WHAT WENT WRONG with the BOOM
JUST A YEAR AGO I reported on these pages certain economic predictions. Not my own, for I am no economist; they represented the views of the ablest professional brains in Ottawa.
Though shouted down, distorted, and smeared in the election campaign a few months later, these predictions have been vindicated.
The ponderous wheel of the North American economy has turned full circle and produced the inevitable recession built into our system long ago by our own folly.
To be sure, the reversal is relatively minor and is only one phase, perhaps the smallest, of a three-pronged crisis which this series of articles will discuss.
One year ago
NOW HE TELLS
y WE OVERBUILT y WE OVERSPENT y WE GOT DRUNK ON INFLATION
and we can’t recover until the U.S. does. But we can sidestep a bust and salvage part of our scuttled savings — if we swallow some bitter facts
WHERE ARE WE GOING?
of three articles by Bruce Hutchison on various aspects of the present crisis in the free world as seen from Ottawa, New York and Washington.
But it is the first phase to come, and the most visible. It touches the ordinary Canadian household, it convulses politics in an election year and it displays more clearly than anything else the deepening dilemma of democracy.
Let us, therefore, consider first what has gone wrong with the great Canadian boom, why it cannot be easily or quickly revived and what we can do to prevent it becoming a bust.
A year ago the boom looked as shiny and strong on the outside as ever, but fatal fractures had already appeared and they widened rapidly. The men in Ottawa who manage our economy—so far as government can manage a free economy—saw these fissures when they were hairthick and desperately tried to close them.
They failed. But it is a libel to say that these men did not know what was happening or that in their ignorance they worsened an unavoidable business decline.
On the contrary, they warned a year ago that the nation was in the grip of price inflation; and that this proeess, in Canada and elsewhere, must assure recession.
Both these things have come to pass. Inflation is still our basic economic danger. Prices are still rising, even in a recession, and will continue to rise for some time by a unique economic paradox.
They also warned that inflation would end the boom without curing the root disease. This is confirmed by every economic index today. The continental economy is in deeper trouble than any government is likely to admit, though with luck and good management we can probably begin to get out of it by autumn. The economy of Canada faces problems different both in size and in kind from those of our next-door neighbor.
What went wrong? Not what most politicians tell us, not what the headlines say, not what citizen Joseph Doakes usually supposes, but something much deeper and much simpler. We must understand that the trigger of our recession was not pulled by any Canadian finger. Assuredly we had loaded our gun with continued on page 31
Something new in pictures
A second album by John deVisser, the remarkable young immigrant photographer. Here he discovers drama and surprise in such everyday sights as the hotbox of an oil furnace above. Four more pages follow ►
Something new in pictures: continued
No gimmicks and nothing up the sleeves when John deVisser made the photographs on these pages. They're
When we published the first album of John deVisser's fine photographs (A New Look at a Controversial City. Maclean's, Oct. 26. 1957), the response was immediate and enthusiastic. From everybody but DeVisser, that is. He liked those pictures well enough, but. he told us. he was building another and much better set. These new ones would attempt to capture the fleeting moments of unsuspected beauty, of humor, of surprise that his ever-open camera's eye noted at
every street corner, on the broad avenues, even in backyards. They were not obvious pictures: they would tell a story of Toronto unknown to its citizens and its chroniclers alike. We were intrigued, and this new fivepage album is the result. Without the use of special camera equipment, using ordinary color film. DeVisser has achieved, in essence. a portfolio of abstract or semiabstract art. He shows those of us who take our cities for granted that beauties of line,
familiar sights. But what are they?
of form, of color can lurk in the places where we throw our cigarette butts . . .
in the mirror-shine of a new car. a factory wall, a porch awning, a misty windowpane. What is this sudden renown doing to John deViiser? For one thing, he's banking the money to take his wife, Barrie-born Helen Reeve, over to Holland to meet his parents. The Netherlands DeVissers. and John's seven sisters and two brothers, livp around the small southern industrial city of Veghel.
Bowling alley? Bridge? Mine? Can you guess what’s below?
Something new in pictures: continued
A fire escape, summer chairs, a parking lot — with an artist’s eye and an amateur's relish, John deVisser finds a
bright jigsaw of color in the streets of his adopted Toronto
What went wrong with the boom
Continued from page 20
back-firing economic explosives, but the trigger was pulled by foreign fingers too numerous and obscure for identification.
Just as the Liberal government did not create the boom and could not control it, the Conservative government did not create the recession and cannot cure it.
