The IMF Crisis of 1976 - Professor Vernon Bogdanor

ladies and gentlemen this is the third lecture in a series on post-war political crises and this lecture is on the 1976 crisis when Britain was forced to borrow money from the IMF the International Monetary Fund and in return to allow IMF supervision of its economic policies the then Labour government was divided on its response to the IMF terms and there was a long cabinet battle before they were accepted so the crisis of both an economic one and a political one and it has seemed to many to be a watershed both in economics and in politics in economic policy it seemed there was a shift away from Keynesian methods of economic management that is the fine-tuning of the economy to control instability inflation and unemployment towards monetarism which involved accepting a higher level of unemployment but it was also a political and in a sense an ideological crisis because it seemed to be a crisis for the British version of social democracy which relied on high levels of public spending to sustain the welfare state and it prefigured the rise of Thatcherism and the long period of conservative dominance which began in 1979 the crisis ended the post-war consensus on economic policy and prefigured the growth of a new consensus based around the idea of a limited state so I think this crisis casts a shaft of light on the whole evolution of post-war economic policy but in fact as I shall argue the loan from the IMF was less of a turning point than a confirmation of a turning point that had already occurred and what the IMF loan did was to give an international seal of approval to the shift of economic policy and so make it appear legitimate but did highlight the difficulties of applying the doctrines of social democracy in globalized economy and therefore cause a long evolution in labour politics to Tony Blair's new labor in the 1990s and this crisis was as much a crisis of social democracy as it was one of the British economy now 1974 to nine years proved to be the last Labour government for 18 years and it was a Labour government under Harold Wilson from 1974 to 6 and then under James Callaghan from 1976 to 9 and it had to handle the economic crisis with a very small majority indeed it had come to power unexpectedly in March 1974 as a minority government without a minority and without a majority at all in October 1974 at one small overall majority of 3 which was rapidly eroded by defections and by-election losses now in April 1976 Callaghan succeeded Wilson as Prime Minister but by July his government had lost its majority and it was therefore a minority government again and by the time the IMF crisis erupted in September 1976 labour was a minority government it was a weak government lacking a strong parliamentary base from which to pursue tough policies but the first labour prime minister in 1974 was Harold Wilson and he's the only post-war prime minister to enjoy as it were a second innings he'd been Prime Minister from 1964 to 70 and 14 of his ministers in this new government in 1974 had also been in that earlier government so this new government in 1974 was not short of ministerial experience and indeed Wilson says in his memoirs that the 1974 cabinet was richer in experience than perhaps any incoming government this century but it was a very divided government that came to power in the midst of quite unforeseen unprecedented economic difficulties now in opposition the Labour Party has packed off and happens with the Labour Party it had moved to the left after its defeat in 1970 and the Left had said that the Wilson government had betrayed the principles of socialism and the next one should make a much more radical attack on inequality and Tony Benn who was the leader of the left and of course the father of Hilary bed not the leader of the left Tony Benn demanded an irreversible shift towards working people and Michael foot who was another leader of the left was also in the new government in 1974 and under Callaham was to become Deputy Prime Minister so it was a government in which the left wing was very strong and determined to ensure that this government in 1974 didn't do what the previous government had done in their view namely to betray the principles of socialism one minister in that government Joel Barnett who was chief secretary the Treasury later said in his memoirs but the party was so divided that it is difficult even to regard it as a coalition and he said there is no comparable example of such intellectual and political incoherence in a party coming to office in the 20th century history of the United Kingdom now it had to deal with an appallingly difficult economic situation that was really quite unprecedented in February 1974 just before the general election at with at which Heath conservatives were defeated the National Institute for Economic and Social Research said this it is not often that a government finds itself confronted with a possibility of a simultaneous failure to achieve all four main policy objectives adequate economic growth full employment the satisfactory balance of payments and reasonable stable prices all these indicators were unfavorable unemployment was rising inflation was rising balance-of-payments was in deficit and growth was stagnant the CBI and same month February 1974 after surveying the intentions of its members concluded that it was the most pessimistic survey that it had ever produced now the underlying trends were unfavorable but added to that was the worsening position of the economy thanks to a short-term factor the four fold rise in oil prices following the Middle East war between the Arab states and Israel were so-called Yom Kippur War in October 1973 because the Arab oil-producing States decided to restrict the supply of oil and to raise prices in route in retaliation for the West's alleged support of Israel in that war though even before the war it's fair to say that had been a rising world commodity prices and in the price of oil now if that wasn't bad enough the defeat of the heath government on the issue of a statutory incomes policy which the miners had resisted increased the inflationary pressures because a new government would not be able to institute a statutory incomes policy and in particular a Labour government which was so close to the trade unions couldn't institute a policy which the unions opposed now all this led both to a boom and a stunt and people thought until their the - couldn't exist at the same time and as boom and slump were called stagflation something totally new because the effect of the oil price rise was inflationary