THE WHOLE WORLD IS MONEY-HUNGRY

NATIONS are like people: no matter how much money they have, they never seem to have enough. Today the world has more capital funds for investment than ever be fore. Yet there is disturbing evidence that capital is not being created fast enough to meet the rising volume of legitimate needs. Capital is scarce and costly almost every where, and the global shortage will worsen unless two basic remedial steps are taken. First, ways must be found to develop more funds. Second, the "flow" or distribution of capital has to be sped up and improved.

Capital--the funds left over from present consumption and used to produce future benefits--is more than the core of the capitalist system. Even the anti-capitalists of Moscow recognize it as the force that corrals human energy and in genuity, transforming it into machines and factories, roads, rail lines, bridges, telegraph nets and power plants. Capital begets capital because it leads to production. That creates jobs and income, which in turn produce more capital and more demand for it. The Atlantic Council of the U.S.--a group of U.S. Government and business leaders--estimates that, in the ten-year span ending in 1976, North America and Western Europe will need $1 trillion to expand pro duction. They will also need the funds to open new and costly programs to assault pollution and slums, exploit the resources of the oceans, and perform other basic tasks to make the civilized world more livable. The needs are great as well in countries that are stepping up toward industrialization. Iran needs $11.8 billion for its current five-year development program, started two weeks ago. In the next five years the Philippines will require $4 billion.

The needs are most conspicuous in the impoverished states, many of them new nations. Almost by definition, an underdeveloped country is an undercapitalized country. Struggling to advance from muscle power to the machine, its people anxiously eye their smokeless horizons in search of capital to build factories, hire managers and export young men to universities from Goettingen to Berkeley. They cast an envious glance at such cities as San Juan and Teheran, which have risen from squalor to considerable splendor in less than a generation. The modern influences of communications--tourists, transistor radios, Hollywood films, advertisements--have carried to every mud hovel in the world the idea that cash and credit can help men build a better life; .that capital can create choices.

Reasons for Squeeze

The consequences of the tight supply and growing demand for capital are postponed projects, frustrated entrepreneurs, and an inflation in the price of money. Interest rates have been rising fairly steadily since World War II, are now the highest since the 1920s. In Brazil, interest is typically calculated by the month, and rates run as much as 2 1/2% 1/2 monthly for prime borrowers, 5% for medium-sized companies, and 7% for consumers who make installment purchases. In large parts of Latin America, Asia and Africa, long-term capital is scarcely available at any price, and great chunks of it are hard to come by in Europe. Last week the deficit-ridden U.S. Government had to pay the highest rates since the Civil War -- 6.45% -- to float $730 million in bonds (see BUSINESS). Double-A corporate bonds market for as much as 6.8%, twice as high as in 1955. On a $40,000 mortgage in Washington, D.C., the tag is 6.5%, plus a "discount" charge of two interest points ($800); in Los Angeles, it is 7% plus 1.5 points.

The squeeze comes from a complex of causes. First, there is the world's exploding population -- itself a product of better medical care and improved nutrition brought by capital investment. Only 40% of the people alive today are in the labor force; thus the majority must be supported by the minority who work--and raising their productivity on farms and in factories requires copious quantities of capital. Second, increasing economic competition forces every society to spend more to modernize and automate. Expensive plants age and fade as quickly as cinema sex queens; machines that have been built to last 25 years must be scrapped after ten. Man the dreamer--constantly torn between today's reality and tomorrow's potential--continually destroys capital.

And the cost of capital goods is climbing. Take airplanes: from $1,000,000 for a propeller DC-6 to $7,000,000 for a 707 jet to about $40 million for an SST. Modern superhighways cost more than $2,000,000 a mile. Chase Manhattan Bank Chairman George Champion notes that in U.S. factories, capital investment per production worker has risen from $550 a century ago to almost $20,000 today; in the petroleum-refining industry, the figure is more than $250,000. The capital investment in a medium-sized U.S. farm is about $80,000--double what it was 15 years ago. In the next five years, the nation's steel producers intend to invest about $12 billion to expand, modernize and automate. Then there is the nation's annual investment in research and development: last year it took $24 billion. Contrary to John Maynard Keynes--who theorized that economies eventually mature, stop growing, and then demand only meager amounts of capital--it is now clear that as economies become stronger and more sophisticated, their appetite for capital increases.

