That is precisely my point. We need to have an adequate volume of purchasing power to maintain full activity, but we must not go so far as to have inflation and a balance of payments crisis. The problem for any Government in this country, of whatever party, is how to maintain adequate demand, to sustain full employment and full activity, without going too far and having a balance of payments crisis which, with our inadequate reserves, we cannot afford to face.
Time and again—in 1947, 1949 and 1951—the economic machine was allowed to run too quickly and had to be checked by succeeding Governments, who in each case had to restrain the volume of home demand. That is what we are doing at the present moment. We are trying to restrain the volume of home demand to prevent it over-running and thereby creating intolerable difficulties for our currency on external account.
The right hon. Gentleman somewhat chided my right hon. Friend the Chancellor of the Exchequer for not knowing the difference between what is often called, in the revolting terms of some economists, a demand-pull or a cost-push inflation. I think it was his right hon. Friend the Member for Huyton (Mr. H. Wilson) who said that the other day. I suggest to the right hon. Gentleman that economics is not yet such a precise science as all that. It is all very well to say that we cannot cure the disease until the cause is diagnosed, but if we assume a greater degree of accuracy in the diagnosis than is justified we might very well be treating the wrong disease. Therefore, it is not wise to say that this is one kind of inflation and that is another kind.
I suggest to the right hon. Gentleman that the two are interlinked, because a cost inflation has to be fed and sustained by adequate demand, and, equally, an excess of demand, as we have seen, will stimulate a cost inflation. I do not believe it is possible to distinguish between them and to divide the one from the other.
So our policies are twofold; first, to restrain demand by operating on the total level of purchasing power, and secondly, to seek effective restraint of personal incomes, and thereby operating both on a demand inflation and a cost inflation simultaneously.
To take the first point first, methods of restraining demand, here we have, in the increased Bank Rate, the limitation of public capital outlay, in the limitation of bank advances and new directives to the Capital Issues Committee, a single unified programme designed to restrain the total effective demand in the economy. What is the alternative? The right hon. Gentleman himself said that the increase in the Bank Rate was effective as a temporary measure to meet a balance of payments crisis, but no one has ever suggested that a 7 per cent. Bank Rate is here for ever.
I think it is fair to say that the cost of capital, like the cost of anything else, is influenced by supply and demand, and we cannot really expect an era of very low long-term interest rates in circumstances in which the world is short of savings, and there is a growing demand for capital throughout the world. That does not make sense. Investment is not to be cut, but held back at its present level. I think the right hon. Gentleman said something about the level of investment. May I remind him that in his Budget in 1951 one of his major proposals was for abolishing initial allowances in order to reduce the level of investment. [Interruption.] Exactly, he did it deliberately. I thought the right hon. Gentleman would raise it. He deliberately planned to reduce the level of civil investment, as he said at the time, to make room for defence and exports. But we have at this moment a level of defence expenditure 32 per cent. above then, a level of exports 27 per cent. above then, and we are not cutting but maintaining a level of investment 70 per cent. above then.
If investment is not to be restrained, if the right hon. Gentleman is against all these cuts in investment, how will he restrain demand? Will he cut consumption, because that is the only alternative? If he will, what forms of consumption and where? Do not let us talk as if the matter concerned only a few garages, cinemas and petrol pumps, because they are trivial and do not have any real relation to the size of the problem whatever.
The right hon. Gentleman reverted again, as in the past, to the question of production, which is of immense importance, and I want to answer the serious argument which he put forward. Indeed,
I think he helped me, because only in July he asked this question:
Do the Government want production increased? Do they regard an increase in production as a solution?
He went on to say:
For what it is worth, I do not think that increased production is necessarily the cure for inflation. If it is due to increased productivity it helps enormously, of course. But if it is simply due to the re-expansion of industry after a period of stagnation, it is then certainly not a cure for inflation, unless, first, we have no trouble about our balance of payments, and we do not get what the Chancellor has warned us about, namely, a situation where, as production expands, imports rise and exports do not rise correspondingly, so that we are back again with a balance of payments crisis."—[OFFICIAL REPORT, 25th July, 1957; Vol. 574, c. 715–6.]
That is exactly the point. Experience has shown that we cannot run this economy flat out the whole time without running into balance of payments difficulties. Therefore, it was possible, as succeeding Governments found, in 1949 and 1951, to take measures to restrict the pace of our advance in order to make that advance more sure and certain.
Experience has shown that, when we allow the economy to expand again, it happens that the rate of expansion of the level of incomes goes ahead of the rate of expansion of production, and we find ourselves back in trouble and faced with inflation and a balance of payments crisis. Therefore, it seems to us that in this connection, it is extremely important to find effective methods of insuring restraint of personal incomes if we are to help the problem of expanding production and avoid a return to a balance of payments crisis.
In talking of restraint, we are talking of all forms of personal income. It is perfectly true that attention normally tends to be fixed on wages, and there are two good reasons for that. First, the volume of demand involved in the case of wages is very much bigger than that involved in the case of dividends, and, secondly, rising wages always mean, as a consequence, rising profits and rising dividends. That is why attention tends to be focused on wages, but clearly the principles which apply to one form of income must in fairness apply to the others.
There are some things which we are not proposing that it has been suggested we are. We are not proposing to apply a wage freeze. Such a thing, I think, would be wrong in principle and impossible in practice, as experience has shown. We are not suggesting a Government-imposed wages policy, a phrase often used, but not so often fully understood, nor do right hon. Gentlemen opposite support such a suggestion. Nor do we propose to interfere with the established processes of arbitration.