Liberalism at Large

by Alexander Zevin

  Rupert Pennant-Rea: Cold War on a High Note, 1986–1993

  Under Rupert Pennant-Rea the Economist, no longer a latecomer to neoliberalism, became one of its advance guards. As a former Bank of England economist, Pennant-Rea was well aware of the deregulatory dynamics that had made the City of London an offshore haven for foreign money and foreign banks since the late 1950s. This training also distinguished him from his predecessors, who made no secret of their innumeracy: Burnet had hired the first economics editor at the Economist, Brian Reading; next came Sarah Hogg, who with Macrae often ‘inserted the economic spine’ into leaders written by Knight; and after Pennant-Rea left this post to become editor, the influential Clive Crook took up the position. Like Knight, Pennant-Rea was born to an aviator father beyond the British Isles, in the colony of Rhodesia. In 1934 Peter Pennant-Rea had moved from Britain to South Africa, and then on to Rhodesia to work as an aircraft engineer for the British firm de Havilland, returning briefly to England to fly for the RAF in 1943. As Rhodesia’s director of civil aviation, he refused to recognize Ian Smith’s unilateral declaration of independence in 1965, which ignited a fourteen-year war between the white minority regime in Salisbury and the black majority.119 Pennant-Rea was a teenager when the family returned to Britain. Bypassing Oxbridge for Trinity College in Dublin and Manchester University, he went to work for a trade union and a business lobby. In 1973, he joined Britain’s central bank as a junior economist, just as the collapse of Bretton Woods and the surge in Middle East oil revenues sent fresh waves of capital pouring into London. Four years on, Sarah Hogg made him economics correspondent for the Economist. By the time he succeeded her in 1981, Pennant-Rea had turned from the centre-left into an ‘anti-government, anti-inflation zealot’, and in his own estimation the paper as a whole was not far behind.120 In 1986, he beat out three rivals in the contest to replace Knight: his mentor Sarah Hogg, the political editor Simon Jenkins, and Nico Colchester, then foreign editor of the Financial Times, whom he made his deputy at the Economist.

  If this was an unusual path to the editorship, it was also a different character walking it. ‘Rangy, goofy-looking, with a dead-pan demeanor, pre-fashionable sideburns’ and a comb-over, Pennant-Rea reminded one profiler of Monty Python’s John Cleese – but serious, opinionated, speaking in a ‘nasal drawl’ with ‘notes of Rhodesia and Dublin’.121 Pennant-Rea had even found time to write an economics thriller in 1978, the novel Gold Foil. In it, the US and the Soviet Union hatch plots to corner the market on bullion in South Africa (the former to tame inflation by returning to the gold standard, the latter to pay for imported grain). Financial journalist Caroline Manning, ‘endowed with beauty and brains’, a taste for ‘Vidal Sassoon’ and ‘Fifth Avenue clothes’, and a bit of a leftist, senses a story. James Glendinning, charming but oafish advisor to the Bank of England’s chief cashier, is charged with implementing the secret gold plan, liaising with the Bank of South Africa, the IMF and the State Department. After some chasing, Glendinning accidentally leaks the scheme to Manning during a night of extramarital bliss in Johannesburg. Her story makes the Guardian front page, halting geopolitical connivances of West and East, and pushing black and white South Africans into a power-sharing agreement.122 A Danish book club adopted it, but otherwise Gold Foil ‘sank without a trace, probably deservedly’, said Pennant-Rea modestly. The book was a response to opponents of apartheid he met in Britain, who failed to distinguish Afrikaners from English-speaking whites, ‘their roots in Africa (including mine) being much shallower. I imagined the day when white Afrikaners and black South Africans could reach a rapprochement, irrespective of the rest of the world … as things turned out, my sense was pretty accurate.’123

  Truth proved almost as strange as fiction on Pennant-Rea’s departure from the Economist. In 1993, he followed Sarah Hogg into the Conservative government of John Major, who in 1990 had made her head of his Policy Unit. At her urging, Norman Lamont, the Chancellor of the Exchequer, gave Pennant-Rea the job of deputy governor of the Bank of England. The two now occupied the highest political posts of any editors since the first, James Wilson – a testament to the immense prestige of the Economist, and its deep historic relationship to City and state. For Pennant-Rea, however, life behind the pink-liveried doormen of Threadneedle Street was cut short. In 1995, the financial journalist Mary Ellen Synon revealed that she and ‘Roo’ had been having an affair on the premises. Coming at a moment of crisis for one of the City’s oldest private investment houses, Barings – as acting governor he refused to bail it out – Pennant-Rea was forced to resign.124 Public service may have ended on a sour note, but private affairs flourished. He began a career in the City, and based in part on his success in raising revenue and readership as editor, became non-executive chairman of the Economist Group in 2009. Today, he works from one of the glass towers that ring the north edge of the Square Mile, non-existent before the burst of financial liberalization he strongly backed during his first months as editor.

