It is a little over a year since black Monday 19 October 1987 and the stock exchange collapse which wiped about $2 trillion off the value of shares on the world exchanges in three days.
In the words of the Financial Times a couple of weeks ago:
At the time it looked … and felt … like an earthquake, an event that would change the economic direction of the world.
The spectre of another 1929, of a stock exchange collapse followed by a world economic slump, was propounded on both Left and Right in the House and outside.
Instead, paradoxically, we have seen a further expansion of the economies of the western world, with an average growth rate of 3·5 per cent. in developing countries which is expected to rise to 4 per cent. next year.
What is really interesting is that the doubts that were expressed 12 months ago still remain. The attention that today's debate has received demonstrates that, and rightly, because the problems that faced us some 12 months ago are far from solved.
The Chancellor is no longer the emperor of the world. Even within the Conservative party the critics and the doubters multiply. Among the more sober analysts outside the House, that trend is much more marked—indeed, it is exponential. During the Budget debate I hazarded the idea that the Chancellor would become known as the emperor without any clothes, and that is becoming more and more evident every day, even if it is not a particularly pretty thought.
Before the stock exchange collapse in 1929 the economic cycle had already begun to plummet, unlike in October last year. Production reached a peak in April 1929 in Germany, in June in America and in July in Britain. In America, manufacturing production dropped 20 per cent. between August and October 1929. The crash that followed was based on a tight money policy which led to a large number of bankruptcies. It led to the Smoot-Hawley Act of 1930, which provoked a world trade war. Protectionism, competitive devaluation and similar measures transformed the recession into a deep slump in which millions of people throughout the world suffered.
Sixty years on we have a different world with a more integrated economy. That was shown by the suddenness and universality of the October 1987 crash. On that occasion the group of seven countries attempted to learn from the experience of 1929 and tried to ward off the recession by pumping $100 billion into the United States economy. At the same time, particularly in this country, there were policies of increased Government spending, cheaper credit and tax handouts to the rich. There has been a reflation in all major Western economies, but nowhere more than in Britain where the Government have doubled the money supply over the past two years.
The fact that there has not been a similar increase in the production of capital goods and commodities has led to an increase in inflation. It is already 6·4 per cent. in Britain and 4·6 per cent. in America. With the exception of West Germany, it is rising in all the countries of the Western world.
The Chancellor said there will be no change. In fact, since last October the Government's policies have marked a fundamental change in the monetarist policies that the Government followed in the previous eight years. Continuing to reflate will lead to the same consequences as those which occurred in 1973 and 1974 when inflation in the OECD countries averaged 14 per cent. and reached 25 to 30 per cent. in some countries, including Britain. After a small change in policy towards inflation the Chancellor is now using the crudest of monetary weapons—a rapid increase in interest rates and a return to stop-go policies, which he has decried in the past.
The Chancellor faces a twin dilemma. There is stagflation—economic stagnation with high inflation—or a continuation of high interest rates which, as has been said, will lead to a fall in investment in productive industry, over-valuation of the pound, a fall in British exports, and an increase in our trade deficit.
The Chancellor talks as if Britain is an isolated island cut off from the rest of the world and as if it did not feel the effects of the American economy. In America the trade deficit is rising. It is over $170 billion and the budget deficit is $135 billion. American interest rates are rising as our interst rates rise, and the strength of the dollar increases as the strength of the pound increases. However, there is still the danger, as there was a year ago, of an increasing trade war and restrictions on world trade which will lead to a world recession. That would have appalling consequences, particularly for Britain. Countries such as Japan will have to seek other markets in Europe, as will West Germany. Thirty per cent. of our manufacturing base has been destroyed and our productivity is one third to a half less than that of our major competitors. Manufacturers are already complaining about the lack of a skilled or trained work force.
With those problems Britain will face a desperate economic position. Those who want to talk about a market economy should look at the world in which we live with its booms and slumps which affect the lives of millions. There is a net transfer of financial resources from developing to advanced countries in excess of $30 billion per year. That is leading to appalling conditions in those countries. There are still 20 million people unemployed in the OECD countries, and in Britain at least one third of the population lives in poverty and at least two fifths have not benefited from the policies of the Government and have lower living standards.
We should not forget the social consequences of the Government's policies. In an editorial in The Sunday Telegraph Peregrine Worsthorne said that the Government
fail to grasp the depth of outrage done to socialist-minded people by this Government; far greater outrage than was ever done to Tory-minded people by any Labour Government. Just imagine what the state of Tory opinion would have been if a Labour Government had ever felt strong enough to introduce a swingeing wealth tax, abolish the public schools, nationalise the Oxbridge colleges, prohibit fox hunting, proscribe titles and turn Whites' Club into a GLC creche".
He went on to say:
There is no gratitude in politics. Those who have benefited from the Thatcherite revolution won't thank her if they see their gains eroded".
He ended by saying:
Not only has she trampled on genuine ideals with deep roots in our national history but enjoyed doing so. In economic good times this did not matter. But if economic times turn downwards … it could matter a lot.
The Government's economic philosophy is based on the belief that there is a choice between the bureaucratic state-owned economies of the East and the free-for-all market economy they preach. I believe that there is another choice—a democratic socialist choice—where the state intervenes in society, not in a bureaucratic way but democratically, with the full involvement of the producers and consumers in our society.