Who Dares Wins

by Dominic Sandbrook

  For perfectly understandable reasons, Gilmour and his friends were shocked by the costs of Howe’s drive to wring inflation out of the economy with high interest rates. But what would they have done instead? Gilmour implied that they wanted to spend their way out, driving up public borrowing to restart the motor of growth. But when Harold Wilson had tried that in the mid-1970s, it had ended with runaway inflation and a bailout from the IMF. This was why Jim Callaghan, like Heath and Wilson before him, had fallen back on an incomes policy to handle inflation. The Wets thought Mrs Thatcher should adopt an incomes policy, too. But only somebody who had been asleep during the 1970s could have seriously believed this would work. The unions had flatly refused to co-operate with the Tories’ last attempt to regulate prices and incomes, and the lesson of the Winter of Discontent was that holding down workers’ pay only led to more trouble in the long run. Did the Wets seriously think they could succeed where Callaghan, the unions’ closest political ally, had just failed?12

  It is not true, though, that there was no alternative. A second Callaghan government would probably have pursued a more cautious version of Mrs Thatcher’s approach, but with some sort of concordat with the unions to bring down inflation more slowly – though the Winter of Discontent suggests this would have ended in tears eventually. A more radical government under, say, Tony Benn would have adopted the left’s beloved Alternative Economic Strategy, borrowing heavily, subsidizing industrial jobs, accepting high inflation and imposing import controls. But whereas the Labour left brimmed with ideas, however lurid or far-fetched, the Wets preferred to moan about Mrs Thatcher. Later, they complained that she never allowed them to have a proper economic discussion. But since they had nothing constructive to say, that was probably just as well.

  They could, of course, have resigned. But as the former Labour minister Edmund Dell scathingly remarks, ‘their determination to whinge in the background, and in coded messages, was equalled only by their determination to cling on to their portfolios and their lack of confidence in their own alternative’. So they stayed where they were: muttering endlessly about mutiny, but apparently incapable of issuing an open challenge to their beleaguered captain.13

  In the meantime, Mrs Thatcher steered grimly towards the storm. It was now almost a year since she had come to power, she told the nation on 12 March. The time had come ‘to ask ourselves one or two important questions’. She urged people to remember that Britain had only recently emerged, ‘scarred and shaken’, from the ‘appalling Winter of Discontent’, and that the election had given her a mandate to ‘stop the rot and change direction’. But as she admitted, this was not proving easy:

  You’ll say to me the prices are still going up, unemployment is still rising. Haven’t we been caught in another prolonged and damaging strike in which, whatever the outcome, there are no winners, only more problems for both sides – and for Britain?fn2 All this is undeniable. Indeed we spoke about it many times when we asked for your vote last year. We didn’t promise you instant sunshine. We pointed out over and over again that a nation can’t accelerate downhill for years and then jam the brakes on and suddenly return to prosperity as though the past had never happened. We had to start by slowing down before turning round and beginning the long, slow climb back up the hill to recovery … We are paying the price for years and years of make believe and now all the problems of those years have come home to roost.

  She knew some people would prefer a quiet life, ‘but we must change and if Britain changes too slowly it won’t recover’. And in an image that was to become very familiar, she likened herself to a doctor trying to save a long-neglected patient. ‘I’m afraid some things will get worse before they get better,’ she said. ‘After almost any major operation you feel worse before you convalesce. But you don’t refuse the operation when you know that without it you won’t survive. Is this perhaps beginning to get through?’14

  Two weeks later, Howe presented his second Budget to the Commons. As before, the Wets had been shut out of the planning, but this time the Budget seemed much less eye-catching. To the next day’s papers, the most exciting elements were Howe’s decisions to cut strikers’ benefits, put 50p on a bottle of whisky and increase prescription charges by a pound. Like Mrs Thatcher, the Chancellor admitted that times would be tough, but insisted that this was the ‘price to pay’ for the ‘long-run decline of our economy’. This provoked some rumbustious oratory from Denis Healey, who, embracing Mrs Thatcher’s medical metaphor, damned the Budget as ‘another enormous dose of a medicine that has already made the patient as sick as a dog’.15

