He had an ebullient rough manner and enjoyed being rude to people, which was not always appreciated by others. Gerald Barnett, his Chief Secretary of the Treasury, said at one meeting in the Treasury, Healey ended the meeting by saying, "Let me make sure that I have indeed insulted everyone around this table.
The Chinese Embassy complained, and Healey had to make an apology… There was even worse: Healey and the left began swearing at each other in the House of Commons — it was not then televised, but in the full hearing of other Members, and Healey always said that they had a very complex love life in the Labour Party. He said, in his Memoirs, he said feelings were at boiling point on both sides. Now, five days after this disaster, Harold Wilson resigned, and he had not told Healey that he would resign, although he had told James Callaghan, and of course Healey's chances of the leadership, whatever they were, were not improved by this episode, and indeed, Callaghan became Prime Minister.
With Callaghan as Prime Minister, there were further reductions in public spending, both in a budget in April and another budget in July, and, in June , the Government was forced to borrow to prevent a further depreciation of Sterling and loss of reserves. People did not believe in the progress of the British economy.
This meant the loan would run out on 7th December , and if, at that time, it could not be repaid, the Government would have to go to the IMF. The pound continued to fall, and on 28th September , just as Labour's Annual Conference was beginning, the pound suffered its largest one-day fall in value since Sterling had been floated in There had now been eight budgets since Healey had become Chancellor in March , and the pound had fallen from 2.
The selling of Sterling was reaching dangerous levels, and Healey was told of this news as he was going to London Airport for a meeting of Commonwealth Finance Ministers in Hong Kong, to be followed by a meeting of the IMF at Manila, at which Britain's application for a long-term loan from the IMF would be considered. Now, Healey decided not to travel to these meetings but to go back to London and then to talk to the Labour Party Conference which was then in session.
Healey told the Labour Party Conference, melodramatically, that he had come "from the battlefront", that he would seek a loan from the IMF so he could continue with existing policies. He received a mixed reception from the Party Conference, as you can imagine.
It means sticking to the very painful cuts in public expenditure on which the Government has already decided. It means sticking to a pay policy which enables us, [as] the TUC resolved a week or two ago, to continue the attack on inflation. It means seeing that the increase in our output which has now begun goes not into public or private spending but into exports or investments.
That's what it means and that's what I'm asking for. That's what I am going to negotiate for, and I ask this Conference to support me in my task! Now, the previous day, Prime Minister James Callaghan had put a further nail in the coffin of Labour's aspirations and of the Keynesian consensus.
He told the Labour Conference that the country for too long, perhaps since the War, had been living on borrowed time, borrowed ideas, and borrowed money. He said the days when full employment could be secured by a stroke of the Government's pen were over, if these days ever existed. Britain's problems, he said, were caused by paying ourselves more than the value of what we were producing, and spending one's way out of recession simply injected inflation into the economy and then the average level of unemployment rose.
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 since the War by injecting a bigger dose of inflation into the economy on every occasion, followed by a higher level of unemployment as the next step.
We have learnt from past mistakes that you cannot spend your way out of a recession. Well, it turns out he has forgotten past mistakes, and now he is condemned to repeat them. There are of course echoes in what Callaghan has said in contemporary debates.
It was seen, in , as a watershed moment, that speech, but it really did no more than confirming for public consumption a policy shift that had already been made by the Labour Government.
But the difficulty was that the speech was interpreted abroad as evidence that the Labour Government would alter its policies in the direction of further expenditure cuts, whereas Healey said he was going to negotiate on the basis of existing policies, but it was those existing policies that had lacked the confidence of the international financial community. Now, the IMF was, at that time, and perhaps it still is, I do not know, but at that time, it was dominated by the Americans and the Germans, who supplied most of the funds, and little could be done without their support.
The Government had first hoped that the Americans and the Germans would support an unconditional loan to Britain, but they, not unnaturally, wanted assurances they would get their money back, and also they would not be asked again to pour good money after bad. Britain had of course borrowed money from the US in when Lend-Lease had run out, and, as those who attended my last lecture on Suez may remember, after the failure of Suez, they borrowed money from America again to prevent a run on the pound.
Now, it was seeking further charitable help from the Americans. Indeed, the British at this time, I think, perhaps still, tended to perceive America as a giant charitable institution which would always be willing to bail Britain out, and that perception was aided by the good personal relations between Callaghan and President Ford, even though Ford headed a government of the right, a Republican Administration, which was not particularly sympathetic to what it saw as an attempt to build socialism in Britain on borrowed money.
The American Treasury Secretary, William Simon, had said in June that "Lenders will become increasingly reluctant to finance expanding current account deficits unless borrowing nations make fundamental changes in their domestic economic policies.
