Britain’s fifth Labour government came to power in October 1964 at a time of rapidly maturing economic crisis for the capitalist system. The political existence of the Labour Party, as of all reformist, social democratic parties, rests on its ability to gain reforms for the working class within the capitalist system. A crisis, therefore, which can only be deepened by the granting of reforms, magnifies the contradictions of reformism. It was inevitable that Labour, given its working-class base, would attempt to introduce some reforms. But it was equally inevitable that it would be driven more and more towards policies designed to restore the level of profitability necessary for capitalist accumulation. The commitment to capitalism led to the failure of the reforms; the strength of the organised working class within the party paralysed the social democratic leadership in its efforts to solve the crisis on behalf of the bourgeoisie.

Reformists cannot admit this contradiction without declaring their political irrelevance. Their instinct is to blame the economic failure of the Labour government on either foreign gnomes or some simple technical economic mistake. So, in Labour’s Economic Recordfootnote¹ (a book of essays full of much very useful information on various aspects of Labour’s economic record, written mostly by economists who were actively engaged in formulating policy), Wilfred Beckerman blames both economic and political failure on the wrong timing of devaluation: ‘there is little doubt that the decision to give absolute priority to the exchange rate was one of the great mistakes of economic policy . . . the failure to devalue earlier was a major cause of the defeat of the Labour Party in the 1970 General Election, in so far as it was largely responsible for the deterioration on the home front—notably with respect to rising prices, worse industrial relations and higher unemployment in the last two years of the Labour Government.’ (pp. 62–3)

Beckerman claims that if devaluation had occurred after Labour’s re-election with a workable parliamentary majority in 1966, then it could have been smaller and therefore less disruptive than the eventual 15 per cent devaluation of November 1967. But neither the worse balance of payments position by the end of 1967, nor the extra official debts which had been incurred prove conclusively that a 1966 devaluation would have been smaller. For the absolute requirement, in 1966 as in 1967, was that the speculators should be convinced that the new parity was sustainable. Moreover the greater official debts in 1967 represented merely a change in the identity of Britain’s creditors. From March 1966 to late 1967 the current account was on average in surplus; this implies that there was no additional burden of debt which could justify a larger devaluation in 1967. Finally, since the devaluation would have done nothing to prevent the deterioration in underlying competitiveness in 1966 and 1967, a smaller devaluation in 1966 would most probably have left the need for another devaluation a year or two later.

But even if a 1966 devaluation had been smaller it would have taken place at a time when the switch of resources from private consumption to exports would actually have been more difficult to achieve than two years later. For, despite the July 1966 cuts, there was actually a very substantial increase in public expenditure on goods and services (about £500m) between the first halves of 1966 and 1968, while between the first halves of 1968 and 1970 there was a £200m fall. This means that, even though overall growth was a bit higher in the first period, the squeeze on private consumption after a devaluation would actually have been greater. With a 15 per cent devaluation resulting in a switch of resources of some £1,200 to exports, private consumption would actually have had to fall slightly over these two years, and would have grown by hardly 1½2 per cent a year if the devaluation had been only 10 per cent.footnote² This compares with a 2 per cent annual rise in private consumption in the two years after the 1967 devaluation. So it is wrong for Beckerman to argue, in the concrete conditions of 1966, that after a devaluation at that time ‘there would have been at least something left for higher consumption, and the chances of a breakdown on the wages front would have been that much less’.

So Beckerman’s assertion that ‘the failure to devalue earlier explains between one third and the whole of the failure to achieve the planned growth rate’ (Labour’s Economic Record, p. 52)—the 25 per cent growth target for 1964–70 of the National Plan which was, in fact, missed by 11 per cent—requires the assumption that workers would not have reacted to a squeeze on their real wages in such a determined way if it had occurred in 1966–8 rather than a couple of years later. For faster growth is not just a question of loosening the balance of payments ‘constraint’, which an earlier devaluation certainly would have done at least temporarily. It also requires the Government to refrain from dampening any expansion by deflationary policies, and this is unlikely when wages are rising rapidly. Most important it requires the maintenance of high profit levels, which were already under pressure from rising wage costs and intensifying international competition. The devaluation was a response to this declining profitability and its aim was to cut real wages and increase profits in export industries and import-competing industries by reducing competition and allowing more inflation. To see it as a technical solution to a balance of payments problem is quite superficial. But devaluation can only restore profitability if the reduction in real wages is not resisted. As we argued above, there is no reason to believe such resistance would have been less after an earlier devaluation.footnote³

Beckerman and his co-authors have ignored the connection between devaluation and profitability because they think in terms of a balance of payments problem or crisis, never in terms of capitalist crisis. On the other hand, they do seem to have been convinced by the facts of falling profitability and rising wage shares which we described in this journal (The critical condition of British capital, nlr 66). Their reactions to these facts are, in one case, irrelevant: Michael Stewart says they are ‘such an unsatisfactory measure of Labour’s success in improving the distribution of income’ which nobody ever thought they were. But in other cases the reactions are extremely revealing of the ultimate political limitations of social democracy.

Michael Stewart also argues, for example that, falling profitability, because it may tend to reduce capital accumulation, ‘cannot augur well for the relative position of the poorer and weaker members of society’ (Labour’s Economic Record, p. 78). Derek Robinson makes the point more clearly in relation to the working class as a whole: