The Cheap money era: how long will it last?

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Part of The American Chamber of Commerce Journal

Title: The Cheap money era: how long will it last?
Creator: Richards, C. S.
Language: English
Year: 1937
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Abstract: Continuing the survey of world conditions.
Fulltext: January, 1937 THE AMERICAN CHAMBER OF COMMERCE JOURNAL 33 The Cheap Money Era: How Long Will It Last? By Professor C. S. Richards Continuing the Survey of World Conditions TWO FUNDAMENTALS Now there are two fundamentals for a rising world price level—the desire (and the will) that it should rise, and the means to make it rise, that is, an adequate supply of money. Both are essential: desire without the means is vain, and a short-lived boom is all that could result. The means without the desire merely implies stagnant money markets and low rates oi interest. There can be no question that desire is there—most countries oi the world are in an expansionist and inflationist mood, though in some cases the idea is less fla grantly decked out and “reflation” is spoken of, though in the end it amounts to very much the same. Granted that the mood is there, are there the means? Has the world the money available to finance such expansion? There can be little ques tion also that it has, and this on two grounds: (a) The fundamental change which has taken place in recent years in the position of “bank money”; (b) The enormous increase in the world’s actual and po tential supplies of gold. (a) With the abandonment of the gold standard in Eng land, to take the outstanding case, the Bank of England is not now under the necessity of maintaining its traditional gold reserves. National monetary policy is expressed through the Treasury (which is virtually now the dominant factor in the money market) by means of the Exchange Equalisation Account. Subject to this policy and its implications, the Bank of England is free to meet the demand for credit without the rigid restrictions which the gold standard imposed and can vary the amount of joint stock banks’ cash within very vfide limits. This non-rigidity in the banking structure is a great improvement in technique, but it does throw added respon sibility on to the central bank. Since the crisis of 1931 these banks have improved technique in other ways so as to safe guard themselves against dangerous developments. 1929 1930 1931 1932 1933 1934 1935 10,412 10,716 10,878 11,559 11,014 10,480 10,773 2,208 2,286 2,396 2,449 2,537 2,916 3,619 1,928 2,102 2,694 3,044 2,949 2,965 3,280 1,085 1,434 1,701 1,990 2,667 4,263 5,650 4,040 4,184 4,702 5,224 6,347 6,715 7,356 19,673 20,722 22,371 24,266 25,514 27,339 30,678 *Record year before the years 1932-35. flncluding the Philippines. 2,108 2,220 2,397 2,600 2,733 2,929 3,287 STILL BUYING GOLD But the fiduciary issue of the Bank of England is still fixed at £260 millions, and the Federal Reserve System must still maintain a reserve ratio of at least 40 per cent. Moreover, central banks are still eager buyers of gold, so that though freedom is greater than previously, it is still dominated by gold. (b) What therefore is the world’s gold position since it still is of the utmost importance? The facts in this connec tion are little short of staggering. 1. The annual physical production of gold continues to rise at a rate never before exceeded in the history of the world. Since 1929 the output of gold has risen by fully 50 per cent and by no less than 150 per cent if valued in currencies which have depreciated by 40 per cent, that is sterling and the dollar. The following table (taken from the Annual Report, 1936, of the Bank for International Settlements) shows the world’s gold production in 1915, the record year before 1932, and each year from 1923 onwards: Year Africa U.S.A.f Canada, in thousands of ounces 1915* 9.096 4,888 918 1923 9.149 2,503 1,233 1924 9.575 2,529 1,525 1925 9,598 2,412 1,736 1926 9,955 2,335 1,754 1927 10,122 2,197 1,853 1928 10,354 2,233 1,891 Russia. Countries for the World »f fine gold in millions of Swiss francs. 1,546 6,146 22,594 2,420 438 4,463 17,786 1,905 594 4,827 19,050 2,041 693 4,592 19,031 2,039 895 4,430 19,369 2,075 810 4,464 19,446 2,083 899 4,206 19,583 2,098 “The probable increase of production in South Africa and Russia alone will lift world production above the 40,000,000 fine ounces mark by 1940.” (“Economist, June 13, 1936.) This increase in production has, of course, been largely brought about by the great increase in price. Assuming that the non-monetary demand for gold and for hoarding in the East is in future to be the same as in 1925-29, namely about 8,000,000 fine ounces, the above figure means that the annual addition to the stock of “monetary” gold may be expected by 1940 to have increased from 10-1/2 million fine ounces in 1929 to approximately 32 million ounces. 