Hot Money
IN Greek mythology a brazen robot named Talos guarded I the island of Crete. He did so through the power of making himself hot. When the xenophobic Cretans wished to be left alone, they sent Talos down to the shore, where he embraced the unwelcome visitors; hence the phrase, ‘making it hot for them’!
An inquiry has been set in motion by Mr. Roosevelt to consider the erection of a kind of Talos on America’s front. The object is to frighten away, not the foreigners, but their money! To other countries, always eager to greet incoming capital, the aim must appear quile topsy-turvy.
A good deal of alien money in itself runs a high temperature. In fact, it is what Mr. Roosevelt, somewhat infelicitously, calls ‘hot money.’ Its temperature, however, has nothing to do with hostility; rather, with the danger that it innocently constitutes to American economic (not to say political) equilibrium. A better phrase to convey its meaning is ‘tramp money’ — that is, money swung back and forth over international borders in ceaseless search of temporary safety or quick profits. Money holders in countries hovering on the edge of war view the United States as a secure depository. Others regard it as the most promising market for speculation. The dangerous quality of this kind of money lies in the possibility of quick withdrawals as the situation changes.
In this uncertain world there is every prospect that, relatively speaking, the United States will become safer. As for profits, this country is two years behind British recovery, which has been expressed in a four-year rise in industrial stocks. Then; is thus no apparent danger of quick withdrawals. Indeed, in a preëlection letter to the worried Senator Vandenberg, Secretary Morgenthau hazarded this reassurance.
Nevertheless the degree of volatility of ‘tramp money’ is anybody’s guess. On the threat of war in 1914, alien funds were speedily repatriated. Withdrawals took place in such volume that they left a hole in American markets which frightened domestic holders and induced widespread selling. In consequence, the authorities closed the exchanges.
Another eventful recall of alien money occurred in the summer of 1929. The crash of the London house of Hatry resulted in British liquidation of American holdings. This action created the first fissure in the great American bull market. Possibly the same repercussions would be felt again in case of foreign war.
In these changed times, however, precedent is a dangerous reed for prognostication. It is not beyond the realm of possibility that, in pursuit of the new war embargo policy, the United States might beat the ‘tramp money’ owners to the gun and ‘freeze’ their holdings. Such a step, to be sure, would smack of authoritarianism. But to-day governments both autocratic and democratic stalk like Agag in their monetary affairs. Besides, the United States Government is committed to non-entanglement, which, in the eyes of the American people, would doubtless excuse a good deal of authoritarianism in insulating the United States.
Short-term investment over international borders in any quantity is a relatively new phenomenon. The classic method of exporting capital is by long-term investment — as, for instance, in the enormous sums that the British sunk in the transcontinental railroads. In certain notable cases the word sunk is not inapt. Many factors have made for the new short-term money tie. One is the modern fluidity of investment — an extension of the development of liquidity of investment which A. A. Borle has dealt with in a notable contribution to depression literature. Some years ago Sir Josiah Stamp gave a vivid example of this growth of financial fluidity. He spoke of the change in the financial habits of Yorkshire woolen manufacturers. At the year end they used to plough their money back into their business. To-day they have on their desks a list of stocks in New York and other financial centres with all kinds of expert analyses of those stocks. The world, rigidly compart merited in other respects, has become a great neighborhood of oscillating investment.
Mr. Roosevelt’s evident fear that the existing short-term money nexus might endanger American aloofness from Europe’s quarrels is certainly justified. The ‘tramp money’ has already established a strong link with Europe.
Reliable data are published periodically by the Department of Commerce. At the end of 1935 the Department estimated that all alien holdings in the United States aggregated no less than 6235 million dollars. Probably half of it would be called ‘hot.’ The stock-market quota is put at 2015 million dollars, though of course some of this sum, in Secretary Morgenthau’s reassuring words to Senator Vandenberg, represents ‘long-term investments in our industry and public utilities.’
During the last year, it is said, nearly one billion dollars have been added to the store, most of it, according to the Federal Reserve Board, going into the stock market. Presumably some of the alien buying is done for the account of Americans seeking to escape American margin requirements and capital gains and income taxes. In addition, there are officers of corporations, I am told, who are operating in the stocks of those corporations through the London market, thus avoiding the restrictions of the SEC. Nevertheless, several well-known facts are testimony to considerable British participation in American securities. As much as 50 per cent of the trading in a few American stockmarket leaders is done in London, and fully half of the portfolios of certain British investment trusts is in ‘Americans.’
It may prove impossible, without warrant of foreign war, to isolate and impede the ‘ hot money’ inflow beyond ‘talking it down.’ A ban on stock buying by aliens would doubtless be followed by the establishment of a bootleg market in American securities. In all likelihood more American stock trading would be transferred abroad. Moreover, this administration is committed to freeing the channels of trade, not to choking them. Trade is trade whether it takes the form of securities or cotton. Finally, drastic action against alien money would disrupt the monetary relations set up by the ‘twenty-fourhour’ understanding between the United States, Great Britain, and France.
Alien investment did not become ‘sustained’ — the Federal Beserve Board’s word — till early 1935. But in 1934 it played a part in laying the foundation for American confidence which set in early in the following year. To some extent it has been responsible for the 81 per cent rise in the total valuation of stocks quoted on the Big Board in the nineteen months ending October 31, 1936.
Whether stocks, in consequence, are overpriced depends upon one’s measuring rod. In the early stages of a dynamic recovery, measuring rods such as oarnings-price ratios are serviceable mainly as footballs for sophisticated financial minds. Value, after all, is a state of mind.
But it is precisely this state of mind that Washington now seeks to control. For years it has been trying to stimulate investment and business confidence by filling out the means of payment available to borrowers. The effort has provoked a good deal of alarm over inflation. For instance, a woman investor on the Pacific Coast, having heard a warning speech by Colonel Knox, recently wrote me asking what she should do to protect her holdings against inflation. No doubt my correspondent would now change the form of her inquiry. For the Administration is alive to the danger she had in mind, and, in Secretary Morgenthau’s words, is ‘clearing the decks’ for antiinflation action.
The ‘hot money’ debate appears to be merely an item in that preoccupation — a preoccupation, incidentally, which is one of the main imponderables in investment problems during l937. Talos is being exhibited to the stock market.