I

On the evening of Monday 26 October 1964, Harold Wilson, Britain's new Prime Minister, made a ‘TV appeal to bosses and workers’, reported the pro-administration Daily Mirror, to explain ‘Labour's bold new prescription for treating Britain's ailing economy’.Footnote ¹ In a ten-minute broadcast on ‘the eleventh day of Mr Wilson's 100 days of dynamic activity to get Britain moving again’, he warned that the ‘profoundly unsatisfactory economic situation’, inherited from the Conservatives, meant that the year's balance of payments deficit might hit a record £800 million. Overseas confidence in sterling had been waning since May and in mid September, as the election campaign got underway with the balance of payments an issue, the three-month sterling forward rate fell below its Bretton Woods lower band of $2.78 and a sterling crisis began to simmer (Oliver Reference Oliver2012, p. 315). The response of previous British post-war administrations to runs on sterling had been deflationary measures and overseas borrowings, but Wilson ‘decisively rejected “any policy based on a return to stop-go economics”’. Although he made no mention of it in the broadcast, the administration's leaders had also rejected devaluation of the pound to address the balance of payments problem. Instead, Wilson's ‘crash plan to beat the trade crisis’ was a 15 per cent temporary import surcharge.

Much attention has been paid by contemporaries and historians to the reasons for Labour's October 1964 ‘non-decision’ on devaluation and the consequences (Bale Reference Bale1999; Brandon Reference Brandon1966; Hirsch Reference Hirsch1965; Middleton Reference Middleton, Arnon and Young2002; Newton Reference Newton2009; Oliver Reference Oliver2011; Tomlinson Reference Tomlinson2004). By contrast, the novel import surcharge mostly receives only passing references, though there are colourful passages in the memoirs of James Callaghan, Chancellor of the Exchequer, and Douglas Jay, President of the Board of Trade (Callaghan Reference Callaghan1987; Jay Reference Jay1980). Wilson devotes some sentences to the surcharge, but it is absent from the recollections of George Brown, First Secretary of State and head of the new Department of Economic Affairs (DEA), and the diary of Patrick Gordon Walker, Foreign Secretary (Brown Reference Brown1971; Pearce Reference Pearce1991; Wilson Reference Wilson1971). Treasury mandarins Donald MacDougall and Leo Pliatzky simply note its introduction, likewise Treasury Press Officer Peter Browning (Browning Reference Browning1986; MacDougall Reference MacDougall1987; Pliatsky Reference Pliatsky1982). The notable exception is Alec Cairncross, Treasury economist 1961–9, who provides illuminating, though fragmented, mentions in his books Sterling in Decline (1983) and Managing the British Economy in the 1960s (1996). The surcharge also features several times in his diary, published as The Wilson Years (1997). Treasury interest in the surcharge as a policy measure led to an uncompleted departmental account, a ‘first draft (an assembly might be a better description)’, in early 1965; an addition to the internal Treasury Historical Memorandum series was intended but never happened.Footnote ²

It is less than surprising that Labour's import surcharge has been largely overlooked since within weeks it was overtaken by conventional crisis management measures and it was deemed a failure. In fact, it was in place for 25 months and not without balance of payments effect. Two years earlier Canada had introduced an import surcharge to counter devaluation pressure on the Canadian dollar with notable success, which did not pass unnoticed in Whitehall or by Conservative ministers. The measures are of interest as a strand of Britain's struggle with sterling and as episodes in currency crisis management.

Currency crises are principally features of fixed exchange rate systems and countries with pegged currencies. There is an extensive economic literature on currency crises, which have been defined as: ‘a speculative attack on the foreign exchange value of a currency that either results in a sharp depreciation or forces the authorities to defend the currency by selling foreign exchange reserves or raising domestic interest rates’ (Glick and Hutchinson Reference Glick and Hutchinson2011). Currency crises are commonly associated with a balance of payments problem that leads to the depletion of the foreign reserves that can be used to defend the exchange rate. A balance of payments problem can turn into a currency crisis when it comes to be believed that a government is no longer able or willing to defend its fixed parity. Governments can implement a variety of defensive financial measures to forestall or confront a currency crisis, usually comprising some combination of international borrowing, spending cuts, tax rises, credit squeeze and interest rate rise. They can also impose ‘physical measures’ – import controls and export subsidies – that affect the trade balance.

Bordo et al. identified 40 currency crises among their 21-country financial crisis data set in the Bretton Woods era 1946–71 (Bordo et al. Reference Bordo, Eichengreen, Klingebiel, Martinez-Peria and Rose2001, web appendix). After an initial bout of exchange rate changes in the late 1940s, politicians in developed countries with external payments deficits eschewed devaluation fearing punishment by voters (Solomon Reference Solomon1977, p. 70). Deflation also had a political price since it led to higher unemployment. But import restrictions had the attraction of offloading adjustment onto foreigners (Bergsten Reference Bergsten1972). In fact, the Bretton Woods system's effective discouragement of exchange rate adjustment inadvertently encouraged governments to adopt import restrictions in response to balance of payments deficits (Irwin Reference Irwin2011, p. 32). Between 1954 and 1971, seven advanced economies imposed a temporary import surcharge. The most prominent and provocative was Nixon's import surcharge that formed a key component of his New Economic Policy unveiled on 15 August 1971, along with the suspension of the convertibility of the dollar into gold and a wages and prices freeze (Gowa Reference Gowa1983; Irwin Reference Irwin2012a; Matusow Reference Matusow1998; Roberts Reference Roberts2011)). The other major episodes affecting significant international currencies were the Canadian and British surcharges imposed, respectively, in 1962 and 1964, which are the focus of this article. It examines why and how Britain introduced an import surcharge and its contribution to the management of the 1964 currency crisis. What impact did it have? Why did Canada's import surcharge succeed while Britain's was regarded as a failure?

