by Andy Beckett
‘I carried on working,’ McSweeney recalled. ‘I was thinking, “Clever old Bill.”’ Less than half an hour later, after more comings and goings involving the fitting room and more men in dark suits, the fitting-room door opened for good and Simon came out. ‘Bill was all smiles.’ McSweeney paused. ‘The men in suits were poker-faced.’ Simon shook his hand and gave him ‘a huge wink’. Then he ordered two suits, he and the others got into the limousines, and they were gone.
When I visited Wells’s old premises in 2005, they had been turned into a restaurant. It was part of the Brown’s chain – appropriately, given the building’s part in the IMF saga – but the connection with the hotel was in name only. The fitting room which Simon and the men with briefcases had borrowed was now a staff rest area, full of empty yoghurt pots and half-eaten apples.
Exactly who was present and precisely what was agreed in there in 1976 remains a little uncertain, but some things can be deduced. Simon’s tailor was a few hundred yards from Brown’s hotel and from the American embassy. It was also less than a mile from the Treasury. Simon himself told the Sunday Times in 1978 that he and his Treasury under-secretary Edwin Yeo ‘met the [British] Treasury people’ at Wells. ‘Then we went off and talked to Whittome for a few hours and I met all the senior [British] government officials.’ Simon summed up his day’s work: ‘We pretty well set the parameters.’
By ‘the parameters’, the Sunday Times inferred, Simon meant the principle that the IMF should not soften its position too much. Yet the American government remained anxious about what might happen if the IMF negotiators in London failed to reach a deal with the British. Back in Washington, the Fund’s historian records, ‘US Treasury authorities’ – Simon or his subordinates – ‘transmitted to Mr Witteveen President Ford’s belief that it would be desirable for Mr Witteveen, in the interest of the international community, to go to London.’ Although Ford had lost the November presidential election, he was not due to leave office until January, as is the custom in America, and he was still preoccupied by the London talks. On 1 December, Witteveen flew to Britain and met Callaghan.
To enable both men to speak as freely as possible, neither the British Cabinet nor the executive board of the IMF were told about the encounter. As it turned out, the discussions between Witteveen and Callaghan verged on the acrimonious. The many different versions of what happened variously have Callaghan losing his temper, threatening to put restrictions on imports to Britain if a loan was not provided, and even calling the director of the IMF ‘boy’. But by the meeting’s conclusion both sides had made potentially decisive concessions. Witteveen now wanted cuts in British state spending of around £2.5 billion over the next two financial years, less than half what the Fund had originally asked for. Meanwhile, Callaghan, according to the IMF’s historian, had ‘finally agreed to support a reduction’ in public spending which, while ‘not as large as that proposed by the [Fund] staff… was, nonetheless, substantial’.
Now all he had to do was convince the Cabinet.
*
Since the IMF’s arrival in London, Callaghan’s roomful of able, quarrelsome ministers had not simply been sitting quietly. Divisions and positions on public spending can be dry to the layman but, particularly in hard times and especially for left-wingers, they are the essence of politics. Over the last year and a half, as Healey had repeatedly forced through his cuts, ministers’ stances had hardened. During November 1976, the Cabinet polarized further.
On the left, and utterly opposed to the Fund’s demands, were Tony Benn and his half-dozen allies. In the centre, but also against the IMF cuts, were Tony Crosland and another faction of half a dozen ministers. On the right, and prepared to do some of what the Fund wanted, were Healey and three relatively junior colleagues. And then there was Callaghan: coming round to Healey’s position in private, but in public keeping his cards close to his chest. ‘It would have been best if we [the Cabinet] could have reached a quick decision,’ he writes in his memoirs, ‘but I knew this would not be possible if we were to remain together.’ He also knew that any senior ministerial resignations over the issue would be the end of his fragile government. ‘So … I decided not to bring matters to a head but to allow time to work and Ministers to become familiar with the problems, with the arguments and with the possible solutions … And so although I knew how far I was ready to go to secure agreement with the IMF, I saw no advantage in making my position clear at an early stage.’
