fel m Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030080661 SECURITIES '^ In This Number Why It Costs You More to Live BY E.W.KEMMERER,Ph.D. Profeisor of Economics and %|^ Finance, CornelMTniversitjr ^0 r MARCH 1912 V. Securities Review A MONTHLY MAGAZINE FOR INVESTORS G. LYNN SUMNER, EDITOR PUBLISHED BY G. LYNN SUMNER & COMPANY TRADERS NATIONAL BANK BUILDING, SCRANTON, PA. YEARLY SUBSCRIPTION, $1.00 SINGLE COPIES, 10 CENTS VOL. 1 MARCH, 1912 NO. 1 Editorial Announcement THERE prevails today in this cotmtry — ^in fact, throughout the world— one condition, the influ- ence of which is felt by every class and every occupation. It is the increased and increasing cost of living. And it is a condition which grows rather than diminishes in importance. Time was, not many years ago, when the varying price level was regarded by the average man as a matter governed largely, if not entirely, by crops, wars, and the party in power, a thing which automatically righted itself about once every so often. But this old-time faith has found a stubborn problem for a decade past in the fact that despite tremendous crop yields, despite prevailing peace throughout the world, despite a hundred and one fac- tors that should tend to carry prices in general to a lower level, they actually continue to go higher and higher. Obviously, when such a condition pre- vails, it must arise from a far-reaching basic cause. And there is only one cause which satisfactorily and completely ex- plains this condition— the increasing supply of gold. It would be futile, of course, to enter here into a discussion of the reasons which justify this conclusion. Volumes have been written upon this one text alone. Suffice it to say that the great economists, the financiers — all the biggest, clearest- thinldng business leaders of the world today — are agreed that the increased production of gold has resulted in a depre- ciation of its purchasing power. Conse- quently, it takes more gold to buy com- modities than it did a few years ago. In other words, prices in general have increased. And as improved mining and milling methods assure an increasing production of gold in the futiire, it is a practical certainty that prices in gen- eral must also continue to increase for many years to come. But we are concerned here not so much with the fact of a higher price level as with a resultant condition— its effect upon invested money. With the cost of living constantly increasing and the rate of interest on loans remaining the same, the person whose money is invested in mortgages, bonds, and other forms of loans must constantly fall behind financially. For, as the principal of such an investment itself cannot increase in value, it actually diminishes in buying power. Out of this situation, therefore, has developed the specific condition which concerns us now — the just and reasonable vmiversal demand for a larger income on invested money. Today, more than OOPYRIOHT. 1912. BY u. LYNN SUMNER i COMPANY SECURITIES REVIEW eyer before, the average man is making a pncere study of investments. Every- where among those who feel the vital importance of this income problem there is an earnest, inteUigent desire to know more about it^ — and to find, if possible, a source of investment yielding sufficient income to keep pace with the increasing cost of living. It is to aid in just such a cause that the Securities Review has been founded. For months the pubUshers of this maga- zine have been watching and studying the trend of sentiment among the invest- ing pubHc, both through the medium of thousands of individual expressions and through the mirror of the financial press. The result of all this preparation is the Securities Review. Through the pages of this monthly magazine the publishers confidently hope to render a real service to the investing public. For the present at least the policy of the Securities Review will be to gather and furnish specific, practical informa- tion along three definite lines : (1) An exposition of the gold supply and its effect upon investments, calcu- lated to give the investor a clear understanding of the basic cause of prevailing conditions, and those which are likely to obtain in the future. (2) An outline of those classes of secur- ities which are least affected ad- versely by the gold supply and those which are benefited by it. This feature will be conducted on con- structive principles, for the purpose of giving the investor intelligent guidance in the choice of invest- ments. (3) Information of all kinds on securities in general — articles and depart- ments through which the average man and woman may obtain a prac- tical knowledge of all classes of investments. The true function of a useful periodical is to give attentive, impartial ear to the pubUc's wants and needs, to interpret and refine them into principles and then to set its standards firmly behind those principles which it deems just and right. The Securities Review recognizes the justice of a demand for larger returns upon investments, and it will devote its efforts to practically aiding investors in their search for a larger income. It is devoted to a tremendous cause. Its field includes every person with money invested or money to invest. With the hope and purpose of doing a real service for this world of readers, it places itself confidently in their hands. New Gold Production Record in 1911 Instead of showing any tendency to decline, the world's gold production gives every evidence of continued in- crease. The production for 1911 was $473,383,500, the greatest in history. This amount represents an increase of more than $200,000,000 over the output of ten years ago and is fotu- times greater than the production of twenty-five years ago. Last year's increase was due to the enormous activity at the Transvaal gold mines in South Africa, which continue to become more productive each year. African gold production has doubled within the past six years. In 1911 Africa produced twice as much gold as the United States and three times as much as Australia. In view of these figures, a prediction of a continued high price level would seem to have a very sound basis. Why It Costs You More to Live High Commodity Prices— Their Cause and Their Significance to the Investor By Edwin Walter