  But the Budget made little impression on the general public, and a poll for the Sunday Times found that 47 per cent approved of it, compared with 36 per cent who were unimpressed. Private Eye’s Denis Thatcher probably spoke for many when he told his friend Bill that Howe should simply have stood up and said, ‘A quid on fags, couple of quid on petrol, etc.’, and then sat down, instead of treating them to a ‘ballsaching lecture beforehand on the state of the nation’. In the Eye’s version of events, the fictional Denis escapes by sneaking away from the Commons gallery to the House of Lords bar, where he finds Harold Wilson, ‘a bottle of brandy in one hand and a balloon glass in the other’. ‘At about five o’clock’, Denis reports, ‘they started serving tea and cakes, and I asked him what had happened in the Budget, but he said he didn’t know and didn’t give a bugger. I know you’ll find it hard to believe, Bill, but I think he’s one of us.’16

  If Denis and Harold had been paying attention, they would, in fact, have heard Howe announcing one of the most controversial experiments in British monetary history. This was the Medium Term Financial Strategy, usually referred to by the initials MTFS – which meant critics liked to call it ‘Mrs Thatcher’s Final Solution’. The tabloids largely ignored it, devoting more attention to the duty on cigarettes and brandy, and in fairness it hardly sounds very thrilling. Yet it mattered. For the first time, the government set out what Howe called ‘a four-year path for monetary growth, public spending and tax policies’. There were two main elements. First, there would be gradually falling targets for money supply growth, measured in sterling M3. The rate in 1980–81, for example, would be between 7 and 11 per cent, but by 1983–4 it would come down to between 4 and 8 per cent. Second, public borrowing would also come down, with spending projected to dip below 40 per cent of GDP by the end of the cycle. This, Howe argued, would allow interest rates to fall, relieving pressure on the exchange rate and giving manufacturers a chance to breathe. Of course there was a political risk in all this: no government had ever tied itself so closely to specific targets, especially so far ahead, and it would be very embarrassing if they missed them. But Howe insisted that by looking ahead to 1984 the MTFS would bring some much-needed certainty to the chaotic world of British economic policy.17

  The idea of the MTFS had been floating around academic circles since the mid-1970s. But its political godfather was Nigel Lawson, who had written an article in The Times in 1978 urging a ‘long-term stabilisation plan to defeat inflation’. After a decade of economic uncertainty, Lawson thought businesses were crying out for the return of ‘known rules’, like the gold standard that had governed economic policy before the First World War, or the Bretton Woods system that had regulated the world’s major currencies until 1971. Howe thought this was a great idea. Like Lawson, he yearned for some kind of anchor, some clear, practical framework that would banish the chaos and indiscipline of the 1970s. In the MTFS he found what he wanted. The targets would keep ministers in check, while publishing them so far in advance made a U-turn almost impossible. As long as they stuck to the plan, inflation would come down, the economy would recover and everybody would go home happy. And as Charles Moore remarks, it made sense politically, too. Suffering today, jam tomorrow: this was the Thatcherite message in a nutshell.18

  Right from the start, the MTFS was intensely controversial. The Bank of England was very dubious about it. Only three weeks before th
e Budget, Gordon Richardson told Mrs Thatcher that he had ‘serious misgivings about the whole exercise’. ‘It was hard enough’, he said, ‘to set a monetary target for one year ahead: it was much harder for a four-year period.’ Howe’s deputy John Biffen, too, thought it madness to publish targets they might struggle to meet. Even many monetarists were very sceptical. The economist Alan Walters thought the government was using the wrong measure of inflation, since sterling M3 was so broad it would be impossible to control. And monetarism’s Supreme Leader, Milton Friedman, thought it was a terrible idea, telling the Treasury Select Committee he ‘could not believe [his] eyes’ when he read that Howe and Lawson were proposing to use spending cuts and interest rates to force inflation down.

