THE MOST IMPORTANT CONTROLS THE plan for employment, in its statistical essence at least, should arrange for income, generated by the domestic production of output during the forthcoming period to be continuously eąual to the rate of expenditure expected from the employment of all re­sources. The attempt had been made, during the period of post-war scarcities, to bring about this balance by direct controls, as the means of securing fair shares and the orderly distribution of supplies. The controls after the war had not been continued as ends in themselves but as means. Recovery and rising production removed many of the more serious shortages during 1948, 1949 and 1950, and the controls were steadily relaxed as supplies increased and as their disadvantages appeared all too clearly to outweigh their adyantages.1 The President of the Board of Trade in 1949, after an internal enąuiry, was able to celebrate, in a succession of spectacular "bonfires", the (literał) burn-ing of clothes ration books and the lifting of a number of controls from commodities in limited or highly specialised use. All steel, ex-cept sheet, was freed from allocation in March 1950, although the control had subsequently to be restored for a short period after the outbreak of war in Korea. The control on timber was eased when the free sale of hardwood was allowed in 1951, and finaliy removed alto-gether in 1953. Some conditions, however, continued to be imposed on deliveries even though limitation of supplies was no longer neces­sary nor intended. Consumers of steel, for example, were still reąuired as a condition of delivery, to provide the supplier with a return specifying the ąuantities and purposes for which the steel would be used. A similar provision was attached to the open generał import licence in 1952, reąuiring importers of tea and coffee to give an undertaking to furnish the Ministry of Food with a monthly return showing the ąuantities arrived and expected.2 A large part of the statistics now collected by Government had been assembled as part of their day-to-day business by those responsible for administering the controls. "Reąuirements" were neither important nor reliable 1 Cmd. 7572, paras. 51 and 52; 474 H.C. 64. 2 The Iron and Steel Utilisation (Records) Order, No. 873, 4th June 1950, Sec. 1. Board of Trade: Import Licensing Branch: Notices to Importers, Nos. 508 and 515. and such figurcs certainly did not repay the cost of collection. But controllers also demanded from their clients returns of stocks; the description and destination of output, whether for home or export markets; and the distribution of consumption between the several uses to which the controlled commodity might be put. Many of the tables embellishing the Monthly Statistical Digest, particularly those showing deliveries, consumption and stocks of raw materials and manufactured goods, were based ultimately on information collected (often under protest) by controllers from applicants for licences and some means had to be found for continuing the flow. Few controls remained when the Labour Government went out of office in November 1951 and fewer still survived the first years of the incoming Conservative administration. Newsprint and jute, alone of the commercially important materials, remained subject to control at the time the Ministry of Materials was wound up in August 1954.1 Building was finaliy freed in October 1954. Free markets have now been restored in the United Kingdom for most commodities in international trade with only the most necessary safeguards against the danger of a dollar drain. Sterling earned in current overseas transactions (by persons not residing in the United Kingdom nor in North America) can be freely exchanged into all other currencies except the dollar; and the control of imports has been so far relaxed that licences are granted for goods which, though bought for dollars, are not to be regarded as wholly essential. The demand for goods and services no longer outruns supplies at the current market prices. There is no longer the appearance of generał scarcity, sufficiently severe to justify the continuation of the controls and to enforce the allocations. The whole elaborate machin­ery described in Chapter V has gone. The attempt, which had seemed so necessary during the period of post-war shortage, to secure, by direct allocation, "the devotion of the national resources to the most essential uses" 2 had lost indeed, as infiation subsided, its principal instrument; and the plan for an expenditure of national resources conforming to some official Schedule of priorities, had been given up even before the Labour Government left office in 1951. The national reąuirements for the year, when budgets of national income and expenditure were being shown in the Economic Surveys,3 1 Cmd. 9309: Continuation of Emergency Legislation. - Cmd. 7572, para. 51. * Cmd. 7344, 1948, Table 22; Cmd. 7647, 1949, Table 