Philip Pilkington: Thinking Makes It So – The IMF Bailout of the UK in 1976 and the Rise of Monetarism

By Philip Pilkington, a writer and research assistant at Kingston University in London. You can follow him on Twitter @pilkingtonphil. Originally published at Fixing the Economists

Monetarism began it’s rise to world prominence in the ever-conservative Bundesbank in 1974. But it would be the government of Margaret Thatcher in the UK, elected in 1979, that would truly launch monetarism in central banking. After Thatcher’s monetarist experiment undertaken between 1979 and 1984 every economics student would be taught to recite the various monetary aggregates by heart for at least a decade or two.

This is what accounts for the monetarist bent we see in the economists of the last generation. Basically any economist trained between roughly 1980 and 1995 would be heavily exposed to monetarist dogma. And only those that read alternative accounts of money creation — namely, the theory of endogenous money — would be fully immunised. This explains, for example, why certain economists that champion Keynesian policies — like Paul Krugman — actually speak in monetarist tones.

But it was the Labour government of James Callaghan that paved the way for the monetarist dogma. The short version of the story runs something like this: in 1976 Callaghan needed a $3.9bn loan from the IMF because he was concerned that the value of the sterling was about to crash. The IMF insisted that Callaghan undertake austerity policies and that he establish a monetary target for the central bank. This is how monetarism entered the UK.

As shorthand this is pretty much accurate. But to understand the history in more depth we must consider the role of the financial markets and the financial press — two institutions that had been ‘converted’ to monetarist dogma pretty much the moment the sustained inflation of the 1970s broke out. In order to explore this I will draw on an excellent paper by Aled Davies entitled The Evolution of British Monetarism 1968-1979.

The debate surrounding monetarism began in 1968 when journalists in Britain and the US began to pay attention to Milton Friedman. This was partly because of Friedman’s communicative abilities but it was also partly because of the inflationary pressures that were beginning to build in the world economy at that time — mostly due to trade union entrenchment, upward movements in commodity prices and large deficits in the US to finance the Vietnam War. Even at this stage institutions like the OECD and the IMF were paying attention.

The financial sector already had began to take note; not so much because of monetarism’s supposed predictive capacity but rather because key institutions were investigating the aggregates. One could not hope for a better illustration of Keynes’ ‘beauty contest’ theory of financial markets. The market in which this imitative behavior most important was the market for British government debt. Davies gives us an idea of how this imitative behavior spread,

[M]onetarist interpretations began to proliferate more generally within the financial markets, providing clues to future economic growth and inflationary pressures likely to emerge. This was led by circulars and bulletins such as those published by W. Greenwell & Co., Pember & Boyle (written by Brian Griffiths), and Joseph Sebag & Co. (Alan Walters). The writers of these circulars demonstrate the significant personal and conceptual overlap between academic-, City-, and political-monetarism. Brian Griffiths was a lecturer in Economics at the LSE (1968-76) and Professor of ‘Banking and International Finance’ at City University (1977-85). Alan Walters was a Professor of Economics at the LSE (1968-76). Both of these, alongside Gordon Pepper, were senior advisors to the Conservative Party in opposition and in Government. (p10)

By the time the inflation in the UK had taken off due to the first oil price hike in 1973-1974 some of these commentators were writing letters to Prime Minister Harold Wilson saying that if he didn’t balance the government budget the UK would fall into the abyss of a hyperinflation. This was complete nonsense, of course, because the inflation wasn’t due to an unbalanced government budget at all. Rather it was due to the rising price of oil and the wage-price spiral that accompanied it. But the City of London, unfortunately, was on the side of the hyperinflationists even though the Treasury Department remained unconvinced.

The Chancellor of the Exchequer Denis Healey, however, took the monetarist critique and turned it into his own: he alleged that the monetarists were correct in their diagnosis and that the imbalanced budget had been the result of the previous Conservative government’s misguided fiscal stimulus programs. Talk about giving them the rope that they would eventually hang you with!

