The Atlantic and Its Enemies

by Norman Stone

  There were various measures, well-stated by a wise political commentator, Alan Watkins: ‘narrow money’ was that held in the Bank of England, plus deposits made by the commercial banks; ‘wide’, that circulating in pockets — together, these were M0. Then there was M1, which to M0 added bank deposits that could be withdrawn on demand. There was an M2 which went out of fashion quickly enough; M3 consisted of M1, with the addition of deposits that could be withdrawn after an interval of time; M4 was this, plus deposits in building societies, where savings for house purchases and mortgages were placed. One leading theorist, Tim Congdon, regarded M4 as the best measure. However, whatever their disagreements, the monetarists could at least chalk up more successful predictions than their opponents. They also had history, on the whole, on their side, since great inflations had accompanied the French and Russian Revolutions, themselves preceded and accompanied by issues of paper money that, in the Russian case, went so fast that there was no time even to print numbers on the notes, such that people who accepted them had to ink in the numbers themselves. In the great German inflation of 1922-3, ending with 11 million million Marks to the pound, the Reichsbank solemnly denied that its money-printing had anything to do with the inflation, and when the inflation was indeed stopped almost in its tracks by the introduction of a new currency altogether, its president, Rudolf E. A. Havenstein, dropped dead.

  The British monetarists had strong Atlantic connections and some found the American atmosphere more rewarding in every way. A measure of British disillusionment was a book by Robert Bacon and Walter Eltis, Britain’s Economic Problem, which showed that the government took 60 per cent of the gross domestic product, that the public services, being ‘non-marketed’, crowded out private investment. There was much truth in this, demonstrated when, in the 1980s and especially in the ‘long decade’ that followed 1991 and the end of the USSR, different ways were tried. Then, electronics vastly lowered the costs of publishing, retailing, even transport; potential producers, and especially China, were liberated, to produce on a vast scale, and some prices fell and fell. But in the seventies, the great advances in technology were not applied in such matters as telecommunications or printing (let alone the heavy industries and mining) because of union obstruction and of course lack of investment. Everything contributed to a downwards spiral, and the critics were right to say that inflation was the chief problem. They were resisted, partly because they seemed to be offering a return to the dismal verities of the Gold Standard age. In the USA economics was much less dominated by the Keynesian orthodoxies. There the unions were markedly less strong, and there was not quite such a concentration on the virtues of full employment. The most basic assumption in England had to do with the thirties, when so many young and educated people had looked guiltily at the mass unemployment of the traditional industries, mainly in the north, and had compared it with the prosperity of the south (and maybe also thought, inevitably, that their own job prospects should have been grander than the schoolteaching or other such low-paid work that many of them found themselves doing). Keynes had said that government spending would cause employment to increase, which would then create more ‘demand’ and cause greater production. This had been formalized in the Phillips Curve.

  Friedman challenged this. He claimed that there was only a ‘tradeoff between unemployment and unanticipated inflation’, meaning that if people saw that inflation was coming, they would take it into account in wage demands, and unemployment would be back to the starting point. In Keynes’s own time people had not expected inflation and did not know how to deal with it. The Friedman school reckoned that ‘economic agents would quickly develop efficient methods of seeing through the short-term real effects of expansionary fiscal policies’. There were rejoinders: there were still economists (James Tobin the best-known) who argued as before that mild inflation was a good thing. The grand establishment — Wynne Godley and Nicholas Kaldor — even toyed with reflation behind a wall of import controls, which would imply planning of this and that, and of course a paper money subject to joyous arithmetic. On the whole, the challengers were more interesting, and serious innovation came from institutions that allowed them to flourish, such as the London Business School. They did not worry so much about the balance of payments, and appreciated that there was an international aspect to the problem of inflation: since 1971, and the end of Bretton Woods, exchange rates had widely fluctuated, the dollar being worth half of a pound and then, a year or two later, being nearly equal to it. In the circumstances, inflation. By 1976, and the arrival of the IMF inspectors, Denis Healey, who, if British Labour had been as enlightened as the SPD, would have been a Helmut Schmidt, was listening to the monetarists, and by March 1980 they were predominant. However, the often bitter, self-righteous and contemptuous arguments about monetarism were really about matters that went deeper.