2. Moreover, in recent years there has been a great trans ference of the world’s stock of gold from non-monetary to mone tary uses—from this source alone the world’s monetary stocks have increased from 553.6 million ounces in 1929 to 734.3 million ounces in 1935. In brief, the position is that the ul timate basis of the world’s money has increased by 32.7 per cent, while annual production will soon be sufficient to increase it by a further 4 to 4-1/2 per cent per annum at least. Nor is this increase in monetary stocks confined to the United States and France. Excluding these two countries, the world’s monetary gold stock has increased from 2860 million ounces in 1929 to 316.4 million ounces in 1935, or by 10.6 per cent. 3. But these figures, impressive as they are, by no means tell the whole story. Not only has there been a great increase in the weight of the monetary gold stock, but its value in terms of paper money has risen. Few countries have definitely de valued their currencies, though in some devaluation seems imminent. The American dollar has been devalued to 59.06 per cent of its former value, the belga to 72 per cent and de preciated sterling stands at about 62 per cent of its par value. It is impossible to say what the ultimate devaluation will be. On the basis of devaluation to 66 2-3 this will involve a rise in the price of gold of 50 per cent (the present rise in the sterling price, say 140s., represents an increase of about 64.7 per cent). The 553.6 million fine ounces of monetary gold in 1929 at 85s. per fine ounce were worth £2,353 millions. The 734.2 million fine ounces in 1935 at 127s. 6d. (50 per cent more) would be worth £4,680 millions. The annual production available for monetary use in 1925-29 was worth about £44.5 million. The annual production available for monetary use in 1940 will be worth nearly £205 million. In other words, the world’s monetary stock of gold has increased since 1929 not by 32.7 per cent (that is from 553.6 to 734.3 million ounces) but by 98.9 per cent (that is from £2,353 to £4.680 millions). If the present price be taken, i.e., say approximately 140s per fine ounce, a rise of 64.7 per cent, the figure is not £4,680 but £5140.1 millions, and the percentage increase not 98.9 but 118.4. 4. Nor does the above complete the tale. Many countries have reduced the legal ratio of gold to liabilities, for example, South Africa from 40 to 30 per cent. No figures are easily procurable, but it seems safe to say that throughout the world as a whole, since 1929, the increase in the monetary stock of gold has been 120-125 per cent. 34 THE AMERICAN CHAMBER OF COMMERCE JOURNAL January, 1937 MORE GOLD THAN EVER These figures are significant. They mean that there is a greater available supply of money than ever before in the history of the world. The secular rises in prices in the nineteenth century were caused by just such increases in gold pro duction, for example, by the Californian and Australian discoveries of 1849 and that of the Rand in the nineties. But such increases were as nothing to the present position. “If mone tary history means anything, it means that the world is on the eve of a very large rise of prices.” ("Economist.”) What are the prospects of such a rise even tuating? The position of the "gold bloc” is becoming daily more difficult to maintain—it seems only a matter of time before the last strong holds of deflation may give up the unequal struggle. There are two countries where such an initial impetus as is requisite to start the movement is possible, and of these, one where it is probable. Under present circumstances a rise is possible in England—but not probable. A rise such as is postulated would largely destroy the internal improvement which has taken place and would imperil the foreign trade position. Moreover, both the Treasury and the Bank of England policy is against it, despite the past four years of “cheap money.” But such cannot be said of the United States. Briefly, there is an enormous potential supply of money in the United States as a result of President Roosevelt’s policy since the spring of 1933. Big as it is, it can be greatly increased by the power the President holds of further deva luation from 59.06 to 50 per cent of the previous gold figure of the dollar, that is, a further rise in the dollar price of gold cf 15.3 per cent. More over, whether the Federal Reserve system could control such a situation is, judged by past ex perience, open to question—both desire and ability seem lacking, and the Treasury necessity of having to finance debt deficits is another factor which increases the possibilities of a rise of prices in the U.S.A. Such a rise could obviously not ESTABLISHED 1812 -------- . -------- - Capital (Paid) - U. S. $ 77,500,000.00 Surplus--------- ”--42,500,000.00 Undivided Profits ” 11,991,339.92 (As of Sept. 30, 1936) -------------------------- ----COMPLETE BANKING SERVICES MANILA OFFICE National City Bank Building be confined to America—the British Govern ment, in all probability, would have to let sterling depreciate still further in the interests of its foreign and domestic trade—and a rising tide would soon lap other shores. It