Britain's postwar socialism, from nationalized coal to the Winter of Discontent

In 1945 Britain had just helped defeat Hitler, and the British people, in a free election, thanked the war's leader by voting him out. That is not an insult to Winston Churchill. It is a fact about what a war-weary country wanted: security, work, housing and a government that would plan for peace the way it had planned for war.

What followed was the most ambitious experiment in democratic socialism in the history of the English-speaking world. It was carried out lawfully, by consent, in a country with a free press and a deep tradition of liberty. That is exactly why it is such a useful case. Nobody can say that Britain failed because it was a dictatorship. It tried the idea honestly, and it is worth reading what the record says.

The claim

Let me state the thesis. Britain's postwar programme of nationalization and heavy taxation did not produce the prosperity its architects promised; by the late 1970s the country had needed an emergency international loan and endured a winter of strikes, and the political consensus that had built the system was broken by its own results. That outcome, rather than the personal qualities of one prime minister, is what made the Thatcher reforms of the 1980s possible.

Terms first. Nationalization means the government takes ownership of an industry, paying the former owners compensation in government bonds. Rationing is a government limit on how much of a good each person may buy at a controlled price. The welfare state is the system of government-provided health care, pensions and benefits. I am arguing about the first two, and I am not arguing that the third was a mistake in every particular. Conservatives of that era accepted a good deal of it.

1945 to 1951: the Attlee government

Clement Attlee's Labour government won a landslide in July 1945 and governed until 1951. Its programme was a deliberate transfer of industries from private to public hands.

• The Bank of England was nationalized in 1946, with the act taking effect on March 1 of that year.
• The coal industry came under the National Coal Board on January 1, 1947.
• Railways were nationalized on January 1, 1948, as British Railways.
• Electricity and gas followed in 1948 and 1949, and the National Health Service began on July 5, 1948.
• Iron and steel were nationalized under the Iron and Steel Act of 1949, with the transfer taking effect in 1951.

The justification was that these industries were the "commanding heights" of the economy, essential, monopolistic or run down by years of wartime use, and that public ownership would allow them to be modernized and run for the public good rather than for profit.

The case for some of it was not foolish. Britain's coal mines and railways were worn out after the war, the country was nearly bankrupt, and in 1945 the United States provided a large loan to keep it afloat. Many of the people who voted for nationalization remembered the Depression and thought private industry had failed. That is the strongest version of the case: after a war that had required the state to organize the whole economy, many believed that the state could organize it for peace.

Rationing: a wartime measure that outlived the war

During the war, rationing of food and clothing was a necessity. What surprised many was how long it lasted afterward. Bread, which had not been rationed during the war, was rationed from 1946 to 1948. Clothes rationing ended in 1949. Petrol rationing ended in 1950. Sweets and sugar came off the ration only in 1953. Meat and bacon were the last: rationing of meat ended in July 1954, nine years after the war in Europe was over.

Meanwhile, West Germany, a defeated, divided and devastated country, had freed its prices in 1948 and was experiencing what was called an economic miracle. For the full story, see Ludwig Erhard ended price controls on a Sunday and launched a miracle. The contrast was not lost on British observers at the time. The victors queued for meat; the defeated were filling their shop windows.

The decline of the nationalized industries

Here the narrative gets more complicated, and an honest account must say so. The nationalized industries were not run into the ground overnight, and some performed adequately in some periods. But over the following decades a pattern emerged that is familiar from every government-owned enterprise: investment decisions were made on political grounds, prices were held down for political reasons, and the industries became a drain on the Treasury.

Steel shows the swings. The industry was nationalized in 1951, denationalized by Churchill's Conservative government in the 1950s, and then renationalized in 1967 as the British Steel Corporation. An industry that changes hands with each election cannot plan, and one that is run to meet political targets cannot be efficient. The coal industry became a dispute-prone enterprise with a powerful union, and by the 1970s it was the focus of a bitter confrontation between the government and the miners.

