Reviewed: Six Moments of Crisis - Inside British Foreign Policy by Gill Bennett

Brits abroad.

Six Moments of Crisis: Inside British Foreign Policy
Gill Bennett
Oxford University Press, 240pp, £20

Gill Bennett worked as an official historian in Whitehall for over 30 years, including nine as chief historian to the Foreign and Commonwealth Office. She has selected six critical recent moments when, had a crucial decision of British foreign policy gone the other way, the course of history would have been substantially altered.

At the beginning of the book, Bennett sets out two important points that are often forgotten. She makes clear that under the British system the critical decisions are taken by ministers of the crown, usually, but not always, in cabinet. Nowadays we sometimes forget the primacy of cabinet decision-making in the British system. We are too quick to identify forces from outside that are said to have dictated a particular decision. These forces may be commercial, for example, the interests of the oil industry, or they may be personal, in the form of the overweening dominance of cabinet by the prime minister of the day. Sometimes a prime minister does possess exceptional gifts that may justify him or her treating his cabinet colleagues as underlings. But we are more likely to find ourselves with an Anthony Eden or a Tony Blair, whose instincts, if unchecked by others, lead us into deep trouble.

The second point that Bennett is right to emphasise concerns the sheer pell-mell of modern government. Every now and then there occurs a real crisis, when all ministerial talent is focused on a particular subject; but these are rare occasions, and ministers soon return to finding that the urgent subjects in their red boxes are not always the most important.

Those of us who keep some kind of diary are vividly reminded of this truth when besieged after retirement by eager students of recent history. Once, when cross-examined about a particular ministerial meeting, I consulted my diary – the only entry read: “Judy lost car keys again.” It is worth remembering that on the day in 1789 that the Bastille was stormed, Louis XVI wrote in his diary “Rien”.

The subjects Bennett chooses for analysis are: the decision to send British troops to Korea in July 1950; the decision to use force against Nasser’s nationalisation of the Suez Canal in 1956; the decision to apply for British membership of the EEC in 1961; the decision to withdraw forces from the east of Suez in 1968; the decision to expel 105 Soviet spies in 1971; and the decision to drive the Argentines from the Falkland Islands in 1982.

The first, second and fourth of these bear on different aspects of the Anglo-American alliance. By the time that the Americans asked the British to join the Korean war, the two most powerful figures in British foreign policy-making were both experienced in handling the alliance and recognised its overriding importance. Ernest Bevin was in hospital, but he and the prime minister Clement Attlee were, from the start, clear what must be done. Their task was to persuade their cabinet colleagues that it must be right to put off their favourite domestic projects in order to remain solid with the Americans.

By this time Bevin had abandoned his earlier belief that Britain’s economic difficulties were temporary. On the contrary, he and Attlee now knew that Britain was exhausted and bankrupt. Nevertheless, they also knew that the British ambassador in Washington, Oliver Franks, was right when he said that to refuse troops for Korea would produce “a prolonged and deep reaction”.

Six years later, the problem took a different form. The question was not whether Britain should follow the United States, but whether the US would tolerate Britain and France launching a military adventure against the Egyptian president Gamal Abdel Nasser that was ill-prepared and played into the hands of the Soviet Union. Anthony Eden and Harold Macmillan greatly overestimated the effectiveness of their appeals for understanding and help in Washington. Memories of wartime co-operation did not stand a chance when set against the imperatives of the moment.

By 1968, the wheel had turned further against Britain, which by now felt constrained to withdraw from its military positions east of Suez. A major transatlantic row was averted only by the diplomatic skill of Harold Wilson, who produced a last-minute compromise on the delicate question of timing. In 1982 Britain insisted on sending an armada to retake the Falkland Islands, but this time British determination was much stronger than at the time of Suez and, after an initial hesitation on the Americans’ part, allowed Margaret Thatcher her victory. It would have been fascinating if Bennett had felt able to round off the Anglo-American story with an account of how Wilson managed to avoid being dragged into the war in Vietnam. Tony Blair, by contrast, showed no compunction in joining the Americans in the attack on Iraq in 2003.

There are other gaps, especially where the Irish question is concerned. It is unfortunate, for example, that there is no account of the cabinet discussion that followed John Major’s announcement that we had received an authenticated statement from the Provisional IRA that the war was over. However, we need to remind ourselves that Bennett is not attempting a comprehensive account of British foreign policy during a particular period. Rather, she is selecting, almost at random, a number of episodes to which she wishes to draw our attention.

Bennett deliberately keeps her range narrow; not for her the private lives or eccentricities of her different subjects. The result is sometimes dry but overall impressive. This is a portrait of a formerly great power wrestling with decline. Bennett describes accurately the “strong sense of frustration” that gripped British ministers once they realised that Britain could not impose its will on Nasser. “The option of doing nothing, to see whether Nasser would keep the canal open with business as usual was not considered,” she writes. “Yet none of the plans or proposals put forward in the next few months seemed likely to achieve what the cabinet had decided upon.”

Bennett does not examine the outcome, namely the failure of the British, French and Israelis to achieve their objectives. They blundered, not because they were wicked but because they failed to see that such an exercise of power was no longer within their reach. Declining to pass judgement, Bennett concentrates on a portrait of serious men taking serious decisions, in the light of their own previous experience of war and peace.

Douglas Hurd was foreign secretary from 1989-95

Eden with Nasser in 1955. Photograph: Getty Images

This article first appeared in the 12 April 2013 issue of the New Statesman, Centenary Special Issue

Getty
Show Hide image

We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?