¹ There is a difficult problem of dating with respect to British investment control. Investment policy–a set of measures trying to influence directly the level and composition of investment–existed in relatively comprehensive form for only the brief period of three years, from 1947 to 1950. It took until 1947 before the planning machinery necessary to administer and co-ordinate the various investment controls could be set up. Then, in 1950, the Korean War and the rearmament associated with it made for dislocation and upset. Subsequently, the election of a Conservative Government in 1951 shifted the emphasis of policy away from reliance on direct and discriminatory controls and towards greater dependence upon market mechanisms. This trend, however, was interrupted from time to time as a crisis forced the employment of more direct measures, including some entirely new forms of direct control (e.g., quantitative regulation of bank lending).

² Balogh, T., “Monetary Restrictions and Economic Progress,” Bulletin of the Oxford University Institute of Statistics, XIV, 04-May, 1952, 164.Google Scholar For those who care for physical analogies, investment control has been likened to building up a head of water in a dam (i.e., demand) and then regulating the flow through the sluice gates (i.e., controls). Perhaps this is a good place to take up the argument that investment policy was prima facie contradictory because it was both expansionary and restrictive at the same time. This view not only misconceives the fundamental character of investment control, but also oversimplifies the nature of economic policy. Policy always subserves many ends, not one; it is likely to be motivated by complex and diverse considerations; and the results it produces are not uniquely good or bad but tend to be combined in inseparable packages of the desired and undesired.

³ The reasons which prompted a cheap money policy would include: a disbelief in the efficacy of monetary control; a preference for the allocative results of direct controls; a belief that tighter money would have undesirable distributional effects; and a strong feeling against a more restrictive monetary policy because of bitter memories of the inter-war period and because of a belief that the economy was more or less inherently leaden and stagnation-prone, and needed the buoyancy imparted by conditions of monetary ease. For a more complete discussion of monetary control, see infra.

⁴ It should also be noted that government policies directed towards other ends exerted an indirect, and sometimes perverse, influence upon the formulation and fulfilment of investment objectives. For instance, price controls on “necessities” tended to make the production of uncontrolled “luxuries” more profitable. Hence, pressure was generated for investment in the latter although this ran counter to the aims of investment control. Similarly, subsidies on food freed consumer income for spending on other things, which would again encourage expansion in non-priority lines. But as long as price control and subsidies were an essential part of a program to stabilize the cost of living, and thereby moderate the pace of wage claims, their perverse effects upon investment had to be lived with and counteracted by the investment controls. This point can be generalized. Given the interdependence of the economic system, all policy cannot help but have some effect, through devious as well as direct routes, upon the level and composition of investment. Our justification for dealing only with investment policy is that the effects of other policies will be, on the whole, of a relatively smaller order of magnitude and will still have to be filtered through the investment controls.

⁵ Until July 1, 1948, the lower limit was £10; from July 1 to November 1, it was £100; and for a time after the sterling devaluation crisis in 1949, a lower limit of £500 was enforced. For other types of building, such as housing and shops, the lower limit was £.100 (including maintenance and repair expenditure). It was in the area of repair and maintenance that the control was least successful. Building licensing was terminated in November, 1954.

⁶ The decisions of the IPC should not be thought of as an exact and rational allocative process but rather reflected uneasy compromise and the pull and tug of many competing interests. See, for instance, Gutmann, P., “Central Planning of Investments in Britain,” in Friedrich, C. J. and Harris, S. E., eds., Public Policy, VII (Cambridge, Mass., 1956).Google Scholar

⁷ Although a licence, as a rule, would be conditional on the economical use of materials. See Political and Economic Planning, Government and Industry (London, 1952), 51.Google Scholar

⁸ Redfern, Philip, “Net Investment in Fixed Assets in the United Kingdom, 1938-1953,” Journal of the Royal Statistical Society, Series A (General), CVXIII, p. 2, 1955, 155. See also Table 9, pp. 160–1.Google Scholar

