Can Another Slump Be Prevented ?

Prospects Better Than In Previous Booms
BY EDWARD LEEMING
T the present time the country has made considerable progress in recovery from the last great slump but it cannot be said to have attained a boom yet. There is still far too much unemployment, notably in the Special Areas, and nothing must be done to hinder further advance towards prosperity. But it is essential that preparation should be made, in the event of boom conditions arising, to be able to prevent another slump overtaking us. The ideal to be aimed at is to keep industry sufficiently active to be able to offer full time employment at just wages to everyone who wants it.
Full Purchasing Power
Full industrial activity is only possible if there is enough purchasing power in the hands of the public to buy all the goods manufactured for consumption.
The price the public pays for these goods must cover all the costs of manufacture, otherwise the process would be unprofitable.
The cost of manufacture of any article is fundamentally the sum of the wages, salaries and dividends paid out by the manufacturer in making it and altogether these make up the purchasing power of the community. It makes no difference if the manufacturer has to buy raw or semi finished materials except that his costs will then include some wages, salaries and dividends paid out by the primary producer.
Naturally all the wages, etc., arc not being paid out at the moment that the article
comes on to the market but some may have been paid out a considerable time before in the earlier stages of manufacture. But, if the output is not decreasing, Mere will be at
least as many articles in the earlier stages of manufacture as there are finished articles waiting to be sold. Therefore in any given time the total wages, etc., paid by the manufacturer must equal the cost of the finished goods made in that time.
Consumption A great part of modern industry is engaged in making the machinery required to manufacture consumption goods. It is bought either with capital subscribed by the public or with accumulated reserves.
The former is the savings of the wealthier part of the community and is that part of their income which they do not spend on consumption goods. It is not lost as consuming power because the cost of the machinery comprises the wages, etc., paid by the manufacturer of the machinery.
The reserves are retained out of the annual profits and are invested, usually in Government securities, so as to be readily available for the repair or replacement of plant. This money is not lost as consuming power because it merely displaces direct investment by the public.
In practice the steady state of full industrial activity assumed above has never continued for an appreciable length of time but fluctuations of purchasing power have caused slumps and booms. There is, however, no essential defect in the industrial system which makes the extremes necessary and prevents steady full production with its ample purchasing power.
Idle Credit
The slow recovery of industry after a slump is familiar from the experience of the last few years.
In the worst period of the late slump there was a large volume of credit unable to find a profitable outlet and manufacturers could have borrowed on easier terms than had ever been known before. At first very little advantage was taken of this because the consuming power in the hands of the public was not enough to induce increased production. Gradually confidence returned and extra production was undertaken in anticipation of demand growing. The additional wages paid in consequence automatically swelled purchasing power.
Recovery, once started, gained strength until the present measure of prosperity was reached. It is the developments which have followed the corresponding stages of past revivals which must be avoided this time.
A large proportion of the raw materials required by industry in this country have to be imported from abroad so that increased industrial activity raises the volume of imports. Also their price per unit rises when the surplus stocks which have accumulated during the slump become liquidated. Therefore, recovery from a slump is usually followed by an increase in the cost of imported raw materials which is not balanced at once by a corresponding increase in exports.
Payment for the extra imports must be made in the currencies of the countries supplying the 'goods and the demand for these currencies causes weakness in sterling.
When the pound was on a gold basis and there was a free market in foreign exchanges any pronounced weakness in sterling led to a tendency for the export of gold from the Bank of England. It was counteracted by raising the Bank Rate which has the result of making it more attractive to retain money in the country owing to its bigger yield.
Raising the Bank Rate Raising the bank rate certainly achieved its object in checking the drain of currency from the country but it also had unfortunate reactions upon industry. The additional burden of an increase in the rate of in terest on loans often came just at the time when other expenses of production were rising and when the manufacturers' profit was declining by the operation of the law of diminishing returns.
The rise in the cost of imported raw materials not only raised the cost of manufacture directly but also did so indirectly because the increase in the cost of living caused by the rise in prices necessitated the payment of higher wages; incidentally it is one of the most unsatisfactory features of a boom that money wages do not rise proportionately to the increase in the Cost of living and the workers suffer a fall in real wages.
When these factors, and other contributary causes, all came into operation together they caused disappointment with the return obtained from money invested in industry.
Output began to decline and this tendency was reinforced by a reduction in constructional work which is usually active at the start of the recovery period and which is sensitive to an increase in the rate of interest. Thus a vicious spiral started in which diminishing production reduced purchasing power which in its turn weakened demand until ultimately slump conditions returned.
Foreign Exchange
Control of the rates of exchange by means of the bank rate is now out of date. The currency is managed by an exchange equalisation fund, set up after the departure from the gold standard in 1931, acting in conjunction with similar funds in America, France and other countries. The funds buy or sell gold or currencies as required for the day to day balances of payments between countries and protect the internal values of the currencies from the influence of temporary external demands. Raising the bank rate would only become imperative in the extreme case of the exchange fund becoming exhausted.
Although industry is in a much better
mercy of an unwanted monetary stringency caused by a rise in bank rate this is not in itself enough to prevent another slump. The necessity of paying for the increased imports still remains and will become more acute if they continue to rise.
The imports consist of goods which cannot ever be produced in this country and which ;te absolutely essential to maintain even the present standard of living. They can only be paid for in the long run by the export of goods, or services, of which we have a superabundance.
If world trade could expand without hindrance by tariffs, import quotas and exchange restrictions our exports would automatically grow as the purchasing power of the primary producers is promoted by the greater demand for their products. It is indispensable, therefore, that every effort should be made to remove all the present trade barriers and stimulate world trade as soon as possible. The exchange fund is strong enough to allow for a small temporary adverse balance of trade but could not do so indefinitely.
Menace of Speculation
The evil effects of the speculation which took place in America before the slump show that a limited amount of monetary restriction may eventually become necessary. Speculation is encouraged by the high dividends paid by some firms which enhances the value of their shares and attracts buyers. Those who sell on the rising market make a real profit but those who buy and hold only make a profit on paper. If prices begin to fall there may be a panic. Some, who have borrowed the money with which they are speculating, wish to sell in order to repay the banks, others wish to realise their profit possibly because they have already spent part of it in anticipation. Unfortunately the trouble is not confined to the stock market but the nervousness spreads and leads to a general collapse of markets which precipitates a slump.
This danger is realised by the banks and they have expressed their intention to limit the amount of money which might become used for speculation.
It is not so easy to stop the payment of excessive dividends; penal taxation merely stifles enterprise and is ultimately to the detriment of the workers.
The best remedy would be the reduction of profits by the payment of decent living wages and the amelioration of working conditions, both, of course, enjoined on moral grounds.
Brightest Prospects Yet
Altogether the prospects of avoiding. or at least mitigating, another slump seem better than they have ever been before.
The large expenditure on armaments, however much it may be regretted in other ways, will spread employment over the whole country for the next few years. It is desirable that any public works which can be reasonably postponed should be prepared but not started until the re-armament is nearly completed. This would avoid a decrease in production, and therefore also of purchasing power, towards the end of the programme.
If depression is allowed to start the public expenditure will not be so effective 'because it is much better to stimulate production, which provides consuming power, than to create consuming power before the goods are made.