In 1976 Britain asked the IMF for a nearly $17 billion loan in today's value...apparently the largest ever. The UK today is counted amongst the top nations of the world economically, but what was the state of the UK in the 1970s? What was the affect of having to ask for such a huge loan?

I will post an introductory answer but I am sure that someone with more indepth knowledge will reply. The answer is more an economics question rather than one of history.

Since the 50s, Britain's economy had operated on what was called an "incomes policy", where the government negotiated with trades union to control prices and wages in a manner that allowed ordinary workers a decent standard of living (their aim, not my hyperbole.) This policy caused high inflation as prices rose in fields where the government didn't control prices. Britain also had a current account deficit, which meant more money was going out of the country than was coming in. Prime Minister Callaghan's budget bill failed to pass Parliament. As a result of all these things, the value of Sterling began to fall.

This was a problem because a lot of Britain's government spending was financed by government bonds; these are basically where investors buy Sterling in order to receive more than they bought later on. So if I buy £10 of bonds in 1975, I expect £11 back in 1980. As Sterling's value began to fall, investors began to be less interested in taking government bonds out. On top of this, there was also the OPEC crisis; you can look that up yourself, but basically because of the west's support of Israel, OPEC (read: Arab) countries put an oil embargo on the west, massively rising the price of oil.

Eventually the British government ran out of money to finance its social programs and support its currency - in the old days the government would "buy" Sterling with taxpayer's money, rising its value if it was slipping (so they could sell bonds and finance imports). When the money ran out, Callaghan went to the IMF asking for money, and ultimately, he got it.

Here's the thing. $17 billion isn't that big of a loan. At the time, it was around 4% of the total government spending. Today it amounts to only about 2% of government spending. The UK borrows (and borrowed) more than that to finance its deficit spending; the thing was that at the time, investors simply wouldn't lend because their loans would be denominated in Sterling, a currency that was falling. The IMF was Callaghan's only option, and the loan did stabilise the government, and the Pound - but not for long. The Winter of Discontent in 78-79 would see stagflation - rising inflation matched by falling economic growth - which would lead to the election of Margaret Thatcher and the dismantling of the social democracy that Callaghan was trying to sustain. But that's another story.

edit: Adjusted some punctuation and syntax.

edit2: I want to add that a lot of people will view the IMF bailout as a result of Britain spending too much on social programs. I think this is bollocks. At that time, Britain was spending - as % of GDP - approximately as much as it did between 2000 and 2009. So yes they were spending a lot on social programs. The problem was they couldn't collect a lot of money in cash because the country wasn't productive. 10 people earning $10 each can be taxed, realistically, half as much than as 10 people earning $20 each. The problem with Britain's economy in the postwar era was its low productivity and that really resulted in a lot of problems. The spending on social programs was just a factor that extended an existing problem.

When Harold Wilson formed his second administration in March 1974, following the loss of Edward Heath's majority in the February 1974 general election, he received a terrible economic inheritance. The shock caused by the oil crisis caused the British economy to crumple into recession: indeed, the GDP contraction in the first quarter of 1974 was a post-war record for the UK. Inflation was shooting up, and would reach a post-war annual record of 26.9% in 1975.

Inflation, in particular, was intensified by two UK-specific factors over and above the global crisis. Firstly, industrial relations posed a problem in the decade leading up to 1976 (and for some years afterwards). The resulting series of clashes between unions and government had, in 1969, led to a major crisis within the Labour government, and, in 1973-74, led to the fall of the Heath government. Labour, as a result, came into power in 1974 aiming for voluntary co-operation with unions on pay policy.

The second domestic factor lay in the fiscal policy followed by the Heath government and the Chancellor, Anthony Barber. The government, from 1971 onwards, had let loose what became known as the 'Barber boom'. But, when the Heath industrial relations strategy collapsed over 1972-74, the government had no other counter-inflationary tools in its arsenal. Despite this, as a result of the recession, public spending and the deficit continued to grow.

Similarly, Britain's deficit on current account had reached levels not seen for some decades. This not only indicated serious difficulties with domestic production and employment, but meant that, in a world where international capital flows were more restricted and more amenable to state control than they are now, the Treasury had to ensure they had enough reserves in foreign capital to finance this deficit.

There were, as a result, several serious problems which the conventional macro-economic outlook of both parties, based on a belief in Keynesian demand management, found it difficult to cope with. And this led to both parties turning away from the traditional centre. In Labour, an increasing body of left-wing opinion reacted to these crises by trying to get their government to take the battle to international capital & the wealthy through such measures as extensive nationalisation, higher taxation, and stringent controls over trade and capital flows. In the Conservative party, the reaction took the form of a renewed shift away from the Keynesian position that the Conservatives had taken since the late 1940s. The new line was monetarism & a smaller state. Just as importantly for the purposes of the IMF crisis, these views were becoming increasingly common in the financial world, which, in turn, shaped the opinion of Britain in the eyes of central bankers and investors.

