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UNITED KINGDOM
BRITISH ECONOMY SINCE DEVALUATION (1968)
A document from the CQ Researcher archives: ... British Economy Since Devaluation

Bank of England
Original article: https://library.cqpress.com/cqresearcher/document.php?id=cqresrre1968103000
Peter Burgess COMMENTARY
I studied economics as a young student and thoroughly enjoyed the subject. I had always been curious and had learned a lot during my childhood by 'observation' ...
Peter Burgess
A document from the CQ Researcher archives: ... British Economy Since Devaluation

October 30, 1968

Report Outline
  • Problems of the Post-Devaluation Period
  • Years of Trial in Britain's Economy
  • Outlook for Economic Progress in 1970s
  • Special Focus
Problems of the Post-Devaluation Period

Uncertainty Over Success of Economic Strategy

Nearly a year has elapsed since British Prime Minister Harold Wilson stunned his people and the world by announcing a devaluation of the pound sterling. The 14.3 per cent reduction in the official value of the pound—from $2.80 to $2.40 in terms of U.S. currency—brought to a dramatic conclusion the most severe sterling crisis in a decade. Fifty-five million Britishers swallowed the bitter medicine on Nov. 18, 1967, in a determined effort to promote the recovery of their ailing economy and to right the country's balance of international payments.

On the eve of the first anniversary of devaluation, British economists and commentators are far from agreement on the results of the step taken last year. Optimists contend that the economy is at last moving, albeit with agonizing slowness, toward equilibrium in the balance of payments. They believe that business confidence and prospects are rising and that devaluation, combined with a number of tough domestic reforms, will finally take Great Britain into the promised land after further hard slogging in 1969. Less sanguine experts point to another large trade deficit in 1968; to rising unemployment and persisting labor-management conflicts; and to the substantially higher cost of living traceable to devaluation. They fear a new run on the pound in international money markets during the coming winter if world trade turns down a bit.

The fate of the British economy is of more than casual interest to the United States. Devaluation a year ago touched off a speculative attack on the dollar that threatened to run U.S. gold stocks down to an unacceptable level. To end the drain, Washington was forced to give up its practice of selling gold on international markets to all comers at $35 an ounce. The new two-tier gold price policy seems to be working well, but it could collapse along with other cooperative arrangements if the pound comes under attack again. Moreover, Great Britain is a leading market for American exports, and U.S. direct investments in Britain total $5.3 billion.

America's interests are best served by a strong Britain capable of contributing to the security of Europe and adding its resources to the maintenance of stability elsewhere in the world. An unfortunate side effect of British economic weakness, so far as Washington is concerned, has been Britain's forced and progressive withdrawal from political and military commitments formerly of global extent. When the world's fifth most powerful nation in terms of national output gets into economic trouble, the shock waves travel far and threaten the well-being of other industrial nations.1

Disappointment at Failure to Close Trade Gap

The Labor government's post-devaluation strategy has as its principal target a significant improvement in Britain's balance-of-payments position. For years the country has been running sizable trade deficits as a result of its failure to sell as much abroad as it imports from foreign countries. In announcing its devaluation policy, the Wilson government set as a target an equilibrium in its foreign payments for 1968 and a surplus of $1.2 billion in 1969.

But a set of forecasts published on Aug. 23 by Britain's independent National Institute for Economic and Social Research predicted a $1.4 billion payments deficit for 1968. Moreover, it forecast that the surplus for 1969 would not exceed $600 million—only one-half of the amount targeted by the government. The report raised the most serious doubts to date about the effectiveness of the present economic strategy. That strategy, explained the Times (of London) on Aug. 23, 1968, has been “simply to wait for devaluation and the [restrictive] Budget to do their work, financing the interim deficit by borrowing from the International Monetary Fund and central banks.”

In the first official admission that the forecasts made at the time of devaluation and later had proved too optimistic, the Bank of England on Sept. 12, 1968, conceded that “the economy has departed somewhat from the path foreseen at the time of the Budget.” 2 Nevertheless, there were several

favorable developments for Britain's economy in September and October 1968. The Board of Trade reported on Sept. 17 that British exports had soared to a new high during August while imports were leveling off: as a result, the visible trade deficit for the month fell to $64.8 million, the lowest total in a year.3 Further heartening results appeared on Oct. 15, when it was announced that the visible trade deficit in September totaled $69.6 million, with exports again hitting a record high.

Although British trade officials sounded their customary warning against taking the figures for one or two months too seriously, there was no mistaking a wave of optimism in government circles. One immediate result of the August showing was a reduction in Britain's stiff bank rate, which had been at the austerity level of 7½ percent for six months. In cutting the discount rate to 7 per cent on Sept. 19, the Bank of England cited the improved trade figures. Devaluation seemed to be performing its function of increasing exports (by making them cheaper to foreign buyers) and of restricting imports (by making them more costly).

