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.
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