Rachel Reeves’ ‘black hole’ narrative echoes the Treasury shock doctrine that tipped Jim Callaghan’s government into chaos, finds Liam Payne.
Since the UK general election, the Chancellor Rachel Reeves has painted a dark picture of British government finances. The fiscal calculations she has been provided by the Treasury reveal, she says, how low growth and seemingly uncontrollable inflation have turned national finances into a black hole, relentlessly sucking more and more resources into a bottomless nothing.
In 1976, a similar situation greeted the newly ascended Prime Minister, Jim Callaghan, and his precarious Labour Government. The infamous ‘stagflation’ of this period – just the latest manifestation of capitalism’s recurring bouts of crises – had hit a chronically unstable British economy worse than most. With the value of the pound daily sliding to lower and lower exchange levels, and the Treasury rapidly using up currency reserves in a vain attempt to prop it up, the British Government was forced to turn to other Western states for support, and eventually the International Monetary Fund (IMF).
It is true that the unstable British economy is in a shockingly bad situation. But the story of these real-world events fifty years ago is more informative about the present than the extra-terrestrial metaphor that Reeves is using to justify another round of austerity.
The Best and the Brightest
The British pound exchange rate had been steadily sliding in the early months of 1976. In March 1976, Bank of England and Treasury mandarins decided to artificially lower its rate even further through a reduction in interest rates and a sale of their reserves, making the supply of pounds to the market greater and further encouraging the downward trend. It was done in the erroneous belief that trade union wage demands – then as now chasing prices rather than setting them – were pushing up the costs of British exports and adversely affecting the country’s balance of payments. Four days later, the pound fell by five cents against the dollar in a single hour.
Quite who made this disastrous decision has never been acknowledged, but the faceless men behind it caused the obviously shaky confidence in the currency to become a total aversion to it. The experts quickly had to change tactic and start using their depleted reserves to now buy pounds on currency markets, to try and revitalise confidence and its value. Between February and April 1976, the Bank of England used up approximately one third of its reserves with these machinations.
Even such flip-flopping failed to halt the slide indefinitely. This was eventually achieved in the middle of June that year, when the Government approached central banks of America, Germany, France, Canada, Switzerland and Japan to ask for a loan. They duly received around £3 billion, which was enough of a sign of ‘confidence’ in the British currency that money markets were temporarily assuaged. However, this loan had to be repaid in full within six months.
By the start of September, this restored confidence began again to ebb away, and the speculators returned with a vengeance. Supposedly perturbed by a Labour party policy proposal around the nationalisation of leading banks and insurance companies, the pound resumed its downward march. Once more, civil servants poured petrol on the fire by announcing that the Bank of England was officially ending its support of the pound’s exchange rate value, due to the further depleted reserves, initially caused by the March devaluation. By the end of September, the currency had reached a record low.
This coincided with the start of that year’s Labour party conference in Blackpool, and Chancellor Denis Healey’s scheduled meetings with the Commonwealth finance ministers and the IMF. On his way to the airport, Healey received updates that the pound was dropping in value almost every fifteen minutes. The Chancellor eventually decided to turn back and, in a later meeting with his Treasury advisers, made the fateful determination that the country would now approach the IMF for a loan.
Conservative Conversions
In Blackpool that day, Callaghan and his close advisers seized the moment to announce an ideological conversion that had been fomenting amongst the Labour right for a while. Ditching the post-war Keynesian consensus of demand management, full employment, trade union rights, and a fully functioning and expanded welfare state, Callaghan proclaimed that Britain had been living on ‘borrowed time’ and that the above social democratic menu of macroeconomic policies no longer existed. These prescriptions for combatting recessions, Callaghan averred, merely added more inflation into the mix, eventually bringing greater unemployment. He and his advisers had taken the first steps on Britain’s road to right-wing monetarist economic orthodoxy, and eventually Thatcherite neoliberal capitalism.
Later that year, the guru of neoliberalism, Milton Friedman, told a British TV programme: “The most hopeful sign I have seen in Britain was the talk which your Labour prime minister gave to the Labour conference at the end of September. That was, I think, one of the most remarkable talks – speeches – which any government leader has ever given.”
The day after Callaghan’s intervention, it was announced that Britain would be applying to the IMF for a loan of £2.3 billion, the largest amount ever requested from the organisation. The pound began to steady, and Healey made his way to Blackpool to make the case. Having been voted off the party’s National Executive Committee the previous year for his right-wing politics, Healey was not allowed to address the conference from the rostrum and instead had to speak from the floor as a standard delegate. Booed on his arrival at the conference hall, Healey’s speech followed a debate on the proposal to nationalise significant sectors of the UK finance industry. Having only the standard five minutes accorded to a delegate to make his case, the Chancellor gave a bizarre performance defending the Government’s recent cuts and stringent pay policies, saying these would form the basis of his negotiations with the IMF, all the while being continuously heckled by other delegates. Regardless, the Labour party conference had no power, real or imagined, to stop the Government’s agenda.
