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Thatcher's Economic Policy
Six steps, about nine minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Step 1 of 6
The government had sold state industries and let council tenants buy their homes. Rules still controlled money, mortgage lending and share dealing in London. The government turned to those rules next.
The question
In 1979 money could barely leave Britain, every share deal in London carried the same fixed charge, and households saved more than a tenth of what they earned.
What you'll be able to answer
Thatcher's Economic Policy · this module is lit
Margaret Thatcher's government removed these controls one by one. The London Stock Exchange, the market where company shares are bought and sold, gave up its old rules in a single morning in October 1986, remembered as the Big Bang. Once the limits on lending were gone, banks lent freely to ordinary households. People borrowed and spent, and that spending became a boom.
Six steps cover the rules, the morning they ended, the boom the borrowing fed, the Budget that added to it, and the interest rates that stopped it in 1989.
Take a guess
British savings could now be invested anywhere. What did that mean for the London Stock Exchange, the market where company shares are bought and sold?
There used to be a limit on how much money anyone could take out of the country. Then there was not.
In October 1979 the government scrapped exchange controls: the rules that had limited moving money out of Britain for forty years.
Until then, British savings mostly had to stay in Britain. From that month they could be invested anywhere in the world, New York included.
Billions of pounds moved abroad in the months that followed, far more than the controls had ever allowed. Much of that money went into foreign companies and foreign markets.
Britain's financial markets now had to compete to keep money, or watch it leave.
For scaleThe controls had stood for forty years, since the Second World War.
On 27 October 1986 the Stock Exchange dropped its two oldest rules in one morning, a change remembered as the Big Bang.
The first rule fixed the charge on every deal. None of the member firms allowed to trade there could charge less. The second rule split two jobs. Brokers took customers' orders, s set the share prices, and no firm could do both.
The Stock Exchange's members all charged the same fixed fee for every deal, so no member could undercut another. The fixed fees worked while big investors had nowhere else to trade. From 1979 they could trade in New York instead, where fees were no longer fixed and were lower for big deals. Every year more business went abroad. The Exchange could keep its rules or keep the business, and it could not do both.
The government and the Exchange had agreed the 1986 date three years earlier. The government had taken the Exchange to court over its rules, arguing that they blocked competition. In 1983 the two sides settled.
The government had taken the Stock Exchange to court over its rules. What did the government get in return for dropping the case?
For scaleThe fixed charges had held since the nineteenth century; they went in a day.
Take a guess
Within weeks of the Big Bang, what happened to the Stock Exchange's trading floor?
The Stock Exchange's old rules were gone, and within weeks its trading floor was nearly empty. The floor was the room where dealers met to trade face to face. The dealing had moved to computer screens in the firms' own offices.
Competition arrived just as fast: before the change, 13 firms set share prices. After it, 31 firms did. Each one showed its prices on screen and dealt at those prices. The value of shares traded each day rose 21 per cent.
The Stock Exchange had another rule: outside firms could not own member firms. That ban also ended on 27 October 1986. Foreign banks bought many of the member firms.
For scaleThe number of firms setting share prices went from 13 to 31.
Take a guess
Households saved 13.7p of every pound of income in 1980. How much were they saving by 1988?
British households saved less and less through the 1980s. In 1980 they saved 13.7p of every pound of income.
Before the 1980s, rules limited how much banks could lend to households. Those rules were removed during the 1980s. Banks and building societies (lenders that mainly offer mortgages) then competed to lend, and borrowing became easy for millions.
Households saved less and borrowed more. In 1987 and 1988 their borrowing rose far faster than their pay. Much of it went on houses, and house prices more than doubled over the decade.
Source: ONS, households' and NPISH saving ratio (NRJS)
For scaleHouseholds still saved 9.4p in the pound in 1987. The fall was getting faster.
It is Budget day, March 1988, and you are the Chancellor, the minister in charge of tax and spending. The economy is growing fast and the government's is in surplus: it collects more in tax than it spends.
You have cut taxes in earlier Budgets, and you believe those cuts are why the economy is growing fast. The surplus gives you room to cut further. The worry is that people are already borrowing and spending freely.
Prices rose 3.4 per cent in 1986, the lowest pace for a generation. They are rising only a little faster now. Borrowing and spending are climbing fast, and that usually pushes prices up later.
You are the Chancellor. The economy is booming and the Budget is in surplus. You believe your tax cuts made the economy grow. What do you do?
In the Budget of 15 March 1988, the Chancellor, Nigel Lawson, abolished every rate above 40 per cent. He cut the basic tax rate to 25 per cent. When pay rises with prices, people pay more tax unless the tax rules are adjusted to match. The law already required the tax rules to be adjusted for prices every year. These tax cuts lowered the government's tax income by 4.5 billion pounds more than that yearly adjustment did.
What followedLawson announced the Budget in a speech to Parliament. Members of Parliament shouted in the chamber, the room where they meet and debate. The shouting stopped the speech, and the sitting was paused from 5.01 to 5.11 pm until order returned. The cuts went through. They left people with billions of pounds more to spend, when the boom was already at its height.