II

After the war policymakers sought to promote international trade and prosperity through the re-establishment of stable exchange rates and the liberalisation of international trade arrangements. The Bretton Woods system of fixed (but supposedly adjustable) exchange rates aimed to provide international monetary stability. The International Monetary Fund was established in 1946 to monitor the functioning of the system and assist countries with balance of payments deficits while they undertook domestic economic adjustments, or made an orderly shift to a new exchange rate. The General Agreement on Trade and Tariffs, drafted in 1947, was the trade counterpart to the IMF. ‘For the first time in history’, declared the GATT Secretariat, ‘countries have accepted a code of practical rules for fair trading in international commerce and have co-operated in lowering trade barriers. This co-operation has been on a global, not a regional basis’ (GATT Secretariat 1962, p. 1). GATT membership doubled from the founding 23 signatories to 44 members in the early 1960s, while a series of rounds of negotiations effected multilateral reductions to tariffs and barriers to trade; by 1962 GATT signatories accounted for four-fifths of world trade (Davis and Wilf Reference Davis and Wilf2011, p. 20).

Import controls can take the form of either quantitative restrictions (quotas) or a tariff. Article XII of the GATT code allowed countries with extreme balance of payments difficulties to impose import quotas for a limited period (Jackson Reference Jackson1969, pp. 673–87). The trade restriction was allowed as a temporary measure with a ‘“time-buying” function’ similar operationally to, and perhaps accompanied by, an IMF loan to allow domestic fiscal or monetary measures to take effect. Consultation with other GATT signatories was required prior to the introduction of quotas, of which there were many instances. A tariff is a tax on imports that raises their price and is paid to the government of the importing country. An import surcharge is a temporary additional tax on imports supplementary to current tariffs. An import surcharge has an economic effect equivalent to an immediate devaluation – making imports more costly – constituting a powerful balance of payments instrument (Rickards Reference Rickards2011, p. 87). GATT rules banned increases in existing tariffs, and thus the import surcharge.

Aggressive trade measures, both quotas and tariffs, abounded in the 1930s. The temporary import surcharge appears to have made its debut in Hungary in 1934 where a 20–40 per cent surcharge was adopted to help manage the pengo.Footnote ³ Post-war, France maintained a ‘special temporary compensation tax on imports’ from 1954 to 1958.Footnote ⁴ The French measure was condemned in the GATT and OEEC.Footnote ⁵ Britain was ‘dismayed at French disregard for the GATT rules…there was a clear breach…and we said so’; the criticism was not forgotten in Paris.Footnote ⁶ Import surcharges were also imposed by Denmark (1955–6 and 1971–2), Spain (1958–9 and 1967–71), Sweden (1959–60), Canada (1962–3), Britain (1964–6) and the United States (1971) (Bergsten Reference Bergsten1977, p. 2). Germany placed a surcharge on exports and cut import tax in 1968 (Solomon Reference Solomon1977, p. 158). An application for a waiver of GATT rules to legitimate a surcharge imposed by a developed country was not favourably received and none was given, delinquents being ‘formally urged’ to remove the surcharge as early as possible.Footnote ⁷ Eight developing countries introduced an import surcharge up to 1971, mostly from Latin America. They were more kindly regarded by GATT, their applications for waivers being mostly granted.

III

‘An unsavoury whiff from the nineteen-thirties drifted across the Atlantic on Sunday’, observed the Economist on 30 June 1962 reporting Canada's introduction of an import surcharge. ‘Could this, one is bound to ask, be the first play in an awful new round of beggar-my-neighbour?’Footnote ⁸ The Canadian dollar crisis of summer 1962 began with Canada's re-adoption of a fixed parity, having floated since 1950, on 2 May 1962 (Helleiner Reference Helleiner2006; Johnson Reference Johnson1970; Plumptre Reference Plumptre1977; Saywell Reference Saywell1963). The move was immediately followed by an election campaign with the poll on 18 June. Uncertainty about the post-election government's resolve to defend the new parity led to large-scale selling of the Canadian dollar during the campaign and after. ‘The rate of loss became severe in mid-June’, noted a GATT report. ‘If no measures had been taken in late June it was clear that the reserves would have been completely exhausted in a couple of weeks.’Footnote ⁹ The outcome of the election was that John Diefenbaker continued as Prime Minister, but as head of a minority administration and the currency crisis intensified.

