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Monetarism and HistoryIan Gilmour
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Vol. 4 No. 1 · 21 January 1982

Monetarism and History

Ian Gilmour

2455 words

Soon after they have ensnared their young victims, the Moonies brainwash them, I am told, into hating their parents and families. Other Californian cults may do the same. The British Conservative Party is a long way from California, and it is still some way from being a cult: yet in recent years odd things have been happening to the Conservative Party. Conservatives have been asked to believe that virtually everything done by post-war Conservative governments was profoundly mistaken and a serious deviation from the path of true Conservatism.

This rewriting of history was occasioned by the monetarist revolution which took place in the Conservative Party from 1974-5 onwards. The shaky economic edifice of monetarism needed to be shored up by some political and historical masonry. Ideally, perhaps, this could best have been achieved by a bell, book and candle condemnation of the Heath Government alone. The snag was that some of the leading monetarists had served without demur in that government. The trail of heresy had, therefore, to be extended back to the 13 Conservative years of 1951 to 1964. The new ideological fervour would in any case probably have demanded the commination of all post-war Conservative governments. Indeed, even poor Disraeli, because he has been rightly identified as a moderate, has recently come in for a good deal of right-wing contempt. If this goes on, Conservatives will soon have to choose their heroes from a short list of Montague Norman, Lord Eldon, Judge Jeffreys and (possibly) Bonar Law.

We are now enjoying the fruits of the monetarist revolution, and the sans-culottes of monetarism seek to deflect criticism by denouncing the alleged follies of the Ancien Régime. So what took place during that régime is not merely of academic interest. Mr Selden’s new book on Churchill’s post-war government provides an excellent starting-point for examining the monetarist charges.* The Cabinet documents not yet being available, Mr Selden has chiefly relied on oral history and has interviewed a large number of people. Reginald Basset in his classic 1931 showed that the recollections of those involved in that crisis bore no relation to what they had actually said or done at the time. But Mr Selden seems to have avoided most of the pitfalls of oral history. His book is a work of prodigious industry and will remain of great value to students of the period even when all the documents have appeared. In particular, his method reveals the importance and influence of senior civil servants without giving any credence to Bennite fantasies about Whitehall conspiracies to thwart the objectives of the elected government.

Mr Selden also leaves no doubt about the importance of Churchill himself. Despite ill health and some decline in his powers and energy, despite the fact that some of his ideas and interests were decidedly out of date, Churchill was still highly effective as Prime Minister, and he led what was probably the best government this country has had since the war. Less constrained by party considerations than other premiers, and often stressing those things which united the country rather than those which divided it, he was, in Mr Selden’s words, ‘the man of vision who gave the lead’. He was above all else a national leader, and it was that which made him an outstanding prime minister in peace as well as war.

Because of Churchill’s fame, some monetarists sometimes attempt to exclude his government from their strictures, and suggest that the rot started only after he had retired. Mr Selden scotches that idea. ‘By his choice of ministers in 1951 and his continual moderating influence,’ Mr Selden writes, ‘Churchill personally ensured that the representatives of empirical and pragmatic Conservatism commanded the senior posts in the Party, a position they were to hold until the departure of Edward Heath as leader in 1975.’ In 1953, Labour moved slightly to the left. The Conservatives, instead of moving to the right, decided to stay where they were: there were to be no cuts in the welfare state and no more denationalisation. ‘By so doing,’ runs Mr Selden’s verdict, ‘they helped ensure clear victories at the 1955 and 1959 Elections.’ Leaving aside the point that there was (rightly) more industrial appeasement of the Trade Unions under Churchill and Walter Monckton than there was later, which should make that period particularly unpalatable to the monetarists, there was continuity both of men and of measures during the 13 Conservative years, and it is artificial and unhistorical to try to create a break between the Churchill governments and those of Eden and Macmillan.

