After 1860 we have abundant data as to the rate of earnings secured by the life companies on their investments. In the early part of the sixties there was a decrease in earnings, but in 1863 the interest rate began to rise, and in 1864 the rate was the highest known in the experience of the insurance companies. This was due to the fact that they had large investments in Government bonds, the interest on which was paid in gold, and gold was at a premium. The prevailing rate was more than 7 per cent and 8 to 12 per cent was not uncommon.

Since the latter part of the sixties the interest rate has declined more or less unsteadily, but none the less surely. The decade of the seventies was a period of widespread financial depression. In the early part of the decade the prevailing interest rate was 63 per cent, in the latter part 6 per cent. After 1880 the decline in the rate of interest became more pronounced. Not a single company maintained a level of 6 per cent unbroken. The general interest rate was 51 per cent. The rapid decline in the rate of interest continued in the decade of the nineties, reaching its lowest point in 1893 and 1894. The average rate for the decade was about 5 per cent, but in the worst years it sank as low in numerous cases as 2 and 3 per cent. The latter part of the decade was a turning point. Since 1900 the average rate of interest earned by the life-insurance companies has been 41 per cent, though there have been sharp fluctuations. It may be safely stated that since 1896 the general tendency of interest rates has been slowly but steadily upward. From this survey of the interest returns obtained by the principal life-insurance companies on their investments, thus collected and classified by Zartman, the main conclusion to be drawn would seem to be this, that the tendency of the interest rate is not to decline but to fluctuate. Remembering that the future is long, it is safe then to argue that while the rate of interest may be low at some time in the future, it is sure, also, to be high at some other time in the future.

It is true, however, that some writers hesitate to hazard a prediction as to the rate of interest in the future. Among them is Prof. Irving Fisher, of Yale University, whose conclusions are thus summarized in his exhaustive work, "The Rate of Interest: "

In order to estimate the possible variation in the rate of interest we may, broadly speaking, take account of the following three groups of causes: (1) The thrift, foresight, self-control, and love of offspring which exist in a community; (2) the progress of inventions; (3) the changes in the purchasing power of money. The first cause tends to lower the rate of interest; the second to raise it; and the third to affect only the nominal rate of interest, though practically it usually produces also a dislocation in the real rate of interest.

Were it possible to estimate the strength of the various forces thus summarized we could base upon them a prediction as to the rate of interest in the future. Such a prediction, however, to be of much value would require more

painstaking attention than has ever been given to existing historical conditions. Without such a careful investigation any prediction is hazardous.1

Numerous actuaries have declared that it is folly to say that the rate of interest will continue to decline, since the time would come if that were true when money would be loaned without interest, a condition contrary to all probability. Carried to its logical conclusion, the idea of constantly declining interest would lead ultimately to the theory that the rate of interest must eventually become a minus quantity, and the time arrive when the money lender would pay the borrower for taking the money off his hands, a theory not likely to gain much credence in the business world.

The probable future rate of interest was discussed with great earnestness at the Fourth International Congress of Actuaries, held in New York in August, 1903. Two papers were presented, one on "The Probable Future Course of the Rate of Interest," by Mr. J. Burn, of Great Britain, and one on "Der wahrscheinliche Lauf des Zinssatzes in der Zukunft," by Dr. Ludwig Grossmann, of Austria. Mr. Burn's conclusion was as follows:

The most probable future course of the rate of interest (providing no exceptional disturbances occur) would therefore seem to be:

A fall, small but rapid, within the next year or two; then a less rapid fall lasting possibly for several years, and gradually settling down to a general tendency to fall at a slower and slower rate.2

3

It is interesting to note that since 1903, the year when this paper was read, the rate of interest has steadily advanced, and that most of the actuaries who participated in the discussion which followed the reading of these papers indorsed rather the views of Dr. Grossmann, who held that the marked decrease in the returns from investments appeared to be mainly of a temporary nature. Dr. Alfred Manes, of Germany, called attention to a recent work by Ernst Voye, of Halle, entitled, "On the Extent of the Various Rates of Interest and their Reciprocal Dependence on Each Other. The Course of the Rate of Interest in Prussia from 1807 till 1900." In this the author divides the century into four periods, discussing the rate of interest in Prussia in each period. He finds that in the first period, from 1807 to 1844, there was a general decline in the rate of interest, which, owing to extremely unfavorable political relations (until 1814) was as high as 8 per cent and then dropped about 1844 to 31 per cent. In the second period, from 1845 to 1870, it rose, interrupted several times by a retrograde movement. The years from 1871 to 1895 comprise the third period, in which an almost uninterrupted decline is to be noticed and the rate of interest dropped to 3 per cent, the minimum of the entire century. Finally, in the fourth

1 See The Rate of Interest, by Irving Fisher, Ph. D., p. 334.

2 See Documents, Fourth International Congress of Actuaries, p. 574.

3 See Documents, Fourth International Congress of Actuaries, p. 922.

period, from 1896 to 1900, was observed a rather rapid upward movement to over 3 per cent. The author states the fact that in America, Russia, France, and Austria the rate of interest has also declined since 1870, and comes to the following conclusion:

Constantly increasing commerce converts the national money markets into an international money market, contracting more and more, so that the rates of the separate countries tend to adjust themselves each to the other. Whether the rate of interest in one of the civilized states will ever again deviate from that in another by 4 per cent, as was the case in 1869 between the United States and England, is highly questionable. * * * The development of an international rate of interest produces the natural result that by an extension of the market, the rate of interest in the separate countries is secured against too low a decline as well as against an immoderate rise. * * * The reaction of the foreign upon the domestic rate of interest can, therefore, be generally only favorable and by no means predominantly unfavorable.1

Another strong speech, bringing out the same point, was made on that occasion by Mr. Charlton T. Lewis, of the United States. Said he:

It has been often asserted in the public press and sometimes in the writings of economists, that there is a progressive and secular tendency to diminution in the rate of interest. This theory has been widely accepted among financial men, yet on examination it proves to be without foundation. All these diagrams, all these tables, the whole history of the rate of interest go to disprove it.

He then went on to trace the history of the rate of interest in Europe and the United States from the time of the Napoleonic wars down to the present day, showing the same general fluctuations in the rate that had been noted by Ernst Voye in his book. From 1815 to 1845 a general decline, from 1846 to 1871 a general rise, from 1872 to 1897 a general decline, and from 1897 to 1903, the year in which he spoke, a general rise again, “so marked that it is astonishing to me that the facts have not obtained more prominence in this debate.” He opposed next "another theory by which many economists have been influenced," and that is "that the accumulation of capital in itself has a tendency to lower the rate of interest, and that as the world grows richer the rate of interest must progressively decline."

If there is any established fact in the financial history of the world, any general truth which is demonstrated by experience on the largest scale, it is that this theory is unfounded. Is there a man with any knowledge of economic history who doubts that the world's wealth made enormous progress in the century from 1760 to 1860? Is there any possible question that the growth of capital in the period which some of us are able to remember, from 1845 to 1870, was rapid and magnificent, far outstripping the growth of population? Yet if we inquire into the market of each of these epochs we shall find that in each case the rate of interest at the later date was materially and universally much higher than it was at the early date. * * *

1 See Proceedings of the Fourth International Congress of Actuaries, Vol. II, p. 150.

These facts, which can not be disputed, show that while the normal rate of interest is a function of the average productiveness of capital, its fluctuations depend not simply day by day and month by month, and even year by year, but sometimes from generation to generation upon other influences, These are mainly the forces which shape the imaginings and expectations of men. The most potent of them is the spirit of enterprise, the degree in which the tendency prevails among men to reach forward energetically for the future and to shape it for themselves with confidence.

Reasoning thus, Mr. Lewis comes to the conclusion that the rate of interest

Will undergo fluctuations, but as long as capital in the hands of human industry and of human ingenuity can reproduce its kind, the rate at which it promises to increase will be the only limit beyond which enterprise and sanguine hope will be unwilling to pay for the use of it.1

Bearing all these facts and arguments in mind, it would seem reasonable to assume that a permanent fund invested in stable securities will yield, on the average, a moderate rate of interest such as it is here proposed shall be guaranteed the Government employees. on their savings.

1 See Proceedings of the Fourth International Congress of Actuaries, Vol. II, pp. 156-161.

74196°-S. Doc. 745, 61-3—14

APPENDIX A.

TEXT OF PERKINS BILL.

[S. 1944, Sixty-first Congress, first session.]

A BILL For the retirement of employees in the classified civil service.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That beginning with the first day of July next following the passage of this act there shall be deducted and withheld from the monthly salary, pay, or compensation of every officer or employee of the United States to whom this act applies an amount, computed to the nearest tenth of a dollar, that will be sufficient, with interest thereon at three and onehalf per centum per annum, compounded annually, to purchase from the United States, under the provisions of this act, an annuity, payable quarterly throughout life, for every such employee on arrival at the age of retirement as hereinafter provided, equal to one and one-half percentum of his annual salary, pay, or compensation for every full year of service or major fraction thereof between the date of the passage of this act and the arrival of the employee at the age of retirement. The deductions hereby provided for shall be based on such annuity table as the Secretary of the Treasury may direct, and interest at the rate of three and one-half per centum per annum, compounded annually, and shall be varied to correspond to any change in the salary of the employee.

SEC. 2. That the amounts so deducted and withheld from the salary, pay, or compensation of each employee shall be deposited in the Treasury of the United States and shall be credited, together with interest at three and one-half per centum per annum, compounded annually, to an individual account of the employee from whose salary, pay, or compensation the deduction is made. The moneys so deducted and the income derived therefrom may from time to time be deposited in savings banks designated by the Secretary of the Treasury for that purpose: Provided, however, That the savings banks receiving such deposits shall pay interest thereon at a rate of not less than three and one-half per centum per annum, compounded annually. For the safe-keeping and prompt payment of the money deposited with them the Secretary of the Treasury shall require the savings banks to give satisfactory security, by the deposit of bonds of the United States, bonds or other interest-bearing obligations of any State of the United States, or any legally authorized bonds issued for municipal purposes by any city or town in the United States which has been in existence as a city or town for a period of twenty-five years, and which for a period of ten years previous to such deposit has not defaulted in the payment of any part of either principal or interest of any funded debt authorized to be contracted by it, and which has at such date more than twenty-five thousand inhabitants, as established by the last national census, and whose net indebtedness does not exceed five per centum of the valuation of the taxable property therein, to be ascertained by the last preceding valuation of property for the assessment of taxes; or any legally authorized bonds issued for municipal purposes by any 210