WELLINGTON NEWS

Hokitika Guardian, 21 May 1931, Page 5

WELLINGTON NEWS

CHEAPER MONEY

(Special Correspondent.)

WELLINGTON, May 19

On Thursday of last week the Bank of England minimum discount rate was reduced from 3 per cenf to 21- per cent and the lowering of the rate was not unexpected, for when the Federal Reserve Rank of New York reduced its rate from 2 per cent to 1£ per cent a reduction of the Bank of England rate was inevitable. . Money is now exceedingly cheap in the principal monetary centres of the world for the rate in Paris is 2 pei: cent. The cheapening of money is an effect nner not a cause ,it is the effect of the dristic decline in commodity prices and the general economic depression. There is a lack of confidence on the part of investors and business men. They are timid and nervous. Traders are buying from hand to mouth because they cannot make certain of commodity prices holding and' they have no desire to be caught with large stocks in a falling market. Investors are equally shy for they have seen prices of giltedged securities tumble down. Cheap money is an effect of the slump later on it will be the cause of trade revival. In London the reduction of the Bank rate meats lowering of the deposit rates by the trading banks also the lending' rate .and both these footers m tlife encV operate to bring about an improvement in trade, The holders of fixed deposits will not long be content with 1£ per cent or 2 per cent, for their money and will be. bound* to look around for investments that will yield them a better return.

As they are still lacking in confidence in respect to the general class of investments it is prolmbl that they will for the present confine themselves to gilt-edged scurities, and therefore we may expect to see British Government stocks advance. The Chancellor of the Exchequer will no doubt take the opportunity of finding as much of the floating debt as pos sible at a low rate of interest. 'The result of the reduction in the lending rate following on the fall in the Bank rate will give traders some encouragement to get in more stock or for manufacturers to secure more raw material.

Flithernuye. lending rates are low costs will be lowered and prices ot finished produces accordingly. The point is that the low prices of money will be seized upon by the adventurous to embark upon undertakings that have been held in abeyance owing to dear money. Confidence must precede any trade activity and that will take time.

The Bft.uk of. 'Ragland, rttto has Stood at* 2i pci l cent, on prtvlou* occTisions, and it is quite ]Tollable that the price will vmnk to % per cent. This is the traditional low rate of the Bank of England and when it reaches that level money will be regarded as exceedingly cheap. The last occasion on which there was a 2 per cent. Bank

rate, was in 1896. 'The rate was reduced from 2£ per cent, to 2 per cent, on February 22, 1924, and that rate was maintained until September 10, 1926, a period of 931 days which is the longest time for which any discount rate of the Bank of England was maintained.

There is .strong presumptive evidence that the rate will drop to 2 per cent. aju c ] that before very long, a nd when it happens we are certain to have many politicians and not a few ill-informed business men suggesting that the trading banks in the Dominion should drop their rates. The overdraft rates in the Dominion will probably be reduced, but that is not just vet. The rate quoted by the Bank of England is for discounting the finest trade paper with prime names. The Bank of England does not do a business with private people—it is a central bank or a bank for bankers. Banks can discount bills with the Bank of England, but such bills carry the endorsement of the trading bank. They are what are known as short-dated gilt-edged securities, for it is very seldom that an acceptance mbs beyond 90 days, generally less. Our banks cannot vary their rates until the economic position improves and improvement will take some time. Money is likely to be cheap ui the principal monetary centres for per Imps two years, that is to say a 8% bank rate will rule for that period. That will enable the world to make adjustments and to wind up this and that concern which have shown no right to continue in existence. What wo must keep in mind is that becaus* motley is cheap in London, the slump is by no means over. The era of cheav money gives us and the whole world breathing tittle to put our respective houses in order. This latter task i> distasteful, but it has to be done.