Interest rates rise

Every newspaper has, or used to have, an anniversary man whose job was to keep a close watch on the calendar of 50 years ago, 100 years ago, 200 years ago, and so on. This used to require something of a scholar who could commute between his pocket diary and an encyclopaedia, but by now the book market, certainly the school book market is cluttered with cross-index atlases of history with all sorts of fancy names in which it's possible, by looking first to the left hand page and then to the right, to discover what German composer was writing which of his minuets at the very moment that the Bostonians were throwing the British tea shipments into the sea.

I once worked for a paper that went after really earthshaking anniversaries so that I remember the time when the editor was showered with congratulations – by his staff if by nobody else – for having been the first newspaper in England to print a piece celebrating the 500th (or was it the 1000th?) anniversary of the birth of Alfred the Great. 

The feature editors of American papers are pretty spry people, even sprier since they began to give women equal standing on the editorial ladder and never a week goes by when we don't have at least a half-page piece on the 100th anniversary of the typewriter or the hamburger, the 50th anniversary of the Charleston or the, say, 200th anniversary of Benjamin Franklin's invention of the down-draught stove. I am a continuing admirer of Benjamin Franklin, especially when I'm living through the summer and fall at the end of Long Island. 

In the fall particularly, the weather is subject to sudden, violent changes and when the wind shifts and blows in from the north-east, we notice what he was the first to notice, that we're in for a three-day storm of wind and rain. We retire indoors, batten down the hatches and stoke the stove, putting the heavy logs on the bottom, the kindling on top of them and the crumpled or tied knots of newspaper on top of (it all). You then light the newspaper, open the vents and, on Franklin's principle, the fire then lights from the top down and pretty soon the room is hotting up in fine style and you settle down to read for three days and to remember to bless Franklin also for his invention of bifocals. 

Well, this past week, I doubt that any American paper has overlooked the 50th anniversary of Black Tuesday 1929, the October day when the bottom fell out of the stock market and dumped the American people, and shortly afterwards the people of Europe, into what will always be known as the Great Depression. Ten years ago, I seem to recall, we had fugitive pieces about the Wall Street Crash and I suppose for every 10-year interval before that, but the magazine pieces this time, the television specials, the general debating and pondering, was of that economic earthquake. 

This preoccupation is not caused simply by the round figure of 50 years. The American economy, for that matter the economies of most of the world have come to seem, in the past year or two, enigmas which cannot be solved by the old rules or the classic text books. And the reminder of the Great Crash and the following worldwide depression comes at an anxious time when we don't know for sure – nobody knows for sure – whether we are going into a recession or pulling out of an invisible one. Few people, however, echo the tolling bell of Cassandra. Mr Wynne Godley, the head of the department of Applied Economics at Cambridge, he doesn't think we're in for a recession. He predicts, and soon, a depression of staggering magnitude. 

In other words, these anniversary pieces have been less interested in recalling the awful and colourful details of the 1929 crash and more concerned about asking the question, can it happen again? There is no halfway, certain answer. Ten, certainly 20, 30 years ago, the economists were of two schools. They were conservative or Adam Smith free-market men or they were New Deal Keynesian deficit-financing men. They argued incessantly among themselves but so long as things prospered, the rest of us simply recalled somebody's definition of economics as 'the dismal science' and we paid them no heed. 

Today, there are at least four or five fiercely competing schools of economics, at least four of them have nurtured Nobel Prize winners. By the way, I made a slip the other week. Arthur Lewis, the black man who won a Nobel Prize this year, got it not for medicine, but for economics. And the outsider, perhaps the insider too, is less and less certain that economics is a science at all. I take scientific method to be the search for a generalisation that covers all the known facts and this is true in any science. It's not enough for a man to get a hunch and scurry around for facts to prove it. 

There is, for instance, a great and raging debate about the dogmatic assertion of Dr Linus Pauling that vitamin – or if you must, vitamin – C will prevent or cure the common cold. All his experiments support him but there have been numerous other experiments in Britain, at Harvard, Chicago and other medical schools, blind tests where the victim doesn't know whether he's getting Vitamin C or a sugar pill, double blind tests where neither the doctor nor the patient knows what's being given, and so far the evidence is, to put it mildly, contradictory. The double blind tests to date show that Vitamin C seems to have little or no effect. A wry doctor friend of mine, asked about the Pauling experiments, predicts that, 'Linus Pauling will be the first human to die of the common cold'. 