obviously it raised costs but it was also deflationary because Britain needed along with other industrial countries to shift resources into exports to pay for higher priced oil and that was the situation that confronted a new Labour government return rather unexpectedly I think they inherited a rate of inflation which was 12% and rising a balance of payments deficit averaging 400 million pounds in the first quarter of 1974 no growth at all in the last quarter of 1973 and rising unemployment stagflation which as the new labor Chancellor Denis Healey said traditional economists regarded as a contradiction in terms both a boom and a slump at the same time now Denis Healey the Chancellor in this new government who died recently was the dominant figure in Labour's economic policy and in a story I am about to tell some of you may think he's the hero of the story others may think he's the villain that's for you to judge perhaps he was both hero and villain now the new government as I said was divided ideologically but really had no idea what to do in these quite unprecedented circumstances unfamiliar and unprecedented and they were told by the permanent sector of the Treasury it perhaps not very helpfully but the economy the economy was now in such uncharted territory that the Treasury model might well not be a reliable guide as to what was going to happen now in our position the Labour Party or in particular left-wing fearing another betrayal of socialism had committed the next government to hire public expenditure on the social services and on the health service and those commitments were in the Labor Party's election manifesto so they had to be met as well and then there was a problem of what to do about the trade unions after the defeat of the heath government and its so-called confrontation with the miners now until 1972 they had been a constraint on wage demands which had been the fixed exchange rate in the British economy because you would always say that if the economy got out of hand the pound would have to be devalued but in 1972 the Conservatives had floated the pound and that removed one discipline from the economy because it meant that you could meet high wage demands simply by allowing the pound to depreciate and the great danger with a floating rate would be that the rate would float downwards further worsening the economic situation by increasing the cost of imports and so increasing the cost of living but there was a further problem with the floating pound because at that time sterling was still a reserve currency indeed the world's second reserve currency after the dollar and other countries and individuals were for the time being happy to put their reserves into sterling and particularly those countries not primarily but not only the added states which had done so well from the rise in the price of oil had to find somewhere to put their surplus cash and many of them decided to put it in London now the problem with that is that if they lost confidence in the British economy and decided to withdraw the money from London they would be in very serious the economy in Britain would be in very serious trouble so that increased financial and economic instability but the rate of sterling depended to a large extent upon short term deposits in the City of London now these problems were nosed so serious that the foreign section new government who was James Callaghan who later became prime minister he told the cabinet in the autumn of 1974 but while shaving in the morning he felt that he favored a young man he would emigrate but he said over breakfast he couldn't think of any country he prefer to go to and so he stayed he later said that remark was intended as a joke ministers took some time I think to appreciate the economic crisis perhaps understandably and one minister in the new government Edmund Dell who was paymaster general and then President of the Board of Trade he said that some ministers seemed unconscious of the economic crisis that have struck the country their attitude resembled that of the character in Jane Austen's novel who carried on their lives undisturbed by the Napoleonic Wars now the government could have said the crisis was so serious that any improvements would have to be postponed they could have made an appeal on the basis of as it were blood sweat and tears postponed improvements until we've restored stability they didn't do that they said there was a crisis that things were difficult but there nevertheless there could be business as usual and we don't know how the voters would have responded to a blood sweat and tears approach because it wasn't tried but it might have worked and the response of the British government was different to that of most industrial country to this crisis because most industrial countries decided to restrict their economy to accept a reduction in the standard living to deflate and cut public spending and that was roughly the kind of policy followed in recent years by George Osborne after 2010 but Britain together with Italy was the only country to adopt a different approach the Labour government said with unemployment rising it would be wrong to adopt policies which would raise it still further and restrict the economy now governments then lived in a different world from the world they live in today they lived in what you might call a Keynesian world or perhaps what was caricature - the Keynesian world where economic problems could be resolved without too much pain but there was less skepticism towards state action there is today and it was believed that governments could easily influence prices wages and the cost of living through direct action through government controls now admittedly those controls hadn't worked under heat for statutory incomes policy but the Labour government had a different approach it had what it said was an agreement with the trade unions called the social contract and what that meant was that the Labour government would repeal the legal restrictions on the trade unions introduced by Heath in particular the Industrial Relations Act and adopt a series of policies to control the cost of living directly food subsidies price controls and controls on council house rents and this would increase what labour politicians called the social wage and in return noting noticing this increase in the social wage the trade unions would voluntarily agree to wage restraint and Michael foot in particular who was employment secretary in 1974 he said if one created the right social climate the trade unions would respond now the policy of a social contract and the solvent ambiguous