  Big Bang: Finance, Innovation, Integration

  Pennant-Rea made a number of changes to the paper – expanding its coverage of finance, starting a new Asia section, and creating new, more personalized columns, such as Lexington on American life and Bagehot on British politics. His most important editorial contribution related to finance and in particular to Big Bang – the name given to the moment on 27 October 1986 when rules governing financial transactions in Britain were torn up, with the aim of increasing the volume, variety and value of market trading done in the City. That included eliminating fixed brokerage commissions and barriers to foreign entrants, looser ownership rules, even laxer regulation and screen-based trading – moving and expanding the centre of exchange out from the trading floor of the Stock Exchange.125 The Economist hailed the event, seeing its significance in terms of the domestic and international standing of the City. London was already an attractive place to do business, of course. Investment banking had never been divided from commercial or retail banking, as in Japan or the US; time zones and language were right for the twenty-four-hour trading cycle that now ran between Tokyo and New York; and it possessed 400 years of international expertise and lax taxation. All it needed was to offer a welcome mat for newcomers and make markets for them even bigger and more liquid – achieved by removing what barriers remained between London’s gilt and share markets (1985 turnover, $476 billion) from ‘the much larger and wonderfully competitive Euro-equity markets (1985 turnover, $2,250 billion)’. While this might ‘crack the cake’ of domestic custom and upset the ancient guild-like structures and personal relationships that still dominated these sectors – British financial firms were smaller than foreign counterparts, and even hallowed names would fail when challenged on home ground – ‘British authorities must let most of them, even quasi-banks, go under.’ ‘Lombard Street, Wall Street, or Patrice Lumumba Street, Timbuktu’, it now mattered much less where the head office was: ‘what really matters for Britain is that the City expands its financial resources, financial knowhow and financial jobs.’ This would reduce the gentility of the place, and the personal power of the Bank of England governor. But what was the alternative? Japan’s Nomura had a stock market capitalization of $30 billion, the US bank Solomon $6 billion, compared with way under $1 billion for prestigious old City investment and merchant banks like Warburg, Kleinwort Benson, Hill Samuel, Hambro. Even before Big Bang, the paper pointed out, only eight of twenty top brokerage firms were still in British hands.126 This insistence that the City must also feel the chill draught of the global market, come what may for its national brands, linked finance to the overall Thatcherite project. Like British industry and public services, British banking would be subject to the fortifying effects of competition. Combined with minimal oversight – who supervised banking and who securities could be worked out later – the City was set to be transformed.127

  Pennant-Rea wrote three books on economics along the road to Big Bang, which supplied simple theoretical arguments for it: W
ho Runs the Economy? in 1979, The Pocket Economist in 1983, and The Economist Economics in 1986. Each one gave greater weight to the free market, with the second pair – co-authored with Bill Emmott and Clive Crook, respectively – so fervent that they received testy reviews in the Economist itself. ‘They identify the dead hand of restrictive practices and market distortion everywhere’, wrote Howard Davies in 1983. ‘But even the best of causes can suffer from overstatement.’ Of the sequel, Rudiger Dornbusch wrote, its authors went ‘beyond intuition, and occasionally even beyond prejudice (“trust markets, overrule them at your peril”)’. He cited a breezy dismissal of Keynesianism from the conclusion: ‘Few economists now believe that government can or should “fine-tune” demand. That way of thinking is dead, its death a tribute to the power of the rational-expectations approach.’ But, Dornbusch interjected, ‘that thinking surely is not dead, as any chancellor of the exchequer, six months from an election, can attest.’128 Neither outside reviewer – Davies, future deputy governor of the Bank of England; Dornbusch, a Chicago-trained economist – were particularly leftwing.

