The difficulties faced by a Labour Government in carrying out socialist policies in the UK assume their most dramatic form in the threat of capital flight.footnote＊ If free movement of financial capital is allowed, domestic UK interest rates are bound by a golden chain, via Euromarkets, to the ‘world’ rate of interest. Moreover, if the future of the sterling exchange rate is in doubt, UK interest rates have to exceed world nominal rates by the discount on the forward pound, which will widen as confidence declines. This confidence factor is the mechanism by which the pressure of international capital is channelled against the implementation of policies which offend against the canons of prevailing financial orthodoxy. Harold Wilson recorded how this pressure was exercised in late November 1964: ‘That night we had our most desperate meeting with the Governor of the Bank. Claiming that our failure to act in accordance with his advice had precipitated the crisis, he was now demanding all-round cuts in expenditure, regardless of social or even economic priorities, and fundamental changes in some of the Chancellor’s
Under current circumstances, the task of restoring full employment over a five-year period demands a whole range of planning measures and controls which the markets would find entirely unacceptable. As I argued in A Million Jobs A Year,footnote2 a Plan for Full Employment would have to be based on a major programme of expansion of the public sector, which would require policies to ensure that the financial institutions provided the finance. It would also require extensive measures of planning and control over the pricing, international trade, and investment of the major industrial firms. This would amount to a package of policies much more damaging to the interests of private capital than those proposed by Labour in 1974, let alone 1964. At the same time the ever increasing complexity of the international financial system, and the City’s deepening involvement in it, suggest that the task of standing up to the pressure exercised through the uk’s international financial links is becoming harder all the time.
If there really is no way of overcoming such pressure it seems fruitless to consider it. Shadow chancellor Roy Hattersley’s approach, designed to ‘reassure the markets that they would not be expected to absorb an unacceptably high amount of debt’,footnote3 would seem to be the only sensible one. Industrial intervention, especially at a local level (which could hardly be regarded as a threat by international capital), would still be possible. Attempts to urge other European countries to engage in some measures of expansion would also be viable, provided the expansion was not so strong as to provoke lack of confidence in financial markets throughout Europe. But however desirable, the likely impact of such policies on uk unemployment must be judged as very limited. Yet despite its utterly devastating consequences, the belief that it is not possible to stand up to international financial pressure is not based on any serious review of the evidence. It is taken as read that Mrs Thatcher’s policy (reported in the Financial Times) of tearing up the exchange control files when the Bank of England’s exchange control department was disbanded in 1979, symbolized the impossibility of a government ever again taking effective control of the country’s international financial transactions.
This article starts from no such presumption. It attempts to analyse what the uk’s international financial involvement actually is, what a capital flight might consist of, what defences are at hand, and what policies would have to be implemented to prevent it. It therefore looks at how a Labour Government could secure the degree of independence from international financial pressure which would be one of the preconditions of an economic programme measuring up to the appalling prospect of mass unemployment persisting for the foreseeable future.
At first sight the net external position of the uk looks rather healthy. According to the Bank of England the uk was a net international creditor to the tune of some £73 billion at the end of 1984.footnote4 There has been a strong build up of assets in recent years, reflecting the substantial current account surpluses and revaluations of assets abroad resulting from rising stock markets overseas and sterling’s decline. The public sector’s net position is roughly in balance (with official reserves of gold and foreign exchange—at £13 billion—hardly in excess of overseas holdings of government stocks and bills). The private sector has substantial net assets both in the categories of direct investment (the excess of uk ownership of businesses overseas over foreign ownership of uk enterprises was valued at about £37 billion) and portfolio investment (the excess of uk ownership of shares and bonds overseas over foreign holdings in the uk was £69 billion). A third of this private ‘long-term’ investment overseas was financed by net bank borrowing from overseas.
The net external position as described above is useful as an indicator of long-term problems and possibilities. An objective might be to use overseas assets to pay off debts abroad under the slogan of ‘no obligations to world capital’—an outward financial sign of inner ideological grace. Indeed, net assets could be used to finance current account deficits (if £73 billion was really available it could finance ten per cent extra imports each year for five years). But unfortunately this longer-term perspective is hardly relevant to the question of capital flight. One hour is a long time in international finance, and the uk’s reserves would probably not last that long in the face of a real loss of confidence.
Possible reasons for a flight of capital following the election of a Labour Government are: