by Norman Stone
The heart of the problem was Reagan’s unwillingness to apply free-market principles to residential housing: nearly 40 per cent of mortgages were guaranteed, whereas in 1970 almost none had been. In 1988 the failure was evident, and, with the deficits, even the tax cuts were reversed, partly formally, but mainly by stealth, as social security contributions went up and up. Federal spending rose by nearly 3 per cent per annum and income by 2.5 per cent: this made for a large deficit, overall of nearly $1.5tn. Defence spending had been part of the story, but only part, and in any case as the arms competition with the USSR ended, it in effect paid for itself in the end. In fact by 1986, to offset the deficit, taxes were raised, and endlessly rising social security taxes nullified the Kemp-Roth tax cut of 1981 for most people. In other words, the Reagan Revolution was something of an illusion, and the same might be said of the Thatcher Revolution. In England, too, taxes were if anything higher and the size of the State had hardly been diminished at all.
Besides, as the economic tide went out, various grasping monsters were beached, as indeed had happened in 1930, and that again gave ‘the eighties’ a bad name. In 1934 the Stavisky scandal had almost destroyed republican, democratic France, since government ministers and parliamentary deputies had been found to be involved in an upended credit pyramid, the apex of which stood in the municipal pawn-shop of Bayonne; the Madoff running it was found dead in mysterious circumstances. Now, in New York, life imitated art, in this case Tom Wolfe’s Bonfire of the Vanities and Oliver Stone’s Wall Street: the makers of ‘junk bonds’ vanished into prison as recession pricked their bubbles. In London the empire of Robert Maxwell collapsed. He (repulsively: the baseball cap making it worse), larger than life, was a lie from the start. He was not, as he claimed, a Czech and therefore a gallant ally. He was born in an eastern part of Czechoslovakia which had been part of Hungary, and where the local (Hassidic) Jews all spoke Hungarian. His name was the Germanic ‘Hoch’, the Hungarian for which is ‘Magas’, no doubt the inspiration for his Anglicized or Scotticized ‘Maxwell’, to which was attached the army rank of ‘Captain’, when he became a Labour MP. His money came from Soviet connections: he had bought up the patents of German scientific magazines for a song in Soviet Berlin, and he performed useful services for the Soviet Communist Party, which probably paid him by letting him know in advance when they would be selling gold or timber, so that he could one-way-bet-ly speculate accordingly. When the Soviet Union collapsed, Maxwell stole his pensioners’ money and then fell overboard from his yacht, in mysterious circumstances. His US equivalent, Armand Hammer, was not caught, though upon his death he was found to have left, net, very little money. Both Hammer and Maxwell used a small orchestra of lawyers to silence enquirers.
By 1991, therefore, the critics of the eighties appeared to be justified. The notable books on the subsequent period — for instance, Joseph Stiglitz’s Roaring Nineties or even Edward Luttwak’s Turbo-Capitalism — rather shook their heads. Later booms and busts (most recently the crash of 2008) caused a veritable vibration of heads, and the ‘decade of greed’, as the eighties had been called, once more came in for condemnation. It is of course legitimate to ask what went wrong, and when. However, in this, the critics of the eighties were misleading. The great weakness in books of the Stiglitz type, knowledgeable and well-intended as they unquestionably were and are, was to suffer a strange nostalgia for the seventies; in fact one very good reason for the triumphs of ‘Reagan-and-Thatcher’ was that their critics were not only very wide of the mark, but disagreed badly among themselves, and were themselves products of the seventies, when their orthodoxies had indeed proven calamitously wrong. The record of development economics, for instance, is unimpressive; countries such as Tanzania, spoiled with World Bank largesse, spiralled down in planning, whereas South Koreas and Taiwans, with hardly any help at all, shot up. This phenomenon made the reputation of the economist Peter (Lord) Bauer, also of Hungarian origin (and also Jewish, but he was educated in Budapest at the grand and otherwise anti-semitic Piarist School, since his father, a bookmaker, had agreed to put a red line through the debts of the chairman of governors, a Count Sigray). His observations did not earn him a Nobel Prize, but, nowadays, the critical literature of the 1980s can mainly only be read as a sort of archaeology, turning up the urn burial practices of some once great tribe, the terror of its neighbours. This irrelevance applied still more when it came to the artistic artefacts of the anti-eighties. British film had a wonderful tradition to it, classics such as The Third Man still watched. In the 1960s, the film schools had been sixtified, in the sense that their students were supposed to develop an updated version of 1930s social realism, allied with hyper-active (or hyper-passive, in