The ' Spec • to 99 'Gower Street, London wci, 6/ A kE ,Tele g rams: Spectator London. Telephone: 01-367 3221
Growth not balance
LAST WEEK the news of a sharply deteriorating balance of payments position sent a shiver through the City; and the nation as a whole, despite the heat-wave, should have felt chill as well. It would be surprising if that were not the case, for the fetish we have made of unfavourable balances since the war has led us so often to the gates of economic and social misery — the nation has so frequently been pulled up sharply in the tracks of progress by the deflations which conventional economic wisdom dictates should follow evidence of its inability to pay its international way — that a grim and weary feeling of "Here we go again" would have been explicable, if not pardonable. However, the Prime Minister is to be congratulated on his promptly expressed and bold refusal to allow the bad news to deflect 44 from his expansionist policy.
THERE ARE, nonetheless, things to worry about. The Chancellor tried to explain the trade figures away. It is not clear whether Mr Barber did this — in a notably unconvincing manner, by the way — simply in order to reassure the public, or because he felt the figures needed explaining away. If the latter then there is cause for concern indeed, for such a motivation would indicate that the first economic minister of the Crown, and his advisers, simply do not understand the nature of the country's economic position.
(Again, as so often in politics, the refusal of ministers to be wholly frank in discussing problems and policies can give rise to fear and anxiety which may have no foundation.) The conventional economist's belief is that this country has been in repeatedly chronic deficit since the war. That is not true. We have been in chronic deficit since at least the late seventeenth century: for as long, that is, as we have had records. In his admirable Britain in balance, W. P. A. Manswer has shown that, in the entire period since 1697, the year in which the practice of collecting annual trade statistics first began, Britain has enjoyed a payments surplus at the end of only seven years — 1797, 1802, 1816, 1821, 1956 and 1958. Furthermore, if one calculates the deficit as a percentage of imports — the most effective and common method of calculation — one can show that, throughout the nineteenth century the deficit was between 20 and 30 per cent of import costs; while since the last war it has run usually at less than 10 and often at less than 5 per cent. It cannot seriously be supposed that an attitude to payments deficits which was found perfectly satisfactory during the period which saw Britain become the first industrial and trading nation in the world is the root cause of our problems today.
WHY, THEN, has it been allowed to masquerade as such? The reasons were initially political and social; only the consequences were economic. The constraints which, since 1945, successive periods of unfavourable payments balance have been allowed to exercise over the domestic British economy have been the inevitable result of the nature of the international monetary system which, under the influence of Keynes, Britain helped to set up after 1945. The objects which that system was designed to serve were two. First, it was believed that artificial fixing of the value of currencies in relation to one another would prevent the worst oscilations in currency value, such as led to international slumps; Second, currencies fixed by the will of governments rather than the impulses of the market, would make it possible for the creation of artificial units of international exchange to finance development, especially in the poorer countries. BECAUSE the British economy is so singularly dependent on im ported food and raw material Keynesian dogma imposed particularly heavy burdens on this country. At every period of boom British industry was hungry for imports. This led to further deterioration in the balance of payments. (Indeed, the size of the current operating deficit can be put down to the fact that, as the revised statistics just put out by the Central Statistical Office indicate, the rate of growth in our industrial activity over the last year has been very much greater than originally thought: over the year to the end of March industrial production has risen by 9.9 per cent rather than 6.4 per cent, and manufacturing output by 13 rather than 9.4 per cent). Because, moreover, in the period since the war British governments took very seriously the responsibilities shouldered by sterling as an international reserve currency, they were extremely reluctant either to devalue or to float in order to correct any over-valuation of the pound: this in turn led to long periods of resistance to changes in the exchange ' rates, which encouraged pressure against the currency, and led in every case to stringent bouts of deflation. These, coming closely on one another's heels as they did, kept the British economy at a chronically low level of activity. In the service of the much sought-after balance of payments surplus gross national product, production and investment were all kept at an artificially low level. This policy was brutally realised in the treatment of the payments deficit: if imports were £10,000m amd exports £9,500m, then the deficit was £500m; but if imports were reduced to £4,50 )m and exports to £4,250m and the gap was thus only 2£250m ruling orthodoxy said we were twice as well off (more Often) only half as badly off as we had previously been. More than an,,thing else, more than the patently untrue arguments tha't,'Britain is somehow chronically less efficient than her rivals, the delibeate efforts of governments trying to make a country with t...he pex:uliar economic characteristics and trading needs of Great Eritair. conform to the requirements of an unsuitable international monetary system can be blamed for our economic performance lver the last quarter of a century.
FROM THIS VIC-T. the Government's decision to float the pound in part rescui:d us: The float lifted the international burden and combined hal:lily with a determination on the part of Mr Heath and his colleagaes cot to deflate. What is not clear is whether they fully recogri:se the consequences of that decision, followed through as it was by a refusal to co-operate with the European countries in pegging their currencies against one another (thus wrecking the prospects of a European monetary union, for the moment at any rate). Certainly a currency that floats downwards increases import prices in real terms, thus causing domestic price rises. The extent to which this happens is probably not as great as has been supposed; but, combined, as it has been, with a massive growth in the domestic money supply designed to finance government spending schemes aimed at increasing industrial expansion, and not supported by high taxation, it has undoubtedly contributed to our domestic inflation. The root and most (even now) under-rated cause of that inflation has been the deliberate increase in the money supply. The danger now is that the rate of growth in the economy will slow down, partly because government expenditure will begin to taper off after the summer; and partly because the relative success of the Pay Board in holding down wages has not been accompanied by any equivalent success by the Prices Commission in holding down prices, which recently have expanded so remarkably. The results of all this could easily be powerfully increased wage inflationary pressures; more industrial unrest and runaway inflation such as would destroy domestic confidence in the currency, and lead to sterner, even totalitarian controls, or to economic collapse.
HOWEVER, none of this has anything to do with the balance of payments. It is time to grasp the fact that, for the last twenty-five years, this balance of payments' syndrome is a rod we have made for our own backs. And while international co-operation may be a fine and a wholesome thing, and all countries should possibly be prepared to make some sacrifices for the good of all, the situation becomes increasingly impossible when one country is required to shoulder a disproportionate part of the burden.
That is what Britain has been doing. We have begun to stop doing it. We must stop entirely. And the way to stop is to cease our pulings about the balance of payments, and to concentrate on the political and economic task before us, which is to increase our material well-being through the production of more and better goods and services.
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