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Last Updated: Thursday, 29 December 2005, 00:33 GMT
1975 economic fears are laid bare
By Ollie Stone-Lee
BBC News reporter at The National Archives in Kew

Denis Healey
Healey's pay talks with the union leaders are now public
Harold Wilson was warned in 1975 that Britain's economy faced "possible wholesale domestic liquidation", newly released Cabinet papers reveal.

One minister told the Labour prime minister there could be constitutional crisis if inflation continued to rise.

Documents at The National Archives show concerns a year before an International Monetary Fund loan was requested.

They reveal that Chancellor Denis Healey and Industry Secretary Tony Benn at odds over policy.

And one of Benn's memos appears to have been dismissed out of hand by Wilson, who wrote at the time: "I haven't read, don't propose to, but I disagree with it."

'Incalculable problems'

Britain asked the IMF for a 2.3bn bail out in 1976 saying unemployment and inflation were at exceptional levels.

Inflation peaked in 1975 and by 1976 Healey was telling the IMF that "the social contract" with the trade unions had reduced the average increase in earnings from 27.6% in 1975 to 13.9% in 1976.

Notes on the economy handed to Wilson by Energy Minister Lord Balogh, an economist, in December 1974 show the extent of concern.

The strategy proposed by the chancellor is bound to be seen as a policy of despair
Tony Benn

Balogh said the continuing the present balance of payments deficit could provoke a "violent withdrawal" of short-term money if people took fright.

He also warned of the risk of a "possible wholesale domestic liquidation starting with a notable bankruptcy... The magnitude of this threat is quite incalculable".

Blaming many of the problems on the Barber boom under the previous Conservative government, he added: "Should inflation accelerate further, a deep constitutional crisis can no longer be treated as fanciful speculation."

Protectionist cure

The papers show that Healey wanted to stick to existing strategy but make it more effective - he was worried TUC guidelines on pay rises were being stretched too far and wage increases must be kept in line with prices.

Benn, on the other hand, pressed Wilson to take a different approach in a letter of March 1975.

He suggests direct measures such as import quotas, high tariffs, an element of rationing, deeper cuts in defence spending and selective help to industry.

In his memo to Wilson, Benn said Healey's deflationary measures would inevitably result in heavy unemployment.

"The strategy proposed by the chancellor is bound to be seen by the Labour movement and the whole country as a policy of despair, representing an admission of failure of our economic policy," he wrote.

"It seems to me that we must now seriously consider an explicit commitment to a protectionist strategy for industrial reconstruction and the return to full employment."

Pay talks

Wilson disregarded the note but the split between Benn and Healey continued - Benn's challenge to Healey's deputy leadership of the Labour Party only just failed in 1981.

The papers also give a glimpse of Healey's talks with the unions as he tried to ensure pay restraint.

At one meeting in 1975, he told them everybody wanted to avoid a statutory pay policy but he could not dodge the difficult problem of getting people to stick to voluntary arrangements.

Minutes of the meeting showing him saying: "Somehow foreigners would have to be persuaded that the policy would stick, and against a background in which the lenient guidelines adopted for the current pay round had clearly failed."

Hugh Scanlon, leader of the Amalgamated Union of Engineering Workers, was among those who said his union could not go along with anything which cut its members' standard of living.

And Jack Jones, from the Transport and General Workers' Union, warned that workers' wages were already suffering through cuts in overtime and short time working.

The minutes state: "Mr Jones said that the trade union leaders were bound to be mindful of the gravity of the situation.

"But the magnitude of the problem had not reached their membership, who were dominated by their fear for the rapid rate of price increases."

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