A key figure in the UK’s 1976 IMF crisis pleaded with ministers to tie Britain more closely to the economic structures of the then European Economic Community to shore up the value of the pound, newly released official papers show.
The papers, from the National Archives, also reveal that officials considered turning the UK into a “siege economy”, limiting imports and imposing exchanging trade controls to try to shield the country from the effects of the currency’s decline.
The events took place as Britain’s then-prime minister, James Callaghan, and the chancellor, Denis Healey, battled to halt the sliding value of the pound, which had dropped by nearly 25 per cent against the dollar in nine months. The decline fuelled inflation — then running at an annual rate of 14.7 per cent — and undermined support for wage restraint policies that the government had painfully hammered out with trade unions.
After months of negotiations, the government in December 1976 secured a $3.9bn loan from the IMF, the fund’s biggest ever loan at the time. In return, the UK made annual cuts of £2.5bn in public spending and raised £500m through selling shares in BP, the nationalised oil producer. The incident is widely regarded as one of the lowest points in Britain’s post second world war decline.
As the IMF negotiations dragged on in the month before the deal, Harold Lever, a key cabinet minister, wrote a paper urging Callaghan to use the expected deal with the fund as a way to join the EEC’s monetary “Snake”, a precursor to the European Monetary System, which later paved the way for the Euro. Members of the Snake intervened to prevent excessive fluctuations in the value of each other’s currencies.
“We ought now to consider joining a reformed Snake at around the present parity,” Lever wrote in the paper, adding that the UK’s trading partners, including the US, would welcome the “resultant increase in monetary stability”.
“We would also benefit politically from this communautaire response to the financial support which our EEC partners will be giving us,” Lever wrote.
The French word “communautaire” referred to steps towards greater European integration. The Snake needed to be reformed because by 1976 only the joint currency of Belgium and Luxembourg, the Dutch Guilder and the Danish Krone were still participating alongside West Germany’s Deutschemark, its benchmark.
However, Anthony Crosland, foreign secretary, rubbished the idea of joining the Snake in a memo to Callaghan days later. Crosland suggested the UK would struggle to stay within the mechanism because its inflation rate was much higher than Germany’s.
The idea of the “siege economy” — imposing exchange controls and strictly limiting imports in a bid to shield the economy from the currency crisis — is discussed in a long memo prepared on October 4 by Kenneth Berrill, head of the Central Policy Review Staff in the Cabinet Office. It concluded that any benefits of a siege economy would arrive too slowly to outweigh its short-term costs and risks.
Although the Snake system was transformed into the European Monetary System in 1979, the UK stayed out until 1990. It was forced out again two years later by market pressure on Black Wednesday.