A Cheque that May Bounce
In October, the IMF negotiating team arrived in London and Healey raised interest rates in an attempt to protect the pound for the duration of the talks. However, due to stalling on the part of the British Government, these talks didn’t actually begin until the start of November. The Treasury informed the IMF that they projected the Public Sector Borrowing Requirement (PSBR) for the next two financial years to be £10.5 billion and £11.5 billion. This caused the IMF to propose state cuts of a total of £7 billion over the corresponding period. The Labour cabinet countered with a figure of £2 billion each financial year as the absolute maximum they and the labour movement would be able to stomach. The talks reached a virtual stalemate over this issue, but the advantage rested with the IMF: Britian needed to repay its loan from earlier in the year by the end of December.
Secret discussions between select Government and Treasury representatives and the IMF team eventually resulted in an agreement to cut £2.5 billion in state spending over the next two financial years. When Callaghan brought this deal to the Labour cabinet, several prominent members objected and proposed alternative plans for the Government to pursue. Tony Benn made the left-wing case against cuts and for an alternative economic strategy. Citing the parallels with the infamous Labour Government of 1929-31, which cut state spending on welfare to try and maintain the gold standard of currency exchange, before quickly dropping it when the party split and its leader Ramsay MacDonald formed a ‘National’ Government with Liberals and Tories, Benn argued that the Government should immediately impose more stringent controls on currency exchange, capital movement and imports, which would shield the pound and allow Labour to then enact a socialist regeneration of the ailing British economy.
Healey restated his case to the cabinet the day after and was supported by Callaghan and Michael Foot. Cuts of £1 billion for the financial year of 77-78 and £1.5 billion for 78-79 were accepted by a vote of eighteen out of twenty-three cabinet ministers. The cuts focused on employment support measures, infrastructure investment, defence, housing, nationalised industries, and government subsidies to essentials. With the Conservative Party ideologically compromised by the whole affair, the terms passed the House of Commons vote, with Tory MPs abstaining. Alan Fisher, the head of the National Union of Public Employees, ominously stated: “In meeting the conditions made by the IMF, the Government have accepted a cheque that may bounce at the next general election.”
Shock Doctrine
After the deal was signed and the terms announced the official PSBR figures were published for the financial year 1977-78. These showed a borrowing requirement of £5.6 billion, almost half the level the Treasury officials had given to the IMF as part of the negotiations.
Bernard Donoghue, one of the Government’s closest advisers and firmly on the right of the Labour party, stated later:
The Treasury and the Bank of England wanted cuts. They were exaggerating everything. In 1976, I remember a Treasury friend said to me, ‘Look, you can’t manage the economy tightly over a long period. You only get a chance once every decade to get the economy under control. What you need is a crisis that frightens ministers into accepting [your ideas]. The bigger the crisis, the more you can frighten ministers. [It’s] what we call the Treasury bounce.
Even Denis Healey commented:
The figures were unreliable. I mean, incredibly so. If you look at the PSBR… [it was] billions out. […] The big problem they always have in the Treasury is getting governments to control spending. So any excuse they can find for getting spending cut they will take. It wasn’t so much a conspiracy against the government so much as an attempt to get the policies they believed in.
Around six months after the conclusion of the loan agreement, it became apparent to the Government that they in fact never needed it in the first place. They used less than half of the funds and paid it back in full well ahead of schedule. Healey again: “The whole thing was unnecessary. If I’d had the right figures, I needn’t have gone to the IMF.” Regardless, the cuts proceeded, and the pound staged a consistent recovery throughout 1977.
Fallout
But at what cost? The shock doctrine of the Treasury and Bank of England caused a Labour Government to denude itself of the ideological buttress of its post-war social democratic advances, namely Keynesian macroeconomics, and forced through cuts to public spending against the wishes of party members and to the direct material disadvantage of the party’s core voting bloc, the working class. The trade union rank-and-file soon blanched at the pay policies enforced on it by a social contract with the Government that was blatantly one-sided: while the unions upheld their side of the bargain through holding back from industrial disputes, the government failed in return to enact or maintain various policies to increase the social wage, especially following the IMF bail-out. The labour movement splintered, and the ‘winter of discontent’ followed in 1978-79. At the next election, voters opted for the more convincing of the two monetarist options, right-wing Margaret Thatcher, and so Britain fell into four decades of a neoliberal nightmare from which it is still to awaken.
The current Labour Chancellor, much more at home with the prevailing economic orthodoxies than even the old right-winger Denis Healey, has been given similar doomsday economic forecasts by the Treasury department as those concocted out of thin air in 1976. Those resulted in what amounted, essentially, to an economic coup by a group of unelected reactionary ideologues, paving the way for a sea-change in British politics and the social fabric of the country, to its clear detriment. Quite where this latest iteration of such events will take us is up in the air at best – how much worse can things get? – but the warnings of 1976 should be borne in mind. The black hole seems an appropriate comparison.
Source: ‘When the Lights Went Out: What Really Happened to Britain in the Seventies’, Andy Beckett (2009).
Liam Payne is a socialist, trade unionist and community worker from Edinburgh.