by Andy Beckett
Healey aside, the Labour figure most central to this fundamental change in economic policy was the man McNally advised, the new prime minister, Jim Callaghan.
Callaghan was four years older than the fading Wilson, and thirteen years older than Margaret Thatcher. He was chosen as Labour leader only after three rounds of voting by Labour MPs. In the first ballot, which showed how divided the party had become, with Healey and Jenkins standing from the Labour right, Crosland and Callaghan from the centre of the party, and Benn and Michael Foot from the left, Callaghan attracted less than a third of the votes and came second. Foot won. In the next round, Callaghan beat Foot by only eight. In the final round, Callaghan won by a less than overwhelming thirty-nine. In his autobiography Time and Chance he describes his state of mind in the period leading up to the leadership contest:
Ten years earlier I would have been avid for the Party leadership, and the prospect of leading the nation, but now I was almost 64 years of age. For nearly 30 years I had served continuously either in Government or in the
Shadow Cabinet, and for 20 years on the Party’s Executive or as its Treasurer. I had been at the centre of all the controversies, but since becoming Foreign Secretary … I had begun to feel a little detached, especially as my visits abroad prevented me from attending Cabinet and Party meetings as frequently as before. I had assumed … that the time would come before long when the Prime Minister would tell me in a kindly way that he would like me to make way for a younger man.
In contrast with the other candidates – and with Thatcher the year before – Callaghan gave no interviews during the leadership election and offered no clear personal manifesto. Instead, he simply continued with his duties as foreign secretary. And yet his apparent diffidence was as deceptive as his Billy Bunter cheeks and kindly old man’s smile. Callaghan, in a less overt way than Wilson, was a man of great ambition, an operator, a delicate weigher of situations, a relisher of political manoeuvres. In the leadership contest, he had correctly calculated that his high profile and extensive connections made traditional campaigning unnecessary. Instead, his parliamentary private secretary Jack Cunningham, with a sleight of hand worthy of Airey Neave, set up two parallel teams of MPs to promote Callaghan, one openly and one behind the scenes. Together they created a sense of inevitability around Callaghan’s candidacy, suggesting that he was the man who could unite the party and keep the unions happy. Then, when it came to the actual voting, Callaghan and his backers played the long game. They realized he did not have to win in the first round; a strong second place would be enough, provided he then attracted the supporters of the other, less successful candidates of the right and centre, who would be alarmed at the prospect of Foot as the Labour leader.
By 5 April, all this had come to pass and Callaghan was prime minister, having won the support of parts of the left and many of the unions, as well as more predictable supporters. ‘I must tell you, there is no other feeling like it in the world, to be sitting in the seat of the prime minister of the United Kingdom,’ he told the television journalist Michael Cockerell a decade and a half later. ‘I had no doubts at all about my capacity. I had watched so many others. It’s not altogether a very difficult job to do if you use elementary common sense, if you have a knowledge of how your fellow human beings think and feel.’
In 1976, Callaghan already felt that his life and career had given him such knowledge. He had been born in 1912, with British power only just beginning to dip from its late Victorian peak. He grew up in Portsmouth, the pride of the Royal Navy moored just beyond the close-packed streets. His father, one of ten children in a family that was half Jewish English and half Catholic Irish, had run away from home to join the navy and risen to chief petty officer. During the future prime minister’s early childhood, Callaghan senior served on the royal yacht Victoria and Albert, the predecessor to Britannia.
