Britain’s post-war economy experienced prosperity, challenges of ‘stop-go’ cycles, balance of payments crises, and Wilson’s struggle to modernise amidst devaluation pressures.
Post-War Economic Boom and Rising Consumerism
In the aftermath of the Second World War, Britain entered a period of sustained economic growth and relative prosperity. This post-war economic boom was driven by several factors:
Marshall Aid: Financial support from the United States under the Marshall Plan helped rebuild the British economy and stabilise finances in the late 1940s and early 1950s.
Full Employment: The government maintained high levels of employment, with unemployment figures rarely exceeding 2% during the 1950s.
Technological Advancements: Improvements in industry and manufacturing increased productivity and fuelled economic growth.
Rising Incomes and Living Standards: Real wages rose steadily, allowing more families to afford new consumer goods and luxuries.
Consumer Revolution: There was a surge in demand for household appliances, cars, and holidays. Ownership of televisions, refrigerators, and washing machines became commonplace.
Credit Expansion: Hire purchase schemes and easier access to credit encouraged consumer spending and the purchase of goods previously considered luxuries.
This period of prosperity fostered an image of a stable, affluent Britain, although structural economic weaknesses remained hidden beneath this facade.
Understanding ‘Stop-Go’ Economics
Despite the boom, Britain’s economy faced underlying structural issues such as low productivity, outdated industrial infrastructure, and persistent balance of payments problems. To manage these, successive governments employed a strategy known as ‘stop-go’ economics.
What Was ‘Stop-Go’?
‘Stop-go’ economics refers to a cycle of expansion and restriction aimed at controlling inflation and the balance of payments deficit:
Go Phase: When demand in the economy slowed, governments stimulated growth by lowering interest rates and cutting taxes. This encouraged spending and investment.
Stop Phase: As the economy overheated, demand outstripped supply, causing inflation and import surges. To counteract this, governments would raise interest rates, impose wage freezes, and cut public spending, thus restraining demand.
Impact on Inflation and Unemployment
While the policy aimed to maintain economic stability, it created frequent fluctuations and failed to address deeper economic inefficiencies:
Inflation Control: The ‘stop’ measures were often abrupt, leading to sudden constraints on businesses and consumers. Inflation was never entirely eradicated.
Unemployment Fluctuations: Efforts to curb inflation sometimes slowed the economy too much, causing short-term rises in unemployment, though overall joblessness remained relatively low by historical standards.
Investment Hesitancy: Unpredictable cycles discouraged long-term industrial investment, contributing to Britain’s lagging productivity compared to European competitors.
Balance of Payments Crises
A recurring challenge was the balance of payments deficit — the difference between the money flowing into the country and that flowing out. Frequent trade deficits meant that Britain was importing more than it was exporting.
Causes
High Consumer Demand for Imports: Rising incomes fuelled a taste for foreign goods.
Stagnant Exports: British industries struggled to compete with modernised European and American rivals.
Costly Defence Commitments: Maintaining a global military presence added to financial pressures.
Government Responses
Governments responded with a mix of short-term measures and attempts at structural reform:
Devaluation Threats: To avoid devaluing the pound — seen as politically damaging — governments relied on borrowing and foreign loans.
IMF Loans: Britain frequently turned to the International Monetary Fund (IMF) for emergency funding to stabilise sterling.
Import Controls and Credit Restrictions: Short-term ‘stop’ measures aimed to reduce demand for imports but often triggered domestic economic slowdowns.
These crises undermined confidence in Britain’s economic management and highlighted the fragility beneath the apparent affluence.
Wilson’s Economic Challenges and Devaluation
When Harold Wilson’s Labour government came to power in 1964, it inherited the persistent problems of the balance of payments deficit and the limitations of ‘stop-go’ management.
Wilson’s Modernisation Drive
Wilson’s administration promised to break the cycle through modernisation, using technological advancement to boost productivity and competitiveness:
National Plan (1965): Wilson’s government introduced the ambitious National Plan, aiming for a 25% growth in national output over six years by coordinating industrial investment and workforce training.
Department of Economic Affairs (DEA): Created to oversee planning and economic reform, it aimed to challenge the dominance of the Treasury’s conservative financial policies.
Focus on Science and Technology: Wilson’s vision of the ‘white heat of the technological revolution’ sought to invigorate outdated industries through innovation.
