1976 and all that
I’ve been reading quite a bit of economic history over the last few months and overl the last few days I’ve been re-reading ‘Good Bye Great Britain: 1976 IMF Crisis’ by Kathleen Burk & Alec Cairncross.I really would recommend it.
It is especially strong in putting the crisis into international perspective – the response of the US and German governments to Britain’s problems was as important as our own government’s. What is striking is the extent to which US Treasury Secretary William Simon, about as free market as Treasury Secretaries come, used the IMF as weapon to force a policy shift in the UK.
Aside from the international context there are some important points, relevant to today.
Last year’s large fall in Sterling is not really comparable to the situation in the 1970s. The external debt position of the UK economy is much stronger and now, as then, Sterling was falling from an overvalued position. Perhaps most importantly Sterling is not the reserve currency it then was and there aren’t ‘Sterling Balances’ held by mainly Commonwealth countries and oil exporters that can suddenly flee.
The other major difference is the inflation situation. 1976 was a crisis characterised by high inflation, the current economic problem is characterised by low inflation. This makes the required response very different.
The Callaghan ‘you can’t spend your way out of recession’ speech is often quoted by the right now, aiming to ‘prove’ that last year’s fiscal stimulus was a bad idea. It’s important to get the context right. The speech was far more aimed at appeasing American opinion than at a domestic audience – President Ford apparently congratulated Callaghan on ‘a helluva speech’. Callaghan himself later stated that he was never arguing against deficit financing in a recession.
Figures, forecasts and statistics can be wrong. Estimates of the PSBR (public sector borrowing requirement) were widely off the mark in 1976/77. The result was that Healey tightened fiscal policy far more than was necessary. What will be the deficit in 2010? I honestly don’t know, probably a large one but to start making judgements and allocating cuts now based on such an imprecise estimate risks repeating the same mistake.
The Cabinet in 1976 was fully aware that the public spending cuts would damage the economy. Benn from the left articulated the Alternative Economic Strategy as a response (actually much praised in Andrew Gamble’s work), Crosland instead argued for increased spending and possibly limited import controls. The failure of the Crosland and Benn camps to unite is a great lost opportunity.
In the end the Cabinet surrendered to ‘the markets’. Monetary targets and spending cuts (plus asset sales) were accepted purely to appease market opinion. The result was a deeper recession and the breaking of the social contract that led, indirectly, to the winter of discontent.
The simple fact is that market opinion is changeable and often wrong. In 1976 the Government backed down rather than fighting. I worry we are being pushed into making the same mistake today.