State of Emergency: the Way We Were

by Dominic Sandbrook

  8

  The Limits to Growth

  The issue is not about the fairly narrow gap between the parties on wage inflation, nor even about the threat of a further bout of most damaging inflation, but about the fundamentals of our constitution and our way of life. For who is now governing the country? The elected government at Westminster or the trade unions?

  – Letter to The Times from John Stokes MP, 20 April 1972

  In March 1972, a group of management theorists at the Massachusetts Institute of Technology published a report on the ‘predicament of mankind’. They had been working for two years on a computer model of the entire global economic system, funded by the giant Fiat and Volkswagen car empires and sponsored by a group of international industrialists, scientists and management consultants who called themselves the Club of Rome. Feeding their computers with data on population growth, food supplies, capital investment, industrial output, resource depletion and pollution, the MIT researchers believed they had produced the first genuinely scientific prediction of where the world was heading, and it made deeply depressing reading. Even in the most optimistic scenario, they predicted, mankind’s food and resources would run out in 2100. The world was like ‘a pond on which a water lily is growing’. Every day the lily was doubling in size; if it grew unchecked, it would take just thirty days to choke off all other forms of life. But at the moment it seemed small, ‘and so you decide not to worry about cutting it back until it covers half the pond. On what day will that be? On the twenty-ninth day, of course. You have one day to save your pond.’ If they were right, the post-war dream of an infinitely expanding affluent society was over: hence the title of their report, The Limits to Growth.1

  Even at the time, experts queued up to pour scorn on The Limits to Growth’s apocalyptic predictions. The report was ‘such a brazen, impudent piece of nonsense’, thought Professor Wilfred Beckerman of the University of London, that ‘nobody could possibly take it seriously’. And yet as he later told The Times, he was horrified to discover that it was actually ‘taken very seriously in high places and amongst a wide public, including some officials in Whitehall’. This was no exaggeration: the new president of the European Commission, the West German politician Sicco Mansholt, issued an open letter calling for governments to act on the report’s conservationist recommendations, while there were even rumours that its authors had been invited to Downing Street to meet Edward Heath. And with the report’s paperback edition costing just £1, it was hardly surprising that its gloomy conclusions were soon filtering through to a mass audience. (By the end of the decade, indeed, an estimated 4 million copies had been sold in thirty languages.) From a British point of view, after all, its timing could hardly have been better. For when the report was formally released on 1 March 1972, the miners’ strike had been over for barely ten days. At a time when electricity supplies were only just returning to normal, The Limits to Growth struck a powerful chord. And at a time when candle manufacturers were struggling to keep up with demand, the MIT team’s predictions of strikes, shortages, blackouts and queues seemed the stuff not of fantasy but of everyday reality.2

  By any standards, the first two months of 1972 had been a terrible time for the government. Heath’s biographer calls them ‘the most dreadful short period of concentrated stress ever endured by a British Government in peacetime’. And although the end of February brought a short breathing space for the embattled Prime Minister, he cut a distinctly gloomy, weary figure, exhausted by the struggle to secure European entry, preoccupied by the slaughter in Northern Ireland, bruised by the furore over unemployment and bloodied by the humiliation of the miners’ strike. The self-confident victor of 1970 had long since disappeared; now Heath seemed more remote than ever, secluded inside the Downing Street bunker with a handful of aides, apparently happiest when poring over policy details or conducting marathon negotiations with Vic Feather and Jack Jones. The journalist James Margach, who had known him for twenty years, thought that power made him ‘authoritarian and intolerant’. It certainly made him a lot fatter: he now cut a very heavy figure whenever he appeared for his glacial, self-consciously presidential press conferences in the grandiose surroundings of Lancaster House. More and more he surrounded himself with Whitehall mandarins such as Sir William Armstrong, the head of the Home Civil Service, whom union bosses nicknamed the ‘Deputy Prime Minister’. No Prime Minister and civil servant had ever had a closer relationship, and by the end of 1972 Sir William was virtually the number two man in the government. He had ‘great personal charm and charisma,’ one aide later told Hugo Young, as well as ‘a desire to be known, an appetite for the front line.’ But many ministers worried that Armstrong, who seemed increasingly pessimistic about the future of the country, had rather too much influence. ‘Messianic was a good word,’ remarked Jim Prior. ‘He drove us along; some people thought here was this great public figure, this ice-cold civil servant, this dispassionate observer – if he looks at it this way, we must be right …’3

