THE ECONOMIC SITUATION

HL Deb 07 March 1956 vol 196 cc129-216

2.39 p.m.

LORD PETHICK-LAWRENCE rose to move, That there be laid before this House Papers in regard to the economic situation. The noble Lord said: My Lords, before I move the Motion which stands in my name to-day, I feel that a word of thanks should be given to the noble Lord, Lord Vansittart, who kindly allowed his Motion which stood on this day to be postponed in order that we might begin this debate at the opening of the Sitting—a great convenience not only to myself but to all those who are taking part. I now beg to move my Motion. I would remind your Lordships that we were last discussing this matter of inflation on the 20th December in reference to the Autumn Budget of Mr. Butler, and I remember that the noble Earl, Lord Selkirk, on that occasion was defending Mr. Butler's proposals and arguing that, even if unpopular, they were an answer to inflation. I ventured to interpolate a query as to whether they were an effective answer, and to this the noble Earl replied —and I quote from the OFFICIAL. REPORT for December 20 [Volume 195, col. 358]: I agree with the noble Lord in this: that, whatever happens, there is one test only, and that is whether these measures are successful or not.

Two and a half months have gone since then. Has the situation improved? Have Mr. Butler's remedies been successful? I could bring forward a good deal of indisputable evidence to show that they certainly have not been successful, but I have no intention of wasting your Lordships' time by doing anything of the kind, because the Government themselves have answered the question and saved me from the trouble of doing so. Quite recently in another place, in introducing Mr. Macmillan's proposals, they gave as their main reason for doing so the further deterioration in the country's financial position. When Mr. Butler first took office as Chancellor of the Exchequer in 1951, the country was entering on a pretty bad patch. Mr. Butler took certain action and, shortly afterwards, there was a great improvement. As a result Mr. Butler was idealised—"A financial wizard," cried the Tory Party; "How smoothly and painlessly Conservative policy restores stability!;", they said. But they are saying something very different to-day. The idol has tumbled down from its pedestal and abuse has been substituted for worship.

I travel through the country a great deal and in the course of doing so I meet a number of people belonging to all classes and of all political faiths; and I hear what Conservatives are saying to-day about Mr. Butler. I confess that I have been shocked at what they say. Indeed, as a humane and judicially-minded person I sometimes feel tempted to spring to his defence; but I am not quite sure whether my form of defence would he very welcome to Mr. Butler or to the Conservatives who are discussing him with me, for I would frankly admit his guilt but would plead that he had been led astray by bad advisers, among whom I should include those members of the Conservative Party who at the present time are running him down.

The real facts of the financial position during the last three years are still not generally recognised by the general public. It is always one of the essential necessities for a Government to maintain the stability of the currency; and particularly after a devastating war the greatest care must be taken to avoid the twin and opposite evils of inflation and deflation. After the First World War, in the years from 1919 onward, this country was taken into a policy of ruinous deflation, with the disastrous consequences of which all of us are aware. Since 1945 successive Governments of both Parties have had their work cut out to try to avoid runaway inflation, and we are still engaged in that task. In 1951, owing to the participation of ourselves and our allies in the Korean war, there was a terrible upset to our economy. Prices rocketed upwards and tile terms of trade went heavily against us. But at the close of the Korean war the terms of trade reverted to their former favourable condition, and Mr. Butler was presented with an unexpected windfall of the fabulous amount of some £500 million a year improvement. It was not his magic personality, still less his policy, but this windfall that enabled the country to get rid of its financial difficulties.

What did Mr. Butler do with that £500 million a year? Instead of using a large part of it to strengthen the foundations of our economy, instead of increasing the above-the-line balance in the Budget, he dissipated it in ways pleasing to his Conservative friends. He hastened prematurely to abolish all physical controls. He indulged in wasteful schemes of de-nationalisation and, in successive Budgets, notoriously in the April Budget of last year, he handed out largesse to the well-to-do. At the same time, in order to prevent his actions from leading to their natural inflationary result, he resorted to the old, rusty blunderbuss of dear money in the hope that the same results would follow in 1955 as followed (and I use the word "followed," not "resulted") in 1952. To the complete surprise of the public who trusted him this result has not actually taken place. The expectation has not been fulfilled. As your Lordships know, I have never shared the faith in this obsolete weapon in modern economic conditions, so I have not shared in this general surprise.

What, then, was the position when Mr. Butler handed over to the incoming Chancellor of the Exchequer a few weeks ago? In the first place, he left an unabated and, in some ways, a worsening inflation. In the second place, he left a high bank rate to bedevil further our economy. In the third place, he left a feeling of injustice and suspicion that, as a Conservative Chancellor of the Exchequer, he had not held the balance fairly between the classes in imposing taxation. All these have serious consequences, and I propose to take a few examples and in each case to try to assess to which of those causes the present troubles are due.

I suppose that the greatest sufferer from the policy of dear money is the State itself, which has to pay higher rates on Treasury Bills and on the Floating Debt generally, and which will have to pay a higher interest burden on any tranche of the National Debt whose date of redemption falls during a period in which dear money is still prevailing. The State's loss is, of course, the taxpayer's burden. It is not for me or for anyone outside official circles to attempt to give a reliable estimate of what this loss is. I have seen it placed as high as the equivalent of 1s. in the pound on income tax. That may be quite an excessive figure. But it is likely that it runs nearly up to six figures. Perhaps the best thing for me to do is to ask the noble Earl, Lord Selkirk—I understand he is making a speech this afternoon—to try to give us some figure of what the taxpayer has to find as the net result of the increased money rates that are paid today, since Mr. Macmillan's one point rise, as compared with what it would have been had they remained as they were when Mr. Butler came into office in 1951—that is, assuming that the present rates stand over for a whole year. But even when we have got that, it will not include the redemption in August next of the £840 million 2½ per cent. National War Bonds which will then have to be redeemed.

Passing from the State, we come to the next big loser, the municipality. It suffers from inflation since inflation has sent up the price of building and of everything else that the municipality has to buy. But it also suffers from dear money because municipalities are constantly going to the market to get money. Incidentally, I may remind your Lordships that Mr. Butler has sent them all to the general market instead of finding money for them. If they cannot get it out of the general market they have still to pay the equivalent rate to the Exchequer. And those additional burdens, taken together, amount to considerable suffering for the ratepayer or the tenant of the municipality.

I turn from those two national bodies—the State itself, the Exchequer, and the municipality—to the world overseas. First of all, I will take the British Colonies. A great many of them have schemes of development with which they want to proceed as soon as possible. They have to get loans from the home Government and they are standing at the present time in a queue waiting to be j served. The fact that we in the United Kingdom have a domestic trouble in the shape of inflation means, in the first place, that these Colonies will have to wait an unconscionably long time to get on with their developments. And Mr. Butler's dear money policy means, further, that if and when they get their loans they will have to pay an unconscionably long price for them.

When we come to the Commonwealth and to foreign countries we are presented with other grave features. We are committed to release annually sterling balances running into many millions of pounds, and the Government—the Prime Minister, in fact—have not long ago committed us (I am not expressing either support or opposition to the actual fact, but fact it is). to spend what may well prove to be over £60 million a year in keeping our Forces for the next fifty years on the Continent of Europe. We may get some payment out of Germany—that remains to be seen; but we are committed at the moment to that large expenditure which will add very much to our difficulties in the way of finance. I understand that a number of foreigners hold part of the Floating Debt. I have seen it suggested that several tens of millions of pounds more are going to foreign holders of Treasury Bills and Floating Debt generally than would have gone if we had not raised the money rates in this country. I should not like to specify any figures myself. If the noble Earl, Lord Selkirk, can supply any figures of that kind, I am sure your Lordships will be interested to have them. The problem of meeting all these liabilities to the Commonwealth and to foreign countries is considerable, and it is, as I have pointed out, gravely increased both by inflation and by the steps which Mr. Butler has taken with a view to remedying it. I am sure the Government must realise that it would be a grave injury to the national credit if all our promises were not carried out in the spirit as well as in the letter. I have no doubt that they will be; but we must bear in mind that it is going very gravely to add to our complications.

I do not propose to dwell on the hardship imposed on the business, trading and farming communities by the credit squeeze, great and serious though it is. Inflation cannot be cured except by the pruning back of industrial capital as well as of personal consumption, but, even so, the question is whether the Government's indiscriminate pruning is the right way to do it—and I shall have a word or two to say about that matter before I sit down. There are, however, a large number of persons who are grievously affected by dear money and whose sufferings contribute nothing whatever to removing inflation—I refer to those persons who are buying their own houses through building societies and who have, in consequence, incurred a mortgage liability to the society.

These persons are being called upon to pay higher and higher rates of interest as the bank rate goes up, and it is no exaggeration to say that as a result of the higher bank rate some of them are paying £10, £20, £30, and in some cases even £40 a year more. That is a serious matter for them. They are not rich people. A large proportion of them belong to the lower middle class, and even before this they were having a great struggle, in the face of rising prices, to make ends meet. It is a grave thing that these people have had this additional burden thrust upon them. I feel sure that this is a class of people who command the sympathy of us all, on which ever side of the House we sit, and I should have thought that they were particularly people whom the Conservative Government would have wished to help, because they are people who are trying to help themselves by initiative and effort of their own. There are more of these people than perhaps some noble Lords realise. I understand that there are nearly 2 million of them, and for every one point that the rate of interest goes up they have to find, in the aggregate, something like £17 million a year. As I said at the beginning, that does not help towards removing inflation at all; it has no direct good result of any kind.

Over and above these sections of the public who in some special way are affected by Mr. Butler's money squeeze, there are the whole of the people on whom, in various degrees, his taxes and restrictions fall. I am a great admirer of the way the vast majority of the British public have always faced taxation. The majority of them neither try to evade it nor complain about its magnitude, always provided that two conditions are fulfilled; that is to say, they mast approve of the purposes for which the taxes are imposed, and they must be satisfied that they are being asked to pay only a fair share of the total. In my view, Mr. Butler never convinced many of these people that they were being fairly treated. They were of the opinion that the scales were not being held evenly, and for that reason they have never given their full concurrence to these attempts to stop inflation.

That is more or less the position that Mr. Butler handed over to the incoming Chancellor of the Exchequer. We have wondered whether, when we had a new hand at the wheel, we should have a new policy at the same time. Do we find any substantial difference now that Mr. Macmillan has taken charge? I think in one respect we must say that we do. Mr. Macmillan, having enlarged on the magnitude of our peril, has not hesitated, as Mr. Butler invariably did, to take fairly strong action. But having said that in his favour, I can only add that in other respects I find little change in policy. Money is made still dearer; the nationalised industries are singled out for special restraint, and individual taxation is inequitably imposed. Thus all the ills produced by Mr. Butler's high bank rate are increased; and the people, as a whole, are not reconciled to the further burdens placed upon them. But Mr. Macmillan has still the Budget in front of him, little more than a month ahead; he has one more chance left to prove himself a national Chancellor of the Exchequer and not merely a Party politician. Will he take it, or will he let the opportunity go by? He alone can choose, but it is the nation that will suffer if he makes a wrong choice.

On that note of negative criticism of the Government, I could well bring my speech to an end, but I feel that, in face of the national crisis, it is incumbent upon every one of us to come forward and make some constructive suggestions. On the last occasion we discussed this subject, the noble Earl, Lord Selkirk pointed out that so far none of us had attempted to do that, so I will now try and meet that criticism. In trying to do so, I should like to make it clear that I am speaking for myself, and that, though I think most of what I have to say would be favourably viewed by my colleagues, I am not laying down Labour Party policy. Did the noble Marquess wish to say something?

THE LORD PRESIDENT OF THE COUNCIL (THE MARQUESS OF SALISBURY)

I only wondered whether anyone from the Front Bench opposite would be laying down the official Labour Party policy.

LORD PETHICK-LAWRENCE

I do not think it is right for anyone, either here or elsewhere, to lay down the official Labour Party policy. As I have said, I think that, broadly speaking, what I am going to say will be the policy of the Labour Party, but I am not pronouncing ex cathedrâ upon it. That is all I am saying. In the second place, I must remind your Lordships that no Opposi- tion speaker has behind him the official knowledge to enable him to do more than make tentative proposals. With these two reservations, I will embark on my task.

The essence of inflation consists in the exercise by the people, as a whole, of the power to spend more money than, at existing prices, there are goods and services to satisfy. The best cure for this is for the people voluntarily to abstain from exercising that power to the full. When I was young the classes that had incomes with a margin were taught that it was a moral duty to save, but that view has not the same vogue to-day among the classes that have surplus cash. No doubt, too, inflation is in itself a disincentive to saving, so that monetary stability and the will to save are, in a sense, interdependent. I pay the highest tribute to the existing institutions for encouraging saving, but I think that the Chancellor of the Exchequer might do far more than he does to inculcate the patriotic duty in this respect. Further, in so far as he is not fully successful in doing this, he should himself come to the rescue by saving out of State revenue —by which I mean, in plain words, that he should budget for a much larger surplus above the line.

Secondly, in view of the close association of the whole banking system with the finance of this country, I think that the Chancellor of the Exchequer should make personal contact with the heads of the joint stock banks. I am aware, of course, that under the Bank of England Act, 1946, he has, through the Bank of England, powers of direction to the joint stock banks. The actual words in the Act, which for those noble Lords who have forgotten them I will read, are these: The Bank,"— that means, the Bank of England— if they think it necessary in the public interest, may request information from and make recommendations to bankers, and may, if so authorised by the Treasury, issue directions to any banker for the purpose of securing that effect is given to any such request or recommendation: But what I am thinking of is something more intimate and less formal than this. This is no time for punctilio, whether it emanates from the Chancellor of the Exchequer, the chairmen of the joint stock banks or the Bank of England. In such talks the Chancellor of the Exchequer will be able to explain his ideas and receive suggestions from the bankers about the general line in which credit should be given or withheld. I noticed, as some of your Lordships must have done, that in the debate on the economic situation' in another place a suggestion was thrown out by one of my colleagues that perhaps the level of the liquidity ratio should be altered in times of stringency. This is one of the suggestions which might be ventilated during any such talks as I have suggested.

Thirdly, nowadays, when the wage claims of weekly wage earners have become a national issue, it would be well if the Chancellor of the Exchequer, before he announced major financial proposals, were to have talks with the principal people representing both sides in industry. I notice with approval that the Prime Minister—and I think the Chancellor of the Exchequer was present—was in consultation with the Trades Union Congress only a few days ago. I feel that it might have been better if the Chancellor of the Exchequer had seen them before he made this announcement; but better late than never— I do not know, from the meagre reports, what precisely took place—naturally not—but I hope they were proceeding along lines that will be worth while. But the point I am making is not that the Chancellor of the Exchequer should disclose his financial policy to the T.U.C. in advance, which would be wholly improper, but that he should pick up from them ideas as to how his policy could come into being and have the right psychological effect on those people for whom the T.U.C. speak. In these days, your Lordships will realise, finance has become largely a matter of psychology. May I give one example of what I mean? There is widespread opinion held in certain sections that what they call "the bosses" get away with far too much money for personal extravagance under cover of "expenses." This is one matter on which the Chancellor of the Exchequer should endeavour to take a reasonably impartial line.

But, of course, the most important thing of all, in my mind and in those of my colleagues, is that the Government should get out of their heads the idea that there is something wrong about national planning. It is true that, from the point of view of the reactionaries in the Conservative Party, it is new-fangled, in the sense that it was not heard of in the nineteenth century; but even Conservatives must move with the times. Planning is today recognised in many parts of the world. I would remind your Lordships of the Colombo Plan, which has been supported and continually pressed forward by successive Governments of this country, of both political Parties. No private employer, however large his business, no confederation of employers or association of employees, has the knowledge to plan the affairs of a nation as a whole. The only people who have the facts which will enable them to do so are the Government of the day; and sooner or later they will have to recognise where their duty lies. I shall be told, of course, that this means controls, and my answer to that is that without planning the Government do not escape controls. They are driven to use the monetary control to an altogether improper extent, and the monetary control can be as grinding and as punishing as any physical control that was ever devised. I say to the Government that they would serve the country better if they paid less attention to the ideologies of their Party and kept their eyes open to learn what is happening in other parts of the world and profit by the lesson that they there will learn. I beg to move for Papers.

3.20 p.m.

LORD BGEVERIDGE

My Lords, seven weeks ago, on Wednesday, January 18, the Prime Minister announced to us all that the battle against inflation was on. Two days ago, finding myself on my seventy-seventh birthday with a little time to spare, I spent all the hours of it happily, or unhappily, in the Library of your Lordships' House reading over the files of The Times from January 18 onwards, page by page—.I missed none—to see just what had been happening about wages and prices and salaries since the Prime Minister spoke. It was a saddening but, I hope, a salutary experience. It began with the announcement, the day after the Prime Minister had spoken, of £23 million more being given to the railwaymen for doing the same work. It went on to announce from £80 million to £100 million more for the engineers, and £34 million for electricians and miners. There were grants, disputes or proposals about farmers, builders, dockers, teachers, doctors, the Civil Service, local authority manuals, and so on. At a certain point the State came in to give more money for the same work to the Fighting Services, and to give more pensions to the same people for what they were not doing or were doing before. I am certain that both those last two payments by the State were absolutely necessary, but they still mean more money going out for no more goods coming in; and that, to me, is inflation. Of course, there were a lot of rather interesting small fry as well; the Canterbury choristers, the bishops, the headmasters, prison officers, waterworks men, Bristol pilots, and any number more—everybody getting more money for doing as much as before, or as little or less, if he could manage to do it. That, I suggest to your Lordships, is inflation.

