Former Labour prime minister James Callaghan pushed through swingeing defence cuts despite a warning that he could be forced to abandon Britain's nuclear deterrent, according to secret files made public today.
Papers released to the National Archives in Kew under the 30-year rule reveal the extent of the panic in 1976 as Chancellor Denis Healey was forced to go capin-hand to the International Monetary Fund to bail out the British economy.
In return for a £2.3 billion stand-by loan to halt a potentially disastrous run on t he pound, the IMF demanded massive spending cuts to the fury of Labour ministers and MPs.
The crisis was a disaster for the reputation of Calla-ghan's Government which was ousted by Margaret Thatcher's Conservatives in the General Election three years later.
The papers reveal how, on the eve of the crucial Cabinet meeting to decide where the cuts should fall, Callaghan's most senior civil servant warned it could mark the "definitive disappearance" of Britain as a major military power.
Cabinet Secretary Sir John Hunt reluctantly advised that scrapping the Polaris nuclear deterrent was preferable to cutting the British Army on the Rhine (BAOR) which could result in the "unravelment" of the Nato alliance.
In the end the Armed Forces were able to achieve the savings through a squeeze on equipment programmes, although not before Callaghan had faced down a threatened revolt by the Chiefs of Staff.
The crucial Cabinet meeting to consider the cuts package was set for December 6. In a note to Callaghan dated December 3, Hunt acknowledged that if the Government was to get the deep social security cuts it needed past Labour MPs it would also have to cut defence.
The Permanent Secretary at the Ministry of Defence Sir Frank Cooper had told Hunt that they could "stump up £50 million with a lot of grumbling but without doing serious damage".
Anything over £100 million, however, and they would have to scrap Polaris as well as considering Britain's Nato commitments at a time when the West was locked in the Cold War struggle with the Soviet Union.
In a further note two days later - the day before the Cabinet was due to meet - Hunt warned of the consequences of trying to cut the 55,000-strong BAOR, howe ver unpalatable the alternatives.
"It is very unlikely that any other country would agree to replace our troops: and the process of unravelling Nato would have begun," he wrote.
"But abandoning the deterrent, or at least scrapping its improvement, would cause much less concern to our allies.
"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 a proof of Britain's definitive disappearance as a major military power. But it would be preferred by our partners to a withdrawal of BAOR."
It took the Cabinet three meetings over two days - ending late on December 7 - before they agreed the final cuts package.
Despite Hunt's warning it included an immediate £100 million cut for defence with another £200 million the following year.
The Chiefs of Staff angrily presented Callaghan with a formal statement, warning that the cuts may "make it impossible for them to discharge their responsibilities".
The prime minister, however, was unmoved, coolly telling them that he would report their concerns to the Cabinet although "there was little likelihood of any change being made".
