CHEAP MONEY

New Zealand Herald, Volume LXXI, Issue 21803, 18 May 1934, Page 11

CHEAP MONEY

calling interest rates idle funds accumulate POSITION IN THE DOMINION PHASE OF WORLD CONDITIONS A period of cheap money, for which there is no precedent in New Zealand financial history and which is felt more intensely now than ever before in older countries/ has developed in the money markets of the world. Normally such circumstances would be the prelude to a revival in business activity and the revitalising of commerce, but local restrictions and impediments to international trade arc operating as a brake on progress. Many unfavourable forces are at work and events cannot bo followed to a logical conclusion even by practical bankers and economists. A downward trend in interest rates has been general during the past two or three years. The following comparisons illustrate this movement in the case of the Dominion: / 1930 1932 1933 1934 Bank Dep. Hate p.c. p.c. p.c. p.c. (21 months) .. 5 -i 3 3 Overdraft Rate . . 7 G 5 5 Mortftaso Kate . . 6 Si 5 51 * Government Loans (appro*. average return) . . . . 5J 5} 4 3j business only. Similar/conditions exist in Australia and Great Britain, as the following comparisons show; — AUSTRALIA / I 1930 1932 1933 1934 Bank Deposit Rate p.c. p.c. p.c. p.c. (21 months) . . 51 3J 3 2;1 Consols (approx. average return) . . 6 5 32 3 2-5 GREAT BR.IT.MX 1930 1932 1933 1934 p.c. p.c. p.c. p.c. Bank Rate . . . . 3i 2i 22 "War Loan (appro*. average return) . . 4J 4i 31 3 2-5 Economic Nationalism The growth of economic nationalism has played a leading part in promoting the present state -of affairs, an unhealthy s(ate in the view of economists. Countries have sought to increase their exports and at the same time limit imports, with the result- that there is a superficial over-production of the world's goods. With no interference to world consumption, this position would probably not have arisen. Under 'these conditions capital has been forced into idle channels and it is functioning as it was never intended iit should. Instead of being the life-blood of trade it is actually a drug on the market. There is no- encouragement to expand in production while produce has such a limited field of marketing, consequently there is little or no call for capital to make expansion possible. It is not/ difficult to visualise what might happen on a general breaking-down of trade barriers. In New Zealand's own case, there would be no need to discuss quotas on butter —the Continent could absorb all the surplus from the British market. A vicious circle has been promoted, for which at the moment no outlet presents itself. Safe Investment Sought It is not surprising under present conditions that lack of confidence in the future has been engendered. This aspect is reflected in a search for safe and fairly, liquid investment of funds, as investors wish to be in a position to take advantage of the turn of events. This has made investment even more difficult, in a country like New Zealand, where there is no highly-organised money markot and the placing of shortterm investments is not facilitated. Evidence of this is the accumulation of funds in the banks on current .account and fixed deposit for short terms. The high exchange policy adopted by New Zealand has added to the difficulties of the Dominion. Importers are not willing to buy in normal quantities, and there is no call on the banks for the same* volume of advances against imports. ; Overseas firms have been induced to leave surplus funds in the Dominion until they can be repatriated under a lower rate of exchange. These funds alone, it is estimated, arc between £1,000,000 and £3,000.000; The probability anses of a further intensification of difficulties if the Reserve Bank buys from the trading banks the Treasury bills held 011 behalf of the Government. 1 - Some Basic Causes

Lack of confidence in the mortgage market, which lias diverted money from this channel, and the poor demand for finance for new business ventures, while the outlook is so clouded, are basic-causes of the accumulation of capital. The problem of investment has become acute. The Government has suspended over-the-counter issues of loans, almost a permanent avenue of investment, and local bodies have hesitated to add to their loan indebtedness with any new issues. Several firms havf taken the opportunity of returning to shareholders capital no longer required jn their businesses. The banks have been approached with probably more money than tliey can employ profitably and there is some suggestion that heavy deposits are neither sought nor accommodated. A tendency has been noted to treat life assurance societies as a medium for depositing funds. On the sharemarket, securities are changing hands at prices which have no relation to the relative worth of capital. Jhere is every indication that nobody fishes to assume the responsibility c<f investment and the onus is being passed on wherever possible. In spite of these conditions, there appears no'reason to doubt that capital again return to its former level in earning capacity. If interest rates have been high in the past, there is ample evidence that the pendulum has swung l °o far in tlio opposite direction.