AFTER the sudden collapse of the hectic postwar boom in 1920, the British economy found itself faced with problems of a long-run, secular kind. The fissiparous effects of war on the world economy; the onrush of self-sufficiency programs; the over-extension of productive and shipping capacity in the world; technical advances in fuel and power production -- all these influences created "depressed areas" in Great Britain where formerly an expanding world trade had developed prosperous business activity. Britain's postwar unemployment problem was mainly in these areas, and it persisted throughout the period of world recovery from 1924 to 1929; nor could hard-hit export industries look forward to sufficient future earning power to be able to borrow money and equip themselves so as to increase their competitive capacity. Foreign countries could secure loans in the City of London at the prevailing high interest rates; the postwar gold exchange standard provided a makeshift international standard of costs; but the net effect of these two influences was to put Britain's competitive strength out of court. From 1925 to 1931 the national economy was under constant strain in an effort to come into line with the world's newly established level of costs. In fact, the British economy never even bridged the 10 percent differential between the dollar and the pound in 1925. The collapse of the postwar world's levels of debt and prices after 1929 rendered the British effort hopeless.

Between the financial crisis of 1931 and the beginning of recovery early in 1933, the National Government effected at least four major economic revolutions in the British economy. Had they been attempted by an administration that was not a Conservative one they would have been execrated as "Bolshevistic." These revolutions were: first, abandonment of the gold standard and pursuit of a managed currency standard; secondly, cast-iron governmental control of the money and capital markets; thirdly, establishment of a medium-to-high general protective tariff; and lastly, a rapid and extensive intervention of the State in foreign trade, agriculture and industry through a congeries of regulatory boards, statutory commissions and supervisory bodies. To these were added an expansionist cheap-money policy and a system of trade treaties and conventions which aimed at bringing individual balances of trade or payments into purely bilateral equilibrium. The logical aim of the latter system was to oust the foreigner from the vast domestic British market in favor of citizens of the British Dominions or the home farmer and his landlord.

This manifold program was devised and begun early in 1932. The embargo on foreign lending and the strict control of new domestic issues, coupled with the liquidity resulting from the depreciation of sterling and the expansion of credit, thrust capital into the construction of the houses for which heroes had been waiting ever since the war. It also facilitated a conversion of the huge War Loan and a fall in the annual cost of running the floating debt. These two reductions alone, and the suspension of budgetary sinking funds, diminished the budgetary burden of the total debt by 33⅓ percent, from £355 millions in 1929-30 to £212 millions in 1934-35. The new agricultural protective devices and the new industrial tariffs began to canalize liquid reserves and new investment into recovering industries, as well as into those secularly developing industries -- automobiles, rayon, electric power and equipment, and printing -- which have stood up well in all industrial countries during the depression.

The building boom was a potent factor of recovery in the fortunes of the iron and steel and domestic equipment industries, and, thus, in the coal and coke industry. The value of building plans for private dwellings rose from a monthly average of £3.9 millions in 1932 to £6.5 millions in 1935 and £6.3 millions in 1936; and the number of houses built by private enterprise and public authorities (mainly by the former after 1930) rose from a total of 183,807 in 1931 to 323,926 in 1936. This great stimulus to the capital construction and equipment trades carried the infant recovery during the first two years, from 1932 to 1934; then the continuance of credit expansion, cheap money, tariffs, and falling gold prices of Britain's necessary imports combined to give her the best of both worlds: reflation at home, deflation in the primary-producing countries. The net result was that, with a still large reserve of unemployment, short time working, and cheap imports (despite the depreciated pound), costs did not rise with the restoration of liquidity and profitability in business. To credit expansion was added the ploughing-back of growing profits.

