How Great Was It Anyway?: There's a popular view of our history that goes like this: great industrial nation that died on the job; never had it so good, then lost it

The truth is that, class-ridden and empire-driven, we have sheltered under a series of economic policies that eroded our wealth while promising to restore it. Thatcherism was the last great experiment, and that failed. Now we've got no empire left, no manufacturing industry and barely a monarchy. What on earth do we do now?

IN SEPTEMBER 1931, the month Britain quit the Gold Standard and sterling was devalued by a quarter, the painters Vanessa Bell and Duncan Grant went to the cinema in London.

'Suddenly,' Vanessa Bell wrote later to her brother, 'Maynard appeared on the screen enormously big, blinking at the lights & speaking rather nervously, & told the world that everything was going to be all right, England had been rescued by fate from an almost hopeless situation, the pound would not collapse, prices would not rise very much, trade would recover, no one need fear anything.'

The quotation, though it is very old, expresses better than anything I know the bizarre mixture of anxiety and blinding relief this country felt on 16 September last year when sterling was blown out of the European exchange-rate mechanism and devalued.

John Maynard Keynes made his reputation in September 1931, because he saw that, in the shock and chaos of devaluation, he could capture the British economy for an entirely new approach, which, by artificially stimulating demand - making people want things and giving them the means to buy them - could abolish the tensions in British society and preserve the primacy of that social class (then known as the upper-middle class) of which he was such a glorious embodiment. Keynes's remedy, as one of his biographers wrote in the 1980s, 'avoided having to choose between capital and labour. Keeping demand buoyant would simultaneously underwrite high profits, full employment and rising wages, thus eliminating or at least easing the conflict over the distribution of wealth.'

Keynes's influence lasted until the mid-1970s when inflation got out of hand and the public turned to Thatcherism. But the old unrest in British society, stifled beneath the blanket of Keynesianism and the deceptive prosperity of the Thatcher years, is beginning to break out again, somewhat in the manner of the racial or religious hatreds buried under communism in Central Europe. Since 16 September, the cry has gone up for Keynes to come back - but he can't, because he's dead.

Serving on the Economic Advisory Council, his prescription in 1931 was to make money so cheap as to be almost free. The bank rate fell to 2 per cent in 1932 and stayed there until 1938. From the last quarter of 1932 England, and above all the north-east and south-western extremities of London, went through a house-building boom of a scale not seen before or since. Whole neighbourhoods came into being almost overnight, raised like volcanic islands on floods of free money.

Go to Rayners Lane] Go to Stoneleigh, Edgware, Chislehurst, Gants Hill, Orpington, Queensbury] Go to Worcester Park, Ruislip, Petts Wood, Tolworth: great districts crashing like waves on the green shores of Middlesex and Surrey, until they stop, quite abruptly: you can almost hear newspaper boys crying 'War]'

In these streets, in these miles and miles of red tiles, half-timber, bay-windows and pebble dash, among fake Egyptian cinemas, louche mock-Tudor roadhouses and residental shop parades, in these nave approximations of a lost British-pastoral past, the dragon of Depression was slain. These were our British autobahns, our Berlin Olympics, our aircraft factories and shipyards, our Tennessee Valley Authority. It is hard to wander these restless and monotonous streets without melancholy. For though they commemorate an economic victory, and are good houses which gave 350,000 London families hot water and electricity, steam irons and radios and cocktail cabinets with chrome trim, though they are part of this country's wealth, it is such passive wealth: unproductive, conformist and shy. It is as if, even in the 1930s, we British were already washed up and only wanted to get out from under the burden of economic history, to retire and cultivate a small garden and peep into one another's windows and sleep what George Orwell, writing in Homage to Catalonia at about this time, called the 'deep, deep sleep of England'.

