We have just had one example of Tory freedom at work, and the subject we are debating this afternoon, the inflationary situation, is another. On 10th April, the day after Budget Day, I described the Chancellor's speech as "an assignment with inflation". That phrase was indignantly repudiated by the Chancellor and the whole establishment Press. I do not think that any hon. Member or any responsible newspaper today, only 15 weeks later, would say that that warning was not justified.
It is the unprecedently widespread concern about inflation itself which has given rise to this debate, although the House will not wish to ignore other developments in the economic situation. There may be some who will wish to question the Prime Minister on his remarkable statement last Saturday—the "You-haven-ever-had-it-so-good" speech—which was in striking contrast to the Chancellor's two grave speeches only a fortnight ago.
Making every allowance for the intoxicating nature of his audience and his own exuberance in his job, some hon. Members might like to question the Prime. Minister about his claim that the gold reserves rose by £88 million in the first six months of this year, always the most favourable seasonal period for sterling. We should like to ask the Prime Minister—if he were here—whether it was just a Freudian slip which made him omit the reckoning that in this same period sterling area borrowings from the International Monetary Fund, the repayment of the U.S. waiver, and the first instalment of Adenauer Aid received in April amounted to £118 million against the £88 million increase in the reserves for which the Prime Minister was taking credit.
I want mainly to deal with the inflationary situation at home. Sterling is under heavy pressure, but we have said many times this year that the scale of the Government's borrowings and the mobilisation of the second line of financial reserves ought to be enough to see us through this year without a foreign exchange crisis. I see no reason to change that view. But the scale of these borrowings and the need to repay them before very long make it all the more urgent, as we have frequently said, that we make all the changes necessary in our internal policies to enable us at the earliest possible moment to be able to reach a situation of strength in our overseas dealings. The first problem with which we have to deal is inflation.
I concede right away to the Chancellor that there is no new or sudden crisis. To some extent it has been over-dramatised and sensationalised, and the Chancellor bears his own responsibility for that and, no doubt, the Chancellor of the Duchy of Lancaster, who has been putting it round rather assiduously, to the embarrassment of the Chancellor of the Exchequer. However it may have been over-dramatised, this is not a new problem.
What has happened in the last two weeks has been a sudden realisation of the degree of inflation in the country, a sudden expression of widespread concern, a sudden shock as we pass further economic sound barriers—consols falling below 50, a 3d. letter—and 1 oz. at that—the lowest recorded price for War Loan, and so on. There is a realisation that the Prime Minister's plateau—and it cost the country £700 million to attempt to reach that plateau, £700 million in lost production—is now lost to us.
All these things have led to an attitude of hopeless resignation about the future of the currency to the point where it becomes not a change of degree but a change of kind, where many people in key positions, from underwriters at Lloyds to those responsible for trust funds, are redisposing their affairs on a scale which reflects their anxiety about the future of the currency. Of course, it is when the community comes to accept inflation as part of the natural order of things and takes action to anticipate the effect of inflation that a creeping inflation turns into a galloping inflation. It is for that reason rather than because of anything inherently new in the situation that we must all view this matter with the deepest concern.
Having said that, let us put the problem into its proper setting. Constantly rising prices have been with us since the early days of World War II. There has been no let up. To some extent inflation has been world wide. From 1946 to 1951, when we were in power, the cost-of-living index rose by 32 per cent. From 1951 to 1957, with the Conservatives in power, it has so far risen by 28 per cent. It is fair to point out that the rise from 1946 to 1951 took place against a background of constantly rising world prices. World prices doubled in the period. We were more successful than any other country in keeping home prices down. It is also fair to point out that since 1951 the rise in the cost of living in this country has been against a background of falling world prices and that the cost of living has risen more in Britain than in almost any other country for which figures are available.
