Bang!: A History of Britain in the 1980s by Graham Stewart Page A
Authors: Graham Stewart
Tags: History
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economists to spring this unsurprising revelation. So, when Sir Geoffrey Howe, whom Margaret Thatcher appointed her Chancellor of the Exchequer, claimed that ‘monetarism
means curbing the excessive expansion of money and credit’, he wasnot arguing for something that would have astounded his Treasury predecessors. 2 What was different was the single-minded devotion to regarding the quantity of money in the economy as determining the extent of inflation, and, in particular, the belief
that it was within the government’s grasp to manage the growth of the money supply.
That monetarist theory rested upon this simple belief was a convenience that suited the Thatcher government’s wider agenda. The interventionist social and economic policies pursued by
successive post-war British governments – rather imprecisely labelled Keynesian, after the economist John Maynard Keynes, whose death in 1946 had denied him the opportunity of commenting on
the policies carried out in his name – made the control of demand rather than of the money supply the central task. If the economy looked like entering an inflationary boom, the squeeze was
applied by raising taxes and cutting the budget deficit. In tougher times, tax, spending and borrowing disciplines could be relaxed. At its crudest, this led to a jolting
‘stop–go’ economy, but until the late 1960s it had succeeded in keeping both unemployment and inflation relatively low. By the mid-seventies, however, both were soaring. In this
environment, demand-fixing measures to reduce unemployment fuelled inflation, which in turn harmed the economy, creating further job losses and a vicious circle of stagflation (diminishing output
and soaring inflation). While the Callaghan government had tried to rein in public spending and prevent the money supply spiralling out of control, it had also attempted to bring down inflation
(which had peaked at 27 per cent in 1975) by intervention, giving more subsidies to nationalized industries so that they would not increase prices to customers, and organizing an incomes policy in
partnership with the leaders of the TUC. So complicated was the effort to fine-tune economic performance from Whitehall that in the space of the five years between 1974 and 1979 Labour’s
Chancellor, Denis Healey, had introduced fifteen budgets and mini-budgets. The
idée fixe
of Keynesianism had degenerated into an excuse for Treasury micromanagement and the belief
that this still offered the best hope of playing an instrument as diverse and complicated as the British economy. Keynes had anticipated his theories operating in a world of fixed international
exchange rates, stable energy costs, modest inflation, containable budget deficits and trade union compliance in ensuring increasing output. None of these preconditions existed during
Healey’s tenure at the Treasury. Theory and reality had parted company.
In contrast to Healey’s multifaceted approach, the claim that control of growth in the money supply should be the central preoccupation of government allowed the Thatcher administration to
dismantle complex mechanisms whose combined effect was an increasingly corporatist state. For monetarism offered simplicity. There would be no need to appease the trade unionsbecause, with the abolition of an incomes policy, they would not be asked to frame pay norms across the economy. This was a crucial consideration. If a Labour administration had come
unstuck trying to operate an anti-inflationary strategy based upon agreeing wage restraint with their nominal allies in the trade union movement, there was clearly even less chance of their
cooperating with a Tory-led incomes policy. In short, that option did not exist, even if Thatcher had believed in it in principle – which she did not. If monetarism and the control of
inflation came to be elevated to an all-consuming obsession in the first years of the new Conservative administration, it was for reasons that
means curbing the excessive expansion of money and credit’, he wasnot arguing for something that would have astounded his Treasury predecessors. 2 What was different was the single-minded devotion to regarding the quantity of money in the economy as determining the extent of inflation, and, in particular, the belief
that it was within the government’s grasp to manage the growth of the money supply.
That monetarist theory rested upon this simple belief was a convenience that suited the Thatcher government’s wider agenda. The interventionist social and economic policies pursued by
successive post-war British governments – rather imprecisely labelled Keynesian, after the economist John Maynard Keynes, whose death in 1946 had denied him the opportunity of commenting on
the policies carried out in his name – made the control of demand rather than of the money supply the central task. If the economy looked like entering an inflationary boom, the squeeze was
applied by raising taxes and cutting the budget deficit. In tougher times, tax, spending and borrowing disciplines could be relaxed. At its crudest, this led to a jolting
‘stop–go’ economy, but until the late 1960s it had succeeded in keeping both unemployment and inflation relatively low. By the mid-seventies, however, both were soaring. In this
environment, demand-fixing measures to reduce unemployment fuelled inflation, which in turn harmed the economy, creating further job losses and a vicious circle of stagflation (diminishing output
and soaring inflation). While the Callaghan government had tried to rein in public spending and prevent the money supply spiralling out of control, it had also attempted to bring down inflation
(which had peaked at 27 per cent in 1975) by intervention, giving more subsidies to nationalized industries so that they would not increase prices to customers, and organizing an incomes policy in
partnership with the leaders of the TUC. So complicated was the effort to fine-tune economic performance from Whitehall that in the space of the five years between 1974 and 1979 Labour’s
Chancellor, Denis Healey, had introduced fifteen budgets and mini-budgets. The
idée fixe
of Keynesianism had degenerated into an excuse for Treasury micromanagement and the belief
that this still offered the best hope of playing an instrument as diverse and complicated as the British economy. Keynes had anticipated his theories operating in a world of fixed international
exchange rates, stable energy costs, modest inflation, containable budget deficits and trade union compliance in ensuring increasing output. None of these preconditions existed during
Healey’s tenure at the Treasury. Theory and reality had parted company.
In contrast to Healey’s multifaceted approach, the claim that control of growth in the money supply should be the central preoccupation of government allowed the Thatcher administration to
dismantle complex mechanisms whose combined effect was an increasingly corporatist state. For monetarism offered simplicity. There would be no need to appease the trade unionsbecause, with the abolition of an incomes policy, they would not be asked to frame pay norms across the economy. This was a crucial consideration. If a Labour administration had come
unstuck trying to operate an anti-inflationary strategy based upon agreeing wage restraint with their nominal allies in the trade union movement, there was clearly even less chance of their
cooperating with a Tory-led incomes policy. In short, that option did not exist, even if Thatcher had believed in it in principle – which she did not. If monetarism and the control of
inflation came to be elevated to an all-consuming obsession in the first years of the new Conservative administration, it was for reasons that
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