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(4) Reciprocal trade measures must, of course, be supported by monetary policy. Special credit facilities will have to be devised to make possible expanding exports of capital equipment to the sterling area countries, for their development. It will, therefore, be necessary to bring the other sterling governments into partner- ship with us in the management of sterling. In the absence of adequate reserves, the soundest financial basis we can hope to create for the Commonwealth is the joint stewardship of the pound sterling.

Trade and monetary policies go hand in hand. Under present conditions, it is very difficult to envisage convertibility between sterling and the dollar. But once the pattern of trade has been directed into a predominantly sterling mould, there should be less difficulty in returning to and maintaining convertibility at least for current transactions. This, incidentally, will do more than anything else to encourage United States investment in the sterling area.

VI. Some of the Difficulties

A policy of this kind is, of course, open to obvious objections.

(1) There is a danger of its degenerating into an artificial system of exchanging high-priced goods in a new form of autarchy. The President of the Board of Trade has called attention to this in his paper.

American protectionism suffered from this defect in its early stages. But the increasing size of the market and the corresponding opportunities for mass pro- duction have completely altered the picture over a period of time. Might not the same be done in the sterling area? Nor should it be forgotten that, in spite of high sterling prices, the shortage of dollars in the non-dollar world is working in our favour.

(2) There is another, and perhaps more fundamental objection. It is proposed here that a larger part of our production of capital equipment should go, not into current exports outside the sterling area (as the Treasury papers suggest), but into development plans at home and in the sterling area. Such investment will, for a time, be a form of unrequited exports. It will thus increase our inflationary problems in the short term, without contributing immediately to the solution of our balance of payments problem. In view of our slender reserves, the question may well be asked: how are we to pay for essential current imports and at the same time liberate enough production to make possible the investment of capital equipment in the sterling area on a sufficient scale?

There is no easy way out of this difficulty, but the following measures should be re-examined. Even the most unpleasant of them may prove acceptable in a climate of hope, instead of an atmosphere of aimless defeatism:

(i) Cutting out all dollar or non-sterling imports not essential for preventing

malnutrition and maintaining full production in essential industries. (ii) Cuts in the building programme for hospitals, schools, public buildings and even houses-as an act of declared policy and not as a result of administrative failure.

(iii) Reimposition of some price and other controls; a form of direction of labour should not be ruled out, especially in view of the localised unemployment which seems in any case inevitable.

(iv) A realistic and objective review of the defence programme (this is being

done).

(v) New measures to facilitate the necessary capital formation.

VII.-Western Europe's Part

It may well be that if we accepted war-time standards of austerity over a period of years, we could rebuild the economy of the sterling area without outside support. It is conceivable that the British people could raise themselves by their own boot- straps. But the process would be both swifter and less painful if sterling investment could be supplemented by investment from elsewhere.

The largest source of investment capital is, of course, the U.S.A.; and when a definite plan of Sterling Area development has been decided upon we should spare no effort in trying to persuade the Americans that it is in their interests to back it.

The U.S.A., however, are not the only source from which additional capital equipment could be obtained. Western Europe and more particularly the heavy industrial complex of the Ruhr, the Saar, Lorraine, Belgium and Luxembourg, is

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