We left the trail last time with James Callaghan telling the British Labour Party Annual Conference on September 28, 1976 that governments can no longer spend their “way out of a recession” and that the Keynesian approach was an option that “no longer exists”. He even suggested that the Keynesian approach to stabilising economic cycles was never valid. Meanwhile, his Chancellor, Denis Healey, by then convinced that Monetarist had validity, was working behind the scenes at the Conference to duchess or beat his colleagues in submission and accept the TINA approach to bringing in the IMF. They worked hard to construct the situation as a crisis of massive proportions although much of the ‘crisis’ was the result of their extreme reluctance to allow the pound to depreciate, to impose capital controls to stop the non-productive speculative outflows that were causing the currency to drop in value, and to accept that in the Post Bretton Woods era they no longer had to match their fiscal deficits with private debt issuance. But in doing so, the British government effectively created their own ‘funding’ crisis. Things came to a head in November 1976 within the Labour Cabinet, which was still deeply divided over the IMF issue. We finish this analysis of Britain and the IMF today by tracing events at the end of 1976 before providing a general summation of what it was all about.
Colin Thain and Maurice Wright (1995: 20) wrote that:
[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.
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.
By October 1976, the currency speculation, which had begun in earnest earlier in the year, had resumed, despite the pleas of Callaghan and Healey to call in the IMF and stabilise the pound.
The huge inflows of OPEC deposits that they had attracted via the Bank of England guarantee against exchange losses via depreciation and the relatively high interest rate regime were now flowing out.
Britain had attracted external investors in speculative assets and undermined productive investment in capital formation by domestic investors.
Central banks in the Middle East (Kuwait, Saudi Arabia and the UAE) and Nigeria, who had built up large sterling-denominated assets started to sell.
The outflows were too large for the Bank of England to sustain a desired value in the pound but its attempts to stabilise the currency markets saw its reserves shrink to around $US4.8 billion by October, “les than half the $10 billion in foreign-held sterling assets still outstanding” (US Congress, 1977: 4).[Reference: United States Senate (1977) US Foreign Economic Policy: the United Kingdom. France, and West Germany, Washington, US Government Printing Office LINK.]
Britain also had to repay $US1.6 billion to the IMF by December as a result of a credit line granted in mid-1976.
Callaghan and Healey thus considered the only option was to request a further $US3.9 billion from the IMF in the Autumn of 1976 and this was revealed at the September Annual Labour Party Conference.
The IMF, acting as an agent for the US, wanted to lock Britain into harsh fiscal austerity and privatisation and deregulation in return for the loan – the so-called ‘conditionality’.
But Callaghan’s anti-inflation strategy was delicately placed – dependent on the Social Contract with the Trade Union Congress (TUC) which had delivered wage moderation in return for commitments not to trash employment and public services.
So while the British government was trying to negotiate more amenable terms with the IMF, the Cabinet was trying to come to some accord that the IMF intervention was necessary in the first place.
Within the Cabinet, the position advocated by Denis Healey, which was broadly in line with the IMF assessment – excessive fiscal deficits and excessive union power – was politically difficult for Labour because it was exactly the position that the Tories and their media stalwarts had maintained.
So Callaghan and Healey were really running the Tory line against unions and public services.
By December 1976, Denis Healey was running what we now know to be a standard neo-liberal line that the provision of unemployment benefits undermined the incentive to search for jobs and subsidised unemployment.
But Labour’s Left were having none of it. They rejected outright the logic that austerity should be imposed when there were more than 1.4 million workers without work.
Moreover they demanded more public investment in infrastructure and industry support to redress the neglect by private capital’s penchant for chasing easy returns on investment abroad.
On November 22, 1976, Chancellor Healey tabled a Memorandum on the IMF Negotiations where he outlined the IMF discussions the Government had been involved in to that point.[Reference: British Cabinet (1976a) IMF Negotiations, Memorandum by the Chancellor of the Exchequer, 22 November, 1976, CP(76), TNA CAB/129/193/1.]
