Lessons from Attlee

If Labour win the UK general election on 4 July, the big political question is this: how much difference will they make? In the postwar era, despite grand manifestos and party pledges, most elections have brought continuity rather than profound waves of change. The first of these exceptions was 1945. As the Second World War drew to an end, the economic outlook was bleak: Britain’s infrastructure was in pieces, and the conflict had left national debt at record levels. John Maynard Keynes, the central architect of postwar economic policy, called the country’s devastated economy a ‘financial Dunkirk’. Yet despite a cash-strapped Treasury, Labour’s leader, Clement Attlee, promised voters a radical programme of change.

Many Conservatives and business leaders had been banking on a Churchill victory, with hopes that the old order would be restored. But after two world wars, and the economic turbulence and mass unemployment of the 1930s, the public were hungry for change. Churchill knew what to expect. While preoccupied with the war effort, he liked to joke with colleagues how Attlee was busy plotting ‘socialism’ at home.

Unlike in 1924 and 1929, when it had formed minority governments, the Labour party was well-prepared for power when it achieved a landslide victory in 1945. It had played a key role in the coalition government during the war. Several senior Labour figures had cut their governing teeth as members of Churchill’s cabinet, including Ernie Bevin, who later became foreign secretary, and Arthur Greenwood, Lord Privy Seal. Taking advantage of their power over the home front, Labour ministers, as Churchill feared, spent much of the war planning the peace.

Attlee may have been underrated by some. Hugh Dalton, Chancellor of the Exchequer from 1945 to 1947, described him as ‘a little mouse’. But there was to be no backtracking. Determined to end the hands-off, pro-market and pro-inequality doctrines of the pre-war era, Attlee pressed on with the party’s ambitious programme of reform. In the House of Commons in 1946, the prime minister was challenged by the opposition on whether the country could afford Labour’s social programmes. If the answer was ‘no’, replied Attlee, it would mean that the country’s resources were ‘not sufficient to provide for all our people even a very modest standard of living’.

Attlee’s response to a threadbare economy was to find new ways of managing the country’s limited resources to meet the priorities of reconstruction. Central to Labour’s approach, controversial as it was at times, was the continuation of the democratic and social control of resources applied in the war years. From 1939, the shape of economic and market activity was subordinated to the interests of victory. Resources were mobilised by a centrally managed economy in key industries from coal to agriculture. Expenditure on war-related activities increased sharply, achieved through a mix of planning, subsidy and rationing, including the severe curtailing of the consumption of non-war goods, services and imports.

These restrictions meant the compression of market activity. The number of cars produced, for example, fell from 341,000 in 1938 to 16,000 for the whole period from 1940-45. While similar state controls had been imposed during the First World War, the postwar government in 1918 moved swiftly to dismantle them. The end of the First World War had brought contradictory demands. After five years of war, the public were desperate for a better society, and were led to believe there would be more social spending, especially on homes and schooling. In contrast, the owners of capital demanded a return to the pre-war status quo, the dismantling of heightened state, and lower public spending.

Initially, the coalition prime minister, David Lloyd George, first appointed on 6 December 1916 and re-elected two years later, promised social reform. ‘What is our task? To make Britain a fit country for heroes to live in,’ he declared to a packed crowd in Wolverhampton, just days after the end of the war. But it was the business leaders who held the power: in an about turn, Lloyd George yielded to their demands for an austerity programme that launched severe cuts in public spending. These included reductions in pay for police, teachers and other public servants. Economic revival, it was argued, depended on lower spending by the state, in order to prevent private activity being ‘crowded out’.

In 1945 this conventional economic thinking was discarded by the new Labour government and replaced by Keynesian theories of expansion through a boost to public spending. Such a strategy, which challenged the dominant anti-state economic orthodoxy and the need for balanced budgets, had been dismissed by the Bank of England, the Treasury and the finance industry in the crisis of 1930s when it would surely have softened the severe unemployment of the Great Depression.

That the state was able to preside over a rolling programme of extensive social reform from 1945, despite the fragile state of the economy, was due to the application of what might be called a strategy of progressive austerity. But this was a model of austerity that was in stark contrast to the version applied after 1918. Attlee’s plan aimed to keep a lid on consumption so that resources could be targeted on greater priorities: exports, investment and the social programme. The strategy involved tight control over the national finances, helped by the budgetary measures designed by Keynes before his death in 1946.

In contrast to 1918, many war restrictions were maintained including those limiting overseas capital transfers. Having been kept in private hands during the war, the economy’s core infrastructure – from coal to the railways – were nationalised. Rationing – including the prohibition of luxury goods such as jewellery – limited demand and managed supply. Private gave way to societal interests. The new National Health Service, a more comprehensive social security system and the boost to social housebuilding were paid for by keeping the progressive system of taxation imposed during the war years. Despite the continuation of pre-war tax avoidance, it was nonetheless the richest who bore the largest share of the cost.

The continuation of controls did, however, mean that material living standards were slow to recover, contributing to the drabness of the immediate postwar years and the lack of consumer goods. That strategy lasted broadly until the Conservatives won the 1951 election. Its relaxation over the early 1950s – rationing not being fully removed until 1954 – allowed personal consumption to rise.

The controls were hardly universally popular, and may have contributed to the erosion of ‘the unity of wartime.’ Though imperfect, they had played a critical role in delivering Labour’s egalitarian goals and eventual postwar prosperity. Recovery when it came was also helped by a global boom, triggered in part by the American Marshall Aid programme that poured funds into a battered Europe, and a more stable international monetary system largely negotiated with the Americans by Keynes.

Central to the postwar agenda was the integration of the ‘distribution question’ – how the cake is shared – into the management of the economy. Tackling the divisions of the pre-war era was a central goal of the Labour administration. Before then, economists had argued that such questions, including the wage gap, should be left to the free market. Labour’s strategy, which overturned pre-war thinking, was a fusion of Keynesian macro-management and social egalitarianism.

When Labour lost power in 1951, ushering in 23 years of Conservative rule, the pro-equality, pro-social spending agenda was broadly maintained, if sometimes through gritted ministerial teeth. Although they had opposed nationalisation, the Conservatives only denationalised the iron and steel and the road haulage industry during the 1951-55 parliament. The Conservative Party largely bought into the legacy of Attlee’s Labour government, an apparent assimilation of the two parties summed up by the term ‘Butskellism’. This described the common ground between R.A. Butler, the centrist Conservative who became chancellor in 1951, and Hugh Gaitskell, who became Labour leader in 1955.

The postwar decades saw social spending rising in line with private consumption. The slow narrowing of the wealth and income gap that had begun in the interwar years ended in the 1970s, a decade which brought peak economic equality and a historic low point for poverty. It was the high-water mark of egalitarianism. But as the landmark election of 1979 brought a new anti-egalitarian governing philosophy, the income and wealth gap widened again and poverty rates surged. Some 50 years later, they have yet to come back down.

Stewart Lansley is a visiting fellow at the University of Bristol and the author of The Richer, The Poorer, How Britain Enriched the Few and Failed the Poor, a 200-Year History (Bristol University Press, 2021).