The deeper problem was the one described in Why Soviet shoppers stood in line, and the calculation problem behind it: when an industry is not subject to the test of profit and loss, nobody knows whether its resources are being used well. A loss in a private firm sends a signal to close or change. A loss in a nationalized industry is covered by the taxpayer, and the signal is never sent.

Taxation and the flight of talent

The political commitment to redistribute produced very high taxes. By the 1970s, the top marginal rate of income tax on earned income was 83 percent, and with a surcharge on investment income the top rate on investment income reached 98 percent. Think about that arithmetic. If you earned a pound of investment income at the top rate, the government took 98 pence and left you 2. A tax rate that high does not collect much revenue from the people who can restructure their affairs or leave the country, and it destroys the incentive to save and invest in Britain. The phrase "brain drain" was widely used in these years about educated Britons leaving for other countries.

To see the same logic in the American context, the story of top rates is told in a century of top income tax rates, from 7 percent in 1913 to the 2018 law, and the idea that high rates can reduce the base they are applied to is treated in where tax cuts pay for themselves and where they honestly do not. Britain in the 1970s is a standing illustration of how rates can be pushed so high that the incentive to earn the marginal pound nearly disappears.

1976: the IMF loan

By the mid-1970s, Britain had high inflation, rising unemployment, a weak currency, and a government that was spending more than it could borrow on reasonable terms. In 1976 sterling came under heavy pressure, and the Labour government under Prime Minister James Callaghan, with Denis Healey as Chancellor of the Exchequer, applied to the International Monetary Fund for a loan, about 3.9 billion US dollars, in exchange for cuts in public spending. A country that had once been the world's banker had to ask an international institution for emergency credit and accept conditions.

That event is often cited as the low point of postwar British economic policy. It forced a Labour government to abandon the belief that it could spend its way out of trouble. Whatever one thinks of the conditions, the symbolism was devastating: socialism in one country had led to a bailout.

1978 to 1979: the Winter of Discontent

The government then tried to hold down inflation by limiting pay rises to 5 percent. It was a form of wage control, and the unions, whose members had seen their real pay squeezed, refused to accept it. In the winter of 1978 to 1979, a wave of strikes spread through the public and private sectors. Lorry drivers, railway workers, hospital ancillary staff, refuse collectors and, famously in Liverpool, gravediggers took industrial action. Rubbish piled up in the streets of London. Schools closed. Hospitals restricted services to emergencies in some places.

The phrase "Winter of Discontent" is borrowed from Shakespeare's Richard III, which opens with the line "Now is the winter of our discontent." The press used it to describe the season, and it stuck.

Notice what the episode proves and what it does not. It does not prove that unions are wicked; workers whose pay is being cut by inflation have a case to make. What it shows is that a system in which the government is the employer of the public sector, controls the prices and incomes of much of the rest, and depends on the cooperation of unions to make its policy work, is a system in which every disagreement becomes a national crisis. On March 28, 1979, the Callaghan government lost a vote of no confidence in the House of Commons by a single vote. An election followed in May, and Margaret Thatcher became prime minister.

The strongest objection

Fair play requires the other side's best argument. Defenders of the postwar settlement say that it created the National Health Service, a system of pensions and unemployment support, and a period of full employment and rising living standards. They point out that British growth in the 1950s and 1960s was historically strong, and that other European countries also had large public sectors and similar problems in the 1970s, including oil shocks that hit everyone. They say the crisis of the 1970s was caused by the 1973 oil embargo and global inflation, not by socialism. And they argue that the Thatcher reforms brought their own costs, including the closure of whole industrial communities and years of high unemployment.

Here is the answer, in numbered points.

One. Postwar growth was real, but it was slower than that of countries that were liberalizing. Britain's relative position fell against France, West Germany and Italy for decades. "The sick man of Europe" was a common description by the 1970s. A country can grow in absolute terms and still lose ground, and that is what happened.

Two. The oil shocks hit everyone, but not everyone needed an IMF rescue or a winter of strikes. West Germany, with its own unions and welfare state, managed the 1970s with lower inflation and a stronger currency. The difference lay in how the economy was organized and how money was managed.

