THIS
DOCUMENT
IS
T H E
PROPERTY
Printed
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HIS
for the Cabinet.
BRITANNIC
July
MAJESTY'S
1949
SECEET
C P .
(49)
2 1 ^ July,
GOVERNMENT
--..91
Copy
No.31
1S9
1949
CABINET
THE
ECONOMIC
SITUATION
M E M O R A N D U M BY THE L O R D P R E S I D E N T OF THE COUNCIL
I n view of t h e success w h i c h w e h a v e achieved i n w o r k i n g o u t our socialist
p l a n s i t is r i g h t , I submit, to w a t c h carefully t h a t a n y necessary economic a d j u s t ­
m e n t does not i n j u r e t h e i r p r o g r e s s , a t a n y r a t e in essentials. A t t h e same t i m e
w e have a l w a y s a p p r e c i a t e d t h a t i t w o u l d t a k e a considerable p e r i o d t o bring:
t h e i n a d e q u a t e p r o d u c t i o n of t h e old i n h e r i t e d system u p to a sufficient level,
a n d t h a t t h e r e w o u l d be setbacks on the w a y , especially t h r o u g h A m e r i c a n reces­
sions a n d other f a c t o r s o u t s i d e o u r control. Economic w a y s a n d m e a n s affect
political a n d social ends, a n d t h e p r o p e r h a n d l i n g of t h e r e l a t i o n s h i p between
t h e m i s of decisive i m p o r t a n c e to o u r G o v e r n m e n t . W h e n economic setbacks t a k e
place w e m u s t b e w a r e of p r e s s i n g on i n t o a n economic a n d political b l i n d alley
from w h i c h t h e r e is n o tolerable w a y out, a n d w h i c h m a y l e a d to p o l i t i c a l crisis,
a n d defeat for t h e G o v e r n m e n t a n d t h e p r i n c i p l e s for w h i c h we s t a n d . 2. T h e economic system m u s t be s a f e g u a r d e d f r o m b r e a k i n g u n d e r a load,
i t is n o t yet r e a d y to b e a r . I t is also v i t a l t h a t t h e G o v e r n m e n t should govern.
Everyone, i n c l u d i n g o u r o w n people a n d those w i t h w h o m w e a r e closely associated­
such as t h e o t h e r c o u n t r i e s of t h e C o m m o n w e a l t h a n d the A m e r i c a n s , as well a s
o u r o p p o n e n t s i n t h e " cold w a r , " should k n o w t h a t t h e G o v e r n m e n t clearly
recognise t h e s i t u a t i o n , a n d a r e t a c k l i n g i t w i t h firm g r i p a n d decision. T h e
t e m p t a t i o n t o defer a c t i o n u n t i l i t is publicly seen t o be d i c t a t e d to us by events
should be resisted if we a r e to r e t a i n a n d m a i n t a i n confidence. I f there is one
t h i n g t h e B r i t i s h w i l l n o t easily forgive i t is a " m e s s . " P r o m p t a n d c o n v i n c i n g
m e a s u r e s now w i l l be m o r e effective a n d w i l l n o t need t o be so d r a s t i c as t h e
m e a s u r e s w h i c h w i l l become necessary if action is d e f e r r e d . T h e following p a p e r
i s i n t e n d e d to suggest h o w the w o r k i n g out of o u r essential p l a n s can be safe­
g u a r d e d w h i l e m a k i n g a d e q u a t e p r o v i s i o n for r e l i e v i n g t h e s t r a i n on the economic
machine. 3. T h e economic c r i s i s is of t h e first m a g n i t u d e i n i t s political a n d social i m p l i c a t i o n s . I t seems to be l a r g e l y a crisis of confidence over B r i t a i n i n t h e o u t s i d e World a n d especially b e t w e e n t h i s c o u n t r y a n d t h e U n i t e d S t a t e s . The-
A m e r i c a n s w i l l give us t h e i r confidence a n d s u p p o r t , even if w e t a k e m e a s u r e s of w h i c h they w o u l d s t r o n g l y d i s a p p r o v e for t h e i r own country, p r o v i d e d w e look as if w e k n o w w h e r e we a r e g o i n g a n d how to g e t t h e r e . I t is also a c r i s i s of m a r g i n s , i n t h a t c o m p a r a t i v e l y s m a l l p e r c e n t a g e c h a n g e s i n o u r e x p o r t p a t t e r n , our level of prices a n d costs, a n d o u r public e x p e n d i t u r e w o u l d be q u i t e sufficient to b r i n g the s i t u a t i o n e n t i r e l y u n d e r our control. L o o k i n g a t t h e p a p e r s w h i c h have been s u b m i t t e d to u s i t a p p e a r s t h a t the economic d a n g e r s t o o u r p r o g r a m m e fall i n t o t h r e e or four closely r e l a t e d b u t d i s t i n c t g r o u p s . 4. F i r s t , t h e r e is t h e e x p a n s i o n a n d employment of o u r n a t i o n a l resources.