does not follow that such a rise is imminent the time element is as usual the unknown factor. In the international field though, as seen already, improvement is noticeable in certain directions, for example, in commodity prices, employment, world production, international debts, etc., but there are still many restraining influences on general world improvement. Tariff barriers and economic nationalism show little sign of relaxation—tariffs still restrict the volume of trade, capital and exchange regulations the flow of international investment funds, and immigra tion laws the movements of population. More over, political tension and uncertainty restrain enterprise and lead to the prolongation of the desire to remain liquid, and the possibility cf a European war cannot be completely discounted. THE CAPITAL MARKET In this respect the position of the capital market in England is significant of a general tendency. Total capital issues during the year 1935 were £182 against £161 million in 1934, and though the former figure is double the lowest year, 1931, it is only half of the peak year, 1928. Moreover, as pointed out by Mr. D. Graham Hutton in Lloyds Bank Limited Monthly Re view for February, 1935, in an article entitled “Recovery and the Rate of Interest,” the share of the total of new non-government issues taken by the local bodies and public boards and cor porations has remained at two-thirds and threequarters of the new borrowings by “mainly pri vate enterprise,” while in 1928 and 1929 it formed but an insignificant fraction. The recovery in England has been, as “The Economist” (June 13, 1936) clearly shows largely confined to that of the industries catering wholly or mainly for the home market, the export trades standing out in “strikingly unfavourable con trast.” This recovery has been conditioned largely by the policy of liberal credits and cheap money, a policy now under general and serious discussion. The strongest advocate, and indeed prognosticator, of lower interest rates and cheap money has been Mr. J. M. Keynes. In an article in Lloyds Bank Monthly Review for April, 1932, entitled “Reflections on the Sterling Exchange,” he advocated and indeed prophesied “lower and lower rates of interest” in erder to counteract the then present deflationary tendencies and stimulate investors “to lend for purposes which involve material risks.” That prophesy has since been amply fulfilled as has already been shown. At the annual general meeting (Feb ruary 21, 1934), of the National Mutual Life Assurance Society, of which he is chairman, he stated categorically that the long term rate of interest would and should fall further in “the interests of the maintenance of employment and the full utilisation of national resources.” (“Economist,” February 24,1934). At the meet ing last year (“Economist,” February 23, 1935) he was still of opinion that “while British econo mic health required a still lower rate of interest, there was less prospect of expecting that to even tuate because British rates were already much below those ruling elsewhere,” and he expressed disappointment “at the comparatively few large scale opportunities for the investment of new savings which had as yet disclosed themselves under the influence of the low rate of interest apart from the new building and electrical devel opments.” At the annual meeting this year, he stated that “a further reduction in the long term rate of interest was urgently called for” and criticised the Treasury for not themselves (judged by recent bond issues) “showing confi dence in the short term rate of interest remain ing low,” since this is of paramount importance in determining the long rate. Indeed, Treasury action would seem to indicate that the period of low money rates may be drawing to a close. Mr. Reginald McKenna, chairman of the Midland Bank, has also himself recently ex pressed the same view (address to Annual Meet ing Institute of Municipal Treasurers and Ac countants at Blackpool, June 18, 1936): “There need be no rise in the cost (of borrowing) to the legitimate borrower if its quantity is increased in accordance with the demand. T"his relative freedom to meet the demand for credit is indeed one of the most striking benefits resulting from our adoption of a scientifically regulated money system and there is nothing inherent in that system, as it now operates, to warrant the sugges tion that cheap money must come to an end as soon as trade recovery passes a given point.” Such a statement embodies an obvious fallacy. Business men arc always likely to regard their' demands for accommodation as “legitimate,” but bank credit is not the same as capital and, in the case of England, it would be idle to think that present population can be maintained on the same standard of living by a somewhat artifi cial policy which concentrates on home develop ment and ignores the necessity for improvement in the export trade, before many depressed in dustries can show any signs of recovery—a policy of too cheap money may dry up some of the sources