A History of Modern Britain

by Andrew Marr

  Yet even if he could read the runes, in the national memory Callaghan is forever associated with failure. There is the humiliating, cap-in-hand begging for help from the International Monetary Fund, the soaring inflation and interest rates of the late seventies and finally the piled rubbish, vast strike meetings and unburied dead of the 1979 ‘winter of discontent’. There is an arc which plummets through earlier crises under Wilson and Heath, before crashing into final chaos and destruction under Callaghan. Only after the wasteland of his time in office can the bold remaking of Britain under Margaret Thatcher begin. And Callaghan himself had been part of the problem. His sentimental failure to understand the aggression of the union challenge to elected power, and his earlier lack of interest in radical economic ideas, came home to haunt him in Downing Street. But the story of the Callaghan and Healey years, for the two must be taken together, is more intriguing than its body-strewn, gore-splattered final act. It is also a story of comparative success, of wrenching inflation down again, doing the best deals with international bankers that could be done, and facing up to challenges that had been dodged for decades. It did not end well for the protagonists, but then few interesting tragedies do.

  Callaghan had a brutal side to him. In remaking his cabinet, he purged much of the left, leaving Michael Foot as his loyal and invaluable leader in the Commons delivering the votes, but sacking Barbara Castle as ‘too old’ and too left wing. The leader of the right, Roy Jenkins, was out too, off to take up the job of European Commissioner in Brussels. Crosland, briefly Foreign Secretary, died, so Callaghan had no serious rivals left. He responded by constructing the most right-wing Labour cabinet since the war, whose new faces included Bill Rodgers, Shirley Williams and David Owen. All would later join Jenkins in the breakaway Social Democratic Party (SDP). By the standards of New Labour after 1997 this was still a left-wing government, keen on redistribution, still describing itself as socialist, levying high rates of income tax. It believed in nationalization, adding shipbuilding, the new oil industry and the aircraft manufacture to the State’s bulging holdings, and in such traditional anti-privilege issues as the abolition of pay beds in NHS hospitals. Some of its cabinet members, including Shirley Williams, joined the picket line during the violent 1977 Grunwick dispute at a film processing laboratory in London – one where Asian female workers, barred from joining the union APEX, had some moral right on their side but which became a bloody mob confrontation. It is hard to imagine New Labour ministers doing the same.

  But by the standards of Labour’s history, Callaghan’s suspicion of liberalism, his admiration for American republicans like Kissinger and Ford, his new faith in monetarism and his increasingly aggressive attitude to high pay demands, put him to the right even of Wilson. In private he toyed with policies which would later make Mrs Thatcher famous, such as selling off council houses. His famous and much-quoted remark to an aide, just as Labour was losing power in 1979, that the country was going through a once-in-thirty-years sea change suggested that he half accepted the consensus years had failed: ‘There is a shift in what the public wants and what it approves of. I suspect there is now such a sea-change – and it is for Mrs Thatcher.’ About this, he was right. But if as Enoch Powell said, all political careers end in failure, then what happened before Callaghan’s final failure is still an extraordinary story of despair, courage, hope and bungled accounting.

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  Cap in Hand

  Jim Callaghan’s first few days as Prime Minister in April 1976 must have brought back some grim memories. A dozen years earlier, as Chancellor, he had been confronted with awful economic news which nearly crushed him and ended in the forced devaluation of the pound. Now, on the first day of his premiership, he was told the pound was falling fast (it had been ‘floating’ since the Heath years but this had become a euphemism). A devaluation by sterling holders was likely. The Chancellor, Denis Healey, had negotiated the £6 pay limit and this would feed through to much lower wage increases and eventually to lower inflation. Cash limits on public spending brought in under Wilson would also radically cut public expenditure. But in the spring of 1976 inflation was still rampant and unemployment was rising fast. Healey now told Callaghan that because of the billions spent by the Bank of England supporting sterling in the first few months of the year, a loan from the International Monetary Fund looked essential. In June standby credits were arranged with the IMF and countries such as the United States, Germany, Japan and Switzerland. What would follow was about as humiliating as peacetime politics gets.

  Healey had imposed tough cuts in the summer but by its end, as he returned from a desperately needed break in the Scottish Highlands, the pound was under intense pressure again. On 27 September 1976 Healey was meant to fly out to a Commonwealth finance ministers’ conference in Hong Kong with the Governor of the Bank of England. But so great was the crisis and so panicked were the markets that he decided he could not afford to be out of touch for seventeen hours’ flying time. (This was before in-flight phones.) In full view of the television cameras, he turned round at Heathrow airport and went back to the Treasury. There he decided to apply to the IMF for a conditional loan – one which gave authority to the international banking officials above Britain’s elected leaders. With exquisite timing, the Ford workers began a major strike. Healey was close to collapse, to ‘demoralization’, he later said, for the first and last time in his life.

