There is No Alternative (21 page)
Read There is No Alternative Online
Authors: Claire Berlinski
A
siren voice, decay,
and ultimate
destruction
âwe all know this story, although it is usually not a fable of fiscal policy. From the analogy to the Fall, it is obvious that redemption will require, as it always does, pain.
siren voice, decay,
and ultimate
destruction
âwe all know this story, although it is usually not a fable of fiscal policy. From the analogy to the Fall, it is obvious that redemption will require, as it always does, pain.
Even less subtle was the language used in 1981 by her then energy secretary and future chancellor, Nigel Lawson, who publicly asked critics of the government's tight money policy to “drop their high moral tone, because there is really nothing that is moral or compassionate in prescribing policies that would engulf this country in a holocaust of inflation.”
104
His use of the word “holocaust” is noteworthy: Lawson is Jewish, and obviously no word conveys greater moral horror to a Jew. The use of the word in this context is grotesque, but at least it makes it quite clear just how much the Thatcher stalwarts hated inflation and why they were willing to bear any price to kill it.
104
His use of the word “holocaust” is noteworthy: Lawson is Jewish, and obviously no word conveys greater moral horror to a Jew. The use of the word in this context is grotesque, but at least it makes it quite clear just how much the Thatcher stalwarts hated inflation and why they were willing to bear any price to kill it.
What Thatcher hoped to do, by maintaining strict control over the money supply, was return the economy to the point of zeroâor at least low and stableâinflation. She imagined this would necessitate a slight period of higher unemployment, after which unemployment rates would return to their starting point.
That is not what happenedâat all.
Within two years of Thatcher's monetarist ministrations, British unemployment soared to rates exceeded in the twentieth century only during the Great Depression. A quarter of the British manufacturing industry disappearedâthe largest drop in industrial output since 1921. Britain's inner cities went up in flames.
. . . The latest government figures show unemployment rising from 1.5 million to 2.5 million in 12 months . . . Joblessness among ethnic minorities is rising even faster, up 82 percent in one year . . .
. . . four nights of what Home Secretary William Whitelaw describes as “violence of extraordinary ferocity” . . . Police are forced to withdraw . . . 150 buildings are burnt down . . . 781 police officers are put out of action . . . CS gas is used for the first time on the British mainland . . .
. . . In Toxteth, unemployment has risen to 37 percent, climbing to 60 percent among young blacks, with 81,000 people chasing 1,019 jobs in Liverpool . . . the local careers office has information on just 12 vacancies to offer school leavers throughout the city . . .
. . . New riots in Brixton are accompanied by a wave of disturbances the length and breadth of Britain. Southall, Battersea, Dalston, Streatham and Walthamstow in London, Handsworth in Birmingham, Chapeltown in Leeds, Highfields in Leicester, Ellesmere Port, Luton, Leicester, Sheffield, Portsmouth, Preston, Newcastle, Derby, Southampton, Nottingham, High Wycombe, Bedford, Edinburgh, Wolverhampton, Stockport, Blackburn, Huddersfield, Reading, Chester, Aldershotâall these and other towns and cities report riots . . .
. . . Margaret Thatcher cancels a planned visit to Toxteth because her safety cannot be guaranteed.
105
105
Unemployment rose and rose and rose. Stores were firebombed and looted. Imagine this period with a soundtrack by UB40. You'll recall the band, I expect, but may not know that the name stands for Unemployment Benefits 40, a form issued by the Department of Health and Social Security, otherwise known as DHSS, an acronym you'll also recall if you've ever listened to Wham!
WHAM!
BAM!
I AM!
A MAN!
JOB OR NO JOB, YOU CAN'T TELL ME THAT I'M NOT!
. . . DHSS . . . DHSS . . . DHSS . . . DHSS . . .
All the same, the inflation rate simply refused to come down and stay down. The government couldn't even achieve the one goal that was supposed to justify this misery. When Thatcher was elected in May 1979, the retail price index had risen by 10.3 percent over the previous year. By early 1980, it had risen above 20 percent.