of savings. Now the current long term rate of interest is a highly psychological phenomenon which must necessarily depend on what expectations are held concerning the future rate of interest. The rate of interest is the price of borrowed capital and IN RESPONDING TO ADVERTISEMENTS PLEASE MENTION THE AMERICAN CHAMBER OF COMMERCE JOURNAL January, 1937 THE AMERICAN CHAMBER OF COMMERCE JOURNAL 35 the equilibrium rate is a figure which equates the volume of savings to the demand for its use, and while no one rate is recognisable at any time, since variations will depend on the risk involved in particular cases, the trend of long term interest rates is so recognisible. Both the demand for and supply of capital are composite factors—but, in general, the greater the level of the na tional income the greater the volume of savings. In recent years in many countries this factor has been greatly influenced by the tendency towards equalisation of incomes, e.g., heavy income tax, death duties and more equitable distribution. The demand for capital is made up of the de mands from governmental, private and industrial uses; governments are everywhere taking larger proportions of the available total, and industry is increasingly providing its own funds by reser vations and re-investments of profits, partic ularly in the large combines, but in England, any way, the field for investment by private enter prise is narrowed both by opportunity and in clination-lessened confidence among business and the restrictions on the movement of capital, together with foreign capital seeking refuge from uncertainty in other parts of the world, seem to preclude much possibility of a rise in interest rates in the near future. It would seem to follow, therefore, in so far as immediate prospects are concerned, that, both from conditions in England, the United States and elsewhere, the low interest rates and cheap money will continue and rates may even perhaps fall further, but that in time the enormous pres sure of the available supply of money will lead to a gradual world rise in prices and values and consequently in interest rates. Such a rise would tend to facilitate a general return to equi librium in the future, but'it may, if it is to be kept within bounds, necessitate measures to neutralise somewhat the factors producing it. THE ECONOMIC OUTLOOK IN SOUTH AFRICA What is the bearing of the above on the po sition in South Africa? There is no need to de scribe in detail the nature and extent of the rec overy in the Union—I have so described it for 1933 and 1934 in an article in the “Economic Journal,” London, December, 1934. But some important figures must be mentioned. The rec overy of the Union has been almost wholly dependent on the great rise in the price of gold and the consequent expansion of the gold mining industry. The following figures, which relate to the operations of the producing gold mines of the Witwatersrand, indicate the altered po sition : Total tons milled... Total fine ounces de clared .................... Total working re venue .................... Tot a 1 w ork i ng c ost s. Total working profit. Revenue per ton milled.................... Working costs per ton......................... 19/3 1932 34,906,000 11,378,000 £48,832,000 £33,526,000 £15,306,000 28/1935 44,235,000 10,565,000 £74,414,000 £41,774,000 £32,640,000 33/8 18/11 Government revenue (direct taxation and profits from lease mines) amounted to approx imately £13,300,000 during the year ended March 31, 1935, whilst for 1932 it was £4,313,000. Working profit per ton......................... 8/9 14/9 Stores consumed.... £16,045,000 £24,829,000 Average number of whites employed.. 23,000 32,000 Average number of coloured persons employed.............. 218,000 273,000 Salaries earned by whites.................... £8,873,000 £12,394,000 Wages earned by co loured persons.... £7,343,000 £9,210,000 Dividends declared. £8,979,000 £16,391,000 This prosperity of the gold mining industry has permeated all sections of the national life, though in varying degrees. Secondary industry has shown marked improvement, and whereas in 1932-33, there were 7,669 establishments em ploying 87,173 Europeans and 105,310 non Europeans with a total salary bill of £21,875,000 and a gross value of output of £90,948,000, the corresponding figures for 1933-34 were 8,180 establishments, 80,647 Europeans, 148,855 non Europeans, £26,399,684 in total salaries and a gross value of output of £111,391,000. Later figures are, unfortunately, not available, but it is certain that the present position reflects an even more favourable situation. While agriculture is still depressed, as com pared with the pre-depression years, there has been a considerable improvement as compared with 1931 and 1932 the increase in commodity prices has favourably affected the position of the farmer though the Union still suffers from the “chronic bucolic complex” which I noted in the previously mentioned article. The improved position is well-reflected in the registration of new companies since gold was abandoned, the figures for 1932 being inserted for comparison—the following figures being the result of a personal detailed investigation of all the companies’ records in the office of the Re gistrar of Companies, Pretoria: REGISTRATION OF Period No. Gold Mining Companies Norn. Cap. No. Other Mining Companies Nom. Cap. No. Manufacturing Companies Total Companies Nom. Cap. N’om. Cap. No. 1932 Jan.