He told Cabinet that the IMF wanted cuts of around £3 billion in the coming fiscal year (1977-78) from a projected £11 billions deficit, “primarily by means of public expenditure savings” (p.2) and further spending cuts of £3-£4 bilion in real terms in the 1978-79 fiscal year.
While he was somewhat diffident about the scale of the projected cuts, he concluded in the “Assessment” section of the briefing that (p.3):
In my judgment, however, the broad scale of the action they now suggest is about right if we accept their view of the pattern of growth in the next two years. In any case we need to take action on this scale to restore confidence and re-establish control of our currency.
He also didn’t question the IMF’s demand that the “bulk of this action should be taken through reductions in public expenditure” but noted that if the cuts were not sufficient (whatever that would mean) then taxes would have to rise.
He listed a freeze on public construction projects including state housing. No further increases in social security benefits and cuts to a “wide range of programmes including health, education, aid, defence and industrial support”.
He told the Cabinet that the repayments on the June drawings ($US1.6 billion) had to be made by December 9 so that time was of the essence.
Healey suggested that by drawing the IMF into the policy making the Government would “obtained international endorsement of the validity of our policies and of the recovery at which they aim” – a motivation squarely aimed at the hostile Monetarist-oriented financial markets.
The Cabinet met again next day (November 23, 1976) to discuss the Chancellor’s briefing. The Prime Minister told them that if they didn’t negotiate a successful IMF outcome then (Cabinet, 1976b: 1) “the Government faced the risk of the exchange rate falling out of control, with reserves totally inadequate for the purpose of intervention, with implications for prices and unemploy ment which could break the partnership between the Government and the unions.”
But he also agreed that under the conditionality proposed by the IMF, the Social Contract would, similarly, be at risk.
Healey urged the Cabinet to bite the IMF bullet because the “Government would be unable to finance either the internal or external deficit over the next year without the loan” (p.1). Of course, he lied with respect to the fiscal deficit. The Bank of England had whatever currency creating capacity that was necessary to ensure the Government did not have to go to external bond markets for funds.
The Chancellor’s statement thus reflected ideology (an antagonism against central bank funding of deficits) rather that fact.[Reference: British Cabinet (1976b) Conclusions of Cabinet Meeting, Minute 2, 23 November, 1976, CM(76) 34th, TNA CAB/128/60/12. LINK]
The Foreign and Commonwealth Secretary, Anthony Crosland, a member of the Labour Right wing, opposed the proposed cuts saying they “could not be defended on any reasonable grounds” (p.3). He also noted that the indications were that the economy was improving both domestically and with respect to the external situation and that the IMF intervention was therefore largely unnecessary.
But, despite this, he still suggested the Government seek a less harsh package from the IMF so as to be seen to be taking “some action” (p.3).
He also floated the notion that the Government held the bargaining chips saying that it could threaten to impose trade protections which would undermine the EEC and the world economy. In other words, “the IMF could not afford not to make the loan available” (p.3).
Behind the scenes, the Government was in talks with the IMF, Germany, the US and other parties as part of the on-going negotiations. It was clear that the IMFs demands were extreme and would have to be modified if they were to be politically palatable to the British.
Cabinet met again two days later (November 25, 1976) and Callaghan noted that the IMF had been informed that the “Cabinet were not convinced of the need for deflationary measures” and that “Germany nor America were now pressing for an immediate agreement with the IMF” (Cabinet, 1976c: 1).
In other words, they did not have to decide in that week. This meant that the Cabinet could hear alternatives to the IMF loan, which had been giving air in the Committee on Economic Strategy. But he ruled out import controls because he claimed the government had already promised, in the Letter of Intent to the IMF from September, that it would not adopt trade restrictions.
But even at that point Callaghan felt it necessary to say that spending on social security benefits would have to be cut in real terms otherwise it “could destroy the Labour Party” (p.4).[Reference: British Cabinet (1976c) Conclusions of Cabinet Meeting, Minute 3, 25 November, 1976, CM(76) 33rd, TNA CAB/128/60/11. LINK]
The Secretary of State for Energy, Tony Benn issued several documents in the next days outlining his alternative plan for Britain, which included the rejection of any dealings with the IMF.
