Economic Record of Labour Government 1964 to 1970

A structural legacy of militant trade union power, de-industrialisation, rising unemployment and inflation

Harold Wilson won the 1964 general election. Labour had been expected to win easily for several years. Harold Wilson was an accomplished Leader of the Opposition. He positioned Labour to win on a platform that spoke to the heady atmosphere of the early 1960s – the Swinging Sixties, the Britain of the Beatles, Mary Quant and the Mini Skirt. Wilson presented a radical programme of modernisation. Thirteen wasted Tory years were to be ended. Labour would use the white heat of technology to modernise industry and make the post-war affluent society more prosperous and more egalitarian.

The election result was not a comfortable victory. Instead it was very close. A Labour majority of four in the House of Commons.. A kindly, patrician, aristocratic Conservative Prime Minister Sir Alec Douglas-Home almost won in October 1964. The man whom Harold Wilson dismissed as the Fourteenth Earl, had left the general election to the very end of the parliamentary term. As Earl of Home, Alec Douglas Home had been Foreign Secretary and succeeded Harold Macmillan in October 1966.Unlike Macmillan, Alec DouglasHome was a genuine aristocrat. To become Prime Minister and get elected to the House of Commons he renounced his peerage. After that he was known as Sir Alec – he was a Knight of the Thistle. Sir Alec had many qualities that were attractive, yet he was another Tory Toff, who appeared wholly out of touch with contemporary Britain in the Swinging Sixties. On television his gaunt skeletal appearance invited caricature.

Reginald Maudling – the chancellor whose ‘dash for growth’ almost pulled off a bought election

Yet against all the odds after thirteen years, the Fourteenth Earl, almost won the1964 election. How could this be? A distinguishing feature of the Stop-Go Cycle that emerged in the 1950s was that the Go part of the cycle could be conveniently, for governments facing re-election, timed with elections. The first example of this was the overheating economy Rab delivered for Sir Anthony Eden 1955. Harold Macmillan ensured that the same techniques of economic management were delivered for him in 1959. As Prime Minister in 1962, Macmillan made similar preparations ahead of the coming election. He appointed Reginald Maudling as Chancellor and they both prepared for expansion. This time, however, the Go phase of the economic cycle was significantly amplified by a novel commitment to an expansion that facilitated an increase in productive capacity that would protect the balance of payments. This Maudling Dash for growth was in full play in 1964 and politically came close to delivering victory for Sir Alec Douglas Home.

Economic consequences of Maudling’s dash for growth: a nightmare for Labour in 1964

In October 1964 the consequences of the Maudling Dash for growth for the balance of payments were just starting to become clear. The truth is that Labour inherited an overheating economy, a vulnerable balance of payments, an exchange rate that was overvalued for balance of payments equilibrium. The exchange rate was a fixed parity against the dollar. It had to be defended by domestic policy, in Britain's case deflation or abandoned. Harold Wilson and his new Chancellor of the Exchequer faced an exchange rate problem every bit as awkward as Rab Butler did on taking office in 1951.

A difficult economic inheritance of structural problems

Labour ministers faced several structural economic problems among them continued commitment to the Bretton Woods system, the problems with increasingly aggressive trade union power and inflexible labour market institutions. The policies and institutions that were central to the post-war Keynesian consensus were straining and becoming less coherent. The full employment commitment was becoming harder to deliver without inflation. The trade-off between inflation and unemployment was becoming less stable. Over the cycle the peaks and troughs inflation and unemployment would exhibit a longer-term trend of both rising inflation and higher unemployment. As these problems emerged the policy reaction of the Treasury and the wider economic commentating British establishment was to turn to a form of ‘authoritarian Keynesianism’, which employed price, income and dividend controls. 

The mixed economy had a large, socialised sector, the nationalised industries. From the time of Herbert Morrison’s public corporation model their governance and management had not been properly sorted out. All decisions about their investment programme, location, wages and external financing limits were politicised. There were clear issues about their productivity, efficiency and return on capital. The creation of the welfare state in the 1940s had been based on supporting the citizens from the cradle to the grave and the creation of a safety net that would banish want and poverty. The working of its services in practice in communities was turning out to be more complex and disappointing. The National Assistance Act 1948 had not eliminated poverty. The depressing disappointment of the challenges of managing the complex social pathologies was vividly explored in Ken Loach’s BBC drama Kathy Come Home in 1966. An extensive social science literature was to emerge in the 1960s exploring the defects and lacuna of the welfare state. Much of this literature was an exploration of the difficulty of getting traction on complex social pathologies.

Failing to Devalue in October 1964 – Labour set itself up to fail

The first set of difficult decisions that Harold Wilson’s government had to make was what to do about the overvalued exchange rate. There were two aspects to the question. Should sterling be devalued against the dollar within the framework of the Bretton Woods system or should Britain abandon Bretton Woods and allow sterling to float, in the manner that Rab Butler had advised the Churchill’s Cabinet in 1952. The decision was made not to devalue sterling and to stick to the 2.80 parity against the dollar. Given the fundamental balance of payments disequilibrium at that parity that was repeatedly exhibited in the 1950s this would have involved significant domestic deflation and suppression of living standards and a relaxation of the definition of full employment. Yet in the circumstances of October 1964 and Maudling’s Dash for Growth these long standing problems were magnified. The decision not to devalue made at the start of the Wilson Government set up his administration to fail economically and in terms of his wider social and political ambitions. 

