naked capitalism

Economists really do seem to struggle with history – and sometimes geography, too. Brad DeLong needs to remember that the Financial Times is published in London. As far as most combatants were concerned, the second world war broke out in September 1939.

Niall Ferguson, FT, 20^th July 2010.

Goodish point. On the other hand, Ferguson isn’t quite so solid when it comes to counting up the number of wars in which the U.S. is currently engaged:

People are nervous of world war-sized deficits when there isn’t a war to justify them.

Niall Ferguson, FT, 19^th July 2010.

So he’s lousy at sums, or very fussy about what counts as a war, but good at geography. But what happens when Fergusonian neo-imperialist historical revisionism encounters Fergusonian austerity economics? Let us see.

My texts today are “Royal Navy strategy in the Far East, 1919-1939: preparing for war against Japan”, by Andrew Field, which, if you like that kind of thing, you can order from Amazon, and “The Economic Consequences of Mr Osborne”, subtitled “Fiscal consolidation: Lessons from a century of UK macroeconomic statistics” by Victoria Chick and Ann Pettifor, which is available online. With a dash of wikipedia, for quickness.

We’ll kick off with the demobilisation hit in the UK at the end of the First World War, raiding Chick and Pettifor for the numbers:

“After World War I, expenditure was cut sharply between 1918 and 1920” – Chick and Pettifor

There is always a demobilisation hit after a big war; but yes sirree, that is quite some cut. Despite the GDP contraction, there is still some vigorous inflation (this kicked off early in the war, just as it did in Germany, as the mutual blockade bit), and the debt/GDP ratio has got a lot worse.

In the mean time, British politicians are fretting about a resumption of the pre-war arms race in battleships; this time the expected competitor is none other than the United States of America. To digress: these today-unimaginable threat assessments are always rather quaint; my all-time favourite is the Thirties US Army study that took the main threat against the US to be an onslaught from the north by three million rampaging Canadians.

An enterprising British Admiral suggested the right answer – just explain to the Americans what ships we think we need to build, and why, and they’ll be fine with it. And it worked! Aren’t Americans nice? Incidentally this success prompts Ferguson to suggest in one of his books that the same diplomatic technique could have been deployed on the Kaiser, pre-war, averting the whole naval buildup 1904-1914. Huh. Anyhow, the whole deal is codified in the Washington Naval Treaty:

After the signing of the Washington Naval Treaty [1921], the Royal Navy achieved parity with the United States Navy, and superiority over the Imperial Japanese Navy, by slashing existing construction programmes (largely on paper in the British case, although many of the older British battleships also had to be scrapped) and limiting future construction, until after a ten-year ‘holiday’ on building.

- Field

The Brits got pretty much what they asked for out of this. They could stop worrying about annoying the Americans, and start to concentrate on what they new, even in the early 20s, was the real threat to British interests, Japan. That ten-year ‘holiday’ was not an Admiralty idea, though:

…The Admiralty continually represented its case for a navy sufficiently large to ensure the safety of British possessions and maintain sea lines of communications. Their reasoning though was often too imprecise to politicians keen to accept naval arms limitation and seeking cuts in expenditure, despite the erosion of the pool of specialist warship builders and the loss of skilled men from their yards that this would entail. The danger was that at the end of the ten-year building holiday, with an ageing British fleet needing to be modernized and replaced, the shipyard capacity and workforce to do the jobs would no longer be there.

Field

And the treaty holiday – the abrupt cessation of a huge chunk of manufacturing activity – ripples straight back into the already demob-hit British economy – shipbuilding, steelmaking, armaments manufacture, what passed for high tech in those days. Back to Chick and Pettifor:

“The post-­‐war macroeconomic outcomes were nasty. There was a very sharp rise in unemployment and fall in GDP – especially in nominal terms; a severe dose of inflation was followed by a severe deflation. Government bond yields remained virtually static in nominal terms, but in real terms yields turned extremely high (not shown, but derived by comparing interest rates with the GDP deflator growth).” - Chick and Pettifor

And then there was the “Geddes axe” (the massive naval cuts of 1921), and then more axework in subsequent years, as politicians contemplated that ever worsening debt/GDP ratio, and cut, and cut, and cut:

Expenditure on the Royal Navy, and financing its plans at a time of economic depression continued to be a bone of contention, and in 1923, on the heels of the 1921 ‘Geddes Axe’, a committee, chaired by Sir Alan Anderson, reported on naval pay. The committee concluded that naval pay was too high relative to other workers and in 1925 an Admiralty Fleet Order established a lower rate of pay from men joining after 5 October, but seemingly guaranteeing the older, higher rate to those who had joined before this date.