The Economic Commission for Europe has just published its latest quarterly report. It examines the cost of living position in seventeen countries, as compared with 1953. By March, 1957, prices in this country had risen by 14 per cent. compared with 1953. Only Greece, Spain, Finland and Yugoslavia—for what comfort that is to hon. Members opposite—showed bigger increases in the seventeen listed countries. Over the same period—and again this is worthy of note—the same report shows that the indices of increase in national production show Britain the lowest of all—bottom of the league—with a 13 per cent. increase in production in 1953 against an average for Western Europe of 29 per cent. So it is clear that Government restriction of production is not the answer to the problem of inflation.
I have said that this is a continuing problem, but perhaps I might fairly begin—for the benefit of those hon. Members still fighting the Korean war with undiminished vigour—with the period 1950–51, because that is the one that they always throw up at us. Yes—that was the year of the worst increases in prices in this country. The international scramble for commodities, and private and Governmental stockpiling, gave a fresh and vicious twist to the inflationary spiral. In 1952, when world prices fell, I believe that the Government missed a great opportunity to halt the spiral, when they deliberately forced up food prices at a time when I believe that prices could have been stabilised. They did it by slashing food subsidies.
Having started from that period, I take another three periods—the periods of the three separate Conservative Chancellors—not for the purpose of making political capital out of it; that would be only too easy; but because there are deep and sincere differences of view about this question of inflation on the two sides of the House. I want to examine the different approaches of right hon. Gentlemen opposite, as a preliminary to drawing conclusions from their experience and presenting, I hope, a positive alternative.
From 1953 to 1955, we had what has come to be known as the "Butler boom". Against a background of the easiest economic conditions that we have known for a generation—favourable terms of trade; falling world prices and no world dollar problem—we had the events which will always be associated with the name of the Lord Privy Seal. This was the era of decontrol; of "Invest in Success" and of tax incentives to investment; and it was also the era of the pre-Election Budget of 1955. It also led to the post-Election import crisis of 1955.
If we analyse what happened in these years, we find that from 1954 to 1955 alone, while our production rose by 3 per cent., our imports rose by 11 per cent. A special dollar problem was created by decontrol, because, during that same period when production rose by only 3 per cent, imports from the dollar area rose within a single year, by 30 per cent. Investment, largely inessential, boomed, and the Economic Survey published the following spring complained that:
a considerable upsurge in the capital expenditure of industry was being superimposed on the buoyant level of consumers' expenditure … the size of the expansion … was greater than our resources permitted.
As we all know, the Lord Privy Seal reacted to this situation by instituting the credit squeeze, imposing hire-purchase controls, raising the Bank Rate and introducing his autumn Budget, which taxed household essentials and which itself gave a fresh twist to the cost-inflation spiral. So much for the Lord Privy Seal, whose cancellarian epitaph was pronounced by the Prime Minister in imperishable prose which I could neither hope nor wish to rival.
I turn to 1956, which economic history will no doubt regard as the era of the Macmillan stagnation and the attempted wage squeeze. The Prime Minister embarked upon a policy of deflating his predecessor and the economy at one and the same time. He was more successful in his first aim than in his second. I am not suggesting that there was a complete break of policy. Continuity of economic policy was shown by the continuation and tightening of the credit squeeze. The Bank Rate was raised to the highest level for a generation, and the investment programmes of the nationalised industries were cut and cut again.
The Prime Minister's Budget had as its motif the encouragement of savings, and in this alone the right hon. Gentleman has had some success. He also set out to make history by cutting Government expenditure, and we all know how that ended. But the main theme of his economic policy—I do not think that I am misrepresenting him—was to curb the boom. He said:
I think we have learned this lesson from the … past year. We cannot afford to run the economy flat out …".—[OFFICIAL REPORT, 17th April. 1956, Vol. 551, c. 857.]
As the present Chancellor in this year's Budget said, after quoting the very words which I have just taken from his predecessor:
We intended to reduce the pressure and we did reduce the pressure … In the process some potential production was lost, and that was inevitable."—[OFFICIAL REPORT, 9th April, 1957; Vol. 568, c. 968.]
