In April 1974, shortly after Labour had returned to power in a minority government under Harold Wilson, the Liberal Party’s Treasury spokesman claimed that Britain was “approaching that situation of ‘explosive inflation’ which has been experienced in so many South American countries”, posing “a danger to our society, to our politics, to our Parliamentary Institutions, to our very democracy”. Predictions of catastrophe mounted: the Economist spoke of “apocalypse”; Milton Friedman of military coups. The Sun’s ironic headline from early 1979 as the wave of strikes that became known as the “winter of discontent” broke out remains infamous: “Crisis, What Crisis?”. In politics today – and in most histories of contemporary Britain – the 1970s figure as the moment when one political settlement, social democracy, fell apart. The old was dying and the neoliberal was yet to be born.
Wilson had returned to No 10 in 1974 after Tory prime minister Ted Heath lost an election on the back of a miners’ strike that led him to declare a state of emergency. Jim Callaghan, who replaced Wilson after his resignation in 1976, would go on to lose to Margaret Thatcher in 1979. Power was precarious and governing difficult. As Rachel Reeves put it in her Mais lecture earlier this year, the end of the 1970s was a “moment of flux; in which old certainties about economic management have been found wanting, the economic mainstream is adapting, but a new political consensus has yet to cohere”.
Thatcher made the running on defining the new political common sense of the 1980s. Her narrative combined prognosis and prescription. She, of course, had a great deal invested in declaring the Labour governments of the late-1970s to be abject failures. In fact, she went further than this, arguing that the Tories had been too. In 1975, she argued that a “progressive consensus” consisting in “the doctrine that the state should be active on many fronts: in promoting equality, in the provision of social welfare, and in the redistribution of wealth and incomes” had captured the Conservative Party, as well as Labour, in the postwar decades. But, she claimed, by the late-1970s it was in its death throes. Postwar social democracy had failed; she was the solution.
Left-wing commentators have not done much to rehabilitate the Wilson or Callaghan governments since. The Labour left saw Wilson’s side-lining of Tony Benn, and Chancellor Denis Healey’s application for a loan from the International Monetary Fund (IMF) as the latest chapters in the storied Labour tradition of centrist, or even proto-neoliberal, “betrayal”. Later, New Labourites were just as dismissive, conjuring the idea of an exhausted “Old Labour” on life support in the late-1970s. These stories have one thing in common: Thatcher as the central protagonist of the era, whether hero, villain, or something in between. Though Reeves didn’t name her in her Mais speech, Thatcher is clearly the anonymous figure who, alone, was able to “fashion a new economic settlement, drawing on evolutions in economic thought”. The narrative is simple: Britain was in crisis; the mainstream of the Labour and Tory parties had no answers; the Iron Lady came along, wielding Friedrich Hayek’s The Constitution of Liberty as a bible, and transformed the country.
Unfortunately, this is bad history. It uncritically accepts the motto beneath the Thatcherite crest – “There is no alternative” – and it implies that it was ideological purity “wot won it”. Understanding the real nature of Britain’s historical transition in the late-1970s and early-1980s is more essential than ever, not least because it is seen as the last axial moment in British history, when fundamental political assumptions could be challenged – and replaced. Labour has been returned to power at a similar moment of fiscal precarity and ideological instability. And in her forthcoming Budget, Reeves will have a chance to show how ambitious her re-interpretation of British political economy really is. It is, therefore, worth reassessing a few myths about this period, particularly about a Labour Party that has been too readily dismissed as hopelessly incompetent or, worse, an anachronism stranded on the wrong side of history.
What was the “crisis” Wilson and Callaghan faced? Economically, the global and domestic context had changed dramatically since the 1950s – mainly for the worse. The Bretton Woods system of fixed but adjustable exchange rates, set up after the Second World War, had insulated national economies from uncontrolled capital flows, but was now under growing pressure. Financial institutions, particularly in the City of London, had created Eurodollar markets that sent destabilising flows of the evocatively titled “hot money” swirling through the global economy. Bretton Woods finally collapsed in 1971 when the US government pulled out (for reasons relating to its own domestic politics), making floating exchange rates an inevitability.