- Field

The General Strike (1926) seems to have achieved a temporary halt to the cutting frenzy. Note the identity of the axe-wielding Chancellor whose fondness for the Gold Standard precipitated the General Strike:

Churchill was appointed Chancellor of the Exchequer in 1924 under Stanley Baldwin and oversaw Britain’s disastrous return to the Gold Standard, which resulted in deflation, unemployment, and the miners’ strike that led to the General Strike of 1926.^[80] His decision, announced in the 1924 Budget, came after long consultation with various economists including John Maynard Keynes, the Permanent Secretary to the Treasury, Sir Otto Niemeyer and the board of the Bank of England. This decision prompted Keynes to write The Economic Consequences of Mr. Churchill, arguing that the return to the gold standard at the pre-war parity in 1925 (£1=$4.86) would lead to a world depression. However, the decision was generally popular and seen as ‘sound economics’ although it was opposed by Lord Beaverbrook and the Federation of British Industries.

Churchill later regarded this as the greatest mistake of his life. However in discussions at the time with former Chancellor McKenna, Churchill acknowledged that the return to the gold standard and the resulting ‘dear money’ policy was economically bad. In those discussions he maintained the policy as fundamentally political – a return to the pre-war conditions in which he believed. In his speech on the Bill he said “I will tell you what it [the return to the Gold Standard] will shackle us to. It will shackle us to reality.”

- wikipedia

The axes came out again after the Wall Street Crash:

After the 1929 Wall Street Crash and the start of the Great Depression in Britain in 1931, and with the country in a grave financial state, another committee was set up, chaired by Sir George May, to determine how to cut public expenditure even further and retain the Gold Standard. His Committee decided that cuts in naval pay would be necessary and that no guarantees regarding the higher rate of pay had been made. Despite the First Sea Lord’s protests, the First Lord, Alexander, had little alternative but to announce that the Royal Navy would accept the May Committee’s recommendations.

Most of the Royal Navy’s personnel found this out from the press and not from their officers. The result was…the Invergordon mutiny”

- Field

British labour relations were not at their best that day. The Invergordon mutiny was quite a small mutiny, 1,000 sailors for a couple of days, but RN sailors aren’t supposed to do that, and the effect was convulsive. The mutiny took place on the 15th-16^th September 1931; by the 20^th, there had been a stock market crash, a run on sterling, and the UK was off the Gold Standard, for good this time:

…This was a low point for morale in the Royal Navy and great damage was done, not just to the prestige and image of the Royal Navy, but also to the nation as a whole; confidence in Britain slumped, inflation rose and the government had to abandon the Gold Standard. For the rest of the decade the Royal Navy would struggle, not just to build up the battle fleet at a time of economic constraint, but also to rebuild its self-confidence.

- Field

So that’s the shipbuilding capacity impaired, the technology investment chopped off, the design expertise and design teams dispersed, a massive morale hit, the economy more or less growth-free for a decade, and we are still short of the deepest point of the Great Depression. The Royal Navy’s preparations for war with Japan do not appear to be going well, do they? They never did get the ships they needed to implement their policy; here’s how it ended:

On 10 December 1941, three days after the attack on Pearl Harbor disabled the US Pacific Fleet, Force Z, the Royal Navy’s battleship Prince of Wales and the battlecruiser Repulse, were sunk by Japanese aircraft. On 25 December the colony of Hong Kong fell to Japanese forces and on 15 February 1942, Singapore, with its extensive naval facilities, surrendered. Twelve days later, at the battle of the Java Sea, Allied naval forces were annihilated by Japanese forces.

…British Far Eastern naval strategy, carefully crafted and developed in the years following the First World War, was shattered by these disasters…it would be 1945 before a Royal Navy fleet was again active in the Pacific. By then the United States Navy reigned supreme, the largest and most powerful naval force in the world, and the end of Britain’s imperial presence in the region was inevitable.

- Field

Now I am not such a big fan of Empire as Ferguson, though I do quite like the story of the Navy. But I do find it hugely ironic that it is so easy to argue that the very economic measures that he espouses destroyed the British Empire.

Different times now: not much manufacturing sector left to chip away at, and no empire to lose, and no really big war just behind us.

One thing though: here in the UK, we are now constructing our biggest naval ships since the end of World War One; perhaps this is some sort of leading indicator of crashes for us, like the height of skyscrapers in the US. The general debt set-up does seem unnervingly similar; this time a small war, a bank bailout and a hefty public sector commitment stand in for the big war. And the mindset is the same. So we are about to see how Mr Osborne compares with Mr Churchill.

Powerful stuff, this austerity economics. Perhaps the subversive fringe should actually be more in favour of it; it seems to be good for ushering in new world orders. A new world order might be the result this time, too, making due allowance for the different politics and economy of the US.