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D O C U M E N T I S T H E P R O P E R T Y O F H I S B R I T A N N I C M A J E S T Y ' S G O V E R N M E N T .

Printed for the Cabinet. January 1932.

SECRET. Copy No.

C.P. 31 (32) . TO BE KEPT UNDER LOCK AND KEY.

I t is r eques ted t h a t special care m a y be t a k e n

to ensure the secrecy of this documen t .

C A B I N E T .

C O M M I T T E E ON T H E B A L A N C E O F T R A D E .

Memorandum of Dissent from the Committee's Report by the Lord Privy Seal.

I M U C H r e g r e t to be in d isagreement w i t h the Recommenda t ions of t h e Commi t t ee ( C P . 25 (32)) . I des i re to s ta te briefly sonie of t he reasons for my dissent .

T h e Commit tee w a s a p p o i n t e d to consider the " adverse " Ba lance of T r a d e , to make r ecommenda t ions for i t s ad jus tmen t if an adverse ba lance were found to exist, a n d if i t we re believed to be in jur ious ly affecting our economic 'and financial pos i t ion .

T h e Commit tee h a s proceeded on t h e a s sumpt ion t h a t the genera l ly accepted test of t h e ba lance of t r ade , namely, t a k i n g the visible impor t s a n d visible expor t s , and a d d i n g to t h e l a t t e r t h e invisible expor ts , is t he one and only tes t of whe the r our fore ign t r a d e is favourable or adverse . I am no t convinced t h a t t h i s is t he whole s tory. I f t h e r e be, on t he accepted view, an un favourab l e ba l ance— tha t is, a n excess of i m p o r t s over visible a n d invisible exportsW-it is assumed t h a t t he excess of i m p o r t s is be ing me t in one of twp, or both of two ways, namely, by g e t t i n g t h e excess of i m p o r t s on " t i c k , " or by t he d r a i n of cap i t a l f rom t h i s count ry . "We have no evidence, which is conclusive, t h a t e i ther or both of these t h i n g s is t a k i n g p lace . I m p o r t s represen t i n d i v i d u a l t r ansac t i ons between t r a d e r s i n t h i s coun t ry a n d abroad, a n d they a re p a i d for in t he o r d i n a r y com­merc ia l w a y . W e have no evidence t h a t commercial debts a r e being p i led u p in fore ign count r ies on account of impor t s . I t is improbable on the face of i t for th ree reasons . F i r s t , B r i t i s h impor t e r s a r e no t l ikely to be given c red i t s for long per iods by impover i shed t r a d e r s a b r o a d ; second, impor t s a re sold by the i m p o r t e r w i t h i n t he u s u a l n ine ty days ' pe r iod as a rule , a n d t h e proceeds a re avai lable t o l i q u i d a t e the bi l ls on m a t u r i t y ; a n d in t he t h i r d place, whi le i nd iv idua l t r a d e r s in th i s coun t ry may buy ahead in a favourable marke t , they a r e not l ikely to do So on " t i c k , " or ou t of cap i t a l , bu t out of the i r l i qu id resources . A l l t h e inves t iga t ions we have been able to m a k e do not s u p p o r t t he a s sumpt ion t h a t c a p i t a l is be ing d r a i n e d a w a y to p a y for an excess of i m p o r t s .

T h e Commit tee abandoned the ques t ion of how f a r t he movements of cap i t a l may affect the balance, because of the difficulty of g e t t i n g adequa t e s t a t i s t i c s . I t is deplorable t h a t t he re should be such a lack of i n fo rma t ion on th i s v i t a l m a t t e r , a n d I sugges t t h a t s teps should be t aken to t r y to remedy our ignorance . T h e Commi t t ee s t a t e t h a t violent movements of cap i t a l m a y have serious effects on o u r exchange, and , w i t h o u t be ing dogmat ic On a m a t t e r on which we have so l i t t le knowledge, I v e n t u r e to t h i n k t h a t if we h a d more knowledge of cap i t a l movements i t m i g h t upse t our a s sumpt ions about the Ba lance of T r a d e .

