Economic Policies and Problems (AQA A-Level History): Revision Notes
Economic Policies and Problems
Britain's economic position by 1964
Updating Britain's economy stood as a major goal for the Labour government. By 1964, it had become widely accepted that Britain was falling behind competitors such as West Germany and Japan in terms of economic performance.
Post-war prosperity had not translated into improved productivity or sustained growth rates. Britain's economy remained trapped in a recurring cycle known as 'stop-go', where periods of prosperity consistently led to inflation, runs on the pound, and repeated crises over the balance of payments. Restructuring economic policy to escape this damaging pattern formed the central aim of Wilson's government in 1964.
Key Economic Terms:
GDP (Gross Domestic Product) refers to the total value of a nation's economy as measured by economists.
Balance of payments measures the difference between what a country earns from exports and what it spends on imports, plus other international transactions.
A run on the pound occurs when investors and traders lose confidence in sterling and sell it rapidly, forcing the government to use reserves to support its value.
Understanding the Stop-Go Cycle
The stop-go cycle was a recurring pattern that trapped Britain's economy:
- "Go" Phase: Economic growth and prosperity begin
- Inflation: Growth triggers rising prices
- Currency Pressure: Inflation causes runs on the pound
- Balance of Payments Crisis: International transactions become unbalanced
- "Stop" Phase: Government introduces deflationary measures
- Slowdown: Deflation slows growth, returning to step 1
This cycle prevented sustained economic development and kept Britain behind its competitors.
The inherited deficit and policy choices
Labour inherited a deficit of approximately £800 million upon taking office. Two standard economic responses existed for addressing this type of problem: deflation or devaluation.
Deflation would support the value of the pound and prevent inflation. However, deflation represented the traditional 'stop-go' approach that Labour aimed to move away from. Additionally, deflation risked preventing Labour from delivering its manifesto commitments to extra spending on welfare and technology.
Devaluation lowers the value of a currency in comparison to others within a fixed exchange system. Devaluation would make imports more expensive and help exporters by making British goods cheaper in other countries, thereby improving the balance of payments.
Wilson's Devaluation Dilemma
Wilson feared that Labour would gain the reputation as 'the party of devaluation', as it had already devalued the pound under Attlee in 1949. This political concern, combined with worries about Britain appearing weaker on the world stage, made devaluation highly unattractive despite its potential economic benefits.
However, devaluation would make Britain appear weaker on the world stage and might force British industry to reduce its activities globally. Chancellor James Callaghan did not want to pursue either deflation or devaluation.
Key Figure: James Callaghan
James Callaghan (1912-2005) entered Parliament as MP for Cardiff in 1945. Harold Wilson appointed him Chancellor in 1964; later he served as both Foreign Secretary and Home Secretary, becoming one of the few men to have held all three top cabinet posts. Associated with the centre-right of the party but with strong links to the trade unions, Callaghan succeeded Wilson as prime minister in 1976.
The Department of Economic Affairs
Instead of traditional approaches, Wilson argued that problems could be solved through careful management and planning. A new department, the Department of Economic Affairs (DEA), was established, led by George Brown.
Brown set growth targets and devised a national system of 'economic planning councils'. He also attempted to establish voluntary agreement about wages and prices with industrialists, trade union leaders and civil servants. The objective was to secure the restraint needed to prevent inflation rising, which would then allow the government to avoid controls. This approach aimed to break the 'stop-go' cycle of the 1950s.
Key Figure: George Brown
George Brown (1914-85) came from a working-class trade unionist background and positioned himself on the Right of the party. He held numerous shadow cabinet and cabinet roles and served as deputy leader of the Labour Party between 1960 and 1970. He was defeated by Wilson in the leadership elections of 1963. Many regarded him as unpredictable, as he had a serious alcohol problem, and he frequently clashed with his cabinet colleagues. He resigned in 1968 after a disagreement with Wilson.
Brown's failed experiment
Brown's economic proposals ultimately achieved nothing. They lacked united government support; Brown and the DEA found themselves in competition with the Chancellor, James Callaghan, and the orthodox economists at the Treasury.
Internal Government Tensions
Some blamed Brown for being impulsive and inconsistent; others blamed the traditional and anti-Labour civil servants at the Treasury and the Bank of England who they felt undermined Brown's efforts, refusing to pass over papers and even tapping his phone.
The Real Problem: Political Management
Perhaps the real problem was political, caused by Harold Wilson attempting to keep different personalities satisfied rather than selecting the best team for the job. This highlights how personal and political considerations can undermine economic policy effectiveness.
In 1966, Wilson moved Brown to the Ministry of Foreign Affairs and the DEA was abandoned in 1967.
Prices and incomes policy
Instead of the DEA approach, the government introduced a prices and incomes policy to control inflation. This involved government intervention to set limits on price rises and to call for wage restraint in negotiations between unions and employers. A Prices and Incomes Board was established to implement this policy.
Prices and Incomes Policy Definition
A prices and incomes policy involves government intervention to set limits on price rises and to call for wage restraint in negotiations between unions and employers. This represented a more direct approach than Brown's voluntary agreements.
