The Crisis Deepens
Is there no way out of the economic mess? In fact there are three. The first is devaluation, the classic method envisaged by Keynes and embodied in the articles of the International Monetary Fund as the proper method for a country in chronic balance of payments deficit. This the Government has rejected out of hand, largely because President Johnson, sensitive about the dollar, would regard it as a hostile and unfriendly act. The second is the retreat to a siege economy, whose central defence would be a battery of discriminatory physical import controls. This has obvious attractions for a Socialist government, but has been rejected by the present administration (for the time being) on the understandable grounds that a move in this direction would inevitably mean Britain's expulsion from EFTA and put paid to any hope of joining the Common Market.
The third method is a prolonged de- flation, from which only the British economy would suffer and which overseas opinion would doubtless applaud. It is clearly on this course that the Government has embarked, as Mr Callaghan's latest decision to make use of the SET to impose a particularly vicious credit squeeze under- lines. Even if deflation were the right answer, this would have been a particularly inept move, since it does nothing about the economy now but will bite hard during the winter when the trade downturn resulting from the Government's earlier deflationary measures will—on all present indications— already have got under way. But in any case, however skilfully applied, deflation alone is no answer. For it does nothing to ensure that the balance of payments stays right once economic expansion is resumed, while, in the meantime, by discouraging in- dustrial investment, it puts still further im- pediments in the way of economic growth.
But although this is the course on which the Government has embarked, it is difficult to believe that it will be pre- pared to see it through. Indeed, it is pos- sible to forecast with some confidence the precise date on which the Government will drop its commitment to deflation : the day when rising unemployment has led to the first Tory gain in a by-election. It is at this juncture that the Government is likely to turn back to the second, Socialist, method of dealing with the crisis : the return to the siege economy. The damage this would do to our relations in Europe would be in- calculable, not to mention the rigidities, distortions and diseconomies it would in- troduce into the domestic economy.
Indeed, as in the case of the import sur- charge, it is more than likely that ulti- mately, having caused the maximum ill-will abroad, the present Government would bow to overseas pressure, dismantle its protec- tive barriers, and then, after yet another bout of so-called speculative pressure, and with no further shots left in its locker, find itself forced to resort to the only remedy left, a devaluation of the pound. But in cir- cumstances as humiliating as this, at the end of a rake's progress of economic mis- management, it would be too much to hope that the day would be saved by a coolly planned change in the exchange rate, care- fully buttressed (as it should be) by tariff cuts, a temporary wage freeze, and a complementary deflation of consumer de- mand at home. The very real fear is that at the end of the day we shall see a forced devaluation, unplanned and on its own, which will only result in a blaze of inflation and leave us worse off than we were at the beginning.
Last week, Mr Wilson. as a substitute for an economic policy, attacked those who 'sell - Britain short.' No doubt he feels he can get a better price, presumably from the Ameri- cans. But as the economic crisis deepens, what Britain needs is not a salesman but a leader who has the courage to buy back her economic strength and political inde- pendence, and the time needed in which to undertake the long-term reforms the British economy needs, at the cost—since it can no longer be bought for less—of the sterling exchange rate. The choice is whether the opportunity is grasped now, or whether we are to be allowed to drift first through an economically damaging deflation, then through a politically damaging retreat to siege Socialism, only to end with a botched devaluation that will effectively waste the only real weapon we have left to us.
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