W e m a y claim to have been m o r e successful t h a n a n y o t h e r c o u n t r y i n t u r n i n g
our economic resources to the best use since t h e w a r , i n s p i t e of all our h a n d i c a p s .
N a t i o n a l p r o d u c t i o n is r u n n i n g a t a h i g h a n d still i n c r e a s i n g level, about 6 p e r
cent, above l a s t y e a r , a n d a long w a y above p r e - w a r . W h a t is even more i m p o r t a n t ,
p r o d u c t i v i t y p e r m a n - y e a r a p p e a r s to be i n c r e a s i n g a t a n a n n u a l r a t e of a b o u t
\ \ p e r cent, overall, w h i c h m e a n s t h a t m a n u f a c t u r i n g i n d u s t r i e s m u s t be i m p r o v i n g
t h e i r p r o d u c t i v i t y a t a very r e m a r k a b l e pace. C a p i t a l i n v e s t m e n t is r u n n i n g a t
37303
a h i g h , a l t h o u g h still i n a d e q u a t e , level, a n d we a r e b e g i n n i n g t o g e t a r e a l d i v i d e n d
o n some of the resources w h i c h h a v e been ploughed back, w i t h steel, for instance,
-already t o u c h i n g the 16 million-tons-a-year r a t e . U n e m p l o y m e n t also is amazingly
low, a n d we have p r o b a b l y been more successful t h a n a n y o t h e r d e m o c r a t i c c o u n t r y
i n c o n c e n t r a t i n g resources on essentials a n d on social needs, a n d i n p r e v e n t i n g
effort from b e i n g f r i t t e r e d away.
5. A l l t h i s is excellent, b u t the p i c t u r e is m a r r e d by o t h e r f e a t u r e s which
have obstinately resisted elimination. I a m puzzled, for e x a m p l e , by t h e title
of the Economic Section R e p o r t on S i g n s of Disinflation ( E . P . C . (49) 77), a s the
p i c t u r e i t gives is of c o n t i n u i n g inflation, a n d I c a n n o t see m u c h disinflation in it.
I n A p r i l people were consuming 10 p e r cent, more by volume t h a n they w e r e last
y e a r a t the t i m e of t h e C h a n c e l l o r ' s first disinflationary B u d g e t , a n d were p a y i n g
o u t 12 p e r cent, more for it. T h e M a y figures since issued a r e even h i g h e r . The
release of 4 p e r cent, more tobacco, m a i n l y from dollar sources, h a s d u l y been sent
u p in smoke i n s p i t e of prices forced u p by t a x a t i o n to levels w h i c h n o t long ago
w o u l d have been considered prohibitive. P r i c e s generally rose 2 p o i n t s i n May,
a n d w e r e t h e n 3 p o i n t s h i g h e r t h a n a y e a r ago, a g a i n s t only 1 p o i n t h i g h e r t h a n
l a s t y e a r in A p r i l . Food prices w e r e 6 p o i n t s h i g h e r , T h i s was, of course fore­
seen i n t h e B u d g e t b u t the parallel rise of 3 p o i n t s in w a g e r a t e s over t h e year
p o i n t s to continued inflation.
