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1976 sterling crisis

January 01, 1970

The 1976 sterling crisis was a currency crisis in the United Kingdom. Inflation (at close to 25% in 1975, causing high bond yields and borrowing costs), a balance of payments deficit, a public spending deficit, and the 1973 oil crisis were contributors.[1]

UK inflation history
  UK M4 Money Supply Increases
  UK Inflation
GBP/USD exchange rate

The origins of the crisis are traced to the 1972 Conservative "spend for growth" budget that initiated the inflation cycle.[2]

James Callaghan's Labour government had to borrow $3.9 billion[a] from the International Monetary Fund (IMF),[4] with the intention of maintaining the value of sterling.[5] At the time this was the largest loan ever to have been requested from the IMF.[6]

History edit

 
UK bonds 1960–2022
Government borrowing for debt (10-year bond) increased to over 15% in the 1970s and early 1980s.
 
The 1973 oil crisis caused an increase in the price of Brent Crude

Initiation of the inflationary cycle is traced to Anthony Barber's 1972 budget which was designed to return the Conservatives to power in an election expected in 1974 or 1975. This budget led to a brief period growth known as "The Barber Boom," followed by a wage-price spiral, high inflation and currency depreciation, culminating in the 1976 sterling crisis.[2] Barber was forced to introduce anti-inflation measures, along with a Price Commission and a Pay Board. The Conservatives lost the 1974 general election to Harold Wilson's Labour Party.

The crisis came to a head during James Callaghan's term as Prime Minister,[7] and caused the Bank of England to withdraw temporarily from the foreign exchange market.[8] After the defeat of the public expenditure white paper in the House of Commons in March 1976 and the resignation of Harold Wilson, many investors became convinced sterling would soon lose value due to inflation. By June 1976, the pound had reached a record low against the dollar.[6]

British ally to Israel during Arab-Israeli Conflicts edit

In 1967, the Suez Canal closed down for eight years following the Six-Day War of that year, when Israel took and occupied the Sinai Peninsula for 15 years. That triggered the 1967 Oil Embargo, which only lasted a few months. In 1966, the year before it closed, 20% of all world oil cargo tonnage passed through the canal,[citation needed] with most of it heading north for Europe.

In 1973, the Yom Kippur War was fought, with Egypt crossing the Suez Canal aiming to take back the Sinai Peninsula from Israel. This triggered the 1973 oil crisis and embargo. Britain was an ally to Israel during the Arab–Israeli conflict.[9][10] The oil crisis presented a severe economic shock to Britain, which it was ill-placed to withstand.[11]

Outcome edit

Only half of the loan was actually drawn by the British government and it was repaid by 4 May 1979,[12] the day after the general election. Denis Healey, the Chancellor of the Exchequer at the time, went on to state that the main reason the loan had to be requested was that public sector borrowing requirement figures provided by the Treasury were grossly overstated.[13]

The IMF loan meant that the United Kingdom's economy could be stabilised whilst drastic budget cuts were implemented. Despite the security provided by the loan, the Labour Party had already begun separating into social democratic and more socialist camps, causing bitter rows inside the party and with the trades unions. Some believe the sterling crisis and IMF bailout may have contributed significantly to Margaret Thatcher's 1979 Conservative victory.[14]

See also edit

Notes edit

  1. ^ equivalent to $20.9 billion in 2023[3] dollars

References edit

  1. ^ "UK – IMF Crisis of 1976".
  2. ^ a b Steele, G. R. (2010). "INFLATION ECONOMICS: THE HEATH–BARBER BOOM, 1972–74". Economic Affairs. 30 (3): 79–81. doi:10.1111/j.1468-0270.2010.02028.x. S2CID 152522190.
  3. ^ 1634–1699: McCusker, J. J. (1997). How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States: Addenda et Corrigenda (PDF). American Antiquarian Society. 1700–1799: McCusker, J. J. (1992). How Much Is That in Real Money? A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States (PDF). American Antiquarian Society. 1800–present: Federal Reserve Bank of Minneapolis. "Consumer Price Index (estimate) 1800–". Retrieved 29 February 2024.
  4. ^ "Cabinet papers | IMF crisis". National Archives. from the original on 11 January 2021. Retrieved 17 December 2015.
  5. ^ "UK – IMF Crisis of 1976".
  6. ^ a b "Sterling devalued and the IMF loan". The National Archives. from the original on 22 February 2014. Retrieved 17 December 2015.
  7. ^ "BBC On This Day". 5 April 1976. from the original on 7 March 2008. Retrieved 17 December 2015.
  8. ^ Rogers, Chris (2009). The Politics of Economic Policy Making in Britain: A Re – assessment of the 1976 IMF Crisis (PDF). University of Warwick. p. 17. (PDF) from the original on 14 November 2016. Retrieved 17 December 2015.
  9. ^ Klinghoffer, Arthur Jay (1975). "Soviet Oil Politics and the Suez Canal". The World Today. 31 (10): 397–405. JSTOR 40394822.
  10. ^ Corbett, Michael. "Oil Shock of 1973–74". Federal Reserve History. Retrieved 27 August 2022.
  11. ^ "Six-Day War | Definition, Causes, History, Summary, Outcomes, & Facts". Encyclopedia Britannica.
  12. ^ Denis, Healey (1990). The Time of my Life. Penguin. p. 432. ISBN 978-1842751541.
  13. ^ Moran, Joe (4 September 2010). "Defining Moment: Denis Healey agrees to the demands of the IMF". Financial Times. from the original on 23 March 2019. Retrieved 23 March 2019.
  14. ^ "1976 government papers". BBC News. 29 December 2006. from the original on 3 September 2017. Retrieved 24 December 2015.