The present difference of opinion among the doctors of economics centres on the action of the Federal Reserve System, the board, in raising the interest rate – which is the privileged rate it charges sound banks – to an unprecedented 15 per cent. Neither smaller banks, nor you, my friends, are going to get a bank loan for anything under 17.5 per cent at best. By the time the Federal Reserve’s action has reverberated through society, we find that within ten days, mortgage rates on new houses and the purchase of flats have almost doubled and the cash you have to put down when you buy a house, or a flat, is now generally 50 per cent. So one thing most people are fairly sure about is that the bottom is about to drop out of the real estate market. I give this as only one result with quick effects throughout the social scale, of the Federal Reserve board's decision to raise the prime interest rate. 

They did it, of course, in the hope of putting a rein on spending, on making people conserve. This means less demand for manufactured goods of all kinds and the theoretical hope is that inflation will dwindle and droop. But, if there's less demand for goods, there's going to be less production of goods, which means – has always mean – lay-offs and more unemployment. When the federals, as we call them, announced their stiff 15 per cent, we read of a chorus of congratulation from the Swiss, the Germans and British economists. 'Thank God!' said one famous official in Bonn, 'The Americans have at last had the guts to call a halt on inflation.' 

Lord Robbins was a prominent member of the hallelujah chorus. While congratulating the Americans, he feared only that next year, an election year, would irresistibly tempt the running President Carter to go into reverse and, and I quote, 'take the popular solution. Cheaper money and a more expansive government and therefore a cheaper dollar.' 

But there are just as many, as influential, economists who think the Federal Reserve is dead wrong. Lord Kaldor is one. He points out that high interest rates were the prescription used in the depressed 1930s and what they did, he says, was not to reduce the pace of inflation but to reduce investment and so lead to more unemployment and more recession. Yet another dissenter is Joan Robinson, the old Keynesian. She accuses the United States through the Federal Reserve action of 'economic nationalism'. Putting up the discount rate, she says, throws a tremendous burden on everyone because the United States is the world's major banker. 

And, meanwhile, some economists deplore the fact that Germany and Japan sit tight, enjoy their orgy of exports and strictly limit their imports and don't allow their currencies to be used as reserves. 

The import/export battle which is now on among all the chief industrial countries is the one symptom of our present discontent that worried the Wall Street Journal in a long and thoughtful piece it published on the comparative situations of 1929 and 1979. Incidentally, just about everybody is agreed that one element, and a very strong element, of the 1929 crash that does not exist today – the 1929 stock market was open to anybody, every citizen, high and low, who had ten cents with which to buy a dollar's worth of stock. When the crash came, there was nothing like the money needed, no money anywhere, to cover the purchase of stocks on ridiculously low margins. Well, since then the Securities and Exchange Commission has been invented and one of its strictest rules prohibits the purchase of stocks on low percentage margins. 

Now back to the symptom that worries the Wall Street Journal. In the wake of 1929, the Journal wrote the other day, as countries felt the slip and tug of the Depression, they rushed to save themselves with economic policies that had a selfish goal, to export their problems somewhere else. Anywhere else. They raised tariffs to keep out imports and started competitive currency devaluations to increase foreign sales. The rich surplus countries stopped lending to the poorer deficit countries. But the Depression couldn't be exported. It was prolonged and deepened and touched off reprisals. 

Similarly, as long as economies boomed after the Second World War, countries were glad to cooperate, but now growth has slowed and some of the causes of the collapse of the international economy 50 years ago have parallels today. And some of the people who shaped Europe's economic policy in the 1930s are worried that the world is returning to 'beggar thy neighbour' nationalism, again trying to export hard times. 

Well, in the next few months, in this country anyway, once the Carters and Kennedys and Reagans and company get on the electioneering stump, we shall know which of them, if any, dares to urge American shoe workers and car builders and TV assemblers to be good chaps, lay down their jobs and encourage the importation of shoes and cars and TV sets made in Italy and Germany and Korea.

This transcript was typed from a recording of the original BBC broadcast (© BBC) and not copied from an original script. Because of the risk of mishearing, the BBC cannot vouch for its complete accuracy.

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