That interesting study of The Times—and I hope that some of your Lordships will make a study of it for yourselves—ended with the slightly depressing account of the opening of the discussions between the Prime Minister and the T.U.C. I hope that the rather depressing account of those affairs given by The Times will prove to have been slightly mistaken. All this is, as I have said, on the basis of more money going out for the same output, with rather vague hopes of possibly getting more output in some way in some cases thereafter. That, I suggest, is inflation. May I say that I have been severely lectured by some of my economic correspondents for suggesting that anything that employers and workpeople do about wages can amount to inflation. They say that employers and workpeople are not in control of money but that it is the State which is in control; that the State alone can either cause inflation or stop it. I do not mind being lectured by these correspondents, because it seems to me that, in a sense, they are talking rather serious nonsense. Of course, it is true that the State alone controls money; it need not print enough money. If the State chose to make a prohibitive credit, it could stop inflation at the price of producing mass unemployment. The real problem is how can we get stable prices without unemployment. That is the really difficult problem to which all of us have to set ourselves. It cannot be done by the Government alone. It needs the co- operation of all the great forces in our economic life: the great forces represented by the magnificent trade union movement and by the mass of employers of this country and, finally, the Government. Let me say a word about each of those in turn.

I will begin with the trade unions, not because they are necessarily the most important in this field (although I think that what they can do is vital) but because, apart from my respect for what the trade unions have done for the people of this country, I have the most moving memories of negotiations with the trade unions on vital points and of the attitude I found in them. I remember, nearly fifty years ago, opening to them the subject of unemployment insurance by the State. In those days they were the only people who gave unemployment insurance to their members, and the problem might arise whether, if the State came in, it would not injure them in what they were doing. Let me say that the result of those negotiations was the most forthcoming co-operation from the trade unions. They were quite prepared to take the risk of damage to themselves if unemployment insurance could be extended. The fact that unemployment insurance did come in made it possible some thirty or forty years later to get the comprehensive social insurance scheme.

I had the same kind of discussions with them at the time of making the Beveridge Report, in 1941. I have always found them open to consider the interest of the people of the country as a whole, and not simply their particular organisation. But to-day it is important, and necessary, to make to the trade unions an appeal which many of them may find a little difficult to accept. The tremendously strong tradition of the trade union movement is the independence of every union and every industry of every other; the union for each industry is to settle with the employers its demands for wages for itself. From that we get, as we are getting to-day, a competitive bargaining, industry by industry. While that goes on it is difficult to see how something like inflation can be avoided.

I suggest that to-day this attitude of the industrial sovereignty of each union and employers' association for the wages in its industry needs reconsidering. In a way, we have here a curious parallel to what is really the greatest danger to all of us in the world. We all know that the claim to absolute national sovereignty, resulting in preparing and organising arms for making war upon other nations, is bringing upon us the risk of war. Equally, if every industry persists in settling its own wages for itself, in competition with others, and then, as others get more, tries itself to get more, I do not see how, under full employment, we shall ever get stable prices. I would appeal to all those who can influence the great trade union movement to see whether they can reconsider this claim which has been sacred to them in the past. I would ask the leaders of the trade union movement to consider on what terms of action by the employers and by the Government they would agree to bring to an end this competitive bargaining about money wages and confine themselves to advancing a standard of living on output and costs.

There is one odd piece of news about another country which I discovered in going through The Times. On February 6. it was announced that in Sweden a 4 per cent. uniform increase of all wages applying to every single person in the labour market, whatever his union, whatever his occupation, had been agreed upon between labour and the employers. I do not know that we can ever get as far as that; but it is possible, apparently, in a good, democratic country like Sweden, and I think we might do as well as, or even better than. Sweden. That is all I have to say about the trade unions.

We come to the employers, about whom there is little to say. I want to be short to-day, if I can, in view of the many speakers who ought to be heard and have the chance of contributing to this debate. The employers here must he prepared to reconsider restrictive practices of all kinds. If the unions are to be asked to adjust their higher wages, to higher output, I think that equally the employers should avoid restrictive practices of all kinds. Those who manage the big monopolies should avoid misusing their powers. We all know that the Government have a Restrictive Practices Bill passing through another place. I hope that, when it comes here, it will be examined with meticulous care to see that it really does something serious to get rid of harmful restrictive practices.

Let me end with the Government. I am not going to deal with all that the Government should do on the money side or the control of imports. That aspect has already been covered by the noble Lord who opened this debate, and will be covered by others. I want to confine myself to only one point; that is, that I beg the Government to consider afresh the treatment of the nationalised industries. As I have told your Lordships, it was the railways which greeted the Prime Minister's appeal against inflation by beginning, on January 19, the scramble for putting up wages. If your Lordships will look at The Times, you will see that another of the nationalised industries, the electricity supply industry, went out of its way to blame the national awards in the nationalised industry for having put them in a position where they could not refuse to give an increase of wages, an increase which they had not wanted to give and which they thought was not justified by any of the facts. There is that argument of the electricity supply industry: that they had to give this 4d. an hour, which they did not want to give and which was not due, simply because of the competition of one of the nationalised industries. They went on to say that the whole cost of this increase—I forget how many millions it is going to be £34 millions—will fall straight upon the consumers of electricity.

I ask whether the Government will consider and reconsider the policy held by a former Government, a Labour Government, about the national boards. The Labour policy has been one of extreme freedom for the nationalised industries from control of any kind. There are occasional limited debates upon their activities, but there is a quite definite practice that Parliamentary Questions cannot be asked about the detailed working of any of these nationalised industries. When a question was raised that practice was defended expressly by Mr. Herbert Morrison, in words which appeared in Hansard of December 4, 1947. He said [OFFICIAL REPORT, Commons, Vol. 445, col. 566]: A large degree of independence for the boards of nationilised industries in matters of current administration is vital to their efficiency as commercial undertakings. Why did he not go on to say that these were commercial undertakings which were absolute monopolies, which had the consumers entirely in their power? They are to be free. I suggest that something other than absolute independence of any kind of control is wanted by a monopoly, whether it is a monopoly of business or a monopoly of a nationalised industry. Something other than hasty inquiries by busy Members of Parliament with no means of gathering all the facts is required.

Let me say at once that there is more than one possible approach to this problem of how some kind of supervision and public criticism can be brought into the administration of the nationalised industries. My own plan—which, I may say, has been completely rejected up to now; I wished to see it applied to the great and famous monopoly of broadcasting—was to embody in the structure of every national monopoly an organ having adequate power to receive and examine criticisms and suggestions coming from the public and having sufficient power in the organisation to make certain that these criticisms were as seriously considered as they deserved to be. In fact, I wanted what I proposed for the B.B.C. And not only that: from the whole of the Committee over which I presided there was a unanimous proposal that an essential part of the Broadcasting Corporation should be a public representation service under an officer of equal rank to anyone else below the Director-General, able to examine every criticism and suggestion and to see that it was seriously considered. I listened quite a lot. If I thought there was anyone who would pay any attention to me. — should say "That man or that woman has gone on long enough. Do for heaven's sake stop this! Do for heaven's sake get people talking who know something about what they are saying!"

My criticism may be no good. It is no good my sending it in now, because what happened to my proposal for a public representation service in the B.B.C. was that the Governments of the day (I think it was first the Labour Government and then the Conservative Government) both agreed in saying, "Well, we will let the B.B.C. do what they think about it." Of course, all the other departments of the B.B.C. did not see why they should have anybody to criticise; they knew all about it themselves. That is the trouble with the administrators of monopolies. Anyhow, our proposal was not adopted. The principle would be equally applicable to all the other industries which are nationalised. It is particularly important for the B.B.C. because, on principle, there cannot be Parliamentary or ministerial control of what is broadcast—that would be contrary to the freedom of expression. But it would be equally valuable to have that same principle in every national board, and to see that there is an organ of internal criticism with adequate authority to see that public criticism is considered.

That is one plan. There is another plan which emerges from the Reports of the Committee of the House of Commons on Nationalised Industries, a Committee which sat under the chairmanship of Sir Ralph Assheton, as he then was, now Lord Clitheroe. I am happy to think that he is going to follow me in speaking. That Committee produced two most interesting Reports. In the first, they came to the conclusion that there should not and could not be any attempt to alter the rule which bars Parliamentary Questions of detail into the working of the nationalised industries; but, in their second Report, they went on to argue for the setting up of an effective Committee and staff for seeing that the House of Commons and its members were well and seriously informed of every criticism that ought to be made of a nationalised industry. They argued that some kind of Committee should be established.

I do not know whether Lord Clitheroe, when he follows me, will say that he thinks that what his Committee proposed has been carried out. I rather think it has not. I do not think that what the Government have, in fact, set up is nearly so strong a means of criticising the nationalised industries as that Committee proposed. I am not in a position to say whether what the Government have done or what they are proposing to do on that matter is adequate. I only beg of them to make sure that it is adequate, so that either a Select Committee of the House of Commons or possibly a Joint Committee—I am sure there are many Members of this House who might be useful on such a Committee—would, with adequate help from a permanent official, be able to study the working of the nationalised industries and be able to initiate debates and criticise the working of those industries. That is a suggestion alternative to my own proposal. I dare say it is better. I do not mind which is adopted, but something serious should be done.

This leads me to my final plea. If the nationalised industries go on leading a new round of inflation, we can only end in the disaster of general inflation, the real victims of which will be those who are not in these big organised industries.—those who are not protected by strong associations, and, above all, those who are past work, who have tried to make provision for their own old age by saving or by pensions of all sorts and kinds, and who will find that all that they have provided for their old age is made inadequate by the way in which the value of money is being destroyed.

3.45 p.m.

LORD CLITHEROE

My Lords, I know that your Lordships are always most indulgent to one who has not addressed the House before, and I hope that you will allow me to apologise in advance for any errors into which I may fall—and they are likely to be many, particularly as I spent a number of years en a tour of duty in another place, the customs of which are not exactly the same as those of your Lordships' House. I am honoured to be speaking immediately after the noble Lord, Lord Beveridge, and I thank him for the references he made to the Report of the Committee over which I presided. Perhaps a little later I may be allowed to say a word on the subject with which that Committee dealt. For the moment, I want to follow him on the first part of his speech and deal with the problem of inflation.

There was a striking leading article in The Times not long ago, headed "The Rule of Fear," in which the author said that since the end of the war a kind of madness had infected British politics where financial and economic matters have been concerned, and he concluded by suggesting that the rule of fear should be replaced by the leadership of courage. No one, I am sure, would doubt that it is high time that some firm action was taken, and. I believe that opinion in the country on the whole supports the proposals which the Chancellor of the Exchequer and the Government have recently made. I fully appreciate all the objections to those proposals which were so adequately catalogued and rehearsed by the noble Lord, Lord PethickLawrence, in his interesting opening speech. None the less, in spite of all their disadvantages—and they are obviously many—I think the Government's proposals should be supported, and I believe that the country as a whole does support them.

So far as I can see, the depreciation in the value of money is alarming even the most inflationary-minded people, and the attempt that has been made to meet the situation by constantly raising prices and wages has really put the inflationary movement at any rate into a fast trot, if not into a canter. Retail prices have risen by 50 per cent. since 1947 and, as Lord Beveridge has told us, almost every day we see new rises in wage rates recorded. It is not the slightest good looking back except for the purpose of learning lessons from our mistakes, but I think we must not forget—I am sure noble Lords will not forget—that the currency was debased by the action of the Labour Government in 1949 in devaluing the. £, and this was bound to be followed by the evil consequences from which we now suffer. I say that only in order to follow it by remarking: let us not forget it, and let us not do it again.

Of course, debasement of the currency is nothing new. Certainly, it is to be sharply distinguished from that rather slow rise in prices over the centuries to which we have become accustomed. In the old days, the currency was debased by the simple method of clipping the coins. Now it is done by the rather more elaborate method of printing paper in one form or another. In the time of Henry VIII the great historical debasement of the currency took place, and when Queen Elizabeth came to the Throne a small Commission was set up, of which Sir William Cecil was a member, which produced a report the result of which was that the reform of the currency was successfully undertaken. I only hope that the steps now being taken by Her Majesty's Government—the Government of Queen Elizabeth II which also has the advantage of the presence in it of a Cecil —will be as effective in its dealing with this problem.

I am sure it is over-simplifying matters to say, as certain financial leaders have said, that the inflation is caused by printing too much money and issuing too many Treasury Bills. That may be true, but it is much over-simplifying a difficult problem. But there is no doubt that far too little attention is paid by Parliament to the note issue. Parliament does not watch that nearly so closely as it should, though it is closely watched by foreign bankers all over the world. Then there has been, in recent years, an increase in the amount of Treasury Bills in issue, and that short-term money has been used for financing long-term projects. Everyone knows that that is a most dangerous practice which inevitably leads to inflation. That is nothing new; it always happens. I notice that between October, 1952, and October, 1955, the amount of Treasury Bills in issue increased by £900 million—a very substantial figure.

It is not difficult to see what the effect would be. I am certain it is not necessary to point out in your Lordships' House the evils of a depreciating currency and the hardship and cruelty it imposes upon all who receive contractual payments—much greater hardship, I would suggest to the noble Lord, Lord PethickLawrence—than an increase in the rate of interest, which may, we hope, be only temporary. It is a much greater hardship that people's savings should be permanently depreciated in that way. A very worthy section of the community is gratuitously impoverished for the benefit of another section; and many evils to the business community follow from that. It becomes, for example, almost impossible to place contracts on a reasonable basis, since there is no predictability with regard to future costs and prices. Again, as has been pointed out, savings become reduced and investment in fixed interest securities is turned from prudence almost into folly, which is a serious matter, because it means a diminution in capital investment just at a time when the prudent investment of capital is most important for this country.

We all know the problems which face us. I thought that the Chancellor of the Exchequer illustrated it admirably in his broadcast not long ago, when he said that we had produced in one way or another 25 per cent. more goods and services since the war but had paid ourselves 80 per cent. more money for doing so. He went on to say that we had to stop pump- ing money in, or to pump it in only at the same rate as the extra production we succeed in turning out. I am sure all noble Lords on all sides of the House will agree with that. There is no doubt that it can be done; but it can be done, and we can master our difficulties, only if we make up our minds that it has to be done. It is no good one section making up its mind; we have all to do so. I humbly suggest that it is the duty of all citizens in the country to help the Government at this time in making this effort, even if individuals do not themselves quite agree with every particular proposal that the Government put forward. I believe it is the duty of all of us to help the Government carry through their plans. I have detected a deplorable tendency recently for everybody to blame everybody else and I am sure that attitude will not carry us anywhere.

In the correspondence in The Times to which the noble Lord, Lord Beveridge, referred, I thought the nail was most accurately hit on the head by Professor Pigou, who said that he did not agree with the suggestion that the sole cause of the present inflationary movement is pressure for wage increases, but that uncontrolled wage increases and expenditure increases are the joint cause, each acting as a spur to the other. That brings me to the question of full employment, a phrase which I believe has been only partly understood; at any rate it is not fully understood. In many ways it is the root of the matter which we are discussing. It is not a true use of language to describe as full employment a situation in which everybody can get full wages. Full employment also must mean that everyone should do as much work as he can reasonably be expected to do. We do not want overstrain in management, and we certainly do not want sweated labour; but we want hard and conscientious work at all levels. We want fair, but not excessive, profits, and we want eight hours' work for eight hours' pay.

I am bound to say, from considerable experience of business, that in some other countries at the present time there is a greater proportion of people who are anxious to work hard than there is here. That is my opinion and others may contradict me; but, if it is so, it is rather a serious state of affairs for a country which depends so much on its export trade. It leads employers into difficul- ties, because, quite naturally, they tend to retain workers even when they have not enough work for them to do, because they are frightened that they will not be able to get hold of them again or replace them when they want them. There is also a tendency for employers to increase pay packets by increasing overtime, not to produce more output but as an excuse for increasing pay beyond standard rates. All those things are happening as the result of inflation and are having serious effects on our economy. Seeing all this, the Chancellor of the Exchequer, quite rightly, is determined to reduce expenditure. It is a pity that it has to be reduced more on the side of investment than on the side of consumption, but no doubt that is due to political reasons. I feel that the common sense of the public is, perhaps, somewhat underestimated and that a bolder approach is justified. It has to be made absolutely clear that the present policy of reduced expenditure is not designed to cause unemployment but to bring employment into equilibrium. If adequate steps are not taken to check inflation, unemployment will, in any case, follow, owing to the fact that the price of goods will become too high to find a market.

What are we doing to support the Chancellor of the Exchequer in his proposals? It is generally agreed among almost everybody—certainly among a large number of workers and members of trade unions—that a halt must be called, for the time being, to general increases in wage rates. I believe that is the general feeling all through the country. I do not mean necessarily that a halt should be called to the level of earnings, but to the level of wage rates. There must be a postponement of certain capital projects by private enterprise as well as by the State, and in certain cases it is necessary that there should be a reduction in profit margins; but I should guess that this will happen automatically as a result of the credit squeeze and the new monetary policy. Here I am referring to true profits and not profits as they so often appear to chartered accountants and members of the Board of Inland Revenue. There is a great difference of opinion as to what are true profits, and valuable study might well be given to the subject.

Here I should like to interject that I believe it is a misconception to put too much stress on the increase in dividends as being a key factor. It is rather excess profits, no doubt caused by inflation, which must be watched. The pressure on the economy is just the same when a company retains its profits itself and spends it on new capital equipment as when the company distributes in dividends money which individuals spend. So the pressure on the economy is just the same, whether the dividends are distributed or not. There may be other reasons for not distributing so much by way of dividends, but I do not think it is a very sound argument related to this problem of inflation and the pressure on the economy.

The next thing which the State must do is to encourage saving, and for this purpose I think additional incentives are right and proper. The increase of interest rates is one of them. The noble Lord, Lord Pethick-Lawrence, I know will agree with me that a very low rate of interest is not encouraging for investment. Therefore there is the other side of the coin in that respect, because the increase of interest rates acts as an encouragement to saving, on the one hand, and checks spending, on the other. A reduction of excessive taxation is another important factor. Here we are on rather controversial ground. I am not supposed to be controversial in a maiden speech. I know, so I will endeavour to put it as uncontroversially as I can. In my opinion, in the present circumstances it would not be true to say that increased taxation would be deflationary. I am not going to argue that in no circumstances would that be true. I say that in present circumstances I do not believe that increased taxation would be deflationary. In fact, I believe the contrary to be true. One must remember that fiscal policy operates on human nature—on human hopes, on human fears and on human decisions, and the effects of it are not always predictable in advance. It is a matter which must be watched by the Chancellor of the Exchequer in the way he deals with the monetary situation, because the psychological consequences of fiscal policy may be quicker or slower in their effect than their authors think, and you have to watch very carefully all the time to see that you are getting it right.

