When the scholars of this great university reflect on the history of Western civilisation, they, like those in other institutions of learning, must be struck by its magnificent achievements. And nowhere have those achievements been more impressive than in the United States. The vast expansion of individual liberty, under a common law, has been one of the most remarkable developments of Western man—and you citizens of this great Republic now enjoy a liberty unprecedented in history. The quality of our freedom in the Western democracies can be measured against the repression and drabness of totalitarian states. That freedom has provided a fertile ground for the varied talents and inventiveness of our peoples. We cherish it. We must defend it. [end p1]
In reflecting on liberty many think mainly in terms of political freedoms. These are founded in a rule of law which protects personal rights against the arbitrary actions of political authority. The right to elect legislators and holders of great executive offices is one of the pillars of our own freedom. But alone it is not enough to support a just and free society. The other great pillar is economic freedom.
In the Declaration of Independence we find the principle of economic freedom firmly embedded in the “pursuit of happiness” . This freedom—the freedom for a man to work for whoever he will, to enter into voluntary agreements and partnerships, to buy and to sell, to save and to invest—this freedom for enterprise is the foundation upon which the unparalleled prosperity of the West is built. [end p2]
Economic freedom requires a system of law that identifies and safeguards the right to property and the right to enter into contractual arrangements. Of course, these rights cannot be absolute. Society may very properly decide, for example for the sake of health or safety, that certain freedoms have to be circumscribed. But such constraints should be the exception rather than the rule. Freedom of contract is the presumptive basis of our system.
These are the ideals of a free society. Yet I fear that both in the United Kingdom and also, as President Reagan has said, in the United States, some of these ideals have been eroded. [end p3]
For many years the state has intervened more and more to limit or even to direct the behaviour of both individuals and corporations. Usually the motives for such regulation have been laudable. It is claimed by some that the results of a free enterprise system are unfair. More and more state intervention has been justified on the grounds that it will provide an outcome which can be seen to be fair to all. But such intervention in the end gives rise to consequences which are neither fair nor free.
Let me make it perfectly clear that the Administration I lead accepts the need for government action to soften some of the harsher consequences of change. In a recession many, through no fault of their own, may find their livelihood disappears. They need hope and deserve help. [end p4] Similarly, all of us subscribe to the principle of helping those who cannot help themselves—the poor, the sick, and the old.
Thus the role of government in a free society should be to ensure that people can go about their business freely and without fear and to protect the weak and those in need. But both in Britain and also in the United States the reach of government has far exceeded this limited role. Instead, governments in both our countries have pursued policies of extensive and detailed intervention far beyond those one would expect to find in a free society. [end p5]
I want to discuss one or two of these interventions which we have tried in Britain but which I believe have failed. One of the most pervasive attempts at state intervention has been the control of incomes. In Britain during the last twenty years we have seen many incomes policies under governments of both political complexions. The ostensible objective was to ensure that we did not pay ourselves in aggregate more than we produced, and that the national product was shared fairly and equitably. We have found to our cost that none of these incomes policies has produced the effects which their sponsors so ardently claimed for them. [end p6]
The control of incomes was supposed to be the only effective and fair way of reducing inflation. But our experience has clearly demonstrated that inflation is not contained by such measures. True, incomes policies seemed to stem the inflationary tide for a while: but then the pressure of wage demands became too great; the dam was breached; and the economy was flooded with a massive surge of inflation. While they were in place wage controls gave rise to rigidities, inefficiency and manifest injustice. They eroded incentives, telescoped differentials and sapped the springs of effort and invention. The essential link between improved performance and increased rewards was virtually eliminated. It is inefficient to destroy incentive. It is also unjust. [end p7]
The control of prices was also supposed to avoid the injustices of the market. But price controls discourage production, distort competition, encourage waste and strangle innovation. This means extra costs for business and extra costs for government; and in the end they do not slow down inflation.
In many cases the intervention of the state has gone much further and has taken great industries into public ownership. In Britain coal, electricity, railways, tele-communications are all nationalised state monopolies. Large parts of other industries such as steel, shipbuilding and airlines are also in state ownership and control. [end p8]
Nationalisation was supposed to make these great industries financially self-sufficient and havens of industrial peace and understanding between management and workers. Public corporations were also alleged to be more responsive to the needs of their customers and more ready to adopt new technology. Alas, the reality has been very different. Now in Britain we know the appalling cost. In 1980 the prices of the publicly owned industries increased more than twice as fast as those of private business. Yet such price increases have not prevented massive deficits which are now being borne by the long suffering taxpayer.
