Implications for Policy

An increase in the payments issuing from, say, the production account, the result of a rise in wages or an increase in output leading to an enlargement of the aggregate costs of production, generates an expansion of income. Wages having risen and more factors being employed, earnings will rise. Higher earnings credited as income to the current accounts of persons raise the yield of direct taxation and hence the revenues to be credited to the accounts of public authorities. With more to spend, more will be spent on the purchase of goods and services from home and foreign output for current consumption. Receipts from sales, credited both to the production account and to the current account of the rest of the world, will rise; and there may also be a larger unspent balance remaining from the higher income to be credited as savings to the capital account. How the expansion proceeds will depend upon the reactions of income receivers, public authorities and capitalists to the larger receipts now being credited to their accounts; but sińce the accounts are all interlocked, payments from any one raise the receipts credited to the others and an expansion, once started, flows through them all. A contraction similarly, beginning, for example, in a reduction of sales on the home market, will be passed from one account to the other throughout the whole system, supposing no active steps be taken to arrest its progress. Reduced sales mean smaller receipts credited to the production account. Falling receipts discourage production and lead conseąuently to a smaller aggregate cost of production. Less is paid out as earnings to be credited to the current accounts of households as personal income. There is a fali in taxation— in both direct taxes collected on income and indirect taxes raised from excise duties on the smaller sales of commodities. Expendi-ture on goods and services out of these lower incomes falls still further and the unspent balance to be credited as saving to the com­bined capital account adjusts itself accordingly. During an expansion imports can be expected to increase and exports to diminish. Since output is rising, more raw materials and so on will be purchased abroad by industry and with higher incomes at home, more will be spent on (foreign) purchases by households of finished goods and services from overseas manufacture for current consumption. Expanding income at home leads to greater expendi-ture on home-produced goods and to rising home prices. Exports will be discouraged, not only by inflated home costs (the result of rising home prices), but also by there being less to sell, owing to rising domestic demand for goods which might otherwise have been sold abroad. Contraction of income takes, in the balance of pay­ments, the opposite courses to those which are followed by expan-sion. Fewer raw materials are imported and there is less income to be spent on goods and sendces imported from abroad for personal consumption. Falling domestic income is followed by less expendi-ture on domestic output and possibly by lower costs of production at home. More goods conseąuently are turned to export markets and their prices too may be lower. Unless the contraction of income at home is being accompanied by contractions abroad of equal or greater violence, exports can be expected to rise. Receipts credited to the rest of the world for imports sold should fali, and the pay­ments debited on account of exports supplied should rise—relatively at least. Whether the conseąuent turn of the balance of international indebtedness in Great Britain's favour takes the form of a reduction of foreign borrowing and a smaller draft on other overseas sources, a repayment of debt, an increase in reserves or an actual investment of British capital abroad, will depend upon the circumstances of the time; but whatever the form may be, some, and possibly a marked, improvement in the balance of payments can be expected from a con­traction of domestic income in all those cases in which the fali leads, and does not follow, the contraction of income in the rest of the world. When a surplus is building up in the balance of payments on cur­rent account, foreign debts, if any, can be reduced and capital ex-ported to add to assets held abroad—the heartening international condition of Great Britain in the days of Victoria and Edward VII. But when imports are inereasing and earnings from exports and other foreign sources fali, the resultant worsening of the balance of pay­ments represents the condition, become so distressingly familiar sińce 1945, in which home requirements for consumption, Govern-ment purposes and domestic investment are exceeding the sum of national resources. There can be no increase of exports, ex hypothesi, because the whole of the national resources and more is being used up at home. The resulting increase of imports is accompanied by unexpectedly large drafts on foreign credits or other overseas assets; by a reduction in the central reserves of gold, dollars and other valu-able foreign currencies and by an addition to the sterling held but unconverted by creditors resident abroad. The first represents a pre-mature exhaustion of foreign aid and a further trenching on capital previously invested abroad. The second takes the form of a gold and dollar drain; and the third of a rise in the "sterling balances", as these foreign debts are commonly called. The classical instrument of monetary control—the increase of bank-rate—raised relative to other international centres