The Cash Nexus: Money and Politics in Modern History, 1700-2000

by Niall Ferguson

  At first sight, Figure 20 seems to bear out this analysis. In other words, Clinton’s own campaign watchword during the presidential race of 1992 – ‘It’s the economy, stupid’ – appears to have been vindicated by his experience in office.2

  ARE YOU BETTER OFF NOW?

  The idea of the primacy of economics in American politics antedates the 1990s, however. In 1980, during a televised debate with Jimmy Carter, Ronald Reagan declared: ‘When you make that decision [at the polls], you might ask yourself, “Are you better off now than you were four years ago?”… Is there more or less unemployment in the country than there was four years ago?’3

  British politicians too have long been economic determinists; indeed, the idea that the state of the economy could decide a government’s electoral success can be traced back as far as the mid-Victorian period. The Peelite view, inherited by Gladstone, had been that the government’s ability to influence the economy was strictly limited. In the liberal Tory scheme of things, ‘public economy was public virtue’: the aim of government should be to reduce taxation and, if possible, the national debt. Attacks on the economic policies of the Whigs in the 1840s were narrowly concerned with fiscal policy, with budgetary restraint rather than economic growth as the desideratum.4 But in the 1870s this began to change. Disraeli declared in his Crystal Palace speech of 1872 that the ‘historic function’ of the Conservative Party was ‘the elevation of the condition of the people’.5 Admittedly, it remained unclear how exactly a government could contribute to economic growth, and in practice Disraeli was inclined to use budgets to woo specific interest groups with tax ‘breaks’, rather than to boost aggregate output. The politics of the Victorian era bore out Bismarck’s observation in 1878: ‘The predominance of economic issues in internal affairs is making inexorable progress … The parties would emerge as sharply defined communities of interests on which one could count and which would pursue tit-for-tat policies.’ Whether Liberal or Conservative, they would ‘be forced to take up a position on economic questions and act more like pressure groups than they have hitherto’.6 Typical was Gladstone’s complaint after his 1874 election defeat that he had been ‘borne down in a torrent of gin and beer’, as a result of brewers’ and publicans’ opposition to his reform of the malt tax.7 This had its counterpart in the 1880 Liberal victory, which was attributed by some to the Tories’ abortive and unpopular bill to take the water companies into public ownership: hence the evergreen joke that the Tories had ‘come in on beer and went out on water’.8

  It was the 1880 election that saw the first distinctly modern attempt to attribute bad aggregate economic performance to an incumbent government. A Liberal leaflet published in Manchester entitled ‘FACTS ARE STUBBORN THINGS’ compared the numbers of inmates and recipients of outdoor relief at the Salford Workhouse ‘when Gladstone took office’ and ‘when he retired’, compared with ‘when Lord Beaconsfield took office’ and ‘on 1st January, 1880’. The figures had fallen under the Liberals and risen sharply under the Tories. The leaflet’s conclusion was ironical: ‘So much for TORY RULE with its Bad Trade, Heavy Rates & Taxes. IF YOU HAVE NOT HAD ENOUGH OF THESE, VOTE FOR THE TORIES.’9 Disraeli himself was sufficiently impressed by such arguments that he told Salisbury: ‘“Hard Times”, as far as I can collect, has been our foe and certainly the alleged cause of our fall.’10

  This might have ushered in the era of economic politics, had anyone been able to offer a convincing governmental antidote to ‘hard times’. There were, it is true, several attempts to do so. Not untypical of the mood of the 1880s was the suspicion felt by many Liberals that Randolph Churchill’s ‘Tory Democracy’ was little more than a device to manipulate economic policy for electoral ends. In 1883 the Liberal magazine Truth published a telling parody of Churchill’s approach:

  Under the paternal sway of this nobleman … we humble folk are to be given, as an equivalent for political power, better houses, a compulsory scheme of national insurance, commons, parks, museums, libraries and workhouses … The Tory Democracy, thus organised, is to put the Liberals into a minority as often as possible, and to assume office frequently for brief periods, in order to get what it can of the public spoil.11

