The Lancaster news. [volume] (Lancaster, S.C.) 1905-current, 1919-08-26

oOU or additional working capital to
carry on the business of the Ameri-
can people. The money goes into
supplies of raw materials, stocks OF
furnished goods on hand. and into the
cost of labor that it took to make the
finished goods. Otherwise expressed
in order to keep this bull movement
in commodity and goods prices going
forward, our business men must be
able to borrow somewhere an addi-
tional $500,0OO,00O each month or
thereabouts.
This is why interest rates are be-
coming so high. 1t is getting more
and more difficult to borrow in such
large aggregate amounts, because the
supply of loanable funds is running
short. Capital is nothing in the world
but accumulated savings; and when
the savers. through their agents, the
banks, have loaned all their savings
or capital the borrowers cannot bor.
row any more until more is saved out
of personal incomes.
What. then, happens to commodity
prices when the supply of capital runs
short as it is doing now?
Let us illustrate with the shoe and
leather trade. The retail shoe dealer
gets in from the manufacturer a big
consignment of shoes at the highest
prices he ever paid. He goes to his
bank with request for an additional
$4,000 lean, and gets the reply that
money is tight and he can have only
$1,000. When money is tight every
business is affected by it, and thus his
efforts to borrow the $4,000 else
where result in either failure or else
In paying an excessive rate of inter-
est. To relieve the situation he
pushes the sale of shoes by shading
prices; and because of the same tight
ness of money other merchants and
manufacturers push the sale of every
thing else by shading prices. They
nave to do it, because their own cap
ital or bank deposits are drawn down
to the limit. and because the banks
cannot lend them the amount of mon
ey needed.
The relationship is extremely sim
pie. Rising prices absorb more and
more capital; and when the capital
supply becomes exhausted. goods
prices must necessarily fall because
producers and merchants have to sell
tn II.
from becoming insolvent So il is that
every period OF tight money is invar-
iably followed by considerable
period OF falling prices. One can IL
lustrate this fact from the expert
ence OF any age or nation as far back
as recorded financial history goes.
Tight money or high interest rates
do not occur except as a consequence
OF scarcity Of capital or loanable
funds; and experience shows that the
money market is one OF the very best
indices TO the future or good prices.
In recent times in the United States
the only four periods of tight money
we have had began in September.
l9O2. December, 1905, August, 1914.
and July, 1919, respectively. OF
course, tight money is not imm edi-
ately followed by a slump in com
modify prices; for merchants and pro
ducers first finance themselves by bor-
rowing all they can from every bank
they know, and also from private cap
italists. and do not cut prices except
as last resort. This, however, causes
a delay of only a few weeks or months
between the beginning OF the tight
money period and the commencement
of the slump in prices.
In the 1902 instance the slump in
prices began in December and car
ried Bradstreet's index number down
from Slab to 7,631S, which figure
was reached the following July. In
1905 the boom here was kept going
means of heavy borrowing in Eu-
rope. so that the slump in prices did
not begin until March. 1907. In less
than year thereafter il carried Brad
streets index down from 9.1293 To
7.7227. Perhaps even more striking
is the fact that in 1914 tight money
resulted in slump in prices in face
OF the certainty Of big war demand
for goods From AupuSt X 1o1t TO