It is sad, too, because the illness recurs but the remedies lose their effectiveness: absolutely the last thing this country needs right now is 350,000 more houses for sale (though some council houses would help); 16 September 1992 was a day of peculiar horror for the British because it marked the annihilation of the best - in the sense of most promising rather than most virtuous - experiment in British political economy since the 1930s. To be British in this year of grace 1993 is to know that every type of government since the Depression - national unity, socialist, social democrat, social liberal and high-, middle- or low-Tory - has failed to arrest the decline of British power, influence and relative prosperity. In the 1950s, we were indisputably richer than the French and the Germans; now we're firmly in the bottom league with Italy, Spain, Ireland and Portugal.

And we're running out of conventional choices. What next, should some accident befall John Major's government? Fascist? Presbyterian? Islamic fundamentalist? What strikes foreign visitors is our utter bewilderment. Bernhard Meyer, a stockbroker of German origin who works in London and lives in Brussels, put it like this: 'What do you British want? You can see what the Germans want: security and a return of their prosperity. The French want to be right at the heart of the modern Europe. But you . . . none of you seems to have a clue.'

The events of 16 September 1992 were the final insult to certain sections of the British public - the aspirant working class, almost everybody between 20 and 30 - who saw the Thatcherite revolution as transforming society to their benefit. Having watched their savings be destroyed by Major's deflation of British housing values, they have now seen the devaluation of sterling wipe out almost all the increase in real incomes that made them feel so rich in the 1980s. In the past three years there has been a partial Restoration: in other words, a surprising number of the people who are rich now were rich when Margaret Thatcher came to power in 1979. No wonder there is such hostility to that symbol of an enduring aristocracy, the Crown.

For Thatcherism's legacy to this country is not just an utterly bankrupt economy: it is also - a novelty for this country - a critical frame of mind. All those British institutions that seemed worthwhile mementoes of a grand past - the judiciary in their wigs, the armed forces, the Foreign Office and MI6, the Bank of England, the Monarchy itself - now appear, in the sceptical afterglow of Thatcherism, as out of scale, folkloric, corrupt, rather daft.

Empire gone. Post-war utopia all busted and falling to bits. Thatcherism failed. What is to become of us?

IN THE SUMMER of 1990, amid the dying embers of Thatcherism, I was invited by a publisher to the Groucho Club in Soho, London, to talk about a book idea. I was thirsty and recently come back from three years abroad: as I sat down, my mind filled with irrelevant images of British good cheer, of sticky children swinging on pub umbrellas, microwaved meat pies and warm, soporific ales.

I said: 'Give me a pint of bitter, please.'

The waiter quivered. Across the room, a young woman spun on her chair. My companion rolled his eyes. The waiter said: 'We do Sapporo. Dos Equis. Moosehead. Only.' I looked down at my hands. Gradually, the foam of indignation subsided. Conversation broke out in corners of the room and became general. The book project was quietly forgotten.

That year, the United Kingdom imported pounds 121 bn of goods from abroad, or about pounds 6,000 for each family. Returning home, I found my country drowning in luxury imports: not just pissy foreign beers, but video games, polenta, obscure champagnes; tropical fruits that had been, just 15 years before, confined to the hothouses of Midlands dukes were on special offer at Marks & Spencer. I saw that what drove the British economy and society in the 1980s was an irrational yearning for foreignness: anything, even Mexican beer, provided it wasn't British and old and patrimonial and failed.

That year, we exported just pounds 102bn of goods. Who made up the difference? Staring out of my window, down at the young men who come for the Camden Town Sunday market, I thought: 'Who earned the yuan to pay the Chinese machinist who stitched your New York Yankees cap? The dollars to assemble your Motorola phone? The yen for your clamped Mitsubishi Shogun?' The answers, which lie under veils and veils of national obscurity and sentiment, took me a long time to find out.

IN THE VAST literature of British decline, and in our national memory, there is a view of history that goes like this: this used to be one hell of a country, Workshop of the World, made a whole lot of things that puffed and stamped and died and stitched; but then dozed off on the job. The sons of mill entrepreneurs became poets or cricketers or lords, while their daughters moved glacially slowly towards emancipation. What the public schools and drawing-rooms started, two wars completed. The ending of the Second World War offered a new start with a sense of national purpose and an American loan, but it was fluffed, and it's been downhill ever since. Successive classes have had a go at government and all failed, so that the country is now run by a raggle-taggle collection of adventurers and mountebanks without links to manufacturing or agriculture or the City or labour or any recognisable economic interest, but only to their own effrontery or boundless innocence: as if Picasso's Saltimbanques had trooped off to the Palace and sought and been granted permission to govern.

