Although the Conservative Governments of the 1950s had presided over a steady increase in affluence, continued high employment, rising home ownership and continuing growth in welfare provision, by the early 1960s, Macmillan had come to accept the belief that Britain's economic record would have benefited from a more steady pattern of growth. This view was articulated principally by the shadow Chancellor, Harold Wilson, but widely shared on both sides of British industry and amongst economic commentators. In my last lecture I dealt with the shift towards new methods of managing the economy, which this entailed, although, as indicated in my revisionist account of the 1955-59 Government in Ruling Performance, there is not a great deal of evidence, rather the contrary, to support the case made by the Government's critics. However, perception often matters more than actuality when considering the course of politics, and that is true also of the topic that I want to address today.
There are a number of reasons for looking at Maudling's "dash for growth". First, since it ended in failure, to assess the reasons and responsibility for that failure. More particularly we need to assess whether the incoming Labour Government was responsible for aborting an experiment that might still have been carried through successfully. It is always difficult to assess "might-have-beens". However, the collapse of the growth strategy led directly to the abandonment of the single most important attempt at an industrial strategy undertaken since the war, broke up a developing consensus between the parties on how best to run the economy, and, because it occasioned almost two decades of "economic failure", contributed substantially to the re-emergence of free market doctrines in the Conservative party. The whole episode has left an abiding impression on the mindset of policy makers, but not necessarily an accurate one. Faulty lessons may have been learnt. At a more prosaic level, the episode had a part to play in ending thirteen years of continuous Conservative government and afforded Harold Wilson the chance to establish the Labour party as the "natural party of government". Finally, judgements on the career and achievement of both Maudling and Wilson have been affected and the record may need to be put straight. Even if the policy turns out to have been predestined to failure, that would not necessarily justify the terms in which Maudling's Chancellorship is usually described.
Dell's account in The Chancellors peddles the conventional wisdom, which is perhaps best summarised in a prefatory note included by Cairncross in his diaries. Maudling, he writes, "took risks with the balance of payments in the hope of a breakthrough in economic growth in which we had little faith; and delayed - in the end abandoned - action of any kind to check an obvious boom in 1964, comforting himself with the thought that, if necessary, the pound could be allowed to float, and ensuring that the alternatives of import quotas and an import surcharge were given careful study." Dell accepts, a little uncritically perhaps, the Treasury's exculpation of its own role and is harsher than his source. "Maudling persisted with his breakthrough policy in 1964, despite the evidence that it was going wrong, because he had an election to win and was not averse to the cynical exploitation of the opportunity he found in the Treasury's earlier support…" However, he senses also that Maudling shared the feeling, by no means confined to politicians, that something had to be done about the performance of the British economy, but writes that it is "no defence that his Opposition critics had advanced the same argument, and would continue to do so in the future whenever it seemed convenient." If that is "Simon pure" with a vengeance, Dell's condemnation finds backing in Blackaby's detailed account of economic policy. It is an account that tends to assume the inevitability of the deflation undertaken by the Labour Government - this despite his admission that the balance of payments in 1965-66 was in balance. For the contrary point of view, the best source is Manser, who takes the robust line that if only the figures had been presented properly, nobody would have thought there was any crisis at all. If there was, the responsibility should be placed squarely on Government spending overseas.
