The Strength and Strains of the British Economy

DR. CRANFIELD:

As President of the Empire Club I wish to extend a very warm welcome to the members of The British Canadian Trade Association, The British Commonwealth Branch of the Board of Trade and The Royal Commonwealth Society. I am pleased to have them share the honour of the presence of our illustrious speaker.

A doctor's son who chooses a life in finance may have been influenced by a confused symbolism. I refer of course to the caduceus. It was worn proudly on the lapels of every flight surgeon's uniform in the R.A.F. and R.C.A.F. in World War II, but it is more accurately the symbol of Commerce. It is a winged rod about which two snakes entwine. The classics scholar recognizes this as the wand of the Roman God, Mercury, and knows that he was the god of eloquence, skill, trading and thievery and served with his winged heels and winged hat as the messenger to the gods of the time.

The proper symbol of healing, of course, is a rod with but a single snake about it and is as old as Moses. This symbol our speaker may well have noted in his father's surgery. He chose instead the Caduceus of Mercury, holding that if one snake is good two must be better. He was educated at Aldenham which is at Elstree in Hertfordshire, a school founded in 1597 a scant hundred years after Columbus discovered America. Leaving there, he qualified as a chartered accountant and joined an old-established City firm of Dixon, Wilson, Tubbs and Gillett. 36 years later he is still with them. There was one digression, in September 1939 he joined the armed forces as a private soldier and by 1945 was a full colonel in Marshal Viscount Montgomery's staff. He accepted an invitation to join the N.A.A.F.I., pronounced Naffee, as the deputy chairman which post he still fills. Any service man who has been abroad knows that N.A.A.F.I. stands for Navy, Army, Air Force Institute and that it runs the British Serviceman's world-wide Supermarkets and Social Centres. Since it was before Sir Charles became deputy Chairman it is no criticism of him to say that some of the worst music hall talent was inflicted on the poor suffering servicemen by the N.A.A.F.I. shows. (I recall that attendance was obligatory.)

In April 1967 our speaker accepted Chairmanship of the White Fish Authority and revitalized this fragmented and sagging industry. Earlier (1964) he had joined the Board of B.O.A.C. to which he became Chairman 5 years later. M.E.P.C. I believe is the parent company to this and he is Chairman of it and of Canprint Holdings Limited. Representatives of these companies have been introduced to you from our Head Table. Altogether he is director or chairman of more than a dozen companies.

He has been recognized by three awards, the O.B.E. in 1943, the C.B.E. twenty years later and finally he received his knighthood in the Queen's Birthday Honours in June 1970.

So it seems that all the assets of Mercury belong to him, eloquence, skill, trading and the winged heels and wheels of B.O.A.C. (That thievery bit we will ignore.)

There can be no question but that the title of today's address, "The Strength and Strains of the British Economy" holds a portent of what we are to hear. There is a physiological dictum that without "strains" there would be no "Strength". Tough sinew is the result of hard muscular action. I judge, what is true of a man and his tissue, we shall hear is also true of a great nation. I now call upon Sir Charles Edgar Mathews Hardie, C.B.E., F.C.A.--Sir Charles.

SIR CHARLES:

My subject today is "The Strength and Strains of the U.K. Economy". It is a golden rule that one should never talk about the politics of one's own country when visiting other countries, and indeed, if I did, the whole subject would take me about 30 seconds. One of our Judges told me the other day that politics are really quite simple, in that under Socialism man oppresses man, and under Capitalism it is the other way round.

What I want to do today is to present to you the external balance sheet of the U.K., and to follow this by the external receipts and payments account, both on capital and income account, the balance of which, of course, represents the vital balance of payments.

The U.K. has, in fact, a position of immense external strength in the sense that the overseas investments of the private sector are as large as $34 billion. The investment in the U.K. by foreign countries totals only $16B. and so you will see there is an $18B. advantage. On top of this the currency and other deposits overseas by the private sector total another $34B., but these are offset by a corresponding amount, being the liabilities by our banking system to the overseas depositors in question. This enormous gross banking asset derives from the fact that London is one of the largest, if not THE largest money centre in the world. We have had a policy of allowing any bank under the sun to set up business in London, and as a result large sums of money arrive in London and are turned over before being redirected, a very useful turn by way of profit for the U.K. in the process.

I remember wondering many years ago why Montreal or perhaps Toronto did not take advantage of the restrictive attitudes of the U.S.A. and New York in particular, by allowing the creation of an absolutely free banking centre as in the west, perhaps on the lines of Amsterdam or Zurich, let alone London.