-June......... 4 £29,000 13 £355,600 301 £955,247 318 £1,339,847 July-Dec........... ... 5 891,500 10 62,860 269 773,986 284 1,728,346 Total................ 9 920,500 23 418,460 570 1,729,233 602 3,068,193 1933 Jan.-June......... .. .. 42 3,509,752 16 111,465 329 1,355,250 387 4,976,467 July-Dec........... . .. 68 4,598,000 20 38,000 375 1,328,000 463 5,964,000 Total................ ... 110 8,107,752 36 149,465 704 2,683,250 850 10,940,467 1934 Jan.-June.......... . .. 53 10,598,000 24 258,000 543 4,870,000 620 15,726,000 July-Dec........... . .. 76 8,682,000 7 1,059,000 487 1,909,000 570 11,650,000 Total................ ... 129 19,280,000 31 1,317,000' 1030 6,779,000 1190 27,376,000 1935 Jan.-June.......... . .. 16 4,881,000 30 388,000 580 3,305,000 626 8,574,000 July-Dec........... 11 107,000 14 718,000 542 4,201,000 567 5,026,000 Total................ . .. 27 4,988,000 44 1,106,000 1122 7,506,000 1193 13,600,000 1936 Jan.-June.......... 16 657,000 23 2,688,000 673 9,338,000 712 12,683,000 1933-36............ ... 282 33,032.752 134 5,260,465 3529 26,306,250 3945 64,599,467 It is interesting to note the order in which in vestment has taken place, first gold mining, then other mining and more recently secondary in dustries. To date the increase in prices has been very small. Wholesale prices (base 1000 in January, 1934, stood in January, 1933, at 955; in January, 1934, at 1161, January, 1935, at 1045; January, Sport of Kings will Begin with Eclat Soon to open its clubhouse and start a season of horse racing, Santa Ana Turf Club announces the purchase of 100 Australian race horses. Y. S. Day, the racing manager, describes these griffins are measuring not under 14 hands 1 inch and not over 15 hands, 3 to 7 years of age in clusive. Under the auspices of Philippine Racing Club, this new sports group is designed to give racing the popularity it deserves in the Philippines. It intends to provide suitable accommodations for comfort, cleanliness and convenience, so that persons who have always wanted to enjoy the “sport of kings” can do so pleasantly. Santa Ana T\irf Club is a non-stock corpora tion. Without going into lengthy technicalities, this means briefly that it is not operated for profit; that it has no authorized capital, and issues no shares. It is the simplest legal entity that can be organized, not requiring a more elaborate structure since it will be operated under the auspices of the parent corporation, the Philippine Racing Club. There will be two grandstands, one for the general public, the other for club members. 1 he latter will include a tastefully-furnished clubhouse with restaurant, bars, ballroom, lounge, and—for race days—very comfortable seating arrangements. Applications for member ship are now being submitted, and subscriptions for the griffins accepted. 1936, at 1089; and the latest April figure is 1091, a rise over the whole period of 14.2 per cent. The retail (cost of living) figure for “all items” (base 1000 in January, 1914), which stood at 1123 in January, 1933, 1160 in January, 1934, 1157 in Januaiy, 1935, 1157 in January, 1936, stood at 1164 in June last, a rise over the whole period of 3.6 per cent. The future of prices will be discus IN RESPONDING TO ADVERTISEMENTS PLEASE MENTION THE AMERICAN CHAMBER OF COMMERCE JOURNAL 36 THE AMERICAN CHAMBER OF COMMERCE JOURNAL January, 1937 sed shortly. The Budgets since the abandonment of gold have shown successive surpluses. Taxation has been reduced, but while revenue has remained at approximately the same figure (£38 millions to £39 millions), expenditure has shown successive increases (£33 millions to £36 millions). Mount ing Government expenditure may denote pros perity, but it may equally indicate national ex travagance. At the end of 1932 the total public debt of the Union stood at approximately £264 millions. It gradually rose and stood at £274 The figures for imports and exports on visible account are as follows:— 1933 1934 1935 1936 (5 months) Exports 94,328,000 81,495,000 102,126,000 50,912,000 Imports.............................................................. 49,371,000 66,321,000 71,392,000 33,713,000 Balance............................................................... £44,957,000 £15,174,000 £30,734,000 £17,199,000 As a result of the altered banking position, all interest rates have been continuously and drastically reduced, as the following tables show:— Date 2/ 8/32 10/10/32 20/ 1/33 15/ 2/33 23/ 3/33 8/ 6/33 31/ 8/36 Date Prior to 21/ 9/32 12 months. Batea (Payable to Public). t'---------------cent. months. - 3. 4. 5, months. Bank Interest ------Fixed Deposit—per 7, 8 and 9 months. Short Call 4-1/4 4-3/4 5 5 3 3-1/4 3-3/4 4 4-1/4 2-1/2 2-1/4 2-3/4 3 3-1/4 . 