Financial crises have a long history of catching governments unawares.
As a writer about such events over many decades, I have watched administrations of all political colours, and on both sides of the Atlantic, swept into the abyss by underestimating the raw power of financial markets.
As a Washington correspondent in 1976, I had a front-row seat to Britain’s humiliating request for a loan from the International Monetary Fund (IMF) after the pound went into freefall as James Callaghan’s Labour government was swamped by surging oil prices, runaway inflation and untrammelled trade union power and wage demands.
Britain’s ignominy was a rehearsal for a similar implosion as the recently deceased and eulogised president Jimmy Carter was defenestrated from the White House.
The lesson of such calamities is that any government that loses control of the economy is condemned to the political wilderness.
For voters are unforgiving of politicians who, through poor decision-making, allow a nation’s financial destiny to be decided by Wall Street and the trading desks of investment bankers in the City of London.
Liz Truss’s short-lived premiership besides, I can think of few administrations that have come into power with such a belief in their own economic superiority only to come unstuck so rapidly as Sir Keir Starmer and Rachel Reeves’s Labour government.
The brimming confidence with which it took office six months ago has unravelled as speedily as any I can remember.
Rachel Reeves is now facing an ugly revolt on the currency markets
It held the naive belief that a technocratic approach to managing budgets would outweigh any doubts as to how taxes are raised and money spent.
Labour’s tax policies have pole-axed business confidence and there is little hope that its big spending, including huge pay rises in the public sector, will improve services any time soon.
Reeves is now facing an ugly revolt on the currency markets and an attack on the value of British government bonds – which will almost certainly require emergency medicine and divert Labour ministers from their election promises of change and growth.
Convincing the public of its ability to govern rather than the Tories proved easier for Starmer than persuading the hard-bitten traders on global markets. The latter pounce on weakness and give governments no quarter.
As Reeves began her current, unwise, trip to China, leaving her low-octane deputy Darren Jones to fend off an urgent question in the Commons, I couldn’t help but be reminded of similar ill-fated foreign jaunts.
In 1976, the then Labour Chancellor Denis Healey was at Heathrow ready to fly to an IMF jamboree in Manila.
Desperate calls from the Treasury and the Bank of England ensued, telling him that UK foreign exchange reserves were being exhausted as the pound tumbled, despite the bank rate being raised to a penal 15 per cent.
Britain was in disarray, with rubbish piled on the streets, the nation’s lifeblood of trade stalled by disruption at the docks and flagship car-maker British Leyland in a perpetual state of war with the unions.
If the pound and the British government was to be saved, the only option was to go cap-in-hand to the IMF in Washington for a ‘standby’ loan to buttress sterling. However, driven by hardliners at the US Treasury, the IMF demanded its pound of flesh.
Within 24 hours, I received a briefing from Healey that the price of the $3.9billion loan (then the biggest in the IMF’s history) would be savage cuts in government spending and dramatic limits on domestic credit.
The humiliation still lives in the nation’s collective memory and propelled Margaret Thatcher into Downing Street.
More recently, there were echoes of this mortifying turn of events when then Prime Minister Liz Truss and her Chancellor Kwasi Kwarteng sacked the trusted permanent secretary of the Treasury Tom Scholar and delivered an unaudited, tax-cutting Budget.
The honourable intention was to kick-start Britain’s languishing economy. Yetthe execution, with financial markets still spooked by the shock of Brexit, was ill-judged, and the pound and bond markets went into freefall.
The Bank of England was forced to conduct a rare, multi-billion intervention in the gilts market.
As Truss’s government unwound, I, with others in the economic media, was alongside Kwarteng at the IMF in Washington. The charming, towering old Etonian was given a dressing down in private by the US Treasury Secretary Janet Yellen and, in public, by IMF boss Kristalina Georgieva.
At a brief late-night appearance before journalists, Kwarteng blithely said he was returning early to London to brief his colleagues on global reaction to his mini-Budget. By the time he landed in London, he had been sacked. Truss, having sacrificed her first line of defence, was ejected from No10 days later. Kwarteng’s replacement, Jeremy Hunt, immediately reversed most of the tax cuts.
Britain is not alone in suffering multiple crises, for financial meltdowns are usually global.
I learned that, too, in 1979, when, Jimmy Carter’s bungled US presidency hung by a thread amid soaring oil prices, 11 per cent inflation and a loss of faith in Washington policy-making. Carter had already sold 300 ounces of gold from the US’s store at Fort Knox, arranged support agreements with other central banks and tapped up the IMF for a temporary credit.
On a sticky August afternoon, financial journalists, including myself, were summoned to the HQ of the Federal Reserve, America’s central bank, where monetary guru Paul Volcker had been parachuted in as chairman.
When it comes to economic failure, the politicians in charge rarely survive
His recipe was higher interest rates, a surcharge on credit card spending and a tight grip on printing dollars.
The result was the deep recession and high unemployment that led to Ronald Reagan becoming president on the back of his sunny ‘It’s morning again in America’ optimism.
More proof that heads always roll from an economic crisis followed Britain’s ejection from the European exchange rate mechanism (the forerunner of the Eurozone) in 1992 with then Tory Chancellor Norman Lamont paying the price.
Just ahead of his fall, while explaining his government’s monetary strategy, he remarked hubristically that he didn’t feel responsible and had been ‘singing in the bath’.
This cloth-eared blunder haunted his Tory government until it was booted out by voters in 1997.
Gordon Brown suffered much the same fate over the Great Financial Crisis in 2008, which saw his government all but nationalise the banks. Brown was punished for destabilising the public finances and Labour lost the 2010 election.
Rachel Reeves won’t need any reminding that when it comes to economic failure, the politicians in charge rarely survive.
Over the past few days, she has learnt that financial markets are fickle and that once confidence is lost, it’s very difficult to regain a sure footing.
That said, she may yet survive if the turmoil abates.
However, if the price for Keir Starmer of saving his government is deep cuts in public spending, spiralling mortgages and family budgets soaring, then Reeves, like so many of her crisis-hit predecessors, will face the brutal heave-ho.