On current Government expenditure, I should like to say just a few words. A year or two ago, in another place, I had the temerity to suggest that there was a lack of control and that the Government machine seemed to be losing grip on expenditure. I appreciate that considerable efforts have been made by the Government to check this tendency in the last two years. While I have no doubt that there is still much to be done, I want now to pay tribute to what has been accomplished. I think it is now being more generally appreciated by the country at large that policy decisions are necessary, as well as close scrutiny, if you are going to reduce expenditure. Close scrutiny must go on, but policy decisions are necessary also. Total Government expenditure still takes a great deal too much of the country's income at the present time.

I should like now to come to the nationalised industries—a matter which Lord Beveridge has already raised. This seems to be a sector of the public economy which is certainly not yet under proper control—I do not think there is any doubt about that. The fact that the capital and overdrafts raised by these industries are guaranteed by the Treasury is in itself a very important fact to remember, because it gives these industries not only an advantage over the private sector which may very well be unfair (as, for example, when they engage in the hire purchase business, and so on) but also it has made it possible for them to give way to pressure for increased wage rates which, in its turn, has to be followed by the private sector of industry. So much has been said on this point recently that I am not going to add to it except to suggest—and I hope the suggestion will, at any rate, be examined—that it might be wiser if the Treasury insisted that the nationalised industries raised their money before they spent it, rather than afterwards. That is an important point and I hope it will be carefully considered.

The Achilles heel of our financial position is unquestionably that part of the State expenditure and national industry expenditure which does not come in the ordinary Budget above the line. We must remember what the Governor of the Bank of England said not very long ago: that the proportion of the economy affected by the credit policy through the banking system is much smaller than it was, and that it could be outweighed by the action of the Government, the nationalised industries and local government.

A Select Committee of the House of Commons, to which Lord Beveridge has referred, studied this problem of the control of nationalised industries for two years. It took evidence from many distinguished persons—the Party leaders, the Permanent Secretary to the Treasury and several distinguished Members of your Lordships' House who have connections with the nationalised boards. The Committee made a unanimous Report, which was surprising in view of its composition. Unfortunately, the Government were unwilling at that time to accept the Report in its entirety, and the Committee they set up, with modified terms of reference and without the vitally necessary independent officer, soon found itself frustrated, and abandoned its task. I am glad to read in The Times that the Government are now considering the question again and I hope they will deal with it in some way or other. If they deal with it by way of the Committee proposed, I hope they will give it strong terms of reference and also the independent officer who, like the Comptroller and Auditor General, could not be dismissed by the Government and would therefore not be in any way in the pocket of the Treasury.

One further consequence of the enormous rise in prices since the war, which I think has a direct and adverse effect on the economy, is the steadily worsening position of all those who carry, and have carried, the greatest burdens of responsibility. The deeply depressing effect of the failure to adjust taxation to take account of rising prices has so seriously affected this very worthy section of the community—a section which includes the work providers whom we are so apt to forget—that I think it is essential to remedy it without delay. The need for this appears to be more generally and more clearly recognised now, and there seems to be a growing demand to do something to help the middle classes. The middle class is what they are called, but I much prefer to say those sections of all classes of the community who bear heavy burdens of responsibility.

My final word is about our reserves and the need to increase them. I wonder how many people in the country appreciate—though I am sure it is well known to many of your Lordships—that the whole of the gold and dollar balances of the sterling area are less than the market value of the shares of the Ford Motor Car Company of America. This is very startling. And the Ford Motor Car Company is not the largest motor car company in America, by any means. These gold and dollar reserves, in view of the price position, are effectively only a quarter of what they were before the war, as The Times pointed out to-clay, so we are now working on a shoestring, as the saying goes.

The strengthening of these reserves depends, I believe, not only on prudent financial policy at home and on many of the matters to which I have referred this afternoon but also on something more intangible. I refer, of course, to the prestige of this country in the world, and to the prestige of our financial institutions. I want to be assured that we have considered sufficiently, for example, the effects of the new constitutional plans for Malaya upon our balance of payments. The dollars earned by our industries there make a most outstanding contribution to the balance of payments of the sterling area, and that is a matter of the highest consequence to every man and woman in this country. The same might be said to some extent about the constitutional developments in West Africa. Have we reflected sufficiently on the consequences of our policy in the Middle East in the last ten years as it affects the vital supply of oil in this country? I suggest that we must never forget that the strength of the country is indivisible and that our power and prestige in the world reflects, without fail, upon our whole financial and economic position.

4.11 p.m.

VISCOUNT BRUCE OF MELBOURNE

My Lords, it is my privilege to express to the noble Lord, Lord Clitheroe, our appreciation of the interesting and thoughtful speech which he has lust addressed to your Lordships. I am sure I shall he expressing the wishes of all your Lordships if I say that we hope he will give us the benefit of his wisdom and long experience on many future occasions. I am afraid that to-day I am going to say little that I have not said before, I offer every apology to your Lordships for this repetition, but long experience has taught me that if, by good fortune, one happens to be right, one has to go on saying the same thing lime and again until eventually something is done about it, generally too late.

In my view, the financial and economic situation of this country is as serious as it could possibly he. We are beginning to wake up to the fact now, but we ought to have woken up to it a long time ago. To-day the inflation bogy has caused alarm, and steps are being taken to cure it by means of increased interest rates, a credit squeeze, and other financial measures. I believe, however, that we have to go much further than that to cope with the situation we are facing. One fact has been completely overlooked—that is, that this is much more a psychological problem than a tactical, financial or monetary one. That has been much better expressed than I can express it by Sir James Turner, the President of the National Farmers' Union, when he said: In my view the problem of inflation will never he solved, and this national economic disease will never be cured, unless and until someone tells the patient its real seriousness and what is certain to happen to him if a major operation is not performed, and performed skilfully and quickly. It is my deep and sincere conviction that the truth, however unpalatable, needs to be laid hare to the people of the country. The war-time catch-phrase, 'Britain can take it,' remains true to-day—but only if her people are told what they must take, and why. That is only another way of saying that we have to take drastic action to meet the circumstances we are up against; that the people have to understand the reasons for the taking of an action, and that the support of the people has to be obtained if that action is to be successful.

I propose to address myself to three questions. First, is there really a serious crisis? Secondly, if there is, can the general public be made to realise how serious it is? And thirdly, can their support be obtained for the drastic measures necessary to overcome it? As to whether there is a crisis, I do not think there is any division of opinion that if the nation is going to maintain employment, support its standard of living and carry on the social services we have established, we must have coming in, by way of exports and interest on investments, sufficient to pay for the necessary imports of food and raw materials. It is also agreed that we must have gold and dollar reserves adequate to meet our obligations and to tide us over any period of recession. These are the essentials.

We have to consider where we are to-day. Since the war, up to 1955, we have paid to other nations 9,850 million dollars more than we received. That the position is not so disastrous as it would have been is due to the fact that over the same period we received, by way of loans and aid from the United States of America and other sources, 9,500 million dollars—almost the same figure. That means, of course, that since the war we have not even begun to pay our way by our own efforts. If we had not received that 9,500 million dollars of loans and aid our gold and dollar reserves would have disappeared in a couple of years, and we should have been in a completely disastrous position some years ago. It is as well that we should get into our heads that that is what we have been doing. I saw in one journal the other day the comment, on the question of how we should have lived without aid, that we should have wiped out our gold and dollar reserves and had an overseas debt of some 4,000 million dollars. The only place where the article went wrong was in suggesting we could have borrowed that 4,000 million dollars if we had not got it from America, as we did, fortunately by way of grants as well as loans. The fact is that there was no other source from which we could possibly have got the money. That is the hard position we are up against.

We have to remember, also, that we have got into this disastrous position notwithstanding the fact that over that period our exports have gone up some 70 per cent. in volume, as against pre-war figures; and, after all, our exports are our greatest source of income. I do not think it would be our desire as a nation that we should go on living on American aid; and it is equally certain that America could not continue that measure of aid. So that in assessing our present situation, and in looking to the future, we must eliminate from our minds a continuance of this source of assistance which has helped us so much in the past; and we have to realise that we must by our own efforts earn enough to maintain our standards, our employment and our posi- tion in the world. In considering whether we can do that, it is necessary to examine the past few years, the present position and the future prospects.

Let me first take the past. I have said that by 1955 we had increased our exports by 70 per cent. in volume. But in the first part of the period immediately following the war we had a sellers' market while the world restocked, re-equipped and restored war devastation; and the going was pretty good. Just when that looked like ending we received a new stimulus from the expansion of armaments and stockpiling consequent on the Korea incident. Now that stimulus has gone, and we are up against a real buyers' market, with the competition increasing every day. Let me remind your Lordships of who are our greatest competitors: the United States of America, Western Germany and Japan—and possibly Western Germany is the best one to take as an example. Before the war, Britain and Germany each had, roughly, a 20 per cent. share in world exports of manufactured goods. In 1951, the United Kingdom's share was 22 per cent., and Germany had built up her share to 10 per cent. During 1955, the United Kingdom's share had declined to 20 per cent., and Germany's share had expanded to 15 per cent. In the years 1952 and 1953 our exports declined, and there is little doubt that that decline was due to the competition of Western Germany.

In 1955, which was a good export year, our position showed no signs of improving. In Germany retail prices rose much less during 1955 than they did in Britain, and Germany's industrial production went up 16 per cent., as against 5 per cent. in the United Kingdom. Our exports during that year went up by 7 per cent., those of the United States by 9 per cent., those of Germany by 17 per cent. and those of Japan by 27 per cent. I give those figures to impress on your Lordships that that is the world market as it is, and in which we have to secure not merely the exports we are producing to-day but an increasing volume, if we are to maintain our position; and that represents about as serious a position as any country could be facing. So that the answer to my first question is that there is a serious crisis; and I put it as high as to say that we are up against as serious a crisis as we have ever been in our history, except in time of war.

I come now to my second question: can we make the people understand how serious the position is? There are a great many people—in fact, it is a widespread feeling—who feel that there is something so complicated and difficult about a nation's financial and economic position that the ordinary man and woman could not possibly understand it. That, to my mind, is a complete and absolute delusion. There is nothing different about the nation's affairs from yours or mine or from those of any other individual. The basic fact is that we must have certain things: the nation must have the food and raw materials on which it can keep going, while you and I must have houses, food and clothes. Then, if we—the nation, or you or I—are relatively prudent people, we try to put a little by so that we can meet the unforeseen vicissitudes of the future. In the case of the nation it is our gold and dollar reserves, and in the case of the individual it is his savings.

Then, when we have passed those two stages, if we have any surplus, whether as a nation or an individual, it is within our discretion to consider what we shall do with it. As individuals we are all different and we should all want to do different things, but we are governed by one inexorable rule—namely, that, of the things we want, we can have only those which our savings will allow us to purchase. There seems to be a delusion with regard to the affairs of the nation that we can have, for example, better housing, better schooling, better health services, greater social security and whatever we feel we should like merely by passing an Act of Parliament. Of course, that is not so; and the hard facts will soon teach us that it is not, unless we come down to earth and realise what we are up against. I am convinced that we can make the people understand that we cannot have these desirable and delightful things unless, as a nation, we earn them. If we are to bring this fact home to the people, we must have a nation-wide drive; and to this end the co-operation of all political Parties, employers, trade unions, Press, radio and television would be required. If we have such a drive then I think the people will understand. In telling the facts there need be no division amongst us, political or otherwise.

Then we come to the question: what can be done about it? I am certain that drastic action must be taken, and the Government must take the first action and bear the first responsibility. I was the head of a Government for a long time, and I can say that Governments are timid things. I should like to tell your Lordships out of my own experience what happened. In 1928, Australia was up against almost an identical situation as that which this country is up against now —in our smaller sphere, I agree. The world's economic and financial crash of 1929–32 was just coming on the horizon. In November, 1928, I was elected as Prime Minister for the third time, and in about July, 1929, these clouds and portents in the sky became so serious that, after my Government had reviewed the position, we went to Parliament and said that there were certain relatively mild measures that we insisted should be taken —they were quite innocuous in comparison with what had to be done in the end —and certain powers that we insisted on being given. Without those measures and powers we were not prepared to carry on. On the first of these measures, when we brought it down, we were defeated in the House by one vote. We declined to accept that setback, and I went to the Governor-General and demanded a Dissolution. He refused to give it to me at first, but in the end he agreed. We went to the country, and we were more disastrously beaten than any Government up to that date had ever been beaten in Australia.

The rest of the story is not uninteresting. The Opposition formed a Government and came into power, but were forced to another Election only two years later, in 1931. The troubles of Australia got worse and worse. I wish to indicate to your Lordships what they had to do in Australia, because it shows that, in the end, hard facts will determine the position, and it is no good relying upon specious promises by politicians of any Party or any colour. In the end the facts will determine the position.

What had to be done in Australia -was to impose a reduction of 20 per cent in all adjustable Government expenditure, as compared with the year ending June 30, 1930, including all emoluments, wages, salaries and pensions—even pensions were cut—paid by the Government, whether fixed by Statute or otherwise a conversion of the internal debts of the Govern- ment, on the basis of a 22½ per cent. reduction of interest; reduction of bank and savings bank rates on interest on deposits and advances, and relief in respect of private mortgages. All those things were implemented, not by the Commonwealth Government, but by the Commonwealth Government and six State Governments. Before the proposals were announced, the leaders of the Opposition in the Federal Parliament were brought into consultation. The matter was discussed with them, and they joined the Prime Minister and the Premier in an appeal to the country to take the medicine that was coming to it. One part of the appeal to which they all subscribed was addressed: to all sections of the people to recognise the position and in the interests of the nation to accept the sacrifices which are involved. By these means the situation was brought home to the people of Australia; and they got down to work. The result was that, having taken more drastic action than anyone else, they recovered more rapidly and more effectively than any other country in the world.

What happened to those who had misled the people is not uninteresting. As I have told your Lordships, I lost my Election in 1929 more disastrously than anyone had managed to do. The Opposition came back with 50 seats in a House of 75. In the 1931 Election they were "massacred," and came back with 18 seats. Even what occurred among my own electorate affords a certain amount of humour, if nothing else. I won my first election by about 6,000 votes. Over five elections I built that up to 13,000. In 1929, I was defeated by 305 votes. In 1931, I was returned with a majority of 24,000. I am instancing that only to show that there is there, perhaps, something we could learn in this country, in what I believe are the most perilous circumstances. I am convinced that, if that fact were once understood by the people, they could be persuaded of the necessity to give of their best to the nation, in whatever walk they were operating. I believe that it would induce them to impose on themselves real self-discipline to do the things that are necessary for the country, including what we are trying to do by regulation, in the sense of bank controls and so on—namely, to restrict their spending and increase their saving. I believe that that would have an effect which few of us could calculate today. I hope, therefore, that the country will get that really strong lead which it needs to save it from the peril which, to my mind, is facing it at this moment.

4.35 p.m.

LORD JESSEL

My Lords, the economic situation must indeed be serious if the Government of the day find it necessary to adopt a policy of slowing down and discouraging investment in future production. Ever since the end of the war, we in industry have been continually exhorted to do exactly the opposite. We have been told—and I think quite rightly —that the only hope of salvation for us was to see that each workman had more power behind him, more organisation, more machine tools, better factories, better methods of handling et cetera; and now we are asked to call a halt. I feel sure that the Chancellor of the Exchequer realises that if he discourages capital investment in industry a minute longer than is absolutely necessary, it will be most damaging from the long-term point of view. I hope that the noble Earl, Lord Selkirk, when he comes to reply, will give us some assurance on this point. That should be one of the first relaxations the Government should give us.

May I turn for a moment to the problem of day-to-day consumption? Personally, I welcome the reduction in the bread and milk subsidies. A few days ago I was listening to a wireless discussion in which Mr. Crosland, who is a distinguished economist and was a Labour Member of Parliament in the last Parliament, took part. I thought that on the general aspect of subsidies he was pretty sound. He said that he thought people should pay the right prices for the goods they consume. But he went on to say that it was not worth saving the tiny sum of £70 million, because the action of the Chancellor would have a bad psychological effect on pending wage claims. Save that "tiny sum" three or four times in the year and you are really beginning to do something about Government expenditure. I suggest that the only "tiny sum" involved is the extra amount of money which each individual has to pay in respect of the withdrawal of the subsidy.

We have recently had many definitions of inflation. I particularly liked the one the noble Lord, Lord Beveridge, gave us a few weeks ago in this House, when we were discussing the question of officers' pay. He said that inflation was giving people more money for doing the same amount of work. As he pointed out to-day, there is plenty of that going on now, and I hope we are going to get more coal for the extra money the miners are getting. A phrase which is often used as an argument in support of a claim for higher wages is that the workers should share in the increased prosperity of the industry. I, personally, am not quite sure whether that is a valid argument. Surely they have already had their reward in the wages and overtime that they have received, if the trading year of the industry has been good. I would much rattler that the consumer benefited from the increased prosperity. I suggest that, if profits in a certain industry are high, it would be much better to lower selling prices so that all would benefit, and then the cost of living would certainly start in a small way to come down. But I am afraid that there will not be much increased prosperity for anybody in the future if wages are put up annually without any corresponding increase in production. I know that several noble Lords have said this before and several more will say it, but it is an inescapable fact. I really think that the leaders of the Party opposite understand it very well. I wish they would do more to explain it to their supporters.

Other noble Lords, including the noble Lord, Lord Clitheroe, in his extremely interesting and able maiden speech, have touched on the Government's monetary policy. I am not going to compete with bankers and ex-Financial Secretaries to the Treasury on that aspect of the problem, but I feel sure that actual Government spending can be cut down. Too much money is still being transferred from the pocket of one taxpayer to the pocket of another, and a high proportion of the money so dealt with gets lost in administrative expenses. The number of people who are on the receiving end only of this operation is very small, but nearly everybody contributes, either directly or indirectly, to this transfer of money via the tax collector. It is questionable whether they really get full value for it.

