A MAJOR changeover from war to peace production is clearly out of the question in any of the United Nations until Germany capitulates. But in the United States the first tentative steps toward reconversion have been taken. In Britain we read of the lifting of the ban on American production of some hundreds of civilian items and of spot authorizations to more than a thousand plants, permitting a $200,000,000 increase in civilian output during the last quarter of 1944 and all of 1945. These moves have been followed with interest in this country.

How much progress has been made along these lines in Britain? The answer is none, almost literally. The best evidence of this is to be found in our figures of government disbursements, which in the first half of the year seemed to have become stabilized at a steady maximum but in recent months have expanded to new high levels. There have, of course, been cutbacks in some lines of production where supplies are now ample to last out the German war, but these have been more than offset by the intensification of the war effort in other directions.

For the most part, labor released by the termination of war contracts has either been absorbed into the armed forces or diverted to other war production, notably that intended for the Japanese war in "Stage 2." In some instances the shift in production has tended to create pockets of unemployment, as, for example, by the release of married women with young children who cannot be ordered to take jobs away from their homes. To build new factories to reabsorb such labor in war work would be useless at this late stage, and to leave the women unemployed would be wasteful. Consequently, the Board of Trade recently announced that some hosiery factories in Lanarkshire might be allowed to reopen, though they will not employ more than two or three hundred people. That appears to be the only example of a return to civil production even on a small scale. The situation in regard both to labor and raw materials is still extremely tight in this country.

Industrial reconversion is still in the paper stage. British manufacturers have not even begun to prepare prototypes -- not through any lack of initiative or lack of interest in postwar prospects, but because any company diverting labor or materials to such planning would hitherto have risked having its labor taken away. In mid-autumn, however, the Board of Trade circulated a letter inviting manufacturers who wished to undertake work on postwar models or similar projects to state their needs to the Industrial Supplies Department of that Ministry. It was pointed out that vital war work must not be impeded, but that subject to this proviso requests for the use of a small amount of labor for postwar planning would be sympathetically considered. Mr. Hugh Dalton, President of the Board of Trade, has since stated that 350 applications for such permits have been received, of which about 150 have already been granted. Sir Charles Bruce-Gardner has just been appointed chief executive for industrial reconversion. He has not yet had time even to announce his approach to the problem, still less to make any of the difficult decisions involved in such a question as the reopening of the more than 4,000 plants closed as unessential or telescoped under the concentration scheme.

In other words, the problem of reconversion still lies before us in its entirety. No invidious comparisons are involved in the statement that the task will be a relatively much more formidable one for us than for the United States. The vast American war effort has been achieved mainly by the stupendous increase of some 75 percent in the total output. Together with the reduction in net investment (which even in 1943 was, however, still positive) this has taken care of the war requirements and left the aggregate civilian consumption still some 15 percent higher than in 1939. In Britain, on the other hand, the over-all expansion in output has not been more than 25 to 30 percent, partly because there was less slack to take up in British economy, partly because as much as 10 percent of our entire population has been taken into the Services.

The remaining two-thirds of our war production has been obtained by drawing on capital, both at home and abroad, and by severe curtailment of civil consumption. Our Budget White Paper showed "overseas disinvestment" totalling 2.843 billion pounds (11.372 billion dollars) for the four years of 1940-1943 alone, representing sales of gold and securities in earlier stages of the war, and the still greater accumulation of sterling claims by overseas countries such as India as the result of our war purchases. By the middle of 1945, the deterioration in our capital position in relation to the rest of the world since the outbreak of the war will certainly easily exceed 4 billion pounds, with a corresponding loss of investment income in the future. Again, in the four years from 1940 to 1943, restrictions on maintenance and renewal of our home equipment resulted in drafts on capital of 763,000,000 pounds. On the other side of the ledger is the fact that the government has built many war factories and accumulated great stocks of war stores; but the extent to which these will have a peacetime value is still an unknown quantity.