20; Cmd. 7915, 1950, Table 11; Cmd. 8195, 1951, Table 24. These projections or forecasts of income and expenditure for the coming year were not shown after 1952 in the explicit form of a budget. were conveniently divided into three broad categories—for personal expenditure, for Government expenditure and for gross capital formation. The output from which these reąuirements were to be satisfied was, of course, the grand total of the gross national product which was foreseen in the coming year as the net output of agriculture, manufacture, mining, transport, commerce, distribution and all other gainful economic activity. Variations arising from changes in industrial efficiency, in supplies of raw materials and labour, in prices, wages and so on all had to be taken into account, and so had any net import from overseas (measured as the current deficit, if any, expected in the balance of payments). Reąuirements for Government consumption might reasonably be projected from the civil estimates presented to Parliament by Ministers in the early part of the year, supplemented by an allowance for the net expendi-ture of local authorities and so on. The forecast for gross capital formation could be computed from the programmes accepted on the report of the investment programmes committee—enlarged, of course, to allow for house-building and repair, for fixed capital laid down during the year in machinery, ships, vehicles, aircraft and so on, and for the expected variation in stocks and work in progress.1 Public expenditure sińce the war has been burdened by a heavy commitment for defence; and the cost of current social policies is not likely to diminish as the population ages. Government expendi-ture has been included in the budget of national income and expendi-ture as one of the fixed and less flexible elements among the reąuire­ments. Exports have clearly commanded the highest priority, and it has not been possible to neglect capital reąuirements for the re-habilitation, re-equipment and improvement of British industry with­out danger to Britain's economic survival. When (these) claims on national income have been met, the remainder is available for personal consumption, and if inflationary pressure is to be avoided, personal consumption must be limited to this amount.2 The expenditure which individuals are likely to incur on their own and their families' consumption is the largest single element to be included among the reąuirements. It is not a ąuantity which can be easily nor directly ascertained. But in the circumstances of the years following the war and certainly during the period of office of Mr. Attlee's two administrations of 1945 and 1950, the value of the reąuirements for personal consumption which could be allowed in the budgets of national income and expenditure, had to be assessed 1 Above, p. 26. 2 Sir StarTord Cripps, 449 H.C. 47. simply as the difference between the sum of the reąuirements already admitted, and the grand total of output from all sources. The guesses, estimates and forecasts which go to make up a budget of national income and expenditure clearly demand crystal-gazing of a very sophisticated kind. But amid so much that is a matter for inspired conjecture, some things at least are certain. The value of expenditure in gross cannot exceed the gross value of income; nor should national expenditure fali short lest capacity stand idle and men go unemployed. Income spent on the satisfaction of reąuire­ments for current consumption, whether arising from the demands of public authorities, business enterprises or private persons, is necessarily eąual to the value of the goods and sendces currently being sold for those purposes. Current expenditure out of income is thus matched by the market value of output from resources devoted to production for current consumption. The surplus of income remaining unspent in the budgets of the recipients after demands for current consumption have been satisfied, is eąual— necessarily—to the market value of output from the resources which have not been used in production for current purposes. Income which has not been spent is saved; and output which is not exported nor taken up in providing for the current consumption of public authorities, business and private persons, has clearly been turned to some non-current, that is, capital use at home. Capital goods like any other, when produced have to be paid for; and a programme of capital investment is completed and transformed into a capital budget, when it is matched with an estimate or statement of the funds fortheoming for the purchase of the buildings, plant, eąuip-ment, stocks and so forth in which the investment is to be embodied. These funds are found from that part of income which is set aside and withheld from expenditure for current purposes—from savings in a word, interpreted in the broadest sense—supplemented by net drawings on reserves and the net contribution from