Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 29 October 1957.

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Photo of Mr Harold Wilson Mr Harold Wilson , Huyton 12:00, 29 October 1957

I said that I was now going to turn to the internal measures which are necessary. I shall be glad to send the hon. Member some very full accounts of things I have said on this subject recently.

We are concerned here chiefly with both the Bank Rate and the statement made by the Chancellor on the day on which it was raised. We have Bank Rate at 7 per cent., the highest since 1920 and representing a jump of 2 per cent. which, I understand, is the highest increase in the Bank Rate in peace time since 1847.

That, of course, was a panic measure, however much the Chancellor may have sought afterwards to rationalise it as being part of a well thought out internal policy. It was dictated by speculation against sterling which the Government never did anything to avoid. We must regard it as the price which our national trade and industry and our future investment have to pay for the rash moves made to convertibility during the time of the Lord Privy Seal as Chancellor, and the freeing of the exchange market and the speculative commodity market, which were once covered by the proud boast that "Tory freedom works."

It is also the price that we have to pay for the stubborn over-reliance on monetary weapons in dealing with the internal economic position. I think that we have not been backward at any stage in the last six years in warning the Government of the probable consequences of each of these actions. Those warnings are all on the record. I have suggested that the speculative drain would have been halted within a few days once the world accepted that 2·80 per cent. would be maintained, but the Chancellor insisted instead on having his 7 per cent.

In referring to the Bank Rate it is inevitable that in this context I must refer briefly to the question of the leakage of information. We deplore, and I believe that the country and very many people in the City, deplore, the refusal of the Government to order a full inquiry, with power to take evidence on oath and secure access to the papers and trading records of the firms concerned. There is no doubt, as The Times, the Manchester Guardian and the Daily Express all said on the Friday morning, that there was inspired selling on the Wednesday night.

Gilt-edged had been rising, consols ended the day—that was Wednesday—slightly up, but heavy sales occurred after hours, mainly on War Loan, at a time of very wide dealing margins in circumstances which suggested that someone knew something. There are many responsible people in the City who believe that something improper had occurred, even if some of the people who knew what happened have hung back because of City loyalty to a Conservative Government.

There are very many questions left unanswered. Some of the most pointed were summarised by the City Editor of the Daily Express last Wednesday. So far as I know he is not a supporter of the Labour Party. There may or may not have been prior information of the Bank Rate increase. I do not know and I never said that there was such a disclosure—only that there was a case for inquiry—but I do know that some people dealing in gilt-edged knew on Wednesday afternoon that the Chancellor was to make what was described as a blistering statement on the Thursday morning and "going to put the screws on."

To most City men such a statement on the Thursday could only mean one thing. Was there at least careless talk about the Chancellor's statement? Was there perhaps some over-enthusiastic public relations expert who thought it was his duty, on political grounds, to prepare the Press for bad news—perhaps someone not in the confidence of the Chancellor on the Bank Rate issue?

On the question of the Lord Chancellor's researches, I will only say this: we are not privy to them and I cannot properly comment on them. He has satisfied himself on the particular items of evidence we brought to his attention. I would only say that the original allegations which gave rise to the Lynskey Tribunal were proved to be utterly fantastic, yet an inquiry was held in that case. We believe that despite the eminence and reputation of the Lord Chancellor an inquiry without power to send for records of dealings and to take evidence on oath was inadequate to the purpose and that the public have not yet had the reassurance to which it is entitled. I will leave that matter there, because we do not want this unfortunate question to divert us from the real issue at stake this afternoon, the economic effects of the Chancellor's policies.

As I have said, his policies were in three parts, Bank Rate, credit squeeze and the investment cuts. I will take his monetary measures first. The House is aware of our past criticisms of previous high Bank Rates. I can summarise in one sentence, what I said on 9th May, 1956, when I referred to the high cost of the Bank Rate. I referred to the increase in the National Debt charge—that is now another £100 million a year as a result of the Chancellor's latest move—the heavy payments across the exchanges of interest charges—another £50 million—we are now a debtor and not a creditor nation as in the classical times of Bank Rate; the effect on the Commonwealth through driving colonial and other borrowers to foreign financial centres; the loss of acceptances and other financial business abroad, the effects on the finances of local authorities, on house purchase and on the small business man. Those, in brief, are the main disadvantages and costs of a high Bank Rate policy.