  Ironically, given that the MTFS was supposedly such a key part of her economic strategy, Mrs Thatcher shared the sceptics’ fears. As Howe recorded, she disliked the idea of being forced into a straitjacket, regarding it as a ‘graph-paper strategy’ that would give her no room for manoeuvre. But the Chancellor played on one of her favourite themes, arguing that the MTFS would help to bring interest rates down. So in the end, as with the rise in VAT and the end of exchange controls, she went for it.19

  The obvious thing to say about the MTFS is that, having published their targets, boasted about their rigour and congratulated themselves on their sense of responsibility, Howe and Lawson proceeded to miss every single one of them. Indeed, not only did they miss them, they overshot so wildly that, had they been medieval archers, their bows would have been confiscated for the safety of the people in the next village. In this sense, the MTFS was an utter failure. To give merely the most flagrant example, M3 growth in 1980–81 was supposed to be between 7 and 11 per cent. In fact, it was more than 18 per cent. The following year, it was supposed to be between 6 and 10 per cent. It came in at almost 13 per cent. Even in 1982–3, when the target was between 5 and 9 per cent, M3 growth was still more than 11 per cent. By this time, as the relatively sympathetic economics writer David Smith put it, the MTFS had become a ‘laughing stock’. Even Lawson, not renowned for his humility, admitted that his scheme was ‘never fulfilled in any literal sense’. That was certainly one way of putting it.20

  What went wrong? The obvious answer is that the MTFS was simply incompatible with the government’s other commitments. The point of the MTFS was to exert tight control over the money supply. Yet not only had Howe scrapped exchange controls, he had chosen his second Budget as the moment to get rid of the corset, a Bank of England scheme introduced in 1973 to discourage banks from lending too much money. With exchange controls gone and people able to borrow from foreign banks, the corset was completely redundant. All this was in perfect accordance with the government’s free-market principles. Unfortunately, Britain’s banks celebrated their liberation by loosening their purse strings. In just two months, their lending spree added not 3 per cent to the money supply, as the Bank of England had forecast, but 8 per cent. In a matter of weeks, the government’s liberalization strategy had blown a hole in its monetary strategy. And this set the tone for what was to follow. In just two years after 1980, mortgage lending alone doubled from £7 billion to £14 billion. As for lending in general, it ballooned by 22 per cent in 1982, 17 per cent in 1983 and 18 per cent in 1984, before growing even faster later in the decade.21

  Yet when Lawson claimed that ‘in terms of its fundamental aims, the MTFS succeeded’, he was not being entirely ridiculous. After all, the MTFS was meant to get both public borrowing and inflation down, and both did come down, only more slowly than he had hoped. The budget deficit fell from almost 6 per cent of GDP in 1980–81 to 3 per cent by 1984–5, and by the late 1980s Britain was running annual surpluses. As for inflation, the annual rate fell remarkably quickly after 1980, down from 16 per cent to 11 per cent, 9 per cent and 5 per cent in successive years. Much of this was attributable to high interest rates and high unemployment, but falling world commodity prices – especially oil – also had a lot to do with it. All the same, there is no denying that the government had done what it promised. It said it would get inflation down, no matter how high the price. It had certainly paid a high price. But it did get it down.22

  In political terms, though, the government’s abject failure to meet its own targets was beside the point. What mattered was that the targets existed at all. As the historian Jim Tomlinson points out, by turning the money supply figures into the be-all and end-all, Howe and Lawson were effectively shrugging off responsibility for unemployment. To reuse the medical metaphor, they had turned the money supply figures into the only meaningful indicator of the patient’s health, while relegating unemployment to an unfortunate side effect.

  But what was even more important was the MTFS’s role as a public relations exercise. The very thing that had, ironically, worried Mrs Thatcher – its inflexibility – became a sign of her determination to stick to her guns. For by publishing the targets with such fanfare, and by promising not to abandon them, she and Howe had made it impossible for themselves to change course. ‘My colleagues and I will not be deflected,’ she told the Press Association a few weeks after the Budget. ‘There will be no U-turns along this road. Please be very sure of that. We have a goal in sight, and we mean to achieve it.’ Yet even now, in the face of all the evidence, the Wets still believed she was bound to change course. The odd thing is that, at the same time, they were always complaining about how stubborn she was.23

