THE FALL IN INVESTMENT STOCKS ' FINANCE - I DOUBT whether

there are many, if any, financial writers who would be able to congratulate themselves upon having foreseen that the opening months of 1937 were to be charac- terised by an unprecedented fall in high-class investment stocks. It is quite true that most writers anticipated a downward rather than an upward move in Government stocks owing to the expected trade expansion, with higher prices of commodities, rising National Expenditure and fresh Government borrowing. Nevertheless,- it was thought that any movement would be limited and gradual, and that cheapness of money would prevent anything like a debdcle in Government stocks. Even, however, during the past few weeks there has been a fall of about nine paints in the premier security, Consols, while the following table shows how prices have fallen from the highest points touched last year : 1936. Price. Fall from

Highest. Lowest. Feb. 23rd. Highest.

821 75t I I

112i Io8 8 t04i rot+ 71 104

III

88 76 Deb.

Nor do the highest prices of 1936 mark the peak of the upward movement in gilt-edged securities, for in the previous year 3!.; per cent. War Loan, for example, touched I tc4.

REASONS FOR THE FALL.

A week ago, when commenting upon the severe fall which even then had taken place in Government securities, I attributed the collapse to what I described as the Chancellor's bombshell in the shape of the announcement of the extent of expenditure on the rearmament programme, including the provision for borrowing poWers over five years up to a maximum amount of i400,000,000. In a sense, it is, of course, true that this announcement gave the impetus to the fall in securities, but it is now seen that that in itself does not afford an adequate explanation of the extent of the decline which has taken place not Only in Government securities but also in all fixed interest stocks, so that even the First Debenture Stock of the London Midland and Scottish Railway, with its great margin of, has fallen it A- points from the highest level touched Iasi year. It is scarcely surprising, therefore, that so sudden and so heavy a deprecia- tion should be occasioning concern both with regard to the causes responsible and the prospect of further movements.

CHEAP MONEY POLICY.

Those who are in any way conversant with financial developments of recent years are aware that we are no longer on a gold standard and that we are working under a system usually described as a " managed " currency policy. It is a system which has recently been eulogised by some of the bankers at their annual meetings, and undoubtedly it has played its part in ministering to industrial activity; and certainly to cheap borrowing by the Government, though incidentally it must be noted that while cheap money has resulted in a saving of about k8o,00o,000 annually on the Debt service, taxpayers have at present experienced little of the relief expected from this important saving, most of which has been swallowed up by the enormous increase in CiYil Service expenditure. What, however, is quite certain about the cheap money policy, so far as investment securities are concerned; is that it has been quite impossible for financial writers to giye the investor much guidance whether the high prices 'which have for so long prevailed for Government and kindred stocks could be, depended upon as representing anything like a permanent level. - RECENT GOVERNMENT ISSUES.

And now while there is no actual proof,-it looks as if there had been some change, however temporary, in monetary policy, or at least as if some action on the part of the authorities was responsible for the -extent' Of-the fall in gilt-edged 'securities. On more than one occasion during recent years, new Govern- ment loans have been issued on terms maniferly unacceptable

Consols 21% ..

do. 4% .. Conversion 31"., War Loan 34% Funding 4% .. Local Loans 30., India 3% Bank Stock .. Gt. Western 4% L.M.S. 4% Deb.

871 161 I08t Io8 1191 981 891 383/ 1191 Ink

Itslk

94i

834

371

105

7i' 81 toi

• 13/ 343 401 105 141

I00 ' 111 to the genuine private investor, and the feeling has been general that such loans must have been largely taken up by Government departments. Nevertheless, prices of existing Government loans have been held up, thus giving an appear- ance of strength to the market, which now has proved sadly misleading to those who may have judged that the market was in a very strong position. How far selling of these stocks not taken by the investor at the time of flotation may, have been responsible for Government securities falling like a pack of cards, or how, far other measures curtailing the holding of cash by the joint stock banks may have played a part it is impossible to say, but after making all allowance for possible weak positions on the part of speculative holders of Govern- ment stocks, it is difficult not to believe that some change in Government monetary policy has been in a measure respon- sible for the debeicle.

To PREVENT INFLATION Even if that is so, it can be admitted that there is something to be said for such tactics, inasmuch as the prevail- ing idea of the cheap monetary policy being continued indefinitely has played its part in the rise in commodity prices, and it is likely enough that the Government may now have the laudable desire to prevent such rise in commodities and the cost of living proceeding too far. As stated in another column, a spectacular rise in the metals has been an out- standing feature of the present week, and that has been responsible in its turn for a considerable setback in many industrial shares owing. to the fear that higher prices of raw materials may seriously affect manufacturing costs, to say nothing of the extent to which rearmament expenditure may be increased by the rise in metals and other commodities. All the same, it is difficult not to feel some sympathy with those investors who have been called upon to witness so great a fall in securities whose chief merit has always consisted in their great steadiness of priCe.

Now, however, that the blow has fallen, a good many will hope that, so far as the investment markets are concerned, natural conditions will be allowed to prevail, even if it means that some further decline may have to take place before genuine investment buying is attracted. For, be the causes what they may, confidence in gilt-edged securities has for the moment been shaken by recent events, and if the debdde is shown to have been occasioned by any sudden reversal of monetary policy, I think that confidence in managed currency ns distinct from the old gold standard and bank rate methods will have been shaken also.

ARTHUR W. KIDDY.