22 NOVEMBER 1963, Page 11

The Spilt Society-3



T may seem strange that the overwhelming I vote for socialism which. the Labour Party secured in 1945 should have been followed by a marginal . victory for Conservative free enterprise in 1951. It was due, as I have sug- gested, to the feeling of frustration and dis- illusionment which swept over the working class after six years of Labour rule. A Labour Govern- ment, they must have reasoned, had failed to turn, a capitalist Society into a socialist one; so why not vote for a party which knew how to make a capitalist society work? Some simple argument of that kind may have helped to tip the scales in favour of the Tories but there was more behind the rejection of Attlee than that. The workers must have felt that 1951 had been another 1931. As far as they could understand it. there had been a similar financial crisis, a similar attack on wages and a similar cut in public assistance--this time in the health service. Attlee did not, of course, betray his colleagues, but he threw up the political sponge. lie had no doubt been a courageous Prime Minister, enforcing consumer rationing and controls for so long—long enough to allow the export trade to treble between 1946 and 1951—but his courage failed him, as it did MacDonald and Snowden, when a new financial crisis blew up. Yet he had reached a point in our remarkable post-war economic recovery when he himself could have promised the end of austerity after he had solved the immediate financial crisis.

This point is worth elaborating. The worst problem which the Labour Government faced on taking office was the balance of payments. After the loss of most of our export trade (which had been virtually taken over by the Americans during the war), after the destruction of a third of our merchant marine, after the sale of some £1,000 million of overseas investments and the piling up of £3,700 million of overseas debt, a balancing of payments in 1946 had seemed im- possible, Our invisible account• had become a minus quantity (against £332 million a year 'plus' from 1935 to 1938) and our export trade was paying for only three-quarters of our im- ports. A dollar loan was, of course, vital and when Keynes was negotiating it—with diffi- culty--the Americans suggested that we should scale down the sterling balances in order to reduce our\ overseas interest bill. Dalton left this negotiation to 'a Treasury official he admired- Eady---who frankly did not believe in its wisdom and 'did not apparently try very hard to succeed. Australia and New Zealand accepted some cuts but no one else. So the Government missed the chance of cutting down its foreign interest bill. However, from 1948 to 1951 the net 'pluses' from shipping, from interest and dividends and from 'other' credits bega,n to build up, so that the ,invisible account produced a surplus in this period of £282 million a year (in real terms still a miserable level—equivalent to about £140 million at 1938 prices). By this time the export trade had been miraculously re-estab- lished--it was £2,250 million in 1950 against only £917 million in 1946—and the final surplus on the balance of payments rose to £300 million in 1950. The huge deficit of £407 million which suddenly appeared in 1951 and frightened the Government out of office was due to a

£1,000 million jump in imports—from £2,383 million to £3,475 million—and this can be ex- plained partly by the high prices of raw materials caused by the Korean War, partly by the need for larger imports to satisfy the short- age of consumer goods in the home market and the demand for materials for the rearmament programme. This import problem could have been met, as it was in 1952, by controls over dollar imports. In other words, Attlee could have solved this financial crisis and held on to his office. Admittedly there was foreign nervous- ness over the £; which the City was quick to exaggerate, but is it always going to be left to financial rumour-mongers in New York, London and Zurich to turn out a British Labour Govern- ment when they feel inclined? Does not the IMF exist to help countries in balance of pay- ments trouble over their temporary exchange crises? Attlee may, of course, have felt that Gaitskell was trying to do the impossible (as Bevan rightly said) when he imposed a huge rearmament programme on an already over- extended economy, but Labour Party loyalists have never forgiven him for allowing the fruits of the austerity period—the necessary prelude to recovery—to be gathered in by their political opponents.

Pathological Cynicism

Under the Conservative regime the acquisitive society flowered into full bloom. The acquisitive instinct being universal, everyone was on the make. In the beginning both sides of the divided nation welcomed the change of government— the workers because there was no Crippsian conscience to make them feel guilty about their wage claims, the employers because controls were being dismantled and they were now free not only to make more money for their com- panies and distribute more dividends to their shareholders but to get down to the serious work of increasing their own private wealth. The rise in wages did not worry them. In periods of full employment they could easily pass that on to the consumer in higher prices. What was important for them was the rise in the market value of their equity shares which could at any time be cashed in for a tax-free capital profit. As soon as their companies were free once again to distribute share bonuses and to raise fresh capital by 'rights' issues the share markets were able to shake off their socialist freeze and show what a policy of economic growth meant in

terms of Stock Exchange prices. From June, 1952, to July, 1955, there was, in fact, a breath- taking boom in equity shares during which prices more than doubled. The Financial Times index of industrial ordinary shares rose from 103 to 224. After nearly three years of ups and downs the equity market the staged another spec- tacular boom, the Financial Times index rising from 154 to 366 by May, 1961. This advance of 254 per cent from 1952 to 1961 was equivalent to a capital gain in real terms of 200 per cent.

