Who says history doesn't repeat itself?
Britain's crisis began in early 1976 with a steady loss of confidence in the pound amid expectations that the budget deficit, current account deficit and inflation were set to worsen, and that the government would encourage a depreciation to boost the economy. The pound slipped below $2.00 in March and continued sliding toward $1.65 by October, a drop of roughly 25 percent in one year's time. Denis Healey, then chancellor of the Exchequer in Britain's Labour government, sought to stop the rot by cutting spending and increasing taxes in July, but the effort failed. In late September, after a one-day fall of 4 percent in the pound, Mr. Healey abruptly turned around at London's Heathrow airport, abandoning plans to attend a Commonwealth conference in Asia in order to return to his office to ride out the crisis. The next day he unveiled plans to seek $3.9 billion from the IMF
In return for the money, Britain agreed to make further spending cuts and, for the first time, to restrain the growth of credit and the money supply. The IMF agreement marked an historical shift away from the postwar strategy of using government spending to stimulate demand and growth, advocated by John Maynard Keynes, the economist, in favor of monetarist policies aimed at fostering long-term growth by controlling inflation and government spending.
"We used to think that you could just spend your way out of a recession," the prime minister of the day, James Callaghan, told the Labour Party's annual conference at the height of the crisis. "I tell you, in all candour, that that option no longer exists."
The new policies worked quickly, in part because the forecasts of worsening deficits proved too pessimistic. Within one year, Britain beat its IMF budget deficit target, the current account was back in the black and the government was trying to restrain the pound's rise.
By contrast, the political effects of the crisis were long-lasting. Labour was driven from office in the 1979 election that ushered Mrs. Thatcher to power. She used the memory of the crisis to build a consensus for policies geared toward low inflation, free trade and reducing the role of the state in the economy, a consensus that Tony Blair accepted in leading Labour back to power in May.
"It enabled Thatcher to say, quite rightly, that the whole period of Keynesian demand management had led to this crisis," said Gavyn Davies, the chief economist at Goldman Sachs International who was Mr. Callaghan's economic adviser at the time. "Even until the 1997 election, the Tories said, 'You elect Labour, you'll get the IMF back."'
Sunday, 23 November 2008
"You elect Labour, you'll get the IMF back"
This from a 1997 edition of the IHT: