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A New Age Of IMF Bailouts – Great Britain In The 1970s
Submitted by Erico Tavares of Sinclair & Co
A New Age Of IMF Bailouts – Great Britain In The 1970s
Hearing of IMF interventions generally conjures up images of developing nations (and the occasional Eurozone peripheral economy of late) facing some kind of financial difficulty. But it was actually Great Britain, the cradle of the industrialized world, which in 1976 became one of the first countries ever to be "bailed out" by the IMF in the modern sense of the term.

Now, previously the IMF had already provided financial assistance plenty of times, including to several advanced countries. Out of the 22 countries which were part of the OECD in the 1960s, no less than 8 negotiated new IMF programs during that decade, including France (1969), Japan (1962, 1964), Great Britain (1961-64, 1967, 1969) and even the US (1963-64). But these had been mostly to address short-term balance of payment issues.
Britain’s bailout in 1976, on the other hand, had strict conditionality elements with deep repercussions on the prevailing political ideology, sparking an intense private and public debate at the time as to whether the country should actually accept it. This episode inaugurated a much more interventionist approach by the IMF, anticipating many features of modern assistance programs.
The bailout arguably marked the culmination of a secular decline which had begun decades earlier. With the emergence of America and the Soviet Union as the global ideological and de facto superpowers at the end of World War II, the sun was setting fast upon the British Empire, which would fade away not long after. Still, in the postwar decades Great Britain offered plenty of prosperity, along with a free and vibrant society (who can ever forget the swinging sixties?), world-class music bands, abundant energy supplies and a respectable manufacturing sector.
Then came the 1970s. And things got bad pretty quickly.
Some Historical Context
The Labor Party was elected with a landslide majority in 1945 against the iconic wartime leader Sir Winston Churchill of the Conservative Party. Sweeping economic reforms were promptly introduced: the creation of a welfare state with national health, pensions and social security; industries were nationalized, seeking to broaden the state-planned manufacturing vitality during the war years; and taxes were raised to pay for the whole thing.
As Britain emerged from the wartime devastation, the economy got better and better, and accelerated in earnest after Churchill’s return to power in 1951. However, things were beginning to heat up abroad, with war raging in Korea, waves of Arab nationalism following the creation of the State of Israel and an increasingly belligerent Soviet Union. The Suez crisis of 1956 weakened Britain's global standing and the government's reputation, leading to the resignation of Anthony Eden, the Conservative Prime Minister who had succeeded Churchill.
But the economy managed to remain fairly robust with low unemployment into the 1960s, aided by tax cuts and other stimulative policies. Nevertheless, this was a time of change. Harold Wilson, the Labor party leader, ended 13 years of Conservative rule with a narrow victory in 1964 before increasing his majority in 1966. But despite the traditionally "euroskeptic" Conservatives losing their grip on power, Britain’s second attempt to join the European Economic Community (“EEC”) was once again vetoed by France’s President, Charles de Gaulle, in 1967.
At the same time, Britain’s increasing lack of competitiveness internationally was starting to become very apparent. The government eventually devalued the pound in 1967 to stem the continuous outflow of gold and dollar reserves. By the end of the decade, the swinging sixties were no longer swinging all that much. And Wilson was surprisingly voted out of power in 1970.
In came a new Conservative government led by Edward Heath. And that’s when things started to get interesting.
Unlucky Heath Ushers In the Unlucky 1970s
Heath came in through the liberal wing of the Conservatives, which means that he was a bit of a rare bird in relation to the party’s traditional free market values. A proponent of the “third way”, he was pro-union, favored devolution of power to Scotland and Wales, launched the Department of the Environment and nationalized Rolls-Royce Aircraft Engines as it was about to go bankrupt. His manifesto was to modernize Britain and reverse its economic decline through better management, efficiency and above all by joining the EEC, which it finally did in the early part of the decade.
Unfortunately, things started to go wrong right after Heath took over. Council workers went on strike in October 1970, an opening salvo in workers action that would become endemic over the rest of his mandate. His Industrial Relations Act of 1971 was bitterly opposed by the trade unions it sought to court. A global financial crisis was slowly unfolding as Bretton Woods collapsed. There was massive unrest in Northern Ireland, complete with assorted terrorist attacks. And then the first oil shock hit in 1973.
