1. The Policy for the Present Depression—Establishment of International Peace—Reduction of National Expenditure—Lowering of Taxation—Stabilizing the Exchanges—Revision of Financial Policy—Reconsideration of Reparations Policy—Inter-Allies Debts—Export Credits—Bringing down Costs of Production.
In approaching the formulation of a national industrial policy, we must first determine the proper relationship of the Government to industry. That involves consideration of what special action the Government can, and should, take in these exceptional times of abnormal trade depression to assist the restoration of industry, and of the position in which the Government should stand to industry in normal times.
The present depression in trade and decline in industry are primarily due to the world-war. The causes are not clearly appreciated by the general public; they are international as well as national, and call for action abroad as insistently as for remedies at home.
The causes are: first, a definite lack of demand from foreign markets for commodities of which this country was, before the war, a producer. It was customary, until recently, to hear it said that the countries of the world are crying out for our goods. That is not an accurate statement. A very considerable proportion of the foreign markets, open to this country before the war, has now, for the time being at any rate, definitely disappeared. I have had opportunities of discussing this question with foreign business men who have special knowledge of continental conditions. All were definite as to this want of demand; the explanation they said was simple—the devastation resulting from the war and the absence of settled and stable government. They described the most amazing expedients and contrivances to which resort is made in foreign countries in order to avoid the purchase of what in normal times would be ordinary trade machinery and equipment. Then next comes the inability of continental countries to produce commodities which—to use the compendious phrase in economics—they require to exchange for commodities from other countries, either because their mechanism of production is rusted or ruined as the result of the war, and they have not capital to renew it, or from inability to buy from abroad because of impoverishment resulting from the war, or the adverse balance of exchange against them. When one turns to this country, we see British manufacturers unable to sell to customers in many continental countries because of the uncertain credit of the foreign buyer, and, where credit is sufficiently satisfactory, or constitutes an insurable risk, because of the sharp variations in exchange. A manufacturer in this country may be in a position to do firm business with a foreign buyer at a given rate of exchange which is just sufficient to ensure a small percentage of profit; a violent fluctuation in the exchange at the time payment is effected may entirely eliminate all profit and possibly convert it into a serious loss. Then again, the high cost of production in this country, especially of manufactured commodities where the wages of labour form 60-85 per cent. of the total cost of production, makes it impossible for the British manufacturer to sell sufficiently cheaply abroad, especially in the face of competition of similar goods produced in countries with a depreciated currency which stands at an external value much below its internal value. In addition, some countries to which we have lent money, and which pay us no interest thereon, are erecting heavy tariff barriers against us, and by subsidies and restrictions on coastwise trade and emigration are injuring seriously British shipping and trade.
International trade implies mutual dependence. If one country goes out of business it injures all other countries, even those that never traded directly with it. Trade must languish in countries where conditions are unsettled. It should be the first aim of the Government in concert with its Allies to establish peace generally throughout the world. That has been authoritatively declared. In accordance with arrangements made by the Council of the League of Nations, an International Financial Conference was convened at Brussels on September 24, 1920. The duty entrusted by the Council to the Conference was to study the international financial crisis and seek for means of remedying it and of mitigating the dangerous consequences arising from it, subject to the provision that no matter included in the then pending negotiations between the Allies and Germany should be discussed. There were eighty-six members at the Conference, representing thirty-nine different countries.
As the chief essential for the recuperation of industry and the revival of trade, the Conference insisted on the establishment of a real, as distinct from a paper, peace:
“First and foremost the world needs peace. The Conference affirms most emphatically that the first condition for the world’s recovery is the restoration of real peace, the conclusion of wars which are still being waged and the assured maintenance of peace for the future. The continuance of the atmosphere of war and of preparations for war is fatal to the development of that mutual trust which is essential to the resumption of normal trading relations. The world must resolve the rivalries and animosities which have been the inevitable legacy of the struggle by which Europe has been torn.”
“The security of internal conditions is scarcely less important, as foreign trade cannot prosper in a country whose internal conditions do not inspire confidence. The Conference trusts that the League of Nations will lose no opportunity to secure the full restoration and continued maintenance of peace.”
