be made is increased from 5 per 
cent of our available coal supply to 
between 40 and 50 per cent of this 
supply, or a net increase of between 
800 and 1,000 per cent; this makes 
available for the manufacture of pig 
iron and steel many low^ade ores now 
regarded as having a negligible value 
only because of their remote location 
from recognized coking coal regions. 

2. That all coal now used by rail- 
roads, except anthracite, which nature 
has coked, can be coked and from the 
sale of the by-products the cost of 
production, including the price of the 

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What Fuel Conservation Means to Amebica 


coal, largely defrayed, thus making 
the coke obtained practically net; that 
in due time all railroads may be advan- 
tageously electrified. 

3. That the enormous banks of culm, 
accumulated through the many years 
of mining anthracite coal and long re- 
garded as so much waste, may be mixed 
with the high volatile coals which 
intersperse the anthracite region and 
coked for fuel at the banks or at the 
mines, thus adding very materially to 
the fuel supply in the coal region closest 
to the great industrial centers of the 
eastern and northeastern parts of our 

4. That by coking all bituminous 
coal, low and high volatile, the total 
amount of which mined in 1917 was in 
round numbers 612,000,000 tons and 
using the same figures for 1918 for 
purposes of calculation — value at the 
mines, at $3.50 per ton, $2,142,000,000 
— ^there would have been produced: 

(a) 437,144,400 tons of coke having f. o. b. 
market value, using standard quotations of 
$6.00 per ton Connellsville, of $2,622,866,400. 

(b) By-products having f . o. b. market value 
of $3,218,000,000. 

(c) There would be a net saving in natural 
resources, allowing $4.89 per ton of coke for 
coal used and cost of manufacture, of $3,698,- 
230,284 as compared with $109,742,799, the 
estimated net profit on 19,059,361 tons of 
coke made in by-product ovens in 1917 from 
26,688,105 tons, the total amount of coal 
coked that year in by-product furnaces; in a 
word, last year we wasted $3,588,487,485 in 
natural resources through coal alone. 

5. That the annual gasoline supply — 
fine oil recovered from coal is its Uke, 
but estimated to be 28 per cent supe- 
rior — ^would be increased by 48,624,110 
barrels; our total production of gaso- 
line in 1917 was approximately 27,000,- 
000 ^barrels. This means cheap fuel 
for tractors, trucks, automobiles and 

6. That the total gas supply of 

the country, on the basis of 6,000 feet 
per ton of coal, B. T. U. 560, would 
be increased to 3,672,000,000,000 cubic 
feet, having a basic or at-the-mine 
value of 10 cents per 1,000 cubic feet, 
or $367,200,000. This, of course, could 
be piped any necessary distance. 

7. That through tie recovery of 
light oils and of 12 gallons of tar per 
ton of coal made, or 7,344,000,000 gal- 
Ions annually, having a present at-the- 
mine value of $367,200,000, we would 
become the greatest nation of dye, 
drug and chemical producers in the 

8. That the 18,360,000,000 pounds 
of ammonia sulphate — ^30 pounds per 
ton of coal — ^produced annually would 
so augment our fertilizer supply that 
our soil could be made to increase 
enormously in productivity per acre 
and would afford an abundance of 
an important ingredient of high 

9. That the production of toluol, 
from which trinitrotoluol (T. N. T.) is 
made, would be increased enormously. 

10. That there would be attnbutable 
to|coal smoke no further reduction in the 
creative producing power of our people, 
estimated in the report on smoke 
abatement by the Chicago Association 
of Commerce to be $1,000,000,000 
annually, and that at least $100,000,000 
in paint and repair work, due to the 
ravages of acids and the destructive 
effect of coal smoke, would be saved 
each year. Every town and city in the 
United States could be made clean and 
kept clean. 

11. That through cheap power our 
productivity per person would be so 
considerably increased that we would 
be able to pay higher wages and with 
our great merchant marine, once we 
are back to normal conditions, we could 
market our manufactures at a profit 

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The Annals of the American Academy 

even in countries having the cheapest 

12. That our national wealth would 
be so augmented eventually through 
the greatly increased value of our high 
volatile coals, now used for high grade 
purposes, that the cost of our partici- 
pation in the war would be almost, if 
not quite, absorbed. 

IS. That by making possible the 
transmission of all power, light and 
heat from the pit heads of the mines, at 
a cost below any yet suggested, the 
saving in domestic labor and in personal 
inconvenience would be incalculable 
and poverty abolished or at least re- 
duced to a very low minimum; that 
thousands of individual industrial 
power plants, so costly to operate, 
would be scrapped or used for power 

14. That through natural processes 
the three greatest of our monopoUstic 
groups — oil, steel and power — ^would, 
with the government owning and 
operating the super-power stations, be 
eflFectively and permanently broken up. 
So, among other things, the prospective 
loss of gasoline produced from petro- 
leum is to be more than offset by 
benzol. That answers Secretary Lane's 
question in large measure. 

The New Coke Oven and the Elec- 
trification OF Railroads 

In my report to the director general 
of railroads on possible fuel economies, 
submitted eleven months before the 
work of Messrs. Gilbert and Pogue, 
from which I have quoted so liberally, 
was issued, I featured the test of the 
new coke oven and called attention to 
the generally admitted fact that our 
railroads must in the near future be 
electrified. I quote in part as follows: 

The super-power station would entirely 
eliminate the transportation of coa} for power 

purposes and would relieve the railroads of 
the congestion caused thereby. This is more 
than half of all the coal used in the country. 
The amount of fuel needed to generate a unit 
of power in the super-power station would be 
much less than that required by our present 
local plants. Besides, the freight cost would 
also be saved; this is more than half of the 
coal item in present costs of power generation, 
and coal is by far the largest single item of 
cost. There are still other items of cost for 
power which would be reduced in the super- 
power station. 

It is generally conceded that the electrifi- 
cation of steam railroads is imminent, but that 
the capital required for the generating plants 
and transmission lines is the chief present de- 
terrent. The super-power plitn would make 
the electrification of the steam railroads to a 
large extent possible at an early date, at least 
very soon after the conclusion of peace, when 
the copper needed for transmission lines is 
likely to be plentiful and cheap. It would 
increase traffic ci^adty from 25 to 50 per cent, 
would increase speed in transportation, and 
would practically eliminate riulroad conges- 
tion, particularly during the winter season. It 
would entu^y eliminate the transportation of 
coal for use by the railroads themselves. 

The advantages to be secured through the 
electrification of steam railroads are many: 

An electric locomotive will handle twice the 
load of a steam locomotive. 

It operates best in cold weather when a 
steam locomotive has its greatest troubles. 

On down grades what is known as regeneraF- 
tive (braking returns from 25 to 50 per cent 
of the power used in climbing. This power 
is returned to the lines for the use of other 
locomotives climbing other grades. Regenera- 
tive braking is separate from air brakes, which 
are only used in emergency and in stopping a 
train. The trains run down any grade imder 
perfect control, better in every way than by 
the use of grinding brakes, and at the same 
time electric current is being generated and 
returned back into trolley wires to assist in 
running other trains. 

An electric locomotive can be operated 
over a thousand-mile run in mountain work 
with only casual inspection. A steam loco- 
motive for the same service requires dose 
attention and makes it necessary to main- 
tun round houses and yards at frequent 
intervals. Most of these can be eliminated 
by electrification. 

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What Fttel Conbebvation Means to America 


Electrification is the cheapest and most 
practical means for producing an increase in 
traffic capacity. There are three ways for 
producing this increase: first, additional 
tracks; second, elimination or reduction of 
grades; third, electrification. 

The entire cost of electrification, including 
the power stations and transmission lines, is 
less than the cost of either additional tracks 
or the elimination or reduction of grades. By 
electrification the traffic capacity can generally 
be increased 50 per cent over what it is with 
steam locomotives. The electric locomotives 
go over the steepest grades with only a com- 
paratively alight reduction in speed. 

The electrification of the railroads would 
better the load conditions on the supei^power 
stations, and this would tend to still further 
reduce the cost of generating power. 

Military experts agree that if there 
is ever another war it will be waged 
largely with gas. Scientists are saying 
that the nation developing the great- 
est dye industry, with its necessarily 

large complenient of chemists, will be 
best prepared. This was the founda- 
tion upon which Germany built. In 
the limited space allotted me it is 
impossible to go even into meager 
details as to the possibilities of the 
dye industry. The point is that we 
are destined to lead the world as dye 
makers. I have not even touched 
upon the proper and logical develop- 
ment of our water power. That is 
a subject on which so much has been 
Written that I have deemed it my duty 
to deal almost exclusively with what 
seemed to me to be the urgent and 
striking phases of the problem of con- 
serving and efficiently utilizing our 
coal. If we are prudent, it is practically 
inexhaustible — and, thanks to the by- 
products process, is the source of the 
cheapest heat, light and power. 

Digitized by 


Food Thrift 

By Raymond Pearl 

Head of the Department of Biometry and Vital Statistics, The Johns Hopkins University; 

fonnerly Chief of the Statistical Division of the United States Food Administration 

Food an Index to the Cost op 

WHENEVER people become 
troubled by the high cost of 
living it is the cost of food which 
occupies the first and foremost place in 
their minds. Expenditures for cloth- 
ing and for housing* the other chief 
items of cost in our merely physical 
struggle with the environment, come 
at relatively infrequent intervals as 
compared with those for victuals and 
drink, to use the old forth right phrase- 
ology. Every day one must buy his 
bread, and the sad fact of rising prices 
impresses itself with a vigor and depth 
which presently becomes soul-stirring. 
On the other hand, the common man 
buys his "new suit" so infrequently, 
and the purchase is furthermore such 
an adventure in itself, and one in which 
one wants to make a brave showing of 
being a regular man of the world, that 
a 50 or even 100 per cent advance in 
the price over what the last similar 
spree cost is met with substantial 
equanimity. During the war, prices 
of clothing in this country rose out of 
all proportion to the prices of food, 
but the public clamor about high 
prices virtually all centered around 
the latter. 

There is real justification for this 
point of view abo in the fact that in 
the maintenance of a family, food ex- 
penditure constitutes relatively a very 
large item. This has been most re- 
cently and thoroughly discussed by 

Professor William F. Ogbum* from 
whose paper the data of the following 
table^ are taken as illustrative of the 
facts at the present time: 

Table I 
Cost of Actual Yearly Consumption of Food 
Yidding Approximately S500 Calories per 
Man per Day (Data from Ogburn) 








ture for 
All Pur- 


New York 




Providence .... 









San Francisco 




and Oakland 












St. Louis and 

East St Louis 




New Orleans 









Minneapolis and 

St. Paul 




New Orleans 

(colored) .... 




The significance of the column 
headed "Equivalent adult males" is 
to show that all the data were from 
families of approximately the same 
size so far as food needs are concerned. 

Further data discussed by Ogburn 
show that at present price levels the 

i Ogburn, William F. A Study of Food CosU 
in Various Cities. Monthly Labor Review, Vol. 
IX, pp. 808-827. August. 1919. 

« Loc, cU., p. 812. 


Digitized by 


Food Thrift 


expenditure for food constitutes, for 
constant size of family, from 28 to 88 
per cent of incomes of $2,100 per year, 
and from 39 to 50 per cent of incomes 
of $900 a year, with intermediate 
X)ercentages for intermediate incomes. 
It is no wonder that the problem of 
meiely Uving has become an extremely 
acute one for many people in this 

What is the way out? Any thought- 
ful student of economic forces in this 
country knows that it is not in the di- 
rection of a lowered price level, at least 
in the immediate future, particu- 
larly so far as food is concerned. The 
producer of food has economically 
come into his own during the war, and 
is not going to submit complacently to 
any marked lowering of the price level 
of his commodities at once. And in 
his power to curtail production he has, 
of course, an economic weapon of first 
magnitude. But in the practice of 
true thrift in regard to food expendi- 
tures the consimiing public of this 
country has ready at its hand a 
means of coping with this problem 
which is abo of the greatest significance 
and economic power. The remainder 
of this paper will be devoted to the 
task of demonstrating this proposition 
and endeavoring to show ways and 

Per Capita Food Consumption 
The first point to be considered in an 
analysis of the situation is to get reU- 
able figures as to the normal per capita 
food consumption of the people of this 
country. I have recently made an ex- 
tensive and thorough statistical inves- 
tigation' of this subject, and from that 

*Cf., Pearl, R. The Relative Coniribtdion 
qf the StapU CommodiUiei to ike National Food 
Coneumption, Proe, Amer. PhU. Soe., Vol. 
LVin, pp. ISSHtStSt, I9I9.' A detailed account 
of the reaeaich u in press in book form, under 

study I wish to present certain results 
here. In the first place, it should be 
said that the basis of any adequate 
survey of food resources or consump- 
tion must be essentially physiological, 
rather than one of commodities or 
trade. Broadly speaking, the ulti- 
mate sources of food are the soil and 
the sun. The energy derived from the 
sun through the mechanism of the 
green plant builds up the inorganic 
chemical elements of the soil, air, and 
water into compounds which can be 
utilized as food by man, either directly 
or secondarily in the form of the prod- 
ucts of animals which have been nour- 
ished on the primary foods of the plant 
world. Furthermore, food must be 
expressed, for proper statistical treat- 
ment, in the ultimate chemical or 
physiological nutrient components, 
protein, carbohydrate, and fat, with of 
course the energy value in calories. 

Table II gives in chemical nutrients 
the food consumption of the United 
States on a total and per capita base, 
for a period of seven years between 
July 1, 1911 and June 30, 1918. Be- 
fore entering on the detailed discussion 
of per capita consumption figures in 
Table II it is well to recall a fact which 
is liable to escape attention, unless 
special attention is called to it. This 
is the fact that the final figures in Table 
n, which are called "consumption 
figures," really include something more 
than consumption in a nutritional 
sense. They include the food actually 
eaten plus that which is wasted by loss 
in cooking, in garbage, etc. It is neces- 
sary to be entirely clear on this point. 

the title The Nation'e Food (W. B. Saunders 
Co., Philadelphia) and will shortly appear. In 
the meantime, it is necessary to ask the reader to 
take on faith the statement that the utmost 
critical care was taken to ensure the greatest 
attainable degree of accuracy in the final figures. 

Digitized by 



The Annals op the American Acadebit 

In calculating the nutrients in the in- 
termediate calculations use has been 
made of factors which allowed for in- 
edible refuse, so that all of the inedible 
portion of the foods as produced or im- 
ported have already been deducted in 
the calculations up to this point. 
Furthermore, gross losses from storage, 
spoilage, transportation, etc., have 
been deducted. Even after all these 
deductions have been made, however, 
it is obvious that there is still a con- 
siderable amount of loss and wastage of 
strictly edible material, which might be 
saved and consumed under a theoret- 
ically ideal system of preparing food 
for the table plus a conscientious inges- 
tion of every bit of edible material. Of 
course, as a matter of fact, neither of 
these theoretically ideal conditions at 
all prevail. There is a considerable 
loss of nutrient values in the process of 
cooking as ordinarily practiced. This 
loss is undoubtedly greater for fats 
than for any other of the nutrients. 
It is a troublesome and time-consuming 
process for the housewife to conserve 
and utilize all of the fat which gets 
melted and floats about in the water 
in which foods are cooked, or adheres 

to the utensils in which they are 
cooked. Nor, in the minds of most 
people, is there any necessity or desir- 
ability of saving this fat. In fact, a 
great many people in this country ob- 
ject very strongly to what they desig- 
nate as "greasy cooking." Conse- 
quently, floating fat of soup stock is 
skimmed off and thrown away in the 
vast majority of instances. The result 
is that in calculations made in the way 
those of this study have been made, 
which include the total nutrient value 
in the edible portion of food materials, 
after deducting inedible waste and 
the losses which accrue up to the time 
the food reaches the consiuner, there is 
bound to be an apparently high con- 
sumption of fats. The figures here 
presented are really statements of 
consumption plus edible waste and 
should be so regarded. 

Another important factor is that of 
edible waste in garbage, that is to 
say, the uneaten portion of the pre- 
pared food which is edible and might 
be consumed, but is not for reasons 
of taste, over-estimation of ingestive 
capacity, etc. 

Looking at the matter from the na- 

Table n 

Consumption per Adult Man 










































Average, whole pe- 










Average. 1911-12 
to 1916-17 


Digitized by 


Food Thrift 


tional point of view, it seems probable 
that of the protein in human foods left 
in the country for consumption in the 
statistical sense» it is safe to say that 5 
per cent is lost in edible wastage; of the 
fat left in the country for consumption 
as human food, it is believed that at 
least 25 per cent is lost through wast- 
age. This figure seems large, but it 
probably under-estimates rather than 
over-estimates the fact. Of the car- 
bohydrates, probably there is 20 per 
cent of edible wastage. 

Applying the estimated percentage 
deductions for edible wastage stated 
above to the per capita average for the 
whole period we have the following re- 
sults for ingested human food: 

114 grams protein per man per day 
127 grams fat per man per day 
4S3 grams carbohydrate per man per day 
8424 calories per man per day 

These figures are probably very close 
to the fact as regards protein and 
carbohydrate. They are perhaps some- 
what too high still as regards fat, 
because the edible wastage of this com- 
ponent is higher than the 25 per cent 
used. The intention, however, has 
been to use the most conservative fig- 
ures in estimating waste. 

The stability of food consumption, 
in physiological units, one year with 
another is one of the striking things 
brought out by Table II. People con- 
sume about the srame total amount 
year in and year*out, so far as we may 
judge both from common experience 
and from careful statistical study. 
This stability of consumption is shown 
graphically in Figure 1. 

Pw. 1. 

DiAO&^M Showing the Ekerot Value in Calories of the Geobs Conbumption 07 
Human Food, per Adult Man per Dat 

Digitized by 



The Annals of the American Academy 

Reduction of Food 9ill by Thrift 
It has been pointed out above that 
in the consumption calculations de- 
ductions were made for inedible refuse, 
for loss by spoilage, in transportation, 
storage, etc. Specifically these deduc- 
tions included the following classes: 

(a) Loss of commodity in storage 

(b) Spoilage of commodity in storage 

(c) Loss of commodity in transit 

(d) Spoilage of commodity in transit 

(e) Loss by vermin 

(f) Amomit fed to livestock 

(g) Amount used for technical, non-food 

purposes, including the manufacture 
of alcoholic beverages 
(h) Inedible refuse 

From the viewpoint of thrift, rather 
than that of pure statistics, it must be 
remembered with the utmost clarity 
and precision, that the consuming pub- 
lic 'pays for all these losses. The prices 
of the commodities actually bought by 
the public include in themselves an al- 
lowance for all of these items. In the 
case of inedible refuse this is apparent. 
One knows that he pays for the rind of 
a watermelon, or the bone in a ham. 
He is not so apt to remember that he 
paysforthe com andwheat therats eat. 

So here, then, in items (a) to (g) 
above, is the first clearly marked place 
at which, from a national viewpoint, 
the practice of thrift would inevitably 
effect a reduction in the country's 
food bill, which in absolute amount 
would be literally enormous. 

Again, it was pointed out in the pre« 
ceding section that after all the deduc- 
tions under items (a) to (h) inclusive 
had been made, there still was a large 
amount of edihU waste thrown away in 
the form of garbage, and lost in cook- 
ing, etc. It is possible to give some 
definite figures on the effect which 
thrift can have on the reduction of this 
edible wastage. In the summer of 
1917 Mr. Herbert Hoover, working 
through the organization he had built 

up, which was later to become the 
United States Food Administration, 
organized a nation-wide campaign to 
urge people to avoid waste in the 
preparation and use of food. In order 
to check up on the effectiveness of this 
campaign statistics^ were collected 
from 96 cities monthly, giving the 
amount of the collection for each month 
in 1917-18, while the conservation 
campaign was on, and the correspond- 
ing month in 1916-17, before any con- 
servation was practiced. The summa- 
rized totals are exhibited in Table III. 

Table m 

Total Tom of Garbage CoUeded in 96 CUies, by 

Months, May 1916 to April 1918 

Garbage Collected (Tons) 





















September . 




October . . . 




November . 




December . 




January . . . 




February . . 




March .... 












It will be seen at once that a sub- 
stantial reduction in amount of garbage 
was effected simply by voluntary care 
and thrift on the part of the people. 
But even more remarkable than this 
quantitative saving, great as it was, 
was the qualitative saving, as indi- 
cated by the amount of fat in the gar- 
bage. In a number of large cities 
there are garbage reduction plants, 
where the grease is extracted from the 
garbage and sold. Table IV gives the 
results in this particular for 12 cities. 

« Pearl, R. Statistics of Garbage ColUetion 
and Garbage Grease Recovery in American Cities, 
Jour. Ind. Eng. Chem., Vol. 10, p. 927, 1918. 

Digitized by 


Pood Thrift 


Table IV 
Tons of Garbage Orease Recovered jn 12 Cities for the Two Years, May 1917 to April 1918 and May 

1916 to April 1917 



Tons of Garbage 


Tons of Grease 

5: 00 


Percentage of 




Boston, Mass 

Buffalo, N.Y 

Chicago, HI 

Cleveland, Ohio . . . 
Columbus, Ohio. . . 

Dayton, Ohio 

Indianapolis, Ind. . 
New Bedford, Mass. 

Pittsburgh. Pa 

Philadelphia, Pa.... 
Schenectady, N. Y. 
Wilmington, Del. . . 




















1 ,415 




































* Population, 1918. ^ Relative figure expressing the monthly collection for 1917-18 as a per- 
centage of that of the same month of 1916-17; that is. relative figures under 100 mean smaller col- 
lections and figures over 100 mean larger collections. 

Tables III and IV make plain in a 
concrete way what thrift can do on a 
large scale. A reduction of about 10 
per cent in the gross tonnage of gar- 
bage» and of 30 per cent in the tonnage 
of fat recovered can only have been 
accomplished by a real and widespread 
saving and utilization of food materials 
which ordinarily go into the garbage 

Gbneral Stability op Food Con- 

Table II and Figure 1 indicate how 
difficult, not to say impossible, it would 
be to lower by any substantial amoimt 
the gross total food intake of a nation's 
population, so long as there is an 
abundance available. The experience 
of every country in the war shows that 
despite regulations, however drastic, 
and propaganda for voluntary reduc- 
tion of the intake, people will eat just 
about the same total amount, if they 

can get it. They can be induced to 
stop wasting, and to save edible mate- 
rial which would otherwise go into the 
garbage can. Also, if there is an actual 
shortage of all foods, as was the case 
in Germany during the war, the total 
calory intake will be perforce reduced. 
But in the presence of plenty all expe- 
rience goes to show that the food con- 
sumption of any nation, per capita of 
population, is exceedingly stable over 
long periods of time. 

From the standpoint of true thrift 
it is desirable that such stability of 
consumption should obtain. The 
human body is a machine. Food is its 
fuel. If the machine is to maintain a 
given output of energy it must con- 
sume a given proper amount of fuel. 
To try to make the machine perform 
on a reduced fuel consumption, below 
the level which human experience 
through centuries has shown to be the 
optimum for efficient performance, 

Digitized by 



The Annals op the American Academy 

would be the height of folly, so long as 
adequate supplies are available. The 
human machine is so delicately organ- 
ized that there is every ^ason to 
believe that if the nation's total calory 
intake were to be reduced by so small 
an amount as 10, or even 5, per cent 
over a period of months the results 
would be promptly apparent in in- 
creased mortality rates, diminished 
output of industry, and greatly in- 
creased morbidity. 

The points which were stressed in 
Mr. Hoover's Food Administration 
conservation campaign seem to point 
tjie way to true and sound food thrift 
more wisely and justly than has ever 

been done before. These points were 

1. General conservation, by the elim- 
ination of waste of edible materials 
wherever and however possible. The 
effectiveness of this has been demon- 
strated by the garbage figures, to take 
but a single instance. Many others 
might be given. 

2. Special conservaiiony by substitu- 
tion of one food material for another 
which it was desired to save for essen- 
tially military purposes. This was 
the method taken to conserve a short 
wheat supply. 

The effectiveness of this special con- 
servation is well shown in Figure 2. 



/9//-/8 /9tZ-i3 /ai3'J4 /&f^-/5 /9t^S6 JQf6rr iOfr-lB 

Fig. 2. Showinq the Pebcentage Increase ob Decrease in Consxtmption in 

CEDING. For Explanation See Text 

Digitized by 


Food Thbift 


In this diagram the total length of 
the bars from the line shows the 
total percentage increase or decrease in 
consumption in 1917-18 as compared 
with the preceding six years. The 
cross-hatched portion of each bar 
shows the percentage increase in pop- 
ulation, and therefore the part of the 
increased consumption to be expected 
as a result of population increase. 
Where the black bar is below the top 
of the cross-hatched population bar it 
means a conservation. Thus the true 
conservation on wheat amounted to 
10.80+5.73 = 16.53 per cent of the 
normal average consumption. 

It will be noted at once that the 
commodities showing great increases in 
consumption in 1917-18 over the pre- 
ceding years are, for the most part, 
those which the Food Administration 
urged to be substituted for articles of 
which the supply was less abundant, 
and for which the needs of the Allies 
were greater. Thus, rye, which con- 
stituted the most popular of the sub- 
stitutes for wheat in the public mind, 
shows the greatest increased consump- 
tion in 1917-18. Next to it stands 
the "Other cereals" of our classifica- 
tion, including barley and buckwheat. 
Nuts, rice and the vegetables generally 
show increases beyond the population 
increase, showing that the people very 
generally followed the suggestions of 
the Food Administration to consume 
more of these products and save wheat. 
The articles on which the Food Admin- 
istration most strongly urged con- 
servation — ^namely, wheat, beef, mut- 
ton, pork, and the sugars — all show 
either a consumption actually below 
the normal average, or else a very 
slight absolute increase well below the 
population percentage increase. In 
either case a real and substantial con- 

servation is, of course, shown. The 
decrease in consimiption of the most 
popular fruits, oranges, apples, and 
bananas is. largely if not entirely ex- 
plained by high prices for these' 

The health and efficiency of the 
American people did not suffer in the 
sUghtest degree from thei^ food sub- 
stitutions. There is no reason why the 
same method cannot be voluntarily 
applied by the people in peace as well 
as in war, and for economic as well as 
military motives. During the past 
summer I have had the privilege of 
visiting and talking over the economic 
situation with a considerable number of 
the largest manufacturers of all kinds 
of food products, from the Atlantic 
to the Pacific Coast. The outstand- 
ing general result of this experience, 
to which the supporting testimony 
was virtually unanimous, was that the 
demand for the highest grade of fancy 
products, put up in the most expensive 
way in the most costly packages, 
was greater than could be supplied; 
while on the other hand, standard 
grades of which the food value was 
just as great, but the price lower, were 
difficult to dispose of. And yet during 
this very period there was great pub- 
lic clamor, coupled with activity about 
equally furious and futile on the part 
of our legislators, regarding the high 
cost of living in general and of food in 
particular. It costs a manufacturer a 
definite and substantial excess amount 
to produce a highly fancy food product. 
But the product contains no more 
protein, or fat, or carbohydrate, or 
calories than does a standard article 
(sometimes indeed less), nor is the 
fancy grade any more sanitary, broadly 
speaking. Yet people are loath to 
buy any food except what they call 

Digitized by 



The Annals of the American Acadebtt 

Table V 
Coit of Food in Rdatum to lis Energy Value 

Relative Cost of 100 Calories, 


Bread Being Taken as 100 





per Lb. 

Oct 1 










Flour, graham 






" wheat 







" rye 






Flour, barley 






" com 






Hominy grits 






Sugar, granulated 






Sirup, com 






Flour, buckwheat 






" rice 






Barley, pearled 












Lard, pure leaf 
Rice, fancy head 











Oil, cottonseed 






Macaroni (bulk) 






Oil, com 






Beans, navy 












Raisins, seeded 






Crackers, oatmeal 






" graham 






Potetoes, white 






Cocoa (bulk) 






Prunes, medium 






Peaches, evaporated 












Potatoes, sweet 






Cheese, American Cheddar 






Butter, creamery 












Honey, comb 












Ham, sliced 






Mackerel, salt 






Oil, Italian olive 






Com, canned 






Pork chops 






Leg of mutton 

Salmon, Red Alaska canned 











Salmon, fresh 






Beef, round steak 




681 . 







Eggs, fresh gathered 
Halibut steak 











Peaches, canned 






Cod, salt 






White fish 






Tomatoes, canned 






Beans, string, canned 





Digitized by 


Food Thrift 


the "best." A point which iniaiits 
emphasizing is that thrift, like Boston, 
is a state of mind. 

Food in Relation to Energy Value 

To give point and direction to 
thoughts similar to those expressed 
in the preceding section it was the 
writer's custom during his connection 
with the Food Administration to issue 
monthly a typewritten bulletin, to 
members of the organization for pub- 
licity use, having the title "Cost of 
Food in Relation to Its Energy Value." 
A sample table from one of these bulle- 
tins (that for October 1, 1918) is re- 
produced here as Table V.. The table 
gives the relative cost of 100 calories 
obtainable from various foods at the 
average retail price prevailing in the 
United States on the dates named. 

Such tables as this can be prepared 
very simply and easily by anyone 
with an elementary grasp of arithmetic. 
They should form one of the essen- 
tial bases and guides of food thrift. 
Canned string beans no doubt have 
their place in the dietary of the rich, 

but it is difficult to see what place they 
have in the practice of food thrift. 

Prerequisites to Practice of 

By way of summary it may be said 
that in the opinion of the writer preach- 
ing the virtues of thrift is much like 
any other sort of preaching, a sadly 
thankless and inefiPective task. What 
I have tried to do in this paper, in 
lieu of exhortation, is to present some 
basic facts about the physiology and 
economics of food, and to point out 
how any people thriftily minded may 
reduce their national food bill much 
below what ours is and suffer no evil 
consequences, but only good. The 
way lies along two lines, which are: 
First, reduction of avoidable waste of 
food at every stage from the farmer's 
field to the consumer's stomach; and 
second, the substitution of cheap foods, 
physiologically just as nourishing, for 
dear foods. But first of all, and all the 
time, it is a prerequisite to the practice 
of thrift, that the people be thriftily 

Digitized by 


The Garbage Pail, a National Thrift Barometer 

By H. L. Baldensperger 
Sometime Executive Officer, Salvage Division of United States Army and also Member of War 
Prison Labor and National Waste Reclamation Section, War Industries Board 

THE city dump is no respecter of 
persons. It reveals the ineffi- 
ciencies of our industrial and communal 
organizations. It serves as a measure 
of the efficacy of our thrift movements. 
Thrift was the war-time slogan; the 
government bent every energy to 
induce us to save. The influence of 
this campaign was registered in the 
city dump. A study of the municipal 
reports covering the years 1917-18 
will show a remarkable decline in the 
amount of waste handled by the city 
agencies but these same reports reveal 
the lack of permanent influence of 
this campaign. The amount of gar- 
bage handled in our larger centers in 
November, 1918, increased from 10 to 
25 per cent over the amoimt of mate- 
rial handled in the previous month . It 
was not necessary to consult the news 
dispatches to ascertain that hostilities 
had ceased, — the garbage pail revealed 
that fact. 

Here is a measure of the effective- 
ness of our movements for organized 
thrift. We may theorize about sav- 
ings, we may develop programs for 
increasing individual and social thrift 
but it is to the city dump that we must 
look to secure the data by which our 
program can be made effective. 

Garbage Reclamation in the Army 

One is tempted to say that garbage 
won the war. Not because it contains 
matter essential to the manufacture 
of mimitions, not because it is the chief 
supply of glycerin upon which the 
success of any militaiy program de- 

pends, but because it checked food 
waste in the Army and became a 
safeguard of the efficiency and morale 
of our men. 

It is true that few Army officers 
recognized that fact; it is doubtful 
if many would agree even in the face 
of the evidence because the average 
official of the War Department Hke 
the average citizen looks upon gar- 
bage as a nuisance, as a loathsome 
thing which must be put out of sight 
and mind once and for all time. 

Garbage in the early days of the 
war was more than a nuisance to the 
War Department; it was a bug-bear. 
Every system of disposal was open to 
severe criticism. Incineration was de- 
structive of valuable by-products and 
fuel. The method of sale to con- 
tractors in bulk was inefficient. The 
government did not receive an ade- 
quate return for the waste, and valu- 
able material with glycerin content 
was being disposed of for stock feeding 

It remained for an officer of the 
British Army, assigned to our govern- 
ment to assist in our reclamation 
work, to develop the true function of 
garbage. Col. Sir Frank B. Beau- 
champ adapted the British system to 
our needs and through the initiative 
and foresight of Col. John S. Fair, 
Assistant to the Acting Quartermaster 
General, saw it put into successful 
operation in this country. Under this 
plan each unit of the Army conducting 
a mess was compelled to keep a six- 
fold classification of its table waste. 


Digitized by 


Gabbaoe and National Thbift 


This material as s^^gated was col- 
lected daily by the salvage corps, 
weighed and the proper records cover- 
ing the weight of each class was checked 
against the separate units. 

The daily tally sheet was the index 
to the kitchen efficiency of the various 
units of the division. It became a 
danger signal in many instances be- 
cause a high percentage of waste 
meant one of two things, over-feeding 
or poorly prepared food. Efficiency 
and morale were affected by either 
situation; valuable food was being 
consumed to no purpose. The salvage 
officer by consulting this tally chart 
was enabled to locate the danger 
points at once. A hurried but heated 
interview with the mess sergeant and 
a rapid transfer of kitchen personnel to 
the School for Bakers and Cooks was 
the usual means of dealing with the 
situation. Garbage became the terror 
of the inefficient, — ^the camp inspector 
worked unceasingly and untiringly. 

This system increased the revenue 
derived from the sale of the waste 
material; it checked the loss of valu- 
able by-products but its true value lay 
in the fact that it revealed the points 
of inefficiency. It indicated those 
centers where additional education and 
training were needed. 

Garbage and Institutional Effi- 


Society needs some such measure to 
check the efficiency of its social insti- 
tutions. It must utilize its garbage 
paQ, its city dump and its institutions 
to determine if it has in reality adopted 
thrift, if it is utilizing its material and 
man power effectively. * The success 
of this system in the Army Ues in the 
fact that the men were under social 
control. There is a portion of our 
people equaling in number the forces 


called to the colors who are under the 
same system of control. Our insti- 
tutional population is maintained 
under a somewhat similar system of 
centralized authority. Is it not time 
to look at our institutional garbage 
pails in order to. check the efficiency 
of our institutional kitchens? 

Our government put a similar sys- 
tem of check into operation at a fed- 
eral institution. The War Prison 
Labor and National Waste Reclama- 
tion Section of the War Industries 
Board issued an outline of this sys- 
tem and had it adopted at a naval 
prison. Other institutions under the 
control of the federal government 
were to adopt this plan when the armis- 
tice suspended the operation of the 
War Industries Board. As a result of 
this suspension of activity the other 
federal institutions are pursuing the 
old policy of dealing with garbage as 
a nuisance and our state institutions 
are following a similar policy. H. C. 
Wright, in his Fiscal Control of 
State Instituiionsy reports but three 
as having such a system of checking 
the efficiency of the kitchen. It is 
time for our institutions to benefit by 
the experience of the War Department 
and through State Board of Charities 
or similar bodies to establish some 
such system of measurement, some 
method of utilizing their garbage as a 
measure of the efficiency of the man- 
agement of the institution. 

The City Dump 

Our attitude is the same in regard 
to the other waste material we dis- 
card. We erect unsightly dumps as a 
monument to our inefficiency. We 
compile Uttle or no data relative to 
the type or amount of material dis- 
carded by the community. We talk 
thrift while we bury in the dump arti- 

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The Annals of the Amebican Academy 

cles with the potential value of mil- 
lions. The war temporarily checked 
this tendency. The amomit of sec- 
ondary metals reclaimed in 1916 was 
more than ISO per cent of the amount 
returned to industry in the previous 
year. The amount of the heavy 
metals conserved and re-utilized in- 
creased about 75 per cent in the same 
period. Bear in mind the condition 
of the garbage pail following armistice 
day and you can readily depict the 
condition in regard to the city dump. 
We are again swinging back to pre- 
war conditions at our points for 
h andli n g the waste of the community; 
we are again diverting needed labor to 
the extractive industries while we 
build ore dumps at the doors of our city. 

The WramlAN Plan 

Our dty dumps and our correctional 
institutions are the products of the 
type of thinking which attempts to 
solve a problem by ignoring it. We 
waste men and material because it 
requires time and effort to find the 
necessary solution. We lose our un- 
salvaged material, we waste our unad- 
justed man. 

The Chicago House of Correction 
is an exception to this rule. John L. 
Whitman, sometime superintendent of 
that institution, inaugurated a sys- 
tem of employing the physically unfit 
man in handling the waste of the com- 
munity which not only revealed the 
potential wealth which exists in the 
dump and in the waste man but also 
served as a basis of the government's 
war-time program for waste reclama- 

Under Whitman's plan of utiUzing 
prison labor in handling the waste of 
the mimidpal departments, the in- 
mates thus employed were enabled to 
make a return equal to four times their 

cost of maintenance an were enabled 
to contribute a sum equal to 50 per 
cent of the cost of maintaining the 
institution. The material after being 
properly handled was sold for a sum 
900 per cent more than was received 
for a similar amount when it was sold 
unsorted. Pieces of copper wire which 
had been thrown aside by the electrical 
department netted more than $43,000, 
waste paper made a return of over 
$4,000 while old rags saved from the 
garbage made a return of approxi- 
mately $4,000 and the platinum in the 
worn out electric light bulbs was found 
to be worth $9,000. These figures, 
representative of the returns secured 
for various items of waste, are com- 
piled from the financial statement for 
the year 1916, — a representative pre- 
war year in the waste trade. 

Obganized Thbift in the Army 

Whitman's system proved to be the 
solution of the two pressing problems 
which were facing the War Depart- 
ment in 1917. An establishment 
functioning with a machineiy untested 
by war was proving unfit for the task. 
Waste was rampant. Such a situa- 
tion was to be expected. A small 
staff working under archaic methods 
of handling material and with theories 
ill-adapted to the times was not only 
wasteful of material, it was also waste- 
ful of man power. The rigid per- 
sonnel system could not attempt to 
adjust the man who did not readily 
fit into the miUtary machineiy. He 
was either discharged as an ''inept" or 
handled as a militaiy misdemeanant. 
Either system meant the possible in- 
crease of institutional population, 
either civil or militaiy and any addi- 
tion to that dass which is maintained 
in idleness meant a serious drain on 
the resources of this country. 

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Gabbaoe and National Thrift 


This problem was referred to Mr. 
Hugh Frayne, General Organizer of 
the American Federation of Labor, 
who represented labor on the War 
Industries Board. Mr. Frayne was 
assisted by Mr. John J. Manning, also 
a member of the Federation and a deep 
student of the problems of prison em- 
ployment, and also by the present 
writer. A plan was developed and sub- 
mitted to the Board by Mr. Frayne. 
Whitman's plan was the basis of this 
program which called for the estab- 
lishment of a central bureau in the 
War Department which was to have 
sole jurisdiction over worn material, 
this material to be repaired for re- 
issue or prepared for the market by 
labor companies which were to be 
composed of men unfitted for military 
service or by general prisoners and 
prisoners of war. 

This plan was approved by the War 
Industries Board and forwarded to the 
War Department for consideration. 
The plan was put into effect in the 
early jOLrt of 1918 but with one serious 
defect, — no provisions were made con- 
cerning labor and as a result the Con- 
servation Division could not function 
either as a reclaimer of material or of 

This defect was soon remedied. 
The Conservation Division was placed 
under the direct supervision of Col. 
John S. Fair who was largely responsi- 
ble for the effective development of 
this feature of army administration, 
as well as the proper development of 
the remoimt and fuel and forage 
branches of the Quartermaster Corps. 
Col. Fair drafted and secured the pas- 
sage of special regulations covering the 
reclamation activity of the Army and 
in these regulations he adopted the 
program of the War Prison Labor and 
National Waste Reclamation Section 

of the War Industries Board. He 
provided for salvage companies which 
were to be composed of men unfit for 
line duty. These companies com- 
prised those men who theretofore had 
been discharged as *' inept" or who 
had fallen afoul of the military courts 
and had become military misdemean- 
ants. Col. Fair also arranged for the 
utilization of prisoners of war, con- 
scientious objectors and general pris- 
oners in certain features of the sal- 
vage work. Thus, at one stroke was 
launched the greatest movement for 
organized thrift in the history of our 
army, a movement which decreased 
criminality, abolished idleness as a 
punishment for miUtary offenses and 
made a monetary saving estimated at 

Utilization op the Unadjusted 


Broad powers were granted the 
Salvage Corps in the development of 
its work. It was authorized to de- 
velop agricultural, mineral and forest 
lands owned, purchased, or leased for 
the army. Under this provision Col. 
Fair in cooperation with the group of 
the War Industries Board responsible 
for the inception of this program 
developed a plan looking to the utiliza- 
tion of the socially unfit from the miU- 
taiy standpoint. This plan would, 
doubtless, have blazed a new trail in 
the field of penalogy and would have 
assisted materially in developing a 
national waste conservation move- 
ment so essential to any scheme for 
organized thrift, but the armistice 
was signed before the program in its 
entirety could be put into effect. 

The movement for the establish- 
ment of the camp gardens is a part of 
this program. Here again the basis 
of the program was the desire to utilize 

Digitized by 



The Annals of the American Academy 

the waste man. The opportunity 
to secure added food suppUes from 
regions adjacent to the camp and the 
cultivation of idle lands were factors 
which received consideration but the 
primary reason was a desire to open 
additional avenues of useful employ- 
ment to the unadjusted man under 
the control of the military group. 
Those of us who were instrumental in 
developing this program and putting 
it into effect did not consider the 
financial return, large though it was, 
as an index of the real function and 
success of this service. The number 
of men returned to the line, the amount 
of Liberty Bonds purchased by prison- 
ers of war employed at a small wage 
on these camp farms served as our 
measure of the effectiveness of these 
newer ideas of thrift. 

The War Prison Labor and National 
Waste Reclamation Section was in- 
strumental in developing other sys- 
tems of waste conservation which 
included the use of the unadjusted 
group. It is to this Board that the 
securing of the executive order per- 
mitting the use of state prisoners on 
federal work is to be attributed. 
Under this authority a large shoe 
repair shop operated under the super- 
vision of the Salvage Corps was 
installed in the New Jersey State 
Prison at Trenton, N. J. Here with 
unskilled and untrained men the 
army developed its largest quasi- 
governmental shop which prepared for 
re-issue a thousand pairs of worn 
shoes daily. 

Thb same section was responsible 
for the movement for the establish- 
ment of the Whitman plan in other 
centers and a number of communities 
organized their salvage work along 
the lines developed by this group. 
Unfortunately, the work of this sec- 

tion ceased with the disbanding of the 
War Lidustries Board and, although 
the Department of Conmierce assumed 
charge of the function, the movement 
was but short lived. Congress was 
busily at work saving pennies and los- 
ing dollars and refused the necessary 
funds for the continuation of the 
movement which would certainly have 
assisted materially in the development 
of a national system of thrift. De- 
spite the fact that this section had but 
a short time to develop its program an 
examination of its records will show 
that in at least three cases prisoners 
were utilized to marked advantage in 
handling the waste of the community. 

Disposal of Army Supplies after 

This section of the War Industries 
Board made one final contribution on 
the eve of its disbanding which has had 
far-reaching effect. The signing of 
the armistice found the Salvage Corps 
with hundreds of thousands of articles 
on hand waiting repair. The army 
had no further need for renovated 
material. Under such conditions this 
material would be sold and utilized in 
the manufacture of other articles. 
The members of this section of the 
War Industries Board pointed out 
that the wearing value of these articles 
should be conserved in their present 
form and proposed that the army sell 
this material to the states to be re- 
paired by the inmates of the state 
institutions and utilized in mainte- 
nance work. The army accepted this 
plan and the machinery of adminis- 
tration was set up but in the legal 
tangles which ensued the opportunity 
for the development of this idea was 
lost. However, as a result, of the 
movement to put it into effect a ruling 
was secured which permitted the sale 

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Garbage and National Thrift 


of material to states and municipalities 
and upon that ruling the army devel- 
oped its system of chain stores for 
disposal of army supplies. 

Municipal Waste Problems 

There is a growing interest in the 
city dump. The experience of our 
government wiD, doubtless, have a 
marked effect in the future develop- 
ment of our municipal and industrial 
functions. We must realize how ar- 
chaic and wasteful our methods are 
and what a social cost is entailed by 
their retention. Two groups have 
recently become interested in the ques- 
tion of the disposal of the city waste. 
Both groups attribute inefficiency and 
cost to the same factor; the same con- 
clusion was reached in widely different 
fields of research and interest. Our 
present system of communal waste 
collection has developed a character 
who is the logical development of our 
present lack of poUcy in dealing with 
the waste of the community. The 
collector or junk man is looked upon 
as a social liability by the social worker 
and the city engineer. 

The Junk Man 

The cost of collecting the rubbish of 
the city is increased by the junk man. 
This fact is revealed by the recent 
research in this field. The city col- 
lection is slowed up by the fact that 
the city collector picks the valuable 
waste out of the litter. This means 
not only a loss of resrenue but a greater 
loss in retardation of the collective 
service. Scavengers who pick the 
rubbish cans prior to the rounds of the 
collector increase the cost of collec- 
tion by scattering the material. The 
city engineer has seen the problem but 
bas not as yet offered a solution. 

Juvenile Delinquency 

The social worker has also indicted 
the junk man. He is charged with 
being the chief contributory factor in 
male juvenile delinquency. A super- 
intendent of a correctional institution 
for juveniles, basing his contention on 
the record of three hundred commit- 
ments, claims that the junk business 
is primarily responsible for 90 per 
cent of the delinquencies. The Chi- 
cago Juvenile Protective Association 
made a thorough investigation of 
this question and reached the same 
conclusion. They found, in Chicago, 
where the system of utiUzing prisoners 
in waste reclamation was first inaugu- 
rated, that the itinerant junk man was 
the chief cause for commitment to 
institutions for juvenile delinquents 
and often responsible for the first step 
in criminaUty which ended in the 
Chicago House of Correction, the 
center of the new system for dealmg 
with city waste. This group proposed 
breaking this vicious circle by mimici- 
paUzation of the jimk business and 
elimination by ordinance of the junk 
collector. It was argued that this 
would give added revenue to the city 
and eliminate a large amount of juve- 
nile delinquency. 

Waste by the Housewife 

Again, the data covering the flow of 
material to the city dump can be used 
to show wherein this movement for 
municipaUzation would have Uttle or 
no influence as an educational move- 
ment. As the conditions now stand 
the junk collector performs an eco- 
nomic service. He secures as large 
an amount of waste material as pos- 
sible. To municipalize might mean a 
decrease in the amount conserved. 
A study of the waste handled by the 

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The Annals of the Amebican Academy 

City of Rochester shows that the 
housewife is the real contributing 
factor in our present system of waste 
by the conununity. Due to her fail- 
ure to make the proper segregation 
valuable waste conmiodities are being 
lost in the ash dump. It was esti- 
mated that with proper segregation, 
the amount of the waste material 
conserved at the dty dump would 
be increased at least 80 per cent. 
Municipalization would not check this 
loss of valuable waste in the ash dump. 
Sentiment, not law, will be the only 
effective measure for checking this 
present system of inefficiency. Patri- 
otism became the driving force for 
conservation during the war. How 
effective this force was in comparison 
with the previous means for stimu- 
lating conservation in pre-war days 
can best be measured by a reference 
to the increasing material handled 
during the war and the decline in the 
amount of material sent to the city 
dumps. We need a similar force in 
the days of peace if we are to increase 
the amount of waste material which 
will be conserved and sent back into 
the channels of consumption. The 
answer to this problem, doubtless, lies 
in a system of cooperative waste sav- 
ing such as that which was launched by 
the government and put into opera- 
tion in Akron, Ohio. 

Cooperative Waste Saving 

The program for an incorporated 
conmiunity waste saving scheme was 
fostered by the War Prison Labor and 
National Waste Reclamation Section 
and was put into successful operation 
by George W. Sherman, Salvage Man- 
ager of the B. F. Goodrich Co., Akron, 

This system will not only check 
waste in the home, it will assist con-. 

servation in industry. By thb system 
a f actoiy or store with small volume of 
waste can have it handled at the same 
cost per pound and will receive the 
same revenue per XK>und as an industry 
with a large turn-over. By this system 
it would be possible to check the dis- 
tribution of material, which, hereto- 
fore, has been impossible due to 
the excessive cost of handling small 
accumulations of waste material, 
and will inculcate ideas of thrift 
by demonstrating the added value 
which accrues with increased accu- 
mulation and proper assorting of the 
waste material. 

Space does not permit a discussion 
of the details of this system. The 
Department of Commerce has investi- 
gated this movement and reported 
upon its successful operation in a pub- 
Ucation known as the Akron Industrial 
Salvage Campanyf — A Community In- 
corporated Waste Sauing Experiment. 
In it wiU be found interesting data 
covering the cost of operation, the 
financial return and the future develop- 
ments of the work. 

But one feature should be mentioned 
here. That is the system of collecting 
the waste paper from the pubUc schools 
and applying the net proceeds for play- 
ground work; and the collection of the 
waste of the home for furthering the 
welfare work of the community. In 
this program, doubtless, hes the an- 
wer to the problem of finding a news 
force to intensify savings, a new com- 
munity driving power similar to patri- 
otism to force the individual to save 
material for the benefit of others. 

The Board of Managers of the Chi- 
cago House of Correction, in the annual 
report for the year 1918, discussed the 
salvage work of the institution and 
stated that the present returns could 
not be continued indefiinitely due to the 

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Garbage and National Thbift 


fact that in the early stages of the 
movement the institution micovered 
the accumulation of years in the vari- 
ous dty departments, that they could 
not hope to secure the same amount 
each year due to the fact that the 
separate departments were certain 
to sell the material direct to the dealer. 

In this naive statement is revealed 
the administrative attitude towards 
waste material and the proper develoi>- 
ment of the functions aad machinery 
for securing an adequate return from 
its disposal. Experience had given 
them a measure which would have 
enabled them to force through a pro- 
gram for centalized control over the 
waste of the city, a system which has 
been successfully adopted by the army 
salvage movement. 

This attitude of mind on the part 
of the officials shows the weakness of 
municipalization and the strength of 
the Akron plan. A cooperative com- 
pany working on the lines of a com- 
mercial concern will be enabled to 
secure such convincing data as to 
the waste of the municipal de- 

partments and the homes that it 
will be enabled not only to increase 
the revenue from the waste but also 
to decrease the amount of waste in 
the community. 

Thrift is paramount but habits of 
thrift cannot be inculcated by precept. 
Modem society has left Uttle for the 
initiative of the individual. Group 
action is the basis of our modem com- 
munal life. Our thrift movements, 
heretofore, have depended upon indi- 
vidual initiative. In order to have 
our thrift movement conform with 
modem sodal conditions it is necessary 
to organize for communal action. We 
must throw the emphasis on spending 
rather thaa on saving and develop 
methods of measuring the efiPectiveness 
of our system of expenditures so that 
we can secure the maximum retiun for 
the dollar spent by the community. 
We must develop some system of 
measurement similar to the system 
utilized by the army to force efficiency 
upon the group. We need to utilize 
our garbage pails as barometers of the 
national thrift movement. 

Digitized by 


The Function of Salvage in the Education of 
Industrial Workers 

By George W. Sherman 

President, Akron Industrial Salvage Co. Fonnerly, Manager of Salvage Department 
of The B. F. Goodrich Rubber Co. 

PossiBiLi'nEs OP Waste 

MODERN industrial salvage meth- 
ods have been developed by a 
pressing need to dispose of large vol- 
umes of material in the best and most 
economical method. The education of 
the industrial worker was no factor in 
the inception of the plans and I may 
say, without fear of contradiction, that 
it was no factor in their development 
and is today no deliberate factor in 
most of the plants that have devel- 
oped this subject. The problem of 
finding uses for a constantly changing 
group of materials flowing overwhelm- 
ingly down upon a Salvage Depart- 
ment, generally crowded as to space 
and hampered by lack of equipment 
and labor, is as fascinating and en- 
grossing as it is overwhelming, and the 
fact that these activities have served a 
purpose in the education of workers 
has been purely incidental and fortu- 
nate rather than deliberate. The later 
phases of this development whereby 
great values are produced from most 
unpromising sources is strictly a cold- 
blooded business proposition, but it has 
nevertheless fostered the educational 
feature which has been of more value 
than any other incidental result. 

There is no line of activity calling 
for more keen or brilliant imagination 
of a practical type than the making of 
something from nothing; the multiply- 
ing of values by sorting, grading, clean- 
ing, or by ingenious mechanical or 
chemical contrivances and simple man- 

ufacturing operations. The men and 
women who live their industrial lives 
close to these problems sense this fact 
and develop remarkable abiUty and 
skill in conceiving and carrying out 
manipulations, in planning new uses 
for materials, or in reducing costs or 
improving quality. The incentive for 
this type of service consists in the op- 
portunity to apply it. In most staple 
manufacturing it is very difficult to get 
changes made, because of the large 
investment in equipment and because 
of the inertia of an established process. 
In salvage work nothing is fixed or 
permanent and one is always privi- 
leged to test out in a crude way any 
dream he may have for the improve- 
ment of anything. 

Popular Attitude Toward Waste 

But I am forgetting that many of 
my readers do not know of modern 
industrial salvage methods, and that 
the sole point of view of most of them 
may be outlined as follows: 

Get rid of it! 

Throw it away! 

Send it to the dump! 

Bum it up! 

Chuck it in the garbage or ash can! 


Sell it to the "junker man," if he'll buy! 
Phone the Salvation Army to send for it, if 

they want it! 
Take it to the United Charities, if it fits their 

Give it to the first Rummage Sale that asks 

for it! 
Pass it on to your own pet charity! 
Have a sale at your home! 


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Salvaqe and Industrial Workers 


Pay a teamster to dean up and haul it away! 

Or, dispose of it in any one of a hundred other 

ways that will immediately occur to you! 

Then you rest content that a nuisance 
has been eliminated, that your house» 
or office, or store, or factory, or school 
is spick and span and that the way is 
clear for real business to proceed in the 
home, the office, the store, the factory 
or the school. Let me change the 
pronoun from you to toe. For I, my- 
self, do all these things at times, even 
though it is my business to do some- 
what differently and even though I 
know that the waste problem can be 
better solved than it is. Again, let us 
change the pronoun from you to we 
because I am seeking your aid and 
codperation in finding and applying 
the program which will advance this 
problem toward a better solution. 

Waste Reclamation an Essential 

There seems to be a difference of 
opinion as to the Biblical text that 
promises the eternal presence of ''the 
poor," but no one will disagree with the 
maxim that waste is an essential of all 
physical activities. I use the term 
"waste" here in the broad sense, cov- 
ering unavoidable trimmings, scraps, 
garbage, ashes, paper, junk, etc., as 
well as similar items produced by care- 
lessness. This acknowledgment es- 
tablishes an essential feature for the 
consideration of the subject as an im- 
portant, essential activity, because it 
is permanent to the extent of always 
being present. Not only is this prob- 
lem always present, and always will be 
present, but with all humility each 
new student in this line must admit it 
always has been present. 

And in spite of the fact that each new 
student, each new recruit, each organi- 
zation conducting a campaign, feels 

sure that their little effort to use the 
junk pile is a pioneer discovery, if not 
of the pile itself, at least of a general 
panacea for the solution of the waste 
problem, it is obvious that we are deal- 
ing with a problem as old as the uni- 
verse, and although histoiy has not 
devoted a great deal of space to the 
subject as a separate entity, reference 
to it is frequent, showing that much 
study has been expended through the 
ages in solving the problems of waste. 
Lazarus lived on the crumbs that fell 
from the rich man's table; Ruth 
gleaned the wheat left in the field by 
the harvesters; Dickens tells of the 
fortune made by the dustman in Our 
Mutual Friend; the close economies 
of the people of France, which have 
become traditional, involve countless 
solutions of the problems of waste; 
many of the fortunes of our own coun- 
try were built on the business of the 
itinerant tin peddler who bartered his 
wares for old rags, metal, bottles, etc., 
and at the same time bartered the news 
of the countryside for other wares of 
the same class; the humble, diligent, 
often despised ''junka-man" of the 
backyards and alleys of the dty solves 
many of the specific phases of our prob- 
lem; and the magnates of the waste 
trade, their business often growing from 
these same humble sources, have de- 
voted their lives to the furthering of 
the same investigation. And who can 
tell the countless garments made over 
by the mothers of the world for another 
use or for the next smaller member of 
the family. And so it must be with 
due humility that we presume to do 
better or to do more or even to do dif- 
ferently in this Une than the accumu- 
lated wisdom of all time has done. 

Educational Aspects 
We must know then: (1) What has 

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The Annals of the American Academy 

been done? (2) In what ways does 
past accomplishment fall short? (3) 
What can we suggest to overcome or to 
lessen these shortoommgs? 

What has been done? Specific prob- 
lems have been solved, and often well 
solved, by the millions. 

Specialists have concentrated keen 
minds, wide experience, limitless funds 
and comprehensive business organiza- 
tions on the problem of making money 
on special items or groups of items, and 
incidentally have advanced the state 
of the art as always happens under 
such circumstances. 

Municipalities, state and national 
governments have investigated, re- 
ported and in many cases acted on the 
reports of certain phases of waste. 
Government activities, however, ex- 
cept possibly in war emergency, have 
approached the problem mostly from a 
mere housecleaning standpoint. 

Manufacturers have faced and 
solved countless problems of value- 
less tonnage and have produced a vast . 
increase in value. 

In what ways does past accomplish' 
ment faU short? (1) In the solving of 
specific problems only without a recog- 
nition that general basic principles ap- 
ply to the whole subject and form a 
legitimate field for a general specialist. 

(2) In the failure to solve, as a part of 
the general problem, the features which 
apparently do not pay and leaving the 
them as a housecleaning nuisance. 

(3) In the failure of the present busi- 
nesis specialist to recognize that his 
business lacks permanence due to his 
narrow field. His very success in 
increasing the number of uses for an 
item or in improving its value, gradu- 
ally cut down the margin as this 
knowledge becomes more and more 

If , therefore, he confines himself to 

too narrow a group, he will inevitably 
work himself out of his business. Also, 
in the constantly changing methods of 
manufacture, the identity, shape, color, 
chemical or physical characteristics of 
the waste changes frequently. The 
business built up on one item or type of 
waste may last for only a compara- 
tively short time and then disappear 
with the disappearance of that item of 

(4) In the wrong psychological 
attitude toward the whole subject. 
Waste is a discard from some physical 
activity and we are all looking back- 
ward from the standpoint of that 
activity insofar as we consider the 
subject at all. 

We use too readily the terms waste, 
trash, scrap, swiU, garbage, jimk and 
simUar terms of contempt. 

What can we siLggest to overcome or to 
lessen these shortcomings? We^ can 
combine large groups of waste pro- 
ducers, either co5perativeIy, or as con- 
tributors or customers of a general 
organization, to handle all types of 
waste produced or used by the group. 
Thus we can gain sufficient tonnage of 
all important items to allow of proper 
grading, marketing and shipping, even 
though none of the contributors may 
have enough by himself to warrant him 
in even saving those items. 

We gain, on account of the volume of 
the combined business, an organiza- 
tion, plant and equipment for economi- 
cal handling, wise storage and manip- 
ulation, proper grading and in some 
cases manufacturing, as well as ex- 
perimental research and development 
work which would not be warranted in 
the case of most of the contributors. 

^ A sucoeasf ul experiment along this line is now 
thriving in Akron, Ohio, in the work of the Akron 
Industrial Salvage Company, of which Mr. 
Sherman is president. 

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Salvage and Industrial Workers 


We gain a stability not available to 
the narrow specialist, due to the fact 
that the handicaps of some line, from 
time to time, are counterbalanced by 
the unusual advantages of some other 

We conserve values that are now be- 
ing lost because there is no proper and 
comprehensive mechanism available 
for them all. 

We gain such a multitude of prob- 
lems that we can always grow, even 
though our solutions of former prob- 
lems do react and cut down the margin 
of profit as the improvement becomes 
general knowledge. 

We can eliminate the housecleaning 
feature for our government because we 
have taken all wastes and have, there- 
fore, left nothing behind. 

It is well to note here that no or- 
ganization can properly solve all these 
problems, but the plan outlined can 
handle everything in some way and 
reduce to a minimum the items and 
quantities which have to be thrown 
away or destroyed because no solution 
has been found. 

We can, and this is the large basic 
feature on which the whole program 
rests, produce a different psychological 
attitude on the part of all of us toward 
this subject by encouraging and popu- 
larizing the use of the words salvage, 
reclamation, conservation and other 
aristocrats of the scrap dictionary 
which imply the saving or conversion of 
lost material into legitimate merchan- 

We can take the subject seriously 
and realize that: '"Nothing useless 
is or low." But, principally we 
must leam to think always of the 
next man along the line, to put our- 
selves in his place and to look at our 
wastes not backward as a discard to be 
gotten rid of and forgotten, but for- 

ward from the standpoint of the con- 
sumer to whom they are raw materials. 

When this point is gained it will be 
immediately reaUzed that these raw 
materials are of greater value, if prop- 
erly graded as to condition, size, 
quality, etc., and particularly as to 
freedom from dirt or other foreign 
material or from damage by moisture, 
grease, oil, unnecessary cutting, etc., 
than if mishandled in any of these or 
other ways. This point of view must 
be luiiversal and its appUcation must 
become habitual to get the best and 
maximum results. 

The people actually producing the 
waste, whether metal chips, or cloth 
trimmings, or scrap paper, or garbage 
from home or restaurant, or rubber 
trimmings, or oil from machinery, or 
empty barrels, or tin foil from about a 
package, or foundry dross, or tin cans, 
or bottles, or feathers, or any other 
of the countless items which reach the 
waste channels of the country, must 
have this point of view and the habit of 
so handling these items as to preserve 
the greatest value possible for the 
industry waiting for them as raw 

The foremen and the management of 
factories where these people produce 
the waste materials must have this 
point of view and habit of thought 
so that they wiU supply to their work 
people the necessary f aciUties to make 
it convenient to preserve waste values. 
And in general everybody must do like- 
wise. Thus we have developed, either 
as salvage departments in large facto- 
ries, or as cooperative companies, a 
business program for getting maximum 
values out of waste. 
/ Reference has been made to a few 
bl the educational influences affect- 
^ing the people actually handling the 

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The Annals of the American AcADEBfY 

Inspirational Influences 

Let us see now what other in- 
fluences there are and what other 
groups are affected by any of these 

There is the influence of a large 
volume of business forcing attention 
and respect and reacting to a scru- 
tiny of the wastes controlled by the 
observer or his company. 

There is the influence of money 
made by the handling of wastes 
properly over and above that made 
by the usual house-cleaning attitude. 
This arouses interest and enthusi- 
asm over the prospect that the ob- 
server may share this money by 
handling his own waste products in 
the same way. 

There is the influence of the ob- 
jection of all normal mature minds 
to deliberate waste. These minds 
condone and even endorse wasteful 
methods because "familiarity breeds 
contempt," and because no adequate 
or better method of solving a press- 
ing problem of waste disposal has 
been brought to their attention. 
But when a new or better method is 
available, this normal objection to 
waste awakens from its sleep and 
strives to equal, eliminate or surpass 
the program presented. 

There is the influence of interest 
in anything new, of instinctive won- 
der at the simplicity of a process or 
machine seen for the first time, and 
of a wish to try it out or to improve 
upon it and in general to utilize the 
inventive faculty more or less dor- 
mant in the average mind. 

