Credit Policies Serious Contradiction In German Econonm

Press, Volume XCIX, Issue 29240, 25 June 1960, Page 12

Credit Policies Serious Contradiction In German Econonm

By

"LYNCEUS"

of the “EconomUt") .(OM

(From the “Ceonomut” Intelligence Unit) '

London, June 14.—When the industrial countries of ‘the free world are so closely interlinked in their economics as they are today one would expect the broad trends of their credit policies to move in the same direction at any particular time. This is particularly so when their currencies are linked to one another at fixed parities and when, furthermore. these currencies are. for all practical purposes, convertll> It is true that under the discipline of the international gold standard one often could discern contrary movements of credit policy. These, however, were only temporary. When costs and prices got out of step and gold movements ensued, the classical rules of the game required the goldreceiving country to expand and ease credit while the gold-losing country was called upon to contract and tighten credit. These contrasts were mere ripples that did not disturb the broad conformity of all domestic policies to the world-wide trends which were so clearly indicated in the fairly regular ups and downs of the economic cycle during the nineteenth and early decades of the twentieth centuries. Today there is again evidence of a striking contrast in credit policies. On the one band we find interest rates falling and credit being expanded in the United States; on the other, credit policy in Germany is moving in ttie other direction, bank rate having increased and credit being made steadily scarcer. This, however, is not a contrast which conforms to the orthodox pattern. It is in fact the very reverse of what the rules of the game would appear to demand.

Toning Up U.S. Economy In the United States the balance of payments is and has for some time been under some strain. Gold has been lost and, although the gold reserve still looks ample, its proportions begin to wear a decidedly more modest look if allowance is made for the large short-term debt which the United States owes to the rest of the world. If in spite of this, credit is being eased in the United States and also in Canada it is because the economy in North America has become somewhat sluggish and needs toning up. This need is all the greater after the collapse of the summit meeting and the entry of the cold war into a new phase in which the two competing ways of economic life will be challenging one another on the field of economic expansion and not of nuclear battle.

In Germany, by way of contrast, the position is one in which the balance of payments is producing a larger surplus than ever before and the central bank is steadily accumulating gold and convertible currencies. In spite of this the German bank rate has been raised from 4 to 5 per cent, and credit is so scarce that the most creditworthy borrowers have to pay 8 per cent, for their bank accommodation.

The reasons for the increase in bank rate are to be found in the recent developments in the domestic economic situation. Germany is enjoying very full employment There are symptoms of An impending rise in prices. The German authorities are beginning to recognise the signs of an inflationary movement. Their fear of this drift into inflation is understandable. It must be ingrained in a country which has seen the value of its currency completely wiped out twice in the course of a single generation. Here then is an intriguing contradiction between the pull of domestic and external consideratiops affecting credit policy. The strength of the German external position is such that it ought to lead to an easing of credit, an expansionist budget policy and. above all, a considerable expansion in the amount of foreign investment. Little Investment Abroad None of these requirements is being satisfied. Credit is being tightened, the, budget is being maintained in a substantial surplus; as for foreign investment though Germany has begun to indulge in it, it is on a scale minute in relation to the available resources and very modest compared with what is being done in much more difficult circumstances by Great Britain.

For the time being therefore domestic considerations are being given priority in deciding the credit policy of Germany. The measures that have recently been taken in the realm of credit policy are calculated to increase the balance of payments surplus and the attraction of gold and other international reserves to Germany. This clash between the requirements of external and domestic considerations must hide a major flaw or imbalance in the German

economic situation. This flaw to be found in the fact -ft German currency is now qug|| at a false value. The mark worth more than its foreign « change quotation. This artificial puts up the price of imporbM German buyers and lowen prices of German exports. As la as that artificiality endures, «m effort by the German authorM to conquer inflationary forces home will merely accentuate th country’s international credit position. This problem of this deserves a prominent position < the agenda of the Internatfoi Monetary Fund meeting at September.