“The Conference affirms that the improvement of the financial position largely depends on the general restoration as soon as possible of goodwill between the various nations; and in particular it endorses the declaration of the Supreme Council of March 8, 1920, ‘that the States which have been created or enlarged as a result of the war should at once re-establish full and friendly co-operation, and arrange for the unrestricted interchange of commodities in order that the essential unity of European economic life may not be impaired by the erection of artificial economic barriers.’”
If trade is to be resuscitated, there must be a ruthless curtailment of national expenditure, an inflexible renunciation of everything resulting in expense which is not absolutely essential to present national existence. On this question the Financial Conference spoke clearly:
“The statements presented to the Conference show that, on an average, some 20 per cent. of the national expenditure is still being devoted to the maintenance of armaments and to preparations for war. The Conference desires to affirm with the utmost emphasis that the world cannot afford this expenditure. Only by a frank policy of mutual co-operation can the nations hope to regain their old prosperity, and to secure that result the whole resources of each country must be devoted to strictly productive purposes. The Conference accordingly recommends most earnestly to the Council of the League of Nations the desirability of conferring at once with the several Governments concerned with a view to securing a general and agreed reduction of the crushing burden which, on their existing scale, armaments still impose on the impoverished peoples of the world, sapping their resources and imperilling their recovery from the ravages of war.”
The Washington Conference has made some progress along this line.
The matter was emphasized in more detail in the following resolution unanimously adopted by the Financial Conference:
“It is, therefore, imperative that every Government should, as the first social and financial reform, on which all others depend—
“(a) Restrict its ordinary recurrent expenditure, including the service of the debt, to such an amount as can be covered by its ordinary revenue.
“(b) Rigidly reduce all expenditure on armaments in so far as such reduction is compatible with the preservation of national security.
“(c) Abandon all unproductive extraordinary expenditure.
“(d) Restrict even productive extraordinary expenditure to the lowest possible amount.”
The effect on industry of unnecessary national expenditure is immediate, direct, and, at these times, absolutely calamitous. The greater the national expenditure the higher necessarily must be the taxation required to provide for the interest on, and the redemption of the debt. Every penny absorbed in unnecessary taxation is so much money diverted from reproductive industry. If a manufacturer is paying 6s. 8d. in the £ in income-tax and super-tax, the effect is the same as if he worked as a bond-slave to the Government for four months in the year, during which time the Government appropriated the whole of the output of his factory.
For the restoration of industry an immediate reduction of taxation is imperatively required. The dangerous height to which taxation has mounted operates with devastating results on industry. Many business firms have had to sell securities to pay their taxes; these have been purchased by American investors. The Government points with pride to the improvement of American exchange; at whose expense? Certainly, in part, at that of British industry. While firms have thus to sacrifice capital assets, or even to borrow money to pay current taxation, industry can never be restored, and each month it continues, the period of industrial convalescence is materially prolonged. Case after case has come before my personal observation where employers, content to make a small margin of profit or no profit at all, but only sufficient to cover standing charges and prime costs, have deliberately decided, when faced with certain loss owing to the grinding burden of taxation, rather than embark any new capital in extending their businesses, or in adding to them some new branch of industry which would have provided employment for many men, to put their money on bank deposit or invest it in gilt-edged securities. The effect of such a course on industry and unemployment is disastrous. If initiative and enterprise, which, in this country, form the life-blood of industry, are to escape extinction, then taxation on industry must speedily be reduced. The directions in which business men are pressing for alleviation from the insupportable oppression of taxation are in the reduction of the rate of income-tax, exemption from super-tax of reserves invested in the business, and abolition of the corporation profits tax. The latter falls entirely upon the ordinary shareholders in addition to income-tax; preference shareholders and debenture holders are not mulcted, but receive in full their prescribed rate of dividend or interest less income-tax. The corporation tax thus operates as a severe deterrent on initiative, especially in regard to the starting of new, and extension of existing, enterprises. There is also a growing volume of opinion in favour of funding certain annual national expenditure, e.g. pensions, as an alternative to raising the necessary expenditure by taxing. Better surely the disadvantages of borrowing with the advantages of a revival of trade, than the satisfaction of theoretically sound finance with the misfortune of being overtaken in the race for foreign markets by continental competitors.
