At one point in their lives Labour Party spokesmen must have repeated their criticisms of ‘Stop-Go’ even in their sleep. Yet, on July 20th, 1966 Wilson announced the most savage set of deflationary measures since the war. How did this great repudiation come about?
When Labour was returned to power in October 1964 it was not, nor does the fact now need emphasizing, as well prepared in the economic field as in some other areas. Detailed work had been undertaken on social security, land, higher education and regional planning, but on the central problem of the balance of payments and the modernization of the economy only sketch plans were available. One problem which should have received more attention was the way in which ‘stop-go’ could be avoided if the Party was elected when there was a large balance of payments deficit. With the Conservatives’ well known habit of staging pre-election booms this was always a strong possibility and it was clear almost from the beginning that 1964 would be a crisis year.
Import controls were one obvious device which could be used to reduce the deficit. Wilson, however, had long doubted whether they could be used in practice owing to the danger of retaliation.footnote1 Another possible policy was devaluation. But, the Labour party had said for years that the protection of the pound was a first priority. Too much weight could not be attached to this: the Party’s leaders would have been very foolish to have suggested that if they were returned to power they might devalue. But it was too readily assumed that the strength of the pound, described as the first ‘external’ priority, was compatible with Labour’s internal priorities, expansion and full employment.footnote2
The 1964 Election Manifesto did contain a number of proposals for closing the balance of payments gap. The list was, however, less impressive than it seemed: tax incentives were difficult to use, owing to international agreements; improved credit facilities were unlikely to make much practical difference as facilities were already fairly satisfactory; help for small exporters was an excellent suggestion but no plans had been worked out; home production of imported goods would take several years to put into effect and show results.footnote3 Significantly there was no mention of the way in which the balance of payments might be improved by reducing defence expenditure abroad. The Party had never during opposition made any real attempt to reassess Britain’s role in a changing world and hence our military commitments overseas. It had been intended that a major policy statement on foreign affairs should be published as a counterpart to Sign-posts to the Sixties which covered home affairs. It was never written.footnote4
With this lack of alternative policies for dealing with the balance of payments there was therefore a danger, obvious even then, that Labour would be forced to use Conservative measures. Wilson, in his major economic policy speech at Swansea in January 1964, recognized this. He said that the Conservatives ‘will have bequeathed us no instrument capable of acting on our balance of payments other than purely monetary weapons’.footnote5