On this the anniversary of the publication of the Beveridge Report in 1942, we’re republishing this article by Andy Newman from 2009 on the 1945 Labour government, which implemented the recommendations set out by Beveridge, forming the basis of the postwar settlement that stands as a beacon of progressive economic and social reform in the nation’s history .  JW

For those of us brought up by parents who had been active in the labour movement during the 1945 to 1951 Labour governments, the Attlee period often assumed the status of Camelot: the once and future possibility of radical and popular reform.

A dispassionate evaluation of the legacy of that government reveals that reality was rather complex; but nevertheless Attlee’s government boldly reshaped British society. The economy was restructured, with large scale social ownership into state owned corporations allowing organisational rationalisation; radical welfare reform was introduced despite the poverty of the country; and after 1947 when Sir Stafford Cripps became Chancellor, there was a limited but decisive degree of economic planning. (Cripps, a left winger had only been readmitted to the Labour Party in 1945) The government also withdrew from colonies, such as Burma, India and Ceylon.

But the issue I want to look at is the problem of the economy, devastated as it had been by the war; and further rocked to its foundations by the coal shortage and currency crisis of 1947; which raises the question very relevant to today of how the government steered towards solving these various crises and providing the foundations for future prosperity.

Regarding welfare, the enduring legacy of the 1945 government, it is sometimes implied that Labour merely implemented the reforms of the Beveridge report, a liberal set of proposals from 1942 calling for comprehensive social security “from the cradle to the grave”; but actually Labour went beyond Beveridge in many important aspects: firstly it gave greater emphasis to the immediate social ownership and expansion of the health service, and to a dramatic commitment towards building housing. But even more significantly, Beveridge had made his proposals conditional on very optimistic projections of full employment and a healthy economy. But Labour didn’t wait for these conditions to be met: one of the very first decisions taken when Labour took office in July 1945 was to introduce welfare reform, and to structure the 1946 budget around Beveridge, regardless of the economic conditions.

At the beginning of August 1945, the economist John Maynard Keynes spelt out those stark economic conditions to the government – what he described as a “financial Dunkirk”.

Britain had lost £7 bn during the war, a quarter of the wealth of the country, and even to maintain the wartime standard of living required imports of the value of £1.1 bn per year, yet exports were standing at only £400 million, the predicted trade deficit up to 1950 would add a further £1.25 bn to the national debt. The country had only been economically surviving during the war due to Lease Lend subsidies from the US government and Mutual Aid from Canada. The national debt (if you include the so called “Sterling balances” which were debts owed to India, Egypt and other dominions, as Britain acted as banker for the whole Sterling area) stood at £3.4 bn. Furthermore, in addition to wartime damage to the economic and social infrastructure, most of the engineering industry had been diverted to armaments production. Britain needed an immediate loan of US$ 5 bn (£1.5 bn) just to maintain meagre wartime living conditions.

Keynes predictions were if anything over-optimistic, in one important respect. He assumed that the wartime support from the Americans would continue for at least a transitional period of few months, but in fact President Truman announced the immediate cessation of Lease lend on 21st August, just six days after the surrender of Japan, and less than a month after Labour took office. A devastating bombshell, and one many suspected was deliberately calculated to destroy the reforming aspirations of the Labour government, whose election had been greeted with some consternation in the USA.

Keynes headed a negotiating team to Washington to broker a loan to survive, but found that having dealt with the Empires of Japan and Nazi Germany, the American government was now determined to defeat Britain. The British perspective was that each of the massively war damaged domestic economies could only recover in the context of a growth of global trade, and the world economy needed to be stabilised; which required the USA, as the world’s largest economy, the world’s largest creditor, and the only one of the major combatant powers not to have suffered huge domestic war damage, to assume responsibility through the provision of credit, low tariffs and stability of its domestic market. The USA disagreed, and massively underestimated the scale of economic damage in the other economies, and saw the priority as dismantling barriers to free trade and protectionism in the mainly autarchic economic and currency zones that the world had been divided into during the 1930s.

