DEFENCE LOANS BILL.

HC Deb 27 February 1939 vol 344 cc927-1043

Order for Second Reading read.

4.3 p.m.

The Chancellor of the Exchequer (Sir John Simon)

I beg to move, "That the Bill be now read a Second time."

The importance of the proposal which is embodied in this Bill is, of course, recognised in all quarters of the House and by all sections in the country. According to our procedure, before we reach the discussion on the Second Reading of the Bill the Financial Resolution has to be considered, and already some 17 hours of Debate have taken place and a very wide range of topics has been discussed. Now we come to the Bill, and it is striking to observe that the whole of this very large proposal, the essence of it, has been stated in a matter of four lines of print—I should think one of the most striking examples of multum in parvo that our Statute Book has ever exhibited. The discussion in the House and the reception of the proposal outside it, make me entitled to claim that the proposal has generally been accepted as justified.

In a few days' time the House will have before it the various Estimates of the Defence Services. The first of them is likely to appear almost immediately. The White Paper circulated a week ago anticipated these Defence Estimates and stated that the total sum of money which will have to be provided in these Estimates, when we include air-raid precautions and food storage as well as the three major Defence Estimates, is no less than £580,000,000 in the coming year. I am not anticipating the Budget in any way; it would be quite impossible to do so. But I do think that in order that the House may have a right view of this Bill and of this enormous provision of £580,000,000 for defence in the next year, it will perhaps be useful to remind the House in two or three sentences what are the nature, the general magnitude and the main topics provided for in each Budget as it comes along. There is the provision which meets the charge for the Debt. That is met out of revenue. There is the very large provision which is made, all out of revenue, of course, for the Civil Estimates. Then there is the provision in the Defence Estimates.

Let me give the House a figure which will indicate the proportions of the problem. I shall not trouble at the moment to speak on the whole subject of the charge for the Debt, complicated with sinking funds and things of that sort. But take the interest which has to be provided for the National Debt. The interest on the Debt that was provided last year, 1937–38, was £215,000,000. I am not making any statement about the year which is to come. That kind of figure indicates the sort of provision that has to be made year after year. It is a very fortunate thing that as a matter of fact that figure has come down in recent years. In 1930–31, in the last Labour Budget, when things were so difficult for them and when rates of interest were higher, the amount for interest was £292,000,000.

Mr. Pethick-Lawrence

Does that include the American Debt?

Sir J. Simon

I thought that the right hon. Gentleman would avoid that topic. The American Debt, as we are so often reminded by hon. Members opposite, was indeed provided for by the Labour Government, but at that time they were getting more money in respect of War debts from other people than they ever paid the United States. The Government that followed made payments on the American Debt far in excess of its corresponding receipts. The truth is that owing to the great improvement in credit which took place in 1932, by the middle of that year my right hon. Friend the Prime Minister had carried through the biggest conversion operation that ever has been carried through in this country, and by that single operation saved the country £29,000,000 of money per annum on that head alone. Be that as it may, the fact remains that one of the three big items to be provided for is this provision for interest on Debt. Then, the Civil Estimates. There is an enormous figure. The Budget Estimates this year amounted to £449,000,000. That included the grants to local authorities, block grants and so on, the social services and provision for aid to agriculture and industry. If you select out of it the social services alone the position is that from revenue in this present financial year we are finding £223,000,000. The corresponding figure in 1930–31 was £172,000,000. If I mention those two out of three major items, they show that a very great effort is being made. The money for them is being pro vided out of revenue, and these are elements in the total burden, which must not be overlooked when we consider how we are to deal with the remaining items.

Now comes this formidable figure of £580,000,000. It raises and necessarily raises anxious and difficult questions. I did my best a week ago to reduce uncertainty and anxiety by stating how I contemplated that that burden would be shared between revenue and loan. It appeared to me that no public advantage could have been gained by leaving the country to speculate; on the contrary it might be of real service and great advantage to remove the uncertainty. It has been my object throughout—it is one of my special responsibilities in the office that I hold—in connection with this loan programme, to promote confidence by removing uncertainty. Nothing could be so destructive to confidence as that un certainty should continue if it can be removed. That is the reason why last November, in answer to a question by the Leader of the Opposition, I said that we should need to have more borrowing powers. That is the reason why 10 days ago I stated what was the proposed amount of the borrowing powers. That is the reason why a week ago I said that I thought this £580,000,000 must be found from two sources in the proportion that the House knows.

Feeling as I do that the full extent of our intention to borrow next year should be made known at the earliest opportunity, I am entitled to say now on the Second Reading of the Bill that from all quarters I am informed that that statement, so far from alarming financial circles in this country, has been very well received, has in fact operated as an encouragement both to British trade and to British finance. There is one comment which has been made on what I then did, both by one or two hon. Gentlemen opposite and by others outside, which I would like to correct, not because I think it has done very much harm, but because it is not really accurate. It is said that by making this statement and dividing the £580,000,000 in two, I was anticipating my Budget. If in the interests of stability or of the encouragement of industry it is necessary to make a statement not strictly in accordance with usual practice I think it ought to be made. I should certainly refuse to be bound by any pedantic tradition, and so would any man in my position if he thought it would help. But as a matter of fact I did not anticipate my Budget at all. What I anticipated was the contents of the Defence Estimates. I would like to ex plain that in two or three sentences now. In a few days' time hon. Members will be receiving in the Vote Office: these bulky volumes—Navy Estimates, Army Estimates and Air Estimates, and a little later the Estimates for air-raid precautions and so on. We know, of course, that in each case the Estimate is divided up into a whole series of Votes—numbers of personnel, pay and all sorts of things. When hon. Members look inside that book what they will find is what indeed they might have found last year or the year before, that whereas some of the Votes, for in stance the Vote for pay, will, of course, be met entirely from revenue, others of the items, like barracks or shipbuilding, will be shown in the Estimates as being met in part from revenue and in part from loan. That is strictly in accordance with the provision of the Defence Loans Act of two years ago. As soon therefore as the details of these Estimates are avail able, any industrious person with a taste for arithmetic and a pencil and piece of paper need only add up the main loan items of the various Defence Estimates, including, of course, the Estimates for air raid precautions and food storage, to find out what they amount to; and he will find that they amount to £350,000,000, and that the revenue provision for defence is about £230,000,000.

It is not without importance that in what I considered it my duty to do—I dare say it was contrary to the usual traditions and to the views of theorists—I was not anticipating the Budget, for no one can anticipate the Budget. We have to wait until we know what in fact is the out-turn of the current year's Budget, and have an accurate estimate of what the position is likely to be in the following year. What I was doing was serving the public interest in anticipating what would very shortly be found in the Defence Estimates. All this could be ascertained from the Estimates even though I had made no statement last week at all. I made it, as I said, to establish confidence by removing uncertainty as soon as ever I could, and I was not anticipating the Budget. I ask hon. Members most seriously to note what I say, that I have made no statement as to how the Revenue contribution should be found.

There is another matter which arose during the earlier Debates on which I ought perhaps to say a word. There have been comments upon this figure of £230,000,000. The right hon. Member the Leader of the Opposition made an observation, and so did the right hon. Gentleman opposite. It is more than a form of words to say, "I cannot anticipate my Budget statement," and no inference must be made as to how that money may be provided. But I think it will be helpful to our orderly examination of this tremendous problem which affects us so deeply, if I may be allowed, within those limits of restraint, to make one or two observations on this matter. The House knows that some heads of Revenue will reflect, with clear accuracy, the current conditions. They may not all be of very great importance in them selves, but they are very good as pointers. There are other heads of Revenue—very large and very important heads of Revenue—which relate necessarily to a condition of things in the year which has past. We used to have, generally speaking, an Income Tax which was based on the average of the three preceding years. It was my right hon. Friend the Member for Epping (Mr. Churchill) who changed that to an Income Tax charged in relation to the profits of the previous year. That certainly has the result that you get greater fluctuations than you would if you had to rely on the average for three years, and it is much more difficult to be precise in your estimate. If you have three years, two of them already ascertained, two out of the three figures are known, and you have only to guess the last one. Perhaps I had better say "estimate" rather than "guess." Therefore the Budget of 1939–40—this is no secret— when it comes, must reflect to a certain extent the conditions of the past year.

The year 1938, although not a year of marked depression certainly was not a year of very great or exceptional prosperity. What one can say already is that the indications are most distinctly indications of recovery. There is a whole series of indications which can be noted now which show that we are likely to pick up as compared with the recent past. If that goes on—it is a prophecy and no one can say—it is extremely likely that the Budget of 1940–41 will reflect more prosperous conditions than we can expect in the Budget which is approaching. I make this observation merely because it is perhaps of some interest to the House to see how this kind of conundrum has to be faced, and the sort of conditions which he who is responsible for the Budget has to consider. It was in those circumstances that I thought it perfectly right to make the provision in the pro portions I have stated. These proportion are those which will be found in the Defence Estimates. If the House or the Committee did not approve of them, they would have to reject the Estimates. I have tried to serve the House as far as I can in anticipation.

If that has been clearly followed and stated, I really think that it is justification for this Bill. However much you criticise it, it is quite plain that we must have further borrowing powers. The borrowing powers existing to-day have been used as to about £200,000,000. No one could face dealing with the prospect in front of him except by getting in creased borrowing powers. As the right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) pointed out very forcibly in his speech the other night, we shall indeed be fortunate if we can go to the end of the quinquennium without any further powers for borrowing than are now being asked.

I will not anticipate the terms of the Amendment and discuss it before it is moved. I have no doubt that during to day's Debate hon. Members will be taking part both on behalf of the Government and from the benches opposite, but I would just make this observation. The Amendment concludes with a reference to the charge, which was prominent in our recent discussions, that in some cases, as it is alleged, an undue rate of profit has been made—no doubt the meaning is, although the Amendment does not say so —on the Defence contracts. I do not feel, representing the Treasury here, that I ought to let that pass without a word, and I wish to say with deep sincerity and feeling—though I do not think that there should be any need to say it—that the Treasury would be deeply concerned to secure in every practicable way that good value is obtained for this vast outlay which we are incurring. It is plainly part of my duty, in my office, to the public to make that declaration and to stand by it. If there be, therefore, unjustified and excessive profits in any Defence contracts, it is a matter of special importance for those of us who have to plan how to meet this large financial burden; and I say more, that it is a matter which most seriously touches the responsibility of every Member in this House. After all, that is almost the first and fore most thing we are here for. Therefore, I certainly say that these matters justify and require candid and fair examination.

I have done my best to examine the methods that are being followed, naturally only in general terms. It would be quite impossible for the Chancellor of the Exchequer to examine the individual con tracts—there are hundreds and thousands of them—but I have very closely examined the general system and methods, and officials of the Treasury have done so with me. I think that the Financial Secretary to the Treasury was justified in saying, at the end of the first day's debate in Committee of Ways and Means, that, on the general question whether there really was a carefully worked out system, there was such a system and so far as we were able to see, it was a good one. I do not say that it could not be improved. Everything in this world could be improved. I do not say that if there are gaps it would not be very important to fill those gaps, but I think it would be a great pity to let it go forward from here that we really believe that these vast sums are swallowed up to some great extent by profiteering. I really do not think that that is true. There is no doubt that some specific instances—and the right hon. Gentleman the Member for Hillsborough (Mr. Alexander) has been very prominent in bringing them up—may be the subject of very pungent examination.

Those particular cases, as far as I can see, chiefly arise in the Department of the Air Ministry, and my right hon. Friend the Secretary of State is proposing to intervene in the course of this Debate in good time and to make a statement on the subject. I think that the House will feel that that is the right course for my right hon. Friend to take, and it will show the House that we draw a sharp distinction between these two things. One is the general system by which defence con tracts are supervised and checked, upon which the Public Accounts Committee and the Estimates Committee have them selves made observations; and the other thing, which is just as important, is whether there are particular cases which require an examination. I hope the House will forgive me if I do not keep them long to-day.

Mr. A. V. Alexander

If the Chancellor of the Exchequer is leaving that point perhaps I may ask him this question. Will he tell the House whether he is going to consider the proposals put forward by the hon. Member for Mossley (Mr. Hopkinson), and seconded by my self, because of the great sacrifice that the country is called upon to make in its present need, that the Government should take either all the profit over a certain percentage made by armament firms, or take possession temporarily of the equity shares?

Sir J. Simon

I think that that is one of the matters with which the Secretary of State is to deal, and if the House will forgive me, I shall be glad if he might be allowed to do it. The terms of the Amendment, though, of course, they are critical in some respects, do show that the Opposition does not really challenge the necessity of the provisions in this Bill. I acknowledge that fact gratefully. I believe it to be a great addition to the strength of this country that on that matter at any rate we should be of one mind. It is a terrible burden, but it is a burden, as I said in the Committee of Ways and Means, which, I believe, can be borne; but it makes an enormous difference if it is borne by a united people. The Opposition Amendment contains some criticisms, and it is quite right that it should. I suppose that we may have a repetition of the modest claim that, if only the management of affairs in this country had been in their cool, firm hands for the last seven years, none of this burden would have fallen upon us. [Interruption.] I think I rightly described it as a modest claim. I agree, as far as one can speculate and judge their declarations, that the course of events would very likely have been somewhat different. I am not at all convinced that we should not have had to incur burdens of a different character even more onerous. The policy that we have followed has kept this country at peace. The country puts its confidence in the Prime Minister because it rightly regards him as steadfastly pursuing a policy aimed at preserving peace. Therefore, heavy as the bur dens are which we have to carry, and easy as it is for hon. Members opposite to explain that if they had been in charge these things would not have happened, I think the country as a whole in facing this burden will recognise that it is necessary and justified as a means of building up the strength of Britain, which is itself a vital contribution to peace and, as we believe, an improvement of the prospects of international agreement.

4.31 p.m.

Mr. Pethick-Lawrence

Before I begin the critical part of my speech, perhaps the right hon. Gentleman will allow me to express my sympathy with him with regard to the throat trouble from which he is suffering. I and several of my friends have suffered in a similar way, and I can only hope that the right hon. Gentleman's present symptoms will not result in the serious complications that mine did.

I should like first to make some comment on what the right hon. Gentleman said at the end of his speech. When I addressed the House a week ago I gave the reasons why we on these benches consider that His Majesty's Government and their immediate predecessors during the last seven years must share a heavy burden of responsibility for the existing international situation. From that inter national situation this loan expenditure naturally arises. I do not wish to-day to repeat the arguments I put forward on that occasion; but I adhere to them, with out the alteration of a comma.

I will turn now to the main part of the right hon. Gentleman's speech, which was directed towards relieving himself of the charge that he was anticipating his Budget. I would not say that he has specifically anticipated his Budget either in anything he said last week or in what he has said to-day. He was, however, to use his own word, giving us a pointer towards it. It is true that the reduction of the Defence Estimates by the amount that he proposes to borrow, in one sense only places us in the same position that we should have been in an ordinary year, when the Estimates establish, by and large, the expenditure side of the Budget. But in ordinary years the Civil Estimates and those of the Army, the Navy and the Air Force are determined by what is necessary, and the Chancellor of the Exchequer has to provide the revenue required to meet them. On the present occasion, when we add together the different Estimates we get a sum far in excess of what the Chancellor of the Exchequer proposes to meet out of tax revenue, and when he tells us that he proposes, as a result of borrowing, to find out of revenue £44,000,000 less than in the current year, that is certainly a very considerable pointer and goes a long way towards being an anticipation of his Budget statement. Of course he is perfectly entitled to do so if it pleases him.

As to the Budgetary position, as disclosed, I have little to add to what I and my hon. Friends said last week except this, that while it is right for the Government not to take any action that will accentuate the under-spending which has been responsible for the presence of the large numbers of unemployed and for the large amount of idle capital, it is also true that this is not the time to encourage the richer sections of the community in luxurious expenditure upon themselves out of their private incomes. That fact has to be borne in mind as well the confidence and pleasure which the right hon. Gentleman's statement last week gave to the financial section of the community. However, a more appropriate time to deal with this subject will be on the Budget, two months hence. Therefore, although it would be in order to-day, I propose to postpone any further remarks on that aspect of the matter and to turn to the strict business of the Bill now before us.

Apart from the inclusion of A.R.P., the Bill is concerned with an increase of the borrowing power for defence purposes from £400,000,000 to £800,000,000. Why has the right hon. Gentleman fixed upon this increase of £400,000,000? When the loan policy embracing the £400,000,000 was originally propounded, the Prime Minister said that he had gone into the figures, and seeing that in the course of the next five years we should have to spend £1,500,000,000 on defence, he could not see the country meeting the whole of that expenditure out of tax revenue. Therefore the Government had come to the conclusion that there would have to be borrowing powers for an aggregate sum of £400,000,000. He introduced a Bill for that amount, and at the time of the Budget he apologised for taking a full £80,000,000 of the £400,000,000 in the first year, and went on to say that partly because of the National Defence Contribution and partly because of the fact that within the quinquennium the expense would rise to a peak and then de cline he was well justified in assuming that over the five years the £400,000,000 would suffice. The right hon. Gentle man also said then that when the five years had gone by we should be meeting the whole current expenditure, as well as the interest on and the repayment of the loan. We on these benches were never impressed by that statement. It was to us just conjuror's patter, but it satisfied the majority of the House for the time being.

Now all that has been given the go-by, as I showed in my speech a week ago. When we have expended the loan of £350,000,000 which the Chancellor of the Exchequer is suggesting, there will be only £250,000,000 left, and unless there is some immediate miraculous change in the international situation, of which there seems no prospect, the £250,000,000 will certainly not suffice for the two remaining years of the quinquennium and is not likely to suffice even for 1940-41. There fore, I pointed out that the Chancellor of the Exchequer next spring would have to come and ask for more. When the Prime Minister spoke on the following day—I was not present, because of my duties upstairs but I have read in the Official Report what he said—he stated that very likely I might be right. If that be so, the £400,000,000 extra that we are asked to authorise to-day is not the right sum. When I was a boy and birds were small and people's appetites were large, a goose was described as a poor sort of bird because it was too much for one and not enough for two. That is exactly what this sum of £400,000,000 is. It is too much for this year and not enough for two years.

I cannot see why the right hon. Gentle man fixed upon that amount. I thought at one time that the Prime Minister might be considering postponing the General Election from the autmun to some period next year and that this sum was enough to carry us over to that day, but I abandoned that assumption because I came to the conclusion that whoever was bringing in the Budget next year would already have had to deal with this question. Therefore, I am driven to the conclusion that this is just part of the failure of the Government to look ahead and to make any suitable plan. If the Chancellor of the Exchequer was thinking of this year only there was no reason why he should have gone further than the amount required, an additional £150,000,000; but if he was thinking of future years he should have fixed the amount high enough to carry us on for two years at least.

The Prime Minister also made another interesting statement which really supported what I said. He said that looking beyond the five years he was beginning to wonder whether at the end of the five years the country would be able to find out of taxation revenue the amount required for the upkeep of the arms, the payment of the interest on the loan, and the repayment of capital. We on these benches had been wondering that from the beginning, but we were told that we had naughty, incredulous, suspicious minds and that if we were good children we should have accepted the carefully-arranged figures which the Government had laid before us. I am glad the Prime Minister has been turning his mind to that question. Perhaps a little later, when he has turned it over a little more, he will be able to give us some idea what the policy of the Government is likely to be in regard to the future. A previous occupant of his office, Mr. Bonar Law, who was greatly respected in this House, took the view that the way of dealing with such expenditure was by a capital levy. I do not know whether that is the view of the Prime Minister; if it is not we are entitled as time goes on to be given some idea what the right hon. Gentleman and the Chancellor of the Exchequer intend to do.

The Prime Minister made a further remark which I have been puzzled to interpret. He said: Does it not show up the terrible self-delusion of those who argue that, if we now spend so freely, it cannot hurt us to add a few tens of millions to our annual expenditure, even if those tens of millions produce no return whatever."—[OFFICIAL REPORT,21st February, 1930; col. 233, Vol. 344.] I am concerned to know to what class of people he was referring. Perhaps he was referring to hon. Members on his own side who have made suggestions which would require very large sums of money. I can hardly believe that the Prime Minister was referring to hon. Members on this side who have urged an expansion of the social services. I can hardly imagine he would suggest that any money spent on our social services would produce no return whatever. Take the question of education, old age pensions, and unemployment maintenance. Obviously, the return in prosperity to the country is exceedingly great. Public expenditure must improve the fibre of the nation and it must help agriculture. I am sure that contention would be supported by many eminent men like Sir John Orr and Lord Horder, and by the Minister of Health, who in a letter recently spoke of the marriage of health and agriculture. Sir John Orr would express it as the marriage of nutrition and agriculture. Therefore, I am still in the dark as to whom the Prime Minister had in mind when he made that remark.

Before I deal with the Prime Minister's final point I want to conclude the strictly financial and economic aspects of this question. There have been some very interesting articles in the "Times" recently dealing with the question of borrowing, in which it was pointed out that there are roughly—and I think this will be borne out by economists—something like £500,000,000 of surplus money available for investment each year. The "Times" suggested that the Chancellor of the Exchequer's proposal is to take £350,000,000 out of that £500,000,000 for the purposes of expenditure on defence. I am not sure that that is the whole picture. In the first place, we have had lately an estimate of our foreign international relations, and we have been spending our foreign capital to the tune of £55,000,000 in each of the last two years. Of course we still have large reserves of foreign capital, and, whether this is desirable or not, part of this £350,000,000 will in fact be raised by reducing our foreign wealth. Further, there is the question of how much of this new loan will be found by short-term borrowing, by Treasury Bills. Although you cannot juggle with money indefinitely it may be that if part of these requirements are met by the issue of Treasury Bills it will not directly come out of the investable total of the country's wealth during the year.

The questions which we have to put to ourselves are three. First, will the balance which will be left after the Chancellor of the Exchequer has taken for the purposes of a loan £350,000,000 or a little less out of the investable surplus of the country be enough to promote the necessary development of the ordinary production of the country? The second question is this. When money is invested in ordinary business enterprises it brings a return and, therefore, the interest that has to be paid on the loan is paid out of the increased income which the country receives in consequence of the loan having been made. When money is invested in a defence loan there is no income from it accruing to the nation and, therefore, the people will become more and more indebted to a class of bondholders who will hold a lien on the future wealth of the country. That is a very serious thing which the Government will have to face.

The third question is this. Has the Government any plan to bring back into active life and production the idle men and women and idle capital in the country? That is a most serious matter. We can bear additional burdens, we can face the additional problems of the future, if the productivity of the country is pushed to the full and all existing men and machinery and capital are brought into play. If the Government make no plans to bring this about, if they leave unemployment, in spite of the tremendous armament boom, not only stationary but actually increasing, then they are throwing upon posterity not merely an additional monetary debt but creating an impoverished country which will have even greater difficulty in finding the debt interest.

I propose now to leave the question of pure finance and come to my Amendment, but before I deal with its actual text I wish to refer to a subject on which many of my colleagues and myself feel deeply. We should have liked to have mentioned it in the Amendment, but it was not appropriate. It is our keen desire to re-establish world opinion and world co-operation. In spite of what some hon. Members opposite rather glibly say, we are the party of appeasement.

We were out for appeasement before the Prime Minister and hon. Members behind him stood for appeasement at all. We were out for appeasement when it was real appeasement. We were against the vindictive terms of the peace treaties. We were out for doing justly by our neighbours even while they were weak. Our criticism of the attempt at appeasement by the Prime Minister is not that it is appeasement but that it comes too late and at a time when it can be more accurately described by a totally different word. But at the earliest possible moment we believe that the nations of the world ought to be brought together for a world conference. In regard to that I want to say this. On a matter of ideology, a very favourite word, I believe, of the Prime Minister——

The Prime Minister (Mr. Chamberlain)

I never used the word.

Mr. Pethick-Lawrence

I am sorry, but it has been used by hon. Members opposite. The position is this. We in this country are not concerned with the particular form of government in another country so far as it merely affects its own internal affairs. What we are concerned with is the form of government in any other country so far as it reflects itself in foreign affairs. That is why we must make the most of the friendship of countries which are prepared to act in a civilised co-operative spirit in regard to other nations, and that is why we on these benches deplore the unwisdom of the attitude of hon. Members behind the Government to the Union of Soviet Socialist Republics, typified in a remark which I know stands for the opinion of many hon. Members of the party opposite, but which I hope is not reflected on the Government benches.

The Prime Minister

What was the remark?

Mr. Pethick-Lawrence

It was to the effect that Russia was more dangerous as a friend than as an enemy. I do not know whether I have quoted it textually but that was the effect of it. I did not say that it was the attitude of the Prime Minister himself.

The Prime Minister indicated dissent.

