WORLD REARMAMENT

Wairarapa Times-Age, 12 May 1938, Page 9

WORLD REARMAMENT

LEADING TO INFLATION.

AN ECONOMIST'S WARNING. GENEVA, March. A warning that the world rearmament race may lead eventually to “a large measure of inflation,” is given by Dr. A. S. J. Baster, economist of the staff of the International Labour Office, in an article on “Some Economic Aspects of Rearmament,” the first instalment of which appears in the current issue of the “International Labour Review.” “In view of the present large budgetary cost of rearmament,” Dr. Baster says, “its present rising trend and unpredictable limits, the great speed thought necessary, the advanced stage of recovery already reached in 1935, and the necessity for low money rates and cheap government financing at least to maintain appearances, it is difficult to see how a large measure of inflation can be avoided.

“The resulting danger suggested both by history and theory is that it will cause excessive investment, and that, after the point of full employment has been passed It will be necessary to maintain resources in the capital-goods industries against the pull of increasing consumer expenditure by more and more inflation. In default of this, contraction of the heavy industries and a consequent rise in unemployment and severe checks to general business activity may be expected.” As evidence of the importance of rearmament expenditures, Dr. Baster cites the percentages of 1937 budgets of various nations devoted to national defence. The figures he gives are: Japan, 56.0; Poland, 37.7; the United Kingdom, 29.3; Italy, 25.4; Czechoslovakia, 24.8; the U.S.S.R., 20.7; France, 20.1; and the United States, 11.7. German figures are not available. At the same time, Dr. Baster points out that, if rearmament expenditure is broadly defined to include any expenditure intended to serve the end of national preparedness for war, there are “obvious gaps in every case.” Tn conscript countries,” he explains, there is the expense of maintaining large sections of the working population in unproductive occupations during their most fruitful years; in almost all countries there are the costs of national self-sufficiency—tariffs, subsidies to industries producing substitutes, uneconomic diversions of resources into agriculture, various sorts of “planning” for strategic purposes (such as the reorganisation of road and train transport to serve threatened frontiers), replanning urban settlemerit so as to minimise air-raid risk, neglecting export markets for domestic armament orders, etc. —a great deal of which need never appear as government expenditure at all, much less as part of the national defence budget.” Discussing the effects of rearmament upon “boom” conditions, Dr. Baster points out that defence expenditures did not increase substantially before 1935. This year, he says, was commonly thought to be favourable “because we can afford it now.”

Yet he holds it “likely” that the stimulus of rearmament, which might have had some economic advantage in 1932, with a world “boom” then gathering momentum, has, by calling forth fresh activity in the midst of a recovery movement already stimulated by government relief expenditures, “increased over-investment” in several old world countries in the years from 1935 onwards.

Dr. Baster finds that, broadly speaking, there are “two economic problems for rearmament.” The first of these, he says, may be called the “budget problem” of collecting from private individuals the requisite proportions of the national income; the second, the “diversion problem of adjusting the economy to produce more armaments with the proceeds of budget collections, and readjusting it to its old tasks. While the first of these problems differs in the various countries, he says, the problem of "diversion” has some common characteristics.

“It is not,” he explains, “merely a question of setting aside a few factories for the production of battleships, but the adjustment of the entire national economy in a state of preparedness for war and then adjusting it back again if the war scare dies down. . . .

“The nature and severity of the problem of economic diversion will of course differ to some extent between different countries. The geographical isolation of the United States, for instance, indicates plans for mobilisation of troops and industries, rather than actual diversion. Great Britain, with no large conscript army and a high “industrial potential,” is concentrating on complete and up-to-date armament equipment. Conscript States like France spend more on soldiers’ pay. States fearing blockade, like Sweden, will store necessities. But the basic problem is common to all, once the stage of planning is passed—that is, to divert the national resources into the building-up of a greater capacity to produce all the varied needs of a nation at war; in short, to “invest” very extensively and very rapidly.”