WEAK LINK IN THE BOOM CHAIN
By NICHOLAS DAVENPORT The father of the boom is, of course, Mr: Derick Heathcoat Amory, but he will be very angry when he reads the Smithy Express. As he explained to the National Production Advisory Council a fortnight ago, he gave a substantial stimulus to business through his Budget because he believed that the re-expansion of the economy, which had already started, would not develop as he would wish without some further prodding. But the Bud- get reliefs, he added, were neither intended nor expected to lead to a boom but to a further phase of steady and cautious expansion. When we talk of a stimulus to expansion, he said, we do not envisage turning on a tap that suddenly starts everyone buying more, producing more, exporting mote, investing more. The real decisions which
affect the trend of industrial growth arc those taken by many thousands of businessmen trying to calculate the prospect of a profit.
Now the Chancellor must confess that he has been encouraging these businessmen to expect much larger profits. The £160 million boost which he has imparted to public investment, the spurt to consumer buying given by the end of hire- purchase restrictions, the easier bank loans and the reduction in purchase taxes, to be followed later by income tax reliefs and more post-war credits, all this implies a substantial increase in production and an expansion of profit margins and of profits. Although import prices may rise, the unit costs of production should remain stable because 'production is likely,' Mr. Amory said, `to go on rising ahead of employment.' Indeed, he told the Production Advisory Council that he expected 'a markedly bigger rate of rise' in pro- ductivity than for some time.
Apart from this rosy domestic scene the Chan- cellor told the American Bankers' Association recently that he expected the level of world trade to rise. The slight recession in Europe was over. World commodity prices had been getting stronger since the beginning of the year and•the reserves of both industrial and primary producing countries had been stabilised or strengthened. The enlarged resources of the IMF and the International Bank were now available to finance a further expansion of international trade. And finally Mr. Amory looked hopefully to the strong recovery in the United States. 'We can hope,' he said; 'that by importing freely and making generous contribt- lions to the development needs of the poorer countries' the United States will continue to stimulate world trade expansion.
If Mr. Amory really feels as bullish as this, the city editor may be forgiven for his rose-coloured spectacles—and the Stock Exchange for its boom. But I think he is expecting too much of the United States. Certainly the recovery there is already strong enough to cause some expansion in capital. spending—not on the construction of new fac- tories, for there is still something like 20 per cent. over-capacity, but on the modernisation of exist- ing manufacturing facilities. The urge is to reduce labour costs, and as many American products have already priced themselves out of the world's markets the same urge is driving more and more American companies to manufacture abroad—in the UK and Europe—where labour costs are cheaper. This explains the rising trend of Ameri- can imports and of American investment overseas. And this explains also the continuing loss of gold. The truth of the matter is that the American economy is not a particularly stable one and at the moment is swinging away from, not going to- wards, equilibrium.
Since the beginning of April the American loss of gold has been increasing again and is likely to become worse as some foreign governments pay 25 per cent. of their extra subscriptions to the IMF by converting dollars into gold. The gold loss last year of $2,300 million was due to a deficit on international payments account of $3,400 million. This deficit looks like increasing this year. The American Government could, of course, do much
to right the balance by cutting foreign military and economic aid, but that would be against their foreign policy. They could not stop private foreign investment, which last year was about $3,600 mil- lion and is likely to be higher this year, because that is symptomatic of the rise in American indus- trial costs. So far there has been little sign of an f■ actual flight from the dollar, but if there is a bad steel strike and a new inflation scare, that could develop overnight. The facilities already exist. An American cannot buy gold for hoarding at home but he can buy it abroad and the Bank of Nova Scotia, in conjunction with Samuel Montagu of London, is ready to issue gold certificates against the deposit of gold in Toronto or London All this is a sign of an economic stress and it is idle for the authorities to pretend that all is well. A hectic boom on Wall Street, coupled with a flight from the dollar, would cause the Federal Reserve to make money really dear and in the last resort, if gold were pouring out of Fort Knox, the American Treasury would have to put an embargo on the export of gold. This surely is the weak link in the chain of booming Stock Ex changes in the Western world.
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