On 28 September 1976 – 40 years ago today – Denis Healey arrived at London’s Heathrow airport on his way to the International Monetary Fund annual meetings. Waiting in the VIP lounge, gin-and-tonic in hand, the UK chancellor of the exchequer learned that the pound was plunging. Healey headed back to the Treasury and announced that Britain was applying to the Fund for a record $3.9bn loan. The British government, observed the Economist, ‘is bust’.
The anniversary of Britain’s so-called ‘IMF crisis’ warrants marking because it was the country’s most searing post-war economic crisis – until 2008 – and a key turning point. Sterling, the balance of payments, prices and the public finances became national preoccupations. The crisis entered public consciousness as marking the low point in Britain’s post-war relative economic decline.
There were three intertwined strands: a sterling crisis; a sovereign debt crisis; and heavily leaked factional frictions within the governing Labour administration. The sterling crisis featured a falling pound that reflected the balance of payments deficit and lack of international confidence in government policy. The foremost purpose of the IMF application was to replenish the foreign exchange reserves. Without it the forthcoming repayment of a G10 central bank credit would leave just $2bn of foreign currency reserves – much less than the foreign-held ‘sterling balances’. A future run could push the pound into free fall. And once the reserves were gone, the prospects were a siege economy or default, or both.
The administration was running a large fiscal deficit with a heavy borrowing requirement and mounting public debt. Moreover, at a variety of points in the future the country faced the need to repay $18bn of accumulated foreign debt. By autumn 1976, there was a ‘buyers strike’ among the usual domestic institutional investors in government debt who were convinced that higher interest rates were on the way. Rates were duly raised in October to 15% – then the highest-ever in Britain – but buyers still sat on their hands. Moreover, the international wholesale market was closed because of the host of adverse factors. The government had run out of credit, with the Fund acting as the lender of last resort for the British state.
Borrowing from the Fund was subject to conditionality, especially in the upper tranches where British drawings would come from. This would mean retrenchment in public expenditure and borrowing for which the prime minister and chancellor had struggled to win the backing of Labour ministerial colleagues. Indeed, Fund-imposed discipline was just what the markets and some ministers were pining for.
On 1 November an IMF mission arrived in London, checking into Brown’s Hotel, Mayfair, under false names. But as the negotiations culminated a majority of the cabinet rejected the chancellor’s austerity package to meet the Fund’s requirements, putting the loan in jeopardy with all that that implied. ‘Goodbye, Great Britain’ declared a Wall Street Journal headline.
The IMF crisis was a watershed in many ways. In public perception of the need for policy change. In the re-establishment of control over the public finances and national indebtedness. It was Britain’s tipping point in the shift from post-war Keynesian economic management to supply-side policy focus. It saw the defeat of the Labour left’s programme of state controls and protection; indeed, it featured the start of privatisation. It prompted the end of the pound’s historic role as a reserve currency, and proved to be the turning point in sterling’s transformation from a basket case to a petro-currency.
And there are intriguing rhymes and resonances with the present, including austerity and the public finances; sterling depreciation; Labour party wrangling between the left and centrists; and, in the background, Britain’s June 1975 referendum on membership of the European project. Had that gone the way of the 2016 vote, the IMF crisis might well have arrived a year earlier.
Richard Roberts, When Britain Went Bust: The 1976 IMF crisis – published by OMFIF Press on 1st November [add link here]