Friday, February 22, 2013

Margaret And The Monetarists: The 1970s, and How To Destroy A Decade

The 1970s as a decade has become forever associated with economic stagnation ("stagflation") and unruly unions. It is this association, continually repeated, that helped the Conservatives stay in power for eighteen years; and it is the almost faith-like acceptance of this perception by the likes of Tony Blair that has helped to  maintain the same economic system that led to the financial crisis in 2008.

Is this perception accurate? When we look at the evidence, the picture tells us a very different, and much more complex picture. What is most important to remember is in whose interests is it that the commonly-accepted perception of "The Seventies" not be questioned. 

The 1970s was not a decade of continual decline and paralysis by the unions. There were two real bouts of crisis, true, but there were various factors for these, which I'll go into later.
It is true that in general the UK had been in overall decline since the end of the Second World War, and that by the start of the 1970s the industries that had supported the economy during the British Empire - trade through manufactured exports, coal production and shipbuilding - were declining by worrying levels due to cheaper and more productive competitors abroad. Put simply, Britain was no longer as useful to the rest of the world now that it no longer had an Empire that depended on it.
But the position was not totally hopeless, and the leading politicians of the day still believed that the "post-war consensus" (i.e. following a basically Keynesian-style of economics) was the best formula. Both leaders of the two main parties, Wilson and Heath, believed in some form of government-led action to maintain the economic health of the country.

Things only really started getting ugly after the Yom Kippur War in late 1973. Before that, the British economy was generally doing fine. There had been the scare of the Miners' strike in early 1972, where Arthur Scargill became a household name through his action at the Saltley picket and had forced the government to make concessions, but this was more of a blip in Heath's first few years as PM. The first few years of The Seventies were not too bad economically. House prices were going up, but that was due to the trend to buy property that was fast catching on (and a clear indicator of perceived wealth). The Heath government had brought the UK into the (then) EEC.
In other ways, the Heath government had some very progressive ideas from both the left and right. There was the (very Keynesian) idea to build a new airport on the Essex coast (Maplin Sands), which was to be the impetus for an adjecent new city like Milton Keynes; therefore promoting growth through massive investment projects. On the other hand, there were some progressive right-wing ideas around reforming (i.e. privatising) how public services were ran, though the ideas were cautiously-envisaged compared to Thatcher's later reforms.

It was the Oil Shock after the Yom Kippur War, that was felt all across the West, that sent the economy into a death-dive. And this is the important thing to remember: every country in the West was affected badly by the Oil Shock. Then the miners' union, the NUM, had an idea: if the government can pay through the roof for oil, then why can they not do the same for Britain's coal? As a result of the government's stubbornness towards the NUM's demands, coal supplies quickly began to fall. So after the New Year of 1974, the government introduced the "three-day week", where power would only be supplied three days out of seven in order to conserve coal supplies. Shortly after, Edward Heath called a general election. The result was a hung parliament, when he tried to make some kind of agreement with the Liberals. He failed, and Harold Wilson returned as PM.

The experience of Edward Heath as Prime Minister had a schizophrenic effect on the Conservative party. Margaret Thatcher had been his Education Minister, but generally she was thought of as something of an aberration.
Unlike her contemporaries as Prime Minister, Heath, Wilson and Callaghan, Thatcher's politics as a young person had not been deeply affected by the Depression. These three one-time Prime Ministers were more-or-less Keynesians of one type or another because they had seen the desperate poverty the Depression had caused at first hand. Margaret Thatcher had not. She had grown up in Grantham, a provincial town in Lincolnshire, her father a family grocer who had made a comfortable success out of his life, and was a longstanding member of the council and mayor later on. She was able to take advantage of this stable background to get herself an education at Oxford, and met her rich future husband, Denis. From then on, her life in politics went from success to success. In short, Margaret Thatcher was a woman not familiar with failure.
Heath stood down after losing the election, and Thatcher put her name forward, though she was not expecting to win it herself. She was the kind recipient of the nebulous dealings of the Conservative party, however, and when she became the surprise choice for leader, her peers didn't give her much of a chance in the long-term.
One of these reasons was her personality, which did not seem very natural or humane. She appeared to struggle to relate to the public, and she had gained the notorious epithet "Milk-snatcher" while as Education Minister. Then there were the types of people she had become associated with.
The "Monetarists" was a term for economists and political thinkers who were attracted to the idea of freeing-up the economy from Keynesian "consensus", allowing "market forces" to run the economy and the government do much less in general . They had created a number of think-tanks where like-minded Conservatives and right-wing economists could discuss and plan a strategy for expanding their philosophy to a wider audience. But in 1974, these ideas seemed too outlandish for many Conservatives, let alone the wider public. Besides, they were theories, that had never been really put into practice.