and for that very reason perhaps attracted the agreement of both left and right in the Labor Party the right said it meant the unions would restrain wages the trade unions and the labor left regarded the social contract as making for expansion over the economy steadily rising wages leading to a shift of power to the working classes but what they both agreed upon left and right in the Labour Party in 1974 was a social contract precluded restrictions policies which would increase unemployment vote required increases in public spending which in the end proved unsustainable but in any case the Labour government elected in March 1974 was a minority government and there be a second election shortly it could hardly go to the country so it thought on a policy of restrictions now the Conservative government under Heath had sought to deal with the crisis which it saw as short-term by borrowing and this policy was inherited by the Labour Party which decided to continue it by 1974 so the government in Britain decided to meet the crisis by borrowing not by restricting the economy and Haley said in 1974 borrowing is more sensible in economic and human terms from trying to cut imports by massive deflation and at a time paradoxically the IMF the International Monetary Fund supported that argument because they said if every kind she restricted their economy they'd turn the depression into a worldwide slump as we've seen in the 1930s but still most countries did not follow that advice they did restrict their economies and that proved to be a sounder basis for increasing employment and growth once the public finances have been restored and that again is what George Osborne did in 2010 in the nineteen seventies Britain and Italy were the only industrial countries which sought to meet the crisis by maintaining income and demand rather than deflating they did not wish to accept the loss in national income and the fall in the stand of living called by the rise of the price of oil by 1978 the government could argue North Sea oil would be flowing Britain would become a net exporter of oil then and Britain would become a strong economy people would be only too anxious to lend us money if only we could hold on till then everything would turn out right but the difficulty with this argument is that Britain was exceptionally exposed to the confidence of the international markets because of its high rate of inflation and unfavourable balance-of-payments position and there was no reason to believe that other countries would indefinitely contribute funds to the British economy to enable us to enjoy an artificially high standard of living and significantly Britain and Italy the only two countries which tried to meet the economic crisis by borrowing or also the only two countries which subsequently had to seek assistance from the IMF in the following two years and because Britain was attempting to expand her economy while others were restricting theirs she was bound to run into economic difficulties and so it proved now inhale his first budget in March 1974 facing another election a few months he increased pensions and food subsidies and subsidized rents public spending had risen in real terms by eight and a half percent in the last year the Conservative government they were to rise in real terms by over 12% in Labor's first year although GDP showed a small absolute decline and to that increase in real terms had to be added the increase in money terms because of accelerating inflation and in 1974 the retail price index was up by 16 percent how is this to be financed in part by increases in employers national insurance contributions and increase in income tax but primarily by borrowing by two forms of borrowing first an increase in the public sector borrowing requirement which meant a deficit but secondly by borrowing from abroad primarily from oil-producing countries these countries as I said had large surfaces and were happy to lend that monies in London and hold some of their surplus funds in sterling but they were as I've said very volatile the truth is that the length and depth of recession were not foreseen and later in 1974 they even further increases in central government spending and this spending again was on subsidies on housing transport food and school meal inflation was rising throughout the year even though by this time commodity prices were beginning to fall and even worse but the end of the year it was apparent that fewer than half of the pay settlements were within the voluntary guidelines that had been agreed by the government and the tea you see as part of the social contract many trade unions were taking no account of the so-called increase in the social wage which Heaney said amounted to a thousand pounds a year for every member of the working population and to make it worse the government which had predicted a three percent rate of growth by the end of 1974 it was clear that growth was nowhere near that level and by the end of 1974 officials felt that a new approach was needed and in December a committee of the permanent secretaries of the economic departments said the social contract was not working that the going rate for wage settlements was well over 20% with some wage settlements approaching 30 percent the chief secretary of the Treasury Joel Barnett later said to my mind the only give-and-take in the social contract was that the government gave and the union's took this was an exaggeration but an understandable one now the committee of officials then went on to say the government could not continue to finance the deficit by borrowing taxes had to be raised and public expenditure cut even though this would mean that unemployment would increase if existing policies continue the committee warned there is a very serious some would say overwhelming risk that an external crisis will hit us and when it does we are likely to experience an attack on sterling in this situation we shall not have the foreign exchange reserves to defend the rate and that was what happened in 1976 if 1974 was you might say a year of unreality 1975 proved a year of fundamental policy changes and there were no fewer than four absolutely fundamental policy changes which I think serve to divide the post 1974 period in post-war history from the pre 1975 period and the first fundamental change was an abandonment of the commitment to full employment so to give priority to the conquest of inflation and this change was announced in Helias 1975 budget he said that although unemployment was rising I do not believe that it would be wise to put unemployment as the central problem he