Modern economic history of UK

1945–1959: The Post-War era

After World War II, the British economy had again lost huge amounts of absolute wealth. Her economy was driven entirely for the needs of war and took some time to be reorganised for peaceful production. Anticipating the end of the conflict, the United States had negotiated throughout the war to liberalise post-war trade and the international flow of capital in order to break into markets which had previously been closed to it, including the British Empire's Pound sterling bloc. This was to be realised through the Atlantic Charter of 1941, through the establishment of the Bretton Woods system in 1944, and through the new economic power that the US was able to exert due to the weakened British economy.

Immediately after the war had ended, the USA halted Lend-Lease. This had been fundamental to the sustainability of the British economy during the war and it was expected by the British that it would continue during the period of transition. Instead, the Labour Government under Clement Attlee sent John Maynard Keynes to negotiate a loan, known as the Washington Loan Agreement in December 1945. The terms of this were not as favourable as the British had hoped for and included crucially a convertibility clause, in line with the US policy of liberalisation. In this, the USA expected that within two years, the British currency would become fully convertible. This, combined with the fact that the loan wasn't for as much as Keynes had hoped and the 2% interest rate imposed by the Americans, meant that Britain faced an uphill struggle to revive the economy.

The winter of 1946–1947 proved to be very harsh curtailing production and leading to shortages of coal which again affected the economy so that by August 1947 when convertibility was due to begin, the economy was not as strong as it needed to be. When the Labour Government enacted convertibility, there was a run on Sterling, meaning that Sterling was being traded in for dollars, seen as the new, more powerful and stable currency in the world. This damaged the British economy and within weeks it was stopped. By 1949, the British pound was over valued and had to be devalued though this is often considered a measure of last resort for Governments.

The Labour Governments of 1945–1951 enacted a political programme rooted in collectivism including the nationalisation of industries and state direction of the economy. Both wars had demonstrated the possible benefits of greater state involvement. This underlined the future direction of the post-war economy, and was supported in the main by the Conservatives. However, the initial hopes for nationalisation were not fulfilled and more nuanced understandings of economic management emerged, such as state direction, rather than state ownership. Throughout though, the basis remained the same: applying the economic theories of Keynes and continued state involvement.

Two world wars had taken their toll on the Empire. Decolonisation began with Indian independence in 1947. For many countries formerly part of the Empire, they argued that, in effect, they had won their independence by fighting for Britain during the two wars. However, British power was already shown to be weakened as it became impossible to resist the tide of self determination which ensued. What began under the Labour Government of 1945–1951 was continued under the Conservatives from 1951–1964 with the exception of the Suez Crisis of 1956. After Suez, the Conservatives made it a central feature of their foreign policy rhetoric with Harold Macmillan's Wind of Change speech.

The loss of Empire and the material losses incurred through two world wars had affected the basis of Britain’s economy. First, its traditional markets were changing as Commonwealth countries made bilateral trade arrangements with local or regional powers. Second, the initial gains Britain made in the world economy were in relative decline as those countries whose infrastructure was seriously damaged by war repaired these and reclaimed a stake in world markets. Third, the British economy changed structure shifting towards a service sector economy from its manufacturing and industrial origins leaving some regions economically depressed. Finally, part of consensus politics meant support of the Welfare State and of a world role for Britain; both of these needed funding through taxes and needed a buoyant economy in order to provide the taxes.

1960–1979: The Sixties and Seventies

As these factors coalesced during the 1960s, the slogan used by Prime Minister Harold Macmillan "(most of our people have) never had it so good" seemed increasingly hollow. The Conservative Government presided over a ‘stop-go’ economy as it tried to prevent inflation spiralling out of control without snuffing out economic growth. Growth continued to struggle, at about only half the rate of that of Germany or France at the same time. The Labour Party under Harold Wilson from 1966–1970 was unable to provide a solution either, and eventually was forced to devalue the pound again in 1967.

Both political parties had come to the conclusion that Britain needed to enter the European Economic Community (EEC) in order to revive her economy. This decision came after establishing a European Free Trade Association (EFTA) with other, non-EEC countries since this provided little economic stimulus to Britain’s economy. Levels of trade with the Commonwealth of Nations halved in the period 1945–1965 to around 25% while trade with the EEC had doubled during the same period. French President Charles de Gaulle vetoed the British attempt at membership in both 1963 and 1967. In 1973 the Conservative Prime Minister, Edward Heath, led Britain into the EEC.

However, with the decline of Britain’s economy during the 1960s, the trade unions began to strike leading to a complete breakdown with both the Labour Government of Harold Wilson and later with the Conservative Government of Edward Heath (1970–1974). In the early 1970s, the British economy suffered more as strike action by trade unions led to a three day week. In all, over nine million days were lost to strike action under Heath’s Government alone. However, despite a brief period of calm negotiated by the Labour Government of 1974 known as the Social Contract, a break down with the unions occurred again in 1978, leading to the Winter of Discontent, and eventually leading to the end of the Labour Government, then being led by Jim Callaghan.

Also in the 1970s, oil was found in the North Sea, off the coast of Britain.