But there were other lasting influences on the younger Callaghan besides his father’s patriotism. His mother was a Baptist, properly puritan in outlook, and when his father died suddenly of a heart attack in 1921, she, Callaghan and his older sister Dorothy struggled along together in rented rooms. Like Jack Jones, and unlike Ted Heath, Wilson and Thatcher, Callaghan did not easily escape the privations of his upbringing. He was a solid rather than outstanding school pupil, and anyway his mother was far too poor to send him to university – an opportunity denied that would linger in him, especially when he entered the well-educated world of British politicians and Westminster reporters. Instead, in 1929, with the Depression filling the streets of Portsmouth with the unemployed, he left and became an employee of the state, working as a clerk for the Inland Revenue in Maidstone in Kent, on the opposite side of the tax game from the future tax barrister and Tory leader Margaret Thatcher. He was already a socialist – for one thing, his mother had received a widow’s pension for the first time thanks to the first Labour government – and he quickly joined a civil-service union. During the thirties, he became an activist of repute and assistant secretary of his small union by 1936, at the age of twenty-four. While in the position, he recalled later, he learned a lasting political lesson:
On one occasion I led a small team to conduct negotiations with the Board of Inland Revenue … We had a good case and … [I] pressed it to the extreme … altogether gave what I thought was a brilliant display of fireworks …. At the end of the afternoon … our team came away without
having gained a single halfpenny. I was furious and could not understand what had gone wrong. But D.N. Kneath, one of the older and more silent members of the negotiating team from south Wales, knew. And the next day he told me, ‘Remember, my boy, more flies are caught with honey than with vinegar.’
Callaghan became an unlikely admirer of Stanley Baldwin, the Conservative who was prime minister twice in the twenties and again in the thirties, and whose moderation and apparent blandness concealed a great ability to defuse crises and appeal across classes. In 1945, after a quiet war service, Callaghan got his chance to start following in Baldwin’s footsteps, winning the marginal Tory seat of Cardiff South – part working-class, part middle-class, part retired – by a comfortable margin. Within a year and a half, he was already being seen in the Commons as a young man with prospects. Tall, with a confident jutting nose and a quick smile that could become a smirk in repose, he was a junior transport minister by 1947. While generally loyal to the frugal left-wing policies of the Attlee government, he sometimes struck a more populist note, writing in 1948, for example, that one of the functions of the tax system should be ‘encouraging the maximum production of wealth’. As a transport minister, he oversaw the introduction of cats’ eyes and zebra crossings, and posed with an actress in Parliament Square for a road-safety campaign without looking the slightest bit embarrassed.
When the Attlee administration began to disintegrate, Callaghan made vain efforts to help hold it together, and emerged with a keen understanding of how embattled governments live and die. ‘The whole of politics is about taking decisions that are either bad or worse,’ he told Cockerell later. ‘You rarely take good ones.’ After Labour’s defeat at the 1951 general election, he spent thirteen years in opposition. He was effective on television, popular with female voters, and forward-thinking: ‘The accent for socialists must be on the consumer,’ he said in a speech criticizing the unresponsiveness of the nationalized industries as early as 1950. He was also known for his robustness on law and order, always useful for an ambitious British politician, and worked for the Police Federation for almost a decade as a consultant. And usefully, too, he had unusually reliable health for a mid-twentieth-century Labour figure, preserving his rosy, unlined features with catnaps, hiking holidays and a famously contented marriage. In 1964, Callaghan returned to office as chancellor; like Wilson’s new government as a whole, he seemed a formidable political mixture of the modern and image-conscious and the shrewd and old-fashioned.
Yet his time as chancellor proved close to traumatic. ‘We had been in office
for only three weeks,’ he records in his autobiography, ‘when the first large attack against sterling was launched from the Continent … an attack by speculators which I had been half expecting and had believed I was mentally braced to overcome. But in all the offices I have held I have never experienced anything more frustrating than sitting at the Chancellor’s desk watching our currency reserves gurgle down the plughole day by day and knowing that the drain could not be stopped.’ For the next three years, he was dogged by economic problems inherited from the Conservatives, by Wilson’s impractical schemes for solving them and by recurrent panics over the pound. ‘I was always aware of the weakness of sterling,’ he told Cockerell. ‘It was something that lived with you the whole time.’ In Time and Chance, Callaghan describes his experience of one sterling crisis as a kind of political drowning: ‘It was like swimming in a heavy sea. As soon as we emerged from the buffeting of one wave, another would hit us before we could catch our breath.’ In 1967, he finally went under, devaluing the pound, being booed by an outraged crowd in Downing Street and giving gulping, tetchy interviews in support of the policy on television. Left with profound ‘feelings of failure’, he resigned as chancellor soon afterwards.
