Evening star., 1920-02-21

Of SITUATION IN
FINANCIAL WORLD
End of Week Conditions
Cheer Trade; Banker Fore
sees Liquidation.
BY STUART Il. WEST,


NEW YORK. February 21.-In the
general situation as it appears at the
close of the week there are two op-
posing viewpoints. The business man
looks at things one way and the bank
ing representative another way. The
business man feels confident because
he can see no overproduction of goods:
on the contrary, in all the leading in
dustrial lines supply is still far be-
hind demand. and the tendency of
prices is to rise. The banker looks at
the credit position, the low ratio of
bank reserves to liabilities and con-
cludes that there must be a period of
commercial liquidation. Therefore the
banker is inclined to be pessimistic,
while the man of business is optimistic.
Market Movement Discussed.
The market movement of the past
week, so far as it has given judgment
between these two attitudes, has dis
tinctly favored the side of the busi-
ness man. Those who have listened to
the talk of industrial depression and
who have been frightened by the COM
PARSONS that have been drawn with
years of panic have sold out their
securities at a tremendous sacrifice,
and are now surprised that the mar
ket has rebounded and has recovered a
very considerable part of the losses of
the past month.
In an analysis of what has hap
pened it may be said that these
widely published statements by men
in high places in the financial and
political world are chiefly responsible
for the losses which the public has
sustained. The industrial situation
is absolutely different from that of
the past occasions where depression
sential features of these past crises
have been, first, an overproduction of
goods and. second, an oVerSupply of
labor. Now we have condition eX-
actly the reverse. Instead of over
production there is underproduction.
instead of unemployment there is a
labor scarcity which is all the time
becoming more acute.
Measures for Credit Situation.
In order to improve the credit
situation it may be necessary to take
more drastic measures than have yet
been adopted. Putting up the Off
cial discount rate from Az to per
cent has accomplished nothing.
Neither would a further advance in
the federal reserve rate to 612 per
cent. as has been discussed. These
higher rates would simply be paid
and the extra charge for money
be passed along to the consumer in
the shape of higher prices, the same
as all other items of increased pro-
duction cost. The only way in which
liquidation of commercial loans
could be brought about would be
through an outright refusal to re-
new these loans when they fall due.
If this radical course were adopted
it would naturally reduce the volume
of business in the country, but II
would not lessen the soundness of the
business position SO long as there is
clear case of demand exceeding sup
ply For this reason we believe that
the business mans point or view as
contrasted with the bankers point of
view is the more trustworthy one to
follow in the present situation.
Recuperative Power Surprises.
The stock market has shown Won
Gerful recuperative power when we
take into consideration the severe
blow that has been struck the public
confidence in investments by the ut
terances of public men. These inter
views and speeches have been pub
lished broadcast over the land. They
people with money to delay putting it
into stocks and bonds even at what
seemed very attractive prices.
What is more mischievous still, they
have scared many people into parting
with their securities at fearful loss.
If we ask why it is, with the normal
investment buying power SO badly i'm
paired and with the public inclined
to sell rather than buy, stocks have
recoiled the way they have this week,
the answer is that the bulk of the
security supply has never been dis
tributed. 1t still remains in strong
hands, in the hands of those on the
inside, who know what stocks are
really worth and are satisfied to hold
on until the time is right for them to
get the prices which they feel that
they are entitled to get.
Interest in Railway List Revives.
The most interesting feature of the
week has been the revival of inter-
est in the railway list. These stocks
have for so long been Improbable
both as a speculation and as an in
vestment that it was hard for Wall
street to believe when they did turn
that the change was anything more
than ephemeral. Now for the first
time those who had faith that Con-
gress would do the right thing by the
roads in returning them to private
ownership. lind themselves JuStlned IN
their opinion.
The European liquidation, which
since the first of the year has pressed
so heavily against the railway shares.
has been lifted. This cessation of
foreign selling has allowed the ef-
tion from home sources to become
apparent. The sequel has been a
very sharp upturn. because with for
eign offerings no longer present upon
the market there have been few
either among the older holders or
the recent buyers at home who have
felt disposed to sell.
..Mystery" in Railway bill.
a great deal of mystery still at
taches to the effect of that provision
in the new railway bill which says
that the Interstate Commerce Com
mission must fix rates that Will allow
the roads to earn 5h per cent on
their property valuation. with an ex-
ira Il per cent for unproductive i'm
provementS. But the more this clause |
is studied the more has opinion !
crystalliZed that under the new dis !
listed railway stocks have been un-
dervalued. and many of them very
considerably. There is. of course, no /
government guarantee. 1t is well |
understood that the 512 per cent on |
property investment represents |
maximum which only companies with |
very efficient management will be
able to earn. But what has struck |
students of the question most are the !
great possibilities for roads which i
have within recent years been in re- !
ceivership and have enormously cut !
down their capital accounts. In these |
cases 51a per cent return on prop !
erty valuation amounts to far more |
than a 5la per cent return on the |
capital stock outstanding. 1t is rec
ognition of this that has been re- |
fected in the remarkable advance of |
the last few days in many of the |
low-priced railway shares.
Indfscriminate Rise in Stocks.
All classes of stocks went up rather
in the upward move