John McDonnell asked at a Labour Conference fringe meeting, “What if there is a run on the pound? What happens if there is this concept of capital flight?” What “if they come for us”? John and Jeremy have been accused of ‘war gaming’ in discussing this threat. John reminded us in reply, “We’re not going to be a traditional government. We’re going to be a radical government.” We all need to think about how the capitalist establishment is likely to respond. This article shows how it will strive to bring radical governments to heel.
The first threat mentioned by John is a run on the pound. In the past countries had fixed exchange rates, for instance in 1966 £1 exchanged for $2.80. That meant that, if Britain was selling less abroad than it was buying, it had to give foreign traders $2.80 to make up the difference of every pound. If it ran out of foreign currency it had to devalue. So, after a devastating run on the pound in 1967, the Wilson Labour government declared that £1 would only get $2.40.
Devaluation made our exports cheaper and imports dearer. It was hoped that this would correct the deficit, but usually this turned out to be just a short term fix. If a country is not competing effectively with other capitalist countries, then it will not be able to sell abroad as much as it imports in the longer term, and apparently technical problems with exchange rates will come back to haunt it.
What has all this got to do with the capitalist establishment? A run on the national currency is presented in economics textbooks as the automatic working of the market. In fact it acts as a discipline imposed by the capitalist system. It is profoundly political. This pressure is intensified by the International Monetary Fund (IMF), the ‘financial sheriff’, as we shall see.
In 1976 we had floating exchange rates, but the threat from capital to a reforming Labour government remained. Since the UK buys more from abroad than we sell abroad (a current account deficit) we have to borrow from the financial markets to make up the difference. After 1974, a series of runs on the pound caused sterling to reach a record low against the dollar. This in turn forced the government to go cap in hand to the IMF for a monster loan of $3.9bn to stem the outflow of money.
The IMF demanded cuts in welfare spending as the price of their ‘help’. According to Cabinet Papers “the IMF crisis reinforced a change in policy orientation away from full employment and social welfare towards the control of inflation and expenditure”. In effect P.M. Callaghan surrendered the country to the IMF. This imposed austerity led to Labour’s electoral defeat in 1979, when Thatcher came to power.
Labour under Wilson and Callaghan was not trying to challenge capitalism – just to create more jobs and better living standards for the people who elected them by reflating the economy. The ‘markets’ (world capitalism) didn’t like it, and they got their way. The pressure on Labour was not confined to the economic. The Defence Correspondent of the Times threatened that the use of troops to break strikes could lead to a situation where “normal legal administration is impossible and the only authority left is the military commander.” Rumours of coups and conspiracies were in the air.
Up till 1979 most countries had exchange controls to help protect their currency. There were limits to the amount of money that could be taken out of the country at one time. One of Margaret Thatcher’s first acts on becoming Prime Minister was to scrap exchange controls. (I have been told anecdotally that she had all the existing data destroyed so as to make it more difficult for a successor to reintroduce them.)
These days we are told we are hapless prey to the merciless forces of globalisation. This episode actually shows the opposite. It was the state under Thatcher that imposed dependence on these market forces upon us like a whirlwind by scrapping exchange controls. What the state can do, the state can undo. Even inside the European Union, where the free movement of capital is regarded as a religion, Greece currently has exchange controls for eminently practical reasons, as do countries from Angola to Zimbabwe including Russia, China, India and Nigeria.
So, without exchange controls, the markets decide whether the pound will go up or down and they give elected governments very little wriggle room on economic policy. ‘Markets’ and their loyal lackeys the Tories prefer austerity in hard times because it loads all the hardship on the backs of the working class. A run on the pound is highly likely if a reforming Labour government tries to break out of the straitjacket imposed by the market system, by capitalism.
Refusing to lend to the government
Governments can influence people’s propensity to hang on to their currency. They can raise interest rates to make holding sterling more attractive. The trouble is, that involves yanking up the rate of interest throughout the economy. That makes borrowing by firms and consumers more expensive, and is likely to harm economic growth. So that’s another constraint on national governments in the face of global capitalism.