There is the influence of order and 
cleanliness which is an important 
feature of the programs described 
above and whose impression is 
deeper because of the unusual diffi- 

culty of keeping materials of this 
nature clean and orderly. 

There is a tendency to codperation 
between the management and the 
organization handling these mate- 
rials because no part of the group can 
get very far away from physical 
handling without losing touch with 
the life of the business. This is so, 
because of the continually changing 
type, condition and variety of the 
items. Thus the organization is and 
must be interested in all of its prob- 
lems. The company's officers, fore- 
men, clerks and workers, are allowed 
in on any and all discussions of 
physical problems and the nucleus 
of the solution is just as likely to 
come from the most humble worker 
as from the superintendent, manager 
or president. This working together 
produces harmony and a spirit of 
team work and pride in the company 
or department that is invaluable. 

These influences and others along 
the same line can all be grouped 
under the head of inspirational influ- 
ences. They are all breeders of 

No system of education gets any- 
where without the interest and en- 
thusiasm of the teacher and pupil. 
Knowledge is most effective, perma- 
nent and valuable when acquired un- 
consciously, incidental to the handling 
of normal obviously necessary work or 
problems, rather than deliberately, as 
it seems to be necessary to acquire most 
book learning. The modem handling 
of salvage problems does not necessarily 
teach details or facts or rules, but it 
does arouse the interest, enthusiasm, 
imagination and inventive faculties of 
the entire organization concerned in the 
work from top to bottom. 

And right here let me say that this 

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Salvage and Industrial Workers 


type of education is sometimes most 
sorely needed at the so-called top of the 
organization as well as at the bottom 
and in the middle. We must not over- 
look our obligation to the poor abused 
capitalist and officials while we are 
offering the best we have to our masters 
who work mostly with their hands. 
These same influences expand and 
have their inspirational effect on the 
departments delivering material to or 
getting material from a salvage de- 
partment; on the companies or indi- 
viduals supplying wastes to or buying 
products from the salvage company; 
and on the waste specialists, whose 
very success is built on keeping awake 
and learning wherever learning is to be 

But, you ask, ''Do these theories as 
to the inspirational value of the modern 
salvage attitude work out?" I reply 
without hesitation that in some cases 
the results are so discouraging along 
this Une that they would seem to dis- 
prove conclusively the theories ad- 
vanced. On the other hand, when men 
and women !9o develop in this work that 
they attract attention outside of the 
department and are transferred in 
spite of salvage department protest, it 

means something more than an excep- 
tional person accidentally located in 
this work. These cases have been 
too frequent for the good of the 

Again, when a department acquires 
and maintains a reputation for united 
loyalty and team work, the method 
under discussion can doubtless be 
credited at least partially. 

Then when the rate of turnover, 
unfortimately very high in these days 
of restlessness and turmoil, maintains 
an average materially lower than that 
of the factory as a whole, we must 
credit a few points at least to our 

It is also an impressive fact that the 
full co5peration of other departments 
and companies has been developed, — 
and it has been developed from an 
initial attitude of skepticism. 

But most conclusive of all is a talk 
with the individuals not only in this 
group, but also in the dqpartments 
and companies coming in touch with 
the activities of the group. That is 

In saving waste, we have inspired the 
workers of hand and head. 

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Efficiency and Thrift 

The New Demand upon the Industrial World 

By W. RocKWooD Conover 

General Electric Company, Schenectady, New York 

Industry the Basis of National 

INDUSTRY in its manifold forms 
is the recognized foundation of 
human existence. It is thus both his- 
torically and coincidentally the eco- 
nomic basis of the state and of 
our national government. A large 
proportion of the aggregate of hu- 
man endeavor is measured by the 
visible evidences of material benefit 
derived from organized forms of pro- 
ductive labor. In time of peace 
industrial enterprise is an essential 
element in the development of the 
race, the upbuilding and growth of 
communities, the establishment of 
order, the stability and permanency 
of both state and national govern- 
ments, and the conduct of private 
life. In time of conflict it becomes a 
vitally important factor in equipping 
and sustaining contending armies 
in the field, and the indispensable 
source of maintenance of the engines* 
of war. 

The Part of Industry in Recon- 

During the period of reconstruction 
and rehabilitation of the world upon 
which we are entering it will devolve 
upon industry to do a large share in 
bringing about the improved condi- 
tions which we are seeking to attain. 
Not only will industrial eflSciency be 
measured by the value and character 
of the service rendered to the people 
at large in supplying an abundance of 

products, but it will also be measured 
by the degree of economy and thrift 
with which the products essential to 
business and private life are produced 
— the amount in dollars and cents 
which is saved to the consumer in 
manufacturing and distributing costs. 
Our progress thus far in the work of 
reconstruction has, in no small degree, 
been retarded by the world-wide 
spirit of unrest. We have been ap- 
palled to learn the extent of certain 
forms of propaganda having for their 
purpose the upheaval of existing 
conditions both in government and 
business and the overthrow of the 
established order of both national 
and private life. Labor strikes, both 
in this country and in Europe, have 
accomplished the disorganization of 
the normal functions of human ac- 
tivity. We are, for these reasons, 
facing a future of industrial uncer- 
tainties which at present oflfer little 
hope of a speedy adjustment of the 
many perplexing problems before us 
or a permanent reestablishment of a 
rightly ordered basis of living. 

Importance of Industrial 

In view of these facts it becomes 
imperative that all our industrial 
operations be placed upon a higher 
plane of eflSciency and economy in 
order to render a larger measure of 
assistance during the present period 
of increasing unrest and distress. It 
is essential that manufacturers and 


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Efficiency and Thrift 


managers everywhere institute anew 
processes of investigation and analysis 
in order to determine where they 
stand in the competitive scale of pro- 
ductive power among the industries 
of the world. Extravagance and 
waste and inefficiency have hereto- 
fore been nearly universal. Nowhere 
have invested wealth and capital 
attained a full measure of success 
oominensurate with the possibilities 
involved, or produced results repre- 
senting one himdred per cent utility 
of equipment and facilities supplied. 
Large resources have been devoted to 
industrial enterprise only to demon- 
strate that net earnings are not 
comparable with initial expenditures, 
and nowhere do we obtain the full 
benefit of human effort or the largest 
product possible through the con- 
sumption of labor and material. 

Many industries are handicapped 
by high manufacturing costs through 
failure to establish proper systems of 
economic control in all the functions 
of industrial operation. In many 
manufacturing plants there is evident 
a large degree of inefficiency and 
waste, coincident with which there 
usually exists a lack of coordination 
and cooperation in the functions of 
management and factory supervision. 
Losses and delays in production occur 
because of incorrect or incomplete 
designing, improper and inadequate 
distribution and supply of tools and 
materials to the shop, incomplete 
drawings and instructions to the 
workmen, and lack of care in author- 
izing and following out production 
schedules. To these add defective 
equipment, unsanitary shop condi- 
tions and lack of interest in the 
individual, and we have the chief 
explanation of the universal decreased 
effectiveness of human endeavor and 

the inevitable curtailment of the 
volume of industrial product. 

Statements of the ratio between 
capacity and /accomplishment in in- 
dustrial undertakings are sometimes 
exaggerated and pessimistic, but one 
does not need to look far to perceive 
that too la^ge a factor of the world's 
labor is expended in the consumption 
of man-power and energy without a 
satisfactory commensurate retium. 



We have a gigantic task, a stupen- 
dous work, to perform, if we are to 
meet all the problems of reconstruc- 
tion at home and render our share of 
service in rehabilitating the war-torn 
and ravaged sections of the earth. 
We cannot hope to accomplish this 
task rightly and completely without 
a changed vision of the problems of 
production, of commerce and labor 
and of the distribution of the material 
necessities of life. It will not be 
sufficient simply to produce in quan- 
tity. It will be our greater duty to 
establish a higher order of efficiency 
and to practice a degree of thrift in all 
our industrial processes which will 
enable us to meet the pressing needs 
of the people at greatly reduced 
manufacturing costs. 

New Lines of Organization 

The organization of new industrial 
undertakings will doubtless have to 
be developed along new lines. Indus- 
tries will need to be established for 
more definite and specific purposes. 
The plans for founding new business 
or building new factories must give 
greater consideration to a proper dif- 
ferentiation between that portion of 
the product or apparatus which it is 
desirable to manufacture at the home 

Digitized by 



The Annals of the Amebican Academy 

assembly plant and those parts or 
details which can be purchased with 
greater economic advantage from 
outside concerns engaged in the pro- 
duction of small parts. Because of 
this fact it will be necessary to analyze 
more exhaustively the principal phases 
of proposed organization and all acts 
relating to the founding of a new 
industry in the beginning, in order to 
proceed with fully defined plans in 
reference to the nature and extent of 
the equipment required, lay-out and 
construction of departments and 
buildings, and the spaces to be allotted 
to receiving, shipping, storage, etc. 

Concentration of productive proc- 
esses and of tools and equipment on 
the one hand, and segregation of 
manufacture on the other, must be 
studied in the relations which they 
bear to transportation, to available 
sources of supply, to advantages in 
making purchasing contracts, to pro- 
ductive efficiency, and coincidentally 
and directly to economic and profit- 
able factory costs. 

New Principles of Management 

The advanced principles of manage- 
ment and supervision must receive a 
new degree of attention, and more 
scientific thought and study must be 
given to the subject of coordination 
and cooperation of executive and pro- 
ductive forces. Greater concentra- 
tion of authority and of all official acts, 
the elimination of repetition and du- 
plication of directive eflFort, and the 
establishment of higher standards of 
operation, involving greater speed and 
precision and greater finality in all the 
rules of shop practice, will be essential 
to meet the demands of progress in the 
new industrial period that is before 
us. New standards must be set up 
as rapidly as new experiences have 

developed new knowledge and have 
demonstrated more practical methods 
of performing either official or me- 
chanical work. 

Constructive Engineering and Designing 

Our engineering and designing work 
will need to be more constructive, 
more final in its application to shop 
processes. The experimental stage of 
new designs will have to be wrought 
out and completed in a field or depart- 
ment by itself. The new order of 
things and the rapidity with which a 
new invention of public or private 
utility must be put into production 
will render imperative a greater degree 
of completeness and refinement in 
design than has heretofore been 
realized. When the shop starts work 
it must be with well defined plans and 
instructions, with no stoppage of 
productive processes through uncer- 
tainty or lack of information, and with 
the stamp of finality and accuracy 
upon every workman's drawing as he 
takes up each new task on bench or 

Improved Production Routine 

In the organization of production 
routine there must be a broader and 
more intimate knowledge of shop 
conditions, in order that the move- 
ment of materials in rapid, progress- 
ive order and sequence of operations 
may be provided for, and the delivery 
of separate details to the assembly 
floor with regularity and certainty 
accomplished. This will involve a 
more extended analysis of both human 
labor and shop equipment, a rear- 
rangement frequently of men and 
machine tools, in order to systematize 
movements and secure greater preci- 
sion of actions both manual and 
mechanical. It will involve a greater 

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Efficienct and Thrift 


refinement of shop processes, the 
substitution of modern tools for old, 
of machine performance for manual 
tasks, and a general speeding up of all 
operations in e£Pective unison of effort 
toward a common end. 

The old methods of handling pro- 
duction must be eliminated from pres- 
ent industrial establishments and the 
progressive shop of the future. The 
distributing of tools and materials, 
instituting schedules of output, or 
providing the workman with drawings 
and instructions, must be with such 
accuracy and promptness of service as 
shall render the application of all 
directive effort to manufacturing proc- 
esses e£Scient and complete. 

Production routine cannot be di- 
vorced from indirect labor in any anal- 
ysis looking toward improvement in 
industrial processes as a whole. The 
systematic supply and movement of 
materials through successive machine 
and assembly operations are directly 
dependent upon the expense forces 
of the shop. These forces need to 
be organized into units of proper size 
for harmonious action and coopera- 
tive effort. Careful supervision and 
patient instruction need to be given, 
the standard of service raised and a 
higher d^ree of efficiency established 
in the same manner that we demand 
precision and cohesion in mechani- 
cal work. 

Purchasing Raw Materials 

The purchasing department has 
a new and added burden and a more 
difficult task to perform brought 
about by the world war. Many new 
problems are involved in obtaining 
the factory's supply of raw materials 
which did not exist three years ago. 
With increased cost of metals and 

fabrics other influences have com- 
bined to make the work of the pur- 
chasing agent hard and often impos- 
sible of result. Retarded output due 
to strikes, increasing consumption 
and demand in every part of the 
world, congestion and delays in trans- 
portation, all tend to render the obtain- 
ing of stocks more and more a matter 
of uncertainty and delay. 

With these increasing difficulties 
greater effort must be made, not only 
to find new available sources of supply, 
but to conserve and save in the pur- 
chase and use of everything required 
by the shop. System of control must 
be set up in eveiy department and 
rigid rules of economy established 
which shall make impossible the 
improper employment or wasting of 
anything of inherent value. This 
will involve the instituting of new 
methods of procedure in most fac- 
tories, for as a nation and as individuals 
we have not yet taught ourselves the 
full lesson of economy either in the 
administration of government or of 
industrial enterprise. We are predis- 
posed to extravagance and waste, to 
inordinate desire to have everything 
in abundance, to the consumption of 
many material things which cannot be 
demonstrated to be of essential value 
to either our physical well being or our 
mental advancement and growth. 
Not only productive stocks but ex- 
pense supplies and materials for 
maintenance of equipment and for the 
prosecution of daily office and shop 
routine must receive greater attention 
than in the past, and new practices 
be established which will limit and 
conserve the use of these materials 
within the bounds of carefully regu- 
lated and scheduled manufacturing 

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The Annals of the Amebigan Acadeict 

Greater Efficiency in Power Production 

The production of power, heat, 
and light is a field demanding spe- 
cial attention at the present time. 
It offers new opportunity for vast 
improvements in the type and char- 
acter of installations, and a higher 
degree of economy in operation. The 
present fuel shortage lays new empha- 
sis upon the need for more investiga- 
tion and study, on the part of manu- 
facturers and managers, into the cost 
of electrical energy and of steam for 
heating and manufacturing purposes. 
New stations will have to be built and 
extensions planned to provide for 
large increases in generating capacity. 
The old equipment of engines and 
boilers must be rapidly superseded by 
modern apparatus before power can 
take its proper place among other 
functions of industry already engaged 
in the conservation and building up of 
the world's resources. There must be 
immediate recognition of the need for 
more efficient installations from year 
to year, more scientific methods of 
operation and better systems of con- 
trol of consumption in the shop, in 
order to keep pace with the present 
and future growth of industrial supply 
and demand. 

Conserving Industrial Wastes 

A new interest has been awakened 
in the subject of salvaging wastes 
which is obviously the direct result of 
the war. Conservation in industry 
has within the brief space of less than 
three years become a world-wide 
slogan. The world is fast becoming 
aroused to the fact, that saving is now 
one of the chief, vital principles of 
existence; that the extravagant, 
wasteful practices of the past mean 
ruin to the nation continuing them, 
and that it is necessary to remould our 

thought. and action to higher stand- 
ards in both political and economic 

In industry these words have as- 
sumed a new and more vital signifi- 
cance for us since our entrance into the 
world's struggle to establish a firmer, 
more stable foimdation of peace. Sav- 
ing and utilizing the by-products of 
production have gained a new promi- 
nence among other established prac- 
tices of recognized value in engineering 
and manufacturing. There now exists 
a paramount necessity to save every- 
thing of inherent value which cannot 
be ignored or gainsaid. It is becom- 
ing pressingly evident that we must 
reorganize our present practices both 
in business and manufacturing in order 
to meet the new problems brought 
about by the world war. It is plainly 
the duty of industrial managers every- 
where, of the leaders of big business 
of every kind and of the citizen in 
every calling of life, to study in this 
great crisis the conservation of waste 
and the salvaging of the by-product& 
of production and every-day living as 
never before in the history of our 
country. Not a pound of metal or 
fabric; not a drop of essential oils or 
chemicals; not a piece of leather, 
rubber or wood; not even a scrap of 
paper, should be allowed to go to 
waste or escape the process of recla- 

Salvaging industrial wastes has a 
more far-reaching significance than 
most people realize. The necessity 
for universal, energetic action is now 
multiplied a thousand fold. It is 
obvious that the imnecessary con- 
sumption of finished fabrics or failure 
to reclaim by-products necessitates 
increased production of raw materials, 
and increased production, of whatever 
nature, means additional labor, addi- 

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Efficiency and Thbift 


tional transportation facilities, the 
tying up of railway equipment and 
congestion of trafBc; all of which 
seriously affect the movement of the 
long list of products required by the 

The conservation of by-products 
is more emphatically brought to our 
attention by the exigencies of the 
great industrial struggle now going 
on, by the measure of uncertainty of 
continued and uninterrupted produc- 
tion of many of the important com- 
modities of life, and by the increase in 
living expenses of the people beyond 
reasonable and just bounds. There 
appears at present no ray of light fore- 
casting to a satisfactory degree the 
establishment of a properly stabilized 
condition of things in the industrial 
labor field. 

The gigantic strides of business, the 
growth of new commimities, the 
wealth of big cities and the world- 
wide demand for products have all 
tended to develop a confidence in our 
abounding resources and a habit of 
wastefulness both in production and 
consumption. This tendency has been 
conspicuous in governmental opera- 
tions, in the building and opera- 
tion of systems of transportation, in 
many public enterprises, and in the 
operation of manufacturing plants as 
well. Contiguous areas between 
shops, as well as factory floors and 
storerooms, show accumulations of 
metals and other materials, left over 
from productive processes or from 
the work of maintenance and repairs. 
Lack of time and reduced labor forces 
make it convenient to leave the dis- 
posal of these materials to some future 

Successive inventories frequently 
show lists of parts held for possible 
supply orders which could judiciously 

be turned into the scrap market at 
advantageous prices and thus aid in 
maintaining the country's supply of 
essential metals. Comparatively few 
industries are free from these accumu- 
lations and few realize the extent of 
the loss entailed through neglect to 
save and sell their by-products sys- 
tematically, as an important part of 
business. It is essential, now more 
than at any previous period in the 
history of manufacturing, that indus- 
trial managers give a fuller consid- 
eration to this most vital of factory 

It is the practice of many managers 
to devote their attention chiefly to 
getting out large shipments of product, 
piling up profit and loss surplus, lead- 
ing in novel engineering designs and 
in an efficient performance of manual 
and mechanical processes in the shop, 
while the conservation of wastes and 
utilization of factory by-products 
receive only a limited degree of atten- 
tion. The failure to utilize by-prod- 
ucts in these industries does not 
represent the true degree of efficiency 
with which manufacturing processes 
as a whole are conducted, nor may it 
always be a definite measurement of 
managerial and executive ability. 

It may not always follow that the 
organization which does not pay sys- 
tematic attention to this important 
phase of business is not progressive in 
other functions of manufacturing. It 
can, however, be stated as a generally 
accepted truth, that the industry 
which gives special care and consid- 
eration to the problems of thrift in 
general excels in all other phases of 
industrial operation, whether relating 
to executive capacities or to mechani- 
cal processes. Wastefulness is both 
a direct cause and result of errors 
in operation^ a cause of decrease 

Digitized by 



The Annals of the American Academy 

in productive volume, of increased 
factory costs and a burden to the 
public in higher prices in finished 
fabrics and materials. 

Waste Reclamation During the War 

During the war much was done to 
incite the people to greater interest 
and activity in saving wastes. The 
whole nation was urged to establish 
practices of thrift and economy and 
to conserve materials in order to 
render assistance to the government 
in its time of need. The Reclamation 
Service of the Department of Com- 
merce did a most valuable work in 
teaching the country to save. All 
kinds of metals, steel, iron, copper, 
brass, aluminum and alloys, and a 
variety of wastes such as rubber, rope, 
paper, cotton fabrics, bags, barrels, 
boxes, oils, chemicals, and residues of 
many sorts and kinds were reclaimed 
by manufacturers and by the people 
at large and sold or converted into 
by-products and bases of use in the 
prosecution of the war and of indus- 
trial enterprise. 

During the period of conflict the 
amount of. waste materials gathered 
increased approximately twenty-five 
per cent. In the year 1918 several 
items, including scrap metals, paper, 
rags, wool waste, bags and cotton 
linters aggregated more than one and 
one-half million dollars. The govern- 
ment itself took unusual interest in 
the work of conservation and reor- 
ganized its methods of disposing of 
waste. Many materials which the 
Army and Navy had disposed of by 
dumping and burning were carefully 
saved, sorted and classified and util- 
ized or disposed of to good advantage. 

The railroads also have caught the 
spirit of better economy and have 
developed new practices .in the field 

of conservation which have netted 
many millions in money return for 
9crap sold and in valuable materials 
saved for further use. 

The larger industries of the country 
are rapidly beginning to view this 
subject in a new light and to assume 
their share of responsibility in this 
great work of putting human activity 
and human living on a more efficient, 
progressive and sounder economic 
basis. One of our big electrical plants 
is reclaiming more than eighty million 
pounds of scrap products annually. 
Others are studying the subject with 
a new interest and establishing sys- 
tems which make for better economy 
and thrift. Such is the work of 
organization and such are the results 
which may be secured. 

The Need of Permanent Reclamation 

It is to be keenly regretted that the 
Senate Appropriations Committee 
failed to make any appropriation for 
the continuance of the Reclamation 
Service. Because of this fact the 
office has been closed. In view of the 
universal, pressing need for greater 
conservation and the almost incalcu- 
lable value of the work to the nation, 
it is difficult to conceive any true 
justification of the committers action. 
It requires but slight analysis to con* 
vince us that the department should 
be maintained as a permanent govern- 
ment service to the people. Through 
this office practical appeal could be 
made to the governors of states, 
through the governors of states to 
mayors of cities and presidents of 
villages, and through these latter men 
to the heads of boards of trade and to 
public spirited citizens, to cooperate 
in the great work of saving the nation's 
wastes. Through thi^ channel also 

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Efficdbncy and Thrift 


could be disseminated much useful 
knowledge and instruction relating 
to the work of reclamation, which 
would thus reach in a helpful way not 
only the populous industrial centers 
but the outlying districts as well, and 
by this means bring about a wide- 
spread, concerted action for the public 
good. No one may attempt to pre- 
dict the full extent of the value or the 
aggregate return of such a movement 
to the government and country at 

A New Conception of EcoNOBrr 

No appeal to the manufacturer to 
save and utilize by-products caa be 
made too forcible or too strong. What 
we need throughout the whole extent 
of America today is to learn individu- 
ally and collectively as a nation the 
vital principles of economy and con- 
servation. We need as a people to 
learn to save everything, of whatever 
intrinsic value, not simply during the 
present moment of great world-wide 
demand, not simply during the coming 
period of reconstruction work, but for 
all time to come. There is insistent 
need to establish those principles of 
thrift and economy in all our indus- 
trial undertakings, which shall make 
extravagance and wasteful practices 
things to be decried, and shall set a 
price of honor and credit upon the 
saving of the so-called unimportant 
things— the smaller by-products of 

It should be. the purpose of the 
management of industries, both large 
and smaU, in all parts of the country, 
to conserve everything possessed of 
inherent value. Proper consideration 
must be given to the cost of accumu- 
lation and preparation for market, 
but the work of reclamation should be 
carried on to as large an extent as 

possible consistent with conditions 
and without actual loss. Improved 
methods of sorting and handling will 
usually permit a wider range of classi- 
fications which result in obtaining 
higher prices for the various classes 
and grades. The question of profit, 
however, in the process of reclamation 
should not always be the chief or 
deciding factor. It should be our aim 
to render all the assistance possible 
both to the national government and 
to the mills which manufacture raw 
materials or finished fabrics, in con- 
serving everything that may be of use 
in production, and in consistently 
following out this principle we will be 
of practical service to the public at 

Conservation of Human Labor 

The factor of human labor has 
assumed a new and most important 
place in all industrial operations. 
During the recent world conflict its 
importance was multiplied a thousand 
fold. Today every productive proc- 
ess is manifestly dependent either 
directly or indirectly upon the con- 
stant application of human energy, 
mental or physical. It is evident, 
therefore, as we take up the work of 
reconstruction, that our efforts can- 
not be successfully carried forward 
without the cooperation of the indi- 
vidual and of skilled labor as a class. 
All our plans looking toward the 
establishment of a higher order of 
efficiency in manufacturing and a 
greater degree of economy must in- 
clude the workmen whom we employ. 
It is now a part of our duty to teach 
them habits of thrift, the way to 
become provident, the way to accu- 
mulate and save. We must afford 
them assistance and encouragement in 
establishing homes, in investing in 

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The Aknals of the American Academy 

real estate and bonds, in buying shares 
in the factories where they labor, in 
protecting their families with safe 
insurance, in educating their children, 
and in any and all ways help them in 
the growth and development of higher 
standards of life. 

Now, as never before in the world's 
history, nations and gpvemments are 
looking to industry to do the greater 
share in the united effort to establish 
an era of permanent prosperity and 
peace. And what does it all mean? 
It means that man-power at home is 
as big as man-power in the trench. 
It means that economy of effort and 
precision in action are as important 
in the factory as science and discipline 
on the fields of battle. Conserving 
human energy and devoting it to the 
business of the world's production 
must be accomplished by training and 
study just as definitely as we train for 
the scientific practices of war. New 
methods in the employment of help, 
adapting men to tasks for which they 

are fitted, training them for higher 
service, instructing them in economy 
of physical strength, educating them 
in the maintenance of health and 
comfort and safety, are all problems 
of management which emphasize the 
greater responsibility of the nation's 
immediate future. 

It is essential that the highest 
accomplishments possible of attain- 
ment shall be realized in all industrial 
enterprise. The call is to industry. 
If we are to attain political freedom 
and economic stability throughout the 
coimtries of the world, it must be 
through a higher refinement of man- 
power — a fuller degree of perfection in 
all the varied forms of manual and 
mechanical art. Systems of control 
must be set up in every factory; in the 
land; analyses of all manufacturing 
operations, of official and directive 
functions, of every detailed process of 
production, must be instituted, which 
shall make possible the highest degree 
of perfection in all human endeavor. 

Digitized by 


Requisites of a Good Investment 

By Albert W. Atwood 

Frinceton, New Jeney 

Suitable Investments for the 


IT is the purpose of this brief article 
to consider a few essential factors 
of the problem of providing suit- 
able investments for the masses of the 
people. I am not concerned with the 
investment problem of the business- 
man, so-called, or of the more pros- 
perous professional. The important 
question which the country must face 
is that of inducing the great bulk of 
its wage earners to save. Provided 
they do save what then is to become 
of their funds? 

Oppobtunitieb OrPBRBD 
SpecidaHve Stocks 

It must be agreed and admitted at 
the outset that the small investor 
should not risk or speculate with his 
funds. This is hard doctrine because 
the little fellow likes to take a chance 
as well as the big one. Indeed the 
promoters of dubious stocks make 
out a specious but alluring argument 
for financial democracy, one might 
say, when they offer oil or mining 
stocks that promise fabulous returns. 

"Why labor for years?" they ask. 
Why put yoiur money into cold 
vault like repositories? What the 
average man wants is not a repository 
for his money, but a good thing. 
Bankers, financial writers and advis- 
ers — ^all these tell you to put your 
money in the savings bank. Why 
not take a try at fortune? The 
millionaire made his money by taking 
big chances, and by making lucky 

strikes. I will give you a chance at 
the same game." 

Not until the offering of speculative 
stock to people of small means is 
widely recognized as charlatanism of 
the worst kind will much progress be 
made in spreading sound investments 
among the masses. I refer of course 
to promiscuous, miscellaneous stock 
offerings, and not to the purchase 
of shares in recognized, established 
transportation and industrial com- 
panies directly by the worker in those 
companies. It would be a hard doc- 
trine indeed that the masses, most of 
whom are destined to remain wage 
earners all their lives, should never 
invest except in low interest bearing 

Profit Sharing 

The opportunity for profit making 
on the part of the wage earner, aside 
from what is technically known as 
profit sharing, may come, and in 
increasing numbers of cases probably 
will come, through the purchase of 
stock in the company for which he 

GovemmerU Securities 

Cannot this whole problem of 
suitability and adaptability of invest- 
ments for the people be treated in a 
brief, simple manner? Is it not solely 
a matter of degree? By that I mean 
that disadvantages such as risk, 
inconvenience, lack of marketability 
and the like in retiurn for which the 
owner expects larger profits, should 
be assumed in increasing measure 


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The Annals of the Amebican Academy 

only as the investor progresses in 

Elimination of Risk. — ^The poorer 
the investor the fewer "outs" should 
there be to his investments. The 
wealthier the investor the more 
chances can he afford to assume in 
return for the possibility of large 
gains. This is a simple principle, 
an A B C of the subject, but I think 
that even among experts its practical 
applications are often overlooked. 

Let us start with the young married 
man, the workman or clerk of twenty- 
seven years, with a wife and one or 
two children. What should he invest 
in? Obviously in government savings 
stamps or in a good, strong savings 
bank. Frankly I do not think there 
is much choice between them. These 
two forms certainly come nearer to 
investment perfection for the young 
man of our imaginings than any other. 

In either case he has a high degree 
of security, although of course the 
savings stamp of the government is 
safer theoretically than the savings 
bank. But for practical purposes it 
is well known that certain classes of 
savings banks are sufficiently free 
from risk. In other words the young 
clerk will not lose his hard won 
savings in either place. That is the 
first consideration. Thei'e is of course 
the Postal Savings Bank, but I take 
it that with the higher rate of interest 
paid upon government savings stamps 
and upon savings bank deposits 
there is no advantage in urging the 
merits of Postal Savings. 

Convenience, — In the next place the 
stamps and the savings banks, or 
rather the certificates which are built 
up ux>on a collection of stamps, offer 
great convenience in the matter of 
dex>osit and withdrawal. There is 
not only convenience but freedom in 

these matters; also sufficient privacy - 
This applies both to the elements of 
time and of amount. Finally there 
is freedom from taxation. 

Limits of Government Securities and 
Savings Accounts. — ^How any sane and 
honest person can urge the wage 
earner to invest elsewhere until he 
has at least enough in the savings 
bank or in government securities of a 
non-fluctuating character to meet sud- 
den emergencies I cannot conceive. 
Further let me say that I do not re- 
gard these two forms of investment as 
wholly synonymous and interchange- 
able. The wage earner should (if he 
lives where there is a savings bank) 
have both. The government stamps 
or certificates are the safest invest- 
ment on earth, but it would be a mis- 
tal^e for the wage earner to put several 
hundred dollars into them and none 
into the bank. For the savings bank 
account gives him a standing in the 
community, and affords him advan- 
tages when it comes to making loans 
and obtaining information regarding 
business or financial subjects which 
the government securities do not 
afford. A savings bank account, to 
be quite frank about it, has ulterior 
advantages which the government 
securities lack. 

Life Insurance 

Next in order for the worker who 
has dependents is life insurance. 
This, I think, is too obvious to require 
elaboration. Often it is well to keep 
on buying life insurance up to large 
sums, many thousands of dollars in 
fact, before any other investment 
whatever is even considered. Why 
waste time talking about the relative 
advantages of public utility bonds as 
against preferred industrial stocks 
for, let us say, a bookkeeper when we 

Digitized by 


Requisites of a Good Ikvestscent 


know perfectly well that if he should 
die his family would be in dire want. 
It is utter piffle, and I think that a 
large part of the efforts of stock 
brokers and bond houses, or invest- 
ment bankers, to win the small 
investor are entirely injurious and 
pernicious. These people that are 
sought out are still in many cases 
about twenty thousand dollars below 
the point where they should become 
direct investors at all. They are 
still in the life insurance stage. 

Somewhere along here the clerk 
with the wife and child should be 
taught to open a regular checking 
bank account, for the convenience 
which it affords and also for the 
standing which it gives him in the 

Having acquired a good Uttle nest 
egg in the form of a savings bank 
deposit or government savings stamps, 
or both; having taken out ample life 
insurance and opened a bank account 
big enough to take care of current 
bills, then the young man had better 
consider the purchase of Liberty 
bonds and a home. I refer of course 
to piping times of peace and not to 
war times when to purchase a Liberty 
bond is an essential of patriotism. 

Certainly the clerk should not buy 
even a Liberty bond any earlier in his 
financial progress than this, because 
the bond is subject to market fluctua- 
tion «and no one is warranted in urg- 
ing upon him the risks of the market 
until he has various back logs of the 
kind already described. As for a 
home, the wisdom of its purchase 
depends of course to some extent upon 
the young man's location, upon 
whether his job is reasonably perma- 
nent and other similar considerations. 
But generally speaking it is a good 
investment and pays dividends of 

family happiness and good citizen- 
ship which cannot be expected of a 
bond or stock in a corporation of 
which the owner hardly knows the 

Building and Loan Associations 

Next let our clerical friend look into 
the building and loan in his town or 
the credit union, if there is one, in his 
own office. Or perhaps his firm is 
offering stock to its employees. This is 
the one case where he can judge direct 
investments. Of course many employ- 
ees do not like to buy stock in the 
concern for which they work because 
they fear it will tie them to their 
present employer or because it may 
give the employer an excuse to reduce 
their wages. But if these dangers 
are guarded against, if the independ- 
ence of the worker is in no way 
infringed upon by a stock selling 
arrangement, or if the worker prefers 
to stay in one place and cast in his lot 
more or less permanently with one con- 
cern, then the more widely the custom 
of inducing employees to invest in 
the business the better. 

With many thousands of workers, 
especially of the clerical and more 
highly skilled classes, I see no reason 
why investment should take any other 
form after the more primary require- 
ments already referred to have been 
taken care of. Of course I recognize 
the danger of possible abuse. Fly-by- 
night concerns might enlist their 
employees' money and decamp with 
it. But even the more ignorant 
worker can form a fair judgment as 
to whether the concern which employs 
him is of that variety. 

Certainly he can form a hundred 
times better judgment than of a 
concern for which he does not work. 
And the corporations which have 

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154 The Annals of the ABfEBicAN Academy 

offered stock to employees thus far and then of stocks. But I feel that 

have in most cases been highly sue- there is no such hurry to educate the 

cessful. A concern must be fairly small investor in direct participation 

stable before it can really make any in corporate bonds and stocks as many 

headway in such financing. experts insist. After the young man 

If our clerk still goes on earning has pro vided for himself in the manner 

enough for further investment — if he here briefly outlined then there will 

feels he has put all that is safe in his be time enough to consider the bewil- 

own concern or if his employer does dering variety of direct investments, 

not offer him stock — ^then let him with their qualities, their suitabilities 

study outside offerings, first of bonds and adaptabilities. 

Digitized by 


Speculation and the Small Investor 

By Theo. H. Price 
Editor of Commerce and Fiminoe 

Chance a Factor in Life 

FROM the cradle to the grave life 
is a speculation. It has been 
said that "'We are all under sentence 
of death with an indefinite reprieve, " 
but most of us, nevertheless, calculate 
upon at least an average life and make 
our plans accordingly. Facing, as we 
do from hour to hour, the chances of 
illness, accident or financial disaster, 
it is not surprising that we should be- 
come more or less callous to the 
hazards of existence and be willing to 
increase them by putting our money, 
when we have it, into schemes or 
investments that promise or are de- 
scribed as promising large returns. 

It is the essential uncertainty of life 
coupled with the hope that each indi- 
vidual entertains that he may be more 
lucky than his fellows that is at the 
bottom of the speculative instinct that 
most men and women evince. This 
instinct is a sound one, for without it 
progress would be impossible. 

We have the spirit of adventure to 
thank for nearly all the great discov- 
eries that have advanced mankind. 
It has been very truthfully said that 
"if our alphabet were ideographic in- 
stead of phonetic, the words conserva- 
tive and unprogressive would look very 
much alike" and the speculative in- 
stinct is not to be discouraged, for 
through its exercise Columbus dis- 
covered America and the political and 
scientific pioneers of all generations 
have opened up opportunities by which 
humanity has profited. 

Pitfalls of Speculation 

In thus acclaiming speculation it is, 
however,, important to carefully dif- 
ferentiate it from gambling. Specu- 
lation ha:s been defined as hazard plus 
intelligence, gambling as hazard with- 
out intelligence, and if we bear these 
contrasting definitions in mind it will 
not be difficult for us to avoid the pit- 
falls that the unscrupulous provide for 
those who are willing to risk their 
money thoughtlessly. 

In an effort to protect the careless 
or guUible members of society against 
themselves many of the states have 
enacted what are called Blue Sky 
Laws designed to make fraudulent pro- 
motion, over-capitalization and stock 
swindles impossible, but there are no 
laws that can give a fool immimity 
from the consequence of his folly, 
and it is questionable whether the 
Blue Sky Laws haven't done more 
harm than good in that they lead 
many to beUeve that the securities 
that are issued in accordance with 
their provisions may be bought 
as safe investments without further 

It is, in fact, extremely doubtful 
whether the judgment of men can be 
educated or clarified by legislation 
which seeks to make the exercise of a 
discriminating and studious intelli- 
gence unnecessary, and since chance is 
a factor in the problem of life that can- 
not be eliminated, a study of the law 
of chance is necessary in order to deal 
with it intelligently. 


Digitized by 



The Annals of the American Academy 

The Law op Chance 

The great astronomer, Richard 
Anthony Proctor, was the first author- 
ity of note to develop the law of 
chance. By a series of experiments 
extending over a number of years he 
discovered and proved that where the 
chances were theoretically equal, it 
was necessary that they should be 
taken an almost infinite mmiber of 
times in order that the results might 
equally counterbalance each other. 
Thus, he asserts, it is not certain that 
a well balanced coin thrown into the 
air even a million times will come down 
heads up 500,000 times and tails up 
500,000 times at the end of the experi- 
ment, and the first postulate of the law 
of chance that should be taken into 
consideration is the factor of luck. 
We must make allowance for it in all 
our calculations and endeavor, in so 
far as it is humanly possible, to put 
ourselves beyond its operation. For 
this reason, no one should embark in 
any speculation, however promising, 
unless his knowledge of the business 
involved and the conditions surround- 
ing it are sufficiently intimate and 
personal to enable him to feel sure that 
the probabiUties at least favor the 
expectation of a profitable result. 

Chance Investments 
Since no one can be thoroughly 
informed with regard to more than one 
or two of life's more important finan- 
cial, industrial, conunercial or agri- 
cultural activities, it is a corollary of 
the foregoing statement that it is 
exceedingly unwise and hazardous for 
anyone to put his money into a busi- 
ness with which he is unfamiliar unless 
he makes the investment upon the 
advice of a trustworthy person in 
whose knowledge of the proposed 
investment he has profound confidence. 

It is, for instance, foolish for a 
farmer to invest his hard earned sav- 
ings in land that he has never seen and 
concerning whose agricultural possi- 
bilities or market value he has no first 
hand knowledge. It is equally foolish 
for any one else, no matter how he may 
have made his money, to invest it in 
any security of whose value he cannot 
convince himself by personal examina- 
tion or in regard to which he is unable 
to obtain trustworthy information 
from a person in whose knowledge and 
good faith he has complete confidence. 

As a generalization, therefore, it 
may be said that it will be wise to 
make it a rule not to invest any money 
in things concerning which we are 
unable to inform ourselves by personal 
examination, unless we base our action 
upon the advice of those who are 
specialists in the business concerned 
and of whose integrity we are entirely 
confident. In the field of corporate 
investments, meaning thereby the 
stocks and bonds of corporations, 
there are throughout the United States 
a number of high class and responsible 
concerns, firms or companies whose 
business it is to select sound enter- 
prises in which the money of their 
cUents may be invested. To the con- 
sideration &f the problems involved 
they bring years of experience and 
training. They are thoroughly alive 
to the fact that if they make mistakes 
they will lose the prestige and con- 
fidence that they enjoy in the financial 
world, and while they err occasionally 
their judgment is, as a rule, sound. 
It is, therefore, safe to say that no one 
having money to invest should buy 
the securities of any corporation unless 
they are reconunended or endorsed by 
some responsible investment concern. 

The fly -by -night -salesman who 
comes into your town with a fairy 

Digitized by 


Speculation and the Sbcall Investor 


story in regard to the distant oil well 
or mine into which he asks you to put 
your money should be summarily dis- 
missed with the suggestion that he 
submit his proposals to the nearest 
successful banker and that you will 
consider them only after that banker 
has approved of them. The land 
agent who seeks to sell you property 
in the Everglades of Florida or the 
Great American Desert upon the 
theory that it can be reclaimed and 
made to blossom hke the rose by the 
expenditure of a little money should 
be similarly treated. The promoter 
of a company that controls a patent 
for a machine that will do the work of 
one thousand men should be required 
to furnish indubitable proof of the 
machine's efficiency and its successful 
commercialization before you allow 
him to persuade you to put your hard 
earned savings into the corporation 
that has been organized for its develop- 

K you are, however, disposed to 
take long chances and are convinced of 
the good faith and honesty of those 
who are inviting you to make the 
hazard you should then feel sure that 
the odds in your favor are sufficiently 
high enough. For those who have 
money and are willing to risk a small 
portion of it in something that prom- 
ises very large profits but involves, 
nevertheless, great hazard, an intelli- 
gent investment made upon a basis 
that promises, say, a profit of $100 for 
every dollar invested is not perhaps 
unwise, but in making hazardous in- 
vestments of this sort care should be 
taken to apply the principle of average 

as in the case of insurance, and a suf- 
ficient number of such investments 
should be made in different enterprises 
to allow for an unfavorable result in 
the case of most of them. 

There are some investors who apply 
this law of average scientifically. 
They put a small sum into each new 
enterprise that is brought to their 
attention under respectable auspices 
upon the theory that although only 
one out of each ten may turn out 
profitably their gain will be sufficient 
to more than offset . the losses that 
they will sustain in the case of the 
other nine. It is, however, hardly 
practicable for the average investor 
who has but an occasional opportunity 
to put his money into these extra haz- 
ardous though promising enterprises 
to adopt such a poUcy, and even if he 
did, it is questionable whether he 
would have the courage to pursue it in 
the case of the tenth investment if his 
nine previous ventures had been un- 
successful. The only wise course for 
him to pursue is, therefore, to refuse to 
embark upon any speculation con- 
cerning whose hazards he is not 
thoroughly informed, either by per- 
sonal observation and experience or 
the testimony of those in whom he has 

If he follows this rule he may possi- 
bly miss an occasional but very remote 
opportunity for making a large profit 
but he will, on the other hand, be rea- 
sonably sure to avoid the loss of his 
capital and will be certain to enjoy 
the complacency of mind which comes 
to those who insist upon "safety first" 
in the use of their money. 

Digitized by 


United States Government Bonds as Investments 

By Joseph E. Cummings 
School of Business, University of Minnesota, recently of the United States Treasury Department 

Government Bondholdebs 

UNTIL the spring of 1917 the 
average American citizen of 
this generation was very little inter- 
ested in the investment features of his 
country's bonds. There have been, 
however, three or four previous periods 
of our national history during which 
government securities attained consid- 
erable significance in the lives and 
calculations of a comi>aratively large 
proportion of our citizens. In the in- 
tervals of these periods of national 
emergency United States bonds have 
been almost exclusively an investment 
for financial institutions and persons 
of wealth. 

Aside from the general fact that 
the great mass of Americans did not 
acquire the habit of investing in securi- 
ties of any sort, there are two chief 
reasons why government bonds ordi- 
narily have been attractive to only a 
certain small group of institutions and 
wealthy investors. (1) The denomi- 
nations of the bonds have been too 
large to be conveniently handled by 
small investors and the "circulation" 
privilege attached to many issues has 
operated to keep the interest rate, 
or at least the yield, so low as to 
make their purchase profitable only 
to national banks or those persons 
seeking the advantage of a tax-exempt 
investment. (2) The tax exemption 
feature, as a practical matter, has 
been much more valuable in the past 
to the wealthy person than to the 
individual of moderate means. These 
conditions, and some others of lesser 
force, have operated to keep the aver- 

age citizen from concerning himself 
in ordinary times, with the invest- 
ment possibilities of government se- 

Bondholders During War Periods 

The financial exigencies of war have, 
during several periods in the past, made 
it imperative to raise such large sums 
that a comparatively wide distribution 
of the government's obligations became 
absolutely essential. In attempting to 
borrow money for war purposes any 
government is ordinarily confronted by 
numerous financial obstacles pecuUar 
to war time, as well as by the increased 
difSculty accompanying the demands 
at any time for unusually great sums. 
These conditions make it necessary for 
the war-time administration to mate- 
rially increase the attractiveness of its 
securities, not only to special groups 
but to the entire citizenry of the nation 
as well as to foreign investors, when 
the international situation so permits. 
This increased attractiveness of the 
securities offered, plus the promptings 
of patriotism and whatever coercive 
measures are possible, has resulted 
during every war period in making 
government bondholders of large groups 
of American citizens who, under ordi- 
nary circumstances, would never have 
seen or handled the stamped paper of 
their country. 

The proportion of citizens who were 
incorporated in the bond purchasing 
class during our past wars has varied 
according to the government's compar- 
ative need for money and its ability at 
the time to touch the mass of its people 


Digitized by 


Government Bonds as Investbients 


with inviting terms and coercive 

The financing of the Mexican War 
in 1846 and the Spanish-American 
struggle in 1808 called for compara- 
tively small sums at times when the 
national financial conditions were so 
good that few persons were added to 
the then existing dass of government 
security holders. On the other hand, 
the War of 1812 and the Civil War 
wereprosecutedimder conditions which 
strained the financial resources of the 
nation and forced a comparatively 
wide distribution of government bonds. 

An analysis of conditions under 
which these war bonds were purchased 
and of their post-war prices on the 
stodc exchanges will determine whether 
or not United States bonds issued to 
finance the War of 1812, the Mexican 
War, the Civil War, and the Spanish- 
American War were a good invest- 
ment for the original subscribers who 
retwied these securities or, in fact, for 
anyone who purchased during or im- 
mediately following the war period. 
Because of the present wide distribu- 
tion of our Liberty Bonds and Victory 
Notes such an analysis should be of 
interest and value to the large group of 
persons who are concerned with the 
question of the probable future value 
of their present holdings of war bonds 
as well as those who are turning over 
in their minds the desirabihty of invest- 
ingin Liberty Bonds^ at present market 

Civil War Bonds 

During the period of the war the 
national debt increased from about 90 
millions in 1861 to over 2,700 millions 
in 1805. As the war went on there was 
a steady shifting of the national credit 

^The term liberty Bond ia used throughout 
this paper in its popular sense, %.e., to include 
both Liberty Bonds and Victory Notes. 

to a higher interest rate basis. In 1861 
86 per cent of the debt was paying 5 
per cent interest and 64 per cent was at 
6 per cent. By 1865 only 11 per cent 
of our debt was on a 5 per cent basis. 
Fifty-four per cent was at 6 per cent 
and 36 per cent of the total debt was 
paying 7.8 per cent interest. These 
were the nominal interest rates, but 
it has been estimated that, because of 
the depreciated state of the currency 
and the fact that interest was paid in 
coin, the average interest being paid 
on the public debt amounted to about 
8 per cent. Our national debt at the 
termination of the war was repre- 
sented by approximately twenty mis- 
cellaneous varieties of securities, rang- 
ing from 5 per cent long-time bonds to 
6 per cent three-year compound inter- 
est notes. The story of the conditions 
of issue and the subsequent market 
price of a few of the larger and more 
typical of these issues indicates that 
investors in Civil War bonds not only 
received a very profitable rate of inter- 
est, but also, in practically every in- 
stance, a substantial increase in their 
capital investment. 

Loan qfJtdy and August^ 1861 . — ^The 
U. S. 6's of 1881, as they were called, 
were marketed at par. The bonds ran 
for twenty years and matured in 1881. 
This issue sold slowly and was placed 
with difficulty. On October 1, 1861, 
approximately 180 millions of the U. S. 
6's of 1881 were outstanding. By 
1866 they were quoted on the market 
at 106} currency and continued to 
rise steadily thereafter imtil approach- 
ing maturity brought about a gradual 
decline to par. The increase in value 
of these bonds was even more rapid 
than is indicated by market quotations 
in currency. All during this period the 
currency in which the bonds were 
quoted was approaching parity with 

Digitized by 



The Annals of the American Academy 

60 6s(/ea/j 
C/03/n^ /^/-/cc of Coc/yoon 3onc7^ 

on or ojboc/f cJc/Zy /^t 
Pr/ces Pec/c/cec/ to Go/c/ Ei^u/i/- 






Year Pr7C€ 

7646 75,9 
7667 79.0 
7666 873 
7649 88./ 
7670 7003 
767/ /02.9 
7672 /042 
767J /0^6 
7674 /04./ 
767^ 706£ 
7674 7062 
7677 7097 
7676 707.^ 
7679 7049 
7660 704 7 












/Wff /647 /646 7649 7670 76^7 767e 7Q73 737^ 7675 7674 7677 /676 7679 

""Based on New York Exchange quotations from contemporary issues of the Commercial 
and Financial Chronicle, 

gold. The chart given above shows the 
gold equivalent of the New York Stock 
Exchange quotations on this issue from 
1866 to maturity. 

It will be noted that by 1870, only 
five years after the termination of the 
conflict, the U. S. 6's of 1881 were 
quoted above par in gold and that they 
continued to rise in market value until 
1877 when they were selling for the 
equivalent of approximately 110 gold. 

Loan of Fehruanjy 1862, — ^The secur- 
ities issued under this act were the first 
of the famous "Five-Twenties." This 
title came from the fact that the bonds 
were redeemable in five years and due 
in twenty years. Interest was payable 
in coin at 6 per cent. The average 
selling price was 100.85 currency — the 
equivalent at the time of about 88 
gold. On October 1, 1865, nearly 515 

milUons of the issue were outstanding. 
The chart following shows that within 
three years after the end of the conflict, 
"Five-Twenties" were seUing on the 
market at considerably more than their 
issue price in gold. By 1871 the gold 
equivalent of their market price was 
nearly two points above par, — ^an in- 
crease in capital value to the original 
subscribers of approximately 16 per 
cent. In addition to this substantial 
increase in the value of their invested 
capital, the holders of these bonds had 
been r^ularly receiving their interest 
in coin during a period when currency 
fluctuations caused the actual rate of 
interest to amoimt to much more than 
the nominal 6 per cent. During cer- 
tain periods the actual value of the 
interest received was at least double 
the nominal rate. 

Digitized by 





c/3. Cs 3-20-S /aa 

C/as/ny Pr/ces of Cocoon 3on<y.3^ 

or? or cfjbouf L/c//y /?/ 
Pr/c&3 /^<ac/ucec/ f^o Go/c/ £^<^c//i/- 











/e€6 ^€2 
/6^6 7^1-/ 
/Q€7 7^5 

/ece 606 

/d69 9/5 
7670 97S 
/67/ /0/.6 

7672 /02.0 

7673 /02.'i- 
/67^ /02.5 

/67S /027 










7e€^ 76^6 76^7 76Cd /&€? /670 767/ 7672 7073 /<57^ 7675 


* Baaed on New York Exchange quotations from contemporary issues of the Commercial 

and Financial Ckronide, 

Loan of March S, 186^. — ^Because 
these bonds were payable in ten years 
and due in forty they were popularly 
known as "Ten-Forties." They drew 
interest at 5 per cent payable in coin. 
On October 31, 1865, approximately 
173 mUlions of this issue were out- 
standing. These bonds were marketed 
at from 100 to 107 currency. The 
currency dollar during this period 
averaged in value 49.2 gold. Thus the 
investors who paid 107 currency for 
this issue gave less than 53 gold for a 
security that by the end of the war had 
risen approximately ten points (to 62.2) 
in value. 


By 1872 "Ten-Forties" were quoted 
on the exchange at the equivalent of 
100 gold. The high point was reached 
in 1878 when the issue was selling on 
the New York Exchange for 108 gold — 
over twice the price paid by the original 
subscribers. In addition to having 
their capital doubled the original 
purchasers of "Ten-Forties" were re- 
ceiving interest in coin amounting to 
over 9 per cent on their investment. 

These facts make it clear that those 
who subscribed for obligations issued 
by the United States government to 
finance the Civil War secured an invest- 
ment that gave very high^ returns. 

Digitized by 



The AiWALs op the American Academy 

While the nominal rate of interest on 
all Civil War issues was high, the real 
return was still higher because of inter- 
est payment in coin on obligations 
purchased with depreciated currency. 
In addition, holders of nearly all Civil 
War issues benefited by substantial 
increases in capital investment through 
purchasing the government's obliga- 
tions with more or less depreciated 
currency and later having them re- 
deemed in gold. Between 1860 and 
1873 the government used its surplus 
revenue to retire its unmatured bonds 
by purchase at the market price in 
currency. These securities had so 
improved in the pubUc estimation 
that the diflference between what the 
government had originally received for 
them and what it was required to pay 
to get them back was, in every instance, 
a veiy substantial amount. The aver* 
age price paid for United States bonds 
by the Treasury Department during 
this period was 112.27 currency. 

U. S. 5*8 10-40'b 

Mabkbt Price in Gold Eqitiyalent On or 
About July 1 
Year Market Price* 

1865 62.2 

1866 69. 

1867 72.9 

1868 76.6 

1869 81.2 

1870 94.8 

1871 99.3 

1872 100. 

1873 100.5 

1874 102.5 

1875 103.5 

1876 106.7 

1877 107.7 

1878 108.1 

* Based on New York Exchange quotations 

from contemporary issues of the Commercial 

and Financial Chronicle. 

War Loans of 1812 

In 1880 the House Ways and Means 
Committee estimated that for over 80 

million dollars worth of government 
obligations issued from 1812 to 1816, 
the Treasury received but 34 millions 
specie value. Many of the issues were 
marketed at large discounts — ^the first 
departure from the usual American 
policy of issues at par. The specie 
value of the returns from loans was 
still further reduced by the acceptance 
of depreciated state bank notes in 
payment. The diflSculty in raising 
money was to a large extent due to 
the impopularity of the war in New 
England and the Eastern States. 
These centers of capital furnished only 
an insignificant share of the fundis 

Mabket Quotations 6 Per Cent Loan 
Wab op 1812 
(On ob About July 1) 
Year Market Price* 

1815 02i 

1816 89 

1817 103 

1818 108 

1819 lOlJ 

1820 loej 

1821 1091 

1822 1041 

182S 1021 

1824 105f 

1825 lOU 

1826 102f 

♦Prices on the New York Exchange from 
contemporary issues of the New York Skipping 
and Commercial List, Only consolidated quo- 
tations on War Loan 6's are available up to 1821. 
Prices for the loans of 1818 and of 1814 were 
quoted separately, beginning with 1821. Since 
these prices vary less than a point, the average 
has been used for the sake of simplifying the 

16 MiUion Loan of 1813.— When this 
loan was marketed public credit was 
f aUing rapidly and it became necessary 
to accept bids below par. In order to 
raise the full amount the subscription 
books were opened a second time and 
new conditions, imposed by subscribers, 
accepted. This issue matured in 

Digitized by 




thirteen years, bore interest at 6 per 
oent, and sold at about 88 currency. 

6 per cent Loan of 18H. — ^In borrow- 
ing the first instaUment of this ^ 
million dollar loan the government 
was forced to agree that if more favor- 
able terms were extended to later sub- 
scribers the more favorable conditions 
should be retroactive as regards pur- 
chasers of the first installments. Un- 
der these circumstances the bonds were 
marketed at from 12 to 20 per cent 
discount and some payments accepted 
in state bank notes worth 65 specie. 

It will be noted that these securities, 
which were issued at from 80 to 88, 
were selling at par within four years 
and at a considerable premium there- 
after. The high point was reached in 
1821 when the average price for the 
year on the New York Exchange was 
over 109. This was a nominal rise of 
some £8 points, but the real increase in 
the value of the investment was, in 
many cases, approximately 100 per 
cent. This, of course, was due to the 
fact that payment was accepted in 
depreciated currency and the securities 
redeemed when the monetary situa- 
tion had improved. Much of the debt, 
in fact, was redeemed at more than 
par. Surplus revenue accumulated 
after the war and as no provision had 
been made for redemption before 
maturity the Treasury Department 
found it necessary to pay full market 
price in order to retire these obhgations 
which were drawing a much higher rate 
of interest than was justified by the 
post-war condition of the national 

Mexican War Bonds 

The prosecution of this war created 
a net debt of 40 miUion dollars. Due 
to the strong financial condition of the 
country, the excellent credit of the 

nation, and the comparatively small 
amount of money required, all of the 
loans were placed at par or above. 
The aggregate premium on all the loans 
amounted to approximately a half 
miUion dollars. Nearly all offerings 
were oversubscribed. Eighteen mil- 
lions were asked for in one case and 
nearly 58 millions were subscribed. 
The following table shows that the 
post-war market value of these bonds 
was always high, up to the outbreak of 
the Civil War when they met the tem- 
porary fate of all securities during that 

U. S. 6*8 of 1867. —These bonds were 
due in twenty years and paid 6 per 
cent interest. They were marketed in 
1847 at prices ranging from 101 to 102. 

U. S. 6*8 OF 1867 

Mabkidt Quotations On or About July 1 * 

Year Price 

1849 1161 

1850 115 

1851 116J 

1852 118 

1853 121i 

1854 120 

1855 1191 

1856 117 

1857 109 

1858 1141 

1859 108 

* New York Exchange quotations fsom con- 
temporary issues of the New York Shipping and 
Commercial LUi. 

It will be noted that by 1858 the 
U. S. 6's of 1867 had reached a high 
point of 121 J. 

Other Mexican War Bonds. — ^In 1848 
16 miUions of another 6 per cent loan 
were sold at lOS to 104. These bonds 
were known as the U. S. 6's of 1868. 

Their post-war market value ran 
very closely with that of the U. S. 6's 
of 1867 as given in the above table. 

In 1846 about 5 milUons of ten-year 
6 per cent bonds were marketed at par. 

Digitized by 


164 The Annals op the Amebican Academt 

These securities were quoted at be- bonds were redeemable in ten years and 

tween 106 and 107 until they ap- due in twenty years. The issue was 

proached maturity. Comparison with seven times oversubscribed. The an- 

the twenty-year 6's described above nual market price of this issue is shown 

shows that the longer term of the by the preceding table: 

twenty-year bonds gave them a con- . A considerable enhancement of the 

sistent advantage on the market of market value of this issue was due to 

approximately ten points over this the fact that they were available to 

ten-year loan of otherwise similar secure national bank note circulation, 

securities. In 1900 over 1S2 millions of this issue 

In spite of the fact that all Mexican were refunded into the 2's of 1830 

War Loans sold above par they almost (consols), also available to secure cir- 

immediately went still higher on the culation and with a longer time to run. 
market — vindicating a strong demand 

for these securities at prices that gave Summary and Conclusions 

a yield much smaller than the nominal War Bonds Profitable Investments. — 

rate of 6 per cent. The above analysis makes it clear 

o A ITT « that, without exception, the war bonds 

Spanish-American War Bonds ^ xi_ tt -^ j o^ 5 -. i. 

of the Umted States government have 

U. S. s's 10-20'b (1918) ^^^j^^ f^j„^ ^^ earhest history, very 

Low Maiuojt P^^^^E THE Ybab* profitable iuvestmeuts. The post-war 

Y^^ p^^ market price has in every instance 

1898 104 exceeded the price received by the 

1899 1061 government at the time of issue. In- 

iwo 1081 terest always has been promptly paid 

^^^ ^^*| at the rate promised and in the medium 

JJJJ; JJ5J specified. Duringthe Warof 1812and 

1904! [.............. 104J ^® ^^^1 War, when currency depre- 

1905 1021 ciation existed, the variations in the 

1006 I02f relative value of gold and currency at 

^^^ ^^\ all times operated to the substantial 

1 QAQ 1 A/ll 

^^og j^l advantage of subscribers to govem- 

i9io! !!!.!!!!!!!!!" lOll ment loans. Civil War bonds origi- 

1911 .' . . . loil nally paid for in depreciated paper and 

1012 loii technically payable in "lawful money" 

^^^^ ^^^* were redeemed in coin or its equivalent. 

jj^jg ^^, How far the analogy between the 

1916 y/^............ 100 post-war market value of previous war 

1917 98f loans and Liberty Loans can be carried 

♦ New York Exchange quotetions from cott- depends upon a nimiber of factors 

temporary issues of the Commercial and Ftnan- which demand very careful considera- 

eial Ckronide. ^.j^^^ ^OT obvious reaaons even the 
To finance the war with Spain the strongest nations are invariably re- 
government in 1898 asked for subscrip- quired to give very good bargains in 
tions at par for an issue of 200 millions order to raise large sums of money 
of 8 per cent bonds — interest and during war times.^ Li marketing Lib- 
principal payable in coin. These erty Bonds the Treasury Department 

Digitized by 


Government Bonds as Investments 


could perhaps drive a harder bargain 
than it could .during previous war 
periods, because of the existence of an 
established national credit, because of 
the greater possibility of an appeal to 
patriotism, and because of the existence 
of highly developed machinery for 
advertising and distribution. On the 
other hand, it was handicapped by 
the absolute and comparative hugeness 
of the amounts needed, the lack of a 
foreign market, and the high earning 
power of capital in industry. The 
credit of our government undoubtedly 
was better in the eyes of its citizens in 
1917 than at the beginning of any 
other war. Our past record in dealing 
with purchasers of government obliga- 
tions and our increased financial and 
political strength had operated to 
perfect confidence in the financial 
undertakings of the nation. During 
previous war periods the interest rates 
and other conditions were necessarily 
more favorable to bond subscribers 
than would have been necessary if 
more efficient means of reaching the 
mass of citizens had existed. 

During the Civil War Jay Cooke 
demonstrated, on a small scale, the 
great value of a comprehensive system 
of advertising and distributing ma- 
chinery in government bond selling. 
Political considerations prevented the 
Treasury Department from making 
the fullest possible use of his ideas and 
organization at that time. 

The establishment of the National 
Banking System in 1868 was a some- 
what belated attempt to improve the 
situation in this respect. Each great 
war in which this government has been 
engaged has called for much greater 
sums of money than preceding conflicts. 
In every instance the unexampled 
amounts of mon^ required have ap- 
palled the people and caused them to 

doubt the nation's ability to stand the 
financial strain. 

In 1862 the United States govern- 
ment was having considerable difficulty 
in raising what at that time seemed like 
huge sums necessary to prosecute the 
Civil War. During this period the 
London Economist expressed its opin- 
ion of our financial future in these 

It is utterly out of the question, in our 
judgment, that the Americans can obtain, 
either at home or in Europe, anything like the 
extravagant sums they are asking — ^for Europe 
will not lend them; America cannot 

The Times expressed conservative 
British opinion as follows: 

No pressure that has ever threatened is 
equal to that that now hangs over the United 
States, and it may safely be said that if in 
future generations they faithfully meet their 
liabilities, they will fairly earn a fame which 
will shine throughout the world. 

In spite of these weighty and honest 
opinions to the contrary we did suc- 
ceed in financing the war for three more 
years until victory was won, and within 
five years after the end of the war the 
United States had either paid off or 
refunded on better terms all its obli- 
gations which were redeemable at that 

As the people of Civil War days were 
appalled by a debt which after five 
years of fighting amounted to less than 
three billions, even so was there an 
element of doubt and distrust among 
the plain people of this country when 
in 1017 we b^an to figure war costs in 
units of ten, fifteen and even twenty 
billions per year. As is usual in times 
of stress and emergency, national fi- 
nancial strength was underestimated. 
This feeling naturally increased to 
some extent the difiBculties of borrow- 
ing money, and the necessity for offer- 
ing especially favorable terms to 

Digitized by 



The Annai^ of the American Academy 

It is probably true that the demand 
for capital in industry was stronger 
during the World War than during 
any previous war. The proportionate 
amount of material supplies of all 
kinds required was much greater than 
during any pre^dous conflict and with 
practically tiie entire world at war the 
effective demand for products of indus- 
try was much greater than at any 
other period of the world's history. 
This industrial competition for funds 
would necessarily be reflected in the 
terms of loans, offered by the govern- 

Post-War Value,— AIL these things 
would indicate that the terms whidi 
would secure takers for government 
securities during the war would be 
considered very favorable indeed in 
the post-war period. During all pre- 
vious war periods the United States, as 
well as other great nations, has found 
it necessary to borrow money on terms 
which soon after the war were reflected 
in a high market price for their war- 
time issues. The above brief analysis 
of the conditions surroimding our 
national borrowings to finance the 
latest war make it seem probable that 
history will repeat itself in this respect. 