Controls & Cutbacks

Yet, as economies grow more industrialized, the productivity of their capital can decline--as the Soviets have lately discovered. To raise gross national product by a value of 1,000,000 rubles a year, for example, the Soviets during the 1950s had to make capital investment of 2,000,000 rubles; to achieve the same G.N.P. gains more recently, they have had to invest 3,300,000 rubles. The Communists have been used to raising capital by coercion, holding down wages, deferring consumption, and plowing back the produce of today's labor into plants and machines for tomorrow. But now they are also finding it politically necessary to divert more and more into consumption to quiet their clamoring people. One consequence is that Poland, Rumania, Hungary, Czechoslovakia and Yugoslavia have begun in a modest way to import capital from the West, permit Western businessmen to invest in some ventures.

Lately, the long-term trend to capital tightness has been aggravated in the U.S. by the Government's large-scale bor rowings to finance its budget deficit. Through issues of securities and loans, the market generates about $70 billion in credit yearly. The Federal Government expects to borrow a phenomenal amount of that--about $22 billion in the fiscal year ending this June. Unless taxes are increased fairly soon and sharply, the Government will pull $17 billion more out of the capital market in the first six months of 1968 than in the first half of 1967. In consequence, capital is likely to become still costlier and scarcer; money tightness has already begun to crimp construction.

There is also a worldwide clamp on capital flow acrosrnational borders. This trend is doubly disturbing because foreign capital is usually targeted on strategic investment projects and provides a particular fillip. The $7.2 billion that Europeans invested in the U.S. up to 1914 financed most of the nation's railroads and canals, and many of its oilfields and mines; the $12.8 billion that the U.S. sent in Marshall Plan aid rebuilt much of postwar Europe. Now, to fight the battle of the balance of payments, the world's two major exporters of capital--the U.S. and Britain--have lurched toward controls. Under newly tightened restrictions on foreign loans and investments, Washington hopes to cut the capital outflow by $2 billion this year. Eu rope stands to lose about $1.5 billion in American capital, Japan and Australia about $300 million between them.

At the same time, a growing disenchantment with foreign aid has led to a leveling-off in grants and other assistance. Although the gross national products of industrialized North America, Europe and Japan have increased more than $300 billion since 1961, the net outflow of aid from their governments is just about the same as it was then--$6 billion. U.S. foreign aid accounts for half the total; but the U.S. gives only six-tenths of 1% of its G.N.P. in aid--a much lower ratio than France, Italy, Belgium and The Netherlands, all of which give 1% or more.

As for private U.S. investment in the developing countries, most of it concentrates in a few that produce marketable minerals--Middle Eastern oil, Latin-American metals. The developing countries are in a squeeze because they depend on the U.S. and other rich nations for 20% of their capital, need hard currencies to buy machines and other capital to build schools, low-cost housing, telephone systems, roads and other all-important "infrastructures" that are slow to show profits. The dilemma: countries often need infrastructure to attract capital, but cannot develop it without large amounts of capital.

Since capital is the product of deferred consumption, the way to make more of it is to increase savings. The U.S. by far leads the world in total savings and capital formation. Economist John W. Kendrick of George Washington University has calculated that Americans have accumulated financial assets of $2.4 trillion, mostly in bonds, stocks, savings accounts, pension funds and life insurance. Last year the U.S. added $129 billion to its stock of capital in the private sector of the economy. The greatest source was not people but businesses, which added $90 billion, primarily through reinvested earnings and depreciation allowances.

Finding New Sources

Government is a fast-growing source of capital formation. Though the Government spends prodigiously on services, salaries, subsidies and defense, which add little directly to capital formation, it does make quite a contribution to the nation's capital resources by building dams and roads, making loans, and investing in education, manpower training, health programs, research and development. The Budget Bureau estimates that these federal investments will rise from $27.3 billion in fiscal 1967 to $31.9 billion in 1968.

Americans are generally becoming much thriftier--personal savings have jumped from 4.9% of after-tax income in 1963 to 7.5% now--but they tend to save less of their pay than do the Europeans. The highest savers of all are the Japanese, whose people, companies and government together save and reinvest 36% of the gross national product-compared with 18% in the U.S. Emphasizing tomorrow's growth at the expense of today's income, Japan this year will rank third in the world in G.N.P., after the U.S. and the U.S.S.R., but 20th in per-capita income. One of the secrets of Japan's 11.4% average annual growth rate, compared with the U.S.'s 4.3% during the 1960s, is that Japan permits its businessmen to deduct from their taxes nearly twice as much depreciation as does the U.S.

