Finance
Cheap Money and the Investor
WE seem to be living in times when the problem of the Debtor receives far greater attention than . that of the Creditor. The most striking instance of what I am refer- ring to is perhaps furnished in the United States where the crisis of 1933 was really an internal Debtors' crisis.
Owing to the extent to which producers and Stock Exchange speculators had alike gambled on a continuance of phenomenal prosperity and even increasing purchasing power of the consumer, there followed in 1929 such a financial crash in Wall Street as to bring down not only security prices but, later on, the prices of commodities to an unprecedentedly low level. This in its turn brought about incapacity on the part of farmers and many other debtors to meet their obligations owing to inability to obtain sufficiently high prices for their produce or output. Land had been rushed up to fictitious values, and many holders found themselves in a precarious position. Ac- cordingly, when President Roosevelt took office the policy pursued was that of getting up prices at all costs, so that the debtor should be able to meet his obligations. It was' in fact an internal debtors' ciisis.
Now, without necessarily criticizing the policy pursued, the fact remains that this adjustment of the position in favour of the debtor seems likely to be achieved at con- siderable cost-to the great mass of the community- which was in no • way responsible for the causes of the crisis. Already the rise in prices in America seems to be hitting the consumer very hardly, while there has still to come the reckoning in the shape of higher taxation to meet the rise in public expenditure. . -
OUR OWN PROBLEM.
In this country a much more moderate policy has been pursued, but nevertheless I suggest that there is rather a tendency for the welfare of the existing debtor or the future borrower being considered somewhat to the detriment of the creditor and the investor. It may be quite true that for some years investors, and particularly those holding Government securities, enjoyed interest payments inconsistent with the high credit of the Govern- ment, and praise rather than blame should be given to the Government for its courageous conversion of the 5 per cent. War Loan in 1932. Undoubtedly thoSe with small incomes who had relied on 'receiving for a con- siderable while longer 5 per cent. on the War Loan instead of the existing 31 per cent. have suffered a considerable hardship, but there was nothing improper or even unfair in the Government's action in exercising their option of redemption. It has been fortunate, too, for our ()verses Dominion of Australia that thanks largely to 'a period of phenomenally cheap money and a rise in our Government securities that Dominion has been able to convert over £100,000,000 of its external debt on terms giving to Australia a great saving on its- annual debt- serviee.. Nor in saying this do I forget that the conversion successes haVe been well merited by reason of the courageous and sound manner in which Australia faced its great financial and economic crisis of a few years ago.
ABNORMAL MONETARY EASE.
. • Nevertheless, I consider_ it is open to serious question how far continued excessive cheapness of money is df material advantage either to trade or to the investor. I know it might be urged that the ease of money, is un- preventable in the sense that it is largely due to trade depression and to the great decline in the,normal demands for loans for trade purposes. It is, however, impossible to forget that, rightly or wrongly, not only- the -cheapness of money but its effect and the expectations of its endurance are closely connected with the declared policy of the Government, in common with all parts of the Dominions, to get prices of commodities up, and to that end to make credit and the suPply`Of mohey a 'plentiful and cheap as possible. When however is.a general feeling that the • . value of Money is 'being influenced by anything in the nature of artificial means, there is always some feeling of mistrust, 'and, -to cite once again' the-instance of the United States, there is little doubt that the comparative failure of the Roosevelt policy to stimulate cianfidenee,and trade is largely; due to the fact that there is aclear recog- nition 'of the artificial, I might even 'say theunsound, character of many of the measures adopted. In other words, confidence in. the best sense 'of the word has been weakened rather than Strengthened.
THE INVESTORS' DILEMMA.
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I do not suggest that matters have reached that point in this country for the very good reason. that there has been less interference with the play. of natural .conditions. Nevertheless, we have a combination of circumstances at the present time which, however much they may favour the borrower, are certainly less pleasing to the 'Creditor- and the investor. As regards gilt-edged securities or securities of the trustee type, the restrictive measures with regard to borrowing have, for the time being, taken away ,alitiOst completelythe opportunities for the investorto take adVan- tage of competitive demands for capital. In. the ,early months of this year we had a position where borrowers of the " trustee type, impressed by the dilemina of the investor, .were issuing stocks giving such 'a meagre' yield that at last the investor revolted and the absence of new issues of this type for many weeks past is not due to an actual cessation. of demand but to the fact that would-be borrowers are now held back until the market is in a position to absorb new issues of capital, and so, it would seem, until prices have once again reached a point at which the borrower can practically impose his own terms. These conditions, moreover, . it must be remembered., coincide with phenomenally high taxation and reduced incomes arising from conversion operations, while with banking deposit rates standing -at only / per cent., the holder of liquid resources is almost forced into . the invest- ment markets where, however, he finds that artificial forces are operating against a fair return of an investment over a long peiiod.
POLITICAL FORCES.
At the present time almost every new'issue of capital is eagerly applied for either by the preinium. hunter, who hopes to snatch a small profit, or by the investor who is'at his wits' end to know how to invest his resources, and some of the issues which have been made during the current year have, I consider, been offered on terms wholly inconsistent with the merits of the 'stock or shares, as the- case may be. Moreover, the, difficulty of the financial writer in advising the investor is- increased tenfold by the extent to which economic and monetary conditions nowadays are controlled by political. forces. But for these, political forces expressing themselves in 'all kinds of restrictions, it might be possible to say that gilt- edged securities are standing at too high' a level and that realizations would be advisable. As it is, however, little in the way of advice can really be offered because condi- tions are swayed, and seem likely to be swayed for some time to come, by political rather than economic forces. That is not a desirable state of things, especially as at present there are few signs of the cheapness of money having exerted any great influence upon trade activity. Of course, there are many .factors restraining activity in business for which neither the United States nor our own Government are in any way responsible, such, for example, as the European political outlook, while so long as we are " off gold " there is the greater probability of a continuance of cheap money. When, however, the prospects of a revival in 'international ,trade are con- sidered there can be no question that stable exchanges and the removal of barriers in the way of a free exchange of goods and services would be a far more potent factor than the existence of abnormally cheap money.
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