Reflections on Monetarism 
by Tim Congdon.
Edward Elgar, 320 pp., £35, November 1992, 1 85278 441 5
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This book brings together the ‘most important academic papers and journalism’ of Professor Tim Congdon, described in the blurb as ‘one of the City’s most well-known commentators’. Congdon’s provocative thesis is that ‘monetarism’, as adopted by British governments between 1976 and 1985, was a decisive success, but that the gains were lost when Nigel Lawson let things rip, causing a boom that had to go bust. The book falls into two parts. The first consists of articles which appeared in newspapers and journals between 1975 and 1989, focus and context being provided by a general introduction and prefaces to the individual essays. The second part, consisting mostly of conference papers, lectures and essays published in other books, is intended to provide the theoretical basis for Congdon’s views on policy. Its most important chapter, ‘Some Initial Theorising’, attempts, in Congdon’s words, ‘to set out, in loosely theoretical terms, how I think the economy works’. Why does Congdon present his views on economic policy in the form of disjointed newspaper articles a few hundred words long, written up to eighteen years ago, ‘many of them ... at great speed, often to a newspaper deadline, in only two or three hours’? The most likely reason is that he is trying to convince us that his views are correct because his economic forecasts were borne out by events, which puts a heavy obligation on him to be sure, first, that nobody holding opposing views made equally good forecasts and, secondly, that his forecasts were right for the right reasons.

The story begins with the Heath-Barber boom of 1973-4, when Congdon himself was still a mere apprentice. His thesis is that it was only monetarist writers such as Peter Jay in a famous Times article of May 1973 who foresaw that ‘the boom [would have to] go bust’ and Professors Laidler and Parkin, writing in June 1974, who foresaw that as a result of the rapid growth of the money supply in 1972-3 inflation would reach 20 per cent in 1974 and 1975.

This is at best misleadingly incomplete.

That the Barber boom would go bust was also forecast by Cambridge Keynesians (arch-opponents of monetarism) on the grounds that domestic demand had been over-stimulated and would lead to an intolerable balance-of-payments deficit. The Cambridge view was published in successive editions of the London and Cambridge Economic Bulletin (LCEB) through 1973 and 1974, most of which were reprinted in the Times. Moreover, to judge from his writings, Peter Jay was not a technical monetarist at that time, there being no substantial difference between his analysis and that appearing in the LCEB. And the same Cambridge economists (I was one of them) forecast in the January 1974 issue of the LCEB that inflation would rise to at least 17 per cent and very likely to more than 20 per cent.

Who had the right reason for being right? Our prediction of accelerating inflation had nothing to do with money growth two years earlier. We thought that inflation would accelerate because of the explosion in oil and other commodity prices interacting with the unfortunate ‘threshold’ scheme which, for a year, hiked wages point for point with the retail price index. I still think our reasons were the right ones: but the matter is not discussed at all by Congdon and he does not even mention the oil price rise or the threshold scheme, let alone the Cambridge forecasts. It should be remembered in this context that the whole establishment – the Treasury, the main conjuncture institutes (particularly the London Business School) and Professors R.J. Ball and R.C.O. Matthews as well as the editor of the Times, William Rees-Mogg – all went overboard in support of the Heath-Barber boom, some of them proposing additional reflation late in 1973.

Having myself written so much about the appalling consequences of the Thatcher-Howe era, I approached Section Four, ‘Britain’s Monetarist Experiment – Initial Setbacks Followed by Triumph’, with some interest: what on earth could Congdon have in mind? Page 112 contains a table summarising ‘the facts’ relating to the mid-Eighties. ‘For every variable under consideration,’ Congdon told us in 1985 and tells us again here, ‘the situation is better now than it was a decade ago.’ What facts? The table in question shows inflation for 1975, 1976, 1984 and 1985 down to 5.75 per cent by the end of the period, the balance of payments at plus .75 per cent of GDP ‘in modest and satisfactory surplus’ compared with minus 1.6 per cent in 1975, a growth in output compared with the previous year of 3.5 per cent whereas between 1974 and 1975 it had been minus 1.6 per cent, and a growth in employment on the year of 250,000 compared with minus 90,000 in 1975.

