The Atlantic and Its Enemies

by Norman Stone

  Since the great Slump of the 1930s, government regulation in the US had followed government regulation. Banks had got themselves a bad name, and thousands collapsed, the managers running away with people’s savings, in some form or another. There always had been a dislike of money-out-of-money people in the United States: Jefferson thought, for instance, that Hamilton’s proposal for a Bank of the United States was intended to restore the monarchy; Andrew Jackson was similarly ill-disposed; William Jennings Bryan famously denounced the ‘Cross of Gold’ upon which honest farmers were said to be crucified. It was easy enough in these circumstances to make a great fuss about crooked finance, and it was no doubt true that behind every fortune lies, if not a great crime, as Balzac claimed, at least a few corner-cuttings. When things went well, these passed unnoticed. When things went badly, various highly placed money-men were found out. Regulations of a fairly stringent sort were then imposed by the Roosevelt administration to make sure that banks did not do it again: ‘the money-changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truth,’ said Roosevelt. This was not really fair. The causes of the great Slump of the 1930s went far beyond the crimes or corner-cuttings of some money-men. It was the high priests themselves who had done for the alleged ancient truths — an absurd tax increase in 1932, in mid-Slump; an absurd tariff, Smoot-Hawley, which had destroyed foreign trade in 1930; a grotesque mismanagement of the money supply and the arbitrary shutting down of 6,000 banks; a pig-headed unwillingness to value gold properly and thus provide internationally valid credit; an equally pig-headed obstinacy as regards Europeans’ paying their war debts promptly and in full, while at the same time discrimination went ahead against their exports. In such a context — it destroyed parliamentary democracy almost everywhere — the crimes of some money-men amounted to small beer. However, they caused an irresistible demand for regulation. The same happened over housing. The ‘thrifts’ took money from savers and lent it to mortgagers, i.e. borrowing short and lending long, with an easy profit margin and a foreseeable income, but through a ‘Reg Q’ which limited the interest that they could charge for mortgages. The inflation of the seventies knocked the props from the system: the existing interest rate on mortgages could not be pushed upwards to match the fall in the value of the dollar, and savers clearly would not keep money in any bank if they wanted to preserve its value — they would look for higher interest elsewhere (the bonds sold by private companies or even the government), or they would switch into gold, or something that would not go away. By 1978 the amount of money in funds tripled, to almost $10bn, and reached over $40bn the following year (and in 1982 over $235bn). In 1980 the thrifts asked for help, as they lost funds, and ‘Reg Q’ was abolished. The ‘thrifts’ were allowed to invest beyond home mortgages, even offering credit cards, and there was, later, a similar relaxation in Great Britain for the equivalent, the building societies. Bricks and mortar, greatly rising in value, offered apparently solid collateral, and pyramids of credit then built up on that basis. But such deregulation happened elsewhere, and banks became free in ways that they had not been since 1932. By 1985 there was lamentation in advanced educational institutions to the effect that economics, business schools and banks were attracting far more students than ever before. A classic of this period, Michael Lewis’s Liar’s Poker (1989), reveals the world of Salomon Brothers. He had been a graduate student at the London School of Economics, despised the concentration at his native Prince-ton on two-dimensional economics, but, almost by chance, was wafted into a world in which his starting salary was twice that of his professor, and then made cruel mock of the whole greedy and stupid business of the bond market. Tom Wolfe’s Bonfire of the Vanities remains the outstanding novel of the decade and perhaps even the half -century. He too had made his observations on the trading floor of Salomon Brothers, once a rather staid and safe Wall Street house, turned into a sort of perambulatory worldwide casino.