abroad, the deficit, if any in the balance of payments. Net additions to re-serves are a deduction from the savings available for the finance of domestic capital expenditure; and a finał surplus in the balance of payments, an addition to capital accumulated and held abroad, can be included in the year's gross capital formation as a part of the (capital) expenditure to be financed. If the value of the capital expenditure taken into the capital budget should be greater than the value of the savings which have been allowed as the net sum of the surpluses arising in all other budgets, then the grand total of the national expenditures being planned for the year, will appear to exceed the value of the national income available to meet these reąuirements. Conversely, if the investment which has been planned should appear to be less than the savings, the sum of the (expected) national expenditure may fali short of the value of the national resources. Excesses or deficiencies of the whole of expenditure over the value of all output may appear in a budget before the event. But neither excess nor deficit could persist when the period is over, and be reckoned when the accounts are made up, as an actual difference between the net sum of the surpluses saved, and the value of the investment actually realised (whether in buildings, plant and eąuip-ment), accumulated as additions to stock, or invested abroad. An apparent deficiency in the forecast of savings, compared with the estimated value of the investment set up in the budget, indicates a condition in which the demand in money offered for output is expected to be greater than the value of output from the resources, valued in terms of the prices current when the budget was drawn up. That condition, if it is allowed to continue, will stimulate a generał rise of prices; and money incomes will expand. The expan-sion will proceed until a margin of income over current expenditure has been created, equal to the value of the output realised on the investment programme. Rise of price checks demand for, and reduces the consumption of, both product and resources; and the expansion needed to bring about the balance between "savings" and "investment" at the higher rate, will be the greater the less the check to expenditure on current consumption which results from the rise in prices. The appearance on the other hand, of an excess of savings in the capital budget indicates that plans for outlay on capital account are going to be less than the net total of the surpluses of income withheld from expenditures. This is the condition in which the foreseeable demands on resources arising from claims for all purposes—Government, business, export and personal, capital and current taken together—are likely to be less than the sum reąuired to absorb the whole of the expected output. Prices in such a case, and output, may fali—one or the other and more likely both. From either and both these causes, income can be reduced and, to the degree that output falls, resources will stand idle and unused. That condition portends a surplus of capacity and danger of unemploy-ment. Balance will be restored in the accounts by the reduction of income; but activity generally will be at a lower level and unem-ployment may spread, carrying depression throughout industry. Chancellors of the Exchequer who, before the war, followed in the narrow paths laid out by the orthodoxy of the times, contrived generally to balance their estimates of ordinary revenue and ex-penditure with a smali surplus of some few hundred thousand pounds on budgets of six and seven hundred millions. Lord (then Mr. Philip) Snowden, one of the soundest of sound Chancellors according to the lights of his day, confronted at the onset of the crisis in September 1931 an estimated deficit of £70,000,000. By the end of the following fiscal year a deficit of £170,000,000 was in prospect. He set himself to restore order. "An unbalanced budget (he re-garded) as one of the symptoms of national financial instabiłity." Increase of debt could no longer be afforded. Borrowing for the Unemployment Fund and the Road Fund was stopped forthwith; and the "whole amounts" raised on these Funds were borne on the revenue for the year. The financial problem could be solved, as he saw it, only in two ways, either by redućtion of expenditure or by increasing taxation—or by a combination of both. We have been under the delusion in these times of unparalleled depression that we can maintain the expenditure of prosperous times . . . Whatever measures you may take to restore solvency to our nation's finances the country must face up to the position and I am going to do it this afternoon.1 Economies saving over £22 million in the half-year to March 1932 and £70 million in the fuli year were imposed "over the whole of Government expenditure", including reductions in the salaries of teachers and other Government servants, in unemployment