Is London Bridge Really Falling Down?
By - December 26, 2008

It broke Ramsay MacDonald's minority government in 1931. It highlighted Britain's diminished world status under Clement Attlee in 1949. It hobbled Harold Wilson's administration in 1967. And it led to the arrival of the International Monetary Fund in 1976 armed with a package of spending cuts. But for more than a decade it seemed a good old-fashioned run on the pound of the sort that had crippled previous Labour governments within two to three years of coming to power was a thing of the past. Until now. The events of the past few months have – for the first time in more than 11 years – revived dismal memories for Labour of coming off the gold standard and of Wilson's claim that the "pound in your pocket" had not been devalued. Rattled by the prospect of Britain being one of the developed world's worst-performing economies next year, investors have lost faith in sterling and pushed it to a record low against the euro. – Guardian UK

Dominant Social Theme: The trials of the United Kingdom continue.

Free-Market Analysis: Again, we have a technical analysis of a too-real difficulty – Britain's ongoing, slow-motion economic collapse. Britain was once the industrial engine of the world. The sun never set on her empire. But after two world wars and 50 years of intermittent but increasing socialism, Britain is seemingly done as a world power. Already America provides the muscle for the British "one world" vision, but it is doubtful how much more power the United States is going to be able to provide in the 21st century. The United States suffers from some of the same difficulties as Britain.

Britain's robust growth rate and the boost to the credibility of economic policy following the decision to grant the Bank of England day-to-day control of interest rates led to hot money flooding into the City, making imports cheaper and exports dearer. The country's tendency to consume too much and produce too little was exacerbated: manufacturing output stagnated and the seeds were sown for the bubble in the property market. There is, therefore, a chance that the cheaper pound will be as good for the economy now as was ejection from the exchange rate mechanism on Black Wednesday in 1992. However, devaluation is unpopular because it raises the cost of imports and erodes living standards. There is also a risk that the aversion to sterling on the foreign exchanges goes deeper than concern over growth next year and reflects concern over government plans to borrow £118bn next year to underpin economic activity.

Again, the analysis of this second excerpt from the same article focuses on a series of technical measures. Reading this perspective, one would conclude that manufacturing was the outcome of a specific currency regime. Raise the value of the domestic currency and output lags. Decrease it and output expands. But is it so simple? Isn't the expansion of industry more than internal currency decisions? Did ancient Rome only prosper because of appropriate currency adjustments? Was the Italian Renaissance the result of finely tuned money? Was Britain's miraculous industrial revolution caused by getting rates right?

In fact, Britain's global expansion was based on free-market principles and a lack of the kind of suffocating regulation that is increasingly being generated by the European Union. Common law and a gold-backed currency, when combined with a republican tradition and an increasing respect for scientific research and analysis, generated a boom that took England from an island to a world power.

After Thoughts

These days, Britain is trammeled by the same difficulties as other Western countries: fiat currency, over-regulation and, increasingly, a lack of commitment to an entrepreneurial tradition. One recalls the vituperation aimed at Margaret Thatcher when she tried to move Britain away from socialism and toward a more competitive approach. The problems of Britain have to do with its competitive stance and the determination of the governing class to maintain the current leveling philosophy. The idea that a currency adjustment, absent other reforms, can re-ignite prosperity is questionable indeed.