Kemmerer, Ph.D. Professor of Economics and Finance in Cornell University MONEY is worth what it will buy. A dollar in the United States to- day will buy on the average ap- proximately as many goods as 67 cents would in 1896. In other words, our gold standard unit of value upon which we have prided ourselves so much has depreciated in value 33 per cent, in 15 years. This assertion, if true, is of the utmost importance to men maMng investments in bonds and mortgages which jdeld fixed rates of income and at maturity return merely the par value of the principal. What, then, is the evidence for the assertion that the dollar has lost one-third of its value since 1896? The United States government, through its Bureau of Labor, publishes annually price tables showing by months the whole- sale prices of 257 important commodities. These prices are collected from reliable sources all over the country and the report upon them is prepared by trained men. The prices for each article are reduced to percentage figures, the aver- age prices for the 10 years 1890-1899 being taken as 100. Then the percent- age figures, or "index numbers" as they are called, for all 257 commodities for each year are averaged together, and the restdting composite represents the general index ntunber for the year..> In every year some prices fall and some rise; if faUing prices preponderate the general index number declines, if rising prices preponderate it advances. Comparing 1896, the year before the recent advance in the cost of living began, with 1910 and comparing also the 10-year period 1890-1899 with 1910, we observe the following results; Prices in 1910 As Compared with Prices in 1896 AND IN the Period 1890-1899 CO ^og Kind of Commodity Number ■e--' ^ S ■" 3 S w S Farm products 20 Foods, etc 57 Cloths and clothing 65 Fuel and lighting 13 Metals and implements. . . 38 Lumber and building ma- terials 28 Drugs and chemicals 9 House-furnishing goods . . 14 Miscellaneous 13 110.2 53.6 35.5 20.2 37.1 64.0 26.3 18.7 45.6 64.6 28.7 23.7 25.4 28.5 53.2 17.0 11.6 33.1 All commodities 257 45.6 31.6 Every group of commodities, it will be observed, showed a substantial advance during the periods studied and the aver- age advance for aU 257 commodities since 1896 was 45.6 per cent, or 3.3 per cent, a year. A study of 202 of the commodities which are readily com- parable during the entire period shows that the price of 83 out of every 100 was higher for 1910 than the average for the period 1890-1899; that the price of 16 was lower; and of one was the same. Only 4 articles out of every 100 decreased 25 per cent, or more, while 49 increased 25 per cent, or more. If we turn from the index numbers of the Bureau of Labor to those of Brad- street (covering 96 commodities), and of Dun (as supplemented by the Gibson index numbers), we find substantially the same story. The Bradstreet index SECURITIES REVIEW numbers increased from 1896 to Jan- uary 1, 1912, 51 per cent, or 3.2 per cent. a year; while the Dun-Gibson index nimibers increased from 1896 to Feb- ruary 19, 1910, by 56 per cent, or 4 per cent, a year. The evidence, therefore, points strongly to an advance in prices since 1896, averaging for all classes of commodities something like 50 per cent. ; or, as stated above, it shows that the value of a dollar today is approximately the same as the value of 67 cents a decade and a half ago. Loaning Money at a Loss The significance of this fact to the investor is evident. If a man bought at $1,000 a 5 per cent, bond January 1, 1896, matirring January 1, 1912, he bought a secured right to draw $50 a year for 16 years, and to receive back his principal at the end of that period. On the average his $50-a-year interest declined in its purchasing power about 3 per cent, a year, and when the bond matured the $1,000 principal which was repaid was equivalent in real purchasing power to only 667 of the dollars which he originally paid for the bond. If the purchasing power of the dollar in a given year depreciates more than the rate of interest realized upon the investment, obviously the rate of real interest becomes negative, that is, the creditor actually pays the debtor for borrowing and using his money. In several years of the period (1896-1912) negative interest prevailed upon most bond and mortgage loans. For example, the piu-chasing power of the dollar declined about 8.2 per cent, in 1899, 8 per cent, in 1900, and 5.4 per cent, in 1906. The losses to investors resulting from the depreciation of money are in some degree compensated by a tendency for interest rates to advance during periods of continually rising prices. Professor Irving Fisher in his well-known book, The Rate of Interest, develops this point at length. Rising prices stimulate in- vestments, make business for the time being more active, and consequently lead to an increasing demand for capital and resulting higher interest rates. The adjustment to higher interest rates, how- ever, in the case of bonds and mortgages can ordinarily only be made upon the dates when the obligations mature, and when new contracts are being signed. Furthermore, in the interim the higher market rates of interest force down the prices of bonds whose rates of interest are fixed at the old and lower level. At best, therefore, the compensation for depreciation of principal, which the creditor receives in the form of advancing rates of interest, is only partial, and is slow of realization. "Will Prices Continue to Rise ? A knowledge of the extent to which the dollar has depreciated in the past is of historical interest to the investor, but his primary concern as a business man is the question whether it will continue to depreciate in the future and, if so, how rapidly. The first step in any attempt to answer this question is an inqiiiry as to the chief cause or causes of the dollar's recent depreciation. It is with such an inquiry that the remain- der of this article is concerned. In making such an inquiry three rather elementary facts must be kept in mind. First. Each commodity is subject to its own peculiar conditions of production and marketing and its price reflects these conditions, as well as the more general conditions relating to money and credit. Our problem is not a study of the prices of any individual commodity or group of commodities, but