Now is the winter of our discontent…

On January 11 around 25,000 British ambulance workers went on strike, their second since December, in an ongoing pay dispute with the government. ‘Mature’ Brits are reminded of the (in)famous ‘Winter of Discontent’ of 1978/79 when the country suffered a wave of strikes as unions resisted the Labour government’s attempt to limit pay increases to 5% to fight inflation. In January 1979 Bill Dunn of the Confederation of Health Service Employees appeared on television from a picket line outside a hospital saying “if it means lives lost, that is how it must be…we are fed up of being Cinderellas. This time we are going to the ball.” In May Margaret Thatcher’s Conservatives were elected with a mandate to get both inflation and the unions under control.

Unions or government?

Britain was plagued by high inflation in the 1970s. The Retail Price Index rose from 2.5% in 1967 to 24.2% in 1975. The unions were often blamed. The ‘cost-push’ theory of inflation said that, as the unions struck for and won wage increases, prices were pushed up. Acting on this theory, the main tool used by British governments to combat inflation were incomes policies, like 1976’s ‘social contract’, deals struck with unions to limit pay increases.

The unions found an unlikely defender in the economist Milton Friedman. In 1970 he had written:

In his 1980 book Free to Choose Friedman produced a number of charts supporting this, showing the relationship between changes in the money supply (as measured by the M2 quantity of money per unit of output) and changes in the Consumer Price Index (CPI) for a number of countries. These charts, Friedman argued, disproved a number of common explanations of inflation, including unions:

In 1976, noting the relationship between “the increase in money supply each year in excess of the increase in output with the increase in prices two years later,” an early British convert to Friedman’s ‘monetarism’, Times editor William Rees-Mogg, wrote:

Friedman commented that:

Now is the winter…

That was the story of the ‘Winter of Discontent’.

In 1976 Prime Minister James Callaghan told the Labour party’s conference:

This monetary and fiscal restraint brought inflation down to 8.3% in 1978.

Then, with an election looming, Callaghan’s Chancellor, Denis Healey, announced tax cuts of £2 billion and over £500 million of extra spending financed by monetary expansion. Inflation began accelerating (it would peak at 18.0% in 1980). Unions, not unreasonably, resisted pay agreements which the government would, in effect, unilaterally repudiate with inflationary policies.

This is the story of the current ‘winter of discontent’. The British government has, once again, caused inflation by printing money to keep down the costs of vast borrowing. If it gives the unions what they want that won’t be inflationary provided they don’t fund it by printing money. As we once learned, it isn’t the pay increases that are inflationary but the means of paying for them.