FINANCE-PUBLIC AND PRIVATE.
SIGNS OF IMPROVEMENT. [To ms EDITOR Or THE " SPECTATOR."] Sin, As you are aware, I have been inclined for some time past to regard the Stock Exchange and mone- tary outlook from two different standpoints. From the standpoint of a far view of the situation, based upon a careful consideration of the various economic factors, I have written in a pessimistic vein, feeling it impossible to write optimistically until there were clearer indications of the community as a whole realizing the supreme necessity for the creation of new wealth through economy and increased industry. On the other hand, taking a shorter and more superficial view, I have pointed out certain factors such as easier money likely to exert at least a passing influence of a favourable charac- ter upon securities. I recall these two points of view for the reason that, unless present appearances are deceptive, it looks at the time of writing as though markets might very soon receive the further stimulus of a reduction in the Bank Rate to 5i per cent.,* and should this occur, and should the joint stock banks reduce their deposit rates, there might be some reason for anticipating at least a temporary fillip to all investment securities. The Stock Exchange has anticipated this further reduction in the Bank Rate for so long that it has rather relinquished hopes, but all the same I should not be surprised if it were to occur shortly, and, after the advent of some important issues of capital expected during the next few weeks, it is conceivable that any moderate recovery in securities might also be stimu- lated by the absence of further issues of capital—owing to the holiday season. I know that this latter circumstance might be hailed as a reason for stagnant markets, but as a matter of fact we have found more than once that the so-called dog days have been characterized by a certain P" Since our correspondent's letter was written the Beak Bate bas been reduced from 0 to bit per ccnt.—Bn. Spectator.j amount of activity in securities, one of the factors contri- buting towards improvement being the very fact of the prorogation of Parliament.
Befpre commenting further upon the significance to be attached to any such improvement in securities—should it occur—I may perhaps comment briefly on the reasons which suggest the likelihood of an early reduction in the Bank Rate. There have probably been few occasions when opinions in the Money Market concerning the advisability of a reduction in the Bank Rate were more evenly divided than at present. At first sight there are at least two circumstances which suggest the inadvisability of a reduction. One of them is the fact that the American Exchange has moved sharply against us during the past week, and the other is that we are undoubtedly passing through a period of fresh inflation occasioned by Govern- ment borrowing on Ways and Means Advances and Treasury Bills to meet current expenditure. These are conditions which would seem to suggest the need for higher rather than lower money rates, though, of course, the inflation is in itself directly responsible for the present ease in the Money Market, so that with the rate of discount in Lombard Street at about 41 per cent. the 6 per cent. Bank Rate is entirely ineffective. If, therefore, I should be right in my anticipation of an early reduction in the Official Minimum, it may be well to recall the manner in which the whole situation has once more been rendered abnormal through the great coal strike. In so far as the higher Bank Rate of last year brought about a fall in wholesale prices of commodities and elimin- ated speculative transactions, it was wholly beneficial, but retail prices and the cost of living were slow to respond, and Labour, which was unsoundly lead by the mere agitator, became restive and demoralized the position by two great coal strikes within a period of a few months. What might have been a most desirable event in the shape of lower prices, if followed by increased production, was wholly changed by Labour taking a course which restricted production and, indeed, brought it to a standstill. Acuth trade depression followed, so acute, indeed, as to make it difficult for many holders of certain commodities to liquidate the positions carried on borrowed money, and to-day, although bankers are being paid off many advances by reason of slack trade, the most unsatisfactory aspect of the financial position here, and to some extent in the United States, lies in the great extent of these frozen credits which are still being carried on borrowed money. A liquidation of such positions is one of the first essentials to sounder conditions generally, and if, as the result of somewhat lower rates for traders' advances—which are based on the Bank Rate—a more favourable atmosphere to such liquidations should result, the advantage is one which perhaps to some extent offsets the risks which easier monetary conditions may bring in their train. At all events, the experiment seems likely to ba tried, and with the Rate in Lombard Street -so far below the 6 per cent. rate, a reduction to 51 per cent. may occasion no further decline in Money Market quotations, though it may touch the spot in the matter of the terms on which bankers lend to the trade.
Inasmuch, moreover, as any revival in trade conditions must necessarily be gradual in character, I am the more inclined to think that it might during the earlier stages even coincide with a moderate improvement in securities. Nevertheless, and for the reasons I will now state, I think that any such improvement should be regarded with caution and not followed too far. In the first place, it must be clear to the most superficial observer that until there is a real improvement in trade conditions and real activity in our exports, there can be no justification for permanent stability in our securities themselves, and I suggest, therefore, that after a brief period one of two things must happen. Either expectations of an improve- ment in trade will be completely disappointed, in which case the position of the country will be so serious as to make a setback in securities probable, or, on the other hand, if hopes of a revival in trade are fulfilled the revival will occasion, after a few months' duration, such a demand for money as possibly to promote an advance in the Bank Rate and a setback in securities. Of course, I am now referring to securities in the mass and to fixed interest-bearing stocks in particular, and not to individual stocks or shares which may be affected by local and special considerations. There is, however, another reason why I am impelled to take a cautious view of the outlook. Immediately after the Armistice there was a good deal of uncertainty as to what might be the effect of the first stirrings of more normal trade activity, and it was not long before it was found that—speaking broadly—trade after the war made very heavy demands upon available supplies of credits. Prices were abnormally high, and that circumstance, combined with heavy taxation, imposed severe demands upon banking resources. To-day we have somewhat lower prices, but not only might any revival in trade quickly affect the situation, but I suggest that another factor is coming into prominence which deserves attention, —namely, a gradual revival of activity in international finance itself. During the past few weeks one of the outstanding features of the situation has been the increasing evidence of trade activity in Germany, and there is good reason to believe that these activities are now being aided to some extent by the resumption of international financial activity which has taken the shape of certain credits given to Germany by bankers in America, Holland, and this country to aid Germany in paying for her imports of foodstuffs and raw materials. I believe that this develop- ment may be regarded as a favourable rather than an unfavourable indication of the tendency of finance, because it is undoubtedly a fact that there can be no great and permanent trade activity here so long as so many of the countries of Europe are out of the running, as it were, in everything pertaining to international business. Never- theless, the fact remains that trade activities, whether here, in Germany, or in the States, make demands upon credits, and there is little doubt that the temporary depression in our own trade in itself tends to stimulate the desire of our international bankers to find other employ- ment for their resources. When, however, autumn prospects are considered and it is remembered that Lom- bard Street will presently be financing the American cotton bills, it is not difficult to see that, given any important revival in our own trade, the whole monetary situation may quickly turn• once again in the direction of comparative stringency. Nevertheless, and if only because in any far view of the situation I am still inclined to regard the future with pessimism until there are signs of an altered attitude on the part of Labour towards the great problems with which the country is confronted, I am the more anxious to elaborate those points in the situation which undoubtedly suggest the possibility, if not the likelihood, of a tem- porary improvement in monetary and Stock Exchange conditions in the more immediate future.—I am, Sir, yours
The City, July 20th.
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