By the spring of 1983, it had fallen below 4 percent. Much excitement ensued: Had she done it? Had she vanquished inflation at last? Alas, no. In late 1985, inflation began again to climb. In 1991, the retail price index rose 10.9 percentâhigher even than the year Thatcher became prime minister. It is not a coincidence that this was her last year in power.
Why didn't it work? The answer is quite technical, and even a professional economist who has spent his life explaining these concepts to hung-over undergraduates would be hard-pressed to sum it up neatly. I know this for a fact, because I asked the Master of Balliol to try.
CB:
Why wasn't it working?
Why wasn't it working?
Andrew Graham:
[
Sighs
] Oh, God. This is back to tutorials, isn't it? I'll try and do as best I can. It's a long time since I've given an economics tutorial . . . this is an incredibly
boring
technical argument . . . Um, I wonder if I could put my hands on an article, that would be even better . . . [
Gets up and rummages through files
] What happened is that a whole load of money that had been going out through the banks suddenly came in through the money supply, and ended up counted in the monetary aggregates, whereas before it had been outside the monetary aggregatesâand, um, uh, sorry, this is extremely inefficient of meâGod, it's amazing what kind of stuff I've got in here, how weird! Um, I could give you, I have more than enough stuff to readâI could probably give you a copy of thatâgetting warmer . . .
[
Sighs
] Oh, God. This is back to tutorials, isn't it? I'll try and do as best I can. It's a long time since I've given an economics tutorial . . . this is an incredibly
boring
technical argument . . . Um, I wonder if I could put my hands on an article, that would be even better . . . [
Gets up and rummages through files
] What happened is that a whole load of money that had been going out through the banks suddenly came in through the money supply, and ended up counted in the monetary aggregates, whereas before it had been outside the monetary aggregatesâand, um, uh, sorry, this is extremely inefficient of meâGod, it's amazing what kind of stuff I've got in here, how weird! Um, I could give you, I have more than enough stuff to readâI could probably give you a copy of thatâgetting warmer . . .
CB:
I can't put a bunch of graphs in this book.
I can't put a bunch of graphs in this book.
AG:
Don't worry, don't worry. It doesn't explain it there, that's annoyingâumâThere are targets for M3, which was a funny old thing we were supposed to measure in those days, and it was supposed to grow by between 7 and 11 percent in that yearâ
Don't worry, don't worry. It doesn't explain it there, that's annoyingâumâThere are targets for M3, which was a funny old thing we were supposed to measure in those days, and it was supposed to grow by between 7 and 11 percent in that yearâ
CB:
And M3 is?
And M3 is?
AG:
Current accounts in banks, plus deposit accounts in banks, plus, that's about it, plus cashâM3 is simply a technical number. It was supposed to grow between 7 and 11 percent, and it grew 17 percent.
106
Next year it was supposed to grow between 6 and 10 percent and it grew 14 percent.
Current accounts in banks, plus deposit accounts in banks, plus, that's about it, plus cashâM3 is simply a technical number. It was supposed to grow between 7 and 11 percent, and it grew 17 percent.
106
Next year it was supposed to grow between 6 and 10 percent and it grew 14 percent.
CB:
And how do you explain the discrepancy?
And how do you explain the discrepancy?
AG:
The abolition in the same year of the corset. The banks had not been allowed to engage in various forms of lending. So what had been happening was companies had been lending direct to one another, and company lending didn't count,
since it's not part of the bank lending, so it just didn't appear in the bank figures . . . At the same time as Thatcher and Keith Joseph were trying to hold down the quantity of money, they changed the way the quantity of money was being influenced and took off this administrative control.
The abolition in the same year of the corset. The banks had not been allowed to engage in various forms of lending. So what had been happening was companies had been lending direct to one another, and company lending didn't count,
since it's not part of the bank lending, so it just didn't appear in the bank figures . . . At the same time as Thatcher and Keith Joseph were trying to hold down the quantity of money, they changed the way the quantity of money was being influenced and took off this administrative control.
