This is a further instalment in tracing through the British currency crisis in 1976 and its retreat to the IMF later in that year. Today we discuss the tensions within the British Labour Party at the time, the Callaghan Speech to the Blackpool Annual Labour Conference on September 28, 1976, the behind the scenes work by Denis Healey and some clandestine activity between the US and British bureaucracies which was aimed to bring Britain to heel, one way or another and to overcome its ‘immorality’ – yes, the US thought the fiscal deficits the Brits were running were immoral.
On September 28, 1976, the British Prime Minister James Callaghan addressed the National Conference of the Labour Party, held in the Lanchashire seaside resort town of Blackpool, known for its famous Blackpool Illuminations.
There was nothing particularly illuminating about the – Speech – despite both the Left and the Right, ever since, seeming to think it was a watershed moment where, rightfully, Keynesian economics was pronounced dead and Monetarist-morphing-into-neo-liberalism became the only legitimate way to deal with globalisation.
The Speech has also been touted as recognising, finally, the demise of the State in the face of global economic forces, which had rendered sovereign borders porous, then irrelevant.
This sort of logic is part of the reason the Left is supporting the on-going notion of an integrated Europe despite the European Union and the Eurozone in particular being a colossal failure. It also influences the attitude of the Left in Britain to Brexit.
Callaghan said (among other things in the Speech) that:
Britain faces its most dangerous crisis since the war … The cosy world we were told would go on for ever, where full employment would be guaranteed by a stroke of the Chancellor’s pen, cutting taxes, deficit spending, that cosy world is gone …
When we reject unemployment as an economic instrument – as we do – and when we reject also superficial remedies, as socialists must, then we must ask ourselves unflinchingly what is the cause of high unemployment. Quite simply and unequivocally, it is caused by paying ourselves more than the value of what we produce …
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 that 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. Higher inflation followed by higher unemployment.
Here is a relevant snippet from his Speech for interest:
First, in the post-Second World War period up to 1976, Britain had experienced a few inflationary surges. This is not the place to analyse each but it is simply factually incorrect to say that each inflationary surge was caused by excessive government spending and was followed by elevated unemployment rates.
In some cases, the unemployment rate actually fell during and after an inflationary surge (for example, mid 1960s).
Further, the stagflation of the mid-1970s was firstly initiated by the OPEC raw material (oil) price shocks not excessive government spending and the unemployment that followed was generated by excessive interest rates and inadequate levels of fiscal support.
Second, and more importantly, by the time Callaghan was speaking (1976) the Bretton Woods system had been abandoned and the pound was floating. The experience of the fixed exchange rate era prior to that had little bearing on the opportunities that beset the British government by 1976.
The problem of the fixed exchange rate era, especially given Britain’s cultural resistance to allowing the pound to reach a more realistic value relative to its trading strength (which would have necessitated much earlier devaluation in the 1960s), was the stop-go nature of growth.
A spending stimulus (from any source, public or private) would increase economic growth – every time (the ‘go’ phase)!
But as imports rose and the current account deficit increased, pressure on the exchange rate meant that the Bank of England had to officially intervene by increasing interest rates (to attract capital flows) and the Treasury had to cut back net public spending (to stifle imports).
Both policy responses – necessary to maintain the agreed parity under the Bretton Woods system – pulled up the growth in its tracks (the ‘stop’ phase).
After Britain floated the pound, that sort of growth pattern was less likely because the domestic policy tools no longer had to be compromised by the need to defend a given parity. The exchange rate could move in whatever direction the foreign exchange markets dictated.
The British government under Callaghan certainly resisted the idea of allowing the pound to reach its own level in 1976 and refused to broach the idea of using capital controls to stem the speculative capital flows.
They were clearly afraid that the pound would continue to depreciate through 1976 and generate higher inflation (and threaten the Social Contract) if they did not try to ‘manage’ the float (Bank of England intervening in the foreign exchange markets) and that choice required funding.
By locking themselves into a defense of the pound and refusing to address the Balance of Payments issues via capital and import controls, in addition, to running a continuing and relatively large fiscal deficit and insisting the private capital markets match it with loans, the British government effectively created their own ‘funding’ crisis.
Of course, the Bank of England would run out of foreign reserves, given the rate at which it was buying sterling in the markets at the time.
Of course, investors in government bonds would be worried about buying British government debt with inflation so high and there being deep uncertainty about what would happen to sterling, given that it was clearly overvalued at the time.
They refused to by-pass the bond markets and go straight to the Bank of England for credit because they had bought the Monetarist line that this would exacerbate an already high inflation rate.