said he could not increase demand any more because he could no longer finance the balance of payments deficit by borrowing so he decided shift resources from domestic demand to the balance of payments even if this meant a further rise in unemployment that went against traditional canes and theory which when faced with rising unemployment said there should be a fiscal stimulus to the economy Healey was proposing the opposite this fundamental change it's worth emphasizing came about not under Margaret Thatcher or her government from 1979 but under a Labour government with healing as Chancellor a government of a left and under labor unemployment reached a peak of one-and-a-half million and it's not fallen below a million since it's often been higher this heralded a move to permanently higher levels of unemployment in the 1980s which peaked in 1982 at 13% of the labor force since the 1970s it's average 7% now at a time supposedly low unemployment just over five percent higher than at any time before the mid 1970s who can divide this period in terms of levels of unemployment the second major change occurred in Healy's second budget of the year in July when he imposed cash limits to policy programs previously a program had been agreed and if inflation had made the program more expensive the money had been found so the programs had been effectively inflation-proof this was no longer to be the case except for Social Security cash payments where the government obviously had to meet whatever was required for the sick disabled unemployed and pensions that all our programs were to be fixed in cash terms not in real terms the third change was a reduction in public spending and indeed a questioning of the belief very strong in labour circles up to that time but a growth in public spending was necessarily a good thing what it really has been officials had previously been thought now according to Tony Ben's Diaries can cabinet in 1975 Denis Healey was arguing that public expenditure cuts would not necessarily be unpopular he said at the labor clubs you'll find there's an awful lot of support for the policy of cutting public expenditure they will all tell you about paddy Murphy at the street who's got 18 children has not worked for years lives on unemployment benefit has a color television and goes to Majorca for his holidays bluefish arms so there was a move towards reducing public spending and the size of the state the fourth and final major change was the introduction of a voluntary incomes policy in July 1975 and this incomes policy accepted that in consequence of the oil prices the standard of living would have to fall and the voluntary incomes policy implied a cut in living standards of around two and a half percent over the year now none of this was popular and in September 1975 Healy was voted off the Labour Party's National Executive and two leading left wingers in the cabinet expressed their disappointment in their Diaries Tony Benn said I despair the Labour government as a force for transformation Barbara castle said I see no reason for the existence of a Labour government but despite that there were to be further cuts in public expenditure in November so all these fundamental changes let me again emphasize came before Margaret Thatcher in 1979 and before the IMF came in in 1976 now the new policy did have some success and the summer of 1975 proved a watershed as regards wage settlements the tea you see persuaded the unions to accept the government's guidelines for two years after 1975 and from then on the annual rate of inflation fell to around 10 percent though some argued it would have fallen anyway but despite this if 1975 was the year of fundamental change 1976 was the year in which the wheels fell off the government's policies because the improvement in the economy did not prove sufficient to restore confidence in sterling nor in the underlying economic position the oil-producing countries were now seeking to place their surplus funds in other financial centers beside Britain and many wanted to invest in property elsewhere in the world there was a fear that although the real economy was improving there was a worry that sterling would depreciate and the trouble was that when a currency is felt to be weak and there seem to be deep underlying economic problems markets will put the worst construction of all News and in particular it was felt that this new economic policy of retrenchment did not have full labour party support and that feeling was strengthened in February 1976 when Healey produced a public expenditure white paper saying that there should be a further reduction in a share of resources taken by public expenditure and that resources should then be moved to the balance of payments and there was a vote on that in the House of Commons in March 1976 and enough labour rebels abstained on a vital vote so the government was defeated and the defeat had to be reversed by a vote of confidence the next day now Haley reacted to this speech with great anger he had no valiant rough manner and enjoyed being rude to people wasn't always appreciated by others joel barnett his chief tech to the treasury said at one meeting in the treasury healy ended the meeting by say by saying let me make sure that I have indeed insulted everyone around this table and Haley's childhood at the left-wing rebels in the Commons that they were out of their tiny little Chinese mind the Chinese embassy complained and and Healy had to make an apology there was even worse Healey in the left began swearing at each other in public in and non-public in the House of Commons it wasn't then televised but in a full hearing of other members and Healey always said that they had a very complex love life in the labour party and he said feelings in his memoirs had feelings were a boiling point on both sides as I returned to the chamber from a voting Lobby one of the rebels used demotic language to cast aspersions on my paternity so I praised his virility in similar language several times now five days after this disaster Harold Wilson resigned and he hadn't told Healey that he would resign though he had told James Callaghan of course he his chance to the leadership whatever they were were not improved by this episode indeed Callaghan became prime minister and with callaghan's Prime Minister there were further reductions in public spending both in a budget in April and another budget in July and in June 1976 the government was forced to borrow to prevent a further depreciation of Sterling and lots of reserves it gained credits of 5.3 billion dollars from the group of 10 industrial nations for three months with provisions for renewal for just one three-month term after that and the government couldn't get borrowing on any other terms people did not believe in the progress of a bridge economy and this meant the loan would run out on the 7th of December 1976 and at that time it could not be repaid the government would have to go to the IMF the pound continued to fall and on the 28th of September 1976 just as Labor's annual conference was beginning the pound suffered its largest one-day fall in value since Sterling had been floated in 1972 there had now been eight budget since hylia become Chancellor in March 1974 and the pound had fallen from 2.30 to the dollar when he lien become Chancellor to 1.67 and since Callahan had become prime minister in April the pound had fallen by nearly 20 percent larger than the devaluations of 1949 and 1967 now the selling of sterling was reaching dangerous levels and he was told of this news as he was going to London Airport for a meeting of Commonwealth finance ministers in Hong Kong to be followed by a meeting of the IMF at Manila at which Britain's application for a long term loan from the IMF would be considered Healy decided not to travel to these meetings but to go back to London and then to talk to the Labour Party conference which was then in session he told them he was applying to the IMF for a loan and that was very unusual at that time for a developed country it was mostly developing countries applied for loans and the application was a 3.9 billion dollars at that time the largest sum ever requested at the IMF Healy told the Labour Party conference melodramatically that he'd come from the battlefront but he would seek a loan from the IMF so he could continue with existing policies he received a mixed reception from the party conference as you can imagine I'm going to negotiate with the IMF on the basis of our existing policies not changes in policies and I need yours when I say existing policy I mean things we don't like as well as things we do like it means sticking to the very painful cuts in public expenditure on which the government's already decided it means sticking to a pay policy which enables us as the TU C resolved or week or two ago to continually attack on inflation it will seeing that the increase in our output which has now begun goes not into public or private lending but into exports or investment that's what it means and that's what I'm asking for that's what I'm going to negotiate now the previous day Prime Minister James Callaghan had put a further nail in the coffin of Labour's aspirations and at the Keynesian consensus he told the Labour conference at the country for too long perhaps since the war had been living on borrowed time borrowed ideas and borrowed money he said the day is when full employment could be secured by a stroke of the government's pen were over if these days ever existed Britain's problems he said were caused by paying ourselves more than the value of what we were producing and spending one's way out of recession simply injected inflation into the economy and then the average level of unemployment rose we used to think that you could you spend your way out of a recession and increase employment by cutting taxes and boosting government spending I tell you in all candor that that option no longer exists and it insofar as it ever did exist it only works on each of texts since the war by injecting a bigger dose of inflation into the economy on every occasion followed by a higher level of unemployment as the next step and if the candor of the last unelected Labour Prime Minister were to listen to what the current unelected Labour Prime Minister used to say we have learned from past mistakes that you cannot spend your way out of a recession well it turns out these forgotten past mistakes and now he is condemned to repeat them there are of course echoes in what Callaghan has said in in contemporary debates now it was seen in 1976 as a watershed moment that speech but it really did no more than confirming for public consumption a policy shift that had already been made bate by the Labour government but the difficulty was that the speech was interpreted abroad as evidence that the Labour government would alter its policies in the direction of further expenditure cuts whereas Haley said he was going to negotiate on the basis of existing policies but it was those existing policies that had lacked the confidence of the international financial community now the IMF was at that time at least it is I don't know but at that time it was dominated by the Americans and the Germans who supplied most of the funds and little could be done without their support and the government had first hoped that the Americans and the Germans would support an unconditional loan to Britain but they not unnaturally wanted assurances they would get their money back and also they wouldn't be asked again to pour good money after bad now Britain had of course borrowed money from the US in 1945 when lend-lease had run out and those who attended my last lecture on Suez may remember after the failure of Suez they borrowed money from America again to prevent a run on the pound now it was seeking further charitable help from the Americans indeed the British at this time I think perhaps still tend to perceive America as a giant charitable institution which would always be willing to bail Britain out and that perception was aided by the good personal relations between Callahan and President Ford even though Ford headed a government of the right a Republican administration which was not particularly sympathetic to what it saw as an attempt to build socialism in Britain on borrowed money now the American Treasury secretary William Simon had said in June 1976 that lenders will become increasingly reluctant to finance expanding current account deficits unless borrowing nations make fundamental changes in their domestic economic policies and in his memoirs Healy says that William Simon was far to the right of Jenga scones but of course one never likes one bank manager in the trouble with the Americans Wells they had the eccentric idea that American policy American economic policy should be decided on the base of America's national interest and not on the basis of Britain's national interest the British were saying our economy is sound just lend us the money and if you were going to your bank manager and saying my finances are perfectly sound please lend me the money but unfortunately it's not for the borrower to decide the terms on which he will graciously accept a loan or an overdraft