6. I n t h e first five m o n t h s of t h i s y e a r wage increases w e r e a w a r d e d a d d i n g
some £ 2 5 million a n n u a l l y to the n a t i o n a l w a g e bill. T h e C o u n t y Council rqad­
men took a n o t h e r r o u n d of wage increases, t h e i r t h i r d since 1945, i n a d d i t i o n to
w h i c h they have h a d t h e i r h o u r s of w o r k reduced f r o m 47 to 44 a week w i t h o u t loss
o f p a y . T h e r a i l w a y workers, i n a socialised i n d u s t r y a l r e a d y faced w i t h a heavy
o p e r a t i n g loss a n d w i t h reduced traffic, a r e also c l a i m i n g a l l - r o u n d increases
which, if conceded, m u s t involve a general increase i n c h a r g e s , or a heavy subsidy
from somewhere. R a i l w a y fares c a n n o t be f u r t h e r increased, a n d h i g h e r ratps
for g e n e r a l traffic would merely drive more on to the r o a d s , so a n y a d d e d costs
from w a g e increases a r e likely t o fail on coal, steel a n d o t h e r basic i n d u s t r i a l
p r o d u c t s e n t e r i n g i n t o t h e cost of our m a i n e x p o r t s . I t is difficult to escape the
conclusion t h a t all our g r e a t achievements since t h e w a r a r e b e i n g imperilled by
the renewed p r e s s u r e to t a k e too m u c h o u t of t h e k i t t y top e a r l y , a n d t h i s a t a t i m e
w h e n i t is a m a t t e r pf life a n d d e a t h for us to get o u r costs down, a t least as f a s t
as our overseas competitors do.
7. T u r n i n g now to the e x t e r n a l aspect, t h e Chancellor of t h e E x c h e q u e r
h a s b r o u g h t out clearly t h a t we a r e c o n s u m i n g . a t t h i s m o m e n t food a n d m a t e r i a l s
f a r i n excess of the r a t e t h a t they can be replaced o u t of o u r c u r r e n t or prospective
e a r n i n g s of foreign exchange, p l u s all the A m e r i c a n a n d C a n a d i a n a i d i n sight.
Clearly, unless we a r e to face t h e u s u a l a w a k e n i n g w h i c h follows a fool's p a r a d i s e ,
we m u s t t a k e , w i t h o u t delay, every possible step to avoid d i s s i p a t i n g o u r c u r r e n t
assets a n d resources on e n t e r p r i s e s a n d services w h i c h d o n o t d i r e c t l y or i n d i r e c t l y
c o n t r i b u t e t o i m p r o v i n g our economic s i t u a t i o n in the s h o r t or t h e long r u n , a n d
we m u s t b e a r i n m i n d t h e vital i m p o r t a n c e of- convincing o u r own people a n d t h e
w o r l d t h a t we a r e t a c k l i n g our troubles seriously.
8. T h e last Economic B u l l e t i n ( E . B . (48) 9) shows t h a t the public sense of
u r g e n c y a b o u t o u r economic difficulties h a s f a d e d a w a y j u s t w h e n i t is most
needed. T h e l a s t Social Survey i n v e s t i g a t i o n i n M a r c h showed t h a t twice as l a r g e
a p r o p o r t i o n (55 p e r cent, a g a i n s t 28 p e r cent, six m o n t h s ' earlier) t h o u g h t t h a t
on t h e whole t h i n g s w e r e going well, 40 p e r cent, could t h i n k of n o t h i n g t h e
G o v e r n m e n t is a s k i n g people to do to h e l p overcome t h e crisis, a n d over a q u a r t e r
m e n t i o n e d C a n a d a or A m e r i c a a s countries w h e r e w e should buy more food.