I do not t h i n k t h a t w h a t has been called " t he a u t o m a t i c equ i l ib r ium theory " h a s been disposed of by the a rgumen t s which have been p u t before t h e Commit tee . I n d e e d i t is a d m i t t e d t h a t the theorv in genera l is sound, bu t t h a t

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i t would be f a t a l to allow i t to ope ra t e to the ex ten t of d e p r e c i a t i n g the exchange value of s t e r l ing to p rac t i ca l ly no th ing . N o doub t t h a t is t r u e ; but if t h a t did h a p p e n i t would show t h a t there w a s someth ing r ad ica l ly w r o n g w i t h our ba lance of paymen t s . B u t t h a t i t no t the case. T h e p o u n d h a s kep t fa i r ly steady since the d e p a r t u r e f rom the Gold S t a n d a r d , a t a figure r o u n d w h a t we are told is i t s rea l ex t e rna l value. I t s p resen t va lue is about t he figure before the r e t u r n to the Gold S t a n d a r d in 1925, a n d a t t h a t t ime we h a d a large ' ' f avourable ' ' t r a d e ba lance on the accepted assumpt ions .

I n short , I t h i n k we a r e e x a g g e r a t i n g the influence of the al leged adverse balance of t r ade , a n d t h a t we a re in d a n g e r of a p p l y i n g medic ine to cure a suspected disease which h a s no t been tho rough ly d iagnosed , a n d about whose exis tence we a r e no t qu i t e sure .

B u t l eav ing these m a t t e r s aside, I wi l l come to the recommenda t ions of the Commi t t ee for dea l ing w i t h the a s s u m p t i o n t h a t t h e r e is a ser ious adverse balance wh ich m u s t be set r i g h t . T h e B o a r d of T r a d e , p roceeding on the a s sumpt ion t h a t we can g e t a t the balance of t r a d e by the s imple method of t a k i n g the excess of i m p o r t s over expor t s a n d a d d i n g to the expor t s the invisible i tems, conclude t h a t in 1931 we shal l have an adverse ba lance of abou t £ 1 0 0 mil l ions , p e r h a p s a s h i g h as £120 mil l ions .

Since the r a t i o between visible i m p o r t s a n d expor t s r e m a i n s t he same, however much the values m a y fall , the adverse ba lance is accounted for by the fa l l in the r e t u r n f rom fore ign inves tments , f re igh ts , i n su rance a n d commissions. T h e r e is no controversy about the f a l l ing off of t h i s source of income. B u t i t is wel l to bear in m i n d w h a t effect m a y be p roduced on these i tems by a n y policy w e may a d o p t for r e s t r i c t i n g impor t s . I wi l l dea l w i t h t h a t la ter . The C o m m i t t e e h a s assumed t h a t no Governmenta l ac t ion can increase the ' ' invisible e x p o r t s " except^very slowly a n d ind i rec t ly . I n r e g a r d to fo re ign inves tments I ag reed t h a u p m r y be in a considerable measure t rue , b u t the o ther i t ems— s h i p p i n g , f re igh ts , & c , m a y be very m a t e r i a l l y affected for good or bad by fiscal policy.

H a v i n g satisfied themselves t h a t t h e problem is one of the excess of the i m p o r t s of m e r c h a n d i s e over expor t s , t he Commit tee proceed to sugges t measures for rec t i fy ing t h i s excess. They p ropose to d o i t by r e s t r i c t i n g impor t s a n d e n c o u r a g i n g expor t s . T h i s is the policy of a l l P r o t e c t i o n i s t count r ies . I t s fa l lacy should be t r a n s p a r e n t . I f every count ry in t he wor ld is r e s t r i c t i n g i m p o r t s a n d t r y i n g to increase i t s expor t s , w h e r e in t h e wor ld is t h e m a r k e t going to be found for increased e x p o r t s ? I would cal l a t t e n t i o n to the fac ts revealed i n t he t r a d e r e t u r n s for l a s t year . T h e figures a r e a lesson to those w h o t h i n k t h a t by lessening i m p o r t s we a r e go ing to redress t he ba lance of t r a d e . The Commi t t ee a im a t r e d u c i n g i m p o r t s by £52m. in 1932, a n d th is , w i t h a myth ica l inc rease of e x p o r t s by £106m. , is to r ed ress t he balance. I n 1931 ou r imporrts w-ere reduced by £181m. , a n d i t w a s i n the year t h i s h u g e r educ t ion of i m p o r t s took p lace t h a t w e h a d for t he first t ime a n adve r se ba lance , excep t in the a b n o r m a l condi t ions of 1926. B u t t h e r e is a n o t h e r i m p o r t a n t f a c t revealed by t h e 1931 figures. T h e r educ t ion of i m p o r t s w a s accompanied by exac t ly t h e same r educ t i on in t h e va lue of o u r e x p o r t s I T h i s i s no new fea tu re . A survey of t h e t r a d e r e t u r n s over fifty years wi l l show th i s correspondence be tween i m p o r t s a n d expor t s .