On November 29, 1976, he put out a paper – Action to Counter Unemployment in 1977 – which sought to counter the projected increase in unemployment from 1.34 million to 1.7 million by December the following year.
Benn noted that if the Government could reduce unemployment substantially over the next 12 months it would also reduce the fiscal balance which means that it was “not an objective incompatible with the hard facts of the situation” (British Cabinet, 1976d: 1)
He advocated extending the period and expanding all existing “selective employment and training measures”, which were due to expire. He also proposed a tripartite approach with the TUC, the Confederation of British Industry and the Government devising ways in which job sharing could be introduced.[Reference: British Cabinet (1976d) Action to Counter Unemployment in 1977, 29 November, 1976, CP(76) 119, TNA CAB/129/193/9.]
On the same day, he tabled another Cabinet Briefing document – The Real Choices Facing the Cabinet – which more directly addressed the Chancellor’s November 22nd Memorandum.
In it, the Benn questioned the sagacity of the Chancellor’s paper which asserted there were “grave economic dangers facing the country due to the run down of our reserves and the need to fund them by an … IMF … loan” (Cabinet, 1976e: 1). The problem the Secretary of State for Energy raised related to the conditionality that the IMF required in order to provide these funds.[Reference: British Cabinet (1976e) The Real Choices Facing the Cabinet, 29 November, 1976, CP(76) 117, TNA CAB/129/193/7.]
Drastic public expenditure cuts would have been required, which would endanger the “Government’s economic, industrial and political strategy”.
Specifically, Tony Benn argued that the cuts would be (p.2):
1. “very deflationary when unemployment is high and rising, investment is slow and sluggish, interest rates are high already, and living standards are falling and due to fall more sharply”.
2. “so deep … [to public services] … as to endanger their basic function and cuts in social benefits … would put at risk the Social Contract”.
In other words, by buying into the IMF neo-liberal conditionality the British Labour Party would be abandoning any pretension to be serving its mandate of advancing the well-being of the working class.
The IMF had made it clear that Britain would have to “forgo completely … [its] … right to impose import controls or exchange controls during the two year period which the IMF loan will cover”.
For Benn, the “real choice” was either to follow the “IMF road” and “accept that a loan is inescapable and unavoidable” and then negotiate the “best conditions” possible for the loan.
Alternatively, and rehearsing proposals that he had previously brought to the Cabinet, including those which Harold Wilson had outrightly rejected while he was still PM, Benn said it was clear that the very fact that the Government was proposing to go to the IMF indicated that its current policy settings had failed.
He said that the (p.3):
… price we must pay for borrowing to finance a free trade policy is too high because it involves unacceptable levels of unemployment, unacceptably low levels of investment and a progressive deterioration of our manufacturing capacity. All these tendencies can be observed to be at work now and our forecasts imply that they will be accelerated by the conditions the IMF might require us to accept.
As a real alternative, Benn proposed a six point “national recovery plan” which was characterised by:
1. Introduction of import quotas on manufactured goods.
2. Introduction of “import deposits” as an interim measure while the quotas were being worked out.
3. Introduction of capital controls to “check speculative outflows” (p.4).
4. “Reintroduction of a Capital Issues Committee” (p.4), which would serve to ensure that bank credit was directed into areas of “national priority” to reinforce the protection of the homemarket provided by the import controls. This was like a national infrastructure assessment process that is common in many countries, including Australia.
5. Reduce interest rates “for all but official holders of sterling” (p.4). In other words, provide cheap finance to industry but not provide an incentive for those foreign interests with the remaining sterling financial assets to continue selling.
6. Introduce planning agreements with industry and provide “more funds for the National Enterprise Board and the Scottish and Welsh Development Agencies” (p.4).
The intent was to “re-industrialise” Britain and rebuild its export base (p.4).
In this context, Benn argued that the IMF might extend a loan to help the plan succeed and if any additional conditions were required they should focus only on “tougher import restriction” (p.5).
