The moral of the Department of Economic Affairs
Samuel Brittan: Remarks at Treasury Seminar 22/10/07
This talk is part of a series, designed to throw some light on the modern history of the Treasury, its ethos and functions. The Department of Economic Affairs was of course a separate department, seen by some Treasury hands as a rival or, at best, a wasteful nuisance. But its evolution and eventual demise in the 1960s throw a good deal of light on how the Treasury was seen, not only by politicians but by many officials in other departments and by critics in the academic world and Whitehall. The subject is of more than antiquarian interest, as it uncovers some problems which are still very much with us.*
Although my own post at the DEA was a minor one, I can claim to have been there at the beginning; and as an economic journalist had followed closely the thinking that led to its establishment. Perhaps half the story is purely political and personal. Harold Wilson, who became Prime Minister in October 1964, had to deal with what may be called the George Brown problem. Wilson had become leader with the support of the Labour left; and George Brown was the nominal leader of the Labour right. But it was not this supposed ideological division which worried Wilson. who was himself far from a socialist in economics - any slight left wing leanings he had were mainly in the area of foreign policy.**
The problem with Brown was his temperamental instability. He did indeed have a drink problem; but this lay mainly in his inability to hold his liquor. He could be at his nastiest when dead cold sober. For such reasons some in the centre right of the Labour Party, including its leading intellectual, Tony Crosland, were keen to promote the claims of the common sense middle of the road James Callaghan.
Although Brown was Deputy Leader, Wilson was at first determined that he should be neither Foreign Secretary nor Chancellor. Callaghan became Chancellor and the colourless Michael Stewart Foreign Secretary. One purpose of the DEA was to find a home for Brown which the latter could honourably accept. Given Labour's traditional commitment to planning, it was not too difficult to build up the post, especially when the nearly meaningless title First Secretary of State was added to it.
George Brown's original concept of the DEA was that of a single major overlord department in charge of all aspects of economic policy. The other economic departments, including the Treasury, the then Board of Trade and Ministry of Labour would have been specialised executive arms carrying out the DEA's policy. This conception, as Brown subsequently wrote, never really went into effect. It could hardly have done so when the Treasury was given to the number three man in the Labour hierarchy, who himself had been a candidate for leadership in 1963, and could not reasonably be expected to act as an executant to the policies of another minister.
It was not my impression, even before the October 1964 election, that Harold Wilson ever thought of the matter in these terms. His idea was that rival views of economic strategy, instead of being argued out in the depths of the official machine, would be represented by different ministers, which would bring the Prime Minister into the picture in a way which had not happened under the Conservatives.
The effective end of the DEA came with a set of restrictive measures, introduced by Wilson and Callaghan in July 1966, in a last ditch attempt to save the pound from devaluation. At that stage the DEA's National Plan was formally abandoned. George Brown, who had by then been more or less converted to devaluation, prepared a last moment alternative package, although it was Richard Crossman who first insisted on bringing up devaluation at the fateful Cabinet meeting of July 19, 1966. The pro-devaluation group was heavily outvoted; Brown pushed back his chair and took no further part in the discussion, but was not allowed to leave the room until the end of the meeting. He was later talked out of resignation by Wilson who this time did make Brown Foreign Secretary. Shorn of the National Plan, the DEA continued to lead a shadow existence, first under Stewart and then under Peter Shore, until it was finally abolished in October 1969 while Labour was still in office.
Anyone who is interested can look up the politics and personalities in lots of different sources. I now want to concentrate on the other 50 pc of the reasons for the DEA's existence. For like many other political manoeuvres, it would hardly have been possible without some background of bureaucratic and policy thinking.
There was nothing new in an economic department outside the Treasury. The running of World War Two involved a great many decisions of an administrative kind and physical kind, which came under the direction of the Lord President of the Council, John Anderson. He was served by an Economic Section containing 9 to 12 economists, mostly recruited from the academic world and a Central Statistical Office. These were situated in the Cabinet Office. There was also a small team who worked for Lord Cherwell who advised Churchill directly on any problem that took Churchill's or his fancy - its most notable economist member was Donald MacDougall.