a study SECURITIES REVIEW of the general price level of all classes of commodities. To explain why the prices of a number of indiAndual com- modities rise (while a number of others faU) is no more an explanation of a rising price level than is an explanation of the crests and troughs of waves an explanation of the rising level of a lake. Second. The chief cause or causes of the rise in the general price level since 1896 are to be found in forces which were either absent or relatively ineffect- ive during the long period extending from 1873 to 1896 during which the general price level in the United States declined about 39 per cent., and that of England about 45 per cent. (See chart.) Third. The chief cause or causes are presumably world-wide in their opera- tion, for a rise in general prices during recent years has been found in every important gold standard country of the world. The extent of this rise since 1896 in eight important countries is shown in the following table : Extent to which General Prices in Leading Countries of the World were Higher IN 1910 THAN IN 1896 Country Belgium Canada England France Germany India Italy United States Name of Index number used Percentage In- crease of Prices in 1910 over 1896 Waxweiler Coates Sauerbeck R6forme Economique Schmitz-Hooker Atkinson Necco-Export Prices Bureau of Labor Average for all eight countries 27 35» 281 31'. 423* 37^. 216 46. 33 1. If September, 1911, were compared in- stead of the year 1910 the increase would have been 32 per cent. 2. If September, 1911, were compared instead of the year 1910 the increase would have been 40 per cent. 3. If September, 1911, were compared instead of the year 1910 the increase would have been 54 per cent. 4. Comparison is for the year 1908, the index numbers for later years not being avail- able. 5. Comparison is for the year 1909, the index numbers for 1910 not being available. A reference to the table will show that while the rise has been greatest in the United States, it has been very substantial in all the countries, and nearly as great for Germany, India, and Canada as for the United States. The average increase for the eight countries was about three-fourths of that for the United States. Coming now to a brief consideration of some of+the principal alleged causes, we may note the following: Trusts, tariff, trade unions, exhaustion of natural resources, increased gold production and improved credit facilities. Trusts The period in question has been one in which many trusts have been organized and in which monoply power has been greatly extended. Trusts are in busi- ness for profit, and despite the fact that they often can produce more cheaply than smaller concerns, they frequently raise prices, or at least maintain them somewhat above what would have been competitive rates. A study of different commodities, however, reveals the fact that the recent advance in prices is by no means limited to trust-produced articles, nor to "trust-ridden" countries. Many ar- ticles exhibiting the greatest advances in price, such as lumber and farm products, are not controlled by trusts. Furthermore, the rise of prices in India was almost as great as that in the United States. Upon this subject we may accept the conclusion arrived at by Professor J. W. Jenks, of Cornell Uni- versity, in his special investigation of the influence of trusts upon prices for the Massachusetts Commission on the Cost of Living. He says: "The general con- clusion must be that the late great general increase in prices cannot be SECURITIES REVIEW I" ■I 170 160 150 140 ISO 120 110 100 90 80 70 601 Bars lOold Production ■ * « Prices in England ——^n Prices in the United States e CO 00 PO o e 90 go o 00 e a o s O c a The heighth of the bars as measured by the index on the right side of the chart represents the world's average annual gold production, for the five (or ten year) period ending with the years designated at the bottom of the chart. The irregular lines represent the rise and fall of prices in England and the United States over the same periods. Inasmuch as the Enghsh price index numbers and those of the United States are computed from a different base, and represent different commodities, there is no significance in the fact that the curve representing English prices is almost always lower than that representing American prices. The curves should be inter- preted merely as representing in a rough way the relative movements from year to year of the price levels of the respective countries. SECURITIES REVIEW ascribed to the trusts, expecially the prices that mainly affect the cost of living, though they are probably respon- sible for a smaU part of it." Tariff A second explanation often given is the tariff. The tariff may be an impor- tant reason for the higher level of prices in this coimtry than in Europe; it prob- ably has Utile weight as an explanation of the recent rise of prices in the United States. The tariff has been high ever since the Civil War, it was high during the long period of falling prices from 1873 to 1896. It was not materially changed from the Dingley Act of 1897 to the Aldrich-Payne Act of 1909. Concern- ing the latter act our foremost scientific authority on the tariff, Professor F. W. Taussig, of Harvard University, says: " In sum, " this act "brought no essential change in our tariff system. . . " Since 1897 prices have been moving upward, and the advance is just as evi- dent in articles which do not bear effect- ive duties as in those that do. The advance, moreover, has taken place in countries with a high tariff, like Germany and the United States, countries with a low tariff, like India, and countries with practically no tariff, like England. Trade Unions The increased cost of living has been attributed by many to the exactions of organized labor. These exactions may be a cause in the case of some goods. When trade unions interfere with the efficiency of labor and unreasonably restrict output, the result can only be less products, and higher prices for particular commodities. The index num- bers of wages per hour "in the leading wage-working occupations of 4,169 estab- lishments in the principal manufacturing and mechanical industries of the United States" compiled in 1908 by the United States Bureau of Labor showed an