Never Had It So Good
Since the Cabinet were not prepared to try and curb inflation by picking a fight with the unions, Thorneycroft was adamant that they must restrict the supply of money themselves, even if that meant allowing unemployment to creep up to 3 per cent or higher. In August, the Chancellor convinced a reluctant Macmillan to agree that the public spending estimates for the next financial year should be frozen at the same level as those for the current year. Since prices had risen in the intervening period, this implied that there would have to be substantial spending cuts. On 19 September, when announcing the deflationary package to protect the reserves, he declared his determination to fight 'the upward spiral of costs,' adding: 'There can be no remedy for inflation and the steadily rising prices that go with it which does not include, and indeed is not founded upon, a control of the money supply.' By this stage, Thorneycroft and his ministers had fallen out with most of their senior civil service advisers, most of whom disagreed that there was a direct link between the money supply and inflation.
Roy Harrod, meanwhile, was busy telling Macmillan that 'the idea that you can reduce prices by limiting the quantity of money' was an 'antiquated doctrine.' Hardly any economist under the age of fifty, said Harrod, took it seriously, and if Macmillan went along with it he would provoke a rise in unemployment and would have Gaitskell and every economist in the country 'lambasting and ridiculing this policy.' At the same time, Enoch Powell was touring the West Midlands praising Thorneycroft's deflationary measures to various Tory audiences. They would not succeed, he warned, 'without a limitation of public expenditure.' It was almost a moral issue: 'If inflation with its evil consequences at home and abroad is to be stopped, this increase in the money supply must be halted and halted without delay.' Macmillan had of course already promised Thorneycroft that cuts would be made to ensure that the spending estimates were frozen for the next financial year. But since the Conservative Party had trailed at least five points behind Labour throughout the previous twelve months, it was highly unlikely that Macmillan would be able to restrain his own expansionist instincts and do as the Treasury ministers demanded.
By the end of November, spending bids from the various government departments were arriving daily at Powell's desk for consideration. He was horrified, and sent a memo to Thorneycroft complaining that they constituted 'the biggest increase ever recorded in peacetime' in public spending. The government, he thought, had to face down the farmers and the defence lobby as well as the demands for increased spending on the NHS and public buildings. In conclusion: 'We cannot go on blundering as we are at present.' The Chancellor's chief economic adviser thought that Powell's ideas were madness. The economy was coasting along nicely; people were better off than ever before; why resort to such violent shock therapy to cure inflation when the potential costs in unemployment and unpopularity were so high? By this point, indeed, the Treasury advisers had largely abandoned their ministers. And as the spending estimates made clear, the rest of the Cabinet had decided to go their own way as well. On 8 December, Thorneycroft complained to Macmillan that their colleagues had simply ignored the directive to hold their expenditure down to the levels of the current financial year. The following day, he told his own senior civil servant that there had to be 'an agonising reappraisal' in which nothing, not even the welfare state, could be 'immune.' This was bound to offend not only his One Nation colleagues but also a Prime Minister who prided himself on his social conscience and dedication to economic growth. On 22 December, Macmillan recorded in his diary that he had just had 'a long talk' with a 'very worried Chancellor,' who was demanding 'swingeing cuts in the Welfare State expenditure—more, I fear, than is feasible politically.' The following day he recorded that a small group of ministers had discussed the proposed cuts, including the abolition of Children's Allowance. All but Thorneycroft were 'bitterly opposed'; the embattled Chancellor, meanwhile, was 'in a very determined (also resigning) mood.'
Two things were therefore clear. First, Macmillan himself had backed away from his earlier promise to cut spending; with Labour ahead in the polls and the country basking in a consumer boom, it was simply not 'feasible politically.' Second, the various Cabinet ministers were not prepared to acquiesce in the Treasury ministers' proposed cuts. Either Thorneycroft or Macmillan would have to give in, or one would have to go. It was unlikely to be the Prime Minister.
All the while, Powell was working hard behind the scenes to stiffen the Chancellor's resolve. On Christmas Eve he wrote to tell Nigel Birch that the Cabinet had refused to co-operate with the programme of cuts and that they ought therefore 'to fight this on resignation.' Thorneycroft must not be allowed to give in: 'It will be necessary to screw the Chancellor to the sticking point and, this done, to present the pistol at the right moment.' But Powell was confident that their ultimatum would work: 'I hardly see the cabinet, on the eve of the PM's departure [on a Commonwealth tour], facing the resignation of all three Treasury ministers because their colleagues refused the necessary co-operation in reducing expenditure.' This was typical Powell. His own logic seemed irrefutable; it was barely conceivable to him that his fellow ministers could not see what he saw, and that they might put other priorities, such as full employment and social services, ahead of the need to fight inflation.
On New Year's Eve the Cabinet met to consider Thorneycroft's ultimatum. He wanted further savings of £153 million. Some £40 million, he said, could come from general trimmings; perhaps £50 million from health and welfare spending; and £65 million if the family allowance was withdrawn from second children. These would be unpopular, but he thought they were 'unavoidable.' At this his colleagues recorded their complete agreement him in principle, but one by one they objected to the 'drastic measures' he was proposing. The meeting broke up amid vague promises that more economies would be sought, and they agreed to reconvene in three days' time.
On the morning of 3 January the Cabinet ministers reassembled in 10 Downing Street. The mood was tense. This time they were also joined by the Minister of Pensions and National Insurance, John Boyd-Carpenter, who was adamantly opposed to cuts in the family allowance and was himself determined to resign if Thorneycroft got his way. The discussion was again fruitless; only Reginald Maudling spoke in favour of the Chancellor's cuts. There was then an adjournment until 4.30, and when they reconvened in the Cabinet Room, Thorneycroft quietly announced that he was intending to resign. Macmillan then asked whether he would stay if they came up with cuts worth around £117 million, £36 million less than the original proposal. This evidently threw the Chancellor; while a man as zealous as Powell would have immediately refused, Thorneycroft asked for time to think.