Monetarism and History

Letters

Vol. 4 No. 4 · 4 March 1982

From L.S. Pressnell

SIR: Ian Gilmour (LRB, 21 January) has pretty thoroughly massaged the economic history of 1951-64 to make a political case against monetarism and against some members of his own party. This will not do, either for Sir Ian’s credibility or for the quality of economic debate. Whilst it is normal if wearisome political practice for Sir Ian to cite unrepresentative ‘inflation’ statistics, there is less scope for resigned tolerance in his brilliantly defective treatment of recent economic history, particularly as he complains of monetarists and others that ‘history has been rewritten’ by them. Sir Ian’s own writing of history sags under scrutiny. Most regrettably, it fosters a burgeoning myth: the myth that the 1950s and 1960s, cosier perhaps in some memories than they were in reality, were blessed with an enviable form of economic management.

In asserting that since 1979 ‘the attempt to achieve stability’ has been ‘abandoned’, and by implication that the earlier period, in contrast, displayed successfully managed stabilisation, Sir Ian forgets to mention that the most characteristic economic feature of the 1950s and 1960s was the far from stabilising phenomenon of ‘Stop-Go’. Similarly, in portraying current monetarism as an extremist aberration that seems somehow un-British or at least un-Tory, Sir Ian does not tell us that from 1951 a persisting and unresolved monetary controversy followed the incoming Conservative government’s attempt to operate a ‘New Monetary Policy’. If that oversight of Sir Ian’s be corrected, current monetarism can be evaluated in a less dramatic perspective as evolving from that debate. Indeed, given the title of his article, ‘Monetarism and History’, it might benefit all parties in ‘Keynesian’-Monetarist exchanges to recognise the far longer perspective – familiar enough to monetary historians – of some three hundred years of intermittent controversy about fundamental problems of monetary control. As Professor Charles Kennedy has bluntly said, ‘no other territory of economic thought seems to have such a slippery surface’ as monetary theory. The Tory ‘centrist’ view means much to Sir Ian. Would it not therefore be more constructive – rather than giving the appearance of taking an extreme position oneself by rejecting monetarism as extreme – to treat the latter instead as one side in a long-run attempt to advance a far from settled debate? It does not seem entirely consistent that the chief populariser of the acronym TINA (‘There Is No Alternative’), in order to brand the present government’s alleged inflexibility, should himself adopt a rigid position about 1951-64: to the claim ‘that there were policies other than Keynesian that the Churchill government and its successors could have adopted’ his TINA-like answer is ‘There were not.’

Let us examine three points about 1951-64: first stabilisation, then the question of alternatives, and finally the monetary debate. Unquestionably, the Conservatives inherited in 1951 a severe crisis for which it is probably fairer to allocate more blame to the upheavals of the Korean War than to the outgoing government. Economic containment was unavoidable. With the aid of a reversal of earlier rises in world commodity prices, the economy moved fairly satisfactorily through 1953 and 1954. Then over-expansion before the May 1955 Election necessitated constraint shortly after in the autumn sterling crisis. With another sterling crisis in 1957, as well as the special crisis arising from the Suez affair, three stumbling years followed. An apparently strong balance of payments emerged during 1958, but after a dreary ‘Stop’ phase of near-zero growth following the strong upsurge of 1953-5. Stimulus to the economy helped expansion in 1959, again in time for a general election to be won by the Conservatives. The rate of growth of output per head in the single year 1959 was half as much again as for the whole of the preceding three years. Although abundant warning signs of domestic and external strain quickly appeared, comparable growth continued in 1960, to be followed by yet another crisis in 1961 and two years of scant economic growth. By this time the Conservative Government was indeed seeking alternative policies – but more of that later. The economy expanded once more during 1963-4, backed by excessive stimulus that is explicable partly as over-reaction to unemployment in the severe winter of 1962-3. This time, however, the evidence of recovery emerged too slowly to prevent the Conservatives’ narrow defeat in the 1964 Election. To summarise the economic experience of 1951-64 chronologically: one year of restraint, three years of recovery and over-expansion, three flat years, two years of over-expansion, two more flat years, then two final years of recovery and expansion. Growth there was certainly, and so there should have been after a dozen years of war and re-conversion to peace. (It seems to take six years to recover from a major war: e.g. 1815-21, 1918-24 and 1945-51 – if we add in the last case the extra drag of the Korean War.) In the light of this switchback experience, can we say that there was indeed a stabilisation policy that was successful, or did it break down and have to be at least partially abandoned even before the end of the 1951-64 Conservative administrations, and thus long before the advent of the present government?