1 — 1-1/2 2 3 — — 1/2 1 2-1/2 — — 1/2 1/2 2 — — 1/2 1/2 2 — Interest Rates—Representative Building Society Savings Account Fixed Deposit Rates— Twelve months 5 to 5-1 /2 per cent, according to the Society. 5 to 6 per cent, according to the Society. 4 to 3 per cent, according to the Society. 21/ 9/32 1/ 1/33 Stabilised at 4 per cent for many years. Now reduced to 3 per cent on daily balance. Varies for different societies but above figures typical. But the altered position of the Union is best reflected in the banking figures ana can be set out as follows: Commercial Banks: 1. Advances and Discounts in the Union............................ Total Deposits (Time and Demand)............................. Ratio of 1 to 2.................. Ratio of Cash Reserves to Liabilities in the Union ... A. Reserve Bank: Bankers’ Deposits in Re serve Bank.......................... Gold cash reserves and foreign balances.................. Ratio of cash to liabilities in the Union....................... Whole banking system: 8. Ratio cash to total liabilities to the public....................... 2. 3. 4. S. 5. 6. 7. The banks are choked with funds; building so cieties and similar institutions are likewise find ing it difficult to invest profitably. What is the significance of the above situation, firstly in relation to the world position and prospects as previously outlined, and secondly in relation to the internal position? With reference to the first question: it has been shown already that there are reasons for believing that a considerable rise of world prices is possible and perhaps probable—when it will even tuate it is impossible to say, but while the means exist and likewise the desire, the wiU to use them is braked by political uncertainty, monetary instability and a whole series of international re strictions, so that it is unlikely to happen im mediately. But ultimately, the situation in U.S.A. millions at the end of 1935. Through the con version of loans and other operations during the first three years after the abandonment of gold, the annual public debt charge was reduced by more than £1,300,000. Similar operations will result in a further reduction of total debt by £23 millions and of interest debt charges by £200,000 per annum through the repayment or conversion (to a rate of 3 per cent) of both London and Cape loans, so that at March 31, 1936, the total Union debt has been reduced to £251 millions and interest charges by £1.5 million per annum. ‘May Dec. ’32 Jan. '33 Jan. '34 Jan. ’35 J an. 36 June '36 £38.6m. £36.9m. £35.4m. £46.0m. £46.3m. £47.6m. £54.6m. 70.8 £59.6m. 61.9 £83.8m. 42.3 £87.0m. 52.9 £88.4m. 52.5 £86.4m. 55.0 12.7 16.7 38.2 27.4 35.6 29.9 £3.8m. £6.7m. £28.3m. £21. Im. £28.5m. £24. Im. £7.6m. £8.4m. £17.7m. £23.8m. £26.9m. £23.0m 57.2 44.0 40.1 59.3 56.3 51.8 14.7 13.7 19.0 24.6 26.3 22.7* in particular is pregnant with possibilities and unknown factors, e.g., further devaluation and the arbitrary power of the Treasury to do anything considered necessary in America’s interests. Let it be assumed that U.S.A, does not devalue further (that is, thegold price remains at 35 dollars per fine ounce) and that an internal rise of prices takes place in the U.S.A. Under such circum stances, what would probably be the effect on the sterling-dollar exchange rate and on the price of gold? A rise of prices in the United States would tend to reduce the volume of exports and it is hardly likely therefore, that the Federal Reserve Board would operate through the Exchange stabilisa tion fund to maintain the exchange value of the dollar, nor is it, either, likely to curb inflation, for example by sterilising gold and/or raising reserve ratios, as it can under the new Banking Act of 1935—political pressure would almost certainly make that impossible. But a weaken ing dollar would in all probability reduce the volume of British trade so the Treasury and the Bank of England would probably let sterling ‘go out” too, resulting in a rise of prices in Great Britain. Gold would probably also rise in price n terms of sterling (for hoarding and holding purposes) which would increase South Africa’s export balance on visible account and make the already difficult position more difficult still. But a rise in prices in Great Britain would, since we are linked to sterling, almost certainly ulti mately be felt here. We could, if we wished (indeed we might have to) sever the link with sterling, in which case in the South African pound would stand at a pre mium over sterling. Such a possibility can, however, after the currency and exchange ex periences here in 1931-32, be safely ruled out. So that our price level and our costs would rise and it would be a question of a race between the rise in the price of gold and the rise in the cost level—even if it were to reduce the profitability of gold inining, the present margin between selling prices and working costs is on the whole great enough to preclude the probability of much immediate