The Chief Elements

FEARS of a return to the stagnation which had marked the thirties were lively as the war drew to its close. Statesmen and publicists recalled the deflation and depression which had followed the last war in 1921 and the prospects of a failure of demand in the United States were being actively canyassed.1 But this time there was ready, in outline at least, an economic plan. It consisted of two main elements, both accepted by all parties and by the public gener-ally. There was first a policy, the application of which, it was hoped, would enable the economy to be maintained at a consistently high level of activity; and, second, a scheme already worked out in con-siderable detail for the compulsory insurance of all citizens against the risks arising from the economic instabilities to which Western industrial democracies seemed to be prone. The Coalition Government, receiving in 1942 the Report on Social Insurances and Allied Services,2 had not, as Lord Beveridge himself had advised, proceeded immediately to take the essential decisions. They had preferred to await the end of the war and issued instead a series of White Papers. Two discussed Social Insurance and compensation for industrial injuries (Cmd. 6551, 6550); and a third took up the matter of Assumption B, the National Health Service (Cmd. 6502).3 A fourth (Cmd. 6527), issued in March 1944, examined the all-important Assumption C, the assumption, that is, that fuli employment could be maintained and mass unemployment successfully prevented. Lord Beveridge's own contribution appeared in his Fuli Employment in a Free Society. Both discussions were undertaken in the comdction that Government had a positive part to play; and both built upon ground which had already been pre- 1 See, for example, National Planning Association: National Budgets for Fuli Employment; and Henry Wallace: Sixty Million Jobs. 2 Beveridge Report—Cmd. 6404. 3 Beveridge: Power and Influence, Chapter XV; Beveridge (J.): Beveridge and his Plan, Chapters X and XV. pared by Lord Keynes and those who had laboured in the same fields during the decade before the war. Lord Beveridge and the authors of the White Paper on Employ­ment Policy both accepted the analysis of the causes of fluctuations in income and employment generally associated (in the United Kingdom at least) with the name of Lord Keynes. Both examined the measures which a democratic community could take for ensuring that the mass of the citizens would be provided with steady work; and both relied upon a variety of devices as a means of maintaining expenditure at a time when, without this support, income and em­ployment might be falling. Lord Beveridge began his study with an examination of the facts of unemployment in peace and its disappearance in war. He re-viewed the dominant theories and went on to discuss conditions for a policy of fuli employment in peace. He considered in detail the implications of fuli employment for such internal affairs as price and wage policy and its international aspects; and he concluded as he had begun, by linking the problem of unemployment with the com-prehensive programme for social improvement which he had earlier presented in his Report on Social Insurance and the Allied Services. The White Paper was much less elaborate. It was confined to a brief statement of the principles which should underlie futurę policies. It opened with a page or two on the international and industrial background against which the economic problems of post-war Britain would be set. The authors pointed to the expansion of exports required to pay for the imports of foodstuffs and raw materials without which the population can neither be fed nor kept in work, and they urged the need for greater efficiency in industry, not only to meet foreign competition in overseas markets but also to sustain and improve the domestic standard of life. The most serious obstacles to the maintenance of total expenditure, and conse-ąuently of activity and employment, were found to lie in these highly inconvenient facts:— First, those elements in total expenditure which are likely to fiuctuate most—private investment and the foreign balance—happen also to be the elements which are most difficult to control; and second, an increase in one part of total expenditure can only within limits offset a decrease in another.1 The possibilities of maintaining or contracting private expenditure by such deyices as variation in the rate of compulsory insurance 1 Cmd. 6527, para. 47. contributions were considered. Expenditure on private consumption it was noted "is perhaps the element least liable to sudden and spontaneous variation". Some part at least of private investment might with the voluntary co-operation of business, be brought to conform with the requirements of the generał stabilisation policy; but the decisions of business managements cannot be foreseen with any certainty. The prevailing atmosphere of optimism or pessimism, particularly in periods of rapid industrial change, probably has as much influence as any independent analysis of facts. Policy fell back conseąuently upon deliberate variations in public investment "carefully planned to offset fluctuations in private invest-ment". The chief instrument of control was found in the accelera-tion of expenditure by Government, both central and local, and by public Utilities (with which the nationalised industries should now be included) at times when the decline of other elements threat-ened a