by Andy Beckett
Over the summer, the soon-to-be-famous hot summer of 1976, with its parched parks and standpipes, its freakish ladybird swarms and languid Alabama skies, the crisis seemed to recede. The pound rose back to $1.80 in late June, and stayed near that level into September. In July, Healey forced his latest cuts in public spending through the Cabinet. The same month, with a typical mixture of bluff and confidence, he told the current-affairs TV programme Panorama: ‘We’re now in a better position to achieve our economic miracle than any time since the war.’ Did the chancellor, the presenter asked, think the pound was now basically out of trouble? ‘My own view is it will settle at a rate which will hold for quite a long time.’
In August, Healey went on holiday, staying in Britain so that, should the state of sterling require it, he could easily be contacted or even return quickly and discreetly to Whitehall. In his autobiography, he recalls,
… not a drop of rain even in the Highlands until the very end of our tour. We drove through Wales and the Lake District … then on to Skye, and up the west coast to Ullapool, where we stopped at a little hotel on the quay … After a pleasant supper of Loch Broom smokies, we went to bed, to be woken by a series of telephone calls. Each time I had to plod downstairs with my pyjamas covered by a raincoat, since the only telephone was in the hall, where the front door was wide open. First, a call from the police to say that there had been a bomb threat against me … Then a series of calls which I had to take more seriously … Sterling was under pressure; I agreed [the Bank of England] should spend up to $150 million on intervention, but then let the pound fall. Finally I got back to bed for a few hours’ sleep. Next day the flurry was over … I spent a couple of days at the Edinburgh Festival meeting actors and singers, including Teresa Berganza, who had been an impeccable Cherubino in Figaro …
By late August, the currency traders were having doubts about sterling again. There were fears on the markets that the drought would threaten water supplies and force a return to the three-day week. The sopping autumn that suddenly set in at the end of the month put an end to that, but traders remained spooked about impending strikes by the National Union of Seamen and at British Leyland; by the announcement in September of poor trade figures; and by the adoption of a policy by the National Executive Committee of the Labour Party, against Callaghan and Healey’s wishes, that called for the nationalization of the insurance companies and leading banks. To make matters worse, on 9 September the Bank of England stopped supporting the pound on the foreign exchanges, on the basis that it had spent over £200 million doing so in the last week alone, and that such an effort was unsustainable in the long term. ‘We had discussions: “What did national bankruptcy mean?”’ Gavyn Davies, then a young but influential member of the Policy Unit, told me. ‘We were on the verge of it. We used to do analyses on the rate at which our reserves would be used up. The answer was … basically in no time.’ Unprotected by the Bank, the pound fell almost immediately from $1.77 to $1.73. By the last Monday of the month, 27 September, the pound was at $1.68, a record low.
It was the first day of the Labour Party conference. In the echoing, restless hall in Blackpool, with cigarette smoke drifting in the television lights, Callaghan survived hostile motions on his policies from the left and the right of the party, thanks to union support. But the pound kept falling.
The following morning, Healey was due to fly to Hong Kong for a conference of Commonwealth finance ministers, and then on to Manila for the IMF’s annual meeting, which finance ministers and the Fund’s senior management traditionally attended. As he left the Treasury in front of the cameras, Healey tried to look relaxed, even jaunty. He wore a casual jacket and summer trousers, not a suit, and kept a hand in his trouser pocket. In the other hand he swung a briefcase. He stood and smiled. His official car waited, black, tank-like, authoritative.
Yet over the currency markets that morning Healey had no authority at all. As he was driven to Heathrow, he heard on the car radio and in updates by car telephone from the Treasury that the pound had gone, as he put it later, ‘into a free-fall … About every quarter of an hour, the pound dropped another cent … It seemed like the end of the world.’ He was exaggerating the extent of the falls, but not that much: in the time it took him to get to the airport, a journey of not more than three quarters of an hour, sterling fell two cents. During 28 September as a whole, it fell by four and a half. On the foreign exchanges that day, The Times noted ‘the absence of almost anybody wanting to buy pounds’.
