Bang!: A History of Britain in the 1980s (4 page)

Stabilizing the economy and restoring growth were more difficult. In 1974, the economy had contracted by almost 2 per cent. Inflation continued to soar. By the summer of 1976, the annual rate
had reached 26 per cent. The savings of the provident were being swiftly eroded. The assault worsened by the year’s end, when the London Stock Exchange crashed. The
Financial Times
index (established at 100 in 1935) plunged towards 150. Denis Healey, the florid, bushy eye-browed Chancellor of the Exchequer, raised taxes in his April 1975 budget. The basic rate of income tax
rose to 35 per cent. The upper rate was fixed at 83 per cent. These were deflationary measures intended to combat acutely rising prices, but they nonetheless helped convince many middle-class
taxpayers that redistributing their diminishing income was a deliberate part of socialism in action. The
Wall Street Journal
’s leading article, entitled ‘Goodbye, Great
Britain’, all but read the country’s last rites: ‘the British government is now so clearly headed towards a policy of total confiscation that anyone who has any wealth left is
discounting furiously at any chance to get it out of the country.’
¹⁸
The US Secretary of State, Henry Kissinger, assured the president, Gerard
Ford, that ‘Britain is a tragedy – it has sunk to begging, borrowing, stealing, until North Sea oil comes in . . . That Britain has become such a scrounger is a
disgrace.’
¹⁹
A few disgruntled reactionaries drew admiring parallels with Augusto Pinochet’s recent right-wing coup in Chile. Some even
went so far as to lay the groundwork for action.
²⁰
The view from most boardrooms, however, was that salvation would come not from men in uniform but
from officialdom in Brussels. Opinion polls, which had suggested most Britons opposed joining the European Economic Community before entry was negotiated by Heath, now indicated growing support.
Articulating the view that the country’s problems were so severe that only foreigners could solve them, Christopher Soames, Winston Churchill’s diplomat son-in-law, asserted:
‘This is no time for Britain to consider leaving a Christmas Club, let alone the Common Market.’
²¹
In June 1975, a national referendum
on the issue (called primarily to solve the internecine debate within the Labour
Party) produced a resounding verdict, with 67 per cent voting in favour of remaining within
the EEC.

With the run on the pound continuing during 1976, it was indeed down to foreigners to get Britain out of its financial misery. When the British ambassador asked the usually anglophile German
Chancellor, Helmut Schmidt, if German funds might be forthcoming, Schmidt responded with a lecture on Britain’s economic incompetence, comparing the country’s management unfavourably
with that of communist East Germany. Another potential rescuer was the International Monetary Fund. An emergency loan from the IMF would come with strings attached, requiring the government to
balance the budget and cut public spending, forcing Labour to choose between fighting unemployment or quelling inflation. The number of those out of work had long passed one million and, at over 6
per cent of the workforce, was well above the post-war 2 per cent level that constituted ‘full employment.’ For Labour, whose heritage was steeped in the depression of the 1930s,
cutting unemployment benefit was especially distasteful. On the other hand, an alternative Keynesian prescription of a reflationary stimulus looked reckless at a time when inflation was at its
highest level for three hundred years, double the rates of Britain’s major competitors, and, it was feared, on the verge of replicating the situation in South America where currencies were
becoming virtually worthless amid mounting chaos and military crackdowns.

In the Cabinet, the left-wing case against accepting an IMF bail-out, with its accompanying requirement to cut public spending, was made by the energy secretary, Tony Benn. He advocated creating
a siege economy, with the normal inflows and outflows of the market being replaced by socialist planning and tariffs against imports. Even the Foreign Secretary, Tony Crosland, proposed threatening
sweeping import controls on the calculation that ‘as the IMF was even more passionately opposed to protectionism than it was attached to monetarism, this threat would be sufficient to
persuade the IMF to lend the money without unacceptable conditions’.
²²
Full-scale protectionism was a dangerous bluff, wholly inconsistent
with the EEC membership that had so recently been reaffirmed. Yet such was the level of panic that even Britain’s forward role in NATO seemed to be tradable: the decision was taken to warn
West Germany that unless she helped bail Britain out, British forces might have to be withdrawn from the country.

