Milford chronicle., 1929-03-01
THE EFFECT OF MONEY
RATES ON BUSINESS

Extract from an address by Benja-
min M. Anderson, Jr., Phi. D.,
Economist of the Chase National
Bank of the City of New York, be-
fore the Converters' Association,
at the Hotel Pennsylvania, New
York City, on the evening of Tues
day, January Is, 1929
There is a theory rather widely
current that low money rates make
good business, and high money rates
make bad business, through their
influence upon the borrowings of
merchants and manufacturers for
carrying and for producing goods.
High rates are supposed to discour-
age such borrowing and low rates
to encourage it. This view has very
limited justification, whether in
theory or in practice. Germany, de-
spite high interest rates, has had a
great deal of business activity in
recent years, while some other Eu-
ropean markets, whose rates have
been so low that they have been
large lenders to Germany, have had
a good deal less of business activity.
In our own country, we have just
witnessed a period of declining bust
ness in 1927, when rates were very
low, with rapid business improve
ment in 1928, accompanied by ris-
ing rates of interest.
Rates of interest for commercial
purposes have not, to be sure, risen
nearly so high as rates for stock
market purposes, but the rise in
commercial paper from ga and
per cent at the beginning of 1928
to 5 IA and IL per cent at the
end of 1928, with corresponding in
creases in counter rates to borrow
ing commercial customers, has none
the less been substantial.
The point is that for short term
operations, as when a merchant
borrows money to buy goods for his
ordinary turnover, or when a manu-
facturer borrows to finance his
work in process" the rate of in
terest is only one of the elements
of cost, and often minor element
in cost, and the state of the markets
is far more important in guiding
the borrowers policy than a rea-
sonable difference in the rate of in
terest could be. Ordinary business
is often very good with firm money,
and is often quite unsatisfactory
with cheap money.
On the other hand, longtime con-
struction, which involves borrowing
for a long period of time, is very
much affected by money rates. The
period from early 1922 to early 1928
was characterized by very low mon
ey rates and a great expansion OF
bank credit, which undoubtedly
stimulated business in several direc-
lions. 1t was easy to float mortgage
bonds for new construction, and
the volume of such flotations was
large. 1t was easy to float foreign
securities in great and growing vol
ume, which maintained the export
trade. 1t was easy to finance a
large volume of installment finance
transactions. Finally, rising values
of real estate and securities, which
went along with this easy money
and rapid bank expansion, created
speculative profits, the expenditure
and reinvestment of which also
served as a business stimulant.
For the long pull, therefore.
American business will need to
make certain readjustments, if we
assume that the period of very
cheap money and rapid bank expan-
sion is definitely over. But this may
come a good deal more slowly than
we might anticipate. Foreign coun-
tries have, as result of borrowings
which they have already made, a
large fund of liquid dollar credits
which they can use, if they wish, in
buying goods here. A great many
corporations have obtained from
security fotations funds in excess
of their present needs, which they
can use for capital purposes without
having to do additional financing.
The end of 1928 shows some evil
dence of decline in building ac-
tivity, but the figures are not yet
impressive. Business will need to
take account of the change in the
money market, but business will
probably have time enough in
which to do it. The policy, which
American business in general has
been pursuing for number of
years, of limited commitments, mod
crate inventory, and hand-to-mouth !
buying, will make it relatively easy
for the business world to put thru
such readjustments as may prove |
to be necessary.