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56
source of gold and foreign exchange require-
the US about 5 times each, and France almost
ments.*
9 times 1938.* Rigorous control over prices,
The central gold and dollar reserves of the
a rigidly enforced system of rationing, and al-
sterling area (excluding reserves held sepa-
location of raw materials prevented a run-
rately by individual countries which are negli-
away inflation although they did not avert
gible except for those of South Africa) were
eventual price rises and a constant pressure
upon the control mechanism. The index of
reported by the Treasury as of 13 January
wholesale prices (1938=100), annual average
1949 to be £457 millions, as compared with £864
rose to 166.7 in 1945, 189.1 in 1947, and 216.2 in
millions at the end of August 1938. The addi-
1948. By the use of subsidies the government
tion, however, of some £90 millions of ECA aid,
succeeded in holding the advance in retail
allocated but not yet transferred as of that
prices of food to 8 percent to the end of 1948
date would make the effective reserves £547
and kept the level of rentals stationary, but
millions, a figure slightly above the announced
the over-all index of retail prices for December
irreducible minimum of £500 million.**
1948 showed an advance of 5 points over De-
Although the British Government financed
cember as compared with 1947, with an in-
about 55 percent of its war effort by taxation
crease of 4 points in wages over the same
and non-inflationary borrowing, the tremen-
period.
dous increase in expenditures of the govern-
The government's close preoccupation with
ment caused a large inflationary expansion in
the inflationary problem is reflected in the
incomes. A doubling of bank deposits and a
fiscal policy of Sir Stafford Cripps, which also
great expansion of small savings left the econ-
demonstrates the close integration of fiscal
omy at the end of the war with a huge increase
measures with the wider economic situation.
of purchasing power. Average monthly de-
Britain's worst problems are those of the ad-
posits in the British clearing banks rose from
verse balance of payments; an injudicious
£2,277 millions in 1938 to £5,650 millions in
monetary policy would permit inflationary
pressures to drive up the price of British goods
1947. In October 1948 they passed £6 billions
which, in turn, would have an adverse effect
for the first time in their history. In addition,
on overseas markets and cut down the level
a continued state of full employment, coupled
of exports. The main purpose, therefore, of
with ambitious export and capital programs,
the government's fiscal program is to "create
caused an excess of currently-generated con-
a real and substantial surplus which more
sumer purchasing power. Money in circula-
than provides for all governmental expendi-
tion increased steadily from £635 millions in
tures, capital and current, and leaves over a
1938 to £1,519 millions in 1945 and to £1,682
balance to be used to counter the inflationary
millions in 1947.
pressure." The surplus is to be gained chiefly
from tax revenues (which have the added ad-
The increase of money in circulation in 1947,
vantage of withdrawing additional purchasing
however, to about 2 1/2 times the 1938 figure
power from the public), a decrease in ordinary
compares favorably with the increases of some
expenditure, and a tapering off of extraordi-
of the other nations which experienced the
nary postwar expenditure. A unique feature
war; Belgium to 3 1/2 times 1938, Norway and
of the 1948-49 budget was the tax on 1947-48
income from investments which, in the case
Members of the Sterling Area, as defined by the
United Kingdom Treasury are: the United King-
of the higher income brackets, amounted to
dom, Eire, Australia, New Zealand, India, Pakistan,
a disguised capital levy. In order to encour-
the Union of South Africa, Ceylon, Southern Rho-
age greater production on the part of wage
desia, British dependent territories, protectorates,
and protected states; and the non-British countries
earners there has been a moderate shifting
of Burma, Iraq, Iceland, Kuwait, and the State of
of the tax burden from direct taxation, chiefly
Bahrein.
At the end of September 1949, the gold and
An analysis of the effects of the velocity of
dollar reserves had fallen to £351 million.
circulation is not attempted in this report.
