6 Searching For the Middle Way: The Political Economy of Harold Macmillan

Harold Macmillan was the most self-consciously intellectual Conservative leader of the twentieth century. In spite of the fact that the Great War ended his undergraduate studies at Oxford, or perhaps because of this, Macmillan displayed a voracious scholarly appetite for books throughout his active political career. His diary for the period from the end of the Second World War to his resignation as Prime Minister in the autumn of 1963 shows he read an extraordinary range of literary, historical, and political works, and on this basis alone Macmillan has good claims to being the most ‘bookish’ Prime Minister since Gladstone. But Macmillan’s intellectual activities were not confined to reading. Leaving aside the six volumes of memoirs he published in retirement, he wrote three books on economic questions, was joint author of three more, and made a major contribution to another in the inter-war years.¹ In the 1930s he enjoyed a fruitful exchange with John Maynard Keynes, and in the 1950s engaged, often to the irritation of Treasury officials, in an ongoing correspondence with Keynes’s biographer, the Oxford economist Roy Harrod, on questions of economic theory and policy. His official correspondence as both a Minister and Prime Minister was characterized by often lengthy discussions of the underlying principles of policy, and, in the realm of economic policy, theoretical stones were rarely left unturned. Macmillan’s approach to problems is encapsulated in an entry in his diary for March 1962—’Luncheon—Sir R. Harrod, Sir Donald Maclachlan, Professor Cairncross, Mr. Prior (Board of Trade) and Tim Bligh. A splendid argument.’² For Macmillan, engagement with ideas and arguments was clearly a source of great enjoyment, but also an essential part of the policy-making process. The range of his intellectual engagement was wide and, necessarily, so too were his policy interests, but this essay will focus upon the realms of economic ideas and policy which were of particular interest and importance to Macmillan throughout his career.

Economic questions played a central role in the early stages of Macmillan’s political career. At the 1923 general election he stood, unsuccessfully, for Stockton-on-Tees as a committed supporter of tariff protection, and, having been elected for the same seat in 1924, made his maiden speech in the House of Commons on the Budget of 1925. The following year, in the wake of the General Strike, he pressed for government reorganization of the coal industry, and argued for the introduction of statutory arbitration procedures to deal with industrial disputes.³ Underpinning Macmillan’s interest in the industrial situation was his concern over unemployment. As MP for Stockton, Macmillan was all too aware of how badly the North-East labour market had been affected by the difficulties faced by the mining, steel, and shipbuilding industries. But although his most immediate and pressing experience of the problem was at a local level, he saw unemployment as a national problem. With the onset of the Slump, unemployment reached unprecedented levels in the North-East and in the rest of Britain’s industrial heartlands, and Macmillan’s political activities and publications in the 1930s were focused on attempts to define and promote remedies for the depression and mass unemployment. Macmillan’s commitment to solving ‘this cruel problem of the depressed areas’⁴ in the inter-war years was clear. So too was his commitment to preventing its recurrence after the Second World War, for he declared in 1958 that ‘I am determined, as far as it lies within human power, never to allow this shadow to fall again upon our country’.⁵ The depth of Macmillan’s commitment can in part be explained in biographical terms,⁶ but this essay will not pursue the question of his personal motivation. Rather, it will focus on the nature and rationale of the policy initiatives he advocated both before and after the war to solve and prevent the return of mass unemployment.

Industrial reorganization was the linchpin of Macmillan’s inter-war economic strategy. In 1926 he argued that the government should step in to rationalize the coal industry, on the grounds that it had proved incapable of doing so on its own initiative. Macmillan felt that had the industry been reorganized along the lines advocated by the Samuel Commission, the miners’ strike of 1925-6 and the General Strike could both have been avoided.⁷ In the wake of the General Strike Macmillan, along with three other Conservative MPs, produced a study which argued that the structural problems of the coal industry were not an isolated example, but that organizational weakness was endemic in British industry.⁸ To overcome these weaknesses, Macmillan and his coauthors called upon the State to act. State ownership of industry was not a favoured solution. Indeed, Macmillan and his colleagues were clear that, generally speaking, ‘nationalisation as a substitute for private ownership must fail … [and that] except where competition and risk are absent, the results of nationalisation must be inferior to those of private enterprise’.⁹ In their view the State’s role was not to engage in direct intervention but to create a climate which would encourage industrial reorganization.¹⁰ In particular, they wished the State to facilitate industrial amalgamation. Adjustments to the tax regime were one route to this, and government loans were another. However, the State had to exercise careful control over the destination of any credit made available, on the grounds that it had to be ‘granted not for the purpose of adding a new competitor to an industry already sinking under the weight of competition, but for the purpose of assisting all the existing members of the industry to reorganise themselves upon modern and scientific lines’.¹¹ The models for ‘modern’ and ‘scientific’ industrial organization were Germany and the United States, where the economies of scale available to trusts and combinations had secured competitive efficiency.¹² If British industry could adopt similar organizational structures, then it would follow that both firms and their employees would be more secure.

Macmillan remained an advocate of industrial combination throughout the 1930s. In Reconstruction he argued that one of the benefits of the introduction of tariffs in 1932 was that they encouraged carteliza-tion. Industries organized on a small-scale, competitive basis were, he suggested, incapable of preventing, and indeed encouraged, overproduction, whereas large-scale, corporate structures could regulate the production, supply, and even marketing of goods.¹³ Macmillan was keen to stress that tariffs alone could not solve industry’s problems, but they could assist the crucial process of reorganization. This could only be achieved by industry itself acknowledging the need for and benefits of such restucturing. In Macmillan’s schema the role of the State was in many respects limited. He was clear that it was unwise and ultimately impossible for government to reorganize industry; it was ‘a task which can only be performed by Industry itself’.¹⁴ The State was to enable industry to reorganize, and its key function was to be the creation of a legislative and administrative structure that would allow industries to regulate and reorganize themselves. Each industry was to establish a National Industrial Council (NIC) which would draw up a reorganization plan for its sector and have the power to force firms to act in accordance with that plan. A central National Economic Council, made up of members drawn from each NIC, government representatives, and independent experts, was to provide an overview of the national situation and enable the NICs to co-ordinate their plans.¹⁵ Such co-ordination was deemed essential on the grounds that the experience of the 1920s and the Depression had demonstrated that ‘The economic policy of a nation cannot be made up of a conglomeration of policies pursued by separate units of industry commerce or finance operating in isolation from one another’.¹⁶ This system was to bring British industry fully into line with the modern industrial world, in which the ‘whole trend of development … [was] in the direction of greater integration, and the supercession of unrestrained competition by methods of co-operation’.¹⁷ With older, small-scale ‘forms of ownership, management and organisation … proved obsolete by the relentless movement of history’,¹⁸ British industry needed to adopt the large-scale structure of industrial enterprise pioneered by its main competitors. This would enable it to maximize efficiency and competitiveness, which in turn would ensure that displaced labour could be more rapidly reabsorbed.¹⁹ For Macmillan, industrial reorganization and the efficiencies it would bring were prerequisites for solving the problem of mass unemployment.

In Macmillan’s economic strategy the State was assigned an essentially supportive rather than a controlling, managerial role. Over-extending State intervention was, in his view, economically unnecessary, and politically dangerous insofar as it could curtail or restrict freedoms. In Reconstruction Macmillan stressed that an important political consequence of industrial reorganization would be that, ‘If … industry is so organized that it is capable of intelligent anticipation and response in the market conditions indicated by prices, then … bureaucratic methods of regulation will be unnecessary’.²⁰ Macmillan expressed some scepticism about the efficacy of the price mechanism,²¹ but argued that the State should only intervene in areas where existing economic structures had ‘failed’. In the industrial sphere direct State intervention was deemed necessary only in those sectors which had proved incapable of reorganizing themselves, such as the coal industry.²² In The Middle Way Macmillan outlined his preference for limiting State action when he spoke of the danger of pressing intervention to combat poverty into other realms of economic activity, stating that, ‘upon this argument … I wish to base a defence of private enterprise in the production and distribution of a wide range of goods lying outside the field of minimum human needs’.²³ The key phrase was ‘minimum human needs’, for it was here that Macmillan felt that existing market structures had clearly failed. Hence he declared:

I do not propose to employ this defence of private enterprise in the fields for which it is best suited in order to condone or excuse the poverty and insecurity in the basic necessities of life, which we have today as a legacy of unrestrained competition and uneconomic waste and redundancy. I shall advocate all the more passionately on grounds of morality, social responsibility, as well as economic wisdom a wide extension of social enterprise in the sphere of minimum human needs.

In the sphere of ‘social enterprise’, as in the industrial sphere, Macmillan advocated the adoption of ‘the most economical methods of large-scale, co-operative enterprise’, but also concluded that:

The volume of the supply of these necessities, the prices at which they are sold, and the power of the consumer to buy them should not be left to the determination of the push and pull of competitive effort. We have to evolve a new system by which the supply of those articles which we have classified as being of common need and more or less standardized in character, would be absorbed into an amplified conception of the social services.²⁴

Such an ‘amplified conception’ was necessary because the ‘satisfaction of those [minimum] needs … [was] a duty which society owes to its citizens’, and the structures of private enterprise had proved themselves unable of carrying out that duty unaided.

Macmillan felt that the State had a major role to play in the provision of social services, but this did not mean that he drew a hard-and-fast line between ‘economic’ and ‘social’ spheres. In his view the two were inextricably linked in terms of both principles and practice. ‘Economic reconstruction’, he argued in 1938, was ‘the only possible or sound basis for social reform.’²⁵ The simple fact, according to Macmillan, was that ‘we can only reduce our social burdens by making the economic system work in a much more efficient way’.²⁶ Industrial reorganization was thus socially essential in that it would serve to reduce unemployment and the ills attendant upon it. If private enterprise functioned at full efficiency the State could concentrate on social problems, such as ill-health and old age, that private enterprise was not best suited to dealing with. Private enterprise and social enterprise were in this respect complementary. For Macmillan the crucial things were, first, to acknowledge that ‘When we look back at history we find that productivity has been increased and the standard of life raised by methods of co-operation, many of them directed by the State’,²⁷ and, second, to draw ‘a clear differentiation … between the proper sphere of State, social or co-operative activity, and the proper sphere to be deliberately reserved for private enterprise’.²⁸ The net result of this would be the creation of what Macmillan termed a ‘mixed system’,²⁹ in which the State and private enterprise worked alongside each other and the State would rectify the economic and social failures of private enterprise. Such a system was, he argued, already largely in place, inasmuch as examples such as the National Grid, the BBC, health insurance, reorganization of the mining industry, and a plethora of municipal enterprises indicated that the State could undertake certain actions and provide some goods and services where private enterprise had either failed to act or to meet demand.³⁰ This quasi-partnership between the State and private enterprise lay at the heart of Macmillan’s ‘middle way’ between laissez faire and Socialism, with the State playing an enabling, supportive, and ‘hands-off role except where ‘the failure of private enterprise to meet the new demands of a developing society makes it essential for public authorities to step in’.³¹

Industry was not the only sector of the British economy that Macmillan felt was ‘failing’. In Industry and the State he and his coauthors expressed concern over the lack of co-operation between financial and industrial interests; this concern was shared by other Conservative advocates of industrial reorganization,³² and lay at the heart of the investigations of the Committee on Finance and Industry chaired by Macmillan’s namesake in 1929-30. In the 1930s his own interest in this problem developed considerably. In his 1932 pamphlet The Next Step he advocated the creation of an investment and development board made up of a membership drawn from government, industry, and the financial sector. This board was to ‘direct investment into the correct channels as advocated by the Macmillan Committee’s Report … [and] the Federation of British Industry’, which meant directing ‘new money into capital modernisation’ and, if ‘unfavourable market conditions discouraged borrowers’, engaging in investment activity itself.³³ Keynes read this pamphlet, and told Macmillan that, although he liked it ‘very much’, he found its ‘proposals for developing the investment functions of the State … not nearly bold enough’. In Keynes’s view the main problem was ‘the sort of middle position’ Macmillan occupied, which meant that he overestimated the level of private investment that could be encouraged in a depression, and underestimated the extent of direct State investment necessary to reflate the economy and provide a stimulus for private investors.³⁴ Not for the first or last time, Keynes was sceptical that market actors could be moved without being pushed by both the pressure and example of State action. Macmillan accepted much of Keynes’s criticism, and argued that political considerations had led him to moderate his position. ‘I am still trying’, he explained, ‘the perhaps hopeless task of incluencing [sic] the Government … [and] I have to conceal a certain amount and to preserve certain political decencies!’³⁵

Political caution may well have influenced Macmillan, for there were those in his party who viewed State action with suspicion.³⁶ But whether this explains his stance completely is open to question. That Keynes pointed to Macmillan’s ‘middle position’ as a problem is important here, insofar as for Macmillan finding a ‘middle way’ was the whole point. Certainly his position changed little through the 1930s. He sat on the committee that drafted The Next Five Years, which was clear that ‘the existing capital market in Great Britain leaves very much to be desired’.³⁷  The Next Five Years did not advocate State ownership and control of either the Bank of England or the joint-stock banks, but it did call for the creation of a National Investment Board (NIB) to regulate and encourage the capital market. Regulation was to include not only powers against fraud but also to discourage share issues ‘of a kind which it considered to be already overdone’ and to ‘encourage issues in directions where further investment seemed to be desirable’.³⁸ In addition, the NIB was to monitor the volume of savings available for investment and to ‘endeavour to see’ that they were ‘sensibly distributed’.³⁹ ‘Encouragement’ meant that the NIB had ‘the duty of creating an active and adequate capital market and watching over its development’. This was to include the establishment of a ‘domestic issuing house’, which would perform the function for home investment that the merchant banks performed for overseas lending, and thereby rectify the institutional bias against domestic lending that characterized the existing British capital market.⁴⁰ However, much as it wished the new institution and existing banks and finance houses to invest in the reorganization of old and the creation of new enterprises, The Next Five Years also stressed that ‘None of these functions can properly be performed by the State’.⁴¹ The State was to act as a ‘midwife’ not a ‘mother’, on the assumption that having created the requisite institutional framework investors would want to lend and industrialists borrow. The State could rectify ‘defects of the capital market’ which had rendered it ‘by far the weakest section of the nation’s financial machinery’,⁴² but it was not to replace it.

Whether or not political niceties separated Macmillan from Keynes on the issue of direct State investment, they were certainly not divided when it came to criticism of the British capital market and the British banking system. In his General Theory Keynes famously looked forward to the ‘euthanasia of the rentier’,⁴³ on the grounds that investment was far too important an activity to be left in the hands of a casino-like financial market. Macmillan shared this disdain. In The Middle Way he pointedly remarked that ‘Finance is a service. Its function is not, or ought not to be, to dictate or determine the condition under which industry and commerce have to be conducted.’⁴⁴ The State, Macmillan contended, needed to exercise a greater influence over the capital market, which was ‘dominated by irrational and anti-social speculation in the fluctuating volume of securities’. Credit and investment, he argued, were needed by ‘productive industry’, but they tended to be used for the ‘speculative purchase of existing securities’, and, as a consequence, were ‘performing no useful social function’.⁴⁵ Like Keynes, Macmillan thought that British financial institutions, and the City in particular, needed to change their outlook and their practices and that the State had an important role to play in helping to bring this about.

Criticism of the failings of the British capital market was not the only common ground shared by Macmillan and Keynes. They were also close on the question of government action to reflate the economy. Keynes’s favoured solution to the problem of unemployment was large-scale public works, expenditure on which would, through the multiplier effect, trigger a virtuous circle of investment, production, consumption, saving, and reinvestment. Famously—infamously for some—Keynes argued that to achieve this it was necessary for the government to be willing to run a short-to-medium-term budget deficit.⁴⁶ Macmillan was sympathetic to this approach. In March 1933 he called for reduced taxation and a boost to government capital expenditure on public works, arguing that these actions would in turn boost business confidence and stimulate private investment. If this resulted in a budget deficit it was, he suggested, acceptable in what was a crisis situation.⁴⁷ Macmillan repeated these arguments the following year, and was one of very few Conservatives in the 1930s who was willing to accept deficit finance.⁴⁸ But his enthusiasm for budgetary unorthodoxy was by no means unreserved. In 1932 Keynes had chided him for ‘paying far too much lip service to [fiscal] economy’, and had urged him to embrace greater public expenditure on the grounds that the severity of the Slump demanded a stimulus to purchasing power that private investment was unwilling and unable to bring about.⁴⁹ Maemillan’s parliamentary intervention the following year seemed to indicate that he had taken Keynes’s message to heart, but it is noticeable that The Middle Way does not mention unbalanced budgets. Although he agreed that it could have an important reflationary effect, deficit finance was not central to his outlook.⁵⁰ Keynes and Macmillan were close insofar as they saw reflation as essential, and felt that the State had to be a key player in any reflationary strategy, but it would be wrong to exaggerate their affinity in the realm of fiscal policy.

