The Capitalist Challenge: WORLDWIDE INFLATION

TO THE businessmen of the world, meeting in San Francisco, the world’s prime economic problem is inflation. The economic disease may be relatively mild, as in the U.S., where prices have risen 3.6% in a year after staying level for four years. Or it may be virulent, as in Brazil, where living costs have risen at a rate of 20% a year for the past six years. None of the conference representatives had any trouble naming the chief causes: 1) the desire of everyone to consume goods faster than production−and the productivity of labor −can be increased, and 2) the urge of underdeveloped nations to industrialize too fast for their capital resources.

India, for example, had a successful $4 billion five-year industrialization plan that ended in 1955 after increasing national income 17.5%, per capita income 10.5%, industrial output 38%. Then India decided to launch a second. $10 billion expansion plan. But the expected foreign capital was not available, and costs turned out to be grossly underestimated. With the government forced to cut imports to save foreign exchange, food prices have risen 16% in six months. India’s neighbor. Pakistan, is not much better off. Once the breadbasket of undivided India, Pakistan had virtually no industry. In the struggle to industrialize, Pakistan raised industrial output 285% between 1950 and 1955. But so much land was shifted out of wheat into such crops as cotton and jute for export (to get the foreign currency needed to industrialize) that Pakistan has to import grain for her rising population. Now with cotton prices down, throwing its foreign trade out of balance and forcing a cut in imports, prices in Pakistan have risen 20% in six months.

While India’s and Pakistan’s inflation is due to their laudable, if overambitious, efforts to expand their industry. Indonesia can plead no such saving excuse. Indonesia has had a 59% cost-of-living rise since 1953. largely because the government is so intent on exterminating the last vestiges of colonialism that it is likely to destroy every profitable form of enterprise in the process. Indonesia has failed to pass a mining-and-oil-exploration law that would bring in new foreign companies, will offer no assurances against confiscation of new capital. Indonesia’s legislature has ordered a 35-hour week, though per capita income is an estimated 15% below the level under The Netherlands’ rule, and the population is rising 50% faster than production.

In the older nations the inflationary pattern varies. In Australia, also trying to expand too far too fast, prices have doubled since World War II, while wageshave risen 160%. The government, in alarm, finally began to choke back on credit, raise taxes and cut down on public spending. Not even conservative, thrifty Denmark has escaped inflation. Denmark has a per capita income of $807, above average for Europe. Recently the Danes discovered that they were living too well. Lulled by the eager world market for their dairy products, bacon, beer, machinery and ships, they let wages, prices and production costs rise so high that they no longer are competitive in their old markets. Nevertheless, unions pressed successfully last year for higher wages despite the fact that unemployment was up to 10%, thus helping drive up prices.

In many countries, such as the U.S. and France, the growing practice of tying wage rates to the cost of living, either by government decree or union-employer contract, gives speed and added momentum to the wage-price spiral. Formerly there was a time lag before wages adjusted to prices, during which time the price rise might be reversed, making a wage rise unnecessary. Today the process is automatic. One country questioning the practice is Finland. There escalator wages are considered a major cause of the inflation that is so severe that the Finmark had to be devalued on Sept. 15 from 231 to 320 to the U.S. dollar. Now the Finns are trying to hold the line on wages.

The European country that has done the best job of holding down inflation is Germany (see FOREIGN NEWS), whose cost-of-living index rose only 6% since 1953, while production increased 60%. With far fewer economic strains to contend with, Switzerland has held to a 5% rise. Britain has had a 16% rise in that time, now hopes its “hard pound” policy, expressed in courageously raising the discount rate from 5% to 7%, will finally check inflation, permit Britain to build up the gold and dollar reserves it needs to act as banker for the sterling area. In Asia, Japan has creditably held its inflation since 1953 to 9%, and recently the Bank of Japan, the government’s central bank, further tightened up on money by raising the discount rate from 7.3% to 8.4%.

Recognizing that the inflation problem is not identical in every country. Dr. Weldon B. Gibson of Stanford Research Institute, conference codirector, pointed out in summing up round-table discussions: “In the highly industrialized areas the problem of wage increases running ahead of gains in productivity, together with other rigidities in the economic structure, places a heavy burden on classical financial measures for [controlling] inflationary pressures.” Some conference delegates doubted that the classical anti-inflation remedies such as tight money will work in these countries. But “for the newly developing countries,”‘said Gibson, “there was a general agreement that inflation originates mainly from the urgency of development, and hence is more nearly of classical nature.” Here, classical remedies such as controlling the money supply can hold inflation in bounds necessary to keep from frightening investment away. Whatever is done, the conferees were fully agreed that inflation will be a worldwide problem for a long time to come. The solution, said Gibson, “calls for a combination of economic realism, political courage and a strong faith in the future.”