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Can “It” (1976) Happen Again?
With apologies to H.P. Minsky for twisting the phrase.
This morning, I went (back) down the rabbit hole on the sterling crisis that supposedly drove the British government into the arms of the IMF in 1976. I’m not a historian of British economic history, but other MMT economists (and some non-economist MMT scholars) have written at length about the period. And I mean at length. (Here’s a 7-part series, and here’s a piece with more than a dozen links to other posts that cover the period leading up to 1976).
All of that writing was done by Australian MMT economist Bill Mitchell, and it offers a deep dive into the political and economic history that culminated in the now-infamous 1976 IMF loan. I don’t have the bandwidth to write up a comprehensive summary, but you can follow the links if you have the appetite for a thoroughgoing take from an MMT voice.
Why is this relevant now?
Well, the release of the Truss/Kwarteng “mini budget” last Friday triggered a sharp decline in the exchange rate that’s got some people asking whether the British government might be sleepwalking into a kind of 1976-style currency crisis. Along with the drop in the pound, interest rates on gilt-edged bonds moved sharply higher on the day. To some observers, it looked all too familiar. Could the British government once again “run out of money” and find itself needing to turn to the IMF for a “bailout”?
Back in the mid-1970s, the leader of the Labour Party, Prime Minister James Callaghan, was wrestling with many challenges that look familiar in the contemporary moment. High inflation fueled by a surge in energy prices, a widening current account deficit, a sharp depreciation of the British pound, and rising anxiety about the economic situation.
What happened that drove Callaghan and his chancellor, Denis Healey, to seek a loan from the IMF? Was it really necessary? Could it happen now?
For quick-and-dirty answers to some of these questions, check out this post from Bill. Scroll down to the section with the heading, A Summation. As Bill has explained elsewhere, Denis Healey went to the IMF under the pretext that the British government was running out of money.
It’s a complicated history, but Bill argues that Healey became infatuated with monetarism and persuaded Callaghan to impose austerity. If you read the speech Callaghan delivered at the annual Labour Party Conference in Blackpool in 1976, you’ll find it laden with direct and indirect references to TINA—there is no other way.
Together, Callaghan and Healey persuaded the Labour Party and the Trade Unions that the government was running out of money. That it had no choice but to borrow £3.9 billion from the IMF in order to avoid risking a crash in bond markets that would leave the government unable to fund itself.
In Bill’s telling, austerity was the Labour government’s objective, not its punishment. The IMF loan simply allowed the government to pursue unpopular budget adjustments—spending cuts and tax hikes—under the cover of IMF loan conditionality.
Another very good voice on all of this is British MMTer Neil Wilson. Wilson is an engineer by training, though he has experience working in banking. Here’s Neil, commenting on one of Bill’s posts back in 2016.
I thought the IMF loan was put in place to help discharge the us dollar swap facility agreed in June 1976 with the US Secretary of State to the Treasury.
So they signed the Brits up to a swap facility on the understanding they would go to the IMF to repay it.
Seems to be confirmed as drawn on page 6 here
So the UK was already up to its eyeballs in debt in a foreign currency before the IMF was even spoken to.
Unlike in 1976, the UK is not currently “up to its eyeballs” in debt denominated in a foreign currency. And the British government never needs to borrow the pound from the IMF (or anyone else). It is, after all, the issuer of the that sovereign currency. So it really comes down to the exchange rate—not “funding” per se— as Bill and Neil explain.