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The British Economy 1951 - 2007
Transcript of The British Economy 1951 - 2007
1951 - 64 The 1970s Conservatives came to power in 1951 at the start of a period of economic recovery.
Wages were increasing (almost doubling within the following decade - think about this in the context of increasing expendable income); boom in savings and car ownership (as well as other consumer items (fridges, televisions, washing machines etc)).
Home ownership increased as well, Conservatives built an average of 300,000 homes a year.
New towns planned by Labour in 1940s were rapidly expanding.
State subsidies allowed farmers to do well and rationing ended in 1954.
The 'middle class giveaway' of £134million in tax cuts also helped the Conservatives win the 1955 election (worth noting that Labour achieved 46% vote to Tories 49% - FPTP).
Suez caused a run on the pound - showed UK's international and financial weakness (Macmillan, then Chancellor, lead campaign to abort Suez invasion).
Macmillan takes over but increasing consumerism in affluent society kept Conservatives in power. Consensus ends 1964 - 75 Labour's election campaign had spoken of the need for the UK to catch up with the 'white heat' of technological change.
Confirmed by electoral victory in 1966 (called to consolidate his position).
However - 1967 devaluation a major failing of the Government.
New Government Department for Technology.
Post-war boom (age of affluence) was not reflected in productivity or growth rates.
Trapped in stop-go economy: prosperity leading to inflation, pressure on the pound and regular balance of payments crises.
Wilson inherited a very large deficit (the worst since WW2) and had a choice of pursing deflation (shrinking the economy) or devaluation (reducing the value of the £ making UK goods cheaper abroad).
Wanted to avoid devaluation as this had been pursued by 1945-51 Lab Gov't (1949) - did not want to remind voters. BUT: £ too expensive.
Instead wanted to grow the economy - created the Department for Economic Affairs (but of little use, overlapped with HM Treasury).
Post-1966 DEA closed and prices and incomes policy introduced (unions negotiated to keep income demand to a minimum).
Strike by the National Union of Seaman in 1967 led to a sterling crisis (run on the pound) with the result that the UK Government devalued in 1967.
Heath had committed to economic modernisation (consider than almost every post-war PM had also done the same.
Had detailed plans in place prior to coming to power.
Tax cuts and cuts in spending were introduced.
The BARBER BOOM began, with a steep rise in inflation.
Many people began to blame the unions and their willingness to hold the nation to ransom in order to achieve higher wages.
Unlike in the past inflation was NOT associated with economic growth. Hence began stagflation. While the Government wanted to reduce state control, it found itself increasing it through state aid to shipbuilders and nationalising Rolls Royce.
1971 Industrial Relations Act: very similar to Castle's in place of strife. Industrial Relations Court it set up was very ineffective at managing disputes.
For the first time since 1930s unemployment broke the 1million mark.
1972 there were major strikes with railwaymen and miners. This drove the country to a standstill - introduction of the three day week. Miners were able to negotiate a good package, which was a victory for miners and made many see the power of a strike.
By 1973 much was being achieved: limits on wage increases, number of strike days halved, lot of government investment to boost economy, unemployment down to 500,000, North Sea oil was coming under stream (made available), Gov't was popular in opinion polls.
Then it all ended... 1990 - 1997 Late 1990 Major inherited a recession that was following on from the 'Lawson boom'.
Declining manufacturing, high interest rates, high unemployment and a slump in house prices.
By early 1992 unemployment was at 2.6million and many home owners were in a position of negative equity (the value of the mortgage exceeded the real value of the property).
Many homes repossessed.
With an election looming Gov't increased public spending (half of which was forced as a result of increasing unemployment): subsidies on transport and increased NHS spending.
1992 Black Wednesday: gov't seeks emergency measures to stop devaluation of the £, the result if a humiliating withdrawal from the European exchange rate mechanism (ERM), less than two years after joining.
Withdrawal from the ERM had many benefits and the economy started growing again, however the Conservatives had lost their electoral asset of being trusted on the economy.
Exchange rate fell and interest rates were reduced (from a high of 15%). Unemployment started to fall and housing prices picked up.
Ken Clarke, new Chancellor, took over at the same time as US economy was comin ou of recession and world trade was increasing. In contrast, Germany was struggling with reunification.
Privitisation continued (railways) and was attempted on Royal Mail (failed).
House prices increased, negative equity a thing of the past, and unemployment started to decrease.
Consumer spending went up as did car ownership. Never had it so good The speech had two meanings: 1. Tories taking credit for rising living standards. 2. Warning about the impact of unemployment and inflation.
Economic boom continued through the 1950s.
However: 1957 onwards, major financial crisis: inflation was rising as wages were running ahead of productivity (think of it as workers asking for a larger slice of a cake that isn't growing quick enough). Another run on the pound (value of £ decreases, which stokes the fires of inflation - it costs more to buy things imported).
