31 DECEMBER 1921, Page 10

FINANCE — PUBLIC AND PRIVATE.

THE FINANCIAL OUTLOOK.

FEATURES OF THE PAST YEAR—TRADE DEPRESSION —FALL IN COMMODITY PRICES — BANKING LOSSES—LOWER MONEY RATES—RALLY IN IN- VESTMENT STOCKS—NEW YEAR PROSPECTS— EUROPE'S DIFFICULTIES — MANUFACTURING SUNSHINE — SECURITY, TRADE AND MONETARY PROSPECTS.

[To THE EDITOR OP THE " SPECTATOR."] SIR,—Despite its cheerful close, the past year has been a trying one in the financial and business world. It has been a year of extraordinary trade depression, and during the greater part of it securities have been weak. Nevertheless, I believe that in time to come the year 1921 will be looked back upon as one in which developments, however unpleasant, were of a kind calculated to prepare the way for a recovery in prosperity. Because of that fact, and with a view, moreover, to forming an intelligent idea with regard to prospects for the New Year, I will briefly summarize some of the outstanding features of the past year, many of which it is already possible to regard with a degree of understanding which was not possible when the events referred to were taking place. * * * * As already indicated, the outstanding feature of the past year has been the continued depression in trade and the heavy fall in prices of commodities. Tangible evidence of both of those features is afforded in the fact that our Imports and Exports for the first eleven months of the year show a decline of £793,000,000 and £707,000,000 respectively, while the Economist Index Number at the beginning of December was 4,458, as compared with 6,594 a year previously. In fact, the latest Index Number of the Economist was the lowest touched since September, 1916. Largely as a consequence of this trade depression there has been a decline in National Revenue and an upward movement in Expenditure (compared with Budget Estimates), the former being connected with diminished prosperity and the latter with doles and subsidies. Nevertheless, in noting the trade figures, it has to be pointed out that lower prices played a considerable part and that our adverse trade balance, as expressed by the excess of Imports over Exports, was about £86,000,000 less than for the corresponding period of the preceding year. Indeed, the great reduction in our Imports, and the fall in the prices of commodities exported by America, undoubtedly played their part in contributing to the remarkable improvement which occurred towards the close of the twelve months in the value of the British pound as expressed in terms of American currency. * * * * Moreover, although the fall in wholesale prices of com- modities has been a source of financial embarrassment during the year, it is a development not without its compen- sating aspects. So sudden and so violent was the fall that considerable difficulty was experienced by many who were carrying goods on borrowed money in liquidating their positions. Consequently, what are known as frozen credits (that is, loans made by the banks to customers on goods temporarily unmarketable) have been among the most unpleasant features of the year, and a feature of the forth- coming profit statements by the banks is likely to be the huge sums set aside on account of Bad Debts or " Contin- gencies." Viewed from the standpoint of trade prospects, however, there is no doubt that this fall in wholesale prices was very necessary if a commercial revival was to be based upon cheaper production, and although retail prices and the cost of labour have been slow to follow the fall in wholesale commodities there has been a slight reduction even in these directions during the latter part of the year. * * * Mainly as a consequence of the stagnation of trade a further outstanding feature of the year has been the down- ward tendency in the value of money. The Bank Rate has been successively reduced from 7 to its present level of 5 per cent., while the market rate of discount is about 31- per cent., as compared with 61 per cent. a year ago. Moreover, this decline in the value of money has been a conspicuous feature on the other side of the Atlantic, where it has also been largely due to inactive trade. For a while the *effect of the ease in money upon public securities was checked by social and political developments, which impaired confi- dence and caused money to be invested in banking deposits or in short-dated bonds rather than in ordinary securities. The great coal strike, in addition to paralysing the trade of the country, also imparted a real shock to Capital, while the general political unrest abroad and the state of affairs in Ireland were influences restraining the activities of the investor. Towards the close of the year, however, when a certain amount of forced liquidation arising out of trade losses had been finished, and when, moreover, political developments were of a more reassuring character, a great change came over the Security Market. The investor, observing that at last even British Funds gave indications of having bottomed, hastened to secure first- class investment stocks at the low level prevailing. It will be noted from the following short table of a few representative gilt-edged and railway securities that the recovery at the end of the year from the lowest points touched was remarkable :- INVESTMENT AND RAILWAY STOCKS.

Price beginning of year.

Highest.

Lowest. Present

Prim.

Consols 2i p.c. .• • • 45

..