the interest which money invested in bills could earn in London. Temporarily at least, investments in sterling became more profitable than in other currencies. Funds were attracted from abroad, equivalent to an in­crease in foreign borrowing and the drain was stopped. By selling at the same time securities on the market, the Bank of England could, if they chose, exchange official holdings for cash. The ąuantity of cash at the disposal of the money market could by these means be so much reduced that anybody wanting cash had to rediscount bills with the Bank—and pay bank-rate for the accommodation. The market was "in the Bank". With no additional cash available except at bank-rate, increases in the demand for securities of all kinds were lessened. Their prices thus fell and rates of interest rose. Bank-rate had been made effective. Higher rates of interest made investment less attrac-tive to business and other investors and restriction of credit made it less easy to borrow. Both discouraged capital outlay. Payments from capital accounts were reduced, expenditures by business and other investors on capital goods diminished and the receipts credited to the production account were smaller. Income contracted and the boom was brought to an end. But this policy in reverse was not as ąuick to stimulate expansion as it was undoubtedly rapid and efficient in forcing contraction. Low rates of interest and ample credit—cheap money—when accompanied by balanced budgets and rigid public economy worked slowly at best in putting business into the frame of mind in which substantial outlay would be incurred for capital and other projects. Booms were short-lived, collapses precipitate, depressions severe and long-drawn-out—all the un-toward circumstances described so succinctly by Lord Beveridge in his Fuli Employment in a Free Society. Contractions of income, experience had shown, could always be enforced and booms often brought to a sudden end, by the suffici-ently'vigorous use of bank-rate, made effective when necessary by sales of securities. Analysis of income now suggested that expansions too might be deliberately engineered: with appropriate and sympa-thetic variation of Government expenditure and revenue, the ąuan­tity (G + B — T) might form an instrument for the control of income and employment less brutal in forcing a contraction and more certain in promoting recovery than manipulation of the rate of interest through bank-rate had shown itself to be sińce the middle of the nineteenth century. Expenditure upon public works, for ex-ample, or an increase in pensions and social security benefits, issues as a payment from the accounts of public authorities, raising G + B relative to T. This outlay, spent upon goods and sendces, is credited to the production account; and that account in turn is debited with the payments made to those who supplied the resources employed in the construction of the works and to the recipients of benefit. More is earned and more is credited as income to the current accounts of corporations and persons. More presumably is spent on consumption and the expansion thus engendered spreads throughout the system bringing with it a generał recovery of income and em­ployment. On the other hand a rise in the receipts of public author­ities (or a lessened public expenditure) might be used to check an expansion which was threatening to carry recovery into inflation, beyond the limit represented by the fuli employment of all the re­sources then available. Higher taxation or reduction in public ex-penditure or both, no less than a reinforcement in the habits of private thrift and a more conservative attitude towards distribu-tion of company earnings, all help at that point to induce contrac­tion. All reduce, perforce or voluntarily, the income at the disposal of persons—income that can be spent either on output in stock or on that currently being produced. Payments issuing from the current accounts of persons fali. Assuming that there is no off-setting increase in private capital outlay nor in public expenditure (nor exports) the net receipts credited to the production accounts will diminish. Producers faced with falling receipts will naturally try to reduce payments in the attempt to balance their accounts. But payments from the production account are the receipts to be credited to corporate incomes and to the current accounts of persons. In­comes fali in conseąuence—and if the Government, seeking stability of employment, can increase the surplus of public revenueover expen-diture {T — (G + By) by no more than the amount that domestic private saving is expected to fali short of private capital formation at home and the current addition to exports, the inflationary increase in income should be brought gently to an end. There should be no slump, none of the depression and long-continued unemployment which had so often in the past been the accompaniment of the rise in bank-rate needed to fortify the balance of payments.1 1 The reader who wants to pursue further this question of the techniąue of social accounting and the use of statistics generally as a basis for policy should turn to Edey and Peacock: National Income and Social Accounting; to Walker and Walters: "The Social Accounts", in The Accounting Field (edited by Cousins); to the annual Blue Books (formerly White Papers) on national income and ex-penditure compiled by the Central Statistical Office; and to Carter and Roy: British Economic Statistics; to name only a few among the many contributions to this discussion.