All Commentary
Monday, February 1, 1965

British Returns to Mercantilism

Mr. Winder, formerly a Solicitor of the Su­preme Court in New Zealand, is now farming in England. He has written widely on law, agriculture, and economics.

The British government took another step back toward the an­cient policy of mercantilism when last October it placed a 15 per cent surcharge upon all imported manu­factured goods. This was against all modern trends and against the interests of G.A.T.T., the Com­mon Market, the Commonwealth, and particularly damaging to the European Free Trade Association agreement to remove all tariffs against manufactured goods by 1966.

The Labour government has an­nounced that this policy is only temporary, but no definite date is given for discarding it. There doubtless will be plenty of time to build up protected industries which soon acquire a vested in­terest in the tariffs that support them.

The object of this return to mercantilism is to save the pound, which the Exchange Equalization Account is sending out of the country in large quantities, thus depleting the country’s reserves.

The British government wishes to persuade foreigners to take her goods instead of her money. The only practical way of doing this is to keep the price of goods down so that others want to buy them; but the British today are unable to do this, for they are pursuing the same inflationary policy which has characterized their economy since World War II and which caused them to devalue the pound in 1949. This policy has earned for the economy the description, “stop-go.”

First the Inflationary Boom, Then the Credit Squeeze

The Chancellors of the Ex­chequer who have presided over Britain‘s economy since the war fall into two classes: the first fails to balance the budget and experiences a boom, but soon runs into an overseas payment crisis; the second comes in to clear up his predecessor’s errors. He does this by reducing the budget def­icit and placing the economy un­der the rigid conditions of a high Bank Rate and a credit squeeze. The subsequent high rates of in­terest for all borrowing tend to stop the credit expansion, and a painful and depressing period fol­lows—but for the time being the pound is saved. It is left to the next Chancellor to begin the cycle all over again.

The outstanding periods of de­pression since the war have been in 1947, 1949, 1952, 1957 (when the Bank Rate went to 7 per cent), 1961, and now when Britain again is in overseas payment difficulties. The cause of trouble this time is not difficult to find. Mr. Maud-ling was an expansive Chancellor who budgeted for a large deficit in 1963 and gave Britain a mild boom. At budget time in the spring of 1964, he was urged by almost every newspaper in the country to go ahead with an expansionary budget. What matter if Britain had to borrow from the Inter­national Monetary Fund? Does not every business borrow sometimes? He succumbed to this pressure and unbalanced his budget by several hundred million pounds.

During the summer of 1964 the pound lost more purchasing power than usual—that is to say, prices went up considerably, and in time to be noticed by the electors. At the same time, exports began to fall and imports increased. Im­ports always increase at this point of the cycle; an abundance of money to spend, and a fixed rate of exchange, result in a great de­mand for imported goods.

The extent of Britain‘s adverse balance was announced every month to the electors, and did the Conservative cause no good. Many people thought the Conservatives were waiting until they had won the election before applying their customary remedies. But they lost the election and a chance of rec­tifying the position.

The Labour government com­plains that the former government left a bill of £800 million to settle. This is the amount by which Brit­ain‘s imports are said to have ex­ceeded her exports. Since a symp­tom of the trouble is high im­ports, the government has decided that it will reduce them by a sur­tax of 15 per cent against all im­ported manufactured goods, these accounting for about one-third of Britain‘s total imports.

Opening Pandora’s Box

In announcing this policy, the Labour government stirred up a hornets’ nest. The European Free Trade Association complained that Britain had broken her solemn treaty to lower duties on manu­factured goods until they reach zero by 1966.

G.A.T.T. also complained and threatened retaliation, although a few members, notably the U. S., have expressed sympathy with Britain‘s position.

Ireland says it is a body blow, because England was her best customer. Japan, France, Italy, and many other countries have protested. Even the Common­wealth has not escaped. Canadian newsprint is hit, because it is con­sidered a manufactured com­modity. Hong Kong, the last re­maining free trade area in the world, is a special sufferer.

Those who suffer most, how­ever, are Britain‘s own nationals. They were given no notice of the extra duties which took effect from midnight of the day of the announcement. This naturally caught many importers with their goods on the high seas; when those goods are landed the extra duties will have to be paid. One importer, who has sold a thousand tons of steel bars, tells me he will have to meet the extra duty out of his own pocket. Another will have to pay the surtax on hundreds of tons of aluminum sheets he is importing from Austria and the E.F.T.A. countries. Thousands of importers will have difficulty in meeting the increased tax, and some will go bankrupt. Such is the fate of the individuals when the government manages the economy.

Will It Solve the Problem?

But the question remains: Will this policy of taxing imported manufactured goods really work? Is it not attacking the symptom in­stead of getting at the cause of the trouble? Manufactured goods are themselves often the raw materials of the export industries, especially in Britain which im­ports large quantities of machine tools and machinery. The sale of goods is essentially an act of ex­change. Who knows what trade channels will be permanently blocked when the surcharge is re­moved? Mr. George Brown, the Minister of Economic Affairs, is expecting the British people to buy more British goods; yet the gov­ernment says the surcharge is only temporary.

It looks as if the Labour gov­ernment wants it both ways. It harbors the old mercantilist sup­erstition that you can export and not import.

Inflation Must Be Curbed

The real cause of Britain‘s trou­ble lies in her excess of money. This, coupled with a fixed rate of exchange, acts like a sponge which draws the goods over the tariff wall in spite of the surcharge. Previously, when Britain faced such a problem, the remedy except in 1949—was to squeeze economy by raising the Bank Rate and making money hard to get.

Even if the Labour govern­ment’s policy does stop imports, the excess money will still cir­culate and press the price level upward. Either the Bank Rate has to be raised to bring about a credit squeeze,* or Britain will have to devalue the pound once again before she can restore equi­librium and sell her exports.

Devaluation is an expedient the British government has avoided since 1949. It involves repudiation of many millions of pounds loaned in good faith to the government. But this is the only thing left for any government to do if it goes on inflating the currency. And a reversion to all the mercantilistic failures of the past will be of no avail against the eventual day of reckoning.

*Editor’s Note: The discount rate has been raised, of course, to 7 per cent from 5 per cent since Mr. Winder submitted his analysis.



Good as Gold

You have to choose as a voter between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And with due respect to these gentlemen I advise you… to vote for gold.

Attributed to George Bernard Shaw