  The money thereby let loose might well be directed towards assets held by the State — in most countries, many. Here, again, was one feature that made the Thatcher government stand out, abroad as well as at home — privatization. In the later nineteenth century, most enlightened people had wanted the essential pieces of the economy — water, railways, etc. — to be run by the State, especially if the companies running them were foreign, as was the case in, say, Russia. In old Austria, trains were stopped at the border because the company had not paid some debt or other. In England such private companies went on for longer than elsewhere, especially France, but in the course of the world wars the State moved in, and by 1979 the ‘commanding heights’ — ports, steel, aircraft, railways, etc. — had been taken over. It was now the State’s turn to experience criticism, and there were even attempts to explain theoretically (‘public choice’) why there was such truth in Nietzsche’s great line, ‘What the State has is theft; what the State says is lies.’ Why theorize? Anecdote existed, in mountains, to bear him out. Even the recipients of ‘benefit’ in Oxford went on a sort of reverse strike at the slipshod and inhuman ways in which they were paid their cash (1984). However, as any government had discovered when it came to privatization (Konrad Adenauer had tried it to a very limited extent), there were very severe difficulties. The arguments against privatization (it should really be called ‘re-privatization’) were considerable, and who would want to take over these tremendous loss-makers, with their in-built over-employment, incompetent or demoralized managers, huge debts and gigantic pensions commitments? As regards education or public health, there was also a very great political problem: the National Health Service in Great Britain, giving medical care at any level for nothing (at any rate in appearance), could hardly be reformed without patients’ having to pay something directly, as happened in, say, Spain or Sweden, but any government suggesting this would have lost the next election, or three. There was a possible halfway house, of introducing what was supposed to be ‘internal competition’, but Nigel Lawson, a chief privatizer, aptly quoted the saying that applying private sector discipline to the state sector was equivalent to painting stripes on a donkey and calling it a zebra. In time there was to be a cavalry charge of such donkeys in British higher education and the health service, but privatization, otherwise, went ahead in areas that greatly deserved it.

  An element of luck supervened. The nationalized industries had no admirers, and the only arguments of substance concerned what had gone wrong: the nature of the beast? Unions? Management? Inflation? At any rate, privatization, to begin with, was just a way of raising money. Steel, coal and Leyland dominated the early agenda, as these cost taxpayers £300 each (in 1995 money). In 1982 a few small things were sold off, such as government shares in British Petroleum and the National Freight (lorry) company. Then, with Lawson as Chancellor in 1983, half of British Telecom was sold off: an enormous success, amounting to the largest equity offering in history. The shares were undervalued, and buyers had to be rationed, but they made windfall profits at the same time. One of the early charging donkeys was also a low-level loan scheme for students who would then pay low-level fees to their universities (less than their parents would have paid for a few weeks in a crèche). Bright undergraduates took the loan, bought the shares, sold them and paid off the loan at a profit. In 1984-5 assets such as railway hotels were sold off, with beneficial results, and the nationalized industries were told they might raise prices (and they even made a profit in 1989). By 1989 half of them had gone to shareholders, and 650,000 workers left state employment, nearly all with shares. As the journalist Simon Jenkins says, ‘the biggest transfer of assets out of state hands in the history of democracy’ was the sale of council housing — 1.25 million people were able to buy their dwellings from the local council, instead of paying ‘social’ rents which, though in themselves sometimes ridiculously low, represented a trap: immobility, no capital. In the ‘projects’ (the American equivalent) of a Liverpool or a Manchester, single mothers live
d without cost, but also without hope. Selling off such housing was a creative step. Great Britain again became a pioneer, but again suffered for it, in that mistakes were inevitably made, which other countries, following, would know to avoid. Water, gas, Telecom, though prepared for privatization, were not groomed to expect competition — they would in effect be monopolies, and BT soon showed that it could fall behind others. Regulation was heavy-handed, and Ferdinand Mount correctly noted that the degree of regulation and public subsidy was such that what in Britain was called ‘private’ would probably have counted as ‘public’ on the Continent. The later privatization of the railways was near farcical (and Mrs Thatcher herself had always opposed the scheme, as too complicated): it would have made more sense just to concrete over the railways and substitute buses on the roads thereby acquired to a central terminal. Mobile telephones worked less well and more expensively in England than they were to do in Azerbaidjan. However, no-one really knew how privatizations should be executed; the Treasury was only interested in taking the money, and reducing the annual borrowing figure; the privatizations were rushed and the shares were undervalued. Rolls-Royce shares were nine times oversubscribed, ports thirty-four times, British Airways twenty-three times, at a cost of £25m to the taxpayer. However, this was uncharted territory, so mistakes would be made. At the least, regulation did become more open and there was an obvious gain in efficiency as against the old, dreadful, days. That managers’ salaries now reflected private sector ones of course created some adverse comment, but the overall degree of efficiency was noted later on. In the old days, nothing had worked and no-one had earned anything.

