The left wing of the Labour Party defeated the Public Expenditure White Paper in the Commons in March 1976. Subsequently, Harold Wilson resigned and James Callaghan took over as Prime Minister. Around this time, investors became convinced that the pound was overvalued and that the government might devalue. A large-scale sale of sterling began, which rapidly lost value against the dollar.
In spite of further efforts to reduce inflation, the pound continued to lose value, reaching a record low against the dollar in June 1976. The US Treasury Secretary now agreed with officials in the International Bank of Settlements that the pound was undervalued. He offered to partially fund a stand-by loan of $5.3 billion to support the pound. He insisted, however, on repayment of the loan by December 1976. Proposals for further cuts in expenditure and tax increases to reduce the budge deficit were debated in Cabinet in July. By September 1976, Britain had already drawn heavily on the short-term loan and it was apparent that a loan from the IMF would be necessary to fund repayment.
As pressure on the pound continued, the government approached the IMF for a loan of $3.9 billion in September 1976. This was the largest amount ever requested of the Fund, which needed to seek additional funds from the US and Germany. The IMF negotiators demanded heavy cuts in public expenditure and the budget deficit as a precondition for the loan. Healey's proposals for a cut of around 20 per cent in the budget deficit were hotly debated in Cabinet, particularly by Anthony Crosland and Michael Foot. Eventually they acceded, as it seemed likely that the refusal of the loan would be followed by a disastrous run on the pound. Healey announced the forthcoming reductions in public expenditure to the House of Commons on 15 December 1976.
Following the agreement with the IMF, the overall economic and financial picture improved. Interest rates were soon reduced and the pound quickly appreciated in value. By the end of 1977, partly as a result of new oil revenues, there were improvements in the balance of trade. Britain did not need to draw the full loan from the IMF. Nevertheless, the IMF crisis reinforced a change in policy orientation away from full employment and social welfare towards the control of inflation and expenditure.