5/24/2019 The Cabinet Papers | Sterling devalued and the IMF loan

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Sterling devalued and the IMF loan

Devaluation of the pound Content

The left wing of the Labour Party defeated the Public
IMF crisis
Expenditure White Paper in the Commons in March 1976.
Subsequently, Harold Wilson resigned and James Callaghan World recession
took over as Prime Minister. Around this time, investors and the oil crisis
became convinced that the pound was overvalued and that Sterling
the government might devalue. A large-scale sale of sterling devalued and
began, which rapidly lost value against the dollar. the IMF loan
In spite of further efforts to reduce inflation, the pound
continued to lose value, reaching a record low against the
dollar in June 1976. The US Treasury Secretary now agreed
with officials in the International Bank of Settlements that the
pound was undervalued. He offered to partially fund a stand-
by loan of $5.3 billion to support the pound. He insisted,
however, on repayment of the loan by December 1976.
Proposals for further cuts in expenditure and tax increases to
reduce the budge deficit were debated in Cabinet in July. By
September 1976, Britain had already drawn heavily on the
short-term loan and it was apparent that a loan from the IMF
would be necessary to fund repayment.

The 3.9 billion dollar loan

As pressure on the pound continued, the government
approached the IMF for a loan of $3.9 billion in September
1976. This was the largest amount ever requested of the
Fund, which needed to seek additional funds from the US and
Germany. The IMF negotiators demanded heavy cuts in public
expenditure and the budget deficit as a precondition for the
loan. Healey's proposals for a cut of around 20 per cent in the
budget deficit were hotly debated in Cabinet, particularly by
Anthony Crosland and Michael Foot. Eventually they acceded,
as it seemed likely that the refusal of the loan would be
followed by a disastrous run on the pound. Healey announced
the forthcoming reductions in public expenditure to the House
of Commons on 15 December 1976.

Following the agreement with the IMF, the overall economic

and financial picture improved. Interest rates were soon
reduced and the pound quickly appreciated in value. By the
end of 1977, partly as a result of new oil revenues, there
were improvements in the balance of trade. Britain did not
need to draw the full loan from the IMF. Nevertheless, the IMF
crisis reinforced a change in policy orientation away from full
employment and social welfare towards the control of inflation
and expenditure.

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