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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 2½%½ 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