SLUMP IN U.S.

Press, Volume LXII, Issue 18636, 10 March 1926, Page 10

SLUMP IN U.S.

INFLATED BANK CREDIT. MORE ENGLISH GOLD ? [By Penlco.] The drastic decline in prices on the New York Stock Exchange, on March 2nd, was brought to a halt two days later. The monetary situation in the United States is of intense interest to the rest of the world, for practically all countries are now leaning on New York for credit. London and New York are working in very close relationship, and on January 2nd of this year, a conference was held at Washington, at which Mr Montagu - Norman, Governor of the Bank of England, Mr Parker Gilbert, Agent-General for Reparation payments, Mr Mellon, Secretary of the United States Treasury, Mr Benjamin Strong, Governor of the Federal Reserve Bank of New York, and Mr Chrissinger, Governor of the Federal Eeservc Board, the object of the conference being to devise ways and means to aid the recovery of France. If was also agreed by the three banking officials, that tho re-discount rate of the Federal Reserve Bank should be raised, which took place a little later. The avowed object of this stiffening of the rate was to check the credit expansion which was being carried to the danger point. The year 1925 was one of pronounced credit expansion in the United States, but almost wholly through loans secured on stocks and.bonds. The loans so obtained increased, according to an American banking authority, by about 9013,000,000 dollars to 5,511,818,000 dollars. This, of course, refers to New York. It should be noted that what 'we call shares the Americans refer to as stocks. The supply of American banking credit is derived from three sources, namely, time deposits, commercial or call deposits, and the credit advances made by the banks against their lawful reserves. The latter is the element of particular interest, as regards the soundness of the credit situation, because it is claimed that therein is registered the expansion or contraction of pure credit. When gold is imported and added to a bank's reserve, or when the member banks borrow from the reservo banks to increase their own reeervea a pyramiding of credit takes place.,. The proceeds of a loan to a customer takes the form of a deposit in the same bank or other, banks, thus enabling other loans to be made, creating more deposits, and so the process goes on. It is calculated that in the United States one dollar of now reserve credit, whether it is a dollar of gold or a dollar borrowed from 'a reserve bank, ultimately supports about ten dollars of bank credit. That is, one dollar of real reserve credit is inflated into ten dollars of loanable credit. The expansion of credit makes money easy, interest rates low, stimulates business activity, and if this expansion is at a rate faster than the growth of industrial capacity and trade, it has the' same effect as printing excessive quantities of paper money; it forces a rise of prices, and produces all the well-known phenomena of an unhealthy boom. The banks are said to haxe extended credit up to the limit of their present reserves, and that, further demands' for bank credit will be' satisfied' only at higher rates of interest. ■ • The Bears'"Attack. When the "bears" launched their attack on the Stock Exchange, public utilities and motor stocks received, special attention?* /Public utilities are gas, electric .light, electric power, telegraph and telephone, and tramway concerns, which are in most, if not in all cases, the properties of joint stock companies. There was a steady upward trend in ■ the prices of stocks last year," the fundamental factor being the-widespread confidence that the t country was-enter-ing upon a period of prdlonged prosperity and that the earnings of the great'industrial corporations would increase in a substantial manner. : "There was a general feeling," says one authority, "that the time tad come for stocks to be valued on a prosperity basis, and for "prices to reflect in some! - degree the fact that the properties which these titles of ownership represent, could not be reproduced physically on the present level of construction ' costs, without expenditure vastly greater than the values at which, these securities had been selling." After two days of frantic selling and price-breaking, there has been a recovery almost as sensational as the break, and the real question is whether the recovery is strong enough to stand. The effect of the- crash must be to weaken confidence. The immediate results appear to be a contraction in the domestic trade, for it is reported that there is a general depression. , x Depression.in Trade. The slump 3tas evidently brought the people up to'a realisation; of the unhealthy state \of the credit system. During the past year it became quite fashionable in the United States to mortgage future earnings' for - present day needs, for « everyone was buying everything he wanted on the instal-ment-plan. It is* stated that fully 75 per cent of the motor vehicles sold last., year was on the time payment system. This depression in domestic trade must reaet on the Stock Exchanges and we may expect to see 'another break in prices. This adverse 'movement has not' yet raffecteji London, but tha't-it "will-do so presently seems certain. The American 'banks will be ' anxious to ''obtain more gold to extend< their credit operations, and may find it> convenient to obtain the metal from London. ■ However, • last week the Bank of England increased its reserve of gold by the substantial 6um of £2,086,000, the aggregate held on Wednesday last being £144,272,000. WHEAT. A prominent firm of millers has advised fanners that a good deal of wheat has changed hands this week at : 6s 8d f.o.b. Lyttelton, and that they ..are still offering this price. They add, however, that millers may have -to re- , vise these prices downward.; On the other hand a leading firm of merchants advises clients that as very little wheat is being Bold to millers, they Relieve €hat very shortly the millers will be obliged to raise their prices. , iWHEAT. , (Received Much 9th, 7.5 p.m.) NEW YORK, March, 8. Chicago Tiheat quotations are:—May, r.itt : 188; old 157}, July 138}, September 132} ' cejrts per.buaheL r .. EGG AUCTION. Messrs Harris Bros., Ltd.. report that the usual weekly auction sale of Feather Brand guaranteed fresh eggs was held in their rooms, 158 Hereford street, yesterday after-, " noon. The following prices were realised: * —Hen .eggs Ist grade (2os or over). 2s Sd; -. ken eggs, 2nd grade (under So*), 2s-3d. —0