16 OCTOBER 1953, Page 30


By NICHOLAS DAVENPORT HAVING stated that I expect some recession in the United States and having confessed that I did not yet know whether it was to be mild or bitter, I suppose I shall be accused of swallowing the old-fashioned theory of the business cycle. But I do not believe that anything like the old trade cycle can itow exist because nothing like the old capitalism now exists. When capitalist econ- omies were free, the greedy entrepreneurs pursued profits to the point of over-investing in a boom when they could make a killing. Then, as over-production led to price-cutting and loss, new investment came to a stand- still and panicky de-stocking brought on a Slump. Thus, the old trade cycle was really psychopathic, being an alternation of greed and fear. To-day the government of a capitalist welfare state seeks to eliminate both these social evils as soon as either rears its ugly head—greed by various controls and taxation of excessive profits, fear by intelli- gent planning and the prompt publication of economic and financial information. And the objective of both American and British Governments is to maximise employment and welfare. Even in the United States the President is bound by law to take steps to Counter a recession. The scope for economic fluctuation has therefore been narrowed down to the follies of Governments and the ittistakes of business men trying to foreCast the wisdom of Governments. There will be Wings but not cyclical swings. There will be ups and downs but they should be less violent. There will be oscillations ; but Oscillations round a line of steady growth, the growth depending on the rate of capital expenditures (or the rate of saving for Investment), the rate of increase in technical 4evelopments and the rate of increase in population. If anyone now predicts that the capitalist West is bound to fall this year pr next into its first post-war major slump he is consciously or unconsciously taking the Marxist-Stalinist-Malenkov line which does pot allow for the fact that capitalism can be made respectable and efficient, moral and /purposive, by the action of its Governments Pnd the force of its public opinion. It is pity that Mr. Harold Wilson, M.P., has been repeating his 1952 prediction of " a Major financial crisis comparable with that 1,13 f 1931," for he is identifying himself with talin's last essay in socialist economics ; is agreeing with the Communist doctrine at capitalism carries within itself the seeds if f its own destruction. If he had studied he working of the American economy , which, unlike ours, can be analysed statis- . cally within thirty days of the events) he ' ould have found out that it carries within self the balances and checks which auto- matically make the readjustments.

Taxing Capital Gains The recession which will make the necessary readjustments in the United States today has not been precipitated by unsound banking or insane speculations which made the depression of the 'thirties so severe and scr unique. Wall Street, after its fall, is already so deflated that the leading railroad Mocks are selling at only 4* times their annual earnings and returning dividend yields of nearly 7 per cent. Leading indus- trial stocks are selling today at only 8* times their annual earnings as compared with 23 times in May, 1946, when the first post- war "bull" market reached its peak. The market will probably fall further, for we are now approaching the season of the year when selling for tax purposes becomes fashionable owing to the complicated basis on which the Federal Government levies a tax on capital gains.

Restoring the Equity—For Steel ?

The " Indian summer " in Throgmorton Street broke temporarily with the weather this week but there is still a feeling that Mr. Butler may restore the sunshine with another per cent. cut in Bank rate. The remarkable success of his conversion of the Serial Fund- ing bonds and of his cash offer of Exchequer 3 per cent. 1963 must have reassured him of the wisdom of his cheaper money policy. The next test for the market will be the first issue of the denationalised steel industry which is expected to be announced this week-end. Will the steel issues mark the peak of the present boom ? They certainly mark the peak of the change in the political climate which made the boom possible. Indeed,‘ it may be argued that the recovery in British industrial ordinary shares since last June is no more than the restoration of the " equity " to its proper place in a capitalist economy freed from political inter- ference at home and external crisis abroad. Viewed in this light our " bull " market does not present such an odd contrast to the " bear " market in Wall Street. The previous regime was so unsympathetic to the equity share. It threatened it with statutory limitation of dividends. It refused to allow it to make bonus issues to bring itself into line with the real value of its assets. It depressed it with talk of capital levies and a tax on capital gains. It was deaf to the plea that the private sector in the economy had to look to issues of equity shares for its risk capital without which it could not expand or bring itself up to date. To the scare of a shortage of risk capital Mr. Gaitskell used to say—and still does—that more institu- tions like the I.C.F.C. must be created to fill the gap. Contrast the °hanged situation today. There is no political restraint of dividends or bonus issues. Companies are allowed to exploit the equity share for what it is worth—as a means of raising capital, as a means of buying control, as a means of rewarding shareholders for risks they have borne or are asked to take. In these circum- stances, it is entirely proper that the public should be offered, as is expected, a yield of about 71 per cent. on United Steel—the first of the steel issues.