The Labour Party sold out 50 years ago

By the mid-1970s, Labour had already discredited Keynesianism and set up the conditions for the legitimisation of neoliberalism — and for Thatcher's all-out attack on the working class

Millions of British voters will head to the polls today to elect a new House of Commons and government. Labour is slated to win by a landslide, though not for its own merits or those of its lacklustre leader, Keir Starmer — but simply because people are desperate to get rid of the incumbent Tory government. That said, it’s unlikely much will change: the Labour Party today is little more than a more culturally progressive (i.e., woker) version of the Conservative Party; on all major economic and foreign policy issues, the two are virtually indistinguishable: pro-war, pro-NATO, pro-Israel and neoliberal to the core. Unfortunately, the Labour Party lost its way a long time ago, well before Starmer — or even Blair — came along. The roots of Labour’s rightward shift can be traced all the way back to the crisis of the 1970s.

By the early 1970s, the post-war Keynesian “class compromise” had already started to unravel: one the one hand, a dramatic decline in capital’s profit margins — as a result of increased international competition, the rise in imported material costs, weak productivity growth and, perhaps most importantly in terms of its political consequences, militant wage pressure — led to an intensification of the distributional struggle between labour and capital in the context of stagflation; on the other, an increasingly militant working class began to link up with the new counterculture movements of the late 1960s — community groups, welfare rights groups, black and women’s groups, anti-war groups, etc. — in struggles that demanded not simply more pay or more government expenditure, but that challenged the bureaucratic and authoritarian forms of capitalist power, and “threatened to provide the foundations for transcending capitalism” itself, as David Harvey wrote.

This provoked an increasingly desperate and alarmed response on behalf of the ruling elites. It is against this backdrop that, in the early 1970s, the newly elected Conservative government of Edward Heath (1970-4) attempted to resolve the crisis by directly confronting the power of the unions: the Industrial Relations Act of 1971 was an attempt to dismantle the existing institutional apparatuses of industrial relations and smash the bargaining power of the unions once and for all. But this provoked mass opposition, radicalising the class struggle and bringing the workers into direct confrontation with the state. Following a series of disruptive mining strikes — including a month-long general strike — Heath eventually called an election for February 1974 to obtain a mandate to face down the miners’ demands, but lost to Labour by a small margin, leading to the re-election of Harold Wilson, whom had been prime minister between 1964 and 1970.

1974–9: how labour took it upon itself to manage the capitalist crisis

The new Labour government and the miners reached a deal shortly thereafter and the strike was ended, but this simply exacerbated the ongoing distributional struggle. As already mentioned, in Britain as elsewhere the oil crisis had bolstered the monetarist mantra, even among the ranks of the Labour Party. This had widened the rifts between the various factions within the party, which was becoming increasingly polarised. On the one hand, the Labour left was becoming more powerful and strongly rejected any attempts to curtail the power of the unions. On the other, the number of Labour monetarists, who were closer to the Tories than to their colleagues on the left on macroeconomic policy, was on the rise as well, especially within the parliamentary wing of the party. As Aled Davies noted, it was the new chancellor [i.e. economy minister], Denis Healey, who “did most to further the ‘monetarist’ cause in British public discourse” once the Wilson government was re-elected in ’74.

Not everyone in the Labour Party shared the chancellor’s views, however. At the Labour Party’s 1973 annual national conference, an ambitious 123-page policy manifesto was unveiled, Labour’s Programme for Britain. The document, which was largely the brainchild of Tony Benn, Ian Mikardo and Michael Foot, all staunch left-wing members of the party, outlined a socialist vision for Britain. The programme had two major planks. First, the creation of a National Enterprise Board (NEB), which would buy up private firms in the national interest. The aim was to use these enterprises as vehicles for investment planning to spawn higher productivity and sustained economic growth, and more generally to revitalise an industry that had waned under the poor management of British capital. Michael Foot was quoted in the Guardian as saying that the programme was “the finest socialist programme I have seen in my lifetime”.

Three days later the 1973 Arab-Israel War broke out and the OPEC embargos began, triggering a chain of events that would end up steering the Labour Party — and Britain — in a very different direction. But that was to come later. While there was strong resistance within the Labour Party’s National Executive Committee to accepting the programme’s full agenda, the left faction succeeded in garnering its support at the 1973 national conference.

When Harold Wilson assumed office, in February 1974, he appointed Tony Benn, a key proponent of the programme, as secretary of state for industry. In his book, That Option No Longer Exists: Britain 1974–76, John Medhurst provides a detailed account of what happened in the months that followed, when the left came close to implementing a radical socialist economic strategy. Benn wasted no time in drawing up a White Paper for an Industry Act commensurate with Labour’s programme, but the document was significantly watered down by Wilson, especially with respect to the NEB’s proposed right to influence the direction of existing firms and impose a statutory framework for economic growth. Benn tried again by drawing up a paper designed to set the Industry Act in the context of a wider Alternative Economic Strategy, which argued for reflation, price and import controls to protect nascent and struggling British industries, public ownership of major financial institutions, and the tackling of systemic inequalities through progressive taxation and social spending. It too was blocked.