I know perfectly well that, if one argues on these lines, one is apt to be shot at with the question: "What are you going to start on? What do you suggest?" I have been looking at certain figures which have given me some ideas. For instance, the Ministry of Fuel and Power employ 3,000 people who seem to me to do more or less the same work as the Coal Board, the Central Electricity Authority and the Gas Council are already doing. The most striking example is the Foreign Office which before the war employed 846 people and now employ 4,649. The Ministry of Supply, which was created during the war for a special purpose, still employs 10,000 people. The Ministry of Agriculture before the war employed 2,600 people; now they employ 13,000. The Admiralty, when there were 133 major ships in full commission, had a staff of 8,000. Now, with only 73 ships, the staff has gone up to over 33,000. There may be very good reasons for this, but I must say that these few examples incline one to the opinion that there is a prima facie case for a possible reduction in Government spending.

I should like to see a team of efficiency experts appointed to make a report on the staffing of some of these Ministries. I believe it is possible that nearly £200 million could be saved annually. That would be a splendid start in helping to reduce taxation. Leaving a little more money in individual pockets might have surprising results, not necessarily inflationary, because, if the real value of money were to be enhanced, there would be much more inducement to save. Economics is not an exact science like mathematics. If it were the case, we should not have heard so many different but equally sincere views expressed as we have already heard this afternoon and shall hear further this evening and tomorrow.

4.46 p.m.

LORD PAKENHAM

My Lords, we have listened to a number of arresting speeches this afternoon, including that of the noble Lord who has just spoken. I venture to think that my noble friend Lord Pethick-Lawrence surpassed even his own very high standard. To me and to many others he becomes more and more one of the wonders of the world every time he addresses us on economics. No doubt, I shall be forgiven if I do not elect at this stage to reply to many points that have come up, because I wish to concentrate upon a single and important aspect of the struggle against inflation. The noble Lord, Lord Jessel, incidentally, mentioned the provision of various definitions of inflation by the noble Lord, Lord Beveridge, and others. There are, of course, other definitions. I know I was once asked for one quickly by the noble Lord, Lord Balfour of Burleigh, who will be speaking with great authority when I sit down, and I do not think I provided him with a very satisfactory definition. I may be forgiven for recalling, in a lighter vein, the late Mr. Ernest Bevin's definition of inflation. He said: It is the condition of a Cabinet Minister when he has made a successful speech at a public dinner; and 'deflation' is the condition of the same Minister when he goes home and wakes up his wife to tell her about it. No doubt, there are alternative definitions, but that carries it far enough for a number of us in our discussions.

I speak only, as the noble Lord, Lord Pethick-Lawrence, said he did, for myself. If there is any doubt as to why that "constituency," so to speak, should be represented this afternoon, I can only say, in all humility, that I have had the honour of being chairman of one of the smaller clearing banks for a year and I have a few personal reflections to offer the House; but no one should hold my bank, let alone any other bank, responsible for what I may be saying on these difficult topics. I will just say, in passing, that I am not in any way ashamed of being a banker. Bankers are a much criticised race of men. I noticed the other day that someone left £5,000 to his bank manager. This was at once set aside on the ground that he was clearly of unsound mind, and the defence which I think was offered, that he had not met his bank manager, was not accepted. That is the public view which I think we can hastily reject, from our knowledge of the noble Lords, Lord Balfour of Burleigh and Lord Brand, and other banking pundits.

When we study this question of inflation, it seems to me that we can split up our thoughts under half-a-dozen different headings. I hasten to say that I shall be dealing with only one of them this afternoon. Some noble Lords will have something to say about harder and better directed work; others, like the noble Lord, Lord Beveridge, who was provocative though attractive this afternoon, will concentrate more on the need for greater restraint by the employers and the employed. Then various forms of control will be suggested, on imports, for example, or building, and we shall hear a great deal, as we have already heard from various speakers a great deal, about the necessary reduction, or the allegedly necessary reduction, of public expenditure, whether by the central Government, local government or the nationalised industries. The noble Lord, Lord Clitheroe, is not here, but I, as the first speaker from these Benches since he spoke, know that your Lordships would wish me to assure him that he is regarded as a genuine financial expert whose speeches will be followed most closely in this House, though he may find himself engaged in controversy as time passes and he casts away his own restraint. We all listened with great attention this afternoon, and will do likewise whenever he decides to address the House.

Another suggestion for combating inflation is that fiscal measures should be applied in the spheres of borrowing or taxation, for example. Finally, we come to the use of the monetary instrument as a disinflationary factor. Of course, we can think of it as an inflationary factor in certain circumstances, but in combating inflation there is this great issue of the proper use to be made of the monetary instrument. By that, I mean the combined effort of the Treasury, the Bank of England and the joint stock banks to reduce spending by checking the creation of bank money. I should, of course, say that I am on no account neglecting the need for much greater savings, as stressed by more than one speaker most effectively this afternoon; but that can be considered under another heading. I shall be concerned only with the last of these aspects of the struggle against inflation: the use of the monetary weapon.

I suggest that while some of us may prefer one or other of the other five methods listed, few of us suppose that the monetary weapon can to-day be entirely neglected in the battle against inflation; few of us would go to the other extreme, and say that the monetary weapon provides the answer all on its own; and, again, few of us would say that its use can be entirely distinguished in practice from the use of the other five methods—for example, the manner and extent of Government borrowing may have crucial effects on the amount of bank credit created. Moreover, we can probably agree that the monetary weapon, if wielded too strongly or clumsily—we have had important warnings about this to-day from Lord Pethick-Lawrence—may, quite obviously, do serious harm. I am assuming this afternoon that the use of the monetary weapon is not pressed to the point where real unemployment occurs.

I would suggest that the first point to notice is that the monetary weapon was being wielded throughout 1955 in a deliberate effort by the Government and the Bank, whom we may call the authorities, to check the inflation. The effort is now being made to use this weapon for that purpose for the first time. The Bank Rate was raised to 3½ per cent. on January 27 last year, and to 4½ per cent. on February 24; yet we find that, in spite of the use of the monetary weapon all through last year, the cost of living in our country rose by about 6 per cent. According to the Ministry of Labour Gazette, the cost of living to the last recorded date rose in the year by 2 points in Germany, 1.4 points in France and by less than half a point in the U.S.A.—the percentage increases being slightly less. It seems fair to conclude, therefore, that our own experience in our own country in respect of the cost of living last year, in spite of our monetary efforts, was worse than that of the leading foreign countries.

I do not want to get bogged down in an argument as to whether the facts which I have just mentioned prove the inherent limitation of the monetary weapon or the inadequacy of the manner in which it may have been wielded. It was used in 1955, and. I would submit that 1955 was inevitably an experimental period: that the authorities and the banks were operating in circumstances for which there have been no modern parallels, but which are likely to persist in the future. I would submit, further, that we have not yet clearly learnt the way in which the monetary weapon can he used most effectively to-day, but that in the light of the experience of 1955 we ought to be much nearer to finding the right answer than we were a year ago.

To-day, I must pass over a question upon which the noble Lord, Lord Pethick-Lawrence, had some pertinent things to say—namely, how far closer co-operation and understanding can be, or should be, secured at the top level and at the high executive level between the Treasury, the Bank of England and the joint stock banks. I consider this question to be one of much relevance and importance, though I need hardly say that I am not referring to individuals or personal relationships; I am confining myself in these remarks to what might be called the mechanics of the thing, although when one is talking of the relationship between human beings the mechanical analogy is always somewhat dangerous. Surely, the truth is that the machinery of disinflation did not work as well as we could wish in 1955 and that no one has any special ground for supposing that it will work as well as we could wish in 1956.

In the first half of 1955, we saw the banks appearing to pursue a policy of expanding advances, in contradiction, so at least it seems in retrospect, of the deflationary policy which the authorities, it was said, were espousing. No doubt a number of explanations can be offered to account for this phenomenon, including, it may he thought (to put it as gently as possible), some uncertainty regarding the degree of determination with which the policy of deflation would be pressed. In particular, there is this which should be said in reply to any criticism of the joint stock banks. The difficulty of bringing about a sharp and immediate reduction in the total of advances in view of the loans already sanctioned before this new policy was introduced is probably a good deal greater to-day, as the noble Lord, Lord Beveridge, would agree, than it was in the good old days—whenever those good old days may be supposed to have been. Of course, there is the important school of thought, with whom I am not going to stop to argue, who hold that the trend of advances is, in any ease, a good deal less important than the trend of deposits—an issue which I must not stop to explore this afternoon.

Be that as it may, in the second half of last year we saw the banks being induced to carry out Government policy in respect of advances by what looked, to me at any rate, like a Governmental directive, though it was not a Governmental directive in the legal sense. It was certainly unwelcome, and it was associated with an equally unwelcome cessation of competition between the banks in certain vital respects. The conditions of the second half of 1955 are still in force in that connection, supplemented, but not altered, by the recent rise in the bank rate. The problem, not solved in 1955 or up to the present, is how to find a method of inducing the banks to adjust their policies to the credit policy of the Government applied through the Bank of England, while leaving them free to operate on commercial lines and to compete freely with one another. That seems to me to be the problem. It is perhaps easier to state it than to provide the answer. Surely, without such free competition the justification of the present commercial banks system would be very much weakened. It would be hard to justify as a long-term feature in financial arrangements the present self-denying ordinance under which, if one is refused a loan by Bank A. one cannot get it from Bank B. I do not think anybody, individualist or Socialist or whatever he may be, would justify that as a permanent feature of our arrangements.

Leaving out the first five headings I mentioned earlier, and still confining myself to the use of the monetary weapon, I believe there are four ways of restricting the amount of spending power which the banking system makes available. First of all, there is the raising of the bank rate and other rates, with the result—I am looking at this problem from the point of view of the banks and also of the country—that borrowers are "choked off"; they do not feel that they can pay the rate, they do not ask for the loan, and there is no special discrimination required by the banks. The grave disadvantages of raising the bank rate past a certain point are widely recognised —that was explained most carefully by my noble friend, Lord Pethick-Lawrence. I only mention now the interest burden on the British Exchequer. Still more dangerous in the last resort, from the national point of view, is the heavy interest burden to foreigners, or, to be more precise, to overseas holders. Various figures have been given and it may be that the noble Earl, Lord Selkirk, will answer Lord Pethick-Lawrence by telling the House what the changes in the bank rate mean to us in damage to the external balance.

In the Banking and Commercial Review of the Statist for March 3, 1956, the matter is, I think, put in quite a vivid way. According to the Statist, the general level of rates for investment in liquid items and short-dated gilt-edged securities is now about 3 per cent. beyond that ruling a year or so ago. So if the rise in United Kingdom rates endures long enough to affect half the bills, and add to the overseas interest, imbursement on this account will come out at no less than £60 million a year as a result of changes made during the period of lending on them for a year, and, as the Statist points out, that is the equivalent of the whole of the foreign exchange earned by the exports of one of the country's major industries. So the effort to correct the trade balance by raising the bank rate is a little like trying to roll a stone uphill; at any rate, it is an obviously grave disadvantage to which we all have to address our minds. That is one method.

Another method is some kind of directive from the Government instructing the banks to reduce either total lending or lending in certain directions below the point which they would regard as commercially desirable. We have something like a reduction of total lending under Government directive in operation to-day, and it seems likely, though not quite certain, that it leads actually to a self-denying ordinance of the kind I have mentioned, which eliminates competition. Most of us would hardly regard it as a satisfactory feature of our system for any great length of time. Certainly this method of legal directive is in direct conflict with the ordinary banker's conception of his free commercial role, as I am sure the noble Lord, Lord Brand, with his great experience, will agree; and it imposes a singularly unpleasant duty on bank managers.

Thirdly, there are various methods, sometimes called "open markets" or "special buyer." or some such technical name, by which the authorities can cut down the credit base and also the deposits of banks. This kind of intervention renders it impossible for banks to lend as much as previously they did so long as they preserve their traditional ideas of the right relationship between the two factors—advances and deposits. One disadvantage of these methods seems to me to lie in their obscurity. In an age when the Chancellor of the Exchequer is, in the last resort, held responsible for our financial policy, it seems difficult to rest a large part of that financial policy on a process which is hidden in darkness, both before and after the event. It also seems likely that the banks themselves must suffer under this method through not knowing in advance, or even at the time, exactly what is expected of them.

Fourthly, and finally, the Government, through the Bank of England, could impose some system of mandatory liquidity ratios which could be announced and adjusted as the situation demanded. By "liquidity ratio" I mean the proportion which the bank maintains of its liquid assets to its deposits; and by "liquid assets" I mean cash, or loans which can be recalled immediately or at very short notice, or holdings in bills whose maximum life, in any case, would be three months. Some of the difficulties under the third or open market policy could be avoided under this fourth policy of imposing mandatory liquidity ratios. Here, at any rate, all would be open and above board, and everybody would know what was going on. Under this policy, however, as under the open market policy, the banks would be faced with the difficulty of having to explain to marginal customers that loans previously made could not be renewed. They would have to exercise some discrimination themselves. On the other hand, I agree that under the policy of raising the bank rate, the disadvantages of which I have indicated, marginal customers would be "choked off" without the bank having to turn them down; so from that point of view it would be easier for the banks.

If we leave out the bank rate increase method and take other policies which require the banks themselves to take responsibility for refusing loans to people who are still coming forward, we can see that under this second policy, that of the squeeze, plus what amounts practically to a directive, responsibility would to some extent be transferred to the Chancellor of the Exchequer. The unfortunate bank manager can say, "It is not my bank's fault; it is the Chancellor of the Exchequer's order." No doubt a great deal of that goes on at present. That is where responsibility is most obviously placed at the present time. Under the open market and mandatory liquidity ratios policies, the banks would themselves have to take responsibility, and it would be for bank managers to explain that it was their bank which was refusing to accommodate marginal borrowers. I submit, however, that, taking all in all, the task of the banks would be a good deal easier under this policy of mandatory liquidity ratios, where the change would be publicly announced, than under the rather mysterious policy of open market operations, where they would find themselves suddenly and mysteriously weakened by the operation of some hidden hand. It would he much harder for them to justify refusal of loans to customers.

Trying to weigh up the matter from the point of view of the banks and the country, which matters a great deal to al' of us, rather than to any one section, I conclude by submitting three points to the House. First, the use of the monetary weapon, whilst it will not be the only weapon needed, will continue to be of the first importance. Secondly, we are still in an experimental stage. It is a fairly new phenomenon for the bank rate to be costing us so much in interest to be paid to overseas holders and damaging our foreign exchange position so seriously. Thirdly, I suggest that the method of liquidity ratios fixed by the Bank of England, in agreement with the Treasury, and adjusted (with as much warning and as much room for elasticity as possible) when the situation demands, is one to be studied with the utmost care and thoroughness by those who decide our financial destinies. I am not bringing before your Lordships some "bright idea" I have thought up myself: its adoption would not be a revolutionary innovation. It could be argued that it is foreshadowed in certain passages of the Macmillan Committee's Report. There are a good many parallels abroad, and noble Lords may have react a most learned article on the subject in the current number of the Economist, although I must not commit the, Economist to the precise point of view which I have put forward. I am sure that the more this method is studied, the more clearly it will emerge as time goes on—and the sooner the better—as a natural development of much significance and helpfulness.

Before I sit down I venture to say a few words on a major and, in some respects, rather delicate subject—the possibility of removing some of the misunderstanding which now exists between the City and my own Party, the Labour Party, or, to adapt a phrase of Sir Winston Churchill, "the Labour slice of England." I am not talking only of a group of politicians. Noble Lords who follow a political and a financial profession will agree that the suspicion felt in the City towards politicians extends in considerable measure to politicians of all Parties—it is not confined to one group. Between the world of Whitehall-Westminster and that of Threadneedle Street-Throgmorton Street, a great gulf is fixed. I know that most noble Lords now always travel by Tube, and it is possible to make the journey between Westminster and the Mansion House, or vice versa, in less than ten minutes; but when one has done so either way, one feels one has been carried by Charon across the Styx—though it is not for me to say which is the upper and which is the nether region. Years ago, when I left Oxford and was thinking of a career in politics (in those days my politics were not Labour politics), I consulted a leading stockbroker of the day as to whether a period on the Stock Exchange was a good preparation for politics. His answer showed the City, rather than the political, angle. He said: "I should not think so. I once knew a fellow who went into politics. I believe he got into the Cabinet, but I never heard that it did his business any good."

Nevertheless, there is a difference, as we all know, between the degrees of suspicion entertained by the City towards Conservative and Labour politicians. Not long ago I sat next to one of the leading men on the Stock Exchange, a man of broad and liberal views and of much distinction. He remarked to me, in a friendly way, what a pity it was that Labour people were so hostile in their comments about the City. I listened to him with respect; his intention was obviously so good. I agreed that sometimes ill-informed remarks were made, but I begged him to ask himself whether it was not a two-way misconception. I think we all know the story of the foreigner who said after the 1945 Election: "I suppose the Conservative Opposition have taken to the hills," and was told in reply: "Oh, no, they have taken to the City." Certainly it is a surprise if a Conservative Minister, when he leaves office, does not receive a good position in the City, and a matter of astonishment if a Labour man does. I feel justified in making that comment as one of the few who have no cause for complaint.

I consider this a matter of real importance for the future. The Labour Party—whatever its merits or demerits —is likely to be alternately in office and the official Opposition for as far ahead as we can see, and without claiming perfection or immutability for the City (where I am still very much a "new boy") I think any honest man must agree that it is a national institution of great traditions, high standing abroad, and has a task to perform which is of the utmost national significance. It may well be that, in so far as there is ever a representative City view towards controversial political issues, it is not likely to resemble the representative Labour Party standpoint, and to that extent a divergence of outlook is likely to continue. But I do feel that much of the present suspicion is due to factors which are outmoded, to ignorance or, as I would rather say, innocence—but an innocence which is hardly bliss on either side. I would urge also, with great respect, that patriotic citizens—and as we all know there is no monopoly of patriotism in any one quarter of our country—must wonder whether some, at least, of the suspicion cannot be removed; and I submit with much earnestness that anyone who contributes to that end will deserve well of our people.

