The Postwar Settlement

In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed.

Among these are:

The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;

The right to earn enough to provide adequate food and clothing and recreation;

The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;

The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;

The right of every family to a decent home;

The right to adequate medical care and the opportunity to achieve and enjoy good health;

The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

The right to a good education.

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being.

—Franklin Delano Roosevelt, State of the Union speech, January 11, 1944

In January 1944, President Roosevelt outlined to Congree his vision of a postwar society defined by social and economic citizenship rights. At the same time, Friedrich Hayek's classic polemic, The Road to Serfdom, was at the publishers in London. Where Roosevelt saw an opportunity to embed and expand the liberal gains of the New Deal, which had been cemented by the war effort, Hayek and his friends saw only the threat of encroaching socialism, collectivism, and totalitarianism. As the war raged to a close, it was possible to see the clash of two diametrically opposed worldviews: American New Deal liberalism and British social democracy, on one side, and a distinctive critique that formed the basis of transatlantic neoliberalism on the other. There was no doubt, however, that Rooseveltian New Deal liberalism was in the ascendance in the United States, while Prime Minister Clement Attlee's government began to build in Britain the postwar settlement symbolized by the foundation of the National Health Service by Minister of Health Aneurin (Nye) Bevan in 1948.

To many on the progressive left, the slow unraveling of Roosevelt's expansive vision in the postwar period is one of the great laments of recent U.S. history. But despite the failure of the Democrats to achieve everything Roosevelt had promised (most obviously, universal health care, something partially redeemed by President Barack Obama in 2010), Harry S. Truman's Fair Deal, the GI Bill, and the 1949 and 1950 expansions of Social Security set the tone for American liberalism's advance. At the same time in Britain, Beveridge's 1942 Report on Social Insurance and Allied Services inspired a demand that postwar reconstruction be built on the welfare state creation of the early twentieth-century New Liberal governments of Asquith and Lloyd George. Indeed, in May 1945 an ungrateful electorate dumped Winston Churchill and the Conservative Party from office and replaced them with Attlee's Labour Party. One of the great reforming governments, Labour implemented Beveridge's proposals for a cradle-to-grave welfare state and, again through Nye Bevan's leadership as secretary of state for health, initiated a high-specification public housing building initiative to replace Britain's bombed-out housing stock.

Here were two countries with very different systems and circumstances that nevertheless felt similar social and liberal-democratic impulses at mid-century. A legacy of the Great Depression of the 1930s was to make unemployment, poverty, and freedom from want the chief concerns of voters, who demanded of their leaders that their societies would "never again" suffer from such indignities and degradations at the hands of market failure. Reformist liberals and moderate conservatives in Britain, and liberal Republicans and conservative Southern Democrats (for whites, at least) in the United States, were as fully committed to these aims as supporters of the Labour and Democratic Parties were. Political culture, conversation, and elections in both the United States and Britain were dominated by the thinkers and parties of the center and left in 1945. Fifty-five years later, at the dawn of a new millennium, a new creed reigned, one the speculator and philanthropist George Soros has called "market fundamentalism." Part of this change was driven by a movement whose origins were visible in the final years of World War II. Transatlantic neoliberalism, and the movement that spread its agenda, emerged from a critique of what Hayek and others referred to as the "collectivist" character of the politics of President Roosevelt and Prime Minister Attlee. This critique was motivated by a profound fear of totalitarianism, the threat of which they saw in the blind acceptance of government and administrative expansion in the first half of the twentieth century. But it would take a transformation in primarily economic structures, mixed with events and circumstances, not just policies, to create the conditions under which these new ideas could take hold in the political programs of the Conservative and Republican Parties, and thus influence government action. That would not happen until the late 1960s and, especially, the 1970s.

But in this chapter it is first necessary to describe the contours and limits of the political settlement in Britain and the United States in the middle of the twentieth century. How far was there consensus among the political elites and publics in both countries? What was the political and intellectual paradigm that the neoliberals viewed with such foreboding? The shape of politics and society in Britain and the United States had fundamentally changed as it had developed through the experiences of two world wars, Progressivism, Fabian socialism, the Great Depression, and the New Deal.