relief, in the defence services and in the expenditure on highways from the Road Fund. Charges for the redemption of debt were reduced by £13,700,000 and new taxation, both Inland Revenue and Customs and Excise, was raised to yield £76 million. The budget closed with an estimated surplus of £1,500,000 and the hope of another surplus of the same dimensions in the next fiscal year. Mr. Snowden's successors in office, Mr. Neville Chamberlain and Lord (then Sir John) Simon, continued to balance their budgets in the estimates but not in the finał outturn. Recovery and rising income caused the fiscal years after 1933 to close with substantial surpluses in the Exchequer accounts. These surpluses, of £20 and £30 million, were immensely larger than the smali margins of £100,000 and £200,000 for which Chancellors were then providing. Debt conse-quently could be repaid; the reductions in salaries and benefits im­posed in 1931 were as steadily restored; and taxes were finaliy 1 256 H.C. 298. reduced. Budgets from 1936 fell under the shadow of rearmament and preparation for war. The Chancellor of the day "convinced that the shock of such a sudden and such a tremendous increase in the burden (of taxation) would have checked, perhaps even reversed the process of conyalescence",1 reversed himself and resorted to borrow-ing to help defray the fuli cost of rearmament. Service estimates rose rapidly. Taxes were increased, but not by the fuli amount reąuired to provide for the cost of rearming. In appearance at least the fiscal canon was respected. Budgets continued to be balanced. Ordinary expenditure was neatly matched by ordinary revenue but over half the estimated expenditure on defence in the last years before war, eąual to one-quarter of the total supply, was being financed outside the budget—"below the line" in contemporary jargon—under authority of the Defence Loans Act of 1937.2 The expenditure of Governments in war is limited not by the revenues coming into the Exchequer but by the value of the resources allocated to military purposes. By 1944-5, the last complete year of war finance, just over one half (54 per cent) of the total expendi-ture, amounting to £6,000,000,000, was being covered by revenue. The remainder had to be borrowed. The Chancellor's business was to avoid infiation, and taxation was then levied as much to reduce purchasing-power as to raise revenue. Not only were receipts from ordinary revenue taken into the balance against these immense ex-penditures, but also all public revenues outside the budget and the sum of all business and personal income withheld from private expenditure. Business income accumulating in depreciation allow-ances and as additions to company reserves and personal savings of all sorts, if lent at all were automatically lent to Government, sińce Government was the only borrower. And if these sums were not so lent, that part at least, being a part of savings, would be held off the market no less than that other part which had been directly invested in Government securities.3 The context in which Chancellors sińce the war have reviewed the fiscal problem is expressed in their speeches. Dr. Dalton gave the aim in the first budget statement after the war in October 1945. "Purchasing power and productive power should always march in step. Otherwise we shall fali into the one or other of the twin evils of deflation and infiation." Sir Stafford Cripps described the budget "as the most important control and as the most important instru­ment for influencing economic policy" at the disposal of Government. 1 322 H.C. 1622. 2 346 H.C. 986-9. 3 370 H.C. 1306, above, p. 50. Chancellors, according to Mr. Gaitskell, now have to assess "the net effect of all the inflationary and deflationary factors in the economy" and close their budgets in surplus or deficit overall, above and below the line, so that, in the words of his Conservative suc-cessor, "the purchasing power available to the community as a whole . . . does not outrun the amount of goods and services ayailable".1 The new duty of Chancellors is thus "to match . . . resources against needs so that the main features of (the) economy may be worked out for the benefit of the community as a whole". Their attention is no longer confined, as it used to be, to the arrangement, with proper respect for strict economy in public expenditure, of that formal balance between Exchequer receipts and outgoings, the tradi-tional mark of prudent finance. They are now concerned with investment and saving, with the balance no less, of the capital budget as a whole. "If the voluntary savings of individuals and firms are insuificient, then the Government must itself make up the deficiency in the nation's savings by accumulating a Budget surplus which in effect helps to pay for capital development such, for instance, as that provided by loans to local authorities." The basis of budget policy sińce the war has been to secure not