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Rise and Failure of Monetarism in the 1980s

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Expand and Explain the Rise and Failure of Monetarism during the 1980s

Monetarism, as an economic and political policy in the United Kingdom, (Hereafter UK) can be seen to have come to the fore in the late 1970s with the election of Margaret Thatcher’s Conservative Party. The government’s brief experimentation with the concept was arguably over by 1982. However, the rise and failure of monetarism cannot be explained fully by analysis of the 1980s alone. It is necessary to consider the historical precursors to the elevation of monetarism as a key economic and political policy. A vital component in understanding this is the demise of Keynesianism as a desirable economic policy. Furthermore, we need to discuss to what extent monetarism it can be said to have failed completely. In addition to this the discussion herein will analyse the relevance of using macroeconomic terms to understand political, economic and historical issues. The essay will conclude that the rise of monetarism came about due to the nature of the global economy and that the study of monetarism is useful as it reflects not only the political complexion of the nation state but the wider global influences. Finally, the essay will concur with Bradford De Long’s theory that monetarism, a failure as a complete experiment, still retains an influence on modern economic thinking.

Before embarking upon a discussion of the rise and demise of monetarism it is necessary to establish what is meant by the term. Monetarism is defined as ‘a system of controlling a country's economy by limiting how much money is in use at a particular time’ (Cambridge Dictionary 2004, online). Monetarism, as promoted by Milton Friedman[1], focuses upon price stability, in contrast to Keynesian economics that place the greater emphasis on the rigidity of currency value. While the 1980s provide the main focus of debate the growth of the theory’s popularity can be traced to the 1950s. It is therefore necessary to briefly establish the precursors to the 1980s to comprehend the rise and fall of the monetarist system.

Macroeconomic models, such as monetarism, can be an important tool in understanding history, economics and politics. During the late 1970s macroeconomic models were important not only in understanding economics but also because modellers were close to policy-makers. The economic modellers had an important influence on the events at the time and offer another way of understanding the historic and political significance of the early 1980s (Wren-Lewis 1995, p. 204). The benefits of such an approach is that one can move away from analyses dependent on concepts of national politics, concepts such as Thatcherism:

Approaches which look at the recomposition of the British state during the 1980s in terms of ‘Thatcherism’ fail to conceptualise the global relations of exploitation in and through which the British state subsists (Bonefeld 1993, pp. 252-3).

In contrast, the study of economic policy, in this case monetarism, cannot be divorced from the global political and economic issues of the time. It is important to this discussion that a wide view is taken to reflect the various impacts and influences on politics and economics. Such an approach is one adopted by many academic writers on the subject. For example Saad-Filho and Johnstone’s collected work on neo-liberalism includes a discussion of monetarism (Saad-Filho and Johnstone 2004) while economic, political and historical journals all contain reference to the political and economic changes of the period. Thus, monetarism as a concept allows us to deal with a number of combined elements simultaneously.

Without the relevant social, political and economic environment an economic policy, like monetarism, would not have been able to take a foothold and assume dominance over Keynesian modes of thinking. However, such difficulties were apparent at the time. Economic planners were faced with difficulties that Keynesianism did not appear able to address. The problem faced by economic planners is most clearly illustrated by the growth of inflation. In the period between the end of the Korean War and the beginning of the 1970s, the inflation rate in the United Kingdom never rose above the 5% annual figure. However, this figure rose to 17%, then 27% and back to around 15% in 1974, 1975 and 1976 respectively (Kenway 1994, p. 124). Indeed, the world economy had become strained even by the late 1960s. As Harold Wilson took office in October 1964 at the head of the Labour Party, the Prime Minister was embarking upon a period of economic upheaval. The Chancellor of the Exchequer, James Callaghan, sought to replenish Britain’s gold reserves, cut wages and improve exports of British goods. Hindered by industrial unrest he and his successor, Roy Jenkins, failed to control rising wages. This example is symptomatic economic difficulties that led to elevation of monetarism as a way of improving the economy.