Those of my colleagues who have followed these Social S u r v e y i n v e s t i g a t i o n s
c a r r i e d o u t by the C e n t r a l Office of I n f o r m a t i o n w i l l h a v e been impressed no doubt,
as I have been, by t h e i r general soundness.
9. O u r i m m e d i a t e task is to r e a w a k e n the n a t i o n to t h e seriousness of the
economic problem while m a k i n g clear the new d i r e c t i o n s i n w h i c h effort is needed,
a n d confirming confidence i n t h e G o v e r n m e n t s l e a d e r s h i p . S u c h measures will
a u t o m a t i c a l l y g r e a t l y improve t h e chances of the U n i t e d S t a t e s A d m i n i s t r a t i o n in
g a i n i n g acceptance for u n p a l a t a b l e m e a s u r e s on t h e i r p a r t t o ease our difficulties.
I s u g g e s t i t would be o p p o r t u n e to p r e p a r e a clear s t a t e m e n t of the problem i n
simple l a n g u a g e a n d to give i t the w i d e s t possible c i r c u l a t i o n a m o n g t h e people,
p r o v i d i n g we a r e able to announce s t r a i g h t f o r w a r d a n d p r a c t i c a b l e steps for
d e a l i n g w i t h t h e various p o i n t s on w h i c h stress m u s t be laid.
10. I f w e a r e t o assume t h a t for m a n y y e a r s to come t h e increased e a r n i n g
-of d o l l a r s a n d h a r d c u r r e n c i e s w i l l be the only means of a v e r t i n g successive
b a l a n c e of p a y m e n t crises, should w e n o t also reconsider the incentive to o u r
e x p o r t e r s to sell for h a r d c u r r e n c y r a t h e r t h a n elsewhere or i n the home m a r k e t .
W e a l r e a d y give e n c o u r a g e m e n t t o i n d u s t r y to i n s t a l n e w e q u i p m e n t a n d to
do research, by allowances i n t a x a t i o n , a n d we e n s u r e a g a i n s t b a d r i s k s t h r o u g h
t h e E x p o r t C r e d i t s G u a r a n t e e scheme. Could m o r e effective recognition be given
to o u r dollar e a r n i n g e n t e r p r i s e s by some system of t a x a t i o n rebates (in t h e
n e x t B u d g e t ) a n d m e a n w h i l e by p e r m i t t i n g t h e m to r e t a i n a small s h a r e of a d d i ­
t i o n a l h a r d c u r r e n c y e a r n i n g s above t h e i r c u r r e n t level, or in some o t h e r a p p r o ­
p r i a t e w a y ? I c a n n o t believe t h a t i n the booming hpme m a r k e t conditions a l r e a d y
described, enough firms w i l l p u t enough effort i n t o the t h a n k l e s s task of e x p o r t i n g
for d o l l a r s a s long a s firms w h i c h do not m a k e t h i s effort enjoy a n i n c r e a s i n g
a d v a n t a g e i n profits a n d i n a s s u r a n c e of m a r k e t s . I am also f r e q u e n t l y told, by
p e o p l e who should know, t h a t o u r selling m e t h o d s a n d our selling o r g a n i s a t i o n
i n b o t h C a n a d a a n d t h e U n i t e d S t a t e s a r e q u i t e unable to hold t h e i r o w n a g a i n s t
A m e r i c a n s a l e s m a n s h i p . I f t h e r e is a n y t h i n g i n these criticisms o u g h t not more
to be done, a n d m o r e quickly, to get our best salesmen on to d o l l a r - e a r n i n g
w o r k ? W e p a n n o t afford to allow our policies to be u n d e r m i n e d by too much
t o l e r a n c e for hit-or-miss selling methods in dollar m a r k e t s .
