This is just like September 1931 when, following the infamous May Report, it was decided to balance the Budget to restore international confidence in the pound. The attempt failed, and history has declared its verdict.
Is the road to a slump paved with merely muddled thinking? Once again the claim of the deficit-cutters is that the Government must show itself to be firm in order to prevent further falls in the value of the pound. But the fall is essential to recovery and one cannot be sure that it is excessive. So measures to protect the pound are as likely to look like panic as firmness, especially as their economic logic is that of Alice in Wonderland. The deficit will be reduced, and sterling will become firmer, as the economy recovers.
But what about inflation? A fall in the pound necessarily results in some price increases. They are already with us, and must be accepted, but they do not increase inflation if directors and managers do not allow them to be the occasion of rises in their own earnings, or in wages. The UK's inflation problem is long run. Earnings rise at more than 6 per cent even in a prolonged recession.
Zero inflation is impossible until that long-run problem is solved. Let us have both a recovery and further measures to reduce the growth of individuals' earnings.
I. M. D. LITTLE
M. F. G. SCOTT
Nuffield College, Oxford