This was the controlled, regulated and much nationalised economy which the Government inherited when it came to power in 1979. [end p9] Restoring economic freedoms to Britain was one of the great tasks which the Government set itself. After some 22 months in office some considerable progress can be reported. But we still have a long way to go.
One of the first tasks of the government in 1979 and 1980 was to abolish controls on prices, wages and dividends. Incomes in the private sector are once again determined by free negotiation.
Another task has been to end exchange controls. Many commentators warned that, without this protection, sterling would sink to new lows. In fact, as you know, sterling climbed to its highest value in five years. Capital did not flow out of Britain in an unstoppable tide. [end p10] On he contrary. Many of our overseas friends now see Britain as a safe and profitable home for their assets. Free exchange is an essential attribute of a free society.
We have also embarked on the long and complex process of returning state-owned enterprises to private ownership, starting with British Aerospace. Legislation has been passed or is under way to denationalise many other public owned concerns, including British Airways and British Telecommunications. We are restructuring corporations such as the British Steel Corporation and British Shipbuilders, again with a view to returning them or parts of them to private ownership as soon as we can. We shall pursue these changes with firm purpose but also with consideration for those whose livelihoods depend upon these industries. [end p11] This will take time, and it takes a lot of money. That is the price of the folly of public ownership.
A controlled society also means a heavy and growing burden on the taxpayer. An essential element in our programme, like that of President Reagan 's Administration, is to bring down rates of direct taxation. Only by allowing people to keep a larger percentage of the incomes they earn can we develop incentive and enterprise in a free society. We have made some progress by reducing the rates of income tax. But so far we have not lightened the tax burden as much as I would have wished. And this is because of the immense difficulties we have experienced in trying to reduce government expenditure at a time of world recession and the rising unemployment which goes with it. [end p12]
Nevertheless in 1981/82 the Government still intends to reduce public spending by almost £6 billion below the level planned by the previous Government. Our objective is to ensure that the taxpayer gets value for his money. Only then can we expect people to trust their government in its traditional role as the guardian of the public purse and custodian of the currency.
This trust in government has been eroded not merely by many years of profligate spending but also by the persistent depreciation of the currency. The internal purchasing power of the pound in 1980 was worth only 28 per cent of its value ten years earlier. And over the last thirty years the trend of inflation rates has been persistently upwards: it was 3½ per cent in the 1960s and 12½ per cent in the 1970s. Although the United States has experienced rates of inflation somewhat lower than those of Britain, the trend here is also inexorably upwards. [end p13]
For many years we have been told that a little bit of inflation is good for you. Many economists assured us—indeed some still do so assure us—that inflation is necessary to maintain full employment, to facilitate growth and to keep the economy moving. The message was: spend your way to prosperity, and when the economy faltered, spend and spend again.
Of course it was difficult for governments to resist such siren voices. Britain was among the first large economies in the West to pursue these policies. We learned a hard lesson—monetary expansion stimulates only a brief and temporary growth. Decay soon sets in. But such monetary expansion does have a permanent effect—albeit an unfortunate permanent effect. It raises the rate of increase of the price level. Inflation comes to stay. [end p14]
With the hindsight of this sad history, we can easily see how the inflation rate rose persistently throughout these decades. But more strikingly, the average level of unemployment has also risen. The average unemployment was less than 2 percent in the 1960s, 4.1 percent in the 1970s and 6.8 percent in 1980. Our higher inflations have merely brought lower growth and rising unemployment.
The lesson is clear. Inflation devalues us all.
But the erosion of the currency not only has insidious effects on the health of the economy; it also breaks a trust between the government and the governed. The fabric of faith on which so much of our life depends rests on the maintenance of money values. A reliable and safe currency is a central responsibility of government. Once the people lose their trust in money the freedom of men and women in society will be [end p15] diminished or even, eventually, destroyed.
That is why my administration has put the permanent reduction of inflation as its first economic priority. In a free society this can be achieved only by reducing permanently the rate of growth of the stock of money. We knew that the transition could not be painless and smooth. After these many years of inflationary drift the costs of recovery have to be paid.
But even now at this early stage we can already begin to see the benefit. The year on year rate of inflation has come down from 22 percent in May 1980 to 13 percent in January 1981. The underlying rate is less than this—probably in single figures. This reduction is even greater than we had forecast. We are laying a firm foundation for a permanent prosperity. [end p16]
In the United States President Reagan 's objective is to restore people's trust in the dollar. Your currency, however, far transcends the shores of the United States. The size and strength of the United States economy and the freedom to hold and deal in dollars has meant that much international trade is transacted in US dollars. Banks, governments and commercial enterprises hold balances of dollars as reserves and as a basis for their trade. The dollar is the world's money.