only that Government expendi-ture is covered by public revenue but also that the nation is holding back from spending on consumption an amount eąual to that which it proposes to spend on investment—and as post-war Chancellors would no doubt have been willing to add for completeness, to secure also, should events so dictate, that the economy, in the reverse case, spends on investment or in other ways an amount eąual to that which the people in their other capacity as consumers, are currently proposing to save.2 Chancellors, in preparing their budgets, have to consider the attitude of the public towards spending and saving, the likely reactions of business and the reactions of those reactions upon plans for private investment. They have to ask themselves (or their advisers) how, and by how much, those changes which can be foreseen in the constituents of income and outlay are going to affect the forces making for expansion and contraction throughout the economy. Some answer has to be found to these and other awkward ąuestions, and Chancellors have to incorporate in their budgets those measures, if any, which may be deemed appropriate to correct and anticipate the particular and adverse changes which appear to 1 Dr. Dalton, 414 H.C. 1877. Sir Stafford Cripps, 474 H.C. 40. Mr. Hugh Gaitskell, 486 H.C. 483. Mr. R. A. Butler, 497 H.C. 1287. * Sir Stafford Cripps, 474 H.C. 61-3. Mr. Hugh Gaitskell, 486 H.C. 836-43. jeopardise that "high and stable level of employment at which we all aim".1 The statistical problems alone are formidable. None of the constituents in the budget of national income and national ex-penditure are easily ascertained, nor can the several elements be forecast with much assurance of accuracy. The determination of some is a distinctly precarious exercise, and among them the capital budget, upon which the balance of the whole appears to depend, is one of the least certain. Projected capital expenditures have to be pieced together from some most fragmentary sources.2 Over half, being undertaken by private business, depends upon decisions many of which may (and probably will) be amended or reversed during the period for which the budget is being drawn. Savings on the other side, are surpluses. They are entered not as an "estimate of the savings which savers will wish to make" nor as a "forecast" but simply as the saving which "will be reąuired if a resurgence of inflationary pressure is to be avoided" and "if home investment plans and the planned reduction of the scalę of foreign borrowing is to be carried through with exist-ing tax rates and without raising prices and incomes above the cur­rent levels".3 The disinflationary impact of surplus in the public accounts had to be fortified during the time of the Labour Governments by savings campaigns, invitations to trades unions and others to exercise a voluntary restraint in the matter of higher wages and personal emoluments generally and by suggestions, at one time under threat of legislation, to private companies to limit the distribution of dividends out of earnings. The problem was temporarily eased by the favourable turn in the terms of trade, which, for a time at least after 1952, prevented domestic prices from rising as fast as before. The Conservative Administration which accepted office after the resignation of the Labour Government in 1951 added the reinforce-ment of a rise in bank-rate, first from 2^ to 3 per cent and then to 4^ per cent, to the other factors already operating to restrict investment at home—the suspension of the initial allowance . . . the physical control over steel allocations and the voluntary arrangements between the Ministry of Supply and manufacturers to decide how much production should be devoted to the export trade.4 The rate has again been put up as a means of arresting the outflow of 1 Mr. R. A. Butler, 497 H.C. 1283. 2 Mr. Harold Macmillan, 557 H.C. 1406. 3 Cmd. 7915, para. 77, and 7344, para. 215. * 497 H.C. 1283. gold and of protecting the exchange. There is once more the pres-sure of exhortation and now, in 1956, another white paper on the Economic Implications of Fuli Employment.1 Situations in which inflations and deflations are likely to occur are created not only by shortage of resources (as in 1947) and by persistent pressure of claims for higher wages (one cause certainly sińce 1950). They are also much coloured by states of mind. If the public begin to believe that a depression is on the way, and curtail their purchases in anticipation of lower incomes, then the conseąuent reduction in outlay will almost certainly cause the de­pression to arrive. If, on the other hand, there is a common sense that the infiation is not yet over and a widely-held expectation that prices are going to rise generally, saving will become unattractive, particularly to private persons who will have cause to fear a fali in the futurę value of any money they may put by. The marked reduction