504 .. 441 .. 50 Local Loans 3 p.c. 501

• •

561 .. 491

56A-

Irish Land 21 p.c. .. 454

52 .. 451 511 War Loan 5 p.c. • • 831

921

821 914 Victory 4 p.c. (Small) .. 721

• •

81

72/ Si India 3 p.c. .. 474

• •

521 . •

461 • •

511 Australia 51 p.e. Reg. '22- '27 .. 94 .. 98 .. 93i 97 Canada 31 p.c. Reg. '30-'50 61

68 .. 604 68 Cape 3/ p.c. Ins. 1929-49 60

67/ .. 59 67 N.S.W. 3 p.c. Ins. '35 .. 62 .. 70 .. 611 76 Queensland 4 p.c. Ins.

'40-'50 .. 64 .. 71 .. 631 69 Victoria 34 p.c. Ins. '29-

'49 ..

62

• •

64.1-

• •

61 .. 64 Gt. Eastern • . 304

• •

314

24 9-16 27

Gt. Western .. • •

751

771

57 ..

721

Lon. Brighton Def. • •

43/ • • 47

34 ..

381 L. and N.W.

• •

751 • • 78

631 .. 70

L. and S.W. Def. • •

22 • • 224

• •

18 ..

18/

Midland Def. .. • •

47

49

• •

35 .. 431

N.-Eastern .. • •

771 • . 78

• •

63* .. 72

This recovery in securities during the latter part of the year is the more noteworthy in view of the fact that it coincided with huge flotations of capital, no less than about £80,000,000 having been absorbed by the investor during the last two months. One outstanding feature of the past year I have reserved for mention in connexion with the prospects for 1922, namely, the continued financial and economic chaos of Europe, of which concrete evidence is afforded in the demoralized state of the exchanges. On that problem and the forthcoming. International and Economic Conference many columns might be written, but, for the moment, I am only concerned with making the briefest reference to it in its relation to the financial prospects for the New Year. There are two main questions on which you would, doubt- less, wish to know the City's views at the present moment. The first is, Will trade revive in the New Year -and the second is, What will be the trend of public securities ? To some extent the views of the average City man with regard to both these questions are already indicated by the very rise which has taken place during the last few weeks in gilt-edged securities. That rise has been due to specula- tive buying based on expectations of a continuance of cheap money with a further rise in stocks early in the New Year. Those expectations are in their turn based upon the fact that the City fails to see how there can possibly be any rally in trade, say, for the next few months, sufficiently pronounced to involve any very important change in monetary conditions. Assuming for the moment that the forthcoming International and Economic Conference will be successful in the sense that " schemes " will be devised, business men argue that such schemes will probably involve credit expansion, thus tending to monetary ease rather than stringency, and that it cannot be for some time afterwards that active trade itself will begin to occasion sufficient demands for money to affect the Stock Exchange situation. In expressing this opinion it must not be supposed that I am giving any view of the City with regard to the International Conference itself. I am simply looking at the matter for the moment as a factor likely to affect monetary, commercial or Stock Exchange conditions.

It is, of course, recognized that a feature of the New Year is likely to be further large capital creations, but these, it is thought, will not for a time check the upward tendency in securities, while the full effect upon the Money Market of the ingathering of the Tax Revenue is not expected. to be experienced until about the middle of February. Conse- quently, barring unforeseen developments, the tendency in the City at the end of the year is to look for the continuance of slack trade, cheap money, and firmness in securities during the early days of 1922.

These views, however, it should be noted, are based upon the broad general conclusion—by no means a safe one— that we have, as it were, seen the worst with regard to untoward developments in international politics, the Irish crisis and the Labour situation at home. It is impossible, however, to forget that a year ago many in the City believed that the trade depression might be short-lived, and then early in 1921 found those hopes completely dashed by the attitude of Labour, culminating in the great coal strike. It is scarcely surprising, therefore, that at the close of the present year, when optimism pervades the City as a whole, some observers—pessimists possibly—are inclined to empha- size such factors as the manner in which the so-called Irish settlement has been reached and the continued economic chaos in Europe, which no mere political schemes can in themselves remedy ; while finally it is felt that one of the cardinal essentials for real recovery in this country, namely, increased production at lower costs, has been overlooked, and that so long as the first signs of unemployment and distress are met by doles on the grand scale, so long will there be reason for grave anxiety with regard to the outlook.

Moreover, at the present moment one of the least satis- factory—I will not say suspicious—elements in the situation is that much of the optimism now prevailing manifestly owes its origin to a deliberate process of sunshine manufac- ture on the part of the present Prime Minister and his satellites. The order has been given out that things are to be better, that an International Conference is taking place to make them better, and that a trade boom at a oomparatively early date can be reckoned upon. The New Year will show whether these predictions are premature or not.—I am, Sir, yours faithfully,