Mr Martin's financial crisis MONEY
NICHOLAS DAVENPORT
At any moment of crisis it is wise to choose your words very carefully, especially if you are about to deliver an ultimatum. Mr William McChesney Martin, the chairman of the Federal Reserve Board, hardly bothered to do so when he addressed the American Society of News- paper Editors last week in Washington. 'We are in the midst,' he said, 'of the worst financial crisis since 1931.' I can assure him it is nothing like 1931. At least I can assure myself because I was there.
The Wall Street crash of 1929 timed my unin- tended introduction to City life. There had been at that time an orgy of stock market speculation on borrowed money, the banking and financial set-up in the United States had been unsound and to some extent corrupt, the life savings of a generation had been wiped out. By 1931 Ameri- - can banks were closing down right and left. I remember meeting the manager of a Canadian bank who had been living near the American frontier. He told me that at the height of the financial panic he had seen from his office window a long, unending line of American cars waiting to cross the bridge into Canada. The demented, hooting drivers were American citi- zens trying to put what remained of their savings into any sound Canadian bank which had remained open. Today the American banks are swollen with money and the pockets of the average depositor are bulging with dollar notes. You have to be a poor white or an American negro to compare 1968 with 1931.
There is, of course, a financial crisis of a very different sort because the two reserve cur- rencies have been running heavy deficits on their international payments. The richest nation on earth is carrying—to quote Mr Martin— 'an intolerable budget deficit' as well as 'an intolerable deficit' on its payments account. Compared with a gross national product of around $850,000 million and government spend- ing of around $180,000 million a year both seem to me not unreasonable. The 1968 budget deficit (to 30 June) has been swollen by the Viet- nam war to around $3,600 million and the 1967 payments deficit to nearly $4,000 million. 'Both these deficits.' said Mr Martin. have to be corrected over the next few years or the United States is going to face either an uncontrollable recession or an uncontrollable inflation. Unless we reverse our present trend it will inevitably lead to world-wide devaluation of currencies and that would be the greatest setback this country has faced in my lifetime.' The warning was accompanied by a 4 per cent rise in the American bank rate. The effect of this alarmist Powellish speech (which was no doubt honestly intended to push Congress into passing the pro- posed 10 per cent surcharge on income taxes) was to send both American and foreign specu- la rs back into the market to buy gold shares Ito their nameless d the Swiss banks to buy gold bullion on the free market on behalf of but numbered depositors.
This fear of currency devaluation which sets speculators rushing into gold is only one of the symptoms of the prevailing financial crisis. The other symptoms, pressing more harshly on the man in the street, are the credit squeeze, the
continual rise in borrowing rates, the slump in government bonds, the mad rush after equity shares, the creeping rise in prices, wages and in the whole cost of living. American bank rates —from 5 per cent to 51 per cent—are the highest rates since 1929 (which may have made Mr Martin imagine things), while the British Bank rate, hoisted after devaluation to 8 per cent, the highest in Europe, has been reduced by only 1- per cent to 74- per cent four months later. We are all victims of the money squeeze, especi- ally if we have to borrow to buy a house. The building societies, being short of money, have just raised their deposit rates by 1 per cent to 41 per cent net (equivalent to 7.1 per cent gross) and their house mortgage rates by -1 per cent to 7-t, per cent (to take effect from I May).
There is no more disquieting symptom of a financial crisis than a runaway equity share market, especially when it takes the form of pushing up the investment dollar premium to 49 per cent and so advertising to the world that British investors will pay almost any premium to get out of British money. It was a great relief, even if it is only a temporary one, to see Mr Martin's dire warning bring the Financial Times index of our industrial shares down 13 points to 450 and the investment dollar premium down 10 points to 39.
It goes without saying that while these finan- cial indices are symptoms of a serious financial crisis they are not yet symptoms of a serious economic crisis. The American economy is booming. The last quarterly rise in the gross national product, some $20,000 million, wa' the largest quarterly rise in American history, pointing to a growth rate of 10 per cent per annum or 6 per cent in real terms after allowing for a 4 per cent rise in prices. World trade is also picking up and is not now being restrained by any shortage of world liquidity. But the explosive financial crisis which is centred in the United States could develop into an economic crisis which would engulf the world if the Washington government were forced into taking even more drastic deflationary action than Mr Jenkins has taken in Britain. It is plain that America—still tied to an expensive war in Vietnam and now committed to huge expendi- tures on the cities where racial war is threaten- ing—is in the grip of a dangerous domestic inflation. If it were to lose the bulk of its remain- ing stock of gold—now down to $10,000 million —it might well be forced into a drastic internal consumer deflation and such protectionist action as putting on import quotas and licences. This would kill the British export drive. If the world's richest nation were to turn protectionist there is a world trade recession ahead.
Before America is forced into such desperate- action as putting on import quotas and licences. promise with the French and agree to an official writing-up of the price of gold in the central bank reserves. (A universal writing-up of official gold does not alter exchange parities and need not lead to a round of competitive currency devaluations as some purists believe.) The central bankers . are much more liberal and sophisticated than they were in 1931 when their then reluctance to raise the price of gold inten- sified the world slump.
What can we do in Britain to provide some shelter from the financial storm gathering on the other side of the Atlantic? Fortunately we have a Chancellor in Mr Jenkins who likes to play it cool. As he no longer has to pursue a policy of trying to bolster up sterling by attract- ing 'hot' money to London he might well reduce Bank rate to 7 per cent and ease the pressure in the-house mortgage market. He might begin to encourage savings by ceasing to attack invested wealth. He might even induce investors to buy government bonds instead of joining in the mad race for equities.
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