When Labour last ruled
- ‘Goodbye, Great Britain’: The 1976 IMF Crisis by Kathleen Burk and Alec Cairncross
Yale, 268 pp, £18.95, March 1992, ISBN 0 300 05728 8
This is a timely and exceptionally interesting book. 1976, the year of IMF intervention, together with the winter of 1978-79, represents in purest form what was for most people (insofar as they have any memory of the Seventies) characteristic of that decade: persistent economic failure and social disintegration at home, humiliation abroad. It is a memory that has also had profound political consequences. In the public mind the Labour Party is inextricably associated with these failures and humiliations; though it bears no more ‘responsibility’ for them than the preceding Conservative government, the Conservatives have been much more successful at distancing themselves from their own part in the debacle; and it is undeniable that the Labour Party was in office for most of the decade (just) and during what is now thought to be its lowest moments. Thus, as Labour tries to convince us that it is a responsible party led by grave statesmen, it is speaking from within the long shadow of the Seventies. And it seems very likely that during the course of this election the Conservatives will have been insinuating into our consciousness all those now familiar words – ‘chaos’, ‘ungovernable’, ‘inflation’, ‘trade unions’, though not ‘unemployment’ – just in case we have forgotten the Seventies.
‘Goodbye, Great Britain’ (the title is taken from a typical comment in the Wall Street Journal) is timely in another way. 1992 is not unlike 1976: there is a persistent current account deficit, a large and rapidly rising PSBR, high and growing unemployment. Inflation is considerably lower and per capita productivity has not fallen as it did in the Seventies. Yet things are ‘objectively’ worse than they were then. The external payments deficit now appears ineradicable at current levels of consumption; there seems no prospect of reducing unemployment to the level of 1976 (which itself was thought in those innocent days to be unacceptable); the social infrastructure has decayed unimaginably since the mid-Seventies; and there has been real social disintegration, not just public sector strikes, which is what people meant by social disintegration in the Seventies. There is, however, unlike 1976, no sense of crisis, no press hysteria, no stock-market collapses even though the City is worried about the funding of the PSBR, no withdrawal of international confidence. That this is so tells us much about the structures of power and ideological configurations in which Labour would have to work should it by some chance form a government after 9 April. It is difficult not to read ‘Goodbye, Great Britain’ with this in mind.
Dr Burk, the historian of Anglo-American financial relations, probably has a better feel for the details of the IMF intervention than anyone; Sir Alec Cairncross writes with the authority one would expect from someone who is not only a distinguished academic economist but a former civil servant who knows the Treasury’s little ways. They have adopted a straightforward division of labour. Dr Burk is responsible for Part One of the book; Sir Alec for Part Two. Part One is a close account of the various crises of 1976, the decision to seek the assistance of the International Monetary Fund and the protracted negotiations which led to agreement between the Government and the IMF at the end of the year. Part Two is a broader study both of the economy and of public and professional opinion, of the ‘loss of control’ of the domestic economy and of external payments, and of the emergence of ‘monetarism’ (which means many things). The book has a vigorous conclusion which ties the two parts together. It might have been better to have had the historical-economic exposition first, to give the reader some general sense of context, before facing him with what is a very detailed (though always clear) analysis of the politics of the IMF loan. Despite this, however, the authors’ views are not tucked away: they do not conceal their belief that recourse to the IMF was essential, that it made no real difference to the attitudes of the Government or the Labour Party and that the monetarists who in the long term were best able to exploit the crises of that year were very largely mistaken in their conclusions.
The argument that intervention had to happen is very persuasive. The authors see it as a more or less inevitable consequence of the run of events since 1973; and they argue that it coincided with, while ‘causing’ only in a limited sense, a partial reversal of the trend of the previous three years. Those years had been marked by unprecedently high rates of inflation, rapidly increasing unemployment, a deteriorating balance of payments, a severe squeezing of business profits and a significant increase in public expenditure. Eventually, and not surprisingly, in addition to these structural problems there came in 1976 itself a real loss of confidence both in the Government and in the economy. As in 1931 (the actors themselves understood the parallels), a Labour government had two deficits to fund: one in sterling, the PSBR; the other in dollars or foreign exchange. By the middle of 1976 it was no longer clear that the Government could fund either one of them. Non-bank lenders had more or less gone on strike while foreigners were liquidating their sterling holdings at a rate the reserves could scarcely meet. It was the agreement with the IMF and the public commitment to policies the IMF approved which broke this cycle. And it broke faster and more thoroughly than anyone had believed possible.