Between 1939 and 1943, civilian consumption was cut by 21 percent in real terms, but this gives a wholly inadequate idea of the degree to which British industry was converted to war production. Consumption at 79 percent of the 1939 level includes supplies received from abroad, either against payments or generously provided on lend-lease terms by the United States, or by gift or mutual aid from Canada. Home production of civilian goods has been cut by considerably more than 21 percent.

II

Lend-leasing of food and raw materials can, of course, achieve its purpose of strengthening the combined war effort only if it sets free for transfer to the fighting services or to war industry British labor that would otherwise have to provide for our essential civilian needs -- directly or by manufacturing exports. Lend-lease has thus been a factor in bringing about what may almost be called "over-mobilization" of British economy, and especially in curtailing our export trades. Britain hopes that the difficulties involved in reversing this process will not be overlooked when the termination of lend-lease is considered.

The net result, at any rate, has been that 80 percent of all employment in manufacturing industries is now on government account. No more than 33 percent of our total labor force of about 23,000,000 is now engaged in producing for civilian purposes -- including under this heading the distribution of power and the operation of essential public utilities, as well as the production of food, clothing, and so on. A bare 2 percent is employed in the manufacture of exports. Not all of the remaining 65 percent will actually have to change their employment during reconversion, since many firms will be able to switch their existing labor force back to peacetime production. The number involved in the changeover has been officially estimated at about 7,000,000.

In the transition period, of course, the major problem will be the same in character, if not in degree, on both sides of the Atlantic: namely, to prevent severe unemployment while workers are being transferred from the forces to their civilian occupation and factories are closed for retooling and conversion. Once economic demobilization has been completed, however, British and American problems will be diametrically opposite. It seems generally agreed that the chief difficulty in the United States will be to reverse the trend which has led to the extraordinarily high level of savings. The disposition to save has done much to damp wartime inflationary tendencies, but in peace it could produce a slump and mass unemployment. (The Federal Reserve Board's calculations of the volume of spending needed to bring about the full employment of America's vast resources were noted with interest over here.)

In Britain, our difficulty will be precisely the converse of this. It will be to meet the numerous and mounting demands on our very limited resources, while maintaining a reasonable standard of living for our people. In particular, we shall have to make large expenditures on housing, we shall have to find capital for industrial restocking and reconversion -- including deferred repairs -- and we must send large quantities of exports to countries such as India in liquidation of the huge sterling balances.

At this stage, estimates of postwar budgets and the postwar national income must be subject to many uncertainties, but the following estimates give a general picture. The combined expenditures of the central government and local authorities may be placed at about 2.5 billion pounds, of which something more than one billion pounds will represent transfer expenditures (national debt interest, unemployment allowances, etc.) and the remainder expenditure of goods and services (defense, education, etc.). The net investment, including repair of war damage and the capital expenditure of public authorities, will probably have to be triple its prewar level of 250,000,000 pounds.

What of the income out of which these demands must be met? If the general level of output were no higher than in 1938, then allowing for a loss of overseas income and assuming a 40 percent rise in prices, the net national income would be only 6.3 billion pounds and taxable incomes would be about 7.3 billion pounds. This means that there would not be enough income left, after public expenditure and investment, to permit consumption to rise at all from its depressed wartime level or to make possible any reduction in the present rates of taxation. These rates would be intolerably repressive in a normal economy. The problem begins to appear manageable only if we assume a 15 to 20 percent expansion in over-all production, bringing the net national income up to around 7.5 billion pounds and taxable income to about 8.5 billion pounds. Given such increase in output, consumption can be restored to the 1938 level or a little higher, and taxes can be reduced by a quarter or a third.

That is the basic situation which must condition all economic policy in this country. An all-around increase in production is absolutely imperative. A reduction in unemployment from the 1938 level of 1,750,000 to perhaps only 750,000 may be expected to result in a 6 to 10 percent expansion in the national income. But with a static population any further increase can come only from a rise in productivity per worker. The prospects in this direction are mixed. During the war there has undoubtedly been a considerable increase in productivity per worker in munitions industries, as a result of the mass production methods made possible by huge government orders; perhaps it is as large as 20 percent. In some of our basic industries, however, productivity per worker has actually declined. In coal-mining the output per wage earner has fallen 9 percent since 1939, while a sharp rise in labor costs per ton has doubled the price of the product. This rise is reflected in the prices of many other products -- steel, for example. Again, the country has been disagreeably impressed by the newly-published report of our Cotton Textile Mission, which shows that the output per man hour in the United States is very considerably higher in all branches of the industry.

