Kathleen Burk

This is not a particularly easy book to read and I suppose that it mostly has an appeal for people who (like this reviewer) lived through the events which the authors recount in great detail.

Nevertheless, it was a major national crisis with interesting features taking a wider view of the choices available in national political and economic policies.

There's no doubt that there was a crisis. In the first 6 months of 1975 British inflation was running at 30% p.a. with widespread economic dislocation and Sterling bondholders getting wiped out (along with the debt itself). From 1971 to 1979 British debt was reduced from 76% to 56% of national income despite record new issues, with bondholders essentially covering government deficits and losing their “investments”.

The hard left Labour central planner governments of Harold Wilson and Jim Callaghan were not going to lose any sleep over the bankruptcy of bondholders but they were very anxious to please their key militant Socialist/Marxist trade union block supporters. Basically they admitted that they were frightened of them and felt obliged to include them in key decision making, eg “Beer and Sandwiches at Nº10” or the “Social Contract “ that was supposed to award pay rises in line with the cost of living but always provided higher settlements with unionists claiming that high pay would get the economy moving. As the authors say, “It has ben estimated that in the first 15 months of the labour government average earnings in the public sector rose 12% faster than consumer prices and 4.5% faster than in the private sector.

Marxist style central planning required the appropriation of private resources by the government and as the authors say, “It (Chancellor Dennis Healey's 1976 White Paper) pointed out that in three years public expenditure had risen in real terms by over 20% while output was up less than 2%. Taxation had risen to the point at which a married man on average earnings was paying a quarter of his income in income tax whereas in 1961 he would have paid only a tenth.”

However, the interesting point is that the government was still not getting anything like enough taxation money to fund its spending, generating a continual growth in the PSBR (Public Sector Borrowing Requirement) that was itself becaming increasingly difficult to fund with the authors showing that this was the trigger for the 1976 economic crisis.

Basically foreign investors no longer wanted Sterling Bonds. They took account of the massive losses inflicted on existing bondholders. They questioned the role of Sterling as a reserve currency with OPEC balances tending to migrate to the Dollar. They saw that the Socialist /Marxist Labour British government supported the massive inefficiency of central planning with ever rising taxation and an ever growing PSBR and they essentially decided to pull out.

This was the Sterling Crisis that faithfully reflected UK economic performance in the early to mid 1970's. Great Britain (1974-76) had the highest inflation in Europe, the lowest rise in GNP, the highest unemployment and the lowest output per man/hour in manufacturing – being seen to fail on all counts. Sterling plummeted in value as the country was unable to handle the big international rise in commodity prices from 1972 to 1974. Germany fought rising prices with higher interest rates and deflation but the British Socialist/Marxist planners decided to support their highly inefficient system in Keynesian style by protecting public spending.

Its an interesting story and Burk and Cairncross show in fine detail how in 1976 the Labour government sought help from from the only organization that could provide it (the IMF) while firmly holding their noses and blocking and attacking it every step of the way.
All credit to the IMF for eventually giving the loans with the associated guarantees despite the lies contained in the British “Letter of Intent” (given in full in the appendix), eg. Clause 4; ”The two pillars on which this strategy is based are the social contract with the trades union movement, which has already allowed us to achieve a substantial reduction in the rate of price and wage inflation and has brought about a dramatic improvement in industrial relations; and the industrial strategy, through which the Government , the trades unions and the employers are seeking to improve the performance of our manufacturing industry and, in particular, its productivity and its ability to compete successfully in world markets.”… (more)