James Callaghan, Labour prime minister who was hobbled by unions and a 'sea-change in politics'

The succession was not a coronation. Callaghan emerged top of the pile in an impressive and crowded leadership contest. Callaghan won the Labour leadership because he was Wilson’s preferred successor and because he was the most centrist of the six candidates.

Labour diarists Richard Crossman and Barbara Castle were dismissive of Callaghan’s abilities – because he had not enjoyed the benefit of a university education – but eventually even they were obliged to concede that Callaghan was a highly professional politician.

Callaghan brought unparalleled experience to the role, being first elected to the House of Commons in the Labour landslide of 1945 and becoming a junior minister as early as 1948.

After his tenure as chancellor of the Exchequer between 1964 and 1967, Callaghan went on to serve as home secretary, from 1967 to 1970, and then foreign secretary, from 1974 to 1976. Thus, Callaghan was the only 20th-century prime minister to have held all four ‘Great Offices of State’. (Incidentally, Callaghan was also the only prime minister to have served in the Royal Navy.)

His cabinet included formidable figures as diverse as Denis Healey, Tony Benn, Michael Foot, Roy Jenkins and Tony Crosland and yet he managed these prima donnas with great skill.

Callaghan’s premiership coincided with three of the most difficult years in British politics since the Second World War.

His problems were compounded by the fact that on his first day as prime minister he lost his parliamentary majority. Presiding over a minority government forced him to turn to other parties – the Liberals, the Ulster Unionists, the SNP and Plaid Cymru – for support. To simply remain in office for as long as he did was an astonishing achievement.

With the shock of the oil crisis of 1973 and the global recession of 1973-75, the British economy was in the grip of ‘stagflation’ – a combination of inflation in double digits, stagnant economic growth and rising unemployment.

Furthermore, within months the government was confronted with a sterling crisis which caused Denis Healey, the chancellor of the Exchequer, to ask the International Monetary Fund (IMF) for an emergency loan of £3.2 billion.

The IMF demanded large cuts in public spending in return for the loan, which caused consternation among Labour's supporters.

After tough negotiations, the government was able to negotiate a reduction in the proposed public spending cuts from £5,000 million to £1,500 million in the first year, and then £1,000 million a year over the next two years. In the event, it turned out that the loan had been unnecessary, as it was based on a grossly over-stated estimate of the Public Sector Borrowing Requirement by the Treasury. Even the mandarins of the Treasury are not infallible.

Clearly, Callaghan handled the IMF crisis skilfully, avoiding any resignations from the Cabinet, and negotiating much lower spending cuts than had been originally demanded.

Only half of the loan was actually drawn by the government, and it was repaid by May 4 1979, the day after the general election.

The centre piece of Callaghan’s economic policy was the ‘social contract’ whereby the trade unions agreed to voluntary wage restraint to curb inflation, in return for various measures to control the cost of living and increases in social expenditure. The policy was successful with respect to inflation but the public spending cuts required by the IMF meant the government could not deliver increased social spending.

As Callaghan explained to the Labour Party Conference in 1976: ‘We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.’

In October 1978, it looked as if Callaghan was going to call an early election, one which he had at least a 50/50 chance of winning because the economy was now in much better shape. Inflation had fallen to single digits, unemployment had declined from a peak of 1.5 million in the third quarter of 1977 to 1.3 million, and general living standards had improved. As a result, the Labour government had recovered lost ground in the opinion polls.

With the benefit of hindsight, Callaghan unwisely decided against calling an election because he expected another round of pay policy to demonstrate the success of his economic strategy, but his government was sabotaged by ‘the Winter of Discontent’.

Callaghan had hoped to keep public sector pay settlements below 5% but tanker drivers secured a 14% pay rise, driving a horse and cart through the policy. By the end of January 1979, water and sewerage workers, ambulance drivers and dustmen were all engaged in highly visible and disruptive industrial action. The trades unions were busily undermining a Labour government, just as the National Union of Miners had brought down Heath’s government in February 1974.

On March 28 the Callaghan government lost a vote of confidence, the first time this had happened since 1924. Parliament was dissolved on April 7 and the election took place on May 3.

Although Callaghan’s personal popularity significantly outstripped that of Mrs Thatcher and even though he had managed to reduce unemployment and the rate of inflation, he had no realistic prospect of winning because of the self-indulgent behaviour of the unions, the so-called ‘industrial wing of the Labour movement’.

During the election campaign Callaghan shrewdly observed to his aide Bernard Donoughue: ‘You know there are times, perhaps once every 30 years, when there is a sea-change in politics. It then does not matter what you say or what you do. There is a shift in what the public wants and what it approves of. I suspect there is now such a sea change, and it is for Mrs Thatcher.’

In an interview in October 1999 Callaghan feared that he might be viewed by future historians as the worst British prime minister since Walpole. As we have had some serious mediocrities in the office since 1999, his fears have proved completely groundless. Callaghan died on March 26 2005 – one day before his 93rd birthday.