During the election campaign Louis Rasminsky, Governor of the Bank of Canada, put together a package of ‘special measures’ to support the exchange rate and avoid devaluation to be available to the post-election administration. ‘Policy must be to err at first on being over-tough and then relax’, he told Diefenbaker. ‘Opposite approach fatal’ (Muirhead Reference Muirhead1999, p. 230). Each point of the package had to be a targeted precise commitment, otherwise it ‘may be received with scepticism and fail to create the confidence which all have agreed is necessary if this program is to succeed’. The resulting package featured ‘strong internal measures’ to correct the adverse balance of payments complemented by large-scale short-term international support for the Canadian currency: (1) government spending cuts that halved the budget deficit, reducing aggregate demand and boosting market confidence; (2) a big interest rate rise from 4 per cent to 6 per cent, increasing the reward for holding the Canadian dollar; (3) ‘sharp’ reductions in duty-free allowances for Canadian tourists, in effect curbing imports; and (4) international credits from the IMF, the US and Bank of England totalling $1bn, doubling Canada's reserves.Footnote ¹⁰ These were familiar currency crisis measures, though their stringency and the articulation of the package were noteworthy. The novel element of Rasminsky's package was its fifth dimension – a temporary import surcharge that affected half of Canada's imports. The measure was designed to improve both the balance of payments deficit and the budget deficit. Diefenbaker announced the emergency measures to the nation on television on the evening of Sunday 24 June, ahead of the opening of the markets the following day when the run on the Canadian dollar was expected to accelerate.

Currency traders were awed by the administration's resolve and selling pressure vanished.Footnote ¹¹ ‘The emergency measures succeeded in restoring confidence and put an end to speculation’, reported GATT's Group on Canadian Import Surcharges.Footnote ¹² Canada's foreign exchange reserves reached Can$2bn in October and the rediscount rate was back at 4 per cent in November. With the crisis over, the international credits were promptly repaid or cancelled. The import surcharge lasted nine months, with relaxations from August and removal in March 1963.Footnote ¹³ The parity was maintained for the rest of the decade. The Canadian authorities were well aware that the import surcharge contravened GATT rules as well as the requirement for prior consultation. Nevertheless, trading partners were kept in the dark because of fears of a leak and the GATT Secretariat was informed the day after Diefenbaker's broadcast. Canadian spokesmen proclaimed the government's willingness for dialogue with trading partners and explained its preference for surcharges over quotas because: they could be quickly imposed; surcharges had ‘less restrictive effects’ on international trade; and Canada lacked the ‘necessary machinery’ for quotas.Footnote ¹⁴

The Canadian surcharge aroused ‘strong resentment’ in the US and many other countries, reported a British Treasury official.Footnote ¹⁵ There was a chorus of complaint at the GATT Council meeting in Geneva on 12 July 1962.Footnote ¹⁶ Canada's finance minister stressed the ‘very serious nature of the balance-of-payments crisis Canada had gone through’ and stated that his government was ‘somewhat disappointed at the lack of understanding that it had met in the Council’.Footnote ¹⁷ There was more criticism at Working Party 3, the OECD's Paris-based technical committee, and from the EEC.Footnote ¹⁸ George Ball, US Under Secretary of State, told Treasury Secretary Douglas Dillon that the Canadian surcharge was ‘unworthy of an economically advanced country’.Footnote ¹⁹ But by the time GATT held hearings in the autumn, relaxation of the surcharge had begun and the government, commented Canadian political scientist Peyton Lyon, ‘got off lightly’ (Lyon Reference Lyon1968, p. 345).

IV

Britain experienced some dozen sterling crises of varying magnitude between 1947 and 1972 when the pound floated, with devaluations in 1949 and 1967 (Hirsch Reference Hirsch1965, pp. 47–9; Kunz Reference Kunz and Louis1995, pp. 123–34). Canada's import surcharge was followed with interest by British Treasury officials. In February 1963 Douglas Allen, Third Secretary, requested a note on how

The resulting note observed guardedly that:

But the Prime Minister was captivated. ‘I prefer this method’, Macmillan told Chancellor Reginald Maudling, ‘to an elaborate system of import controls and licensing.’Footnote ²² ‘Import surcharges, on the Canadian model, was the least harmful of the available devices’, concluded the Treasury. ‘The Canadian experience showed that even GATT disapproval was not inconsistent with the willingness of other countries to furnish aid [short-term credits].’Footnote ²³ The Board of Trade was asked to produce an import surcharge scheme and update its existing scheme for import quotas. While the paper was being prepared, Maudling delivered his expansionary April 1963 budget, setting a course that might possibly put sterling under pressure in future (Brittan Reference Brittan1969, pp. 177–9). In June he informed officials that he ‘wanted the Government to be in a position to deal swiftly with balance of payments difficulties without having at the same time to cut back on economic expansion’.Footnote ²⁴ Hence he was keen for the two outline schemes to be completed, himself believing that the surcharge method ‘seemed more promising’. But the Board of Trade took ‘strongly against’ a surcharge because of its flagrant illegality.Footnote ²⁵

By early 1964 it was plain that the Maudling ‘dash for growth’ was well underway (Baston Reference Baston2004, p. 227; Cairncross Reference Cairncross1996, pp. 80–7). The boom was sucking in imports and in mid March the Treasury secretly estimated that an ‘alarmingly large’ balance of payments deficit of £400 million was in prospect for 1964.Footnote ²⁶ This gave urgency and relevance to import controls as a currency crisis management instrument and a balance of payments improvement measure, given that overt deflation was politically impossible with an election pending. Treasury officials favoured following Canada, partly because of quantitative restrictions' operational time lag, but also because a surcharge was more appropriate to a fully employed economy being ‘more deflationary and less inflationary than quantitative restrictions’.Footnote ²⁷ In April the Permanent Secretary, Sir William Armstrong, instructed the preparation of a Treasury plan for import surcharges in addition to an updated Board of Trade quota scheme, with both schemes aiming to save £200–250 million a year of imports.

