British Economic History, 1952-1963

Assess the period of 1952-1963

The period of 1952-1963 was in the heart of what is known as 'the golden age', which saw wide scale growth of GDP and investment in Western Europe. The distinguishing features of the post war period as identified by Matthews was of full employment, chronically rising prices, an abnormal ratio of domestic investment to income and relatively high growth in income per capita by historical standards. In this epoch of British history government policy principally tried to manage the level of inflation, the balance of payments, the level of investment, the rate of growth and the level of employment. The tools available to the government can broadly be divided into two categories manipulating the level of fiscal expenditure in the economy as well as influencing the level of monetary supply in the economy.

Fiscal policies largely revolved around changing the levels of government taxation and expenditure, to expand or contract the economy. The government would purposely run a surplus, where revenue from taxation would be higher than expenditure on public goods and services, in order to calm down the economy and reduce inflation. Oppositely the government could run deficits or run down the level of the surplus to fulfil an expansionary policy in order to boost the level of demand in the economy though this could be inflationary. The idea of manipulating the direction of the economy through the level of spending is a traditional Keynesian school of thought which predominated economic thinking in this period.

Monetary policy involved the manipulation of the level of money supply in the economy with instruments such as banking credit controls, creating ceilings on lending, and manipulating the bank interest rate. In the period of the 1950's and

1960's it was the Keynesian view that was the consensus with monetary policy being viewed as having a weak effect. This was because the evidence of the time suggested that investment and borrowing was interest inelastic, i.e. demand for money was not very responsive to the interest rate. The prevailing view was that investment was more influenced by the availability of credit rather than its nominal cost . When monetary policy is compared to pre-war actions we can however see an expansion under the conservative regime.

The economic problem facing the post-war conservative government in the period of 1952-1963 was how to maintain a steady rate of sustainable growth through the encouragement of investment in the face of high rates of inflation while at the same time maintaining a positive surplus on the balance of payments.

Throughout the period of 1952-1963 investment incentives were undeniably in the heart of the policies in a real attempt to boost the future productive potential of the economy. Mr Butler used focused incentives and tax reliefs to boost the level of investment in the early 1950's. This was achieved with the incentives including the promise of cuts in the excess profits levy in the April budget in 1953, which would increase future profits on investment. In 1954 Mr Butler brought another of his investment encouraging reliefs in with what the economist acclaimed as the ingenious device of the new "investment allowance" . Mr Butlers policy of directing the tax cuts at the specific area with spare capacity, namely in the creation of productive capital, was designed to limit the negative influences of an expansionary policy on the inflation rate and balance of payments. The investment allowance had a chequered life and was withdrawn in 1956 when demand was excessive, and was reinstated by Amory in 1959. The affect of the investment allowances was to enable the producer to deduct against their profits more than the original cost of the assets they acquired, as to reduce the level of tax paid and to increase the profits on the investment. This acted as a subsidy to future investment increasing relative returns. The marginal success of this policy can be seen in fig 7 illustrating how investment as a proportion of investment compared to GDP increased over the period as a whole. The success of the policy should not be overestimated due to the fact that comparisons of UK investment levels, fig 7, and those averages in Western Europe, fig 8, reveal that the UK is still comparatively lagging.

The increase in the investment rate did however hold significance for the level of inflation during the period which was attributed to the shortage in the labour market. Sargent argues that the higher levels of investment, fig 7, in new machinery led to a greater requirement of labour than was released through the scrapping of old equipment and the growth of the labour market, leading to wage push inflation. The period of 1952-1963 saw chronic rises in, prices as illustrated in fig 4 and though the threat of inflation was of significant concern in the implementation of policies the conservative government never really managed to control the rate of increases. There were consecutive attempts to bring the level of inflation down with the government maintaining a current account surplus throughout the period. Many of the policies were still deemed as having too high of an inflationary risk, such as the expansionary policies of 1952-1955 where tax cuts were offered during a period where the economy was overheating suffering chronic inflation.

The most successful of the deflationary policies employed during this epoch was that of Thorneycroft and Amory in 1957 and 1958 which decreased the rate of inflation considerably for the period of 1958-1960. Thorneycroft began the trend through the limitation of the expansion of future fiscal government spending and the limitation of money supply through the increase of the interest rate to 7 per cent. Thorneycroft' priorities appeared to be a willingness to sacrifice employment for the sake of price stability. Thorneycroft resigned over the political debate surrounding the increases in government expenditure over the pensions. Amory continued Thorneycroft' disinflationary stance maintaining a tight fiscal budget, current account surplus, even though he was expecting a contraction of the economy. This policy of restriction led to a decrease in the level of output in 1958 compared to 1957, Fig 2, as well as an increase in unemployment to nearly 2%, Fig 6. At no other period in this epoch has there been an actual decrease in output and the only other years to see equal or higher unemployment were in 1962 and 63. Inflation however was only limited for a short period as Amory paved the way for expansion in 1958 with the relaxation of monetary interest rates and then undertook his expansionary programme in 1959.

Amory' expansionist policy of 1959