  A week after the MIT experts issued their depressing predictions, The Times published a long editorial entitled ‘A Turning Point for Mr Heath’. Its message was clear: on issues from inflation and unemployment to Northern Ireland and Europe, Heath must show that he led ‘a learning Government … accepting the lessons of their own experience’. He must personally learn from ‘the mistakes that were made in handling the miners’ strike’, and must ‘take no notice of critics who despise conciliation’. ‘ “George, be a King” ’, the paper insisted, ‘is bad advice to a Prime Minister – after all it cost Britain America.’ To many people, the thought of Heath changing his mind was about as likely as the Beatles getting back together. But this was to misread the man. For all his personal stubbornness, Heath was ultimately a pragmatist. And as the quintessential product of the post-war consensus, he shuddered at the thought of an age of limits. Like his old boss Harold Macmillan, he believed that rapid economic growth was the key to national prosperity and political survival. So did Sir William Armstrong, and at a Chequers seminar in November 1971, Heath listened with approval as Armstrong suggested that ‘we should think big, and try to build up our industry onto a Japanese scale. This would mean more public spending. We should ask companies what they needed in the way of financial and other help, and give it to them.’ This completely contradicted what Heath had promised in his manifesto. But to the surprise of some onlookers, he nodded enthusiastically. ‘Fine,’ he said, ‘and of course we must give it only to the good ones, not the bad ones.’4

  They began, however, with one of the bad ones. On 24 February, barely a week after the end of the miners’ strike, John Davies told his Cabinet colleagues that he had decided – in total contravention of his previous undertakings – to put up £35 million to save the doomed shipbuilding yards on the Upper Clyde. He frankly admitted that there was little chance of UCS becoming commercially viable, but explained that the end of shipbuilding on the Clyde might have disastrous consequences in terms of mass unemployment and public disorder. The local Chief Constable, David McNee, had even suggested that he would need 15,000 extra policemen to maintain order if the yards went under, and, given what was happening in Belfast, as well as what had happened during the miners’ strike, the government were not prepared to take that risk. Since the yards were not likely to become viable even in five years, the Cabinet minutes recorded, ‘the case for Government intervention was principally a social one’. In private, Davies even admitted that ‘if the general level of unemployment was lower and economic activity was reviving more rapidly, he would not have felt it necessary to recommend financial support for the three yards on the scale now envisaged’.5

  Given what Davies had said eighteen months before about leaving lame ducks to their fate, this was clearly a U-turn of enormous proportions. There were roars of delight from the Labour benches when he announced the news four days later, and many people saw the decision as a victory for Jimmy Reid and his fellow shipbuilders, whose work-in had been v
indicated. On the right, however, the decision looked like a sign of panic in the face of unemployment, a disturbing surrender to the threat of public violence. Listening to her colleague, Margaret Thatcher felt a sense of ‘tangible unease’, while The Economist lamented that if the government had to throw £35 million at any industry, ‘one of the worst possible economic choices is shipbuilding, whose future probably lies in low wage countries and certainly does not lie so many miles up the Clyde’. As the magazine later put it, the government seemed to have ‘lost its nerve’.6

