The Benn Diaries: 1940-1990 (71 page)

I was also asked about exchange controls by Harold Lever. I said I knew very well that the Treasury had a secret emergency plan. I didn’t know the details but it was there and we would need it, certainly in the short run.

Denis said, ‘Yes, but where would you get the foreign currency to fund us immediately if we had exchange controls?’

Jim replied that it could be that new sources of money would become available in the short run for that purpose.

I mentioned the export of capital being on a large scale but they disputed that, saying these were profits made by British firms abroad.

Shirley Williams asked if my strategy was a threat or a real policy. I answered that I’d adopted it reluctantly, I would much rather we didn’t have to do it but I thought it was inescapable. Mrs Thatcher would do it and in a way she would probably find it easier because no one would suspect her of wanting to make it an entry point into a full siege economy. We had to make it clear that we would be prepared to adopt this strategy in order to release the money. It would be absolutely inexplicable if we didn’t try it out.

Peter was called next. He said we had two alternative strategies: the earlier policy had failed and we could either go for deflation or import controls. Denis was for deflation, which would encase us in a two-year tomb. The IMF tranches would come bit by bit; we would be drip-fed to police us and it was all very well to tease and hound Tony Benn, but the alternative policy needed to be looked at properly. Jim wouldn’t accept that I was being teased and hounded – I didn’t think so either – but I suppose that’s how it looked.

Peter’s position was slightly different from mine. He believed we were not paying our way and the easiest way to deal with that was to control imports. As to retaliation, we would have to look at our rights. The GATT and EEC provisions allowed any country to take these protective measures where there was a risk to its currency or to forestall a fall in its monetary reserves – they had almost been written specially for us!

Jim said the fear wasn’t exactly of retaliation but of a possible trade war.

Peter Shore believed the Italians would retaliate, the Americans and the Germans would have no grounds, nor would the Japanese, and he wasn’t sure about the French.

‘What about the small countries? Would they follow suit?’ asked Shirley.

She pointed out the risk of emulation by, for example, Australia, New Zealand and Canada if we took the GATT line and Peter didn’t rule that out because there would have to be another world economic conference quite soon. The world system was seizing up.

Elwyn asked about the mid-term position. We had to return 1.6 billion dollars to the central bank on the 9th, we had to finance the external deficit and we had a £2.5 billion deficit expected next year. How would we deal with the immediate borrowing or were we prepared to risk the bankruptcy of the UK?

Peter said the current account would be dosed in 1977 under his proposals. Second we could push forward the impending dollars repayment for three months. Thirdly we would get the IMF’s backing, but if we didn’t we might have to mobilise our assets and then release them in an orderly way. We would have to guarantee the sterling balances as we had done before.

Jim said he was particularly worried about these survival problems, and Bruce Millan couldn’t understand why import controls were on the basis of now or never.

The third gladiator in the ring, Tony Crosland, began with marvellous arrogance. ‘I think the proposals I wish to put forward will command more support than Tony’s or Peter’s. I want us to stick to our existing strategy. We have had deflation, we have had devaluation, we’ve got a wages policy and it will work. There is no case for a change. New cuts would have a disastrous effect on investment because they’d damage wages policy and destroy confidence.

‘But we live in the real world of expectation and there are two scenarios to consider. One is the £1 billion net cut which is unacceptable, and the IMF won’t really press us for it. If they do, we should resist and threaten a siege economy, or talk about our role in Cyprus or our troops in Germany, or our position in Rhodesia, membership of the EEC, etc. Schmidt and Ford would soon give way.

‘The other alternative is tolerable: to get £1 billion off the PSBR by selling the Burmah oil shares, having import deposits which are a bit deflationary and have political advantages, and to do a presentational job to the IMF by announcing now the cuts we had decided on in July but which have not yet become known, and possibly some extra cuts.’

‘What if the IMF say no?’ I asked.

‘We won’t accept it.’

Denis pushed him. ‘But what if they stand firm?’ Tony believed that they would, but that we would have to defend ourselves.

Stan Orme thought that the market might require even greater cuts than the IMF.

‘They will be real cuts,’ said Tony, ‘but we are going to discuss all of that tomorrow.’

