THE PROBLEM of raw material supplies for European industry, to which the recent resignations from the British Government so spectacularly drew attention, is beyond doubt of profound significance for Anglo-American collaboration and for the security of the Western World. It is part of an international problem too complex to admit of comprehensive survey in any single article, even if the relevant statistical data were available; and this contribution does not presume to make the attempt. The writer's aim is the more modest one of trying, first, to set the causes and implications of the recent furor in perspective against the wider background, and then to indicate some longer-range possibilities and needs, in the hope of thereby narrowing the area of misunderstanding on (and between) both sides of the Atlantic. One difficulty at the outset, however, is that in the domestic dispute in Britain the fundamental issue of raw material supplies was heavily overlaid by purely political considerations and tactics; these must be disentangled before a clear view of the real issue can be obtained.


It is little more than a month, as this is written, since Britain's first rearmament budget, sponsored by the new Chancellor of the Exchequer, Mr. Hugh Gaitskell, provoked in quite unexpected circumstances two major resignations from the Cabinet and one resignation of a minor Minister. The British public had been prepared to witness the departure of Mr. Aneurin Bevan, chief architect of Britain's National Health Service, on the ground that the Chancellor had set a firm limit to the cost of the service and was imposing a "half-price" charge for dentures and spectacles supplied under it. It was quite unprepared to see the attack on the Government extended from teeth to tanks, and broadened by the adherence of two more rebel Ministers, with the support of the extreme fringe of Labor members in Parliament. It was told, in effect, that America's voracious appetite for scarce materials confronted British industry with "unparalleled disaster" and "mass unemployment;" that raw material shortages made the year's defense objectives quite unattainable, so that the budget was based on false premises; that the whole three-year program for spending 4.7 billion pounds on defense was indeed "already dead;" that the projected pace and scale of the Western defense effort were so great that the "foundations of political liberty and Parliamentary democracy will not be able to sustain the shock;" that if the defense programs lowered the standard of life and social services of the Western World, then "Soviet Communism establishes a whole series of Trojan horses in every nation of the Western economy." These dire consequences, a bewildered public was told, were to be envisaged from a policy that allowed Britain to be "dragged too far behind the wheels of American diplomacy" and put her at the mercy of the "chaos of unrestrained capitalism in America." It seemed at first that a Government already gravely weakened by last year's departure of Sir Stafford Cripps through ill health, and by the death of Ernest Bevin only a few days before, could not survive so violent an onslaught on the fundamentals of its policy.

Yet within a few weeks the popular excitement thus aroused had so far subsided that its reverberations seemed to be more audible from Washington than from London. This is less surprising than may at first sight appear. The British public, taken as a whole, was not alert to the dangers of the raw materials situation and has not fully awakened to them even now; nor is more than a minor fraction of the public either prone to take an anti-American view or sensitive to issues that may cause difficulties between the two countries. The defections from the Cabinet did not provoke any general public outcry on these issues, nor was there any likelihood that they would do so unless they brought the Government down. But the Government has survived the main shock, has declared the threat of raw material famine to be much less menacing, on a medium view, than the dissidents alleged, and has wholly rejected the conclusions they drew from it. These reassurances, and the reaffirmation of the Government's policy, have left the man in the street more than ever convinced that this was, after all, a "dentures and spectacles" crisis--an oversimplification that is not the whole truth, but is certainly more than halfway toward it.

The American public, with its ear not attuned to catch these political overtones, has not unnaturally taken a different view. Stung by the violence and extravagance of the language used by Mr. Bevan and his friends (language that it is not accustomed to hear from British Ministers), it was presumably the more ready to resent what it evidently regards as wholly unfounded accusations --especially as these unhappily coincided with other resentments, whether justifiable or not, against Britain. In the circumstances, it was predisposed to assume, quite wrongly, that comparable misunderstandings had been simmering in Britain, and had suddenly boiled over, in this outburst, into a charge that the United States was "hogging" materials and deliberately putting its own civilian needs and convenience above the defense programs and essential needs of its allies. And, beyond all this, there lurked the question whether even the foremost among these allies was taking its defense effort as seriously as its official pronouncements had consistently affirmed.

