In a single decade, Britain was led by four Prime Ministers, it went to the polls four times and experienced two of its worst recessions since the Second World War. That was the decade that was the 1970s.
The surprise victory of Edward Heath and the Conservatives in 1970 was just the first of many unexpected moments in the 1970s. Heath was keen to make his own mark but ultimately followed the post-war consensus model when faced with crisis, as his predecessors had done since the war.
His government faced its first shock, when new Chancellor of the Exchequer Ian Macleod died unexpectedly in July 1970. Anthony Barber was chosen to succeed Macleod, and held the role for the remainder of Heath's premiership.
The stagflation crisis of the 1970s was unprecedented, not just in post-war history, but British history entirely. Number crunchers at the Bank of England have a rough idea about the history of inflation (at least in England) going all the way back to the Middle Ages. Before the 1970s crisis, inflation had been more of a multi-generational phenomenon, as there had been great inflation in the 1500s, possibly due to the discovery of gold and other precious metals in the New World, which would hav flooded the economy with a fresh supply of money.
Another price surge had happened around the time of the French Revolutionary and Napoleonic Wars, and again during WWW1 and WW2. These surges had been followed by long periods of price deflation, and so in the long run, prices tended to revert back to an average level eventually. The 1970s inflation crisis was unique, because prices rose on an enormous scale, and the price level never fell back in the aftermath. In that way, we are still living with the impact of this surge in prices today.
Inflation in the 1970s would rise to levels not seen since the 1920s, when fascism began to spread across Europe, and there was a fear that a sustained period of high inflation or hyperinflation would ultimately lead to civil unrest. The unions, which were already uneasy over pay policy in the 1960s, were far more potent in this new decade, bringing the economy to a halt on numerous occasions.
Another price surge had happened around the time of the French Revolutionary and Napoleonic Wars, and again during WWW1 and WW2. These surges had been followed by long periods of price deflation, and so in the long run, prices tended to revert back to an average level eventually. The 1970s inflation crisis was unique, because prices rose on an enormous scale, and the price level never fell back in the aftermath. In that way, we are still living with the impact of this surge in prices today.
Inflation in the 1970s would rise to levels not seen since the 1920s, when fascism began to spread across Europe, and there was a fear that a sustained period of high inflation or hyperinflation would ultimately lead to civil unrest. The unions, which were already uneasy over pay policy in the 1960s, were far more potent in this new decade, bringing the economy to a halt on numerous occasions.
Heath inherited an economy that had a trade surplus, but unemployment was rising. Initially, Heath's government muddled through, but felt forced to act, when unemployment rose above 1 million people by 1972. A strike in early 1972 was a taste of things to come, demonstrating how mass strikes had the potential to hit the economy and bring a government down onto its knees. It is this point where Heath began to follow the post-war consensus model. Chancellor Barber slashed taxes and spurred an easing of credit in 1972-73, bringing about a pre-election boom.
In January 1973, Heath managed to achieve what Macmillan and his other predecessors had failed to do: attain British membership into the European project. Britain formally entered the EEC as it was called, the European Economic Community. Harold Macmillan had made an application for British membership in the early 1960s, but Charles de Gaulle had vetoed this. By 1973, Georges Pompidou was President of the French Republic, and he was more accomodating.
The decision was controversial in Britain, but not in the way you would expect. In the early post-war era, the Conservatives (especially under Heath) were keen on closer ties with Europe, on an economic basis. More left-wing politicians, particularly in the Labour party, were some of the most vocal opponents to EEC membership, and were essentially the Eurosceptics of their day.
In January 1973, Heath managed to achieve what Macmillan and his other predecessors had failed to do: attain British membership into the European project. Britain formally entered the EEC as it was called, the European Economic Community. Harold Macmillan had made an application for British membership in the early 1960s, but Charles de Gaulle had vetoed this. By 1973, Georges Pompidou was President of the French Republic, and he was more accomodating.
The decision was controversial in Britain, but not in the way you would expect. In the early post-war era, the Conservatives (especially under Heath) were keen on closer ties with Europe, on an economic basis. More left-wing politicians, particularly in the Labour party, were some of the most vocal opponents to EEC membership, and were essentially the Eurosceptics of their day.
