The Atlantic and Its Enemies

20. Reaction

Afghanistan was another gigantic dwarf, like Greece: a place, not very significant in itself, where geography and the local complications combined to make it important on a world scale. The Soviet invasion prompted a Western, particularly British and American, reaction, but that had in any case been building up, for quite different reasons, for some time. A wise observer had said, at the time of the Hungarian uprising in 1956, that the system was going to go on and on until an explosion happened in Moscow itself, which duly happened. But the origins of this went back to a change that had come about with Henry Kissinger, in the middle of the seventies.

In November 1975 the ‘capitalists’, leaders of the half-dozen advanced industrial countries, had met at Rambouillet, outside Paris, at the behest of the French president, Giscard d’Estaing. They stared gloomily into the fireside as they, as expected, chatted. Helmut Schmidt wondered if democracy would survive: in this period, Portugal had almost passed under Communism, and Italy was very unstable. New York was going bankrupt, and Saigon had fallen not long before. Henry Kissinger vowed that his purpose on earth was to break the OPEC cartel that was making so much of the trouble, but the inflation associated with OPEC went on. It was worst in England, at 24 per cent in 1975 (and altogether not far from 100 per cent between 1971 and 1975) and in 1976, of all extraordinary signs of failure, the IMF was called in, extracting a Letter of Intent in return for the organizing of support for the pound. Every country had some degree of inflation at this time, but the Germans and the French kept it well below British figures. How? Was it greater discipline as regards petrol use? Or moderate, responsible behaviour on the part of the trade unions? Or better management of the credit and money supply by the Bundesbank, using interest rates and bond prices to stop too much spending with borrowed money? Or European financial collaboration, which, certainly, Schmidt and Giscard greatly wanted?

These subjects came up on the Rambouillet agenda of the ‘G7’, as they were to be called. By now, ideas of radical change were in the air: otherwise, the Western world would be in thrall to the Arabs, and the Soviet Union, with its vast oil revenues, would predominate. A declaration promising exchange rate stability and restored trade was made; beyond that — a sign of what was to come — the International Monetary Fund was invoked, and at last given a true world role. This was the start of the celebrated formula, the ‘Washington Consensus’, in effect shaped by the USA. It amounted to a recognition that the post-war order, with reference in effect to John Maynard Keynes and Bretton Woods in 1944, had failed. There must be liberalization.

The problem of inflation was worldwide, but it was worst in the Atlantic countries. The USA, after the Nixon crash, was in poor shape and needed the formula itself, as the dollar went down. Newly emerging Far Eastern countries, especially Japan, were making American exports uncompetitive; great heavy industrial regions turned into ‘rust belt’ country, historic places such as Baltimore or Philadelphia becoming wastelands. In the USA and in England, blundering efforts were made even by supposedly right-wing regimes to control wages, but to make this acceptable to trade unions, prices were also controlled, and, with reference to the unions’ supposed interest in equality, ‘the rich’ were to be taxed heavily. In practice, this meant tax rates of 80 per cent at a none-too-high level, and on ‘unearned income’, i.e. people’s savings, 98 per cent. The argument behind this was that inflation was caused by excessive wage demands from trade union leaders who had become spoiled and greedy; they might give up their bad habits provided that the middle classes were taxed so hard that equality would prevail. However, the trade unionists themselves then found that they were being taxed at higher levels: there was even a danger that people who were receiving welfare payments would pay tax at 40 per cent. Improvement did not follow, and in any case the unions could always say, and this was the right thing to say, that their problem was not greed, that prices were rising, that their wage demands were defensive. ‘Corporatism’, English-style, was no more successful than the preposterous ‘Planning’ had been before it. Alternative thoughts were then thought.

There was another argument altogether as to why inflation rose, and it was advanced under the name ‘monetarism’. In 1970 Milton Friedman, an American economist (who had had experience of Cambridge but not in the charmed circle of King’s College: he had stayed at Gonville and Caius, where the leading light was the Budapest-Jewish Peter Bauer), gave a lecture in London to the effect that the British economists were ‘naïve, unsophisticated’ — more so even than the Americans of the 1930s. He noticed later on that ‘the present situation cannot last. It will either degenerate into hyper-inflation and radical change, or institutions will adjust to a situation of chronic inflation; or governments will adopt policies that will produce a low rate of inflation and less government intervention into the fixing of prices.’ There was, said Friedman, an alternative course: to control the supply of money. Inflation was at the source of the whole problem, and that could be stopped if governments stopped producing the paper money (most of that consisting of figures printed in bank accounts) that caused it.

