For 16 months Prime Minister Harold Wilson has cajoled, wheedled and haggled with Britain's powerful labor unions in a vain effort to stop their rampaging wage demands. The basis of his policy was the "social contract," a formal deal (although never written into law) between the government and the labor unions. The government would deliver social welfare benefits in exchange for voluntary restraints in pay settlements. Purpose: to keep workers abreast of—but not ahead of—inflation.
But the unions have welshed on the deal. One major union after another won pay raises of 30% and more; during the past twelve months, average weekly wage rates for manual workers rose 32.6%, leapfrogging ahead of the 25% inflation rate for the same period. Last week, after inflation had worsened and the pound sterling had hit a new low, Wilson and his Cabinet took a deep breath and finally scrapped the tattered social contract. Chancellor of the Exchequer Denis Healey announced that beginning with the September round of pay negotiations no wage increases above 10% will be allowed.
Fresh from his victory over the union bosses and the left wing of his own party in the referendum on staying in the European Common Market, Wilson had just set out to establish a new voluntary agreement on national pay and price guidelines between the unions and the government. Munching fresh strawberries at the Royal Agricultural Show in placid Warwickshire early last week, Wilson confidently declared: "We reject panic solutions."
Back in London next day, the Prime Minister had to eat more than strawberries. On the foreign exchange, the pound opened at an alltime low of 29.2% below the value fixed by agreement with Britain's main trading partners at the end of 1971. One reason for the drop: nervous Arab depositors began withdrawing funds from London banks. Kuwait alone converted £50 million into dollars in one day. A gentle slide of the pound had been viewed by many economists as a healthy means of erasing some of the trading disadvantages created by the differing rates of inflation between Britain and its competitors. But now the slide was clearly threatening to become a financial Götterdämmerung. Said one Cabinet minister: "Nothing can concentrate Harold's mind more quickly than a fall in the pound."
In an emergency Cabinet meeting, Healey presented a proposal for a wage-restraint policy backed by legal sanctions. Instead of waiting to hear the consensus of his Cabinet as he usually does, Wilson promptly backed Healey. He won the decisive approval of the Cabinet. The only holdout was Employment Minister Michael Foot, the silver-tongued tribune of the unions. Foot was given a face-saving week to try to obtain union agreement. But the Cabinet made it clear that the proposal would be introduced in Parliament whether or not the union leaders accepted it.