Harold Wilson made the decision not to devalue with his Chancellor James Challagan and the Deputy Leader of the Labour Party, the Secretary of State for Economic Affairs and First Secretary of State George Brown. Ben Pimlott Wilson’s biographer explains that the decision was made hurriedly and with little careful evaluation of the economic implications of trying to maintain an overvalued exchange rate. As President of the Board of Trade Harold Wilson had been involved in the decision by the Attlee Labour Government to devalue sterling against the dollar in 1949. He was determined to ensure that Labour did not become the party of devaluation in the public’s mind.Wilson and his ministers also saw it as a moral question of not letting down the owners of British sterling deposits and assets. Yet this political decision was made in the face of significant advice from academic economists that had advised the Labour Party in Opposition, such as Lord Kaldor and Robert Neild.

A National Economic Plan, Expansion and Growth

An important part of Wilson’s economic agenda was faster growth brought about by higher investment, use of technology and national economic planning on the French model. Harold Wilson as Shadow Labour Chancellor in the late 1950s had been one of the first people to draw attention to the UK’s poor relative performance in terms of economic growth. He was determined to remedy this with an ambitious industrial strategy. These policy ambitions about planning, industrial strategy and industrial policy were to be brought about or delivered by significant institutional changes in Whitehall. The government was equipped with a new ministry of economics. The Department for Economic Affairs was created and headed by George Brown the Deputy Leader of the Labour Party.

The Department of Economic Affairs was to build on the work of the National Economic Development Council, NEDC, the tripartite government, employer and trade union body set up by Harold Macmillan’s government in 1962 to promote growth and borrow from French success with indicative planning. NEDC had devised a framework and target for growth of 4 per cent a year in the paper it published in 1963. This was revisited and represented in the National Pan published in 1965. The economy was planned to grow by 25 per cent by 1970. The problem with it was that it was based on an annual rate of growth that was around a third higher than the rate the Treasury considered realistic on the basis of the past performance of the British economy. The critique of Labour, the economic commentating community and the business community of the Stop-Go Cycle was that clumsy deflation was too readily used to control inflation and the balance of payment. What Britain needed was growth in its industrial capacity, to grow the economy out of its balance of payments constraint. There needed to be commitment and ambition to match the opportunity that expansion presented.

But what do you do about inflation and planning pay increases?

An important part of this analysis was the growing belief that an effective prices and incomes policy could contain inflation without recourse to monetary and fiscal policies to deflate the economy and its growth. Prices and incomes policy was the instrument that would deus ex machina square the circle. An important part of the working on planning the government’s industrial strategies and growth plans was the TUC. The unions were very sensitive to any suggestion that wage bargaining and their role in collective bargaining could be constrained by government or ministerial policy. The National Plan carefully omitted any reference to a comprehensive plan for pay.

An economics ministry without the tools of a finance ministry was set up for failure

The central problem for George Brown and his new department was that however great the political status invested in the Department of Economic Affairs and the secretary of state himself, all the big policy instruments were in the hands of the Treasury. As it happened George Brown was made Chairman of the Economic Committee of the Cabinet and replaced the Chancellor as Chairman of NEDC. James Callaghan the Chancellor, however, controlled decisions on the Bank Rate, public expenditure, taxation, investment in the nationalised industries and borrowing.

James Callaghan, moreover, as Chancellor had his work cut out – defending an overvalued exchange rate and stabilising the balance of payments. It was a cruel political task and an economically impossible one. When the Wilson Government decided that there would be no devaluation of sterling it set itself up to fail. The measures necessary to attempt to make such a policy work were wholly inconsistent with the ambitions of the National Plan. The Department of Economic Affairs was set up to be frustrated. When ideas for a separate ministry for economics were first being floated Samuel Brittan, who at that time was fully invested in expansionism, wrote in the chapter Choosing Priorities in his book The Treasury under the Tories 1951-1964 published in August 1964:

‘Much in the preceding pages would point in the same direction as the Production or Economics Ministry favoured by the Labour and Liberal parties. But the snag in most of these plans is that they assume that there is something called ‘finance’ quite apart from economics and production.

 In fact, of course, the instruments by which production is influenced in this country are the budget, monetary policy, exchange rate policy, and one or two very general controls. Despite all the talk of physical intervention this is likely to remain the case. If the treasury remains responsible for the balance of payments, for taxation for the Bank rate, and from the use of devices like the regulator, it's likely to remain the effective Economic Ministry, whatever nominal changes are made’.

Edmund Dell described the division of labour between the Treasury and the Department of Economic Affairs in A Strange Eventful History Democratic Socialism in Britain. The DEA was ‘the department for promoting ‘socialism’, and the Treasury the department for managing capitalism. Managing capitalism in a fraught economic conjuncture was bound to drain any prospects of success from the DEA's socialism’.

Why an unrealistic growth target was fundamentally flawed

The whole expansionist, planning growth project was doomed from the start. The start of course was the NEDC set up by Harold Macmillan’s Chancellor Selwyn Lloyd in 1962. Ambitions for growth based around plans for increased exports invited scepticism. This increase in export production was to take place in the context of a domestic economy exhibiting excess demand – there being no suppression of home demand being a central proposition, the expansionist argument – without a devalued or adjusting exchange rate invited scepticism. The Cambridge economist and one of Maynard Keynes’s closest collaborators in the 1930s, Sir Austin Robinson wrote in the Three Banks Review in December 1963 ‘we have appeared to assume that we can follow policies bound to increase our propensity to import in the simple faith that exports could be left to balance our imports whatever they may be’.

