THE PRICE OF MONEY

Manawatu Standard, Volume LV, Issue 244, 12 September 1935, Page 6

THE PRICE OF MONEY

TENDENCY OF INTEREST RATES. GREATER DEMAND FOR MONEY. (By r “Finance.”) It is quite in order to speak of the “price” of money since we are in the habit of speaking of the money market. In all markets the dominating factor is price, and price depends upon the inexorable law of supply and demand. At the present time the price of money is engaging sqme little attention, because it is believed by some that money may go even lower than it is at present, while others believe that, in the natural order of things, money rates will harden. The balance of evidence is on the side ol the latter. Politicians are most anxious to keep the interest rate low, as is seen in the low rate offered on the Mortgage Corporation’s debentures, namely, £3 7s 6d per cent, for a period of twenty years. But economic conditions are more powerful than human tendencies and desires. It is claimed that the short-term rate in most countries is exceptionally low and that the long-term rate must conform tb this, which is quite true. There must be a balanced position. There is at the moment a definite upward trend in short-term rates. '1 bus we find that British Treasury Bills with a currency of three months, which were discounted practically at 10s per cent, per annum throughout the first half of the year arc now discounted at over 12s per cent. On August 30, British Treasury Bills to the amount of £45,000,000.” were discounted at 12s 1.73 d, and on Friday a similar amount of hills were discounted at 12s 4.34 d, an increase of 2.bid on the week. This may be looked upon as a trilling increase, hut it amounts to an appreciable sum when calculated over the whole £45,000,000. However, the basic fact remains that compared with the first half of the year tlie discount rate on British Treasury Bills has risen by over 20 per cent. Long-term lunds must conform to this, that is they must go relatively higher. With giltedged securities this means a drop in the Stock Exchange values. Money rates will go up as the demand lor loanable credit increases, and the increase must come as general trade improves. In our own case we have the fact that our imports for the year ended July last increased by over £0,000,000 compared with the previous year, and bank advances over the same period increased by £1,814,000, thus showing an improved demand for loanable credit. There is also the fact that several commodities have advanced in price recently, for example corrugated iron is reported to have risen £2 per ton recently. Building O'jieratioiis throughout the Dominion are expanding and building timber has in consequence risen by about 25 per cent. This calls for the expenditure of more money, and therefore a greater demand for money. And with the greater demand there must be an increase in the cost of money. There cannot be standard wages for labour, without a compensating standard for capital. Both are now on the up grade. The movement is as yet insignificant, but it will gather momentum. The ruling factor in all markets, whether it be the money market, the meat market, or the metal market, is confidence, and the world is slowly regaining confidence. Notwithstanding all the financial vicissitudes of the past five or six years, London remains the financial centre of the world, with the Bank of England as the controlling influence. The experiences of the Bank of England provide a reliable fuide to money market trends. The bank rate is announced eacli week, usually on a Thursday ever since September 5, 1844, when the rate was per cont. In September 1847 the rate went to as high as 8 per cent., and early in January 1853 it was down to 2 per cent., which is the traditional minimum rate. AA’e have given these early rates to show that tho rate varies according to the prevailing economic and political conditions. World politics have a disturbing influence on the money market, and the disturbances generally occur with dramatic suddenness. In spite of these fluctuations in the bank rate it has been proved that over a long term as 25 years the average rate works out at about 3J per cent. On this aspect of the matter an authority writes: —“When we are told that tho bank rate lias averaged 31 per cent, for the last 30 or 40 years we are none the wiser as to what has caused the rate to be at such a figure. In reality it can neither be said that the bank rate governs the market rate or the market rate governs the bank rate. Both are but agents of a primary cause —the conditions of life, and so the average bank rate a hundred years hence will bo practically the same as the average for the. past 30 or 40 years. The conditions of life are such that tho average person must pay back to humanity during his lifetime his debt of labour for having lived in the world and used its commodities.” Tlie average yield on liquid capital in New Zealand if worked out, would probably be £5 5s to £5 10s per cent. Money rates will vary and those who believe that money in New Zealand Mill be cheap for a long time will soon get a disappo i ntment.