17 SEPTEMBER 1932, Page 6

Has Recovery Begun ?

BY 0. R

. HOBSON.

IF I am to answer this question literally and cate gorically the answer must be " No." Economic recovery clearly implies an increase in production and employment, and there has so far been no increase in either. Unemployment in this country stood at a record level at the end of last month ; railway traffic receipts are still declining and none of the recognized indices of trade and industry has so far shown any improvement. The same is the case in the United States, to which country the rest of the world has grown accus- tomed to look, if not for spiritual guidance, at any rate for indications of the trend of material progress. All the statistics of trade and production tell the same dismal story of continued decline, and if the last few days have brought a flicker or two of hope in the slight contra-seasonal increases reported in railway car loadings and the unexccuted orders on the books of the Steel Corporation, there is no sure evidence as yet that that is more than a flash in the pan. But if the question " Has recovery begun ? " means " are there discernible such signs and portents as, on the basis of past experience, must be read as heralding an early improvement in production and employment ? " then I believe that the right answer is a fairly confident " Yes."

The signs I am referring to are, of course, the sharp upturn in the stock markets and in the prices of such basic commodities as wheat, cotton, wool, copper and rubber which has occurred in the last few weeks. A rise in commodity prices and in share values is traditionally the first phase of the upward swing of the trade " cycle." It betokens in the first place nothing more than a change of mind on the part of a limited number of speculators who have persuaded themselves that there is at last a better chance of profit in buying shares or goods which they cannot pay for, in the hope of selling them at a higher price, than in selling shares or goods which they have not got in the hope of buying them back at a lower price. This recovery of confidence by a limited number of self-seeking individuals may (if it does not fly too violently in the face of the physical facts) prove to be the magic spell which breaks the " vicious circle " of declining consumption, falling prices and declining em- ployment, and sets up a virtuous sequence in its stead. A rise in wheat, even if the force which originates it is no more substantial than the whim of a group of gamblers, will put money into the pockets of the farmer. And the farmer will spend that money (unless he must willy nilly use it to pay off bank loans) on buying goods of one kind or another which he could not otherwise have bought. And these goods will have to be made (unless indeed there are too many of them already in stock) and their making will give employment ; and those who make them will be able to buy other goods (including bread which will enable the aforesaid gamblers to sell for actual consumption the wheat thus bought " on spec ") ; and this will give more employment and so on and so on, until trade has fully recovered and the world is on the way to prosperity again—and perhaps to another " boom " doomed to culminate in another Wall Street " crash " with a slump to follow. So confidence may beget trade and psychological lead to physical recovery.

Of course that will not really happen unless there is some rational basis for the revival of confidence. That basis is normally to be found in the gradual encroachment of consumption upon the available stocks of commodities. The outstanding characteristic of a trade slump is, as everyone knows, " over-production." Consumption falls off rapidly and violently while production declines much more slowly (for a time it may even increase), with the result that stocks in the hands of producers, manufac- turers and dealers grow alarmingly. Misguided efforts to keep up prices and to keep up production in the early stages of a slump may prolong the agony, as happened in 1980, but in the end—as no one can go on permanently producing at a loss—production must decline to a point at which consumption, however much contracted, exceeds it. In the end declining production must overtake declining consumption, and stocks must cease to increase. It is then that " bull " speculation in the commodities concerned first becomes a rational proceeding.

If, therefore, we are to form a judgement upon whether the recent rise in prices is justified and is likely to continue, it is vital to examine the stock position. The result will be moderately reassuring. Of the important raw materials for which statistics are available, the " visible stocks of the majority ceased rising about the beginning of the year, though in hardly any case has there been an appreciable decline. Stocks of wheat, rubber, tin, spelter, silk and sugar all indicate a position of equilibrium between supply and demand, though in each case they are very much above normal pre-slump levels. Cotton supplies have continued to rise, but this year's crop will not be a large one ; the position of tea and petroleum, on the other hand, is satisfactory, for there has been an appreciable shrinkage of supplies. On the whole, then, there would seem to be reasonable ground for the recent recovery of prices from the abysmally low levels to which they had fallen ; and that recovery will, if it is sustained, help towards higher production of manufac- turd goods and more employment. But there is cer- tainly no justification as yet for any such violent rise as would raise raw material prices substantially ► above the cost of production. And, in fact, if reck- less speculation were to bring about such a rise, the certain consequence would be a severe check to trade revival. The newly-established equilibrium between supply and demand of which -I have been speak- ing is as -yet a. very precarious achievement, for -in the ease of several of the commodities, such as tin and copper, it has been accomplished only by drastic restriction agreements between producers. These agreements would inevitably break down if anything like a handsome margin of profit were dangled before their signatories, and the result would be a big recovery in output and a corresponding collapse in price. That is why the recent activities of Wall Street, and particularly the political motive underlying them, are so dangerous. Big business in the United States having apparently made up its mind that Hoover is the lesser of two evils, is out to help his election by running up the façade of a new temple of prosperity without thought for the security of its foundations and utterly careless of the damage which its • collapse would do. A stock and commodity market boom, engineered for political reasons, is the worst possible contribution towards genuine recovery, and I, for one, rejoice at the sharp set-back in Wall Street which the cables report to be in progress, as I write. So even the crassness of American politicians shall not persuade me to retract from the modest optimism with which I started. I believe that the process of recovery has begun and is well under way, even though there is little visible evidence of it as yet. But convalescence must at the best be slow, owing to the terrible network of constrictive bonds in which the world has contrived to envelope itself in its desperate and futile efforts to escape from the consequences of its own economic folly. I have little faith in the powers of a World Economic Conference to. produce a formula for the unravelling of the tangle. The only real hope lies in a steady and unrelenting pressure of business men for the piecemeal removal of obstacles to trade, and in the natural -ingenuity of the trader. Every importer or exporter who can find a way (preferably legal) through, round or over a tariff, quota, or exchange control deserves well of humanity at the present juncture.