If Sir Austin Robinson had disposed of the expansionist proposition of growth from exports another Cambridge economist Lord Kaldor doused the investment case with realism. In Causes of the Slow Rate of Economic Growth of the United Kingdom published in 1966 Lord Kaldor argued that the slow rate of growth, fewer investment and growth opportunities. While tax relief on investment fluctuated, tax expenditure to support investment were generous. Lord Kaldor speculated that the low ratio of investment in Britain reflected the exhaustion of labour reserves and low structural opportunities for growth. Writing in 1970 on the NEDC planning episode, the economics don at Christ Church College, Oxford Peter Oppenheimer in a series on essays in The Age of Affluence commented that the implication of this would be that, if the authorities did succeed in jacking up the investment ratio either by eliminating stop go or through bigger fiscal incentives, this would chiefly lower the social return on investment and have only a small effect on the rate of growth.’

Peter Oppenheimer also made a withering comment on much of the asinine zeitgeist of 1960s economic wishful thinking: ‘the idea of stepping up the growth rate simply by persuading industry that it was going to be stepped up sprang partly from fashionable talk about ‘virtuous circles.’

The National Plan 1965

The National Plan was agreed with the NEDC and published in September 1965. The target was to increase national income by 25 percent between 1964 and 1970, an annual rate of growth of 3.8 per cent. The Prime Minister Harold Wilson regarded the plan as a way of defending sterling by some sort of socialist alternative to deflation. Expansion had been seen by Labour for many years as the means to overcome balance of payments constraints and preserve the exchange rate parity. Yet in July 1966 measures were taken to defend sterling using the conventional tools of demand management and deflation that vitiated the plan’s numbers published in September 1965. 

Edmund Dell in his book The Chancellors was unsparing his criticism of the National Plan:

‘It was absurd, but it was not socialist’.

The National Plan, however, was damned not by its over optimism but by its lack of any useful role.

It was otiose without devaluation but would have been no less otiose with it.

It was a political gesture, supported equally by naive politicians, naive businessmen and naive civil servants in the DEA.

In his book on Democratic Socialism Dell quotes Harold Wilson’s biographer Ben Pimlott commenting that as a result of Labour’s abandonment of planning ‘A hole was created in Labour’s raison d’etre which, arguably, has never been filled.’

The DEA atrophied and became irrelevant within Whitehall. The focus of economic policy became the necessary fiscal and monetary measures to stave off the inevitable devaluation of sterling in 1967. The Department of Economic Affairs however lived on in popular culture long after most of the protagonists involved in its creation and work had gone to their graves. Its work was used as the inspirational model for the fictional television comedy Yes, Minister.

Ministry of Technology

Harold Wilson set up a new ministry of technology. It was to give effect to the prime minister's vision of modern industry transformed by technological innovation. Mintech was the Whitehall departmental expression of the ideas that Harold Wilson had tried to explore in a speech to the Labour Party conference in Scarborough in 1963. A speech that has gone down in history as the ‘white heat of technology’ speech. The ministry was to encourage the adaptation of the most modern practices in British industry, save the British computer industry and bring about cultural and sociological changes, such as raising the status of engineers. As Edmund Dell noted, in his "Scarborough, speech Wilson, had warned that the technological age would leave no room for restrictive practices’. To foster good relations with the trade unions and to encourage trade unions to cooperate with achieving higher productivity and reforming those restricted practises that Wilson had complained about, the prime minister appointed Frank Cousins the General Secretary of the Transport and General Workers Union to be the Minister for Technology.In Dell’s view Harold Wilson saw the DEA and Mintech along with the Ministry of Overseas Development and the Ministry of Land and Natural resources as ‘instruments of his many ‘socialist’ departures in policy. In his famous diary, The Diaries of a Cabinet Minister, the leftwing former Oxford classics don, Richard Crossman was more caustic, dismissing them as ‘idiotic creations’.

Labour’s Industrial Policy

Harold Wilson was strongly committed to an ambitious industrial strategy. His focus was traditional manufacturing. In Opposition Wilson had condemned the ‘Candy Floss Society’.

For Labour economic success was about manufacturing and visible new technology. Labour was suspicious of finance when it was not actively opposed to it. The City of London was a bogey to be characterised and services were not appreciated in the same way that motor industry, textiles, television or computers were all lauded.

The UK had a large manufacturing sector that was composed of what should be called legacy industries. Industries where the UK had lost or was losing its comparative advantage or had done so decades before. The firms involved had been supported by a range of public intervention. These interventions included trade protection, such as Commonwealth Protection, publicly supported cartels dating back to the 1930s, development area support, government contracts and a periodically devalued exchange rate. Industries that had already pretty much lost their comparative advantage and commercial rationale also faced acute industrial relations problems. Managerments could not properly control their workshops, long standing practices that hinder productivity growth and the introduction of new technology and adaptation to it were often subject to strikes.

There were several eye-catching initiatives. These included Selective Employment Tax. This was a surcharge applied to employers using workers in services in general, sectors that did not export and in areas of high employment. Its main effect was to raise employment costs in successful expanding sectors of the economy that did not conform to ministerial prejudices about the future beneficial evolution of the economy. The collection of the tax also involved awkward complexity.

The Industrial Reorganisation Corporation

An Industrial Reorganisation Corporation IRC was established to promote the competitiveness and modernisation of industry through the benefits of economies of scale. It was headed by Sir Frank Kearton, the former Chairman of Courtaulds. An important purpose of the IRC was to create large companies that could have the scope to specialise and be competitive in export industries.When mergers were sponsored by the IRC it was understood that the competition authorities would stand aside and not prevent mergers that would create issues of market dominance and lack of future competition The work of the IRC and the Ministry of Technology is explored in an interesting Government British Business History Blog The Industrial Reorganisation Corporation and the 1968 reorganisation of British manufacturing, published in June 2019 by Roy Edwards and Anthony Gandy.

