Monday, October 12, 2015
Geoffrey Howe, exchange controls and the 1981 budget
Posted by David Smith at 01:00 PM
Category: David Smith's other articles


An extract from my book, Something Will Turn Up

The 1979 budget was big and bold. Rarely has a government set out its stall, and its philosophy, so clearly. The argument was that if these big changes had been delayed, they might never have happened, once events intervened. As significantly as the income tax cuts and the big shift from direct to indirect tax was another section in Howe’s speech.

Exchange controls had been the cross that British individuals and businesses had had to bear through sterling’s long period of vulnerability. During the worst of the country’s ‘sick man of Europe’ period in the 1960s, before and after the 1967 devaluation, a £50 ‘foreign travel allowance; operated, this being the limit on the amount of money British travellers could take abroad. That was probably the least important though most visible aspect of exchange controls. Partly to hold the Bretton Woods system together, most countries operated controls on the amount of capital that could flow in and out. For countries with vulnerable balance of payments positions, which could be exposed by flows of ‘hot’ or short-term money, such controls had come to be seen as very important. All that changed for Britain in the space of just a few months in 1979. In his budget speech, Howe said it was now ‘an appropriate time to start dismantling our apparatus of controls on outward capital flows’.

In his budget speech, Howe suggested that his approach to the removal of exchange controls would be a cautious one. It would be a ‘progressive dismantling’, he said, and determined by the strength of sterling among other factors. In the event, the chancellor was able to proceed a lot more rapidly than he thought. Just four months after his budget he announced to a surprised House of Commons that all the remaining exchange controls were to be abolished. This was quite a moment. Nothing better illustrated the commitment of the Thatcher government to free markets than this bold move to allow people and businesses to decide for themselves how to money across Britain’s borders.

It set the standard for the rest of Europe, which eventually followed suit by removing national exchange controls, though in some cases not for a decade or more. The Labour Party complained that it would cost British jobs, as firms used their new freedoms to invest overseas, although in subsequent years Britain was a net beneficiary of such flows, as inward investment increased sharply, particularly from the Far East. It also signalled to the world that the Thatcher government meant it when it said it would be radical and reforming.

The removal of exchange controls was one of the most important reforms of the Thatcher era, alongside other financial liberalisation including freeing the banks to enter the home loan market, the removal of hire purchase controls and the Big Bang reforms of 1986; which opened the City up to foreign ownership and brought the phenomenon of investment banks to Britain. A controlled financial system became a liberalised one, with both good and bad consequences.

Sunday, October 11, 2015
China sneezes: Is the rest of the world catching a cold?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

How worried should we be about the world economy and, by extension, Britain’s recovery? Is it time to batten down the hatches or is this just a pause for breath?

Should there be emergency action to boost global growth which, with the monetary levers already turned up to maximum can only mean a massive Keynesian fiscal boost, as advocated a few days ago by Larry Summers, the former US treasury secretary?

Concern over the global economy has been building for some time, most notably in worries over China and even America, where the majority on the Federal Reserve’s decision-making committee is keen to get on with raising interest rates but has so far been thwarted by global developments and disappointing US data.

That concern has been brought into sharper focus, however, by the latest forecast from the International Monetary Fund. The IMF’s forecast for world economic growth this year is just 3.1%; and given how much of the year has gone it is as much an assessment as a forecast.

Friday, October 09, 2015
A review of Something Will Turn Up
Posted by David Smith at 08:30 AM
Category: Independently-submitted research


A review of my book Something Will Turn Up, for the Society of Business Economists

By Andrew Sentance

Something Will Turn Up is a very readable, semi-autobiographical account of the UK’s economic fortunes since the mid-1950s, as seen through the eyes of David Smith, Economics Editor of The Sunday Times.

David starts his narrative with a description of the Black Country economy around Walsall in the West Midlands, where he was born and brought up. The local economy was dominated by manufacturing industry, which prospered in Britain in the 1950s and 1960s. As our industrial competitors in continental Europe and Japan rebuilt their economies after the ravages of the Second World War, Britain supplied a wide range of manufactured goods to customers at home and abroad. ‘Made in Britain’ was a hallmark of quality and a source of national pride.

One key theme of David’s book is the story of how a country dominated by manufacturing industry has evolved to become the post-industrial British economy we now inhabit. The peak year for UK manufacturing jobs was 1966, when British industry employed over 9 million people. Around 50 years later, the figure is down to around 2.5 million, a decline of over 70 per cent. UK manufacturing industry was partly undermined by its own weaknesses – poor management and bad industrial relations. But it was also the victim of tougher global competition, big financial shocks and mismanagement of the national economy.

Another major theme of the book is periodic economic crises. After the shock of the 1967 devaluation, the UK economy appeared particularly accident prone in the 1970s, 1980s and early 1990s, which included three major recessions, the 1976 IMF crisis, and exit from the ERM in 1992. The UK economy seemed to follow a steadier economic path from the mid-1990s until the mid-2000s, but the illusion of stability was shattered by the Global Financial Crisis.

Sunday, October 04, 2015
Denis Healey and the IMF
Posted by David Smith at 12:45 PM
Category: Thoughts and responses


This is from my book Something Will Turn Up, on Denis Healey and the IMF.

