The Sterling Crisis (1967)

Eric Koch / Anefo [CC0], via Wikimedia Commons

How much do you think you know about the UK in the 1960s? No doubt it consists of things such as Swinging London, shillings, the World Cup victory and the introduction of colour television.

It was also a decade of enormous economic and political crisis. In the last chapter of this series on post-war political crises, we saw the end of Eden and the rise of Supermac. Britain was seemingly booming its way out of the Suez Crisis with an Old Etonian in Number 10. As the UK entered the 1960s, you’d be forgiven for thinking things seemed rosy. It didn’t take long for the whole thing to unravel again.

In 1962, another unsustainable boom had led to inflation and a government-introduced credit squeeze. In a highly-publicised by-election in Orpington, the Liberals shocked many by unseating the Tories, who had won the seat with a resounding majority in 1959. Supermac began to lose his magic touch, sacking a third of his Cabinet in one fell swoop. Within a year, John Profumo MP, the Minister for War, resigned in disgrace after being alleged to have had an affair with Christine Keeler, a woman who also happened to be having an affair with a Russian attaché. The scandal sparked concern of a security breach, having been revealed mere months after a Cold War standoff between the US and Cuba in the Bay of Pigs. Supermac resigned in late 1963, succeeded by Alec Douglas Home, a man who had been a member of the House of Lords.

Douglas-Home’s accession to the Premiership caused considerable concern among many, as such a thing hadn’t happened since 1902. Suddenly, Number 10 was occupied by a Prime Minister without his own mandate. That same year, the Labour opposition faced its own succession crisis, following the unexpected death of leader Hugh Gaitskell. His successor, Harold Wilson, had been a cabinet minister of the post-war Labour landslide government, who had resigned in 1950 as part of a split in the party over NHS prescription charges. This mini-split at the top of the party was just the start of a deepening schism that led to what would resign the party to the wildnerness in a matter of decades. For now however, Wilson was in charge.

Within a year of Douglas-Home entering Number 10, he found himself leaving for good, when Labour won a slim majority in the 1964 election. Douglas-Home has the distinction of being the first Prime Minister born in the 20th Century, but Wilson was almost half a generation younger than him and had a knack with appealing to a broader audience. He was often seen brandishing a smoking pipe and spoke of the “white heat” of a coming technological revolution that Britain could play a leading part in. Tony Benn MP (a name to remember in future articles) was appointed Minister for Technology, overseeing the opening of the BT Tower, a landmark designed to showcase Britain’s ambition to rule the airwaves.

Upon reaching office, Wilson faced grim news: the economy was in a deep malaise. A pre-election boom in 1963-64 had proved to be unsustainable and left an enormous trade deficit for the incoming Labour government to contend with. It might sound small to us in 2019, but a trade deficit of £800m was a big deal in the 1960s. While we obsess about GDP nowadays, politicians in the 1960s regularly paid close attention to the UK’s balance of trade figures. 

Released monthly, they provided what many deemed to be a barometer of the UK’s exporting potential. Any data showing a surplus would suggest strong exports and less reliance on foreign goods. A deficit, which became more and more common, suggested a growing weakness in the British economy. Inflation was on the rise again and pressure piled onto Sterling. The industrial sector groaned under tight economic policy, with British workers underperforming their competitors with less productive equipment and an increasingly growing market for cheaper goods from elsewhere.

At the height of the British empire, the British Pound had enjoyed an exchange rate of about four USD to one British Pound. By 1966, this had dropped to $2.80. Labour earned a reputation as a party of devaluation following a slide in Sterling back in 1949. It had blighted Atlee’s government in its final years, and Labour remained out of office for over a decade. By the late 1960s, a Labour government was under tremendous pressure to make the UK’s exports more competitive.

Wilson’s Cabinet refused to accept a devaluation in 1966, instead preferring a deflationary policy to restore the trade balance to a sound footing. This came in the form of a credit squeeze and an attempt to put a cap on wage increases. The measure proved unpopular, and a strike by seamen in 1966 led to the government spending millions of Pounds of reserves to keep the Pound stable. This was a warning of things to come.

