Slow on the uptake

July 7, 1995

Eric Roll lists the errors in Britain's postwar economic policy.

First one cautionary remark: hindsight can show what should not have been done and what should have been done; but it does not necessarily explain whether the latter course would have been feasible at the time. The evolution of economic policy is a seamless garment; and any starting point is somewhat artificial, even 1945. In a recent book (Where Did We Go Wrong), analysing errors of economic policy, I started the sorry tale in 1925. The return to the Gold Standard at the old - excessive - parity did indeed affect our economy well beyond the 20 years separating that date from 1945. It ruined our export trade, weakened our industrial base, gravely corrupted industrial relations (the General Strike) with consequences well into the postwar period. Together with the fiscal measures during the crisis and depression (which were almost exactly the opposite of what was needed) and with the appeasement policy, it made us enter the war in a very weak position. This meant a much more draconian system of mobilisation of resources for the war. Even so we were dragged from the brink of disaster by the mobilisation of American economic and military might.

After the war this recognised dependence on America showed itself first in a premature return to convertibility in the wake of the Lend-Lease (the arrangement whereby the US sold, lent and leased supplies to its wartime allies) and American loan settlements, which were accompanied by a far too generous settlement of the sterling balances arising out of the war and were quickly followed by a massive devaluation. The argument that the settlement of the sterling balances was partly due to a recognition of the relative poverty of the creditor countries is not an adequate explanation since it is by no means certain that the settlement redounded to the benefit of the poor masses in the countries concerned. The ambivalent attitude to our relations with the United States has left its mark ever since then: politically in an unrealistic reliance on the "special relationship" together with an inevitable dependence - in many respects economic and political - and acceptance of American leadership. Suez is a good example of the strain resulting from this relationship. So is the continued uncertainty of foreign exchange policy and the domestic fiscal and monetary policy related to it. Other landmarks on this road are the continued ideological commitment of the postwar Labour government and the party until almost the present day to clause four.

"Typecasting" is inevitable in party politics. The Labour Party, no doubt unjustifiably, has been described as the party of devaluation, of spending and of high taxation. These prototypes of the political argument, though with some element of truth, can be very misleading. The Conservatives are not always the party of restriction and prudent finance. Butler and Maudling were not skinflints nor Cripps and Callaghan spendthrifts. Gaitskell was no nationaliser nor were George Brown or indeed Harold Wilson and Callaghan, though all were under the constraints of party traditional ideology.

The foreign exchange problem continued as a red thread right through the period. The short-lived proposal of "ROBOT" in the 1950s which would have made sterling fluctuate and does let the exchange rate take the strain of balance of payments fluctuations might have been a way out of our exchange troubles. But the commitment to defence expenditure among other burdens made it doubtful whether the benefits could in fact be reaped.

Another critical moment was when Labour came to power again in the early 1960s and had to decide whether to devalue on inheriting a Pounds 800 million balance of payments deficit. The same question remained for some years. Not only the decision itself but what rate to choose seemed insoluble. The decision against it in 1963-64 may well have been justified not only on political grounds ("Labour is the Party of devaluation") but also because the economic factors were not propitious for taking advantage of a devalued pound. However, the other measures taken, including the "surcharge" on imports had the same deleterious protectionist effect, as well as worsening relations internationally.

During the subsequent Tory governments the foreign exchange problem continued its baleful influence. The refusal in 1979 to join the European Exchange Rate Mechanism together with the precipitate and excessive resort to tax cuts distorted the allocation of resources in regard to both domestic and international investment and domestic private and public consumption. It made reliance on monetary policy - excessive in regard to what it could achieve - about the only instrument which successive governments had available and followed, even if reluctantly and even if defended on ideological grounds.

The ambivalent and inept handling of these problems was shown again in our belated entry into the ERM at the excessive rate of 2.95 to the mark. Ministers defended this vehemently until the very moment when we were driven off it. At that point they claimed that we now had a "fiercely competitive exchange rate". But given our proneness to the so-called J-curve which made devaluation show first its unfavourable effects through imports and much later its favourable ones on exports, the net effect of the change of the devaluation of sterling was slow and inadequate.

Throughout this period another red thread which I can here only touch upon had bad economic effects, namely our attitude to European integration. At best reluctant, at worst hostile, it subjected our policy not only to continuous squabbles with our partners after our entry in 1972 but deprived us of the ability to influence the development of the Community - now the Union - in ways which could have been more readily accepted by British opinion while at the same time being constructive in a broader European sense. It is this failure to grasp an opportunity for leadership which goes back to the late 1950s and has appeared for well over 30 years that is almost more lamentable than the direct unfavourable effects that it has produced.

Is there one overarching explanation? Many have been put forward. I think myself that a slowness of acceptance of great changes in the economic and political power map of the world and readiness to adapt to them quickly runs through all this (here only limited) list of errors of policy. We do not seem to have been very successful in that tricky balancing act of which Whitehead spoke: To revere our historic symbols but not to be afraid to revise them radically when necessary.

Lord Roll of Ipsden is president of S. G. Warburg.

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