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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
Interest rates had been raised to bring prices down, and British manufacturing had shrunk more than the rest of the economy. North Sea oil was coming ashore at the same time.
The question
Nigel Lawson was Chancellor, the minister in charge of the government's money, for six years. He resigned on 26 October 1989 after a row about the pound. He wanted the pound's value fixed against the German mark, Germany's currency. Margaret Thatcher, the Prime Minister, did not. She also refused to sack the adviser Lawson wanted gone.
What you'll be able to answer
Thatcher's Economic Policy · this module is lit
Britain had struck oil in the North Sea. The country went from buying its oil abroad to selling it. The pound rose about 21% against the currencies of Britain's trading partners between the election in May 1979 and January 1981. Factory jobs fell by about 22% between 1979 and 1983.
This module follows the pound through the 1980s. It covers the oil tax money that came in and then fell away. It covers the year the government held the pound at a level the Prime Minister said it was not holding. It ends with Lawson's resignation and Britain joining the European exchange rate mechanism in 1990.
Take a guess
The same machine, still listed at 10,000 pounds, on 28 January 1981. How many German marks did the customer pay for it?
Finding oil under your own sea sounds like nothing but good news. It was not.
Britain sold more oil abroad than it bought in 1981, for the first time since the government's records began in 1890. The North Sea produced nothing in 1974. By 1984 its oil was 7.2 per cent of the value of everything the country produced.
Foreign demand for North Sea oil pushed the pound up, and high s pushed it up too. Money left in a British bank now earned more than money left elsewhere, so people abroad wanted pounds.
Foreign buyers need a country's money to pay for its oil, so more people want that currency. Before it had its own oil, the country had to swap its own money for foreign money to buy oil abroad. Once it has its own oil, it swaps less of its money away. Both changes push the currency's value up.
In May 1979, the month of the general election, a pound bought 3.94 German marks. Over the next twenty-one months, more oil came ashore and interest rates went higher.
A German customer buying a British machine listed at 10,000 pounds paid 39,450 marks for it in May 1979. The exchange rate decided that bill, and the firm in Britain had no say in it.
A British firm selling abroad is paid in somebody else's money. When the pound rises, the same foreign price changes into fewer pounds. The firm then has two choices. It can take fewer pounds for each sale. Or it can raise its foreign price and sell fewer. A firm selling only at home never faces that choice.
Source: IMF exchange rates: German marks per dollar times dollars per pound, monthly averages, averaged by quarter
For scaleA pound bought 3.91 German marks on average in January 1980 and 2.78 in December 1989.
Two things pushed the pound up in the early 1980s. The oil was one. High interest rates were the other, and both happened at the same time.
Nobody can run the 1980s twice to see what the pound would have done without the North Sea. Economists get round that by building a model of the economy and running it both ways.
Nobody can watch the same years twice. So economists build a model, a set of equations that behaves like the economy, and run it in two versions. One has the oil in it. The other does not. Everything else is held the same. The gap between the two runs is what the oil did.
The economist Charles Bean built such a model. In his model, the oil had raised the pound by 12 per cent by 1983. It had also moved workers out of making goods and into services, such as shops, banks and offices.
Factory jobs fell by about 22 per cent between the middle of 1979 and the end of 1983. Bean's model puts a figure on how much of that fall the North Sea accounts for.
Of that 22 per cent fall in factory jobs, how much does the oil account for on Bean's estimate?
For scaleIn the same model, the oil shifted jobs towards services by 2.8 per cent by 1983.
Take a guess
North Sea tax raised more in 1984-85 than in any year before it. Why had it shrunk to a small part of that by 1991-92?
In the tax year 1984-85, North Sea oil and gas paid 8.0 per cent of all the money the government took in. One industry paid about one pound in every thirteen.
The government collected North Sea money in three main ways. Oil firms paid a royalty, a fee to the government on every barrel taken out. On top of that came ordinary company tax and a tax charged on North Sea profits alone.
The peak was the tax year 1984-85, when the North Sea paid 12.0 billion pounds. No year before it had raised as much.
For scaleNorth Sea oil and gas paid 2.7 per cent of the government's income in 1979-80 and 0.4 per cent in 1991-92.
It is November 1987. All year the government has kept the pound at a set level against the German mark. No law requires this, and no minister has announced it.
If the government raises the interest rate, it cannot hold the pound at this level. A higher interest rate brings money into Britain from abroad. The people bringing that money in must buy pounds. Their buying pushes the pound's price above the level.
