Was the British government’s decision to embrace austerity in the wake of the global financial crisis the right policy, after all? Yes, claims the economist Kenneth Rogoff in a much-discussed recent commentary. Rogoff argues that while, in hindsight, the government should have borrowed more, at the time there was a real danger that Britain would go the way of Greece. So Chancellor of the Exchequer George Osborne turns out, on this view, to be a hero of global finance.
To show that there was a real threat of capital flight, Rogoff uses historical cases to demonstrate that the United Kingdom’s credit performance has been far from credible. He mentions the 1932 default on its World War I debt owed to the United States, the debts accumulated after World War II, and the UK’s “serial dependence on International Monetary Fund bailouts from the mid-1950’s until the mid-1970’s.”
What Rogoff’s analysis lacks is the context in which these supposed offenses were committed. The 1932 default on Britain’s WWI loans from America remains the largest blemish on the UK’s debt history, but the background is crucial. The world emerged from the Great War in the shadow of a mountain of debt that the victorious Allies owed to one another (the US being the only net creditor), and by the losers to the victors. John Maynard Keynes predicted accurately that all of these debts would end up in default.
The UK was the only country that made an effort to pay. Having failed to collect what other countries owed it, Britain continued to pay the US for ten years, suspending debt service only in the depth of the Great Depression.
Rogoff’s discussion about the debts accumulated after WWII is beside the point. It is neither here nor there to claim that “had the UK not used a labyrinth of rules and regulations to hold nominal interest rates on debt below inflation, its debt-to-GDP ratio might have risen over the period 1945-1955 instead of falling dramatically.” The fact is that the UK did manage to reduce its debt using a series of policies, including encouragement of economic growth.
As for the UK’s “serial dependence” on the IMF from the mid-1950’s to the mid-1970’s, there were actually only two episodes: the 1956 bailout during the Suez crisis and the 1976 bailout that preceded the winter of discontent when strikes in many essential industries – even the dead went unburied – practically brought the country to its knees. (It hardly needs stating that borrowing money from the IMF is not a default.)