Meanwhile, aided by the large international flows of capital generated by decolonisation, financial interests had been developing what the historian Vanessa Ogle has described as an “archipelago” of free-market spaces like tax havens. They now began to export the financialised practices developed there back to Britain. Patterns of ownership were being transformed by the rise of intermediaries (including pension funds) as shareowners, a development Wilson described in 1977 as “the biggest revolution in the financial scene this century”. And deindustrialisation was beginning to bite. Measured in terms of overall jobs in manufacturing, heavy industry and coal mining, deindustrialisation had begun in Britain as early as the mid-1950s. In the 1970s, it was growing at pace. Because industrial jobs tended to be relatively well-paid and easy to unionise, their loss undermined the union movement, and propelled the growth of inequality and in-work poverty. Industry was still seen by most people as the bedrock of British prosperity, but some were trying to change that: the City of London had started lobbying for its services to be viewed as “invisible exports” and as the lynchpin of the national economy.
In addition to these economic shifts, a long cultural revolution was coming to fruition, the product of which we could loosely call individualism. This had roots stretching back to the Enlightenment and the era of industrialisation. But more proximate causes included: the growing rhetoric of a “people’s war” (which questioned the cross-class solidarity of 1939-45 and demanded a “people’s peace”); the new structures of “cradle-to-grave” welfare; and the affluence and consumerism of the 1950s and 1960s. Some people saw this cultural shift as part of the “crisis”, but today it doesn’t necessarily appear so ominous. One facet was the grassroots-led trade union militancy of the 1970s, which alarmed the right but also many on the left, who feared it was a sign that the working classes were becoming more sectional, and less collectively-minded; less class-conscious, even. In his famous 1978 Marx Memorial lecture, “The Forward March of Labour Halted?”, Eric Hobsbawm lamented that workers were all pursuing their “own economic interest irrespective of the rest”.
But this gloomy view was misplaced. When we place the industrial militancy of the period alongside such phenomena as the new social movements organised around race, gender, disability, and the environment, they appear not so much to represent the decline of solidarity as the decline of deference. It wasn’t that the trade unions were (as Thatcher said) out of control in the late-1970s, but that trade union bosses were out of control of their own members. Those members were part of a growing chorus of voices demanding more autonomy and more voice. This was individualism – but not Thatcherite, “no such thing as society” individualism. Benn recognised what was happening: “If the Labour Party could see in this rising tide of opinion a new expression of grassroots socialism, then it might renew itself,” he had written at the start of the decade. Wilson and Callaghan were more wary though, and demurred from actively associating Labour with this shift.
Added to these structural trends was a pile-up of political impediments. Neither Wilson nor Callaghan ever had an effective parliamentary majority: the election Wilson called for October 1974 gave him a majority of just three. They had a resurgent left wing led by Benn to deal with, and profound divisions over Europe. They faced the fallout from the inflation spike produced by the 1973 oil price hike, as well as the deepening Troubles in Northern Ireland. It was not an auspicious moment to be a Labour prime minister – a moment of profound structural change for Labour’s electoral base, the British economy, and the world. But the achievements of both Wilson and Callaghan far exceed the popular image of two men cluelessly watching rubbish pile upon the streets.
Much of the first year or so was consumed by the European debate. Wilson had become convinced the European Community would be the best strategic move for Britain’s economy and foreign policy, though he said he had “never been emotionally European”. He had determined to take Britain in as prime minister in the late-1960s, but his application was vetoed by France, and it fell to Ted Heath to oversee entry. When Wilson returned to power in the mid-1970s, he promised to renegotiate Heath’s terms of entry and put the whole issue to the electorate, ditching his often-stated opposition to the constitutional innovation of a referendum. A key goal was to quell the insurrection some prominent Labour figures, like Benn, were mounting on the topic of Europe, one which, then as now, disrupted allegiances on both ends of the political spectrum. Wilson’s renegotiation has often been criticised as superficial, but it achieved what he wanted it to do: giving many in the Labour movement enough to convince them to vote with Wilson and with the Yes campaign. He presented himself to voters as a one-time sceptic won over by the pragmatic case for membership, and helped lead Yes to a huge victory: two votes to one in favour of remaining. Thus Wilson defused, for several decades, a political issue that has helped destroy several prime ministers and party leaders in the past eight years.