This version of events, though it has its origins in popular memory of the Great Exhibition of 1851, is not entirely honest. By the second half of the 19th century, we weren't much of a manufacturing country and by now we are hardly a manufacturing country at all. In the 1870s, Britain ran a huge deficit on its merchandise trade with the rest of the world which has continued, except during the forcible interruptions of two wars, to the present: since 1983, we have imported more manufactured goods than we have exported, as if we were some Third World country that had floated north into cold seas.

Seven million people were employed in manufacturing when Thatcher came to power in 1979. This number was reduced to 5.5m during her first attempt at deflation (a peculiarly horrible period that lasted until the middle of 1982) and then to 4.5m by her second deflation, which Major is continuing. Some people, such as the economist Paul Gregg at the National Institute of Economic and Social Research, believe that already our manufacturing industry may be too small to support itself (let alone those dependent little trades, such as design, marketing and advertising, which are so important to the London economy and will have to re-orient themselves to export markets). Politically, manufacturing is as impotent as agriculture: there are, as Vernon Bogdanor of Oxford University wrote in the Independent last month, just 70 out of 336 Tory MPs who come from north of a line from the Severn to the Wash. In the great cities of our manufacturing history there are less than half a dozen Tory seats. Just as France believes itself to be an agricultural country, despite irrefutable evidence to the contrary, so in the imagination of the British public, in the roots of British masculine culture, we are troubled by a sense of running away from manufacturing, which carries contradictory feelings of loss, nostalgia and elation. This was the exposed nerve that Michael Heseltine touched in October when he said 30,000 coal miners must be fired; for there is hardly a man in the country, including Michael Heseltine, who does not feel, obscurely, that his occupation has its moral and physical ancestry in coal mining.

When you import more goods than you export, you still have to find the difference in foreign currency, which you do by selling services to foreigners. These can range from financing their trade to performing plays for them at Stratford-upon-Avon; selling them works of art and property at home, such as houses or salmon rivers; shipping out the reserves of foreign exchange at your central bank; and, when even that fails, by devaluation. The British approach has been a creative and flexible mixture of all these methods.

In the past century or more, we've sold a lot of the family silver. The dealers in Bond Street think that everything to be sold abroad has been sold, while the rest has been locked up by Heritage activists or the Treasury. Many of the main art dealers in London have no British clients, either as buyers or sellers, and it is only habit that keeps them from moving to New York or Zurich. We also sold off thoroughbred bloodstock that had taken three centuries to breed: in the 1980s, the best of it was repatriated here by generous and quixotic Arab investors who are threatening to take it away again. Real estate is being offered to foreigners at bargain-basement prices: British houses and office blocks are about 50 per cent cheaper in German marks than in the late 1980s, farmland half as expensive as in 1980.

But in reality, it is the City - the merchant banks, stockbrokers and commodity traders, the insurance industry - which has made our exuberant national existence possible. The City, which never had much to do with the creation of the manufacturing trades in the north or the west Midlands, has always made much of its money abroad: financing railways in the US or ports in Argentina and, more recently, scooping up and finding borrowers for the great pool of dollars left in Europe by the financing of the Vietnam War or paid out to Arab oil producers in the 1970s.

By the late 1980s, the City was regularly earning pounds 10bn in foreign exchange a year, and covering half of the shortage in the balance of payments. It is profoundly galling to realise that it is dishonest brokers and snotty merchant bankers who pay the bills, but they do, they do: they, as much as the miners with their blackened faces, are the Roast Beef of Old England. And because they pay the bills, they get to turn off the lights. When the City helped destroy Major's economic policy on 16 September, it proved that foreign exchange dealers, not Major or Norman Lamont or even Robin Leigh-Pemberton, are the economic law around here.