In 1890 the average interest rate 
being paid on United States bonds was 
4.08 per cent. By 1915 the average 
rate of interest had dropped to 2.37 
per cent. There are two main reasons 
that make it seem probable that Lib- 
erty Bonds will never attain a market 
price which will reduce their yield as 
low as that paid in 1915 by the long- 
time obligations of our government. 
First, the terms of the "old" issues 
are, with the exception of the rate of 
interest, in several respects more 
favorable to investors than are the 
conditions attached to the various 
issues of Liberty Bonds; second, it is 

possible that post-war conditions of 
the security market will be somewhat 
less favorable to government bonds 
than was the pre-war market. The 
"old" bonds have the advantage of 
complete tax exemption while the 
Liberties are subject to certain forms 
of national taxes if held in large blocks. 
The Liberty Bonds do not. bear the 
" circulation " privilege which has given 
the somewhat artificial value to many 
earlier issues of United States bonds. 
In this connection it is interesting to 
note that an issue of 50 milUons of 3 
per cent Panama Canal bonds, which 
were not available to secure bank note 
circulation, was marketed in 1911 at 
an average price of 102.58. With the 
decline in importance of National Bank 
Note circulation it is probable that 
the "circulation" privilege will also 
decrease in importance and value. 

Supply and demand effects the price 
of investment securities just as it 
controls the price of the more concrete 
commodities. The vast increase in 
the supply of investment securities, 
because of the huge government issues, 
has undoubtedly had the effect of in- 
creasing the supply of this conunodity 
beyond the effective demand. This 
results in the presence of large amounts 
of so-called "imdigested" securities. 
The period required for this invest- 
ment demand to catch up with the 
present oversupply will probably be 
lengthened by excessive industrial 
competition for funds demanded by 
the great amoimt of after-the-war 
industrial and commercial readjust- 
ment necessary. While these condi- 
tions, and perhaps some others of lesser 
importance, make it seem unlikely 
that Liberties will completely attain 
the favor of the "old" issues of gov- 
ernment securities, it should be pointed 
out that Liberty Bonds, because of 

Digitized by 


Government Bonds as Investments 


their higher interest rate may sell at a 
very substantial premium indeed, be- 
fore their yield is reduced to that paid 
by the older issues in 1915 and pre- 

A very real, if seldom realized source 
of profit in the purchase of govern- 
ment bonds, may well be expected 
through the operation of buying with 
inflated currency and taking payment 
of interest and capital after this war- 
time inflation has decreased. It is a 
commonly appreciated fact that the 
dollar today will purchase only ap- 
proximately half as much in goods 
and service as it would in 191S-14. 
This, of course, means that the 1919 
dollar is worth in reality only about 
50 per cent as much as the 191S-14 
dollar. If we exchange these "cheap'* 
dollars for government securities now, 
and hold them until our currency has 
resumed its former value in exchange 
for goods, it is clear that our capital 
investment will be approximately 
doubled in real value. The possibility 
of profit from this source is, of course, 
contingent upon post-war deflation of 
the currency and a consequent increase 
of the purchasing power of the dollar. 

While the question of deflation is still 
a subject for argument we believe 
that it is safe to state ^hat the weight 
of intelligent opinion holds that while 
the purchasing power of the dollar may 
never return to the before-the-war 
basis, nevertheless, we may expect a 
substantial increase in the value of our 
currency in its relation to other com- 
modities as industrial conditions ap>- 
proach to normal. The greater this 
deflation the greater will be the increase 
in the real value of the capital now 
invested in long-time securities. 

Using as a guide, the experience of 
the past, modified by the changed- 
conditions of the present, it would ap- 
pear very probable that the obligations 
issued by the United States to finance 
the World War will be suflSciently 
attractive to cause them to sell at a 
substantial premium as soon as the 
security market is entirely adjusted to 
a peace-time basis. This fact com- 
bined with the probability of an in- 
crease in the purchasing power of our 
currency, point to a yield considerably 
in excess of the nominal rate of inter- 
est to those who now hold United States 
bonds of the recent issues. 

Digitized by 


The Development of Thrift Facilities 

By Milton Harbison 
Executive Manager, Savings Banks Association of the State of New York 

Money Saving an Index to Thrift 

BETTER bujong, greater system in 
private affairs and the quality of 
doing without what one may desire are 
elements manifesting personal thrift. 
However, consistent saving of money 
must be the result of the practice of 
such thrift elements. The evidence 
of thrift is independence; indepen- 
dence is secured through the saving 
of money, but the quality of that 
independence must not be disregarded. 
To continuously stint and live only on 
the bare necessities of life, thereby 
maintaining a low standard of living, 
may permit a person to accumulate an 
amount of capital which will be suf- 
ficent to assure independence, but the 
quality of that independence will be 
exceedingly poor. Life is a tissue of 
habits, and if the tissue is miserly it 
cannot be changed at a time when the 
life is the tissue, and thus the means of 
independence can only be enjoyed by 
relatives, after death. High quality 
independence, therefore, presupposes 
the maintenance of a decent standard 
of living throughout the period of 
accumulation, and money saving must 
be consistent in order to reach real hapn 
piness during the unproductive days of 

Facilities for Money Saving 

Since saving of money in the way 
above described is the Alpha and 
Omega of thrift, the establishment of 
adequate facilities as an aid thereto is 
of first importance. During the past 
five years the establishment of proper 
and adequate facilities for the saving 

of money has been advancing tremen- 
dously. As a result, more of the pres- 
ent generation of Americans will enjoy 
a happier old age than those of preced- 
ing generations. 

People doubtless are saving more 
consistently today than they ever have 
before. The propaganda of the Treas- 
ury Department in the encouragement 
of thrift has had a marked influence 
upon the American people. It has 
brought the lesson of saving to the 
masses of the people. The war may 
have been the object and the immedi- 
ate reason, but the fact remains that 
people generally know the meaning of 
money saving. The present may wit- 
ness undue extravagance but every 
person who spends, no matter how 
wildly the spending may be, feeb a 
restraining force due to the lessons of 
thrift taught in the heat of war. 

There are twice as many banks to- 
day as there were five years ago, and 
there are 28,000 of them in the nation, 
that are urging the people to save and 
conserve through the establishment of 
savings departments. It is admitted 
that such business is profitable to the 
bank, but nevertheless, money saving 
facilities are thereby increased. As a 
general principle, the adult who knows 
the lesson of thrift will not save unless 
the facilities exist directly at hand. 
The industrial worker will not go four 
blocks away from the beaten path of 
the plant to his home to deposit a small 
sum from his weekly wage, unless thrift 
is an inborn habit or a habit acquired 
at an early age or to save in order to 
pay an obligation that must be met* 


Digitized by 


Development op Thbift Pacilitibs 


Thus, the banks of the country, recog- 
nizing this necessity, are expanding 
their facilities into industrial plants 
but free from the influence of em- 
ployers. Building or Savings and 
Loan Associations are being, estab- 
lished in factories and mills. Govern- 
ment savings stamps and certificates 
are being made conveniently available 
to industrial workers. Plans are being 
made and carried out to sell railroad 
and municipal bonds in small denomi- 
nations, as well as participation cer- 
tificates secured by high-grade bonds. 
These bonds may be sold not alone 
through banks, but in drug stores and 
other local responsible retail stores. 

Savings banks are planning to install 
concrete safety deposit vaults which 
will contain boxes of sufficient size to 
hold a considerable number of bonds 
and private papers. These will be 
made available to the people of small 
means at a very nominal sum. There 
is one savings bank in the Middle- west 
which has already contracted for the 
installation of a concrete vault to 
contain 100,000 of such boxes, to be 
rented as low as $1 per year. They 
expect to operate the vault at a profit. 
Thus, savings facilities are developing 

Small Savings and Capital 

The savings account is simply the 
nurturing force in the accumulation of 
capital by the person of relatively 
small means. Its primary purpose is 
to promote the systematic saving of 
small amounts. When the account 
reaches several thousand dollars, it 
ceases to be a desirable savings ac- 
count. The law of the State of New 
York limits the balance of a savings 
account in the name of any one person 
to $3,000. The Connecticut law does 
not permit a greater aggregate deposit 

by one person within one year or more 
than $1,000, and $2,000 is the limit of 
a savings account in Massachusetts, 
while New Jersey law limits the ac- 
count to $10,000. The average sav- 
ings bank would rather go to the ex- 
pense of caring for ten accounts of $100 
each than to carry one account of 
$1,000. The deposit of small amounts 
is preferred to the deposit of large 
amounts. This is only the result of 
following the fundamental principle 
of the savings account as the nurturing 
force in the accumulation of capital. 

Independence Through Thrift 

In the days before the war a few 
thousand dollars seemed adequate to 
care for a person during his unpro- 
ductive days; this was because the 
principal was used and the interest or 
income was disregarded. He was 
comfortable while the money lasted 
and a pauper or dependent when the 
principal was exhausted. Such kind 
of people continued to live in the 
city where their savings went solely to 
living expenses and thus $3,000 meant 
meals for a few years; whereas, if the 
sum were invested in a small farm, and 
there are plenty of them available, it 
would mean happiness and content- 
ment during the remainder of life. 
But a very small proportion of the 
people who have lived all their lives in 
a city would be content to vegetate in 
a village even during old age. What 
then is the solution of the problem? 
Life insurance has solved the problem 
of the care of dependents in the event 
of the death of the producer of the 
family income, but the care of people 
grown old or incapacitated must be 
left to the accumulation of capital 
from which some income may be de- 
rived, if the independence of the in- 
dividual is to be maintained. It is 

Digitized by 



The Annals of the Akerican AcABEBnr 

argued that when parents have grown 
old, it is the duty of the children to care 
for them, but this does not assure the 
independence of the parents and only 
creates a deterrent force in the progress 
of the children in building up their own 
lives. This may be counted as a sel- 
fish attitude to take but nevertheless 
each person is responsible for his own 
life and it is only one short span, 
wherein a person must begin early to 
accumulate capital for success in life 
and for independence in old age. The 
principal theme of thrift is indepen- 

Investment of Small Savings 

Adequate accumulation of capital 
requires facilities which will absorb 
the capital accumulated and will re- 
turn a fair rate of income. The future 
will have plenty of opportunity for the 
absorption of capital. The world will 
look to America for the finance of 
foreign governments, of foreign rail- 
roads and cities. On the other hand, 
the demands for capital for domestic 
finance will tremendously increase. 
It will not be long before most banks 
will be seUing the bonds for such 
finance, in small denominations, over 
their counters on the partial payment 
plan. But the efiFort to urge the people 
to buy will have to be continuous and 
strong in order to be efiFective. Lib- 
erty and Victory Bond and War Sav- 
ings Stamp drives may have made 
America a nation of bond buyers, but 
there is some question as to whether 
such drives have made America a 
nation of bondholders. The effort 
made to sell war bonds could not be 
paralleled in times of peac6 in the sale 
of either government bonds or other 
high grade issues. The people will 
have to be met with cold facts; only 
their selfish interests can be appealed 

to. To produce results propagandists 
of saving must begin with the payment 
of private debts by the individual and 
then urge him to save, for his assets 
must be greater than his liabilities if 
there is to be any real surplus or saving. 

Where Saving Should Begin 

The faciUties for saving must begin 
in the schoolhouse. There is no more 
effective way of teaching thrift than 
through the school savings bank estab- 
lished and operated by school children. 
Every school in America should install 
such a bank. Not a slot machine, but 
a real bank, with tellers, bookkeepers 
and even officers, all of whom should 
be school children. The teacher may 
exercise a supervision in the operation 
of the bank, but the children should be 
allowed to do the work. 

The School Savings Bank, — ^New 
York City Schools have been most suc- 
cessful in this respect. So also have 
the schools of Detroit, Rochester, 
Minneapolis, St. Paul, Chicago, Kan- 
sas City and San Francisco. The chil- 
dren systematically save until they 
have an amount sufficient to open an 
account in the local bank or to buy a 
Government Savings Stamp. Saving 
money easily becomes a habit with the 
ordinary child and it continues through- 
out his life. There is no school lesson 
the child could learn that will produce 
better results than that of depositing 
his pennies and nickels — ^real money — 
in the school savings bank. He learns 
the value of money, he learns funda- 
mental economics and it stays with 
him; it makes him a better student, a 
better business or professional man; 
it gives him an appreciation of the 
value of individual independence, 
which, if it were learned by all the 
people, would advance our civilization 
a thousand years. The establishment 

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Development of Thrift Facilities 


of school savings banks is eminently 
important in the further development 
of thrift faciUties. 

Household Economics Departments. — 
•Savings banks are considering increas- 
ing thrift in the home by the establish- 
ment of household economics depart- 
ments. Approximately 65 per cent of 
savings depositors in the savings 
banks are women. Through advice 
given to such depositors by women 
employed by the banks who have been 
especially trained in household eco- 
nomics, homes are being financially 
reformed and adjusted so as to permit 
families to live within their incomes 
and thereby produce a saving in 
money. The correct spending of 
money to maintain a home requires 
considerable intelligence, an inteUi- 

gence which the housewife should have 
acquired at public school, instead of 
some non-essential learning. The 
household economics department of a 
savings bank is still in an experimental 
state but it will not be many years be- 
fore most savings banks will be making 
every effort through such means to 
better the condition of the home, by 
urging the housewife to use the budget 
system, by urging Boards of Educa- 
tion to teach rudimentary principles 
of better buying and of the value of in- 
dependence in old age. 

In conclusion, the possibilities of the 
thrifty people of the United States are 
unlimited. Every safe and sound 
f aciUty for the accumulation of capital 
must be put into operation. It is an 
Herculean task, but America can do it. 

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Cooperative Credit Institutions in the United States 

WEALTH begins with thrift and 
increases as saving is prac- 
ticed. In the whole organic king- 
dom man is the only being which 
stores up the fruits of labor for future 
use. Thrift, or saving, is at the 
foundation of civilization. Yea, more, 
it is the framework of property and 
the source of economic and social 
relations. To encourage thrift, there- 
fore, is to promote social progress by 
increasing the supply of stored-up 
wealth for use in our democratic sys- 
tem of national economy. 

PaoDucTiON OP Wealth 

In striving to produce wealth man 
may either work alone or in coopera- 
tion with others. The long experi- 
ence of the race, however, has demon- 
strated that more wealth is produced 
by division of labor in group produc- 
tion than by an equal number of 
individuals working separately. But 
it took a long time for mankind to 
learn this truth. 

Campeiiiion — Monopoly 

During much of our past history, 
the organization of modem business 
has rested on competition. What 
the struggle for existence is to the 
natural world, the law of competition 
is to the economic world. To elimi- 
nate competition in any particular in- 
dustry is to create monopoly, a most 
dangerous power, the economics of 
which are not established on the law 
of supply and demand, but on the 
arbitrary will of the directors of the 
monopolistic industry. Against this 

By James B. Morblan 

Assistant Secretary, Federal Farm Loan Board 

phase of social economy, the whole 
civilized world is now in open revolt, 
for to it is attributed in no small de- 
gree the great problem of the high 
and rising cost of living which strikes 
at the very foundations of national 
welfare and the health and happiness 
of the people. 

Cooperation Through Division of Labor 

But between competition and mo- 
nopoly stands cooperation. The basis 
on which it rests is that of "'mutual 
help for self-help." Its purpose is 
not to destroy, but to build up by 
combining the savings of many into a 
collective force for service. Funda- 
mentally, therefore, co5peration rests 
on the economic basis of division of 
labor which increases wealth produc- 
tion. Its origin in modem history is 
very simple, beginning, it is said, in 
the custom of the Swiss peasantry of 
borrowing milk from one another to 
secure a sufficient quantity to make a 
cheese. This led to the pooling of the 
milk at a common center, the alter- 
nate manufacture of the cheese by the 
different peasants, and the final divi- 
sion of the products according to the 
quantity of milk furnished by each 
member of the cooperating group. 
The mutual help thus rendered was 
found not only to save the waste of 
individual small supplies of milk 
which taken alone would not be suffi- 
cient for the making of cheese, but to 
bring greater returns at less loss and 
less labor than an individual could 
expect or secure if producing milk 
and making cheese alone. 


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Credit Institutions in the United States 


Society as constituted today is 
divided into "nirar' and "urban" 
population. The rural workers are 
engaged in the production of wealth 
from the soil to provide food and the 
raw materials of many textile manu- 
factures. On the other hand the 
workers in towns and cities, grouped 
as "urban/* are largely engaged in 
industrial pursuits which work up the 
raw materials produced on the farms 
into finished products. Here, then, 
we have the mutual relations of both 
groups of our population clearly indi- 
cated showing the interdependence 
of one class of the people on another 
class which results in benefits to both. 
Taken in its broadest aspects, civili- 
zation is progressive co5peration in 
the production and distribution of 
those things which make for the 
health, the wealth, and the happiness 
of all the people. 

Thbipt Through Co5pbrative 
Credit Institutions 

The four primary needs of mankind 
are food, fuel, clothing and shelter. 
The masses of humanity born into the 
world must earn these things by their 
own labor. With growth in popula- 
tion and civilization, a house, which 
provides shelter, becomes costly and 
the average worker would be unable 
to occupy a home which he could call 
his own if some method of co5peration 
did not exist which enables him to 
buy a place and pay for it out of his 
savings. Such a system, however, has 
been devised and is called "coopera- 
tive credit.'* 

The institutions primarily supply- 
ing this form of credit are known as 
Building and Loan Associations. 
These are mentioned first because 
they have been in existence longer 
than those ioatitutions which pro- 

vide credit facilities for rural workers. 
In either case the need of credit and 
credit institutions is based on the 
same fimdamental principle, namely, 
the mutual aid furnished through co- 
operative eflfort as a means of self- 
help to every individual member of 
the organization. 

In view of the financial and eco- 
nomic problems now confronting our 
country, probably no theme is more 
timely than that of pointing out how 
codperative credit institutions en- 
courage thrift among all classes of 
people in the United States. 

Building and Loan Associations^ 

In some respects the building and 
loan associations are the greatest 
co5perative financial system in the 
world. They began in 18S1, and from 
that time to the present they have 
had a steady growth through private 
enterprise and mutual self-help. As 
generally understood a building and 
loan association is an incorporated 
institution with a capital which may 
be increased or decreased by the 
issue or cancellation of shares, or by 
payment or withdrawal of payment 
on shares. The original source of this 
capital is the savings of members, and 
the purpose is to make loans to mem- 
bers for building or acquiring homes. 
The owning of homes being an en- 
couragement to thrift, building and 
loan associations are exempt from 
taxation on the ground that their 
purpose is considered a benevolent 
one and that it promotes the welfare 
of communities in which they are 

1 For more detailed accounts see Senate Doc. 
S96, 64th Cong., 1st Sess., pp. 24-82; Secretary's 
Annual Report, United States League of Local 
Building and Loi^n Aaaociatiooa (Cincinnati) for 

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The Annals op the American Academy 

In accordance with co5perative 
principles, these associations are ad- 
ministered by their members at a 
mere nominal cost. They have a 
limited territory, the membership is 
not large, and the subscribers to 
shares are mostly people of only 
moderate means. In carrying out the 
principles of building and loan asso- 
ciations the aim is to encourage co- 
operation in local community life. 
For this reason each association 
should be self-sustaining and with a 
membership only large enough for 
all to attend meetings regularly and 
watch over its afiFairs. 

Funds are provided by accepting 
the savings of members and investors. 
Each association issues and sells 
shares which are mainly of two kinds 
— installment shares and investment 

On installment shares the subscriber 
makes his payments at stated inter- 
vals. These are the ones in general 
use for loan transactions. A bor- 
rower subscribes for shares in an 
amount equal to his loan, a first mort- 
gage is given on the property on 
which the loan is made, and the 
shares are pledged to the association 
as additional security for the loan. 
Payments made by members are 
applied on a share until paid off, and 
each share is credited with its por- 
tion of the profits. Borrowers in 
reality, therefore, receive interest to a 
limited extent on their own debts, a 
result attributed entirely to the prin- 
ciple of cooperative credit. At ma- 
turity a borrower's shares are can- 
celed, — that is, when his payments 
equal his debts; and his mortgage is 
canceled with his pledged shares. 
The latter can at no time be with- 
drawn during the period of the loan. 

The installment share was origi- 

nally the only kind issued and created 
an obligation to keep up regular pay- 
ments until maturity. In effect, 
therefore, it requires self-imposed 
compulsory thrift or saving which 
inculcates the habits of frugality 
and economy on the part of bor- 
rowers. In this day of extravagance, 
waste and high living, the habits 
inculcated through building and loan 
associations are worthy of being given 
broad publicity in the interests of our 
national welfare. 

On investment shares the sub- 
scriber may make one payment in 
full or he may make several partial 
payments at stated periods to suit 
his convenience, and he may sub- 
scribe for as few or as many shares as 
he pleases. At maturity the shares 
are canceled, and in the case of a non- 
borrowing member the face value of 
his shares is paid to him in cash. 
Pledged shares by borrowers cannot 
be withdrawn until the loan has been 
paid, but the credits on investment 
or "free" shares may be withdrawn 
ordinarily on sixty days' notice. 

Since the only credit instruments 
of a pure form of building and loan 
association are its shares, loans can 
only be made as fast as savings accu- 
mulate. This difficulty is inherent 
in the codperative method of pro- 
viding credit, but it is well under- 
stood by the members who realize 
that it cannot be changed without 
destroying the co5perative feature. 
As a matter of fact very serious con- 
sequences have more than once fol- 
lowed when building and loan asso- 
ciations deviated from the straight 
and narrow path of cooperative credit. 
The most dangerous departure from 
these principles was the right ac- 
corded in some states to use the credit 
as well as the cash of .members for 

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Credit Institutions in the United States 


the issue of bonds or other debt 
obligations. In the last quarter of 
the nineteenth century there were 
many failures of these associations 
due largely to the fact that the laws 
did not always require adequate 
supervision, that large associations 
were formed by persons who had no 
correct knowledge of the limitations 
of cooperation, and that the average 
ofBciab were unfamiliar with intri- 
cate financial methods. 

Evidently, then, a building and 
loan association when it conforms to 
its original concept, is distinctively 
a thrift society, whether considered 
from the standpoint of the borrower 
or the investor. The compulsory 
periodical saving which it requires of 
members gives it the character of a 
thrift institution to a greater extent 
than is possessed by a mutual savings 
bank or similar institution, and the 
safeguards thrown around the invest- 
ment of its funds make it one of the 
sanest and safest institutions for 
home building by persons of moderate 
income. Its methods are strictly 
cooperative, the only creditors are 
its own members, and it is managed 
and financed exclusively by them. 

That building and loan associations 
have encouraged thrift, both before 
and during the World War, may be 
shown by the following figures: There 
were in the United States in 1914 no 
less than 6,429 associations having 
a membership of 2,886,433 and a 
share capital of $1,248,479,139. This 
means that there was one member for 
every 13.45 persons engaged in gain- 
ful occupations, for every 7.14 census 
families, or for every 2.55 urban dwell- 
ings. Financially considered, it means, 
$1.00 of assets for every $13.91 of in- 
dividual deposits in all banks in the 
United States. That the World War 

did not diminish thrift but rather 
encouraged it may be shown by the 
following figures for December 31, 
1918, as compared with those for 
1914: Number of associations 7,484; 
membership 4,011,401; and assets 
aggregating $1,898,344,346. Well may 
it be said of this kind of co5pera- 
tive credit institution: "By their 
fruits ye shall know' them.'" 

A Proposed Federal Home Building 

The well-recognized merits of build- 
ing and loan associations have led to 
a proposal to establish a federal sys- 
tem. On July 15, 1919, Senator W- 
M. Calder, of New York, introduced 
"a bill among the objects of which 
are to encourage home ownership and 
to stimulate the buying and building 
of homes"; and "to create a standard 
form of investment based on building- 
association mortgages." 

This bill was referred to the Senate 
Committee on Banking and Cur- 
rency, but no report had been made 
thereon up to October 20. I shall 
content myself, therefore, with pre- 
senting the merest outUne of this 
proposed plan for encouraging home 
building, because of the changes 
which are likely to occur when a 
measure of this kind passes through 
the troubled waters of legislative 

In its general outlines this bill 
follows closely the provisions of the 
Federal Farm Loan Act, the coopera- 
tive feature of which is described 
later in this paper. It provides for. 
dividing the continental United States 
into eleven federal building loan bank 
districts and the establishment of a 
bank in each district which shall 
make loans to "building associations" 

> Senate Bill 2492, 66th Cong., 1st Session. 

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The Annals of the Abierican Acadebtt 

for the purpose of encouraging home 
building by wage-earners and others. 
The term '' building association," how- 
ever, is defined broadly to include 
"all duly incorporated domestic 
building and loan associations, savings 
and loan associations, co5perative 
banks, homestead aid, or other kin- 
dred incorporated associations or- 
ganized and conducted exclusively 
for the mutual benefit of their mem- 
bers and doing what is generally 
known as a cooperative building and 
loan association business," and which 
are under state supervision. 

The establishment of a federal 
building loan bank is provided for in 
the following manner: Whenever ten 
or more building associations located 
within a district, with aggregate as- 
sets of not less than $5,000,000, shall 
associate themselves together for the 
purpose for which they are organized, 
they may establish a federal building 
loan bank in their district with a paid- 
in capital of not less than $100,000 in 
shares of $1,000 each. This capital 
may be loaned to building associa- 
tions on first mortgages on dwelling 
houses, no other security being ac- 
ceptable, said mortgages being de- 
posited with a registrar as security 
for an issue of bonds in equal 

Bonds may be issued up to twenty 
times the capital of a federal building 
loan bank and funds may be advanced 
to any member association up to 
twenty times the amount of the capi- 
tal stock owned by such member. 
The rate of interest on bonds, which 
are tax-exempt, cannot exceed 4j 
per cent, and the compensation to the 
bank for services may not exceed J 
per cent. The interest rate on funds 
advanced to the associations, there- 

fore, cannot exceed 5 per cent. After 
paying expenses and providing for a 
reserve account, the banks may de- 
clare dividends to shareholders of the 
whole or part of its net earnings and 
carried as undivided profits. 

Here, then, we have a plan for the 
co5peration of co5peratives in which 
building and loan associations within 
a given district may pool their credit 
for mutual benefit. The scheme is 
largely patterned after the Land 
Bank of the state of New York, which, 
however, has made little or no progress 
since 1914. Many objections have 
been raised against the New York 
plan of financing the savings and loan 
associations of that state; and whether 
or not these difficulties could be over- 
come if a similar institution were 
estabUshed under federal fostering 
and supervision is problematical. In- 
asmuch as the federal plan for estab- 
lishing co(5perative credit institutions 
is in an embryonic condition, the prob- 
lems connected therewith may be 
left for solution should that time ever 

Credit Unions — Urban and Rural 

Turning from the strictly urban 
aspect of cooperative credit, as repre- 
sented by building and loan associa- 
tions, let us now consider tyjjes of 
institutions which, beginning as 
urban, have become semi-rural or 
strictly rural in character. These 
institutions are called "people's 
banks" in Canada and "credit 
unions" in the United States.' 

While the people's banks were orig- 
inally organissed in Canada to lend 
small sums to members on personal 

' For a more detaOed account of these ooOp- 
erative credit institutions, see Morman's The 
Principles of Rural Credite, pp. 26S-275. 

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Credit Institutions in the United States 


security in the towns and cities of 
Quebec, the percentage of their mem- 
bership is now so overwhehningly 
composed of farmers, — 90 per cent 
being farmers and 10 per cent wage- 
earners, — that the name could well 
be changed to "rural banks." In 
passing over into the United States, 
the modification brought about in 
their character led to the adoption of 
the name of credit unions, the aim of 
which was to make short-time loans 
to members on chattels. That both 
types of credit institution were in- 
tended to promote thrift may be 
shown by a brief accoimt of their 
origin and development. 

The people's banks in Canada owe 
their origin and success to the un- 
tiring energy of Alphonse Desjardins. 
The first bank was established at 
Levis, Quebec, beginning operations 
in January, 1901. From Quebec 
these banks spread to Ontario and 
have even made their way into some 
of the New England states. 

The capital of each bank is raised 
by selling shares at $5 each and by 
receiving deposits, on which savings- 
bank interest rates are paid. Stock- 
holders are free from liability — ^a 
departure from the European system. 
Deposits can be withdrawn at will, 
or by giving thirty days' notice at the 
utmost. Shares of stock may be paid 
for by small installments. Every 
applicant for membership has to be 
approved by a council of adminis- 
tration, the by-laws requiring that 
the applicant must be honest, punc- 
tual in his payments, sober, of good 
habits, and industrious. Each bank is 
carried on by three committees. The 
council of administration controls the 
admission to membership, supervises 
the transfer or withdrawal of stock, 


selects the manager who alone draws 
a salary, and overlooks the manage- 
ment of the business. The credit com- 
mittee determines the amount of 
credit each member can receive and 
passes on all applications for loans. 
The council of supervision audits the 
accounts and has general supervision 
over the bank. A reserve fund is 
built up by means of 20 per cent of 
each year's profits and a membership 
fee of 10 cents; and the reserve fund 
18 protected by a providence fund, 
raised by taking 10 per cent of the 
annual profits, which is designed to 
meet any calls that threaten the 
bank's stability. Loans usually run 
between $10 and $150, although 
larger loans are sometimes made, the 
rate of interei^t being about 6 per 
cent. These institutions do business 
within a limited area where everyone 
is known to all the shareholders, and 
where every shareholder is interested 
in the repayment of loans. 

These are the general principles 
which regulate the activities of the 
cooperative personal credit institu- 
tions in Canada and the United 
States. They have been eminently 
successful in the Dominion where 
more than 150 have been organized 
since 1906 with more than 66,000 
members; and, notwithstanding they 
are small institutions making small 
loans, the business transacted amounts 
to nearly $9,000,000 a year. As a 
means of encouraging thrift among 
small farmers and poorer-paid classes 
of wage-earners, the Desjardins' type 
of semi-rural cooperative bank, in 
which farmer and wage-earner can 
unite their savings to lend to others 
of their own class, afiFords a good op- 
portunity for supplying cheap money 
for short-time loans on personal or 

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The Annals of the American Acadebij 

chattel security. But their success 
has undoubtedly been due to the real 
co5perative spirit existing among the 

Turning from Canada to the United 
States we find that credit unions have 
been organized as separate institu- 
tions in both city and country. In 
the states of Massachusetts and New 
York a considerable number have 
been organized in various cities among 
the working-classes, Massachusetts 
alone reporting 50 urban credit unions 
in 1916. 

Rural Credit Unions, — ^During the 
past few years, however, more atten- 
tion has been given to organizing 
credit unions among farmers, these 
rural credit unions now serving as 
supplemental institutions to the fed- 
eral farm loan system which provides 
farm mortgage loans only, the cooper- 
ative feature of which is outlined and 
discussed in the following section. 
The original plan of rural credits 
legislation in the United States in- 
cluded both short-time (personal) 
and long-time (mortgage) credit, but 
no legislation on personal rural credit 
has ever been seriously considered 
in Congress. To a very limited ex- 
tent, therefore, the organization of 
credit unions among farmers has oc- 
cupied this neglected field of personal 
or short-time credit. The following 
are the principal data on rural credit 
unions as reported in 1916: 

^ In a letter to the writer under date of October 
11» 1919, Mr. Desjardins says: "With reference 
to the development of thrift as one of the effects 
of the World War» I can assure you that the 
movement has greatly increased, so much so 
that since 1916 the total amount deposited in 
our credit unions has more than doubled, al- 
though the number of credit unions has not 
materially increased during that time." 






Massachusetts. . . 


New York 

New Jersey 

North Carolina.. 







The security given by members for 
loans in rural credit unions is either 
chattel mortgage or endorsement, and 
the prevailing rate of interest is 6 per 
cent. In the latter case a farmer in 
order to borrow money must know two 
or three neighbors who are willing to 
sign a note with him. But both the 
borrower and his indorsers must be 
known to the credit committee of the 
union or a loan will not be granted. 
Through living close together they 
learn the habits of thrift, industry 
and honesty of borrower and indorsers. 

The greatest number of rural credit 
unions have been organized in North 
Carolina, the State Department of 
Agriculture supervising the work. 
The credit unions among farmers in 
the other states mentioned above have 
all been organized with the aid of 
the Jewish Agricultural and Industrial 
Aid Society. 

The efiFect of the war on the devel- 
opment of rural credit unions has not 
resulted in increasing their number 
except in North Carolina, where the 
state has taken an active interest in 
the organization and success of these 
institutions. This is not to be inter- 
preted, however, to mean that the 
war has been detrimental to the en- 
couragement of thrift among farmers. 
It is more than likely that the in- 
creased prosperity during the past 
three years has enabled tliose farmers 

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Credit Institutions in the United States 


who were formerly members of credit 
unions to pay off their loans and 
thereby were automatically released 
from membership. This is likely to be 
the reason for the status of credit 
unions among farmers August SI, 
1919, as reported by the United States 
Department of Agriculture, which is 
summarized as follows: 

According to the latest report of the Jewish 
Agricultural and Industrial Aid Society, 
several of the rural credit unions in New York 
have been obliged to wiod up their affairs. 
In place of the eight credit unions among 
fanners reported in 1916, only three now exist 
in that state, and no mention is made regard- 
ing the present status of the credit unions 
among Jewish farmers in the states of Con- 
necticut and Massachusetts. On the other 
hand the report from the superintendent of 
rural credit unions in North Carolina shows 
that they then numbered 28, with a total mem- 
bership of 080, and with outstanding loans 
aggregating $88,164. Thjs would seem to 
indicate that North Carolina is the only state 
where any considerable progress has been 
made in the development of credit unions 
among farmers. 

Summing up the situation as to 
both kinds of credit unions, they are 
known to be excellent local savings 
banks, stimulating thrift, bringing 
out hoarded money, and conferring on 
local communities the benefits of 
properly and safely invested money. 
However small a village or a farming 
community may be, it can organize a 
credit union, give to its inhabitants 
the benefits of banking, and extend the 
practice of thrift to every home in the 
locality. Such a credit union bor- 
rows from its members by accepting 
savings deposits and lends to other 
members for productive purposes. 
The fundamental principle is that 
thrift precedes savings and credit. 
The general tendency of these simple 
institutions is to develop individual 
capacity for a higher personal and 

public life. There is every reason, 
therefore, for encouraging the or- 
ganization of credit unions in every 
well-defined community in the United 

Federal Cooperative Farm Mortgage 

The last type of credit institution 
of a cooperative character to be de- 
scribed forms a very important feature 
of the federal farm loan system. This 
new method of making farm mortgage 
loans includes both individualist and 
cooperative features. Both have ma- 
terially aided in improving farm mort- 
gage credit conditions and have a 
very important relation to our na- 
tional welfare. In conformity to my 
topic, however, I shall confine myself 
more particularly to presenting facts 
and figures on cooperative farm 
mortgage credit.* 

The Federal Farm Loan Act went 
into effect on July 17, 1916, the day 
it was signed by President Wilson. 
The primary object of the law was 
to provide capital for agricultural 
development, the money to be loaned 
to farmers for productive purposes at 
a low rate of interest. Only first 
mortgage loans could be made on 
farms or farm lands, and two kinds of 
land banks were authorized to make 
these loans. One kind is known as 
Federal Land Banksy which make loans 
to farmers through "agents" or 
through national farm loan associa- 
tions, a cooperative organization; the 
other is known as Joint Stock Land 
Banks which are operated by private 
capital for lending money to indi- 
vidual farmers. 

' For an extended discussbn of the relation of 
rural credits to national welfare, see Chapters 
XI-XTTT, inclusive, of the author's recent worl( 
on The Place qf Agriculture in Reconetruetion. 

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The Annals of the American Academy 

Twelve Federal Land Banks were 
organized largely by government capi- 
tal, the amount subscribed by the gov- 
ernment being $8,891,270 out of the 
minimum of $9,000,000 authorized. 
The balance of the capital was sub- 
scribed by private individuals. The 
aid furnished by the government in 
establishing this cooperative system 
consists in supplying the capital 
without interest. This capital, how- 
ever, is to be repaid and part of it has 
already been paid back by the Fed- 
eral Land Banks. 

National farm loan associations 
may be organized in any locality with 
not less than ten members whose sub- 
scriptions for loans cannot be less 
than $20,000. Loans are made at 5^ 
per cent interest, range from $100 to 
$10,000, and on the amortization 
plan of repayment. The associations 
are chartered by the Federal Farm 
Loan Board. 

The primary cooperative feature is 
community organization for borrowing 
on land security, but there is not un- 
limited land Uability. Individual 
mortgages are given for the payments 
on which each borrower alone is 
responsible. The cooperative lia- 
bility lies in the subscription to stock 
in the association equaling 5 per cent 
of each loan which, however, becomes 
an investment and receives dividends 
from the Federal Land Banks. The 
money subscribed for stock in the 
association by the borrowers is re- 
subscribed by the association in stock 
of the Federal Land Bank, the stock 
being held by the bank as additional 
security for the loans made through 
the associations. On September 80, 
1919, the capital of the twelve Federal 
Land Banks aggregated $21,887,689, 
of which amount $18,082,860 was 

owned by the national farm loan 

The first loans were made on 
March 27, 1917, so that on Septem- 
ber 80, 1919, the system had been in 
active operation practically two and 
one half years. The rapid growth of 
this cooperative plan of farm mort- 
gage credit may be realized by a study 
of the following table which gives by 
states the number of associations 
chartered, number of loans granted, 
and the total amount of loans: 

The cooperative feature of the 
federal farm loan system was orig- 
inally designed not only to aid 
farmers to procure better credit 
facilities, but to encourage thrift 
among all classes of the rural popula- 
tion by furnishing a savings-bank 
institution in the form of a national 
farm loan association. This feature, 
if carried out and developed, might 
well serve as a nucleus for the organi- 
zation of a rural credit union for 
making short-time personal loans to 
farmers. I present this as a new sug- 
gestion in connection with the thrift 
campaign and which may serve a 
very useful purpose in our rural social 

Under the law national farm loan 
associations may receive savings de- 
posits from both members and non- 
members for the purchase of farm 
loan bonds.' Anyone who may have a 
few dollars saved may start a savings 
account with an association for this 
purpose. A certificate is granted 
which states the amount of money so 
deposited, and the savings may bear 
interest for one year as high as 4 per 
cent. These deposits are sent to the 
Federal Land Bank of the district for 
investment in bonds or first mortgages. 

• S^ Federal Farm Loan Act, Sec. 11, subd. 4. 

Digitized by 


Credit Institutions in the United States 


Number of National Fabm Loan Associationb Chabtebed, Together with the Numbeb and 
Total Amount of Loans Made in Each State from the Organization of the Federal 
Farm Loan System to September SO, 1919 

District and State 

Number of 


farm loan 




of loans 



District No. 1: 


New Hampshire 



Rhode Island . . 


New York 

New Jersey .... 
District No. 2: 

Pennsylvania . . . 


West Virginia . . 



District No. 8: 

North Carolina . 

South Carolina . 



District No. 4: 





District No. 5: 




District No. 6: 




District No. 7: 

North Dakota.. 




District No. 8: 



South Dakota.. 


District No. 9: 




New Mexico . . . 
District No. 10: 


District No. 11: 





District No. I9t: 


















































































2,414,120 * 



















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The Annals of the American Academy 

The object of restricting the savings- 
bank interest to one year is to en- 
courage the exchange of certificates 
into farm loan bonds. 

Under a recent amendment to the 
Farm Loan Act which has passed the 
House of Representatives bonds for 
small investors are issued at $20, 
$40 and $100; for large investors at 
$500, $1,000, or larger denominations. 
When the money deposited with an 
association is sent to the Land Bank, 
it is invested for the benefit of the 
holder of the association certificate in 
first mortgages on farms, and such 
holder may receive farm loan bonds in 
exchange for association certificates 
whenever presented in an amount 
sufficient to buy a bond . These bonds 
make a safe investment for small sav- 
ings as they draw interest at 4^ per 

Under the conservative plan of 
land appraisal and granting of a loan 
up to 50 per cent of the value of the 
land for agricultural productive pur- 
poses, — as well as the careful govern- 
ment supervision over loans, the 
associations, and the Land Banks, — 
no better security exists in the world 
than farm loan bonds. And this will 

hold true no matter if the present tax- 
exempt feature which now exists un- 
der the law should be removed from 
these bonds as has been proposed. 
Consequently, depositors, borrow- 
ers and investors all benefit under 
this system. This particular feature 
of farm loan associations receiving 
deposits, notwithstanding the fact 
that it has not yet developed to any 
extent, could be made to serve a very 
useful purpose by encouraging thrift 
among all classes of our rural popula- 
tion and by developing a more general 
spirit of cooperation which could ex- 
press itself in the form of rural credit 
unions organized in every county, 
throughout the length and breadth 
of our land. 

Even as it is today, with its farm 
mortgage cooperative feature pre- 
dominant, the results of the federal 
farm loan system have been per- 
fectly wonderful in encouraging agri- 
culture, promoting thrift, and extend- 
ing credit. It stands as the greatest 
cooperative farm mortgage credit sys- 
tem in existence — a monument of 
lasting merit to the great industry of 
agriculture in our own country, the 
greatest credit nation in the world. 

Digitized by 


Life Insurance in Its Relation to Thrift 

By S. S. HinBBNBR 

Professor of Insurance, University of Pennsylvania 

The Purpose of Life Insurance 

THE fundamental purpose of life 
insurance is the capitalization of 
the value of a human life, and through 
this means the protection of depend- 
ents or business interests against the 
loss of the value of that life through 
premature death.^ But while this is 
its primary object, life insurance also 
accomplishes a very important sec- 
ondary purpose, viz., the promotion 
and protection of thrift. No other 
business institution bears so many 
important relations to saving. At least 
four of these relationships deserve 
special mention, and as regards most of 
them life insurance is unique in its 

^Emphasis should be placed upon the value 
of human life as contrasted with the value of 
mere property. The productive lives in any 
community constitute by far its greatest eco- 
nomic value. It is the purpose of life insurance 
to capitalize this value for the benefit of the 
insured's family or business. For years we have 
developed a science, "corporation finance," 
which deals with the capitalization of lands, 
buildings, equipment, and good will. But it is 
only in recent years that our thoughts have 
turned to the incorporation of human life values, 
and life insurance furnishes the only known 
method of capitalizing the producing value of a 
life. The analogy between life insurance and 
corporation finance is complete. Life insurance 
is corporation finance applied to human values. 
From the moment the policy is issued an estate 
has been created. A life insurance policy u a 
eaUable $inkingfund bond issued upon the life of 
the policy holder. It wiU be paid if Providence 
calls the policy holder. In case thero should not 
be a call, the bond wiU also be paid through the 
aocomulation of its nnking fund provision, or 
the reserve as it is oommonTy called. Live or 
die, payment of the bond is a certainty. The 
value of the earning capacity of the life has been 
capitalised, and should prematura death destroy 

service and unapproached by any 

1. Life Insurance PROTEcrrs the 
Saving Period 
A common objection against life 
insurance may be stated as follows: 
"I do not believe in life insurance, I 
believe in saving, and I can make and 
save more in other ways." The an- 
swer to this objection is that life insur- 
ance alone makes saving feasible for 
the great majority of people. If possi- 
ble, both insurance and saving in other 
ways should be practiced. But to 
start on a plan of saving (outside of life 
insurance), where a dependent family 
exists, without hedging against the 

this value the proceeds of the life insurance 
policy will act as a substitute to continue, in a 
measure at least, the former earning capacity of 
the deceased. 

The protective feature of life insurance, and 
for that matter of all forms of insurance, has 
received too little emphasis from economists. 
Their efforts have been confined mainly to a dis- 
cussion of the problems connected with produc- 
tion, distribution and consumption, and a 
review of leading text-books on economics 
indicates the authors* difficulty in assigning 
insurance to some one of the standard divisions 
of the science. Often the subject is treated 
merely in an appended chapter. Insurance 
cannot logically be placed in any of the afore- 
mentioned categories. It partakes somewhat 
of all, it is true, but its real place is in a separate 
division of economic science, viz., the elimina- 
tion of risk. The real function of all insurance is 
the elimination of risk in our economic activities. 
It is to be hoped that our text-books on eco- 
nomics will soon assign to insurance the separate 
division that its distinct function in our economic 
life BO well warrants. Elimination of risk, as 
hero suggested, contemplates not only the many 
commercial forms of personal and property 


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The Annals of the American Academy 

uncertainty of having the saving 
period cut short by an untimely death, 
is for the overwhehning majority of 
people an act of wanton foolishness 
and gambling. 

It is easy to make a resolution to 
save $10,000 in 20 years by ways 
other than life insurance. But let us 
not forget that we are only human 
beings and that the fulfillment of a 
resolution is on the average a very 
doubtful product of a somewhat frail 
and exaggerated mentality. Assum- 
ing the sincerity of the resolution, there 
are three great obstacles that should 
always be borne in mind. In the first 
place, what right has a man with de- 
pendents to say, "I will save $10,000 
in 20 years," when he does not know 
that that number of years — ^yes, even 
one year — ^will be given to him. The 
mortaUty table shows that out of 
85,441 persons 30 years of age, 720 will 
be cut short in their effort to save the 
above $10,000, in the first year of the 
trial; and in all 15,637 will fail to 
accompUsh their purpose in the set 
time of 20 years through premature 

But death is not the only factor that 
may defeat the carrying out of a reso- 
lution to save. Let us not forget that 
a resolution to save, even eliminating 
the chance of premature death, is con- 
fronted by two other great dangers: 

(1) lack of will power to continue the 
plan (the resolution being more often 
ended in this way than by death) and 

(2) failure to keep intact what may 
have been saved, owing to bad invest- 
ment, speculation, or tempting expend- 

insurance, but also the numerous other economic 
devices which accomplish the same economic 
function, such as "continuous organized mar- 
kets," "hedging" in our produce and security, 
markets, "options," "future contracts," "short 
selling," "stop loss orders," etc. 

itures. Let us not forget that only 
about one adult in ten manages to 
accumulate a fairly decent compe- 
tency, and that one half of the limited 
number who succeed in doing so again 
lose the same before death. 

The three pitfalls just mentioned 
may be easily avoided through the use 
of life insurance which assures an 
estate — live or die — equal to the full 
face value of the $10,000 promise, as 
soon as the first premium is paid. In 
other words life insurance insures the 
resolution to save the $10,000 in 20 
years. An illustration of a 20-year 
$10,000 endowment pohcy will serve 
to make this clear. Such a policy 
promises $10,000 at any tune in the 
event of death during the 20-year 
period, and also the payment of the 
same sum at the end of the 20-year 
period in the event of survival, i.e., 
$10,000 is promised, live or die. An 
analysis of this contract shows that it 
is composed of two distinct portions, 
each supplementing the other. One 
portion represents a savings bank 
accumulation which is available at any 
time (after the second or third pre- 
mium is paid) to the insured through 
surrender of the poUcy or at the 
maturity of the contract. But this 
savings feature is supplemented by 
term insurance (the other portion) 
which is, however, not a level term 
insurance of $10,000 at any time, but 
an insurance of an amount, which 
added to the investment accumidated 
in the savings fund at the time of 
death 'will make the amount of the 
policy payable equal $10,000. The 
term insurance portion of the contract 
is for a decreasing amount, being 
nearly equal to the full face value of 
the policy at the start, and gradually 
decreasing throughout the term of the 
contract. Thus, if at a particular time 

Digitized by 


Life Insurance in Relation to Thrift 


the savings portion of the endowment 
policy has accumulated to $1,000, the 
insured will be protected by $9,000 
of term insurance. In the event of 
death, the insurance company will 
pay the saving accumulation of $1,000 
plus the term insurance of $9,000, or 
a total of $10,000. In other words 
the insurance company agrees always 
to make good the diflFerence between 
the amount actually saved (in this 
case $1,000) and the originally pro- 
posed estate which the insured was 
not given time to save (in this case 
$10,000), or $9,000. Had the insured 
relied upon other methods of saving, 
he would have left a pittance of $1,000, 
a sum totally out of accord with duty 
and good citizenship where a depend- 
ent family is at stake. When the 
accumulation under our policy reaches 
$5,000 there will be term insurance for 
only $5,000. Finally, at the end of the 
20-year period, the savings fund will 
have grown to the full face value of 
the policy of $10,000, and the term 
insurance protection will have been 
reduced to zero. The original resolu- 
tion having been f ulfOled, the insurance 
protection necessary to protect the 
saving period is now no longer needed; 
and the insurance company will pay the 
full sum, or continue to hold the same 
in trust at the option of the insured. 
The premium for the policy may be 
divided into two distinct parts, one 
part for the savings or investment 
fund, and the other for the decreasing 
term insurance. It should here be 
noted that all life policies, other than 
mere term contracts, are endowment 
policies. The 20-year endowment 
policy, for example, accumulates a 
savings fund which will equal the face 
value of the policy at the end of 20 
years, the same then being paid to 
the insured. A whole life policy, on 

the other hand, is also an endowment 
policy maturing at age 96, i.e., the 
savings fund in a whole life policy 
gradually accumulates to the full face 
value of the policy at the end of life, 
which is 96 according to the American 
experience table. At that time the 
policy will be paid although actual 
death may not have occurred. In a 
long term endowment policy, at any 
given age, the savings fund is so 
arranged as to accumulate gradually 
to the full face value of the policy at 
say, age 65, the age of retirement, or as 
it might more properly be called, the 
age at which economic death occurs. 
• Protection of the saving period is 
the most important relationship of life 
insurance to saving. In our illustra- 
tion, life insurance was used for a two- 
fold purpose, viz., to save as well as to 
protect the saving period. But even 
where the saving is effected outside of 
life insiu'ance it is highly essential to 
use some kind of a life insurance policy 
to protect the saving period, although 
it be only a pure term insurance pohcy. 
Every building and loan association 
account should be hedged; otherwise 
great distress may result in case an 
untimely death cuts short the saving 
account to a mere pittance. Every 
mortgage on a home or a small business 
should likewise be hedged with life 
insurance. Briefly stated the insur- 
ance proceeds, in the event of death, 
serve to complete the building and loan 
association account or the payment of 
the mortgage. Moreover where earn- 
ings are reinvested in a business enter- 
prise, especially during the early years 
of development, or where the business 
is of a speculative nature, such invest- 
ment should be protected against loss 
through the capitalization of the value 
of the life that constitutes the back- 
bone of the business venture. 

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The Annals of the American Acadekit 

2. Life Insttrance Is Saving 

The above illustration should make 
it dear that life insurance policies, 
other than ordinary term policies, con- 
tain an important savings feature. 
At the dose of 1917 such savings held 
in trust for policy holders by Ul Amer- 
ican life insurance companies aggre- 
gated $6,000,000,000, and the gain in 
the savings for the year exceeded 
$400,000,000, or at the rate of $141,801 
for every working hour of the year 
(assuming an eight hour day), $2,S64 
every working minute and $89 every 
working second. This showing has 
been greatly exceeded since 1917, al^ 
though exact figures are not yet avail- 
able. As a matter of fact, life insur- 
ance is distancing all other savings 
institutions. The savings accumula- 
tions of the 241 regular life insurance 
companies at the close of 1917 were 
three and one third times the combined 
assets of the 7,269 building and loan 
associations in the United States as 
reported to the annual meeting of the 
United States League of Local Building 
and Loan Assodations. The gain in 
the savings of these insurance com- 
panies during 1917 amounted to nearly 
three times the total gain in assets for 
all the building and loan associations of 
the country. Moreover, the savings 
for poKcy holders held by these insiu*- 
ance companies exceeded the total 
deposits of all the 1,807 savings banks 
of the country by $467,000,000. The 
gain in the savings of the companies 
during 1917 amounted to nearly one 
and one third times the total gain in 
the deposits of all the savings banks in 
the coimtry. 

All these immense savings are earn- 
ing a very fair rate of interest consider- 
ing the safety of the investment. Past 
experience shows that life insurance 

companies have earned on the savings 
held for policy holders the largest 
interest return consistent with safety. 
During 1917 the interest earned on all 
the mean invested funds of the 88 
leading companies was 4.94 per cent; 
while the average annual interest 
return for 20 years (1898-1917) was 
4.80 per cent. 

Not only is the rate of earnings very 
substantial, but, judging from the sol- 
vency record of insurance companies, 
the security of the savings hdd is 
the very best. Very rarely is there a 
failure of a life insurance company 
after it has once passed through the 
stage of initial development. Even 
in the case of newly formed companies, 
the insolvency record shows an incon- 
sequential loss of savings. This may 
be illustrated by the record for the 
decade 1905-14, a wholly abnormal 
period in life insurance history which 
was characterized, as probably never 
before, by a craze for forming new 
companies. During that decade 55 
companies suspended operations, but 
all died during infancy, the average 
age of these companies being four 
years. The combined insurance of all 
the failing companies was only $139,- 
500,000,' and of this all except $1,033,- 
000 was reinsured in other companies. 
In other words only one dollar out of 
every $140 of protection carried by 
the suspending companies was lost; 
but even here the policy holders had 
returned to them the full cash value 
(the savings) of their policies. The 
reasons for such stability are not dif- 
ficult to comprehend. In the first 
place, life insiu'ance "is based on 
nature's law of mortality." A sinking 
fund is accumulated in advance for all 

* The combined insurance carried by all the 
regular companies exceeded $27,000,000,000 at 
the close of 1017. 

Digitized by 


Life Insuhance in Relation to Thrift 


future payments as per the require- 
ments of a conservative mortality 
table, and the acceptance of risks is 
based on a medical selection. More- 
over, no other business is so stringently 
regulated and supervised by the state. 
A drastic record of solvency is required 
by law, and investments, commissions, 
expenses, and important practices are 
dictated by statute. The investments 
of the companies are also so widely 
scattered as to kind, class, and location 
that a possible loss in one investment 
is coimter-balanced by a gain in other 

3. Life Insubance Represents Com- 


The regular payment of the premium 
from year to year will soon be looked 
upon by the insured in much the same 
maimer as he comes to regard interest 
upon a mortgage. Consequently, to 
secure the necessary funds to pay the 
premium, his industry will be consider- 
ably enhanced, or his efforts to save 
the required premiums out of income 
will be increased. It is the common 
assertion of individuals who hold life 
insurance policies that they became 
the possessors of a considerable sum of 
money which, imder other circum- 
stances, they would never have accu- 
mulated, or which, if they had done so, 
would have been lost or dissipated. 
Life insurance causes policy holders to 
stick more steadfastly to their resolu- 
tion to save than do other agencies for 
the inculcation of thrift. When once 
started, the desire to remain protected 
through insurance acts as a powerful 
spur to continue the savings feature. 
The regular payment of premiums soon 
strengthens the pohcy holder's abiUty 
to save and soon moulds his thought in 
the right way. Not only is the saving 
habit developed through life insurance, 

but the insured's effort to acquire the 
where-with-all is also increased. When 
the necessity of insurance protection 
is once recognized, household and per- 
sonal expenses are soon adjusted to the 
necessity of paying the premiums. 

Saving under life insurance policies 
is abo convenient, the method being 
admirably adapted to the placing of 
small sums to prompt and profitable 
use. The premiums may be paid in 
installments, if desired, and every dol- 
lar deposited with the company begins 
immediately to earn interest. It is 
for this reason that life insurance has 
been called *' compound interest in 
harness." The average investor can- 
not invest his small savings as regu- 
larly as can the insurance company. 
For the average person a life insurance 
policy represents the accumulation of 
small sums (which in all probability 
would not otherwise be accumulated) 
over a long period of years into a sub- 
stantial total. Stated in another way, 
life insurance bears the relationship to 
thrift that the modern utilization of 
by-products (largely wasted in former 
years) bears to many of our leading 
manufacturing enterprises today. The 
periodic driblets — ^the premiums — are 
not particularly missed by the insured. 
In fact they were earned — and other- 
wise would probably not have been — 
in anticipation of the due date of the 
premium; and had they been other- 
wise earned it may be doubted whether 
they would have been saved; ,and had 
they been saved it may be doubted 
whether they would have earned a 
fairer rate of interest elsewhere. The 
present savings held in trust for pol- 
icy holders by the regular companies 
aggregate some $6,000,000,000. It is 
doubtful whether one fifth of this huge 
sum of capital would be in existence 
today if it had not been for the com- 

Digitized by 



The Annals of the American Academy 

pulsory and systematic influence upon 
saving exerted by the life insurance 

4. Life Insurance Protects Against 

THE Hazard of Outliving One's 


Assuming the efficiency of the pro- 
tective and compulsory savings fea- 
tures of life insurance, the thinking 
public is rapidly coming to recognize 
the desirability of conserving the 
principal of a life insurance policy 
against the modem tendencies of 
reckless expenditure or loss through 
speculation or unfortunate investment. 
To assure an income for life, it is now 
common to issue policies on the "in- 
come plan." This means that the 
principal of the insurance, instead of 
being given to the beneficiary in a 
lump sum, will be paid in installments 
for a definite number of years, like 20 
years, irrespective of whether the 
beneficiary lives that long or not, and 
for as many years thereafter as the 
beneficiary may survive. In this way 
a definite income is assured as long as 
it may be needed by the beneficiary, 
i.e., for life. The insurance company 
becomes the trustee of the principal 
of the policy. Judged by a mortality 
table the average life of beneficiaries, • 
at any given age, is well known. 
Therefore, the beneficiary may be 
promised an annual or monthly income 
for life, and the amount promised will 
be derived from two sources, viz., (1) 
a portion of the principal itself, and 
(2) the interest earned on the balance 
of the principal remaining with the 
company after the payment of each 

The same fimction is performed by 
annuities, which may be defined as 
contracts, whereby for a cash payment 
the insurance company agrees to pay 

the annuitant a definite income for life. 
Their purpose is to protect against the 
hazard of outliving one's income, and 
at the same time to increase the income 
to an extent which contemplates the 
gradual exhaustion of the principal 

To illustrate the manner in which 
annuities permit the utilization of sav- 
ings for old-age support, let us assume 
that a man aged 65 possesses $15,000, 
and that this fund constitutes his sole 
means of support. If invested in the 
most careful manner, let us say in 
"gilt-edged bonds," so as to avoid any 
danger of loss, the current rate of re- 
turn will not exceed 5 per cent, thus 
limiting the owner's income to $750 a 
year. This amount may prove woe- 
fully inadequate for proper support, 
yet the owner, not knowing how long 
he may live, does not feel that he can 
afford to take a portion of his principal 
each year for living expenses, because 
impairment of the principal means a 
corresponding reduction in income. 
The danger confronting this man is 
just the opposite of that facing the 
man who wants insurance against 
death. The latter wants insurance be- 
cause he does not know how long he 
may live, while the former wants assur- 
ance that he will not outlive his income. 

The difficulty referred to can be 
remedied by investing the savings fund 
of $15,000 in a life annuity. By doing 
this a definite and much larger income, 
guaranteed for the whole of life, can be 
obtained. To quote the rates of a cer- 
tain company, the investment of the 
$15,000 in an annuity at age 65 will 
yield an annual income throughout 
hfe of $1,538.10, instead of $750 per 
annum, or 10^ per cent as compared 
with the current rate of 5 per cent. 
As the age of the annuitant when 
purchasing the annuity increases, the 

Digitized by 


Life Insurance in Relation to Thrift 


greater will be the return, amounting 
in this company to nearly 12^ per cent 
at age 70 and to nearly 15^ per cent at 
age 75. These large returns are possi- 
ble (1) because the death rate following 
ages 65, 70, and 75 is very high, and (2) 
because in accordance with the mean- 
ing of an annuity all payments will 
cease upon death and the unused por- 
tion of the purchase price of the annu- 
ity will redoimd to the benefit of those 
annuitants still living. The appar- 
ently large return is again made up of 
two portions, viz., (1) a part of the 
principal, and (2) interest earnings on 
any net balance held by the company. 
The advantageous use of annuities 
by many classes of people must be ap- 
]>arent. Even where a decent savings 
fund has been accumulated, it is usu- 
ally of such modest size that the enjoy- 
ment of the fruits of a life's toil for the 
I)eriod of retirement from active life is 
spoiled by the economy that must be 
exercised to make ends meet, by the 

limited character ,ot the comforts that 
can be obtained with the fimd avail- 
able in view of the high cost of Uving, 
if the principal is not to be touched, 
and by the prospect of losing the source 
of the income itself through unfor- 
tunate investment. The prospect, 
amounting almost to a terror, of living 
too long, makes necessaiy the keeping 
of the entire principal intact to the 
very end, so that as a final wind-up, 
the savings of a lifetime, which the 
owner does not dare to enjoy, will pass 
as an inheritance to others. In view 
of these facts it is surprising that so 
few have undertaken to enjoy toUhovi 
fear the fruits of the limited com- 
petency they have succeeded in ac- 
cumulating. This can only be done 
through annuities. Why exist on 
$750 a year (assuming 5 per cent on 
$15,000) and then live in fear when 
$1,500 may be obtained at age 65 
through an annuity for all of life and 
minus aU the fear? 

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Promotion and Practice of Thrift in Foreign Countries 

By S. W. Straus 

President of American Society for Thrift 

EUROPEAN thrift really began 
with Daniel Defoe. His essays 
marked the first crystallization of pub- 
lic thrift impulses. His plans for a 
Mutual Marine Insurance Society and 
his Essays on Projects constituted the 
first definite step toward organized 
pubUc thrift. The genius of Defoe be- 
stowed its rich gifts upon the world 
during the latter part of the seven- 
teenth century, but so far ahead of his 
time was he that it was not until an- 
other hundred years that any definite 
thrift institutions began to take form. 
With the establishment of Europe's 
first savings bank in Brunswick, Grer- 
many, in 1765, there began a steady 
appUcation of the principles of thrift, 
which grew with constant substan- 
tiabiUty as the processes of education 

The havoc of war has greatly 
changed conditions among the masses 
of the people in Europe. There is a 
temporary absence of the former poise 
and steadfastness of the people. A 
wave of discontentment, together with 
a wave of thriftlessness, is sweeping 
England and the Continent. One hears 
stories of the growth of popular dis- 
cord and of unprecedented waste- 
fulness and debauchery in the capitals. 
The upheaval of war has left many 
strange impressions on the hearts 
of men, and it will only be through the 
return of the European masses to their 
former standards of thrift that the 
great political problems now confront- 
ing the nations across the sea will be 
solved. Belgium, long one of the most 
thrifty nations in the world, is begin- 

ning to settle down to her former basis. 
Her people have gone back to work. 
Production is being rapidly increased 
and the old time thrift is being 

• While one must witness with deep 
cioncem the throes of social and eco- 
nomic agony with which Europe now 
is suffering, it must be borne in mind 
that common sense, justice and right 
will prevail in the end, that the process 
of stabiUzation will be carried through 
to successful conclusion and that the 
thrift of the old days will again be- 
come generally practiced. 

It was only through thrift that the 
peoples of many of the countries of 
Europe were able to live and make 
progress before the war. With tre- 
mendous populations crowded and 
herded together on small areas of land, 
life itself would have been impossible 
had it not been for the frugal cultiva- 
tion of every square foot of soil and 
the conservation of every atom of 

Beginning op Thrift in Europe 

In tracing the history of thrift in 
Europe, it has been foimd that, after 
the establishment of the first savings 
bank, a period of thirteen years elapsed 
before the second one was opened. 
This was in Hamburg, Germany, in 
1778. In Aldenburg, Germany, the 
third savings bank was opened in 1786. 

