The Wilson & Callaghan Governments, 1974-1977 (AQA A Level History: Component 2: Depth study): Revision Note

Wilson's return to power, 1974

Two elections in one year

• Labour returned to office in March 1974 without an overall majority

  • The Conservative prime minister Edward Heath had called the February election around the question 'Who governs Britain?' but the Conservatives lost their majority

  • Labour became the largest party and formed a minority government

  • Wilson depended on support from other parties to pass legislation

• Wilson called a second election in October 1974

  • Labour won an overall majority of only three seats

    • The small majority meant that by-election defeats or rebellions by Labour MPs could threaten the government

Dealing with Heath's immediate legacy

• Wilson acted quickly to end the miners' dispute

  • The government reached an agreement with the National Union of Mineworkers (NUM)

  • The state of emergency and the three-day week ended

• Labour also tried to repair relations with the trade unions

  • The Industrial Relations Act (1971) was repealed

  • The government began negotiations over the 'Social Contract'

A more difficult position than in 1964

• Wilson returned to office in much worse economic conditions than during his first government (1964–1970)

  • Inflation stood at 15%

  • The balance of payments deficit was £3 billion

  • The 1973 OPEC oil price rises had increased costs across the economy

• Labour was also less united than it had been in 1964

  • Disagreements remained between the party's left and right

  • The government's narrow majority made these divisions more difficult to manage

Approach: Callaghan is recalling this cabinet meeting in memoirs published in 1987, around 13 years after the events. As Foreign Secretary, he was well placed to describe the concerns within the government, particularly over inflation, unemployment and wage restraint. However, the account was written with hindsight, so it may reflect how Callaghan later understood the crisis as well as what he thought at the time

Political, economic and industrial problems

Political problems

• Labour remained divided between its left and centre

  • Tony Benn at the Department of Industry and Michael Foot at the Department of Employment argued for greater state intervention

    • Both Benn and Foot resisted pressure on the trade unions

  • The Treasury argued for tighter controls on public spending and pay

• Membership of the European Economic Community (EEC) divided the party

  • Wilson suspended collective cabinet responsibility during the 1975 referendum

  • Ministers were allowed to campaign on either side

• Labour's small Commons majority gradually disappeared

  • By April 1976, the government no longer had an overall majority

• Callaghan negotiated the Lib-Lab Pact in 1977

  • Liberal MPs agreed to support the government in key Commons votes

  • Labour agreed to proceed with plans for devolution in Scotland and Wales

Approach: Wilson presents compromise and consensus as necessary to prevent Labour's divisions from causing resignations or a split in the government. This makes the source useful for showing how Wilson wanted his leadership between 1974 and 1976 to be understood. However, because he was defending his own record, he had a reason to emphasise successful party management and play down the problems caused by these divisions

Economic problems

• Britain continued to suffer from stagflation

  • Inflation and unemployment rose at the same time

  • Increasing demand to reduce unemployment risked pushing prices even higher

• Inflation rose above 24% in 1975

• Chancellor Denis Healey introduced three budgets in 1974, in March, July and November

  • All three aimed to control the economy

• The government extended state involvement in industry

  • The National Enterprise Board (NEB) was created by the Industry Act 1975 to invest public money in struggling firms

    • The NEB could also manage government shareholdings in private companies and provide financial assistance

  • British Leyland received public money in 1975 to keep operating

Industrial problems

• Wage demands were an important cause of inflation

  • Large pay rises had been granted to settle the industrial disputes that contributed to Heath's defeat

  • In a speech at Leeds in January 1975, Healey warned that wage inflation threatened employment

• Wilson tried to rebuild cooperation with the trade unions

  • The National Industrial Relations Court and the Pay Board were abolished

    • This reversed the approach taken by Heath's government

The Social Contract with the unions

What was the Social Contract?

