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Kathleen Burk

Goodbye, Great Britain: The 1976 IMF Crisis

by Kathleen Burk (Author), Alec Cairncross (Author)

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In this authoritative and gripping book―the first full account of the 1976 International Monetary Fund crisis―Kathleen Burk and Alec Cairncross peel back the surface of the most searing economic crisis of postwar Britain to reveal its historical roots and contemporary context. During the spring of 1976, the plummeting value of the British pound against the U.S. dollar triggered a traumatic economic and political crisis. International confidence in the pound collapsed; an article in the Wall Street Journal, headlined "Good-bye, Great Britain," urged investors to get out of sterling. Refused aid by the London and New York markets, the Labour Government under Prime Minister James Callaghan was forced to turn for help to the IMF―a highly unusual move for a developed Western economy. Fearing that the economic crisis would drive Britain into a left-wing siege economy which would endanger NATO and the EEC, the United States and Germany used the IMF loan as a means to force Britain to make major domestic policy changes; when the IMF mission arrived in London in November 1976, it was announced that the price for the loan included deep cuts in domestic spending. Burk and Cairncross uncover the maneuvers of the Labour Government to evade IMF conditions. They also examine underlying economic factors, the political agenda, the rise of monetarist ideas, and the Keynesian response. Juxtaposing narrative with analysis, they provide surprising answers to critical questions and reveal how the breakdown of the post-war consensus on the macroeconomic management paved the way for the triumph of Thatcherism.

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In March 1976 the value of the British pound began to slide. The slide turned into a rout and triggered an economic and political trauma. By September confidence in the pound had collapsed. In April 1975 the Wall Street Journal had run the headline 'Goodbye, Great Britain, ' advising investors to get out of sterling. Now the British Labour government under its new Prime Minister James Callaghan was forced to seek help from the International Monetary Fund, a familiar option for Third World countries but highly unusual for a developed western economy. This expert new study uncovers the roots of the most searing economic crisis of postwar Britain. The weakness and instability of the British economy in the mid-1970s, the consequence in part of the 1973 rise in oil prices, raised international alarm. The US government in particular feared economic crisis would drive Britain into a left-wing siege economy, endangering NATO and the EEC. Anticipating the danger, the US Treasury set out to force Britain to make major domestic policy changes. The sterling crisis provided the opportunity. The IMF provided the weapon. Arriving in London in November 1976, the IMF mission announced that the price for the loan included deep cuts in public expenditure. The consequent political crisis was fought out in private and in public, amongst members of the British Cabinet, the Labour Party, the Treasury and the Bank of England. It involved the US President, Treasury and State Department, the Federal Reserve, the German Chancellor and the Bundesbank. Burk and Cairncross uncover the efforts of the Labour government to escape IMF conditions. They also examine the political agenda, the loss of economic control, therise of monetarist ideas and the change in the climate of opinion. Juxtaposing gripping narrative with expert analysis, the book provides surprising answers to critical questions and reveals how the breakdown of the postwar consensus on macro-economic management paved the way for the triumph of Thatcherism.

Product details

Hardcover : 256 pages
ISBN-10 : 0300057288
Dimensions : 6.14 x 0.69 x 9.21 inches
Item Weight : 1.35 pounds
Publisher : Yale University Press (March 25, 1992)
ISBN-13 : 978-0300057287
Language: : English

Best Sellers Rank: #4,941,060 in Books (See Top 100 in Books)
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Jessica Rojakovick

Economics Without Consequences

Reviewed in the United States on November 6, 2017

This book contains a mass of data, but not indication that the authors understand basic economics. They continually defend a Labour government and an economic doctrine (Keynesiasm, manifested in generous hand-outs to unionized workers and massive increases in the number and pay of public-sector employees) that drove Britain to bankruptcy.

The text consists of large amounts of data, interspersed with economic illiteracy. Here is one example among dozens of simple illogic. The authors here point out that government borrowing was not as out of control as it appeared, because inflation was eating away at the real burden of borrowing:

"A deficit is a deficit if the government has to borrow even when it is being enriched and its bond-holders impoverished as inflation eats into outstanding debt....the amount of debt wiped out by inflation exceeded in every year in the 1970s the total of the government's net borrowing. As the 'profligate' 1970s progressed, public sector fell steadily as a proportion of national income...[the government's] power to borrow was enlarged because the holders of depreciating government bonds tended to save more in order to replenish their wealth..."