The area in which Macmillan and Keynes were perhaps closest was monetary policy, where both wished to break the ‘deflationary mind set’⁵¹ of economic orthodoxy. In Industry and the State Macmillan and his co-authors expressed agreement with the quantity theory,⁵² but by the late 1930s Macmillan, under Keynes’s influence,⁵³ had modified his position. In the section of The Middle Way that dealt with monetary policy, the importance of which Macmillan felt ‘could hardly be exaggerated’,⁵⁴ he argued that the rate of interest was the ‘price’ which equi-libriated the desire to hold wealth in cash with the available quantity of cash, and that ‘in given circumstances’ the quantity of money in conjunction with liquidity preference could determine the rate of interest.⁵⁵ Macmillan, like Keynes, was an advocate of ‘cheap money’, seeing low rates of interest as an important stimulus to borrowing, investment, and consumption. However, he felt that the availability of money did not necessarily lead either to investment or consumption, and that the price level was not, therefore, determined simply by the supply of money. The key thing, in Macmillan’s view, was the relationship between the speed and quantity of the production of goods and the expenditure of money upon their production and consumption. Money, he argued, was not necessarily invested or spent but could be saved in ‘idle balances’ in banks or other institutions. Savings and investment could balance, in which case the economy would be at a healthy equilibrium of production and prices, but if they did not then there would be deflation or inflation as either savings exceeded the supply of goods or as investment and consumption outran production. It was here that the institutional structure of the economy had a part to play, insofar as it was ‘the function of the financial system to keep money circulating in the purchase of goods and services … [and] the function of industry to see that these goods and services are produced’.⁵⁶ The State could assist the smooth functioning of the system by fostering the reorganization of the industrial and financial sectors and, if necessary, providing the stimulus of its own investment and expenditure. For Macmillan, like Keynes, markets did not necessarily clear, and prices did not adjust simply in response to variations in the supply of money. Money could have ‘real’ effects, but these were dependent on other ‘real’ factors, especially the liquidity preferences and behaviour of individual and institutional holders of capital.

The banking system had a particularly important role in Macmillan’s analysis, in that it could offer business ventures long-term loans at low rates of interest or place cash in public hands by selling securities, in both cases releasing money which would otherwise have been kept in ‘idle’ blances or ‘hoarded’. This action would stimulate business activity and ‘recovery … would have been directly initiated as the result of an act of monetary policy’.⁵⁷ Once initiated, recovery would increase general business confidence and, as ‘confidence begets confidence’, a virtuous circle would have been set in motion. To achieve this goal meant, in Macmillan’s view, charting a careful path through the ‘maze of economic fact and psychological fantasy’.⁵⁸ A necessary first step here was the creation of ‘a more rational financial mechanism’. Such a mechanism, he argued, required five main elements. First, the accumulation of idle balances was to be prevented. Second, the volume of credit and the quantity of money was to be regulated in accordance with the needs of production rather than being ‘dominated by irrational and anti-social speculation in the fluctuating value of securities’. Third, the price of goods was to be determined by the cost of production rather than manipulation of the value of the medium of exchange. Fourth, money was to be a measure of value and medium of exchange and not a store of idle value. Finally, the central bank was to be made a public institution and be in a position to ‘influence the direction of investment’ as well as its volume.⁵⁹

The points of intersection between Keynes and Macmillan on monetary questions were clear. Both were critical of the classical quantity theory of money, and viewed any veracity it held as contingent upon circumstance.⁶⁰ Although Macmillan did not enter into extensive theoretical discussion of the relation between savings and investment, and did not address the multiplier effect, his position represented an implicit acceptance of Keynes’s arguments. Keynes himself saw Macmillan as a kindred spirit in the fight against ‘reactionary forces’ opposed to any break from orthodoxy,⁶¹ whilst Macmillan felt Keynes provided the kind of ‘expert and informed opinion’ required in the Depression.⁶² But it was more a general accord than the specifics of theory and policy that drew Macmillan and Keynes towards one another. To begin with they both saw deflation as the main enemy to overcome, and saw the government’s predisposition to adopt a deflationary strategy as a political rather than a technical choice. Late in life, Macmillan stated that Keynes had told him that 2.5 per cent inflation was the optimum price situation, which he accepted on the grounds that: ‘If you had deflation of $212$% a year, ultimately the claims of the creditors become too great (after all, the creditor doesn’t create wealth—it’s the entrepreneur). If you have permanent inflation that’s too high, it’s not fair to the savers, the creditor, who is normally in the saving classes … between $212$ to 3%, then nobody would notice.’⁶³ Macmillan and Keynes shared a suspicion of, even contempt for, bankers and rentiers, and although they would not have gone so far as to describe inter-war deflationary policy as a ‘bankers’ ramp’, they had no doubts over the financial sector’s preferences or the power of their influence.

A related, general point of agreement between Keynes and Macmillan was the importance of ‘psychology’ in economics. The creation of a climate of confidence was central to their calls for reflationary action and policy. Public expressions of belief by influential economic actors that an economy was picking up, and actions by them commensurate with that belief, were essential to creating a positive interaction between the psychology and reality of recovery. Confidence bred confident actions and vice versa, whilst poor expectations produced poor results. Expectation, so prominent a feature of Keynes’s work, was also built into Macmillan’s argument. It was in many respects in this context that the policy and actions of the State were important, in that the level of government expenditure and influence made it the largest actor in the economy: if government spoke and above all acted in a confident manner this would encourage others to follow suit.

Keynes and Macmillan both saw positive action by the State as essential, with Keynes inveighing in a letter to Macmillan against the reactionaries who ‘conscientiously disbelieve in the kind of schemes for planning etc which you and I favour’.⁶⁴ But it would be wrong to exaggerate the closeness of their positions on this point. ‘Planning’ was a lingua franca of the 1930S, but different individuals and groups spoke it with very different accents.⁶⁵ For Macmillan, planning involved State action, but his emphasis was upon business planning its own affairs, with the State very much in the background. For Keynes, however, the State had a central role. Moreover, there were differences between the two in terms of the focus of economic policy. In his memoirs, Macmillan noted that ‘Keynes quite naturally put the greatest stress on reflation and monetary policy generally. I, for my part, and many agreed with me, felt that this was only one part of the policy; that the efficient organisation of industry, and everything that was involved in the term ‘rationalisation’, was just as vital.’⁶⁶ In short, Macmillan felt that Keynes’s emphasis was on macro-economics whereas his own was more micro-economic. He was indeed not alone in feeling that Keynes underplayed the ‘supply-side’ aspect of the causes of and cures for the Depression,⁶⁷ and this in itself reflected Macmillan’s greater faith in and commitment to encouraging industry and even finance to reorganize and rationalize the British economy into recovery. Keynes was right when he noted in 1932 that Macmillan wished to ‘minimise the part which the state must play’, and sought ‘to get … results by a combination of private enterprise and subsidy’.⁶⁸ Keynes felt that this was unlikely to succeed, and that only the State possessed the capacity to stimulate recovery.⁶⁹ Macmillan’s retrospective judgement was accurate, for although he and Keynes were close, there were important differences between them.

Prior to the Second World War, Macmillan’s economic ideas were politically unacceptable to the Conservative party, and as a result his political career was stymied: he had been in Parliament for fifteen years by the outbreak of war, but had not held even junior ministerial office. During and after the war, however, his career took off, culminating with his accession to the Premiership in 1957. Macmillan himself argued that his ideas did not change, but that the Conservative party was educated into accepting them, in part by the war but largely by the experience of electoral defeat in 1945. Broadly speaking, this is an accurate account of the trajectory of Conservative economic ideas in the immediate postwar period. The shock of defeat did prompt the Conservatives to rethink their economic and social policies. Moreover, Macmillan played a significant role in this process, and found the party unwontedly receptive to his ideas.

