‘Austerity’ should not be confused with pragmatism
Sticking to budgetary adjustment plans has been the key to restoring international credibility
John Maynard Keynes: his proposal to seek cancellation of Britain’s wartime debt did not find any takers among allies (Photograph: Gordon Anthony/Getty Images)
At the end of the second World War, Britain faced a crippling debt burden. It had been unable to win the war without large-scale material assistance, especially from the US. The debts that had been accumulated were not only vis-à-vis the US; indeed, among others, Ireland had become a substantial creditor as a result of the export of foodstuffs.
But the US was the major creditor, and it fell to Britain’s foremost and flashiest economic and financial expert, Maynard Keynes, to devise a negotiating strategy with the Americans that could allow his country to recover its position as the world’s leading financial centre.
Ever the eloquent optimist, Lord Keynes presented three options for dealing with the debt crisis. The first was to try to pay all the debts promptly; the second to accept a long-term low-interest loan from the Americans, thereby spreading the burden over a protracted period of time; the third, advocated by Keynes, was to insist that the Americans and the dominions (presumably including Ireland) should cancel debt on the grounds that these countries had either incurred moral debts to Britain or had extracted “windfall profits” during the war.
Seduced by Keynes’s rhetorical repudiation both of the “austerity” implied by the first option and the “temptation” of accepting a loan, the British shipped Keynes to Washington in September 1945 to seek “justice”, to wit, the third option.
In his recent history of the period, Benn Steil * deftly paints what ensued. Unsurprisingly, the creditors were both unimpressed and irritated by the line adopted by the British negotiators. Far from accepting the “justice” of the third option, the American side “immediately began stabbing through the fog of Keynes’s wispy words”.
Within two weeks Keynes was reduced to asking a shocked Whitehall for permission to reverse course and negotiate that tempting long-term loan. It took a further two months before even that was agreed – and on terms which were less favourable than had been hoped for.
It is not just the historical parallels – imperfect though they are – with more recent debt negotiations that made reading the history of the postwar financial talks interesting. There is also the rhetorical element: Keynes’s use of the term “austerity” may well have been one of the first instances this term was used in the context of fiscal adjustments.
Thus from the start “austerity” was already being used as a pejorative term and applied to what would have been a self-destructive policy of ignoring available opportunities to defer and spread out debt repayments. “Austerity” in Keynes’s usage meant cutting back for its own sake.
The modern macroeconomy does not thrive on such masochism. But a return to stable economic growth does require a disciplined and realistic approach to balancing the national books over a credible time horizon – the policy which was eventually employed by Britain when Keynes’s somewhat naive appeals for debt cancellation were dismissed out of hand.