aver- age increase of wages from 1896 to 1907 of 29 per cent., as contrasted with the Bureau of Labor's index numbers for prices, which showed an average increase of 43 per cent, for the same period. The argument that the demands of organized labor has been an important cause of the recent rise of general prices loses much of its apparent weight when one notes that -prices have risen much more rapidly than wages. It is probably to a very considerable extent a case of "putting the cart before the horse." One would be nearer the truth in saying that the demands of organized labor for higher wages have been stimulated by rising prices and by the need of higher wages to maintain existing standards of living. Wages normally lag behind prices on an upward movement, and the demands of trade tuiions in many cases merely represent efforts to "take up the slack." The upward movement of prices, moreover, has taken place not only in countries, like England and the United States, where labor organizations are comparatively strong, but also in countries, like Germany and India, where such organizations are compara- tively weak. Exhaustion of Natural Resources The exhaustion of natural resources has unquestionably been a factor in the upward movement of general prices. Our population has been increasing rapidly and making continually heavier demands upon our agricultural, mineral, and forest resources. In exploiting these resources we have been altogether too careless and wasteftd. The prices of such basic commodities as foods, building materials, fuel, and the like have risen more rapidly than those for most other kinds of commodities. But the rise in 8 SECURITIES REVIEW prices has been limited by no means to such articles as these. It has, moreover, taken place in countries, like Germany, where great care has been taken in the conservation of natural resources. Increased Gold Production Another cause, and in my judgment' by far the most potent one, is the recent phenomenal increase in the world's gold production. Every price in the United States involves a comparison of the value of an article with the value of a dollar. When a farmer brings eggs to the country store to exchange for sugar he knows that the higher the value of sugar, the more eggs it will require to buy a ten-pound sack; he knows equally well that the lower the value of eggs, the more eggs it will require to buy the sugar. He knows that both eggs and sugar fluctuate in value according to the law of demand and supply. When, however, he pays money for goods, he always attributes a change in the price of the goods to a change in the value of the goods, although it may be due to a change in the value of money per se. We think of a dollar as a fixed unit of value just as a meter is a fixed unit of length, or a kilogram a fixed imit of weight. But the analogy is an incorrect one. There is in a $10 gold piece 232.2 grains of pure gold. Anybody can take that many grains of pure gold to the mints and obtain for it a $10 gold piece, and anybody can melt down a new $10 gold piece and get from it that many grains of pure gold. A $10 gold piece is ac- cordingly practically equivalent in value to 232.2 grains of pure gold, and a dollar is equivalent to the value of 23.22 grains of pure gold. The United States cur- rency system is on a gold standard, and all of our different kinds of money are interchangeable with gold. A dollar, therefore, represents the value of 23.22 grains of pure gold put up by the government in the form of coins. An5rthing that changes the value of gold changes the value of a 4ollar, and tends to change the price of every article quoted in terms of dollars; that is, the price of everything which is bought and sold. But gold, 'like other commodities, obeys the law of demand and supply. A reference to the accompanying chart on page 6 shows the movement of the world's gold production since 1820. The chart shows the great increase at the time of the Califomian and Austra- lian gold discoveries of the middle of the last century, the tendency for gold production to decline about 1860 to about 1890, at a time when the move- ment of many countries from a silve standard or bimetallic standard of cur- rency to a gold standard was leading to a greatly increased demand for the yellow metal; and finally it shows the steady and phenomenal increase in pro- duction since the early nineties. The average annual production by 5-year periods since 1891 has been as follows: Period 1891-1895 1896-1900 1901-1905 1905-1910 Millions of Dollars 163 257 323 434 Thousands of Otinces 7,880 12,450 15,610 20,980 -The world's production of gold in 1910 was over 3| times as large as in 1870, over 4| times as large as in 1880, more than 3-| times as large as in 1890, and 78 per cent, larger than in 1900. Gold is a durable commodity and its annual product is not used up, like that of wheat, from year to year. On the contrary, the world's stock is an accumu- lation of ages. The enormous gold pro- duction each year during the last decade and a half has greatly increased the SECURITIES REVIEW world's available supply and as the demand, though greatly increased, has not kept pace with the supply, the value of gold has fallen— in other words, the price levels in all gold standard countries throughout the world have risen. The present advance in prices is in many respects a repetition of what hap- pened at the time of the great Califomian and Australian gold discoveries in the latter '40's and early '50's. (See chart.) Then as now people were greatly con- cerned with the rising cost of living. All sorts of explanations were given at the time, but the verdict of history seems to be that the chief cause was the greatly increased gold production. This rise in prices about the middle of the last centtiry was followed, as we have seen, by a long period of falling prices, when the supply of gold did not keep pace with the demand. The evils of this long period of falling prices led to the great controversy over bimetallism. About 1897 the gold production in South Africa turned the tide of prices from a falling one to a rising one, and since that time we have heard little of bimetallism, but much of the rising cost of living. Improved Credit Facilities and Increased Rate of Monetary Turnover The last