The Labour party created two potent myths about their Conservative opponents in the 1964 election. The first can be summarised by the slogan "Thirteen Wasted Years", but in the light of what the Wilson Governments themselves achieved, that charge has not worn well. Even so, in diluted form, it can still be found in the historiography. However Labour's alibi for their own record was their economic inheritance from the Tories, a balance of payments deficit of £800 million pounds that had been kept hidden from the country until Labour revealed it during the election campaign. That myth too persists. The economist Brian Reading repudiated the charge in a Conservative pamphlet, The Great Mess Myth, which deserves more attention than it customarily receives. However, little attention is given to the possibility that the dash for growth could have been carried to a successful conclusion. Much, if not all of the historiography has turned on the question of whether the incoming Labour Government should have devalued. There is a curious notion around that devaluation or floating the pound would have avoided the need to deflate the economy, although that is plain economic nonsense. I have offered an alternative account of the possibilities in The Decade of Disillusion and am by no means unpersuaded by Wilson's defence of his decision not to devalue in the autumn of 1964. Eltis and Bacon provide a more qualified defence of Maudling's actions, but they conclude that Maudling was one of the few Chancellors to leave the economy stronger than he found it and that the evidence suggests that the economy was on the right track as a result of his actions. Although 1964 was undoubtedly a disastrous year so far as the balance of payments is concerned, there is in fact surprisingly little evidence that the value of the pound was unsustainable. The major problem was that Britain was simultaneously running a deficit on both capital and current account, but, as in most of the postwar years, the problem was less with Britain's trading position and was in large measure to do with Government spending abroad, i.e. across the exchanges.
In my last lecture I indicated that large sections of informed opinion had come to accept that "Stop-Go", as Wilson had termed the conduct of economic policy by the Conservative Government, was damaging to Britain's growth prospects and that the aim should be steady, sustained growth. [Macrae's book, cited as an additional reading, is a contemporary contribution to the debate and may help in understanding why the view had such credence.] By 1962 there was an emergent consensus (entry into the EEC apart) not only about the failings of the British economy but about what was needed to set it right.
Just before Selwyn Lloyd was forced from office, the NEDC had agreed a provisional figure for economic growth of 4% annually as the basis for their industrial enquiry. Maudling had not been an enthusiast for NEDC, but his hostility may have been departmentally inspired. Although cautious in action, he was by temperament an expansionist and he was under pressure from No 10. It is not surprising that long before NEDC made a formal commitment, Maudling was referring favourably to the 4% target in his speeches.
Subsequent historians, Leruez for example, have been critical of the "rush", pointing to the fact that the "little Neddies" were not brought into being until 1964 and that French plans had a longer period of gestation. They are right to point to the political imperatives of a government nearing the end of its term as a major cause for the haste, but the figure of 4% was seen at the time as a not unreasonable target and if Maudling was under fire it was for being too cautious. Sir Donald MacDougall, the economic director of NEDO, is far from apologetic about the 4% target, suggesting that with the projected growth in the labour force (0.8%) and the rate at which they thought output per head was rising (3.2%), they could hardly have set a lower figure. It implied only a small improvement in the growth of productivity and NEDO addressed a whole series of supply side issues (education, industrial training, business schools, redundancy payments, earnings-related benefits, the tax system, regional policies, housing policies to help mobility, transferable pension rights), all of them calculated to make modest improvements in productivity that might aggregate up to what was required. But the central ideas behind the drive for faster growth were two, better demand management and what MacDougall termed the "confidence trick". "this consisted of thinking of a number for the growth of the economy over a period ahead rather greater than had been achieved in the past, and working out what it would involve for all concerned. Then everyone would work on the assumption that it was going to happen, and lo and behold it would happen."
The change of Chancellor at this juncture, which was largely due to Lloyd's failure to create workable machinery to deal with the question of incomes AKA wages, had at least two unfortunate effects: -
Macmillan was concerned at the possibility of a world-wide slump, hence the Maudling plan to expand international liquidity, which was given the brush-off. {ironically some of those responsible for the thumbs-down came to see the need for some such step, but not for another eighteen months}. There was more than a touch of arrogance and self-interest in the plan, which was perhaps responsible for its lack of headway.
Inevitably there were consequences for sterling, which served further to inhibit Maudling from radical reflation of the economy. Hence "stop dawdling, Maudling" and the subsequent verdict that Maudling did the right thing too late [Brittan]. Nevertheless there were a series of reflationary packages, although some of Maudling's bright ideas fell foul of his officials and he was reluctant to ease tax on beer and cigarettes.