By the mid-1970s ‘Keynesianism appeared to be a spent force’ (Bonefeld 1995, p. 35). Not only was this the case but in contrast monetarism was on the ascendancy, as David Smith has summarised:

For monetarists, and in particular British monetarists, the early 1970s were what the Great Depression had been for Keynes and his followers. Existing ideas about economic policy had been dealt a savage blow by actual events (Smith 1991, p. 45).

One of these actual events was the move away from the Bretton Woods system.[2] This was a reaction to the economic difficulties that increasingly resulted in the disengagement of labour from capital. Monetarist policies sought to re-associate the relationship between the market and labour. As part of this process, advocates of monetarist policy sought to greater exploit the labour force, lower their wages and cut expenditure upon public services. Monetarism was designed to make market freedom the deciding factor in regulating the economy rather than maintaining labour at an artificial level. Its appeal was such that monetarism was being accepted as a viable economic school of thought in all western countries by the mid-1970s.

Central to the philosophy of monetarism, as Bonefeld points out, was the abolition of employment guarantees as a pre-condition for economic recovery (Bonefeld 1995, p. 36). Power over the economy would be taken back from organised labour and the free market would regulate the relationship between money and the workforce. As part of this trade unions became undesirable and any false elevation of the role of labour, through artificial levels of employment and high wages, had to be addressed. Monetarism, therefore, with its emphasis on the strict relationship between money and exploitation of labour, appeared to offer a solution to the problem of people and governments spending ‘beyond their means’. In essence, monetarism offered ‘a capitalism of ‘value for money’’ with Labour subjugated to the same level as any other factor of production (Bonefeld 1995, p. 45).

Monetarism’s appeal would not have been effective without apparent difficulties in the dominant economic theory of the time, Keynesianism. In part, the predominant Keynesian philosophy was undermined by the overly-confident position of its proponents. They failed to consider the threat to their dominant model and the serious competition posed by monetarism. However, this was in direct contrast to the reality of the economic landscape. In this respect the star of Keynesianism was on the descent in the eyes of many people:

The old Keynesianism lost its hold within economics, not because economists ceased to believe in the importance of unemployment, but rather because they ceased to believe the Keynesian account of how those variables were determined and, in particular, the means by which the government could influence them. The transformation from Keynesianism to Monetarism required, therefore, a transformation of views about how the economy worked. (Kenway 1994, p. 10).

The transition of views referred to by Kenway started to materialise with a growing appreciation for the monetarist system in some circles. On the academic front the cause of monetarists in the UK was boosted as Harry Johnson was appointed Professor of Economics at the London School of Economics (Hereafter LSE). His influence spanned the Atlantic from Chicago to London and he became a key academic proponent of monetarism. This position was bolstered as Johnson formed the driving force behind the Money Study Group at LSE, which was a forum for monetary theory and policy. The Money Study Group provided the respectable face of monetarism and highlighted the growing body of academic in favour of it.

Academic support alone could not account for the elevation of monetarism over Keynesian philosophies. The House of Commons and the role of policy-makers were, of course, necessary for the successful implementation of any economic policy. Johnson and other economists, with the help of Conservative MP Richard Body, produced a pamphlet entitled A Memorial to the Prime Minister. The document was signed by eight leading monetarists and had the support in the House of Commons of forty Conservative MPs. The producers of the pamphlet, who called themselves the ‘Economic Radicals’, attacked the policy of Edward Heath’s government, but with little effect on his political position or outlook. Despite the ‘Economic Radicals’ making another public appeal in 1974 a second miner’s strike brought about two general elections and a Labour government. This was a failure for the Conservative Party but it ultimately pushed the party towards the Right and towards Margaret Thatcher, a key proponent of monetarist doctrine.

In the public sphere monetarism also began to attract some influential backing. David Smith has also demonstrated that monetarism began to find some powerful allies in the newspaper world of Fleet Street. Samuel Brittan, economic commentator for the Financial Times and Peter Jay, economic editor for The Times, both favoured monetarist economic philosophy. Eventually this favouritism evolved to open advocacy for monetarism and, as Smith argues, they were soon joined by others (Smith 1991, p. 52). Such support would have no doubt been invaluable for bolstering the attractiveness of monetarism. It put the debate into the public arena, allowing people to become involved or at least aid understanding of the debates in question. Furthermore, the influence would have had a reassuring effect on the City, a key ingredient in the success of any economic policy.

