The Government's Economic Policy
BY REGINALD MAUDLING* HE challenge that Britain has to face in the second half of the twentieth century is this : can a free society thrive and prosper in a small island under modern economic conditions while carrying the weight of defence and Of the social seryices? Unless we can show clearly that the answer to this' question is in the affirmative we shall not suc- ceed in the battle for men's allegia'nee between the forces of freedom and the powers of dictatorship.
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The Conservative Party's economic policy is based on the fundamental principles of freedom and incentives, We believe that it is / the function of government to give the greatest possible scope and encouragement to the enterprise and effort of individual citizens. This, of course. does not meank a return to laissez-faire, as our record clearly shows. The Government must continue to guide and influence the economy generally and provide an economic climate in which such individual enterprise can yield its full results. More specifically, the func• tions of government in this matter are three.
First, government must hold the balance between inflation and deflation, allowing demand taexpand far enough to finance the maximum production of which the economy is capable. but not, permitting the pace or scale of expansion so to exceed our capacity 'as to threaten a return of inflation and balance of payments difficulties. In other words. we want an expanding economy. but not a rate of expansion so fast as to outrun our resources and so undermine the position of sterling.
Secondly; the Government should constantly seek to remove all possible barriers to free and competitive enterprise at home Minister of Supply. Formerly Economic Secretary to the Treasury. and the widest exchange of trade and payments between the nations. This means removing Government controls and restrictions, investigating and dealing' with monopolistic prac- tices and co-operating with the Commonwealth and, our friends overseas in a mutual policy of trade expansion.
The third function of Government is by prudent and economic management to reduce its own calls on the economy to the minimum consistent with its broad social policy : in other words, taxes must be reduced as much as possible if enterprise is to earn and retain its proper reward.
I am convinced myself that there is no half-way house between this policy and the policy of full-blooded socialism. At home or abroad the only alternative to such a policy of freedom is to return to detailed and pervasive controls. The value of sterling depends largely upon the confidence which other people have in it. and this in turn will depend very largely on the freedom with which they can use it. The more you try to protect sterling with controls and exchange regula- tions the less attractive you make it as a currency and the more you undermine the real sources of its strength. So you will be forced, once you adopt a policy of increasing exchange regulations, to pursue it to the bitter end of complete control over all transactions. In the process you will find that you have destroyed the position of this country as banker to the sterling area, and the international character of our currency, upon which our ability to import the food and raw materials we must have to live so much depends. For the consumer at home any policy of returning to controls—ipport controls and price controls-a-must mean eventually the return' to con- sumer rationing. Import controls reduce the amount of goods available without reducing the demand for them. The' result must be shortages. This means either queues and black markets, or rationing, or a deliberate policy of raising prices. But, if at the same time price controls are also used to bring prices down, thereby increasing demand without in any way increasing the supply, the shortages become worse and the only alternative to wide-scale black markets and queues is a return' to consumer rationing. I have heard this argument abused as a Tory- lie, but I have never heard anyone attempt to refute it on the merits of the case.
Our policy therefore has been one of freeing the economy and giving incentives, and it has produced results.
Our first problem was to cope with the record exchange crisis which the Labour Party had left behind and which they had done nothing to tackle. This meant that Mr. Butler had to take urgent and drastic action to reduce demand at home. So he brought into play, for the first time for many years. the classic weapon of monetary policy, by contracting the credit base and increasing the Bank rate.
The effect of this policy was dramatic. Between 1951 and 1952 there was a complete change in our overseas financial position. The Labour Party left behind a large and growing deficit, a weakening sterling and a yawning gap between official and unofficial exchange rates. The effect of Mr. Butler's policies has been to restore the strength of sterling, to close the gap between* official and unofficial rates and to set the reserves moving upwards again. • One result of this policy, which was so dramatically success- ful in restoring our overseas position, was at first to put a temporary check to the rate of expansion at home. In fact, the textile industry was already beginning to contract at the time of the 1951 General Election and this tendency was more marked in 1952. As soon, therefore, as the balance of payments situa- tion had been righted by dealing with the internal inflation which was its main cause, the Government set about a deliberate policy of cautious re-expansion. The purpose of this policy was to allow internal demand to increase to the point where we would achieve maximum production and maximum employment without allowing it to go so far as to threaten once again the position of sterling.
This is what underlay Mr. Butler's policies in the years 1953 and 1954. He reduced taxation and relaxed credit restric- tion in order to encourage and give incentives to greater. pro- duction. In particUlar, he designed his tax reductions so as to give special encouragement to investment in new factories and capital equipment. By the end of 1954 we had seenkthe success of this policy with records established in production, con- sumption, productivity and employment, and with investment in private industry, which had been deliberately checked by Mr. Gaitskell's last Budget, booming again.
At the turn of the yeas signs appeared of a new strain on our balance of payments. Sterling was not strengthening and the reserves were not rising as they should have done at this season. In February there was in fact a loss to the reserves. Clearly action was needed. Here the contrast between Mr. Gaitskell and Mr. Butler is to be seen at its clearest.
In 1951, with a serious crisis looming and gathering speed, 'no serious action was taken whatever. In July, 1951, apparently a small reduction was made in the imports of cheese. This, so far as I can trace, is the only action that was taken before the 1951 General Election. Nothing whatever was done to use the weapon of credit restriction that proved so effective in Mr. Butler's hands when he succeeded to the Exchequer. In February of this year, faced with the first signs that all was not going well, Mr. Butler immediately took action by sharply increasing the Bank rate. This, on Mr. Gaitskell's oWn evidence, is hardly a popular thing to do politically, but there is no doubt that it has had a rapid and good effect, as the figures for the reserves in April show. But if there is a • contrast between the two Chancellors hi their willingness to act rapidly and, if necessary, with loss of popularity, there is equal contrast between the methods that would be adopted by the two parties. The problem in either case would be to reduce internal demand, which is largely responsible for the excessive import bill. The Conservative Party acts by restricting the amount of money people can borrow and making it more costly for them to do so. The Labour Party reject this method and will adopt the only alternative, which is to stop people spending their own money, by controls and higher taxation. We Attack inflation at the roots : they merely deal with the symptoms.
There are, of course, many ways in which the economic policies of the two parties differ. We, for example, oppose any further nationalisation. The Labour Party apparently want a lot more—though Heaven knows why they should after recent experience! We are concerned in our policy with the cost of any new schemes to the taxpayer. They make reckless promises all round in utter disregard of what this will cost in increased taxation. But the fundamental difference ,between us is how we should tackle the great economic problem of modern Britain, which is to combine maximum production and employ- ment with stable exchanges and a strong currency. The last few years have shown up in clear relief the contrast between the two methods and their results.
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