Further reading edit

  • Burk, Kathleen. "1976 IMF Crisis." (1989): 39–45.
  • Ludlam, Steve. "The gnomes of Washington: Four myths of the 1976 IMF crisis." Political Studies 40.4 (1992): 713–727.
  • Wass, Douglas. Decline to Fall: The Making of British Macro-economic Policy and the 1976 IMF Crisis. Oxford University Press, 2008.
  • Kevin Hickson (13 May 2005). The IMF Crisis of 1976 and British Politics: Keynesian Social Democracy, Monetarism and Economic Liberalism: the 1970s Struggle in British Politics. I.B.Tauris. pp. 14–. ISBN 978-1-85043-725-3.
  • Kathleen Burk; Alec Cairncross (1992). Good-bye, Great Britain: The 1976 IMF Crisis. Yale University Press. ISBN 0-300-05728-8.
  • Mark D. Harmon (1997). The British Labour Government and the 1976 IMF Crisis. Macmillan. ISBN 978-0-333-67818-3.

January 01, 1970
1976, sterling, crisis, currency, crisis, united, kingdom, inflation, close, 1975, causing, high, bond, yields, borrowing, costs, balance, payments, deficit, public, spending, deficit, 1973, crisis, were, contributors, inflation, history, money, supply, increa. The 1976 sterling crisis was a currency crisis in the United Kingdom Inflation at close to 25 in 1975 causing high bond yields and borrowing costs a balance of payments deficit a public spending deficit and the 1973 oil crisis were contributors 1 UK inflation history UK M4 Money Supply Increases UK Inflation GBP USD exchange rate The origins of the crisis are traced to the 1972 Conservative spend for growth budget that initiated the inflation cycle 2 James Callaghan s Labour government had to borrow 3 9 billion a from the International Monetary Fund IMF 4 with the intention of maintaining the value of sterling 5 At the time this was the largest loan ever to have been requested from the IMF 6 Contents 1 History 1 1 British ally to Israel during Arab Israeli Conflicts 2 Outcome 3 See also 4 Notes 5 References 6 Further readingHistory edit nbsp UK bonds 1960 2022 Government borrowing for debt 10 year bond increased to over 15 in the 1970s and early 1980s nbsp The 1973 oil crisis caused an increase in the price of Brent Crude Initiation of the inflationary cycle is traced to Anthony Barber s 1972 budget which was designed to return the Conservatives to power in an election expected in 1974 or 1975 This budget led to a brief period growth known as The Barber Boom followed by a wage price spiral high inflation and currency depreciation culminating in the 1976 sterling crisis 2 Barber was forced to introduce anti inflation measures along with a Price Commission and a Pay Board The Conservatives lost the 1974 general election to Harold Wilson s Labour Party The crisis came to a head during James Callaghan s term as Prime Minister 7 and caused the Bank of England to withdraw temporarily from the foreign exchange market 8 After the defeat of the public expenditure white paper in the House of Commons in March 1976 and the resignation of Harold Wilson many investors became convinced sterling would soon lose value due to inflation By June 1976 the pound had reached a record low against the dollar 6 British ally to Israel during Arab Israeli Conflicts edit In 1967 the Suez Canal closed down for eight years following the Six Day War of that year when Israel took and occupied the Sinai Peninsula for 15 years That triggered the 1967 Oil Embargo which only lasted a few months In 1966 the year before it closed 20 of all world oil cargo tonnage passed through the canal citation needed with most of it heading north for Europe In 1973 the Yom Kippur War was fought with Egypt crossing the Suez Canal aiming to take back the Sinai Peninsula from Israel This triggered the 1973 oil crisis and embargo Britain was an ally to Israel during the Arab Israeli conflict 9 10 The oil crisis presented a severe economic shock to Britain which it was ill placed to withstand 11 Outcome editOnly half of the loan was actually drawn by the British government and it was repaid by 4 May 1979 12 the day after the general election Denis Healey the Chancellor of the