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In October 2010, the song was recognised by BMI for surpassing five million performances worldwide. It was awarded Gold Certification on two occasions, on 1 April 1978 and 22 July 2013 by the BPI in the UK.
Named after Baker Street in London, the song was included on Rafferty's second solo album, City to City (1978), which was Rafferty's first release after the resolution of legal problems surrounding the formal break-up of his old band, Stealers Wheel, in 1975. In the intervening three years, Rafferty had been unable to release any material because of disputes about the band's remaining contractual recording obligations.
Rafferty wrote the song during a period when he was trying to extricate himself from his Stealers Wheel contracts; he was regularly travelling between his family home in Paisley and London, where he often stayed at a friend's flat on Baker Street. As Rafferty put it, "everybody was suing each other, so I spent a lot of time on the overnight train from Glasgow to London for meetings with lawyers. I knew a guy who lived in a little flat off Baker Street. We'd sit and chat or play guitar there through the night." Privately, Rafferty also spent a lot of time drinking, which he noted he mentions in the lyrics, "light in your head and dead on your feet."
The resolution of Rafferty's legal and financial frustrations accounted for the exhilaration of the song's last verse: "When you wake up it's a new morning/ The sun is shining, it's a new morning/You're going, you're going home." Rafferty's daughter Martha has said that the book that inspired the song more than any other was Colin Wilson's The Outsider (1956). Rafferty was reading the book, which explores ideas of alienation and of creativity, born out of a longing to be connected, at this time of travelling between the two cities.
The album City to City (1978), including "Baker Street", was co-produced by Rafferty and Hugh Murphy. In addition to a guitar solo, played by Hugh Burns, the song featured a prominent eight-bar saxophone riff played as a break between verses, by Raphael Ravenscroft.
Rafferty claimed that he wrote the hook with the original intention that it be sung. Ravenscroft remembered things differently, saying that he was presented with a song that contained "several gaps". "In fact, most of what I played was an old blues riff," stated Ravenscroft. "If you're asking me: 'Did Gerry hand me a piece of music to play?' then no, he didn't." However, the 2011 reissue of City to City included the demo of Baker Street which included the saxophone part played on electric guitar by Rafferty. A very similar sax line, however, was originally played by saxophonist Steve Marcus for a song called "Half A Heart", credited to vibraphonist Gary Burton, that appeared on Marcus' 1968 album Tomorrow Never Knows.
Ravenscroft, a session musician, was in the studio to record a brief soprano saxophone part and suggested that he record the break using the alto saxophone he had in his car. The part led to what became known as "the 'Baker Street' phenomenon", a resurgence in the sales of saxophones and their use in mainstream pop music and television advertising.
In January 2011, radio presenter Simon Lederman revealed that Ravenscroft thought the solo was out of tune. When asked during a live radio interview on BBC Radio London, "What do you think when you hear [the sax solo] now?" Ravenscroft replied, "I'm irritated because it's out of tune; yeah it's flat; by enough of a degree that it irritates me at best", and admitted he was "gutted" when he heard it played back. He added that he had not been able to re-record the take, as he was not involved when the song was mixed.
According to one story, Ravenscroft received no payment for a song that earned Rafferty an income of £80,000 per annum; a cheque for £27 given to Ravenscroft bounced and was framed and hung on his solicitor's wall. However, the bouncing cheque story was denied by Ravenscroft during an interview on BBC Radio 2's Simon Mayo Drivetime show on 9 February 2012.
The saxophone riff was also the subject of another urban legend in the UK, created in the 1980s by British writer and broadcaster Stuart Maconie. As one of the spoof facts invented for the regular "Would You Believe It?" section in the NME, Maconie falsely claimed that British radio and television presenter Bob Holness had played the saxophone part on the recording. Later, the claim was widely repeated.
The song is also heard in the closing scene of "Lisa's Sax," the episode of The Simpsons which recounts how Lisa Simpson received her first saxophone. Lisa performs a brief, cruder rendition of the hook before the music segues into Rafferty's recording.