France manifested her first accept- 
ance of thrift in 1790 when a savings 
bank was founded at Loire. Two years 
later the idea reached Switzerland in 
the establishment of a bank in Basil; 


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Thrift in Forbion Countbies 


in another two years one was opened in 

English thrift had its first definite 
manifestation in 1797 when Jeramy 
Bentham began the establishment of a 
system of crude institutions called 
"Frugality Banks." A Christmas 
fund was established in the parish of 
Wendover, Buckinghamshire, through 
which the working classes were en- 
couraged to save money during the 
summer to be returned at Christmas 
time with an additional bounty. What 
appears to have been the first English 
Thrift Society was established at Tot- 
tenham, Highcross, in 1798 by Miss 
PrisciUa Wakefield, called a "Friendly 
Society for Women and Children." 
This was an annuity movement with 
provision for sick benefits and burial 
funds. Three years later it was de- 
veloped into a savings bank which 
appears to have been the first institu- 
tion of the kind in Great Britain. The 
movement spread rapidly and met 
with special favor in Scotland where 
in 1810 the Rev. Henry Duncan began 
a parish bank atRuthwellinDumfries- 
shire» containing many features of the 
modem savings bank. The institution 
proved profitable, and in 1814 the Rev. 
Mr. Duncan's plans were followed in 
Edinburgh by the organization of 
the "Society for the Suppression of 
Mendicity," out of which grew the 
Edinburgh Savings Bank. 

Forms of Thrift 
Great Britain 
Savings Bank. By 1817 the thrift 
movement in England had attained 
such proportions that the British Par- 
liament began the control and regula- 
tion of savings banks. With this 
splendid encouragement banks sprang 
up in all important centers of popula- 
tion in England, Scotland, Wales and 

Ireland, so that by the dose of the 
year 1818 there were in existence more 
than two himdred savings banks. 

As the thrift movement grew in Eng- 
land, certain fabe conceptions of thrift 
took root. Many of the so-called thrift 
societies were out-and-out charity or- 
ganizations. The people gained con- 
fused ideas. Misconceptions were fos- 
tered. Thrift work, if not conducted 
along the lines of actual charity, was, 
in many instances, encouraged in its 
most narrow sense. The broad, con- 
structive principles of personal effi- 
ciency were ignored and the poor were 
taught to hoard their small earnings 
without thought of the underlying 
principle that thrift means the process 
of thriving, of upbuilding, of growing. 

One must save his money not merely 
for the sake of saving, like the miser, 
but for the purpose of utiUzing his 
earnings in ways that do him the most 
good. He must be thrifty with his 
time, his energies, and his health as 
well as with his money. He must study 
himself as well as the rights and needs 
of those about him. The thrifty man 
must be a dynamic force in his com- 
munity, not a dead weight on society. 
In much of the thrift work done in 
England before the war, these basic 
principles were not understood. The 
conditions, which were the logical out- 
come of these errors, were briefly de- 
scribed by Mr. Hartley Withers, editor 
of the London Economist^ who said: 

When the public was called upon to assist 
in financing the wab by saving, the entire 
country was honeycombed with delusions 
concerning money and the spending thereof 
which made it seem an almost impossible task 
to persuade it within any reasonable time, 
that saving money was a patriotic duty in 
time of war or at any other time. The well- 
to-do class, the education of which concerning 
money matters was mostly a minus quantity, 
were convinced that, since spending money 
gave employment it was at all times the right 

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The Annals of the American Academy 

and proper thing to spend money as fast as 
possible and "help poor people" who wanted 
work. It had not dawned upon them that 
there is any difference between spending 
money on a display of fireworks and on build- 
ing a factory to give employment to those 
who built it, and to continue to give employ- 
ment to all who work in it, and, moreover, 
to increase the supply of goods that a man 
wants for his living and comfort. Among the 
poor classes this belief also flourished in a vague, 
unconscious way and in their case the preju- 
dice against saving was greatly strengthened 
by the very narrow margin that the general 
level of wages gave them for subsistence. 
Their power to save was so small that those 
who spent all they got would afanost inevita- 
bly be obliged at one time or another to live on 
someone eke, and the deeper economic fact 
which lies behind saving in normal times — 
that without saving there can be no new 
capital, and that without new capital there 
can be no expansion of the equipment of in- 
dustry — had not even dawned except upon a 
small minority of thinking Englishmen. 

England learned well her lesson of 
patriotic thrift during the war. Every 
man, woman and child bought savings 
securities to the average of nearly 
£3,000 per capito. More than 40,000 
war savings associations flourished and 
it is estimated that, as a result of these 
efforts, £1,250,000,000 came from the 
pockets of the very poor, a considera- 
ble percentage of whom had not saved 
before. This was true because the war 
furnished an exalted motive and the 
English people arose to their great op- 
portunity with true subUmity. 

A rather definite idea of the general 
standards of thrift in England prior to 
the war may be gained from the fol- 
lowing official statistics: During the 
period from 1907 to 1911, of all men 
who died in Great Britain, over 75 
years of age, 79.23 per cent left estates 
of less than £100, 90.12 per cent left 
estates under £500 and 93.45 per cent 
left estates of less than £1,000. Dur- 
ing this period the 79.23 per cent of 
the total number of estates represented 

only 4.57 per cent of the value of all 
estates; the 90.12 per cent comprised 
but 8.19 per cent of the total value of 
estates; while the 93.45 per cent of the 
total number of estates constituted 
only 11.36 per cent of the total value. 
It may be said, however, that, regard- 
less of this rather poor showing, al- 
most every English family was pro- 
tected in either one way or another 
through membership in a provident, 
friendly or insurance association. 

The English Post Office Savings Bank 
was the pioneer in this phase of thrift 
work, and, therefore, the Postal Sav- 
ings Bank systems in all European 
countries are patterned after the Brit- 
ish plan. The system, since its estab- 
lishment in 1861, has accomplished 
much good. It is interesting to note 
that the original bill ''for establishing 
a fund and assurance office for invest- 
ing savings of the poor" was intro- 
duced in the British Parliament as 
early as 1807, but only after agitation 
lasting more than half a century did 
the government take up this work. 

In the United Kingdom there are 
some 12,000 offices of the Postal Bank, 
where deposits or withdrawals may be 
made. A short time before the war 
one person out of every seven in Eng- 
land had money deposited in the Post 
Office Savings Bank. Deposits as low 
as a shilling and as high as £150 are 
accepted from the depositor annually, 
and each depositor may have placed to 
his credit the maximum of £200, in- 
cluding interest. When his account 
exceeds this amount the balance is 
invested in government securities, un- 
less the depositor designates some other 
use for it. The interest paid deposi- 
tors is 2^ per cent. 

For the benefit of small savers, 
penny stamps are issued, which can be 
redeemed when a shilling's worth have 

Digitized by 


Thbift in Foreign Countries 


been saved. Children over seven years 
of a^ may deposit and withdraw in 
their own names, but when under seven 
the guardian must transact the busi- 
ness. Accounts may be opened both 
by individuals and by societies. With- 
drawals may be made by the depositor 
in person or upon due order. In cases 
of emergency the depositor may with- 
draw fimds by telegram. 

The English Postal Savings Bank 
system attends to the collection of divi- 
dends for its depositors whose accumu- 
lations have been invested in govern- 
ment stock, and it also makes sales of 
these securities, for which service a 
small commission is charged. Not- 
withstanding the popularity of the 
British Post Office Banks, and the vast 
amount of money deposited, and the 
low interest rate paid depositors, the 
system has not been self-sustaining. 
Italy, on the •contrary, makes a profit 
from her Post Office Savings Bank 
system, after paying 5 per cent interest 
on her consols. 

Generally speaking, Belgium, in her 
pre-war days, was a nation in which 
pauperism was unknown. Everybody 
practiced thrift. The government had 
popular devices not unlike our war 
savings stamps, and, in fact, there was 
provision even for saving the pennies 
and investing them with the govern- 
ment. The Post Offices, the Govern- 
ment Savings Bank, and the branches 
of the Government National Bank all 
received deposits as low as one franc. 
When deposits were made in small 
amoimts the depositor received an ad- 
hesive stamp similar to an American 
war savings stamp. These were pasted 
in a book, which was given an official 
number and deUvered without expense 
to the owner. This book contained the 


record of all transactions with the de- 
positor, including the addition of the 
interest, which was computed annu- 
ally. In order to encourage school 
children and the very poor, postage 
stamps could be purchased and used as 
savings stamps. All letter carriers 
were provided with an equipment of 
stationery and stamps to supply those 
who wished to make these little 

Another form of practical thrift fos- 
tered by the Belgium government was 
the life annuity, which could be con- 
tracted for any place where govern- 
ment savings were accepted, and at 
the offices of the tax collectors as well. 
By this system payments, varying from 
one to 1,200 francs, could be made. 
Special attention was given to teaching 
thrift to the children of Belgium, for it 
was recognized that only in this way 
would the nation remain thrifty. 

The School Savings Bank, which orig- 
inated in France, has developed more 
successfully there than in any other 
country in the world, and no doubt the 
success of the system has been one of 
the underlying causes of the splendid 
thrift of the French people. It has 
been said that ''France was sav^ by 
thrift." After disastrous defeat at the 
hands of Grermany in 1870 she lost 
Alsace and Lorraine, and was com- 
pelled to pay an indemnity of one 
biUion dollars. The value of thrift 
then was splendidly demonstrated. 
The people came to the assistance of 
the government with their savings in 
those dark days, and made it possible 
for the heavy indemnity to be Uqui- 
dated in a very short time. The French 
have been known as a nation of bond 
buyers, and the issues of government 
bonds of very small denominations 

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Thb Annals of the American Acadeicy 

have afforded a medium of investment 
which has appealed alike to the French- 
man's frugality and patriotism. 

Savings Banks. Although France 
had an exceedingly low wage scale prior 
to the war, there were 362 savings bank 
depositors out of every 1,000 popula- 
tion. A very good idea of economic 
conditions among the people of France 
before the war may be gained from the 
following statistics: "The Annuaire 
Statistique" for 1010, which com- 
prises the government reports of all the 
estates probated in France during the 
year 1909, shows that of all persons 
who died that year, both men and 
women, 29.83 per cent left estates of 
less than 500 francs; 25.72 per cent of 
the total number left estates between 
500 and 2,000 francs; 28.07 per cent 
left estates between 2,000 and 10,000 
francs; 12.89 per cent left estates be- 
tween 10,000 and 50,000 francs; and 2 
per cent left estates between 50,000 
and 100,000 francs. 

Oovemment Bonds. The thrift ac- 
tivities of the French were exerted 
largely through the mtedium of the 
small government bonds, issued in 
denominations as low as two and 
three francs. Nine-tenths of France's 
10,000,000 electors were investors 
either in government debt certificates 
or some form of security, and there 
were 12,500,000 savings bank deposit- 
ors in the Republic, over 50 per cent of 
whom had each less than $4 to his 

An instance of French thrift is 
shown in the way the French secure 
kindling wood.. They gather up the 
smallest twigs, load them in their little 
carts and carry them into Paris where 
they are sold. French housewives 
probably excel the women of all other 
nations in their skill in utilizing the 
full amount of food from their pur- 

chases. Absolutely nothing is wasted 
in the French kitchen. There is a 
recipe for every possible left-over 


The Peoples* Banks of Italy have for 
many years done much to develop 
habits of saving among Italians. Sig- 
ner Luigi Luzzatti was responsible for 
the Peoples' Bank movement, which 
originated in Milan in 1866. The small 
bank was organized with a capital of 
only $140, the primary purpose of the 
institution being to combat the injustice 
of usurers. Shares in the bank were 
issued and sold in denominations of $5 
to $10 each, with a small enti:ance fee. 
From this small beginning the system 
grew imtil it now is a great factor in 
the life of the Italian people. Loans 
are made only on short-time maturi- 
ties, usually for a period of three 
months, although a rather Uberal 
policy of renewab is maintained. 

"Loans of Honor" are made by 
some of the banks to persons who are 
able to fiu-nish no security, and it is a 
matter of gratification to know that 
these loans have been made with good 
judgment, and that the borrowers have 
been actuated by motives of very high 

Signer Leone WoUenborg was the 
founder of a similar movement among 
the country people of Italy. He seems 
to have had an understanding of the 
educational value of thrift, which has 
resulted in considerable moral as well 
as financial benefits. No one coidd 
become a member of Doctor Wollen- 
borg's banks unless he were able to 
read and write, and as a result, great 
good has been done in eliminating 

Membership in these banks is also 
denied to drunkards or persons guilty 
of any form of dissipation. The result 

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Thrift in Forbion Countries 


has been that they have exerted an 
uplifting influence in the rural commu- 
nities where they have been estab- 
lished. There were, according to the 
best available pre-war statistics, more 
than 400 rural banks of independent 
formation in Italy, in addition to ap- 
proximately 100 of the WoUenborg 

The Peoples' Banks of Italy have 
detracted somewhat from the number 
of depositors in the Post Office Savings 
Banks, as the people naturally pre- 
ferred to use institutions in which they 
were shareholders. These Peoples' 
Banks, in addition to encouraging fru- 
gality among the masses of the people 
in Italy, have enabled the farmers to 
develop their land to the highest state 
of productivity, furnishing the ready 
money with which to purchase stock, 
fertilizer, and machinery, erect build- 
ings, construct fences, and make such 
other improvements as are needed. 

The Co5perativb Plan 

In many parts of Europe one en- 
counters some form of the co5perative 
movement. The economic value of 
co5perative marketing methods is the 
elimination of the so-called middle 
men. The products go directly from 
producer to consumer, and all unnec- 
essary labor cost is eUminated. The 
producer gets the maximum price for 
his products, and the consumer gets his 
food commodities at the minimum 

In Belgium, Switzerland, Holland 
and Denmark, one found before the 
war much development of the coop- 
erative plan, particularly in the mar- 
keting of Holland's dairy products in 
London. Farmers of Holland offer 
splendid examples of thrift, not alone 
in the utilization of every square inch 
of available land, but also in the care 

and attention given to live stock. In 
the summer time the finer cows are 
blanketed to keep off the flies, and in 
the spring time the cattle are covered 
to protect them from cold rains. In 
the Netherlands, the grim fight to pre- 
serve their land from the constantly 
threatening encroachment of the sea 
has bestowed on the Hollanders a 
sturdiness of character and has made 
them a most admirable people. Every- 
where in that wonderful country of 
flowers, canals and windmills, one finds 
manifestations of intelligent, construc- 
tive thrift. Thrift has, indeed, made 
^olland, as it has made Switzerland, 
Denmark, Belgium and France. 

Savings in the United States and 

By way of comparing general con- 
ditions in Europe prior to the war with 
those in the United States, as based 
on the number of savings bank depos- 
itors per 1,000 population, the United 
States ranked thirteenth among the 
great nations of the world. The rel- 
ative standing of these coimtries in 
this respect was as follows: Switzer- 
land, Denmark, Norway, Sweden, Bel- 
gium, France, Holland, Germany, Eng- 
land, Australia, Japan, Italy, United 
States. In Switzerland nearly six out 
of every ten persons were savings 
bank depositors, but in the United 
States the ratio was just a little better 
than one to ten. Statistics in Switzer- 
land show that there was an average 
of five savings depositors for every 
two families, and in all of the European 
countries there was one savings de- 
positor to each family. 

The showing of various European 
countries in the matter of fire pre- 
vention also is of much interest. The 
figures for 191S, the last pre-war year, 
show the per capita losses from fires in 

Digitized by 



The Annals of the American Academy 

the United States as compared with the 

losses in Europe as follows: 

United States $2.10 

England 59 

France , 49 

Germany 28 

Austria ,25 

Italy 25 

Switzerland 25 

HoUand 11 

The practice of thrift in foreign 
countries can be made to serve a most 
worthy purpose for America. First of 
all, we can learn the lesson of the value 
of little things. Thrift as exemplified 
in Europe, consisted primarily in the 
elimination of waste. The smallest 
amount of money was not too insig- 
nificant to be saved nor was the most 
obscure bit of land unworthy of cul- 
tivation. Could America develop her 
natural resources as thoroughly and 
exhaustively as was the case with most 
of the countries of Europe before the 
war, our national wealth would be far 
beyond what it is today. This is one 
of the big lessons that America must 
learn. We must understand that the 
pennies are to be saved as well ajs the 
dollars, that the little scraps of food, 
little bits of land and the smallest 
amounts of our various resources and 
commodities must be guarded just as 
assiduously as our mightiest store- 
houses of wealth. 

Europe also can teach us that there 

is a close inter-relationship between 
education and thrift. A general sur- 
vey of pre-war thrift conditions on the 
Continent gave impressive demonstra- 
tions of this fact. In Russia and the 
Balkans one found illiteracy. In Eng- 
land, Scandinavia, France, Belgium and 
Switzerland, one found a satisfactory 
average of literacy with a correspond- 
ing prevalence, of thrift. America 
must learn eventually that the de- 
velopment of thrift will not only be the 
means of solving economic and social 
problems, but that it also constitutes a 
subject of technical pedagogic interest. 

If we are to develop thrift in Amer- 
ica .along lasting lines, we must begin 
at the foundation. We must make use 
of that most important laboratory, the 
schoolroom. We must learn to teach 
thrift in the classroom, not as a sep- 
arate subject, but in its relationship 
to such branches as arithmetic, his- 
tory, chemistry, biology, geography, 
grammar, household economics and 
business practice. An analysis of 
European thrift will reveal that among 
nations where the most effort was con- 
centrated in teaching thrift to the 
children, the more sturdy and stead- 
fast were the people of that nation in 
their thrift practices. 

America must learn these great 
fundamental truths from the peoples 
across the sea. 

Digitized by 


National Saving in the United Kingdom 

By William Schooling, C.B.E. 

Member of the British National War Savings Conunittee 

A REMARKABLE development of 
national saving has taken place 
as a direct result of the war. Not only 
are the statistics striking, but the 
character of the whole movement, and 
the basis of the appeal to save, are also 
remarkable. It is an example of an 
organisation, established to effect a 
somewhat limited purpose, achieving 
unexpected results of far greater im- 

At the outbreak of war it was antici- 
pated that there might be a great deal 
of unemployment, but as a matter of 
fact unemployment disappeared al- 
together, and weekly wage-earners as 
a whole were better off than ever 

Effect of War on Personal 

In the early stages of the war the 
government attracted workers to mu- 
nition making and other occupations 
connected with the conduct of the war, 
by offering wages in excess of the mar- 
ket rate; this and the national need 
brought into employment a large num- 
ber of people, especially women, who 
were previously not engaged in indus- 
try, and the family incomes became 
very large in proportion to what they 
had been previously. -There were a 
smaller number of people who were 
making large profits out of war con- 
tracts, many of whom thought it ap- 
propriate to spend their money with 
ostentatious extravagance. The pro- 
fessional and upper classes — speaking 
generally — ^greatly reduced their ex- 
penditure, partly of necessity but 

largely from patriotic motives. The 
best shops in the west end of London 
and elsewhere experienced a great 
change in the character of their cus- 
tomers and gradually began to cater for 
the extravagant and vulgar tastes of 
the nouveaux riches. 

The wage-earners, with better ex- 
cuse, were also extravagant and bought 
cheap jewelry, furs, pianos and other 
things in a way that was rather 
pathetic. They also bought necessary 
clothes, useful furniture, and in par- 
ticular fed and clothed their children 
better than before. In thousands of 
cases people had a surplus over the cost 
of necessaries for the first time in their 
lives and none but the unsympathetic 
were prepared to blame them for 
injudicious extravagance. 

Effects of Government Expendi- 
tures on Business 

The expenditure of the British 
government on the war was, of course, 
enormous. It raised by taxation about 
half the proportion of war costs derived 
from taxation during the Napoleonic 
Wars; it raised money, partly by loans 
and partly by inflation, through print- 
ing a large amount of paper money, 
and also by the artificial creation of 
credit through the banks. The natural 
result was to depreciate the piu*chas- 
ing power of money, or in other words 
to increase the cost of living. This led 
to demands for increased wages; added 
to the cost of war supplies; increased 
the amount of money required by the 
government; produced further infla- 
tion, and so on continuously, each 


Digitized by 



The Annals op the American Academy 

adverse condition being consequence 
and cause of further injury. A vicious 
vortex was set up which still exists and 
from which escape is only possible by 
means of increased production and 
of economy by the government and 
by individuals. 

Government Securities for the 

In these circumstances the Treasury 
thought it would be advisable to obtain 
subscriptions to government securities 
from the wage-earners, whose incomes 
in terms of money, and whose "ef- 
fective" incomes, especially from the 
family point of view, were so much 
larger than before. Consequently a 
"Parliamentary War Savings Com- 
mittee" was appointed. This effort 
was a failure. 

In 1915 a committee was appointed 
to consider War Loans in relation to the 
small investor. The Chairman was 
Mr. Montague, the present Secretary 
of State for India. This committee 
recommended the establishment of a 
body, which became known as the 
National War Savings Committee, 
and the introduction of a security called 
the War Savings Certificate. Both 
these recommendations were adopted 
and an unexpectedly great amount 
of good has resulted. 

The War Savings Certificate 

The War Savings Certificate is a 
registered security which costs 15s, 6d. 
It was originally issued for five years, 
at the end of which time it could be 
cashed for £l. The period was sub- 
sequently extended to ten years, at 
end of which time the certificate be- 
comes worth 26^. 

The Montague Committee pointed 
out that some of the conditions neces- 
sary for a security that would appeal 

effectively to the small investor were: 

(1) The ability to withdraw the 

money invested at any time and 

without loss. 
(i) Facilities for safe custody for 

people with no accommodation for 

keeping valuables. 
(8) A rate of interest as high as is 

given to the large investor. 

The War Savings Certificate fulfils all 
these conditions. It can be cashed 
through any post office on three days' 
notice. The amount obtainable within 
twelve months of the date of issue is 
the cost price of 158. 6d. After twelve 
the amount is 158, 9d, Thereafter the 
months cash value increases by one 
penny a month until at the end of four 
years and eleven months the cash value 
is 19*. 8d. At the end of five years it is 
£1. It again increases by one penny 
a month, until at the end of nine 
years and eleven months from the date 
of issue it is worth 24*. lid., and at 
the end of ten years 26*. 

On purchasing a certificate, the 
investor has to sign his name; this need 
only be done once, since, when buying 
subsequent certificates, the reference 
number of an earlier certificate owned 
can be given. When application is 
made to cash the certificate, the signa- 
ture of the owner is again required. 
The transfer of certificates from one 
individual to another is not normally 
permitted; as the certificates are 
readily cashable, there is no occasion to 
transfer them. 

No interest being earned during the 
first year, the rate of interest paid 
grows gradually during the first five 
years, and the rate for the five year 
period is just under 5\ per cent per 
annum, compound. For the succeed- 
ing four years and eleven months the 
rate gradually falls slightly, but be- 

Digitized by 


National Saving in the United Kingdom 


comes 5.S per cent compound for the 
ten year period. 

No income tax is charged in connec- 
tion with the interest on these certi- 
ficates. In order to avoid loss of tax 
it is necessary to Umit the number of 
certificates any individual may pur* 
chase. This Umit is fixed at 500, which 
cost £387 10^., and become worth £500 
at the end of five years and £650 at the 
end of ten years. Each member of a 
family may hold 500 certificates, and 
an individual may hold more than 500, 
if acquired by inheritance, but after 
the holding exceeds the Umit, no further 
certificates may be purchased. The 
loss of income tax is not so great as 
might be supposed, since the majority 
of the holders of certificates have in- 
comes which are too small to make 
them Uable to income tax. 

The Cost of handling securities of so 
small an amount as 158, Od. is consider- 
able, but the advantages of a wide- 
spread holding of government securi- 
ties and the individual and national 
benefits from the encouragement of 

thrift are so great that this expense is 
amply justified. 

Extent op Savings op Small 

As a result of the issue of Savings 
Certificates and other government se- 
curities in small denominations, the 
number of holders of British govern- 
ment securities has increased from 
845,000 before the war to over 17,000,- 
000 at the present time. 

War Savings Certificates were first 
issued in February, 1916. In addi- 
tion, various War Loans and War 
Bonds for amounts of £5 and upwards 
were issued through the Post Office. 
Loans and bonds for large amounts 
were issued through the Bank of Eng- 
land. The contributions to war finance 
by the smaU investor are fairly 
represented by subscriptions to Post 
Office Issues. Another channel for 
the savings of the small investor is 
the Post Office and the Trustee Savings 
Banks. The following table summarises 
the subscriptions to these securities: 

Table I. Savings of Small Investors 


Increase or 


in Savings 



Government Securities 
Post Office Issues 



War Savings 

Aug. 1914— Jan. 1915 

4- 3,816,000 
4- 13,517,000 
+ 4,864,000 

+ 4,651,000 
-f- 5,665,000 
- 8,250,000 

+ 17,256,000 
+ 15,094,000 
+ 27,416,000 









Feb. 1915— July 1915 


Aug. 1915 — Jan. 1916 


Feb. 1916— July 1916 


Aug. 1916-^an. 1917 


Feb. 1917— July 1917 


Aug. 1917— Jan. 1918 


Feb. 1918— July 1918 


Aug. 1918 — Jan. 1919 



+ 56,495,000 




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The Annals of the American Academy 

The figures for the Savings Banks 
show the variations in the amount of 
the deposits and not the total deposits. 
The reductions in the deposits are due 
to money being withdrawn from the 
Savings Banks for investment in War 
Loans or Bonds. 

Single documents can be obtained 
representing one certificate, twelve 
certificates, twenty-five certificates, 
or any number from twenty-six to 
500. It is a significant fact that, since 
the signing of the Armistice, the sale 
of certificates has been w6ll main- 
tained; this is especially noticeable in 
connection with the smaller denom- 
inations of one certificate and twelve 

Although, as we shall see presently, 
these certificates were largely pur- 
chased from patriotic motives in order 
to help the country during the war, 
the number that have been cashed 
in proportion to the total issued is 
extremely small, when compared with 
the normal withdrawals from Sav- 
ings Banks, or the surrender or lapse 
of industrial life policies. Some sta- 
tistics of certificates cashed are 

Table II. Wab Sayinos 





6 months ending July 1916 . . . 
" Jan. 1917... 
" July 1917... 

" Jan. 1918 . . . 
" July 1918... 
" Jan. 1919... 











Savings Banks in the United 

There are two classes of Savings 
Banks in the United Kingdom: one is 
the Post Office, and the other the 
Trustee Savings Banks. The rate of 
interest paid by these banks is only 
%\ per cent, and it was not unnaturally 
thought that the higher rate of interest 
yielded by certificates would lead to 
substantial withdrawals of deposits 
from the Post Office and Trustee 
Savings Banks. These expectations, 
however, were not realised, and since 
the Savings Campaign conducted by 
the War Savings Movement has been 
in progress, the increase in the Savings 
Banks deposits has been much larger 
than in normal times. 

The National War Savings Commit- 
tee was most anxious to avoid any step 
that would be detrimental to the per- 
manent thrift institutions of the United 
Kingdom, since it was not generally 
contemplated that the War Savings 
Movement would continue for long 
after the termination of the war. Its 
success has, however, been so marked 
that the movement will continue, and 
it is intended that securities of the 
character of Savings Certificates shall 
be a permanent feature of British 
government finance. The terms may 
of course vary, and the adjustment is 
likely to be made by an alteration 
in the price, leaving the conditions 

It would be interesting to give some 
record of other thrift institutions in the 
United Kingdom, such as Industrial 
Life offices, and Friendly, Building, 
and Cooperative societies; but it may 
be more useful to devote the space 
available to some account of the Na- 
tional Savings Movement. 

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National Saying in thb United Kingdom 


The National Savings Movement 

The National Committee was ap- 
pointed by the government early in 
1916 for the purpose of organising 
England and Wales. A separate com- 
mittee was subsequently appointed for 
Scotland and, more recently, the move- 
ment has extended to Ireland. The ac- 
count here given refers mainly to the 
work of the National Committee in 
England and Wales. 

The first step was to set up local 
committees throughout the country. 
The initiative in doing this was 
generally taken by the Lords-Lieuten- 
ants of the Counties, Lord Mayors 
and Mayors of Cities and Boroughs, 
and the Chairmen of District Coun- 
cils. Help of the most valuable char- 
acter was rendered by the Ekiucation 

The response to the appeal was at 
first extremely disappointing, but grad- 
ually the needs of the country and the 
sound economic basis of the movement 
won recognition and at the present 
time there are about 1,800 local War 
Savings Committees. The function 
of these committees is to set up Sav- 
ings Associations which collect sub- 
scriptions to War Savings Certificates; 
to carry on educational work which, 
as will be seen, is a most important 
feature; to supervise the working of 
the associations, and, generally, to act 
as the National Commfttee for the 

. The out-of-pocket expenses are paid 
out of a Parliamentary grant admin- 
istered by the National Committee, 
but the whole of the work throughout 
the country is done by unpaid volun- 
teers, of whom there are some 200,000. 
The number of Savings Associations is 
about 35,000. 

What the Savings Movement 

It was said at the beginning of this 
article that the movement was ac- 
complishing much more than was 
originally contemplated. The truth 
of this becomes apparent when we 
consider the objects which various 
members of this great army thought 
they were working for. 

The original idea was to obtain 
money for the Treasury from the small 
investor for the conduct of the war. 
In the minds of many workers this was 
the sole object. This conception was 
fostered by special campaigns such as 
Business Men's Week, Guns Week, 
and in connection with War Loans, 
the subscription lists of which were 
open for only a short time. Friendly 
rivalry between towns was a feature of 
these campaigns, and the amounts 
subscribed in each area were widely 
published. The appeal to support the 
fighting forces with money was readily 
responded to from patriotic motives, 
and the high rate of interest yielded 
had no weight with the vast majority 
of the subscribers. 

It did not require much thought, 
however, to show two things. The 
first that so long as the country sup- 
ported the war, the government could 
pay for it in some way or other, and 
secondly that the Savings Movement 
was accomphshing something of greater 
importance than supplying money for 
the Treasury. For the most part 
money could only be found by the 
small investor by reducing his personal 
demands for goods and services; the 
supply of these was limited and, by 
releasing them for war purposes, the 
fighting efficiency of the nation was 
increased. Further, genuine savings 

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The AimAiiS of the American Academy 

effected a transfer of purchasing power 
to the government and served to 
diminish that artificial creation of 
purchasing power by the manufacture 
of credit which, as we have seen, was 
drawing the nation into a vicious vor- 
tex. Hence the Saving Movement was 
found to be increasing the efficiency 
for war, and, by encouraging sound 
instead of unsound finance, was pro- 
moting the future industrial prosperity 
of the country and its easier recovery 
from the strain of war. 

Looking a little more closely into the 
facts it was seen that the material cost 
of the war was an example of the cost of 
waste in general. So far as concerns 
the reduction in the national wealth, 
the sinking of the Lusitania by a 
German submarine, and of the Titanic 
by collision with an iceberg, are of the 
same character. Whether motors are 
worn out in joy rides, or on the battle- 
field, the consequent decrease in the 
aggregate wealth of the nation as a 
whole is identical. Hence, if the na- 
tion was not to suffer unnecessarily, 
the waste of war must be substituted 
for, and not added to, the normal 
waste of peace time. 

Manifestly the welfare of the individ- 
ual was being promoted by the adop- 
tion of the course that best furthered 
national well-being. If lower prices 
were to be expected in the future 
than diuring the war, deferred expendi- 
ture would be more beneficial than im- 
mediate outlay; by accumulation at 
interest the amount of money avail- 
able would be increased; there is the 
further probabihty that large amounts 
would be more wisely spent than small 
sums, thus ^nelding permanent satisfac- 
tion in place of temporary gratifica- 
tion. Looking further ahead, money 
could be provided for the education of 
children; the purchase of a house or a 

business; or the starting of a boy in 
some profession or trade. 

The success of the movement was 
very largely due to the personal in- 
tercourse between the voluntary work- 
ers and the individual savers; they 
were making a joint effort in a common 
cause in face of a great national peril; 
it was seen that the restrictions and 
self -discipline were building character 
and forming wiser habits. Among the 
earliest and most successful features 
was the enthusiastic reception met 
with from the schools, in which in 
England and Wales there are some 
12,000 Savings Associations. It was 
not only that habits were being 
formed which the children will main- 
tain in after life, but the boys and 
girls became enthusiastic missionaries 
to their parents. 

Thus, little by little the larger and 
enduring aspects of the movement 
came to be recognised. It is because 
of this that the movement is continuing 
with but little decrease of efforts, or 
results, now that the war has been over 
for a year. 

It was to be anticipated that some 
associations would cease to exist, but 
large numbers of new associations are 
still being formed. During the war 
many associations had the voluntary 
services of workers who collected sub- 
scriptions from house to house, and 
there were numerous associations in 
munition works which have come to 
an end; in such cases the associations 
could scarcely continue. 

Where, however, groups of people 
exist for some other purpose, such as 
children in schools and work people in 
common employment, the associations 
are continuing and their number is 
being added to. 

Special schemes have been devised, 
by means of stamps and otherwise. 

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National Saving in the United Kingdom 


for receiving subscriptions of small 
amounts, such as six pences, and the 
account-keeping involved is not of an 
onerous character. 

A fundamental conception of the 
movement may be approached in an- 
other way. Man owes his predomi- 
nance over other animals largely to the 
fact that he is a tool-making and tool- 
using animal; his progress in this direc- 
tion is indicated by the change from 
the axes and arrow-heads of the Stone 
Age to the power-driven automatic 
machines of today. It is estimated 
that the introduction of steam power 
was equivalent to the addition of 
1,000,000,000 human workers. Thus 
there has been created a vast army of 
"'mechanical slaves" for doing a large 
part of the work which mankind re- 
quires. This development has mate- 
rially contributed towards the substitu- 
tion, to a continually increasing extent, 
of life for existence. Bare necessaries 
are more easily obtained and there is a 
growing margin or surplus, making 
possible a higher type of life. 

Some Effects op the War on Saving 

One good result of the war has been a 
general recognition that the standard 
of Uving must be higher than before; 
thus we have shorter hours of labour, 
and an increase, not merely in money 
wages but, in effective wages. These 
conditions are possible if — ^but only if — 
we have increased efficiency and a 
lai^er output. Further, the increase 
of leisure will be fully beneficial when — 
and only when — people have learnt to 
use their leisure in ways that give 
lasting satisfaction and develop their 
higher faculties. 

If we look back to any epoch that 
has marked a social advance, we find it 
to be characterised by a fuller apprecia- 
tion of non-material joys. There is a 

desire for life, and life more abundantly, 
such as was expressed by the young 
Erasmus when he wrote from Paris "I 
have given up my whole soul to Greek 
learning. When I have some money I 
shall buy some Greek books, and then 
perhaps I shall buy some clothes." 
There is today in the United Kingdom 
a widespread, partly inarticulate, hun- 
ger for a wider life — ^for some familiar- 
ity with the best that has been thought 
and said in the world — and a desire to 
promote by social effort a better and 
a happier England. These desires are 
at least as marked among the wage- 
earners as in any other class of the 

Recognising the advantages, that 
have come gradually through the ages, 
for a margin over bare necessaries, 
and appreciating the attractions of the 
products of invention and discovery, 
the National Savings Movement is not 
advocating saving for saving's sake, 
but for far greater reasons. Saving is 
urged as the practical method of pro- 
viding the means for ivise spending in 
the future. We are familiar with the 
housewife who can make one dollar 
yield more benefit than others can 
derive from two dollars; it is manifest 
that a better standard of living will 
come as much from wise spending as 
from high earning, and it is as a means 
to procuring the greatest and most 
lasting satisfaction, that saving is 

The normal waste of peace time, 
yielding little or no permanent satis- 
faction, diminishes the surplus avail- 
able for real life and, through the 
action of familiar economic laws, im- 
poses the greatest burden upon the 
poorest classes of the community by 
increasing the cost of the necessaries 
of Ufe. 

Especially while we are making good 

Digitized by 



The Annai^ of the American Academy 

the waste of war, restricted expenditure 
and abstention from extravagance and 
waste are imperative, and the accumu- 
lation of capital for the development 
of industry, and the maintenance of 
full employment at high wages are a 
purpose of the utmost national im- 

In the long run, however, the desir- 
able thing is not less spending but more 
spending, always provided that it is 
that wise expenditure which makes for 
the enjoyment of a higher type of life. 

Throughout the long period of the 
life of man upon the earth there has 
been a rising tide of progress, ac- 
companied by waves of retrogression; 
for the moment the war appears as a 
retreating wave, but it may be made to 
serve as a force in aid of the advancing 
tide. Britain, like America, went into 
the war for the cause of Freedom, 
Honour, and Civilisation. The defeat 
of Germany was but a means to a 
greater end, and while there remains in 
our midst any preventable ignorance, 
poverty, or disease, the cause for which 
so much was sacrificed will not have 
been won. 

That cause is as much worth fighting 
for now as it was while the war was 
waging. Recognising the splendid 
purpose the National Savings Move- 
ment can serve, its large army of 
volunteers is working in the finest 
spirit and with the greatest enthusi- 
asm for a social institution that will 
be a beneficial and enduring feature 
of British life. 

Before the war there was published 
An Open Letter to English Gentle- 
men; it was addressed primarily to 
Public School and University men. 
They were reminded that England 
had done much for them, and it was 
suggested that they would welcome 
the opportunity of rendering some 
social service to their country. The 
appeal was made "You would fight, 
will you not also serve?" When the 
need for fighting came we saw the 
response that was made. 

Today there is a double appeal; to 
some it is "You have fought, will you 
not also serve?" To the rest of ua 
"You could not fight, will you not 
therefore serve?" And the fighting 
and the service are for the same cause. 

Digitized by 


Thrift in the United States 

By George F. Zook, Ph.D. 

Professor of Modem European History, the Pennaylvania State College; recently of the Savings 

Division of the United States Treasury Department. 

Thbift Among American Colonists 

^T^HE thrift of a large portion of the 
-^ American colonists is proverbial. 
Compelled as they were to earn their 
livelihood mider extremely adverse con- 
ditions they showed how they appre- 
ciated the value of the products of their 
labor by saving them for future emer- 
gencies. They also improved their 
spare time in the making of tools, 
clothing and shoes. As opportunity 
offered they built better homes, bams 
and warehouses. Thus they assured 
themselves that their necessary wants 
in the future could be supplied with 
increasing ease. They earned well and 
they saved well. Much of what they 
produced and saved was permanent in 
character and has been passed on to 
future generations to use and enjoy. 

In later colonial times thrift re- 
mained deeply ingrained in the char- 
acter of the American people, especially 
those who lived in the northern and cen- 
tral colonies. From 1732 to 1737 Ben- 
jamin Franklin, writing under the 
pseudonym of "Poor Richard," found 
a very sympathetic audience for his 
Almanac in which, through verse and 
precept, he so succinctly described the 
virtue of thrift and the vice of waste 
and extravagance. 

Beginning op Savings Institutions 

The thrift of time and materials 
which was emphasized by the American 
colonists naturally included money 
thrift, but there was no established in- 
stitution in America where people 
could place their small savings to ad- 

vantage until 1816. On November 29 
of that year Thomas Eddy organized 
"The Bank for Savings in the City of 
New York." This bank opened its 
doors for business March 26, 1819, with 
80 depositors and $2,807 in deposits. 
Within eight months these numbers 
increased to 1,481 depositors with 
$148,372.27 in deposits. 

Three days after the organization of 
the New York Savings Bank, that is on 
December 2, 1816, the "Philadelphia 
Saving Fund Society" was formed and 
inmiediately began to receive deposits. 
The Philadelphia institution was thus 
the first savings bank in the United 
States to begin operation. Shortly 
thereafter similar institutions were 
founded in Boston and Baltimore. In 
1820 there were 10 savings banks in the 
United States with 8,635 depositors. 
These numbers grew to 61 savings 
banks and 78,781 depositors in 1840; 
to 278 savings banks and 693,970 de- 
positors in 1860; and to more than 
2,000 savings banks and about 11,000,- 
000 depositors in 1914. 

At the same time building and loan 
associations, first organized in 1831, 
also developed in a remarkable way. 
The number had so increased by 1886 
that a national organization of building 
and loan associations was formed at 
MinneapoUs. On December 31, 1918, 
reports showed 7,269 such associations 
to be in existence with 3,838,612 mem- 
bers and assets of about $1,750,000,000. 

Factors Against Thrift in America 

Notwithstanding the opportunities 

for saving money oflFered by these or* 


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The Annals of the American Academy 

ganizations and the remarkable growth 
which they have had, the American 
people developed throughout the nine- 
teenth century the unthrifty habits for 
which they have been known the world 
over. The reasons for this condition 
are numerous. America has been 
blessed with abundant and bountiful 
natural resources which have been 
easily obtained and sufficiently well dis- 
tributed to allow the great majority of 
American people to Uve comfortably 
without undergoing the hardships suf- 
fered by those who live in old and im- 
poverished countries. 

Moreover, the ease with which cer- 
tain fortunate individuals have some- 
times secured sudden wealth from our 
natural resources has caused a wide- 
spread spirit of speculation. Far too 
many people, unwilling to accept the 
usual interest rates paid by recognized 
and legitimate investments, have pre- 
ferred to risk the entire principal in 
speculation with the hope of ''striking 
it rich." This unfortimate tendency 
toward speculation has continued 
throughout all of our later histoiy, 
although dealers in fake stocks and 
bonds have annually taken advantage 
of the situation to fleece such people 
out of millions of hard-earned dollars. 

People who have had this unfortu- 
nate experience naturally d6 not forget 
it easily. In numerous instances they 
go to the other extreme and become 
wary of all investments except perhaps 
those in real estate in their immediate 
vicinity. This has naturally had a 
tendency to keep considerable sums of 
money out of legitimate investments 
and even out of the banks about which 
many people have had an ignorant awe 
or distrust which in our earlier history 
was often justified. This distrust ex- 
plains why in the year ending March 1, 
1908, 127,623 money orders represent- 

ing a total of $8,054,894 were issued 
to "self" by the United States Post 
Office Department. 

Tendencies Toward Thrift 

Thrift in Production. There are 
several exceptions to the general state- 
ment that Americans have been un- 
thrifty. In the first place they have 
always demonstrated their great genius 
for thrift in production. This means 
that as a nation we have developed 
quantity production at the lowest pos- 
sible cost more than any nation in the 
world. In spite, therefore, of the wide- 
spread tendency to waste goods after 
they are produced in this manner, the 
United States has steadily grown in 
per capita wealth from $307.69 in 
1850; to $779.83 in 1870; to $1,035.57 
in 1890; to $1,318.11 in 1904; and to 
$1,965.00 in 191^. 

Saving Through Life Insurance. At 
the same time an increasing proportion 
of Americans through the active propa- 
ganda of the life insurance companies 
have formed the habit of investing 
money regularly in insurance policies, 
a large proportion of which, especially 
of a decade ago, were a combination of 
insurance and investment. Even at 
the present time many people still re- 
gard life insurance as a desirable way 
of saving money notwithstanding the 
comparatively low rate of interest 
which is paid. So successful, indeed, 
have the life insurance companies been 
that it has been said that while Eng- 
land is a nation of stock buyers, France 
a nation of bond buyers, the United 
States is a nation of insurance policy 

The success of the insurance com- 
panies demonstrates in no uncertain 
way the need for safe, convenient and 
well, known small investments. In 
this respect the United States has 

Digitized by 


Thrift in the United States 


lagged far behind the European coun- 
tries. Some relief for this situation 
was offered by the establishment of the 
postal savings banks in 1910. Their 
deposits have steadily increased al- 
though during the fiscal year 1917-18 
the number of depositors decreased 
from 647,728 to 612,188. Three- 
fourths of these depositors are said to 
be recent immigrants from foreign 
countries. As an institution for ab- 
sorbing the small savings of the Ameri- 
can people, however, the postal savings 
banks have been a failure. 

Education for Thrift in America 

Notwithstanding the use made of 
savings institutions in this country be- 
fore the Great War, the American 
people were extravagant and wasteful. 
The habit of saving for the future was 
possessed by but a small element of the 
population. The institutions for sav- 
ing money were not so numerous and 
well known as they should have been 
and those that did exist were not com- 
monly patronized. A general|campaign 
which should have for its object the 
widespread teaching and practise of in- 
dividual thrift was an urgent necessity. 

Thrift and Ejjiciency Commission of 
the Young Women's Christian Associa- 
tion, Campaigns for this purpose had 
been carried on by various agencies 
previous to America's entrance into the 
European war. The life insurance 
companies, realizing the beneficial ef- 
fect of thrift on their business, have 
been consistent promoters of it. The 
Young Women's Christian Association 
appointed a commission on thrift and 
efficiency which, in its report of 1913, 
emphasized the importance for women 
of a training for remunerative employ- 
ment and especially the wise spending 
of money and the accumulation of 
savings. The same ideas have been 

emphasized in recent years in colleges 
and universities for young women 
where the study of household budgets 
has become a prominent feature of the 
home economics curriculum. 

The American Society for Thrift. In 
January, 1914, the American Society 
for Thrift under the leadership of S. W. 
Straus was organized in Chicago. 
Ttirough the efforts of this society the 
National Education Association was 
induced to appoint a committee on 
thrift, which conducted several essay 
contests among teachers and pupils of 
the schools of the country on the 
general subject of thrift. More than 
100,000 children entered the competi- 
tion for the prizes offered during the 
school year of 1916-17. A number of 
the essays and suggestions submitted 
by the teachers were printed as a 
monograph by the National Education 
Association and have become the basb 
of much of the present .thrift teaching 
in the schools. 

School Savings Banks. In 1916 the 
American Bankers' Association com- 
memorated the centennial of the found- 
ing of savings banks iii the United 
States. This commemoration afforded 
a convenient opportunity to call the 
attention of the public to the impor- 
tance of the school savings bank move- 
ment in the United States, This was 
a movement first begun in this country 
in 1876 by Sereno F. Merrill, superin- 
tendeot of schools at Beloit, Wisconsin. 
Mr. Merrill had become imbued with 
the idea of school savings at the Vienna 
exposition of 1878 where he learned of 
the school savings plan then in opera- 
tion at Ghent and which afterwards 
has been operated with such great suc- 
cess in France. After being in opera- 
tion in Beloit for five years, however^ 
the school savings plan was dropped. 

To John H. Thiry, therefore, must be 

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The Aksais of the American Academy 

accorded the honor of instituting school 
savings on a permanent footing in the 
United States. Thiiy was a native of 
Belgium and was therefore familiar with 
the school savings system of Belgium 
and France. On March 16, 1885, he 
instituted a savings bank in one of the 
ward schools of Long Island City, New 
York. Atfirst the idea wentslowly not- 
withstanding the fact that Mr. Thiry 
devoted much time and effort to the 
movement. In 1892, however, he was 
able to report that school savings banks 
had been formed in twelve different 
states with a total of 27,430 deposit- 
ors holdings deposits of $207,428.76. 
Thereafter the movement gained mo- 
mentum, and in 1915 through arrange- 
ment with the U. S. Comptroller of the 
Currency, the following statistics con- 
cerning the school savings banks were 

which emphasized the virtue and neces- 
sity of saving, the people of the United 
States were brought suddenly to the 
realization shortly after entering the 
World War that we must conserve 
labor and materials as we had never 
done before. The money which had 
hitherto been spent for luxuries must 
be saved and loaned to the government 
for the purchase of vital war supplies. 
To these ends the people were urged to 
produce the greatest possible amount 
of food and war materials; to conserve 
food and fuel; and out of current sav- 
ings to purchase Liberty Bonds and 
War Savings Stamps. 

War Savings Stamps. Furthermore, 
realizing that the war could not be 
financed by the men of wealth unless 
assisted by the small savings of the 
miUions of wage earners, the govern- 
ment provided convenient opportuni- 












New England States 




189 ' 











Eastern Central SUtes 

Southern States. '. 


Mfddle Western Stotes 

Western States 


Pacific States 








The school savings bank movement 
has been materially assisted by the 
passing of a law in Massachusetts in 
1910 providing for compulsory instruc- 
tion in thrift in the public schools. 
Acts of the legislature in New York, 
New Jersey, California and Minnesota 
also make provision for the correlation 
of the school savings banks with the 
local savings banks. 

War Emphasis on Thrift 
Notwithstanding all the agencies for 
thrift and the various movements 

ties for the purchase of Liberty bonds 
in small denominations. Also, follow- 
ing the example of Great Britain an 
organization was authorized by act of 
Congress, September 24, 1917, for the 
sale of war savings stamps and for 
spreading the gospel of thrift through- 
out the length and breadth of the land. 
This organization known as the Na- 
tional War Savings Committee devel- 
oped national plans for widespread 
popular education in thrift and the sale 
of stamps. The actual sale of the 

Digitized by 


Thrift in the United States 


stamps was left to each of the twelve 
federal bank districts. In each one of 
these districts a war savings director 
was appointed with a corps of assist- 
ants who was to establish county and 
city or other local volunteer organiza- 
tions in each state. 

The war savings stamps were sold 
for $4.12 in January, 1918, advancing 
in price one cent each month through- 
out the year. At maturity, January 1, 
1928, the government promises to pay 
$5.00 for each stamp. The difference 
between the purchase price and the 
maturity value of the stamps makes an 
interest return of about^ 4 per cent 
interest compounded quarterly. Other 
features of the stamps made them par- 
ticularly attractive small investments. 
They could be registered at any first, 
second or third class post office as a 
precaution against loss; and they could 
be redeemed at any time before matur- 
ity by giving ten days' notice to a post 
office. In such cases the rate of inter- 
est paid amounts to about 3 per cent. 
In order to preserve these attractive 
investment features to persons of small 
means it was provided that no one 
yiras to be permitted to hold more 
than $1,000 (maturity value) of the 

Thrift Stamps. As a means of 
assisting people to accumulate small 
sums of money for the purchase of 
savings stamps, thrift stamps were 
sold at twenty-five cents each. The 
thrift stamps bore no interest, but . 
whenever sixteen of them were accu- 
midated they were exchangeable with 
the addition of a few cents, varying 
with the month of the year, for a sav- 
ings stamp. By means, therefore, of 
the savings stamps the government 
brought an attractive investment 
within the reach of practically every 
man, woman and child of the country. 


The plan of the savings campaign 
included considerable education in the 
principles of thrift. For this purpose 
a number of pamphlets emphasizing 
the necessity for thrift, advising the 
methods of organizing savings socie- 
ties, and showing methods of regular 
and systematic saving through individ- 
ual and family budgets were distributed 
to the public. As the campaign pro- 
ceeded, however, the financial necessi- 
ties of the government became more 
and more pressing and there was a 
gradual tendency to make the thrift 
campaign purely a selling campaign of 
war savings stamps. Every organ- 
ization which could possibly be induced 
to do so was enlisted in the sale of 
the stamps. The Boy Scouts and the 
schools undertook the work with espe- 
cial enthusiasm and the result was 
distinctly gratifying from a financial 
point of view. 

The sale of the 1918 series of war 
savings stamps began on December 3, 
1917, and continued throughout the 
year 1918. The original quota set for 
the country was not to exceed two bil- 
lion dollars. This was an average of 
about $16.50 for each man, woman and 
child in the United States. One state 
only, Nebraska, exceeded this per 
capita quota with $21.18. Ohio was 
second with $16.39; South Dakota 
third with $16.38. The lowest were 
Georgia, South Carolina and Alabama, 
with per capita sales respectively of 
$4.78, $4.69 and $4.48. The grand 
total of sales for the entire country 
was $1,015,067,471.80 which was an 
average per capita of $9.64. 

Thrift Campaign After the War 

The sale of savings stamps duric 
the year 1918 was so gratifying to the 
Treasury Department that it was im- 
mediately decided to continue their 

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The ANNAifi of the American Acadebiy 

sale after hostilities ceased with the 
hope of making them a permanent 
feature of the government. The pur- 
pose was partly to raise money but 
especially to carry home the lesson to 
every American that individual thrift 
was as necessary after the war as it 
was during the war. This was an 
exceedingly difficult task because the 
natural tendency of the American 
people was to throw oflF all the war 
restraints and to resume the usual 
extravagant practises of the pre-war 
period. Furthermore the organiza- 
tion which had been carefuUy devel- 
oped during the war fell apart with the 
close of hostilities. Nearly the entire 
corps of workers in the Savings Divi- 
sion at Washington and in the various 
federal reserve districts had to be re- 
placed with new men and women who 
brought to the enormous task great 
enthusiasm but little experience in 
this field of work. 

The new campaign wais to be less 
a campaign for the sale of savings 
stamps and more of an educational 
movement in thrift. In carrying out 
this idea there was* to be less of the 
popular emotional appeal and greater 
emphasis on the individual's self inter- 
est. It was believed that as soon as 
the people of the coimtry realized the 
value of practising thrift and the excep- 
tional manner in which savings stamps 
fulfilled the requirements of small, safe 
and convenient investments a steady 
growth in the number of investors 
would ensue. Thus the sale of the 
stamps would follow as a natural 
corollary of the educational move- 
ment. The objects of the entire move- 
ment as set forth by the Savings Divi- 
sion were to encourage people to — 

1. Put aside as a first obligation, before spend- 
ing anything, a definite portion of the income 
in savings for future use. 

2. Invest these savings in a security which 
pays a reasonable and profitable rate of 
interest and which is absolutely safe — sav- 
ings stamps and other government securi- 

8. Use the remainder of the income so as to 
get fuU value for the money expended. 

4. Use what is bought with as much care as if 
it were money itself. 

In conducting the thrift campaign of 
1919 the Savings Division immediately 
decided to work through established 
organizations. In order to deal with 
these organizations several sections of 
the Savings Division were created at 
Washington with corresponding units 
in the federal reserve districts. The 
most important of these sections were 
schools, churches, women's organiza- 
tions, publications, industrial, frater- 
nal and agricultural organizations. 
Each of these sections was to develop 
plans for continuing the savings socie- 
ties formed during the war and to 
stimulate the formation of new 

In the field of the schools the thrift 
propaganda found a very cordial recep- 
tion. Upon several occasions the Nar 
tional Education Association endorsed 
the movement in the highest terms. 
At its last meeting in Milwaukee, July 
5, 1919, the elementary and secondary 
schools were urged to make the teach- 
ing of thrift compulsory. For the pur- 
pose of this instruction the Savings 
Division issued several pamphlets for 
use in the various types of schools. 
Further publicity was given to the 
school program through the two maga- 
zines. The National School Service and 
The School BvileHn, Arrangements 
have also been made in a large propor- 
tion of the schools for the sale of thrift 
and war savings stamps. The pupils 
have responded enthusiastically to the 
opportunity to give a practical demon- 
stration of their instruction in thrift, 

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Thrift in the United States 


and have become r^ular purchasers 
of thrift and savings stamps. 

Among the women's organizations 
the General Federation of Women's 
Clubs through its department of social 
and industrial conditions has worked 
out extensive plans for promoting the 
study and practise of thrift among the 
members of the local branches. In the 
industrial organizations savings soci- 
eties have been promoted among the 
employes with the purpose of inducing 
them to make pledges for definite 
weekly or monthly savings toward the 
purchase of savings stamps. A large 
number of envelope inserts advertising 
the investment features of savings 
stamps have also been distributed by 
corporations when mailing dividends 
to their stockholders. 

Through cooperation with the field 
workers of the Department of Agricul- 
ture the Savings Division has also 
been able to reach the farmers of the 
coimtry. A series of twenty leaflets 
presenting practical thrift problems in 
the home were issued in co5peration 
with the home economics division. 
Widespread pubUcity for the thrift 
movement has also been gained by the 
work done with the labor organiza- 
tions, churches and fraternal organiza- 

At this time it is difiScult to estimate 
the success of the thrift movement 
since the close of hostilities. The 
number of stamps sold during the year 
1919 has fallen far below the mark set 
in 1918. This was anticipated from 
the beginning but the extent of the 
falling off has been an impleasant sur- 
prise, and the figures are therefore 
quite disappointing. During the first 
six months the sales reached only 
$89,856,043.77 more than one-half of 
which were sold during the month of 

January while the momentum of the 
campaign of the previous year was 
behind the movement. During the 
month of June the sales declined to a 
little less than five miUion dollars. 
Since that time they have b^un to 
increase again. 

The causes for this great decrease in 
the amount of stamp sales are numer- 
ous. In the first place, with one excep- 
tion, all the districts have made the 
movement primarily educational ex- 
pecting that the sale of stamps would 
naturally follow. In the second place, 
the cost of living has been high and 
industrial conditions have been unset- 
tled. The savings movement during 
1919 has imdoubtedly been advertised 
widely but it has not been convincing 
with a large element of the population. 
In other words it has been exceedingly 
difficult to make headway against the 
natural tendency to fall back into the 
pre-war habits of extravagance deeply 
ingrained in American character 
through years of practise. 

One must realize, furthermore, that 
the practise of thrift is largely a moral 
question for each individual and that 
as such it is a process of years rather 
than months to secure a satisfactory 
universal response to such an appeal. 
It is for this reason that the success of 
the thrift movement now being prose- 
cuted with such vigor can never be 
properly measured by the number of 
savings stamps sold. The good effects 
will be felt all through our economic 
life and many of them will not be fully 
realized for years to come. Moreover, 
the task of making out of the American 
people a nation of thrifty men and 
women is a work of years, but the enor- 
mous national and individual benefits 
accruing therefrom will justify what- 
ever time and effort is expended on it. 

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Psychological Notes on the Motives for Thrift 

By Edward L. Thorndike 
Teachers College, Columbia University 

A COMPLETE inventory of the 
motives for thrift and appraisal 
of each from the point of view of the 
common good would require thought 
and investigation by many men for 
many years. It would presuppose 
adequate study of the actual working 
of scores of agencies such as savings 
banks, building loan societies, install- 
ment-plan selling, deferred salary 
bonuses, and the like; and indeed of 
all forms of delayed veraiis immediate 
use of purchasing power. 

In default of such adequate informa- 
tion, principles should at least be 
based on what knowledge is available 
of the ways in which, and the reasons 
for which, children and adults do save — 
that is, delay the use of such purchasing 
power as they from time to time obtain. 
The writer, however, lacks even this 
knowledge and can offer only certain 
facts and principles based on the gen- 
eral psychology of motives. These 
may perhaps be helpful. 

Psychological Basis of Saving 

The original nature of man, — ^the 
equipment of capacities and tenden- 
cies, desires and aversions which he 
inherits as he inherits a back-bone, 
upright posture, and power to laugh 
and cry — predisposes him rather 
against saving. Except for the tenden- 
cies to bring an attractive object to 
one's lair and cherish it there and to 
collect and hoard certain small ob- 
jects, man is by nature improvident. 
The parental instincts lead him to 
feed, nurse, cuddle and protect the 
infant and child, but not to save for 

its futiu-e welfare. The tendencies to 
acquiring and hoarding may be used 
as a starting-point for habits of saving 
which may later be refined into habits 
of real thrift: they are, however, by 
nature productive only of indiscrimi- 
nate saving of material objects; and it 
is doubtful whether they do much more 
good by the energy they supply, than 
they do harm by its undesirable mani- 

On the other hand there are, working 
against thrift, the very strong original 
tendencies toward gratifying the gross 
sensory appetites, and toward display, 
mastery and approval. Everybody 
understands the potency of the sensory 
appetites, and their essential conflict 
with thrift. The cruder inborn pas- 
sions of approval, getting and mastery 
and their effect on thrift are not so well 

Natural Tendencies of Man 

The essential facts are as follows: 
To the situation, "intimate approval, 
as by smiles, pats, admission to com- 
panionship and the like, from one to 
whom he has the inner response of 
submissiveness," and to the situation, 
"humble approval, as by admiring 
glances, from anybody," man responds 
originally by great satisfaction. The 
withdrawing of approving intercourse 
by masters and looks of scorn and deri- 
sion from anyone originally provoke 
a discomfort that may strengthen to 
utter wretchedness. The reader will 
imderstand that the approval and dis- 
approval which are thus satisfying and 
annoying to the natiu*al man are far 


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The Motives for Thrift 


from identical, in either case» with the 
behavior which proceeds from culti- 
vated moral approbation and condem- 
nation. The sickly frown of a Sunday- 
school teacher at her pupil's mischief 
may be prepotently an attention to 
him rather than the others, may con- 
tain a semi-envious recognition of him 
as a force to be reckoned with, and may 
even reveal a lurking admiration for 
his deviltry. It then will be instinct- 
ively accepted as approval. 

Darwin long ago noted the ex- 
traordinarily ill-proportioned misery 
that comes from committing some 
blunder in society whereat people in- 
volimtarily "look down" on one for an 
instant. Except for him, little atten- 
tion has been paid to the originality of 
the himger of man for the externals 
of admiration and the intolerabiUty 
of objective scorn and derision. Yet 
these forces of approval and disappro- 
val in appropriate form, from those 
above and those below us in mastery- 
status, are and have been potent social 
controls. For example the discipline 
of a humane home or school today 
relies almost entirely upon such ap- 
proval from above, and finds it even 
more effective than severe sensuous 
pains and deprivations. The elabo- 
rate paraphernalia and rites of fashion 
in clothes exist chiefly by virtue of their 
value as means of securing diffuse notice 
and approval. The primitive sex dis- 
play is now a minor cause: women ob- 
viously dress for other women's eyes. 
Much the same is true of subservience 
to fashions in furniture, food, manners, 
morals, and reUgion. The institution 
of tipping, which began perhaps in 
kindliness and was fostered by eco- 
nomic self-interest, is now well-nigh 
impregnable because no man is brave 
enough to withstand the scorn of a line 
of lackeys whom he heartily despises, 

or of a few onlookers whom he will 
never see again. 

Best of all illustrations of the potent 
craving for objective approval, perhaps, 
is offo^d by Veblen's brilliant analysis 
of the economic activities of the leisure 
class. These he finds to be essentially 
vicarious consumption and conspicu- 
ous waste, or the maintenance of a use- 
less retinue and public prodigality in 
order to show that you have more than 
you can use, and so to fix upon you 
the admiring glances of those who can 
afford to waste less or nothing at all. 

To manifest approving and disap- 
proving behavior is as original a 
tendency as to be satisfied and annoyed 
by them. Smiles, respectful stares 
and encouraging shouts occur, I think, 
as instinctive responses to relief from 
himger, rescue from fear, gorgeous 
display, instinctive acts of strength and 
daring, victory, and other impressive 
instinctive behavior that is harmless to 
the onlooker. Similarly, frowns, hoots 
and sneers seem bound as original re- 
sponses to the observation of empty- 
handedness, deformity, physical mean- 
ness, pusillanimity, and defect. 

As things are and have been in most 
communities, thrift reduces, or at least 
delays, the chance to win approval by 
"relief from hunger, gorgeous display 
and other impressive behavior," and to 
attain a superior mastery-status. The 
"tight-wad" is scorned; the meanly 
dressed girl feels inferior. In popular 
juvenile and adult fiction, which mirror 
rather faithfully the instinctive pro- 
clivities of man, the necessity for thrift 
b at the best a burden which it is 
heroic to endure. The exercise of 
prudence about money and property is 
tolerated if not actually scorned. 

In a less degree the instincts of ad- 
venture, rivalry, sex pursuit, parental 
love and general kindliness are also 

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The Annals of the American Academy 

against thrift. Parents, for example, 
tend by original nature to indulge 
their children in food and toys, but 
not to take out life insurance. To 
make man thrifty his original, love 
of notice, approval, mastery and 
sport, as well as his cruder animal 
appetites, have to be counteracted by 
other tendencies or amended by dex- 
terous training. 