⁹ Fogarty, M. P., “The Location of Industry” in Worswick, G. D. N. and Ady, P. H., eds., The British Economy, 1945-1950 (Oxford, 1952), 267.Google Scholar

¹⁰ Calculated from Table 7, p. 426, “Ten Years of Industrial Building in Great Britain,” Board of Trade Journal, CLXIX, no. 3061, 08 20, 1955.Google Scholar

¹¹ Capital Investment in 1948, Cmd. 7268 (London, 1947), 12 Google Scholar; Economic Survey for 1950, Cmd. 7915 (London, 1950), 33.Google Scholar

¹² See Economic Survey for 1950, Cmd. 7915 (London, 1950), 32–3.Google Scholar In the 1947 crisis, the authorities were more hopeful of cutting back building already begun: “All factory building, including extensions, now in progress which has not reached the steel erection stage will be reviewed with the object of postponing at least half.” Capital Investment in 1948, 12.

¹³ Nurkse, R., “The Relation between Home Investment and External Balance in the Light of British Experience, 1945-1955,” Review of Economics and Statistics, XXXVIII, 05, 1956, 130.Google Scholar

Another perverse effect was that a cut in building tended to be concentrated upon the larger, more important projects over which, in general, the government had better control. This meant that building resources would be diverted to projects of lower priority. See Rosenberg, N., “Government Economic Controls in the British Building Industry, 1945-1949,” this Journal, XXIV, 08, 1958, 353.Google Scholar

¹⁴ Mention should be made of the controls over the allocation of certain scarce materials (e.g., steel, timber, non-ferrous metals) which could have been, but generally were not, used for investment control purposes. Material allocation control tended to be removed as soon as the supply situation for a particular commodity improved.

¹⁵ Rogow, A. A., The Labour Government and British Industry, 1945-1951 (Ithaca, 1955), 27–8.Google Scholar For a good summary of the history and workings of the Capital Issues Control, see Midland Bank Review, 08, 1950, 1–7.Google Scholar

¹⁶ Nevin, E., “Social Priorities and the Flow of Capital,” Three Banks Review, XIX, 09, 1953, 32.Google Scholar

¹⁷ “Until about 1955 private firms were unusually liquid and quite able to finance considerable investment internally without recourse to the new-issues market.” Pious, H. J., “Control of Capital Issues in the United Kingdom,” Journal of Finance, XIII, 09, 1958, 357.Google Scholar For a time (1957–58) the Capital Issues Committee seemed to take on a more active role as shown by an increase in the percentage of applications refused and by a proliferation of (perfectly legal) avoidance schemes on the part of firms caught in the credit squeeze. To deal with the avoidance problem, it was found necessary in July, 1958, to restore statutory control over transactions which lent themselves to this type of abuse, such as the sale and purchase of “shell” companies.” In February 1959, however, to stimulate a flagging economy, all controls over domestic issues, with an insignificant exception in respect to timing, were abolished.

¹⁸ An excise tax was used in one instance as a deliberate investment control device when, in 1950, the government imposed a purchase tax on commercial vehicles. It was quite successful, but excise taxes (and subsidies) were not used more widely because of the authorities' reluctance to discriminate.

¹⁹ Perhaps the omission of any reference to the general deterrent effects upon investment of the level of company and personal taxation may strike some as surprising. Undoubtedly the general level of taxation did exert some drag upon investment. But, to the extent it operated through squeezing the liquidity of firms, the measures described above were off-setting; and to the extent it operated through discouraging risk-taking and weakening incentives, it was overborne by the general prosperity of the period.

²⁰ See National Income Statistics, Sources and Methods (London: Central Statistical Office, 1956), 330.Google Scholar

²¹ It might be mentioned in passing that the relationship between investment and its finance is usually not grasped correctly in these complaints about the inadequacy of depreciation allowances in the face of rising equipment costs. After all, investment is presumably dependent upon current profit expectations whereas those who argue that finance is a limiting factor tend to confuse two propositions: (1) that imperfections in the capital market will affect investment decisions; and (2) that current investment decisions should be affected by whether or not the sums sets aside for depreciation are equivalent to current replacement costs. The first proposition is, of course, correct; but with respect to the second, Jevons' dictum that “bygones are forever bygones” is perfectly apposite. Decisions to invest would not be influenced by whether depreciation allowances cover replacement costs or not, if the capital market were perfect. Only the imperfection of the capital market makes the source of finance for investment an important matter.

