Phase 3 diversions
Nicholas Davenport
I remember Wall Street once falling ten points in a few hours when the report flew around that President Eisenhower had had a stroke. Last week it fell 41 points mainly because President Nixon had had a stroke — of very bad luck. Whether he deserved it is not for me to say but things have been going very wrong for him, not only in the Watergate affair but in economic affairs. As I have said, the American economy is estimated to have grown over the first quarter of 1972 by 14 per cent in money terms but in real terms by only 7 per cent. Wall Street operators are said to have become ' demoralised ' over the failure of the Nixon administration to take some definitive action to control this inflation. There was a massive outflow of capital in the first quarter — about $10,000 million according to the balance of payments return.
As the British economy often repeats the action of the American economy after an interval of SIX to nine months it is worth our While to examine why President Nixon's luck is running out. American industry is booming and the economy is getting overheated. In March industrial output was up 8} per cent on the previous year and because the orders for consumer durables are still mounting up delivery dates are at a. peak and there is growing criticism both of delays in completion and of workmanship. As a result of this all-round boom and of the very rapid rise in prices since Phase 3 was introduced in January there is even talk of tax Increases being necessary to restrain the growth of the economy. A happy-go-lucky Wall Street would, of course, now be booming in recognition of the sharp rise in company profits in the first quarter. With the easing of price restrictions for Phase 3 and with labour costs still contained both trading and manufacturing companies have had a bonanza. But Wall Street is no longer happy-golucky. It is looking forward with trepidation to the important rounds of wage negotiations during 1973 and in view of the sharp rise in prices labour is not in an accommodating mood. Consumer real incomes have, in fact, fallen by about 2 per cent since October owing to the restraint imposed on wages. If labour refuses to co
operate with the Government in Phase 3 and if Government is then driven to act on prices and allow money rates to rise, we shall hear much more talk from ' bears ' of a coming American recession.
By way of contrast with President Nixon Mr Heath's luck is running in. In the five months to end March, which covers the freeze, the rise in British retail prices was only 23/4 per cent — or 63/4 per cent at an annual rate — and according to the OECD our inflation record among the member countries has improved from being the third worst to the third best. But April will see a sharper rise in prices due to the introduction of VAT and although Mr Scanlon has conceded victory to Mr Heath over' Phase 2 there is still the awkward question whether Labour will cooperate with him in Phase 3. The worsening of economic events in America — the possibility that Mr Nixon will not be able to carry on his prices and incomes policy — may make things very difficult for Mr Heath. That is why it seems to me wrong to talk of an end to our bear market. It would be odd to see Throgmorton Street go on rising if Wall Street goes on falling. The great economic irrelevance of the May Day strikes is matched by the great economic irrelevance of the recent merchant bank merger. Jim Slater and Sir Kenneth Keith of Hill Samuel are joining together in holy matrimony (blessed by the City Pope, the Governor of the Bank of England), to form the biggest merchant banking group in the City. It will have a market capitalisation of over £250 million, £1,500 million of gross assets and net assets of £153 million.
Both chairman (Keith) and deputy chairman (Slater) stressed that the merger would create an international financial group of ereat strength and potential and that every opportunity for rapid expansion in international and overseas financial business would be seized. In other words, they are not looking to Mr Heath's revival in industrial investment at home for their bread and butter. The City is stuffed with merchant banks. There are about twentyeight British ones and about a dozen subsidiaries of American banks. And they are all stuffed with money. The financial profits derived from company mergers and issues have swelled their funds. Moreover outsiders deposit their own surplus profits with these merchant banks and ask them to manage them. Slater Walker-Hill Samuel will have over £1,000 million of investment funds to look after.
The Economist has suggested that whereas the traditional role of the merchant bankers is to arrange finance for their corporate clients' projects at home they are now much more concerned to find investment projects round the world for their multi-national clients who have more money than they know what to do with. It gave a table showing which countries had the richest reserves and therefore the wherewithal to invest. In billions of dollars Germany is top with $291/2, Japan second with over $19, France with $101/2, Switzerland with $7.7, Italy with $6.4, Australia with $6.2 and Britain with $5.9. The extraordinary feature of the table was that Libya, politically the most aggressive of the Arab oil producers, came out on top with reserves expressed per head of population. Its total reserve of $3 billion amounted to $1,539 per Libyan head — higher than the $1,216 per head in Switzerland. I Socialists work themselves into a fury when they see the poor getting poorer while the rich are getting richer — which, I am afraid is the necessary mathematical result of growth economics — but will the Arab socialist states — Libya, Egypt and Iraq, which produce the oil riches — ever realise that they have a trust for mankind, that they should use their wealth for investment in the poorer half of the• developing nations?
The merchant banks in the capitalist West are ready to advise them and are undoubtedly skilled in the lay-out of the finance required, but will the Arab social
ists make use of those in the City of London which are Jewish by origin and still Jewish in administrative direction — and the more skilled because of it? I doubt it. And this brings me to the only criticism I have of the irrelevant Slater Walker-Hill Samuel merger. The name Slater Walker is to disappear I and the name Hill Samuel is to continue — with the Jewish connotation to upset the Arab clients. ' It could be an oversight, or it could be a bravado, which I must applaud, but I regret that the name of clever Jim, the British builder's son, our grammar-school, boy made good, should disappear from the merchant bank compendium.
One gets the feeling that the financial world gets more out of touch with reality as it grows richer. The reality is the struggle of Western democracies to bring their capitalist systems into a growth harmony without inflation, so that the workers can increase their standard of living in real terms. But in America this honest endeavour is upset by gigantic frauds —
financial as well as political — while in Britain it is sidetracked by the pursuit of financial bigness. When I see a marriage between an Arab Sheik and a Jewish merchant • banker I will begin to feel more optimistic.
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