The Chancellors (23): James Callaghan

James Callaghan, 1964-67

Labour, under Wilson

You can read about Callaghan’s time as home secretary here, as foreign secretary here, and as prime minister and after here.

Leonard James Callaghan (left, courtesy of the National Portrait Gallery) was one of the more remarkable British politicians of the 20^th century. His secondary modern school left almost no mark. His formative influences came from other sources: some of those were also those of the first generation of Labour. One was self-improvement. Like many Labour men, there was something of the autodidact about him: growing up in Portsmouth, he was an avid user of the local Carnegie Library. Another was nonconformism, in the form of the Baptist church. It was through the church that he got his real education. He became a Sunday school teacher, and gained sufficient qualifications to take up a career in the Inland Revenue. It was through church that he met his wife, Audrey. They remained a devoted couple until her death in 2005: he went shortly after. Another traditional Labour influence was trade unionism. Callaghan, characteristically, came to the trade union for its correspondence courses.

There were other influences. The memory of his father, a chief petty officer in the Royal Navy, left him with an abiding affection for the sea: come the Second World War, he fought long and hard to get out of his reserved occupation in the Inland Revenue and join the Royal Navy. His patriotism remained strong thereafter. When his father had died, in 1921, the family had been reduced to dire poverty, something alleviated by the first MacDonald government’s introduction of the naval pension that rescued his family from poverty: it was the sort of practical, down to earth socialism that never left Callaghan.

These influences were brought together by his career, marriage, trade union activism, and by war. His ability saw him promoted to the Inland Revenue’s London office. He met Audrey at Maidstone Baptist church. Callaghan’s socialism was never of the rabble-rousing variety, and Audrey’s respectable middle class background proved a comfortable fit (her father was a company director). Likewise, his trade unionism was pragmatic: nonetheless, his energy and organizational abilities became obvious, and he was taken under the wing of Douglas Houghton, the leader of the Association of the Officers of Taxes. In 1936, he was elected as the full-time assistant general secretary.

Callaghan’s war service was delayed by the difficulty of extricating himself from his reserved occupation status, and then contracting TB. It was that hiatus that saw him decide to enter politics (something which his service in the Royal Navy undoubtedly helped him with). He was adopted as the candidate for Cardiff South, (South-East as it would become in 1950) and elected in 1945: it was then he took the name James.

At this point Callaghan looked more like a left-winger than anything else. At the 1944 party conference, Callaghan had supported a motion publicly restating the party’s support for nationalisation, against the wishes of the leadership. As new MP, in 1945, he voted against the American loan. In 1946, he put his name to a letter critical of Bevin’s hostility to the Soviets. None of this did him any harm, however. He came under the wing of Hugh Dalton, and was widely seen as a rising star.

In may have in, in part, to quieten his critical voice that Callaghan was made a junior minister in 1947. Labour, of course, lost office in 1951. Thus, Callaghan’s rise would take place in the context of 13 years in opposition, and the bitter factionalism that went with it (and would remain for the rest of his career, not least when prime minister). Labour’s shadow cabinet was elected, and Callaghan was only one of two of the 1945 intake to win a post (the other was Harold Wilson), gaining experience shadowing a range of ministries. He also became a public figure, not least thanks to his journalism and broadcasting. By 1960, he succeeded Wilson (who became shadow foreign secretary) as shadow chancellor. He was now one of Labour’s top brass. After Gaitskell’s sudden death, Callaghan ran for the leadership, though without any chance of winning: he was laying down a marker for the future. He secured 41 votes, and the backing of the rising star Tony Crosland. It had worked: he had firmly established himself as the third of Labour’s big three.

As such, it was no surprise that Wilson made him chancellor in 1964. It was not a happy inheritance, as his predecessor Maudling acknowledged. However, Wilson didn’t help. Wilson saw himself as the government’s true economic maestro, and was determined to lead economic policy from the front. Furthermore, he was determined to change the direction of economic policy towards a more corporatist and technocratic direction: to do that, he believed he needed to clip the Treasury’s wings. Just as Attlee had looked to planning and had made Herbert Morrison economic overlord, and Cripps minister for economic affairs, Wilson created a department of economic affairs. He put his rival, George Brown, in charge of it and a new National Plan. Being Wilson, one cannot help but feel that two put his two most powerful rivals in just such a position had its appeal: by dividing, Wilson would rule.

A turf war was inevitable. On the face of it, it looked like one Brown could win. Brown’s force of personality and Wilson’s shared belief in planning meant that, early on, Brown won the arguments. However, the Treasury are not used to being bested in such matters. That the DEA failed was, in hindsight, always the likely outcome, given the balance of power: a newly minted department was up against the one used to wielding the purse strings and, with that, power.

Circumstance, and politics, also helped the Treasury. For all their good intentions, prime ministers’ attentions are easily diverted abroad. Like most, Wilson’s leadership on economic policy proved fitful, and often broad-brushed. Furthermore, Wilson could never be accused of not engaging in the political game. To be fair, the Wilson of the ‘sixties had many virtues: he had to. His cabinet was full of large egos, factional rivalries and ideological divisions. No ego was larger than Brown’s. Brown had expected to win the leadership in 1963, and still believed he should have done. Wilson knew that. As Brown grew frustrated, he became more disputatious and difficult to work with (something not helped by his legendary penchant for the booze). If Wilson had never trusted Brown, his mistrust grew as the arguments between Brown and Callaghan ground on.

