Rock Island Argus. (Rock Island, Ill.) 1893-1920, 1919-08-16
CREDIT BUBBLE
EXPANDS; WILL
: IT BURST NOW?
OVertrading Develops as Circle OF
Loans Initiates National
Money Market.

credit, stretched now to what seems
the utmost. burst?
In the monthly report on bust
ness conditions issued by the Alex
ander Hamilton Institute of New
York, is the above question asked.
In part, the report says:
when the war ended banking
credit was over-expaDded. A credit
bubble, however, cannot burst I'M
til the banks refuse to make loans
to their customers, and in this case
it was impossible for the banks to
restrict loans because the govern
ment was the largest borrower and
because the government compelled
the reserve banks to lend money
to the treasury at an artifcially
low rate Of interest. Virtually, the
treasury is also compelling the
banks to lend against Liberty
eonds below the market rate.
The Circle Widens.
when will the bubble burst?
When will the banks put a stop to
credit expansion? Certainly not so
long as the private banks can con-
tinue to borrow freely at the re-
serve banks and so long as the
credit statements of their custom
ers will justify liberal loans.
when the armistice was signed,
most of the bank customers, ex-
cept the government, had very
small loans. Nearly all depart
ments of business were entitled to
a substantial increase in credit,
considering the amount of their
III ia ~
rates on call loans in Wall street,
however, suggest that brokers and
investors have about reached their
limit. By the end of the year,
also, it may be presumed that mer-
chants and manufacturers general
NJ will have increased their loans
tCN a considerable degree. In the
west there is riotous speculation
in land, and mortgages are being
placed for $4,000 where $4,000 was
the rule in years past. Internally
the credit bubble is rapidly ap-
preaching a condition of >disten-
sion. Possibly there is room for
a considerable expansion of loans
in connection with the export trade,
because most of the foreign credits
during the war were extended to
governments. The export mer-
chant did not become extended. 1t
is likely. however, that export
credits will become normal during
the winter, and that a year hence
the credit bubble will be full
blown, if not sooner. A crisis will
then be inevitable
Overriding Takes Place.
THE basis of the present infla-
ton, of course, is the willingness
of the reserve banks to lend mon
ey on Liberty bonds at Az per
cent to private banks, who relend
it at AZ per cent or more. This
federal reserve board recognizes !
that the funds of the reserve sys-
TEN are being used to finance spec
ulative transactions not contem- |
plated by the banking law, and |
continually utters disapproval of |
the overtrading which is taking /
place, but the federal reserve !
board does not practice what it !
breaches. It is good business to |
borrow money at Az per cent if |
possible to invest it at or per |
S6nt or better. Consequently the !
business public continues to ex-
pand instead of paying off their
loans. Sound banking would re-
quire that the discount rate at the |
reserve banks be advanced to 6 |
per cent soon in view Of the pres
ent excessive imitation. This would /
restrict overtrading.
A Crisis is Breeding.
THE logical sequence flowing
from high prices is as follows:
Il. High commodity prices re-
Quire large loans. The loanable
fund of the banks being reduced,
rates are increased.
80. AS the shortage of funds
becomes pronounced, the banks be
gin to discriminate against loans
on securities in order to give the
utmost assistance to commercial
borrowers. Gradually stock eX-
change borrowers sell out their
stocks and pay off their bank loans
in order to avoid high interest
rates. Spectators perceive that
tight credit is restricting activity
and begin to sell out. Stock prices
-all.
"3. Eventually commercial Dor
towers find it impossible to obtain
anfficient credit to carry through
heir plans, the result being a de-
,rease in the volume of new orders
or goods. Sellers of goods become
for lack of credit and
)ffer goods at . sacrifice in order
o obtain cash. The falling off in
lemand and the increase in selling
PRESSURE force commodity prices
o lower levels.
Indications are that the above {
will gradually develop
rom now on. A shortage of capt.
al is already indicated by high {
money rates in Wall street. The 9
ecretary of the treasury announc- {
S that he expects to reduce ex- l
enditures to less than seven bill
ion dollars during the next u
months and to obtain most of this t
through taxation rather than Dor G
owing. Next year, then, we may 1
xpect a greatly diminished de-
hand for goods from the wa de- c
artment and probably also a re- 1
uced wheat acreage and a smaller c
urchasing power from the farm S
r. This general weakening of de-
land in 1920 will come when man g
featuring profits are being reduc- O
1 by high wages and large tax on c
rofits. v
During 1920 we should see un- a
listakable harbingers of an ap- il
reaching crisis" Il