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International Socialism, June 1976


Notes of the Month

Pay Policy and the Pound


From International Socialism (1st series), No.89, June 1976, pp.3-4.
Transcribed & marked up by Einde O’Callaghan for ETOL.


The vote in favour of government pay policy (29 to 22) by the national committee of the engineering section of the AUEW ensures that the 4½ per cent pay deal will be carried by a huge majority at the special Congress on 16 June.

That week, as the AUEW met in Scarborough, the pound reached a new low of $1.78075 (21 May), a fall of nearly 12½ per cent since early March when the current run got under way. The feed-back from this alone in higher inflation via import costs will make nonsense of Healey’s prediction of a cut of ‘only’ 1 to 2 per cent in real earnings over the next 18 months if the pay policy holds.

On the one hand the government has been enormously successful. At a time of record (post-war) unemployment and massive inflation (21.7 per cent rise in the retail price index from March 1975 to March 1976), it has pulled the unions behind a policy which means, on its own showing, further cuts in real earnings. And it has done so against a background of cuts, actual and projected, in public services which simultaneously increase unemployment and further reduce the social wage.

On the other hand the very success contains the seeds of its own destruction – and not just in the long run. The government’s policy involves near-total reliance on riding on the back of the world boom, whilst shifting resources in Britain from labour to capital by pay policy and high unemployment. But this policy involves an extreme and exaggerated dependence on the course of events elsewhere.

The run on the pound has been attributed, with varying degrees of plausibility, to several factors: differential inflation rates, fears that the pay policy cannot be made to stick, sterling sales by oil states (notably Nigeria) and so on. But there is no doubt at all about the cause of the latest slide. It is the rise in interest rates engineered by the Federal Reserve Bank in the USA.

Given the higher inflation rate in Britain – the US price index rose only 6.1 per cent from March to March – investors have to be paid a premium, around 4 per cent according to the current conventional wisdom, to prevent them switching funds from London to New York. Every upward movement in US interest rates depreciates the pound further against the dollar. The government then raises interest rates in Britain to offset this, and in doing so cuts right across its aim of keeping money cheap to stimulate borrowing for investment.

With the latest rise in the minimum lending rate, interest rates are up 2½ per cent since March – which is unlikely to be enough. Gold and currency reserves are down by £1500 million (from £5000 million) due to ‘support operations’ to prop up sterling and, above all, import prices are up by one eighth due to the sinking pound alone, over and above the substantial rises in raw material prices (in dollar terms) due to the world economic upturn. All this in under three months.

Boom Underway

The upward movement of US interest rates is an attempt to moderate the inflationary effects of the fast developing boom. For there is no question that, on a world scale, the boom is well underway. In the USA output rose sharply in the last quarter of 1975 and is now running at 11½ per cent up over this time last year. According to the Economist (22.5.76)

‘US steel was working at 74 per cent capacity in March but was back to 90 per cent in April with order books still lengthening. There is the threat of bottlenecks in chemicals, textiles and paper (where maximum normal operating limits are already being reached).’

Significantly, though, unemployment is still around 7.5 per cent of the workforce and has not fallen in recent months.

Similarly in West Germany, output rose by 8 per cent (annually projected) between the last quarter of 1975 and the first of 1976. Again, unemployment is virtually unchanged at around one and a quarter million. In Japan production was up 14½ per cent in March 1976 on March 1975, in Italy the increase over the same period was also 14½ per cent, in France 8 per cent. In all cases unemployment remains high. Of the major economies only Britain showed a further decline in output (of 2½ per cent) over this period and British output is now rising quite fast.

Raw material prices, consequently, are shooting up. Average prices on the London Metal Exchange – a weighted average of copper, tin, nickel, zinc, lead etc. – rose by 18 per cent in dollar terms in April. The OPEC countries are discussing a 10 to 15 per cent increase in the price of oil for the autumn.

Evans' cartoon

The position is similar to that in 1972 when the last boom was taking off. There is, however, this big difference. Inflation rates in all the major economies except West Germany (and the USSR) are now two to three times higher than they were then – yet the 1972-73 boom was the most inflationary on record.