Both Britain and the United States underwent economic and political transformations in the first half of the twentieth century. The size of government expanded exponentially in both countries. For example, in 1900, total central government expenditure in the United States amounted to $521 million. This compared to £193 million in Britain. By 1949, government expenditure had reached $39 billion in the United States and almost £3.5 billion in Britain. By 1990 the federal government was spending $1.3 trillion in the United States and £158 billion in Britain. The income tax was introduced in the United States after the Sixteenth Amendment to the Constitution was ratified in 1913. This was quickly reflected in increased government revenue from taxation. In 1900, federal government revenue amounted to $567 million. By 1949, total revenue was $41.5 billion, of which $26.7 billion was from the income tax and $3.8 billion was from payments into the Social Security fund. In Britain in 1900, the government received £140 million, of which £29 million came from income and property taxes. In 1949 the government received £4.1 billion, of which £1.85 billion came from income and property taxes. These figures illustrate the growth in the presence, scope, and power of government in both countries as policymakers, driven by increasingly insecure populations, built large-scale welfare states in response to the economic collapse of the 1930s and world war in the 1940s.

By the end of the war, in 1945, however, the economic positions of the two countries were in stark contrast. The United States had emerged from the war with unprecedented global power and affluence, while Britain had been brought to its knees by a war whose graphic cost had taken its toll in terms of dead bodies and towns and cities destroyed during the Blitz. The cost of the defeat of the Nazis propelled Britain toward the loss of its imperial possessions. Compounding the difficulty of Britain's position was the fact that the devastation wrought by the war came on top of the far-reaching economic collapse of the 1930s. A new approach to economics to deal with these crises was demanded and duly arrived in the ideas of the Liberal economist, John Maynard Keynes. Keynes constructed a theory that developed the concept of macroeconomic management of fiscal and monetary policy as a response to the Great Depression. Keynesian prescriptions would now be adopted by the politicians of Britain and the United States, and would dominate the mainstream of the economics profession. Macroeconomics focuses on economy-wide phenomena such as employment levels, interest rates, and fiscal and monetary policy, as opposed to sector-specific, microeconomic policy. Keynes's General Theory of Employment, Interest and Money, published in 1936, and Keynes's leading role in the postwar negotiations that led to the creation of the Bretton Woods international monetary system, had set the terms by which Western governments were to manage stable economies in peacetime. In the wake of the disasters of the 1930s, full employment was to be the primary goal of economic policy. The desire to avoid the dole queues pervaded the establishments of both Britain and the United States as much as it did the working classes.

Keynes argued that governments could beat the business cycle through fiscal policy or large-scale public investment when demand in the economy was either sluggish or in recession. By pumping money into the economy, practicing government intervention through deficit spending, or boosting consumption through tax cuts, policymakers believed they had a set of tools with which to ensure high employment and continued economic growth. This recipe seemed to offer politicians and publics alike what they most wanted: the prospect of full employment and increased prosperity. Keynes's followers pushed these ideas beyond what the man himself would have envisaged. As Robert Skidelsky, Keynes's biographer, has suggested,

[Keynes] thought governments could manage total spending power only in a rough and ready way which would still be an improvement on laissez-faire. But the next generation carried this project much further. They thought the problem of limited knowledge facing the central manager was a contingent one, and that as statistics improved, so would the possibility of control. This reached its apogee in the "fine tuning" approach of the 1960s.

This neo-Keynesian approach, alongside the welfare state (though of course provision was less comprehensive in the United States than in Britain), formed the bedrock of U.S. and British economic policy of the 1950s and 1960s. It was the era of "Butskellism," as described by Norman Macrae in the Economist, so called after senior British Conservative Rab Butler and Attlee's successor as Labour leader Hugh Gaitskell.

In the United States the New Deal marked a revolution in government during the 1930s. Roosevelt's administration, after his election in 1932, reformed the banking sector, supported the farmers, and created large-scale public employment programs through the Public Works Administration, the Civil Works Administration, and the Works Progress Administration in order to defeat the Depression. A welfare state, if one limited in several important ways, was enacted through the Social Security Act of 1935. Labor unions were recognized and their rights assured through the National Recovery Administration and, especially, the National Labor Relations Act, known as the Wagner Act, also of 1935. A system of regulation of the stock exchange and the financial sector, since repealed, was created through the Glass-Steagall Act (1933), which separated the commercial and speculative operations of banks and established the Securities and Exchange Commission and the Federal Deposit Insurance Corporation. A rudimentary structure of support for home buyers and the homeless was put in place with the creation of the Federal Housing Administration and the U.S. Housing Authority. Mortgages were to be provided at subsidized rates, and public housing was created in the United States for the first time.

