Thursday 26 March 2020 ★ FINANCIAL TIMES 17

FT BIG READ. UK ECONOMY

British leaders are evoking the spirit shown in the second world war as they tackle coronavirus. But unlike

the last global conflict, the real challenge is managing an economy that has been demobilised overnight.

ByJonathanFord

a conflict for which Britain was rela-

tivelywellprepared.

“For several years before 1939, every-

onecouldseethataconflictwaslikelyso

there was time to prepare,” he says.

“Civil servants had spent years working

out the lessons of the first war, so when

the second came along they had sheaves

ofplanspreparedtheycouldconsult.”

The coronavirus crisis is of a different

stripe. It is not just that Britain had no

detailed contingencies to hand, having

largely brushed off warnings about the

risks posed by pandemics — unlike

some Asian countries that were

affected byepidemics such as Sars and

swineflu.

What is also striking is the sheer scale

of the sudden dislocation, which has

provoked antagonism between coun-

tries, impeded movement across bor-

ders and disrupted trade around the

world. In that sense, it bears more

resemblance to the first world war,

whichfelluponthepublicoutofaseem-

inglyclearsky.

Just as in 1914, the biggest immediate

casualties have been the financial mar-

kets. In his first world war memoirs

David Lloyd George, later prime minis-

ter but chancellor at the start of the con-

flict, describes how London’s role as the

financier of global trade was shattered

in days. Cross-border business cratered,

leaving creditors unable to pay their

debts and banks loaded with potentially

defaultedassets.

The recent shock bears some resem-

blance to that period. Markets have

slumped because of uncertainty about

the duration and nature of the distur-

bance. Will it end quickly? Is it a ques-

tion of liquidity or is the solvency of

participantsindoubt?

The ultimate response remains

uncertain. The world is transfixed

by memories of 2008, and the powerful

stimuli that were administered to

markets in the form of massive asset

purchases by central banks. A number

of central banks, including the Bank of

England, are repeating those measures.

But some think the authorities should

look more to 1914, where Britain

focused simply on keeping markets

functioning and not preordaining at

whatleveltheyshouldtrade.

“In markets, the aim now for central

bankers should be to keep core markets

openratherthantryingtokeepthemup

by simply buying everything,” says Paul

Tucker, chair of the Systemic Risk

Council and a former deputy governor

oftheBankofEngland.

He argues that the aim should not be

tostimulateaneconomy,whichthegov-

ernment is anyway trying to tamp down

with its measures to suppress the virus.

It should, instead, be to avoid the econ-

omyfallingintoavortexandforgovern-

ment to ensure that citizens can live

decently and businesses are not unnec-

essarilydestroyed.

“Ifmarketscannotfunction,wellthen

the central bank’s job is to ensure the

government is funded. But you

shouldn’t start from there. You should

try to be a catalyst and not automat-

ically buy something that Larry Fink

[chief executive of investment group

BlackRock]andothersmightstillbuy.”

Government gratitude

No one can know how long the corona-

virus crisis will last. But one lesson of

wartime politics is that governments

cannot simply demand endless sacri-

fice. At some point, politicians must

turn their minds towards the pay-off for

allthatblood,sweatandtears.

If the virus endures, Mr Todman sug-

gests that this might involve some sort

of generational compact to benefit the

young on whose shoulders much of this

inflated national indebtedness will fall.

“Theobviousthingwouldbesomecom-

bination of improved lifestyle, more

sustainable employment and the avoid-

anceofclimatecatastrophe,”hesays.

Thiscouldevenbeapoliticalopportu-

nity.ItwasafterallnotChurchillbutthe

LabourpartyunderClementAttleewho

seized the possibilities of the 1942 Bev-

eridge Report on social welfare, paving

thewayfortheNationalHealthService.

“It would be nice to see some ambi-

tious post-pandemic settlement,” Mr

Todman says. “But I am not optimistic

about any of our leaders being able to

pullthatoff.”

On a

wartime

footing

Having initially doubted the severity

of the coronavirus outbreak, Donald

Trump has started to cast himself as a

wartime president.

He said at the weekend: “We’re at

war, in a true sense we’re at war, and

we are fighting an invisible enemy.”

And in words that appeared to echo

Abraham Lincoln telling Congress in

1862 that the US in the middle of civil

war was facing a “fiery trial”, Mr Trump

added: “We’re enduring a great

national trial and we will prove that we

can meet the moment.”

So far, Mr Trump has been reluctant

to use the legal powers available to the

White House to mobilise resources for

dealing with the pandemic. The

administration has given ambivalent

signals about whether it will invoke the

1950 Defence Production Act, a law

passed during the Korean war which can

be used to direct the private sector

towards specific tasks. Andrew Cuomo,

New York governor, has called on the

White House to accelerate production of

ventilators and other equipment.