Interestingly, he questioned the language that Callaghan and Healey had been using and eschewed the use of terms such as “sacrifice” and exhorting people to “face the harsh truth” (p.5). He rightly pointed out that the unemployed were already engaged in heavy sacrifice and the Tories newspapers were already telling them about the ‘harsh truth’.
Tony Crosland also agreed with Benn on the use of language. In a separate paper presented to Cabinet on November 29, 1976, he questioned the use of the narrative that “British people are not living within their means and need to be taught a sharp lesson about the reality of our condition” (Cabinet, 1976f: 2).
This was the ‘financial sinner’ story that the Germans and the Americans had been running.
His summation was clear:
[Reference: British Cabinet (1976f) Economic Strategy – The IMF, 29 November, 1976, CP(76) 118, TNA CAB/129/193/8. LINK]
… the British people are enduring 11/2 million unemployed, a loss of potential production on an enarmoous scale, and an actual fall in their real standard of living. There is no canon of morality or economics of social democracy which demands from them a further and needless sacrifice.
After a few days of ruminating, the Cabinet met again on December 1, 1976. Callaghan emphasised that the Germans were concerned that Britain would “start moving down the trade restriction route”, a slight against the Benn Plan.[Reference: British Cabinet (1976f) Conclusions of a Meeting of the Cabinet, 1 December, 1976, CM(76) 35th, TNA CAB/128/60/13. LINK]
Benn rejected the “unsympathetic” approach of the West German chancellor and said that the “United States was a lame duck” (Cabinet, 1976f: 2) so Britain should aim to achieve “self-reliance” by expanding “the manufacturing base” and protecting social welfare payments (p.2).
He repeated his claim that “expansion could only be achieved through protection” (p.2), which at the time was permitted under the GATT and EEC rules. He was supported by Peter Shore, then the Secretary of State for the Environment.
Tony Crosland, however rejected the alternative plan based on import controls put forward by Benn but urged the Chancellor to seek less harsh spending cuts as part of the deal with the IMF.
The Cabinet was moving towards the view that “A go-it-alone policy was not viable” (p.5) because “the country would be unable to finance the needs of her basic industries” (p.5). They also believed that “rising unemployment was inevitable”.
Denis Healey tried to push the Cabinet towards his preferred option by claiming that the fiscal deficit had to be brought down because it was inflationary – pure Monetarist doctrine.
He further depoliticised the rising unemployment by claiming it was a “world phenomenon” (p.6), in other words, denying that domestic expenditure boosts could offset the lossed through trade.
Healey accused Benn of promoting the idea of a “siege economy … a command economy” which would compromise the Government’s aim to promote private enterprise (p.6).
Forrest Capie (2010: 755) wrote that the Bank of England “resisted strongly” Benn’s proposal because they claimed it would “destroy … the future of the City as an international financial centre”.[Reference: Capie, F. (2010) The Bank of England: 1950s to 1979, Cambridge, Cambridge University Press.]
He won the day. Cabinet met over the weekend of December 11-12, 1976 and the Left and Crosland caved in as Healey gathered the support of the right-wing members, who had swallowed the Monetarist snake oil.
It was a grand win in political terms. At the outset of the negotiations it was reported that “at least two-thirds of the Cabinet, including ministers from both the ‘Right’ and the ‘Left’ wings of the Party were … strongly opposed to the IMFs deflationary program” (US Congress, 1977: 9).
As it turned out the IMF significantly moderated its demands to give the British government the political room on which to sway the Cabinet.
On December 15, 1976, Healey announced in the House of Commons that the Government would cut “£1½ billion in 1977–78 and £2 billion in 1978–79” (Commons Hansard, 1976: c1535) and that the IMF “supports … the economic strategy” (c1535) and will grant the stand-by loan as requested.
Healey said (c1535):
In total we shall be able to draw up to nearly $4 billion, $1.15 billion of it immediately and over $1 billion more before the end of 1977. This, I am confident, will transform the external financing position in 1977.
