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Analysis
‘A pivotal moment in British history’

‘A pivotal moment in British history’

UK’s propensity to live beyond its means

by Julian Frazer in London

Wed 14 Dec 2016

The 1976 crisis began with a major sterling fall, and concluded when the British government requested what was then the largest loan – $3.9bn – in the history of the International Monetary Fund. As Permanent Secretary Tom Scholar put it, '1976 was a pivotal moment in British modern economic history, and marked a significant change in course.'

He was speaking at an 8 December meeting organised at the Treasury, marking the 40th anniversary with the launch of Richard Roberts' book, When Britain Went Bust - The 1976 IMF Crisis, published by OMFIF Press.

The meeting was addressed by individuals involved in the bail-out. Former Foreign Secretary David Owen said 'confidence in leadership and quality of Cabinet' was, and remains, paramount. Owen highlighted how the reaction to the crisis marked the establishment of monetary discipline in Britain.

Bernard Donoughue, a senior policy adviser to Callaghan, said governments 'only work' if the prime minister and the chancellor of the exchequer work together, and that they 'must go into Cabinet united on every decision'. Donoughue was quick to point out that, rather than going bust, the real economic problem of the 1970s for Britain had been inflation.

Roberts reiterated the gravity of the 1976 episode and highlighted the lessons for Britain in 2016. Between the end of the first world war and 1976, the UK had experienced six currency depreciations. There have been four more after 1976, including the most recent collapse of sterling in the immediate aftermath of Britain's vote to leave the European Union. The decline in June-July 2016 was of roughly the same magnitude as in 1976.

Roberts noted how the use of currency depreciation as an economic solution is a notable long-term trait of British governments. As he put it, 'Britain appears to have an ingrained propensity for living beyond its means.' As was the case after 1976, it is unlikely that the Brexit depreciation will be the last, which is ominous news for Theresa May. Roberts noted, 'Financial crises are distinctly bad news for incumbent administrations. Studies demonstrate that a currency crisis doubles the likelihood of a government losing office in the following 12 months.' May and her Cabinet will be tested by the EU negotiations and the effect on currency markets.

Gerard Lyons, chief economic strategist at Netwealth, highlighted the parallels with the post-referendum period. '1976 was in some respects the birth of monetarism. Now we are almost seeing the rebirth of Keynesianism across the globe.' In contrast to recent decades, when monetary policy has been the central influence, 'fiscal policy is very much coming to the fore' in 2016, and 'we are seeing demand for increased public expenditure'.

Lyons discussed another great paradigm shift, the rise of Asia. He remarked: ‘The key country relationship is China-US, and the key region is Indo-Pacific – India, Asian, China, Japan, and the US – where innovation is the core of everything they do.'

Returning the conversation to today’s political scene in Europe, Owen said, 'There is a great danger in getting ourselves too excited about making projections about what's going to happen until we see out this coming year in Europe.' Right-wing political movements are gaining traction in key economies, including the Netherlands, Germany and France. 'We are making much too rapid an assumption.'

Julian Frazer is Subeditor at OMFIF.

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