That is only a portion of the City's power and influence. By the 1870s, the City had evidently decided that returns from home investment were too paltry - or, at least, without turning the country into an industrial slum - and had started buying up assets overseas, mostly in the United States. By the Edwardian era, when the British domestic economy stagnated for 10 years in that long, hot, idle high summer of popular memory, the City was earning pounds 150m in foreign dividends and interest; in 1929 it was pounds 247m. All these holdings, and the direct subsidiaries of British industrial companies, had to be sold to help pay for American military aid in the Second World War. But since Thatcher lifted exchange controls in 1979, the process has begun all over again.

In 1988, I visited Lord White, chairman of what was then called Hanson Trust, at his flat in Park Avenue, New York. He said: 'I want to be remembered for helping to restore the traditional British ownership position here that was all sold off by Wall Street sharks at 10 cents on the dollar at a time of our national crisis in 1941.' By the time of that lunch, the country was earning about pounds 50bn or so a year in foreign interest, profits and dividends and we now probably own an overseas estate worth about pounds 400bn, or more than the entire British stock market is worth. In effect, we own a second, phantom industrial base abroad.

By we, I mean most of us. The bulk of this is owned by the City institutions that are responsible for investing the contributions made by companies and working people into pension plans: under the British system (leaving aside criminals such as Robert Maxwell), funds to cover future pensions must be invested for greater prudence outside the company in question. So, while British industry and the North Sea oil business has been run down at home, it has been milked for cash for investment overseas and - here is the genial feature of it all - these overseas holdings are not diminished by devaluation but enhanced (because they convert back into more pounds). What the City has done up to now is protect the working public from the consequences of its own low productivity, from low economic growth and inflation. The price paid has been low investment at home and persistently high unemployment.

We have become, as in the Edwardian era, a nation living off its rents, or like a modern farmer, drawing an income from set-aside fields. We are surprisingly well-to-do. We can jog along for a while yet, dammit.

ALREADY, just four months after 16 September, several possible futures have taken shape for this country and vanished, as if history itself were accelerating. The first of these, and the one least likely to come to pass, is a future in which all our economic sins will be forgiven and our virtues celebrated in a European division of labour under the banner of a common currency and tax regime.

In this glimmering but wildly utopian future, it no longer matters that we could not make machine tools as well as the Germans or foie gras like the French: we shall concentrate on retailing, trading and running the capital market, while our manufacturing will consist of a few international champions (pharmaceuticals, Scotch whisky, jam) and some factories serving keg beer to the home market. This future looks unlikely for a while, and probably for one or even two revolutions of the business cycle, because it requires the participation of Germany; and, just at the moment when western Europe needed Germany, Germany has become caught up in eastern Europe.

The second is more likely, because it is the policy that John Major and Norman Lamont were tending towards before 16 September. In this British future, the wages of people in work are driven down to the point where it becomes worthwhile for foreign capital to establish its factories here for access to the continental market: Britain will become a sort of Czechoslovakia.

This has been going on for some time: you can see it in the low-grade electronics factories that use female labour in the former mining valleys of South Wales, or at the Japanese transplant car factories in Sunderland and Derbyshire. The variation in pay - between the highest- and lowest-paid - is greater now than at any time since the 1880s. In this future, the degradation of British training and education becomes less of a problem while the relatively weak labour protection and pollution laws are a magnet to foreign investors.

This future reverses the experience of Keynesian Britain. Profits will accrue to a hoarding aristocracy or be sent out to Japan or wherever, leaving barely enough wealth to underwrite a social security system, socialised medicine, a class devoted to the arts and conservation and so on. Our overseas assets will be sold off to pay for government. Middle-class wealth will be liquidated to pay for terminal health care. The destitution of the unemployed will be almost matched by the poverty of those in work. Any outbreak of consumerism or price inflation will be punished by spectacular devaluations.

It probably won't happen in these lurid terms: but, for a long time yet, in the old frontier districts of the north and Ulster, in London and the ruined boom towns of the south of England, low wages and very high unemployment will be routine. Men thrown out of work in their thirties in industries such as banking, which are being transformed by technology, may never work again.

