The Iron Lady

inflation. It was taken for granted that, though the Chancellor held up the dispatch box outside Number Eleven, the political will had come from Number Ten. ‘Either she succeeds,’ the Daily Mirror commented, ‘or we go bust.’⁹ Mrs Thatcher was widely reported to have insisted on a bigger tax cut than the expenditure savings warranted and on a steeper rise in VAT than her Chancellor had wanted. The reality was in fact quite the opposite.

The impact of Howe’s June budget was as damaging as its critics predicted. The virtual doubling of VAT and the cutting of subsidy to the nationalised industries, along with the ending of pay and dividend controls and John Nott’s swift abolition of the Price Commission, added 6 per cent to the Retail Price Index almost overnight, leading inevitably to large compensating pay claims, while the income-tax cuts boosted consumption and further fuelled inflation that way. For a Government that had come into office proclaiming the conquest of inflation as its first priority, this was a perverse beginning. Inflation actually doubled from 10.3 to 21.9 per cent in the first year. As industry laid off workers under the impact of the high pound, benefit payments had to keep pace with inflation, while Government revenue fell.

Set against these rising commitments, Howe’s two packages of spending cuts were insufficient to dent the inexorable rise in Government borrowing. The Government’s only other means of curbing the growth of money was raising interest rates. Howe had already raised the minimum lending rate (MLR) from 12 to 14 per cent in June. He warned that it would not fall until the money supply and public-sector borrowing were under control; but this only caused more money to flow into London. Instead of falling, ?M3 – which measures the amount of money in circulation, including bank deposits – actually rose by 14 per cent in four months between June and October. In November Howe was obliged to hike the lending rate another three points to 17 per cent – an unprecedented rise to an unprecedented level. Thinking more of the effect on mortgages than of the cost to industry, Mrs Thatcher hated having to do this. ‘It bothered me enormously,’ she told Patricia Murray. ‘It really was devastating.’¹⁰ But monetarism prescribed no other remedy, so she bit the bullet. ‘We would not print money,’ she insisted at Prime Minister’s Questions; therefore ‘it was necessary to raise interest rates to conquer inflation’.¹¹ Thus the Government got the worst of both worlds: its first actions were simultaneously too much and too little, painful enough to raise howls of fury from industry, unions, homeowners, educationists and others, yet ineffective in cutting spending and positively counterproductive with regard to inflation. Mrs Thatcher and her economic team had come into office with a doctrinaire prescription which they proceeded to apply, undeterred by the most unfavourable economic circumstances. After a few months of rising unemployment, rising inflation and record interest rates, the Government’s monetarist experiment was already widely dismissed as a dogmatic folly.

This, however, was where the composition of the Cabinet prevented any loss of purpose. The central quintet of Mrs Thatcher, Howe, Joseph, Nott and Biffen was firmly in control of economic policy. Sceptics like Prior, Ian Gilmour, Peter Walker and Michael Heseltine first learned of the abolition of exchange controls when they read it in the newspapers.¹² While individual ministers fought more or less successfully to defend their own budgets, it was too soon for any concerted rebellion. The most unflinching doctrinaire was Geoffrey Howe. It is clear from the memoirs of both Howe and Lawson, and the recollections of Nott and Biffen, that if any one of the central directorate faltered in the early days it was the Prime Minister herself. Not that her sense of purpose faltered. Relentlessly every Tuesday and Thursday in the House of Commons and in radio and television interviews she reiterated the simple message that the country must learn to live within its means, that public expenditure must be cut to a level the wealth-producing taxpayer could support, that the Government must tax and spend less of the national income.¹³ Publicly she never weakened; but she was always vividly conscious of the political risks. It was the Chancellor, intellectually stiffened by Lawson, who stubbornly put his head down and got on with what he was determined must be done. The Prime Minister’s function, quite properly, was to be the last to be persuaded that each course of action – doubling VAT, abolishing exchange controls, scrapping the Price Commission or raising interest rates – was both necessary and politically practicable. In her memoirs, despite their later differences, she paid due tribute to Howe’s tenacity: ‘In my view these were his best political years.’¹⁴ In truth she could not have done without him. Though their relationship deteriorated later, for these first two or three years of the Thatcher Government they made a formidable combination, perhaps the most successful Prime Minister – Chancellor partnership of the twentieth century.

