After the war, Britain’s Labour government initially favoured planning sectors of supply (through a licensing or rationing system) to planning components of demand. Supply-side planning more obviously pointed to public ownership. Socialists like Dalton (Britain’s first post-war Chancellor), Durbin and Gaitskell were hostile to Keynes’s social values. ‘Durbin recognised that Keynesian policies alone would lead to a continuation of the system of private enterprise …’22 However, there was some scope for reconciliation. On the one hand, demand management could be made the instrument of redistributive goals which socialists favoured, while reducing the need for extensive nationalisation. On the other side, the socialised public utilities offered increased scope for controlling aggregate investment. On this basis, a deal could be struck. Powerful anti-planning arguments were provided by the economists Denis Robertson and, intermittently, Hubert Henderson, who both spoke for Keynes’s values, if not his theory, as did Hayek in his influential book, The Road to Serfdom.
However, the crucial factor facilitating acceptance of Keynesianism was the need to contain inflationary pressures. Here was a paradox. The Keynesian commitment of the mid-1940s was directed to saving the world from another slump. Keynesian policy was actually adopted to control the postwar boom. The technique adopted was fiscal Keynesianism. Not only had it proved itself in the war, but the Treasury wanted to keep interest rates low to borrow more cheaply. The situation called for budget surpluses, not deficits. Thus Keynesian calculation emerged as an instrument of financial orthodoxy.
This is the plausible story told by Jim Tomlinson. As he tells it, the budget of November 1947 marked a shift within the government from the use of controls to fiscal policy and Harold Wilson began his ‘bonfire of controls’ in 1948. A full employment target of 3 per cent was officially announced in 1951, mainly, it seems, to encourage the United States and other countries to follow suit so as to ensure a high demand for British exports. On the other hand, a basic problem had already emerged with using the public sector as an instrument of short-term demand management, because of its disruptive effect on public sector investment programmes. This pointed to reinserting monetary policy into the armoury of instruments available to balance the economy. ‘The kind of macroeconomic management that began to emerge in the late 1940s, and was to dominate the 1950s and 1960s, owed little to the devices suggested in 1944. It focused on budgetary and, to a lesser extent, monetary policy, within an overall framework of buoyant private expenditure and budget surpluses.’23
However, this cannot be quite right. Although British budgets were always in surplus ‘above the line’ from 1947 onwards, loan-financed capital spending by public authorities was much greater than it had been before the war. There was a positive borrowing requirement (budget deficit) right through the Keynesian age (except for the years 1969–70) which tended to expand with time.24 It is at least arguable that the net impact of fiscal policy during the ‘golden age’ was somewhat inflationary. However, the more substantial charge is not that public spending policies produced inflationary pressures in the golden age, but that Keynesian policy-makers, over-anxious about the dangers of depression, took the build-up of these pressures too lightly.
The Conservatives, who held power from 1951 to 1964, had their own political agenda, notably cutting taxes. This meant making more use of monetary policy as an instrument of short-term demand management. More importantly, demand-management under the Conservatives was directed towards maintaining the sterling-dollar exchange rate at $2.80 at all costs, and ensuring the re-election of Conservative governments. Both aims made their policies seem perverse from a ‘Keynesian’ perspective, without however threatening the maintenance of full employment. From the mid-1950s onwards, maintaining the value (and it was thought the world position) of sterling in face of low productivity growth and wage inflation required subjecting the British economy to frequent ‘stops’ in order to protect the balance of payments from the tendency to import too much at full employment. The Conservative penchant for depressing and stimulating the economy at the ‘wrong’ times led to them being credited with inventing the ‘political business cycle’. ‘Stop-Go’ or ‘fine-tuning’ the economy may be seen as a specific British contribution to Keynesianism arising from the economic characteristics of a declining economy, the tightness of the political battle between Conservative and Labour, and the ability of the British Prime Minister to fix, within broad limits, the date of the next general election.
Although ‘stop-go’ policies were attacked for destabilising the economy, they did not destabilise it by much, and unemployment never exceeded 3 per cent over the whole Conservative period. This employment record was not the result of national full employment policy but of a global private investment boom which swept up the ‘free world’ in a cumulative wave of prosperity. In other words, those historians are right who claim that the ‘golden age’ was the product of world conditions, from which most national economies benefited, irrespective of whether their governments were imbued with Keynesian ideas or pursued Keynesian policies. (The German, French and Japanese economies were not managed according to Keynesian principles, even rhetorically.)
To this there may seem to be one important qualification. Most governments in the post-war era spent about 10 per cent more of their national incomes than they had before the war – 35 per cent, rather than 25 per cent. This probably had an important effect in steadying economic activity over the cycle; or, to put it another way, making the cycle much shallower than it would otherwise have been. But although the higher level of government spending may have had Keynesian effects, it was not undertaken, for Keynesian reasons, reflecting rather the state of international relations (arms spending) and the establishment of ‘welfare states’ in post-war capitalist countries.
‘International conditions’ is an omnibus term, made up of a ‘conjuncture’ of market opportunities, policies and institutions. The crucial conditions for the long private investment boom seem to have been reconstruction needs, opportunities for technological catch-up with the United States, availability of cheap labour and energy, and the policies of military spending and trade and payments liberalisation associated with the Pax Americana. The war had also bequeathed a set of transnational institutions (the International Monetary Fund, the World Bank and GATT) designed to reconcile the national pursuit of full employment with free trade and stable exchange rates. The central idea inspiring the Bretton Woods system, as it was known, was that full employment should be secured by national policy; its achievement would make it safe to liberalise trade and payments.
Or at least this was the British view, as argued by Keynes. It was never so clear that it was the American view. The Americans attached much more importance to trade liberalisation as the engine, and not just the consequence, of full employment and prosperity, and were able to impose their views on a reluctant Britain and western Europe. They looked to trade expansion rather than government spending to keep demand buoyant; this was also the economic philosophy that inspired the Common Market, which was established in 1958. Trade liberalisation was a policy decision, but it had nothing as such to do with Keynes or Keynesianism. The historical comparison is with the Cobden treaties, which helped produce a similar ‘golden age’ in the mid-nineteenth century.
A key question we would now want to ask about the ‘golden age’ is why, until about 1968, there was a lack of serious wage inflation. The answer that is most consistent with the story told above falls into three parts. First, a high rate of real economic growth allowed the demand for rising real incomes to be satisfied out of productivity gains. Secondly, the adoption of mass-production technology allowed the labour market to be balanced without upsetting the ‘modest traditional pay relativities between industries, and between skilled and unskilled workers’.25 Finally, working class incomes were still very lightly taxed, so that increases in negotiated pay were reflected in increases in take-home