Economic policy was also becoming volatile. In a bid to contain a rising unemployment, the new government had decided to pump up demand. Large tax cuts were implemented, along with policies to boost salaries and credit growth. While the economy responded favorably initially, a period known as the “Barber boom” (named after the Chancellor Anthony Barber), inflation began accelerating to levels not seen since the war.
The oil crisis only made things worse, with price inflation reaching double digits by the end of 1973. As the Barber boom faded, the economy plunged into a deep recession, with output declines not seen since the depression in the 1930s. Britain was now stuck in “stagflation”.
In order to prevent inflation from spiraling out of control, the government responded by capping wages. Workers organizations responded immediately. In 1973, miners went on strike and were also joined by sympathetic trade unionists. Flying pickets successfully blocked coal and coke factories, which at the time produced the majority of the nation's power. With power in short supply, economic activity had to be curtailed. At the height of the strikes, Britain was on a mandatory 3-day workweek.

On Heath’s watch, the country would go on to lose 9 million working days to strike action. His government was in constant turmoil, declaring a state of emergency in a peacetime record of five times. The last of these, in 1974, triggered an early election, bringing Harold Wilson back in power: a known face hoping to govern an increasingly ungovernable Britain.
New Government, Same Problems

Figure 1: Annual CPI Inflation in Selected Countries, 1969-1979
Source: www.inflation.eu.
Britain’s inflation rate steadily outpaced that of its main trading partners for most of the decade. The peak was reached in 1975 at almost 25% annually, compared to a little over 9% for France and a remarkable 5.4% in Germany. Whatever ideas the new Labor government had, clearly they were not working.
Primary among these was the “Social Contract”, a grand plan to run Britain like Germany, with government ministers and union leaders meeting to discuss policy and the best course for the country. And like all grand plans, it did not take long to backfire. The unions decided that they were in charge of the country and that their members should always get the best deal at the expense of everybody else.
At the same time, the balance of payments situation was getting serious. In December 1974, Energy Minister Lord Balogh, an economist, warned Wilson that the country was exposed to a violent withdrawal of short-term money if people took fright on the British pound. If inflation was not contained a deep constitutional crisis could follow.
But the inflation rate remained stubbornly high, along with unemployment and budget deficits. As other advanced economies gradually recovered from the first oil shock, it did not take long for this increasingly unsolvable toxic trifecta to be noticed abroad.

Figure 2: British Pound vs US Dollar, Monthly, Jan 1971 – Dec 1979
In April 1975, the Wall Street Journal ran the headline “Goodbye, Great Britain”, advising investors to get out of the pound. The advice was well taken. The steady decline initially turned into a rout by late 1975. And it got worse from there.
The hesitation of British politicians in confronting the situation was being watched with trepidation across the Atlantic. In early 1976, Charles Robinson, the US Under-Secretary of State for Economic Affairs wrote: “The UK’s persistent double-digit inflation and low productivity have forced abandonment of serious Bank of England efforts to defend the pound. Workers demanded and have been granted inflationary wage increases”.
As the situation got more and more desperate, Wilson decided he had enough and called it quits. In April 1976 a new government was formed with James Callaghan as the Prime Minister. Time was running out for Britain. And so was the money.
The IMF Bailout
The political landscape was becoming even more complex. Labor had already lost its small majority in the House of Commons by the time Callaghan was elected, and dealing with minor parties such as the Liberal party became a necessity to push through legislation.
By September 1976 confidence in the pound had collapsed. The game was up. With no other alternatives and facing a massive external crisis, the government was forced to seek a bailout from the IMF, a highly unusual move for a developed western economy, worth £2.3bn (over £12bn in today’s money).
From the onset of the crisis, the US government had feared that Britain would turn into an ungovernable mess held hostage by leftist trade unions, endangering the NATO alliance at a sensitive period during the Cold War and the stability of the EEC. At the same time, US right wingers imbued in the monetarist tradition of Milton Friedman were becoming much more influential within the IMF. Help would be forthcoming alright, but at a steep political price.
When the IMF mission arrived in London in November 1976, deep cuts in public expenditure were announced as part of the package. This shocked the British government and the public, and a fierce debate followed, eventually involving the country’s entire political establishment, the Bank of England, the US President, the US Treasury, the Federal Reserve, the German Chancellor and the Bundesbank.