important factors in the recent rise of prices to be considered are im- proved credit facilities and the increasing rate of monetary turnover. Any com- modity tends to decline in value when less expensive substitutes are used in its place. The last decade and a half has witnessed a remarkable development in the use of credit as a means of pajnnent; our banking power has much more than doubled, checks are being used to an , increasing degree as media of exchange, and otu: bank note circulation increased from $200,000,000 to neariy $700,000,000 between 1895 and 1910. Similar develop- ments, although in most cases not so rapid, have been taking place in many other countries. If money txims over more rapidly it is obvious that a given amount will do more money work. A million dollars with an average rate of turnover of 20 will perform 120,000,000 of money work in a year, while if its rate of turnover is doubled it wiU perform 140,000,000 of money work. That increase of money work may be represented by the exchange of the same amount of commodities at a higher price level or of a larger amount of commodities at the same price level, etc. Professor Irving Fisher, of Yale University, in his book. The Purchasing Power of Money, estimates that the rate of monetary turnover increased about 12 per cent, from 1896 to 1909. We have, therefore, the situation of a more efficient use of money, and a rapid development of the use of effective money substitutes, at a time when the mines are pouring out the standard money metal as never before. A Word as to the Future Two forces appear likely to exert a strong influence for some time to come, in the direction of higher price levels: One force is a continuation of the present large and increasing gold pro- duction. Known gold deposits are still enormous and new gold fields may be discovered ; while improvements in meth- ods of mining and metalltu-gy are making it profitable to work poorer and poorer ores. Much of the world's gold today is being obtained from ores which would have been discarded as worthless a generation ago. The other force is the improvement of our monetary and banking mechanism in such ways as to increase the efficiency of money — a result equivalent in its 10 SECURITIES REVIEW influence on prices to an increase in the supply of money. We may reasonably expect the rate of monetary and of deposit turnover to increase in the future, we may expect a more extensive use of checks in place of cash by the public, and we may expect a higher degree of centraUzation and of efficiency in our American banking business. All of this will tend to cheapen gold. It is true, there are certain gen- eral forces which will tend to increase the value of gold. Space will merely permit the mention of a few important ones: (1) As population and trade increase there will be an increased demand for circulating media; (2) as the world's existing supply of gold increases a given annual product will represent a smaller and smaller percentage of the total supply. A cup of water poured into a small pail will raise the level of the water in the pail much more than will the same cup of water poured into a large pail. > (3) As the best gold deposits are worked and it becomes necessary to resort to poorer mines and more inacces- sible veins, the cost of mining gold will increase. Furthermore, as prices rise, the cost of labor, machinery, chemicals, etc., used in gold production will continue to increase, while gold enjoys the distinction of being the only commodity (in gold standard countries) whose price remains constant. It is dangerous to prophesy as to what will be the resultant of these forces (and numerous others that might be men- tioned), some working in one direction and some in the other; it seems, to the writer, probable, however, that we may reasonably expect a continuation of ris- ing prices for some years to come; rising prices, however, accompanied by tem- porary reactions in the form of com- mercial crises and depressions similar to the ones we have recently expe- rienced. Cost of Living an International Problem THOSE who have followed the course of events during the last few months with respect to an investigation of the present high cost of living, must appreciate the importance of the article by Professor Kemmerer in this issue and the significance of his theory. Unquestionably the cost of living is today the one question that is most generally engaging the thought of the nations of the world. The high scale of commodity prices and the tendency toward a continued increase is world wide — conclusive evidence, it would seem, that the cause also must be of universal influence. High prices in the United States are frequently attributed, and possibly not without some justice, to the growing extravagance of the Ameri- can people. Yet this theory is most forcefully refuted by the fact that in France and many other European coun- tries, where the highest ambition of the people as a whole is to live comfortably upon a fixed income, the increased cost to live is almost uniform with our own. The United States Consul at Havre reports that between 1900 and 1911 beef rose there from 23 to 29 cents a pound, pork from 25 to 40 cents, eggs from 40 to 58 cents, rice from 8 to 10 cents, bread from 3 to 4 cents, and tea from 75 cents SECURITIES REVIEW 11 to $1. Proportionate increases, as shown by the various index ntunbers cited in Professor Kemmerer's article, obtain throughout the world. An International Commission Proposed Possibly no organization has given more thorough study to this question than the American Economic Associa- tion, which counts among its members practically all the economists connected with the American colleges and univer- sities and hundreds of bankers and other business men. At its annual meeting at Washington in December, this Association presented a resolution to President Taft proposing an international commission to investi- gate the causes of the prevailing high cost of living and, if practicable, to sug- gest remedies. As a consequence, Presi- dent Taft sent to Congress on February 2, a special message advocating the com- mission. The result of such an investi- gation, if approved by Congress and participated in by foreign countries, wiU be most interesting. Many members of