Writing in 1969, Macmillan summed up his attitude to the Attlee government, noting ‘I tried to criticise and even attack their policy without abandoning the progressive policies which I had preached in the past’.⁷⁰ In many respects the situation was tailor-made for him. Organizational defects and the legacy of the ‘guilty men’ of Appeasement took some of the blame for the 1945 defeat, but the prevailing Conservative wisdom was that the ‘hungry thirties’, the memory of mass unemployment, and Labour’s unequivocal endorsement of the Beveridge Report were chiefly responsible for the Conservative debacle. The Conservative quest after 1945, therefore, was to produce a policy stance which would enable them to criticize the Labour government, but at the same time allow Conservatives to differentiate themselves from their own pre-1945 antecedents. The Industrial Charter of 1947, which Macmillan helped draw up, was a textual embodiment of this quest. The Charter accepted the 1944 White Paper’s central argument that ‘the government must be responsible for a high and stable level of employment’,⁷¹ and stressed that workers should not only have jobs but should also enjoy more respect and status at the workplace in the shape of proper contracts of employment, consultation, and, if possible, co-partnership and profit-sharing schemes.⁷² Employment and the need to ‘humanise’ the workplace had been important elements in The Middle Way, which helps to explain why the Charter was often referred to at the time as a ‘second edition’ of Macmillan’s book. In his memoirs, Macmillan emphasized that the Charter had embraced his pre-war position, in that it accepted full employment and the mixed economy.⁷³ However, this was a misleading oversimplification of both the Charter’s and Macmillan’s post-war position. To begin with there is the important fact that the Charter, echoing the 1944 White Paper, did not use the term ‘full employment’, but ‘a high and stable level of employment’. The White Paper had been produced in part to ‘scoop’ Beveridge’s book Full Employment in a Free Society,⁷⁴ and it had studiously avoided using the term ‘full employment’.⁷⁵ The Charter adopted the Treasury’s cautious vocabulary and, by implication, its hesitant, even equivocal, stance on employment levels. Macmillan himself had no hesitation in saying in June 1950 that a main duty of government in the economc sphere was ‘to maintain “full employment”‘.⁷⁶ He may have equated ‘high and stable’ with ‘full’ employment, and if so he was not the only person to do so, either at the time or subsequently, but the two were very different in terms of both their literal and historical meaning. Macmillan argued for, and was not afraid to use the term, ‘full employment’, but he may have flattered himself that his party accepted his position unequivocally, and was perhaps deceived by Britain’s post-war employment record when he came to write his memoirs.

With regard to the mixed economy, Macmillan oversimplified both his party’s and his own position in the immediate post-war years. Far from ‘accepting’ the mixed economy, The Industrial Charter stated in its ‘Summary of Proposals’, designed as a ready reference for party activists, that ‘We are opposed to nationalisation in principle’.⁷⁷ In the main body of the text this position was qualified, and the Charter declared

We are opposed to nationalisation as a principle upon which all industries should be organised. If all industries were nationalised Britain would become a totalitarian country. If only a few industries are nationalised, they become islands of monopoly and privilege in a diminishing sea of free enterprise … Moreover, we consider that the bureaucratic method is highly inefficient when applied to business matters.⁷⁸

Macmillan, who had spoken of his desire to see a ‘mixed system’ in The Middle Way, took an almost identical stance. He agreed with the nationalization of coal and the Bank of England, and saw rail, gas, water, and electricity as effectively in public ownership already, but he strongly opposed further direct State intervention in the economy. In 1946 he argued that the nationalization of ‘selected and suitable undertakings’ was acceptable, but expressed concern that the Attlee government’s ongoing programme indicated ‘the totalitarian tendencies of modern Socialism’.⁷⁹ In the run-up to the 1950 general election Macmillan stated that full employment and rising living standards were what most citizens wanted from the economy, but that ‘these depend in the long run, not on restriction, but on abundance, and abundance comes from enterprise and is fed by freedom’.⁸⁰ This emphasis on removing restrictions and allowing ‘freedom’ was wholly in keeping with the burgeoning Conservative critique of the Labour government’s economic controls, which were depicted as the cause of austerity and the growth of an impersonal, interfering bureaucracy. Macmillan’s view of the mixed economy was one in which free enterprise and ‘personal responsibility’⁸¹ were the predominant features.

There are a number of ways in which Macmillan’s position in the immediate post-war period could be explained. Political and electoral considerations were to the fore. He noted that internal party critics of the Industrial Charter, such as Sir Waldron Smithers and Sir Herbert Williams, attacked the Charter as ‘not Tory policy’ on the grounds that it was too Statist.⁸² Such criticism, Macmillan felt, falsely equated Conservatism with the ‘Manchester laissez faire school’ and nineteenth-century Liberalism. This was in keeping with his long-standing hostility to laissez faire, but his broader public attitude to Liberalism was noticeably accommodatory. In his memoirs, Macmillan stated that when he spoke at Chatsworth in 1946 he was conscious of the alliance forged between the Liberal Unionists and the Conservatives in 1886, and that this provided a model for the Conservatives to build new alliances with ‘those who rejected Socialism but wanted progress’.⁸³ Here he had the Liberals in mind, and both his historical and immediate sense of possible links with the Liberals was strengthened when, at the invitation of Charles Gladstone, he spoke at Hawarden in September 1947.⁸⁴ Macmillan even toyed with the idea of making the Conservative party a more congenial home for such new allies by changing its name to the New Democratic party. This last idea was short lived and barely serious, but it has significance insofar as it indicates that Macmillan saw the key, common ground between Conservatives and Liberals as the defence of individual liberties and economic freedom against the threat of Labour’s incipient Socialist ‘totalitarianism’. There were faint echoes here of Churchill’s ‘Gestapo’ speech in the 1945 general election campaign, and clear harmonies with the Conservative effort to build a ‘United Front Against Socialism’ with the National Liberals most particularly and Liberal opinion in general.⁸⁵ In this context it made sense for Macmillan to play down the more Statist aspect of his middle way, and instead to emphasize the question of whether ‘the free society which Conservatives and Liberals have built up over centuries … [is] to be sustained and strengthened … [or] to pass quite rapidly into the full Socialist State?’⁸⁶ At the same time, however, he reminded Liberals of their own interventionist past, when he noted that ‘The “Welfare State” is the work of a long line of Liberal and Conservative reformers’.⁸⁷ He thereby opened a route to an argument that the Conservatives offered the best available defence of economic freedom, whilst at the same time preserving the positive freedoms first introduced by the social reforms of the New Liberals.

Macmillan himself presented his position as wholly consistent with the one he had held in the inter-war years and expressed most fully in The Middle Way. His argument was a straightforward version of the familiar politician’s story that his views had not changed, but that circumstances had. His claim was that in order to keep to the middle way one had to correct the over-steer to the Left caused by the Labour government’s wrench on the wheel. Writing in 1950, Macmillan argued that in the nineteenth century laissez faire had ‘inflated the rights of the individual to the point at which social responsibility for the welfare of all citizens threatened to be ignored’. In post-1945 Britain, he contended, ‘The Socialists have inflated the rights of the State to a point at which they fhave) threatened the rights of men’, with the result that in reaction against one extreme, we are in danger of rushing, or of being rushed, towards the other’.⁸⁸ On this basis he could claim that he was, as he had been before the war, seeking to devise a ‘compromise … between the extreme individualism of the early nineteenth century and the totalitarian tendencies of modern Socialism’.⁸⁹

There were clear continuities between Macmillan’s pre- and post-war ideas, but there were important differences as well. It would be all too easy to attribute these changes simply to the fact that he faced new circumstances and different political opponents. But the relationship between the new context and subtle shifts in Macmillan’s ideas requires close appraisal. The most important change in Macmillan’s outlook was a dilution of his views on the role of the State. He had not been a great proponent of State ownership, management, or control of industry, except in those cases where private enterprise had failed to take the necessary steps to organize itself efficiently. However, he had outlined an important role for the State in terms of using its power to construct an institutional environment conducive to enterprise, and to influence and even guide the structure of industry. In this respect the main emphasis of his arguments in the 1920s and 1930s had been on the microeco-nomic environment. Elements of this were still evident in his post-war ideas. The removal of restrictive practices, whether those of capital or labour, was one theme which recurred in his speeches and writings after 1945, but this in itself marked a shift: before the war he had been anxious to encourage cartelization, whereas post-war he sought to ‘throw the searchlight of enquiry on all monopolies or restrictive practices … [to] encourage enterprise and efficiency’.⁹⁰ That problems of over-capacity had given way to shortages, and that restriction was no longer either necessary or in the public interest, was Macmillan’s explanation of his position, but his adoption of a more unfettered language of free enterprise marked a change of emphasis. But the most important shift in his position concerned the general governance of the economy. He defined the main economic tasks of government as being to secure full employment and rising living standards, and he argued that The instruments for these tasks are the control of credit and currency, the supervision of the location of industry, taxation policy and the like. They cannot be secured by the direct intervention of the State in the ownership and management of industry and commerce.’⁹¹ His desire to avoid State ownership, management, and control was consistent with his pre-war position, but his emphasis on monetary and fiscal controls marked a departure. Macmillan had altered the parameters of his economic policy strategy, with the macroeconomic variables being given greater weight than the micro. He had inverted his pre-war priorities and, in effect, moved towards an acceptance of what came to be known as Keynesian demand-management techniques. He was not alone in this. The Labour government, as it found microeconomics industrial planning difficult to implement, looked to the indirect controls offered by fiscal and monetary policy as an easier way of managing the economy.⁹² At the same time, many Conservatives saw demand management as the means to achieve the politically crucial goals of high and stable employment and rising living standards whilst avoiding direct State intervention. Macmillan’s position is thus best understood when placed within the context of the ‘retreat to consensus’ that characterized the direction of British economic policy debate in the last years of the Attlee government, with demand management emerging as the best available, or most politically acceptable, form of government action.⁹³

