Overview of Labour’s problems and policies, 1945-51

“Despite all the crises, Britain was in better shape in 1951 than when

the war ended.”

London Olympics, 1948 a symbol of recovery

The Labour government’s main economic problems

• Balance of payments crisis – Britain was borrowing and importing more than she was exporting.

• Existing war debts to the USA and Empire• Shortage of raw materials• Industries in need of investment• Need to borrow more in order to recover• LABOUR MADE THIS PROBLEM A

PRIORITY

Labour’s international problems – the British Empire

• Main problems = Egypt and India

Labour’s international problems – the emerging Cold War

• Europe, 1949-9 • Korea, 1950-3

Labour’s promises!

• The Labour government had been elected just before VJ day to:

• Nationalise and revive industry

• Implement the recommendations of the Beveridge Report against idleness, disease, want, ignorance or squalor. High expectations of ‘a New Jerusalem’!

The 1945 crisis

• President Truman cancelled Lend-Lease and asked for repayment of war debts - Britain owed over $30 billion to USA alone

• Britain unable to pay and had insufficient dollars to pay for raw materials for food, industry etc

• Dec 1945, JM Keynes asked the USA for a further loan

• This was granted but on USA’s terms• Canada lent Britain $1.5 million on easier terms

The loan

• Keynes asked for:• A gift or at least an interest free loan of 6 billion dollars• The USA gave:• A 50 year loan at 2% interest of 3.75 bill $• We finished paying in 2006!• The USA demanded:• Britain dismantle the imperial preference trade network

with the empire• Allow sterling to have convertibility with the USA dollar

within a year i.e. July 1947 (meant investors in Britain could withdraw their investments in dollars – bad for Britain, good for USA)

Labour’s economic aims and policies

• Borrow dollars from the USA• Use these to buy raw materials and regenerate industry• Export drive - export as much as possible, in return for

more dollars• Create a virtuous cycle and rely on exports not

borrowing.• Achieve balance of payments surplus• Use rationing, high income tax and wage controls to

prevent Britons buying consumer goods until economy had recovered – a policy known as “austerity”

What went wrong? The winter of 1946-7

The worst crisis - 1947

• The Minister for Fuel, Emanuel Shinwell, had failed to stockpile enough coal in advance.

• Snow hit Britain in Jan 1947 and lasted 3 months. Coal froze and could not be transported. The limited stocks were used for fuel and power. Industries closed down. Exports fell.

• Unemployment rose to 2 million as workers in inactive industries were laid off.

The worst crisis – 1947 (cont)

• The US loan ran out because, when sterling became convertible in July 1947, investors drew on the dollar reserves, so the dollar loan ran out.

• People were already suffering from the continued rationing of food and clothes.

• Now there was a food and fuel shortage.• There was a political crisis within the

government but Attlee survived as P.M.

Labour’s response

• Feb 1947- Announced that Britain could no longer support Greece and Turkey in the struggle to prevent the expansion of the Soviet bloc.

• Feb 1947 - Announced that Britain would withdraw from Palestine, leaving it to civil war.

• June 1947 -convertibility of sterling suspended.• Sept 1947 - Created a Minister of Economic Affairs. This

was Stafford Cripps, who drove the austerity policy even harder. (Chancellor of the Exchequer 6 weeks later)

• June 1947 - The USA realised that Britain’s economic crisis was genuine and offered Marshall Aid to Europe.

• This was a turning point in Britain’s recovery.

US containment of Communism

• The Truman Doctrine• ‘I believe that it must be

the policy of the United States to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressures.

• I believe that we must assist free peoples to work out their own destinies in their own way.’

• The Marshall Plan• ‘The truth of the matter is

that Europe's requirement of foreign food and other essential products - principally from America - is so much greater than her present ability to pay that she must have substantial help or face economic, social and political deterioration of a very grave character.’

Was recovery smoother in1947-51?

• Yes, overall.• By 1950 the volume of exports

was 50% higher than in 1937.• In 1946-50, the volume of

exports rose 80% (from a low base)

• Car production rose 100% compared with its pre-war peak.

• Balance of payments better in 1951 than in 1945

• But, biggest British market was USA.

• So,1949 slump in USA reduced demand for UK goods which caused another balance of payments CRISIS.

• Pound had to be devalued from 4.03 $ to the £ to 2.8 $ to the £.

• Blow to morale, but made exports cheaper.

• 1950-1 Korean War CRISIS also led to high level of imports.

In what ways did Labour introduce a managed economy?

• Borrowed heavily from USA

• Nationalised the Bank of England, 1946

• Nationalised fuel, power, steel and transport – 20% of enterprises

• Ran them as public corporations, having compensated former owners

• Controlled interest rates - low, to aid investment

• Controlled wages – low (with agreement of T.U.s)

• Investment for depressed regions

• Subsidised agriculture so fewer imports and better balance of payments

How successful was the Labour government in bringing about an economic recovery

1945-51?Yes:• By 1951, no longer needed

Marshall Aid• Aim of export based recovery

achieved• Balance of payments much

improved• Full employment maintained• Geographically widespread

recovery• Low inflation (3% over the period)• Achieved this and Welfare State• And foreign commitments• This combination of limited central

planning and Keynesian economics influenced government policy until the late 1970s

• But: • Marshall Aid very important in

recovery• Export industries dependent on

US markets.• Lucky to be trading in a less

competitive environment (Ger and Jap weakened by war)

• In 1949-50, the government had to reduce controls because they were stifling enterprise and investment. Conservatives reduced controls further.

• Coal and other depressed industries hampered by lack of money to invest

Questions

• Explain why 1947 was a year of crisis for Labour.

• How successfully did the Labour governments of 1945-51 deal with their economic problems?

• How well did the Labour government deal with the economic crises of 1945-51?