Britain’s return to the gold standard in 1925 has become a byword for a self-inflicted economic fiasco. The idea was to seek stability by fixing a price for an ounce of gold on demand – trade and confidence in sterling would flood back and Britain would continue with the roaring 20s, the boom that followed the First World War and the 1918 flu pandemic.
However, the exchange rate was pitched so high that industry, instead of seamlessly adjusting its prices and costs, was devastated. The consequent public austerity, deflation and attempted wage cuts triggered mass unemployment and the General Strike.
But at the time, Conservative opinion was universally for it and the Labour party made no objection. Indeed, Ramsay MacDonald’s short-lived government four years later continued with the policy until it collapsed. The empire, free trade and sound finance demanded no less.
A hundred years later, in very different circumstances, amid hopes that we can emerge from lockdown into a soaring economy, a parallel self-inflicted fiasco is playing itself out. The no-deal, or figleaf-deal Brexit, rupturing trade relations with the EU, is now a month away.
Superimposed on the disaster of Covid, it will be regarded by future generations with the incredulity we regard the return to the gold standard. British business is to adjust as seamlessly and as quickly to the impending trade wrench as it was meant to do in 1925 to a vastly overvalued exchange rate. World economic pre-eminence will again magically return, as global Britain, freed from the regulatory chains of socialist Europe, spearheads a new era of burgeoning free trade.
No matter that trade in 2020 is not in bulk cotton and coal but in precision-engineered complex artefacts and sophisticated business advice and services. The preconditions are mutually recognised standards, specifications, qualifications and rules, a negotiated framework in which sovereignty is shared to deliver the gains from trade. But Brexiters, as the then chancellor, Winston Churchill, did in 1925, look to an imagined past. Britain is to be a sovereign free trader beholden to no one. That is a green light for hedge funds to speculate, for free ports to become paradises for anything-goes-capitalism and for ministers to spray cash to chums, unconstrained by EU rules.
Mainstream business, despite its increasingly desperate warnings, and ordinary workers have to take their chance. Once again, the Tory party and its press are mesmerised by quasi-imperial delusions – and again the Labour leadership is intent on slipstreaming in their wake.
Brexit was the unmentionable in the chancellor Rishi Sunak’s spending review last week. It is widely commented that Johnson’s ultra-hard Brexit is going to cost as much or more than Covid in lost jobs and lost output, even as he blusters about the glorious opportunity. More seriously, British economic policy is founded on increasing the national debt from its current £2tn to nearly £3tn by 2024.
In the midst of a pandemic, this must be economically, strategically and morally right, especially as borrowing costs are negligible.
However, Brexit forces a major qualification. As the former Bank of England governor Mark Carney observed, every year that Britain’s international accounts are uniquely and permanently in the red, our capacity to borrow at home and abroad depends on the “kindness of strangers”. As long as we retain their confidence, there is no “maxing out” on borrowing as an individual might max out on a credit card, but lose that confidence and hell breaks over us.
Buried in the Office for Budget Responsibility’s economic outlook is the forecast that the deficit in Britain’s international current account will remain at a record 5% of national output for the next four years; it will be worse if there is a no-deal Brexit. No advanced country has ever tried to borrow so much for so long – and at the same time so ruptured trade relations that its capacity to export its way out of trouble and build vital great companies is dramatically weakened.
Even the scant deal that Johnson might sign, at the death, will only marginally reduce the risk of economic calamity. Covid, and the challenge of remaking British capitalism, demands a high seriousness about our plight, absent from Brexiter recklessness. Only then will the strangers on whose kindness we depend take note and carry on lending.
First, there has to be a laser focus on lowering unemployment, dramatised by the collapse of Philip Green’s retailing empire, Arcadia, which includes Burton and Topshop. Covid is exposing the over-reliance of the British economy on the high street, with little to put in its place. Sunak has a partial response in infrastructure spending (although inevitably slow burn) and a boost to the Jobcentre network, but this is poor tinder with no match to set the job-creation process alight.
Britain needs much more. It needs a Rooseveltian network of “rainmaker” agencies whose mandate is proactively to bring together work-rich projects and unemployed people to work on them. Putting all the emphasis on the unemployed to find work themselves in a world without it is moral and economic turpitude.
This needs to be supported by growing many more clusters of great companies to compensate for the Arcadias we are losing and they need markets at home and abroad. At home, this implies promising to sustain public and private demand with continued high public borrowing, but within a credible framework so that the commitment is believed. An option gaining ground in the US is to commit to keeping interest payments on the national debt below 1% of national income. It is credible and would allow trillions of borrowing headroom.
But companies need overseas markets too. In the 1930s, Britain could use its empire as an extension of its home market. The only parallel option in the 2020s is the EU single market: imagining the US, China and India as alternatives is fairground fantasy. We don’t just need a Brexit deal. We need the full monty: membership at least of the EU single market and customs union and, although it now seems inconceivable, ultimately, membership of the EU. There is no crisis-free way through to better times without it. Let’s learn from history.