1 1 . T h e n e x t aspect of t h e economic s i t u a t i o n w h i c h h a s a close b e a r i n g on
o u r p r o g r a m m e is public e x p e n d i t u r e . O u r public e x p e n d i t u r e , a p a r t from local
r a t e s , is n o w almost t o u c h i n g £ 3 , 0 0 0 million, a n d a l t h o u g h a g r e a t p a r t of t h i s
i s clearly essential to financing our p r o g r a m m e , it does not. seem to m a k e sense
t h a t i n such a n immense t o t a l w e cannot find, say 5 p e r cent, w o r t h of e x p e n d i t u r e
w h i c h could be e i t h e r p r u n e d off or s p r e a d over a longer p e r i o d w i t h o u t serious
consequences.
12. A c c o r d i n g t o t h e Economic Survey, c u r r e n t public e x p e n d i t u r e for 1949
( i n c l u d i n g local a u t h o r i t y s p e n d i n g ) w a s e s t i m a t e d to a m o u n t to £ 3 , 4 7 5 million
a g a i n s t a n a t i o n a l income of £10,000 million or a b o u t 7s. i n the £ . B u t the
- a m o u n t a c t u a l l y t o be r a i s e d i n r a t e s a n d t a x e s to cover public e x p e n d i t u r e p l u s
s u r p l u s w a s even h i g h e r — 3 9 p e r cent, of n a t i o n a l income, a n d it n o w looks a s
if a c t u a l e x p e n d i t u r e w i l l a p p r o a c h t h a t level. T h e incentive t o effort for w o r k e r s
as well a s professional a n d technical people a n d employers is seriously affected by
t h i s b u r d e n , which, i n t u r n , r e a c t s on our costs, a n d on o u r c a p a c i t y to e a r n dollars.
Sooner r a t h e r t h a n l a t e r the t a x p a y e r will rebel verbally a n d a t the ballot box.
13. T h e C h a n c e l l o r s p a p e r on G r o w t h of E x p e n d i t u r e ( E . P . C . (49) 76)
shows a c o n t i n u i n g p r o s p e c t of f u r t h e r rises i n s p e n d i n g all along t h e line, a n d
i n t h e absence of t h e c o r r e s p o n d i n g forecast of the t r e n d of revenue i t seems
difficult to believe t h a t revenue can be m a i n t a i n e d even a t p r e s e n t levels w i t h o u t
p r e s s i n g on t h e l i m i t s of t h e t a x p a y e r s e n d u r a n c e . T h e position about S u p p l e ­
m e n t a r y E s t i m a t e s i s especially d i s t u r b i n g , politically as well as financially.
In
the case of the F e s t i v a l of B r i t a i n b u d g e t (which I a m convinced will give a n
e a r l y a n d l a r g e d i v i d e n d i n t e r m s of f o r e i g n exchange a n d of a s t i m u l u s to
i m p r o v e d p r o d u c t i o n t h r o u g h better design a n d a fuller use of research results),
I have a g r e e d w i t h t h e Chancellor t h a t a n y increase i n e x p e n d i t u r e i n one
d i r e c t i o n should be offset by e q u i v a l e n t cuts somewhere else. Could n o t the same
p r i n c i p l e be a p p l i e d to S u p p l e m e n t a r y E s t i m a t e s ? I t seems difficult to defend
i n p r e s e n t circumstances a l l o w i n g S u p p l e m e n t a r y E s t i m a t e s to become a n a u t o ­
m a t i c net increase on t h e e x p e n d i t u r e side.
