With the firmness of the money market the only disturbing factor in the present financial situation. Wall Street has been somewhat concerned over reports from Paris that the Bank of France will convert a material portion of its enormous holdings of foreign exchange into gold.

Withdrawal of the metal from this country immediately narrows the credit base since a dollar’s worth of gold is the basis for from ten to fifteen dollars of credit. This means that, unless offset by other influences, the credit supply in the United States would be reduced by from $2,000,000,000 to $3,000,000,000 if France were to buy $200,000,000 in gold here and take it home.

French banking authorities have no wish to embarrass other countries but if business in that country continues to expand the conversion of some of their exchange holdings into gold is inevitable. The Bank of France’s reserve ratio is now about thirty-nine per cent, only four per cent above the legal limit.

It is reassuring to know, though, that our Federal Reserve authorities could prevent any serious damage as a result of gold loss by purchases of Government securities. Such purchases have exactly the same effect on the credit market as gold imports.

Any business man and almost any Wall Street speculator is fairly well aware of the importance to him of the volume and price of credit. American industry and commerce are more efficient than they have ever been before and not the least important element in this efficiency is their economical use of credit. By skillful merchandising, by buying only to fill their immediate requirements, they are borrowing less in proportion to their turnover than at any time in their history. They have not, however, arrived at a state where they can progress without borrowing—and they never will. Plants and equipment must be expanded to meet the country’s growing consumptive capacity. Usually this expansion must be accomplished by the use of borrowed money.

Some able bankers and other practical economists are fond of saying that money rates never checked business prosperity or relieved depression. This is pure hyperbole. If pinned down, they would admit that their assertion is true only within limits. An advance from four to five or perhaps six per cent in the commercial paper rate probably would not have much of an effect but it would be absurd to deny that an advance to eight or nine per cent would not block expansion that might well be carried on in an easier credit market. In other words, business responds to wide fluctuations in money rates but not to small ones.

Christmas demands for both currency and credit are largely responsible for the current stiffness of the call money market but the fundamental rates are due chiefly to four causes—the activity of business, the loss of gold since the beginning of the year, Federal Reserve policy and the demands of the market.

Source: Outlook, 2 January 1929