The decline in Canadian business stems from a decline throughout the world, and especially in the United States, our largest foreign market.
In theory there was no reason for any decline. The majority of mankind is in need of goods and the West is well able to supply them. But a vast increase in the output of the industrial nations lias not been absorbed by their own people or by the backward peoples who need it.
By the autumn of 1957 there was an unsaleable surplus of the things that Canada sells abroad in large quantities— wheat, timber products, paper and metals. The sudden fall in demand for, and prices of, these things damaged many of Canada’s basic industries. The fact that our total exports continued at a high level could not counteract this damage in vital aspects of our economy — damage that spreads from the idle mines or lumber mills right down to the corner grocery store.
More than almost any other, our economy is vulnerable to these w'orld forces. But it is rich because it has learned to sell gigantic quantities of a few highly specialized products to the world. If it were more self-contained it would be less vulnerable. Also, it would be much poorer. We cannot have the advantages of our specialized exports without the disadvantage of vulnerability.
This obvious fact of geography, climate, resources and economic organization was largely ignored during the boom. We thought w'c could have our cake and eat it too, and for the most part our politicians told us our expectations were reasonable.
Accordingly, we proceeded to overbuild a productive system that might prosper so long as the world boomed and we could sell virtually anything at rising prices. The Americans did the same thing on a proportionately smaller scale.
When the world boom ended we had guaranteed a maximum of danger by our decision to build too fast with the aid of foreign money, a productive apparatus considerably in excess of our domestic and foreign markets.
The consequence was that complex phenomenon we loosely call inflation.
In seeking scarce materials, machinery and manpower for our expanding industry wc bid up prices and wages. T hen higher wages produced still higher prices in a vicious spira). Though the spiral destroyed half our savings in the last two decades, it could have continued indefinitely so long as the world maintained inflation at the same pace and was thus prepared to pay our increasing export prices.
Unfortunately there were two gaping flaws in this cheerful assumption. First, the world economy crossed, last year, the point at which the buyer resists the seller and refuses to pay existing prices. A chain reaction followed. Since many basic Canadian industries were hurt, investment naturally fell off sufficiently to take the steam out of the capital boom.
Second, while we were beginning to
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price ourselves out of the world market we were also pricing ourselves out of our own market, even among employed and prosperous workers.
The Canadian buyer quietly resisted the high prices of some non-essential goods and started to damage industries not directly concerned with the world market. Thus the spiral of inflation reached the breaking point, to be replaced overnight by a spiral of deflation.
At this point the politicians and the public look around for a whipping boy. The Conservative party blames a former Liberal government. The Liberal opposition blames the Conservative government. Everybody blames the Hank of Canada, the best whipping boy of all because it cannot defend itself and, at the present primitive stage of public knowledge, can hardly explain what it is doing or how money works.
1 he real villain of the piece is the public itself. But since the public is never willing to admit its own error, it is a human necessity to personalize and punish another villain. He was readily at hand and his name was l ight Money.
Actually tight money never existed. At no time did the Bank of Canada make money “tight” if by that we mean scarce. The supply of money increased as fast as the supply of goods and, indeed, a little faster. All the Bank did in recent years was hold back the supply of money from running far beyond the supply of goods.
Nor did the Bank raise interest rates, the least understood version of the tightmoney legend. Rates rose of their own accord simply because the demand for investment funds exceeded the supply, forcing up the price of borrowed money.
The managers of money were not trying to restrict our prosperity but to stabilize it. They were not trying to destroy the boom but to stretch it out and avoid a bust. They were not trying to prevent useful investment but to keep it within our real means and to channel it into useful works.
But they failed—as they knew they must fail against pressures which insisted on building anything and everything, however unsound, at once. Besides, the money managers could manage money alone. Money, though a vital instrument, is not the only factor in inflation.
The Bank could refuse to create excessive money out of thin air and pump it into the spending stream, but it could not prevent an industrialist building a new plant in excess of his potential market. It could not stop him borrowing money wherever he found it at any price he chose to pay. It could not provide money for the small businessman who, going to a private bank, sometimes found that the stronger, larger firm already had borrowed the available supply at a high interest rate.
Caught between a public which expected the boom to go on forever, between politicians of all parties who promised to keep it going on forever, and a business community which was determined to expand without regard to its potential markets at home and abroad, the money managers could hope only to restrain the worst of these follies.