5.13 p.m.

LORD BALFOUR OF BURLEIGH

My Lords, I want at the outset of my remarks to establish two propositions which I hope will be accepted in every quarter of the House. The first is about full employment. Real prosperity for this country is impossible without the fullest possible measure of employment. That is common ground. What is the fullest possible measure of employment? I feel that anyone who ventures upon a definition is treading on dangerous ground. I noticed that Lord Pakenham, in the course of his excellent speech, referred to "the point where real un- employment occurs." I did not like to interrupt the noble Lord, but I should be interested to learn what is the point where real unemployment occurs. I hardly think it is capable of definition. I think that the fullest possible level of employment might fairly be defined as the highest level which can exist without inducing inflation and without a consequent fall in the purchasing power of the pound. I do not see why we should not all agree on that, and agree that that is the common object of all Parties.

At all events, of one thing I am quite sure—and I do not think it will be disputed: that a condition of employment where there is an excess of vacancies over applicants is hound to be inflationary and must, in the very nature of things, perpetuate the wage-price spiral and involve a reduction in the purchasing power of the pound. That is the first point I want to make: that the fullest possible level of employment is a common object of us all. Secondly, I want to lay down the rather obvious proposition that we can import only that which we can pay for by exports. A high standard of living requires a high level of imports. It follows, therefore, that the higher our standard of living the greater must be the volume of our exports.

Before I come to the point that I particularly want to emphasise—namely, what is the best way of checking undue excess of imports—I am going to permit myself to comment on the speech of the noble Lord, Lord Pethick-Lawrence, who, I will not say taunted us, but referred to the fact that the measures taken so fat by the Government to counter inflation have not been successful. I should be the first to admit that they have not been as successful as we could have wished, but I would say that the reason is that they were both too little and too late. I should also be quite prepared to admit, perhaps in an outburst of frankness, that the reduction of taxation in the first Budget of this Government did rot turn out in the way that was hoped.

Here I would refer to what was said by my noble friend Lord Clitheroe; and, with great respect, I must differ from him. He thought that because high taxation had an inflationary effect, therefore high taxation must be avoided. I would not deny for a moment that higher taxation might have a certain inflationary effect, but far more important is its effect on the current spending. What we are suffering from, we must all agree, is am excess of internal spending. I am rather afraid that higher taxation may be one of the weapons to deal with that. Lord Pethick-Lawrence said that the duty of maintaining the stability of the currency was one of the first obligations of every Government. How true! Loth as I am to inject the smallest note of Party controversy into this debate, I must say, I hope with good temper: what a comment on the Dalton cheap money inflation of 1946! The noble Lord, Lord Pethick-Lawrence, speaking about monetary weapons referred to indiscriminate pressure. My way of putting it would be "pervasive influence." I think that monetary pressure permeating all sections of the economy is effective in unseen ways—and that is one of its great merits. But monetary measures cannot do it alone. I am sure that what the noble Lord called our "old rusty blunderbuss" will still have to be used—I hope in conjunction with other things which perhaps we shall hear more about in the Budget. I would agree with the noble Lord—in contradistinction to the noble Lord, Lord Clitheroe—that a large Budget surplus is desirable.

I turn now for a moment to what Lord Pethick-Lawrence said about relations between the City and the Government. I will also comment on what Lord Pakenham said about possible variable ratios. I perhaps may do so because I am no longer in any position of great responsibility in the City, and speak entirely for myself. So far as contact is concerned, when I had the privilege of being chairman of the Clearing House I had close contact with the then Chancellor of the Exchequer, Sir Stafford Cripps, and on more than one occasion he expressed his appreciation of the cooperation of the banks. I think that the intimate co-operation which the noble Lord, Lord Pethick-Lawrence, advocated, is very much what exists. The noble Lord referred to the Bank of England Act, with its power of direction of the banks. That is a blunderbuss if you like. It has never been used; I hope that it never will be used; and I confidently believe that, with the informal and intimate consultations that exist between the Treasury, whatever the colour of the, Government, and the banks, it never will be necessary to use that weapon.

I listened with great interest to what the noble Lord, Lord Pakenham, said, and I welcome from the bottom of my heart what he said about the need for better understanding between Labour and the City. If I may boast in a very minor way, I believe that I was able to do something towards that, when I helped to bring a prominent member of a trade union on to the board of a great bank of which at that time I was chairman. Nothing is more needed than better understanding between Labour and the City. I am afraid that I regard that ignorance as existing on the side of the trade unions much more than on the side of the City; but the noble Lord may be right in attributing it to the City. However that may be, the dissipation of that mutual ignorance can have only good consequences for all concerned.

I do not think it would be right to try to follow the noble Lord, Lord Pakenham, in his dissertation about the monetary mechanism. I know, of course, that the variable ratio method is in use in different parts of the Commonwealth—New Zealand is a notable example. The noble Lord will not have overlooked the fact that if the ratio of cash to liabilities were increased, it would amount to a compulsory funding by the banks of some of their Treasury Bills. With the small reflection I have given to the matter, I would only say that, though this idea is worth considering, it should be approached with caution. I think that, on the whole, the less we have of arbitrary and compulsory arrangements in that delicate sphere the better. If I may make one more comment on the noble Lord's speech, I think that the husband he spoke of was the rashest man I have ever heard of and the deflation he got was nothing more than he richly deserved.

We are facing difficulties, serious difficulties, in our balance of payments. Is it more than that? The word "crisis" has been used by the noble Lord, Lord Pethick-Lawrence, and by my noble friend Lord Bruce of Melbourne. I would say that at the moment the situation is serious —how serious the next few months will show. It will be disappointing if we do not achieve a surplus in our balance of payments of £300 million by the end of the year. In-saying that the situation is serious, I would agree that, unless it is rectified speedily, it may rapidly become dangerous. The main points to which I wish to direct your Lordships' attention are the necessity to reduce imports and how that can best be accomplished. There are two alternatives. One is by the application of direct physical controls. I had anticipated that the noble Lord, Lord Pethick-Lawrence, would have advocated that course, although I do not think he did. The second alternative, which I prefer, is a reduction in the amount of the available internal spending power.

The first alternative, to cut imports, can surely be done in practice only by a large percentage reduction on a fairly limited range of imports. Whitehall cannot possibly foresee the minute adjustments which millions of consumers will make in taking their own decisions. Import cuts do nothing except divert spending power to other resources which could be available for export. I am glad to see the noble Lord, Lord Winster, opposite assent. That means that there is a double reduction in international trade. There is an immediate drop in imports, a reduction in exports as a consequence and, therefore, the danger of the necessity of yet more drastic import cuts.

An interesting illustration is to be found in Australia. I listened with greatest interest to what my noble friend Lord Bruce of Melbourne said about the "great days of old" when he was courageous enough to reduce purchasing power by monetary methods. I think it would be greatly to the advantage of Australia if he were there to do the same thing to-day. Here is a report that I read in The Times of February 29 of a speech by Mr. MacEwen, the Australian Minister of Trade. He said: The problem of the balance of payments is really serious, and clearly the answer is to earn more by exporting more. Import controls were not far removed from a position where additional cuts could be made only at the expense of goods necessary to maintain the primary and secondary production. I do not know how near we are to that point. If we are anywhere near it, then, of course, what is serious would immediately develop into a crisis. But having regard to the fact (which I do not think can be disputed) that excess internal spending power is the trouble, surely physical restriction of imports is about as useful as putting a dam in the middle of a river and having the water still flow all round and over it.

Contrast this with the effect of reducing spending power. At once the consumer arranges his own expenditure so as to reduce his personal satisfactions as little as possible. In that connection I was deeply interested to see in The Socialist Case the following statement by Mr. Douglas jay: In the case of nutrition and health, just as in the case of education, the gentlemen in Whitehall really do know better what is good for people than people know themselves. I do not know whether Mr. Jay was the author of that famous phrase, but there it is. Whether it is true about nutrition and health or not, I am sure that "the gentlemen in Whitehall" do not know how to teach us the proper way of spending the whole of our incomes. The great value of reducing purchasing power is that it makes the consumer concentrate on the essentials. May I draw your Lordships' special attention to the great merit of making the consumer spend more on milk and bread and rent? The more he spends on essentials, the less he will have to spend on unessentials, which may become available for export. Those resources are released for export, and that has the effect of making the home market less profitable to the manufacturer and of giving him an incentive to cater more for export. Surely, the second process, the cure by reducing spending power, is as self-perpetuating as the disease is self-perpetuating with physical control of imports. I repeat that full employment is our common objective, but it is a vain hope to think that it can be maintained indefinitely so long as internal purchasing power consumes an undue proportion of our production.

There are at least two wider considerations which support this view. If we start imposing protective duties or quotas, there is a real danger of retaliation. Our greatest interest in this country is an increase in world trade. Our earnings of dollars and of European currencies must be affected adversely by import cuts. I am sure I am right in saying that the only safeguard for full employment, in the long run, is the ability to be able to win our Share of increased world trade. There is also a perhaps somewhat more remote argument: that if we rely on consumer choice by checking spending, we encourage the dynamic nature of our industry. We must never forget that industry must be dynamic; that new things must go ahead and be able to attract their labour. If we encourage consumer choice by that means, new progressive industries will be able to get the labour they need, and will be justified in bidding up for it—which some of them are doing now, and which is a dangerous feature.

I suggest that, instead of talking about the battle against inflation, we ought to talk about the battle for preserving the purchasing power of the pound—and in that respect, I believe it was the noble Lord, Lord Pethick-Lawrence, who referred to the importance of savings. Here is a simple equation which is little appreciated but which I know is true: savings equal investment equals efficiency and employment. We must never lose sight of our ultimate objective which is the return to full convertibility of the pound, in the fullest sense of the word. I will not enlarge upon that aspect of the matter, but it is one which is very present to my mind. We can remain the financial centre of a great volume of world trade only if our pound is beyond reproach. Two things remain essential for that: larger reserves—which can be engendered only by a favourable balance of trade—and the maintenance of our competitive power.

I feel that I must deal with one objection which I know noble Lords opposite take to anything in the nature of disinflation by monetary mechanism. They feel that it may lead to a deflation and a slump. For this part of my argument I wish to refer to two authorities—one is Sir Stafford Cripps, and it is contained in a short paragraph from an article by Mr. Gaitskell. He says: When Sir Stafford Cripps warned the country that the great threat to employment was not economic depreision but inability to earn enough through exports to pay for the materials we needed to keep our factories going, he was absolutely right. If a balance of payments deficit is really chronic, and cannot be covered by borrowing, gifts, or using up foreign exchange reserves for other assets, then eventually the cuts in, imports might extend to materials for the factories. That is a real danger. It would arise much more from a slump in world affairs than in any other way. The world situation at the moment is favourable. One does not see any likelihood of a general fall in demand for our exports in the national markets, provided always that they remain competitive. World trade is at a high level, and our problem at the moment is our internal situation.

There is another point. The corrective measures which the Government are taking, of making spending power less, are unpopular and difficult, but if at any moment it seemed that they were going too far, the measures to reverse them would be the easiest thing in the world, and would be popular. At once you could restore hire purchase; you could pay up the post-war credits and you could reduce taxation. These measures are as easy and popular as the corrective measures are unpopular and difficult. Far greater danger of permanent damage exists to our high employment and prosperity in the situation of uncorrected over-full employment. To correct it by physical control is perhaps the easy way. I am quite certain that it would not only be ineffective, but dangerous; and it would be dangerous because it would be, and would be regarded as being, the first step to a further devaluation.

My noble friend Lord Clitheroe talked about psychology being important. A noble Lord opposite shakes his head. Let me refer him to the Manchester Guardian of to-day. This is a quotation from the financial correspondent of the Manchester Guardian, which says: A curiously unequal struggle is going on in the exchange market. On the one side are foreign speculators, a small but extremely powerful band of European financial interests. These are the little gnomes sitting over ticker tapes in Zurich.'…The little gnomes"— noble Lords on this side of the House will be interested to hear this— are men of extremely conservative opinion. They long ago decided that the present British Government would be unable to maintain the exchange value of sterling. In their view, the Government's fear of creating unemployment will stop it from breaking the spiral in wages and prices, and sooner or later another devaluation of sterling will be inevitable. From time to time they decide that devaluation is imminent and a skirmish develops in the foreign exchange market. I think that is most significant. I feel that our Party on this side have to take a share of the blame for the present state of affairs. Both Parties have drifted; lack of courage has been common to both. High employment is attainable by inflation; it is not maintainable by inflation. There comes a point when "Halt" must be called. I wonder if this is really the point. I think it may be. Distasteful medicine is needed. I hope that the Government will have the courage to give it to us and we the fortitude to swallow it.

5.40 p.m.

THE CHANCELLOR OF THE DUCHY OF LANCASTER (THE EARL OF SELKIRK)

My Lords, I should like most warmly to congratulate the noble Lord, Lord Clitheroe, on the speech which he made to-day. His reputation, of course, has come well in advance of him as a man speaking with common sense and balanced judgment. I, who am connected with the great county of Lancashire in an official capacity, am particularly glad to have this opportunity of welcoming him. His family, I believe, have lived there for a thousand years. The noble Lord mentioned Malaya. I should like to stress that in the Report of the Conference—and I am sure the noble Lord has read it—the mutual character of the arrangements between London and Malaya are fully brought out. The Malayan delegation have said that they intend to remain in the sterling area; that they will restrain dollar expenditure; and that they will send a delegation to the future meetings of Commonwealth Finance Ministers; and the United Kingdom, on their side, have promised to give continued financial assistance and to allow Malaya access to the London market. I think the noble Lord's point is fairly well covered. No one can bind the future, but I think that arrangement is fairly satisfactory.

The noble Lord, Lord Pethick-Lawrence, was a little more polemical to-day than he is sometimes, and I would say this to him. I think it is a pity to hold it against Mr. Butler that he should have annoyed some of his friends. If any Minister who is Chancellor of the Exchequer should ever be afraid of annoying his friends, then this country has a pretty poor outlook. The noble Lord answered the question by pointing out that the problem was not recognised by the public. In those circumstances, it is hardly surprising that some of the Chancellor of the Exchequer's actions would be a little unpopular. The noble Lord went on to talk about unjust taxation. I wonder whether he thinks that all the taxation which was imposed while he was in Government was considered just by the people of this country.

I would rather approach the problem with which we are faced, not so much from the angle of the noble Lord. Lord Pethick-Lawrence, as from the angle of the noble Viscount, Lord Bruce of Melbourne, who, I think, made a most powerful and important speech to-day. In giving a picture of our economic position I do not think it is possible to over-emphasise the narrow margin on which we stand. If I may cite some figures, they will tell very much the same story as the noble Viscount told us. For instance, since the war we have had a current balance of transactions overseas varying from a deficit of £400 million to a surplus of £300 million. On present figures, that is a swing of about 10 per cent. on our total turnover of overseas payments on current account, which again is about what our gold and dollar reserves are at the present time; while, of course, we have sterling liabilities to the extent of about £4,000 million. We never had much room to manœuvre, and, frankly, we have not a great deal to-day. It is perfectly clear that the building up of these reserves, the need for which the noble Lord, Lord Balfour of Burleigh, has so properly emphasised, will be a slow process, particularly as we are pursuing a policy of investment overseas because we consider this aspect important. But, inevitably, the process of building up reserves will take a long time.

We may ask ourselves: Did we enter into a world after the war with rather too big ideas? We knew that we had lost investments abroad; we knew it was urgent for us to rebuild our foreign trade; we knew the terms of trade were less favourable than before the war—and they have tended on the whole over the last ten years to he rather less favourable. That is in addition to the point about competition which the noble Viscount, Lord Bruce of Melbourne, mentioned, and which is not quite the same thing as terms of trade. Moreover, we are now a net importer of coal. The result is that to-day we are buying half our food and all our raw materials, we have virtually no primary products in this country at all to export, and we are directly dependent for our survival on the ability by hand and brain of the people who live here. I was glad to notice the emphasis from both sides of the House to-day on the need for common respect among different cate- gories of people in this country: among those who work by hand, those who work by brain and those who have to exercise responsibility and judgment in their particular functions. It is encouraging that this point should have been so clearly emphasised.

What did we do in this post-war world? We certainly launched out and succeeded in establishing a higher standard of living in this country than we have known before. In this respect I often think that sometimes we underestimate the substantial extension of the social services which has taken place. They do not appear in cost of living indices. They are not mentioned when people are comparing relative levels of wages and salaries, but they do constitute a heavy burden on the productive industries of this country. To many people this increase in the standard of living sounds a hollow jest, because there are substantial numbers of people in this country whose standards of living have steadily fallen over ten years. I think it is right and proper that we should recognise that fact. What I mean by saying that the general standard of living has increased is that the amount of consumption, speaking economically, is much greater than it has been before. To this we have added the considerable expenditure on defence which has diverted our activities from production to defence measures. We are keeping a lot of troops abroad which, of course, is a strain on our overseas payments, and we have continued an extended policy of investment in the Commonwealth. The Economic Survey last year showed that we were running at a net investment level of about £180 million a year abroad, in one form or another. This is an achievement of quite a considerable character in ten years, but at the same time it is an immense burden which none of us should misconceive.

How have we done this? We have done it substantially by three things. First of all, we have had more or less every year a steadily mounting rate of production. We have now increased from about £10½ billion as the gross national product to nearly £13 billion in terms of 1948 prices. That is about 25 per cent., which means that we have been running at the rate of something between £300 million and £400 million in real terms in recent years. Secondly, we have maintained full employment and, as the noble Lord, Lord Balfour of Burleigh, said, from an economic angle that is of real importance. Thirdly, we have increased capital investment inside this country. Admittedly we went a little slowly at first, but there is no doubt that in recent years it has gained impetus considerably. The price we have had to pay for this has been continuous inflation over ten years. In other words, while we have increased production we have paid ourselves a good deal more for doing so. The figures were quoted by the noble Lord, Lord Clitheroe, and I would only say that in ten years two-thirds of the rise in prices has been due to inflation.