The British were saying our economy is sound — just lend us the money, and as if you were going to your bank manager and saying "My finances are perfectly sound — please lend me the money", but unfortunately, it is not for the borrower to decide the terms on which he will graciously accept a loan or an overdraft. It is for the person who lends you the money to decide. At the Manila Conference of the IMF, Arthur Burns, who was the Chairman of the Fed in America, issues a diatribe against the Labour Government, saying it must abandon what he called "this nationalisation nonsense" and give the people some incentives.
It had to reduce its awful deficit, satisfy the world banks, and he said "Denis Healey does not understand this".
But in any case, even if the Ford Administration had been more willing to help, it was in the middle of a presidential election campaign, and in November , Ford was defeated by Jimmy Carter, so he became the lame duck President, so there was not much the Americans could do.
At first sight, things appeared rather better in Germany because Helmut Schmidt, the Chancellor, who, like Healey, died recently, he was a social democrat, albeit much to the right of the British Labour Party, and he had a very warm relationship with Callaghan and Healey. Schmidt was sympathetic, but he could not help because he had no lawful authority to commit resources without the consent of German's independent central bank, the Bundesbank. The view of the Bundesbank, and indeed most Germans, was that Germany had put her economy in order after the oil crisis, through methods of financial discipline, and that Britain should do the same.
In any case, Schmidt, like Ford, was facing an election at the end of the year and was unwilling to follow policies which German voters would see as profligate and inflationary.
So, friendship proved an inadequate basis on which to expect help. The money that was to be loaned to Britain came, after all, from American and German taxpayers, and the prime responsibility of the American and the German Governments were to their own taxpayers and not to the British Government.
Treasury officials reported back to London the IMF's view that we had run out of time. Our failure to take sufficient action on the Public Sector Borrowing Requirement and monetary policy earlier meant that our options were now much more limited and the action needed now was more drastic.
The margin of credibility had narrowed. There needed to be what the officials called "a change in fiscal stance". The IMF said Britain's problems were not due only to the oil price rise but deep-seated and longstanding economic weaknesses and antiquated industrial structure, high marginal tax rates, low rate of capital formation, poor trade union and management practices, and that meant the British economy could not cope with temporary crises such as the oil crisis and a run on the pound.
Healey had told the Labour Party Conference he would negotiate with the IMF on the basis of existing policies, and that was true to the extent that public spending cuts, monetary targets, and cash limits had all been introduced before December , but it was not true if it meant there was to be no intensification of these policies.
For the loan to be obtained, there had to be such intensification. The IMF demanded further spending cuts and a new macroeconomic and budgetary stance, secondly, a new policy on the exchange rate, and thirdly, financial performance targets.
The main political battle was over the cuts, and the Labour Government was in danger of being trapped between the demands of the IMF for cuts and the unwillingness of the Cabinet, the Party and the trade unions to accept them. Healey also promised to abolish food subsidies and the other price controls imposed in and he agreed to strict monetary targets and cash limits on public expenditure, to be monitored by the IMF. So, the reduction of unemployment was put even further into the background, but in return for that, we secured the IMF loan and that stopped the slide on Sterling.
The main problem had been how to get the left in the Cabinet to agree. The left wanted a programme of import controls to protect the balance of payments and avoid having to restrict the economy.
In addition, there was a danger that import controls would lead to retaliation so they would not yield any lasting gains. But fundamentally, the IMF would not accept import controls as a basis for a loan, and the general view of the Cabinet was, if they could not get the loan, they were sunk, so that was excluded.
They argued that, with unemployment at 1. The spare capacity was available to increase exports. Now, Callaghan, as Prime Minister, said that the Labour Party must avoid, at all costs, another , when the Party had split and the Government had broken up over public spending cuts, and in particular cuts in unemployment benefit. Tony Benn circulated the Cabinet papers from as a warning of what could happen. But Callaghan showed great political skill in allowing dissenting Ministers full opportunity to put their case.
There was a detailed discussion in Cabinet, from nine Cabinet meetings, before agreement was reached on a new economic package. In the end, Crossland withdrew his opposition, saying the Prime Minister could not be defeated on a matter of this importance, and in fact, Callaghan had told Crossland, though no one else in the Cabinet, that he would resign if the terms were not accepted.
Acceptance of these terms did not indicate a reversal of policy but an intensification of the policy adopted first in , cuts in public spending, a further bite of the cherry. Paradoxically, the IMF loan gave the seal of international approval to the Labour Government's policy, and this, again paradoxically, enabled the Government gently to inflate the economy in as conditions improved and confidence was restored.
There were three intertwined strands: a sterling crisis; a sovereign debt crisis; and heavily leaked factional frictions within the governing Labour administration. The sterling crisis featured a falling pound that reflected the balance of payments deficit and lack of international confidence in government policy.
The foremost purpose of the IMF application was to replenish the foreign exchange reserves. A future run could push the pound into free fall. All content is available under the Open Government Licence v3. Search the website Search the catalogue.
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