As the Crisis Approaches . . .

By JOHN VA1ZEY

ALL sorts of signs may be found, as you look

round the world, of a great storm blowing Up. Britain is the storm centre. It is this which Will dominate British politics for several years; it is in this context that the hopes and fears of the young or youngish professional people (whose Opinions and feelings seem, by common consent, to be the dominant factor in British politics) will have to be interpreted. A fundamental restructur- ing of the British economy and of British politics may be about to take place.

Take, first, the British economy. Technically, as the recent Bank of England report showed, We are bankrupt. Our short-term liabilities con- siderably exceed our short-term assets. Our economy is overstrained—there is little reserve capacity to produce more exports. There is little Sign that our.exports will rise dramatically (as I Shall argue below) because our export markets are more likely to contract than to expand. Consequently, no immediate sign of the end of the bankruptcy can be observed, especially by our creditors, whose opinions are what count. The prospect of devaluation is still, therefore, a ,ery real one. On October 16, as a planned move, it would have made some sort of sense. It does not now, as a forced move. We have had the Power of a maniac. By threatening in November to bring the whole structure down we black- 'nailed the bankers, but gradually they are going to get out of this commitment and they are strongly recommending deflation at home to restore our balance of payments. The alternative Policy—of spending our long-term overseas assets—which the Government is being urged to adopt, is rash and foolish. There is little evidence that the incomes and prices policy will work quickly; as Mr. Brown held up his Statement of Intent, the busmen got a big wage award—and so it has gone on. The policy of controlling prices and incomes is a sensible one, but is being intro-

duced in circumstances where the pressure for rises is great, and the chances of failure are correspondingly great. For such a policy to work, less pressure of demand is most certainly necessary, as the deflationary policies since October confirm. As a result of the particular kind of deflation adopted we now appear to have falling output and rising prices; the downturn of employment will presumably occur in the late autumn. Meantime we live in a familiar condition of uncomfortable paradox.

So the internal outlook is bad. It is difficult to see how another autumn crisis can be averted. There are reasons to believe that this crisis may be of 1931 (or at least 1949) proportions, rather than of the 1957 and 1961 type that we have grown used to. If we avert a devaluation it will be at the price of a very severe deflation indeed. The world may be heading for a major down- turn as Mr. Nicholas Davenport has argued in this paper. In the United States steps arc being taken to limit capital outflows and government overseas spending. This in itself is deflationary. The Americans are quite properly being ruthless in cutting down the supply of dollars. Interest rates may have to 'be raised as the European bankers, especially in France, are asking. The end of the US boom may be in sight—despite the optimism of Washington—and who knows whether, at the crunch, LBJ and Congress will be able and willing to spend their way out of the ensuing downturn? Whatever the outlook is internally, the US is no longer likely to provide expanding markets for our exports nor is it likely to remain an expanding source of liquidity —to put it at its lowest—unless some international crisis blows up requiring vast US overseas expenditure.

The French stabilisation programme has caused French output to stop growing as fast as it was. In Germany the surplus on the balance of payments shows signs of falling and fears of 'importing inflation' are real. In Italy the deflation shows few signs of ending quickly despite the adoption of a ro.flationary policy. Japan's pros- perity. like Italy's, is partly dependent on short- term US funds which may well be substantially reduced, as the recent Stock Exchange crisis showed. India has virtually run out of foreign

exchange. For all these reasons, it is difficult to see British exports doing better than they have

been, and it is possible to foresee a downward spiral of world economic activity, as a conse- quence mainly of the measures taken to respond to the world shortage of liquidity. Britain is the storm centre because the pound is the really weak link. If the pound goes, the dollar will not now go as the Americans have taken action to preserve the dollar. The only real remedy is for the world to quickly establish a new system of international liquidity. Only an optimist would expect that to happen. What then do we do?

In the first place, all plans and programmes based on 'economic good weather' must be re- examined.

Secondly, the fundamental readjustment of the British economy assumes an urgency—and a magnitude—rarely realised hitherto. Mr. Brown quite rightly has realised this, but few others.

The alternative to this revaluation of policies and practices is to 'slither through' in a condition of dreary deflation, already to be expected from the 6 per cent Bank rate, the shortage of credit and the budgets. (The reduction of Bank rate last week appears to have been largely for technical reasons; the credit squeeze is tighter than ever.) But to 'slither through' will mean to do worse than in previous periods of slither through; and it will mean the bankruptcy of many present policies—with rather frightening prospects for people's judgments on politics.

What one foresees is a dangerous split. On the left, the 'socialist' Labour people will say that everything has gone wrong because the present Government has not been socialist enough. Their departure from the Labour party can be contem- plated by most of us with equanimity. The other split of opinion, the division between moderate progressives and the reactionaries, is much more alarming. Already people are saying that no prices and incomes policy can possibly work. Certainly, by the timing and manner of the introduction of the present policy it is fairly sure that the dice are loaded against any such policy. But in the long run, some control of prices and incomes is essential for a mixed economy in full employment. The less 'informed' opinion accepts this proposition, the greater the degree of unemployment (or inflation) we shall eventually have to regard as normal. Further, so great is the hostility of business to the budget—including the unfortunately timed corporation tax—that deep reaction in the form of hostility to all government expenditure is again on the up and up. If a crash occurs, the reaction to it may be irrational and not post-Keynesian. Expenditure could be slashed by an incoming reactionary government with mass unemployment as a result.

That is why it is essential to rally the middle ranks of opinion.

One way of minimising the impact of the forthcoming crisis—perhaps even of averting it— would be to strengthen sterling. A simple objec- tive impossible to attain, one might think, except by the expedient of a devaluation, and a severe policy of deflation for at least a year, or possibly two years, in conditions of considerable inter- national uncertainty. (A 10 per cent Bank rate is by no means out of the question on present form.) But the strength might come at once if Britain joined the Common Market, because sterling would be backed automatically by the Common Market monetary arrangements which are now developing rapidly. We are told that for us to join is impossible before 1968, but an autumn crisis will alter the circumstances.

To join the Common Market would make the need for structural change more urgent than ever, even though it would remove the possibility of a dramatic crash. The problem—the social and political problem—is that many of these changes are contrary to current policies. But economic prediction' is a chancy business. Perhaps we shall be lucky. But what is it to be 'lucky' at the moment? To go on as we are?