There was no consensus even within the government. Industry Secretary Tony Benn feared that the deflationary policies of the IMF would create persistently high unemployment. As an alternative, he advocated pursuing outright protectionism: high tariffs, import quotas, deeper cuts in defense spending and propping up industries.
Still, somehow the government managed to ram through the cuts in spending. A renewed sense of hope provided some respite for the pound, which went on to recover some ground lost to the dollar over the rest of the decade. The economy started to improve, as did the balance of payments, helped by burgeoning oil revenues as North Sea production increased substantially. As a result, Britain did not even have to draw out the whole IMF loan.
But these were the 1970s. And there were plenty of more “rotten days” ahead.
The Winter of Discontent
Any stabilization benefits on the domestic economy brought about by the IMF assistance slammed against the inescapable reality that politically speaking Britain was still a mess. Inflation continued to be a problem well into the late 1970s, fueled by higher energy costs and nominal wage growth.
Once again the government tried to control wage inflation by imposing caps. And once again the unions were in no mood for stiff wage settlements.
The all-powerful Transport and General Worker’s Union decided to abandon the Social Contract and seek a better deal. They went on strike at Ford, which promptly gave them a 17% wage raise as opposed to the 5% pushed by the government. Callaghan tried to retaliate, to no avail. Seeing this, almost every other union began a program of random strikes for better pay, extending from the industrial heartlands to the public sector. And thus began the “Winter of Discontent” of 1978-79.

Many important private and public services were halted across the country. Unburied coffins in Liverpool piled up and there was no garbage collection in many cities. The strikes were having a highly disruptive effect on the lives of average British citizens. The country was now in gridlock.
There was a general feeling of helplessness. The government seemed completely unable to control either inflation or the strike action. Was there any man who could fix the situation? And what about a woman?
Maggie Steps In
Into this mess strode Margaret Thatcher.
In the mid-70s she had been regarded as another one of those Conservative rare birds, but now coming in from the deep right of the party. Thatcher had watched the unions, whom she regarded as the “enemy within”, take down Heath and Callahan and was determined to break their grip on the economy. She campaigned strongly for the promotion of private enterprise. At a time of chronically high unemployment, she went on TV calling for an end to immigration to stop foreigners from taking British jobs, a highly controversial position.
All of this resonated with a nation exhausted by strikes and power cuts. And the “Iron Lady” was elected to power in May 1979.
The rest, as they say, is history. Out went the unions, as well as, according to Thatcher's critics, large chunks of British manufacturing and the coal industry, where many profitable mines ended up being shut down. But at long last Britain was governable again, and it marched on to regain its footing domestically and abroad.
The chronic problems of the 1970s now look very remote, perhaps unimaginable even.
Lessons Learned?
This striking episode in British economic life brings out several aspects that are worthwhile keeping in mind. The current economic malaise engulfing much of the Western world is certainly not as severe as in the 1970s, but there are parallels.
First of all, “it can happen here”. Not even an advanced and resourceful economy, like Britain was at the end of the 1960s, is safe from bad economic policies. The oil shocks of course had a very detrimental effect, but they merely amplified what was already happening in the country. Other advanced economies like France and especially Germany fared much better over that period.
The bailout also marked a decisive shift in how the IMF intervened in crisis situations, with increasingly stringent conditions. These were rolled out across many countries in the decades that followed: Greece (1978, 2010-), Mexico (1982, 1994), India, Russia (1996, 1998), South Korea (1997), Thailand (1997), Indonesia (1997), Brazil (1998, 2002), Argentina (2001), Seychelles (2008), Iceland (2008), Hungary (2008), Ukraine (2010, 2014-) and an assortment of peripheral Eurozone countries (2010-). Perhaps unsurprisingly, almost 40 years on the discussion on the heavy burden of economic adjustments and the possible loss of sovereignty remain just as current today.
However, the British example showed that while bailouts can be a necessary condition to resolve a serious economic crisis, they are not sufficient. The “bailoutee” needs to have the political will as a whole to carry out the reforms (assuming that they are the right ones in the first place). This was not the case in Britain, and after an initial stabilization the economic rout promptly resumed. Food for thought in the context of the current political debates over “austerity”.
