The Atlantic and Its Enemies (65 page)

Where the monetarists faced difficulties, which were never really resolved, was in the external aspect of inflation. In conditions of free trade and money movement, inflation could be imported. The German Bundesbank, with the lessons of 1923 and 1948 well within living memory, was naturally concerned to keep inflation down, and was independent, in so far as any central bank can be independent. On occasion it had arguments with governments, and on the whole it won them. However, whatever the Bundesbank did, it could not stop foreigners buying Marks, and increasing the domestic money supply; Germany, too, suffered inflation in the 1970s, though at a considerably lower rate than did England. Now, the British had acquired, of all oddities, a petro-currency. Oil had been found in the North Sea, and the rise in oil prices meant that it was worth exploiting, expensive and difficult as this clearly was. Foreign money therefore poured into the pound, and to London came Arabs, acquiring property. How did all of this affect the British money supply, and what should be done about it? The answer had to be in international co-operation among the first-rank countries, the G6 or, with Canada, G7. And since that in turn depended on monetary policy in each of these, they had to march in step. In the end, the contest of internal and external monetarism was won by the external side’s managers, when the price of the dollar was brought down very hard at the Plaza Agreement of 1985. There is a case to be made that that was the end of the Reagan-Thatcher experiment: thereafter it was back to business as usual. But in 1979 a determined effort was indeed made.

International co-operation was essential. The reform would have to come from Washington, and from Washington it duly came, though with some prodding from the German central banker Otmar Emminger. Paul Volcker, an austere and in private life heroic figure, was now presiding over the management of American public finance, and he was converted to monetarism, in effect by Emminger. On 6 October Volcker woke him up, at a meeting of the IMF in Belgrade, to say that American interest rates would be put up as far as necessary to stop the dollar slide. Carter, by now, was simply furniture, and the unheard of dollar interest rate, of almost 20 per cent, was introduced. That pushed the dollar up to over 3.3 Marks in the years 1980-85. This had very great international complications, some of them near disastrous: Latin America, debt-ridden, with interest to be paid out of native paper but in dollar terms, was in tremendous difficulty. The world’s exports even fell by 11.2 per cent in the years 1980-83, and overall there was no growth at all in the world economy. Such was the dark international context for Margaret Thatcher’s accession in May 1979. Reagan’s United States could somehow absorb interest rates at this level, because of a unique feature of the civilization: Americans moved, and expected to, from parts of the country that did not work to parts of the country that did. Besides, the bankruptcy laws were far easier than in England, and bankruptcy was almost par for the course. Foreign money moved to the USA in any case.

The British also got foreign investment, given North Sea oil, and of course the income from it helped as regards budgets. But the problems were more difficult to solve: the pound was absurdly overvalued, at $2 in 1979 and $2.50 in 1980, very helpful for buying American assets, very bad for exports. This was a very unfortunate context in which to proceed, and it took Margaret Thatcher time to find her way. She had had to keep men from the Heathite past, very ill at ease when it came to forceful confrontation. Alfred Sherman remarked of one of them, John Gummer, that in an age of plastic kidneys and iron lungs someone might have thought up an artificial backbone. Peter (Lord) Carrington was the very archetype of dogmatic appeaser, a dangerous man, very astute, his wife an excellent listener, likely to bring out the best in any interlocutor. He was made Foreign Secretary, and was from all points of view a good choice, in that his short-term talents were extremely effective, and he did not much care about the medium term in any event. He had been party chairman, a job he detested, as he did not much care for the Tory grass roots. His own career had been about appeasement, at the highest level. In 1945 he had been on the sidelines when the antiCommunist Yugoslav and Soviet troops had been tricked into death or the camps at the hands of Tito or Stalin: why bother with niceties when geopolitics were at stake? There had been similar espousal of bureaucratic roughshod-riding when he was Minister of Agriculture in the fifties, having to defend an indefensible takeover of private land (the Crichel Down scandal) by a public body for wartime purposes that had long lost validity. Similar realism applied when it came to trade union protection rackets at home. With decolonization, the British had had quite enough, and a certain pattern set in - identify the least unappetizing would-be successor, arrange some commercial deals, ignore the subsequent massacres. Carrington, who was a landowner, had interests in Africa (as director of Rio Tinto-Zinc). Quite early on, he turned his talents on Rhodesia, where the least unappetizing man of power was thought to be the Marxist Robert Mugabe. In 1980 ‘Zimbabwe’ became independent, the USSR was held off, and the settler would-be independent aristocracy had a guarantee of existence for a longer time than was usual.

