The Iron Lady

Lawson, Financial Secretary to the Treasury, who successfully sold the idea to Howe with the slogan ‘Rules rule, OK’.⁸ Howe pragmatically agreed: he always insisted that the MTFS was ‘commonsense rather than revolutionary’.⁹ As so often with ideas she subsequently adopted as her own, however, Mrs Thatcher was initially hostile. Though in theory all in favour of squeezing the money supply, ‘she reacted instinctively against what she called “graph-paper economics”’, which smacked of socialist planning. In the end she was persuaded that fixed targets would both put a ceiling on high-spending ministers and make it possible to reduce interest rates.¹⁰ In fact the targets were not fixed at all. The MTFS was no more than a statement of desirable objectives. Its effect – as Mrs Thatcher came to realise – was essentially declaratory. ‘Its credibility depended… on the quality of my own commitment, about which I would leave no one in doubt. I would not bow to demands to reflate.’¹¹ On that basis she was converted, elevating the MTFS into a symbol of her personal resolution.

The fact is that monetarism in the strict sense did not work. Paradoxically, the importance of controlling the money supply was now almost universally accepted. Although it suited both parties to gloss over the fact after 1979, Healey had run a pretty successful monetary regime from 1976. The difficulty Howe and Lawson had was in measuring the growth of money – particularly after they had scrapped exchange controls. As Biffen anticipated, by elevating the control of money into the central totem of policy the Government made a rod for its own back. At one level it was perfectly correct for the Prime Minister and Chancellor to maintain that monetarism was not some ‘minority doctrinal obsession, pursued blindly for its own sake’,¹² but ‘simple common sense’, long accepted in Switzerland and Germany.¹³ ‘Monetarism,’ she insisted in the House of Commons, ‘means honest money. It means that money is backed properly by the production of goods and services.’¹⁴ The trouble lay not in the principle but in the practice. Of the various available yardsticks they took as their measure of money in circulation ?M3, which included not only notes and coins but bank deposits. They were then made to look ridiculous when ?M3 rose during 1980, despite the Government’s best efforts to curb it, by 18 per cent – that is, nearly twice as fast as before 1979.

This embarrassing inability to control the very indicator on which the Government had publicly staked its reputation caused serious friction between Downing Street and the Bank of England. Mrs Thatcher took a closer personal interest in the minutiae of monetary control than any previous Prime Minister. Yet she lacked a trained economist’s sense of the subject’s intrinsic fallibility. Rather, she had a scientist’s literal belief in money as a finite substance which must be able to be measured. The result, as Jock Bruce-Gardyne observed, was ‘a conflict of personalities between an exceptionally determined Prime Minister and an exceptionally formidable Governor’.¹⁵ Appointed by Ted Heath in 1973, and now serving his fourth Prime Minister, Gordon Richardson was the most dominant Governor of the Bank of England since Montagu Norman in the 1930s. He objected to being treated like an errant schoolboy who had got his sums wrong. The crunch came in the summer of 1980, when Mrs Thatcher was taking a rare, brief holiday in Switzerland. ?M3 rose 5 per cent in July alone and another 5 per cent in August. She furiously consulted various Swiss bankers, then came storming home to charge the Deputy Governor, Eddie George – Richardson was on holiday – with rank incompetence. While Downing Street insisted that the Prime Minister was ‘not rattled, they admit that she needs some sturdy reassurance’.¹⁶ It was provided by the return from the United States of her favourite monetarist guru Alan Walters, who told her to forget about ?M3. ‘Bugger ?M3!’ he is supposed to have said. ‘Sterling is obviously far too high. That can only mean that sterling is scarce.’¹⁷ He proposed commissioning an independent report from another monetarist academic, Professor Jurg Niehans of Berne University, who duly supported Walters’ diagnosis, giving Howe impeccable authority to loosen the monetary squeeze. ‘The appreciation of sterling in the last two years,’ he reported, ‘is largely a monetary phenomenon’ – in other words, it was not due to oil.¹⁸

The theory was right, but the implementation was wrong, he told John Hoskyns. ‘If the Government goes on with its present monetary squeeze, you won’t just have a recession, you’ll have a slump.’¹⁹ To the CBI’s relief, Minimum Lending Rate was cut by 2 per cent in November, and previous monetary targets were discreetly modified in the 1981 budget. At the beginning of 1981 Walters formally moved into Downing Street as the Prime Minister’s personal economic adviser.

Thereafter what finally got inflation back to single figures by the spring of 1982 was not the control of money but heavy pressure on public spending, higher indirect taxation and lower borrowing, resulting in nearly three million unemployed.²⁰ In other words the MTFS was a blind – just a fancy smokescreen for old-fashioned deflation. ‘If Keynesianism stood accused of buying employment at the price of inflation,’ Peter Clarke has written, ‘Thatcherism could plausibly be accused of simply inverting the process.’ The Government came in preaching the painless alchemy of Milton Friedman but ended up delivering the harsher medicine of Friedrich Hayek.²¹

Howe’s 1980 budget took another ?900 million out of planned public spending for 1980 – 81, mainly from social services. Sickness and unemployment benefit were made liable to income tax, child benefit was raised by less than the rate of inflation, prescription charges were doubled again – to ?1 per item, five times the level of a year before. Higher education took the heaviest cuts; university funding was severely (but unequally) reduced, and overseas students were required to pay the full cost of their tuition. All these measures evoked a furious outcry from those affected. The Guardian accused the Government of waging ‘war against the poor’.²² In July the Cabinet agreed a further package, though several of the biggest spenders – Patrick Jenkin at the DHSS and, above all, Francis Pym at Defence – fought successfully to limit the impact on their departments. Pym threatened resignation and deployed the Chiefs of Staff to exercise their right of access to the Prime Minister to defend his budget. The more the Government tried to cut, however, the more the cost of social security kept on rising. In her memoirs Lady Thatcher recalled that cutting public expenditure at this time felt like ‘running up the “Down” escalator’.²³ Obliged to make a virtue of failure, she pointed out that spending in 1979 – 80 was actually slightly up on the year before, ‘which should give the lie to those who accuse us of savage cuts’.²⁴ In October 1980 she admitted that the Government’s revised objective was merely to hold spending to its current level; but insisted that since some expenditure was expanding, this inevitably necessitated economies elsewhere.²⁵

At least half the Cabinet, however, believed it was wrong to be trying to cut spending at all when unemployment was rising. Not only the established ‘wets’ but even some of those previously counted ‘dry’ were beginning to shrink from the social consequences – notably John Biffen, who as Chief Secretary was responsible for wielding the Treasury axe, but quickly concluded that no really major cuts were practicable. Conventional wisdom took it for granted that no Government could survive unemployment at two or three million. Less than a decade earlier the Heath Government had been forced to reverse its strategy when unemployment hit one million. It was not as if the Conservatives had given warning that unemployment would have to rise. On the contrary, they had denounced Labour’s employment record as opportunistically as any opposition. Ever since 1975 Labour (and, privately, many Tories) had warned that monetarism, strictly applied, would inevitably cost jobs: Keith Joseph had on occasion admitted it. Yet it seems that Mrs Thatcher and her economic team had genuinely not expected unemployment to take off as it did as soon as they got into office. They were alarmed by the mounting figures and protested that they were doing everything possible by means of tax cuts and other incentives to encourage the new industries and businesses which would create new jobs. But Mrs Thatcher had staked her political reputation on not repeating Heath’s U-turn. Whatever the economic arguments which came from every part of the political spectrum, her credibility would have been destroyed if she were seen to reverse her insistence that squeezing inflation must remain the top priority. From political necessity, then, but also with extraordinary nerve (and a good deal of luck), Mrs Thatcher contrived to stand conventional wisdom on its head by making a virtue of her refusal to change tack – almost indeed making a virtue of unemployment itself.

In the House of Commons she faced uproar every month when the latest figure was published: Labour MPs accused her of creating ‘an industrial desert’ and using unemployment deliberately to cow the unions. She responded with a mixture of angry retaliation, recalling that unemployment had doubled under Labour too, and patient lectures on the facts of economic life.

She insisted that there was no painless remedy. Only by becoming competitive would new jobs in the new industries eventually be created. Cutting public expenditure, far from exacerbating unemployment, was actually the way to reduce it by releasing resources for the private sector, which was the productive sector. ‘It is the sector from which the jobs will come.’²⁶ As the recession endured and deepened, she increasingly accepted an obligation on the Government to ‘cushion the harsher effects of change’ by promoting enterprise