When the money (sort of) ran out: The IMF Crisis of 1976

2016 has been a year of political and economic calamities. The EU referendum led to the value of the pound slumping on the international money markets, and threw British politics into turmoil. In the USA, a bitter and sometimes violent election culminated in the victory of Donald Trump, a man singularly unfit to hold the office of President. Many are declaring that 2016 is the Worst Year Ever.

How soon we forget. For 2016 is the 40th anniversary of 1976. The year that the money ran out. Sort of. The year that a narrative was allowed to emerge that did not fit the facts. Sound familiar?

Our story starts at the beginning of 1976. The Labour government of Harold Wilson, unexpectedly elected in 1974, is clinging on. 1975 saw inflation spiral out of control. Wilson is not the crack political operator of the 1960s. But no one was expecting what happened when he turned 60. He resigned.

The country was stunned. As was the Labour party. Several distinguished men and women threw their hats into the ring to succeed Wilson. After several rounds of closely contested balloting, James Callaghan emerged as the new Labour leader and Prime Minister.

On the day he took office, Callaghan lost his majority in the House of Commons. He would govern for the next three years as the head of a minority government.

The economic legacy that Callaghan inherited was truly dreadful. Only a few years before, Richard Nixon had ended the post-war Bretton Woods system of international financial controls. This meant all currencies now floated on the money markets, although it was often said that sterling 'floated' in much the same way that the Titanic did. The pound was subject to constant speculative attacks, and the Treasury was spending hundreds of millions of pounds to prop up the value of sterling. The weaknesses in Britain's economy were clear for all to see, and so the crisis worsened.

The crunch moment came in October 1976. Denis Healey was supposed to fly to the Far East to attend a G7 finance minister's meeting. This was before in-flight phone calls. Healey would be out of touch for several hours. The vultures on the exchange markets were circling, ready to launch another expensive attack on the pound. Healey decided the risk was too great. In full view of the world's media, he turned around from the plane at Heathrow, and drove back into London.

Meanwhile, Labour were holding their conference in Blackpool. The atmosphere was toxic. The far-left of the party had just passed resolution after resolution, calling for mass nationalisations, the creation of a siege economy, withdrawal from NATO and the EEC. The arrival of the man they saw as 'Hitler Healey' to defend his position sent the hard left into overdrive. Healey wasn't even given a proper spot to speak, grabbing a few minutes from the floor. He gave an impassioned defence of the government's policies, calling for the support of the Labour movement in dealing with the crisis.

Shortly after this showdown, the men from the IMF arrived to exact their price. They called for swingeing cuts in public expenditure, in return for the loan that Britain needed to get by. Callaghan and Healey haggled, stalled, delayed, did everything in their power to wear down the IMF. A sizeable minority of the Cabinet was opposed, preferring a siege economy and international isolation over capitulation to the international bankers. Callaghan was only able to get acceptable terms by secretly threatening the IMF negotiators with a general election, pitting the bankers against the people.

Eventually, the terms were agreed, and passed by a divided Cabinet. In exchange for a loan of $3.9 billion, the UK government would cut public spending by £2.5 billion.

What is more staggering about this crisis is that it was all completely pointless. The Treasury had completely miscalculated all it's forecasts and figures. Britain didn't need any of the money. It was actually able to pay the loan back in full within two years of receiving it. The IMF crisis is an excellent example of where hyperbole around events gets out of hand.

But being able to pay this loan back did not save the Callaghan government. The complexity of international fiscal and monetary policy in a changing landscape was buried beneath the easy headlines. James Callaghan was Prime Minister under the most horrendous economic and political circumstances. He managed to govern incredibly successfully, and on the whole does not deserve the reputation the IMF crisis and the Winter of Discontent left him with.

However, being 'forced to go cap in hand to the IMF because the country was broke' was an easy slogan for the Leader of the Opposition to use to beat the government with. And use it she did, to devastating effect.

2016 was a bad year, at least if you are a Western progressive. But it is by no means unique. 1976 was also pretty bad. Both show what happens when narrative is allowed to replace facts.