The Use and Abuse of Credit
Finance
DURING the four years of the Great War (1914-1918) many discoveries were made. I doubt, however, if -any was more important, or destined to be more far-reaching, than the one concerned with the enlargement of credit. Whether, if the War had continued for another six or twelve months, it would have collapsed through lack of power to finance it, cannot now be determined, but we know that the expenditure of many thousands of millions of pounds on the War would not have been possible but for the sheer expansion of credit. In recent years, and especially since Great Britain's departure from the gold standard in 1931, this practice of expanding credit has received a fresh stimulus and, in it is to be found the chief explanation of why high-glass investment stocks stand at so high a price in the market as to give a miserable yield to the investor, for the political and financial authorities which nowadays are closely allied, have decreed that money shall be abundant and cheap. In 1932, when the War Loan for £2,000 millions was con- verted voluntarily from 5 per cent. to 34 per cent., such a transaction would not have been possible if the Govern- ment had not been in a position to announce that all those who declined to convert would have their loan paid off. Needless to say, that only by an actual creation of credit • could the Government, through the Bank of England, have effected such redemption, but, nevertheless, .the creation would have been passible and because the in- vestor knew that it would be possible, and that the effect would be to make it impossible for this vast amount of money to be reinvested without occasioning a colossal rise in security prices, general consent was given to the conversion. ,This transacticn, of course, was not actual credit 'expansion, but a powerful expression of potential in - power n that direction, and it can fairly be admitted that, on balance, the effect was beneficial, enabling a considerable burden of debt to be lifted from the taxpayer.
Since then, however, matters have gone further in this ..and other countries in the expansion of Government credit and while certain benefits have resulted, the practice his undoubtedly its drmiibacks, and to one or two of these I would like to draw attention.
GOVERNMENT CONTROL.
In the course of a recent speech at the annual meeting of the Insurance institution with which he is connectifd, Mr. J. M. Keynes, the eminent economist, made ce references to the future course of prices of Britjsh F His main contention was that the Government word be well advised in pursuing a policy best calculatO still further to reduce the yield on long-dated Government stocks. He criticised, for instance, some resent.overations where the Government borrowed a moderate amount in short-term obligations and a much larger amount in kinger-dated stock. It was apparently Mr. Keynes's view that by borrowing so large an amount for a number of years ahead the Treasury was conveying the impressiOn to the public that they judged that money Tates must decline in the coming years, whereas-. borrowing for a short term they could have raised the money on much easier terms and their action would have had the effect of occasioning a further rise in prices of long-dated securities. Mr. Keynes said (the italics are our own) : " There can be no rational explanation of the longer-dated issue except that they (the Government) -themselves have no confidence in the short-term rate of interest remaining low. Since they largely control the situation, it is natural that humbler fink should be influenced by what the Treasury seem to expect."
I have placed a few words in the foregoing sentences in italics because they bring out what is- undoubtedly the great new'factor in financial conditiOns iodiy, namely, the power and also apparently, the will of Governments to control monetary policy, and with it more or less the course of securities from which a large section of the population derives its income. It is this fact which makes it so difficult. indeed well-nigh impossible, for financial writers of today to ,speak at all authoritatively with regard to the' course of public securities. -WA, Such great forces at the disposal of statesmen and politicians, and with financial and political considerations so closely intertwined, the ordinary laws governing financial and economic .developments no longer •operate with their former freedom.
MORTGAGING THE FUTURE.
It is not merely in this country, however, that this use ofixtended credit has become so general. It might well be aiked how in these days of 'industrial dePression and unemployment in so many parts of the world many millions can be spent upon- armaments with apparent ease. In the case of Italy, for example, although we may be sure that the financial situation of the country will not bear examination, the fact remains that there are no signs at present of the Abyssinian conflict being brought to a close for lack of funds; or more properly it should be said for lack of credit. And much the same might be said with regard to Germany and Russia where colossal sums must have been expended in recent years upon armaments and military preparations. Even in our own country there is some reflection of these conditions, for we know that although we are still suffering here from trade depres- sion and unemployment, there is no thought of difficulty in raising at cheapinterest rates the hundreds of millions which may be required for the strengthening of our defences. It might be better, however, if in every country in the world the raising of these sums for armaments meant an immediate strain upon the population thus making more difficult the task of preparing for 'war.
However, these modern tendencies exist and, like sonic of the modern inventions, they can be both used and abused. The only point, therefore, I. would wish to make. is that, in. my judgement,, sheer expansion of credit constitutes a form of mortgaging the future and its desirability must depend u- pon the use-made of the (Continued on page 376.)
FininCe
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expansion. A-nation of an indii-idual may by the use of its credit raise sums which.when employed for productive purposes actually add to the wealthd the nation or the individual even after the credit expansivilitself is cancelled. Can that be said -Of most of the credit expansions which have taken place during the post-3Var years ?
- A RTIIUlt W. KIDDYt.'
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