Stock Exchange statistics give a fair idea of the increase in private wealth under the Con- servative regime. In April, 1951, the market value of all securities (government bonds, fixed interest stocks and equity shares combined) was £26,900 million—only slightly higher than it was in April, 1946. By April, 1961, it had reached a total of £50,900 million. It may therefore be surmised that the average rich man virtually doubled his capital in the ten years to April, 1961, without having to exercise his brains. If, however, he had invested his capital shrewdly in equity shares he would have trebled it.

The workers, reading about this furious Stock Exchange boom in the headlines of their popular paper, naturally became more and more cynical about the slogan 'Conservative freedom works.' They assumed, of course, that this gave them freedom to go on demanding higher and higher wages, 'In a free for all,' Frank Cousins sagely remarked, 'labour is part of the all.' From the next table it will be seen that the average male manual worker over twenty-one was able in the period from 1951 to 1962 to push his weekly pay packet, up from 160/- to 311 /-. This was equivalent in real terms to a rise of 43.8 per cent.

Average Weekly Earnings of Male Manual Workers over Twenty-one Consumer Weekly Weekly Price Index Earnings in Earnings (1954= 100) Real Terms


69/- 41

168/- 1946


69 165/-

1951 .

160/-. 91 176/- 1962 31I/- 123 253/- (Sources: London and Cambridge Economic Ser- vice and Nat. Inititute Economic Review.) Such were the workers' rewards under the Conservative regime. They were not particularly striking. Only occasionally was a spectacular success won in a wages dispute. For example, in 1957, when the Government was politically weak after the Suez debacle, the railwaymen won a resounding victory over wage restraint and this was followed, after a nation-wide strike, by the engineers and shipbuilders. But in the following year Frank Cousins was beaten in his bus strike. All this time the workers must have , felt that they could not relax in their struggle to keep their wages ahead of the rise in prices. A gain in their real standard of living of nearly 44 per cent in eleven years-31 per cent p.a. com- pound—does not stand up against the rise of 200 per cent (in real terms) in the value of equity shares which the owners of capital enjoyed, which was at the rate of over 101 per cent p.a. compound. And the workers never managed to. win a larger slice of the national income. Their share remained at a little over 42 per cent throughout the Conservative regime.

Division of the National Income 1938 1948-51 1952-55 1956-59




(;) Wages 39.9 43.4 43.0 42.7 42.0 Sala.ies* 18.9 21.4 21.9 23.4 25.4 " Salaries include directors' fees: wages exclude em- ployers' contribution and forces pay. (Source: Nat. Income and Expenditure Blue Books.)

Of course, the bigger pay packet looked wonderful to the worker's family for it encour- aged them to buy their household amenities ahead by the use of the ingenious techniques of hire purchase and consumer credits. When- ever the financial controls were eased, these 'never-never' facilities were quickly and widely extended. This spurt in better living in the home undoubtedly deceived the working man's family into thinking that they were much better off than in fact they were. This may explan why the Conservative Party won victory so easily at the two subsequent general elections and why the right wing of the Labour Party tried so hard to dissociate itself from any formal commit- ment to socialism in order to win back the votes of the workers who agreed with Macmillan that they 'had never had it so good.'

As the outward show'of affluence grew more splendid in the average worker's home, so the feeling of cynicism grew deeper in his heart. He knew that everyone in this acquisitive society was on the make and that the rich were beating him in the race because they had capital and the expertise to make it grow. So when the opportunity came for the trade unions to jump on the bandwagon in Throgmorton Street they did not let this ironic situation pass. Suppressing, their hatred of the capitalists' sordid pursuit of material wealth, they participated in a unit trust formed under the auspices of a City merchant bank to invest trade union subscrip- tions in 'growth' equity shares. A richly sardonic touch was to invite on the board of this unit trust a financial journalist who had spent his years declaiming against the inflationary im- plications of the annual round of wage claims. In Rome you must obviously do as the Romans do, and, better still, get a guide to show you how. In this case the financial journalist would be the guide picking out the shares which would offer the best hedge against the persistent cost- inflation caused by his trade union colleagues. Apparently the workers had no objection to tax-free capital gains. After all, when one of them in a million could win a few hundred thousand pounds out of the football pools they would be angry if the pay-out were not tax-free.