Labour contends that the Government can materially assist industries which cater for our export trade by stabilizing the exchanges. It appears to contemplate reversion to some such system as “pegging” the exchanges, which was customary during the war. The International Financial Conference pronounced on that procedure as follows:
“Attempts to limit fluctuations in exchange by imposing artificial control on exchange operations are futile and mischievous. In so far as they are effective, they falsify the market, tend to remove natural correctives to such fluctuations, and interfere with free dealings in forward exchange which are so necessary to enable traders to eliminate from their calculations a margin to cover risk of exchange, which would otherwise contribute to the rise in prices. Moreover, all Government interference with trade, including exchange, tends to impede that improvement of the economic conditions of a country by which alone a healthy and stable exchange can be secured.”
On the other hand, “the present chaotic conditions of the exchanges makes international trade,”—to quote the Federation of British Industries—“instead of being a matter of reasonable foresight and calculation, a game of chance, in which the rules and stakes are perpetually altering without the will or knowledge of the player.”
It does not seem that much can be done in the direction of steadying the exchanges except to put such pressure as is practicable on foreign countries to cease inflation by printing paper money, to balance their budgets, and to stabilize their currencies and re-anchor them to gold, though not necessarily in the same parity as pre-war, at the same time adding to the national wealth, on which sound currency is based, by increasing national production, decreasing consumption, reducing expenditure, and prompting public and private economy.
Business men contend that stability and not inflation or deflation should have been aimed at by the Government, and that industry has been gravely injured by the instability resulting from the Government’s financial policy of deflating with the object of restoring an effective gold standard. In pursuance of this policy, towards the end of 1919, the bank rate was raised from 5 per cent. to 6 per cent., and Treasury Bill rate from 4½ per cent. to 5½ per cent.; then in April 1920, the bank rate was further raised to 7 per cent.[19] and the Treasury Bill to 6½ per cent. Appended to the Report of the War Wealth Committee, published in May 1920, is a Treasury Memorandum explaining the policy. Inflation and deflation are ambiguous terms; the Government has explained its understanding of them to be the increase or decrease respectively of purchasing power relative to the amount of commodities available for purchase—purchasing power being measured by the amount of bank deposits and currency in circulation. A masterly description of the nature and effect on industry of the Government’s policy was given by the Right Hon. R. McKenna at the Ordinary General Meeting of the London Joint City and Midland Bank, Limited, on January 28, 1921. Mr. McKenna drew the distinction, almost invariably overlooked, between “speculative inflation”—a temporary condition remediable by making money dearer and restricting credit—and “monetary inflation”—a more or less permanent condition which cannot so be remedied. In regard to the latter he said: “Dear money and a rigid restriction of credit, so far from proving an effective means of restoring trade to a wholesome condition, could only aggravate our evils.” Monetary inflation was due to gigantic war-time borrowing by the Government, not for increasing industrial production, but almost entirely for consumption. As loans remained outstanding after the commodities had been consumed, there was an immense increase of purchasing power relative to the amount of commodities available for purchase. Mr. McKenna pointed out that the first effects of an attempt at monetary deflation would be to cause severe trade depression, manifesting itself in a fall in wholesale prices, due to goods being thrown upon the market by traders who were unable to carry their stocks or who had failed in business; a diminution in production; a reduction in prices; a growth in unemployment; reduced purchasing power of wage-earners, and so a further fall in wholesale and retail prices, and later, in consequence of the trade depression, a decline in national revenue without any diminution of the permanent liabilities of the Government. To pay taxes traders would have to borrow from their banks; to meet national expenses Government would have to resort to bank loans, and credit inflation would again ensue. Mr. McKenna conclusively showed that monetary deflation can only be achieved through repayment of the immense Government loans, which cannot be effected by the imposition of additional taxation, as that would bring immediate ruin upon our commerce and manufacture, but only from funds secured by the most rigid economy in national expenditure, and by increasing the commodities available for purchase through the stimulation of production and of trade.