Confidence in the pound sterling was strengthened in September by news that a $2 billion standby credit had been arranged in Basel, Switzerland, by central bankers to underwrite Britain's sterling liabilities.4 This agreement had the effect of easing pressure on the pound in world currency markets. Britain's Treasury reported on Oct. 2 that sterling area reserves of gold and convertible currencies had risen by the equivalent of $50.4 million in September to a total of $2.72 billion. Chronic trade deficits sooner or later are translated into foreign debt.

Between the summer of 1968 and the early part of 1971, some $3.4 billion of medium-term debts must be repaid under the current schedules. On top of that, an undisclosed sum—said to be in the neighborhood of $2.4 billion—is owed to the central banks on a short-term basis. In other words, Britain's debts total about $5.7 billion, not including the $2 billion Basel standby credit which may be drawn on at any time to underwrite volatile sterling balances. Britain is far from broke, because its identifiable assets of all types exceed liabilities by around $4.8 billion. Nevertheless, The Guardian commented on Sept. 12, 1968, that “Britain has in fact been spending the wealth we have inherited too rapidly for comfort.” A payments surplus is necessary to repay the very heavy burden of short-term debts: even then, the entire time-table of debt repayment may have to be renegotiated.

While Britain's balance-of-payments troubles cause most concern abroad, the specter of another year of substantial unemployment is creating apprehension at home. The same National Institute report which forecast a payments deficit for 1968 predicted that more than 700,000 Britons would be unemployed in the winter of 1968–69. Neither did the report see any prospect of an abatement in high unemployment levels in 1969. The basic causes of the joblessness are an expected slower over-all economic growth rate and a faster underlying rise in productivity that will limit demand for additional workers.

Fear of Unemployment Rise in Winter of 1968–69

Britain had a hard-core unemployment total for August 1968 of about 585,000, or 2.5 per cent of the number of workers. The August total was the highest (seasonally adjusted) for any month since the end of World War II. In Whitehall, however, there was cautious optimism because the underlying trend of unemployment appeared to be rising less steeply than earlier in 1968. This optimism was supported when the September figures disclosed a 9,000 drop in the number of jobless persons.

The typical Briton asserts that jobs are available for those who really want them, and he has little sympathy for “layabouts” on the dole. It has been said that the government needs to have a certain number of people out of work as a part of its economic strategy, and that to keep them quiet it pays high benefits. Britain's jobless benefits are among the highest in the world. A worker who loses his job usually receives a redundancy (job severance) payment as well. But the high benefits are paid for only six months; thousands of idle men must get by on a dole of only $10.80 a week.

Lack of job opportunities is a serious problem in the regions of Britain far from the economic power bases of southeastern England and the West Midlands. In Northern Ireland, 7.2 per cent of the work force was unemployed in the summer of 1968; unemployment in Scotland is stabilizing but at the relatively high level of 4 per cent. To the west, Wales continues to lose population as young men leave for job opportunities elsewhere. Another region of declining employment opportunities is the county of Cornwall in southwestern England.

Northeastern England, which begins at York and runs to the Scottish border, provides an instructive case history of a region in decline. In the past 10 years alone, coal has shed almost half of its labor force there, while shipbuilding has cut its payroll by one-third. Unemployment in the region, where 3.3 million people live, now stands at 4.3 per cent. In Sunderland, a city of almost 750,000 people, nearly nine male workers in each 100 were out of work in the summer of 1968. The region's plight would be even worse had the national government not provided special economic assistance since 1963. The aid includes direct payroll subsidies in certain manufacturing industries. It is argued, however, that the region's old industries are still far too large and are being mistakenly supported by government subsidies devised to tie men to jobs that should no longer be done at all.5

Public Reaction to Continuing Economic Reverses

One of the paradoxes surrounding Britain's rising rate of unemployment is that, from a purely economic standpoint, it is entirely acceptable. The Wilson government has been willing to tolerate growing unemployment as a means to higher productivity in British industry. Higher productivity, in turn, is considered the key to modernizing British industry and making its products more competitive in world export markets. In the end, it is argued, good trade returns will mean more business for British factories and more employment. Although an essential part of the official economic strategy is being accomplished, the Times of London pointed out on July 19, 1968, that high joblessness is “bad for votes and bad for human life.”

