In spite of the “Social Contract”, the initial TUC guidelines on wages were quite vague. In fact real wages grew by eight per cent between April and December 1974. However, by the spring of 1975, with the acceleration of inflation, real take-home pay began to decline. By June real wages were nine per cent lower than December 1974, and living standards were falling. Wages were chasing higher prices and falling behind. Yet the economists who had the ear of the Labour government argued that prices were following wages, and that the latter had to be controlled to halt inflation.
At this point the government used the sterling crisis to turn its policy firmly to the right, to the delight of big business. Denis Healey announced that he intended to reduce inflation – which was around 30 per cent – to 10 per cent by the following wage round, and to single figures by the end of 1976. Since the government regarded wages as the main cause of inflation, pay increases would have to be dramatically curtailed.
Wilson’s economic arguments, supplied by bourgeois economists, were bogus. In reality the inflation of the 1970s was not caused by wage increases, but by the colossal sums of speculative fictitious capital that had been injected into the system as a result of decades of Keynesian deficit financing. The propaganda about “excessive” wage rises causing inflation was used as a pretext to boost profits at the expense of wages.
The Wilson government put forward a voluntary incomes policy in co-operation with the TUC based on raises of 10 per cent. However, Wilson warned that if this proved unworkable, a statutory limit would be imposed. As was to be expected, the TUC readily acquiesced to the government’s wage controls and published guidelines for voluntary restraint with a £6 limit on all settlements prior to August 1976:
“The £6 policy was accepted by the General Council at its meeting in July but only narrowly, nineteen votes to thirteen”, recalls Jack Jones. “I urged those who opposed the policy not to push the government to the point where it might fall… Whatever my misgivings I was determined to back the government, ‘warts and all’.”[8]
Although it meant a cut in real wages, the £6 limit was agreed at both the TUC, on a resolution proposed by Jack Jones, and the Labour Party Conference. When left-winger Ian Mikardo attacked the decision at the Tribune meeting at Labour Conference, Jones shouted across the platform, “I object to these attacks like this!” Hugh Scanlon also supported Jack Jones’ stance. The Labour movement demonstrated tremendous loyalty to its leaders, and the incomes policy of Wilson and Callaghan was taken on trust. The Labour leaders demanded sacrifices to overcome “the legacy left by the Tories”, and, without any alternative being offered by the Lefts, this was accepted as a necessary price to be paid for a Labour government.
But when a “Phase Two” followed “Phase One” of the incomes policy, there was a growing disquiet in the Labour movement. As a concession to the government (which wanted a three per cent limit), the TUC offered its own voluntary five per cent norm, with a lower limit of £2.50 and an upper limit of £4. A special TUC conference adopted this policy by a massive majority of 17 to 1. But this decision was to have grave effects on the living standards of ordinary workers. In fact, between 1974 and 1977, the Labour government was to preside over the largest fall in real wages than at any comparable period in British history.
The sterling crisis of early 1976 forced the Labour government to go cap in hand to the IMF. But the IMF would only grant these loans on condition that a £3 billion cut was made in public expenditure over the following two years. The Cabinet reluctantly accepted this IMF proposal.
Anthony Crosland later told Labour Party Conference, to everybody’s astonishment that “the party was over”. Callaghan also stated that Keynesianism was dead and that no government could now spend itself out of a crisis. “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending,” stated Callaghan to the 1976 Labour conference. “I tell you in all candour that that option no longer exists and that insofar as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment at the next step”. In all, over the following period, the government was to slash public expenditure by an estimated £8 billion. This proved to be the thin end of the wedge.
When Wilson resigned the premiership, Callaghan took his place as prime minister. Labour had now lost its overall majority. There was a growing sense of political instability. The following year, in order to get a working majority, the Labour government entered into a formal “Lib-Lab” pact with the Liberals. This retreat, which gave rise to despondency in the rank and file, sealed the fate of the government.
Around this time, a bitter industrial dispute at Grunwick, a photographic processing business in North West London hit the headlines. Mass picketing took place in an attempt to gain the reinstatement of sacked women, mainly Asian workers. The dispute was led by the APEX union, and attracted widespread support. Postal workers refused to handle mail, a key to the company’s business survival. The right-wing National Association for Freedom rushed to the owners’ support in organising alternative deliveries. “I gave NAFF as much support as I could”, stated Margaret Thatcher.
It was the Grunwick dispute that caused Margaret Thatcher to begin to formulate her future plans to cripple the trade unions:
“Yet, for all that, Grunwick was not limited to the closed shop; it was about the sheer power of the unions”, wrote Thatcher. “Appalled as I was by what was happening at Grunwick, I did not believe that the time was yet ripe to depart from the cautious line about trade union reform (which I had agreed with Jim Prior) in order to mount radical attack on the closed shop. We had to consider a much wider raft of questions, ranging from the unions’ immunity under civil law, to violence and intimidation which only escaped the criminal law because they came under the guise of lawful picketing. Until we had begun to solve some of these problems, we could not effectively outlaw the closed shop.”[9]
As might be expected, the World Bank and the IMF took a hard view of the Labour government – given its links with the unions and the presence of a left wing inside the party. They correctly feared that the intense pressure of the working class could force Labour to take measures against big business.
“As I saw it, it was a choice between Britain remaining in the liberal financial system of the West as opposed to a radical change of course because we were concerned about Tony Benn precipitating a policy decision by Britain to turn its back on the IMF”, stated William Rogers from the US State Department. “I think if that had happened the whole system would have begun to come apart… it would have had great political consequences. So we tended to see it in cosmic terms.”[10]
The strategists of capital were alarmed by these dangers and called for disciplinary action against the Labour Left, which according to them, was subverting the Labour Party from within: “Moderates in the constituencies must be organised to combat the activities not just of the undemocratic sectarian left, but of the more numerous, less sinister supporters of the Tribune group whose leaders effectively control the NEC”, urged The Economist. “The sensible leaders among Britain’s larger trade unions must be persuaded to purge the national executive.”[11] At all costs, the Labour Party had to be kept in reliable (that is, pro-capitalist) hands, and that was a job for the right-wing trade union leaders.
The cuts in public expenditure were followed by a further stage – Phase Three of the incomes policy. This now stipulated a ten per cent limit on wages rises. But for the working class, this phase proved to be the straw that broke the camel’s back. Enough was enough! Asking for a further round of restraint was simply adding insult to injury. Under pressure, the TUC voted to reject the incomes policy and demanded an immediate return to free collective bargaining. Jack Jones realised the game was up when the vote went against him at the TGWU national conference. In November, 80,000 trade unionists lobbied Parliament against the government’s incomes policy. Callaghan’s attempt to impose a wage limit in the public sector simply pushed “moderate” sections into industrial action. Although strikes were limited in the first period of the Labour government, things began to come to a head at the end of 1977.
In early November, a special conference of the Fire Brigades Union voted to take industrial action (against the wishes of its Executive Council) in pursuit of a 30 per cent wage rise and a reduction in hours from 48 to 42. It was to herald the first national fire brigades’ strike in British history. In spite of the attacks by the press and the use of troops to break the strike, the action remained solid for over two months. Despite the Home Secretary’s hand wringing at the potential loss of life, Merlyn Rees’ over-riding principle was to maintain the government’s pay policy.
Despite widespread sympathy for the striking firefighters, the TUC refused to endorse the dispute. At a special FBU conference in January 1978, 70 per cent of the delegates voted to accept an immediate ten per cent offer, with a new pay formula that was to link firefighters’ pay to manual workers. To the government’s dismay, the 1977 firefighters’ strike served to break the dam of wage-restraint and open the floodgates for other workers.