Thatcher Fallacy (8)


“Three million unemployed was an unnecessary evil”

In 1979 ‘Monetarism’ was adopted by the Thatcher government. It prescribed that inflation is always and everywhere a monetary phenomenon, that can only be tamed by some reduction in the growth of money supply. The correlation between inflation and money supply was clear:


Therefore the immediate objective of the Thatcher government was to reduce the rate of money growth. It was to this end that the Medium Term Financial Strategy (MTFS) was geared. Generally it succeeded. Between 1980 and 1984 money supply was reduced and inflation fell from 20% to 5%.

This squeeze, however, produced a rapid increase in unemployment. Between 1979 and 1981 unemployment grew from 1.9 million to 3 million. However, this was an inevitable consequence rather than an unnecessary evil.

In economic terms the gradual increase in inflation since the 1960’s precipitated a shift in policy aim away from full employment to low inflation. Inevitably this resulted in higher unemployment, however during the course of the MTFS the inflationary culture was decidedly broke. In the longer term this has allowed for sustainable job creation and output.

When speaking about the squeeze, Margaret Thatcher claimed that “There was no alternative”. And certainly from a political stand-point she was right. ‘Shock-treatment’ was probably the best political option available to break the inflationary cycle. A gradualist approach may have resulted in a less severe recession, but it is questionable that the more moderate reduction in inflation would have been enough to vindicate the government’s policy.

More broadly, opponents must accept that high unemployment had other causes. External ‘shocks’ such as high oil prices and high global interest rates had a sizable impact on UK growth. This was also a period of structural change in the British economy which inevitably resuled in displacement and unemployment.

To suggest that unemployment was an ‘unnecessary evil’ is to suggest that the Thatcher government was completely responsible for it (which it was not), or that it had a viable alternative to Monetarism.


2 thoughts on “Thatcher Fallacy (8)

  1. She did have something to do with it though, didn’t she? Lets be honest.

    There is a reason that this hasn’t been repeated – people spotted the policy mistakes and endeavoured to avoid doing them again. Doesn’t take an economic genius to work that out.

  2. The government did have something to do with it. I don’t deny that at all. But there were several other important reasons for the rise in unemployment.

    The approach taken by the Thatcher government in the MTFS was valid given their experience. As I demonstrate in my blog it was thought, and correctly, that the growth of money supply was linked to the cycle of inflation. At the time obvious antedote was to contract the money supply. Despite the part this played in the recession, inflation was brought down significantly as determined. The long-term economic benefits of this in terms of sustainable employment should be considered.

    Also, I would add that we have not been locked in an inflationary cycle since, and therefore there has been less need to control the money supply. That said, today’s inflationary policy is inherited from the monetarist experiment. Although we no longer measure the money supply, we would exercise restraint and in turn prioritise inflation over employment.

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