Inhibition by Rational Insight 

These may be counteracted in many 
ways, two of which are .of special 
interest, — ^inhibition by rational in- 
sight and inhibition by unreasoned re- 
pression. Inhibition by rational in- 
sight is one aim of training in good 
homes, schools, shops and factories. 
Children and others are taught by 
precept and by example that twenty 
dollars is better if saved for a bicycle 
than if frittered away in buying candy 
and trifling entertainments. They are 
taught that it is well to provide for 
future as well as for present needs, and 
for unforeseen needs as well as for those 
at present envisaged. They are taught 
to care for property which they or 
others may need later, even though 
there miay be a present enjoyment in 
destroying or neglecting it. In general, 
they are taught the meaning of money 
and property as means of deferred as 
well as present enjoyment and purchas- 
ing power, and to consider their de- 
ferred use. More or less elaborate at- 
tempts may be made to teach them to 
esteem prudent behavior as well as, or 
in place of, size, beauty, courage, gor- 
geous display and lavishness. All this 
is a part of the general program of 
teaching wisdom and morality, and is 
useful if enough pedagogical skill is 
used.' The person learns to value 
thrift rightly and redirects his in- 
stinctive appetites by such learning. 

Inhibition by Unreasoned Repression 

When sufficient pedagogical skill is 
not used to give an appreciation of the 
reasons, or when the reasons given for 
being thrifty are not really rational, we 
have inhibition by imreasoned repres- 
sion. In this case the reason ostensi- 
bly associated with the acts of saving is 
incomprehensible or valueless to the 
saver, the active reason or motive for 
him being something quite different. 
Thus a Uttle child may be taught to 
put his money in a bank ''because all 
good children do so" or "so that you 
will have money for an education " or 
"because it is wrong to spend all your 
money for candy and toys." The 
active force in his saving is not accept- 
ance of these maxims, but fear of 
parental rebuke, or love of praise, or 
the pride at displaying his savings, or 
a more comfortable feeling when other 
children are displaying theirs. 

In such cases the child often, per- 
haps usually, forgets what the active 
force was and has left chiefly or solely 
a diffuse feeling that he ought to save, 
because it is the thing one ought to 
do, what the philosophers might call a 
categorical imperative. Such a mo- 
tive is strong so long as the individual 
cherishes it. He can withstand argu- 
ments and persuasive attacks. Hold- 
ing his position for no reasons that he 
knows of, he cannot be dislodged from 
it by reasons. The motive is weak in 
the sense that if it is once lost, it can be 
recovered only by slow re-creation. 

Redirectino the Tendencies of 
Approval and Scorn 

Instead of thus coimteracting prodi- 
gal tendencies from without by rea- 
soned or unreasoned habits, we may 
try to amend them, attacking them as 
it were from within. 

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The Motives for Thrift 


The desire for approval can theoreti- 
caDy be made to favor thrift as much 
as it now favors lavishness. And 
practically such redirection of popular 
applause can be carried much further 
thaii past history might lead us to 
expect. Modern advertising, if given 
free scope, can almost guarantee that in 
a given year any defined population 
will approve a color combination which 
a year ago it detested. 

It would probably not be hard to get 
the world to pity or scorn a man who 
had to have a chauffeiu* drive him as 
it now pities or scorns a man who has 
to be carried in another's arms. 
People could be taught to regard the 
child who, went to a private school, 
with large tuition fees, as an unfortu- 
nate who was not expected to get on 
in the world without special favors, — 
as a "lame duck" who required a 
large handicap, as the weak mind who 
had to have a pedagogical doctor and 
special medicine. The woman who 
lived in a palatial house with a retinue 
of maids and lackeys mi^t come to be 
viewed as insane — ^like a woman who 
should wear twenty gowns one over 
the other or ten hats one on top of the 
other, to show that she could afford 
that mapy, or who rose each half hour 
of the night to change to a different 

If gills and women all wore a stand- 
ard dress and if it became the custom 
to regard any excess of quality or 
adornment as the effort of an inferior 
physique to hide its unattractiveness, 
the misery of unsatisfied longings for 
personal adornment in the poor, and 
the still more debasing glorification of 
one's self for merits really belonging to 
one's dressmakers and milliners, might 
be notably decreased. In certain girls' 
schoob something much like this is 
actually attained. 

Whether we try to inhibit prodigal 
tendencies by rational insight or to 
amend them by attaching the zest of 
adventure, power, notice and approval 
to thrifty behavior, success requires 
not only that we use right principles of 
persuasion and habit formation, but 
also that we be ingenious in the details 
of human engineering. The former 
are now fairly well known; the full 
development of the latter will require 
the time and thought of many gifted 
men, and much experimentation and 
verification. The concrete sugges- 
tions which make up the rest of this 
chapter are at best only a millionth 
part of what adequate talent and work 
may achieve. 

iMPROviNa Thrift by Rational 

The worst form of thriftlessness is 
expenditure for objects or conditions 
which give no essential satisfaction 
to the buyer or anybody else. Such 
utter waste is of greater magnitude 
than might be supposed. We buy 
many things which we soon find out 
we do not want at all. We buy vastly 
more things which we think we want, 
but only because we have been taught 
to believe that we want them. Let 
some one teach us to believe that we 
do not want them and our net satis- 
factions are increased with a decrease 
in costs. The coat I am wearing has 
buttonholes and buttons on the sleeves 
whose only value hangs by a conven- 
tion which is itself essentially valueless 
to all. We pay for many objects and 
conditions when a different and cheaper 
object or condition would have suited 
us far better. Thus to the average 
girl of eighteen, an automobile and the 
privilege of driving it is far more sat- 
isfying than the same automobHe and 
a chauffeur to drive her in it. To the 

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The Annals of the Amebigan Academy 

girl's mother the pride that her daugh- 
ter can take care of herself may be far 
more satisfying, as well as cheaper, 
than the knowledge that there is a 
servant to take care of her. The fool- 
ish father pays ten dollars for carved 
animaJs for his child who would in- 
finitely prefer a fifty-cent knife and a 
stick of wood to cut. Leaders of the 
public should teach it to know what it 
really wants and to save the expense 
of paying for what makes it miserable. 

It has been an unfortunate custom 
for poets, philosophers, literary men 
and men of science to regard money as 
in some sense ignoble. We have been 
taught that the cultivated man cares 
little for money, or that money will not 
buy the best things in the world, or 
that we do not wish our children to 
care especially about making money. 
This is, however, false or at least 
fallacious, what is really meant being 
properly that the average uses of 
money are less noble than the average 
uses of wisdom, honesty, courage, 
female virtue, health and the Uke. 
Money is purchasing power, and wis- 
dom, honesty, courage, female virtue 
and health are purchasable. Pur- 
chasing power rightly used could, for 
example, reduce prostitution by a 
large percent, and eliminate tubercu- 
losis entirely. 

The wise and cultivated man may 
give the world a new scientific truth 
directly, if he has the talent to dis- 
cover it. Any man can ensure giving 
a new scientific truth to the world if 
he will purchase a perennial research 
fellowship of $10,000 instead of build- 
ing himself a house for a quarter of a 
million dollars. A woman may add 
one to the roster of female virtue by 
preserving her own, but she can ensure 
the addition of many by spending 
money judiciously to provide for 

healthy recreation of girls or for the 
segregation of the feeble-minded. 

The Nature of Saving 

The fact that saving is simply de- 
ferred spending is perhaps worth mak- 
ing clearer to children and adults of 
uncritical minds. Saving is often felt 
as an essential deprivation, for example 
by children whose savings go year after 
year into a bank and never come out. 
If he is to be rational, the saver should 
think of his bank account as a fund of 
purchasing power; and should from 
time to time spend money that he has 
saved. Saving thus becomes dis- 
sociated from mere self-denial and a 
restricted life and associated with the 
sense of mastery and self-confidence 
which ordinary human nature so 
highly values. It is too much to ex- 
pect children or unintelligent adults to 
save rationally for the needs of old 
age or sickness or for a reserve for un- 
foreseen emergencies. Prudence with 
them may consist in going without 
candy to have a bicycle, or in denial in 
food, dress and amusements to have a 
home of their own. The foresight thus 
encouraged may extend to an apprecia- 
tion of the value of a reserve of general 
purchasing power. 

It may be desirable to give more peo- 
ple and at a younger age the conception 
of true economic waste. Many chil- 
dren and adults would be willing to 
save for the public if they were brought 
to consider the matter. They destroy 
in neglect what they cannot themselves 
use for their own satisfaction, not be- 
cause they wish to injure others to save 
themselves a very slight inconvenience, 
but because they do not consider the 
interest of the others at all. Their 
deficiency is intellectual rather than 
moral, and is curable by reasoning and 

Digitized by 


The Motives for Thbipt 


Also many children and adults con- 
fuse the virtue of generosity and the 
virtue of true economic thrift and se- 
cure the former at the expense of the 
latter. In the common case of dis- 
carded clothes, for example^ the aver- 
age American would regard himself as 
generous and thrifty when he gave 
away a suit of clothes. He is generous 
to the extent of the money value of the 
old clothes minus the money value of 
his own trouble in selling them to an 
old-clothes dealer. But he cannot 
credit himself with any true economic 
thrift, except in so far as he chooses as 
the beneficiary someone who will surely 
make effective use of the clothes. 
True economic thrift is in general 
much more surely secured if he sells the 
clothes; the proceeds he may use as 
generously as he chooses. 

The Stimulus to Saving 

The interest in savings is accentuated 
by a concrete and obvious thing to 
embody, represent, or at least measure 
it. A bank with the pile of pennies 
therein increasing; a farm growing by 
the purchase of field after field — these 
are more stimulating to the average 
mind of young or old than a bank book 
with ink entries or a safety-deposit box 
of securities. The saver's record of his 
savings may well be made more cor- 
poreal and obvious than it would be 
made if the clerical convenience and 
accuracy of the record were the only 
desideratum. In the case of little 
children, for example^ the savings 
account proper might be duplicated by 
affixing a red seal for each quarter, a 
silver seal for each dollar, and a gold 
seal for each five dollars. Passing the 
ten dollar mark might be celebrated 
by promotion to a larger-sized book. 
These devices may be criticized as 

childish, but with little children child- 
ish motives may well be employed. 

Where Redirecting the Tenden- 
cies TO Approval and Scorn 
Should Begin 

It appears probable that men and 
women of notable achievement or 
popularity or both can encourage thrift 
greatly by denying to themselves and 
their families all forms of ostentatious 
expenditure. If the ablest lawyers, 
surgeons, bankers, manufacturers, ball- 
players, athletes, salesmen, musicians 
and actresses show a contempt for 
wasteful display in their lodging, serv- 
ice, food and dress, the fashion will in 
large measure spread to those who 
observe them directly and to the multi- 
tudes who observe them through the 
media of newspapers and magazines. 
If the most popular politicians, singers, 
authors, and leaders of society (what- 
ever that may be) let their merit at- 
tach itself to plain living, luxurious 
display will soon lose a large measure 
of its reinforcement. It might become 
not only vulgar but also eccentric, the 
behavior of a crank. 

Certain forms of ostentation that 
were considered entirely suitable five 
hundred years ago would be considered 
vulgar now, because men and women 
of eminence have abandoned them. 
Possibly the same process of association 
could attach vulgarity to all forms of 
conspicuous waste. As fast as Veb- 
len's conspicuous waste is made syn- 
onymous with conspicuous vulgarity, 
imbecility and inferiority, it will tend 
to be replaced by conspicuous thrift, 
or (if we are ingenious enough in our 
social engineering) by modest thrift. 

Thrift should then be begun with 
the rich, important, able, and popular. 
So long as it is advocated as the virtue 

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The Annalb of the American Academy 

of the poor and lowly, the young and 
struggling, the propaganda will be 
largely self destructive. Jeffersonian 
simplicity can be inculcated in a land 
where universal ambition is encouraged 
only when men of Jefferson's status 
live simply. It is not only bad taste 
and bad morals for the ostentatious 
rich to preach thrift to the poor; it is 
also largely time wasted. The man 
who by thjrift in youth is able to in- 
dulge in luxurious display later is more 
of an encouragement to luxurious dis- 
play than to thrift. His example 

when he was an imknown struggler is 
of little force; what he does when he is 
known as successful has publicity and 

If the world as a whole is to be effi- 
cient, its mighty ones must distinguish 
sharply between expense for efficiency 
and expense for display, and leave the 
latter to peacocks, monkeys, the feeble- 
minded, and women who have to make 
themselves saleable. They must also, 
and this will be much harder, teach 
their wives and daughters to do like- 

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Thrift in the School Curriculum 

By W. H. Carothers 

Professor of Education, Kansas State Normal, Emporia, Kansas 

ANALYZED out of the social 
heritage of race experience and 
the environment which surrounds us 
are certain elements which society has 
found desirable stimuli to affect the 
generation of learners. These ele- 
ments, properly organized, graduated, 
and classified constitute the school 
curriculum. Every body of subject 
matter which has found a permanent 
place in the curriculum has at some 
time stimulated responses in the learner 
that better adapted him to the world 
in which he Uved. For convenience in 
treating the phenomena of the mind, 
and to clarify our own thinking, certain 
names have been given to the more or 
less permanent effects which these 
stimuli and their responses have on the 
nervous system of the person who 
experiences them. Arranged in the 
order of simpUcity they are habits, 
ideas, ideals, prejudices, and attitudes. 
It is the business of the curriculum to 
bring about those changes and to 
realize those values which society has 
considered of greatest worth. 

The Broader Curriculum 

What has been described is the cur- 
riculum in its Umited sense. The 
broader curriculum is the learner's 
total environment and includes all the 
influences that affect a person from 
birth to death. The limited curricu- 
lum is an attempt to bring order out of 
chaos and to control the elements 
which should enter into the child's 
education. The school is often power- 
less to prevent outside stimuli from 
creating permanent and undesirable 

effects. Imitation is an instinct of 
great potency in young people, a fact 
which robs the school of much of its 
power in its anti-narcotic campaigns 
so long as adults use tobacco in the 
presence of children. The extrava- 
gance and luxury of the modem city 
which attract the daily attention of 
the rising generation and appeal to 
the powerful social instinct of display 
will nullify in part the efforts of the 
teacher in thrift education. The 
broader curriculum . will continue to 
have its effect, but the school will 
always have the advantage over the 
capricious phenomena of the outside 
world in training the yoimg. 

What Cak Be Taught 

The question often arises whether 
this idea or that thing can be taught. 
Can w;e teach patriotism? The answer 
is that all the patriotism we now 
possess has been taught to us, for we 
are not bom in possession of this or 
any other sentiment. The infinite 
capacity of the human mind to be in- 
fluenced is the most significant fact in 
our social life and one that has been 
only narrowly appreciated. Can we 
teach people to save in the midst of 
plenty? The answer is, you can 
teach people anything in the world 
that you seriously want to teach them. 
There are, however, many qualities 
desirable in the twentieth century 
which only careful training, requiring 
time, patience, and effort can bring 
about. Thrift is one of them. Nature 
has not been generous in her endow- 
ment of this quality. Opposed to the 


Digitized by 



The Ansais of the American Academy 

weak collecting instinct which mani- 
fests itself in the bulging pocket of the 
boy" of ten — ^an instinct adapted to a 
period when the child picked up small 
particles of food strewn among the 
debris of a cave — ^is the strong social 
instinct which manifests itself in gaudy 
display and ostentation. The diffi- 
culty of a problem, however, may 
easily add interest to it. 

Thrift Education Through 
Specific Habits 

The first and most universal method 
of training was habit formation. It 
remains the basic fact in the elemen- 
tary systems of education throughout 
the world to-day. Since the great 
majority of habits are fixed at an early 
age and remain permanent throughout 
the lifetime of the individual, James 
has spoken of them as constituting 
*the great fly-wheel of society.' For 
the same reason it is of vital impor- 
tance that thrift habits begin to take 
form in the kindergarten and continue ' 
throughout the elementary school 
period. The saving of paper and pen- 
cils, care of clothing and of school 
equipment, the school bank, purchase 
of Thrift Stamps and War Savings 
Stamps, and the salvaging of com- 
munity waste are desirable means of 
establishing thrift habits. Spasmodic 
efforts will not bring results. The laws 
of habit formation forbid exceptions 
and accentuate the importance of regu- 
larity over mere repetition. In view of 
the greater ease with which habits are 
formed in the majority of people and 
the fact that only a small percentage 
of the population receives considerably 
more than a common school education 
it is primarily to the power of habit 
(so-called second nature) on which we 
must rely as the chief factor in the 
solution of our problem. 

Education for Thrift Through 

The second method of education is 
through the use of ideas. While ideas 
are present in the earlier training they 
rise to prominence in that period which 
is included in the years devoted to the 
junior high school. Secondary edu- 
cation, which rightly belongs to the age 
of adolescence, has been defined as the 
rational interpretation of experience 
as the basis of future conduct. This 
means that the child in this stage of 
development demands a reason for the 
habits he has formed and the acts he 
is called upon to perform. It is prop- 
erly the scientific age when the mind 
attempts to grasp principles and con- 
struct systems for unifying the scat- 
tered elements of his experience. This 
is the time par excellence for laying 
the foundation of sound economic 
thought by giving the child an insight 
into the economic world in which he 

It has been said that we are a nation 
of economic illiterates. If that be the 
case — ^and it is guilty only of mild 
exaggeration — ^the duty of the school 
is plain. It is no less true that if the 
defect is to be remedied the educative 
process must begin where the larger 
numbers are. The rapid depletion of 
the ranks of school children from grade 
to grade make an early beginning 
necessary if results are to be expected. 

It has been affirmed that attempts 
to teach political economy in the 
secondary school have not proved a 
success to date, and that such efforts 
as have been made have been a waste 
of time. This has been due no less to 
the fact that teachers have been 
signally unprepared to teach the sub- 
ject except in the form of dry subject 
matter of a book than to the lack of 
pressure from the outside. Very much 

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Thrift in the School Cubriculum 


the same condition existed with ref- 
erence to civics up to the time that 
Bryce wrote his American Common- 
wealth. Teachers had caused children 
to memorize the dry facts of the Con- 
stitution because no one had yet been 
able to see the working of American 
government in his own community. 
There is seldom much diflSculty in 
teaching children what teachers them- 
selves understand and appreciate. 

Economic Principles in the Secondary 
Schools. — ^The first task, therefore, in 
preparing children for an understand- 
ing of the principles of thrift is the 
preparation of teachers. There has 
never been a period in the history of 
our nation when so many carelessly 
conceived economic theories were oc- 
cupying the minds of great numbers of 
people. It is the tiine-old danger of a 
'little learning' applied to a big prob- 
lem. So little careful thought has 
been given to the sul>ject of poUtical 
economy that men have 'made the 
wish the father of the thought' and 
have confused desired ends with the 
means of attaining them. There is no 
reason why the child's grasp of eco- 
nomic laws should not unfold gradually 
and naturally with the widening and 
deepening of his experience. The 
logical time for the beginning of this 
development is the early years of the 
secondary school and belongs logically 
with a course in civics. The fact that 
the productive capacity of one man or 
a group of men is Umited, and that the 
person who owns three or four auto- 
mobiles and keeps a house full of serv- 
ants to care for his personal wants 
takes labor out of the production of 
essential commodities can be made 
very plain to the secondary school 
child, and it may well be held as a 
sound principle of good citizenship. 

The shroud of ignorance which has 

enveloped the principle of lavish spend- 
ing is evidenced in the remarks of 
bystanders who observe that great 
expenditures of money, though un- 
necessary, give labor to the poor and 
keep money in circulation and make 
business better in the commimity. 
All that is necessary to correct these 
fallacies is to put the correct ideas 
into the minds of school children and 
this dangerous superficial philosophy 
will disappear from our thinking. 

The idea once implanted in the 
minds of every secondary school child 
in America that we as individuals are 
the great employers of labor, and that 
through our purchases we determine 
what men and women shall do, what 
materials they shall use, how much of 
their time shall be wasted in making 
gewgaws that should be devoted to 
making sensible things, — that idea will 
fructify and yield manifold returns. 

There are a number of economic 
laws which the secondary school child 
can grasp but this does not mean that 
the way to teach them is through a 
formal text in economics. Our eco- 
nomic life is so much a part of a work- 
a-day existence that the study of it 
without the imprint of the market- 
place, the farm, and the home, lacks 
reality. It becomes formal, lifeless, 
and meaningless. 

Thrift Taught Through Ideals 

The third great method of recording 
experience in the nervous system of the 
child for purposes of better adjustment 
is through the use of ideals or emotion- 
alized standards. These are elements 
in the child's experience which when 
shaded off into their secondary forms, 
namely, tastes and prejudices, have a 
powerful influence in shaping character. 

It required only a comparatively 
short period of time to create a prej- 

Digitized by 


Hit The Annam of the American Academy 

udice against alcohol in America, and ideas or knowledge; and, third, of 

although scientists state that so ancient ideals and prejudices. 

is the custom of drinking liquor that it 

is embedded in the fiber of humaii Subject Matter of the Curriculum 

nature itself, the habit is passing, the ArUhmeiic. — ^We may properly pass 
miracle being wrought before our own to a consideration of the subject matter 
eyes. The prejudice began to take of the curriculum under its various sub- 
form, and as it grew it crystallized into divisions. In the subject matter of 
words with repulsive connotations, arithmetic, the budget, interest — sim- 
The poetic "mint julep" and the pie and compound, problems relating 
"little drink" for sociability began to to industry and thrift can be used as 
lose groimd in the popular mind, and important means of accentuating the 
" booze " with all its sordid associations importance of thrift, 
got the upper hand. The power of The habit of budget-making is so 
prejudices early formed in the minds of foreign to us either in our private or 
a generation is difficult to estimate, public life that the term is apt to be 
The emotional reaction against civic vague in the mind of the average per- 
corruption in America crystallized into son. A simple tyx>e of personal budget 
the word "graft" which became a to acquaint the child with the princi- 
term of contempt, and as public con- pies of foresight, system, and accurate 
sciousness was aroused by the stench knowledge from day to day is shown 
of corrupt poUtics the words "graft," below: 
"boodle," and "pork barrel" consti- month op March. IMO 

tuted the weapons with which the income: Savings $1.00 

common man fought his battle for On hand.. $0.75 Expenditmes: 

decency. Allowance . 1.50 Books S.OO 

Among current social and economic ^^^^ ^-^ ^^P*' ^ 

. .1 .. . . Pencils 10 

customs the practice of conspicuous ^j, g^ 

waste for the gratification of the in- Necktie.... .75 

stinct of display and as a means of Amusements .50 

flaunting in the eyes of the onlookers Sundries ... .ao 

superior economic status is open to Balance 50 

attack on the grounds that waste is a Toud,,, '^5 Total... $6^ 
sin against society. One may well 

speculate on the change that could be Children can be taught the art of 

made in the public mind by a campaign budget making, and a generation of 

of education in school and press against skillful budget-makers will be a genera- 

this deep-seated economic evil. In my tion of thrifty people among whom 

judgment it will come, using as its fewer business failures will result than 

weapon a term or phrase which will bite is true of the present, 

into the pubUc mind until the evil from The wonders of compoimd interest 

which it sprang has been eradicated, acting on capital to which regular in- 

Briefly summarizing, I have attempted crements are made belong in the field 

to show that the general method of of arithmetic, but this aspect of the 

thrift education should take the form, subject is receiving little if any atten- 

first, of specific habits; second, of tion in present day arithmetic courses. 

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Thrift in the School Cubbichlum 


The reasons assigned for the omis- 
sion are doubtless plentiful, but the 
principle of compound interest is not 
unknown to our great insurance com- 
panies, banks, and other financial insti- 
tutions, and is, in fact, the cornerstone 
of their success. It is no less impor- 
tant for the laboring man, and the 
great mass of people of slender means 
to become acquainted with the theory 
and practice of compound interest. 

It may be said that since the prob- 
lems involved in budgets and the prin- 
ciples of compound interest are not 
necessaiy in making adjustments to 
ordinary business life they should find 
no place in the curriculum. This is 
the view taken by a certain modem 
school of educators, but it should be 
recalled that education means much 
more than mere mechanical adjust- 
ment; it means superior intelligent 
adjustment, and as such demands 
training and instruction which wiQ 
prepare the child to analyze and solve 
the more subtle problems which do not 
lie on the surface. 

The mathematics of thrift has been 
carefully studied by financial experts 
who know, for example, the vast dif- 
ference between one-tenth and one- 
twelfth of one per cent when applied 
to modem finance, but little oppor- 
tunity is ^ven the average person to 
get an insight into the workings of 
these subtle elements in financial 

Building and Loan Associations, 
savings banks, insurance, annuities, 
and the special types of banking insti- 
tutions which operate a "chain" of 
banks in various cities are founded on 
the mathematical law of compound 
interest. They are apt to be looked 
upon as the working of some mythical 
potency which favors the capitalist at 
the expense of the worker. 

History. — ^The second subject which 
in virtue of its subject matter and 
organization provides a fertile field for 
thrift instruction is history. Thrift is 
an active principle in social evolution 
and the growth of civilization is con- 
ditioned by its practice. 

History furnishes us with numerous 
instances of primitive peoples who, 
through their failure to practice the 
principles of thrift and economy, lived 
in almost continuous poverty. As 
soon as the individual men and women 
of these tribes began to make wise use 
of their surroundings they evolved into 
civilized nations. In these countries 
personal comforts and cultural life 
were possible. Moreover, a nation 
built upon so sure a foundation has 
nearly always been able to withstand 
the attack of enemy countries which 
lacked this sturdy strength of thrifty 

There are, also, numerous instances 
of powerful civilized nations whose 
citizens have forgotten the cardinal 
virtues on which their forefathers 
built the nation. In such instances 
the waste and extravagance practiced 
by the individual citizens contributed 
in no small degree to the decline and 
fall of those nations. 

In this way history makes very 
apparent not only the desirability of, 
but also the necessity for individual 
and national thrift. In each instance 
the teacher should correlate the ex- 
amples in history with the conditions 
and necessities of the present time. 

To say that our courses in history 
have emphasized the political and mili- 
tary aspects of society to the loss of 
the social and economic is a trite 
criticism, but history must uncover 
the foundations as well as the super- 
structure of institutions of the past. 
To recite the common, homely virtues 

Digitized by 



The Annals of the American Academy 

of mankind is a prosaic task and the 
story is likely to fall on indifferent 
ears, but the choice unfortunately 
does not rest with us. Fortunate is 
the nation which learns to enjoy the 
things that have to be done, for the 
inexorable laws which shape the des- 
tiny of nations are concerned only 
with what people do and not with 
what they like. Thrift is one of those 
commonplace virtues which by its 
homely familiarity is apt to breed con- 
tempt. Under such circumstances the 
common sanction of society is required 
to raise the habit to a position of dig- 
nity. History always has at its com- 
mand a powerful instrument for creat- 
ing attitudes and perspectives which 
determine social sanctions of the 

- Geography. — Closely allied to his- 
tory is the study of geography. The 
great program for the conservation of 
our natural resources inaugurated dur- 
ing the Roosevelt administration should 
be carried on as a part of the regular 
work of the school. Living in the 
midstof abundancewe have the greatest 
difficulty in seeing that the supply of 
natural wealth is limited and that the 
constant increase of population is 
destined to reduce the American stand- 
ard of living unless we deal more 
sanely with our resources. 

The Belgian Commission sent to the 
United States conmiented on our lack 
of foresight as follows: 

We saw miles of young trees being destroyed 
by fires started by engine sparks, and left to 
bum. We saw farms divided by wooden 
fences that contain enough lumber to build 
the homes of all Belgium. Everywhere in the 

country was wasted land. If we had such 
bounteous wealth of land and other resources 
as are wasted here, we could transform our 
people into conditions of prosperity beyond 

The rising generation should be 
made to realize its duty to the future 
with respect to the bounties of nature, 
and it rests with the school, the one 
great institution of learning left under 
direct public control, to create deep- 
seated prejudices against this great 
transgression of the American people. 


The method and subject matter of 
thrift instruction has been briefly out- 
lined in the foregoing paragraphs. 
Not all of the departments of the school 
which are equipped to aid in this 
educational movement have been men- 
tioned. The field of English, includ- 
ing reading and composition, is an un- 
worked educational gold mine for thrift 
education. In general, in view of the 
rapid multiplication of subjects it will 
be wise to correlate thrift instruction 
with other established courses in the 
school until the later years of the high 
school, when a course in economics em- 
phasizing the principles of thrift may 
seem advisable. 

Of fundamental importance is the 
inmiediate introduction into the cur- 
riculum of a program which will pro- 
vide for the building of good habits, 
the creation of correct ide^s and 
worthy ideals of thrift. The nation 
waits upon the school for this service, 
and we may depend on the judgment 
and resources of the American educa- 
tor to perform the task. 

Digitized by 


The Consumer's ResponsibiKty^ 

By Hartley Withers 

Editor of The Economist, London 

'I^TIT'E are all of us consumers or 
▼ ▼ money-spenders, and all of us, 
including the very poorest, could SpencJ 
our money to better advantage if we 
tried, and make the world a much 
pleasanter place for ourselves and 

"Why should I try?" asks someone 
very plentifully endowed with common 
sense. "What has it to do with me? 
I earn £1,000 a year, and I work for it. 
I shouldn't be paid this income if I 
wasn't worth it to somebody, and why 
on earth shouldn't I spend it exactly 
as I like? I am not responsible 
for our economic system. It hasn't 
treated me badly. I pay a lot of peo- 
ple to look after the government of the 
country and it's their business to put 
things right if they're wrong. I enter- 
tain freely; I give plenty away to 
objects that I think deserving. It's 
my own money, and why shouldn't I 
do what I like with it?" 

First of all, let us try to frighten 
him a little. If there is any likelihood 
that a real economic improvement can 
be brought about by more sensible 
spending, it is surely better to try 
this method instead of letting things 
drift towards terrible experiments like 
general strikes, and the possibility of 
bloodshed and perhaps revolution. 
Surely it is plain that never before in 
the world's history has there been such 
world-wide unrest among the workers. 
Those who are in sympathy with the 

^ This is an article prepared for the use of the 
British National War Savings Committee which 
Mr. Withers sent as his contribution to this 
volume, also. 

16 225 

workers and think that they ought to» 
and must, get a bigger share of the 
world's goods, are glad to see this 
unrest. But to the man who is quite 
content with the manner in which 
wealth is at present distributed, and 
only wants to enjoy his own income, it 
must be a most disquieting and uncom- 
fortable system. For he feels that he 
is really much more vulnerable than 
the workers. He must have his three 
good meals a day, perhaps four. They 
are quite used to going hungry — one 
of the most pathetic facts in languages 
is the existence of a regular word for it 
in the north country, to "clem." If 
the workers could only solve the ques- 
tion of unity among themselves, so 
that a strike meant a really unanimous 
cessation of work by them, a general 
strike would become a terrible weapon 
against people who do not like to miss 
their accustomed creature comforts 
for a day. It is easy to talk about the 
strong hand and martial law, but the 
strong hand is a game that two sides 
can play at, and martial law may be 
met by martial lawlessness. 

But if our common sense friend is a 
hearty, robustious person, who is not 
going to be frightened by phantom 
pictures of what might happen, we 
must try to persuade him that he is 
wrong in his confidence about his 
economic value and his right and title 
to all the good things that he enjoys. 
We must put it to him that of course 
he must do just what he likes with his 
money, but that possibly if he thought 
the matter out he might like to use it 
in a manner that is a little different 

Digitized by 



The Annai^ of the Amebicak Academy 

from his present method of spending. 
Because if he has done us the honor of 
reading the preceding pages he has 
been brought face to face with the 
fact that by spending money on luxu- 
ries he causes the production of luxu- 
ries and so diverts capital, energy, and 
labor from the production of necessa- 
ries, and so makes necessaries scarce 
and dear for the poor. He is not asked 
to give his money away, for he would 
probably do more harm than good 
thereby, unless he did it very carefully 
and skilfully; but only to invest part 
of what he now spends on luxuries so 
that more capital may be available for 
the output of necessaries. So that 
by the simultaneous process of increas- 
ing the supply of capital and dim- 
nishing the demand for luxuries the 
wages of the poor may be increased 
and the supply of their needs may be 
cheapened; and he himself may feel 
more comfortable in the enjoyment of 
his income. 

Then we proceed to appeal to that 
excellent common sense of his, and ask 
him whether he is quite sure that 
because he receives £1,000 a year he is 
really worth to the community ten 
times as much as the artizan who is 
paid two pounds a week. How much 
of his £1,000 a year does he really owe 
to himself and his own exertions and 
abilities, and how much of it ought to 
be credited to his education and nur- 
ture and the long start with which he 
began life? If we all started from 
scratch, he might fairly make some 
claim to having earned his success him- 
self, though even so he would have to 
allow a very wide margin for luck; for 
his will be a rare experience if he can- 
not call to mind schoolfellows of his 
own, just as well endowed as he is in 
character and ability, to whom fate 
has only opened her purse to the 

extent of a few hundreds a year. 
Moreover, if he will remember the 
store of intelligence that lies dormant 
among the workers because they have 
no real education to awaken it, he will 
see that if the career were actually 
open to talent, and all talent had a 
genuine chance of being developed, it is 
possible that his abilities and attain- 
ments might be of quite commonplace 
standard. As it is, owing to this 
lamentable waste of the intelligent 
material that lies ready to our hands, 
the business world is always crying 
out about the scarcity of available 

Moreover, still appealing to his 
common sense, we ask him to wonder 
how much use his own abilities would 
be to him if it were not for the rest of 
the community that gives him ease 
and security and supplies him with all 
the comforts and luxiuries that he 
enjoys. The argument so commonly 
used about landlords — ^that it is their 
neighbors who make their property 
valuable, by wanting to live on it — ^is 
true in a certain degree about all of us. 
Whatever our gifts of mind and body 
may be, they would avail us little 
towards achieving comfort, to say 
nothing of luxury, if we found ourselves 
planted by ourselves on a barren 
mountain top. Man, as a solitary 
unit, cannot acquire the well-being 
that is now enjoyed by the comfortable 
classes; he can only do so as a member 
of an economic brotherhood. We are 
accustomed to think of our economic 
civilization as based on competition, 
but in fact cooperation is much more 
important to it, for it is impossible to 
compete unless one first cooperates. 
This being so, since all of us who are 
comfortable and well fed and easy are 
so by the exertions of our fellows, is it 
in accordance with common sense, 

Digitized by 


The Consumeb's Responsibility 


which is closely allied with common 
sympathy, to stand by and see mil- 
lions of those who help to provide our 
comfort go short of the necessaries of 
life if we can do anything to better 
their lot? Is it "good business" — ^for 
all this question is a matter of busi- 
ness — ^to spend money on things that 
one does not really need, if by so doing 
we improverish the workers and sap 
the strength of the nation? 

"But," we shaU be told, "there 
always must be rich and poor. It's a 
law of Nature that some shall be strong 
and some shall be weak, and that the 
weak shall go to the wall." 

Of course there must always be rich 
and poor. Even if all our incomes were 
made equal tomorrow, there would 
still be a great difference in the degree 
of our welfare, for some men can live 
cheerfully on a hundred a year, and to 
others a thousand is penury. But be- 
cause there must always be differences 
that is surely no reason for sitting stiU 
and leaving things alone if by a slight 
change in the habits of the spending 
classes some of the more glaring 
differences can be lessened. 

As to the law of nature and the 
necessary division of mankind into 
strong and weak, is it safe to appeal to 
it before we have made quite sure that 
those now at the top are really the 
strong and those at the bottom are the 
weak? If the law of nature really had 
free play we might see a very startling 
redistribution of the good things of the 
earth. "Were there," says a great 
scientist and thinker, "none of those 
artificial arrangements by which fools 
and knaves are kept at the top of 
society instead of sinking to their 
natural place at the bottom, the strug- 
gle for the means of enjoyment would 
ensure a constant circulation of the 
human units of the social compound. 

from the bottom to the top and from 
the top to the bottom."* 

Civilization, in fact, consists chiefly 
of a series of triumphs over the laws of 
nature. In a natural state, if we had 
a decayed tooth it would go on decay- 
ing till it gave us such pain that we 
should pray some kindly brother 
savage to batter it out with a boulder, 
and it is Ukdy that he would knock 
out two or three more with it. Civili- 
zation provides a dentist who stops it 
for us and preserves it as a useful 
member of our anatomy. In a natural 
state, when dimmed eyesight and 
dwindling muscular power made it 
impossible for us to get food by hunt- 
ing or fishing we should either die of 
hunger or be mercifully eaten by a 
wild beast. Civilization keeps us alive 
and useful long after the laws of nature 
would have forbidden us to cumber the 
earth, and finally lets us die comfort- 
ably in our beds. If the laws of nature 
were given free play, any question at 
issue between a set of Northumbrian 
pitmen and the shareholders for whom 
they work would very shortly be 
settled, and the shareholders, or their 
remnants, would be found shouting for 
the police. As it is, the artificial 
arrangements of which Huxley com-, 
plains, work for the benefit, not only 
of fools and knaves, but of all who lead 
comfortable and sheltered lives, and 
have got nice well-paid posts, largely 
through the accident of being bom in 
a certain class, and having been taught 
certain things at school, chiefly by their 
schoolfellows. We had better be very 
careful about talking of the survival of 
the fittest, for the more dosdy com- 
mon sense looks at the matter the less 
certain its possessor will be that in a 
really natural struggle he would be 
among the survivors. The reason why 

> Huxley, EvolvHon and Eihic*. 

Digitized by 



The Aitnals of the Abcbbican Academy 

man, naturally a very weak animal, has 
triumphed over all his natural enemies 
is because he had the good sense, by 
cooperation and care for the weak, to 
overcome much of the terrible waste 
that is implied , by the unrestricted 
working of the law of the survival of 
the fittest. He has acted by the 
weaker members of his tribe, who, by 
natural laws, ought to have perished, 
as the dentist acts by our weak teeth, 
and kept them as useful members of 
society. In fact, we have carried our 
conquest of natural laws so far that a 
man's grasp of the good things of life 
depends much less on his strength and 
courage and ability than on the poid- 
tion and circumstances in which he 
happens to be bom. "Virtue is of 
Uttle regard in these costermonger 
times," and we are faced by a state of 
things under which large numbers of 
us, and those by no means always the 
weakest, do not get a fair chance of 
life. Conmion sense surely compels 
us to do anything that can be done to 
put this right, and in the meantime 
advises us not to talk too loudly about 
the laws of nature, if our position in 
the world depends on artificiial laws 
which defeat them. 

. But common sense has still another 
cartridge in its belt. We shall be told 
that, even if we could persuade the 
spending classes, by more sensible 
spending, to increase the supply of 
capital, raise the wages of the workers, 
and cheapen the necessaries of life, we 
should not have touched the most 
serious side of the problem of poverty, 
which is the existence of a host of 
people who, from mental and bodily 
weakness, are not fit to work, and so 
could not benefit by an increase in the 
wages of the workers. This is quite 
true, but I never suggested that the 
reform put forward in these pages 

could, if adopted, cure all the econo- 
mic evils in the world. It is very safe 
to say that any remedy which is 
expected to cure everything is almost 
certain to cure nothing. But at least 
it may be claimed, if wages were raised 
and the prices of necessaries were 
lowered, that the creation of these 
unfortunate folk, whom heredity and 
environment have combined to deprive 
of man's birthright, would be sensibly 
checked, and, if the process were carried 
far enough, would be stopped alto- 
gether. Then all that would have to 
be done would be for the State either 
to see to it that they did not reproduce 
themselves or to take such measures 
for the care of their offspring that 
environment might have a fair chance 
of undoing the hereditary weakness. 

For how has this army of the unfit, 
whose existence is the most ghastly 
condemnation of our economic system, 
come into being? They are the crea- 
tion of low wages, assisted by the mis- 
erable conditions under which the 
worst paid of the workers have lived 
for generations, and to this source of 
their production has been added irre- 
sponsible spending, extravagance, and 
consequently weakened moral fibre 
among the richer classes, which have 
turned out spendthrift ne'er-do-wells, 
who, in spite of all the artificial arrange- 
ments complained of by Huxley, have 
gradually sunk to the dregs. Both 
these sources of the output of unem- 
ployables might be stopped up, if the 
reform suggested in these pages were 
set to work and given time to bring 
forth its results. Probably it would 
take many generations before it would 
be possible altogether to weed out the 
unfortunate wights who are, in the 
expressive popular phrase, "bom 
tired," and simply cannot face the 
daily effort of regular work. But 

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The Conbumeb's Responsibilitt 


much might be done to stiffen their 
backbones and lessen their number if, 
instead of encouraging their production 
by underpaying our workers and mak- 
ing their lot difficult, and setting a 
stupid example of irresponsible and 
wasteful spending among the richer 
classes, we tried to bring home to all, 
the simple fact that by wrong spending 
we aggravate the economic evils of our 
present system, and that by wise spend- 
ing we help to correct some of them. 

As things are at present, the manner 
in which we spend our money is a 
matter in which we are swayed less by 
intelligence than by habit and conven- 
tion and sheep-like mimicry of one 
another, tempered by weak-minded 
submission to the bullying of the 

"Although," says Dr. Hadley, "laws 
prescribing what a man may buy or 
sell have fallen into disuse, it must not 
be supposed that every man exercises 
his intelligence and pleasure to buy 
what will give him the most happiness. 
People are bound by custom where 
they have ceased to submit to law. A 
large part of the expense of most peo- 
ple is regulated, not by their' own 
desires and demands, but by the 
demands of the public sentiment of 
the community about them. The 
standard of life of every family is fixed 
in large measure by social conventions. 
Few are intelligent enough to break 
away from those conventions, even 
where they are manifestly foolish. 
Although we have made much prog- 
ress in the direction of economic free- 
dom, it is a mistake to assume that the 
authority of custom in these matters 
is a thing of the past. With most 
men custom regulates their economic 
action more potently than any calcu- 
lation of utility which they are able to 
make. Nor can we assume, as some 

writers are prone to do, that such cus- 
tom represents the average judgment 
of the community as to the things 
needed for the comfort and happiness 
of its members. It represents an 
average absence of judgment — a sur- 
vival of habits which doubtless proved 
useful in times past, but which in 
many instances have entirely outlived 
their usefulness. The success of 
advertising shows how little intelli- 
gence is habitually exercised in these 
matters. A man does not generally 
use his nominal freedom to buy what 
he wants until someone comes and 
tells him in stentorian tones what he 
wants to buy. The authority of cus- 
tom and tradition can only be over- 
come by the authority of drums and 
trumpets. It is a mistake to draw too 
fine-spun deductions as to the motives 
which guide buyers in their choice, 
when three-quarters of the buyers 
exercise no choice at all. It is not 
merely that people want things which 
hurt them, or which fail to do them 
the maximum good . . . but that 
they buy things, without knowing 
whether they want them or not, 
through sheer vis inertia,*'* 

This uncomfortable string of home- 
truths, dealt out to us all by a distin- 
guished economist, would not hit us 
very hard if we were the only sufferers 
by the absurdities that he puts before 
us so clearly. If we choose to waste 
our own money at the bidding of con- 
vention and the advertiser, and if we 
could do so without hurting anybody 
else, we need only say with Puck: 

Lordp what fook these mortab be! 

and leave ourselves to the consequences 
of our folly. But the folly becomes 
tragedy when we have once grasped 
the fact that bad spending makes the 

* Hadley, EctmomicB, chap, iii^ 

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The Anttaus of the American Academy 

poor poorer, and it becomes necessary 
to look more closely into this question 
of the consumer's responsibility and to 
see whether something cannot be done 
to deliver him from the yoke of con- 
vention and from the paw of the adver- 
tising lion. 

A sense of responsibility in the enjoy- 
ment of wealth is no new-fangled no- 
tion. In the Middle Ages the owner 
of land, then the form in which wealth 
was most commonly held, owned it 
only on condition that he put so many 
men, in proportion to his wealth, into 
the field when called on by his sover- 
eign, and put himself at their head 
when they went into battle. This re- 
sponsibility is long obsolete, and in the 
^e of the law and of custom a man 
who cuts off coupons or draws divi- 
dends and rents, or earns a big salary, 
may do as he pleases with his money. 
If he makes handsome contributions to 
charity, it is counted to him for right- 
eousness, and rightly, since he is giving 
away what he believes, and his neigh- 
bors believe, to be his own. But, in 
fact, it is his own only in a very limited 
sense. If he has inherited it, he owes 
the peaceful possession of it to the pro- 
tection given him by the rest of the 
community. If he earns it by his abil- 
ities, he owes it to exceptional training 
that his abilities have had, and to the 
neglect of the abilities of the greater 
part of the population, through lack of 
this training. The ease and comfort 
that he enjoys only exist because he is 
a member of a great whole, that works 
for him and works with him. If he 
spends his money in a manner that is 
harmful to the whole, he is not making 
a fair return to it for the benefits that 
it pours on him, and any expenditure 
that makes the lot of the poor harder is 
unquestionably harmful to the nation 
as a whole. Apart from any considera- 

tions of humanity and equity, it is 
economically unsound that a large 
proportion of the population should be 
short of the necessaries of life. 

It is a commonplace that needs no 
proof that extravagance on the part 
both of nations and of individuals has 
increased very fast in the last few gen- 
erations. The consequences, scarce 
capital and high prices, are before our 
eyes, "plain as way to parish church.*' 
High taxes prevent our saving and so 
does a so-called high standard of com- 
fort, which generally means a high 
standard of ostentation, and of expend- 
iture according to convention, instead 
of according to our wants. 

"For at least half his expenditure," 
says Mr. Dibblee, "an ordinary indi- 
vidual does not know what he wants, 
and out of the other half for at least a 
half he does not get what he wants. 
. . . Half the furniture of any 
house is mere mimicry of other es- 
tablishments, whose use is in display 
without beauty or comfort. Half the 
clothing of either children or adults is 
dictated by fashion and discarded be- 
fore ^nsumption. Half the wages of 
most of those who pay any for domestic 
service are for the performance of cere- 
mony, useless, boring, and time-waste- 
ful. Few of us are perhaps willing to 
admit this specifically in our own 
cases. . . . But it is easier to see 
the truth of such a generalization in the 
habits of others, particularly of the 
very rich, whose estates and stables, 
yachts, gardens and pictures are bought 
for them, kept going for them and regu- 
lated for them down to the last boot- 
button by a whole army of officials and 
experts, with only an occasional refer- 
ence to any personal enjoyment which 
their owner may expect from them."* 

^"The Laws of Supply and Demand," pp. 

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The Consumer's Responsibility 


Let us leave the question of national 
extravagance to statesmen. Individ- 
ual extravagance is a matter that each 
one of us can deal with himself, as far 
as he is guilty of it. As long as he be- 
lieves that he only is a sufferer by it, 
and that if he outruns the constable he 
alone takes the consequences, he can 
go on merrily wasting the good things 
of the earth. But when once he has 
grasped the fact of the consumer's* 
responsibility, he sees that it is one 
which he cannot evade. We are all 
consumers, and by our demand for 
goods and services we decide what 
goods and services shall be brought 
forth into the world's mart. If we 
abstain from, or reduce, our luxuries 
and frivolous consumption, we check 
the production of luxuries, and set free 
capital and energy for the production 
of necessaries. At the same time, by 
checking our consumption of goods 
that we do not want we save more 
capital and so quicken the demand for 
labor, and so the workers are enabled 
to take advantage of the increased 
supply of necessaries. When the 
workers are all supplied with neces- 
saries and poverty in its grimmest 
aspect has been driven off the face of 
the civilized earth, then it is likely 
enough that increased production may 
give us a surplus that we can use as we 
like. At present we consume luxuries 
at the expense of the ill-fed workers. 

As we are all consumers so we all 
have this consumer's responsibiUty, 
and nearly all of us ignore it. Extrav- 
agance is rife in all classes. Thanks 
to the drums and trumpets of the 
advertiser, and the blatant publicity 
with which the luxurious exploits of 
the wealthy are nowadays chronicled, 
the habit of aping the expenditure of 
those better off than ourselves is pathet- 
ically general. The thriftlessness of 

the poor, and the terribly bad use that 
they make of the pittance that civil- 
ized society hands out to them, are 
lamented by all who have worked 
among them. The marvels that the 
really destitute achieve in keeping body 
and soul together on next to nothing, 
are almost paralleled by the reckless- 
ness with which those who are rather 
better off take no thought for the mor- 
row, and waste on betting or drink or 
cheap finery, money that is needed for 
their food and clothing. In their case 
it is natural enough. How many of 
us, who have been brought up differ- 
ently, would act differently if we had 
to live their lives and face the prob- 
lems that they deal with daily, and 
look forward to the future that is be- 
fore them? But it is one of the lessons 
that the leaders of the workers have to 
teach, that they also have responsi- 
bility as consumers and that labor can 
never win a complete victory until it 
has conquered its own lack of thrift. 

"When we remember," says Walker, 
"that the expenditure of the people of 
Great Britain, annually, for alcoholic 
beverages reaches the enormous sum 
of £180,000,000 . . . four-fifths, 
at least, of which is spent in a way that * 
is not only without any beneficial 
effect, but is positively injurious, a 
large part of it going to the destruction 
of moral, intellectual, and physical 
power, we get a rude measure of the 
force which a wiser consumption of 
wealth might introduce into the eco- 
nomic life of that country."* 

In this matter of the consumer's 
responsibility an enormous influence 
can be exercised by women. In the 
constituency of consumers they have 

" PolUical Economy, Part V. chap. ill. Tlie 
Second Edition, from which I quote, was 
published in 1887. Our National drink bill for 
1013 was 166} millions. 

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already got a vote and a majority, and 
can use it today with overwhelming 
effect. Most of the world's spending 
is done by them, especially in the mid- 
dle class, whose numbers and wealth 
make its action all-important. In 
many middle class households the man, 
the ostensible head of the family, is 
more or less in the position of the doc- 
tor described by Mr. Arnold Bennett 
in Buried Alive^ whose "wife and 
two fully developed daughters spent 
too much on their frocks. For years, 
losing sight of the fact that he was an 
immortal soul, they had been treating 
him as a breakfast-in-the-slot machine: 
they put a breakfast in the slot, pushed 
a button t>f his waistcoat, and drew out 
banknotes." Household expenditure, 
that bulks so large in most of our bud- 
gets, is usually regulated almost en- 
tirely by the women of the family, who 
are the spending departments of the 
domestic Civil Service. K women 
could be brought to see, and act on, 
their responsibility as consumers, we 
should have made a long step forward 
towards a big reform. How far some 
of them are from this perception is 
shown by the example of a lady who 
* lately achieved the honor of public 
mention in the newspapers by owning 
over a hundred nightgowns. 

Summing our conclusions up, we 
may say that two evils now stand in 
the way of a better share for the work- 
ers in the good things of the earth. 
These are the deamess and scarcity of 
capital and the dearness and scarcity 
of food and raw materials. Both these 
evils every one of us can help to correct 
by spending less on luxuries, and living 
more sensible lives, in accordance with 

a more genuine standard of comfort, 
based on our real wants instead of 
mimicry of the extravagance of our 

If we did so we should at the same 
time be working to do away with two 
important causes of discontent with 
the results of civilization. The dis- 
content is due partly to our comparing 
our present comforts, not with those 
•enjoyed by our forbears, but with those 
indulged in by our neighbors, and 
partly to an uncomfortable feeling that 
the existence of poverty in the midst 
of wealth is a disgrace to our civiliza- 
tion. Now we find that we can do 
something towards expelling both these 
causes of discontent by a single effort 
of mind, by seeing that members of the 
well-fed classes are better off than they 
have ever been before, if only they 
would recognize the fact, and not al- 
ways be asking for more. The keen- 
ness of the struggle among them is only 
due to a false ideal, which makes 
comfort consist in spending more 
than one's neighbor. If they would 
straighten out this twist in their minds, 
they would kill one cause of discontent 
at a blow, and by the more rational 
expenditure that would follow they 
would do something to kill the other; 
by checking the demand for luxuries, 
laying by more capital for industry, 
and helping the production of neces- 
saries. So we might do something 
towards making a world in which the 
poverty of those who do the hardest 
work should no longer be a reproach 
to all who enjoy its comforts. And 
we could do it ourselves, every one 
of us who have more than a living 

Digitized by 


The Promotion of Thrift in America 

By Alvin Johnson 
Editor, New RepubUo 

SO long as we live under an economic 
system in wHich income is dis- 
tributed on another basis than that 
of needy savings from private income 
or "thrift" will remain the most 
natural source of new capital for 
investment, the source involving the 
least hardship to individuals. So long 
as there are adverse chances of life 
against which adequate provision can- 
not be made through the insurance 
principle, every man who hopes to live 
in reasonable security will strive to 
build up reserves of purchasing power. 
As our economic life is now organized, 
and is likely to remain organized to a 
point in the future beyond the reach 
of reasonable calculations, the exercise 
of thrift is a public service and a pri- 
vate virtue. This has always been 
sufficiently clear to the few who have 
had the opportunity and taste to trace 
the operation of economic forces to 
their remote ramifications. The prob- 
lem is: How to make the claims of 
thrift cogent to those who are not in 
the habit of abstract economic analysis, 
how to induce the maximum number 
not only to recognize these claims but 
to act upon them, against the solicita- 
tions of present indulgence and against 
the organized forces that through 
argument or suggestion support the 
counterclaims of the principle of free 

Education for Thrift 

Something may, I believe, be ac- 
complished in this direction through 
education. The fallacy of the argu- 
ment that spending stimulates trade 

while saving kills it does not present 
logical difficulties beyond the control 
of the average child in the last years of 
the public school. If we could intro- 
duce the school savings bank generally 
and build up in connection with its 
administration a set of lessons explain- 
ing the use to which the savings are 
put, the source of their earnings, the 
possibilities of compound interest, we 
should no doubt in time add consid- 
erably to the number of habitual 
savers. There are also many direc- 
tions in which the educational method 
might be apphed to adults. It should 
not be impossible, for example, to in- 
terest labor organizations in the ques- 
tion whether the condition of the 
reserves of the individual members is 
not a mighty factor in determining the 
outcome of labor disputes. There is 
much evidence that could be assem- 
bled on this point. It would work 
toward establishing the rule of conduct: 
"Every union man should keep several 
months' reserves ahead." 

SociAii Policies for SmtfULATiNa 

Additional possibilities of bringing 
educational methods to bear upon the 
problem of extending the practice of 
thrift will readily occur to everyone. 
I do not linger over them because I 
believe that the habits of saving or 
spending, like most other personal 
habits, are rather refractory to logical 
demonstration and reasoned precept. 
Most men who have learned to prac- 
tise thrift have been little influenced by 
theory and exhortation. They have 


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The Annals op the American Academy 

been much influenced by environing 
conditions that make saving and in- 
vestment as easy and natural as spend- 
ing. The farmer who is yearning for a 
tractor is not in a state of mind essen- 
tially different from that of the subur- 
baiiite who is yearning for a touring 
car. Each cuts down expenses where 
he can to realize his desire. Each 
saves, for a while. But when they 
have realized their desires, the farmer 
has an instrument of production which, 
barring miscalculations, will add to his 
income by an amount equivalent to 
interest on the money he paid for it, 
together with a fair sum to offset wear 
and tear. The suburbanite has an 
instrument that adds no doubt to his 
happiness butrather helps him to spend 
his remaining income than to increase 
it. I hasten to disavow any intention 
of suggesting that the one application 
of purchasing power is more rational 
than the other. All I mean to imply 
is that differences in external condi- 
tions may have more to do with the 
practical exercise of thrift than inher- 
ent differences in temperament or dif- 
ferences in training, and that a social 
policy of stimulating thrift ought to 
look closely to these conditions. It 
should not expect the same measures 
to work with the factory hand or de- 
partment store employe as may be 
expected to work with the farm laborer 
or share tenant. As in most other 
matters of social policy, we ought to 
attend first of all to classification. 

Thrift in Agncidtural Pojndaticm 

Let me offer, by way of suggestion 
only — ^for any one by taking thought 
can improve upon it — a rough classi- 
fication of the American groups in 
which it would be desirable to stimu- 
late thrift, with some opinions, also 
tentative, as to how thrift might ac- 

tually be encouraged in each class. I 
shall begin with the agricultural pop- 
ulation. Here we have (1) the inde- 
pendent farmer, with unencumbered 
holding; (2) the farmer owning subject 
to mortgage; (3) the tenant, ranging in 
status from (a) the more or less pros* 
perous cash or share tenant of the 
North to (b) the Negro tenant, grad- 
ing all the way down to peonage in the 
South; (4) the farm laborer. 

As to the independent farmer^ it may 
be thought that he is already suffi- 
ciently thrifty; nothing needs to be 
done to encourage him to save. That 
may in most instances be a sound view 
of the farmer's condition; but have you 
ever observed what happens in a typi- 
cal farming cbmmunity where mort- 
gages are well cleared off and money 
begins to back up in the local banks? 
That is a fertile field for the promoter 
of speculative enterprises — oil, copper, 
or gold, Canadian wheat lands or 
orchard lands in Florida or California. 
And the fruit of most of this speculative 
activity is disillusionment and lessened 
incentive to save in future. What such 
a community could profitably absorb 
is safe and sound paper in local busi- 
nesses — ^banks, elevators, mills — ^for a 
good yield, or the bonds of the federal, 
state jEtnd local governments, or of solid 
private corporations, for ready con- 
vertibility in case the usual sources of 
annual income fell away too seriously. 
The prosperous farmer won't have such 
investments; he wants sudden wealth 
through lucky speculation? Try him. 
Present to him the true merits of sound 
investments as seductively as the false 
merits of the unsoimd. That has never 
been done, so far as I know. Here is 
an opportunity for the educational 

The farmer owning subject to mort- 
gage usually has all his thrift instincts 

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The Promotion of Thrift in America 


harnessed to one purpose, paying off 
the mortgage. You would say that of 
course such a farmer would save all he 
could; his mortgage usually falls due 
within a very brief period — ^seldom 
more than five years — ^when he stands 
a chance of losing his equity unless he 
pays in full. But there is such a thing 
as putting so heavy a load behind an 
instinct that it balks altogether. It is 
astonishing how often the mortgagor 
comes up at the end of the period with 
a request for renewal of the whole loan. 
I have an impression, vague for want 
of any statistics for America that are to 
the point, that more net progress in 
payment is made in countries where 
such loans run from twenty to fifty 
years, with small compulsory instal- 
ments and no limit upon repayment at 
the option of the debtor. Practical 
men in America have a theory that the 
short term loan with drastic renewal 
possibilities makes for desperate strug- 
gles to save. That is a theory that 
wants fortification with facts, before 
it can override the reasonable psycho- 
logical assumption that thrift grows 
best not under desperation but under 
reasonable ease and security. 

We are experimenting, under the 
Federal Farm Loan act, with what I 
conceive to be the sounder principle; 
we need to push it much more ener- 
getically, and especially to use every 
effort to place farm loan bonds with 
the farmers themselves, so that as 
nearly automatically as possible the 
man who has extinguished his own debt 
may proceed by way of becoming an 
investor in loans to other farmers. 
That is a way of opening this field to 
non-speculative securities. It would 
have another effect of direct bearing 
upon the prospects of our next class, 
the tenants. 

The Tenant Fanner. No democratic 

American contemplates with satisfac- 
tion the idea of a permanent agricul- 
tural tenantry. As we would have it, 
the status of tenant ought to be a pass- 
ing phase in the individual progress 
from farm hand to unencumbered 
owner. But at present there are two 
serious barriers to this progress, the 
one, the limited opportunity to secure 
long term purchase loans, the other, 
selling prices of land in excess of invest- 
ment values. Much of our land is held 
at such a price that the interest a 
buyer would have to pay would greatly 
exceed the rent a tenant would pay. 
That is a heavy penalty upon the 
enterprise of establishing ownership. 
Its existence is usually explained by 
reference to the fact — ^which is not a 
fact — ^that land is sure to go up. A 
truer explanation, though a negative 
one, is that owing to our failure to 
develop among the agricultural popu- 
lation the habit of investing in sound 
securities, the very conception of in- 
vestment values is wanting. A pros- 
perous farmer with money to invest 
looks about for land to buy, as some- 
thing certainly safe, not recognizing 
that there are security investments 
equally safe and much more convenient 
and productive. And so he contrib- 
utes his share to hoisting the price of 
land above the reach of the man who 
must pay for it with what he can earn 
on it. The consequence is an inevi- 
table discouragement to the tenant 
which makes for thriftlessness. The 
influence does not end with the tenant 
class, but sinks through it to the agri- 
cultural laborer, whose case, in the 
northern agricultural sections, is the ' 
case of the tenant, merely some- 
what exaggerated. Sound education, 
not directly in thrift, but in invest- 
ments and investment values, would 
appear to be the most promising 

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method of attaining the desired end. 
The Negro share tenants in the South 
stand on a different footing. Owner- 
ship of land is for many of them a goal 
well beyond the horizon. Their im- 
mediate goal is the ownership of a 
working capital sufficient to deUver 
them from the crop Hen and their 
consequent absolute dependence upon 
the local trader, often the landlord in 
another capacity. A condition more 
inimical to thrift could hardly be con- 
ceived. Apparently the first stage 
toward preparing the ground for thrift 
must be the creation of personal 
credit associations to break the tenant^' 
dependence upon the local merchants; 
and consiuners' cooperation to curb the 
merchants' prices. I am aware of the 
difficulties that such an enterprise 
would entail; of the resistance that 
would be offered by established inter- 
ests that profit, apparently, from the 
dependence and degradation of the 
Negro tenantry. But the record of 
what intelligent racial leadership was 
able to accomplish in this direction in 
Poland and the Baltic Provinces, under 
conditions even less promising, makes 
the undertaking seem far from hope- 
less. It is sufficiently recognised in the 
South that a hopeless, thriftless, shift- 
less Negro tenantry is a wretched 
foundation for permanent prosperity, 
so that a serious attempt at a substan- 
tial improvement would conunand sup- 
port even among the classes that gain 
immediate profit frpm the existing 

Thrift Among Wage Earners 

The Immigrant. In the case of the 
iu*ban laborer there is as great need for 
classification as in the case of the farm- 
ing classes. The same methods will 
not work with the salaried classes as 
will work with the wage earning classes. 

The methods of thrift stimulation that 
might be effective with the American 
bom laborer, usually occupying the 
better paid position, could not be 
expected to be so effective with the 
recent immigrant, uncertain in his 
strange surroundings and suspicious of 
all efforts that may be made to set him 
on the road to prosperity. The immi- 
grant, as he lands, is not as a rule 
wanting in disposition toward thrift. 
He means to save all he can, as often 
as not with the intention — quite nat- 
ural and legitimate — of carrying it 
away with him. He fears, and not 
without good reason, that somebody 
will try to euchre him out of any sav- 
ings he may accumulate. What he 
asks of us is a place to store his savings 
in absolute security. We do offer him 
the services of our savings banks, in 
the greater part of the cotmtry as 
nearly absolutely secure as any rational 
and well informed person would desire. 
But the immigrant is not well informed, 
and suspects. He would trust the gov- 
ernment, and the government meets 
his desires halfway by providing postal 
savings banks. Only half way, how- 
ever, for the government, out of a 
gentlemanly desire not to compete with 
any private enterprise, pays a rate so 
low that the immigrant feels robbed. 
European governments in their pov- 
erty pay better rates. Why could not 
America? America could and should 
pay as high a rate as the yield of gov- 
ernment bonds, less the cost of admin- 
istering the system. It could and 
should exert itself to place the govern- 
ment bond itself in the hands of the 
postal saver who has accumulated a 
sum sufficient to pay for it. Even a 
partial payment plan, in time of peace 
as in time of war, would be worth 
trying. A United States government 
bond in the hands of a recent immi- 

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The Pbomotion of Thrift in America 


grant would be a good start in Ameri- 
canism and a conservation of thrift 
that is likely to profit us in the end> 
for most immigrants, whatever their 
original intention, stay with us. 