That is what he said in April. Now, in July, the Chancellor, growing more daring, or reckless—I am not sure which—blames inflation upon the failure of production to rise, and calls for higher production. The late Chancellor—the present Prime Minister—as part of his policy to curb the boom, abolished investment allowances and tightened the credit squeeze. As he hoped, production stagnated.
But there was another aim in his economic policy, namely, the "plateau". He asked the nationalised industries to hold down their prices, and he appealed to private firms to do the same. Then, with his promise of a plateau, he appealed for a wage freeze. His policy was to lower the tempo of production and to have a small measure of unemployment, nothing like the old Stockton days, but enough to reduce overtime and increase short-time working, and to squeeze industry so that wage claims could not be granted.
He aimed, in fact, to create conditions in which, to quote the famous words of the Deputy Chief Whip—
… the atmosphere of negotiation when they "—
come to employers will be very different from what it has been during the years since the war.
Some of us feared, and warned the Government, that this would mean a worsening of industrial relations. We warned the Chancellor a year ago about the economic Suez group calling for a show-down with organised labour. We did not know then that he was leading that Suez group as well. The show-down came in engineering, where the chairman of the engineering employers happened to be a crony of the Prime Minister, so much so that he is now a Cabinet Minister, in charge of fuel and power, in another place, and, we hope, largely out of range of those hon. Members opposite who have already got two fuel and power scalps dangling from their belts.
The House will want to know whether there was collusion between the Chancellor and the engineering employers. We have no Bromberger papers to show as yet, but there was certainly a resort to force in the employers' blank refusal even to discuss the wage claim. As we all know, when the show-down came the Government changed their attitude. As the Economist commented, at the end of all this period of attempted wage squeeze:
Disinflationary policy probably raised labour costs, at least in British industry, more than galloping inflation had done in the boom.
Why did the squeeze fail? Why did the plateau policy fail? For this reason—that at the very moment when the Chancellor was appealing for wage restraint he was himself forcing up wage claims by forcing up the price of bread, milk, prescriptions and, above all, rents.
So much for the Prime Minister's attempt to deal with inflation. The new Chancellor, who took over this year, had to frame his policy regarding inflation amid the ruins of the policies of both his predecessors. He had this dilemma. Should he follow the Lord Privy Seal and have a "free-for-all," leading to inflation and an import crisis, or should he follow the Prime Minister and hold imports down at the cost of industrial stagnation? Should he, as the Lord Privy Seal did, go in for expansion with inflation, or should he, as the Prime Minister did, go in for inflation without expansion?
The right hon. Gentleman decided, so far as we could measure what his policy was in the Budget speech, to let production ride. This is what we called his assignment with inflation. When we used those words in April, we were not complaining of the size of the Budget surplus; that is really irrelevant. The right hon. Gentleman keeps telling us that he is aiming at the same surplus as the Prime Minister aimed at a year earlier, but, of course, the Prime Minister was £300 million out in the event. Of course, the size of the inflationary surplus is irrelevant; in periods of inflation, some surplus of realised revenue over realised expenditure is not of itself disinflationary, because the greater the pressure of inflation the higher is the Budget surplus, borne like a cork on the waves. We were not even referring, when we used this phrase in the Budget debates, to the nature of the tax concessions, although, of course, the highly provocative nature of the Surtax concessions must, by this time, be obvious to all.
What was clear, even in April, was that the Prime Minister's little recession was over. Home consumption was rising. Hire purchase was reviving. Wages, profits and dividends were all on the upgrade. The credit squeeze, on which the Government relied, was weakening, and the Chancellor was unwilling to do anything except look forward to next year's Budget give-aways. Three months later, we have all the signs of inflation. The cost of living is still rising.