May I turn from this general background? Towards the autumn of 1954, on to a position of buoyant level of consumer demand there was superimposed an upsurge of capital expenditure. Of course, that was urgently wanted. It was exactly what we required. But it was at a time when we had little reserves. That produced what may be described as the classic inflationary situation. May I read what Keynes says in his book on this matter, because it is exactly what happened: When full employment is reached, any attempt to increase investment still further will set up a tendency in money-prices to rise without limit, irrespective of the marginal propensity to consume; i.e., we shall have reached a state of true inflation. Up to this point, however, rising prices will be associated with increasing aggregate real income. May I for one second say what that situation looks like from an entirely different angle? This is the industrial world as described in the industrial survey in the Manchester Guardian, which is a fairly independent paper. This is how it describes, from an entirely different angle, the same situation which Keynes envisaged: The Great Industrial Machine is thundering along at full speed. The factories are busy, the roads are crammed with goods transport, the ports are clogged with cargo. On all sides, industry is crying out for more space, more equipment and, above all, for more labour of all types and grades. People are prosperous and, on the whole, happy. When we think of a situation like that—and the noble Viscount, Lord Bruce of Melbourne, tells us with his full authority that this is the most serious crisis we have had outside of war—can it be wondered at that people should find it a little difficult to understand and that it leads to such irritation at the measures of caution which the Government have taken?

Possibly we might have relieved the inflationary pressure last year by increased production. Frankly, we did not do too badly in production last year. We had full employment and, I think, ample materials. The only way we could have increased production last year was by increased capital equipment or the more efficient use of labour and materials available, but neither of these improvements was likely to take place quickly. In any case, our gap in visible trade remained high. Imports of coal and steel, which are comparatively new, became an important element in this situation. Moreover, there were last year two periods which, as the noble Lord, Lord Balfour of Burleigh, described, gave rise to periods of lack of confidence in sterling. The first was in February and the next was in September. To some extent, this tended to reduce a certain amount of our reserves. Up to the end of 1955, the Government had sought to check consumer spending and capital investment by raising the bank rate, restricting hire purchase and increasing the purchase tax and the companies tax. It is difficult to know what the net effects of these measures have been. As has been said, "What is done we justly can compute, but not what has been resisted."

When the new Chancellor of the Exchequer came to examine the situation, he found that, whatever those effects were, they were not, in his opinion, adequate to meet the situation, though in examining it, it was necessary to consider the steps which had already been taken and which, even if not showing results, might well be exercising considerable influence in the economy. As I see it, this is what the Chancellor of the Exchequer saw when he came to look at the position. He saw that the price of sterling had remained steady and firm for about four or five months and the fall of reserves appeared to have been checked and indeed to have improved slightly, though I do not think it would be right to place too much importance on this point unless there was a real improvement in the trade position. The January figures for visible trade did not show that.

Moreover, a recently published forecast of investment by private industry, which was shown in the Board of Trade Gazette, estimated a development in the private sector of at least the same rate of increase in 1956 as for last year. The demand for labour continued to be very high. There were nearly two vacancies for every man employed—and, indeed, in January and February the figures for unemployment were the lowest since the war. Both wages and prices have risen steadily over the past year. The noble Lord, Lord Beveridge, has written a couple of letters to the newspapers. If I may say so, I agree with much of what he says, particularly with the statement that this problem is profoundly complex.

LORD WILMOT OF SELMESTON

The noble Earl said that there were two vacancies for every man employed. Did he mean that?

THE EARL OF SELKIRK

I beg your Lordships' pardon. I am most grateful to the noble Lord. I meant "nearly two vacancies for every man unemployed."

VISCOUNT ALEXANDER OF HILLSBOROUGH

The noble Earl did say "employed."

THE EARL OF SELKIRK

I am going on now to the problem of what we should do. Obviously, there is the fear of controversy between tackling the symptoms and tackling the cause. A typical example of dealing with the symptoms is the imposition of import control and the stabilisation of prices by subsidy. These might ease temporarily our trading gap and might reduce our imports and stabilise certain retail prices: but, whilst giving a momentary impression of balance, they would only conceal inflation and might indeed increase its strength. Conversely, if we treat the cause and reduce demand either by making credit more difficult or by increasing prices through purchase tax, the result must be to make the symptoms of higher cost even more prominent. This, in turn, might give rise to increased pressure for higher wages, which would again set the spiral in motion.

However, the Government have decided to try to treat the cause rather than the symptoms because they do not believe that you can beat inflation simply by hiding the symptoms. The noble Lord, Lord Balfour of Burleigh, has brought out clearly that every single instrument which the Chancellor of the Exchequer has for increasing inflationary pressures is highly popular. One can think of a whole range of them. Everybody would be delighted if his post-war credits were put up or down, as the case may be.

Perhaps I may put it from a purely economic angle. I think it would be right to do what the noble Lord, Lord Clitheroe, says, and 'exercise pressure on the economy by reducing consumer demand alone, so that capital investment would be entirely unimpeded. We have not done so. In this, I am glad to find myself in agreement with the noble Lore, Lord Pethick-Lawrence. We are spreading it between the consumer and capital investment. We have done so because we think the burden should be as widely spread as possible and, secondly, for the practical reason that capital goods are of great importance in the export market. The noble Lord, Lord Jessel, I think possibly deliberately overstated the ease when he said that we were asking people to call a halt to capital expenditure. I think that, over the whole sphere and range, capital expenditure is likely to be considerably higher this year than it was last year. What we do not want to happen is that it should be so adjusted that one scheme world gel in the way of another. We hope to restrain home buying whilst leaving the salesmen overseas free to sell in the foreign market.

The other point on which we find ourselves in close agreement with the noble Lords, Lord Pethick-Lawrence and Lord Balfour of Burleigh, is on the question of savings. This is by far the most valuable way of relieving the inflationary situation to-day. It could be done by a compulsory increase in taxation, which is the view which the noble Lord, Lord Pethick-Lawrence, adopted. But this might have the effect of reducing private savings in other spheres because of high taxation. To some extent, we are already doing it. I think it would he a pity for that to take the place of genuine private savings—indeed, I do not think it can.

LORD PETHICK-LAWRENCE

If the noble Lord will allow me, I would point out that I said that the best way was to save; I thought it was altogether the best way. I said that I thought the Chancellor of the Exchequer might do more to encourage and exhort people to save. In so far as he failed in that effort, I said he ought himself to put in an oar and make a greater effort.

THE EARL OF SELKIRK

I am delighted to find that we are completely at one on that matter. All I would say to the noble Lord, with his great knowledge and inventive mind, is that perhaps he would suggest to the Chancellor of the Exchequer ways in which genuine savings can be increased. It is easy enough to produce an attractive bond of some kind, but you might well be diverting savings from one place to another and yet not improving the total volume. I can assure the noble Lord that any practical proposal would be much welcomed. I think he will agree that probably the most important thing in saving is a stable currency, and, as he pointed out, that, too, is interdependent, because a high level of savings plays an integral part in making a stable currency. The two things substantially act together.

The noble Lord, Lord Pakenham, mentioned a number of points, with some of which we find ourselves in agreement. There was the question of the liquidity ratio, which is a difficult point and one about which the noble Lord knows more than I do. It works very well in America, but the banking system there is rather different from what it is here and I do not think we can transpose it. I can assure him that the Chancellor has been considering this point, and I am sure that he will read and examine extremely carefully what the noble Lord has said. I hope he will not ask me to go further than that, because, frankly, I do not think that I can usefully do so.

The noble Lord, Lord Pethick-Lawrence, rather complained that some hardships were created. I do not know whether he thought that import controls or other licences would avoid hardship. Inevitably, they would have some effect. I was going to outline a list of import controls but the noble Lord, Lord Balfour of Burleigh, covered the point so well that I do not think I need do so. It would not help the inflationary position, because what has happened is that we have had ample materials and our inflation has gone overseas. What we want to do is to stop the inflation so that it will not go overseas but, even more important, is that it would be a reversal of our whole policy. Here we call them import controls, but in another country they become quotas, and there is nothing that people overseas object to more than quotas. They are basically obstructive to any form of import. I wonder what imports the noble Lord would consider we need. I have here figures of the imports we have to-day. Seventy-one per cent. goes to industry for processing, 25 per cent. goes to consumers without further processing—of course, that is overwhelmingly food—and 4 per cent. goes on capital equipment. Without bringing industry to a standstill, I do not think there is much that can be done.

LORD WILMOT OF SELMESTON

Before the noble Earl leaves that point, may I ask whether it is not true that a large slice of our import trade is still subject to the obtaining of permission in one form or another, either by licence or the necessary currency permits? It is not all free.

THE EARL OF SELKIRK

The noble Lord is perfectly correct. I should not like to give him a figure, but I know that to be true to some extent.

LORD WILMOT OF SELMESTON

A large proportion.

THE EARL OF SELKIRK

I should not like to use an adjective at all in that regard. The noble Lord, Lord Pakenham, dealt with a number of longer-term problems in regard to credit. What he said is of real importance. We cannot go on living on this narrow edge and falling over once in a while, one way or the other. If we can find a measure, even if it be by establishing a form of control which is sufficiently delicate to keep us on the rails, it would be of infinite importance.

The noble Lord, Lord Pethick-Lawrence, dealt at some length with the bank rate. I was under the impression that he thought that we almost liked putting up the bank rate. I can assure him that we do not like it. We recognise that it is a weapon which is used only for a specific purpose. The noble Lord dealt with the disadvantages, but he did not deal with the purposes and objects which we had in mind. I must admit that some of the disadvantages are exactly the purposes which the higher bank rate is intended to attain. The noble Lord knows that. For instance, if a person's bank rate goes up, he cannot spend on other matters. The noble Lord mentioned the subject of the Colonies. If we did not have a favourable balance of trade we should have nothing to invest in our Colonies overseas or anywhere else, so that the purpose of the higher bank rate here is to help make the currency favourable and to enable us, amongst other things, to invest abroad.

The noble Lord asked me whether I could say how many Treasury Bills are held by foreigners. I am afraid we have no figures, and I am fairly confident that no one could give an accurate figure on that matter. Naturally, there are quite a number of residents abroad who hold Treasury Bills as part of the sterling liabilities. The noble Lord asked me, too, what would be the cost, or the increased cost, of the higher bank rate on Treasury Bills since this Government came into office. I am not able to give him that figure, but I can say that during the last twelve months £133 million was spent on interest rate on Treasury Bills, and if that had been ½ per cent., which the noble Lord will remember was the case a good deal earlier, the figure would have been £17 million.

There has been a good deal of comment on the nationalised industries. The noble Lord, Lord Pethick-Lawrence, thought that they were being unfairly treated. All I can say is, that their capital expenditure in 1954 was 50 per cent. higher than it was in 1951; that last year it was higher than that, and that I am fairly confident that this year, taking it as a whole, it will be higher again. Lord Beveridge saw a danger in the nationalised industries and, with Lord Clitheroe, I think wanted a greater control, while Lord Jessel wished to abolish the Ministry of Fuel and Power. I rather think this would reduce the measure of control which could be exercised, but I would rather not go into that subject, because it is too big to attempt at the present time.

May I say this in ending: that what we hope to do is to reduce the home consumption so that we can satisfy a larger proportion of it from home production, which would reduce the need for imports. The home market itself would become less attractive and manufacturers and merchants would be compelled, or at least more attracted, to sell their products abroad. That is our object. We are aware that our steps are fairly severe. The position will certainly involve a measure of re-deployment of labour, and I hope will lead to a less urgent demand on our retail market. My Lords, if we think it is worth while to maintain the, stability of sterling—and without that we cannot remove inflationary pressure—then these burdens do not constitute anything at all untoward, because there is no country where the stability of money is more important. I think it is only by maintaining a stable currency that we can hope to maintain a balance in our overseas trade and payments.

We can only maintain full employment by earning it with our efforts. There can be little doubt that so far we have obtained it substantially at the cost of inflation, which simply means that we are eating up our reserves. If we are to avoid unemployment it is essential for everyone to refrain from taking full advantage of the bargaining strength which he may have from time to time. The result of increased efficiency and increased productivity should not be entirely absorbed, let alone more than absorbed, in the costs of manufacture. At least some proportion of it should be passed on to the consumer in the form of reduced prices, a point made earlier by the noble Lord, Lord Jessel. If we looked further ahead we probably should find education and training among the most important things for the people of this country. Your Lordships will have, noticed that they have been little touched by recent measures. We also look for a high rate of capital investment, which will be considerably higher this year than last year, and wide recognition of our common interest in resolving these, problems. If this is to become an internecine war in which sectional interests are a major consideration then we shall not be able to resolve it. We shall have, failed to understand the continuing interest we have in progressive development. I have not been able to answer all the questions put by noble Lords but have tried to answer those I can, and if I may write to some noble Lords afterwards I will do so.

6.11 p.m.

LORD WINSTER

My Lords, the noble Earl who has just resumed his seat put his finger exactly on the spot about savings. I am always very happy to speak on behalf of the Savings Movement if I am invited to do so, but I invariably come up against the man who says: "We are constantly told that the purchasing power of the pound is falling steadily and that means that if I put my money into savings, when I take it out it will buy less than it would have bought when I put it in." That is the reason why people hang back a little on this question of savings. I am not at all anxious to see any cuts in imports. What I want to see is the sale of a great many more exports, so that we can buy the imports which we need without throwing the balance of trade out of equilibrium and consequently causing yet more inflation.

I take part in this debate with considerable hesitancy because I am not an economist, nor do I understand economics. I am a little reassured on the latter point because I find so many economists do not understand economics. Such economists as I have met certainly seem to have very few fixed opinions. I was told that the late Lord Keynes used to begin his day with a prayer which ran: Give me this day my daily opinion And forgive me my opinion of yesterday. How true that may be I do not know, but it certainly seems that economics are not a fixed science. An economist who after an interval of twenty years went up to Cambridge to pay a call on his old tutor asked, out of curiosity, to see the last examination paper which had been set. Having looked through it he said, "But the questions are all just the same," to which his tutor replied, "Yes, but the answers are all different." My interest in economics has become increasingly practical because I have been trying to find out why I get steadily poorer and why I cannot have things like a new motor car, a new suit or a holiday which I seemed to be able to have in the days when my income was smaller than it is to-day. Mr. Butler's "largesse," which was referred to this afternoon, seems somehow to have passed me by.

So I have been reading and thinking about the endless articles and correspondence on economics with which newspapers and magazines are now filled. I am bound to say that articles and letters written by economists seem frequently to cancel each other out, but those written by laymen occasionally add up and seem to make sense. From them I get an impression of forces at work damaging our economic life and impairing our ability to compete in export markets; driving up the cost of living and producing chronic inflation which a speaker at the annual meeting of the Chamber of Shipping has just told us was likely to go on for many years yet, which is rather discomforting. I ask myself: if these forces continue at work unchecked and uncorrected, can we go on as we have been doing without coming an almighty smash? Many people talk as if, no matter what happens, there will always be Elisha's ravens to feed us. I do not get the impression that the world at large feels it owes us a living. I believe that we have to earn our living by our own efforts.

Warning voices are raised on these subjects: exhortation is not wanting, but perception seems lacking where it is much needed. A very prevalent mood is, "We have never had it so good." In a panel discussion on these subjects on the B.B.C. recently the speaker who represented the workers had been listening to what had been said along the lines I have previously indicated. But when it came to his turn to speak he said, "I have only one thing to sell, my labour; and I am going to sell it for as much as I can get for it. These things which you have been talking about do not interest me—they are not my concern." That outlook is not unnatural in people who have had hard times in the past, as they have, but I hope that soon a steady and better mood and better understanding will prevail on these matters. There are traces of tendencies which perhaps one must expect individually in a great industrial country like ours, but taken cumulatively they make one a little uneasy at times.

I do not like boasts about ability to flout the law; I do not like prolonged strikes over demarcation disputes or refusals to work new equipment unless employers agree to its being overmanned. I believe there are too many strikes without resort to conciliation machinery and too many strikes over trivial matters. I have seen it stated that in one motor establishment there has been an average of one small stoppage a day for six months. And, coupled with that, I must say that I do not like the all too common inability of successful, level-headed trade union leaders to prevent unofficial strikes with which they do not agree. I feel that these things which I have mentioned—and there are many more—are alien to the true spirit and purpose of the trade union movement. They are an excrescence on that movement which I am quite sure many trade union leaders deplore—in fact several of them have said so. If they were to spread and develop they would bring a great movement, which in the past has done great work for this country, into disrepute with the community.

In thinking over the causes of inflation (we have heard a great many discussed this afternoon, and, no doubt, much of what has been said has considerable validity and contributes to the result) I ask myself whether it is not the case that one cause of inflation is the fact that full value for money is not always given in return for the hundreds of millions of pounds a year which are paid out in wages. If it is the case that full value for that money is not always given, it means that labour is over-priced, and it therefore costs more than it should to produce a given article. That, of course, must impair our ability to compete against the foreigner in the export market, so that we tend to price ourselves out of those essential export markets. I know that one cannot have 100 per cent. perfection in this matter, and I am not suggesting that the situation is too bad. Yet I cannot help feeling that if all in receipt of wages gave—as I am sure great numbers do—a fair day's work in return, our troubles would melt away like snow off a roof during the recent thaw. I believe that the menace of inflation would begin to lift; I think we should then begin to be able to meet competition from any quarter; the export markets would lie open to us; the gold and dollar reserves would begin to fill up; the trade gap would close; the standard of living would go up, but upon a sound and secure basis and in a manner which did not involve inflation as it rose.

I have noticed—and I am sure your Lordships will have done so also—a recent series of articles in the Sunday Times with the title "Saboteurs of Prosperity." I did not like the choice of the word "Saboteurs" because that implies something very sinister—very evil things at work; and I feel that perhaps the word "Saboteurs" was not very happily chosen. Bat I thought these articles were well worth close attention. I believe that, on the whole, they were fairly written, and I did notice that the trade union leader who summed them up last Sunday, while he had criticisms to make, did not seem to find any fault with what had been said in them upon factual grounds. I think that the paper performed a service in initiating a reasonably impartial discussion of matters upon which our future depends.