First steps in foreign policy

It was really after Howe moved to the Foreign Office in June 1983 that their relationship deteriorated. By that time – after the Falklands war and with the assurance of a second term in front of her – Mrs Thatcher’s self- confidence in foreign affairs had grown and she was ready to be her own Foreign Secretary. In 1979, by contrast, she was conscious of her relative lack of experience and was content to leave foreign policy largely to Lord Carrington. This was a surprising abdication, since one of her prime ambitions was to restore Britain’s ‘greatness’ in the eyes of the world. Like Churchill she had a clear view of Britain’s place as America’s foremost ally in the global battle against Communism, and she regarded the Foreign Office as a nest of appeasers. For her first sixteen years after entering Parliament in 1959 her energies had been almost exclusively diverted to domestic responsibilities: pensions, energy, transport and education. On becoming Leader of the Opposition in 1975, however, she had quickly made up this deficit, marking her arrival on the world stage by launching a series of uncompromising verbal assaults on the Soviet Union. For four years she had avoided appointing a shadow Foreign Secretary with the authority to make the portfolio his own, but travelled tirelessly in parliamentary recesses to educate herself and meet the leaders she hoped to have to deal with in office.

Once elected, however, she recognised that she could not do everything. Her priority was the economy. Moreover, she believed that restoring British influence abroad depended essentially on restoring the economy at home. ‘A nation in debt,’ she told the House soon after becoming party leader, ‘has no self-respect and precious little influence.’¹⁵ For all these reasons she told her aides that she did not intend to waste her time on ‘all this international stuff’.¹⁶ In appointing Peter Carrington as her first Foreign Secretary, with Ian Gilmour his deputy in the Commons, she made a tacit concordat to leave the detail of foreign policy to them, while Carrington in return suppressed his doubts about her economic policy.

In fact, she soon found that there was a crowded calendar of international meetings which she was bound to attend: European councils, G7 summits (attended by the leaders of the seven leading industrial nations) and Commonwealth conferences. That first summer there was one of each, respectively in Strasbourg, Tokyo and Lusaka. She confessed to Patricia Murray in 1980 that she had been ‘surprised at the amount of time we actually have to spend on foreign affairs.The amount of summitry we have now is terrific.’¹⁷ At first she was nervous – though she was careful not to show it. Conscious of her inexperience, she felt patronised by senior European leaders like the West German Chancellor Helmut Schmidt and the French President Valery Giscard d’Estaing, who treated her with patrician disdain which stopped barely short of outright rudeness. She did her homework more anxiously than ever, only to find that they were much less well briefed than she was. Her self- confidence visibly increased as she discovered that with the Rolls-Royce machine of the despised Foreign Office behind her, she was more than a match for any of them.¹⁸

By chance one of her first meetings was with the Soviet leadership. The Soviet Union was one major country she had not visited in opposition, preferring to denounce the Communist menace from the safety of Kensington Town Hall. But on her way to the Tokyo summit at the end of June her plane made a refuelling stop in Moscow. To her surprise Prime Minister Kosygin, with half the Politburo, came out for an unscheduled dinner in the airport lounge. They were reported to be ‘very curious’ to meet the famous ‘Iron Lady’ who wore their intended insult as a badge of pride. ‘They were absolutely mesmerised by her,’ Lord Carrington recalled, ‘because… she was very direct with them.’¹⁹ She questioned them specifically on the plight of the Vietnamese ‘boat people’ – refugees from Communist persecution who had taken to the sea in a perilous effort to reach Hong Kong – and was unimpressed by their answers. This brief stopover confirmed her contempt for the moral and intellectual bankruptcy of the Soviet system, without in the least diminishing her perception of the challenge it posed to the West.

Nevertheless, as Carrington recalled, ‘distrust of the FO… was never far from the surface, and could erupt in impatient hostility unless ably countered’.²⁰ Ably countered it usually was: this was Carrington’s