Between 1967 and 1976, Callaghan rebuilt his career. As home secretary in the late sixties, he reversed the liberalizing drift of government policy on law and order and public morality. In 1968, he supported the fierce policing of the Grosvenor Square riots. In 1969, he opposed the legalization of cannabis, telling the Commons he wanted to ‘call a halt to the rising tide of permissiveness’. The same year, he stood up for a different, more left-wing traditionalism by helping sink Barbara Castle’s proposal for taming the unions, ‘In Place of Strife’. Unlike many Labour politicians, Callaghan had a genuine union background, and his attitudes and closeness to Jack Jones and other union leaders reflected that. He also enjoyed exercising his political muscle and making a successful political kill. ‘I wasn’t stabbing them in the back,’ he told Cockerell of his behaviour towards Castle and her allies over ‘In Place of Strife’. ‘I was stabbing them in the front.’
As foreign secretary during Wilson’s listless seventies government, Callaghan was able to maintain a useful distance from the troubles at home. He made himself into an international statesman, and was on particularly good terms with the Americans: with Gerald Ford, who took over as president from Richard Nixon in 1974; and with Ford’s slippery Secretary of State Henry Kissinger, whom Callaghan admired, as he put it in Time and Chance, for his ‘negotiating skill and persuasive powers’ and his ‘flexibility’. The admiration was mutual: in 1975, Kissinger flew specially to Cardiff to see Callaghan given the freedom of the city.
By the mid-seventies, Callaghan’s smooth eagerness as a young politician had given way to a more cunning, more homespun charm. He had developed an unhurried, almost cosy public speaking style, full of plain sentences and wise, grandfatherly vowels. It could sound patronizing, but to many it sounded reassuring. He had lost his smirk and taken to wearing elderly, thick-rimmed glasses. He had been married for almost forty years and was known for his devotion to his children and grandchildren. Since 1967 his main British home had been a small Sussex farm, only an hour from London and just a few miles from Healey’s house but usefully unworldly, for personal and political purposes, in its domestic routine and outward detail. Sometimes in front of photographers and sometimes not, Callaghan would put on a tweed hat and, heavy shoulders stooping slightly, walk the 140 acres checking on his barley and cattle and keeping a daily account of the rainfall. Close colleagues regularly speculated that he might give up politics and become a farmer.
He did not, of course, but in one important area of his political thinking Callaghan became increasingly receptive to ideas emphasizing good husbandry. Like Healey, he was not dogmatic about economics: ‘I am no theologian in monetary doctrines,’ he wrote in his autobiography. But his puritan streak inclined him in a certain direction: ‘I was always prudent in economic affairs, and agreed with a view expressed by Bernard Donoughue [whom he had kept on as head of the Downing Street Policy Unit] that “… monetary disciplines were essential to good economic management, and conversely that monetary laxity would undermine the foundations of sustained economic growth”.’ As early as 1970, Callaghan attended an IEA lecture – one of the first senior Labour politicians to do so – by Milton Friedman on the benefits of monetarism and the bankruptcy of Keynesianism. Callaghan was not instantly or completely converted; instead, he later told his biographer Kenneth O. Morgan, as the seventies went on he came to believe, like Healey, that some of Keynes’s ideas were beginning to show their age. And during that decade Callaghan did find himself increasingly in agreement with the monetarists on the identity of the main threat facing the British economy: ‘He thought that eventually inflation undermined the whole fabric of society,’ his adviser Tom McNally told me.
Callaghan and Healey’s new thinking about the economy was supported by a growing body of opinion in the Treasury. Some civil servants there were sceptical, almost by definition, about the ability of other government departments sensibly to consume the revenues the Treasury helped gather. Others were intrigued or persuaded by the new right-wing economics. Still others had found the barely controlled surge in public spending during the first half of the seventies simply too alarming.
