Ray Davies experienced a nervous breakdown just before the major recording sessions for the album. Moving away from the Kinks' earlier "raunchy" sound, Davies had begun incorporating a softer style in songs like "A Well Respected Man" and "Dedicated Follower of Fashion." In July 1966, "Sunny Afternoon," written in this new style, reached No. 1 in the UK Singles Chart. Its success convinced Davies and the band's management that this direction could work, shaping the Kinks' output for the next five years. This period, from 1966 to 1971, is often referred to as the band's "golden age."

The album is considered one of the first rock/pop concept albums, featuring a loose theme of social observation. Initially, Davies planned to connect the tracks with sound effects, but Pye Records pushed for a more traditional album format. Some effects remain, as heard in "Party Line," "Holiday in Waikiki," and "Rainy Day in June," as well as in tracks left off the album, like "End of the Season" and "Big Black Smoke."