Tag Archives: monetarism

Inflation and unemployment – the Margaret Thatcher experience


From 1979, inflation doubled in the first year of the Thatcher administration from 10% to 22%. The recession that followed brought the rate down to 5% in 1980. At the same time, unemployment soared to a breathtaking three million – and that was the official figure.

For Thatcher, inflation was always a bigger priority than unemployment. This was unusual at the time because memories of the starving jobless in the 1930s still loomed large in Britain.

Whereas in Germany, memories of hyper-inflation chimed more with the Thatcher viewpoint. That’s not to say British people weren’t fed up with price rises in the 70s – but the spectre that haunted families more was the prospect of the breadwinner being out of work.

To combat inflation, Thatcher embraced an economic theory called “monetarism” that necessitated high interest rates, higher taxes (VAT doubled almost straight away) and sharp cuts in public spending. The result of what one politician dubbed “voodoo economics” was disastrous for millions of people between 1979 and 1981.

It didn’t even work very well as a theory. Inflation was brought under control by 1980 but the money supply continued to grow. So there were further spending cuts that led to calamitous falls in economic output and whole regions de-industrialised. Unsurprisingly – monetarism was dumped by 1984.

To get a clearer idea of Thatcher’s thinking on inflation, I found a 1974 speech made in Preston by Thatcher’s economic guru Keith Joseph. He made it very clear that inflation was regarded by the Tories as the main enemy and not the traditional bogey of unemployment.

In fact, he argued, governments had been so spooked by the Great Depression of the 1930s that they thought mass joblessness was always around the corner. So governments spent money and then tried to hold down pay with incomes policies – always unsuccessfully.

Keith Joseph’s words in 1974 make interesting reading given what was to happen in Thatcher’s first two years in power with unemployment leaping:

It is perhaps easy to understand; our post-war boom began under the shadow of the 1930s. We were haunted by the fear of long-term mass unemployment, the grim, hopeless dole queues and towns which died. So we talked ourselves into believing that these gaunt, tight-lipped men in caps and mufflers were round the corner, and tailored our policy to match these imaginary conditions. For imaginary is what they were.

“Inflation is caused by governments” – speech by Keith Joseph in 1974

Already by the mid-1970s, people were shocked by an unemployment level of 500,000. Joseph swept that aside. Public money should not be used to create jobs. And anyway, he went on, a significant percentage of the unemployed were shirkers and scroungers.

There are the drifters and hippies who draw “welfare” but engage in activities to earn money, legal or illegal. From time to time the Ministry carries out local checks, and suddenly the number of registered unemployed melts away. How many fraudulent unemployed there are at any given time can only be estimated, but they probably account for at least a tenth of the registered unemployed at normal times. We ought to do more about such people, but expanding demand will not turn them into honest men.

“Inflation is caused by governments” – speech by Keith Joseph in 1974

The Great Depression of 1979 to 1981


Anybody over 50 years of age who lived in the Midlands or North of England and Scotland after 1979 will remember the economic depression that ravaged the industrial heartlands. I went to university in Liverpool in 1981 just after a summer of riots in that city and can recall well the sight of closed factories and decaying docks.

So – what on earth happened at that time? Up until Margaret Thatcher took over in 1979, unemployment had actually been falling for two years. Inflation had been brought to under 10%. Industrial output was finally ticking up as were living standards. The middle of the 70s had been disastrous. The Labour government of James Callaghan had to grovel to the International Monetary Fund for a bail out. But by the end of the decade, the economic indicators were improving. Plus oil from the North Sea was about to provide a bonanza.

However – Thatcher played to a sense that the post-war political consensus had run into the buffers. Even if the economics looked more favourable, the political and social environment in Britain was very volatile. Many people were fed up and looking for decisive leadership. And so Thatcher was elected. Unfortunately, she came into power wedded to what Labour Chancellor of the Exchequer Denis Healey described as “voodoo economics”.

Pursuing a monetarist economic policy turned a global recession into a British depression. Our unemployment sky-rocketed from 1979 to 1981 from about a million to three million – and that was the official statistics. Those stats were constantly revised in the 80s to massage them downwards.

Big rises in interest rates, indirect taxation (VAT), the exchange rate and cuts in public spending depressed demand and accelerated factory closures and bankruptcies. Every evening, the TV broadcast news would announce thousands of job cuts and names of firms now facing closure. These included household name brands and affected all sectors.