adverse effect. But a rapidly rising price level is not such a phenomenon as we can gnore or treat with contempt. But what of the actual present position? One certainly cannot, in view of the present banking position, visualise at. the moment higher money rates, but can we go on piling up funds as we are doing? Lower short and long term rates of interest would perhaps stimulate enter prise, but judging by past experience not always of the right kind. What possibilities out of the present impasse are open? They seem to be as follows:— 1. An internal rise in prices—this is in any case possible because of our own internal position, indeed prices are already slowly rising—but it would bring considerable difficulties and in any case raise the costs of production of gold mining and is highly undesirable on other grounds. 2. Investment abroad—this is possible, but investment in what? At the moment it is hardly likely and, in any case, foreign capital is being invested here because of the security offered by our gold mines, and from many points of view this is a welcome sign—the risks of min ing are taken by by others and the more foreign investment in this country the less is anything drastic likely to happen to gold in future. It is as well for us to have—ambassadors and friends at court, even if it is a foreign court! 3. We could reduce tariffs and so increase imports, but in so far as a reduction reduces local manufacture it would not be popular and the im mediate effect would probably be an increase in unemployment, though it must be remembered that imports (goods and services) could be of a sort different from those we manufacture at present. 4. Housing could be improved and other amenities undertaken, e.g. slum clearing—this is already being done as building plan figures show, and any further increase might involve dangers of a lop-sided development and cause (Please turn to page 4%) 42 THE AMERICAN CHAMBER OF COMMERCE JOURNAL January, 1937 THE RICE INDUSTRY By PERCY A. HILL of Munoz, Nucva Ecija Director, Rice Producer's Association Prices of luxury rice range from 1*5.45 to 1*6.55 per sack of 56-1/2 kilos with palay of that grade from 1*2.30 to 1*2.40 per cavan of 44 kilos. Macans from P4.85 to 1*5.40 per sack with palay of that grade from 1’2.25 to 1’2.30. The latest Sai gon quotations for grade No. 2, is 1’7.05 per sack laid down Manilaalldutiespaid, with some stocks of the Saigon imported article still unsold. Strictly speaking there are no Macans on sale in the general market, except in very small quantity. Threshing reports to date in the Luzon Plain show a very fair to good crop according to local ity, but more will be known in next report. A plentiful supply will of course not require any or very little importations for this next year. So far the price of macans has held quite close to the line suggested by the NARIC (Rice and Com Corporation) offerings being from 1’2.25 to 1*2.30 but of course can only be maintained so long as the corporation can buy at the price suggested. So far as is known only about 100,000 cavans of palay have been purchased, the impasse being a lack of local warehouses and of ready cash to make purchases from those who are forced to sell. Very naturally the Corporation will have to face the problems that face ordinary business, with certain privileges. If all the capital primarily set apart for this entity were now avai'able it would go far in stabilizing the minimum price in the principal buying regions concentration of course, being in those districts with large quantities of the cereal for sale. It is understood that the spread of 1’0.25 is for the macan grades, the luxury classes not being very desirable for supplying the masses later in the season. The restricted local amounts proposed to be bought in the smaller producing town will have little or no effect unless these are arranged to buy supplies as offered, in fact, if these are not so purchased it will weaken any effect of what the corporation was established for—the stabilization of supply and price. MANILA HEMP By H. P. STRICKLER Manila Cordage Company During December, the Londqn market atrengthened further as a result of trade demand, and prices advanced steadily on practically all grades. This strength in the London market finally influenced both the American and Japanese markets, where a similar advance in values took place, and the market closed active and stronger on all grades. All local markets responded to the foreign demand, and during most of the time, local values were considerably higher than the pari ties of foreign prices. Continued small pro duction throughout the abaca producing dis tricts lent a special incentive to the higher prices asked by producers and dealers. Prices of Loose Fiber ii November 30th n Manila Per Picul December 31st CD............. 1’25.00 CD....... . .. P28.00 E. 21.50 E 23 00 F. .............. 18.50 F.......... 21.00 I.. ............. 17.00 I.......... 19.00 JI. ............. 15.50 JI........ 16.50 G. ............. 14.50 G......... 16.75 H. ............. 