Chapter 1 gives a brief summary of trends in Britain in 1960, and surveys the state of British industry at the end of the year. Chapter 2 looks at world developments and prospects—in particular at the world payments difficulties developing in 1960. In the light of these trends, Chapter 3 considers Britain's export trade and her balance of payments. Chapter 4 then gives a forecast for the British economy during 1961. Chapter 5 examines the world problem of reserves and trade and, finally, considers the problems of current economic policy.

Nineteen-sixty was by far the worst year for the United Kingdom current balance since 1951. The £100 million deficit recorded in the third quarter will probably prove to have been repeated in the fourth and the deficit for the year was probably about £150-175 million (table 20). Private investment overseas appears to have been maintained at a fairly normal level and the net outflow on inter-Governmental loans was higher than usual. Moreover, the overseas sterling area drew heavily on its sterling balances, perhaps by about £200 million. Yet after payment of £127 million to the IMF during the year, the reserves rose by £177 million.

This paradoxical result is due to a capital inflow, particularly in the second half of the year, on an unprecedented scale. A rough attempt is made in table 21 to estimate the amount of this ‘abnormal’ capital inflow during 1960. The definitions of I abnormality' are necessarily arbitrary and some of the figures are little more than guesses.

In the top part of the table are set out estimates of the transactions resulting from the flow of trade and services, from Government grants and loan transactions, and from the general trend of private long-term capital movements in recent years. From the balance thus obtained the normal ‘balancing item’ is subtracted (representing net receipts which are not identified in the official statistics.)

It is not likely that insufficient industrial capacity would by itself prevent an appreciable rise in production this year. Table 26 sums up the results of the Institute's annual enquiry into this question. At the end of last year there was of course much more spare capacity in the vehicles industry than a year earlier; but the figures also show much less spare capacity in general engineering, as a consequence of the boom in output in capital goods (page 8). Capital goods producers, however, have more freedom to subcontract than industries which are tied to a production line; the enquiry showed that a number of makers of steel plant and machine tools, for instance, were already increasing capacity by sub-contracting. Subcontractors to the consumer durables and motor car trades can often switch to capital goods trades. Nevertheless, since manufacturers are planning to continue the rapid rise in their investment, delivery delays of some capital goods may lengthen and imports of plant and machinery may increase rapidly.

No important raw materials shortages were reported in the enquiry. Steel should be plentiful again in 1961. It is possible that brick production might hold back any further rise in house building.

If there were no external payments problem, the British Government could safely encourage a considerably faster rate of domestic economic expansion than in fact seems likely during 1961. It could do so without straining the productive capacity of the economy and without causing any more rapid increase in prices than is likely to occur in any case. Yet, because of the desire to reduce the risks to the international position of sterling, it is probable that the Government will once again consider it impossible to encourage economic growth.

The most important policy questions for 1961 are to ask what action the Government can take to solve two fundamental and closely related problems. One is that of the underlying disequilibrium in the British payments position; the other is that of the difficulties caused both to Britain and to the United States by the present system for settling international payments, involving the international use of the national currencies of these two countries.