Thus the liquidity of concerns and of the money and capital markets not only continued, it was enhanced; and interest rates remained low. Deposits in the clearing banks rose from a monthly average of £1,738 millions in 1929 to £1,791 millions in 1932, and thereafter in a steady advance to £2,142 millions in 1936. The banks were driven into the gilt-edged market; their securities portfolio rose from a monthly average of £257 millions in 1929 to £615 millions in 1935 and £613 millions in 1936. The liquid assets of big businesses advanced concomitantly up till 1934 or 1935. Thereafter they were directed into more rapid replacement of obsolete equipment and extension of capacity on the most modern lines. The capital construction boom, the basis of British recovery, went ahead at a faster rate than it ever had done since the end of the abnormal wartime demand upon industry. Municipalities, public utilities, and industrial concerns again entered the capital market as and when the authorities gave them the signal, so that the market could always bear the traffic without sending up interest rates. And unemployment figures, the best index of recovery, fell back from a monthly average of 2,756,000 in 1932 to 1,684,000 in 1936. More striking still, the insured employed population rose from a monthly average of 9,348,000 in 1932 to 10,896,000 in 1936 -- a figure 676,000 above the corresponding average for the so-called prosperity year of 1929. More significantly, short-time working hours progressively gave way to full employment (with its corollary, full weekly earnings, as opposed to nominal wage rates); the cost of living did not rise; it fell until 1933 and did not pass above the 1931 figure until 1936; so earnings of more and more full-time workers every year were increasing, while the cost of living remained, right down to the figure for last September (the highest since 1930), below the basic figure of 100 in 1929. Thus, the purchasing power of consumers was steadily extending to a wider range of amenities than those immediately covered by the Ministry of Labor index -- which is one explanation of the demand for new and better houses, for automobiles, etc., as well as of the country's ability to bear more direct and indirect taxation.

In the depression-recovery cycle, therefore, the British economy moved steadily from a position below the world average in employment, industrial efficiency, and competitive capacity, to a position where it was in the very van of industrial progress; and this striking transformation had been achieved at virtually no current domestic sacrifices or costs. The favorable terms of trade (a corollary of the world depression among primary-producing countries), coupled with the management of new controls in the home money and capital markets, combined to enable British industry to draw every advantage from the depreciation of the pound and the new tariff. Costs did not rise, as depreciation of the currency usually implies, so long as the managed liquidity of the money market and big businesses reduced capital charges, and so long as the cost of living remained below that of 1929 and 1930. Accordingly, no significant labor disputes occurred until 1937.


It is necessary to bear all the foregoing tendencies and factors in mind when appraising the immediate economic outlook; for in 1936 the foundations of British economic recovery began to undergo important changes.

First, the process of clearing out overhanging stocks in the principal world commodity markets neared completion in that year. This technical improvement in the supply position of these markets -- a most influential factor affecting the largest importing country in the world -- was powerfully reinforced by a second factor: a monetary influence.

In the autumn of 1936 the attempts of the remaining "gold bloc" countries to "reflate on gold" were abandoned in favor of devaluation; and the remaining deflationary psychology in the world was removed, giving place to an inflationary psychology. It is not inexact to describe this change as one from deflationary exasperation and doubt to inflationary apprehension and conviction. Coming on top of the technical improvement in commodity markets, it sent world prices up with a run. The social reforms of the French and United States Governments raised prices and costs in both countries -- the logical outcome of devaluation or reflation, as well as the avowed solution of the disparity between the prices of primary and manufactured products during depression. And towards the end of 1936 the industrial world became thoroughly convinced that inflation of credit based on the rapidly increasing world supply of gold was well under way. Merchants and manufacturers increased inventories, not only to cover increasing consumers' demand, but also as a normal "hedge" against an inflationary rise in prices, which was expected to follow a relative increase in purchasing power over and above that regular annual increment resulting from the increase in net new capital investment and construction. Businessmen feared that the purely monetary factor, in the hands of the authorities in each country, would outrun the normal annual extension of recovery. Prices of food, raw materials, and of manufactures bounded upwards.