the German case) camerawork. Public subsidy was then showered upon films that would otherwise have been utter financial flops, the beneficiaries afterwards rounding upon the subsidy-givers to complain at their parsimony. In the opera, one Fidelio after another evoked Pinochet and the SS; you would hardly have been surprised to find the Dove in Parsifal represented by a B-52 bomber over Vietnam. There was a characteristic episode, in the context of President Mitterrand’s celebrations of the bicentenary of the French Revolution. The Bastille: ideal place for a popular opera, ran the thinking. The episode was chronicled by Maryvonne de Saint-Pulgent in her Syndrome of the Opera (1991) — vastly over-budget, vastly late, strikes at the opening, peacock-screeching between major participants, flouncings-out. Opponents of the eighties very frequently missed the entire point, and only really showed how accurate had been their own critics of the later seventies. However, it was true that the decade had not ended as these self-same critics had wanted. What had gone wrong, and where?
It is curious to see that, in 1986, there was some crisis, in itself insignificant but generating headlines, that seems to have marked a caesura on the Right. Ronald Reagan’s administration was lamed by ‘Irangate’. After Vietnam, Congress had found ways to stop intervention abroad by the CIA, regardless of any national interests that might be involved. Nicaragua had undergone a revolution in 1979, and the ‘Sandinistas’ who took charge talked Cuban language; Central America was full of combustible material, and American interests were at stake. The CIA wanted to keep a counter-revolutionary movement (the ‘Contras’) going and found a complicated way round the congressional prohibition: through Israeli mediation, a deal was done with Iran for the release of hostages, some of the proceeds going under the cover to the Contras. Nothing much about the affair was quite what it purported to be but the Washington media were only too happy to have another Watergate, and though Reagan always protested innocence, some of his senior staff suffered. This coincided with the much larger failure, in 1986, to clean up the overall mess that had become of the budget — an objective that had been stated in the first Inaugural. ‘Irangate’ was a symbol that the Reagan Revolution had failed, at least in its own terms. By 1993 the tax take was almost where it had stood in 1980.
There was an odd parallel in Britain around the same time, an affair known as ‘Westgate’. A small helicopter company called Westland was in trouble, and wished for government help because of defence exigencies; but the American company Sikorsky proposed to buy it. The defence minister, Michael Heseltine, was a vain man, able none the less to arouse enthusiasm at Conservative Party gatherings. He strongly believed that there should have been a government strategy for industrial regeneration, and had tried, in stricken Liverpool, to do his best on a local scale. He had spoken up for local government, even when the Prime Minister (in 1983) wished to close down the rather attitudinizing left-wing apparatus that in theory ran London. He also believed in a European zone. Now he argued that a European consortium should save Westland. More generally this reflected a belief in ‘regional policy’, German examples of which he had no doubt heard of. It was true that in the once industrial powerhouse of Germany, Nordrhein-Westfalen, regional policy had been practised such that towns like Essen, which, had they been in England (or France), would have been stric
ken in the manner of Liverpool, had recovered. But in Germany, which had nothing like the British problem with inflation, planning could proceed on a relatively confident assumption that costs would not go beyond bearing (and there were also solid critics in Germany of regional policy: it seemed to hold the richer parts back while doing little to improve the poorer parts). Besides, local government there was simply more competent. Now it appeared that Heseltine, whose talents had not, he thought, been adequately rewarded, was using the Westland case to push his way into the Department of Trade and Industry, a monster that reflected sixties gigantomania in a hideous concrete building. He stirred up the more corporatist-minded of his business friends, and was indiscreet in his pursuit of his aims. There were leaks to the press about a warning to him, and it came to a Cabinet meeting early in 1986 at which Heseltine lost his temper, resigned there and then, and stormed out. There were even pompous complaints to the effect that constitutional government had ‘broken down’. It was no doubt true that, by now, the Prime Minister was bypassing some of the Heathite arrangements, and Heseltine’s coup failed. However, sufficient mud stuck to the government and there was more muttering complaint. One minister on the way down was permitted to take such blame as there was, and another, on the way up, delicately indicated that there might be a leadership crisis. ‘Westgate’ was of no interest to even a narrow public, because the country had much else to ponder.