Beyond the quagmire of the European debate, Labour’s flagship policy was the “social contract”. This has a very bad reputation. Thatcherites attacked it relentlessly, but many trade unionists also hated it, committed as they were to free collective bargaining and to the defence of their own pay “differentials” against the advances of other workers. So did many further to the left of Labour. The Communist Party mounted a full-frontal assault on the policy, and the experimental composer and communist activist Cornelius Cardew even wrote a quasi-pop song entitled “Smash the Social Contract”. What was this hated policy? The social contract aimed to hold down inflation. It offered, in exchange for the unions moderating wage claims, reversals of the Heath government’s restrictive trade union legislation, and measures – such as more progressive taxation, rent freezes, food subsidies, and higher pensions – that were supposed to add up to a “social wage”. This wasn’t just a quid pro quo with the unions though. The Labour leadership saw it as crucial to another priority – producing, as party documents and manifestos kept demanding, “a major redistribution of both wealth and income”. This represents one of the lesser-remembered themes of the Labour Party in the 1970s: its shift of focus from reducing poverty through the welfare state to reducing inequality at large.
Though today we tend to celebrate Clement Attlee’s postwar government for founding the welfare state, in fact the Beveridgean welfare system created then was underpinned by liberal ideas, and limited in many regards. As the historian Gareth Stedman Jones has written, it was really the “last and most glorious flowering of late-Victorian liberal philanthropy”. It was in the late-1960s and 1970s that some of its manifest failings began to be rectified. After Wilson returned to power in 1974, Barbara Castle introduced graduated state pensions, created child benefit, abolished pay beds in the NHS (an achievement Thatcher reversed before it could come into effect), and reformed health funding to address the gross regional inequality baked into the system. She then turned her attention to disabled people, for whom provision in the postwar welfare system was appallingly poor, creating four new benefits that a president of the Disablement Income Group described as “a breakthrough”. Callaghan also went out to bat for comprehensive education, making a high-profile speech attacking progressive teaching methods but defending the comprehensive principle, in the face of a series of high-profile moral panics over educational standards. This was, in fact, a period where welfare became more universal and more egalitarian than it had ever been.
The social contract aimed to boost equality and expand the welfare state while simultaneously addressing the economic goal the Thatcherites later seized as their own: containing inflation. One historian has suggested that in this regard, it was “fatally flawed” from the start, totally out of touch with economic reality. It was indeed fragile, but for several years it worked, despite the union movement’s basic commitment to free collective bargaining. Jack Jones of the Transport and General Workers’ Union – a man whose left-wing credentials included fighting Franco in the 1930s – did the most to hold it together. And it ultimately went wrong; not so much because of fundamental contradictions as hubris. In 1978, Callaghan demanded a much lower pay norm than the unions wanted, without consulting their leaders. He thought he still had the political capital he’d built up when he sided with the unions against Castle’s proposed reforms, In Place of Strife, in the late-1960s; but he was wrong. Rather than make a serious effort to persuade union members of his plans, he confused everyone by singing an old music hall song about being left at the altar at the Trade Union Congress (TUC) conference in autumn. Union members at Ford proceeded to smash through Callaghan’s pay norm, setting off the “winter of discontent”, with all its associated squalor. But, as Healey wrote in his autobiography, Callaghan’s proposal wasn’t the last gasp of a desperate government – as it is too often remembered – but the move of a leader “‘dizzy with success’, in Lenin’s phrase”.
For a government usually recalled as an abject failure, the political and economic record of Callaghan and Healey in the last years of the 1970s is remarkably impressive. Some commentators have seen any recovery after 1977 as the result of the IMF coming in and “saving” Britain with its proto-neoliberal demands, but this argument doesn’t stand up to scrutiny, and some of its crutches can be easily kicked away. The “cap in hand” IMF loan was only required because of faulty estimates of the Public Sector Borrowing Requirement; the deficit was eliminated without any help from the IMF money, and it was all paid back by 1979. All the major policies that got the economy back on track – deflationary Budgets and a Keynesian strategy constrained by monetary targets – had been put in place by Healey before the IMF got involved. By the tail end of the parliament, inflation, the balance of payments and economic growth were all improving.