This underlines a really important point. It is true that the unions in Britain wielded a disproportionate control over the economy in the 1970s and that the strikes had a major impact on the economy and public morale. But this control had been more or less given over the years by politicians seeking to pander to their electoral bases. Well organized groups can and will continue to exploit this dynamic in any modern society, to the detriment of everybody else. It is not that hard to find examples today, albeit in different shapes and forms.
And there might not be a Maggie to save the day next time.
PS: Seen in this light, Britain in the 1970s looks appalling – gridlocked, decaying and out of ideas. But not all was bad. The decade produced plenty of large-scale visionary projects: the Channel Tunnel, the Advanced Passenger Train, the Thames Barrier, a new London airport, the creation of a vibrant oil economy up north and the beginnings of a thriving computer industry. And the hopes and societal changes brought about by the swinging sixties finally materialized then. Britain was down, but it certainly was not out.
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So the last failed fiat empire was bailed out by the next. When does the present failed fiat empire get bailed out by the next?
Exactly. You loan me money you don't have. I loan it to someone. They loan it to someone and on it goes, till someone finally loans it back to you.
Say what you want about Maggie; she probably saved Great Britain by keeping them out from under the tyranny of the EU:
https://www.youtube.com/watch?v=U2f8nYMCO2I
"No! No! No!"
As opposed to the tyranny of interests she helped bring in during the 1980s?
1. Good read
2 unions suck
3. IMF is just the US money
4. They didn't print their way out
5. Germany's model will never work for anyone else
6. Its happening here but you can't tell because MSM is bought and paid for
7. The US has 535 cowards in power
Thatcher did not save anything. It was North Sea Oil that saved the UK. She just happened to arrive at the right moment - when the size of these reserves was established and the oil was beginning to come onshore in quantity. Proven oil reserves is just like a fat bank account - bankers fall over one another in an effort to lend you money.
It is amazing how many people think that closing down all the coal mines was the solution to the problem - it only worked because oil was there. Total cognitive dissonance.
yes the oil saved england, but didnt the coal mines close because theres no more left??
Closing the coal mines was partly due to the lack of maintenance during the years of strike and partly because having unions demands causing a whole country to go without electricity was so ridiculous it was better to not have coal mines and buy it from abroad.
The Gods of the Copybook Headings by Rudyard Kipling, 1919
AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.
We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.
We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.
With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.
When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."
On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."
Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.
As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;
And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!
Let me help you understand the poem;
Hippie Epoch, 60's
On the first Feminian Sandstones we were promised the Fuller Life
Which started by loving our neighbour and ended by loving his wife
Till our women had no more children and the men lost reason and faith,
Progressive/Liberal War on Poverty Epoch, 70's-
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
2008 Great Recession Epoch
- Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
Obama's Epoch
-And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
The next Epoch-
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!
The next what ? The residents of the planet xmop ? there isn't anybody left to bail out anybody.
Meanwhile IMF warns things are not as they seem.
http://www.cnbc.com/id/102080180
Because if anyone knows how bad is it IMF sure does.
Clueless fucking Labour socialist government voted in by clueless fucking benefit recipients. This time next year they may be back in power. Clueess fucking parasites.
Those benefit recipients (at least the ones that aren't non-assimilating foreigners) ended up there thanks to the overzealous pursuit of vengeance on labor unions. That is, something enabled by Thatcher's government and amplified by the opposition's use of non-assimilating foreigners.
I liken the IMF to the current US electorate.
The concept of the IMF is that all these countries pooled together can bail out the weak. However, since every country is broke; and weak, who is going to help.
In the US, a government "of the people", has been promoting that the government can help you if you're a failure, and more and more citizens are sinking to that level. But how can a country of individual failures, combine to help the failures?
A country of individual failures ? You mean like, France ? Well, they make cheese, don't they ?
http://fixingtheeconomists.wordpress.com/2014/03/17/thinking-makes-it-so...
I agree, in part, with the first comment.
"And there might not be a Maggie to save the day next time."
Plenty wrong with that statement, but just taking it on it's face, Maggie couldn't get elected in today's world any more than Ronald Reagan could. They both lose by 8%, easily.
