W. Keith Hancock and Margaret M. Gowing

“ When, however, the Government came to fix prices and profit margins for the production of vital materials, foodstuffs, and munitions, quite different problems arose. High profits in war time were distasteful; but since the Government could not itself undertake direct responsibility for all the necessary increases in production, the profit motive had to be respected because of the incentive it provided. But, in fixing prices to allow reasonable profits and incentive to the many, it was difficult to avoid giving excessive profits to the few. ”

“ In peace time, one of the traditional arguments in defence of the profit system—weakened though that argument may be by the growing imperfection of competition—is that profits are the lot of the progressive and the losses of the backward. In war time, this argument may become altogether invalid; for the poor land, the seams of low grade ore, the backward coal-mine must now be positively encouraged. Unfortunately, the Government never treated this dilemma as a problem of general economic policy. ”

“ The cost of the war was paid socially rather than economically—in the numbers of children going without education, the numbers of sick people ejected from their hospitals to make room for the expected casualties, the heartache of families widely scattered from each other. Few people as yet had any real conception of the great contribution that civilian sacrifice could make to economic mobilisation. Ministers, high officials and trade union leaders alike found it difficult to believe that sufficient manpower and raw materials will be forthcoming to work the new factories that were going up. ”

“ Since profits could in the main be mopped up by taxation, inflation of profits was unlikely to lead directly to any serous inflation of spendable income; but the profits allowed to farmers influenced food prices, subsidies and cropping programmes, and the degree of profit incentive permitted by methods of contracting or E.P.T. produced effects upon the efficiency of production. Most important of all, however, was the psychological effect; for public suspicion that private firms and individuals were harvesting rich profits would have nurtured demands for increased wages. ”

“ The intentions of 1929 had shrunk and when the Chancellor of the Exchequer, introducing his first war budget, spoke of the economic purpose of the government, it was in much more general terms. ‘We are aiming,’ he said, ‘at maintaining a level economy in which prices and profits and remunerations are kept as steady as war conditions will allow and in which the flow of such goods as are available for civilian consumption is kept in regulated supply.’ [1] The phrase ‘a level economy’, is too vague to be taken very literally ”

“ The invariable tendency of policy was to approve prices that would cover the high-cost men and leave the profits of the low-cost men to the small mercies of the Inland Revenue.
This problem has already been briefly discussed in relation to shipping freights. It arose also in the raw material industries—steel, for example, and home-produced iron-ore. It made itself most acutely felt in the discussions about prices and profit margins for domestic agriculture. Even on the pre-war assumptions about shipping, there had never been any doubt that additional land must be brought into cultivation. ”

“ Except for some general stores which, though numerically preponderant, were small in value relatively to armaments, prices had to be fixed with individual firms. Moreover, while the public were never very interested in farmers’ profits—they had so often been conspicuously absent—they maintained the keenest watch over armaments profits. The problem was to devise a form of contract that would both exercise the rigid control over profits that public opinion demanded and also give the contractor a sufficient incentive to efficiency and economy. ”

“ Control over supplies by government purchase or licensing, control over distribution and control over prices must all be established. The Ministry of Food and the Raw Materials Department both had plans ready for controlling strictly essential materials when shortages of them were inevitable. They had also forearmed themselves against an initial bout of profiteering, by preparing orders to freeze maximum prices at the levels current at the outbreak of war, or by negotiating agreements in which trade associations pledged themselves not to raise prices without consulting the minster concerned. ”

“ In the light of our fuller statistical knowledge, we may in retrospect feel some surprise at finding the Government and informed public opinion in those early months perpetually preoccupied with inflationary dangers, and with erecting barriers against their insidious approach. ”

“ The capacity of engineering firms was increasingly absorbed by munitions work. Production of industrial machinery fell, and such goods as motor cars, [20] vacuum cleaners and refrigerators were among the first consumer goods to disappear. In fact, during the first nine months of war, the expansion of munitions work took place largely at the expense of the home and export trades of the engineering industry; [21] by June 1940 most sections of the engineering industry had only about twenty percent of their workers employed, on the home trade. ”

“ The figures of prices and wage rates already quoted are not a sufficient test of economic stability. In fact, although prices and wages rose rapidly at the beginning of the war, the danger of inflation was only slight. The progress of war production was halting and government war expenditure showed no startling rise. In February 1940, it averaged £34 millions a week compared with about £20 millions in September 1939; part of the increase, moreover, was due to the rise in prices. ”

