“The Thatcher government’s money supply policy was disastrous for the economy, and was then abandoned.”
Both points made here are fallacious.
The central aim of the post-war economic consensus was full employment. Increasingly, monetary and fiscal expansion was used as a means to achieve this desired outcome. However, this was a false hope. An increase in money supply produces only artificial employment and inflation. When inflation inevitably rises the economy falls into recession and all those jobs, and many more, are lost. When this in fact happened the economic consensus proscribed yet further monetary expansion, thus condemning Britain to spiralling inflation.
In the 1980s this inflationary cycle eventually culminated in the over-haul of the post-war economic consensus. Low inflation became the aim of economic policy instead of full employment. Tax increases, lower public spending and high interest rates tightened the money supply. Far from disastrous, this shift is the basis for the subsequent conditions that have allowed sustainable economic output and expansion.
Neither was the policy abandoned. The Medium Term Financial Strategy (MTFS) was designed to progressively reduce the rate of inflation between 1980 and 1983/84. Once inflation came down (which it did), the MTFS was followed by a policy of ‘flexibility not laxity’ where the squeeze would be loosened. The rapid fall in inflation from 20% to below 5% between 1980 and 1984 vindicated the MTFS.
Critics might point to the abandonment of the main measure of monetary supply, M3. It is true that M3 and the other M’s were abandoned, but this was necessary due to their inherent inaccuracies and the Government’s own micro-economic policy which rendered them even less accurate. But this hardly distracts from the fundamental shift in economic policy.
The Thatcher government’s radical departure from Neo-Keynesian economics was vital to Britain’s prosperity.