By 1967, Wilson’s position on Sterling had become untenable. It was simply not possible for the Pound to remain at such a high level any longer. On a cold weekend in November, the government announced the devaluation of Sterling from $2.80 to the Pound to an all-time low of $2.40 to the Pound, a reduction of over 14%. Interest rates were immediately hiked to 8%, a level not seen since 1914, in order to stop inflation rearing its head.

When Parliament reconvened the following week, the decision was ridiculed and the government was accused of hypocrisy. Iain Macleod, the Shadow Chancellor, reminded Callaghan of a statement made in July 1967, where he had dismissed the idea of devaluation, adding:

“The Chancellor of the Exchequer will know that I am using his own words. He has done all these things. He has broken faith. He has devalued his word. He is planning to bring down the standard of life of our own people. He is an honourable man. Will he resign?”

By month’s end, Callaghan would resign, replaced by Roy Jenkins. The Liberal leader Jeremy Thorpe criticised the devaluation for being poorly-timed and somewhat clumsy. Wilson’s government suffered a sharp decline in opinion polls following this crisis, falling below 30% by mid-1968. Barely a few years in, the government was damned, whatever it did. Wilson opted to wait some time before calling another election. He waited to see how the economy would fare, as Britain came to the end of the Sixties. The economy was deflated further in 1968 with a consumption tax hike but the trade balance improved.

Meanwhile in Wolverhampton

While the economic situation was a sticky mess, another issue became headline news, following an imflammatory speech by an MP by the name of Enoch Powell. Powell, who represented the people of Wolverhampton South West, made a speech at a gathering of West Midlands Conservatives on 20th April 1968. Powell had briefed a journalist beforehand to say he was preparing to make a speech that would make serious waves up and down the country. On the day itself, a camera crew turned up and recorded fragments of his address. It became known as the “Rivers of Blood” speech, for Powell’s apocalyptic prediction that:

“in 15 or 20 years’ time, the black man will have the whip hand over the white man…it is like watching a nation busily engaged in heaping up its own funeral pyre”

Powell was talking about the annual inflow of about 50,000 people a year, and how it would change the country beyond recognition. Britain was actually in the grip of a wave of emigration at this time. Britons left in their thousands, seeking a better life in the US, Canada and beyond. Thousands of people from all over the world were arriving, to drive the buses, tend to the sick in hospitals and help redefine the country in the post-war era. Powell's speech was triggered by debate surrounding the Race Relations Bill, something he believed would penalise native Britons. Powell was fearful of the prospect that by the late-Eighties, Britain could become a country where whites were in a minority, or beaten into submission.

The instant reaction was polarising. Powell was sacked from the Shadow Cabinet by his leader, Edward Heath. Heath had faced off against Powell for the Tory leadership in 1965. Powell had failed to clinch the leadership, but had remained a problem for Heath. His sacking from the Shadow Cabinet marked his official departure from front line politics, but he continued to influence political debate for many years, before his death in 1998.

Wilson ultimately waited until mid-1970 to call an election. Parliament could have remained as it was for another year or so, but Wilson was looking for a fresh mandate. Wilson had consulted his new Chancellor, Roy Jenkins about timings for a possible election, as revealed in this 1970 election interview with David Dimbleby. Jenkins was of the view that the economy would remain on a neutral path between June and October. By the time Wilson called the election, Labour appeared to have recovered in the polls and he expected to return to office and make the most of a stable economy. 

The electorate had other ideas. Labour unexpectedly lost the 1970 election. Wilson suddenly appeared to have lost control of events. The UK took a turn to the right, just as the US had done in 1968, when voters chose Richard Nixon to go to the White House.

The blame for Labour’s defeat is tricky to pin down. For some, the devaluation was the culprit, as voters may have judged Labour for failing to run the economy competently. Some claim a release of poor trade balance data on election day itself may have swayed voters. Others believe Enoch Powell’s comments on immigration two years before had helped sway the election in Heath’s favour. Whatever the cause, the outcome was clear. The public had voted Labour out of power, and now they faced the stark reality of opposition as Britain entered the Seventies. The next time the public went to the polls in 1974, the mood would be drastically different.