Mr. Pethick-Lawrence

I am glad the right hon. Gentleman shakes his head, but the Government have been cold-shouldering that country. I am glad that they are now sending a trade delegation under the direction of the Secretary for the Department of Overseas Trade to Russia, and I hope it will inaugurate better relations with that country. Friendship of countries which are prepared to act honourably and in a co-operative spirit cannot be despised and ought to be encouraged, particularly at a time like the present. Then there is the great country across the Atlantic. Let me quote a few words of President Roosevelt's in a recent speech: We stand by our historic offer to take counsel with all other nations of the world to the end that aggression may be terminated, the race in armaments cease and commerce be restored. We reciprocate those words, and press upon the Government the importance of keeping in the closest touch with the United States. As soon as there is any ground for believing that there would be a fruitful result we urge the Government to summon a world conference in which the nations of the world can put their cards on the table, reduce their armaments and start what should really be the work of humanity, to build up a common life instead of this ridiculous and monstrous division and the building of instruments of destruction and war.

Three points are mentioned in the Amendment. It suggests that before the Bill be read a Second time there should be more effective measures for the co-ordination of the services, the organisation of supplies and the elimination of excessive private profits. I do not propose to deal in any great detail with any one of these subjects because that will be largely the purpose of the speeches which will follow from this side of the House. I will content myself with a short reference to each.

With regard to the co-ordination of the services, we had a little while ago an eminent member of the legal profession as the co-ordinator of defence. Without any disparagement to the personal qualities of the right hon. Gentleman, we never thought him particularly suitable for the post. We never thought that a lawyer was the right kind of person to take on the work. It does not require semi-judicial qualities. It requires active and vigorous intervention, and a knowledge of the work of the different services. Our criticism was increased by the fact that the right hon. Gentleman had no staff. The qualities which he possesses might have served him if he had had an effective Ministry to go into the details and bring before him the actual matters for decision. With the minute staff which his Department possessed and with the inadequate knowledge which he necessarily brought to his task, we thought that he was unable—and I think events proved us right—to be successful in achieving the purpose for which he was appointed. The present occupant of the position, Lord Chatfield, is a man of very considerable experience about whom I shall not say anything, but his right hon. Friend the Chancellor of the Duchy of Lancaster has the reputation of being a man of very great ability. In fact, he has been tipped for a very high post in the future. All that we can say about him is that so far as we have experienced his ability in replying to speeches on two very important Debates we have not seen much sign of it. If it is there, we hope when he replies on another occasion that he will give us a little less irritation and a little more illumination.

With regard to the question of supply, our criticism about the absence of the Ministry is quite as important as our criticism of the absence of the Minister. It is apparent that there is a need for a body of civil servants acting with a Minister, an executive and administrative officer, who will have in review all sorts of questions that are not, in our opinion, being properly thought out at the present time. I will give only one illustration. In the Debate last week two right hon. Members from the Government side raised the question of a possible overseas army from this country. I am not going to take any view to-day as to whether in time of war an expeditionary force should be sent from this country, but the points which those hon. Members brought forward certainly need very careful attention. Assuming that the question has been decided by the Government, the actual detail matters must largely remain to be settled when the time arises; but I would ask, "Are the necessary implements ready? Can we be sure that they will be ready when the time comes?" I very much doubt it. From what I have seen and have heard about what was ready in this respect, I should be very surprised if the Government have shown any planning capacity or ability for looking ahead towards the proper provision for such an expeditionary force.

There is another matter, which is rather more for the Minister who is concerned with air-raid precautions, and that is the question of the deep trench. So far as I can see, the Government have set their minds against the deep trench, but the public of this country are determined to have the deep trench, in spite of the difficulties mentioned by the Prime Minister. There are difficulties and complications in all these things, but I believe that the Government will in the end have to meet public opinion and give to the public the deep trenches that they require. I spoke just now about the marriage of health and agriculture; here is a case of the necessity for the marriage of defence and a cure for unemployment. If these deep trenches are to be built, the persons who should build them are obviously the miners. Large numbers of miners are out of work and this is just the kind of thing that they understand. Here is an opportunity for the Government to kill two birds with one stone; to relieve a very large amount of unemployment among the miners and to meet the wishes of the public by building deep trenches throughout the country.

The third point is with regard to the elimination of excessive profits. There is a certain amount of confusion of ideas on this question. The point being made by the Opposition is that firms who are doing Government work are obtaining immense sums of money as profit. The Government ask us to look at it not from that angle but from the angle of the individual item of manufacture. The Government say that on this aeroplane, or tool or gun only so much percentage of profit is being made, and they say that they have the figures to prove what they say. Nevertheless, a number of persons in different parts of the House think, even on the strict question of profits on one particular item, that the matter is not as satisfactory as the Government believe. My hon. Friend the Member for Ipswich (Mr. Stokes) takes this view. He is not a theoretician, but has a direct personal experience of these matters. He takes the view that considerably more profit per item is being made than the Government are aware of.

Be that as it may, it does not affect the other question of whether firms, through their Government contracts and in view of the large amount of the orders which they are executing and of the particular circumstances in which they are able to put out their work, are making profits which may not seem excessive to some people but seem to be wrong to the ordinary public of this country. We shall not get the unity which we desire and the volunteering for service that many of us think may be necessary, so long as public opinion believes that vast profits are being made out of the national need by the firms who contract for Government service.

The Opposition have known all along that under private enterprise this state of things will arise. We have taken the view from the beginning that there would be no adequate solution of the armaments problem except by creating by direct labour under the Government itself the armaments that were required, and we still take that view. We have never altered our opinion that in the long run that is the only satisfactory method. We still believe that in war-time something very much like that will have to arrive. If the Government have turned that proposal down, it is for them to solve the problem. You may reduce the profits on one particular item to a comparatively small figure but there is bound nevertheless to be an immense sum made by firms in the manufacture of large numbers of items. A feeling has been aroused in the public mind, and although it may be neglected it will have considerable results upon the ordinary men and women of this country.

I think the Prime Minister recognises that and that he showed it in the original form of the National Defence Contribution. He realised that great profits would be made in this way and he attempted to claw back, as the right hon. Gentleman the Member for Epping (Mr. Churchill) once said, out of the profits that are reaped, some largish amount for the revenues of the country. The Prime Minister will pardon my putting it bluntly by saying that his proposals were so crudely framed and so widely criticised in all sections of the House that he had to withdraw them and that the only thing that could be said afterwards about it was: If I was so soon to be done for, Whatever was I begun for? The new version of N.D.C., chough more administratively workable, has not achieved the purpose which the Prime Minister had in the beginning. The Government have to devise some method, not of clawing back the profits after they are made, but of working successfully under the semi-war conditions which obtain at the present time in the great armaments industry without allowing these enormous sums to be created and to go into private profit.

We all know what will be the fate of our Amendment. The Government have their serried ranks behind them and, when the time comes to vote, no doubt hon. Members opposite will go into the Lobby of the Government and will reject the Amendment by a large majority. But if the vote were secret and if the supporters of the Government realised that to vote for the Amendment would be to induce the Government to get a move on, then, in spite of the forensic ability of the Chancellor of the Exchequer, the assurance of the Prime Minister, the blandishments of the Patronage Secretary, the frowns of the Minister of War and the smiles of his colleague who, in the Government "Tempest" plays the part of Ariel, this Amendment would be carried by an overwhelming majority.

I beg to move, to leave out from the word "That," to the end of the Question, and to add instead thereof: whilst recognising the regrettable necessity for an unprecedented defence programme, this House is of opinion that in the interests of efficiency and public economy the Bill ought to be preceded by more effective measures for the co-ordination of the services, the organisation of supply, and the elimination of excessive private profits.

5.13 p.m.

Sir Archibald Sinclair

I would begin my speech by associating myself with the sentiments expressed by the right hon. Gentleman who has just spoken, and with the horror and disgust which he feels at the necessity for this tremendous effort in building up instruments of destruction. Those sentiments received eloquent expression in the Debate last week from the hon. Member for Burslem (Mr. Mac-Laren) and from the Prime Minister, and while we may differ as to the proper policy which ought to be followed, and while we on these benches believe that the necessity for this grave effort could have been avoided by a wiser policy, I am sure that there is no difference among Members in all parts of the House in deploring the necessity with which we are now confronted. Nevertheless, we all agree that in the pass to which our affairs have come, this expenditure is unavoidable. There is, moreover, general agreement that provision for raising a very substantial part of it by loan, is expedient. At the same time, my hon. Friends and I do not regret our opposition to the Defence Loans Bill when it was introduced two years ago. I believe that opposition has been justified by events. It would have been far better if a larger proportion of the money had been raised by taxation at that time; we should have made a better start in finding the money required for this programme if we had begun by raising more money from taxation two years ago, when the country was in a more prosperous position than it is now. However, facing the situation as it is now, this provision for increased borrowing is necessary.

I do not criticise the Chancellor of the Exchequer on the ground—a ground on which he seemed himself to feel that he was open to a certain amount of criticism —that in his speech last week he anticipated the Budget; but I think that his statements are open to other criticisms. I was not very much impressed this afternoon by the reasons which the right hon. Gentleman gave for the proportion in which the money required for this year's expenditure is to be taken out of Revenue and loan. The right hon. Gentleman indulged in a good deal of wishful thinking about the prospects for the Budget for 1940-41, but I do not think those prospects are so certain as to justify the right hon. Gentleman in his decision to reduce the amount of money that is to be found out of Revenue for Defence in the coming year as compared with the current year by a sum of no less than £44,000,000. Indeed, my only criticism —and it is one that I do not wish to carry too far to-day, for we shall have other and better opportunities of making it—is that the Chancellor does intend to raise £44,000,000 less out of Revenue for defence in the coming year than in the current year. Does not that represent, roughly at any rate, the amount by which he expects the Civil Estimates to increase, and therefore, does it not amount to this, that the House is being asked to relieve the Revenue by authorising the Government to borrow the £44,000,000 which is to be spent on defence during the current year, in addition to the other provision for defence which is to be made out of loan, in order to put that revenue at the Chancellor's disposal in balancing his ordinary Budget? Therefore, while I agree that any additional sums required for defence in the coming year ought to be borrowed, the reduction of the sum to be spent on defence out of Revenue seems to me to be open to serious criticism.

Hon. Members on these benches are greatly concerned, as is the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence), about the question of profiteering. If we are to vote these colossal sums, surely it is our duty, as indeed this afternoon the Chancellor of the Exchequer agreed it is our duty, to ensure that the taxpayer receives full value for his money, and that the evil of profiteering is eradicated. It was for that reason, among others, that five or six years ago we on these benches pressed so strongly for an inquiry into the private trade in and manufacture of armaments; and it was largely as a result of an Amendment which we moved that the Government finally consented to the appointment of the Royal Commission. When the Royal Commission reported, we urged very strongly—and on two occasions during the present Parliament we have moved Amendments to the Address urging very strongly—that its recommendations should be carried out, especially in regard to the institution of a Ministry of Supply. The case for a Ministry of Supply does not rest only upon the grounds that it would enable profiteering to be suppressed, but that is certainly one very important part of the case for such a Ministry; and the Royal Commission gave very cogent reasons for believing that the only means of eliminating profiteering was by the institution of a Ministry of Supply.

Last week when we discussed the question of profiteering, criticism was made not only by hon. Members of the party above the Gangway and my own party, but by hon. Members opposite. Those who criticise find great difficulty in bringing their criticism home to the Government. If we criticise in general terms, we are asked to produce specific instances. Of course, that is not an easy thing to do. We have plenty of information, but a great deal of it was given to us under seal of confidence, and we are told that if we give away the name of the firm, very likely it will not receive contracts in future. It is very difficult indeed for us to obtain the necessary specific instances. But when we do produce specific instances and argue them out, the Chancellor of the Duchy of Lancaster, who represents in this House the Minister for the Co-ordination of Defence, and who is Chairman of the Supply Officers Committee, says that the matter is one which we must discuss with the Minister in charge of the Department, and I am very grateful, as I am sure the whole House is, to the Secretary of State for Air for being present and for being prepared to answer some of the very important questions that were raised by the right hon. Gentleman the Member for Hillsborough (Mr. Alexander) and other hon. and right hon. Gentlemen on the last occasion when we discussed this subject. Another answer that was given in the last Debate was that the criticisms we had made would take too long to answer in Debate. The right hon. Gentleman the Member for Hillsborough was told that he should write to the Minister and that then he would get a full reply. But these matters ought to be thrashed out in public, and if that cannot be done on the Floor of the House, there ought to be an inquiry into them in order that they may be thrashed out. Then, if we seem to be making rather good progress, as sometimes we do, with a particular instance, we are told that it is not fair to generalise from a particular instance. If we argue in general terms, we are told to produce specific instances; but if we produce specific instances, we are told that it is not fair to generalise from a particular instance.

On the last occasion when these matters were raised, the right hon. Gentleman the Chancellor of the Duchy of Lancaster taunted us by saying that he did not possess those compulsory powers which everyone wants to apply to someone else and not to himself. I do not think that is a fair comment on our criticism. Hon. Members on this side of the House, and I believe the great majority of hon. Members opposite, want those powers which arc necessary to eradicate profiteering to be applied to the firms which are making armaments and profiteering out of the national need. If it be the case, as we are told it is, that the Machine Tools Association refuse to the Government information which is necessary in order to prevent profiteering in that industry, then that is an unanswerable argument for setting up a Ministry of Supply. It is very far from being the only argument, but it is an unanswerable argument for setting up either a Ministry of Supply or some other Government organ which will compel the disclosures to be made. While answers of the sort to which I have referred have been given, the Financial Secretary to the Treasury had to admit last week: I certainly do not claim that there may not be individual contracts or even whole groups of contracts, where profits have been excessive."—[OFFICIAL REPORT,20th February, 1939; col. 165, Vol. 344.] This afternoon, the Chancellor of the Exchequer said that specific instances may be made the subject of pungent examination. That is our case, and that is what the country will not stand. Either there must be a Ministry of Supply, for which we have contended, on these and other grounds, or there ought to be an inquiry into the Government's system of financial control. I have referred to some of the other grounds on which a Ministry of Supply is demanded. I do not want to go into this subject at very great length; I made a speech on it not many months ago in the House, and I do not want to go over the same ground again; but it seems to me that it is vitally necessary to have such a Ministry to co-ordinate the claims of the various Departments and to allocate priorities, especially at a time when priorities which ought to be allotted to the Departments must necessarily change with the changing situation.

On the last occasion on which the subject of profiteering was debated, there was a discussion about the method of costing —whether there should be costing at the conclusion of a contract, or whether there should be costing in advance. It seems to a great many of us that what is required is a more thorough system of control and inspection all along the line of supply. Take, for instance, a contract for rifle barrels. It may well be that the profit on the conversion of the steel tubes into rifle barrels may be quite reasonable, but perhaps excessive profits may have been made probably by the same interests in converting the ingots into tubes, or the pig iron into ingots, or the scrap into pig iron. No system of control of profits will be watertight unless there is control all along the line of supply. Therefore, I say that inquiry is necessary, and I believe that a Ministry of Supply will prove to be the only effective safeguard of the public interest.

I pass to another subject which is raised in the Amendment. That is the question of the co-ordination of defence. Let me saw, in the first place, that so long as the Minister for the Co-ordination of Defence is also responsible for Supply, he ought to be in this House. It is only here that we can subject him to the necessary cross-examination and control, and defend the interests of the taxpayers and of the people in general whom we represent in this House. As long as he is a Minister for Supply he ought not, in my submission, to be in the House of Lords. I think the Prime Minister, probably, felt the strength of the objection to such a Minister being in the House of Lords, and, therefore, the Minister for the Co-ordination of Defence has been given a representative in this House in the person of the Chancellor of the Duchy of Lancaster. Unlike the right hon. Gentleman the Member for East Edinburgh, I have never doubted the ability of the Chancellor of the Duchy of Lancaster. Possibly the rather acid comments of the right hon. Gentleman about the Chancellor of the Duchy may have been inspired by what must have been, I feel sure, a misprint in the Official Report which makes it appear that the Chancellor of the Duchy in the last Debate called the right hon. Gentleman "an intransigent phantom." Of that I feel sure we must acquit the right hon. Gentleman.

The Chancellor of the Duchy of Lancaster (Mr. W. S. Morrison)

I am obliged to the right hon. Gentleman for calling attention to it. What I said, of course, was "a transient phantom."

Sir A. Sinclair

Of course, I guessed it. But nobody supposes that the Chancellor of the Duchy will remain long in his present position, and it seems to me that we ought to have something more than a "transient phantom" in the very important position which the right hon. Gentleman is now occupying as Chairman of the Supply Officers Committee and as the representative of the Minister for the Co-ordination of Defence in this House. The right hon. Gentleman has already held high offices of State, and he will certainly hold some such office in the very near future. Nobody supposes for a moment that he will long hold a position in which it is his duty to answer questions for a Ministerial chief in another place and I cannot believe that such an obvious makeshift arrangement in such a vital field of policy as the Co-ordination of Defence is in the interest of the country or of this House.

Meantime the departmental battle for priority goes on merrily and the Air Ministry is at last catching up on the others. We have long argued that the Air Ministry should have greater priority. Indeed, so great was the feeling that the Air Ministry was not getting satisfactory treatment that we had those Debates last summer to which the right hon. Gentleman the Secretary of State for Air owes the high office which he now holds. As a matter of fact, we on these benches never asked for the head of the right hon. Gentleman's predecessor on a charger, and we were surprised at the gift when it was offered to us. What we did want was greater energy and resources devoted to the work of that Ministry, and we are glad, therefore, to see that the Air Ministry is catching up in expenditure as compared with the other Services.

But is it catching up as compared with "the strongest air force within striking distance of our shores." That is what we want to know. The right hon. Gentleman refuses to answer that question. He tells us that the rate of production has been doubled, compared with what it was, but he does not tell us what it was, and, therefore, the comparison is useless. It is a comparison with a datum line of which we are ignorant. But I shall go on asking that question unless and until I get a satisfactory answer. I know I shall never get an unsatisfactory answer, because, of course, if the answer were unsatisfactory the Government would not disclose it, but I hope that, possibly, one day I shall get a satisfactory answer. I ask again: Is the rate of production of aircraft in this country catching up with that of the strongest air force within striking distance of our shores? That is the only question which matters when we are considering air affairs.

There is another factor in the strategic equation which is of increasing importance, and that is the Army. Some very weighty speeches were delivered last week by the right hon. Gentleman the Member for Epping (Mr. Churchill), the right hon. Gentleman the Member for Spark-brook (Mr. Amery) and the hon. Member for Altrincham (Sir E. Grigg) on this subject. The right hon. Gentleman the Member for Epping said truly that there was a great deal to be said, for having neither commitments nor arrangements, that is to say, staff arrangements with another country. He pointed out that considerable criticism could be made of the position we were in before the War when we had arrangements but no commitments; but there was nothing at all to be said for what seems to be the present position of having commitments without arrangements.

For my part, I have in the past argued against commitments for sending an army on to the Continent of Europe if the dread eventuality of war should take place. I believe that the elements in which we are mainly and most directly threatened are the sea and the air, and, therefore, our contribution in any struggle must be made primarily in those elements and next in the munition factories, and the anti-aircraft defences and all the other great calls which will be made upon the man-power and the economic and financial resources of the nation. I argued in that sense when we had a similar Debate a year ago, but two things have happened since which greatly affect the situation. First, there were the events of last summer culminating in the Munich Conference and resulting in the absorption of Austria and the disappearance of Czecho-Slovakia as a military factor in Europe, the actual release of 35 German divisions and a probable total increase in the forces available to Germany for use on other fronts of not less than 45 to 50 divisions. That is the first formidable factor. The second, of course, is the victory of General Franco in Spain with Italian and German support, and the probability that France will have three frontiers to defend, including one from which her newly-established munition factories in the South-West will be open to attack.

In short, France, a nation of 40,000,000, is now faced by the formidable combination of 120,000,000 Germans and Italians with the doubtful neutrality of Spain on her South-West Front. In those circumstances it is clear that the commitment which the Government have entered into with France and which they have avowed, which the Chancellor of the Duchy avowed afresh last week, that all the forces of this country would be at the disposal of France in the event of an attack upon France or upon French temtory—that that commitment is a very serious one, and that it might involve the despatch of an army to the Continent of Europe in the event of war. In the crisis of September last those forces in France which were opposed to taking a strong line in support of Czechoslovakia made much play with the slogan, "It is only French blood that will flow": Cest le sang Francais qui coulera seul. That would be much more true now that the nations which were then faithful to the Covenant of the League have been scattered, now that they have been frightened into acquiescence in German policy, now that, as in the case of Czecho-Slovakia, they have been disarmed and now that Russia has been alienated. It is true that the Government are at last taking some steps to repair their terrible blunder in the treatment of Russia, but Russia has been largely alienated, and the last meeting of the Assembly of the League was the first that M. Litvinoff did not attend for many years. But the situation in which France now finds herself could be much more truthfully described by the phrase which I have quoted than the situation of last autumn. Therefore, it is apparent that the necessity of sending an army to France is one which we cannot refuse to contemplate.

I would ask, then, what is going on now in these conversations—I am afraid rather intermittent conversations—which the Chancellor of the Duchy tells us are proceeding between the French and British staffs? Is it unfair to describe them as intermittent? Are they frequent and close? Upon what basis is it agreed that all the forces, military, naval and air, of France will be, as the French Foreign Minister said, at the disposal of Britain if Britain is attacked, and that all the forces of Britain will be at the disposal of France if she is attacked or her territories are attacked? Before the War we were told that an Expeditionary Force of six divisions would be available in the event of war. The House and the country knew it; it was no secret. Has any comparable provision been made by the Government now for helping France in the event of war? I repeat the question which the right hon. Gentleman the Member for East Edinburgh has asked. Is the equipment ready for a force, and, if so, for a force of what size? Is the equipment being made ready in case we have to send such a force to the Continent?

In conclusion, let me say this. The Chancellor of the Exchequer, in his speech on the Financial Resolution, said that he was quite sure that every hon. Member who had read the White Paper must feel a sense of satisfaction at the progress which the preparations for defence were making. The Government give us small proof of that. I was reminded of the speech which the Prime Minister delivered in this same Debate, on 7th March a year ago, when he used almost exactly the same words as the Chancellor of the Exchequer used last week. He said: A study of the White Paper, —that was, of course, last year's White Paper— and perhaps much more any observation of what is going on in the country to-day, will convince people of the enormous progress that we have made in the building up of our defensive forces. He went on to say: The sight of this enormous, this almost terrifying, power which Britain is building up has a sobering effect, a steadying effect, on the opinion of the world."—[OFFICIAL REPORT,7th March, 1938; cols. 1565-6, Vol. 332.] Yet we know that when the crisis came six months later there were only 100 antiaircraft guns of an old pattern for the defence of London and only four for the defence of Gibraltar.

Mr. Ede

That was four days before Hitler marched into Austria.

Sir A. Sinclair

I ought perhaps to have mentioned, as the hon. Member says, that that speech by the Prime Minister was made four days before Hitler marched into Austria. Then the Prime Minister told us last week that peace could not be imposed by force. If force is no guarantee of peace, why are we, why are France, why are the United States all arming as fast as we can arm? I believe that it would add to the strength of the forces opposed to unlawful aggression if they were gathered together on the moral basis of the Covenant of the League, but the policy of the Government has resulted in the destruction of the League and of the ideal of collective security, which they now despise, at which the Chancellor of the Duchy was scoffing in the Debate last week, but on which the Government got their great majority at the last election.

On looking at the Amendment, I find that we have made the same points, all of us. I do not make any criticism of the Amendment on that ground. There are three very important points that are in the Amendment, and they have all been made by us before in speeches and even in Amendments which we have brought before the House, notably those three points about the co-ordination of defence, the organisation of supplies, and profiteering. I believe them still to be valid, and, therefore, I shall support the Amendment. I rather gather, however, from the wording of the Amendment, that it is not intended to express opposition to the general principle of the Bill, and that there will not be a Division on the Second Reading of the Bill. If there were such a Division, I should vote for the Bill, but I shall certainly vote for the Amendment.

5.49 p.m.

The Secretary of State for Air (Sir Kingsley Wood)

I want to say a few words in reference to one part of the Amendment and to make some observations on the question in reference to the Air Ministry. I wish first to thank the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) for his personal references to me, and also the righthon. Gentleman who has just spoken, and I wish I could in return answer the question which he put, but I am sure that on reflection he will feel that it is not in the national interest to answer it.

