THE ECONOMIC SITUATION

HL Deb 08 March 1956 vol 196 cc222-60

3.8 p.m.

Debate resumed (according to Order) on the Motion moved yesterday by Lord Pethick-Lawrence, That there be laid before this House Papers in regard to the economic situation.

LORD WILMOT OF SELMESTON

My Lords, I am sure that your Lordships will agree with me if I say that the debate which we had yesterday and adjourned last evening was one of the most interesting and important that has occurred for some time. I know that in reflecting upon it later I felt privileged to have been here yesterday to listen to the debate, and I shall feel even more privileged if your Lordships indulge me enough to allow me to make some contribution to-day. I know there are a number of noble Lords who still wish to speak in the debate and therefore I will try to be brief. The contributions which noble Lords made yesterday included several which fell from those of long experience in this field and who speak with unquestioned authority. I make no such claims; I am no expert in this matter but an ordinary business man who, by conscience and conviction, has for many years been a member of the Labour Party. However, I ask your Lordships to believe me when I say that in the remarks I make to-day I shall try not to be actuated in any sense by Panty politics. I believe the subject which we are discussing to-day is of such importance, is fraught with such grave consequences to the livelihood and welfare of our people, that we ought to try to find a way in which everybody can make some contribution to its solution. It is with that in mind that I shall say what I have to say to-day.

Yesterday, I felt that we displayed much agreement over a wide area. From all sides of the House there seemed to be agreement as to the nature of the problem. My noble friend Lord Pethick-Lawrence gave us a definition of inflation which I think can hardly be equalled. He said it was the exercise of the power to spend more money than, at existing prices, there were goods and services to satisfy. That seems to me to be a perfect definition of that half of the problem. The other half is that we are increasingly buying from abroad more than we can pay for from the proceeds of what we are able to sell abroad, and that is the only source of our ability to pay if we include the sale of invisible as well as visible exports.

I think we also agree as to the peril of this situation. Unless it is abated, and abated swiftly, I see inevitable and disastrous consequences. We were also agreed as to the duty of everybody—and all of us in public affairs have a special duty laid upon us—to do whatever he can, whatever his ability, whatever his occupation or position, to bring home to people the nature of the problem and the seriousness of its consequences. Mr. Macmillan in another place, in concluding his recent speech, made an appeal of this character. He said [OFFICIAL REPORT, Commons, Vol. 549 (No. 100), col. 59]: In the past our common national effort saved our freedom and redeemed our greatness. I only beg that faction may not now destroy what unity then achieved. I accept that duty, and I should like to be able to make some contribution. But I am bound to say there are certain prerequisite actions which must be taken before it becomes possible to do much. I agree with what the noble Viscount, Lord Bruce of Melbourne, said yesterday: this problem is as much psychological as technical. In fact, I think it is more psychological. If we could solve the psychological problems involved in it, the technical problems could be easily adjusted.

I am bound to say that I see no hope of bringing the public at large to a realisation of this serious situation unless the Government themselves are prepared to do a lot more and differently from what they have already done or have indicated they are prepared to do. Mr. Macmillan said that the Government must lead, and that is true. He said the Government are prepared to lead, but that is not true, apparently, for no lead whatever has been given. What is required, first of all, is an admission by the Government that their past policies have been wrong and ineffective, and unless they are prepared to do that I do not see how it is possible to get people to do the unpleasant things for them which are necessary to help solve the problem.

I think it is also necessary that the Government should bring forward an entirely new set of proposals embracing a number of actions which they have, for Party reasons, ruled out, and to admit what most honest people are prepared to admit some time or other: that things were not as they thought they were, and the things that they did proved to be ineffective and wrong. Now is that too much to ask of the Government in this situation? It is a good deal to ask. Politicians are loth to admit past errors, and Parties are even more loth than individuals. But I wonder if we appreciate what it means to working people, first of all to listen and then to act in the direction which they must act if they are to make their contribution to the solution of this problem. I think we should agree that unless we can get the working people to do things which, although in the common interest, are not in their personal immediate interest, then we shall fail altogether.

Consider the position of a working class family. It is easy for people to say that the trade unions are unpatriotic to press wage demands, or that the workers are demanding more and more. But these are individual people with individual families. They find themselves in an era of rapidly rising prices. They find that all around them those who have goods to sell pass on their increased costs to their customers. The workman has only one thing to sell—his labour. His costs are increasing, and it is not surprising that in a sellers' market he passes on the increased cost to his consumer, the employer. Few workmen more than pass on their increased costs, and whole sections of working people have not been able to pass that much on. Many of them find the cost of living rising much faster than any adjustment of wages. So we are asking working men and women to behave in a non-commercial way. We are asking them to charge lower prices than the market is prepared to pay for the only thing they can sell, and out of very slender margins indeed to bear themselves the rising costs which they must pay, not in deprivation of luxuries, but in many millions of cases the voluntary going without of the essentials of life.

We are asking them also—and let us remember this—to take part under a Conservative Government in a mass attack on inflation and a move towards deflation. I venture to suggest that there is not a working class home in this country which either consciously or subconsciously has not got bitter and hateful memories of the last time a Conservative Government embarked upon a policy of deflation. It put millions of people on the streets for many years. When you see men not working their best and slacking, and demanding that modern machinery, which is intended to save labour, shall be overmanned, the core of all that feeling is back in the 'twenties and the 'thirties, when deflation caused Jarrow, Maryport, West Cumberland and South Wales to be areas of death and decay. These things are in the very heart of the nation. They are just as deep in the soul of the English working men and their families as are the national hatreds to which we became accustomed in various parts of Europe. If noble Lords feel that, in asking the Government completely to revise their policies and approach, I am asking something which is impossible, then I say that it is impossible to get working people to co-operate in this matter.

There cannot be any doubt that since 1951 the Government have been wholly in error in their policies adopted in this matter. They still seem unconscious of its gravity and magnitude. One has only to read the speeches which have been made by the last Chancellor of the Exchequer, by the President of the Board of Trade, and even by the Prime Minister himself during the past year, to realise how completely they have failed to grasp the seriousness of the situation and how they have misread the indications, which were clear enough to some other people. In his speech last April Mr. Butler said [OFFICIAL REPORT, Commons, Vol. 540, col. 39]: …it became clear by February that we needed to take action to moderate the growth of imports and to encourage exports. And from the result, all I can say is thank goodness that we took action in time. Later on he said, in the same speech: But the situation has been brought under control, as, for example, is shown by the movement of the reserves since then and the latest rates for sterling. Then we had the Election broadcast, when he addressed millions of people and had to persuade them to take an entirely different view. He told them then: We have restored the national solvency. We are begining to see the first effects. Our trade figures are better and we are once again holding the position of our reserves. That is what Mr. Butler thought of the Situation. But other people have thought differently. I have here the report and accounts of Lloyds Bank for 1955, one of our greatest joint stock banks. I see the names of numerous noble Lords who were present yesterday, and who are also, I am happy to say, here to-day, upon the list of directors. The chairman of this bank, Sir Oliver Franks, a man who has served the Governments of both Parties for many years with devotion and distinction, can see clearly enough. He says: …all the major decisions of policy in the economic sphere during 1954 were of a nature to stimulate activity rind release additional demands upon, the economy, and not exercise a restraining influence. He goes on to say something which ought to be read and understood by the Chancellor of the Exchequer and those around him—I apologise for a somewhat lengthy quotation but it has not been mentioned in this House. The chairman went on to say—and here he was dealing with the other side of this problem, the even more serious side, the question of the exchange reserves: Conditions in recent years could scarcely have been more favourable to the building up of a strong reserve hid our policies been directed primarily towards that end. The volume of world trade has been expanding; the terms of trade have not been too un-favourable; the rest of the world has beet gaining gold from the United States. It is a sobering thought that the purely regional currencies of Western Europe are collectively backed by exchange reserves four times as large as those supporting sterling, the currency in which nearly half the trade of the world is conducted. Since the end of 1951, the Continental countries have accumulated some 5,000 million dollars of gold and dollars; our own reserves have actually fallen on balance and are indeed lower than in 1945, when prices were half their present level. This is a state of affairs that we must surely all find deeply disquieting. Those are very serious words from the chairman of a great bank. I suggest to noble Lords that they indicate quite clearly that during that period the Government were pursuing the wrong policy.