Now this great possession of the private sector is offset to a great extent by the overseas borrowings of the U.K. Government from the IMF and other national funds of some $16B. although this is covered, of course, by the U.K. Government holdings of its own overseas lendings and its gold and currency reserves, altogether totalling some $611. The net result, in any event, is an overall surplus in private and public sector holdings overseas of some $711. This in the terms of industrial finance is the classical situation of long term investment against medium term loans and overdrafts, with a liquid reserve in the form of cash of sufficient proportions to cover normal fluctuations, and the task is, of course, to see that the fluctuations are not abnormal.

So much for the balance sheet of the U.K. I am told that in years gone by a Chancellor of the Exchequer, or was it a Finance Minister in Canada, always used to refer to a document in the left-hand top drawer of his desk whenever figures were talked about. When he retired, his staff hastened to see what was in this drawer, only to find a note with the simple words on it, "The asset side is the one nearest the window." If I get the figures the wrong way round today it will be because there are no windows in the ballroom of the Royal York Hotel.

As I have said, the task is to maintain the balance of payments so that net assets of the U.K. do not unduly diminish, and this really means the currency and gold holdings. How does the U.K. set about this task? Basically, we are exporting manufactured goods--incidentally only one-sixth of them to North America as a whole--at the rate of nearly $2B. per month--that is over $20B. per annum--and then we are importing raw materials, partly manufactured goods, in contradistinction to Canada, where it is the other way around, although I am sad to say that Canada imports from the U.K. only 50% of what it exports to Britain. It is obviously the task of a lot of those here to try and remedy this imbalance and I am very conscious of the great efforts being made in this direction by the British exporters. What we want is some more Canadian importers!!

Now these exports and imports on visible trade are at the present time in balance. There was a balancing item in the statistics in the past unexplained, but this now turns out to be unrecorded exports by those not wishing to fill in too many forms. There is always some joy in such situations for someone, because the property company of which I am Chairman let an empty office building just for the purpose of putting this accounting right. This balance is really a remarkable achievement because historically, actually since 1900, the earliest date I can roughly remember, the balance has always been the other way, namely a surplus of imports.

Now on top of this we have the invisible exports of the U.K., and these are the most valuable of the lot, yielding an annual surplus of $1 B., which is roughly the net balance of payments presently enjoyed by the United Kingdom. The word "invisible" seems a contradiction in terms, and I hope our columnists can find something more realistic to describe what is the real basis of our economical health. I was in Miami a few months ago with the President of our Board of Trade, and there was an English girl swimming in one of those see-through glass swimming baths, whom we couldn't help watching. This British tourist to Miami, I reminded the President, is what is known as an invisible export from the USA point of view, to which he quickly replied, "She looks more like a visible import to me."

Now these invisible exports derive mainly from the dividends and interest on those investments of the private sector of some $34B., against which, of course, we have to knock off what is payable upon the smaller amount of overseas investment in the U.K. These investments have a double value in that the retained earnings are very much greater than the dividends paid, and so we have a built-in capital appreciation going on the whole time. If the country was an insurance company, I suppose it would re-value its funds from time to time to demonstrate a better showing than the bare book figures. On top of this we have our net receipts from shipping, and on the travel front I am glad to say that the airlines produce $500,000 for our economy in overseas sales. In fact B.O.A.C. only sells 30% of its tickets in the U.K.--all the rest overseas. Then we have our insurance companies, not forgetting our entertainers, and our great traditional merchanting business. All these so-called invisible exports from the private sector amount to over $3B., but there is, of course, as usual, another side to the coin.

The U.K. Government necessarily has much invisible expenditure in the form of overseas aid to emerging countries and defence costs in Germany and the Near and Far East under our traditional roles, and the overall cost of these is nearly $2B., which reduces the overall invisible surplus to $1 B., which reflects the current overall surplus of the U.K. economy as a whole, if I may be allowed to oversimplify it.

I am afraid I have been rather peppering you with figures, but we are so highly computerized these days that at least we have to make use of this great new service. The first time I came across a computer was in France, during the war, when we had a computer on a lorry, recording ammunition and general stocks and stores, and we used to feed all sorts of other problems into this machine. On one occasion in a very sticky situation in the Ardennes, a General fed into the computer his situation in terms of resources and disposition of troops, and also the known position of the enemy, and then enquired of the computer, "Do we advance or retire?" Like a flash came back the reply, "Yes," to which the General speedily enquired of the computer, "Yes what," to which the computer equally quickly replied, "Yes Sir."

Now what do we do about securing the economy in order to maintain this balance of payments? And I can quickly summarize this by saying that not only do we concentrate on our exports, but we are constantly controlling our imports, because apart from the overseas aid we give, it is the excess stocks which in recent history, in such relatively small sums of £ 200m., which have precipitated crises in drawing off an equivalent amount from our currency resources. But the biggest task of all is to resist inflation, and I shall try and tell you in a few minutes what we are doing about this, in common with every country in the world.

