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Printed for the Cabinet. May 1952:
SECRET
C. (52) 166
CABINET OFFICE
RECORD COPY
17th May, 1952
CABINET
Copy No. 72
ECONOMIC POLICY
MEMORANDUM BY THE CHANCELLOR OF THE EXCHEQUER
As I stated in C. (52) 111, the measures so far taken have given us a breathing space. In the last few weeks the dollar drain has indeed slowed down. must not forget that the emergency measures which we took when we came into office consisted to no small extent of cutting back the growth of imports and by living on stocks. These steps, by their very nature, were no more than stop gaps. We must now look further ahead. I set out in the paper the plan of work which I recommend that we should follow, if we are to attain our objective of regaining economic stability and building up a strong, free and prosperous country.
war:
:
I
2. In many essential ways, we are much worse off than we were before the
(i) The United Kingdom instead of being a net creditor of £3,500 million is
now a net debtor of £2,500 million.
(ii) The gold reserves before the war were equal to four or five months' turn- over of our external transactions and were practically always sufficient to cover our sight liabilities. To-day, they are equal to three weeks' turnover of transactions, and cover one-sixth of our sight liabilities. (iii) Since 1938, there has been a marked deterioration in the terms of trade and there is no reason to expect that they will improve. Each unit of exports now brings us in only three-quarters as much imports as it did in 1938. This has added £1,000 million a year to our imports bill. It means that another three hours' work a week has to be done by every worker in the country to get the same amount of commodities from abroad.
(iv) In the last war our capital losses at home and abroad were equal to about one-quarter of our entire national wealth. We have made good most of the internal losses, and in some fields are now better equipped than we were in 1938. But the check to our industrial progress has been very
severe.
3. Despite this great change for the worse this country has undertaken far larger commitments.
4. Internal
(i) The scope of the Social Services has been greatly extended and the standard raised. We are providing better schools, better health services, and better pensions than before the war. We are also seeking to provide a far higher standard of housing. In the six years since world war II we have built between two and three times as many houses as in the six years after world war I; they are, moreover, better houses; and we are straining every nerve to go up to 300,000 houses a year, a figure around the peak levels of the pre-war housing boom.
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Pagbuffdard of amenities is also far higher. Capital res&fcés1 ar€ bling
5. Defence
used on a tremendous scale to provide the domestic user with far greater quantities of electricity than they used before the war. And urban transport services are on a higher standard of amenity even than in the United States.
(i) In the middle thirties we had 350,000 men in the armed forces: To-day we have 850,000 men and women, due to rise to 900,000. Of these 300,000 are serving overseas, and almost all of these will be at the cost of our balance of payments if, as is probable, Germany stops paying occupation costs next year.
(ii) This year, we are spending 10 per cent. of our national product on defence, compared with 5 per cent. even in the late thirties. The Foreign Exchange cost of this programme is very large and is due to grow substantially in the next two years.
(iii) We may be faced with heavy commitments for defence works overseas,
e.g., in the Middle East.
6. External
(i) United States of America and Canada.—We have dollar liabilities to the United States of America and Canada for repayment of debt. The present figures are £25 million a year capital and £40 million interest. (ii) Sterling Liabilities. Our total outstanding sterling liabilities are over £3,500 million. We have contractual obligations to release about £60 million a year over the next few years to India, Pakistan, Egypt and Ceylon.
It would be unsafe not to make allowance for some net drawing down of the sterling balances not covered by these arrangements- amounting to £2,500 million. This can vary very considerably from year to year, but we should allow £100 to £150 million a year on an average.
(iii) European Payments Union.-Whether or not this continues, we must repay our existing over-drawing of £200 million. This could cost us £70 million a year.
(iv) Overseas Investment.-The oil companies programme costs about £50 million a year for the next five years-all very profitable, but involving a big strain on our resources. Abadan has meant the loss of a capital asset worth £300 million and an annual loss on our balance of payments of £65 million.
Investment in the rest of the sterling area will require about £100 million a year.
·(v) The Reserves. Provision ought to be made for rebuilding the reserves. Thus, if we set aside £200 million a year for this purpose it would take about four years to restore them to the level they were at in July 1951. (vi) The above are mainly items of a capital nature. There are also current charges. Thus we are committed to find assistance to certain foreign countries, e.g., Yugoslavia, to which we subscribe a larger part of our national income than does the United States. An indication of the extent by which our overseas commitments on current account have increased is given by the increase in direct overseas Government expen- diture (excluding supplies for the defence programme). To-day this figure is about £200 million a year, whereas in 1938 it was £16 million (and that was a heavy year). Even if allowance is made for price changes, the increase is enormous.
II
7. This analysis shows how formidable is the task of putting the economy on a sound footing. With shrunken assets we have accepted commitments which are not only far greater than before the war, but many of which are non-productive. In total they represent a burden upon the economy which must be lightened if we are to have any chance of success. Some of them are, however, inescapable and it follows that if we are to meet these, and to be in a position to undertake badly- needed new productive investment, and to make a start in building up the reserves