I would first observe that, of course, the question of the methods and steps taken by my Department in reference to contracts, particularly for aircraft production, have received constant and active attention in the Department, and the right hon. Gentleman who has just spoken has, I know, in his turn, with his colleagues, given a great measure of attention to the same matter when it has come before the appropriate Committees of the House, the Public Accounts Committee and the Estimates Committee, in recent years. As a matter of fact, I was reading only a day or two ago a very close and patient examination and cross-examination which the right hon. Gentleman devoted to this subject only a short time ago, and I would suggest to anyone who desires to join in public discussions on this matter that they should read the reports of the examination of these matters and the statements of the Departmental officers and those of the Treasury given before the Committees, because they are well worth perusal and consideration. I do not for a moment want to put the position, or the verdict, or conclusion of the Committee too high, but I do not think that it can be denied that much time and attention has been successfully employed in dealing with the problem— and I think that those who have given careful consideration on the Committee to this problem of profits, so far as munitions and aircraft are concerned, would be the first to agree that it is a difficult problem—which called on the one hand, so far as I am concerned at the Air Ministry, for rapid and extensive production of aircraft in a very short period— because that is what we and the nation require—and, on the other hand, we have to see to it that reasonable prices are obtained, fair alike to the State and to the contractors.

It is perfectly true that in criticising profits and the methods and the machinery which we have adopted in relation to fixing them, you can make certain calculations, for instance, on the basis of nominal capital, and try by that means to build up a case of profiteering. But I suggest, and I think my right hon. Friend will agree, that that does not fully apply when you are operating a Service Department as I am, or a Ministry of Supply. In the end, you get back to the real test, and that is whether the method and system which is and has been adopted in the past is on the whole soundly conceived, and whether it is as fair as one can make it to the taxpayer and to the contractor. That is the real test, and in fact I think my right hon. Friend will agree that if there was a Ministry of Supply to-morrow, they would still have to devise and test and attempt to settle these methods. In the end, you have to come down to whether the method which you are putting in operation is doing the work on the whole fairly and reasonably to both the State and the contractor. We know, of course —this is the only piece of evidence that we have, apart from my own statement in the matter—that the Estimates Committee, after hearing the evidence, were of the opinion—I will not put it too high —when they considered the matter, on two occasions I think, that the methods that were being followed were soundly conceived and that they were of opinion, so far as they could form an estimate, that they had been effective, up to that date, in preventing profiteering at the taxpayers' expense. It may be that further evidence will be forthcoming and that the system may require to be amended in some particular respect, but I think it is only fair that that opinion should be on record.

That is the real position, and I think the right hon. Gentleman who spoke this afternoon rightly said that he regarded himself as sitting on that committee in a semi-judicial position, and that is what we want the Members of the Committee to feel. But apart from that verdict, I should like to assure the House, having had some experience since the new procedure has been built up, that I do not say for a moment that it could not perhaps be improved as it goes along, but you have to remember that, so far as this system is concerned, if reasonable prices cannot be obtained, the final resort is that such prices in fact have to be fixed by arbitration. It should, I think, also be understood by Members of the House that there is not only in the first place an examination by skilled officers —and I would like to say, as I see my hon. Friend opposite the Member for Mossley (Mr. Hopkinson), who has given such considerable thought and attention to this matter, that it is not only a case of officers dealing with profits and calculations at the end of the contract, but, as I daresay he will remember, we employ a very large number of technical cost officers who estimate and who are at the works themselves right from the beginning and through the contracts. But even when you have said that there is, of course, also the accumulated and, I may say, accumulating knowledge to-day of the cost and the performance of a particular firm on a previous contract— and many machines., as the House may recollect, are derivations of earlier types, preserving many of their characteristics, and that is an additional help so far as fixing the price is concerned.

Then there is another check, which is the comparison with similar types from other contractors, and, finally, we are able to employ still another safeguard in this connection by a comparison with world prices. I made inquiry to-day, when I was considering this matter and the statement that I was to make in the House, how our prices compared with those in other countries, and this I can say, that there are indications that, now that we are getting fully into our stride, our costs are definitely lower than for corresponding types, say, in America.

Mr. Bellenger

Does that apply to the Bren machine gun that the right hon. Gentleman has ordered from Canada?

Sir K. Wood

I could not answer that without inquiry. I would like to make this further observation, because I think that here again there is a misconception concerning it. Statements about a ring have been made, but I know the right hon. Gentleman the Member for Hills-borough (Mr. Alexander) will appreciate this, that there is in fact no ring to-day restrictive of the development of manufacturing capacity where it is suitable and available; and if hon. Members will kindly again peruse the statement that I made in November last, they will see that one of the features of the growing production in the Air Department to-day has been the number of additional organisations and firms that we have brought in, apart altogether from the members of the original industry itself. What I have tried to avoid—I want to be perfectly frank with the House—is to multiply the number of types of machines, and for that reason I do not want, for instance, to encourage additions so far as designs of new types are concerned, which have also the considerable disadvantage of making demands upon draughtsmen who are, I may say, very scarce at the present time. But it cannot be said there is a restriction on the development and manufacture of aircraft by manufacture being concentrated in just a few firms.

The Members of the Opposition quite rightly assert—I do not complain about it—that notwithstanding the consideration that has been given to it by the two Committees of the House, and notwithstanding the safeguards and the methods which we adopt at the Air Ministry, a perusal of certain balance sheets and the profits disclosed show that there has been gross profiteering which, they say, is nothing short of a public scandal. I am anxious to dispel that impression if I can, because I agree with both right hon. Gentlemen who have spoken that it is very harmful, especially from the point of view of aircraft production, that there should be a feeling that there is widespread profiteering. It does not make for good feeling between employers and men in the aircraft industry, and it has a bad effect generally when we appeal to people for National Service. I want to dispel that impression and to take any further steps that may be open tome to improve matters if they possibly can be improved.

I would like to say this on behalf of the industry. From a defence point of view we may count ourselves fortunate in having a strong core of firms upon whom we have been able to call in the national emergency, and who have done so much to help the rapid expansion which has taken place by their expert knowledge and by the successful training of the additional labour required. They have also made an excellent contribution by helping considerably to train the new-comers in the aircraft business. So far from repudiating or resenting other firms coming in, they have done a great deal to help by advising those people who have come into the aircraft business for the first time. It is also right that I should say that many of them have had very difficult times in past years. It is all very well to look at the position today, but in fairness, if we want to see the general position of aircraft firms, we have to look a little backwards and, it might very well be, a little forwards too. Many of them have undoubtedly had difficult times in past years and some of them have had to write down their capital in bad times to low levels. It is a fortunate thing that with the immensely increased work which we have been able to give them and the employment of the facilities which they have been able to build up in past years, they have again been able in a large number of cases to rebuild organisations which are capable to-day of meeting our defence needs on a considerable scale. I think I shall be in general agreement with those who have expert knowledge on this matter when I say that they are supplying the nation at this time with some of the finest aircraft in the world. That should be said on behalf of the industry.

It is said again, quite fairly—and I have not the slightest objection to it— by people who have taken an interest in this matter, "But look at the balance sheets of certain firms." Two firms have been mentioned. If we want to be fair and just, before we make statements as to what the precentages of profits are we must be sure that we are giving the percentages on the right figures. In perusing such balance sheets a fair and careful critic would no doubt agree, before coming to a conclusion whether excessive profits had been made, that he must take a number of matters into consideration. I would commend to the House the statement made in the Debate on Thursday by my hon. Friend the Member for Gloucester (Mr. Boyce) and supplemented by an hon. Gentleman opposite. He said that in determining whether a company has made an excessive profit or not we must consider the profit in relation to the capital employed in the company. I would go further and say that we must consider also the real value of the assets employed. Whether we employ the standard I suggest or that of the hon. Member for Gloucester, we find that the value of the assets may be several times the amount of the nominal capital itself. In the Debate on Thursday the hon. and learned Gentleman the Member for North Hammersmith (Mr. Pritt) expressed the view which is commonly held when he said that very often the capital employed in a business was not of the same value as the nominal value of the shares when originally issued. The statement in some of the papers about some of these large percentages are based on the nominal capital, and that, as I have suggested, is not a proper and fair comparison.

I would ask the House to consider another matter, because criticism has been directed to it and inferences have been drawn from it. If a company issues shares at a premium it gets more money into its capital account. That is of some importance, especially from the point of view of the nation at the present time when large additional capital is required to finance the considerable orders that are being given. It is asserted by some of the criticis as if it were a crime that a particular firm issued shares at a premium. As a matter of fact, that premium goes into the coffers of the company and is additional capital to finance the work.

Mr. Alexander

We make no complaint about that.

Sir K. Wood

I am making no personal allusions but just stating the position. There is also an elementary consideration which is overlooked in a large number of criticisms. It is one that should not be overlooked before charges of profiteering are made. Before a critic starts off on a campaign of that kind he should first ascertain whether the profits declared by a company are in whole or in part due to armament contracts. When reading the criticisms of the balance sheets of two or three of these firms, one would think that the whole of the profits came from armament production. That is far from being the case in all instances. These matters should all be borne in mind in considering cases to which public attention has been called if we are to arrive at a just conclusion on the merits.

I will refer in general terms to the companies which have been mentioned. The first is the well-known firm of Handley Page, which produces a very fine aircraft. It is just as well to look at the history of Handley Page when going into share transactions and matters of that kind to see what the position is. The firm of Handley Page was converted into a public company in 1919. In succeeding years they lost a large proportion of their capital owing to losses incurred in the development of aviation. In 1927 those losses were written off and the capital of the company reduced to approximately one-third of its value. I have no doubt the company were well advised to take that course. An interesting feature of the company which is never referred to by the critics is that since 1927, when the capital was reduced, they received from the development of their patent rights and the grant of licenses no less than £500,000, which is two and a half times the nominal capital of the company. That money was not distributed to the shareholders, but was retained in the company. It enabled the company to finance its expansion programme without calling on the public to subscribe further fresh capital. From the point of view of the company and the State no one could object to that transaction or say that any of it was in the nature of armaments profits. In fact, it had nothing to do with armaments profits as the bulk of the money was received prior to 1935.

Another series of transactions by this company has encountered certain criticism, and all sorts of sinister suggestions have been made concerning it. The fact is that as, under the expansion programme, there was continual need for the employment of its finances, the company increased its capital from the sums so received, but the capital when so increased and as it exists to-day is still Jess than the original capital of the company. This should be stated in conclusion if you want to be fair to the company, as I have no doubt all hon. Members do; that taking the period of 19 years during which this company has been a public one the average annual return to the shareholders has been only just over 3 per cent. on the original capital.

Mr. Alexander

Up to when?

Sir K. Wood

During the 19 years. I have given the whole of the period and I think that is the fair thing to do. The right hon. Gentleman says that I ought to have picked out the last few years, but I do not think that is a fair suggestion. I do not want to have any personal controversy with him, but I do not think it is fair to take the last few years. If we take the period I have quoted we are getting a fair presentation of the position of the company.

Now let me take the Bristol Company. It was dealt with in detail by my right hon. Friend last week, but I should like to say a few words about it, because I fear there was some misunderstanding underlying the references to the company's various financial activities, and it may be to the general advantage if I give briefly the history of the case as I see it.

Mr. A. Edwards

Will the Minister clear up one point concerning the previous company with which he was dealing? Is the Minister arguing that this company was justified in recouping itself for past losses from current contracts with the Government?

Sir K. Wood

What I have been endeavouring to do is to give a history of the company, and to show, in the first place, that it made £500,000 outside its armament activities altogether to which objection was taken. Secondly, so far as the increase in its capital was concerned, it was in fact utilising the money and not paying it to shareholders; and there is also the fact that the capital is not at present as large as the original capital.

Mr. Edwards

But the Minister did seem to be arguing about past losses and suggesting that because the company had had those losses for the last 19 years they were justified in taking large profits in these cases.

Sir K. Wood

I should like the hon. Member to read my statement carefully, because he will find that it justifies what I have said.

I was going on to say a word about the Bristol Company, which, of course, is very well known not only in this country but throughout the world. The Bristol Company was first created as a private company in 1910, and there were 25 years of intense activity and enterprise on its part as a private company—and holding the views I do, I do not complain when business enterprise and activity meet with some reward. In 1935 it was converted into a public company. The ordinary shares of that company were not offered for public subscription. They went to the vendors of the business, and the vendors, who were the people who had worked to make this company what it was, did a thing of which, so far as I am in a position to give a judgment, no one I should imagine could possibly complain. They decided to sell, or offer for sale, certain of the shares which they had received in that way to the public through the usual channels. In other words, they did what any of us would be at liberty to do if we received a thousand shares: we should be at perfect liberty to dispose of them—of course at no detriment to the State—as we desired.

That is what was done in this case, and the market and public dealings in the nominal 10s. ordinary shares subsequently opened at a price of approximately 53s. I do not see anything wrong in that. That was simply the market's assessment of the value of the shares, and, of course, it in no way affected the company's financial resources or capital structure. Later, in 1936, there was, as has been stated, an issue of 10s. shares to secure fresh capital, and the issue price was 25s. Again I do not see that there was any crime so far as that was concerned. The sum of £900,000 resulting from this premium of 15s. a share was, in fact, employed in the company's business. The issue of bonus shares last November in fact merely placed this £900,000 in its true position as part of the company's authorised capital.

Mr. Alexander

Is the right hon. Gentleman clear about that? As I read the balance sheet it meant that £900,000 of that premium was, subject to deductions, put straight into the reserve fund, and that the development of the capital side of the business was represented by another £900,000 overdraft at the bank.

Sir K. Wood

I do not see that. I will look at it again in view of the right hon. Gentleman's statement, but I think I am correct. Then I should explain that at the same time a fresh issue of capital was made—again not a crime—because this company wanted fresh capital to provide the increased funds required for the expansion programmes. The privilege of purchase granted to the existing shareholders did not constitute any marked financial advantage, as illustrated by the current market price, and the fact is that the shareholders lost money on the transaction as a whole, as was explained by my right hon. Friend the other night. The fallacy underlying the suggestion that the shareholders had by this transaction received a return of more than 200 per cent. on their capital lies, of course, in taking the ordinary shares at their 10s. nominal value. They were, in fact, never issued at that figure. Taking the figure at 53s., which I think is the right and fair thing to do, as business men would take it, and the market valuation immediately before the recent bonus share issue, the actual result to the shareholders is not a gain of 205 per cent. as suggested, but is, I am sorry to say, at the current valuation of the shares, a loss of some 6 or 7 per cent.!

I want to make it clear as regards both these companies that I have endeavoured to give such information as I think should in fairness be given to the House. I am not concerned to justify the course of these market transactions, I only state them as I have obtained them, and I would say that they neither prove nor disprove that profits on Government contracts have been excessive. That is my own general judgment of the position, only I thought it was right and fair that the House should hear the other side of the picture.

Mr. Alexander

I want to get down to the real basis of this. Has the right hon. Gentleman looked at the statement in the report of the Estimates Committee which I quoted where his own expert chiefs say that on these contracts they tried to get costings and profit based upon the capital employed? If we are to form any judgment on whether there has been an unreasonable profit, we have to relate it to the capital. I know the right hon. Gentleman is going to talk about the difference between nominal and real capital, but, in fact, these adjustments of nominal capital have been made in an endeavour to relate the nominal capital issued to the real capital employed, and the market price has been the anticipation of the market of what it was going to be worth.

Sir K. Wood

I will study what the right hon. Gentleman has said. I must confess that I do not understand him. I have suggested to the right hon. Gentleman that he must abandon the comparisons that he is making and the percentages he is giving based upon figures of nominal capital, and I am not the only person who has said that. I am equally clear that these comparisons and these percentages must be based—I do not mind how you juggle with the words—on the real assets employed in the business, and that is the contention which I am making. The right hon. Gentleman asked in the course of the Debate last week what was the percentage of profit added to estimated cost, a very important question. I have to say that apart from any sharing of savings below the estimated cost of economical production as the result of special efficiency—the right hon. Gentleman will recognise what that means: that is, by way of expedition of deliveries and reduction of costs—the rate of profit allowed on the contracts for the supply of aircraft has been progressively reduced during the period of the rearmament programme, and has in recent months represented a fixed sum per aircraft delivered which is roughly equal to 6 per cent. on the estimated cost.

The right hon. Gentleman also put two other suggestions to me. He asked us why we do not abandon this system of examination, give up all officials, have no record of what other costs are, but simply pay 7½ per cent. I hope he will think that suggestion over again, as I will, but it seems to me a most dangerous proposition from the point of view of aircraft production. What incentive would there be to firms to accelerate production if that system were in operation? Then I would put this question to the House. If you are going to take up that attitude, what is to happen when there are not all these orders? Are you then going to guarantee a firm either work or profits? Those are two very difficult questions to answer. Another proposal, put forward by my hon. Friend the Member for Mossley was the very revolutionary one that there should be a compulsory exchange of the shares which shareholders in aircraft companies hold to-day—that they should be given in exchange a share, or a debenture, or some form of investment at a fixed rate of interest. Then, said my hon. Friend, when the aircraft boom is over and aircraft production has ceased so far as the present programme is concerned, the shares could be handed back to them.

Mr. Austin Hopkinson

I suggested giving them the option of exchanging, which is quite another matter.

Sir K. Wood

I am very doubtful about that proposal. It seems to me to involve shareholders taking a risk beforehand and afterwards which is not likely to commend itself. Another difficulty which I should like my hon. Friend to consider is that of differentiating in these firms as between the work which they do in armament production and the other work which they are doing for ordinary com mercial purposes. My hon. Friend says that this is a very exceptional matter, and that, because very large orders are given, you must take exceptional steps; but these firms are doing all kinds of business——

Mr. Hopkinson

Does the right hon. Gentleman suggest that the Bristol Company and Handley Page, the examples he has taken, are doing any other sort of work at all?

Sir K. Wood

Certainly. I only took those two firms, and I gave an example of what Handley Page axe doing. My hon. and gallant Friend the Undersecretary reminds me that the Bristol Company have a very considerable contract for the supply of engines for Imperial Airways, and, if I may mention another firm, the Hawker Siddeley Aircraft Company, they are not only doing armament work for the Air Ministry, the Admiralty and the War Office, but they are engaged in the automobile industry, and they have an export trade covering aircraft, aero-engines, accessories, and many other commercial activities. Therefore, it is impossible to divide firms of this kind into two parts and say that you will take their shares from them in the manner which my hon. Friend has indicated.

I do not for a moment suggest that, because some of these statements, are, as I think, exaggerated, and some are ill-founded, we should not examine the position closely and take any further steps that may be necessary. But I think, myself, that necessary examination and further steps are often delayed by extravagant charges—that, while the charges may be denied or proved to be untrue, you may at the same time neglect the necessary operation of perfecting your machine and your methods. That is a danger which must be borne in mind.

The Estimates Committee, and I think also the Public Accounts Committee, recommended that all these contracts should be kept under constant review by the responsible Minister, and it is also obvious that, as more experience and information and data are available, we are better enabled to review the position of our system in the light of our most recent experience. Towards the end of last year I gave instructions that a special investigation should be made in the Department to see whether any revision of the existing system was desirable, particularly with a view to meeting the changing circumstances of to-day. This examination is now approaching completion, and it will, I hope, show me whether it is necessary to make any revision in our methods or system, and, if so, in what respect. If I am advised to that effect, I think the House will at any rate give me this credit, that I shall lose no time in discussing the matter with the representatives of the industry and others concerned. I should like to add that on all these matters of organisation and production I know that they have done their best in endeavouring to meet the Government's requirements, and I believe they would meet any reasonable request I might make for further reassurance that the prices paid for the supplies which the country so urgently needs are fair both to the taxpayer and to the manufacturers themselves. If the occasion should demand it, I hope I shall be able to say something further when the Estimates are discussed in Committee of Supply in a few days' time. Meanwhile, I hope the House will feel assured, after my statement this afternoon, that, while there is, in my view, no justification for adopting that part of the Amendment which deals with this matter, certainly the whole question has been receiving the attention which it deserves in the national interest.

Mr. Edwards

In the Debate last week I mentioned some figures, which I quoted to the Prime Minister more than a year ago, with regard to public subscription and the question of the capital structure which the Minister has endeavoured to explain to-day. The Minister for the Co-ordination of Defence wrote to me and asked me the source of my information, and I submitted it to him several weeks ago, asking him at the same time if he would take an opportunity of giving an explanation in the House. Although, however, I repeated the figures in the Debate last week, there was not a word about them in the reply. The figures showed that, when the Prime Minister made his first appeal to the country, patriotic people subscribed £7,000,000 for the production of aeroplanes, but that, of that £7,000,000, less than £1,000,000 got into the production of aeroplanes and £6,400,000 went straight into the pocket of the profiteers. In view of the fact that the Government have had these figures and the source of my information in their possession for several weeks, I think that who-ever is going to reply should give us some enlightenment on this very serious matter. The "Economist" also has published figures showing that 60 per cent. of the money subscribed for all kinds of armament production went to profiteers. These are very serious figures, and I think we are entitled to an explanation.

Sir K. Wood

I cannot, of course, accept the statement of the hon. Member without further investigation. I saw a statement about the £7,000,000, but I confess I did not understand it, and I did not, of course, have an opportunity of learning of the correspondence between the Minister for the Co-ordination of Defence and the hon. Member. No doubt that point will be dealt with by my right hon. Friend to-night. I rather anticipate that the hon. Member is endeavouring to assert, and it may be true, that at a certain period—I think it was in 1935— a number of companies were floated in this country dealing with aircraft and matters of that kind, and I daresay a number of them came to grief, but I suggest that that is hardly material to the issue we are now discussing.

Mr. Edwards

The Minister said to-day that the capital had been written down, but, so far from its having been written down, the capital has been very largely written up, and I think an explanation is required.

6.40 p.m.

Mr. J. Morgan

I do not propose to enter into the technical aspects of the subject we are discussing, but I want to point out the concern that is felt in the country, and is now being felt in this House, at the operations for consolidating capital in this particular form of undertaking, and at the fact that the particular type of balance sheet which is now before us is beginning to emerge at a time when the Government are placing enormous armament orders. It is part of the case for an inquiry into this matter that these crude apologies for capital reorganisation have to be made at this stage in the national business. They have not, significantly enough, occurred before armament orders were placed, in spite of the fact that these firms were already engaged in private business.

This discussion of the way in which capital is being employed by armament firms would not have arisen but for the fact that various firms engaged in the manufacture of armaments and aircraft have begun to consolidate their capital. They start with nominal capital amounts, and, on the percentage earned or returned on that nominal capital, it looks as though they are profiteering. They are now beginning to readjust the capital they have used, and must have used, to carry out their orders, and to put it into a form that can carry the interest that is being returned on the business done. I am not making definite charges, because the only figures I can discuss are published figures. I cannot discuss private figures, even if I had them at my disposal, but here are figures appearing in the Press, for the first time, of firms who are obviously undergoing a kind of financial flush at the present time, and we can rely upon it that they will do their utmost to hide the real position. We cannot expect them to do otherwise than to protect their own special interests. But these accounts, as they are published, are in themselves sufficient to attract public interest arid cause public concern.

I have the advantage, if it be an advantage, of having been before the electorate rather more recently than most Members of the House, and I can assure the House that, if there is one question on which there is uneasiness at the present time, it is this question of the way in which the accounts of armament firms are being made public. This subject has also a certain amount of significance from the fact that, on the inauguration of the present Prime Minister as Leader of this House, he was himself caused a certain amount of embarrassment by the fact that, under pressure, he had to withdraw the National Defence tax on armament profits as such, and from that moment there has grown up this general feeling of uneasiness. It is evident that armament firms have had access to forms of capital which even now are not figuring in their balance sheets—that they are in process of consolidating their capital so far as regards their liability to their share holders; but they are also operating, from the very nature of the transactions——

Mr. Godfrey Nicholson

Would the hon. Member be good enough to say what exactly he means by "consolidating their capital"? It may be that I am stupid, but I should be glad of an explanation.

Mr. Morgan

We have had from the right hon. Gentleman an explanation of how one firm takes £500,000 derived from profits that it was using as capital, and proceeds to place it formally on the capital side of its business. Reserves also had been explained away, capital bonuses described as adjustment of funds that were being used as capital, and premiums secured to the issue of nominal capital and put into a permanent capital form. A figure mentioned in the opening statement of the Chancellor of the Exchequer has some bearing on this subject. He made an extraordinary statement. It was to the effect that although the national funds are carrying heavier interest rates than in 1931, the capital amount to be paid out to discharge debt obligations is much lower. In 1931 we were committed to pay £290,000,000 a year out of the Exchequer income in order to discharge our debt obligations, and last year, in spite of the fact that the national Exchequer was carrying heavier capital burdens, it was able to discharge those obligations by a payment of something like £221,000,000. We were told that part of that reduction had been secured by a conversion operation, initiated by the present Prime Minister when he was Chancellor of the Exchequer. That indicates a direction in which the Exchequer might find other means at its disposal for working out the cost of producing an article than the mere technical costing up of the operation. There are other advantages which accrue to firms from taking Government orders. They are securing the use of capital on the basis of the credit that a Government contract gives. They are able to go to banks and finance institutions, and secure short-term loans at low rates—possible 3 per cent. or 3¼ per cent.