Between 1966 and 1970 firms employing around half a million people directly and a further half a million in the companies involved in their supply chains were reorganised by the IRC. Among the most prominent reoganisations were companies involved in the motor industry, electronics and computers. The British Motor Corporation had been formed out of a merger of Austin and Morris merged with Leyland. Leyland was a successful and profitable truck manufacturer that had bought Triumph and Rover cars. The IRC brought them together in British Leyland. It was a huge company that dominated volume car production in Britain and employed 250,000 people. Alas it was not a success. British Leyland became financially unviable and had to be nationalised in 1974. Its motor cars throughout its iterations as a volume car manufacturer were disappointing. Their quality, performance and reliability was summed up by a comment made by a driver in the Government Car Service. The Secretary of State for Employment’s driver was a former policeman. His comment was straightforward “it should be made a criminal offence for British Leyland to manufacture cars’

The IRC promoted a merger between GEC and the English Electrical Company. The Managing Director of GEC was one of the most impressive industrialists of the post war generation. Sir Arnold Weinstock created profitable businesses through rigorous control of costs and a relentless focus on profit and cash management. The newly merged firm became a giant employing 230,000 people in a series of subsidiaries such as Marconi and Elliott Automation. The IRC supported GEC in its takeover of Associated Electrical Industries AEI in 1967. Yet GEC was neither interested in economies of scale as such or exports. What Sir Arnold Weistock wanted was an acquisition without hindrance from the competition authorities. Through the offices of the IRC he got the assistance he needed. GEC was not particularly interested in exports. Whereas AEI was. The difference in commitment to exporting was noticed by one of the government sponsoring departments involved, the Department of Trade. One of the cost savings that Sir Arnold carried out at AEI was to close its export office Japan. Sir Arnold was interested in profits and not very interested in exports with tight margins and low profits. While Sir Arnold Weinstock ran successful profitable companies that were capable of generating huge amounts of cash that his managements were unable to deploy in their own businesses, he had no particular vision or idea about creating the sort of economies of scale that the authors of the vision that led to the creation of the IRA sought. Its management explained to the IRA that GEC was in fact effectively 180 separate companies, vitiating any notion of economies of scale.

International Computer Ltd ICL was created through the sponsorship of the Ministry of Technology. This involved taking English Electric’s computer division and combining it with the computers business of International Computers and Tabulators ICT. The new firm employed 35,000 and was the largest computer firm outside the US and the only one whose products were not based on American design and technology. The creation of ICL was the work of Anthony Wedgewood Benn the Minister for Technology. The intention was that ICL would compete against IBM head to head in export markets. In practice it did little exporting and the backbone of its business was supplying the British public sector. Contracts from the Inland Revenue, the Department for Work and Pensions, the Ministry of Defence, the Post Office, local authorities and nationalised industries were ICL’s main customers. In the 1990s ICL increasingly collaborated with Fujitsu which became its only shareholder in 1998. ICL’s most notable public legacy now is its involvement through Fujitsu with the Horizon system at the Post Office that has been central to miscarriages of justice exposed in the Post Office Scandal.

Another example of Ministry of Technology intervention was that of the creation of Upper Clyde Shipbuilders. The purpose of this merger of firms with names such as John Browne was to achieve horizontal integration and economies of scale in 1968. The Chairman of Dunlop Sir Reay Geddes played a central part in bringing it about with the Minister for Technology Anthony Wedgwood Benn. Sir Reay had chaired an inquiry into the future of shipbuilding. It recommended two large ship building groups on the Clyde, two in the North-east of England, and one in Belfast. The key concept was that they should be as big in size as their Japanese and Swedish competitors. The idea being that they could then survive in a highly competitive international market place.The recommendations were accepted by the Ministry of Technology and energetically applied, by Mr Wedgwood Benn.

Roy Edwards and Anthony Gandy’s conclusion was clear: ‘Managerialism and government cajoling was meant to deliver firms able to lead the world in terms of the ‘white heat of technology’ and ensure the UK remained a leading exporter of complex high technologies. Crafts notes that industrial relations and indulgent management were at the heart of the ‘British disease’. To this we should add the damage caused by a blind faith that large enterprises would automatically improve competitiveness, without reference to underlying product markets - this was a failure of government understanding.Scandal Managerialism and government cajoling was meant to deliver firms able to lead the world in terms of the ‘white heat of technology’ and ensure the UK remained a leading exporter of complex high technologies. Crafts notes that industrial relations and indulgent management were at the heart of the ‘British disease’. To this we should add the damage caused by a blind faith that large enterprises would automatically improve competitiveness, without reference to underlying product markets - this was a failure of government understanding’.

Ministers at MinTech such as Anthony Wedgewood Benn and Peter Shore also pushed hard for further powers of industrial intervention.They wanted to be able to take direct equity stakes in firms and set up joint ventures, using government money. As Michael Shanks observed in his monograph Planning and Politics The British Experience 1960-76 the The Industrial Expansion Act 1968 ‘represented a major step towards selective intervention in the private sector, going a long way beyond the IRC or anything envisaged in the National Plan’. The measure was controversial and little used. It interestingly pointed ahead to the direction of travel taken by both Conservative and Labour governments in the 1970s when the process of de-industrialisation began to bite on a significant scale. 

Devaluation, Disinflation, IMF Conditionality and yet the decision to Float Sterling was flunked

In November Harold Wilson after a fruitless three-year delay bowed to the inevitable and devalued the exchange rate by 14 per cent from $2.80 to $2.40. This was a major political blow to the Labour Government. It was a publicly humiliating reversal of the decision made when Labour took office, against the logic of the new Labour government’s economic advisers. Labour had inherited an overvalued exchange rate and a balance of payments that was fundamentally in disequilibrium. Yet it was fully committed to a growth strategy based on an ambitious strategy of industrial intervention. The exchange rate target could not be met without an internal deflation of output or the sort sometimes referred to as ‘internal devaluation’. This Sisyphean defence of the sterling exchange rate parity within the Bretton Woods system vitiated the rest of Labour’s economic programme.