Maudling told Armstrong to have both schemes ready by mid October, ahead of the forthcoming general election. The position was reviewed by a group of permanent secretaries assembled by Armstrong on Wednesday 7 October.Footnote ²⁸ By then the campaign was in full swing, with polling on Thursday 15 October and a sterling crisis on the cards. As regards policy responses, deflation was ruled out by ‘the current commitment of almost all opinion to a higher rate of growth and the elimination of the necessity for stop-go policies’. So was devaluation, which would be ‘more a confession of failure than an instrument of policy’. Thus the focus was on import restrictions. ‘The more the Board had studied the problem’, stated the Board of Trade mandarin, ‘the more they had been forced, reluctantly, back on the quantitative restrictions as the least objectionable scheme.’ However, the weight of opinion in the discussion was that a surcharge was ‘generally preferable, if the difficulty of our international obligations could be circumvented’. But the danger of a leak during consultations was deemed ‘unacceptable’. ‘It thus appeared’, Armstrong summed-up inconclusively, ‘that, in view of our international obligations, levies [surcharges] could not be preferred to quantitative restrictions without some international bargain; and the practical difficulties of the latter were obviously very great.’ Following the meeting a three-page ‘General briefing – import controls’ was written for the new Chancellor – Conservative or Labour.Footnote ²⁹

V

Within hours of taking office, Wilson, Brown and Callaghan, Labour's economic triumvirate, decided against devaluation (Callaghan Reference Callaghan1987, p. 187; Oliver Reference Oliver2011, p. 586). Then they met with officials to discuss Britain's daunting now £800 million prospective balance of payments deficit, the scale of which was as yet unknown by the markets. Armstrong explained that so far the deficit had been financed by borrowing, but officials had also been working on ways of reducing the trade imbalance by physical restrictions on imports. They had gone as far as they could without ministerial decisions. Should there be import controls at all? If so, which scheme? Wilson responded that ministers needed to think matters over adding that ‘the Government would need to make one or two dramatic gestures which would emphasise their determination to tackle the balance of payments situation’.Footnote ³⁰

Wilson, Brown and Callaghan were determined not only not to devalue but also to use alternatives to deflation to manage the currency and reform the economy, being desperate to break out of stop-go (as was Maudling). They intended economic regeneration through a ‘third way’ – the DEA, a National Plan, tax changes and an incomes policy – but the programme would take time. Immediately there was the gaping balance of payments deficit and an incipient currency crisis to be addressed; temporary import controls offered the answer, allowing them to avoid expenditure cuts or a hike in Bank Rate. The alternative short-term expedient was further international borrowing to tide the country over, but they were also against this since it would doubtless have deflationary conditions attached. A surcharge was preferred by both ministers and officials for the same reasons as in Canada: it would involve less bureaucracy; it would be quicker acting, less arbitrary and discriminatory; and it would generate revenue. Callaghan in his November 1964 budget estimated tax revenues from the surcharge of £200m a year (Tew Reference Tew and Blackaby1979, p. 344).Footnote ³¹ But Douglas Jay, President of the Board of Trade, pressed strongly for quotas because ‘the surcharge was illegal under both GATT and EFTA; whereas quota limitation was explicitly legal…They all made light of the illegality of the surcharge, to an extent which I found astonishing’ (Jay Reference Jay1980, pp. 298–9). The decision was made by Brown and confirmed by the Cabinet (MacDougall Reference MacDougall1987, pp. 153–4).

The surcharge had a single 15 per cent rate. It was entirely non-discriminatory, applying fully to European Free Trade Area (EFTA) countries, the Commonwealth and Ireland irrespective of preferential arrangements.Footnote ³² It covered manufactured goods and most semi-manufactures, but foodstuffs, tobacco and raw materials were exempted. The exemptions significantly mitigated the impact on the Commonwealth and EFTA because of differing compositions of British imports, being levied on 57 per cent of imports from the European Economic Community (EEC) and 48 per cent from the US, but only 36 per cent from EFTA and 9 per cent from the Commonwealth (Ray Reference Ray1967, p. 65). Prior consultation with other countries was deemed ‘impossible’, but as a matter of courtesy ministers sent messages to opposite numbers in the US, the Commonwealth and EFTA. The EEC was notified on Sunday 25 October and GATT on Tuesday 27th^, when Article XII was invoked (even though it applied to quotas not surcharges).Footnote ³³

‘The Economic Situation. A Statement by Her Majesty's Government’ was launched by Brown and Callaghan at a morning press conference on Monday 26 October. ‘The immediate short term problem which we discovered’, Brown began, ‘is that we are faced here and now with a deficit…of the order of £700 million or £800 million.’Footnote ³⁴ The statement's centrepiece – Wilson's ‘dramatic gesture’ – was the 15 per cent import surcharge. Commentators were unimpressed by the lack of detail and sceptical as to whether the measures were adequate to meet the underlying balance of payments problem. ‘Yesterday's White Paper contains no detailed plan or comprehensive programme’, observed a not unsympathetic leader in the FT. ‘Deflation is ruled out for Labour, as it was for the Conservatives…Devaluation, though not mentioned, has plainly been ruled out equally firmly. The alternative is to operate directly on the trade balance with import restrictions and export incentives…Mr Maudling, if he were still in office, might well be taking precisely the same steps as his successors.’Footnote ³⁵ Cairncross thought likewise, writing in his diary ‘I don't doubt that Reggie would have done much the same, but a little later, and with more preparation of key foreigners’ (7 November; 1997, p. 14).