However, another sterling crisis occurred in 1966, caused partly by a prolonged and bitter strike by the National Union of Seamen. The government defeated the strike but many, particularly on the Left, were shocked by Wilson's critical attitude towards the strikers. Following this, trade unionist Frank Cousins resigned from the cabinet over the incomes policy. The relationship between the government and the unions was beginning to break down.
Sterling crises and the 1967 devaluation
The Labour government survived sterling crises in 1965 and 1966. However, in 1967, an outbreak of war in the Middle East affected oil supplies and a major national dock strike in August 1967 damaged the balance of payments.
The 1967 Devaluation Decision
The government decided that devaluation could not be avoided; the pound dropped by 14 per cent to $2.40. Labour also implemented defence cuts and introduced hire purchase restrictions and higher interest rates. These were deflationary policies that appeared little different from the 'stop-go' policies of previous Tory governments.
Wilson's broadcast on devaluation
In a television broadcast in November 1967, Harold Wilson addressed the nation to explain his decision to devalue the pound:
"Our decision to devalue attacks our problem at the root. Tonight we must face the new situation. First what this means. From now the pound abroad is worth 14 per cent or so less in terms of other currencies. That does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued. What it does mean is that we shall now be able to sell more goods abroad on a competitive basis. This is a tremendous opportunity for all our exporters, and for many who have not yet started to sell their goods overseas. But it will also mean that the goods that we buy from abroad will be dearer, and so for many of these goods, it will be cheaper to buy British."
Understanding Wilson's Message
Wilson attempted to reassure the public by explaining that while the pound's international value had fallen, domestic purchasing power remained unchanged. He emphasized the opportunity for exporters while acknowledging that imports would become more expensive, encouraging people to "buy British."
Impact on credibility and the EEC application
Labour had attempted so strenuously to avoid devaluation that the devaluation crisis damaged its credibility. A few weeks later, Britain's second application to join the EEC was rejected. The application to join the EEC had been made largely on economic grounds as Wilson himself was lukewarm about Europe and much of the Labour Party did not want to join. Having the application rejected immediately following the devaluation crisis made the government's economic policies appear futile.
Roy Jenkins and economic recovery
The economic situation improved markedly from this low point. Callaghan's replacement as Chancellor was Roy Jenkins, who had been strongly in favour of devaluation in 1964.
Jenkins employed deflationary methods. He raised taxes and tightened government spending in all areas of the economy, giving top priority to improving the balance of payments. These tough measures made the government unpopular but, by 1969, Jenkins had achieved a balance of payments surplus, although inflation between 1969 and 1970 was still running at 12 per cent.
Jenkins' Economic Strategy
The improvement in the economic situation from 1969 was a major factor in making Labour confident of victory in the 1970 general election. Jenkins' willingness to embrace unpopular deflationary measures showed a pragmatic approach that ultimately delivered results.
Key Figure: Roy Jenkins
Roy Jenkins (1920-2003) was the son of a Welsh miner who had entered Parliament as a Labour MP in 1950. Under the premiership of Harold Wilson, he served as Home Secretary from 1965 to 1967 and Chancellor of the Exchequer from 1967 to 1970. He was a strong pro-European and considered to be on the Right of the Labour Party. In 1981 he went on to found and lead the Social Democratic Party (SDP).
Industrial relations and the trade unions
One of the important elements in the post-war consensus was the influence of the trade unions. Since the war, all governments, Conservative as well as Labour, had seen it as necessary to maintain full employment and to keep the unions content. In opinion polls in the early 1960s, nearly 60 per cent of people said they had a favourable view of the unions.
In 1964, Wilson made the trade unionist Frank Cousins minister of technology and Wilson was relying on union cooperation with his prices and incomes policies. In 1966 and 1967, industrial relations with the trade unions began to deteriorate. Strikes by the seamen and the dockers caused economic problems for the government.
The Wildcat Strike Problem
These strikes also seemed to demonstrate that traditional union bosses were losing some of their control. Many strikes started with 'wildcat' strikes - sudden, unofficial local disputes begun without reference to the national leadership - by local activists who would not take orders from above.
This represented a significant challenge for both the government and union leadership, as centralized negotiations became less effective.
The Conservative opposition under Edward Heath announced a policy that it called 'Fair Deal at Work'. Wilson and his new employment minister were concerned about this challenge.
Key Points to Remember:
- By 1964, Britain's economy was trapped in a damaging 'stop-go' cycle and lagging behind West Germany and Japan in productivity and growth
- Labour inherited a deficit of approximately £800 million and chose to avoid both traditional deflation and devaluation initially
- George Brown's Department of Economic Affairs attempted economic planning through voluntary wage and price agreements but failed due to internal government divisions and opposition from the Treasury
- A prices and incomes policy replaced the DEA approach but caused tensions with trade unions, particularly following the 1966 seamen's strike
- The 1967 devaluation crisis saw the pound fall 14 per cent to $2.40, triggered by the Middle East war and dock strikes, damaging Labour's credibility and coinciding with EEC application rejection
- Roy Jenkins as Chancellor from 1967 used deflationary methods to achieve a balance of payments surplus by 1969, though inflation remained at 12 per cent, helping restore confidence before the 1970 election