FINANCE AND INVESTMENT
NICHOLAS DAVENPORT QUESTIONED in the House of Commons this week Mr. Butler did not deny that currency matters might be discussed at the forth- coming meeting of the International Mone- tary Fund, when Commonwealth Ministers would be present, but he insisted that he had never departed from his well-known conditions for sterling convertibility—ade- quate credits, a sound internal policy and a lowering of the barriers to trade. He added that it must be clear to everyone that the state of the internal economy at the present time was 'one which wants,a certain degree of tightening up.' I see no chance of Mr. Butler's conditions being realised by the autumn, when rumour has it that the £ will be made fully convertible for foreigners and allowed to float between more widely separated gold points. Even if President Eisenhower could secure a lowering of the American tariff barrier by that time, can Mr. Butler deliver a sound economy at home? We are suffering not only from the disease—perhaps incurable—called 'creep- ing inflation,' which reduces the value of money year after year by 21 to 3 per cent., but from a summer fever caused by a tem- porary excess of internal demand over
available supplies. Although production in the first half of this year has been rising at much the same rate as it did in 1954, when the total increase over 1953 was £625 million, consumption in the first few months was running at an annual rate of about £400 million in excess of the previous year, while fixed investment was rising much more steeply than it did in 1954, both factory building approvals and home orders for machine tools being 60 to 70 per cent. higher than a year earlier. The increase in fixed investment last year was about £125 million and if the increase this year is to be over £200 million it will be seen that the excess of internal demand over supplies could be serious. Relief could, of course, be obtained either from an increase in im- the expense of a worse crisis in the balance of payments. Relief can hardly be expected from a running down of stocks because the recent railway and dock strikes were a warning to both manufacturer and trader not to be caught too short of supplies. * * * The prospect before Mr. Butler is not, therefore, a pleasant one. He is trying to cut internal demand without resort to direct controls except in the finance of hire pur- chase; that is to say, he is relying on dear ports or a decline in exports, 'but only at l ary pressure.) In any case, economic events tend to move more swiftly than politicians. The increased purchasing power of the workers is being mopped up by the higher cost of home-grown food (estimated at £180 million extra a year) and of coal (which will cost £1 18 million more a year). That is the mark of the inflation. All that Mr. Butler can now do is to go on squeezing the banks so as to reduce advances, con- tinue urging managements and workers to increase their productivity and hope for the best. But he should abandon these talks money and a credit squeeze. 'This weapon,' about convertibility.
be told the electors of Essex last week, `takes some time to work, but there have been encouraging signs that it is working.' ke added, however, that if there were any signs that further measures of restraint were needed he would not hesitate to adopt them. Some 'further measures of restraint' were adopted a fortnight ago when the rates charged to local authorities by the Public Works Loan Board were raised and an in- crease given to the rate paid on tax reserve certificates. The first will slow down coun- cil housing and the second will not only encourage saving but will draw money away from the banks, who are already short of it. I do not think that Mr. Butler can do much more unless he wants to have an autumn Budget, increase personal taxation and withdraw the new investment allow- ances. (That would be too much to expect, for it would be tantamount to confessing that he had made a fool of himself in April
by reducing taxation at a time of inflation-
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