Saturday, November 8, 2008

The real history of the Great Depression in Britain

By Dominic Sandbrook

Keynesianism did not, as is often imagined, put an end to the Great Depression. Indeed, the record of big-spending governments during hard times is not one to be proud of.

John Maynard Keynes was, at first glance, an unlikely candidate to become one of the great icons of Left-wing politics.

Born in 1883 to a Cambridge economist and social reformer, he was brought up in an atmosphere of high-minded privilege.
Eton and Cambridge, where he got top marks, gave him social gloss and academic distinction.

He was no scholarly drudge, though, but a lover of beauty and pleasure. (Asked on his deathbed, in 1946, whether he had any regrets, he was said to have remarked: 'I should have drunk more champagne.')

By 1925, Keynes was building a reputation as the most brilliant and controversial economist in the western world. After advising the Government during World War I, he seized attention in 1919 with an attack on the Treaty of Versailles, arguing (correctly, it turned out) that its punitive terms were bound to provoke a terrible German reaction.

And during the Twenties he cemented his image with a series of onslaughts on economic orthodoxy, chipping away at the three pillars of the old order - the Treaty, the gold standard (the system whereby bank notes were literally exchangeable for gold) and laissez-faire government, the economic ideology which advocates minimal state intervention.

But one of the great myths about Keynes is that when the Wall Street Crash sent shockwaves through the world economy in 1929, politicians seized on his ideas as a solution to the Depression. They did nothing of the sort. For although Keynes' brains were highly regarded, he remained a heretic.

His trademark notions - government borrowing and spending on public works to boost demand and alleviate recession - were unpopular on both sides of the political divide.

Although Ramsay MacDonald's Labour government brought him on board in 1930, it did not take up his prescriptions. For as a Whitehall joke at the time had it, if you asked five economists for their opinions, you would get six replies - two of them from Keynes. And when a major committee asked his advice on solutions to the Depression, he gave no fewer than seven different answers.

In fact, it was only at the margins of British politics than Keynesianism, as it eventually became called, really caught on.

Then, the most distinguished champion of government spending in hard times was the former Liberal Prime Minister David Lloyd George, one of the most dynamic and charismatic speakers in the country.

But Lloyd George was a political pariah, his image besmirched by a cash-for-peerages scandal and his private reputation damaged by a string of sexual misdemeanours.
Even many Liberals hated and despised him. 'The Goat', as he was called, was far from the ideal person to sell Keynes's radical economics to the political establishment.

Yet Keynes's biggest political admirer was even less salubrious. During the Twenties, he had met a dashing young Labour politician, Sir Oswald Mosley, and it was he who made the most determined effort to introduce Keynes' ideas into British economic life.

As early as 1925, Mosley was arguing for nationalised banks, an economic council and centralised planning for full employment. And in 1930, Mosley, who was then a minister without portfolio outside the Cabinet, presented his famous Memorandum to the Labour Cabinet, recommending 200 million pounds of public works and social spending to kick- start the economy into recovery.

This was Keynesianism pure and simple - and the Cabinet rejected it. To most Labour ministers, borrowing money to throw at public works during tough times smacked of profligate irresponsibility.

Mosley promptly flounced out of the Government and ended up founding the British Union of Fascists, horrifying his old friends and colleagues. He remained an admirer of Keynes's ideas, though - as did his great friend and mentor, Adolf Hitler.

Indeed, if there was one government that did embrace Keynesianism enthusiastically in the Thirties, it was Hitler's Germany - where borrowing, spending and public works were the foundations of the Nazis' economic appeal in a country ravaged by the Depression.

In Britain, meanwhile, Keynes remained a prophet crying in the wilderness. When the Labour government fell from office in 1931, ripped apart by the economic crisis and replaced with a National Government run by MacDonald and Conservative leader Stanley Baldwin, Keynes was not impressed. He thought the Tories' ideas were 'medieval' and despised Baldwin's 'stupidity'.

And he was even less impressed when the first thing the National Government did was the exact opposite of what he recommended - slashing spending and ruthlessly pruning unemployment benefits to impress the markets.

And yet the common image of the National Government, supposedly a cabal of rich, hard-faced men watching with callous indifference as millions of workers in flat caps trudged through the streets looking vainly for work, is complete nonsense.

Indeed, the very idea of the Hungry Thirties is largely a myth. By comparison with most countries, Britain escaped the Depression relatively unscathed.

Unemployment did rocket, hitting a terrifying 23 per cent in January 1933, but then it quickly fell back to pre-Crash levels. Wages remained high and, for those people still in work, life was better than ever. And as early as the end of 1933, while Germany and the U.S. were suffering the worst throes of the Depression, Britain was already in recovery.