Monetarism, therefore, was not an unknown ideal in 1979 when Margaret Thatcher’s Conservative Party swept into office. On the contrary, as had been discussed above, the Conservative Party had in some part been pushed to the Right of the political spectrum because of economic issues. However, it was not necessarily such a clear break from previous policy as one might assume. Instead one agrees with Bonefeld’s view that 1979 brought continuity as well as change:

[T]he shift from Labour to Conservative government in 1979 comprises a complex of discontinuous and continuous elements. In the 1970s, there was an integration of monetarist policies with Keynesian forms of class collaboration; the incoming Thatcher government continued, in a more radical fashion, monetarist economic policies in a monetarist framework (Bonefeld 1993, p. 251).

Bonefeld is careful to assert that the Thatcher government’s approach to economic policy, while more radical, was not revolutionary. As with the study of history it is vital to understand the continuity as well as the changes in society. With this in mind it is easy to see why Bonefeld was clear, as discussed earlier, in condemning those who viewed the period in Thatcherism. Not only were they ignoring the wider global ramifications, but also by studying Thatcherism specifically one is tending to ignore the continuity and place over-emphasis on change.

As the Conservatives came to power they did so with a determination to beat high inflation rates in the United Kingdom. Their position had been weakened partially by previous national wage rises. This was in contrast to the ‘tight money’ principles of monetarism. Thus, while attempting to curb inflation the levels actually rose to 22% by May 1980 (Pugh 1990, p. 347). Thatcher’s government sought to adhere more firmly to the monetarist principles as a way of tackling monetarism. A key component of this was Geoffrey Howe’s budget of 1981 which is ‘generally taken to be the most dramatic demonstration of the fact that Keynesianism was no more’ (Smith 1991, p. 105). But there was some ambiguity about the aims and methods of monetarist policy as Pugh highlights:

Though professed for many years by marginal figures in the economics profession, monetarism remained an unproved theory; and it was not clear what exactly constituted the money supply. For some years Chancellors of the Exchequer kept changing their definition in an effort to apply the theory in the real world (Pugh 1990, p. 347).

Thus the concept of monetarism was a difficult one to grasp and the theory was harder to implement under real economic conditions. Yet, despite this there was some evidence to suggest that by 1981 the Conservative’s policy of monetarism was beginning to yield some positive results in the fight against inflation. But this came at a cost.

The 1981 budget had introduced strict monetarist policies because although inflation had fallen in 1981 it had done so because the economy was in economic depression. Howe therefore set about implementing some heavy-handed deflationary measures. His budget brought with it large tax increases, a reduction in borrowing by the public sector which fell from £13.5 billion to £10.5 billion (Pugh 1990, p. 347). The fear was that this would lead to high unemployment.

Mrs Thatcher could have been politically challenged at this point. A number of politicians disagreed with her stance and had they resigned they may have forced her hand. However, failure to do so emboldened Thatcher who embarked on a period of strengthening her position. She rid herself of the so-called ‘wets’ in her party, the likes of St John Stevas, Gilmour, Pym and Prior, while simultaneously promoting these close and loyal to her such as Norman Tebbit, Nigel Lawson and Cecil Parkinson. However, while the monetarist policy failed to halt Thatcher politically the economic consequences were widespread.

Britain was set for the worse economic depression for fifty years, with unemployment reaching 2.7 million. The Conservatives continued to claim their policy was intended to aid the country in the long-term. Between 1983 and 1988 Chancellor of the Exchequer, Nigel Lawson, pointed to some economic growth as proof of the success of Conservative monetarist policies. Indeed, as Pugh points out, the Conservatives could rightly point to decreased union militancy as evidence of their success in redressing the imbalance between money and labour influence. However, as Pugh also suggests, this had as much to do with the high rates of unemployment as it did of any successful government policy (Pugh 1990, p. 348).

Thatcher’s monetarist policies allowed the manufacturing industry to fall into decline. Although the period saw some expansion of service industry this was by no means enough to make up for the losses in industry. Furthermore, it sometimes exacerbated other issues. For example, as the service sector grew and demanded more use of computers the balance of trade deficit was increased as more computers were imported. Britain’s lack of a strong export sector heightened the economic decline and to protect the pound from currency speculation high interest rates were introduced.

Not all of these difficulties were clearly evident at the time, for Nigel Lawson was claiming a mini-boom in the mid-1980s. The Conservatives won elections in 1983 and 1987 despite high unemployment rates. In this respect the monetarist principle of getting people to accept unemployment and move away from notions of guaranteed employment appeared to be working. However, what expansion there was came at the expense of mounting personal debt. Martin Pugh has shown how private debt per household rose between 1980 and 1989 from £16 billion to £47 billion. In the same period borrowing on mortgages shot up from £43 billion to £235 billion (Pugh 1990, p. 350).

Lawson did not learn from previous mistakes either. The high rises in personal debt did fuel a consumer boom. Consumer booms in turn generate a feel good factor in society however it is unsustainable because of the levels of debt incurred. Furthermore, with the decline in manufacturing the demand for consumer goods had to be satiated by importing items, thus further expanding the trade deficit to new heights. Lawson then exacerbated the situation to an even greater extent. He continued to fuel the consumer boom but the economy turned down once more. Despite his protestations that this was only a temporary problem the fact remained that a second depression had been brought into effect. As Pugh explains this had substantial political repercussion:

Monetarism had long since been abandoned as unworkable, so that the government had no weapons at its disposal except for the highly destructive use of interest rates which, at 13 per cent, severely handicapped industry. The appearance of a second depression with the decade undermined all the claims made for Mrs Thatcher’s radical economic strategy… After twelve years in power Mrs Thatcher was to leave office with the economy demonstrably weaker than when she first took over (Pugh 1990, p. 351)

There is no question of economics influencing the downfall of the Conservative Party and more specifically Mrs Thatcher. The cause and effects of depression appeared to be obvious signs of a failed policy in monetarism. However, debate continues to surround the point at which it is fair to say that monetarism itself failed or was superseded by newer economic thinking. Furthermore, it should also be considered whether or not monetarism ever failed entirely of if the policy has continued in some form.

Thatcher had come to power as the world trade recession was worsening and the combination of these two economic factors was damaging as social historian Arthur Marwick explains:

In this context the Government’s determination to adhere strictly to the principles of monetarism and to ruthlessly curtail public spending had very serious repercussions. Unemployment in 1979 had eased to 5.7%. In 1980-1 it took off astronomically and by the end of 1982 had more than doubled, with a rate of 13.4 per cent, and a highest-ever number of people out of work 3,190,621 (Marwick 1990, pp. 271-2).

On these figures alone it would appear that monetarism was an ill-suited remedy to the economic difficulties. However, the Conservative government was implementing standard monetarist principles. They sought to lower taxation in an effort to reward greater free market enterprise. In direct opposition to socialist principles as much financial choice as possible was to be left with the individual. The state should, under these circumstances, take a back seat. Part of this deregulation took the form of attempting to limit the power of trade unions and channelling money into small businesses. Monetarism went hand-in-hand with de-industrialisation.

Debate and uncertainty remains over whether monetarism can be said to have failed by 1982. Despite the debatable end of Keynesianism in 1981, arguably monetarism in its simple form did not last past 1982. The 1980-2 economic crisis meant policy-makers responded with Keynesian deficit demand management. In 1982, at a time when Mexico almost defaulted, the March 1982 UK budget appeared, to some people, to present another watershed in economic planning:

To some commentators, March 1982 represented the end of the monetarist experiment. That was premature. But it was the start of the official process of unwinding the policy (Smith 1991, p. 106).

It was premature because the flirtation with monetarist principles did not end entirely. After the 1982 budget some improvements in the economy were visible. For example, inflation fell; modest recovery was noticeable although unemployment remained high. But as politics began playing into the economic equation Howe sought to woo the electorate with economic incentives in the run-up to a 1983 election. By initiating a consumer boom before the election the economic cycle had returned to one of boom and bust. It is true that the Conservatives did not manage to adhere strictly to their own spending limits and therefore appeared to be undermining their monetarist economic roots. However, Marwick argues the reality is not as clear cut as this:

But the very definite restrictions on expenditure in certain areas, the whole concept of ‘level funding’, that is to say funding that did not automatically make adjustments for inflation or pay settlements (as had been the general principle in the ‘consensus’ period), and the ready resort to high interest rates, continued to give government policy a distinct monetarist flavour (Marwick 1990, p.312).

It is perhaps therefore wrong to discard the concept of monetarism post-1982. As Howe moved to the Foreign Office to be replaced by Nigel Lawson the UK saw a brief return to rigid adherence to monetarism. If viewed in light of Marwick’s comments this should not be seen as surprising for the monetarist undertones were still prevalent. Thus, alternatively Smith proposes that the January 1985 Sterling crisis marked the changeover point from pragmatic monetarism to pragmatism (Smith 1991, p. 123).

Arguably then we can trace the rise and demise of monetarist policy and conclude, as Smith does, that a clear watershed was reached. However, an alternative discussion is purported by Bradford De Long who suggests that the New Keynesian ideas that appeared to supersede monetarism in fact actually contain many of the same elements, under a different name (Bradford De Long 2000, p. 84):

We may not all be Keynesians now, but the influence of monetarism on how we all think about macroeconomics today ahs been deep, persuasive, and subtle (Bradford De Long 2000, p. 85).

In this respect it may be incorrect to study the rise and failure of monetarism as a policy. This may be particularly incorrect if one talks only of the monetarist experiment and specifically 1979 to the early-to-mid 1980s. Monetarism did not begin in 1979 with Thatcher’s government and an analysis of it in terms of Thatcherism ignores too many other economic, global and political variables. In much the same way, if we adopt Bradford De Long’s conclusions it may be incorrect to talk of the failure of monetarism. However, as Pugh’s argument suggests it seems to be during Thatcher’s time that monetarism came to the fore of public knowledge. Arguably the peak of monetarism’s influence came in this period of the short experiment. However, the rise and fall of monetarism must take into account the wider implications outlined above to provide a more complete understanding. Furthermore, while its most public experimentation may have occurred in the 1980s this does not preclude its existence and therefore its importance in either the period before or the period after.


Online Sources

Cambridge Dictionary Online, http://dictionary.cambridge.org/define.asp?key=51549&dict=CALD, (Accessed 12th June 2005).

Wikipedia Online Encyclopaedia, http://en.wikipedia.org/wiki/Monetarism, (Accessed 11th June 2005).


Bonefeld, Werner ‘Monetarism and Crisis’, in Bonefeld, Werner and Holloway, John (eds), Global Capital, National State and the Politics of Money, (London 1995, pp. 35-68).

Bradford De Long, J, ‘The Triumph of Monetarism?’, Journal of Economic Perspectives, Vol. 14, No. 1 (Winter 2000, pp. 83-94).

Wren-Lewis, Simon, ‘Review. From Keynesianism to Monetarism: The Evolution of UK Macroeconomic Models’, The Elconomic Journal, Vol. 104, No. 428 (January 1995, pp. 203-5).


Bonefeld, Werner, The Recomposition of the British State during the 1980s, (Aldershot: 1993).

Kenway, Peter, From Keynesianism to Monetarism. The Evolution of UK Macroeconomic Models, (London: 1994).

Marwick, Arthur, British Society since 1945, (London: 1990).

Pugh, Martin, State and Society. A Social and Political History of Britain 1870-1997, (London: 1999)

Saad-Filho, Alfredo and Johnstone, Deborah (eds), Neoliberalism. A Critical Reader, London: 2004).

Smith, David, The Rise and Fall of Monetarism. The Theory and Politics of an Economic Experiment, (London: 1991).


[1] Milton Friedman was an American economist known for his promotion of laissez-faire capitalism. For a biography of the man consult the Wikipedia online encyclopaedia at: http://en.wikipedia.org/wiki/Milton_Friedman.

[2] The scheme is described thus: ‘The Bretton Woods system regulated the international deficit financing of demand on the world market on the basis of an inflationary supply of dollars to the rest of the world’ (Bonefeld 1995, p. 35). Bretton Woods was so named after the New Hampshire village where it was devised in 1944.

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