Here it is necessary to introduce a third factor into our description of the British economic picture. Before the great expansion of capital construction in Britain due to house building and industrial expansion had even reached its peak, the Government entered enormous demands for other kinds of buildings and equipment. The rearmament program was begun in 1934-35. It was extended in 1935-36, mainly for the Air Force, Navy, and munitions. In 1936-37 it was again expanded considerably. And at the outset of the current year, 1937-38, announcement was made that the budget would contain not only double the amount appropriated for national defense in as recent a year as 1931-32, but that, in addition, a sum of £400 millions would be expended from borrowed money outside the budget during the five-year period 1937-38 to 1942-43. This expenditure was to be for "capital" purposes of defense. The Defense and Ordnance Estimates for 1937-38 disclose that this "capital" will amount to precisely £80 millions (i.e. one-fifth of the five years' borrowing), and that it will be mainly for armament factories and their equipment, land for factories, aërodromes, barracks, and naval bases, and (though it is discreetly not referred to as such in the Estimates) war matériel. In sum, defense expenditure has risen from £136.9 millions in 1935-36 to £186 millions in the last financial year (in both cases covered by budget revenue) and to £278.3 millions in the Estimates for 1937-38 (of which sum £80 millions is to be borrowed). This £80 millions will not be exceeded; but unfortunately it is almost a certainty that the purely budgetary provision of £198 millions will be exceeded, just as the 1936-37 Estimates of £158.3 millions turned out in practice to be £186.1 millions, the increase being divided between Supplementary Estimates of £20 millions and over-expenditure of £7.8 millions.[i] Even a cursory knowledge of the rate at which British rearmament and its financing are forging ahead suggests that the difference between last year's actual expenditure for defense at £186.1 millions, and the current budgetary Estimate of £198 millions, will turn out to be greater than the figures imply; and this despite the additional £80 millions to be borrowed, because the tempo of capital construction serving the rearmament program is accelerating by leaps and bounds. It is estimated that from 1929 to 1938 the toll of defense on the (growing) national income will have risen from 2.6 to 5.5 per cent.

Now, the consumption of all capital goods in the home market in 1935 has been estimated by Mr. Colin Clark at about £650 millions, from which must be deducted all of the output for pure repair, maintenance, etc. This leaves a net figure of about £270 millions, of which about £145 millions alone went into the construction of new houses. That was the peak year for housing construction; last year it tailed off. We therefore can broadly guess that in 1936, out of a possible £300 millions of new capital equipment in the country as a whole, anything between £150 and £170 millions will be available for all other net new capital construction. Indeed, the figures since the end of 1935 show that, far from the decline in construction for private owners having reduced the total of all building, the plans for "other" building -- i.e. public authorities, factories, plants, offices, etc. -- have carried the total of all building investment even above the 1935 levels; and this has continued until September 1936. Moreover, the statistics do not include direct building contracts for the Government; they refer only to plans passed by 146 municipal housing and building authorities. As a result, something like an extra £50 millions is being spent on constructional work for the Defense Services and Royal Ordnance Factories in the current fiscal year, over and above the building figures. If to the net amount of annual new building of all kinds -- about £150 millions in 1936 -- we add the Government's contribution to new capital construction and investment, as indicated in the 1937-38 Estimates, we find that about £170 millions of the £270 millions of net new investment in 1935 is already covered, and this makes due allowance for the decline in private housing. If we estimate the total of net new investment in 1937 at about £300 millions, we still have only about £130 millions to cover the entire field of investment in capital equipment apart from construction of buildings.

This is clearly too small a figure. There are not only the Government factories, but also the "shadow" factories for aircraft, as well as those to which extensions are being made on Government guarantee. There is all the equipment for these plants: the machine tools, working inventories, power plant, etc. There is, in addition, all the new equipment for private businesses which have been expanding capacity -- e.g. iron and steel mills, shipbuilding yards, automobile factories, electrical equipment works. The sudden invasion of the capital construction trades by an unforeseen £80 millions of Government expenditure taken from capital, in addition to an enormous increase in the normal expenditures both of business and of the Exchequer (the latter through the budget) on basic capital goods, has already evoked reactions.

For example, overtime rather than short time is becoming general in the skilled trades, especially those dominated exclusively by the trade unions. The unions have opposed any shortening of apprenticeship or trainees' terms, in faithful adherence to the policy they adopted throughout the postwar period, namely to concentrate on maintenance of the employed unionist's wages, at the cost of the unemployed. (The state and local authorities were left to look after the latter.) As a consequence, weekly earnings have been rising very fast since mid-1936; and in many trades -- e.g. iron and steel, engineering, coal-cutting, precision work on tools, aircraft, automobiles and ships -- actual shortages of labor have emerged despite a total of 1,300,000 unemployed registered in September 1937. The ranks of the unemployed have now been reduced to those over suitable age and those who are unskilled and unfit, plus those normally changing over from one job to another who happen to be out of work on the day of the monthly count, and a stubborn residue of skilled men who are not required in their traditional callings because of technical progress and the rapid mechanization of their trades. Accordingly, the wages of skilled men are now rising throughout British industry; for, in effect, and as far as basic British industry is concerned, a state of "full employment of resources" seems already to have been reached.

There is, indeed, evidence that rearmament, on top of "civil" reëquipment and expansion, has already produced certain signs of inflation. It can be well argued that the rise in retail prices and the cost of living in the last twelve to eighteen months has far exceeded the rise in world prices of the primary foodstuffs or raw materials of consumption goods; and this is a hint that more and bigger earnings (not necessarily wage-rates, owing to overtime) are competing for consumption goods in markets which, because of a concentration of effort and investment on the production of capital goods, are not able to increase supplies. This suggestion is confirmed by an analysis of recent import figures. Not only has the United Kingdom been importing large quantities of machine-tools, motors, engines and parts, iron and steel, equipment, etc., during 1937 -- all for capital goods -- but its imports of general manufactures, semi-manufactures and foodstuffs have been steadily rising. These increases have luckily been paid for by parallel increases in British exports, whose prices have risen almost as much as those of the necessary imports; but, clearly, if world commodity prices fall back to their 1935 levels, Britain's exports will tend to fall back, too, as their overseas markets contract. Then the problem of British industrial capacity will be posed in another -- and foreign -- quarter.

The violent rapidity and extent of Britain's reëquipment and expansion of industrial capacity between 1932 and 1937 are, indeed, the chief elements of danger in an otherwise remarkable prosperity. Consider the figures of the table on the opposite page, bearing in mind that in 1929 British industry was not so prosperous as that of other industrial countries.

There is enough evidence in this collection of interdependent economic indices to explain the sudden uprush of prices, wage rates, earnings, investment and interest rates during the last twelve to eighteen months. That is the period in which both the world economy and the British economy passed into an abnormal stage of hectic capital construction, centered upon basic industries working for rearmament; and this stage was entered when already a "civil" recovery in Britain had reached a peak after four years' progress from depression.[ii]

One example will suffice to indicate the extent of the capital-construction boom in Britain. The coal industry had been the major depressed industry since the war ended. It accounted for the biggest element in unemployment and for the worst "depressed areas." Yet it needed the depression of 1932 and its aftermath of recovery to bring interest-rates so low that, at the present time, reëquipped collieries are producing mechanically-cut coal at the lowest unit-costs known for years. Today, output per man-shift is attaining new records every quarter; and there is a shortage of skilled labor alongside persistent unemployment of unskilled labor in that basic industry. What capital equipment at

Monthly Averages, unless otherwise stated
Great Britain How 1929 1932 1935 1936 September September
or United Kingdom Measured 1936 1937
Production of coal million tons 21.4 17.4 18.6 19.0 18.8 20.4
Production of pig iron,
  U. K. thousand tons 632 298 535 641 651 727
Production of steel ingots
  & castings, U.K. thousand tons 803 439 822 975 1,027 1,163
Production of private
  cars, U. K.b unitsb 15,196 14,270 25,962 29,479 18,351a 20,888a
Production of commercial
  vehicles, U. K.b unitsb 4,705 5,123 7,681 8,967 7,539a 7,508a
Production of rayon,
  U. K. thousand lbs. 4,742 6,043 10,314 12,110 9,860a 10,800a
Production of electricity
million kw. hours 858 1,020 1,464 1,685 1,544 1,752
Volume of retained imports,
  U. K. 1935 average=100 108.9 92.2 100 107.2 104.4c 110.6c
Volume of domestic exports,
  U. K. 1935 average=100 140.3 84.0 100 101.5 102.9c 111.6c
Insured employed thousands 10,220 9,348 10,377 10,896 11,082 11,555
Bank of England note
  circulationd millions of pounds 362.3 258.5 394.7 431.4 446.1 488.4
Clearing Banks' deposits,
  U. K.d millions of pounds 1,738 1,791 1,999 2,142 2,180 2,209
Clearing Banks' advancesd
millions of pounds 991 844 769 839 850 943
Clearing Banks' investmentsd
millions of pounds 257 348 615 613 620 611
Yield on 2½ percent
  consols percent 4.61 3.75 2.89 2.94 2.93 3.41
Government revenuee millions of pounds 815 827.0 844.8 896.6 325.5 334.2
Government expendituree
millions of pounds 829.5 859.3 841.8 902.2 405.8 426.8
Wholesale prices (Economist)
1929=100 100 67.8 74.3 78.8 79.6 88.3
Cost of living (Ministry
  of Labor) 1929=100 100 87.8 87.2 89.7 90.2 96.3
Net deadweight national
  debt, U. K.f millions of pounds 7,500 7,434 7,800 7,796 7,900 8,100
est. est.
a Month of August. b Annual figures to September. c Quarter ending September. d Average of weekly figures. e Fiscal year beginning April 1; half-year only for last two columns. f Including Foreign debt, Floating debt, and Exchange Fund; excluding bonds surrendered for tax payments.

