The choice facing Major: expansion or resignation

WHAT is happening in Britain seems unusual, because nobody under 80 has had adult experience of it, but it is not historically unusual at all. The widespread public suffering, the impotence of government, the blunders of economic and industrial policy, all repeat what happened in the depression of the late Twenties and early Thirties. If we understand the sequence, it will not make us forgive the feebleness of ministers, but it may help to indicate what ought to be done next.

Each great depression is worldwide. It is set up by inflationary expansion of debt. It is produced by the painful process of liquidating that debt, which forces down asset values and destroys businesses and jobs. Governments initially react to the pressure of the inflation by fixing exchange rates, or by staying in a fixed exchange rate system. When the depression begins, governments, businesses and individuals face rising debt on a falling income. A queue forms for the exit, but it is not possible for everyone to leave the hall of debt at once.

H V Hodson, later the editor of the Sunday Times, described the process in his 1938 book, Slump and Recovery 1929-37. 'Deflation, of course, was not simply an erroneous doctrine adopted by a limited group of misguided individuals or countries. It was part of the apparatus used by every government and every private economic system in meeting the world depression, at least in its earlier stages.' The first thing everyone does in a depression is to try to save himself by cutting expenditure. In 1933, Franklin Roosevelt began his presidency by cutting the pay of veterans.

The turning point comes when governments realise that if everyone deflates at once, the depression can only get worse. You then reach a stage at which some governments are trying to expand, but businesses and individuals are still trying to pay off debt and restore their margins of solvency. Other governments will then still be stuck at the deflation stage.

This is where we are now. The governments of the United States and Japan have committed themselves to expansion, but their businesses and people are still deflating. Hence the weakness of the US recovery and the likelihood that President Bush will lose the election.

In Britain, 16 September, Black Wednesday, saw the effective but involuntary change from deflation to at least the possibility of expansion in government policy, but the countries of the ERM remain committed to deflation. That is parallel to 20 September 1931, when Britain left the gold standard, but the French and their European partners stayed in the gold bloc; they suffered a much worse depression from 1931 to 1936. Both in 1931 and in 1992, Britain professed to be leaving the fixed rate system only temporarily, but gained a freedom our European neighbours rejected.

Unfortunately, the inner group of British ministers has neither clearly understood what has happened nor been able to agree on a coherent new policy; as a result the Government is becoming discredited.

The alternative policy of consistent expansion would have to include further base rate cuts, on a voluntary rather than forced basis, a determination to slow and then reverse the rise in unemployment, a budget policy aimed at increasing revenue through higher activity and lowering expenditure by reducing unemployment, higher targets for monetary growth, accepting under-funding of the Public Sector Borrowing Requirement, and policies to encourage finance for small businesses.

Britain should not go back into the ERM, which will prove a deflationary trap for those who remain in it. Nor should we ratify the Maastricht treaty, which is deflationary, bureaucratic and calculated to raise Europe's industrial costs.

Maastricht is also destroying the unity of the Conservative Party, so the political price for the Government will be as high as the economic.

That is the alternative policy to the deflation from which, in the nick of time, the exchange market saved us. The present government confusion is caused by failure to follow the logic of such a policy of expansion.

This failure has done great damage to the reputation of senior ministers. Michael Heseltine has handled the problems of the future of coal with incompetence. He failed to consult other members of the Cabinet and announced the decision in an inept way. In the worst unemployment crisis in 60 years, you do not destroy 100,000 jobs without a full Cabinet and public examination of alternatives.

Norman Lamont based his abandoned policy on the ERM, which crippled the British economy in the last year. He was then forced to leave it. In subsequent weeks he has probably seen more clearly than some of his colleagues that expansion should now be the priority. But he lacks the authority to carry through a new policy.

Kenneth Clarke is one of the Cabinet's leading Europeanists. He made a poor speech at Brighton, which can easily be forgiven, and then, which cannot be forgiven, admitted that he had never read the Maastricht treaty. A Home Secretary who tries to force through the greatest constitutional change of the post-war period without reading the essential document convicts himself of an intolerable degree of irresponsibility.

Douglas Hurd has conducted himself much better, but his Brighton defence of the Maastricht treaty - that it has a devolutionary and not a federal commitment - could only be believed by those, like Mr Clarke, who had not read the treaty. It is simply not true.

All of them have been trapped by continuing to follow parts of a policy of deflation - including high interest rates, implied exchange rate targets, acceptance of mass unemployment and a commitment to return to the ERM and towards European convergence under Maastricht - after the deflationary policy has been destroyed by events. Until they accept the logic of the new situation, the Government will lurch from crisis to crisis and discredit to discredit.

What then of the Prime Minister? Until Friday, he seemed committed to the same semi-deflation and no doubt he is still confused. Of course he is going to have to review the coal policy, if he is not to be defeated in the Commons on Wednesday. But on Friday he did at last start talking about growth. He told Robin Oakley of the BBC that he wanted to 'pursue a policy that will bring us out of recession and into a growth pattern and secure permanent jobs that is sustainable'.

He qualified that with warnings against instant action, but it seemed clear, at least for the moment, that the shock of the reaction to the mine closures has forced him to accept a policy of expansion.

The fearsome five - Major, Hurd, Lamont, Heseltine and Clarke - have come close to ruining the country, and their commitment to Maastricht suggests that they still hanker to complete their work. Yet they are politicians. The reaction to the mine proposals has shown the universal anger in the country. That is based on everyone's personal experience. Who, reading this column, does not have financial worries far worse than when John Major became Prime Minister in 1990? Millions have faced ruin, lost their jobs, lost their homes, had to face compounding debts.

Politicians live and die by the passions of their electors. At present those passions include pain, anger, bitterness and a sort of fierce contempt. Mr Major has a simple choice, much like that which faced Roosevelt in 1933. He can either lead a policy of national expansion, with all that implies, or he can face the fury of an unforgiving nation. As a Prime Minister there is nothing for him but heroic courage or resignation.