The new monetarism was brought to England from America by Mr Peter Jay, but politically the beginning of monetarism can be dated from Sir Keith Joseph’s Preston speech of 5 September 1974. The key sentence in that speech was: ‘it is the method that successive governments have used to reduce registered unemployment – namely expanding aggregate demand by deficit financing – which has created inflation, and without really helping the unemployed either.’ Preston was the first of a series of brave and eloquent speeches in which Keith Joseph set out to change the views of the Conservative Party, and of much outside opinion, on economics, the post-war consensus, and a lot else besides. He largely succeeded in his objective, and that must be recognised as a notable achievement, however unfortunate the consequences.

The right-wing or monetarist indictment of the Conservative Party and Conservative governments in the post-war era up to 1975 can be summarised as follows: all previous post-war governments went for soft options and easy answers during what were long sad years of decline. Inflation is a self-inflicted wound: successive governments caused it by trying to do too much too quickly by way of deficit financing. Grossly excessive government expenditure is the main cause of inflation. In other words, inflation is politically-induced and caused by governments. If governments get the money supply wrong, nothing else will come right. Post-war Conservatives followed the false trails of social democracy, embracing the delusion of the efficacy of government action in the economic sphere, and failing to pay sufficiently respectful attention either to the quantity theory of money or to the spontaneous in-built correctives in the economy. The post-war consensus did not notice that many of our population did not belong to trade unions or to big business. As a result, the Conservative Party found itself on alien and treacherous ground. Conservatives talked about plans and strategies and to trade unions and other corporate bodies. This activity was unnecessary as well as damaging. All that they needed to remember (while acting accordingly) was that changes in the general price level are determined by changes in the quantity of money, and that government is able to determine the quantity of money. Finally, Conservative governments and the Conservative Party since the war made the fatal mistake of seeking the middle ground. In consequence, the party pendulum was replaced by a socialist ratchet, and the middle ground moved continually to the left. The Conservative obsession with the middle ground became a rake’s progress and swept us down towards the abyss. Indeed, it even drove the Labour Party to the left. Similarly, Keynesianism, so far from being an alternative to red-blooded socialism, merely paved the way for socialist advance.

Plainly there is a grain of truth in some of this, as well as a good deal of hysteria. The right-wing Conservative retreat into the 19th century in search of eternal truths, like the left-wing Marxist retreat into the 19th century in a similar search, was not wholly irrational. Britain’s economic performance since the war has been much inferior to that of our competitors. British post-war governments, like all other governments, made many mistakes. What is now known as supply-side economics was ignored by the Government in the Fifties. Britain did constantly suffer from more wage and salary push than its competitors, as it still does. Probably, as Mr Selden suggests, an attempt to reform the Trade Unions should have been made in the late Fifties or the early Sixties. By the time the Heath Government did try for reform, the Union leadership and the rank and file were much more militant, and the attempt was made against the background of an unpopular economic policy. And governments did sometimes try to expand the economy too fast, and were insufficiently aware of the constraints upon growth. But all that is a very different thing from making a blanket condemnation of those governments.

In Mr Selden’s view, ‘the malaise of Britain’s industrial weakness’ went very deep, and ‘cannot be laid at the door of any one government’. Moreover the post-war years saw the biggest and most widely spread increase in national wealth that there has ever been in this country. If the British economy performed worse than its competitors did, it performed better than it did before those years or since. The 13 Conservative years saw a transformation of the country. The standard of living rose more than it had in the previous half-century. Those who were hardest hit by economic and social forces beyond their control were protected. Full employment was combined with growth and relative price stability (the average rise in prices from 1952 to 1964 was 3 per cent a year). The Government pursued a policy of stabilisation which achieved those results – any one of which a monetarist might envy. At any rate, we have now seen what happens when the attempt to achieve stability is abandoned.

If we turn to look at the monetarist charges in more detail, the general picture, allegedly, is one of ever-rising inflation and ever-increasing deficits. But 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. In the Sixties, as the Government’s Chief Economic Adviser has recently said, the inflation rate drifted upwards, ‘but no more than in other countries’. Indeed the average annual rate for the UK in the Sixties was 4 per cent. But, Professor Burns went on, ‘following the oil price shock in 1973-4 UK inflation far exceeded the average rate in other industrial countries.’