The other test of the Government's actions, other than the measure of the exchange reserves, is the level of internal prices, because that is the index of domestic inflation. That was realised by the present Government before they became the Government, for they put in their Election proposals a statement that the Government would be judged by the effect of their policies on costs and prices. That is a very fair method of judgment. For comparison, in the two years ending in the autumn of 1951, while import prices rose by 66 per cent. the cost of living rose by 14 per cent. Consider the contrast with the period after the Conservative Government took office. In the four years to December, 1955, while import prices, instead of rising by 66 per cent., fell by 7 per cent., during that period the cost of living rose not by the 14 per cent. which I have just quoted but by 23 per cent. So that the record of the effect of their policies on the domestic price level is completely disastrous.

Therefore it seems to me that, on both these tests, it must be admitted, to whichever Party one belongs, that the Government have failed. This spectacular rise in the cost of living, despite the fall in the cost of imports, is unique to Great Britain. Our rise in domestic prices during the period of this Government and their predecessors, the previous Conservative Government, has been steeper than the rise in the United States, Canada, Switzerland, Norway, Sweden, Holland, Belgium, France, Germany, Japan and Italy. The cost of living has risen faster since 1951 in this country than in any other country in the world.

That seems to me a complete condemnation of the Government's internal policy. Therefore, I do not think it is an exaggeration to say that among ordinary people, whose lives are outside Parliaments, politics and Parties, there is no confidence in this Government in this matter. As I go about—and noble Lords must have the same experience—talking to working people and business people, I find that nobody believes that the Government know what is wrong or what to do about it. I find that in banks, commercial circles and everywhere else. Sir Anthony Eden seems to me to share this same delusion. In June last year, when things were really getting bad, he said: The gold and dollar reserves have remained without any significant change since February, and in all the circumstances I think that is a pretty satisfactory solution. This self-satisfaction spreads alarm and despondency among people who really understand the nature of the problem and the perils which confront us. There is this boasting of the prosperity which has resulted from the advent of the Conservative Government, these posters talking about Conservative freedom to enjoy the things so long denied us, and above all, it seems to me, the unbelievable folly of forcing through Parliament the commercial television project, which is costing millions of pounds and is making great demands upon one of our most important export industries, the electronics industry, which is a direct competitor with every form of scientific research and development. This whole apparatus of low-level entertainment is financed almost exclusively, apart from some Government money, by revenue coming from advertisements.

What is happening? We read these economic homilies. We read these feeble speeches. Then the people go home to sit in front of a screen from which with all the devices of modern advertising, they are urged to spend more money on consumer goods. That situation has been brought about by this Government, in the face of opposition from my right honourable friends and against the advice of a great many people who could see what it was going to mean. The cumulative effect of what in our present situation is nightly poison in the homes of working people is something that we must work hard to offset. I say to the Government that we regard this as a test: that if they really mean what they say, if they have any hope of regaining public confidence, they have got to stop this. We cannot afford to have people listening every night to exhortations to spend more money upon consumer goods and then expect them to listen to anybody who tries to tell them exactly the opposite. It seems to me that if the Government are prepared to be frank with the people, if they are prepared to say, "We have been wrong," if they are prepared to stop this nightly advertising—in other words, if they are prepared to make some original, fearless demonstration of their determination—

THE LORD PRESIDENT OF THE COUNCIL (THE MARQUESS OF SALIS-BURY)

Might I ask the noble Lord a question? Is he proposing that the I.T.A. advertising should be closed down, or advertising by all mediums?

LORD WILMOT OF SELMESTON

I am referring particularly to commercial television.

THE MARQUESS OF SALISBURY

Would the noble Lord apply it to other mediums as well?

LORD WILMOT OF SELMESTON

I should see what happened first. The noble Marquess is so good at this kind of interruption that I am not really able to compete with him. He knows very well what. I mean; so does the noble Viscount, Lord Waverley, who took a courageous stand on this matter; so do many other noble Lords, who know that this boosting of consumer goods in working class homes is against the national interest in these circumstances. I would say this to the noble Marquess: if it is found to be ruining our economic position we should deal with it; and if he really means what he says, so would he. If he is not prepared to deal with it, then I do not believe what he says about the rest of it—I mean that this would be just another Party political stunt.

If we really believe in the seriousness of this matter, if we believe in it in the same way that I know that the noble Lord, Lord Balfour of Burleigh, believes in it, then we shall do something and we shall do it whatever it costs, because not to do it will cost even more. If we could get some statement of that kind, some proof which will offset the bitterness in the hearts of many people about the reduction in income tax, while the price of bread and milk is increased, and if we could make the sort of statement that Sir Winston Churchill used to make to the nation when he was calling on us during the war to make sacrifices and to endure unpleasant things, then, upon that basis, if the declaration were sincere and the policy right and bold, I think there would be some hope of a broad flowing of national response that would carry us out of this danger. If not, I see little hope—and I am bound to reflect that time is running heavily against us.

3.35 p.m.

LORD GRANTCHESTER

My Lords, the continuous slipping away of the value of our currency under successive Govern ments since the war is so serious a matter that I think a little plain speaking is desirable. It is common ground that continued inflation is deplorable in theory, but in practice there appears to be general addiction to this value-destroying drug. What I should like to say on this subject of inflation is, I think, complementary to what my noble friend Lord Beveridge said yesterday, and also to what was added by the noble Lord, Lord Winster. It has been made clear in this debate that there is more than one contributory cause to inflation although, as I shall seek to show, I believe that it is within the power of Her Majesty's Government so to adjust their policies as to bring this inflation to an end without worrying too much about some of the factors which are at present adding to the inflationary pressure—among these I would number those mentioned by the noble Lord, Lord Wilmot of Selmeston, in his concluding remarks. If I do not follow him in his historical analogies from the 1920's it is because I think those analogies are false.

I was brought up in a Liberal school, which looked critically upon any intervention in our economy by the Government, believing that Governmental interference rarely does good and often does a great deal of harm. Certainly no better example of the disastrous effects of Government intervention could be found than the action first of the Labour Government, and then of the present Government, in their relations with the banks. I said that straight speaking was necessary, and I am not putting it, too strongly, I think, if I say that the banks have been unduly influenced by pressure, which would have been thought unbelievable not long ago, to adopt certain policies. Under the Labour Government there was overhanging the banks the threat of nationalisation unless there was conformity with that Government's views on an expansionist credit policy. As a result, many businesses have been over-trading on bank overdrafts, largely in a tariff-protected market where there is no real competition to check over-pricing. Now along come the present Government, asking the banks to restrict credit. Undoubtedly, under pressure from the Labour Government many credits were granted or allowed to run too long, and under the present pressure some credits are being refused which normally would be granted.

This is a sorry story of disastrous intervention by successive Governments. By their spending and monetary policy the Government can, of course, influence the volume of bank deposits, and so the volume of credit; but within their resources the banks should be left free to conduct their normal business of making advances on a business assessment of the risk, and it should be recognised that the Government cannot influence their decisions in this field without causing grave dislocation and courting disaster. I am unhappy even on the subject of changes in the bank rate. I should like to know where the initiative in this important matter now rests. Is it with the Court of the Bank of England or is it with the Chancellor of the Exchequer? Has advice been tendered by the Governor of the Bank of England, and, if so, on what occasions during the past seven years? Has this advice been taken at the time it has been tendered or has the Governor waited upon the Chancellor of the Exchequer's instructions? I should feel much happier if we could be assured, at any rate under a Government who profess to uphold a market economy, that decisions upon changes in the bank rate will be made on the advice of the Bank. While I am referring to the Court of the Bank of England, I wonder whether it might be better informed of the practical difficulties of industrial banking if a representative of the joint stock banks were appointed to the Court.

