Mr Healey's short memory
Tim Congdon
Mr Healey is a perceptive politician. He knows that, although the Labour Party may not be united on what it agrees about, it is united on what it disagrees with. As at present the Party loathes nothing more strongly than 'monetarism', he has been hurling verbal brickbats at the principles monetarism is supposed to represent. Mr Shore has recently joined in, devoting a public lecture in Pennsylvania to stereotyped moans and groans about the damage he claims monetarism has done to the world economy.
Mr Healey and Mr Shore were presumably hoping that, by condemning the monetarist policies to which the Conservatives are committed, they would be able to distract attention from their own party's internal squabbles and perhaps provide one issue which would bring together the different factions at this week's Party Conference. The rhetoric about the connection between monetary restraint and unemployment recalls one of the Labour Party's most hal lowed, familiar and boring themes. It illustrates rather clearly that the party continues to see the problems of the Seventies through the eyes of the Thirties. It should be an effective rallying point.
But is the Labour Party entitled to attack monetarism? And what precisely is the thrust of its accusation? Presumably the criticism is not being levelled against monetary theories themselves, Not only are these mostly scientific and non partisan in intention, but also Labour politicians confess to finding them incom prehensible. There is surely something anomalous about describing ideas one cannot understand as wicked and wrong.
What Mr Healey and Mr Shore should really be worried about is the possibility of a sharp slowdown in the rate of money supply growth. It is monetary deceleration, not stable monetary expansion or monetary acceleration, which causes unemployment and it is unemployment which has traditionally alarmed the Labour conscience. But there is a certain inconsistency between the last Government's actions and its members' fears for the future. Mr Healey and Mr Shore seem to have forgotten that they were in the administration which presided over the most violent monetary contraction since the early Twenties.
The facts are not in dispute. They can be checked by anyone with an issue of Financial Statistics and a pocket calculator ready to hand. In 1972 and 1973 the money supply grew by 25 per cent a year; in 1974 by 10 per cent; and in 1975 by 7 per cent. The slowdown from the Barber boom rates of monetary growth to those of 10 per cent or less began in early 1974, shortly after Mr Healey became Chancellor of the Exchequer. A change in the stance of monetary policy of such speed and abruptness was without precedent in the post-war period. Even in the Thirties the rigours of sound finance had been more gentle. Only in the early Twenties, when the Bank of England crushed a dangerous inflationary boom too aggressively, had a monetary deceleration as sharp as that in 1974 and 1975 been recorded. _ .
Hoever, merely to recite figures is unfair. Mr Healey may have been Chancellor during an episode of massive deflation, but, to give him his due, he did not realise what was going on. At the time the Treasury had no conception how much effect monetary policy would have on the economy, and its forecasts of output and unemployment were far too optimistic. In particular, it failed to recognise that there might be a delay before the results of monetary restraint became visible. Employment stayed fairly high in 1974 and collapsed only in 1975, 18 months after money supply growth had been checked. As so often, the economist's lag proved to be the politician's nightmare. Mr Healey in early 1974 had had no idea of what was coming.
By a strange irony, only one group of economists warned the Government that it was being too tough — the monetarists. Professor David Laidler at the University of Manchester was particularly outspoken but, as he stood for a minority view, he was more or less ignored. When unemployment rose from 700,000 at the beginning of 1975 to 1,200,000 at the end, more people took notice.
From then on monetarism steadily gathered support and, with the visit of the International Monetary Fund in 1976, it became a prominent element in policy formation. It also, for some reason, acquired the connotations of 'extremism' and 'deflation'. Perhaps not surprisingly, therefore, as soon as Mr Healey started to take an interest in monetary policy, it became less extreme and less deflationary. The first ever money supply target was announced in July 1976. It was for sterling M3 growth of 12 per cent in the next twelve month period, a figure which was actually undershot by a wide margin. But subsequently monetary growth accelerated. In the two years from mid-1977 to mid-1979, which were marked a barrage of government propaganda about the virtues of monetary discipline, not least from Mr Healey, sterling M3 rose at an annual rate of 14 per cent; in the previous three years, when there was a thinly veiled contempt for monetarism in official economic statements, the comparable figure was 9 per cent. There are further paradoxes. The benefits from monetary deflation, like those of an insurance policy, arrive a long time after the costs. In 1977 and 1978 inflation declined to under 10 per cent, the delayed response to the squeeze of 1974 to 1976. Mr Healey, pleased with the success of at least this part of his economic strategy, described monetary policy over the whole of his period as Chancellor as 'moderate' and 'responsible'. The press generally accepted this characterisation, and so Mr Healey acquired a reputation for monetary 'moderation'. As we have seen, it is quite unjustified. The financial policy pursued by the Treasury and the Bank of England in the first half of Mr Healey's Chancellorship was nasty, brutish and protracted. It pushed unemployment to the highest levels since 1940 — and at a rate of increase which caused considerable hardship to many ordinary people.
But equally misleading is Mr Healey's claim to have followed 'responsible' monetary policies in the second half of his Chancellorship. Having subjected the economy to the stresses and strains of vicious monetary deflation, and having paid the price in unemployment and lost output, it would have been logical to hold money supply growth down to the 8 to 10 per cent a year level in 1978 and 1979. Instead, it rose back toward 15 per cent. Sure enough, this generated a minor consumer boom and led to some reduction in unemployment. But these gains have proved temporary. The chance of a relatively early return to noninflationary rates of monetary expansion (say 5 per cent or less a year), which was created by the traumas of the midSeventies, has been squandered. The Conservatives' financial inheritance from Labour is uncomfortable. They must reduce money supply growth from the 15 per cent recorded in 1978 to 12 per cent at most this year and under 10 per cent next. This is monetary deflation, and it will feat in more unemployment. But, in comparison to the about-face of financial policy in 1974 and 1975, it is a modest correction. For Mr Healey and Mr Shore to scorn the present government's monetarism as primitive, mindless and 'extreme' is absurd. Labour's monetary policy was far more haphazard in conception and damaging in its resutls than the Conservatives' is likely to be. In any case, the only reason why the nev0 administration is having to pursue a deflationary policy is that the last 18 months of Mr Healey's Chancellorship saw an unwarranted relaxation of control. Mr Healey's skill in having his monetary policies commended as 'moderate' and 'responsible' is not matched by the honesty of his recent polemics against monetarism. If the polemics are sincerely meant, Mr Healey must have a remarkable power of self-deception and a short memory. But, then, for any Labour politician who wants to be popular at the Party Conference, self-deception and a certain convenient forgetfulness qualities. orgetfulnessmay be important and necessary
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