  No matter: with regulatory bonfires ablaze, the Thatcher Revolution was said to be delivering at last. GDP growth rose to 4 per cent in 1986 and 4.5 in 1987 and 1988, as inflation dropped to 2.5 per cent. Unemployment remained high at 11 per cent, but rising real income for those still in work, as well as ‘gains’ from privatization – more homeowners, given the chance to buy council flats by taking out mortgages; more shareholders (5.5 million), offered shares as the state sold off profitable public utilities like British Telecom – meant ‘more money, more security, more independence for ordinary Britons’.129 In 1992, the Economist backed Thatcher’s handpicked successor on this record, after a party revolt over Europe toppled her as leader. If it worried John Major was ‘too relaxed about spending and borrowing’, this tacitly acknowledged the difficulties Thatcher had left him: inflation was back at 8 per cent and rising in 1988, interest rates touched 15 per cent in 1989, recession set in by 1990.

  Far from questioning the policies of the last decade, for the Economist this simply demonstrated the need to press ahead – in particular for Britain to join the European Exchange Rate Mechanism. Pegging sterling to the Deutschmark, the paper argued, would oblige British governments to defend the pound sterling on the open market, placing strict limits on the level of inflation it could tolerate. Thatcher only agreed to try it in 1990; in the event, recession and high interest rates (again touching 15 per cent to defend parity) forced a humiliating exit and devaluation five months after Major’s election in 1992. Black Wednesday was not the fault of deregulation or the lifting of the last barriers to capital mobility, the Economist insisted, which were like genies that could not be put back in their bottles. ‘Rebuilding capital controls is beyond the wit of governments, and even if it could be done, the cost in misallocation of resources would be huge.’130 For this stalwart backing of John Major’s exchange rate policy, some journalists groused, Pennant-Rea was ‘rewarded’ with the Bank of England job the next year.131

  Ends of the Cold War: Interpreting Liberalism’s Triumph

  By then another revolution was underway in Eastern Europe, which turbocharged the neoliberal dynamic at the Economist, and seemed to stamp it with an almost providential seal. The collapse of the Soviet Union and its satellites took place with breathtaking speed between 1989 and 1991, opening up new vistas for capital overnight. The 1980s had been a decade of reversals for Moscow, which saw a crash in oil prices and thus its export earnings, squeezing imports of basic goods as well as the technology needed to modernize production; at the same time Reagan threatened it with a new arms race, even as it strained to spend more than twice what the US did on defence as a share of GDP, with half its per capita income. In this context, the arrival of a younger, idealistic reformer in the Kremlin, pledged to economic and political liberalization and dialogue, should have been music to the ears of the Economist. Not so: wary of Mikhail Gorbachev, it enjoined Reagan and his ‘overcautious’ understudy George Bush Sr. not to compromise with him, even as his chaotic management of glasnost and perestroika set the disintegration of the Soviet system in motion.

  If the paper greeted all signs of this with glee – ‘we just sat back and enjoyed the ride’, according to Pennant-Rea – it also brought a characteristic ferociousness to its coverage of events, closing out the Cold War as it had waged it. For peacefully dismantling the Warsaw Pact and pulling the Red Army out of Europe, Gorbachev deserved nothing. No new Marshall Plan: ‘it has to change itself fundamentally before it can be helped’. No strategic reciprocity: the US should leave its armed forces and missile bases in Western Europe, and expand NATO east at top speed, for the alliance ‘had woven itself into the fabric of European stability’.132 In 1990, with American ‘freedom of regional manoeuvre greatly enhanced’, the Economist called for a war in the Persian Gulf before Bush did – as an unbeatable chance for America to lead ‘the world into a time of real peace and economic progress.’133 One journalist called the office a hothouse with no debate. ‘In a crucial meeting we spent our time arguing about fish quotas, not war.’ For Gorbachev, however, this meant the end of the line: he had been ‘immensely helpful in building up the coalition against Saddam Hussein’, but ‘not indispensable’ and ‘when the fighting is over, will not be needed … the west should be looking for a better man.’ By the turn of 1991, that was Boris Yeltsin, who promised not to reform communism but to hasten its breakdown at the centre by raising the same cry for Russian national sovereignty as the Baltic, Caucasian and East European states had done.134