In the run up to the Autumn sterling crisis there were a mix of unhelpful things that made life difficult for the Chancellor Of the Exchequer, James Callaghan . A national docks strike unsettled the foreign exchange markets. In the same way that the seamen’s strike had in 1966. It was reasonable for foreign exchange trading desks to interrogate the implications of paralysed ports for the balance of payments. European governments commented on the sterling exchange rate. The French Foreign Minister Couve de Merville thought sterling should be devalued not least as part of any entry into the Common Market that Harold Wilson was negotiating in 1967.

James Callaghan insisted on resigning as chancellor after sterling was devalued. Harold Wilson decided that the formal decision should be made by the full Labour Cabinet. There was some consideration given to the question of whether sterling should be allowed to float but it was cursory and the central issues involved in managing a currency with a fixed target was flunked. To make a devaluation work an economy has to be deflated to ensure that it retains the competitive benefits of a devaluation. Devaluation offered immediate relief from deflationary pressure but it was not a silver bullet to avoid uncomfortable decisions. Devaluation put up the domestic price level by making imports more expensive, in the context of a potentially overheating labour market operating beyond full employment, a devolution could ignite a domestic inflation dynamic of higher import costs, higher wages and higher inflation in the absence of a non accommodating monetary policy.

The the new Chancellor Roy Jenkins is best remembered, in terms of economic policy, for decisive measures to deflate the economy and returning the balance of payments to surplus.This was economy done through a combination of monetary and fiscal policy measures, large cuts in public expenditure, big increases in taxation and a relentless focus on reducing the Public Sector Borrowing Requirement. While the measures were eventually taken Edmund Dell in his books on The Chancellors and A Strange Eventful History Democratic Socialism in Britain observes that the necessary measures were taken tardily. There was a two month delay in the cuts to public expenditure and a further two month delay ahead of the necessary deflationary budget.During these months sterling at its newly devalued exchange rate came under further pressure. Despite the devaluation the UK had to seek assistance from the IMF to finance the balance of payments capital account. This assistance came with IMF conditionality on public expenditure, borrowing and monetary and credit conditions. These were the first tentative hints indicating the future direction of policy in the final decades of the 20th century, particularly the £400 million ceiling on Domestic Credit Expansion for the financial year 1969-70. The Head of the Treasury Sir Douglas Allan had in the view of Samuel Brittan come to the opinion that ‘uncontrolled growth of the money supply could undermine attempts to control demand’. Yet most official Treasury opinion saw the ceiling as little more than window dressing to please the IMF and in Brittan’s view the Bank of England was pretty indifferent to innovation of a DCE ceiling and controlling the money supply as part of maintaining stable monetary conditions.

A decade later an IMF assessment of the decision to devalue in 1967 illustrates that it was a temporary measure that alleviated immediate balance of payments problems but aggravated a general inflation that would inevitably have to be addressed later. The 1967 Devaluation of the Pound Sterling published by Jacques Artus in IMF Economic Review in November offers instructive reading:

‘Nearly 3 per cent of gross domestic product was transferred into the balance of payments as a result of the devaluation. Devaluation effects came through relatively rapidly. Perverse effects’ that is the so-called J-Curve effects - ‘ on the trade balance which occurred in the first half of 1968 were more than compensated for by favourable effects on private services and other invisibles’

‘The “cost” of the devaluation in terms of inflationary pressures and welfare losses was also high. By 1971, the devaluation had raised both consumer prices and hourly labour earnings by about 5 percentage points and had worsened the terms of trade by about 4½ per cent for goods and 1 per cent for private services’. 

Annual growth in GDP and real disposable household income per head, 1960-69 

House of Lords Research Note The UK economy in the 1960s February 2024 

Households have less patience when ministers chose to spend the ‘National Dividend’ on priorities chosen by government 

Between 1964 and 1970 there was a marked increase in public spending and taxation. This involved a redistribution between households with incomes close to the middle of the distribution of income and the top towards households towards the bottom. The tax threshold before income fell as a ratio of average earnings. Real household incomes were squeezed within national income. While there was growth in national income, a greater share of it was preempted by the state for an egalitarian agenda, of the sort roughly outlined by Anthony Crosland in his books, such as the Future of Socialism and the Conservative Enemy. There was increased spending on social security transfer payments, local authority services and education exemplified by Crosland’s commitment to non-selective education and the network of degree awarding Polytechnics. Where overall growth was disappointing compared to the heroic assumptions of the National Plan, this reallocation of national income to the political priorities of ministers in terms of more spending on social services and the deployment of resources to protect the balance of payments, was increasingly painful for households. 

Britain’s growing industrial relations problem

When Labour took office in 1964 there was increasing concern about trade unions, their behaviour, their power in the workplace and their structure. At the start of the 1960s the Judicial Committee House of Lord, acting as the UK’s senior appellate court, restricted the immunity from damages for people organising industrial action that had been in place since the Trade Disputes Act 1906. This judicial decision stimulated a discussion about UK industrial relations law. At the end of the Douglas Home Conservative administration it was suggested that there should be an inquiry into the law as it affected trade unions. The immediate matter of the decision in the Rooker v Bernard case in 1964 was resolved by Harold Wilson’s Labour Government swiftly passing the 1965 Trade Disputes Act that restored the immunity to the status quo ante. 

