MONETARISM AND THE COLLAPSE OF THE POST WAR CONSENSUS
However what I, and I think my comrades as well, missed at the time was the extent to which the post-war settlement which had enabled the advance of working class interests was already being undermined even prior to 1971. In her book The case for the Green New Deal the Neo-Keynesian economist Ann Pettifor, drawing on Oliver Bullough's book Moneyland, tells the story of how the London banker Siegmund Warburg 'began the process of dismantling Bretton Woods by dealing in Eurodollars and trading "offshore" beyond the reach of US regulators.' Without going into the details, he devised a complicated means of undermining 'the Bretton Woods system of checks and balances for the management of cross-border flows of capital.':
'The cumulative impact of this game of "jurisdictional Twister" was a "Eurobond" that paid Warburg's bank a high, real rate of interest, on which no tax of any kind was paid and which could be turned back into cash anywhere. The "walls" of the international financial fortress had been breached, and henceforth eurobonds were to become the battering ram which broke down the carefully constructed Bretton Woods system of managed finance. Thanks to Warburg's ambitions, investors in capital markets had been "liberated" from the oversight and management of regulatory democracy ...
'By gradually discrediting and tearing down the Bretton Woods architecture in the 1950s and 60s, the finance sector and its friends in governments and academia dismantled the international framework of what is universally known as the "golden age" of economics. On one Sunday night in 1971 - and without consulting any of his allies or indeed any international institutions - President Nixon, in an event that came to be known as the "Nixon shock", unilaterally dismantled the international financial architecture so carefully constructed at Bretton Woods. He did so without putting any other system in its place. Once again the international finance sector was in control. In the absence of a sound international framework governed by public authorities, societies and their elected representatives in both rich and poor countries were once again rendered relatively powerless. Democratic governments were denied effective agency over the management of domestic economies. By the 1960s (sic - PB. 1980s?], financial deregulation had restored private authority over both the international financial system and national economies.' (4)
(4) Ann Pettifor: The Case for the Green New Deal, London, Verso, 2019, pp.55-6. Oliver Bullough: Moneyland: Why Thieves And Crooks Now Rule The World And How To Take It Back, Profile Books, 2019.
In 1967 Milton Friedman became President of the American Economic Association. In his presidential address he laid out the argument that 'monetary policy' - control of the money supply - was a much better policy for stabilising the economy than fiscal policy (government spending and taxation). (5) The theory was - if I've understood it aright - that the money banks lend, and so the money that is available for investment, is dependent on the policies of the Central Bank - through the reserve ratios banks are expected to keep with the Central Bank as a guarantor of their ability to lend, the 'discount rate' charged by the Central Bank to lend money in the event of overnight liquidity shortages, and through the buying or selling of government securities. By these means the Central Bank can encourage banks to lend at reduced interest rates thus facilitating investment; or alternatively discourage them thus discouraging investment. Too much investment can produce higher rates of employment but with the risk of inflation and a level of production that is unsustainable in the market. In that case the level needs to be reduced at the risk of higher unemployment and deflation.
(5) This and much of what follows is based on my understanding of William Mitchell and Thomas Fazi: Reclaiming the State, Pluto Press, 2017.
Left to its own devices the system will balance out, ie booms will result in busts and vice versa, but the process is painful. The ideal is a balanced economy, neither too hot nor too cold, with a steady rate of growth and this is what the Central Bank policy with regard to reserve ratios, the discount rate and the purchase and sale of government securities is supposed to achieve.
But the main thing in the eyes of Friedman and his followers is that the Central Bank should be independent of government control. Its purpose and policies should not be dictated by politicians responsible to the electorate. The expertise required is like the expertise of a doctor or a dentist, a clearly defined technical task. In the immediate post war period under the influence of Keynesian economics, the Central Bank was seen as one of the tools available to government and one of the clearly defined tasks of government was to maintain full employment. 'Full employment' has now been redefined as whatever level of employment is required to keep the economy sufficiently in balance (between inflationary and deflationary pressures) to maintain a steady rate of growth. It is called the NAIRU - the non-accelerating inflation rate of unemployment. The battle against unemployment is tributary to the battle against inflation.
