The New York herald., 1920-01-26

extended. that steps should be taken TO
correct that initiation, and that the log
ical thing TO do would be to make 1t more
difficult for borrowers TO obtain banking
accommodation. Where bankers are dis
posed to see flaw Is I'm the methods
adopted by the Reserve authorities to ef-
feet that correction, In word they
dispute the wisdom OF marking UP dis
count rates TO such extreme levels at one
stroke They crltlcise what appears to
be an effort TO bring deflation about over
night, so to speas.
These are critical times the world over.
The situation is one which calls for the
exercise of firmness and courage. Any
thing which tends to shake the nerves OF
business and TO destroy its courage at this
juncture is bad. 1t is because drastic ad'
vances In the money rate tend to upset
business calculations and to disturb con-
fidence at a time when courage is sc
necessary that the Federal Reserve au'
thorities are coming in for criticism Just
now. While 1t is true that ''unessentia
loans" made TO promote boarding anc
profiteering. should be curtailed, 1t alsC
is true that legitimate business and com
nercial enterprise should be encouraged
In every way in order that the world may
regain its equilibrium, SO badly disturbed
by the world war.
IT may wen Ot QutSllOncu WHtlhci Ni'
country is not reaping the harvest of al
ill-advised Treasury policy in financing
the war That policy was to obtain billions
of dollars at the lowest possible cost to the
government regardless OF the open mar
ket price. 1t led to the establishment o.
an artificially cheap interest rate on LIB
erty bonds. Issue of almost $50, 600, ,moooO OF
war bonds at par to yield only a. per cent
was in defiance of economic law. 1t laio
lot &c.
ton. To correct that initiation the gov
ernment now is compelled to resort tc
drastic measures to bring about deflatior
Of that credit.
The unfortunate effects OF the gov
ernment's financial policy had been re-
Elected more particularly in the marker
for Liberty bonds. These bonds, issued
at par on per cent to Ia per cent
basis, for some time have been selling al
a discount of seven to nine points, or on
basis TO yield in some instances more
than per cent. The decline represents
the open markets measure of the true
basis on which those bonds should have
heen sold.
This depreciation has not been so seri-
Gus for the small individual bond holder
as IT has been for large corporations. more
especially railroads. which in the enthusi-
a-srn Of patriotic impulse bought or were
induced by banks to buy more bonds than
they ordinarily would have subscribed foI
becaus. of assurances of the government
that they would be able to hypothecatt
their bonds for almost their fun face
value at the coupon rate OF interest. Inc
government kept its promise for year
but that did not help the railroad sub
scribers much because their earnings nave
been so poor they have never been able
to pay much. If anything, on account OF
the principal of their bonds.
The fact which impresses itself mos'
vividly upon the mind at the moment Is
the stability the stock market eXhibitec
upon publication OF the sensational news
regarding the Federal Reserve Boards
drastic step. The first Gay the facts
were known the market stood STILL as u
hesitating until it could measure the ful
import of the big advances in the discount
rates The second day prices advanced
The market in a word. acted as il it hao
turned its back on the past as something
that had been fully discounted and now Is
facing the unknown future with Urn
front This apparent serenity may be de-
ceptive. At all events, 1t would be wise
not to draw conclusions without due de-
liberation. The buying which developed
with such urgency on Saturday was un'
uuestionably for short account. In sense
the market may he regarded Tor the mo-
ment as a stock dividend market. Short!
felt the psychological effect OF an an
nouncement of a proposed stock distribu
ton by the Crucible Steel Company on th'
eve. so to speak, of another day on which
Supreme Court decisions are announced
The street is mindful that ruling on thu
taxability OF dividends in capital stocl
may be handed down and may prove
favorable. Bears do not care TO be caught
mapping If, as is quite possible, another
Monday comes and goes without any an
nouncement by the Supreme Court the
bears will take fresh courage and sci
stocks again.
There is no question that sentiment II
growing that an era of genuine deflatior
has started. Such deflation would spell
diminishing profits for corporations en-
gagged in Industrial activities. lt is sig
nificant that stocks of such corporations
while popularity regarded as '9iquidated.
are selling yet far above normal aV'
erage. Certain of them would appear tt
have passed the peak of earnings and q
have discounted capital readjustment
They may be regarded as entering an ers
OF distribution. Others have yet TO real
ize the fun benefits OF stock dividends OF
Of other asset distribution. But IL is wei
to bear In mind that the sole purpose q
all extraordinary division OF assets IL
merely to facilitate distribution OF stocks
so that insiders may reap the prollts Una
lCOrpOrationS IN Wnicn t1ty are ihAticSeS-
have accumulated during war times.
In the case of railroad securities there
has been a deflation instead of Imitation
The same is true of public utility stocks
and. in "a measure. of copper securities
Contraction of commodity prices such ~
will come about by deflauon OF creult'
will mean increased earning power io
these securities of that class. Moreover
the good news is ahead of the railroads
not behind them. Although the progress
being made on the Railroad Bill is SLOW
n Is constructive. All Developments poiiIi
20 a restoration OF the roads to their own
ers under favorable conditions, III thl'
restoration is not accomplished by Marct
1. as promised. it viii make niue uliIeI W
once n II Is attended by satisfactory cir
cimnstances when the actual transfer u
made.