There are some drastic remedies which leave the patient cured of his disease, but dead from general debility; monetary deflation, as practised by the Government, is one of them. It is no satisfaction to the manufacturer whose works are closed down, or the worker who is unemployed, to be told that the currency is being restored to pre-war parity of exchange. They see in the United Kingdom and the United States—exponents of this process—a larger proportion of the population unemployed than in any other industrial country, and these are the two wealthiest countries in the world, with the greatest foreign trade.
No one suggests that Germany should be relieved from payment of reparations or that the Government should be dissuaded from insisting on payment by any fraudulent bankruptcy on the part of Germany. At the same time there is real urgency for clear thinking and decisive action on the part of the Government in regard to the amount and mode of payment. The Government’s original figure of 20,000 millions turned out to be a ridiculous over-estimate, afterwards reduced by the Ultimatum of London to a maximum yearly payment of 400 millions. To make the payment, the surplus of the value of Germany’s exported saleable commodities over the cost of her imported raw materials and food must at least equal that amount. Pressed to provide that surplus she must necessarily undersell our manufacturers in foreign markets, which she will and can do by depreciating the mark in foreign exchange so as to keep its external below its internal value. This results in a premium on German exports, and the undercutting of our commodities in those markets. Mr. McKenna’s reasoned speech to his bank on January 27, 1922, is worthy of close attention. “Before Germany could meet her full liability,” says Mr. McKenna, “before she could develop her foreign trade to such a degree as to have an exportable surplus of 400 millions a year, the foreign trade of this country, her chief competitor, must dwindle into insignificance.” Speaking from the economic point of view, he goes on to point out that Germany can pay annually “to the full extent of the export surplus her trade can give her without forcing the external value of the mark below its internal value ... she can pay in specified commodities, which in our case might include sugar, timber, potash, and other materials which are indispensable to us, but which we either do not produce at all or in insufficient quantities. She can pay also by the surrender of any foreign securities her nationals may possess, so far as they can be traced, and, if the Allies are willing to accept this form of payment, by the direct employment of her labour in reconstructing devastated areas.” There can hardly be much question that vacillation in the reparations policy has been productive of serious injury to our foreign trade.
The restoration of international trade depends also on a sound and sensible recognition by those of the Allies who are creditor nations of the economic effects of enforcing payment of the indebtedness to them by the Governments of debtor nations, coupled with such action as they, in the interests of civilization and of their own countries, find themselves able to take in the direction of modification. Government war-debts have produced for no debtor country any increase of its national wealth; they can be paid by the debtor country only out of its capital or its income. In regard to the first alternative, no debtor country can possibly, under any scheme of finance, pay its government war-debts out of capital, that is to say, out of home or foreign securities in the hands of its Government or its nationals, or out of cash balances standing to the credit abroad of either or both of them. If those debts are to be paid at all, it must be out of income, that is to say, out of the surplus realized by the export of natural products, manufactured goods, services and “invisible exports,” after payment of the expenses involved in producing such surplus, e.g. cost of raw material, labour involved in manufacture, and other costs of production and expenses of rendering the services. Now, the dominant fact to-day is that the debtor nations’ available surpluses are either insufficient, or not more than sufficient, to cover their pre-war debts. How then in each case is the surplus to be so enormously increased as to cover the fresh indebtedness resulting from the Great War? In one way only—by enormously increased production, and by a reduction in the national standard of living. Nothing is more certain than the absolute impossibility of any debtor country being able to pay its war-debts under its present standard of production and of living. Supposing, however, it to be practicable, and that it is determined to compel each debtor country to create the requisite surplus, what would be the peril to international trade of such forced payments? Mr. F. C. Goodenough—the Chairman of Barclay’s Bank—has explained the position with cogent clarity; his illuminating exposition will be found in The Times of April 11, 1922.