By the time the NEB was set up under the 1975 Industry Act, its remit had been modified. Its primary role was now that of providing funds for industrial investment. To the left the NEB was a disappointment. Nonetheless, the 1975 Industry Act, did go further than any previous legislation in increasing the state’s role in industry. In many ways, the painstaking legislative action on the creation of the NEB had brought to the fore the fundamentally incompatible visions of the right-wing and left-wing factions of the Labour Party. On the one hand was Wilson (and the rest of the party leadership), increasingly under pressure from an establishment that recognised in Benn’s industrial strategy an existential threat to its power and privileges; on the other was Benn himself, an eloquent and effective socialist in a vital ministerial position who had support across the extra-parliamentary left and trade union movement. Clearly, the party — and Britain — were at a crossroads, and ripe for a reckoning. By this point, the British ruling elite was apoplectic. Andrew Glyn recalls that the Times ran various articles calling for “a co-ordinated defence against industrial action or wholesale nationalisation” and discussing scenarios in which the armed forces would be called in to break strikes, which could escalate to a situation where “normal legal administration is impossible and the only authority left is the military commander”.

By this stage, it was clear that a solution to the crisis within the narrow limits of the social-democratic framework (such as the one attempted by Wilson in the mid-1960s) was not an option. A radical resolution one way or another — either on labour’s terms or on capital’s terms — was inevitable. From a socialist perspective, as the Labour left argued, this meant: (i) bringing a larger share of production under public ownership; (ii) expanding the government’s role of employer of first resort (thus reducing the ability of capital to use unemployment as a blackmail tool); and (iii) implementing capital/import controls to manage the country’s balance of payments. The leadership of the Labour Party had no intention of permitting such a development, however. The European Economic Community (EEC) referendum of 1975 provided the opportunity for the leadership to inflict a comprehensive and decisive defeat on the left. The overwhelming victory of the “yes” vote gave Wilson the perfect opportunity to sideline Benn — who had campaigned against the EEC, fearing (correctly) that Treaty of Rome competition clauses threatened the Industry Act — by moving him to the much less influential Department of Energy.

This all but killed the impetus for radical reform. The Labour leadership, in fact, had come to the conclusion that the only way out of the crisis was to restore the profitability of capital. This required it to use its indissoluble link with the leaderships of the trade unions to discipline the working class. In other words, Labour took it upon itself to use the apparatus of the state to manage the capitalist crisis on behalf of capital — which is what the neoliberal counter-revolution was all about, really. However, in doing so it painted itself into a corner: increasingly engulfed in monetarist ideology and at odds with the more radical sections of the working class, and with no alternative strategy for managing the economic crisis, the government desperately needed the support of key sections of capital.

By the mid-1970s, however, capital — in the UK and elsewhere — was firmly committed to overcoming the Keynesian political-institutional framework, which it saw as a barrier to its own reproduction. Thus, even though by early 1976 Britain appeared to have weathered the OPEC storm quite well, the British financial-corporate lobby, supported by powerful free-market think tanks such as the Institute for Economic Affairs, started mounting an increasingly aggressive anti-government campaign. The financial press was relentless in its criticism of the government. In this context, we can better understand the events that led to James Callaghan’s infamous 1976 speech, which marked the party’s break with Keynesianism and precipitated the collapse of Keynesian legitimacy, paving the way for the rise of the neoliberal right.

Sounding the death knell of Keynesianism: Callaghan and the 1976 IMF loan

The troubles started in March 1976, when the left wing of the Labour Party defeated a public expenditure White Paper calling for the immediate freezing of public expenditure and setting out plans for cuts over the 1977–9 period. Bitter divisions within the party came to the fore once again. These were exacerbated by the growing influence and pressure exerted by the monetarists on chancellor Healey, who clearly also saw the White Paper as a means to “reassure the market”, in today’s parlance, by demonstrating the government’s commitment to reducing the deficit. Following the defeat of the White Paper, the markets became hysterical: a large-scale sell-off of sterling began, which rapidly lost value against the dollar. Furthermore, as the Wall Street Journal had advocated just a few months earlier, financial markets began refusing to buy British government bonds “until, in their view, the government had ‘put its house in order’”. This became known as the “gilt strike”.