Unlike previous post-war booms, inflation was already sitting at elevated levels, and the credit boom took the economy far beyond its capacity, causing a bubble to form. House prices rose rapidly, with inflation following shortly afterwards. Unions grew distrustful of Heath's government, while voters became increasingly concerned about double-digit inflation eating into their pay packets.
The US decision to end the Bretton Woods system in 1971 had led to a global rise in inflation, through food prices and other commodities. The so-called Barber Boom had added fuel to a fire that was blazing out of control. Then, without warning, stirrings in the Middle East turned an awkward situation into a full-blown crisis.
The First Oil Shock
Edward Heath addresses the nation in December 1973, warning of the looming crisis
Just as the Suez Crisis had crippled Anthony Eden's government, the Yom Kippur War of 1973 would do irreparable damage to Heath's. In October 1973, Egypt and Syria led a coalition of Arab states to occupy Israeli territory seized in 1967, with conflict raging in Sinai and the Golan Heights.
The United States supported Israel during the conflict, triggering a strong response from Arabic members of OPEC, the Organisation of the Petroleum Exporting Countries. Saudi Arabia, one of OPEC's most powerful members, made the controversial decision to cut oil production from October 1973 onwards. The move simply led to increased US support being granted to Israel, resulting in the Saudi oil embargo, which spread to a number of other countries aligned with the US.
The outcome was devastating. In January 1974, the price of oil lept from just $3-4 a barrel to $10 per barrel. In modern terms, that's like oil prices of $23 suddenly jumping to $54 overnight. This became the first shock in what became the 1970s energy crisis, the first so-called "oil shock".
In December 1973, to halt disruption in the supplies of oil, gas and coal, Heath announced the introduction of a "three-day week work order", whereby businesses would have to limit their usage of electricty to three days a week, rather than five. Businesses responded by cutting working weeks down to three days. This has since become known as Heath's Three-Day Week.
The conservation of energy became such an issue that even TV broadcasts stared to have cut-off points at night-time. The National Union of Miners voted to go on strike in January 1974, having rejected an offer of a wage rise of almost 17%, a figure which sounds racy compared to the average wage increase of about 3-3.5% nowadays. The British economy shrank in early 1974 at its fastest rate since the post-war recession of the 1940s.
In an attempt to break the political and economic deadlock, Heath opted to call a snap election, in order to appeal to the population in the hopes that a fresh mandate could help him tackle the crisis once and for all. The election was scheduled for February 1974, with the Conservatives running under the slogan, "Who governs Britain?".
When voters were given the choice, they gave a mixed message.
The February 1974 election resulted in a hung parliament, much like in 2010, except Labour won the most votes. The Liberals had surged, in part thanks to their charismatic leader, Jeremy Thorpe. For a short while after the election, Heath clung on to power, toying with the idea of a coalition with the Liberals, but when they demanded electoral reform as part of a coalition deal, Heath rejected the offer, and so the Liberals withdrew.
Heath's government crumbled, he resigned and Wilson became Prime Minister again, but Labour lacked enough seats to form a majority. Labour had run in February 1974 on a socialist platform, promising to undo the policies of Heath's government, but grim economic reality forced him to correct his agenda quickly.
Wilson opted for a snap election of his own in October 1974, narrowly increasing Labour's number of seats, but he was granted a majority of just a single seat, leaving his government vulnerable to collapse, if a single MP should defy him. Wilson's final term was much like his previous one, being hijacked by economic crisis. The Labour government opted to try and reduce inflation through 1975-77 through a pay squeeze and high interest rates.
One of Labour's election pledges had included a referendum on Britain's entry into the EEC. Held in May 1975, the UK voted by a large margin to remain in the EEC. By this time, the Conservatives had undergone a major transformation. In February 1975, Conservative MPs had held a leadership ballot, in which Edward Heath was defeated by Shadow Cabinet colleague Margaret Thatcher.
Margaret Thatcher famously campaigned for continued membership of the EEC, wearing a jumper bearing the flags of EEC members. As her future premiership would show, she would transition towards a more Eurosceptic leaning, but for now, she was far more pragmatic.
The Conservatives returned to the opposition benches, but began to rebuild, and the early roots of Thatcherism were already being formulated, as the stagflation crisis wore on during the 1970s.
