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ftoveeber 20, 1945- Honorable Henry A. fl&ll&ce, Secretary of Commerce, Washington 2$, D. C» De&r I as sending you herewith as a matter of Interest In connection with the British credit negotiations, Mi ftrtlelt prepared by a cs«aber of the Board' s staff concerning "The British Balance of Payments and Rational Income14, Very truly yotirs, M. S. Kcdea, Cha Enclosure. JBK:mla the British Balance of Payments and National Income By Lloyd A. Metzler fhe statement i s frequently made, in popular discussions of Britain's post-war international problems, that "the United Kingdom i s a bankrupt nation," or that "the United Kingdom has been reduced to a state of poverty by her -war-time losses* n .Assertions of this nature refer, of course, to the loss of British overseas assets, to the increase of her overseas l i a b i l i t i e s , and to the fact that, with the resulting loss of overseas income, the United Kingdom will find i t difficult to produce and sell enough exports to pay for her imports. Without intending to minimize Britain's post-war problem, i t may be said that most discussions of the bankruptcy or impoverishment of the United Kingdom give a distorted impression of the importance of the war-time changes to the British standard of living. While i t is true that the British have been highly dependent upon foreign trade in the past, i t does not follow that a reduction of imports will result in a permanent deterioration of the British standard of living. Ihen the figures for exports, imports, overseas assets, and overseas l i a b i l i t i e s are compared with the sise and rate of growth of British income, i t becomes apparent that British prosperity is much less dependent upon foreign trade than is commonly supposed. Figures for net national income, total consumption, and the balance of trade are presented in the following table for the years 195® through 1 MM 9 - Tear 1958 1959 1914-0 1*1 19^2 191+5 Net Retained Exports of Import Total income consumption imports U.K. produce surplus (in millions of pounds sterling) U.619 U,970 5,915 6,877 1,55k 8,079 8,55U 5,607 5,672 5,762 5,815 5,955 5,972 858 - 991 1,227 1,299 m - 269 232 258 587 722 995 export and import statistics in this table include only non-munitions items. Foreign trade statistics for 1959* 1>9hO, and I9I4I BTB excluded because the official data for these years include munitions as well as civilian goods.) - 2I t i s well known that the international problem whioh faces the United Kingdom at the present time i s partly a result of the abnormal import surplus whioh developed during the war* The British econoiay was io completely mobilised for war that resources were not available for the production of normal exports, Ihe large iiaport surplus whioh developed when exports were reduced, together with the munitions imports of the United Kingdom, were financed both by Lend-Lease and by an increase in Britain"s banking obligations (sterling balances) to the rest of the world, the termination of Lend-Lease and the reluctance of many countries to accumulate further sterling balances mean that other methods must be found to finance the British trade deficit in the transition fro® war to peace* The British expect that, in the long mn, they will be able to increase their exports sufficiently to pay for their imports; but in the meantime they need financial assistance for the transition years. The exact siee of the deficit in the British balance of payments cannot be accurately foreseen, but various estimatss have placed i t between 750 sind 1,500 million pounds, or®r a three-year post-war period. In any case, however, i t ie important to note that oven the largest of these estimates Is small relative to the probable value of domestic production in the United Kingdom. It has been estimated that, at full employment, Britain could produce a post-war net income of approximately 5»6 billion pounds, stated in 1938 prices* In post-war prices, this income would amount to approximately 7*8 billion pounds, She actual level of income w i l l , of course, be lower than this goal, owing largely to th© difficulties of reconversion* But even if an allowance In excess of 10 per cent is made for these difficulties, i t is likely that the net income of the United Kingdom over the three years lSh&~lShfi will exoeed 7 billion pounds per year* Compared with a n&tional product of this magnitude, even the maximum deficit of 1.5 billion pounds is relatively small. Over the three-yesr period, in fact, th@ deficit amounts to only 7*1 per cent of the aggregate net product* Considering the fact that productivity per worker increased about 1»5 Ver cent per year in th© pre-war period, i t is apparent that the deficit in the post-war balance of payments will not, in the long run, be a serious burden on the British economy*i/ Under these conditions, I t i s surely an exaggeration to say that Britain is bankrupt or destitute* Sie real problem, then, i s not the financing and rehabilitation of an economically bankrupt nation, but simply the provision of temporary assistance for a relatively small part of th© entire British economy* While such assistance is obviously not absolutely essential for the survival of th© United Kingdom as an industrially strong nation, i t i s nevertheless highly desirable. War damage and depreciation have reduced the l/ iltkough the net deficit in thei^alanoe of payments is likely to be small, relatire