The Economic Section was not moved from the Cabinet Office to the Treasury until 1953; but by then this was largely a formality. Its director, the soft-spoken and underrated Robert Hall, had long advocated demand management in place of physical controls, to be achieved by fiscal rather than monetary policy. So his natural point of contact was the Treasury. There was also something with the grand name of Central Economic Planning Staff under Stafford Cripps which moved with him to the Treasury after he became Chancellor in 1947. This was mainly responsible for writing an annual Economic Survey and was formally dissolved by the Conservative Government in 1958 after it had been seven years in office.
Yet no sooner was the Treasury-led system in place than it attracted criticism. Fiscal demand management was then attacked from the left as being too laissez-faire and not enough hands-on. Others believed that economic policy should not be entirely determined by the Department whose main job was to say no to public spending proposals. These doubts surfaced in the last few years of Harold Macmillan's Conservative Government (1957-63). He and his Chancellor of the time, Selwyn Lloyd, were determined to find something positive and optimistic to balance the 1961 stop-go package and in 1962 they set up the National Economic Development Council under tripartite supervision with - guess who? - Donald MacDougall as its economic director. Many of the NEDO staff were subsequently transferred to the Department of Economic Affairs established by the Wilson Government at the end of 1964.
If I can leap ahead, the idea of a department or group outside both the Treasury and the spending Departments as a third voice in economic policy never really died. The Heath Government established the Central Economic Planning Review Staff under Lord Rothschild in 1970, which was not formally abolished until well in to the Thatcher era (1979-90). Nearer to our own time Gordon Brown evidently believed that the unprecedented ten-year overlordship he obtained over economic policy bypassed any need for a third force. The jury is still out on this period.
What were the substantive arguments behind all this to toing and froing? There were really two, supposedly interlinked. The first was the publicity being given to the French system of indicative planning. This was one of the competing models embraced by critics who believed that the British economy was not growing as fast as it could or should and that something could be learned from foreign models. Another and rival fashion was for the German social market economy, espoused by those who spoke about the German economic miracle. Do not forget that we are talking about the early 1960s, when the German economy had not developed the ossified structure about which the British have more recently become so superior. An earlier model still was Swedish social democracy, which was espoused for instance by Tony Crosland whose book The Future of Socialism had appeared in 1956. This was supposed to combine a market economy with liberal trade policies and an extensive fiscal redistribution of income and wealth.
I will not discuss now whether the British economy was really doing all that badly or how valid it is to try and pick out bits from other countries experiences and fasten them on to ones own national institutions.*** But clearly, the model which most appealed to the founders of the DEA was the French one. Many of those who spoke about French planning had little idea what it really was; or what the point was of the industrial projections for firms that had to sell their products in competitive international markets. Interestingly enough, as a result of experience of the early years of the European Union - then called the Common Market - many of the more thoughtful elements in the French Commissariat du Plan were making the same points, regarding their projections as illustrative only and putting the emphasis on ideas for structural reform, which were not always adopted by the French government or the so-called social partners.
Cutting across these international fads was the second simple idea that there was no department in the British government whose main concern was to raise the underlying growth rate. The spending departments all had their own clienteles while the Treasury had a time honoured commitment to curbing spending and making sure taxes were sufficient to pay for an adequate proportion of what did have to be spent.
These concerns survived the shift from Gladstone to fiscal Keynesianism, as the latter was still consistent with time honoured prudent procedures. The DEA, on the other hand, was supposed to act as a force that gave growth priority.