The obvious keys to attracting capital are economic good sense and political sanity. Without those, foreign capital will not flow in and domestic capital will flow out. When governments begin to welsh, devaluate and expropriate, capital flees. Such was the case with Indonesia under Sukarno and Brazil under Goulart. And merely printing money cannot create capital. All that that usually does is bring on inflation. When prices soar and money values decline, people usually put their money into goods instead of savings.

Savings plus stability lead to an economic takeoff point, as several countries, including Spain and Mexico, have recently demonstrated. Benefiting from a Japanese-built infrastructure, Chinese management and U.S. aid of $1.5 billion, Taiwan has established a promising capital base. By rapidly spreading a network of banks, Thailand has increased savings deposits twenty-five-fold since 1958. Meanwhile, Colombia, Chile, The Netherlands and other countries are considering various plans to increase capital through enforced savings by issuing bonds in place of promised wage increases or tax reductions.

In capital terms, much of Europe is an underdeveloped area. The Continent lacks many of the broad-based financial institutions that, in the U.S., have transformed "people's capitalism" from a flag-waving slogan into a reality that works. The bourses exist in an aroma of gossip, cater primarily to a thin group of the elite. In France, most brokers do not even advertise--and the first one who does so aggressively may get on to quite a good thing. Still fearful of invasion and deflation, peasants tend to distrust securities, put their money in the mattress and their faith in gold, which they hoard and bury--a complete waste of capital. But proper marketing techniques can lure it out. Europe had hardly any mutual funds until an expatriate from Brooklyn, Bernie Cornfeld, started marketing them a dozen years ago. His Investors Overseas Services now raise more than $2,500,000 per day in new money, and by investing in American stocks, Cornfeld contributed $324 million in 1966 to the plus side of the U.S. balance of payments.

Hurdling the Borders

One important innovation, mothered out of necessity after the U.S. began curbing its money exports, is the big and free "Eurobond" market, which rallies currencies from many countries. Conceived and usually underwritten by Wall Street bankers, the bonds are floated for borrowers as diverse as South Africa's De Beers, France's state-run P.T.T. telecommunications monopoly, and U.S. subsidiaries abroad. They are sold to oil sheiks and other wealthy individuals, and reportedly, the United Nations pension fund and the Vatican. From almost nothing in 1963, the volume of these bonds rose to $2.1 billion last year, mostly for European corporate and governmental borrowers. Hung up for capital from home, European subsidiaries of U.S. companies are turning more and more to this market. They raised $527 million on it last year, another $550 million in the first two months of this year. Internationalizing the world's capital markets is the single best hope for expanding them. Europe's Common Market officials have been disappointed by the slow progress made toward their goal of a free-capital market. Still standing in the way is a thicket of props, controls and discriminatory taxes on incoming or outgoing capital. Governments often tell banks and other financial institutions where and how to invest their capital.

But progress is being made. One day last week, a Japanese industrial borrower phoned the Paris office of an investment bank, whose officials in turn called a German and a Belgian bank to raise money for him, while a London bank acted as financial agent on the loan--which was quoted half in dollars and half in Deutsche marks. More deals like that would go far to unclog the capital channels.

The tragedy of the world's current unrest over gold and money is that it forces nations to take capital-curbing actions that may be necessary today but will be dangerous tomorrow. The way to expand capital is not to clamp chains on its movements but to scrap them, not to reduce foreign aid but to increase it. One step to capital freedom would be a reform of the world monetary system and an expansion of international reserves. That would remove some of the pressure on the dollar, enable the U.S. to enlarge its foreign loans, investments and aid.

Capital has almost always been tight, and will always be tight so long as society is dynamic and man creates new needs. If the scarcity causes investors and governments to size up projects more carefully and make sensible priorities, it will be all to the good. The problem is that the majority of the world's population has urgent needs that will not wait. It is primarily a lack of funds that compels many people to live in shacks, to send their children off to work instead of school, and to die young. Only if they succeed in expanding their capital will men be able to dominate the forces of nature.

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