per cent for 1967 as a whole, it accelerated to around 5 per cent in

1968 and in 1969. In 1969 the Government's commitment to the incomes

relations legislationCIn Place of Strife’) and in the Budget of 1969

the Government announced that it would not be seeking to renew its

powers over prices and incomes when they expired at the end of the year.

The improvement in the balance of payments continued into

1970 although the rate of inflation and the level of unemployment

were rising together by then. Mid-1970 saw the election of a new

Conservative Government pledged to operate through market forces and

determined to limit the scale of any intervention. The revival of

the n o w discredited Phillips curve by Hilton Friedman (1968) which now

became known as the 'augmented Phillips curve' provided a means by which

the Conservative Government hoped to curb inflationary tendencies.

It was accepted that this would require some abandonment of a low

unemployment target, at least in the short term.

The NBPI was abolished by the new Government but the search

to improve economic performance by institutional reforms continued with

the introduction of changes to the banking and financial sectors

through the new competition and credit control arrangements. This

showed new interest in the money stock as such and followed the domestic

credit expansion (DCE) target set in 1968 leading to the move away

from traditional devices such as hire purchase controls (abolished in

1971) and restraints on bank lending. A more thorough review of the

changes in monetary policy implied by the new arrangements and their

effects is given by Tew and by Artis in Blackaby (ed., 1978).

The Phillips curve approach towards limiting inflation proved

to have little success in 1970 and 1971 however, and the rate of

price inflation continued to accelerate whilst unemplojment levels

rose. This led to measures specifically designed to combat inflation

and the CBI agreed to operate a form of price restraint whilst the

4.10

subsidy finance from Che Government. The Government also started to

operate directly on wages by applying the 'n-1' policy to the public

sector whereby each public sector pay award was intended to be 1 per cent

lower than the preceding one. Whilst the rate of inflation did show

signs of abating in early 1972, the level of wholly unemployed had

exceeded 900 thousand (and the crude unadjusted level of unemployment

1 million) and the Government changed its priorities away from inflation

towards reducing unemployment. The dash for growth began in 1972

against a background of a balance of payments surplus and in June 1972

the exchange rate was floated. The decision to float the exchange rate

was largely influenced by the breakdown of the Bretton Woods international

system but it was also seen as an attractive development by the

authorities since it was hoped that it would prevent continued

expansion from being prematurely halted by a balance of payments

problem (with the implication that a lower exchange rate would be

beneficial for output and employment). The dollar exchange rate did

in fact fall by nearly 10 per cent between the second and last quarters

of 1972 and the current account surplus was rapidly transformed into

deficit. This also reflected the very expansionary Budget of spring

1972 where the Chancellor openly stated his intention of ensuring a growth

rate of 5 per cent (or more) between the second half of 1971 and the

first half of 1973. This growth rate was actually achieved and the

level of unemployment was reduced to under 600 thousand. However

following a failure to achieve an agreement on a voluntary incomes

policy in the summer of 1972 the Heath government announced a 90-day

standstill on wages and prices to begin in November 1972 (later to be extended

by a further 60 days). This was followed by two further stages of the

policy which allowed for some increases in wages. In the final stage

of the policy (Stage 3) an allowance was made to index wages to the

New institutions to monitor pay policy were also set up, the Fay Board

and the Prices Comnission. Unfortunately Stage 3 coincided with

both a falling exchange rate and an explosion in world commodity

prices so that the rate of inflation accelerated to over 10 per cent per

annum by the end of 1973. Late 1973 also saw a curtailment of OPEC

oil supplies and a dramatic increase in the price of oil. This brought

growth in the world economy to an abrupt halt as the non-OPEC world

sought to ease the inflation effects of the oil price rise and to

deal with the resultant enormous balance of payments deficit. The

Government was forced to bring in a restrictive Budget in late 1973

but then a conflict with the miners in early 1974 over their pay award

led to the introduction of a 3-day working week and eventually to a

general election, at which the Government was defeated and the Labour

Party returned to power.

The new Government allowed the threshold provisions of the