What is the measure of this problem of inflation? It is quite simply the overweight of some £400 or £500 million of spending each year. Who are the real sinners in this matter? The note circulation, which in 1947 was some £1,400 million, stood last week at some £1,800 million. Bank deposits increased during the same period by £1,000 million, although a fall seems to have set in during the last month. For this increase Government spending is largely responsible. It would appear that in the last four years outstanding Treasury Bills have gone up from £4,000 million (which I believe was the figure on February 23, 1952), to some £5,000 million in the corresponding week of this year. I believe that those figures are correct because the noble Lord, Lord Clitheroe, took the figures as at October this year, compared with October four years ago, and made it £900 million. The figure in February comes out at £1,000 million. This increase in note circulation and increase in Treasury Bills is the easy way to meet Government over-expenditure. It also makes more likely an increase in the credits which can be extended by the banks. By these means the currency has been debased by one-third of its value—that is the real meaning of the increase in retail prices since 1947 which, as the noble Lord, Lord Clitheroe, mentioned yesterday, are up by some 53 per cent.

It has been argued by respected economists (and a year or two ago the Economist printed an article agreeing with these views) that no Government in a free society can, with impunity, take from its citizens more than about 25 per cent. of the national income. Under post-war Labour Governments almost 40 per cent. of the national income was taken in central taxation, local rates and National Insurance contributions. In spite of its promises and professions, the present Conservative Government have not reduced to any appreciable extent, this monstrous proportion. Out of a national income of something like £15,000 million, £5,500 million is still taken from private citizens. Let us be clear what this means. It means that the Government are forcing the spending of two-fifths of the people's income before they have any chance of making any expenditure themselves. Surely that is why over-taxation is inflationary and why any arguments for increasing taxation to mop up the individual's spending power are so wrong. The proceeds of taxation are spending power in the hands of Government. Here, I contend, is the root cause of inflation, the root cause of the inflationary pressure, because spending is maintained constantly at too high a level. Her Majesty's Government should practise what they preach to the banks and cut their own expenditure by something in the region of 10 per cent.

On what can Government expenditure be reduced? Administrative economies, although necessary, are not sufficient, as the noble Lord, Lord Clitheroe, said yesterday; major changes of policy are called for. First the Government are forcing the expenditure of the people's money on defence. That is the largest single item, and one to which the noble Viscount, Lord Ridley, referred yesterday afternoon. They are forcing expenditure on all kinds of development projects; they are forcing expenditure to give subsidies to the needy and the not-needy alike. Under the heading of "Defence" the Government order tanks, bombers, fighters and guided missiles—all and everything that either America or the Soviet Union may attempt, with a population four times as large as that of this country. We are told that this is supposed to enhance our national prestige. An overspending and bankrupt nation has no prestige at all in the world. If it is prestige that Her Majesty's Government are worried about, this would be enhanced far more if the citizens of this country were rich and prosperous than by the number of weapons they may he thought to possess.

As we all know, these weapons which we manufacture are constantly becoming out of date even before they are in commission; and some are often produced just for the scrap heap. After all this expenditure, do Her Majesty's Government even pretend that they are providing us with security? This cannot be their contention because, rather casually, they talk of evacuating one-third of the population should disaster overtake us. So what is the virtue in this expenditure of £1,500 million every year? Someone seems to think that there is magic in this figure, for although in the search for economics it was found possible to save something like £67 million in the Estimate for the coming year, a sum was then added to the research Estimates, so that the figure of £1,500 million was restored—as if this figure were sacrosanct.

I should like to ask, frankly, how much less secure should we be if this £400 or £500 million of over-expenditure which is causing the inflationary pressure were knocked off the Defence Estimates? Nothing could so greatly help our export industries, which need the material now being used on tanks that are obsolescent, if not already obsolete. I am glad that in another place a few days ago the Minister of Defence appeared to have come to the view that defence expenditure must have a limit, having regard to the financial safety of this country. I hope that by the time the Defence Estimates are discussed in your Lod-ships' House we shall hear something more definite on cutting defence expendi ture. I hope that the Estimates will not be allowed to go unchallenged, and that they will be revised for the current year.

I do not want to be accused of being unrealistic in this matter. Some months ago we on these Benches were accused of being unrealistic for suggesting the abolition of National Service. Now this is declared Government policy. Nor do I believe that a cut such as I have suggested in the defence expenditure need weaken the defensive strategy of the West. If the Atlantic Alliance means anything, it should eliminate duplication of expenditure upon experimental weapons. So far as Europe is concerned, it might be the start of getting nearer a united European effort, with all that that could mean in economy. In fact, a decision to cut our expenditure, and keep it within what we can afford, I contend, might prove, to be the dawn of reason in introducing a more realistic and co-operative spirit into the Western Alliance. It is a question of making up our minds with our Allies that we are part of a larger organisation in which there must be mutual confidence. If that is not the purpose of the Atlantic Alliance what is it?

The cutting of expenditure in the way I have suggested must be reflected in a reduction of taxation, so that costs fall instead of rise. I will give but two examples, to illustrate what I have in mind. It is proposed, I believe, to raise the salaries of senior civil servants because they are so much worse off than they were before the war—chiefly because of the steep grading of taxation. But instead of increasing their salaries from £4,500 to £7,500 a year, as is proposed, how much more sensible it would be to reduce the amount they pay in tax by raising the surtax level—as one noble Lord suggested yesterday—to the equivalent of its pre-war value, which would effect the same result so far as the impoverished civil servants are concerned and keep costs down. This matter of not raising costs in any sector by Governmental action is important, and the Government should surely never be a party to hindering the process of lowering costs as it was last week in fighting for the imposition of a 10 per cent. tariff on imported Danish bacon. My second example relates to what is happening in countries where taxation is lower. Liberia is now the fourth largest ship-owning country. Why is this? Because taxation here puts British shipping at an impossible disadvantage in competition. The Government try to tinker with the problem by special investment allowances, and make the position of the country generally worse. No one is wise enough to discriminate between one and another in granting special privileges to particular industries. Taxation should be equal, and if too heavy must be reduced for all. Let us get back to this sound democratic principle.

The other matter that I should like to suggest to your Lordships is that the time has come for a major change of policy in social outlook. It is ridiculously expensive to give to all and sundry, irrespective of need, whether it be subsidies on such items as bread or milk, or even maternity benefits. By all means let us be civilised, and help those in need, but we can the better do this if we conserve our resources and do not overburden the Administration. I am aware that this means some kind of test, and here I should like to make a suggestion. Concessions in the form of subsidies are surely more appropriately confined to those who do not pay income tax. The proper manner to help those who pay income tax is not by making subsidies to them, but by increased allowances in reduction of that tax. I believe that a reorganisation could be carried out if some such guiding principle were accepted as the basis of a reorientation of social policy.

There are one or two other matters upon which I should like briefly to touch, if your Lordships will forgive me. There is the necessity for increased productivity to help our balance of payments. This has been stressed again and again by everyone. But I must say that the acquiescence of the Government, and of the trade unions, in preventing the stepping up of coal production is nothing but a scandal over which both Her Majesty's Government and the trade unions should hang their heads in shame. For there is no other item of national wealth which could be so easily developed to help our balance of payments. To be importing coal and paying for it expensively in dollars is nothing but a national disgrace. I am very glad that this matter is being raised by the noble Lord, Lord Teviot, in your Lordships' House in the near future. Increased productivity will best be secured by increased incentives, and the best incentive Her Majesty's Government can give is to lower taxation, both personal and corporate. And the best contribution to increased efficiency that Her Majesty's Government can make is by the elimination of restrictive devices. We shall be interested in the discussion of the Bill on this subject which will soon be coming to your Lordships' House.

The final matter I should like to mention is the question of savings. I think it is useless to go to the public and suggest that they should exercise restraint in spending when they are promised a rising standard of living. If I might refer for a moment to what Lord Wilmot of Selmeston said in regard to television, what individuals do is simply to make a choice. After all, every individual is limited in what he can spend. If he spends his money on one thing he cannot spend it on another. That is not true of Her Majesty's Government, who are not so restricted, because they can always find in Treasury Bills the wherewithal to meet expenditure which they have not checked. Instead of this approach to the public with a request for the exercise of restraint, I suggest that there should be a positive appeal to save to build up security by instalments. It should be brought home to every wage-earner that security cannot be provided in all contingencies and circumstances, but that a nest-egg of savings tucked away can go far to relieve anxiety for an uncertain future.

