Managing the British Economy in the 1960s

In the early post-war years in Britain there was little thought of the growing prosperity that lay ahead. The public was more concerned with the recovery of pre-war living standards, the threat of nuclear war and the danger of a post-war slump. As one crisis followed another, the government for some years held back consumption in the interests of industrial reconstruction and the balance of payments. Unemployment rather than economic growth was the dominant preoccupation.

Before I begin to trace the development of policy, let me briefly explain what my job was, what staff I inherited and how we all fitted into the Treasury. Although I was given the rather grand title of Economic Adviser to HMG, my job in practice was that of a Treasury official advising the Chancellor (or more frequently the Permanent Secretary) on economic and financial affairs. I had the assistance, as Director of the Economic Section of the Treasury, of a group of economists who had been since 1940 the principal source of economic advice to the government.¹

The Chancellor of the Excheque when I took up my duties in the Treasury on 5 June 1961 was Selwyn Lloyd. He was a lawyer by training, with no knowledge of economic theory and little experience of economic policy; shy and rather diffident in discussing matters where he felt himself at a disadvantage in expertise, and at the same time distrustful of would-be experts. He had no ready flow of language, stuttering more than any Minister I have known, and was given to taking up the time of his officials in long meetings to draft speeches and memoranda. On the other hand, he did not lack boldness or originality and had firm ideas of his own. He had held senior office as Minister of Defence, and subsequently as Foreign Minister, and in June 1961 had been Chancellor for nearly a year.

The new Chancellor was a good deal younger than his predecessor. He had a relaxed, almost off-hand manner, as if he never took anything very seriously, but was invariably well-informed and always considered deeply how he should run his risks. He was at home in economic problems and took an intellectual interest in them, relying much less than Selwyn Lloyd on his advisers.

The General Election in October 1964 brought Labour to power by the narrowest of majorities after thirteen years of Conservative Government. The result was uncertain until the last. First one and then the other party took the lead as the results were announced. In the end, Labour had a majority of five and another election seemed almost inescapable within the next year or two.

If there was to be no devaluation and little or no deflation, how was the deficit in the balance of payments to be got rid of? How were the external debts that were mounting up ever to be repaid? It was not possible to count on the continuation of the surcharge for more than a year or two and there was a limit to what should or could be borrowed abroad. A long-term foreign loan received scant consideration. Instead a whole series of measures was taken to improve the balance of payments directly or to make British industry more competitive and narrow the gap between imports and exports. These measures were spread over several years, many of them during the exchange crises in July 1965 and July 1966, without any effort to frame a comprehensive programme and assess its adequacy.

The April budget created no great stir — at least not in Britain. The controversial new taxes on capital gains and corporate profits had already been discounted after their announcement in November. The increase in tax revenue proved just large enough to keep the market quiet. It was obvious, however, that trouble lay ahead. The pressure on the economy continued to mount and unemployment to fall. Wage-rates were rising at 8 per cent per annum and eating into competitive power. The balance of payments might have improved but there was still a small deficit on current account and a large outflow of capital that together made it necessary to offer support at the rate of £650 million a year out of borrowed funds.

Over the winter of 1965-6 there was a marked improvement in the balance of payments. In the final quarter of 1965 the current account was in surplus and the outflow of long-term capital was relatively small. As a result, the dollar spot rate rose above par in September and remained there until February. The three month forward premium on dollars fell from 2.5 per cent in August to 0.8 per cent in January 1966 and 0.5 per cent in May. The forward commitments of the Bank of England started to fall in September, continued to fall until in January 1966 they were less than in January 1965 and fell heavily in February. In the first quarter of 1966 it was possible to repay £200 million and, by transferring £316 million from the dollar portfolio, to increase the reserves by a net £200 million.

1967 opened in an atmosphere of low key euphoria. The news was either good or not so bad as it had been. Exports had continued to rise strongly in the second half of 1966 while imports, held down by the expectation of an early end to the Temporary Import Surcharge, fell off a little. The balance of payments had improved quarter by quarter throughout the year. In the exceptional circumstances of the final quarter of 1966 the surplus on current account was an all-time record and even the balance of trade, when seasonally adjusted, showed a surplus for virtually the only time in the whole of the 1960s. Confidence appeared to be reviving and the authorities no longer found it necessary to support the pound.

The starting-point was a change of sentiment after the announcement by the Prime Minister on 2 May that the United Kingdom would apply formally to join the Common Market. Such an application had been in the air since November 1966, when the intention to engage in renewed discussions with the EEC was made public. Although no official estimates of the balance of payments cost of joining the Community had been issued, it was known that it was likely to be substantial, and there was also a natural suspicion that, in view of this, Britain ’s entry might be made the occasion for a devaluation of the pound. Ironically enough, devaluation preceded by a week or so, not Britain ’s entry to the Common Market, but General de Gaulle ’s second veto.

1968 was even more palpitating than 1967 had been. If we had thought that devaluation would prove an instant solution to all our problems we should soon have been disillusioned. One crisis succeeded another, forcing us to contemplate extreme measures, and making us despair of eventual success. The exchange losses showed no sign of falling off; instead of repaying our debts we were obliged to borrow still more; the danger of a second devaluation, or even of being obliged to block sterling held abroad and at the same time letting the pound float, hung over us throughout the year. The crisis might initially seem unconnected with the pound: it could start with a rise in dealings in gold on the London market or with the rumour that the franc was about to be devalued or the mark upvalued. Any aggravation of currency uncertainty tended to rebound on sterling in its weakened condition causing large-scale withdrawals to a safer haven and bringing the exchange reserves near to exhaustion.

When we took stock of the situation in April, two indicators — consumer spending and imports — were particularly disturbing. In the first quarter of 1968, the consumer boom was more swollen than ever: consumer spending was running nearly 5 per cent in volume above the level in the middle of 1967. Yet we had held out the prospect to the IMF after devaluation of finding resources for the balance of payments at the expense of consumption and on those grounds had argued in Economic Trends that ‘there can be little if any scope for an increase in personal consumption next year ’.¹

1969 was the second of the ‘two years of hard slog ’ that Roy Jenkins had warned in his 1968 Budget would be needed to get the country back into balance. But if the slog continued would the promised surplus appear? There was every likelihood of a substantial improvement in the current balance of payments in 1969, but the promised surplus of £500 million at the end of the year was beginning to look to commentators like ‘pie in the sky ’.¹ The pound was expected to remain weak and undergo the same kind of speculative batterings that had raged in 1968. So long as the mark and the franc exchange rates remained misaligned, currency uncertainties would issue in periodic crises like that of November 1968 and would envelop sterling even if they did not originate in sterling ’s difficulties. If the current account improved steadily, a flight from the pound into deutschmarks could still scupper all chances of holding to the parity when the exchange reserves had fallen so far and further borrowing was increasingly difficult.

In the 1960s monetary policy had only a limited contact with the monetary policy discussed in textbooks. It was largely a collection of administrative devices intended to improve the balance of payments and moderate excess demand. It was neither aimed at controlling the stock of money nor was it much relied upon to combat inflation. From 1961 onwards, incomes policy was regarded as a more appropriate weapon for that purpose and fiscal policy had for many years been the favoured instrument of demand management. Raising interest rates had the disadvantage of being particularly discouraging to investment, which was regarded as of major importance to economic growth.

Like most other decades in British post-war history, the 1960s can be made to seem in retrospect a long series of economic disasters. Two unsuccessful attempts to enter the European Community, the collapse of the National Plan, the abandonment of incomes policy in disillusion, one balance of payments crisis after another ending in the devaluation of sterling in 1967 when so much had been staked on maintaining the parity: these episodes left little to enthuse over. The hopes of sustained expansion with which the decade opened soon faded in the July measures of 1961; Britain ’s share of world trade in manufactures continued to decline year after year without interruption; and from 1964 onwards the energies of the government were concentrated on the twin problems of wage inflation and a sagging balance of payments.