The Donovan Report 

The General Secretary of the Trade Union Council (TUC) Geroge Woodcock welcomed an inquiry to explore how the traditional structure of British trade unions could be modernised. Woodcock’s purpose was to have a catalyst as he saw it that would get trade unions to put their house in order before the Government took it upon itself to do so. Woodcock wanted large industry unions to replace the fragmented structure of craft unions. This reflected his view that in conditions of full employment, wages presented an inflation problem. Governments would respond by either legally imposed curbs on collective bargaining or would allow unemployment to rise.To protect the interests of organised labour, in George Woodcock’s view the structure of unions had to be reformed so that the TUC could speak to the Government with full authority. 

The Labour Government’s new Minister for Labour Ray Gunter was a trade unionist who was alive to and frustrated by the problems of trade union behaviour and their effect on productivity and restrictive practices. The Royal Commission on Trade Unions and Employers Associations 1965-1968 was set up with a former Labour MP and senior appeal court judge, a Lord of Appeal in Ordinary, Lord Donovan, as its chairman. The Labour Government’s eventually response to the Donovan report, the Harold Wilson and his Secretary of State for Employment to publish a contentious White Paper In Place of Strife that the Cabinet eventually had to abandon.

 Peter Jenkins, The Guardian's political columnist published The Battle of Downing Street in 1970. It offers the reader the benefit of the judgement of a journalist who for nine years had been The Guardian’s Labour Correspondent. It therefore brings together a political perspective and the robust purchase of a writer with a specialist knowledge of the personalities and issues involved in the trade union movement. Not least the pivotal role of the perspective and political prejudices of the influential Oxford School of Industrial Relations, in influencing the Donovan Commission, and the Labour Party’s approach to industrial relations reform after the failure of In Place of Strife.

The Nuffield College Oxford School of Industrial Relations

One of the Commissioners, Mr Hugh Clegg was an Oxford don and a specialist in industrial relations. Having won a scholarship to Magdalene College, Oxford he switched and read Philosophy, Politics and Economics, PPE. He was persuaded by the socialist economist and historian GDH Cole to study industrial relations and became a Fellow of Nuffield, Oxford. Dr William McCarthy, was appointed as the research director to the Donovan Royal Commission. Bill McCarthy became one of the most influential academics in the field of industrial relations. Having left school with little advanced secondary education, McCarthy worked in gentlemen’s outfitters, the sort of mens clothes shop that barely now exists in modern Britain - outside Jermyn Street. He became the local representative of the Union of Shop, Distributive and Allied Workers (Usdaw). His union sponsored McCarthy to go to the trade union college in Oxford, Ruskin College. He then did PPE at Merton College and after a DPhil became a fellow of Nuffield College. There with Hugh Clegg he developed the Nuffield College Oxford theory of industrial relations. It was based on close sociological observation the behaviour of unions, their officials, their shop stewards, their members and strikes. It was a socialistic, or more accurately, British Labourite perspective on working class behaviour in the workplace. At its heart was a belief that traditional norms and mores should be observed by management in the private and public sectors. 

A central proposition of this distinctive school of thought was that trade unions should be left to run their own affairs. Disputes with employers should be resolved with as little interference from the law as possible. It has to be recognised that the Nuffield School of industrial relations and its practitioners - Mr Clegg and Dr McCarthy were busy arbitrators in industrial relations disputes - was a lachrymose celebration of working customs and behaviour. It accommodated not only damaging working practices that hindered the economy and manufacturing sector, in particular, but turned an eye to ugly and thuggish behaviour in closed shops, such as the Fleet Street Newspaper printing workshops and on picket lines. 

It should also be said that the Nuffield approach paid little or no attention to conventional micro-economics. At this time the paper Labour Economics at Oxford University could either be approached as an exercise in industrial sociology or a conventional economics paper. I chose to approach it as a conventional economics paper. Spending time studying economics through the lens of the labour market provides an economics student with a significant purchase on both the big macro and micro questions in economics and it played an important part in educating me as an economist.

The broad conclusion of the Donovan Royal Commission was that the Government should leave trade unions alone to regulate themselves. The best sympathetic gloss that summarised the work of the Commission was given by Ken Mayhew - who taught me the Labour Economics paper - describing ‘ a whole series of deficiencies in the UK’s IR system. The Commission’s recommended solutions were essentially pluralist and voluntarist in nature’. The problems with bad industrial relations and strikes in the 1960s were in this analysis located in poor management practices not in trade union behaviour. These conclusions were unhelpful from the perspective of Labour ministers in 1968. They had an inflation problem, a sterling valuation problem, the need for a prices and incomes policy that could be enforced and an economic growth problem where union and worker practices - restrictive practices were a significant block on progress not least in technological innovation, the Labour placed so much store by. The result was that the Secretary of State for Employment and Productivity and the First Secretary of State, Mrs Barbara Castle, decided to set aside the recommendations of the Royal Commission and prepare proposals for legislation. These built on the implications of ideas laid out in the report by Mr Andrew Schonfield, in a note that was in effect a minority report dissenting from the main report. Although Schonfeld’s note was dressed up in a fudge worthy of the Nuffield School of negotiators, as something else. 

The result was the publication of the White Paper on industrial relations, In Place of Strife published in 1969. It proposed using the law to regulate trade union practice and to introduce through legislation a requirement for unions to hold strike ballots.In Place of Strife was bitterly opposed by the trade unions and divided Harold Wilson’s Labour Cabinet.The opposition to the white paper in the Cabinet was led by the former chancellor and then Home Secretary, James Callaghan. The Prime Minister Harold Wilson and Mrs Castle were ignominiously forced to abandon it. This political defeat of an attempt to address an inadequate framework of industrial relation law coincided with an international radicalisation of trade union behaviour. This reflected the revolutionary sensibility in France arising from events in May 1968, the radical marxian political alienation exhibited by the various Red Army Faction in West Germany and Red Brigades in Italy. This infused the British Labourite version of truculent collective bargaining over pay and conditions with a novel radical political agenda. This novel political radicalism was further infused with the inevitable discontent and militancy that arises in a workplace when inflation starts to rise.  