it's for the person who lend you the money to decide and at the manila constants the IMF Arthur burns who was a chairman of a Fed in America issued a diatribe against the vaillar government saying it was to banned and what he called his nationalization nonsense and give the people some incentives it had to reduce its awfull deficit satisfy the World Bank's and he said Denis Healey does not understand this but in any case even if the Ford administration have been more willing to help it was in the middle of a presidential election campaign and in November 1976 Ford defeated by Jimmy Carter so he became a lame-duck president so there wasn't much the Americans could do at first sight things appeared rather better in Germany because Helmut Schmidt the Chancellor who like Healy died has died recently he was a social democrat or being much the right of the bridgid Labour Party and he had a very warm relationship with Calvin and Healy Schmidt was sympathetic but he couldn't help because he had no lawful authority to commit resources without the consent of Germany's independent central bank the Bundesbank and the view of the Bundesbank and indeed most Germans was that Germany had put our economy in order after the oil crisis through methods of financial discipline and that Britain should do the same in any case Schmitt like Ford was facing an election at the end of the year and was unwilling to follow policies which German the voters would see as profligate in inflationary so friendship proved an adequate basis on which to expect help the money that was to be loaned to Britain came after all from American and German taxpayers and the prime responsibility of Americans and the German governments were to their own taxpayers and not to the British government Treasury officials reported back to London the IMS view that we had run out of time our failure to take sufficient action on the public sector borrowing requirement and monetary policy earlier meant that our options were now much more limited and the action needed now was more drastic the margin of credibility had narrowed they needed to be what the officials called a change in fiscal stance the IMF said Britain's problems weren't due own to the oil price rise but deep-seated and long-standing economic weaknesses an antiquated industrial structure high marginal tax rates low rate of capital formation poor trade union air management practices and that meant the British economy could not cope with temporary crises such as the oil crisis and a run on the pound now Hayley and told the Labour Party conference he would negotiate with the IMF on the basis of existing policies and that was true to the extent the public spending cuts monetary targets and cash limits had all been introduced before December 1976 but it was not true if it meant there would be no intensification of these policies for the loan to be obtained there had to be such intensification the IMF demanded further spending cuts and a new macro economic and budgetary stance secondly a new policy on exchange rate and thirdly financial performance targets the main political battle was over the cuts and the Labour government was in danger of being trapped between the demands of the IMF for cuts and the unwillingness of the cabinet the party and the trade unions to accept them the imf's original terms were for three pounds further cuts in nineteen seventy seventy eight and four billion nineteen seventy eight to nine but after complex negotiations Healy reached agreement on the base of a further 1 billion of cuts in the next financial year and 1.5 in the year following less than the IMF had wanted Healy also promised to abolish food subsidies and the other price controls imposed in 1974 and he agreed to strict monetary targets and cash limits on public expenditure to be monitored by the IMF so the reduction of unemployment was put even further into the background but in return for that we secured the IMF loan and that stopped the slide on sterling but the main problem had been how to get the left in the cabinet to agree the left wanted a program of import controls to protect the balance of payments and avoid having to restrict the economy the difficulty with that policy would be that it would be against the rules of the general agreement on tariffs and trade GATT and also the European Economic Community the predecessor of the European Union which we joined in 1973 though been and foot had been against our joining in addition there was a danger than import control would lead to retaliation so they would not yield any lasting gains but fundamentally the IMF would not accept import controls as a basis for a loan and the general view of the cabinet was if they couldn't get the loan they were sunk so that was excluded but there was a second alternative proposed by what one might call the Keynesian right in the Labor Party led by Anthony Crosland the foreign secretary and Shirley Williams the education secretary and they argue that with unemployment at one-and-a-half million there was no case for further cuts the spare capacity was available to increase exports now callaghan's prime minister said that the labor party must have voided all costs another 1931 when the party had split and the government had broken up over public spending caps and in particular cuts in unemployment benefit and Tony Benn circulated the cabinet papers from 1931 as a warning of what could happen but Callahan showed great political skill in allowing dissenting ministers full opportunity to put their case there was a detailed discussion in cabinet for nine cabinet meetings before agreement was reached on a new economic package in the end Crossland withdrew his opposition saying the Prime Minister could not be defeated on a matter of his importance and in fact Calla who told cross them though no one else in the cabinet that he would resign if the terms were not accepted now acceptance of these terms did not indicate a reversal of policy but an intensification of the policy adopted first in 1975 cuts in public spending a further bite of the cherry paradoxically the IMF loan gave the seal of international approval to a Labour government's policy and this again paradoxically enabled the government gently to inflate the economy in 1977 has conditions improved and confidence was restored this was a great triumph for Callaghan and Healy to persuade the cabinet to agree on the program persuade the IMF scaled down its original demands persuade the trade unions to agree with no split in the party and no repetition of 1931 now as it turned out the Treasury forecasts of the public sector