Instead, between 23 November and 14 December Callaghan held a succession of carefully orchestrated Cabinet meetings. Simultaneously, negotiations continued between the government and the IMF: the pivotal Cabinet meeting of 1 December started half an hour late because, unknown to ministers, Callaghan was in his meeting with Witteveen. But even Benn was impressed by the thoroughness of the Cabinet debates. ‘Callaghan was very fair,’ he told me. ‘He said, “This is a very important thing.” He put me on to speak first. I put up my alternative to the IMF cuts, then the others put theirs.’ He paused. ‘They were the most interesting discussions I ever attended in my life.’
Benn’s case against the cuts was simple and dramatic. ‘This is a political decision as grave as any in our history,’ he began at the meeting of 1 December. ‘We are in the middle of a slump … We’ve got to reduce unemployment … We’ve got to expand our manufacturing base. We’ve got to safeguard the benefits of the welfare state … We cannot fudge the issue … Cuts and deflation will not be acceptable.’ As a cautionary tale, he cited the 1929 to 1931 Labour government, still remembered with a shiver in the party, which had split and then been crushed in a general election after succumbing to pressure for cuts in public spending in the midst of a sterling crisis and a recession. This time, Benn went on, Labour should be more streetwise and resilient: rather than accept the IMF’s demands, the government should shield sterling and the economy by putting limits on currency trading and foreign imports until the economic pressures eased.
Benn was fiercely cross-examined by Callaghan and other less left-wing members of the Cabinet. He defended his arguments determinedly, and made some telling points against those who would do a deal with the IMF. ‘They said, “Your proposal is a siege economy,”’ he told me. ‘I said, “Yours is a siege economy too, except the bankers will be inside the castle, and your supporters will be outside, besieging.”’ Yet ultimately his plan was too similar to other schemes for Britain’s economic salvation that he had unsuccessfully proposed earlier in the seventies. Moreover, behind his clear, defiant rhetoric there appeared to lurk an uncertainty about whether or not to ignore the IMF altogether. According to Benn’s diary, at the 1 December meeting, ‘Jim [Callaghan] asked [me], “Do you think we need the loan?” I said I would prefer to have the loan rather than not.’ But in the very next sentence Benn seems to adopt a different position: ‘I reminded the Cabinet of the famous cartoon in 1940 of a soldier after Dunkirk waving his fists and saying, “Very well, alone.”’ And in the next sentence he seems to adopt another position still: ‘I said that I thought the IMF would help us because it would be in their interests to do so.’
Benn did not win over enough of the Cabinet. Next to argue against the IMF cuts was a less charismatic, more pragmatic left-winger, the environment secretary Peter Shore. He proposed two years of restrictions on imports to protect the British economy, until, he anticipated, significant North Sea oil revenues started to flow and removed the need for such emergency measures. Shore’s plan, being less ambitious and ideological than Benn’s – and not being proposed by Benn – fared slightly better under cross-examination, but other ministers still worried it might provoke a trade war with Britain’s allies or bankrupt the country before its measures could take effect by endangering the loan from the IMF. Shore, too, failed to convince a Cabinet majority.
With the momentum of the meeting established, Callaghan called on the final and potentially most formidable opponent of the IMF to speak. Tony Crosland, unlike Benn and Shore, was ideologic
ally close to a large proportion of the Cabinet. He had an enduring reputation – probably still the pre-eminent one in the party – for panoramic but nuanced political thinking. And he could not be typecast as a financially unrealistic socialist. The previous May, he had been one of the first major Labour figures to call for belt-tightening, telling a local government conference in Manchester that councils should curb their spending: ‘We have to come to terms with the harsh reality of the situation which we [the Labour government] inherited. The party’s over.’