Conservative governments of the 1950s adhered to the demand-management strategy for governing the economy, and sought, where they felt it was politically feasible, to withdraw the State from direct intervention in the economy. Rationing and controls were ended and removed, two industries were denationalized, and scope for the private sector was extended.⁹⁴ Macmillan, as housing minister from 1951 to 1954, was fully in accord with this strategy, and indeed played an important part in it. When he was offered the Housing Ministry Macmillan’s response was, ‘Oh dear, it is not my cup of tea’,⁹⁵ but his success in fulfilling the Conservative promise to build 300,000 houses was his springboard to senior Cabinet office. His strategy for housing in many ways encapsulated the Conservatives’ broad economic policy, insofar as, without by any means abandoning public housing, he sought to deregulate the housing market and encourage both private building and the private rental market.⁹⁶ But when Macmillan took the position of Chancellor in 1955, and then Prime Minister in 1957, and perforce focused his mind on economic policy in the round, he began to confront problems which led him to question the adequacy of demand management.

When he became Prime Minister in January 1957 Macmillan’s chief concern was to end the Suez imbroglio and repair the damage it had done to Britain’s international standing and to the Conservative party. However, by the end of the year his difficulties were chiefly economic. Above all, inflation emerged as a significant economic and political problem, generating a ‘revolt’ amongst the Conservatives’ middle-class core constituency in particular.⁹⁷ Macmillan himself was more than aware of the economic aspects of the problem, for it was during his tenure of the Exchequer that the Treasury produced the 1956 White Paper The Economic Implications of Full Employment, which underlined inflation as the chief such implication. Moreover, he publicly signalled his awareness of the political implications of the problem in July 1957, when, speaking at Bedford, he stated that the ‘constant concern today is—can prices be steadied while at the same time we maintain full employment in an expanding economy? Can we control inflation? This is the problem of our time.’⁹⁸ On the day he made this speech Macmillan recorded in his diary that the Cabinet meeting had been dominated by the question of inflation. He also noted that the newspapers were ‘still running the “Rising Prices” and … demand … that the Prime Minister should act’, but added with irritation, ‘How he is supposed to act, no one ventures to propose’.⁹⁹ For most of 1957 Macmillan supported the strategy for controlling inflation adopted by his Chancellor, Peter Thorneycroft, which was to deflate the economy by reducing public expenditure and investment. This was hardly surprising, in that, leaving aside his sense of political urgency, Macmillan had pursued this strategy himself when Chancellor.¹⁰⁰ In early September he drew up a Memorandum on inflation which gave strong support to the Chancellor’s deflationary policies.¹⁰¹ Macmillan recorded in his diary that this Memorandum was written ‘primarily for the Chancellor’, but after he had completed it he noted that ‘I may decide to circulate it to the whole Cabinet’.¹⁰² He duly did so, indicating it seemed that Nos. 10 and 11 were wholly in accord. But, also in September, he was being warned by his economic guru, Roy Harrod, that Thorneycroft was creating the impression that the government adhered to a simple monetarist view of inflation. ‘The idea’, Harrod declared,

that you can reduce prices by limiting the quantity of money is pre-Keynesian. Keynes spent half his energy inveighing against precisely that idea. Hardly any economist under the age of 50 would subscribe to it. If it were supposed that the Conservatives were associated with such an idea, that might drive many middle of the road economists into the ranks of Labour … I do sincerely hope that no Govt. speaker will use words implying that the Govt, subscribes to such an antiquated doctrine.¹⁰³

Harrod’s criticisms were cleverly aimed, for he knew that Macmillan admired Keynes and that the last thing the Prime Minister wished to appear was ‘antiquated’. Macmillan may have found Harrod’s arguments persuasive, or he may have become concerned that Thorneycroft had indeed fallen under the influence of his monetarist-inclined Treasury ministers, Enoch Powell and Nigel Birch, and was pressing for too strong a deflation on the wrong policy lines. However, Macmillan did not support his Chancellor, either in the run-up to or at the crucial Cabinet meeting of 6 January 1958 which saw the resignation of the entire Treasury team. Macmillan’s position, although he was not alone here, was that the ‘swingeing cuts in … Welfare State expenditure’ demanded by Thorneycroft were ‘more, I fear, than is politically feasible’.¹⁰⁴ The fact is, however, that one of the reasons they were not politically feasible was because the Prime Minister, having stated in August that his Chancellor ‘must be bold’,¹⁰⁵ was unwilling to be bold himself. Harold Wilson famously remarked with regard to the Suez crisis that Macmillan was ‘first in, first out’, and perhaps the same thing was true of the ‘inflation crisis’.

Although Macmillan’s Treasury team went away, the problem of inflation did not. Soon after the Treasury team’s resignation Macmillan left for a Commonwealth tour, and told journalists at the airport that he had more important things to consider than ‘little local difficulties’. Six weeks later, in a speech to mark the twentieth anniversary of the publication of The Middle Way, Macmillan admitted that he had been less sanguine. He noted that in 1938 unemployment had been the most pressing problem, whereas in 1958 reconciling full employment with stable prices was ‘for us the problem’,¹⁰⁶ and that the ‘middle way’ in 1958 was to be found between inflation and deflation. He confessed that, ‘The day I left for my Commonwealth tour I had a feeling that the strict puritanical application of deflation was in danger of being developed into a sort of creed’.¹⁰⁷ However, he congratulated himself and his government upon having avoided extremes, and used a metaphor that for many commentators summed up the Conservatives’ management of the economy in the 1950s, to wit, that just as ‘both a brake and accelerator are essential to a motor car’, so they were for an economy as well.¹⁰⁸ The 1958 Budget applied a touch on the brake in the form of a milder deflationary package than the one Thorneycroft had called for, and inflation fell accompanied by only a small rise in unemployment. The following spring the government pressed the accelerator with an expansionary, pre-election Budget, but in early 1960 Macmillan was being warned that the inflationary consequences of this action were already apparent, that the problem of reconciling full employment and stable prices was unresolved,¹⁰⁹ and that the political difficulties that had been extant in 1957-8 were being reawakened.¹¹⁰ The latter-day ‘middle way’ was proving difficult to find.

The difficulty of balancing employment and prices, affluence and stability, raised doubts as to the adequacy of the instruments of economic control available to the government and the overall efficacy of demand management as a means of governing the economy. Demand management placed emphasis on government use of fiscal and monetary policy as the key instruments of policy. The fiscal levers appeared, in the shape of the Budget, to be completely in government hands, but control of spending by relatively autonomous local government authorities, and even that of central government departments, was not unproblematic, as was acknowledged by the appointment of the Plowden Committee in 1959 and subsequent creation of the Public Expenditure Survey Committee in 1961.¹¹¹ But, in the first instance, it was control of the monetary levers that most exercised Macmillan. After the nationalization of the Bank of England in 1946, control over interest rates lay with the Treasury, but there were no government controls over the banks and financial system. On two occasions in the 1950s enquiries were made of the Treasury Solicitor as to whether the government could issue directives to the banking system through the Bank of England, but on both occasions the reply was in the negative.¹¹² This absence of government control over the banking system, especially in relation to banking advances and the availability of credit, was an issue that Macmillan had raised as Chancellor, and, as will be shown in the following chapter, it was a key aspect of the debate on monetary causes of inflation in 1957-8.¹¹³ In early 1957, largely as a result of pressure from Macmillan when he was at No. 11, the government established a committee—the Radcliffe Committee—to inquire into the workings of the monetary system and to investigate the possibility of strengthening governmental powers. The Radcliffe Committee, which reported in 1959, recommended increasing the government’s authority, and in particular advocated the introduction of a Bank of England Special Deposits scheme to limit bank advances.¹¹⁴ Its recommendations were implemented, but concern, especially Macmillan’s, was by no means fully assuaged.