I got used to reciting the figures as a young political activist at that time. Manufacturing jobs slid by 22%. In vehicle production, jobs crashed by 28% – nearly a third of those in work. Young people were disproportionately affected with under-25s making up 40% of the jobless total. Two out of every three school leavers couldn’t find work. As the recession continued, it became clear that the number of long-term unemployed was increasing at an alarming rate. Many who had worked in blue-collar manufacturing, mining and dock work were stuck on the dole.

The incredible cost of this level of unemployment was around £17bn in benefits and lost tax revenues. I’d have to calculate the real cost in today’s money. That is a 1981 figure. It didn’t make economic sense. But it made political sense. For Thatcher, inflation was the real demon and fear of losing your job was a weapon against the power of the trades unions.

Austerity economics – how it failed 35 years ago


Since winning the 1979 General Election, the Conservatives had embarked on an economic policy described as ‘monetarism’   This entailed rigorous control of the money supply in order to curb the great British disease of inflation.  The outgoing Labour Chancellor of the Exchequer Denis Healey, no stranger to cutting government spending himself, had dubbed the new creed as ‘sado-monetarism’.

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The high priest of monetarism was a professor at the Chicago school of economics by the name of Milton Friedman.  Without going too far in to the vast detail that any debate on economics can become mired in, Friedman essentially threw out the conventional Keynesian wisdom that in a depression, governments should spend to keep people in work.

Out of control public spending, he argued, would lead to something called ‘stagflation’ – stagnation with high inflation – which was a prevalent condition of many economies in the 1970s.  The answer was a kind of shock therapy where high interest rates, as one weapon, would make it unattractive to spend money.  This would then lead to restraint in wages and prices, which would result in inflation coming down.

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JK Galbraith

Oh that life was so simple, Keynesians retorted angrily – in many newspaper columns and on the letters pages.  Friedman’s leading Keynesian nemesis on the global stage was the elderly but highly alert J K Galbraith, who had served in President Franklin Roosevelt’s administration steering through the New Deal.  He warned over and over again that Friedman’s medicine would lead to idle industrial plants and high unemployment.

Just because it hurt, Galbraith thundered, didn’t mean monetarism was actually doing any good to Britain.

“Suffering must have a purpose: out of much suffering there must come much good.  No one is quite sure how this works in economics; one only knows that the bad times are somehow the price of the good.  Pain and punishment are considered especially salutary for other people.”

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General Pinochet – enthusiastic supporter of austerity economics

So agonising were the effects of monetarism that many on the left pointed out that in its most undiluted form, it had only successfully been applied in Chile – which still languished under a military dictatorship.  The implication being that a democracy could not hold the lid down on a population tormented by the rigours of this doctrine.

Within the trade unions, the widespread suspicion was that the Conservatives were using high levels of unemployment deliberately to beat down pay demands.   With an instinctive hatred of state regulation of the economy, Thatcher didn’t want to get involved in imposing incomes policies (as Labour had tried to do in the 1970s) but fear of the dole, it was thought, was her preferred weapon against wage inflation.

In reality, the Conservatives quietly dropped monetarism and adopted a more pragmatic and less doctrinaire approach after 1982.  But not before they would experience a bitter lesson from Britain’s hugely pissed off youth on how far you can pursue an experiment before the subject bites back.

Political badges from the 1980s


Emptying out my parents’ attic as they downsize, I opened a tatty plastic bag and out fell a load of political badges from the 1980s. These were worn with pride on my lapels at various demos back in the day. They date from about 1979, when I’d have been 16 years old through to around 1984 and the miners’ strike. As a snapshot of what we fought, cared and fretted about – they’re truly fascinating. And the language now seems a bit dated on some of them.

Badges of the 80sBadges of the 80sBadges of the 80sBadges of the 80sBadges of the 80s Take a look at the photos below and I’ll just chat through some of them. Nuclear arms – big obsessions. There were surveys at that time where most young people honestly believed there would be a nuclear catastrophe in their lifetime. Remember we had the Soviet Union versus Uncle Sam and in 1981, I went on the massive CND demo to Hyde Park. I remember one old dear screaming at me that I was as bad as those Hitler loving pacifists in the 1930s Peace Pledge Union. Another big demo that year was the People’s March for Jobs and you can see a big badge there for that.