They knew that the nation was building, in some departments, far too fast. They knew a break would come as soon as the domestic and world market began to resist rising prices. They knew that the nation was drunk on inflation and they foresaw the hangover. The only question was how long the spree would
last and how painful the hangover would be.
The spree could last only so long as the world market was thirsty for our products and w'as itself drinking the heady wine of inflation as fast as we. The record shows that the world market started to sober up early last year and, by autumn, was painfully hung over.
Does all this mean that the money managers in Canada, the United States, Britain, Germany and elsewhere erred in their refusal to release a new stream of money last spring? Not at all.
Unquestionably their restraints, inadequate as they were, saved us from a major crash. Without them we would be entering another 1929 instead of a 1958 of difficult but manageable readjustment. At any rate, the deflation in demand for goods did not mean, in Canada, an end of inflation. The money managers had monetary inflation under control by the end of 1956. They had refused to create new money in the Bank of Canada and they had arrested the creation of more money, in the form of loans, through the private banking system.
Prices: up, up and up
From the beginning of 1957 the inflation ceased to be monetary. The supply of money no longer exceeded the supply of goods. In the meantime, however, a non-monetary inflation had been built into the economy by rising wages and rising prices. Not monetary policy but wages and prices were sweeping the nation toward the breaking point.
As I reported then, the economists of the central bank and the government expected retail prices to keep on rising. They did rise. They are still rising, even though the price of raw materials has fallen. And barring some unlikely accident retail prices will be higher by autumn than they are now.
We have not escaped the grip of price inflation while suffering a world-wide
economic deflation. In this situation we have encountered a factor unknown, or at least insignificant, in any former recession.
We have lurched against the power of organized labor, and the fixed or rising wage scale which often takes no account of economic realities. The position of organized labor in this equation may prove decisive, for better or worse. The question is how labor will use its power, perhaps the largest single concentration of power in contemporary North America.
In a competitive society each group, quite properly, will put its own interests first. It is ridiculous to expect labor to do anything else; childish to complain because it tries to secure for itself a larger cut of the total pie, for that is its legitimate purpose.
But what is labor’s true interest in the changed conditions of 1958? Obviously it is to keep the pie as large as possible lest every slice, including labor’s, be drastically reduced. We are speaking here of the hard facts of things as they exist. Those facts must convince any workingman, regardless of his ideology, that the total pie will certainly be reduced at the present time if we cannot sell a large piece of it on the world market.
If our wages and hence our prices are too high we shall not sell that slice and the chief victim will not be the capitalist, who can look after himself, but the workingman who loses his job.
Probably the largest economic question before us, therefore, is whether labor can discern its own interest, or whether labor will demand more than the traffic'can bear. If so, it will be the passengers in the day coaches, not in the Pullman, who will suffer most.
We face, or should face, an alarming economic fact: our national productiv-
ity—the amount of goods that the average worker produces in a day’s work— has fallen in the past year although our mechanical efficiency has increased. The fall was slight but definite. Yet in the
same period wages on average rose by about seven percent.
Under those conditions prices had to rise even if profits were squeezed or entirely eliminated. Such are the grim facts in the early months of 1958 as a political campaign begins to blur and confuse them. While the politicians are engaged in a post-mortem on the boom and a carnival of promises for the future, the practical question today is not how we got into this jam but how we can get out of it.
To this end the money managers be-
gan to move quietly but firmly in the middle of last year, when they saw that the long-expected breaking point was close at hand. Interest rates slipped in the autumn by the same law of supply and demand which had raised them in the first place. As borrowers became less eager for borrowed funds the price of money fell, along with the stock market and for the same reason—the prospects of business looked increasingly unattractive. In this new situation the money managers had to ask themselves whether they should intervene and drive down
interest rates still further by issuing an increased supply of money.
Though few Canadians noted it at the time the central Bank decided to intervene last September, but cautiously. The total supply of money was quietly increased, over a period of weeks, by about four hundred million dollars. The private banks were encouraged to lend as much money as possible to sound borrowers. The monetary brakes were released and the accelerator applied.
But with non-monetary inflation still underway it would have been madness
to attempt to cure a recession still relatively mild by a massive monetary inflation. And in any case, no monetary inflation could possibly cure the recession. The money managers had also to consider the long-term effects of an excessively low interest rate. It would defraud all savers of a reasonable return on their money, just as some had already been defrauded, by inflation, of half their capital. It would discourage future saving needed to finance the public works of the government and the private development of resources. Moreover, the Bank’s eminent ex-governor, Graham Towers, has recently denied with uncharacteristic passion that a deliberate monetary inflation, even on a small orderly scale, can be a good thing. In the view of Mr. Towers and of his successor James Coyne there can be no safe continuing inflation, however small, any more than there can be a half pregnancy. Father we stop inflation in its tracks, these men say, or it will not only destroy our economic system and our savings but will also destroy our whole society. There is a breaking point on which Towers recently placed a firm finger. When this point is reached, he said— that is, when the public begins to lose confidence in the value of money—a flight from money follows. People refuse to save, government and private bonds cannot be sold, boom leads to bust and the whole financial structure collapses. Far worse, confidence in government itself collapses and society is fractured in the struggle between the benefactors and the victims of the debacle. After money, what? To men like Towers and Coyne money is thus something much more important than a mechanism of economics; its stability is the supreme test of a stable society; its ruin assures the ruin of any state. It is not too early to ask ourselves whether we are moving toward that end. Apart from money we have to ask ourselves what other device we can use to cure the recession and recover our former prosperity. If that question is answered candidly the answer must disappoint a generation of Canadians who escaped the great depression and have been spoon-fed for years on impossible expectations. There simply is no easy way, and probably no quick way, out of the recession. A full economic recovery in Canada is entirely outside our own control, no matter w'hat the election orators may say. No interest rate, however low, can compel an investor to borrow and build a factory if he foresees no profit in it. No amount of government spending, however large, can enable the Canadian people to eat all their surplus wheat or use all their lumber, paper and metals. No amount of monetary inflation, even if it put a million dollars into every Canadian’s pocket today, can insulate us from the world market where about a fifth of our total production must be sold. Without abundant sales there, our economy must languish because that fifth makes all the difference between good times and bad. Certainly government spending can cushion the recession, but alone it cannot rescue us from the post-boom hangover. We must therefore, for the most part, rely on two reasonable possibilities, one internal, the other external. Internally we have to grow up into our oversized productive capacity. The
length of that growing period will depend on our population growth and the prosperity of the average family. Prosperity and consumption will depend very largely, in turn, upon our sales in the world market.
Externally our sales in the world market will depend on the condition of the market and on our ability to meet its prices. Our economic future hangs primarily on conditions in the United States. We may not like it but this is a fact, not only for us but for every nation in the free world.
What are conditions in the U. S.?
In Washington and New York I quickly realized, as 1 should have realized before 1 left Ottawa, that the American business situation differs fundamentally from ours. The American economy is almost self-contained, selling most of its goods in its own market and giving away what it cannot sell abroad. Canada is a generation or more aw'ay from anything like a similar self-containment if. indeed, that is a desirable state.
Today the American economy, so far as government can manage it, is being managed on lines laid down by a man long dead. The late Maynard Keynes visited Washington in the hideous spring of 1934. could not explain his theories to President Roosevelt, and went back to Britain quite disenchanted with the New Deal. He left behind an economic time bomb.
It will be exploded this year, if it is needed, by a Republican government, the enemy but imitator of the New' Deal.
President Eisenhower’s administration is prepared to prime the American pump by deficit spending. This Keynesian remedy will be applied within the next few' months unless business shows definite signs of recovery.
If any economy fits the Keynesian theory of “compensatory spending” it is the relatively self-contained economy of the United States. If any pump can be primed, it is the American pump. Nevertheless the American government’s spending cannot of itself cure the recession, because the greater part of all spending — about five sixths at present — is controlled by the millions of private spenders.
As one of America’s most powerful businessmen put it to me in Wall Street the other day: “The sixty-four-dollar
question this year is whether Joe Doakes will buy a new automobile or its equivalent. If he decides to buy we’ll see the beginnings of prosperity in the autumn. If not, there’ll be no real recovery this
year. The problem is mostly psychological.”
The truth, as everyone admits privately in Washington and New York, is that no one really knows what will happen to American business this year because no one can foresee the buying habits and changing whims of the Doakes family.
Here we can see, though, that an improvement in the American situation will greatly ease ours, provided it goes fatenough to increase the demand for outgoods. Even that improvement cannot completely cure the hangover of out-
boom. A real cure will take some time. In the meanwhile, given a world recovery. we can enjoy a high prosperity short of our recent boom level.
Two potential dangers are imbedded in the cure already underway on both sides of the border.