  Against Callaghan’s initial advice, he decided to dash to the Labour conference in Blackpool and make his case to an anguished and angry party. As we have seen there was a powerful mood at the time for a siege economy, telling the IMF to get lost, cutting imports and nationalizing swathes of industry. Given just five minutes to speak from the floor because of the absurdities of Labour conference rules, the Chancellor warned his party this would mean trade war, mass unemployment and the return of a Tory government. But, he shouted against a rising hubbub, with something of the young Major Healey who had visited the 1945 conference in battledress, he was speaking to them from the battlefront. He would negotiate with the IMF which would mean ‘things we do not like as well as things we do like. It means sticking to the very painful cuts in public expenditure…It means sticking to the pay policy.’ As Healey ruefully recorded in his autobiography, he had begun with a background of modest cheers and a rumble of booing: ‘When I sat down, the cheers were much louder. So were the boos.’ Benn called his speech vulgar and abusive: in fact Healey’s final arm-clasp of triumph was a last throw by one of politics’ great showmen.

  So, with the cabinet nervously watching, the negotiations with the IMF started. Callaghan and Healey naturally wanted to limit as far as they could the cuts being forced on them. The IMF, with the US Treasury standing behind them, was under pressure to squeeze ever harder. The British side was in a horribly weak position. The government was riven by argument and threats of resignation, including from Healey. There were incredibly long and difficult cabinet arguments about what levels of cuts were acceptable and whether there was any real alternative in a leftist siege economy. In deepest secret, Callaghan and the lead IMF negotiator from Washington had bitter private talks, in which the Prime Minister warned that British democracy itself would be imperilled by mass unemployment. When it came to the very end of the tense and complicated haggling, the IMF was still calling for an extra billion pounds’ worth of cuts and it was only when Healey, without telling Callaghan, threatened the international bankers with yet another ‘Who runs Britain?’ election, that they gave way. The final package of cuts was announced in Healey’s budget, severe but not as grim as some had feared, and greeted with headlines about Britain’s shame.

  But the truly extraordinary thing about this whole story is that it was unnecessary from the start. The cash limits Healey had already imposed on Whitehall would cut spending far more effectively than anyone realized. More startling still, the public spending statistics (on which the cuts were based) were wildly wrong. Public finances were stronger than they
appeared. The Treasury estimate for public borrowing in 1974-5 had been too low by £4,000m, a mistake greater than any tax changes ever made by a British Chancellor; but the 1976 estimate was twice as high as it should have been. The IMF-directed cuts were more savage than they needed to have been. As to the bloated State, another major issue of the day, the amount of Britain’s wealth spent by government was miscalculated too. A government white paper early in 1976 had put it at about 60 per cent – huge by the standards of the West. But this was, as Healey put it, ‘unforgiveably misleading’. When Britain’s spending was defined in the same way as other countries’ and at market prices, the figure fell to 46 per cent. By the time Labour left office it was 42 per cent, about the same as West Germany’s and well below that of social democratic Scandinavian countries. Britain’s balance of payments came back into balance long before the IMF cuts could take effect and Healey reflected later that ‘If I had been given accurate forecasts in 1976, I would never have needed to go to the IMF at all.’

  In the end only half the loan was used, all of which was repaid by the time Labour left office. Only half the standby credit was used and it was untouched from August 1977 onwards. During the IMF negotiations Healey had talked about ‘Sod Off Day’ when he and Britain would finally be free of outside control. That came far sooner than he had expected. Of course, at the time, nobody did know that Britain’s finances were so much stronger than they had seemed. Yet all the lurid drama which imprinted itself on Britain’s memory – the rush back from Heathrow, the dramatic scenes at the Labour conference, the humiliating arrival of the IMF hard men, backed by Wall Street, a political thriller which destroyed Labour’s self-confidence for more than a decade and which was used repeatedly in the Thatcher years as clinching evidence of its bankruptcy – all this could have been avoided. That is only the start. It was the prospect of ever greater cuts in public spending, inflation out of control, and the economy in the hands of outsiders that helped break the Labour Party into warring factions and gave the hard left its great opportunity. Had the IMF crisis not happened would the ‘winter of discontent’ and the Bennite uprising have followed?

  Healey later said he forgave the Treasury for its mistakes in calculating public sector borrowing needs, because nobody had got their forecasts right. He and they were operating in a new economic world of floating exchange rates, huge capital flows and speculation still little understood. It made him highly critical of monetarism, however, and all academic theories which depended on accurate measurement and forecasting of the money supply. He liked to quote President Johnson, who at about this time reflected that making a speech on economics ‘is a lot like pissing down your leg. It seems hot to you, but it never does to anyone else.’ Healey was bitter, though, about the Treasury’s mistakes over the true scale of public spending which so hobbled his hopes of being seen as a successful Chancellor. He said later he could not forgive them: ‘I cannot help suspecting that Treasury officials deliberately overstated public spending in order to put pressure on governments which were reluctant to cut it. Such dishonesty for political purposes is contrary to all the proclaimed traditions of the British civil service.’