We had a tremendous speech from Roy Mason. He thanked Denis for his courage and imperturbability, his intellectual resilience, his strength and moral fibre, at a time when the country is bankrupt and the Party is at its lowest ebb. He said we’d had the militants of NUPE, the disastrous Labour Conference, the NEC, which was the laughing stock of the country, Transport House, which some people seem to think has 2,000 employees because it writes so many embarrasing reports. There was no buoyancy in the Party.

‘We have to keep the Cabinet and the Party together and Tony Benn at least has a clear alternative. But we can’t survive alone. How can we finance and support ourselves? Peter Shore and Tony Crosland are looking for a painless way out.’

On quotas he reminded us of the wrath of the European Free Trade Association when he was President of the Board of Trade. We were the biggest fish in EFTA at that time. Now we were very small fish in the Common Market. Threatening was no use to us now because it would put a brake on world trade and there would be no lubrication to keep it going.

GATT was sympathetic, he thought, but the EEC would react to Tony Benn’s measures by saying they are subsidising us. They would not allow the green pound to remain at its present level, we would lose £500 million a year, inward investment particularly in semi-manufactured goods would be threatened, the protection in inefficient industries would go on and managers don’t want a siege economy. Import deposits were not on, unemployment would rise anyway because of our strategy. ‘After all, why did we nationalise the aircraft industry, the shipbuilding industry, the car
industry, if it wasn’t to rationalise them and cut jobs? As to the mining industry, we have put in tons of money to make it efficient and we have to go back to pit closures. Steel was the same. We’ve taken the misery out of unemployment but we’re not taking the credit. What we need are selective investment measures and we try to eliminate the balance of payments deficit, we rally round the tax cuts, we rally round a cut in inflation for our wage policy. We should be emphasising these things.’

I went back to the office, and Frances and Francis and I went over it all.

Thursday 2 December

Slept late, because I didn’t get to bed until 2.30 in the morning.

Cabinet at 10. Parliamentary business as usual, followed by Foreign Affairs. Tony Crosland reported the Geneva Conference on Rhodesia saying that a date for reconvening it in January had been agreed.

We came to the IMF negotiations. ‘We now come to a decision on the quantum,’ started Jim.

‘Can I ask a procedural question?’ I said. ‘Are you going to decide things bit by bit
ad referendum
at the end; or are we going to have to reach a final decision today?’

Jim replied that he would be dealing with that in his summing-up. Then Peter Shore said, ‘Are we going to be discussing a paper from Shirley which has just come round?’

Jim said, ‘Well, I should never have yielded but I did to a woman. She said she would do a one-page paper but in fact it is longer than that.’

Denis opened today’s discussion, which lasted throughout the whole morning. He said there had been a general feeling yesterday in the Cabinet that had led to a rejection of the alternative strategy and the siege economy, and therefore we would have to seek agreement with the Fund. We only had £2 billion left next week and if we failed to agree with the Fund, it would be a disaster. Then much more drastic measures would have to be taken, and there would be higher unemployment. The question was: what adjustments should we make and would they satisfy the Fund and meet criticism at home and abroad?

He said the PSBR must be cut below the forecast of £10.56 billion because otherwise we would either have to print money or we would have to have higher interest rates. Denis said, ‘I now recommend that we go for a £500 million sale of Burmah shares; for a net reduction of £1 billion in the PSBR in 1977–78, mainly by cuts, with another £1.5 billion reduction in 1978–79. Unemployment would rise by 30,000 by the end of 1977 and by 110,000 by the end of 1978; but these would be offset by micro measures of a kind that Albert Booth has suggested. Anything less will not restore confidence even if the IMF accept it.’

Jim Callaghan then said, ‘I think the time has come for me to give my view. I read the Hansard on the Tuesday debate in the House and I noticed
the speeches by Heffer, Maudling, Oonagh McDonald, Enoch Powell, and Eric Ogden, which were very interesting and well informed. I must admit, I am not sure about what to do, but I think the time has come to make my position clear.