  Monetarism was a useful fiction. It was not a miracle cure, though it could certainly deal with symptoms, and this was noted by political commentators who had made their training in Marxism. One such, Alfred Sherman, dismissed economics as jumped-up accountancy: paper-money inflation just reflected the power of labour and the trade unions to impose transfer payments; he also saw the interest of the Keynesians themselves in the power of the State in organizing the transfers, the productive parts of the economy having to pay for it all. It was described in the United States as ‘rent-seeking’, as political economists tried to find a theory to fit what had been happening. A bureaucracy, complete with its own wooden language, was established to effect the transfers, and it taxed the middle: as Sherman said, the State turns everybody into a proletarian or a functionary. This was again a very old argument. It was levelled at the Counter-Reformation Catholic Church. In the later nineteenth century, Protestant countries were overwhelmingly richer and better organized than Catholic ones. Why? You cannot really point to significant doctrinal differences; nor can you say that the rich and the organizers were especially Protestant. The obvious answer, expounded in Hugh Trevor-Roper’s essay on this subject, was that the Counter-Reformation Church drove the businessmen out through taxation and religious harassment. They moved from Antwerp to Amsterdam, from France to Prussia, from Italy to England. Meanwhile, the papacy built extraordinary baroque buildings, and developed an equally baroque bureaucracy of much splendour, which made generous charitable arrangements for the poor (in Latin languages, ‘pawn shop’ is ‘mount of piety’), whereas in Protestant countries such as the Netherlands or Scotland ‘sturdy’ beggars were whipped out of town and churches were bald boxes, with a smaller bald box next door marked ‘school’. The paradoxical outcome, in the later twentieth century, was that Catholic countries were becoming richer and better organized than Protestant ones: Bavaria and Baden, for instance, easily overtook much of northern Germany, let alone the German Democratic Republic, which was, in origin, overwhelmingly Protestant.

  There was, here, one obvious line of enquiry, that in the Catholic countries conservatism reigned as regards the family and education, whereas elsewhere (including northern Germany) the changes of the sixties did great damage to both. Welfare was a case in point. Originally, welfare in the Atlantic countries had been set up on an insurance principle: you paid for ‘stamps’, and this guaranteed you against bad times. There were also, in the USA, many charity hospitals for the poor who did not have the wherewithal to deal with emergencies. But inflation killed such things, as it made scholarship funds for education meaningless small change; the insurance funds suffered from inflation, and the State anyway needed the money to pay for the widening gap between ‘entitlement’ and reality. The State won, and, increasingly in the Atlantic world, including Canada, the State took over what should have been a matter of semi-private insurance, and ‘social security’ just became another tax. In Sherman’s view, State spending then brought about inflation.

