(c) crown copyright Catalogue Reference:CAB/129/76 Image Reference:0015 The circulation of this paper has been strictly limited. It is issued for the personal use of TOP SECRET C o p y N o . J 2 C.P.(55) 65 9th July, 1955 CABINET THE ECONOMIC SITUATION M e m o r a n d u m by the Chancellor of the E x c h e q u e r T h e E c o n o m i c Policy C o m m i t t e e has discussed a R e p o r t on Balance of P a y m e n t s Prospects - June, 1955 ( E . P . (55) 22) n o w circulated as C . P . (55) 68. T h e salient facts a r e attached as a n A p p e n d i x to this paper. In m y opinion s o m e further m o v e is necessary in order to reverse the deterioration which has taken place in our balance of payments. This p a p e r , read with the R e p o r t on Balance of"Payments Prospects and the minutes of the E c o n o m i c Policy C o m m i t t e e ( E . P . (55) 5th Aieeting, Item 1) is designed as a guide to discussion. I reserve the opportunity of m a k i n g oral c o m m e n t s and additions. 2. T h e deterioration in our overseas balance h a s come"about at a time w h e n world conditions could hardly b e m o r e favourable to the United K i n g d o m . W o r l d trade is expanding rapidly and at the s a m e time the t e r m s of trade are not m o v i n g against u s ; and yet the United K i n g d o m is barely in balance instead of achieving the substantial " surplus necessary to m e e t all its c o m m i t m e n t s and responsibilities. Against this background the situation revealedis all the m o r e disturb­ ing and calls for action. 3. M y colleagues will recall that the likelihood that the situation would develop v e r y m u c h on the lines n o w described b y the C o m m i t t e e on Balance of P a y m e n t s Prospects w a s understood early this year. T h e p r i m a r y reason" for the deterioration in our balance of p a y m e n t s has been a large rise in imports, considerably greater than the small rise in exports. T h e m e a s u r e s of 24th February, n a m e l y the higher bank rate, credit restriction and restriction of hire" pur chase, w e r e designed to reduce the excessive level of internal d e m a n d which w a s both drawing in excessive imports and discouraging a greater expansion in exports. T h e s e m e a s u r e s which a r e necessarily only slow in their operation have progressively had s o m e effect in reducing overall demand. But, on the other side, w a g e increases in the first six m o n t h s of this year w e r e considerably larger than w e had anticipated and the strikes (particularly the dock strike) have lost us s o m e exports for goods and delayed others. T h e m e a s u r e s of 24th F e b r u a r y will continue to have increasing effect and, in particular, I h a v e recently had v e r y satisfactory talks with the C h a i r m a n and Deputy C h a i r m a n of the Clearing B a n k s Association, which satisfied m e that the G o v e r n m e n t is having their full co-operation in operating the credit squeese. 4. I have n o doubt that our action w a s on the right lines and w h e n supplemented in other specific w a y s , such as b y the increase in the prices of coal a n d sugar, and the increased rates of interest on local loans, is "capable "in due course of lessening the internal pressure. It is, h o w e v e r , being considerably impaired' in its effect by the apparent exemption fr'0"m the policy of restraint of the development p r o g r a m m e s of the G o v e r n m e n t and other public bodies (i. e. nationalised industries and local authorities). 5. W h a t is really w r o n g with the e c o n o m y is that w e are trying to do "so "much at borne that w e are finding real difficulty in balancing our overseas accounts. W e m u s t slow down"the rate'at which W e are incurring n e w c o m m i t m e n t s . I therefore propose "that, after Consulta­ tion with the D e p a r t m e n t s and nationalised industries concerned, expansion in this sphere should b e limited. ' I think w e should also consider whether the nationalised 6. industries could not raise m o r e of the finance they require f r o m their o w n resources, for e x a m p l e by m a k i n g m o r e adequate provision for depreciation. 7. A t the s a m e t i m e , besides the above action on the development p r o g r a m m e s of the nationalised industries and local authorities, it will be necessary in "support of our policy to keep the closest watch o n other G o v e r n m e n t experiditure,and especially G o v e r n m e n t expenditure overseas., T h e Minister of Defence and I w e l c o m e the setting u p b y the Secretaries of State for W a r and A i r of working parties to enquire respectively into A r m y and Air expenditure in G e r m a n y in v i e w of the approaching with­ d r a w a l of "support costs". " 8. " If action on the above lines is not taken (or if it is taken and nevertheless the policy of credit restriction proves inadequate) the only alternative will be a direct attack on c o n s u m e r expenditure with the attendant risk of stimulating w a g e claims. S o m e items such as the abolition of the bread subsidy and a substantial increase of purchase tax could b e taken without legislation, but in the event of the inflation continuing there might be n o escape f r o m m o r e drastic m e a s u r e s involving legislation in the a u t u m n . 9. I ask m y colleagues to co-operate with m e in"carrying out the policy in paragraphs 5, 6 and 7 above. twill, after reflection and discussion, consider whether a n a n n o u n c e m e n t should b e m a d e in Parliament and, if so, w h a t f o r m it should take. R.A.B. T r e a s u r y C h a m b e r s , S. W . 1. 8th July, 1955. APPENDIX T h e salient facts are that the United K i n g d o m " overall current balance, which exceeded £ 3 0 0 millions in 1953/54, is' estimatedrto have declined to one of £ 5 0 millions in 1954/55, and is forecast to be slightly w o r s e in 1955/56. T h e gold and dollar reserves" of the sterling area increased b y £ 2 3 0 millions in 1953/54 but decreased b y £120 millions in 1954/55 T h e reserves n o w stand at £ 9 5 7 millions; and the' forecast is that there might b e a further loss of £100 millions or m o r e in 1955/56. a T h e non-sterling surplus of the rest of the sterling area has also fallen b y £100 millions in 1954-/55 and is forecast to continue at about the s a m e level, although s o m e slight i m p r o v e m e n t is possible.