Strange Rebels: 1979 and the Birth of the 21st Century (34 page)

It was also a weapon of control. She was determined to know the subject matter of government better than any and all of her ministers. As for the professional bureaucrats of the British civil service, Thatcher regarded them as suspect from the start. They were, she believed, sly defenders of the entrenched status quo, and she was not going to let them get the better of her. She believed that career civil servants would always find ways to undermine directives from the political leadership; she was convinced, among other things, that resistance from left-leaning officials had been a major cause of Heath’s downfall, and she was determined not to tolerate it. From the very beginning of her stint at Number Ten, she looked for ways to supersede or bypass the bureaucrats wherever she could. She paid surprise visits to the ministries, and she carefully noted who was likely to go along with her program and who was not. Over time she came to realize that most of these highly professional government officials were willing to implement the course that she set, and she gradually relaxed. Still, from the very beginning she began to make a habit of appointing special political advisers to help her formulate policy on particular issues. And within the cabinet itself, she took care to appoint her own loyalists to the most important economic positions.

Perhaps her most significant appointment was the one she did not make. The minister with the most direct responsibility for the British economy is the chancellor of the Exchequer, and many onlookers assumed that her natural choice for this position was Keith Joseph. He was, after all, her avowed mentor on economic issues. It was Joseph who had first dared to challenge Heath for the leadership in
1975, and it was Joseph who had done the most to lay the groundwork for an intellectually credible challenge to the reigning mixed-economy consensus. Yet many of Josephs colleagues—not to mention Thatcher herself—had harbored doubts about his steadiness ever since the gaffe that had ended his ministerial ambitions. In the event she passed him over for the big job. She chose him instead as the secretary of state for industry, where he was to supervise the state-owned corporations, the commanding heights of the British economy. “To put Joseph in charge of the one Whitehall department whose whole purpose was to pursue active government industrial policies was the political equivalent of putting a monk in charge of a whorehouse,” one commentator wrote at the time.
⁸
As it happened, Joseph’s reputation as a crusader for the free market was little in evidence during his term—further confirmation, to his doubters, that he was more of a talker than a doer. The first year of the Thatcher government brought only a few cautious measures to expose the nationalized industries to greater market competition; a few shares were sold in some of the companies. Joseph gained notoriety primarily for his efforts to win even greater allocations of budget funds for his charges.

It was, instead, Geoffrey Howe that Thatcher picked to be her chancellor of the Exchequer. It was a revealing choice. Howe boasted nothing of Joseph’s oratorical flair. The famously caustic Labour politician Denis Healey memorably compared listening to Howe in the House of Commons to “being savaged by a dead sheep.” But Thatcher was not looking for flashiness. For years Howe had been quietly carving out a name for himself as a student of monetarist theory and market-oriented policies. His somewhat pedestrian exterior concealed a spirit of remarkable tenacity. On the surface he seemed to have little of Thatcher’s combativeness, but he was, in fact, impossible to dislodge on an issue once he had made up his mind. True to form, he was to prove one of the most persistent of Thatcher’s ministers, remaining in the cabinet almost until the end of her administration.

Shepherded by an anxious prime minister, Howe now set to work devising the new governments first budget. The scheduling of the election left him just a few weeks for the task. Thatcher was determined to use the 1979 budget as the occasion for a stark declaration of her policy priorities for the economy. In the event, the supposedly plodding Howe proved that his instincts were even more radical than hers. His budget not only proposed dramatic cuts in income tax and public spending and a considerable tightening of the money supply—all principles laid out in the election manifesto—but also ushered in the dismantling of exchange controls. There could be no clearer statement of the new government’s commitment to the workings of the market. But it was a highly risky move. The turbulence that had
plagued the British economy in the preceding years had not inspired great confidence in foreign investors. The removal of controls could potentially spark a run on the pound sterling—a horrendous prospect for a newly inducted prime minister. In her memoirs Thatcher claimed to be on board with Howe’s move from the start. In fact, as Howe later recalled, she needed considerable persuading.

