FINANCE—PUBLIC & PRIVATE.
By ARTHUR W. KIDDY.
AN ABNORMAL SITUATION. [To the Editor of the SPECTATOR.] SIR,—It is too early to determine the precise effect likely' to be produced upon the Stock Markets by the latest phase of the Reparation crisis. All the same, there arc already certain financial developments which arrest attention and call for comment. Only a fortnight ago I expressed the City view that, if any serious breakdown of the Paris Conference occurred, a reaction might be expected in securities, and more especially, perhaps, in the industrial group which had been bought in antici- pation of hopes of better trade, which were scarcely likely to be fulfilled if there were to be no prospect of an early solution of the Reparation tangle. The Paris Conference, as we know, has broken down, and Germany is apparently threatened by strong action by France. But, although some of the foreign exchanges have been disturbed, the Stock Markets have shown remarkable steadiness and British Funds and other (Continued on page 71.) gilt-edged securities have been actually firm. Following the collapse of the Conference we have had a further slump both in the franc and in the mark ; but whereas these movements a few weeks ago would probably have occasioned a sympathetic fall in Stock Exchange prices, there has been practically no such movement during the past week. What is the explanation ? Dealing ant with what may be termed the most natural reasons for the steadiness of markets, there is no doubt that the blow imparted by the break-up of the Conference has been softened by the preservation of absolutely cordial relations between France and this country. Another explanation is to be found in the fact that the technical position of markets was good—that is to say, there was no unwieldy speculative count for the rise to make prices sensitive to any adverse- influences. And in the third place, with the turn of the year came the release of large sums in dividends, a portion of which was available for reinvestment.
Nevertheless, I am inclined to think that the situation is one where it is necessary to look a little below the surface, for there are not wanting signs that some of the reasons for the rise in securities may have been of a somewhat less satisfactory character than those which I have enumerated. One of them is the fairly obvious fact that when the outlook is obscure and somewhat threatening, there is usually a tendency on the part of the investor to seek refuge in gilt-edged securities, and it is probable that not a few who might have been inclined to venture into the industrial groups have thought it wiser to remain in the safer purlieus of the strictly investment groups. Moreover, it is rather suggestive that following the detachment of this country from France in any extreme measures which may con- ceivably be resorted- to with regard to the extraction of Reparation payments from Germany, there has not only been a decline in the currencies of such countries as France and Germany, but there has been a very marked and general movement of nearly all the foreign exchanges in favour of this country. Coupled with this movement there have also been signs that a certain amount of buying of British securities has been on foreign account, and it looks; therefore, as though the situation was one which had not only prompted caution on the part of the British investors but had involved appre- hensions abroad sufficient to occasion a flow of foreign capital here. If that is so, the importance of the move- ment as a factor in the markets can be recognized, but the nature of the impulse should not be ignored. It is impossible, for example, to forget that the points at issue between France and ourselves concerning German reparations were very sharply defined. Setting aside for the moment all question of divergence of views as to the bona fides of Germany's intentions, Great Britain laid down certain terms which she regarded as the maximum which could be imposed upon Germany without occasioning a financial, and possibly a political and social, catastrophe in that country. Moreover, it was also part of the British argument that even these terms could only be successfully imposed if the attitude of the Allies towards Germany was one making for the restora- tion of political confidence in Europe and an improve- ment in economic conditions generally. France, on the other hand, maintained that much better terms could be imposed than those outlined by Great Britain; and further, that only by a stern process of obtaining securities in advance and by keeping a tighter grip on Germany generally could there be any hope of extracting Reparation payments. Now, if France was right in her view it is of course conceivable that after the exertion of some further pressure and the occupation of some territories a fresh arrangement may be entered into whereby Reparation payments will be expedited, and confidence will gradually return when it is seen that the French demands are con- sistent with the maintenance of German solvency and the continuance of social and political order. If, however, the British view was the correct one, then there is the fear first of financial catastrophe in Germany and second of the possible effects of that catastrophe upon Franoe (Continued on page 72.) and upon the other countries of Europe. For it must not be forgotten that during the past year or two trading with Germany on the part of many countries, including our own, has been on a fairly large scale. With such tremendous issues in the balance, therefore, there is, I think, after all something logical in the appar- ently illogical course of Stock Exchange price movements during the past week. The inherent strength of markets, due to a sound technical position, is to be welcomed ; the absence of any undue perturbation concerning the serious developments in the Reparation crisis is to be commended ; while the positively favourable factors I mentioned at the beginning of this letter deserve con- sideration, as does also the fact that we are getting to grips with problems which have troubled us for the past four years. Nevertheless, I do not believe that the continued state of political and financial chaos in Europe is one which we can afford to disregard as though these things were not happening at our door and as though our very existence did not depend upon the full restoration of international trade.—I am, Sir, yours faithfully, The City, January 10th. ARTHUR W. KIDDY.
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