The outlook, therefore, must be for a big increase in inflation rates internationally, notwithstanding attempts to check them by tightening money supply (as in the USA). For these are most unlikely to be pushed far enough to kill the boom at this early stage. Of course, there will be no exact repetition of the last boom. Oil prices cannot possibly rise again as they did in 1973-74 – then the price had been falling, in real terms, for more than a decade. And, most .important, all the indications at present are that high unemployment will continue in spite of the boom – unless it is really prolonged.

The Shopfloor and the Unions

The sinking pound has not harmed the government’s drive to persuade the union chiefs to accept the 4½ per cent pay policy. On the contrary, it has helped it in the short run. The rightward swing of the trade union leaderships – with yesterday’s ‘lefts’, Scanlon and Jones, in the van – is still running strongly. 16 June will be a field day for the right.

Recent union election results confirm the trend. Bob Wright, paladin of the Broad Left in the AUEW, was pushed into second place by Weakley (82,094 to 63,723) in the first ballot for Assistant General Secretary after losing, successively, the contest with Boyd for General Secretary and his own seat on the Executive Council. Other set-backs for the Broad Left included the defeat of the sitting Divisional Organiser for Birmingham and the Black Country and the sitting District Secretary in Birmingham West. The two revolutionary candidates for Assistant General Secretary (IS and WRP) polled, jointly, just under 18,000.

In NALGO, two prominent left wingers (one IS, one CP) were knocked off the Executive. In this case the left wing vote held up – the results being due to an increased vote for the right. In the CPSA, the Broad Left majority on the Executive was reduced, although the far-right President, Losinska, was replaced and two IS candidates were elected.

More important, it is now clear that the £6 policy will run its course without a single successful challenge from below. Days lost through strikes have fallen back to pre-Heath levels. Moreover, the vast majority of recent disputes have concerned matters other than pay (at any rate directly); the toolmakers’ strikes being the notable exception.

There can be no doubt that over the last year the government and the TUC won the ideological battle. The ‘wage rises are the cause of inflation’ argument has been very widely accepted in the working class. The initial impact of rising unemployment has also had its impact in dampening militancy.

This state of affairs can hardly last more than a few months more. Assuming that the right-wing win the NUM ballot on pay policy the government may well be riding high over the summer. But by the end of the summer the price index will be up another 3 per cent because of sterling depreciation (up to late May) alone and the impact of rising raw material prices will be beginning to be felt. There is no chance at all of government promises on inflation being fulfilled. Disillusionment with pay policies, successfully imposed but with continuing inflation eroding real earnings, is bound to grow.

Another factor is the cumulative effect of the cuts. Already, as the spectacular occupation of Scottish Colleges of Education shows, this is a potential flashpoint. But, as Jim Kincaid pointed out in these Notes two months ago:

‘despite the £2,400,000 a year of cuts to be carried out over the next four years, the fact is that projected public expenditure will actually be higher in 1979 than now.’

If, as is quite possible, the government has recourse to the IMF for a substantial sterling-support loan the conditions will include an intensified squeeze on public spending – except, of course, on the growing interest charges (half the total deficit). Sections, even of the trade union bureaucracies, must react against this and in terms of ideas it is a damaging issue for the right.

And there is unemployment. The fraudulent claim that pay ‘restraint’ saves jobs is bound to be less and less convincing as unemployment continues into the boom. Ideologically, this is the most important issue of all for exposing the irrationality and waste of capitalism. May saw an important step forward in the Right to Work campaign, the setting up of a broad and representative National Council. Our next issue will survey the experience of the campaign to date.

The right in the labour movement is now at high tide. The ‘new face’ of Callaghan and the political uncertainty of a minority government with its appeal to ‘keep the Tories out’ may prolong its dominance for a while. But the underlying economic situation is opening up increasing opportunities for the left. With the CP and its Broad Lefts in increasing disarray, the outcome depends on the capacity of the revolutionary left to seize its opportunities.

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