The background of this report is interesting. The Cotton Board brought out a report some months ago pressing the government for legislative powers to fix maximum and minimum prices and to restrict entry into the industry. It denied that the average unit in the industry was too small for efficient production, but approved amalgamations as a means of facilitating "unified and united commercial policies," i.e., price-fixing agreements. To this the government replied by refusing outright any price-fixing powers and making any legislation conditional on immediate steps toward a five-point program to increase efficiency by such means as amalgamations, modernization of equipment, and the pruning of redundant merchandizing organizations. It is hoped that this new-found emphasis on efficiency will characterize the government's approach to all industrial problems.

In defense of the low productivity in many British industries, it is said that in peacetime there may be great advantages in a flexible industrial setup organized for "batch production" rather than "mass production," especially for export markets. But it is encouraging to find a realization growing on the part of all concerned that disparities in British and American productivity are too great to be explained away on this score. It must be freely admitted that the present position has undoubtedly come about to some extent from restrictive practices by trade unions and by "slump-mindedness" on the part of management -- that is, the tendency to seek solutions by way of combinations and price maintenance rather than by technological improvements. In a sense, this past weakness may now prove a source of strength, since a mere change of outlook and methods would permit a substantial reduction in costs and an increased output. But there can be no doubt that many industries can be brought up to full efficiency only by the expenditures of fresh capital for new equipment. Its total will run to several hundred million pounds.

III

This situation has a threefold significance for our position in regard to balance of payments. In the first place, coal and cotton are themselves major export industries. Secondly, modernization may necessitate imports of capital goods (American coal-cutting machinery, for example) precisely at a time when we shall be hard put to it to pay for normal current imports. Thirdly, even if the new equipment is manufactured at home, the necessity of producing it will increase the general strain on our resources and indirectly add to the difficulty of achieving the needed all-round increase in exports. Large home demands for capital equipment will be inconvenient in the postwar years, since it is precisely in the engineering industries that the markets for expanded exports appear most promising. Wool and chemicals are other industries which hope for greatly expanded exports.

By 1943 British wartime exports had been reduced to no more than 29 percent of the prewar volume, in obedience to the principle that exports can now be permitted only if they are essential to the life of the importing country or are the only means of obtaining essential supplies in return. In short, the common war effort has placed drastic restrictions on British trade. No one would have it otherwise. Naturally, this virtual suspension of exports involved heavy sacrifices.[i] It is partly responsible for an increase in our external indebtedness and it means the severance of normal trade contacts, which cannot be regained overnight. In many lines, for example, our Dominion and other customers have been handed over to alternative sources of supply or have themselves built up industries to produce goods formerly bought from the United Kingdom. As will be seen from the following table, American cash exports have for the past three years been running at about three times the level of our own (figures in millions of pounds):

Exports from
Exports from United States
United Kingdom (including reëxports Ratio: United
(including reëxports but excluding States to United
Year and reciprocal aid) lend-lease) Kingdom -- Percent
1938 471 633 134
1939 440 (including munitions) 716 163
1940 411 (including munitions) 1,000 243
1941 365 (including munitions) 1,091 299
1942 269 780 290
1943 232 646 278

Owing to the loss of overseas investment income, and a probable decline in earnings of the British Mercantile Marine, it is estimated that our merchandise exports will have to be 50 percent above the prewar volume to bridge the resulting gap in the British balance of payments. In other words, they must expand fivefold from the 1943 level. This is a formidable goal. In the short run, the task will be facilitated by a world-wide backlog of demand, especially for capital goods of all kinds, and presumably by the disappearance of German competition.

