§ The figure of £2,000,000,000, assumed in April for war expenditure, represented an average of about £40,000,000 a week during the year. The rate of expenditure during recent weeks has been over £50,000,000 a week, and the latest figures, 638 which I have just received, show that for the four weeks ended 20th July the rate was £57,000,000 a week. At that rate our war expenditure for the whole of this year will approach £2,800,000,000, and it may well be that during the rest of the year the weekly rate will increase still further. Any figure which I now take for our war expenditure must, as I have already stated, be given with all reserve, but if one assumes that the increase over the £2,000,000,000 will be of the order of £800,000,000, the total for all expenditure comes not to £2,667,000,000, but to £3,467,000,000. Accordingly, the Committee will note that the excess of expenditure, thus estimated, over revenue will be in the region of £2,200,000,000.
§ While the gap thus disclosed between revenue and expenditure is formidable, it is not so alarming as at first sight might appear. To meet that part of our expenditure which is made overseas, we are able to a considerable extent to draw on outside resources, and this happens in three principal ways. First, we can dispose overseas of gold which is the property of the Government and in which other nations are ready to invest. Secondly, we can dispose overseas of securities which the Government have had to purchase from persons in this country, and although the process is indirect, this also relieves the general situation. Thirdly, the Dominions and India are not spending the whole of the proceeds of our large expenditure upon their products, but are allowing part of them to accumulate in the form of balances and other short-term investments in this country.
§ I need hardly say that we do not wish to deplete our overseas resources in these ways more than is necessary for the victorious conduct of the war, but the exigencies of war are compelling us, for reasons not connected with domestic finance, to make considerable use of these reserve elements of our financial strength. While this is regrettable from other points of view and will create many problems for us in future, it does undoubtedly render the immediate economic problem less intractable than it might at first appear.
§ There is also another factor, too, which is working in the same direction. Owing to the need to conserve the use of skilled labour, of machinery and of building 639 materials for purposes directly connected with the war, it will not be physically possible for most businesses, especially those normally catering for civilian consumption in the home market, in the near future to spend as much money on the maintenance and renewal of plant as wisdom would ordinarily dictate or as prudent finance will have made provision for, and here is another source of subscription to Government loans which does not involve any fresh saving on the part of the subscriber but rather a substitution of one kind of asset for another.
§ The Committee will realise that I have mentioned these elements of relief, not in order to minimise the task which remains, but in order to dispel any fear which a superficial glance at the figures might create that the task that lies before us is outside our powers to fulfil. In these various ways there is some alleviation to be found, but however optimistic a view might be taken in that respect, there must remain, it is obvious, a large gap to fill which will require very strenuous and continuous efforts in the form of increased taxation and additional savings.
§ Behind this formidable financial problem there lies an economic problem of fundamental importance. One consequence of the huge expenditure which the Government are incurring is that the total money income of the community is, on balance, higher than it was. By far the greater part of the sums that we expend on the manufacture or purchase of guns or aircraft or munitions is paid out as wages or salaries to those who help to produce them or the component commodities, right down the productive process, which are used in their manufacture. Against this the incomes of very many persons are seriously reduced by war conditions, but on balance there has unquestionably been an increase in the incomes of the British people reckoned in terms of money, and reckoned gross, before the tax collector has done his work. We must also remember that the more we succeed in expanding our war production, and the greater the consequent volume of Government expenditure, the larger is this total of money incomes likely to become.
§ That is one side of the picture. The other side is that there will be no increase in the supply of commodities on which these larger incomes can be spent. The 640 case, in fact, is very much the contrary. The speeding-up of the war effort means that we are devoting to war purposes a steadily increasing proportion of our productive resources—that is, our plant, our labour power and raw materials—and it follows that a steadily diminishing proportion is left to satisfy the multifarious needs of civilian life. Indeed, in order to free the maximum amount of capacity as quickly as possible for the expansion of the war effort, it has been necessary for the Government to adopt direct restrictions on the amount of material that may be used to supply the home market, and the Board of Trade has already made Orders restricting considerably the normal supply to retailers by manufacturers and wholesalers of a wide range of goods. By another Order the Board has prohibited the supply, except under licence, of certain types of machinery for the home trade, and it is the Government's intention to extend these methods of regulation. By this action we shall not only release labour and material for urgent war service requirements, but we shall enable manufacturers to maintain and, where possible, extend the export trade, which must be regarded as a vital part of our war effort. For it is by our export trade that we must obtain the means of payment to the greatest possible extent for imports of munitions, raw materials, food and other essential goods, and, in its claims upon our resources, the export trade must come second only to overriding military necessities. It follows that in any regulation of productive capacity designed to give the maximum impetus to our war effort we must aim first at reducing the calls on that capacity which would normally be made by civilian consumption in the home market.
§ Here is the crux of the economic problem—a larger and increasing total of money incomes and a smaller and a diminishing supply of consumable goods —and I do not hesitate to say that this is a fundamentally dangerous situation. Behind it there is always the danger that prices might rise, no matter what action was taken to check them, and that a rapid inflationary movement might develop in which people came to distrust money and tried to turn it into goods as soon as they got it, and in which prices and wages chased one another upwards. I do not want further to enlarge upon 641 these matters, because I am confident that we shall be able to avoid them, but let there be no mistake—to allow a real and quickly developing inflationary movement might well be fatal to the successful prosecution of the war, and certainly a source of hardship and suffering, more particularly to the poorer sections of the community. To meet this danger the essential need is to see to it that demand does not outstrip production, and this means that, in so far as the incomes of the public are in excess of the available supply of goods and services at present prices, this excess must not be used for current purchases. Much the best way of securing this object is to divert this excess of incomes to the State, by taxation so far as tins is practicable and, so far as taxation is not practicable, by the public saving a substantial portion of their incomes and lending the savings to the State.