In the inter-war years, as noted above, Macmillan had entertained a profound suspicion of the banking sector, and his views did not change dramatically after the war. In 1952, when Housing Minister, Macmillan had felt that the encouragement of long-term investment held the key to Britain’s future prosperity, and that short-term balance-of-payments problems should not dominate policy decisions. When Treasury officials sought to counter his argument by ‘appealing to the views of the City and the Bank of England’, Macmillan was ‘tempted, perhaps improperly, to make the disrespectful reply that while the authority of the City, and particularly the Bank of England, must always be great, yet the most tender critic of the financial policies proposed by successive Governors could scarcely maintain that the Bank had always given wise advice’.¹¹⁵ Although in public hands, the post-war Bank of England still tended, in Macmillan’s view, to see itself as the voice of ‘the City’, and he could not resist recording that even a Governor whom he admired, Lord Cromer, was ‘not a Baring for nothing’ when it came to policy.¹¹⁶ As regards the clearing banks, Macmillan’s views veered between irritation and contempt. During the ‘inflation crisis’ of 1957-8 he had been frustrated by their apparent unwillingness to curtail their advances. He had high hopes of the Radliffe Committee, and was greatly disappointed when it did not produce suggestions for more far-reaching government controls.¹¹⁷ What irritated Macmillan most, however, was that the banks seemed willing to bypass the controls that had been introduced on the Radcliffe Committee’s recommendation. In August 1960 Macmillan was furious when he learned that the Midland Bank, having been asked to make a Special Deposit, had proceeded to sell £15 million of Treasury Bills to replenish their liquidity. Writing to his newly appointed Chancellor, Selwyn Lloyd, the Prime Minister launched into what can only be desribed as a diatribe, arguing that:

The City, especially the Clearing Banks, seem to me to be out of touch with modern conditions. It is all very well for them to say it is their job to make money for their shareholders and that they won’t co-operate with the Treasury on something which may cause them losses or may reduce their profits. If capitalist society as a whole were still to take that view we should be very near the crash … If the Chancellor says he wants the base of credit restricted he ought to be able to have a meeting with them, tell them what he wants, and rely upon them to carry it out … At present it is all kept as a sort of mystery, very much on an ‘old boy’ basis. This is all very well, but it needs some new look at it all.¹¹⁸

Given that this statement was made less than a year after the Radcliffe Comittee’s report had supposedly provided such an in-depth ‘new look’, the Prime Minister’s outburst was indicative of a deep-seated frustration.

For Macmillan, the point of ‘the whole question of the Bank of England, the Clearing Banks and the Treasury’ was ‘to make a real partnership out of the three’,¹¹⁹ and to bring the financial sector into line with the government’s overall economic strategy. With regard to monetary policy this meant greater control over the quantity of bank lending, but in broader terms the quality of lending, in terms of its purpose, was also crucial. In March 1959 the former Minister of Labour, Lord Monckton, wrote to Macmillan advocating an expansionary economic strategy, based on a ‘considerable’ increase in the supply of money and, if necessary, a budget deficit. He added, however, that ‘the fillip to personal spending on “consumer durables” has probably exhausted itself … [and that] what is needed now is to provide inducements to private capital expenditure’.¹²⁰ This message was underscored in the spring of 1960 by one of Macmillan’s close allies in his earlier battles with the banks, David Eccles, who argued that the City’s penchant for overseas lending had to be curbed, and domestic investment increased, on the grounds that ‘it is better to be a strong manufacturer and producer of food than to be a weak lender overseas’.¹²¹ Selwyn Lloyd attempted to bring about this boost to domestic investment between 1960 and 1961. To begin with, he introduced generous investment allowances for business in his Budgets, but, approaching the problem from the other end, he noted in July 1961 that ‘The banks have been asked that, when reviewing existing commitments or considering new lending, they should be particularly severe on proposals related to personal consumption, including finance for hire purchase, as well as finance for other speculative purposes, so that all possible room should be left for the finance vitally needed for exports and productive industry’.¹²² Lloyd enjoyed only limited success, and in the spring of 1962 Eccles was again writing to Macmillan to stress that ‘increases in purchasing power going to consumers’ through simple reflation were not wanted, and that the economy needed ‘a transfer of resources from consumption to various forms of investment’.¹²³ In 1963 Macmillan pressed his fourth and last Chancellor, Reginald Maudling, to shape his Budget for the ‘encouragement of private investment’, on the grounds that this was the soundest way to bring unemployment down before the impending election. But ‘encouraging’ investment did not necessarily ensure that banks would lend to industry or that industry would borrow. At the same time, Macmillan looked to the Budget to ‘touch the accelerator’ by giving a boost to consumer spending, but here too he confronted problems. In the late autumn of 1963 the clearing banks raised their overdraft interest rates, which prompted a ‘furious’ reaction from Macmillan who saw the banks undermining the government’s expansionary policy.¹²⁴

The ongoing technical and institutional difficulties presented by managing demand through fiscal and monetary policy had, by the early 1960s, raised important doubts about their adequacy as tools of economic governance. These doubts were only further strengthened by the problems which the British economy faced. Reconciling stable prices with full employment was the first problem to surface, but another problem emerged in the late 1950s and early 1960s which led Macmillan to call for a new approach to governing the economy—the problem of slow growth. The modern ‘discovery’ of British economic decline took place in the period from 1958 to 1960. The key to this discovery was the burgeoning number of comparative, international economic surveys by both individuals and organizations, such as the OECD, which showed that Britain’s rate of economic growth lagged well behind those of other industrialized nations. These surveys had a marked impact on and were internalized by both politicians and civil servants engaged in the ‘official’ discussion of Britain’s economic situation,¹²⁵ but they also gained a wider audience. Britain’s growth rate was the main topic of debate at the Federation of British Industry’s [FBI] annual conference in 1960, and in early 1961 the runaway success of Michael Shanks’s The Stagnant Society, in which slow growth was a central feature of Britain’s economic stagnation,¹²⁶ was accompanied by widespread discussion of Britain’s relative failure in the press. Small wonder that in July 1961 the Chancellor and his Treasury officials noted that, ‘In the past year public interest in the rate of economic growth in this country has been intensified’.¹²⁷

The problem was obvious, but for Macmillan, like Lenin, there remained the question of what is to be done? The Treasury Report of July 1961, cited above, was clear that ‘Experience in the 1950s has shown conclusively that merely to increase demand in the short run in relation to the resources available does not increase national efficiency’. The Report went on to point out that when demand was ‘managed’ to reach a peak, imports flooded into the country, indicating that even at peak capacity British manufacturers were neither productive nor competitive enough. It suggested that, to overcome this problem, ‘the modernisation of our market economy needs to be accelerated by a revolution of attitudes parallel to the revolutionary achievement of full employment and social services’, and it further contended that, ‘In this revolution the Government has a part to play by striving to remove obstacles to the effective operation of a market economy in the production of goods and service’. The Report ruled out extensions of public ownership, and was forthright in its view that ‘The exploitation of the most rewarding investments by private industry is better secured through the operation of the market’, on the grounds that the market was better than the government at ‘picking winners’.¹²⁸ The policy implications of the Treasury’s arguments were that arm’s-length governance of the economy, through the use of fiscal and monetary levers to manage demand, had not brought the British economy to optimum levels of efficiency, and that a more active role for the State was required.

Since taking up the Chancellorship in July 1960, Selwyn Lloyd had been moving towards advocating a more ‘hands on’ role for the government in the economy, and had discussed the general direction of his ideas with Macmillan in early summer 1961. In May Macmillan told Lloyd, ‘I like your idea of a little more planning in the economy’,¹²⁹ and, shortly after Lloyd’s July circular to the cabinet, he told his Chancellor:

I do not think we ought to be afraid of a switch over towards more direction. Our party has always consisted of a number holding the laissez faire tradition, but of an equal number in favour of some direction. So far as I am concerned I have no fear of it because these were the policies I recommended before the war. Therefore I shall be able to claim, like Disraeli, that I have educated my party.’¹³⁰

Educating the party and the country at large began in earnest in September 1961, when Lloyd, in consultation with the Cabinet, drew up a letter to employers’ organizations and trade unions inviting them to join a new consultative body that was to become the National Economic Development Council (NEDC).¹³¹ This body was to have a membership drawn from employers, trade unions, and government, and was to provide

a more effective machinery for the co-ordination of plans and forecasts for the main sectors of our economy … study centrally the plans and prospects of our main industries … correlate them with each other and with the Government’s plans for the public sector, and to see how in aggregate they contribute to, and fit in with, the prospects for the economy as a whole.¹³²

Macmillan threw his weight behind this proposal in a memorandum to Cabinet in mid-September, and also suggested that the NEDC be ‘supported by the establishment of a high grade planning staff in an office, which, while it would be linked with and use the information of the Government machine, would have a considerable measure of independence and authority’.¹³³ This ‘planning staff came into being as the National Economic Development Office (NEDO), and began operating in adjunct to the NEDC from March 1962.