The policy of recent Governments has been to whittle away the inducements to save—by reducing, for instance, the tax allowances on insurance premiums. Here perhaps I should declare an interest, but I should like to point out that if a policyholder wishes to increase his savings under a policy from a premium of £10 per year to one of £25, a material increase which would be desirable at the present time, he gets no more inducement to put by £25 a year than he does to save only £10 a year. I should also like to suggest again that the Government should arrange that their tax inspectors do not chase small savings accounts in the Post Office. There should be a limit free from such prying eyes. As we know that the amount involved is small and it is a disincentive to put money in the Post Office if it is going to be dug out and disclosed possibly to another member of the family—

VISCOUNT ALEXANDER OF HILLS-BOROUGH

My Lords, I should like to be quite clear about the noble Lord's suggestion on insurance premiums. Does he actually propose an increasing rate of help per £ on every rising £ of premium paid?

LORD GRANTCHESTER

I think the old arrangement was to give a rebate in tax to the extent of half the rate on premiums paid with a limit of one-sixth of income, but that has been altered by a rather complicated arrangement which amounts to a two-fifths tax allowance on a £10 premium, but it goes up to £25 without any corresponding tax allowance on the increase. There is no tax inducement for the individual to save £25 instead of £10 a year. I should like a more imaginative campaign, with inducements to popularise every form of saving. But before this can be expected to be really effective, the Government must show that inflation will not destroy the value of the labour and savings of the thrifty people of this generation as it has destroyed the labour and much of the savings of the older generation, to which some of us belong.

4.4 p.m.

LORD BALFOUR OF INCHRYE

My Lords, like other noble Lords who have taken part in this debate, I feel privileged to be able to do so on an occasion which has been enriched by the effective and authoritative maiden speech of the noble Lord, Lord Clithcroe, who is an old friend to many of us and whose maiden speech in another place I remember some twenty-two years ago. His maiden speech in another place was just as effective in that Chamber as his maiden speech was in your Lordships' House yesterday.

Last November, Her Majesty's Government hoped and believed that the Autumn Budget steps would halt the economic decline and check the imminent inflationary clangors. The description was given us then that the Government were grasping the nettle while there was yet time. Yesterday, my noble friend Lord Balfour of Burleigh gave another description when he said that the steps which were taken last autumn were both "too little and too late." It is no good jobbing backwards. The Government were sincere in their belief that they were doing what was necessary at the time. However, the situation has not worked out as they expected and here we are with another set of proposals, another economic debate and another hope that the steps that are proposed will be adequate to meet the situation.

Again we must ask ourselves the question that many noble Lords, including myself, asked last autumn: whether the proposals which we are now considering, coupled with those of the Budget yet to come, will bring about the early, drastic and essential transformation in our international balance of payments position which the circumstances of the time render necessary. The Chancellor of the Exchequer's proposals are undoubtedly courageous and deserve, I believe, the support of all noble Lords in every quarter of this House. Particularly do I believe that his steps in dealing with the artificial prices of essential foodstuffs are courageous, though unpopular. I think it is right that we should come down to reality, as the Chancellor of the Exchequer is gradually making us do. I do not believe the strictures of the noble Lord, Lord Wilmot of Selmeston, that these proposals are going to bear harshly on millions of people in our land. The extra cost is about 2d. per week per head, and we have to remember that the Government have raised considerably the allowances of dependants and pensioners since they have been in office. I do not believe that the steps which have been taken are going to hear very harshly on the people, and I believe that they will be accepted as part of the sacrifices which the difficulties of the position render necessary.

Having said that, I would remark that some of us here and some others outside are fearful whether the monetary weapon is able swiftly and positively to do what is expected of it by the Government. They expect the monetary weapon to decrease consumer demand and divert the flow of production into export Channels. They hope it will halt the rising costs of production and discourage excessive imports. In fact, it is the hope of the Government, which all those who support them share, that the monetary weapon will bring about the circum- stances required to remedy the worsening balance of trade position. But I find some difficulty in seeing anything in the Chancellor of the Exchequer's proposals which is likely to reduce what I consider is the intolerable position of steadily increasing dollar imports of supplies which we could, and should, produce from sterling sources within the sterling area and within the British Commonwealth. Last year we imported £55 million worth of animal feeding-stuffs, mostly paid for in dollars. Imports of barley from Canada rose from £13.6 million to £21.3 million. Imports of maize from the United States rose from £18.4 million to £28.7 million.

Last year we spent £74 million, mostly in dollars, in importing some 12 million tons of coal. And because this country has never been a coal-importing country and we have not suitable docks for importing and unloading coal, this coal had to go to Rotterdam, be unloaded in Rotterdam into barges and brought in barges from Rotterdam to this country. No one can deny that from our soil and from the soil within the British Commonwealth we could have produced the feeding-stuffs, the import figures of which I have just given to your Lordships, and to that extent have eased our dollar situation about which my noble friend Lord Bruce of Melbourne spoke so forcibly yesterday. No one in your Lordships' House or outside, could deny that we should be a coal-exporting nation rather than a coal-importing nation, and that beneath our soil and the soil in parts of the British Commonwealth exist rich undeveloped coal deposits—undeveloped in the sense of being mines linked to an efficient mine-to-port railway system. In Rhodesia there are rich collieries and rich coal deposits. Had we ten or fifteen years ago concentrated upon building the necessary transport outlets to the sea from where those deposits lie, we might have had to import coal but it would not have been for dollars; it would have been for sterling.

My noble friend Lord Balfour of Burleigh yesterday declared that there were two ways to check excessive imports: first, direct physical controls; and secondly, the reduction of internal spending. He hoped that the measures which the Government are proposing would achieve, through the second method, the reduction of internal spending, and thus check the excessive imports. I should like to submit that there is a third course which might give immediate relief to our critical dollar position. It is what I would term a switch of imports from dollar to sterling sources. This does not mean Government control and limitation of imports; nor does it mean relying solely upon the working of the monetary weapon. It is a sort of half-way house. It would not need legislation; but it would need Government leadership, Government directive to trade associations, Government direction and Government pressure on the interests concerned, to switch their requirements, even at some sacrifice to their own interests, to a far greater degree than at present, away from dollars to the sterling area. We cannot go on indefinitely with our dollar deficiency. We cannot go on indefinitely spending two dollars in imports for every one dollar we earn by exports, which is roughly what we are doing at the present time.

VISCOUNT ALEXANDER or HILLS-BOROUGH

I should like to hear the noble Lord's views on the other side of the picture. If it is two dollars to one dollar between imports and exports, what will then be the amount of your exports in dollars to the dollar area if you make this switch? How does the noble Lord propose to arrange for that?

LORD BALFOUR OF INCHRYE

I am afraid I cannot argue on the actual figures. The noble Viscount will have his opportunity in the debate, and no doubt he will be able to deal with this point. I am only putting forward a general point, that we are facing to-day an avoidable and, to a large extent, intolerable importation of dollar requirements which could be obtained from sterling sources. I think we might have a slogan, "Reduce and replace" as a guiding slogan for examination of dollar imports by Her Majesty's Government to see in regard to which commodities greater encouragement could be given than at present to their importation from sterling sources.

I believe that more than ever now we need in this country a new policy of closer British Commonwealth and Colonial Empire economic integration. As a first objective, we should lead in developing alternative sources of supply from an economically interwoven Commonwealth and Colonial Empire. It was brought out in yesterday's debate how much more necessary than ever before is such a policy, because the political and constitutional changes that we see going on all the time in our Colonial Empire must be accepted. Some may think that they go too fast, others that they go too slowly; but they are like the weather; it is with us, and we cannot change it. But these very territories which are now gaining their political and constitutional independence are our main dollar earners. The noble Earl, Lord Selkirk, yesterday reassured my noble friend Lord Clitheroe upon the future position of Malaya. Malaya, with its tin and rubber, is one of our biggest dollar earners. The Gold Coast, with its cocoa, is also a great contributor, and I would ask the noble Marquess the Leader of the House, who is to reply, if we could have the same comforting assurance, to the extent that was given to us yesterday concerning Malaya, in regard to the Gold Coast, and whether, in the political evolution that is now taking place in the Gold Coast towards granting them full independence, there will be the same safeguard for the dollars earned to come to the sterling area pool.

The noble Earl, Lord Selkirk, said that one cannot bind the future. I hope he does not see a day when he regrets the description he gave yesterday of the arrangements as being "fairly satisfactory," because territories fresh with political independence are liable to have nationalistic outlooks—for example, we see it in the Sudan. If they choose to withhold all or part of their dollar earnings from our contribution of dollars to the sterling pool, our economy could be dealt, almost overnight, a devastating blow. It is well to remember that in 1954—these are the last figures that I have, but the tendency has been the same since—the United Kingdom spent 263 million dollars more than she earned; but the Colonies earned 283 million more dollars than they spent. So one can see at once the value of our Colonial Empire as regards dollar-earning for the United Kingdom. I doubt whether the citizens of the country realise fully, or realise enough, the grave economic risks we are accepting while we are advancing these countries along the road of political independence. The very risks which we are taking—and I think we have to take them, and one can only rely on whatever Government may be in office at the time to obtain such safeguards for our economic position as are possible—through this political advancement, stress the urgency of developing the policy upon which I spoke a moment ago, of economic integration of the Commonwealth and Empire to a far greater degree in the future than has been the case in the past.

Such a policy would at once need a review of the present levels of colonial development capital allocations. Two Sundays ago, the Observer had a powerful and clear article on this particular subject, and the noble Lord, Lord Beveridge, spoke about it yesterday. In a normal year the London money market provides a sum of £22 million of new capital for colonial projects; last year we supplied £9 million only, and as a result of the remedies we have to take for our own domestic difficulties which we are debating to-day, remedies which we have to accept for ourselves, we must be loading the under-developed Colonies which require capital with heavier burdens for the money they obtain. I suggest that Her Majesty's Government should take into account, and try to give some special preference in some form or another to, colonial requirements, so that the Colonies can contract out of the penalties put upon them through our own domestic needs. Such a policy of economic integration would require boldness and need acceptance of implications on the present adherence of Her Majesty's Government to the international trade policy of non-discrimination in international trade.

My noble friend Lord Balfour of Burleigh, who told me he could not be here this afternoon, sees a favourable world situation for us provided our goods are competitive. The noble Lord believes that any general growth of world trade must automatically be to the advantage of this country. I cannot see that. If world trade grows in textiles from Asia or in motor cars from Germany, it is not automatically to the advantage of this country, though the figures of world trade may be enlarged. Let us remember that we have deliberately limited our competitive ability in relation to the products of other countries in the world. Many noble Lords who have knowledge of in- dustrial matters know of costed-out industrial jobs. You take your material, you take your direct labour, you take your on-cost and you express it in terms of percentage on direct labour when you prepare your estimate. We have put upon ourselves deliberately—I do not say wrongly—the national on-cost of the Welfare State, the on-cost of a high standard of life, which we must see represented in our costs of production and which must affect our competitive ability in relation to other people who do not so load themselves with the social standards we rightly consider necessary.

I believe that, sooner or later, we shall be forced to abandon strict adherence to non-discrimination, particularly when so many members of, what I would term the non-discrimination club do not obey the rules. So often Britain joins an international club and plays the game and obeys the rules while many others do not but indulge in such things as hidden export subsidies and many other devices which I could mention. My noble friend Lord Balfour of Burleigh dragged in the "fear of retaliation" bogy if we extend our preferential area of trade. In fact, there are only three foreign countries in the world with whom we have a favourable trade balance of more than £10 million a year—that is to say, who buy more from us than we buy from them. One is Norway, the second is Liberia, which is not in the General Agreement on Tariffs and Trade, and the third is Burma, with whom we have a preferential system. Therefore, I do not think the fear of retaliation is a formidable one.

My noble friend Lord Bruce of Melbourne spoke of carrying the people with us in the difficulties which we face. I believe we all, to whatever Party we belong, seek some rallying point, some inspiration, some cause which will rouse the people as they have been roused in times of stress, emergency and war. I believe that here is the call: a British Commonwealth economic integration of policy which would give this country the economic independence which I do not see we shall otherwise obtain. In such a policy we could afford differences of method towards a common objective, and we could afford differences of emphasis and direction in a common policy. But in the British Commonwealth and Colonial Empire lies the means of that rallying call for British economic independence. Broadly, I believe that we are a fairly well administered country. But administration is not enough. We must have leadership and inspiration; and it is that leadership and inspiration that we hope to find from Her Majesty's Government in the weeks to come.

4.25 p.m.

LORD SALTER

My Lords, at this late stage in our debate I think I can best serve your Lordships by commenting upon some of the suggestions that have already been made, rather than attempting to add new ones. I agree with a good deal of what the noble Lord who has just spoken has said, but I could not accept it all without some qualifications with which there is not time for me to deal this afternoon. I hope we shall have a later opportunity to discuss a subject which certainly merits a day's debate to itself.

The first proposal on which I wish to comment is that impressive appeal made by the noble Viscount, Lord Bruce of Melbourne, yesterday. He said—and I believe that everyone in this House, not least those who sit on the opposite Benches will agree—that it is of the utmost importance to attempt a combined effort to make the country realise the kind of danger with which it is confronted. I was greatly encouraged for the moment by the opening words of the noble Lord, Lord Wilmot of Selmeston. I was equally discouraged a little later, because I do not think it is a practical thing to say: "We quite agree with you about the nature of the peril confronting the country. We quite agree that many of the people who ought to understand what this peril is, if we are to be successful, do not understand it. We will do our best to help you in making it clear to them what it is, on condition, first of all, that you say that you are wrong and we are right." Really that is not reasonable.

I am not going to say that the present Government are right in all respects, and still less that Conservative Governments in the past have been right: there are many respects in which I think they have not been right. But I cannot accept the implication that Labour Governments, when they have been in power, have been right or more nearly right. I came into office in October, 1951, and I well remember the situation with which we were confronted then in the Treasury. I do not want to go over that matter now: I do not want to recriminate. But I must not he asked, before I go any further, to admit that the Labour Government were innocent in regard to the situation which then occurred, and that we have been wrong since.

LORD WILMOT OF SELMESTON

I know the noble Lord too well to think that he would wish to misrepresent me. I did not say that we were right. I merely said that the facts proved that the present Government were wrong.

LORD SALTER

To be quite honest, I think that both Governments have, in certain respects, misjudged the situation in the light of what, by later events, it proved to be. So much I would admit. But I think it is even more unreasonable to expect the Conservative Government now to go into a white sheet because of what the noble Lord called the deflationary policy of a Conservative Government between the wars. Undoubtedly mistakes were made then. If the noble Lord will look at the terrible unemployment figures at that time, he will find that they were not so very different in the periods of office of the Labour Governments of those times and of the Conservative Governments. Again, I do not wish to recriminate, but I am able to say this, I think, a little more freely, because during that time I was working very hard with Maynard Keynes and others of the Economic Advisory Council to press certain measures, measures that were then regarded as unorthodox and heretical in Whitehall but which have since been accepted by both Parties, and by this country, America and a large part of the Continent, as useful and orthodox.

It is surely not reasonable to say that the Government must say, "We are wrong" before we make the kind of reasonable appeal that the noble Viscount, Lord Bruce of Melbourne, made yesterday. That is not to say that the Party of noble Lords opposite should in any way sacrifice their views or give up the advocacy of what they want, but only that where they agree on a matter the public should be enabled to understand the position; that they should say so, and say so in a way which will help us in spreading an understanding which is essential, whatever remedial policies are adopted by whatever Government are in power. Cannot we respond to the appeal of the noble Viscount, Lord Bruce of Melbourne, by disentangling what is non-controversial from what is controversial and, up to the point of diagnosis, speak more or less the same language and attempt to educate the public? Of course, it is not only the right but the duty of the Labour Opposition to criticise the Conservative proposals where they think they are wrong, and to advocate their own proposals when they think they are better; but that position would not be prejudiced. I believe that the diagnosis of the position is very alike on the part of the responsible leaders of both Parties. I think, however, that the position is not really understood by the public. The public generally understand what is the effect of inflation so far as their home experience is concerned, but they do not understand what is the significance of the drain on the reserves. There is no difference of opinion between the responsible leaders of the two sides as to what is the significance of this drain, and I trust that it will be possible to get some kind of co-operation in explaining it.