The American Bom Laborer, In 
dealing with the American bom work- 
man something other than facilities for 
saving is required. He knows suffi- 
ciently well of the existence of facilities 
that would suit him if he wanted to 
save. But he is suspicious too; sus- 
picious of eveiything savoring of an 
attempt on the part of outsiders to 
improve and perhaps control him. A 
good rule would be to consult him first. 
It is impossible to consult him in his 
collectivity, but he has an abundance 
of shrewd leaders who know pretty 
exactly how he feels. 

One thing that the American work- 
ingman will want to know before he 
will take the least interest in any move- 
ment designed to stimulate thrift is 
that it is not in intent or in tendency 
a scheme to make him more safe and 
sane, more content with his present 
lot, less disposed to organize and 
strike. There has been a vast amount 
of advice to labor from adherents of 
the orthodox economic school, to work 
and to save, and to endeavor to raise 
himself out of his class on the wings of 
his savings. All that has to be coun- 
teracted before any thrift movement 
will look to him Uke anything but 
insidious hostile propaganda. Then, 
as a practical fact, in every struggle 
over wages, in order to* win popular 
support labor must win credit for the 
assertion that wages are insufficient 
for decent Uving and capital must 
demonstrate that wages are quite 
adequate. What would have been the 
effect upon public opinion in the recent 
coal dispute if the operators could have 
published the headline ''Aggregate 

bank deposits of 'exploited' miners 
$40,000,000." That would be an aver- 
age of $100 apiece. Of course they 
ought to have an average of much more 
than that; any single miner with only so 
much faces a disquieting future, having 
one month's provisions ahead and three 
months' shut downs as common as the 
changes of the seasons. If they had an 
average of $1,000 ahead it would be 
meagre enough as reasonable security. 
But how would $400,000,000 or even 
$40,000,000 look to you and me, mem- 
bers of a general public more prone to 
gasp at big aggregates than to reduce 
them to their true meaning? The coal 
miners can't afford to save — openly — 
so long as their wages need readjust- 
ment and so long as we of the gen- 
eral public do not see that the power 
to accumulate a reasonable reserve 
against the contingencies that beset 
every man's life is as natural a right 
as the right to bread and butter. 

And then there is the history of at- 
tempts on the part of employers to fix 
the loyalty of their men through the 
investment of a few dollars in the busi- 
ness, forfeitable in case of strike or 
departure without cause; of attempts 
to plant employes in partial payment 
houses, not in practice salable in the 
event of retirement from the enter- 
prise and from the neighborhood that 
lives by the enterprise. Not to pursue 
the inquiry farther, there is a great 
tangle of unhappy experience to be 
unravelled before you can say "thrift" 
to a trade-conscious American work- 
man and not elicit a cold grin. 

Yet, as I have pointed out before, 
there are cogent facts on the side of 
thrift. In a strike still pending, when 
funds ran low the strikers succeeded in 
tiding themselves over by hyiwthe- 
cating the Liberty bonds held by the 
collective membership. The differ- 

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The Annals of the American Academy 

ence between having bonds or not may- 
prove to be the difference between vic- 
tory and defeat. The general public 
may curse them for capitalists, if they 
win, but it would not bless them for 
anything if they lose. Now, I am not 
urging that a thrift campaign be inau- 
gurated among trade union men to 
enable them to win any strikes they 
may undertake. I am urging that it is 
possible, through the men themselves, 
to work out a scheihe by which the 
creation of individual reserves would 
appear clearly to be at least as much 
an element of strength as of weakness 
in industrial conflicts, and an element 
of strength alone in all the non-con- 
tentious mischances of life. 

I have already exceeded the space 
allotted to me, and therefore I cannot 
trace out the altogether different case 
of the salaried employe of private en* 
terprise or of government service, with 
present security and highly developed 
concern over the latter end of life, with 
which the average wage earner troubles 
himself little. His case suggests the 

endowment principle as the worker's 
case suggested saving for a reserve and 
the farmer's case the accumulation of 
a permanent capital. But I have 
ranged widely enough for my purpose, 
anyway. That purpose was to suggest 
that thrift, as a national force, worthy 
of the most serious attention on the 
part of political science and statecraft, 
is not something simple, to be pro- 
moted by large simplicities of method, 
but something extremely complex to 
be handled successfully only after due 
consideration of the varying conditions 
under which men live and by methods 
judiciously adapted to those condi- 
tions. One thing all lives have in com- 
mon: uncertainty; one maxim all men 
may take to heart: be prepared; and 
for the vast majority of us, thrift is 
essential to being prepared. So much 
may be inculcated in all the schools. 
But th^t is only elementary. We shall 
make real progress when we give due 
recognition to the necessity of apply- 
ing the weft of diverse circumstance to 
the warp of common principle. 

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What a saving of $1.00 a week amounts to at interest compounded 


















2 • 






















































































4,01 i.o6 


















































































































The Amount of $100.00 

At Simple Interest 

At Compound Interest 

Compounded Quarterly 































































. 148.81 





180. g<l 

















































































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The Annals of the American Academy 




205.00 • 





























































































































































































































What the New Savings Habit Has Done for the Banks 

Issued by The War Loan Organization Fifth Federal Reserve District, Richmond, Va. 
Incbeaseb in Deposits from December 81, 1916, to December 81, 1918 


No. of Banks 

In Individual 
Demand Deposits 

In Savings 

In Total Deposite 











District of Co- 


West Virginia . . 
North Carolina . 
South Carolina . 


























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No. of 

In Individual . 
Demand Deposits 

In Savings 

In Total Deposits 













District of Co- 


West Virginia . . 
North Carolina . 
South Carolina . 

























Counties Showing Increases in Deposits 


No. of 

In Individual 
Demand Deposits 

In Savings 

In Total Deposits 














District of Co- 


West Virginia . . 
North Carolina . 
South Carolina . 































' Includes Baltimore City. 

' Includes Richmond City and Alexandria City. 

' Eight counties in State have no banks. 

* Two counties did not report Demand or Savings, but only total deposits. 

* Three counties did not classify savings deposiU in their reports. 


The growth of bank deposits in the 
Fifth Federal Reserve District during 
the war period was nothing less than 

Reports filed with the Federal Re- 
serve Bank of Richmond by 1,563 
banks out of the 2,047 in the district 
show that during the two calendar 
years 1917-1918: 

Individual demand deposits increased 

$284,781,000 or 55.25% 

Savings deposits increased 

126,631,000 or 32.87% 

Total deposits increasd . 438,050,000 or 43 J3% 


These increases are the more re- 
markable in view of the fact that dur- 
ing practically the same period the 
people of this district, in addition to 
these savings and their liberal contri- 
butions to the Red Cross, Y. M. C. A., 
Knights of Columbus, United War 
Work, and many other special funds, 
all made in the face of a rapidly in- 
creasing cost of Uving — subscribed 
for, and to a Ikrge extent paid for out 
of their current earnings, $850,000,000 
worth of bonds of the first four Lib- 
erty Loans and about $75,000,000 of 

Digitized by 



The Annals of the American Academy 

War Savings Stamps, not counting 
$225,000,000 subscribed to the Vic- 
tory Liberty Loan. 

This growth in deposits was general 
throughout the district. The increases 
in individual demand deposits varied 
from 31.04 per cent in Maryland to 
88.05 per cent in South Carolina; in 
savings deposits from 18.56 per cent 
in West Virginia to 73.60 per cent in 
South Carolina; and in total deposits 
from 26.21 per cent in Maryland to 
59.67 per cent in South Carolina. 

Within the States also the increases 
were very general. Of the 321 coun- 
ties in the district (exclusive of the 
District of Columbia) reports were 
received from 297. Of these 297 
coimties 290 reported increases in 
demand deposits; 268 in savings de- 
posits, and 294 total deposits. 

It is especially notable that savings 
deposits increased 32.87 per cent. 

There has been a very general increase 
in savings deposits throughout the 
country, despite the heavy purchases 
. of Liberty Bonds. The two principal 
factors, perhaps, that contributed to 
this condition were the larger wages 
paid workers during the war period, 
and the savings habit which became 
far more general than ever before 
among the great mass of Americans. 
Many of them bought War Savings 
and Thrift Stamps periodically; many 
paid for Liberty Bonds on installment 
plans. Very generally those who 
bought these securities did not with- 
draw their money from the savings 
banks to pay for them, but saved from 
current earnings. Then, when these 
securities were paid for, the people, 
by force of their newly acquired habit 
of saving, continued to save and to 
deposit in the banks. 

Digitized by 


Selected Bibliography of Books on Thrift and Savings 

By George F. 2k>oK 

Professor of Modern European History, The Pennsylvania State College; recently with the United 

States Treasury Department 

Atwood, A. W. How to Get Ahead. 
Indianapolis, Bobbs-Merrill, 1917. 
277 p. A popular treatment of 
individual and domestic economy 
and wise investments. 

Brown, M. W. Development of 
Thrift. New York, Macmillan, 
1899. 222 p. The purpose of 
thrift and the various agencies for 
saving money. 

Carver, T. N. War Thrift. Carnegie 
Endowment for International 
Peace. New York, Oxford Uni- 
versity Press, 1919. 68 p. The 
fundamental principles underlying 
the necessity for thrift in war; 
applicable also in peace. 

Chamberlam, A. H. and J. F. Thrift 
and Conservation. Philadelphia, 
Lippincott, 1919. 174 p. Simple 
and readable account which em- 
phasizes the importance of con- 
serving goods and materials. 

Ely, R. T., and others. The Founda- 
tions of National Prosperity. New 
York, Macmillan, 1917. 378 p. 
Comprehensive exposition of the 
necessity for the conservation of 
hiunan and natural resources in 
every stage of human progress. 

Farmer, L. A. B. C. of Home Saving. 
New York, Harper, 1916. 113 p. 
Handbook of practical suggestions 
for economy in the home. 

Fowler, N. C, Jr. How to Save 
Money. Chicago, McClurg, 1913. 
287 p. A popular treatise val- 
uable, to those not familiar with 
financial operations^ for its sound 

advice on the ways to save and 
invest money. 

Gregory, M. H. Checking the Waste. 
Indianapolis, Bobbs-Merrill, 1911. 
318 p. A simple and practical 
r£sum6 1>{ the importance and use- 
fulness of our natural resources. 

Hall, Bolton. Thrift. New York, 
Huebsch, 1916. 247 p. Popu- 
lar discourses on modem methods 
of using personal and social re- 
sources most advantageously. 

Hamilton, J. H. Savings and Savings 
Institutions. New York, Mac- 
millan, 1902. 436 p. A stand- 
ard and comprehensive account of 
savings institutions in America. 

Harris, E. P., and others. Coopera- 
tion, the Hope of the Consumer. 
New York, Macmillan,1918. Des- 
cribes the success of cooperation, 
especially the Rochdale plan, in 
Europe and in America. 

Jackson, B. B., and others. Thrift 
and Success. New York, Cen- 
tury, 1919. 288 p. Suggestive 
and inspirational extracts for use 
in the elementary schools. 

Kemmerer, W. Postal Savings. 
Princeton, Princeton University 
Press, 1917. 176 p. Excellent 
and thorough account. 

King, W. I. The Wealth and Income 
of the People of the United States. 
New York, Macmillan, 1915. 278 
p. The most comprehensive and 
valuable book on this subject. 

Kirkpatrick, E. A. The Use of Money. 
Indianapolis, Bobbs-Merrill, 1915* 


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The Annals of the American AcADEifT 

226 p. Very suggestive book for 
the training of children in the use 
of money. 

Leeds, J. B. Household Budget. Ger- 
mantown. Pa., The Author, 1917. 
240 p. Actual divisions of time 
and money in running a house- 
hold with suggestions for saving 
both. Emphasizes the productive 
labor of the housewife. 

MacGregor, T. D. The Book of 
Thrift. New York, Funk and 
Wagnalls, 1915. S49p. Suggest- 
ive and practical chapters on the 
various aspects of the thrift move- 

Marcossen, I. F. How to Invest Your 
Savings. Philadelphia, Altemus 
Company, 1907. 120 p. Short 
chapters on the various kinds of 
available investments. 

Marden, O. S. Thrift. New York, 
Crowell, 1918. 92 p. A popular 
discourse on personal economy for 
young people. 

Mead, E. E. The Careful Investor. 
Philadelphia, Lippincott, 1914. 
289 p. Good advice as to how to 
invest in stocks and bonds. 

Nesbit, Florence. Household Man- 
agement. New York, Russell 
Sage Foundation, 1918. 170 p. 
Problems that homemakers who 
live in crowded city quarters have 
to meet. 

Powell, G. H. Co5peration in Agri- 
Culture. New York, Macmillan, 
1913. The value of co5peration 
to the farmer from a buying as 

well as a selling point of view. 

Pritchard, M. T. and Turkington, G.A. 
Stories of Thrift for Young Ameri- 
cans. New York, Scribner, 1915. 
222 p. Stories suited to children 
in the upper grades. 

Rose, M. S. Feeding the Family. 
New York, Macmillan, 1916. 450 
p. Handbook on food problems 
presented especially from the point 
of view of nutrition. 

Smiles, Samuel. Thrift. New York, 
Harper (1875). 404 p. A very 
suggestive book concerning the 
importance and necessity of per- 
sonal economy and savings insti- 

Straus, S. W. (The History of the 
Thrift Movement in America. 
Philadelphia, Lippincott (in 
press). Chiefly devoted to the 
history of the recent thrift move- 
ment with special attention to the 
American Society for Thrift. 

Taber, C. W. Business of the House- 
hold. Philadelphia, Lippincott, 
1918. 438 p. Treats the finan- 
cial problems of the home, bud- 
gets, standards of expenditures, 
accounts and investments. 

Wellman, M. T. Economy in Food. 
Boston, Little, Brown, 1918. 36 
p. Concerning economy in buy- 
ing and storing food. 

Withers, Hartley. Poverty and Waste. 
New York, Dutton, 1916. 180 p. 
An excellent exposition of the 
economic principles underlying 
personal and public economy. 

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Agricultuie: profits, 39; thrift, 2S4. 
Amebican Farmer's Need for Capital. 

Edward H. Thomson, 89-04. 
American Federation of Labor and Thrift, 

America's New Conception of Thrift. 

Roy G. Blakey, 1-8. 
An Analysis of the Need of Capital 

for Transportation in the United 

States. Holcombe Parkes, 83-8. 
Army supplies, disposal of, 132. 
Atwood, Albert W. Requisites of a 

Good Investment, 151-4. 

Balance of trade, 101. 

Baldensperqer, H. L. The Garbage 

PaiL a National Thrift Barometer, 128- 

Banking credit, extension of, 62; influence 

on prices, 63. 
Banking theory of thrift, 44. 
Basis of prosperity. The, 27. 
BiBLEOGRAPHT. Gcorgc F. Zook, 245-46. 
Blaket, Rot G. Foreword: America's 

New Conception of Thrift, 1-8. 
Bonds: Civil War, 159; Mexican War, 163; 

1812, 162; Spanish American War, 164. 
Budget Plan: for individuals, 13-8; for 

nation, 65-70; limitations of, 69. 
Building and Loan Associations, 153, 173. 

Capital: accumulation of, 34» 39, 42, 59; 
American farmer's need of, 89-94; de- 
ferred replacements, 57; diversion of, 50; 
field for investment, 87, 88; increase of, 
31; levy on, 57, 107; needs of education, 
71-82; needs for transportation, 83-8; 
needs for foreign trade, 100-5; small sav- 
ings, 169. 

Capital Needs for American Indxtstrial 
Development. Francis H. Sisson, 95-9. 

Capital Needs for Education in the 
United States. David Snedden, 71-82. 

Capital Needs of Foreign Trade. 
Thomas W. Lamont, 100-5. 

Capital replacements: deferred, 57; made 
through saving, 59. 

Capital wealth in United States, 33. 

Carothers, W. H. Thrift in the School 
Curriculum, 219-24. 

Carver, T. N. The Relation of Thrift 
to Nation Building, 4-8. 

Civil War bonds, 159. 
Coal conservation, the problem of, 113. 
Collins, Charles Wallace. Govern- 
mental Thrift through a National 

Budget, 5^-70. 
CoNOVER,. W. RoGKWOOD. Efficiency and 

Thrift. 142-50. 
Conservation: of garbage, 122, 124; army 

reclamation of, 128, 148; in institutions, 

129; of human labor, 149. 
Conbxtmer's Resfonbibiijtt, The. ELartley 

Withers, 225-32. 
Consumption: of wealth, 28; thrift in, 47; 

conservation in, 109; of food, 118-21, 

123; goods, 28. 
Cooperative Credit Inbtitxttions in the 

United States. James B. Morman, 

Co()perative saving, in Belgium, 49, 195. 
Corporate savings and taxes, 40. 
Cost of food in relation to energy value, 126. 
Cost of living, 118. 
Coking our coal supply, 114. 
Credit Unions: 179; foreign trade, 100; 

farm mortgages, 179. 
CuMMiNGS, Joseph E. United States 

Government Bonds as Investments, 158- 

Cycles of prosperity and depression, 46. 

Demands which encourage saving, 15. 
Development of Thrift FAauTiEs, The. 

Milton Harrison, 168-71. 
Dividends, corporate, 39-40. 
Dowrde, George W. Thrift and Business, 


Economic dependence, causes of, 23. 

Efficienct and Thrift — ^Thb New De- 
mand UPON THE Industrial World. 
W. fiockwood Conovcr, 142-50. 

Effidency: in conservation, 146; in organ- 
isation, 143; in purchasing, 145; in spend- 
ing, 13. 

Electrification of railroads, 116. 

Energy value of food, 127. 

Expenditure, 12; written account of, 13; 
national, 57; for public education, 72; 
government, 197. 

Expenditure and thrift, 12; factors affect- 
ing, 30. 

Export balance, 102. 


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Foreign trade: and credit, 100; future of, 

102; ability of America to extend, lOS. 
Facilities for saving, 168. 
Factors in capital accumulation, 42. 
Federal Farm Loan Act, 179. 
Federal Home Building Flan, 175. 
Fluctuations: in price level, 84; in value of 

money, 81, 61. 
Fonns of capital needed by farmers, 92. 
Foreword, 1-8. 
Food expenditures, 14. 
Food, yearly consumption of, 118, 128. 
Food Thmpt. Raymond Pearl, 118-^7. 
Freedom Through Thrift. William 

Mather Lewis, 9-10. 
Fridat, David. Wealth, Income and 

Savings, 82-48. 
Function of Salvage in the Education 

OF Industrial Workers. George W. 

Sherman, 186Hkl. 

Garbage Pail, a National Thrift 
Barometer, The. H. L. Baldensperger, 

Governmental Thrift through a Na- 
tional Budget. Charles Wallace Col- 
lins, 65-70. 

Government borrowing, 62. 

securities and savings accounts, 152; 

government bonds, 158-167, 194; securi- 
ties for wage earners, 198. 

expenditures in England, 197. 

ELiNBEN, Alvin H. Thrift and [Labor, 

Harmony of interest theory, 45. 
Harrison, Muton. The Development of 

Thrift Facilities, 168-71. 
Hazards of life and thrift, 22. 
Household operating expenses, 14. 
Hoover, Herbert. Memorandum on the 

Economic Situation, 106-11. 
HuEBNER, S. S. Life Insurance in Its 

Relation to Thrift, 188-9. 

Income, money and real, 11; national, 82, 

86; corporate, 89, 40; farm capital and 

income, 90. 
Individual thrift, 26, 5S. 
Individual expenditures, factors affecting, 

Industry, capital accumulations in, 89. 
Inflation: reduction of, 64; of currency, 109. 
Insurance, 26. 
Insurance of Thrift, The. John A. 

Lapp, 21-6. 

Investments: for the masses, 151; wage 

earners, 286. 
Investment: and thrift, 17; capital, 95; war 

bonds, 164. 
market, the, 88. 

Johnson, Alvin. The Promotion of Thrift 

in America, 288-8. 
Juvenile delinquency, 188. 

Labor: and purchase of war savings stamps, 
50; economic change in, 108; conserva- 
tion of, 149. 

Land values, increase of, 84. 

Lapp, John A. The Insurance of Thrift, 

Lamont, Thomas W. Capital Needs of 
Foreign Trade, 100-5. 

Lewis, Whjjam Mather. fVeedom 
Throu^ Thrift, 9-10. 

Life Insurance in its Relation to 
Thrift. S. S. Huebner, 188-9. 

Life insurance, 152, 188-9, 206. 

Marketing dubs, 14. 

McVbt, Frank L. The Nation's Call for 
Thrift, 27-31. 

Memorandum on the Economic Situa- 
tion. Herbert Hoover, 106-11. 

Mexican War bonds, 168. 

Miller, A. C. Thrift and the Financial 
Situation, 57-64. 

Money, value of, 81. 

Morman, James B. Cooperative Credit 
Institution in the United SUtes, 172-82. 

Nation's Call for Service, The. Frank 

L. McVey, 27-81. 
Nature of thrift, 5, 21, 52; of saving, 216. 
National Saving in the United Kino- 

DOM. William Schooling, 197-204. 
National farm loan associations, 181. 

financing: in the past, 65; and war, 68. 

income: 82; amount for, 1917, 86; 

amount of» 96; increase in money value of. 


program for thrift, 49. 

savings: total volume of, 87; increase 

in, 37. 

thrift, the measure of, 82. 

wealth, 82; increase in value of, 88. 

OftoANiZED Labor's Attitude toward 
THE National Thrift Movement. 
Frank E. Wolfe, 50-51. 

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Park£8» Holoombe. An Analysb of the 

Need of Capital for Transportation in the 

United States, 8^8. 
Peari^ Raymond. Food Thrift, 118-27. 
People's banks of Italy, 194. 
Post office savings bank in England, 172. 
Post-war conditions, 52. 
Pressure of population on food supply, 80. 
PfiiCE, Thbo. H. Speculation and the 

Small Investor, 155--7. 
Prices: change in level, 84; control of, 109; 

factors controlling, 61; influence of bank 

credit on, 08; saving and change in, 61. 
Production: effect of taxes on, 60; basb of 

prosperity, 27; decline in petroleum and 

oil, 112; effect of price control on, 109; 

improved routine in, 144; and saving, 61; 

thrift in, 206; waste in, 114. 
Promotion OF Thbift IN Amebiga. Alvin 

Johnson, 288-8. 
Promotion and PRAcncB of Thrift in 

Foreign Countries. S. W. Straus, 

Pbtchologigal Notes on the Motives 

FOR Thrift. Edward L. Thomdike, 

Public education: expenditures for, 78; 

achievements in, 74; expansion of, 75; for 

immigrants, 76; the support of, 79. 

Reconstruction, the part of industry in, 142. 
Reclamation of waste, 128. 148, 
Rehabilitation of Europe, 108. 
Relation of Thrift to Nation Buildino, 

The. T. N. Carver, 4-8. 
Requisites of a Good Investment. 

Albert W. Atwood, 151-4. 

Savings: and insurance, 16; and life insur- 
ance, 186; and inflation, 64; basis of, 212; 
corporate, 40; farmers, 41; investment of, 
170; life insurance, 186; loans from, 62; 
money, 168; national, 87; relation to 

prosperity and depression, 46; 

to thrift, 15, 52, 168; to 

business, ^\ volume of for 1919, 48. 

table, 289. 

banks in En^^d, 200. 

School savings bank, 170, 207; in France, 

Schoouno, Wiluam. National Saving in 
the United Kingdom, 197-204. 

Sherman, George W. The Function of 
Salvage in the Education of the Indus- 
trial Worker, 185-41. 

SissoN, Francis H. Capital Needs for 
American Industrial Development, 95-9. 

Snedden, David. Capital Needs for Edu- 
cation in the United SUtes, 71-62. 

Social custom and expenditure, 80. 

insurance, 16. 

policies for stimulating thrift, 288. 

Spanish American War bonds, 164. 

Speculation and the Small Investor. 
Theodore H. Price, 155-7. 

Spending, relation to prosperity, 46. 

Standards of living, 48, 107. 

Straus, S. W. Promotion and Practice of 
Thrift in Foreign Countries, 190-6. 

Taxes: effect on production, 60; capital 

accumulation and, 69. 
Thomson, Edward H. American Fanner's 

Need for Capital, 89-94. 
Thorndike, Edward L. Psychological 

Notes in the Motives for Thrift, 212r-218. 
Thrift and Labor. Alvin H. Hansen, 

Transportation: capital deficit in, 85; 

development of facilities, 85; inadequacy 

of, 88; requirements for future, 84. 
True saving, 52. 
Thrift and Business. George W. Dow- 

Thrdt and the Financial Situation. 

A. C. Mifler, 57-64. 
Thrift in the School Curriculum. W. 

H. Carothers, 219-24. 
Thrift in the United States. George 

F. Zook, 205-211. 
Thrift: banking theory of, 44; beginning of 

in Europe, 190; and conservation, 18; 

consumption, 47, 122; cooperative credit 

institutions, 178; in conduct of business, 

54; expenditure, 12; harmony of interest 

theory, 45; hazards of life, 22; income, 11; 

investment, 17; in the army, 130; savings* 


Unadjusted man, the, 181. 

United States Government Bonds as 

Investments. Joseph £. Cummings, 

Utilities, public, 110. 

Volume of savings for 1919, 48. 

War expenditures, magnitude of, 57. 

loans of 1812, 162. 

savings certificates in England, 198; 

stamps in U. S. 208. 

Digitized by 




and national finance, 68. 

Waste: cooperative waste saving, 134; 
municipal problem, ISS; possibilities of 
reclamation, 186; prevention of, in educa- 
tion, 80. 

Wbai/th, Inooiie and Savxngh. David 
Friday, 82-43. 

Wealth: capital wealth in U. S., 88; con- 
sumption of, 28; national, 82; production 
of, 172. 

Whitman plan for garbage conservation, 

What Fuel Conbebvation Means to 

America. Robert W. Woolky, 112-7. 

What the savings habit has done for the 
banks, 240-1. 

WiTHEBS, Habtlet. The Consumer's Re- 
sponsibility, 225-82. 

Wolfe, Frank E. Organized Labor's 
Attitude toward the National Thrift 
Movement, 50-1. 

WooLLBT, Robert W. What Fuel Con- 
servation Means to America, 112-7. 

ZooK, George F. 
States, 205-11. 

Thrift in the United 
Bibliography, 245-46. 

WAY 1 8 1920 

Digitized by 




Bonds and the Bond Market 

36TH Street and Woodland Avenue 


No. 177 

The American Academy 


Political and Social Science 


T, S ROWE, Ph 1>. 

University of Pennsylvania 

ni P<^nn<;vtvRnia 

University of Cincinnati 

J. P. LlCHTh-.. rGER^ PhJ>. 
University of Pennsylvania 

University of California 



North American Building, Philad^lpbia 



Federal Reserve Bank, Ph^'^'l^iphia 


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h,.fj n''^fr"rlJu ''1/ fA 

\r-!''Iryny n( f*n)-ifirrJ nvf Sncifl! Si'ieyin' at (\>!cnrii^ 


ts:i^ Annate 


March, 1920 

Editor: CLYDE L. KING 


A860CIATB Editoe: J. H. WILLITS 

Editorial Council: THOMAS CONWAY, Jr.. A. A. QIE8IECKE. A. R. HATTON. AMOS S. 




EdUar in Charge of 
this Volume 


Professor of Insurance and Commerce, Uniwrsiiy of Pennsylvania; Expert in Insurance 

to the United Stales Shipping Board and the Committee of the 

Merchant Marine and Fisheries 

Tbe American Academy of Poutical and Social Science, 

86th Stbeet and Woodland Avenue, 



Digitized by 


Copyright, 1920, by 
The American Acadeiit of Poutical and Social Science 
All rights reserved 


ENGLAND: P. S. King & Son, Ltd., 2 Great Smith St., Westminster, London, S. W. 
FRANCE: L. Larose, Rue Soufflot, 22 Paris. 

GERMANY: Mayer & MuUer, 2 Prinz Louis Ferdinandstiasse, Beriin, N. W. 
ITALY: Giomale Delgi Economisti, via Monte Savello, Palazzo Orsini, Rome. 
SPAIN: E. Dossat, 9 Plaza de SanU Ana, Madrid. 

Digitized by 


The Editor desires to express his 
grateful appreciation to Mr. Erastus W. 
Bulkley, of Spencer Trask & Co., for 
his very he^ful advice and generous 
aid in the planning of this volume 
and the selection and procurement of 
contributors. At all times the Editor 
was favored by Mr. Bulkley's hearty 
cooperation, and his aid and advice 
were frequently sought. Such value 
as this volume may have is in large 
measure due to his suggestions and 

Digitized by 




Editor in Charge, S. S. Huebnsb, Profeflsor of Inauranoe and Commeroe, University of Penn- 
sylvania; Expert in Insurance to the United States Shipping Board and the Committee on the 

Merchant Marine and Fisheries 




The Editor. 


Hastings Lyon, Attomey-at-Law and Lecturer in Finance, Columbia University. 

Montgomery Rollins, Boston, Mass. 

Arthur S. Dewing, Graduate School of Business Administration, Harvard University. 

Hastings Lyon, Attomey-at-Law and Lecturer at Columbia Univernty. 



C. Frederick Childs, President, C. F. Childs & Co., New York and Chicago. 


William R. Compton, President, William R. Compton Company, Investment Bankers; 
President, American Trust Company, St. Louis. ^ 


F. J. Lisman of F. J. Lisman & Company, New York City. 


H. M. Addinsell of Harris, Forbes & Company, Member of Public Utilities Securities 
Committee of the Investment Bankers Association. 


John Moody, President, Moody's Investors Service, New York City. 


George A. Hurd, President, The Mortgage Bond Company, New York. 


Richard S. Stoyle, Instructor in Finance, Wharton Scho<4, University of Pennsylvania. 
J. Sheppard Smith, Vice-President, Mississippi Valley Trust Co., St. Louis, and Chairman* 
Reclamation Securities Committee, Investment Bankers Association of America, 



James Sheldon of Lee, Higginson k Co. 

T. W. Lamont of J. P. Morgan k Co., New YoA City. 

Arthur J. Rosenthal of Bemhard, SchoUe k Company, New York City. 


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Contents v 


G. A. Macpherson of A. £. Ames & Company, Toronto and Montreal. 


W. S. Kies, formerly Vice-President of the National City Bank of New York and of the 
American International Corporation. Now of Aldred k Company. 



Roy C. Osgood, Vice-President, First Trust and Savings Bank, Chicago, and Chairman, 
Taxation Committee of the Investment Bankers Association of America. 


Robert Riegd, Assistant Professor of Insurance, Wharton School of Finance and Com- 
merce, University of Pennsylvania. 


Robert R. Reed of Reed, Dougherty & Hoyt, New York City. 



Hermann F. Arens and James R. Bancroft of the Babson Institute. 

Hermann F. Arens and James R. Bancroft of the Babson Institute. 
INDEX «00 

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This volume deals with one of the 
great agencies for thrift and invest- 
ment. For the great mass of people 
with dependents, life insurance should 
be the first type of security to be pur- 
chased. Where a dependent family 
is at stake it is the height of folly to 
urge investments in other directions, 
and it is quite beside the point to offer 
laborious explanations of the relative 
merits of various classes of bonds and 
other types of investment. The first 
duty of every man is to protect his 
household against want in case of pre- 
mature death, and this can be done 
only through the purchase of an ade- 
quate amount of life insurance. As is 
well known, life insurance offers a 
convenient and safe method of accu- 
mulating a savings fund at a very fair 
rate of return. But the greatest pur- 
pose of life insurance is to protect. It 
takes time to save and, where depend- 
ents must be protected, life insurance 
alone guarantees the accumulation of a 
competency against the contingency of 
the saving period being cut short by an 
untimely death. The great mass of 
people live only within the life insur- 
ance stage and are removed by thou- 
sands of dollars from the point where 
they can judiciously become direct 
investors along other lines. But, for 
those who have emerged from the life 
insurance stage, good bonds consti- 
tute the most favorable type of invest- 
ment, aH advantages being considered 
such as safety, yield, convertibility, 
stability of price, convenience of 
handling and suitability for quick 
borrowing. Even the billions of sav- 
ings of those living in the life insurance 
stage, it should be remembered, are 
chiefly invested in bonds, although 
indirectly, since this type of security 

constitutes the major portion of the in- 
vestments of life insurance companies. 
The accumulation of a decent com- 
petency should be regarded as a duty 
and an act of wisdom. Yet present 
practices in attempting to attain this 
desirable goal remind one of iEsop's 
fable of the race between the tortoise 
and the hare. The hare relied upon 
the speedy method of running the 
race, expected to leap to victory, 
and accordingly saw fit, somewhere 
on the race-course to take a nap. 
The tortoise, on the contrary, relied 
upon his steady, persistent and un- 
spectacular gait, and won the race. 
And such is the case today in the 
race for a decent competency. Many 
seek to win by the quick method. 
They expect to leap to success. 
They assume highly speculative haz- 
ards, particularly in stocks, with- 
out possessing either the financial 
or educational equipment, and, as a 
rule, are put to sleep somewhere 
along the course. Others adopt the 
slow method. They save their sur- 
plus earnings patiently and persist- 
ently, invest the same in gilt-edged 
bonds, are satisfied with a fair in- 
terest return, allow compound interest 
to work its wonders, and win the 
race. When the hare of iEsop's fable 
awoke from his sleep he realized his 
defeat and lost all interest in the 
race. When the incompetent specula- 
tor awakes from his folly he finds his 
resources gone, and along with them 
all hope and all ambition to try once 
more. Conscious of his folly and 
crushed by the bitterness of disap- 
pointment, he almost invariably loses 
all interest in the goal he strove to 
reach and, financially speaking, goes 
to sleep permanently. 

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The difficulty of accumulating and 
retaining a competency is well illus- 
trated by the fact that only one out of 
every ten adults in this country leaves 
a decent estate at the time of death, 
and that of those who acquire a 
reasonable competency by the time 
age 50 is reached one-half again lose 
the same before death. Much of this 
miserable showing is traceable to 
two very prevalent practices on the 
part of the general public. The first 
relates to the purchase of stocks, often 
of a very hazardous and questionable 
nature, by those who are not at all 
equipped to judge the merits of the 
proposition, and, in fact, are ignorant 
of the fundamental nature of that type 
of security. Bonds are credit instru- 
ments and, with few exceptions, con- 
tain a definite promise as to principal 
and interest. Stock certificates, on 
the contrary, promise nothing at all. 
They merely constitute an evidence of 
ownership, a certification of the hold- 
er's privilege to share in risk, i.e., to 
participate in the varying fortunes of 
the business enterprise. 

Few facts deserve to be impressed 
more upon the investing public than 
this fundamental distinction between 
bonds and stocks. Common observa- 
tion shows that the American pec^le 
are afflicted with a mania for specula- 
tion and gambling in the security 
market. They seem callous to risk. 
The words "preferred" and "guaran- 
teed" and the "promise" of fancy 
dividends serve, as probably nowhere 
else, as an irresistible attraction. 
Were this not the case there would 
soon be an end to the present whole- 
sale tendency to fill the principal news- 
prints and flood the mails with allur- 
ing advertisements and prospectuses. 
So serious has the problem become 
everywhere that the nation has been 
subjected to an epidemic of "blue sky" 
legislation of one kind or another de- 

signed to protect the public against 
their own folly (see the article on 
''Blue Sky'' Laws). 

The second unwelcome tendency 
relates to the very general practice of 
the investing public to "go it alone," 
instead of seeking the advice of con- 
servative and well established invest- 
ment concerns. The average investor 
is not in a position to base his selection 
of a bond upon personal examination. 
Nor is it practicable for the average 
investor to spread his investments so 
widely as to have the law of average 
render negligible a serious loss on any 
particular security. The wisest course, 
therefore, is to invest only in such se- 
curities as are recommended by respon- 
sible investment houses (see article on 
The Work of an Investmeni Banking 
House) . Numerous such concerns exist 
throughout the United States. They 
are specialists in the bond business and 
possess the experience and training 
necessary for a proper investigation 
and selection of securities. Their 
greatest trade asset is their past record 
for good judgment. Such concerns 
must operate on the theory that sound 
advice to clients is the surest road 
to large business, while faulty recom- 
mendation is a quick and certain way 
to failure. 

Avoidance of the aforementioned 
deplorable practices, now so deeply 
ingrained in the American psychology, 
can be accomplished only gradually, 
and reliance for a change must be 
placed largely upon education. This 
volume, it is hoped, will be of service 
in this respect. In one sense it is a 
successor to the volume on Bonds as 
Investmeni Securities issued by the 
American Academy thirteen years ago 
which enjoyed a wide circulation 
and served as a basis for numerous 
educational courses. In fact, it was 
the continued demand for this volume, 
even after such considerable lapse of 

Digitized by 



time, that suggested the desirability of 
issuing a new and up-to-date volume 
on the subject. The changes wrought 
by time in the bond market have been 
so numerous and important that all 
of the articles in the present volume, 
except two, are essentially new. One 
of these exceptions deals with princi- 
ples which are unchangeable, and the 
other, although retaining its original 
form, has been materially revised to 
meet the changes of the past decade. 
The purpose of the volume is to explain 

the bond market from a fourfold 
standpoint, viz., (1) the features of 
bonds and the services of the invest- 
ment banker, (i) present problems 
and tendencies associated with the 
various types of American and foreign 
government and corporate bonds, (3) 
leading problems of current interest 
to the bond market in general and 
(4) the record of bond prices and the 
factors that govern such prices. 


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Classification of Investment Bonds 

By Hastings Lyon 
Attomey-at-Law, Lecturer in Finance, Columbia University 

NO definition of an investment bond 
is broad enough to include every 
instrument ordinarily included in that 
phrase short of the general statement 
that it is a formal promise to pay ex- 
pressed in a written instrument. Even 
to say that it is an instrument con- 
taining a promise to repay would be to 
give too narrow a definition, for the 
promise of a bond of the nature of a 
government perpetual annuity does 
not involve any stipulation for the 
repayment of principal. We have, 
then, to consider the classification of 
formal instruments containing promises 
to pay given as evidences of the com- 
mitment of investment funds to the 

Classification Based on Means of 

No Compulsory Payment 
Government Bonds of a Sovereign 
Power, — Our first broad classification 
is between those promises on which no 
compulsion can be brought to bear in 
the event of failure to fulfill the prom- 
ise in accordance with its terms, and 
those on which compulsion can be 
brought to bear. This first broad 
general classification could be ex- 
pressed in another way as stating the 
difference between bonds expressing 
the promise of a government to pay 
and the statement of the obligation of 
other promisors. Note the change in 
the phrase from the promise of a gov- 
ernment to the obligation of other prom- 
isors. This change in the phrase is 
necessary because the promise of a 
government to pay is not in a legal 
sense an obligation. This face arises 
out of the nature of sovereignty. 

Since the sovereign state is the law 
enforcing power and the force back of 
all legal mandates lies in the govern- 
ment, obviously, no legal compulsion 
can be brought to bear on the govern- 
ment. That one cannot sue the sov- 
ereign is a principle inherent in the 
very nature of law. So the fulfillment 
of the promise of a government rests 
on good faith. It should be kept in 
mind in this connection of government 
bonds that the several states of the 
Union are sovereign powers, retaining 
all the aspects of sovereignty not ex- 
pressly surrendered by the constitution 
to the federal government. The sev- 
eral states did not make any surrender 
to the federal government that en- 
ables an individual to sue one of the 
sovereign states of the Union. There- 
fore, no individual can bring compul- 
sion to bear on a state of the United 
States to make it fulfill a promise to 
pay. The several statas did surrender 
their sovereignty so far, however, as 
to enable sister states of the Union to 
bring an action against them in the 
federal courts. One of the most not- 
able of such actions is the suit of the 
state of Virginia against the state of 
West Virginia to compel the latter to 
carry out its undertaking to pay its 
share of the pre-Civil War debt of the 
state of Virginia from which the state 
of West Virginia separated at the time 
of the Civil War. This limitation of 
sovereignty is so slight, however, that 
bonds of the states of the United States 
may be considered government bonds 
for all practical purposes. Indeed, 
they are absolutely such so far as 
individuals are concerned. 

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Classification of Investment Bonds 

Compulaory Payments 
Municipal Bonds {Government Agen- 
cies), — ^Note, however, that this dis- 
tinction between promises to pay of a 
sovereign power and other promises to 
pay for the fulfillment of which legal 
compulsion can be brought to bear, is 
not the same thing as promises to pay 
for which the means of fulfillment 
rests in the taxing power. This differ- 
ence raises the distinction between 
government bonds and the bonds is- 
sued by government agencies to which 
the sovereign power has entrusted some 
part of its govermental functions. 
These agencies go under the broad 
general name of municipalities and 
their bonds are broadly termed munic- 
ipal bonds. Since the municipalities 
are created by the sovereign, it follows, 
in the nature of the case, that the 
sovereign can bring its compulsion to 
bear on them in any direction it sees 
fit. Municipalities have a right to 
issue bonds only by virtue of the au- 
thority given to them by the sovereign. 
When the sovereign has given author- 
ity it will compel the performance of 
the promise of the municipality to pay 
made within the scope of the authority. 
The fact that the promise to pay must 
be within the scope of the authority 
given makes especially important the 
usual investigation of the validity of 
municipal bonds by legal experts on 
behalf of the purchaser. 

The payment of municipal bonds 
rests on the taxing power. This is 
true even of bonds issued to provide 
the funds for revenue producing mu- 
nicipal undertakings, as water works, 
which are commonly revenue producing 
municipal undertakings, or the less 
common municipally owned lighting 
plants, street railways, and other 
enterprises which municipalities some- 
times engage in. The payment of 
interest and principal of bonds issued 
for these purposes is not limited to the 

earnings and assets of the particular 
enterprise but is a general municipal 
obligation. When we say that the 
fulfillment of the promise to pay rests 
on the taxing power we mean that it 
rests on the power of the municipality 
to appropriate for public purposes such 
part of the privately owned wealth as 
may be necessary. The sovereign 
through its courts will compel the 
municipality to make such an appro- 
priation by the usual methods of taxa- 
tion to fulfill the municipal promise to 
pay expressed in its bonds. 

Municipal bonds require no sub- 
classification other than that which 
arises naturally from the classes of 
issuing municipalities. In the word 
municipality we here include any 
agency to which the sovereign dele- 
gates any governmental powers, in- 
cluding counties, cities, townships, 
school and other municipal districts. 

Special Assessment Bonds. — One 
class of bonds lies between municipal 
obligations and the promises to pay of 
private obUgors, this is the special 
assessment bond. Though issued by 
a municipaUty the resources out of 
which payment is to be made are lim- 
ited to particular assets. Usually 
they are isi^ued to provide the funds for 
local improvements, as sewers or side- 
walks. The property benefited be- 
comes liable for all or part of the cost 
of the improvement. The municipal- 
ity undertakes only to levy the assess- 
ments which are to provide the fund 
for repayment. If the value of the 
property benefited and liable should 
not be sufiicient to meet the obligation 
the municipality would not have any 
further liability. A deficiency in the 
assets out of which payment is to be 
made might well happen in the case of 
over-improvement resulting from too 
sanguine expectation of the growth of 
population. These true special assess- 
ment bonds are to be distinguished 

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The Annaia of the American Acadebit 

from bonds on which the municipality 
is generally liable issued by it to refund 
its proportion of the cost of a local 
improvement which is not especially 
assessed against the benefited property. 
Corporation Bonds. — ^When we think 
of investment bonds of private obligors 
in distinction from government and 
municipal bonds we usually have 
corporation bonds in mind. The 
broader distinction, however, would be 
the one indicated, namely, that be- 
tween a public promise to pay resting 
on the taxing power, and a private 
obligation resting for its fulfillment on 
the value of privately owned property 
and the earning power of privately 
conducted business. Such an obliga- 
tion can just as well, and even more 
simply, be created by a natural person 
as by a corporation, which is an artifi- 
cial person. Indeed, in various juris- 
dictions a bond is the ordinary form of 
mortgage obligation, and an invest- 
ment in ordinary individual mort- 
gages is an investment in bonds. In 
attempting this classification of invest- 
ment bonds, however, we are consider- 
ing those bonds which have a fungible 
quality, that is, which represent equal 
parts of the same general obligation 
to pay. They are, as we say, bonds 
of an "issue." Such bonds are more 
commonly issued by corporations. 

Classification Based on Security 

Our first broad classification would 
draw the line of distinction between 
secured and unsecured bonds. A se- 
cured bond, besides representing the 
general obligation to pay, has specific- 
ally pledged to the fulfillment of the 
obligation some particular asset or 
assets. An unsecured bond represents 
simply the general obligation to pay, 
and the holder would have recourse 
only to assets not otherwise specifically 
pledged. Unsecured bonds are gen- 
erally called "debentures" in this 

country, from the Latin debere^ to 
owe. In Great Britain and Canada, 
however, the word debenture is generic 
and includes both secured and unse- 
cured bonds. 

Secured Bonds — Dired Access to Assets 
of the OUigator 

Tangible Property — Mortgage Bonds. 
— Secured bonds may be classified 
according to the assets pledged. The 
assets may be intangible, as the stocks 
or bonds of other corporations, or may 
be tangible personal property or may 
be real estate. Let us take the last 
first. The ordinary way of giving the 
security of real property is by mort- 
gage, and bonds secured on real estate 
are generally called mortgage bonds. 
If they represent the first claim against 
real estate they are fiurst mortage 
bonds. Bonds representing a second 
or more remote claim against real 
estate are seldom called second mort- 
gage bonds, or third or fourth, as the 
case may be. Some euphemy is ordi- 
narily used to designate them, taken 
from some other aspect of the security, 
as "general mortgage bonds." It 
should also be kept in mind that a 
bond may be secured by a first mort- 
gage on some particular asset but have 
the security only of a second or even 
more junior mortgage on other assets. 
If it has the security of a first mort- 
gage as to any asset it is entitled to be 
called a first mortgage bond. Usually 
in that case the juniority of the secu- 
rity as to other assets is indicated by 
some further appellation, as "first and 
general mortgage bond." In relation 
to their priority of claims against 
assets, bonds are called "senior" and 

CorporcUion Bonds, — Corporation 
bonds are usually secured by the mort- 
gage of the tangible personal property 
of the corporation as well as by real 
estate. That is, the mortgage securing 

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the bonds is a chattel mortgage as well 
as a real property mortgage. This' 
fact arises out of the nature of the sit- 
uation. The real property, including 
the improvements on it, as factory 
buildings, or whatever they may be, 
derives its income producing value 
through its use as part of a productive 
enterprise. For his real protection the 
investor in the bonds of the corpora- 
tion needs to be in a position to get the 
benefit of the continuous productive 
value of the property, and to do this 
must have all the chattels that go with 
the business as well as the real estate. 
So, regularly, the bond is given the same 
priority of claim against the tangible 
personal property used in the business 
that it has against the real estate. 

Intangible Property — Collateral 
Bonds. — ^Bonds secured only by the 
pledge of intangible personal property, 
as by bonds and stocks, are not mort- 
gage bonds. That is, a mortgage ap- 
plies only to tangible property, chat- 
tels or real estate. The security of 
stocks and bonds is given by way of 
pledge and made effective usually by 
depositing the pledged securities ¥ath 
a trustee to hold under the terms of 
the trust indenture expressing the 
pledge. Bonds so secured are called 
"collateral bonds." 

Bonds may be secured by both the 
deposit of collateral and by mortgage 
on real estate and chattels. Usually 
if there is a mortgage the bond takes 
its name from that and the deposit of 
the collateral is regarded as incidental 
and in the nature of additional security. 
In short, from the aspect of security, 
very little can be taken for granted 
from the name of the bond. The in- 
vestor needs to investigate in each 
case and find precisely what security 
has been given. 

It should be remarked that fre- 
quently all the mortgage bonds of a 
given issue are deposited as collateral 

security for bonds of another issue. 
In that case the bonds of the second 
issue have, in effect, the same mortgage 
claim as the deposited bonds. This 
situation frequently arises through a 
parent corporation taking all the bonds 
of an issue of a subsidiary and pledging 
them as collateral security for an issue 
of bonds of the parent company. In 
this way the parent company is able 
to borrow on the security of its general 
credit and give at the same time vir- 
tually a mortgage security on the assets 
of the subsidiary. Sometimes, how- 
ever, a company may pledge its own 
bonds as collateral security for an 
issue of its own. At first thought this 
may seem a complication without an 
advantage. Why should not the cor- 
poration sell the bonds of the original 
issue? This situation ordinarily arises 
out of a change in the money market 
after the original issue was authorized. 
Interest rates have gone up. The 
original bonds were authorized to run 
for a long period. To sell them on the 
terms that may now be obtained would 
be to impose on the corporation for 
the entire term of the bonds the burden 
of the money rates now existing. If 
the management of the corporation 
believes that interest rates are going 
down, the simplest solution of the 
financing problem immediately before 
it is to take the authorized long term 
bonds and pledge them as collateral 
security for bonds with a shorter term, 
maturing at such a time as the man- 
agement believes will be more favor- 
able for the issue of long term securities. 
The management believes that when 
the collateral bonds mature it will be 
able to sell advantageously the long 
term bonds deposited. 

Ordinarily, in the case of individual 
obligors, only specific assets existing at 
the time the mortgage is given come 
under the lien of the mortgage. Cor- 
poration mortgages contain a stipula- 

Digitized by 



The Annals of thu American Academy 

tion that the mortgage is given not 
only on the projierty owned by the 
corporation at the time but also on any 
property the corporation may acquire 
in the future. Such an agreement is 
termed a future acquired property 
mortgage. Such future acquired prop- 
erty mortgages have led to the forma- 
tion of subsidiary corporations in 
order that new assets acquired may be 
mortgaged not subject to the lien of 
the parent company which uses bonds 
of the subsidiary bs collateral for an 
issue of its own. 

Parent companies also guarantee 
bonds of subsidiaries. Sometimes such 
a guarantee is given as part of the 
payment for a lease. It is these two 
situations which most frequently give 
rise to guaranteed bonds. It is desir- 
able from the viewpoint of the investor 
that the guarantee be endorsed on the 
guaranteed security. 

Our discussion of corporation bonds 
has indicated those for the payment of 
which the bondholder may reach the 
assets of the obligor. A special class 
of bonds contain a stipulation that 
interest is payable only out of in- 
come. Such bonds are called income 

Ciassification on Authority op the 


So far our classificatioh of bonds has 
been from the primary viewpoint of 
the obligation, that is, whether the 
promise to pay is enforceable or not, 
and the security, that is, whether the 
bondholder relies on the general credit 
of the obligor or has in addition a 
direct claim on specific assets that 
would come prior to the rights of 
general creditors. But aspects other 
than that of security lead to other 
classifications. One classification can 
be made on the basis of the authority 
to issue. 

Open and Closed Mortgage Bonds 
This may be considered really a 
sub-classification of mortgage bonds. 
It is necessary that stockholders au- 
thorize the creation of a mortgage. 
Directors of a corporation may not 
voluntarily cease to do the business 
contemplated by the stockholders when 
they committed th^r funds to the 
enterprise, and may not voluntarily 
do that, the natursd result of which 
might be the ceasing to do business. 
Therefore, directors may not sell all 
the assets of a corporation, converting 
into cash its means of continuing busi- 
ness. Ordinarily the authorization of 
a bare majority of stockholders would 
not be sufficient to effect a sale of all 
the assets of a corporation. Statutes 
usually declare the size of the majority 
requiied. To mortgage the property 
might result, through foreclosure, in a 
corporation being deprived of the 
means of doing business. A mortgage 
is in itself a conveyance. To be sure 
the same result might follow any in- 
debtedness in some other manner, but 
the possible result of the mortgage is 
direct and obvious. Therefore, stock- 
holders' authority is required to mort- 
gage and to create a debt secured by 
mortgage. The stockholders author- 
ize the amount of the mortgage debt. 
If bonds representing the entire au- 
thorized debt are issued the mortgage 
is said to be *Mosed," and the bonds 
are closed mortgage bonds. If bonds 
are not issued up to the entire mort- 
gage debt authorized the mortgage is 
open and the bonds are open mortgage 
bonds, but more commonly spoken of 
as "" authorized and unissued bonds." 

Refunding Bonds. — If a restriction is 
placed on the issuance of all or part of 
the authorized and unissued bonds, 
limiting their issuance to the one pur- 
pose of providing funds for the pay- 
ment of other, and usually senior bonds, 
the issue is called a refunding bond 

Digitized by 


Classification of iNVESTHiENT Bonds 


issue. The usual provision is that the 
authorized and unissued bonds, or 
such part of them as are reserved for 
this purpose, may be certified by the 
trustee only on the receipt of an equal 
number of bonds of the issue which is 
to be refunded. 

Classification According to 

Another basis of classification of 
bonds licfs in the maturity and in the 
provisions, if any, for supplying funds 
with which to make payment at 
maturity. Bonds may be perpetual, 
that is, without any due date. This 
is different from a demand obligation, 
for which, in a sense, it may be said 
that every day is a due day. 


Government bonds are frequently 
perpetual. In this country bonds are 
seldom a perpetual security. Still 
there are a number of corporation 
issues in this country without a due 
date. Bonds may be "redeemable," 
that is, the issuer may reserve the right 
to pay before the date on which the 
issuer is obliged to pay. Ordinarily 
the redemption right is exercisable 
only in the payment of a premium, 
that is, some stated amount above the 
obligation to pay at maturity. Some 
specific provision may be made for the 
accumulation of a fund with which to 
meet the obligation to pay at maturity. 
Such a fund is termed a " sinking fund " 
and the bonds are called sinking fund 
bonds. A sinking fund provision 
equalizes or distributes the burden of 
the debt. 

Serial Bonds 

A distribution of the burden of the 
debt may be provided by making an 
issue of bonds fall due, not all on the 
same date, but part each year through 
the entire period, or part of the period 

covered by the debt. Such bonds are 
called serial bonds. 

Convertible Bonds 

Perhaps the conversion feature of 
bonds may be considered most appro- 
priately at this point. Sometimes 
bonds contain a stipulation giving the 
holder the option to convert into a 
junior security, usually stock of the 
corporation, under the stated condition 
of time and price. This conversion 
stipulation may be thought of in close 
connection with the classification ac- 
cording to maturity because, in a sense, 
an exercise of the option to convert is 
an acceleration of maturity in that it 
brings the particular obligation to an 
end. The conversion stipulation con- 
tains the condition of the time within 
which the option may be exercised. 
That is, the right to convert may begin 
at once or at some later date and con- 
tinue till the due date of the bond, or 
the right may terminate earlier than 
the due date. The time limits are 
explicit and readily understandable. 
More diflSculty sometimes arises over 
the price conditions. If the exchange 
is at par for par, that is, a thousand 
dollar bond may be exchanged for ten 
shares of stock of the par value of one 
hundred dollars a share, the situation 
is clear enough. But the stipulation 
is sometimes that the bond may be 
converted into stock at, say, 150. 
This means that it would require 
fifteen thousand dollar bonds to 
effect an exchange for one hundred 
shares of stock at the par value of one 
hundred dollars a share. The stock 
is paid for, so to speak, at 150 with the 
debt considered as worth the full 
amount of the obligation. Sometimes 
the option may be more complex, as 
that the bonds may be converted at 
75 into stock at 150. This means that 
the bonds are worth only 75 cents on 
the dollar of the obligation to convert 

Digitized by 



The Annals of the Abierican Academy 

into stock at a price of 150. Th)^ 
particular ratio could be expressed by 
stating that the bonds could be con- 
verted (at par) into stock at 200. A 
conversion stipulation has been made 
in a number of government bonds 
issued during the war to the effect that 
the particular issue may be converted 
into another issue or issues. Of course, 
this is not a conversion into a junior 
security as we have stated of corpora- 
tion bonds, as there is, generally 
speaking,, no seniority or juniority of 
government bonds, but simply a change 
from one government promise into 
another with different terms. 

Classification as to Payment of 

Bonds are further classified with 
respect to the manner of transfer and 
interest payment into registered and 
coupon bonds. The creditor whose 
claim is represented by a registered 
bond can transfer his right to receive 
payment only by an entry on the books 
of the corporation. Payment of inter- 
est is made by check to the registered 
owner mailed to the r^stered address. 
Since title can pass only by change 
of registration such bonds are not 

Classification According to Tax 

A special stipulation frequently con- 
tained in bonds has been given such 
importance through the course of 
federal income tax legislation as to 
have given another basis of classifica- 
tion for bonds. Agreements have fre- 
quently been inserted in bonds by 
which the obligor has promised to pay 
any tax which the obligor may be 
required to retain or withhold from 
the obligee. These agreements were 
doubtless inserted for many years 
without very much thought of the 
effect or expectation that the obligor 

would, in fact, ever be called on to suf- 
fer any loss on account of them. 
Neither did the investor pay any at- 
tention to them or pay a dollar more 
for the bonds on account of them. 
Years before there was any thought of 
an income tax with a "'collection at the 
source" feature the writer came in con- 
tact with the British income tax with its 
"'collection at the source" features, and 
called attention to the dangers of these 
tax covenants to the obligor. When 
our ''collection at the source" statute 
was passed these tax covenants blazed 
with importance. When " collection at 
the source" was abandoned prices of 
bonds had become so affected by the 
presence of the tax covenant that it was 
deemed expedient to retain the "with- 
holding at the source" feature in rela- 
tion to bonds. So on the basis of the 
federal income tax, bonds are known 
as "tax covenant" and "non tax cove- 
nant" bonds. 

The laws of our mult4)Ucity of juris- 
dictions vary widely in respect to the 
taxation of securities, and bonds not 
subject to taxation in given jurisdic- 
tion are known as tax exempt in that 
jurisdiction and those subject to taxa- 
tion are called taxable in the juris- 

Classification depending on the promise to pay 
No compulsion 
Government bonds, i^. of sovereign powers, 
induding sovereign states of federations 
Municipal bonds (government agencies) 
Private bonds — i.e. of individual, associated 
and corporation obligors 
Classification depending on the means of payment 
Bonds depeskding on the taxing power 
Bonds for the payment of whidi direct access 
may be had to assets of the obligor 
Private bonds that contain absolute prom- 
ise to pay 
Bonds for the payment of which, so far as 
interest is concerned, access may be had 
to earning power only 
Income bonds 

Digitized by 


Classification of Investment Bonds 11 

ClaflaificBtion acocNrding to security . Classification according to provision for maturity 

Debentures Perpetual 

No specific security but depending on the Serial 

general credit of the obligor enforceable Sinking fund 

through judgment and levy of execution Convertible 

Mortgage bonds Redeemable 

Bonds secured by mortgage on tangible Optional {t.e, redeemable after a c^tain 

assets time) 

Collateral bonds Classification according to manner of transfer 

Bonds secured by the pledge of intangibles — and payment of interest 

as stocks and bonds Registered 

Classification according to the element of time in Coupon 

relation to the specific security Classification according to tax position 

Future acquired property mortgage bonds Federal Taxation 

Specific mortgage bonds (i.e. relating only to Taxable 

assets existing and mortgaged at the time Tax exempt 

the mortgage is created) Tax covenant 

Classification according to authority to issue Non tax covenant 

Closed mortgage bonds State taxation 

Open mortgage bonds Taxable 

Refunding bonds Tax exempt 

Digitized by 


Tables of Bond Values — ^Theory and Use 

By Montgomery Rollins^ 

Boston, Mass. 

THIS article assumes that the ma- 
terial presented is to be referred 
to by the average practical dealer or 
investor in bonds, who seeks results for 
easy use and application. There are 
more exhaustive treatments of the sub- 
ject^ which may better serve the pur- 
pose of those engaged in the valuation 
of an estate, or in other instances 
where great care should be exercised in 
order that all parties may be treated 

It is strange how frequently one who 
has been familiar during his entire 
business career with the handling of in- 
vestment securities, or, who has been 
in almost daily contact with such 
matters, fails to comprehend the prin- 
ciples upon which bond values tables 
are computed. The writer has been 
time and again surprised to find that 
men who should understand such mat- 
ters suppose that it is a mere calcula- 
tion by simple arithmetic, and that 
not to obtain the results given in the 
ordinary tables of bond values by their 
method astonishes them. Such people 
have begun on the supposition, to il- 
lustrate, that they could take a bond 
bearing 6 per cent interest, maturing 
in ten years, costing 110, and divide 
the premium — 10 per cent — by the 
length of time which the bond has to 
run — ^in the case cited, ten years — 
and, obtaining 1 as the result, deduct 
it from 6 per cent, the rate which the 
bond bears, and assume, therefore, 
that the net return upon that particu- 
lar investment is 5 per cent, the 10 

'This article is a reprint from the March 
1910, Annals, by Montgomery Rollins. 

*See Chapter VIII of The Accountancy of 
InceHment, by Charles £. Sprague. 

per cent premium being charged off 
at the rate of 1 per cent yearly. 

The failure in this reasoning arises 
from their not understanding the fun- 
damental principles upon which such 
tables are based, which presuppose 
that the holder of a bond will, at the 
maturity of each one of the coupons, 
reinvest a sufficient portion of the 
money received, and keep it so invested 
until the maturity of the bond, so that 
the face value of the bond, added to 
the accumulation of reinvested interest 
will, at its maturity, be exactly equiva- 
lent to the original cost of the same. 

We have now arrived at the parting 
of the ways in this computation. 
There are two classes of accountants, 
or what you may choose to call them, 
whose ideas at this point sharply di- 
verge. The first proceeds on the prin- 
ciple that the portion of the coupon 
money set aside shall be compounded 
at the same rate as the net return upon 
the investment. To illustrate: If it 
is a twenty-year 5 per cent bond, and 
selling at such a price as to yield 6 per 
cent, it is assumed that the money 
set aside ^hall be compounded at 6 per 
cent, regardless of the rates of interest 
which will probably prevail at such 
investing periods. To show further 
the absurdity of this, imagine the 
owner of several different lots of bonds, 
one lot having been purchased at a 
price to yield him 6 per cent per an- 
num, another at 5 per cent, and another 
at 4 per cent. The class which we 
are now discussing assumes that a 
portion of these interest payments, 
even though they may all fall due at 
the same dates, shall be reinvested at 
compoimd interest at 6 per cent, 5 per 


Digitized byLjOOQlC 

Tables of Bond Values 


cent, and 4 per cent respectively. It 
is unreasonable to believe that these 
three separate rates of interest will be 
ruling, at the same time for a similar 
grade of securities, or that there is any 
likelihood that the investor will guide 
himself, in the reinvestment of this 
interest, by taking into consideration 
the net return which he is enjoying 
upon the bonds in question. 

The other school, which is undoubt- 
edly the correct one, proceeds upon the 
plan of the reinvestment at some fixed 
definite per cent, say 3| per cent or 4 
per cent, without any regard to the 
net return which the original purchase 
price of the investment warrants. 
It does not take a very deep knowledge 
of finance to see that it is fairer to pre- 
dict the future investment rates of 
money at some average rate, such as 
just mentioned, than at such widely 
divergent rates as by the other plan. 