By 1975 the financial markets — most notably the foreign financial markets upon whom the strength of the sterling depended — had become convinced that the best manner to understand the viability of the UK’s economy was to focus on the monetary aggregates. In order for the government to appease the foreign exchange markets and foreign holders of UK government debt they had to appear to be trying to keep the money supply under control. Since these two markets had an enormous impact on the value of the sterling the government already found itself needing to drum up the monetarist rhetoric. As Davies writes,

Civil servants and Bank officials consciously expressed the view that the influence of ‘monetarist’ ideas amongst investors were a significant limitation on the Government’s policies. In a note from the Downing Street Policy Unit in January 1976 the Prime Minister was informed that ‘some people in the City…(whether correctly or incorrectly does not matter) believe that a rising money supply leads to inflation.’ (p17)

Because the Bretton Woods system had broken down only a few years before the financial markets needed a metric by which to judge whether government policies were ‘sustainable’. That metric became the money supply. This was a classic example of a rather unimportant variable becoming important merely because people began to think it important. In 1977 Treasury Minister Denzil Davies summed the situation up perfectly when he said,

[W]e should do all we can do to keep M3 within the announced target during this financial year. It matters not, it seems to me, that the definition of M3 is arbitrary; that the commitment to the IMF is in terms of Domestic Credit Expansion (although everyone knows that DCE is irrelevant when a country is in a balance of payments surplus); and that an increase in the money supply caused by “printing money” may be of a different nature to an increase caused by inflows. All this, no doubt, is good stuff for a seminar. Unfortunately, those people who have the power to move large sums of money across the international exchanges believe, on the whole, that “money counts”. The fact that it may not count as much as they think it does, seems to me to be somewhat irrelevant. (p25)

By 1976, with inflation raging and monetarism important because of the very fact that it was believed, the government felt the sterling to be faltering. They were concerned about a massive speculative attack that would crash the currency and send inflation skyward. It was at this point that the Callaghan government approached the IMF for a loan.

The Treasury hated the idea, but the Callaghan government felt compelled to accept it. And with that the government had trapped itself. By positing the need for a target without the intention of seriously pursuing it they had sealed their fate. They could now be chastised for not meeting a target which was, as those working in the Treasury at the time knew well, impossible to meet because the money supply was impossible to control (i.e. it was endogenous and determined by other variables).

In 1979 Thatcher would rise to power with full intentions to meet the targets she set, no matter what the cost. The fact that she failed spectacularly and monetarism was thrown in the dustbin after 1984 was of secondary importance; the dogma had done it’s job — it had justified the demolition of British manufacturing and the gutting of trade unions — and anyone exposed to economic ideas in this era was forever infected.

So, what can we learn from all this today? Well, certainly that the finance sector has a remarkable ability to spread ideas which become important simply for the fact that they are believed. Unfortunately, however, financiers have a very immediate and obvious interest in seeing the government tackle inflation — as it eats into their earnings — but they have no very immediate and clear incentive to have the government reflate the economy.

Nevertheless, it is clear that most of the financial community are coming around to Keynesian-ish ideas today and for those of us who want to see those sorts of policies enacted that cannot be a bad thing at all. Apart from that I think that there is much of aesthetic interest in the monetarist saga; if nothing else it shows us just what a hall of mirrors we live in, with ideas taking on a life of their own through the simple act of people pretending to take them seriously.

The New Monetarism

About a year and a half ago I wrote a three-part series on monetarism which I published on Naked Capitalism. It might be of interest to readers so I include links below.

The New Monetarism Part I — The British Experience

The New Monetarism Part II — Holes in the Theory

The New Monetarism Part III — Critique of Economic Reason

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About David Dayen

David is a contributing writer to He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. Ben Johannson

    So, what can we learn from all this today? Well, certainly that the finance sector has a remarkable ability to spread ideas which become important simply for the fact that they are believed.

    Elites are as vulnerable to groupthink as any other socio-economic set, which to me means they aren’t particularly elite; they’re dummies just like everyone else.

    1. Moneta

      A large percentage of the elite got a ride on the gravy train and those who believe it came from their greatness instead of luck are at risk. Which is most.

  2. allcoppedout

    There’s an excellent example of cracker-barrel “thinking” at ZH today –

    I’d suggest the 9 golden rules of speculation put forward (all mutually contradictory) are no more than a punt to find those dumb enough to catch the ball.

    The problem with Philip’s argument is that we have known that it is easy to argue using different root metaphors in the limits of a paradigm for a couple of millennia (Sextus Empiricus). Socrates today would probably say ‘I know nothing but even this is to know more than them’ whilst pointing at economists.

  3. Chad

    The financial sector is going to believe what they like. The problem is their very loud insistence that their policy priorities are the only important policy priorities, and the news media’s complicity in propagating this idea, and the government’s complicity in actually believing it. (Well, they believe it because they’re generally the same people, revolving door and whatnot, etc.)

