The economy has continued to move broadly in line with our expectations three months ago, output in the third quarter standing only marginally higher than the level reached a year earlier. The usual annual revision of the national accounts in October has not materially altered the picture of the economy in earlier quarters either.

The world economic position and prospects have worsened further in the last three months. In the United States and Japan, in particular, recessionary conditions are proving to be more marked and more prolonged than we had expected, and it looks as though by the end of the year all the major industrial countries, with the possible exception of France, will have experienced at least one quarter in which output has fallen or at best shown no appreciable rise. The other developed countries have fared better, but we no longer expect there to be any growth of output in the OECD area either in the second half of the year or in the year as a whole. In 1975 the position should be rather better, at least by the second half. We expect OECD countries' aggregate GNP to grow by about 2 per cent year-on-year and nearly 3 per cent between the fourth quarters of 1974 and 1975.

In this Review we publish four signed articles on the same general subject: index-linking. The articles originated in discussions which took place in the Institute during the three-day week. For many years the Economic Review has taken the view that inflation could not be brought under control without some kind of prices and incomes policy, and it supported both the efforts made by the Labour government between 1965 and 1969 and the measures introduced by the Conservative government in the autumn of 1972. Some members of the Institute staff argued that the Review had not sufficiently considered the alternative of trying to ‘live with’ inflation, in particular by the introduction of ‘index-linking’ or ‘indexation’.

Money is held to economise on the high cost of conducting transactions in a barter economy, to provide a ‘precautionary’ reserve in case of unforeseen expenses and for speculative reasons, such as bearish expectations about shares or government securities. But if conventional money changes in value rapidly it ceases to serve all these purposes. In these circumstances it may become more convenient to conduct future transactions in terms of index-linked contracts which have the effect of changing the unit of account into a given basket of goods by specifying that future payments in terms of nominal pounds are to be scaled up or down by an amount which depends on the changes in an index of average prices.

Though it has become increasingly popular, indexation is not a new idea. As early as 1742 Massachusetts had an issue of bonds based on a few commodities and Jevons in 1875 and Marshall in 1886 advocated the use of a standard unit of purchasing power in contracts for deferred payments.

Although it has long been recognised that inflation may have important consequences for the level and distribution of the burden of a progressive personal income tax, it is only with the recent sustained acceleration in the rate of increase of the general price level that these relationships have become matters of serious concern. A number of Western economies, including Iceland (in 1965), the Netherlands (1972) and, most recently, Canada (1974), have introduced schemes for linking the main parameters of the income tax to an index of consumer prices, and considerable interest has been shown in the possibility of a similar reform in this country.

Much attention has been paid recently to the activities of building societies and their influence on the housing market. Criticism has been largely directed towards the destabilising effects of the present methods of financing house purchase, in which borrowing and lending rates tend to be ‘sticky’ with the result that the availability of mortgages goes through the familiar ‘feast and famine’ cycle.