to the national income, i t is important to point out that the actual importance of foreign trade is greater than the relative figures indicate, since many of the imported commodities are essential to h r © production* this question i s further discussed below. on -3value of British capital by approximately 1 billion pounds, and the speed * with which these losses oan be replaced depends partly upon the assistance which the United Kingdom receives from abroad* thus the British are faced with a choice of accepting a loam from the United States, i f offered, and thereby accelerating their rate of recovery, or reducing their deficit immediately to the point where I t can be financed by bilateral arrangements with countries in the sterling area, the l a t t e r alternative would, of course, increase the time required to restore Britain's post-war standard of lining as well as her capital equipment, 'fhe nature of the alternatives confronting the British may be seen more clearly by considering the possible disposition of the net national income in a typical transition year* I t was suggested above that the average annual British income in the transition years 19U&-19W J a &y amount to slightly more than 7 billion pounds. If assistance of 500 million pounds per year is received from other countries, the total value of resources available to the British in a typical year will be 7*50 billion pounds. O the assumption that consumption i s restricted to the n 19ll4 l«vel by means of rationing, the resources devoted to this purpose will amount to U»18 billion pounds, leaving 3*32 billion pounds for reconstruction, other capital development, military and other governmental expenditures, Kon-military government expenditures on goods and services in 1 W were approximately 0-5 billion pounds. I t may be assumed that 9 + this rate will continue into the post-war years, Ihlle military expenditures are much reore difficult to estimate, i t is generally believed that they will be about one-fourth of the war-time peak, or approximately 1,2 billion pounds per year, Thus total government expenditures on goods and services msy be about 1,7 billion pounds, leaving 1,6 billion pounds for reconstruction and other capital development, At this rate of development, the domestic war losses could be replaced in approximately 2,5 years. But such a rapid rate of reconstruction is hardly to be expected. It seems more likely that the British will permit their standard of living to increase somewhat above the 19hh level, and will restore their war losses in perhaps four years. The figures just presented are summarised in the table belowt (In billions of pounds) Bet national income in a typical transition year Loans from abroad Total resources available to the U,K, Less* Consumption Resources available for other purposes Lesss Government expenditure of resources Military 1,20 Hon-mil i tary ,30 Balance available for capital development 7«00 ,50 7,50 4 1 -t - hThe general impression created by these figures is that foreign even on a generous scale, is & relatively small factor in the total British recovery program. The actual importance of foreign aid, however, is no doubt greater than these figures indieate. To some extent, the products received in foreign trade are essential to the maintenance of national output, The textile industry, for example, cannot operate without the eotton received from abroad. Similarly, the food industries are highly dependent upon importation of foodstuffs* In view of this inflexibility, it cannot be inferred that elimination of foreign aid frQ» the figures above would simply reduce the possible level of oapital development from 1«6 billion pounds to !•! billion pounds. Actually, the resulting shortage of raw materials would probably reduce the national income below the figure suggested abo^e, and the rate of capital development would be correspondingly reduced. Even after making allowances for Inflexibilitys however, the fact remains that the British standard of lining is by no means entirely dependent upon the international position of the United Kingdom, On the contrary, the standard of living is f&r more dependent upon the productive ability of domestic industry than upon foreign trade* this means that the British have considerably greater freedom in the choice of a post~w@r foreign economic policy than is sometimes believed to be the case* If financial arrangements are made ijhich are satisfactory to both th© lending countries and the lOhited Kingdom, the rate of British recovery will be accelerated and th@ standard of living will return mor© rapidly to its normal level* But if such financial ©.ssistanee is not given, and the United Kingdom relies more heavily upon domestic industries and upon countries of the sterling area, th© final outcome will by no means be catastrophic to the British standard of living. Thus a loan to the British is important n@t so much because it ©nables the United Kingdom to restore living standards rapidly as because it provides the only means of eliminating the barriers to international trade which have developed during the war* Biere can be little doubt that the British national income will rise steadily in the post-war years ®ven without assistance from the United States. But unless a means can be found of providing financial aid in th© transition years, th@ iriseof British ineom© will inevitably be accompanied by a continuation and strengthening of barriers to foreign trade.