The 1976 sterling crisis was a currency crisis in the United Kingdom. Inflation (at close to 25% in 1975, causing high bond yields and borrowing costs), a balance of payments deficit, a public spending deficit, and the 1973 oil crisis were contributors.[1]
The origins of the crisis are traced to the 1972 Conservative "spend for growth" budget that initiated the inflation cycle.[2]
James Callaghan's Labour government had to borrow $3.9 billion[a] from the International Monetary Fund (IMF),[4] with the intention of maintaining the value of sterling.[5] At the time this was the largest loan ever to have been requested from the IMF.[6]
History edit
Government borrowing for debt (10-year bond) increased to over 15% in the 1970s and early 1980s.
Initiation of the inflationary cycle is traced to Anthony Barber's 1972 budget which was designed to return the Conservatives to power in an election expected in 1974 or 1975. This budget led to a brief period growth known as "The Barber Boom," followed by a wage-price spiral, high inflation and currency depreciation, culminating in the 1976 sterling crisis.[2] Barber was forced to introduce anti-inflation measures, along with a Price Commission and a Pay Board. The Conservatives lost the 1974 general election to Harold Wilson's Labour Party.
The crisis came to a head during James Callaghan's term as Prime Minister,[7] and caused the Bank of England to withdraw temporarily from the foreign exchange market.[8] After the defeat of the public expenditure white paper in the House of Commons in March 1976 and the resignation of Harold Wilson, many investors became convinced sterling would soon lose value due to inflation. By June 1976, the pound had reached a record low against the dollar.[6]
British ally to Israel during Arab-Israeli Conflicts edit
In 1967, the Suez Canal closed down for eight years following the Six-Day War of that year, when Israel took and occupied the Sinai Peninsula for 15 years. That triggered the 1967 Oil Embargo, which only lasted a few months. In 1966, the year before it closed, 20% of all world oil cargo tonnage passed through the canal,[citation needed] with most of it heading north for Europe.
In 1973, the Yom Kippur War was fought, with Egypt crossing the Suez Canal aiming to take back the Sinai Peninsula from Israel. This triggered the 1973 oil crisis and embargo. Britain was an ally to Israel during the Arab–Israeli conflict.[9][10] The oil crisis presented a severe economic shock to Britain, which it was ill-placed to withstand.[11]
Outcome edit
Only half of the loan was actually drawn by the British government and it was repaid by 4 May 1979,[12] the day after the general election. Denis Healey, the Chancellor of the Exchequer at the time, went on to state that the main reason the loan had to be requested was that public sector borrowing requirement figures provided by the Treasury were grossly overstated.[13]
The IMF loan meant that the United Kingdom's economy could be stabilised whilst drastic budget cuts were implemented. Despite the security provided by the loan, the Labour Party had already begun separating into social democratic and more socialist camps, causing bitter rows inside the party and with the trades unions. Some believe the sterling crisis and IMF bailout may have contributed significantly to Margaret Thatcher's 1979 Conservative victory.[14]
See also edit
- Economic history of the United Kingdom
- Galloping inflation – Inflation that develops at a rapid pace
- Stagflation – High inflation, low economic growth, and high unemployment
- Sterling – Currency of the United Kingdom
- Sterling crisis, other currency crises in British history
- Winter of Discontent – Winter of 1978–79 in the United Kingdom
- Closure of the Suez Canal (1967–1975) shortly after the start of the "Six-Day War" or Third Arab–Israeli War
- 1970s commodities boom – Rise of many commodity prices in the 70s
- Alternative Economic Strategy – Economic policy proposed by Tony Benn,
Notes edit
References edit
- ^ "UK – IMF Crisis of 1976".
- ^ a b Steele, G. R. (2010). "INFLATION ECONOMICS: THE HEATH–BARBER BOOM, 1972–74". Economic Affairs. 30 (3): 79–81. doi:10.1111/j.1468-0270.2010.02028.x. S2CID 152522190.
- ^ 1634–1699: McCusker, J. J. (1997). How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States: Addenda et Corrigenda (PDF). American Antiquarian Society. 1700–1799: McCusker, J. J. (1992). How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States (PDF). American Antiquarian Society. 1800–present: Federal Reserve Bank of Minneapolis. "Consumer Price Index (estimate) 1800–". Retrieved 29 February 2024.
- ^ "Cabinet papers | IMF crisis". National Archives. Archived from the original on 11 January 2021. Retrieved 17 December 2015.
- ^ "UK – IMF Crisis of 1976".
- ^ a b "Sterling devalued and the IMF loan". The National Archives. Archived from the original on 22 February 2014. Retrieved 17 December 2015.
- ^ "BBC On This Day". 5 April 1976. Archived from the original on 7 March 2008. Retrieved 17 December 2015.
- ^ Rogers, Chris (2009). The Politics of Economic Policy Making in Britain: A Re – assessment of the 1976 IMF Crisis (PDF). University of Warwick. p. 17. Archived (PDF) from the original on 14 November 2016. Retrieved 17 December 2015.
- ^ Klinghoffer, Arthur Jay (1975). "Soviet Oil Politics and the Suez Canal". The World Today. 31 (10): 397–405. JSTOR 40394822.
- ^ Corbett, Michael. "Oil Shock of 1973–74". Federal Reserve History. Retrieved 27 August 2022.
- ^ "Six-Day War | Definition, Causes, History, Summary, Outcomes, & Facts". Encyclopedia Britannica.
- ^ Denis, Healey (1990). The Time of my Life. Penguin. p. 432. ISBN 978-1842751541.
- ^ Moran, Joe (4 September 2010). "Defining Moment: Denis Healey agrees to the demands of the IMF". Financial Times. Archived from the original on 23 March 2019. Retrieved 23 March 2019.
- ^ "1976 government papers". BBC News. 29 December 2006. Archived from the original on 3 September 2017. Retrieved 24 December 2015.
Further reading edit
- Burk, Kathleen. "1976 IMF Crisis." (1989): 39–45.
- Ludlam, Steve. "The gnomes of Washington: Four myths of the 1976 IMF crisis." Political Studies 40.4 (1992): 713–727.
- Wass, Douglas. Decline to Fall: The Making of British Macro-economic Policy and the 1976 IMF Crisis. Oxford University Press, 2008.
- Kevin Hickson (13 May 2005). The IMF Crisis of 1976 and British Politics: Keynesian Social Democracy, Monetarism and Economic Liberalism: the 1970s Struggle in British Politics. I.B.Tauris. pp. 14–. ISBN 978-1-85043-725-3.
- Kathleen Burk; Alec Cairncross (1992). Good-bye, Great Britain: The 1976 IMF Crisis. Yale University Press. ISBN 0-300-05728-8.
- Mark D. Harmon (1997). The British Labour Government and the 1976 IMF Crisis. Macmillan. ISBN 978-0-333-67818-3.