Taken as a whole, the New Deal enshrined the federal government's role in American life and legitimized government activism. But the gains of the New Deal were limited in important ways. First, the American welfare state, unlike Britain's, did not proceed along universalist lines. At the insistence of the congressional Southern Democrats, blacks, casual and agricultural laborers, and women were initially excluded from Social Security and unemployment insurance, and welfare was left to the states to administer. This ensured that blacks in the South, for example, received few or no benefits. Universal health care, implicit in Roosevelt's Committee on Economic Security's plans, was not attempted, let alone enacted, until the Obama administration made it a priority. A large vociferous opposition, meanwhile, was never reconciled to a program it saw as counter to all American traditions of individual initiative and liberty. Out of this opposition would emerge some of the most significant business funders of the neoliberals after World War II, including such figures as William Volker and Laurence Fertig. The finance provided by the anti–New Deal businessmen was crucial to the successful promotion of free market ideas in the postwar United States.

What Peter Hennessy has called the "British New Deal" was a mixture of the reforms of Herbert Henry Asquith's and David Lloyd George's Liberal governments of 1906–22 and Attlee's Labour government of 1945–51.12 It was confirmed and accepted by the long Conservative Party administrations of 1951–64, which did not attempt to reverse its key components or chart a radically different course. The postwar consensus, as it was known in Britain, involved a universal welfare state combined with nationalization of "the Commanding heights" of the economy and public utilities, which, by 1951, Labour had achieved— the Bank of England, railways, road haulage, civil aviation, coal, steel, electricity, and gas.

The British welfare state was created in stages. The Liberal governments of Henry Campbell-Bannerman and Herbert Henry Asquith between 1906 and 1916 introduced means-tested pensions for the elderly and means-tested unemployment insurance, labor exchanges for the unemployed, limited means-tested health insurance, and sickness benefits for workers. The system, however, was patchy, and many citizens were left out of its provisions. If the New Deal marked the emergence of a new form of liberalism in the United States, the enactment of these early reforms marked the split between the nineteenth-century Victorian liberalism of Gladstone and a new progressive and activist liberalism in Britain. Gladstonian liberalism had been built on laissez-faire and free trade. The New Liberals, by contrast, saw impediments to freedom in poverty, sickness, and squalor.

The postwar Labour government, inspired by the Fabian socialists and William Beveridge, among others, built on these early reforms by introducing universal pensions, unemployment insurance, and Nye Bevan's National Health Service. Beveridge, like Keynes a member of the Liberal Party, was a main architect of both the Liberal and Labour reforms. He was a contradictory figure. According to his biographer, Jose Harris, "Far from being a consistent 'liberal collectivist', he veered between an almost total commitment to the free market and an equally strong commitment to a semi-authoritarian administrative state." His personality epitomized the conflict in twentieth-century liberalism, torn between its classical and laissez-faire heritage and a radically new kind of interventionism. However, both Beveridge's and Keynes's ideas were central to the developments that the neoliberals feared and opposed.

At the heart of both New Deal liberalism and the British Liberal and Labour reforms was a happy conception of the state so long as its power was in the hands of an enlightened and expert policy elite. The famous Brain Trust around Roosevelt and the progressive liberal civil service personified by Beveridge and Keynes fit exactly this notion of top-down reform for the benefit of society as a whole. The progressive liberal project was not revolutionary. It was born of a desire to preserve and defend liberal democracy and the capitalist system. However, it was also based on a belief that a "middle way," as Keynes put it, was possible. Once the economic disorder of the 1930s had been replaced by war, liberals saw a ray of light. In both Britain and the United States there was a belief that the wholesale mobilization of the economy and society for the war effort had pointed the way to how social objectives might be achieved in peacetime. This, of course, was a judgment that the neoliberals vehemently challenged.