Finance—Public & Private

The Past Year

IN next week's issue I shall, with even more trepidation than usual, be writing something in this column with regard to the possible trend of financial developments in the New Year, though there was probably never a time when, owing to the obscurity of the outlook, anything in the shape of intelligent forecast was more difficult. If readers, however, will have the patience to read the few comments I propose to make this week with regard to some of the features of the year which is now closing, they will be better able to follow the argu- ments I shall put forward next week with regard to prospects for 1931. For, after all, the developments of one year really constitute the chief guide to future pro- spects, and while, of course, from time to time the sequence of cause and effect is interrupted by some great event, the process of evolution goes on, more or less, in finance and politics as in other matters. Let me, then, briefly recall some of the features of 1930.

TRADE DEPRESSION.

The closing year will be remembered as having for its predominant feature a deepening of financial and industrial depression at home, and an extension of that depression to many parts of the world. The figures of our foreign trade touched fresh low records during the year, while new high records were established in the figures of Unem- ployed. Moreover, as the year has proceeded so the conditions of trade depression have become more marked in other parts of the world, notably in the United States, while further causes of depression have been found in manifestations of political and social unrest in many parts of the world, and in three countries of South America there has been an actual revolution, and some- thing akin to a revolution has more recently been witnessed in Spain. The crisis in Australia, which was becoming marked at the end of 1929, has been more pro- nounced during the past year, while elsewhere the condi- tion of affairs in Russia, combined with the insistent propaganda carried on by that country, has provided a kind of perpetual nightmare. There has been compara- tively little improvement, too, in conditions in China, and the state of affairs in that country, together with unrest in India and the boycott of British goods, are circumstances which have aggravated the general and industrial depression. In fact, it would be difficult to discover any very important events and influences of a favourable character during the year which is about to close. A full expression of these conditions is to be found in the market for public securities, and while as a consequence of cheap money and lack of confidence elsewhere, high-class investment stocks have risen, the movement has been completely offset by the weakness of general securities so that on balance there has been a heavy fall.

Two Donneaser FACTORS.

It usually happens, however, that while the influences affecting the financial situation during the year may be numerous and varied one or two dominating factors stand out from the rest. Such, I think, has been the case during the past year. To one of these, namely, the setback in American prosperity, I have made a brief reference, but a fuller examination is necessary if we are to determine its possible influence upon the course of developments in the New Year, and at the conclusion of this article I will also refer to the other dominant influence of the past year.

THE AMERICAN SITUATION.

It would be easy to sum up the developments in the United States by saying that for something like a couple of years the boom in Wall Street was so gigantic as to send money rates up to 15 and 20 per cent. and to attract capital from all parts of the world, constituting, indeed, a menace to the world's Money Markets. It might then be added that in the autumn of last year there occurred a great slump from which the American market has not yet recovered, so that the year 1930 closed to the accompaniment of much liquidation in the States with a considerable number of banking and other failures. Such a brief summary, however, would really give an imperfect picture of an almost unpre• cedented situation.

From 1914 to 1918 events occurred which, while bringing America for a short period into the World War, gave to that country an impetus in productive activities, and an accession to wealth expressed in actual gold and credit balances such as even America had never pre- viously obtained. Following upon the War came a period of prolonged prosperity, aided by a gigantic inflow of gold and a great command of the exchanges, due to an unprecedentedly unfavourable trade balance and to America having, as a result of the enfeebled state of Europe, captured many of the world's markets. Not long after the conclusion of the War came the funding of Europe's War Debts to the States, which resulted in her receiving annually from this country over £80,000,000 for Debt service and, ultimately, a not dissimilar amount from other countries.

THE PROSPERITY PERIOD.

