§ The Exchequer, in a narrow sense, is thus doing well. How, then, has it happened that our general economic position declined so markedly? I would attempt to give the impressions I received to the Committee. In January, 1951, the late Government, faced with the new and heavy burden of defence, budgeted for a "significant fall" in civil investment at home, and some decline in civil consumption at home. Realising that this would not be enough, they accepted that there must be a decline in the balance of 1271 payments surplus. They set themselves, however, to maintain a balance, apart from strategic stockpiling, on the United Kingdom overall current account in the year before them.
§ In this year, there was one serious new factor, which made the penalty of failure more serious than at any time since the war. Marshall Aid had just been suspended, and the first repayment of the United States and Canadian loans was in sight. This meant the removal of the cushion of external assistance upon which our economy had rested since the end of the war. Failure to pay our way would quickly mean, therefore, drawing on the gold reserves.
§ Unfortunately, as one of my predecessors once remarked, "Great Expectations" was followed by "Bleak House." Over the year as a whole, the deficit on the balance of payments was over £400 million more than was bargained for. Some of this was due to events that could not have been foreseen. Invisible income fell below expectations, partly because of the loss of Abadan. The terms of trade proved worse than was forecast. But this is not the whole story.
§ The state of the internal economy was such as to hamper the expansion of exports and to stimulate an increase of imports. Production did not increase so much as was expected and the Budget failed to produce any general decline in personal consumption.
§ Instead of falling, the volume of civil investment rose substantially. On top of the defence burden, this put a heavy overload on the industries producing vehicles, engineering goods and other metal products. Order books grew longer than ever and the extra exports, which the world was ready to buy, did not go out. At the same time, other industries met with a slack or falling demand abroad. It was thus not surprising that the total volume of exports failed to expand as fast as the situation required.
§ The other big factor was the rise in imports. Compared with 1950, the increase in volume was about £300 million; but, because of higher prices, the total increase in the import bill was £1,100 million. The balance of payments deficit came next, as night follows day. In the year as a whole, we passed from an over- 1272 all surplus of £238 million in 1950 to a deficit of £516 million in 1951—a swing of no less than £750 million.
§ In fact, the deterioration was more serious still. Most of the deficit happened in the second half of the year; it was then running at the annual rate of over £800 million a year. The deficit with the non-sterling world was much greater still. In the first half of the year, it was running at an annual rate of about £325 million; in the second half, the annual rate was nearly £1,200 million.
§ This United Kingdom deficit in itself meant a severe drain on the gold reserves. The drain was all the greater because the position of the other sterling area countries was also getting worse. The prices of their main exports—rubber, tin, wool and so on—which had been so high in the winter of 1950–51 were falling to more normal levels, while their imports—the result of the earlier rise in incomes—were increasing.
§ As a result, most of them moved into substantial deficit, not only with ourselves, but with the non-sterling world. Under this double strain, the loss of gold gathered momentum. After increasing by £203 million in the first half of 1951, the reserves fell in the second half by £547 million. At the end of the year, they stood at only £835 million.
§ I must remind the Committee that these reserves are the foundation on which is built the whole structure of trade between the sterling area and the rest of the world. Events have shown that they must be adequate for the work they have to do. During 1951, with the tapering-off of Marshall Aid, a sterling area deficit with the rest of the world could be met only by credit with the European Payments Union or by drawing on the reserves.
§ Here, it is well to reflect on what would have happened if we had allowed things to drift. If the reserves had been allowed to run out, as I told the House before and now tell the Committee, we here in this island would, before the end of the year, have found ourselves unable to secure either our daily bread or the raw materials upon which both employment and production depend. There would have been expanding areas of real want and of growing unemployment.