In fact the USA had largely themselves created the conditions that partitioned world trade into regional or currency blocks in the pre-war period. Having emerged from the Great War as the world’s largest creditor, each of the other major economies had large debts to the United States, but after the war the USA was prepared to neither accept imports from, nor to provide long term loans to its rivals, thus ensuring that other countries had difficulty in paying their dollar debts to the USA and needed to retreat to trading within their own currency areas.

The conditions of the loan eventually negotiated by Keynes were at relatively harsh commercial rates 2%, to be repaid in fifty instalments starting in 1951; but most significantly Britain would have to open both the domestic economy and the Empire to American free trade, and make Sterling a fully convertible currency within 12 months. The British had asked for US$ 5 bn, they were loaned $3.75 bn (£1.13 bn) .

The outcome was that the British Empire and the Sterling block was over; but so was the possibility of Britain developing a planned, socialist economy, which was incompatible with the American conditions. This was reflected in the parliamentary vote, where those voting against included the most extreme Empire loyalist wing of the Tory party; and the centre left, including James Callaghan, Barbara Castle and Michael Foot.

The immediate run up to the pound being floated was a terrible winter and coal shortages that disrupted industrial production and briefly pushed unemployment over the one million mark- due to the incompetence of the privately owned coal industry and manpower shortages in the mines and transport.

In 15th July 1947, Sterling became a fully convertible currency. Within a week there was tidal wave of selling of stocks comparable to 1931, in particular mass selling of government gilts; and the country’s dollar reserves were in free fall as the Bank of England bought Sterling to prop up the price: in the first week of convertability $106 million was lost, a further $126 m in the second week, the third week saw losses of $127 m, and so on – by 14th August the rate of weekly loss had risen to $187 m. A total of $869 m was lost in just one month.

Even before convertability took effect Britain had lost $1.84 bn of its US dollar reserves in the first two quarters of 1947, as other European countries exploited “lead and lag” trading with Britain to by-pass their own dollar shortages. – effectively other European countries (especially Sweden and Belgium) bought American goods in Britain using their own Sterling reserves, thus transferring the problem of how to pay the Americans to the British. Furthermore, a condition of the loan from the Americans was that Britain was forced to pay its international suppliers in dollars if they requested, but with no reciprocal ability to sell goods for dollars.

The American loan expected to last until 1951 was down to just $400 million, and due to run out within weeks. There were a number of factors behind this run on Sterling, one of which was deliberate destabilisation by the USA, who raised their interest rates during the crisis accelerating the dash for dollars, and even temporarily froze the loan to prevent Britain drawing upon it, after the UK government unilaterally suspended convertibility to prevent catastrophe. However, the underlying weakness of the British economy and the huge trade deficit meant that convertibility forced upon them by the Americans could never have worked. Harold Wilson also accused profiteers of short selling so they could benefit from pushing down the value of the pound.

Almost inadvertently, America’s economic polices amounted to an effective war against Britain in 1947,  as they sought to transfer the full cost of the international economic disequilibrium onto the world’s biggest debtor nation, and at the same time undermine the “Imperial Preference” trading relations that allowed Britain to pay its debts. In the process the USA was prepared to wipe out the Sterling balances, making worthless the £3.57 bn ($US 12.0 bn) deposited in British banks by the dominions, two thirds of which belonged to India. Indeed the British decisiveness in reneging on the convertability of Sterling was partly informed by the destabilisation that it was causing in India, where negotiations with Congess and the Muslim League were hardly being helped by India’s entire accumulated wealth being wiped out on the eve on Independence. Indeed precipitous collapse of Sterling would have disastrously affected world trade everywhere.

Nevertheless, what the crisis really showed was that the old model of the economy, based upon the Empire, was as unsustainable as it was morally and politically undesirable. The pre-war system had seen the British Territories and Dominions in the Sterling block trading to provide a surplus to Britain, and this financed Britain’s economy trading at a deficit with Europe and the USA. The war, the disruption of world trade, and Britain’s inablity to meet the requirements for industrial goods from the Empire meant that Britain was no longer trading at a surplus even within the Sterling block. The same pattern occurred throughout Europe, as the major European economies were no longer earning a surplus from trade, either within Europe or with their colonies, and the whole world economy had developed an acute shortage of dollars to lubricate international trade. What is more, the destruction and disruption on European industry meant that they were dependent upon US imports, so while the aggregate volume of imports into Europe in 1947 was only 7% higher than in 1938, the increase in imports from the USA was up 130% – but there were no dollars to pay for these imports.