Several noble Lords have called attention to the critical, and indeed, in its extent, the unique, danger of this country through its dependence upon imported food and raw materials at a time when its ability to sell abroad is impaired by great and increasing inflation. But the consequences of a continuance of that position are not, I think, fully realised. Let me suggest what I think would be the sequence of events if the measures that have been proposed or that may be undertaken in future should be ineffective in preventing a continuous loss of our export trade and a continuing drain upon our reserves. In the first place, of course, there would be unemployment in the particular branch of our exporting industry which was failing to compete successfully. That we have already seen in the motor industry which has been able to sell competitively abroad much less this year than at the same time last year. The Government, whatever Government it was, would have to prevent that outside loss of sales from being compensated by an expansion of home demand, because they would realise that the underlying cause and difficulty was largely an inflation which increased home demand would only increase. Very soon there would be the same phenomenon in other export industries, again with unemployment. As that happened, the reserves would run down further and further. Very soon, anybody who could change his dealings in sterling would begin to speculate upon a devaluation. When that happened, through methods of action upon which I need not now dilate, the process of the drain of the reserves would be accelerated. Soon, probably, we should reach the point of actual devaluation—though not because it was wanted.

I am quite sure that Sir Stafford Cripps was entirely sincere when almost right up to the eve of devaluation in September, 1949, he said, in effect, "Never, never." There I would differ from the noble Lord, Lord Clitheroe, who, in his brilliant speech, talked about the act of policy of the Labour Government in devaluing at that date. It was not an act of policy; it was a surrender to forces beyond the control of the Government of that time. Here again, I am glad that the Labour Party have clearly said this. Mr. Harold Wilson said the other day that the Opposition were just as strongly as the Government against any change in the value of the currency. Yes, but that does not necessarily mean that the forces will not get so strong that it will happen, and then the familiar evils will again result. For every dollar we earned, you would have to put in more human effort and use more materials. And, of course, inevitably prices would go up and up, because everything we bought from abroad would have to be paid for with more pounds.

When we got as far as that, we should be very near the point at which we should literally be unable to find the dollars to buy the food for our present standard of living, or even something a good deal less than that; and, in particular, the raw materials to keep our factories employed. When we reached that point, we should get mass unemployment. In my view, that is far and away the greatest danger, and perhaps the only danger, of mass unemployment that confronts this country. It is the kind of danger against which all the Keynes remedies are no remedy at all, for they were designed to stimulate and supplement a flagging home demand. Applying them to such a situation as I have just described would not only not cure but would aggravate the trouble. That is the position which I think needs to be brought home to the people of this country as a background to whatever is the remedial policy adopted. I suggest that the Labour Opposition, while fully maintaining their right, of course, to criticise and advocate alternative policies to those proposed by the Government, might collaborate with us in doing so.

So much for the suggestion of the noble Viscount, Lord Bruce of Melbourne. I should now like to come to a question which has occupied a number of the speeches during this debate—that is, the part that wage inflation is playing in the general inflation which we are discussing. I agree with the noble Lord, Lord Clitheroe, on the whole, in quoting Professor Pigou, that there are two main causes of inflation. One is public expenditure and the way in which it is financed, and the other is wage inflation. Of the two, particularly at this moment, in view of what is happening on the wages side, there can be no doubt whatever that far and away the more dangerous is wage inflation. Wage inflation, although not the sole kind of inflation, is indeed the characteristic form that inflation has taken since the last war, just as much as note printing was the characteristic form of inflation on the Continent of Europe after the First World War.

Wage inflation results from one perfectly simple thing. To avoid it does not mean that wages should not increase; it means just this: that you should create your wealth before you spend it. The whole of the trouble in wage inflation has been, as the noble Lord, Lord Beveridge, pointed out quite clearly, that people have tried to spend beforehand the wealth that they or others hopefully anticipated they might produce in future but which, in fact, they did not produce. That putting of the cart before the horse, and increasing your spending power in the hope that you may increase the objects upon which you are going to spend it, instead of producing the objects first and then sharing them, has been the root cause of our difficulties and the biggest trouble from which we are suffering in the economy of this country.

That evil has been immensely increased, as Lord Beveridge said yesterday, by the particular contribution made to it by the nationalised industries. As he said, quite truly, they have led the way to the rounds of wage inflation. Why is that? I think it is for one simple reason. The whole of the system under which wage rates are negotiated was built up and developed its traditions when privately owned industries were competing with each other. Nobody on either side of the table in negotiating questioned the fact that, whatever might be the proper share of the profits between the management and shareholders on the one hand and the workers on the other, both sides had to draw from earned profits. That essential basis of the system was cut away when there was established a national monopoly which, because it was a monopoly and not subject to competition, could meet extra costs for wages by putting up fares or prices to the consumer, and, because it was nationalised, could if the consumer could no longer be persuaded to pay more, in ore way or another put the cost on to the taxpayer. In fact, that is what has happened, and that is why the national industries are spearheading the wage inflation process. That is the most disastrous thing in our present economic history.

The real fact is that the nationalised industries have, in regard to the authorities which represent the public interest, power without responsibility. By this I mean that they can do things which compel the Treasury to pay, without any responsibility for collecting the money in taxes with which payment has to be made. At the same time, in relation to their workers they have responsibility without power, in the sense that they are responsible for organising their business efficiently and for negotiating rates of wages. But they have not got, for the reasons I have just mentioned, the power to compel, because behind their negotiations the workers feel and say, as they never did at the time when the system of wage negotiations was being built up, "Well, if you cannot pay these extra wages, put up prices; and, if that is not enough, then go to the Government."

That, I suggest, is one of the biggest evils and dangers confronting us. Behind it is the whole question of full employment or the relation between the demand for and the supply of workers. Practically everybody who speaks on this subject confines himself to saying, "I am in favour of full employment."But he is usually most reluctant to take the trouble to define exactly what he means by that phrase. There are same things that I think ought to be said in order to give perspective and proportion to what is likely to be the course of events in the weeks and months that follow. I should like to approach this matter by quoting from those who can speak, and have spoken, with great authority.

First of all, let me take the pioneer and protagonist of full employment, Lord Beveridge, whom I am sorry not to see in his place at the moment. In his book, written in 1944, he said that full employment does not literally mean no unemployment; it means no more than 3 per cent. of unemployment as compared with the 10 to 22 per cent. which Britain experienced between the wars. It is well to keep that figure in rnind—3 per cent. of unemployment is what he defined as a state of full employment. Then, a few years later, in 1949, Sir Stafford Cripps, having experienced the consequences of people thinking of full employment as meaning not a single person ever without a job, was careful to say that full employment did not mean that an individual was guaranteed continuance in his particular job or even his particular trade, and that to insist upon the rigid maintenance of the present pattern of employment would be to destroy all hope of full employment. That was in 1949. Then, as recently as 1951, the Labour Government made a formal declaration of what they meant by a full employment policy. They said they had decided to express the full employment standard of the United Kingdom as a level of unemployment of 3 per cent. at the seasonal peak.

Compare that with the present and what has been the recent position. Three per cent. unemployment means about 550,000 unemployed people in all. Over this last winter the percentage has been about 1 per cent., and that 1 per cent., or something a little under 200,000, covers "casuals" and people who have been unemployed for only a short time, after which they have usually quickly got better employment somewhere else. I emphasise all these figures because it may well be that, not because of a desire to create unemployment but in order to cure this fatal disease of inflation, any Government may have to adopt measures that, as Mr. Gaitskell recognised only a few months ago, may well have as an incidental effect an increase of the figure, particularly of short-time unemployment, so that it rises to somewhere nearer 2 per cent. rather than the present 1 per cent. I ask the Labour Opposition to help us in getting over the view of what has always been understood to be the real meaning of the kind of full employment which should be the objective of Government policy. All that I am suggesting at the moment is that in itself that should not be regarded as a bad thing.

