SAFETY IN INVESTMENT.

Auckland Star, Volume LVII, Issue 80, 6 April 1926, Page 4

SAFETY IN INVESTMENT.

GOVERNMENT AND MUNICIPAL ISSUES.

STILL OFFER BEST SECURITY. t

(By H. WITHERS.)

A rude shock has been given to the confidence of investors, in gilt-edged and all other securities, by the events of the last dozen years. So many examples are to be seen of elderly men, still hard at work, because the savings of their lifetime, prudently invested in unexceptional securities, bring them in an income, the buying power of which is about half of what they reasonably expected, that it is very natural for the younger generation to conclude that saving and investing are a very much over- rated policy, and that free spending, and short cuts to fortune through speculative adventure, are certainly more attractive and possibly more profitable, pursuits.

Convention and habit are strong influences in investment, and there can be no doubt that their influence before the war was exercised to an exaggerated extent in favour of securities issued by governments and other public bodies. The high prestige of such securities had a solid foundation at first sight. They were based on the capacity for paying taxes and local rates of wealthy and populous areas, and so were raised above the industrial risks from fluctuations in trade and production, which affect the securities issued by the most well established enterprises working for profit. As long as public finance is conducted on sound lines the debts of public bodies, owing to the breadth and strength of the foundation on which they rest, ought to 'be quite impregnable investments.

But that condition, of prudent conduct of the public finances, is a matter about which one feels in these times much less certainty that was formerly possible. Two tendencies for which there is much to be said from other j>oint3 of view, have shaken its foundation. One is the widening of the franchise and the other is the growth of direct taxation, by which the burden of public expenditure is thrown more and more on the shoulders of the well-to-do, who are best able to bear it. Excellent in themselves, these reforms have had.the effect of encouraging public extravagance and bad public finance, in order to pay for schemes which are pleasing to the electorate and have to be paid for by the well-to-do minority.

It might have been expected that the wisdom.of statesmen, working for their country's good, would have prevented evil consequences from these causes, but unfortunately the wisdom of statesmen is nowadays at a heavy discount. We have the authority of the Britisli Prime Minister, who ought to know as much about politicians as anybody, for the statement that there is no Government on earth which can be trusted to "manage" a currency. According to the advocates of the managed currency, its management, would be fairly simple and almost an automatic affair—when the index number of prices goes down, you expand credit and currency, and set public works going; when the index number goes up,, you restrict credit and currency, and hold, up public works; and so you keep your general price level always on an even keel. The considerable advantages, on paper, of such, a scheme are outweighed by the fact that steadying the general price level does not help the individual producer and merchant, who is not concerned with the index number, but with the price of the particular commodity which he produces or handles; also tLat.it would be very dangerous to put the power of manipulating the currency into the hands of the Government. Mr. Baldwin's emphatic endorsement of this latter objection is decisive, but it also makes one feel some apprehension as to the future of public finance. For if no Government- is to be trusted to manage a currency, how far are they to be trusted to maintain the canons of sound tradition in handling the enormous revenues and redeeming the Gargantuan debts which are now entrusted to their caTe? England has set the world a , great example by the manner in which she has since the war faced the problem of her debt, external and internal; but the cry of distress lateiy uttered by the Chancellor of the Exchequer about the difficulties in the way of effecting the economies promised in his last Budget— ten millions a year reduction in expenditure was the' figure to which he pledged himself— shows that the forces of extravagance have formidable strength behind them.

Public debts as investments have thus been shadowed by the clouds. In common with :all other securities which carry a fixed rate of interest, they have been shown to be seriously impaired by a rise in commodity prices which makes the money income from them, though itself secure, less valuable in purchasing power. This is a danger which may per° haps be neglected in view of the efforts towards price stability which are likely to be part of the future policj' of central banks. The other is the tendency of popular Government, whether national or local, to placate the populace by extravagance at the expen:e of" the national or local credit.

Public opinion among taxpayers, for reasons stated, cannot be relied on to check this dangerous tendency. Public opinion among investors, by making it difficult and expensive for spendthrift Governments and local bodies to borrow, may do much. Public debts may tie still the safest form of inestment. but the pinnacle on which they Etand has been reduced, in height by a few feet, and this process is not without advantage, from the point of view of public finance.