In this context of international trade crisis, the restructuring of the British economy by the Labour government was therefore a formidable achievement. Nationalisation focused on industries that were old and were failing under private ownership, and also key concerns like the Bank of England, and Cable and Wireless, that were strategic for planned economic growth. The Coal industry and steel industry were dramatically rationalised and modernised under public ownership, and this included improvements of working conditions, safety, reduction in working hours to a five day week, and better pay.

At the same time the nationalised industries deliberately operated a policy of pricing below market levels, both to benefit private sector profitability, and also as a direct subsidy to working class living standards, as a trade off for the pay freeze negotiated with the TUC in 1948. Railway fares were subsidised, house coal for domestic use was sold at between 10 and 30 shillings per ton less than world market prices; gas and electricity prices were frozen, and were lower than 1938 levels. Socially progressive subsidies also operated in the private sector, with food and other necessities being sold at prices far below market levels.

The government also effectively used the Distribution of Industry Act of 1945 to promote employment. A staggering four million men and women were demobilised from the armed forces by the end of 1946, yet the Board of Trade, first under Cripps, and later under Harold Wilson made aggressive use of Industrial development Certificates to force modern, new industry into area of unemployment, like the North East, south Wales and Central Scotland, and then provide these new industries with remission of rents, zero rates, and interest free loans.

The North East of England had unemployment of 38% in 1932, by 1948 this stood at 2%; over the same period Scotland saw unemployment fall from 35% to 4.5%, and Wales saw unemployment fall from 41% to 5.5%. The UK national average unemployment by 1951 was just 1.8%. Although there was only limited forward planning, government direction effectively produced full employment, and intervention against the market’s bias towards the South East of England spread the benefits across the UK.

The Welfare state saw a revolution in the provision of health care, providing for the first time universal and free medical care; there was a less dramatic, but nevertheless impressive expansion of housing, and the introduction of national insurance schemes and comprehensive social security.

The most dramatic period of economic growth occurred after Sir Stafford Cripps became Chancellor in 1947. Cripp’s authority was very high, as he was the only member of the cabinet to have come out of the sterling crisis well – it was he who had publicly and successfully advocated defying the Americans, and suspending the trading of Sterling; and his period at the Board of Trade associated him with effective economic intervention in the interests of jobs.

The desperate balance of payments deficit was handled boldly by decreasing imports paid for in dollars, which mainly hit food, decreasing calorie intake to significantly below wartime levels. This was accepted both because it was done on the ration – broadly ensuring  fairness; and also because of the goodwill the government had generated through its welfare policies.

But Cripps also prioritised productive investment – for example in Scotland alone 536 new factories were built between 1945 and 1951, providing direct employment for 150000 workers.

The issue that has to be addressed is the degree to which the Labour government’s programme was possible only due to the Marshall Aid Plan, which transferred $3.3 bn (about £1 bn) to the UK between 1948 and 1951.

Marshall Aid (The European Recovery programme) is subject to a number of competing mythologies, either that it saved Europe due to American generosity, or that it was a cunning trick to undermine the USSR, some argue that it had little effect, and Noam Chomsky even argues that it subsidised the French and Dutch counter-insurgency wars in Indochina and the East Indies.

In truth, the US administration were genuinely unnerved by the economic and social collapse that they were presiding over jointly with the British in the German proto-state of Bizonia; and the economic chaos in Britain (at that time the world’s second biggest economy) during the winter of 1946/1947 scared them that there could be meltdown in Europe. The confident view that had led them to force convertibility of Sterling onto the British was further shaken by the currency crisis that almost brought the British economy to its knees; which caused a change in direction from the US administration during 1947, who now saw that the shortage of dollars in Europe was a major crisis.