The 1981 Brixton riots put the focus on the SUS laws – stop and search by police, which impacted on black kids a lot more than white. And it’s still an issue today – how depressing!  The anti-racist badge saying “will you choose to abuse” seems a bit patronising and corny now – your views? Note the brilliant badge with Home Secretary William Whitelaw and his detergent that would whitewash police tactics over Brixton – still think that’s amusing.

On the global front – you had Chile under the Pinochet dictatorship and of course we all know how much Thatcher liked him. There’s also a Polish Solidarnosc badge as the movement against Stalinism in that country took hold – then faltered. Spain had emerged from the Franco dictatorship and the socialist party – the PSOE – was about to take power. Though the promised socialist revolution never materialised.

Rhodesia gave way to Zimbabwe at the end of the 70s and you can see a badge there. Ireland and the ‘Troubles’ were a constant feature with bombings in the north and on the mainland UK. In 1979, Lord Mountbatten was blown up. Thank goodness that all seems like ancient history now.

Above all else – there was a visceral hatred of Thatcher. When I watch all these 80s progs saying we were all yuppies in that decade, it makes me furious. Nobody who was there would recognise that narrative. We were heavily polarised as a country. You either loved Maggie or hated her – and your style of dress and badges reflected that.

Predictions for Maggie’s future – from 1979


The Economist

The Economist – December 1979

Maggie had been in power for eight months at the end of 1979. The Economist magazine (broadly sympathetic to her aims) was making its predictions for a new decade – the 1980s. So how did The Economist think Thatcher was going to fare in the years ahead?

Well, the next election was due in 1984 and they thought that was way too close for a government rapidly losing the level of popular support it had enjoyed in the May, 1979 General Election.

Like Cameron today, Thatcher was pleading for more than one term in office to achieve her aims but at the end of 1979, the polls were suggesting Labour would come back to power. The Economist thought the Labour faces just rejected by the electorate – Peter Shore, Dennis Healey, John Silkin – would be back in ministerial posts.

And there wouldn’t have been much surprise there. After all, through the 1960s and 1970s, Labour and the Tories took turns in power. Nobody would have thought in 1979 that Thatcher would last to 1990. The Economist believed it was “conceivable” that Thatcher would be dumped as Tory leader before 1984.

Europe was a big problem for Thatcher – senior Tories were horrified by her roughing up of the EEC (as the EU was called then). Foreign minister Lord Carrington was seen as a restraining influence on the Prime Minister (he would resign when the Falklands War broke out).

The Economist wrote that Carrington and Home Secretary William Whitelaw might move to “bell the cat” – put Thatcher under firm control and force her into a U-turn towards more traditional One Nation Toryism. She would be forced to adopt a more Ted Heath approach or resign.

The revival of the Liberal Party made a Lib-Con coalition – similar to what we have now – a real possibility. But The Economist thought that Labour – under Dennis Healey, who by 1984 would have defeated the left wing of the party – was more likely to return to power. The magazine correctly predicted that Roy Jenkins and Shirley Williams would form a new political party and for a while, that party would exercise a big influence.

So, how wrong was The Economist? The election was called early in 1983; an unexpected war in the Falklands boosted Thatcher; the Labour left put up a stronger fight and Dennis Healey did not become Labour leader; Thatcher purged her enemies within the Tory party and no bell was put on that cat!

1979 General Election – James Callaghan fights back


In the 1979 general election, a local Liberal campaigner came round to our family house and as a chatty, politically obsessed 15 year old, I got into a long conversation with her. She was convinced that the electorate would reject the right wing economics being proposed by Margaret Thatcher as too extreme. Most people, she continued, didn’t wish for a rupture with the post-war consensus – they just wanted it to work better.

I was very sceptical. Pessimistic even. I had no doubt as a political swot even by that tender age that Labour was doomed. My school was trending heavily Tory. At a mock election, the Labour candidate was treated like a leper or pariah. The Liberal was jeered and sheepishly exited the school stage as if expecting to be lynched. The Tory, by marked contrast, was cheered to the rafters. That told me everything I needed to know.

But – Jim Callaghan fought a brave campaign. And even managed to narrow the Tory lead. However….it was too little, too late.

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