Evening star., 1937-03-21

"A
influences affecting agricultural COM
modltIeS.
lnfiationary experiments. deficit
financing and the like have beyond a
doubt Influenced the commodity price
rise since 1892 But i'll the view of
the administration. the current boom
in business and prices is due to nom
monetary factors and its control
should be attempted by non monetary
measures.
According to this view. defation-
an increase in the gold content of
the dollar or contraction Of currency
and bank deposits by other meanS-is
completely unworthy of consideration,
not because it would be ineffective,
but because it would be harmful The
continued production of goods is to
be encouraged. rather, by keeping
money cheap. The gauge of monetary
management is to be the interest rate
on long-term Government bonds or
what Robert Warren aptly describes as
tRe ~ per cent currency system
With one eye on Government loan re-
qulrements and the other on business
activity, 1t is apparently planned to
manage the currency according to
the interest "thermostat."
Effect of Bond Purchases.
II to check decline in Govern
ment bonds the Federal Reserve banks
or the Treasury enter the market as
buyers, spending money for bonds,
then privately owned deposits are in
creased. Reserve bank credit or Gov
eminent funds perhaps some of the
"thln-alr profits of devaluation) are
added to our already huge supply of
private bank deposits, swollen by sew
eral years Of budget imitation.
ms tends to check rise in money
rates which decline in the prices of
Government bonds would otherwise
imply. But with commodity and stock
prices rising as rapidly as they have
been IN recent months, 1t is difficult
to decide how far the authorities
should go in direction of easy money.
For easy money is bound to encourage
speculation in one way or another
The more immediate Government
oudgeting and national credit consid-
eratlonS have to be balanced against
the longer-term risk of a business
boom and collapse.
That there is a close connection
between demand and supply factors
and commodity prices is generally ap-
preciated. During the depression
wholesale prices declined while stocks
of commodities increased The subse-
quent decline in stocks of commodities,
itself an important measure of re-
vival, has been accompanied by price
recovery, although not in equal
measure
Cause of Increased Demand.
Naturally, the greater the increase
in demand relative to stocks, or the
smaller the supply of stocks relative
to demand, the higher do commodity
prices tend to go. Demand is growing
| not only because of the long-poStponed
fultlllment of requirements character
istic of all depression cycles, but is
also reflection of our still increasing
population.
Moreover, there is always a certain
hard core" of inventories. In any in
duStry certain minimum stock in
trade must always be kept on hand,
and in country whose business over
the long term is increasing such
minimum inventories tend to increase.
Abroad an additional factor is
prominently present; the desire of the
national defense authorities to build up
stocks OF essential raw materials
against war needs. Such foreign
stocking-up of international commod-
tiles reflects itself in our own price
level.
When one uses the figures repre-
senting commodity stocks in connec-
ton with study of prices it is we'll to
keep in mind the relationship of those
stocks to the current rate of con-
sumption
The period of rapid price rise since
October 1886, was preceded and ac-
companied by rapid increase in the
stocks of finished goods, while raw
material stocks were declining. In
other words, commodities were moving
from the raw material stage into the
eml-manufactured and manufactured
stages, business and industry were
more active, and this was reflected in
prices.
Effect Of Inventory Gains.
As illustrated by certain individual
commodities, the increase in inven-
tories when related to the current
rate of demand does not always mean
a relative increase. Stocks can be ris-
ing and yet not act as an increasing
drag on prices. Total inventories of
all commodities have been increasing
since the beginning of last Autumn,
but in relation to consumption there
has been on the whole no material
change since the end of 1885, when
the inventories es-consumption ratio de-
clined to the lowest level since 1929.
This would seem to warrant the con-
clusion that, by and large, the inven-
tory position does not indicate price
collapse for commodities in general in
the near future, whatever may be the
position Of some individual commodi-
ties. A recession may occur, but the
(Cc--tt,wed on Third PaSe.)