Mr. Leslie Boyce

Any decent industry in this country to-day can secure those rates. I am doing it myself. Why should a firm find it necessary to get Government contracts in order to do so?

Mr. Morgan

I am using a figure that cannot be controverted. They may be able to get the money at 2 per cent.; I believe they can. I suggest that some of these firms are availing themselves— quite rightly; I have no objection to it—of credit facilities that are available to them only because they are holders of Government contracts of a particular kind; and probably that capital, for which they paid 2 per cent. or 3 per cent. per annum, can be turned over two or three times during the year, so that they may earn 10, 15, or even 20 per cent, on it. Here is a direction in which some new kind of approach could be made to what is a profit in which the State: is entitled to take an interest. If these firms are able to capitalise their developments by the utilisation of credit based on Government orders, and are returning a profit for which they have not to pay from that short-term borrowing, the Government are entitled to a share. There are services that the State is rendering to these concerns that should be taken into account in assessing whether they are making an undue profit. Some of these armament firms are taking advantage of what I would term "accommodation finance," on the basis of contracts secured from the Government.

We have heard this afternoon that, in order to enable these firms to produce armaments, there should be a certain amount of tolerance in regard to the amount they are able to earn on the capital they have invested. But I would suggest that the way in which that use of capital has been justified this afternoon is an indication that there is no case for allowing firms to put forward a plea that before receiving these contracts they had difficulty in making ends meet, and that at present they are enjoying only a temporary prosperity and should therefore be given consideration. I feel that no case has been made in justification of these excessive profits, over which public uneasiness is being expressed. The main argument that I rose to put forward is that, in spite of all we have heard from the other side as to the history of various concerns and the difficulties they have had to overcome in order to undertake this kind of business, the fact remains that these capital operations did not occur before the rearmament programme was started. The Secretary for Air spoke of firms that until recently had not earned 3 per cent. on an average. That is an indication that they are now publishing balance sheets which are right out of line with their records: so much out of line with their records that there should be an inquiry into the development of profits from armament-making at the present time.

6.55 p.m.

Sir Isidore Salmon

I would suggest that hon. Members opposite are doing a great disservice to the country at this juncture in making sensational statements as to the profits made out of armaments. I happen to be Chairman of the Estimates Committee of this House, and we have had the opportunity of having before us all the Directors of Contracts and the high officials of the respective Departments, whom we severely cross-examined on different points. I think every Member of that Committee will admit that the questions we asked were very searching, and that the details that were supplied were very numerous. These witnesses have-never hesitated to tell us anything we wished to know; in fact, we have had information which it was not in the public interest to publish. We spent a great deal of time in investigating the way in which the Government have built up their organisation for considering the cost of the articles that are being made. Bearing in mind the overhead charges and the fact that in some cases it is necessary to have a certain amount of sub-contracting, we also asked the witnesses to take into consideration the aggregation of contracts from the Government Departments. I would suggest to those who ask for a Ministry of Supply that the system would be the same under such a Ministry, although it is true that contracts would then have to go through only one Department instead of three or four Departments, as is the case to-day. But the fact remains that reasonable steps are being taken to protect the State.

The essence of the contracts that we enter into is speed. Hon. Members from all sides of the House are anxious that we should have immediate delivery of guns, aeroplanes and other munitions of war. If speed were not so essential, no doubt further methods of control could be established. Because of the system of control that has been setup, different parts of machines are being produced to-day at a much less figure than they were before. The Departments have satisfied themselves that the lay-out and supervision are much more efficient. The consequence is that the State is benefited by the cheaper mode of production, and the contractor himself is of course, benefited, too.

Hon. Gentlemen have said, "Why should he make any profit?" Now, I do not think it ought to be considered a crime to make a profit, but I say it is a crime to exploit the country at a time of emergency. I would like to remind the House that other countries have tried the idea of cutting down profit for the producer, and the consequence has been that production has fallen in those countries. I do not think it desirable to mention any particular country; we all know the facts. The result has been that the whole system has been altered in recent years. I mention that not with the object of jibing at other countries, but as an object lesson.

One hon. Gentleman in the Debate last week said he thought it a great crime because Woolworths were making large profits, and the whole trend of opinion on the Opposition side is that it is a crime for industry to make profits. The hon. Member for Westhoughton (Mr. Rhys Davies), in a speech on Friday last, went so far as to say—he was not talking of armaments, but he mentioned Woolworths —that the large profit that was made was a disgrace. That is a mentality that it is very difficult to understand. If those large profits are made, it is for the benefit of the country and of the employés too. I do not think that their general criticism of the amount of money that a firm earns has anything to do with the cost of the Government orders. You have to deal with each case on its merits. You cannot have a hard-and-fast rule and say that a particular profit should be made on everything. You have to take many circumstances into account. You have to have regard to the total value of Government work.

I believe that there are certain improvements that might be made. I think the Departments themselves recognise it. The right hon. Gentleman the Air Minister informed us this afternoon that the subcommittee which has been set up is shortly to make a report, and I am quite sure that any suggestion that that sub-committee make whereby the country can be protected against possible profiteering will be carried out. It is a very serious thing to suggest, as the last speaker did, that the civil servants are not doing their duty properly. He suggested that huge profits were being made by firms supplying the Government, and the only inference was that the Departments were paying too much for those particular armaments. I submit that, in view of the care that is being taken, that cannot happen. There may be isolated cases. After all, you are dealing with hundreds of millions of money and hundreds of thousands of items; nevertheless I am sure that if hon. Members were on my committee and questioned the officials who appear before us they would come to the same conclu- sion to which we have come, that all reasonable care has been taken. There is no question on our committee of looking at these matters from the political point of view. They are looked at from the business point of view, and I think it will be admitted that every one of us, no matter on what side of the House he sits, aims at one thing only, and that is to get at the facts so that we may report to the House or make suggestions to the Department concerned where anything can be improved.

Mr. J. Morgan

I had no intention of casting a reflection on the Civil Service. I was simply putting a fresh consideration that the Government themselves should take into account—not the Civil Service.

Sir I. Salmon

I would like to make one observation on the criticism made by the right hon. Member for Caithness and Sutherland (Sir A. Sinclair) that too high a figure had been charged for this or that particular article. The right hon. Member prefaced his statement by saying, "Of course, I cannot give you the name," though he knew the facts. It is so easy for disgruntled contractors, who may have lost a contract, to make suggestions that certain things are not right, or that so-and-so is doing something that is very dishonest from the point of view of the public interest. But really, if one wants to serve the public interest, the fair thing is to go into details so as really to get at the facts. We have far too many generalities and too few details.

Mr. Edwards

The hon. Member has accused Members on this side of doing a great disservice to the nation by calling attention to excessive profits. Is it not fair to assume that where the shares of a company are rising and rising, on the stock market, and people are speculating in them, and the companies are paying 25 or 45 per cent., an undue profit is being made?

Sir I. Salmon

I do not think you can judge by the Stock Exchange as to the value the Government are getting. After all, I believe that the civil servants are doing their duty, and they have costings, which give them an opportunity of seeing that we are not paying an unreasonable figure. I know there is a lot of criticism of the way that costings are arrived at, but, believe me, I do know something about the question. As far as armaments are concerned I have not any interest, but the way you arrive at the figures is the same, whether for armaments or for other forms of business. There is only one practical way of doing it, and I believe that the Departments are trying to do their very best in difficult circumstances. The hon. Gentleman keeps talking about one firm's 45 per cent. profit. I would ask him what is the percentage of that firm's total business not attributable to Government work at all, but to work outside. If he does not know, he has no right to suggest that 45 per cent. profit is being made out of the Government. It is such statements as that which are doing a great disservice to the country.

Mr. Alexander

While we do not deny that these firms are doing civilian work, how is it that the return on their capital jumps at once when they receive armament orders? It is the Government orders which have appreciated the whole capital position of these companies.

Sir I. Salmon

The right hon. Gentleman knows that if you are running a factory and doing a certain level of business, all the work that you get beyond that level makes your profit very much greater. When a firm is working at 60 per cent. of capacity and then gets Government work which enables it to work at 98 per cent. of capacity, is it unreasonable, with the greater aggregate of business, that that firm's profits should go up?

Mr. Alexander

Yes, if you are getting it out of the necessities of the country.

Sir I. Salmon

You are not subsidising the trader or the industrialist when he is working at 60 per cent. of capacity; a part of the profits he then makes goes to the State in the form of taxation. I agree of course that the industrialists should not make too high a profit. That is a matter which the committee over which I preside are watching very carefully. But I think that at this juncture it is a very serious thing for it to get around the country that huge profits are generally being made by those who are providing armaments for fee Departments. I am afraid the effect will be to reduce enthusiasm among those who would like to render National Service. Hon. Members opposite seem to think that the mere fact of having a Government contract is a very fine thing for the individual firm. I am not giving away any secret when I say that Government Departments have had great difficulties in getting firms to reduce their normal business and go in for Government work at all, because they lose their regular trade when, with the idea of doing a piece of national work, they give up part of their works for Government contracts. It is very unfair to generalise and to say that anyone who supplies anything to the Government is profiteering. It is not true and it is not fair, and those who say it are doing a great disservice to the country.

7.17 p.m.

Mr. Harold Macmillan

The Second Reading of this Bill is indeed an historic occasion, on which this vast sum of money—the largest loan ever voted in time of peace—is to be granted to His Majesty for defence purposes. I am very glad to see, and I think that the House as a whole recognises the fact that the Amendment which we have been more particularly discussing during the last hour or two begins by recognising the regrettable necessity, but none the less the necessity, for this Bill. I cannot conceal from the House that I find myself in general agreement with the particular Amendment moved by the Opposition. In effect it is an Amendment calling for the setting up of a Ministry of Supply, and that topic has existed for a considerable time, and on several occasions I have spoken, and occasionally voted, with one or two friends, in support of that suggestion. These arguments have been repeated so often and such expert knowledge has been brought by both sides to bear on the proposition, for or against a Ministry of Supply, that I, like any other private Member, can only weigh as best I can those arguments, and trust that a decision which I think is right will ultimately be arrived at. From the point of view of the organisation of priorities and of mass production, a Ministry of Supply will ultimately become necessary, and the Government themselves, I believe, feel that on the outbreak of war, if ever that occurs, a Ministry of Supply would in fact come into being.

I, like every other Member of this House, listened with delight to the Secretary of State, who with such agility and skill guided us through the complicated question of profits. Excessive profit is a very difficult thing to define, as is also fair profit. It matters whether you are a regular manufacturer of armaments or are coming in to assist the Government by using your factory temporarily for armament production. It depends on the total amount of the order, whether the particular machinery you are to find for the purpose is machinery you may be able to use afterwards for your other processes or whether it is specific to these processes, and what is to be the rate of amortisation which ought to be allowed for this new machinery in dealing with a particular order. Anybody who has had any experience knows that, if you are not an armament manufacturer, you come into this business with great reluctance, knowing that it will inflict a great deal of damage to your ordinary business, and you watch with alarm the general effect upon your business as a whole.

The speech of the right hon. Gentleman, with which I agreed and which admirably put the point, confirmed my opinion of the ultimate necessity for a Ministry of Supply. I think that he and I would be happy if his Department did not have to spend so much time on the study of this question and was able to devote itself to those strategic and immense questions which face that Department. These are not new. We have had a war—I hope that we shall never have another—and we learned a great deal from 1914-18. Not enough use is made of that experience. Many of these problems were, by the last years of the War, successfully overcome, and a whole technique was built up by the Civil Service during that time. That which was weak at the beginning of the War, had by the end of the War reached a state of perfection.

I would like to recall the attention of the House for a moment to the question as a whole. In this Measure we are to vote, as I understand it, on loan account, what seems to us enormously large sums of money. In the year 1937-38 we spent £265,000,000, in 1938-39 £406,000,000, and we expect to spend in 1939-40 £580,000,000. The ratio between money raised from Revenue and money borrowed varies, but in the year 1937-38 we had to spend £265,000,000, rising in 1939-40 to the figure of £580,000,000, and the total expenditure for the five years is expected to be £1,500,000,000.

It is very difficult to calculate exactly the expenditure of other countries. The calculation which I have made in consultation with very expert economists leads me to believe that it would be a very conservative figure to say that Germany has spent, in the five years since the coming of the Nazi regime, up to 1938, the sum of at least £2,800,000,000 on military expenditure alone. In the Budget for the year 1937-38, I estimate that their military expenditure, translated into English purchasing power, amounted to £1,200,000,000, and that is the year in which our expenditure amounted to £265,000,000. Our highest year's expenditure amounts to £580,000,000, which, I think, is a conservative rather than an exaggerated estimate. In the last year of which we can get details the German expenditure amounted to £1,200,000,000, which is not much short of the five years' expenditure on British rearmament. This is not the time to see how this immense effort has been made, but these are very formidable figures, and I do not think that any Member of this House can feel that the money which we are now voting is not absolutely a necessity, although a regrettable necessity. We also know that during this period in Germany, 5,000,000 unemployed have been put into employment, producing now a shortage of employment, while we still have 2,000,000 men who are not employed, and that their rate of producing is rising comparably. Therefore, the reply that we are making now cannot be said by anybody to be too great, and if we regard it frankly, we must sometimes wonder whether the effort will be great enough.

There is something which is more important perhaps even than this technical, financial and economic rearmament. I do not want to over-estimate what we have to fear from abroad. I believe that in the last few weeks we have recovered more in moral rearmament than will compensate for great weaknesses before. We have shaken off the dangerous illusions of four or five months ago. I hope that this Bill may receive the unanimous consent of the House on Second Reading as a demonstration to the world that we are prepared to face any burden that the Government may ask us to put upon the nation. We have abandoned the old illusions. We have seen the realities. The "Observer" said yesterday that Munich was a special case that could never be repeated. The Foreign Secretary's statement of foreign policy, upon which this Bill depends, will, I think, meet with almost unanimous approval in this country. Therefore, feeling as I do —and this is not merely a technical question as to a Ministry of Supply or any other method—I hope that it will go out from this House that this country has pulled itself together and is about to make this effort with a united front. I hope that the Opposition may not press their Amendment, and even if they do, I trust that they will give united support to a Bill which represents certainly not too great an effort, considering the enormous efforts which have been made in the countries which confront us overseas.

7.28 p.m.

Mr. Stokes

I am sorry that the hon. Gentleman the Member for Harrow (Sir I. Salmon) is not still with us, because he made certain observations which, I feel, cannot be allowed to go uncommented upon, and I may say at once that I remain completely unmoved by his appeal that we should allow, or that it is reasonable to allow, profits in armaments. I stand as one who would like to see armament profits abolished altogether, but I recognise the deficiencies of the system under which we at present operate, and I also recognise that it is extremely unlikely that the present Government will take such measures as will prevent profits from armaments. Therefore, I naturally turn my attention to a system of limitation which will prevent these profits becoming exorbitant. If armament firms or firms engaged in munition supply show a certain amount of their profits in their public balance sheets, every business man in this House knows that the actual profits earned are a very great deal higher.

The hon. Member for Harrow also said that many firms were reluctant to accept armament contracts because they interfered with their business and spoilt their goodwill and so on. That might be the case in some instances, but I should like to remind the House—and this is the third and last point I wish to make with regard to the subject—that not long ago, there was a firm, within my knowledge, that made an offer to assist the Government on terms of no profit at all. I am sure that the remarks of the hon. Member in regard to the Civil Service are supported entirely by hon. Members on this side of the House, and in any remarks that I make to-night I should like it to be made quite clear that I cast no aspersions on the way the Civil Service carry out their work. My complaint is that they are far too reluctant to adopt new and, in my view, much more modern and up-to-date methods. Unfortunately, I was not in the House when the Secretary of State for Air made his speech, but I should like to refer to a statement made by the Chancellor of the Duchy of Lancaster in the early hours of last Friday morning. When talking of profits he said: I am sure it is a thing we should all regret as damaging and harmful to the great national effort the country is making. If there are things of the sort"— He was referring to excess profits— let them be speedily ventilated and examined."—[OFFICIAL REPORT,23rd February, 1939; col. 749, Vol. 344.] I take that statement as an invitation to recall to the minds of hon. Members the fact that a certain offer was made two and a-half years ago for the supply of 3.45 inch shells. That may seem stale news but it is not, because these contracts are still running and are renewable from year to year. I suggest that it is well worth while for the Government, through their proper representative, to re-examine this matter, which was never properly dealt with by the Ministers who were in office at the time. The offer was made to supply a shell of this size at 17s. 11d. each. The Woolwich Arsenal price at the time was 28s., and the average trade price about 21s. It was estimated by the firm that made the offer that the shell could be made at something of the order of 12s. 6d. each. The offer was turned down.

Mr. Craven-Ellis

Can the hon. Member give us some details of what he means by costs?

Mr. Stokes

Certainly. I am asked to define costs. My answer is that costs are labour and materials and that proportion of overhead charges which ought rightly to be absorbed in a contract m the course of ordinary business. In my experience as a manufacturer I have found that there is no difficulty in satisfactorily carrying that out. It is humbugging the country to declare that you must take all your overheads at the same rate on a high output as you do on a low output.

Mr. Craven-Ellis

The hon. Member omitted one item. He mentioned nothing about the interest on the money necessary to produce the goods.

Mr. Stokes

I cannot go into all the details of what is contained in overhead charges. In my own factory there are 127 different items, and if I were asked to recount them I should be regarded as completely out of order.

Mr. Craven-Ellis

I do not accept the hon. Member's figure.

Mr. Stokes

If the hon. Member will not accept my figure, I cannot help it. The fact remains that the offer was turned down for no satisfactory reason. The only reason that carried any weight at all was that the town in question was in a very vulnerable position on the east coast. The figures that would have been involved in the saving are really astronomical. Reckoning at the normal rate of shell fire at the height of battle in 1917 on the Western Front, the difference between 12s. 6d. or 14s. each for the shells and the current price the Government were paying would mean a saving of £100,000,000 a month. Therefore, it is worth while for the Government to examine this matter at the present time, especially in view of the fact that these contracts are renewable from year to year. It might even be reasonable, if the Government want this work to be done at this price, that they should visit the town from which the offer was made, because in the last few days it has been scheduled as an invulnerable town, into which it is suitable to evacuate population from London.

A second matter to which I would draw attention has a great bearing on the cost of rearmament and the catastrophic falling away of our export trade. I refer to the cost of raw materials. I will not quote the large series of figures in my possession, but I should like to refer to a few. The average price per ton of east coast hematite pig iron in 1934 was £3 7s. 2d., and in 1938, £6 12s. The price of steel castings—not the highest grade castings but the ordinary trade castings—was £37 in 1935, and at the end of 1938 we had to pay £66.

Finally, we come to the very vexed question of machine tools, and I find that high-class machine tools at the end of 1938 were costing 25 per cent, more than in 1936, and low-class machine tools per cent. more. I will not take up time in discussing the attitude adopted by the Machine Tools' Association, but I understand their point of view in declining investigation by the Technical Costs Branch, because I am not a believer in the Technical Costs Branch nor in the inspection of the Government accountants. They have some merit in stopping astronomical profiteering, but they will never, without the collaboration of the manufacturer, get at the person who is making 20 or 25 per cent, profit instead of 5 or 10 per cent. As I have said before, I would guarantee to defeat them on every occasion in my own factory. Here surely is an excellent opportunity to apply the method which I have suggested in this House, and which I have had the honour of discussing with the Chancellor of the Exchequer on a previous occasion, and that is that firms should be made to submit a statement audited by their own auditors, stating what profits they have made on the completion of each of their contracts.

Now I come to the question of land. I would mention a case which was brought to my notice to-day, in the hope that the Secretary of State will deal with it. I have not had time to verify the statement, but I am told that the Government have recently acquired a tank range in Pembroke of 6,000 acres which has hitherto been regarded as absolutely valueless, useless land. I am told the grazing was so bad that the cows said, "No," and would not eat. The War Department have, however, thought fit to pay £240,000 for these 6,000 acres, or £40an acre for land which was utterly useless, which had been derated and was contributing nothing towards the upkeep of the district.

The argument has been advanced that it is fair to allow armament manufacturers who have put down new plant for the purpose of such manufacture to recover the losses which they may have sustained as a result of their capital expenditure. I do not admit that argument, but if you do, remember the amount has to come out of the pockets of the workers sooner or later. I would ask what about the unemployed who find themselves thrown out of work because there are no armament contracts. Have they not a right to claim that in times of good trade they should be allowed not only their normal rate of earnings but also be able to put back into their pockets the wages they have lost while they have been enduring enforced idleness?

In conclusion, I would urge the incompleteness of the Government's method of approach to this whole subject. It is entirely wrong. The costs accountants and the costs investigations are a great nuisance in the factories. Everybody puts something on to their price so that in case they are found out they will still be able to get something. If it is discovered they lose nothing; if not it costs the country more. I submit that it would be a very wise thing in the interests of the community if the Government insisted that all firms engaged in the manufacture of armaments, indeed I would say that firms supplying goods of any nature to any of the Services, should be forced to render a statement, audited by their own auditors, at the conclusion of each contract, stating exactly what profit they have made on that contract.

7.42 p.m.

Sir George Schuster

I do not propose to follow the speakers who have dealt with the question of armaments profiteering, except to say that I feel that the expressions of disgust at those people who would take advantage of a national emergency to make unreasonable profits for themselves, are supported in every quarter of the House. I would appeal to the Government that if they feel their case is a good one and that their methods are effective, they should give us the most convincing argument they possibly can, because at this time, when we are trying to get the whole country to realise that we are facing something more than a normal emergency and we are making appeals to all classes of the country to come forward in voluntary National Service, we should do all that we can to create the impression that this is not a time for "profits and pleasure, as usual."

I wish myself to deal with technical matters of finance and to bring the Debate back to the speech of the Chancellor of the Exchequer. One is justified in doing so, because the principles of finance which are at stake in this programme are principles which should not be lost sight of. I recognise that on this occasion we are not being asked to vote upon the particular proposals for expenditure which the Chancellor of the Exchequer has indicated that he is going to put forward. We are not, for example, being asked to approve the expenditure of £350,000,000 from loan. On the other hand, the Chancellor of the Exchequer has told us what he proposes to do. Therefore, I presume we are in order in considering the principles involved. I should like to make an appeal to the Chancellor of the Exchequer to state very clearly when he puts forward his proposals what are the principles on which he is acting.

Two years ago when this exceptional emergency programme of rearmament was introduced, the House was asked to accept what was, according to our Budgetary traditions, a new principle. It was asked to accept a distinction between capital and income expenditure, and to approve the principle that capital expenditure could properly be met from loan fund and not from revenue produced by taxation. That was a very wise principle to observe, and behind all that I have to say to-day there lies the belief that the proper use of British credit on suitable occasions as for raising money for sound objects of capital expenditure is one of the most important functions which the Chancellor of the Exchequer has to exercise to-day.

The question which exercises me in considering the proposals which the Chancellor of the Exchequer has indicated, is this. We have accepted the principle that capital expenditure or non-recurrent expenditure may properly be provided from loan funds. Are we now being asked to go one step further and accept the principle that recurrent expenditure may also legitimately be raised from loan funds? It has already been suggested in several financial newspapers that the Chancellor of the Exchequer is asking us to accept that principle. For example this week's "Economist" had an article reviewing the situation and used this argument. When the rearmament programme was introduced two years ago it was stated that £400,000,000 was to be raised by loan funds and £1,100,000,000 was to be provided from revenue. The principle, so the writer states, was accepted that non-recurrent expenditure was to be met from loan funds and current expenditure from revenue.

The article assumes that that principle has been correctly adhered to and, therefore, as in the first year something like £200,000,000 was raised in revenue and £65,000,000 from loan funds, it is assumed that the £200,000,000 represented the regular recurrent expenditure. In the second year we are told that £274,000,000 is to be raised from tax revenue and something like £136,000,000 from loan funds. Therefore, it is again argued, £274,000,000 represents the regular recurrent expenditure for the year 1938-39. We are now told by the Chancellor of the Exchequer that in the coming year 1939-40 he proposes to provide £230,000,000 from tax revenue. Therefore we know that the amount provided from tax revenue is to be reduced by £44,000,000. The financial papers argue that it is impossible that the recurrent expenditure of next year can be less than for this year and, therefore, that the Chancellor of the Exchequer is going to provide £44,000,000 of recurrent expenditure from loan funds.