The argument was not really new. Economists had argued as to the role of money for a long time, and in the nineteenth century there had been differences as to whether the supply of money and credit just reflected the demand for it, or whether it shaped that demand. The brightest brains of Europe, the British in the lead, had addressed such questions, and they could only be answered with a good grasp of mathematics, logic and history. In late-nineteenth-century Cambridge, Economics had even arisen out of Moral Sciences, the working name for Philosophy. However, along with moral questions, there were technical ones. What was money? In the nineteenth century the question almost answered itself because money was based on gold, which of course had a value. True, there was not very much gold, but a piece of nobly printed paper could be taken to the bank and changed back, if need be, into so many ounces of gold. Of course that did not happen, because gold was heavy and could be stolen, and if governments were trusted, then their paper was as good as metal — especially in England, where the gold reserve was actually quite small, less than Russia’s. However, there were limits to the amount of paper that could be printed in these circumstances, and that limited bank credits. People who needed them sometimes wanted to have a wider basis for money (in the USA there were demands from farmers for silver to be used as well as gold). Keynes in the 1920s and still more in the 1930s had wanted governments to abandon these standards, on the grounds that gold was ‘a barbarous relic’, that a properly managed paper money would expand credit, stimulate the economy and cause employment to happen. His critics said that a paper money of this sort would mean a rise in prices, the inflation that did indeed occur in the seventies. Friedman was returning to the older ideas of monetary stability: the seventies were to bear out such wisdoms.

At the time these ideas were not at all fashionable. As David Smith says, to be a monetarist in the 1960s was ‘like having an unfortunate but embarrassing affliction which people were too polite to mention’. The grand establishment at King’s, Cambridge, basked in the sunlight of Keynes, and disdained monetarists, who were on the whole of a lower order. They seemed to be backwoodsmen, offering the grim formulae that had made the thirties such a black decade in the minds of the Keynesians, who sneered. As Keynes’s biographer, Robert Skidelsky, has demonstrated, there was even a sexual aspect to this. Keynes broke the rules, did so in a very sophisticated way, and was never held to account for it, even though other homosexuals, including the inventor of the computer and cracker of the German codes in the war, Alan Turing (also of King’s, but not as grand as Keynes), were harried to death because of it. Old E. M. Forster and George ‘Dadie’ Rylands, characteristic of the twenties, lived on and on, into a world where Death in Venice became museum piece Edwardian, and witnessed a radical change: Antonio Gramsci came to King’s, which adopted the causes of 1968, discovered women, and went in for positive discrimination of various sorts. It did not flourish, eventually going bankrupt, bringing down Cambridge Economics with it: within a generation, no foreigner bothered with it, and even very few English graduate students took its doctorates. The then Provost, Noel Annan, wrote memoirs, Our Age (1990), explaining why this course had been adopted, and of course not just at radical King’s alone, but widely across the old institutions, such as the BBC. He recognized the mistake, but the Cambridge economists of that era were part of ‘our age’, and they high-hatted little Friedman, happily married, quite Jewish, and very American. One of the best monetarists, Alan Walters, not of grand social origins, and initially interested in the economics of another British disaster area, transport, was turned down when he wanted support for research in a monetarist direction in the 1960s: the money supply was dismissed as unimportant.

True, there were outposts. The University of Chicago — Friedman’s — was one such, and not just in economics. The USA was still in some ways an old-fashioned country, and Chicago, a place dominated by an Irish-Italian-Polish Catholic mafia much as other religion-mixed cities had been in 1900, was a place where political arithmetic made more sense than the moral algebra of Keynes. Catholic priests were everywhere far more adept than Protestant pastors at mobilizing votes, making non-Catholics pay for municipal jobs and contracts awarded to their followers. ‘Who, whom?’, i.e. who paid for whom, was the great question, and a simple answer to mafias was for money not to be created for them to steal. In 1956 Friedman wrote his article on ‘The Quantity Theory of Money’: it restated the old idea that money did indeed have an independently very powerful role in shaping the economy, and did not just reflect the shape of it. As matters worsened in London, these ideas began to surface. One of Chicago’s professors, Harry Johnson, a heavy-drinking Canadian with verve, also held an appointment at the LSE, and by 1969 influential commentators in London had become interested, particularly Peter Jay at The Times and Samuel Brittan at the Financial Times. All along, there had been people — in the main, disciples of Keynes’s great critic, Friedrich von Hayek — who had not liked the orthodoxies of the Welfare State. They had been derided, but, with support from enlightened businessmen, a successsful poultry farmer set up the Institute of Economic Affairs (IEA), where, in the high noon of Keynesian England, the old ideas were kept alive. The IEA published interestingly, staged provocative lunchtime meetings, and often proved to be right. Now, in the mid-seventies, it began to move centre-stage.

Its people began to take some tricks at last, as the grandees’ schemes went awry. Even in 1969 there had been some official talk of limiting the money supply, and to hold the Bretton Woods line a budget surplus was prepared, in London as in Washington (the cuts in spending probably cost Labour the election of 1970: the then Chancellor, Roy Jenkins, a masterpiece of reproduction furniture who was eventually to split the party, probably wanted this, because it might bring sense to the trade unions). At the London Business School shoestring research turned out to be effective. David Laidler at Manchester predicted, for instance, that unemployment would get worse despite the spending spree of 1972, and he was right: it reached two million in 1980, even more than he had expected, while in that year the inflation rate, at 18 per cent, ought to have precluded this. But the monetarists were also accurate in predicting inflation rates of 15 per cent and 25 per cent in 1975 and 1976. Laidler reckoned that the problem with inflation was that it became self-propelling: people assumed that it would happen and behaved accordingly. He recommended keeping the money supply under control, and announcing ‘targets’ for it in advance. This was all very well, but there was a difficulty to be overcome, and it never quite was. How were you to define ‘money’? Notes and coins were a tiny fraction of what people could spend, given chequebooks, bank loans, credit cards, and stocks and shares that rose or fell. Then again there were great complications concerning abroad: money might flow into England, according to oil discoveries or to alterations in the exchange rate. These things were very difficult indeed — and, some said, impossible — to measure, even assuming that they were worth measuring at all.