What all this is aimed at is inspiring confidence in the will of the United Kingdom to tackle its problems without fear, and this is what is commonly called Faith. Now, at heart, we are really a modern, deep-thinking country, although we have not yet reached the stage of priests without habits or clergymen without collars. We are even getting a little more modern in this direction and a bishop was saying the other day that he has had to tolerate one of his clergy who was a devotee of donkey-racing, with all its attendant gambling involvement. The climax was reached when this particular clergyman actually entered his animal in a donkey race in Holy Week, and so he felt constrained to write him a reprimand, to which he promptly received a reply on a postcard, simply stating, "I have scratched my ass."

It is in this spirit of self-flagellation that the United Kingdom is tackling its problems. The first of these is resistance to wage advance, which is causing exceptional difficulty. It is a fact, however, that in the U.K. there is an unemployment level of 21/2 % only, compared with 5 to 6% in North America, and so you will see that in this context there are obviously major patches of unfilled vacancies, which raises the demands. We are very conscious of our strike position, which receives so much publicity and probably derives from the fact that the whole plateau of British wages is fundamentally too low. In this field however, things are not really so bad, as we have an average record in the last 3 years of 60 days lost per 1,000 employees, compared with 300 days lost per 1,000 employees in North America. We are well above the European average except for West Germany, where the stoppages are only 10 days per 1,000 employees per annum. New legislation is being introduced with the usual cooling off periods and penalties for unofficial strikers, compulsory arbitration, but this is really only likely to be effective in terms of a background of new rules as opposed to regulations, which will not often, we hope, have to be litigated.

All this question of inflation is known as "ballooning". I was talking to a balloonist yesterday, believe it or not a director of the Royal Bank, and he told me that when in a balloon you are in the clouds, the only thing to do is to throw out of the basket a piece of lavatory paper of the soft variety. If it goes up, you are going down. If it goes down, you are going up. If you see pieces of paper dropping out of the window of Mr. Benson's office, you will know what is happening.

The next thing we are doing is to reduce public expenditure by Government Departments, and by the nationalized industries in matters which our present Government thinks are best left to private industry and the law of supply and demand. This should release more resources for the unsatisfied consumer demand which is currently being propped up to a minimal extent by a reduction in personal taxes of 2 1/2 %. Personal taxes up to $25,000 a year are really not very much higher than in North America and Europe, but I regret personally, above that figure the tax rate is 90% on individuals. That is why I look so pale and lean!

There has also been a 2 1/2 % reduction in corporate taxes, by way of encouraging plant investment, but the real control of the economy seems now to be centred in the control of money supply and we have a 3 1/2 % of resources of banks by way of special deposit in the Bank of England, free of interest, in order to curb the level of advances to customers. In Scotland the special deposit is only 13/a %, but as you will know in Canada there is always something special about the Scots!

I really cannot today fail to mention the Common Market, and here there is a real possibility of entry in order to create in economic terms 3 or 4 great powers--North America, Europe, Russia, and I suppose we must not forget the Far East. We have a transitional problem here, although owing to the relatively small dependence on mutual Canadian trade I don't think Canada will be unduly affected. Our most highlighted problem, but probably not so important as the opponents of entry would say, is the question of agricultural prices, which are subsidised in the U.K. This is already being anticipated by the U.K. by the imposition of import levies which will tend to lift U.K. food prices to a level which will be supportable after a few years after entry into the Common Market. When I read the menus in Canada, on which 90% of the dishes are made of beef, which is probably twice the price of beef in the U.K., you can see that there is a little personal problem here for lots of us, and we must not forget the dependence of New Zealand on its subsidized lamb exports. These, however, are only relatively small matters of highly emotional content. What will really matter about entry into the Common Market will be that the whole standard of living in Europe will be lifted to that of the U.K., as it is presently being lifted also to that of West Germany, a sort of substitution of proteins for carbohydrates, and in this expanding personal consumption market we shall play our part, and receive our benefit and likewise right across the world the whole uplift in standards will be felt in terms of international trade. We already have one precious thing in Europe, not the standard of living, but the standard of life, and when one sees south of the border the evidence of strife and violence and the problems of youth, we trust that we can avoid this particular degree of difficulty.

You can therefore see that the U.K. is really a very prosperous economy but that the price of a certain amount of political turmoil is we do impose strains and discipline upon ourselves in order to retain world confidence.

The whole problem is really nothing new and was clearly set out by the Indian Chief about 200 years ago, who called together his tribal elders and said, "I have two pieces of news for you--one good, and the other bad. The bad news is that this winter we shall have nothing to eat but buffalo dung, but the good news is there will be plenty of it."

Mr. Chairman, we, your guests, have not had this particular ingredient for lunch today, nor, we hope, will your members when they visit London next June, but I can say on behalf of us all, what we have had, we have had plenty of it.

Thanks of the meeting were expressed by Mr. Buell Manning.