Monetarism and History

Ian Gilmour

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.

[*] Churchill’s Indian Summer: The Conservative Government 1951-55 by Anthony Selden. Hodder, 667 pp., £14.95, 26 October 1981, 0 340 25456 4.