From the beginning of 1977 money poured into the country – by the end of the year the international reserves had risen nearly sevenfold and the problem was to hold the pound down rather than talk it up; the domestic debt was funded comfortably, the balance of payments improved steadily; unemployment fell and (important in an IMF sense) consumer spending scarcely rose at all. The paradox is, as Sir Alec points out, that 1976 was by no means the worst year: 1974 probably had a better claim to that distinction. Furthermore, the Government had been preparing from 1975 onwards a programme pretty much the same as the one negotiated with the IMF: indeed, one of the reasons why the IMF package could be negotiated at all was that its content was already largely ‘in place’. What a Labour programme would not have done, however, was to convince those it needed to. Short of a change of government à la 1931, only the IMF could do that.
The IMF had a useful function within the Labour Party as well. While it is conceivable that the Cabinet would have agreed a programme of cuts in any case, the Prime Minister might have had much difficulty in getting the Parliamentary Labour Party to accept them. External intervention was one way of presenting them as force majeure – as forced upon a reluctant government. Simultaneously, both Callaghan and Healey used the Labour Party as a way of wringing concessions from the Americans and the IMF: what the Party would accept became one of the few bargaining weapons the Government had.
It is also clear from Dr Burk’s account how comparatively lightly Britain got off. This was not a bankers’ ramp. Although the Americans, particularly, were convinced that Britain was not to be treated differently from any other mendicant nation – such as Mexico – in practice it was treated differently. And this was because the Americans themselves were divided. The Treasury under William Simon and the Federal Reserve System under Arthur Burns had an unflinching belief in the ‘market’ and a suspicion of Labour governments imbibed with their mothers’ milk. Had they been left to themselves, a much more rigorous programme might have been devised. The State Department under Kissinger, however, had different concerns. It was alarmed that too stringent conditions would be unacceptable to Britain, which might then adopt a ‘siege economy’, institute huge defence cuts, withdraw from Nato etc. The possibilities seemed so grim that at one point President Ford was even induced to turn the sound down on a Washington-Minnesota football match he was watching on TV. It was fortunate for Britain that individuals in the State Department and the President’s entourage should have so exaggerated the likely consequences if Britain were ‘pushed too far’. (Brent Scowcroft, Ford’s National Security Adviser, said that this ‘was considered by us to be the greatest threat to the Western world’.) Nor did West Germany, the fourth player in the game, have any wish to rock boats. Schmidt, who liked Callaghan and who was ideologically sympathetic to him, said that the Germans only wished ‘to help’, and that is what they did.
It was apparent at the time, and has since been abundantly confirmed, that neither the British Government nor the British Treasury was of a single mind. One of the reasons why the Chancellor, Healey, seemed constantly to be prevaricating – of course he often was prevaricating – is that there was no agreement within the Treasury about what should be done. Sir Douglas Wass, the permanent head, was, at least in the early part of 1976, rather a devaluationist, whereas Healey’s instincts were to worry about the inflationary consequences of devaluation. There were also divisions about the seriousness of events. Since the Government took the view that the economic situation had much improved on 1974-75, its members were reluctant to admit that this was not how outsiders might see it. It was Benn, interestingly, who appears to have been the first in the Cabinet to recognise that it would all end up at the IMF – not the first time nor the last that he would see the heart of the problem before others, and then produce an impossible solution. The Prime Minister, for his part, was obsessed by the problem of the sterling balances – those highly volatile foreign holdings of sterling which had, in his view, done so much harm during his own Chancellorship – and was convinced that the real solution was to end the pound’s role as a reserve currency. He was thus comparatively slow to see that that might not be of the priority of others.
The reader of ‘Goodbye, Great Britain’ will be impressed, though perhaps now not surprised, by the extent to which both the Treasury and the Chancellor were operating in a fog. For all the famous confidence with which the Chancellor announced his forecasts for the size of the PSBR, annual growth rates, levels of unemployment etc, they were rarely accurate, and sometimes unnervingly wrong. My sense is that, on balance, the effect of these wrong figures was to make things look worse than they were. The authors discount the notion that the Chancellor darkened the gloom in order to secure a support for the IMF programme which otherwise might not have come.