The subsequent debates in Britain have disposed of this last suspicion more forthrightly than of the others that have been troubling the American public. The political crisis which has thus searchingly tested British public opinion has revealed no sign of any considerable doubts about the rearmament program or of unwillingness to shoulder the large burden that it will impose (though it must be admitted that the general public has yet to realize how onerous the load may be). Even Mr. Bevan, who had been a leading spokesman for the program in the debates in Parliament only a few weeks before, had not apparently been in critical mood for long. It would be unfair, however, to accuse him of insincerity in his sudden extension of the attack from teeth to tanks; untrained in economic matters, he seems to have realized only gradually the possible implications of the defense effort, not only for his cherished Health Service but for the whole social achievements of the Labor Government over these past five years. This realization must have been sharpened by the official estimates of the large rise in retail prices, principally deriving from the steeply increased cost of imported raw materials, that will be thrust this year (uncushioned by any increase in the cost-of-living subsidies) onto the backs of British consumers--causing incidentally a further erosion of the real worth of all social payments.

To Mr. Bevan and his friends (and especially to Mr. Harold Wilson, the resigning President of the Board of Trade, who is much more alive to economic trends than Mr. Bevan) this line of argument would have led, in turn, to a fear that the burden would probably be even greater than the official estimates implied, because raw material supplies would not suffice to permit the volume of production upon which the Government's planning and budget policy were based. The one hopeful approach to the tasks of rearmament--by way of increasing productivity, which has been urged even more forcibly by the American Government than the British--was thus closed. The British Government, not without some cause, is very proud of its productivity record over the past few years; and to this Mr. Bevan seems to have pinned his faith, in the hope that Britain might thereby secure guns as well as butter--only to discover, as he thought, that this was the route chosen by the United States and by that very fact denied to Western Europe. Thus it seemed that the price to be paid by Britain for rearmament--in terms both of real sacrifice and of the social disruption caused by steeply rising prices--was being needlessly raised by a chaos in world commodity markets for which the behavior of the United States was largely responsible. Whereas in the early post-Korea days the "Bevan school" (like everybody else) had looked upon America's potential for running a guns-and-butter boom as the main rock on which Western security was founded, they now looked upon it as a threat that Europe's metal supplies and Europe's butter ration would disappear, in a surge of world-wide inflation, down the maw of America's roaringly prosperous economy.


There was just enough truth and logic in this argument to threaten not only new friction between Britain and the United States but also real damage to Britain's defense effort. What was novel about the attitude of the departing Ministers was not the fears they expressed but the nightmare proportions assigned to those fears, and the dangerous conclusion that therefore the arms programs should be throttled down. The Government has successfully circumnavigated these political whirlpools by pointing out that it had all along emphasized that the scale of Britain's defense effort and the nature of the plans needed to prosecute it were in the last analysis dependent upon a sufficient supply of critical materials and tools; that the basic assumptions about this year's production, although deliberately scaled down with the current stringency in mind, had been put forward with the clear warning that even this level might be unattainable; but that there was no reason yet to take so pessimistic a view; and that, in any case, a short fall in production would be a ground not for deliberately slackening the arms drive but for intensifying the cuts imposed upon the civil economy.

Mr. Herbert Morrison, the new Foreign Secretary, while admitting that there was "most serious anxiety" about raw material supplies, gave the following assurance:

If severe shortage did thus curtail our output, although we would be unable to prevent its having some effect on the fulfillment of the rearmament program, it would certainly not be our policy to let that program take the first cuts or bear the main effects. So far as was physically possible we would continue to follow our existing line of policy and to protect both our defense program and our export drive as far as we could by taking the burden of shortage, while it continued, on our current standard of life. As far as budgetary policy is concerned, this would mean, of course, not an easier Budget, but a harder one.[i]

No other policy, he affirmed, would be compatible "with that view of the needs of national security that the Government has repeatedly proclaimed and is in process of putting into effect." Mr. Gaitskell later echoed these assurances and then reiterated that the whole program of 4.7 billion pounds was still regarded as one that could be attained without "fatally damaging the fabric of our economic life," without driving Britain heavily into debt again, and without "such a fall in our standard of living as would be intolerable."