As a currency crisis management package, the measures fell a long way short of Rasminsky's programme, to say the least. That had comprised a set of stringent and credible conventional corrective measures capped by an import surcharge. Labour's ‘bold new prescription’ relied entirely on the surcharge to restore confidence in sterling. The three-month sterling forward rate leapt immediately after the statement, but then fell day after day with sterling weakness becoming a sterling crisis.

VI

Confidence in sterling was battered by the storm of protest the surcharge provoked abroad. Ministers' bruising encounters began with Jay's briefing of ‘stiff and frosty’ EFTA ambassadors. ‘Naturally, they concentrated in protest against the illegality, to which we had no real answer’, he recalled, ‘so that we were forced back on emphasising the £800 million deficit left us by the previous Government, which (as was foreseen) was not helpful to the exchange value of the pound’ (Jay Reference Jay1980, p. 301). ‘There has been no meeting so unpleasant or so openly beastly in tone’, reported the Economist of the EFTA Council meeting in Strasbourg on 29 October, recounting ‘face to face encounters of the sort of towering rage that starts as a slow flush at the base of the neck and climbs flaming to the scalp, the kind of anger that reduced [the meeting] quite literally to uproar’.Footnote ³⁶ Simultaneously, the European Commission called for the surcharge to be ‘rapidly withdrawn’.Footnote ³⁷ GATT members gave Britain a ‘furious hammering’ and Britain found itself ‘in the dock’ before the OECD's Economic Policy Committee in Paris on 5 November.Footnote ³⁸ At a Western European Union meeting in Bonn, Jay was the recipient of ‘an onslaught’ against the surcharge.Footnote ³⁹ For good measure there was even a protest from UNESCO. ‘The big squabble is on the import surcharge’, Cairncross wrote on 7 November:

The anger called into question the willingness of some countries, notably France, to support British emergency drawings from the IMF or central bank credits.

VII

Callaghan was scheduled to present an emergency budget on Wednesday 11 November. This presented the prospect of the introduction of additional measures to address the balance of payments deficit and buttress sterling. The weekend before Lord Cromer, Governor of the Bank of England, attended the monthly meeting of G10 central bank governors at the Bank for International Settlements in Basle. He reported to Armstrong by telegram that there were ‘high expectations’ of ‘immediate and extensive contribution to solution of Balance of Payments problem to be expected from Wednesday's measures…I fear otherwise that disillusionment could have serious impact on exchanges.’Footnote ⁴⁰ Charles Coombs, head of foreign exchange at the Federal Reserve Bank of New York (FRBNY) and a key figure in the international financial markets, who was also at the Basle meeting, reported that the central bank governors ‘concurred in the view that the programme so far announced had left an impression of weakness and reluctance to come to grips with the problem and that this would inevitably lead to the emergence of speculation …[with] a potentially explosive situation in the gold and foreign exchange markets’.Footnote ⁴¹ Colleagues urged Cromer to raise Bank Rate; he needed no persuading, but the government called the shots.

In the event, the budget featured both tax rises and higher welfare spending in fulfilment of election pledges, being on balance mildly deflationary. Nevertheless: ‘Abroad’, stated the FT, the budget ‘was thought irrelevant to the balance of payments, to give evidence of thoroughgoing socialism and to be directed “against” the City.’Footnote ⁴² Although disappointed, the market's verdict was suspended ahead of Thursday 19 November, which was the normal day for an alteration in Bank Rate. On 13 November, Cromer wrote to Callaghan advocating a ‘modest’ 1 per cent increase in Bank Rate to abate the ‘profound anxiety’ overseas about the British government's commitment to an effective defence of sterling's parity.Footnote ⁴³ The Governor and Chancellor met on Tuesday 17 November. Callaghan told Cromer that ‘deliberate steps to make money dearer would be contrary to the policies on which the Government had fought the Election’ – there would be no increase in Bank Rate.Footnote ⁴⁴

Thursday 19 November, the day of the non-Bank Rate increase, also saw a climactic showdown over the import surcharge at a meeting of EFTA ministers in Geneva. Jay and Gordon Walker encountered ‘severe criticism’, noted the Treasury, ‘the breakdown of the Association was only narrowly avoided’.Footnote ⁴⁵ EFTA ministers threatened legal action as well as country-by-country retaliation against British trade. With the acrimonious session spinning into the night, Gordon Walker, telephoned Wilson and reported ‘heavy pressure…feeling was terrific and unless some satisfaction could be given there would be a serious situation. There was a demand for a precise date on which the surcharges would be abolished, but he and the President [Jay] could probably get off the hook if they could say in the Communiqué that “a reduction was to be expected in a matter of months rather than years”.’Footnote ⁴⁶ Wilson recounted the ‘emergency, almost panic’, call from the Foreign Secretary. ‘He needed my clearance for a firm assurance that the 15 per cent import surcharge would be reduced in a matter of months…I gave him the assurance and at 4 am the conference reached an uneasy agreement’ (Wilson Reference Wilson1971, p. 35).