One possibility is that unemployment may rise to a point at which there will be irresistible pressure from both inside and outside the government to relax the severe economic restraints and reflate domestic demand through higher spending and softer credit. But Chancellor of the Exchequer Roy Jenkins has vowed he will not repeat the mistakes of past chancellors in reflating consumer demand on a shaky financial base. Under Jenkins, it has been said, Britain is “going to have export-led expansion, or no expansion at all.” His position is regarded as politically courageous, particularly for a Labor government that is supposed to be the party of compassion.6

At the same time, the restrictionist policy is open to attack as needlessly condemning men to idleness. Evidence that the Labor Party's rank and file were becoming restive under the current policy was given at the recent annual Labor Party conference in Blackpool. Party delegates voted on Sept. 30, 1968, by nearly 5 to 1 for an immediate end of its own government's statutory wage controls. But Roy Jenkins made it clear to the rebellious delegates that he would not be moved from his tough restraints. Earlier in the proceedings, 50 miners had forced their way into the convention hall to protest the closing of certain government-owned mines where they worked.

One of the oddities of the current financial squeeze is that many Britons—perhaps a majority—see little reason for alarm. There have been so many economic crises in Britain's post-World War II history that the impact of the current one is dulled. Despite the troubles of the pound in the unfathomable world money markets, the living standard for the average Briton has continued to rise. The poor are apt to rationalize their difficult situation of low wages and rising prices with the observation that “the working man's always up against it.” A typical view of the irrelevance of economic theory is expressed in a play, Time Present, by iconoclastic playwright John Osborne:

I don't see economies at all [says a middle-aged character in the new play]. I mean I see astrology fine. But well, ever since I have been born there's been an economic crisis. We went off something called the gold standard I think when I was born, there's been no confidence in sterling, crashes, devaluing, loans and …at the end people are better off, better fed, better housed than ever, and if you never look at those forecasts it makes no difference.

Britain's diminished role as a world economic and military power apparently is widely accepted. Roy Jenkins spoke on Oct. 3 of the way in which the British now were trying “to cut ourselves free from one of the most crippling legacies of our past: the attempt to maintain the status of a great power on the basis of the economy of a medium power.”

Author Malcolm Muggeridge professed to find himself never more appreciative of England as a place and of the English as a people than today. “The truth is,” he wrote in The Observer, Aug. 11, 1968, “that a lost empire, lost power, and lost wealth provide perfect circumstances for living happily and contentedly in our enchanting island…. Our currency is gently expiring, which lets us off any form of saving. It would be as sensible to save next winter's snow as the Pound Sterling.” Other Britons do not find the situation so amusing. At least some of the political unrest—manifested in the growing nationalist movements in Wales, Scotland and Northern Ireland—can be traced to lack of confidence in the central government's ability to manage economic affairs and keep all of Britain prosperous.

Years of Trial in Britain's Economy

The devaluation of Nov. 18, 1967, was the culmination of a series of severe money crises that plagued Britain throughout the 1960s. Basically, the country had failed to pay its way in the world; it had run up a heavy string of trade deficits and taken inadequate, or ineffective, action to stem them. By the fall of 1967 it was apparent that Britain was as far away as ever from solving its problems. The cold judgment of international bankers, the ubiquitous gnomes of Zurich, was that the pound sterling had become irrevocably over-valued in relation to the main trading currencies of the world.

Failure of Official Policies in Postwar Period

Persistent payments problems, the lack of sufficient reserves, and the fear of sterling drains have handicapped Britain throughout the postwar period. Yet a Brookings Institution economist who recently analyzed the country's economy, along with 11 colleagues, wrote: “In many ways, Britain's economic performance since World War II outstrips any earlier period in the past half-century. Her rate of growth, her attainment of full employment are, in the perspective of history, fit objects of pride, the more impressive because they were achieved despite the immense problems of postwar reconstruction, dwindling overseas earnings, and increased competition in export markets.” 7 This performance was not good enough only because other industrial nations in Western Europe, and the United States and Japan, were enjoying far greater economic growth.

“Throughout the postwar years,” explained The Economist in a post-devaluation analysis, “no government has managed fully to restore overseas confidence in sterling and create a sense of confidence in the future of government economic policies. Since Stafford Cripps, in Clement Attlee's postwar Labor government, devalued the pound [on Sept. 19, 1949] from $4.00 to $2.80, eight more Chancellors of the Exchequer have come and gone from the Treasury, dealing with seven more crises, each using the same sort of crisis measures—taxes, Bank rate, cuts in public spending, restrictions on hire purchase and bank credit—to try to get the British economy moving steadily in a balance of payments surplus. From 1956 onwards Britain had the support of external credits…. But even with this support, the pound could not be maintained at its old parity.” 8

Two of Britain's early sterling crises, in 1956 and 1957, were purely speculative ones, coming at times when the balance of payments was reasonably healthy. But a feeling that there was something fundamentally wrong with the economy began to take hold in the early 1960s. Chancellor of the Exchequer Reginald Maudling introduced an expansionary budget in April 1963. The economy did spring forward in 1964 by 5½ per cent, but the growth was led by domestic consumption and a high rate of imports. By the summer of 1964 there was a severe sterling crisis.

