The Bank of England’s failure in the early 1970s to control the money supply under the Competition and Credit Control (CCC) policy should have discouraged the Monetarist support base. However, while the monetary targets were abandoned, the Monetarist infestation was firmly alive among economists in the British Treasury and the Bank of England and the junior ministers in Edward Heath’s government. The City was also a hotbed of Monetarist support, with the likes of Gordon Pepper, an economist in the private sector who edited the Greenwell Monetary Bulletin prominent. Pepper, was very vocal and very influential within government circles. The ‘Greenwell Monetary Bulletin’ became a vehicle for the monetarist views to penetrate the highest levels of government. The British Labour Party was struggling with its factions. On the one hand, the Left was becoming more powerful within the Party and deeply rejected the attempts to diminish union operations. They formulated a new and far reaching industrial policy, which was light years away from the approach adopted by Harold Wilson’s government in the 1960s. But there was also a significant rump of Labour Monetarists, mostly concentrated in the Parliamentary party who were closer to the Tories on macroeconomic policy than their colleagues on the Left. Major tensions developed and would, ultimately lead to the famous 1976 surrender to Monetarism by James Callaghan at the National Conference. We trace this evolution in this blog so that we can understand the next instalment, which analyses the 1976 IMF loan arrangement that the British government entered into. This arrangement is a significant turning point in the way that social democratic governments have been captured by the neo-liberal myths.
The City (London financial sector) was also a hotbed of Monetarist support, with the likes of Gordon Pepper, an economist in the private sector who edited the Greenwell Monetary Bulletin prominent. Pepper, was very vocal and very influential within government circles. The ‘Greenwell Monetary Bulletin’ became a vehicle for the monetarist views to penetrate the highest levels of government.
Needham writes (2015: 117):
After Margaret Thatcher’s victory in the February 1975 leadership election, Conservative economic planning was dominated by a small clique of ‘believing monetarists’.
[Reference: Needham, D. (2015) ‘Britain’s Money Supply Experiment, 1971–73’, English Historical Review, 130(542), 89-122.]
Thus, even though one of the principle assumptions of Monetarism – that the central bank had the ability to control the money supply – proved to be false, the religious zealots lived on and continued to pressure government to cut deficits and raise interest rates.
Their ‘belief’ would manifest again, explicitly, in the 1979 Medium Term Financial Strategy announced by Margaret Thatcher, but the reality was that both major parties were leaning in this direction by the mid-1970s.
The capacity to sustain the Monetarist myth in the early 1970s after the CCC failure was, in no small part, due to the linking by Monetarists of the accelerating inflation in 1973-74, with the rapid growth in the broad monetary aggregates a few years earlier under the CCC and Anthony Barber’s ‘Dash for Growth’.
It was a spurious, lagged correlation but that reality was easily obscured in the public debate, which more often operates at the slogan rather than the factual and deductive level. To the proponents of Monetarism, the relatively close coincidence of the two were sufficient to push their message further and the British Labour Party fell for it, hook, line and sinker.
Aled Davies writes that in 1974 (2012: 12)
The modest cadre of British monetarist economists became particularly vocal, expressing their concerns in increasingly pessimistic terms. In an open letter to Harold Wilson in July 1974, Alan Walters and Harry Johnson urged the Prime Minister to take urgent action to ensure a gradual reduction in the rate of money supply growth with a return to a balanced-budget.
[Reference: Davies, A. (2012) ‘The Evolution of British Monetarism: 1968-1979’, Discussion Papers in Economic and Social History, No. 104, October, University of Oxford.]
The Chancellor in the Wilson Government at the time was Denis Healey attacked the Tory Opposition repeatedly for failing, while in government, to control the money supply to ensure stable inflation.
The hardline Tory Monetarists, aided and abetted by the likes of Gordon Pepper and his crew, were relentless in attacking Anthony Barber for the ‘Dash for Growth’. For the hardliners, the emphasis of the Heath government should have been on destroying the trade unions not fiscal stimulus. Both fiscal austerity and a full-blown assault on the unions would come later in the decade.
