Economic history · Thatcher's Economic Policy
What Thatcher Inherited
Nine steps, about fourteen minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Did the unions bring the country to its knees, or were they blamed for a mess they did not make?
Margaret Thatcher won three general elections, and the argument about what her governments did has lasted ever since. Her governments changed the economy in ways that explain both.
But none of it makes sense without the thirty-five years before it, when both main parties ran Britain the same way and mostly agreed about it. This module is about what that was, why it worked for so long, and the winter it stopped working, from 1945 to 1979.
It ends in the winter of 1978 to 1979, which is where the argument about Thatcher starts.
What this module covers
- The promise made in 1944 that both parties kept for thirty-five years
- Why it worked, and how much better off it made people
- What stagflation was, and why it broke the method rather than only strained it
- The winter of discontent, and what was left to try afterwards
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
- [1] Hansard, Commons, 21 June 1944, Employment Policy
- The 1944 commitment. Ernest Bevin, Minister of Labour, moving the motion: the government accepts "the maintenance of a high and stable level of employment after the war" as "one of their primary aims and responsibilities", and "we are turning our back, finally, on past doctrines and past conceptions". Open the source
- [2] House of Lords Library, The UK economy in the 1960s
- The 1960s. Unemployment 2.1% in 1960, rising to 3.5% by 1969, which it calls a post-war high. Growth averaging 3.5% a year. Real disposable household income per head 25% greater by the end of the decade than at the start. Open the source
- [3] House of Lords Library, The UK economy in the 1970s
- The 1970s. Table 1: 1974 inflation 16.0%, unemployment 3.6%, growth minus 2.5%; 1975 inflation 24.2%, unemployment 4.5%, growth minus 1.5%. Working days lost 2.8m in 1967, 11.0m in 1970, 23.9m by 1972. The loan from the International Monetary Fund, January 1977. Open the source
- [4] ONS series MGSX, unemployment rate, aged 16 and over, seasonally adjusted
- Unemployment. 5.4% in 1979. This ONS series is used throughout the modules in preference to the claimant count, which was redefined repeatedly during the 1980s. Open the source
- [5] ONS series BBFW, labour disputes, working days lost, United Kingdom
- Strikes. Thousands of days: 2,772 in 1967, 10,980 in 1970, 23,909 in 1972, 3,284 in 1976, 9,405 in 1978 and 29,474 in 1979, the highest year since 1926. Every strike figure comes from it. NOTE, 16 August: 29.5 million is the CALENDAR YEAR, not the winter of discontent. The winter began in December 1978 and 1978's whole-year total was 9.4 million; the biggest single month of 1979 for days lost was September, after the winter was over. The pair labels below say the year and not the event for that reason. The 1990 figure belongs to module 5 and is not stated here. Open the source
- [6] ONS series CZBH, Retail Prices Index, all items, twelve-month rate
- Inflation. 24.2% in 1975, 10.3% in May 1979. Inflation always means the twelve-month change in the Retail Prices Index, which is the measure the governments of the day used and the one the ONS still publishes. Open the source
- [7] London Museum, What was the Winter of Discontent, 1978 to 1979?
- The winter of discontent. With inflation at 8% in 1978, "a capped 5% increase on wages would mean workers would still get less for their money. Essentially, it would be a pay cut." The striking public service workers were already low paid and were asking for a £60-a-week minimum. Open the source
- [8] ONS series IHYP, gross domestic product, year on year
- Output. The economy shrank in 1974 and again in 1975, and shrank again in 1980 and 1981. Open the source
Step 1 of 9
The promise both parties made
We are turning our back, finally, on past doctrines and past conceptions.
Governments make promises that last longer than they do. One made near the end of the war shaped everything that came after.
Ernest Bevin told the Commons in June 1944 that the government accepted “a high and stable level of employment” as one of its primary aims. He was Minister of Labour in the wartime coalition.
Britain came out of the Second World War determined not to go back to the 1930s. That decade had put so many people out of work that no government after 1945 would risk repeating it, whatever the cost of avoiding it elsewhere.
Every government of either party held to that until 1979. The state owned the coal, the railways, the steel and the telephones, and leaders sat in on the decisions about all four.
The politicians who promised this in 1944 had lived through the 1930s, when unemployment stayed high for most of a decade and no recovery came. A firm keeps the staff its orders need. When people stop buying, the orders go, the jobs go with them, and the people who lose the jobs buy less still. The way out they settled on was for a government to do the buying instead, borrowing money that people were sitting on rather than spending. Somebody has to be employed to build the roads and houses, and those people spend their wages, which is how the orders come back.
- trade union
- An organisation of workers that bargains with employers over pay and conditions on behalf of its members, rather than each worker bargaining alone.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
In the 1930s, at the worst of it, what share of the British workforce was out of work?
For scale. It has never been close to that since. The worst year of the 1980s was not much more than half of it, and the worst of the last thirty years was under 9%.
It worked, for twenty-five years
In 1960 was 2.1%, and Britain had close to as many jobs as there were people to do them.
Full employment was the first test a government of this period was judged on. Work was easy to find in the 1950s and the 1960s, and both parties took the credit for it.
Unemployment drifted up through the 1960s and reached 3.5% by 1969, the highest it had been since the war.