By the authors' reasoning, the 1970s Labour governments were not profligate because the government simply inflated away the debt. Leave aside the moral issues of destroying the savings of the private sector -- retirees, pension funds, etc -- to award massive pay raises to an inefficient public sector and focus on the economics. The theory is that a government can simply inflate away debt. The problem of course is that people are not stupid. Once you destroy their wealth once, they won't lend again. And, this is precisely what happened. Savers had the wealth destroyed by inflation, and refused to lend to the British government. The British government was unable to finance its budget from taxation, nor was it able to find lenders who voluntarily lend it money. So, it went begging to the IMF, in a concession of heroic economic mismanagement.

The authors see none of this. In their view, Labour economics were sound -- its strategy of borrowing more, than inflating away the debt, then doing it again -- actually made sense. Remarkably, the authors believe that more inflation leads to more saving, and that a government that routinely inflates away debts will find it EASIER to borrow money.

It is a theoretically untenable position completely belied by the empirical reality that nobody would lend their own capital to Great Britain in 1976 after Labour had pursued this strategy. What happened is exactly what anybody with Econ 101 under the belt would have predicted, which is when a government effectively defaults on a debt and then goes out to raise more money, nobody lends them the money.

Mistakes of this sort riddle the book with logical errors. Simply put, Labour's brand of economics -- protecting inefficient private-sector jobs, agreeing to large wage increases, increasing the size of the public sector, giving state employees massive pay-raises, financing this all with debt, and then inflating away the debt, expecting foreign creditors to continue to lend indefinitely -- was the fantasy of ideologues and the economically illiterate. It could not work and it did not work. The authors spend a great deal of time defending the indefensible.

On a related note, if you read the book, note the silence on the percentage of debt to GDP, which would have made clear just how incompetent Labour was in the early 1970s. It isn't fair to say that GDP grew rapidly from 1970-75 when the debt/GDP was exploding....it ignores that the "growth" is simply unsustainable borrowing.

One person found this helpful

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Baraniecki Mark Stuart

British Marxist Socialism of the 1970's and the Sterling Crisis

Reviewed in the United States on March 9, 2014

This is not a particularly easy book to read and I suppose that it mostly has an appeal for people who (like this reviewer) lived through the events which the authors recount in great detail.

Nevertheless, it was a major national crisis with interesting features taking a wider view of the choices available in national political and economic policies.

There's no doubt that there was a crisis. In the first 6 months of 1975 British inflation was running at 30% p.a. with widespread economic dislocation and Sterling bondholders getting wiped out (along with the debt itself). From 1971 to 1979 British debt was reduced from 76% to 56% of national income despite record new issues, with bondholders essentially covering government deficits and losing their "investments".

The hard left Labour central planner governments of Harold Wilson and Jim Callaghan were not going to lose any sleep over the bankruptcy of bondholders but they were very anxious to please their key militant Socialist/Marxist trade union block supporters. Basically they admitted that they were frightened of them and felt obliged to include them in key decision making, eg "Beer and Sandwiches at Nº10" or the "Social Contract " that was supposed to award pay rises in line with the cost of living but always provided higher settlements with unionists claiming that high pay would get the economy moving. As the authors say, "It has ben estimated that in the first 15 months of the labour government average earnings in the public sector rose 12% faster than consumer prices and 4.5% faster than in the private sector.

Marxist style central planning required the appropriation of private resources by the government and as the authors say, "It (Chancellor Dennis Healey's 1976 White Paper) pointed out that in three years public expenditure had risen in real terms by over 20% while output was up less than 2%. Taxation had risen to the point at which a married man on average earnings was paying a quarter of his income in income tax whereas in 1961 he would have paid only a tenth."

However, the interesting point is that the government was still not getting anything like enough taxation money to fund its spending, generating a continual growth in the PSBR (Public Sector Borrowing Requirement) that itself became increasingly difficult to fund with the authors showing that this was the trigger for the 1976 economic crisis.

Basically foreign investors no longer wanted Sterling Bonds. They took account of the massive losses inflicted on existing bondholders. They questioned the role of Sterling as a reserve currency with OPEC balances tending to migrate to the Dollar. They saw that the Socialist /Marxist Labour British government supported the massive inefficiency of central planning with ever rising taxation and an ever growing PSBR and they essentially decided to pull out.

This was the Sterling Crisis that faithfully reflected UK economic performance in the early to mid 1970's. Great Britain (1974-76) had the highest inflation in Europe, the lowest rise in GNP, the highest unemployment and the lowest output per man/hour in manufacturing -being seen to fail on all counts. Sterling plummeted in value as the country was unable to handle the big international rise in commodity prices from 1972 to 1974. Germany fought rising prices with higher interest rates and deflation but the British Socialist/Marxist planners decided to support their highly inefficient system in Keynesian style by protecting public spending.

