Labour and the Failure to Control Inflation, 1974–79

Inflation Crisi

• Inflation was the dominant economic problem for Labour (1974–79).

• By 1975, prices were rising over 30%, faster than wages.

• Union members saw living standards fall and ignored government appeals for wage restraint.

Healey’s Shift Away from Full Employment

• By 1975, Chancellor Denis Healey challenged Labour’s commitment to full employment.

• Argued that injecting money to create jobs only fuelled higher inflation

IMF Loan, 1976

• By early 1976, international confidence in Britain collapsed due to inflation and fear of strikes.

• The pound slumped from $2 to $1.63 (nearly 20% decline).

• Britain accepted an IMF loan of just under £4 billion.

• Conditions: Britain had to agree to £3 billion in spending cuts.

• Healey was denounced as a “traitor” by the Labour left for accepting IMF terms.

• Healey argued Britain was living beyond its means

Labour Left’s Alternative Economic Strategy (Tony Benn)

• Proposed to protect the welfare state by:

  • Trade barriers to block foreign imports

  • Government investment and more nationalisation

  • Withdrawal from the EEC

• Benn called this a “siege economy”.

• Callaghan rejected it as unworkable and unrealistic.

• By backing Healey, Callaghan signalled Labour’s shift away from Keynesianism toward monetarist thinking.

Monetarism

• Promoted by the Centre for Policy Studies (CPS), co‑founded by Keith Joseph.

• Argued government must control the money supply to prevent inflation.

• Accepted that this might cause unemployment, but believed inflation ultimately caused unemployment anyway.

• Proposed free‑market / neo‑liberal reforms:

  • Major reduction in the state’s economic role

  • Privatisation of state industries

  • Deregulation, especially in finance

  • Promotion of free trade

• These ideas echoed the earlier Selsdon Manifesto, though Heath had abandoned most of them due to union resistance.