The statutory prices and incomes policy announced in 1966 had not worked. Trade unions objected to the government interfering in pay bargaining and workers objected to inflation, the thing that prices and incomes policies were supposed to suppress. For close to a decade it had become an article of faith in the Treasury, among employers and most of the economic commentariat that an incomes policy was needed to be added to make the post-war Keynesian full employment consensus work. The increasingly apparent difficulty in the 1960s was that whatever trade union leaders may choose to agree to with the government, the members of trade unions may choose to dissent from. Wild Cat Strikes and Unofficial strike action could undo nationally agreed pay and other bargains made by trade union leaders. Workplace committees of shop stewards in manufacturing firms such as British Leyland appeared to become as important if not more than the official representatives of the trade unions involved.

Samuel Brittan, in Steering the Economy the role of the Treasury published in 1971, vividly captured the political economy that followed the defeat, In Place of Strife ‘the worst possible course was to announce it and then abandon it. The disastrous impression was created that until the election, the trade unions had only to emit the gentlest puff of breath and the government would give way’. In the public sector the Government appeased union pay pressure and agreed settlements that averaged 12 per cent in 1969-70.

Trouble ahead a toxic combination: inflation, rising unemployment, profit squeeze and an increasingly radical militant workplace

The challenge that this presented to the post-war Butskellite economic consensus was most firmly grasped and certainly most vividly expressed by Marxist economists, such as Andrew Glyn and Barry Suttclife. Glyn was the economics don at Corpus Christi College, Oxford. A relative of the family that owned the private bank Glyn Mills, the son of the 9th Lord Wolverton, an Etonian, Marxist. Writing in the New Left Review Glyn and Sutcliffe expressed the position with arresting relish in April 1971.

‘Crisis a word like wolf: it has been cried too often. But for British capitalism it looks as if this time the wolf is really at the door. A number of facts about the recent evolution of the British economy are well known enough—the rise in unemployment at the same time as an unprecedented high rate of price inflation and money wage increase’. 

‘What is not so well realised, and especially by the left, is the extent to which these trends are eating into the profits of capital. In this article we present and analyse some startling facts about the recent decline in the rate of profit on capital and the share of profits in the national income. From 1964 to 1969 there was a huge increase in the share of the national income taken by the working class. It is a qualitatively new situation which cannot be explained as the result of a cyclical change. 1970 saw a continuation of the trend during a moment of exceptional political weakness on the part of capitalism.’

They recognised that this could not go on. They perceived it as a crisis in capitalism that would provoke a political response from capital. They developed their thesis in British Capitalism, Workers and the Profits Squeeze published by Penguin in 1972. They supported workers’ struggles for higher pay and enhanced rights. They recognised that both inflation and such wage claims posed a radical challenge to a functioning market economy, writing that ‘when the wage struggle does threaten the survival of the capitalist system . . . it is time for workers not to moderate their wage demands but to destroy the system which exploits them.

This was a world away from the Labour Movement’s comfort zone of collectivism and tripartite corporatism of the NEDC. Trade union leaders liked a world of government sponsored committees and boards where they met business leaders, civil servants and government ministers and passed the time, pleasantly talking.Their special subjects for discussion were things such as the concept of a National Dividend dreamt up by Harold Wilson in the late 1960s. Another favourite was the idea of ‘social wage’. This arose from higher taxation being spent on higher social security transfer payments and higher spending on public services. In return Trade Unions would moderate their wages. This Social Democratic Labour Movement perspective was spelt out by another Oxford economics don at Balliol College, Wilfred Beckerman in Inflation and the Class Struggle in the New Statesman, December 1972 ‘as the inflationary threat is greater (than ever) so never before has the need for restraint been so vital.’

The post-war economic consensus was coming to the end of the road, something would have to give

A Marxist perspective provided in a review of Glyn and Sucliffe’s book by David Yaffe in the New Left Review in the summer of 1973 The Crisis of Profitability: a Critique of the Glyn-Sutcliffe Thesis, provides a clear headed assessment about where the post- war consensus had ended up in 1970. ‘The revival and remarkable growth of capitalist production since the Second World War has given impetus and apparent support to those who reject the Marxist perspective. The prospect of a capitalist system developing and functioning without serious interruption seemed to such reformists a real possibility. Social and economic stability was to be maintained by state intervention in the economy and with suitable government policies the last pockets of poverty and despair could be slowly reformed away. However, the last few years have given this perspective a severe blow. The intensification of international competition, the international monetary crisis, chronic rates of inflation approaching the levels of the Korean War and the trend towards increasing unemployment with the crisis of profitability, indicate that the post-war boom is rapidly coming to an end.’

The Economic Legacy of the Labour Government in 1970

Harold Wilson’s Labour Government left office in June 1970. Roy Jenkins had belatedly made the 1967 devaluation of sterling work in terms of stabilising the balance of payments for the time being. There were surpluses on both the balance of payments current account and the budget, the Public Sector Borrowing Requirement - PSBR - had been eliminated. Sterling had a new target against the dollar that would not be easy to stick to within the Bretton Woods fixed parity regime, even with a West German revaluation of the deutsche mark. The whole international payments system was becoming unstable along with the dollar itself and a generalised international inflation, reflecting unstable monetary conditions in the US, itself. The UK ‘authorities’ to paraphrase the Radcliffe Report had yet to devise an effective framework for the conduct of a non-accommodating monetary policy. The Bank of England was among the oldest central banks in the world, yet in terms of serious monetary analysis it operated as a sort of intellectual ingenue.