the American Eco- nomic Association have individually ex- pressed themselves as being confident the increased supply of gold will be found the most universal cause. Professor Irving Fisher of Yale University, who was largely instrumental in bringing the matter before President Taft, says: "It would be interesting if an interna- tional commission could show whether the rise in cost of hving was confined to gold standard countries. It is signifi- cant that in a general way such figures as are available for India show a greater parallelism to those in gold standard countries before 1873, when gold and silver were joined by the bimetallic tie, and since 1893, when India has had a gold exchange standard. In the inter- vening period of twenty years the price fluctuations in India seem to have been strikingly independent of those in gold standard cotmtries." Senator Reed Smoot, of Utah, who was a member of the Senate committee that recently investigated the high cost of liv- ing in the United States, is a firm believer in the gold supply theory. Speaking of information he gathered as a member of this committee, he says: "The more gold the world has, the smaller becomes the purchasing power of money. This is decreased further through the exhaustive system of credits in the modem business world. In 1890, when the gold production was something like 25 per cent, less than it is today, eggs cost 20 to 25 cents a dozen. "With the gold output 25 per cent, larger, eggs are now costing 40 to 50 cents a dozen. The same is true in regard to butter, meats, fruit, wool, linen — ^in fact, everything we eat and wear. Little Hope for Decrease in Prices "Our increase in population is not stiffi- cient to make prices rise as steadily as they have, nor could any combination of commission men, wholesalers, or pro- ducers keep prices on the increase for so many years. It has been too permanent. We must seek some other cause. " The investigation now being conducted by the Bureau of Labor into the high cost of living wiU undoubtedly eliminate abuses which have become a part of the marketing of all products and necessarily increase their cost. "I have little hope, however, of a sub- stantial decrease of prices, anywhere near where they were fifteen or twenty years ago, imtil the world's gold supply falls oflf considerably." 12 SECURITIES REVIEW The Demand for Higher Interest Rates To the investor, the whole signifi- cance of the increased and increasing cost of Uving Hes in the necessity it commands for a larger return on invested money. The general average of prices on all commodities showed an increase for 1910 of slightly over 4 per cent. Therefore, the man whose invested money netted him only 4 per cent, in 1910, actually profited nothing on his investment, for at the end of the year he was compelled to add his interest to his principal to give it the buying power it had twelve months before. The investor who received less than 4 per cent, was an actual loser, and was obliged to draw upon his reserve to maintain the purchas- ing power of his capital. Obviously, then, if either of these is to profit at all upon his investment he must turn to a form of investment which will afford him a larger income. Larger Returns Easily Obtainable More and more investors are coming to recognize this. The Chicago corre- spondent of The Journal oj Commerce (New York) said on Feb. 13: " There is in this market at the present time a decided apathy on the part of banks and the investment public toward railroad and the higher grade bonds, and an abnormal demand for short-term notes and the issues offering large investment returns to the purchaser." The Wall Street Journal, the foremost financial paper in America, goes stUl further when it says: "Rich investors who heretofore were satisfied with 4 per cent, or even less on their money now say they need and wiU not be satisfied unless they have more for an income. And they have found that they can get more with almost as much safety as they had on the first grade railroad bonds they formerly bought." But what shall this investment be? Consider this. If certain commodities are constantly selling at higher prices, it follows logically that a proprietary inter- est in those commodities will likewise become increasingly valuable. For ex- ample, if wearing apparel is constantly selling at higher prices, an interest in a business which manufactures such goods should increase in value. If coal is increasing in value, a share in the own- ership of a coal property will certainly grow in value. The Logical Investment The logical course for the investor to follow, therefore, is to place his money where it will secure for him a share in the ownership of some property or enter- prise. He can do this in three ways: First, by actually engaging in some business enterprise himself; second, by buying stock in an enterprise; or, third, by buying bonds which carry with them as a bonus certain amount of stock. By thus becoming an actual owner or part owner of an enterprise, the iavestor participates in its profits and thus gains instead of loses through the increased and increasing value of commodities. It was the growing recognition of the wisdom of this cotu-se which brought out and made so successful the heavy distri- bution in 1911 of 7 per cent, preferred stocks of large corporations at a price which netted 6§ to 7 per cent, to the investor. And there is every reason to believe that as more and more investors realize that a larger rate of interest is imperative, there will be a general turn- ing toward sound industrial stocks and bonds carrying a stock bonus. SECURITIES REVIEW 13 Lack of Capital Chief Cause of Failure INVESTORS should never forget that one of the greatest assvirances of safety in a business enterprise is ample capitalization. While it is true that over-capitalization is often a just cause for criticism, especially when the physical assets of a corporation are of modest proportions, it is none the less true that a corporation endangers the security of its stockholders' interests by failing to provide stifficient capital to carry through its plan of opera- tions. This is best proven by the fact that each year more business failures are due to lack of capital than to any other cause. Bradstreet's reports that of the 