The New Phase

"We have entered into a new phase of the postwar development," said West Germany's Federal Bank President Karl Blessing last week: "It is marked by the end of creeping inflation in the U.S. and reduced growth in Europe."

Though non-Communist Asia and Europe are still expanding economically, they are doing so far more slowly than a few years ago. Last week the Common Market Commission reported a still further "tendency for expansion to slow down" among the Six. The free world lag, says top Japanese Economist Ryokichi Minobe, "is not so much a slowdown of a recession nature, but a forced adjustment back to more normal, healthy rates." All over the world this forced adjustment shows itself in softer demand and sharper competition, in that old profit-price squeeze and nervous stock markets.

Wonderland Economics. The general slowdown is making for some unfamiliar strains in the payments balances of many countries. Europe's huge hoard of gold and dollar reserves is dropping. West Germany recently moved from a fat surplus to a small deficit in international payments, and the surpluses of Belgium and Switzerland are declining. And in a time when everyone talks of expanding markets, Japan has clamped on import controls and Canada has raised many of its tariffs from 5% to 15% in an attempt to bolster its sagging dollar. It seemed that almost all countries were attempting to improve their trade balances and reserves at the same time.

If they all try simultaneously to boost their exports and cut down their imports, agreed the latest Bank of England bulletin, then "industrial growth both here and abroad could be retarded." The British are also jumpy about U.S. talk of a coming recession, and some English bankers think that the Kennedy Administration may help bring one on by the anti-inflationary policies that it is using to stop the U.S. gold outflow and shore up confidence in the dollar. "The world's currency difficulties are now exerting a clear deflationary influence on the world economy," says the Economist, which finds the situation uncomfortably reminiscent of 1929.

Control Mechanism. Most other bankers and businessmen seem less alarmed than the British. A world depression, argues the Indian economist T. T. Krishnamachari, a minister without portfolio in Nehru's cabinet, while possible, is most unlikely. Says Krishnamachari: "I think the world has developed techniques of meeting such things better than it did in the 19303."

These techniques range from exchange stabilization arrangements between individual countries to the close cooperation of the European central bankers. In the past few weeks the central bankers have helped cool speculative fever on the London gold market by injecting fresh gold from central reserves whenever the price of gold showed signs of going too high. Most important of all the control mechanisms is the 17-year-old Washington-based International Monetary Fund, whose 76 member nations are now raising its resources to $21 billion. It is the proud boast of the I.M.F.'s Swedish managing director, Per Jacobsson, that when the Canadian dollar crisis grew acute, the Fund "provided one billion dollars for the Canadian government within four to five days." Should the U.S. dollar begin to quake--an event that Jacobsson believes has grown far less likely in the past year --the I.M.F. stands ready to shore it up with loans of more than $4 billion.

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