At Heathrow Healey got out of the car and walked quickly, still smiling, straight past the waiting journalists and into the terminal. But – a rarity in his political life – he was no longer sure what to do. ‘If I took the plane,’ he wrote in his memoirs, ‘I would be cut off from all contact with London for seventeen hours.’ If he did not leave for Hong Kong, he might seem to be panicking and the pound might sink further. For twenty-five minutes he conferred with his aides and the governor of the Bank of England in the VIP lounge. He also phoned Callaghan in Blackpool. Callaghan later recalled:
I was about to leave the hotel to deliver my speech to the Conference … Denis told me that Bank of England experts were forecasting gloomily that sterling would continue to fall … as low as $1.50 and no one could tell whether it would then stop. He said … he was uncertain whether he… should leave for the Far East at such a moment. My view was that if staying in London would make the situation easier, he should do so …
A quarter of an hour before take-off, Healey decided that getting on the plane was too risky. Outside the terminal, one of his subordinates, stooping awkwardly in his suit, with one foot on the pavement and one foot in the gutter, slowly lifted a series of black suitcases back into the boot of the official car. A policeman watched impassively with his hands behind his back. Then Healey emerged, walking much less briskly than before, smile intact but distinctly fixed. He stopped briefly to speak to the reporters. He told them he had not ruled out flying to Hong Kong the following day, or to Manila later – the IMF meeting did not start for another six days. But when his smile slipped a few times, his broad, strong face looked numb.
He went back to London. That evening, he held an emergency meeting with his Treasury advisers. ‘It took us three hours to agree that our best course was to announce that we were applying to the IMF for a conditional loan.’ Callaghan agreed, but the announcement of the decision was held back until the next day, in order not to upstage the Commonwealth conference. In the meantime, the markets reacted to Healey’s retreat from Heathrow with – Callaghan’s phrase – ‘hysterical panic’. Even Healey was badly shaken: ‘It was the lowest point of my period at the Treasury,’ he wrote later. ‘For the first and last time in my life, for about twelve hours I was close to demoralisation.’
In Manila, with Healey absent, the IMF gathering was addressed instead by Sir Douglas Wass, a senior Treasury civil servant who looked down at his notes and spoke to the huge, half-empty hall in a precise accountant’s tone, with none of the chancellor’s boisterous charisma. ‘The lack of frank, face-to-face talks at this stage’, suggests the Fund’s official historian with some understatement, ‘may have added to the difficulty of later negotiations.’
Yet in the other conference hall of the moment, in Blackpool, the first signs had already come of an effective response to the crisis from the Callaghan government. Shortly after taking Healey’s phone call from Heathrow, Callaghan had given his maiden speech to the Labour conference as party leader and prime minister. Aware that it might also be his last, he decided to be frank.
For too long, perhaps ever since the war, we [have] postponed facing up to fundamental choices and fundamental changes in our society and in our economy … We have been living on borrowed time … Governments of both parties have failed to ignite the fires of industrial growth in the ways that [other] countries … have done. Take Germany, France, Japan …
The cosy world we were told would go on for ever, where full employment would be guarant
eed by a stroke of the chancellor’s pen – that cosy world is gone … We used to think that you could spend your way out of a recession … by cutting taxes and boosting government spending. 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 … by injecting a bigger dose of inflation into the economy, followed by a higher unemployment …
Now we must get back to fundamentals. First … our labour costs being at least comparable with those of our major competitors. Second … significantly improving the productivity of both labour and capital. Third … [by not] printing what Denis Healey calls ‘confetti money’ to pay ourselves more than we produce.
The delegates listened to his words in near silence. When Callaghan finished, he did not receive the leader’s usual standing ovation. Some members of Labour’s National Executive Committee and some ministers sitting with him on the stage – the conference slogans behind them read, ‘With Your Help Labour Will Go from Strength to Strength’ and ‘Labour Gets to the Heart of Matters that Matter’ – did not clap at all. On the currency markets, to which the speech was transparently also addressed, the response was contradictory. ‘Dealers said, everyone was “waiting for a sign”,’ The Times’ economics editor Peter Jay reported. ‘The PM’s speech at Blackpool was not construed as such a sign … in part because those who were engaged in hectic dealings had very little idea of what he had said. When questioned about it … they tended to “assume” that Callaghan had said “the same old things”. When asked what he should have said, they gave a fair summary of what he had said. When told that he said it, they expressed surprise.’