I do not think that it is a good thing that there should be, as at this moment, about twice as many vacancies seeking men as men seeking jobs. When that is the position, when there is such a small number of people available for any new development or expansion that may be needed in the most crucial and vital industries, there is really no chance of making the progress in prosperity and the creation of wealth which the country otherwise could achieve. Therefore, I should like to ask that the sense of horror at any kind of number of unemployed, however small and however temporary, should be dissipated by the combined efforts of both sides. There must be a margin of people who, at any given moment, are seeking new employment, and the present measures of relief might conceivably be added to. That would be immensely better from the point of the working classes as a whole, and indeed of those temporarily unemployed, than that, as Sir Stafford Cripps saw, the present pattern of employment should be crystallised and made rigid, thereby preventing any future increase in prosperity.

I should like to make one or two remarks about monetary policy. I agree with Lord Pethick-Lawrence and Lord Pakenham when they demonstrate, as they did demonstrate, the great cost and the great disadvantages of high interest rates long continued. I was glad, however, that the noble Lord, Lord Pakenham, and I think the noble Lord, Lord Pethick-Lawrence, agreed that, in its proper place, combined with and assisted by other measures, the high interest rate has its utility at certain stages of an inflationary period. But I agree that it is of the utmost importance that not too much should be put upon that or any purely monetary weapon. I agree with the noble Lord, Lord Clitheroe, when he pointed out that under the present conditions of the market, with the great number of Treasury Bills, for example, the old classical weapons of monetary policy—open market operation, high rate of interest and so on—are not so effective as they were; and if they are not given the right environment and supplemented by other measures they would be much too expensive and not effective enough. In that connection I should like to see Treasury Bills restricted a good deal. It is all very well for Sir Edward Boyle to say—as he can say with literal truth—that Treasury Bills are not necessarily inflationary. But when they are increased to the extent and at the pace of Treasury Bills in recent years, and are devoted, as so much Treasury Bill finance is, to long-term expenditure that ought to be financed by loans subscribed to out of the savings of the people, then they are seriously inflationary.

I believe that we have a good deal to learn from modern America in its use of the monetary weapon, both as to liquidity ratios and also as to the use of a much better system of intelligence and information about the movements of boom or depression. I hope that we shall try to learn the necessary lessons from them. Monetary policy could be made a great deal more effective if it were supplemented by some of the weapons that have successfully been used in America. Among those monetary weapons I would add one that has been used both here and in America and which I have always thought, for many years, to be an extremely valuable one—hire purchase. That is one of the best regulators. To ease up with hire purchase in days of depression and to tighten hire purchase in the case of a boom is a very simple and effective method.

There was considerable debate as to whether high taxation is inflationary or deflationary. I did not entirely agree with the noble Lord, Lord Clitheroe, who said that it was at present inflationary. I believe one cannot give a plain "yes" or "no" to that question, for it depends on the time, and whether one is thinking in terms of a short crisis or the long-term effect; and it depends, too, on the kind of taxation. The first effect is, of course, deflationary: it reduces the spending power. It may later, however, reduce incentives to the creation of new supplies, in which case it ultimately becomes, in that sense, inflationary. In that respect, it is exactly like reductions of investment. We are now trying to help the immediate critical position by reducing expenditure on investment. Continued over a long time, that process would have the effect of reducing production and thereby worsening the ratio between supply and demand. Whether or not taxation is in-flationary depends a good deal, also, on the form of taxation. Frankly, I regretted, in the Autumn Budget, the extension of purchase tax to pots and pans —articles which previously had not been subject to tax—because I think purchase tax has a more direct and sensitive relationship to wage demands than any other tax. When one finds what was really in itself a very small tax in its immediate reduction of expenditure (and which therefore could not do much good) applied, with the provocation that these were articles of domestic necessity which previously had not been taxed, the indirect result in causing inflation through increased wages was probably greater than the immediate advantage of reducing expenditure.

The noble Lord, Lord Beveridge, referred in a very interesting part of his speech, with which I wish I had time adequately to deal, to the general system of wage negotiations. I have said something of the particular part played in that matter by the nationalised industries, but the case he put before your Lordships goes a good deal wider and further. There is a great deal in what he said: in that we want some mitigation of the complete union sovereignty of separate unions in dealing with wage negotiations. As he, or some other noble Lord, said yesterday, it is quite useless to say to a particular union: "Do not press for an extra 10 per cent. on wages, for the only effect of that would be to put up by 10 per cent. the cost of things you buy." That is not true, because the fact that they ask for, or get, that 10 per cent. will not necessarily result in other people getting it; and if they do not ask for it, that will not prevent other people from getting it.

But what is not true of separate unions is true of the union world as a whole. If we could get in regard to wages a policy that was in the interest of the union world as a whole, it would, in my view, be a policy almost identical with the national interest. That does not mean, however, that if we were able to do so it would be wise to have national negotiations for all wages conducted, let us say, by the T.U.C. That would be, likely to mean a uniformity of wages which would destroy the proper differential between different classes of workers, and would prevent a proper increase of wages for the expanding new industry as against the old static industry. Even if one could get a plain 4 per cent. increase, as in Sweden, or any other percentage, as the noble Lord, Lord Beveridge, seemed to think desirable, I do not think it would be a good thing. Some element of variability and flexibility is needed. But it is true that the disadvantages of inflation quantitatively fall, perhaps as to more than half, upon union members as a whole; and if one adds to that half those classes of the community who are not economically better off, the proportion is more like four-fifths. There is therefore a strong case for developing a system which would, to a greater extent, make effective on particular union negotiations the interests of the union world as a whole. This subject might be a suitable one in itself far debate—I ventured to put sonic proposals before your Lordships in July of last year.

Lastly, a number of noble Lords referred to the necessity of recovering the dynamic character of our society. They were right; but, of course, one has to say that when we are in a critical position in regard to the exchanges and our reserves, as we are now, a solvent society is an essential and prior condition of a dynamic society. Once we can get past the critical danger of the drain upon our reserves, then we can be free to concentrate in every way upon incentives to extra production and the removal of all restrictions, whether on the workers' or the employers' side, that impair greater production of saleable goods. There is then hardly any limit to the extent to which wages can, with no harm to anyone and with great advantage to the workers themselves, advance, subject only to the fundamental condition, which has unhappily not been observed in the past, that you should first create your wealth and then decide how to share it.

5.0 p.m.

LORD SEMPILL

My Lords, may I join with your Lordships who have spoken previously in congratulating the noble Lord, Lord Pethick-Lawrence, upon initiating this debate and in thanking him for his interesting opening speech. I should like also to add to the tributes already paid by your Lordships to the noble Lord, Lord Clitheroe, on his maiden speech. The speech of the noble Viscount, Lord Bruce of Melbourne, which has already been referred to by Lord Wilmot of Selmeston and Lord Salter, impressed me very much. I thought it a notable speech, since, whilst dealing with the technicalities of this involved situation, the noble Viscount stressed again and again the psychological aspect. The psychological aspect was emphasised again to-day by Lord Wilmot of Selmeston, Lord Salter and others. I think it is vitally important. In fact, as I understood it, the noble Viscount, Lord Bruce of Melbourne, whilst indicating his view as to what should be done technically, pointed out that success would be achieved only when there came about a change in the attitude of mind all over the country. With that view I completely agree, as others of your Lordships have intimated that they do also. The noble Viscount, Lord Bruce of Melbourne, said at one point [OFFICIAL REPORT, Vol. 196 (No. 68), col. 156]: we are up against as serious a crisis as we have ever been in our history, except in time of war. There is surely only one sound remedy for inflation, a subject upon which much has been said in this debate; and that is increased production. We ask ourselves whether this is possible to-day. As one engaged in production engineering, I would say "Yes," without question—but only provided that we stop pretending we have full employment to-day, when restrictive practices abound on both sides of industry. "Go slow;" "work to rule;" two or three men doing one man's job—this sort of thing is going on all over the country. Your Lordships will remember that the noble Lord, Lord Clitheroe, in his maiden speech yesterday, referred to full employment. He emphasised that it was a term only partly understood. Lord Salter said the same thing to-day. Lord Clitheroe used these words [col. 148]: 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. The result of these practices to which I have referred, as your Lordships well know, gives rise to dissatisfaction and an overall feeling of frustration. This is inevitable. These restrictions, broadly speaking, do not, however, apply in the expanding industries, since employer and employee are still aware of each other as fellow human beings. I suggest that the question which needs to be answered is why, in a period of crisis, in which we are to-day, and of inflation, should not restrictive practices be abandoned and production increased up to the full volume of purchasing power.

