THE RIGHT RELATIONSHIP OF GOVERNMENT TO INDUSTRY
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.
1. THE POLICY FOR THE PRESENT DEPRESSION
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.
Establishment of International Peace
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.’”
Reduction of National Expenditure
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 6_s._ 8_d._ 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.
Lowering of Taxation
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.
Stabilizing the Exchanges
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.
Revision of Financial Policy
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.
Reconsideration of Reparations Policy
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.
Inter-Allies Debts
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.
Export Credits
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.
Bringing down Costs of Production
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.