The Wanganui Chronicle. THURSDAY, OCTOBER 31, 1946. IS AN ECONOMIC DEPRESSION DEVELOPING?

Wanganui Chronicle, 31 October 1946, Page 4

The Wanganui Chronicle. THURSDAY, OCTOBER 31, 1946. IS AN ECONOMIC DEPRESSION DEVELOPING?

'THE fear that an econoini: depression is developing is present in the minds of many people. This fear has been fed in the United States of America by the cautionary advice which has recently been issued by (lovOrnment and financial experts. Mr. Mari'iuer Eccles, chairman, of the Federal Reserve Board, has stated that prices for urban real estate and for farm property have in many areas exceeded levels which can be maintained. Mr. M. T. Harle, chairman of Ihe Federal Deposit Insurance Corporation. embracing 13,526 insured banks, has intimated that banks should dispose of all real estate except that required for their own premises and should exercise caution in granting loans, particularly those secured on real estate. This advice is sound and. if followed, will head off the worst effects of n general depression. The United States experienced in 1921 a downward movement which originated in Japan. There the economy of the agricultural section depended upon the export to the United States of raw silk to maintain a balanced farmers’ budget. When the stoppage occurred in the demand for this product in the United States— the principal market for Japanese raw silk— Japan’s income immediately contracted and her imports were reduced. This brought about a slump in the price of wool and New Zealand felt the full force of this adverse wind, save in respect to butter, which maintained its price. - The 1921 depression, however, soon passed and the people of the United States came to believe, and were encouraged to believe, that their country had attained to an “era of permanent prosperity.’’ The country had the greater portion of the gold of the world, the finest industrial equipment, and the largest domestic market, and the people with the highest spending power. Encouraged in this belief people went ahead buying and bidding up values, particularly in real estate. This belief in the “era of permanent prosperity” was so great that the banks lent their depositors’ money to brokers in New York and on real estate all over the country. When the Great Depression' broke in 1929 the losses on the Stock Exchanges compelled depositors to withdraw their money from the banks. These institutions, having loaned the money on longterm mortgages, were unable to meet their obligations as they fell due, resulting in 26,000 banks with 668 million dollars’ liability failing in 1930, and 28.000 banks failing tn the next year with 736 million dollars liabilities. In 1932 32,000 banks failed with liabili ties totalling 928.000,000 dollars. In the same years the. number of hanks which suspended payment but which eventually re opened totalled 112.000 in 1930, 208.000 in 1931, and 108,000 in’ 1932. Thi disastrous “optimism” of the era of permanent prosperiry. the period wncn it was believed that economic and financial manipulation could be employed to offset a world-wide depression led to the worst banking and economic crisis in the history of America, which country cxpei;ie’n - ed the deepest and longest depression of any developed ■•onniry in the world. If the same “optimism” obtained to-day in thj United States as prevailed up Io 1929. if the belief that the eouidry eotild be insulated against depressions (as was claimed by N’iw Zealand’s Mr Savage io be possible), then the same disasters would follow as have occurred in the past It is precisely because the financial authorities of America have benefited by the experience of the past that they are not in the unhappy position they occupied in 1929. If bankers will refrain from making credit available to the degree that people become “credit happy” and go in for purchasing property beyond their own means, then the results from a reaction in world business trade will not be as harmful as they would be if a reverse policy were pursued. It does not follow that, because the warnings have been issued against inflating the real estate market, a general depression is round the corner. The higher prices rise the sooner will the present consumer-demand become exhausted and the greater will be the reaction. If, however, prices can be kept from rising the consumers will be able to sustain their demand for a longer period, because their money will go further, and the subsequent reaction will be less harmful all round. The problem which now confronts monetary authorities in many countries is how to pipe off the excess spending power into channels that will not prove to be harmful. As workers become available they should be absorbed into increasing the efficiency of industry, in reducing prices by enlarging output, and in refusing to bid against each other to advance the price of property. Bankers are powerless to do much more than to be selective to a higher degree than normally in advancing loans and in refusing to engage in bidding up the market for real estate or Government bonds or other equities. It is not the bankers who can engineer either a boom or a slump; they can aggravate the one and intensify the other. Governor Eccles and those associated with him are, by giving timely advice to the bankers of the United States, taking appropriate steps which, if heeded, will do much to keep the United Stales on a more even keel than will be possible if that advice is ignored.