²² F. W. Paish estimates the ratio of dividends (net of tax) to net company profits after tax declined from 66 per cent in 1938 to 33 per cent in 1954. See his article, “Company Profits and Their Distribution since the War,” District Bank Review, 06, 1955.Google Scholar

²³ “It is clear … that whatever factors may have been responsible for the limitation on the rate of capital investment, financial stringency caused by heavy taxation could not have been an important cause. Some fast-expanding firms must have been hampered in their expansions by a shortage of finance, but for industry as a whole net savings were far more than adequate to cover requirements both for capital expenditure at home and abroad and investment in stocks. The net increase in ‘financial assets’ which is a measure of this excess appears to have amounted to around £300–£.400 millions a year (allowing for investment abroad), in the average of the last few years.” Kaldor, Nicholas, An Expenditure Tax (London, 1955), 150.Google Scholar See also Economic Commission for Europe, Economic Survey of Europe in 1955 (Geneva, 1955), 91–2Google Scholar and Midland Bank Review, 11, 1953, 3.Google Scholar

R. F. Henderson puts forward a somewhat different view when he argues that this comparison of company savings with company investment is liable to be misleading because it makes no allowance for other normal and legitimate calls on company saving (e.g., increases in liquid assets, extension of trade credit) which are the accompaniment of economic growth. See his article, “Comments on Company Finance,” Lloyds Bank Review, no. 51, 01, 1959, 20–33.Google Scholar

²⁴ For instance, a study of a sample group of companies, in the main large and medium-sized, whose shares are quoted on a stock exchange and whose quarterly accounts are summarized and aggregated by the Economist, reveals the following conclusion on this point: “… the retained income (gross of depreciation) of the companies amounted to only two-thirds of their expenditure on tangible fixed assets and stocks, most of the balance being met by capital issues. This appears to be strikingly different from the picture shown by the national income estimates for all British companies.” Luboff, Andrei, “Some Aspects of Post-war Company Finance,” Accounting Research, VII, no. 2, 04, 1956.Google Scholar

Reliance on external finance by this group of companies, however, far from indicating a handicap, is instead, because of the nature of the Economist's sample, merely a validation of the well-known fact that large firms have privileged and easy access to external sources of funds.

²⁵ There is some controversy over the longer-run effects of differential profit taxation. Some believe it will lead, on the one hand, to a less desirable composition of investment because “tied finance” encourages excessive expansion by existing enterprises and diminishes the effectiveness of the capital market, and, on the other hand, to a lower level of investment because the lower snare prices caused by dividend limitation will boost the earnings yield (earnings/share price) that any new investment project must satisfy before it will be undertaken. For an argument which seeks to rebut these contentions, see Balogh, T., “Differential Profit Tax,” Economic Journal, LXVIII, 09, 1958, 528–33.CrossRefGoogle Scholar

²⁶ Kennedy, Charles, “Monetary Policy and the Crisis,” Bulletin of the Oxford University Institute of Statistics, XIV, 04-May, 1952, 137.Google Scholar See also Sayers, R. S., Central Banking after Bagehot (Oxford, 1957), 79.Google Scholar

²⁷ For a discussion of this sort of flexibility in the capital market, see Frost, Raymond, Bulletin of the Oxford University Institute of Statistics, XIV, 08, 1952, 265.Google Scholar

²⁸ Nevin, , “Social Priorities and the Flow of Capital,” 34.Google Scholar

²⁹ There were several other factors which worked in the direction of increased bank advances: the below-normal ratio of advances to total assets because bank portfolios were heavily dominated by government securities as a result of war finance; the excessive liquidity of the banks coupled with the relatively low bill yields compared to that on loans; the cost pressures forcing banks to look for higher earnings.

