FINANCE—PUBLIC AND PRIVATE,
A COMPLACENT CHANCELLOR.
PUBLIC REVENUE IMPROVING—CFfRAP MONEY AND THE NATIONAL CREDIT—THE LOWER BANK RATE—MARKET CONDITIONS.
[To TKI EDITOS 01 TM " SiNCTATOR."] SIR,—In my letter to the Spectator of July 8th I endeavoured to do full justice to the more satisfactory position disclosed in the National accounts for the first quarter of the current fiscal year. I duly recorded the fact that the Revenue was, so far, exceeding expectations, and that the reduction in expenditure was greater than had been looked for in some quarters. To-day I have, unfortunately, to call attention to the fact that already this slight improvement in the financial position seems to be producing a light-heartedness in Government circles which, having regard to all the experience of the past, gives ground for fresh apprehensions. Only last week we found the Government passing measures extending the operations of the Unemployment Insurance. Act—an extension which adds quite a considerable item to Supplementary Estimates for the current year—while. on Friday, in the House of Commons, Sir Robert Horne, during the discussion on the Finance Bill, adopted an air of optimism and complacency concerning the National credit which scarcely befits the present conditions and the weight of taxation still borne by the community. * * * * The attention of the Chancellor of the Exchequer had been called by the Leader of the Opposition to the fact that during the past three years something like £1,100,000,000, representing the sale of War Assets, had been applied, directly or indirectly, to Revenue purposes, although these assets had originally been mainly financed by loans, therefore making it imperative that the proceeds of the sales should have gone to Debt redemption. At the present moment the Government make great play with the fact that monetary conditions have enabled them to effect a really substantial reduction in the Floating Debt of the country, as expressed in Treasury Bills and Ways and Means Advances. No one will deny the advan- tage of very short-dated debt having been converted into somewhat longer-dated bonds, but nothing can alter the fact that the many hundreds of millions, representing the sale of War Assets, have been the means of fostering gross extravagance in the National Expenditure and that in spite of the reduction in Floating Debt the decline in the Debt as a whole during the last year or two is insignificant, while, as compared with the date of the Armistice, there is actually a substantial increase.
It is, however, Sir Robert Horne's complacency with regard to the state of the National credit to which the. City is inclined to take some exception. The Chancellor was challenging the view expressed during the second reading of the Budget Bill that the suspension of Sinking Funds would affect the National credit and, speaking last Monday, he said : " All these gloomy prognostications have been absolutely falsified. Our credit to-day is not only higher than it was a year ago, but higher even than it was three months ago." Presumably, Sir Robert was referring to the fact that during the period mentioned there has been a very great rise in Government securities, and, indeed, in all investment stocks. No one, however, knows better than the Chancellor of the Exchequer the reason for this rise in securities which he ia pleased to describe as an enhancement of the National credit. The cause is the unexampled commercial depression of the country, which has so cheapened money rates as to drive credits into investment securities. Should trade revive and the economic position of the country really improve, nothing is more likely than a corresponding advance in money rates with a material setback in all investment stocks. Such an event,. I imagine, however, will scarcely be regarded by Sir Robert Home as indicating a fall in the National credit ! Similarly, I suggest that we cannot consider the present rise, in. securities as expressing an appreciation in National or Government credit, but must rather regard it as one of the results of those unfavourable economic conditions I have just referred. to. In all fairness, however, and with due regard for strict accuracy, I may add that hopes of economy in National Expenditure have probably aided the rise in investment stocks, and to the extent to which those hopes are hen Red will there be a real enhancement of the National credit.
* * * By way of emphasizing the effect of the unfavourable trade conditions already referred to I may mention the further reduction which has taken place in the •Bank Rate to 3 per cent. Here, again, we have an influence making not only far some possible further improvement in gilt-edged securities, but one directly useful to the Government in helping it to obtain its money cheaply on Treasury Bills. Thus, whereas a week previously three months Treasury Bills had been sold in the market on the basis of about. 1 it per cent., they were sold on the day following the reduction in the Bank Rate on as low a basis as 1* per cent., so that on the standard of reckoning employed by the Chancellor of the Exchequer the National credit appre- ciated marvellously within one week ! Undoubtedly the main cause of the lower Bank Rate is to be found not only in the continued trade depression, but in the scant signs of any important revival in the immediate future, while monetary conditions in the United States are also excep- tionally easy, so that the present reserve ratio of the Federal Reserve in the States is now over 77 per cent., against 61 per cent. a year ago, while the gold holdings in America are being further increased by large shipments from this side in connexion with the service on our debt to America. It is not surprising, therefore, to find that the market is discussing the likelihood of a further reduction in the Federal Reserve Bank Rate of discount.
Nor is it very surprising that many should see in the cheapness of money an argument for a further rise in securities rather than for an early revival in trade. The process of reasoning is simple. Holders of credit balances, and especially banks which have to pay interest on their deposits, are in the position of being compelled to employ their resources, and, with trade demands so slack, high-class investment stocks, and especially the short-dated issues, offer almost the only opportunity at the moment for such employment, while it is felt that it is almost useless to expect any important revival in international trade until the economic outlook in Europe has improved. Whether before such improvement is established there may be some serious financial catastrophe on the Continent, with far- reaching effects, is a matter which seems to give little concern to the optimists, who imagine in somewhat vague fashion that somehow or other matters will sure to be straightened out. It is true that the Hague Conference, like all previous conferences, has proved an utter failure, but France is said to be disposed to show more leniency to Germany in the matter of Reparation payments, and in connexion with those rumours there has been some slight improvement in Continental currencies during the past week. The Stock Exchange, therefore, continues to look on the sunny side of the situation, and during the past week there has been a continued improvement in silt-edged securities, with a further rise in Home Railway stocks and a tendency even for some of the Speculative markets to revive a little. All the same, I am inclined to think that it would be well if the present optimism were tempered with a certain amount of caution. There are at least two points in the situation upon which I am. inclined to lay some stress. One is the fact that any rise in money rates will show that large lines of investment stocks are being carried upon borrowed money, and the other is that in influential quarters where six months ago a very con- fident view was taken as to the prospects of gilt-edged securities, those same quarters are now disposed to take a more cautious view of the situation.—I am, Sir, yours faithfully,
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