Within two years prices were rising fast again. The rate was 3.4 per cent in 1986, 7.8 per cent in 1989 and 9.5 per cent in 1990.
Stopping the boom took s of 15 per cent, reached on 5 October 1989.
When millions of people borrow and spend at once, shops and builders cannot keep up. When shops and builders cannot keep up, prices rise faster. The government's tool against rising prices is the interest rate: making borrowing more expensive until spending slows. People had borrowed heavily while the boom grew. The more they had borrowed, the higher the interest rate had to go before they cut back. By October 1989 the interest rate had to reach 15 per cent.
Mortgage payments rose and fell with the interest rate. So every mortgage taken out in the 1980s now cost more each month, and spending slowed as borrowing got more expensive.
The interest rate had stood at 7.5 per cent in 1988, so the cost of borrowing doubled in a year. Prices were rising 7.8 per cent a year by 1989, against 3.4 per cent in 1986, and they were still speeding up.
The government that had freed borrowing in the early 1980s spent the decade's last years making it expensive again.
Inflation was 3.4 per cent in 1986, the decade's low point. By 1990, was it higher or lower?
A tie counts as correct either way.
For scaleInterest rates went from 7.5 per cent in 1988 to 15 per cent in October 1989 to stop the boom.
Thatcher's Economic Policy
Can you answer each one now? Tap to check.
Why did the Stock Exchange give up its old rules?
What changed in London's share market on the day of the Big Bang?
What caused the boom at the end of the decade, and what stopped it?
Can you remember each figure? Tap to check.
Exchange controls scrapped
The Big Bang
Dealing gone from the trading floor by December 1986
What households saved, 1980 and 1988
The 1988
Inflation, 1986 and 1990
You met four terms in this module
, , ,
Exchange controls ended in 1979. By 1990 inflation was 9.5 per cent, and the fight against rising prices had begun again.
[1] The controls scrapped in 1979: Bank of England Quarterly Bulletin 1981, The effects of exchange control abolition on capital flows. Exchange controls were abolished in October 1979, ending forty years of limits on moving money out of Britain; the article records the outward portfolio flows that followed (p.369, Tables A and B).
[2] The deal, the day and the new City: Bank of England Quarterly Bulletin 1987, Change in The Stock Exchange and regulation of the City. The Stock Exchange's reform of 27 October 1986: the end of fixed commissions and of the compulsory separation of brokers from jobbers, agreed in 1983 in return for the government dropping its restrictive-practices court case against the Exchange's rulebook. Before the change 13 jobbing firms made markets; after it 31 firms did. By December perhaps 95% of business had left the trading floor, and daily turnover was up 21% (pp.54-60).
[3] What households saved: ONS, households' saving ratio, series NRJS. The saving ratio was 13.7% in 1980, 9.4% in 1987 and 7.8% in 1988.
[4] What households borrowed: Bank of England Quarterly Bulletin 1998 Q3, the personal sector in the 1980s and 1990s. Charts 4 and 8: personal borrowing surged relative to income in 1987-88, mirrored in the fall in the saving ratio. House prices rose 131% (Halifax measure) between 1981 Q1 and 1990 Q2, per the 1998 Q2 article used in module 8.
[5] What the 1988 Budget gave away: Nigel Lawson, Budget speech, 15 March 1988, Thatcher Foundation document 111449. The Budget's measures 'will cost £4.5 billion in 1988-89 over and above statutory indexation', which the module states as 4.5 billion pounds more than simply keeping pace with rising prices.
[6] The Commons suspended: Hansard, HC Deb 15 March 1988, Budget Statement, cols 1012-1013. Lawson, col 1012: 'I propose to abolish all the higher rates of tax above 40 per cent.' Col 1013: 'a basic rate of 25 per cent. and a single higher rate of 40 per cent.' Then the procedural entry, col 1013: 'Grave disorder having arisen in the House, MR. DEPUTY SPEAKER, pursuant to Standing Order No. 45... suspended the sitting' (5.01 to 5.11 pm).
[7] Where interest rates went: Bank of England Quarterly Bulletin 1989 Q4, Operation of monetary policy. Interest rates rose to 15% on 5 October 1989 (p.495). The Resolution Foundation's account: base rates were raised from 7.5% in 1988 to 15% in 1989.
[8] What inflation did: ONS, RPI annual inflation, series CZBH. Inflation was 3.4% in 1986, 7.8% in 1989 and 9.5% in 1990.
[9] The boom, judged afterwards: Resolution Foundation, The Thatcher legacy. Easy credit became an important driver of Britain's low household saving; tax was cut in 1986 and again in later years while the economy was already growing fast; base rates were raised from 7.5% in 1988 to 15% in 1989 to stop the boom.
[10] The episode chart: ONS series NRJS, households' and non-profit institutions' saving ratio, annual. Open Government Licence v3.0. Retrieved 30 September 2026. The current vintage gives 13.8 for 1980, against the 13.7 the module quotes from an earlier release; 1988 is 7.8 in both.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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