CHEAP MONEY

Evening Post, Issue 66, 15 September 1936, Page 12

CHEAP MONEY

DANGERS OF BOOMS

IDEAL IS TO SAVE

"Evening Post," Sept. 15. Is cheap money beneficial, or otherwise, to industry and trade? "That all depends," as a little girl mi&ht reply. The question of the influence of cheap money in London on British trade revival is carefully and thoughtfully dealt with in the monthly review of finance and commerce issued by Barclay's Bank, London. Some remarks made by the President of the British Board of Trade (Mr. Runeiman) 6n "the fertilising influence of cheap money" are taken iri review. Following an analysis of the weekly returns of the Bank of England from 1929 to June, 1936, together with London clearing banks' average weekly balances, the review comes to the opinion that in the early stages of recovery the main impetus to industrial production was due to other causes than cheap money. Among those causes are mentioned the improvement in the national finances, protection of certain industries through the Customs tariff, and "elimination of the over-valuation of sterling." An investigation of the influence of cheap money on the improved conditions in Great Britain, it is added, would be incomplete without examination of its effect in reducing national expenditure by enabling the Government to borrow at very low rates of interest. A POSSIBLE DANGER.

In its concluding remarks the review draws attention tb the unwisdom of "over-estimating the value of cheap money as a stimulant to trade." Credit expansion, so far as it has been allowed in Great Britain, has been an orderly expansion, judiciously. managed, but any exaggeration m the public mind of the powers of the authorities to influence by monetary manipulation the trend of industrial progress might result in agitation for exceptional measures, with the possibility of injurious inflation. "There is also a danger that if the influence of low interest rates on trading recovery is overrated, moderate changes either upward or downward may be given an undue importance in assessing industrial prospects. . "Nor should it be overlooked that, in times of abundant credit, 'boom' conditions in security prices and new capital issues frequently arise with ultimate unsatisfactory repercussions on trade and industry. "Furthermore, should cheap money be carried to extreme lengths it may tend to injure the smooth working of the financial organisation on which the trade and industry of the country so greatly depend. After a long period of exceptionally low rates for shortterm money, ideas as to what is cheap and what is dear money may become distorted. J BATES COULD BE RAISED. . "A review of conditions over a long period of years would, however, serve to show that money market rates could be raised very considerably above the present level and still be relatively , cheap. Neither need a rise in short-1 term rates cause a corresponding rise in those for long-term borrowing, as the factors affecting them are not necessarily identical and,' at times in the past; long-term rates have been lower than those for short-term financing. "The ideal position, so far as trade and industry are concerned, is that there should be no stringency likely to hinder the day-to-day, commercial business of the country or sound industrial development," states the review. "In the long run,-the- latter will1 depend on the ability and willingness of investors. to save, and one' of the factors most likely to encourage the accumulation of capital is a fair return on investments having regard to the prevailing circumstances and the risks i involved." !