Government, warned by the experience of the first world war, were much preoccupied in the first months of the second with the dangers of inflation and with the public reaction which might be expected to any disclosure of profiteering in the war industries. Many wage agreements were linked with the official index of retail prices and if the "cost of living" began to rise then wages could be expected to follow. There had been marked increases of price im-mediately after the outbreak of war and wage rates had in fact been rising from the first, though by no great amount. The numbers now in work were greater than in the days of unemployment before the war; hours of work were longer and for those who made it, the move from civil employment into war work was a move from a lower to a higher paid trade. Excess Profits Duty at 60 per cent, later raised to 100 per cent, was levied on all profits earned over and above a normal pre-war figurę. Foodstuffs were rationed; and in December 1939, the principle was accepted that certain of the more important foodstuffs distributed by the Ministry of Food should be subsidised in order to prevent unseemly increases in the index of retail prices. The Prices of Goods Act, 1939, had fixed the prices current on August 21st, 1939, eight days before the outbreak of war, as a base which could not be exceeded except in so far as that rise might be justified by an increase in cost. The administration of the Act was 1 Hancock and Gowing: British War Economy, Chapter XV. The use of man­power budgets in time of peace is described below, pp. 81 ff. entrusted to a Central Price Regulation Committee assisted by seventeen local price regulation committees. The committees acted on complaint and could institute enąuiries on their own initiative. The expenses which might be reckoned as "costs" were specified in the Act. But there was no provision for enforcement and the Act, by linking prices to costs, had the awkward conseąuence of causing prices to go up with any increase in the costs of raw materials and labour. The Prices of Goods Act was strengthened in 1941 by the Goods and Services (Price Control) Act. The Board of Trade was then empowered to fix maximum prices and margins at each stage in the productive process. The problems of deflning what exactly was the commodity the price of which was being fixed and what were the processes for which margins could be allowed, were cer-tainly among the factors driving the Board into the business of arranging for the production of utility goods, and of certain standard-ised lines to specifications which were agreed with the trade. The constituents of the index of retail prices were the prices of foodstuffs, clothing, fuel and light and rents. The prices of food-stuffs were kept in hand at first by the administrative arrangements of the Ministry of Food. Rents of unfurnished dwellings, in which the mass of the people lived, were restricted by legislation stretching back to the first world war. But coal prices were raised soon after the outbreak of war in response to an increase of wages allowed by the owners on this condition; and the initial depreciation of sterling at the outbreak of war together with the higher costs of ocean freight soon caused the Ministry of Supply to raise the prices at which raw materials were being issued. The prices of manufactures were still further raised when diminishing allocations of materials, limitation of deliveries to shops, the call-up and the drift of workers into the war factories, all combined to impose on firms still producing in the civilian trades the diseconomies of short-time working and of idle capacity. Clothing was one of the more important groups of manufactures. The price of this constituent in the index of retail prices had risen by 1941 by 60 per cent compared with 26 per cent for foodstuffs. It was elear that no legislation nor administrative action alone could continue to keep prices down and prevent the cost of living (and so wages) from rising. A considerable discrepancy began to emerge between the income generated as earnings coming into the hands of the mass of the population and the volume and value of the goods currently being placed at the disposal of the consumer. Limitation of supply, an assured but not over-generous ration of the principal foodstuffs and the relatively Iow prices at which the prices of rationed goods were being kept, conspired to reduce the amount which could be spent upon the essentials. Earnings and incomes on the other hand were steadily expanding. The purchasing power which might have been splurged, had the recipients so wished it, upon the steadily diminish-ing supplies of goods coming on the home market, was steadily in-creasing. There was in that the danger of an inflation; and inflation, had it occurred, would certainly have prejudiced the efficiency with which the economy was being mobilised for war. The Chancellor addressed himself to the containment of inflation in his budget of 1941. The policy of the Government he explained to the House of Commons (and the explanation was later amplified in a White Paper1), was to avoid the "vicious spiral of rising costs and prices". The "least fortunate members of the community" would be "the most gravely affected" and inflation, if it went far enough, "would undermine and seriously impair the nation's strength for war". The limitation of supplies was steadily reducing the volume of goods on which the rising income generated by heavy Government expenditure for war could be spent. The danger which we have to control is that of being flooded out by the torrent of excess purchasing power fed by the springs of war-time Government expenditure. Against that torrent there had already been erected as "a dam", the "system of food and industrial controls ... price control and ration­ing and the like". But no controls could prevent an inflation if the excess of purchasing power were all to be used in the attempt to buy whatever goods were available in the shops. "The force of the torrent" had to be abated and that was the function of finance. The Chancellor relied for his computations on the first official estimates of National Income and Expenditure, contained in the White Paper which he had just laid before the House.2 Government expenditure in the forthcoming fiscal year would, he reckoned, amount to £3,700,000,000. Taxes, at the existing rates, could be expected to yield £1,636,000,000. Other public revenue outside the budget together with depreciation allowances and additions to reserves by companies, plus the probable private savings of institu-tions and individuals, might hołd back from the market another £1,600,000,000. 