I want for a moment to refer to the problem which local authorities are facing as a result of the Chancellor's action. Even for seven days they are now having to borrow at a rate of 7⅛ or 7¼ per cent. I ask the House to think what that means in terms of council house rents as well as the level of local rates. Some local authorities have already cut their housing programmes because the rents which would have to be charged at the present rate of interest would be far beyond the means of the families in greatest need of rehousing.

Does the Chancellor really believe that forcing up council house rents as well as the rents of landlord-owned houses, which was done earlier this year, is the way to secure wage restraint? With the Bank Rate the Chancellor combines a freeze on bank lending. It is a rather crude attempt to control the economy. He thinks that he will be able to solve the problem by freezing the supply of money.

From where is the right hon. Gentleman getting his economic advice these days? Was he really advised on these lines by the highly qualified and distinguished economists in the Economic Section of the Treasury, or is it true, as one hears in the City, that the Chancellor is getting his advice privately from some outside sources, some of those discredited laissez-faire economists whose notions of economic policy are about as outmoded as the Prime Minister's crossbow is in this nuclear era? If there are to be these eminences grises, these economic Rasputins advising the Chancellor, then I would be prepared to settle for the Parliamentary Secretary to the Ministry of Education once again.

The whole trouble is that the Chancellor is trying to fight what is a cost-push inflation, a wage-price-dividend-profit spiral with the crude techniques which classical theory considers appropriate to a demand inflation. Production is a long way below capacity, yet the Chancellor sets out to cut it further. It would take too long to deal with all the fallacies behind the Chancellor's approach, but perhaps I may mention one or two of them briefly.

The right hon. Gentleman thinks that he will solve the economic problem by freezing the volume of bank deposits. Has he never heard of "velocity of circulation", the habit of money to circulate more rapidly if the demand is there, the activation of idle deposits? Since the Government embarked on monetary controls, in the last six years prices have risen by 30 per cent. but the amount of money, bank deposits plus coin and notes, has increased by only 10 per cent. That shows that merely to freeze the supply of money does not of itself freeze prices. Indeed, the Chancellor knows this, because he told us in a debate on 25th July, when referring to those optimists who thought that prices could be kept stable by freezing the value of the banknotes in circulation, that One does not stop inflation by refusing to print bank notes any more than one cures a fever by trying to hold down the mercury in the thermometer."—[OFFICIAL REPORT, 25th July, 1957; Vol. 574, c. 644–5.] Of course, he was quite right, but that is exactly what he is doing today. He is trying to cure the fever by holding down the mercury in the thermometer, except that he is now taking bank money and not banknotes as his test.

The second fallacy is the extraordinary notion that a high Bank Rate somehow miraculously separates inessential from essential investment. We used to have that view expressed from this Box. It was put on 2nd November, 1950, by Lord Chandos, then Oliver Lyttelton, who gave us this memorable quotation: If the industrialist thinks that a 5 per cent. interest rate for borrowing his money will still leave him with a profit, the plants will be built, but the marginal capital investments will be discarded."—[OFFICIAL REPORT, 2nd November, 1950; Vol. 480, c. 332.] He was thinking of a Bank Rate of only 5 per cent. We did not have the present Chancellor then. The same theory was supported by the authors of the Conservative Central Office document to which I have referred, "Work for the Nation," because they say: …higher interest rates…help to control borrowing and to select the most necessary investment. Will an hon. Gentleman tell us some time how it is that a high interest rate by itself selects between essential and inessential investment? It does not. It selects the most profitable, and very often the most profitable investment—one thinks of the high rates that the hire-purchase companies are able to afford—is the least essential.