low interest rates has done for coal concerns, new borrowing and the ploughing-back of growing earnings have achieved throughout British industry. And, at the very peak of this "civil" boom in investment and capital construction, the Government enters the arena with a vast non-reproductive, non-yielding public works scheme -- introduced by the same Mr. Chamberlain who was loudest in denunciation of the proposals of Mr. Lloyd George and others to overcome depression by "civil" public works in 1931 and 1932 -- a five-years' rearmament program of formidable dimensions. Simultaneously, the old arguments of "What will happen, when, or if, it ends?" and "It is only capital consumption!" and "How are we to maintain, obsolesce, and amortize this military equipment?" are all pooh-poohed, as though in 1937 they had not the same validity as they had in 1931 or 1932 when Mr. Chamberlain and his colleagues employed them to confute Liberals and Labor.

Actually these questions, these arguments, hold greater economic validity today simply because the Government's military public works scheme has been launched on the very crest of a "civil" recovery wave. True, there is no difficulty in the mere financing of rearmament; nor, for that matter, in damping-down new borrowing and new capital works by municipalities, authorities, utilities and businesses not directly serving the rearmament program. The Treasury, the Bank of England, and the various "voluntary" watch-committees in the capital and stock markets can easily control the new issues, whether to the public or to syndicates which will later float them off onto the public. The liquidity of the banks and money market, of big businesses which have ploughed back greater reserves than ever before, of the multifarious old and new statutory funds under direct Governmental control, can be assured for months, perhaps for a year or two to come. The Exchange Fund -- increased by £200 millions last July to £575 millions -- and the balances of Government departments can control the short-term market so long as "hot money" in London, the embargo on foreign lending, the expansion of credit, and the control of new issues can enable the authorities to continue to fund floating debt by converting it into longterm debt at comparatively low rates.

Now there's the rub. For the "liquidity preferences" of investors, individual and corporate, have kept the short-term rates immovably low while the long-term rates have been steadily rising. New Defense Loans must soon appear, or else rearmament financing must swell the floating debt beyond the bounds of safety; and the last two Defense Loans (£100 millions 1952/57 2¾ percent Funding Loan at 98½ in November 1936, and £200 millions 1956/61 2½ percent Funding Loan at 96½ in December 1935) now show yields of 3.00 percent and 3.15 percent respectively. The low point in long-term rates was reached as long ago as 1935; and though the Government Departments' and Statutory Funds' balances are now so big as to permit the easy subscription of new loans, they are still holding large blocks of recent loans, besides old loans, which doubtless could be sold to the public for cash, which cash could in turn be used to subscribe to new loans from which the public might shy away. These extra-budgetary, statutory funds (such as the Post Office Savings Bank, Trustee Savings Banks and Friendly Societies, National Health Insurance Fund, and Unemployment Insurance Fund) are expanding at the rate of about £75 millions per annum; but this can only continue in conditions of prosperity, confidence and increasing employment.

Quite apart from the technical aspect of financing rearmament is the other problem of the obsolescence, replacement and amortization of much of the new war material within the five-year period. Battleships will last fifteen years; but in that time they need refits which outrun the initial cost. Amortization of the initial cost, interest on the borrowed money, and funds for refits must all be provided. When we come to aircraft and mechanized land equipment we face much more rapid obsolescence. Here, perhaps, the very same British Government which launched the program will have to find the funds not only to pay interest and repay principal of the present borrowing, but also to write off aircraft, tanks, etc., at a rate of 33⅓ percent per annum and replace them. Thus, the financial program for rearmament, at present limited to five years, will involve a peak expenditure about 1939 and 1940; and, roughly at the same time, the first batch of obsolete war machines, produced under the same program, will come due for replacement.