Sterling, until mid-1975, appeared to have withstood crisis conditions fairly well. Sterling’s strength, however, was not viewed entirely positively in the Treasury. British goods and services were less competitive, preventing the economic expansion needed to boost employment. A reduction would, in the eyes of its advocates, boost domestic production, and employment, and also reduce the need of the Treasury to finance the deficit. (It is worth pointing out that, throughout this period, there was considerable debate and division within the Treasury, reflecting the wider political debates on the economy, about the right methods to restore economic health to Britain, although it would take too long to discuss this here.)

During 1975, as inflation increased, and doubts about the British government's commitment to fighting inflation and reducing the PSBR grew, sterling began to come under pressure from April onwards. The Treasury had to resort to the methods used during sterling crises in recent years: loans from central banks, and loans from the IMF which were bigger than the unconditional loans the UK could draw upon. For the low-conditionality loans IMF required government to show it was taking measures to reduce public spending, which it duly did. The Chancellor, Denis Healey, delivered a revised budget that was fiscally restrictive, and also drew attention to control of the money supply. These measures, by Christmas 1975, seemed to have done the trick.

With the disadvantages of a strong pound in mind, a decisive group of Treasury officials, at the beginning of 1976, noted that the general economic outlook was improving, and decided that the time was right for encouraging a modest depreciation of sterling. The Treasury put this plan into place in early March 1976, cutting the interest rate and intervening to stop sterling rising further. They aimed to manage this depreciation by using the IMF loans obtained in 1975 as reserves. Indeed, an open policy of depreciation would have been considered an unfriendly act by the other big industrial nations, all aiming to retain their own competitive exchange rates, and would have had counterproductive diplomatic consequences. They could not afford to let sterling get out of control, as foreign holders would then divest in a big way.

But, just as this intervention was taking place, a series of events took place which changed the landscape. Nigeria publicly announced it intended to diversify its reserve portfolio. The second event was parliamentary: the government was defeated in the Commons on a motion involving the Expenditure White Paper. The third event was the resignation of Harold Wilson as Leader of the Labour party & PM. While these events were relatively minor factors in themselves, they all fed into general market sentiment, and drove sterling downards. By the early part of that summer (which, incidentally, saw one of the longest and hottest heatwaves in recent British history), it was clear that the 1975 loans were close to exhaustion, and that yet more assistance would be needed to give the UK financial authorities the firepower to get sterling under control. The Treasury, therefore, asked the G10.

But, this time, they found the attitude of the financial authorities in the US to be considerably more hostile. While US officials were relatively diplomatic and cordial at an official level, expressed great irritation at yet another sterling crisis, and frustration that the government were not bracing themselves to take further action. As a result, while Britain got the loan, it was not given on the usual terms for such loans (a three-month loan, extendable indefinitely). It was granted for three months with a single extension. It was this factor that severely magnified the crisis, as it was absolutely clear that the UK would have to go to the IMF if the loan did not stablise sterling.

The first result of this situation was an effective ‘gilt strike’ by investors. This lent a new and dangerous aspect to the sterling crisis. If investors in gilts did not buy government debt, then the government could end up in a position where interest rates were so high as to be deflationary, and the government simply would not have enough money to pay its expenses without a chaotic and draconian emergency reduction in spending, which would have an even worse deflationary effect. Again, this could only be avoided if the government could stablise sterling.

Another potential disaster lurked in the form of the reserves. If the financial authorities lacked the foreign currency to service the current account deficit, the only way it could make up the shortfall would be by imposing a huge array of restrictions. These might include forcing importers to make a deposit to Customs before receiving their goods, severely restricting foreign holidays and luxury items, as well as tariffs.

This prospect came much closer on the 9th of September, when the Bank of England, in effect, conceded the battle to the markets, and advised that further intervention under current conditions was pointless.

When the IMF team arrived, it put forward a demand for £3 billion worth of spending reductions in the current fiscal year, and £4 billion the next. The government ultimately managed to winnow down the conditions to £1 billion in the current fiscal year, and £1.5 billion in the next, in addition to commitments such as money supply targets.

But the big battle still had to be fought once this was achieved: the Cabinet had to be won over. As the debate began, there were two different kinds of opponent. There were the left-wing opponents, led by Tony Benn & Peter Shore, who wanted what would be a siege economy on the basis of the left wing programme I described earlier (although Shore and Benn did differ on significant details). There was also an important group from the right and centre of Labour, led by Tony Crosland, whose book, The Future of Socialism, had been the bible of intellectual Labour right-wingers in the 1950s and 1960s. Maintaining Keynesianism was essential to his creed. His argument, essentially, was one of bluff. Given Britain's prestige and strategic importance, if Britain did reject the IMF terms and threaten to go for a Benn-style economy, he argued that the IMF & the G10 would have no alternative but to accept the terms Britain chose to offer, or face an economic dislocation with potential global consequences.

These two groups were, at the start, strong enough to win the argument. But Callaghan stuck to his guns - and made clear to Crosland, in private, that he would resign if he lost, which would not only mean the end of his leadership, but the end of the Labour government, in circumstances which would resemble the catastrophic collapse of 1931. In the end, after many gruelling hours and days of debates, the Cabinet accepted the package. With that, the era of post-war consensus politics came to an end, and the new economic consensus which Mrs Thatcher would embody began to emerge.