  Churchill himself later declared that he had ‘sought for nothing – absolutely nothing – except to protect and promote [the] most material interests [of the people]’. The irony was that he wrecked his political career by offering to resign as Chancellor of the Exchequer over the ‘great question of economy and retrenchment’, exactly the issue that drove Gladstone himself to his final resignation in 1893. Another late-Victorian politician who sought to redefine politics in economic terms was Joseph Chamberlain. In 1892 he declared: ‘The most urgent questions of our era are … social questions dealing with the material condition of the great masses of population.’ He too remained entangled in older ideologies, however. His campaign for ‘Imperial Preference’ or ‘Tariff Reform’ – though couched in macroeconomic terms as a way of boosting employment – appeared to many voters little more than a return to the Protectionism of pre-1846 Toryism.12 When the Liberals revived the old slogan of Free Trade – ‘Your Food Will Cost You More’ – and juxtaposed their ‘Big Loaf’ with the Unionists’ small one, they won a landslide victory in 1906.13

  Gladstonian conceptions of free trade, sound money and fiscal orthodoxy proved so resilient that they survived even the massive expansion of state economic control during the First World War. Protectionism failed at the polls after the war as it had before; and successive governments, up to and including the 1929 Labour government, were unable to offer more than the old remedies – low tariffs, high interest rates and balanced budgets – despite the persistence of unprecedented unemployment. In 1930, as the international depression deepened, Winston Churchill declared: ‘It is no longer a case of one party fighting another, nor of one set of politicians scoring off another. It is the case of successive governments facing economic problems and being judged by their success or failure in the duel.’14 However, it was only after the abandonment of the gold standard and free trade that a counter-cyclical economic policy became possible during the 1930s; and this improvised break with the Gladstonian past required the formation of a coalition government, effectively eliminating overt party competition until 1945.

  In the post-war period two distinct models of economic management competed for power: the Labour Party’s moderate socialism, which offered nationalization of selected industries and the provision of universal welfare; and the Conservative Party’s vulgarized Keynesianism. To many voters in the late 1940s, the former came to imply austerity, in the form of continued wartime controls. The Conservatives responded in the early 1950s by appealing to voters as consumers, for the first time overtly using Keynes’s idea of demand management through the manipulation of fiscal and monetary policy as a political instrument. Typically, they saw ‘Rab’ Butler’s 1953 budget as the key to their success in the subsequent Sunderland South by-election (the first Government gain from an Opposition in thirty years).15 Perhaps no post-war politician was more influenced by Keynes’s General Theory – or rather Roy Harrod’s caricature of the theory – than Harold Macmillan; and Macmillan was quite explicit in regarding gentle inflation and low unemployment as the bases of Conservative political success. ‘Let us be frank about it,’ he famously told Bedford Conservatives in July 1957, ‘most of our people have never had it so good.’16 Two years later, the party’s election slogan was ‘Life’s Better With the Conservatives: Don’t Let Labour Ruin It.’ When the Liberals won the Orpington by-election in March 1962 Macmillan blamed his own Chancellor’s economic policies.17

  It did not take long for the Labour Party to adopt the same mode of operation. It was characteristic of Harold Wilson to fret about the coincidence of new unemployment figures and two by-elections, assuming that the former would affect the latter.18 In 1968 he told the Financial Times: ‘All political history shows that the standing of a Government and its ability to hold the confiden
ce of the electorate at a General Election depend on the success of its economic policy.’19

  By the 1970s, therefore, the idea that government popularity depended on economic performance – and that economic policy could and should be manipulated to maintain popular support – had become almost axiomatic. In July 1975 Barbara Castle gloomily concluded that ‘unemployment levels continuing at 3 per cent [sic] right up to 1978–79’ would be ‘a scenario for another Tory victory just in time for them to reap the harvest of our bitter self-sacrifice’.20 Two years later, as Wilson’s successor Jim Callaghan began to prepare for the next election, John Silkin told a meeting of ministers at Chequers: ‘People vote Labour out of hope, and lack of self-confidence is our problem. We must do something about unemployment.’ Callaghan concluded the meeting: ‘We should plan for [an election] victory … Pay is important and we might consider a standard of living guarantee. Full employment is central.’21

  The cynicism of politicians by this time is abundantly clear from the diaries of Tony Benn. On 13 September 1977 Benn ‘went to see Jim’:

  ‘What do you think about an Election date?’ he asked.