Wilson shocked the nation in early 1976, when he announced his sudden resignation as Prime Minister. He denied ill health at the time, but it has since been revealed he was allegedly suffering from the early symptoms of Alzheimer's disease.
When he left Number 10, Wilson granted a number of resignation honours to a variety of people, as indicated in the so-called "Lavender List", a document drafted on lavender-coloured paper by his political secretary, Marcia Williams. Williams, who went on to become Baroness Falkender, passed away just a matter of weeks ago, at the age of 86.
Wilson's departure was followed by James Callaghan becoming Prime Minister, but his short premiership would be dominated by yet more chaos from an unexpected source. As Labour prepared to hold its annual conference in 1976, the Pound faced a fresh wave of speculative pressure, ultimately crashing to a new all-time low. Inflation remained high by this time, and investors were losing their faith in Callaghan to bring it down unless he adopted significant reforms.
Britain eventually capitulated and requested the IMF for a bailout, which was only granted on the condition that the government reduced public spending to reduce inflation. The austerity of the late-1970s was effectively an embryonic form of Thatcherite monetarism. After decades of stop-and-go policies by post-war governments of different stripes, Callaghan's government had run into a major obstacle, and was forced to change tack.
The 1976 bailout was followed by a brief slowdown in growth, but by 1978, the economy was booming again. Labour had entered into a short-lived pact with the Liberals, the Lib-Lab Pact, but this fell apart after a year, due to disagreements on economic policy. Inflation fell at last, but remained elevated. Callaghan briefly considered holding a snap election in 1978, but jokingly rejected the idea, singing the old song "Waiting at the Church". Labour was relatively steady and in the lead in the polls of the time, yet Callaghan decided not to ask for a mandate of his own.
By the end of 1978, the electoral goodwill evaporated. Industrial unease resumed in the autumn, and strikes returned, leading to the so-called Winter of Discontent, a reference to Shakespeare's Richard III. Graveyard workers went on strike, resulting in corpses going unburied. Binmen refused to collect rubbish, resulting in bin bags piling up.
In early 1979, as the strikes intensified, Callaghan was accused of being out-of-touch, when he returned from a summit in Guadeloupe. He denied the country was sliding into mounting chaos, leading the Sun to run with the headline "Chaos? What Chaos?". The strikes crippled the economy in early 1979, just as they did in 1974. Output fell, and things came to a head in March, when the Conservatives called a vote of no confidence in Callaghan's government. They defeated Labour by a single vote.
With Parliament having no confidence in his government, Callaghan was forced to call an immediate general election. Labour MPs responded by singing the socialist anthem "The Red Flag". In the election that followed, in May 1979, Labour lost power, and the Conservatives won the most seats. Despite the mounting crisis of the day, Mrs Thatcher and the Conservatives won a narrow majority of just over 20 seats.
Rather than follow the policies as laid out in the post-war consensus, Mrs Thatcher was determined to end the stagflation by adopting monetarist economic policies. The Iranian Revolution in the summer of 1979 led to a new oil shock, just as devastating as the previous one, leading to one final spike in inflation. By the end of 1979, interest rates had risen to 17%, their highest level ever, since the Bank of England's creation in the 1690s.
The economy slid into recession by 1980. The UK was now in the unenviable position of having faced not only a double-dip recession in 1973-75, but now it had an even deeper one, less than half a decade later. When unemployment began to hit 3 million, the government was criticised by a large number of economists, who feared Mrs Thatcher's government was dragging the UK into a new great depression. Mrs Thatcher carried on regardless, using the 1981 budget to raise taxes, despite a deep recession.
The Thatcher government held its nerve, despite having enforced policies that led to a collapse in the industrial sector of the economy. By 1981, as I have recorded in a previous post, the Labour party had split and a small group of MPs created their own party, the SDP. The impact of the 1980s recession led to a fall in Conservative support, and at one point, it seemed possible that an SDP government might win the next election.
However, to her great fortune, when the country finally went to the polls in 1983, Mrs Thatcher was granted a second term. The SDP-Liberal alliance and Labour battled for left/centre-left voters, so any kind of meaningful opposition to the Conservatives was split down the middle. The Falklands War of 1982 had undoubtedly given the Conservatives a boost in support, and in 1983, they won a sizable chunk of the vote and an increased number of seats. By 1983, inflation had fallen to levels not seen since the 1967 Sterling crisis. The economy was growing rapidly again, but unemployment remained above 3 million and rising.