• The Social Contract was an agreement between Labour and the Trades Union Congress (TUC)

  • It was negotiated while Labour was in opposition in 1973

  • Trade unions agreed to restrain wage demands voluntarily

  • In return, Labour promised policies that supported trade unions and protected living standards

• Labour introduced its side of the agreement after returning to government

  • Food subsidies were introduced and rents were frozen to protect lower-income households

  • Employment protection and health and safety legislation were passed

Why voluntary wage restraint broke down

• Wage increases continued to rise faster than prices

• National union leaders could support restraint, but they could not control every wage negotiation

  • Local union officials and shop-floor representatives continued to press for larger increases

• By 1975, inflation had risen above 24%

  • Workers were less willing to accept limits that reduced the value of their wages

The move to a formal pay policy

• In July 1975, the government replaced open-ended voluntary restraint with a fixed £6 limit agreed with the TUC, though it was still not backed by law

  • Pay increases were limited to £6 a week

  • The same cash limit applied to all workers

• The flat-rate increase gave a larger proportional rise to lower-paid workers

  • However, it narrowed pay differences between skilled and unskilled workers

    • This contributed to demands for higher settlements and later pay rounds

• Inflation began to fall

  • It declined from over 24% in 1975 towards 10% by 1978

    • The government treated this as evidence that pay restraint was working

Approach: Wilson made this statement to the House of Commons on 11 July 1975 while introducing the £6 pay limit. He presented the policy as a temporary measure based on consent and co-operation rather than legal penalties. This makes the source useful for showing how the government justified the move from voluntary restraint to a fixed limit. However, Wilson was defending the policy to Parliament so he had a reason to stress co-operation and play down opposition within the Labour Party and trade unions

The IMF Crisis, 1976

Why did Britain apply to the IMF?

• Wilson resigned suddenly as Labour leader in March 1976

  • James Callaghan succeeded him as prime minister in April

• Sterling remained under pressure during 1976

  • The balance of payments remained weak

  • Public borrowing was high

  • Currency traders doubted whether Britain had enough reserves to support the pound

  • The value of sterling fell sharply against the dollar

• The government applied for an emergency loan from the International Monetary Fund (IMF)

  • Callaghan used his speech to the Labour Party conference in September 1976 to prepare the party for a change in economic policy

Approach: Callaghan gave this speech at the Labour Party conference in September 1976 while sterling was under pressure and before the IMF loan had been agreed. He was addressing Labour members, but he also knew that international lenders and the financial markets would hear this message. The source is useful for showing how he prepared the party for spending cuts and signalled that the government would no longer try to reduce unemployment through higher spending. However, it was a public speech intended to reassure more than one audience, so it does not reveal all the disagreements within the government

The IMF loan and its conditions

• The loan was agreed in December 1976

  • Denis Healey, as Chancellor of the Exchequer, secured $3.9 billion (£2.3 billion)

    • It was the largest loan the IMF had made at that time

• In return the government agreed to substantial reductions in public spending

  • This marked a move away from using higher government spending to reduce unemployment

• The decision caused political disagreement

  • Conservatives described the loan as a national humiliation

  • Labour's left argued that the government had surrendered control of economic policy to international financiers

The economic outcome

• The crisis proved less severe than the government had expected

  • Later figures showed that the level of borrowing required had been overestimated

• North Sea oil production began to increase

  • This improved the balance of payments from 1977

• Inflation began to fall

• The number of working days lost through strikes reached a ten-year low

• Unemployment remained high

Problems in Northern Ireland

The collapse of power-sharing

• Labour inherited the Sunningdale Agreement, negotiated under Heath in 1973

  • It created a power-sharing Executive made up of unionists and nationalists

  • It proposed a Council of Ireland

• Loyalist opposition developed quickly

  • The Ulster Workers' Council was formed by loyalist trade unionists and received support from loyalist paramilitary organisations

  • After the Northern Ireland Assembly voted to support Sunningdale on the 14 May, 1974, the council called a general strike

