WELLINGTON NEWS

Hokitika Guardian, 1 November 1929, Page 2

WELLINGTON NEWS

frenzied finance in u.s.a

(Special Correspondent)

WELLINGTON, October 30,

During the past two years there have been several breaks on the New York Stock Exchange, some of them of rather a serious nature, involving heavy losses, but none of them have been so severe or so far' reaching as the slump just experienced. The paper losses must be tremendous and perhaps it will go down in history as the Three Billion Dollar Stock '■ Exchange crash. To understand and appreciate the present position it is necessary to go back to 1925. With the view of helping Europe to restore the. ,gbld i; standard and to facilitate the export of gold from the United States the Federal Reserve Banks reduced their re-discount rate to 3:j- per cent:

This was an' altruistic gesture and was no doubt fully appreciated in Europe. New York was then the cheapest money market in the world and borrowers flocked to that centre and raised many millions of dollars in loans which /enabled the Americaii Eagle to screech: “We are the world's bankers.” This cheap money rate had other effects. It resulted in the export o'f gold, and it led to an incrense in speculation on the New ork Stock Exchange, and neither of these movements caused any concern on the part of bankers or financiers. . The increase in speculation naturally caused the shares or common stock, as the American term ordinary shares, to advance. Coincident with this advance the big corporations or joint stock companies began to show big profits which was ’inevitable iyith expanding domestic trade, and with bigger profits they were able to pay bigger, dividends, Thus another and a stronger reason existed for the shares to move up wards.

The fact that the people were making money and that the outlook was for further appreciation in. share values drew the general public into the speculation. A good deal of speculation is: done on margins for which purpose brokers require extensive credits...- As the number of speculators, and they did increase to an enormous extenp, brokers’ demands for loans increased and the rate of interest. At first the interest rate was normal about 4 to 5 per cent., but- as the demand expanded the rate on call loans expanded. Banks outside otf New Yoi’k seeing chances of earning comparatively largeprofits by lending to New York brokers at call, rushed in all their available funds which' were loaned out promptly. But this did not keep the rate down, for .volume of speculation continued ■to grovK,.: more funds were needed and- mpre funds were, obtained from big companies throughout the States and from Europe. The loans to brokers appears not to have gone beloVr £1,000,000,000 and at times greatly exceeded that while tho rates of interest for call money, that is loans that can be called up at any hour of the business day, never went below 6 per cent and mostly ranged from 7 to 10 per cent. The higher the rate went the greater the stimulus to the gamble for more money poured in from everywhere to take advantage of the high rates, and in this there was verification of the old saying that money like fvater will find its own level. The Federal Reserve Banks became alarmed of affairs for their well-ltlid schemes were going astray. To check the speculation the rediscount rate was raised' three times last year, a } per cent at a time, from ,3$ per cent to 5 per cent. But this failed in its purpose. The “bulls” and “bears” continued the game, the latter getting a look in now and again, resulting in temporary breaks with feverish selling and breakdowfi of the tickers. The position in New York ever since the beginning of the year has been an anomalous one and we have witnessed the richest country on earth paying +he highest interest rates on temporary loans.

At last the position became serious and could not be allowed to continue. Interest rates were "going up in all directions, even the American Government had to pay more ifor its loans. In the meantime gold was being withdrawn from London for export to New York to strengthen the gamble. The Bank of England raised its rate from 44 per cent to 5£ per cent. This temporarily checked the outflow of gold, hut it was resumed in July and August, France arid Germany joining the United States in relieving the Bank of England of its metal reserve, and New York made the position worse for London by raising the discount rate 6 per cent which made New York the dearer market.

This advance took place in August. The Bank of England tried very hard not to raise its rate, but on September 6 the Bank was forced into action und the rate was raised to per cent. There were immediate repercussions in Europe for many central banks raised their rates. The exchanges moved in (favour >of London, the export of gold was prevented and under the combined influence of a 6 per cent rate in New York ,and a rate in London the senseless and frenzied speculation is smashed. Money instead of being poured into New York is being rushed out. It was the psychological moment for the;“bears” to operate and they have .done so with some effect. The debris has now to be cleaned up and that will affect the whole financial world.