Prosperity's Demands Ration the Supply

WORLD CAPITAL SHORTAGE

TO many U.S. businessmen--and politicians--the most pressing economic problem of 1957 is the increasing tightness of money, which last week drove the interest rate on U.S. Treasury bonds to the highest point in nearly 25 years (see above). Yet tight money, which economists define as a shortage of available capital to meet the demands of an expanding economy, is not a peculiar phenomenon of the great American boom. As gauged by interest rates, the U.S. actually has easier money than 23 other major nations. The entire free world is caught in the grip of an unparalleled capital shortage that threatens to crimp the expansion plans of businessmen from Bonn to Bombay.

While U.S. firms with high credit ratings can still make short-term loans at 4%, British businessmen must pay 51%. In Germany, Japan, France, Brazil and Greece, interest rates run anywhere from 7% to 12%. For smaller companies, the effective rate often is much higher, reaching 25% or more annually. Even at such rates, demand so far outstrips supply that companies are hard-pressed for expansion capital, are turning increasingly to profits to get the funds they need. In Britain, West Germany and Belgium, some businessmen are plowing up to 60% of all profits back into their firms. -

The basic reason for the capital shortage is that the free world is riding the crest of a postwar boom, and the great demand is to expand and industrialize at once. Enormous technological breakthroughs in almost geometrical progression force businessmen everywhere to search for capital to buy new equipment and materials. And with more jobs and higher pay than ever before, the effective demand of consumers with money to spend and the will to spend it has created vast new markets. In their rush to produce and buy, businessmen and consumers have pushed many a nation into serious inflation (see FOREIGN NEWS), with prices for men, materials and goods all skyrocketing. As industry hikes wages higher and higher, productivity lags behind costs. At the same time, it costs more than ever before to build and operate new production capacity. For expanding businessmen, it means an increasing tightness in the money market.

These byproducts of prosperity are felt most strongly in Western Europe, where industry is highly developed and consumer demand high. In many nations, consumers have been spending so much money that the relative level of effective savings, traditionally the most important pool of new capital, has not increased as fast as the economy as a whole. Another problem is competition between Government and private industry for available funds. Great Britain's current investment program for the nationalized railway and fuel industries alone totals $1.5 billion, v. $2.4 billion for the entire privately owned manufacturing industry. -

In underdeveloped countries, the demand for capital is even more urgent --and even harder to supply. The same factors that apply to Western Europe apply more primitively to the awakening nations of Asia, Africa and South America, struggling to catch up with the world's more industrialized nations. Countries such as India have adopted vast development programs that are based more on artificial paper goals than economic realities. But underdeveloped lands lack the basic industry to create new capital, as well as the savings institutions to channel what money there is into industry. The average Middle Easterner, says one Arab economist, "hides whatever money he acquires in a pillowcase--if he owns one." Nor is it easy to get capital abroad, since Western nations have more use for their capital at home than ever before.

The World Bank and the U.S. Government's Export-Import Bank are doing their best to alleviate the capital shortage, but the aid falls far short of demand. Nor have private investors in the U.S. and Great Britain, traditionally major world exporters of venture capital, been able to supply the demand from overseas, especially since pressure for capital at home is greater than ever. Overseas, even in cases where investment opportunities compare favorably with those at home, a lack of political and economic stability and the threat of nationalization have acted as a deterrent.

Despite the uncomfortable short-term effects on industrial expansion, few economists are seriously worried that the present capital shortage will harm the free world's economy over the long run. Most consider it an inevitable and, to some extent, desirable byproduct of worldwide prosperity. In many nations, the shortage of money acts as a brake on hell-for-leather expansion programs that threaten to burst their economic seams. Often the general effect is to create a natural rationing system based on the laws of supply and demand, which tends to channel capital away from marginal projects into more important--and often more profitable--enterprises.

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