Thatcherism, by Kim, Changhyun, Oct 2005

Disinflation Policies and Severe Recession

Margaret Thatcher was strongly influenced by Monetarism of Milton Friedman, an economist at the University of Chicago. Friedman identified inflation as a major problem of the economy and believed that inflation should be controlled by restricting the growth of the money supply. Friedman rejected the idea that inflation could lower the unemployment rate. Sir Keith Joseph of the Centre for Policy Studies, a friend and mentor of Thatcher, also recommended bringing the inflation rate down.
Coincidentally, there was the second oil shock in 1979, caused by an Islamic revolution in Iran. This made the inflation rate rise even higher, reaching 21% in 1980. Thatcher made lowering the inflation rate her first priority.
In Margaret Thatcher's opinion, attempting to control inflation by wage and price controls were failed policies of Labour. What was important was the amount of money in the economy.
Stringent efforts were made to keep money growth within acceptable limits. High interest rates were imposed to reduce business and consumer borrowing. Interest rates were already at 14% when Thatcher took office. In November 1979, it was raised to 17%.
When the government spends more than it taxes, it fuels inflation by pouring money into the economy. Heavy cuts in public spending was announced in all branches of government except the police, defense, and the National Health Service (NHS). The government imposed tight cash limits on all departments, forcing them to cope with the inflation on their own.
Subsidies to nationalized industries were cut. Furthermore, Thatcher did not salvage failing private companies to keep the unemployment rate down. These policies, along with general budget restraint and the increase in the interest rate, started a deep recession.
From 1979 to 1981, the economic output fell by 5 percent, investment fell by 30%, and manufacturing output fell by 15%. 1.3 million people were unemployed in 1979, but 2.7 million was unemployed by 1981. The number of unemployed persons would continue to rise even after the recession was over, reaching 3.3 million (11.4% of the workforce) in 1986.
Eventually, the high interest rate, budget restraints, and unemployment brought down the inflation rate. In 1982, the inflation rate halved, and reached 4.5% by 1983. For the next five years, it remained near 5%. Thatcher did succeed in getting inflation under control, although she started a recession. The worst part of the recession was over by 1981, and the economy began growing again in 1983.

Kim, Changhyun
October 2005

Winter of Discontent, from Wikipedia
Thatcherism, from Wikipedia
National Enterprise Board, from Wikipedia
Margaret Thatcher, from Wikipedia
United Kingdom General Election 1979, from Wikipedia
Thatcherism 1979-91, from BBC England Timeline
Thatcherism 1979-90, from BBC British Timeline
The "British Disease", from BBC British Timeline
Thatcherism, from Economy Professor
Margaret Thatcher, from PBS
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