If we look for the moment at which the impetus of the early eighties gave out, it would be 1986, the year of these insignificant symbolical twists. In that year, the seventies came back again, with attempts to rig currencies along lines satisfactory to the powers that be; Europe adopted the Single Market, promptly misused in an anti-market sense; and it became plain that the Thatcher government had lost its overall sense of direction, becoming, as the great historian of government S. E. Finer noted, ‘an unimpressive and unhappy government’. This coincided with a further great problem, that inflation, which had brought this government to power, now returned. Nigel Lawson had been an imposing Chancellor, commanding confidence, and in his own view he was irreplaceable. In March 1988 he brought down the top rate of income tax from 60 to 40 per cent, and the standard rate to 25 (from 27). Labour politicians howled, with the usual shouts that the rich were being given privileges, while the poor suffered. The tax reduction made sense, of course, as it had been shown the advanced world over that if taxes were put at a sensible level, people would not strive very energetically to avoid paying them if they knew that they were getting something in return. The tax reductions cost £6bn, not, by 1988, a large sum, and if they contributed to rich taxpayers returning to the country, there would be no loss at all. In any case, the government’s accounts were in surplus, the first time since 1969.
A far more insidious problem lay in the world of international finance. In 1985 Lawson had in effect abandoned the original monetarist strategy. Instead, he wished to control inflation, as part of a worldwide effort, through the rate of exchange. In 1985 there had been a parallel movement in the United States, and the finance ministers of the main countries met, in an agreement — the Plaza — to bring down the overvalued dollar. These attempts to control the world’s money were not usually successful over the medium term, nor were they now. In February 1987 there was another agreement — the Louvre — to bring the dollar up again. There was then a disagreement between the Germans and the Americans, provoked by some unguarded vinegary statements by James Baker, now a dominant figure in the Reagan administration, and, on the whole, a force for uncreativity. The new trouble was a fear that the dollar would have to be protected by high interest rates, and in October 1987, the midst of the great eighties boom, the stock markets crashed. Understandably, the finance ministers then agreed to cut interest rates, pumping credit into the world, and generally fearing that there might be a repetition of the Slump of the 1930s. In reality these fears were entirely overdone. The stock markets quite soon recovered, and much of the problem had had to do with ultra-new technology, which put the market’s usual herd instincts into fractions-of-a-second velocity. A credit boom was already under way; it went ahead, and inflation went up. But in England there was more to it. Lawson had decided that his best method of controlling inflation was to link the pound with the most stable currency on the Continent, the Deutsche Mark. In a way, this was inconsistent with his earlier stance. He had been an efficient manager of the sound-money Medium Term Financial Strategy, an attempt, not senseless, at domestic financial management. However, the Single European Act was emerging, and the Americans were trying to recover control of the dollar; and there was in truth almost no way in which domestic money could now be measured, because Britain had recovered as a trading and foreign-currency-dealing nation. Inflows of foreign money were vast, much of it connected with Japanese investment. The British balance of payments had been suffering, because oil prices declined, and Lawson took the circumstances of 1985 as guide: the pound had indeed declined by 16 per cent against the Mark, which would of course add to inflation.
