The Washington times., 1935-12-20
MUCH DEPENDS
0NPOLITICIANS,
SAYSHANEY
BY LEWIS HANEY
Professor of Economies. New York
University

OHANSASASJ
Two inquiries from confused
investors" are before me, one
from New York and one from
Detroit.
In replying to these inquiries,
/ would first point out that un-
der present conditions the
power Of economic analysis Is
unusually limited. Politics is
in the saddle everywhere. So
much depends upon how Mus
sOIini, Hitler, Stain and ROOSe-
welt feel, that reasoning based
upon economics cannot give
sure results.
Thus when one is asked about
the effects upon the stock mar
ket of devaluation Of the franc,
there is no sure answer. Perhaps
the following considerations, how
ever, may be helpful.
There is no certainty that the
franc will be devalued again.
Such action is not economically
necessary. The French political
situation, however, now seems to
make devaluation more prooaole
than it was a year ago.
There is no certainty about how
a devaluation of the franc would
affect the stock market. Sentl-
ment among traders has been
such that devaluation would prob
ably cause some selling on the
news. But if other conditions were
good, this would probably not last
long.
The more important questions
are: What would be the terms
Of the devaluation? Would the
outlook for money seem better here
than in France? If France were
to 60 in for managed currency"
as in England or the United
States, I doubt that any large part
of the expatriated funds would
flow back. To the extent that
funds have come here to buy our
securities. they would not go back
merely because of devalution.
They would go back only when our
securities ceased to look good.
Again, / am asked if it is con-
siStent with the idea of infla-
ton that new bonds should be
issued at 312 and per cent
and sell at par.
These bonds merely refund"
issues that are already outStand-
ing, and mostly do not mean new
investment. Corporations find the
charges on 5 and 6 per cent bonds
hard to meet, and they see money
lending at much lower rates. So
they go to the old bondholders
and say, I'VE give you new bonds
yielding 4 per cent, which is better
than you can get at the bank or in
Government bonds"
Thus this bond situation IS
based on the artificially low money
rates that now exist, and is just
a sign of the growing trend toward
initiation.
Money rates are so low. chiefly
because the "excesS reserves" OF
the banks are so huge, and be-
cause the demand for money in
business is so small.
The chief reason for these con-
ditions is Government borrowing
and spending. 1t mostly comes
down to our public debt. The
Government borrowS from the
banking system. 1t spends what
it borrows, and it's checks are de-
posted in the member banks. In
part these deposits become excess
reserves. And excess reserves put
pressure on money rates.
At the same time uncertainty
prevails among business men-un-
certainty as to Government con-
troll and Government monetary
policy-so they borrow as little
as possible.
Thus savings banks and life in
Surance companies can get very
little return on their investments.
They, therefore, can pay very lit
tie to depositors or stockholders.
And all the time the politicians
who run the Government are en-
COuTdSlI1S W UO1IO" AAlOA @ NCSoNSS
their bonds" (debt) are regarded
as assets by the banks and part
of their spending creates "excess
reserves" and keeps interest rates
low.
Thus prosperity" is largely
Oased on government borrowing
debit, and is credit initiation.
The only thing needed to
touch off this credit initiation is
business confidence.
From a short-term trading
standpoint, the possibilities of
franc devaluation or further New
Deal experiment" may cause
fluctuations that have to be con-
sidered. From a long-term stand
point, however, those qualified to
buy stocks should buy and hold
those stocks which. because of
earnings, will benefit by infla-
ton prosperity"
NN0NIIHTI0AIIIN