Bang!: A History of Britain in the 1980s by Graham Stewart Page B

made perfect sense in the light of Thatcher’s
interpretation of what had gone wrong in the previous decade. To her and her monetarist friends, inflation did not accompany national decline, it hastened it. An incomes policy aimed at reducing
price rises through persuading union members to take wage increases close to or below the inflation rate – in other words to reduce in real terms their standard of living – was doomed
to fail. There was no personal incentive to agree to such a cut in living standards, and the effort to enforce it naturally led to strikes for higher pay, which, when successful, only further
priced British jobs out of the international market, thereby fostering stagflation. Thus, counter-intuitively, tough incomes policies actually encouraged union militancy and ever higher wage
demands. Monetarism offered a way out of government engagement with this vicious circle. Furthermore, if inflation could be controlled by strict monetary policy, there was no requirement to depress
prices artificially through subsidies to certain, favoured (usually nationalized) industries. This would leave the free market to determine the price at which producers sold to consumers. And over
time, taxation could fall in order to let the market operate more freely, rather than tax rates having to be periodically hiked and lowered in a continuous, and disrupting, cycle of demand
management.
    That was the theory. The practice was more complicated. Even if inflation was caused by lax control of growth in the money supply, how was that growth to be accurately measured? After all, if it
could not be properly measured, government could not know whether it had set appropriate targets. Finding a convincing measure for the money sloshing around in the British economy proved no less
difficult than assessing whether controlling demand needed the Chancellor’s touch on the accelerator or the brake. Was a narrow definition of money, like Sterling M0 (cash), the best measure?
Or would a broader measure, like Sterling M3 (cash and bank deposits) or Sterling M4 (cash and bank deposits and building society deposits), be more appropriate? Even monetarist economists –
in fact, especially monetarist economists – could not agree. The broader the category, the more difficult it was for government to control. Sir Geoffrey Howe, who was by training a lawyer,not an economist, used his prerogative as Chancellor to pronounce that the correct measure was Sterling M3. Later, he was not so sure.
    Having decided what indicator of money supply growth to watch, the next question was how that growth might be controlled. High interest rates were the obvious tool by which credit, and thus the
money supply, could be made more expensive. Howe’s policy was to raise interest rates at the same time as he implemented a separate strand of the Tories’ agenda – the bringing
down of the government’s own reliance on credit to fund state investment programmes, by reducing the public sector borrowing requirement (PSBR). The British electorate did not wait long to
discover the extent of the new administration’s determination to place the war against inflation above other considerations. In June 1979, the month after the election, Howe stood at the
dispatch box in the House of Commons to deliver his first budget speech.
    He did so at the very moment when it was clear that inflation was again rising back into double digits. Partly, this was for reasons beyond Whitehall’s control. The price of oil rose
threefold between the beginning of 1978 and the end of 1979. Given that the North Sea rigs were in the process of making Britain self-sufficient, the high price of oil meant large petroleum tax
receipts for the Treasury. But it was bad news for British industry and for the cost of living. The re-emergence of inflationary pressure was not purely down to the soaring cost of energy, however.
It was also a consequence of political decisions taken