It gives me very great pleasure to see the City of London playing host this week to such a distinguished gathering of bankers from every corner of the globe. You have, I venture to suggest, chosen a most appropriate venue for this gathering.
We hear much—too much, I sometimes think—these days about a dread affliction called the ‘English disease’. There is a tendency to overlook some of the real achievements of Britain. And not least those of this City. I do not want to spoil your digestion with a long catalogue of statistics this afternoon—but I think it right to remind you of one set of figures which your hosts may be too modest to mention. [end p1]
In 1976—the latest year for which full figures are yet available—this country bought goods to the tune of over £3½ billion more than it sold overseas (which was one of the reasons why our currency was in real danger of collapse until the International Monetary Fund came to our aid). But in the same year our private sector invisible earnings—partly the shipping, banking, insurance and other services provided for the world community by the City of London—brought in £4½ billion: more than all the savings in foreign currency which we hope to enjoy from North Sea Oil at the peak of its output in a few years' time.
This was not the achievement of politicians. The services provided by the City of London attract no subsidies, no hidden subventions, from Government. [end p2]
On the contrary, I fear that the politicians mostly contribute to the City of London's performance by the barriers they place in the way of its improvement, including a crippling burden of taxation on those who work long hours and take the risks to produce these results and increasingly indefensible restraints on productive outward investment. If the industries which have fallen under the direct control of government in this country began to match the performance of the City of London, we should have the strongest currency in the world. Start of press release
You meet at a moment of unusual questioning in the world financial community. The 1970s have witnessed the passing of what might be called the comfortable Keynesian certainties of the post-war world: the conviction that governments can always simply spend their way out of recession. [end p3]
We have begun to rediscover the dangers of the illusion spelt out a hundred years ago by the celebrated British philosopher John Stuart Mill:
“to make the fortunes of a whole community is a brilliant prospect, when once a man is capable of believing that printing a few characters on bits of paper will do it. The philosopher's stone could not be expected to do more” .
As with the original philosopher's stone, the trick only works so long as the audience trusts the illusionist's magic. Take away that trust, and the acceleration of real output which deficit spending generated for a time disappears. The passage from the printing press to the inflationary spiral becomes direct and self-defeating. [end p4]
That is a lesson which both politicians and bankers the world over learned the hard way in the early 1970s. The last doomed attempt by national governments to orchestrate expansion was brought to a painful halt by the leap in the cost of oil.
So today ‘reflation’ is no longer seen as an automatic remedy for domestic ills. But it is advocated for export instead. You urge its virtues on your neighbours. The weaker economies preach expansion to the stronger. Unfortunately the recipients of such advice reflect upon the economic performance of those who lecture them, and prefer their own counsel.
“Was none who would be foremost To lead such dire attack; But those behind cried “forward” And those before cried “back” .”(Macaulay—Lays of Ancient Rome.) [end p5]
Nowhere perhaps is such gratuitous advice more fashionable than here in London. Rescued from the brink of uncontrollable inflation by the support and good sense of the international banking community little more than twelve months ago, we seem to be the first to upbraid our rescuers for their reluctance to choose the path that almost led us to disaster. Worse, we seem to be in some danger of trying to set the example by reverting to the road of ruin ourselves.
Too many of our economic wiseacres are impatient at home, and pessimistic abroad. Both emotions are surely exaggerated. For they ignore the extent to which declining inflation rates are already providing an almost automatic and entirely healthy push to the world economy as the purchasing-power of earnings begins to rise once more after the last few years of painful compression. [end p6]
This is true of Germany and Japan—the two nations which alas are most often placed in the ducking-stool of international opinion. It is true of the United States. It is also true of the United Kingdom.
Here in Britain we are at last enjoying a significant fall in the rate of inflation. It is very welcome, although I wish we were not asked to regard what only a decade ago would have been looked upon as a quite ruinous rate of currency debasement as a miracle of good government—particularly when so much of the improvement is due to the wise instructions of the IMF, and the effect of growing revenues from North Sea oil on the sterling exchange rate. [end p7]
The growth of earnings continues to reflect last year's inflationary expectations, coupled with what I believe was a fundamentally misguided decision to give the Trade Unions a target figure from which to launch their wage negotiations this winter. Whitehall is still desperately slow to learn the lesson that over a period of years the regulation of wages can add to inflation rather than diminish it.
Put together some months of single-digit inflation and double-digit earnings growth, and you have the makings of a consumer boom. To these ingredients we must add the contents of the April Budget to come. We are promised large reductions in direct taxation. And about time too! [end p8]
Every sector of the British economy cries out for the restoration of incentives recklessly destroyed over the past four years. But if I remind you that it would take Mr Healey all the revenues from North Sea oil at their peak to offset the cost of putting tax rates back to the point which he inherited, you will see that we have a long way to go.
What worries me, however, is that I detect little sign of awareness of the need to make room for such essential tax reductions by restraint in public spending. On the contrary, I very much fear that the new financial disciplines which have been successfully applied to government spending in Britain these past eighteen months are on the point of relaxation. [end p9]
Well, Mr Chairman, we have been here before—many times! The history of British post-war economic management is littered with instances when we have put both feet on the accelerator just as demand was picking up momentum of its own accord.
To plead that this time we are being urged on by international advice will not save us from the inevitable consequences. We should very soon discover that North Sea Oil would not suffice to avert them. Today, it gives us a margin of safety. But that margin would soon disappear.