13.50 II......... 15.50 J2. ............. 14.50 J2........ 16.00 K. ............. 13.25 K......... 15.25 LI .............. 12.75 LI........ 14.75 L2 .............. 10.25 L2........ 13.00 Prices of Loose Fiber ih Davao Per Picul November 30lh December 31st F. .............. P18.75 F.......... ... 1*22.50 I.. ............. 18.00 I.......... 21.50 S2. .............. 17.00 S2........ 20.00 JI. ............. 17.50 JI........ 20.50 G. ............. 16.00 G......... 19.00 H. ............. 13.50 H........ 16.00 J2. ............. 15.75 J2........ 19.00 K. .............. 14.50 K......... 16.75 TOBACCO REVIEW By P. A. MEYER Rawl‘:af: The central and upper parts of Isabela province were visit ed by an enormous inundation at the beginning of the month. However, as most of the tobacco of the 1936 crop had already been sold, tobacco losses through wa ter damage affect ed buyers more than farmers. In some districts considerable damage was done to seed beds, thus probably resulting in reduced tobacco acreage for the 1937 cr^p. Comparative ship ments abroad were as follows: Australia and New Zealand..................... Austria and Czechoslo vakia......................... Belgium and Holland. China, Hongkong and Manchoukuo............ France, option other ports......................... Gibraltar....................... Japan, Korea and For mosa ......................... Java and Malaya........ North Africa............... Spain............................. Kawleaf, Stripped Tobacc December o and Scraps Kilos Year 1036 1936 13,768 6,357 1,041.582 128,623 59,816 379,563 1,816,090 14,160 1,816,090 34,966 121,981 2,305 31,067 1,416,811 18,652 383,150 6,286,341 United States............ 129,928 1,009,781 Various......................... 16,363 2,183,129 12,545,690 November 1936........... 156,039 December 1935........... 1,751,051 Year 1935.................... 18,517,176 Year 1934.................. 14,024,614 Cigars: Business with the United States continues lagging due to insufficient shipping opportunity caused by the maritime strike. Comparative figures of shipments to the United States and abroad are as follows: U n ited Other States Countries December, 1936. . 10,503,060 836,010 November, 1936.. 11,151,085 1,697,994 Year 1936. . 164,905,078 14,637,306 Year 1935. . 208,676,183 15,771,427 Year 1934. . 208,268,782 15,352,252 Cheap Money .... {Continued from page 36) anxiety when the building boom slackened off as it probably will shortly in Great Britain. 5. Even more oversea debt could be paid off, but reasons have already been advanced in para. 2 for believing that it is wise to have certain oversea creditors on Public Debt account. 6. New industries might be started, but our market is at present, small and the pace of in dustrialisation can, as previous figures show, hardly be accelerated with safety; moreover, the ultimate effect of a too rapid industrialisation might be to reduce the relative volume of im ports and still further increase oversea balances. 7. There remains one further possibility— a gradual improvement in the economic position of the lower classes, unskilled European, the natives and coloured. There are dangers even here. But a solution partly along these lines seems to offer most possibility of permanency and an improvement in distribution and an ex pansion of the local market is desirable on other grounds. For where an increase in wages in creases efficiency, costs of production should ultimately fall. While therefore I look to a continuance, for some time, of the present favourable position of South Africa, it is obvious that there are dangers. Cheap money looks like continuing for a period—indeed, present banking figures wiSthl, ajmost warrant a further fall in money rateSjCJgrf when the secular rise of prices does take pRtCe, interest rates will also rise, though they may not rise sufficiently in the early stages to offset the rise in prices. It would be idle to prophesy at what price gold will ultimately be stabilised, but we must remember that South Africa is thriving because of the present atmos phere of world distrust, which pushes up the price of our chief product. No country is more vitally concerned than is the Union in a return to stable conditions—some form of the inter national gold standard—and a reduction of all those artificial barriers which impede trade and restrict exchange. At present we are in a highly favoured position but there are signs that the inevitable pressure of events may produce a secular rise in world prices with unfavourable reactions. While appreciating our favoured position, our policy should be directed (even though it may help little) towards a return to a condition of things which realises the ultimate and final interdependence of all countries through out the world. We add that al) that relates to South Africa in this gold question relates equally to the Philippines as a considerable producer of gold, making a study of Dr. Richards’s whole paper from our December issue and concluded here, germane to our leaders in mining.—Ed.