The major reflationary action came in the 1963 budget, which was ostensibly and I think in reality designed to further the NEDC's growth strategy. Maudling did not go so far as the NIESR or some of his critics. But his package totalled £260 millions and it had the approval of bodies like the TUC. There is obviously an issue about Maudling's enthusiasm for NEDC - was it opportunist or genuine? Did it cool, as Leruez suggests? - his evidence is a bit thin.
The major measure of expansion was an extraordinary increase in public sector investment - 25% in 15 months in real terms.
There was undoubtedly plenty of spare capacity in the British economy - industrial production in the autumn of 1962 was no higher than it had been in the first quarter of 1960, while net investment had continued. Not only was the plant there, but so too were the men. Unemployment was 612,000 and there were only 197,000 vacancies in 1963. Industrial investment, however, was slow to respond - up 1% in 1963, up 14% in 1964, and up a further 6.5% between 1964 and 1965. [manufacturing investment up 4% in the first year, 25% in the following two years].
One can be critical of Maudling in two respects: first and understandably in the run up to a general election, he did not cut consumption, and secondly he almost certainly did not realise how the expansion of the public sector would rapidly draw down the available manpower.
The major downside of expansion, which in 1963 was running at about 6% per annum was the prospect of a deficit on the balance of payments. There were already advocates of devaluation, but no one in the Government or on the Opposition front bench seems to have been amongst them. Maudling had always had a soft spot for floating the pound, however, and he was under pressure from No 10 to work on three safeguards for the economic strategy, import controls, floating the pound, and liquefying Government owned international assets.
Change of PM in October may have been unfortunate. But the election was always likely to be delayed. Home backed modernisation, but played little part in economic policy. It is worth noting in fairness to the Chancellor, however, that Maudling would have preferred to go to the country earlier in the year.
While it does not in itself prove the strategy right, it is important to note that the strategy that Maudling was pursuing had cross party support right up to the moment at which Wilson came to the conclusion that he was in danger of losing the 1964 election.: Opposition criticism was not directed at the pace set for the British economy by Maudling, but asserted that it was not fast enough. NB Wilson's Swansea speech in January 1964 and the reaction to the 1964 budget. This was mildly deflationary. Rightly Maudling had recognised that the boom was flattening out of its own accord and he wanted to stabilise the growth rate at 4%. He was perhaps more confident about the balance of payments deficit than he should have been - the Treasury advice was badly out - but he had always intended to borrow to cover the deficit. He would have preferred an early election, but that was because of the strain on sterling, not because he anticipated any reversal of policy. Home was advised rightly that his best chance of victory was to wait.
Again it is possible to criticise Maudling on several grounds: -
As against that, however he got no help from the TUC to realise voluntary restraint and it was an election year, the little Neddies had only just come into existence, and when the Government acted on RPM, the Labour Opposition dishonourably sat on its hands and watched the fun.
By 29 September the Conservative recovery was such that at the end of the first week's campaigning the polls showed the Tories in front. On the advice of Balogh and Crossman, Wilson raised the balance of payments as an issue at Norwich on 30 September. The quarterly trade figures pointed to a deficit of £290 million. Callaghan had been against such a move because of the risks to sterling, and even Wilson's defenders are inclined to believe that sterling's difficulties began with this speech. They were not that serious - Maudling did not even consider the possibility of raising bank rate until election eve and he believed [rightly] that a rise in exports was on the way.
Note that Wilson conflated the figures for current transactions (the normal figure used) with capital. Both were in deficit and hence the notional £800 million deficit. The true figure was under half that total, perhaps as high as £362 million
Brown's broadcast on 3 October, which I think was decisive in securing Labour’s (narrow) victory..
The worst trade figures reached Maudling on election eve and they were the figures on which Labour made its initial decisions.
In the end Wilson wins 317 seats, an overall majority of 4. Almost immediately senior ministers took the decision not to devalue and instead they chose to resort to one of the measures that Maudling had prepared, the import surcharge, which would be sufficient in their mind to halve the deficit.