The other measures included tax hikes, the privatisation of the BP shares held by the Government and the restrictions on domestic credit growth were included in the final agreement.[Reference: Commons Hansard, HC Deb 15 December 1976 vol 922 c1525. LINK]
In addition to the IMF deal, the British government were also able to concoct further currency support from the Group of 10 nations to provide swap arrangements with the Bank of England as it sought to reduce the outstanding sterling balances held by foreign central banks.
It was clear that the IMF deal was pushed through because the Monetarist orthodoxy both within the Cabinet and among the external players refused to admit that the alternative proposed by Benn was allowable.
There was an alternative. Benn’s plan could have been improved by scrapping the employment subsidies and directly creating public sector employment.
But by imposing capital controls and introducing targetted import restrictions, while at the same time investing in British industry to lift productivity, Benn’s plan would have headed off the currency speculators.
The Bank of England could have funded the fiscal deficits and the Social Contract was taking care of the residual inflation left over from the OPEC oil shocks.
While the US Congress (1977: 10) briefing concluded that “this IMF agreement can only be termed ‘soft'”, the reality was that it was severe enough in terms of public spending cuts, which drove up unemployment further and undermined business sentiment within Britain, that it was setting up conditions for a breakdown in the Social Contract and further turmoil.
That would manifest in 1978 as the Winter of Discontent signed the death warrant for a Labour government that was willing to use the most disadvantaged citizens, the poor and unemployed, in a needless fight against inflation.
By leading the Monetarist charge in Britain, British Labour set up the conditions for that austerity to be refined into an all-out attack on the working class by Margaret Thatcher, who not only significantly undermined what was left of the nation’s manufacturing but also set into motion the deregulation and other incentives that saw the financial sector expand beyond any reasonable size.
Many of the problems that Britain now face are a direct consequence of the unnecessary acceptance of the IMF conditionality in 1976.
The question to be addressed – was there actually a crisis in 1976 of the proportions necessary to call in emergency IMF funding? Had the British government ‘run out of money’?
Was there credibility in the Callaghan-Healey claim that the problem was that Britain would ‘run out of money’ given that the Bank of England foreign reserves were finite and the fiscal and external deficits were relatively large?
Kathleen Burk (1989: 40) suggest that the alternative hypothesis, which the Americans, Germans and the IMF mounted, was that there was:
… something more fundamentally wrong with the political culture which was sapping the political and economic strength of the country, and which needed to be confronted?
In this regard, the Americans, in particular (and by dint of their influence) the IMF, considered the British to be hard-core “financial sinners” (p.40) who needed to be pulled into line through austerity so as not to destabilise Europe and threaten the NATO initiative. The Americans were scared “that political coalitions may gain power in Italy and France which would include Communist Ministers in the Government” (US Congress, 1977: 1).
First, Callaghan characterised the last three ‘Keynesian’ decades‘ as only working “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.”
This was a false claim.
Robin Ramsay wrote in 2012 that:
[Reference: Ramsay, R. (2012) ‘How Labour Embraced the City’, New Left Project, December 15, 2012]
The received story of British political economy since the Labour governments of the 1960s holds that inflation and stagflation—stagnation plus inflation—in the 1970s killed economic demand management. The ‘humiliation’ of the UK government having to make the loan application to the IMF in 1976 signalled its end; and its last rites were read over it by Prime Minister Callaghan in a speech to the conference written in part by Callaghan’s son-in-law, Times journalist Peter Jay, an early media convert to what became known as ‘monetarism’.
Peter Jay, who began life in privilege, was educated at Oxford and then worked in the British Treasury before becoming the economics editor of the conservative newspaper, The Times, married Callaghan’s daughter.
As an aside, Callaghan’s Government gave Jay the plum job as British Ambassador to the United States in 1977, a decision that caused claims of nepotism given that Jay had no prior experience nor had ever held any public office.
Ramsay concurs that Callaghan’s claims about repetitive bouts of accelerating inflation and higher unemployment as a result of Keynesian macroeconomic demand management do not bear empirical scrutiny.
