Is it Slump ?

By OSCAR R. HOBSON

AYEAR ago in an article in the financial number of the Spectator I discussed the cost of living and its probable future movement. I said that the cost of living must broadly follow the course of general wholesale prices and that general wholesale prices in turn took their cue from basic commodity prices, grains, metals, textile fibres and the like. I pointed out that in the eighteen months between the devaluation of sterling to the price " peak " of February, 1951, these basic raw material prices —first line prices as they can be called—had risen no less than 56 per cent. (reckoning by Moody's dollar price index) and that in the ensuing three months they had fallen back 6 per cent. Second line prices (i.e. the general run of wholesale prices) had moved rather more moderately ; they had risen by 36 per cent. in the eighteen months September, 1949 to February, 1951 and by a further 1 f per cent. in the ensuing three months.

LAG IN RETAIL PRICES On that basis I ventured the forecast that unless the reaction in commodity prices should prove more severe than then appeared the third line of prices, the British cost of living, could hardly rise by much less than 20 per cent. from the February, 1951 level.

I cite all this, not to prove how right I was (though I was moderately right) but to provide myself with some sort of factual basis from which to try to look at the prospect now 'before us and in particular to discuss the outstanding economic problem of the day (or rather one of the two great problems—the other one will inevitably butt in presently) namely whether we are in for a real trade slump or not.

In fact the rise in the cost of living in the past fifteen months has not been 20 per cent. but just on 15 per cent., though there are (even apart from the effect of the reduced food subsidies) presumably a few more points arrears of rise still in it, for British wholesale prices have continued even in recent months to rise slightly and, of course, wage rates are rising.

On the other hand basic raw material• prices have fallen more heavily than I was prepared for a year ago. After a rally in the autumn they began to fall again early this year and they are still falling. Many commodities, not merely wool (which as a matter of fact is now recovering) have lost from a half to two-thirds of the value they had at the beginning of last year. They include, unfortunately, quite a number of colonial products, copra and certain vegetable oils for example, as well as rubber, which play an important part in the Sterling Area's dollar balance of payments. They do not include food grains or feeding stuffs and they do not include metals, though nearly all the non-ferrous metals have now fallen somewhat from the high level of prices they held until recently. And curiously enough they do not include cotton, the main raw material of the one consumer goods industry which is in a real depression at the moment.

It is this very heavy fall in commodity prices which, more than anything, has given rise to the fear that the world may be in for a real slump of 1920-22 or 1930-32 strength. That and, of course, the actual recession of demand in a few consumer goods industries, of which textiles are much the most important. • RISK OF VICIOUS SPIRAL

It is, of course, incontrovertible that in any sizeable fall in demand whether for basic commodities or consumable goods, there reside the seeds of a cumulative further fall of demand—of a " vicious spiral " of falling demand, falling prices, falling incomes, falling demand. And it is idle to deny that we are even now witnessing such a sequence. The depression of trade is certainly not entirely concentrated in the textile industries. All farm products, almost without exception, have fallen in value on the world market and, though in certain countries the incomes of the producers of agricul- tural produce may be protected by government subsidy or the equivalent, that does not apply, in the great productive regions of Australia, Asia or Africa. The purchasing power of the people of those regions has fallen and is falling and we are seeing the effect in balance of payments deficits and import cuts and counter-cuts.

We are in a recession of trade. There cannot be any argument about that. What is really at issue is whether the recession is or will develop into a slump of the classical cyclical type, which will go on getting progressively worse for three or four years before the " trough " is reached and a gradual recovery begins to develop.

POSITION IN AMERICA

Even as it is there are precious few signs of depression to be discovered in the United States. Industrial production is at the same level as a year ago, that is at the highest level ever; unemployment is slightly less than a year ago, and retail trade, though not very active is less depressed than it was a year ago. Wall Street, that sensitive index of hopes and fears and sober estimates and trends is remarkably steady, with industrial shares averaging not more than 3 or 4 per, cent. above their highest ever level of last autumn. In a word great prosperity reigns in the United States—and in Canada too. That should be a powerful sheet anchor for the rest of the world.

In the circumstances it seems better to

view the great fall in commodity prices of the last twelve months as no more than the

reversal and correction of the great rise which followed the Korea outbreak in the summer of 1950—to regard the rise and subsequent fall as an excrescence upon what would have been a normal fairly smooth curve of prices. As a matter of fact very many commodity prices now stand in reasonably close, relation to their eve-of-Korea levels. Very few of them stand below those levels ; even rubber, whose fall has been so often spot-lighted in recent months, stands, as I write, a penny or so above the pre- Korea price of 221d. while tin, despite the dramatic fall which it suffered a year ago, still stands some 60 per cent. above its pre-Korea level of £600 a ton.