12,646 failures in the United States in 1911, 3,970 or 31.4 per cent, were due to lack of capital. The percentages due to the various causes were as follows: Lack of capital 31.4 Incompetence 27.0 Specific conditions 16.9 Fraud 10.6 Inexperience 4.1 Competition 2.9 Neglect 2.2 Unwise credits 2.0 Failures of others 1.3 Extravagance 9 Speculation 7 Of those that failed, 90.9 per cent, were doing business with $5,000 capital or less 6.5 per cent, with $5,000 to $20,000 1.6 per cent, with $50,000 to $500,000 and .02 per cent, with $500,000 to $1,000,000. There was not a failure in the United States in 1911 among concerns having a capital of $1,000,000 or over. In Canada an even larger proportion of last year's failures were charged to insufficient funds. Almost half of the total failures, 49.3 per cent, to be exact, were due to lack of capital. It is also significant to the investor that the factor of second importance in contributing to failures last year was incompetence, 27 per cent, of the failures in the United States having been due to this cause. Inexperience, which may be considered a direct cause for incompe- tence, resulted in the failure of 4.1 per cent. more. Therefore, 62.5 per cent, of the failures of 1911 were attributable to the three causes — ^lack of capital, incompetence, and inexperience. It would thus seem that the investor who wishes to make sure of the safety of an enterprise should first of all satisfy himself upon two points — that the concern is provided with ample capital to carry out its plans and that its management is composed of experienced and efficient men. The Geography of Investment NOT the least important factor to be considered in choosing an investment is the geographical location of the plant or properties behind the securities offered. Whether the in- vestment be in land itself, in natural resources, or in stocks or bonds of a rail- road or industrial corporation, the ques- tion is equally important. The investor should invariably ask: "Is the location of this proposition such that it will tend to enhance its future value ? ' ' Such fore- sight has been the basis of more than one fortune. A striking example of this was 14 SECURITIES REVIEW the sale a few weeks ago of the small oddly shaped piece of groiind in the southeast comer of the block occupied by the Macy store at Broadway and Thirty-fourth Street, New York. About ten years ago this parcel of ground, considerably less than a hundred feet square, was bought for $650,000. Even that was an enormous price. But the buyer saw what was com- ing. New York's retail district was rap- idly being transplanted to the Greeley Square district. Land values would in- variably increase. The other day the owner of this little comer plot sold it for exactly a million dollars. His foresight paid him a handsome profit. Even more striking instances are to be foimd in the case of those who have made wise "geographical investments" in the coal lands and coal properties of Pennsylvania. Dr. I. C. White, State Geologist of West Virginia, tells an interesting story of the shrewd fore- sight that built a small fortune for James G. Blaine. "It was my good fortune," he says, "to accompany the lamented Blaine, the last time that he visited his boyhood's home, 20 odd years ago. He had acquired 1 , 100 acres of Pittsburg coal lands in the vicin- ity of Elizabeth, about 22 miles above Pittsburg, and the party stopped there a few hours to permit Mr. Blaine to examine his property. "Being curious to know why he had made an investnient of this kind so far removed from his home in Maine, I asked him how it happened. "He said that cheap fuel was the most important element in the life of nations, and that in looking the country over he had concluded that there was more of it easily accessible to the Pittsburg region than in any other portion of the country, and hence the Pittsburg district would some time become the manufacturing center of the world, and therefore that investments in its coal fields could not fail to prove remunerative. The proph- ecy of that far-seeing statesman was ftdfilled much sooner than even he ex- pected, since Pittsburg has held first place among the workshops of the world for the last ten years." The Necessity of Saving THE Equitable Life Assurance Soci- ety published recently some figures of rather startling significance to the man who is saving and investing little or none of his income. A careful examination of the records of the Surrogate's Ofiice of New York County for a period covering 5 years, shows that of the adults who died dur- ing that time : 85.3% left no estate at all 4 3% left estates valued at $300 to $1,000 5 3% left estates valued at $1,000 to $5,000 1 8% left estates valued at $5,000 to $10,000 1.8% left estates valued at $10,000 to $25,000 and only 1 5% left to those dependent upon them estates valued at $25,000 or more Similar researches made in Lucas County, Ohio, in which Toledo is located, show that: 78.15% left no estate at all 10.40% left estates valued below $1,000 7.88% left estates valued at less than $10,000 2.62% left estates between $10,000 and $25,000 and only .95%, less than one in a thousand, left to those dependent upon them, estates valued at $25,000 or more These reports are striking evidence of the necessity of saving and investing money, even though in small amounts, where it will be safe and will yield a steady income. ?