Finance—Public and Private The Slump in Wall Street Booms cannot
last for ever, even in that most wonderful of countries, the United States. America is a land of records, and it might almost be said that the average New Yorker is as proud of his slumps as he is of his booms. In both cases he feels that, at all events, develop- ments are on a scale eclipsing anything of the kind in any other country.
One of the regrettable things about " booms " and " slumps " is that both produce conditions under which there is a tendency to take a distorted view of actual facts. A few days ago Wall Street might have been depicted as a veritable Tom Tiddler's ground where, if not gold and silver, at all events paper profits were to be picked up like mushrooms off a field, and, also like mushrooms, the rapidity of the rise in these paper profits was prodigious. To-day it might be imagined from some of the cables reporting the frenzy in Wall Street and the stupendous losses, that New York had suddenly become an impoverished city. Neither impression, of course, is a true one. Without attempting in the space of a short article to give to readers of the Spectator a complete account of the actual position, I may be able, perhaps, within the compass of a few paragraphs, to present a sketchy outline of the conditions responsible for the recent boom and the meaning of the recent slump.
U.S. PROSPERITY.
Everyone is more or less aware that, largely arising out of the War, America amassed great wealth and obtained opportunities of many kinds. In the first place, during the years of neutrality, and at a later date, the exchange had moved so greatly in her favour as to bring stores of gold, embarrassing in their dimensions, but all helpful to enlarged credit and increased pros- perity. The War did more than that, however, because it produced such a permanently favourable exchange and such an indebtedness on the part of outside nations as to constitute, as it were, a bulwark to the prosperity achieved during the War. In addition, the years of neu- trality and the impoverishment of the belligerent countries gave America a start in acquiring oversea markets which brought her new sources of wealth. Finally, on the principle that money makes money, the lending of her surplus wealth during recent years gave a direct stimulus to her export trade and brought in still more wealth.
WALL STREET ACTIVITY BEGINS.
So far as the New York Stock Markets were concerned, the first effect of this great increase in wealth was to drive up prices for all high-class home securities. The second effect, however, when these stocks rose to a level giving a very small yield to the investor, was to stimulate lending to foreign countries, and especially to Germany, where higher rates of interest were obtainable. Some of these •loans were in the shape of securities absorbed by the investor and others were in the form of short-term credits granted to the German Money Market. Meanwhile, however, the wealth of America also found expression in high wages with a consequent increase in purchasing power on the part of-the general community. This, in its turn, gave a kreat.impetia_ to industrial concerns and. utility companies in the United States, and some eighteen months or two years ago the rise in • the shares of some . of - these captured the imagination of the American investor, and, from a desire to secure a good investment yield, he passed to the more feverish longing for getting rich quick through appreciation in market values. A few sensational advances in one or two particular securities served as an attractive bait and a speculative movement, beginning in real estate and extending finally to almost every form of Stock Exchange security, produced a gambling fever in Wall Street, not, perhaps, greater in fierceness, but greater in dimensions, than anything previously recorded in the history of that most speculative of all centres.
STRAIN ON MONETARY CENTRES.
Meanwhile, one effect of this colossal speculation in Wall Street was to make such inroads upon supplies of loanable capital that not only was there a sharp fall in the supply of investment resources for foreign loans, but banks who had been lending on profitable terms abroad called in their credits as a still more profitable use was obtained for them at home. The Federal Reserve Bank raised its rate early in the year to 5 per cent., but for one reason and another did not pursue further the restraint of speculation through the imposition of dear money rates. The effect on foreign centres, and particularly on this country, was considerable, because such was the stringency both in New York and Berlin that both Paris and London have been active lenders in those directions for some time past.
For some time, therefore, it has been evident that unless the Wall Street boom collapsed, there was little hope of a return to easy monetary conditions here or at other centres. The plain facts are, of course, that the world's demands for capital for legitimate trade are so great that if at any centre a huge speculation exists, dear money rates become almost inevitable. It is in that sense, therefore, that the break in Wall Street has been regarded as a favourable development in its relation to the international financial situation as a whole.
PRICKING THE BUBBLE.
It is always difficult to determine the precise causes of a slump, but almost invariably the collapse is imme- diately preceded by the previous gambling assuming a frenzied aspect. Thus, almost the day before the collapse in Wall Street, one or two particular shares were advancing almost by 100 per cent. within a few hours. As a consequence, the banks began not merely to charge high rates, but to call for such additional margin of security as to amount practically to a calling in of loans, and the shock imparted by such action produced greater sobriety, and sobriety is inconsistent with booms, or, at all events, with booms in their wildest form.
WILL THE FALL CONTINUE ?
Whether the slump will go ftirther it is difficult at the moment to say, but the problem is one with which the future of money rates and financial conditions generally during the coming year is very closely linked. If the recent slump is merely an interval to be followed by still wilder movements in the upward direction in Wall Street, then it follows that the strain on loanable capital is likely to react upon other centres to a rather serious extent. If, however, following upon the slump, Wall Street settles down quietly to more sober conditions, and especially if there, should be a fresh lending of credits abroad, die New Year may mark a turning point in the monetary situation in the direction of ease, with ..a beneficial effect upon trade- and enterprise generally.
ARTIMR W. KIDDY;
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