The government’s debt is nearly a whopping £1.8trn. That means the national debt is heading towards 90% of GDP, and the government is rolling over the debt all the time by issuing new securities. How much interest does it have to pay? That depends on the all-powerful markets. If they decide there’s a risk (to capitalism) they’ll jack up how much they charge. Even the mild Wilson/Callaghan Labour government of 1974-79 was faced with a ‘gilt strike’, a refusal to buy government bonds till they came to heel .(‘Gilts’ are short for gilt edged securities, a common form of UK government borrowing instrument.)
How Mitterand met his match
So there can be a run on the currency, a refusal to lend to the government and finally capitalists can refuse to invest in the country - a flight of capital. The capitalist resistance can operate with a combination of all three sanctions.
The Mitterand Socialist government was elected in France in 1981 on a programme of a big increase in the minimum wage, a 39 hour working week, five weeks’ holiday for workers and a wealth tax. Twelve industrial conglomerates and 38 banks were taken over. Good stuff, but the bosses didn’t like it.
The French government was also hampered by membership of the EMS, predecessor of the Euro. In effect they had to keep the franc aligned to the German deutschmark. There were three runs on the French franc leading to three ‘currency adjustments’. Each time Mitterand devalued, the run on the franc intensified. In addition business came to a standstill and refused to invest. In March 1983 Mitterand turned tail. The ‘tournant de la rigeur’ (austerity turn) led to increased unemployment and cuts in public services, all in the name of the fight against inflation.
Greece and Austerity
Austerity – making the working class pay the price of the Great Recession of 2008 – has been the worldwide policy of the capitalist class. Nowhere has this been more blatant than in Greece. Even prior to the 2008 crisis Greece owned enormous sums to North European banks. The culture of speculation and swindling had already made the country effectively bankrupt before the crisis hit. Greece’s national debt to Gross Domestic Product (GDP) ratio had swollen to 179% by 2014.
The first Greek ‘bailout’ in 2010 really just salvaged the French and German banks who had incautiously lent so much to the Greek government - at the expense of the Greek people. As the American economic historian Barry Eichengreen records, “In particular German banks, led by the Commerzbank, held some €17 billion of Greek debt. The German private sector, including pension funds, insurance companies and thrifty burghers searching for yield, came to as much as €25 billion, a considerable fraction of what the Greek government owed. What was in stake, in other words, was not just the solvency of the Greek government but the stability of the German financial system.” (Hall of Mirrors pp.346-7) Thus the Greek people were sacrificed for the benefit of German banks.
The Troika - the IMF, European Commission and the European Central Bank (ECB) acted as debt collectors for the North European banks. The monstrous debt was not written off but transferred to the Troika. The Greek people continued to pay. Despite being unelected, the Troika dictated policy in the form of continual austerity programmes imposed upon successive Greek governments.
Greece after 2009 suffered an economic meltdown as severe as the world crisis of 1929-33. Their people were the first to rebel against the wretched austerity regime imposed by world capitalism after the onset of the great Recession in 2008.
In January 2015 the radical Syriza government was elected with a mandate to fight austerity. It was brought to its knees, partly by exorbitant interest charges on its national debt intended to bankrupt the country – another ‘gilt strike’ like that which struck the 1974-79 Labour government. Greek ‘spreads’, the difference between the rate of interest offered on Greek government securities and those of Germany (Bubos) ballooned.
The government had to offer usurious returns on the bonds it issued if it was to borrow money at all, because the bond vigilantes claimed there was a danger of default and demanded ever-higher rates of return. These people have the power to hold elected governments to ransom. Of course the rise in interest rates made it even more difficult for the Greek government to keep up the payments on the debt that was strangling the economy.
Also the ECB actually organised a flight of capital to lay the radical government low and impose vicious austerity upon the Greek people. The nineteenth century commentator Walter Bagehot, in his book Lombard Street, suggested that central banks should lend open-handedly in a crisis to try to calm and stabilise the situation, while commercial banks are being subjected to bank runs from their depositors. The ECB on the contrary was deliberately creating chaos in order to bring down an elected radical government.