But I have a doubt whether that argument is correct, and I want to ask the Chancellor of the Exchequer when he puts his proposals before us in detail to reassure us on this matter. I would rather prefer to assume that in past years he has raised a great deal more from revenue, according to a strict classification of expenditure as between capital and income expenditure, or recurrent and non-recurrent expenditure, than he need have done. He has, I suggest, in the past been more conservative than he need have been. But if he tells us that the regular recurrent expenditure for next year is likely to be considerably in excess of the £230,000,000 which he proposes to raise from revenue, then we have to realise that an important new principle is being put before us which will require very careful consideration. The Chancellor of the Exchequer is now being hailed in certain papers as a convert to the doctrine that it is a wise thing to budget for a deficit; that it is a wise thing if trade lags and public consumption is not as active as trade requires, for the Government to come into the market and spend as much money as it can. I venture to put it to the House that on occasions of that kind it may be a very wise thing for a Government to come forward with well considered proposals of capital expenditure, but that if a Government adopts a policy which commits it to meet a regular irreducible annual recurrent charge, then it is a very unwise thing for a Government not to make provision straightaway to increase its revenue to a level which is sufficient to meet that regular inevitable recurrent charge. I hope that the Chancellor of the Exchequer, when he comes to put these proposals before us, will be able to reassure us on that matter.

I recognise that I am putting a question to the Chancellor of the Exchequer which it is not easy to answer, because who can say what is the regular recurrent charge to which we are committing ourselves? On the other hand, I feel that he ought to be able to give us some answer. Taking the establishment of our forces on which the Government are now working we want to know what is the sum required to meet its upkeep and the annual replacement of its equipment. I think the Chancellor of the Exchequer should be able to give us a figure of that kind, and should be able to reassure us that the £230,000,000 which he is providing from revenue will be sufficient to meet that regular recurrent charge. If it is argued that it is a wise thing in certain circumstances to budget deliberately for a deficit—and when I say "a deficit" I mean a deficit as between regular recurring expenditure and ordinary revenue— I say that that is a very dangerous doctrine, and I hope we are not going to be asked to give our approval to any doctrine of that kind.

7.52 p.m.

Mr. Cary

I agree with the hon. Member for Walsall (Sir G. Schuster) that the Government should provide a convincing answer to the general charges which are being made in regard to profits in armaments. So far most criticism has centred upon the Bristol Aeroplane Company, but in that case I do not think the excess, profits have been made by the company at all. Some two or three years ago an issue was made on behalf of that company at a premium of 10s. a share. The company itself received £1 for every 10s. share, but the speculator and the market operator, in fact, made a much more extended profit than that. I appreciate the difficulties of the Government in arriving at some degree of control in peace time. It is obvious that the nation will not tolerate either excess profits in armaments or profiteers in war time, and we have to ask ourselves how far we can go in peace time in getting the necessary degree of control which will not only be convincing for ourselves, but will also be convincing to the people throughout the country, who, in a greater or lesser degree, have to subscribe to defence by volunteering for National Service.

The right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) and the right hon. Member for Caithness and Sutherland (Sir A. Sinclair) have raised matters in regard to the responsibilities and duties of the Minister for the Coordination of Defence. Some hon. Members will be familiar with the speech made on Monday last on the Financial Resolution by the hon. Member for Mossley (Mr. Hopkinson). My hon. Friend claimed that he was in a particularly advantageous position to criticise because for some months he had worked in close co-operation with the first Minister for the Co-ordination of Defence. He praised, in the main, the decision of the Government in regard to fixing the cost of the rearmament programme at £1,500,000,000 to be carried out with a minimum disturbance of the normal peace time activities of the community, but he was not so enthusiastic about the interpretation placed by the first Minister for the Co-ordination of Defence upon the nature of his duties. Indeed, my hon. Friend the Member for Mossley said that he thought the first Minister for the Co-ordination of Defence should have looked upon himself as a deputy Prime Minister.

If my impression serves me right during the Debate in March, 1936, when this new Ministry was brought into being, we were given to understand that he was going to act merely as the Vice-Chairman of the Committee of Imperial Defence, to relieve the Prime Minister of the day-to-day tasks of that Committee, distracted as the Prime Minister was by the affairs of the Foreign Office. In addition to acting as the Vice-Chairman of the Committee of Imperial Defence he was to do what he could to level out some of the difficulties which existed between the Service departments in regard to priority, but was in no way to threaten that he would at some time in the future take the part of the Service Minister and that he would not ultimately prove to be the means of taking away from Parliament that necessary degree of Cabinet control with which the rearmament programme must be conducted. The Committee of Imperial Defence is a co-ordinating and advisory body, and if you are going to confer upon the Minister for the Co-ordination of Defence the powers of a deputy Prime Minister you are at once placing a certain executive power in the hands of the Committee of Imperial Defence, and decisions will be taken in regard to the rearmament programme before Parliament has had time or opportunity to consider them. Indeed, to take any further step ahead or away from the present method will only lead us into a series of false groupings for an unpredictable future. It is interesting in this respect to point out that in France, which has identically the same responsibilities as ourselves in rapid rearmament, they see no reason to set up a ministry comparable to our own. They leave it to a free exchange between the Service Departments and industry.

May I say one word about the statements made relating to defence? During the last four or five years we have had statements relating to defence presented prior to the introduction of the Service Estimates. They have in the main dealt with the reconditioning and modernisation of the Forces and of the cost likely to be involved. A sucession of White Papers has not dealt with the wider aspects of defence in regard to distribution and planning. When people think of planning they often think merely in terms of a Ministry of Supply to be set up in this country. They do not take it or see it from the wider aspect of defence in that the whole of the Empire must now be correlated on the basis of Imperial Defence, and that in this country we form only a part of the pattern of Imperial Defence.

The last meeting of the Committee of Imperial Defence dealt with the affairs of the Imperial Conference of 1937 and stated that it would require the urgent and immediate attention of the Parliaments throughout the Empire to gather together as quickly as possible, the moment they had made their own local systems of defence workable and strong, to consider what they might have to do, and the-responsibility which they would, or might, have to face as a united team working together to bring defence from purely national and local situations to the wider and more Imperial situation upon an Empire basis, both in relation to manpower and to supplies, and into a position-in which it could challenge any act of aggression which might be made against any of its lines of communication. When the rearmament programme was first started it was, I think, the "Times" which, in summarising the position, stated: The ultimate foundation and strength of our defences must in the last resort be centered upon this country. I suggest that if only half the success hoped for, for instance by the German air force in attacking this country, is made possible, this country may become almost untenable and that in the early stages of the outbreak of war there will be immense confusion and dislocation in this country. The ultimate direction of war may have to be undertaken from a totally different quarter from London or Manchester, of from the northern parts of these islands. The direction of Government may have suddenly to be set up in an emergency. It is advisable to take some steps, not only to bring all the Parliaments together to a united plan, but to include in our discussions representatives of the French Government. Ultimately we are faced with the problem of pooling the whole of our resources. If we are to do that and obtain for ourselves any satisfactory degree of efficiency, the interests of ourselves and the Empire will be best served if, at some stage in the not distant future, we take some steps in conjunction with the French Government to inquire into the whole position; or alternatively to set up an Empire commission of defence which would make an exhaustive examination, and if need be to make a personal tour of the Empire so that we may really be able to assess what our needs may be and what resources of men and man-power we have to meet.

Often in the past our communications have been stressed in terms of the Mediterranean, which has been described as a vital line of communication for the British Empire; indeed, as a main, arterial road. I suggest that the Mediterranean is not a vital line of Empire communication and that we have an alternative, the Cape route, and that we should now turn our attention to the urgent needs of some parts of that route, for instance the Simons Town base. We might find ourselves, if the Meriterranean were closed, not saddled with a clumsy alternative, but with a better route upon which to hold our communications than ever we held through the Mediterranean. If we are again plunged into war and we are not faced in the Mediterranean with a powerful aggressor, no problem will arise, but if we are faced with a powerful aggressor there, the Mediterranean will almost certainly be closed; and the Suez Canal, 80 miles in length, might be subjected to modern air bombing. The dropping of one bomb on the banks of that canal would succeed in closing it. Even in our own time our ships still have to travel at a snail's pace in passing through that canal.

Mr. Alexander

The hon. Member's argument is becoming very interesting, but does he not consider that after the closing of the Mediterranean we should still have to get our supplies into the Mediterranean for the defence of the Suez Canal, and that you would have to sacrifice many of your own pooled resources which you had got from Mediterranean sources? If you adopt the Simon's Town Base, how do you protect your ships from the new bases that you will certainly get in Spain?

Mr. Cary

I agree with the point which the right hon. Gentleman raises, but that which I am trying to make at the present moment is that the Mediterranean is not vital to the British Empire and that if it were closed it would not bring the British Empire to a standstill. If the Mediterranean were closed and the Cape route itself were insecure and cut, that would in fact bring the British Empire, although not to a standstill at least to a grave position that might determine the result of any war in which we were engaged.

Notice taken that 40 Members were not present.

House counted, and 40 Members being present—

Mr. Cary

I was making the point that the Mediterranean is not a vital line of communication to the scheme of Empire defence. In condemning the Mediterranean one might well ask, "What is the vital line?" I say that it is the Cape route. Arising out of this point: If the Mediterranean is not the vital sea, what is the vital sea? My answer is that it is the same sea that it has always been, the Indian Ocean. In recent years we have built on the far side of the Indian Ocean perhaps the greatest fortress for defence that the world has ever seen, the Singapore Base. It will govern the defensive position in the Far East for some years to come, and it will be an attraction and a magnet to all the smaller nations, such as the Dutch, the Siamese and the interests of French Indo-China, who would rally, if need be, to the side of the one most likely to hold that ascendancy.

I am not particularly frightened by the present march of events in regard to Japan. If hon. Members are disturbed in that direction let them read the extremely interesting article published last week in the "Manchester Guardian" and headed "Japan in Difficulties." On that side of our communications there is nothing to be feared. It is on the other side, the Cape Route, that we should concentrate our energies and if need be obtain from the South African Government the fullest interpretation of the Smuts-Churchill agreement. When we come to discuss the Navy Estimates the week after next I hope that the Parliamentary Secretary will be in a position to say something about Simonds Town and the position at the Cape. I know what the South African Government have always said in regard to their local situation. There has been such constant discussion as to the differences between Boer and Englishman and never discussion of their common objectives, that it has at times been almost impossible to live up to the general scheme of Empire Defence. I understand that rapid strides are now being taken to repair that gap.

A reference was made by the right hon. Gentleman the Member for East Edinburgh to a remark which he said was made by hon. Members on these benches that Russia was more dangerous to have as a friend than as an enemy, but I am certain that no one on this side wished or said anything so wounding or foolish about Russia. As on the last occasion in 1914, Russia might be extremely important on a future occasion. German policy has always been directed to obtaining the friendship or the neutrality of Russia, and the efforts of the great German Chancellor von Bülow were devoted from 1897 to 1909 to securing that in the event of a European war in which they might find Great Britain opposing Germany, his Eastern frontier should be secured by pact with Russia. Russia had many difficulties in the Great War, but she did divide the German forces into two. If Russia had not come in as an ally of Great Britain and France perhaps the ending of the last War in 1918 might have had a totally unforeseen climax. If any hon. Members on this side make sweeping charges as to the quality of the Russian nation, either now or in future, they should be refuted on all occasions. I can only conclude that the right hon. Gentleman the Member for East Edinburgh must have misunderstood a remark or an interruption made from these benches.

I want now to say a word or two about Germany. Germany is building an immense air force and an immense land army. She is building substantial land fortifications in the West. In trade, she is offering in international markets an attractive price above the current market price. Most of her industries are sub-sidised, and she is building up immense reserves of raw materials. She is now committed to the re-creation of the German High Seas Fleet. In addition, under the four-year plan, she is to spend no less a sum than £1,000,000,000 on the German State railways. One may well ask what strange and fantastic economy makes all that possible in a country which was so recently bankrupt, as a result of the Great War. I can only suggest that there is some fundamental difference in economy between ourselves and Germany which, to a certain extent, makes the German method, be that method what it may, right, and our own system, to a certain extent, antiquated. We are faced with a challenge from Germany in economic and financial matters which cannot be allowed to pass unnoticed. The Chancellor of the Exchequer has told us that finance is now as important as any one of the three Services. I hope that when the Budget is introduced we may have from the Chancellor a clear and convincing statement as to where those differences lie.

In any war in the future, do not let us under-estimate in a short war, the strength of a powerful opponent to strike hard and in particular to inflict immense punishment by air bombing on this country; and do not let us over-estimate in a long war, our own chances of being free from vast problems of internal security throughout the Empire, problems from which a great nation such as ours cannot be free, because we have constantly to control and govern so many different races and creeds throughout the world.

8.19 p.m.

Mr. Viant

I have listened to the Debate to-day, and to the Debates on this subject on previous occasions, and I feel that there is no shadow of doubt that the House, like the country, is labouring under great apprehensions. There is in the country a considerable amount of uneasiness in regard to the attitude of the Government towards the question of peace. No hon. Member can address a public meeting, or enter into a conversation in his constituency, without having put to him very definitely the question whether the Government are making any efforts in the direction of sounding other countries on the subject of peace. Many people feel that the Government did not accept the good offices of President Roosevelt when he said that he would be prepared to take the initiative, if need be, in convening a world conference. Millions of people think—and, in my opinion, rightly think—that that is the only way in which we can hope to obtain anything in the nature of security.

The mass of thinking men and women are not convinced that the policy of rearmament will lead to peace; rather they fear lest it should lead the country into war. It is for this reason that we have put to us questions as to what steps we are taking to bring the Prime Minister and the Government to explore every avenue for the purpose of convening a world conference. About a fortnight ago, in a Parliamentary Question, I asked the Prime Minister whether he was taking, or was prepared to take, any steps with a view to convening a world conference, and his reply was to the effect that, in his opinion, the circumstances of the moment were not ripe for such a conference. We may continue this policy for another two or three years, but somebody must take the initiative; and I am hoping that the Prime Minister will have the honour of taking the initiative in seeking to bring about such a world conference. It is not a sufficient reply to say that, if the conference were convened, it might be a failure. But it should be attempted. Even assuming that some nations would not attend, it would at least show the world that we and other nations were prepared to attend such a conference on peace intent. Working men and women in all sections of the community are holding back; they are not prepared to volunteer their services, for the reason that they do not want war. What is important, they feel, is that the Government should make strenuous attempts in the direction of peace, and then, if failure were to loom on the horizon, there is every reason to believe that men and women would volunteer for the purpose of defending this country. At the moment they are not convinced that the Government have done everything possible to avert war.

I listened to the Secretary of State for Air making what cannot but be described as a fantastic defence of profiteering. It was not permissible to interrupt him. His brief had been carefully prepared. He glossed over certain points concerning finance. They were, in many respects, put in a false setting. If the right hon. Gentleman were still in his place I would suggest to him that the general public will not be hoodwinked by a statement of that kind. No one can deny that at this moment gross profiteering is taking place, profiteering quite as bad as that which took place during the last War. If the Government imagine that people, especially unemployed people, will volunteer for service when they see profiteering taking place to that extent, then I can assure the Government that they are labouring under a delusion. Workmen who have been unemployed for two, three or even four years are not entitled to ask for increased remuneration to recompense them for the time which they have lost, but the defence put up at that Box by the Secretary of State for Air—in effect, though not in these words—-was that these companies had had a lean time for a number of years and were, therefore, justified in exploiting the community now.

I know that ethics do not enter into the commercial system to any great extent, but as the country is likely to be confronted with grave danger, we are entitled to ask that the directors of these companies shall have some regard to the position of the country, and shall be prepared to set up some moral or ethical standard which will inspire the rest of the community to do their best in the national interest. But where gross profiteering is taking place, as it is to-day, no appeal is likely to evoke from the mass of the community that spirit of honour and patriotism which this country will possibly need in the very near future. I ask the Government, therefore, to give greater consideration to this gross profiteering. I suggest from my own experience during the last War, as one engaged in production, that you may have the most elaborate system of costing and auditing that is possible, and even then fail to discover profiteering.

I do not intend to single out any firm. The Secretary of State for Air this afternoon mentioned firms who are engaged in private work as well as Government work. That work is not being done in two separate parts of each establishment. The men who are engaged on the work know a particular job only by a number. The number of the job is shown on the time sheet. Since when have the Government been in a position to know where they are paying for Government work and where they are paying for work which is being done for a private customer? Since when have they been able to differentiate? They will never be able to discover whether they are paying for the actual work which is being done for them or for private work until they have inspectors in the factories, seeing the work that is being done under the respective numbers on the various jobs. It is quite easy for men to be engaged on a job known as No. 105 when many of the parts that are being machined are not for job No. 105 but for job No. 108 which is, perhaps, work of a private character. You must have inspectors at liberty to go into works unexpectedly and to inquire whether particular jobs which are being done are Government work or private work. Otherwise your auditing system and your costing system will not avail.

During the last War, private work and Government work were being done in the same establishments and the firms were ringing the changes on them. They are ringing the changes to-day and the men who are engaged in the factories could be the Government's best informers in that regard. But there is no use in the right hon. Gentleman standing at that Box with a prepared brief and trying to persuade the House that gross profiteering is not taking place. Let the Government be candid and admit it and set up machinery which will enable us to get down to the source and see where the wrongs are taking place and where the community is being robbed. Until we adopt these methods I shall have no confidence in the Government's system of costing and auditing, having in mind my own experience during the last War in connection with the production of war material. I know precisely how the changes were rung as between the different classes of work.

I appeal to the Financial Secretary to the War Office, who is the Minister in charge at the moment, to take note of these facts. He is concerned with Army contracts. When I was in a Government Department during the Labour party's term of office, I know what I had to do on more than one occasion in order to find out whether we were paying for work done for us or for other work. I hope that these points will be considered and that machinery will be set up which will give the community the assurance that they will not continue to be robbed as they are being robbed at present. "Robbed" is not too harsh a word. It is a correct term, and until we stop this kind of thing at the source, the Government will never inspire working men in the way they desire, or effectively appeal to them to render the service which people are being asked to give at the present time.

8.33 p.m.

Mr. Butcher

Running through the speech of the hon. Member for West Willesden (Mr. Viant) almost like a theme song were the words "gross profiteering." I listened at first with some interest but afterwards with some impatience to hear how he developed that line, but so far from any concrete specific instances being brought forward we had nothing but the grossest generalisations.

Mr. Viant

Is it necessary for me to repeat figures which have been given not only to-day but in previous Debates? I thought they were well known.

Mr. Butcher

The hon. Member referred to the nominal capital of certain public companies and I believe there is a list in the financial columns of the "Daily Herald" to-day, but it is impossible to decide whether a profit is reasonable or unreasonable merely by examining the nominal capital of the company. There are several factors which must be discovered before an accurate statement can be given. First, of course, is the total amount of capital that is involved in a company. It may be that the capital is locked up in book debts, in machinery, and even in those more intangible objects, such as patents and development work. All of that has to be considered, but that is not all. The financial gearing of a company's capital must also be considered. If a company has the whole of its capital in ordinary shares, the profits may be entirely different, although the actual profits derived from a transaction are the same, from what the dividend declared on the nominal ordinary capital would be if the company had various kinds of capital. Therefore, it is unfair and misleading to quote high percentages.

On the other hand, I think the very fact that there is this eagerness shown in the House to-night to make sure that excessive profits are not being made from armaments is in itself a tribute to the desire of this country that we should possess ourselves of the weapons for our defence, and defence alone, as rapidly and as cheaply as possible, because let us never forget that what we do not pay for in our lifetime posterity will have to pay for in theirs. I have not a great deal of sympathy for posterity in the abstract. I did not come here on the votes of posterity, and I shall never, I imagine, be examined by them, but I must confess that when one of my little daughters saw me off at lunch-time to-day, I realised that on those tiny shoulders and those chubby legs part of the burden of our rearmament will be laid. Therefore, while appreciating the statement made by my right hon. Friend the Secretary of State for Air and being very satisfied to learn of the increased attention that is being given to the question of preventing excessive profits on contracts under the purview of his Department, I still think there are other correctives that might be brought in. I think we have not yet explored, in connection with our rearmament programme, the fullest extent of sub-contracting.

I think it was the hon. Member for Stockton-on-Tees (Mr. H. Macmillan) who said that Government contracts were something of a nuisance. I believe that to be correct, and I believe that there are engineering firms in this country with large resources of skilled engineers and machine tools which have" little or no armament work inside their factories. They have not been asked to take it, and because they are reasonably full up with other work they have not asked for it. I am connected with one industry, and representatives of the machine suppliers for that industry call on me from time to time, and I say to them, very casually, "I suppose you are full up with rearmament work." They turn round and say, "No, we have hardly anything, and we really do not want it. We have plenty to jog along with." I believe, and I put forward the suggestion, that there should be some check-up of the factories that are equipped for the production of munitions and other armaments which we require that are not doing Government work, and that the burden should not be left to some factories to carry alone. Everybody with the plant and the skill should be required, and if necesasry compelled, to take their share in supplying what we need.

But I do not believe that it is upon compulsion alone that this country depends, for, after all, what is required is the spirit. There is a new spirit rising in this country, a spirit which is certainly shared to an increasing degree on both sides of this House. There is no desire among the shareholders of these companies, who are in many cases exactly the same people who go out at night as air-raid wardens or on other forms of National Service, to accompany that service with an increased dividend on their interest in some armament factory. We have in this House, on all sides, Members who are themselves proposing to make great sacrifices for the sake of their country, and I do not believe that that spirit is limited to this House or to the professional classes. Just as those in charge of our rearmament programme have made an appeal for voluntary National Service, so I ask them to make a special appeal direct to the business community for assistance in this task of rearmament at the cheapest possible rate for the community.

8.41 p.m.

Mr. Edwards

How true it is, as the last speaker said, that a great part of the burden of rearmament that we are incurring will fall on the chubby children of the future, but how much greater a burden is going to fall upon some of those not so chubby children, children with rickety legs, for whom we cannot afford even enough milk. In our districts many people are volunteering twice a week for work of national importance, and then are being told that we are going to consider the introduction of compulsory work. The hon. Member complained that many factories do not want to share in armament work. I wish he could spend a few days in my constituency, where we are begging for a share of this work on which millions of pounds are being spent, and yet we have increased our unemployment by 50 per cent, in the last 12months. I had occasion to draw attention to that fact last week, and I do not want to go into it again, but it is a criminal offence that at this time, when we are supposed to require all the armaments we can get, there should have been a 50 per cent, increase of unemployment in a district manufacturing iron and steel.

I was rather interested in the remarks of the hon. Member for Harrow (Sir I. Salmon), who rebuked Members on this side for drawing attention to profiteering in this rearmament programme. He, like many other speakers, tried to tell us that there is no profiteering going on, but I think the greater danger is that it should not be ventilated as we are ventilating it on this side. We should be the first to go back to the country and tell them that it is not true if the Government would give us some evidence to that effect, but there has been no attempt to do that yet. On the contrary, the Secretary of State for Air came down to-day and made a remarkable speech, telling us that everything in the garden is lovely. I cannot help but admire the right hon. Gentleman. Anybody who can make a speech like that, and get away with it, compels admiration, but he did not attempt to analyse the situation. The hon. Member for Harrow tried to tell us that, after all, if companies manufacturing aeroplanes are getting 45 per cent., it does not really mean 45 per cent. He was like the Minister of Labour, who analysed the 2,000,000 unemployed and said that it was not really 2,000,000, but cut it down to about 250,000.

The hon. Member for Harrow tried to convince the House that everything is very carefully scrutinised, and we are asked to believe that it would not be possible for anyone to get away with a profit of 45 per cent. Who is he to be the watchdog of profiteering? A gentleman who is used to drawing 50 per cent, and 100 per cent. is not a capable watchdog; he is so used to it that he would never notice 45 per cent. The fact remains, contrary to what the Minister told the House to-day, that manufacturers of aeroplanes often have inflated capital. It may be the case in certain companies that their capital has been written down to one-third, but the capital of those who go back to the glorious times when they were having flotations was inflated, and even on the inflated capital 25 per cent. to 45 per cent. dividends have been paid. We have had the strange doctrine from that Box that, after all, aircraft manufacturers have had some bad years and some reward was justified. Joseph was rewarded by Pharaoh for warning of the lean years to come, but Joseph was a novice compared with the Minister for Air. He is openly inviting the manufacturers to-day to help themselves handsomely because they have had some lean years and that, as they did not know what was to come in future, they should help themselves while the going was good. That is what he told the industry to-day. There is not a word about an increase in wages. We have, indeed, been told by the Prime Minister that there may be a cut in the social services.