However, these plans faced significant obstacles:
Industrial Resistance: Trade unions resisted productivity-linked wage restraints.
Ineffective Implementation: Bureaucratic rivalries between the DEA and the Treasury hindered progress.
External Shocks: Global economic pressures and sterling crises disrupted planning efforts.
The 1967 Devaluation
One of Wilson’s most significant and politically damaging decisions was the devaluation of the pound sterling in 1967:
Reasons for Devaluation:
Persistent balance of payments deficits exhausted Britain’s reserves.
Repeated borrowing and short-term measures failed to stem the outflow.
Confidence in sterling collapsed, leaving no alternative but to devalue.
Action Taken:
On 18 November 1967, the pound was devalued from 2.40, a 14% drop in value.
Wilson controversially claimed the move would make exports cheaper and more competitive, boosting the balance of payments.
Political Fallout:
Devaluation was seen as a humiliating admission of failure.
It damaged the government’s credibility and Wilson’s personal authority.
The public remained sceptical, and opponents ridiculed the idea that ‘the pound in your pocket has not been devalued’ — a statement Wilson made to reassure ordinary citizens that domestic purchasing power would remain stable.
Attempts to Move Beyond ‘Stop-Go’
Despite the setback of devaluation, Wilson’s government continued to push for reforms:
Incomes Policy: Efforts were made to control wage inflation through voluntary and statutory wage restraints, often provoking union resistance.
Industrial Reorganisation Corporation (IRC): Established to encourage mergers and modernise industries, but its impact was limited.
Emphasis on Export Growth: The government sought to pivot the economy towards higher export earnings to support a stable balance of payments.
Nevertheless, structural issues like low productivity, outdated industries, and strained industrial relations persisted, meaning that by 1970, many of Wilson’s modernisation ambitions remained unfulfilled.
By the end of the 1960s, Britain’s economic story reflected a paradox:
On the surface, many enjoyed unprecedented prosperity, consumer goods, and higher living standards.
Beneath this, the economy struggled with inherent inefficiencies, dependence on short-term fixes, and the burden of international financial commitments.
‘Stop-go’ economics, rather than providing a lasting solution, exposed the weaknesses of Britain’s post-war economic model and set the stage for the more turbulent economic climate of the 1970s.
Understanding this period is crucial for grasping the economic and political challenges that Britain faced as it sought to redefine itself in the post-war world. The tension between rising consumer expectations and the limits of an outdated economic system would continue to shape debates about Britain’s place in the global economy for decades to come.
FAQ
Britain’s reliance on ‘stop-go’ economics sharply contrasted with the more consistent growth strategies pursued by Western European neighbours like West Germany and France. While Britain cycled between stimulating demand and imposing restraints to manage inflation and balance of payments issues, European countries focused on industrial modernisation, investment in infrastructure, and collaboration between government, industry, and labour. The Marshall Plan aided them too, but they channelled funds into technological advancement and productivity improvements more effectively. For instance, West Germany’s economic miracle (Wirtschaftswunder) saw stable policies fostering export-led growth, low inflation, and sustained investment in heavy industry and manufacturing. Meanwhile, Britain’s short-termism discouraged businesses from committing to long-term capital expenditure, resulting in obsolete industrial practices and lower productivity. This left Britain lagging in international competitiveness. European nations also maintained stronger relationships with trade unions, reducing the industrial strife that often disrupted Britain’s economic plans. Therefore, ‘stop-go’ made Britain’s post-war economic performance less robust by comparison.
Trade unions were pivotal in shaping the economic context of ‘stop-go’ Britain. They held considerable power due to full employment and the political landscape, which made governments cautious of industrial unrest. Throughout the 1950s and 1960s, unions frequently demanded wage increases to keep pace with rising living costs, particularly during periods of inflation. This wage pressure often conflicted with government attempts to restrain inflation through wage freezes or incomes policies. When governments tried to implement pay restraints during ‘stop’ phases, unions often resisted, leading to strikes or threats of industrial action, which disrupted productivity and strained the economy further. Unions also had significant influence within the Labour Party, complicating efforts by leaders like Harold Wilson to modernise the economy and enforce wage discipline. This tension meant that ‘stop-go’ measures frequently fell short of their aims. Instead of fostering stability, repeated union opposition undermined consistent economic management and contributed to Britain’s relative economic decline during this period.