borrowing requirement proved mistaken and public borrowing turned out to be far less than had been forecast and predicted the Treasury had predicted that for 1970 six seven the public sector borrowing requirement would be ten point five billion in fact it turned out to be eight point five billion and this was mainly due to the introduction of cash limits whose effects had been underestimated Healy was furious and in his memoirs he said the an economist was a man who when you ask him for a telephone number gives you an estimate now the economy improved rapidly in 1977 visible exports heavily up and the balance of payments was almost in equilibrium growth was back to 3% unemployment was falling inflation was below 8% and it was natural for people to argue for the if the forecast has been right and the true economic situation in Britain had been presented the outside world the loan would have been unnecessary I'm not sure that argument is acceptable because it ignores the power and irrationality of the markets whatever the realities if the markets in a globalized world do not have confidence measures will have to be taken and the trouble was the measures originally taken in 1974 which involved increasing borrowing together with increases in public spending and a failure to control wage demands together with a long term chronic weaknesses of the British economy a history of poor economic and industrial performance had raised deep-seated doubts in the minds of holders of sterling now it was easy for critics to insult the holdings of the holders of sterling as speculators Harold Wilson had famously called on the gnomes of Zurich but the noes were bad only when they were selling sterling not they were when they were buying it and enabling Britain to live on borrowing and Britain had relied on the wicked knowns in 1974 to maintain public spending but whatever you think about whether the agreement with the IMF was needed or not it undoubtedly enabled the Labour government to continue by 1978 the government was in carmell waters and perhaps a general election in the autumn of that year would have kept labour in power but callahan postponed it and the public sector strikes of the ensuing winter of discontent ruined the government and led to 18 years of conservative rule so the seeming can't for 1976 turned to dust and ashes labor was defeated not so much by the Conservatives as by its own industrial wing the trade union wing of the labor movement by the public sector unions and one of callaghan's advisers said it was the public sector unions that brought Margaret Thatcher to power and she then proceeded to thank them in her own individual way Healey was to spend his years in retirement recalling the past and claiming that if only the election had been called in autumn 1978 he would some years later have been forming his third or fourth administration with the aid of benefits from North Sea oil who knows now the verdict of most historians is this government's policies had failed but then most historians also also think the heath government before it failed and perhaps the reason they are both seem to have failed they lessen failings of personalities contingencies or ideological failures then in another reason that they were seeking to govern in a period of transition in which the familiar political and economic landmarks were disappearing and one paradigm was being replaced by another Wilson and Callahan as well as Heath had all been governing in the twilight of the post-war settlement issues that seem to have been closed were now being reopened new questions being asked first as I said full employment could the state really as his plane through intended macroeconomic policy secure full employment and price stability using Keynesian methods now in an important book written in 1956 by Anthony Crosland called the future of socialism a book which influenced a generation of thinkers on the Left Crossland said acting mainly through the budget although with the aid of other instruments government can exert any influence it likes on income distribution and can also determine within broad limits the division of total output between consumption investment exports and social expenditure well that's still true by the 1970s it seemed the traditional levers were no longer working effectively secondly the state showed in Crossland view used its ability to control the economy to redistribute income Crossland said in the future of socialism a Labour government should commit itself to a definite increase in the proportion of national resources devoted to social welfare but in 1976 the argument the economic crisis should be met by a rise in taxation rather than cuts in public services was rapidly dismissed by Callaghan and Healy and press the eve normal left in a somewhat lukewarm manner later after its unexpected defeat in the 1992 election the Labour Party drew the lesson whether rightly or wrongly that electors whatever they told the opinion posters were not in the privacy of the voting booth supporter party which prompted Hart which proposed higher taxes to finance the public services so improvements in the public services would have to be found in other ways thirdly shorter trade unions still be given such an important consultative role in government which was an inevitable consequence of incomes policies and it really began in 1940 when Ernest Bevin has become Minister of Labour were incomes policies really a much use in controlling inflation they were induced by every government between Macmillan in 1962 and Callaghan in 1976 they weren't to be introduced again after the winter discontent now in his memoirs he lee says I abandoned Keynesianism in 1975 his theories had two important weaknesses when applied in post-war Britain they ignored the economic impact of social institutions particularly the trade unions in fact Keynesian policies were unlikely to work in Britain without strict control of incomes and they ignored the outside world it's worth elaborating on those two points the first is the role of trade unions in the full employment economy now when canes and published a general theory in 1936 Britain the student depression and the problem didn't arise during the war Keynes and others were well aware of the danger of inflation but hoped it could be dealt with by trade unions showing a sense of responsibility and acting for the common good all should pull together that was made more difficult after the war by the growth of a large nationalized sector for a nationalized industry unlike a private one could never go out of business it could never say the money