SECRET
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"ocrText": "56\nsource of gold and foreign exchange require-\nthe US about 5 times each, and France almost\nments.*\n9 times 1938.* Rigorous control over prices,\nThe central gold and dollar reserves of the\na rigidly enforced system of rationing, and al-\nsterling area (excluding reserves held sepa-\nlocation of raw materials prevented a run-\nrately by individual countries which are negli-\naway inflation although they did not avert\ngible except for those of South Africa) were\neventual price rises and a constant pressure\nupon the control mechanism. The index of\nreported by the Treasury as of 13 January\nwholesale prices (1938=100), annual average\n1949 to be £457 millions, as compared with £864\nrose to 166.7 in 1945, 189.1 in 1947, and 216.2 in\nmillions at the end of August 1938. The addi-\n1948. By the use of subsidies the government\ntion, however, of some £90 millions of ECA aid,\nsucceeded in holding the advance in retail\nallocated but not yet transferred as of that\nprices of food to 8 percent to the end of 1948\ndate would make the effective reserves £547\nand kept the level of rentals stationary, but\nmillions, a figure slightly above the announced\nthe over-all index of retail prices for December\nirreducible minimum of £500 million.**\n1948 showed an advance of 5 points over De-\nAlthough the British Government financed\ncember as compared with 1947, with an in-\nabout 55 percent of its war effort by taxation\ncrease of 4 points in wages over the same\nand non-inflationary borrowing, the tremen-\nperiod.\ndous increase in expenditures of the govern-\nThe government's close preoccupation with\nment caused a large inflationary expansion in\nthe inflationary problem is reflected in the\nincomes. A doubling of bank deposits and a\nfiscal policy of Sir Stafford Cripps, which also\ngreat expansion of small savings left the econ-\ndemonstrates the close integration of fiscal\nomy at the end of the war with a huge increase\nmeasures with the wider economic situation.\nof purchasing power. Average monthly de-\nBritain's worst problems are those of the ad-\nposits in the British clearing banks rose from\nverse balance of payments; an injudicious\n£2,277 millions in 1938 to £5,650 millions in\nmonetary policy would permit inflationary\npressures to drive up the price of British goods\n1947. In October 1948 they passed £6 billions\nwhich, in turn, would have an adverse effect\nfor the first time in their history. In addition,\non overseas markets and cut down the level\na continued state of full employment, coupled\nof exports. The main purpose, therefore, of\nwith ambitious export and capital programs,\nthe government's fiscal program is to \"create\ncaused an excess of currently-generated con-\na real and substantial surplus which more\nsumer purchasing power. Money in circula-\nthan provides for all governmental expendi-\ntion increased steadily from £635 millions in\ntures, capital and current, and leaves over a\n1938 to £1,519 millions in 1945 and to £1,682\nbalance to be used to counter the inflationary\nmillions in 1947.\npressure.\" The surplus is to be gained chiefly\nfrom tax revenues (which have the added ad-\nThe increase of money in circulation in 1947,\nvantage of withdrawing additional purchasing\nhowever, to about 2 1/2 times the 1938 figure\npower from the public), a decrease in ordinary\ncompares favorably with the increases of some\nexpenditure, and a tapering off of extraordi-\nof the other nations which experienced the\nnary postwar expenditure. A unique feature\nwar; Belgium to 3 1/2 times 1938, Norway and\nof the 1948-49 budget was the tax on 1947-48\nincome from investments which, in the case\nMembers of the Sterling Area, as defined by the\nUnited Kingdom Treasury are: the United King-\nof the higher income brackets, amounted to\ndom, Eire, Australia, New Zealand, India, Pakistan,\na disguised capital levy. In order to encour-\nthe Union of South Africa, Ceylon, Southern Rho-\nage greater production on the part of wage\ndesia, British dependent territories, protectorates,\nand protected states; and the non-British countries\nearners there has been a moderate shifting\nof Burma, Iraq, Iceland, Kuwait, and the State of\nof the tax burden from direct taxation, chiefly\nBahrein.\nAt the end of September 1949, the gold and\nAn analysis of the effects of the velocity of\ndollar reserves had fallen to £351 million.\ncirculation is not attempted in this report.\nSECRET"
}