Back into Crisis?

By OSCAR R. HOBSON YEAR ago, in contributing the introductory article to the Fiftieth Annual Financial Supplement of the Spectator; I used the heading "Is it Slump?". If I now entitle this icle as above, let me not be accused of scaremongering. Last year :turned the answer " No " to the question " Is it slump?" And lay say it turned out not to be slump, in the old cyclical sense which ;rybody then had in mind, but merely a short, sharp, localised ction from the buying spree set going three years ago by the break of the Korean War.

If 1 now in this Fifty-first Financial Supplement ask a very similar estion, it is because it is a question which is prominent in the minds most people whether they be bankers, industrialists or economists, o by their avocations are compelled to give systematic thought lay to the problems which will confront them tomorrow. A year ), when I wrote, we were just turning the corner of the severe lance of payments crisis of 1951. Yet now again everyone .is :ing whether we are not destined shortly—the pessimists and the nudists who have swallowed the odd-year crisis theory think Ore the present year is ended, the more titnistic fear before 1954 is over—to Inge into a similar, cauldron of trouble.

the fact that much the same question is w being asked as was being asked a year ), is in a sense in itself symptomatic. It

'`'S underline the fact that certain basic iditions have not changed. In that year

s country has made a remarkable recovery. e depressed textile and consumer goods lustries have rallied; the comparatively all amount of unemployment which their

Pression caused has disappeared; industrial )duction has been restored to its high

el of 1951; the balance of payments has Ling from a state of frightening debit to e of reassuring credit. The change, nevertheless, is rather of the -• Micawber order. Psychologically it is

Inense, yet concretely it is rather unim-

sslve. It is a change from sixpence— 'ugh one should say half-a-crown--on wrong side to sixpence on the right side. Is a change of a rather marginal order,

kh suggests that we might easily slip 2k. agaln.

kre we going to slip back again? Well, I ,I certainly not going to return a resounding 'lel' ' to that one—and so save my readers trouble of reading any further. It is

ssible that we shall slip back, yet I cannot bring myself to believe a the hypothesis. that we shall is as axiomatic as a good many of friends almost passionately believe. It is quite true that many of basic underlying conditions are unchanged. It is true that the lerican market is, relatively to the rest of the free world, so immense It small fluctuations in demand or in production in the United tes are liable to cause disproportionate disturbance to trade and ces in other countries. It is true that the monetary reserves of those ker countries, and especially those of Britain (which have to serve .Sterling Area as well as herself) are low in relation to the demands leh comparatively minor recessions are likely to put upon them. 14._ it is certainly true that America cannot be expected to go °ugh the remainder of history without running into minor reces- 11.5 and, very likely, major ones as well. line Stalin's death three months ago Russia's demeanour towards Western World has altered remarkably. The change, nevertheless, so 'far superficial. The fundamental political facts which have ranged West from East still exist; Eastern Germany is still occupied; Poles and the Czechs and the Roumanians are still dominated; re is not the slightest sign that Russia is ready to abate her military Paredness by one iota.

While those facts hold it would seem such madness for the West to Indon its defence plans that one cannot imagine its being done. me relaxation, some shading off or spreading over of programmes re may be, kit if that is all, civilian demand and civilian industry i easily haul in the slack as it occurs. It is able to do that because world is still, and perhaps more than ever, in a state of rapid technical development and of intense desire for material advancement.

At the risk, therefore, of qualifying for inclusion in an anthology of "famous last words" I will say that I see no ground at all for expecting a major trade recession in the United States—or here—in the foreseeable future. But what about a minor recession—a repeti- tion of 1949, when a temporary five per cent. drop in American national income drove us to devalue? Must the recurrence of such conditions necessarily have the same effects for us—i.e., deplete our reserves to the point at which more or less desperate measures are necessary?

I am not convinced that it must. Reserves are not everything. Nor are gold reserves the most useful kind of reserves. Certainly, we could do with gold reserves which were higher in relation to our turnover of overseas trade, though personally I have little faith in such artificial expedients for strengthening them as writing up the price of gold.

If we have such reserves we can tide over periods of balance of payments strain with- out disaster. We had in fact such reserves in 1951 and we did in consequence survive the 1951 crisis without disaster. We accu- mulated those reserves as the result of panic in 1950 at very high prices. I do not blame the Labour Government for that. Their fault was that, for all their mania for "planning" they exercised insufficient con- trol over the process of accumulation, did not realise in time where it was leading us, and neglected to use the only effective instrument of control, monetary policy.

The Conservative Government in a measure remedied that defect. It made use, for the first time for twenty years, of the Bank Rate. It used it timidly at first, rather more boldly later, but never yet, I should say, with complete confidence and conviction. It has at any rate still not ventured to dispense with the expedients of import licensing (even as against the continent of Europe) and direct controls of banking credit and capital issues.