Thus did the Government ride out the political storm. It would be quite wrong, however, to deduce from the subsidence of popular excitement in Britain that the real dangers to which it drew attention have been averted--even for the short run. In British eyes, this revolt, unfortunate though its surrounding circumstances were, is indeed widely regarded as having served a valuable purpose by focusing attention more sharply, on both sides of the Atlantic, upon the urgencies of the raw material problem--and in leading Washington to pour a little oil on the troubled waters. The utterances of American spokesmen are being closely scrutinized, and the recent assurances from Mr. Acheson and Mr. Charles Wilson have been cautiously welcomed as an earnest of future aid--especially Mr. Wilson's admissions that his "views had been changed" by his brief visit to London, that "there is no fat in Britain's civilian economy," and that certain commodities will have to be reallocated if Britain's defense effort is to be kept in full swing. These promising comments have encouraged London to build considerable hopes upon the developments that may flow from the visit to Washington of Mr. Richard Stokes, the vigorous Minister to whom will be entrusted the new Government department that is about to be created to centralize all procurement and supply (but not allocation) of raw materials.

In this new mood of qualified optimism, well-informed commentators have lately shown much less disposition to blame the United States for Britain's raw material worries than they had done during the phase of astronomical advances in world prices--a phase in which America's accusation that British colonial primary producers were "gouging" American consumers was arousing, not unjustifiably, widespread indignation in informed British circles. This complaint, coming from quarters that for years had never ceased to urge upon Britain the virtues of free markets, and launched at a time when the cardinal sin of the British Government was that it was buying not too much but too little, always sounded hollow in British ears. Now that American policy has apparently become more restrained and American private buyers are temporarily over-bought, with the result that world primary prices have dipped significantly below their recent peaks, British commentators have been faithfully expounding the American point of view. The London Times, among others, has lately pointed out that the money rate of official American stockpiling does not appear to have been any faster in the second half of last year than in the previous 18 months; that many specific cuts of American consumption of scarce supplies have been projected by administrative decrees or attempted indirectly by selective credit controls; that people in Britain have perhaps been prone to exaggerate the number of "dollar" materials; that the shortage of sulphur, which up to date has had the biggest impact upon British industry, has had acute effects in the United States as well; and that, in general, the disequilibrium between raw material supplies and industrial demand was apparent before Korea.

These arguments, which help to place the whole problem in perspective, do not, however, deny the primacy of American influences upon world markets, a primacy that carries with it a responsibility to behave with particular care and circumspection in phases of pressure and sudden change, such as that inaugurated by the attack on Korea; and it is surely undeniable that the business habits of the American economy are not conducive to such cautious behavior. Most British observers would unhesitatingly say that American demands were overwhelmingly more important than all others in provoking the post-Korea rises in prices, and most of the real shortages of which they were the barometer. Though it be true that official stockpiling purchases were not aggressive, the fact that American business, despite the pace at which industrial output has been rising, is now suffering a temporary inventory indigestion is proof that the total intake of supplies was unduly heavy; and further proof of the primacy of American influences is given by the sharp declines in prices that have followed the temporary relaxation of the pressure from America. Available statistics show that in six out of seven major primary materials (the exception was natural rubber) America's shares of world output rose sharply in 1950 by comparison with 1949. In contrast, Britain's shares were either unchanged or reduced, except for a moderate increase in wool; with that same exception, they were in every case appreciably below the ratio to America's shares that would be indicated by relative population. This last comparison, admittedly, ignores differences in machine-power and productivity per head; but even by 1949 these differences had already shifted the balance strongly in America's favor by comparison with the prewar relationship. With such considerations as these in mind, most British observers remain convinced that in the circumstances of the second half of last year (before any effective measures either had been taken or could begin to operate to curtail actual consumption) anything more than cautious and very selective stockpiling was wrong; and that in many cases it would have been advantageous to the whole Allied effort --including the American--if previously-acquired stocks had been judiciously released. And, for the longer term, there remains the conviction that although these crucial problems cannot be solved except by harmonious international coöperation, it is the behavior of the American economy that will in the last analysis determine whether the effort succeeds or fails.[ii]