In fairness to myself, I did not swallow any of this even then. If I can quote from the first edition of my book on the Treasury, which went to press well before the 1964 election: "The snag in most of these plans for a production or economics ministry is that there is something called finance quite apart from economics or production. In fact of course the instruments by which production is influenced in this country are the budget, monetary policy, exchange rate policy and one or two very general controls. Despite all the talk of physical intervention this is likely to remain the case. If the Treasury remains responsible for the balance of payments, for taxation, for the Bank Rate and for the use of devices like the regulator, it is likely to remain the effective economic ministry, whatever nominal changes are made." The Treasury has indeed since lost one or two of these functions - not to a super economics Ministry, but to the Bank of England, a prospect which would have then horrified almost everyone in nearly all parts of the political and economic spectrum, myself included.
You may then ask why I joined the DEA in however junior a capacity. The short answer is that I wanted a gateway out of the Observer, for which I was then writing, and from an editor, David Astor, who may have been a great man in other ways but did not see the slightest point in anything I was writing. If I had been offered a similar job at the Treasury I would have taken it like a shot. But the Treasury was not then in the market for irregulars (as special advisors were then called) except for a couple of very senior economists such as Nicholas Kaldor and Robert Neild, who were personally appointed by the Chancellor. Indeed, although I only spent just over a year at the DEA, some outsiders wrongly thought that I was at the Treasury and accordingly attributed to me knowledge of that Department which they were not willing to accord me before. By the time I left I got fed up with Treasury officials saying to me privately "Why don't you go back to the Financial Times and we will be able to talk to you much more freely?" (They were willing to overlook my period at the Observer as a temporary aberration).
The division of responsibilities between the Treasury and DEA was eventually formulated in a Concordat according to which the Treasury was responsible for the short term and finance and the DEA for the long term and physical resources. I leave you to say who was in the driving seat. The DEA's weakness was that it did not control any of the instruments of economic policy.
Nearly all the DEA economists were privately - and not so privately - strongly in favour of devaluation to remove the balance of payments constraint on growth. Unfortunately that had been ruled out by Wilson, Brown and Callaghan at a summit meeting well before the October 1964 election. The politicians were committed to the now famous concept of a Third Way which would avoid both devaluation and deflation. They left lesser mortals to work out what that was. In the world of Whitehall devaluation became known as the "great unmentionable". (Then don't mention it I remember Brown saying to me before his own conversion).
There was a document prepared by officials just before the change of government known as the Armstrong Report. Its most concrete proposal was for a temporary 15 pc Import Surcharge which the new government proceeded to implement. But as the then President of the Board of Trade Douglas Jay warned, Britain's trading partners would not allow us to keep it for long and it was first reduced and then finally abolished in November 1966.
For the longer term, the main hope was that incomes policy would, by lowering British costs relative to competitor countries, be a substitute for the Great Unmentionable. The Treasury, and to some extent even the Ministry of Labour, were more than happy to leave incomes policy to the DEA. The greatest achievement of the period was a Statement of Intent, published on Dec. 16, 1964, signed by Ministers, TUC leaders and representatives of no less than four employers' organisations. Reginald Maudling, the previous Conservative Chancellor, had tried and failed to achieve a similar declaration earlier in the year. Its main fault, as I wrote only a little while later, was the assumption that individual behaviour could or should be determined by national purpose in normal peacetime conditions. Too much was expected from mythical entities such as management and unions which had no real power to deliver.
Much of the negotiation of this document had to be done by George Brown personally. The TUC leaders would not bargain with lesser fry. The only other DEA person who counted here was a Fred Jones, an irregular who came over from the TUC to assist the First Secretary. When the DEA was dissolved Fred went over to the Treasury where he became a successful, if fairly conventional, official, covering in his time the full range of policy.
The single activity which probably absorbed the greatest number of DEA personnel was the preparation of the National Plan, published in 1965. I can remember that when the skeleton draft was circulated to senior Ministers they found it abstract and unconvincing. But when it came round again, full of supposed industrial detail, they were full of praise. This was precisely the wrong way round.