  The Economist did more than comment or give advice on these events. It supplied philosophical reflections on the meaning of liberalism’s victory, with Beedham and Macrae offering panoramic views of its past, present and future on the eve of their retirements. Beedham started out cautiously in the summer of 1989, peeking behind the Iron Curtain in ‘Long Live Spring’. Predicting the consequences of perestroika, in particular its reduction of imports from Eastern Europe, he explained how to push reform further: as step one, privatize and split up state enterprises, end subsidies, and force them to compete with one another; allow the market to set prices, even if runaway inflation resulted; found private banks to lend money based on expected return, not planning targets; start stock markets; solicit Western investment through debt swaps and joint ventures. Unleashing economic freedom – at a minimum the legal right to own, protect and pass on private property – was a precondition for rolling back totalitarianism, which was looking far more vulnerable than he anticipated. Stalin’s henchmen had not ‘found a way to stay on top forever’, he decided, ‘happy liberals are declaring that Hannah Arendt must have been wrong after all’ and ‘Leninism can finally be lowered into the grave.’ How long would this take? Based on interviews with Politburo members in Poland, Hungary and Yugoslavia, Beedham guessed that Gorbachev was unlikely to intervene as they moved from economic reform to multi-party elections, effectively giving up Communist control. If Bush bargained hard, most Soviet satellites might be allowed to leave the Warsaw Pact – though this also risked provoking a coup to oust the pliable ‘Gorby’. But by then it might not matter: its armies withdrawn, economy in tatters, an ethnic crisis or two on its hands in the south, and the Russians would be too vulnerable to turn back the tide. ‘The case for drastic change is strong, and the chances of getting away with it not bad.’135

  Beedham became even bolder as the disarray in Moscow mounted, Gorbachev refusing to intervene to prop up embattled regimes anywhere, apparently just as in thrall to liberal ideals as the apparatchiks in Poland or Hungary. Four months later, Beedham wrote a valedictory that read like Herodotus on speed, his vision of world history punctuated by a dozen ‘really top-ranking’ dates. ‘One of history’s biggest mistakes began to be rubbed out … and this makes 1989 even better than 1945, when Hitlerism was erased’ (though neither year made the list, since in great years ‘something new is written in the human led
ger’). Ranging from 457 BC, when ‘Pericles got Athenian democracy firmly on its feet’, to 1775 when America gave us ‘liberal democracy, plus self-determination’, he admitted to a distorted timeline. But ‘no apology is needed for the fact that most are Euro-American dates’. Was any needed for imperialism? Empire received just one mention, and that was to the civilized manner in which it was wound up. ‘The post-1945 freeing of the colonial empires was carried out in the name of self-determination and liberal democracy, though it achieved little of the second.’ America’s record since was as a beacon of liberty. ‘In 1989 yet another echo from Lexington has been crashing, this time more efficiently, round Eastern Europe.’ In rejecting one form of historical causation, Beedham praised another, Whiggishly optimistic about human progress, inflected by Christianity. The death of Christ was crucial, for ‘people who have been told that God became one of them, and let himself be crucified to help them, feel rather better about the human condition afterwards.’136 The religious leitmotif grew even stronger after the Soviet Union disappeared from the map, with a survey on ‘Islam and the West’ in 1994 shocking even his friend Samuel Huntington for its simplistic view of cultural and religious difference.137

  Yet the foreign editor also revealed a kind of nostalgia for a fading world, as source for a satisfying argument. In one survey, he ‘stitched together’ five conversations with communist leaders who in 1989 admitted to seeing history roughly as he did. ‘Despite the lying and brutality of the past 40 years, this region still has some of the world’s most attractive politician-intellectuals’, he suddenly announced. What, he asked his composite communist, did socialism really mean? ‘The attempt to create a society, maybe several hundred years from now, in which people can be prosperous, free and equal.’ Was there still a big difference between this and capitalism? ‘Not all that much, especially if you take the social-democratic version of the Western system.’ Then what was distinctive about Marxism? ‘Marxism is one part of a long tradition, which goes back to the Bible, the Reformation, the French Revolution.’ Had it accomplished anything? ‘It may have stirred capitalism into becoming more civilized.’138 Beedham might as well have had this conversation with himself, so closely did it hew to thirty years of advice served up to his foes. By having surprisingly reasonable communists confess to their own errors, he consummated his victory over them in the realm that mattered most – ideas.