The lessons from the civil disorder in the British cities will not be lost in this country. It is something on which, more than Englishmen, we have had experience. Where people have jobs, reasonably good housing, other urban amenities, and find life, if not perfect, at least benign, these outbreaks do not occur. Where there is despair and especially among the young, there is risk. This we know, but there is one aspect of the British experience that, to our sorrow, we are less likely to notice. That is the relationship between economic policy and urban distress and disturbance. It is a relationship that all, liberal or conservative, should recognize, and the British experience is a powerful signal as to its importance.
In most discussion and in much university and textbook teaching, monetary policy is pictured as socially neutrl. It is a technical arbitration between the central bank, the bankers and the business community; it may work or not work, but there is no remarked difference in its impact on different income groups or otherwise on the social structure. Decisions in the calm boardrooms of the Federal Reserve System or the Bank of England are safely distant from such concerns. This is sadly, seriously and dangerously wrong, and the British reliance on monetary policy in these last years, the most committed in the industrial world, makes it a matter not of theory but of harshly realized experience.
Monetary policy works, and on this there is general agreement, by restriciting bank and other lending and by rationing the credit so allowed by high interest rates. It will occur to most that those who receive the high interest rates -- banks and individuals with loanable cash -- do not suffer from such rates. On the contrary. And neither do affluent citizens who do not need to borrow money. Or cash-rich corporations that are similarly situated. Or those that, though they borrow, have the market power and position that allow them to pass the higher costs of money along to the public.
But, as one passes down the income scale, there comes the deprivation and restraint that it is the purpose of monetary policy to induce. Those who must borrow money for their business, to find housing, to replace an automobile are subject to its effects. Again, this is a matter of experience. In this country the effect of high interest rates on the housing industry, other small business and automobile purchases has been evident to all. In Britain, it has produced the largest failure rate among small businesses in half a century. But the really disastrous effect is yet farther down the income scale.
For monetary policy works against endemic inflation not through some technically neutral nexus that relates the money supply to prices. It works against inflation in a highly organized society such as ours or that of Britain only as it creates enough unemployment so that this restrains trade union claims and enough idle plant capacity so that price increases are forgone, discounts initiated and the unions resisted. Or, a notable recent feature, it forces the removal of production to less unionized, lower-wage areas. Again there is the experience. This is how the claims of the United Auto Workers on Chrysler were contained, how discounts were forced upon the automobile companies and how this became a pattern of restraint in rubber, machinery and other industries. And this is how the policy has worked against the rather more stubbornly resistant unions of Britain.
But long before the UAW and its counterparts succumb to monetary policy, there is the terrible social tragedy for those who have never had a job, are in the wrong place, are of the wrong sex or have the special disadvantage of being of the wrong color or race. A policy sufficiently strong to act against the organized sector of the economy -- the world of the unions and the big corporations -- comes down with exponential force on the young, unorganized, black and central-city workers or would-be workers. Their unemployment rate, as we and the British have learned, can run to 30, 40 or 50 percent of such workers in the cities. Many do not have unemployment compensations entitlement; and none has supplementary unemployment benefits. This has been the effect of monetary policy in the British cities. It is the way it works or will work everywhere.
I do not believe the monetarists see their policy as a deliberate design for rewarding the rich at the cost of the very poor, although the sources of some of their applause should make them very uneasy. There is, rather, the tendency already mentioned to see the policy as a technical exercise, to ignore its social consequences as somehow unworthy of practical thought. Or the proponents move directly from the money supply to the effect on inflation without consideraton of the intervening process and the pain associated therewith. One can even be slightly mystical about the relationship. Responding to British critics last year, Professor Milton Friedman, the supreme protagonist in both countries, said: "We can know that a bird flies and have some insights into how it is able to do so without having a complete understanding of the aerodynamic theory involved." Most important of all, we are made uneasy about anything that suggests an opposition of interest between rich and poor. That is not the way a society is supposed to work. So we suppress mention of it.
Well, we now know what makes monetary policy fly, and we know that -- unlike strong fiscal and incomes policies, these being the required alternatives and supplements -- its flight does reward the fortunate, penalize the poor. Better the truth. The British are now paying the price for their heavy reliance on monetarism. It is a price no American, whatever his or her income bracket or political faith, can ignore. Social tranquillity is just as important for the affluent as for others and for conservatives as for liberals.