  At the beginning of May, Mrs Thatcher celebrated the first anniversary of her arrival in Downing Street. Interviewing her to mark the occasion, the journalist Brian Connell found her the picture of ‘relaxed ease’, a ‘trim and comely lady … composed and smiling’ in her first-floor study. How was she coping with the pressure? ‘I don’t feel any sign of physical strain at all,’ she said. ‘I like it. I have a tremendous amount of energy and for the first time in my life it is fully used.’ She relaxed, she said, by reading ‘the John le Carré kind of thing, which I love’, as well as ‘biography and some philosophy and anything in connexion with the home. I love going through the House and Garden magazines, seeing what other people are doing who have time and money to do it.’

  But most of their conversation focused on the economy. Once again Mrs Thatcher cast herself as a doctor, prescribing bitter medicine for the patient’s own good. ‘We have taken all the necessary steps and they will work through,’ she said firmly. ‘There’s a time when you are still suffering from the disease and you take the medicine, and there is a time when you are suffering from both the disease and the medicine. That doesn’t mean you stop the medicine, you know you have to take the medicine if you are to be cured of the disease.’ So, Dr Thatcher explained, they had started cutting spending and were now, apparently, ‘controlling the money supply’: ‘The immediate effect of that, I am afraid, is increased interest rates, just as sometimes the immediate effect of an antibiotic can be rather damaging to your digestive system.’

  Connell asked if it was true that she was taking Britain back to the 1930s. ‘Absolute poppycock,’ she said. ‘There is absolutely no comparison between today and the 1930s, none whatsoever.’ It was true, she admitted, that ‘unemployment will rise … You have to slim down industries like shipbuilding and steel to make them efficient, to be able to conserve the industry for the future and to let it expand again.’ But she knew that ordinary people, deep down, were on her side. ‘There’s a tremendous individualistic streak in the British people … I think it is far better they are off my apron strings. You feel far more self respect, pride and responsibility when you do things yourself.’24

  On the right, the anniversary of Mrs Thatcher’s arrival was a moment for rejoicing. ‘In one short year of power,’ said the Sunday Express, ‘Mrs Margaret Thatcher has stamped her personality on the whole of Britain, and captured the political imagination of the world. Not since the wartime years of Winston Churchill has a leader displayed so much aggression, such determination or such confidence … Margaret Thatcher has already r
estored the pride of Britain.’ But the Mirror, speaking for her critics, took a very different view. ‘After one year of power – Inflation 19.8% – Mortgages 15% – Jobless 1½ m – The REAL Face of BRITAIN’, roared its front page, beside before-and-after pictures of a serene, fresh-faced Mrs Thatcher, taken in 1979, and a haggard, anxious Prime Minister in 1980.

  Inside, the Mirror ran a full-page interview with Donald and Christine Kirby, a young Stevenage couple who a year earlier had voted Tory ‘for the first – and last – time’. Donald was a skilled plater-welder, while Christine helped out in her parents’ electronic dealership. They came from Labour families, Christine said, but were ‘fed up with all the strikes during the winter and it looked like the unions were taking over. We wanted a change and we were sure things couldn’t get worse.’ But that only showed ‘how wrong you can be’. Prices had gone up, Donald was paying £3 a week more in tax and her parents’ business had ground to a halt. ‘It’s a joke really,’ Donald said bitterly. ‘I feel a right Charlie falling for that woman’s promises.’

  If anything, Christine was even more self-critical. When she listened to housewives complaining about the prices in the Co-op, she felt ashamed of herself:

  I know it’s people like me to blame. Voting for that woman is one of the biggest mistakes I’ve ever made – and God knows I’m paying for it …

  You’d think she wasn’t a woman at all. The price of school dinners has doubled. The kids have to wait longer to get into nursery school, and she has cut back on education.

  The kids used to have jumble sales to pay for extras at the school. Now it’s to foot the bill for necessities … like books …

  I hate making the kids miss out. I just have to say ‘Mummy’s got no pennies’ when they ask why.

  To me it’s like Mrs Thatcher is the wife and the nation is the henpecked husband. And like in most families, the wife gets the final say.