There are two ways, and governments usually use both. If the currency's value falls, the government can buy it, and that buying pushes the value back up. If the value rises, the government can sell it, and that selling pushes the value down. It can also change interest rates. Higher interest rates make the currency more attractive to people abroad, and lower ones make it less attractive.
The government is holding the pound just under three marks. On 4 November it cut the interest rate again, to 9 per cent. Prices are rising at 4.1 per cent a year.
The Prime Minister denies that the government is holding the pound at any level. Asked in public this month, she said there is no specific range for the pound. She said Britain is always free to let it rise or fall.
You are the government. Buyers keep pushing the pound above the level you are holding. You have never admitted to holding it. What do you do?
The government went on holding the pound at just under three German marks, and kept interest rates low enough to do it. The pound sat at around 2.98 marks for the first three weeks of January 1988.
What followedThe pound went above three marks on 7 March 1988 and reached 3.10 marks by 17 March. The Prime Minister told MPs in the House of Commons there were only two ways to stop the pound rising. One was heavy selling of pounds, which feeds inflation. The other was lower interest rates. Interest rates were cut on 17 March.
People still argue about whether that year of low interest rates caused the that followed. Both sides use the same figures.
One reading One reading blames the level the pound was held at. Holding the pound there kept interest rates lower than Britain needed for a year. Households and companies borrowed heavily at those low interest rates. On this reading, that borrowing is why the yearly rise in prices went from 4.1 per cent in November 1987 to 10.9 per cent by the autumn of 1990.
The other reading The other reading points to two other causes. The government cut taxes in the 1988 Budget, and household borrowing had been climbing for years. Loans secured on homes, such as mortgages, went from 31 per cent of household income in 1980 to 68 per cent in 1989. On this reading, borrowing and prices would have risen anyway. Holding the pound only changed when the rise came.
Nigel Lawson resigned as Chancellor on 26 October 1989, after a public row with the Prime Minister about the pound.
Lawson wanted the pound fixed against the German mark. He told Parliament that a steady exchange rate was an essential part of holding prices down. Margaret Thatcher wanted interest rates to hold prices down, and the pound left free to rise or fall.
Sir Alan Walters was Thatcher's personal economic adviser. He had written an article about the exchange rate mechanism. On 24 October, MPs in the House of Commons were told that the article called the mechanism “half-baked”. Walters resigned on the same day as Lawson.
Lawson had been Chancellor for six years and had cut the top rate of from 60 to 40 per cent. Prices were rising at 7.3 per cent in October 1989, the month he went, against 4.5 per cent two years earlier.
Lawson's resignation letter gave one reason. What was it?
For scaleLawson had held the job for six years. The Prime Minister's reply to his letter opened, “It is with the most profound regret that I received your letter”.
Britain set the pound's official level at 2.95 German marks on 8 October 1990, by joining the European exchange rate mechanism.
Britain agreed to hold the pound within six per cent of that level. The pound had been rising against the German mark since April, from 2.74. By the last trading day before Britain joined, it was already close to 2.95.
Prices were 10.9 per cent higher than a year earlier in the month Britain joined. The banks' base rate is the interest rate banks build their own interest rates on. It had stood at 15 per cent for the twelve months before Britain joined.
The banks' base rate moved with the decisions of the Bank of England, Britain's central bank. Which was higher, the day before Britain fixed the pound or the day after?
A tie counts as correct either way.
For scaleThe pound had bought over five marks at the 1981 peak. It was fixed at 2.95.
Thatcher's Economic Policy
Can you answer each one now? Tap to check.
Why did the pound rise so far between 1979 and 1981?
Why did a high pound hurt British factories?
Why did Nigel Lawson resign as Chancellor in 1989?
What happened when Britain finally fixed the pound in 1990?
Can you remember each figure? Tap to check.
The pound at its 1981 peak, in German marks, and where it was fixed in 1990
The share of a 22% fall in factory jobs that Bean's estimate puts down to the oil
North Sea tax in 1984-85, and seven years later
Where the pound was held through 1987, and when it went above that level
Why the Chancellor said he was resigning, in October 1989
The level Britain fixed the pound at, and what interest rates did that day
You met two terms in this module
,
Britain left the mechanism on 16 September 1992, two years after joining.
[1] What the oil paid for: Office for Budget Responsibility, The evolution of North Sea oil and gas receipts. Receipts reached a then record high of 12.0 billion pounds in 1984-85, and between 1984-85 and 1991-92 they fell by 91.9 per cent, to 1.0 billion. The box puts the fall down to lower oil prices, higher operating and capital costs, and the cut in the main corporation tax rate from 45 to 33 per cent. The same figures appear in the HMRC table cited as hmrcoil.