Although they conclude that nothing really happened, to the extent that neither the Government nor the Labour Party had any intention of behaving any differently, it is obvious, as Sir Alec’s chapter ‘The Movement of Opinion’ itself argues, that things certainly happened in quarters outside Labour. The events of 1976 greatly accelerated the ‘monetarist’ conquest of the Conservative Party and most of the metropolitan press. The authors have little sympathy with monetarism as a body of theory, and Sir Alec is able to demonstrate just how little it explains the events of the Seventies; and that it is, in fact, for the most part wrong. He also makes the point that it actually had little support among academic economists; that its crucial conquests were financial journalists, among the earliest being Samuel Brittan and the Prime Minister’s son-in-law, Peter Jay. Sir Alec has some gentle fun at their expense. Of William Rees-Mogg, he writes: ‘in his eagerness to find a simple explanation of inflation he advanced one of the most preposterous arguments for monetarism ever published.’ In due course it also conquered the Treasury. The former head of the Treasury, Sir Peter Middleton, is cited here solemnly affirming monetarist truths (in 1988 of all years) with a certainty inconceivable a decade earlier.
The importance of what was called monetarism was never theoretical, however. What it enabled the leadership of the Conservative Party and much of the London press to do was to find an apparent justification for large-scale cuts in public expenditure. I doubt that many of them ever understood it as a theory or even much cared; certainly when the Conservatives came to office they made little attempt to meet predetermined monetary targets and soon gave up trying. Indeed, given the particular mix of policies which constituted Thatcherism, it was impossible for them to meet such targets. But cuts in public expenditure were sought relentlessly, even though it was not until the mid-Eighties that it was possible to achieve them. Within the Anglo-American tradition of party-political debate the individualist or laissezfaire case has always been argued in terms of state expenditure; whether you were an ‘individualist’ or a ‘collectivist’ has usually been measured by whether you think public expenditure is desirable in itself (for whatever positive purpose) or whether you think it is only to be tolerated when there is no apparent alternative. That is why the press in 1976 concentrated almost hysterically – and for the most part irrationally – on the supposed profligacy of public expenditure.
As Sir Alec points out, although the level of public expenditure had risen rapidly in Britain in the early Seventies, it was by European standards not unusual; in fact, it stood somewhere in the middle. There were many things wrong with the British economy but government expenditure was not one of them. It was, nevertheless, almost inevitable, given the ‘anti-socialist’ traditions of this country, that the press would light on public expenditure. In this regard, the conversion of the financial journalists was very important. What was less excusable in 1976 was the intemperate and careless manner in which the right-wing press chose to present their argument. In this book (rather to my surprise) most institutions and individuals come out rather well; the one institution which comes out badly is the British press. (No surprise there, I suppose.)
The authors conclude that, whatever outsiders might have wanted, there was no change of heart within the Government, still less within the Labour Party or the Unions. They point out that the Prime Minister might dismiss spending as a way out of recession (though these assertions were probably for the benefit of foreign holders of sterling as much as anything) but still looked for a PSBR of nine billion pounds, while the Chancellor had every intention of restoring the cuts as soon as he could. What is striking from the Burk-Cairn-cross account is how strongly committed to a neo-Keynesian policy both Callaghan and Healey were and with what reluctance they abandoned it. On balance, they worried at least as much about employment as about inflation, and often worried more. There is an important lesson here. Many on the left of the Party (and some on the right) repeatedly accused Callaghan and Healey of abandoning Party traditions and policies. Yet this form of Keynesianism has been the predominant ‘theoretical’ tradition within the Labour Party since the late Thirties; Callaghan and Healey might be accused of many things but abandoning Party traditions is not one of them. Both conceded what the ‘market’ wanted, but in the most grudging way and on the assumption that they had no alternative. In the end, this adherence to a modified Keynesianism proved to be the Government’s undoing – it presupposed the continuance of an incomes policy, and that (‘one incomes policy too many,’ as Dr Burk notes) led to the winter of 1978-79.
There are no doubt general conclusions to be drawn from this story. While that unstable combination of interests and prejudices which makes up the financial market is not necessarily hostile to a Labour government, it is friendly only in the most limited circumstances and is deeply irrational in its response to anything it supposes unorthodox. What these markets (or many of them) wanted in 1976 and what, as the authors write, they ‘ultimately’ got was Thatcherism. But if what they wanted was what Thatcherism actually was, then they are even more irrational than one might think. In any case, if would-be Labour ministers wish to get some idea of the grandeurs and miseries of office, especially the miseries, that may await them on 10 April, they should take a careful look at this informative and incisive book.