T h e figures g iven in the Commi t t ee ' s R e p o r t cover ing the l as t two y e a r s s u p p o r t t h i s conclusion. I n p a r a g r a p h 10 i t is s t a t e d t h a t the E x p o r t s for t he twelve m o n t h s ended September las t were va lued a t £422m. , as compared w i t h £729m. in 1929—a fal l of £307m. The I m p o r t s for t h e same pe r iods were respect ive ly £814m. , a s compared w i t h £1,111m., a fal l of £297m. T w o th ings a r e clear from these figures. F i r s t , t h a t , a s i m p o r t s fal l , e x p o r t s f a l l ; a n d second, t h a t a r educ t ion of £297m. in i m p o r t s in t w o years h a s b rough t about the assumed adverse ba lance of t r a d e . W e have r educed impor t s by t h a t h u g e figure an two years , a n d ye t we a re asked to assume t h a t if we can reduce them by £ 5 2 mil l ions in 1932 we a r e go ing f a r to r educe t he adverse ba l ance ! B u t the i m p o r t a n t fact wh ich emerges from all t he figures i s t h a t any a t t e m p t to reduce i m p o r t s wi l l r esu l t in a r educ t ion of expo r t s , a n d I submi t t h a t i t is a de lus ion to i m a g i n e t h a t we can increase expor t s a n d a t t h e same t ime reduce impor t s .

T h e r educ t ion in t he r e t u r n of invisible e x p o r t s from s h i p p i n g , &c., would n o t be remedied by r e d u c i n g impor t s . T h e s h i p p i n g i n d u s t r y depends more upon

impor t s t h a n upon expor t s , for, I u n d e r s t a n d , t h a t the grea t bulk of impor t s a re b rough t to t h i s count ry in B r i t i s h ships .

The Commit tee propose to effect the reduc t ion in impor t s by a general tariff, and by specific tariffs upon goods of a l u x u r y na tu r e , a n d upon goods which can be produced in t h i s country . " Goods which can be produced in this country " is a wide and indefinite te rm. W e could produce every th ing we need in th is couutry a t a pr ice , a n d for a t i m e - a very shor t t ime.

These recommendat ions of the Commit tee t ravel f a r beyond i ts t e rms of reference, which were to find means of revers ing the balance of t r ade . These recommendat ions a re for a complete a n d p e r m a n e n t reversal of ^ I r s c a l policy. They lay the founda t ions of a P ro tec t ion i s t system upon which the complete s t ruc tu re can be g r a d u a l l y bui l t . I do not wish to in t roduce the pol i t ical aspects of t h i s quest ion, bu t I mus t p o i n t out t h a t t h i s is going f a r beyond the p r o g r a m m e upon wh ich the N a t i o n a l Government w e n t to the coun t ry . I t s m a n d a t e is c lear and unequivocal , and w a s well s t a t ed by M r . B a l d w i n on the 24th October. H e said :—

P e r h a p s I should say a word about those who have t r i ed to confuse t h e issue w i t h a t t e m p t s to revive the F r e e T r a d e - P r o t e c t i o n controversy of twenty-five yea r s ago. Now, th i s is no t the rea l issue. H e r e the P r i m e M i n i s t e r a n d M r . Snowden have both s ta ted the posi t ion fa i r ly accura te ly— t h a t t he N a t i o n a l Government m u s t be free to consider any and every exped ien t which may he lp to es tabl ish the balance of t r ade .