  ‘As late as possible.’

  We talked about the scale and timing of reflation and I suggested we do a bit of secret reflation. ‘We don’t have to publicise it. You said you didn’t want a pre-Election boom. Why can’t we do it quietly earlier – raise pensions, a little easement on pay, and help the public sector, particularly health?’22

  In September 1978 Callaghan wound up a Cabinet meeting by saying: ‘Don’t forget, Governments do well when people have money in their pockets. How do we do it?’23

  Though they had little else in common with their predecessors in office, the Conservatives of the Thatcher era were equally firm believers in the view that the economy was the key to political success. From ‘Labour isn’t Working’ in 1979 to ‘Labour’s Tax Bombshell’ in 1992, economic issues were central to the campaigns run for the Tories by the Saatchi brothers. According to Maurice Saatchi, there was ‘a consistent economic focus in Conservative campaigns … The Conservatives preferred a more hard-headed approach to economic matters … [They] knew how to look after your money and Labour didn’t.’24 Thatcher and her advisers ‘put economics at the centre of the Conservative critique of socialism’.25

  Of course, the 1979 Tory campaign’s emphasis on unemployment soon proved to be a double-edged sword, as unemployment soared in the wake of Geoffrey Howe’s deflationary budgets to a peak of 3.2 million, two and a half times the level the Tories had inherited. In her memoirs, Margaret Thatcher herself explained her own early unpopularity in strictly economic terms:

  The circumstances … were grim. Inflation … remained stubbornly at between 11 and 12 per cent…. Interest rates now stood at an alarming 16 per cent. Above all, unemployment continued its inexorable rise: it would reach the headline figure of three million in January 1982, but already in the autumn of 1981 it seemed almost inevitable that this would happen. Most people were unpersuaded, there fore, that recession was coming to an end … On the eve of the Party Conference I was being described in the press as ‘the most unpopular prime minister since polls began’.26

  Despite the importance of her victory in the Falklands War, Thatcher had ‘no doubt’ that the result of the 1983 election ‘would ultimately depend on the economy’. In the same way, as the 1987 election approached she saw ‘economic recovery’ as providing ‘an effective salve’ for political ‘wounds’ such as the Westland Affair: ‘Our policies were delivering growth with low inflation, higher living standards and … steadily falling unemployment.’ When the 1986 Conservative Party Conference coincided with ‘increasing evidence of prosperity, not least the fall in unemployment’, it ‘gave us a lift of morale and in the polls which … set us on course for winning the next election’.27

  Nigel Lawson, Thatcher’s Chancellor between 1983 and 1989, expressed similar views in his memoirs. He too believed that the party’s success in 1983 owed as much to the economy as to the Falklands factor. ‘An upturn in the Government’s fortunes had begun in the final months of 1981, as the recovery from the recession became apparent … the burgeoning economic recovery and the sharp fall in inflation … argued for an early general election.’ The fear that inflation might rise again in the autumn was one reason why Lawson’s predecessor as Chancellor favoured an early election. But Lawson was one of those ministers who argued ‘that we would win whenever the election was held, particularly with the economy recovering well and inflation low’.28 His chapter on the 1987 election is entitled simply ‘An Election Won on the Economy’.29