of personal savings during the early years of the Labour Administration must have added greatly to the difficulties facing the Chancellors of the day; and there can be no doubt either table 14 Savings and Jmestment Year Persons (1) Corpora-tions (2) Private (3) Central Govt. (4) Local Authori­ties (5) Public (6) Residual Error (7) Total (8) Gross Capital Forma­tion (9) 1938 241 290 531 - 150 75 - 75 Nil 456 1948 59 939 998 520 71 591 9 1,598 1,688 1949 95 1,019 1,114 581 77 658 - 25 1,747 1,764 1950 102 1,337 1,439 662 79 741 24 2,204 1,906 1951 237 1,351 1,588 593 68 661 25 2,274 2,124 1952 706 1,155 1,861 349 81 430 - 12 2,279 2,371 1953 870 1,370 2,240 173 118 291 59 2,590 2,759 The difference between the total of savings (Column 8) and the total of capital expenditure (Column 9 gross capital formation) is made up by tax and dividend reserves, taxes on capital, capital transfers and stock appreciation. In 1948 and 1949 taxes on (personal) capital exceeded the sum of personal savings, plus additions to tax reserves, plus additions to (personal) tax reseryes and transfers of (personal) capital. The net change in personal assets was conseąuently negative—the value of personal assets, that is, was reduced in 1948 by £39,000,000 and in 1949 by £10,000,000. (Saunders, op. cit. infra, Appendix 1.) Sources: C. T. Saunders: Some problems In the estimation of personal savings and investment, Manchester Statistical Society, lOth November 1954, Table 1 and Appendix 1; Central Statistical Office: National Income and Expenditure, 1946-53, Table 42, and Annual Abstract of Statistlcs, No. 91. 1 Cmd. 9725. that the subseąuent rise to the very respectable annual total of £763,000,000 in 1953 has eased the Chancelloris problem after 1951. Domestic funds ready for the finance of investment were distri-buted in 1953, according to the most recent estimates of national income and expenditure, between personal, business and public savings in the proportions of 9, 13, and 3. Business appears as the largest contributor in the form of depreciation allowances and un-distributed profits; and personal savings are the most variable. Saving to some is the result of a deliberate act, the expression of per­sonal thrift; to others, merely the reverse of their rate of consumption. Some people spend less than they earn, others more. Many of us, at different stages of our lives, have done both. Saving, as Lord Keynes remarked, is a mere residual1 and the net volume of savings is reckoned after the event, as the excess of income remaining when taxes have been paid, dividends distributed and the bills for con­sumption met. Saving, in a society which permits any large degree of freedom in the disposition of business earnings and private incomes, is not easily reached by government. Private income at the disposal of business and persons can certainly be reduced by raising taxes on income, by excise duties and by purchase taxes levied for purposes of revenue. But increase in direct tax when rates are already high may do as much harm in discouraging effort (and output) as good in adding to the volume of saving; and the attempt to limit the expendi-ture of persons by higher taxes can generally be defeated by any taxpayer who prefers to maintain his rate of consumption and pays his taxes out of the sum which he might otherwise have saved. Private saving cannot itself be planned—arranged for in advance that is to suit the needs of a national investment programme. Govern-ment expenditure in these days cannot be much reduced, for good reasons of social and economic policy, and the surplus of public revenue over public expenditure is not always to be relied upon to make up a feared deficiency of private saving. Government in a society which leaves individuals to dispose as they please of their earnings after tax, cannot easily nor with certainty influence the value of the income which is saved nor conseąuently the value of the resources currently being withheld from consumption and ready for capital purposes. The particular nightmare of the nineteen-thirties and earlier as we see it now, was the uncertainty that plans for investment, private 1 Keynes: General Theory of Employment, Interest and Money, Book II, Chapter VI (p. 64 in the first impression). and public, would not take up the margin of resources released by the contemporary rate of saving. The element of danger in the fully employed economy is the opposite, that the volume of resources being released by current saving may not allow for the rate of invest-ment demanded by current programmes. Investment is one of the factors governing the rate of materiał progress. The application of scientific discovery to industry is another; but improvements in techniąues are often costly and may involve the replacement of capital (or indeed, of an industry itself) long before the physical eąuipment is in fact worn out. Resources taken by investment cannot also be used to