The Labor Party profited from the crisis by winning nationwide parliamentary elections on Oct. 15, 1964, ending 13 years of Conservative Party rule.9 Less than 24 hours after taking office in a deteriorating economic situation, Harold Wilson made the negative decision not to devalue the pound. Instead, he imposed an immediate surcharge of 15 per cent on all imports of manufactures in an effort to cut the import bill. This move, and later mild adjustments, failed to halt a further weakening of the pound. A run in the early summer of 1966 forced Wilson to announce new crisis measures. His big deflationary package culminated in a six-month freeze on increases in prices and incomes.

Decision of November 1967 to Devalue Pound

By the spring of 1967, James Callaghan, the new Labor government's first Chancellor of the Exchequer, was confident that the program was working. He introduced a “neutral” budget intended to combine resumption of economic growth with a strong balance-of-payments position. The latter hope collapsed when, on Oct. 12, 1967, the government reported that Britain's export-import deficit for September had been the worst in 15 months. A few days later, the pound hit the lowest level in world money markets permitted under rules of the International Monetary Fund—$2.7825. The Bank of England was forced to buy up all pounds that came on the market, paying out the nation's precious, inadequate reserves. The pound weakened further in the exchanges when figures released on Nov. 14, 1967, showed the trade deficit for October to be the largest for any month since January 1964.

About this time the United States let it be known that it was opposed to devaluation. “Washington has always feared that devaluation of the pound might ultimately bring the dollar down, too,” the New York Times later (Dec. 17, 1967) reported in a chronology of the devaluation crisis. But Washington was unsuccessful in getting the countries of Western Europe to agree on another big loan for Britain as an alternative to devaluation. Prime Minister Wilson called his Cabinet to 10 Downing Street on Nov. 15; on Nov. 18, 1967, at 9:30 p.m., the Treasury made its devaluation announcement, disclosing at the same time that the bank rate would be raised from 6½ per cent to 8 per cent, corporation taxes increased, and government spending cut, and that $3 billion in external aid was being arranged. The Prime Minister went on television the next morning to tell his people that “we are on our own” and that “we must take with both hands the opportunity now presented to us.”

The fact that most other countries maintained their existing exchange rates helped to make Britain's devaluation efficacious. Only three of the countries included in Britain's 15 leading overseas markets—Ireland, New Zealand and Denmark—revalued their currencies, and Denmark went only halfway. In 1949, by contrast, nearly all of the countries of Europe and the Commonwealth devalued at the same time as Britain, negating the benefits that the British otherwise would have reaped from devaluation. The danger now is that benefits from the 1967 devaluation will be undercut by a continued high level of imports. Although the average rise in import prices as a result of devaluation has been between 10 and 12 per cent, the volume of imports has failed to fall off according to expectations.

Persistence of Consumer Demand at High Levels

This fact has been the more surprising because the Wilson government followed up the November devaluation in March 1968 with a savagely deflationary budget aimed to cut consumer spending by 1 per cent in the ensuing year. It was the first budget in living memory designed to bring a drop in the standard of living of the British people. But the continued high level of imports showed that many Britons were managing to keep up a substantial level of spending. Some people financed their spending out of personal savings; others worked more overtime or took a second job on a part-time basis. By one means or another, the workingman improved his position despite the best prepared plans of the government.

This does not mean, however, that there has not been hardship caused both by reduced employment opportunities in certain regions and by the rising cost of a whole range of consumer goods and services. Retail prices climbed 5 per cent in the first eight months of 1968. The squeeze comes from a national incomes policy designed to keep wages and all other forms of income from going up by more than 3½ per cent a year. Workingmen recall with some bitterness that Harold Wilson assured them a year ago that “Devaluation …doesn't mean, of course, that a pound in your pocket or purse or in your bank account has been devalued.”

Higher prices are a major problem in a country where wages are low and the average worker has little discretionary income. There are more than 4.5 million households in Britain with a weekly income of less than $36. Men employed in factories earn an average of $53.40 a week; employed women fare even worse because there is no requirement that they receive equal pay with men for the same work. The English have a reputation for keeping up appearances. But “family poverty is a major social problem, even in areas that might seem quite prosperous to the casual observer.” 10 Britons are being asked to accept a greater measure of personal sacrifice now than at any time since the end of World War II.

