View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

ftoveeber 20, 1945-

Honorable Henry A. fl&ll&ce,
Secretary of Commerce,
Washington 2$, D. C»

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,

the British Balance of Payments and National Income
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 19M-M



Retained Exports of Import
income consumption imports U.K. produce surplus
(in millions of pounds sterling)












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 horn© production* this question i s further discussed below.

-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&ay
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. On the assumption that consumption i s restricted to the
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 19W+ were approximately 0-5 billion pounds. I t may be assumed that
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
Hon-mil i tary
Balance available for capital development


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.