Three. The costs of reform are real, and an honest conservative says so. The closure of coal mines and heavy industry caused real hardship in real communities, and a serious defence of the 1980s must reckon with it. But the choice was not between a painless status quo and a painful reform. The status quo was already failing, and subsidizing losses year after year only postponed the bill.

Four. The consensus was ended by its own results. The most telling fact is that the Labour government itself, in 1976, abandoned the strategy. It accepted public spending cuts as the price of the loan. When the party of nationalization concedes that the economics have failed, the argument from the other side is over.

The 1980s: privatization

The Thatcher governments reversed the process. Council house tenants were given the right to buy their homes under the Housing Act of 1980. Beginning with British Telecom, the governments sold off the big state utilities and industries, among them British Gas, British Airways, British Steel (1988), the water companies and the electricity industry. The policy created a wider base of share ownership, ended the problem of public subsidies for loss-making enterprises, and, by most assessments, improved performance in industries such as telecommunications, where consumers had been waiting weeks for a telephone line.

It was not painless, and it was not perfect. Some privatizations, particularly of monopolies like water and rail, raised legitimate questions about regulation that remain in dispute. A conservative should not defend every detail. But the broad direction showed what happens when an economy is allowed to price things and risk capital again, and it influenced governments in many countries.

What Americans should take from it

There are three lessons, and all three are about America today.

The first is that socialism does not have to arrive with a revolution. It can arrive by ballot, one industry at a time, with each step justified by a real problem. That is how Britain did it. The result was an economy in which a larger and larger share of decisions was made by officials, and in which the cost of every mistake was spread across taxpayers.

The second is that high taxes and state ownership feed each other. When the state owns the industry, the tax base shrinks as innovation slows. When taxes are high, the incentive to build new enterprises dries up, and the government is tempted to take over what is failing.

The third is that even a country with the oldest parliamentary tradition in the world can be brought to the edge of a fiscal crisis by promises it cannot keep. You can read about the American version of that arithmetic on the national debt clock. For the broader evidence from other countries, Two Germanys and two Koreas, the natural experiments that socialism lost, Venezuela was once Latin America's success story, and then came socialism and eight socialism myths tested against the countries that actually tried it belong in the same shelf.

Measure it against the Founders

The American Founders had just left a country where the crown controlled trade and industry by monopoly and charter. The Declaration of Independence complains of "cutting off our Trade with all parts of the world" and of "imposing Taxes on us without our Consent." Their solution was a government of limited and enumerated powers, one that left the question of what to produce and at what price to the people themselves. The Constitution gives Congress no power to nationalize an industry. The Fifth Amendment requires that private property not be taken for public use without just compensation, a safeguard that Britain's nationalizations observed on paper but that a long-run policy of taxation and control wore away in practice.

Britain was not wrong to care for its poor, its sick and its old. Americans care for them too. The lesson of the Attlee years is about the means. A government that takes the commanding heights ends up commanding a decline.

The case in brief

1. After 1945 Britain's Labour government nationalized the Bank of England, coal, railways, electricity, gas and steel, and kept wartime rationing so long that meat was not freed until 1954, while defeated West Germany freed its prices in 1948.
2. State ownership removed the test of profit and loss, and rates of tax reached 83 percent on earnings and 98 percent on investment income by the 1970s, driving away talent and capital.
3. In 1976 the Labour government borrowed about 3.9 billion dollars from the IMF on condition of spending cuts, and in 1978 to 1979 the Winter of Discontent showed a system in which every wage dispute became a national crisis.
4. The Callaghan government fell by one vote on March 28, 1979, and the Thatcher reforms, from the 1980 right-to-buy law to the privatizations of the 1980s, were built on the failure of the old consensus.
5. The lesson for Americans is that socialism can arrive by ballot, one industry at a time, and that its results can be seen in the record.

What you can do: look up the federal government's list of the businesses it owns or runs, such as Amtrak, and ask your representative in writing what test of profit and loss each is held to.