`Stop-Go' The Conservative Government always realised that a full-employment policy without an in- comes policy would lead to inflationary pressures and it always appreciated that it could not enforce an incomes policy on an unwilling and uncooperative trade union movement. So it decided on two important measures to restrain the rise in wages. The first was to bring back general monetary controls by the use of the Bank rate and the manipulation of bank credit. A deflationary policy, it believed, if applied firmly enough on the right occasions, could teach the trade unions a useful lesson by throw- ing men out of work, as was done in the Twenties and Thirties, if their demands became excessive. The second was to bring moral pres- sure to bear on the trade unions by public propaganda. This was to be carried out from 1958 to 1961 through the reports of a new Council on Prices, Productivity and Incomes. The effect of these policies was to anger both sides of our split society and to hold up the steady growth of the economy.

Now it has never been proved, as the Radcliffe Committee reminded us, that it is possible to maintain equilibrium in a free economy by the mere use of interest rates and credit controls. Deflationary monetary measures applied to the whole economy by way of dearer money, tighter credit, higher indirect taxes, restrictions on, hire- purchase trading' and cuts in public spending are no doubt necessary when there is an over-all inflation, that is, when total demand is in ex- cess of the total supply of goods and services, but they are not essential when the trouble is simply a wage-cost inflation caused by a few over-extended industries. The best way of deal- ing with the latter is by specific controls applied to the trouble spots and by taking care that wage bargains in key industries do not inflate the whole wage structure. There were virtually only two industries capable of setting up a dangerous wage-cost inflation—the building and contract- ing industries and the motor industry. Over- extension in building and contracting could easily have been averted by a simple licensing system. The motor trades could always be jerked up or slapped down (as indeed they were) by the reduction or increase in the purchase tax on motor-cars. Yet even when total demand and supply in the economy were more or less balanced the Conservative Government still pre- ferred to deflate the whole economy in order to deflate a few over-extended industries. Such a policy borders on lunacy. It stems from the neurotic attitude of fright adopted by the ruling clique when confronted with the annual .wage claims of the working class.

The application—on and off--of these general monetary restraints, popularly known as the `stop-go' policy, has been responsible for the extra slow growth of the Bri:ish economy in the past twelve years. The theory behind the `stop'— the sudden application of the deflationary brakes —is that it reduces imports and stimulates exports, so that the balance of payments is restored to surplus. But cutting down the home trade does not necessarily stimulate exports in the least. What it does do of a certainty is to reduce output, raise costs and worsen our com- petitive position abroad. By denying factories their long production runs it pulls down the productivity of the efficient and fastest expanding industries. Moreover, it creates a feeling of de- spondency throughout industry, making the busi- nessman feel less inclined to undertake new investment at home or to spend money on a sales organisation abroad. And it certainly does not stop the worker asking for higher wages. The Conservative reliance on monetary measures for economic equilibrium has, therefore, been fatuous and harmful-- an irritant to both the employer and working classes. Incidentally, it has raised.the cost of servicing the national debt by some £200 million a year and the overseas sterling liabilities by £50 million. At the same time the use of dear money has increased social tension by putting up house rents against the poorer half of the nation. It has, in fact, doubled the rent of a Council house since 1951. Yet it has not stopped the price of development land from soaring. Fantastic profits have been made by speculators out of house property and since the Rent Act ■■ as passed property racketeers as well as property millionaires have appeared on the social scene. Meanwhile, the homeless are watching the growth of the skyscraper office blocks with increasing bitterness. The refusal of the Conservative Government to apply a licensing system to property development gener- ated a boom in office-building, for the rents of offices are paid by companies which can charge them against their gross profits for income •tax. There must have been more fortunes made out of property development in the last ten years than in any other decade in' our social history.