It is to be hoped--as most observers in Britain certainly do hope--that the events of recent weeks, by promoting better understanding on both sides, have cleared the way for more effective action not only to meet the immediate needs but also to grapple with the critical longer-run problems that have scarcely yet been approached. An attempt is made at the end of this article to indicate broadly some salient characteristics of the current British attitude toward these problems. Before thus looking ahead, it is desirable to examine with somewhat greater precision the impact upon Britain of the raw material trends of the past ten months, the difficulties that are feared in the short run, and the measures that have been taken or projected to mitigate them.


It is undeniable that the stringency that developed in the markets for raw materials in the second half of 1950 caught the British Government on the wrong foot. Its policy had been founded on the assumption, not unreasonable before Korea, that prices were more likely to fall than rise, and that it was therefore safe to release stocks that had been built up before the devaluation in 1949 by the Government departments in charge of raw material purchases (scattered at that time between the Ministries of Supply and Food and the Board of Trade). There is no evidence to show that these 1949 purchases had been made with the possibility of devaluation in mind; but, after the devaluation, the policy of running down stocks, partly by sales at pre-devaluation sterling prices, was quite deliberately adopted as one means of cushioning the impact of sterling's depreciation upon the domestic price level, thus reinforcing the effort to stabilize wages.

Whether the Government, in framing its buying policy, should have paid more attention to international dangers even before Korea is merely a matter for debate; where it is clearly open to criticism is in the sluggishness of its response after Korea. This criticism, however, applies with much greater force to food than to industrial materials. For several months in the late summer and autumn, the Ministry of Food's purchasing missions stood Canute-like on the beaches, hopefully content to announce that they could not countenance a rise in prices. Since Britain is the market for suppliers of most of her essential foodstuffs, this policy did not do as much harm as might perhaps be expected. In Buenos Aires and elsewhere the Ministry's missions had eventually to retreat before the tidal waves in world markets, but the supplies that Britain needed were at any rate still there to be bought. With industrial raw materials, however, the position was very different. Although the pre-devaluation principle that gold reserves had to be safeguarded by import restrictions had a lingering death, the departments in charge of these materials were, it now seems, permitted to move more swiftly than the Ministry of Food (though with only tiny and belated authorizations for "strategic" stockpiling). In July, the order to restock industrial raw materials went out; in August the British purchasing missions were presenting their shopping lists abroad; but by November most of them were reporting quite alarming failure. The decline in stocks went on.

Over nearly every market, it seemed, American private and public buying towered like a colossus--necessarily so in materials such as sulphur and molybdenum, for which the United States is virtually Britain's only source of supply, but also, though to a less extent, in cotton, copper, zinc and certain special types of sheet steel, where United States exports account for an important, though not predominant, proportion of British supplies. Britain's frustrated purchasing agents also learnt afresh that the preemptive power of American industry when running in top gear is the ruling factor, too, in the markets for many materials that are not usually exported from its own territory, especially metals. A 10 percent increase in American consumption of lead, zinc and copper above early 1950 levels--and that is the order of annual rate of increase that the guns-and-butter boom seems to imply--could cut production and employment in British industries using these metals by 20, 30 and 40 percent respectively, unless the burden could be passed on to other users. It is not surprising, therefore, that since July last about the only commodities that have been forthcoming in reasonably adequate quantities for the British defense program seem to have been the sterling area staples of wool, rubber and tin--the very markets in which the violence of the rise in prices has had a notable effect in restraining aggregate demand.