Its an interesting story and Burk and Cairncross show in fine detail how in 1976 the Labour government sought help from from the only organization that could provide it (the IMF) while firmly holding their noses and blocking and attacking it every step of the way.
All credit to the IMF for eventually giving the loans with the associated guarantees despite the lies contained in the British "Letter of Intent" (given in full in the appendix), eg. Clause 4; "The two pillars on which this strategy is based are the social contract with the trades union movement, which has already allowed us to achieve a substantial reduction in the rate of price and wage inflation and has brought about a dramatic improvement in industrial relations; and the industrial strategy, through which the Government , the trades unions and the employers are seeking to improve the performance of our manufacturing industry and, in particular, its productivity and its ability to compete successfully in world markets."

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Top reviews from other countries

Baraniecki Mark Stuart

British Marxist Socialism of the 1970's and the Sterling Crisis

Reviewed in the United Kingdom on March 9, 2014

Verified Purchase

This is not a particularly easy book to read and I suppose that it mostly has an appeal for people who (like this reviewer) lived through the events which the authors recount in great detail.

Nevertheless, it was a major national crisis with interesting features taking a wider view of the choices available in national political and economic policies.

There's no doubt that there was a crisis. In the first 6 months of 1975 British inflation was running at 30% p.a. with widespread economic dislocation and Sterling bondholders getting wiped out (along with the debt itself). From 1971 to 1979 British debt was reduced from 76% to 56% of national income despite record new issues, with bondholders essentially covering government deficits and losing their "investments".

The hard left Labour central planner governments of Harold Wilson and Jim Callaghan were not going to lose any sleep over the bankruptcy of bondholders but they were very anxious to please their key militant Socialist/Marxist trade union block supporters. Basically they admitted that they were frightened of them and felt obliged to include them in key decision making, eg "Beer and Sandwiches at Nº10" or the "Social Contract " that was supposed to award pay rises in line with the cost of living but always provided higher settlements with unionists claiming that high pay would get the economy moving. As the authors say, "It has ben estimated that in the first 15 months of the labour government average earnings in the public sector rose 12% faster than consumer prices and 4.5% faster than in the private sector.

Marxist style central planning required the appropriation of private resources by the government and as the authors say, "It (Chancellor Dennis Healey's 1976 White Paper) pointed out that in three years public expenditure had risen in real terms by over 20% while output was up less than 2%. Taxation had risen to the point at which a married man on average earnings was paying a quarter of his income in income tax whereas in 1961 he would have paid only a tenth."

However, the interesting point is that the government was still not getting anything like enough taxation money to fund its spending, generating a continual growth in the PSBR (Public Sector Borrowing Requirement) that itself became increasingly difficult to fund with the authors showing that this was the eventual trigger for the 1976 crisis.

Basically foreign investors no longer wanted Sterling Bonds. They took account of the massive losses inflicted on existing bondholders. They questioned the role of Sterling as a reserve currency with OPEC balances tending to migrate to the Dollar. They saw that the Socialist /Marxist Labour British government supported the massive inefficiency of central planning with ever rising taxation and an ever growing PSBR and they essentially decided to pull out.

This was the Sterling Crisis that faithfully reflected UK economic performance in the early to mid 1970's. Great Britain (1974-76) had the highest inflation in Europe, the lowest rise in GNP, the highest unemployment and the lowest output per man/hour in manufacturing - being seen to fail on all counts. Sterling plummeted in value as the country was unable to handle the big international rise in commodity prices from 1972 to 1974. Germany fought rising prices with higher interest rates and deflation but the British Socialist/Marxist planners decided to support their highly inefficient system in Keynesian style by protecting public spending.

Its an interesting story and Burk and Cairncross show in fine detail how in 1976 the Labour government sought help from from the only organization that could provide it (the IMF) while firmly holding their noses and blocking and attacking it every step of the way.
All credit to the IMF for eventually giving the loans with the associated guarantees despite the lies contained in the British "Letter of Intent" (given in full in the appendix), eg. Clause 4; "The two pillars on which this strategy is based are the social contract with the trades union movement, which has already allowed us to achieve a substantial reduction in the rate of price and wage inflation and has brought about a dramatic improvement in industrial relations; and the industrial strategy, through which the Government , the trades unions and the employers are seeking to improve the performance of our manufacturing industry and, in particular, its productivity and its ability to compete successfully in world markets."