The first is that the United States treasury, if it is sufficiently frightened by the look of the economy or pressed hard enough by the politicians in an election year, will not finance its extra expenditures and deficits by borrowing real money now in existence but will create
new money. This can be done quickly and almost invisibly through the sale of government bonds to the private banks. Money borrowed from the public does not increase the total money supply but merely transfers part of it from one holder to another. Money raised by issuing fresh government bonds and selling them to the banks widens the whole money base. At first its effect will hardly be noticed by the public. But a little later on. as business improves and Doakes is in a spending mood, he will have more money to spend. With it he
will start again to bid prices up, renewing the inflation cycle.
That is exactly what happened after World War II—the huge wartime addition to the money supply, needed to finance the war, was hidden by price controls, rationing, high taxes and patrioticrestraint in the buying habits of the ordinary family. The dam of tissue paper broke as soon as the war was over. The accumulated new money rushed out and tumbled the value of money by about fifty percent in ten years of inflationary boom.
All this could happen again if the American money supply is seriously inflated now.
Even if Canada refused to follow such a policy it could not escape the effects, since rising American prices must carry our prices with them in the daily exchange of goods across the border.
The second danger is that deficits will be incurred for the wrong purposes and will become unmanageable later on. It is one thing to prime the pump by deliberate deficit budgeting for a brief period. It is quite another thing to increase the permanent running costs of government.
Public works, for example, can be turned on or off as the economic climate suggests. But additions to government services and overhead costs can never be turned off in practical politics. They will not only remain in the budget but will increase as more people must be provided with the services.
The platforms are loaded
Of course the increasing cost of such things will not reduce the real income of the ordinary family so long as its wealth is increasing just as rapidly. A man whose income is doubled will not be hurt if his taxes are doubled at the same time.
This is fine in theory. But in fact we seem determined at the moment to increase permanent government spending (as distinguished from temporary deficits) considerably faster than we can increase our real national income.
Such is the obvious meaning of the platforms erected during the last year by both our political parties in their effort to outbid each other for electoral support. Both platforms are loaded with potential inflation.
Given a rise in permanent government costs faster than the rise in national income, one of two things must happen: either the average citizen must turn over a larger share of his income to the state in taxes or, more likely, the state will finance part of its costs by inflating the currency as most states have done for the last two decades.
Politically it is hard to levy taxes; it is easy to inflate the currency when nobody is looking and when most people do not understand what is happening anyway.
As Keynes, the high priest of government spending, once remarked, the public is snug abed, in the dead of night, when the plug of monetary inflation is pulled. The ensuing flood of price increases is not observed for some time afterwards and then it is too late to identify the persons who pulled the plug. Assuredly it will be pulled again during the next year or so if we don’t keep our eyes glued on it.
What should we have learned from our experience of inflation?
We should have learned at least that the process of monetary inflation has repudiated the state’s solemn guarantee to savers and lenders; that the value of savings has been cut in half; and that if the
process continues at the same speed our dollar will be almost worthless a generation hence.
We should have learned that "tight money” will always be painful for some people but, in times of inflationary pressure, is necessary to protect all the people from ruin.
We should have learned that this whole subject was wildly confused, often deliberately misrepresented, and generally misunderstood last year because a complex subject was plunged into the middle of a deranged election campaign.
We should have learned from this experience that the general run of politicians understand money little better than the general run of voters; that the management of money is a task too complicated and volatile to be entrusted directly to politics but should remain in the hands of experts, as the Bank of Canada Act provides; and that after the Liberal defeat of last June it will be a brave government indeed that will ever again risk the unpopularity of sound, or "tight.” money even when it is needed.
We.should have learned that we, the public, compelled the inflation by our excessive demands for goods and then assured a deflation by building a productive plant in excess of our market.
We should have learned, in short, that our own ignorance lies at the root of all these troubles.
What we need above all in our economic system is not better machines, wdser management or more intelligent labor—though all of these are needed— but an economically literate public mind.
As a first step in its education 1 respectfully propose that the great mass of the people—the consumers, who must pay rising prices, the savers who ow n lifeinsurance policies or a few dollars in the bank, the ordinary citizens who ask no state charity but expect the state to keep its financial covenant with them—shall organize themselves into a new pressure group.
Unorganized, disregarded and weak, the people are no match for the great pressure groups of politics, management, labor and agriculture.
Certainly they are no match for the subtlest and most dangerous pressure oi all which, in varying guises, is named inflation. Faceless, ingratiating and full of fair promises, his purpose is ruin, his method is slow', sweet poison, his latest achievement is the mess we are now in and his intended victim is no one but you. ★