The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1934-09-18

In the preceding fnstallment MAJOR
AnEas described how the government
BY devaluing gold increased the potential
cash reserves BY over three billion dol
lars and BY borrowing from the banks
videned the basis Of credit.
INSTALLMENT EIGHT
CONCOMITANT with the two
~ above methods of creating re-
dundant credit currency either by
central bank action Or by govern
ment borrowing from banks is the
policy Of cheap money. Though
it is inseparably linked with the
above methods, it is really a sep
arate factor in its effect upon re-
viyal.
A decline in the long-term rate
Of interest. such as a slump en-
genders, is itself a powerful slim
illus to trade: It tends to stimu-
late all forms of CONSTITUTIONAL
enterprise. e. g., speculative house
building and factory moderniZa-
ton. and thus to improve many
industries.
Normally, however, there is a
lag in such enterprise, since dur
ing depression speculative builders
and industrialists habitually re-
strict their activities through gen.
eral loss of confidence.
But here it is that a govern
ment can step in and speed up
the volume of capital expenditure.
The government, for instance, by
floating cheap loans for public
works and thereby absorbing the
surplus funds of the banks, may
put them into active industrial
circulation, and thereby restimu-
late industrial activity. Such po-
itical action, however, in the
early stages Of depression, is nor
mally rare because of the call for
government economy.
1t should be added here that at
the same time that cheap long
term money stimulates trade by
fostering speculative house build
ing and Constitutional enterprise,
it also, by raising the market
prices of government securities,
and, because of competition for
yield, common stocks as well,
makes investors as a whole feel
richer ION paper" Thus, even
though their actual incomes may
not yet have increased, the fact
that they feel" richer will make
them spend their incomes more
rapidly than recently, while a few
may even borrow from their banks
for a purchases, home redecora-
ton, etc; they may also run up
bigger bills at the shops, arguing
that when payment falls due they
can sell their appreciated invest
ments to pay for them.
The net result of the feeling
richer on paper" as a result of the
fall in long-term interest rates is:
l. To increase the velocity of
private spending, which leads to
replacement orders and thus to
general improvement in employ
ment and incomes.
2. 1t leads to an expansion in
the commercial" credit given by
the shops for the purchase of
goods, which, although not yet
paid for, nevertheless give rise to
additional replacement orders to
producers.
3. 1t leads to additional borrow
ing from the banks, on overdraft
or on loan.
All these factors speed up the
velocity of money and increase the
volume of trade and employment.
TT can thus been seen that cheap
Il long-term money is a condition
which statesmen should particu-
larly foster is they wish to ter
inmate a slump.
Now, a S has already been shown,
cheap money itself can be brought
about by increasing the reserves
of the banks. This increases their
cash ratios and stimulates them to
increase their investments. This
forces up the prices of bonds, and
in consequence cheapens long
term as well as short-term money.
In America this began before
1884. but was accentuated by Wild
ening the gold base through reval-
uing the dollar.
In England it was brought about
by the Bank of England increas-
ing its investments and thus en-
larging the so-called cash reserves
of the joint stock banks.
1t is to be pointed out, how
ever, that if a government bor-
rows from the central bank, or
America from the federal reserve