The British experience of the global profitability crisis had, until 1977, been characterised chiefly by a periodic struggle to defend the price of sterling in the context of a deteriorating balance of payments performance. Foreign currency reserves, as such, were rarely in abundance, and had to be periodically run down in order to prop up the pound. Following the IMF’s intervention, however, this situation changed dramatically. The sharp appreciation of sterling allowed the Bank to ‘cream off’ foreign currency and replenish the reserves, which reached £20.2 billion in November 1977 (Dow, 2013: 281). Furthermore, North Sea oil, which began to flow in 1975, began to constitute a significant proportion of British exports in 1977, which further boosted sterling (Booth, 1995: 78).
Figure 4.UK official international currency reserves, $US million (Howson, 1994: 232).
0 10000 20000 30000 40000 50000 60000 1948195019521954195619581960196219641966196819701972197419761978198019821984198619881990
Nevertheless, this loosening of the external constraints on British policy- makers did not imply their complete insulation from the global crisis. The strong pound both masked and exacerbated the decimation of non-oil industrial companies’ rate of profit, and the rate of inflation remained at historic highs despite the disinflationary pressures of the exchange rate. The dilemmas created by the profitability crisis simply changed form: rather than finding themselves pressed on both sides by the tangible demands of their electorate for the maintenance of living standards, on the one hand, and the threat of currency crisis, on the other; the British state was now forced to reconcile the deflationary, disciplining effects of the strong pound and the growing resistance from various sections of society to the resulting depressionary conditions.
In order to repay the IMF loan, the Callaghan government needed to ensure economic growth. Yet this could not come by way of demand stimulus reflation, without sacrificing the IMF-imposed DCE targets. Export-led growth appeared to be the only solution, but the rising price of sterling was making this increasingly difficult (Britton, 1994: 33). In order to achieve a rise in exports, then, the Callaghan government attempted to purchase the TUC’s acquiescence to wage restraint through a series of tax cuts announced in July 1977 (Needham, 2014: 183). An expansionary mini budget was also announced in October, in reaction to the increase of unemployment over 1.2 million. In addition, the government sought to reduce the upward pressure on sterling by lowering interest rates and liberalising exchange controls, which were partially dismantled in December 1977 and January 1978 (ibid). Following the revelation that the PSBR had actually been below the IMF target in 1977, the government launched another moderately expansionary budget
in April 1978, which led to an erosion of the balance of payments recovery as demand increased (ibid).
At this time, fears within the government began to intensify that the recent confidence in sterling may not last, and that by the time the post-IMF boost in sterling wore off, the non-oil exporting sector of the economy would have already been decimated and deindustrialised. In July 1978, Callaghan consequently published a White Paper called Winning the Battle Against Inflation, which stated a five per cent guideline for wage increases (Britton, 1994: 319). This strict incomes policy would, it was hoped, allow the government to increase the competitiveness of British industry by combatting inflation, without the need to increase interest rates and thus further exacerbate sterling’s rise. This, however, was not to be. The TUC rejected the five per cent guideline in September, and the Labour Party rejected any form of pay restraint at their party conference in October (Needham, 2014: 125). This paved the way for a devastating wave of industrial action, known as the ‘Winter of Discontent’, which began with Ford workers winning a 17 per cent wage hike in November 1978 and peaked with a one-day strike by 1.5 million public sector workers in January 1979 (Cairncross, 1995: 223). Labour subsequently lost the May General Election to Thatcher’s Conservative Party.