Instead, Mr Trump is using the wartime

mood for political purposes. He has

alighted on an enemy: China. His

America

Trump uses

pandemic

for political

ends

I

n the dog days of July 1938, amid

German rumblings in Czecho-

slovakia’s Sudetenland, the British

government led by Neville Cham-

berlain acquired a collection of

fields and a sewage works beside Castle

BromwichairfieldintheWestMidlands.

For a purchase that attracted little

notice, it would have a large impact on

world events. Over the next year, and

with the expenditure of some £4m of

public money — a huge amount at the

time — this unprepossessing location

was transformed into a giant manufac-

turing plant under the aegis of the UK’s

“shadowfactories”scheme.

The idea behind the plan was to spur

rearmament by expanding the coun-

try’s capacity to make military aircraft

beyond that which the private sector

was willing or able to finance. Whole

plants would be built in advance of

demand for their output. Castle

Bromwich was one of a number of such

facilitiesscatteredroundthecountry.

Initially under the management of

Wolseley Motors, and later the aircraft

maker Vickers-Armstrongs, the pub-

licly funded plant expanded to employ

12,000 people, taking its first orders in

the summer of 1939. When production

finally ceased in July 1945, it had manu-

factured more than half the nation’s

20,000Spitfirefighteraircraftalongside

hundreds of Lancaster bombers and

helpedtosecurenationalsurvival.

Last week, that same Castle Brom-

wich plant was back in the news. No

longer an aircraft manufacturing site

butaproductionfacilityforJaguarLand

Rover, the carmaker announced that

the factory’s 1,900 workers, along with

others on its five UK sites, would be

downing tools until at least April 20.

JLR said it was “minimising the spread

ofthecoronavirus”,addingthatitwould

“work towards an orderly return to pro-

ductiononceconditionspermit”.

In recent days, UK government min-

istershaveinvokedthespiritofwartime

mobilisation, calling for a wholehearted

national effort to stem the advance of

coronavirus. Boris Johnson, prime min-

ister, has talked about running a “war-

time government” taking steps that are

“unprecedented since world war two”,

while Matt Hancock, health secretary,

has called for “one gigantic national

effort” on a par with the time “when our

cities were pounded during the

Blitz”.Similarrhetoricisbeingdeployed

byministersinothercountries.

With its memories of communal sac-

rifice leading to ultimate triumph, the

second world war looms large in Brit-

ain’s national consciousness. But as the

fate of Castle Bromwich suggests, the

“mobilisation” required to beat corona-

virus may have a different shape and

rhythmfromthosedistantevents.

“The prime economic challenge of

the second world war was how to mob-

ilise and direct resources,” says Duncan

Weldon, an economic historian. “Our

present ones are almost the opposite,

being about how to manage the reality

of national demobilisation in order to

stopthevirusspreading.”

In his 1940 book,How to Pay for

the War, the economist John Maynard

Keynes wrote of the imperative that

“Britain’s war output [should be] as

large as we know how to organise”, leav-

ing only a “definite residual available

for civilian consumption”. It meant the

state commandeering the lion’s share

of resources for war production, and

taking measures such as higher taxes to

reduce consumer demand. These steps

were needed because of steeply rising

household incomes — the product of

wartime full employment. This, it was

feared, might tempt producers to divert

capacitytomakeconsumptiongoods.

“We cannot allow a matter of mere

money in the pocket of the public

to have significant influence on the

amount we are allowed to consume,”

Keynesobserved.

With the government now directing

most retail businesses to shut, and

many companies slowing production

voluntarily either because of ebbing

demand for their products or a desire to

preventinfection,therearefewcapacity

constraints (short of illness) to stop

ministers corralling the resources they

need to combat the virus. Outside of

a few areas, such as food, consumer

demandisslumping.

“You needed central direction in the

war to stop carmakers producing cars

and get them to make Spitfires,” says Mr

Weldon. “But now if the government

wants companies like JCB or Dyson to

turn over production to medical sup-

plies, that ought to be possible using

ordinary contracts. After all, JCB isn’t

likely to be selling that many diggers

overthecomingmonths.”

Economic hibernation

The bigger challenge for the British

government — and for all other coun-

tries reeling from the pandemic — is to

make sure its demobilisation strategy

is effective. Without that, its hopes of

on but the consequences for the public

finances may end up looking quite

familiar to someone who financed the

war,”saysMrWeldon.

Acts of compulsion?

Another area where there are echoes of

past conflicts is in the balance between

voluntary and compulsory measures.