fali in the grand total of all expenditure.1 The Caretaker Government, in June 1945 had passed into law the Family Allowance Act, making provision for a part at least of the cost of rearing children and thus realising the first of Lord Beveridge's three assumptions. The newly-returned Labour Government, in a series of measures introduced (with one exception) in their first two years of office, passed into law the chief elements in the Plan for Social Security—the National Insurance Act, 1946, National Insur­ance (Industrial Injuries) Act, 1946, National Health Service Act 1946, and finally the National Assistance Act, 1948. Some of the financial safeguards by which Lord Beveridge had intended to pro-tect his scheme were unhappily ignored. Retirement benefits in par-ticular were paid from the first not only to the existing insured population—though they necessarily had paid, in the past, pensions contributions at very inadeąuate rates when compared with the new pensions and had paid them only for a relatively short period—but also (subject to a waiting period) to those classes of persons who were then brought into insurance for the first time and had paid no contributions at all in the past.2 These concessions in the Act of 1946 to the insured, to those who had not previously been insured and to the existing pensioners, all of whom were now paid benefit at the new rate of 26s. a week com- 1 Cmd. 6527, Sections 4(M8. 2 National Insurance Act, 1946: Third Report by the Government Actuary, 1952, p. 12. pared with the lOs. they had received before, created "an enormous liability" which in the absence of adeąuate reserves or a sufficient income from contributions, "would have to be met from the Ex-cheąuer". Increases in the weekly rates of pension, conceded, as in 1951 and 1952, in response to the rise in the cost of living added to this " uncovered" liability—and increased immediately the annual pensions charge—by giving the benefits of the improved rates forthwith to the whole population of contributors and pensioners.1 Expenditure from the Fund exceeds revenue (at the current rates of contribution) from 1958 and mounts to £417 million a year at the beginning of the decade 1977-8. The deficit is one claim among many others upon resources already fully occupied. It must appear as a burden in times of fuli employment; but if activity at any time should show signs of failing, an excess of expenditure from the Fund spent in financing the incomes of pensioners, should be a useful prop supporting that outlay upon which the maintenance of employ­ment in such circumstances so much depends. The policy recommended by the authors of Employment Policy for the period of transition and post-war reconstruction was dili-gently followed. Rationing, allocations of raw materials, price con­trol and stabilisation by subsidy of the index of retail prices were all continued. The rate of interest was steadily forced down throughout 1946 and 19472 lest any hint of dear money hamper plans for recon­struction and place a brake upon enterprise; and also to pave the way for large issues of stock to be paid as compensation to the former owners of the nationalised industries. Government expendi-ture was allowed to exceed public revenue and the budget was left unbalanced. Conforming with the White Paper on Employment Policy, and under authority of the Distribution of Industry Act, 1945, manufacturers of light consumer goods were attracted into the Development Areas (the depressed areas of the twenties and the Special Areas of the thirties). The inducements offered were Govern-ment-built factories at 1939 rents and there was held out in addition the prospect of ample supply of women's labour.3 Demand was stimulated by the removal of purchase tax from a number of con-sumers' durable goods. Domestic electric fires turned out to be the most remarkable choice for this encouragement. Releases of metal 1 National Insurance Act, 1946: First, Second and Third Reports by the Government Actuary, 1950, 1951 and 1952; National Insurance Acts, 1951, and Family Allowances and National Insurance Acts, 1952; Report by the Govern-ment Actuary on the Financial Provisions, Cmd. 8518. 2 414 H.C. 1877-82, 436 H.C. 44-6, 61-6. 3 419 H.C. 1938-2216 passim. for consumer goods were to be expected now that reąuirements for munitions were smaller. These no doubt should have allowed for an increase in the output of smali wares; and light electrical goods were exactly the things to which women previously engaged in the manu-facture of armaments could readily be turned without serious loss of employment during the change. Coal however was already scarce and there was soon to be a shortage of electrical generating capacity, to which increase in the domestic heating load was certainly con-tributing. This piece of planning soon had to be reversed. Eighteen months later, purchase tax was re-imposed on domestic electrical equipment and at double the former rate, in the attempt to reduce the consumption of electricity.1 The patches of unemployment which had been expected during the period of reconversion did not occur.2 Reconstruction instead led straight to inflation, a potential danger to which the Chancellor of the day (Dr. Dalton) had pointed at the time.3 The generał public were impatient to make up for the restrictions which had been imposed on civilian purchases during the war; and their savings and incomes provided ample means. An ambitious housing policy, en-couraged by subsidy to local authorities, aimed at raising the rate of house-building to 200,000 new dwellings a year, almost the figurę which had been reached in the pre-war years of depression. British industry reąuired and was ready to undertake an extensive invest-ment in re-equipment and rehabilitation of plant, installations and other capital designed to raise industrial efficiency and increase out­put. The Plan for Social Security had been established and expendi-ture on education was rising. There was not that rapid demobilisation and dismantling of the military machinę which had been character-istic of earlier periods of transition from war to peace. On the contrary, demands for Western defence and other commitments made necessary a continuing military expenditure. Last, and by no means least, there was the urgent need of goods for export to win back markets lost during the war, to provide the Commonwealth, allies and friendly neutrals with the industrial goods of which they had been deprived for so long, and to help restore the balance of payments. Any one of these forces alone would have been sufficient to bring about a sizabłe expansion of income. The combination of all over-loaded the economy. Demand was everywhere in excess of supply. But prices did not at first respond. The efficiency of the controls prevented increase in the prices of essential goods and services. The 1414 H.C. 1901, 436 H.C. 85-6. 2 Cmd. 6527, para. 13. 3 414 H.C. 1902, 421 H.C. 1821. continued payment of the food subsidies held down the cost of living and the index did not rise significantly above the maximum figurę at which it had been stabilised six years before.1 There was, there-fore, no sign of that accelerating and upward spiral of prices and wages by which inflations have generally been recognised. The out-ward manifestations of inflation in Great Britain in 1946 and 1947 took the form of a depletion of stocks, a shortage of goods, and a scarcity of resources of every kind, above all of labour—and a deficit in the balance of payments. Throughout 1946 the adminis-trative success of the controls and the absence of a black market concealed the fact of inflation. "So far", said the Chancellor, "our price controls, our financial and physical controls, our production and our savings have held the inflation reasonably well in check." 2 But plans for reconstruction and development were being hampered at every turn, particularly by the shortage of manpower. The apparatus of control clearly reąuired fortification and Ministers in 1947 took the serious step of reimposing in peacetime the direction of labour.3 All persons under the Order could be reąuired to accept such employment as the Minister might specify. Unoccupied persons and all those engaged in "non-essential" work, the "spivs, drones, eels and butterflies" to use a popular and dramatic, but seriously misleading contemporary description, were compelled to register at employment exchanges as available for more useful employment. At the same time, an extensive publicity campaign was instituted and housewives were exhorted to return to the factories at a time when a large section of organised labour was successfully insisting on the five-day forty-hour week. The series of crises which began in February 1947 with a wide-spread industrial stoppage, the result of coal shortage, culminated in the summer of that year with the premature exhaustion of the Anglo-American loan negotiated in 1945. The gold and foreign exchange held in London, the central cash reserves of the whole sterling area, were drained away and the convertibility of sterling suspended after the briefest of trials. The United States of America came promptly to the rescue. Marshall Aid (the European Recovery Programme) was approved by the Congress of the United States in the spring of 1948. The day-to-day balance of international pay­ments was restored and the danger was put off that we might not be able to obtain the food we ate and the raw materials reąuired to maintain employment in the factories. 1414 H.C. 1877-80. 2 436 H.C. 54. 3 Control of Engagement Order, September 8th, 1947. Below, pp. 83-9. Government addressed themselves to the theme of economic planning in the changed circumstances of the post-war world in the first Economic Survey issued in February 1947. We have lost less men than some of our Allies . . . but our losses, though less obvious, are very real and are now making themselves felt, first in our export-import problem and second in the need for rebuilding our basie industries. We must ftnd the means to pay for imports which we formerly got in return for our overseas investments and we must make up six years arrears of industrial eąuipment. These are basie things and to put them right is a huge job of work—especially as we must at the same time rebuild our battered housing, restore our depleted flocks and herds and produce more clothing and industrial goods.1 Government were not now to be concerned with ways and means of employing that surplus of resources which had been the expected, and so much feared, aftermath of war. They were faced instead with scarcities, with all manner of shortages, and they took it as their duty to ensure that the "best" use was being made of resources which, as during the war, were everywhere limited in relation to the demands made upon them. Production and available resources were less than the sum of the minimum and most necessary reąuirements for reconstruction and all other inevitable claims on current