  In his memoirs, Heath admitted that the U-turn over UCS had been a mistake. It gave the impression that the government was ‘baling out companies as a panic reaction to the prospect of seeing the unemployment figures rise to about 1 million’, he wrote. ‘In hindsight … we were wrong.’ Not untypically, he put all the blame on Davies, cattily observing that ‘John had been unlucky rather than incompetent’ and that ‘the demands of the job were proving too much for him’. But although Davies was demoted later that year, Heath’s account leaves much to be desired. He had approved the UCS bailout not as a one-off, but because it tallied with his new approach, which was to make a dynamic bid for economic growth in order to get unemployment down, win back the friendship of the trade unions, and give Britain the best possible chance of making a splash in Europe when it joined the Common Market in January 1973. In part, as Edmund Dell suggests, this was a strategy born of sheer panic: facing the massive resistance of the trade unions, Heath had blinked, preferring to put people back to work rather than pay the price for free-market principles in mass unemployment. But it also tallied with all his personal instincts. When Harold Macmillan had been in a tight spot in the early 1960s, he had backed a ‘dash for growth’, hoping that a consumer boom would somehow help the economy break through the fetters of inflation and the balance of payments. And now that Heath was in trouble, he fell back on his patron’s example. As Douglas Hurd later wrote, it was not that he ‘lost his nerve’ because he was ‘frightened of the political consequences of unemployment’. It was more that a policy of radical expansion ‘appealed to his underlying belief’ in ‘sustained growth’ as the answer to all Britain’s problems. The laissez-faire overtones of the ‘quiet revolution’ had been all very well, but they had not yielded the results that Heathco’s chief executive expected. With the country plunging into the vastly enlarged markets of Europe in January, he wanted a quick fix, and he was prepared to do whatever it took to get it.7

  On 21 March 1972, Anthony Barber rose to Conservative cheers to unveil his second Budget. It was, he said, ‘the first Budget since Parliament took the historic decision that we should join the European Economic Communities’, providing ‘an unparalleled opportunity’ to sell British goods and services abroad. But it was also a Budget conceived against a background of high unemployment, ‘which has persisted despite the unprecedented action to counter it which has been taken over the past year’. Though present policies would eventually bring a recovery, they would not do so quickly enough ‘to meet the challenge of Europe’, and so the time had come for radical action to ‘help British industry to modernise, to re-equip and to reorganise to meet the challenge of greater international competition’.

  What Barber wanted above all was a faster rate of growth, and he unveiled the extraordinarily ambitious target of 10 per cent growth within just two years, to be achieved through a massive boost to demand. Not only did he slash £1 billion off income tax, he also cut purchase tax by £140 million, increased social security and pensions by some £21 million a week, and announced a vast range of incentives for industry, from generous tax allowances for new plant and machinery to regional investment grants in struggling areas (which had been explicitly repudiated in the Conservatives’ manifesto). To call it a giveaway Budget was an understatement. For ordinary taxpayers and businessmen alike, it was as though Father Christmas had brought several years’ worth of presents in one go. With public sector borrowing up to almost £3.5 billion, there was of course an enormous risk of inflation. But Barber told the House that there was no danger that his stimulus proposals would send prices up; on the contrary, he explained, the boost to business profits and productivity would actually help to keep inflation down – not least because the unions, inevitably impressed by the government’s commitment to full employment and economic growth, would refrain from demanding big pay increases. It was the most ambitious Budget in living memory: no wonder that as the Chancellor sat down, his voice hoarse, his backbenchers gave him a standing ovation.8

  In later years, when Barber’s Budget had become a byword for reckless profligacy, the rationale behind it would often be overlooked. The basic philosophy was very similar to the dash for growth under Macmillan in 1963, the premise being that if the government could only urge the economy on to a faster rate of growth, the resulting gains in output and productivity would put an end to the debilitating cycle of ‘stop-go’. Back in the early 1960s, the Wilson government had been forced to apply the brakes after barely a year, the reason being that the boom had stimulated huge demand for imports, which consequently pushed Britain’s balance of payments deep into the red and heaped pressure on an already beleaguered pound. But in 1972, the thinking ran, the situation was very different. Thanks to Roy Jenkins’s austerity, Britain had built up a healthy balance-of-payments surplus, and on top of that, Barber was determined not to allow an ‘unrealistically’ high pound to ‘distort’ the domestic economy. With the economy free to expand, he hoped, the gains in productivity would be so great that they would more than make up for any surge in prices, thereby keeping inflation down. And to be fair, plenty of people agreed with him. Many Tory MPs were delighted by such an expansionist Budget, while the most common complaint among Labour MPs, for whom no Budget could be too generous, was that he had not gone far enough. The economist Sir Roy Harrod, once the protégé of John Maynard Keynes, predicted that the boom would have no adverse effects on inflation, while The Times’s only complaint was that Barber had been too timid.9

