Floating
If Heath is associated with a single action, it is British entry into ‘Europe’ but throughout his time in office the economy, not Europe, was the biggest issue facing him. British productivity was still pitifully low compared to the United States or Europe, never mind Japan. The country was spending too much on new consumer goods and not nearly enough on modernized and more efficient factories and businesses. Prices were rising by 7 per cent and wage earnings by double that. This was still the old post-1945 world of fixed exchange rates which meant that the Heath government, just like those of Attlee and Wilson, faced a sterling crisis and perhaps another devaluation. It is hard to describe quite how heavily, how painfully, relative economic decline weighed on the necks of politicians of thirty and forty years ago. The unions, identified by Heath as his first challenge, had just seen off Wilson and Barbara Castle. Heath had decided he would need to face down at least one major public sector strike, as well as removing some of the benefits that he thought encouraged strikes. Britain not only had heavy levels of unionization through all the key industries but also, by modern standards, an incredible number of different unions – more than 600 altogether. Leaders of large unions had only a wobbly hold on what actually happened on the factory floor. It was a time of political militancy well caught by the 1973 hit from the folk-rock band the Strawbs, who reached number two with their anthem, ‘Part of the Union’. Its chorus ran, ‘Oh you don’t get me, I’m part of the union’ and different verses spelt out why: ‘With a hell of a shout, It’s out brothers, out…And I always get my way, If I strike for higher pay…So though I’m a working man, I can ruin the government’s plan.’ And so they could.
Almost immediately Heath faced a dock strike, followed by a big pay settlement for local authority dustmen, then a power workers’ go-slow which led to power cuts. Then the postal workers struck. The mood of the government was less focused and less steely than it would be nine years later when Margaret Thatcher came to power. Douglas Hurd, later seen as a ‘wet’ in her cabinet, was Heath’s political secretary at the time, and recorded in his diary his increasing frustration. ‘A bad day. It is clear that all the weeks of planning in the civil service have totally failed to cope with what is happening in the electricity dispute: and all the pressures are to surrender.’ Later, Hurd confronted Heath in his dressing-gown, warning him that the government machine was ‘moving too slowly, far behind events’. Things were so bad in the car industry that Henry Ford III, with his right-hand man Lee Iacocca, came to warn Heath that they were thinking of pulling out of Britain entirely. Yet Heath’s Industrial Relations Bill of 1971 was meant to be balanced, giving new rights to trade unionists while at the same time trying to make deals with employers legally enforceable through a new system of industrial courts. It was the Tories’ first stab at the kind of package which had been offered to the unions by Wilson. There were also tax reforms, meant to increase investment, a deal with business on keeping price increases to 5 per cent, and even some limited privatization – the travel agents Thomas Cook and Lunn Poly were then state owned, and sold off, along with some breweries.
But the Tory messages were still, to put it gently, mixed. Cuts in some personal taxes encouraged spending and inflation. With European membership looming, Barber, Heath’s Chancellor, was dashing for growth, which meant further tax cuts and higher government spending. Perhaps the most significant move in the long term was the removal of lending limits for the high street banks, producing a vast surge in borrowing. Lending had been growing at around 12 per cent a year already but in 1972 rose by 37 per cent and the following year by 43 per cent. This, obviously, further fuelled inflation but it also gave a fillip to the ancient British fetish for house price ownership and borrowing. The huge expansion of credit and the unbalanced amount of capital sunk in bricks and lawns in modern-day Britain can be traced back partly to this decision, then the new credit boom of the Thatcher years. It is not even mentioned in Heath’s memoirs.
At the same time one of the historic constraints on British governments had gone. In the summer of 1971 President Nixon unilaterally tore up a key part of the post-war financial system by suspending the convertibility of the dollar for gold and allowing exchange rates to float. His problem was the awesome cost of the war in Vietnam (though it would cost only 60 per cent in real terms of the later post-September 11 conflicts in Afghanistan and Iraq), combined with rising commodity prices. The effect on Britain was that the government and Bank of England no longer had to be quite so obsessed by sterling reserves, though this remained a problem until 1977. But it opened up new questions, about how far down sterling could go and how industrialists could be expected to plan ahead. Heath’s instincts on state control were quickly tested when the most valuable parts of Rolls-Royce faced bankruptcy over the cost of developing new aircraft engines. Heath briskly nationalized the company, saving 80,000 jobs and allowed it to regroup and survive, to the relief of the defence industry. Rolls-Royce duly did revive and returned to the private sector, making this a clear case of one nationalization that with hindsight clearly ‘worked’.