Industrial conflict marked the first months of Harold Macmillan's premiership, when a general strike threatened on the railways and in shipbuilding and engineering. The government was unwilling to agree to employers' demands and a Court of Inquiry settled the dispute. A significant challenge to the politics of consensus came in 1957, when Macmillan's Chancellor, Peter Thorneycroft, proposed deflation of the economy and spending cuts to prevent devaluation of the pound (which was pegged against the dollar under the Bretton Woods system). This led to unemployment and, in 1958, Macmillan turned the measures down, leading to Thorneycroft's resignation. Macmillan was instrumental in negotiating a three per cent wage increase for railway workers in 1958. During the London Transport strike in 1958, the Cabinet defeated Frank Cousins and the TGWU. However, a partnership of government employers and trade unions remained the Conservative ideal.
Although the Conservatives won the 1959 election with a substantial majority, the economic situation soon deteriorated and the Treasury pressed for deflationary measures. In 1961, the Chancellor, Selwyn Lloyd, introduced spending cuts, increases in indirect taxation and an increase in the bank rate. Most significantly, Macmillan agreed to a seven-month wage freeze and, although the electricians' union broke the wage freeze, it was generally successful in holding wage levels. After 1962, the Conservative government took steps to regulate the voluntary system through statute. The Contracts of Employment Act of 1963 specified minimum periods of notice for the termination of employment, and was a significant break with the policy of non-intervention. The government also did the groundwork for legislation on redundancy payments, which was legislated under Labour as the Redundancy Payments Act of 1965.
By 1962, Macmillan believed that voluntary collective bargaining under full employment would lead to a dangerous rate of inflation. He began to work towards an incomes policy to achieve full employment, price stability, strong exports and economic growth. He also wanted to form a National Incomes Commission to consider wage claims. There was considerable opposition to Macmillan's proposals, leading to the purging of Cabinet in the 'night of the long knives' of July 1962. Macmillan now pressed ahead with the establishment of the National Incomes Commission (NIC) in October 1962. However, largely due to employers and the Trades Union Congress (TUC) boycotting it, the NIC proved to be ineffectual. Instead, the National Economic Development Council (NEDC) was created. It first met in March 1962 as a forum for consultation between government, trade unions and management, but did not consider incomes policy. The TUC General Secretary, George Woodcock, was keen on participation as a way to influence economic policy.
By 1964, incomes policy was being seriously debated within the Labour Party, although no definite agreement had been made when Labour came to power in October 1964. Provided it stopped short of wage restraint, the unions broadly supported a policy to control wage increases proportionate to economic growth. The new government's immediate problem was the hefty payments deficit, and although Harold Wilson was against devaluing the pound, alternative policies required the dampening down of wages to prevent inflation. Late in 1964, Cabinet members met with Trades Union Congress (TUC) officials, securing support for a prices and incomes policy. Early in 1965, the TUC accepted the government's proposals for a three per cent limit on pay increases. Plans were made for a National Board of Prices and Incomes (NBPI) made up of representatives from government, unions and employers. A national plan was designed to produce high economic growth over the next five years. Nevertheless, the trend of high wage settlements continued and, in July 1965, the Chancellor of the Exchequer, James Callaghan, was forced to announce deflationary cuts in expenditure. In September, the Cabinet debated a compulsory incomes policy backed by sanctions. It was now agreed that the NBPI should be given statutory powers.
The economic situation worsened, and crisis threatened in the middle of 1966 as the overvalued pound caused money to flow out of the country. Devaluation was discussed in Cabinet but Wilson again refused. In July 1966, he announced a six-month wage freeze, a further period of restraint and a price freeze. The TUC eventually agreed, but it was apparent that incomes policy was becoming an instrument for achieving deflation. Cabinet agreed to devalue the pound in November 1967, which led to an increase in prices. Cabinet ministers met TUC officials to impress upon them that rising prices should not be met by increases in wages. As a result, unions became increasingly disillusioned with Labour policy. In 1968, the TUC membership overwhelmingly voted to reject legislation that restricted collective bargaining.