Capital in the Twenty-First Century (26 page)

Next, we must insist on the fact that the fall in the capital/income ratio between
1914 and 1945 is explained to only a limited extent by the physical destruction of
capital (buildings, factories, infrastructure, etc.) due to the two world wars. In
Britain, France, and Germany, the value of national capital was between six and a
half and seven years of national income in 1913 and fell to around two and a half
years in 1950: a spectacular drop of more than four years of national income (see
Figures 4.4
and
4.5
). To be sure, there was substantial physical destruction of capital, especially in
France during World War I (during which the northeastern part of the country, on the
front lines, was severely battered) and in both France and Germany during World War
II owing to massive bombing in 1944–1945 (although the periods of combat were shorter
than in World War I, the technology was considerably more destructive). All in all,
capital worth nearly a year of national income was destroyed in France (accounting
for one-fifth to one-quarter of the total decline in the capital/income ratio), and
a year and a half in Germany (or roughly a third of the total decline). Although these
losses were quite significant, they clearly explain only a fraction of the total drop,
even in the two countries most directly affected by the conflicts. In Britain, physical
destruction was less extensive—insignificant in World War I and less than 10 percent
of national income owing to German bombing in World War II—yet national capital fell
by four years of national income (or more than 40 times the loss due to physical destruction),
as much as in France and Germany.

FIGURE 4.5.
   National capital in Europe, 1870–2010

National capital (sum of public and private capital) is worth between two and three
years of national income in Europe in 1950.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

In fact, the budgetary and political shocks of two wars proved far more destructive
to capital than combat itself. In addition to physical destruction, the main factors
that explain the dizzying fall in the capital/income ratio between 1913 and 1950 were
on the one hand the collapse of foreign portfolios and the very low savings rate characteristic
of the time (together, these two factors, plus physical destruction, explain two-thirds
to three-quarters of the drop) and on the other the low asset prices that obtained
in the new postwar political context of mixed ownership and regulation (which accounted
for one-quarter to one-third of the drop).

I have already mentioned the importance of losses on foreign assets, especially in
Britain, where net foreign capital dropped from two years of national income on the
eve of World War I to a slightly negative level in the 1950s. Britain’s losses on
its international portfolio were thus considerably greater than French or German losses
through physical destruction of domestic capital, and these more than made up for
the relatively low level of physical destruction on British soil.

The decline of foreign capital stemmed in part from expropriations due to revolution
and the process of decolonization (think of the Russian loans to which many French
savers subscribed in the Belle Époque and that the Bolsheviks repudiated in 1917,
or the nationalization of the Suez Canal by Nasser in 1956, to the dismay of the British
and French shareholders who owned the canal and had been collecting dividends and
royalties on it since 1869) and in even greater part to the very low savings rate
observed in various European countries between 1914 and 1945, which led British and
French (and to a lesser degree German) savers to gradually sell off their foreign
assets. Owing to low growth and repeated recessions, the period 1914–1945 was a dark
one for all Europeans but especially for the wealthy, whose income dwindled considerably
in comparison with the Belle Époque. Private savings rates were therefore relatively
low (especially if we deduct the amount of reparations and replacement of war-damaged
property), and some people consequently chose to maintain their standard of living
by gradually selling off part of their capital. When the Depression came in the 1930s,
moreover, many stock- and bondholders were ruined as firm after firm went bankrupt.

Furthermore, the limited amount of private saving was largely absorbed by enormous
public deficits, especially during the wars: national saving, the sum of private and
public saving, was extremely low in Britain, France, and Germany between 1914 and
1945. Savers lent massively to their governments, in some cases selling their foreign
assets, only to be ultimately expropriated by inflation, very quickly in France and
Germany and more slowly in Britain, which created the illusion that private wealth
in Britain was faring better in 1950 than private wealth on the continent. In fact,
national wealth was equally affected in both places (see
Figures 4.4
and
4.5
). At times governments borrowed directly from abroad: that is how the United States
went from a negative position on the eve of World War I to a positive position in
the 1950s. But the effect on the national wealth of Britain or France was the same.
⁸

Ultimately, the decline in the capital/income ratio between 1913 and 1950 is the history
of Europe’s suicide, and in particular of the euthanasia of European capitalists.

This political, military, and budgetary history would be woefully incomplete, however,
if we did not insist on the fact that the low level of the capital/income ratio after
World War II was in some ways a positive thing, in that it reflected in part a deliberate
policy choice aimed at reducing—more or less consciously and more or less efficaciously—the
market value of assets and the economic power of their owners. Concretely, real estate
values and stocks fell to historically low levels in the 1950s and 1960s relative
to the price of goods and services, and this goes some way toward explaining the low
capital/income ratio. Remember that all forms of wealth are evaluated in terms of
market prices at a given point in time. This introduces an element of arbitrariness
(markets are often capricious), but it is the only method we have for calculating
the national capital stock: how else could one possibly add up hectares of farmland,
square meters of real estate, and blast furnaces?

In the postwar period, housing prices stood at historic lows, owing primarily to rent
control policies that were adopted nearly everywhere in periods of high inflation
such as the early 1920s and especially the 1940s. Rents rose less sharply than other
prices. Housing became less expensive for tenants, while landlords earned less on
their properties, so real estate prices fell. Similarly, the value of firms, that
is, the value of the stock of listed firms and shares of partnerships, fell to relatively
low levels in the 1950s and 1960s. Not only had confidence in the stock markets been
strongly shaken by the Depression and the nationalizations of the postwar period,
but new policies of financial regulation and taxation of dividends and profits had
been established, helping to reduce the power of stockholders and the value of their
shares.

Detailed estimates for Britain, France, and Germany show that low real estate and
stock prices after World War II account for a nonnegligible but still minority share
of the fall in the capital/income ratio between 1913 and 1950: between one-quarter
and one-third of the drop depending on the country, whereas volume effects (low national
savings rate, loss of foreign assets, destructions) account for two-thirds to three-quarters
of the decline.
⁹
Similarly, as I will show in the next chapter, the very strong rebound of real estate
and stock market prices in the 1970s and 1980s and especially the 1990s and 2000s
explains a significant part of the rebound in the capital/income ratio, though still
less important than volume effects, linked this time to a structural decrease in the
rate of growth.

Before studying in greater detail the rebound in the capital/income ratio in the second
half of the twentieth century and analyzing the prospects for the twenty-first century,
I now want to move beyond the European framework to examine the historical forms and
levels of capital in America.

Several facts stand out clearly. First, America was the New World, where capital mattered
less than in the Old World, meaning old Europe. More precisely, the value of the stock
of national capital, based on numerous contemporary estimates I have collected and
compared, as for other countries, was scarcely more than three years of national income
around the time that the United States gained its independence, in the period 1770–1810.
Farmland was valued at between one and one and a half years of national income (see
Figure 4.6
). Uncertainties notwithstanding, there is no doubt that the capital/income ratio
was much lower in the New World colonies than in Britain or France, where national
capital was worth roughly seven years of national income, of which farmland accounted
for nearly four (see
Figures 3.1
and
3.2
).

The crucial point is that the number of hectares per person was obviously far greater
in North America than in old Europe. In volume, capital per capita was therefore higher
in the United States. Indeed, there was so much land that its market value was very
low: anyone could own vast quantities, and therefore it was not worth very much. In
other words, the price effect more than counterbalanced the volume effect: when the
volume of a given type of capital exceeds certain thresholds, its price will inevitably
fall to a level so low that the product of the price and volume, which is the value
of the capital, is lower than it would be if the volume were smaller.

FIGURE 4.6.
   Capital in the United States, 1770–2010

National capital is worth three years of national income in the United States in 1770
(including 1.5 years in agricultural land).

Sources and series: see
piketty.pse.ens.fr/capital21c
.

The considerable difference between the price of land in the New World and in Europe
at the end of the eighteenth century and the beginning of the nineteenth is confirmed
by all available sources concerning land purchases and inheritances (such as probate
records and wills).

Furthermore, the other types of capital—housing and other domestic capital—were also
relatively less important in the colonial era and during the early years of the American
republic (in comparison to Europe). The reason for this is different, but the fact
is not surprising. New arrivals, who accounted for a very large proportion of the
US population, did not cross the Atlantic with their capital of homes or tools or
machinery, and it took time to accumulate the equivalent of several years of national
income in real estate and business capital.

Make no mistake: the low capital/income ratio in America reflected a fundamental difference
in the structure of social inequalities compared with Europe. The fact that total
wealth amounted to barely three years of national income in the United States compared
with more than seven in Europe signified in a very concrete way that the influence
of landlords and accumulated wealth was less important in the New World. With a few
years of work, the new arrivals were able to close the initial gap between themselves
and their wealthier predecessors—or at any rate it was possible to close the wealth
gap more rapidly than in Europe.

In 1840, Tocqueville noted quite accurately that “the number of large fortunes [in
the United States] is quite small, and capital is still scarce,” and he saw this as
one obvious reason for the democratic spirit that in his view dominated there. He
added that, as his observations showed, all of this was a consequence of the low price
of agricultural land: “In America, land costs little, and anyone can easily become
a landowner.”
¹⁰
Here we can see at work the Jeffersonian ideal of a society of small landowners,
free and equal.