Then again, the very confusion of these responses confirmed Callaghan had said something unexpected. In his slightly fussy, schoolmasterish way, and with stiff, sometimes awkward turns of phrase – ‘in all candour’, ‘insofar as’ – that gave away all the redrafting and intellectual gear shifts that lay behind the final text, the Labour leader had made an attack on the post-war consensus at least as coherent and bold as anything by Margaret Thatcher. The ability of a struggling Labour prime minister to toughen up the whole British attitude to the economy could be questioned; so could the extent of Callaghan’s conversion to or understanding of the new right-wing economics; and so could the wisdom of that thinking in the first place, as the less economically successful Britons of the next decade and a half would find out. But after Blackpool nothing would be quite the same again in British politics. On 10 December, the new right’s economic guru Milton Friedman acknowledged as much, telling The Money Programme: ‘The most hopeful sign I have seen in Britain was the talk which your Labour prime minister gave to the Labour conference at the end of September. That was, I think, one of the most remarkable talks – speeches – which any government leader has ever given.’
Callaghan’s Blackpool address, like any leader’s party-conference speech, was the work of many hands. Bernard Donoughue and Gavyn Davies of the Policy Unit had influenced its contents, as had Tom McNally; and so had the prime minister himself, with his growing alarm about sterling and the state of the economy. Yet the author of the speech’s most iconoclastic passages was not officially a member of the government but rather a less formal, more intimate ally of the Labour leader and a man of many usefully overlapping political and media guises: Peter Jay.
The Jays were about as close as Labour came to royalty. Peter’s mother Peggy had long been one of the most powerful women in the party in London, as a councillor, Hampstead activist and the confidante of Labour grandees. His father Douglas, meanwhile, had been a prominent left-wing journalist in the thirties, a Labour economics minister in the forties, fifties and sixties, and remained a Labour MP. Douglas was known for his quick and certain mind, for his pioneering ideas about modernizing the party – in the early sixties, he argued it should abandon nationalization and its ‘working-class image’ – and for his icy relations with Harold Wilson, who terminated Jay’s career as a minister in 1967 with a meeting at a railway station in the south-west of England. Jay, halfway through a Cornish holiday, had refused to come back to London to be fired.
Peter Jay had inherited many of his parents’ attitudes and connections, and had updated them. In 1961, at the age of twenty-four, he married Callaghan’s daughter Margaret. From 1961 to 1966, he worked as a senior civil servant at the Treasury. In 1967, still only thirty, he became economics editor of The Times, a position he held until 1977. In 1972, he also began presenting Weekend World, the most rigorous and respected – if not the most watched – current-affairs programme on British television. Throughout, Jay behaved as if born to such roles. Lanky and drawling, with a faintly spoilt, handsome face and a big, confident mouth, he was articulate, inquisitive and increasingly pessimistic about Britain. He was fundamentally loyal to the Labour Party but capable of being stingingly critical. Callaghan considered his son-in-law ‘brilliant’ and, from the early sixties, intermittently sought his advice.
When I met Jay in 2006, he seemed little changed. He collected me from a station outside Oxford in an unkempt Mercedes. As we surged out of the car park he immediately began explaining that 1976 was the true turning point in modern British politics. ‘At the time I called the change of attitude the New Realism,’ he said. Beneath his craggy, tanned forehead his eyebrows went up. ‘Later, Thatcher used that phrase quite a lot.’ He paused briefly. ‘I call the twenty years beforehand, 1956–76, the years of the two Harolds [Wilson and Macmillan]. Disgusting, horrible, contemptible people. They alienated a whole generation of people like myself who might otherwise have gone into politics.’