In June the Syriza government was presented with the 10th (!) austerity package by the Troika. Syriza called a referendum and got a magnificent 61% support to defy the authorities. The fighting spirit of the Greek people was not replicated by Tsipras and the leadership of Syriza. As Yanis Varoufakis notes in his book, Adults in the Room, when the fantastic referendum result came in at party HQ he was the only one celebrating. The government capitulated the following month.
Austerity is a policy which has failed even on its own terms. The fight against it will go on, and we will win.
Where will the money come from?
What can we do to fight the saboteurs? When people ask about money, they actually mean – where will the resources come from? The resources, people and material, are already there. Money is just needed to oil the machine.
Jeremy Corbyn has in the past floated the idea of ‘people’s quantitative easing’. Between 2009 and 2012, in the teeth of the economic crisis the Bank of England created £375bn out of thin air – it’s called quantitative easing (QE). That’s a lot of money. What did the Bank do with it? Effectively it gave it to the big banks by buying their bonds. This was supposed to reduce interest rates.
There is no evidence that this huge amount of cash plucked from a magic money tree benefited the rest of us apart from the banks. Living standards have stagnated. Corbyn argued that the Bank of England could create the money - people’s QE - for useful public investment in infrastructure, rather than just bunging it at the banks.
In 1997 Gordon Brown made the Bank of England operationally independent, though it is still publicly owned and has been since 1946. Brown was acting under the monetarist belief that elected governments couldn’t be trusted to run monetary policy as they would always print too much money just to be popular - leading to inflation. Monetary policy should therefore be conducted by technocrats.
Since inflation is now very low despite the Bank of England printing enormous quantities of money, Brown’s monetarist theory has been comprehensively disproved. It is high time that monetary policy was back in the hands of our elected representatives and conducted in our interests.
All governments borrow, and they usually borrow mainly from the rich who have the money to lend. There is an acute danger that a radical government will be faced with a threat to turn the money taps off or to wind up interest rates so high as to deliberately sabotage the elected government’s reforming plans.
We Can Win
Phew! A strike of capital sounds scary. And so it is. Can we do nothing to break out of this prison? Of course we can.
One lesson is that we must take over the banks. They are not only the creators of the crazy speculation that triggered the crash in the world economy in 2008. They are also the monetary conduit by which a run on the pound and capital flight are conducted.
A government aiming to represent the working class cannot be dependent on the good will and the lending of the rich and big business. People’s QE is one way of financing the resources to transform the country in the interests of working people and bypassing a strike of capital. A socialist administration which aims at greater equality and shrinks the difference between rich and poor will, of course, be much less dependent on borrowing from the rich in any case.
In Greece the vice in which the government was held was the debt. Syriza should have simply refused to pay. That would inevitably have led to further outflows of capital. The only response to that was for bank workers and the whole working class to be mobilised against the capitalist sabotage.
The entire machinery of the establishment will be thrown against a Corbyn-led Labour government. It doesn’t matter that Labour’s programme doesn’t actually call for the abolition of capitalism. We will be threatening their right to rule as they think fit. The Wilson and Callaghan governments were still sabotaged in 1974-79, for all their moderation.
For the Many, Not the Few has given working people an awareness that austerity can be defeated, something worth fighting for and the confidence to fight to win. The difference with the 1974-79 Labour government is that then there was no attempt to mobilise counter-pressure. Labour’ leadership just bowed to the diktat of the IMF.
We can’t just leave it all to Jeremy and John. They have already come under fantastic pressure. They are bound to come under so much more. They will need our support. There must be a mass mobilisation of the working class to make sure that the undemocratic reality of capitalist class rule and manipulation that lies beneath the democratic facade is defeated.
It will be us or them. We will be confronted by the full-scale resistance of the ruling class. In order to win we must paralyse and then take away the powers they hold over us. The alternative is disaster, as the evidence of the Wilson/Callaghan Labour government, the fate of Mitterand and the failure of Syriza all show.