FINANCE-P-UBLIC AND PRIVATE
IT must not be supposed that, becarise no immediate great response has been given by public securities to the signing of the European Pact at Locarno, the City is unmindful of the importance of that event. On the contrary, it is regarded as probably the most significant development since the Armistice, not even forgetting the importance which attached to the acceptance of the Dawes Report last year. Before, however, offering one or two sugges- tions as to the far-reaching effects of the European Pact in relation to financial and commercial developments, it may be well to explain why, up to the present, the event —apart, perhaps, from a sharp rise in German 7 per cents. —has had comparatively little effect upon the Stock Markets.
CONSERVATIVE VIEWS.
In the first place, so far as this country is concerned, It must be remembered that satisfaction is modified to some extent by a recognition of the serious responsibilities undertaken by Great Britain. The event, in fact, comes as a fresh reminder of the radical changes effected by the recent War, so that this country, which for many genera- tions pursued a policy of splendid isolation, has now deemed it advisable to enter into the closest relation with the political affairs of Europe. Up to a certain point it is well, of course, that this critical attitude, should be adopted, because there is no sense in shutting our eyes to the responsibilities as well as the advantages attaching to this great international agreement. Unfortunately, however, legitimate criticism has degenerated, in a certain section of the so-called " popular " Press, into a mere anti- Government attack, in which none of the advantages and all of the drawbacks are emphasized, though the same critics would probably be the first to have attacked the Government if the Locarno Conference Iliad proved abor- tive and there had been no prospect of a more peaceful and settled outlook in Europe. The tone, in fact, adopted by this section of the Press has not been without its part in preventing the full and clear recognition of the great importance of the Locarno Agreement.
DEARER MONEY.
So far, however, as the City is concerned, there is a simpler and more diiect explanation of why the roof of the Stork Exchange has not been lifted by this most important political development. The Stock Exchange is noted for taking short views and, at the moment of the signing of the Pact, the City was almost entirely engrossed with certain financial developments exerting an immediate and direct influence upon the course of public securities. At the moment of the reduction in the Bank Rate on October 1st, from 4i to 4 per cent., the event was hailed on the Stock- Exchange as a strong " bull " point for securities, and speculative operators acted accordingly. In the Money Market, however, due attention was given to the possible effect of the lower Bank Rate upon the American Exchange, and it is the more cautious view of Lombard Street which has proved to be the correct one. The American Exchange has tended steadily downwards, and, as a result, large amounts of gold have been taken out of the Bank of England for export, so that whereas, at the end of last July, the Bank had gained about £9,000,000 since our return to the Gold Standard at the end of April, that Institution has now lost on balance a little over £2,000,000. As a consequence, money and discount rates in the Open Market have advanced- sharply, and the present quotation for bills is actually higher than it was at the beginning of the month, when the Bank Rate, was 41 per cent.
FALL IN THE FRANC.
A further circumstance which has exerted a depressing influence upon the markets has been the great depreciation in the French franc, which during the past week has touched the lowest point of the year, while the quotation has not been far from the lowest on record, which was reached in March of last year, when it will be remembered that for the moment the franc was as low as 120 to the £. Moreover, the weakness of the French franc has been particularly emphasized during the past week by the fact that the Belgian franc has rallied a little and now stands at a considerable premium over French currency. With- out discussing the many causes responsible for the con- tinued weakness of French currency, there is no doubt that the main cause operating during the past few weeks has been the failure on the part of M. Caillaux to attain the permanent funding of the French debt to the United States and also the anxiety as to whether the French Chamber will even ratify the temporary agreement reached, whereby America was prepared to accept for a period of five years a total payment from France of £8,000,000 annually in the shape of interest. Moreover, there has recently been a still further expansion in the French Note Circulation, and it is felt that unless France immediately faces with courage her external debt problem, and arranges a settlement, stabilization of her currency will become increasingly difficult.
WILL MORE GOLD BE EXPORTED ?
So far, therefore, as the immediate outlook of markets is concerned, it is necessary to keep in mind these two adverse influences and especially, of course, the possibility of a further gold drain to the United States. There is little doubt that the fall in the American Exchange, although probably accentuated by the lower Bank Rate here, is largely to be explained by seasonal causes. That is to say, America has been exporting cotton and other commodities largely and, while we have been by no means the only customers, this country has probably been called upon to finance not only her own purchases, but a good part of the purchases of other European countries. Added to that fact we know that our own trade position is most unsatisfactory, and that our adverse visible trade -balance is the worst for many years past. There is, however, another factor which has operated, and it is one for which we are in no way responsible, namely, the great boom in securities in Wall Street, the effect of which upon Money Rates at that centre has been all the greater owing to speculation in securities coinciding with considerable activity in trade. It is just this factor which makes it difficult to gauge the possible extent of further gold shipments to the States. So far as ordinary seasonal requirements are concerned, it seems fair to assume that another three weeks might break the back of the _gold drain, but if the boom in Wall Street should continue, and should require higher Money Rates on the other side of the Atlantic to curb it, it is quite possible that measures might have to be taken here to check any undue drain of gold. Recognition of these uncertainties, therefore, naturally has a restraining effect for the moment upon the course of public securities.
RESTRAINED OPTIMISM.
Nevertheless, I think it will be found that possibly before many weeks have passed the influence of the European Pact is something which will make itself felt over and above these other and more temporary factors. Assuming that the Pact is ratified by the various countries concerned, it will undoubtedly promote a greater feeling of political confidence not only throughout Europe, but throughout the world, and that in its turn will undoubtedly give driving force to international financial and commercial activities. In the ease of America, too, there is little doubt that just as the acceptance of the Dawes Report caused an outpouring of American capital to Europe, so tenden- cies in that direction will be increased after the European Pact becomes an accomplished fact and gives indication of a good understanding between the European nations, an understanding conceivably leading a little later on even to some measure of disarmament to the relief of the distracted Budget makers of more than one country in Europe. There is, in fact, much in the Locarno Pact to justify considerable optimism with regard to the future, even though, for the moment, such optimism—so far as the Stock Exchange is concerned—may be restrained by a recognition of other factors which, however temporary, cannot be entirely disregarded.
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