Now I turn to the Chancellor's investment cuts. One of the main charges against the Government is that to deal with an external crisis, Which, on their own claim, was caused by short run speculative factors from economic sources, they have made investment cuts which will have a lasting effect on national productivity and our ability to compete in the markets of the world. We shall need time to study what the Chancellor said this afternoon about individual industries, because we need to compare that with figures already announced, but he has announced a very serious retardation of the railway modernisation programme compared with the one announced earlier this year.

I repeat the two arguments against the Chancellor. Why hold back essential public investment and refuse on doctrinaire grounds to cut back the quite inessential private investment, the vast office blocks and the totally inessential factories producing goods for an artificial home market whipped up television advertising? Secondly, does the right hon. Gentleman not realise, with his emphasis on the Free Trade Area, that European free trade, as we have urged many times, makes it vitally necessary to convert this country from a low investment economy to a high investment economy? The figures given in the Manchester Guardian yesterday of international comparisons of investment underline that warning.

Now I turn to production. Does the Chancellor want production to increase or decrease this year? He has not made it plain. In the 1956 Budget the Prime Minister set out to reduce industrial production and he succeeded—I will give him credit for having succeeded in that. The Chancellor applauded his predecessor's restrictive policy, but in July he said that production must increase. He recognised, for a moment, at any rate, that that was the only way to get costs down, but in September he set out to cut production again. What does he want? The country, and above all industry, has the right to know what he is after.

There were cryptic references to unemployment in Washington and again this afternoon. I do not suggest that the Government are out to make Stockton-on-Tees a depressed area once again. Of course they are not, but I think that if the Chancellor is faced with a choice between stable prices and full employment he is prepared to see to it that it is employment that has to give way. We believe that that is not the choice facing the country. It is the choice only if we refuse to have selective controls and if we refuse to try to plan the economy as a whole. It is the choice only if we have this blind, groping system of overall monetary control.

We must warn the Chancellor that the policies which he is now pursuing will lead to unemployment if he presses on with them. Quite apart from social considerations and social hardship—and we all accept the Prime Minister's sincerity on this point in the many speeches he has made—a little dose of unemployment is not the way to bring down prices.

If we get unemployment, factory overheads are spread over lower output; firms hoard labour; there is work-spreading; restrictive practices develop on both sides of industry and production investment is cut. A little unemployment, a little retardation of production, is the one certain way of increasing costs. [Interruption.] We saw this quite recently in the cotton industry, where there was quite heavy unemployment but no improvement in productivity.

Or is it, as the whole of the Establishment is proclaiming, the prelude to a showdown with the unions in the matter of wages? The Chancellor used some very strange words this afternoon, which the trade union movement in particular will want to study. We must warn the Government, as we have warned them before, "Do not run away from your own responsibility for the crisis; do not seek refuge in this new alibi policy of blaming the unions for the fact that they have sought to protect their members from the effects of the Tory free-for-all."

This is the Suez mind all over again. This demand for a showdown can be just as dangerous, just as costly and just as ineffective a policy as was the other Suez policy of a year ago this week. If this is what is in their minds, and we have all heard Lord Hailsham—I say this very seriously, because I do not speak of the more buffooning parts of his performances, but of the very serious pronouncements made by the Lord President of the Council and Chairman of the Conservative Party—then I have to say that this is not the way to lower prices and to raise productivity. It is the way to the most bitter industrial strife that we have known for a generation, and the road to industrial and economic disaster.

Hon. Gentlemen opposite delude themselves when they put the blame on wages, and I will give some figures to show this. Since 1950, money wages—that is, hourly earnings—have risen in this country by 61 per cent.; in Germany, by 59 per cent.; in America, by 42 per cent.; and, in France, by 96 per cent. On the other hand, prices have risen more here than in any of those countries. They have risen by 43 per cent. here, and by 14 per cent. in Germany. So, if we take real wages—hourly wages discounted for prices—we find that since 1950 real wages here have risen by only 12 per cent., whereas they have risen by 39 per cent. in Germany and by 24 per cent. in the United States of America in the same period. There is wage restraint, but it is not wages that explain the problem—it is productivity due to higher investment and greater efficiency in German industry.