• The Ulster Workers' Council strike lasted from 15 to 28 May 1974

  • Strikers disrupted electricity supplies, blocked roads, and closed industry

  • Brian Faulkner resigned as head of the Executive

  • Wilson reintroduced direct rule from Westminster

  • The Sunningdale Agreement collapsed

Attempts to find a new settlement

• Wilson and Northern Ireland Secretary Merlyn Rees looked for a settlement agreed within Northern Ireland

• A Constitutional Convention was elected in 1975

  • It was intended to propose a new system of government

  • Unionists opposed to power-sharing dominated the convention

• The convention was dissolved in 1976

• Direct rule became the continuing system of government rather than a temporary measure

Continuing violence and security policy

• Violence continued throughout the period

  • Loyalist car bombs killed 33 people in Dublin and Monaghan on 17 of May, 1974

  • The Provisional Irish Republican Army continued its campaign and extended attacks to targets in England

  • After the IRA's Birmingham pub bombings in November 1974, the government passed the Prevention of Terrorism Act (1974), giving the police special powers of arrest and detention

• Rees ended internment without trial in 1975

• Roy Mason replaced Rees as Northern Ireland Secretary in 1976

  • He placed greater emphasis on security and policing

  • Political negotiation became less central

Approach: Rees made this statement to the House of Commons in December 1974 after the collapse of the Sunningdale Executive. As Northern Ireland Secretary, he was explaining the government's plan for a constitutional convention and defending the continuation of direct rule

The source is useful for showing that Labour wanted a settlement designed by politicians within Northern Ireland rather than imposed entirely from Westminster. However, Rees was presenting government policy publicly, so he had a reason to sound confident about cooperation even though unionist opposition had already brought down Sunningdale

How well did Labour respond to Britain's problems, 1974-1977?

• Labour inherited serious economic, industrial and political problems in 1974

• Labour's policies reduced some immediate pressures, but several underlying problems remained unresolved

  • Some key evidence for each side is outlined below

Areas of progress

• Wilson ended the industrial confrontation inherited from Heath

  • The miners' dispute was settled

  • The state of emergency and the three-day week ended

• Inflation fell from its 1975 peak of over 24%

  • It was moving towards 10% by 1978

• Industrial relations initially improved under the Social Contract

  • The number of working days lost through strikes fell to its lowest level for ten years

• Callaghan secured the International Monetary Fund loan in 1976 without splitting the government

  • The cabinet remained together despite disagreement over the conditions attached to the loan

• Labour remained in office despite losing its parliamentary majority

  • The Lib-Lab Pact of 1977 allowed the government to survive important Commons votes

• The economy began to improve from 1977

  • North Sea oil production increased

  • The balance of payments strengthened

Continuing problems and limits

• Voluntary wage restraint under the Social Contract failed

  • Wage settlements continued to rise faster than prices

  • The government introduced a formal £6 pay limit in July 1975

• Pay restraint caused growing tension with Labour supporters and the trade unions

  • Many trade unionists regarded free collective bargaining as a basic principle

  • Flat-rate limits narrowed pay differences between skilled and unskilled workers

• The IMF loan damaged the government politically

  • Britain had to accept conditions on public spending

  • Labour's left argued that the government had surrendered control of the economy

  • Spending cuts affected services that Labour had promised to defend

• Divisions within Labour were managed rather than resolved

  • Labour's left opposed pay restraint, spending cuts, and continued membership of the European Economic Community

• Unemployment remained high

  • It stood at around 1.6 million by 1978

  • Employment did not return to the levels associated with the early post-war period

• Pressure over pay differentials continued to build

  • Skilled workers who had accepted flat-rate increases later demanded larger settlements

Approach: Eric Heffer was a Labour backbench MP speaking in the House of Commons in July 1975 during the debate over the government incomes policy. As a member of Labour's left, he criticised the proposed pay controls as a return to policies the party had previously opposed

The source is useful for showing opposition to the policy from within the Labour party rather than from the Conservatives. However, Heffer represented the Labour left rather than the party as a whole, so it does not show how all Labour MPs or trade unionists responded