FROM the beginning, European recovery has presented a mixed picture. Last year the main ground for encouragement was the marked expansion of production, and the main worry -- so far as internal conditions were concerned -- was inflation. This year production has expanded further, and the peak of the postwar inflation has been passed. In France the change came with dramatic suddenness early in the year, and since then the evidence of further progress has been continuous. In Western Germany there had been fear that the marked change produced by the currency reform of June 1948 would be only temporary, and that inflation would break out again. But this danger has not materialized, and one of the outstanding developments of 1949 has been the recovery of German production, which before the currency reform had been less than 50 percent of prewar and is now rapidly approaching the prewar level.
There is thus continuing evidence of substantial progress. Yet probably at no time since the recovery program began has there been more disposition to question the outcome, or to insist that drastic changes in policies are essential for success. In an article in this review last spring, I referred to the two schools of thought which existed, one emphasizing the internal aspects of the problem, the other the external.[i] This debate still goes on.
According to the one view, now that production has been expanded and inflation corrected, we are much closer to achieving the internal conditions which will inevitably result in the disappearance of the external deficit. This view holds that if we have as yet made no great headway with regard to the deficit, it is because the processes of internal change have not gone far enough, and in particular because in England, despite Sir Stafford Cripps' severe budgetary changes of last year, disinflation is being frustrated by nationalization, increased social welfare expenditures, excessive taxation, the continuance of direct controls and the unwillingness or inability of the Labor Government to apply the necessary
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