The new planning machinery did not enjoy an easy birth. The TUC was initially suspicious of and reluctant to co-operate with the NEDC, largely because it felt that the new organization would place the blame for Britain’s slow growth on the ‘wages problem’, and would bring pressure to bear for the introduction of a restrictive incomes policy.¹³⁴ The employers’ side was more positive: the President of the FBI agreed that something had to be done about low rates of growth, and stated that as ‘all of us plan in our businesses’ there was ‘no reason why we should be afraid of the word’.¹³⁵ In Cabinet, Macmillan and Lloyd encountered ‘a surprising degree of hostility’ to aspects of the new planning strategy:¹³⁶ the President of the Board of Trade, Reginald Maudling, expressed scepticism as to whether an ‘independent body’ would carry weight with either trade unions or employers, and concluded that, ‘in a free enterprise system there is no real room for central planning in the proper sense of the word’.¹³⁷ Macmillan, however, sought to assuage the concerns of his Cabinet colleagues about the NEDC’s purpose, and argued that its object was ‘not to dictate or enforce measures of economic planning, but to influence the attitudes and independent decisions of employers and unions’.¹³⁸

When Macmillan was preparing to meet with his Cabinet on 21 September 1961, he asked his civil servants to add a paragraph to a memorandum he had written ‘setting out the purpose of the new Council [NEDC] and the middle way which was possible and desirable between extreme laissez faireism and rigid planning’.¹³⁹ Macmillan, as his correspondence with Lloyd in the summer of 1961 had shown, consciously constructed the new departure as a renaissance of his prewar principles.¹⁴⁰ It is easy to see why Macmillan made this connection. The role he envisaged for the NEDC was advisory rather than directive and controlling, which was very similar to the position he had envisaged for the NEC in The Middle Way. Likewise, the idea of the NEDO as a body of independent experts was akin to the body of ‘informed opinion’ working as an institute ‘outside Party shackles’ that he had suggested to Keynes in 1932.¹⁴¹ The most important echo of The Middle Way, however, was the emphasis on the NEDC’s role as a forum which would bring together the most important actors in the national economy, in the public and private sectors, and enable them to co-ordinate their individual plans in terms of agreed national economic goals. This was to overcome the problem of economic interests acting in a disaggregated fashion with no national purpose—a problem which, as noted above, Macmillan had outlined as central in 1938.

The interdependence of all sectors of the national economy was built into the practical goals as well as the principles of the NEDC. By May 1962 the NEDC] had announced that the target rate of growth for the economy was 4 per cent, which the FBI leadership thought was feasible if conditions allowed. One important condition was the position of trade unions on wages. The ‘wages problem’ had been ongoing since the mid-1950s, and in 1960-1 the government had implemented a ‘pay pause’ in the public sector and urged the private sector, without success, to follow suit. At a Cabinet meeting in January 1962 Macmillan stated that ‘the main objective at this stage was to secure the co-operation of the TUC in long-term planning directed towards economic growth’¹⁴² The way to achieve this was, the Cabinet agreed, to convince the trade unions that growth rather than industrial action was the best route to higher wages. This was an argument Macmillan repeated in the autumn, when he told Oliver Poole: ‘There is nothing that I can see inconsistent between an incomes policy and an expansionist policy. Indeed an expansionist policy must lead to trouble unless some reasonable incomes policy can go with it.’¹⁴³ But the question remained as to how to persuade the trade unions to agree to ‘planned wages’. Alongside the NEDC] the government established the National Incomes Commission (NIC]) to monitor and advise on wage settlements, but it had no statutory powers and, like the NEDC], its tools were to be persuasion and influence. But persuading the TUC] required that there be persuasive arguments and actions. In July 1961 Macmillan had suggested that increased welfare benefits and pensions could be a means to obtain union agreement to six-monthly assessments of the level of wage increase commensurate with the rate of growth.¹⁴⁴ In January 1962 the Cabinet felt that restrictions of prices and dividends could be a persuasive quid pro quo for trade union agreement to wage restraint.¹⁴⁵ However, the most important action that Macmillan set in train in the spring of 1962 was the abolition of Resale Price Maintenance (RPM). The decision to abolish RPM appears at first glance somewhat paradoxical, insofar as it represented a withdrawal of State intervention at a time when Macmillan was arguing for a greater role for government in the economy. But the logic here was that if RPM went then high-street prices would fall, and with government having demonstrated a commitment to lowering the cost of living, trade unions could be persuaded to accept wage restraint.¹⁴⁶ The connections between growth, industrial relations, wages, and prices were all thrown into relief once the new search for ‘the middle way’ was begun in earnest.

But although Macmillan was keen to acknowledge the interdependence of all sectors and aspects of the economy, he wished to avoid the macroeconomic trap of the 1950s. By the winter of 1962 the NEDC, NEDO, and NIC had been established, but Macmillan was clear that only the first objective had been reached in the new era of planning. In a memorandum to Cabinet he stressed that ‘We have now reached a stage in our post-war history where some more radical attack must be made upon weaknesses of our economy, both productive and structural’.¹⁴⁷ The removal of restrictive practices in order to boost industrial productivity was one of Macmillan’s priorities, but he also argued that the imbalance in British society between the North and South had to be addressed, and stated that:

Our efforts in this have been mainly directed to influencing the economy as a whole; and whether we have been concerned to stimulate it or to restrain it, our methods and techniques have been largely indiscriminate. But this concept of influencing the economy as a single entity has led to a situation in which, in order to reduce unemployment to an acceptable level in some areas, we have to stimulate excessive employment in others. 2-3% overall OK, but 5% in some areas.¹⁴⁸

The implication of this was clear. The microeconomic emphasis of Macmillan’s inter-war political economy had resurfaced. Industrial growth, restructuring, and regeneration were once again the focus of his interest, with an emphasis on the need for a regional bias in order to ‘rectify the imbalance between south and north—between the “rich” areas and the “poor” areas, the over-employed regions and the underemployed regions—and redress the grave social anomalies which are created by this’.¹⁴⁹ As in The Middle Way, economic efficiency was the basis for the amelioration of social ills: government influence over the location of industrial growth would ensure that prosperity was evenly distributed, and the attendant buoyancy of government revenues would provide funds for social welfare without recourse to increased taxation.¹⁵⁰

Harold Macmillan’s political economy represented a lifelong quest for the middle way. The most obvious balance he sought to strike was between Socialist Statism and laissez-faire capitalism.¹⁵¹ In 1994 one Thatcherite Conservative described The Middle Way as a work of ‘nearly Bennite Socialism’,¹⁵² but it would be difficult to construct a more inaccurate description of Macmillan’s view of the State either in 1938 or indeed at any stage in his career. Speaking at Cranbrook in November 1946, Macmillan outlined what in his view differentiated the Conservative from the Socialist position: ‘We accept, and indeed demand, the broad strategic planning which, especially in a period of post-war reconstruction, is of vital necessity. We reject day to day and detailed interference with industry on a tactical level. Most of all we protest against the actual ownership and management of individual industries by the State.’¹⁵³ Macmillan’s view of the role of the State, which shifted only within very narrow boundaries over the whole of his life and career, was that it should assist, enable, and advise free enterprise but should only play a direct role when all else, and in particular free enterprise itself, had failed. In his view the two things that were important about the State were that its duty was to the national interest rather than to any sectional interest, and that, as a consequence, only it possessed the information to see which economic developments would best serve the national interest. Given that particular economic interests in a nation were themselves part of the national economy, there was no intrinsic need for the State to own, control, or direct them. If the State provided information, co-ordination, and support, the interests of free enterprise and the national interest would for the most part naturally coalesce. It was for this reason that Macmillan advocated the self-regulation of industry in the 1930s, rejected day-to-day State interference in the immediate post-war years, and spoke of his dislike of detailed planning in 1961. At the same time, however, he had no time for laisssez faire, which, he felt, had produced the economic and social waste of the inter-war years.