furnish goods and services for personal consumption or for public expenditure; and a fully employed economy which has no surplus of resources is forced to limit the annual addition to its capital to the rate at which income is being held back and saved from expenditure, by the exercise of private and public thrift. Output in the United States, now exceeding (at 1953 prices) $2,000 a head per annum, seems able to accommodate simultaneously an astonishingly high standard of personal consumption and a rate of investment which strikes an Englishman as positively extravagant. One calls to mind, as an illustration, the substitution of diesels for steam locomotives by the (privately-owned) railways, completed sińce the war, and the speed at which new motor highways are being driven across the eastern seaboard. Russia on the other hand, though here one speaks from little knowledge, has given, by all reports, a con-siderable precedence to investment and the consumption of citizens has been severely rationed, to find the resources needed for the rapid growth of heavy industry projected in successive plans. Gross national product in the United Kingdom in 1953, just reaching £300 a head, is clearly insufficient as yet even to give the illusion that consumption and investment can both be raised at time of fuli employment. Policies for economic and social improvement are thus likely to be embarrassed in the futurę as in the past by infiation, if current schemes should demand an investment greater than can be financed by the savings then forthcoming from private and public sources combined. Another element in the capital account—and in the accounts of the United Kingdom a predominant element—is the balance of pay­ments. The British balance of payments being the accounts of the United Kingdom with the rest of the world is also, and at the same time, the account of the rest of the world with the United Kingdom. The value of the balance of payments in its one aspect, in the national accounts of the United Kingdom, is identical with the sum of net domestic savings less the value of the net domestic addition to capital. In its other aspect, in the combined social accounts of the countries trading with the United Kingdom, the balance of payments is also and simultaneously identical with the finał sum of net savings in "the rest of the world" less the net addition to capital in "the rest of the world". The domestic capital account, if that phrase may be employed for the terms on the left-hand side of the identity / - S = M - (X + A)1 thus has to be kept in balance, not only with all relevant domestic factors, but also with the rates of savings and investment, the rates of expansion and contraction of income in the rest of the world at large. Suppose, by way of horrid example, that the United States should undergo by inadvertence or design, some "recession" in business. The conseąuent contraction in the national income of the United States would lead to a reduction in American imports, not only because the people of the United States, with less income at their disposal, would naturally buy less, and United States industry, with a lessened activity, would reąuire fewer raw materials, but also because American business and labour, fearing the onset of unem­ployment, would almost certainly press for higher tariffs against imported manufactures and other goods competing with the domes­tic product. British exports, if the contraction were sufficiently severe, might suffer from each and every move in the American economy. Sales in American markets would, of course, be directly affected; and the reduction of American imports from the rest of the world might so diminish the earnings of all other overseas customers that they could no longer afford to buy as much from Britain as before. British exports to all parts of the world would share in the American depression. Unemployment starting in the export trades could spread throughout Great Britain (and might well be aggravated if there should be at the same time an increase in British imports stimulated by the reductions in prices brought about ąuite generally by the lowering of incomes in the United States and throughout the world). The fairest hope for a continuing prosperity, in the United King­dom no less than throughout the free world, rests upon the expansion of world income and outlay and, in particular, upon the steady expansion of income and outlay in the United States. If, as their income grows, Americans consume more of their own output, less is left for exports; and if, with larger incomes to dispose of, they buy 1 Above, p. 20. more from abroad, American imports will rise. Provided that the American economy continues to grow, provided that futurę reces-sions of business in the United States are checked before the con­traction of American income becomes really severe, and provided too that the terms of trade with the rest of the non-dollar