The End of the Credit Spree?

THE present boom has been swept along largely through the injection into the economy of new bank credit at a rate exceeding £20 million pe: week in the recent period. Since the credit squeeze ended the total increase in bank loans and advances is well over £1,000 million.

On this basis a considerable 1ew market was opened up, chiefly for consumer durables. The hire purchase companies have been permited to take full advantage of the lifting of restrictions on instalment business. Individuals have been able to borrow more readily than ever before, whether for buying houses or to participate in the Stock Exchange boom.

How long and how far the system can go on imbibing credit at this rate without mishap is uncertain. Certainly the government has come to the conclusion that this rich mixture is going to some people’s heads and is applying the brakes. Bank rate is moving upwards, while the only secret about next month’s Budget is which taxes will be raised and what restrictions it will impose on spending.

Yet so far there has been no inflation and recession still lingers in some sectors of the economy. But the timing of the new policy emphasis is not just Tory bungling or wickedness. The system cannot take it.

Growing production over the past year was facilitated by the existence of excess capacity built up in the earlier phases of the prosperity. Production and productivity increased with little or no new investment in many firms and with a decline in unit cost. Import prices were favourable. As for wages, the recession provided a pretext for breaking the rhythm of annual wage claims on the part of right-wing officialdom in a number of key unions. Hence profits have soared, especially in the favoured consumer goods industries, such as household appliances and cars, and for the distributive chains and credit companies handling the increased volume of sales. A striking example is Hoovers Ltd. Trading profits doubled in 1959. Dividend on 5s. shares went up from 60 per cent. to 90 per cent. and an extra share will be :ssved for each ‘A’ ordinary share held; the Ss. share now stands at 110s. 6d.

By the last quarter of 1959, however, it was becoming evident that in these prosperous fields excess capacity had been SALFORD absorbed; an upward revision of investment plans was revealed by the Board of Trade’s figures published in January. Meanwhile, in some areas, labour scarcities arose. The rank-and-file in industry, too, has forced unions to put in wage claims and to stand more firmly by them than over the past two years.

Inflation, if not yet actual, is iatent in the economy and may become rampant if the credit spree continues without check.

Meanwhile, there is no possibility of reducing Government expenditure. Peaceful co-existence seems to mean 10 per cent. increase in the army estimates, new and more costly missiles and warning posts. The rail settlement, the recommendations of the Committee on doctors’ pay, the higher National Assistance rates all add their quota to the expenditure side of the Budget and hence to the inflationary pressures now building up.

Well, it may be asked, what is wrong with a little inflation? For some time inflation has been rank heresy. Yet it seems that the only terms on which a cavitalist economy today can be prosperous is through credit expansion and high government expenditures which eventually bring inflation in their train. The real problem is that while inflation brings undesirable results for some parts of the internal economy it leads to even more intractable external problems—the weakening of sterling, runs on the pound, fall in gold and dollar reserves ... not at all to the liking of the City of London.

There is no doubt that ‘defence of sterling’ comes first—as was shown by the crash increase of Bank Rate to 7 per cent. in the autumn of 1957. Something similar could be in store again, with the evident result of ending expansion at home.

All this adds up to a persistent dilemma of economic policy which illustrates the fact that a decade of prosperity is very far from having solved the problems of British capitalism.

Economists all in favour of ‘expansion’ reflect this dilemma in acute form and it can be demonstrated daily and weekly from the financial press. Some are even capable, in the same article, of bewailing ‘the danger that the tardy revival in investment in plant and equipment may be checked off before it has really got under way’ and yet wonder whether enough has been done to ‘restrain’ an expansion which may turn into inflation (see, for example, London and Cambridge Economic Survey, March, 1960)!

of them expressed the feelings of a large section of the tenants,