The Atlantic and Its Enemies (61 page)

True, there were outposts. The University of Chicago - Friedman’s - was one such, and not just in economics. The USA was still in some ways an old-fashioned country, and Chicago, a place dominated by an Irish-Italian-Polish Catholic mafia much as other religion-mixed cities had been in 1900, was a place where political arithmetic made more sense than the moral algebra of Keynes. Catholic priests were everywhere far more adept than Protestant pastors at mobilizing votes, making non-Catholics pay for municipal jobs and contracts awarded to their followers. ‘Who, whom?’,
i.e.
who paid for whom, was the great question, and a simple answer to mafias was for money not to be created for them to steal. In 1956 Friedman wrote his article on ‘The Quantity Theory of Money’: it restated the old idea that money did indeed have an independently very powerful role in shaping the economy, and did not just reflect the shape of it. As matters worsened in London, these ideas began to surface. One of Chicago’s professors, Harry Johnson, a heavy-drinking Canadian with verve, also held an appointment at the LSE, and by 1969 influential commentators in London had become interested, particularly Peter Jay at
The Times
and Samuel Brittan at the
Financial Times.
All along, there had been people - in the main, disciples of Keynes’s great critic, Friedrich von Hayek - who had not liked the orthodoxies of the Welfare State. They had been derided, but, with support from enlightened businessmen, a successsful poultry farmer set up the Institute of Economic Affairs (IEA), where, in the high noon of Keynesian England, the old ideas were kept alive. The IEA published interestingly, staged provocative lunchtime meetings, and often proved to be right. Now, in the mid-seventies, it began to move centre-stage.

Its people began to take some tricks at last, as the grandees’ schemes went awry. Even in 1969 there had been some official talk of limiting the money supply, and to hold the Bretton Woods line a budget surplus was prepared, in London as in Washington (the cuts in spending probably cost Labour the election of 1970: the then Chancellor, Roy Jenkins, a masterpiece of reproduction furniture who was eventually to split the party, probably wanted this, because it might bring sense to the trade unions). At the London Business School shoestring research turned out to be effective. David Laidler at Manchester predicted, for instance, that unemployment would get worse despite the spending spree of 1972, and he was right: it reached two million in 1980, even more than he had expected, while in that year the inflation rate, at 18 per cent, ought to have precluded this. But the monetarists were also accurate in predicting inflation rates of 15 per cent and 25 per cent in 1975 and 1976. Laidler reckoned that the problem with inflation was that it became self-propelling: people assumed that it would happen and behaved accordingly. He recommended keeping the money supply under control, and announcing ‘targets’ for it in advance. This was all very well, but there was a difficulty to be overcome, and it never quite was. How were you to define ‘money’? Notes and coins were a tiny fraction of what people could spend, given chequebooks, bank loans, credit cards, and stocks and shares that rose or fell. Then again there were great complications concerning abroad: money might flow into England, according to oil discoveries or to alterations in the exchange rate. These things were very difficult indeed - and, some said, impossible - to measure, even assuming that they were worth measuring at all.

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.