'...cut public spending to the bone, follow a “hard money” monetary policy (which would probably require him to replace King) ... and wait for the newly liberated private sector to produce a second Industrial Revolution.'<blockquote>
'The result was a “double dip” recession of considerable severity, exacerbated by 1816's “Year without a summer” famine (caused by the 1815 eruption of the Mount Tambora volcano). However Liverpool's courage and determination were rewarded after 1820 by an astonishing boom, in which the Industrial Revolution transformed Britain's economic prospects, sent British living standards into a century-long upward trend and reduced the burden of debt to a manageable and eventually benign level.
Since Britain already had free elections (albeit on a limited franchise), Liverpool's approach required enormous political courage. However as his sidekick (Foreign Secretary and Leader of the House of Commons) Lord Castlereagh remarked in 1821 “I am grown as popular now as I was unpopular formerly, and of the two unpopularity is the more convenient and gentlemanlike.” It is an attitude unimaginable in a modern politician; truly we have lost much.
...
The final alternative would be for the new prime minister to cut public spending to the bone, follow a “hard money” monetary policy (which would probably require him to replace King), steel himself to the inevitable shrieks of anger from the media and the big-spending interests, and wait for the newly liberated private sector to produce a second Industrial Revolution. As for Liverpool and Castlereagh, that would almost certainly work. Re-election might indeed be difficult, but Liverpool managed it twice, in 1818 and 1820.'</blockquote>
Britain: One with Nineveh and Tyre?By Martin Hutchinson
May 03, 2010
SourceFrom the economic point of view, the 2010 British General Election due on May 6 is one that no sane person would want to win. By far the country's largest industry, financial services, is in deep trouble, facing concerted worldwide attack by enraged governments and citizenry. The budget deficit is at 12.8% of Gross Domestic Product, near Greek levels, while the decline of North Sea oil and gas has left the country in increasing dependency on the tender mercies of Gazprom. It is increasingly obvious that British living standards are going to decline substantially over the next decade. In short, the task ahead for whoever wins looks thankless.
Bank of England Governor Mervyn King put it even more strongly last week; he claimed that the pain necessarily imposed by the next government would put the winner of the election out of office for a generation. It has to be remembered however that King was one of the 364 economists who at Thatcherism's darkest hour in 1981, prophesied that her policies were hopelessly doomed – this about a month before the British economy launched into 25 years of almost uninterrupted expansion. Thus King's track record is by no means one of infallibility.
To examine further whether King is right and assess the chances of the new prime minister (or possibly the re-elected old one) pulling Britain's economy out of the mire, we should look at the three previous occasions on which Britain's debt and deficit position took the country near bankruptcy; these are 1945, 1931 and 1815. Two of these occurred when Britain's debt level at the end of ruinous wars approached 250% of GDP – about double the level of Greece's today; the third was in the middle of a disastrous world slump, following a decade of stagnation after another devastating war.
Britain's policy after 1945 was heavily influenced by Maynard Keynes, alive until 1946, who at the Bretton Woods conference of 1944, in return for a large post-war loan from the U.S., had agreed to two U.S. demands that together would prove devastating to Britain's post-war performance: that Britain should give up its modest tariff system of Imperial preference and that it should fix the pound against the dollar at an overvalued rate of $4.03.
Both were devastating to Britain's post-war export performance. Morris Motors for example in 1945 had a highly plausible expansion plan for the U.S. market that was thwarted by the overvalued pound, which made its well-made small autos uncompetitive. (The problem was not British labor costs, which were low, or Morris's productivity, which was highly competitive, but its steel, which came from antiquated British mills at a cost 30% above U.S. supplies.)
Keynes' activities at Bretton Woods however left one extraordinarily valuable legacy to the incoming Attlee Labor government: an international monetary system which pretended to fix prices in terms of gold but in practice didn't. For the first twenty years after World War II, British Chancellors of the Exchequer were thus able to fool investors and borrow at traditional interest rates in the 2.5%-4% range, while running rates of inflation often considerably higher than that. This devastated the British middle class – “euthanizing the rentier” in Keynes' odious phrase – but made the real value of British government obligations decline rapidly at the rentier's expense.