There was an accumulation of overdue industrial restructuring that would involve the nationalised industries and manufacturing firms that were not viable in their sectors. In the 1940s and 1950s the problems of overmaning, restrictive practices and poor industrial relations had presented themselves in terms of poor relatively productivity growth, lack of innovation, overall losses of competitiveness, international market shares of output, trade and export markets. By the late 1960s these problems were increasingly being presented in company balance sheets and financial reports where insolvency was only a short journey away. Inevitable change and restructuring was put off by direct intervention from the Ministry of Technology and the IRC. Unexpected inflation was beginning to play havoc with contracts. Major firms that the government had a large hand in, such as Upper Clyde Shipbuilders, Rolls Royce and British Leyland had balance sheets that amounted to financial bombs ready to go off. Despite reasonable overall economic growth during the 1960s the economy-wide rate of return on capital fell by over a fifth from 28.8 per cent to 22.2 per cent.

 Profitability 1960–69

House of Lords Research Note The UK economy in the 1960s February 2024 

Britain’s inflexible labour market with its anachronistically structured trade unions and restrictive working practices, had moreover taken on an atavistic political radicalism. The defeat of the Labour Government’s proposals to reform industrial relations set out in the White Paper In Place of Strife, emboldened trade union militancy. Trade union leaders were opposed to incomes policies. In so far as they were prepared to agree to any pay restraint, their inability to control their members, their unofficial committees of shop stewards and unofficial or wild cat strikes, vitiated the effectiveness of income policy. Yet it remained an article of faith among the British economic establishment and its supporting Greek chorus of economic commentators that prices and incomes policies were necessary to control inflation and maintain the 1944 Employment White Paper’s commitment to full employment. This was a perspective explored by Hugh Clegg in a book How to Run an Incomes Policy, and Why We Made Such a Mess of the Last One. The political problem was how to get unions to agree to one with a Labour government, let alone a Conservative government. The economic problem was that incomes policies created micro-economic distortion

In 1970 while the balance of payments and the government financial balance were in equilibrium in narrow financial terms. In 1969-70 there was for example a public sector surplus of 1.7 per cent of GDP. Yet, there were huge malign structural legacy problems. There was an inflation problem. It was running at a rate close to 8 per cent and the public objected to it and it became a campaigning issue in the general election in June 1970. The Leader of the Conservative Opposition, Edward Heath’s pledge ‘to cut prices at a stroke’, cut through to the electorate. The truth was the post war full employment Keynesian consensus was coming to the end of the road even without Britain’s distinct labour market and trade union challenges. Moreover, there was an increasingly awkward set of issues that was emerging: the welfare state established in the 1940s was exhibiting difficulty in ending poverty and the complex social pathologies associated with it. After a significant discretionary increase in both spending and taxation these problems were becoming more not less evident. At the same time higher taxes and higher prices, - with domestic prices being raised as a result of the necessary devaluation - meant that growth in real disposable income per head was squeezed.

The writing on the wall for the 1970s and beyond

The House of Lord research note The UK Economy in the 1960s published in February 2024 concluded that at the end of the 1960s there was ‘ slowing growth in real disposable household incomes and the declining profitability of industry, this trajectory can also be seen with respect to inflation and unemployment …inflation and the unemployment rate began the decade at 1 per cent and 2.1 per cent respectively, but gradually ratcheted up with every stop-go cycle. By 1969 inflation was 5.4 per cent and unemployment 3.5 per cent, a post-war high’. As Peter Jenkins said in The Battle of Downing Street published in July 1970 ‘by mid 1970 the country was experiencing the twin evils of rapid inflation and near stagnant production, the so-called inflationary recession’.

Inflation and unemployment, 1960–69

(Inflation data from ONS series ‘CZBH’, 17 January 2024; and unemployment data from Bank of England, ‘Research datasets: A millennium of macroeconomic data’, 2016)

House of Lords Research Note The UK economy in the 1960s February 2024 

In answer to the question does Rachel Reeves the Chancellor of the Exchequer face economic and financial challenges that are more difficult than those facing any government since the election of Clement Attlee’s government in 1945: No. The Labour ministers that took office in October 1964 faced much more difficult challenges than contemporary British finance ministers. 

Harold Wilson’s Cabinet left structural economic difficulties to Edward Heath’s new Conservative Government elected in June 1970 that were greater than anything that Rachel Reeves has to manage in 2024. 

The economic legacy of the Wilson Government in 1970 is worth interrogating, because it offers a series of warnings for future governments. Among them:

•  attempting to raise the trend rate of economic growth artificially by ambitious intervention yields disappointing results and often expensive and ill judged examples of industrial intervention; 

• maintaining a fixed exchange rate target without accepting that domestic macro-economic policy has to be fully directed to it, and will often involve domestic deflation, will fail; 

• maintaining price stability without appropriate monetary conditions will not be possible - whatever devices of micro economic policy, such as prices and incomes policy are used to repress inflation; 

• a commitment to full employment defined as a rate of unemployment less than 2 per cent will not be possible to achieve without a rising and unstable rate of inflation, if labour market institutions that determine pay and other costs are inconsistent with it;

• a concentration on the government's fiscal balance and achieving a budget surplus is irrelevant for economic performance;

•  that increased government spending financed by taxation squeezes household real disposable income ;

• that increased government spending, at the margin, has little significant effect in making the complex social pathologies that public services are directed at, more tractable. 

Warwick Lightfoot

16 September 2024

Warwick Lightfoot is an economist and was Special Adviser to the Chancellor of the Exchequer between 1989 and 1992.