  4. PhilJoMar

    OK IANE (I am no economist) but I think this account needs a little fleshing out for sake of completeness. I seem to remember reading that Treasury calculations of the overall budgetary implications of the 1976 sterling fiasco were incorrect and that the Callaghan govt. didn’t have to go cap in hand to the IMF at all (although hindsight, of course, is a wonderful thing).
    I think Robert Skidelsky might have written about this…

    1. James Levy

      What they needed was a bridge loan until the North Sea oil came online, and the Americans refused to give it to them, so they had to go to the IMF (although why they didn’t just use government bonds to paper over the gap I have no idea).

      What you had was a newly empowered financial elite (because Bretton Woods was dead) wanting to change the rules of the game, and a political elite that had lost any belief in the humanizing project of the 1945-51 government (or in America the 33-36 government). The guts, ingenuity, and incentive were all on one side. It was a chance for conservatives to do what they always want to do: establish hierarchies and inequalities, which they see as the natural outgrowth of the fact that men are not created equal and that violence and competition are the natural order of things. The “all in this together” spirit of the Depression and World War II grated on them something fierce, and the first chance they got to upset that apple cart, they pounced.

      1. PhilJoMar

        Finally got round to looking at this again…
        What I am questioning is the idea of the bridging loan…it wasn’t needed!

  5. allcoppedout

    Sadly appears more or less impossible to discuss this thread in any detail due to whatever. The budget “discussion” in Parliament today has the same problems of Philip’s piece against (what I believe) idiot monetarism. The Government has just given a clown accentuate the positive view of our economy, and the Opposition is explaining the vast majority of us have it worse. What our arguments don’t do is make the data clear (I don’t mean bandying institutional figures). Much as I prefer what the opposition says to the government, I prefer Philip to the monetarists by a country mile. This is the problem and I see it as a data problem.

    More in whatever melted into air if it appears.

  6. Jim Haygood

    ‘Inflationary pressures that were beginning to build in the world economy at that time — mostly due to trade union entrenchment, upward movements in commodity prices and large deficits in the US to finance the Vietnam War.’

    Silliness. Unions don’t cause inflation. Commodity prices don’t just go up by themselves (their long-term trend is down). US deficits were significant because they were monetized by the Federal Reserve, thus exporting inflation via the US dollar reserve currency.

    1. John Yard

      I have always suspected that much of the inflationary pressures of the 1970’s were due to demographics: the baby boom generation started entering the labor market in huge numbers in the late 1960’s/early 1970’s. As entry level workers they were relatively inefficient and unskilled, yet had to be paid a similar wage as skilled workers. Add the explosion upward in household formation, and you have a large burst in demand, without corresponding increase in output. The exact opposite of the current situation.

      1. Synoia

        Things were going well until the Oil Shock in 73. The remainder of the ’70s was economic hell.

        1. Moneta

          If you consider that a large number of people started buying houses and cars at the same time, that would mean a large demand for resources… and if capacity was limited that would accentuate the squeeze…

        2. Calgacus

          Synoia is largely right, except that the rest of the 70s were still better for most of the 99% than the subsequent decades. The inflation was caused mainly by oil (& other unusual commodity price rises, as from the Russian Wheat Deal). The best, accessible description of the 70s inflation are in Lester Thurow’s fine old books – get ’em for 1 cent plus shipping at Amazon. The “fine-tuning”, trickle-downy, military “Keynesianism” of the time was more prone to inflation than Keynes’s own MMT/Minskian/New Deal prescriptions and the COLAs of the time helped maintain inflation. Wray, following Vatter & Walker contends that Johnson’s Vietnam era deficits were not a major cause of the 70s inflation.

          That all these things would have some bad effects was unavoidable. But elites worldwide, having seen excessive uppitiness from those they thought themselves the masters of, decided that these problems would be the perfect excuse to enact the planned end of the postwar golden age by abandoning full employment. (See Mitchell & Muysken’s Full Employment Abandoned) Only the smartest cookies saw what was happening before the oil crises (Around 1971, the Kaleckian economist Josef Steindl & the philosopher Herbert Marcuse said in almost the same words: “the decision for stagnation has been made”). Mitchell’s student Victor Quirk dug up a lot of confirming evidence for the conscious – and pre-1973 – nature of this decision – surprising even Mitchell.