was not available to finance wage claims it was always there it could be obtained through further taxation or borrowing so the nationalized industry refused to increase wages that was a political not an economic decision and could perhaps be reversed by strike action and today and it's interesting enough the threats to industrial peace line to nationalized industries the National Health Service and the London Underground now above all the Keynesian proposals presumes social cohesion that everyone thought as one nation and when Edwin Heath introduced his statutory incomes policies he said think nationally think of the nation as a whole think of these proposals as members of the society that can only beat rising prices if it acts together as one nation now that might have worked in the war it might have worked under Ashley and Churchill in the immediate post-war years but by the 1970s feud took much notice because society was becoming more fluid there was less loyalty to the group or the tribe even if the trade unions were sympathetic to request made by the Labour government and many of them were they were losing authority over their members in the 1960s and 70s there was a rebellion against Authority deference was being undermined the trade unions were not immune to that trade union members were ignoring their leaders if they thought they could get more money through unofficial strikes the success of incomes policy depended on the authority of trade union leader that's also on the fear of unemployment which the post-war commitment to full employment had removed now the second weakness in the Keynesian analysis to which he drew attention in his memoirs was that the world was becoming increasingly globalized so a policy that might be intellectually defensible would not work in a world where the international markets made an unfavorable judgment a government takes risks when it flies in the face of market opinion even if that opinion is believed to be misguided now Crossland had believed that Social Democrats could pursue policies of their choice largely untrammeled by foreign opinion in the 1950s that seemed to make good sense because Britain was a sheltered economy protected by tariffs and exchange control but by the 1970s the progress of national economies was becoming inextricably bound up with the International economy and the pressures of the global market governments could no longer adapt national macroeconomic policies aimed at boosting demand without risking punishment by the markets in the form of higher interest rates and falling currency Tony Blair showed he understood this when in 1995 he said we must recognize that the United Kingdom is situated in the middle of a global market for capital a market which is less subject to regulation today than for several decades an expansionary fiscal or monetary policy that is at odds with other economies in Europe will not be sustained for very long to that extent the room for manoeuvre of any government in Britain is already heavily circumscribed now in addition to these general constraints Britain as a member of the European Community in the 1970s was subject to further constraints now the European Community had not come into existence when Crossland wrote the future of social in 1956 and the leader of the Labour Party at the time Hugh gates kil Rawls with some of his leading colleagues such as Douglas Jay and Patrick Gordon Walker posited the hostile to it partly on the grounds that membership would inhibit the policies of economic planning to which a democratic government should be committed but by 1976 Britain was a member of the European communities we joined in 1973 and membership had been confirmed by a referendum in 1975 and this made Sub Britain subject even more rules for example on free trade which would make it more difficult to introduce socialist policies so all this made it more difficult to see how the Social Democratic value of redistribution could possibly be attained in particular when studies showed that globalization had the consequence of increasing inequalities even within the single state let alone between states now for much of the 20th century the Labour Party had been sustained by the belief that socialism was somehow in tune with the trends of history that the advance of socialist or social debt democracy was in some sense guaranteed by history by what Sydney we're but called the inevitability of gradualness society so it was believed was moving in a collectivist direction a Conservative government no doubt would continue to be elected from time to time but it would administer a dispensation shaped by labour and that had been the case possibly with the Churchill and macmillan governments in the 1950s but if the Conservatives tried to go further if they tried to rollback the state they would be repudiated by the electorate because of social gains of the Atlee government could only be maintained through state action and voters would punish any government which sought to undermine them and it was for this reason that crossed them believed that these gains full employment for welfare state sharply progressive taxation and recognition of the claims of organized labour were permanent and immune to challenge from the right now the advent of Margaret Thatcher to power of course changed all that because she conceived her task not merely as one of containing the advances made by labour but of reversing them and dismissed at first by many on the left as an aberration it soon became apparent that she was engaged in reversing many of the social-democrats and in 1981 the Marxist historian Eric Hobsbawm wrote a famous pamphlet called the forward march of labor halted so a Labor Party was forced to adapt its doctrines to conditions that hit her not before envisage it now seemed that social democracy far from being guaranteed by history was being repudiated by it and in 1994 Tony Blair produced the doctrines of new labor a social democratic philosophy capable of meeting the new conditions of a globalized world in 1974 Tony Benn had said the crisis should not be used to prop up an alien capitalist system but should be the basis for a forward march into socialism we should all be socialists now he said but after the 1974 29.4 party could not again come into power for another 18 years when it's succeeded in convincing the electorate under Tony Blair but none of us are socialists now and that I would argue is the fundamental significance of the IMF crisis in 1976 you

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Length: 64min 5sec (3845 seconds)

Published: Wed Feb 03 2016