More remarkable, to my mind, was The Times editorial to which the noble Lord, Lord Clitheroe, referred this afternoon in his admirable maiden speech. That editorial was headed "The Rule of Fear," and it said bluntly what a great many people in high places have been shirking saying. The leader writer was very impartial. He laid about him like Punch in a Punch and Judy show: everyone "caught it" in turn. Conservatives and Labour alike came under criticism. The leader said that A kind of madness has infected British politics where financial and economic matters have been concerned…. The merits of the case have had scant respect from either Party Going on to ask what has been to blame, the writer answered his own question in this way: The real lack is courage. Ministers have been expected to cut to the root of the cancer inexorably eating away what national wealth we have left. The story has been the same—half measures; too little too late. And not only Ministers are found wanting by The Times. The editorial mentions boards of companies which submit to unjustifiable wage demands to avoid trouble. On that point, certainly, I can say something from my own experience.

Your Lordships will not recollect it, of course, but some time ago I moved a Motion in this House on the subject of conditions of work in the docks. Before doing that I made some inquiries—I wanted to be sure of my facts before I spoke. At that time I was told quite definitely that there were employers who would not thank me to speak about certain things that were going on because they preferred to pay rather than risk possibly unpleasant consequences. If that is true—and as I say I was told it on very good authority—it indicates a very grave neglect of duty. Again, I read a few lines from a speech made at the recent annual general meeting of the Chamber of Shipping. The speaker said: Delays in port vitally affect every member of the community because of the vast waste of money involved, which inevitably in the long run has to be added to the cost of every article bought throughout the country and so adds directly to the inflation through which we are passing. So I feel that The Times was justified in saying that it is wrong to submit to unjustifiable demands and unjustifiable practices.

The trade unions, too, come in for their share of criticism, for The Times says that unjustifiable wage claims, framed and encouraged by trade unions, are a root cause of inflation. Those who grumble about rising prices do not always seem to know or be told that their cause is a combination of wage claims and low production. There are boards, says The Times (the companies are now coming up for their "caning") which give the inflationary spiral another vicious turn upwards with six, seven, eight or even ten per cent. wage increases in the dishonest and futile hope that 'this really will be the last time'. We used to hear that from Hitler. Every time Hitler was given way to he always said, "My ambitions are now satisfied: I have no further demands to make." Then he would retire to Berchtesgaden to think out plans for his next aggression. The trade union leaders are further accused of showing lack of courage. The Times says that: They tolerate such a festering folly as the Cammell Laird strike over who should drill certain holes. They know perfectly well we are heading for the abyss and are yet willing to seize any crumb of excuse to allow their followers to push them yet more vigorously from behind. Managements, it was said, manifest cowardice by bidding up and up to the point of bribery for scarce labour till some total earnings have reached fantastic levels. This is a very serious editorial. I think we are all accustomed to regard The Times editorials with a certain amount of respect. We believe that they are written with the good of the country at heart, even if we cannot always agree with everything they say. When I read this leader I felt that it was the speech which the Prime Minister ought to have made at Bradford before he went to Washington. I do not commit myself to saying that it was not perhaps a little high-pitched and over-coloured here and there, but many things were said in that editorial which I should have been glad to hear the Prime Minister say at Bradford.

In the circumstances, I found that his speech was not an adequate speech. The Prime Minister seems to have been mostly concerned with announcing increases in Government expenditure, and many issues upon which I have touched were shirked. But I am bound to say that Prime Ministers before him have also shirked these issues, and if we are to blame the present Prime Minister, we must also allot some blame to others who have preceded him. I thought it, however, a disappointing speech. The Daily Telegraph said that The speech was no Philippic. Jove hurled no thunderbolts; he merely hinted that thunderbolts were in stock. He nerved himself to say, You cannot fight inflation without pain. The Times comment was that we have had "merely a twitch of discomfort" and no real pain.

The Prime Minister said that none of us "wants to go back to a period of unemployment". Who is there who says the contrary? I can remember visits which I paid to Rhondda, Jarrow and West Cumberland—to Maryport, in particular, during those terrible days of unemployment. Who is there who would get up and say that he would like to go back to those days of unemployment? The Prime Minister was uttering a truism. But surely employment depends to a large extent upon customers being willing to buy from us, and they will buy from us only if our prices are right. Unfortunately, we seem to be pricing ourselves out of the market. Shipbuilding is an example. In a word, I thought there was too much wishful thinking in the Prime Minister's speech, and I recalled the proverb: I never fared worse than when I wished for my slipper. There were too many "ifs" in the speech—"if our balance of payments could be put right"; "if our reserves could be built up"; "if we are economically sound, we can continue to play our part in the world"; "if every citizen will help us …" I hate your 'ifs', said Tristram Shandy—and how right he was! How are those "ifs" to be translated into action? Every speaker has put forward his own proposals to that end this afternoon, all of them valuable, all of them deserving consideration in shaping the final course of action in these matters. My main suggestion to-day is that everybody concerned should be perfectly certain that value is being given for wages. I believe that that way lies one of the paths to salvation.

6.34 p.m.

LORD CONESFORD

My Lords, this debate has been made memorable for some of us by the maiden speech of my noble friend Lord Clitheroe, which impressed and delighted the House but did not surprise his friends in all Parties who knew him in another place. I should also like to thank the noble Lord, Lord Winster, for having the courage, which makes it easier for me, to break into a debate which has been conducted so ably and so largely by great bankers and former Treasury Ministers. I do not share any of those advantages of expert knowledge but, like the noble Lord, Lord Winster, I have had experience over many years of trying to explain these important matters in the country. Perhaps it is desirable that some laymen should intervene even among the experts who have made such admirable speeches this afternoon.

This debate has been mainly, and rightly, about inflation. I think the point could not have been put better than it was by my right honourable friend the Chancellor of the Exchequer, in his broadcast, when he said: We must beat the inflation or the inflation will beat us. I believe that that is literally true, and I agree with my noble friend Lord Balfour of Burleigh that we have not an indefinite time in which to do it. The necessities for success in this task—and I believe we can be successful—are courage, intellectual clarity and the will to deal with the real world and not with illusions. May I give your Lordships my favourite quotation in politics? It is more than 200 years old and comes from Bishop Butler, the philosopher. It is very well known, but I think the lesson it contains should never be forgotten: Things and action; are what they are, and the consequences of them will be what they will be: why, then, should we desire to be deceived? It sounds fairly obvious that nobody would desire to be deceived. Unfortunately, a great many people do desire to be deceived, and are very willing to applaud politicians who are prepared to deceive them.

May I give a few examples of deception? We deceive ourselves whenever we speak of our standard of living or our level of employment as if they were things to be determined simply by our desires and had nothing to do with external possibilities having nothing whatever to do with our desires. We deceive ourselves again when we speak as if unemployment could result only from some Party's malevolence, and as if employment were not in tile least dependent on the quantity, quality and efficiency of the work which we were prepared to do. We deceive ourselves, a word, if we act on the assumption that the external world owes us a livelihood and is likely to honour the debt. I am glad that the noble Lord, Lord Winster, made that point.

In this connection, I should like to commend to the House two admirable statements by Sir Winston Churchill which, though made many years ago, are to-day as cogent as ever. In a speech at Edinburgh in April, 1946, he described both our glorious national achievements and our unique dependence on external trade for our raw materials and food and then used these words: There never was in all human history a community so numerous in a position at once so magnificent and so precarious…' The other quotation from Sir Winston Churchill is more recent and many of your Lordships may have heard it. It is from the speech he broadcast when the Conservative Party won the General Election of 1951, and he again formed a Government. This is what he said in his broadcast speech of December 22, 1951: We are resolved to make this island solvent, able to earn its living and pay its way. Without this foundation not only do we lose our chance, and even our right, to play our pant in the defence of great causes, but we cannot keep our people alive. If we cannot earn our living by the intense exertions of our strength, our genius, our craftsmanship, our industry, there will not be time to emigrate the redundant millions for whom no food is grown at home; and we have no assurance that anyone else is going to keep the British lion as a pet.

LORD WILMOT OF SELMESTON

What was the date of that speech?

LORD CONESFORD

December 22, 1951. In the last few words which I cited that great master of English speech used a simile, and used it not to obscure his point but to drive it home. Few men can do that. The rest of us, I think, should avoid similes and metaphors and state the necessary truths as we see them, whether popular or unpopular, with accuracy and precision.

What is inflation? Various noble Lords have had a shot at defining it, and I do not think their attempts differed very much. Not being an economist, let me make my attempt. You cause inflation when you increase the amount of money or ability to pay without a corresponding increase in the amount of goods and services offered for payment. That, at any rate, is what I understand by inflation. The result of that process is a rise in prices or (and this is an alternative way of looking at the same thing) a depreciation in the currency. It is a complete error to speak of a rise in prices as causing inflation; on the contrary, inflation causes the rise in prices. If an inflationary round of wage increases does take place, not only will prices, in fact, rise but, as the Economist recently pointed out, an even worse injury would be done to our external balance of payments if prices did not rise.

The noble Lord, Lord Winster, mentioned the trade union leaders. I think that some of them have an extremely difficult problem. May I put the point in this way? It is often said that, if this inflationary round of wage increases takes place, the country and everybody will be the worse off. That is true. But the problem, as seen by the individual leader of a particular trade union, is not quite so simple, because, if he obtains a rise for his union early, it is not true that his members will not for a time benefit. On the other hand, if, being a far-sighted man, he persuades his union not to ask for that rise at that moment, he has no certainty that other unions will behave in a similar way. I believe that none of us who has studied the question would exaggerate the simplicity of his task. That does not mean that it is not overwhelmingly important that trade union leaders should make every attempt to drive the truth home, and it is only fair to acknowledge that many of them do.

LORD WINSTER

I fully agree. I recognise the difficulties of which the noble Lord has spoken, and I endeavoured to emphasise the point in my speech.

LORD CONESFORD

I was not for one moment meaning to criticise the noble Lord in what I have just said. The way to stop the rise in prices is to stop the inflationary increases in the supply of money. You merely risk making things worse, instead of better, if you try to stop the rise of prices after the supply of money has increased without a corresponding increase in the output of goods and services.

I should now like to say a word or two about profits and dividends, about which I believe much error is still prevalent. I do not wish to repeat what I said on this subject in the debate on November 1 last year. If we stop inflation, that fact will make, and rightly make, profits far harder to win. But that does not mean that profits have caused the inflation, or that the nominal profits of British industry, as measured in depreciated currency, are in general too high—and in this respect I would support what has been said by various noble Lords on the necessity to provide for depreciated assets. Does anyone, irrespective of his Party, really think that it would be a good thing for the country, or for our trade balance, if the earnings of our shipping and insurance companies or our engineering industry were less than in fact they are? I do not believe it.

But if companies' profits have not caused the inflation, it is still more absurd an error to suppose that the payment of dividends is inflationary. I was glad to hear what the noble Lord, Lord Clitheroe, said on that subject. The payment of a dividend by a company to its shareholders does not increase the means of payment or the supply of money at all; it makes literally no difference of any sort in the supply of money. Before the payment the company has it, and can spend it or save it as the company may choose; after the distribution the shareholders have it, less tax, and they can spend it or save it as they may choose. It can be disputed which of the two, the company or the shareholders, is likely to use it in the better way; but the one thing on which it has no effect whatever is the supply of money and inflation. If there is any noble Lord who thinks that that is not so, he will expound the error when the time comes.

VISCOUNT ALEXANDER OF HILLS-BOROUGH

I am sure the trade unions will be interested to know the exact difference in the purchasing value of that money issued in dividends and the money issued to workers as wages. One is just as inflationary as the other.

LORD CONESFORD

I do net think the noble Viscount has quite followed my point. The inflationary round of wage increases, if it is inflationary, is inflationary because, in fact, it increases the supply of money.

LORD GREENHILL

Does it?

LORD CONESFORD

Yes, often. If a great industry does agree after a certain day to pay an increased wage, for the reasons demonstrated, among others, by the noble Lord, Lord Beveridge today, the actual volume of currency and credit, the means of payment, is increased. In the case of a profit already made by a company, I am saying merely that the distribution of that profit by that company to shareholders makes no difference whatsoever to the supply of money that can be offered in the purchase of goods and services. The only difference it makes is as to those who can exercise the right.

In present circumstances, let me say at once that it is quite obvious that a great many factors will prevent a company, and rightly, from distributing increased profits which it might otherwise be in a position to do—or indeed, in some cases, from distributing a dividend at all. The company may well need, for example, an increase in fund; for investment in plant or stocks, or for other purposes. They may need it in order to build up their own reserves. They will also no doubt take into consideration the fact that future profits are threatened by the credit restric- tion. All those matters, quite rightly, may influence it not to distribute a dividend, or not to distribute an increased dividend. I suggest to the House that there is only one wholly improper motive for refusing to distribute profit to shareholders, and that is that the board of directors should take it upon itself to think that dividends are not good for the shareholders. That is a wholly improper motive, in morals and law.

VISCOUNT ALEXANDER OF HILLS-BOROUGH

I take it that it is just as good for the shareholders as wages are for the workers. But if you want to have a national policy and try to restrain people from spending money on objects not so necessary to them, or even necessary articles, so as to reduce inflation, then surely you should be just as careful how you distribute your profits: whether for capital investment and "digging in" of the company, or whether for free spending by shareholders on undesirable objects.

LORD CONESFORD

I completely agree with the noble Viscount that the company should not distribute the profits if it needs the money itself for a proper object. I have said that before. I beg the noble Viscount to take the trouble to read what I said on the subject on November 1, and what the Royal Commission, whom I also cited, said on the same subject. I beg him to read that, and he will see that what I am disputing is, first of all, the question of whether a distribution of a dividend can be inflationary—if I am right in my definition of "inflation" I say it cannot. Secondly, I believe it to be quite wrong to think that the public interest will be served if a company that does not need money for any of these purposes simply refuses to distribute it to the people entitled to the equity because it thinks it is not good for them. As I say, by all means let a company refrain from increasing a dividend for any of the reasons I have suggested.

I am bound to say that when I hear a Minister say, or read that a Minister has said, to a company or companies, "Exercise restraint in distributing dividends," I think that is on exactly the same intellectual and moral level as if he were to say to a crowd of debtors, "Exercise restraint in paying your creditors." It is neither good morals nor good sense. I pray in aid the pertinent remarks which I quoted on a previous occasion from the Report of the Royal Commission on the Taxation of Profits and Income. I realise that it may be asked. "Even though the amount of dividends, even before the payment of tax, is trivial compared with those great increases in the means of payment which have in fact been causing inflation, even if what you say is completely true that a payment of dividend is not and cannot be inflationary in the true sense, what harm do these mistaken statements do? May it not be useful always to group dividends with these other payments, if it gives pleasure to somebody who does not understand the position? "I hold most strongly that the right way to combat an intellectual error is to expose it and to tell the truth. I do not believe you do any good by paying lip service to the error.

There is, however, a far more important reason why this nonsense about dividends should cease, and that is for a purpose which has been mentioned by a great many noble Lords on both sides this afternoon. I refer to the need to encourage savings. That need, I hope, is common to noble Lords in every quarter of the House. If dividends are not to be increased in times of inflation and when the company is successful, what hope is there that people will continue to invest their savings in British industry? If an investor in 1938 had invested his money in a representative list of English ordinary shares, he would, of course, by now have lost a large part of the real value of his investment; but he would not have lost it all. He would not have done nearly so badly as if he had invested in Government securities. I hope that inflation will cease and that it may be safe to lend pounds to the Government. Many of us have done our best on many occasions to persuade audiences to lend their money on Government investments. I hope noble Lords will also agree that we want people prepared also to invest their money in British industry. Ought not the Government to desire that an investment in British industry should be some hedge against inflation? Does anybody, whatever his politics, desire that a man shall be able to preserve his savings, if he buys something like precious stones or gold, but that he shall lose it almost inevitably if he invests it in British industry? I do not believe that any noble Lord, to whatever Party he belongs, really thinks that that would be a good idea.

May I say a word to my own Party, and to the Liberals? The Liberals have often advocated profit-sharing. My Party has often advocated that there should increasingly exist a property-owning democracy. The difficulty of achieving either of those aims is the method. But one method is readily available, and that is to encourage people, friendly societies, trade unions, and every sort of society, to invest in equities. It has been done very largely—the Churches do it. It is not only the private person who is interested in dividends. I say that, if we really desire that ordinary shares should be increasingly held by the public, we ought to cease all these indiscriminate attacks on the distribution of dividends. I was interested to see that the present leader of the Opposition has suggested that one of the progressive measures that might be taken by his Party was for the State to take, by way of death duties or otherwise, an increasing number of ordinary shares or stock in a company. If I understand and have followed correctly what has been said by some of the Socialist Party, the two propositions seem to be these: "Do not let dividends grow," and "Let the State share the growing dividends." Not having learnt my logic at Winchester, I find difficulty in following the two-fold argument.

The importance of the inflation with which we are faced was admirably expressed by my right honourable friend the Chancellor of the Exchequer in his recent broadcast. I think, with my noble friend Lord Balfour of Burleigh, that it is important that the Government should persist in curbing purchasing power as they are now doing. I agree with the noble Lord that the steps that have been taken are formidable. I will also say that I hope they will persist in that course until they are quite certain that it has achieved its object. I agree, too, with the noble Lord, Lord Pet-hick-Lawrence, that we must consider not only the steps that have been taken but those that will be taken very soon in the Budget. I hope that my right honourable friend, when he comes to frame his Budget, will not overlook the importance of encouraging production. All these necessities for curbing increases of wages would vanish if productivity greatly increased.

I agree with the noble Lord who made his maiden speech this afternoon on the importance, for this purpose as for many others, of the middle classes, the professional classes and those who are prepared to take responsibility. I beg the Government to stop saying: "We have all done too well for ourselves." I was glad that the noble Earl who spoke for the Government this afternoon was careful not to say that. It is emphatically not true of the middle classes or the professional classes or, above all, of those of them who are self-employed. For them, it is urgently necessary that provision should be made in the coming Budget so that they can at least provide for their own pensions in old age. Various reports of Commissions and Committees of Inquiry have given advice to Governments on this matter. I feel sure that my right honourable friend the Chancellor of the, Exchequer will not ignore that advice. I wonder really how many people think that the figure of £2,000 as the basic figure for surtax can be justified to-day when the value of money at the time that that limit was chosen is compared with its value to-day.

