1976 sterling crisis

The origins of the crisis have been attributed to the 1972 Conservative "dash for growth" budget initiating the inflation cycle.

James Callaghan's Labour government had to borrow $3.9 billion (equivalent to $22.1 billion in 2025 dollars) from the International Monetary Fund (IMF), while implementing significant spending cuts, with the intention of maintaining the value of sterling. At the time this was the largest loan ever to have been requested from the IMF.

History

Initiation of the inflationary cycle is traced to Anthony Barber's 1972 budget which was designed to return the Conservatives to power in an election expected in 1974 or 1975. This budget led to a brief period of growth known as "The Barber Boom," followed by a wage-price spiral, high inflation and currency depreciation, culminating in the 1976 sterling crisis. Barber was forced to introduce anti-inflation measures, along with a Price Commission and a Pay Board. The Conservatives lost the February 1974 general election (and the subsequent election held the same October) to Harold Wilson's Labour Party.

After the defeat of the 1976 public expenditure white paper in the House of Commons in March 1976 and the Bank of England withdrew temporarily from the foreign exchange market, Harold Wilson resigned as prime minister and was replaced by James Callaghan in April. Many investors became convinced sterling would soon lose value due to inflation. By June 1976, the pound had reached a record low against the dollar.

Oil shocks

In 1967, the Suez Canal closed down for eight years following the Six-Day War of that year, when Israel took and occupied the Sinai Peninsula for 15 years. That triggered the 1967 Oil Embargo, which only lasted a few months. In 1966, the year before it closed, 20% of all world oil cargo tonnage passed through the canal, with most of it heading north for Europe.

In 1973, the Yom Kippur War was fought, with Egypt crossing the Suez Canal aiming to take back the Sinai Peninsula from Israel. This triggered the 1973 oil crisis and embargo. Britain was an ally to Israel during the Arab–Israeli conflict. The oil crisis presented a severe economic shock to Britain, which it was ill-placed to withstand.