In those materials where this restraint has been lacking and where, therefore, demand has run right away from supply, United States consumers seem, however, to have been at an advantage. There is nothing surprising about this. Whenever any commodity goes under the counter, the largest customer is liable to come off best. And the United States is now far and away the biggest customer for nearly every raw-material-producing industry in the world. Striking evidence of this preponderance had, indeed, been given in the ten months after November 1948, when the minor "inventory-adjustment" recession in the United States (and the 5 to 6 percent decline in the volume of American imports associated with it) abruptly swung raw material producers from conditions of moderate boom to recession--and thereby precipitated the wave of currency devaluations. It was inevitable, therefore, that America's restocking and increased production after July 1950 (which drove up the average monthly volume of United States imports by 10 to 12 percent) should swing the raw material markets from similar conditions of moderate boom to quite desperate stringency.

The first official expectations of the broad effect of these stringencies upon British industry can be briefly indicated. Between 1947 and 1950, industrial output in Britain was increasing at an annual rate of between 7 and 9 percent, manufacturing output at an annual rate of between 8 and 10 percent, and output of the metal-using industries at a slightly higher rate than this. When the "Economic Survey for 1951" was prepared in February and March, the Government's experts estimated that this cheerful cavalcade would, at best, come to a dead stop in 1951 at the level attained by the end of 1950. Although this level was tentatively adopted as the basis for this year's economic and budgetary planning to meet the needs of defense, the Survey bluntly stated that it would not be attainable "if the levels of imports of sulphur, cotton, zinc, copper and other basic materials now in prospect cannot be improved upon." It was this warning, in particular, that justified the Government's retort to the resigning Ministers that there was nothing new--except exaggeration--in their fears that the target would not be reached. The official attitude now is that it is still too soon to say definitely that there will be any serious failure to reach the target--although in this the Government appears to be counting significantly upon a sympathetic response to its appeals to Washington. Meanwhile, preliminary estimates of industrial production for the first quarter of the year suggest that the global target (though not, of course, that of all constituent industries) was in fact just achieved in that period.

If the end-1950 rate of output can be sustained, on the average, through 1951, the year's aggregate output would be 4 percent above that for 1950. Even if the performance is no worse than this, it will involve not only those ad hoc cuts in civilian use that result from specific shortages, but also a general cut in consumption. This is a far-reaching change in the pattern of economic policy followed in recent years, in which the increment of output has sufficed to allow not only the imperative strengthening of the external balance of payments and a high level of domestic capital outlay, but also a modest increase in consumption year by year. For Britain, the stringency in raw materials means, at best, that additional output cannot meet more than a part of the new defense outlays, quite apart from the further defense burden indirectly thrust upon Britain by the sharp deterioration in her terms of trade (that is, the increase in her import prices relative to export prices). Merely to maintain in 1951 the same volume of imports as in 1950 will cost Britain £700,000,000 more, an increase of 30 percent. To meet this bill and to provide the bare minimum of urgently needed additional supplies will require diverting further resources to exports--even though last year's export surplus is converted into a bare equilibrium. Since the Government is determined to avoid more than a minor cut in domestic civil investment--social investment as well as the industrial investment upon which future productivity depends--the deficiency in total resources has to fall upon consumption. Although consumers are expected this year to spend £630,000,000 more, they will get, in real terms, at least £ 50,000,000 less--and will fare much worse than that if the optimistic output target is not attained.

To achieve the necessary constraint by the more liberal methods followed since 1948--when the Government was first persuaded to put its faith in "disinflationary" budgeting rather than in physical controls alone--will be very difficult so long as social expenditures combine with defense to keep taxation at its present crushing level. But the Government was last year taking pride in the relaxations of controls that this wiser budgetary policy had permitted--which partly explains its reluctance to retrace too hastily its earlier steps toward economic freedom (and, incidentally, to follow the course that seems to have been preferred in the United States).