[2] How much of it was the oil: Resolution Foundation, The Thatcher legacy, reporting simulations by Charles Bean. By 1983 the oil had raised the real exchange rate by 12 per cent, shifted employment away from making things by 1.5 per cent and towards services by 2.8 per cent. The paper sets that beside the actual fall in manufacturing employment of about 22 per cent between the second quarter of 1979 and the end of 1983. Oil production went from nothing in 1974 to 2.7 per cent of national income in 1979 and 7.2 per cent by 1984.
[3] The Chancellor resigns: Margaret Thatcher Foundation, Nigel Lawson's resignation letter and the Prime Minister's reply. Lawson: 'The successful conduct of economic policy is possible only if there is, and is seen to be, full agreement between the Prime Minister and the Chancellor of the Exchequer. Recent events have confirmed that this essential requirement cannot be satisfied so long as Alan Walters remains your personal economic adviser.' Thatcher's reply opens 'It is with the most profound regret that I received your letter' and says 'There is no difference in our basic economic beliefs'. The archive page is headed 27 October and notes the exact time of issue is uncertain; Hansard fixes the resignation at 26 October.
[4] What he told the Commons: Hansard, HC Deb 26 October 1989 vol 158 and HC Deb 31 October 1989 vol 159, Lawson's resignation and his resignation speech. Howe, 26 October: 'My right hon. Friend the Member for Blaby (Mr. Lawson) has resigned as Chancellor of the Exchequer', and Walters resigned the same day. Lawson, 31 October: 'for our system of Cabinet government to work effectively, the Prime Minister of the day must appoint Ministers whom he or she trusts and then leave them to carry out the policy', and on the exchange rate 'my answer is, unhesitatingly, that it should be seen as an essential element of financial discipline'. The word 'half-baked' is attributed to Walters in the House on 24 October 1989 by John Smith, about Walters's article 'A Life Philosophy' in The American Economist; it is not verified from Walters's own text, so it is attributed to the Commons and not to Walters.
[5] The condition she set: Hansard, HC Deb 29 June 1989 vol 155, European Council (Madrid). Thatcher: 'On the exchange rate mechanism, our promise has been that we would go in when the time was right. I put conditions on that... One condition depends on us, which is that we get inflation well down, but some of the other conditions depend on the other members of the Community.' The tidy enumerated list of Madrid conditions found in secondary accounts is a reconstruction; the Madrid press conference itself contains no such list.
[6] What the Prime Minister said: Margaret Thatcher Foundation, interview for the Financial Times, 20 November 1987. Asked whether the pound was being run against the German currency, she said: There is no specific range. We are always free.
[7] Joining: Margaret Thatcher Foundation, press conference on joining the exchange rate mechanism, 5 October 1990. We would become members on Monday and I hope that they would agree to the central rate of 2.95 DM which was the one which we thought appropriate and, of course, we have a 6 per cent latitude. Interest rates are to be reduced by one percentage point on Monday.
[8] The decade in outline: House of Lords Library, The UK economy in the 1980s. High interest rates strengthened the pound by making assets held in it more attractive. The pound was also being strengthened by demand for North Sea oil, and that created significant challenges for the ability of the firms that made things to compete.
[9] Marks to the pound: Bank of England Statistical Interactive Database, series XUDLDMS (spot German mark into sterling, daily). Fetched 30 September 2026. Cited for individual daily figures only; the series is not republished here, because the Bank excludes selected exchange-rate series from its Open Government Licence. XUDLDMS gives marks to the pound: 3.9450 on 3 May 1979, 5.0127 on 28 January 1981, between 2.9094 and 2.9991 on every day from 1 April to 30 November 1987, between 2.9725 and 2.9862 from 4 to 22 January 1988, 2.9986 on 4 March 1988, 3.0445 on 7 March 1988, 3.0987 on 17 March 1988, a low of 2.7374 on 17 April 1990, 2.9482 on 5 October 1990 and 3.0253 on 8 October 1990. Monthly averages of the daily figures: 3.9062 in January 1980 and 2.7764 in December 1989. The machine priced at 10,000 pounds is 10,000 times the day's rate: 39,450 marks on 3 May 1979 and 50,127 on 28 January 1981, 27.1 per cent more.
[10] The pound against all trading partners: International Monetary Fund, Effective Exchange Rates dataset, United Kingdom nominal effective exchange rate index (NEER_IX_RY2010_ACW), monthly. Fetched 30 September 2026; IMF data may be reused with credit. The index, 2010 = 100, was 138.85 in May 1979 and 167.82 in January 1981, a rise of 20.9 per cent (167.82 divided by 138.85, less one). January 1981 is the highest month from January 1979 to December 1990; February 1981 is next at 167.81. Monthly averages only, so the module states the rise month to month, not day to day.
