Finance—Public and Private
A Fresh Opportunity
*LAST week's reduction in the Bank Rate from 5 to 41 per cent. may be regarded as constituting a "fresh start" in the matter of the general financial and industrial outlook. The 5 per cent: Bank Rate now displaced had been in operation ever since December, 1925, and the circumstances responsible for the long retention of that rate arc worth recalling. It is now almost exactly two years since we returned to the Gold Standard, that important step being announced in the Chancellor of the Exchequer's Budget of two years ago. Not unnaturally, the Bank Rate which was then 5 per cent, was retained for a while, until the effect of the Government's decision upon the central supplies of gold had become more clearly revealed. In the early autumn, when it was found that the Bank of England, instead of losing gold, gained a considerable amount, the Bank Rate was lowered at first to 41 and then to 4 per cent. it soon became apparent, however, that the lower rate was not justified by the facts of the industrial position. Already unsettlement in the coal industry was looming on the horizon, and, because of the adverse trade balance, gold began to drift away to other countries. So exten- sive, indeed, were the withdrawals that in December, 1925, the Bank again raised its rate to 5 per cent. with the result that by the spring of the following year a great improve- ment had occurred. In the first place, the exchanges were moving more favourably and gold was flowing to us, and, in the second place, and before the trouble in the coal industry began to be acute, there were not wanting signs of a small revival in trade.
A FALSE START.
When making his Budget Statement in April, 1926, Mr. Winston Churchill, referring to the more favourable financial outlook, stated that only the uncertain Labour outlook stood in the way of an immediate reduction in the Bank Rate. Unfortunately, apprehensions of Labour troubles were abundantly justified, first by the General Strike in May of last year and then by the prolonged coal stoppage. All hopes of a lower Bank Rate immediately disappeared, and only by the retention of the 5 per cent. minimum was it possible to avert a heavy drain of gold. Thanks, however, to a sound monetary policy, not only was a big drain averted, but gradually the exchanges recovered from the extreme depression occasioned by the adverse trade balance, and. during recent weeks especially, gold has continued to flow in so rapidly that whereas at one time the net loss of gold by the Bank since our return to the Gold Standard two years ago amounted to about £12,000,000, the net reduction is now only about £2,000,000. Thus as we are now at the season when the greater part of our purchases of foodstuffs from abroad has been effected and paid for, the Bank was undoubtedly justified in making the experiment of a lower Bank Rate, for the advantages of easier money rates both to trade and to the prospects of a profitable conversion or the Government debt are, of course, enormous. It is, indeed, because those advantages are so universally recognized that the reduction in the Bank Rate has been immediately followed by a general rise not only in high- class investment securities ''but in the shares of many ind tist rial companies.
FAVOURABLE TRADE BALANCE NEEDED.
I cannot, however, too strongly emphasize the plain fact that an inflow of gold, easier money rates and expanded credit are factors which do not necessarily strengthen the economic position. They may, indeed, even impair it. Everything depends upon the use made of these opportunities. If it is to be a case of continued strife between Labour and Capital, resulting in inefficient and cramped output, of conditions, in fact, entirely out of keeping with the requirements of the situation as expressed in our economic position and in the competition of other nations, then we shall very soon find ourselves back again to dearer money, for the trade balance will not have been improved and high prices will have involved a heavy strain upon the financing of even a moderate tra revival. If, on the other hand, by enlarged and cheapen production, we can stimulate our exports of goods a services, then we shall have used the advantages of ehea money to create conditions which will give us a favourab trade balance and a hold over the exchanges, and a qi lower Bank Rate may even be justified.
DANGEROUS ANTICIPATIONS.
The danger at the moment, however, is that industil in which term both Capital and Labour are included seems scarcely alive to the possibilities of the situatio while, on the other hand, in the Money Market and on t Stock Exchange there is far too great a tendency t discount in advance the possibilities of a still lower Bak Rate by forcing down money rates and raising Stoe Exchange securities by speculative operations. La week's reduction in the Bank Rate to 41 per cent. by means necessarily implies an early further reduction t 4 per cent. That course of action must be determined1) the considerations I have enumerated, and it is too cad at present to judge whether our industrial position I sufficiently. strong to enable us to re-establish pre-\\ conditions, under which the value of money at this cent was usually below that prevailing on the other side of t Atlantic.
A FRESH START.
Meanwhile, as indicated at the commencement of ti article, the lower Bank Rate may be regarded as " fresh start," the previous one last year having bee grievously interrupted by industrial strife. How mud was lost by the country as a whole, and how little gain( by Labour, by last year's follies, is being more dead revealed every day. Have we yet learned our lesson fro bitter experience, or is it again to be a ease of polit industrial disturbances marring prosperity, with attempt to fix the blame on Gold Standard, monetary policy any other cause but the true one ?
ARTHUR W. KIM.
Previous page