So under Conservative direction the two halves of British society grew farther and farther apart. The division was most pronounced when Selwyn Lloyd became Chancellor and declared his pay pause. His predecessors at the Treasury had prepared the way. Their exercise of monetary control had not always been happily timed or executed. For example, Peter Thorneycroft became 'hard' money mad. Instead of consulting his official economic adviser, the diffident Sir Robert Hall, he took the advice of an outside economist, Lord Robbins, who had preached the virtues of a 'hard' £. In Septem- ber, 1957, when the country was still running a surplus on its balance of payments, Thorney- croft decided that the £ was in grave danger from the attacks of foreign speculators and that the Bank rate must be raised to 7 per cent in order to protect it. He proudly told bankers at the Mansion House dinner: if one can re- gard the economy as an electric current we arc ensuring that if the current overloads it, the fuse will not be the pound sterling. The strain must be taken in other areas of policy.' It 'was bad imagery, for a 'growing economy has not, like an electric circuit, a maximum capacity. He desired, of course, to see employment--the workers' livelihood---become the 'fuse.' He actually told an audience in New York, where he had gone for an IMF meeting, that he was prepared to press his deflationary measures to the point when they would create serious un- employment if the £ could be saved. When he informed the Cabinet that as guardian of the £ he must have the last word on government ex- penditure he was rebuffed and •quickly forced to resign. Macmillan, having seen the terrible effects of hard money extremism in the 1930s, was no doubt glad to see him go.

This money fanatic was succeeded at the Treasury in 1958 by a mild and genial business- man, Heathcoat Amory, who allowed the economy to re-expand too qdickly in the wrong direction—consumer spending. The banks were freed from credit control and allowed to extend personal loans as far as they liked. All hire- purchase restrictions were removed and before long a 'dangerous boom developed in the motor trade. It was possible for a man without any cash to secure a •£1,000 motor-car by the simple device of a personal loan from a bank for his deposit and a hire-purchase contract for the remainder. This was to cost the hire-purchase finance companies some £50 million in bad debts and put a lot of working-class households into serious trouble.

It was Thorneycroft who had set up the admonitory .Cohen Council on Prices, Produc- tivity and Incomes. It was childish to expect the workers to learn the harsh facts of economic life from the lectures of 'three wise men' from the upper class, especially when they were directed by the austerity-minded Dennis Robertson, a right-wing Cambridge economist, who had an obsession about a wage-cost infla- tion. The trade unions refused to give evidence before a council which, they thought, was only interested in keeping wages down. The first two depressing reports of the Council which Robert- son wrote only served to make the division be- tween employers and workers wider than before.

These appeared before the remarkable OECD report on wages and prices which showed how a. reasonable 'wages policy' could be applied.

Later on 'this Council was reconstituted under the liberal-minded Phelps-Brown and Lord Hey-

worth and produced an excellent fourth report—

in July, 1961—advocating the end of the 'stop- go' policy and the introduction of a tentative wages policy. By this time Selwyn Lloyd had succeeded Amory at the Treasury. Advised by Sir Frank Lee, the chief of his Treasury hierarchs, he decided to have a showdown with the trade unions. There were thirty-five differ- ent wage claims pending in the spring of 1961 which could have added £500 million to the national wage bill, so he was determ: ned to put an end once and for all to the wage-cost inflationary spiral. He had been driven to take this drastic decision, first, because he had been told that incomes in 1961 would increase by £1,200 million and output by only £800 million, secondly, by the sterling exchange cris s which followed on the huge deficit of £340 million in- the 1960 balance of payments. In the first half of 1961 there was a flight of foreign money from London (around £700' million in all) and the £ was saved only by borrowing heavily from the IMF. The IMF loan was conditional on steps being taken to end the domestic inflation by means of a 7 per 'cent Bank rate and a wages pause. To enforce his pay pause Selwyn Lloyd took the unprecedented step of refusing to im- plement not only the Burnham Committee's award to the teachers but the other arbitration awards currently being made by the Wage Councils. At the same time the Chancellor took power to impose a 10 per cent surcharge on all excise duties—and forthwith exercised it. He will go down in Labour history as the Chancel- lor who, having raised the standard of living of the surtax-payer (not before it was due) took steps to lower the standard of living of the working man.