But Healey used this “monetarist critique of the Heath administration” (Davies, 2012: 12) to score political points, without caring that the Monetarist causality had already been discredited by the empirical reality.
It was political bastardry at its best.
Aled Davies notes that Healey “did most to further the ‘monetarist’ cause in British public discourse” once the Wilson government was re-elected in February 1974 (Davies, 2012: 12).
A reading of the British Hansard in this period reveals that Healey regularly berated the Conservative party over the rising inflation that had emerged in the last year of the Heath incumbency.
In one memorable Commons session, Healey was asked whether there was a need to “curb the vast wage increases now being sought in the nationalised industries” (see British House of Commons Hansard, HC Deb 27 March 1975 vol 889 cc667-73 – specifically cc671).
Healey responded (cc671-72):
I have set those out in detail in various statements … I must, however, remind the hon. Gentleman of one fact, which, since his right hon. and learned Friend referred yesterday to my speech at the Mansion House, may be worth stating again. I think that there is now general agreement on both sides of the House that the major cause of the inflation now racking Britain is the excessive increase in the money supply which took place in the last year of the previous Conservative Government … I am sure that the Leader of the Opposition will now concur, although she was a member of the Government who were responsible for that large increase in the money supply.
Another turning point was about to be reached but as we will see it was without foundation and British Labour had fallen right into the trap.
As I explained in this blog – Distributional conflict and inflation – Britain in the early 1970s – the inflation in 1973 and 1974 was not a ‘Monetarist’ event.
It was the result of supply-side factors, specifically the oil price shock in October 1973, which sparked a distributional struggle between workers and capital over who would bear the real income loss.
The British Labour Party, like the Conservatives, was also fractured along ‘Monetarist’ lines. While the likes of Denis Healey had become a Monetarist mouthpiece, there were other Labour politicians that disavowed Friedman’s ‘voodoo’ economics.
At the Labour Party Annual National Conference in 1973, an ambitious 123-page industry policy was unveiled – ‘Labour’s Programme for Britain’ – which was motivated by the internal observations that the first Wilson government in the 1960s had failed to pursue a coherent vision of Britain.
The Programme outlines a socialist vision for Britain and key players in pushing the agenda through the Party’s National Executive Committee (NEC) were Tony Benn, Ian Mikardo and Michael Foot, all staunch left-wing members of the Party.
The Programme had two major planks.
First, the creation of a National Enterprise Board (NEB), which would buy up private firms in the national interest. The aim was to use these enterprises as vehicles for investment planning to spawn higher productivity and sustained economic growth. The plan involved, in the first instance, the NEB would buy up around 25 companies, including large manufacturing firms as part of the first five years of a 25 year odd planning horizon.
Second, the government would enter planning agreements with around 100 of the largest private manufacturing firms, in addition for exisiting public enterprises, in return for financial assistance.
The Programme would be made operational by a proposed Industry Act, which would bestow significant intervention powers to the NEB.
The Programme thus aimed to change the perception of British Labour as a rather inert party in government but also laid out a plan to revitalise British industry that had waned under the poor management of British capital.
Michael Foot was quoted in the UK Guardian on October 3, 1973 as saying that the Programme was “the finest Socialist Programme I have seen in my lifetime
[Reference: The Guardian. ‘On Labour’s Programme 1973’, October 3, 1973.]
Three days later (October 6, 1973), the Yom Kippur War broke out between Israel and an Arab coalition and the OPEC embargos began. History would change.
While there was deep resistance on the Labour Party’s NEC to accepting the full import of the Programme, it was supported by the National Conference.
Some backpeddalling occurred in the lead up to the February 1974 national election.