The Thatcher governments have been the subject of intense academic scrutiny for decades (Hall, 1988; Kavanagh, 1990; Gamble, 1994a), with at least six key theses on Thatcherism existing within the literature (Jessop, 1988). Perhaps the phase of Thatcher’s reign that has provoked the most debate has been the government’s ‘monetarist experiment’ in the early 1980s (Thain, 1985; Bulpitt, 1986; Tomlinson, 2007). The chief point of contention regarding this issue has been
the degree of intentionality behind the Thatcher administration’s recessionary policies. While Eric Evans (2004) has argued that the Thatcher government plunged the British economy into a deep recession in order to break the back of the labour movement, Duncan Needham (2014) has insisted that the economic shock was a ‘mistake’ deriving from the government’s unfamiliarity with monetary targeting. Yet rather than relying on this ‘intentional versus accidental’ schema, this period can be better understood by grasping the contradictory role of recession in the reproduction of capitalist wealth: the Thatcher administration’s contractionary policies were intended to purge inflation from the British economy and reinstitute profitable capital accumulation, yet the ensuing depressionary conditions also threatened to undermine the government’s legitimacy. The monetarist experiment can thus be understood as a negotiated attempt to reconcile accumulation and legitimation imperatives through a hybrid governing strategy that fused elements of both palliation and depoliticised discipline.
Chancellor Howe’s first budget in July 1979 was quite contradictory, as it consisted of deep counter-inflationary expenditure cuts and an interest rate hike, as well as inflationary VAT increases. In addition, the government removed the remaining exchange controls in July and October, in an effort to ease sterling’s rise. Howe’s second budget, on the other hand, was unambiguously contractionary. In March 1980, the government set out MTFS – a framework of yearly declining targets for the money supply and PSBR. This policy, it was hoped, would lock the government in to a project of severe financial discipline: ‘If the targets were not met there would be automatic fiscal or monetary changes in government policy. The
room for discretionary economic management, which was held to have be so destabilising in the past, would be drastically reduced’ (Gamble, 1994a: 109).
However, this strategy of depoliticised discipline required a degree of perseverance that Thatcher did not possess, despite popular opinion to the contrary. In 1980, the stagflation crisis reached its most critical stage and the British economy experienced the worst economic downturn since the interwar period. Faced with more than two million unemployed, record levels of bankruptcies, and a collapse in GDP, Thatcher reneged on the MTFS commitments by reducing interest rates – despite the fact that the money supply aggregates were far exceeding the proclaimed targets (Britton, 1994: 53). As Needham (2014: 162) has wryly observed, ‘the lady
was for turning’. The government consequently enacted a hybridised crisis governing strategy. Palliative assistance was extended to the worst affected firms and to homeowners, through a relaxation of interest rates that was intended to ease corporate and mortgage debt repayments, as well as depreciating sterling to the advantage of exporters (Tomlinson, 2007: 9). Simultaneously, the government attempted to stick to its MTFS target commitments by balancing the loosening of monetary discipline with more draconian expenditure cuts and tax increases, as well as by selling massive quantities of government debt to soak up excess liquidity (Dow, 2013: 12; Goodhart, 1995: 106). In order to aid the anti-inflationary push, the government moved forward with restrictive trade union legislation with the 1980 Employment Act, which banned secondary picketing, attempted to disrupt the closed shop, and provided state aid for secret ballots (Dorey, 1995: 116). As such, by the March 1981 budget, the Thatcher administration was operating a deeply
contradictory governing strategy – pressing their feet on both the brake and the accelerator simultaneously.
This hybridised governing strategy continued throughout 1982 and most of 1983. Bank lending continued to grow, making a mockery of the government’s MTFS targets; yet unemployment also climbed above three million (Dow, 2013: 290). The government thus continued to rely on fiscal tightening and massive government debt sales to combat monetary growth, while loose monetary policy was intended to keep the worst effects of the recession at bay – particularly in the run-up to the June 1983 general election. Furthermore, additional restrictions on labour organising were introduced with the 1982 Employment Act, which redefined trade disputes (Dorey, 1995: 126). Nevertheless, the worst of the stagflation crisis was over. In 1983, British profitability climbed to eight per cent, the highest level since 1973, and inflation fell below five per cent, the lowest since 1968 (Mouatt, 2016: 290; Bank of England, 2018). Nationally, this recovery was due to the depth of the preceding recession and the consequent fall in wage and capital costs; while globally, the profitability crisis had reached its trough and the world economy began to experience an upturn.