The Chancellor proposed spending cuts, cutting money supply and limiting wage increases - start of 'stop-go economics'.
Low interest rates allow economy to expand - but this increases inflation as demand is greater than supply (productivity).
The result was the economy continued to expand so much so that there was another tax break of £370million in 1959. The bank was not independent, as it is today.
So Governments could increase or decrease interest rates as they liked. Hence 'stop-go'. The early 60s Hopes of modernisation never materialised. There was no massive infrastructure change and by the late 1950s European growth was leaving the UK behind (especially West Germany).
Trade with the Commonwealth could not keep up with EU growth.
Application as a symbol of UK's failure to modernise.
1959 - UK forms the European Free Trade Area (EFTA) - could not match the European Economic Community (EEC). 1961 the UK Government submitted its application for membership of the EEC.
Stop-go economics continued, followed by overheating of the economy (inflation would weaken the currency, leading to more expensive imports, greater demands for wage increases, etc...).
Pay pause in 1961 - hold down inflation, asked IMF for a loan. This did not resolve the situation, stop-go continued and the balance of payments problem remained.
1963: Membership vetoed by France - UK policy in disarray.
In the same year the Beeching Report recommended massive cuts in the UK's rail network - exemplifying continuing concerns on the UK's infrastructure and modernisation. Why the EU?
1. Boosting industrial producting by providing a large export market.
2. Increasing industrial efficiency by providing competitive forced.
3. Economic growth stimulated by EEC expansion. A declining nation Barnett: 1970s as the inevitable culmination of long-term economic decline. A failure to control public spending or control wage demands from trade unions.
Industry, which had been too insular, failed to invest and was uncompetitive.
UK's share of world trade had steadily declined.
Productivity was low.
Nationalisation a mistake: propping up failing industries.
Concentration of unemployment at the expense of inflation.
HOWEVER: consider low unemployment (around 2%), rising living standards and rising global trade ('Golden Age').
Comparisons with Japan and Germany are also unfair - both had massive infrastructure problems post WW2 - catch up growth means it is natural to expect them to grow faster.
The devaluation UK devalued from £1 = $2.80 to $2.40 The late 1960s Labour's application to join the EEC, on economic grounds, rejected once again. Followed closely on the heels of the devaluation crisis. Government looked weak.
Despite this the economic situation improved drastically: Callaghan as Chancellor pursued deflationary measures (increased taxes, improved Gov't spending, and concentrated on resolving balance of payments problems).
By 1970 balance of payments surplus!
Trade Unions: major problems here as industrial unrest increased (consider NUS result) - wildcat strikes as local groups refused to listen to hierarchy.
In place of Strife: Barbara Castle 1969, seen as too radical (cooling off period, ballot before a strike, Gov't able to impose a settlement). Split within Labour. The Oil shock End of the post-war boom in 1973 with the oil shock and ensuing energy crisis.
1973 Yom Kippur war - OPEC declared an oil embargo, exports stopped.
Price increased 4x.
NUM then demanded a new price rise (inflation was chronic by now).
NUM now seen as challenging the power and authority of a democratically elected Government.
New balance of payments problem.
1974 - who governs Britain? Not the conservatives. Labour 1974 - 1979 1975 - 1979 decline of party unity.
Wage increases that were deemed necessary to resolve industrial crisis created a surge of inflation: demand-pull inflation.
Some pay settlements as high as 30%, inflation was at 20%.
Budget sought to curb inflationary pressures by increasing taxation and reducing wage increases to 3%.
Split within the party (Tony Benn/Michael Foot believe in greater intervention and less pressure on unions).
Party divided when UK nationalised British Leyland (car maker) - a failing company.
1976 Wilson replaced by Callaghan.
Denis Healey approached the IMF for a loan (plans to reduce spending and use IMF money to prop up spending are signs of a monetarist approach).
The approach to the IMF reinforced the image of the UK as a declining nation.
By 1978 with North Sea on stream inflation began to fall.
1978/9 the Winter of Discontent: wave of industrial disruption: rubbish piled high, doctors pleading with hospital staff, funerals postponed, etc.
Government unable to manage trade unions.
1997 - 2007 Labour party more united than at any point since 1945.
Trusted on the economy, Gordon Brown the Chancellor.
Made Bank of England independent, handed inflation targetting and interest rate management to the Bank.
Initially followed conservative spending plans.
2001 onwards: massive injection of money into public services. New schools, hospitals and pay rises for doctors, nurses and teachers.
Public finance initiatives: public buildings up quickly but long-term debts.
Rise in consumerism not fuelled by increase in salaries or wages but by housing bubble and prolific extension of credit.
Inequality fell (tax credits, etc.).