The budget that Howe revealed to the nation in June 1979 thus made for a radical departure. It slashed the rate of income tax for top earners from a punitive 83 percent to 60, and took the basic rate from 33 percent to 30. It unveiled the first steps toward the elimination of exchange controls. (The chancellor waited until later in the year to abolish them altogether.) Howe also announced deep cuts in public spending—though he boosted funding for the military and the police, in line with Thatcher’s election pledges. That meant that some revenues would still have to be increased, and Howe did it by raising taxes on consumption. The budget accordingly provided for a sharp rise in value-added tax, which now rose to 15 percent. This point also gave Thatcher cause for nervousness. As she was perfectly aware, the hike in VAT would add several percentage points to retail prices, thus contributing to inflationary pressures.

This was not the only factor that looked likely to undermine price stability. In its final months the Callaghan government had agreed on substantial pay hikes for public-sector unions, and during her campaign Thatcher had agreed to respect her predecessor’s pledges. Just as expected, inflation rose. The consumer price index jumped from 11 percent in the summer to 20 percent by the end of 1979.

Thatcher and Howe believed that they knew the solution. It was Milton Friedman who had declared—with bracing but controversial clarity—that “inflation is always and everywhere a monetary phenomenon.” In the view of Friedman and other monetarists, the notion that governments could tame inflation by demand-side methods, like tinkering with wage and price controls, was utterly illusory. The acolytes of monetarism insisted instead that government’s task was to ensure price stability by restraining the supply of money in circulation—or, to use the more populist formulation, to slow down the rate at which government printing presses were turning out banknotes. Thatcher’s team was not breaking entirely new ground here. Key members of the Callaghan government’s economic team—above all his own chancellor, Denis Healey—had already accepted the basic monetarist premise. So, too, had the directors of the Bundesbank, the central bank that had presided over West Germany’s economic miracle (and thus represented a prominent foreign model for the Thatcherites). And in the United States that autumn of 1979, the
new chief of the Federal Reserve, Paul Volcker, launched a tight money policy also aimed at tamping down his country’s high rate of inflation.

But no one went about it with quite the same single-mindedness as the new government in London. Howe pledged to squeeze the money supply a few percentage points beyond what Healey had done, and he backed it up by raising interest rates from 12 percent to 14 percent. In June, he raised them again, from 14 to 17 percent—the largest one-day hike in British history. This amounted to a serious austerity program. Unemployment, exacerbated by the cuts in government spending, continued to climb. This was, perhaps, a bit more determination than the commercial class had counted on from the new prime minister. British business associations—noting continuing threats from the unions, Thatcher’s pledges of monetary restraint, and the generally dim prospects for global growth—predicted a rash of bankruptcies. After reaching a euphoric high upon her election, the British stock market plummeted in the first few months after Thatcher took office.
⁹

Thatcher, however, was determined to push ahead. The critics who attacked monetarism as an exercise in scholasticism were missing the point. For all her attention to political ideas, Thatcher was not interested in doctrine for the sake of doctrine. She drew her motivation from values, a firmly held set of moral principles; policy was just a way of putting them into action. The distinction is important. Shirley Robin Letwin, one of Thatcher’s most persuasive apologists, argues that the key to understanding Thatcher is not ideology but a core ideal. For her, Thatcherism is a practical approach to achieving certain political ends in the specific historical context of Britain at the end of the 1970s. Thatcherism, she argues, was above all an effort to promote certain “vigorous virtues.” It aimed to restore the primacy of the individual by nurturing a sense of personal choice and responsibility and to revive the family’s role as the basic unit of society, and it aspired to achieve these goals without resorting to active government intervention. It was this political agenda, she writes, that explained the distinctive style of government that characterized the Thatcher administration. In her pursuit of these “vigorous virtues,” Thatcher inevitably assumed a role as the “leader of a crusade,” a “continuous revolution.”
¹⁰