In the years up to the middle of the 1960s the world was happy to hold dollars. Their value was assured. They were “as good as gold” . The average rate of inflation in the United States from 1955–1965 was only 1½ percent. Virtually all currencies were defined in terms of the stable dollar and defence of the dollar parities was the main objective of policy. [end p17] While these parities were maintained and while the United States maintained more or less stable prices, there could be no world inflation.
Gradually—and at the time imperceptibly—a sea change occurred. From the mid 1960s onwards the rate of growth of the supply of dollars began to increase. There were many reasons for this surge in money—the Vietnam conflict, President Johnson 's welfare programmes and the policy prescriptions of “the New Economics” . The effect was clear. A surfeit of money gave rise, as always, to a fall in its value. The prices of goods began moving inexorably upwards, first slowly (at 5 percent a year between 1965 and 1974) and then, by the late 1970s, at a gathering pace.
The dollar was in double jeopardy. There was an increasing flood of dollars looking for willing holders and yet the declining and uncertain value of the dollar made it less and less attractive to hold. [end p18] In the latter half of the 1960s the flight from the dollar assumed alarming dimensions. Most countries in the west were reluctant to import the United States inflation. European central banks traded many of their dollars for gold. Finally, in 1971 the United States formally renounced the gold standard. And the rapid erosion of the dollar thereafter brought about the collapse of the international monetary system which had lasted since Bretton Woods.
There have been many attempts to fill the gap created by the faltering dollar. The deutschmark, the yen, sterling and various baskets of currencies have in part taken on the role of the currency of international trade and reserves. But none of these currencies can adequately assume the immense tasks of the United States dollar. Only the United States has that combination of institutional structure, size and strength, to sustain the responsibilities of a world [end p19] reserve currency. The world must rely primarily on the dollar for its trade and its reserves.
You can understand why the free world is so concerned that the faith in the value of the dollar be restored. The dollar is our money as well as yours. And the restoration of trust in the dollar will bring great benefits to you citizens of the United States as well as to the world at large.
I began by saying that political and economic freedom go hand in hand. That applies to the world economy as to our domestic economies. The free economies have become more and more international. The free movement of trade, of capital and of investment is essential to them. In the difficult years of the 1970s, we have done well in defending these freedoms. The free economies still show great resilience but they face greater dangers in the 1980s. [end p20]
I offer four propositions for coping with these dangers and reaching the end of the decade with our economic freedoms in better shape. The first is that we must restore the soundness of money. All that I have said about fighting inflation and strengthening the dollar as the main prop of the international monetary system is part of that. Secondly, we have to relearn the old lesson of cutting our coat according to our cloth. We have to persuade our peoples to match their expectations to a world in which growth is likely to be slower than in the early 1970s and increases in living standards have to be hard-earned. In public expenditure and in the running of private industry the coat must match the cloth.
My third proposition is that, internationally and nationally, we must let markets function more freely and we must intervene in them less. That includes the free movement of trade and [end p21] capital to which I have referred. But those countries which expect to export goods freely must also be prepared to import goods freely. Free and fair trade is a two-way business.
And my fourth proposition is that we must reduce the excessive dependence of the Western economies on imported oil. That dependence has increased inflation and unemployment and reduced growth. I applaud the steps President Reagan has taken to free oil and gasoline prices from control and to let the market play its full role in reducing that dependence.
I believe that sustained pursuit of these four interrelated propositions would give us our best chance of reducing unemployment and improving the lives of the peoples of the developing as well as the developed countries. [end p22]
In my discussions with your President I have been impressed with the striking similarity between our aims and our policies. The President's goal is a stable price level. Ours too. The President's aim is to free the individual from government restraint. Ours too. The President's objective is to reduce public spending and cut direct taxes. Ours too.
These policies are neither new nor experimental. Two hundred years ago the foundations of a free society were laid down by two wise Scotsmen and by your founding fathers. We have rediscovered these old verities. Individual freedom and responsibility are the springs of our prosperity as well as the foundations of our moral order. [end p23]
Father President, the road to recovery is paved not with good intentions but with hard decisions. I believe that both our countries are now on the right road. We in Britain wish your new President and his administration success and Godspeed.