The central problem of our economy for more than a generation has been that, although our productivity has grown more slowly than that of our competitors, we have seen annual wage increases of the same order as theirs. So our inflation has risen faster than in other countries and we have been able to maintain price competitiveness and full employment only by a series of devaluations which have further added to inflation and increased the pressure for excessive wage increases. In the era of North Sea oil it will be more difficult to devalue our currency to maintain price competitiveness. So unless we can keep wage increases close to the level of productivity increase we shall face rising unemployment and a further erosion of our industrial base.

Let there be no doubt that our present rate of inflation is the main cause of our economic difficulties. There never has been a more mistaken piece of economic analysis than the view that we should accept inflation to avoid unemployment. Inflation today, so far from being an alternative to unemployment, is its main cause. If our rate of cost increase is allowed to continue close to twice that of the average for the developed world it will increasingly price us out of world markets. Employers...will have to restrict their activities and still more their labour force in response to mounting and uncontainable wage and salary bills.

I fully understand why I have been urged by so many friends both inside and outside the House to treat unemployment as the central problem and to stimulate a further growth in home consumption, public or private, so as to start getting the rate of unemployment down as fast as possible. I do not believe it would be wise to follow this advice today. As I have said, I did last July and November adopt reflationary measures whose full effect would only be felt this year. I cannot afford to increase demand further today when 5p in every £ we spend at home has been provided by our creditors abroad and inflation is running at its current rate. I do not believe anyone in Britain would thank me for producing an even larger deficit on our balance of payments and injecting a further massive dose of inflation through price and wage increases. Moreover a Rake's Progress of this nature could not last for long. The patience of our creditors would soon be exhausted. We would then face the appalling prospect of going down in a matter of weeks to the levels of public services and personal living standards which we could finance entirely from what we earned. I do not believe that our political or social system could stand that strain.

Perhaps the most insidious danger today is the notion, which many accept unreflectingly and others propagate sedulously, that a stable value of money is incompatible with economic progress or with a high level of employment. Theory and experience alike refute such a notion. I have already reminded you that throughout sixty years of Britain's golden age of expansion in every sphere, the value of money remained virtually constant. So far from it being true that inflation and a high level of employment hang together, the fact is that, for a nation in Britain's situation, dependent on world trade and commercial dealings with other countries for its livelihood, continued inflation is the greatest threat to full employment. It would be a tragedy if the Government or the nation allowed themselves to be diverted by these false fears from the single-minded pursuit of plain and elementary duty: the duty to secure and preserve the integrity and stability of the medium of exchange, on which depend all the economic dealings of man with man.

As much as wages are up and unemployment are down, we — unemployment is down — we also recognize there are longer-term issues we want to address, including inflation

Britain's future depends, above all, on mastering inflation. That can be done, as the right hon. Member for Leeds, East (Mr. [Denis] Healey) well knows, only if we bring the money supply under firm control, progressively reduce the rate of monetary growth over the years and pursue the most rigorous restraint on public spending. The supposed alternatives to these policies are a delusion. None of those alternatives would be responsible and none would be sustainable. The action that I have taken today underlines the Government's total and continuing commitment to getting inflation down.

For years there was a widespread belief that we could have inflation and a high level of employment at the same time. For years there was a belief that we could secure more jobs if we were prepared to put up with a little more inflation—always a little more, it was thought. The experience of the past 25 years has taught us on the Government Benches that those beliefs were a most damaging illusion. Inflation and unemployment, instead of moving in opposite directions, rose inexorably together. As Governments tried to stimulate employment by pumping money into the economy they caused inflation. The inflation led to higher costs. The higher costs meant loss of ability to compete. The few jobs that we had gained were soon lost; and so were a lot more with them. And then, from a higher level of unemployment and inflation, the process was started all over again, and each time round both inflation and unemployment rose. In Parliament after Parliament, each new Government had a higher average rate of inflation and unemployment than the preceding Government. It is that cycle that we have set out to break.

If inflation priced us out of world markets we should be back in the old nightmare of unemployment. What folly to risk throwing away all that we have gained... Our first duty at a time when there is more money about than goods to spend it on is to keep down Government expenditure... The second duty of the Government is to frame policies which encourage saving and discourage spending... [I]n the long run there is only one answer to the 64,000 dollar question—to increase production. That is the answer. That is where the real hope lies.

Britain is not earning her living. We are not keeping pace with the economic performance of our European and North American neighbours, and we are certainly not achieving the potential that is in us. ... At the end of a war of prolonged sacrifice we were left with much obsolete industrial plant, and a short-fall in the capital necessary to scrap and renew it. For a century we had lived on cheap food and raw materials imported from overseas. They are not and will not in future be available to us. ... We cannot continue to live beyond or ability or our willingness to earn. That is the one basic fact with which Britain has yet to come to terms.

The equally dangerous threat of inflation is building. Consumer prices reflecting the drought and last winter's cold weather have been going up at an annual rate of about 10 percent in the last 3 months, and the basic inflation rate, under everything else, has been running 6 or 6 1/2 percent. These inflation figures are too high for comfort. And as you know, also, inflation falls most heavily on people with modest means and people who've worked all their lives for a little security and who then find that security threatened. Inflation robs us of our confidence in the future. However, it's interesting to point out, at the recent London summit conference, the single issue of most concern to the seven heads of state assembled there was unemployment among young people. In the ideological struggle with the Eastern Socialist and Communist countries, this is our one major vulnerability. We have got to provide in our country an economic system that's healthy enough and an education system that's competent enough so that when our young people reach the age of 18 or 19 years old, they can find a way to use the talent and ability and opportunities that God gave them and not enter adult life discouraged and excluded from society. This ought to be number one in all our efforts in the future. Experience has shown us and all economists that we must attack inflation and unemployment together. To get our economy moving again, in the short 4 months that I've been in office, we proposed both direct creation of jobs and permanent tax reduction for the low-income and middle-income taxpayers. Last week I signed a bill, public works, which will provide both necessary community improvements where you live, plus about 600,000 jobs concentrated in areas of high unemployment. We have proposed more than doubling the existing jobs program for the long-term unemployed and the young. And Congress has already appropriated the money that we requested to increase public service jobs from 310,000 to 725,000. I've also proposed--and I believe the Congress will rapidly approve--a major initiative to train our young people and to put them to work in productive jobs in our cities, rural areas, national parks and forests. And in addition to this, above and beyond what I've just described, we will provide work this summer for about 1.1 million young people, more than ever before.

Inflation in Britain is at an unacceptable level. It is now mostly home-induced and wage-induced. It is moving well out of line with that of the rest of the world. If it goes on doing so it will ruin us as a nation, both economically and politically. It is of a different order from any of our other difficulties. It is, quite simply, our biggest menace since Hitler.

[The first task is to beat inflation.] Until we do, every wage rise which is not met from higher production is a ticket to the dole queue. That is why it is important to reach a renewed understanding with the trade union movement for the next 12 months, an arrangement which will break decisively from the inflationary spiral that has plagued us.

We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment. That is the history of the last twenty years.

...to me, at least, this unemployment problem is the most crucial problem of our country. I regard it as such. I can fight it. I am willing to fight it. I cannot fight it without weapons. I have for myself come to the conclusion that—owing to the conditions that exist to-day in the world, having regard to the economic environment, having regard to the situation of our country—if we go on pottering along as we are we shall have grave unemployment with us to the end of time. And I have come to the conclusion myself that the only way of fighting this subject is by protecting the home market. (Loud and continued cheering.)