THE HONEY MARKET.

Otago Witness, Issue 3097, 23 July 1913, Page 37

THE HONEY MARKET.

STOCK EXCHANGE DEPRESSION. POSITION IN LONDON. V\ idling in the Daily Mail on June 5, Mr Charles Duguicl (the (inancial editor) made the following comments :—- This severe depression from which the Stock Exchange iias been suffering is no niere incident in a speculative market. It is the symptom of a. much more serious and widespread state of affairs. Not merely for the Stock Exchange, but for the financial and commerc.al community at large, and not only in this country but throughout the civilised world, a serious economic crisis has arisen. In the picturesque language of personal finance, the world at large lias outrun the constable, and with all its prosperity it is short of ready money. To put it in another and, perhaps, more accurate way, the world has enlarged its financial and commercial activities to such an extent that there is not enough money to go round. And by money is meant not merely coin, but whatever is equivalent to coin in our highly complex modern financial structure, whether it be bank-notes or an amount at the bank. As everybody knows nowadays, a vast system of credit, has taken the place of coin as a medium of exchange. That credit can be manufactured. Our banker can give us a credit of iGIOCO without our passing a single halfpenny into his till, and that £IOOO is to us as good as gold for financial and commercial uses. That, with various elaborations, is what goes on in financial transactions throughbut the world. But there are limits. The theory is that all credit repnsents so much gold and can at will be converted into gold. But there is a point beyond which the manufacture of credit involves a danger of upsetting this eminently useful theory. Custom in some cases and leg station in others prescribe certain restrictions. States by legislation ordain that notes shall not be, issued beyond a certain amount with gold ready to meet them if need be. Groat London bankers by custom do not let their cash balances fall below a certain rough percentage of the credit they have manufactured. Broadly speaking, the world has reached the limits of this wonderful creditmanufacturing system. Two principal causes have contributed to this state of affairs—world-wide trade activity and world-wide growth of .State expenditure. Trade is no longer barter pure and sdnplo; it has so bo financed. And the enormous expansion of the monetary value of tieworld's trade, even though a great part 1 of it he due to higher prices, involves an | enormous expansion in credit manufacture. The bulk of this expansion occurs privately between trading firms and their bankers, but in the case of public companies it comes to light iu the form of those new issues of capital which have been su prominently in evhh nee recently. But trade is nor tire only thine that needs to be (ilianeed. There are the Balkan war, | tin new ( 'him se Republic, the liiMirara e Act, j our own and Germany's Dreadnoughts, j ihe great Continental armies, and arina- j incur schemes —all these conn.* within the I second great cause of credit manufacture, j the growth of .State expenditure. At home wo are managing to avoid the iAmic of big ( State loans, but that, dors not entirely avoid i rite manufacture of credit. The burden is shifted On to the shoulder? of the individual j citizen. Omtribut nns to the Insurance Act j whether by the purchase of stamps or brother forms of tax-paying, increase the l financial requirements of the trading torn- ! mindly and help to inerea.se the demand for tile manufacture of fresh credit ; and <o do j all other bra itches of increase d expenditure j by the State. In the oversea dominion 4, win re the less j advanced eta ire of development m ei s-hates j ex pei ul it are for works for wide], provision | cannot be made out of r< v< Hue. rl;■ • creation I of fresh credit for State expenditure is paten' to ah in ti:e form of new loan issues. | But tlie .di'iCT <,f State expenditure as n ! •'■redit nianuf.ieturn- i- most obvious and has become mo-t critical in G* i mar.y. In this ca>e we have a highly developed State embarking upon scln nice involving increased expenditure to flu altogether unprecedented amount For years past Germany, i in le'r efforts lo maintain, not only a great, ! standing army, hut a!- -1 to rival the British j navy, has been forced lo issue large loans 1

to preserve a balance in her national accounts. While such loans relievo the individual taxpayer for the time being-, they merely put off tlie evil dav and make the burden all - the heavier for future generations. Nevertheless the German Government puts no check upon the country's expenditure. On the contrary, in the naval race with Great Britain it is incurring more and more expenditure, and in the armament race with France it is adding millions upon millions to its obligations at one stroke. As has been said, the manufacture of credit is most patent to the general public when it takes the form of new capital issues, whether on the part of commercial companies or of Governments: and the expansion of this kind of credit has been only too obvious since the beginning of the year, because it has been so plainly beyond the monetary resources of the community. Instead of being taken by the general investor ns a more or loss permanent investment, the bulk of those new issues has gone to professional underwriters. These underwriters have taken the new eccuritios not primarily as investors, but as financiers. In order to pay for them they have to use the cash balances that already form their working capital or obtain credit from their bankers by pawning the securities. Here again there is the manufacture of still more credit. All this would bo dangerous enough in time of peace, but it has become still more so because of the strained condition of European politics. Particularly in Germany and France, the Balkan war and the possibilities of complications with which it has been fraught have led to a hoarding of money. Far from being inclined to extend their operations, financiers have tightened their purse-strings and so diminished the supply of the wherewithal that forms the basis for credit manufacture. The crisis is world-wide, but us the world’s financial centre London reflects every phase of it, and as the market for the purchase and sale of credit the Stock Exchange by its movements brings home to the public the evils of the crisis. Stock Exchange business, like mercantile business, has to be financed. The deficiency of money due to the excess of credit manufacture inevitably means the restriction of the financial facilities afforded to those who operate in the stock exchange. If Berlin has manufactured too much credit for State expenditure it reduces the amount of credit, for instance, that it has extended to those who have bought Canadian Pacific shares with borrowed money. In short those who lent the money demand its repayment, and the shares have to be thrown on the market in order to meet the demand for repayment. As with Canadian Pacific shares, so with every class of security. The great mass of securities with which underwriters have been saddled involve a continually increasing burden as the instalments on them become due. There comes a point where fresh credit to finance this burden can no longer bo obtained —the banks will grant no further loans. The only alternative is to throw these or other securities on the market. This brings a fall in prices which necessitates further restriction of credit, with further unloading of securities, and so the depression accumulates. The hopeful element of the situation is that in one respect it brings its own remedy. With lower prices for securities and a general restriction of credit, a check is put upon credit manufacture. True, this may hamper trade: it may curb the appetite for armaments; but it provides a remedy for the financial crisis, although the remedy is drastic.