In the event, Keynes' machinations were all rather futile. Postwar Britain notably did not share the “economic miracles” of the devastated economies of France, Germany, Italy and above all Japan or even the steady but healthy growth of the United States. Instead it founded the National Health Service – thus making it inevitable that it would be forced to give up the Empire, a trade-off that in retrospect I still reject, though others may disagree.
In the previous crisis, of 1931, Britain's National Debt, at about 170% of GDP, was lower than in 1945 – though still considerably higher than Greece's today. However in the chaotic capital markets of that period, without a friendly U.S. sugar-daddy as in 1945, there was a serious chance that Britain would be unable to raise finance. The solution this time was to abandon the Gold Standard, thus making British exports about 20% more competitive, while at the same time cutting government spending sharply, reducing civil servants' salaries by 10% on the rather sophisticated ground that the option value of their job security was higher in a depression. The result of this and six years of solid management by the great chancellor of the exchequer Neville Chamberlain, was to give Britain in 1932-37 the best five year growth period it ever had, greatly strengthening the economy for the ordeal ahead and reducing the debt/GDP ratio to a low of 110% by 1939.
Both these solutions involved a certain amount of economic flim-flam, either fooling investors about inflation as in 1945 or unilaterally devaluing the exchange rate as in 1931 (which helped because Britain's obligations were almost all in sterling). The most interesting debt crisis is thus that of 1815, in which neither expedient was adopted by Robert, Lord Liverpool, prime minister at the time. Instead of inflation, Liverpool restored the pound to the Gold Standard at its pre-1797 parity, thus forcing a price deflation of over 20% within a few years, while at the same time providing a benchmark of currency stability for the world and facilitating the emergence of the City of London as the capital of world finance. Liverpool cut public spending to the bone, protected British agriculture from the worst consequences of deflation through the Corn Laws and adopted a policy of determined resistance in the face of the inevitable unrest.
The result was a “double dip” recession of considerable severity, exacerbated by 1816's “Year without a summer” famine (caused by the 1815 eruption of the Mount Tambora volcano). However Liverpool's courage and determination were rewarded after 1820 by an astonishing boom, in which the Industrial Revolution transformed Britain's economic prospects, sent British living standards into a century-long upward trend and reduced the burden of debt to a manageable and eventually benign level.
Since Britain already had free elections (albeit on a limited franchise), Liverpool's approach required enormous political courage. However as his sidekick (Foreign Secretary and Leader of the House of Commons) Lord Castlereagh remarked in 1821 “I am grown as popular now as I was unpopular formerly, and of the two unpopularity is the more convenient and gentlemanlike.” It is an attitude unimaginable in a modern politician; truly we have lost much.
Contrary to the gloom of Mervyn King, therefore, the new incumbent of No.10 will have a choice of three approaches to Britain's problems, all of which might in principle succeed. One would be to follow Attlee and Keynes, and inflate Britain out of the problem. Unfortunately investors today aren't as naive as those of 1945-65, so interest rates on government debt would soon rise to levels higher than the inflation, preventing the desired result.
A second would be to follow Chamberlain, devaluing the pound to about $1.20 and attempting to export Britain's way out of trouble. That might well work; its problem is that Britain's principal trading partners are now the jealous EU rather than the friendly Empire, so no equivalent of “Imperial Preference” would be available to assist the process. More likely, the EU and Britain's other trading partners would erect non-tariff regulatory barriers against British exports, particularly of financial services, thus preventing a replica of the splendid recovery engineered by Chamberlain.
The final alternative would be for the new prime minister to cut public spending to the bone, follow a “hard money” monetary policy (which would probably require him to replace King), steel himself to the inevitable shrieks of anger from the media and the big-spending interests, and wait for the newly liberated private sector to produce a second Industrial Revolution. As for Liverpool and Castlereagh, that would almost certainly work. Re-election might indeed be difficult, but Liverpool managed it twice, in 1818 and 1820.
Like the Anglo-Indian Liverpool and the Anglo-Irish Castlereagh, the Anglo-Scottish David Cameron and the Anglo-Dutch-Russian Nick Clegg are aristocrats. Do either of them have the political “bottle” to follow Liverpool and Castlereagh? Unfortunately, I don't think so. But suppose there were a stable Con-Lib coalition, with over 400 MP's, like the 1931 National Government? One can dream!