THE IMF CRISIS OF 1976*
British history since the war has been marked by a long series of balance of payments crises, culminating in the crisis of 1976 when it was necessary to turn to the IMF for a large loan on terms acceptable to the IMF. Thanks largely to North Sea oil, the series of crises has been interrupted for nearly a decade and a half. But with a deficit that far outdistances all previous deficits we may yet see a resumption of the familiar pattern. If so it may be useful to look back to the crisis of 1976 to see what lessons can be drawn from that experience.
The crisis had its origin in events abroad going back to the world boom of 1973. International commodity prices shot up in that year at rates not experienced since the Korean war in 1950-1. Then came the first oil shock at the end of 1973 which multiplied oil prices fourfold and created a major imbalance in international trade and payments. The oil producers moved into balance of payments surplus on an enormous scale while countries importing oil, including nearly all the major industrial countries, ran into corresponding deficits. The rise in the United Kingdom’s import bill for oil in 1974 was estimated to account for £2.5 billion out of the balance of payments deficit in that year of £3.4 billion.
The outcome of these events was a universal speeding up of inflation on the one hand and a world-wide depression on the other. Domestic prices rose in sympathy with international prices which, roughly speaking, doubled between the autumn of 1972 and the spring of 1974. As the cost of living rose, demands were made for higher wages which, when granted, made prices rise faster still. At the same time, the increase in import prices which, in the British case, was much greater than the rise in export prices, exerted a deflationary pressure on demand and on the level of economic activity. Much of this took the form of a running down of stocks, in reaction to the difficulty of finding the necessary finance. By the spring of 1975 most industrial countries were
* First Cairncross Lecture, delivered at the LSE on 13 June 1991 (unpublished). This paper draws on material assembled by Professor Kathleen Burk and myself for our joint study of the IMF crisis, Goodbye Great Britain, Yale University Press, 1992.