Downing Street Years - Margaret Thatcher [427]
There was still much I would have liked to do. But Britain under my premiership was the first country to reverse the onward march of socialism. By the time I left office, the state-owned sector of industry had been reduced by some 60 per cent. Around one in four of the population owned shares. Over six hundred thousand jobs had passed from the public to the private sector. It constituted the greatest shift of ownership and power away from the state to individuals and their families in any country outside the former communist bloc. Indeed, Britain set a worldwide trend in privatization in countries as different as Czechoslovakia and New Zealand. Some £400 billion of assets have been or are being privatized worldwide. And privatization is not only one of Britain’s most successful exports: it has re-established our reputation as a nation of innovators and entrepreneurs. Not a bad record for something we were constantly told was ‘just not on’.
* See p. 355.
* See also Chapter 20.
* The earnings rule limited in the early years of retirement the amount a pensioner could earn without reducing his pension.
** For Nigel Lawson’s resignation see pp. 15–18.
* On both of which, see pp. 681–5.
* See pp. 437–41.
CHAPTER XXIV
Floaters and Fixers
Monetary policy, interest rates and the exchange rate
A correct economic policy depends crucially upon a correct judgement of what activities properly fall to the state and what to people. The state has to set a framework of laws, regulation and taxes in which businesses and individuals are then free to operate. But there also has to be a financial framework for policy. After a long struggle during my first term, from 1979 to 1983, like-minded ministers and I had largely converted the Cabinet, the Conservative Party and opinion in the worlds of finance, business and even the media to a more restrictive view of what the state’s role in the economy should be. Moreover, as regards the regulatory framework within which business could run its affairs, there was a general understanding that lower taxes, fewer controls and less interference should be the goal. But as regards setting the overall financial framework, within which the real economy generates wealth, there was less common ground. Whereas Nigel Lawson and I agreed strongly about the role of the state in general, we came sharply to differ about monetary and exchange rate policy.
Our success in bringing down inflation in our first term from a rate of 10 per cent (and rising) to under 4 per cent (and falling) had been achieved by controlling the money supply. ‘Monetarism’ — or the belief that inflation is a monetary phenomenon, i.e., ‘too much money chasing too few goods’ — had been buttressed by a fiscal policy which reduced government borrowing, freeing resources for private investment and getting the interest rate down. This combined approach had been expressed through the Medium Term Financial Strategy (MTFS) — in large measure Nigel Lawson’s brainchild.* Its implementation depended heavily on monitoring the monetary indicators. These, as I have noted, were often distorted, confusing and volatile. We needed other indicators as well. So, before the end of Geoffrey Howe’s Chancellorship the value of the pound against other currencies — the exchange rate — was also being taken into account.
It is important to understand what the relationship between the exchange rate and the money supply is — and what it is not. First consider the effect of an increase in the exchange rate; that is, one pound sterling is worth more in foreign currency.