Persuading voters that “the Labour way is the better way”, and persuading them to read beyond this upbeat cover message, was always going to be a struggle for Labour as it launched its manifesto in 1979. After unprecedented economic growth and social progress in the 1950s and 60s, the UK (and the western world) had suffered a series of shocks in the early 1970s. Edward Heath’s Conservative government felt the initial effects of these in 1970-73, but their full force only struck after Harold Wilson led Labour back to office in February 1974.
The collapse of the Bretton Woods international exchange rate system, when the US suspended the convertibility of the dollar (on which it was anchored) in 1971 (see video below) and devalued it again in 1973, sent the world economy into a downward spiral of inflation and competitive devaluation. This was exacerbated by the passing-on of higher oil prices, which sent UK inflation into double digits in 1975-6.
Nixon Suspends Convertibility Of Dollars Into Gold - 1971
Later analysis would show that the inflation resulted almost wholly from the actions of the OPEC oil cartel, and that subsequent oil-price falls can equally fully explain the decline of inflation a decade later. But at the time, it was easiest to blame the sudden resurgence of inflation on a ‘wage push’ by over-strong trade unions, even though they were attempting little more than a defence of members’ wages against rising prices.
Ironically, the view that militant wage bargaining and strikes were consequences of inflation, and not its causes, was shared by the Conservatives’ favourite economist Milton Friedman as well as Labour’s trade-union allies. But earlier strike waves led by the miners, although hastening the downfall of the previous Conservative government, had given the next one the pretext it needed for rallying support against an ‘enemy within’.
Labour tackled inflation after 1974 through an ‘incomes policy’ which imposed highly unpopular limits on major unions’ pay settlements. The Conservatives would later quell pay claims through more frontal assault on union rights and the fear sown by rapidly rising unemployment. But this played better with an electorate the majority of whom stayed in work, and enjoyed real income growth as inflation and basic income tax came down.
The Conservatives Capitalise
Shellshocked by these externally- (and some self-) inflicted wounds, Labour under Callaghan missed a number of new opportunities that glinted from the rubble of the post-war settlement. The end of Bretton Woods gave national governments a chance to deregulate the financial sector, and open up to international capital inflows. The incoming Conservatives would seize this chance, giving the financial sector a ‘Big Bang' whose political dividends lasted until the crash of 2008. Capital inflows drawn by the City of London’s expanding wholesale financial markets enabled the UK to finance a chronic current-account deficit, which had forced Labour into an election-losing currency devaluation in 1967 and an equally destructive turn to the IMF in 1976. Competition in retail financial markets sparked the growth of mortgage lending which, along with a giveaway of council houses, created millions of new home-owners who largely stayed loyal to the party that enabled it.
London: March against government spending cuts, Nov. 1976
Within months of taking office, Mrs Thatcher’s first government would be hit by another oil crisis, with the world price doubling after Iran’s Islamic Revolution sent the pro-western Shah into exile. But while this was still a shock for an oil-consuming economy, it now had hidden benefits for a government inheriting North Sea investments which made the UK a net oil exporter from 1980. Crudely, in every sense, the oil surplus paid for Conservative income-tax cuts, whose benefits (to working- as well as middle-class households) were to play a major part in their subsequent three-time re-election. Mrs T may not have had all the attributes of a great comedian, but good timing was certainly one of them.
Margaret Thatcher Joking About Being the Iron Lady
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