Harold Wilson’s speech to launch his election campaign – Let us work together – Labour’s way out of the crisis – embodied the intent of the Programme:
… we shall substantially extend PUBLIC ENTERPRISE by taking mineral rights. We shall also take shipbuilding, shiprepairing and marine engineering, ports, the manufacture of airframes and aeroengines into public ownership and control. But we shall not confine the extension of the public sector to the loss-making and subsidised industries. We shall also take over profitable sections or individual firms in those industries where a public holding is essential to enable the Government to control prices, stimulate investment, encourage exports, create employment, protect workers and consumers from the activities of irresponsible multi-national companies, and to plan the national economy in the national interest. We shall therefore include in this operation, sections of pharmaceuticals, road haulage, construction, machine tools, in addition to our proposals for North Sea and Celtic Sea oil and gas. Our decision in the field of banking, insurance and building societies is still under consideration. We shall return to public ownership assets and licences hived-off by the present government, and we shall create a powerful National Enterprise Board with the structure and functions set out in Labour’s Programme 1973.
When Harold Wilson assumed office in February 1974, he appointed Tony Benn as Secretary of State for Industry, a key proponent of the Programme.
In his book – That Option No Longer Exists: Britain 1974-76 – John Medhurst – provides a detailed account of what happened in the mid-1970s in Britain. He traces the industrial plan initiated by Labour Secretary of State, Tony Benn to transform British industry, which had been left in stagnation by years of underinvestment.
[Reference: Medhurst, J. (2014) That Option No Longer Exists: Britain 1974-76, London, John Hunt Publishing.]
Tony Benn also wanted to achieve a “fundamental and irreversible shift in the balance of wealth and power in favour of working people”.
A White Paper The Regeneration of British Industry, was published by the Secretary of State for Industry on August 15, 1974, which somewhat watered down the Programme – especially the controversial compulsory nature of the planning agreements.
The Industry Act 1975<, which would operationalise the White Paper's recommendations was made public on January 31, 1975 and modified the powers and scope of operation if the NEB, which would come into operation on November 1975. The NEB was active in liaison with the National Economic Development Council (NEDC), which had been established in 1962 to faciliate economic planning. Its primary function was changed to provide funding for industrial investment and to assist in the rationalisation of failing enterprises.
It was promiment early in its life when it implemented the findings of the so-called Ryder Report British Leyland: The Next Decade into British Leyland. Donald Ryder was inaugural head of the NEB.
Leyland had fallen into shambles after years of mismanagement by its executives and their poor rapport with the workforce. The unions were also aggressive and were involved, according to the Report, in undermining productivity. But the poor model choice, the lack of investment in state of the art production technology, poor marketing, was all down to the owners and their managers.
The Report concluded that British Leyland “should remain a significant part of the UK economic base and recommended a massive and immediate investment programme to modernise plant and equipment”. It was estimated that around 1 million British jobs were at stake should British Leyland not be saved.
As a result, the British Leyland Act 1975, brought the company under state control (under a new name) and provided some £1,500 million of assistance and state control of BL was outlined in the British Leyland Act 1975.
This intervention was about as far from Monetarism as one could imagine and highlights both the divisions within the Party and the pragmatic nature of politics viz the uncompromising positions that academics and on-lookers in the financial sector, such as Gordon Pepper could take.
But we shouldn’t think the Parliamentary wing of the Labour Party was full of socialists. Far from it!
The decision of the 1973 National Conference to approve the ‘Programme’ and push it into the political sphere was a reflection of the growing influence of the trade union movement in the British Labour Party.
We have already documented the rising militancy in response to Edward Heath’s Industrial Act. At this time, a number of older, right-wing union leaders were replaced by more militant left-leaning people, especially in key unions.
The unions were also upset that the first Wilson Government had proposed a White Paper in 1969 – In Place of Strife – which was seen as a major attack on unions. The proposals never made it to the legislative stage after the Trade Union Congress expressed their bitter opposition.
Andrew Thorpe relates that the unions became estranged from the Parliamentary MPs in the Labour Party. He notes that:
… it was the more militant sections of the rank and file rather than the union leadership that initiated the main challenge to In Place of Strife. But the repercussions were felt at the very highest levels, with political humiliation for Castle, and severe embarrassment for Wilson, who had supported her. On 17 June, the Cabinet, at a ‘very, very tense meeting’, decided against the Prime Minister’s opposition to abandon the plans. Next day a face-saving agreement was reached, with the union leaders promising to do all they could to contain unofficial strikes.
