rophesy the
precise level at which they will ultimately settle (using that word
with considerable relativity). But, for reasons for which the reader
is referred to Volume II in this series, it is safe enough to say that
the general level of post-war will greatly exceed that of pre-war
prices. Now this will apply not only to consumers' goods like milk and
clothes, or to raw materials like pig-iron and cotton, but in very
much the same degree to things like factories and machinery. Things of
this last type are sometimes called "capital goods," because it is in
them that a large part of the capital of a business is embodied. Now
the fact that it will cost much more than it did before the war to
construct fresh capital goods, has a significance which very few
people appreciate. An existing factory cost, let us say, $500,000 to
build and equip with machinery before the war. To construct a similar
factory to-day would cost, let us assume (it is probably a moderate
assumption) $1,000,000. Suppose 10 per cent to be the gross profit
that is necessary to attract capital to the particular industry. Then
it will not pay to construct this new factory unless the trade
prospects point to the probability of a profit of about $100,000 per
annum. But if the old factory is equally well managed, it too should
be able to earn this $100,000, which upon the capital actually sunk
would represent a rate of 20 per cent. The particular figures given
are, of course, purely illustrative; the conclusion to which they
point is that, if new enterprises are to be undertaken, pre-war
enterprises are likely to yield a rate of profit, on their fixed
capital at least, increased in rough proportion to the price-level. Of
course, in years when trade is bad, the factory which dates from
pre-war times will not earn a profit of this kind, it may very likely
make an actual loss. At those times it is very certain that few new
factories will be erected. But it is difficult to reconcile a
condition of trade activity, in which the constructional industries
are busily employed, with a rate of profit to pre-war businesses on
the fixed part of their capital of a lesser order of magnitude than
has been indicated. It makes no difference, it should be observed,
whether we suppose the new enterprises to take the form of starting of
new concerns or extending old ones; in neither case will they be
undertaken, unless there is reason to expect an adequate return on the
capital