We are told by other Members that some firms in this industry are being overloaded, that they are so busy they do not know where to turn, and that they must, therefore, make more profit. I have always been led to suppose that the more business a firm has the lower the costs. We are told from the Government benches, however, that exactly the contrary is the case when it comes to armaments. That is a strange doctrine. It is not true, and it is a thoroughly dishonest way of dealing with this problem. I hope that the Minister will pay some attention to the speech of the hon. Member for Ipswich (Mr. Stokes). The hon. Member told us that the Government were de liberately wasting millions of pounds in over-payment for shells. One manufacturer could make shells for 12s. 6d. Another is charging 21s. 6d. There may be some difference in cost——

Mr. Boyce

The hon. Member said it was 21s. 6d. at Woolwich.

Mr. Stokes

No, I said that it was 28s., that the commercial price was 21s., that an offer was made for 17s. 11d., and that it could probably be done for 12s. 6d.

Mr. Edwards

Is the House going to admit that there is profiteering or is it going to dodge the issue again? We cannot get over the remarks of the hon. Member for Ipswich. In the last War I remember a similar case of a great miller who offered his services to the nation for the duration of the War. He said he did not want to make any profit, but he was told promptly that he must act like a business man. He has recorded that he made £2,000,000 during the War. They almost compelled the hon. Member for Ipswich to make £2,000,000, but he was an honest man and would not do it. I have not forgotten the day when the Prime Minister told the House and the country that they would have to pay more and that the people who were making the profits were the people who would have to pay for the cost of this rearmament. He said very piously, "I am sure that my patriotic fellow countrymen will gladly make this further sacrifice." A right hon. Gentleman who used to siton the other side and is now in another place told the Chancellor of the Exchequer that the City of London would do no such thing. We are told that aircraft manufacturers must have reserves, as lean years might come. Would it not have been more decent had they paid 10 per cent. and kept money in reserve for the lean years? They have no right to declare 45 per cent. when 10 per cent. was enough, and they only declared it because certain people would not have been able to make such capital profits if they had had only 10 per cent. That is where the profiteering comes in.

I want to ask the right hon. Gentleman who represents the Minister for the Coordination of Defence whether he is prepared to deal with the correspondence I have had with his late chief on this question. I was asked for information from the Minister because I had used certain figures. I reminded him that if he looked in the Official Report he would see that I put the figures to the late Prime Minister and that I then asked, If they were not accurate, that I should be told then, for I did not want to quote them in the country if they were not true. No response was made to that speech, which was delivered two years ago, and I assumed that the figures I gave were correct. I used them recently and the Minister for the Co-ordination of Defence was very surprised and evidently felt they were too terrible to be true. I therefore sent him the source of my information. I am just as anxious as the Minister is to correct that statement if it is not true. On the contrary, if it is true, I hope that he will say so. If it is true it is disgraceful and disgusting that such profits should be made. It may be said that this was a long time ago, but even if it was two years ago it is important, because the leopard does not change its spots, and if we were allowing profiteering two years ago those who did it are still willing to profiteer and are clever enough to do it in some other way.

About the time I gave those figures, the "Economist" published the amount of money that had been subscribed to every armament company in the country in the form of new capital since the rearmament plan was announced. They said that only 38 per cent. of that money got into armament production and that 62 per cent. was sheer profit for someone. I do not know where it went and I do not know that it is very important. All we know is that it did not go where it was intended to go. I want to say to those who have been justifying this profiteering that if we got into the difficulties against which we are preparing to defend ourselves I assume that there would immediately come into operation an excess profits tax. If we are to have such a tax when war is declared, why cannot we have some kind of excess profits tax to-day? I cannot see that there is any more virtue in making a profit before war is declared than there is afterwards, and the Government should make a direct claim upon these people in order to see that their profits are definitely limited. There would not be an opportunity to develop the theme in a Debate like this to-night, but I should be glad on another occasion to go into it in more detail, for I honestly believe that the moment you take profits out of war, or the preparations for war, you have started to abolish war, and I do not believe that so long as. profits are to be made in war or in the preparations for war you will ever have peace in this world of ours.

I pointed out to the House last week, and no comment was made, although it was an astounding statement to make without contradiction, that unless we British people supplied the raw materials to the nations we are arming ourselves against they could not possibly build up their armaments. It is an astounding thing that the British Parliament should be taking steps to raise thousands of millions of pounds to defend this country against the arms of other nations—arms which have been manufactured from materials which the British Empire supplies to them. When is Parliament going to face up to that issue? If there was not any profit in supplying those materials we should not do it and the country would be safe. There is not a man who dare get up and say that Germany or Italy could be a menace to this country unless they had been able, and were still able, to get their raw materials from the British Empire; and, as an hon. Member reminds me, we have to some extent financed that process. That is a remarkable thing to say without any contradiction. I hope that if the Minister does question that statement he will have something to say about it, for I honestly believe what I have said. This country could assure peace to the world by merely controlling its raw materials and refusing to supply them.

Mr. Fleming

The hon. Member will agree that this House does not control the British Empire as regards the sale of its raw materials.

Mr. Edwards

No. The hon. Member, or some other hon. Member, made that simple remark last week, and my retort is exactly the same as it was then, that I am assuming that the Dominions are just as patriotic and just as loyal as we are, and that if the Dominions can establish peace on earth by merely controlling those raw materials they will do so just as gladly. There is no question of our controlling the Dominions, but I am assuming that they will co-operate with us, and we have been told by the Prime Minister that they are ready to do so. It was the Prime Minister who raised the issue. He has told the world that our economic resources are more than those of any other nation. I think it is time we used them, instead of spending thousands of millions of pounds in defending ourselves against armaments owned by foreign countries— arms which have been manufactured to a large extent from materials drawn from the British Empire.

8.58 p.m.

Mr. Leslie Boyce

I do not think it is necessary for me to repeat what has been said so often from these benches, that we on this side are every bit as much opposed to profiteering as are hon. Members opposite. I should like to intervene for a few moments in an endeavour to show how easy it is to be misled as to whether certain profits are excessive or not. I am, of course, fully in agreement with the Secretary of State for Air when he said that, strictly speaking, in determining this question all the capital assets involved should be taken into account. But to give additional point to my remarks, and in order, as I hope, to simplify them, I propose to take only the working capital that is actually employed in executing orders.

Let it be assumed, to demonstrate my point, that a profit not exceeding 6 per cent. on the working capital employed in Government contracts is reasonable, that is to say, 6 per cent. on the money that is expended in materials, wages and on-cost. Now we come to the point where hon. Members are, I think quite innocently, misled in making their calculations. It is a common practice of large engineering concerns to take powers in their articles of association to borrow money either up to the amount of the issued capital of the company or to an unlimited extent. If their credit and their security are good it enables them to borrow additional working capital from the banks in the form of temporary or floating loans in order to finance large orders. It is an everyday practice of industry throughout the country, and it affords the banks a reasonably safe outlay for their funds and obviates the necessity of companies being over capitalised in normal or slack times.

The hon. Member for Doncaster (Mr. J. Morgan) endeavoured this afternoon to make some point of the fact that, as he alleged, special rates of accommodation were given by the banks to armament firms. I can assure the House that there is no substance in that contention, because low rates have been ruling now for some years in respect of loans made to companies of good standing if they had orders, whether those orders were from the Government or not. We have agreed for the purposes of this discussion to allow a company to make 6 per cent. profit on the working capital employed.

Mr. Stokes

I want the hon. Member to be quite clear in what he is saying. Is he saying a clear 6 per cent. profit or an ascertained 6 per cent. profit, because they are very different things?

Mr. Boyce

I am sorry that the hon. Member for Ipswich (Mr. Stokes) has not been following me. What I said was, let us assume for the purposes of the discussion we are about to have that a profit not exceeding 6 per cent. on the working capital employed in executing a Government contract was reasonable, that is to say, a profit of 6 per cent. on the money expended on materials, wages, and on-costs. Suppose that in addition to the company's own working capital it borrows from the bank, as often happens, a sum equal to its own issued capital. Everyone in the engineering industry knows of several companies that regularly have to do this when they are very busy in order to finance the work in their shops. In the course of its financial year that company may turn that borrowed money over as many as four times, and in that case the amount of profit that is derived from the employment of this loan would be equal to 24 per cent. of the issued capital of the company, that is to say apart from what it has made from turning over its own smaller amount of working capital, which might reasonably in the circumstances be equal to, say, 9 per cent. on its issued capital.

Mr. Stokes

I want to be perfectly clear and also to follow the hon. Member's argument. He says I may borrow 100 per cent. of my capital—which I, personally, have done at one time or another —and then may turn over that capital three or four times, but I hope he is not suggesting that in my published balance-sheet the profits I show have not been calculated subject to the interest payments upon the capital borrowed.

Mr. Boyce

No, not at all, but the interest on the money borrowed from the bank will presumably be about 3¼ or 3½ per cent.

Mr. Stokes

You are very lucky.

Mr. Boyce

I can assure the hon. Member that I am aware of cases where it has been 3¼ per cent. But whatever the rate at which you borrow from the bank, 3¼ or 3½per cent., that interest has to be paid once only in the course of the year, whereas you may turn over the money two, three or four times. It obviously depends on the nature of the business; I imagine that in Ford's works, for instance, they turn it over more than four times in the course of a year. The result is that, taking the 24 per cent. on the issued capital of the company which results from turning over four times at 6 per cent. the amount borrowed from the bank, and adding the 91/3 per cent. earned by turning over its own working capital, we arrive at a total profit of 33⅓ per cent., or one-third of the issued capital.

Let us assume that the capital of the company is divided as to one-third into 5 per cent. preference shares and as to two-thirds into ordinary shares; then, with a profit equal to 33⅓ per cent. on the issued capital, there will be available for distribution, after paying 5 per cent. on the preference shares, an amount equal to 47½per cent. of the issued ordinary capital. What proportion of this profit should be distributed as dividends or bonuses is irrelevant to my point, which is to demonstrate how a reasonable profit such as 6 percent. at one moment may appear to be excessive at 47½per cent. at another moment. In a case such as I have described, it cannot be said that either the company or the Government has been a party to profiteering when the contract was placed with a margin of only 6 per cent. It is axiomatic that every day that a job takes in going through the works adds to the cost of manufacture. Wages have to be paid, overheads keep running on, and the undertaking of other work is prevented.

Mr. Stokes

I am sorry to interrupt the hon. Member again, but this is a fairy tale. The conception that he puts forward seems impossible. I quite agree that one borrows perhaps up to the limit of one's borrowing powers, and, if one has no limit, one goes further; but do not let anyone tell me that an engineering firm, whose output depends upon the actual capital expenditure and not on the money that they borrow from the bank to help them along for a time, are going to be able to borrow four times their declared capital and reserves and then turn that money over three or four times. It is not possible.

Mr. Boyce

It would be if what the hon. Gentleman has said in any way represented what I have been saying. I did not suggest for a moment that the company had borrowed from the bank four times its issued capital.

Mr. Stokes

Then I explained myself badly. What I meant to say was that I do not believe that to borrow up to 100 per cent. of your borrowing powers and then immediately turn that borrowed money over three or four times is within the realm of possibility. As a member of the investing public, I should want the facts very carefully laid before me before I put up a penny in support of such a proposition.

Mr. R. J. Taylor

In the case that is being quoted by the hon. Member for Gloucester (Mr. Boyce), if the company were so busy with financial arrangements, would they have any time left for making armaments?

Mr. Boyce

The interjection of the hon. Member for Morpeth (Mr. R. J. Taylor) was the most fatuous heard in this House for the past 10 years. The hon. Member for Ipswich says it is not customary for an engineering concern to have the good fortune to be able to turn over borrowed capital three or four times in the course of a year, but no doubt there are a number of instances within his knowledge and mine where capital is turned over quickly, and there are other cases also where firms are lucky if they turn over their working capital once. I am not interested in any armament firm, and was not picking on any particular company, and I am always pleased to hear what the hon. Member has to say.

I was saying that it is axiomatic that every day that a job takes in going through the works adds to the cost of manufacture; and, conversely, the more the manufacturer can improve upon the date fixed for delivery, the more profit he makes on his order. I saw it stated recently that a certain aircraft firm was two months ahead of schedule in its de livery of orders to the Government. That is not profiteering; it is a combination of good management and good workman ship which is of considerable advantage to the State. It not only means that the working capital employed by the company is being turned over a little faster than was anticipated, but it also means that the workmen, practically all of whom, in this class of work, would be on a piece work basis, have been earning particularly good wages. No one will attempt to deny, and I least of all, that certain firms engaged in the making of aircraft and munitions for the Government have made larger profits than it was intended that they should make, and that they have been able to distribute by way of dividends and bonuses unexpectedly large profits, in spite of all the care that has been taken to safeguard the public interest when placing orders, and of the application of the National Defence Contribution. I hope, however, that I have demonstrated to the House that large profits can result from orders placed at reasonable or even low prices when the working capital is largely augmented if it is possible for a large temporary loan to be turned over several times during the same financial year.

The setting up of a Ministry of Supply, which has been advocated this afternoon by the right hon. Gentleman the Member for Caithness (Sir A. Sinclair),and also by my hon. Friend, the Member for Stockton (Mr. Harold Macmillan), would not and could not affect such a position as this. While we cannot prevent the profit from being made in the circumstances I have described, if the present method or scale of taxation is insufficient to deal with it, by all means let us take steps that will be more effective. At the same time, let us have an end of these unfounded and stupid accusations that the Government have been a party to profiteering. Such accusations do credit neither to the intelligence of those who make them nor to the intelligence of those to whom they are made.

9.14 p.m.

Mr. Tinker

The Chancellor of the Exchequer, in moving the Second Reading of the Bill, stated that the whole of it was contained in four lines, but I should like to examine what it means. We on these benches agree that some kind of preparations for defence have to be made; we realise that, in our position at the moment, anyone who did not take up that attitude would be foolish, because there is no telling when the blow might come. But we ask, and we are anxious to hear from the Government benches, what steps are being taken to get other countries together with a view to rendering this kind of thing unnecessary. We are all piling up armaments in readiness for what may happen, each country realising that other countries are doing exactly the same, because we are all afraid of each other. One wonders what attempt is being made to bring the countries together and point out the futility of this mad race in armaments. I hope that we shall hear from the Government benches whether such an attempt is being made; and if not, why not. We cannot go on in this way for ever. There must be some approach by somebody at some time, and I have alwaysheld—it may be egotism on my part—that this country stands foremost, and should give the lead. Whatever may happen in the dictator countries, it is not too late for the British Government to see whether other countries will meet us. I can foresee that, unless some big step is taken next year or in 1941, another £500,000,000 may be required; and we shall not be able to make any protest, because we shall realise that something has to be done. Only last week, I was one of the group of Members of this House who went to see the preparations being made by the Army. Those preparations won my admiration, but, mixed with that admiration, was sadness at the thought of what these things were being used for. I trust that some attempt will be made to ask other countries whether they are now ready to talk reason.

I do not know whether I am correct in thinking that profiteering is taking place. I have never claimed in this House to understand finance; I am always at a loss when it is talked about. But on Thursday night and Friday morning I sat listening to our cheif speakers on this side. The right hon. Gentleman the Member for Hillsborough (Mr. Alexander) made very grave charges about the way in which profits are being made. His manner convinced me that he believed what he was saying; and, knowing him well, I have no doubt that his arguments were well-grounded. He was answered by a right hon. Gentleman for whom I have great respect, the former Minister of Agriculture. I thought he did not meet the situation fairly. I may have misjudged him, but it appeared as though he thought the Opposition had a good case, but that, being a Government speaker, he had to defend the present system. I felt that he was putting up a case for his party, and that he was not so sure of it as he would have liked to have been. During the Debate one Conservative Member, the hon. Member for Aylesbury (Sir S. Reed) supported what had been said on this side, and declared that the time had come when this question would have to be examined. He said that when a firm was making 42½ per cent. profit something would have to be done to stop that. When a figure of 42½ per cent. profit is mentioned, it makes me think that there is something very wrong going on. Our Amendment says that we are not against providing the armaments that are necessary, but that we want to be satisfied that these enormous profits are not being made.

When private firms get contracts from the Government, they seem to think that these contracts are a sort of Eldora do for them, and that they have an opportunity to make up for the bad times that they have gone through before. This is one of the things that are not regarded as being wrong. It is not considered to be the same as robbing a private individual, though a little examination will convince people that it is a number of private individuals who have to find the money. In effect, when money is taken unjustifiably from the Government, it is being taken from the individuals who have to find that money. I hope the Government will not brush our protest aside lightly, but will satisfy us that at least something is being done to stop profiteering. I would ask the Prime Minister to issue a White Paper giving some clear statement to the House and the country as to what steps are being taken by the Government to stop the making of excessive profits out of the distress of the country. Also I would like the Government to lay down what they think to be a fair rate of profit. Some lead ought to be given, and some protest should be made to let these people who are getting these orders know that the House of Commons will not stand this kind of thing. The stronger we make our protest the greater chance we shall have of preventing what I believe is happening at the present time. If action on these lines is taken, those who have been drawing excessive profits, with nothing on their consciences, will realise that Members of this House are determined that that shall stop. If such a lead is given from the Government benches to-night there will not be as much resentment against the need of finding this money as there will be if we are not satisfied on the question of profiteering.

9.25 p.m.

Mr. Crossley

The hon. Member for Leigh (Mr. Tinker) always speaks with sincerity and a great deal of power and eloquence, which I envy very much. We were told by him just now that he endeavours to study speakers on this side of the House and to try to find out whether we are talking from our hearts or merely putting up a party case. I do not mind telling him that I am talking quite frankly as the director of a firm which does take a good many contracts for armaments for the Government. I want to say that at the outset, because I do not want anybody to be under a misapprehension about what I am going to say. But I think the House will agree after I have sat down that I have not said a single word which could be interpreted as speaking on behalf of my own interests.

I take it that in all these discussions on the production of armaments what the House is most concerned with, and what the Government ought to be most concerned with, is speed and value for money. I prefer to put it in those terms rather than merely in terms of profit. I would like to say that of the three main Government spending Departments, so far as I can judge, the Admiralty is extremely efficient. Its orders are given with a real knowledge of what value for money means. The firm which gets the orders is pretty sure, if it does well, of repeat orders, and it is pretty sure equally to make a small profit, but to make no excessive profit. The Air Ministry is much improved under the direction of the new Secretary of State for Air. It has undoubtedly made great strides. I noted particularly that in his speech to-day the right hon. Gentleman said that there was now no ring. I hope that that meant that he recognises that previously there was a ring, and that he is trying to break that ring.

I do not believe with the hon. Member for Gloucester (Mr. Boyce) that there has been no excessive profit-making in the Air Ministry. It is too remarkable a fact that the firms which have made the greatest profits are those firms which have had the greatest number of Government orders, and the firms which have not made anything like such great profits are the firms which are still carrying on a considerable part of their normal production. That is too great a coincidence to be very easy to stomach. I think there has been a ring. I think there have been excessive profits, and I say quite candidly and frankly to the Under-Secretary, who sits there, that I think the position of Sir Charles Brace-Gardner is one which I regret. I think it is a pity that a man who is a nominee of the aircraft producers themselves should find himself in the position of head of the principal Supply Committee in the Air Ministry.

The Under-Secretary of State for Air (Captain Harold Balfour)

He is not the head of that committee; I am.

Mr. Crossley

I am sorry; I should have said a member of it. I would say that I am equally convinced that the new Air Minister, who is now rapidly engaged in diffusing production over a great many more firms, is on the right lines. I wish that the step had been taken at the same time as the decision to make shadow factories. I wish that the shadow factories had not been put into the control of the original ring of firms. Still, I think we are on the right lines now.

As to the Army, I would say something quite different. I do not think there is any excessive profiteering on Army orders, but I do not think that on Army orders the Government get value for money. There are too many and too small orders, and then they are changed, or the specification is changed. They have not the great advantage that the Navy have in having people giving those orders with a very great deal of engineering knowledge, of having a very highly skilled technical staff; and the consequence is that I think they are frequently not getting value for money. If I might give an example, the firm of which I am a director got an order for a particular type of gun, let us say the number was x. When they had procured the tools and jigs for this order the number was cut down to y, y being one-third of x. Now for military reasons it may have been desirable to change the type of gun, but quite clearly, as the price of those tools and jigs was passed on to the Government, the price per gun would be greatly raised by cutting down the order and shifting us on to another type for which we had to get a whole lot of different jigs and tools. There is far too much change of specifications going on under the War Office orders.

There is one subject which I would like to mention. I asked a supplementary question the other day of the Prime Minister, and I got a raspberry reply. It was on the question of the Advisory Panel for Industry. I am going to state quite plainly to the Chancellor of the Duchy that the Industrial Advisory Panel is at the moment of no value whatever as regards complaints from the manufacturers, and for a very simple and a very human reason. Suppose a manufacturer makes a complaint to the Industrial Advisory Panel, what happens? If it is traced at all it is traced back, and to whom? It is traced back, in fact, to a civil servant. That civil servant is trying to do his best. He is probably trying to do his best in a job at which he is very new, and of which he has had very little experience as one who gives vast orders on behalf of a public Department. He has got Treasury control behind him, and he is very frightened of Treasury control, and he has got Ministerial responsibility over him, and he does not much mind how often he changes his Minister.

The result of that in the case of ordinary firms which definitely want to go on with Government orders is this. They like Government orders; they are very valuable to them; they keep their works going, particularly at a time when industry is not so prosperous as it was, or as it may be, and they simply do not want to be written off the list, and they think they would be marked men if they went to that Panel. The effect that the Industrial Advisory Panel has is quite simple. It completely cuts down criticism, both in the House and in the industry. It cuts it down in this House because my right hon. Friend will get up and say, "Well, why does not the firm go to the Industrial Advisory Panel?" And it cuts it down in the industry because, in fact, the managing director of a firm, responsible to his directors and his shareholders, does not in fact go to the Panel. Therefore, in my opinion that Industrial Advisory Committee is, in fact, absolutely useless as a medium for complaints.

I want to say a few words in a constructive spirit about speed and value for money. The most rapid and the cheapest way of rearmament would be to introduce as much mass production as possible. One firm would be concentrated upon making one item or one part of a gun, or a gun or tank, or whatever it might be. On the other hand, from a national point of view, obviously, it is a very dangerous course, because it might easily mean that one fatal item in your supply in time of war might be completely cut off by one bomb, and therefore the Government have, I think, quite rightly rejected that way. I cannot help feeling that at the moment there are far too many changes in specification, and far too many small orders, and I hope that my right hon. Friend will look into that point, particularly with regard to the War Office. That is one item of speed. I want him to think of the skilled workman as a child playing a piano. At first it makes an awful noise, and then improves very slowly, making a great many mistakes, until it becomes more efficient and used to the job. [Interruption.] I know that the professional pride of the hon. Member opposite is aroused, but he will agree that, as a man gets used to a skilled job, he works faster and makes fewer mistakes; he works faster and faster and becomes very efficient, and that leads both to speed and cheapness for the Government.

There is one other aspect of speed to which I would like to draw the attention of the House, and that is, Treasury control. It is proper that the Treasury should have some form of control, and that this House should have ultimate control, but it is the fact that at the moment contracts, after allocation, are often held up for an extraordinarily long time in the Contracts Department of the War Office. It is not a matter of price, because the price is determined after wards according to the cost, but it is, in fact, a matter of very real delay in the actual production of armaments. A firm has to make out a programme. It knows that the Government expect it to equip its works and start production directly the order comes through. The firm is informed that the order is coming through, but sometimes it has to wait weeks and weeks before the order comes through, and particularly is that so with the War Office.

I would like to make a few remarks about the question of value for money. There is one main wrong principle, which I do not think has been mentioned, in the Government method of costing, and that is, that, subject to the Government inspections of cost, the greater the cost of production of any item of armament production, say, of a gun, the more profit is in fact made by the manufacturer. His price is fixed as a rule after the contract has been under way for some time, and all the processes, the sub-contracts, the raw material, and the labour, and so on, are taken into the general fixed price. Therefore, the higher the cost of the general fixed price—andhe gets a percentage on the top of that—the greater is his actual profit. That wrong principle is aggravated—and here I speak subject to correction by my right hon. Friend—by a second wrong principle.

I will take an example to illustrate it. Let it be supposed that there are three different firms making a gun turret for a tank. Firm A makes it at X cost, firm B at X, plus £10 cost, and firm C at X, plus £20 cost. Also suppose that for the purposes of speed it is vital for the Government to have all three firms producing. The price is fixed at firm C's cost, plus a certain percentage, and, therefore, A, the efficient firm, makes a profit of £20, plus the percentage which firm C gets. It is true that that is a premium on efficiency, but it equally seems to me to be an unfortunate fact that firm A, the efficient firm, which if it were simply competing for an ordinary private order would be selling at a lower cost than firm C, should be getting both the advantage of the order and the advantage of the higher cost of production of firm C. There is room for some improvement under that heading. All these firms should not get more than a percentage upon their costs. I do not think that the main contractor is getting too much on the whole, apart possibly from some aircraft producers, but I feel that there is too much money being paid to sub-contractors, and sub-sub-contractors, and possibly producers of raw material. This may not be true, and certainly day-to-day inspections are bad and cause delays, and sometimes increases in the cost of production, but there is room for a real inspection of some of the sub-sub-contracts and of raw materials.