There were various measures, well-stated by a wise political commentator, Alan Watkins: ‘narrow money’ was that held in the Bank of England, plus deposits made by the commercial banks; ‘wide’, that circulating in pockets — together, these were M0. Then there was M1, which to M0 added bank deposits that could be withdrawn on demand. There was an M2 which went out of fashion quickly enough; M3 consisted of M1, with the addition of deposits that could be withdrawn after an interval of time; M4 was this, plus deposits in building societies, where savings for house purchases and mortgages were placed. One leading theorist, Tim Congdon, regarded M4 as the best measure. However, whatever their disagreements, the monetarists could at least chalk up more successful predictions than their opponents. They also had history, on the whole, on their side, since great inflations had accompanied the French and Russian Revolutions, themselves preceded and accompanied by issues of paper money that, in the Russian case, went so fast that there was no time even to print numbers on the notes, such that people who accepted them had to ink in the numbers themselves. In the great German inflation of 1922-3, ending with 11 million million Marks to the pound, the Reichsbank solemnly denied that its money-printing had anything to do with the inflation, and when the inflation was indeed stopped almost in its tracks by the introduction of a new currency altogether, its president, Rudolf E. A. Havenstein, dropped dead.

The British monetarists had strong Atlantic connections and some found the American atmosphere more rewarding in every way. A measure of British disillusionment was a book by Robert Bacon and Walter Eltis, Britain’s Economic Problem, which showed that the government took 60 per cent of the gross domestic product, that the public services, being ‘non-marketed’, crowded out private investment. There was much truth in this, demonstrated when, in the 1980s and especially in the ‘long decade’ that followed 1991 and the end of the USSR, different ways were tried. Then, electronics vastly lowered the costs of publishing, retailing, even transport; potential producers, and especially China, were liberated, to produce on a vast scale, and some prices fell and fell. But in the seventies, the great advances in technology were not applied in such matters as telecommunications or printing (let alone the heavy industries and mining) because of union obstruction and of course lack of investment. Everything contributed to a downwards spiral, and the critics were right to say that inflation was the chief problem. They were resisted, partly because they seemed to be offering a return to the dismal verities of the Gold Standard age. In the USA economics was much less dominated by the Keynesian orthodoxies. There the unions were markedly less strong, and there was not quite such a concentration on the virtues of full employment. The most basic assumption in England had to do with the thirties, when so many young and educated people had looked guiltily at the mass unemployment of the traditional industries, mainly in the north, and had compared it with the prosperity of the south (and maybe also thought, inevitably, that their own job prospects should have been grander than the schoolteaching or other such low-paid work that many of them found themselves doing). Keynes had said that government spending would cause employment to increase, which would then create more ‘demand’ and cause greater production. This had been formalized in the Phillips Curve.

Friedman challenged this. He claimed that there was only a ‘tradeoff between unemployment and unanticipated inflation’, meaning that if people saw that inflation was coming, they would take it into account in wage demands, and unemployment would be back to the starting point. In Keynes’s own time people had not expected inflation and did not know how to deal with it. The Friedman school reckoned that ‘economic agents would quickly develop efficient methods of seeing through the short-term real effects of expansionary fiscal policies’. There were rejoinders: there were still economists (James Tobin the best-known) who argued as before that mild inflation was a good thing. The grand establishment — Wynne Godley and Nicholas Kaldor — even toyed with reflation behind a wall of import controls, which would imply planning of this and that, and of course a paper money subject to joyous arithmetic. On the whole, the challengers were more interesting, and serious innovation came from institutions that allowed them to flourish, such as the London Business School. They did not worry so much about the balance of payments, and appreciated that there was an international aspect to the problem of inflation: since 1971, and the end of Bretton Woods, exchange rates had widely fluctuated, the dollar being worth half of a pound and then, a year or two later, being nearly equal to it. In the circumstances, inflation. By 1976, and the arrival of the IMF inspectors, Denis Healey, who, if British Labour had been as enlightened as the SPD, would have been a Helmut Schmidt, was listening to the monetarists, and by March 1980 they were predominant. However, the often bitter, self-righteous and contemptuous arguments about monetarism were really about matters that went deeper.

