Balance of payments in Europe

The fog of economic debate is now pierced by one clear fact, to which I have drawn attention for years, but it has long been ignored as politely and firmly as the presence of the Devil in the Holy of Holies. This fact is indeed blinding in its unanswerable simplicity: it is impossible for everyone to have a favourable balance of payments at the same time.

All nations cannot simultaneously sell more than they buy; this simple fact would not elude a child in an elementary school, but its studious avoidance in current economic debate is at the root of our difficulty in finding a solution. First one nation then another is in trouble, because all cannot together attain this beatitude of the system, a favourable balance of payments. At regular intervals each country must restrict credit, deflate and create depression in order to put itself again in surplus on external account. This means that the country in question can again sell more than others on world markets, and consequently pushes some other country into deficit with compulsion to adopt the same measures.

Countries only get a favourable balance of trade by mounting on the backs of others and pushing them by successful competition into the deep waters of deficit, an adverse balance of trade. These countries in turn deflate and accept artificial depression in order to scramble back to solvency on the backs of others. This is an extreme over-simplification of the economic problem, but it is useful to state these realities because they go to the root of the matter, which will not be settled until we transcend the narrow nationalisms.

The entry of Britain into the Common Market will not solve our balance of payments problem, and the same problem in other countries will not be settled until Europe is as complete a community as the component countries are today. It will not then be a question of Britain having an adverse balance of payments and France and Germany having a surplus, or vice versa, but only a question of whether a firm in Manchester can or cannot compete successfully with a similar firm in Lyons or Hamburg. We shall no more have balance of payments problems within Europe than we have balance of payments problems between Yorkshire and Lancashire today. A common currency will follow naturally from any such arrangement. Until Europe is thus integrated it will be found that these problems are insoluble and will cause continually increasing friction until we end in a major crisis.

The bankers' dream is of course theoretically possible with all countries accepting the dictatorship of international finance to keep their trade in near balance, and with temporary deficits serviced by the banks until the correction of compulsory deflation has worked. In what the bankers conceive to be an entirely rational world, the carrot of loan and the stick of credit restriction would keep all trotting together in a fashion both orderly and profitable. The trouble is that the world is not rational in this way, less so than ever today. The completion of western industrialisation and the desire of other countries to imitate the process both in its successes and failures, the development of science with its enormous productive potential, and the desire of everyone to play the big frog in the puddle at the same time, has shattered any hopes of a return to the nineteenth-century bankers' system. It rested on the basis of poverty economics, which were easy to control, but are in extreme contrast to the plenty economics of today, which already suggest to industrialist and worker that they can be free of bankers' control in a producers' system. Bankers will eventually discover their twentieth-century role in the profitable organisation of the vast new enterprises of a scientific, producers' system. In the meantime, so far from solving the balance of payments problems for every country at the same time, the bankers have failed even to agree on a plan to secure international liquidity which is primarily their concern; several different solutions are available, but the will has been lacking to agree on any durable policy.

The matter of international liquidity and related issues, now so laboriously debated, will in the long term be found irrelevant to the fundamental question. It is highly desirable that solutions to these difficulties should be found, but the effect of success would be transient if the deeper problems are not faced. Roosevelt in the thirties temporarily solved the liquidity problem by doubling the price of gold, but the effects were exhausted within three to four years for exactly the same reasons as are still operative. Sir Stafford Cripps temporarily solved the British balance of payments problem in 1949 by a devaluation of 30 per cent, followed by the austerity of credit restrictions to prevent or rather retard a commensurate rise in internal prices, but in due course the problem returned in a form aggravated by a drug which was no remedy; it will return yet more speedily after the devaluation of 14 per cent in 1967. There are certain fundamental questions to which I have long drawn attention which will return in a more acute form than ever when the artificial effects of war and armament booms are eliminated or even reduced. Before we approach these larger questions and the solutions I have proposed, it may be well briefly to consider the policies by which Europe is now aggravating problems which are already difficult enough.

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