That inflation rate was generated, initially, by the oil price shocks (a cost push event) and was dissipating as the distributional conflict between labour and capital had been largely sorted out by the Social Contract, with labour prepared under that agreement to accept real wage cuts.
The inflation was not a demand-pull event as in the Monetarist explanation.
As an aside, it was curious that after berating what he called the ‘cosy’ old way of thinking Callagan, later in his Speech, talked about how various employment initiatives such as the Labour Government’s “Job Creation Programme” which was introduced in 1976 was “helping to alleviate a serious problem”.
In addition, other employment stimulus measures were introduced, and Callaghan claimed in his Speech that “teachers … social workers … young people themselves and … employers … value these measures as a very real contribution to the alleviation of” unemployment.
So it wasn’t quite the case that more spending was unable to increase employment! But these admissions were in the latter part of the long speech and by then, one imagines, the delegates were nodding off to sleep, anticipating the next food or drink break, and didn’t get to observe the inconsistency.
Was the Speech a turning point in Left history?
Colin Thain and Maurice Wright (1995: 20) caution us that “Even the rhetoric can be misleading”.
They say that (p.20)
[Reference: Thain, C. and Wright, M. (1995) The Treasury and Whitehall: The Planning and Control of Public Expenditure, 1976-1993, London, Clarendon Press.]
Callaghan’s famous ‘monetarist’ speech to the Labour Party Conference was a tactical political attempt to achieve multiple objectives: to appease the financial markets, to frighten the Labour Party into accepting the need for tough measures, and to make the right impression on the US Treasury Secretary whose support would be vital for the UK to obtain IMF support.
They are effectively restating William Keegan’s assessment of the Callaghan intervention, which appeared in his 1984 assessment of Margaret Thatcher’s early years at the helm.[Reference: Keegan, W. (1984) Mrs. Thatcher’s economic experiment, London, Penguin Books.]
The British government effectively had tied its hands behind its back and then sought funds from external sources who by now were firmly in the Monetarist camp. The problem it had was that its own ranks had not yet made that ideological cross-over and Callaghan needed Cabinet support for what was to come.
The appeal to external factors was strategic because it effectively depoliticised what Callaghan and Healey thought should happen anyway. They just wanted to avoid the political fallout if they could so they could turn their attention to appeasing their, to this date, incorrigible colleagues on the Left.
But the depoliticisation via the IMF confronted the British government with ‘required’ cuts that were ‘outside’ the parameters of the domestic political range, and the Labour Left, in particular.
The US Congress briefing on the situation (1997: 7) stated that:
While the conservatives, both in and out of government, may have been pleased by the policies being recommended by the IMF, the Fund’s initial proposal ran into strong opposition from the Left wing of the Labour Party. Not only was the notion of pursuing a deflationary policy at a time of high unemployment intolerable, but the underlying theme of reducing the role of the public sector in the economy is directly contrary to the direction in which the Left feels Britain should be moving.
The IMF first came into the picture on September 29, 1976, when the Chancellor Denis Healey announced that the Government would apply to the IMF for a stand-by arrangement (a loan) of $3.9 billion, which would be “the largest single loan ever considered by the Fund” (US Congress, 1997: 5). The formal application came in October.
However, Healey’s announcement in September came the day before he was due to speak at the Annual Labour Party Conference at Blackpool. His speech then continued to emphasise their perception that the nation needed a massive injection of external funds, and the previous multilateral sources were no longer prepared to stump up the funds neeeded.
Kathleen Burk (1989: 40) said in relation to Callaghan’s speech:
[Reference: Burk, K. (1989) ‘1976 IMF Crisis’, Contemporary Record, 3(2), 39-45.]
It is problematical whether this speech had much effect on his immediate audience or on certain members of the Cabinet: but importantly for the resolution of the crisis, it had a profound effect on another group of listeners, the President and Secretary of State of the US, and crucial officials in the US State and Treasury Departments.
The US, in particular, wanted to channel Britain into the IMF web, where they knew the conditionality that would be imposed would shift Britain further towards the ‘free market’ model that the US wanted to export throughout the advanced world.
On June 5, 1975, the US Under Secretary of the Treasury for Monetary Affairs (Edwin Yeo) visited Britain and told Callaghan and Healey that they had to pay back the $5.3 standby credit provided by other central banks by December or “they would be forced to turn to the IMF” (Burk, 1989: 39).
Burk notes that the US considered Britain to be “hardened financial sinners” and they didn’t want them adopting a “siege economy” because then “NATO … would be at risk” (p.40).
In her summary of the ‘witness seminars’ held at the Institute of Contemporary British History (ICBH) on the IMF Crisis during April 1989, Burk interviewed, among others, Bernard Donoughue, who was the Chief Policy Adviser to both Harold Wilson and James Callaghan.