Probably most people regard deficit financing in certain circumstances with some equanimity. Only monetarists regard it with horror. But in any case it did not happen. Central government ran a financial surplus in every year from 1950 to 1973. 1974 was the first in which there was a deficit, and there has continued to be a deficit throughout the monetarist era, which began under Mr Healey in a very diluted form in 1976. The Public Sector Borrowing Requirement, that great totem pole of the monetarists, tells the same story. The aggregate total of the PSBR from 1952 to 1970 inclusive is only slightly more than it was in either of the single years of 1979 or 1980. Even allowing for the great fall in the value of money that is surely quite striking. The allegation of financial profligacy during the Keynesian years is therefore false. In general, both fiscal and monetary policy were fairly strict.

The monetarists’ political history is no better than their economic history. Britain did not move sharply to the left between 1951 and 1974. The Tory search for the middle ground did not turn the party pendulum into a ratchet for socialism. As Mr Selden notes, the Labour Government’s nationalisation programme of 1945-51 was ‘not significantly increased until after 1975’. Nor did Tory moderation drive the Socialists to the left. From 1951 to 1970 Tory centrism helped to keep Labour well away from the far left. This can easily be shown by comparing Sir Harold Wilson’s Labour Government of 1964-70 with Mr Michael Foot’s present Labour Party. In politics, moderation tends to breed moderation, just as extremism tends to breed extremism.

Finally, the allegation that Keynesianism merely paved the way for socialist advance implies that there were policies other than Keynesian that the Churchill Government and its successors could have adopted. There were not. Had Churchill adopted monetarism, he would never have been elected. The 1951 Election would have been 1945 all over again. And if he had adopted monetarism once he had been elected, his government would have had no Conservative successors and would probably not have survived. Such a policy was politically unthinkable at that time. The only alternative to Keynesianism was socialism. By adopting Keynesianism, the Conservatives maintained themselves in power for 13 years and helped to retain moderation in the Labour Party for 20. Conservatives should surely applaud such achievements, not go out of their way to denigrate them. Admittedly, the Heath Government lasted only three and a half years. But it was defeated because, to use a favourite monetarist phrase, the country chose the soft option and refused to support the Government’s counter-inflation policy.

Nearly everything, then, that the monetarists say about their Conservative predecessors is wrong. History has been rewritten. But that makes all the more remarkable their achievement in converting to their views, and to their ‘facts’, so much of the Conservative Party and much of Fleet Street. Mr Roger Opie has blamed the economics profession for allowing it to happen and has referred to ‘this treason of the academics’. Certainly many economists were either slow to react to what was happening or did not react at all. But no less puzzling is why so many Conservatives should so easily have succumbed. After all, the essence of Conservatism is to avoid abstractions and to be guided by experience. The Party – or the bulk of it – committed what is for Tories the unforgivable sin: it abandoned scepticism, and embraced what almost amounted to a system.

It is hard to find anything comparable to this strange episode. But the history of the Arian heresy has some similarities. Though Arianism was condemned by the Council of Nicaea in 325, it remained strong and was favoured by Constantine’s sister Constantia, and by his successor in the East, Constans. And after a number of other councils and much banishment and counter-banishment of prelates, Arianism was accepted by both Eastern and Western bishops in 359. As St Jerome later sadly commented, ‘the whole world groaned and marvelled to find itself Arian.’ In much the same way, Keith Joseph claimed a few years ago: ‘We are all monetarists now.’ Yet the adoption and apparent triumph of Arianism were the beginning of its downfall. The West returned to orthodox Catholicism shortly afterwards and the East followed later. As with Arianism, so with monetarism. Its adoption spells its end. The theory was safe until it was put fully into practice. Now it will not survive that experience. Let us hope that the damage it has done to the Tory Party will prove no more lasting than the damage the heresy of Arianism did to the Catholic Church.

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Vol. 4 No. 4 · 4 March 1982

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.

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