See Johnson, Harry G., “The New Monetary Policy and the Problem of Credit Control,” Bulletin of the Oxford University Institute of Statistics, XIV, 04-May, 1952, 118.Google Scholar

³⁰ “Until 1951, and only in less degree until 1955, the banks had been so glutted with liquidity that they felt under no compulsion, other than the qualitative control imposed by official requests, to refuse to lend to good banking borrowers. In the early post-war years, indeed, the pressure of liquidity was so great that the banks tended to broaden their notions of what constituted a good banking borrower, and they also tended-at least between each of the various reiterations by successive Chancellors-to broaden their interpretation of what lending was conformable with government requests.” Sayers, , Central Banking after Bagehot, 98–9.Google Scholar

³¹ Nevin, , “Social Priorities and the Flow of Capital,” 35.Google Scholar This superior performance with respect to capital issues reflects, on the one hand, the greater ease with which capital market transactions can be controlled and, on the other hand, the absence of this factor of close personal contact between borrower and lender.

³² Some writers argue, correctly we believe, that this control would have worked more efficiently if lending had been made more difficult by a more restrictive monetary policy. Over-all financial stringency would reinforce selective restriction. Cf. Paish, F. W. in Bulletin of the Oxford University Institute of Statistics, XIV, 04-May, 1952, 144 Google Scholar; and Nevin, , “Social Priorities and the Flow of Capital,” 42–3.Google Scholar

Although this is an important point, the real issue is at what cost this will be achieved, and whether it would then be justified. On this, opinions will differ. Professor H. G. Johnson, referring to recent tight money policies, puts the issue very succinctly: “… what has been achieved has been to bribe banks, by means of higher interest earnings, into enforcing directives, which, in the less profitable days of cheap money, they were inclined to disregard as much as they decently could.” “The Revival of Monetary Policy in Britain,” Three Banks Review, 06, 1956, 11.Google Scholar

³³ Monetary policy would be difficult to employ on a sustained basis because (1) swings in the budget and foreign balance, the need to finance nationalized industry, and restrictions upon government funding inevitably affect the supply of Treasury bills, and thus make it impossible to maintain continuous pressure on bank liquidity ratios, (2) velocity movements are off-setting, and (3) the inherent vagueness of the “traditional” 30 per cent liquidity rule. Monetary policy is likely to be ineffectual in its impact because in so far as it affects the capital market it will tend to influence the timing of new issues rather than the undertaking of new investment; and in so far as it works through expectations and cost calculations, commitments to full employment diminish the threat it poses to future sales and the industries most sensitive to changes in interest cost (housing and public utilities) are already subject to the direct or indirect influence of the state. See the Radcliffe Report, passim.

³⁴ On this last point, see Smith, W. L., “On the Effectiveness of Monetary Policy,” American Economic Review, XLVI, 09, 1956, 605.Google Scholar

³⁵ In July of 1958 the authorities instituted a system of “special deposits” whereby the Bank of England can impose a modified form of secondary reserves upon the banking system, and this, of course, is a step towards resolving the dilemma mentioned in the text. On this point, see “The New Monetary Weapon,” Banker, CVIII, 08, 1958, 493–506.Google Scholar

³⁶ Some indication of the length of time involved may be derived from the fact that it was not until 1950 that the Coal Board published its plan, and 1954 that the railway and electricity plans were announced.

³⁷ See Morrison, Herbert, Government and Parliament (London, 1954), chap, xiiGoogle Scholar, “Socialization of Industry,” esp. 248–55 and 264–5.

