10 June 2013

Thatcher in office

[Margaret] Thatcher arrived in office in May 1979 more clearly defined by what she wouldn’t do than by what she would. She was the alternative to two approaches to politics that had both run out of road. One was consensus: at various points during the traumas of the 1970s it was mooted that only a national government of all the parties and all the talents could save the country (the octogenarian Harold Macmillan apparently spent much of the decade waiting for the call to lead such an administration, which goes to show what an unrealistic idea it was). Thatcher’s solid parliamentary majority of 43 put a stop to all such talk, at least for the time being. The other was confrontation: the Winter of Discontent had tested to destruction the idea that a managed wage policy could produce anything other than permanent antagonism between the government and the union movement, as each looked to see how far it could push the other. Thatcher’s alternative to both consensus and confrontation is conventionally understood to have been monetarism. A Thatcher government would withdraw from the industrial battlefield and focus its attention on tightening the money supply in order to attack the primary cause of inflation. Wage policy would be a matter for individual employers to determine, with the state’s role limited to enforcing the rule of law (beefed up where necessary) in any confrontations that might ensue. The government would not seek industrial agreement but neither would it attempt to impose its will by fiat. It would take a step back to create the monetary framework within which sustainable economic growth could be achieved without constant derailment by pressure-group politics and crisis management. The conventional understanding is, however, wrong. It is true that Thatcher was determined not to have a wage policy and she stuck to that. It is also true that she had an initial go at monetarism. But she didn’t stick to that. It turned out that her alternative to both confrontation and consensus was simply another sort of crisis management: she made it up as she went along.

Thatcher’s personal attachment to monetarism was never very steady. She was no economist: as one of her advisers put it, she was ‘good on finance … not good on economics’. She had read the high priest of monetarism, Milton Friedman (she and members of her shadow cabinet had met with him often), and she knew she wanted the same things he wanted: sound money, an end to stagflation, limits on government profligacy. But he was far from sure that she understood his prescription for getting there. There was one thing she liked even less than high inflation and that was high interest rates. They unnerved her because she felt she had direct experience of their effect on small businesses and ordinary families, especially those with mortgages. Her government’s first foray into controlling the money supply included punitively high interest rates, which made her uncomfortable. They also made Friedman uncomfortable because he thought this was the wrong way to tackle the problem: in his universe it was doing things back to front to use interest rates to control the money supply rather than acknowledging that the rate of interest simply reflects the supply of and demand for money. Friedman wanted the Bank of England to print less of the stuff and let things take their course from there. But Thatcher did not have the time or the political patience to let things take their course. Her tough monetary stance had had the unintended side-effect of boosting the value of sterling, so making it much harder for British industry to export. Within a year of coming to Downing Street her government was presiding over rapidly rising unemployment, stubbornly high inflation, an expanding money supply, sky-high interest rates and falling exports. It was time to try something else.

This is what she did in the autumn of 1980. Just as she was making her famous ‘The lady’s not for turning’ speech to the party conference, the lady turned. She wanted lower interest rates. She also wanted a more competitive currency. Her government, under the direction of her chancellor, Geoffrey Howe, returned to traditional methods of exchange rate management through adjustments to interest rates and fiscal policy, hoping to patch together a short-term fix to get her over the worst. At the same time, she didn’t want to signal any weakening of resolve. She turned her personal attention to getting the spending of government departments under control. This was much more her style.

- David Runciman, London Review of Books, 6 June 2013, reviews Margaret Thatcher: The Authorised Biography. Vol.1: Not For Turning, by Charles Moore.

See also:
Blog: 'This Monty Python, is he one of us?', 8 October 2010
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