There are probably several answers. For example, if labour-saving or output-increasing devices are effectively used, they must inevitably reduce the amount of labour required in those industries where, for any reason, demand does not expand correspondingly. This is consistently denied on the grounds that in expanding industries, like, for example, motor car production, productivity has increased sixteen times in forty years; and still there are more people employed than ever before. Is it seriously considered that during a similar period the British coal industry could either have sold sixteen times as much coal or have reduced its personnel to one sixteenth? Your Lordships will have heard recently a great deal about automation, which is already here. It brings with it the possibility of an enormous increase of man's capacity to produce—perhaps by twenty to thirty times. Has anyone made clear how the present economic system adjusts the ability to purchase what is produced, bearing in mind that prices cannot be cut to one-twentieth or one-thirtieth because of the very large capital investment in automation which has to be amortised?

Surely, my Lords, we have to ensure that the supply of the right volume of money, issued at the right time, is the main objective of monetary policy. The periodic boom or slump indicates that this is quite haphazard; and, that being so, the question of ensuring that the right volume of money is put into circulation is crucial. Would it not be correct to assume that the reason why the Government of New Zealand not long ago set up a Royal Commission on Monetary Policy, was to consider, and find answers to, such questions as this? I understand that the Commission's Report is due some time next month. As noble Lords of far greater experience in economic matters have spoken on these questions, emphasising the seriousness of the position to-day, may I, who am but a student in the economic field, say that in my opinion it surely cannot be many months before we strike bottom and then commence to learn the results of past errors of judgment the hard way. That, I suggest, is the only sure road to recovery.

5.10 p.m.

LORD DOUGLAS OF BARLOCH

My Lords, the noble Earl, Lord Selkirk, who spoke for the Government yesterday said that their policy was to attack causes and not to attack symptoms. That is a sentiment with which I, and all of us, no doubt, would sincerely agree. But I wonder whether the measures which have been proposed by the Government do, in fact, reveal the implementation of that policy. They appear to me to be a diverse mixture of measures, some of which are dealing only with symptoms and not with the causes at all. There is a large measure of agreement in your Lordships' House that the root cause of the difficulties with which we are at present confronted is inflation, but I am not so certain that there is uniformity of view as to what inflation really consists in. For my part, I understand inflation to be a condition in which the price of commodities is increasing and in which that increase of price is caused by an increase in the amount of money in circulation—that and nothing else. And that is precisely what we are suffering from at the present moment.

Take what has happened during the last seven years. Between 1948 and 1955 the volume of industrial production rose by about 35 per cent. During the same period the amount of currency in circulation rose from some £1,200 million to over £1,700 million. What was the inevitable result? There was an increase in prices, so that the increase in consumer expenditure during that period amounted to £4,000 million a year, of which £3,000 million was due to increase of prices. The inference from these facts is perfectly clear. If one goes back over a longer period, one finds that the currency in circulation in 1938 was only £442 million, and now it is about four times as much. The inevitable result has been a tremendous increase in prices, compared to what they were before the war. If inflation is to be prevented, it is essential that in the first place the Government should control the note issue and should prevent it from going up year after year as it has done. I do not forget for a single moment that the circulation of bank credit is also a form of currency and that it has gone up pari passu with the increase in the note issue. But the final and ultimate responsibility for all this rests upon successive Governments, which have steadily pursued this policy.

If this is the truth of the matter, it is clear that the policy which the present Government are pursuing is erratic and contradictory. What, for example, had the measures which were included in the emergency Autumn Budget to do with the increase in the note issue? Nothing whatsoever. The increase in purchase tax and profits tax has nothing to do with controlling the volume of currency in circulation. So with regard to the more recent measures which have been proposed. The reduction of housing subsidies has no relation at all to the increase in circulation; nor has restriction upon hire purchase, though both measures may in themselves be defensible. It may be perfectly true that it is highly undesirable that people who are well able to afford to pay for accommodation should have their houses subsidised. It may also be true that hire purchase has a demoralising influence and tends to make people forget that they ought to earn before they spend. But that is not, in itself, a cause of inflation so long as hire purchase is financed by the saving of somebody. Of course, if hire purchase is financed by the creation of credit, and if the Government allow credit to he created for that purpose, then we have inflation. But that is not the result of the institution of hire purchase; it is the consequence of the inflationary position which is allowed to come into existence.

These measures have really nothing whatever to do with the fundamental difficulty with which we are confronted, which is due entirely to the policy of successive Governments in allowing the creation of currency and of credit to proceed at the rate at which it has done. I know that it is said that we can control this tendency by controlling expenditure. That was the advice which Keynes gave to the Treasury in 1940, and the Treasury were acting upon that advice when they introduced the system of post-war credits as a means of combating inflation. But that measure has failed, as every measure of that kind is inevitably bound to fail: such steps will not and cannot work. What we have seen during the last fifteen years is the proof of it. Inflation is bound to follow so long as Governments are content to allow the note issue in circulation to increase year after year.

I deprecate also the view which has been expressed by some speakers in this debate that the cause of our troubles is mainly the work of the trade unions in forcing up wages. That has not created the inflationary position with which we are confronted—indeed, it has little or nothing to do with it. I do not deny that it is possible, if the demands of the trade unions are excessive and they are granted by employers, that troubles can flow from that. It could easily happen that the cost of production might rise so high that it would become impossible to sell goods at a profit, particularly in foreign markets, and consequently our exports would fall away and our ability to buy the food and raw materials which we require would be diminished. But that again has nothing at all to do with inflation in itself: that is an entirely separate and different problem. Therefore, it is not correct to say that the trade unions, by securing increases in wages, have been responsible for this situation. It was not they who increased the monetary circulation. It was successive Governments who were entirely responsible—and I draw no distinction between one Government and another, so far as this matter is concerned.

During this debate we have been told—and this I understand is the view of the Government—that in order to combat inflation the public ought to save more. I am all in favour of saving. I was brought up to believe in thrift; I was brought up to believe that you should not spend money which you had not got. But once more, what is the position? What is the use of any Government advice to people to save, so long as conditions remain as they are at present? The workman who puts his money into savings certificates finds in the course of time that, even with the addition of interest. they purchase less than at the time when lie invested his money. When he is invited to put his money into things of that kind, he is being asked to lose it, because of the inflation which is taking place year after year and which is reducing the purchasing power of his investment. In those circumstances, for which the responsibility must lie upon the Government, it is futile to ask intelligent people to put their money into investments of that kind, because they know they will inevitably end up with less purchasing power than they had to begin with.

It is absolutely essential that we should restrict the volume of currency in circulation and prevent the price level from continuing to rise year after year. If that is not done, these troubles will continuously recur, and we shall march forward from crisis to crisis. I wish that I could see on the part of the Government some clear and definite recognition of this fundamental fact. It is dangerous to our economy; it is unjust and unfair to important, respectable sections of the community; it pillages the old age pensioner, the man who has saved up his money in order to provide something for himself, the executive, and the scientific, technical worker who is not a member of a mass union and whose wages or earnings do not keep pace with the continual increase in the cost of living. It is injurious to everybody of that class, and it is helpful only to those who are in the position of being speculators, and who are able to put their money into things which are increased in price because of the diminution of the purchasing power of money.

This, of course, is a doctrine which is well known and which has been borne out by hundreds of years of experiment. Country after country has given illustrations of this kind of thing; yet it seems that nobody is willing to profit by the experience of the past. Nobody is willing to learn the simple lesson that it is necessary to prevent prices from being increased and to stop multiplying the amount of money in circulation, and that the real criterion, with a properly developing economy, is that when production is increased the prices of commodities ought to fall and not rise, so that the benefits of industrial progress are spread more evenly over the whole community. That is the lesson of this situation, and I wish I could see signs that the Government realised it more clearly.