The contrary pulls of patriotic sentiment and geopolitical realism recurred in relation to other remnants of Britain’s imperial past: the Falklands, Grenada and Hong Kong. In the case of Rhodesia, as in Hong Kong, realism prevailed. For fourteen years since 1965 the colony had been a running sore in British politics, the annual vote on the maintenance of sanctions a source of division and embarrassment to the Tory party in particular. All Mrs Thatcher wanted in 1979 was to be honourably rid of it. She was lucky that the circumstances came together to make a solution possible just as she came into office. But she deserves credit for seizing the opportunity, against her initial instinct, and for exerting her influence to secure a tolerable settlement. The outcome gained her a good deal of international credit, not only with black Africa but also in Washington, at a time when the Government’s domestic economic record was already looking bleak. After seven difficult months, the Zimbabwe settlement was her Government’s first unquestionable success.
The end of the beginning
By the time the Zimbabwe settlement was signed at the end of 1979 the Government’s honeymoon, such as it was, was over.The Lancaster House agreement was the one bright spot in an otherwise darkening picture.The novelty of a woman Prime Minister had quickly worn off. Her style was established: brisk, didactic, combative, with a touch of syrup. There was no lingering doubt about her capacity to do the job. She had established her domination of the Cabinet and Government machine, despite the barely concealed scepticism of many of her senior colleagues. By her mastery of detail and clarity of purpose she had asserted her command of the House of Commons despite having to shout over a perpetual hubbub of heckling and interruption.
She had achieved a notable coup in November by her unprecedentedly full disclosure of the facts surrounding the unmasking of the distinguished art historian Sir Anthony Blunt – the Keeper of the Queen’s Pictures – as a one-time Soviet spy, the ‘fourth man’ who had tipped off his friends Guy Burgess and Donald Maclean, enabling them to escape to the Soviet Union in 1951, and then done the same for Kim Philby in 1963. It was a tricky task for a new Prime Minister to reveal that Blunt’s treachery had been suspected since 1951 and known to the security services since 1964, but covered up by successive Home Secretaries and Attorneys-General in return for a full confession. But she carried it off with considerable aplomb, raising hopes – not to be fulfilled – that she would inaugurate a more open regime where MI5 and MI6 were concerned. Willie Whitelaw was actually working on a new Protection of Information Bill to replace the catch-all provisions of the 1911 Official Secrets Act; but this was abandoned when Andrew Boyle, the journalist who had exposed Blunt, asserted that he could not have done so under the new provisions. It was another ten years before her government returned to the reform of the Official Secrets Act, and then it was to tighten, not loosen, its provisions.
Mrs Thatcher also won considerable admiration for her response to further Irish atrocities. At the end of August the former Viceroy of India, Lord Mountbatten, and two members of his family were blown up while on holiday in the Irish Republic; and the same day eighteen British soldiers were killed at Warrenpoint in County Down. Mrs Thatcher not only condemned the attacks but paid an unannounced visit to Northern Ireland two days later to demonstrate her defiance of the terrorists and her support for the troops. She visited some of the victims of previous IRA bombs in hospital, went on a courageous walkabout in the centre of Belfast protected by just a handful of flak-jacketed policemen, had lunch with army commanders at Portadown and then flew by helicopter to the republican stronghold of Crossmaglen, where she ‘enthusiastically donned a combat jacket and a beret of the Ulster Defence Regiment’.78 This ‘nation-rallying trip,’ The Times wrote at the end of the year, ‘was a stroke of genius’.79 She repeated it just before Christmas and made a point of going at least once a year over the next decade.
She enjoyed a rapturous victory conference at Blackpool in October, at which she thanked her party for keeping faith during the years of opposition and boldly looked forward to ‘the far longer years of Conservative government that are to come’.80 In this and other speeches Mrs Thatcher repeated the Government’s determination to tackle the four linked problems of inflation, public spending, taxation and industrial relations. But by the end of 1979, as the commentators looked back on the Government’s first six months, it seemed that in every one of those areas its first actions had only made a bad situation worse. On the credit side, opinion polls still showed overwhelming public support for action to curb the unions, and the Government was further heartened by votes against strike action by the miners and the British Leyland car workers.Yet despite lurching hard to the left since losing office, Labour was once again ahead in the polls. Even those who wished the Government well were holding their breath. Fred Emery, political editor of The Times, wrote that the dominant reaction to the Prime Minister’s first six months was one of awe for the ‘marvellous flair’ of ‘this unflinching woman’ who had swept her doubtful party into ‘a high-risk policy gamble’. ‘The awe reflects Mrs Thatcher’s private and public dominance, making our system more presidential than ever.’ But many wondered ‘whether Mrs Thatcher has quite grasped yet how bad the economy could be’.81
The Government was sailing into stormy waters.