Notwithstanding this indebtedness of Europe, the U.S. Government evidently determined that American prosperity was not to be slackened in any way by Europe endeavouring to discharge fully her indebtedness through an exchange of goods and services. Consequently tariffs were piled still higher and the task of the European countries became increasingly difficult. For a time the situation was eased in Europe by large loans from American investors to Germany and some other parts of Europe. That phase did not last, however, for very long, for presently the prosperity at home began to stimulate speculative activities in Wall Street, and this speculation ultimately took the form of a frenzied gamble in ordinary shares of industrial and utility companies. Not only was the abnormal prosperity of the United States accepted as normal, but speculators discounted prosperity in the years to come by piling up shares to a height which, on the basis of current dividends, meant that the yield to the investor was infinitesimal. This work of discounting the future, however, was not confined to the speculators in Wall Street, for finance and industry united in discounting future consumption requirements by the public through an elaborate system of instalmentpay- ments. Wages were abnormally high by reason of the continued prosperity, and the instalment system was based on the idea of their perpetual continuance. More than once the soundness of the instalment system was challenged by this country, but, as is customary nowadays, we were told that times had changed and that those who were discounting future possibilities in the United States were doing so on lines the soundness of which could not possibly be challenged.

FORCING CONSUMPTION.

I have tried not to overdraw this picture of develop- ments in the United States during recent years, but I have felt it necessary to express the facts rather fully because if the picture is a true one then it is fairly clear that any reaction from these abnormal conditions was bound to be of a pronounced and prolonged character. And, indeed, that view of the matter has been largely borne out by the developments of the past fifteen months. When the drop of September, 1929, occurred American bankers declared that while the slump was sharp it would be short lived, and were busy prophesying a revival in the spring of 1930.

And, indeed, during the early part of this year more than one attempt was made to galvanize markets into new life, only, however, with the result that prices fell to a still lower level and as the year proceeded depression became more pronounced not only on the Stock Exchange but in trade throughout the country. There is little doubt that America by now has realized that she is suffer- ing not only from the reaction from her abnormal and to some extent fictitious prosperity, but that she is feeling more than she expected to feel the adverse conditions prevailing in foreign countries. How far the charge of overproduction may be true, so far as world conditions are concerned, it would be difficult to say, but so far as America is concerned the conditions I have described certainly suggest that in the United States the forcing of consumption demands through the instalment system may easily have led to overproduction its that country.

I suggest, therefore, that in considering the pro- spects for 1931 very considerable allowance has to be made for the likelihood of the reaction in the United States lasting for a considerable period.

SOCIALISM AT HOME.

The other dominant factor which has affected markets throughout the year has been the concern felt with regard to conditions at home, and especially with regard to the general course of Socialistic finance and legislation. The failure of the Government to deal successfully with the industrial problem would not, in itself, have had a demor- alizing influence for the sufficient reason that business quarters fully appreciated the magnitude and complexity of the problem. When, however, in the face of the situation presented and the admitted fact of the burden of taxation upon industry, the present Government deliberately added many millions to the National Ex- penditure, real alarm was occasioned and there was added to the many other damaging influences the further factor of a lack of confidence just when confidence was never more needed.

It was noticeable that the depression became increasingly marked following upon the Chancellor of the Exchequer's Budget last April, and some of the staunchest adherents of Free Trade were aghast at the Chancellor's callous attitude towards Safeguarding Duties which were aiding particular industries. The very uncertainty with regard to the Government's policy aggravated the depression and increased the alarm. It aggravated the depression because uncertainty is always a disturbing influence in business, and it created alarm because it appeared to display a lack of appreciation of the gravity of the whole industrial situation which was so keenly recognized by the financial and business community. It is difficult to write fully on this factor of the past year represented by apprehensions concerning Socialistic legislation without becoming " political," ' but I should not be giving a correct picture of the situation if I failed to deal with it. Only during the past week, when depression was par- ticularly marked in the City, I was at some pains to canvass the views of business men with regard to the factors which they considered were pressing most heavily upon the situation. The enquiries were made in many quarters and a great variety of replies might have been expected. As a matter of fact, however, I found that they practically came down to two points, namely, that the situation in the United States and anxiety with regard to the economic situation at home as affected by Socialistic legislation, announced and apprehended, were the outstanding depressing influences at the end of the year 1930.

Such being the case, or at all events such being the argument, what is to be said with regard to the pros- pects for 1931 ? On that matter I shall hope to write next week, but if the City is correct in its view as to the two main dominating influences at present affecting the situation, I.think that readers of the Spectator will have no difficulty in perceiving that a forecast of the possi- bilities for the New Year constitutes a pretty formidable ,task.

ARTHUR W. KIDDY.