NERVOUS TREMORS KEEP racing through the economy. Gold prices leap feverishly up and down. The country's tenth largest manufacturing company, Chrysler, reports unprecedented losses. In this city, there are signs that the boom in real estate has crested. Interest rates have risen to record levels. In response, the stock market has dropped sharply and some borrowers are having trouble finding money at any price.The close coincidence with the anniversary of the great crash of 1929 has amplified anxieties and pressed that inevitable question: will it happen again?
No, it won't -- not the 1929 kind of crash. Modern governments have unlimited capacity to prevent the collapse of domestic credit -- please note the adjective -- that followed the traditional panic. Governments occasionally let a bank fail, as a warning to reckless management, but they protect the depostitors. The most familiar of disasters won't repeat itself. But there are other kinds of disaster about which you can't be quite so sure. In particular, there are three sources of serious economic disruption that Americans ought to worry about.
The public enthusiasm for combating inflation seems to be diminishing -- especially now that the tightening of credit is starting to hurt. You can already hear the cry: inflation's been high for years and, since most people are getting along all right, why fight it? The answer is that, unfortunately, inflation damages the long-term processes that generate jobs and raise real incomes. There are countries that have, for a time, combined high inflation and high prosperity. But it doesn't last. fWhen a country's currency is, like the U.S. dollar, one that foreigners hold for security and in which they do most of their international business, there's very little leeway. The decline of the British pound has repeatedly weakened the British domestic economy, and vice versa, over the past generation.
While the major countries' banking systems are perfectly solid at home, there is also a very large international system that is, in effect, under no flag at all. A Eurocurrency is the currency of one country deposited in the banks of another -- and the Eurocurrency market is not regulated by anyone. Banking authorities of the leading financial centers are aware of the peril here, and have been working on cooperative arrangements to handle serious defaults or failures. But those arrangements have never been seriously tested.
Finally, and inescapably, there's oil. Driven not only by high demand but by national emotions in the exporting countries, oil prices have risen by two-thirds over the past year and are still rising. You will have observed tht all of these dangers -- inflation, the vulnerability of an unregulated international banking structure and oil prices -- are closely related and each aggravates the others.
The international financial system is not self-regulating of self -stabilizing. During the 1930s, nobody was in charge of it and that was one reason the depression lasted so long. For nearly three decades after World War ii, the United States commanded the system. Now American procedures has declined. Every government knows that a vacuum of authority exits. But so far, no one has found a way to fill it.