The reasons the British economy was in difficulty in the 1970s had little to do with the welfare state or nationalised industries (which provided a cheap subsidy to underperforming private industry) but reflected the failures of British capitalism. Since 1945, European countries such as France, Italy and Germany, as well as Japan, had outstripped Britain in productivity and economic growth. This was due to the sustained and government-planned and supported investment those countries put into their industries.
In contrast, Britain was badly served by the City and its financial institutions, which prioritised short-term profits, immediate shareholder return and overseas investment. As a result there was a decline of UK industry. Labour’s industrial strategy in the 1970s aimed to provide greater strategic direction and investment through a national enterprise board, planning agreements and targeted regional investment. The City and Conservative Party opposed this.
Analysts such as Alan Bailey, Treasury under-secretary in 1973-79, writing about Labour’s industrial policies of the 1970s, concluded that its attempt at an activist industrial strategy was more positive and successful than is accepted in ‘the prevailing caricature of the period’. As for other economic indicators, such as inflation, there were particular causes, which the 1974-79 Labour government inherited from its Tory predecessor (see below), and which it had some success in dealing with, resulting in inflation halving between 1976 and 1979.
Britain was so far from being a ‘failed state’ in the 1970s that a survey by the New Economics Foundation – based on social inequality indices, investment in public services, levels of pay and other benefits to ordinary workers – found that 1976 was the ‘happiest year’ in the period 1945 to date. There were major advances on sexual equality, such as the Equal Pay Act, the Domestic Violence and Matrimonial Proceedings Act, and child benefit. Britain in the 1970s was also characterised by vibrant and original popular music, design and fashion industries.
Although there were significant miners’ strikes in 1972 and 1974 and the so-called ‘winter of discontent’ disputes in 1978/79, these arose from legitimate wage grievances as trade unions tried to ensure their members’ pay kept pace with inflation. The strikes were lawful industrial actions and were accompanied by three general elections (February and October 1974, and March 1979) in which political power changed hands peacefully and constitutionally.
The main threat to British democracy in the 1970s arose from the activities of the political right and the security services. Unaccountable elements in the security services and military intelligence created covert operations such as ‘Clockwork Orange’, which smeared left wing figures in Northern Ireland and Britain, as well as providing Protestant paramilitaries with the names and addresses of Catholic activists. Paramilitary organisations such as GB75, which sought to organise strike‑breaking armies and prepare for a possible military coup, were supported by senior figures in the security services, the military and the Conservative Party. Many on the right, including Margaret Thatcher, supported General Pinochet’s 1973 military coup, which removed Chile’s democratically elected socialist government and murdered thousands of its supporters.
Inflation went up considerably between 1972 and 1976, when it began to go back down. It was mainly driven by the Heath government’s relaxation of the Bank of England’s competition and credit control rules, which had ensured that the ratio of bank deposits to lending should broadly balance out. Without these controls, the banks expanded their ‘reserve assets’ to support massive lending, resulting in an inflation and credit boom. Heath refused to raise interest rates to counter this and by the end of his government the rate of inflation was rising remorselessly – it would increase from 10.2 per cent in 1973 to 24.6 per cent in 1975.
Despite being the root cause of the problem the banks and the financial sector demanded more freedom to lend and speculate, and resisted any attempt to re-impose the regulatory rules that had ensured stability since the war. Instead, they and their media allies blamed inflation on the unions’ annual wage claims, which were constructed merely to keep pace with the rise in the cost of living.
Most of the unions’ industrial actions of the period were reactive, either seeking to resist wage or job cuts, or political attacks such as the 1972 Industrial Relations Act. In industry (private and nationalised) most British companies, instead of prioritising research, reinvestment and restructuring, preferred to simply lay off workers, prompting industrial militancy in response.
After Labour was elected in 1974 the unions showed great patience in abiding by the ‘social contract’ with Labour, reigning in pay demands in return for an increase in the ‘social wage’ (rent freezes, pension increases etc). As a result inflation began to come down. But although the unions had contributed to containing inflation, the banks continued to send money abroad, causing a balance of payments crisis and threatening a further rise in inflation. While Phases 1 and 2 of wage restraint were broadly accepted by the trade unions, Phases 3 and 4 were not. Phase 3 allowed a maximum wage increase of 10 per cent, although inflation was higher. By 1978 inflation had fallen to 10 per cent but the government unwisely chose to go to Phase 4, which limited pay increases to 5 per cent. This set off the strikes of the ‘winter of discontent’, which were in response to pay increases lower than the rise in the cost of living and large cuts in public services demanded by the International Monetary Fund (IMF) in return for its loan in 1976.
The media greatly exaggerated the size and impact of the strikes to discredit Labour and assist Thatcher. In reality the strikes inconvenienced relatively few and, compared to genuine catastrophes like the collapse of UK manufacturing in the 1980s or the banking crisis of 2008, had no permanent economic impact. Despite this the legend of the winter of discontent is now set in stone, impervious even to the admission of Derek Jameson, editor of the Daily Express in 1979, that: ‘We pulled every dirty trick in the book. We made it look like it was general, universal and eternal, whereas it was in reality scattered, here and there, and no great problem.’
In early 1979, as part of industrial action across public services, grave diggers at two cemeteries (one in Liverpool and one in London) took unofficial strike action. These actions lasted for a few weeks, during which bodies that would have been buried in those cemeteries were kept on ice. In all other cemeteries across the UK the dead were buried as usual.
By 1979 inflation was going down and North Sea oil was coming on stream. The 1974–79 Labour government was unlucky in that its time in office coincided with the capital investment phase of North Sea oil exploration rather than the results of that investment. Its Tory successor reaped the benefits and then squandered them, using North Sea oil revenues to fund tax cuts for the middle class and pay benefits to the more than three million it allowed to become unemployed, instead of using it as the basis for national economic recovery.
Thatcher applied an extreme economic dogma that had the immediate effect of plunging the country into the deepest recession since the war, which it did not begin to emerge from until 1988. For most of the 1980s UK growth was the same as the 1970s and on a par with average growth rates in other western European countries of the time. Inflation was higher when Thatcher left office than we she entered it, and the effect of mass unemployment on British society was devastating. The focus of the British economy shifted from manufacturing industry, which sustained vibrant communities and ensured decent living standards, to a deregulated finance sector based in London, supported by a de-unionised service economy of long working hours and minimal employment protections.
John Medhurst is a trade union policy officer. His book on the challenge posed by Tony Benn and the Labour left in the 1970s, That Option No Longer Exists: Britain 1974-76, is published by Zero Books
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