1 370 H.C. 1304, Cmd. 6294. 2 Cmd. 6261. Stone: "Use and Development of National Income and Expendi-ture Estimates", in Chester (ed.): Lessons of the British War Economy, Chapter VI. table 2 Government Expenditure £3,700,000,000 Yield of taxes at current rates . . . £1,636,000,000 Estimated total of public revenues outside the budget, depreciation allowances, additions to company reserves and other private savings £1,600,000,000 £3,236,000,000 Difference, being excess of Govemment ex- penditure £464,000,000 What Government took in 1941 (and in any other period, for that matter, of fuli employment and fuli occupation of all re-sources) the public, of course, could not enjoy at the same time. But if Government expenditure were to be greater than the amount of income the public were simultaneously refraining from spending (either voluntarily by saving or by force of taxes and other exac-tions), then both Government and public would, in effect, be com-peting for the same parcel of resources—or rather, sińce Government had already appropriated those resources for war, the public would be trying to spend income against which no goods had been produced. It was to this difference, of £464,000,000, roundly £500,000,000, between Government expenditure and the sum with-held in taxes, in revenues outside the budget and in private savings that the Chancellor pointed as the "gap" through which, if it were not closed, the inflationary torrent could pour. He did not mean, he went on to say, that a failure to cover the whole of the gap exactly would necessarily have serious conseąuences of an inflationary character; but if budgetary policy is to play its proper part in the closing of that gap, in the stemming of any torrent of inflation, we must deal properly and adeąuately with the situation not only in order to enable us to make our fuli war effort, but also to ensure reasonable conditions and prospects after the war.1 Aided by the forceful propaganda of the National Savings move-ment the economic and financial policies of Government would help to direct the greater part of the excess of (private) income generated by public expenditure into savings. The Chancellor hoped for a contribution of £250,000,000 to £300,000,000 from new savings. The remainder would be found by increases in taxation and the gap thus closed. Avoidable increases of cost, the result of inflation, had now been 1370 H.C. 1320. prevented. The next step was to deal with those unayoidable in­creases caused by the rising expense of imports, transport and so on. The index of retail prices would be put up by such "real" increases of cost just as much as by the "inflationary" increases which the Chancellor's fiscal measures had been designed to prevent; and wages would follow if the index rose no matter from what cause. Fiscal policy alone could not be relied upon to keep the index steady in the face of such unavoidable increases of cost—or not without measures so drastic that other costs and prices would be caused to fali by the amount by which the unavoidable items of import, ocean freight and so on had risen. So severe a financial and fiscal policy could not and certainly was not, contemplated in wartime! But the object could be reached by stabilising the price level. It was not possible, the Chancellor observed, to promise that there would be no increase in the price of any single item; but Government would endeavour to prevent further increases in the index above the figurę at which it then stood, between 125 and 130 per cent of pre-war. The instrument chosen for the execution of this policy was the device of subsidy. Bounties had been paid before the war by the Ministry of Agriculture and Fisheries on certain agricultural products. These subsidies continued to be paid after the outbreak of war by the Ministry of Food. Other foodstuffs were added to the list in Decem-ber 1939; and the Chancellor now declared his readiness to extend the device of deliberate subsidy to the prices of all goods and sendces in common use, regardless of whether they entered in the construc-tion of the index or not, in order to prevent or minimise the impact of increases of costs, par-ticularly of imports and of transport on the prices of essential goods and services apart from any increases in their prices rendered inevitable by further increases in wage rates.1 Three elements came together in this policy of stabilisation. The first was fiscal policy which, by taxation and the encouragement of saving, would relieve the market from the inflationary pressure of unspent and unspendable income. The second was the interaction of subsidies and controls, which would prevent the cost of living from being driven up. The third was wages. Government, the Chancellor hoped, had created conditions which will enable the wages situation to be held about where it now is. It is elear that persistence of the tendency towards rising wage l370 H.C. 1320-2. rates which necessarily increases costs of production at every stage of the productive process, would compel abandonment of the stabilisation policy. But Government could exercise no direct control over wage rates nor, indeed, was it any part of the policy of a British Government to look for such powers. It was up to the parties themselves, the employers on the one side and the workers on the other, to make this contribution. The regulation of wages, on the recommendations of the Trades Union Congress and the employers' organisations, had been left to the "traditional and well tried" arrangements for conciliation through the joint voluntary machinery for wage negotia-tion and to the statutory (and independent) wage councils where these had been established. Employers and workers were reminded in the White Paper that it was "incumbent" upon them "with all the help that Government can give, to do their best to prevent the cost of production from rising, from whatever cause". Increase in wage rates had so far been reasonable and there might be proper grounds for adjustment of wage rates in certain cases, particularly among low-paid grades and categories of workers. But it would be necessary to bear in mind, particularly when dealing with generał wage applications, that the policy of price stabilisation will be made impos-sible and increases of wage rates will defeat their own object unless such increases are regulated in the manner which makes it possible to keep prices and inflationary tendencies under control.1