14. T h e G o v e r n m e n t h a s a r e s p o n s i b i l i t y a s a whole for t h e control of
e x p e n d i t u r e , a n d I a m w o n d e r i n g w h e t h e r t h e Economic Policy Committee, or
some new C o m m i t t e e of M i n i s t e r s established for the purpose, ought n o t to consider
w h a t changes o u g h t to be m a d e i n t h e m a c h i n e r y for controlling e x p e n d i t u r e a n d
for e n s u r i n g t h a t measures l e a d i n g to increased s p e n d i n g receive p r i o r G o v e r n m e n t
sanction, a n d t o re-examine the policies u n d e r l y i n g the 1949-50 E s t i m a t e s a n d
a g r e e w i t h D e p a r t m e n t a l M i n i s t e r s w h a t s a v i n g s can be m a d e to restore the balance
of t h e B u d g e t a n d to i m p l e m e n t the C h a n c e l l o r s declared i n t e n t i o n s i n r e l a t i o n
to k e e p i n g down t h e b u r d e n of S u p p l e m e n t a r y E s t i m a t e s .
15. A s i m i l a r s c r u t i n y m i g h t simultaneously be m a d e on m a n - p o w e r . I n the
l a s t Economic S u r v e y ( C o m m a n d 7467) provision w a s m a d e for a r e d u c t i o n
d u r i n g t h e y e a r of n u m b e r s i n n a t i o n a l G o v e r n m e n t service by 19,000. T h i s
is a small enough t a r g e t : is i t b e i n g realised ? Local G o v e r n m e n t service w a s
forecast to e x p a n d by 4,000 (despite the t r a n s f e r of a n u m b e r of i m p o r t a n t
f u n c t i o n s to n a t i o n a l bodies), m a k i n g a total of 1,455,000 for public a d m i n i s t r a ­
t i o n a s a whole. C a n n o t some s a v i n g be m a d e on t h i s immense figure a n d thereby
assist i n the r e d u c t i o n of p u b l i c e x p e n d i t u r e ? L a s t year, a l t h o u g h t h e Civil
Service n u m b e r s w e r e k e p t below the Economic S u r v e y ceiling, local g o v e r n m e n t
exceeded i t by 71,000 persons. T h i s y e a r by t h e e n d of M a y employment i n local
g o v e r n m e n t h a d a l r e a d y reached the 780,000 level forecast for the e n d of t h e y e a r .
I s a n y t h i n g b e i n g done t o p r e v e n t o u r difficulties f r o m b e i n g a g g r a v a t e d i n the­
same w a y a s l a s t y e a r 1
16. M y first object i n t h i s p a p e r h a s been to stress t h a t t h e economic crisis,
is a n d r e m a i n s a t h r e a t to all t h a t w e have achieved a n d all t h a t we s t a n d for.
I t r u s t t h a t none of my colleagues a r e u n d e r t h e illusion t h a t e v e r y t h i n g w i l l i n
some w a y come out all r i g h t w i t h o u t a lot more action on o u r p a r t . A t t h i s m o m e n t
our l a s t reserves of gold a n d dollars a r e v a n i s h i n g a t t h e r a t e of a b o u t £ 1 2 m i l l i o n
w o r t h a week. A t the p r e s e n t r a t e they w o u l d be d o w n to zero i n j u s t over
200 d a y s f r o m now, a n d i n f a r f e w e r days t h a n t h a t o u r p o s i t i o n will become
u n t e n a b l e unless t h e fall can n o t only be s t o p p e d b u t reversed. I have n o t a t t e m p t e d
t o p u t f o r w a r d d e t a i l e d r e c o m m e n d a t i o n s for action. T h a t is for the a p p r o p r i a t e
M i n i s t e r s to do, b u t if t h e c o u n t r y is to a v o i d h a r s h a n d p a n i c m e a s u r e s s u c h as
w e r e forced on i t i n 1931, t h e p r e s e n t tendencies m u s t be corrected by well-timed,
w e l l - p l a n n e d a n d vigorous action c a l c u l a t e d t o s a f e g u a r d a n d s t r e n g t h e n the­
p r o g r e s s we have achieved i n t h e l a s t four y e a r s .
H. M.
Privy
Council Office,
21st July, 1949.
S.W.1,