“ On top of the heavy increases in import prices, domestic prices were also being pushed up. There were A.R.P. measures to be paid for and increased insurance charges. In some industries, overhead costs were covered by higher prices on a decreased turnover.
The Government had not wholly foreseen this large initial price rise. Indeed, as late as July 1939, representatives of the Board of Trade had informed the Stamp Survey that it would be unwise to assume that there would necessarily be a sharp increase of prices of uncontrolled materials on the outbreak of war. ”

“ Ironically enough, the Ministry of Foods case for sugar rationing had been compromised in ministers eyes by its claim to have bought the whole Empire sugar crop. Sugar bought, however, was not sugar delivered; stocks in hand were being steadily dissipated: as unpleasant proof, the Ministry applied in November for authority to negotiate the purchase of 300,000 tonnes of foreign sugar at an estimated cost of £3 millions worth of dollars. Sugar rationing was once more recommended and this time—on 6th December—it was approved by the War Cabinet. ”

“ After that, the Government looked mainly to general price increases to provide the incentive. Its theory of agricultural price policy was that ‘the price paid for home supplies will be the best price obtainable having regard to the necessity to provide farmers with adequate incentive to increase production’.
During the autumn and winter of 1939, therefore, the main object of agricultural price policy was to cover farmers’ increased costs and to stimulate production by allowing them a general increase in their incomes. ”

“ In the first half of 1940, as it became clear that the shortage of shipping and the blockade were carving a gulf between countries of demand and countries of supply, world wholesale prices rose much less rapidly than in 1939, or actually fell. Shipping costs continued to rise in 1940 but the initial leap was not, of course, repeated; with the introduction of general requisitioning in January 1940 rates of hire were fixed by direct negotiation between the Government and the shipowners. [9] The causes of the rise in import prices also varied in importance from commodity to commodity. ”

“ The survey was completed within three days and the War Cabinet was told that if there was any risk of shortage, the public would definitely favour immediate rationing. But the War Cabinet still hesitated to authorise action which would trammel the customary liberties of selling and buying food. Not until nearly two months after the outbreak of war did it agree at last to the rationing of butter and bacon, of which there were already spot shortages; and it still remained unconvinced that meat and sugar rationing were necessary. ”

“ War also made heavy demands from the beginning upon the building industry. The Government’s building programme for the first twelve months was more than double the 1938 programme and could only be met by cutting civilian building to the bone and organising the industry effectively. ”

“ This anxiety, however, arose in part from a general awareness that the war effort was bound to grow at an increasing speed and that it would, sooner or later, drain the stagnant pools of unemployment. Even before full employment had been achieved, the Government’s policies towards finance and the civilian economy were of great importance. ”

“ The Committee went on to recommend that the opportunity should now be taken of adjusting prices to the order of priority in food policy: since it was impracticable to grant some commodities no price increase at all, an effective rearrangement of incentives would mean giving farmers an increase, not of £14.9 millions, but of £20 millions. ”

“ And since the demands of war could at this early stage be met with such small inroads upon personal consumption, the dangers of inflation were only slight; very little seems in fact to have been let loose upon the country. ”

“ The Government publicly reserved to itself the right to vary prices up and down, and in future farmers whose profits exceeded a stated amount were no longer to have the option of being assessed for income tax under Schedule B.
It is true that the farmers responded to all their financial incentives. ”

“ But steel cuts did not begin until the spring of 1940 and most controls found it difficult to harden their hearts even when there was obvious shortage. They were reluctant to cause unemployment and very respectful towards the argument that a prosperous home trade was a necessary base for flourishing exports. ”

“ It threatened, said the Treasury, to reduce supplies and stimulate demand—dangers which should not be incurred merely for a vague desire to allay public sensitiveness about profiteering. Following this warning, the Economic Policy Committee formulated in October 1939 new principles to guide departments in fixing control prices. Maximum prices should henceforward be advanced to cover replacement costs. Government trading, moreover, must avoid loss except in exceptional cases: it must in appropriate cases aim at a substantial profit. ”

“ At the earliest practicable stage of production they negotiated firm prices which were usually based either on technical costing or on comparison with the previously ascertained costs or tendered prices of the most nearly similar stores. Theoretically, these prices would provide the maximum incentive to keep costs low: but in reality fixed prices frequently had to be settled when production was well advanced. ”

“ With the stern lessons of 1914–18 behind them, the Governments of 1939 to 1945 could be expected to achieve much greater success in maintaining a level economy. And so indeed they did. The following table tells part of the story. ”