The problem with all this was to be cruelly exposed by the 2008 crash and its aftermath. The means the Central Bank has at its disposal to influence activity in the real economy are in fact very limited. They cannot address the underlying problem, which is a problem of production (production in the older European economies being undercut by competition from cheaper and often better production in the emerging South Asian economies) and demand (producers responding to this competition by cutting costs ie wages and governments responding to the reduced tax intake by cutting expenditure). Nor indeed in what appears to be its own field, the financial services industry, have its tools proved to be very effective. In a sense the means at the disposal of the Central Bank (control over reserves and over the amount of hard cash that is in circulation in the economy) could be described as the ghost of the gold in Fort Knox. Most of the money in circulation at the present time, especially in the digital age, is what Keynes called 'fountain pen money'. It is created when banks make loans. What disciplines it isn't anything the Central Bank can do. It is the expectation that at some point the loans will be repaid. When that expectation is disappointed a bubble will burst. Well before the big bubble burst in 2008 there had been a series of smaller but still highly destructive bubbles. To quote the Marxist economist Robert Brenner: 'Every so-called financial expansion since the 1970s very quickly ended in a disastrous financial crisis and required a massive bailout by the state. This was true of the third-world lending boom of the 1970s and early 1980s; the savings and loan run-up, the leveraged buyout mania, and the commercial real estate bubble of the 1980s; the stock market bubble of the second half of the 1990s; and, of course, the housing and credit market bubbles of the 2000s. The financial sector appeared dynamic only because governments were prepared to go to any lengths to support it.' (6)
(6) Robert Brenner: What is good for Goldman Sachs is Good for America - The Origins of the Present Crisis, Center for Social Theory and Comparative History, UCLA, 2009. Available on the internet - Google Brenner Goldman Sachs. I quote this and more from Brenner in my essay The Christian Faith and the Financial Crisis Part Two - http://www.british-values.com/index-to-articles/griffiths-2/griffiths-211.html
I have engaged in that necessarily superficial account of monetarism because the 'failure of Socialism' of my title was largely a matter of the acceptance of this argument by Socialist parties and Socialist governments, starting with the British Labour government of the 1960s.
I can remember the Harold Wilson government inveighing against the stock exchange and therefore against finance capital, appealing to us all to 'buy British', putting limits on the amount of money ordinary tourists were allowed to take out of the country. I'm guessing that this may have been connected to the Warburg bank's ability to evade capital controls that had been part of the architecture of Bretton Woods and therefore to export large sums of money out of the country. At any rate, Britain in the late sixties was faced with a major balance of payments problem, meaning that it was importing more than it was exporting, meaning that it was losing money abroad. In those circumstances, the government negotiated a loan from the International Monetary Fund, another part of the Bretton Woods architecture designed to help governments that had got into difficulties by acting as an international 'lender of last resort'. But it seems that the IMF, based in the US, was beginning a process of conversion to Friedman's ideas. In Britain itself, there was an immense push in this direction in, for example, the British professional paper, The Banker, in the Financial Times (in particular the articles of Samuel Brittain), and indeed in the Quarterly Bulletin issued by the Bank of England itself. In these circumstances, the Labour government agreed as part of agreement signed with the IMF 'that the Bank of England would start controlling the money supply - and in particular domestic credit expansion', (7) a key step towards adoption of the monetarist programme taken well before Margaret Thatcher came to power.
(7) Fazi and Mitchell, op cit. I have this in a Kindle version that doesn't give page references. Kindle location 792.
It proved however to be a false start, getting somewhat lost in the dramas of the 1970s - miners' strikes, OPEC oil pice hike and the attempts of both Tory and Labour governments to control wage push inflation through a prices and incomes policy. But in December 1976, Denis Healey wrote a 'letter of intent' to the IMF, agreeing to a programme of harsh spending cuts and monetary restraint in exchange for another loan. Fazi and Mitchell say (loc 1289): 'This was a watershed moment for Labour, reinforcing a change in policy orientation away from full employment and social welfare toward the control of inflation and expenditure.'
This, we may remember, coincided with the debate over the Bullock Report. I remember a discussion I had at the time in Cambridge with the prominent Communist Party economist, Bob Rowthorne. He was arguing against Bullock on the grounds that, now that industry and capital were free to move outside national boundaries, there was nothing, or very little, useful to be done at the national level. The working classes in different countries were effectively in competition with each other and any advance in the power - whether the bargaining power or management power - of the one would simply result in management and capital's transfer of affections to the other. We may remember the argument against Marxism I had encountered in the 1970s. Marx had argued that capitalist competition was a race to the bottom to reduce production costs and therefore, in the first instance, wages. But because of government engagement following the war, this was no longer the case. Government however was now disengaging and the world was - and still is - coming to resemble Marx's original vision.