The secret history of inflation, from Black Wednesday to Brexit

Britain’s struggle with monetary policy has not just had economic consequences: it is also a key source of the Euroscepticism that has brought us to crisis

This month sees the 20th anniversary of the granting by New Labour of independence to the Bank of England.

It was not full-scale independence but “operational independence” in monetary policy: that is, the freedom to change interest rates without having to consult the chancellor. The Bank is still the Treasury’s agent in other matters, such as decisions about the nation’s currency reserves.

The Strand Group at King’s College London held a high-powered conference to mark Bank independence last week: but against the background of elections and all this Brexit nonsense, the anniversary of what was a controversial event at the time seems to have passed non-aficionados by.

I myself was against the move at the time, and while hardly anyone questions the idea now, I am still inclined to take the Zhou Enlai view. This is a reference to then Chinese premier’s reply in the 1970s when he was asked what he thought the consequences of the French Revolution had been. He famously replied: “Too early to tell.” This has gone down in fake history as a witty reference to the events of 1789, but an official who was present said Zhou was actually referring to the riots in Paris in 1968.

Even critics of Gordon Brown give him, and his economic adviser at the time, Ed Balls, credit for making the Bank independent in this area.

It is noteworthy, however, that most of the Brexiters who go on about parliamentary sovereignty seem to have no qualms about placing decisions in the hands of unelected officials.

The granting of independence was the final resort of British policymakers in the long, and losing, battle for Labour and Tories alike to control inflation. Both parties had problems with incomes policies in the 1970s. The Tories brought monetarism from 1979, but that failed – indeed, the doctrine was even subsequently disowned by Milton Friedman, its most prominent advocate. Then came Chancellor Lawson’s obsession with the success of the Germans in controlling inflation; his instrument was to be membership of the European exchange rate mechanism. When Margaret Thatcher vetoed that, Lawson directed the Bank to intervene in the foreign exchange market so that the pound “shadowed” the Deutschmark.

When he was rumbled, there was hell to pay, ending with Lawson’s dramatic resignation in 1989. Ironically, after Lawson went, Thatcher was finally worn down a year later, and the pound joined the ERM in 1990.

Membership of the ERM then ended in sterling’s ignominious exit from the mechanism on Black Wednesday, 16 September 1992. Amazingly, the British establishment did not seem to be aware of what the Germans knew only too well: namely that the historic reunification of Germany at around the time we joined the ERM would have serious inflationary consequences, because of the massive cost of absorbing the run-down East German economy. It was exactly the wrong time to subject Britain to what was effectively German monetary policy.

John Major was prime minister, and he took the rap. Now, although some fanatics had been trying to reverse the result of the 1975 referendum (a two-to-one verdict in favour of remaining in the EEC we had joined in 1973) from the start, we can really date the onset of the cancerous growth of Euroscepticism in the Conservative party to the early 1990s. The general election of 1992 saw the end of the dominance of pro-Europeans in the parliamentary party and the rise of what the beleaguered Major termed the Eurosceptic “bastards”.

Meanwhile, after the ERM, the next supposed panacea for British inflation was central bank independence. While this period has coincided with low inflation, it has not necessarily caused it. Most industrial countries have had low inflation in recent times.

However, central bank independence is but a sideshow when it comes to the major economic crisis of our times, which is the prospect of Brexit.

Which brings us to David Cameron. I gather that Samantha Cameron has been quoted as saying words to the effect that “Dave can rationalise himself out of anything”. To judge from reports of what our former prime minister recently said in Kiev, he is rationalising his disastrous decision to hold a referendum on the grounds that the Euroscepticism that was poisoning the Tory party had to be addressed.

Well, it is an open question whether the poison has been neutralised. Quite apart from that, we are in the lamentable position where a Tory party that used to have the national interest at heart is now sacrificing everything to its own preservation. Yes: thanks to Theresa May’s lame acceptance of the result of a referendum conducted on a false prospectus, the poison has now spread to the nation at large.

We have a government that really is, in Angela Merkel’s word, “delusional” about squaring the circle: obsessed by the immigration she failed to control at the Home Office, May wishes to leave the customs union and the single market while cherrypicking her way back into the best bits. This is impossible. As often happens, the people running this country do not seem to realise that our continental partners have their own interests, and tend to say what they mean.

It is not too late to rethink. My old friend Lord Kerr, who drafted article 50 of the Lisbon treaty, says that it is not irrevocable. It is reversible. There is still an opportunity for our leaders to see sense, and own up to the people.

I know the people have spoken. They spoke in 1945 and said one thing, and in 1951 and said another. Throughout the 1960s, the 1970s, the 1990s and the first decade of this millennium, they said one thing, and then another. To coin a phrase: it is a people’s privilege to change its mind.


William Keegan

The GuardianTramp

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