          The most poignant part of Mosler’s 7 deadly book is his observation that the boring thrifts that he started working at in the 70s – managed to finance more home buying, in a smaller poorer USA, than the wonderful financial innovations of the next few decades, even in speculative bubbles.

    2. bob

      Monetarism (n)- As defined by Jim Haygood-

      “US deficits were significant because they were monetized by the Federal Reserve, thus exporting inflation via the US dollar reserve currency.”

      Complete gobbledegook. You should write op-eds for the WSJ. Just enough big, vacuous words to sound intelligent.

      You do realize that you are a monetarist, don’t you?

      1. skippy

        Minimalism has a long a bloody swath throughout history, too much data, must reductive sample with narrow focused bias – all outcomes – must preform with in pre-established perimeters.

        skippy… for it was written…

  7. Alejandro

    “So, what can we learn from all this today? Well, certainly that the finance sector has a remarkable ability to spread ideas which become important simply for the fact that they are believed. Unfortunately, however, financiers have a very immediate and obvious interest in seeing the government tackle inflation — as it eats into their earnings — but they have no very immediate and clear incentive to have the government reflate the economy.”

    If a distinction can be made between “risk” and “uncertainty”, then certainly a distinction can be made between “earnings” and “profit”. Are all “profits” earned?

    “If a person is over-committed to verbal constructs, definitions, formulae, ‘conventional wisdom’, etc., that person may be so trapped in those a priori decisions as to be unable to appropriately respond to new data from the non-verbal, not-yet-anticipated world. By definition, the extensionally oriented person, while remaining as articulate as any of her/his neighbors, is habitually open to new data, is habitually able to say, “I don’t know; let’s see.”” –From Science and Sanity by Alfred Korzybski

  8. susan the other

    It would be nice if trickle-down worked. It doesn’t work because the trickle always gets diverted and never makes it to the lowest levels. If trickle-down worked, supply-side stimulus to get an economy running again without “inflation” (which nobody can define unfortunately) would be a good tactic. What always happens is whoever is at the top of the food chain, the richest set of people, always eat first! Ass backwards if you want to nourish the entire economy without creating “inflation” (whatever that really is). And in the case of the US, “investors” (we are forever getting our investors and our speculators mixed up, but nevermind) on Wall Street demanded a good return on their investments, they demanded high productivity and the best way to achieve it was by decimating labor and off-shoring entire factories to low-wage nations. It was achieved under the name of TINA by hijacking the stimulus. It all became such a farce and even today nobody is admitting that this whole debacle even happened, and certainly not that it all happened in the sacred name of profits. Profit is such a dirty word. In a real economy there should be no profit unless it rises from the bottom and the only way it can rise from the bottom is if the bottom 90% of the economy is functioning and prospering. MMT can achieve this. But upside-down MMT (monetarism) simply controls the money supply (like a reservoir of water with no irrigation canals) and looks the other way when it all goes to the top 10% who happen to be living right on the shoreline. I really do not understand why this isn’t simple common sense.

    1. James Levy

      You bring up a critical point about profits. As far as I can see, if markets worked the way we are told they work, profits would not exist: each party would get the exact same exchange value so both would be happy but neither would make a profit. There has to be some inefficiency or other factor involved for profits to pop out magically from what is supposed to be an impartial mechanism for parties to exchange goods and services.

      1. jonboinAR

        In the one Econ class I took, way back in the Pleistocene, they taught us something like that, I think, that in a properly functioning market there are no profits.

        1. James Levy

          Ironic, then, that economists NEVER judge the health or soundness of a market by the drop or disappearance of profits in it! Anything the government does to effect markets is bad, yet markets that yield windfalls for the few and crapified goods for the rest of us are just ducky.

          Is it all lying, cognitive dissonance, or just arrogant stupidity?

        2. skippy

          Funny that Says opinion only functions in a perfect barter economy, but, hay, perfection is always around the corner.

  9. 1 Kings

    Read, re-read, then triple-down on Nicholas Shaxxon’s book ‘Treasured Islands’ to see how this all jives with City of London and Wall St’s machinations during this time.
    Shaxxon has commented on here from time to time, and let me just say thanks for the book, Nick, and for sending my ‘resistance-is-futile’ meter up several notches. Still can go up to eleven, so at least I(we’ve) got irony.

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