If this analysis presents our economic problems in a somewhat somber light, it should not be inferred that they are regarded as insuperable. The British people will rise to the tasks of peace with the same resourcefulness and determination that they have shown in war. But so far as the balance of payments is concerned, a solution cannot come from our own efforts alone. It demands international understanding and coöperation. For example, in the immediate postwar years, rationing and the allocation of raw materials will be necessary to prevent a rush of spending which would raise the total monetary demand for goods far above the productive capacity of our economy, and so tend to cause an inflationary rise in prices. For the same reason, there must be restrictions on imports at first, to exclude luxuries and confine purchases to essentials. If, in this period, the British Government is giving priority to export industries in allocating materials and is sponsoring the export drive generally, then it may well seem to other countries that Britain is seeking to play it both ways. It is vital that our friends overseas understand why such a government policy is necessary. In a free market, the same goal -- the limitation of imports and the expansion of exports -- would be reached automatically through the depreciation of sterling. But that is what everybody wants to avoid. For many years to come this country will have no interest in exports for their own sake or as a stimulus to employment; it strives for them merely as a means of obtaining essential food and materials.

IV

Britain particularly hopes that her problems and policies will be understood in the United States, for although American mass-produced goods and British specialties are largely complementary, the rivalry between our two nations is inevitable in many markets. Britain has always been the world's largest importer, but has hitherto ranked second to the United States as an exporter, since 40 percent of our imports were not paid for with merchandise but by services and investment of income. Now that more than half of this "invisible export" income has been lost only two means of balancing our accounts remain. The first alternative is a reduction in British imports that would not only depress our own standard of living but would put "finis" to hopes of an expanding world economy. The preferable alternative is the expansion in British merchandise exports to a point well above the prewar level of American exports.

It cannot be denied that many people in this country view with some apprehension the plans being made by American manufacturers for a vigorous postwar drive for trade. In the absence of any sign that the United States would welcome a corresponding increase in imports, there is danger that America will assume an unbalanced creditor position and create a world shortage of dollars. Fortunately there is one policy that would reconcile the expansionist ambitions of America with Britain's need for additional exports. Direct loans would be quite inacceptable to this country, which already faces a serious burden of external debt. But great assistance to international commerce would be rendered by American loans to third parties not obligated to spend the entire proceeds on American goods. Once again, this may seem to be asking a great deal. But the suggestion is made in the serious belief that, on reflection, it will be found to provide the most practicable short-term solution of an international problem, even if only a short-term solution. In the long run, must not the United States acknowledge her creditor position by permitting an import surplus on the current account? In any event, it should be remembered that every increase in British exports does not mean an equivalent loss of business to American traders. On the contrary, the only alternative to such British expansion would be a reduction in the volume of British imports; and this in turn would greatly reduce the prosperity of many of America's overseas customers and so render them less able to buy American goods.

Despite the obvious difficulties, economic opinion in this country has been greatly encouraged by the insight into world trade problems shown by the United States Department of Commerce in its publications "The United States in the World Economy" and "Postwar Trade with the British Empire." In the latter, the Department urges that an increase in the volume of United States imports from Britain and Canada would be advantageous, reasoning that it would ensure the maintenance of American trade with the British countries which have hitherto absorbed more than 40 percent of all United States exports. It recognizes that Britain's international position will be too strained to permit a reduction in imperial preference without a quid pro quo, and that British commercial policy will be dominated by America's commercial policy.

Britain welcomes these admirably liberal sentiments. But opinion in this country would probably declare that the maintenance of internal prosperity in the United States is even more important than the reduction of the American tariff. After all, a prosperous America can be a good customer of the rest of the world, despite import duties, but even a completely free-trade America would be merely a depressing factor in world economy if she were to get into a slump. The whole future of world trade depends on the question whether the United States will be able to avoid postwar depression.

[i] On the average our export prices were 71 percent higher in 1943 than in 1938. Since United States prices have risen about 50 percent during the same period, and sterling has declined from $4.88 to $4.03, it would seem that the relative cost of British and American goods has not been greatly altered during the war.

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