Threat of Import Curbs to Cut Payments Deficit

Until Britain's balance of payments is set right, little can be done to reflate the economy and permit a rise in living standards. Roy Jenkins, the present Chancellor of the Exchequer, told a joint annual meeting of the International Monetary Fund on Oct. 2 that Britain's cross-over from deficit into surplus in foreign trade “should come in the first half of 1969 and so permit us to be earning a substantial surplus and repaying debt in the second half of the year.” He warned of one possibility that could not be ignored: that the program of economic restraint in the United States might bring about a slowdown in the growth of world trade and output in 1969.

Such a slowdown might well force the Wilson government to impose new restrictions on imports. The Economist noted on Sept. 21 that Britain's import bill from March to August 1968 was 24 per cent higher than in the same period of 1967, although sterling prices of imports had risen by only 13 per cent. The publication added:

Almost certainly, Britain has increased its propensity to import as a result of the spending spree earlier this year; and there is little evidence so far of import-substitution on any scale. Although imports must be brought down from their present level, a somewhat larger import bill than was originally envisaged could be tolerated, if exports do better than expected. Even with the uncertainty about the prospects for world trade, it would now be a reasonable bet that they will. But whether they will do well enough is another matter.

One alternative in the event of a widening export-import gap would be to devalue the pound a second time in the hope of again spurring exports and making imports more costly. Most experts believe, however, that this step would be taken only when all other remedies had been exhausted. A unilateral devaluation would create a new crisis of confidence in the already weakened pound and might set off shock waves that would imperil the entire world monetary system. However, close observers do not foreclose the possibility of a mild devaluation of the pound if France should take the lead by devaluing the French franc, which some economists believe to be overvalued in relation to other currencies.

More immediate attention is centered on proposals to restrict the flow of imports into Britain. Import controls might offend Britain's trading partners and invite reprisal, but the thinking is that they would go along with such controls as a lesser evil than a second devaluation. The National Institute of Economic and Social Research in August 1968 specifically proposed that import restriction be considered as “the only means in this type of situation which can both safeguard the balance of payments …and at the same time prevent a further rise in unemployment.” The influential Financial Times (of London) suggested in an editorial, Aug. 14, 1968, that the time had come to set up a bench mark for the trade balance by the final quarter of 1968. “If this is not reached, direct action to contain the growth of imports should be considered.” In any case, as two British economists recently pointed out, “imports remain the crucial indicator of the success or failure of devaluation.” 11

Outlook for Economic Progress in 1970s

Many prescriptions for reviving Britain's economy have been written. Most of them involve fundamental changes in the structure of industry, in labor-management relations, and in fiscal policies, and they even reach into the realms of the educational system. Although modernization of industry and higher worker productivity are the keys to economic resurgence on a long-term basis, a caution flag is being flown by commentators who fear that the proposed changes would upset the very nature of British society. In an epilogue to their study, Britain's Economic Prospects, the Brookings Institution economists mused: “Are we not propounding growth and change in a society where don and docker alike prefer tradition, leisure, and stability? This may be. But many segments of British society have declared for growth, or at least for the fruits of growth. Their aspirations can be satisfied—at a price—and they should know the price they must pay.”

Need to Improve Labor-Management Relations

Good industrial relations are essential if the nation is to achieve lasting economic recovery. Strikes, or the threat of strikes, have hovered over the economy throughout the 1960s, cutting the ground from under the plans of the government to expand sales abroad. Prime Minister Wilson closed the Labor Party conference at Blackpool on Oct. 4, 1968, with a stern warning: “Production, productivity, exports, everything we have achieved at so great a cost can be imperiled by ill-considered industrial action, whose effect can only be to put the employment of so many of our people at risk.”

A series of strikes during 1968 damaged the economic program. In the automobile industry alone, exports valued at $115 million were lost in the first nine months through labor stoppages. In most cases the shutdowns resulted from wildcat strikes called by one or another of the various unions working in the auto plants. Because industry-wide, or even plant-wide, labor contracts are uncommon, a strike by one group of workers can bring production to a halt. Moreover, it is said that “the law in Britain actually prohibits any group of organized workers from making a firm and legally enforceable agreement with their employer.” 12 Nor is there any legal provision for a “cooling off” period in labor disputes such as the Taft-Hartley Act affords in this country. Three million workers could have been idled in a strike threatened in October 1968 by the Conference of Shipbuilding and Engineering Unions. Fortunately, the strike was postponed by union leaders, but the government had no legal means of enforcing the delay.