There certainly was a policy of stabilisation, which technically deserved high praise for keeping the British cycle of fluctuation within a narrower range than that of other major economies. The average level of growth was, however, decidedly lower than elsewhere. By the early 1960s, not surprisingly, the stabilisation policies of the Fifties were losing their grip: partly because it was becoming fashionable to criticise Britain’s relatively low growth rate (although, in fact, it was somewhat above the historical trend of the preceding 250 years), and partly because it was becomingly increasingly difficult to operate. As experience of credit squeezes and sterling crises accumulated, businessmen were warier about exposing themselves to the former and foreigners to the latter. With every crisis, long-term borrowing rates went higher and never seemed to fall back to pre-crisis levels. With growing consciousness of inflation, wage pressures seemed to become more serious, bringing sluggish productivity and the threat of balance of payments difficulties before sustainable expansion could be achieved.

Sir Ian is far more definite than the record allows about the pace of inflation under the 1951-64 Conservative administrations when he declares that ‘the rate of inflation did not rise during the Fifties. It fell. So much so that in 1958-59 it was negligible at 0.6 per cent, and in 1959-60 it was 1.1 per cent.’ Two comments may be offered. First, the low rate of 1958-59 reflected the credit squeeze and near-zero growth of the preceding three years, whilst that of 1959-60 was typical of an economic recovery which had not yet stopped short (though it soon would) through limitations of resources. Second, the rate of inflation showed no clear trend, falling only in the later Fifties in the circumstances just outlined, but rising again in the Sixties. If we exclude, as stemming largely from the Korean War, the years 1950-52, the percentage rates of change of retail prices under Conservative administrations (using figures slightly different from Sir Ian’s but slightly more favourable to him) were as follows from 1953 to 1964: 3.3, 1.7, 4.5, 4.9, 3.9, 3.0, 0.5, 1.0, 3.6, 4.1, 2.2, 3.2.

Alternative policies to those of the early and mid-Fifties were being canvassed well before 1960. Some argued that a lower pressure of demand might mean higher unemployment, but would yield more output and less inflation. Others, including the Chancellor of 1957-58, Mr Peter Thorneycroft, sought stricter monetary controls. So widespread was informed dissatisfaction with economic policy, so nagging was the feeling that something might be wrong with monetary policy and with its operation, that in 1957 the Government appointed a Committee to inquire into the working of the monetary system under a distinguished public servant, the late Lord Radcliffe. This malaise about economic policy, and this Inquiry, both escape attention in Sir Ian’s article. True, the Government responded in-audibly to the Radcliffe Committee’s Report in 1959: but the debate about money intensified.

Contrary to Sir Ian’s assertion – ‘the only alternative to Keynesianism was socialism’ – Mr Macmillan was devising one. The alternative pressed by the Conservative Prime Minister was the ultimately treacherous middle road of incomes policy. Lying in bed one June day in 1961 and counting his blessings, and the reverse, he noted that the economic problem was ‘probably insoluble’. Rather than embrace overt deflationary measures, he backed a ‘Pay Pause’ and a ‘Guiding Light’ for pay increases, allied to a modest move towards economic planning with the National Economic Development Council. This was not all. The most striking confession of the inadequacy of existing policy was the portrayal of the abortive application to join the Common Market in 1961-3 as an attempt to break out of the impasse in which the British economy was thought to be stuck.

The role of monetary policy during the 1951-64 Conservative administrations is mentioned far too cursorily in Sir Ian’s article: nobody could deduce that it was intended to be a major weapon, nor that, if Mr Butler, Chancellor of the Exchequer for the first four years, had had his way, its operation might have avoided the ‘centrist’ economic policies known as ‘Butskellism’. Within four months of the Government’s taking office, Mr Butler was asking the Cabinet to consider the then dramatic proposal to float sterling as a means of regulating the balance of payments. This ROBOT plan (the title deriving from the names of its three chief progenitors) was dropped after fierce debates within government, but it did not die. Conceivably, Sir Ian regarded this – wrongly – as an ephemeral episode, scarcely warranting attention, since his article is formally a review of, and dependent on, a recent book by Dr A. Seldon, Churchill’s Indian Summer. Unfortunately, that book is weak on Conservative monetary policy, and not least on ROBOT, allowing the quite incorrect inference that it was dropped by mid-1952. Not only did it survive in Mr Butler’s vision as a possible policy for three further years or so, but years later he declared that ‘the decision not to free the pound was a fundamental mistake.’ Whatever its other features, then, Dr Seldon’s book does not merit Sir Ian’s encomium that it ‘provides an excellent starting-point for examining the monetarist charges’. Nor is there the excuse that ‘the Cabinet documents’ are ‘not yet available’: for there is an adequate published literature.