Donoughue told the Symposium that (Burk, 1989: 43):
… in the middle of this crisis I was privately summoned to the United States Embassy for a secret meeting with a very senior official there who said ‘You should be aware of something, which is that parts of the Treasury are in very deep cahoots with parts of the US Treasury and with certain others in Germany who are of very right-wing inclination and they are absolutely committed to getting the IMF here and if it brings about the break-up of this government, they will be very, very happy’. He actually showed me a copy of a secret communication between London and Washington which seemed to confirm this. view.
He also noted that:
I then spoke also to one or two friends in Washington, on the State Department side, who were convinced that something was going on and there was some agitation in Downing Street. What this adds up to I don’t know but I was intrigued a year or so later when in Downing Street we happened to come across a telex relating to the IMF in Portugal which actually specifically said that this economic crisis might possibly be a means whereby an undesirable, which meant socialist, government might be replaced by something a bit more acceptable … there was no doubt that I think some people, on an individual basis … did raise the possibility of getting rid of the Labour government. When I spoke to Ed Yeo he told me that a domestic deficit of more than 3% was not just a question of economics but was a moral issue reflecting the immorality of our government.
This resonates with the contemporary disclosures in March 2016 where the conversation between two senior IMF officials with responsibilities to Greece was leaked. We learned that one official proposed creating an ‘event’ (similar to that in June 2015 when the ECB pushed the Greek banking system towards insolvency as a bargaining chip to get the Greek government to roll over. In this case, it was to force the Greeks to accept harsher austerity in return for the next bailout payment.
I covered that disgraceful interchange in this blog – IMF groupthink and sociopaths.
Former British Labour Politician Phillip Whitehead recalled in his 1985 monograph – The Writing on the Wall: Britain in the Seventies – that there were secret meetings between US Treasury and British Treasury officials in 1976, which “set the parameters” for the IMF intervention (1985: 197-8).[Reference: Whitehead, P. (1985) The Writing on the Wall: Britain in the Seventies, London, Michael Joseph.]
The behind the scenes role played by the Chancellor, Denis Healey at the Annual Conference is less publicised. The UK Guardian headline (October 2, 1976) – Bulldozer Healey tramples on left – is graphic.
The Guardian reported at the time that:
There was not much doubt that the performance, which involved a dash to Blackpool and back by plane, was intended as a demonstration to the international bankers that the government still has control over its own party …
He told the conference that the adoption of any of the siege economy proposals being put forward by the Labour left … would lead to still further falls in living standards, faster rising prices, and further unemployment, coupled with still more cuts in public expenditure.
While Healey used the TINA strategy in terms of the economic choices, he did note the alternative if the Left didn’t comply – Thatcher and her TINA strategy.
So we have the beginnings of the modern distinction between austerity and austerity-lite at this stage. Healey was proposing the continuation of what at the time, given the massive pool of unemployed, were harsh austerity cuts.
But … they would be worse under Thatcher. Again, resonating with the approach taken by modern British Labour.
The Labour Party, however, were not convinced. Soon after Healey ended his speech at the Conference where he repeated his IMF announcement, the delegates were asked to “vote on proposals to nationalise four major banks and most of the insurance industry” (UK Guardian, 1976).
Healey had called the plan an “albatross” (UK Guardian, 1976) and Callaghan and told the Conference the Government would disregard the vote.
The UK Guardian reported that the proposal was carried “by 3,314,000 to a mere 525,000”.
Tony Benn recalled during a 2003 interview – Tony Benn on the True Power of Democracy (October 24, 2003) – that in relation to his alternative plans:
The Treasury didn’t want that because they wanted to bully us into believing that we were so weak that we had to capitulate. When I put my argument, I was told: ‘The trouble with your scheme, Tony, is that it’s a siege economy.’
I retorted that their policy was a siege economy, only they had the bankers inside the castle with all our supporters left outside, whereas my policy would have our supporters in the castle with the bankers outside.
… We are living today under a siege economy — we are now under siege from big business and the IMF.
As British Labour was to learn, schmoozing up to the international bankers at the expense of the poorest sections of British society, would come back to haunt them during the Winter of Discontent, which paved the way for Thatcher’s assault on decency.
But that is taking us beyond the remit of this part of the book.
I know I keep saying this is the final instalment in this part of the book project. But the next one will surely be it. I will cover the November-December deliberations and the capitulation of the Left.
And sum up whether there was a crisis at all! You can guess what my view is on that!
The series so far
This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.
The series so far:
The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.