Theodore W. Kheel, one of the most successful American labor mediators, told reporters on his return from a trip to Britain in the summer of 1968 that that country was “50 years behind the United States in its labor relations.” Kheel suggested that the concepts of exclusive union recognition via plant-wide elections and court enforcement of voluntary, fixed-term labor contracts be made mandatory in Britain through legislation similar to America's National Labor Relations Act. “It is ridiculous,” he declared, “to have as many as 15 to 20 unions in a single plant. Anyone can start a strike any time he feels like it.”13

Even when strikes do not occur, employers complain that workers too often make little effort to speed or expand output. Americans arriving at Heathrow Airport outside London occasionally are enraged to learn that their baggage is being delayed because the baggage handlers are taking time off for a spot of tea. Low productivity is ruinous to a national economy when earnings continue to rise at a high rate. Thus in 1967, the year of final crisis, average weekly earnings went up about 6 per cent and prices rose only 2 per cent, but productivity increased by a mere 1 per cent. Commenting on these figures, Roy Jenkins noted on Sept. 30, 1968, that though the real increase in wages was 4 per cent, “the only trouble was we did not earn it.”

In an effort to increase productivity, the Labor government has placed increased emphasis on productivity agreements that make higher wages dependent on changes in work practices. However, promotion of such agreements is seriously handicapped by mutual distrust between employer and employee. Productivity agreements are feared because they usually provide for reductions in the work force through early retirements or layoffs.

Job mobility is restricted by shortages of employment opportunities, or by the reluctance of some workers to move from one town to another because it would mean, in many cases, giving up low-rent public housing accommodations acquired after years on a waiting list. Many employees are reluctant also to work too fast or hard on the job because it might reduce overtime; with basic wages low, overtime on a regular basis is the only way many workers can count on a living wage. Workers also complain that the personal income tax rates are so sharply graduated that if they work hard enough to make more than an average wage the government takes most of the additional earnings.

Urgency of British Industry's Need to Modernize

If the wage-earner stands condemned of letting down his country's economy through outdated work practices and low productivity, there is equal justification for complaint against his employer. The heavy importation of goods in which British industry is popularly thought to be competitive implies a double condemnation of British industry: “It suggests that the manufacturers are not even able to compete with foreign firms on home ground, and casts considerable doubt on their ability to compete successfully in the more difficult conditions of foreign markets.” 14 British firms, in effect, have abandoned lucrative fields to foreign competitors.

There is no longer, for example, a single British-owned company manufacturing typewriters. Not a single coin mechanism of any significance is made in Britain, although the market for such machines has been expanding worldwide by about 20 per cent a year. British industry in general has been slow to adopt new materials and methods that cut costs and speed up production time. In an effort to help private industry reform and strengthen management practices, the Labor government has set up an Industrial Reorganization Corporation financed by public money.

Some social commentators are unsparing in their attacks on Britain's industrial backwardness, which they trace to the fact that for centuries a landed gentry controlled the nation's destinies. “All through the nineteenth century and into the twentieth, industry was fairly contemptible,” wrote David Frost and Antony Jay. “It was not even called industry. Most of the time it was referred to, slightingly, as ‘trade.’ Gentlemen had better things to do.” 15 When it became clear after World War II that Britain's well-being depended more on industry than on landowners, there was a huge talent vacuum.

British industry is criticized for its shortcomings in management training and for its lack of adequate capital investment for expanded plant and equipment. Nearly 3,000 pit ponies still are used in British mines; no ponies have been used in American mines for 40 years, and none are now employed in the mines of the European Common Market countries. While Britain's total stock of factories, offices and machinery has grown by only about 4 per cent annually in recent years, West Germany's has grown by nearly 7 per cent and France's by 6 per cent.

Controversy Over American Investment in Britain

Nevertheless, management of British industry has been improving, and some of the force behind the improvement is the example and the competition afforded by American companies operating in the United Kingdom. Modern management techniques rate high on the list of reasons why American investment is welcomed; another is the willingness of American companies to build new plants in regions like the Northeast of England, or in Scotland, where unemployment is a chronic problem. U.S. investment also helps to reduce Britain's worrisome import bill, at least in the short run. If American companies build factories, instead of sending in finished products, Britain saves foreign currency.

A bitter side of the investment picture is the fact that more and more of Britain's key industries may be dominated by Chicago or Detroit. With investments in Britain worth $5.3 billion, America's influence is inescapable. Anthony Bambridge of The Observer wrote on July 21, 1968: “The question is not whether Britain will eventually become the 51st State of America, but whether it already is.” International Business Machines alone has just under 30 per cent of the British computer market, and three other American computer companies operate factories there. Almost 60 per cent of the British car industry's output is accounted for by General Motors-Vauxhall, Chrysler-Rootes, and Ford. Of the top 10 companies supplying the National Health Service with drugs, six are American. Kodak has captured 70 per cent of the color-film market; Gillette claims more than one-half of the stainless steel razor-blade market.