‘I want to look at it from a political and economic angle. It is very hard to jduge what will happen. These measures could have an adverse effect on the PLP and the unions but the public may take a different view. The Chief Whip sent me a minute to say that there is an absolute need that, whatever we do, we must avoid any legislation following from this package because it is not possible to rely upon the Parliamentary Party support to carry it through. But Denis’s proposals do need legislation and the Cabinet had better face it. The PSBR approach alone is not enough and my view, therefore, is as follows.

‘Denis has fought very hard and I must tell the Cabinet that there is no agreement with the IMF yet. I must also tell you very confidentially that the Managing Director of the IMF, Johannes Witteveen, came to London yesterday and I had a long meeting with him. I read him Article 12 of GATT, which provides for exemptions; it amused me yesterday, when I was told by Tony Benn that we had never put the possibility of import controls to the IMF. So I read it to him and he was very unyielding and he wants £2 billion of real cuts. Schmidt was going to phone me this morning but it was an abortive call. But I had a word with President Ford yesterday on the telephone and he said that if the Fund came through he would try to help with the safety net. He said he felt sure that it would be acceptable to the Congress.’

Then Jim read out – because Prime Ministers like to show how well they get on with Presidents – the last few words of his exchange with Ford which ran something like this:

Jim: Sorry to bother you, Gerry.

Ford: Well, don’t worry, Jim, I expect you’re busy.

Jim: Well, it’s just a question of which of us remains in office longer.

Ford: Well, I sincerely hope you succeed. When will the Cabinet decide?

Jim: By 1 pm.

Ford: You might be out of office first . . .

An almost exact reproduction, of course, of the telephone call on 23 August 1931 in which the Prime Minister announced that he had had a call on the phone from our Ambassador in Washington. That stuck in my mind as I listened to Jim.

Denis said, ‘Congressman Henry Reuss will help.’

The Prime Minister continued, ‘What I said to Ford is this. I would like to propose a three-legged stool: a cut of £1–1.5 billion in the PSBR; a safety
net; import deposits on the same basis as Italy. I might be able to sell it.’ Ford said their attitude was to be firm but fair.

Jim then added, ‘I have also told Schmidt this, but if we can’t sell it then we have a completely different perspective. I support this policy because: first, it will allow lower interest rates; second, the uprating of benefits will be reduced in a way that will be sensible; third, we will be reducing tax at the margins: fourth, we will perhaps be dealing with indirect taxation; fifth, our industrial strategy will be strengthened. But we do put our lives to the test and our life as a government could come to an end. We must all understand that if we reject this, our overseas friends and critics will bring the life of this government to an end and the tremors will shake us.’

Then Michael Foot spoke for the first time this week. He began very quietly by saying he was grateful to the Prime Minister, ‘But I must tell you that your proposals are not satisfactory. £2 billion cuts and all the consequences that will flow from that, are inconceivable. The whole position has been changed by unemployment rising to 1.75 million in the forecasts and we would be accepting an increase in that. As to pay arrangements, the Party believes in egalitarian approaches to pay and you can’t unscramble that. If you tried to deal with benefits by statute, it would destroy TUC support. The legislation would not be passed and we would be in a position where, if the Government was defeated, Labour candidates would be fighting an Election in favour of cuts in social benefits. The Party and public opinion can’t be divided in that sense.’

He said he recoiled in horror from the unemployment effects and the cuts in benefits. ‘If we followed this course we would forfeit our agreement and our association with the unions and would be ground to death. We must connect what we do to our own beliefs. We may not get the loan but we have better prospects than a course that would be a disaster for the Government. We need more time; we want to sustain the Government; or, if forced into Opposition, sustain ourselves in unity rather than be split into snarling groups.’

Crosland said that the Prime Minister’s statement was a very grave one. He had thrown his judgement in with the Chancellor and this was a completely new factor. He thought it was wrong economically and socially, destructive of what he had believed in all his life. Also it was politically wrong. He doubted the judgement of the Cabinet and what was proposed was wrong. ‘But the new factor is your view, Prime Minister. What would be the consequence of rejecting the Prime Minister? The unity of the Party depends upon sustaining the Prime Minister and the effect on sterling of rejecting the Prime Minister would be to destroy our capacity. Therefore I support the Prime Minister and the Chancellor.’