Balance of Payments Issues and ‘Stop-Go’ Policies (AQA A-Level History): Revision Notes
Balance of Payments Issues and 'Stop-Go' Policies
The economic context of growing affluence
The late 1950s appeared to be years of optimism for Britain. Workers enjoyed more jobs, higher wages, and access to consumer goods. Adults who had experienced wartime deprivation could now afford cars, new appliances, and entertainment, while younger generations grew up in comparative plenty. The British economy was growing and living standards were rising.
However, beneath this surface prosperity lay structural economic problems that would plague successive governments. Wage growth consistently outstripped increases in production, creating inflationary pressure. The rate of productivity growth in Britain lagged behind international competitors.
Britain's Declining World Trade Position
Between 1950 and 1962, Britain's share of world trade declined from 25% to just 15%, whilst:
- The USA maintained around 20%
- West Germany rose from 7% to 20%
- Japan increased from 3% to 7%
This dramatic decline revealed fundamental weaknesses in Britain's economic competitiveness.
Productivity refers to efficiency in getting more produced per worker, per shift, or per hourly wage. When costs are reduced and profits increased through higher productivity, workers can be freed up for other uses. British productivity growth in this period was substantially lower than that of France and West Germany.
Understanding 'stop-go' economics
'Stop-go' economics describes a damaging pattern that characterised British economic management in the 1950s and early 1960s. The name derives from the tensions between an expanding economy with low interest rates and rising consumer spending (the 'go' phase) and the consequences of economic overheating, when wages and imports exceeded productivity and exports, necessitating deliberate deflation through higher interest rates and spending cuts (the 'stop' phase).
This created a destructive cycle. The Conservative government constantly faced the challenge of maintaining both growth and employment whilst simultaneously keeping prices steady. Macmillan's answer was to appeal directly to industry and the public, advocating restraint in wage demands and sensible spending habits.
The 'stop-go' cycle mechanism
Worked Example: The 'Stop-Go' Cycle in Action
The cycle operated as follows:
- Initial expansion ('go'): Increased demand in the economy led to rising imports and higher consumer spending
- Overheating: Imports exceeded exports, creating a balance of payments crisis
- Government intervention ('stop'): Authorities imposed controls including high interest rates and wage freezes
- Contraction: Demand fell and output decreased
- Controls removed: The cycle began again with renewed expansion
This pattern repeated itself throughout the 1950s and early 1960s, preventing sustained economic growth.
Although higher salaries created substantial internal consumer demand, they did not encourage manufacturers to increase export trade, which would have helped address the underlying imbalance. This fundamental problem meant that domestic prosperity was not translating into international competitiveness.
Balance of payments problems
Balance of trade measures the difference between the goods a country imports and what it exports. When imports exceed exports, a trade deficit exists; when exports exceed imports, there is a trade surplus.
Balance of payments encompasses a broader measure including invisible imports and exports (services such as shipping, banking, and insurance). The balance of trade forms part of the overall balance of payments calculation.
| Period | Balance of visible trade (£m) | Balance of invisible trade (£m) | Overall trade balance (£m) |
|---|---|---|---|
| 1946-50 | -160 | +104 | -56 |
| 1951-55 | -345 | +326 | -19 |
| 1956-60 | -94 | +226 | +132 |
Interpreting the Balance of Payments Data
The balance of trade figures reveal Britain's persistent difficulties. Whilst invisible trade (services) often generated surpluses, visible trade (goods) consistently showed deficits. The overall balance fluctuated but indicated underlying structural weaknesses that would increasingly constrain government policy options.
Trade unions and wage pressures
Trade unions had emerged in the nineteenth century to protect workers' interests regarding pay and working conditions. They employed industrial action, including strikes, to pressure employers and governments.
Persuading trade unions that their members should accept modest wage increases proved difficult, particularly in industries such as coal mining where workers felt they were not gaining as much as others. High taxation remained necessary both to control spending that would lead to unwanted import increases and to fund rising costs of public services.
The Challenge of Wage Restraint
Government controls had to curb what ministers saw as excessive inflation. However, this created political tensions as workers resisted wage freezes while prices continued to rise, creating a difficult balancing act for successive governments.
The 1957 financial crisis and cabinet split
Pressure from the United States over the Suez crisis exposed Britain's financial weakness and triggered a run on the pound (a rapid fall in the pound's value in international currency markets, especially against the US dollar). Macmillan's Chancellor, Peter Thorneycroft, advocated what later generations would call 'monetarism': limiting wage increases and cutting the money supply.
Other cabinet ministers, particularly Iain McLeod, who represented one-nation Conservative thinking, strongly opposed such restrictive policies because they would lead to increased unemployment and housing construction cutbacks.
The dispute and divisions within the cabinet continued throughout summer 1957, symbolising the inherent problems of 'stop-go' economics. Macmillan ultimately sided with those favouring continued expansionist economic policies. When Thorneycroft proposed drastic spending cuts in 1958, Macmillan overruled him. Thorneycroft resigned, along with his junior ministers, Enoch Powell and Nigel Birch. The post-war consensus on economic management had remained in place.
Key figure: Peter Thorneycroft (1909-94)
Peter Thorneycroft served as a Conservative MP from 1938. Although he resigned as Chancellor of the Exchequer in 1958, he returned to cabinet in 1960. He later became a strong supporter of Margaret Thatcher and served as chairman of the Conservative Party from 1975 to 1981. His advocacy of monetarist policies in 1957-58 foreshadowed later Conservative economic thinking.
