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Economist Frederick Robertson Macaulay: "The bond market has reached such high levels it may eventually even be necessary artificially to bolster the prices of Government securities if the condition of the banks is not to be the factor that will lead, some years hence, to another general collapse."
Best answer to these warnings is that whatever Administration is in power for the next few years will use its best efforts to keep money cheap. And this argument is used by both commercial bankers, who are buying Government bonds because they can find no other outlet for their funds, and by investment bankers, who would like to see a cheap money era prolonged because it makes for a good bond market. Long periods of cheap money are not unprecedented. For 23 years from 1886 to 1909 British Government consols, a taxable security, never sold to yield more than 3%.
Institutions which buy bonds with the idea of holding them to maturity would not suffer from lower prices. The suckers would be those who bought at high levels and who decided to sell during a national boom, when interest rates are generally high, bond prices low. Investment bankers are thinking about that type of investor already. Fortnight ago in Manhattan, Kuhn, Loeb & Co.'s Hugh Knowlton wound up a speech to the Financial Advertisers with a highly logical argument for future use. This smart, sharp-nosed young banker, who was trained in the law and got into finance by way of Paul Warburg's International Acceptance Bank, declared:
"It is no fault of the investment banker if, due to the fact that a bond was brought out at a time when bond prices generally were very high, as is the case at present, the market price at some time during the life of the security declines. . . . The banker does not make prices. Nor is the banker responsible for the high level at which investment securities are selling today. The Government itself, by the various ways in which it is contributing toward easy money, is one of the responsible factors, and when subsequently prices drop—as they are bound to do— and the politicians blame the bankers—as they always do—it will be well to remember this fact."
—Low interest rates have been a boon to financing companies, which borrow, chiefly from banks, a large part of the funds used to carry installment purchases of automobiles, radios, refrigerators, etc., etc. For this borrowed money the financing companies are now paying 1% or less. When they loan it to a time buyer, they get from 12% to 25%. That spread is by no means all clear profit, for installment paper means high overhead. Nevertheless, favored still further by a tremendous pickup in the volume of installment buying, financing companies are reporting record high earnings. Last month Commercial Investment Trust Corp. upped its dividend, declared a 20% stock dividend. Last week its traditional rival, Commercial Credit Co., also upped its dividend (from $2.50 to $3 per share), also declared a 20% stock dividend.