[Reference: Thorpe, A. (1999) ‘The Labour Party and the Trade Unions’, in McIlroy, J., Fishman, N. and Campbell, A. (eds.) British Trade Unions and Industrial Politics, Vol.2: The High Tide of Trade Unionism, 1964-79, London, Ashgate.]
But it is clear that the experience of the late 1960s had caused a division between the unions and the key elements in the Parliamentary Labour Party. The position of the right-wing Labour Parliamentarians was further weakened by the introduction of Edward Heath’s Industrial Relations Act in 1971.
This further fuelled the growing influence of the Left in the Party.
Leo Panitch (1979: 57) writes that these divisions however did not lead to a party split:
… the common struggle against the Tory Government and the necessity of maintaining Labour as a viable political force to fight the next election – also ensured that the battle would not go so far as to risk Party unity.
A manifestation of this willingness to compromise was the abandonment of key elements in the ‘Programme’ that was approved by the 1973 National Conference – in particular, the proposal from the NEC to nationalise 25 key firms.
[Reference: Panitch, L. (1979) ‘Socialists and the Labour Party: A Reappraisal’, The Socialist Register, Vol 16. 51-74 – LINK.]
Panitch also noted that (1979: 58:
Thus in 1973, the advantages of this link went to the Party as both large union delegations responded to the call for moderation and pre-election unity. There was no concerted attempt to push the more radical interpretation of the role of the National Enterprise Board …
The result was that the Labour Party emerged out of its period of opposition with a most ambiguous programme.
There were other developments with increased the influence of the Left in the Party during this period. The most important was the issue of the Common Market (EEC), which was highly divisive. Edward Heath’s proposal for UK to enter Europe was also supported by the a number of Labour politicians.
John Mackintosh (1972: 2) noted that:
The current tensions in the Labour Party which have come to a head over the issue of the Common Market have, as is often the case with such strains, pulled the fabric apart and revealed many of the seams and loose stitches.
[Reference: Mackintosh, J.P. (1972) ‘The Problems of the Labour Party’, Political Quarterly, 43(1), 2-18.]
He also said that the deeply held opposition to joining the Common Market by centre-right politicians, led them to join a rare association with the Left of the Party, which undermined their influence within the Party, and, ultimately, meant that its leader (Roy Jenkins), would not take over the Prime Ministership when Wilson resigned.
The Left was able to force to force the local branch of one Pro-EEC Labour politician (Dick Taverne) to deselect him in 1972 for the next election. This was characterised by Bochel and Denver (1983: 45-46) as a concerted campaign by the Left:
… change the political balance of the Parliamentary Labour Party (PLP) by a concerted effort to select left-wing candidates … constituency Labour parties (CLPs) did indeed become increasingly likely to choose left-wingers to replace outgoing Labour MPs …
[Reference: Bochel, J. and Denver, D. (1983) ‘Candidate selection in the Labour Party: what the selectors seek’, British Journal of Political Science, 13(1), 45-69.]
They concur with Berrington’s assessment (1982: 91) that only a “spectacular change in the character of constituency parties can sustain the right’s present precarious majority (in the PLP)”
[Reference: Berrington, H. (1982) ‘The Labour Left in Parliament’ in Kavanagh, D. (ed.) The Politics of the Labour Party, London: George Allen and Unwin).]
The scene was now set.
The high inflation instigated by the OPEC oil price hikes, combined with a resistance among the Labour government to allow the currency to depreciate and the inheritance of a major economic slowdown, led to increased currency speculation.
It was a lethal cocktail. And on the questions of how to deal with these problems, once again opened up the divisions within the Parliamentary Labour Party.
The Government was also being bullied by the now, entrenched Monetarist IMF, who demanded fiscal austerity and laid out a plan to provide funding to avoid a situation where Britain would ‘run out of money’.
No-one seemed to question the fact that the British government could never run out of money – it was issuing its currency. The problem was that it also wanted to hang on to the old fixed parities with other currencies as some display of its colonial power that had vanished years before.
The Labour Party fell for the IMF lies and entered a totally unnecessary arrangement with the IMF.