Monetarism was a useful fiction. It was not a miracle cure, though it could certainly deal with symptoms, and this was noted by political commentators who had made their training in Marxism. One such, Alfred Sherman, dismissed economics as jumped-up accountancy: paper-money inflation just reflected the power of labour and the trade unions to impose transfer payments; he also saw the interest of the Keynesians themselves in the power of the State in organizing the transfers, the productive parts of the economy having to pay for it all. It was described in the United States as ‘rent-seeking’, as political economists tried to find a theory to fit what had been happening. A bureaucracy, complete with its own wooden language, was established to effect the transfers, and it taxed the middle: as Sherman said, the State turns everybody into a proletarian or a functionary. This was again a very old argument. It was levelled at the Counter-Reformation Catholic Church. In the later nineteenth century, Protestant countries were overwhelmingly richer and better organized than Catholic ones. Why? You cannot really point to significant doctrinal differences; nor can you say that the rich and the organizers were especially Protestant. The obvious answer, expounded in Hugh Trevor-Roper’s essay on this subject, was that the Counter-Reformation Church drove the businessmen out through taxation and religious harassment. They moved from Antwerp to Amsterdam, from France to Prussia, from Italy to England. Meanwhile, the papacy built extraordinary baroque buildings, and developed an equally baroque bureaucracy of much splendour, which made generous charitable arrangements for the poor (in Latin languages, ‘pawn shop’ is ‘mount of piety’), whereas in Protestant countries such as the Netherlands or Scotland ‘sturdy’ beggars were whipped out of town and churches were bald boxes, with a smaller bald box next door marked ‘school’. The paradoxical outcome, in the later twentieth century, was that Catholic countries were becoming richer and better organized than Protestant ones: Bavaria and Baden, for instance, easily overtook much of northern Germany, let alone the German Democratic Republic, which was, in origin, overwhelmingly Protestant.

There was, here, one obvious line of enquiry, that in the Catholic countries conservatism reigned as regards the family and education, whereas elsewhere (including northern Germany) the changes of the sixties did great damage to both. Welfare was a case in point. Originally, welfare in the Atlantic countries had been set up on an insurance principle: you paid for ‘stamps’, and this guaranteed you against bad times. There were also, in the USA, many charity hospitals for the poor who did not have the wherewithal to deal with emergencies. But inflation killed such things, as it made scholarship funds for education meaningless small change; the insurance funds suffered from inflation, and the State anyway needed the money to pay for the widening gap between ‘entitlement’ and reality. The State won, and, increasingly in the Atlantic world, including Canada, the State took over what should have been a matter of semi-private insurance, and ‘social security’ just became another tax. In Sherman’s view, State spending then brought about inflation.

But there was more. It also brought about unemployment. As to this, there was much worry, because especially in England unemployment had gone up and up, despite repeated applications of the Keynesian formula against it — even and perhaps especially under ostensibly right-wing regimes such as Heath’s. Why? One of the leading monetarists, Patrick Minford, studied the question and did so from the viewpoint of Liverpool University. Liverpool, by 1980, was a stricken city. It had been one of Britain’s grandest, with superb Victorian architecture and an art gallery, set up by the Walker shipping family, that contained the best Pre-Raphaelites. The shipping, as with Glasgow, had collapsed, but Liverpool, unlike Glasgow, did not have alternatives, and anyway had to compete with Manchester, which did. The professional classes moved out, the Victorian city declined. But Liverpool had also developed hideous housing estates, themselves a prescription for demoralization, and a spiralling down began. Any sensible observer of the scene immediately wondered: why, with so much unemployment, can you not get a taxi? The university itself had had its great Victorian days; Patrick Abercrombie, the originator of town planning in Great Britain (and of much else), had taught there, and Gladstone even talked with a Liverpool accent. In modern times, it had produced the Beatles, who, despite nonsense in the opposite sense, were quite well-educated middle-class boys. Patrick Minford (like Sherman, a one-time Communist) might well feel resentful, as a professor paid far below the inflation rate (some trade union boss having declared that academics did not rate much love and care), and he examined the paradoxes of a Liverpool that he could see crumbling before his eyes. Minford had adopted monetarism, as a surrogate Gold Standard, and now wrote on unemployment. Why was it at such a level? His answer was one that had already been offered in the great Slump. Even then, money had been spent on Liverpool, and it had not responded very well. There was a particular problem, in that Irish immigration had created what in the USA became known as an ‘underclass’, so bad that, even in the truant schools that were set up to punish boys who absented themselves from school, the Catholics and the Protestants had to be kept rigidly separate: there was a common bathhouse, for instance, and it was kept locked on one or other of the religious sides, in the yard, on alternate days. The same problem existed in Glasgow but there — the State in Scotland being more forthright — it was somehow kept under control. Not so in Liverpool: four decades later, money was spent, and even more; the result, said Correlli Barnett cruelly, was ‘urban primitives’. Minford was less outspoken, but said much the same: if you pay people to be unemployed, they will be. More: they will abuse the system. This again had origins in Ireland, where the alienation of the Catholic Church by the Anglo-Scots in the nineteenth century had meant that it would not co-operate over birth certificates. No-one knew who was born, when. Old-age pensions were introduced in England before the First World War but Ireland was not included, because no-one knew when the claimants reached the claiming age. Now, much of Liverpool existed on the black economy: the city that had pioneered the slave trade then turned, by fearful symmetry, into Ireland’s revenge on England. Men and women would want to get married as a matter of course, especially if there were children. One problem in measuring unemployment was that people lived in couples, and the wife might try for employment. She was then taxed. ‘The marginal tax rates on wives of unemployed men are high and increase with his unemployment duration… her income risks loss of benefit.’ Wives — one third worked — even lost 15 per cent of their income in tax, while the husband got something back in ‘benefit’. You did not need to be a mathematician to work out that men and women would not marry, if they were paid not to. He might have added that the housing policies pursued since the war had had the same perverse effect. The couple paid a low rent, sometimes ridiculously low, and, if they left the dwelling to take employment elsewhere, would find a new dwelling so expensive that no money was made. They were therefore imprisoned in unemployment, in a collapsing city, with effects upon the children that would prolong the problem and create what was coming to be known as the British underclass. If you were in a union, you had a job, and real wages rose. But the unions also kept people out, and the result was division: some people working in padded employment, others not. This went together with a proliferation of public bodies offering employment of a sort — for instance, the ‘Perambulator and Invalid Carriages Wages Council’ and the ‘Ostrich and Fancy Feather and Artificial Flower Wages Council’, which covered 400,000 people. These things simply priced people out of real work and minimum-wage laws reinforced this. Late-seventies England was not a happy place, or, rather, what was happy was not real, and what was real was not happy.

