For more than seven decades, the convulsions of British politics were marked by sterling crises. The second Labour government fell apart in 1931 when Ramsay MacDonald cut unemployment benefit to try to keep sterling in the Gold Standard. British postwar foreign policy crumbled when sterling crises ended military action against Egypt in 1956 and later forced a withdrawal from East of Suez. James Callaghan ended the postwar commitment to full employment after his government was forced to seek an IMF loan in 1976 to compensate for sterling’s collapse. Black Wednesday in September 1992 terminated more than a decade of Conservative electoral hegemony and any hope that Britain would turn its Maastricht opt-out on monetary union into an opt-in. That monetary fault line went on to play a crucial part in wrecking Britain’s European Union membership.
Although Conservative governments suffered their fair share of sterling-induced political crises, Labour was structurally disadvantaged by the perpetual risk of a currency run. The fear that investors would take fright made it harder for Labour to present itself as a party of competent government. Indeed, New Labour’s repudiation of the past was directed, as much as anything else, at the financial markets, reassuring them that a chastened Labour leadership now understood the constraints markets created better than the Conservatives. George Osborne’s tactical success in 2010 was to disrupt this New Labour narrative by using Gordon Brown’s fiscal record and the financial and eurozone crises to resurrect that old fear within the bond markets.
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