Let me rephrase this. Monetarism sounded simple in theory but in practice proved confusing. This does not mean the theory was wrong, but it does mean that no one quite understood how to use it.
The heart of the technical problem is this: To control the money supply you have to
measure
the money supply. To measure the money supply, you have to define what you mean by money. Coins and bills with the Queen's face on them are obviously money. So you measure those. What about the contents of savings and checking accounts? Yes, that's money too. What about bananas? No, not money, definitely not. Treasury bills? Wellâactually that one's tricky; you could argue it both ways.
measure
the money supply. To measure the money supply, you have to define what you mean by money. Coins and bills with the Queen's face on them are obviously money. So you measure those. What about the contents of savings and checking accounts? Yes, that's money too. What about bananas? No, not money, definitely not. Treasury bills? Wellâactually that one's tricky; you could argue it both ways.
The contents of a PayPal account?
Mardi Gras beads?
Mexican pesos?
Mexican pesos after they've been taken from the mattress where they've resided for the past five years and converted to British pounds?
If not, why not?
In principle, as long as you use a consistent definition of money, you should be able to measure the growth of the money supply over timeâ
if
people are using money, as you've defined it, in a consistent way.
if
people are using money, as you've defined it, in a consistent way.
But while it was using an unchanging definition of money, Thatcher's government was changing the way money was used. The abolition of foreign exchange controls and the deregulation of the banking sector were key free market reforms, obviously, and both led to a radical change in the way people used money
as the government defined it
. Corporations that had previously lent money
to each other directly to bypass cumbersome bank regulations began using banksâwhich were now, as intended, more efficientâto facilitate these transactions. Stuff (to use the term of art) that had
not
previously been defined as money went into the banking system, where it
was
defined as money. This severely skewed the government's efforts to measure the money supply, in a meaningful way, from year to year.
as the government defined it
. Corporations that had previously lent money
to each other directly to bypass cumbersome bank regulations began using banksâwhich were now, as intended, more efficientâto facilitate these transactions. Stuff (to use the term of art) that had
not
previously been defined as money went into the banking system, where it
was
defined as money. This severely skewed the government's efforts to measure the money supply, in a meaningful way, from year to year.
AG:
It's just likeâimagine that you've got a particular marketplace. Prohibition in the '30s. You're using all your official statistics on sales of alcohol, but alcohol sales are banned, so it looks pretty low. But plenty of alcohol sales were going on in the '30s in the black market. Take off the controls, suddenly your shops are selling the alcohol, which was previously being sold by bootleggers. The banks in this case are the shops. Suddenly all this money-lending comes back to the banks, because banks are the efficient way to do it, and the black market is the inefficient way to do it. So it comes back into the banks and it suddenly counts as money.
It's just likeâimagine that you've got a particular marketplace. Prohibition in the '30s. You're using all your official statistics on sales of alcohol, but alcohol sales are banned, so it looks pretty low. But plenty of alcohol sales were going on in the '30s in the black market. Take off the controls, suddenly your shops are selling the alcohol, which was previously being sold by bootleggers. The banks in this case are the shops. Suddenly all this money-lending comes back to the banks, because banks are the efficient way to do it, and the black market is the inefficient way to do it. So it comes back into the banks and it suddenly counts as money.
Here's an even simpler way of looking at it: Thatcher's key economic reforms collided in mid-air and exploded.
And yes, they should have predicted this.
There is a consensus now among economistsâto the extent that there is ever a consensus among economistsâthat Thatcher's first government measured money the wrong way and thus chose the wrong monetary targets. Her last government confused matters inordinately with an incoherent policy toward entering the European Exchange Rate Mechanism. This is why Thatcher's remedy did not work as quickly or as well as expected, and this is why British cities went up in flames.