  Other Thatcher-era ministers agreed: they owed their time in office above all to the economy. Norman Tebbit explained the demise of the Callaghan government largely in economic terms;30 and his reasons for advising an early election in 1983 were entirely economic: ‘[By October] inflation would be edging up from its mid-summer low and unemployment would have begun its seasonal climb.’ In April that year ‘the best inflation figures for fifteen years’ encouraged Tebbit to press for a June election.31 Planning the Conservative campaign for the 1987 election, he ‘aimed to get the negative issues such as unemployment out of the way early and to finish on our strong subjects – the economy, taxation and defence’. Three out of the four main campaign issues he foresaw were, in other words, economic.32 Norman Fowler too saw the 1987 election as a victory based on economic success: ‘We won the election because our policies had produced low inflation, good economic growth, reduced taxes [and] more home owners … Most people felt better off and they feared that Labour would jeopardise that …’33 Conversely, Kenneth Baker summed up the government’s plight in the spring of 1989 as a consequence of economic difficulties: ‘Interest rates were high, the balance of trade was moving into the red, and the Government was unpopular.’ By the summer, ‘the economy was heading into a recession, the balance of payments was moving into the red, unemployment was beginning to rise, high interest and mortgage rates were driving our supporters away in droves.’34 The supreme economic determinist among the Thatcher ministers was Nicholas Ridley. Not only did Margaret Thatcher come to power and remain in power because of the economy; but, according to Ridley, she died by the economic sword too.

  Her personal popularity ratings in the polls was [sic] at a very low point in the autumn [of 1989]…. The single most vital electoral attribute of the Tories – that they were seen as much the best party at managing the economy – suddenly became questionable. Historically, there seems to be an almost direct relationship between the interest rate and the popularity of a government. Over a long period, the higher the interest rate the less popular has a government been in the opinion polls, and vice versa.35

  A PROBLEM FOR THE THEORY

  Yet for the politicians quoted above who were around to witness the general election of May 1997, the result was not so easy to explain. Labour’s landslide victory signified a complete breakdown of the supposedly traditional relationship between the economy and government popularity.36 The Conservative manifesto’s opening chapter was entitled ‘Doubling Living Standards’.37 The party’s key campaign slogan, ‘Britain is Booming’, was based on the assumption that economic prosperity would once again lead voters to re-elect them.38 And Britain was booming. Since April 1992, the date of the previous election, Bank base rates had fallen from 10.5 to 6 per cent; inflation had fallen from 4.3 per cent to 2.6 per cent; unemployment had fallen from 9.5 per cent to 7.2 per cent; real GDP had risen by 15.8 per cent; and average annual growth was a healthy 2.4 per cent. What is more, voters in 1997 knew that the economy was doing well. An opinion poll published on 24 April, a week before the election, showed that nearly half of the electorate agreed that ‘the Government has built strong foundations for Britain’s recovery’. Unfortunately for the Tories, however, only a fifth of those polled believed that they deserved to win.39 Although they managed to reduce considerably the Labour lead between December 1994 and the election, the Cons
ervatives’ share of the vote still fell by nearly 11 per cent, and the number of seats they held in the Commons fell by 170. ‘Recessions … destroy governments,’ the former Deputy Prime Minister Michael Heseltine was heard to declare in February 1999.40 But it was anything but a recession that destroyed the Major government.

  Predictably, economic commentators struggled to make their models fit the facts. According to the Institute for Fiscal Studies, although it was true that incomes had risen since 1992, they had not risen by as much as in previous electoral periods. After tax, the real income of an average family with two children had risen by £765 a year between 1991 and 1996. But the figure for the period 1983–7 had been twice as high and that for the period 1987–92 three times as high. There was, in short, not enough ‘fuel for the feelgood factor’ in 1997.41 The journalist Will Hutton argued that the ‘success’ of the economy since 1992 was superficial: nothing had changed in the ‘underlying performance of the economy’, and voters recognized this.42 A third theory advanced was that the Conservatives had simply not been forgiven for the economic mismanagement which had resulted in the 1990 recession and the 1992 departure of sterling from the Exchange Rate Mechanism.43 This indeed was the explanation offered by the principal architect of the Conservative campaign:

  Only one thing changed between the 1997 election defeat and the four election victories that preceded it. There was a 40 point turnaround against us, from +20 to -20, in answer to the standard … question: ‘With Britain in economic difficulties, which Party has the best policies for managing the economy?’ The only thing that changed between victory and defeat was the perception of the parties’ relative economic competence.44