The 1976 IMF Crisis: The shift to a New Consensus

Following the end of the second world war, the people of Britain had enjoyed an extended period of prosperity like none before. With the hardships of conflict gone but still in recent memory, Britain began the monumental task of rebuilding damaged war stock, subsequently raising public spending levels to all-time highs. Full employment and greater access to universal credit brought with it a new wave of consumer based demand. Resultantly the governments of post war Britain had found a new enemy. Inflation.

The burden of inflation on the economy culminated in the mid 1970s and a vicious economic cocktail began to brew. High wage demands from the trade unions, spiking oil prices as a result of the OPEC embargo and a recession in 1974 following on from an inflation provoking budgets delivered by Anthony Barber had all began to bare too much strain on the British economy.

Resultantly in 1976 the new head of the Labour party James Callaghan proposed a move away from traditional Keynesian economic policy. The former chancellor instead proposed a white paper to cut the budget deficit, causing controversy amongst the party leaders. Michael Foot strongly opposed the spending cuts and it quickly became apparent a new route would have to be pursued. The final straw came in the form of a sterling crisis, as the pound began to rapidly lose value, Callaghan was forced to approach the IMF and request to borrow $3.9bn in order to stabilise the exchange rate. The loan was secured on the basis that Britain would begin a regime to cut public spending and raise interest rates in such a way to bring down the astronomical inflation rates of the period. This move characterised a shift from the post war economic consensus to commit to high public spending in favour of maintaining full employment and marked the shift toward a new monetarist economic agenda.

James Callaghan emphasising a point on wages to trade union delegates.

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