FUTURE OF RATE OF INTEREST

Press, Volume LXIX, Issue 20983, 11 October 1933, Page 9

FUTURE OF RATE OF INTEREST

Many Uncertainties INFLUENCE OF POLITICS (SPECIALLY •WaiTTBK SOS THE PEESB.) [By HARTLEY WITHERS.I To all of us, investors, speculators, manufacturers, traders, and taxpayers, the future course of the rate of interest is of momentous importance; and yet there never was a time when it was more difficult to forecast it with any approach to certainty. At all times such forecasts were more likely than not to lead those who acted on them into loss and disillusionment. So much so that years ago, at the end of the nineteenth century, in days when money matters moved more or less according to laws that could be calculated to work, I remember hearing a well-known dealer in the British consols market assert that if you wanted to back a view about the future of money the safest thing to do was to collect the very best expert opinions you could get and then act just in the opposite direction from that pointed to by their conclusions.

Nowadays, as a money-dealer of much experience observed when I tried to pump him on this subject, it is no use trying to see your way about the future movements of money, because there is no longer a money market, but just a political mess, and politics are the only influence that really counts. This is most certainly true; but perhaps this fact, instead of obscuring the position, makes it just a little more possible to make a guess about it.

j Low Prices and Cheap Money. One thing that old-time experience and recent events have combined to confirm is that low prices of commodities and cheap money go together. The extreme example of this combination was in the 'nineties of the last century, when a period of trade depression and an unprecedently low level of wholesale prices were accompanied by a long spell of cheap money, cheaper than it has ever been seen until during these last two years, and a fall in the rate of interest that brought the yield on "trustee" securities in London down to, and in many cases below, 2j per cent. This present period of cheap commodities has not brought down the long-term rate of interest nearly so far, though the price of short credit in the London market has beaten all the records of the 'nineties. For long-term purposes British credit is now priced at roughly 3J per cent., though, owing to the higher income tax, the net yield to holders is not substantially higher than in the earlier spell of cheap money. If this rule, of low prices for goods going with a low rate of interest, is to hold good in the near future, the omens seem to be in favour of a rise in both; for President Roosevelt appears to be determined to put prices up in America and has already succeeded in doing so to a substantial extent, while the British Government has frequently laid stress on the need for a higher level of commodity prices, though showing no inclination to take any active measures to produce it. If the President's effort is backed by Britain and the British Empire and the rest of the "off-gold" group, and rounded off by a general devaluation of currencies, recognising and stabilising the depreciation already de facto existing, the effect on world prices seems bound to be restorative.

Solvency Possible. On the other hand, so much has been done in. the last three years in the direction of reducing costs of production, that it ought to be possible to bring back the solvency and profit-earning power of debtors and producers, without any violent further advance in wholesale, and still less in retail, prices. This being so, the pressure of commodity prices on money rates need not be strong, though it is likely to modify the excessively low price of short-term money in the chief financial centres. But some recovery from the extravagantly low short-term rates is quite possible without any serious advance in long-term rates, for the difference between the prices of short and long term borrowing has lately been usually wide. If, then, there are reasons for expecting that recovery in commodity prices need not be accompanied by much advance in the long-term rate of interest, there are also influences which will tend to keep the latter low and perhaps even to send it lower still. First and foremost is the fact that all governments are at present more than ever vitally interested in keeping the rate of interest down, either because they want to borrow or because they have big maturities to meet, or because, in order to quicken the flow of their revenue, they want to stimulate industry and development. In recent years governments and central banks have learnt a good deal about monetary manipulation; and even if the gold standard is restored, it is fairly safe to expect that its working will be safeguarded in such a way that it will not be allowed to cause stringency to any degree that would upset the market for securities.

Lack of Confidence. Second, there is the melancholy but insistent fact that the lack of confidence that has done so much to make money cheap is only too likely to continue. When Government securities first began to rise in London the jobbers called it an "undertakers' boom," signifying that it was based on the death of political, financial, and commercial confidence. Can we see much prospect of any resurrection of this lamented corpse? Two authoritative statements, quoted in "The Times" of August 31, indicate that it is likely to stay buried for some time. Dr. Benes, the Czechoslovakian Foreign Minister, has expressed, in the Bulletin of the Agence Economique et Financiere, the conviction that we are "still at the beginning of a long period of commercial and nolitical disorder" Mr Downi.e Stewart, lately Finance Minister of New Zealand, foretold that "if the economic and political, and social and biological, forces now operating in the Pacific proceeded unchecked along present lines the result could only be catastrophic." Economic nationalism, with all its damping effect on international trade, shows no sign of slackening; and a general scaling down of debts.„by...countries...JitaL