world remain generally favourable, then there should be no disturbance to the stability of employment and the growth of income in the United Kingdom that is too unsettling to be kept in hand either by con-triving an increase in outlay at home, or if necessary, by drawing on the reserves. The cost of employment depends upon the numbers in work, the amount of capital reąuired to assist each employee, the value of the raw materials consumed, and, of course, upon the rate of wages. Fuli employment sińce the war has been accompanied by a steady rise in costs. The working population has been increasing slightly, more and better machinery has been used in industry, the values of im­ported raw materials are now higher (partly because of the adverse turn in the terms of trade) and, of course, rates of wages have steadily been rising, driven up in part at least by the pressure of unfilled vacancies in a fully employed economy. There is always the risk that domestic remedies for mass unem­ployment at home might be frustrated by the weakening of the exchange. The danger to the United Kingdom that slump might be imported from abroad cannot be ignored; and fuli employment at home has periodically been jeopardised by the sudden emergence of deficits in the balance of payments. National policies designed to forestall an impending depression are likely to create in the domestic accounts, a capital expenditure, i, either by the well-canvassed ex-pedient of public works or by some variation in the initial allowances on investment undertaken privately. The deficiency of saving, sińce the combined capital account must be balanced as a whole, is made up, per contra, by deficiency in the balance of payments, M— (X+A), followed, presumably, by fali in the reserves. Her Majesty's Govern-ment at Westminster, committed to fuli employment at home in circumstances which bristle with uncertainty, have perhaps under-standably not yet been able to forgo the protection for the exchange which can be afforded by a selective limitation of the volume and value of overseas purchases and of the sources from which they are drawn. By control of the sales of sterling during a crisis of the exchange, by licence and by ąuota, expenditure upon imports can be kept reasonably closely within the bounds set by earnings in foreign currencies or any group of currencies. By refusal of licences for inessential goods, scarce resources in foreign exchange can be con-served to pay for imports of the essential; and by discriminating in the issue of licences against this country and in favour of that, the control can also direct the sources from which any particular class and ąuantify of goods can be obtained. British demand for imports can thus be turned away from the hard currency areas toward these other areas which the British authorities might think it proper (and politic) to prefer, and direct competition with the home product from foreign goods (and particularly American, if these should have be-come unexpectedly and embarrassingly cheap) could certainly be ayoided.1 Self-help exercised through exchange control and the licensing of imports has an obvious attraction for all those who, for reasons of nationalism or socialism (or both), feel a need to preserve the illusion that the management of national economic affairs is in national hands. But the countries of the world, it must not be forgotten, are inextricably linked through the transactions each has with the others; and the greater the value of foreign trade in relation to the domestic transactions in any one country, the less can that country insulate its economy from the economy of the rest of the world. Planning for stability of income and continuity of employment in peace has perhaps this, and this only, in common with planning for a maximum of military output in war—that in each case the problem transcends national frontiers and combined policy undertaken by all the free nations is an essential reąuirement for success. In any plan for em­ployment set up in the United Kingdom, the values which may be reąuired by domestic circumstances for the strategie ąuantities in the domestic accounts must always be adjusted to the values to be assumed by the balance of payments. It is perhaps with this limitation constantly in mind that economic plans for British econ­omic problems are most usefully considered, a reflection which must have been present to those who read (or heard) the Prime Minister's announcement in July 1956 that the Chancellor would have as his advisor on economic and financial matters a distinguished senior civil servant who has so lately been among Her Majesty's senior Ambassadors.2 1 The safeguards required for the defence of the British balance of payments should Great Britain be associated with the proposal for a European Common Market were canvassed in the House of Commons on 26 November 1956. 561 H.C. 35 to 164, particularly col. 63. • 556 H.C. 639-41.