Evening star., 1941-01-01
Money Rates Likely
To Change Little
In Coming Year
Larger Credit Needs
Muy Affect Interest
Moderately
BY Cambridge Associates.

AS long as some semblance of a
free economy operates it can be
taken as automatic that interest
rates are going to rise The prob
lem is whether this rise will take
place in 194l or later. The prob
abilities as now seen, do not indicate
that much change will be witnessed
next year.
Certain forces, however. are STIR
ring which might throw the most
careful calculations out of gear,
Most important Of these is the sharp
increase, now developing, in the de-
mand for bank credit. This could
easily turn into a broad credit ex-
pansion. which would test the eff
ficacy of Federal monetary controls,
In order to examine Satisfactorily
the outlook an understanding of
the factors contributing to the pres
ent record low rental value for
money is essential.
Most important among these is
the extremely large bank reserve
in excess of the basic legal re-
quirementS for adequate protection
of deposits. AS loan demand is
relatively light and as gold-the
basis for credit supply-continue
to flow to the United States. such
reserves remain at levels sufficient
to allow huge credit expansion.
Cheap Money Policy Stands.
Another factor that must be con-
Sidered is the Federal Govern
ment'S cheap money policy. Every
financial act OF the New Deal has
been aimed toward maintaining low
interest rates. Thus has made pos
sible the fact that despite the huge
increase in the Federal debt since
1883, the service charges thereon
are no greater than was the case
seven years ago. Through the loan
ing agencies and the Federal Re-
serve Banks open market policy
1t has been possible TO control the
market for Government bonds so
that their prices have reached sue
cessively higher levels. A third point
to be borne in mind is that during
the time that the credit supply has
been increasing. demand therefore
has failed to expand materially. AS
always, when supply outStrips de-
mand, prices have declined
Another y months could easily
see quite drastic reversal of this
situation. Financing of the rearm-
ament program should result in a
large increase in the demand for
credit on all fronts. In fact that
demand appears to be at the point.
even now, where it is increasing
faster than is the supply. If, as
seems possible, this trend is con-
tinued the supply of loanable funds
should begin to decrease. In such a
case a Stiffening of money rates
should soon follow.
Moreover there is good reason to
believe that gold imports may be
reduced as a result of the European
conflict. France from whom We
have imported much gold in the
past is now removed as supplier of
the yellow material. England is now
raising the question of credits for
future purchases here and already
we are making loans to South Amer
lean countries.
Controls VS.. Credit Demand.
Government controls have worked
well in the past few years when
any tendency for money rates TO
change became evident. As long
as extraordinary factors do not in
trude they will probably work we'll
in the future. But there are extraor-
dlnary factors in the present situa-
ton Certainly, if our industrial
plant is TO provide the mechanical
equipment for proper Army, Navy
and air force it is going to take lot
of credit. In other words. the sue
cess OF Government controls in the
face of credit demand rising fast
enough to sharply diminish the
available supply is something that
is yet to be determined. If this
increase could be checked and busi-
ness forced to slow down for few
months, there wouldn't be much
question. But there can be no busi-
ness def1ation for several years to
come if We as nation are to rearm