This is terrible stuff. Output growth between adjacent years at the beginning and end of a ten-year period is no way to measure performance over the period as a whole. The relevant facts are that the average growth of total output over the whole period 1975-1985 was barely 2 per cent (compared with 1979, the growth rate was under 1.5 per cent), which is slower than in any pre-Thatcher period of the same length, while manufacturing output fell absolutely between the beginning and end of the ten-year period. The balance-of-payments comparisons are misleadingly incomplete because they make no mention of the huge increase in oil production between 1975 and 1985. If oil is excluded, the underlying trend of Britain’s international trade is revealed as disquietingly adverse; the current balance of payments, excluding oil, was 1.5 per cent of GDP in surplus in 1975 whereas it was 1.5 per cent in deficit in 1985, a marked deterioration not withstanding the exceptionally slow growth of output through that period. Presumably the adverse trend had been made even worse by the absurdly high rate of exchange at the beginning of the Eighties which was an unfortunate consequence of the (vain) attempt to control the money supply, particularly in 1980/81 and 1981/2. Perhaps the most shocking thing about Congdon’s table of ‘major economic indicators’ is that it contains no reference to unemployment, which at the end of 1985 had nearly reached 3.1 million compared with just under 1.1 million in 1979 and less than a million in 1975. Some triumph! Given this extremely high level of unemployment, the reduction in inflation to 5.5 per cent, though in itself welcome, was not all that impressive.

I have always taken the view that between 1979 and 1985 the Government completely failed to control the growth of money supply (in every year except 1982/3 money growth always exceeded the upper end of its target range); that the attempt to control it caused what, until then, was far and away the most severe recession of the post-war period; that had the money supply been kept within its target range (probably only possible if regulation of financial institutions had been retained), there would not have been enough recovery to stop unemployment rising well above the 3.1 million peak actually reached or ever to bring it down again; and that the existence of a ‘scientific’ link between the growth of the money supply and inflation some two years subsequently, once so confidently predicted by monetarists, was demonstrated not to exist. Nothing in Tim Congdon’s book would lead me to qualify these views in any way. According to Congdon, writing in 1983, ‘the Thatcher administration, unlike its predecessors, has achieved all its objectives. But this success has been made possible not by cleverness, skill or luck, but because it has redefined the economic problem. It has concentrated on the financial side and abandoned targets for the real economy.’ This is not so much changing the goalposts as removing them. Meanwhile those who attach importance to the ‘real’ economy – that is, to the levels of employment, unemployment, output and real income and who believe that it should be part of any government’s objectives to bring about tolerable growth rates and unemployment levels – are entitled to go on thinking that the early Thatcher years were the most disastrous of the post-war period, at least until the present debacle.

The articles which appeared between October 1985 and the spring of 1990 are quite another matter. Against an incredibly strong tide of Tory ‘triumphalist’ opinion, Congdon persistently maintained that the expansion sponsored by Nigel Lawson was nothing other than a ‘typical Tory boom’ and certain to go bust, with very destructive consequences. I have some admiration for this part of the book because it testifies to a considerable degree of moral courage and independence of mind on the part of its author. I agree, furthermore, with Congdon’s stricture on any forecasting model (such as that operated by the Treasury) which does not include any representation of credit flows to households; and I share his disdain for ‘computerised sheep’ – the great body of economic commentators who at once form and ape mainstream opinion with computer technology but with neither flair nor originality. Yet the format permits Congdon to avoid facing up to one important question which demands an answer. Suppose there had been only a moderate growth of credit and money from 1985 onwards, would there have been an expansion of demand and output fast enough to make unemployment fall at all? And if there had been a moderate recovery, is there any reason to suppose that, as oil production fell back, the extremely adverse trends in Britain’s trading performance would not have resulted in an intolerable balance-of-payments deficit? Were not the 364 economists who wrote to the Times in 1981 protesting that there would never be a recovery if the declared policy was maintained right after all?

The second, theoretical half of Reflections on Monetarism falls a long way short of being a description of ‘how the economy works’. What we are given is one man’s description of how part of the financial system – the money and credit-creating part – works. Congdon fails to discuss a huge number of vitally important questions, including how employment, unemployment, growth, competitiveness in world markets – inflation even – are determined. Indeed, it would be fair to say that Congdon’s whole perspective, in both his policy analyses and his theoretical writing, is unduly restricted to narrowly financial matters. I believe that it is on Britain’s industrial performance, particularly her ability to export enough to pay for the imports which a decent growth rate will require, that the future success of the economy will depend. Congdon does not seem to recognise that industrial performance is a factor at all; perhaps he thinks that market forces will sort things out by themselves so long as money and credit expand at the right speed.

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