There were problems, too, with the civil service. John Hoskyns was unimpressed by the government machine: here were men with substantial pensions, inflation-proofed, who had no particular brief against public spending, and whose ways meant committees and paper. Mrs Thatcher was no respecter of them and interfered sometimes in detail with the budgets, much to the civil servants’ resentment. She did not like the ridiculous figure (83 per cent at a none-too-exalted level) of direct taxation: ‘no group is more important’ (than the professional middle class) ‘and yet none has been more put through the mangle . . . between the rollers of progressively penal taxation and discriminatory incomes policy.’ She saw the very existence of these civil servants, and the width of their powers, as the problem, or part of it. So she was rude to them. She even visited them in their offices to find out who was who: she remarked, ‘I make up my mind about people in the first ten seconds, and I very rarely change it.’ There was a welcoming dinner at No. 10, Downing Street for the Permanent Secretaries: ‘one of the most dismal occasions of my entire time in government,’ said Mrs Thatcher. Later, it was a different story: the civil servants defeated the outsiders such as Hoskyns, who, by 1982, walked away. She complained that there were just too many state servants - 24 per cent of the workforce in 1961 and 30 per cent in 1979 - which was no doubt true, but despite the hysteria of her opponents, she had not come to power with a military coup, could not exile the bureaucracy, and in any case soon found that getting rid of one part of government meant installing another part. In the end this was to be a fatal problem. ‘Cutting back the State’ was very difficult, at any level from local administration to ‘Europe’, which bored and bewildered her, and with which her relations were difficult. Her relations with Chancellor Kohl never recovered from a first meeting, at which she and the interpreter, Alexander Lieven, a Russian émigré prince who had run part of the BBC World Service, told each other funny stories until Kohl, not pleased, finally understood that his wisdoms were not being interpreted.

Margaret Thatcher also had a ball and chain: she had to honour promises made by the outgoing government, including a 25 per cent wage increase for public employees, arranged by some commission that had tried to work out how many secretaries a deputy manager was worth, and the like (‘relativities’),
etc.
Edward Heath glowered from the back benches, and there was much snobbish sneering. Problems mounted. There were terrible monsters of Heath-Wilson industrial gigantism: British Leyland and British Steel together pushed the budget up by £3.3bn. Average earnings rose by 20 per cent in 1980, but there was a slump in industrial output (of 12.8 per cent in 1979-81) and by the winter of 1980-81 unemployment (including school leavers) reached 2 million. By the early 1980s the West Midlands, industrially and not so long ago not much behind the south-east, was stricken - those square miles of devastation that Ferdinand Mount travelled through; and yet in May 1980 inflation stood at 22 per cent. There were some immediate reforms - for instance, an end to the absurd arrangements by which workers on strike could claim ‘benefit’ rather than take strike pay from their union. The abolition of exchange control on 23 October 1979 was of great importance for the future, because British investment abroad made the City of London again a financial centre of the first importance. However, the monetarists were finding their way, and the initial budget of 1980 was a mixture - Alan Walters said, as it turned out rightly, that the money supply had been too tightly held. There was too hard a squeeze on credit. The new Chancellor could not fail to borrow, to pay for welfare costs, which shot up, but at the same time, with support from his junior ministers (John Biffen and Nigel Lawson), he could see that real austerity would be needed as regards the money supply. It was in the name of ‘monetarism’ that the programme went ahead: a step-by-step policy was announced, to bring down M3. A very confusing pattern followed, with expenditure cuts being announced, but in the first three years the monetary targets were not met; it was only in 1983-4 that monetary growth at last came closer to the aims of 1980.