The turn towards the government being the source of all benefits and favors is systemic at this point. It can no longer be changed from within the system, at least not without some cataclysmic event. Even then, there's a lot better than 50/50 odds it goes full-fascist as opposed to returning to individual liberties and market-based solutions.
Indeed.
We have become a true 'democracy' where three wolves and two sheep vote on what's for lunch.
Unfortunately, the takers now outnumber the makers, so expect more of the same.
Unfortunately, I keep seeing the final scenario from Atlas Shrugged playing out: where the country slowly grinds to a halt under the weight of its own incompetence, indifference and mismanagement.
The UK better hope Nigel farage and UKIP gain some traction...
Fuck hope; they better give him some traction.
no report about the new derivative crash regulation for big banks?
18 major banks have agreed to the proposed changes in derivatives trading to hedge the financial system in principle . If supervisors must intervene in the future to handle a collapsed financial firm , associated with derivative contracts collateral to remain intact for up to 48 hours. "This makes the system more secure ," said Scott O'Malia , Chairman of the International Swaps and Derivatives Association ( ISDA ) . These and other changes in the regulation to come into force in January . In the affirmative institutions are loud ISDA to banks from the USA , Europe and Japan . By derivative contracts are initially excluded from the settlement , collapses of large financial corporations are henceforth less chaotic run than before and also not trigger a domino effect .There is no single commonly adopted definition of derivative or derivative contract in the European Union. This plays havoc with what and when reporting rules apply. It also highlights divisions in how national regulators view reporting rules for the $693 trillion over-the-counter derivatives market.
Remember this is only part of a much larger market that includes hundreds of trillions of dollars in non-reported agreements and private contracts. Everyone paying attention knows that the size of the derivatives market is 20 times larger than the global economy, the article below explores some of its ins and outs.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html
Fact is the IMF is a tool of the Western developed countries that provide its funding. This means that when the IMF rubber stamps their policy it means very little and we should not be reassured.
The pool of money the IMF loans and redistributes around the world helps to stabilize countries if they are failing or economically unstable. But many people do not understand who, and how they are funded. While the IMF exerts a fair amount of influence, it is political in nature and pushes the way the wind blows.
This bring up the issue and questions as to how muddled this system is. With a loud voice the IMF is overrated, it often uses only a small amount of money to make the very desperate march in line, at times this means not solving problems but helping to kick the can down the road. For more on the IMF see the article below.
http://brucewilds.blogspot.com/2013/04/imf-overrated-institution.html
Britain was "saved" thanks to Big Oil and the Big Bang. Oil and finance have carried her through. They are both finished now.
These horrible individual governments just don't have the loving interests of the people at heart
I'm sure a global one world government will fix everything
Fuck the IMF. They help themselves to a country's best resources, and leave nothing but impoverished masses in their wake.
Maybe they used to be halfway decent, when they helped England in the 70's, but now they're just a bunch of crony, greedy bastards which feed on the corpses of a multitude of countries while lining their friend's pockets.
IMF loans are used to pay banks in the West, they are not for the common people of the countries they are allegedly helping.
Missus Thatcher handed the country over to finance interests, which in turn handed the UK over to foreign interests.
Say what you will, but Thatcher represented a Faustian bargain - she smote the unions down, encouraged employers to blacklist their families from work, and handed the Crown Jewels over to the City to get peace. What you get now is a country that has largely abandoned itself, opting for Third Worlders to loot and pillage what is left.
The article makes it sound like everything in Britain was fixed the instant Thatcher was elected.
The miners were on strike for over a year during the Thatcher government. There were numerous strikes by teachers during her time as well and she took us to war with Argentina over some tiny islands in the South Atlantic simply in order to get herself reelected at one election and then bribed a whole section of the electorate by selling them social housing at 20% of the market rate to win another.
I keep reading these rewrites of history claiming she "saved" Great Britain. She did nothing of the sort. She started off the programme of the Great Wealth Transfer from the people to private enterprise, selling off nationalised industries to her supporters in big business for a song, effectively stripping the country of its wealth and placing it in the hands of the 1%, a programme which following Conservitive and "Labour" (in quotes because there is no UK party that represents the interests of labour any longer) governments have been happy to continue.