12
Heading for the Rocks
The failure of monetarism
THE two years 1980 and 1981 were the critical period for the Thatcher Government, when the Prime Minister and her Chancellor, with dwindling support even from former true believers in the Cabinet, confronted by appalling economic indicators and widespread predictions of disaster, set their faces against the storm and stubbornly held – more or less – their predetermined course. Economically, in truth, things did not go according to plan. Some targets were quietly abandoned, others were hit only at huge cost: economists still dispute whether more lasting good or harm was done to the economy by the monetarist experiment. Politically, however, Mrs Thatcher won through without being seen to change course. There was no overt U-turn, such as her critics had confidently predicted. Instead, by the end of 1981 she had purged her Cabinet of the most persistent doubters and laid the basis of the reputation for unwavering resolution which would keep her in Downing Street for another nine years.
By all the normal measures of economic management the Government’s performance was dismal during 1980. Inflation went on climbing for several months, reaching 22 per cent in May before finally starting to fall. By the end of the year it had fallen to 13 per cent, but that was still higher than it had been when the Conservatives came in. Meanwhile unemployment continued to soar, reaching 2.8 million by the end of 1980: the sort of level no one had ever expected to see again. The Tories’ 1978 poster showing a winding dole queue with the caption ‘Labour Isn’t Working’ was revealed as a cynical mockery.
The worst problem was the pound, which reached $2.40 in September 1980 (compared with $2.08 in May 1979). The rise was partly due to the rising oil price, partly to the falling dollar and partly – some economists would say mainly – to the Government’s determination to keep interest rates high, which impressed the markets. Whatever the cause, the effect on British manufacturing industry was devastating. Hundreds of small companies went out of business, while even the giants struggled. Industrial leaders queued up to blame the Government. In November the chairman of the CBI (Confederation of British Industry), Sir Terence Beckett, called dramatically for ‘a bare-knuckle fight’ with the Government.1 Sir Michael Edwardes of British Leyland said it would be better to leave North Sea oil in the seabed than let it do such damage.2 In principle, however, she was inclined to believe that the high pound was a good thing: first because she always had a simple patriotic belief that the currency was a barometer of national prosperity, and second because she thought it would administer a healthy shock to industry, forcing it to become more competitive to survive. Industrialists faced with closure were not so sanguine. ‘I am aware that the exchang
e rate is causing some difficulty for some exporters,’ Mrs Thatcher conceded, ‘but it is also keeping down the rate of increase in inflation in this country.’3 The monetarists’ real problem, one sceptic told the Observer’s William Keegan, ‘was that they could not make up their mind whether the squeals from British industry were a good thing or not’.4
The critics’ case is that by sticking to their predetermined strategy, despite the oil-price increase and deepening world recession, Mrs Thatcher and her Treasury team wilfully exacerbated an already threatening situation. ‘Undeterred by the prospect of a world recession ahead,’ Ian Gilmour later wrote, ‘they proceeded to create their own far worse recession at home’, permanently destroying in the process much of Britain’s manufacturing base.5 The Thatcherites, by contrast, argued at the time – and still argue – that British industry was overmanned and featherbedded and needed shaking out. A shift from old manufacturing to new service industries – what Mrs Thatcher called ‘tomorrow’s jobs’6 – was both inevitable and necessary: the recession of 1980 – 81 merely accelerated this process which was the precondition for subsequent recovery. To which the Keynesians reply that there was bound to be some recovery eventually from such a deep trough, but that it was only partial, and more delayed than it need have been, while much of manufacturing industry never recovered at all.
Geoffrey Howe’s second budget, introduced in March 1980, unveiled what Lady Thatcher later called the ‘cornerstone’ of her Government’s success – the so-called Medium Term Financial Strategy (MTFS).7 Its purpose was to bring down public spending and monetary growth by announcing fixed targets for several years ahead, instead of just one year at a time. The strategy was the brainchild of Nigel 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 Oblig
ed 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.
The Iron Lady Page 21