Yet by the late autumn of 1976, after a year and a half of much more penny-pinching Labour government, Crosland felt that the cuts proposed by the IMF were unnecessary and would be counterproductive. ‘I want us to stick to our existing strategy,’ he told the Cabinet on 1 December. ‘We have … deflation … We’ve got a wages policy, and it will work. There is no case for a change.’ Far from reviving the apparently all-important currency markets’ faith in the government, ‘New cuts would have a disastrous effect … because they’d damage wages policy and destroy confidence.’ If the IMF absolutely insisted on the cuts as a condition of the loan, he went on, Britain should ‘threaten a siege economy, or talk about … our troops in Germany … membership of the EEC, etc. Schmidt and Ford would soon give way.’ Or, alternatively, the government should ‘do a presentational job to the IMF by announcing now the cuts we had decided on in July but which have not yet become known, and possibly some extra cuts …’
Crosland was a confident man, and often signalled the fact. He smoked cigars, wore loud shirts and used irreverent words. Callaghan had made him foreign secretary, but he had long-standing ambitions to be chancellor. Yet at the Cabinet meeting of 1 December the casualness of Crosland’s language and the unevenness of his arguments – some of them penetratingly logical, some of them barely sketched out – suggested a talent on the wane. In the Labour leadership contest the year before, he had come last and been eliminated after the first round. As foreign secretary he was often abroad, even during the IMF crisis, and his political, as opposed to intellectual, influence had not recovered. He was only fifty-eight in 1976, not old for a senior politician then, but there was a weariness and passivity in his handsome face. The year before, Barbara Castle had caught his mid-seventies mode in her diary: ‘a mixture of brilliant analysis and suspended action’.
By the climax of the IMF crisis, Crosland was not the only Cabinet member who was worn out. ‘The IMF negotiations were the most tiring part of my life,’ Healey told me. ‘I would often work sixteen hours a day or even longer. Get up at six in the morning, and go to bed maybe about two or three in the morning.’ He lowered his voice. ‘I got shingles, which is a famous nervous disease… Unpleasant, but you use an ointment.’
Yet the chancellor proved tougher than his Cabinet opponents in the end. The day after Benn, Shore and Crosland had presented their arguments, the Cabinet met again. Healey told them that the government would have to start repaying its non-IMF loan from the summer in exactly a week. If it did so without borrowing more money from the IMF, he continued, the Bank of England would be left with less than £2 billion in reserves. Earlier in the autumn, the Bank had sometimes spent over a tenth of that sum in a single week, defending sterling on the foreign exchanges.
Healey next urged the Cabinet to accept the £2.5-billion reduction in state spending that Callaghan had secretly agreed with Witteveen on 1 December. The cuts would be scheduled to delay the pain as much as possible: £1 billion in the financial year 1977–8 and £1.5 billion in 1978–9. The prime minister then confirmed to the Cabinet for the first time that he supported his chancellor. In another astute piece of stage management by Callaghan, Michael Foot, the Cabinet’s most popular left-winger and closest link to the unions, then announced that he too agreed with Healey. Finally, Callaghan records that he ‘went round the table one by one, inviting the opinion of every member of the Cabinet’. The IMF cuts were accepted by eighteen out of twenty-three ministers.
It took another fortnight for the detail of the deal to be agreed by the Cabinet and the IMF, and for it to be accepted by Parliament and the unions. There were still delicate moments. On 3 December, in a meeting with Healey, Whittome appeared to increase the IMF’s demand for cuts again, to almost double what the Cabinet had just reluctantly conceded. ‘I told Whittome he should tell the Managing Director [Witteveen] to “take a running jump”,’ Healey wrote afterwards. ‘He smiled and said, “We seem to have reached an impasse.”’ Healey warned that if the Fund did not back down, the government would ‘call a general election on the issue of the IMF versus the people’, not a prospect the officially apolitical IMF would welcome, and an unconscious echo of Heath’s challenge to the miners two years earlier. As chancellor, Healey had no authority to threaten elections, Callaghan noted later,
But I was quite happy that he should have done so. He and I sat for some time in my bedroom talking over the various drastic policy changes that would be needed if a loan was not forthcoming… On that night anything seemed possible… The next morning we parted and I travelled to Chequers for the weekend, and on arrival was handed a message… The IMF negotiators had reported back [to] Washington and had shortly afterwards telephoned London, suggesting a renewal of contacts…
When the Commons debated the final terms of the loan on 21 December, twenty-seven Labour MPs voted against the government, despite a three-line whip, and thirty abstained. But the Conservatives, caught between wanting to paint Healey as a pawn of the IMF and their own basic agreement with much of what the Fund was demanding, abstained rather than opposed, and the loan terms were passed comfortably.