In the case of bonds selling at par, 
both schools would be right as to their 
results, because there are no premiums 
or discounts to be provided for. Also, 
in the case of a bond computed by the 
first method, selling at a net return 
which is the arbitrary rate assumed as 
the reinvestment rate of the second 
method, then, likewise, will the two 
schools agree. In all other instances 
they disagree. An idea of the amount 
of this disagreement may be shown by 
referring to the table accompanying 
this article, by which it will be seen 
that a 6 per cent bond having twenty 
years to run, selling to net 5 per cent, 
is 112.55, and, in this case, 5 per cent 
is the compounding rate. By the use 
of a table of bond values based on a 4 
per cent compounding rate, 112.0S is 
the result — a difference of nearly one- 
half of 1 per cent. Yet custom has 
decreed, and undoubtedly always will, 
that the tables based upon the princi- 
ples of the first school, including those 
of the author of this article, which he 

conceives to be inaccurate, are likely 
always to prevail in use, and that the 
tables of the second school will never 
reach any wide circulation. It would 
be relatively as great an undertaking 
in financial matters to change from 
the incorrect to the correct school, 
as it would be to introduce the 
metric system into this country, or to 
change the present standard gauge of 

In the circulars of banking houses 
offering investment securities, in the 
financial columns of newspapers, and in 
the "shop" talk of the investment 
dealer will be encountered, with great 
frequency, such expressions as: "net re- 
turn upon the investment," or, to 
be more specific, "a bond pays the in- 
vestor 4 J per cent," "yields 4^ per 
cent," "is on a 4j per cent basis," or 
whatever the rate may be. In any 
event, the intent is to convey the in- 
formation as to what rate of interest 
the purchaser of a certain security 
at a given price may expect upon his 
money. By this is meant the propor- 
tionate rate which the income upon 
any investment bears to the total cost 
of that investment — " accrued interest " 
excepted — taking into consideration 
the time which it may be outstanding 
before being paid off. 

Stocks, as a rule, are irredeemable, 
and consequently are figured as per- 
petual. Most bonds and other in- 
vestments of a redeemable nature — 
having some fixed determinable time 
to run — are not so figured. A simple 
illustration of an irredeemable stock 
would be that of one selling at $200 
per share, upon which dividends are 
being paid at the rate of 8 per cent 
yearly. In this case, the ratio of divi- 
dend, namely, 8 per cent, to the total 
cost, $200, would be 4, or 4 per cent, 
which is the investment yield. If the 
price of the stock were but $100 per 
share, and the dividend rate 4 per cent 

Digitized by 



The Annals of the Ahebican Academy 

per annum, the yield would still be 4 
per cent. 

We now come to a security haying 
some determinable date of maturity, 
and the problem likewise becomes 
more complicated. Special tables, com- 
monly known as bond values tables, 
are used to ascertain the net returns 
from investments of this class. The 
books comprising these tables are so 
arranged as to cover different periods 
for which redeemable securities are 
likely, in the experience of bankers, to 
be outstanding; and, therefore, cover 
half yearly periods from six months to, 
say, fifty years, and then at greater 
intervals to one hundred years, it being 
supposed that most securities of this 
class will mature in, perhaps, twenty- 
five or thirty years and the vast 
majority inside of fifty years. 

To simplify this article, page 15, 
. which covers the twenty-year period, 
is reproduced from one of the ordinary 
books in use. 

Henceforth, we shall speak of all 
redeemable securities as bonds. Let 
us now take an example of a bond hav- 
ing twenty years to run, bearing 5 i>er 
cent interest . At what price must it be 
sold to pay the investor 4 per cent? 
The twenty-year page above covers 
the period in question. The column 
headed 5 per cent must be taken and 
followed down until opposite 4 per cent 
in the extreme left-hand column. A 
result of 11,368 will be found, which is 
the rate of purchase of a bond to yield 
4 per cent upon the investment; that is 
to say, $1,136.80, plus the interest 
which may have accrued since the last 
maturing coupon. This 4 per cent net 
return means 4 per cent per annum for 
each of the twenty years, and is reck- 
oned upon the entire sum invested — 
"accrued interest" excepted — or in 
this case, $1,136.80. 

The time upon which to compute the 
net return, or the price of the bond, is 

the time from the date of computation 
to the maturity of the issue, not from 
the date of the issue, as some inex- 
perienced persons have occasionally 
supposed, unless, of course, the date of 
issue and the date of computation 
should coincide. 

This seems a pertinent place to con- 
sider at some length the matter of 
"accrued interest" r^erred to above. 
Strange as it may seem, there are 
many investors who fail to comprehend 
a subject which, to most, is so simple. 
It is customary to make nearly all 
bonds with interest payable twice 
yearly. Let us take a $1,000 bond 
bearing 5 per cent interest. Upon this 
there will be found two coupons of $£5 
each, and, we will say, for the sake of 
simpUcity, that these coupons fall due, 
one in January and the other in July d 
each year. On the first day (tf Septem- 
ber a purchase is made of a twenty-year 
bond at 113.68 and accrued interest. 
The purchaser will pay $l,136.80,which 
is the principal and premium, but 
in addition thereto he will pay the in- 
terest upon $1,000, the face, value of 
the bond, from July first, when the 
last coupon was detached, until Sep- 
tember first — ^two months. The bond 
bearing 5 per cent, this interest will be 
computed at that rate, and the investor 
will pay, in addition to the $1,136.80, 
$8.33, which is the interest on $1,000 
for two months at 5 per cent. An in- 
vestor may fail to comprehend that 
this $8.33 is not thrown away. As a 
matter of fact, it is returned to him 
when the next coupon is paid, which 
will be, following this illustration, 
January first. The investor witt have 
held the bond four months, at the end 
of which time he will receive not only 
5 per cent per annum for the time he 
will have held it, but also the $8.33 
which he paid to the holder from whom 
he made the piu*chase. He wiU be out, 
however, interest on the $8.33 for the 

Digitized by 


Tables of Bond Values 


Interest Payable Semi-Annuallt. 

PER an, 






























4. 49 




4. 79 










• . 





98 5a 

95 63 

94 58 

93 54 

79 M 

75 95 
64 25 




















































"7 47 

105 42 



97 43 
96. X7 

94 94 



91 36 



83 95 



74 39 



24 75 

23 49 





09 33 


07 93 

05 19 
ox. 27 





95 M 




87 13 




41 13 
39 30 

37 95 
33 58 

24 19 




15 32 
13 92 
XX. 20 

04 47 
ox. 46 




93 13 



57. 8x 
55 82 
52 41 

47 72 


44 55 
39 32 
35 98 

34 35 
29. 6x 
23 65 

13 13 
10. ox 
07. ox 

04. X2 

ox. 35 

Digitized by 



The Annals of the AmaiiCAN Academy 

four months.^ Here is where bonds 
and stocks sell differently, although 
there are exceptions to this rule. 
When a stock is sold, a sufficient price 
is added to the quotation so that it off- 
sets the amount of interest — dividend 
— ^which has accrued since the last 
payment. A stock selling ordinarily 
at $100 a share and paying dividends 
at the rate of 4 per cent per annum — 2 
per cent, say, each January and July — 
would be quoted, everything else being 
equal, at 101 half way between the 
two dividend periods, as the 1 per 
cent premium would fairly represent 
the dividend accumulation for three 
months at the rate of 4 per cent per 

Until recent years, bonds were sold 
on the New York Stock Exchange in 
this same way, and quotations included 
the interest accrued. Today, however, 
upon this exchange, as well as other 
leading exchanges, bonds are sold — 
income or defaulted bonds accepted 
— plus the accrued interest. The ordi- 
nary bankers selling bonds also cus- 
tomarily sell them 'Vith^ accrued 

The foregoing explains such common 
expressions as *'10S and accrued in- 
terest," "109 and accrued interest," 
or "109 and interest." 

An expression something like this is 
often encountered: "Yielding 4 per 

' The loss of interest upon the interest brings 
up the point that ordinary investment transac- 
tions always ignore this loss. Unless a bond by 
chance happens to be purchased upon a coupon 
date there must be some accrued interest paid, 
and absolute accuracy in figuring would demand 
the taking of this into consideration and would 
change slightly the net yield if it were figured 
into the actual purchase price, even though it 
were returned to the purchaser at the next cou- 
pon period. This would complicate matters so 
much, however, that it is seldom taken into con- 
sideration, as the amount, which is always 
against the purchaser and in favor of the seller, 
is slight. 

cent for the first ten years and 5 per 
cent for all time thereafter which the 
bond may run." By this it is under- 
stood that the issuer of the bond has 
the right to redeem it any time after 
ten years, but shall not be obliged so to 
do until some later date, as, in this 
case, twenty years. These bonds are 
known by such titles as "10-M year 
bonds" or "10-20's," by which it is 
imderstood that they are absolutely 
due and payable in twenty years, but 
optional on the part of the issuer to 
redeem any time — generally upon a 
coupon date — between ten and twenty 
years. In a case of this kind, the 
seller must not assume that the bond 
will run longer than ten years. The 
greater the length of time which any 
form of an indebtedness, selling at a 
premium and having a fixed rate of in- 
terest, may be outstanding, the greater 
the percentage in interest return to 
the holder, prices always being equal. 
Therefore, in selling a 10-20 year bond 
at a premium, the net return should be 
computed on the basis of its being 
outstanding the minimum possible 
number of years — ^in this case ten — 
but should it run twelve years, for 
instance, before being paid off, the 
purchaser would benefit by the two 
additional years. That is, if the net 
return were computed, as it should be, 
on the ten-year basis, for any addi- 
tional time which the bond might run, 
the investor would obtain a yield of 
the full rate of interest borne by the 

Should a bond be selling at a dis- 
count, the shorter the length of time 
which it runs the greater the intereist 
return, prices being equal; the con- 
trary is true of a bond selling at a pre- 
miiun. In computing the interest re- 
turn or yield, the following rule must 
be observed if the issue is "optional," 
so called, as in the case just cited: 

Digitized by 


Tables of Bond Values 


Rule for Computing Net Yield 
OF Optional Bonds 

When bonds are selling at a premium 
the interest return must be computed 
upon the shortest possible time which 
the security may be outstanding; when 
selling at a discount, the greatest 
length of time which it may be out- 
standing must be used as the basis. 

In buying an issue of bonds known 
as ** serials," that is to say, with a cer- 
tain portion of the issue maturing 
periodically, many dealers in invest- 
ment securities, who should know bet- 
ter, make the mistake of averaging 
the life of the issue, and then, by the 
use of a table of bond values, basing 
their computation upon this average 
maturity; whereas, a separate price 
should be computed for each maturity, 
and then the average price taken — 
supposing, of course, that it is the in- 
tention to make one price for the entire 
lot, including all the different maturi- 
ties. If bonds are bought by the first 
method and retailed by maturities, 
either a loss will result, or a less 
profit than expected. 

The fallacy of averaging the matu- 
rity, and computing the net return 
upon the period of time resulting, 
arises from the fundamental principle 
set forth elsewhere in this article, that 
the net return upon a bond is based 
upon reinvesting at compound interest 
a certain portion of the coupons as 
they severally become due. Conse- 
quently, each maturity of a serial 
issue must be computed upon its own 
time in order that this principle of 
compounding the interest may have 
true application. 

An investor should guard against 
deceiving himself as to the income 
upon a redeemable bond for which he 
has paid some price other than par. 
Let us illustrate by taking a bond hav- 
ing twenty years to run, beariag 5 per 
cent interest, and for which payment 

has been made at the rate of 113.68 — 
that is, $1,136.80 and accrued interest, 
the net return by the ordinary bond 
values tables being 4 per cent. That is 
to say, the investor is supposed to 
receive 4 per cent per annum upon the 
purchase price of $1,136.80. In ac- 
tual practice, as the coupons fall due, 
the investor receives $25.00 each six 
months, or $50.00 per annum. When 
the bond matures, he will receive, in 
addition to the last interest payment, 
only the principal sum of $1,000. 
There is, therefore, $136.80 premium 
paid that must be accounted for in 
some manner. A sinking fund, so- 
called, may be set aside each half 
year out of the interest as received to 
provide for this premium. The in- 
vestor is entitled to reckon his income 
at 4 per cent per annum on $1,136.80, 
the total purchase price, which would 
be $45.47, or, for each six months' 
period, one-half that sum; namely, 
$22.74. Deducting this from the semi- 
annual coupon leaves $2.26, which 
sum, if invested each six months at 
4 per cent, will, at the maturity of 
the bond, added to the principal 
sum, equal $1,136.80, the original 
purchase price. 

This is all based on the supposition 
that the $2.26 above mentioned will be 
invested promptly when received' twice 
yearly at the rate of 4 per cent per 
annum; in other words, that it will be 
compounded at 4 per cent per annum. 
It may be that this is an imfair rate, 
that a lower rate, 3^ per cent, or the 
prevailing savings bank rate, would be 
a better one to choose. If this were 
the case, a proportionately larger sum 
would have to be set aside each six 
months to create a sufBcient sinking 

So far, we have had but one period, 
i. e.y twenty years, together with a 
fixed net return and price. The 
amount of the sinking fund must 

Digitized by 



The Annals of the American AcADEBrr 

necessarily vary with the change of 
any one of the three factors: time, 
net return, or price. We will change 
but one of these, the time. Take 
nineteen years as the life of the bond 
when purchased. The tables show the 
price of a 5 per cent, nineteen-year 
bond to net 4 per cent, to be 11S.S2, 
or $1,132.20 for a $1,000 bond. Pro- 
ceeding again as above, we find 4 per 
cent on this sum to be, for a half year, 
$22.64, or $2.86 less than $25.00, the 
amount of the six months' coupon. 
Here, then, is $2.36 for a nineteen- 
year bond, as against $2.26 for a 
twenty-year bond — ^prices and net 
return being equal — as the sinking 

The question naturally arises as to 
the way to treat similarly a bond 
bought at a discoimt. Let us again 
illustrate: A 5 per cent bond having 
twenty years to run, if purchased at 
the rate of 88.44, or $884.40 and ac- 
crued interest, will net the investor 6 
per cent; that is, 6 per cent on the 
$884.40 invested.' As the coupons 
fall due, he obtains, the same as in the 
above case, $25.00 each six months, 
or $50.00 per annum. When the bond 
matures he will receive, in addition to 
the interest, the full principal sum of 
the bond, $1,000, for which he has 
paid but $884.40. There is, therefore, 
a difference here of $115.60, by which 
amount the purchaser will be appar- 
ently enriched at the maturity of his 
bond. If, however, he wishes to avail 
himself of the full 6 per cent net re- 
turn which he is entitled to receive, 
he must anticipate this difference of 
$115.60, which may be done in this 
manner: He is entitled to reckon his 
income at 6 per cent on the $884.40, 
the original purchase price, which, 
for each six months, would call for 
$26.53. The coupon which he de- 
taches from his bond provides for but 
$25.00 of this. There is, consequently. 

the sum of $1.53 which he should 
receive from some source to make his 
full 6 per cent interest. He may antic- 
ipate the $115.60 above referred to 
by taking from some other fimd this 
$1.53 each six months. This repre- 
sents the amount which, if invested at 
6 per cent, the same net return as pro- 
vided for in the investment, will, at the 
maturity of the bond, added to the 
$884.40, just equal $1,000. It will be 
noticed, however, that in this instance 
it is supposed that the $1.53 will be 
compoimded at 6 per cent, and. here 
again the fallacy of the customary 
method of compoimding the reinvest- 
ment portion is emphasized, for it is 
not Ukely, nor supposable, that these 
sums can be compounded at 6 per cent. 
But, in this case, as the bond is bought 
at a discoimt, the investor will not be 
Ukely to deceive himself; for accepting 
an arbitrary compoimding rate of 6 
per cent is necessarily taking a less 
amount (in this case $1.58) than he 
would if it were compounded at a 
lower rate. To prove this, let us sup- 
pose that 4 per cent is taken as this 
rate. The investor might then allow 
hiniself $1.88 each six months to add to 
his $25.00 to, provide himself with a 
6 per cent net rate. 

To explain one more point in this 
connection, and following the illus- 
tration above where $1.53 is taken each 
six months, which must be taken 
from some other fund, is there not a 
loss of interest each time upon that 
amount until the maturity of the bond? 
Or, in other words, what provides for 
the interest on these sums? That 
comes back at the maturity of the 
bond, for it will be noticed that if $1.53 
be multiplied by 40, the number of cou- 
pons, the sum equals $61.20. But 
$115.60 will be received at the end 
of twenty years, and the difference 
between these last two sums is $54.40. 
That is to say, $54.40 represents the 

Digitized by 


Tabuss of Bond Values 


compound interest on the $1.58 period- 
ically taken and expended as income. 

The above argument is based upon 
the supposition that a bond will be 
held until maturity, or that, in case it 
should be disposed of earlier, the price 
reahzed shall be such as to give a yield 
equivalent to that at the time of pur- 
chase. In other words, if a bond hav- 
ing twenty years to run, bearing 5 per 
cent interest, is bought at 118.68, t. ^., 
a 4 per cent basis, and is sold at the end 
of five years it is supposed that the 
price shall be computed on a basis of 
the fifteen yeass which the bond still 
has to run, which, to ^ve a 4 per cent 
basis, would be 111.20. Instead, how- 
ever, the holder of such a security may 
sell it at a higher price than the equiva- 
lent basis. What, then, shall be done 
with this surplus or profit? This ques- 
tion has been considered many times 
by the courts, who have decided that 
this excess premium belongs to the 
principal and should not be considered 
as income. This is from the stand- 
point of trustees. The ordinary in- 
vestor, however, may treat it as he 
likes, except, that in order to ascer- 
tain whether or not he has made a 
profit, he must find the price for the 
equivalent basis, and compare it with 
the price received. 

Loring's A Trustee*8 Handbook dep- 
recates the practice of buying bonds 
at a discount to offset those purchased 
at a premium. The reasoning is that 
the difference in price is not simply a 
question of interest, but more often 
one of security. 

Bond values tables cannot cover all 
rates of interest and all maturities. 
Neither can they give every conceiv- 
able net yield. To have in one volume 
sufficient matter to cover all the pos- 
sible results, which investors or bank- 
ers may desire to obtain in the course 
of their investing or business careers, 
would require a volume beside which 

the family Bible of old would pale into 
insignificance. The most likely called 
for and commonly desired results only 
can be given in a volume of moderate 
dimensions. Likewise, financial con- 
ditions change. At times, rates of 
interest between 8i and 8 J per cent are 
the prevailing levels of high-grade 
securities. It was not many years 
since that few bond dealers would have 
had the temerity to predict a long-con- 
tinued interval during which high- 
grade securities could be purchased to 
net the investor in the neighborhood of 

5 per cent. Yet such is the condition 
of affairs at the time of writing this 
article. This is stated to illustrate the 
difficulties with which the authors of 
tables of bond values have to contend 
in order to meet the popular demand. 
Tables issued a few years ago during 
the prevailing low rates of money are 
of Uttle value today, when the rates 
have so largely increased. 

The fact, however, that a book of 
bond values does not give every result 
sought for need not deter the user 
thereof from making some attempt to 
secure the result desired by a simple 
use of mathematics. We will confine 
ourselves to that twenty-year page 
already referred to as an illustration. 

Suppose it were desired to know the 
price at which a 5| per cent bond 
should be sold to net the investor 4 per 
cent. In the 6 per cent column, op- 
posite 4 per cent, will be found 127.86. 
In the 5 per cent colunm, directly 
to the left, 118.68. Add these two 
results together and divide by 2, and 
you have the result for a 5j per cent 

The highest rate bond which the 
sample page covers is 7 per cent. 
Prices to cover an 8 per cent bond 
may be found by obtaining the differ- 
ence between those of a 7 per cent and 

6 per cent rate and adding the result 
to the former. Example: 

Digitized by 



The Aknals of the American Acadebct 

Price of a SO-year 7 per cent bond to 
net 5J per cent $118.06 

Price of a 20-year 6 per cent bond to 
net 6i per cent 106.02 

Subtract $12.04 

Add price of 7 per cent bond . . . 118.06 

Price of 20-year 8 per cent bond to 
net 6| per cent $130.10 

By an understanding of all this, it 
will be clear that the results for a bond 
bearing any rate of interest may be 
quickly computed. 

Again, suppose it is a 5 per cent bond 
having twenty years to run and that 
it is desired to find the price at which 
it will net the holder 4.05 per cent. 
The nearest results in the table here 
given to this are 4 per cent and 4.10 
per cent net returns. Find the column 
headed 5 per cent; obtain the results 
for 4 per cent and 4.10 per cent; add 
them together, divide by 2, and the 
result, near enough for all practical 
purposes, will be obtained. There will, 
however, be a very slight inaccuracy. 
K a result for 4.03 per cent were de- 
sired, it would be necessary to find the 
prices opposite 4 per cent and 4.10 per 
cent; substract the lesser from the 
greater, divide by 10, which is the dif- 
ference between 4 per cent and 4.10 
per cent in the left hand column, and 
then you obtain what the ratio of 
change in price is for each one-hun- 
dredth of one per cent increase in the 
net return. Multiply your result, to 
follow this example, by 3, and deduct 
it from 113.68, the price to net 4 per 
cent, and you obtain the price of a 5 
per cent bond to net the investor 4.03 
per cent per annum. This, again, is a 
rough mathematical calculation and 
not absolutely accurate, but a little 
understanding of such matters will 
enable one to form approximate and 
useful conclusions. 

It is sometimes desired to ascertain 
what a bond will yield at a given price 

when sold "flat." (By this expression 
it is understood that the purchaser 
pays no accrued interest.) A twenty- 
year bond, bearing 5 per cent interest, 
with coupons maturing semi-annually, 
February and August, is offered for 
sale on April 1st at 115 "flat." What 
does it pay? We must first find out 
how much interest has actually ac- 
crued upon the bond. In this case, 
it is two months. This, then, must be 
brought into dollars and cents. Two 
months' interest at 5 per cent on $1,000 
(360 days to the year) is $8.33. The 
price of the bond is 115: that is, $1,150 
for a $1,000 bond. Deducting the 
$8.33 just mentioned, you have as a 
result $1,141.67, which brings the bond 
down to 114.167, or, rounding out the 
second place to the right of the decimal, 

114.17. To put it in another form, 
114.17 and accrued interest is equiva- 
lent to 1 15 " flat." By referring to the 
table under the column headed 5 per 
cent, we find that 114.17 lies between 

115.18, which is a 3.90 per cent basis, 
and 113.68, which is a 4 per cent basis. 
We deduct the lesser of these two 'fig- 
ures from the greater and obtain 1.50, 
which represents the ratio of increase 
for each variation of ten one-hun- 
dredths of one per cent in the net return . 
That is, a 3.90 per cent basis is to a 4 
per cent basis as 115.18 is to 113.68. 
Divide 1.50 by .10, the difference be- 
tween 3.90 per cent and 4 per cent, 
and you get what the ratio of decrease 
in price is for one one-hundredth of 
one per cent, which would be 15. 
Now we deduct 114.17, which is the 
price given, from 115.18, the nearest 
higher price in the tables, and obtain 
as a result 1.01. Divide this by 15, 
the ratio of change in price for each 
increase of one one-hundredth of one 
per cent in the net return, and we get 
.067; by which we understai^i that 
114.27, the price given, is less than 
115.18, the next higher price in the 

Digitized by 


Tables of Bond Values 


tables, as .067 is the increase in net 
return over 3.90 per cent. Add, 
therefore, these two together, 8.90 
and .06+, and we obtain 8.96+, which 
equals the approximate net yield, 
according to this example, of a bond 
sellmg at 115 "flat," which is the 
equivalent of 114.17 and "accrued 
To sum up: 

Priceof bond— "flat".. $115. 
Deduct 2 months* inter- 
est .833 

Price of bond — "with 

interest" $114. lOT or $114.17 

Price of bond to yield 

3.90 per cent 916.18 

Price of bond to yield 4 

percent 113.68 

Difference in price to 

equal .10 difference in 

yield $1.50 

jhif per cent difference 

in yield, therefore, 

equals .15 

Price of bond to yield 3.90 per cent 

equals $115. 18 

Deduct price of bond in example . . 114. 17 

Difference $1 .01 

Divide by 15, the difference in price 
equivalent to difference in yield 
for each xiv per cent and get ... . .067 

Add to 3.90 

The result desired $3.96+ 

Be it understood, however, that this 
result is not absolutely accurate. 
There will be a variation of one or 
more one-hundredths, but it is a rough- 
and-ready way to obtain a very close 
approximation to what a bond will 
pay under conditions that are given. 
By the above method, it will be under- 
stood how to obtain the net return 
at a given price, when the price varies 
from what is actually given in the 
tables used. 

It is seldom that a security is pur- 
chased upon a coupon date, and when 
such is not the case, tables which cover 

only half yearly periods are only ap- 
proximate and must be adjusted to the 
actual time which the bond runs before 
maturity. For example, take a bond 
with 19 years 8j months to maturity 
bearing 5 per cent interest, to net 4 
per cent. The twenty-year table gives 
113.68; the 19} year table, 113.45. 
Subtract and get .23 which equals the 
difference in price between 19} and 20 
years for a 5 per cent bond netting 

4 per cent. Nineteen years 8} months 
lies between these two periods, and is 
2} months longer than 19} years. 
There being twelve half months in a 
half year, divide 23, found above, by 
12 and get .01916. As 2} months are 

5 half months, multiply .01916 by 5 
and get .0958, which is added to the 
price of the 19| year bond. 

Thus 113.45 and .0958 give 113.5458, 
or, rounding out, 113.55, which is 
close enough for practical purposes. 

We have been so far discussing bond 
values tables based upon redeemable 
securities with interest payable semi- 
annually. There are many issues of 
bonds in existence bearing annual 
interest, far more than the average 
bond dealer or investor realizes. There 
are, likewise, many other issues, such as 
our government securities, which have 
interest payable quarterly. It is not 
fair, therefore, to use a table of bond 
values based on semi-annual interest 
payments to compute the net return 
upon issues of bonds with interest 
payable in annual or quarterly instal- 
ments. The semi-annual bond values 
tables, as already explained, are based 
upon the theory that a portion of the 
coupon money, as received, will be 
reinvested twice a year, and the inter- 
est compounded. In a bond with the 
interest payable but once a year, 
this money can only be reinvested 
and compounded once a year. Like- 
wise, in a quarterly table, it will be 
four times a year. To show the dif- 

Digitized by 


M The Annals of thb Aicerigan Academy 

ferenoe, let us take (again see the nually the price would be II4.889 and 

table) a 4 per cent bond having as a bond bearing quarteriy interest 

twenty years to run. At 114.96 it payments, the price would be 115.00. 

pays 8 per cent as a semi-annual bond. There are to be had, therefore, separate 

As a bond with interest payable an- sets of tables to meet these requirements. 

Digitized by 


Treatment of Bonds at the Time of Reorganization 

By Arthur S. Dewing 
Graduate School of Business Administratioii, Harvard University 

marked* nearly forty years ago, 
that "it rarely happens in the United 
States that foreclosures of railway 
mortgages are anything else than the 
machinery by which arrangements be- 
tween creditors and other parties in 
interest are carried into eflFect."* This 
apparently revolutionary doctrine rep- 
resented the acknowledgement by the 
highest court that the adjustment 
of the financial misfortunes of a rail- 
road was to be conducted along dif- 
ferent lines from the adjustment of the 
affairs of any other bankrupt business. 
It was the tacit acknowledgement that 
a railroad occupied a peculiar and in- 
dividual position in our economic life 
and that its financial affairs were af- 
fected by its social significance. In 
effect, it was the extension of the social 
responsibility of a railroad's operation, 
— as developed in preceding years' — 
to a railroad's financial affairs. Pro- 
phetic of the future was Justice Waite's 
grasp of the substance behind the form 
of a railroad reorganization, for since 
this statement was made the entire 
current of events in the field of rail- 
roads has been such as to amplify 
and reinforce its truth. Further- 
more, the whole course of corporate 
reorganizations in all fields of indus- 
trial activity has followed in the wake 
of his theory of railroad reorganization. 
The present theory and practice of 
corporate reorganization has been the 
result of a slow evolution in which the 

» Chief Justice Waite, Can, So. Ry, Co, v. 
OMard, 109 U. S. 539 (1883). 

' Granger cases beginning Mvum. v. IlUnou, 94 
U. S. 113 (1877); to SUme v. Wueaimn, 94 U. S. 

exigencies of financial necessity have 
always dominated legal forms. This is 
clear from its purpose; for reorganiza- 
tion is surgery applied to corporate 
failure. It is the climax of blasted 
hopes and thwarted ambitions. As 
such, it is, even in its happiest light, 
merely an expedient for making the 
best out of an imfortunate situation. 
It necessarily involves a conflict of 
legal rights, and it is necessarily carried 
through under the stress of disappoint- 
ment, ill-temper and personal animosi- 
ties. It readies down into the funda- 
mentals of corporate affairs. For this 
reason, if for no other, it is at once the 
most intricate and at the same time the 
most fascinating topic of corporation 

Factors Determining the Status 
OF Bonds at Reorganization 

The fundamental character of the 
general subject of reorganization is 
shown by the treatment of bonds. For, 
in the end, the real and abiding security 
of a bond issue is its probable treat- 
ment at the time of reorganization. 
All else is superfluous. The mortgage 
securing the New York and Erie Rail- 
road 4s of 1947 is the simplest and 
crudest railroad mortgage now in force. 
No corporation lawyer of the present 
would think of employing anything 
like it to secure a contemporary issue 
of bonds; yet, probably no corpora- 
tion bonds are more secure than those 
issued under this old mortgage. The 
bonds are a first lien, of over seventy 
years' standing, on the main trunk line, 
representing the most important sec- 
tion of the shortest route between New 
York harbor and Chicago. They have 

Digitized by 



The Annals of the American Acadeict 

withstood three separate reorganiza- 
tions of the Erie system. 

Five fundamental and important sets 
of conditions determine the status of 
any bond issue at the time of the re- 
organization of the corporation which 
is liable for the issue. The first two 
are concerned with the nature of the 
corporation, without reference to the 
bond issues involved in the reorganiza- 
tion. Two other sets of conditions are 
concerned with the economic and 
strategic position of the specific issue of 
bonds, in relation to the other obUga- 
tions and liabiUties dealt with in the 
reorganization. The fifth set of deter- 
mining conditions is legal; superficially, 
these are of paramoimt importance; 
actually, they are insignificant com- 
pared with the others. Before dis- 
cussing the treatment of any bond 
issue in particular, it is necessary to 
understand the bearing of these un- 
derlying factors. 

Public Attitude Toward Bankrupt 

The first set of conditions is con- 
cerned with the public attitude toward 
the necessity and social importance of 
the business conducted by the bank- 
rupt corporation. At the one end of a 
series is the privately owned water 
company, the business of which is so 
essential to the life of the community 
which it serves that public officials 
exercise a strict supervision over the 
conduct of its business. Of sim- 
ilar inestimable economic importance 
to the nation are the great railways 
which make our present industrial 
organization possible. At the other 
end of the series are the small, locally 
owned manufacturing businesses en- 
gaged in the production of unimpor- 
tant luxuries, of which the supply 
is always ample. Businesses of the 
former type are so interwoven into 
our modem mode of living that we 

designate them collectively by the 
term "public utilities." As the indus- 
trial order changes, businesses which 
at one time were not of great social 
significance become so, and the courts, 
sanctioned by social opinion, invest 
them with the privileges, restrictions 
and limitations that belong to public 
service corporations. The attitude of 
the public, as crystallized in judicial 
precedents and statutory law, toward 
the public character of a business has 
much to do with the treatment of the 
corporation's bonds at the time of re- 
organization. If the business of a 
bankrupt corporation is invested with 
a public character, the courts may 
permit a great variety of past and 
present debts to supersede all the 
bonds, even the underlying first mort- 
gage, provided such a course is neces- 
sary in order to keep the public service 
enterprise in actual operation ; whereas, 
a bankrupt business not invested '^'ith 
a public character will be liquidated by 
the courts for the benefit of the credit- 
ors, and no general creditor can acquire 
a priority of claim sufficiently strong 
to emasculate the security of the mort- 
gage bondholders. In the one case, 
public convenience or necessity may 
supersede all the contractual priorities 
of a mortgage bond; in the other case, 
the claims of the various creditors, 
including the bondholders, to the 
bankrupt's property follow logically 
the order of their lien on the corporate 

Character of Business CondtuAed by the 

The second set of conditions are con- 
cerned with the specific character of 
the business conducted by the bank- 
rupt corporation — ^the kind of market 
it supplies, the merchantability of its 
assets, the rapidity with which its capi- 
tal is "turned over" and its natural 
capacity for borrowing capital. There 

Digitized by 


Bonds at the Time of Reorganization 


is one type of business requiring a 
large amount of fixed capital, of which 
a power dam is an illustration, which 
has no current quick assets that can 
be sold for the benefit of creditors. It 
requires little or no working capital 
and, therefore, once it is in operation, 
it requires no loans from the banks. It 
supplies a relatively stable market. 
The services it sells cannot be "trade- 
marked" and little business skill is 
required for its administration. 

At the other extreme is the type of 
business which requires little fixed 
capital — ^as a tannery — ^where the cur- 
rent assets constitute about all there 
is to the value of the corporation's 
property. The capital is "turned over" 
readily; the volume of purchases and 
sales fluctuates rapidly, so that large 
amounts of bank credit must be avail- 
able at certain times. It produces a 
commodity for a highly competitive 
market and great skill is required for 
the administration of the business. 

In the reorganization of the former 
type of business, general as well as 
underlying bonds may be left undis- 
turbed, because the reorganized cor- 
poration will have an assured and rela- 
tively constant earning power, and no 
need would arise for securing bank 
loans to carry, temporarily, an unus- 
ually large volume of business. In the 
reorganization of the second type, the 
old bonds must be scaled down to the 
lowest possible point, and in reorgani- 
zation plans of markedly good tech- 
nique all bonds of the bankrupt cor- 
poration are converted into stock. 
The plan must safeguard, above all 
else, the general borrowing credit of 
the reorganized corporation, and pre- 
serve the organization, the "good will" 
and the trade standing of the business. 
A bond, even a mortgage bond, of such 
a business is an empty symbol unless 
these intangible elements are main- 

Economic Position of Bond Issues 
The third set of conditions pertain 
to the earning capacity of the particu- 
lar property which secures one bond is- 
sue in contrast to another bond issue of 
the same bankrupt corporation. In 
the reorganization of a large railway 
system, a large local utility on an indus- 
trial "trust" of hybrid origin, there are 
usually several separate issues of bonds. 
One issue is secured by a mortgage on 
one piece of property; another issue by 
a mortgage on an entirely different 
piece of property; and the two pieces 
of property have probably contributed 
differently to the earning capacity of 
the bankrupt corporation. Obviously 
the bonds secured by the more lucra- 
tive property must be treated more 
liberally than those secured by property 
having a less inherent earning capacity. 
Obviously, no bondholders can be 
asked, under any circumstances, to 
accept new securities in a reorganized 
company which yields less income than 
the distinguishable earning capacity of 
the property securing the bonds; and, 
equally self-evident, bondholders whose 
only security is propei'ty having little 
or no independent earning capacity 
may be justly asked to endure any 
sacrifice in income short of the com- 
plete extinction of their investment. 

Strategic Position of a Bond Issue 

The fourth set of conditions have to 
do, again, with the property securing an 
issue of bonds — the strategic signifi- 
cance, rather than the explicit earning 
capacity, of the property. For it is 
true that in any complex financial 
structure the property securing one 
bond issue is more essential to the 
operation of the business as a whole 
than the property securing another. 
Obviously, the former issue must be 
treated with conspicuously greater 
liberality than the latter. This dis- 
tinction is of great importance in ad- 

Digitized by 



The Annals op the American Academy 

justing the relative interests of differ- 
ent small, and separately secured bond 
issues in every complex reorganization, 
but it is especially important in the 
reorganizations of large railway sys- 
tems. For, obviously, the holders of 
bonds secured by a mortgage on the 
main trunk stem of a railway system 
must be treated with the utmost 
liberality. They must be treated, in 
actual practice, with much greater 
liberality than the holders of bonds 
secured by a mortgage on a branch 
line, the traffic on which is important 
but not absolutely essential to the 
integrity of the reorganized property. 

Legal Conditions 

The fifth set of conditions to be 
considered are legal. Except in rare 
cases,' all bonds are issued under a 
covenant or indenture which specifies, 
explicitly, the rights of the bondhold- 
ers in case of default. Often, however, 
federal and state statutes or judicial 
precedents have altered the signifi- 
cance and the strength of the legal 
privileges accorded the bondholders in 
their contract with the corporation, 
and these privileges, so far as they are 
binding, have a direct bearing on the 
claims of the bondholders to the assets 
of the corporation. Then, too, the 
general machinery prescribed by judi- 
cial procedure tempers the relative 
standing of bond issues. If the re- 
organization follows a foreclosure of 
one of the bond issues and a judicial 
sale of the assets of the corporation, 
severe pressure can be exerted on all 
the junior bondholders. In all re- 
spects, except actual command,^ a 
court can impose a reorganization plan 

' Like certain old debentures of the New York, 
New Haven and Hartford, and the Boston and 
Maine Raihoads. 

^The court, by approving of the conditions 
of the judicial sale, may indirectly force the 
dissenting minority to accept the plan of re- 
organisation approved by the assent of an over- 

upon recalcitrant bondholders. On 
the other hand, if no foreclosure sale 
is ordered by the court, and the plan 
of reorganization is carried out by per- 
suasion only — ^without judicial pres- 
sure — ^then all the bondholders must 
be treated with great leniency. In 
some rare cases, there are special 
state statutes which affect the general 
priority of bondholders^ and, in other 
instances, the mental slant of the 
federal and state judges of the geo- 
graphical region in which the reorgan- 
ization occurs may affect the attitude 
of the court toward the sacredness of 
mortgage contracts. Yet, when all 
is said, the legal conditions of the re- 
organization are, on the whole, im- 
portant, chiefly, as determining the 
form of the reorganization and the 
extreme limits that a reorganization 
committee can go in demanding sacri- 
fices from bondholders; whereas, eco- 
nomic sanctions determine the sub- 
stance or structure of the reorganization 
plan and the particular distribution of 
the sacrifices demanded of the various 
classes of security holders. 

whelming majority. But the court cannot di- 
rectly force a security holder to accept a pkin. 
"It is clear that the courts cannot directly or 
indirectly rewrite this reorganization agree- 
ment." — Guar. T. v. Inter. Steam Pump C«., 
231 Fed. 596 (1916). This was tried in one 
notable case, but the United States Circuit Court 
of Appeals (Supreme Court Justice Brewer 
rendering the opinion) declared against any 
such use of the court's power, on the ground that 
" there is no wide discretion vested in the chancel- 
lor which permits him to disturb contract ri^ts 
— ^the rights of property. ... It is not for 
the court to assume the power to compel because 
it believes it wise and good business. . . . 
Every man in this country decides questions in 
respect to his own property for himself.** — 
Merdtants* Loan and TruH Co. v. Chicago Rye. 
Co., 158 Fed. 92$ (1907). 

* In the recent reorganisation of the Jackson 
Light & Traction Company of Mississippi, the 
first mortgage bondholders* committee found 
that an old state statute seemed to give the 
resident merchandise creditors a priority over 
the first mortgage bondholders. 

Digitized by 


Bonds at the Time of Reorganization 


"Reorganization Imperatives" 

These considerations apply to con- 
crete cases of the treatment of par- 
ticular bond issues in specific re- 
organizations. They are, however, 
circumscribed and limited in their ap- 
plication to two considerations which 
are paramount in every reorganization. 
The fixed charges of the reorganized 
company must be reduced so as to be 
well within the earning power of the 
corporation and the reorganized corpo- 
ration must be supplied with new 
money. The relative importance of 
these two considerations — one might 
almost call them reorganization imper- 
atives — varies with the nature of the 
business conducted by the bankrupt 
corporation and the seriousness of the 
failure. But that they are of para- 
mount importance is tacitly acknowl- 
edged by every practical business man 
who pretends to prescribe for a sick cor- 
poration, aqd explicitly stated by every 
writer on reorganization procedure. 
Possibly the most lasting contribution 
of the late J. Pierpont Morgan to the 
orderly development of American fi- 
nance was his insistence that in the 
great railroad reorganizations, of which 
he was the dominating factor, these 
two principles should be strictly ob- 
served. And the railroad reorganiza^ 
tions following the panic of 1893 are 
to be contrasted with those that 
preceded it by a strict observance of 
these imperatives, notwithstanding the 
losses this involved.* 

The detailed working out of these 
two imperatives gives rise to the prob- 
lems and expedients encountered in 
every individual corporate reorgan- 
ization. Let us consider, first, the re- 
duction of fixed charges to within 

* For brief study of the historical development 
of the theory of railroad reorganization, see 
Dewing, A. S.—The Theory of Railroad Re- 
organizaHoru, 8 American Economic Renew, 774 
(Dec. 1918). 

the reasonable limits of the earning 
capacity of the corporation. This is 
the point which most concerns the 
treatment of bonds. 

Reduction of Fixed Charges 

Equipment ObligcUions 

If the corporation to be reorganized 
is a railroad, any outstanding equip- 
ment trust obligations must be contin- 
ued either according to their original 
tenor or else paid off in money. There 
is no other alternative. This is es- 
pecially true if they were issued under 
the so-called Philadelphia plan, by 
which the title to the equipment does 
not pass to the road until the last in- 
stalment of the trust is paid. Unless 
these obligations are paid, or at least 
continued, the owners can withdraw 
the locomotives and cars from the 
jurisdiction of the receiver and the 
railroad is deprived of its rolling stock 
and hence its ability to carry on its 
business. As a result of the observa- 
tion of this principle, which brooks no 
exception, equipment obligations have 
a better investment standing than any 
other class of investment securities.' 

Receiver's Certificates 

The other type of bonds that re- 
ceives special consideration in every 
type of reorganization are the receivers' 
certificates. These are issued either 

^ The present writer does not know of a single 
ease, throughout the whole range of American 
finance, wherein the holders of equipment 
obligations have been forced to endure a per- 
manent loss. There are several instances — 
Denver and Rio Grande reorganization of 1886 
and the Norfolk and Western reorganisation 
of 1896 — in which the holders were forced to 
refund their equipment obligations, but in the 
end they recovered the principal and interest. 
In two recent cases — Detroit, Toledo and Iron- 
ton, and Buffalo and Susquehanna Railway — the 
equipment under the obligations was withdrawn 
from the railroad and sold. But the prices 
realised were ample to satisfy the outstanding 

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The Annals of the American Academy 

to pay off the '"six months" claims 
existing at the time of the receivership 
or else to secure the money to enable 
the receiver to meet absolutely neces- 
sary expenses when the current income 
is insu£Scient. Under ordinary cir- 
cumstances, a reorganization plan must 
provide sufficient money to pay oflF, at 
par, these receiver's certificates, else 
the court will not permit the plan to 
be carried out. This applies to all 
types of reorganizations — ^railroad, 
public utilities and industrials — al- 
though it should be noted in passing 
that our federal courts show far greater 
willingness to permit their receivers to 
issue certificates of indebtedness that 
take priority over mortgage bonds in 
railroad receiverships than in industrial 
receiverships. Obviously, this attitude 
is based on the presumption that the 
right of the public users of a railroad 
to have good service takes priority over 
even the contractual rights of mortgage 
creditors. The principle of the in- 
violability of the claims of the holders 
bf receivers' certificates has received 
some severe shocks of late, when the 
severity of several small railway fail- 
ures has compelled even the holders of 
these certificates to undergo radical 
sacrifices. It is also interesting to 
note that the great legal strength of 
these obligations of the courts has 
proved less of a protection to investors 
than the mere business expediency 
upon which equipment obligations 

' Perhaps the most instructive of the8<* severe 
failures is that of the Atlanta, Birmingham and 
Atlantic Railroad. At no time during the re- 
organization was there any question but that 
the equipment obligations would remain undis- 
turbed by a reorganization. The interest and 
instalments of principal were regularly paid. 
But in the first plan of reorganization (March, 
1914) it was proposed to give the holders of 
receivers' certificates only 00 per cent in cash. 
And in the final plan of reorganization the holders 
of the receivers' certificates were forced to accept 
income bonds of subordinate and meagre value. 

Special Bond Issues 

With the exceptions of equipment 
securities and receivers' certificates, 
all the bonds dealt with in any reorgan- 
ization are the specific obligations of 
the financially embarrassed corpora- 
tion itself. Their treatment is, there- 
fore, a matter of comparative values. 
When it comes to lay down broad 
principles governing the treatment of 
special bond issues, one is confronted 
with hopeless confusion unless the 
general distinctions suggested in the 
opening paragraphs of this article are 
carried in mind. Of these, the one 
which is applied relentlessly, in formu- 
lating the reorganization plan of every 
bankrupt corporation, is the purely 
business principle that the holders of 
bond issues shall undergo sacrifices if 
the earnings of the corporation before 
the failure were insufficient to meet 
their fixed interest charges. This sim- 
ple principle is seldom violated. It 
takes precedence over all others. For it 
is obvious that if bonds were allowed to 
remain undisturbed, when past expe- 
rience had shown that the reorganized 
company could not earn the charges 
upon them, the corporation would im- 
mediately fail again. Legal and equa- 
ble rights of every description are 
dominated by the motive of giving the 
reorganized company at least a reason- 
able chance of surviving the immediate 
repetition of failure. 

SmaU Underlying Issues 

Among the various classes of bonds 
least likely to be in any way aflFected 
by the reorganization, or called upon 
to make any real sacrifice, are the small, 
underlying issues. If they represent 
first mortgages on essential parts of 
the railway, the lighting system or the 
industrial plant, their position is prob- 
ably impregnable, provided the net 
earnings of the entire corporation ex- 
ceeded their fixed charges. 

Digitized by 


Bonds at the Time of Reorganization 


Sometimes,' however, these underly- 
ing issues are refunded into large 
blanket mortgages, even though their 
holders are asked to make neither a 
real nor an apparent sacrifice. This 
usually occurs when the failure is un- 
usually severe, and the reorganization 
plan proposes to simplify the entire 
financial structure of the corporation. 
Yet it should be noted in passing that 
in the reorganization of smaU corpora- 
tions, the failure of which was so severe 
as to practically exhaust their apparent 
assets, it may be necessary for even the 
underlying bondholders to undergo a 
very substantial sacrifice. In a few 
cases of small railroads, the value of 
these first mortgage bonds has been 
utterly extinguished by the superposi- 
tion of receivers' certificates above 
them, and the final sale of the corpo- 
rate assets for even less than the re- 
ceivers' certificates.' 

' The difficulty of forming any generalizations 
concerning the treatment of even prior lien bonds 
at the time of reorganisation has led the writer of 
the present article to attempt to classify railroad 
failures and reorganizations with this very matter 
in view. It would appear that there are three 
types of railroad failures and resulting reorgani- 

Class I. This embraces serious, thorough- 
going- failures of large railway systems. The 
causes are deep-seated and long-continued; the 
system has been over-extended; it has been 
under-maintained; it has not, nor is likely to 
have, an inherent earning capacity commen- 
surate with its invested capital. Reorganiza- 
tions of this type are as thoroughgoing as the 
failures which preceded them. Usually all the 
bonds of every description, including the under- 
lying divisional and main line prior liens, are 
refunded into one, or, at the most, into two great 
consolidated issues. Generally the old general, 
refunding or debenture junior liens are refunded 
into preferred stock and rarely income bonds. 
Illustrative of this type are the Wabash reor- 
ganization of 1888, the Norfolk and Western 
reorganization of 1896 and, conspicuously, the 
recent Pere Marquette reorganization of 1907. 

Class II. This embraces less serious failures 
of large railway systems. The causes are tem- 
porary, easily diagnosed and easily remedied. 
Although the earnings of the system are de* 

Junior Mortgage Bonds and Deben- 
tures. — Junior to the layers of under- 
lying bond issues there are usually large 
issues of bonds, either mortgage or de- 
benture, which represent the genera] 
obligations of the corporation. In 
fact, quite generally among industrials 
and also in the cases of railroads and 
public utilities which have been reor- 
ganized before, the senior issue of these 
general bonds represents the first 
funded lien of the corporations, as there 
are no prior lien underlying issues. The 
manner of treating these general bond, 
issues is determined entirely by the past 
earnings of the corporation. If these 
were fully ample to meet the interest 
charges, then the issue is treated like 
one of the underlying mortgages. It 
is either allowed to remain undisturbed 

pressed, the best judgment indicates that the 
system contains an inherent earning capacity 
commensurate with its capitalization. Re- 
organizations of this type seldom penetrate be- 
neath the superScial layers of the Snancial plan. 
The underlying and first general mortgage bonds 
are not disturbed. Quite frequently the only 
important result of the reorganization is the re- 
funding of the uppermost layer of fixed charge 
obligations into preferred stock. Excellent il- 
lustrations of this type are the recent reorganiza- 
tions of Chicago, Rock Island and Pacific Rail- 
way, and of the Missouri Pacific Railway, both 
in 1917. 

Class III. This embraces the failures of small, 
local, unimportant and often unfinished ' rail- 
roads. As the securities are closely held and the 
fortunes are not of much public concern, the 
public admission of failure is usually postponed 
until the last ray of hope has vanished. Con- 
sequently, when the failure actually does come, 
it lays bare a very serious situation. In con- 
sequence, the reorganization of these little roads 
almost invariably involves the elimination of all 
security holders junior to the prior lien bonds. 
It involves, too, the refunding of these bonds into 
preferred and common stock, and usually an as- 
sessment in addition. In fact, instances are by 
no means rare in which the prior lien bonds are 
extinguished by the failure of the assets to sell 
for enough to pay the receivers* certificates. 

For further details concerning this classifica- 
tion see 9 American Economic Association Review, 
277 (June 1919). 

Digitized by 



The Annals of the American Academy 

or else is refunded into a new issue of 
bonds with no loss or sacrific to the 

A serious question arises when it is 
quite doubtful, after adequate depre- 
ciation or maintenance charges are al- 
lowed, that the earnings of the co rpora- 
tion were adequate to meet the interest 
charges on the issue. Clearly, to allow 
the bonds of such an issue to remain un- 
disturbed would be to jeopardize the 
solvency of the reorganized company. 
The charges upon them must be re- 
duced or even entirely extinguished. 

Until the reorganizations of the mid- 
dle nineties, it was the custom to fund 
the coupons for the succeeding few 
years on the bonds upon which charges 
had not been earned. This gave the 
corporation a temporary rest from bur- 
densome capital charges . But this was, 
at best, only a palliative and secured 
to the reorganized company no per- 
manent relief. A much sounder prac- 
tice is followed at the present time. 
Instead of seeking merely a temporary 
"rest" for the corporation, one of four 
expedients is tried. Each one of these 
gives to the reorganized company some 
measure of permanent relief, although 
it invariably involves a considerable 
sacrifice on the part of the bondholders. 

One method is to refund the old bonds 
into new long-term bonds of the same 
principal amount, but with a lower in- 
terest rate. A second method is to 
refund the old bonds into two new 
securities, one with fixed and the other 
with contingent charges. ^'^ Thus the 
holder of $1,000 par value of the 5 per 

^^The word "contingent'* as applied, in this 
article, to securities or charges implies that the 
charges which such securities bear are contingent 
on the earnings of the corporation. They need 
not be paid unless the earnings are sufficient, 
and a lapse in their paymlent will not precipitate 
the failure of the corporation. In this sense 
preferred stock and income bonds are contingent 
securities, and the dividends and warrants they 
bear represent contingent charges. 

cent general bond issue of a corpora- 
tion, which had failed to earn the full 5 
per cent on the issue, before the failure, 
might receive $500 par value in new 5 
per cent general bonds and $500, or 
even $700, in new preferred stock. In 
this way the obligatory fixed charges 
would be cut in half, or very much re- 
duced. A third method has been to re - 
fund the entire issue into new preferred 
stock bearing a higher rate of contin- 
gent return than the fixed charge on the 
old bonds. This method is frequently 
used when the issue is large and it i^ 
obvious that considerable amounts of 
money must be spent on the property 
of the corporation in the years im- 
mediately following. the reorganization. 
It has the very great advantage of 
insuring the reorganized corporation 
complete rest from the fixed charge. 
A fourth method, considerably used 
in the earlier reorganizations and 
somewhat revived of late, is to refund 
the fixed charge bonds into income 
bonds. And often two separate issues 
of income bonds are used, so that a 
portion of the contingent charge car- 
ried by the new securities has a priority 
over the rest. In this way the bond- 
holder, who is forced to forego his fixed 
income, secures the assurance thatt at 
least some of his lost income will be 
restored to him at the earliest op- 

The decision as to wliich of these 
methods of dealing with the general 
bonds shall be adopted rests very 
largely upon the special circumstances 

^^ This was the method pursued in the reorgan- 
ization of the St. Louis and San Francisco Rail- 
road in 1916. The important use of income 
bonds — on the whole an obsolete practice — is 
only one phase of an altogether stupid plan of 
reorganization. For, historical precedents and 
business expedients considered, the reorgani- 
sation plan of the St. Louis and San Fran- 
cisco Railroad shows the least insight and 
intelligence of any of the great railway rcor^ 
ganisations of the last decade. 

Digitized by 


Bonds at the Time of Reorganization 


attending each reorganization. If the 
failure was occasioned by special 
causes — embezzlement, failure of large 
creditor, sudden shrinkage of inventory 
or even a nation-wide stringency in 
the money market — probably no very 
serious sacrifices will be asked of the 
bondholders. Almost certainly they 
will not be asked to refund their bonds 
into income bonds or preferred stock, 
with the positive assurance that other 
new fixed-charge bonds will be super- 
imposed ahead of their securities. But 
this is exactly what will happen if the 
failure is due to deep-seated and far- 
reaching causes. The justice doled 
out to the bondholders is purely a 
matter of expediency. 

When it comes to the manner of 
treating those layers of junior securi- 
ties upon which the interest charges 
were not earned, by any subterfuge of 
accounting, there is now almost com- 
plete unanimity of judgment. They 
are invariably refunded into preferred 
or common stock. In large railroad 
and public utility reorganizations they 
are refunded into preferred stock bear- 
ing, ordinarily, non-cumulative divi- 
dends equal to, or possibly one per cent 
higher than, the fixed charges on the 
old bonds.^^ 

In industrial reorganizations these 
junior bond issues, upon which the in- 
terest charges were not earned prior to 
the failure are usually refunded into 
common stock. In fact one very whole- 
some characteristic of industrial reor- 
ganizations, as a class, is the willingness 
of reorganizing managers, forced, to 
be sure, more by necessity than choice, 
to reduce and, if possible, eliminate, 

^Securities bearing exactly this standing 
were the First and Refunding Mortgage 4s of 
the Wabash Railroad, the First and Refunding 
58 of the Missouri Pacific Railway, and the De- 
benture 5s of the Chicago, Rock Island and 
Pacific Railway. In the recent reorganisations 
of these systems each one of these issues was 
refunded into a new preferred stock. 

both the contingent as well as the 
fixed charges. There is a tacit ac- 
knowledgment that an industrial en- 
terprise, especially one that must 
rehabilitate its credit, should have 
few direct or indirect liens upon its 

Methods of Procuring New Money 

Less, by far, need be said concerning 
the treatment of bonds in securing the 
other purpose of practically every 
reorganization — the procuring of new 
money. Although this is often the 
crux of the reorganization — quite gen- 
erally it is so in an industrial reorgan- 
ization — ^yet its burden almost always 
falls on other interests than the bond- 
holders. In railroad and public serv- 
ice reorganization plans this burden 
falls on the stockholders who are forced 
to subscribe new money or suffer the 
extinction of their equities through the 
foreclosure of the bonds and the judi- 
cial sale of the corporate assets. In 
industrial reorganizations the burden 
of supplying new money is often 
divided among the stockholders and 
the unsecured creditors — the latter 
being forced, as well, to fund their 
obligations into a preferred stock. 

But bonds are not always free from 
the necessity of supplying at least some 
of the money required by the reorgani- 
zation. If the amount of money re- 
quired to settle with the various 
creditors that need it and to rehabili- 
tate the weakened credit of the corpora- 
tion is more than the reorganization 
managers believe can be coerced from 
the stockholders, then they will assess 
the junior bondholders. It is purely 
a matter of expediency. If the new 
money cannot be obtained from the 
stockholders without nmning the dan- 
ger of driving them away, then some 
of the burden must be passed onto the 
next higher layer of security holders. 

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The Amnals of the Amebican Acadebit 

This is the junior bondholder.^ And 
if, in turn, the jimior bondholders can- 
not be counted upon to sacrifice very 
much to protect their equity, then at 
least a share of the burden may be 
passed on up to the senior bondhold- 
ers.^* In some instances the bond- 
holders are placed in the position of 

" This principle is succinctly stated in an often 
quoted passage from a circular issued at the time 
of the second reorganisation of the Atdiison, 
Topeka and Santa F6 Railroad. After stating 
that the amount of money to be raised amounted 
to $14,000,000, the reorganization committee 
went on to say: 

"The stockholders in the ordinary course 
should provide the whole of this amount . . . 
but the proportion of the assessment that 
would be borne by the ^i^kholders could only 
be gauged by the amount of assessment that 
they would be willing to pay in order to protect 
their rights. This amount is believed to be $10 

guaranteeing the assessments levied 
on the stockholders, so that if the latter 
default, the junior bondholders step 
into their position, pay their assess- 
ments and take the securities allotted 
to them. In some industrial reor- 
ganizations, too, the debenture bond- 
holders find themselves forced to sub- 
scribe sufficient money to pay off 
certain preferred creditors in order to 
give themselves a controlling voice in 
the reorganization. Again, it is a mat- 
ter of expediency. 

per share, and it is necessary that the second 
mortgage bondholders shall provide the remain- 
ing $4 for their own protection." 

^* This was the procedure followed in the re- 
organization of those small railroads (Class III 
enumerated in note 9 page 30) which required 
the foreclosure of the senior mortgage and the 
total extinction of ail junior securities. 

Digitized by 


The Work of an Investment Banking House 

By Hastings Lyon 

Attorney at Law, Lecturer on Finance, Columbia University 

Commercial and Investment 

Difference in Matter 
Commercial Banking. — ^Let us first 
differentiate the work of commercial 
banking from that of investment bank- 
ing. The commercial banker is en- 
gaged in financing the circulating 
capital of business enterprise. His 
control over capital is subject to cer- 
tain very strict limitations. Most of 
it might be called a delegated control 
subject to revocation without notice. 
Though he may direct capital into 
certain channels he must be able to 
withdraw it quickly, if necessary to 
satisfy the demands of his depositors 
who have vested him with control over 
capital under the condition that they 
shall be able to revoke that control on 
demand and resume it for their own 
purposes. Therefore, the commercial 
banker who is conducting his business 
with careful regard for his obligation to 
repay depositors on demand, properly 
loans on the security of commodities or 
goods in the process of consumption 
which, as they enter into consumption, 
automatically provide the means for 
liquidating the loans of the commercial 
banker. He may, to be sure, make 
loans on the collateral of fixed capital 
securities, but only as by reason of 
their enjoying a quick market they pos- 
sess the quality of ready liquidation in 
sale which affords the equivalent of 
liquidation through the processes of 
consumption. It should be noted too 
that this loaning on security collateral 
takes place only after some one else has 
directed the capital represented by the 
securities into the enterprise on which 
the securities are based. 

DistribtUion of Surplus Capital. — 
This shows the matter of commercial 
banking from the viewpoint of the 
commercial bank. Look at it for a 
moment from the viewpoint of the 
borrower from the commercial bank. 
A certain part of the capital of a busi- 
ness enterprise is required through the 
entire year and from year to year. 
Another part of the capital needs of 
any business varies from month to 
month. The inventories of a manu- 
facturing concern, for example, have 
their peak and their valley. In addi- 
tion to the raw material goods in 
process and finished product, the man- 
agement of the enterprise must finance 
goods sold and delivered but not yet 
paid for. Seasonal variations cause 
this capital requirement to fluctuate 
widely. A business must render a 
return for its use of capital. Stated an- 
other way the cost of capital is an es- 
sential part of the cost of production. 
If it is possible to avoid paying for a 
whole year's use of capital, the actual 
use of which is required for only part of 
the year, that is good business. The 
capital which gives rise to these sea- 
sonal variations is that very circulating 
capital which by reason of its steady 
consumption is constantly providing 
the means to liquidate loans by which 
it may be financed. So the complex 
development of our economic life has 
given rise to this nice adjustment, 
which is really an economy, providing 
the ability to shift the control over 
capital quickly from the place where, 
for the moment, it is not needed to the 
place where, at the moment, it is im- 
peratively needed. 

But any business enterprise has 


Digitized by 



The Annals op the American Acadebit 

certain capital requirements which do 
not diminish through any natural 
seasonal variation. The land, the 
factory building, the machinery in the 
factory — ^when the capital committed 
to an enterprise takes these relatively 
enduring forms it remains a fixed 
quantity. Even though the plant or 
some part of it is idle for a time, and 
even though this idleness may be of 
periodical recurrence, we have devised 
no means of efifecting a capital economy 
here. The capital is not fluid, but 
fixed, and we must count it a capital 
cost through the entire year, and year 
in and year out, whether we actually 
use it continuously or not. Besides 
having this capital which is "fixed" by 
reason of its physical aspects, a busi- 
ness enterprise has a certain minimum 
amount of circulating capital which, by 
reason of its constant quantity, gives 
rise to the same financing requirements 
as that part of the capital which is 
physically permanent. That is, in a 
manufacturing enterprise, for example, 
the inventory of raw material, work in 
process and finished product and the 
accounts receivable, all of which pre- 
sent a requirement for the financing of 
circulating capital, reach a minimum at 
some period of the year. Though in its 
physical quality this is circulating 
capital, or its representative in ac- 
counts receivable, the permanence of 
its quantity gives rise to the same 
financing problem as the physically 
fixed capital assets of the business. 

Invegtmeni Banking. — ^Here lies the 
field of the investment banker, in 
financing the capital requirements of 
business which are not subject to 
seasonal variation, principally the 
fixed assets which are not seliF-liquidat- 
ing through the rapidity with which 
they enter into consumption, but also 
that part of the circulating capital 
which, though constantly entering into 
consumption, is, by reason of its fixed 

quantity, not self-liquidating. By 
tie term "self-liquidating," of course, 
is meant furnishing the means for 
prompt repayment of the principal com- 
mitted to the financing. 

DiFFiaiENCE IN Method 

Besides this fundamental difference 
in matter, a fundamental difference in 
method should be observed as between 
the work of the commercial and the 
work of the investment banker. The 
depositor in the case of the commercial 
banker has no choice in the risks to 
which his capital is committed. To 
offset this the commercial bankers' 
own capital forms a guarantee fund 
which assumes the first hazard in all 
risks. The person committing his 
capital to an economic undertaking 
through an investment banker has a 
choice in his risk and the investment 
banker's own capital is in no way 
pledged to indemnify him, the investor, 
in the event of loss. 

The Investment Banker and Pri- 
vate Enterprise 

Without going fiu-ther into the com- 
parison of the commercial and the 
investment banker, which has been 
made only as a means of defining the 
scope of the investment banker's ac- 
tivity, let us now consider the mech- 
anism by means of which capital, not 
required in their own economic under- 
takings by those who have control over 
it, is committed to economic enterprise 
under the management of some one 
else. The entrusting of capital to the 
management of another is an essential 
element in the idea of investment as the 
word is commonly used, and hence the 
term investment banker as describing 
those through whom this commitment 
is made in the financing of the fixed 
capital assets of business. 