Mr Johnson’s government has faced

criticism for its initial reluctance to

laydownrules,mostnotablyinordering

non-essential companies or schools to

closetopreventthespreadofinfection.

It has not stepped in to control the

distribution of food and essential items

or their prices despite evidence of panic

buying. Supermarkets have been left to

improvise their own responses, in spite

of competition rules that inhibit co-op-

eration between them. These were sof-

tened last week to permit them to share

data and distribution depots. Social dis-

tancing measures have been lightly

enforced, although rules announced on

Monday may mark a change, with

emergencylegislationnowinprospect.

Mr Johnson has made much of his

attachment to British liberties, urging

thepublictodotherightthing.

According to Daniel Todman, author

ofBritain’s War, a social history of the

second world war, this is reminiscent of

theautumnof1939,whentheChamber-

lain government debated whether to

bringinfoodrationing.

“The argument was over how fast

to introduce it and whether to move

quickly to a compulsory system,” he

says. “Lots of Tories were worried, not

admittedly Chamberlain, who favoured

a big state in wartime, but Churchill was

very anti. He felt it would be seen as a

sign of weakness and a threat to tradi-

tionalliberties.”

If the second world war is a guide,

compulsion will ramp up quickly if

the present lockdown endures. Indeed,

according to Mark Harrison, emeritus

professor of economics at Warwick uni-

versity, this might enjoy widespread

public support. “Societies that are

understresswelcometheclarityofclear

rules and penalties,” he argues, likening

ittoaformofmoralmobilisation.

The second world war saw a prolifer-

ation of such regulations, with particu-

larly fierce punishments reserved for

infractions such as looting or blackout

breaches. More than 1m citizens were

prosecuted for infringements, many

of them seemingly petty, according to

Mr Harrison. They included one unfor-

tunatewhowasarrestedduringtheBlitz

attacks on British cities after handing

round a bottle of brandy he had

retrieved from the ruins of a pub

through which he was hunting amid

corpsesforbombblastsurvivors.

Yet despite their ferocity, these rules

were not resented by the public. Keynes

likened them to “rules of the road”,

which got around the collective action

problem of everyone abiding by irk-

some regulations that were all to no

avail if others did not comply. He dis-

missed the threat to liberty, describing

their prescription as the “perfect” veh-

icle for “social action, where everyone

can be protected by making a certain

ruleofbehaviouruniversal”.

Sudden dislocation

Most comparisons with the present

crisis focus on the second world war.

But, as Mr Weldon points out, this was

campaign released an email attacking

Beijing, as well as his likely opponent,

Joe Biden, for siding with them.

Early signs suggest Mr Trump is

enjoying a bump in popularity.

Mohamed Younis, editor in chief of

polls at Gallup, says: “The ‘rally round

the flag’ effect tends to be most

dramatic when the nation is under

attack, as happened after 9/11 [when

President George W Bush’s approval

rating soared to 85 per cent in late

2001]. But it is going to be interesting

to see how that breaks out politically

the longer this goes on.”Kiran Stacey

containing the virus will be in vain.

Rishi Sunak, chancellor, has announced

measures designed to underwrite the

costs of keeping much of the workforce

idlewithoutleadingtomasslay-offs.

To encourage this form of economic

hibernation, the government has

undertaken to pay up to 80 per cent of

affected workers’ wages for an open-

ended period. It is a measure that could

have transformative consequences for

the public finances. Estimates suggest it

could cost the government roughly

£3.5bn for every million workers for

three months’ operation. Beyond the

scheme, additional support for people

on welfare benefits is estimated to cost

£7bn. Unlike wartime, this will happen

atatimeofplungingtaxreceipts.

All told, these and other measures

could place burdens on Britain’s

finances that might approach the

1939-45 period, when budget deficits

exceeded 20 per cent of Britain’s gross

domestic product between 1941 and

1945, peaking at 26.7 per cent in 1942.

“It depends how long the virus goes

A woman works

on a Lancaster

bomber in 1943.

Politicians had

to ensure the UK

had the capacity

to make military

aircraft. Below:

JM Keynes, seen

here signing a

postwar loan

agreement with

the US, advised

on thenew‘rules

of the road’.

Right, modern-

day British

citizens must get

used to similar

constraints

Keystone Features/Getty

‘If the

government

wants

companies

like JCB or

Dyson to

turn over

production

to medical

supplies,

that ought to

be possible’

Defending the

nation: George

W Bush’s ratings

soared after the

2001 terror

attacks

MARCH 26 2020 Section:Features Time: 25/3/2020 - 18: 45 User: dana.prince Page Name: BIGPAGE, Part,Page,Edition: EUR, 17 , 1