FINANCE-PUBLIC AND PRIVATE
THE NEW BANK RATE
BY ARTHUR W. KIDDY.
QUITE the most interesting financial event of the past week has been the reduction in the Bank Rate from 5 to 4i per cent. Its effect upon the Stock Exchange, more- over, was all the greater, first,.because it was unexpected, and second, because it followed so closely upon the tem- porary settlement of the coal crisis. Because the fall, in the Bank Rate happened to coincide with the day on which the Premier made his statement in the House of Commons explaining his action in the coal settlement, there were some who did not hesitate to attribute the reduction in Bank Rate to " political " rather than to ordinary and financial motives. As a matter of fact, however, this idea was never entertained seriously in the Money Market, where it is recognized that the question of Bank Rate is a matter where the judgment of the directors reigns supreme, and because of that fact the weight of responsibility is the greater. Moreover, the market quickly came to the conclusion that as a matter of fact the averting of the coal stoppage was probably just one of the circumstances which enabled the directors to put down the rate, whereas such action would have been impossible if we had been confronted with a big coal strike, with all its demoralizing effects, not only upon trade but upon the Foreign Exchanges. So long as there was even a prospect of such a catastrophe in the immediate future, any reduction of Bank Rate would have been an impossibility. Inasmuch, however, as the nature of the coal settlement suggested at all events an industrial truce for some- few months, the directors probably judged the position to be peculiarly suitable for a reduction, especially as, in view of the temporary character of the coal settlement, it is to be feared that any great trade revival is unlikely in the immediate future. By the present reduction traders •will • get, of course, a small benefit in the matter of banking loans, and by reason of the lower rates for. Treasury Bills the Govern-. ment will also save something in the way of interest charges, which will be a small set-off against the cost of the subsidy."
SIGNIFICANCE OF MOVEMENT.
To appreciate, however, the more important significance of the reduction in Bank Rate, it is necessary to recall some of the events of the past few months. It will be remembered that the previous 5 per cent. Bank Rate was established early in last March and, while the move- ment was doubtless largely connected with the rise which had just taken place in the Federal Reserve Rediscount Rate in the States, it is probable that the advance in our own rate was also prompted in part by the expectation of an early return to the Gold Standard. It will also be recalled that those who opposed not so much the return to Gold as a policy in itself as the wisdom of an immediate return, urged a number of considerations why the movement should be deferred. It was main- tained, and with some truth, that the advance which had taken place in sterling could not be regarded altogether as a natural movement based upon our economic position, but must be attributed in part to our higher Bank Rate and the expectations of our return to gold. Therefore, these critics maintained that if we returned to gold immediately it would probably be a case of our losing the metal and having to establish a higher Bank Rate than 5 per cent. to retain an, adequate reserve.
PRECAUTIONS.
The weight of these criticisms was duly recognized, and when the Chancellor, in the course of his Budget speech, announced our return to gold it was clear that a number of precautions had been taken. Among these it was announced that the Treasury has already accumulated in dollars in the United States a sum sufficient to meet the service of our debt to America for a twelvemonth ahead, so that there was no fear of Treasury remittances for Debt service pressing upon the exchange. The further precaution was taken of securing in the United States the promise of dollar credits if desired - up to a total of 800,000,000 dollars, the right to draw on them extending over the next two years. At the same time Mr. Churchill made it clear that such reserves would not be drawn Upon save in cases of emergency and that if we were losing gold other measures would be adopted at home before such reserves were tapped. Accordingly it followed from the Chancellor's statement that the Bank - Rate would certainly be maintained at 5 per cent. until we had got very definite indications as to how the Gold Standard was working.
RISE IN STERLING.
It was not until a day or two after Mr. Winston Churchill's statement in the House of Commons that the United States appeared clearly to recognise that England was actually back on the Gold Standard, certain phrases in his speech conveying the impression that the Gold Standard would not be operative until the end of the year. When, however, the actual fact was grasped, sterling, as expressed in the American Exchange on London, quickly rose to about the level of the dollar ; and, while some of this recovery may have been of a sentimental character or may even have been based on a little specu- lative buying, there were few signs of expectations during previous months of our return to gold having occasioned any important speculations for the rise on account of American operators.
GOLD INFLUX.
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• For a short period after our return to gold the move- ments of the metal were somewhat uncertain. Gradually, however, the withdrawals tended to slacken f Indian enquiries became less, and finally gold from Holland, South Africa, and some other quarters came in extensively, with the result that the first three months of our return to gold closed with a net influx of something like £9,000,000, bringing up the Bank's total holding of coin and bullion to £164,000,000, while we .now see that, so far from the Bank-Rate having had to be raised,- the movement has been in the opposite direction.
AUTUMN PROSPECTS.
I am not asserting that this plain recital of events necessarily constitutes a triumphant proof of the wisdom of our return to gold, nor am I even going to suggest that it completely refutes the views of those who con- sidered that we had returned to gold prematurely. That is a position which cannot possibly be taken for some considerable time to come. In my judgment Mr.- Keynes is entirely unjustified in selecting certain events of the past few months and attributing them mainly to the rise in sterling. Equally, however, I should not be justified in maintaining that, because we have gained £9,000,000 of gold and have put down the Bank Rate to 41.per cent., we have therefore established a triumph for the Gold Standard. What, however, I think is of importance is that we should realise in the events of the past three months, culminating in a reduc- tion in Bank Rate, a demonstration of the fact that a return to gold does not necessarily..imply dearer money. That by returning to gold our credit from an international Point of view is improved -all will admit; but what I think is not so clearly perceived is the restored power given to the old weapon of Bank Rate. Backed as it is by a fairly high total of gold, Bank Rate is a force which can be used to relieve the situation and occasion easier monetary conditions when such are held to be justified. Up to the present, and although- Foreign balances here are supposed to be fairly large, the lower rate has not occasioned any serious weakening of sterling, while in the United States, at all events, the movement has been hailed as an indication of financial stability here and has even tended to arrest an upward movement in Money Rates which ' seemed about to begin. It is, of course, far too early to attempt yet to forecast monetary conditions for the coming autumn, but at present it looks very _much as though, having taken pre,. cautionary measures early in the year, one effect of our lower Bank Rite here might be ""fo" Maintain easier monetary conditionsS--at bit- tile leading' centres durink the coming autumn than at one time seemed-to be-possiblee and if that should be so, it must be counted as a circum- stance helpful to trade all over the world.
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