The course most likely to be followed is a continued regime of inflation and deflation. This is not an utter disaster: during the Thatcher inflation, new fortunes were created and, though many were washed away as the deflationary tide rolled in, some were not. So, in this ebb and flow, the composition of the British ruling class is altered and possibly invigorated. In this process, new constituencies may well be enfranchised: immigrants, the despised and forgotten regions of Northern Ireland and Scotland, and above all women, whose eruption into the paid labour force is no longer a matter of personal liberty but national necessity. (Their marginal productivity is higher: in other words, if only men work and no women, the first woman to be employed is bound to be many times more intelligent and effective than the last man). There is one more possible future, but it is so speculative and interesting that it deserves its own section.

IN SIR Peter de la Billiere's memoir of the Gulf war, Storm Command, there are three passages that stand out in the brisk, bland, get-the-job-done-and-get-home narrative, like broken glass in cake. The first describes an occasion in the War Room in Riyadh when the US air force commander, Lt Gen Chuck Horner, turned to Sir Peter and said: 'Gee, I sure admire the courage of your pilots, but I'm a little bit concerned they ain't achieving much in relation to the risks they're taking.' The second reveals that the engines and transmission systems of the British Challenger 1 tanks were failing at such a rate that the armoured division at one stage looked likely to be littering the desert with tank hulls. The third says quite baldly that the despatch of an armoured division to the Gulf rendered north Germany more or less defenceless: 'Those units remaining (in Germany) were left with barely enough men to guard their own installations, let alone carry out any training.'

To civilians, military operations always seem breathtakingly risky. But the picture presented by the British commander in the Gulf is of soldiers and pilots operating at the extremity of their courage, equipment and numbers. And these numbers are to be reduced further: under the defence White Paper Options for Change, the Ministry of Defence intends to reduce army numbers by 25 per cent, with the infantry to come down 30 per cent and deep cuts in armour: in effect, this country's land forces are to be reduced to the payroll of Barclays Bank (or, at least, before that, too, started disintegrating). Officers complain that they have no prospects of interesting command in amalgamated regiments; men are fed up with being rotated round the world.

In Germany in the early 1980s, British officers used to point out the gap in the hills where they would halt the Red Army and when - and then take you off to lunch. But modern conflicts are likely to be messy little battles in weird environments with complicated and restrictive rules of engagement; or operations to contain threats arising from hunger, mass migration or economic collapse.

I sense that the public can tolerate relative impoverishment because it still feels safe, and still believes that the British military is the best in the world and that at least one piece of British history is secure. This is mere speculation; but if this country did suffer a military disaster - the loss of an aircraft carrier or the wiping out of an entire brigade - in some dead-end piece of peace-keeping in some Nowhereistan, I'm sure that all of the assumptions in this article would be demolished. In those circumstances, the whole business of comfortable and elegant national decline will appear excessively risky and everything - the Monarchy, the Union - will be up for discussion. Perhaps a mood for revolution might even develop.

Who will be the revolutionaries? There is no shortage of malcontents among the collapsed working-class, the exploded lumpen proletariat of homeless teenagers and rural vagrants, hand-wringing journalists like me, the people raised up and cast down by Thatcherism. What is missing is any ideology other than a watery republicanism - which is merely old-fashioned British leftism minus the economics - or any emotion more productive than acute anxiety and an amazing scratchiness. We British have become mean sods.

Actually, a middle-class republic may not even be the likeliest outcome.

Soon after Margaret Thatcher fell from power in 1990, I was visiting a friend near a well-known English county-town and was invited to dinner by the local magnate to help make conversation with the deposed ex-prime minister, put Denis at his ease, etc.

That evening, Mrs Thatcher constantly mispronounced the name of the county town, although it had never occurred to me that it might present difficulty. Nobody corrected her. When she entered a room, the other women stood up. The telephone rang off the hook, spookily. I thought then that constitutional monarchy is the alternative to dictatorship, as well as to a republic; that there are deep currents of deference and subordination in British society; and God forbid that any but a constitutional monarch should tap them. Secretly, and in champagne, I drank a toast to long life and health to the British Queen.-

(Photographs omitted)