I began by saying that we need radical new policies. We have not had any of them today. We have had just the same weary round to which we have been listening for the last three years. It is, therefore, our duty to make suggestions to the Chancellor. I shall do so very briefly, and hope that there will be other occasions to elaborate them.

First, overseas. We must first deal with the problem of ensuring adequate liquidity in international payments. This means more funds available to the International Monetary Fund and to other international monetary institutions. I want to make this constructive suggestion to the Prime Minister. Let the Government now propose an economic conference between Great Britain, the United States, Canada, Germany—and France, if she has a Government at that time—to examine the problem of liquidity, and the key position of sterling, the dollar and the deutschmark. Indeed, I go further and say let them examine internal policies in the creditor countries. I believe that it would help the world greatly if the Americans would cease their own umbilical preoccupation with interest rates and the domestic price level and embark on a good-creditor expansionist programme. And the same is true of Germany.

Secondly, let the Government take the initiative in calling urgent international talks on the commodity problem. The United States may now be more willing to agree to international commodity agreements. We have them for tin, sugar and, after a fashion, for wheat—why not have them for cotton, rubber and cocoa for a start? This is not just idealism; it is not merely to stabilise prices; it is not only plain common sense for Britain and for the sterling area, it is a measure of self-protection for all the industrial exporting nations.

Thirdly, I suggest that we should have a real sterling area conference and work out with these developing countries a planned programme for drawing on sterling balances—as my right hon. Friend did in the Colombo Plan—economic aid and, if necessary, a support price policy for sterling area commodities such as cocoa, rubber, jute and the rest.

Fourthly, let us recognise now, as we have urged for a long time, that we must reduce our dependence on the United States. We hope that there will be no American recession, but if there is an American recession our dollar earnings will suffer as well as sterling area dollar earnings. Let us have plans ready now. It will be no good, in six or nine months' time, trying to introduce panic measures of import licensing. But, at the same time, we must expand our trade with the Commonwealth. That, as we have urged, means bulk buying and long-term contracts. In making this appeal to the Government, we say to them "Do not go on sacrificing our own future and Commonwealth interdependence to this doctrinaire preoccupation with the speculative commodity markets."

Fifthly, and last, I say that the Government should go much further in expanding East-West trade. After all, Russian gold shipments have been a very valuable corrective to the dollar drain. The partial easement of strategic controls in 1954 did not go far enough then; it is strategic nonsense today. In a war that the experts say would last 48 hours what is the use of controls of cargo boats with speeds of not more than nine knots? The same applies to control of many machine tools—it is simply forcing the Russians to extend their own shipbuilding and machine tool capacity. Is that strategic?

At home, our policies have been made plain. I will not repeat what we said in July about how budgetary or monetary weapons should be used or our concept of the use of the public section—including Royal Ordnance factories and dockyards—for essential civilian work and exports, and such controls over private industry as building licensing. But, once again, I repeat—and the 7 per cent. Bank Rate underlines everything we have ever said on this—that the Government will not solve these problems, will not get the goods produced for export and get an adequate level of essential investment, unless they are prepared, by controls and purposive planning, to hold back inessential investment and production so as to give not merely a green light, but positive encouragement to essential investment and to export.

With this I conclude. There is no future for this country on the basis of conflict between the Government and organised labour. It may or may not meet Lord Hailsham's need to satisfy the "blimps" of his own party, but neither threats, nor force, nor bluster will solve the problem. Trade union co-operation in national economic policies was the asset that every Government of this country had enjoyed since the war, until the Prime Minister, in 1956, destroyed the very basis of that co-operation by his policies, and by his wanton disregard of the advice given to him.

We indicated in July the conditions which, in our view, are necessary to any understanding between the Government and the trade union movement. We re-emphasise that now the position is even more urgent than when we put these suggestions forward in July. The nation's economic problems—so dramatically brought to a head a month ago cannot be solved by a state of open conflict, or even of cold war between the Government and the mass of the producers of the nation's wealth, nor can they be solved by the posture of economic abdication that we had from the Chancellor today.