For these reasons, the British Government continues to prefer the method of "over-all" restraint of demand to new systems of rationing and licensing, except at the specific points of acute stringency. Even in these instances, it has so far generally tried to avoid recourse to detailed allocation, with all its administrative complexity and strains upon manpower, relying instead upon ad hoc measures to ensure a sufficient flow to defense industry. Specific cuts ranging from 10 to 30 percent of 1950 rates of consumption have had to be imposed for sulphur, zinc, copper, lead and aluminum; informal cuts have also been applied in allocations of steel, nickel, chrome, molybdenum and cotton--in the sense that purchasers cannot now get the quantities and qualities they want except perhaps when they can show the allocating authorities (in some cases private sellers) that their needs rank high in the informal scale of national priorities. Except to that extent, most of the cuts apply to industry as a whole.

The degree of disturbance already caused to production by these cuts and other shortages has been substantial. The recent allocation of 95,000 tons of American sulphur to Britain in the second quarter of the year was well above the worst that had been feared; it will enable supplies for explosives, steelmaking, oil refining, tinplate and essential health services to be kept at or above last year's levels. But the chemical industry is still cut well below its capacity use, the rayon industry is being forced to work 20 percent below capacity, and production of superphosphates will still be 33 percent below capacity. Other users of sulphuric acid will also be cut 30 percent below end-1950 capacity. Use of zinc and copper in the manufacture of certain unessential articles has been banned altogether, except for certain exporters. To other users, the current average allocation of zinc is 35 percent below the average for the first three quarters of 1950, the relevant cuts varying from 50 percent for galvanizers to 20 percent for diecasters. The over-all allocation of copper to producers of "essential" articles is 15 percent below their consumption in the first half of 1950 and about 25 percent below current capacity. For aluminum, nickel and lead consumers, allocations seem to be between 10 and 20 percent below what they need to maintain the end-1950 rate of production, although there are some hopes that supplies of these three minerals will increase later in the year. The cotton industry, which has had its supplies of American cotton cut to 50 percent of its 1949-50 consumption, is trying to make do with other growths as best it can; this industry, incidentally, is faced with large rearmament demands for uniforms, web equipment, ground sheets, tents and so on.

Supplies for the steel industry are also now causing serious concern. The industry last year, as in every preceding postwar year, raised its output to a new high level. Production of steel ingots and castings rose from 15,550,000 tons to 16,290,000 tons. The "Economic Survey" forecast that, owing chiefly to German competition for ore and scrap, British production would not amount to more than between 16,000,000 and 16,250,000 tons in 1951. The nationalized Iron and Steel Board has apparently recently bruited it around that it does not expect even this to be achieved. Up to last month output figures seemed to be belying this pessimism, but three small steelworks in Wales have recently closed down because of the scrap shortage and the impending start of production at the new steel sheet and tinplate mills at Margam and Trostre. The threatened limitations on crude steel production make it probable that the output from these new mills will come on to the market only at the expense of other forms of finished steel production. Until Margam's plant starts to roll, Britain is partly dependent on United States imports for sheet steel. Reductions in these imports have already caused some British motor producers to go on short time, and the tiny ration of cars for the home market has been cut from 110,000 in 1950 to 80,000 in 1951. (Allowing for the difference in population, this would be equivalent to a supply of less than 240,000 in the United States.) Home supplies of commercial vehicles have been cut from 105,000 to 80,000. Restrictions have also been necessary in the London County Council's housing program--a cut that is political dynamite. The fact that supplies have been cut down to these "unessential" users, although there is no official steel allocation system as yet, is a sign of the way that informal controls are tending to run on ahead of formal ones in Britain's planning for its defense program.