One can argue as one likes about the relative value of the different measures adopted to deal with crisis; yet it is difficult indeed to believe that the better. distribution of material stocks through industry was not mainly due to the rise in interest rates which increased the cost of "carrying" surplus supplies. A reserve that can never be used is no reserve. Stocks of materials hoarded or immobilised as the result of inflation are useless.

The present. Government has gone a long way towards restoring mobility and flexibility to our economic system. It has not V by any means gone far enough. It has made good progress with the decontrol of prices and the restoration of the old free markets of London and Liverpool. Wheat and other grains, lead, zinc, copper (prospectively), cotton and timber restored to private trading, petrol decontrolled, tea, eggs, sweets and, prospectively, sugar derationed, steel de-allocated—it makes an impressive list for a period of Office which still barely exceeds eighteen months.

But it is still only a bare beginning. The great and stubborn problem of over-taxa'tion remains. What Mr. Butler wkas able to do in his second budget hardly scratches its surface. It is utterly essential that rates of taxation should be worked down to levels at which they are not found to constrict every movement, stifle every breath of energy. For this country, if for no other, the final economic reserve, worth all the other reserves put together, is and must always be flexibility. We have no vast natural resources, we can never feed ourselves from our own land, we have no domestic market big enough to employ mass production on the highest scale. We must live by our wits and our experience, our banking and marketing skill, our craftsmanship, our national solidarity, or not at all. We have to develop anew our historic skills and advantages rather than turn our backs on them comfortable delude ourselves into thinking that mature years have earned us a `ninfortable and sheltered existence. We need physical reserves, gold and raw materials, but we shall never have them in sufficient Plume unless we regard them merely as a background for versatility, 'tier developing new lines of production andri trade, for switching trade Go old markets to new when the need ases.

,....Coming back to the question which heads this article, am far more lightened by the widespread inability or flat refusal to recognise these nUgs than by the state of our gold reserve. It is stupidity at home which is the danger and not the inadequacy of the external reserves. trending is true that from the way the import and export figures have been mending in the last few months, it looks as though the process of months recovery in reserves which we have been witnessing for twelve re"ionths past may give place to a new decline. So far there is no if,,, s°,11 to expect that it need be more than a normal fluctuation. And (t,' uoes turn out to be a new decline, there is nothing that we can about it in advance—except behave rationally, keep alert for 'lion if necessary.

substantial increase in wages at the present time would obviously .,"?_1 be rational. There is no .case for it on grounds of increased Kroductivity and, in face of the present tendency for exports to decline, could be extremely dangerous. Nor is there any real case for it on the ground that the cost of living has increased. It is true that Tutee 1947 the interim index of retail prices has risen by 41 per cent. and index of weekly wage rates by only 35 per cent. But the whole at six points discrepancy, except for a small fraction of a point, arose before 1951. (Dare I mention that those were the years of Labour Government?) retail the middle of 1951 wages have risen by 12i per cent. and h7ail priceS by 12.8 per cent. Furthermore, half the rise in prices these two years‘ has been due to the removal of cost of living subsidies for which workers have been largely compensated by n y leaduecrisentions in direct tation. Real net wages have not but There is, every reason to expect, that they will go on rising slowly provided that the trades unions are not blinded by illusions—or political passions—into insisting' on a new round of unjustifiable claims.

Inflation in Britain and, indeed, most of the world, has been scoiched. The benefits are already apparent and the general improve- ment in economic health Which has followed is not the least of the reasons for cherishing the belief that there will be no relapse into crisis. But inflation has not been killed. It, could easily be revived. A more certain way of reviving it in this country than by giving the engineers and shipbuilders their 15 per cent. wage demand, it would be difficult to find. But we must also not lose sight of the fact that there are inflationary possibilities inherent in the budget. It may be that, as one set of pundits is insisting, the budget was too "soft." It may be that, Mr. Butler was too optimistic in thinking that his rather slight tax remissions would so stimulate saving that current savings would cover some £400 million of public expenditure on housing and other works as well as an expanded amount of "private sector" capital expenditure. It may be that his experts under- estimated the effect of last year's trade recession on the yield of income tax and profits tax. The tremendous reductions in tax liability which many company reports currently appearing are showing look rather alarming.

I would certainly not like to say that there are any clear signs so far that the budget is "going wrong" and beginning to generate new inflationary pressure. The state of the gilt-edged market and of the foreign exchanges is reassuring. Yet one must recognise that safety margins are slender. Exchange rates can quickly turn from set fair to stormy. The gilt-edged market can quickly develop symptoms of acute indigestion. The price of economic vigour and independence is eternal vigilance. If in the matter of the budget the Chancellor in a measure cast his bread upon the waters, he has the ,new-found instrument of the Bank Rate in his hand wherewith to retrieve it. He said in his budget speech that he would, if necessary, not hesitate to use that instrument. It is always easier to threaten than to act. Mr. Butler's place in history may well depend on the vigour and decision with which he brings monetary policy to bear on a deteri- orating balance of payments situation. If he displays decisive qualities of action, there will be no "Back into Crisis."