It is quite clear, in retrospect, that this was not just a technical, “neutral” decision taken in reaction to Britain’s economic fundamentals — which were, in fact, improving — but a deliberate move to put pressure on the government to curtail public spending and retrench the welfare state. As the pound began to slide, despite a massive foreign currency loan from the IMF and foreign central banks, James Callaghan — who replaced Harold Wilson as prime minister in 1976 — portrayed the predicament facing Britain as one where the country had no alternative but to introduce harsh spending cuts and to resort to further external funding to “avoid a continuing slide in the exchange rate”. This was not the case, however: Britain could have chosen to challenge the speculators by letting sterling float cleanly and resorting to capital/import controls and improved planning, which would have largely eliminated the need for foreign capital inflows. By refusing to follow this route — for reasons of ideology or ignorance — Britain effectively created its own foreign currency funding crisis.

Against this background, in December 1976 the new chancellor, Denis Healy, sent his infamous “letter of intent” to the IMF — released to the public only in 2005 — agreeing to a programme of harsh spending cuts and monetary restraint in exchange for another loan. Upon news of the loan-cum-conditionalities, speculation against the pound abated. In the letter, Healey eschewed any notion that Britain would move to restrict capital flows or trade. This was a watershed moment for Labour, reinforcing a change in policy orientation away from full employment and social welfare towards the control of inflation and expenditure. Political commentator Peter Riddell wrote in 1983 that all the elements of what would become Thatcherism were already contained in Healey’s letter. The government’s official line was that it had no other choice because it had “exhausted its recourse to potential sources of financing other than the IMF”. In fact, these concerns about the lack of foreign reserves were all in the context of their commitment to sustain a given level of the pound. The “funding” concerns would have vanished had the government allowed the currency to fully float.

There are two dominant interpretations of the event: one that sees it as the moment in which the Labour Party, and Britain as a whole, capitulated to the demands of the Americans, effectively surrendering control of British economic policy to the IMF; and another one that sees it as the moment in which the British left was forced to acknowledge the harsh realities of globalisation. They are both wrong. While it is certainly true that from the 1970s onwards the IMF (and other Washington-based institutions) increasingly morphed into tools of US economic imperialism, and that the US government feared that Britain’s ongoing crisis would undermine “assumptions of political stability” and threaten US interests in the region the reality is that the terms of the loan imposed no constraints on the government that it had not already adopted voluntarily.

In fact, Callaghan had already explicitly rejected Keynesian full employment policies in his infamous address to the party conference in September 1976 — several months before the IMF application. The speech is said to have “effectively sounded the death-knell for postwar Keynesian policies”, and to have “served the monetarist cause for years to come”. It is also touted by some as the moment at which the British left finally “faced up” to the reality of the growing irrelevance of the state in the face of global economic forces.

In fact, as a 1977 US Congress briefing acknowledged, Labour’s leadership had long wanted to move in the direction now being recommended by the IMF, but had not been able to override the opposition of the party’s left wing: “they therefore secretly welcomed being put in a position of appearing to have no choice but to carry out the deflationary policies being dictated from outside Britain’”. That is, the IMF loan, far from imposing harsh conditionalities on a reluctant but powerless government, actually provided the government with the perfect alibi with which to head off mounting political opposition, by presenting austerity as the only way forward. The IMF, of course, was more than happy to be of support. It was, in other words, one of the first examples of depoliticisation — a strategy that in subsequent years and decades would become commonplace across all advanced countries, whereby politicians can reduce the political costs of unpopular policies by “scapegoating” international institutions.

In other words, though alternatives to austerity (such as Benn’s proposal) did exist at the time, they were no longer perceived to exist. This leads to the disquieting conclusion that the Labour-led British government of the mid-1970s was the first government effectively to break with the Keynesian consensus (excluding Germany, which never really subscribed to Keynesianism in the first place) and embrace monetarism-morphing-into-neoliberalism, not due to outside imposition or external constraints, but of its own volition. This, in turn, paved the way for Thatcher.

As world inflation began to rise at the end of the decade, the “social contract” that had reconciled the unions to wage restraint in exchange for job growth and redistribution finally broke down, leading to a massive wave of strikes, particularly in the public sector, during the so-called “winter of discontent”. Having failed to resolve the distributional struggle (either one way or the other), discredited the Keynesian ideology, and legitimised monetarism, Labour effectively set up the conditions for the social-democratic “austerity lite” to be refined into an all-out attack on the working class by Thatcher, who was able to appeal to the public’s mistrust of statism and bureaucracy, and growing frustration with union power, to advance a radical anti-labour and (seemingly) anti-statist agenda.

Thanks for reading. Putting out high-quality journalism requires constant research, most of which goes unpaid, so if you appreciate my writing please consider upgrading to a paid subscription if you haven’t already. Aside from a fuzzy feeling inside of you, you’ll get access to exclusive articles and commentary.

Thomas Fazi

Website: thomasfazi.net

Twitter: @battleforeurope 

Latest book: The Covid Consensus: The Global Assault on Democracy and the Poor—A Critique from the Left (co-authored with Toby Green)