The succession of events that brought these options to the Cabinet table unfolded during the autumn of 1976. The government’s budget deficit had broken records. The pound had slumped to
$1.57, despite interest rates hiked to 15 per cent. The markets looked at Britain’s spiralling public sector borrowing requirement and concluded sterling was not a currency to hold
on to. The nadir came on 27 September. Scheduled to attend an IMF conference in Manila, via Hong Kong, Healey’s chauffeur-driven car got as far as Heathrow airport before its
passenger panicked. So acute was the pound’s free fall that he concluded he could not afford to spend seventeen hours on a flight and out of telephone contact. The television cameras captured
his limousine turning round and heading back towards the Treasury. There, Healey brought forward the scenario he had already concluded was inevitable. Britain would have to appeal to the IMF for a
loan. The following day, Callaghan found himself virtually shouting at the delegates at the Labour Party conference in Blackpool:

The pronouncement was not to prove, as was subsequently assumed, the beginning of full-throttle monetarism – the money supply grew more quickly between 1976 and 1979 than
between 1975 and 1976
²⁴
– but it was, perhaps, the end of the more simplistic interpretation of Keynesian economics. Two days later, Healey
announced Britain was going begging to the IMF for $3.9 billion, the largest loan in the fund’s history. Indeed, the sum necessary to bankroll Britain was so great that the IMF had not enough
money itself and needed to seek additional resources from other lenders. In return, it would instruct Her Majesty’s Treasury how to run its affairs. Between 1975 and 1978, the Labour
government slashed public spending in real terms by 8 per cent,
²⁵
a far more swingeing cut than Margaret Thatcher ever achieved in the 1980s. In the
space of three years, from 1973 to 1976, Britain had experienced not just galloping inflation but stagflation – rising prices and falling output – as well as massive industrial unrest,
the temporary switching off of energy supplies, serious civil unrest in Northern Ireland which claimed over eight hundred lives and spread to the British mainland, a stock market collapse, a
secondary banking crisis, credit controls and a begging mission to the IMF. Apart from the darkest days of the Napoleonic conflict and the two world wars when the prospect of military annihilation
had loomed (and notwithstanding the one-off embarrassment of the Suez fiasco), it was surely the greatest convocation of visible humiliations visited upon the country since the civil wars of the
seventeenth century. What effect this had on the national psyche was difficult to tell: ‘Britain is a country that resents being poor,’ concluded
The Times
on New Year’s
Eve 1976, ‘but is not prepared to make the effort to be rich.’
²⁶

It was thus perhaps understandable that the popular response to the Queen’s silver jubilee in 1977 was not to behead the monarch but to rejoice that in Elizabeth II
there was at least the embodiment of one state institution that remained secure and fit for purpose. Yet, almost contemporaneous with the red, white and blue bunting strung across lamp posts and
shopfronts in celebration of the Queen’s twenty-five years on the throne, there came early signs that recovery was under way. Following the enforcement of spending cuts, wage inflation was
being brought under control. Unemployment figures stopped going up. The pound was climbing towards $1.90 and reserves, depleted during the crisis of 1976, were replenished as sterling assumed the
status of a petro-currency. Indeed, the exchange rate strengthened to the extent that it became Treasury policy to prevent it from rising beyond a rate deemed uncompetitive for British exporters,
for in 1977 the country’s trade balance had moved into surplus for the first time since the 1960s. While going begging to the IMF was an act of national degradation, it nonetheless impressed
investors, convincing them that Britain was adopting the right medicine. In consequence, less than half of the IMF loan needed to be drawn. Suddenly, it seemed that Britain might buck the trend of
ex-imperial powers that had gone into long-term decline, its period in the doldrums merely a matter of a few unfortunate years rather than the drawn-out process of decades.

Healey deemed the signs of recovery sufficient to allow a mild relaxation of his tough deflationary measures. Further amelioration was dependent upon the inflation rate continuing to fall. The
government had made wage restraint the centrepiece of its anti-inflationary strategy, believing the key to success lay with its own forecasting skills and the willing compliance of the trade unions
not to push for pay deals above what the government decreed should be the ‘norm’. More than half of all employees were members of trade unions. The leverage exerted by the state on pay
policy was considerable given that almost 30 per cent of Britain’s workforce was employed by the state, either in the public services or the nationalized industries. Eighty per cent of those
on the public sector payroll were also members of unions. Thus an anti-inflationary policy that relied upon partnership between government and unions was founded upon three assumptions: that
inflation was caused by big pay rises, that the state remained the dominant employer, and that the unions were far more likely to reach agreement with a Labour administration than risk undermining
it and putting their Conservative antagonists in power.

This form of corporatist government was a relatively recent innovation. Until the late 1960s, Whitehall had not deployed meaningful industrial relations policies, believing that this was best
left to collective bargaining between individual unions and employers. The Wilson and Callaghan governments,
however, made incomes policy a central tool of economic
management. Whereas Heath had found himself with a statutory incomes policy because the unions would not work amicably with a Tory government, Labour in power believed it could achieve similar
results through its goodwill with the union high command. Each year, the government announced the ‘norm’ pay increases. In July 1975, a maximum £6 per week increase (with no
increase at all for anyone earning above £8,500 per year) was set. A year later, the pay increase was a mere 5 per cent, up to a maximum of £4 per week. Ten per cent was permitted in
1977. Only 5 per cent was allowed in 1978. All these increases were below the rate of inflation. Almost every week, the media ran stories about the ‘norm’: where it had been breached,
what efforts were being made to arbitrate a compromise or what a government minister proposed to say or do about it. The front steps of ACAS, the arbitration service, became almost as familiar a
backdrop for news reports as College Green, outside the soot-covered Houses of Parliament.

To match the incomes policy there was a statutory prices policy. This, indeed, was the mechanism whereby supposedly voluntary pay deals were indirectly enforced by a statutory Price Code which
legally prevented any company from passing on in higher prices any wage increase above the ‘norm’. The Price Commission acted as an ombudsman to police ‘unearned’ price
rises. Large firms, labelled ‘Category I’, had to give twenty-eight days’ advance notification of price rises to the Price Commission; fourteen days were required by
‘Category II’ firms (which included manufacturers and public utilities), except for those in distribution, construction and professional services, which were let off with a mere
compulsion to report. The Price Code laid out what sort of cost increases could be taken into account before prices were increased. The government also intervened with targeted subsidies to
specific everyday items, in particular foods, in order to depress the cost of living.
²⁷
Taken together, the incomes and prices policies provided
some of the clearest contrasts between how the state intervened in daily life in the 1970s and how it left it to the free market in the thirty years thereafter.

In the short term, the incomes and prices polices produced favourable results. By February 1978, inflation had fallen below 10 per cent. The unions, however, had had enough of squeezing their
members’ salaries because the government told them to do so. Higher pay awards in the private sector left those in the public sector struggling in comparison. And in order to counterbalance
private sector increases, the government was particularly keen to crack down further on wage increases in the sector of the economy it could more easily control. When the unions refused to
cooperate any further, the result was the ‘Winter of Discontent’ and the downfall of James Callaghan’s corporatist vision for Britain.

Crisis? What Crisis?

Four months after James Callaghan had informed his colleagues that there would be no autumn general election he was back in the Cabinet Room at 10 Downing Street marshalling
their views on whether to call a national state of emergency. Within this short space of time, the government’s claim to have sorted out the industrial anarchy inherited from Edward
Heath’s Tories in 1974 was tested to destruction. Between December 1978 and March 1979, the ‘Winter of Discontent’ fatally undermined claims that a cure had been found for the
‘British disease’ of dismal industrial productivity, strikes and poor relations between government, management and unions. The opinion polls, which had shown a clear Labour lead in
October 1978, started suggesting the result of the next election would be a Conservative landslide.
²⁸