I will tell my right hon. Friend exactly what I would like to see him do, because I believe that it can be done efficiently, rapidly and well and without any sort of public scandal or inconvenience. He should get a few officers of the Admiralty together to inquire into the matter, and I believe that in three months he would get a perfectly good, efficient and satisfactory report, and that it would rouse the other Departments to emulate the standard already set by the Admiralty. I apologise for praising the Admiralty, and perhaps I ought to mention that we do not get any orders from the Admiralty Department. I address these questions to my right hon. Friend because he is the nearest that we have had to that new type of animal which many of us have longed to see for a long time—a Minister of Supply. He is not quite that yet perhaps, but, unless he makes himself into something like a Minister of Supply within about six months, he will not be the man which I have long believed him to be. The manufacturer is entitled to a greater security of orders, and, in particular, to repeat orders. It is far more to the interest of the Department, the Government and the country that he should get a small profit on a steady and comparatively large turnover than that he should get a large percentage profit on a small turnover, with more cost to the country because his men have not been properly trained in the work which they have to do before they are shifted on to another job.

I would like to turn from that for a few minutes, if the House will bear with me, to another subject altogether. I want to say a word about man-power. I signed the Motion of the hon. Member the other day about increased armaments. It looks as if the National Voluntary Service scheme of the Government is going to be a pretty grim failure, and we ought to face that fact. It is not meeting with anything like a reasonable response, and I would go so far as to say that I do not believe that the voluntary system is, in fact, popular in this country to-day. I do not want to speak about air-raid services but I want to use them to illustrate an example. The establishment of Manchester for air-raid services is 26,273 and the enrolled are 13,204, or 51 per cent. The trained are 9,935, or 35 per cent. Those figures are in advance of many big industrial towns. In connection with the National Service booklet recently issued I am told that some 778 up to now have offered themselves for air-raid services. I do not believe that that failure is, in fact, due to slackness on the part of our population. I think it is due to a very decent feeling on the part of a very large number of our young men. I think it is due, in the main, to a feeling on their part that if war comes they ought to be in the Army and not in an air-raid service. At the same time, they do not quite see why they should go to the inconvenience and very often the economic loss of joining the Territorial Army voluntarily, when their next-door neighbour may actually gain by staying out or by joining some air-raid service.

I believe the National Service booklet was composed by a notorious poet. If his own publishers had advertised his poems in the same way that he has advertised National Service, I cannot help feeling that as a poet, like myself, he would have been "born to blush unseen." That National Service booklet was about the nadir of the efforts of the National Government. There are three comments that I should like to make about man power. There was far too much emphasis in the booklet on the reserved occupations. The booklet might well have been headed: "You will be serving your country best by being a scrimjack." That would have been a reasonable heading for the booklet. Secondly, the age limits of many occupations in the booklet and the reserved occupations are far too low, and it is time the Government realised that although we may be protected by our Navy and, to some extent, by our Air Force, wars are won by armies and won by nothing but armies, in the long run—armies and food supplies. An army marches on its stomach. I hope the Government will take notice of the speech made recently by the right hon. Member for Spark brook (Mr. Amery), because it was a fine speech. In most things that they have undertaken in the last three months, certainly much of the improved spirit that they have shown, has been directly at the instigation of that little band of Members of this House who were very unpopular, last autumn because they criticised them severely for their foreign policy and their lack of progress in rearmament. I want to be a loyal supporter of the Government, and I should like them to set their own lead, and they have a chance now.

I am glad that the Chancellor of the Exchequer is looking ahead in finance and in introducing this Bill. I hope that I shall not be considered as having made a pessimistic speech. The huge octopus of rearmament is at last beginning to grasp its problems, and gradually it is getting under way. [Laughter.] I admit that is a mixed metaphor, and I must correct it. The octopus is beginning to grasp its problems, and the problems themselves are gradually becoming clarified. We are beginning to realise what this huge national effort entails, and it really rests with the Government to go forward. Nobody is going to blame them if mistakes have to some extent been made in the past. Many of those mistakes were inevitable; many of them were due to the fact that nobody had experience of the sort of problems that had to be dealt with, except those concerned with the last War, and that is a long time ago. Now, however, the experience is forthcoming, and the Government have a chance to face up to the position. It is by the way they face up to the situation, by the way they face up to the question of profiteering in armaments, and by the way they have faced the question of production, that they will be judged in the next two years. I have every confidence in my right hon. Friend who now finds himself as a new Minister of Supply, if I may say what I hope is his real position. I have every confidence that he will tackle these problems and meet them face to face, and that the new regime in the Government in charge of the Defence Department will fulfil the double duty of defending the country, and in spending more money on that defence to see that the country gets complete value for money.

9.53 p.m.

Mr. Alexander

We have had nearly three days' debate on the subject of this Bill, with the addition of half a night, and I am bound to say that the more I listen to the speeches the more I fail to find any real answer to the criticism which has been levelled against the Government's administration from this side of the House. I recognise that we have had what we might expect from a loyal and patriotic House of Commons. We have had from all parts of the House speeches which, from their different angles and points of view, have been very sincere. Although there has been some hard hitting, there have been numerous contributions from the Conservative side, which shows that the view expressed by the Opposition is shared by a considerable number of Government supporters. I should take up too much time if I went back over the speeches to which I have listened or of which my hon. Friends have made notes. Last week we had a speech from the hon. Member for Mossley (Mr. Hopkinson), and we had a speech from the hon. Member for Aylesbury (Sir S. Reed), and we have just listened to an informed speech from one who, as a loyal supporter of the Government, speaks sincerely and with a technical experience that is valuable, of the needs of the situation.

Not one of the speeches to which I have referred nor any of the other speeches has been in opposition to the spirit which has moved the official Opposition, and hon. Members below the Gangway in their criticism, not of the actual provisions to be made for armaments as something needed now, but of the administration of the Government in handling the problem and their policy in having brought us to the situation we are now in. The Government at this very critical period should take note of that. Many of the speeches have been directed to the question of the undue sum which is being taken out of the taxpayers' purse, because there is an inefficient check upon production with value for money. There was a notable contribution from the hon. Member for Walsall (Sir G. Schuster) with regard to the general financial basis of the Government's proposals. If the hon. Member would join my right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) in a little financial collaboration in formulating policy, he would find himself, I think, much nearer my right hon. Friend than to the Chancellor of the Exchequer. He gave us a very sound speech as to the proper approach to this matter from the national Budget point of view. I hope the Chancellor of the Duchy is going to give us an answer to the hon. Member for Walsall. It seemed to me to be a very important point indeed.

What is to be the future of our budgeting in this country? The hon. Member for Walsall pointed out that you cannot, if you follow up the statements of the Prime Minister last week, contemplate a repetition of deficits as something which is likely to recur, without taking proper steps to meet that situation. He pointed out the difference of current expenditure of that character, which is not on capital account, and I shall be interested to hear the reply of the right hon. Gentleman. We have had as yet no answer to the case we put last week as to the need for taxing more of the available wealth in the country instead of raising so much of the expenditure by way of loan. We had no answer from the right hon. Gentleman last Thursday night, but I hope he will be moved by the speech of the hon. Member for Walsall to give us an answer to-night.

I come to the vexed question of profits on armaments and to the speech made by the Secretary of State for Air to-night. His cherubic countenance and bland smile on all occasions are very disarming, but in his speech to-night, which purported to be a reply to me, he said everything in general and nothing in particular. It was no answer at all to the particular case we are putting. I felt that the right hon. Gentleman was drawing upon his previous experience as a solicitor and thought that he could put over in this House what he would not be allowed to put over in a police court. I want to bring him to the real point of our charge, which is that in this national extremity we ought to be getting value for money; and we are not. An attempt has been made to challenge the figures I quoted. I do not say that every figure I quoted was the most apposite, although I am prepared to argue that point, but what we are getting at is this, that since the introduction of the Government's rearmament expansion programme profits are being made by aircraft and other munition-making firms which are unreasonable in the face of the nation's need; that there is no proper supervision on expenditure.

What is the answer to that? The Chancellor of the Duchy early on Friday morning seemed to me to be speaking from a most imperfectly prepared brief. Certainly the figures given by the Secretary of State for Air this afternoon are totally different from those which the Chancellor of the Duchy quoted, at any rate in their position and in their effect.

If I may say so, the kind of argument he put up early on Friday morning was that there was an issue at 53s. of shares of the Bristol Company and that, therefore, the profits paid were not unreasonable, that it had nothing to do with the case whatever because the 53s. never found itself into the company's account at all. The Secretary of State for Air now admits it. We are saying that the checks on profits, in the processes and in the finished article, are such that when the company comes to distribute interest upon the actual capital of the company it is at such a figure that the Stock Exchange market is willing to buy at four, five and six times the normal value of the company's capital because the profits returned upon it are so large. I really cannot understand how it is that hon. Members opposite, when they have to make statements on finance, should stand up and lecture us as if we did not know anything about it. It is most amusing. The Prime Minister smiles at that. Any Member of the Front Bench knows that they can get as much financial help from those who sit on this side of the House as they can from any section of the community, and if you want to know how finance can be run I dare say there is as much knowledge on this side of the House as there is on the benches opposite. The Chancellor of the Exchequer was much obliged for some of the things which have been done during the past 12 months.

We understand what it takes to capitalise a company and what may be the difference between the nominal capital of a company and the real capital employed. In the concern with which I am connected we have a great many more capital assets employed in the business than may be stated in the actual capital account, because we have been wise and prudent and written down the value in the past of our assets. We then distribute profits to the consumer on the basis of the real capital charges. I say to the country that when you deal with profits on armaments you are entitled to say, to firms who have for any reason changed the basis of the publication of their capital, that if they had written down their assets because they have had plenty of profits in the past from which to write them down, or because those assets are no longer what they were, it is on that basis that their costings should be judged when they do work for the Government. That is the case that I am putting, and we are not going to be lectured by hon. Gentlemen opposite as if we knew nothing whatever about the matter. We do know a good deal about it.

What do the Government really propose to do? I must say that I felt that the Government had been a little more fair in this Debate than in the previous one; they have put up three Ministers to answer on one day and on the Second Reading of the Bill. It looks as though they were becoming a little anxious as to the effects upon the platforms of the country of the facts which have been revealed in this House. I am grateful to the right hon. Gentleman the Secretary of State for Air for the approach indicated in his speech towards a better attitude to the problem than existed at the end of last year when he himself instituted an inquiry. Perhaps he will not mind my saying in the House that when I approached him last November it was in the hope that, after what had happened in November, some action by the Secretary of State for Air might prevent a repetition of the position.

If an inquiry instituted into this matter resulted in an actual check being effected, no one would be more pleased than my hon. Friends, but I am not at all hopeful about that, so long as the right hon. Gentleman has in his mind the kind of position indicated when he said: "Holding the beliefs that I do." That is how he described his attitude to the problem this afternoon. It was a sentence that revealed the real mind of the Secretary of State for Air. If he approaches the matter in that way, it is really a confirmation of the statement made nearly two years ago by the Prime Minister when Chancellor of the Exchequer, and when he said to me across the Floor of the House: "How does the right hon. Gentleman think we are going to get armaments without profit?" If he approaches the problem in that manner, I am certain that he will not succeed. The right hon. Gentleman holds a very great position in the fighting Services, and he really ought not to approach the problem in that spirit, having regard to the experience gained in the last War.

What does the country think about it, on such an occasion as this, when we are being asked to vote the largest loan figure of any peace time during our history? I will tell the right hon. Gentleman what the country is thinking and saying. The hon. Member for Stretford (Mr. Crossley) pointed out why there has not been a larger response to the Government's plea for voluntary service. I meet the workers in the country, and some of them say that they are completely dissatisfied with the Government's foreign policy and with the handling of the Government's rearmament programme. It is not very logical to be asking them for almost unlimited voluntary service if other people are to make unlimited profits. In the light of the experience of the past, no head of a fighting Service ought to approach this problem in the stereotyped fashion of saying: "I am a capitalist supporter. I do not believe that we can get service for the nation without profit." The right hon. Gentleman ought to remember the report of the War Profits Committee of 1918, which revealed that while men were being killed in thousands at the front, profiteers and the hard-faced men made, according to the report, £4,000,000,000 in unjustifiable profits. That is the spirit in which the Secretary of State for Air and the Minister for Co-ordination of Defence ought to approach this problem of profits in armaments. If he will do it in that spirit he will get where the House and the people of the country want him to get in preventing this kind of thing happening again.

I thought that the right hon. Gentleman rather preened himself on the fact that since he has been there he has broken through the ring. It was denied that there was a ring, but what was stated by the hon. Member for Mossley and the hon. Member for Stretford indicated that there had been a ring. Certain steps taken by the right hon. Gentleman had actually reduced the measure of profits upon this process and upon that article, and he thought it was a very great thing that the final result had been that we were reduced to a profit on turnover of 6 per cent. That is not the last word in this matter. There are in this country in private business many people who would be very glad to see 6 per cent. upon a manufacturing process, particularly upon the large volume of orders being placed through the Air Ministry.

I cannot make it a firm figure in my mind, but I am calculating that the Secretary of State is spending about £200,000,000 this year and that if you deduct from that a reasonable figure for the maintenance of Air Force personnel and for certain other charges, he will be spending in orders something like £150,000,000. If you allow a net 6 per cent. on turnover, I see a net profit of £9,000,000, on that Department alone. In relation to what capital? That is what I should like to know. All the capital is not being provided by the companies, but some of it is being provided by the Secretary of State's Department, as well as by the Treasury. There are expenses in relation to the factories and in pro viding new factories. We can see almost at a glance what the relation to the capital is on that net profit on turnover. I am certain that the Secretary of State, and the Minister who has been projected as the Minister of Supply, have a lot to do in their inquiry before they can set at rest the anxieties of the public mind in relation to these problems. I beg the right hon. Gentleman to give us some idea to-night of what they are going to do in order to get something actually accomplished in this matter.

Now I would say a word or two about the White Paper which has been issued. If the Chancellor of the Duchy of Lancaster can manage it I should very much like him to reply about the policy to be followed in spending for food storage the money provided in the Bill. I observe that the proposals in the Bill will mean a smaller sum to be spent this year than in the previous year. I make no complaint about that, provided that the Government are clear about the policy they are following. I do not say that, for example, an increase in the actual storage of food would necessarily mean a very heavy increase in the cost to the Government, for it could be arranged without an increase, or at least with an additional cost that would be infinitesimal.

But I should like to know whether the Government, in formulating this part of the financial programme, have thought about the general problem. What do they intend to do about that? Certainly, I am a little concerned by the statement of Sir Auckland Geddes, which was con firmed rather weakly, I thought, by the President of the Board of Trade, about the food reserves necessary in time of war being very much helped if only people who can afford to do so will now begin to accumulate, as they can, domestic reserves in their households. There is no need now to make a secret about the real plans for dealing with food supplies if war should unfortunately break out, because the issuing of the instructions last September, at the time of the emergency, and the formation of the local food control committees—a part of the Government's prepared machinery which worked like clockwork—means that, on the very outbreak of war, the whole of the civilian population would be placed upon a ration basis for food supplies.

It seems to me that two things stand out immediately. First of all, if the Government are going to advise people with money to replenish their larders now to such an extent that they will have a reserve of food for their households, it also means that those households will have a completely equal right to ration supplies from the Government the moment war is declared, exactly the same as the poorest of the poor. This means that they will be placed in a very favoured position. That is very wrong advice to give to the community in such circumstances. I am even more concerned about this side of the matter when I look at it from the point of view of Government policy. If, as the Chancellor of the Duchy of Lancaster knows, all the principal importers and wholesalers in the country are keeping the Government fully informed at regular periods of their stocks of all the main foodstuffs, surely that is because the Government want to know exactly upon what basis the first ration should be made when the emergency comes—what should be the family and personal ration. That cannot be done effectively unless the Government, when the time comes, has control of the whole of the stocks in the country, and those stocks ought not then to have a great piece missing because they are scattered, no one knows where, in the hoards of the people who have bought upon the advice of the Government and put the foodstuffs in their own larders.

The second point I want to make is this. I find no corollary proposals in the White Paper for what will be equally vital to this country if, as we all hope may never be the case, an emergency should come. We may be able to increase our food production in this country to some extent by special emergency measures, although that would take time; but we shall still have to depend for at least half of our war-time food supplies on overseas countries. I find no mention in the White Paper of any proposals for expenditure to deal with the new threat to our life-line. I and my colleagues will, I hope, have an opportunity of dealing with some of the aspects of this problem when we have before us the Estimates for the Fighting Services; but I want to-night to deal with another side of that problem.

If we are to be able adequately to replenish our food storage, we must have adequate shipping. In reply to my hon. Friend the Member for Seaham (Mr. Shinwell) the other day the President of the Board of Trade said that he was fully seized of the seriousness of the present shipping difficulty, in relation to the national need in an emergency and in a couple of phrases which will stand out in the future, he said that whereas only four or five years ago the national ship ping policy had been a "scrap and build" policy it should now be a "lay up and build" policy. But how, and on what finance and on what basis of organisation? That is vital to the maintenance of food supplies in time of war in this country and I find no mention of that at all in the White Paper and no provision for it in this Bill. I think we ought to hear something from the Government on that point.

I have already spoken much on the general provisions of this Bill and I want to give the Chancellor of the Duchy time to reply, but would add this. I shall be very pleased if the right hon. Gentleman can say to his hon. Friend the Member for Stretford that he has been authorised by the Prime Minister to form a Ministry of Supply and to accept the first leadership of that Department. But I am rather afraid, from the way in which the right hon. Gentleman looked round at his hon. Friend, that that is not likely to happen. But on this very historic occasion, when the country is being asked to make huge sacrifices I say that what we really need from the Government is an effort to get the world to return to sanity. The gravamen of our charge against the Government is that it is their policy, in leaving as they have done the principle of collective security and the prevention of so much of what might have been accomplished by collective organisation against aggressors, that has brought the country to this position in which we are spending huge sums on the defence of the home front and of the Empire. The Prime Minister made what was, from his point of view, a great political speech the other night at Blackburn. I read it with great interest and especially one passage which will I daresay, in some countries abroad be described as being almost sabre-rattling. The right hon. Gentleman said: When we reflect that what we are now considering is the effort of this country alone, without taking any account of the contribution that could be made, if need arose, by the great Dominions or by our allies and friends outside the British Empire, we may feel, to quote our own Shakespeare, 'Come the three corners of the world in arms And we shall shock them.' [HON. MEMBERS: "Hear, hear!"] I do not recognise great heartiness in those cheers. They sound pretty feeble. But I do not know a great Power in the world to-day which could really speak in that spirit, as if they were certain of complete victory, fighting by themselves alone. I have said in this House continuously ever since 1935 that I do not myself believe that the British Empire by British power alone can defend the whole Empire. What is really needed is for this Empire, still the largest Commonwealth of the world, still with democratic principles and with a love of freedom, to give a lead to the other nations of the world, to go back to the protection of law against the aggressor, and to combine all peace-loving nations for that purpose, instead of to be giving way, as the Prime Minister and his Government have been giving way continuously, to pressure by the aggressors.

I believe that it is still not too late for the Prime Minister and the Cabinet to make up their minds to do that. Our trouble has been that we have not been able to persuade them to stick to the principles of peace by collective security, for the reign of law, instead of yielding to the threat of force, and I beg the Government, in the face of this enormous sacrifice for armaments that they are asking the country to make, that they will take immediate steps along the lines that I have suggested. Believe me—I say it in this way because I have been talking to people all over the country about this—there is a great mass of opinion in this country waiting for a lead to the League policy, the League principles, and the establishment of peace with justice.

10.26 p.m.

Mr. W. S. Morrison

I am glad to be able to open the few remarks with which I shall trouble the House to-night by saying that I find a point of great agreement between myself and the right hon. Member for Hillsborough (Mr. Alexander). When we previously discussed some aspects of this affair a few night ago, and protracted our discussion into the early morning, perhaps evidence of dissension between us was more marked than it need have been, but to-night I must begin by noticing as a great feature of the Debate to-day the spirit of unanimity which has appeared in the House as to essential questions. It is true that there have been differences of opinion as to some details, arguments, figures and facts, but I think that should not blind us to the great fact that the expenditure envisaged in this power to borrow is not in itself challenged in any quarter of the House. Neither the necessity for it nor the method employed is seriously challenged. Indeed, our Debate to-day has been concerned with a desire, expressed in every corner of the Chamber, that for this great expenditure the taxpayer should get the utmost value. On that there can be no difference of opinion at all. I have previously discussed some aspects of that, and perhaps I may be permitted to make a few more remarks upon the subject to-night.

Let me, to clear the ground, say a word about the purely financial issues involved. The right hon. Gentleman asked me certain questions, but they all tended to the suggestion that I ought to say something about how the Chancellor of the Exchequer is going to find that part of his deficit which must be raised from revenue. Clearly, that would be a very hazardous undertaking on my part, and I have no intention at all of attempting to prejudge or to forecast what are to be the contents of my right hon. Friend's Budget. I prefer to follow the course suggested to the House as convenient by the right hon. Member for East Edinburgh (Mr. Pethick-Lawrence), when he said—and I think he had the assent of the House with him—that these financial matters would be more properly discussed upon the Budget and that he, for his part, proposed to postpone discussion of those matters until that date. I propose to follow exactly the same course, and I mention that because I should not like my hon. Friend the Member for Walsall (Sir G. Schuster) to misjudge me. If I do not go into the weighty considerations which he put forward, it is from no discourtesy to his remarks, but so as to keep our business in order, and because they would be better discussed as a purely financial matter when we come to the Budget.

We had an intervention to-day, at which, I think, the House was very glad, by my right hon. Friend the Secretary of State for Air. It is true that the right hon. Member for Hillsborough attributed the intervention to some motive which was far from being the actual one. My right hon. Friend intervened because the right hon. Gentleman pointedly requested that he should, and I am sure that the right hon. Gentleman will be the last to complain of that intervention or to read into it some sinister motive. It is true that he said that my right hon. Friend's reply was no answer. What he meant, however, was not, I think, that it was no answer, but that it was an answer with which he did not agree. I want to urge the right hon. Gentleman to cherish sometimes as a fond fancy in his mind the possibility that although he does not agree with an answer that is given to him yet, nevertheless, the answer may be perfectly correct. I am not going again into the figures to which we devoted a great deal of attention the other night. That matter may be left where it is with the statement of my right hon. Friend that long before this matter became one of public controversy in the House he had already started investigations into these contracts. The House would do well to leave the matter in his hands, and I am sure no one will deny the earnestness of his desire to put all these contracts on a just basis.

I will only say this about my remarks the other night. I am not concerned to stand here at any time to defend any excessive rate of profit. What I am concerned to do is to prevent public confidence being shaken by allegations of excessive profit founded upon a basis which is neither logical nor accurate. Let us have in mind the danger of generalising from the particular in a manner which, as we used to say in the Army, is calculated to spread alarm and despondency, upon premises which are not accurate. I would say to the hon. Member for Leigh (Mr. Tinker) that it was simply to that end that I addressed my self the other night and urged that we should not get wrong ideas by confusing nominal capital and the actual capital employed, and other considerations of that kind. The right hon. Gentleman seemed to think that as long as my right hon. Friend holds the beliefs that he does, nothing very good was going to happen, but that, again, I do not believe to be an incontrovertible proposition.

The real point about the matter is this. The Government had great decisions to make. The first was whether to re-arm or not, and they decided to re-arm. The second was whether we should make use of the agencies at our disposal in this free society and make use of those engines of production which exist in society as it is, or postpone rearmament and its commencement until we had completely revolutionised that society and created a millenium in which the motive of profit did not exist at all. Clearly the Government decided to take society as it existed, and if that is remembered we shall narrow our controversy to the much more important ground of seeing that the profit is not excessive.

The right hon. Gentleman finished by telling us certain things about profiteering in the last War. I am not in a position to go back over that ancient history to-night, but I would draw attention to one aspect of the case. We have frequently heard it asserted that profiteering would have been miraculously exorcised if there had been a Ministry of Supply. In the late stages of the last War we had a very powerful Ministry of Munitions, with all sorts of compulsory powers, and if what the right hon. Gentleman has told us to-night has been the fact, and I am not challenging it, surely it throws a very curious sidelight upon the assertions of those who think that a Ministry of Munitions or a Ministry of Supply would instantly abolish profiteering.