1979–1990: The Thatcher Era

When Margaret Thatcher became Prime Minister in 1979, her main priority was to reduce the power of the unions and their ability to paralyse the economy, a battle which culminated in the Miners' Strike of 1984. She also applied monetarist policies to reduce inflation, and reduced public spending--these deflationary measures contributed to the 1979-80 recession. Her rhetoric was of a trimmer civil service and good housekeeping. Major state controlled firms were privatised, including British Aerospace (1981), British Telecom (1984), British Leyland (1984), Rolls-Royce (1987), and British Steel (1988). The electricity, gas, and water industries were split up and sold off. The ultimate success of Thatcher’s approach has been contested, but the political landscape has changed, with the chief opposition to Thatcher's Conservatives, the Labour Party, advocating many of the same economic methods, but with a greater social dimension.

Since 1973, the UK has been a member of the European Union and its predecessors. Various British governments have signed on to measures which have been aimed at improving economic conditions, such as the Single European Act (SEA), signed by Margaret Thatcher in 1985. This allowed for the free movement of goods within the European Union area. The ostensible benefit of this was to give the spur of competition to the British economy, and increase its ultimate efficiency.

Exchange controls, in operation since the war, were abolished in 1979. British net assets abroad rose approximately ninefold from £12 billion at the end of 1979 to nearly £110 billion at the end of 1986, a record post-war level and second only to Japan. [4] Privatisation of nationalised industries increased share ownership in Britain. The proportion of the adult population owning shares went up from 7% in 1979 to 25% in 1989. [5]

During much of the 1980s Britain experienced a period of boom, including an unprecedented housing boom. However, the period was also characterised by continued social strife. Unemployment skyrocketed and social ills such as homelessness and absolute poverty, which had been almost entirely eradicated in Britain during the post-war era, became common features of British life again.Fact|date=October 2008 There was rioting in a number of urban areas including Toxteth in Liverpool and Brixton in South London, violent clashes during the miner's strike 1984-1985, and a wave of civil disobedience culminating in violence in Trafalgar Square when the Thatcher government introduced, ultimately unsuccessfully, the Poll Tax, known officially as the Community Charge. While the policies of "Thatcherism" took hold in Britain, a similar set of policies were also being adopted in the U.S. through so called "Reaganomics", named for the American president, Ronald Reagan, who championed them.

Many of the economic policies put in place by the Thatcher governments have been kept since, and the Labour Party which had once been so vehemently opposed to the policies had by the late 1990s embraced them.

1990–1997: the Major years

On Thursday 22nd November 1990, Maggie was forced out of Number 10 Downing Street by her own party colleagues. John Major, who had been her Chancellor of the Exchequer from 1989 was elected her successor.

In autumn 1992 the pound sterling was still, as it had been since 1989, tied to Exchange Rate Mechanism (ERM). The restrictions imposed by the ERM combined with the global economic downturn that 1992 saw the very worst of, put pressure on the pound, leading to a run on the currency, initiated by George Soros. The UK Government pumped hundreds of billions of pounds into the markets to instill confidence. It failed. Norman Lamont, by now Chancellor himself, stood on the steps of the Treasury and announced that "this has been a very difficult day". John Major considered resigning and even went as far as drafting a resignation letter addressed to Her Majesty The Queen. The day became known as Black Wednesday and it forced a humiliated Britain out of the ERM. The Tories have never gained back their reputation for economic competence since.

However this led to what many economists call White Wednesday.After Sterling was forced out of the ERM, the economy recovered very quickly from the global recession with unemployment falling, inflation falling and GDP growing every year since 1992.

1990 1997

Inflation 11.3% 2.6%

Unemployment 2.8m 1.7m

Avg GDP growth -1.5% +3.5%

1997 to present: New Labour

In 1997, the Labour came to power with a huge majority in the House of Commons. For two years, Tony Blair's Labour Party stuck with the former Conservative government's spending plans. The Chancellor, Gordon Brown, worked to establish a reputation as the Iron Chancellor and helped to inspire renewed confidence in Labour's ability to manage the economy. One of the first acts of the new Labour government was to give the power to set interest rates to the Bank of England, effectively ending the risk of governments using interest rates as a political tool. Labour also introduced the minimum wage to the United Kingdom, which has currently satands at £5.73. The Blair government introduced a number of strategies designed to combat unemployment. Officially, unemployment - as measured by those claiming job seekers' allowance - has fallen back to the level it was in the late 1970s, although this does not take account of those claiming incapacity benefit and it still remains significantly higher than it was during the post-war era and the 1960s.

The 21st century

By 2000 the world was a very different place from the world of 1900, and Great Britain herself had undergone massive change as well.

In the Labour Party's second term in office, beginning in 2001, the party increased taxes and borrowing. The government wanted the money to increase spending on public services, notably the National Health Service, which they claimed was suffering from chronic under-funding.

Growth rates have consistently been between 2% and 3% since the year 2000 and inflation has seldom threatened to exceed its target range. The Bank of England's control of interest rates has been a major factor in the stability of the British economy in recent years. The pound has continued to fluctuate however, reaching a low against the dollar in 2001 (to a rate of $1.37 per £1), but rising again to a rate of approximately $2 per £1 in 2007. Against the Euro, the pound has been somewhat steadier, but has recently lost ground and currently trades at a rate of approximately €1.35 per £1.

For further details on Britain’s contemporary economy, see Economy of the United Kingdom.