A.B.C. OF THE CRISIS
By ROY HARROD N August zoth it was decided to make sterling inconvertible, after a brief run of convertibility lasting 36 days. This decision was a momentous one, not only in relation to the economic future of the nation, but also as affecting her honour.
By the American Loan Agreement Britain was cleared of her liabilities under Lease-Lend and given a loan to tide her over her post-war difficulties on semi-charitable terms. It has been roughly estimated that the loan may be regarded as one-half gift and one- half a loan on the most favourable commercial terms. There were certain conditions. The one to which the Americans probably attached the greatest importance of all was that the loan should be used in such a way as to establish sterling as a convertible currency. They desired this, not only in their self-interest, but also because they wished to see Britain strong as a bulwark of liberty, and because they deemed that sterling convertibility would be a first step in world economic revival. Having used by far the greater part of the money, Britain violated this primary condition. The plea was necessity. A similar plea was made in defence of the Munich agreement (but in that case our honourable obligation to defend the integrity of Czechoslovakia was less clear). In the one case, as in the other, it is necessary to examine the steps by which the impasse was reached.
There were two causes which precipitated the crisis of August 20th, one more fundamental, but the other, though subsidiary, of great immediate importance. The fundamental cause was the state of our balance of trade, or, more strictly, our balance of foreign payments on current account. In 1946 this made rapid improve- ment; for that year we were only L400 million on the wrong side ; if from this figure is subtracted the L300 million that the Government had to pay abroad in discharge of our abnormal political and military commitments, the commercial adverse balance was only Lioo million. Allowing for the changed value of money, this was less than our adverse balance in 1938 (£7o million).
The improvement should have been continued in 1947, as demobilisation and immediate post-war adjustments were com- pleted. Markets were not lacking. But meanwhile there was coming into being, with gathering momentum, a vast progranune of capital outlay for improving the country—re-equipment of our basic services, building, etc.—which absorbed the men and materials that were released from the war effort and should have gone to increasing our exports. Our foreign markets had to remain unsatisfied. The effect of this gathering momentum is clearly revealed in "The Economic Survey for 1947," which estimates capital programmes at a figure showing an increase of £400 million over 1946. The important point is that the programme exceeded by a roughly similar amount what we could expect to finance from the savings of our own people. This is a point at which our honour is involved. A man has no business to incur liabilities on capital account which exceed what he foresees being able to provide him- self and for which he has made no previous arrangement with others to provide.
If the programmes had consisted merely of items Of immediate re-equipment, which could have been expected to come to an end within 1947, they could have been justified as a legitimate use of the U.S. and Canadian credits. But they were by no means of this character. Their direct consequence was that the balance of trade did not improve in 1947, and, what is worse, it could be predicted that it would not tend to improve thereafter. I am not suggesting that observers and interested parties made the analysis in the precise- terms in which I have just given it. But what was plainly visible to them was that our resources had ceased moving in the direction of manufacture for export, and in view of the universal "manpower shortage" (the direct consequence of the overblown capital pro- grammes) there seemed no reason to suppose that resources would so move before the U.S. and Canadian credits were exhausted. Thus in addition to the registered adverse balance in early 1947 there was complete lack of confidence both at home and abroad in
any early return to solvency. In the first six months of 1947 the adverse balance was about £265 million (i.e., at the rate of £530 million per annum). Much the greater part of this deficit was the direct consequence of the domestic capital programmes, only a fairly small fraction being attributable to the fuel crisis and the high prices that we had to pay for imports. This failure to prune our capital programmes down to what we could afford has been the fundamental cause of the present crisis.
But there is a highly important contributory cause. The credits amounted to some £1,250 million ; but of this it seems that only some £55o million have been applied for the purposes for which they were intended, viz., to supporting our adverse balance of trade and that of the sterling area. Yet there was said to be only some £225 million of the credit left on August 20th. This is a highly disgraceful state of affairs. It is true that, given the domestic capital programmes, there was bound to be a crisis in the end ; but the credits might well have lasted another eighteen months or more, had we not allowed the remaining £475 million to be squandered ; during that time public opinion and the Government might have been per- suaded of the necessity of dealing with the root question of our capital programmes ; no crisis need have arisen yet nor our solemn undertaking to the Americans have been violated.
The greater part of the E475 million and probably the whole of it has been used to pay off war debts (the "sterling balances "). It must all have been so used, save to the extent that we may have built up in our favour soft currency balances abroad during the last eight months. This item, if it exists at all, must be a very small one. In consequence of the war L3,500 million in the form of "sterling balances" were chalked up against us ; we were supposed to pay out these sums to nations, almost all allies, by way of reimbursement for their war efforts. It was always plain that this sum was much too large to be paid at once. Yet even had we taken the heroic course of funding the total amount ai commercial rates of interest and amortisation—but it would not really have been honourable to be so generous with what was in effect American money—we should not have had to pay out so much as £475 million in the first two years.
We have paid money out by way of voluntary releases, and we have let money leak out because we have not perfected the controls over the "balances." On the side of releases we had no right to be so generous. In so far as the money went out through leakages, this reflects most shockingly on the efficiency of the Bank of England. We have in all conscience sufficient controls in our domestic economy. Yet in the momentous question where the world standing of Britain was at stake and an obligation of honour involved, arising out of the greatest gift by one nation to another in recorded history—we did not bother to perfect the controls.
Or was it not a question of "not bothering," but of policy? Was the Bank of England reluctant to "block" the accounts of old customers? But it was absolutely plain that, if it did not do so, the U.S. and Canadian credits might quicldy be exhausted in paying off these war debts, and our obligation to maintain convertibility be dishonoured. Or was the Bank of England not overmuch concerned about this prospect? Did it have some covert disposition to regard it as not altogether disastrous to have a little demonstration of the " impossibility " of maintaining convertibility, so as to let Britain have the opportunity of adopting the system—which, however, I have no doubt will prove totally ineffective—of maintaining her imports by a series of bilateral bargains? Much was said in criticism of the Bank of England in pre-war days when it was a private institution. But surely no error it then committed is com- parable in gravity with these disastrous bac.kslidings of the nationalised Bank.
Although these great mistakes have been made, the position is by no means irretrievable. Resources must be shifted quicldy on a large scale from capital works to exports. Far greater rhange-overs took place in 1945 without noticeable frictida. This done, we shall be able to stand on our own feet and, if we also block the war debts, we shall be able to honour our obligation to make sterling convertible once more. Meanwhile it is intolerable that our long-suffering people should be asked to endure further cuts in food and other commodities that they greatly value. The economic strength of the country remains great and, if not wrongly directed, would be sufficient to raise our standards very much above any level we have known since the triumph of V.J.
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