What is fascinating in this story is this: Despite Thatcher's insistence that she was not confusing her country with a laboratory experiment, experimenting is precisely what she was doing. Obviously she was. That famous article by Friedman was published
in 1975. No one in the world knew if this “monetarism” business would work. No one had really tried it before. As clearly evidenced by her government's inability to figure out what to measure, no one was quite sure how to apply this theory in practice.
in 1975. No one in the world knew if this “monetarism” business would work. No one had really tried it before. As clearly evidenced by her government's inability to figure out what to measure, no one was quite sure how to apply this theory in practice.
CB:
Now, were they aware that this [abolishing the corset] would have this effect? Or was it inadvertent?
Now, were they aware that this [abolishing the corset] would have this effect? Or was it inadvertent?
AG:
No, they were aware of it, but they probably didn't understand it.
No, they were aware of it, but they probably didn't understand it.
It is the consensus of everyone, and I do mean
everyone
who knew Thatcherâeven her most devoted loyalistsâthat she didn't understand the technical details of the policy upon which she staked everything. Yet she did stake it all, and she would not relent, because it just sounded
right
to her.
everyone
who knew Thatcherâeven her most devoted loyalistsâthat she didn't understand the technical details of the policy upon which she staked everything. Yet she did stake it all, and she would not relent, because it just sounded
right
to her.
Her policies appeared in these initial years to be an absolutely catastrophic failure. Economists the world over proclaimed Thatcher's government to be the most disastrously incompetent in the history of postwar Britain. When asked in a debate in the Commons whether she could name just two economists who supported her, Thatcher managed to cough up the names of a pair of dogged loyalists who would have agreed with her had she pronounced her allegiance to the theory of phlogiston. Upon her return to Downing Street after this exchange, one of her civil servants apparently said to her, “It's a good job you weren't asked to name three.”
Yet she would not relent
,
even in the face of overwhelming pressure, not only from the public, not only from the Opposition, but from her own party. She believed, with what seemed at the time an almost religious faith, that it would workâbecause
it just sounded right.
,
even in the face of overwhelming pressure, not only from the public, not only from the Opposition, but from her own party. She believed, with what seemed at the time an almost religious faith, that it would workâbecause
it just sounded right.
CB:
Where does she get the confidence to do this?
Where does she get the confidence to do this?
AG:
I don't know! I would positâI think Keith Joseph thought he did understand these things, and he was very enamored
with Friedman, so he thought there were explanations as to why this would all work . . . I don't think Thatcher went into these arguments
at all
. . . I think she was a remarkably instinctive politician. I think that she probably sort of at some gut level thought,
I've just got to kill this inflation, I think it will create unemployment, but I think somehow we'll get through . . .
She had no training as an economist, none, no intellectual equipment which would suggest that she would have thought it through . . . Her statements were the statements of somebody who thinks about the economy asâI mean, to put it crudelyâas a
housewife.
I don't know! I would positâI think Keith Joseph thought he did understand these things, and he was very enamored
with Friedman, so he thought there were explanations as to why this would all work . . . I don't think Thatcher went into these arguments
at all
. . . I think she was a remarkably instinctive politician. I think that she probably sort of at some gut level thought,
I've just got to kill this inflation, I think it will create unemployment, but I think somehow we'll get through . . .
She had no training as an economist, none, no intellectual equipment which would suggest that she would have thought it through . . . Her statements were the statements of somebody who thinks about the economy asâI mean, to put it crudelyâas a
housewife.
Before concluding that monetarism was nothing more than the dimwitted delusion of a demented housewife, however, note this. In 1981, 364 highly trained economists, led by Frank Hahn (the very one who declared Thatcherism to be “intellectually without interest”) signed an open letter to the
Times
protesting her economic policies. Not long thereafter, the economy began rapidly to grow, entering the longest sustained period of expansion of the postwar era, and not long after that, unemployment began to come downâand it has stayed down to this date.
Times
protesting her economic policies. Not long thereafter, the economy began rapidly to grow, entering the longest sustained period of expansion of the postwar era, and not long after that, unemployment began to come downâand it has stayed down to this date.
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