Right hon. Gentlemen have, I think, deluded themselves too long about the stability of the Retail Price Index over last year. They always take April as the starting point, and, of course, the reason for its apparent stability for long periods during some months last year when there was no increase in the index lay in purely temporary and seasonal factors in the price of vegetables, resulting from poor crops early last year—as the Treasury Bulletin for Industry recently made clear. Looking at all the other indices, the prices of publicly-owned and privately-owned industry have gone up. "Ernie" has done his calculations and produced the 3d. one-ounce letter. Wage rates, about which we hear a lot, were in May 5 per cent. up on May last year. Industrial profits, in the first quarter of this year, according to the Economist, are per cent. up on those for 1956, and they, of course, cover the whole year, the year of the Prime Minister's recession. We can, therefore, I think, expect a further rise in industrial profits.
Dividends have gone up over the last year more than wages, despite their covering the period of the temporary recession. Ordinary shares this week, on the index, stand at 203 as compared with 183 a year ago—11 per cent. up on the year, an 11 per cent. increase in ordinary share values, tax free. I could, of course, show a much more graphic increase if I were to base the comparison on the low figure during the Suez Crisis; they have risen nearly one third from that point. But I am trying to be objective about these figures, and I am going back to last July.
The figures of home consumption are rising rapidly, especially hire purchase. The figures for household goods are up by 15 per cent., and the hire purchase figures for motor cars have doubled. As to the financial indices, bank advances since January are up by £167 millions, despite the fact that the nationalised industries have repaid £52 million. The expansion to other borrowers, therefore, was two-and-a-half to three times as great as in the same period of 1956. Bank deposits of clearing banks are up by £184 million in six week, the largest ever recorded for this time of year; compared with twelve months ago, they are up by £193 million. As the Economist said, commenting on these figures last week,
So much for the credit squeeze".
There are more serious things. The gilt-edged yield has been down recently to less than 0·25 per cent. differential compared with the yield on equities, and the dollar premium only yesterday was up to nearly 20 per cent. compared with prices in this country. It can, I think, fairly be said that the Chancellor has kept his assignment with inflation.
I do not need to spell out the dangers to our foreign balance, to our standard of life, to employment, and, of course, even more immediately, to the already low, and month by month worsening, conditions of life of old-age pensioners and those living on small fixed incomes. That needs no arguing in this debate.
Looking back over the record of the three right hon. Gentlemen, the question arises, where has Government policy gone wrong? First of all, they have deliberately forced prices up and given repeated twists to the cost inflation. Now they are doing it again with rents. I should like to ask the Minister of Labour what his position is. We often hear appeals for wage restraint, and there is this very gentlemanly campaign of denigration against the trade union movement. Will the Minister of Labour tell us whether the Government now consider that the unions are justified in claiming more wages because of rent increases, or are they expected to absorb rent increases within existing wages? Surely, the right hon. Gentleman must have borne this in mind when rents policy was being considered by the Government.
The second reason why the Government have failed is that they have relied almost solely on monetary policy and now find that it does not work, at least, in the only way they know how to apply it. Thirdly, they have failed because they reject all selective controls. Their approach is, all or nothing, full steam ahead or full stop, the accelerator at full throttle or the brake. The Lord Privy Seal gave the green light and everything, especially the inessentials, boomed ahead. Then they had to cut, and when this Government have to cut, it is mainly the essential sector of the economy which they cut. We have warned them time and time again. We told them in 1954, in 1955, in 1956, and again this year, that the test in holding back or pressing forward should not be, "Is it public or private industry," but, "How essential is it?" Of course, they cannot accept that argument, because if one has to apply the test of essentiality in the private sector, it means controls, and it means selective controls at that. Investment in the public sector, in the main, is plannable. In the private sector it is plannable to a degree, only if one uses controls. I am sorry if these phrases offend the susceptibilities of the hon. Member for Kidderminster (Mr. Nabarro), but this is an extremely important matter.