Mrs Thatcher had managed to break a cycle her predecessors had been trapped in, but the monetarist policies of 1979-83 did lasting damage to the Conservative party's reputation in old industrial regions. Leaders like Macmillan had lived through the horrors of two world wars, and attempted to ensure full employment, but lived long enough to see the Thatcher government doing away with this notion, in favour of a new principle of price stability.
It seemed not to matter whether employment was high or low now. The level of joblessness became immaterial, but the stability of wages and inflation was a prime focus. As we shall see in the next post, we will see how Mrs Thatcher's final years saw her government lose sight of even this principle, and how her successors did further damage to the Conservative party's economic credentials.
In December 1973, to halt disruption in the supplies of oil, gas and coal, Heath announced the introduction of a "three-day week work order", whereby businesses would have to limit their usage of electricty to three days a week, rather than five. Businesses responded by cutting working weeks down to three days. This has since become known as Heath's Three-Day Week.
The conservation of energy became such an issue that even TV broadcasts stared to have cut-off points at night-time. The National Union of Miners voted to go on strike in January 1974, having rejected an offer of a wage rise of almost 17%, a figure which sounds racy compared to the average wage increase of about 3-3.5% nowadays. The British economy shrank in early 1974 at its fastest rate since the post-war recession of the 1940s.
In an attempt to break the political and economic deadlock, Heath opted to call a snap election, in order to appeal to the population in the hopes that a fresh mandate could help him tackle the crisis once and for all. The election was scheduled for February 1974, with the Conservatives running under the slogan, "Who governs Britain?".
When voters were given the choice, they gave a mixed message.
The February 1974 election resulted in a hung parliament, much like in 2010, except Labour won the most votes. The Liberals had surged, in part thanks to their charismatic leader, Jeremy Thorpe. For a short while after the election, Heath clung on to power, toying with the idea of a coalition with the Liberals, but when they demanded electoral reform as part of a coalition deal, Heath rejected the offer, and so the Liberals withdrew.
Heath's government crumbled, he resigned and Wilson became Prime Minister again, but Labour lacked enough seats to form a majority. Labour had run in February 1974 on a socialist platform, promising to undo the policies of Heath's government, but grim economic reality forced him to correct his agenda quickly.
Wilson opted for a snap election of his own in October 1974, narrowly increasing Labour's number of seats, but he was granted a majority of just a single seat, leaving his government vulnerable to collapse, if a single MP should defy him. Wilson's final term was much like his previous one, being hijacked by economic crisis. The Labour government opted to try and reduce inflation through 1975-77 through a pay squeeze and high interest rates.
One of Labour's election pledges had included a referendum on Britain's entry into the EEC. Held in May 1975, the UK voted by a large margin to remain in the EEC. By this time, the Conservatives had undergone a major transformation. In February 1975, Conservative MPs had held a leadership ballot, in which Edward Heath was defeated by Shadow Cabinet colleague Margaret Thatcher.
Margaret Thatcher famously campaigned for continued membership of the EEC, wearing a jumper bearing the flags of EEC members. As her future premiership would show, she would transition towards a more Eurosceptic leaning, but for now, she was far more pragmatic.
The Conservatives returned to the opposition benches, but began to rebuild, and the early roots of Thatcherism were already being formulated, as the stagflation crisis wore on during the 1970s.
Wilson shocked the nation in early 1976, when he announced his sudden resignation as Prime Minister. He denied ill health at the time, but it has since been revealed he was allegedly suffering from the early symptoms of Alzheimer's disease.
When he left Number 10, Wilson granted a number of resignation honours to a variety of people, as indicated in the so-called "Lavender List", a document drafted on lavender-coloured paper by his political secretary, Marcia Williams. Williams, who went on to become Baroness Falkender, passed away just a matter of weeks ago, at the age of 86.
Wilson's departure was followed by James Callaghan becoming Prime Minister, but his short premiership would be dominated by yet more chaos from an unexpected source. As Labour prepared to hold its annual conference in 1976, the Pound faced a fresh wave of speculative pressure, ultimately crashing to a new all-time low. Inflation remained high by this time, and investors were losing their faith in Callaghan to bring it down unless he adopted significant reforms.