In recent years, it’s become common sense in histories of 20th-century Britain to describe the period from 1945 to the late-1960s as one of “social democracy”, giving way to “crisis” in the late-1960s and 1970s, before being superseded by a new, “neoliberal” settlement in the 1980s. The attractions of this view of history are fairly obvious. There’s something appealingly linear about connecting Keynesianism and the welfare state with the other leading phenomena of the postwar decades, like nationalisation, strong trade unions, and falling inequalities of income and wealth, to form a single whole – social democracy. And, thanks to the scale of change to come under Thatcher, it becomes straightforward to see the late-1970s as the moment this political formation crumbled. This reduces the 1970s to a series of bleak snapshots: snow-bound roads, unburied cadavers, managed decline, a country held to ransom over beer and sandwiches. But it nonetheless elevates the period that came before, giving the left a positive story of Labour’s achievements from the 1940s to the 1960s from which to draw inspiration. It is telling of the power of this historiography that it is 1960s-era Wilson on whom Keir Starmer most consciously models himself.
But taking a closer look at the Labour governments of the late-1970s scrambles this narrative. If it were accurate, why do we find Labour ministers successfully expanding the scope and egalitarianism of the welfare state in the 1970s? And if the crisis were insoluble without the Thatcherite medicine, why were Callaghan and Healey’s economic policies working – before Callaghan torpedoed them in a moment of hubris? We need a more sophisticated analysis. The epochal approach to understanding our recent past consigns the Labour governments of the decade to the dustbin of history. Remarkably, despite the global financial crisis, austerity, the turmoil of Brexit, the Covid pandemic, and the war in Ukraine, the 1970s remain perhaps the most powerful political nightmare haunting British politics today. For several decades, Labour politicians have felt the need to defer to two closely connected shibboleths to be seen as electable: that we must never go “back to the 1970s”, and that Thatcherism was in some senses “necessary”. Both are past their sell-by date.
One problem with the epochal account is that, hung as it is on the rise and fall of two ideologies – social democracy and neoliberalism – it tends to imply that ideas were the motive force behind changes in political economy and in culture. This grossly underestimates the power of actors – especially economic actors – entirely outside of politics to shape the country. If Britain became “neoliberal” in the late-20th century, a lot of that was the doing of pension funds, Eurodollar markets, and City lobbyists, not simply the adamantine will of an Iron Lady. Perhaps we hold on to the idea of the Iron Lady in part because it makes us better to think that someone with strong ideas could just get into power and change the country in their image. If that was the case, though, Liz Truss’s ostentatious ideological inflexibility wouldn’t have led her to be beaten by a lettuce live on the internet. There’s an obvious warning here for anyone hankering for a pure politics that makes no compromises with economic and electoral realities.
But freeing ourselves from the dead hand of the nightmare of the 1970s also allows us to imagine different pasts – and different futures. Thatcherism wasn’t inevitable. Some of the things that happened in the 1980s would have happened without her – changing technology, for example, was already fostering globalisation and deindustrialisation – but they could have taken different forms. After all, Thatcher didn’t enter power determined to decimate Britain’s industrial base: that was just an unhappy side-effect of her early monetarist “adventurism”, one around which she subsequently had to retro-fit her other policies. (Luckily for her, City of London lobbyists were waiting in the wings with a new vision of the engine of British prosperity.) Some of the changes associated with Thatcherism actually look less dramatic when we get beneath her own PR carapace, like the much-advertised “death of Keynesianism”, which was greatly exaggerated (it came back in covert form after monetarism proved unworkable). A more complex view of the 1970s reveals that there was an alternative. There are alternatives today. As Reeves said in her Mais lecture, “old certainties about economic management have been found wanting”. Thatcher wrote the story about the 1970s. Labour needs to get the country out of the corner her narrative boxed us into – and thereby open up new political imaginaries.
This is an edited version of a lecture first delivered at King’s College London
[See also: The Budget must give people hope]
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