The 10 per cent, genera l tariff is p u t f o rward as a " revenue " tariff. I t is to be all b u t un iversa l in i ts app l i ca t ion . I t is to be p e r m a n e n t . I t is to a p p l y to nea r ly al l the ca tegor ies of food-stuffs and to a l a rge number of r a w mate r ia l s , and to a l l s emi -manufac tu red and manufac tu red ar t ic les . I w a n t to know whether t h i s 10 pe r cent, d u t y is to be r ega rded as a revenue du ty or a protect ive duty. I t may be answered t h a t i t is both. I t may ra i se revenue and it may protect . B u t in so f a r as i t p ro tec t s by r educ ing i m p o r t s i t defeats i t s purpose as a revenue producer . W e cannot have it both ways . Such a weapon in t he h a n d s of a n impecunious Chancel lor wil l a lways be a t emp ta t i on to increase the r a t e of t he duty. A n d to p lace such a d u t y in the h a n d s of any Pro tec t ion i s t Chancel lor is t o g ive h i m al l he needs to t u r n t he t a x into a full P ro tec t ive duty. I f t h i s 10 pe r cent, d u t y is advocated as a revenue duty, then it is outs ide the reference of the Commit tee , which w a s confined to finding " exped ien t s which may he lp to establ ish the balance of t r a d e . "

I t is p roposed to exempt from the genera l tariff ce r t a in ar t ic les of food a n d a few r a w mate r i a l s . The re is no logical defence of such exempt ion. T h e exempt ion of ce r t a in food-stuffs is justified on the g round t h a t the ma in i tem in t h i s c a t e g o r y — w h e a t — i s being dea l t w i t h by a quota , and mea t a n d bacon form a p r o m i n e n t i tem in household budgets , and t h a t to t ax these ar t ic les m i g h t cause such a r ise in the cost of l iv ing as to incur a demand for an advance of w a g e s . T e a is a p p a r e n t l y to be dea l t w i t h in the Budge t . I find from a summary of the I m p o r t s of food-stuffs suppl ied by the Boa r d of T r a d e t h a t the value of these a r t i c les in 1931 ( inc lud ing those a t present dut iable) w a s £397m. Of these i t is proposed to exempt f rom the 10 per cent, du ty a total of £134m. , leaving t a x e d ar t ic les of food for men and beasts to the value of £263m. I n add i t ion , r a w ma te r i a l s to the value of £ 9 5 m . are to be taxed , a n d m a t e r i a l s to the value of £52m. are to be exempt . M a n u f a c t u r e d goods to the value of £292m. wil l be taxed, i n c l u d i n g £48m. a l r eady p a y i n g duty . Al l a r t i c les of domest ic use a n d consumpt ion , w i th the compara t ive ly small exempt ions ment ioned, a r e to be taxed. W h e n w e add the profi t on the d u t y in the i n t e rmed ia t e s tages, a n d the inevitable increase of p r ices of the home-produced art icles , we must contemplate an increase of probably not less t h a n 15 pe r cent, in the cost of l iving.

T a k e n in conjunct ion wi th the possible increase in pr ices owing to the fal l in t he exchange, we get an increase in the cost of l iv ing which wil l be in to lerable to the w o r k i n g class. T h i s is bound to cause wages t roubles a t a t ime when i t is v i t a l no t to a d d to t he difficulties of the m a n u f a c t u r e r s by a d d i n g to the w a g e i tem in t he cost of p roduc t ion .

I f t he 10 p e r cent, d u t y is advocated as a revenue producer then o the r object ions can be u rged which I need not s t ress here. I f the revenue is to be used

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t o reduce d i rec t taxation-—to reduce the income t ax , for ins tance , by sixpence t he change will be a relief of the well-to-do a t t he expense of the work ing classes. A reduct ion , or even the abol i t ion of the Income T a x would give no relief to a m a r r i e d m a n w i t h th ree chi ldren a n d a n income u n d e r £400 a year . Bu t from the ana lys i s of fami ly budge ts the proposed revenue t a x would involve the t a x a t i o n of these people to the ex ten t of from £ 7 to £ 1 5 a year .

