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Thatcher, Volcker, Keynes and the power of ideas

The death of Margaret Thatcher reminds us all of the power of ideas, when allied to guts and leadership, to change the world. She identified one area of national life after another where restrictions and old ways of doing things were holding back innovation and the spirit of enterprise that lay dormant in the British people. She and her able team then set about systematically dismantling those restrictions and obstacles – in the nationalised industries, in controls over foreign exchange markets, in the professions, the City, in small business. She set free the energies of the people.


But the intellectual groundwork had been prepared for her. Free market thinkers from von Mises to Hayek, Friedman and Brunner had made the case, in detail, for an alternative approach to the prevailing collectivisim of the post-war settlement. Think tanks such as the IEA in the UK had disseminated the messages and worked out their application in different areas of the economy. Thoughtful commentators were engaged. Without that intellectual spadework the Thatcher and Reagan revolutions would not have taken place.


Thank God we have a few seasoned giants of the Thatcher-Reagan era still with us. One is Paul Volcker.

Listen to him this week on central banking:

“Central banks are no longer central banks,” said Volcker, according to a report by CNN, “I think it gets dangerous when they lose sight of the basic function of the central bank.”

The Wall Street Journal reported Volcker as saying that central banks should “maintain price stability and stay out of the markets as much as possible…We’re a long way from that pattern now,” he said.

The Fed’s purchases make it “the world’s biggest financial intermediary… dominating the long-term capital markets and residential mortgage-backed securities markets.”


Today’s generation of central bankers should think long and hard about this warning from such an authoritative source.


Volcker’s strictures apply equally to the Bank of Japan, ECB and Bank of England – all of which have embarked on policies that carry huge risks and dangers for their societies. The least their leaders should do is to spell out these risks – including the risks of an inflationary collapse – to their people. They should make clear directly to the people that they are in uncharted territory. They should say: “We do not know what the effects, over the medium and long term, of our policies will be. There are huge risks for monetary, economic, political and social stability. We are going well beyond out competence, our expertise and our mandate.”

The money trap

How much we miss such inspiration today, as we struggle to find a way out of the trap set by recession, feeble growth and an overmighty financial sector. Oh, for a politician that can take on the financial sector as Mrs Thatcher saw off Britain’s over-powerful trades unions! Why do we have politicians in short trousers who see politics as a stepping stone to more lucrative jobs in finance? Why, come to that, do we have central bankers in short pants who see their jobs merely as stepping stones to greater glory?


To get out of the trap, we need fresh thinking most of all in the field – closely related of course to central banks – of international money and financial markets. The absence of agreed rules, norms and standards in international monetary relations threatens a new descent into inflationary chaos, nationalism and protectionism.

Here we remember Maynard Keynes.

Keynes was the first economist to articulate a global international monetary system that could provide an appropriate mix of national discretion and external discipline. That was what was novel about the Bretton Woods system that he helped to bring about – it built on the fixed dollar price of gold to create a fixed but adjustable par value system disciplined by an international policeman, the IMF.

No, it could not endure for ever. The vision remains.

Keynes had a vision of a symmetrical system that would apply discipline equally on creditors and debtors. What he called his “new-fangled” creation, the bancor, remains the benchmark for all reformers who frame proposals for super-sovereign currencies today.

But above all, we remember Keynes for insisting on – and demonstrating – the connection between a good international monetary system and good domestic policies. Bretton Woods was successful because it went beyond “business as usual” in a practical way, reflecting a revolution in ideas that he brought about. That is what we need today.

On 18 December 1945, Keynes opened the second day’s debate in the House of Lords on the Bretton Woods and US loan agreements legislation with a passionate plea:

The proposals were, he said, an attempt “to use what we have learnt from modern experience and analysis, not to defeat, but to implement the wisdom of Adam Smith”:

“We are attempting a great step forward towards the goal of international economic order amidst national diversities of policies….Fresh tasks now invite.

“Opinions have been successfully changed. The work of destruction has been accomplished and the site has been cleared for a new structure”.

For further comment on central bankers and the monetary system, see here