Finance—Public & Private
Why there is Caution• IF evidence were required of the fact that even now, ten years after the conclusion of the War, there is much in the financial situation which is abnormal, it is undoubtedly furnished by the cautious view which is taken of the monetary outlook. For, judged by all the pre-War standards, the present monetary position is one of quite extraordinary strength, and it might be thought that an early reduction in the Bank Rate could be regarded as a foregone conclusion. Assuming for the moment that the gold due by the Berengaria ' from New York arrives in time to go into the Bank of England on Wednesday, this week's Bank Return should show a total Reserve of well over £58,000,000, which is quite the highest point touched since 1915.
A STRONG POSITION.
Moreover, the figures of the Reserve in that year were swollen abnormally owing to the fact that the joint stock banks were handing over gold which had come in from private circulation so that the metal might be centralized in the Reserve at the Bank of England. Normally, however, the Bank of England Reserve previous to the War was seldom higher than £40,000,000, and even occasionally it dipped below E20,000,000. Not only so, but whereas, say, in June of 1914 the Reserve was about 125,500,000 and the total stock of coin and bullion about £36,000,000, the Reserve to-day stands at over 150,000,000 and the stock of coin and bullion at over 1168,000,000. Of course, it is quite true that we no longer have a secondary gold reserve represented by holdings of gold coin in the pockets of the people and in the tills of the joint stock banks, and it may be doubted whether the entire holding of gold in the country is any greater, if as great as it was previous to the war. Nevertheless, the recovery is sufficiently Marked and the position is sufficiently strong to make it evident that causes other than the position of the Bank of England are responsible for the feeling of caution I have referred to,
INVESTORS AFFECTED.
The point is of some importance because while, on the one hand, the rise which has recently because, place in high-class investment securities and the easier monetary conditions may be traced to the large gold influx and the general improvement in the monetary position here, holders of these stocks are doubtful as to how far the move- ment may be justified by future developments or how far it may be ultimately proved to have been somewhat premature. It may be useful, therefore, to state quite simply what are the factors responsible for a continuance of the cautious attitude in the face of the satisfactory monetary conditions I have referred- to.
THREE MAIN FACTORS.
There are, I think, three main factors to which attention is being directed at the present time, any one of which, it is considered, might have a considerable effect upon our Money •Market. Placing these somewhat in the order of importance, the first is the monetary situation in the United States, the second is the uncertainty with regard to plans for stabilising the French currency, and the third is connected with the problem of German Reparations. I can only touch very briefly upon each.
POSITION IN THE STATES.
With regard to the monetary situation in the United States, the position can be stated very briefly by saying that a year or two ago America possessed a record holding of gold, a record position as regards a favourable visible trade balance, and a position in Wall Street which was not regarded as unhealthy in the matter of speculative activities. During the past eighteen months, however, developments in the Unitecl States have been along the lines of great activity in lending to foreign countries, with colossal activity in speculation in Wall Street, combined with heavy purchases of foreign securities. As a consequence of these developments, America has lost RISE IN N.Y. MONEY RATES.
It is, however, the excessive activities in-Wall Street which have occasioned the Federal Reserve banks to raise their rates to a level equal to that of the Bank of England rate here, and although - up to the present even that action has not resulted in causing a recovery in the dollar exchange, it is felt that the economic strength of the United States is such that at any moment there might be a turn in the tide of affairs causing the New York exchange to move adversely to London. • Espe- cially it has been thought that if there should be a further rise in money rates in New. York, capital might be attracted to that centre to an extent calculated to materi- ally affect the exchange. At the moment of writing, anxieties in that particular direction have been somewhat relieved by signs of a slackening of speculation in Wall Street, thus lessening the prospects of the imposition of higher money rates on the other side of the Atlantic.
THE FRENCH FRANC.
Both in New York and in London, however, the position is further complicated by the anticipated early stabilization of the French franc. This is a subject which in itself demands a whole article. I am, however, only concerned at this moment with the matter as it affects the monetary and, therefore, the investment outlook. Briefly, then, it should be understood that for many years the French exchange has not operated naturally in so far as gold movements are concerned. If it had, an exchange of 124 francs to the £ would have meant that France would have lost every farthing of gold to other countries. When, however, the franc has once been legally stabilized, conditions will function naturally once more, and France will be added to the list of those countries where gold may flow, given a favourable exchange. It does not, of course, follow that when the franc is stabilized the exchange will necessarily move in favour of France, enabling her to take gold, but the odds will, so to speak, be in favour of France. For while, should the exchange move adversely, the Bank of France will be able to protect the position through having accu- mulated enormous balances both in London and New York, neither we nor New York would be in the same favourable position if the exchange moved adversely to us. Consequently, although neither London nor New York are, perhaps, acutely apprehensive of unreasonable withdrawals of gold on French account following upon the stabilization of the franc, the great uncertainties connected with that event impart a cautious attitude which might otherwise be lacking.
REPARATIONS.
Finally, looking a little further ahead, there is some anxiety as to whether the international exchanges and monetary centres—to say nothing of politics—may experience some disturbance when the full weight of the German Reparations begins to be felt. In the present fourth annuity year the amount to be paid is 2.87,500,000, but next year it rises to 2,500,000,000 marks, or the equivalent of /125,000,000. Hitherto it has apparently been possible to provide for the Reparation payments and the service on the various external debts of Germany without any breaking of the German exchange, but in the comparatively near future not only are the Reparation payments to rise in the manner just indicated, but during the last two years German borrowing abroad has increased greatly, so that to the burden of Reparation payments will have to be added the increased burden of the service of the foreign debt.
FOREWARNED IS— These, then, are the three outstanding factors respon- sible for a cautious attitude at a moment when, so far as existing gold supplies and Bank Returns are concerned, the sun is shining brightly. Possibly the anxiety, or, at all events, the feeling of caution, is overdone, and it is really all to the good that the possibility of difficulties should. be discerned far ahead. To be forewarned is to be forearmed, and in placing these considerations many millions of dollars in gold during the past six months and has had to contend with an adverse exchange as expressed in sterling, while, although there has been no material set-back • in trade, it has been distinctly less • progressive. before readers of the - Spectator, I have no desire of belittling the prospects of high-class investment stocks which, I think, are sufficiently good, but rather of explaining Why. the upward movement in prices proceeds, if surely, somewhat slowly. ARTHUR W. KIDDY.
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