The second Wilson government had to face the continued worsening of the economy from the after-effects of the Oil Shock. What was worse, neither Wilson, his peers, or even the civil service, had much of an idea about how to deal with it. Because something like the Oil Shock had never happened before in living memory (at least, not since the Depression), a collective torpor seemed to gather over government in general. Inflation and unemployment soared. This forced the then-chancellor Denis Healey began to take a more pragmatic line with the Keynesian "consensus" by cutting public spending from spring 1975 onwards, so that the economy began to pick up. However, a cut in interest rates in spring 1976 (by the Bank Of England or the Treasury, no-one seems quite sure) started a domino effect on the stock markets, causing a calamitous drop in the value of the pound. It was this crisis that prompted Wilson's resignation and Callaghan to take over.

The drop in the pound continued for months. A loan in the summer of 1976 from other rich countries helped to reverse the damage, but the loan needed to be paid back quickly, and this is where the infamous IMF loan came from. By the end of that horrible year, Britain had been made to look a laughing stock on the money markets, and great damage had been done to the economy. What was worse, this was all entirely avoidable if the Bank Of England and the Treasury had got its act together; worse, when explaining the scale of the problem to the IMF, they had exaggerated the damage. In the end, barely half of the IMF loan money was needed by the government, so a crisis had been created almost out of nothing, and Britain's reputation destroyed needlessly.
This, and the "three-day week" were the low points for Britain in The Seventies. Callaghan as PM turned out to much more like Heath than many in the Labour party would have liked to admit at the time. His approach to dealing with the state of the economy was very pragmatic. After the IMF loan debacle, Britain's economy began to improve once more, and union action had reduced significantly compared to the first half of the decade, and at a time when union membership was growing ever more.
It was Callaghan's approach to the unions that was his signature piece, and also, counter-intuitively, his downfall. Callaghan had wanted to make the British economy and working life much more like Germany, as he believed it was Britain's best approach to a more progressive society and sustainable economy. And in many ways, posterity has proven him right. His approach with the unions involved a compromise called the "social contract", whereby unions accepted pay rises lower than than inflation.

By the summer of 1978, with the economy still on the right track, there was gossip of an autumn election. The polls were close, indicating another hung parliament like in early 1974 (another election later on in '74 gave Labour a small majority, but this has been eroded to a minority by losing successive by-elections, so that Callaghan was in government by an informal pact in parliament with the Liberals). Like Gordon Brown in 2007, Callaghan weighed up the options and thought, with the economy on track to improve further, he should wait till the spring of 1979. This decision proved to be fatal.
The longstanding union leader, Jack Jones, was a virtual power-broker with the government. As a fellow supporter of Callaghan's compromise and "social contract", his retirement in 1978 coincided with Callaghan's bold (or arrogant) decision to restrict union pay increases even further than what had been previously agreed, which was also around the same time as the gossip surrounding an autumn election. The result was that Jones' successor took a much stronger line with the government. Once Callaghan had made the decision to opt for a spring '79 election, the dice had been rolled and it didn't take long for the opportunistic element of the unions to strike. The result was the "Winter Of Discontent", which saw the widest organised strike action seen since the 1920s.