I did not mean to detain the House so long. I do not believe that we can easily exaggerate this problem of inflation. I do not believe that we shall solve it, or get people to understand it, if we ever indulge in intellectual fallacies merely because we think that those fallacies will be popular in some quarters. It is quite possible to analyse and make clear the position of this country, though I agree with what many noble Lords on both sides have said on the complexity of this matter. I thought that the noble Lord, Lord Pakenham, and others were careful not to over-simplify. I hope that I have not been guilty of doing so. If I have made one point which struck another noble Lord as a novelty, I agree it is a novelty in public speech. I have listened in silence to the repetition of a fallacy until I have become sick of it. I am glad that I have been able to state the fallacy and, I hope, to expose it this afternoon. If any noble Lord thinks I am wrong, I hope that either here or outside I shall hear the answer.

I remember that in another place, if I may mention it, in a general attack on companies, one honourable Member of the Party opposite constantly referred, in terms of depreciation, to "absentee shareholders"—meaning, apparently, shareholders who did not live above the works. But, of course, the whole object of the great invention of the joint stock company was to enable shareholders to be absentees; it was precisely to enable people, wherever they lived, to be "profit-sharers" (in the words of the Liberal Party) or to be "members of a property-owning democracy" (in words that corn-mended themselves to our present Prime Minister). That great instrument of the joint stock company is available for the purpose. Do not let us blunt its use by talking nonsense about it.

7.7 p.m.

THE EARL OF PERTH

My Lords, I want to begin with a quotation, which has already been given to your Lordships to-day and which came from a broadcast by the Chancellor of the Exchequer when he said that since the end of the war our production had increased by 25 per cent. but that, for that 25 per cent. increase in our production, we had paid ourselves 80 per cent. more. We all have an instinctive feeling that something here is wrong; and, indeed, it is wrong, for, since the end of the war, we have had a succession of economic crises. There seems to be no better example of inflation. We have had many definitions of "inflation." I will add to the list by saying that it has been defined as "Too much money chasing too few goods"—that is to say, too much pay (80 per cent.) and spending for toe little production (that is, only 25 per cent. more production since the end of the war); or, as the noble Lord, Lord Beveridge, pointed out, more money going out for no more production.

The cure, I think, is obvious: either less money or more goods, or a combination of the two. I intend, briefly, to examine these two approaches. First, let me take "too much money." Here, I believe that the 'various monetary measures which have been taken in the last few months by the Government to restrict the supply of money have been effective, but they have worked more slowly than we all expected. The reason for that is, as we have already heard, the very large amount of spending which is outside the ordinary monetary controls—I refer to all of the Government spending, which is not really strictly within the orbit. In the private sector, however, which is within this orbit, things have reached a critical stage. We have a position where many companies are short of money, so short that they are unable to meet new wage demands or are unable to keep up their activity. I believe that is good—not, I hasten to add, because I am against increase in wages or increased business activity at the right time, but because the spiral of wages and prices has to be stopped. We know that, in fact, everybody prefers a steady wage to an increase in prices.

At this critical stage, the Government must not relax in their monetary measures. Indeed, I should like to take up a technical point which the noble Lord, Lord Pakenham, has already made: that is, on the question of the liquidity ratio. With him and other noble Lords, I believe that this is something which needs watching carefully, and that the magic figure of 30 per cent., which is generally held to be the right ratio, should be maintained and not allowed to get out of hand. I think that the Government and the Bank of England should examine whether there are not some unorthodox measures which can be applied to this end. If the banks are kept tight in this way they will be unable to make advances or to help out industry. Frankly, at this time I think that is what we want. It sounds very hard, but what is the alternative? I think it is bankruptcy, great unemployment and general disaster.

Now I wish to turn to the second point, which is that too few goods are being produced. Here there appears to be something of a paradox in relation to what I have said before, because if you have a tight money policy people will not be able to buy so much, and what is the point of producing goods? I think the answer is that we want more of the right kind of goods at competitive prices. What is the right type of goods?—any goods which can be exported, any goods to save imports; for example, in the latter category, agricultural products or coal. We are an island with few natural resources, and to export or die remains true. When money is plentiful at home we are apt to neglect the markets abroad. When money is tight we try hard to sell abroad.

It is argued by many that tight money is not a selective weapon in its application. While this was broadly true in the past, I think it is far less true to-day. In practice the Government over a large field directly control what shall be produced—for example, by their agricultural policy. Here I would plead that the Government at this moment should do everything they can to increase agricultural production and thereby to save imports. Again, there is the purchase tax on certain consumer goods; there are the hire purchase regulations and the Government's control over the huge public sector of spending. As Lord Balfour of Burleigh pointed out, if at any moment deflation shows danger of becoming too strong, it is easy for the Government to reverse its various measures. It is further argued by various people—not today in the House—that at a time of crisis we should impose import restrictions and rationing, but, at best, that is only a palliative to, and not a cure for, our ills. I think the Government are to be congratulated on not having adopted any such measures, and, indeed, on continuing, whenever they have the opportunity, to liberalise overseas trade. It must be remembered that import restrictions can breed retaliation by other countries, which could lead us to real economic difficulties and a shrinking of our overseas markets.

So much for less money and more production. There remains one important short cut to various things that we have been discussing—namely, an increase in savings. This is something which cannot be emphasised too often, and we must all welcome the knowledge that the Government are examining ways and means to increase savings. I would only ask that they try as much as they can that which is enticing and novel. In that connection I would refer once more to a suggestion I threw out a little while ago in your Lordships' House—that where wage increases are to take place, some attempt should be made to take part of those wage increases, not in immediate cash to spend, but in some deferred payment which would go into a fund for the benefit of the workers of the company. This has been tried by the big motor unions in America, with considerable success. Over there they call it a guaranteed annual wage. I am not necessarily advocating that we should follow exactly their pattern, but I suggest that it is something well worth thinking about, to see whether there is not some way in which any increase, if there is to be such an increase, is not immediately spend-able and thereby adding to the general run of inflation.

Our foreign exchange reserves are, as your Lordships know, our buffer against bankruptcy, and it is encouraging to see that there has been a slight increase in the last month, to the amount of £20 million. But that is not enough. There must be no relaxation. Two hundred million pounds by the end of the year would still be not enough; we must reach a figure of total reserves of £2,000 million before we can consider ourselves safe, and that represents twice what we have at the present time. These figures show that it is going to be a long and hard pull before we can recover our economic strength. But let the Government hold fast to their present monetary policy and continue every measure they can to keep money short, even though this causes temporary hard-ship. Let the people forgo industrial unrest, and let us all play our part by saving and hard work; then the country will be able to play its proper rôle in the development of the great riches of the Commonwealth, and we shall again be a strong force in world affairs, able then to improve the true living standards of all our people—that is to say, more goods for the same money.

7.18 p.m.

VISCOUNT RIDLEY

My Lords, I was particularly interested in the comment made by the noble Lord, Lord Pakenham, which was referred to by my noble friend Lord Balfour of Burleigh—namely, the relationship between the City and one or other political Parties. I always thought that what he said was perfectly true, but l think that it is truer to say that if you take a ride from Westminster and go on a long-distance train to one of the main terminal stations, you arrive in some area of manufacturing industry and you will find, on all sides, that people are no more suspicious of the members of the noble Lord's Party opposite than they are of members of the Conservative Party. I believe there is a general cynicism at the inability of consecutive Governments since the war to appreciate what the economic problem really is. There has been so much talk in catch phrases—such as "Too much money chasing too few goods," "Dash for freedom," and things like that. There has been too much exhortation to people to restrain their demands for what they believe they are entitled to get and can get. There is too much persuasion and nothing sufficiently definite. After all, whatever the economist may say, people will react to their surroundings, in the way that, by nature, they do react to such surroundings, and it is that part of the problem which I think must always be considered in considering there matters.

If I may digress for a moment to the subject of dividend increases referred to by the noble Lord, Lord Conesford, I would not go all the way with him in saying that an increase of dividend was less inflationary than an increase in wages. In either case the increase in spending power and free speculating power seems to have a good deal of effect, at least on the laws of supply and demand. From practical experience, I would say that the continuing rounds of demands for wage increases have had a noticeable effect on increases in dividends. It must be common knowledge to most Members of your Lordships' House that many companies have felt shy about raising their dividends to the extent they thought they ought, for fear of provoking a further round of wage demands. I have not the figures with me, because until a noble Lord mentioned the point I had not thought of touching upon it; but such figures as can be found show that the percentage increases on dividends of (here I speak carefully) manufacturing companies in this country have not kept up with the percentage increases of wages in those industries. I believe that is an inevitable result of the policies which have been followed in this country. I am not saying it is a wrong thing but I believe it to be a fact. People who invest in these companies are often those with few resources themselves. They are what is known as "the small man," and if their cost of living goes up they are entitled to some increase from time to time. They put money in at risk and are entitled to some increase in return, along with the inflation in which they are falling behind.

The main problem is a longer and much more permanent one than at first sight would appear. It is a problem of balance of payments. The figures we have heard have shown that since the war we have increased our exports substantially but have not yet caught up with the quantity we need to import. The result is expressed at home in an excessive demand on various of our industries. There is the parallel problem of inflation of our currency in the world of building, civil engineering, contracting, engineering, machine tool-making and shipbuilding. There are delays, increases of prices and situations which make it almost impossible for business people to look far enough ahead. Many of those conditions are due to shortage of materials and labour and to the great length of companies' order books.

It is not surprising that in that atmosphere leaders of trade unions have felt themselves in a position to bargain for wage increases. I do not think they can be blamed for doing so, within reason. Costs of imports are rising all the time. At the same time, it is understandable that many employers have willingly agreed to increases which they felt were not always justified, because they knew that, without much trouble to themselves, they could increase their price to their customers. Though not all firms are like that, I believe that in any group in industry there are always one or two who, in a wage negotiation, will take that line; and the rest have to follow. Naturally wages would have had to rise to some extent in this country after the post-war devaluation, but I doubt whether the cost of wages and materials, and the cost of living resulting, would have risen so high had it not been driven up by the excessive demand from all sources.

Turning to the exchange problem, we find that we shall have to increase our exports as more than just a temporary expedient. It is the greatest mistake to think of trying to reduce imports at present. We in this country can survive commercially over a long period only as a trading nation. We must have customers to sell to and more customers than we now have; and I believe we must have customers in more countries. We must be willing to buy back from them and must not risk retaliation in the form of restrictions against our exports. Considered in relation to the whole position of the sterling area, our reserves are negligible. Figures quoted by noble Lords this afternoon show that we must do something urgently. Nor must we forget that over the next seven to ten years, so far from cutting them we shall require a great deal more imports. The announced programme means much more steel and coal—the coal not imported but taken from some other use. The plans of the Electricity Authority have been published and include a substantial contribution by atomic energy. There will be a large increase in the demand for coal which must be got from somewhere. Then we still have to get food for all our people and other raw materials as the basis of the exports we must make.

This is an extremely difficult and intractable problem, but one thing to be kept in mind is that somehow we must increase exports, almost at all costs. If we do that in a rational way, we shall find that internal inflation, the excessive demand on labour and materials, will drop off. The, manufacturing resources of this country, unfortunately, are limited and there is considerable competition for them. At the present time they are used for manufacturing exports and a large quantity of them are used for defence manufactures of all kinds. Apart from manufacturing there are the supply, building and other industries which are to-day using up resources for Government expenditure of all kinds, maintaining the social services and creating productive assets in the form of new factories and plant. A relatively small proportion may be used on products of personal expenditure. If we are to increase exports, as I believe we must almost immediately do, we must reduce the resources put into one or other of these forms of expenditure.

I do not believe it is right to reduce the amount of resources we are putting into the expansion of productive capacity. We should do more than we are doing. The noble Earl who spoke for Her Majesty's Government quoted the increase in new productive capacity last year. I hope to see more this year but I have a little doubt, and I feel that some of the measures proposed under the Government's policy may have an adverse effect on that activity. In general, we must not reduce the growth of our productive capacity. I do not believe that in the long run we should reduce consumption by private individuals. It is the avowed intention of everyone to increase the standard of living—that is, the real standard of living—of the people of this country as much as possible. And rather than reduce the resources available for the ordinary people for their ordinary needs, we must in the long run, I believe, increase them—probably by means of further imports for that purpose, which we must earn. For the moment, we cannot earn those imports and it is inevitable that the real standard of living will not be able to jump very quickly for a short time.

What else can we reduce to make more annual resources available for the manufacture of exports? I believe that we could save quite a lot of incidental Government expenditure, particularly in relation to capital development. I do not think that it would be desirable, nor do I see any virtue in attempting, to reduce the present scale of the running of any of our social services. But I think there should be a re-examination of all the standards which the various Government Departments, and local authorities as well, adopt in the construction of new building, equipment and so on. Many of us, no doubt, could give numerous cases with which we are familiar to illustrate the need for this. It was all very well when we were a large creditor nation and were earning money all over the world. In those days we set ourselves standards of excellence for everything that was built and made in this country. We always have had, and still have, that attitude of mind; but I think we must recognise that we can no longer afford it. We must make do with makeshift sorts of improvements.

Let me give one very small example. There are many rural village schools I know which, according to plans which have been drawn up, are to be pulled down and replaced with much bigger establishments. I am fairly sure that a large number of these could well be added to and improved, and made reasonably comfortable and effective for their purpose for a good deal less money than the cost of new schools to replace them. I know that the Ministry of Education some years ago reduced the standard of accommodation required, the numbers of classrooms and so on. I believe that in present circumstances we could go much further in the direction of compromise, and probably achieve a good deal better results by making a total slight improvement for a large number of children, rather than a big improvement for a very small number.

Here is another illustration. There has been a great deal of discussion about the Government's proposals for pulling down the Imperial Institute. I do not profess to judge in this matter, but on the ground of economy—economy in materials, labour and expenditure—it seems to me more than likely that a satisfactory compromise could be found in that case, possibly by leaving the present building, adapting it inside, and adding to it here and there. These are all very small examples of economies which I am suggesting, but many others could be given. Road repair work, for example, is done quite magnificently to a very high standard in this country. Our roads are made up superbly. Should we not do better now to have slight improvements to a large number of roads and smaller improvements on corners? Again, I know that the attitude has been that nothing must be done through the agency of the Government or a local authority unless it is done to the highest and most elaborate standards in finish and detail. I believe that that is a matter which could well be studied with profit.

There is another matter, about which I know very little, but which I believe ought to be thought about. We have seen published figures of the demands in terms of cash to meet this year's expenditure on defence. I suggest that we must consider just how much we can, in fact, afford. Are we trying to do too much in this connection? Are we trying to do too many things? Would it not be better if we were to try to do fewer things and perhaps manage to do them a bit better? Do not we need to think of where we should concentrate our defence efforts—whether on dollar-earning areas, or on export areas, or on areas to which we hope to be able to export? Have we not to do some "re-thinking" in the light of the power we actually possess? Is it not the fact that in a military effort of any kind the strength of any country is only the effort which it cart sustain and with which it can keep itself alive? What will be our position?

Let us for a moment compare the present situation with the situation at the beginning of the last war. At that time normal industries were running productively and well. There had been a fairly large expenditure on defence, but by the time the war began there was a good deal of slack to take up. The defence effort, when it got fully under way, had a reducing effect on consumption industries at home. At the present time there is much less slack to take up because defence production is occupying a much higher proportion of our industry than it was before the war. As to increasing exports, if we can make available capacity, whether from the defence effort, or from Government or public authority expenditure, or whatever it may be, I believe it ought to be made clear that the capacity which notionally is freed must, in fact, be used for exports.

Here I think the Government have a responsibility. Something more must be done than merely talking about the desirability of increasing exports. Could we not, perhaps, think in rather a different way about these things? Is there no possibility of having some form of differential tax to favour the people who carry on our export trade? It may be that that is impracticable. As we all know, companies' income tax and profits tax are already hideously complicated, and one hesitates to suggest any further complication. But I do feel that something definite must be done. There must be a lead in action more than in words.

Again, could we do more than we are doing, by Government activities in the form of trade missions, by participation in trade fairs abroad? I do not know. How can we ensure that we can not only sell our goods abroad but that they are sold at the right price? How can we make sure that they are the kind of things that will sell? We have seen something which bears on that aspect in recent weeks. We know what has happened recently with regard to the sale of British-made motor cars in the home market. At the same time, there has been difficulty in maintaining exports of cars because of foreign competition. One does not like to see anything like a recession in that industry, but the recent happenings may be doing some good if the people concerned are brought to look more carefully at their products to see whether they can produce something which has a better chance of competing in world markets. In many other industries, while tremendous strides have been made since the end of the war in the improvement of the design and quality of goods exported, there is still a long way to go.

One further point which must not be forgotten, and which also indicates the necessity for building up our export capacity, is that there is a substantial amount of engineering and constructional work being done and exported to foreign countries as capital goods. We are fortunate in being able to do that, but we cannot expect such goods to be demanded for ever by other countries. We must also expect, in the long run, that the machines, equipment and plant we are supplying will be capable of being used in competition with our own exports. Therefore, we must think farther ahead and take any competitive steps we can. Inevitably we are being forced by the circumstances around us to look closely at what is in front of us, at the problems of inflation and at the spiral of wage increases. It is much more difficult to think of the problems which are further away, like this continuing export problem, yet that is the problem which I think, in the end, will be the more difficult to surmount. It is one which we ought to be tackling much more seriously than we are doing now.

7.42 p.m.

THE EARL OF LUCAN

My Lords, on behalf of my noble friend Lord Wilmot of Selmeston, I beg to move that the debate be now adjourned.

Moved, That the debate be now adjourned.—(The Earl of Lucan.)

On Question, Motion agreed to, and debate adjourned accordingly.