The economic circumstances helped the Treasury in that turf war. Labour had inherited an incipient balance of payments crisis. That, and the attempt to defend sterling, would dominate Callaghan’s time at the Treasury. Nor would the pressure from Brown to inflate the economy to meet his growth targets help. The failure to tackle the fundamental problem meant that the balance of payments dominated economic policy, and that was very much to the Treasury’s advantage, especially when Wilson was looking to go to the country in 1966 and turn his tiny majority of four into something healthier (which he duly did). Not long after, Brown was moved to the Foreign Office. The DEA wasn’t dead yet, but it was on life support.

It was as much that constant air of crisis that did for Brown’s DEA as much as anything else. It almost did for Callaghan too. The Treasury mandarins like to frighten new chancellors: the arrival of a new boy is their best chance of knocking some fiscal sense into a government. They didn’t need to soup things up to frighten Callaghan. The projected balance of payments deficit inherited from Maudling was £800m. Thus, there was an immediate problem facing the triumvirate of Wilson, Brown and Callaghan. The government faced an acute dilemma. Some felt that the best option was devaluation, but they were the still relatively junior figures such as Crosland or Jenkins. The big three were against it.

Party of their reasoning was political. The ghosts of 1931, 1947 and 1949 haunted them. Labour could not afford to be labelled as the party of devaluation yet again. Others feared that if the markets were given Labour blood at this early stage, they would only come back looking for more: if they devalued now, they might be forced to again. The markets had been scenting blood for the past thirteen years, Wilson felt they had to deny it to them now.

The problem was that if sterling was to be saved, some of the fundamental problems of the British economy had to be dealt with. The problem with that was that one of them, the poor productivity record of British industry, was not under the government’s control. Furthermore, anything it might do to encourage investment would inevitably take time. There was little time. The alternative was wage restraint. The government talked to the TUC, but even the TUC was undermined by the refusal of Britain’s largest union, the TGWU, to countenance an incomes policy of any sort.

The irony is that, either way, both fiscal and monetary policy would have to be sharply deflationary. With another election wanted, that was hardly likely to happen anytime soon. The policy became, de facto, one of living from hand to mouth, of muddling through and hoping somehow the issue could be avoided. Some measure of deflation was, though, unavoidable. This was, however, a Labour government. Overall spending was cut by £240m, though health charges were cut or abolished, whilst national insurance benefits, national assistance and pensions went up. National Insurance contributions were increased to pay for it, and more. Income tax went up, as did excise duties. Callaghan proposed a corporation tax, and capital gains tax. He had already issued an import surcharge. He also raised the bank rate from 5% to 7%. It half-worked, but only at the expense of two more years of what Edmund Dell calls ‘stumbling on’. He tried other measures, such as prices and incomes policy and hire purchase restrictions. Again, they half-worked, but not for long.

In hindsight, devaluation was inevitable. If it wasn’t one thing that would finally do for sterling, the other would. In the end, it was the balance of payments, pure and simple. Once, in the summer of 1966, Callaghan had been persuaded to devalue by George Brown (read about that here). The next day, Wilson persuaded Callaghan to retract his support and deflate the economy sharply.  By November 1967, however, the deficit was back, and then some: running at £107m per month, the highest on record. A Commons question forced Callaghan to admit that the government had borrowed £1bn to prop up sterling. Callaghan admitted nothing about any possible devaluation, but the next day the government spent another £1.5bn trying to prop up sterling. The dam was breaking: sterling was devalued to $2.40.

For Callaghan, it was a personal defeat. He had been bitterly unhappy for a while, and wanted to resign. Wilson saved him. He did not want to be seen to lose him, so Callaghan swapped jobs with Roy Jenkins and went to the Home Office.

If there is one lesson 20^th century gives us, it is that where sterling is concerned there will come a point at which you can’t buck the markets. Labour faced sterling crises in 1931, 1947, 1949, 1967 and 1976. It lost every time. In as much as Callaghan, Wilson and Brown were wrong not to devalue sooner, they were hardly alone in that (as the Conservatives would find in 1992). It is true to say that Callaghan did succumb to the machismo that the pound tends to bring out in British politicians. Even then, devaluation was hardly the easy option. To make it work (and it did work) policy would need to be sharply deflationary, as it was under Jenkins. Politically, the 1967 crisis undoubtedly weakened Wilson and his government; so did the 1966 predecessor, and a 1968 variant. The attempt to avoid devaluation caused economic damage. Whether the government could have devalued and deflated in 1964 and won in 1966 is debatable; however, devaluation in 1967 certainly hurt it, and hurt its prospects of winning in 1970.

For all that, Callaghan’s time at the Treasury was hardly happy, or successful. In some ways, he was lucky to survive it. However, survive it he did, and then some. He would go on to be the only man to have held all four great offices of state, and one of the ten chancellors to go on to be prime minister since 1900, and one of twelve to go on to lead their party. He was nine chancellors to be foreign secretary as well, one of ten to hold the Home Office too. In many ways, Lucky Jim (as he became known) was anything but: his career at the top was in an era of seemingly never-ending political crises, many of which he was right at the centre of. That he rose to the top, and did so much that was good may well have owed something to the experience he gained in those difficult years in number eleven. As much tough as lucky, perhaps.