That is why I regard monetary disciplines as of continuing overriding importance. When in the past, like some of our friends and neighbours overseas, we have set ourselves clear and specific monetary targets, they have proved effective here as they have abroad. We must not now abandon them just as they have begun to pull us round. [end p10]
Another false prescription is now going the rounds. We should not underestimate its political attraction. I refer to protectionism in all its various shapes—whether it be straightforward tariff and quota barriers to world trade, or the more insidious forms of subsidy and competitive currency devaluation.
Countries which have to live by selling to others must allow others to live by selling to them. Open trade is not a one-way street. Do as you would be done by is a good precept in international as in personal relations.
But insistence on reciprocity is one thing. The use of protection as a shield for low productivity is quite another. Sophisticated modern machinery is increasingly making it possible for the developing countries, with ample reserves of labour, to supply goods which until recently were the preserve of the industrial nations.
It is no answer to shut them out. We must not look to our power to issue import restrictions for a solution. We must look to [end p11] our brain-power and ingenuity. That way we can compete with all comers—as some of our leading British companies are demonstrating.
But it surely must be folly to subsidise other countries to buy capital goods from us which they can then use to undercut our trade and commerce. It is not by paying the shipping lines of eastern Europe or India to build ships in our shipyards and then to run them on loan from our taxpayers that we can hope to guarantee a sure future for those who build them. On the contrary, we are most likely to end up ruining shipyards and shipping lines alike.
This is yet another example of government action which may easily damage the invisible earnings of the City of London. [end p12]
These reflections should, I firmly believe, point to the one constructive way forward for all of us, from the uncertain seventies into what could be, and should be, the bustling eighties. We must harness the endless ingenuity of capitalism to satisfy the needs of world markets as they emerge and evolve. The state cannot do it—it always gets it wrong.
Let me give you one rather endearing example. Thirteen years ago our government published a plan for the future of the Scottish economy. It was full of messages of good cheer—as such plans always are. But the authors admitted that there was one corner of Scotland which was unlikely to share in the general well-being. The city of Aberdeen and its hinterland were going to miss out. Well, thirteen years later, surprise, surprise! [end p13]
It is that same city of Aberdeen and the surrounding area which is booming—not just more than the rest of Scotland, but more than anywhere else in the United Kingdom. The reason, of course, is North Sea oil. North Sea oil was something the planners had simply not allowed for. I take pride in the fact that it was a Conservative Government which awarded the licences which opened the way for the oil companies of the world to develop this vast new natural resource for the benefit of all of us. And I wonder what would have happened if, instead, we had started by setting up a State oil corporation to cream off the rewards of others' labour and risk-taking? I suspect that we would still, today, be looking for someone to help us to get the work started, instead of enjoying a growing source of revenue and foreign exchange. [end p14]
I have no doubt that you have been hearing a good deal about the impact of this piece of good fortune in the course of your discussions. And quite right too! For it does give to this country a real opportunity which other nations dependent on imported energy currently lack. An opportunity to eliminate some of the barriers we have erected over the years to enterprise at home and investment abroad.
But every silver lining has a cloud!
We could squander the proceeds; we could squander them on trying to preserve yesterday's jobs instead of using them to create the jobs of tomorrow. Or we could preempt them by endowing ourselves with a standard of state provision which we had not yet earned by developing resources with a longer life than North Sea oil. [end p15]
We could, however, put them to good purpose. The extra tax revenues resulting for a period from our oil wealth will ease our path to a more balanced budget, leading in turn to all the blessings of low monetary expansion, low interest rates, and hence to a strong pound and a lasting cure to the devasting inflationary tensions of recent years.
They could do more. Coupled with determined restraint in State spending, this extra tax yield could enable us responsibly to reduce our personal tax rates at least to parity with those of our major international competitors. [end p16]
We are sometimes told that the taxpayer is not to be trusted with the revenues. He might spend them on imports. So, in part, he might. But in part he would also save them and reinvest them, directly or indirectly, in our industries and services. Not perhaps in the industries and services preferred for support by government precisely because their record makes it hard or impossible for them to attract funds from anyone else. But in the businesses which are geared up to cater for the markets of tomorrow.
But above all he would respond to the rediscovery that night shift and overtime could produce rewards which match their inconvenience. He would respond with an entirely changed attitude towards work and industrial relations. [end p17]
In Britain today, we have much going for us. Not just North Sea Oil. Something far more important. An impatience with the overweaning pretensions of governments to make the choices for us. An impatience with industrial trouble-makers who have too often denied their fellow-workers the opportunities to realise their natural potential. A reviving sense of national unity and pride, so admirably displayed at the time of the Queen's Silver Jubilee last summer.
Partiality is not perhaps a luxury in which international bankers can afford to indulge. I don't suppose the founder of the House of Rothschild always checked on the civil rights record of his royal clients.
But I am not a banker, and I am unashamedly partial.
Partial to a free society, where the state exists to serve its citizens and not the citizens to serve the state. [end p18]
And to me the very bedrock of a free society, the essential condition without which it cannot long survive, is a free and open market.
That is why I am determined to see that our new revenues from oil are used, not to grease the slide to collectivism, but to open wide the door to personal opportunity and enterprise.
I am determined to recreate in Britain a climate in which you will want to invest, and where we, for our part, will once more be free to put our talents and our savings to the service of a wider world.
It is time for us to put behind us the years of timid introspection and passive decline.
Time for Britain to be up and about.