THE TROUBLES OF WALL STREET
By NICHOLAS DAVENPORT LATELY the United States has been losing gold at quite an alarming rate—$20 million in the week ending August 3. This \does not necessarily mean that the American economy is in %:2) bad shape. It means simply that the pull of international money rates is now working against New York. For example, the British Treasury bill rate is 5.57 Per cent. against the American 2.2 per cent. With this extraordinary disparity it is small wonder that we enlarged our reserves last month by £37 million (it would have been over £50 million if it had not been for some special payments). Ger- many has taken steps to prevent hot money flow- ing in just to take advantage of her comparatively high Bank rate of 5 per cent., but the German banks, being under liquidity pressure, have been drawing in funds from abroad. At the same time the increasing German export surplus has put the outside world in debt in terms of D-marks. Between April and July no less than £438 mil- lion worth of gold and foreign currencies poured Into the German Federal Bank. If an innocent American were to ask why Germany and Great Britain should be holding such high Bank rates It Would be difficult to find a sensible answer. But What sense has there ever been in the snakes and ladders game of international hot money?
In actual fact the American economy is not in particularly good shape. It has worked itself into a mild recession. The steel industry is operat- ing at about 50 per cent. of capacity—stocking- UP after the steel strike had been overdone—and the automobile industry is now slowing down in preparation for the start-up of new models. Retail sales of cars have lately been disappointing and for the first time this year the month's sales were below those of the corresponding month (July) of 1959. Total sales of manufactures were actually down 1 per cent. in July. Apart from this hesita- tion a high level of personal expenditure has been sustained. Ultimately this has been offset in the last three months by what is called in economic Jargon 'the decline in inventory accumulation.' The leading economists, who have been badly out' in their forecasts this year, are still hopeful that 1960 will see another 21. per cent. advance in the gross national product (the rate oitorowth since 1956); they are banking, it seems, on a Continuance of the gently rising capital spending on plant and equipment. But how is it that the American economy cannot do better than 2-} per Cent.? Why must it run so high an unemployment as 5 per cent. of the labour force? Why is its ■ ndustrial production index today actually below its January level? Why must it keep so much of its huge plant working at under capacity? The main reason, as I have suggested on a previous occasion, is that the American people have lost confidence in their leadership; they are going through a period of business doubt, un- certainty, perplexity; the incompetent administra- tion of President Eisenhower has lost them their sense of direction. This is not conducive to long- term industrial planning and investment. Besides, the emphasis on more and more consumer goods and services can only end in a saturated and un- stable materialistic society.
Secondly, the American Treasury has put the sound dollar before an expanding economy and has even been mad enough to budget for a budget surplus of $4,200 million in the fiscal year 1960-61. The wonderful recovery of 1958-59 was coincident with a budget deficit of $12,400 mil- lion in the fiscal year which ended in June, 1959.
Thirdly, the Federal Reserve authorities have pursued a monetary policy which has been con- spicuous for its shortsightedness. Terrified by the pace of the 1958 recovery and fearful of an in- flationary steel wage settlement, the Federal Reserve steadily made money dearer until the Treasury bill rate had risen to 41 per cent. by the beginning of this year. They have now had to .drop it to 21 per cent.—and run the risk of losing more gold than they can afford. Reliance on the monetary weapon, as I am continually arguing here, is a very crude and imperfect way of con- trolling an economy and the Americans are no better at it than we are It is no wonder that Wall Street has been be- having in a very bearish manna. (The Dow Jones index of industrial equities has dropped 12 per cent. since the turn of the year.) Company earn- ings are not going to show big gains this year. In the first quarter the companies reporting for the index actually earned slightly less than in the corresponding quarter of 1959. The same trend is expected for the second quarter. At the beginning of 1960 the shares of the index companies were selling in the market at an average of nineteen times their estimated earnings. That was far too high. They are noW selling at seventeen times, which, historically, is still high. In nineteen out of the past twenty years they have sold at some point of the year at under fifteen times estimated earnings. The bears ar.:, therefore anticipating a fall in the index, now 614, to around 540.
But the bulls can take heart. President Eisen- hower has responded to the hotting-up of the cold war in the only way open to a Republican Right-winger—by promising larger military expenditures. This may begin to turn the trend of the economy from recession to recovery. And who knows? A sharp rise in government spend- ing under a new President, financed by cheap money and a budget deficit, might make the foreign depositors more anxious to draw their money out of the US. The further loss of gold, now down to nearly $19,000 million—foreign deposits are well in excess of the free gold reserves—might force the American Treasury to put an embargo on the sale of gold and over- night the dollar would find itself devalued—in company, I hope, with the pound sterling. I can- not imagine any prospect better calculated to turn Wall Street then into a raging bull market.
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