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Tue, 11 December 2018 05:51:19
Maggie Thatcher, slayer of high inflation and expropriation, dies
09 Apr, 2013 00:00:29
By Fuss-Budget
Apr 08, 2013 (LBO) - When Margaret Thatcher came to office in 1979, Britain was reeling from a decade of raging inflation and the country was a shadow of its former self, with tottering industries expropriated from the people by the coercive power of the state.
Inflation was near 20 percent with the gold standard broken in 1971, a second oil shock was in progress and trade unions were the biggest growth industry with failed Keynesian economics firing inflation and generating a pool of workers who could not make ends meet.

After the end of World War II, Germany under economics minister and then chancellor, Ludwig Erhard, threw away the shackles of Nazi 'mixed economy' and state intervention. Britain expropriated and intervened.

Erhard, influenced by Wilhelm Ropke, who was himself inspired by Ludwig von Mises, an Austrian economist, created an economic miracle (Wirtschaftswunder) out of a Germany that was destroyed by war. Germany went from strength to strength.

But Britain, which was in a much better shape immediately after war, was progressively weakened by expropriation and state controls as well as the currency crises and devaluations that came from loose monetary policies, under the Bretton Woods soft-peg system.

From opposition benches Thatcher relentlessly opposed the deadly interventionism, and spending of British rulers.

When Thatcher came to office in 1979, the English or the British who were the pioneers in ending serfdom in Europe were now themselves serfs to an ever-expanding state machinery, interventions, regulations and inflation.

Despite the best efforts of Friedrich von Hayek, another Austrian economist, to stop Britain from going down the path of inflation and subjugation to the state, by writing in the English language one of his best known works, The Road to Serfdom, the country was in deep trouble.

Throwing post World War II neo-Mercantilist Anglo-Saxon economic orthodoxy aside, Thatcher embraced the economics of liberty of German speakers, who had seen the worst horrors of socialism and statism in action.

In 1975, when she was elected leader of the British Conservative Party, the Institute of Economic Affairs arranged for her to meet Hayek, who, before the war had personally challenged Keynes.

When Thatcher had later visited the Conservative research office, a speaker had prepared a paper on why the Conservatives should take the 'middle way'. The mixed economy had always been the favourite of the worst fascists.

Legend has it that even before the speaker was finished, she dug up from her handbag, a copy of Hayek's work, the Constitution of Liberty and banged it on the table.

"This," she had told the speaker in ringing tones, "is what we believe in."

She was however later accused of resisting Asian immigration, a nationalist policy which was in sharp contrast to her other actions.

Alan Walters, who was a professor at the London School of Economics (where Hayek worked at one time) became her chief economics advisor from 1981.

Walters, who was also at one time at John Hopkins University in the US, later created the Hong Kong currency board to fix the territory's exchange rate, which remains fixed even today.

Residual exchange controls in Britain were abolished, and expropriated industries were given back to the people.

As interest rates were raised - across the Atlantic monetary policy was also tightened in the US - the economy spun into a much needed recession, worsening already high Keynesian led unemployment Thatcher had inherited.

She cut spending and raised taxes.

364 leading horrified economists sent a signed petition asking her to change course.

She held firm. "The lady's not for turning" Thatcher had told doubters within her own party.

The rest, as they say, is history.

Long-term inflation in Britain

Inflation fell, gold, oil and all kinds of commodity prices collapsed as both the pound and the US dollar strengthened.

Though coal mines were shut in Britain, commodity rich countries with authoritarian regimes that oppressed their own people found themselves suddenly without their main source of sustenance. The Soviet Union collapsed.

Britain recovered. Unemployment fell and Britain entered one of the strongest phases of stability in its history.

She was the only woman Prime Minister of Britain and the longest serving one in the 20th century.

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6. kawdaboy Apr 29
The Argentinians, in perticularly their Navy nust be rejoicing.

Yes i agree with Fuss that Maggie not only changed the UK for the better, but her influence did much more (than most people know or imagine) across the pond and helped the Reagan adiministration control the ticking bomb, the Federal Reserve.

5. fuss Apr 10
You are right inflation was going up. The Bank of England had not really found an effective way to operate floating fiat regimes at that time. New Zealand invented inflation targeting later, which reduced discretion and made policy more rule based.

Even the radical quantity targeting that brought inflation down in the early 80s was very disruptive. There were all kinds of debates about what was the monetary target to control and the targets were missed. But policy was tight anyway and it worked.

Then Britain went into other weird mechanisms. Shadowing the Mark etc.

In 1989 Sir Alan Walters was brought back as adviser to Thatcher and he promptly went into a boxing match with Nigel Lawson.

He heavily criticized the ERM, which Thatcher and Lawson were planning to join. He knew currency boards and it was obvious that ERM was a soft-pegged inflationary mess. The problem with soft pegs is that they are against the laws of nature. It is not possible to target both the exchange rate and interest rates at the time - meaning you cannot print money and hope have a strong exchange rate also. Mere men cannot go against the laws of nature.

He went public that pegs were prone to inflation and instability.

He said ERM was 'half-baked'. You and I could have said it too.

Ultimately he resigned, Lawson resigned. And also Thatcher resigned over the poll tax mess.

Britain went to the ERM and then in 1992, it all went belly up - as predicted.

New Zealand came up with inflation targeting for floating rates in 1996.

Europe is in trouble now because it tried to 'shadow' the dollar under pressure from exporters who wanted to stop the Euro from going up, when Greenspan-Bernanke was creating the mother of all liquidity bubbles from 2001.

4. CAMan Apr 10
Thanks Fuss-budget for the interesting article. For the sake of argument, wasn't UK inflation near double digit when Mrs Thatcher had to resign, and the great moderation for the UK could really be seen only after she left? Of course Mrs Thatcher's iron grip would have helped, but should Major and Blair/Brown also get some credit?
3. Mahinda Apr 10
"Disciplining yourself to do what you know is right and important, although difficult,is the highroad to pride, self esteem,and personal satisfaction" - Margret Thatcher
2. T.S.B.Ratnayake FCMA,CGMA Apr 09
A greate lady who practically showed the world & U.K the advantages of bold & honest leadership.Indeed it is a sad day.
1. WAW Apr 09
I was in the UK during 1976 - 77 during the previous Labour rule and the economic stress of the country was visible everywhere. The most common motor car was either a Morris Minor or an Austin Mini. Households did not have colour televisions and when I visited them, they confessed that they go to movie theatres to see colour films. Food prices were rising and salaries were stagnating.

One consolation was that public transportation system was extremely good and reliable though trains ran on long distance routes only at a speed of 100 miles per hour which the UK still has when the continental Europe had gone for high speed trains.

Everyday, there were labour disputes and even the students at my university occupied the administration building and kept it under occupation for about 3 months before they vacated the place voluntarily; they did not win any demand because the government was not in a position to give them any concession.University professors of standing were moving to N America in search of better pay and research facilities. Hence, the once great power was only limping and stagnating.

At a time like that,the emergence of Maggie was a historical necessity and she indeed rescued the country. But not everybody appreciates what she has done to the country and that is the nature of people. She is nevertheless a trail blazer in the modern era.