There were other ideas around at this time, often of great interest, and reflecting the disillusion of men and women who had regarded the sixties as a time of hope. Much of the inspiration, and even some of the money, came from North America. There, the disillusion had also run deep, and Johnson’s idea of a ‘Great Society’ had disintegrated: as Ronald Reagan put it, ‘We declared war on poverty, and we lost.’ Daniel Moynihan, originally a New Dealer and a Democrat, made himself very unpopular at Harvard (they threatened to burn down his house) because he said that welfare was causing black girls just to do without husbands, and bringing about the disintegration of the black family; that was producing an ‘underclass’ of hopeless misfits who, again through welfare, were paid to reproduce themselves. Education also produced its counter-revolutionaries, who had even, at the very end of his life, included John Dewey himself, the architect of progressive education. The United States was big enough, and decentralized enough, for new ideas to be tried out here and there. But was this possible in an England that was centrally run?

Disillusion with the sixties was now quite widespread. The educational reforms of that decade — comprehensive schools — had demonstrably done nothing either for better education or for social mobility. The concrete architecture that had replaced old and solid Victorian buildings was widely hated, outside architectural bodies, and go-ahead local authorities in the USA even began blowing up the more offensive of the ‘projects’. However, whereas with monetarism there was at least a chance of changed financial ways, the bureaucracies and interest groups involved in these things were not easily changed: short of some coup, they were even irremovable. A very disillusioned figure of the era was John Vaizey. Here was one of the bright young men of the fifties, a clever man, married to a clever art historian (whose brother had written about Orwell), with a background in poverty and for that matter crippling illness: during the war, he had contracted polio, and had been cured by the then methods, which were torture chamber stuff, as he was clamped into a plaster straitjacket for a year, to be fed, immovably on his back, wartime rations. He studied a very difficult subject, the economic effects of education, and wrote well; Labour put him into the House of Lords. But trade-union-dominated England was not for him, and he recognized his mistake. In the seventies, he described it: the more criminology, the more crime; the more sociology, the less community; he could have added, the more economics, the less money. There were many such cases. Noel Annan was also extremely clever, a man for any committee needed to pronounce on the Arts, the BBC, the Royal Opera; but his Our Age is a rueful piece of work, trying to explain quite why his generation had deliberately subverted the wisdoms of the ages; again, it was domination by trade unions that he most resented. In the later 1970s the best British literary editor since Cyril Connolly, John Gross of The Times Literary Supplement, though again sympathetic to Labour, was being driven to distraction because he had to deal with obdurate print unions for days on end every month; in the end they closed him down for a year. There were in all areas ideas of much radicalism on both sides of the Atlantic. In hardly more than twenty years, England changed extraordinarily. Orwell had noted that football crowds behaved as if they were on church parade, and there was remarkably little crime. By the 1970s football hooliganism had become such that, in West Germany, the owners of small hotels in the vicinity of an international game put up notices to the effect that the English were not wanted. In the later 1970s there were warnings, and in the new ‘think-tanks’ set up on an American model, and following the success of the IEA, hard-hitting pamphlets were produced. The mood was set for reaction, but its cause was, as yet, far from won. The various social reforms, and the change in institutions such as the universities or the BBC, were very difficult to combat, and in any case there was no agreement — far from it — that there were problems other than lack of money. There might be a specific British problem to do with uncontrollable trade unions, and perhaps even over the management of the money supply, but that did not automatically discredit the whole structure. Besides, there was always the hope that membership of the European Economic Community would bring an improvement.

Here was another illusion, though a forgivable one, shared by almost anyone in the educated classes. If in 1973 you moved to Europe, you could see that things worked. France had picked herself up, had world-class concerns, and was almost twice as well-off as Britain. Northern Italy was heading in that direction. Especially, the legend of miracle-Germany lived on. The pound sank and sank against the Mark — it had started at twelve, and was coming down to two — and if you came back to Heathrow airport from Cologne or Munich, you either sat in a traffic jam for two hours, getting into London, or you took the underground railway for an hour or so, trundling through endless Actons, whereas in Munich you reached the centre of town from the airport in a quarter of an hour, because someone had taken the point that traffic from airports was not the same as traffic from suburbia. The Americans had never really understood why Great Britain had kept herself apart from Europe, and pressed strongly for her joining it: Henry Kissinger characteristically remarking that it was tiresome to have to make six telephone calls instead of just one, to a counterpart in Brussels. With a cross-party arrangement, British governments duly joined, and, with some media management and some mendacious language, their decision was confirmed by referendum in 1975. Their negotiating position was weak, they were in a hurry, and they were easily outmanoeuvred by the French. Concessions, later regarded as absurd, were made. The country paid more than its fair share of the European budget, and accepted provisions as regards agriculture that proved expensive and corrupt. One positive thing did emerge: the European Court, to which British law was now subject, decreed that trade unions did not have the right to enforce membership (‘the closed shop’), and that, in time, was to counter the protection racket ways that had been developing. But, in the short term, ‘Europe’ did not turn out to be the answer, because Europe herself was losing steam.