³⁸ Nurkse, R., “Internal Growth and External Solvency,” Bulletin of the Oxford University Institute of Statistics, XVII, 02, 1955, 41.Google Scholar

³⁹ This issue is important because allegations of lack of control have been used to support a charge that the share of nationalized industry in total investment has been too great, The nationalized industries have indeed been prodigious users of capital, but the reasons for this are largely unrelated to any lack of control over them by the state. Partly it is due to the capital intensiveness of these industries; partly because investment therein is not as sensitive as private investment to short-run cyclical fluctuations; and in part it is that they provide the common-service inputs whose growth is essential to sustain expansion in the rest of the economy. There is only one respect in which this criticism may have some substance: the government has deliberately pursued a policy of maintaining low prices on the products of nationalized industry, and the consequent stimulation of consumption has taxed facilities and thus led to demands for more investment. This problem, however, has been serious only in the case of the electricity industry. Thus nationalized industry's share has been large but not excessively so.

⁴⁰ Caine, Sydney, “Some Doubts about Sterling Area Policy,” Lloyds Bank Review, 04, 1954, 1–18.Google Scholar

⁴¹ In any case it is doubtful whether Britain can continue to undertake such lavish foreign investment. To a large extent, through much of the post-war period, Britain was able to maintain its foreign investment at a high level because it conducted a “substantial re-export trade in imported capital.” The sources of this imported capital were, in the immediate post-war period, United States and Canadian aid, and, latterly, the rapidly rising sterling balances held by the colonies. However, the former source has been cut off long ago and the colonial sterling balances should either rise less rapidly or even diminish as the development programs of these areas begin to make an impact on their sterling balances (to say nothing of the uncertainties attending the future behaviour of primary product prices). Therefore, it is likely that Britain will not be able to rely in the future upon this trade in “capital re-export.” See Paish, F. W., “Britain's Foreign Investments: the Post-war Record,” Lloyds Bank Review, no. 41, 07, 1956, 23–39.Google Scholar

⁴² As of July, 1957, United Kingdom residents were not permitted to purchase dollar securities from other Sterling Area residents. This tightening up of exchange control was necessary because outer Sterling Area residents, mainly operators in Kuwait, were purchasing dollar securities with transferable sterling, and then selling these securities on the London market. Estimates of the value of these purchases of dollar securities are put at £45 million in 1955 and 1956, and £70 million in the first half of 1957, before the new regulations were introduced. This, of course, meant that dollars that would have gone into the central reserves were instead held in the form of dollar securities, which, it is true, are deposited with “authorized repositories” to the account of the United Kingdom residents.

⁴³ Conan, A. R., The Changing Patterns of International Investment in Selected Sterling Countries, “Essays in International Finance,” no. 27 (Princeton, 1956).Google Scholar

⁴⁴ Subsequent developments associated with the formation of the Common Market and Britain's position with respect to it have, of course, completely recast the problems of foreign investment and Commonwealth relations.

⁴⁵ See National Income and Expenditure, 1946-1953 (London: Central Statistical Office, 1954), Table 45, p. 65.Google Scholar There was an insignificant rise in 1951, but from 1952 housing expenditure increased rapidly. This had important consequences.

⁴⁶ Several miscellaneous programs (e.g., productivity councils, scientific research assistance, specialized financial institutions, ad hoc subsidies) affected investment but these were the small change of investment control. Although they produced some important results, their overall impact was not great.

Furthermore, no discussion of investment control would be complete without acknowledging the role played by persuasion and exhortation in the British system. This is what D. H. Robertson has called “stroking the donkey's ear as well as using the carrot and stick.” Based on intimate familiarity within the British “establishment,” arising out of shared experience, common values, and social homogeneity, these methods were all-pervasive and underlay the whole network of relations between controller and controllee. They could not fail to influence the form and effectiveness of the controls. I do not mean to suggest that this is an inefficient form of control; on the contrary, within the area it can serve it works very well indeed. But reliance on this type of control circumscribes policy. A method of control depending to such a great extent on cajolery and subtle intimation cannot by its very nature be a vehicle for introducing large-scale change.

⁴⁷ “Relation between Home Investment and External Balance,” 125.

⁴⁸ In a very broad way it might be helpful to think of investment control as a substitute for devaluation in the sense that it can achieve more quickly and with less disturbance the necessary long-run shifts in the pattern of resource use that would ultimately, but not without great difficulty and unnecessary cost, be brought about by devaluation.