output. The central fact of 1947 is that we have not enough resources to do all that we must do. Whether we reckon in manpower, coal, electricity, steel, or national production as a whole, the conclusion is unavoidable. To get all we want, production would have to be inereased by at least 25 per cent. This is clearly impossible in 1947.2 The Economic Survey for 1947 had been preceded by a Statement on the Economic Considerations affecting the Relations between Em­ployers and Employed, and was followed by Capital Investment in 1948 and the Statement on Personal Incomes, Costs and Prices.3 The three together marked the new goal for economic policy—the control of inflation and the restoration of the balance of payments without risk to fuli employment nor prejudice to housing, the social services, food subsidies and other inviolable domestic claims. Finally, there appeared in December 1948 the Long Term Programme* The memoranda constituting the Programme were offered as a descrip-tion "in some detail" of "the policies which the United Kingdom 1 Economic Surey for 1947, Cmd. 7046, para. 62. 2 Cmd. 7046, Sec. 61. 3 Cmd. 7018; Cmd. 7268; Cmd. 7321. 4 Economic Co-operation: Memoranda submitted to the Organisation for Euro-pean Economic Co-operation relating to Economic Affairs in the period 1949 to 1953, Cmd. 7572. proposed to follow to 'achieve and maintain a satisfactory level of economic actMty without extraordinary outside assistance' by 1952-3". Government re-affirmed their respect for the rights and duties of the subject and set out the limitations on economic planning in Great Britain. Economic planning in the United Kingdom is based upon three funda-mental facts: the economic fact that the United Kingdom economy must / be heavily dependent upon international trade; the political fact that it is, and intends to remain, a democratic nation with a high degree of indi-vidual liberty; and the administrative fact that no economic planning body can be aware (or indeed, ever could be aware) of more than the very generał trends of futurę economic development. Heavy post-war demands for goods of all kinds aggravated by price control and the beginnings of inflation, had continued the severe scarcity of materials, industrial capacity and labour beyond the end of the war. Demand, at the controlled prices, for a number of important goods—soft woods, steel, leather, cotton yarn and petrol were examples—exceeded by more or less the amounts which could be supplied. Some part of these shortages was no doubt a conseąuence of war and devastation; another was only apparent, the result of inflation. The excess of demand, however caused, could not be satisfied, and some means had to be found to adjust demand to the limited capacity of the supply. Prices in a free market high enough to choke off demand are one means of confining reąuirements within the bounds of supply. Distribution by ration and allocation are another. The merits of the two were amply debated at the time;1 here it will be enough to point out that, for reasons of social eąuality and to avoid a "scramble for labour and goods", rationing and allocation were deliberately chosen in preference to distribution by prices and the mechanism of the market. Public policy after the war demanded, or so it appeared to the Government of the day, a large measure of control. . . over imports, over the total amount of home consumption, over the scalę and composition of investment. But powers of prohibition and compulsion, though they must be used to set limits to economic freedom, must not be allowed, except in very special circumstances, to infringe the freedom of the individual. The execution, 1 See, for example, the contributions of: Henderson: Uses and Abuses of the Price System; Meade: Planning and the Price Mechanism; W. A. Lewis: Principles of Economic Planning; T. Balogh: Dollar Crisis: Cause and Cure; Robbins: Eco­nomic Planning in Peace and War; Franks: Central Economic Planning in War and Peace; Robertson: "The Economic Outlook", Economic Journal, 1947. as well as the preparation of plans, must be based upon the willing co-operation and understanding of the generał public.1 The "system of economic planning" which the Government were seeking to develop, was concisely set out in the first of the Economic Surveys. The "chief elements" included: (i) An organisation with enough knowledge and reliable information to assess our national resources and to formulate the national needs. (ii) A set of economic "budgets" which relate those needs to our re- sources and which enable the Government to say what is the best use for the resources in the national interest. (iii) A number of methods, the combined effect of which will enable the Government to influence the use of resources in the desired direc- tion without interfering with democratic freedoms.2 Two principal budgets were outlined. One of these expressed reąuirements and resources for the year in terms of manpower; the other in terms of national income and national expenditure. These budgets were supplemented by analyses of particular problems. These analyses, or "programmes" as they are more usually called, are statements comparing the estimated reąuirements for particular commodities and resources with the expected supplies. Foreign ex-change, capital, fuel and power, timber, steel and certain other materials were marked out at the time as resources the scarcity and importance of which to the whole economy justified this special attention.