Thorneycroft's Warning (January 1958)
In a speech to Parliament shortly after resigning as Chancellor, Thorneycroft warned:
"We have slithered from one crisis to another. Sometimes it has been the balance of payments crisis and sometimes it has been an exchange crisis. It is a picture of a nation in full retreat from its responsibilities. It is the road to ruin. I do not believe that the problem is technical at all. I do not believe in an answer to the question whether we should use bank rate or physical controls. To tell the truth, neither of them works very well. The simple truth is that we have been spending more money than we should."
This critique proved prescient as Britain continued to struggle with the same problems throughout the early 1960s.
Key figure: Enoch Powell (1912-98)
Enoch Powell was a Conservative MP from 1950 to 1970 who held various ministerial posts but remained a critic of the post-war consensus. He became notorious for a 1968 speech about immigration which led to his dismissal from the shadow cabinet. In February 1974 he left the Conservative Party, instead urging people to vote for Labour in the March election because he opposed entry into the EEC. In the October 1974 election he was elected as an MP for the Ulster Unionist Party.
The 1959 election success
Despite the financial crisis and cabinet resignations, these events did not inflict lasting damage on Conservative popularity, which improved dramatically by 1959. Macmillan typically dismissed the resignations of Thorneycroft and Powell as 'a little local difficulty'. Sterling (the pound) regained its value against the dollar.
The economy expanded substantially: the April 1959 budget provided tax cuts of £370 million, exceeding even the Butler 'election give-away' budget of 1955. The widespread sense of consumer affluence reflected in the budget became generally accepted as the determining factor in Macmillan's comfortable re-election in October 1959.
Economic developments 1960-1964
The British economy continued growing and reached its peak between 1960 and 1964. However, the government became further trapped in cycles of 'stop-go' policies whilst attempting to maintain economic stability.
The 1961 pay pause and IMF loan
In 1961, concerns about the economy overheating forced the government to introduce a 'pay pause' to restrain wage inflation and to request a loan from the IMF (International Monetary Fund). The economic difficulties facing the Conservatives by 1962 were the familiar ones: balance of payments problems and the broader economics of 'stop-go'.
Economic growth in Europe, especially in West Germany, was leaving Britain behind. Trade with the Empire and Commonwealth was not sufficient to maintain competitiveness. Macmillan therefore reversed his previous policy and decided it was necessary for Britain's economy to join with Europe's. The 1961 application symbolised the sense of failure in bringing about economic modernisation.
National Economic Development Council (NEDC)
To address these challenges, Selwyn Lloyd, Macmillan's third Chancellor of the Exchequer, established the National Economic Development Council (NEDC), known as 'Neddy'. This body consisted of government representatives, academics, employers, and trade unionists, and was made responsible for long-term planning. A National Incomes Commission (known as 'Nicky') was added in 1962 to monitor wages and prices.
International Assessment of Britain's Economic Performance (1962)
In April 1962, the left-leaning newspaper The Guardian reported:
"Britain economically came bottom of the class in the annual report published here tonight by the Secretariat of the United Nations Economic Commission for Europe. Britain has the 'sorry distinction of being the only Western country whose volume of national output was practically unchanged from the previous year' and is, 'the one country where the employment situation has seriously deteriorated'."
This damning assessment highlighted how far Britain had fallen behind its European competitors.
The 1963 EEC rejection and Beeching Report
Major Setbacks for Macmillan's Economic Strategy
The rejection of Britain's application to join the EEC in January 1963 represented a serious setback for Macmillan's economic policies. In his memoirs, Edward Heath claimed that he never saw Macmillan as bitterly depressed as he was after the Gaullist veto. This closure of the European option left Britain with limited means to address its economic decline.
In autumn 1963, the Beeching Report was published as part of a review into cutting public expenditure. It recommended substantial cuts in Britain's rail network, including the closure of more than 30% of the rail network, provoking public outrage. Hundreds of branch lines and thousands of stations were axed, causing widespread social change and leaving many rural areas more isolated. The government was no longer surfing on a wave of prosperity and economic success.
Reginald Maudling's 'go' phase
Reginald Maudling, who had replaced Lloyd as Chancellor of the Exchequer, pushed the economy into a 'go' phase by lowering the bank rate to encourage consumer spending. Britain's growth rate rose from 4% in 1963 to nearly 6% in 1964.
The Persistent Trade Imbalance
Nevertheless, whilst exports rose just over 10% between 1961 and 1964, imports remained nearly 20% higher. The cycle of 'stop-go' economics had not been broken, and Britain's fundamental economic problems remained unresolved.
Remember!
Key Points to Remember:
-
'Stop-go' economics created a damaging cycle where periods of growth ('go') were followed by deflationary measures ('stop') to control inflation and balance of payments problems
-
Britain's balance of payments remained consistently problematic throughout 1951-64, with imports regularly exceeding exports despite surpluses in invisible trade
-
The 1957 Thorneycroft crisis highlighted fundamental disagreements about economic policy, with Macmillan choosing expansionist policies over monetarist restraint
-
Despite underlying economic weaknesses, consumer affluence and tax cuts enabled Conservative electoral success in 1959
-
By 1962-63, Britain's relative economic decline compared to European competitors became increasingly apparent, prompting attempts at modernisation through the NEDC and EEC application, though the latter failed in January 1963