- SECURITIES REVIEW 16 i= THE INVESTOR'S DICTIONARY Every man and woman, in order to intellieently choose an investment, should first of all be ^"''l^r with the nature of the various forms of securities. In this Department the SECURITIES REVIEvv will publish each month definitions and explanations of terms and expressions commonly used in connection with investments. ^ 4 A Bond ^^ ^ promise to pay a definite sum of money at a definite future date, with interest at a fixed rate payable at stated intervals in the meantime. It is usually secured by a mortgage, a deed of trust, or some other collateral security. Thus, when a municipal government or a railroad or an industrial concern wishes to raise money for a certain purpose, it may issue bonds. If you buy one of these bonds you are simply loaning money and the borrower gives you the bond as its for- mal legal promise to pay you back your money after a certain number of years, with interest payable annually or semi- annually at a fixed rate. Government ^^ ^°"^^ ^^^^^ ^y Bonds *^^ government of the United States. They are secured by the taxing power of the government and indirectly by the country's good-wiU and national wealth. They are, therefore, as near to being "absolutely safe" as any secvirity can be. However, they bear a low rate of interest, the majority of those outstanding bear- ing only two, three, or three-and-a-half per cent. are bonds issued by a railroad company for the construction of new lines, for the rebuilding of its old lines, or for the construction or purchase of equipment. They are secured by a mortgage upon all or a specified portion of the company's property. Railroad Bonds Public Utility ^^ ^""^^^ ^^^"^^^ ^^ Bonds corporations engaged in some business of general service to the public, as gas, electric lighting, telephone, and street railway companies. They are secured by a mortgage on the property of the company issuing them. Industrial ^^^ those issued by a Bonds corporation for the development or pur- chase of a manttfacturing, mining, or other industry. They are secured by a mortgage on the property of the company and by its earning capacity. Municipal Bonds are those issued by a village, city, county, or state. They are usually issued for the purpose of making some public improvement and are secured by the power to levy taxes upon the property within the jurisdiction of the government that issues them. Stock represents an actual share in the owner- ship of a corporation. When a railroad, a manufacturing concern, or any busi- ness incorporates, it issues a certain amount of stock which represents its capital. When you buy a portion of that stock you become an owner of the business to the extent of your holdings and are entitled to a proportionate share of the profits of the business. The profits distributed among the stock- holders are caUed dividends. Stock is of two kinds. Preferred and Common. 16 SECURITIES REVIEW Preferred ^^^ ^ fixed dividend Stock ^^^^ ^^^ ^^ issued with the un'derstandin'g that it has first claim upon the profits of the business after operating expenses and fixed charges, including interest on bonds (if any are outstanding), have been paid. The rate of dividend may be four, five, six, or seven per cent. Pre- ferred Stock may or may not be " Cumu- lative." If it is "Cumulative," the dividends remain a debt against the company until they have been paid. For example, if the profits of the busi- ness are not sufficient to pay the dividend this year, the dividend, or part of it, may be deferred, but it must be paid in full as soon as sufficient profits have been earned. If the stock is "Non-cumu- lative," the dividend, in such a case, is simply passed. Common Stock has no fixed dividend rate. The dividend may be large or small according as the earnings are large or small. If a company is organized with only one kind of stock, that stock is all common, and the profits, after fixed charges have been paid, may be dis- tributed among the various stockholders in proportion to the number of shares each owns. If the company is organ- ized with both Preferred and Common Stock, then, as explained above, the Pre- ferred Stock has first claim upon the profits and the remaining profits may be distributed among the holders of the Common Stock. Thus, if the earnings for a certain period are sufficient to pay only the Preferred Stock dividend, the Common Stock receives no dividends whatever. On the other hand, if the earnings are large the Common Stock dividend may be even larger than the Preferred. In fact, with highly success- ful concerns this is frequently the case. A Real Estate ^^ ^ promise to pay, Mortgage secured by a definite piece of real estate. You loan a certain amount of money and the borrower gives you a mortgage, promising to pay you back at a certain date and pledging certain real estate as security. In the meantime he pays you interest at stated intervals and at a specified rate on the amount borrowed. If the principal is not paid when due, the mortgage may be foreclosed and the property given as security sold to satisfy the debt. Because the safety of the lender's money is largely dependent upon this privilege, it is customary to require that property double the face of the mortgage be given as security. A SavineS ^^ ^^ institution or- Bank ganized under State Laws for the purpose of receiving deposits, particularly savings of wage earners. The aggregate of these savings In any one bank are invested by the board of men who direct the institu- tion. Interest ranging from 3 to 5 per cent., according to the bank, is paid on money deposited. Savings Banks are of two kinds — Mutual and Stock. A Mutual is a savings institution Savings Bank all the profits of which belong to the deposi- tors. That is, the depositors share the profits derived from the investment of their funds over and above the fixed rate of interest. Such a bank is managed by a Board of Trustees formed by its organ- izers at the time of its promotion. A Stock ^^ °^^ organized with Savings Bank ^^p^^^^ ^*°^^ ^"^ directed by a Board of Directors and Officers the same as any other corporation. The profits remain- ing after the interest on deposits has been paid belong to the stockholders. Cornell University Library HD6978 .K31 Why it costs you more to live olin 3 1924 030 080 661 'TpHE Securities Review is an independent ■*• monthly magazine edited and published ioryou. Its policy is clearly defined: To help you place your money where it will bring the largest possible return consistent with safety — a return that will provide for the increasing cost of living. If you have money invested or money to invest, in large or small amounts, YOU NEED THE Securities Review And one dollar will bring it to you for a full year — twelve issues, each packed to the covers with just the facts about investments that you want to know. Send a dollar with your name and address today. This in itself will be the best investment you ever made. SECURITIES REVIEW Traders NatioiMl Bank Building SCRANTON, PA. 31281 §i£^m^5m md ;-^s 5^1 l^-i ft ioWi**^>- ?* % ^; ^:l jk-? ?%- ■i?' '^■i. m0^- ^3? ^ "H M, j^t Tr,. l,(^. ^^. [^?s 9^m •'^ i^ m t'lV M; i /•^fe.*?!^