NEW CAPITAL

Evening Star, Issue 23123, 24 November 1938, Page 10

NEW CAPITAL

FORMATION METHODS EXPERTS' ANALYSIS LEAGUE OF NATIONS SURVEY The complexity of the modern capital market is strikingly demonstrated ■in a report "which has been issued by the League of Nations Committee of Statistical Experts. The committee was asked by the Council of the League to report on methods of improving the comparability of financial statistics with particular reference to the question of capital formation. Most of the report is devoted to questions of statistical technique, but the committee found it advisable to review the process of capital formation in order to arrive at '.statistical methods.of measurement. It points out that when savings are made in any country (by individuals, business enterprises, or public authorities) those savings may be used in any of the following ways:—(l) For purposes other than investment (for example, for export, for hoarding, or for transfer to other persons for consumption by them); (2) for the acquisition of capital goods; (3) for investment. Of these, the second and third classes result in funds being available for investment, although funds of the second class never pass from the control of the saver. Funds of the third class find their way to investment through the capital market, either directly or through intermediate banks or similar institutions. This is the second stage of capital formation, and it is complicated by another factor. “ The streams coming from savings do not. however, represent all funds available for investment,” the report I mints out. “Thus, the money streams easing the banks need not be equal to savings put at the latter’s disposal, as the funds supplied by the banks may, in particular, have been increased as a result of an increase of the credit base or a reduction in reserve ratios, and by funds accumulated for maintenance or replacement of existing capital goods.” The 1 third stage in the process of capital formation is the creation of new capital goods or the outlay of money for the acquisition of such goods. Here, also, there is a complication, because the money outlay may not equal the funds available for. investment resulting from the second stage. The difference may be causedby the time-lag between the accumulation of funds and the acquisition of capital goods, or by thjy-fact that part of these funds may ■be_ usdd for purposes other than acquiring, capital goods—the covering of losses by business enterprises, or the provision of unemployment benefits by Governments.

The report emphasises that a measurement of the money streams at various stages will possibly show significant differences. Moreover, measurement at different levels will be necessary for different purposes. For studies of the price credit it will be ■ important to have information about the stream of money passing through the capital market; but for the study of capital formation as a whole it will be more important to know the total funds available for investment, including those funds which do not pass through the capital market.