The objective was to move from an economic growth rate of 3pc pa, which was then regarded as the norm, to something nearer 4pc. Hardly anyone in the DEA thought that this could be achieved because of the balance of payments constraint. Nevertheless the Plan was rigorous in its own terms. It was an honest attempt to figure out what the economy would look like if 4pc growth could be achieved. The detailed industrial estimates were far more suspect. They were not projections on which any firm was actually working, but a guess about what would happen if they believed the macroeconomic assumptions. Some of the trade associations with economic departments and larger firms tried to do this, but in many cases the projections had to be pencilled in by DEA officials.
My own take on these projections was that they were a virtuous confidence trick - demonstrating to business the consequences of 4 pc growth. If they believed it would happen they might invest accordingly, and so it would. Even now I still suspect that there may be a little something to this argument. My mistake, in good company, was to count on this happening in advance.
Many middle of the road outsiders suggested that instead of breathing down the necks of business firms, the DEA should concentrate on planning the public sector's own spending. What they did not know was that the need for this had already occurred to a few go-ahead Treasury officials, well before the DEA was established. But I shall leave this aspect to Peter Jay who was heavily involved and even understood "funny money."
The Supply Side
The third main activity of the DEA in which mainline civil servants and advisers seconded from industry [e.g. Fred Catherwood] could take part was a sector by sector attempt to improve industrial efficiency and - unfortunate phrase - international competitiveness. A Labour Government could call this planning and a neoliberal one could call it improving the working of the market. Either way it was open to the charge of duplicating the work of other non-Treasury ministries who had always been concerned with these subjects. In the final edition of my book on the Treasury I spoke of uncreative tension. But I now believe that competition has value even inside government, especially given the tendency of the industrial Ministries to be captured by the interests they are trying to regulate [Agriculture!].
A good many of the supply side changes were ones in which the Treasury and the DEA had a joint interest in speaking up for long term rationality. Even some Conservative reforms, for instance of trade union law or tax incentives, were in the last analysis complementary to what the Wilson Government had done. [Mention of this aspect never failed to infuriate Thomas Balogh.] The changes in which the DEA in its heyday must have had a key role included the cancellation of various aerospace projects, a ceiling on real defence spending and a review of East of Suez commitments. More controversial, but courageous for a Labour Government, was the encouragement to takeover kings, even when they were aimed at cutting bloated labour forces.
The activity of which I was most sceptical was the Little Neddies - groups of businessmen, trade unionists and officials charged with improving performance on a sector by sector basis. Other departments regarded them as a way of keeping the DEA harmlessly employed. The most shaming moment of my professional life was when I was allowed to write a portion of an official submission to the IMF and concentrated on boasting about how large a proportion of the economy was now covered by Little Neddies.
One conclusion from all this history is that there should be a group in Whitehall, apart from the Treasury, concerned with wider economic issues - I would now say long term rationality rather than growth. All one can say in general terms is that it needs to be large enough to go beyond position papers to specific worked out proposals. Whether that unit should report to the Prime Minister or a separate Minister must depend on personalities and politics. The danger of this unit reporting directly to the Prime Minister is that it then tends to be caught up in short term electoral considerations.
Secondly beware of temporary fads and look at a broader spectrum of ideas than can be incorporated in current paradigms. By all means try to improve performance, but don't count on improvements in advance.
Thirdly, proposals for splitting the Treasury into a Dept of Finance and something else still surface from time to time. They ignore how much the Treasury has already lost to the Bank of England. Any further splitting would leave it just as a Bureau of the Budget. Is that really a good idea?
NB Permanent permanent Treasury mottoes
* My fullest account in Steering the Economy, Penguin 1971. Out of print but available in good libraries
** See Left or Right: the Bogus Dilemma. Copies available from author.
*** For my more recent reflections, see Against the Flow, paperback Atlantic Books, Parts Three and Four
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