Digitized by 


The Work of an Investiient Banker 


The Fidd of the Intestfnent Banker 
In the process of this commitment 
the investment banker uses his own 
capital as a means of clearance. He 
is a merchant buying on his own ac- 
count with the risk of the transaction 
on him» not a broker performing a 
service only. The investment banker 
buys securities and sells them. Since 
his capital is not unlimited and his 
transactions are large he must arrange 
for credit. Yet the legal and business 
exigencies surrounding each transaction 
are such that credit is seldom extended 
to him by the vendor. Offsetting this 
fact is the fact that he seldom extends 
credit to the purchaser from him, the 
investor. But he must arrange loans 
to carry his goods, the securities in 
which he deals, until he sells. The 
method of doing this requires some 

The Method of the Investment Banker 

DietribiUion of Investment. — When 
the investment banker has committed 
himself to the purchase of an issue 
of securities, or even before actually 
making the commitment, he proceeds 
to shift a large part of his risk as 
rapidly as possible. He forms an 
underwriting syndicate of investment 
bankers which assumes the entire risk 
of the transaction. He will retain such 
part of the risk as he desires or cannot 
shift by becoming himself a member of 
the syndicate of which he will be 
the manager. Though sometimes the 
members finance the carrying of their 
respective participations, more com- 
monly the banker who has initiated the 
entire transaction arranges for the 
loan to carry the entire issue. To this 
end he seeks the commercial banker. 
For the purpose of the commercial 
banker the securities now in the process 
of distribution are like commodities 
entering into consumption. By reason 
of the market the investment banker is 

engaged in making, it is anticipated 
that the transaction will itself provide 
the means of liquidating the loan. 
Though there is not the same assurance 
that this will be the case as there is 
with a loan based on standard com- 
modities, as food and clothing, or 
goods consumed in the necessary opera- 
tions of our economic life, the consump- 
tion of which is imperative to human 
existence in the established social form, 
nevertheless, loans of this kind have 
become in financial centers a well rec- 
ognized part of the business of those 
banks which have hitherto been desig- 
nated in this article as commercial. 
Bank operations of this kind based 
on investment securities, whether in aid 
of the investment banker or the stock 
exchange broker, are sometim^ called 
financial banking to distinguish them 
from operations based on tangible 
goods to which the term commercial 
banking would be more strictly applied. 

Shifting the Risk, — ^Even though the 
investment banker has shifted the risk 
of the transaction by forming an under- 
writing syndicate, he may pledge his 
personal credit for the loan and put up 
the syndicate agreements as collateral 
along with the securities themselves. 
With the loan all arranged in this way 
the transaction is now ready for the 
"clearance," that is, for the payment 
of the purchase price to the issuer, the 
issuance of the securities and the 
delivery of them to the bank to be held 
as collateral. The precise form of the 
business varies a great deal with the 
nature of the transaction and no 
adequate inclusive general description 
can well be given. 

There may well be a further shifting 
of the risk before this clearance opera- 
tion. If the transaction has gone far 
enough, assumed sufliciently definite 
form, the underwriters may proceed to 
sell subject to the condition of "when, 
as and if issued and delivered." The 

Digitized by 



The Annai£ of the American AcADESir 

securities may even be advertised in 
the press and by circular this way. 
When the advertising takes the form of 
an announcement of an ofiFering for 
pubUc subscription, and the subscrip- 
tion books are closed within an hour or 
two of their opening it need not always 
be assumed that an eager pubUc has 
rushed in of its own accord. The 
probabilities are that a large amount 
of seUing work was done before the 
subscription announcement. 

How the IrweHTnent Merchant Buys 

Investigation of enterprise. — ^In our 
description of the work of the invest- 
ment banker we have followed one 
thread of the warp further than some of 
its parallel threads. So far we have 
followed the thread of distribution. 
How does the merchant of investments 
buy the goods he sells? Sometimes an 
investment banker assiunes the work of 
a promotor, assembles from the very 
beginnings the elements of an enter- 
prise and follows it through its con- 
struction stage to its demonstration of 
an earning power. We will consider 
his work, however, only in relation 
to an enterprise already established. 
Those in control of such an enterprise 
seek the banker, usually, because they 
want to increase the business and in 
order to do so need to add to the capital 
accoimt. Sometimes for one or more 
of various, good and sufficient reasons 
those in control wish to withdraw from 
the business, to sell out, and, since by 
reason of the magnitude of the enter- 
prise the number of possible private 
purchasers is so small as to be negli- 
gible, they seek to sell to the investing 
public through the jobbing banker. 
The banker stays in business, however, 
through a reputation for the quahty of 
the goods he sells. He must investi- 
gate and test his goods before adding 
them to his stock. He must test for 
earning power as being the quality 

which will provide dividends for stock- 
holders, and interest and the provision 
for the repayment (rf principal for 
bondholders. He must consider the 
liabiUty of this earning power to 
fluctuate depending on the kind of 
business involved as affecting the 
capacity of the enterprise to meet 
fixed charges and afford a probable 
continuity of preferred dividends. He 
must test the value of the assets, the 
cost of reproduction less depreciation. 
The business makes its earnings by 
reason of creating a value of some kind, 
a value of place, a value of form. How 
much of this added value is attribu- 
table to the use of capital, and how 
much, therefore, of the earnings is 
capital Ukely to be able to continue to 

Earnings and Income. — ^Though the 
banker must depend on his own judg- 
ment in making a purchase of securi- 
ties, he needs facts and the judgments 
of expert technical knowledge on which 
to base his judgment. So when con- 
sidering the merits of an enterprise as a 
basis .of investment he calls in experts 
for several lines of technical investi- 
gation. We will assume that the 
enterprise is industrial. The banker 
needs to know the facts about earnings. 
The management of the corp)oration 
may be perfectly honest in its represen- 
tations to the bankers and still state 
earnings incorrectly because them- 
selves mistaken. Accoimting practices 
are by no means universally sound. 
So, as a check on possible wilful mis- 
representation, but more probable un- 
intentional inaccuracy, the banker 
requires the audit of expert accountants 
running over such a period of years as 
may be considered sufficient to guard 
against a commitment based on ex- 
ceptionally favorable earnings for a 
single year. 

Value of Assets. — ^Though income is 
the first consideration, the value of as- 

Digitized by 


The Wobk of an Inyesi^ment Banksr 


sets is also highly important. If the 
employment of capital in the enter- 
prise is unduly small in relation to the 
earnings, apparently elements other 
than capital contribute principally to 
the income, ss management, or some 
especially favorable but probably not 
really permanent condition. Question 
may well arise as to the value of capi- 
tal committed in the absence of the 
especially favorable element. What 
would the assets be worth to some other 
competent management? As an as- 
simince of the probable continuity 
of income available to capital and of a 
liquidation value, in the event of some 
weakness that may develop in the 
management of the enterprise in its 
present form, the value of assets must 
be taken into account. So the banker 
needs an appraisal of the tangible as- 
sets. The auditors have passed such 
judgment as is possible on the value of 
the intangible assets, the bills and ac- 
counts receivable. The judgment is 
perhaps not based on very profound 
investigation, but it is the best 

Appraisal of Materials. — ^The audi- 
tors, however, who are skilled in ac- 
counts, have no basis for judgment of 
the tangible values on which those ac- 
counts are largely based. So, both for 
the purpose of supplementing and 
enabling a check on the deductions 
drawn from the audit, the bankers 
have an appraisal made. This ap- 
praisal may be made simultaneously 
with the audit, and its results, or more 
especially the appraisal of the invento- 
ries of material, goods in process and 
finished product, taken advantage of in 
completing the report on the audit. 
So far as the fixed capital assets are 
concerned the appraisers estimate the 
cost of reproduction and deduct a 
proper allowance for depreciation. 
Such an appraisal, of course, leaves out 
of consideration special increases or 

decreases of value due to location or 
other causes than costs, but as these 
special advantages or disadvantages 
are reflected in earnings this is not of / 
consequence. The appraisal serves the J 
purpose for which it is taken. 

The cost of reproducing the plant 
may be a certain amount, yet the plant 
may not be advantageously arranged 
for operating purposes. The banker 
needs the opinion of a competent en- 
gineer on this matter. Such an opin- 
ion completes the Ust of expert investi- 
gations ordinarily made. 

Investment Merit. — ^To the facts as 
ascertained by these expert investiga- 
tions the banker must add the more 
general facts in forming his judgment of 
investment merit. He must consider 
such matters as whether the general 
geographical location is and will con- 
tinue to be advantageous, the ability 
of the management, whether the en- 
terprise is large enough to hold its 
own in the industry, the labor element, 
in short, the entire set of general busi- 
ness considerations. 

Kind of Securities to Be Issued. — 
Before these investigations are under- 
taken the financing bargain has been 
made, that is, an agreement reached as 
to the kind and amount of securities to 
be issued and the price to be paid for 
them. This is done on the basis of 
representations by the management of 
the enterprise. The investigations are 
made to substantiate these representa- 
tions, and the financing bargain is made 
conditional on this substantiation. 

In arriving at the financing bargain 
the management and its attorneys and 
the bankers and their attorneys all have 
a part. The management of the enter- 
prise and the bankers state the results 
they wish to arrive at and, in a general 
way, the means. The attorneys indi- 
cate how far these results and means 
are legally practicable. In this way 
the bargain is made which includes as 

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Ths Amnale of ths American Academy 

part of its terms the f<Mrm of security 
to be issued. The experts proceed 
with their investigations, which we will 
assume do substantiate the representa^ 
tions of the management. The at- 
torneys proceed with the legal matters 
necessary to carry out the bargain. 
The bankers go ahead with their 
preparations for the ultimate dis- 
tribution of the securities. This in- 
volves the formation oi the syndicate, 
as already indicated, the preparation 
of the circular and any other matters 
looking forward to the final offering 
of the securities to the investing 

The Sale of Securities. — ^The prepara- 
tion of the circular and other advertis- 
ing matter is by no means an unimpor- 
tant part of the work antecedent to 
the sale of the securities. Statements 
made in the circular constitute the 
representations on the basis of which 
the securities are sold. Every care 
must, therefore, be taken to have these 
statements accurate. The banker's 
reputation, to say nothing of legal 
liability, depends on their accuracy. 
Yet, naturally, the circular should 
make as good a showing for the busi- 
ness as consistent with the facts. If 
there are any faults, however, they 
are Ukely to be faults of omission rather 
than of commission. 

We will not undertake to describe 
the processes by which an investment 
banker develops the clientele which 
is the foundation of his business. 
The forming of business connections 
through the agencies of the sales- 
man, through personal relationship, 
and through such value as the printed 
advertisement, may foUow a course 
for investment banking fairly similar 
to that for any other form of busi- 
ness enterprise. The problem is es- 
pecially difficult in that the thing 
which the investment banker has to 
sell consists ot intangible values. 

The Investment Banker and Pubuc 
For the sake of claritgr in the par- 
ticular description, we have so far 
confined ourselves to the work the 
investment banker performs in direct- 
ing investment in private enterprise 
and have neglected his relationship to 
pubhc finance. The community act- 
ing in its organized capacity as the 
sovereign state, including the munici- 
pal agencies of the state, makes its 
primary provision of funds substan- 
tially in two ways, by taxation and by 
borrowing, that is, the enforced levy 
and the voluntary loan. Though the 
funds may be provided in the first 
instance by the voluntary loan the 
repayment of the loan and, therefore, 
the ultimate source of the funds lies in 
the enforced levy. 

Public Loans 
The loan is properly resorted to as a 
source of immediate funds f(M* such 
extraordinary expenditure that to levy 
for the whole amount would interfere 
with the economic functioning or 
productive power ot the community. 
Two men equally able to pay in the 
long run may differ very widely in 
their abiUty to make immediate pay- 
ment. One man may, without in- 
terfering with his productive power, 
part with his private control over 
capital to many times the amount ol 
another man of equal worth. ' If an 
immediate tax levy would seriously 
interfere with the productive power of 
the other man, it is a matter of expedi- 
ency to borrow part of funds immedi- 
ate^ required on such terms as make it 
advantageous to those members of the 
conununity whose wealth is of such 
a nature that they can part with con- 
trol over more than their proportionate 
share for tax purposes without inter- 
fering with their productive power. 
It may be remarked that no element of 

Digitized by 


The Wobk of an Inye8tk£NT Banker 


patriotism is involved in the transac- 
tion which would make it praiseworthy 
to loan to the government on terms less 
advantageous than a good bargain to 
the lender. The ultimate beneficiary 
is not the government but the tax- 
payer who is not in a position to part 
with his proportion, of the necessary 
funds without too seriously impairing 
his economic efficiency. During the 
recent war the investment bankers 
of this country contributed their 
services in the flotation of the govern- 
ment loans. They not only made no 
profit but also suffered a positive 
loss through their running expenses. 
There was no more reason why they 
should contribute their services with- 
out pay and suffer the loss of their 
operating expense than that the maker 
of munitions of war should do the 
same thing. 

The Investment Banker a Merchant of 

Ordinarily the investment banker 
acts as a merchant of credit in the case 
of government and municipal loans 
just as he does in the case of the financ- 
ing of private corporations. In the 
case of the private corporation, how- 
ever, the sale to the banker is a private 
sale, that is, the corporation does not 
offer its securities generally to whoever 
will come and buy, but privately seeks 
a particular banker, and if unable to 
do business with him seeks another. 
The regular course of business with 
public securities, however, is to offer 
them publicly to the highest bidder. 
If the banker seeks to buy he must 
take what is offered. He does not 
have the opportunity he has with the 
private enterprise to take part, and 
usually much the greater part, in 
shaping up the investment contract 
expressed in the security. Since pub- 
lic securities rest on the taxing power 
as the one form of provision for pay- 

ment, and usually all the issues have 
exactly the same claim on the taxing 
power, the opportunity for variation in 
the investment contract is confined to 
purely formal matters of the security, 
as the term and rate. So the lack of 
opportunity to take a part in the shap- 
ing up of the issue is not as disadvan- 
tageous as it would be in the case of 
securities of private corporations. 

Public Sale of Securities 

The business of financing the mu- 
nicipalities is highly developed and the 
fact of the pubUc rather than the pri- 
vate sale by the issuer of the securities 
makes some fundamental differences. 
Since the purchaser does not know that 
he is to get the securities until it is 
time also for him to pay the money for 
them, there is not the same opportunity 
to shift the risk. Any syndicate formed 
before the purchase and payment is a 
joint account rather than an under- 
writing syndicate, that is, a joining in 
the risk as a primary purchaser rather 
than taking an assumption of the risk 
as a secondary purchaser. The same 
reason prevents any shifting of the 
risk to the investor before the time of 
payment. Since the purchase is un- 
certain it is not worth while to under- 
take the work and the banker has really 
nothing to offer. 

Another respect in which the pur- 
chase of municipal securities differs 
from purchasing securities of private 
corporations lies in the lack of special 
independent investigation, other than 
legal, in the case of the municipal 
security. It is the nature of the trans- 
action that the vendor's statement 
of assessed values and of financial 
position should be accepted by the 
purchaser. The purchaser does not, 
however, accept the legal proceedings 
as being necessarily adequate. The 
legality of the issue of municipal securi- 
ties is so highly technical a matter that 

Digitized by 



The Annals op the American Academt 

the investment banker always requires 
an independent report on legality, and 
the importance of this is indicated by 
the large percentage of cases in which 
the municipal bond attorney detects 
some flaw in the proceedings which re- 
quires remedy." 

Creation of Investment Market 

This description of the work of an 
investment banker has confined itself 
to his business as a merchant in credit. 
He has one function which the mer- 
chant in ordinary commodities does 
not have. The ordinary commodity 
goes its straight course direct to con- 
sumption. A security, however, is not 
consumed in use and the financing of 
it is, therefore, not liquidated in the 
consumption process. The only way 
in which the investor can liquidate a 

security with a long term still to run, or 
without maturity, as stocks, is to put 
his investment in the market again. 
A very considerable part of the eco- 
nomic service performed by the in- 
vestment banker consists of his crea- 
tion of this market. The processes 
by which it is created, through bro- 
kers, through telephonic, telegraphic 
and mail inter-relationships among the 
banking houses, through the medium 
of the organized exchanges, through 
direct dealings with the bankers' own 
clientele are all matters that would 
requirfe another article for telling. It 
is enough to say here that liquidity in 
sale is an important element of eco- 
nomic value, and this value, when 
present, is one of the creations in one 
form or another of the investment 

Digitized by 


United States Government Bonds 

By C. Frederick Childs 
President, C. F. Childs and Co., New York and Chicago 

The Nature op Government 

A GOVERNMENT bond is pri- 
manly a loan which the legally 
constituted national authorities cove- 
nant and promise to pay on a specified 
date. Being, therefore, the obligation 
of a nation, such a bond represents a 
form of credit of the utmost superiority. 
The bond of a government presupposes 
that the nation borrowing the money is 
entitled to the accommodation which it 
seeks, and does so in unimpeachable 
good faith and integrity for the welfare 
of its people. When founded upon the 
strictest observance of all past conmiit- 
ments and supplemented by the lend- 
er's recognition of the standing of the 
borrowing nation and its estimated 
resources, the obligation is entitled 
to the fullest confidence on the 
part of foreign, as well as domestic 

A national loan should not be re- 
garded as in the same class with a state, 
mimicipal or corporation bond, since 
the debt of a government supersedes 
all obligations of any minor political 
body or subdivision. Even the sacri- 
fice of the credit or solvency of any 
municipality is of small importance 
when the financial standing of the 
sovereign state is at stake. In the lat- 
ter case the faith and credit of the 
entire nation and all its units and 
peoples is pledged to honor its obliga- 
tions, and taxes may be levied ac- 
cordingly without regard to the needs 
or sacrifices of any subordinate com- 
munity or corporate body. A na- 
tional loan is therefore a veritable 
mortgage on the integrity, wealth and 
taxable assets of the entire population. 

and when such a loan ceases to be safe, 
then no other known security or in- 
vestment based upon property within 
that nation will have any dependable 
market value. The default of a na- 
tional obligation would be an absolute 
calamity to the entire commercial 
structure and credit of its people, and 
the money of such a nation would 
become virtually worthless. No such 
situation, therefore, is conceivable in 
the case of the United States Govern- 
ment and its bonds. The govern- 
ment's power to control all the re- 
sources, wealth and productivity of 
the nation, coupled with unlimited 
powers of taxation, constitutes the 
economic vitality of the nation in 
support of any desired credit. 

National Finance 

History records that a liberal appli- 
cation of taxation is the surest method 
of marshalling national resources for 
the successful financing of every great 
nationa} calamity or crisis. The rec- 
ords of the Napoleonic Wars indicate 
that at that time over 40 per cent of 
the cost of the wars was paid by direct 
taxation. At the close of our Great 
War just ended, it was estimated that 
taxation was producing about 35 per 
cent of the actual daily cost of the 
war. In consequence, it becomes ap- 
parent that submission to such sacri- 
fices on the part of a nation's citizens 
makes its government capable of ful- 
filling any duty necessary to honor 
its debt. Responsive patriotism to a 
like degree assures the government 
that public support will safeguard all 
its accompanying moral and financial 


Digitized by 



The Annals of the American Academy 

Wealth, Debt and Income op the 
United States 

Before the United States entered 
the late war our net national debt was 
approximately $1,000,000,000. The 
gross cost of the war to the United 
States up to June SO, 1919, was com- 
puted by the Secretary of the Treasury 
to have been $30,177,000,000. To 
meet the treasury's needs to conduct 
the war and its unprecedented ex- 
penditures, there were issued and sold 
to the public $16,978,856,250 bonds 
and $4,500,000,000 notes. Also vari- 
ous other obligations were incurred, 
notably War-Savings Stamps and Cer- 
tificates and serial issues of short term 
Treasury Notes sufficient to make the 
gross debt of the United States up to 
June SO, 1919, total $25,484,506,160. 
To better appreciate the significance 
of such figures, the contrast between 
, the estimated wealth, net debt and 
annual income of the United States 
might be shown in round numbers as 

Wealth $300,000,000,000 

Debt $20,000,000,000 

Income $50,000,000,000 

By an obvious analysis of these figures, 
the net debt of the government is only 
about 40 per cent of our country's in- 
come for one year. Similarly, if we 
assume that the government's yearly 
rental or interest charge for the use of 
the mon^r represented by the loans 
averages 4^ per cent on the bonds and 
4j per cent on the notes, it is evident 
that our income is equivalent to about 
fifty-six times the interest requirements 
on the national debt. By comparison, 
the average cori)oration bond pur- 
chased by investors shows earnings of 
only about two to five times the in- 
terest charges. 

\lthough not generally realized, our 
financial burdens today are not alto- 
gether disproportionate to those im- 

mediately following the Civil War. 
A comparison of the data indicates 
that the debt of the United States after 
the Civil War was $80 per capita, or 
10} per cent of our national wealth. 
Today our debt is about $275 per capita 
and the percentage of our debt to our 
national wealth is now about 10 per 
cent. The tremendous increase in 
our wealth during the last fifty years, 
coupled with the general prosperity 
which has accompanied the marked 
development of our resources recently, 
does not indicate that our present bur- 
dens are so difficult to bear as was the 
weight of the Civil War debt. 

Amount or Government Bonds Out- 

Without reference to the bonds 
which were outstanding prior to the 
year 1917, there was issued and sold, 
within approximately two years from 
April 2, 1917, the date of our entrance 
into the war, $21,478,357,250 Liberty 
Loans, of which amount $4,500,000,000 
were designated as Victory (short-time) 
Notes. All were sold at par, as the 
several dififerent issues were announced, 
direct to institutions or individual in- 
vestors through an organization of 
volunteers under the direct supervi- 
sion of the twelve Federal Reserve 
Banks. The districts allotted to each 
Federal Reserve Bank, covering the 
entire United States, were subdivided 
into state, county, city and town or- 
ganizations so that every individual 
throughout the entire country was 
directly or personally appealed to 
for subscriptions up to the limit of 
his financial abiUty. These int^isive 
campaigns by personal solicitations, 
which were conducted, without salary 
compensations for the most part, by 
bankers and experienced bond sales- 
men, were supplemented with litera- 
ture, posters and advertisements issued 
by the treasury department. 

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United States Government Bonds 


Date of Various Loans 

The emission of the various loans 
was made as follows, and the campaigns 
necessary to complete subscriptions for 
the amount of each loan were usually 
extended over a period of about thirty 

Loans Ofered 

First Liberty S^s May 14,1017 

Second " 48 October 1,1917 

Third " 4^8 AprU 6,1918 

Fourth " 4}8 September 28, 1918 

Victory Liberty S|8 and 4|8 April 21,1919 

The 3 J per cent and 3f per cent loans 
were made absolutely exempt from all 
taxation both as to principal and in- 
terest during their life, whereas the 4s, 
4^8 and 4|s were given specific and 
dififerent tax exempt characteristics. 
To the 3^8 and 4s was attached the 
privilege of conversion into the 4J 
per cent rate and to the 3}s and 4f s 
were given convertible and reconverti- 
ble privileges. Under the various acts 
of Congress authorizing the 4 per cent, 
4i per cent and 4} per cent loans, dif- 
ferent privileges of tax-exemption were 
granted and appUed to certain limited 
amounts of bonds provided they were 
originally subscribed for or later pur- 
chased by investors in the open 
market. These made it possible for 
a holder of a maximum amount of 
$160,000 bonds, consisting of a com- 
bination of the different issues, to 
have the income thereof tax-exempt 
for a period of time ranging from 
two to five years after the formal de- 
claration of peace by the President 
of the United States. 

The maximum face amounts of the 
different United States issues of Liberty 
Bonds, exclusive of holdings of 3js 
and 3fs which an investor may hold, 
still obtaining exemption from taxa- 
tion on all the resulting income, may be 
tabulated as follows: 

$5,000 in the aggregate oi First 4s, First 4^8 
(issues of May 9, 1918, and October 
24, 1918), Second 4s and 4}s, Third 
4^8, Fourth 4}s, Treasury Certifi- 
cates, and War-Savings Certificates. 

80,000 of First 4i8 (issue of October «4, 1918, 
only), until the expiration of two 
years after the termination of the 

80,000 of Fourth 4is, until the expiration of 
two years after the termination of 
the war. 

45,000 in the aggregate of First 4s, First 4}s 
(issue of May 9, 1918, only). Second 
48 and 4|s, and Third 4}s, as to the 
interest received after January 1, 

1918, untU the expiration c^ two 
years after the termination oi the 
war — this exemption conditional on 
original subscription to, and con- 
tinued holding at date of tax return 
of, two-thirds as many bonds of the 
Fourth Liberty Loan. 

$110,000 Total possible exemptions, subject 
to conditions above summarized. 
Under the terms of Section 2 (a) 
. of the Victory Liberty Loan Act, the 
following additional exemption be- 
comes immediately effective, and is 
independent of any subscription to 
the Victory Liberty Loan. 
$80,000 in the aggregate of First 48, First 4h 
(issues of May 9, 1918, and October 
24, 1918), Second 4s and 4}s, Third 
4}s, and Fourth 4}s, as to the interest 
received on and after January 1, 

1919, until the expiration of five years 
after the termination of the war. 
Under the terms of Section 2 (b) of 
the Victory Liberty Loan Act, the 
following additional exemption is 
provided, conditional upon original 
subscription to, and continued hold- 
ing at the date of the tax return of, 
one-third as many notes of the Vic- 
tory Liberty Loan, and extending 
through the life of the notes of the 
Victory Liberty Loan instead of 
expiring five years after the termina- 
tion of the war: 

$20,000 in the aggregate of First 4s, First 4}s 
(issues of May 9, 1918, and October 
24, 1918), Second 4s and 4K Third 
4}s, and Fourth 4|s, as to the in- 
terest received on and after January 
1, 1919. 

$160,000 ToUl. 

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The Annals of the Abcerican Acadebtt 

Market Values of the Different 


The market value of the several 
different loans is subject to the daily 
vacillating sentiments of the pres- 
ent holders and prospective buyers. 
Every condition of local or foreign 
significance has a direct bearing upon 
the market which, however, is primarily 
governed by the supply and demand. 
When it is realized that prior to the 
war there were approximately four 
hundred thousand recognized bond 
buyers in the United States, and that, 
impelled by patriotic motives and 
drastic solicitation, fully twenty million 
people of this country were successfully 
induced to subscribe for the War Loan 
Bonds, it is not surprising that a large 
percentage of the subscribers should 
endeavor to liquidate their bonds by 
selling them in the open market as soon 
as the war ended. In consequence, 
the supply of bonds tendered for sale 
greatly exceeded the demand of in- 
vestors who were ready to add to 
their holdings by purchasing additional 
amounts. The result naturally, pro- 
duced a constantly declining market. 
As a means of forestalling a precipitate 
decline, and for the purpose of con- 
stantly supporting and steadying the 
market, the most potent factor was the 
War Finance Corporation which pos- 
sessed adequate powers and means for 
functioning in that capacity for the 
government. Its daily purchases and 
sales frequently totaled several million 
dollars par value of bonds. Similarly 
(and most eflFectively) the operation 
of the government sinking fund was 
arranged to retire and cancel a pro- 
portionate amount of $18,000,000,000 
bonds annually diuing a period of 
twenty-five years. For the annual 
sinking fund to extinguish the princi- 
pal in addition to the funds necessary to 
meet the interest on the bonds, $417,- 
861,532 will be required, or ?,32 per 

cent of the respective amount of Lib- 
erty Loan Bonds outstanding. 

Up to the present writing the follow- 
ing prices show the lowest level to 
which the different loans have declined 
since their issuance: 

Ixnc Recorded 

First IflsueSis 07. SO 

First " 46 9«.«0 

Second " is 9«.10 

First " 4}s 9S.90 

Second " 4is..... 92.70 

First-Second 4is 94.30 

Third " 4is 94.00 

Fourth " 4is 9«.70 

Fifth " 3js 99.28 

Fifth " 4ls 99.28 

Owing to the fact that the chief 
influence attracting buyers of bonds 
bearing as low a rate as government 
loans is the tax-exempt feature (ex- 
clusive of any patriotic consideration), 
it is manifest that the 3|s and 3fs, 
which are totally tax-exempt would 
be selected for purchase by individuals 
or institutions of large wealth who 
would otherwise be subject to heaviest 
taxation under the Income Tax Law. 
Therefore, these two issues virtually 
stand alone marketwise on their merits. 
With respect to the 4s which are now 
convertible at any time into a 4j per 
cent rate and also all the 4J per cent 
issues, there does not exist a sufficient 
distinction in their accompanying taxa- 
tion features to justify any compara- 
tive difference in their market value. 
Therefore, the principal variance in 
their quoted prices is primarily based 
upon their different matiuity dates, 
coupled with the fact that there is a 
marked difference between the amount 
of bonds outstanding. In general, all 
4^ per cent bonds shoidd be quoted on 
a parity basis of income yield so that 
a ten-year bond and a twenty-five- 
year bond should sell at prices to yield 
the same net return. However, as 
long as the vast niunber of public 
holders of these bonds are unable to 

Digitized by 


United States Government Bonds 


comprehend or to act with appreciable 
discrimination, but instead select for 
purchase or sale one issue instead of 
another without reference to this 
technicality, it is not probable that 
any factor except that of supply and 
demand will exercise any considerable 
market influence over prices until the 
greate)r portion of bonds are lodged in 
the hands of discriminating investors. 
As a general rule, the most inexpe- 
rienced investors select by preference 
short, rather than long time maturities. 
The two different issues of First 4is 
afford another conspicuous example <rf 
a notable price difference. Both of 
these bonds exist as the result of con- 
verting a 8i per cent bond into the 
4J per cent rate under two different 
Acts of Congress. In the case of the 
First Liberty Loan Converted 4is, 
issue of May 9, there are nearly 
$380,000,000 bonds outstanding, where- 
as in the case of the First Liberty 
Loan Second Converted 4is, issue of 
October 24, there are outstanding less 
than $3,500,000. Bonds of the former 
loan are available in sufficient amounts 
to meet the demand and still be quoted 
at a substantial discount, but bonds of 
the latter loan, on the other hand, are 
scarce and virtually unobtainable in 
the open market, which fact causes 
them to be quoted at a premiiun when 
an occasional block of bonds becomes 

On the assumption that the govern- 
ment will not call the Liberty Loan 
Bonds for redemption at their optional 
date, but rather will allow them to run 
to maturity, the prices at which the 
different bonds should be quoted in 
order that a 4i per cent and 5 
per cent income yield shall be obtained 
by the buyer are specified below. It 
is assumed that bonds bought Jan- 
uary 1, 1920, will be retained until 

Price to Price to 

MaiurUy Yidd h\% Yield 5% 

Liberty dlfl....l»47 84.31 77.71 

l8t 48 1947 92.16 85.14 

2nd 4s 1942 92.88 86.42 

l8t 4i8....1947 96.08 88.86 

2nd 4}8.... 1942 96.44 89.82 

Srd 4}8....1928 98.17 94.62 

4U1 4}8. -.1938 96.83 90.87 

Victory d}8....192d 97.59 96.03 

4i8....1923 100.80 99.21 

Apart from these technical consider- 
ations, there are no grades or classes in 
the credit of our government, and the 
bonds of one loan of the United States 
are equal in safety with any and all 
other loans which our government has 
obligated itself to pay. 

Pre- War Bonds 

There are now outstanding seven 
different pre-war issues, three of which 
are suitable primarily as collateral 
security for National Bank notes, the 
remaining four being regarded as 
more or less suitable for public invest- 
ment. They are classified as follows: 

$599,724,050 CodboI 28 (payable at the pleasure 
of the government after April 1, 

74,901,580 Panama 28 (redeemable at the 
government's option after Au- 
gust 1, 1916, and November 1. 
1918, and payable August 1, 
1936, and November 1, 1938). 

1 1,250,000 Postal Savings 2^8 (redeemabk one 
year after date of issue and pay- 
able twenty years from date of 

50,000,000 Panama Ss (payable June 1, 1961). 

28,894,500 Conversion 3s (payable January 1, 

118,489,900 Old 48 (redeemable at the pleasure 
of the government after Febru- 
ary 1. 1925). 

The Consol 2s and Old 4s are the 
consolidated and refunded debts 
created during previous wars and na- 
tional crises, and the Panama 2s were 
issued to defray in part the cost of con- 
structing the Panama Canal. These 
three issues are now, for the most part, 
utilized by national banks and pledged 

Digitized by 



The Annals of the American Academy 

Characteristicb of 
The principal characteristics of the ten different issues 







16-SO Year Bond* 

la-BB Year Bondt 


13-30 Year Bond* 


16-90 Year BoruU 















Exempt from all 

NotesA. B.FandG. 

Notes A. B. F and G. 

Notes A. B. C. F 


Uxee (except es- 


(Summary Below) 

tate and inheri- 
tance taxes). 

Date of 

June 15. 1917. 

November 15. 1917. 

November 15. 1917. 

May 9. 1918. 

Issue and 


June 15, 1947. 

June 15. 1947. 

November 15. 1942. 

June 15. 1947. 


Redeemable at gov- 

Redeemable at gov- 

Redeemable at gov- 


ernment's option 

ernment's option 

emment's option 
on or after Nov. 

ernment's option 


on or after June 

on or after June 

on or after June 

15. 1932. 

15. 1932. 

15. 1927. 

15. 1932. 


June 15th and Dec. 

June 15th and Deo. 

May 15th and Nov. 

June 15th and Dec 







Convertible into any 

Convertible into the 

Convertible into Sec- 

Not convertible in- 


higher rate bond 

First Converted 

ond Converted 4 ^ 

to any future 

issued during the 

4}s if application is 
made before Nov. 

if application is 
made before Nov. 


war (except short 
term loans) w^ithin 

. 9, 1918. 

9. 1918. 

six months from 
date of the issue of 

This privilege to con- 
vert has oeen ex- 

This privilege to con- 
vert has oeen ex- 

such higher rate 
bond. The date 

tended and re- 

tended and re- 



of the termination 

of the war shall be 

date fixed by proc- 

lamation of the 




Notes E and H. 

Notes E and H. 

Notes E and H. 


Note A. — Exempt from state and local taxes and from normal income tax, but subject to estate, inheritance, 
super-tax, excess and waivprofits tax on all incomes and earnings above the normal exemption (incomes from hold- 
ing of $5,000 bonds are tax exempt except for estate and inheritance taxes). 

Note B. — In addition to tax exemption in Note A. income from not more than $45,000 bonds of this issue or a 
smaller amount of bonds of this issue not exceeding 1 \ times the amount of the Fourth Liberty Bonds hold by the 
owner is exempt until two years after the war from surtaxes, excess and war-profits taxes, provided said Fourth 
Loan Bonds were originally subscribed for and have been continuously owned by the taxpayer up to the date of 
his tax return. 

Note C. — Bonds owned continuously for at least six months prior to one's death are acceptable at par and accrued 
interest in payment of any estate and inheritance taxes imposed by the United States under any present or future 

Note D. — In addition to the tax exemption in Note A, interest on not to exceed $30,000 bonds of this issue is 
exempt until two years after the war from surtaxes, excess and war-profits taxes when owned by one individual, 
partnership, corporation or association. 

Note E. — The Secretary of the Treasury is authorised from time to time until the expiration of one year after the 
termination of the war to buy bonds of this issue to the extent of 5% of the original issue during the 12 ninths* 
period beginning on the date of issue and in each 12 months' period thereafter to the extent of 5% of the amount 
outstanding at the beginning of the period, the average cost of bonds purchased in any such 12 months* period not to 
exceed par and accrued interest. 

Note F. — In addition to the tax exemption in Note A. income received on and after January 1. 1919. on not 
to exceed $30,000 bonds in the aggregate is exempt until the exiiiration of five years after the war from surtaxes, 
excess and war-profits taxes. 

Note G. — In addition to the tax exemption in Note F, income received on and after January 1, 1919. on not to 
exceed $20,000 bonds in the aggregate is exempt from surtaxes, excess and war-profits taxes, extending through the 

Digitized by 


United States Government Bonds 

Different Issues 

of Liberty and Victory Loans are set forth below. 





l0T Lnnrrr Loan — 

2nd Libbrtt Loan — 


10-U Year BontU 

Srd Libkrty Loan 41b 

4th Libcbtt Ix>an 4 Is 

Victory Libbrtt 

2nd Convbrtbd 4i» 

10 Year Sonde 

16-»0 Year Sonde 


16-SO Year Bonda 

&-A Year Notee 

Available by con- 
verting 318 before 
April 24. 1010. 
Outstanding ai>- 









Notes A. C. D, F 

No^ A. B. C. F 

Notes A. B. C, F 

Notes A. C. D. F 

Notes I and J. 
Note C. as to 4fs 

October 24. 1918. 
June 15. 1047. 

May 9. 1918. 
November 16. 1942. 

May 9, 1918. 
September 15. 1928. 

October 24. 1918. 
October 16. 1938. 

May 20, 1919. 
May 20. 1923. 

Redeemable at gov- 
ernment's option 
on or after June 
15. 1932. 

Redeemable at gov- 
ernment's option 
on or after Nov. 
15, 1927. 

Not redeemable until 

Redeemable at gov- 
ernment's option 
on or after Oct. 
15. 1933. 

emment's option 
on or after June 
15. 1922. upon 
not less than four 
months' notice. 

June 15th and Dec. 

May 16th and Nov. 

September 15ih and 
March 15th. 

April 16th and Oc- 
tober 15th. 

December 15th and 
June 15th. 

Not convertible into 
any future issue. 

any future issue. 

Not convertible into 
any future issue. 

Not convertible into 
any future issue. 

The Sis and 4 Is 

are convertible 
and reoonvertible 

other after July 
15. 1919. but 
before maturity 
or call for re- 

Notes E and H. 

Notes E and H. 

Notes E and H. 

Notes E and H. 

Notes E and H. 

life of the Victoiy Notes, pro\'ided such bonds do not exceed three times the principal amount of Notes of the Victory 
Liberty Loan originally subscribed for by such owner and still held by him at the date of his tax return. 

Note H. — The Victory Loan Act created a sinking fund to retire all Liberty bond and note issues at maturity, or 
to redeem and purchase them before maturity at an average cost not to exceed 100 and accrued interest. Begin- 
ning July 1st, 1920, and for each fiscal year thereafter until all such bonds and notes are redeemed, there is ap- 
propriated for the purposes of the sinking fund an amount equal to the sum of (1) 2|% of the aggregate amount of 
Bonds and notes outstanding on July 1st. 1920, leas an amount eoual to the par amount of any obligations of foreign 
governments held by the United States on July Ist, 1920, and (2) the interest which would have been payable 
on the bonds and notes purchased or redeemed or paid out of the sinlking fund during such year or in previous years 
for which the appropriation was made. 

Note I. — The 3fs are exempt both as to principal and interest from all taxation (except estate and inheritance 
taxes) now or hereafter imposed by the United States, any State or any of the possessions of the United States, or by 
any local taxing authority. 

Note J. — The 4}s are exempt both as to principal and interest from all taxation now or hereafter imposed by the 
United States, any State, or any of the possessions of the United States, or by any local taxing authority, except estate 
or inheritance taxes, and graduated additional income taxes, oommonly known as surtaxes, and excess profits and 
war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partner- 
riiips, associations or corporations. 

* The two issues of First Converted 41s differ only to the extent that the issue of October 24th is tax exempt as to 
the interest on not to exceed $30,000 bonds regardlessof one's subscription to the Fourth Loan, whereas the issue of 
May 9th is tax exempt as to Uie mterest on not to exceed $45,000 bonds in connection with one's subscription to the 
Fotuth Loan. 

t Outstanding January 31, 1919. 

Above data revised to June 1, 1919. 

Digitized by 



Thb Annaijb of the American Acadeict 

ill Washington to secure the issuance of 
national bank notes. 

The Conversion 3s were created by 
refunding a certain amount of Consol 
2s and Panama ^ acquired in 1914 
by the Federal Reserve Banks at par. 
The new converted 8 per cent bonds 
were thereafter sold to the public. 

The Panama 8s were issued pri- 
marily to complete payment for the 
cost of the Panama Canal, and the 
Postal Savings Bank S^s were issued to 
encourage the purchase of a govern- 
ment investment on the part of small 
savings bank depositors, and more 
particularly foreign bom laborers who 
otherwise would withhold their earn- 
ings from the banks. 

As the Federal Reserve Bank Act, 
providing rediscount privileges for the 
benefit of all national banks also ex- 
tends the bank note issuing privilege 

to Federal Reserve Banks (which was 
formerly granted only to national 
banks), it is not likely that any future 
refunding of the present Liberty Loans 
will result in authorizing any new issue 
having the bank note circulation privi- 
lege attached to them. Therefore, it is 
probably safe to assume that without 
this privilege, no future issue of United 
States Bonds can be sold, during the 
present generation at least, bearing as 
low a rate of interest as 2 per cent; and, 
furthermore, it is improbable that the 
outstanding 2 per cent bonds will be 
called for payment so long as they 
can be profitably utilized by national 
banks for securing circulation. A 
notable commentary on the value erf 
the circulation privilege is the fact that 
the 2s and Old 4s are now quoted at 
lOOi and 106} respectively. 

Digitized by 


Municipal Bonds 

By William R. Compton 

Preaident, William R. Compton Company, Investment Bankers; President, American Trust 

Company, St. Louis 

IN preparing this article upon the 
issuance of municipal bonds by 
states, counties, cities and other polit- 
ical subdivisions of the United States, 
it has been necessaiy to take into con- 
sideration limitations of space and 
time. The subject is so complex that 
it is utterly impossible, without writ- 
ing volumes, to give a detailed and 
comprehensive outline of the theory 
and practical working out of the issu- 
ance of municipal bonds. In any con- 
sideration of this subject, or any phase 
thereof, it should be remembered that 
the present system of municipal financ- 
ing is a typical illustration of the evo- 
lutionaiy process in which necessity 
and environment combine to produce 
a desired result. 

Definition and Classification of 
Municipal Bonds 

A definition has been called the 
result of an attempt to condense vol- 
umes into one or two short statements 
— ^in this case a most unsatisfactoiy 
procedure. We may, however, char- 
acterize municipal bonds as the 
obligations — ^the promises to pay — 
volimtarily assumed, of definite gov- 
emmentalities, and payable from taxes. 
Again, we may say that municipal 
bonds are the means through which 
improvements, whose benefit is of a 
public nature, are financed. 

Municipal bonds may be classed in 
two or three ways, nkmely, according 
to the purpose of their issuance, or with 
reference to the laws affecting their 
issuance, or from the standpoint of 
the community incurring the debt. 

Here we will discuss municipal bonds 
from the latter standpoint. 

National Bands 

The term '* municipal" has been 
diverted from its limited meaning to 
include that which pertains to any 
district, city, state or nation function- 
ing as an independent body. Even as 
the bonds of a city are the obligations 
of an independently functioning body, 
or as the obligations of smaller govern- 
mentalities are classed as municipal 
bonds, so are the obligations of the 
federal or main government placed 
under the same heading. Each is 
voluntarily voted by the people, or by 
their representatives, and is payable 
from revenues derived from the people. 
The underlying fundamental concept 
is the same. The taxpayers voted the 
bonds of the nation when they voted 
favorably on the Constitution, endow- 
ing Congress with the power to author- 
ize the issuance of federal bonds. 

State Bonds 

State bonds represent the transition 
between Federal and public bonds of 
lesser governmentalities, such as cities, 
counties, school districts, improvement 
districts, etc. In practically every 
state today a loan, pledging the faith 
and credit of that state, must be au- 
thorized and voted by a direct vote of 
the people themselves, although in 
isolated cases the legislatures of states 
may have the power to issue bonds, 
their authority having been obtained 
from a constitutional amendment or, 
in the last analysis, by a favorable vote 


Digitized by 



The Annals of the Americas Academy 

of the taxpayers of the state. Like the 
obligations of the federal government, 
state bonds need not have a specific 
tax levied for their payment, but may 
be paid from the general revenues of 
the state. More and more is it deemed 
proper to liquidate state loans, prima- 
rily, from certain specific revenues 
which the state enjoys, although, 
generally speaking, in the last analysis 
those loans are supported by the 
taxing power of the state. 

County, City and Tmvn Bonds 

County, city, village and town 
bonds, practically without exception, 
are voted by the taxpayers themselves 
and are autiiorized by a favorable vote 
at an election held for that specific 
purpose. In the majority »of cases, a 
definite, irrevocable tax, sufficient for 
the liquidation of the debt incurred, is 
levied against all taxable property at 
the time of the issuance of the bonds. 
However, as in the case of many state 
bonds, specific revenues of counties, 
cities, villages and towns furnish the 
primary means for the payment of 
debts incurred for revenue producing 

School Bonds 

School bonds are often issued by 
cities themselves and as such are 
direct city obligations. There is a 
second method, however, of issuing 
school bonds, namely, through the 
formation of a school district which 
may consist of an entire city or a part 
thereof, or of the city plus adjacent 
territory. Whatever the component 
parts may be, the district itself is 
formed voluntarily by the taxpayers 
therein, according to the existing laws 
of their state, and in practically every 
state it is necessary that school debts be 
created by popular vote of those who 
will have to pay them. But in a few 
isolated cases the administrative body 

of the school district has the power to 
issue bonds without a vote of the 
people, being limited either as to the 
amoimt of indebtedness that may be 
incurred or else as to the amount of 
tax available to pay the total debt, 
which in effect is an estoppel of the 
issuance of bonds beyond a certain 
specific amount. 

District Bonds 

By far, the most important class 
of bonds in any discussion of obliga- 
tions of minor municipaUties, such 
as districts, is the class issued to 
finance improvements whose benefit is 
practically localized. This class of 
municipal bonds will be discussed 
later, but it may be noted here that 
the districts standing sponsor for the 
payment of bonds of this character are 
always formed with the approval of 
the property owners therein. 

So far, two fundamentals of all 
municipal bonds have been empha- 
sized; first, their voluntary assumption 
by the taxpayers, either through a 
direct expression or through an expres- 
sion of the representatives of the tax- 
payers, and, second, their payment 
from taxes or other revenues derived 
from those who expressed their will- 
ingness to assume the indebtedness. 
A part of the taxes from practically 
every taxpayer goes to pay the prin- 
cipal and interest of bonds issued by 
the community in which that person 
lives. No corporation, other than 
charitable or reUgious, and no in- 
dividual having property, escapes. It 
has been remarked that the only cer- 
tainties in the world are death and taxes. 

Methods of Financing 

Municipal Property Tax. — ^Any dis- 
cussion of Municipal Bonds would be 
incomplete without a discussion of 
methods of payment. The majority 
of municipal bonds are payable from 

Digitized by 


Municipal Bonds 


the collection of taxes levied upon 
property within the municipality creat- 
ing the debt. Sometimes the taxes 
are collected by a levy on all of the 
property assessed; in other words, by 
an ad valorem tax levied in ratio to 
the assessed value of the taxable 
property — so many cents for each one 
hundred dollars assessed valuation. 
This tax is levied against all assessed 
property, real and personal, land and 
money. It is irrevocably levied sim- 
ultaneously with the issuance of the 
bonds, and is pledged for the payment 
of principal and interest thereof and 
may be used for no other purpose. 

CommunUy Property Tax, — ^Many 
municipal bonds, especially those is- 
sued in late years, are payable only, in 
their last analysis, from the levy of a 
tax against the property embraced 
within the community. Bonds pay- 
able in this manner are termed General 
Obligations in contrast to Direct Obliga- 
tionsy the name applied to bonds pay- 
able by a direct ad valorem tax upon 
all taxable property within the issuing 
community. The so-called general 
obligation bond is usually issued for 
some special purpose or improvement, 
and is payable from special taxes or 
from revenues derived from the im- 
provement itself. Only when these 
funds fail or proye insufficient must the 
entire municipality, standing sponsor 
for the debt, assume its burden and 
liquidate the insufficiency from general 
revenues or from special taxes which 
may be levied. Examples of financing 
of this character are bonds issued for 
terminal facilities, for the improve- 
ment of streets, for waterworks pur- 
poses, for agricultural credits, and so 
forth. Summing up, it may be said 
that a general obligation bond is one 
not primarily payable from the taxing 
power of the community creating the 
debt, but actually payable, in its last 
analysis, in that manner. 

Special Assessment Bonds, — The 
least known form of municipal financ- 
ing is that of obtaining improvements, 
whose benefit is entirely local, by the 
issuance of bonds whose principal and 
interest are payable from a special tax 
levied upon the property benefited in 
proportion to the benefits that will 
accrue to the property taxed. This 
form of municipal financing is the 
result of conditions found, for the most 
part, in the middle west, although to 
some extent in other parts of the United 
States. The draining of lands not 
sufficiently rolling to carry off surplus 
rain water, the construction of levees 
to protect fertile lands from rivers and 
streams in their flood stages, the con- 
struction of roads to furnish at all 
times an outlet to the shipping point 
for products of the community, are 
causes which have called forth what is 
known as Special Assessment financing. 
This form of financing, although com- 
paratively new, is sufficiently old to 
have proven its merit. 

The majority of municipal bonds are 
evidences of debt incurred, presum- 
ably, for the benefit of all of the resi- 
dents of a municipality. They are 
issued to finance the very purposes for 
which the municipal government ex- 
ists. Often, however, there are com- 
munities and districts, not organized as 
one of the usual political subdivisions 
of the state, which, because of their 
location or the peculiar physical con- 
ditions obtaining, necessitate special 
financing in order to provide local 
improvements. Accordingly, these 
communities or districts are organized 
under Enabling Acts which exist in 
almost every state solely for the pur- 
pose of financing and constructing the 
proposed improvement. If the im- 
provement is such that it will operate 
to the benefit of all of the residents of 
the community, then the statutes more 
often provide that the bonds issued to 

Digitized by 



The Annals of the American Acadeict 

pay for the improvement shall be 
payable by a tax levied against all of 
the property in the district. If, on 
the other hand, the improvement is 
such that it will benefit one class of 
property owners more directly and in 
greater proportion than the remainder, 
then it is equitable and fair that the 
property thus benefited should pay 
the cost of the improvement. Conse- 
quently, there are in most of the states 
statutes which provide for the organ- 
ization of a district or municipality for 
the purpose of constructing an im- 
provement whose cost shall be paid 
by the property specially benefited. 
Bonds issued by those districts, which 
are payable by a tax levied against the 
property benefited and in proportion 
to the manner in which it is benefited, 
are known as Special Assessment Bonds ^ 
the most typical examples of which are 
drainage, levee and road improvement 
district bonds. 

Land in a district subject to over- 
flow, or land which is poorly drained 
or has roads inadequate to allow the 
products thereof to be marketed read- 
ily, will be increased intrinsically in 
value if the necessary improvement is 
secured. The benefit to this land is 
direct and much greater than to any 
other class of property. It is obvious 
that the land should bear the burden of 
the cost, yet, it is equally apparent 
that, in order to provide an opportunity 
to secure the money for the improve- 
ment and at the same time furnish the 
necessary safeguards to the land owner 
as well as to the purchaser of the 
security, it is essential that many legal 
proceedings be performed and judic- 
ially confirmed. 

Method op Forming Bond Districts 

The method of the formation of a 
district and the steps necessary to be 
taken before bonds can be issued vary 
to some degree in the different states. 

but the idea is the same. Only a 
general theory of the procedure can be 
indicated here. The organization of 
such a district is accomplished either 
by a special act of the legislature or by 
compliance with a general act; but in 
either case the organization of the 
political subdivision is with the consent 
of those who will enjoy the benefit from 
the proposed improvement and will 
consequently bear the cost thereof. 

After the formation of the district, 
plans for the desired improvement are 
formulated and adopted after their 
correctness has been estabUshed to the 
satisfaction of property owners. The 
cost of the improvement is estimated at 
the time the plans are made, and if the 
proposed improvement is found to be 
too expensive, the project, of course, is 
abandoned; but it is generally known, 
before the district is organized, just 
about what will be the cost of the im- 
provement. Then disinterested per- 
sons are appointed to go upon the 
land affected by the improvement and 
determine the benefits that will accrue 
thereto by reason of the accomplish- 
ment of the proposed improvement. 
The benefits, so estimated, are adjudi- 
cated to the satisfaction of the owners 
of the lands that will be benefited, and 
after the benefits have been so adjudi- 
cated and sufficient time has been given 
in which they may be attacked, they 
stand as an immovable basis for the 
financing of the district. Assessed 
valuations fluctuate, but benefits, once 
confirmed after their adjudication, can- 
not be lowered or in any way changed, 
except in rare cases where benefits 
against individual tracts may be 
changed, provided the change does not 
at all affect the total amount of bene- 
fits confirmed; i.e., it any benefits are 
lowered, others must be raised propor- 
tionately so as not to affect the totaL 
Throughout the procedure of the 
assessment and confirmation of the 

Digitized by 


MxTNiciPAL Bonds 


benefits, the property owners affected 
have ample time in which to appeal 
from the benefits assessed. Thus, when 
the benefits are finally confirmed it 
means that the confirmation comes 
after the interest of those affected has 
been entirely safeguarded. It is im- 
portant,, in connection with the assess- 
ment of benefits, to bear in mind that 
benefits are assessed with the consent 
of the property owners, or after it has 
been proven that their dissatisfaction 
is not justly founded. 

When the benefits have been con- 
firmed, the next step is to advertise for 
bids for the doing of the work, accord- 
ing to the adopted plans for the im- 
provement. When the exact cost of 
the work has been ascertained, through 
letting a contract, a tax is levied to 
cover that cost. Time is given the 
property owners to pay their part of 
that tax in cash, and if they do not 
choose to do so, bonds are then issued 
to produce the money necessary to pay 
for the cost of the improvement. The 
bonds so issued are payable from the 
collection of the taxes levied against 
the property benefited, and in propor- 
tion to the manner in which the court 
has confirmed the benefits. The taxes, 
from which the bonds are payable, are 
irrevocably levied at the time the 
bonds are issued, and usually exceed 
the requirements for principal and in- 
terest by a safe margin. Taxes so 
levied are usually on a parity with 
taoces levied for state and county pur- 
poses and, in most cases, are collected 
in the same manner and at the same 
time as state and county taxes. 

The creation of special assessment 
debts requires experience in mimicipal 
financing, as well as a knowledge of the 
needs and problems of the community 
affected, but when correctly and intelli- 
gently constructed, special assessment 
debts should be liquidated as promptly 
as direct obUgation, general obUgation, 

or other classes of municipal bonds. 
The administration in districts issuing 
special assessment bonds is generally as 
efficient as in other municipaUties, be- 
cause in such districts the largest 
property owners generally advocate 
the improvement and take a leading 
part in obtaining it and maintaining 
its efficiency. Volumes might be writ- 
ten on special assessment financing 
since, although the idea is practically 
uniform throughout the United States, 
the technique of the creation of the 
debts varies so greatly in different 

Municipal Bonds a Barometer of 

Municipal bonds have been called 
the barometer of progress. They are 
indicative of the spirit of a community. 
As industrial development proceeds 
and as population increases, new facil- 
ities become necessary. Good roads 
or paved streets are needed, increased 
school facilities are demanded, court 
houses and city halls must be enlarged 
or built, waterworks must be estab- 
lished or extended, lands heretofore 
unproductive must be made to produce 
food and basic materials. All of these 
projects are usually carried through by 
the issuance of municipal bonds. The 
growing industries, the producing 
farms and the new homes all become 
the security behind the bonds. Muni- 
cipal bonds, whether of the direct 
obligation, the general obligation, or 
the special assessment class, are a 
prior hen to all private obligations, and 
their prompt payment is dependent not 
on a small group, but upon the com- 
munity whose welfare is irrevocably 
yoked to the maintenance of proper 

In concluding this statement on 
municipal financing, it is proper to 
mention the matter of value received. 
It would be folly to purchase any secur- 

Digitized by 



The Annalb of the American AcADEmr 

ities, the technique of whose issuance 
did not correspond exactly to that pre- 
scribed by law, but it would be equally 
foolish to purchase municipal securities 
that were issued for other than a meri- 
torious purpose, or for any purpose 
not calculated to benefit the commu- 
nity creating the debt. History fur- 
nishes but rare instances of a public 
community in the United States refus- 
ing to repay, with the agreed interest, 
that which it contracted to pay, and 
in return for which the proper value 
was received. Municipal financing, in 
its last analysis, rests upon the credit 
of a community, and the credit of a 
community is determined as much 
by its integrity and willingness to 
liquidate its debts as by its ability 
to do so. 

It is. well to remember that we in this 
country are in the initial stages of 

municipal financing. As life becomes 
more complex, as the demand for food 
and clothing becomes greater, and as 
the demand for the enjoyments of life 
becomes more pronounced, the crea- 
tion of debts by public communities 
will be increased correspondingly; and 
with that increase we will discover new 
and improved methods of providing 
the necessary funds. Of late years 
practically all municipalities are adopt- 
ing the method of paying their debts 
year by year, so an increase in the out- 
put of municipal bonds should not be 
alarming as the outstanding amoimt is 
constantly being liquidated. If I were 
asked to state the determining factors 
of a safe municipal bond, my experi- 
ence would prompt me to say, a needed 
improvement, an honest community 
and a proper construction of the debt. 

Digitized by 


Railroad Bonds 

By F. J. LisMAN 

Of F. J. Liaman & Co., New York City 

THE capitalization of the railroads 
of the United States is nearly 
twenty billion dollars, of which nearly 
two-thirds is represented by bonds and 
the balance by stock. Up to about 
ten years ago railroad securities formed 
the bulk of the transactions on the 
Stock Exchange, and the money in- 
vested in these securities was more 
convertible into ready cash than 
money invested in most other enter- 
prises; in fact, previous to the forma- 
tion of a number of our large industrial 
companies in 1900, railroad securities 
were substantially the only securities 
which enjoyed a broad market on the 
Stock Exchange. 

The gross earnings of our railroad 
companies have doubled in every 
twelve or fifteen years. With this 
steadily increasing business, which 
grew beyond all expectations, the con- 
stant investment of additional capital 
is, of course, necessary. To provide 
for consolidation and this rapid ex- 
pansion, additional mortgage liens were 
created, and thus ensued the compli- 
cated structure of securities resting on 
many of the older railway systems. 
Up to about 1890 the expansion of 
the transportation business had not 
been sufficiently visualized, and nearly 
all mortgages made were closely limited 
to the requirements of the corporations 
at the time of the creation of such 
mortgages. From 1887-90 several 
large railroad corporations were reor- 
ganized and new mortgages created, 
which did not provide one dollar of 
additional money for expansion. This 
was the case in the reorganization of 
the Wabash, the Missouri, Kansas 
& Texas, the Atchison, Topeka & 

Santa Fe, and others. When the traffic 
grew these companies were unable to 
raise additional money by the sale of 
stocks or jimior mortgages and in 
many cases went into bankruptcy be- 
cause they could not get the necessary 
capital on fair terms. 

Since 1900 mortgages have grown 
larger and larger. In 1898 the state of 
New York for the first time permitted 
the investment of trustees and savings 
bank funds in railroad bonds. Since 
that time a number of other states 
have followed this example. The 
laws of most states require that only 
such bonds are available as a legal in- 
vestment for trustees and savings 
banks as are secured by mortgages, 
which are obligations of companies 
that have paid not less than 4 per cent 
dividends for a period of not less than 
five years on a capital stock which 
must not be less than one-third of the 
bonded debt. In other words, the 
Umit of bonded debt recognized as be- 
ing safe is a capitalization represented 
by about three-fourths of its capital 
value in bonds and one-fourth in stock. 
As a consequence of this legislation 
several of our larger railroad com- 
panies, like the Pennsylvania, the 
New York Central and the Balti- 
more and Ohio have executed what is 
known as an open moT^a^e, under which 
bonds may be issued from time to 
time whenever the company may need 
money for the purpose of paying oiT 
prior lien bonds or for raising additional 
capital. The amount of such bonds 
outstanding, however, shall never be 
more than three times the amount of 
the outstanding stock of the corpora- 


Digitized by 



The Aknals of the American Academy 

Forms of Mortgages 
The art of drawing railroad mort- 
gages has made progress in many di- 
rections. At first, mortgage* were se- 
cured by deeds of trust similar in all 
respects to the real estate mortgages 
then in vogue. Gradually the needs of 
the situation evolved a different type 
of trust deed, and now some of these 
very formidable documents run up to 
one hundred fifty pages and more. 
Formerly the mortgage was given to 
an individual the same as in real estate 
transactions; now mortgages are exe- 
cuted to corporate trustees in practi- 
cally every instance. The advantage 
of a corporate trustee is that it never 
becomes sick, nor dies. As many com- 
pUcated questions may arise with the 
trustees, but there is a clause in every 
trust deed defining the duties of the 
trustee and holding the trustee harmless 
against everything except malfeasance 
or breach of trust. Whenever it is nec- 
essary to do so, bondholders, in order 
to assert their rights under a mortgage, 
must get together, because very sel- 
dom is the trustee required to take any 
action on any subject connected with 
the mortgage except at the request of 
holders of not less than one-quarter of 
the outstanding bonds. On the other 
hand, a majority of the bonds, in most 
cases, can direct the trustee to take ac- 
tion, that is, declare due the principal of 
a mortgage in case the interest or prin- 
cipal is not paid when due, in case 
the property has not been properly 
maintained, or in case a receiver is ap- 
pointed, etc. 
V The deed of trust generally contains 
provisions under which the corpora- 
tions agree to maintain the property, 
pay promptly taxes, rentals, etc. It 
has been found in many of the recent 
reorganizations that the properties had 
not been properly maintained and that 
the equipment and other items had 
been allowed to deteriorate. Under 

the trust deed the trustee was not 
obligated, nor provided with funds 
for matters of this kind. This subject 
has been taken up by the Investment 
Bankers Association of America and 
discussed considerably at the annual 
meetings. Some method is being 
sought to keep the bondholders in 
closer touch with the conditions of 
their mortgaged property. 

Bondholders' Committees 

The bulk of railroad bonds are 
coupon bonds payable to bearer, hence 
after they have become thoroughly dis- 
tributed it is extremely difficult to 
locate them. It is for this reason that 
the modem bondholders' committee 
has been evolved. Whenever com- 
panies get into trouble or whenever it 
is necessary for bondholders to com- 
bine for purposes of protecting their 
interests, a committee is formed. 
This committee is usually composed 
of representatives of one or more firms 
who distributed the bonds in question 
and of representatives of the large 
bondholders. These committees al- 
ways request holders to deposit their 
bonds with some trust company under 
an agreement which gives the com- 
mittee full power to deal with the de- 
posited bonds as may seem proper. 

The bondholders' deposit agree- 
ment, like the trust deed or mortgage, 
is also a document which has under- 
gone considerable change to meet the 
decisions rendered by courts from time 
to time. The courts, in all cases, have 
interpreted the powers of a com- 
mittee as powers in trust and have 
held conmiittee members strictly liable 
as trustees. 

As a rule, reorganization progresses 
much slower than is anticipated, due, 
largely, to protracted litigation which 
is frequently carried on by the defend- 
ant in order to gain as much time as 
possible, in the expectation that time 

Digitized by 


Railroad Bonds 


. will tire out the creditors or that finan- 
cial conditioiv may improve in the 
meanwhile. Bondholders have felt in 
some cases that the committee was 
taking an undue length of time in 
which to accomplish its work and have 
brought suit for the return of their 
bonds. The courts have been inclined 
to hold that, whenever no definite time 
was mentioned, five years was a rea- 
sonable time to work out a situation, 
and that, generally speaking, bond- 
holders should be entitled to the return 
of their securities if the committee has 
not achieved anything within that 

Decline in Railroad Credit 

During the last ten years railroad 
securities have not been so popular as 
previously, and the decline in price has 
been due to the following reasons: 

1. As money became dearer with 
the expansion of commerce, and later 
owing to the war, many prime bonds 
have declined in value commensu- 
rate with the rise in the value of money. 

2. As restrictions and regulations of 
railroads by the forty-eight state and 
federal authorities became more and 
the more complex and profits more and 
more circumscribed, investors felt that 
securities of corporations, whose profits 
are limited by public opinion and by 
law, were not a desirable investment. 

3. The railroads, in order to educate 
the public to their needs and thus in- 
fluence legislators, were compelled to 
announce their poverty broadcast and' 
they thereby educated the investing 
class, also, on this subject. 

4. The rising cost of labor and the 
fact that Congress and state legislators 
were trying to help labor get increased 
wages, and at the same time were not 
willing, presumably at the behest of 
another class of voters, namely, the 
farmers and shippers, to advance rates 
commensurately with increased wages 

and costs of material, is anoth