both supported Lawson, which persuaded Whitelaw to lend his weight, as usual, to what he thought was the consensus. Faced with the unanimity of her senior colleagues, Mrs Thatcher told them bluntly: ‘I disagree. If you join the EMS you will have to do so without me.’21 ‘There was a deathly silence,’ Lawson recalled, ‘and then she left the room.’22 Lawson wondered if he should resign; but Whitelaw and Tebbit assured him that if he persisted she would eventually come round, as she did on so many other issues to which she was initially opposed.23 In fact this was one matter on which she remained immovable right up to October 1990.
Though she framed her objections as matters of timing and judgement, she was actually adamantly opposed on principle – or rather two principles, economic and patriotic. On the one hand she believed, as part of her free-market economic philosophy, that exchange rates could not be fixed and it was folly for governments to try to buck the markets. On the other hand, and somewhat contradictorily, she was instinctively opposed to sacrificing any shred of sovereignty over the value of the pound or the British Government’s right – illusory as it might be in practice – to set its own interest rates to try to fix it. These two objections, fiercely maintained for the next five years against the growing determination of both Lawson and Howe to join the ERM by the back door if necessary, represented a ticking bomb at the heart of the Government. This fundamental disagreement between a determined Prime Minister and an equally stubborn Chancellor ultimately destroyed them both.
1986 was the year in which Lawson’s economic management finally began to show results. In February Mrs Thatcher was driven to admit that unemployment would probably not begin to fall before the next election.24 In fact David Young’s training schemes at last began to take effect, and in October the headline figure turned down, for the first time since 1979. At the beginning of the year a sudden drop in the price of oil stymied Lawson’s hopes of dramatic cuts in income tax in his budget; but he still contrived to take a penny off the standard rate (bringing it to twenty-nine pence). The sliding oil price proved unexpectedly beneficial: sterling fell against other European currencies, giving British exports over the year the benefit of an effective 16 per cent devaluation, without the political odium that accompanies a formal devaluation. Suddenly the economy entered a ‘virtuous circle’.25 Low inflation and low interest rates combined to promote 3 per cent growth. Faster growth meant falling unemployment and higher tax revenues. Higher revenues, further boosted by increased VAT on soaring consumer spending and the windfall proceeds of privatisation, enabled the Chancellor in his 1987 budget to achieve the elusive hat-trick of higher spending, reduced borrowing and further tax cuts, just in time for a summer election. No wonder that from the autumn of 1986 the polls began to move back in the Government’s favour, or that by the spring the Tories were once again ahead.
The key to this dramatic turnaround was that most of the population – the twenty-five million in work – had more money to spend and were spending it, stimulating an explosion of small businesses and services: new shops, restaurants and wine bars, electrical consumer goods like videos and microwaves, conservatories and home improvements of every sort. Economic growth was visible, the City of London was booming and there was suddenly a heady whiff of optimism and opportunity in the air – just as the Tories had always promised would flow from deregulation and incentives.
Even as the Lawson boom took off, however, sceptical critics warned that it was not merely partial and unbalanced, but even on its own terms fragile and unsustainable. It was a boom founded on reckless consumer spending, stimulated by pay rises way above the rate of inflation, by easy credit and tax cuts paid for by oil and privatisation revenues, not based on long-term investment or increased domestic production. In fact it blatantly belied all Mrs Thatcher’s homilies about good housekeeping. Both individual families and the nation as a whole were living beyond their means. While average incomes rose by 35 per cent between 1983 and 1987, personal indebtedness rose four times as fast in the same period: new bank lending trebled, and the number of mortgages doubled in 1986–7 alone. For the first time ever, the average British household was spending more than it earned. On the national scale, increased consumption was sucking in imports at twice their 1979 level, while manufacturing output was only just back to the 1979 figure. The deficit was covered only by the temporary bonus of North Sea oil, which was not being invested for the future. The domestic manufacturing capacity to supply the new demand had been destroyed in 1979–81 and was no longer there to be revived: industrial investment was actually 16 per cent less in 1986 than it had been in 1979. The illusion of an economic miracle since 1983 was a statistical sleight of hand achieved by measuring growth only from the trough of the economic cycle in 1981; measured from peak to peak, average growth over the cycle was still only 1.8 per cent – actually lower than in the previous Labour cycle of the late 1970s.26 In 1987 Britain’s GNP fell behind that of Italy – an event gleefully hailed by the Italians as
Lawson’s boom, in short, contained the seeds of both renewed inflation and the next slump. Having abandoned the excessive restraints of monetarism, he had swung to the opposite extreme and unleashed a headlong pre-election spending spree similar to those of 1963 and 1973, except that he had now deprived himself of the traditional tools which previous Chancellors had used to check overheating: incomes policy, credit controls, exchange controls. Exuding a gambler’s confidence, Lawson professed himself blithely unconcerned about the growing trade gap, still insisting that manufacturing no longer mattered.27 His priority was, frankly, to win the election, then make any necessary adjustments afterwards.28 Like the sorcerer’s apprentice, he assumed that he could turn the tap off when he needed to.
Mrs Thatcher was instinctively more prudent: already in the autumn of 1986 she sensed that something was going wrong. Lawson dismissed her fears; but her intuition was right. ‘Perhaps,’ the former Labour minister Edmund Dell commented, ‘if Lawson had paid more attention to her hunches and less to her reasoning, his economic management might have been better. But that would have been too much to expect from so cerebral a Chancellor.’29 For her part, Mrs Thatcher failed to act decisively on her hunch. On the one hand she was still in thrall to her Chancellor’s greater expertise. On the other she was grateful for the turn-up in the polls and was swept up in the general excitement surrounding what she called ‘popular capitalism’.
The phrase is said to have been coined, ironically, by Michael Heseltine, shortly after he walked out of the Cabinet in January 1986. A year earlier Lawson had hailed the privatisation of British Telecom as marking ‘the birth of people’s capitalism’.30 Mrs Thatcher first used the words on 26 February 1986, when she declared: ‘We’ve got what I call popular capitalism.’31 Thereafter she made the phrase her own. She adopted it as the defining slogan of her political project in a speech to the Conservative Central Council, meeting on 15 March. This was a critical speech in which Mrs Thatcher tried to put the trauma of the Westland crisis behind her and came out fighting for her political life. First she looked back, listing the principal achievements of her Government so far – taming the unions, curbing inflation and beginning to dismantle the public sector:
Seven years ago, who would have dared forecast such a transformation of Britain? This didn’t come about because of consensus. It happened because we said: This we believe, this we will do. It’s called leadership.
By contrast, she concluded, socialist crusades to go back to the old ways were ‘muted nowadays’:
Socialists cry ‘Power to the people’, and raise the clenched fist as they say it. We all know what they really mean – power over people, power to the State. To us Conservatives, popular capitalism means… power through ownership to the man and woman in the street, given confidently with an open hand.32
Property-owning democracy
‘Popular capitalism’ was Thatcherite shorthand for three separate revolutions in British economic life: wider home-ownership, wider share-ownership and an ‘enterprise economy’ characterised by more small businesses and more people becoming self-employed. The first revolution was well under way in Mrs Thatcher’s first term, with half a million council houses already sold before the 1983 election. But the second and third took off only in the second term. The first was simple and irreversible, a major social change. The second turned out to be rather less significant than was pretended at the time, at least so far as individuals were concerned. The third was economically by far the most important: though stimulated by the Government’s supply-side reforms and initially associated with the unsustainable euphoria of the Lawson boom, it represented the British reflection of universal