In 1986 these circumstances were to change, as the boom went ahead. ‘Big Bang’ meant that the City could bid for world financial supremacy, and ‘popular capitalism’ was an enormous success, with a great part of the population now owning assets in property or even shares. The City firms turned into ‘security houses’ as in New York, and the wonder occurred that the British sold automobiles again, even if they were from foreign-managed factories. The British addiction to buying property meant that credit based upon property assets was in heavy demand. In natural circumstances, this would have meant a rise in the pound, just as in the Reagan boom the dollar had risen. Any deficit on trade would be met, as in the USA, by foreign investment. However, that was not Lawson’s idea, and he preferred to control the pound otherwise. Lawson agreed with the Bundesbank that the pound would be kept at just under DM3, i.e. if it threatened to go higher or lower, he would change interest rates and sell foreign exchange or bonds accordingly. This allowed him, of all things, to cut interest rates in October 1987, and again in the March, to 7.5 per cent.
But, as things turned out, DM3 was too low: with foreign investment pouring into ‘booming Britain’, the pound was undervalued, and inflation was a consequence. This link to the Deutsche Mark was intended to attach Britain to the Exchange Rate Mechanism (ERM), which was the Europeans’ contribution to world financial stability. Lawson had argued for this in 1985, when the monetarist recipes turned out to be inadequate. Back then, Margaret Thatcher had resisted — she preferred the markets to set exchange rates, and anyway disliked handing sovereignty to the Europeans. It was a sign of her loss of power that Nigel Lawson started to devise his own exchange rate policy, ‘for which there are few precedents in modern economic policy-making’. The chief civil servant was not told until after several months had gone by, and the Bank of England just did what it was told, without asking why. Margaret Thatcher found out from an interview in the Financial Times, and on 7 March 1988 heard from her own people that their opposite numbers at the Treasury themselves disagreed with the policy. She at once told Lawson that the pound must rise, which it did, to DM3.10. Lawson, though humiliated, survived because of his triumphant budget. But the economic climate began to worsen, in the sense that inflation was returning, and now the demand for a link with the ERM, to prevent the inflation (as the French franc fort was alleged to be doing), became very very strong. The French had high unemployment, because credit rates and the franc were kept high. But this was ‘Europe’, an apparently sacred cause. An excellent account of the problem appears in Bernard Connolly’s book, The Rotten Heart of Europe (1995). Writing as a European civil servant, he exposed the rough dealings of Brussels, and the machinations to which Lawson exposed himself.
In the inflationary boom of the later eighties, as stocks and house prices doubled and trebled, the popularity of the Reagan and Thatcher governments was unassailably strong; and, besides, especially in Margaret Thatcher’s case, they had demonstrab
ly dealt with at least the short-term problems confronting them in 1979. It would not be wrong to say that she had turned round the temper of the country. The same was also obviously true of Ronald Reagan, as witness his triumphant re-election in 1984. However, both had been sucked more and more into foreign affairs. The ending of the Cold War was quite well managed, and was maybe the last moment at which a British Prime Minister could claim a true world role (although she had an unnecessarily carping tone when Germany was reunited). But both in London and in Washington, when it came to matters of the longer term, the Right fell apart. Here again, those critics with their hearts in the seventies can be dismissed out of hand as irrelevant. It was certainly correct to observe, as did the reactionary critic Anthony Daniels (a prison psychiatrist with considerable qualifications), that the British had achieved the feat of becoming much richer while also having a more uncomfortable life. But the seventies-minded commentators were quite mistaken in blaming the rising crime and growing coarseness on ‘the Thatcher cuts’ or an alleged ethos of ‘greed’. The problems had been well in evidence before, and had even caused the rise of Margaret Thatcher in the first place. If she can be faulted, it would have to be in failing to take up a strategy to deal with such problems. The Atlantic, or ‘the Anglo-Saxons’ if we are to include Australia, struck French observers as undergoing a sort of social crisis, for all the money, or perhaps because of all the money, that was pouring out. Plantu, the cartoonist of Le Monde, wrote the line, ‘socialism is the hope of Europe’, and then drew three representative British figures — the Prime Minister saying, ‘What’s Europe?’, the banker saying, ‘What’s socialism?’, and the young street hooligan saying, ‘What’s hope?’. ‘Yob’ was the reinvigorated word used for this last figure, while ‘yuppie’ entered the language to describe the noisy young products of the financial revolution.
