There were fateful choices in the autumn of 1931 and the months that followed whose consequences affect us today. The beliefs still current in British exceptionalism – attachment to laissez-faire economics and pursuit of the chimera of global Britain – have their roots in the choices made then, which became embedded in our culture, especially on the right.
Challenging what should be stone-dead myths and reinventing a conception of what Britain can and should be demands understanding our past, the better to escape it.
Global capitalism was reeling from the 1929 crash and the collapse of the global currency order. Would Britain strike out, as the US and Sweden were to do, and organise a state-led reconstruction of capitalism, supported by great programmes of public works and investment, and repudiate free-market thinking? Or would it look to empire and imperial preference to try to preserve existing structures and ideas, and so protect itself from recession and slump?
Labour leader Ramsay MacDonald and his chancellor, Philip Snowden, in power in the summer of 1931, had no doubts. The party’s mission was to return capitalism to its 19th-century glories by following the tried and tested policies of laissez-faire, only this time determined to ensure that, when recovery was established, the working class gradually got a much fairer share of the spoils. There was to be no fundamental reshaping of the economy. When adhering to the gold standard proved indefensible, they would lead a national government to preserve as much as possible of what had worked hitherto, and look to Britain’s vast empire to protect its stricken capitalism from high-risk “socialist” reform.
At the Ottawa Imperial Economic Conference in 1932, an imperial preference system was launched. Britain set an average import tariff of 14.7% on all manufactured goods, with concessions for imports from the empire, which limited imports dramatically and lifted profits spectacularly. The system lasted until we joined the Common Market in the early 1970s, with the late, distinguished economic historian Prof Nicholas Crafts calculating the average tariff on manufacturing imports was still 14.5% in 1960, and only fell slightly over the next decade. Baby boomers grew up in the long shadow of empire.
Add to this tariff wall the adoption of Keynesian economics, with the government stimulating demand, and great prosperity ensued: unemployment averaged 2% in the 1950s. Sales of cars, TVs and white goods flourished. Profits were more than twice those in Germany, according to Crafts. But that led to a cluster of problems. British firms, accustomed to few overseas competitors penetrating the tariff wall, had gone on a rampage of price-fixing agreements to keep profits high. Overseas producers found they could undercut these rigged prices and still be very profitable; imports steadily rose.
Britain’s more than 1,000 trade unions could organise closed shops, abandon wage agreements at will and protect outmoded working practices without challenge: firms were so profitable they could live with the results. Shareholders were disengaged and greedy for high dividends, which firms could easily afford to pay. Banks did not have to lend to business: it could finance itself. Empire had conferred an easy option, as I argue in my new book, but a rotten economic structure that generated low investment, inflation and low productivity.
However, with decolonisation proceeding apace, it was obvious to Harold Macmillan, Tory prime minister from 1957 to 1963, and later to Labour’s Harold Wilson that empire would not survive much longer. Its markets had to be replaced. Britain had to access growing European markets. The economy might be growing faster than at any other time in history, but the underlying rottenness was showing up in higher inflation and bigger balance of payments deficits than our competitors.
Empire and the free-market idea that the capitalism associated with it could be self-organising were obviously redundant. Modernity demanded getting serious about industrial strategy, planning, the creation of national champions, trade union reform and engaging with Europe – which, after two French rebuttals, we finally achieved. The postwar settlement, if it was to survive, had to be reshaped.
It did not happen, partly because of the aggressive resistance of a powerful trade union movement to any suggestion that its rights and legal privileges should be challenged, even if accompanied by rights to sit on corporate boards and win mandatory recognition; and partly because the City and business were equally resistant to any qualification of their freedoms. Living was too easy to accept change. When Labour’s social contract collapsed in the 1978/9 winter of discontent, any chance of reforming the postwar settlement died with it. Margaret Thatcher was elected with the intent to dismantle it, borrowing from the resurgent US right to resuscitate the dying embers of free-market economics.
The results we know: the calamity of monetarism and excessive deindustrialisation, madly enthusiastic financial deregulation and the great crash of 2007/8, austerity and the fiasco of Liz Truss’s libertarian, unfunded, tax-cutting budget of 2022 leading to a run on the pound and doubled mortgage rates. Britain is reeling economically and socially from the impact.
Brexit should be included in the list; the referendum might have been won by votes from the disillusioned ex-industrial heartlands, but its intellectual inspiration was to return to the vision of a free-market Britain buccaneering to success globally – the globe replacing empire. It has failed spectacularly. The trade and investment advantages of EU membership that boosted GDP by 10% have evaporated. The economy has stalled, with concern growing about once healthy sectors like financial services or the creative industries. The City, once poised to become Europe’s financial centre, is in trouble – the stock market falling to ninth in the world league table.
But this is also an opportunity. What Macmillan, Edward Heath and Wilson thought two generations ago is reconfirmed as right. Britain’s only destiny is to make common cause with the EU. This, starting with a broad-based defence pact, as Labour promises if elected, is where we are headed. The long road back is beginning.
• Will Hutton’s book, This Time No Mistakes: How to Remake Britain, is out now
