The Dominion. THURSDAY, JANUARY 13, 1921. GETTING BACK TO NORMAL

Dominion, Volume 14, Issue 93, 13 January 1921, Page 4

The Dominion. THURSDAY, JANUARY 13, 1921. GETTING BACK TO NORMAL

While it is generally agreed here and in other countries that existing economic conditions arc abnormal, and that a return must be .made in some way to normal conditions, not many people seem to have very clear ideas about the meaning that is now to be attached to “normal.” It is very important that this uncertainty should be cleared up, because in itself it is an unsettling and disturbing factor which operates with detrimental effect on trade and the conduct of industry, and therefore tells against general prosperity. Obviously it will serve no purpose to talk about re-establishing normal economic and financial conditions until a definite understanding has Iven reached on the subject of prices and the level at which they ought to be stabilised. Until such an objective is plainly defined there is an ever-present danger of violent fluctuations in trade and prices which will rather delay than hasten a return to normal conditions. On the whole, recent waves of price-cutting in the United States and in Great Britain are much more suggestive of fluctuations reflecting the instability and insecurity of existing economic conditions than of steps towards a firm readjustment on a new basis. It is, of course, apparent that the most essential feature of normal conditions, when they are attained, will be stability, but in regard to the best means of approaching this goal, even the. highest authorities are disappointingly vague. The Commission on Public Finance appointed by the International Financial Conference at Brussels declared, for instance, that “ an end must be put to the extention of inflation,” and that “countries which have deviated from effective gold standards should revert to them.” On the vital question of deflation, however, the Commission had nothing more definite to say than that “where deflation is undertaken it must be effected' progressively and with great prudence.”. Guardedly as it is worded, this recommendation contains a distinct warning against the dangers of unduly rapid deflation, and it is, of course, not difficult to understand the grounds on which the warning is based.

In- a recent letter to the London Times, Mu. Edgar Crammond effectively emphasised these dangers by instancing the results that would follow if deflation were carried to an extreme —that is to say, if an. attempt were made to restore prices and the purchasing power of money to their pre-war level. The considerations adduced with reference to the financial affairs of the United Kingdom are . in a great measure relevant to circumstances in this country and others. Mr. Crammond compares the following estimates of total national income and of expenditure by the Government and local bodies in the United Kingdom before the war and for the current year:— 1913. . 1920-21 £ £> Estimated national income 2,400,000,000 4,400,000,000 Expenditure an national services (by the > ’ Government and local authorities) 281,000,000 1,350,000,000 Dealing next with the effects of a return to 1913 prices, assuming; that this were possible, Mr. Cram~Mond points out that the national income would decline from £4,400,000,000 to about £2,500,000,000. With this greatly reduced income, Britain would be paying in terms of. 1913 money the 7000 millions of war debt which was borrowed in terms of inflated The. annual charges for interest and sinking fund on the national debt amount in themselves to 240 million pounds—much more than the total annual revenue the British Government raised, before the war. With deflation carried to an extreme these .and other charges would impose impossible demands on the national income out of which the needs of all sections of the population have to be met. Then, again, deflation could only be carried to the point indicated if wages declined rapidly to a level approximately 50 per cent, below their present standard, and, as Mr. Crammond asks, what prospect is there of such a fall in wages? It is another vital consideration that the lately belligeient States of Europe are not in a position to follow Britain in a policy of. rapid deflation. Thus, rapid deflation in Britain would seriously aggravate the. difficulties of transacting trade with these countries, and “an improvement in the Anieri can exchange would not neutralise the disadvantages which would thus arise.” As Mr. Crammond remarks, it is impossible, in view of the foregoing considerations, to believe that prices can return to anything like the 1.913 level, but “a certain measure of deflation appears to be desirable and inevitable.” If (he adds) the official policy (in the United Kingdom) is simply to effect such a reduction of inflation as will bring sterling prices and present gold, prices together, that is stabilisation on a basis about 20 per cent, below present oricns, hut twice those of 1914. an authoritative) statement to this effect would have a. beneficial influence upon the general financial situation and enable the credit machinery of the country to perform its vital functions in a more efficient manner Ihnn is possible in the present stale of nneerlaini.v as to the future of prices. The broad contention here presented, that the readiest approach, to economic stability and the establishment of conditions that could be regarded as normal is to be, found in a limited measure of deflation and a correspondingly limited fall in prices, seems on the face of it aound. The evils of inflation, where

it is still proceeding, are apparent. Continued inflation tends to choke consumption and paralyse industry. The results of. an extreme swing in the opposite direction, however, would be almost as serious. The great need is stability, and there does not seem to be any reason why it should not be obtained by a moderate readjustment of prices. . ft is very necessary that any remaining uncertainty on tins point should be cleared up, for it is plain that the existing unsettlement and insecurity are partly duo to unreasonable expectations of such a fall in prices as, if it occurred, would spell general misfortune.