Whilst it is probably correct that the early distancing from monetarism owed a good deal to Churchill’s own wariness, arising from his experiences over the mismanaged return to gold in 1925, it blurs the facts for Sir Ian and his guide, Dr Seldon, to project Churchill-inspired continuity in monetary policy throughout 1951-64. Although stress was maintained on the use of governmental and Bank of England requests to control the volume and use of money, there was growing distaste during the second half of the Fifties for such controls, and a growing inclination to seek more market-oriented mechanisms. Bit by bit, there was an edging away from a soft approach to the supply of money. So long, however, as Britain was tied to the IMF system of fixed exchange rates the money supply was in effect under partially external control. It should nevertheless be noted that, since much more flexible exchange rates had been seen as a desideratum for the maintenance of convertibility before that obligation was assumed in 1958-61, Mr Macmillan’s Conservative government would have had to face full-on the necessity to control the money supply if – in the preferred though not achieved outcome – exchange rates were not to flex unduly downwards.

We cannot return to Butskellism any more than we can to the Fifties which produced it. Echoing Max Beerbohm, Mr Macmillan wrote early in 1960 to his second Chancellor (he got through four in six years, which might be reckoned a hint that policies lacked the continuity that Sir Ian attributes to them) pointing out that history does not repeat itself: ‘it is the economists and professors who do. They are apt to make the same diagnosis and apply the same remedies although the circumstances may differ in character.’ Before long, the Prime Minister and his third Chancellor were to be seeking an alternative to the policies of the Fifties.

There were alternatives then as doubtless there are now. What seems particularly unreal is the assumption that ‘Keynesianism’ or monetarism could be adequate by themselves, or that they are mutually exclusive. Each side is too often its own enemy. Keynesians are apt to forget Keynes’s monetarist side. Monetarists, even Professor Milton Friedman himself, are so anxious to stress the need for monetary control that they neglect the other, complementary elements in their dream of an efficient market economy, such as anti-monopoly action and freeing of markets. If that wider framework had been kept in mind, critics and supporters of monetarism alike might long ago have abated their mutual hostility, to the great advantage of our suffering economy.

L.S. Pressnell
Professor of Economic and Social History, University of Kent

Ian Gilmour writes: Despite his opening remarks, Professor Pressnell does not disagree with much of what I wrote. His disagreement is chiefly with things I did not write. For instance, I did not suggest that the years 1951-1964 were wholly successful: I said that our competitors did much better, and that our governments made many mistakes. I did not talk about Stop-Go because, unlike the Professor, I was not seeking to write a history of those years: I was seeking to demolish a number of current myths. Later in his letter Professor Pressnell does not deny that there was a policy of stabilisation. I did not say that there were no arguments within government about monetary policy during those years. Naturally there were arguments about that, and about all other aspects of economic policy. But my article was long enough already without including laborious statements of the obvious.

Professor Pressnell gives reasons for the low inflation rate in 1958-1959 and 1959-1960. He does not dispute the figures I supplied. He then tries to manufacture an argument by leaving out the figures for 1950-1953. If these are included, it is quite clear that, as I said, inflation did not rise in the Fifties, but fell. He then completes his argument by saying that inflation rose in the Sixties – which is just what I said. I did not say that the Conservative governments did not try to improve their economic management, because, again, that seemed sufficiently obvious. He suggests but surely cannot mean that an incomes policy is an alternative to Keynesianism.

In concentrating on what I did not write, he has largely ignored what I did write: that the monetarist revolution is based upon bad history. But his principal confusion is his apparent belief that to pay any attention to monetary policy is to be a monetarist, and that to criticise monetarism as it has been preached and practised during the last few years is to imply that monetary policy should be wholly ignored.