Finding a balance between the State and free enterprise was one aspect of Macmillan’s middle way, but a social balance between the classes was equally important to him. This was one reason why he rejected laissez faire, in that the abdication of social responsibility attendant upon this nineteenth-century Liberal philosophy had resulted in the social neglect of the working class and chronic social deprivation. Macmillan supported the introduction of the Welfare State, but above all he campaigned for and sought to maintain full employment as the best means of helping the working class to help themselves. That one consequence of full employment was a growth in the bargaining position of organized labour was undoubtedly a political and economic irritation for Macmillan, but for political and social reasons he proved willing to tolerate this. Politically, Macmillan felt that full or near-full employment was an electoral necessity, and that any government that allowed unemployment to rise would be punished by the electorate.¹⁵⁴ He was, in this respect, the first Prime Minister fully to adhere to and articulate what was to become a received wisdom, that the electoral fate of governments was determined by a few, key economic indicators. Trade-union militancy was ‘tolerated’ for a different, though related, reason, in that Macmillan resisted calls from the Conservative party rank and file for a reform of trade-union law on the grounds that it might alienate trade unionists who were, in Macmillan’s eyes, unwont-edly voting Conservative.¹⁵⁵ But in addition to reasons of Realpolitik, Macmillan had a predisposition to give the working class the benefit of the doubt, partly because he disliked the middle class. His well-known request to Michael Fraser at CRD to note down on a sheet of paper what the middle class wanted can be read as typical of Macmillan’s sang froid in the face of the ‘middle-class revolt’. But it was perhaps also indicative of the fact that middle-class wants were not worth more than a single piece of paper. In 1951 he described the Economist’s assaults on the Labour government as ‘a mixture of fear and middle class jealousy towards the Conservatives’,¹⁵⁶ and in 1962 he attributed poor by-election results to the revolt of the middle classes, ‘who resent the vastly improved condition of the working classes, and are envious of their apparent prosperity & the luxury of the rich’.¹⁵⁷ For Macmillan, the most active, if largely unseen, proponents of class envy were the middle classes, and as a consequence he held a low opinion of them.

But Macmillan’s dislike of the middle classes was as nothing compared to his dislike of the financial community. In Reconstruction, his call for a more rational financial system in Britain implied that bankers were irrational, but when in The Middle Way he stated that their speculative activities performed no useful social function, he was, in effect, implying that they were parasites. In 1961, when involved in discussions with the International Monetary Fund, Macmillan noted that they would call for reductions in government expenditure before allowing Britain to draw money, and also remarked that, ‘if the package [of reductions] is not good enough the international usurers—bankers—will turn us down’.¹⁵⁸ Although the particular ‘international usurers’ in this case were the IMF, this comment summed up Macmillan’s general criticism of bankers and financiers, which was that they were interested only in their own sphere of economic activity and had no sense of social or national responsibility. The IMF’s ‘usurious’ behaviour came less than a year after the Midland Bank’s ‘anti-social’ behaviour had provoked his diatribe against the City, and only served to confirm Macmillan’s prejudices. That the banking community had no part in Macmillan’s plan for the ‘Modernization of Britain’ in the early 1960s, and the Bank of F^ngland actively discouraged banks from participating in the NF1DC, both reflected and confirmed Macmillan’s view that the financial sector could not and would not tread the middle way.

Harold Macmillan was referred to, in the title of one biography, as The Last Edwardian at No. 10,¹⁵⁹ not simply because he had grown to adulthood in the Fdwardian period, but because of his dress, public manner, and patrician lifestyle. But his political economy also had distinct inflections of Fdwardian Conservatism. The fact that when he first stood for Parliament it was as a tariff reformer should not be overestimated: rather, the broad sweep of Macmillan’s ideas on economic policy as they evolved over the course of his career prompts the comparison. His dislike of the financial sector was very reminiscent of that voiced by Fdwardian Conservatives. Where he referred to bankers as ‘international usurers’, they had denounced them as ‘cosmopolitan finance’,¹⁶⁰ but the underlying objections were the same, namely, that financial interests were too international and, therefore, not concerned with the economic health of Britain’s domestic, productive economy. In this respect Macmillan adhered to and developed aspects of the nationalist political economy that had underpinned the Fdwardian tariff campaign.¹⁶¹ His advocacy of tariffs, both for protection and imperial preference, in the 1920s and 1930s is one obvious echo, but the overall rationale of his economic strategy in the inter-war years indicates a broader resonance. In Industry and the State, Macmillan and his coauthors were clear that inductive rather than deductive reasoning was the best way of approaching questions of economic policy, and in The Middle Way he stressed that history and economics had to be taken together as the essential guides in such matters¹⁶² positions which were entirely in keeping with the historical economic philosophy that had informed the tariff campaign.¹⁶³ Moreover, as had been the case with the late-Victorian and Edwardian historical economists, Macmillan saw the historical evolution of monopoly capitalism as evidence of the redundancy of laissez-faire, Liberal economics, with its emphasis on individualist, small-scale production.¹⁶⁴ The essential logic and shape of Macmillan’s economic ideas was very similar to that of the Edwardian tariff reformers.

The trajectory of Macmillan’s ideas after the Second World War reflected the way in which Britain’s retreat from Empire and its decline in world economic status brought about an intriguing shift in the nature of his national economics. The basic aim of securing the economic strength of the nation remained a given, but the post-war liberal world trading order structured by the United States placed constraints on the room for economic manoeuvre. In late 1957 Macmillan launched what he saw as his big theme in terms of defining Britain’s role as it lost its Empire, which was the concept of ‘interdependence’.¹⁶⁵ In specific, diplomatic terms this meant cementing Britain’s alliances with the United States and within NATO, but in more general terms it meant acknowledging that Britain, without its Empire, could not stand either militarily or economically contra mundi. This in turn meant that it was in Britain’s national interest to build and participate in partnerships with other nations, which was, in this respect, the ‘nationalist’ logic behind Macmillan’s ‘grand design’ for British entry into the European Economic Community. Unlike ‘isolationists’, such as Lord Beaverbrook, Viscount Hinchingbrooke, and other opponents of the idea of interdependence in general and the EEC in particular,¹⁶⁶ Macmillan, and some other inheritors of the national-imperial mantle,¹⁶⁷ sought to ‘turn their minds from the old Imperialism … to a new concept of Britain’s ability to influence the world’.¹⁶⁸ For Macmillan, Britain’s ability to influence the world was and always had been dependent on its possession of economic strength, and in a post-imperial era that national economic strength would come from an acknowledgement of the need for economic partnership with other nations striving for similar goals in an interdependent world.

The failure of Macmillan’s ‘grand design’ to gain entry to the EEC did not bring an end to his attempt to ‘modernize’ the British economy. Quite the reverse. In December 1962, when he circulated his memorandum on the ‘Modernization of Britain’ to the Cabinet, he already knew that de Gaulle was likely to veto Britain’s entry. Membership of the EEC was certainly an important element in his design to bring about the political and economic modernization of Britain,¹⁶⁹ but the domestic economic aspects were just as important, and became even more so when the assistance of EEC membership was denied. Hence, on the day before the formal announcement of the EEC’s rejection of Britain’s application, Macmillan wrote to his Chancellor of the Exchequer to advise him that: ‘In view of the probable break down at Brussels I feel that the Budget ought to be concentrated on help to industry, especially exporting industry as well as to the encouragement of private investment … [and that] lower rates of income tax and other such reliefs fare of] less importance than our industrial and commercial interests.’¹⁷⁰ In the wake of the European disappointment, the role of the NEDC, the NIC, and assaults on restrictive practices such as RPM took on, if anything, an increased significance for Macmillan as he pressed on with his quest to modernize the British economy.¹⁷¹ This was confirmed by a meeting at Chequers in April 1963, at which members of Cabinet and Conservative party research officers discussed the whole range of the modernization strategy. The meeting concluded that problems of slow growth, lack of investment in British industry, and the inadequacy of industrial research and development required the State to ‘take a more active role’, not in terms of ownership but in terms of ‘conscious (iovernment support’ to show the country that, ‘while we were giving people every chance to take advantage of their opportunities, the Government was taking a hand in shaping the economy’.¹⁷² In the autumn of 1963 ill-health forced Macmillan to abandon this quest in person, and he was concerned that his party might do so as well. In July 1961 he had, as noted above, expressed the hope that he had ‘educated his party’ to accept the notion of a ‘middle way’, but as the contest to succeed him as leader and Prime Minister took shape he evidently had doubts about this. He recorded in his diary that a ‘“draft” Home’ movement was underway, and that Quentin Hogg, the contender whom Macmillan himself had initially favoured, ‘had almost thrown it away’. But he also stressed that, ‘What worries me in all this is the underlying struggle. It is really the old one. I find Hogg … represents what Stanley, & John Loder, & Boothby, & Noel Skelton & I had tried to represent from 1924 onwards’,¹⁷³ with the implication being that the other contenders, including Home, did not. Realizing that Home’s emergence as leader was least likely to result in a party split, Macmillan accepted that he was the most acceptable candidate in the immediate circumstances. But having attempted throughout his career to steer Conservative political economy along the middle way, Macmillan retired unsure of whether his party would continue on the course he had set.