To advance this theory that what we are going through is-rather a return to the pre-Korea " trend line " than a plunge into the " cyclical " depths may provide small comfort to those on whom the impact of the price fall is concentrated. The Australian wool- farmer, the Malayan rubber grower, the Lancashire cotton spinner and the West Riding topmaker, may plaintively point out that the losses they are suffering hurt just as much whatever the theory evolved to explain them. That is true but even so it should mitigate their discomfort to be able to indulge the reasonable hope that they are now seeing the worst and will not have to face two or three years more of dwindling trade and increasing financial exhaustion.

Nevertheless, when all is said and done we, the sterling' area and these troubled islands, are still in the mess that we are in. We still have our balance of payments deficit to adjust and we still have our pound to save.

Our difficulties appear, indeed, to have been aggravated by the severe fall in commodity prices, but that is only true in a qualified

sense. This country, as an industrial country and a large importer of foodstuffs and raw materials, stands to benefit when these imports are cheap—provided they are not so cheap as to destroy the purchas- ing power of those who buy our exports. It is the raw material producing territories of the Sterling Area, particularly the Colonies, which are primarily harmed by the collapse of commodity prices. Britain is secondarily affected not only because the Colonies and the Commonwealth can buy less of her exports but because she has been relying on the Colonies and the Commonwealth to provide her with dollars to help balance her dollar account. So far as our direct dealings with the dollar area are concerned we stand to gain from the lower commodity prices. Our real trouble is that we have been borrowing Commonwealth-earned dollars and using them on our own account and that there are now fewer of these dollars to borrow. It is well to be clear on this point ;- otherwise, one would have to conclude that history was being stood on its head and that what these islands really need is expensive raw materials and " unfavourable " terms of trade !

INFLATION HALTED And this brings me to our own, strictly domestic, position. I suggest that, dismal as it is generally thought to be it is not altogether without its compensations. We are nearing the end of the long upward pull of the cost of living, with the strains that it imposes on our social and industrial cohesion. Our imported raw materials, the life-blood of our industry, are now mostly obtainable at more reasonable prices. The long march of inflation is halted though, of course, not finally stayed. The new monetary policy, adopted six months ago, has not been unsuccessful, though it may be that it will need reinforcing. In the circumstances the widespread tendency now apparent in the City and elsewhere to confuse counsel by urging the " freeing " of the pound sterling is to be deplored. There is everything to be said for making the pound freely " convertible " into dollars or other currencies at the earliest possible moment. Only so can we hope to return to our traditional position as a world financial centre and a world market place. But in current discussion the " freeing " of the pound in this sense of making it freely convertible is all too often linked with a proposal for " freeing " the pound in the sense of setting it loose from the present dollar parity rate, and letting it fluctuate under the influence of demand and supply. With our present depleted reserves freedom to fluctuate would almost certainly mean a sharp new depreciation of the pound, with all its ugly conse- quences. Convertibility would be conceded at the cost of sub- mergence is a fresh wave of inflation. The cost is too high. Our policy should be to reject such defeatism and to work patiently and steadfastly for the gradual restoration of convertibility at the present rate of exchange.

What we have to do now is to consolidate and extend the ground we have won, and, above all to resist new encroachments upon it. The great trade unions have put forward claims for wage increases which, if granted, must in some cases infallibly lead to a substantial increase in manufacturing costs and, therefore, in the cost of living. These demands represent a new grave threat to our export trade and consequently to the stability of the pound. I find it difficult to believe that given a modicum of courage on the pars of the Govern- ment and a modicum of statesmanship on the part of the trade union leaders we cannot avoid falling into this very obvious pitfall.

ONLY THE HARD WAY

Is the trade union head so completely at the mercy of the trade union tail that it must go on relentlessly calling for wage increases when it knows perfectly well that to do so is to endanger the standard of living of the whole working class ? And if it is, is the Govern- ment so scared of its supporters in the constituencies that it dare not resist the pressure—which it can do perfectly well by tightening up the money measures it has already adopted ? What advantage will it be to the Government at the next election if it runs away now, devalues the pound again and then has to face the heavy unemploy- ment that would necessarily follow the exhaustion of our dollar reserves ? It is unfortunate indeed that, with our inadequate reserves, we dare not relax our monetary measures to help the textile and other depressed consumption industries. That is the penalty we have to suffer for having so long played fast and loose with our finances. There is nothing for it now, so far as I can'

an see, but to go through with it the hard way. But I am quite sure that we can get through that way—and that we cannot any other way.