  As the ‘high eighties’ went ahead, a great wave of money swept over the Atlantic world, and the outcome was a long boom — ninety-two months of growth, compared to fifty-eight in any earlier period (outside wartime, as with the Vietnam era). No recessions got in the way of the compounding of growth: 1984 was spectacular enough — almost 7 per cent growth — but the other years are remembered for the extraordinary prosperity of the Atlantic world. Geoffrey Owen, an expert on this dismal subject, shows how even the motor car industry was recovering. In 1984 Toyota and Nissan were adopted and invited, and Michael Edwardes could simply close the hopeless Merseyside plant. Jaguar was privatized, and some of the excessive manpower was at last shed, but the new models were still not much of a success (even in 1986 there were of course industrial-policy Conservatives arguing for continued support) and in the end the Japanese were brought into north-eastern England to show the way forward. Honda-Nissan insisted upon a single-union agreement, as did Toyota-Honda at Swindon. By 1997 output was 1.7 million cars and exports accounted for a million of them. The world of the sixties albatross had at last been overcome, but essentially through foreign management. By 1988 100,000 new firms were registered. As Bernard Connolly remarks, ‘the bullishness of the country’ became visible. Business investment rose by 20 per cent. The adaptation of advanced computers to financial transactions somehow catapulted London back to the centre of the world’s money, and as the bond market got under way, older divisions between deposit banks, operating on classic old-fashioned lines, and investment ones, involved in speculation, were elided. In October 1986 came an important moment, deregulation of the City, otherwise known as ‘Big Bang’, such that old-fashioned banks and stockbroking firms gave up their staid ways. Venerable (and well-run) establishments such as Lawrence, Prust were bought up by a Deutsche Bank anxious to escape from the stuffy confines of Frankfurt, where, it was said, there was a night-life, but she went to see her aunt on Tuesdays. In New York and London the money poured in, and in the British case Alan Walters himself called it a ‘miracle’, comparable with the earlier German one, for there had been steady growth since 1981, weekly earnings had risen by 14 per cent in real money between 1983 and 1987, and inflation had been held below 5 per cent.

  However, as the money poured into government coffers, what next? It mattered that Margaret Thatcher was now a world figure. As with an American presidency, the possibility always existed that a British Prime Minister would escape into foreign affairs. To begin with, she had been rather contemptuous of these international gatherings — what had begun as a decent enough idea for small, informal gatherings soon degenerated into a media circus, and at meetings of the G7 the final communiqués would be drafted before the people had even met. Photographs and television images with foreign leaders were thought (mysteriously) to win votes. Besides, abroad there was sometimes adulation — none of the abuse shouted back home. Patriotism could be on display, without any sniggering. It also mattered that NATO had come under considerable pressure. In 1982 there was a great fight over the placing of intermediate-range ultra-modern missiles on European soil, and vital countries, Germany, especially, saw enormous demonstrations against this, a matter in part of KGB manipulation which Bukovsky, from Politburo documents, was able to demonstrate. In this atmosphere of the ‘Second Cold War’, as commentators called it, the transatlantic link became all-important. Margaret Thatcher took her eye off the domestic ball, and moved on to what appeared to be a much larger one, foreign affairs. Instinctively, she did not like the Foreign Office: it was too ‘European’, talking platitudes, and inclined not to be as fervently Atlantic as she was. If the Americans took a hand in anti-terrorist action, as they did in the spring of 1986 against Gaddafi in Libya, then Mrs Thatcher could follow her instincts and offer support. There had been an outburst of terrorist killings, organized from Iran or Libya or elsewhere, and at Christmas 1985 nineteen people had been killed at Vienna and Rome airports. Three British hostages were taken in the Lebanon and killed, and her view of such things was that proper retaliation should be made. It duly was, and the problem greatly lessened, though she was regarded as reckless in the usual quarters. In general, she remained forthright in her opposition to the humbug of Third World goody-goodies, Scandinavian ladies, lecturing and the like, and at the waste-of-time ‘summits’ which now proliferated she was at ‘new levels of manifest arrogance’.