Consumer credit and hire purchase were central to driving Britain’s post-war consumer boom. As incomes rose and employment remained high, more households sought to enjoy new standards of living through ownership of household appliances, cars, and leisure products. Hire purchase allowed families to buy expensive goods by paying a deposit and spreading the cost over monthly instalments. This made previously unattainable items, such as televisions, washing machines, and motor vehicles, accessible to ordinary families. Banks and finance companies increasingly offered credit, encouraging spending beyond immediate means. This stimulated domestic production and retail sectors, boosting employment and tax revenues. However, this credit-fuelled spending also had drawbacks. High consumer demand increased imports of foreign goods, worsening the balance of payments deficit and putting pressure on sterling. It also meant that when governments applied ‘stop’ measures, like raising interest rates, household debt repayments became harder, leading to abrupt slowdowns in spending. Consequently, while hire purchase underpinned short-term growth, it exacerbated Britain’s vulnerability to economic fluctuations.
Maintaining the pound’s value was seen as vital to Britain’s prestige and economic stability. After the Second World War, sterling retained an important international role as a reserve currency, underpinning Britain’s status as a major global power. A strong pound signalled economic strength, encouraged foreign investment, and supported Britain’s commitments abroad, including military bases and trade links within the Commonwealth. Devaluation was viewed politically as an embarrassing admission of mismanagement and decline, so successive governments, both Conservative and Labour, avoided it at all costs. They feared that devaluation would trigger inflation by raising the cost of imports, erode public confidence, and damage relations with creditors and allies. Moreover, international lenders such as the International Monetary Fund were wary of reckless devaluation and often demanded credible austerity measures instead. Wilson’s government, inheriting a fragile pound, initially resisted devaluation to protect its reputation and maintain economic trust. However, mounting deficits and a currency crisis left no alternative but to devalue in 1967, despite the political damage it caused.
The ‘stop-go’ cycle left a lasting imprint on Britain’s industrial sector. Frequent shifts between expansion and restraint undermined industrial planning and discouraged firms from making long-term investments in new machinery, technology, and workforce training. Many companies stuck to outdated production methods because the economic climate was too uncertain to justify costly modernisation. This led to a widening productivity gap between Britain and more dynamic European economies like West Germany and France, whose industries were modernising rapidly. Britain’s reliance on traditional industries such as coal, textiles, and shipbuilding made the economy vulnerable to global competition. Furthermore, industrial relations deteriorated during this period; strikes and work stoppages became more common as workers resisted wage freezes and redundancies linked to modernisation efforts. By the late 1960s, the lack of competitiveness contributed to persistent trade deficits and dependence on foreign borrowing. This structural industrial weakness set the stage for the economic turbulence Britain would experience in the 1970s, culminating in greater calls for reform and restructuring.
Practice Questions
Explain how ‘stop-go’ economic policies affected Britain’s economic stability between 1951 and 1970.
‘Stop-go’ economic policies created a cycle of artificial growth and abrupt restraint which undermined Britain’s long-term economic stability. During ‘go’ phases, consumer spending surged, fuelling imports and worsening the balance of payments deficit. The subsequent ‘stop’ phases imposed credit restrictions and higher interest rates, dampening growth and creating uncertainty for businesses. This cycle discouraged long-term industrial investment and failed to address structural inefficiencies in production. As a result, while living standards improved temporarily, Britain’s competitiveness lagged behind European neighbours, leading to repeated sterling crises and the damaging 1967 devaluation under Wilson’s Labour government.
Assess the reasons for Harold Wilson’s decision to devalue the pound in 1967.
Wilson’s 1967 devaluation was driven by persistent balance of payments deficits and declining confidence in sterling. Despite efforts to boost exports through modernisation and the National Plan, Britain’s outdated industries and low productivity hindered growth. Repeated borrowing and IMF loans failed to sustain the currency’s value as import costs soared. Political reluctance to devalue earlier worsened the crisis, leaving no viable alternative. Devaluation aimed to make British exports cheaper and more competitive globally. However, it damaged Wilson’s credibility, highlighted the limits of ‘stop-go’ economics, and exposed the deep-rooted structural weaknesses within the British economy.