At first, cunning and caution were on display when it came to the problems that had destroyed the Heath government and then Labour. John Hoskyns, in 1980, said that Mrs Thatcher had been ‘too gentle’ over public service pay and the trade unions. But there was a legitimate enough fear of a battle, especially with the miners. Their leader was a case of life imitating art. A famous British film,
I’m All Right, Jack
, with a star of genius, Peter Sellers, had made mock of British industrial relations - smooth crooks in charge of industry, vainglorious would-be Stalins in charge of the trade unions. Arthur Scargill was Peter Sellers, down to the body language: strutting walk, bald-patch-covering hair arrangement, humourlessness. But he was single-minded, and from an early age had absorbed a sort of Red epic, as a small boy no doubt striking in the mirror attitudes drawn from one of those lifeless Soviet paintings of the October Revolution: single-handedly he would bring down capitalism. The question on his side was how to keep his troops together. The miners were not unpatriotic, and had no interest in killing capitalism. They were also divided, in that some (a few) coal mines were quite profitable, while others, in a sane world, would have been closed down long before. The whole business was complicated because there were better, cleaner and cheaper sources of energy - not least, oil and gas, coming on stream from the USSR or for that matter the North Sea. In 1980, with the ‘second oil shock’, petrol was still expensive, having doubled in price, but how long would that last? A mixture of sophisticated energy policy and obsolete Marxism-Leninism was involved, and Scargill was determined to make life difficult for Margaret Thatcher and the ‘capitalists’. He had already helped destroy the Heath government. Marauding bands of striking miners had attacked the power stations, so as to keep them from getting coal. The lights had gone out, as the power stations failed, and Heath had been left blustering angrily into the nation’s television sets. The unions had then been invited to take responsibility for running affairs, after Heath had been overthrown. They had not proved to be any good there, either: running the country was not their job. But the lesson learned by Margaret Thatcher and her allies was a valuable one: do not act precipitately. In her first year she used ministers who talked, with every evidence of conviction, of finding common ground with the unions, and her keener supporters were disappointed. Civil servants made trouble in March 1981, refusing to pay pensions. The miners threatened to strike, in response to a plan to close twenty-three obsolete pits, with 13,000 jobs. Here, the Prime Minister gave way: it was not the moment to fight. An initial round with the miners was conceded, with a flexibility that surprised. But inflation, itself driving the miners and other unions, had to stop. She was dismissive as to three-cornered German solutions - suitable for regimented Germans, no doubt, but unworkable anywhere else. As with other matters German, she was right but for the wrong reasons: the institutions of the (untranslatable)
Sozialmarktwirtschaft
really worked because there was reasonably sound money.

British institutions were dealing with a rubber currency, and proper planning was not possible. Besides, as costs rose, employers looked to machinery, new technology, to reduce them. There was such new machinery in printing. Newspapers could just take news from an agency, and dispense with many journalists; the money would come from advertising. Accordingly, the National Union of Journalists, then led by Denis MacShane, took a lead in stopping provincial newspapers; not just stopping, through strike pickets, their delivery, but also trying to stop, through ‘secondary picketing’, the functioning of the agencies. MacShane even won a court case, and the
Times
itself was closed down for a year. In the same style, private steel companies lost £10,000,000 per week in a fight that had nothing to do with them. Here again was a characteristic affair. Heath had overinvested in steel before the 1973 oil price rise. The Clyde had been given the deepest deep-water jetty in Europe, but Rotterdam obviously had a vastly more important role, and a far better infrastructure because Dutch and German unions had not had to be placated as British ones had had to be. In 1979 the transport and steel unions had fought for six months over access to the Hunterstone Ore Terminal, as it was called, and cargoes were actually diverted to Rotterdam, there to be transferred to smaller cargoes for despatch to the deep-water jetty - a symbol, among many, of what was going wrong. British Steel took £3bn in public money and made a loss in 1979-80 just the same. Alone of the national corporations, British Steel was trying hard to modernize, to shed labour and expenses. Businesslike, it could not offer the 20 per cent the miners were given. The workers struck and ‘blacked’ private steel producers. In time, European law could be invoked against such practices, and a small start was made in an important process: that unions could be made liable for damages. As things turned out, sense, after three months, prevailed. The steel union leaders were not stupid; they realized that they had an industry which, if successfully modernized, could compete, with high wages. British Steel did continue to modernize its labour practices quite effectively, preparing the way for a privatization that was very successful: a sign that, pre-privatization, there were essential changes to be made.