In this reading, the Thatcherites were drawn to monetarism not because they had particular views on the technicalities of the monetary supply but because the monetarists stipulated that direct government management of the economy through the control of prices, wages, dividends, or foreign exchange was inefficient and wrong. Thatcher’s supporters often made the point, in later years, that she herself never
approved of the conceit of “Thatcherism.” It is true that did not see herself as the progenitor of an economic theory. What she aspired to do above all else was to restore to Britons a sense of individual agency, to create an environment that rewarded entrepreneurial risk and self-sufficiency and did away with the notion that government could be relied upon to meet all needs. In economic policy, this translated into the assumption that it was not the business of government to micromanage economic activity. Privatization was consistent with this view. So, too, was her consistent opposition to any form of wage and price controls.
¹¹
This was an instinct that she first revealed, with bracing clarity, in 1979. When Thatcher took office, the British government had a long-established mechanism that held down prices on a number of retail goods. It was clear that lifting the controls would fuel already galloping inflation. But she quickly moved ahead to dismantle them.

Thatcher regarded economics as the realm in which the most decisive battles would be fought, and it was above all for her economic policies that she is remembered. Cutting taxes, reducing public spending, curtailing the money supply, and lifting controls on foreign exchange were all measures that she began in 1979, thus making a clear break with the principles of the postwar consensus and laying the groundwork for even more crucial reforms that were to come later.

Needless to say, there were other matters that demanded her attention during her first year in office. Quite a lot of her time went to the problem of Northern Ireland, where the situation had steadily deteriorated throughout the 1970s. In August 1979 things took a dramatic turn for the worse. That was the month the Provisional Irish Republican Army managed to assassinate Lord Mountbatten, the last viceroy of India, by blowing up his boat during a vacation on the Irish coast. The same day the IRA staged a carefully engineered ambush outside of the Northern Irish town of Warrenpoint that took the lives of eighteen British soldiers—the largest loss suffered in a single incident by British security forces during the Troubles. The two attacks presaged a long and bitter struggle with Irish Republicans that would run straight through the Thatcher era. She responded by ratcheting up British military action against the IRA—a tough and resolute policy that was sure to invite retaliation from the Nationalists, and did, years down the road.

The most immediate foreign policy issue to be resolved was the problem of Rhodesia, where the minority white population was struggling to cling to power in the face of an armed struggle conducted by several revolutionary anticolonial movements. In the end, despite a certain degree of resistance from those within her own party who maintained ties with the white settlers, Thatcher managed to find an elegant diplomatic solution that allowed Britain to divorce itself from the colony and ensured majority rule. Her success was attributed, in part, to a highly effective (and
photogenic) goodwill gesture: her dance with Zambian president Kenneth Kaunda at a meeting of the Commonwealth countries aimed at addressing the question of Rhodesian independence. The commentators at home greeted this triumph as evidence that she was a far more practical politician than her uncompromising manner might otherwise suggest.

If they thought that they had figured her out, however, she soon moved to confound them. In November 1979 she attended her first European Economic Community (EEC) summit meeting in Dublin. There she presented the other heads of state with a demand that no other British leader had made before her in such categorical terms. For some time it had been clear that the United Kingdom was paying more into the European budget than it took out. Contrary to existing EEC policy, Thatcher now informed her colleagues that Britain wanted the extra money back. They agreed to consider the matter and resolved to move on to other points on the agenda. Thatcher, having made the point, then continued to make it, for hours. German chancellor Helmut Schmidt and French president Valéry Giscard d’Estaing, who were accustomed to having their way at European get-togethers, displayed their disapproval. Schmidt ostentatiously began to leaf through his newspaper. Giscard d’Estaing pretended to fall asleep. Thatcher went on. Giscard d’Estaing ordered his driver to rev the car engine outside the windows of the summit venue. Still Thatcher continued. No one had seen anything like it. Giscard d’Estaing later stated publicly that the summit, completely overshadowed by this single issue, had been on the brink of collapse several times.