The confrontation and climb-down was immediately leaked to the press. ‘The Government's handling of its import surcharge has almost passed belief’, lamented The Times:

Friday 20 November, with reports circulating of the EFTA disarray, saw a headlong flight from sterling with huge reserve losses. Cromer told Callaghan that ‘the situation of sterling is deteriorating disturbingly quickly…the facts speak for themselves that the Budget has not created the degree of confidence necessary to sustain sterling…the unilateral devaluation of sterling, even by force majeure, could easily precipitate a world financial crisis for which this country would be held responsible.’Footnote ⁴⁸ To avert this he urged an immediate 2 per cent increase in Bank Rate. On Monday 23rd Callaghan informed parliament that Bank Rate was being raised from 5 per cent to 7 per cent ‘to place beyond any doubt the Government's determination to maintain sterling at its present parity’.Footnote ⁴⁹ ‘Perversely enough’, recounted Coombs:

Asked that evening by the Chancellor why the heavy losses, the Governor said that they were ‘in a state of extreme crisis…it stemmed from a basic lack of confidence overseas in the policies of the Government…a feeling that the measures which had been taken were not in themselves enough…that the longer term measures the Government had proposed seemed blurred and insufficiently concretised.’Footnote ⁵⁰ Armstrong said that ‘the Government had rejected both devaluation and deflation. Looking back, he still believed that a middle course between the two could have been found. But great finesse would have been needed; in particular the need not to lose confidence at any point. In retrospect, the fact that the import surcharge had involved breaking treaties had been unfortunate.’ Callaghan asked Cromer for his views on devaluation. The Governor replied that it was ‘so desperately serious a measure that no Government could contemplate it as a calculated act. If it were resorted to now in preference to restraint at home it would be regarded as an act of extreme irresponsibility.’ He warned apocalyptically of the possible results: the devaluation of the dollar, American isolationism, a global recession and rampant protectionism – ‘he had memories of the 1930s and did not wish those conditions to be repeated’.

At 10.30 that night the Prime Minister met with the Chancellor and the Governor at 10 Downing Street. Cromer reported that the selling of sterling had started in France, but there were no signs of deliberate sabotage anywhere.Footnote ⁵¹ The US had offered to buy sterling the next day, as had Canada as part of a coordinated central bank operation with European countries to provide funds to ‘put in the shop window’. Commenting on the possibility that there might be difficulty in getting some European central banks to participate, Wilson warned that:

Cromer replied that France could retaliate by restricting imports of British cars. The real issue was that ‘the rest of the world did not believe that the policies so far put into effect were sufficient to put the economy straight’. (A personal note from Wilson's private secretary next day reported that he had changed his mind about threatening an election.)Footnote ⁵² To meet the crisis it was agreed that the Bank should immediately approach the US, Canada, Germany and other European countries for short-term assistance. ‘Beginning early on the morning of November 25, the Bank of England, the Federal Reserve Bank of New York, and the central banks of other major countries were in almost continuous telephone communication’, stated Coombs. ‘At 2 p.m., New York time, it was announced that a $3 billion credit package provided by eleven countries and the BIS was at the disposal of the Bank of England’ (Coombs Reference Coombs1965, p. 45). ‘The pressure on sterling has evaporated completely’, declared a Citibank foreign exchange trader following the ‘biggest overdraft in history’.Footnote ⁵³ ‘It was the old firm that did its stuff today’, Cairncross recorded in his diary on 25 November. ‘The Governor delivered the goods, and but for him the Government would have been in a sad way with devaluation inevitable’ (1997, p. 18). Sterling soared following the announcement of the record $3 billion credits, but it soon slipped back below $2.78 and despite continuous intervention stayed below the rate until April 1965, reflecting continuing anxiety about a possible devaluation.

VIII

Wilson visited President Johnson at the White House in early December. After thanking the President for US financial assistance, Wilson recounted the ‘critical economic situation’ he had inherited from the previous Conservative administration that had:

Treasury Secretary Dillon commented that ‘the difficulties which the UK government had encountered could be in part traced to unfortunate statements which British officials had themselves made’. Federal Reserve Chairman William McChesney Martin concurred: ‘the most serious element contributing to the British crisis had been the unfortunate statements made, or reported to have been made, by members of the British government’. Ministers' stress on the balance of payments crisis in defence of the surcharge had undermined sterling. Callaghan agreed: ‘We emphasised this heavily as our justification for the import surcharge scheme – too heavily, as events were to show, for the health of the foreign exchange market’ (Callaghan Reference Callaghan1987, p. 170). The FT also linked the surcharge and the sterling crisis, commenting that the ‘outburst of general fury was a major factor in undermining the confidence of foreigners in the Government and sterling’.Footnote ⁵⁵ Having initially greeted the measure ‘with sympathy’, the paper had come to the view that ‘in deciding to employ the tariff surcharge method of putting the brake on imports, the Government chose about the worst of the various methods available’.Footnote ⁵⁶

