From the devaluation of sterling in 1967 to Brexit uncertainty, our economics commentator reflects on how Britain has diced with fiscal catastrophe
I wanted to be a journalist from an early age – the age when most of my (male) contemporaries out there in west Wimbledon had set their sights on becoming footballers or engine drivers.
At Wimbledon College I produced an underground (handwritten) newspaper and dabbled in undergraduate journalism at Cambridge in the early 1960s. In those days, although I read economics – because I wanted to understand politics – I had no idea that I would take up economic journalism as a career. But the field began to narrow when I heard the Financial Times took one or two recruits straight from university.
The scales were removed from my eyes during an interview with Sir Gordon Newton, the FT’s then editor, when I was firmly told that the cuttings of which I was most proud were “not up to it” – but there was one that suggested I had potential as an FT reporter. From then I never looked back, and in 1977 I joined the Observer, first as economics correspondent, then as economics editor.
One interesting change I have noticed is the way that economic and business coverage is much more prominent, not to say all-pervasive, than it used to be. When I came into economic journalism one had to work hard and win people’s trust in order to gain background information, let alone a “quote”. But one gets the impression these days that people are vying to let the world know what they think – not least in their much-publicised tweets.
In terms of the recurring themes over the period covered by these nine crises, I find two that stand out. One is the constant search by British policymakers for an economic panacea, and the second is the way that certain obsessions take over in the coverage of economics. In the 1960s and 70s the obsession was with the overseas trade figures and the balance of payments; nowadays these hardly get a mention, even though the underlying position is much worse than it was then.
The modern obsession is with the budget deficit, which received precious little attention in earlier decades. And, of course, the 2016 referendum and prospect of Brexit have, for good reasons, taken over as the main focus of economic news. Welcome to the ninth of my crises… and to the eight that preceded it.
In November 1967 the Labour prime minister, Harold Wilson, took the decision to devalue the pound by 14.3%.
He had resisted devaluation for three years, against official advice that it would restore export competitiveness, but in the end it was forced upon him by the markets.
Wilson, trying to get across to the public that it was the price of imports that would be significantly hit, rather than people’s total spending power, was nevertheless widely mocked for saying that “the pound in your pocket has not been devalued”.
2 The oil crisis and the three-day week
The Conservative government under Edward Heath – 1970-74 – tried to take on the unions by restricting their power – but it failed.
Heath’s mistake was not to recognise that the market power of the miners had been dramatically increased by the impact of the oil-exporting countries (Opec), which had quintupled the price of oil in the autumn of 1973.
A miners’ strike provoked disruption to electricity supplies and the nation was put briefly on a three-day week.
Heath held an election on “who governs?”… and lost.
3 The IMF crisis
Once again a Labour government was returned with all manner of good intentions, but bedevilled by “events”. It inherited an “inflationary spiral”. In one of the worst-timed but best-intended economic policy moves of the post-1945 era, the Heath government had linked wage increases to the cost of living on the eve of the oil shock.
The government, by this time led by James Callaghan, had, in a popular phrase, “to go cap in hand” to the International Monetary Fund in humiliating circumstances.
4 Thatcher recession
The Thatcher government came in having adopted the monetarist doctrinesof Professor Milton Friedman. The message was that all they needed to do to control inflation was to control the money supply. This proved a false god, and many years later monetarism was disowned by Friedman himself.
But having promised to control inflation, the Thatcher government saw a rise in the rate from an inherited 10% to more than 20% a year later.
Britain experienced its worst recession since the 1930s, and the pain inflicted on society and manufacturing was such that unemployment went on rising to more than 3 million by 1986.
5 Lawson boom-and-bust and Thatcher
Nigel Lawson, chancellor 1983-89, was at heart an expansionist. He produced an expansionary budget in 1988, in the middle of a campaign to persuade Thatcher that the answer to Britain’s endemic inflation problem was to emulate the far more successful Germans. He failed to persuade Thatcher to put the pound into the European exchange rate mechanism (ERM) but instructed the Bank of England to “shadow the deutschmark”.
It all ended in tears when Thatcher found out, and the last straw for Lawson was the reappearance on the scene of Thatcher’s economic adviser Sir Alan Walters, which provoked him to resign.
6 Black Wednesday
The Lawson boom led to another splurge in inflation, with the annualised rate of increase peaking at 10.9% in the autumn of 1990. By this time John Major had been chancellor for a year and, along with the rest of the establishment, had worn Thatcher’s resistance down.
The pound was put into the ERM. This was the worst possible time to hook the pound to what was in effect a deutschmark zone, because the good news about German reunification in 1989 was soon followed by the bad news of the impact of unification on German inflation. It took the second-worst recession – 1990-92 – since the 1930s to bring UK inflation down again.
The need to keep the pound in the ERM involved cripplingly high interest rates. Finally, by 16 September 1992, the policy was seen to be unsustainable and the Bank of England spent most of its currency reserves in a vain attempt to prop up the pound.
7 Financial crash
By 2007, policymakers believed that, with the aid of the latest panacea, “inflation targeting” – entrusted to an independent Bank of England in 1997 – they had found the economic philosopher’s stone. Alas, in Britain and elsewhere, they took their eyes off the “financial stability” ball.
The crash a decade ago was, in the words of Nicholas Macpherson, Treasury permanent secretary under both Labour and the Conservatives, “a banking crisis, pure and simple”. Gordon Brown was not responsible for the financial crises in the rest of Europe and the US.
8 Osborne’s austerity
Thanks to an enormous fiscal and monetary stimulus, the British economy was recovering nicely by the summer of 2010. But the coalition government, making absurd comparisons with the seriously troubled Greek economy, caused the incipient recovery to stall by removing the fiscal stimulus and embarking on a prolonged period of austerity. This is still with us, and its impact has been deleterious.
Not only were public investment plans cut back: business confidence was shaken, and the industrial investment required for normal growth was much reduced, affecting the economy’s underlying productivity. Moreover, George Osborne made no secret of the fact that he was using austerity in a deliberate, doctrinal bid to reduce the size of the public sector.
9 Referendum and Brexit
It is well known that David Cameron thought that, by resorting to a referendum, he could resolve the decades-old fissure within the Conservative party over “Europe”. Instead he has aggravated these splits, as we see daily.
I am still hoping that, at the 11th hour, the country will come to its senses. The oil crises of the 1970s severely aggravated our economic problems, but they were external shocks. This crisis is self-inflicted.
• Nine Crises by William Keegan is published by Biteback, £20