The right hon. Gentleman asked me a few questions about food storage. I do not think there is very much difference of opinion between us on that matter. I think it has been made abundantly clear that the stores of food which are being accumulated in this country in time of peace are not there with the object of enabling our country to withstand a prolonged siege, but merely for the purpose of enabling any temporary dislocation in the early period of a war to occur, if it does occur, without causing suffering through lack of food to the inhabitants of the country.

The right hon. Gentleman harked back to the proposition that householders should store food—I think a week's supply was mentioned—and seemed to think that that was undesirable on a number of grounds. I, myself, do not think that the proposal is open to the same objections. It is true, as the right hon. Gentleman says, that one feature of war time would undoubtedly be a rationing system, and then it would be true that those householders, be they rich or poor, who had managed to accumulate, say, a week's supply of some foodstuffs would be in the position of having their rations and their week's supply. It may be said that there is something objectionable in that, but, for my part, I do not rate that very high, because the objection is that some people in the country might have more food than they require, and that is not nearly as bad as that some people should not have enough. It seems to me that the plans we have for ensuring that everyone does get enough are not vitiated because some householders may have a week's supply in addition.

Another question put to me concerned shipping policy. The President of the Board of Trade has repeatedly said that he has received suggestions on this head from the shipping industry and is examining them, and he hopes to make a statement on the subject as soon as he can. I agree with the right hon. Gentleman that the position of our shipping in a time of emergency is a matter of great importance, and while I do not wish in any way to minimise the problem there are features in it which are sometimes forgotten which are of a more optimistic character than are apparent from a mere enumeration of the number of our ships now and the number at an earlier period. If there are fewer ships they are larger, they hold more per ton and, on the average, they travel faster. All these are factors which ought to be taken into account.

The right hon. Member for East Edinburgh asked a few questions about co-ordination. He referred to my right hon. Friend the Secretary of State for Dominion Affairs as being a lawyer, and seemed to attach importance to that part of his qualifications. I must say that the party opposite seem to be very down upon lawyers at the moment, and I my self took it that the right hon. Gentleman, in his references to my right hon. Friend, was carrying over into this controversy some feeling about lawyers in general which he has gained from some other controversy. In these domestic disputes I believe in the policy of non-intervention, so I will leave that topic alone and proceed to other matters.

The right hon. Gentleman asked me some questions about the Army, and these were repeated by the right hon. Gentleman the Member for Caithness (Sir A. Sinclair). Both stressed the undesirability of having, as the right hon. Gentleman the Member for Caithness put it, commitments without proper arrangements, and I was asked whether our staff conversations were intermittent or whether they were close and continuous, on what basis our preparations were being made, and whether the required equipment was ready or was being made ready. As regards the first point, I told the House on Tuesday about the conversations which have already begun between the French and British staffs. I said that those conversations were being continued, and that naturally the respective roles of the different Services in the first stages of any such war would be one of the matters for discussion. I do not think there is anything else I can say in amplification of the statement that I made, except to assure the House that these staff conversations are intended, among other objects, to cover the points referred to by the right hon. Gentleman, and that there is nothing half-hearted or intermit tent about them.

As to the second point, I told the House on Tuesday that we do not con template the accumulation of reserves or of war potential in peace-time on a scale comparable with what prevailed during the latter part of the Great War, but I added that we intended our plan to be complete, that is to say, that men, material, and war potential should all take their appropriate places. I think that that is a sufficient answer to the right hon. Gentleman as to our intentions on that matter.

Mr. Pethick-Lawrence

"Take their appropriate places" is rather a vague phrase. Have we the equipment now; or, if we have not the equipment now, is there any reasonable ground for thinking that we shall have it expeditiously when the time comes?

Sir A. Sinclair

Before the last War it was perfectly well known that an expeditionary force of six divisions would be available for embarkation at once. Have we any force of that character now, or is it contemplated that we should have in the near future?

Mr. Morrison

The numerical size of the Army is always a matter that is stated in the Estimates, and I would ask the right hon. Gentleman to pursue his investigations on that matter with the Secretary of State for War when he opens his Estimates. I can answer the question of the right hon. Gentleman the Member for East Edinburgh by saying that, whatever forces we send at the outbreak of any war to any part of the world, they will be properly equipped.

The right hon. Gentleman asked me some questions about the co-ordination of defence, and, in particular, he asked me to explain how the duties of that office will be allocated between my Noble Friend and myself. My right hon. Friend the Prime Minister answered a question about that the other day, but if it is necessary for me to add anything to his answer, I should conceive my position to be that, whereas I shall have to cover the whole ground in order to be able to reply for my Noble Friend on any matters falling within his duties, yet, when I view our respective histories, and recognise his expert knowledge of strategy and of technical defence matters, I conceive that I shall probably be able to assist him best by trying more particularly to relieve him of the day-to-day work in relation to supply and matters of that sort. I hope that that will be a sufficient answer to the right hon. Gentleman.

The hon. Member for West Middles-brough (Mr. Edwards) made a number of statements about profits, and pressed me to give him some answer. It is very difficult to understand the hon. Member's figures when he says in effect—if I took him down aright—that 62 per cent. of what was subscribed by patriotic people went to profiteers, and the remainder to the actual production itself. That is a very astonishing statement. I think it was quoted from a pamphlet called "The Sky's the Limit," published by the party opposite in October, 1935, but those figures have nothing to do with the problem we are discussing, as to whether the Air Ministry is paying too much for its equipment; they are entirely concerned with the prices paid by the public for shares in aeroplane companies. That is a very different affair, and it was dealt with by my hon. and gallant Friend the Under-Secretary of State for Air in February, 1936. He pointed out then that a number of companies, some of them of a very temporary character, were floated, and that there was a rush for shares in some of them and a good deal of rushing up of the prices of these shares. He warned the public against this form of speculation, and gave advice that was sound and good, that to put money into these inflated shares was unwise. I think I am right in saying that that is the source of the hon. Member's remarks.

Mr. Edwards

Partly.

Mr. Morrison

I think it was the whole source. It must be obvious that what the public in such circumstances as that choose to pay for shares is quite irrelevant to our question of what the Government are paying for aeroplanes. They are two different commodities. The hon. Member was giving a misleading impression—quite innocently, I have no doubt—as to the real question that we are interested in, namely, how much is being paid by the Government for these aero planes.

Mr. Edwards

I take it that the Minister confirms the statement that of the £7,000,000 subscribed by the patriotic people who responded to the Prime Minister's appeal, only £600,000 has gone into actual production, and that he confirms the other figure that I quoted from the "Economist," that 62 per cent. has found its way into the pockets of the companies?

Mr. Morrison

No, I certainly do not accept those figures, but my point is that they are quite irrelevant. The price that people pay for shares has nothing to do with the question. What we want to examine in looking at this question is what has been paid for aeroplane production. That bears no relation at all to the prices paid for shares on the Stock Exchange. I will not pursue the matter further, because it is not relevant to our problem. If the hon. Member is concerned only with prices paid for shares, the Air Ministry is not responsible for that.

Mr. Edwards

It is not that.

Mr. Morrison

The hon. Member for Doncaster (Mr. J. Morgan) complained that the companies are consolidating their capital. I do not quite know what he meant by "consolidating their capital," but I take it he was drawing attention to the fact that some of these companies by issuing bonus shares are bringing their nominal capital and their real capital into line. I do not see anything to complain of in that. The great difference between nominal and real capital has already given rise to some confusion in the minds of hon. Members opposite, and from that point of view I think that the process may have something to commend it.

There were other points made by the hon. Member for Ipswich (Mr. Stokes), and he raised again the question of shells produced on a non-profit basis. This is a very old controversy to some of us. The matter has been repeatedly discussed, and my right hon. Friend the Secretary of State for the Dominions when he was Minister for the Co-ordination of Defence went into the matter at great length. It is well known to the House what the main points are. As I understand it, the transaction, although it was to be on a no-profit basis, was also to be on a no-loss basis. That is one feature about it, but the main fact is, I am told, that the price quoted for these shells was not, in fact, the lowest price that was tendered, and I understand that one feature of the transaction was that the firm in question were going to get a £10,000 building free at Government expense.

Mr. Stokes

When the right hon. Gentleman said "no loss" did he mean to suggest that the firm was to be guaranteed against loss?

Mr. Morrison

I think that my understanding of the matter is right, that the contract was of such a character that the price was to be paid by the Government, whether it was higher or lower than competing tenders.

Mr. Stokes

That is entirely wrong.

Mr. Morrison

I shall be very glad to look into the matter further. I hope the hon. Member agrees with me as to the other two points I made.

Mr. Stokes

No, I do not.

Mr. Morrison

I approach this matter with a certain degree of circumspection arising from what the hon. Member said about land in Pembroke shire, which he described as of a very bad character, on which nothing would grow. I have seen in the public Press a number of references to this land, and those who live on it, on the contrary, take the view that it is very good agricultural land.

There are other points which were raised by my hon. Friend the Member for Stretford (Mr. Crossley), who said that the Industrial Advisory Panel was of no use for dealing with complaints. I am bound to say that I do not agree with him there, but that is a matter which I shall look into. I should have thought a body of this sort was a very useful intermediary between a business man and a Government Department. The idea that there are any reprisals against those who com plain I think can be dismissed. A number of complaints have been examined already, and I think business men throughout the country can make use of this body with the utmost confidence that it will probe any complaints made with the assistance of the Department.

Mr. Crossley

I am quite certain that the Industrial Panel has been used by manufacturers who want orders, but what I would like to know is whether the Industrial Panel has been used by manufacturers who, for some reason or other, are discontented, or have some cause of complaint against the Government Department. Because there are two different sorts of complaint, and I do not believe that complaints of the second category have, in fact, been addressed to the panel.

Mr. Morrison

Yes, there have been complaints in the second category as well as in the first, and I wish to say for the information of the House and of people outside that they should make use of this machinery if they feel that they are not getting what they would consider to be fair or impartial treatment from the Department concerned. I am bound to say that the House will readily understand that, though it is by no means true of all the complaints, there are one or two cases of complaints where they have been old friends who have made a complaint that they have put up before; but I am sure that this mechanism, if used, ought to be of service to the business community.

The hon. Member also referred to the prices charged by sub-contractors, and there was in the House throughout the early stages of this Debate a general disposition to believe that, because in many cases sub-contractors were not costed, there was no check upon them and that this element of waste was one which should be attended to. I quite agree that these matters must be attended to, but a great amount of sub-contract work is actually and rigorously costed. It is not always possible to do it when sub-contracting gets beyond a certain distance, but the House should remember that it is always in the interests of a contractor who makes a sub-contract to secure a low price for the work done by the sub-contractor. Clearly, if there is a margin of profit, the less of that margin that is absorbed by the sub-contractor the better it is for the main contractor. Also if the prices become unduly large by reason of the fact that too much is paid for the sub-contracting work, the chances of that contractor getting repeat orders is diminished proportionately. There are, no doubt, a great variety of contracts, but I adhere to the general proposition that sub-con tracts are either sufficiently costed or they

have not shown an amount of profit which is unreasonable.

I will end as I began, that we should all recognise the importance of the fact that this Bill is not opposed. There is an Amendment against it, but the whole House is agreed in principle to this vast sum.

Mr. Gallacher

I am not.

Mr. Morrison

The whole House with one notable exception. We should not, in considering this important question of prices, attempt to approach it too much from abstruse questions of what are the prices of shares and calculations of profit. The real question is—and this is a matter on which I hope the House will be satisfied: Are the Government making real efforts to ensure that the public are getting value? I venture to say that this discussion has shown that, broadly speaking, they are. If that is the view of the House, and it is willing to proceed to the perfecting of the defences of our own country, undiscouraged by lack of confidence in this matter, for my own part, while I have to deal with questions of supply, if I ever see a case of profiteering, I will do my very best to stop it at once. The general position, as I stated, is that we shall watch and exercise control over a wide field, and we shall see that that control changes with changing circumstances and shall endeavour from day to day to make it more perfect still.

Question put, "That the words pro posed to be left out stand part of the Question."

The House divided: Ayes, 232; Noes, 117.

Division No. 47.]	AYES.	[11.0 p.m.
Acland-Troyte, Lt.-Col. G. J.	Bower, Comdr. R. T.	Channen, H.
Adams, S. V. T. (Leeds, W.)	Boyce, H. Leslie	Chapman, A. (Rutherglen)
Agnew, Lieut.-Comdr. P. G.	Bracken, B.	Christie, J. A.
Albery, Sir Irving	Brass, Sir W.	Clarke, Colonel R. S. (E. Grinstead)
Allen, Col. J. Sandeman (B'knhead)	Briseae, Capt. R. G.	Clarry, Sir Reginald
Amery, R Hon. L. C. M. S.	Broadbridge, Sir G. T.	Clydesdale, Marquess of
Anderson, Sir A. Garrett (C. of Ldn.)	Brooklebank, Sir Edmund	Cobb, Captain E. C. (Preston)
Anstruther-Gray, W. J.	Brooke, H. (Lewisham, W.)	Colfox, Major W. P.
Apsley, Lord	Brown, Brig.-Gen. H. C. (Newbury)	Colman, N. C. D.
Aske, Sir R. W.	Browne, A. C. (Belfast, W.)	Conant, Captain R. J. E.
Astor, Viscountess (Plymouth, Sutton)	Bull, B. B.	Cook, Sir T. R. A. M. (Norfolk, N.)
Astor, Hon. W. W. (Fulham, E.)	Bullock, Capt. M.	Cooke, J. D. (Hammersmith, S)
Baldwin-Webb, Col. J.	Burgin, Rt. Hon. E. L.	Cooper, Rt. Hn. A. Duff (W'st'r S. G'gs
Balfour, Capt. H. H. (Isle of Thanet)	Burton, Col. H. W.	Cooper, Rt. Hn. T. M. (E'nburgh, W.)
Barolay-Harvey, Sir C. M.	Butcher, H. W.	Courthope, Col. Rt. Hon. Sir G. L.
Beamish, Rear-Admiral T. P. H.	Butler, Rt. Han. R. A.	Craven-Eills, W.
Beauchamp, Sir B. C.	Campbell, Sir E. T.	Critchley, A.
Beaumont, Hon. R. E. B. (Portsm'h)	Cartland, J. R. H.	Croft, Brig.-Gon. Sir H. Page
Beit, Sir A. L.	Cary, R. A.	Cross, R. H.
Bernays, R. H.	Cayzer, Sir C. W. (City of Chester)	Crossley, A. C.
Bossom, A. C.	Cazalet, Thelma (Islington, E.)	Crewder, J. F. E.
Boulton, W. W.	Chamberlain, Rt. Hn. N. (Edgb't'n)	Davies, Major Sir G. F. (Yeavit)
De Chair, S. S.	James, Wing-Commander A. W. H.	Rosbotham, Sir T.
Denman, Hon. R. D.	Joel, D. J. B.	Royds, Admiral Sir P. M. R.
Despencer-Robertson, Major J. A. F.	Jones, Sir G. W. H. (S'k N'w'gt'n)	Ruggles-Brise, Colonel Sir E. A.
Donner, P. W.	Kerr, H. W. (Oldham)	Russell, Sir Alexander
Dorman-Smith, Col. Rt. Hon. Sir R. H.	Karr, J. Graham (Scottish Univs.)	Russell, S. H. M. (Darwen)
Dower, Lieut.-Col. A. V. G.	Keyes, Admiral of the Float Sir R.	Salmon, Sir I.
Drewe, C.	Lamb, Sir J. Q.	Samuel, M. R. A.
Duckworth, Arthur (Shrewsbury)	Lancaster, Captain C. G.	Sanderson, Sir F. B.
Dugdale, Captain T. L.	Latham, Sir P.	Sassoon, RI. Hon. Sir P.
Duggan, H. J.	Leech, Sir J. W.	Schuster, Sir G. E.
Duncan, J. A. L.	Leighton, Major B. E. P.	Shakespeare, G. H.
Dunglass, Lord	Levy, T.	Shepperson, Sir E. W.
Eas'wood, J. F.	Lewis, O.	Simmonds, O. E.
Eckersley, P. T.	Llewellin, Colonel J. J.	Sinclair, Col. T. (Queen's U. B'lf'st)
Eden, Rt. Hon. A.	Mabane, W. (Huddersfield)	Smithers, Sir W.
Elliot, Rt. Hon. W. E.	McCorquodale, M. S.	Snadden, W. McN.
Ellis, Sir G.	Macdonald, Capt. P. (Isle of Wight)	Somervell, Rt. Hon. Sir Donald
Elliston, Capt. G. S.	McEwen, Capt. J. H. F.	Somerville, A. A. (Windsor)
Emmott, C. E. G. C.	McKie, J. H.	Southby, Commander Sir A. R. J.
Emrys-Evans, P. V.	Macmillan, H. (Stockton-on-Tees)	Spens, W. P
Errington, E.	Macnamara, Lieut.-Colonel J. R. J.	Storey, S.
Everard, Sir William Lindsay	Makins, Brigadier-General Sir Ernest	Strauss, H. G. (Norwich)
Fleming, E. L.	Manningham-Buller, Sir M.	Stuart, Hon. J. (Moray and Nairn)
Fremantle, Sir F. E.	Margesson, Capt. Rt. Hon. H. D. R.	Tasker, Sir R. I.
Furness, S. N.	Markham, S. F.	Tate, Mavis C.
Fyfe, D. P. M.	Marsden, Commander A.	Thomas, J. P. L.
Gluckstein, L. H.	Mason, Lt.-Col. Hon. G. K. M.	Thorneycroft, G. E. P.
Glyn, Major Sir R. G. C.	Maxwell, Hon. S. A.	Titchfield, Marquess of
Goldie, N. B.	Mayhew, Lt.-Col. J.	Tree, A. R. L. F.
Gower, Sir R. V.	Medlicott, F.	Tufnell. Lieut. Commander R. L.
Graham, Captain A. C. (Wirral)	Mellor, Sir J. S. P. (Tamworth)	Wakefield, W. W.
Grant-Ferris, R.	Mitchell, H. (Brentford and Chiswisk)	Walker-Smith, Sir J.
Greene, W. P. C. (Wercestar)	Moore-Brabazon, Lt.-Col. J. T. C.	Wallace, Capt. Rt. Hon. Euan
Gretton, Col. Rt. Hon. J.	Moreing, A. C.	Ward, Lieut.-Col. Sir A. L. (Hull)
Crimston, R. V.	Morris-Jones, Sir Henry	Ward, Irene M. B. (Wallsend)
Guest, Lieut.-Colonel H. (Drake)	Morrison, G. A. (Scottish Univ's.)	Warrender, Sir V.
Guest, Mal. Hon. O. (C'mb'rw'll, N.W)	Morrison, Rt. Hon. W. S. (Cireneester)	Waterhouse, Captain C.
Guinness, T. L. E. B.	Mulrhead, Lt.-Col. A. J.	Watt, Major G. S. Harvie
Hambro, A. V.	Munro, P.	Wells, Sir Sydney
Hammersley, S. S.	Nicnolson, G. (Farnham)	Whiteley, Major J. P. (Buckingham)
Hannah, I. C.	Nicolson, Hon. H. G.	Wickham, Lt.-Col. E. T. R.
Haslam, Henry (Horncastle)	O'Connor, Sir Terence J.	Williams, C. (Torquay)
Heilgers, Captain F. F. A	O'Neill, Rt. Hon. Sir Hugh	Williams, H. G. (Croydon, S.)
Hely-Hutchinson, M. R.	Peake, O.	Willoughby de Erasby, Lord
Heneage, Lieut.-Colonel A. P.	Peters, Dr. S. J.	Windsor-Clive, Lieut.-Colonel G.
Hoare, Rt. Hon. Sir S.	Pethcrisk, M.	Winterton, Rt. Han. Earl
Hogg, Hon. Q. MeG.	Pickthorn, K. W. M.	Wise, A. R.
Holmes, J. S.	Radford, E. A.	Womersley, Sir W. J.
Hope, Captain Hon. A. O. J.	Ralkes, H. V. A. M.	Wood, Hon. C. I. C.
Hopkinson, A.	Ramsbotham, H.	Wood, Rt. Hon. Sir Kingsley
Hudson, Capt. A. U. M. (Hack., N.)	Ramsden, Sir E.	Wright, Wing-Commander J. A. C.
Hulbert, N. J.	Rankin, Sir R.	Young, A. S. L. (Partick)
Hume, Sir G. H.	Rathbone, J. R. (Bodmin)
Hunloke, H. P.	Raid, A. C. (Exeter)	TELLERS FOR THE AYES.—
Hunter, T.	Reid, Sir D. D. (Down)	Lieut.-Colonel Kerr and Major
Hutchinson, G. C.	Reid, W. Allan (Derby)	Herbert.
Inskip, Rt. Hon. Sir T. W. H.	Rickards, G. W. (Skipton)
NOES.
Asland, R. T. D. (Barnstaple)	Davies, S. O. (Merthyr)	Hopkin, D.
Adams, D. (Consett)	Day, H.	Jenkins, A. (Pontypool)
Adamson, Jennie L. (Dartford)	Dobbis, W.	Jenkins, Sir W. (Neath)
Alexander, Rt. Hon. A. V. (H'lsbr.)	Ede, J. C.	Johnston, Rt. Hon. T.
Ammon, C. G.	Edwards, A. (Middlesbrough E>	Jones, A. C. (Shipley)
Attlee. Rt. Hon. C. R.	Edwards, Sir C. (Badwellty)	Jones, Sir H. Haydn (Merioneth)
Banfield, J. W.	Foot, D. M.	Kennedy, Rt. Hon. T,
Barnes, A. J.	Frankel, D.	Kirby, B. V.
Batey, J.	Gallacher, W.	Kirkwood, 0.
Bellenger, F. J.	Gardner, B. W.	Lathan, G.
Benson, G.	George, Major G. Lloyd (Pambreks)	Lawson, J. J.
Bevan, A.	Gibson, R. (Greenock)	Leach, W.
Brown, C. (Mansfield)	Green, W. H. (Deptford)	Leonard, W.
Burke, W. A.	Greenwood, Rt. Hon. A.	Leslie, J. R.
Cape, T.	Grenfell, D. R.	Logan, D. G.
Cassells, T.	Griffith, F. Kingsley (M'ddl'sbrs, W.)	Lunn, W.
Charleton, H. C.	Griffiths, G. A. (Hemsworth)	Macdonald, G. ince)
Chater, D.	Groves, T. E.	MaEntee, V. La T.
Cluse, W. S.	Hall, J. H. (Whiteshapel)	Maclean, N.
Cocks, F. S.	Hardie, Agnes	Mander, G. le M.
Collindridge, F	Harris, Sir P. A.	Marshall, F.
Daggar, G.	Henderson, A. (Kingswinford	Mathers, G.
Dalton, H.	Henderson, J. (Ardwick)	Montague, F.
Davidson, J. J. (Maryhill)	Hisks, E. G.	Morgan, J. (York, W.R., Doneaster)
Davies, R. J. (Westheaghton)	Hills, A. (Pontefract)	Morrison, Rt. Hon. H. (Haekney, S)

Morrison, R. C. (Tottenham, N.)	Silkin, L.	Viant, S. P.
Nathan, Colonel H. L.	Silverman, S. S.	Watson, W. MsL.
Oliver, G. H.	Simpson, F. B.	Welsh, J. C.
Paling, W.	Sinclair, Rt. Hon. Sir A. (C'thn's	Westwood, J.
Pearson, A.	Smith, Ben (Rotherhithe)	White, H. Graham
Pethick-Lawrence, Rt. Hon. F. W.	Smith, E. (Stoke)	Whiteley, W. (Blaydon)
Pools, C. C.	Smith, T. (Normanton)	Wilkiruan, Ellen
Prill, D. N.	Stewart, W. J. (H'ght'n-le-Sp'ng)	William., E. J. (Ogmora)
Ritson, J.	Stokes, R. R.	Williami, T. (Don Valley)
Robinson, W. A. (St. Helens)	Strauss, G. R. (Lambeth, N.)	Windsor, W. (Hull, C.)
Rothschild, J. A. de	Summerskill, Dr. Edith	Woods, G. S. (Finsbury)
Sanders, W. S.	Taylor, R. J. (Morpeth)	Young, Sir R. (Newton>
Seely, Sir H. M.	Thurtle, E.
Sexton. T. M.	Tinker, J. J.	TELLERS FOR THE NOES.—
Shinwell, E.	Tomlinson, G.	Mr. Anderson and Mr. Adamson.

Bill read a Second time.

Bill committed to a Committee of the Whole House for To-morrow.— [Captain Margesson.]