Yet, abroad, many observers of British economic policy continued to believe throughout the mid-seventies, and often long after that, that nothing had really changed. Strong impressions of foreign countries, once formed, can linger, often in defiance of shifting realities. This was perhaps especially true of how the Americans, with their relatively insular media, saw Britain then, with its socialist government, which was so alien to the American political tradition.
In 1975, Margaret Thatcher confirmed the views of Labour’s foreign critics on her first visit to the US as Conservative leader by breaking with the Commons tradition that opposition leaders do not attack Britain when abroad. The country, she said, was being stifled by socialism, and might even fall apart: ‘If Britain were to break, a well-nigh mortal blow would be struck against the whole Western world.’ Callaghan chastised her for a lack of patriotism, but in America Thatcher’s self-possession and dramatic turn of phrase was, for the first time in the US, widely noted and her message widely heard.
On the increasingly important international currency markets, meanwhile, confidence in Britain had already drained away. ‘The dealers thought the state of the economy in the UK was weak,’ recalled Dennis Weatherstone, then head of the foreign-exchange operation at the influential American bank JPMorgan. ‘The markets are pretty smart. They’re not full of economists, but they talk to economists. And they smelled that something wasn’t quite right in Britain. The country was declining – I hate to say that. I had come to the States from England in 1971. I found that in the bank in New York we had lots of young people being promoted. In London we had had none of that.’ More specifically, ‘There was a recognition that sterling was less and less the world’s reserve currency, that it shouldn’t be as strong [in value] against the dollar.’ He paused. ‘I didn’t think the pound would go into free fall. But one thing you know about markets is they always overreact.’
In 1972, before the start of Britain’s mid-seventies crisis, a pound was typically worth $2.60. By January 1976, the exchange rate had eroded to just above $2. Until early March, the rate held. Then, in the fortnight before Wilson’s resignation, it began to lurch downwards. By mid-month the rate was $1.90 – the first time it had ever fallen below $2; by mid-May, it was $1.80; by early June, not much more than $1.70. Often, a fall of several cents occurred in a single day. On 8 March, a fall of over five cents occurred in a single hour.
Besides the general disenchantment with the British economy, there was a specific explanation for all this. In March, the Bank of England and the Treasury, believing that Britain’s inflated wages were making its exports too expensive, had decided that a modest furt
her drop in the value of the pound could ease the situation. On the 4th, the Bank cut interest rates, which was a traditional prompt to the currency markets to lower the price of sterling, and began selling pounds, which was another. Exactly who in the Bank and the Treasury favoured this course of action, and the precise detail of what was done, has been a matter of protracted and intricate dispute, but the effect on sterling was unambiguous: other major holders of the currency, in particular the newly rich oil-producing countries, suddenly took fright at what they saw as the fragility of sterling and the British economy in general. They sold their pounds. As the currency slid further on the foreign exchanges in consequence, the Bank of England abruptly changed course and began using its reserves, often in vain, to buy pounds and prop up the value of sterling. Between February and April alone, the Bank’s reserves shrank by a third.
It took until mid-June, over three months in total, for the Callaghan government and the Bank of England to halt the pound’s fall. They did so by borrowing money, not from the IMF – Britain had just done that the previous December – but from the central banks of other rich countries, notably America, Germany, France, Switzerland, Canada and Japan. On 7 June, Healey announced to the Commons that a loan had been secured from these countries with a combined value of $5.3 billion, or approximately £3 billion. The money, it was intended, would buy the government breathing space. It would replenish the Bank of England’s depleted reserves; restore the markets’ confidence in sterling – a country with a truly weak currency and economy, the thinking went, would not be offered such credit; and it would also give the government’s new economic policies time properly to take effect and demonstrate their worth to the outside world. Considering the potentially shaming symbolism of the deal, it was done with relatively little public comment. But there was a catch: the loan would have to be repaid, in full, within six months.