The Prime Minister, Margaret Thatcher, believed the Budget’s critics had got it wrong. Far from being deflationary, reducing Government borrowing would precipitate a fall in interest rates and a reduction in sterling’s overvalued exchange rate.50 In the short term this proved accurate, with interest rates falling 2 per cent, to 12 per cent, the day after the Budget. By October, though, it was a run on the pound that caused nervousness, and interest rates were hiked back up to a crippling 16 per cent.
At the end of March, 364 economists sent a letter to The Times denouncing monetarism. The signatories included seventy-six present or past professors and five former chief economic advisers to the Government. It was the idea of two Cambridge professors, Frank Hahn and Robert Nield, and academics at thirty-six universities appended their names. Although it became famous as the ‘Letter to The Times’, the newspaper almost squandered it. David Blake wrote up the story, but its front-page position was anything but prominent and much of it was continued fifteen pages on in the business news section. By the time it attracted a leader article, the following day, it had been downgraded by the altogether more dramatic story of the assassination attempt on President Reagan.
But the letter was important, not only as a counterblast of the learned and eminent against the Government’s economic policy but also as a measure of the culture clash between those now in power and the academic community whose stipends were about to be cut. The letter did give grounds for ambiguity. It claimed there was ‘no basis in economic theory or supporting evidence for the Government’s belief that by deflating demand they will bring inflation permanently under control’ or, as a consequence, bring about an economic recovery. In ignoring the alternatives to monetarism, ‘Present polices will deepen the depression’.51
When the leading article ‘An Avalanche of Economists’ appeared, it was somewhat more circumspect. It avoided explicitly endorsing the round-robin letter but made clear The Times believed the Treasury’s fixation with Sterling M3 concentrated minds upon too narrow a measure of the money supply. Rather, there was now a need for controlled reflation rather than further deflation.52 The monetarist response appeared in the business pages in an article by Patrick Minford, Professor of Economics at Liverpool University. His article so pleased the Prime Minister that she wrote to congratulate him.53 Suspecting the 364s’ ‘apparently political ends’, Minford claimed they were more Keynesian than Keynes: Keynes had supported reflation in 1932 when there was sub-zero inflation and less than 1 per cent money supply growth. He had thus advocated price stability. But the public sector borrowing requirement for 1980–81 was an inflationary 4 per cent. Consequently, reducing the PSBR would create the structure for the sort of price stability Keynes had in mind. Recent history suggested incomes policies were not an effective alternative. What was more, Minford even maintained ‘there is no evidence that those with sound long-term prospects are going to the wall’ since ‘the stock market is now increasing the capitalization of even the hardest hit sectors’.54 Nigel Lawson later wrote of the 364 economists, ‘Their timing was exquisite. The economy embarked on a prolonged phase of vigorous growth almost from the moment the letter was published’.55 This may have surprised the still swelling ranks of the unemployed, but it was true, nonetheless. The standard measure of national output, gross domestic product (GDP), reached its bottom in the first quarter of 1981, at the very moment when the massed ranks of academia staked their reputations to the statement ‘present policies will deepen the depression’.
The end of fixed exchange rates in 1972 had freed governments from the necessity of manipulating their balance of payments to stay in check in order to uphold the exchange rate parity. This liberty permitted running up a persistent budget deficit as a means to stimulate demand and fund the welfare benefits of those for whom there remained no demand. But easing discipline in this way quickly drove western governments onto a road to ruin and by the late seventies Whitehall was desperately trying to rein back the PSBR’s share of GDP. The squeeze applied by the Thatcher Government’s high interest rate policy also had the effect of pushing up the exchange rate because high rates of interest made it attractive for ‘forex’ traders to buy sterling. At a time when North Sea oil revenues were already giving the pound the credentials of a petrocurrency, the resulting high exchange rate made exports yet more uncompetitive. During 1981, The Times became increasingly hostile to the notion that the Government, obsessed by its monetary targets, should have no view on what the appropriate exchange rate should be. In July, a leader column, ‘The Price of Floating’, attacked the whole post-1972 free-for-all. Railing against ‘the ideology of do-nothing monetarism’ with its exclusive focus on combating inflation, the editorial maintained that since ‘it is doubtful if a sensible exchange rate policy can be maintained unilaterally’ it was necessary to restore international cooperation.56
Supporting calls for new world central banking institutions to curb the supposed excesses of the foreign exchange markets, Evans wrote a leading article claiming, ‘our fortunes and our prospects have been devastated’ by ‘the experiment with floating rates and the stupendous growth of international mobile funds’. There was ‘a currency casino’ in operation when ‘on the world market the average trading volume in currency is now some 70,000 million dollars a day, a volume by which the global trade in goods, services and investment is insignificant’. The leader article mentioned Enoch Powell and Samuel Brittan among the false prophets who had preached floating as a means of ridding the country of its balance of payments problems. In fact, Peter Jay had penned an influential four column Times leader article in September 1976 advocating monetarism and a ‘cleanly’ floating currency only days before he had drafted the speech his father-in-law, James Callaghan, delivered to the Labour Party conference denouncing reflationary politics – a turning point in the country’s affairs. But in July 1981, The Times renounced its own former position with the excuse that ‘the beginning of wisdom is the admission of error’ (unfortunately the ‘i’ was missing from the word ‘is’ when the sentence was printed).57
Margaret Thatcher had told the 1980 Conservative Party conference, ‘You turn if you want; the lady’s not for turning.’ With Evans at the steering wheel, The Times now made clear it was performing a very public U-turn. It marked the 1981 party conference debate on economic policy with a damning analysis of monetarism by James Tobin, the Yale professor who had the previous day been named as the winner of the 1981 Nobel Prize for Economics.58
‘Three million unemployed and still more to come’ was the front-page headline for Melvyn Westlake’s report that one in eight of the workforce was without a job and that the figure – which excluded a third of a million more on special employment and training schemes – was likely to keep rising at least until 1983. This proved an optimistic forecast. The accompanying leader column concluded that with output below its 1974 level and the national fabric fragmenting:
It is devastatingly clear that Britain needs massive investment, private and public, to restore its competitive strength … The Europeans are valiantly trying to create a pool of lower interest rates