What was the key, then, to Britain's escape? It was certainly not Keynesianism - for Keynes's ideas were never tried.

The key economic figure in the National Government, Chancellor Neville Chamberlain, was a strong believer in protectionist tariffs and tight money. Despite this, he was a keen reformer, setting aside cash for unemployment benefits, health and housing, but he drew the line at borrowing millions of pounds to spend on public works.

And although he approved a programme of aid to depressed areas, notably the coalfields of South Wales and Tyneside shipyards, it cost a tiny 2 million pounds - a hundred times less than the programmes Keynes and Mosley had envisaged, and nowhere near enough to make a major impact.

In fact, the real key to Britain's recovery was probably the moment in September 1931 when the pound, battered by speculators, was forced off the gold standard. Until then, the Bank of England had been compelled to keep interest rates high to maintain the ludicrously elevated value of sterling.

But as investors lost their faith in the pound at the height of the Depression, the Bank finally gave up the fight and abandoned the gold standard. Now there was no need for the cripplingly high interest rates and by June 1932, bank rates were down to a barely noticeable 2 per cent - the ideal level to stimulate a recovery driven by private enterprise.

For while industrial areas, especially in the North, Scotland and South Wales, were suffering from the collapse of international demand in the Depression, the paradox is that many people had never had it so good.

As even a socialist like George Orwell was forced to admit, when contemplating the popularity of the cinema, gambling and High Street fashion in Wigan, Britain in the Thirties was an increasingly affluent society. 'It is quite likely that fish-and-chips, silk stockings, salmon, cut-price chocolate, the movies, the radio, strong tea and the Football Pools have between them averted revolution,' he grumbled.

As a result, as early as 1935, the Depression in Britain was virtually over. By contrast, the U.S., where government intervention - in line with Keynesian thinking - was much more pronounced, did not begin to recover until the outbreak of World War II.

While President Franklin D. Roosevelt's innumerable government schemes and unprecedented welfare spending undoubtedly protected Americans against the ravages of poverty and unemployment, they certainly did nothing to bring recovery.

In many ways, the New Deal, with its obsession with government control over the economy and money supply, intervention to control prices and agricultural production among myriad social projects, was a terrible advertisement for big government. For when businesses should have been investing for the future, they were defensive and angry, their confidence shattered by Roosevelt's attacks on them.

The great myth about Keynesianism, in other words, is that it was tried in the Thirties and proved successful. In fact, Keynes did not publish his landmark General Theory until 1936, and his ideas did not take hold among senior Tory and Labour politicians until the Forties.

And in the years after the war his complicated theory of demand management was gradually diluted into a recipe for government spending, with prime ministers such as Harold Macmillan and Harold Wilson printing money rather than facing up to the realities of Britain's industrial decline.

By the mid-Seventies, the result was rampant inflation, soaring unemployment and a bloated, bureaucratic public sector, prompting Labour's Prime Minister Jim Callaghan to issue a famous repudiation of Keynesianism. 'We used to think you could spend your way out of recession by boosting government spending,' he told his party in 1976. 'I tell you, in all candour, that option no longer exists.'

Callaghan's words marked the end for Keynesianism in Britain - which makes it all the more surprising that it is making a comeback.

But while even Keynes's critics, such as the monetarist Milton Friedman, acknowledge that he was a brilliant economist, it would be a dreadful mistake to turn back the clock to the theories of the Twenties and Thirties.

In fact, as a die-hard Liberal who hated socialism and supported capitalism, Keynes thought of government intervention only as a last resort. He never envisaged a public sector on the scale we have today and would be horrified by the current regime of welfare entitlements.

What is more, he never anticipated the problems of soaring world commodity prices and massive inflation, which is why Keynesianism collapsed in the Seventies.

His admirers insist that he would have tackled the problem of inflation had he not died in 1946 at the age of 63 - but this only hammers home the point that, at best, his theories were a work in progress, not the definitive answer to the world's ills.

Above all, Keynesianism was the product of a world of national tariffs, protectionism and jealously guarded economic sovereignty. In a globalised world when governments badly need to win the confidence of international exchange markets, the idea of heedlessly borrowing and spending your way out of recession is as outdated as the films of George Formby and Gracie Fields.

The crowning irony, though, is that Keynes himself would have been the first to mock his new admirers. A daring nonconformist who loved to poke fun at conventional wisdom, he would have shuddered at the thought of dusting down the orthodoxies of the past instead of thinking up solutions based on changed global realities.

In other words, Keynes would have been no Keynesian. For as he rightly put it, politicians are never so ridiculous as when they make themselves 'the slaves of some defunct economist'.

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