  One of the Budget’s few perspicacious critics was one of Barber’s predecessors as Chancellor, Roy Jenkins, who predicted from the Labour side of the House that in due course it would lead to ‘swingeing and unacceptable public expenditure cuts’ and ‘substantial tax increases’ – as indeed, in the long term, it did. Remarkably, however, one of the biggest sceptics was Barber himself. He always had profound doubts about the recklessness of the stimulus, as did many of his advisers, who knew that the balance of payments was already deteriorating and that there was a real risk of sending inflation into overdrive. ‘A lot of people within the Treasury were worried,’ recalled his special adviser Brendan Sewill, while a senior civil servant later claimed that, although ‘the Chancellor went along with it’, the Budget had been conceived not in Number 11 but in Number 10, by ‘the Prime Minister and one or two of the spending ministers’ who thought that it was a formula for political recovery. Unfortunately, it was a formula only for disaster, a classic example of politicians over-stimulating the economy because they lacked the backbone to resist public criticism or the patience to wait for their previous measures to take effect. Thanks to Barber’s stimulus measures the previous year, unemployment would have come down anyway, but by throwing even more money at the economy Heath was stoking the flames of inflation. At any time it would have been a naive, irresponsible gamble. But with the world economy in a state of deep uncertainty and international currencies in deepening disorder, this was the worst possible time for such an expensive mistake. It was the product not only of good and noble intentions, but of panic and arrogance, and it was a classic example of a disease to which British politics was peculiarly prone in the 1970s: the economics of wishful thinking, based on rosily optimistic predictions that were never, ever vindicated.10

  The dash for growth unleashed by Barber’s Budget took place against the background of two seismic economic events. First, there was the collapse of the Bretton Woods system, which had kept monet
ary order through fixed exchange rates since the end of the Second World War, laying the foundations for the great post-war boom. Thanks largely to the decline of the dollar, Bretton Woods had finally disintegrated in August 1971, and was replaced by a temporary realignment under the Smithsonian Agreement at the end of that year. Meanwhile, the six countries of the EEC, together with Britain as an aspiring member, formed what was nicknamed the ‘Snake’, a primitive version of the Exchange Rate Mechanism in which members agreed to keep their exchange rates from fluctuating more than 2.25 per cent against one another. But this proved no more successful than its sequel. The pound would probably not have lasted long in the Snake anyway, but, thanks to Barber’s dash for growth, sterling was bound to come under enormous pressure. As the Budget took effect and British consumers began to spend heavily on imports, the pressure became unsustainable. At last, on 23 June, the Chancellor made the historic announcement that the pound was to float freely, its value determined by the markets rather than by a fixed exchange rate. Strictly speaking, this should have been an embarrassment for the government, a rebuke to their European ambitions and a hint of the dangers of unchecked growth. Indeed, the fact that the pound fell steadily from $2.60 to $2.38 in just twelve months hardly suggested great international confidence in the British economy. Yet since a floating pound removed the fetters on domestic expansion, the reaction at home was one of delight. The Times hailed Heath’s ‘insight’, ‘courage’ and ‘confidence’ in allowing the pound to float, while many Tory backbenchers were overjoyed at the thought of the economy surging ahead without being checked by petty considerations about exchange rates. That a floating pound made the risks of inflation all the greater seems not to have occurred to them.11