  Such bluntness went down well, domestically, and it was no doubt utterly deserved: the British had given away too much for membership of the Common Market and the cant of ‘North’ and ‘South’ needed to be dismissed. But there was similar and greater cant at home, and here the lady was being sidetracked. More and more, foreign affairs took over: the endless grind of domestic reform was too exhausting, and the divisions on the Right too difficult to bridge. Increasingly, too, matters European came centre-stage, generally in a cantankerous way. For a good generation the Common Market had been bumbling along, but in 1985 Margaret Thatcher herself had promoted the ‘Single European Act’, which was supposed to simplify things. It would end the hidden protection devices and stop the endless haggling over uniform standards that got in the way of trade. But, unnoticed at the time, that same Act allowed the larger countries, and of course Germany especially, to override opposition provided they could take on a lesser ally or two. This meant that in matters of some importance the British might be outvoted and yet compelled by the Europeans to go ahead. ‘Europe’ took attention that diverted and exhausted; it was also in the end destructive of constitutional ways. The British Parliament soon found itself nodding through great heaps of small-print legislation in obedience to European directives, and since Parliament had absolute power, the police were soon prosecuting people who illegally killed bats in their attics, and the absurd persecution of smokers got under way.

  Deregulation, privatization, the existence of powerful computers that could be programmed to buy and sell at an advanced level, with endless manipulations of complicated IOUs (‘swaps’, ‘options’, ‘warranties’): much of it came down to mortgages on bricks and mortar, whether the Colombian embassy in Tokyo being sold to pay off the national debt, or a broom cupboard near Harrods in London being sold for £35,000. As ever in such a world (after Louis Napoleon’s Eighteenth Brumaire there was a similar bonanza with property in Paris, and even a form of unit trust) there were fig
ures, part child, part ogre, who understood the system, made vast sums of money mainly by borrowing from people who did not, and discredited the system as a whole. There had been Armand Hammer, who had managed to make money in Stalin’s Russia, with a monopoly for the sale of pencils made on a German model, just as every child in the USSR needed a pencil for the expansion of schooling — Stalin ended this in 1929, but Hammer was allowed, in compensation, to take two waggon-loads of icons and art, confiscated from the original owners, out of the country; he set up shop in Park Avenue, used the profits to buy oil in the early 1930s, when its price was very low, and then boomed: at the end of his life, while watching cricket at Lord’s with the Prince of Wales, he was harassing his sister-in-law for the $15,000 that he had lent to his much less successful brother for a life-saving operation which had failed. There was Robert Maxwell, fraud to the core, claiming to be a Czech, but in effect Hungarian (he had been born in what had been north-eastern Hungary, and cut his teeth, financially, on cross-border smuggling). He survived by doing his own people out of their retirement fund, and died by drowning, probably suicide, in circumstances that were never cleared up. In the USA ‘junk bonds’ created fortunes and led to discredit of the whole system. These involved a real risk, being bonds raised against the possibility of taking over, via the stock exchange, some firm or other, allegedly badly managed and overextended. In 1980 such bonds raised $5bn, but by 1986 almost $50bn, falling back to around $35bn thereafter. Their chief architect, Michael Milken, made himself vastly unpopular and eventually was imprisoned (though on a lesser offence). He financed Turner Broadcasting and many other well-known, now well-established, concerns, and two thirds of the ‘junk bond’ money went quite productively into such corporate growth, not into the spectacular takeovers. It was all, in the end, brought about as a consequence of the seventies inflation, and the distortion that that had produced, but there was a great deal of head-shaking. Economists stuck in the Left could be waved aside. Those on the Right, with views as to probity, not so, and the best were worried. In the mid-1980s Tim Congdon wrote in warning against what was happening, and was followed a decade later by Peter Warburton. They were proven right, but only a decade later, in 2008, when the bubble appeared to collapse, and trillions disappeared, the exports of Japan (at this moment of writing) dropping a quarter in a month (January 2009). But such works appeared in the 1980s to be wolf-crying. Michael Milken might be led off, to boos, in handcuffs. But a far greater drama was going ahead elsewhere: Moscow and Peking had noticed what was happening.