John Medhurst argues that our perspective on the 1970s in Britain has been significantly tainted by a series of “constructed myths” (p.2) which has meant that (p.3):
… there is now almost universal agreement in mainstream media and historiography that the 1970s were indeed a nightmare decade, a pressure cooker of extreme politics and economic decline, a buildup of social dysfunction that required Margaret Thatcher’s harsh monetarist medicine to purge and clean.
Everything fell apart after that in terms of how the Left perceived macroeconomics.
The next instalment in this series will complete the analysis of this turning point in history and how it has damaged the way the Left constructs macroeconomic understandings.
We will analyse the IMF loan arrangement and the famous Callaghan surrender at the 1976 National Conference. In three years, the vision of the British Labour Party had changed dramatically and it is no wonder that the likes of Tony Blair would come along and take the Party further to the right.
The series so far
This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.
The series so far:
The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.
Pressure Drop single now released
My Melbourne band – Pressure Drop – released its latest single – Take Me Higher – this week.
The track is about the inhumanity of Australia¹s detention program and calls on Australians to share rather than detain.
It is now available for sale or stream via iTunes, GooglePlay, Spotify, Apple Music or Deezer – https://noisehive.lnk.to/y8NXl
You can view the accompanying video of the track via our homepage or via YouTube – https://www.youtube.com/watch?v=CxL2EFC_0R8
Like all musicians we are hoping it is a Number 1 hit.
FINALLY – Introductory Modern Monetary Theory (MMT) Textbook
We have now published the first version of our MMT textbook – Modern Monetary Theory and Practice: an Introductory Text (March 10, 2016).
The long-awaited book is authored by myself, Randy Wray and Martin Watts.
It is available for purchase at:
1. Amazon.com (60 US dollars)
2. Amazon.co.uk (£42.00)
3. Amazon Europe Portal (€58.85)
4. Create Space Portal (60 US dollars)
By way of explanation, this edition contains 15 Chapters and is designed as an introductory textbook for university-level macroeconomics students.
It is based on the principles of Modern Monetary Theory (MMT) and includes the following detailed chapters:
Chapter 1: Introduction
Chapter 2: How to Think and Do Macroeconomics
Chapter 3: A Brief Overview of the Economic History and the Rise of Capitalism
Chapter 4: The System of National Income and Product Accounts
Chapter 5: Sectoral Accounting and the Flow of Funds
Chapter 6: Introduction to Sovereign Currency: The Government and its Money
Chapter 7: The Real Expenditure Model
Chapter 8: Introduction to Aggregate Supply
Chapter 9: Labour Market Concepts and Measurement
Chapter 10: Money and Banking
Chapter 11: Unemployment and Inflation
Chapter 12: Full Employment Policy
Chapter 13: Introduction to Monetary and Fiscal Policy Operations
Chapter 14: Fiscal Policy in Sovereign nations
Chapter 15: Monetary Policy in Sovereign Nations
It is intended as an introductory course in macroeconomics and the narrative is accessible to students of all backgrounds. All mathematical and advanced material appears in separate Appendices.
A Kindle version will be available soon (stay tuned for the announcement).
Note 1: There is a typographical mistake in the book which although not repeated might throw your understanding.
On Page 138, Equation 7.15a is written as
(7.15) Y = E = A + [c(1-t) – m]Y
and solving for Y is then stated to give
(7.16) Y[1 – c(1-t) – m] = A
however this should instead read Y[1 – c(1-t) + m] = A.
Thanks to Brian S. for picking this up.
Note 2: We are soon to finalise a sister edition, which will cover both the introductory and intermediate years of university-level macroeconomics (first and second years of study).
The sister edition will contain an additional 10 Chapters and include a lot more advanced material as well as the same material presented in this Introductory text.
We expect the expanded version to be available around June or July 2016.
So when considering whether you want to purchase this book you might want to consider how much knowledge you desire. The current book, released today, covers a very detailed introductory macroeconomics course based on MMT.
It will provide a very thorough grounding for anyone who desires a comprehensive introduction to the field of study.
The next expanded edition will introduce advanced topics and more detailed analysis of the topics already presented in the introductory book.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.