  But there was more. It also brought about unemployment. As to this, there was much worry, because especially in England unemployment had gone
up and up, despite repeated applications of the Keynesian formula against it — even and perhaps especially under ostensibly right-wing regimes such as Heath’s. Why? One of the leading monetarists, Patrick Minford, studied the question and did so from the viewpoint of Liverpool University. Liverpool, by 1980, was a stricken city. It had been one of Britain’s grandest, with superb Victorian architecture and an art gallery, set up by the Walker shipping family, that contained the best Pre-Raphaelites. The shipping, as with Glasgow, had collapsed, but Liverpool, unlike Glasgow, did not have alternatives, and anyway had to compete with Manchester, which did. The professional classes moved out, the Victorian city declined. But Liverpool had also developed hideous housing estates, themselves a prescription for demoralization, and a spiralling down began. Any sensible observer of the scene immediately wondered: why, with so much unemployment, can you not get a taxi? The university itself had had its great Victorian days; Patrick Abercrombie, the originator of town planning in Great Britain (and of much else), had taught there, and Gladstone even talked with a Liverpool accent. In modern times, it had produced the Beatles, who, despite nonsense in the opposite sense, were quite well-educated middle-class boys. Patrick Minford (like Sherman, a one-time Communist) might well feel resentful, as a professor paid far below the inflation rate (some trade union boss having declared that academics did not rate much love and care), and he examined the paradoxes of a Liverpool that he could see crumbling before his eyes. Minford had adopted monetarism, as a surrogate Gold Standard, and now wrote on unemployment. Why was it at such a level? His answer was one that had already been offered in the great Slump. Even then, money had been spent on Liverpool, and it had not responded very well. There was a particular problem, in that Irish immigration had created what in the USA became known as an ‘underclass’, so bad that, even in the truant schools that were set up to punish boys who absented themselves from school, the Catholics and the Protestants had to be kept rigidly separate: there was a common bathhouse, for instance, and it was kept locked on one or other of the religious sides, in the yard, on alternate days. The same problem existed in Glasgow but there — the State in Scotland being more forthright — it was somehow kept under control. Not so in Liverpool: four decades later, money was spent, and even more; the result, said Correlli Barnett cruelly, was ‘urban primitives’. Minford was less outspoken, but said much the same: if you pay people to be unemployed, they will be. More: they will abuse the system. This again had origins in Ireland, where the alienation of the Catholic Church by the Anglo-Scots in the nineteenth century had meant that it would not co-operate over birth certificates. No-one knew who was born, when. Old-age pensions were introduced in England before the First World War but Ireland was not included, because no-one knew when the claimants reached the claiming age. Now, much of Liverpool existed on the black economy: the city that had pioneered the slave trade then turned, by fearful symmetry, into Ireland’s revenge on England. Men and women would want to get married as a matter of course, especially if there were children. One problem in measuring unemployment was that people lived in couples, and the wife might try for employment. She was then taxed. ‘The marginal tax rates on wives of unemployed men are high and increase with his unemployment duration… her income risks loss of benefit.’ Wives — one third worked — even lost 15 per cent of their income in tax, while the husband got something back in ‘benefit’. You did not need to be a mathematician to work out that men and women would not marry, if they were paid not to. He might have added that the housing policies pursued since the war had had the same perverse effect. The couple paid a low rent, sometimes ridiculously low, and, if they left the dwelling to take employment elsewhere, would find a new dwelling so expensive that no money was made. They were therefore imprisoned in unemployment, in a collapsing city, with effects upon the children that would prolong the problem and create what was coming to be known as the British underclass. If you were in a union, you had a job, and real wages rose. But the unions also kept people out, and the result was division: some people working in padded employment, others not. This went together with a proliferation of public bodies offering employment of a sort — for instance, the ‘Perambulator and Invalid Carriages Wages Council’ and the ‘Ostrich and Fancy Feather and Artificial Flower Wages Council’, which covered 400,000 people. These things simply priced people out of real work and minimum-wage laws reinforced this. Late-seventies England was not a happy place, or, rather, what was happy was not real, and what was real was not happy.

  There were other ideas around at this time, often of great interest, and reflecting the disillusion of men and women who had regarded the sixties as a time of hope. Much of the inspiration, and even some of the money, came from North America. There, the disillusion had also run deep, and Johnson’s idea of a ‘Great Society’ had disintegrated: as Ronald Reagan put it, ‘We declared war on poverty, and we lost.’ Daniel Moynihan, originally a New Dealer and a Democrat, made himself very unpopular at Harvard (they threatened to burn down his house) because he said that welfare was causing black girls just to do without husbands, and bringing about the disintegration of the black family; that was producing an ‘underclass’ of hopeless misfits who, again through welfare, were paid to reproduce themselves. Education also produced its counter-revolutionaries, who had even, at the very end of his life, included John Dewey himself, the architect of progressive education. The United States was big enough, and decentralized enough, for new ideas to be tried out here and there. But was this possible in an England that was centrally run?