Britain eventually capitulated and requested the IMF for a bailout, which was only granted on the condition that the government reduced public spending to reduce inflation. The austerity of the late-1970s was effectively an embryonic form of Thatcherite monetarism. After decades of stop-and-go policies by post-war governments of different stripes, Callaghan's government had run into a major obstacle, and was forced to change tack.
The Winter of Discontent
The 1976 bailout was followed by a brief slowdown in growth, but by 1978, the economy was booming again. Labour had entered into a short-lived pact with the Liberals, the Lib-Lab Pact, but this fell apart after a year, due to disagreements on economic policy. Inflation fell at last, but remained elevated. Callaghan briefly considered holding a snap election in 1978, but jokingly rejected the idea, singing the old song "Waiting at the Church". Labour was relatively steady and in the lead in the polls of the time, yet Callaghan decided not to ask for a mandate of his own.
By the end of 1978, the electoral goodwill evaporated. Industrial unease resumed in the autumn, and strikes returned, leading to the so-called Winter of Discontent, a reference to Shakespeare's Richard III. Graveyard workers went on strike, resulting in corpses going unburied. Binmen refused to collect rubbish, resulting in bin bags piling up.
In early 1979, as the strikes intensified, Callaghan was accused of being out-of-touch, when he returned from a summit in Guadeloupe. He denied the country was sliding into mounting chaos, leading the Sun to run with the headline "Chaos? What Chaos?". The strikes crippled the economy in early 1979, just as they did in 1974. Output fell, and things came to a head in March, when the Conservatives called a vote of no confidence in Callaghan's government. They defeated Labour by a single vote.
With Parliament having no confidence in his government, Callaghan was forced to call an immediate general election. Labour MPs responded by singing the socialist anthem "The Red Flag". In the election that followed, in May 1979, Labour lost power, and the Conservatives won the most seats. Despite the mounting crisis of the day, Mrs Thatcher and the Conservatives won a narrow majority of just over 20 seats.
Rather than follow the policies as laid out in the post-war consensus, Mrs Thatcher was determined to end the stagflation by adopting monetarist economic policies. The Iranian Revolution in the summer of 1979 led to a new oil shock, just as devastating as the previous one, leading to one final spike in inflation. By the end of 1979, interest rates had risen to 17%, their highest level ever, since the Bank of England's creation in the 1690s.
The economy slid into recession by 1980. The UK was now in the unenviable position of having faced not only a double-dip recession in 1973-75, but now it had an even deeper one, less than half a decade later. When unemployment began to hit 3 million, the government was criticised by a large number of economists, who feared Mrs Thatcher's government was dragging the UK into a new great depression. Mrs Thatcher carried on regardless, using the 1981 budget to raise taxes, despite a deep recession.
The Thatcher government held its nerve, despite having enforced policies that led to a collapse in the industrial sector of the economy. By 1981, as I have recorded in a previous post, the Labour party had split and a small group of MPs created their own party, the SDP. The impact of the 1980s recession led to a fall in Conservative support, and at one point, it seemed possible that an SDP government might win the next election.
However, to her great fortune, when the country finally went to the polls in 1983, Mrs Thatcher was granted a second term. The SDP-Liberal alliance and Labour battled for left/centre-left voters, so any kind of meaningful opposition to the Conservatives was split down the middle. The Falklands War of 1982 had undoubtedly given the Conservatives a boost in support, and in 1983, they won a sizable chunk of the vote and an increased number of seats. By 1983, inflation had fallen to levels not seen since the 1967 Sterling crisis. The economy was growing rapidly again, but unemployment remained above 3 million and rising.
Mrs Thatcher had managed to break a cycle her predecessors had been trapped in, but the monetarist policies of 1979-83 did lasting damage to the Conservative party's reputation in old industrial regions. Leaders like Macmillan had lived through the horrors of two world wars, and attempted to ensure full employment, but lived long enough to see the Thatcher government doing away with this notion, in favour of a new principle of price stability.
It seemed not to matter whether employment was high or low now. The level of joblessness became immaterial, but the stability of wages and inflation was a prime focus. As we shall see in the next post, we will see how Mrs Thatcher's final years saw her government lose sight of even this principle, and how her successors did further damage to the Conservative party's economic credentials.