Germany looked, in informed British eyes, miraculous. In November 1972 the SPD-FDP coalition won handsomely, and although the Left did make a spirited effort to take over important places, it was always defeated by factors without a British counterpart: the liberals of the FDP controlled essential ministries, with foreign affairs and finance, while the trade unions, quite happily part of ‘the system’, did not get in the way of sensible management of the oil crisis. The Bundesbank defied governments’ attempts to spend money that they did not have, whereas the Bank of England blew hard into asset-bubbles. The Left might make a great deal of noise; Brandt, increasingly and rather sentimentally tolerant of these things, isolated himself, and somehow grew down. Bismarck used to say, On revient toujours à son premier amour, and Brandt’s own weakness, as he grew older, drank more, and showed off to the women, was for the Left of his youth, a split-off from the Communist Party which was quite close, during the Spanish Civil War (in which Brandt had been present), to the POUM, the anarchist element in Barcelona that Stalin had had put down. He became, in a word, vain and silly. His memoirs are very revealing, and they almost typify Graham Greene’s comment, that you live until you are thirty and then remember. In Brandt’s case the memoirs are full of life until about 1955 and then the machine takes over the ghost: his version of Ostpolitik is hardly more than toponymy. His judgement clearly went, and in his closest entourage he was tolerating a clammy East German spy, Günter Guillaume, who, eventually found out, caused Brandt to resign when the FDP foreign minister, the machine-man Hans-Dietrich Genscher, revealed this. Helmut Schmidt, the power in the party, dismissed the Left as ‘half-baked students’ who confused the crisis in their own brains with a general crisis; and he went ahead with an interesting strategy. There would be Ostpolitik. Germany would recognize the post-war borders, and maintain proper relations with Poland especially. Given that, in the previous generation, millions of Germans had been driven out, a great many of them dying on the way, this required much dignity and sense, whereas in comparable situations elsewhere — the Armenians, the Greek Cypriots, or for that matter the Palestinians — self-pity, distorted history and cries for vengeance went on and on (and on). But there would be no sentimental nonsense as to how Left would understand Left; Germany remained firmly in and with NATO, and, when he had to explain why Marks were spent in defence of the staggering dollar, Schmidt was forthright: they defend us, therefore we support their currency. More generally, Schmidt had a strategic sense that good relations with Moscow would in the end mean that a deal could be done there, wiping out East Germany. So it proved. Helmut Schmidt, who smoked heroically on television, aged ninety, and said of Herbert von Karajan that his life had been all discipline (‘loathsome’), was one of the later twentieth century’s none-too-many interesting political figures.

Schmidt took over in 1974, and Germany managed the oil shock quite successfully. Motoring on Sundays was banned; traffic in cities was subjected to controls. To this day, the traffic mess of a British town would be unthinkable in a Germany where elementary enlightenment in such matters — a limit to the number of buses, and a prohibition of deliveries by vans and lorries after 8 a.m. is normal — comes as a matter of course; it is also true that, in spending public money to offset the effects of industrial crisis on old industrial cities, the West Germans were again very successful. Essen, heartland of the old Ruhr, suffered from the competition in iron and steel from up-and-coming countries such as Korea. So did Sheffield. Sheffield, like other northern English cities, was then swamped in ugly, badly planned concrete, with hardly any effect upon employment, and none at all upon prosperity. Essen was simply more intelligently managed, because local government, trade unions and employers knew something and could co-operate for the greater good. Perhaps the essential element was the federal system: if one of the big states embarked on a mistaken strategy, it would have to compete with alternatives practised elsewhere. This happened over education. Left-wing local governments offered an equivalent of the comprehensive schools that were pushed through uniformly in Great Britain, and, at that, schools which kept open all day, in such a way that housewives could work. These Gesamtschulen were, as in England, not only, on the whole, unsuccessful, but in some cases scandalously so. Parents then migrated to another state that had managed these affairs differently. One result was that the balance of prosperity shifted south, into Bavaria and Baden. Another result, some years later, was that the Gesamtschulen improved their ways. Again the question came up, why was England not Germany, rather than the other way about?