Whereas the US administration had previously regarded the removal of tariffs and obstacles to free trade as a worthy objective they could use the battering ram of their economic strength to achieve, they suddenly realised that this left the rest of the world with no mechanism to pay for US goods – and they certainly did need to find a way to pay. In 1946 the aggregate value of all European imports was $5,8 billion, of which $4.2 bn was imports from the USA. In 1947 total European imports were $7.5 bn, of which $5.4 bn was from the USA. What is more, Under Secretary of State for the Economy Will Clayton argued that the USA needed to export $14 bn of manufactured goods per year to maintain its wartime levels of production, otherwise it would slide into recession.

So George Marshall’s speech at Harvard in June that year reflected the evolving American thinking that the European economies needed to trade with each other to generate profits that could then finance trade with the USA – and he indicated a commitment from the USA to temporarily fund the dollar deficit itself to provide brief respite for the European economies to recover. However his speech lacked any concrete scheme or timescale for implementation.

What is usually overlooked is that it was not the US government who then developed a detailed implementation. Taking Marshall’s speech as a cue, the very same day British Foreign Secretary Ernest Bevin created a task force, and two weeks later the Foreign Office presented a detailed plan to the Americans for an emergency aid package, much to the delight of key figures in the American administration. like George Kennan, who saw that the Aid Plan had to be driven by Europe. The administrative structure of Marshall Aid was finessed by Paris and London, not by Washington. Marshall Aid was the product of $14 bn (~ £4.2 bn) of American money offered with some foresight to their long-term economic and geo-political interests, combined with British and French diplomacy, and Ernest Bevin’s cold war obsession for a Western block against the USSR.

This is why the oft-repeated claims that Marshall Aid was offered to the eastern block are a bit disingenuous. The Americans publicly offered aid to the USSR and its allies, but the draft implementation of the plan drawn up in London, and later collaborated upon by the French foreign minister, Georges Bidault, excluded the Russians from day one. In any event the Communist parties opposed the conditions attached to the aid.

Arguably, the Marshall Plan was a failure in the terms it was conceived of by the Americans. As soon as the dollar transfers to Europe ceased in 1951 then the dollar shortage reasserted itself, and as European industry was less productive than the USA, and Americans notoriously unwilling to buy imports, recovering European trade tended towards a return to the pre-war pattern of each nation trading with the areas affiliated to its own currency block. The British plan which the Americans wouldn’t listen to, that the dollar deficit could be solved by America accepting imports to boost global trade and providing cheap credit to develop productive capacity in other economies was never tried.

Eventually the failure of the Marshall Aid was masked by the huge spending on rearmament associated with the Korean war, and the scaling up of US military presence in Europe during the cold war, which reduced the dollar gap to manageable levels. Paradoxically, the increased military spending for the Korean war that solved the dollar deficit on a global scale also precipitated the domestic political crisis that broke the back of the 1950 to 1951 second Attlee government.

Without Marshall Aid, it is probable that the welfare reforms would have faltered, and the economic recovery of 1948 onwards, would not have happened. But it is important to note that the amount of Marshall Aid was less than Britain had borrowed in 1945, and was only equivalent to two years balance of payments deficit. And the necessity for the Marshall Aid to the UK economy was only required to repair the damage caused to the British economy by the USA forcing convertability onto Sterling in the first place: effectively Marshall Aid to Britain merely replenished the British government’s dollar reserves lost during the convertability crisis.

Nevertheless, had the Attlee government followed modern Tory orthodoxy and used the Marshall Aid money for debt reduction, they would have achieved nothing. Instead, they used it for productive investment, building new factories, and putting people to work.

The Labour government dug the country out of economic catastrophe. The 1951 election saw Labour get 14 million votes (13,948,883), on a 82.6% turnout – they got more votes than the Conservatives, and the highest ever share of the vote for any political party in a national British election. They were defeated mainly because the Liberal party stood less candidates, having made a deliberate anti-socialist pact with the Conservatives to stand down in constituencies where sitting Labour MPs were vulnerable.

Sources:

“Labour in Power 1945-1951“, Kenneth o’ Morgan, Oxford University Press, 1984

“The Labour Party’s Political Thought“, Geoffrey Foote,  Croom Helm,  1985

“The Sterling Crisis of 1947 and the British Response to the Marshall Plan“, C. C. S. Newton, The Economic History Review, New Series, Vol. 37, No. 3. (Aug., 1984), pp. 391-408.