THE WAIPA POST. Printed on Tuesdays, Thursdays, and Saturdays. SATURDAY, 5th NOVEMBER, 1932. INTEREST RATES.

Waipa Post, Volume 45, Issue 3251, 5 November 1932, Page 4

THE WAIPA POST. Printed on Tuesdays, Thursdays, and Saturdays. SATURDAY, sth NOVEMBER, 1932. INTEREST RATES.

PROFESSOR BELSHAW'S suggestino that New Zealand interest should be lowered, and the simultaneous announcement that, as from Ist November, the Australian Commonwealth Bank is to reduce the rates on fixed [ deposits by \ per cent, recall a discussion by Mr J. M. Keynes in the September number of the Economic Journal, on the long-term rate of interest in relation to the British Conversion Scheme, a discussion which incidentally may throw light on the recent decline in the external value of the pound sterling. It has been widely believed that the success of the British Government's recent conversion scheme was dependent upon the willingness of investors to make a patriotic sacrifice. As Mr Keynes put it, public opinion believed that "the whole thing is a bit of bluff which a fortunate conjunction of circumstances is enabling us to put over ourselves and one another." In Mr Keynes' opinion, this view is erroneous. The new 3* per cent rate is a true "economic " rate of interest, which corresponds profoundly to the character as well as to the necessities of the underlying facts. The significance of the conversion scheme lies mainly in the fact that it is likely to accelerate general public recognition of the fundamental changes in the capital market which justify the lower long-term rate of interest. In other words, the relation between the supply of, and the demand for, capital is now such as to justify a much-reduced interest rate, but lenders have been so slow to recognise the change that the rate is still maintained at an unduly high level and the recovery of industry is thereby retarded. The abnormality of the relation between the supply of, and the demand for, capital at current interest rates is indicated by facts like the steady accumulation of fixed deposits in New Zealand banks—an accumulation which, if one reasoned on the analogy of the accumulation of stocks of wheat, rubber, coffee, or other raw products, must certainly sooner or later depress the interest rate. The sponsors of the conversion scheme, perhaps only half-consciously, realised the nature of the change in the conditions of the capital market, and the success of the scheme is therefore a gonsirleiivS measure of the very first -importance, quite apart from the easing of the burden of the National Debt. The connection of this discussion with the recent weakness of the sterling exchange follows from the fact that, stimulated by the conversion loan, the British capital market has realised the change which has occurred in the true economic interest rate more promptly than the capital market in the United tSates and elsewhere. Interest rates are, or were, still high in America, with the resultthat in July, at the time when Mr Keynes was writing, anomalous and quite unprecedented disparities were recorded between the yields on sterling securities quoted in London and the yields on comparable dollar securities quoted in New York. Australian sterling 5 per cent loans, for example, were selling in London at about 102, while similar dollar 5 per cent loans were quoted in New York at 72. Corresponding disparities were observed in the price of wellsecured industrial and public utility fixed interest securities. This created a powerful magnet for attracting money to New York, the full effect of which was not being felt, mainly on account of the extreme distrust recently felt by many investors towards America —a distrust which at no time was completely justified and was already showing signs of disappearing. Sooner or later, a steady steady stream of British purchases in America might be expected to take | advantage of the unusual discrepancy between the interest rates in the two countries, and such a steady stream would certainly place a great strain upon the sterling exchange. It is possible that this is what has been occurring during the last few weeks. The moral in that event, is that the depreciation of sterling should cause no alarm because it is the inevitable, though temporary, conseqeunce of a policy which is fundamentally sane and healthy. It would be unfortunate if the authorities were to take fright, k and attempt to stay the exchange I movement by reversing the trend of interest rates. "We must stick to our policy," says Mr Keynes, " and be prepared, if necessary, to sit quietly through a period of exchange weakness, which may well be calculated to make us nervous, without seeking to redress the situation by any deflationary measures whatever!." The fall

in the value of the pound is an inconvenience which must be suffered as a contribution to the more important cause of convincing the world as a whole that interest rates are now being kept above tehir proper level. The possibility of unduly sticky interest rates should be readily appreciated by New Zealanders on whom the power of the Arbitration Court to retard necessary adjustments in laboitr costs has been frequently impressed. The followers of Mr Keynes might argue indeed that interest rates are often likely to be even more sticky than wage rates, for, while labour, which seeks too high a price seldom has any alternative source of employment to which it can turn for temporary support, the owners of capital who are unwilling to invest their money permanently at low rates can always turn to the banks' fixed deposit facilities, and derive therefrom a modest but assured and steady income. According to Mr Keynes, " a reduction of the long-term rate of interest to a low level is probably the most necessary of all measures if we are to escape from the slump and secure a lasting revival of enterprise," and it would be a matter for regret if the banks, justly resentful of the ill-advised and ignorant attacks which are made upon them from many quarters to-day, were completely to ignore the constructive suggestions of more sympathetic and better-informed critics.