The biggest cut, £320 million, would come in spending to stimulate employment; then defence, £300 million, with the chancellor showing his lack of political sentimentality by squeezing his old department; then housing, £280 million; nationalized industries, £240 million; food subsidies, £217 million; and road building, £125 million. Reductions in the budgets for education, the NHS, and welfare benefits and services were relatively small or non-existent. Clement Attlee died in December 1976, but the Callaghan government was not ready to dismantle his welfare state just yet.
In Washington, William Simon declared the planned cuts ‘excellent’ regardless. At Transport House in London, Jack Jones was more guarded: ‘The unity of the Labour party and the trade unions, despite our concern about a lot of these measures, will be maintained.’ It was left to a less senior but rising union leader, Alan Fisher, of the rapidly expanding National Union of Public Employees, to strike a more ominous – and prescient – note. ‘In meeting the conditions made by the IMF’, he said, ‘the Government have accepted a cheque that may bounce at the next general election.’
During the IMF crisis, the government had broadly accepted the Treasury’s forecasts about the economy, in particular concerning the public-sector borrowing requirement (PSBR). When the PSBR for the financial year 1977–8, which had been pivotal in the IMF negotiations, turned out to be £5.6 billion rather than the £10.5 billion the Treasury had predicted, suspicions were sown in the Labour Party that have flourished since: that the Callaghan government had been the victim of a subtle campaign in 1976 by right-wing Treasury officials to make it accept cuts in public spending. When I asked Bernard Donoughue about this theory in 2005, he dropped his customary insouciance for a moment and looked at me fiercely. ‘The Treasury and the Bank of England wanted cuts,’ he said. ‘They were exaggerating everything. In 1976, I remember a Treasury friend said to me, “Look, you can’t manage the economy tightly over a long period. You only get a chance once every decade to get the economy under control. What you need is a crisis that frightens ministers into accepting [your ideas]. The bigger the crisis, the more you can frighten ministers. [It’s] what we call the Treasury bounce.”’
A few weeks later, I asked William Ryrie, who had been in the Treasury from 1963 until 1975 before joining the IMF, whether he thought there had been a ‘Treasury bounce’ in 1976. ‘History isn
’t made that way,’ he said. ‘It’s always cock-up more than conspiracy.’ But a few minutes later, when I asked less directly about how the Treasury had seen the IMF crisis, he said cryptically: ‘The window had opened.’ What did he mean exactly? Ryrie, now Sir William and retired to an idyllic private estate in south London, sat very upright in a pink shirt and cream trousers in his vast living room. A distant clock ticked. ‘An opportunity to pursue better policies,’ he said.
Finally, I asked Healey about the Treasury figures. ‘The figures were unreliable,’ he said. ‘I mean, incredibly so. If you look at the PSBR… billions out.’ He looked at the ceiling of his study in mock outrage. Then he told me a story about his war service. ‘When I was in the army, I ruptured myself. [To convalesce] I was sent to replace a drunken bombardier as a railway checker on Swindon station. And on six platforms in the blackout, it was very difficult to count the number of soldiers getting on and off… So I made up the number who were getting on, and I went to the ticket collector [on the trains] to get the number getting off. But I found he made up his too.’ Healey chuckled. ‘So I always had a distrust of statistics.’ Did he think the Treasury had duped him in 1976? ‘The big problem they always have in the Treasury is getting governments to control spending,’ he said calmly. ‘So any excuse they can find for getting spending cut they will take. It wasn’t so much a conspiracy against the government so much as an attempt to get the policies they believed in.’