The 1976 IMF Crisis and Its Aftermath

For Prime Minister James Callaghan, the 1976 IMF crisis was the most serious since the end of the Second World War.1 However, it was ‘less traumatic’.2 The austerity measures the IMF demanded did not prevent steady economic expansion in 1977–78 and the rapid improvement in the external position meant Britain avoided exhausting all its credit line,3 which together overshadowed the calamitous collapse of sterling.4 Nevertheless, a crucial fact remains: it was the IMF agreement that caused ‘the immediate turn-around in the flow of funds’.5 Furthermore, even though the crisis was ‘less traumatic’, it was ‘the most difficult economic and political baptism of any postwar British administration except that of Attlee’.6 As market forces demanded the ‘baptism’, Britain was forced to petition for an IMF stand-by. This standby was not ‘business as usual’,7 for it amounted to an unprecedented SDR 3,360 million.8, 9 In particular, and unlike the stand-by at the time of the 1967 devaluation, stringent terms entailing stabilisation programmes and performance clauses were agreed ‘for the first time in the Fund’s history’.10 Furthermore, the Basle Agreement was restored in order to reduce the use of sterling as a reserve currency, with the agreement being strictly tied to the IMF stand-by: ‘The Managing Director of the Fund was asked to undertake an unusually important role in monitoring the [Basle] agreement’.11 For the IMF, it was ‘the largest, longest, most difficult, and, perhaps, most momentous negotiation in the history of the Fund’.12