Not many years ago it was the Labor Party which attacked the Conservatives for selling the commanding heights of the British economy to the Americans. Now what has been called the great American takeover of British industry continues under Wilson's Labor government. William Davis, financial editor of The Guardian, wrote on July 17, 1968, that it was “fair to argue that America's share of British industry has reached a point where Ministers must keep a wary eye” on takeover bids. Two other journalists have warned that England could become a “well-heeled vassal” if it adopted the habit of “letting someone else do the saving, the investing, the working and the thinking.” 16 At a minimum, the writers suggested, it should be official policy to require that at least 51 per cent ownership of a company continue in the hands of Britons.

British industry is handicapped in finding and keeping able people by the lure of high-paying jobs in other countries. The so-called brain drain cost Britain in 1966 more than two-fifths of its new engineers and technologists and more than one-fourth of its new science graduates; the largest loss was to the United States. A government report estimated that the bill Britain had to pay for the brain drain, in terms of economy loss, amounted to $240 million in the single year of 1966. In the first eight months of this year, 123,036 Britons applied to emigrate to Australia, a 50 per cent increase over the same period of 1967. Since 1935, nearly two million Britons have emigrated to Canada and Australia.17

It is no doubt true, as Leonard Beaton noted in The Times (of London) on Sept. 13, 1968, that “The amount of potential resentment which emigration has drained out of the British Isles in our time must surely be enormous.” The difficulty is that with their resentments, the emigrants took with them ambition, skills and the activist tendencies that might have forced a transformation and modernization of British industry and commerce. Too many of those who elected to stay behind chose to go on “sleeping the deep, deep sleep of England” (the phrase used by George Orwell to describe pre-World War II England).

Common Market Entry vs. Atlantic Trade Proposal

Whether to seek economic alignment with the Continent or, alternatively, to strengthen its economic ties with the United States, has been a major issue in Britain for more than a decade. In the years immediately after World War II, official policy stressed the Anglo-American alliance and the Commonwealth bonds which, even then, were slowly loosening. In what in retrospect appears to have been a major blunder, Britain declined an invitation to take part in the negotiations leading up to the Treaty of Rome, signed in March 1957, which established the European Economic Community (Common Market).18

Belatedly, in August 1961, Britain applied for membership, although it still insisted on guarantees to protect the trade preferences enjoyed by Commonwealth countries. That insistence provoked strong opposition from France. As the negotiations dragged on, the Labor opposition in Parliament added to the problem by attacking the Conservative government's decision to seek entry to the Common Market. When the Labor Party came into office in 1964, it initially dropped efforts to gain admittance; then, in May 1967, it decided to submit an application of its own. One explanation for the shift by Harold Wilson is that: “Gradually it was borne upon him that the policy of unequal partnership with the USA was unworkable. Reluctantly he looked again at Europe as a possible power base.” 19 French opposition to British entry had hardened, and it persists to this day. As recently as Sept. 27, 1968, France in effect vetoed British membership for the third time.

With the British application in limbo so long as Gen. de Gaulle rules France, Britain remains adrift so far as coherent, long-range economic planning is concerned. A British intellectual warns:

It is necessary to decide whether to place more emphasis on Britain's European role or on her Atlantic role; and, having made the decision, it is equally necessary to follow it through with consistency and determination. If we choose the European role, we must now begin the process of adjusting our economic and political institutions to future membership in the E.E.C…. If we choose the Atlantic role, we must cease to knock forlornly on the Common Market's door, and start to work systematically for the creation of a North Atlantic Free Trade Area (Nafta) and a dollar trading bloc.20

The Atlantic free trade plan involves a trade liberalization centered around the U.S. economy. Such a pact, into which Canada and even Australia, New Zealand and Japan would enter along with the seven-nation European Free Trade Association (EFTA),21 is seen as one alternative to British membership in the Common Market. The Wilson government offers no encouragement, however, to those who look on Nafta as a way out of Britain's economic difficulties. Wilson himself has said his government considered the idea and rejected it before applying for Common Market membership.

Opponents of Nafta stress the dominance that the United States would have in any such organization and the lack of evidence that a large body of American opinion would welcome any such organization. Britain is trying to move closer to Europe by decimalizing its currency, adopting the metric system of measurement and European time, as well as entering bilateral arrangements with the French for construction of certain civilian passenger aircraft.

Yet it is questioned whether Britain's desire for wider markets can be satisfied in its present ambiguous position. Britons must face their difficult circumstances without the comfort of strong ties with continental Europe and with the knowledge that their special relationship with the United States raises the threat of permanent dependency. A year after devaluation, the economic future of Britain is still very much up in the air.