First let us consider how much of the needed surplus can be created by increased production. It obviously involves enormously greater output on the part of labour each working hour, the introduction of very greatly improved organization and of time- and labour-saving appliances, which, apart from the new spirit it would demand in industry, would entail a drain upon capital resources for their provision, that, at this present time of scarcity, could not be met, and a general alteration in price levels. Our difficulty to-day is to attain even to our pre-war standard of efficient and effective output. We are living to-day largely upon our capital and not upon income. But, assuming that debtor nations can go some way towards paying their war-time indebtedness by increased production, they plainly cannot go anything like the full length; they must fall back, if pressed, on a reduction of their standard of living which would be primarily effected by a reduction in industrial wages. Then mark the effect upon creditor nations. If wages in a debtor nation are reduced, and costs of production are correspondingly brought down without any equivalent diminution in the efficiency of labour, that debtor nation is in a position, and, if put under pressure to pay its war-debts, is compelled to put its manufactured commodities into foreign markets at prices considerably lower than its creditor nation with a higher standard of living can afford to do. This unfair competition applies not merely to creditor nations, but to all nations trading in the same competitive foreign markets. But, then, follow the matter one stage farther: if the other nations, under the stress of this competition, bring down their costs of production to the same level, the debtor nation loses its preferential position in the foreign markets and ceases to be in a position to pay its war indebtedness.
Even by means of increased production, and a reduced standard of living, a debtor country may be unable to meet its war indebtedness in full. Should it be forced to do so, it must borrow the balance of the money annually due, which can seldom be achieved by external or internal loans, but usually by increase of paper currency which soon brings its own retribution—national bankruptcy. The total amount of Inter-Allied Debts, as between the United States of America, Great Britain, France, Italy, Russia and Belgium, is 4,000 millions sterling, to which, if the Reparation payments of 6,600 millions sterling are added, makes a total of 10,600 millions sterling which does not include the war-debt owing by each country to its own nationals nor by the Dominions to Great Britain. Mr. Goodenough’s suggestions were eminently practical, that the amount to be paid by each debtor nation should be fixed as soon as possible, so as to clear away the present disturbing atmosphere of uncertainty, that bonds for as long a period as practicable should be created by each debtor country representing the total amount of its national war-debt, and that these should be gradually offered to the public for investment supported by the national guarantees of the debtor country. Bonds handed by one debtor nation to a creditor nation in respect of a debt could be endorsed by the latter nation to another country in respect of a debt owing by the endorsor to the endorsee, and so find a ready market among investors all over the world. Each country creating a bond would be compelled to provide a fund out of its own taxation for the redemption of its own bonds. The scheme of Mr. Goodenough urgently needs consideration, as the whole question of Inter-Ally indebtedness calls for a decision.
Acting with prudence, and exercising co-operation with business men, the Government can, as experience has shown, beneficially use its credit to assist sound trading between this and foreign countries and to enable works to be carried out which provide employment; and so long as the Government employs the normal machinery of finance and commerce, much can be done in this way to further the restoration of trade and industry. The Export Credits Scheme administered by the Department of Overseas Trade is conferring substantial benefits on industry in stimulating orders from abroad, and developing markets to replace those permanently lost or temporarily closed to us in countries which are, at the time being, potential producers of commodities exchangeable for the commodities we produce. The guarantee of loans so ably administered by the Advisory Committee under the Trade Facilities Act, 1921, is materially encouraging sound commercial business.
But after all is said and done, we are living in a fool’s paradise if we think that, even when financial equilibrium and stability have been attained, we shall be able to compete in foreign markets at our present real costs of output. Wages constitute the greatest proportion of costs of production in every industry, and wages will have to be reduced—the standard of living of 1920-1 cannot be maintained. A lower standard of profits must likewise be accepted by employers. There must be equality of sacrifice all round. Labour argues that reduction of wages in industry means diminished national purchasing power, and consequently increased trade depression. That is only true when there is an effective demand at existing prices for the output of industry. The object now is to reduce costs so as to get down to a price at which demand may be effective. The foolish expectations nurtured by the working-classes of getting out of the war a higher standard of living than they enjoyed before the war was largely due to the utterly impossible—and sometimes grotesque—pictures painted by members of the Government of “the good times coming.” These reductions in cost by reductions of wages and profits can be immediate; any reductions in cost of production through improvement of management, organization and plant or increasing the efficiency of labour’s output, while necessary for the permanent well-being of industry, are too slow acting for the present emergency.