Exchequer at the time went on to state that the main reason the loan had to be requested was that public sector borrowing requirement figures provided by the Treasury were grossly overstated 13 The IMF loan meant that the United Kingdom s economy could be stabilised whilst drastic budget cuts were implemented Despite the security provided by the loan the Labour Party had already begun separating into social democratic and more socialist camps causing bitter rows inside the party and with the trades unions Some believe the sterling crisis and IMF bailout may have contributed significantly to Margaret Thatcher s 1979 Conservative victory 14 See also editEconomic history of the United Kingdom Galloping inflation Inflation that develops at a rapid pace Stagflation High inflation low economic growth and high unemployment Sterling Currency of the United Kingdom Sterling crisis other currency crises in British history Winter of Discontent Winter of 1978 79 in the United Kingdom Closure of the Suez Canal 1967 1975 shortly after the start of the Six Day War or Third Arab Israeli War 1970s commodities boom Rise of many commodity prices in the 70s Alternative Economic Strategy Economic policy proposed by Tony Benn Notes edit equivalent to 20 9 billion in 2023 3 dollarsReferences edit UK IMF Crisis of 1976 a b Steele G R 2010 INFLATION ECONOMICS THE HEATH BARBER BOOM 1972 74 Economic Affairs 30 3 79 81 doi 10 1111 j 1468 0270 2010 02028 x S2CID 152522190 1634 1699 McCusker J J 1997 How Much Is That in Real Money A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States Addenda et Corrigenda PDF American Antiquarian Society 1700 1799 McCusker J J 1992 How Much Is That in Real Money A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States PDF American Antiquarian Society 1800 present Federal Reserve Bank of Minneapolis Consumer Price Index estimate 1800 Retrieved 29 February 2024 Cabinet papers IMF crisis National Archives Archived from the original on 11 January 2021 Retrieved 17 December 2015 UK IMF Crisis of 1976 a b Sterling devalued and the IMF loan The National Archives Archived from the original on 22 February 2014 Retrieved 17 December 2015 BBC On This Day 5 April 1976 Archived from the original on 7 March 2008 Retrieved 17 December 2015 Rogers Chris 2009 The Politics of Economic Policy Making in Britain A Re assessment of the 1976 IMF Crisis PDF University of Warwick p 17 Archived PDF from the original on 14 November 2016 Retrieved 17 December 2015 Klinghoffer Arthur Jay 1975 Soviet Oil Politics and the Suez Canal The World Today 31 10 397 405 JSTOR 40394822 Corbett Michael Oil Shock of 1973 74 Federal Reserve History Retrieved 27 August 2022 Six Day War Definition Causes History Summary Outcomes amp Facts Encyclopedia Britannica Denis Healey 1990 The Time of my Life Penguin p 432 ISBN 978 1842751541 Moran Joe 4 September 2010 Defining Moment Denis Healey agrees to the demands of the IMF Financial Times Archived from the original on 23 March 2019 Retrieved 23 March 2019 1976 government papers BBC News 29 December 2006 Archived from the original on 3 September 2017 Retrieved 24 December 2015 Further reading editBurk Kathleen 1976 IMF Crisis 1989 39 45 Ludlam Steve The gnomes of Washington Four myths of the 1976 IMF crisis Political Studies 40 4 1992 713 727 Wass Douglas Decline to Fall The Making of British Macro economic Policy and the 1976 IMF Crisis Oxford University Press 2008 Kevin Hickson 13 May 2005 The IMF Crisis of 1976 and British Politics Keynesian Social Democracy Monetarism and Economic Liberalism the 1970s Struggle in British Politics I B Tauris pp 14 ISBN 978 1 85043 725 3 Kathleen Burk Alec Cairncross 1992 Good bye Great Britain The 1976 IMF Crisis Yale University Press ISBN 0 300 05728 8 Mark D Harmon 1997 The British Labour Government and the 1976 IMF Crisis Macmillan ISBN 978 0 333 67818 3 Retrieved from https en wikipedia org w index php title 1976 sterling crisis amp oldid 1204883336, wikipedia, wiki, book, books, library,

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