In 1973, the economist Charles Kindleberger made the now common-sense argument that currency crises demand ‘counter-cyclical’ policy responses: if there is inflation, spending must be reigned in and taxes levied to withdraw money from the economy; if there is a recession, spending must be raised and taxes reduced to boost the recovery, which would fund itself. In the Great Depression, this did not happen: the recession was met with limited spending by governments due to a reluctance to deviate from the constraints of the gold standard, according to which currencies could not fluctuate significantly without losing their gold pegging and thus their international credibility. The abandonment of the gold standard in the 1930s was too little, too late, with the preceding economic devastation leading to political upheavals that fuelled the fires of military competition and totalitarianism. The consequences of mismanaging economic crises are severe — politically, socially, and morally. Such is the case with today’s economic crisis of nation-states emerging from pandemic lockdown conditions, as 1920s-style inflation grips us once again, albeit in muted form. The 1922 Genoa Conference led to the restoration of the gold standard and the stabilisation of currencies; but when financial panic hit in 1929, these anti-inflationary measures fuelled the fires of the world in depression. Countries do usually wake up to their economic situation — but usually when it is much too late to make much of a difference to the lives of ordinary people, who suffer the consequences of policy blunders. Such is the case today, as UK Prime Minister Liz Truss’s tax-cutting policies have exacerbated the inflationary spiral in which the UK finds itself — directly in contravention to Kindleberger’s sage advice to counter the cycle and create the conditions for stability. Why is this happening? And what could rationalise such a policy blunder?
There are two reasons, from ironically different quarters. Firstly, Liz Truss is personally inspired by Margaret Thatcher’s tax cuts after winning power in 1979, cuts which were reversed after causing a recession in 1980-1, just in time for the 1982 re-election, when restored Keynesian taxes brought Thatcher back to office — only to resume the ‘neoliberal’ restructuring of the economy through a steady diet of deregulation, privatisation, and tax relaxation. This reflects Friedrich Hayek’s theory that, after the Great Depression, the advice of John Maynard Keynes to follow a strictly national model of economic rejuvenation was followed to a fault. Too much power was vested in the state and its power; the market and the profit margins of entrepreneurs suffered. Of course, this didn’t actually happen — capital enjoyed militarism immensely, reaping the benefits of monopolistic industry. After World War II, small businesses returned, and high taxes on the rich went hand-in-hand with high economic growth. The ‘welfare state’ that the ‘warfare state’ created lasted under a dollar-gold pegging which protected countries from inflation. But after capital broke free from these ‘golden fetters’ in the 1960s Eurodollar market, President Nixon felt compelled to drop the dollar-gold pegging in 1971, precipitating a decade of ‘stagflation’ as oil crises coupled with capital mobility to produce currency crises around the western world. To tame the ensuing price inflation, President Carter appointed Paul Volcker to chair the Federal Reserve in 1978, tackling inflation with interest-rate hikes that raised unemployment and inequality alike, facilitated by the election of Ronald Reagan in 1980 to accompany the global growth of Thatcherism, or neo-Hayekian market economics. Capitalism was back with a vengeance, and to hell with the consequences for those on the bottom of the new state-backed pyramid scheme, the ‘market economy’.
But to speak less prosaically, Thatcherism immediately toppled the value of sterling against the dollar, before the temporary restoration of Keynesian policies ushered in the new wave of neo-Hayekian deregulation in the mid-1980s. Even more impressively, Thatcher succeeded in converting Labour to the cause, with Tony Blair embarking on a regime of maintaining financial deregulation and encouraging privatisation while softening the blow on the poorest. The consequence was a new financial crisis in 2007-9 brought about by Anglo-American banking deregulation (aided by the Bill Clinton administration’s passage of the Glass-Steagall Act to reverse Depression-era banking regulation). The temporary stimulus packages of the Brown and Obama administrations helped the world economy stay afloat, supported by supermassive stimulus from China (whose savings glut contributed to the American banking glut and Treasury burden), but the ensuing attempts by Obama/Biden in the US and Cameron/Clegg in the UK to roll back government stimulus in the 2010s contributed to fears of a new debt crisis at the end of the decade. In the event, another wind from the east — coronavirus 2.0 — travelled from China to the rest of the world and created the conditions for a new Keynesian moment, where state spending to save the pandemic lockdown economy from total financial and productive meltdown succeeded in averting a grave depression. As we emerge from this moment, inflation is returning with a vengeance, and the Federal Reserve’s old plan to maintain low interest rates is coming up against the constraints of a new 1970s-style economy.
That’s right, Liz Truss wants to bring back the 1980s to save us from the new 1970s. To avert inflation, Truss wants to resurrect Thatcher’s U-Turn in order to push through Hayekian policies without costing her leadership. By restoring mild taxes after briefly embarking on a kamikaze attack on the British economy with tax cuts and spending stability in a time of inflation, Truss neutered the initial market panic, while opening the door for future Thatcherite policies with a new Chancellor, Jeremy Hunt, after the ideological point was made to a fault by newcomer to the front bench, Kwasi Kwarteng.
At this point, I would suggest Truss may, unfortunately, seek to shore up public support through military aggression, as Thatcher did over the Fawklands. But to avoid furthering the analogy, I would like to comment on the paradigm of thought that has accompanied the neo-Thatcherism we see today. This paradigm is the Cambridge School of political thought, whose current political representative Kwasi Kwarteng undertook a PhD in economic thought under notable economic historian István Hont in the 1990s. The thesis was published at the turn of the Millennium. It is entitled, ‘The political thought of the recoinage crisis of 1695-7’.
I will be reading this thesis and commenting on it shortly, but before I do I’d like to make a few brief observations. István Hont published a book in 2005 entitled Jealousy of Trade, echoing David Hume’s argument in the eighteenth century about the passions of economic life in early-modern market society. Hume also made a case for a closed system of gold-backed money, where gold inflows into a country produce a rise in prices that leads gold flows to stabilise. Symmetrically, gold outflows will lead prices to drop and attract gold back in. Of course, what if this doesn’t happen naturally, and artificial controls have to be introduced? This is exactly where Kwarteng’s thesis comes in about the situation at the end of the seventeenth century, when silver constituted the main valuable metal underpinning the currency.
But we don’t live in that world of metallic money. Currency today is floating and not pegged to either the dollar, or silver, or gold. So currencies float their values according to their credibility to international capital — and almost nothing else. Capital itself has become the new gold standard according to which economies are measured — and, in turn, economic policy. But ironically, defenders of this system do not necessarily intend to do whatever will boost capital’s attraction to the economy in the short term — for capital immediately flees disorder, and change is always disorderly, especially if it violates every economic maxim about ideal crisis response. Capital may be drawn to lower taxes, but it flees higher inflation. Truss’ bet was seemingly that the Federal Reserve would raise interest rates to contain inflation to protect the British economy from its government’s at once reckless and ambitious policy. But equally her bet may have been to put it on her Chancellor, all along. Then again, much like Thatcher, she may just be making it up as she goes along. After all, if Hayek’s advice to the Thatchers of the future boils down to one word, it is this: spontaneity.