The "Winter Of Discontent" was not really as fully organised as the General Strike in the 1920s; it was much more about mass opportunism by workers tired of a decade of wages kept below inflation, and those workers in unions around the country simply began following suit with everyone else. The "Winter Of Discontent" was less a strike than a spontaneous social uprising, unprecedented in modern British history. Since the crisis of the "three day week" of early 1974, unions had been relatively disciplined. But Callaghan's step to restrain wage increases further was the straw that broke the camel's back. In one sense it was as though the spirit of '74 had returned, but the crucial difference was the spontaneous and almost hysterical nature of the events of the winter of '78-'79. Although there were many who did not strike, the sheer random nature of how previously quiet unions (such as those representing grave-diggers, refuse collectors, traffic wardens and lorry drivers) suddenly became militant, was a shock to the establishment, the Labour government included. There was a period during that winter when Hull had become effectively a union-ran city, where employers had to queue like supplicants at the local union office to ask for permission to transport goods. For a number of weeks, it was like the "Paris Commune" had taken over Hull; Leningrad-on-the-Humber.

Such a "social revolution" was bound to terrify some parts of the establishment, and in such an emotive atmosphere, the reckoning was not long in coming. When the election finally came after the government lost a vote of confidence, Callaghan was punished and lost the election.
Thanks to a series of fortuitous events, Thatcher and "The Monetarists" had finally won their place in government.

It is one of politics' "what ifs". If Callaghan had gone for an autumn 1978 election, a hung parliament or small Labour majority was the most likely result. Thatcher would likely have been forced out by her party, and the more moderate "Heathite" side of the party would have likely been able to select a new leader. So "Thatcherism" and "Monetarism" may well have never had the chance to see the light of day at all. And a second term Callaghan, with the backing of the growing revenues from North Sea Oil, may have been able to make Britain's economy more sustainable like Germany's.

Instead, Thatcher was given the chance to implement her theories on the giant laboratory of Britain. But it did not happen right away; in fact Thatcher's first term in many ways resembled a sort of "Heath II": it was unsure of what to do, and her government gave in to a miners strike in early 1981 just like Heath in 1972. Often forgotten now, Thatcher's first term presided over a far worse economy and unemployment levels far worse than even in the 1970s; the economy stagnated for three years, not showing real signs of improvement until after the 1983 election. The Conservatives in the 1983 election didn't even do very well; what saved them was the civil war on the left that split the opposition vote three ways. That, and the "Falklands effect".
It was only after the '83 election that Thatcher felt confident enough to implement her "Monetarist" agenda.
The opening-up of the banking sector led to the free-for-all in the stock market and the practices that led to the financial crisis in the UK. What remained of British manufacturing and heavy industry (i.e. the key industries outside of the South Of England) was allowed to stagnate. Union power was crushed, at the expense of employees' rights. The "right to buy" council houses led to a massive shortfall in the number of affordable houses in the UK in the long term, and was a key factor that led to the dysfunctional housing market we now face. Public sector industries were sold off to the private sector; now we know the result of that in the ever-rising cost of our bills.

And all this because Margaret Thatcher and "The Monetarists" thought that The Seventies was a horrible time for Britain. In reality, the peak of British egalitarianism, where the gap between the rich and the poor was at its smallest, was in the later seventies, during Callaghan's government. The poor generally did well in the 1970s, in spite of inflation. So clearly there is something wrong with the "consensus" formed since that it was a time of economic hardship and poverty. It was not, for the vast majority. The people who "suffered" (in the technical sense) the most in the 1970s were the rich; in particular, the mega-rich, as they were forced to contribute more to the state in taxes, and saw the loss in value of their savings in real terms.

But do we want a more egalitarian and meritocratic society, or one that is designed to benefit those who are already rich?

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