Subsequently the incoming Government published a White Paper that indicated inter alia that there was no excess demand in the economy. While one can argue that this was overstated, the growth rate had eased and was easing. Clearly the Government felt the need to do something to cope with the "crisis" it had publicised - hence the import surcharge. But the growth policy was to continue and indeed, largely as a
Table Percentage Annual growth of GDP (at factor cost)
|
|
Contemporary estimate |
Revised estimates |
|
1960 |
4.5 |
5.6 (4.5 - 5.7) |
|
1961 |
2.6 |
2.5 (2.5 - 3.2) |
|
1962 |
0.2 |
1.1 (0.2 - 1.3) |
|
1963 |
3.6 |
3.9 (3.6 - 4.1) |
|
1964 |
5.6 |
5.6 (5.1 - 5.9) |
|
1965 |
2.4 |
2.9 (2.4 - 3.0) |
result of the spadework Maudling had done, George Brown was able to secure an incomes policy to underpin it.
The support the growth policy had and the decision of the incoming Labour Government to continue with the policy and not to devalue again cannot be taken in themselves as indications that Maudling's policy was right. However the degree of support given to the strategy by industry, most economic commentators and a good many economists does suggest that the question of whether the strategy was in fact viable merits re-examination.
Maudling made no apologies for attempting a "dash for growth" and in his memoirs contented himself with two observations: first, that he had had no difficulty at all in financing the deficit, and secondly, that, as forecast, exports rose in the first quarter of 1965, bringing the current account into balance. It was usual in political debate at the time to focus on the current balance of payments. Lumping the current and capital accounts together to damn the Government was a partisan act to which we should not lightly subscribe. It is certainly true that the trade position was on the mend. In the second quarter of 1964 minus £63 million, in the third minus £192 million, in the fourth minus £101 million, in the first quarter of 1965 minus £35 million and in the second quarter of 1965 minus £8 million. The trend was as predicted, but the improvement had come a few months later than Maudling had expected it to come. The overall current balance of payments deficit for the entire year 1965 is now estimated to have been minus £43 million with a surplus of £113 million in 1966. Admittedly that was not the picture at the time, but even on contemporary figures the downward trend was quite evident and was one of the reasons that the Wilson Government thought that they could successfully defend the rate.
Bacon and Eltis note that Maudling had no difficulty in borrowing to cover the deficit and had he won the election he clearly could have gone on doing so -after all Labour was to borrow short term £3,000 million and liquefy Government assets overseas. The Conservatives would certainly have found it far easier to maintain confidence and would not have felt compelled to stage an Autumn budget to implement some of their welfare promises..
Bacon and Eltis also note that the economy was moving in the right direction (p.46), although the improvement was modest. Indeed the economy continued to move in the right direction over the entire period 1964-66 when (as they observe) the Maudling boom was very largely allowed to roll on (p.51). It was not until the Treasury resorted to deflation in 1966 that the beneficial effects of the Maudling boom on the economy were brought to an end.
Arguably a large part of Labour's subsequent difficulties was self-induced. Coming to power with the likelihood of an early action, they tended to continue with the rhetoric that had won them the 1964 election without counting the cost in terms of foreign confidence. Surprisingly perhaps, confidence did not crack until the third week in November and the trigger was Labour's autumn budget.
Was Callaghan's budget needed and was it inflationary? What was the effect on confidence? The Bank of England's "new factors". The Government's mishandling of the hike in Bank Rate.
It can be argued that Maudling's strategy was shipwrecked, to their own undoing, by the incoming Government and that had it been left to work out, it might have enabled Britain to move on to a higher growth path. Labour were pledged to supply-side changes to generate faster growth and they had an advantage the Conservatives had not enjoyed in that the unions were ready to co-operate with them over incomes policy.
Might-have-beens are always difficult to pursue and dangerous, but the consequences if the Conservatives rather than Labour had won the election or if Labour had not created the November crisis would have been significant and arguably would have altered the whole course of British political history. As it was, the latest figures quoted for the balance of payments in 1965-66 suggest that the deficit on current account had fallen to £43 million in 1965 and had turned into a surplus in 1966.