However, Europe was not going to be the answer to England’s problems. Whatever its prosperity, there was a sense that, somehow, its creativity was going. It could repeat past glories, and the Bayreuth of Wieland Wagner splendidly did so. But where were the great films of yesteryear, where the interesting architecture, and where, increasingly, the young generation? Overlaying it all, there was a cultural malaise, as the Germany of the ‘miracle’ generation bored its children, and still more its grandchildren; the universities were to suffer over this. Hans-Magnus Enzensberger, the German Orwell, moved over the border to Denmark, and just despised his native land: he notes, for instance, that at some time in the later eighties Chancellor Helmut Kohl’s New Year Address, on television, was got wrong: they played the previous year’s address, and no-one noticed. Enzensberger was bored, but was bored by the wrong things. He noted, quite rightly, that television was the opiate of the masses, that people would just look at a row of dots on the screen as if it mattered, that there were seventy people writing doctoral theses on one poet. But he was the product of a world that hated its grandparents, and shook its head at its parents. Of course, it was true that families mattered, but did there have to be a law by which a wife could not take a job until she had performed her housewifely duties? That made sense, but only if the tax system supported fathers, and the sheer costs meant that the State taxed, and did so in defiance of its own rules. Problems were coming up in this, and though the coalition government did try to modernize, it did so superficially. The intelligentsia were bored. Bayreuth put on strange interpretations of Wagner, and Horst-Eberhard Richter produced a ‘Physicians for Peace’ movement, recording that ‘we men must learn to overcome the militant image of masculinity’. Heavy, charmless, sentimental German Protestants hawked their consciences round the world, and chicken-muscled women in shorts were to be seen in the vicinity of the old Teutonia-Haus in the old Istanbul street of steps, looking patronizing right and left, and regarded with wonder by the locals: why were north European women so unappetizing? And yet Germany was the admirable European country, if you judged these things from the viewpoint of an England in which nothing worked. In the early 1980s England was going to produce an extraordinary counter-attack.

There was more. Helmut Schmidt had a sense of strategy, that Germany could be a model for East and West alike, and the country could take a lead in Europe. Here, he encountered France. The decline of the dollar maybe made some opening for an alternative world currency, the euro. However, there were severe difficulties. True, there was a successful economic community, but the economies were quite different, and England especially, where property had a preponderant part, and there were worldwide interests, did not fit.

French and German budgets were very different: in France deficits were second nature, whereas in Germany the Bundesbank had its rules and could operate independently, to encourage saving. The Common Agricultural Policy took up almost all of the European budget (a uniform fraction of the value added tax, itself varying from place to place) and if the franc went down against the Mark then there were problems as regards adjustment of the sums to be paid to farmers in the way of subsidies. In the end, a European common currency could just mean Germans paying Frenchmen to do nothing, and the British were as usual in the middle as regards the dollar. Even Helmut Schmidt shook his head at the complications.

The Germans went doggedly on, trying to find some formula for sensible foreign exchange. This really boiled down to some scheme by which the German taxpayer would pay for it, and in 1979 the French graciously agreed: a European Monetary System was founded, authorizing governments to draw unlimited credit to defend their currencies. Schmidt called this ‘part of a broader strategy for political self-determination in Europe’, and then had a battle with the Bundesbank, which would have in effect to create inflation in Germany in order to pay for irresponsible finance in France and Italy. The decreed rates, originally variable only by small percentages, had in the event to be widened, and there were also controls on capital movements — all of this a breach of the free-trade rules. In the early 1980s France even had a preposterous rerun of the Popular Front, and controls on ‘capital’ meant, for a time, that travellers could not take cash abroad. The bourgeoisie then re-enacted the suitcase-to-Switzerland part of the French historical scenario. Early in 1983 this farce was stopped, and two Frenchmen of guile, Jacques Delors, and his Treasury secretary, Michel Camdessus, were able to point to the high unemployment, the high inflation and the general bankruptcy of state concerns as evidence that ‘Europe’, rather than the go-it-alone Popular Front line, was the answer.

