How Britain flirted with Cyprus-style wealth raids
Is it really feasible, as Graeme Archer argues over at the Telegraph, that something akin to the great Cyprus bank robbery could happen one day in the UK?
It’s tempting to dismiss the idea out of hand: after all, there has never been a widespread tax on bank deposits before in the UK. Plus, unlike Cyprus, Britain has its own central bank with its own printing press, which means unlike those trapped in the straitjacket of the euro it has other escape routes from fiscal crises.*
However, the reality is that something akin to the Cypriot bank haircut has indeed been considered a number of times in Britain, and came close to being implemented.
Back in the 1920s, Hugh Dalton (who would later go on to become Chancellor) proposed a so-called “capital levy” – a one-off tax on the wealthy to help pay off war debts. The idea was pushed aggressively by the Labour Party throughout the decade, but every time it was close to becoming policy, Britain slipped into a recession that made the prospect of gouging savings less attractive. As Barry Eichengreen has shown in his excellent paper on the history of capital levies (h/t Carola Binder), this form of tax-raising was applied in other European countries throughout the 1920s – and, most successfully, in Japan after WWII.
In fact, it turns out that far from being economically loony, one-off surprise wealth taxes (which is, when it comes down to it, what happened in Cyprus, albeit latterly disguised as a bank bail-in) have a powerful economic pedigree. None other than David Ricardo, one of the fathers of economics, suggested a capital levy to pay back Britain’s enormous national debts after the Napoleonic wars.
After World War Two, John Maynard Keynes proposed a capital levy in his pamphlet How to Pay for the War. And in case you’re tempted to dismiss this as the mad raving of a left-wing economist, consider this: the idea came to him from one of the greatest free-market thinkers in history. None other than Friedrich Hayek suggested a capital levy to Keynes in a 1940 Spectator review of an early edition of Keynes’s pamphlet (something Eichengreen’s paper doesn’t mention). Hayek wrote:
There might… be a strong case for a capital levy on old wealth, payable partly in shares of the industrial capital of the country, to create a trust fund, a kind of giant holding company, which would give the holders of the war savings, instead of a claim against the government, an equity in the industrial capital of the country.
In other words, economists of many different persuasions have on occasions argued in favour of a one-off levy on the wealthy. In general, they tend to agree that such taxes should only ever be imposed 1) when a country has found itself indebted beyond its normal capacity to pay, typically after a war, 2) when much of the national wealth is in the hands of a relatively small number of people, and 3) when no-one expects it (as if they did they’d move their money out of the country, quick).
Well, given that Britain is 1) facing national debts of war-like proportions, 2) unequal to a degree we haven’t seen since the first half of the 20th century and 3) a safe haven for investors, who generally assume policymaking here is more predictable and stable than in the eurozone, I’d say all three of those conditions have been fulfilled.
Either way, for better or for worse (and, given the shambolic way it was administered, I’d say on balance for worse) Cyprus has put the idea back into mainstream consciousness. Given the scale of debt in many economies, including Britain, is back to post-war highs, perhaps we shouldn’t be surprised if it crops up again in the future.
* Some contend (and with some reason) that monetary tactics do a similar thing to the deposits tax in Cyprus, robbing savers and distributing the proceeds to debtors.