It is difficult to say how far this gloomy picture justifies the judgment that Britain cannot possibly maintain its end-1950 rate of industrial output throughout 1951. The "Economic Survey" contained an almost impassioned plea to industry to exercise its "skill and imaginative effort" to prevent "the shortage of a particular imported raw material from having anything like a proportionate effect upon output" and there is no doubt that the process of substitution of plentiful materials for scarce ones--together with the drive for collection of waste materials and scrap--will cushion some of the impact. Among many substitution efforts, one that has attracted a great deal of attention is the new £ 3,500,000 anhydrite plant sponsored by the Imperial Chemical Industry. It is expected that this and kindred developments will reduce Britain's dependence on sulphur by 50 percent in three years. But those three years are going to be very vital ones for the free world's defense.


If the many short-run expedients now in contemplation, including perhaps some releases of American supplies, prevent any such further deterioration as would seriously frustrate Britain's present production plans for 1951, they will still leave the fundamental longer-range problem virtually untouched. It cannot be too strongly emphasized, first, that the menacing degree of dislocation in world supplies has arisen before either Europe's or America's arms production has got into its stride, and, secondly, that even before Korea there was clear evidence of world shortage of raw materials in relation to industrial demand based upon high levels of employment.

The force of the first point was well illustrated in Britain's recent debate in Parliament: the Minister of Supply, though cautiously reassuring about the immediate prospect, disclosed that raw material supplies on the present scale would not suffice to meet the needs of Britain's defense program in 1952 and 1953 even if the civilian sector of the economy were completely starved. But such starvation cannot be countenanced in any conditions short of total war; it is agreed on all sides that the defense efforts of cold war will defeat their objects if they gravely endanger the stability of national economies. In British terms, this does not mean that there must be no cuts in consumption (although the scope for cutting is incomparably less than in the United States); but it does mean that the ground gained with such difficulty (and with such American aid) in the five-year struggle to reëstablish Britain's economic independence and the efficiency of her domestic production machine must not be sacrificed anew. The maintenance of the level of industrial investment and of whatever level of exports is needed to keep Britain from running into debt again abroad are priorities ranking only a shade below the defense program--and particular aspects of them may even rank ahead of particular defense demands. As one looks toward the defense program of 1952 and 1953, it seems clear that it is only by raising her productivity that Britain can hope to achieve these several exacting tasks simultaneously.

The second crucial fact--that a basic disequilibrium existed even before Korea--was forcibly brought out in the survey by Mr. Richard Bissell, Jr. in the April issue of Foreign Affairs. It has also been the subject of several recent studies in Britain. Among these, a survey by Dr. E. H. Stern[iii] estimated that whereas world demand for industrial raw materials, as measured by the growth in the output of manufacturing industry, rose by at least 60 percent between 1937-38 and 1950, world output of virgin materials rose by only 34 percent; he further showed that this deviation, which is becoming more pronounced year by year, represents an aberration from a closely parallel trend extending back to the 1870's.

The postwar drive for "productivity" has proceeded on the blithe assumption that all that is necessary to raise industrial output is to lay down more plant and improve technique--a procedure that, until recently, was saved from threatening disaster only by a process of exhaustion of secondary materials and scrap and drafts upon stocks. Now the limits are all too clearly discernible, yet demand still mounts alarmingly. Among the symptoms showing that the "productivity" theory still holds the field, especially in the United States, British observers have noted with concern the extraordinary rate at which "certificates of necessity" have been granted to American industrialists to entitle them to quick write-off of their projected plants. If demand extends at the rate such signs portend, its consequence will be, not the desired increase in total output of the Western Allies, but more or less indiscriminate paralysis of many of their industries. It has to be realized that, unless and until raw material supplies can be expanded, the hopeful theory of the guns-and-butter boom has only very limited possibilities. The butter ration has to be cut in the short run however efficient the world's industries; yet the whole wider objective of the Western defense effort may be threatened in the end if Europe's comparatively meager ration is cut too far.

In the relatively short period that embraces the phase of main strain of new defense outlays, the solution has perforce to be sought rather in cutting out marginal demands than in expanding supply. (If the pressure is as great as seems likely, perhaps even military stockpiling is marginal.) This leads naturally, and rightly, to schemes for international allocation, and discussions of "fair shares" for "essential" uses. But it does not rightly lead also to the assumption that, because supply may be inelastic in the short run, the price function is of little account; so that allocation may and should become in effect a concert of users to prevent their "exploitation" by producers. On the contrary, it is precisely in these circumstances that rising prices may exert their most salutary function--by enforcing economy everywhere and encouraging substitution, as well as by calling forth additional supplies where physical expansion still is rapidly possible. To the "gouging" argument, many objective British observers would reply that the high prices--of wool, for example--definitely have brought some relief already by restraining marginal demand; and that British as well as American interests would have been better served had there been similar price freedom elsewhere--notably, for example, in sulphur, the relative cheapness of which has acted as a deterrent to the rather costly conversions to pyrites and anhydrite.

This is not an argument that international allocation schemes should condone prices that are demonstrably extravagant (if only for the reason that such prices may often do more damage to supply in the long run than they stimulate it in the short). But it does mean that allocation should not be used to bludgeon producers into accepting prices far below the present equilibrium level. The only means, indeed, of striking a balance between the needs of the present and of the medium-term future seems to be by combining international allocation with relatively long purchase contracts at prices that offer adequate inducements to expansion.

To the extent that such arrangements, necessary though they are, reduce current prices, they ought to be regarded as actually aggravating the immediate problem of curtailing demand, making other methods of restraint the more necessary. However smooth and equitable the international allocation, the issue of intranational allocation and restraint will remain, and is really the essence of the short-run problem. If the working of the price mechanism, whether or not conditioned by long-term contracts, is regarded in present circumstances as too socially disruptive (as indeed it may be if proper correctives are not applied), the remedy lies not in arbitrary measures to limit prices by damming up "unessential" demand, but in cutting down demand at the source.

The clear lesson of Britain's experience in 1945-1947, when Government policy appeared to rest on the assumption that physical controls could ride roughshod over orthodox principles of the market place and of fiscal and monetary policy, was that physical measures cannot work satisfactorily in peacetime, with its infinite complexity of competing priorities, unless confined to a few crucial items and operated with the minimum of detailed intervention. Under any other system, if any large head of water is allowed to pile up against the dam, much of it will soon flow around or through it, no matter how competent and numerous the planning engineers who labor to maintain the rampart. The crucial need is honestly to do battle with inflation within each economy, and the test of success in this fight is not the number and range of price-ceilings, wage-stops and controlled profit-margins, but the extent to which the man in the street--from the Twin Cities to New Orleans, from Aberdeen to Portsmouth--is genuinely "hard up." Britain since 1948 has learnt at least the first principles of this lesson, though in her social expenditures and monetary policy, and in other ways, she is still far from acting upon their full implications. But at least the Government has not, in this new emergency, forgotten the little it had learnt; it has not rushed headlong to recreate the wartime colossus of physical controls, because these could not work in conditions short of totalitarian war--or government.

[i] In an address before the American Chamber of Commerce, London, April 25.

[ii] For a balanced example of these views see the survey of "The New Commodity Inflation," by Mr. Oscar Hobson, City Editor of the News-Chronicle, in the April issue of Lloyds Bank Review. After remarking that neither Britain nor any other European country has the right to throw the first stone of criticism at the United States, he nevertheless concludes that "the only country which had it within its power to restrain the frightening upsurge of commodity prices was the United States, and she has so far signally failed to exercise that power." As for Britain, he comments that if she "has so far kept aloof from the stockpiling melée, that unfortunately has not been from any high-minded belief in the virtues of coördinated demand but from sheer mental sluggishness."

[iii] "The Long-Term Outlook for Raw Materials," The Banker, London, May 1951.

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