We pulled up outside a large stone house with several cars in the driveway. Next to it was a converted barn full of books on politics and economics and framed caricatures of Jay, who since the seventies has had a high-profile media career without quite recapturing his Callaghan-era influence. He sat down at a long messy desk, folded his tanned arms and continued. ‘At Oxford and the Treasury I was a twenty-four-carat Keynesian. My father was a great influence in that. Then, during the late sixties, I noticed that the trade-off between inflation and unemployment was worsening in the UK. I went to the States for The Times and became interested in monetarism. I visited the University of Chicago, the Hoover Institute in Stanford, the Federal Reserve in St Louis, the great centres of monetarism. I liked their flow of statistics – very useful for a journalist, well-presented. I met Friedman. He’s a very attractive character. He has that wonderful Jewish humour and intellectuality. He became a good friend. He signed my application for a green card …’
Jay stopped. Then his deep, smooth broadcaster’s voice rose a little: ‘I was absolutely conscious that on a number of issues … the monetarists were on the political right. I entirely disagreed with them on those issues – as I did with the lot on Lord North Street, the IEA. But the macroeconomic question was a factual question. Ideology can’t be against the facts.’
From the late sixties on, Jay became increasingly convinced that British economic policy required a complete overhaul. ‘You needed a healthy economy for there to be redistribution of wealth. So you had to stop the crisis.’ He began advocating monetarism in The Times, with dire warnings about what would happen to the economy, and to British democracy itself, if there was no change of course. He said the same things to his father-in-law and to Healey in private. When Callaghan replaced Wilson as prime minister, Jay became a direct influence on both No. 10 and No. 11 Downing Street. Callaghan’s Blackpool speech was merely the most famous instance.
‘He rang me up,’ Jay said, leaning back in his chair, legs stretched right out. ‘I recall it being the day before the speech. He said he’d got a rubbishy draft. Would I send him something? I sat down and wrote a whole speech. The first part said, “Keynesianism has no future,” and all that. The second half said, “So the way forward for socialists is … to change the role of labour so it becomes entrepreneurial.” I called this market socialism.’ Jay’s big mouth bent into an unexpec
ted self-mocking grin. ‘Callaghan, wisely, did not use that part of the speech.’
Even the part of the speech Callaghan did use was a little too radical for Healey. In his memoirs, he calls Jay’s contribution ‘a notorious passage … [which] appeared to reject the very concept of Keynesian [ism] … in principle and at all times’. The chancellor did not want to go that far. For one thing, he did not wholly trust Callaghan’s judgement on economic matters. ‘The thing about Jim was,’ Healey told me with one of his knife-plunging smiles, ‘he wasn’t a great success in his earlier jobs before he became prime minister. In fact, he was a disaster at the Treasury and had to resign …’
For his part, Callaghan had misgivings about Healey’s retreat from Heathrow. He had hesitated before agreeing that the chancellor should miss his flight, and the negative reaction of the currency markets and the media to the decision confirmed these doubts. Callaghan wrote later in his memoirs: ‘I should have encouraged the Chancellor to go.’
Instead, for the whole of 29 September and the morning of the 30th, Healey stayed in London. ‘Jim doesn’t want me in Blackpool,’ Healey wrote in his diary. ‘[Would] weaken repair of calm.’ The 29th had brought the official announcement that Britain was applying for an IMF loan of $3.9 billion (£2.3 billion), the biggest sum the Fund had ever been asked for. On the foreign exchanges that day and the day after, with Callaghan’s speech still being digested and the Labour conference still restive, the pound was wildly up and down but no longer in free fall. At breakfast time on the 30th, with a debate on the economy due that day in Blackpool, Healey phoned Callaghan to ask if he could come to the conference and make the case for the IMF loan and the government’s changing economic strategy, but Callaghan said no. To take his mind off things, Healey went to the National Gallery for the morning. He had a meeting with the curator, he wrote later, ‘to choose an Ostade and a Wouwerman for my office at the Treasury, and a Van den Neer for No. 11’. Then suddenly, at 11.30 a.m., he told me, ‘Somebody came in from my office – rushed in – and said, “The PM wants you up right away. There’s a plane waiting for you at Northolt.”’