If the West as a whole had problems, brought on or exposed by the end of the cheap energy era, Britain had much bigger ones. When Harold Wilson and his chancellor, Denis Healey, travelled to France in November 1975 for the Rambouillet summit Britain’s inflation rate had hit 26.9 per cent the previous August and was still more than 25 per cent. Though price changes were much more volatile in the distant past, often reflecting agricultural harvests, official figures show only two years when inflation in Britain was higher than in 1975: 1800 and 1917. 1975, when inflation appeared to be out of control, was a terrible year for the British economy. In April, in what looks like an unusually well-judged call, the Wall Street Journal, then the oracle for American investors, ran the unforgettable headline ‘Goodbye, Great Britain’ and advised its readers to get out. If 1975 was a bad year, there was worse to come, and it was to come very quickly: 1976 was even worse.

The Wall Street Journal had picked up what was happening to the British economy, and it was not alone. Since the war, Western governments had operated Keynesian demand management policies, adjusting taxation and government spending in a counter-cyclical way, and thus trying to smooth the extent of the cycle; by dampening booms and heading off busts. If that was the strategy during the golden age up until 1973, the policy followed by Wilson and Healey from 1974 to 1976 was Keynesian demand management on steroids.

Those green shoots were always stronger than we were told
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

History has been rewritten. What we were told was happening to the economy two or three years ago was not happening. Growth was stronger than the official figures of the time told us it was. Hundreds of “flat-lining”, “double-dip” and even “triple-dip” headlines were written in vain.

Nor is the process over. The revisions a few days ago to the growth numbers for 2011-13, foreshadowed here last week, are not the end of the history rewriting process. Indeed, we are still very close to the beginning. It will go on for many years.

Long after the figures have ceased to be of interest to anybody other than economic historians, they will carry on changing. There is nothing wrong with that. It is good that the Office for National Statistics (ONS) does not close the books. As new information comes in, or new methodology is adopted, the numbers are revised.

It is important to recognise, however, that these things matter. As I have pointed out before, comparisons between the current recovery and its predecessors are meaningless, because the data on previous recoveries has been through many more revision cycles than recent figures. One day, maybe in a couple of decades, we will know for sure whether this recovery was weaker than its post-war predecessors. We cannot know that with any certainty yet.

It also matters for the decisions that were taken at the time. Rupert Harrison, George Osborne’s former right-hand man, tweeted after the gross domestic product (GDP) revisions were released that they showed that Britain had enjoyed exactly the same growth since the first quarter of 2010, the last quarter before the coalition took over, as America.

Sunday, September 27, 2015
Bank frets that is has run out of ammunition
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The economic news is generally good, particularly in Britain. Growth has decent momentum, zero inflation is bringing strong gains in real wages, business investment is rising, and consumer and business confidence are high. There are even signs of a productivity revival.

Not only that but this week official figures will show that the recovery was stronger than initially thought, as is often the case. The Office for National Statistics (ONS) will revise growth in 2011 up from 1.6% to 2%, 2012 up from 0.7% to 1.2% and 2013 from 1.7% to 2.2%. The 3% growth number for 2014 will probably stay the same.

These revisions will be a reminder that conclusions drawn about the state of the economy on early ONS data are often misleading. Britain was never “flatlining” during the last parliament. Average growth over 2011-14 was more than 2% a year. Quarterly growth on the new figures was stronger on a number of occasions than in the second quarter of 2010, when the coalition took over and before most deficit-reduction measures were introduced.

I’ll return briefly to those revisions in a moment. The point about the generally good news about Britain’s economy is that it stands in sharp contrast to the fears stalking the world’s stock markets. The Greek crisis gave way to worries about China, which continue. There are now concerns that the Volkswagen scandal could drag down Germany. In a world of worry, it never rains but it pours.

Sunday, September 20, 2015
Even at low rates, infrastructure's not as easy as it looks
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Even without going as far as Churchill – “If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions” – we expect economists to disagree. Consensus is rare, debate and disagreement the norm.

If there is one thing on which you would get something close to consensus, however, it is that the current period of very low interest rates presents an ideal opportunity for governments to borrow and spend on essential infrastructure.

After all, there is no country in the world, not even China after its public investment boom, which could not improve its infrastructure. Britain could certainly improve her roads, railways, schools and hospitals. There is a pressing need for new investment in power generation. The economic effect of building new infrastructure is to generate more employment and economic activity directly, as well as improving the economy’s performance over the long run.

Not many sensible economists would agree with Jeremy Corbyn’s “people’s quantitative easing”, if it ever becomes a policy – and it was good to see Mark Carney put his head above the parapet to attack it – but plenty think there should be more infrastructure spending.

Fiscal multipliers associated with infrastructure spending are higher than for other public spending; in American parlance you get more “bang for your buck”. It looks like a win-win. So why is it not happening?

Saturday, September 12, 2015
The Great Escape: How Scotland dodged a bullet
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

A year ago this Friday the Scottish people voted on whether to remain part of the UK. It was a big moment, more important because of its irreversibility than this year’s general election. Maybe more important than the coming referendum on European Union membership.

The Scots, of course, voted no, by 55.3% to 44.7%, to my considerable relief and I hope theirs. In doing so, they gave us a Scottish version of The Great Escape. They dodged a bullet. Had Scotland voted for independence, its economy would be in deep trouble. Nicola Sturgeon, its first minister, would not be attacking George Osborne’s austerity but announcing more of it in an effort to prop up Scotland’s chronically weak public finances.

But, and this is not purely a backward-looking exercise, these issues have not gone away. After rejecting independence in September last year, Scottish voters flocked to the Scottish National Party in the May general election, its 50% vote share being enough to give it an astonishing 56 out of 59 Scottish Westminster seats.

Buoyed up by this, some in the SNP have been talking up the prospect of a second referendum, with its former leader Alex Salmond saying it is “inevitable”. A vote to leave the EU would be seen by the SNP as one reason to hold a second referendum but there could be others.