[11] Interest rates: Bank of England Statistical Interactive Database, series IUDBEDR (the Bank's official rate, daily) and IUMAAMIH (monthly average of four UK banks' base rates). Fetched 30 September 2026 (Open Government Licence). In this period the Bank's own rate sat one eighth of a point under the banks' base rate, so a base rate of 9 per cent shows as 8.875. IUDBEDR moved to 9.875 on 6 August 1987, 9.375 on 23 October, 8.875 on 4 November, 8.875 to 8.375 on 17 March 1988, 14.875 on 6 October 1989 and 13.875 on 8 October 1990, with no change in between the last two. IUMAAMIH gives base rates averaging 10 per cent in September 1987, 15 per cent in every month from November 1989 to September 1990, and 14 per cent in November 1990.
[12] Prices, month by month: Office for National Statistics, series CZBH, RPI all items, percentage change over 12 months (dataset MM23). Fetched 30 September 2026 (Open Government Licence) as CSV. Figures used: 21.9 per cent in May 1980, 11.7 per cent in May 1981, 4.5 per cent in October 1987, 4.1 per cent in November 1987, 7.3 per cent in October 1989, and 10.9 per cent in September and October 1990.
[13] What the North Sea paid: HM Revenue and Customs, Government revenues from UK oil and gas production, September 2025 data tables, Table 2; with Office for National Statistics series ANBT, public sector total current receipts. Fetched 30 September 2026 (Open Government Licence). Table 2 gives total net oil and gas revenue by tax year and splits it into royalty, corporation tax, petroleum revenue tax and, for two years, supplementary petroleum duty: 2,313 million pounds in 1979-80, 12,035 million in 1984-85 (the highest to that date) and 979 million in 1991-92. The share of government income divides each figure by ANBT summed over the four quarters of the same tax year (April to March): 12,035 over 151,365 is 8.0 per cent for 1984-85, about one pound in 12.6; 2,313 over 86,677 is 2.7 per cent for 1979-80; 979 over 239,422 is 0.4 per cent for 1991-92.
[14] When Britain started selling oil: Department for Energy Security and Net Zero, Crude oil and petroleum products: production, imports and exports, 1890 to 2025. Fetched 30 September 2026 (Open Government Licence). Total net exports of crude oil and oil products, in thousand tonnes, were minus 111,324 in 1974, minus 18,858 in 1979, minus 1,672 in 1980 and plus 18,205 in 1981. 1981 is the first year in the table, which starts in 1890, with net exports above zero.
[15] The pound in the Commons, March 1988: Hansard, HC Deb 8 March 1988 (Prime Minister, Engagements), 10 March 1988 (Interest Rates; Prime Minister, Engagements) and 15 March 1988 (Budget Statement: Monetary Policy; Income Tax). Read 30 September 2026 (Open Parliament Licence). On 8 March the Prime Minister, asked about the pound rising against the mark, said the only ways to deal with it were heavy intervention, which would feed inflation, or interest rates. On 10 March the Chancellor gave base rates as 9 per cent and said the government stayed committed to exchange rate stability, and a Conservative MP argued, with the Chancellor agreeing, that pressure on inflation mattered more to industry than a small rise in the pound; the Prime Minister said the market could not be bucked. On 15 March the Budget cut the top rate of income tax from 60 to 40 per cent.
[16] What leaving cost: HM Treasury minute, The cost of Black Wednesday reconsidered, 1997, released under freedom of information in February 2005, as published by the Margaret Thatcher Foundation. Crown copyright document (Open Government Licence). The Treasury's preferred assumptions put the loss at 3.3 billion pounds, measured at February 1994. Britain left the exchange rate mechanism on 16 September 1992.
[17] The episode chart: International Monetary Fund, Exchange Rates dataset (IMF.STA:ER), Germany marks per US dollar and United Kingdom US dollars per pound, monthly period averages, crossed and averaged by quarter. IMF data, reused with credit under the IMF terms of use; retrieved 1 October 2026 through the IMF SDMX API. Marks per pound are the product of the two monthly averages, then averaged by quarter. Quarterly averages smooth the daily peak: the single-day rate of 5.01 marks on 28 January 1981 sits inside a quarter that averages 4.82. Replaces the Bank of England series XUDLDMS, because the Bank excludes selected exchange-rate series from its Open Government Licence.
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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