Britain has become the world's great experiment in curing inflation through monetary restraint. The disappointing results of that experiment to date represent much more than the traditional British tendency to transform solutions into problems.
Prime Minister Margaret Thatcher came into office with goals very similar to those of President-elect Reagan: reducing inflation, cutting government spending and stimulating a renaissance of private enterprise. With the best of intentions and the most diligent of efforts, her policies have produced the worst of results.
Britain's current economic program may be likened to driving a car while pressing firmly on both the brake pedal and the accelerator. The car is not going anywhere, but the friction of conflicting forces is tearing it apart.
The brake is monetary restraint. Thatcher hoped that a firm, gradual deceleration of growth in the money supply would produce a gradual deceleration of both inflation and inflationary expectations.
Merely finding the monetary brake has proved to be unexpectedly difficult. Instead of steadily declining, money supply growth has been extraordinarily volatile, mostly on the upside. Effective control of the money supply is the missing centerpiece of Thatcher's program.
The blame for excessive and uncontrolled money supply growth is placed squarely on the Bank of England. Even more than our own Federal Reserve, the Bank of England has been reluctant to exchange its hallowed policy of controlling interest rates for the new policy of controlling money supply growth through bank reserves.
While the Bank of England fumbled unsuccessfully for the monetary brake pedal, the British Treasury began pressing firmly on the fiscal accelerator. Fiscal stimulus from rising budget deficits is the unwanted by-product of a recession that increases both unemployment claims and the deficits of nationalized industries.
Britain's nationalized industries have become a bottomless pit that swallows ever-increasing amounts of cash. British Steel alone will exceed it original cash limit by about $1.5 billion in the current fiscal year. Conservatives are reputed to be tough economic managers, but recession and bureaucratic inertia have proved even tougher.
After campaigning on a platform of reducing government spending as a percentage of GNP, Thatcher has been embarrassed to preside over a rise in it. Cutting spending is not easy when a large part of the public has come to depend on that spending.
The Treasury's yawning budget deficit means that Britain's meager private savings go to finance public consumption, not private investment. Crumbling corporate profits and high interest rates are destroying both the incentive to invest and the financial ability with which to do it.
Declining investment will reduce further living standards, but the pain of Thatcher's program is already apparent in the highest unemployment rate in 40 years. Even today's high unemployment rate is expected to go higher year as the economy sinks still deeper into recession.
Thatcher's patience has been tested by the disappointing and often perverse of her own policies. The British press watches "Attila the Hen" like a hawk for any sign of a policy U-turn toward massive stimulus of the economy, but so far she has made minor detours along a very bumpy road.
Lower inflation, the goal for which Thatcher has traveled that very bumpy road, has proved a disappointingly elusive goal. The inflation rate spurted to 20 percent shortly after she took office and only recently declined to a bit over 10 percent. Even that recent decline may be due less to official policies than to the surprising strength of the pound sterling which has made imports cheaper.
The pound has been strong largely because of the windfall provided by North Sea oil. Britain's economic performance is all the more disappointing in view of the bonanza of black oil which has provided a lucky boost to the economy.
The world's economists view Britain with a mixture of awe, fascination and gratitude for its willingness to be the world's experiment in curing inflation through monetary restraint. The lessons so far apparent from the British experiment are uniquely disappointing:
The money supply is more difficult to define and control than previously imagined, particularly when monetary restraint is offset by fiscal stimulus.
Budget cuts are far more difficult to produce than to promise.
There appears to be no swift and painless route to the goal of lower inflation. The Nobel-Prize-winning economist Freidrich A. Von Havak, who did much of his work in Britain, expressed the pessimist's viewpoint: "That we probably have reached the point where even a further increase in inflation cannot prevent the depression which we have made inevitable by our past inflation. It is bound to last as long as we reduce the rate of inflation, and the only thing we can do about it is to get is over with as soon as possible."