THE ECONOMY & THE CITY
'The Whole Truth' About the Crisis
By NICHOLAS
DAVENPORT
IT was a fine idea of Mr. Cecil King to devote six pages of the Daily Mirror over three holi- day days in August to tell the British public the 'whole truth' about the sterling crisis, 'stripped of political blarney and wishful thinking.' The sermon was unfortunately addressed to the wrong people. It should have been directed, not at the simple workers crowding on the beaches, but at their exalted rulers ruminating in their retreats, especially at those responsible for stability in prices and full employment. The average worker is shrewd enough to understand that he will price himself out of a job if he pushes his wages too high, but he really cannot be expected to under- stand banking and the international monetary system or the complicated problems of a reserve currency caught up in a balance of payments deficit. He elects better-educated people to solve these problems for him. And the rulers he has voted for are supposed to know the exact eco- nomic consequences of the conventional mone- tary weapons they use so freely, even the bizarre consequences of planning five years' productivity growth in a monetary prison. But do they? Mr. King should have another series of articles aimed at the Treasury mandarins and the overlords of the Department of Economic Affairs. But he must be more erudite and more precise in his arithmetic, and distinguish between the trading and capital items in the payments deficit. He must really stop talking of 'bankers' in Kuwait and Peking—of all places. Unless he wants to plant his article on The Thnes, he must also stop moaning: 'If we can't attract their [foreigners'] money Britain will lose forever the vital status of world banker.' Those dislodged workers of Ford and Hoover cannot be expected to swallow the blarney of the financial Establishment, even when it comes from the mouth of the Daily Mirror.
The status of world banker may be vital for some sectors of the City of London, but it is certainly not vital for the national economy as a whole or even for the prosperity of our great engineering and exporting industries. How happy we would be if the sterling liabilities which the wars have laid upon us had been written off en- tirely and the only foreign deposits left in London were those of world traders who found the bank- ing, insurance, shipping and agency services of London indispensable for their job! We ate not 'broke,' as Mr. Cecil King would have it, 'but our masters apparently find great difficulty in keep- ing our economy in balance, especially in sustain- ing a decent rate of growth without a wage-price inflation. The reason, of course, is because we remain a split society. So we have run badly into the 'red' on our balance of payments. But the deficit last year was not £800 million, as the Daily Mirror proclaimed, but £374 million on current trade account and £371 million on long- term capital account, or a total of £744 million allowing for the balancing item. In the first quar- ter of this year the deficit on current trade was cut down to £7 million and as soon as we can close the capital outflow we can look our credi- tors in the face and perhaps discuss with theni the extension of part of the £900 million loans which fall due for repayment over the period 1967-70. Our free reserves may be minimal, but they are not quite exhausted, as they were in 1931,
and we have the promise of more assistance from the American Treasury.
The fundamental difference between 1931 and 1965 is twofold: first, we have no official 'May Committee' today recommending drastic cuts in the pay of public servants and the armed ser- vices (so another naval mutiny at Invergordon is not on the cards); second, there is no longer any public confidence, even in America, in the conventional type of bankers' deflation which was the stock-in-trade of deficit countries in the 'thirties. The nearest we have got to a 'May Com- mittee' report is the latest UK survey from the OECD in Paris, which did have a sharp criticism to make—that we had tried to relate too far and too fast, that we had suffered not from too much `stop-go,' but rather from too much `go-stop.' There was some truth in that rebuke. It will be recalled that Lord Butler carried the 1955 investment boom too far and reversed it too late, that Lord Amory started a consumer boom in 1958—by allowing the banks and hire- purchase finance companies to extend consumer credits too rapidly—which he failed to control, and that Mr. Maudling overdid the capital spend- ing programmes of the government departments and nationalised industries. All this suggests that our masters should be the first to confess their own management faults before they blame the faulty management of company boards and restrictive trade unions. But the burning question
today is whether our new masters have already done enough or too much to bring our balance of payments into equilibrium—whether they have even promised the American Treasury enough deflation to land us in another slump.
The National Institute of Economic and Social Research, in a gloomy report (August Review), virtually suggests that they have done too much. It believes that Mr. Callaghan will achieve his balance on current and long-term capital account in the second half of 1966, but at the cost of bringing the rise in output to a standstill. In other words, we are all set for stagnation. 'By the end of 1966,' it says, 'when, on present policies, output will have been flat for nearly a year, unemployment may well be around 24 per cent and still rising. . . . On present import and export trends there is a choice between quasi- stagnation or an inability to repay by 1970 the debts incurred last year.' This is not a pleasant prospect, even if the Government has, in the Institute's judgment, sufficient resources to sur- vive a run on sterling this autumn. The Institute concludes that something will have to be done to change either Britain's 'import propensity or her export competitiveness.'
Clearly we did not elect a Labour government to start imitating Mr. Selwyn Lloyd. We must get down to the more important task of making British industry efficient enough to displace a lot more imported manufactures. Could he not remove the 10 per cent import charge, impose import quotas on a select list of manufactures and urgently set about reconstructing the indus- tries which are quota-protected? The 'Little Neddies' are on hand to help and Mr. Brown might even consider postponing his Economic Plan while his businessmen attend to the more urgent and practical job of import-substitution.
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