Footnotes
  1. [1] With a 1967 gross national product of $82 billion, Britain ranked behind the United States, the Soviet Union, Japan, and West Germany, and was just about on a level with France. See “Britain in the 1960s: Descent From Power,” E.R.R., 1967 Vol. II, p. 697.
  2. [2] “Bulletin” of the Bank of England, September 1968.
  3. [3] So-called invisible earnings from insurance, oil, banking and shipping, which averaged $48 million a month in the first half of 1968, presumably nearly closed the trade gap for August.
  4. [4] The U.S. share of the credit was $650 million.
  5. [5] The Economist of London on Aug. 17, 1968, published a special survey of the Northeast's problems.
  6. [6] A joke heard frequently in Britain is that “Harold Wilson is the best Conservative Prime Minister the nation's ever had.”
  7. [7] Richard Caves and associates, Britain's Economic Prospects (Brookings Institution, Washington, D. C., 1968), p. 3.
  8. [8] “Devaluation: Why It Must Work” (a Brief Booklet published in 1968 by The Economist), p. 9. In addition to 1949 and 1968, the pound had been devalued, in this century, in 1931, when Britain went off the gold standard and decided to abandon the fixed rate of $4.86 and let the pound seek its own level. By 1949 the value stood at $4.03 but, faced with high postwar production costs, Britain devalued to a fixed rate of $2.80—the rate which prevailed until the November 1967 cut to $2.40.
  9. [9] See “British Election, 1964,” E.R.R., 1964 Vol. I, p. 661. By law a new Parliament must be elected sometime before March 1971.
  10. [10] The Morale of the Poor: A Survey of Poverty on a Nottingham Council Housing Estate, edited by K. Coates and Richard Silburn (Department of Adult Education, Nottingham University), 1968.
  11. [11] Richard Casement and Frances Cairncross, “UK Industry Must Face Import Challenge,” The Times (of London), Aug. 28, 1968, p. 26. Britain's Board of Trade reportedly has under consideration a standby plan to place credit controls on importers as a means of discouraging imports.
  12. [12] The Economist, Sept. 28, 1968, p. 18.
  13. [13] The tendency of British workers to walk off the job almost on whim was demonstrated on Sept. 25, 1968, when 44 men strode out of an auto body plant in Swindon, Wiltshire, bringing production to a halt for half a day. The walkout was in protest against being caught in the crossfire between workers who enticed pigeons by tossing them sandwich crumbs and workers who threw nuts and bolts to scare the birds away. Only in agriculture is there a single union for the workers; the state-run railway system and the shipbuilding industry each have three; the leather, boot and shoe industry have five; clothing seven; printing eight; civil servants 11; and the textile industry tops the list with 28 separate unions.
  14. [14] Richard Casement and Frances Cairncross, “UK Industry Must Face Imports Challenge,” The Times (of London), Aug. 28, 1968, p. 25.
  15. [15] David Frost and Antony Jay, The English (1967), p. 74. The nostalgia for pre-Industrial Revolution Britain was strikingly expressed in H. V. Morton's In Search of England (1935): “The village is still the unit of development from which we have advanced first to the position of a great European nation and to that of the greatest power since Rome…. A streak of ancient wisdom warns us that it is our duty to keep an eye on the old thatch because we may have to go back there some day.”
  16. [16] James McMillan and Bernard Harris, The American Take-Over of Britain (1968), p. 196. See also “American Investments in European Industry,” E.R.R., 1968 Vol. I, pp. 70–75.
  17. [17] In 1967 the number of people leaving Britain exceeded by 84,000 the number entering the country; there were about 309,000 emigrants and 225,000 immigrants. See “World Competition for Skilled Labor,” E.R.R., 1967 Vol. I, p. 439.
  18. [18] Composed of Belgium, France, Italy, Luxembourg, Netherlands and West Germany. See “European Economic Union,” E.R.R., 1957 Vol. I, pp. 234–236.
  19. [19] James McMillan and Bernard Harris, op. cit., p. 219. See also “Common Market: Start of a New Decade,” E.R.R., 1967 Vol. I, pp. 110–112.
  20. [20] David Marquand, “Labor's Pangs, Economic and Electoral,” Interplay, August-September 1968, p. 24. Also see Arthur Marwick, Britain in the Century of Total War: War, Peace and Social Change, 1900–1967 (1968).
  21. [21] Composed of Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the United Kingdom.


Document APA Citation

Dickinson Jr., W. B. (1968). British economy since devaluation. Editorial research reports 1968 (Vol. II). http://library.cqpress.com/cqresearcher/cqresrre1968103000
Document ID: cqresrre1968103000
Document URL: http://library.cqpress.com/cqresearcher/cqresrre1968103000

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