The curious thing was that Selwyn Lloyd had done nothing to prepare either public or trade union opinion for this sudden attack on the time-honoured system of wage negotiation. Almost as an afterthought he had said that a new system of negotiation would have to be devised to secure a more realistic relationship between the rise in wages and the rise in national productivity. He was even prepared for that purpose to accept some State planning of the economy. Out of this ferment of ideas. which no doubt Frank Lee had put into Selwyn Lloyd's bewildered mind, emerged the National Incomes Commission and the National Eco-. nomic Development Council. The trade unions, of course, would have nothing to do with the first but after some hesitation decided to serve on the second. This point gained, Lloyd dis- missed the Heyworth Council on Prices, Produc- tivity and Incomes which had been the first official body to propose a sensible wages policy and a planned control of the economy. He had probably resented their remark that their pro- posals would call 'for a high degree of leader- ship both on the part of the Government and both sides of industry.' He knew that he could not supply A Chancellor who expected the trade unions to co-operate in a wage restraint policy without being offered a quid pro quo in the shape of dividend restraint was completely lacking in leadership and sensibility. A raising of the profits tax was not enough. And his be- lated offer of a capital gains tax limited to six months was considered derisory by the trade unions. In his extraordinary insensitive approach to the wages problem Selwyn Lloyd had probably been moved by a sado-masochistic impulse to bring suffering on himself and others in order to expiate a sense of guilt. In his view the working class had been sacrificing their country for the sake of their pay packets and they would have to be taught a lesson by suffering. In a Freudian analys's this sadistic instinct would be an extroversion of his primary maso- chism and I am sure that his greatest hour came when he received an unexpected letter from his Prime Minister to say that he had been sacked.

When Selwyn Lloyd had gone, both his suc- cessor and the Prime Minister endeavoured to offer the trade unions something more tangible in return for wage restraint. Macmillan said in the House of Commons in July, 1962: 'Restraint on profits and dividends is no less important than on wages and salaries. It is vital that people should not feel that acceptance of restraint on pay meant that someone else got large profits or dividends. Most economists are agreed that restraint on wages and salaries should be accompanied by a fall in profits. Should that not be so 1 give this formal pledge that the matter will be dealt with.'

Macmillan's strange ideas about profits sprang out of political expediency, not economic under- standing. (It will not be forgotten that it was he Who displayed his appalling ignorance of business by saying 'exporting is fun' when every businessman knew that exporting is hell when the government, applying 'stop-go' techniques, restricts the home trade and slashes the margin Of profit.) But Chancellor Maudling was more circumspect than Macmillan. He was careful to say that while they could not control wages they could always fake care of profits—by

'I think you can be too careful.' appropriate taxation. He leant over backwards to try to convince the trade unionists, that re- straint of profits was as much a government policy as restraint of wages. But 1 do not sup- pose that the trade unionists believed him. In any case when he made that remark he knew that company profits were actually falling.

Division of the National !,,come—Percentames Total Income Total income Gross from from self- profits of

employment employment companies*


1938 -

1948-51 13.4 14.3 71.2 13.3 19.5 1952-55 71.6 11.4 17.7

1956-59 10.1 17.3 1960-62 7743. (5) 9.7

* Excluding capital consumption.

(Source: Nat. Income and Expenditure Blue Books.) It is extraordinary that the Conservative leaders should have expected the trade unions to accept wage restraint while the other re- cipients of company earnings salaries and dividends7–not only remained untouched but were constantly being raised. (Dividends were, in fact, advancing faster than earnings.) There is surely an obligation on the part of managements ,to use their brains. When wages rise It is invari- ably within the capacity of managements to offset that rise by some more intelligent organisation of the business—by better ordering of materials or by better planning of the manufacturing and distributing process. It was surely a gross pro- vocation to the working class to expect them alone to carry the burden of income restraint.

In the Macmillan epoch the sour, cynical. 'browned-off' behaviour of the workers was becoming pathological. This was evident from the number of frivolous strikes they indulged in. Railwaymen have struck because they could no longer get their hair cut by railway em- ployees in railway time and on railway premises. Shipyard workers have struck because joiners and metal workers could not agree who should drill holes in aluminium sheets. Motor-car workers have struck because managements dared to alter the time arrangements for the tea break. A, Arthur Koestler wrote in the Observer of February 10, 1963: 'In no other country has the national output been crippled on such frivo- lous and irresponsible grounds. In this oldest of all democracies class relations have become more bitter, trade union politics more undemo- cratic than in de Gaulle's France or Adenauer's Germany. The motivation behind it is neither communism, socialism, nor enlightened self- interest, but a mood of disenchantment and cussedness.' Psychiatrists will recognise these frivolous strikes as the mood of the 'obstructive psychopath'—the man who will lie down on the job regardless of the 'public inconvenience he causes because he is discontented with and sick of the society in which he lives. Such a neurosis can only have been brought on by the extreme harshness and insensibility of a regime which had encouraged the acquisitive instinct to be the prime mover in the national economy. and had then seen to it that the capital-owners with their tax-free capital profits should come out of its expansion and growth far better than the trade unions who had to fight hard against government restraints and hostile public opinion to keep their wages rising just ahead of the rise in prices. The final result has been a lowering of the national standards of behaviour and the continued alienation of the working class

(To be concluded) :c.) Nicholas Davenport 1963