  The Callaghan government is remembered for the IMF crisis and for the ‘winter of discontent’. His defenders point out that Callaghan actually presided over a relatively popular and successful government for more than half his time in power – some twenty months out of thirty-seven. Following the IMF affair, the pound recovered strongly, the markets recovered, inflation fell, eventually to single figures, and unemployment fell too. By the middle of 1977, the year of the Queen’s Silver Jubilee, North Sea Oil was coming ashore to the tune of more than half a million barrels a day, a third of the country’s needs. Britain would be self-sufficient in oil by 1980 and already was in gas. The pay restraint agreed earlier with Healey was still holding, though only just. The new American President, Jimmy Carter, visited for a much-praised summit. Callaghan, for the first time, was getting a good press while the Tory opposition under Margaret Thatcher seemed to be struggling. After having to rely on an odd mixture of nationalist MPs for its precarious Commons majority, Labour entered a deal with David Steel’s Liberals from March 1977 to August of the following year, giving Callaghan a secure parliamentary position for the first time. The Lib-Lab pact gave the smaller party, which then had only thirteen MPs, rights only to be consulted, plus vague promises on possible voting system changes: it was much more helpful to Labour. Labour regained a modest majority over the Tories in the opinion polls and the prospect of Callaghan and Labour continuing to govern well into the eighties looked perfectly reasonable. This did not look like a dying government, still less the end of an era.

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  Peasants’ Revolt: Two, the Left

  We have seen the peasants’ revolt of the right, but there was another too, from the left. This would be publicly associated with Tony Benn, the face of the left in Labour’s highest circles. But it was a wide and a deep political force, with complicated roots. The Communist Party of Great Britain had almost collapsed, so great was the disillusion with the Soviet system to which it pledged undying and largely uncritical obedience. By the seventies it was riven by arguments of the kind that split most declining organizations. Further left were a bewildering number of Trotskyist groups, all hostile to the Soviet Union, all claiming to be the true party of Lenin, all denouncing one another over ideological and tactical detail. They tended to be dour and puritan. Only two had any real following: the Socialist Workers’ Party, or SWP, and the Militant Tendency. Each had descended by political split and fusion from earlier groups which had first organized in Britain in the forties.

  Militant would later cause a huge convulsion in the Labour Party. Wilson complained a lot about ‘Trots’ trying to take the party over but in the seventies he was largely ignored and Militant built up strong local bases, particularly in Liverpool. The SWP, outside the Labour Party, campaigned on specific issues such as strikes and racism. Their distinctive clenched fist logo and dramatic typography appears in the background of countless industrial and political marches, pickets and rallies. The SWP’s single biggest influence was in combating the rise of the National Front.

  The NF, under its tubby would-be führer Martin Webster and the bullet-headed John Tyndall, had been founded in 1967 after the original British National Party and the old League of Empire Loyalists joined together. Electorally it was struggling, though Webster polled 16 per cent in the West Bromwich by-election of May 1973 and in the two 1974 general elections the NF put up first fifty-four and then ninety candidates, entitling them to a television broadcast. More important to their strategy were the street confrontations, engineered by marching with Union Jacks and anti-immigrant slogans through Bangladeshi or Pakistani areas in Leeds, Birmingham and London. A more extreme offshoot of the original skinheads attached themselves to the NF’s racialist politics and by the mid-seventies they too were on the march. The SWP determined to organize street politics of their own and bring things to a halt and formed the Anti-Nazi League in 1977. The League drew in tens of thousands of people who had no particular interest in the obscurities of Leninist revolutionary theory, but who saw the NF as a genuine threat to the new immigrant communities. And the young flooded to their rallies, marches and confrontations, during which there were a couple of deaths as the police weighed in to protect the National Front’s right to march. Beyond Militant and the SWP, other far-left groups inside and outside the Labour Party would achieve brief notoriety because they were supported by a famous actress, such as Vanessa Redgrave, or through influence in a local party or borough. Eventually the ‘loony left’ would come to the boil, enjoying enough influence, particularly in London, to shred Labour’s credibility. But in the seventies, this was still a slowly developing, obscure story.

  Much more important then was the influence of socialists who were not working for secretive Trotskyist or communist parties, but had simply wanted to bring down Wilson and were now gunni
ng for Callaghan and his friends. Like Thatcher and Joseph, they believed the old consensus politics was failing. Some of their thinking was also shared by the right – they were mostly hostile to the European Community, for example, opposed Scottish and Welsh nationalism, and were hostile to America. But that was where the similarities ended. The Labour left wanted to deal with world economic chaos by pulling up the drawbridge, imposing strict controls on what was imported, taking direct control of the major industries, and the City too. The left thought planning had failed because it was too weak, and should therefore be dramatically extended. Any strongly held political view which is excluded from the centre of power tends to develop a conspiracy theory. The Powellites believed Heath had lied to the British people. The Labour left believed Wilson, Callaghan and Healey had been captured by international capitalism, as had many MPs. The answer was to make them accountable to ‘ordinary people’, as the obsessive meeting-attenders of Labour politics innocently believed themselves to be. So the siege economy or ‘Alternative Economic Strategy’ and mandatory reselection of MPs became the two main planks of the left.