It is perfectly simple to explain that. The position of Europe and of the world was at that time expanding, and a sharp restriction of credit in this country very rapidly put right the very serious position facing us in 1951. The world situation in 1957–58 has been very different from that of 1951–52.
Experience has shown that it is impossible to run any economy flat out all the time without running into inflation and balance of payments difficulties. That is our experience in this country and, broadly speaking, it is the experience since the war in all the Western economies. It is a particularly acute problem for this country, by reason of our position as international traders and bankers. A comparatively small increase in prices is a more serious thing for us than for other countries. Our position depends upon confidence at home and abroad in the maintenance of our currency. Therefore, maintaining confidence in the continuing value of our currency is of supreme importance.
In 1955, for example, the excess pull of the home market affected the balance of payments. In 1957, though we had a useful surplus on current account, once again we had a crisis of reserves because our position as bankers was affected by the feeling of other countries that we were not fully determined to maintain the internal value of our currency. The fact is that through all these balance of payments crises that we have had since the war the one continuing fact has been inflation and rising prices in this country and the continuing lack of confidence, or tendency to lack of confidence, by overseas countries in the purchasing power of our money.
I will not enter into the question of whether it was a cost-push or a demand-pull inflation. That seems a slightly academic argument, because it is not always possible to disentangle the one from the other. They are undoubtedly interlinked. The one remaining source of inflation in the country is that which arises from the growth of personal incomes. In 1957, incomes rose faster than output and contributed about two-thirds of the general increase in the level of prices.
We know now that import prices have been falling. We know now that the Government expenditure as a percentage of the national product has been falling and, as is generally argued, a great deal, if not all, of the credit inflation has been squeezed out of the economy. Therefore, the only remaining pressure or influence working in the direction of inflation is the influence exerted by personal incomes, wages, salaries and dividends, rising faster than output. The Government still hold to the argument that so long as the pressure of rising incomes is greater than the increase of production there is a continuing danger of inflation, which would grow very rapidly if we were to relax prematurely in our monetary and fiscal policies.
The argument made by the right hon. Member is that if the trouble is the relation between production and incomes, instead of trying to hold down incomes we should increase production. I should like to deal with that, because it is an attractive argument and one which all of us would, I think, in principle accept. I am sure that my right hon. Friend the Member for Monmouth (Mr. P. Thorneycroft) would accept that view, and all of us would. If we could treat the problem by increasing production rather than by restraining incomes, that would be to the general benefit.
But it is not so easy as that. As the Leader of the Opposition said, in July, 1957:
I do not think that increased production is necessarily a 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 got what the Chancellor has warned us about, namely, a situation where, as production expands, imports increase 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. 713–4.]
That statement seemed to me a classic statement of the argument for the policy we are pursuing at present. If we have more production, as my right hon. Friend pointed out yesterday, that inevitably means a substantial increase in imports. In present conditions of world markets, where exporting is getting increasingly difficult, to increase imports substantially without increasing exports must throw a new strain on balance of payments.
We consider as a condition of combining expansion with stability, as my hon. Friend the Member for Wolverhampton, South-West mentioned yesterday, we must ensure a national attitude to the problem of income from all sources which recognises that increases in income must be earned first by increased production and increased productivity. If the increase of incomes precedes increase of production the effect can only be inflationary and can only lead to a return to the problem of inflation and balance of payments. That is one of the conditions which must reflect any attempt to re-expand the economy at present.
The other problem is the problem of world trade as a whole. I think that the right hon. Member for Huyton, in an article in the Manchester Guardian some months ago, referred to the dangers of us becoming an island of inflation in a world of deflation.