By the turn of 1978-9 the conviction grew that international co-ordination was not possible, given the weakness of the dollar. Trade would suffer, and inflation would rise. That summer, 1978, the dollar fell, interest rates rose, and Carter imposed wage-price stops. He organized swaps of credit, and issued US bonds denominated in yen and DM. This was designed to help the ‘real’ economy — thought to be in good condition — to ignore the financial fluctuations, held to be ‘unreal’. Poor Carter was unlucky. The world was about to be hit by a second oil shock. Late in 1978 Iran boiled over. Here had been a sort of showcase of modernization. The rulers of Iran had looked to the example of Atatürk’s Turkey in the past, a country where the alleged or real backwardness of Islam had been overcome. Rulers of Iran had a history of misunderstanding Turkey. Atatürk had not really persecuted Islam at all; he had tried to limit the excesses of religion where its ambitions to control the State, and education, were concerned. The Turkish state had also been honest, whatever its mistakes. The Shah of Persia broke both of these rules. Besides, Turkey had no raw materials to speak of, and money was scarce: austerity reigned. In Iran money in enormous quantities poured out of the ground, in the form of oil, and the Shah became for a decade or so the figure of which his title, ‘King of Kings’, spoke. The great of this world paid him court. His self-understanding caused him to look down on assorted Arabs as wild tribesmen; and Persians by tradition also regarded Turks with much resentment, because (as to a degree with the Hindu nationalists on the subject of the also Turkic Moguls) they were alleged to have thwarted the otherwise obvious course of the great and Aryan Persian civilization towards the patterns of the West. In fact (a fact very frequently denied) a good third of his subjects were Azeri Turks. The Shah did not regard them with much favour. He had launched a gaudy programme of modernization, expecting (a mistake much made elsewhere) that Islam would vanish once Moslems understood that the world offered rewards for those who abandoned the rules of a very strict religion. Why bother with chastity and virginity tests in an age of contraception? Money was spent — most grotesquely, on a ceremony at the ancient city of Persepolis, where the King of Kings sat on a golden throne and dispensed patronage to an assortment of academic specialists and emissaries of the world. Money was also stolen. Teheran acquired huge traffic jams and vast concrete buildings. Western parasites arrived, middlemen of middlemen. An inflation got under way, which left the bazaar people, with their habits of thrift, of saving even empty jars and used boxes, impoverished, while the speculators were enriched. Part of the educated middle-class youth turned Communist, and the Savak, the secret police, did not treat them gently. They took up an alliance with the Islamic opposition, and they, too, suffered from a patronizing arrogance, leading them to see these people as just infantry fodder for a revolution that would soon turn Communist — an illusion that the then Soviet advisers also shared and promoted. Strikes and demonstrations began. The final push came from Carter. Persuaded that the Shah’s regime was too oppressive, that America’s mistake in the past had been to alienate the Castros and Allendes through CIA action, he encouraged the Shah to hold back. In the same way, his official representative at a human rights gathering had solemnly stood up and apologized for his country’s handling of Allende and Chile. And so the Shah was overthrown. But his successors were not Communist at all. Over the turn of 1978-9, after various governments had passed in and out, the Ayatollah Khomeini took over, a grim, elderly figure whose prescription was theocracy, the Rule of Saints. The Saints manifested themselves in mobs of students, in gruesome executions, in parades of black-garbed women vociferously demanding that Westernization, in particular the ways of ‘satanic’ America, should be put down. This left the Communists nowhere: they — who after all did represent women’s rights and much else that Islam did not wish to see — received as much persecution as the rest, if not more. The Western oil companies, where they did not at once leave, were expelled, subject to persecution or worse. Accordingly, oil prices went up all of a sudden: they doubled. Another version of the troubles of 1973?

To start with, paradoxically, the dollar rose in value because in times of trouble the world, including Iranian Islamists, used it as money of last resort. Dollars also flowed back to the USA, again for reasons of safety. Gold rose from $200 per ounce to $875 in 1979 as the Middle East produced crises — the Iran hostages affair, and then the Soviet invasion of Afghanistan. Carter himself had somewhat turned, appointing William Miller of the Fed to the Treasury and Paul Volcker of the New York Fed to run the American equivalent of a central bank. There was to be a meeting of the IMF at Belgrade late that summer. Volcker received lectures from Helmut Schmidt and once returned to the USA that October he announced that the defeat of inflation would be the Fed’s main target. Interest rates would rise as much as necessary, and there would be direct control of bank reserves. American opinion had been the most important factor, but it also mattered that the Germans were rebelling. After all, at the Bonn summit in 1978 there had been a great deal of resentment of the Americans’ ways, and even threats as regards trade; there were large imbalances as states reacted differently to the second oil shock, and the Europeans’ Exchange Rate Mechanism had been called into existence to provide for some stability in a world dominated by the fecklessly managed dollar.

This was an absurd way to manage world trade and international money. It also encouraged mathematical-minded parasitism on an enormous scale. At a scrape with a felt-tip pen in Japan, or by a fax, or the touch of a computer button, elsewhere, huge sums of money could move from one currency to another, in search of a profit based on some even tiny movement of interest rates or bond yields. By 1992, $880bn went through the machines every day — one third of the value of the whole of the world’s annual trade. In 1987 that process was already well under way, when it amounted to a tenth of world trade. This was in effect a huge and grotesque comment on the ‘Triffin Dilemma’, and that man had identified the central problem of Bretton Woods almost before the ink was dry on it. The Americans themselves suffered 30 per cent inflation in the 1960s, and yet unemployment reached 6 per cent in 1971 and New York City went bankrupt in 1974. Latin American countries borrowed joyously in paper, built upon paper, and ran into great trouble, as their rich just moved the money out, into property in Miami, where a crime wave emerged. Here were contradictions of capitalism in neon lighting, and most media commentators on the Continent scoffed. Could not Europe produce a currency that meant something? The Mark (the Swiss franc played a similar role) might then represent real, sensibly managed money. One way was the setting-up of a European currency, a standard in a fluctuating world. They tried. It was not easy, because Carter was rather stupid. Schmidt had to repeat things to him, more than once, for him to understand, and the two men ended up regarding each other with wonder, the one in a cloud of cigarette smoke, and an experience of the Eastern Front of the Second World War, the other with very little experience of anything at all except his mother.

Meanwhile, the oil money was floating around, waiting to land wherever it could find even a tiny percentage of profit, and it moved into Latin America and central Europe, especially Poland, the rulers of which were projecting themselves as a new Japan. When Citibank left Okęcie airport at Warsaw, after signing the deal, the plane was delayed on departure because a drunken baggage-handler crashed his vehicle into it. That debt built up, and up, and even Professor Congdon worried enough about it, in 1986, to write an alarmist book. It was not necessary: the debt was simply not paid, or, rather, the American taxpayer paid it. The West, in the summer of 1979, was in poor condition, and Europe was not producing the answers. Creativity would have to come from the Atlantic again, and it did. Margaret Thatcher emerged in May, and Ronald Reagan was elected President in 1980.