  Disillusion with the sixties was now quite widespread. The educational reforms of that decade — comprehensive schools — had demonstrably done nothing either for better education or for social mobility. The concrete architecture that had replaced old and solid Victorian buildings was widely hated, outside architectural bodies, and go-ahead local authorities in the USA even began blowing up the more offensive of the ‘projects’. However, whereas with monetarism there was at least a chance of changed financial ways, the bureaucracies and interest groups involved in these things were not easily changed: short of some coup, they were even irremovable. A very disillusioned figure of the era was John Vaizey. Here was one of the bright young men of the fifties, a clever man, married to a clever art historian (whose brother had written about Orwell), with a background in poverty and for that matter crippling illness: during the war, he had contracted polio, and had been cured by the then methods, which were torture chamber stuff, as he was clamped into a plaster straitjacket for a year, to be fed, immovably on his back, wartime rations. He studied a very difficult subject, the economic effects of education, and wrote well; Labour put him into the House of Lords. But trade-union-dominated England was not for him, and he recognized his mistake. In the seventies, he described it: the more criminology, the more crime; the more sociology, the less community; he could have added, the more economics, the less money. There were many such cases. Noel Annan was also extremely clever, a man for any committee needed to pronounce on the Arts, the BBC, the Royal Opera; but his Our Age is a rueful piece of work, trying to explain quite why his generation had deliberately subverted the wisdoms of the ages; again, it was domination by trade unions that he most resented. In the later 1970s the best British literary editor since Cyril Connolly, John Gross of The Times Literary Supplement, though again sympathetic to Labour, was being driven to distraction because he had to deal with obdurate print unions for days on end every month; in the end they closed him down for a year. There were in all areas ideas of much radicalism on both sides of the Atlantic. In hardly more than twenty years, England changed extraordinarily. Orwell had noted that football crowds behaved as if they were on church parade, and there was remarkably little crime. By the 1970s football hooliganism had become such that, in West Germany, the owners of small hotels in the vicinity of an international game put up notices to the effect that the English were not wanted. In the later 1970s there were warnings, and in the new ‘think-tanks�
� set up on an American model, and following the success of the IEA, hard-hitting pamphlets were produced. The mood was set for reaction, but its cause was, as yet, far from won. The various social reforms, and the change in institutions such as the universities or the BBC, were very difficult to combat, and in any case there was no agreement — far from it — that there were problems other than lack of money. There might be a specific British problem to do with uncontrollable trade unions, and perhaps even over the management of the money supply, but that did not automatically discredit the whole structure. Besides, there was always the hope that membership of the European Economic Community would bring an improvement.

  Here was another illusion, though a forgivable one, shared by almost anyone in the educated classes. If in 1973 you moved to Europe, you could see that things worked. France had picked herself up, had world-class concerns, and was almost twice as well-off as Britain. Northern Italy was heading in that direction. Especially, the legend of miracle-Germany lived on. The pound sank and sank against the Mark — it had started at twelve, and was coming down to two — and if you came back to Heathrow airport from Cologne or Munich, you either sat in a traffic jam for two hours, getting into London, or you took the underground railway for an hour or so, trundling through endless Actons, whereas in Munich you reached the centre of town from the airport in a quarter of an hour, because someone had taken the point that traffic from airports was not the same as traffic from suburbia. The Americans had never really understood why Great Britain had kept herself apart from Europe, and pressed strongly for her joining it: Henry Kissinger characteristically remarking that it was tiresome to have to make six telephone calls instead of just one, to a counterpart in Brussels. With a cross-party arrangement, British governments duly joined, and, with some media management and some mendacious language, their decision was confirmed by referendum in 1975. Their negotiating position was weak, they were in a hurry, and they were easily outmanoeuvred by the French. Concessions, later regarded as absurd, were made. The country paid more than its fair share of the European budget, and accepted provisions as regards agriculture that proved expensive and corrupt. One positive thing did emerge: the European Court, to which British law was now subject, decreed that trade unions did not have the right to enforce membership (‘the closed shop’), and that, in time, was to counter the protection racket ways that had been developing. But, in the short term, ‘Europe’ did not turn out to be the answer, because Europe herself was losing steam.