He says that:
This was just nonsense. In 1956, the beginning of the 20 year period offered by Jay (through Callaghan), inflation was 5% on average over the year; for most of the Labour governments of 1966-70 it was less than that; and it was 5% in January 1970. By contrast, for almost all of the 1980-1997 period of Conservative governments which were ostensibly primarily focused on keeping inflation under control by ‘controlling the money supply’, inflation was above 5%.
The high inflation that Callaghan inherited was not caused by Keynesian policies.
The first impetus to elevated inflation levels came from the introduction by the Bank of England of its Competition and Credit Control (CCC) policy whereby commerical banks were freed from ceilings on lending. This was introduced at the same time as Edward Heath was pursuing the ‘Dash for Growth’ expansion designed to make it easier for Britain to enter the EEC.
While Heath had hoped the credit expansion that followed the CCC policy would stimulate industry, the fact is that the loans fuelled a real estate and consumer spending boom, with little expansion of productive capacity.
But, without doubt, it was the fact that crude oil prices tripled in 1973 and caught oil-dependent nations such as Britain unprepared and unable to cope with the sudden cost surges.
By 1976, this inflationary impulse was moderating (slowly).
Callaghan’s characterisation of the ‘failed’ Keynesian approach was not consistent with the facts but reflected a growing acceptance of Monetarist ideology within the financial markets and the media, which he considered had to be addressed.
By talking up the crisis and invoking the need to bring in the IMF, Callaghan was hoping to speak to the Monetarists and head of the speculators and, hence, stabilise the pound.
Robin Ramsay makes it clear that “Keynes-influenced economics didn’t actually disappear: no chancellor since 1940 has actually believed in laissez faire and the withdrawal of the state … these are constraints on the actions of a domestically-oriented government; but only constraints, not prohibitions.”
Callaghan and Healey accepted the narrative that the “real constraints which Labour politicians believe themselves to be under come from the City” (Ramsay, 2012).
The overarching perception is the threat that (Ramsay, 2012) “international bankers will leave the UK” but the reality is that “The days are gone when politically-motivated actions—‘a run on the pound’—by groups of anti-Labour bankers can be mounted”.
The actual reality is that “The international currency markets care only about value and profit” (Ramsay, 2012) and that claims they act according to ideological motivations seem to have infested the thinking of a succession of Labour politicians.
Ramsay (2012) says that “only Bryan Gould in the Kinnock shadow cabinet” understood the reality whereas “Gordon Brown and Alistair Darling … both lived in a world in which something nasty was just around the corner if they challenged the City’s interests”. Certainly, Denis Healey and James Callaghan were among the early members of this ‘Fright Club’ and jumped at any shadow that looked like the City!
While the City grew substantially under the deregulation policies of Thatcher and later Blair and Brown, at the time Callaghan was abandoning Keynesian approach for fear of what the City might do, the Manufacturing sector accounted for 29 per cent of total employment, while the Financial and Insurance services sector accounted for just 2 per cent of total employment.
As Ramsay notes:
… having decided after the 1987 election defeat that Labour had to be acceptable to ‘business’, they identified ‘business’ as the City despite domestic manufacturing then being about three times the size of the financial sector. The figures who created New Labour, the late John Smith, Tony Blair and Gordon Brown, did not meet with the representatives of the domestic economy: the Confederation of British Industry and chambers of commerce, say. Instead they embarked on a ‘prawn cocktail offensive’ in the City of London and attended the annual Bilderberg meeting, on whose steering committee John Smith sat from 1989-92 while in the shadow cabinet.
But this trend to give “the financial sector a greatly exaggerated significance” began in the mid-1970s under Healey and his advisors.[Bill notes: I have a little more to write here – not much – but time escaped me today]
I am nearly done on this part of the book. This material is being heavily edited into the final manuscript.
I am starting on Part 3 next week, which will outline our Progressive Manifesto. We have about 10 major policy constructs that we think modern progressive political movements should embrace to defeat the neo-liberal monstrosity
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.