Book Review: Decline to Fall – The Making of British Macro-Economic Policy and the 1976 IMF Crisis, Douglas Wass, 2008, Oxford University Press.
This is a most fascinating book written by a civil servant that was advising the Chancellor of the Exchequer (Treasury Secretary) during one of Britain’s financial crisis. This particular crisis I remember vaguely as it was the crisis that paved the way for Margaret Thatcher to emerge a few years later. The book is densely written and tends to keep referring to sections to follow (an annoying habit) but once you follow the story (it is written chronologically, mostly, through 1974, 1975 and 1976), it is well worth the time. The detail shared is welcome, not tedious, and quite simply fascinating.
What you are left with is an understanding for how easily, accidentally almost, a wealthy developed nation got itself into an economic and financial bind it simply could not get out of. You have to remember that in the 1970’s, Keynesian ideas were still dominant and monetary ideas related to inflation and supply side policy were only just emerging. The tools to hand where the same – interest rates, exchange rates, taxes, incentives, trade barriers, credit etc – but the goals being targeted were different, and the understanding for how the tools drove toward, or away, from those goals were not fully understood. At one point we are told that ministers of the day realized that the models they used were not likely to predict how things were going to play out. No kidding.
There were some pretty damning issues to deal with. The Trade Union Congress (TUC) or unions were very strong at this time and wage bargaining was a national sport that the unions won regularly. Looking at the data in the book (there is not too much of it, thankfully) you get the feeling that the TUC was guilty of being the main driver for a terrible run up in inflation that is hard to understand in today’s low inflation era. Collective bargaining was anathema to effective inflation management: there was little connection to productivity or merit, and a huge swathe of industry was tied to the same goals. Thus the country entered this period with a wholly ineffective and misaligned understanding for how to pay for its own way. The country was paying beyond its means and was uncompetitive in the global economy. A Labor (Democrat) government came to office and tried to bargain with its paymasters – and to some degree it worked. The previous government’s national incomes policy (a response to out-of-control collective bargaining) was not reinstated and voluntary wage claims finally brought inflation down from over 20% to closer and just under 10% but it took too long to achieve and was too late to avert disaster. The damage to the economy had been done years before the crisis for which this book was written was to appear.
Due to the lack of manufacturing competitiveness and the changing role of sterling in the global economy since the two World Wars, the trade balance was pretty much set to go in one direction only: negative. The current account was almost always negative and exchange reserves were dwindling. It just so happened that Britain, an open market, global trading nation, was able to obtain credit from a mature banking system and able to fund its excesses in consumption over exports and production. They key of course was confidence, and that currency (along with sterling) was running out. This led to several runs on sterling and frightening drops in exchange reserves. At one point the Bank of England literally withdraws from the market and is told by the government to stop support sterling. There are interesting stories abound of actions taken that created unintended, and sometimes positive, outcomes – some related to how the pound was “saved”.
The final aspect that is fascinating to read concerns public sector spending and the lack of method for how it is planned, and the collective lack of discipline for how it is managed. Again, this is the 1970’s and developed nations are learning as they go. But there was clear indiscipline here – for several years the actual public sector borrowing requirement (PSBR) was exceeded and not only by unforeseen circumstances – ministers just over promised when the cupboard was bare as if the results was not going to matter to anyone. They did not run the government as if it was their own household.
The result was a bail out. The government had to go “cap in hand” to the IMF to set up a loan, supported by the US and Germany, to help create the confidence in the market. It worked: the exchange rate recovered; sterling inflows to the central bank increased and reserves grew; PSBR was brought down as wage restraint was achieved. The “solution” worked but overall the UK economy was in dire straits. Though the UK paid off its debts to the IM, the next few years were not that much better than during the crisis. Union power reasserted itself and this led to additional economic challenges that troubled the economy for years. In 1979 the Conservatives (Republican) took office with a clear mandate to curtail the unions and try to put the economy onto a sure footing.
This long but exciting book is recommended for students who want to understand the UK during the 1970’s. Very recommended: 9 out of 10.