The GATT Council meeting on 30 November resounded with more complaints about the surcharge, particularly from EEC delegates.Footnote ⁵⁷ ‘Six are mad at US interventions at GATT especially as we and US had forced through condemnations of France in 1958 and now sought escape for more flagrant offence’, Frank Figgures, EFTA Secretary-General, told Cairncross. ‘We would “get nothing out of the surcharge”. He argued that we must reduce by 5% in February and should abolish in the Budget. The high rate was interpreted as a sign of weakness and probable devaluation’ (Cairncross Reference Cairncross1997, p. 25). Under pressure from the EEC, especially a vengeful France, and LDCs, which protested on hardship grounds, on 18 December 1964 the Council formally declared the UK in violation of the GATT treaty.Footnote ⁵⁸ The ruling explicitly endorsed the right of reprisal by members, with February set for further consultation. EFTA too was demanding action ‘with increasing vehemence’.Footnote ⁵⁹

Brown headed off EFTA reprisals by announcing that the surcharge was being reduced to 10 per cent at a meeting of ministers in Geneva on 22 February 1965. The decision received ‘a very warm reception’, the Austrian Minister of Trade declaring that the crisis of confidence among the Seven was ‘at an end’.Footnote ⁶⁰ The EFTA partners reciprocated by dropping their demand for a removal timetable and the issue was defused. ‘This can be interpreted as something of a victory for Mr Brown’, commented the FT. ‘The fact that this has been the shortest EFTA meeting so far owed much to the impression that was created that EFTA feelings had played a major part in the British decision.’ The cut, which came into effect from 27 April 1965, was followed by a British restocking surge, though the trade balance deterioration proved temporary.Footnote ⁶¹

Thereafter the surcharge continued to operate but disappeared from pubic attention. A DEA Working Party on the Temporary Import Charge, on which the Bank, Treasury, Board of Trade, Foreign Office, Department of Agriculture, and H. M. Customs and Excise were represented, quietly oversaw the technical operation of the levy.Footnote ⁶² Much consideration was given to the possible substitution of an import deposit scheme to get round the illegality of the surcharge, but it was concluded that it was ‘likely to be held contrary to the spirit of international agreements even if it was not contrary to their letter’.Footnote ⁶³ The end of the surcharge was announced by Callaghan in his 3 May 1966 budget and took effect on 30 November after 25 months. ‘On one point at least everyone should be absolutely clear. It failed in its essential purpose’, stated a valedictory editorial in the FT.

IX

The tribulations of sterling in the 1960s have received considerable attention from contemporaries and historians. A recent contribution by Scott Newton identifies two sterling crises in autumn 1964, one that coincided with the result of the 16 October election and another that began several weeks later in mid November (Newton Reference Newton2009, p. 75). As regards crisis management, there were indeed two phases: a first phase that began on 26 October with the import surcharge as the foremost feature; and a second phase from 23 November with 7 per cent Bank Rate and the $3 billion international credits as the principal measures. Newton characterises the first phase of the crisis that was met by the ‘October package’ as ‘handled efficiently’, deeming the measures adopted to be appropriate alternatives to deflation since there was no evidence of overheating in the economy. However, as a crisis management measure the October package was not only inadequate but aggravated matters, as Wilson and Armstrong acknowledged. The competence of the government's response to the onset of the 1964 crisis has been questioned by Michael Oliver, who observed that it was the first of many occasions over the period 1964–7 ‘when the Treasury misread or even appeared not to understand the strength of feeling against sterling’ (Oliver Reference Oliver2012, p. 318). He does not mention the import surcharge, but quotes the FRBNY, which noted with relief after the Bank Rate rise that the British had now adopted ‘an air of urgency that had been lacking before’.

Oliver has also challenged the notion of there being two crises in 1964. Based on the three-month forward rate for sterling, he argues convincingly that there was a single crisis that began in September (or before) and lasted until April 1965 (Oliver Reference Oliver2012, p. 314). That is not incompatible with different stages in crisis management, beginning with the import surcharge. It was certainly the way that Cromer and fellow central bank governors perceived it, as his notes and memos show.Footnote ⁶⁵ Indeed, from his perspective the 1964 crisis turned almost seamlessly into the next sterling crisis that began in July 1965, and there was a further crisis that started in June 1966. Indeed, Bordo, MacDonald and Oliver have argued that sterling was a non-credible currency over the whole period from 1964 until after devaluation in November 1967, being propped up by international rescue loans (Bordo et al. Reference Bordo, MacDonald and Oliver2009, p. 456). The several sterling crises were instances of so-called ‘first-generation’ currency crisis models reflecting increases in inconsistency between the external peg and domestic fundamentals (Eichengreen Reference Eichengreen2003; Glick and Hutchinson Reference Glick and Hutchinson2011; Krugman Reference Krugman and Krugman2000).

