RATES OF INTEREST

Nelson Evening Mail, Volume LXIV, 2 January 1931, Page 3

RATES OF INTEREST

IS FALL IMMINENT? EFFECT OF INVENTIONS CHAMBER. OF COMMERCE VIEW Some economists attribute as part cause of the present world-wide depression the high rates of interest ruling for all kinds of borrowed moneys. In the Auckland Chamber of Commerce Journal appears an article, headed: “Is a Fall in Interest Bates Imminent?” which deals with this vexed question. “One of the most striking economic differences between the post-war world and the. pre-war world is to be found in tlie high level of the market rate of interest for long-term loans,” says the writer, “As a rough generalisation, comparing securities of approximately equal risk, etc., Mr J. M. Keynes, the wellknown English economist, has latel- estimated that the long-term rate of interest in England is nearly 50 per cent, higher to-day than it was 20 years ago, thoygh this estimate has been challenged in some quarters as being too high.

REASON—MUCH POST-WAR INVESTMENT

“The reason for this change beyond a doubt lies mainly in the very large volume of investment reouired on the cessation of hostilities in 1918 to restore working capital to a peace-time basis. Now, the interest on working capital is rarely a large part of manufacturing costs, and when the demand for manufactured goods is keen and selling prices are satisfactory it is a matter of some indifference to manfacturers just what rate of interest they pay to finance their working capital. There existed an acute need requiring raoid satisfaction quite ready to pay a high rate of interest. At the same time, there was war damage to" be repaired and arrears of housing, public utilities, etc., were clamouring to be made good. “Every major series of inventions has the effect of creating a demand for further capital to exploit for profit such improvements. Now it so happened that about this time rapid developments based on the use of electricity (such as radio, etc.) and on the use of the internal combustion engine for road transport were calling for extra capital of just this kind. These and other forms of expansion in fixed capital enterprise served to maintain the actual rate of interest to some extent after the wardepleted fund of working capital had been replenished and war damage, etc., had been made good. “BIDDING UP” POLICY “Since the restoration of some semblance of the gold standard, moreover, ‘those central banks which had entered upon the new responsibility of maintaining gold parity were naturally nervous and disposed to take no risks—some of them because they had been just emerged from currency catastrophes attended by a total loss of credit; others (especially Great Britain) because they had returned to the gold standard at ,a dangerously high parity which might prove inconsistent with their existing domestic equilibrium. This nervousness on the part of a number of central banks naturally tended in the direction of a degree of credit restriction which was not truly called for by the real underlying economic facts. “Mr Keynes, moreover, considers that while the high rates of interest in the early post-war years were justified because there were outlets in genuine investment that could afford to pay a high rate, the rates had been kept too high during the last year or so because various groups of ‘artificial’ borrowers (Australian Governments constitute one of them) have been bidding up for loans. As an outcome rates of interest have been too high for purposes of genuine new investment; with the result that the level of current saving is now considerably higher than the level of new real investment, and there is an unusually wide gap between the ideas of borrowers and the ideas of lenders regarding the level of interest rates that is appropriate to present conditions. '■ “It is extremely doubtful whether borrowers for new real investment will come forward on a sufficient scale until there has been a very great fall in' the rate of interest - for sound borrowers bn long-term. But once there is such a fall there must surely be an immense volume of enterprise which will be attractive to borrowers on the new terms available from lenders: and when this comes about the present slump will be largely a thing of the past.”