I t is i n t ended now, o r la ter , to give a r educ t ion of the 10 pe r cent, du ty on i m p o r t s from the E m p i r e . I f du t i e s a r e r equ i r ed to reduce impor t s there is no jus t i f ica t ion for t h i s preference . Goods f rom the E m p i r e affect t he alleged adverse balance j u s t as much as goods from foreign count r ies . B u t if the p r imary p u r p o s e of these du t i e s is to reduce i m p o r t s to redress the balance of t rade , it i s more i m p o r t a n t to reduce E m p i r e impor t s t h a n foreign, for the t r a d e wi th the E m p i r e is more adverse to us t h a n our fore ign t r a d e . The figures are i l l u m i n a t i n g . T a k i n g the first n ine months of i m p o r t s a n d expor t s for 1929, 1930 and 1931, we find t h a t the " a d v e r s e " ba lance of merchand i se t r a d e wi th fore ign count r ies h a s been decl ining, a n d t h a t w i t h the E m p i r e r a p i d l y r i s ing. T h e " a d v e r s e " ' va lue w i t h fore ign count r ies in 1929 w a s 257m.; in 1930, £ 2 5 4 m . ; in 1931, £241m. The " a d v e r s e " balance w i t h t he E m p i r e count r ies was in 1929, £ 1 2 m . ; 1930, £ 2 2 ^ m . ; 1931, £391m. A n encouragement of impor t s f rom the E m p i r e will increase th is ' ' adverse ' ' ba lance s t i l l more.

I n a d d i t i o n to the general d u t y of 10 pe r cent., t he Commit tee recommend specific du t i es of a h i g h e r r a t e u p o n ar t ic les of luxury , a n d upon ar t ic les which can be p roduced in t h i s country . T h e Board of T r a d e assumes the possibi l i ty of t he i m p o r t s of a r t ic les " wholly or ma in ly m a n u f a c t u r e d " being reduced in 1932 by one-quar te r . H o w th i s possibi l i ty is v isual i sed we a r e not told. I t is assumed t h a t these excluded impor t s wi l l be rep laced by home-produced goods. C a n anybody real ly believe t h a t t h i s is possible ? I n t h e sphere of food product ion I do not deny the poss ibi l i ty over m a n y yeaiy, by a tho rough reorgan i sa t ion of a g r i c u l t u r a l p roduc t i on a n d m a r k e t i n g , of p r o d u c i n g a much l a rge r p ropor t ion of our food consumpt ion , bu t i t wi l l t ake years . W e have been told t h a t in the m a t t e r of bacon i t wrouid t ake five years to es tabl ish a system comparab le w i th the D a n i s h system. I n the meant ime, we a re not l ikely to encourage higher p roduc t ion of d a i r y p roduce by t a x i n g impor t ed oats a n d g r a i n a n d other feeding-stuffs for cat t le , or pou l t ry f a r m i n g by t a x i n g e q u i p m e n t a n d produce.

H o w an encouragemen t is go ing to be given to expor t s by inc reas ing the cost of p roduc t ion by "the t a x a t i o n of the m a t e r i a l s w h i c h en te r in to p roduc t ion I d o n ' t know. The assumpt ion of an increase of £100m. in expor t s th i s year is f a n t a s t i c ; a n d i t ce r ta in ly wil l not be he lped by inc reas ing the costs of pro­duct ion . T a x e d i m p o r t s of r a w m a t e r i a l and semi -manufac tu red ar t ic les which enter in to the p roduc t i on of expor t s a r e not to be en t i t l ed to draw-backs; so i t is u n d e n i a b l e t h a t costs of p roduc t ion wil l be increased.

T h e Commi t t ee clear ly con templa te t h a t t he specific du t i e s wil l be so high as to be to a g r e a t ex t en t prohib i t ive . The repercuss ions of a n increase in the pr ices of i ron a n d steel, for ins tance , a r e bound to be i n ju r ious to h u n d r e d s of i m p o r t a n t i n d u s t r i e s who a r e l a rge buyers . T h e case of t imber is impor t an t . Th i s , I assume, fa l ls u n d e r the 10 pe r cent. du ty . Fo re ign t imber is a n essential impor t , a n d to increase i t s pr ice when we a re t r y i n g to reduce t he cost of building­is indefensible .

I t is asser ted t h a t the proposed du t ies wall g ive us a b a r g a i n i n g weapon w i t h P r o t e c t i o n i s t count r ies , a n d t h a t we m a y by th i s demons t r a t i on of our r ead iness to impose dut ies , induce them to lower the i r s . T h i s is the oldest of the controvers ies between F ree T r a d e a n d P ro t ec t ion . A l l experience h a s proved i t s ineffectiveness. I f p ro tec t ive du t i es tended to ge t lower tariffs, we should have h a d un ive r sa l free t r a d e long ago. On the c o n t r a r y , tariffs beget tariffs, and tariffs beget h i g h e r tariffs. A t t he Economic Conference, a few yea r s ago, over fifty count r ies unan imous ly agreed t h a t tariffs were a g r e a t h i n d r a n c e to the exchange of commodit ies , a n d called for a reduct ion . B u t most of these countr ies , w i t h the b a r g a i n i n g weapon of h i g h tariffs in t h e i r h a n d s , have been increas ing t h e i r tariffs ever since, a n d the b a r g a i n i n g w e a p o n h a s been useless to b r i n g a reduc t ion .

Recen t events a r e ins t ruc t ive . I n t he las t few mon ths a considerable number of count r ies , w i t h the weapon for b a r g a i n i n g for lower tariffs in the i r hands , have l a rge ly increased the i r tariffs. I t a ly , I n d i a , A r g e n t i n e , F rance , Colombia,

Denmark , F i n l a n d , P o l a n d , U r u g u a y a n d N o r w a y ; a n d Hol l and is now cons ider­ing a new tariff schedule. W h e r e every o ther coun t ry has found the tariff ineffective to induce tariff r educ t ion , we a r e not l ikely to succeed. On the con t r a ry , our e n t r y in to t he tariff w a r i s f a r more l ikely to lead to st i l l f u r t he r increases.

I t is f u r t h e r sugges ted t h a t t he " specific tariff " may be used to compel t h e reorgan i sa t ion of our i ndus t r i e s . I canno t deal fully here w i t h t h i s hope. O u r experience of efforts to induce r e o r g a n i s a t i o n h a s shown us t h a t the i n d u s t r i e s will n o t r eo rgan i se w i t h o u t a .tariff, a n d if they ge t a tariff they wi l l fa l l asleep under i t s pro tec t ive cha rm.

T o sum u p the g r o u n d s of my dissent f rom the P ro tec t ion i s t p roposa l s of the Commit tee , I may say t h a t I do n o t believe they wil l do a n y t h i n g to redress the ba lance of t r a d e ; they wi l l m a k e the recovery of our expor t t r a d e more­difficult, they wil l increase t he cost of l iv ing a n d the costs of p r o d u c t i o n ; they will d i scourage en t e rp r i s e a n d efficiency; they wil l be useless to induce a lower ing of fore ign tariffs.

I may be asked w h a t a r e my a l t e rna t ives . T h e purpose of t h i s memo­r a n d u m is to t r y to show t h a t t h e p roposa l s of the Commit tee wil l do more h a r m than good, a n d no t to set fo r th a l t e r n a t i v e p r o p o s a l s ; bu t I may briefly say t h a t I t h i n k the causes of t he wor ld economic s i t u a t i o n a r e (1) r e p a r a t i o n s a n d w a r debts ; (2) t he m a l d i s t r i b u t i o n of the wor ld gold stocks, which is due in a l a rge measure to r e p a r a t i o n s a n d w a r deb t s ; (3) tariffs, which impover i sh t he consumers a n d r educe t h e i r p u r c h a s i n g p o w e r ; (4) exchange embargoes ; (5) b u r d e n of a r m a m e n t s ; (6) in our own count ry , inefficient o rgan i sa t i on i n i ndus t ry a n d p a r t i c u l a r l y i n a g r i c u l t u r e ; a n d t h e h i g h Bank R a t e a n d t h e res t r ic t ion of c redi t .

I n t e r n a t i o n a l ac t ion is needed to dea l w i t h the first five of these causes. W e should press w i t h the u t m o s t v igour for a p e r m a n e n t se t t lement of (1); a second Genoa Conference on gold a n d cur rency a n d gene ra l economic ques t ions should be a imed a t , a s I t h i n k m a n y coun t r i e s would now be r eady for it . T h e ques t ion of tariffs would be bound to a r i s e a t such a Conference.

I t may be sa id t h a t i t wi l l t ake t ime to deal w i t h these ques t ions . T h a t is t r u e ; b u t i t is be t t e r to be deeding w i t h f u n d a m e n t a l causes t h a n to a p p l y so-called remedies w h i c h wi l l no t cure, bu t wi l l a g g r a v a t e the disease.

S. January 18, 1932.

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