Britain's surcharge had two roles: (1) as a currency crisis management instrument; and (2) to improve the balance of payments. As regards the first, as a stand-alone protection shield for sterling it was plainly inadequate. Cairncross, who worked on the import control schemes during Maudling's chancellorship, observed that ‘it had never been assumed that there would be no accompanying measures of a different kind’ (Cairncross and Eichengreen Reference Cairncross and Eichengreen1983, p. 168). In Canada, by contrast, the surcharge was part of a coherent plausible package. Moreover, because of the acrimonious rows it engendered in international forums the British surcharge undermined confidence in sterling rather than bolstering it. Would a Conservative administration have done differently? Probably not; Maudling was plainly intent on introducing an import surcharge if he returned as Chancellor. Better? Who knows, though possibly the Bank might have been involved in the designing the October package and the government might have taken some heed of the Governor's anxieties and recommendations.

Regarding the surcharge's impact on the balance of payments, the government's estimate at the time of the surcharge's introduction was that it would cut imports by £200m a year, raised by Callaghan in his November 1964 budget speech to £300m. Adjustment for the subsequent reduction in the rate from 15 per cent to 10 per cent after six months suggests an official expectation of around £440m of import reductions over the two years. Between 1967 and 1973 at least eight econometric studies of the impact of the surcharge on the UK balance of payments were undertaken (Tew Reference Tew and Blackaby1979, pp. 344–7). ‘Import Surcharge – an idea that failed’ was the headline above an article in The Times reporting the findings of the first of the studies by Johnston and Henderson of Manchester University.Footnote ⁶⁶ They estimated the reduction in imports over the life of the surcharge at just £150–200m (Johnston and Henderson Reference Johnston and Henderson1967, p. 107). Barker, on the other hand, using a different approach, estimated a surcharge effect of £462m; Boatwright, at the University of Reading, came up with £350–£450m (Barker Reference Barker, Hilton and Heathfield1970; Boatright Reference Boatright1969). Reviewing the various estimates, Tew commented that ‘the government figure seems to have been on the optimistic side’, himself favouring a study by Fane and Whitley that calculated the reduction at around £250m over the whole period (Tew Reference Tew and Blackaby1979, p. 347). Whichever the number, the surcharge had, observed Cairncross, ‘a large and immediate effect’ on Britain's balance of payments (Cairncross and Eichengreen Reference Cairncross and Eichengreen1983, p. 175).

The import surcharges adopted by various countries in the 1950s and 1960s had significant balance of payments effects that temporarily substantially surpassed the multilateral tariff reductions resulting from GATT round negotiations (Irwin Reference Irwin2012b, p. 155). In Britain's case, the trade deficit fell during the surcharge years from £540m in 1964, to £260m in 1965 and £110m in 1966, though the surcharge was only one factor (Thirlwall and Gibson Reference Thirlwall and Gibson1991, p. 232). Import growth declined while export volume grew at 7 per cent a year and the current account balance moved into surplus in 1966. The removal of the surcharge from December 1966 was followed by a rush of imports, and in June 1967 the Economist observed that ‘it looks as if the import surcharge…may have had a bigger deterrent effect during 1964–66 than had been supposed’, though the forthcoming sterling crisis was the result of other developments.Footnote ⁶⁷ Soon the trade deficit ballooned to £600m and the balance of payments shifted heavily into the red, culminating in devaluation in November 1967. Despite the short-term relief provided by import controls, Bergsten argued that they did not provide a long-term solution to underlying problems and merely delayed par value adjustment. ‘In every case where trade measures were adopted by a major country, they failed to prevent a subsequent exchange-rate change’, citing France in 1958, Britain in 1967, and German revaluation in 1969 (Bergsten Reference Bergsten1977, p. 3). Canada was evidently an exception to the general pattern.

X

The Canadian, British and other import surcharges were introduced to avert currency devaluation. Nixon's surcharge, paradoxically, was imposed to achieve devaluation (Irwin Reference Irwin2011, p. 32). Mounting balance of payments deficits led the administration to want a devaluation of the dollar to improve America's international competitiveness. But with the dollar as the anchor of the Bretton Woods system, the US could not devalue against itself. To do so it had to get other countries to revalue their undervalued currencies, which they were reluctant to do, generating growing resentment in the US of perceived currency manipulation. To cajole them to revalue the US created an international monetary crisis through the measures introduced in August 1971 that included a 10 per cent import surcharge as an ‘attention getter and bargaining chip’ (Shultz and Dam Reference Shultz and Dam1978, p. 115). When they did so the surcharge was lifted in December 1971.

The move to floating exchange rates with the end of Bretton Woods in 1973 meant the end of the need to defend fixed exchange rates and hence the discontinuation among advanced countries of balance of payments trade measures. However, in the 1970s, 1980s and 1990s import surcharges were imposed by some emerging and transitional economies that pegged their currency to the dollar or developed an overvalued exchange rate (Drabek and Brada Reference Drabek and Brada1998). Accusations of currency manipulation and calls for a new Nixon-style import surcharge revived in the US in 1985 and again in the early 2000s (Bergsten Reference Bergsten1990; Bergsten and Williamson Reference Bergsten and Williamson2003; Bergsten and Williamson Reference Bergsten and Williamson2004; Destler Reference Destler, Bergsten and Williamson2003; Kaempher and Willet Reference Kaempher and Willet1987). Currency manipulation was back in the headlines in 2010–12 in relation to China, with Congressional moves to reimpose a Nixon-inspired import surcharge (Scott Reference Scott2011).Footnote ⁶⁸ It is not only financial historians for whom import surcharges in their various guises and usages may be of interest.