Considerations such as these impel the conclusion that the 1938-39 and 1939-40 budgets will need at least another £100 millions of revenue, over and above the 1937-38 level -- itself a record estimate since the immediate years of postwar inflation. The Economist concluded last April, in its Budget Supplement, that a £1,000 million budget was possible "before very long," and it animadverted on the uncertain course of interest rates and on the lag of income tax, surtax, and death duties' yields behind the rise in the national income. These things may have prompted Mr. Chamberlain in his last budget to attempt the imposition of the ill-prepared, ill-digested, and ill-fated National Defense Contribution: a bastard offspring of the old wartime Excess Profits Duty. But that inequitable tax was scotched by Parliament, and it is now a very tiny mouse indeed. On the other hand, the national income, in money terms, is rising fast; and there is some ground for believing that new direct and indirect taxation of individuals (not firms, for that would penalize capital-goods production) would damp down competition for consumption goods and restrain a rise in the cost of living. In this context, it may be observed that since 1930 the fall in the annual burden of the national debt, the suspension of sinking funds in the budget, and the increase in customs revenue, have together freed about £200 millions, within each budget, for other purposes. These "other purposes" have been equally divided between social services and rearmament. Doubtless a bold government could proceed to budget against "painful necessities" by curtailing expenditure on social services and restoring sinking funds in the budget. Assuredly, from 1936 onwards the British economy stood -- and stands -- in danger of inflationary jams and bottlenecks, both on the capital-goods side of production, and even more so on the consumption-goods side. Some check on these developments must be imposed, or, despite world trends, the level of British prices, costs, etc., will be forced out of alignment, with serious consequences to Britain's associates in the sterling area, especially to the British Dominions, the United States and France.


Although all the foregoing appears specifically and peculiarly a British economic problem, several morals emerge which are applicable to the other leading economic systems in the world of still relatively free democratic states. To begin with, Britain, being the first to depreciate her currency, rode on the back of the deflationist countries during a critical transition period, very much to her own advantage. But she has not been able in the long run to avoid what is the normal effect of devaluation: a scaling-up of all values. In France and the United States this process was more rapid and extensive; but Britain is now catching up, and the strain within her economy is increasing.

Secondly, world prices of primary commodities do not necessarily move as sensitively to purely monetary "pump-priming" as do national prices of nationally manufactured goods. The lack of coordination between different groups of national producers of wheat, sugar, cotton, coffee, meat and dairy produce has prevented the prices of such goods from rising exactly in conformity with devaluations. If there is to be no effective international monetary standard between the semi-free economic systems of the remaining democratic states, and if they do not trade on a common basis of tariff rules and regulations, commodity prices may yet slump again. And if they do, the political effects in Central and Eastern Europe, in Latin America, in portions of certain British Dominions, may well be disastrous. Devaluations, now general, have not saved us from over-capacity and under-trading in the world's primary commodities; they have not modified, but instead have even intensified, the self-sufficiency programs of democratic states alongside the programs of the totalitarian states. In the upshot, world trade suffers -- save only as concerns the raw materials that go into armaments. The United States and the United Kingdom would be helping themselves and helping others if, on the basis of their heralded trade agreement, they began to increase the volume of trade between the large and rich markets which they can command. In so doing they would prevent a decline in the world prices of primary products, ease their own domestic problems (the problems of the American South and Middle West can be solved by the same measures which solve Britain's wage and cost-of-living problem), and this without sacrificing interests elsewhere, e.g. in Canada or Australia. For such a result it is crucial to aim at increasing the total of trade among the still comparatively free economic systems in the world, not at redistributing an existing volume of trade, clamped down by national controls. This factor must be urged so strongly because foreign trade is the only buffer, both against disparate rises in the various national levels of prices and costs and against an ultimate halt in the annual new investment in armaments. Britain, probably the most deeply committed democracy in this respect, will also be most vulnerable if war does not come!

Thirdly, the British economic system in the last six years has been virtually bounced into becoming that of a corporate state. Over the currency, money and capital markets, over the whole realm of agricultural production, over road and rail transport, over production of coal, iron and steel, over shipbuilding, over the unemployed, over electricity, and over much foreign trade, the Government is now able to make its writ run unhindered. To the extent that the five-years rearmament program renders whole concerns, industries and services more dependent on government action, the secular development towards an authoritarian economy during the last six years has been powerfully reinforced. Simultaneously, the trade unions and their "poor relation," the Labor Party -- His Majesty's Opposition -- have sidled under that umbrella, corporate economy, instituted by their nominal rivals. Is not the same thing discernible in France, Sweden, Czechoslovakia, Switzerland, the British Dominions -- yes, and the United States -- irrespective of the political group in power? Would their economies, as altered by the state during the last decade, be relaxed, be rendered more flexible, more "free" for individual workers and businessmen, if opponents became rulers? Whoever doubts the answer, and whoever hopes to see a return to the system of economic initiative unregulated by the state, might ask himself this question: Will there ever again occur an attempt deliberately to overcome depression by deflationary methods? The simple question reveals the remoteness of every democracy today from the prewar world, the world of the nineteenth century, still strangely green in memory.

Therefore the problems facing Britain, the Dominions, the United States, Sweden, France, are virtually the same in kind as those facing Germany, Italy, Japan -- and only less acute in degree. They can be summarized in one question: How are we to make the least painful transition from an economy founded on international specialization to one founded on economic acts of state? As the arms race careers onward, the identity of economic method in both democratic and totalitarian states becomes more evident. An economist from Mars might well ask why men of property in our remaining democracies, part owners of vast national debts, do not see that their own expropriation is as probable under Fascist economics as under Communist politics -- and only more gradual in its advent under the inflationary technique of their own elected representatives in a democracy. These things are not being done in a corner; yet neither the men of property nor the organized workers in Britain, France and the United States have yet become seized of their ultimate significance. Not even the statesmen who control the destinies of democracy have yet seen that behind the various shadows is one substance, that behind all three "isms" -- Fascism, Communism, and Liberalism -- an œcumenical economic revolution has been taking place.

If, now, we have a few years of peace, the people of Britain, and after her of the other democracies, will awaken to as changed a national economy, to as changed an economic world, as that to which they awakened two decades ago after four years of war. For Britain as for her democratic associates, the short run holds few dangerous economic surprises; she can ferry herself over the economic cross-currents of the next one or even two years without insuperable difficulties, either in trading or in finance. The economic dangers in the short run will necessarily fall upon the totalitarian states, whose resources have been bespoken by mortgage and then swallowed up. It is in the long run -- and not so very long, either -- that Britain and her associates will be confronted by the magnitude of their economic problem. If the world gets war, both sets of problems will be solved in a general flux. If we get peace, a peace enduring some years, then both totalitarian and liberalistic states must face economic convulsions during the liquidation of those vast interests, vested in state action, which remain as the damnosa hereditas of the Great Depression and its Great Panaceas.

Perhaps Britain's principal danger today is that persistent prosperity which (as in the United States between 1927 and 1929) prevents thought for a day of reckoning. Yet "the reckoning bideth," and the wise man prepares in the fat years for the lean that will assuredly follow. Britain's main economic problem is to find the wherewithal to meet all her normal and abnormal needs today, at the peak of her recovery, and simultaneously to find a surplus wherewith to provide for the rainy day. To the extent to which she succeeds in doing this now, she will keep her head above water later on. If she fails to do so now, it will be a case of après Chamberlain le déluge. That is why such significance attaches to the narrowing of political differences in Britain, the closing of the gap between Government and Opposition. It is significant both for Britain herself and for the world. If the catastrophe of war descends upon us soon, the greatest sacrifices will be demanded and made by all. If by skill and wisdom that catastrophe is long averted, then the developing British democracy must either show the world how wisely it can impose upon itself timely sacrifices for peace and security, or reconcile itself to meet greater economic sacrifices, imposed upon it willy-nilly, in a much less rosy future. Upon this issue, almost as much as upon the more clamant issue of peace or war, depends the future of representative government and of Western civilization as we have hitherto known it.

[i] Indeed, in introducing this year's budget Mr. Chamberlain made provision for some Supplementary expenditure inside the budget's purview, though this was only for civil purposes.

[ii] Incidentally, the United States and France were the only major industrial countries in which capital construction did not carry recovery forward -- of course, for differing reasons. Owing to different monetary policies, however, prices and costs rose just as quickly in those two countries.

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