Britain’s ‘Third Crisis’

October 22, 1951

LONDON—On Oct, 3 the British public received the jolting news that the gold and dollar reserves of the sterling area had fallen in July, August, and September by $598,000,000. This loss of gold was greater than that in the entire six months before the 1949 devaluation. As T.W. Kent wrote in Lloyds Bank Review, “the change is almost the most startling of all the dramatic turns in Britain’s postwar economic experience.”

One of the most illuminating analyses of the causes of these recurring British crises is that made recently in The Manchester Guardian by the well-known statistician Colin Clark (Newsweek, Oct. 1), “Not merely the British Government,” he declares, “but virtually the whole British people . . . has allowed itself to cherish three economic illusions”—the illusions of Cheap Food, of Limitless Taxable Capacity, and of Rapidly Increasing Productivity.

The illusion of cheap food, according to Clark, consists in the belief that the recent adverse movement of the “terms of trade” is temporary and that Britain will soon be able again to buy its imports cheaper and to sell its exports dearer. Clark shows convincingly that this belief rests on nothing better than wishful thinking.

His next point concerns taxable capacity. In each postwar year British national and local taxation has been levied at a rate of more than 40 percent of the national income. “In no other country has a rate like this ever been approached.” As early as 1945 Clark contended that the safe limit of taxation was 25 percent of the national income. “This result was based not upon theoretical considerations, but upon a study of the actual experience of attempts which had been made at various times and places, to exceed this limit. In every case the effects were so discouraging to real production, and encouraging to the circulation of money, that within two or three years an inflation supervened sufficient to raise prices (and thus the money value of national income) to a point where the 25 percent ratio again prevailed.” Clark concludes that unless drastic and immediate steps are taken to slash British Government expenditures the present “temporary barriers” to inflation “will shortly all be swept away.”

This conclusion is of course not “scientific.” But it is based on impressive experience. A number of economists in England, in fact, have come independently to the conclusion that taxation is already so high that more of it will not combat inflation because it will so seriously reduce the incentives to hard work, risk taking, and enterprise. This conclusion has a direct bearing on our inflation problem at home. Only drastic slashes in governmental spending can help.

The third economic illusion in Britain, according to Clark, is the belief that British productivity has been increasing at an unprecedented rate. He questions the official claims that real product (not money product) has been increasing at the rate of 5 percent per annum. His own conclusion is that real product per man-hour is rising very slowly and is only about 5 percent higher than that of 1938. About half of this increase, moreover, has been swallowed up in shorter working hours. This conclusion is supported by the London and Cambridge Economic Service, which argues that the rate of increase in real product may now be very small. It is supported also by what is known in special fields. The Girdwood committee estimated in 1950, for example, that to build a given type of house in England the man-hours needed in 1949 were 26 percent above the level of 1938–39—a 20 percent drop in productivity.

Colin Clark, in short, has correctly put his finger on three of the economic illusions that have led to persistent financial crises in Great Britain. But there are many others. He has not put his finger on the central illusion, from which most of the rest are derived. This is that England can be saved by a series of governmental controls. The truth is that these very controls—and above all exchange control—create the evils they are ostensibly designed to combat.