1976 government papers
By Dominic Casciani
Britain's mid-1970s economic crisis was so bad that it could have led to the loss of its nuclear weapons system in a "siege economy", papers reveal.
Polaris: Very expensive when belt tightening was needed
Documents show civil servants warned the UK may have to give up its Polaris missiles to economically survive 1976.
Jim Callaghan's Labour government was forced to turn to the International Monetary Fund to prop up the country.
The hugely controversial IMF deal saved the pound - but destroyed Labour's economic reputation with voters.
Jim Callaghan moved into 10 Downing Street in 1976, and was immediately told the economy was facing huge problems, according to documents just released at the National Archives.
The world's financial markets were losing confidence in Sterling as the British economy stumbled. The Treasury could not balance the books. At the same time, Labour's strategy emphasised high public spending which it appeared could no longer be paid for.
Fear of falling
Callaghan was told there were three possible outcomes: a disastrous freefall in Sterling, an internationally unacceptable siege economy or a deal with key allies to prop up the pound while painful economic reforms were put in place.
By the autumn, the pound was indeed plunging and the government called in the International Monetary Fund, the body co-founded by the UK to tackle economic crises.
The IMF demanded massive public spending cuts in return for urgently needed loans.
But many Cabinet members were unconvinced, fearing a complete collapse of industry. Indeed, the documents reveal substantial scepticism over the accuracy of the Treasury's own predictions of dire consequences.
Jim Callaghan was walking a political and economic tightrope.
Papers in the National Archives show cabinet meetings in which Callaghan passed his own scribbled notes to officials and back again as he tried to reach consensus among party colleagues, while also adhering to the IMF's demands.
But while he was scrambling to convince both his Cabinet and the wider Labour Party, the prime minister also knew there were far larger issues at stake.
Were Britain's economy to collapse, defence spending would be the first major target for cuts from left-wing Labour ministers.
Jim Callaghan: Battled to keep Cabinet together
Above all else, Washington and other Nato allies feared the UK would become a siege economy and fatally undermine the entire Cold War strategy.
Almost a full year before Sterling plummeted, the then US Secretary of State, Henry Kissinger, cabled London, foreseeing Washington's nightmare scenario.
"Any further defence reductions would weaken Britain's influence as a Nato ally, with important implications for future European stability," Kissinger wrote.
"I am sure you are aware that America's long-term relations with the UK will inevitably have to take into account Britain's standing as a partner in our common security enterprise."
On 5 December, as talks with the IMF neared collapse, the then Cabinet Secretary Sir John Hunt passed a highly confidential briefing paper to Jim Callaghan on the implications of cutting military spending.
Sir John warned that withdrawing the British Army's massive presence in West Germany was politically and diplomatically unacceptable. The 56,000-strong British Army of the Rhine (Baor) was a key plank of Cold War strategy, he said. But scrapping nuclear missiles, was potentially palatable.
"Abandoning the [nuclear] deterrent, or at least scrapping its improvement, would cause much less concern to our allies," wrote Sir John.
"It would leave France as the only nuclear power in Europe, which would be unwelcome to most members of the alliance: and it would be seen as proof of Britain's definitive disappearance as a major military power.
"But it would be preferred by all our partners to a withdrawal of Baor."
The papers show the prime minister placed a great deal of faith in US President Gerald Ford to broker a deal.
Callaghan candidly told the president, who was due to leave office in weeks, that there was "not a cat in hell's chance" of the party agreeing to "the full severity" of the IMF's proposed cuts.
Margaret Thatcher: Economic trust passed to Conservatives
Without warm words from Washington, the Cabinet's waverers were likely to support the measures the US feared most.
"If we go for what the IMF are demanding [Cabinet waverers] will swing over to the [left-wing] group that is asking for all the restrictions because they will see no hope for the economy or for the government in any alternative course," Callaghan told Ford.
"The question is Gerry, [who] is going to be out of office first, you or me?"
Gerald Ford said little in return. But Jim Callaghan did eventually win Cabinet backing for a painful IMF deal and the proposal to drop the nuclear deterrent never went further than the papers on his desk.
Many historians regard Callaghan's handling of the crisis as an example of consensual Cabinet government at its most effective - his prevention of ministerial resignations was a huge personal political achievement.
But the price he paid was high. The Labour Party was unravelling into camps of social democrats and left-wingers. Those bitter rows inside the party and with the unions, combined with a loss of public confidence over the coming 18 months, led ultimately to Margaret Thatcher's 1979 Conservative victory.