A comparison of slumps
Nicholas Davenport
Turnover on the Stock Exchange has fallen to such a pathetic shadow of its former body that I expected stockbrokers to cheer the Tony Benn announcement that the Shipbuilding industry is to be comPletely nationalised. State takeovers in the past have always led to a burst of activity in the market, especially as the expropriated owners receive cashable government bonds in exchange for more or less unsaleable shares, Which they promptly re-invest. But 110! The dreary downward trend was resumed and the FT index of thirty industrial shares has now fallen 57 per cent from its top (5431/2 in May 1972) — a bigger Percentage fall than it suffered in the immediate anmediate Wall Street crash of 4929. Naturally every one in the City is very depressed and many brokers are expecting a world trade depression to follow the market slump as it did in the 'thirties. Now there are many striking resemblances between the stock Market slumps of today — from Wall Street to the European capitals and Tokyo — and those of 1929-32 but there are also important economic differences. While I suspect that a world trade recession is approaching — largely because of the "deflation" of $60,000 Million imposed this year by the quadrupling of the price of Arab oil ---.I do not believe that it will acin
quire the awful size of the one the 'thirties when millions and influents of men were thrown out of Work because no businessman found it profitable to employ them.
The most obvious resemblance uetWeeri the two slumps is the financial crisis, which is bound to occur with the collapse of e'ver-extended banks. Whenever tthere is a wild boom in the properY. commodity and equity share ornfarkets there is always a number t• greedY, irresponsible and some, lutes crooked speculators who 1r-ow too much and cannot repay sl:leir loans when the boom subIdes. In the present case they n-kbled mostly on property, on ceornmodities and in the currency i:cchanges: in the 'thirties they did s illetstlY on Wall Street shares. The ,9-called "fringe" banks were the tu•st to go in our own market and 1Pen followed two German banks, a
• 'O '„wiss bank and the Franklin NaI
;,rial Bank of New York. More tiailures are sure to come. In addi„pl. to fringe banks there are now !Inge” life assurance companies
in trouble. The linking of unit trust promotions with life assurance cover and the issue of tax-dodging annuity bonds, guaranteed income bonds etc etc were the main cause of the growth of "fringe" life companies. The first here to go bust with more liabilities than assets is the Nation Life Insurance Company. But it may be recalled that the Jessel Group life subsidiary had to be rescued by its parent while Vavasseur Life with 25 per cent of its life fund invested in one property had to have a property guarantee.
It seems incredible that the financial whiz-kids of the City should have been allowed by their bosses to take on such outrageous risks but their bosses were no doubt greedy and were making use of the. enormous credits extended to them by the responsible clearing banks out of the swollen money supply created by the Tory government: of which Mr Heath, Mr Barber and their advisers should now be feeling thoroughly ashamed. I think I was the only financial writer to keep on bleating that it is always wrong and rash to give freedom to moneylenders.
Banking and life assurance failures are the common feature of the collapse of any hectic boom in the property and equity share markets. When about $40,000 million was wiped off the market value of shares in Wall Street in a few weeks of the autumn of 1929 banks all round the States, finding that their collateral for loans had disappeared, closed their doors. It is a sobering thought that since the peak of the Tory boom in Throgmorton Street over £20,000 million has been lopped off the market value of British shares. To make tnatters worse the collapse in property values has been even worse. With the freezing of rents, private and commercial, the British property market has virtually ceased to exist. The vanishing of this huge amount of paper money, which had been the support for bank loans and the prop of life assurance funds, threatens the vital sub-structure of our whole financial system. The flow of savings into productive investment, on which economic growth depends, is in danger of being stopped, as it was in the 'thirties.
Apart from this common feature of a financial crisis there is no resemblance in economic terms between the boom and slump of the 'thirties and the boom and slump of today. In the 'thirties there was stability of prices and wages; today there is price and wage inflation. In the United States the price level was static between 1921 and 1929; in fact, wages in real terms failed to rise to match increased productivity. Nearly 25 per cent of total personal incomes was then derived from rents, interest and dividends. So when the middle class lost their capital the drop in demand was catastrophic. Investment stopped and about a quarter of the working class lost their jobs. The fall in commodity prices also ruined the American farmers. The drastic fall in total American demand brought the slump to Europe and the poor developing nations. The slump became universal.
Today the world is not so dependent on American demand. World trade has broadened and is better distributed. The world commodity producers have not yet passed from boom to slump; they are still enjoying comparatively high prices. And the rise in wages, even in real terms, is big enough to offset the fall in middle class real incomes. The catastrophic fall in property and security prices could wipe out the middle class without bringing a catastrophic fall in total consumer spending. But there is one deflationary force which has not yet worked itself through to the consumer end. That is the quadrupling of the price of Arab oil which takes $60,000 million away from the spending power of Western comsumers this year. This is a further point of difference between recession today and the slump of the 'thirties.
There is, however, a point of resemblance which could be important, and is certainly depressing. In the 'thirties the central banks and the governments were ignorant of the right economic cure for their depression. They really believed that they had to deflate — to bring down wages so that labour was "cheap" enough to employ. When Roosevelt had grasped the Keynesian theory that governments must spend their way out of depression — by creating fresh monetary demand through budget deficits — the United States began to recover. His "New Deal," followed by raising the price of gold and lowering the dollar exchange rate, completed the Keynesian trick. In the quite different economic conditions of today, when "full employment" is given economic priority, when budget deficits and the money supply tend to run out of control, when a wage-cost inflation is added to a business recession, do the governments and the central banks really know what to do? I doubt it. They still cling to the idea — expressed by Dr Burns of the Federal Reserve — that money rates must go higher and higher to kill the inflation. They, I believe, are acting as insanely as they did in the 'thirties. And to make matters worse for the UK we have a socialist government which apparently believes that Marks and Spencer could be run more efficiently if it were nationalised.
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