- unemployment
- The number of people who want paid work and cannot find it, usually given as a share of all those working or looking for work. People who are not looking are not counted, so the figure understates how many are out of work.
Unemployment was 2.1% in 1960. What was it in 1979?
For scale. 3.5% was called a post-war high at the time. By 1979 that had been passed, and it went on rising for five years after that.
And people got better off
The economy grew by 3.5% a year on average across the 1960s, and households felt it in what they could buy.
That way of running the economy lasted thirty-five years because people were better off at the end of each decade than at the start of it. Full employment alone would not have kept it popular.
The measure of being better off is real disposable household income per head, which is what a household has left to spend after tax, counted .
Growth of that kind, year after year, is what made the promise of 1944 look like something a government could go on keeping.
- in real terms
- A figure adjusted for inflation, so that a rise means more was actually bought rather than that prices went up. Comparing two years without doing this compares two different pounds.
By how much did the average household have more to spend by the end of the 1960s than at the start?
For scale. Across the same decade unemployment stayed between 2.1% and 3.5%, and the economy grew by 3.5% a year.
Prices ran out of control
The oil-producing countries raised the price of oil to four times what it had been at the end of 1973, and British prices followed.
That cost worked its way through everything Britain made and moved. A country that buys its energy abroad pays the higher price on every delivery, every furnace and every plastic part.
Prices then rose in the middle of the 1970s at a speed Britain had not seen outside a war, and the worst single year was 1975.
In its worst year, how fast were British prices rising?
For scale. The Bank of England now aims for 2% a year. In the whole of the twenty-first century, British inflation has passed 10% once.
Both at once, which was not supposed to happen
In 1975 prices rose by 24.2%, unemployment rose to 4.5%, and the economy shrank.
Britain had lived with fast-rising prices before and had a familiar answer for them. The 1970s brought something new, which was .
Economic theory had long seen inflation and unemployment as a trade-off: higher unemployment usually meant lower inflation, and the other way round. When work is plentiful, employers bid against each other for staff and pay rises. Wages are most firms' biggest cost, and firms charge more to cover them. When fewer are in work that bidding stops and prices settle. A government that spends more puts more people to work. So it could pick its spot on the trade-off, accepting faster price rises for lower unemployment. In the 1970s both went the wrong way at once, and there was nothing left to trade.
The economy had shrunk the year before as well, so 1975 was the second year running of falling output and rising prices together.
Prices and unemployment rising together broke the assumption both parties had governed on, which was that a government could have less of one by accepting more of the other.
- stagflation
- Prices rising fast at the same time as the economy stops growing and unemployment climbs. It was thought impossible before the 1970s, because the usual assumption was that the two moved in opposite directions.
Why did prices and unemployment rising together break the method governments had been using?
For scale. In 1974 prices rose 16.0% and unemployment was 3.6%. In 1975 prices rose 24.2% and unemployment stood at 4.5%. Both got worse together.
Bargaining over pay, and the strikes
Labour and the Conservatives answered rising prices the same way: they sat down with the unions and agreed a .
Each limit held for a year or two and then broke. Holding prices down depended on these limits, so the next government agreed another one.
There is no single reason, and the reasons differed from one attempt to the next. Three that the record supports:
- The limits ran below the rise in prices, so keeping to one meant a cut in what a wage actually bought. By 1978 prices were rising at about 8% and the limit was 5%, the third year running that pay had fallen behind. A limit breaks when workers stop accepting it and employers pay above it rather than lose the work.
- The workers who struck hardest in 1978 and 1979 were the low paid in public services, asking for a minimum of £60 a week rather than a percentage. A limit set as a percentage gives least to those who start with least.
- The deal was national, the bargaining was not. Union leaders signed for the whole country, and pay itself was settled factory by factory, where neither they nor the government did the signing. Once one group with the power to stop production won a rise above the limit, other groups felt cheated and followed its example.
Four of those agreements broke between 1964 and 1979. Workers pressed for the rises they had gone without each time, and the way to press was to stop working.
- pay limit
- A cap on how fast wages may rise, agreed between a government, employers and unions or imposed by law, used to slow price rises without putting people out of work.
Put these years in order by working days lost to strikes, most first.
For scale. At the other end, 1976 lost 3.3 million days, and in a normal year now the figure is under half a million.
The last pay limit
By the autumn of 1978 the government had held pay down for three years with the agreement of the union leaders. It asked for one more year.
Each of those years had cost union members something. Pay rose more slowly than prices in 1976 and again in 1977, and the leaders signed for both.
Prices were rising at about 8% by the autumn of 1978. The limit the government wanted was a figure below that, agreed before the winter.
Prices were rising at about 8% when the limit was set. What did the government ask people to hold their pay rises to?
For scale. Prices had risen 24.2% three years earlier, so any limit in single figures was a large change of gear.
The winter of discontent
A capped 5% increase on wages would mean workers would still get less for their money.
Lorry drivers, hospital porters and refuse collectors all stopped work through the winter of 1978 to 1979.
One union after another refused the fourth year and went after its own claim instead. The strikes spread across the public services and ran on into the spring.
The Labour government lost a vote of confidence in March 1979, which is a vote on whether it still had the support of the Commons to govern. Losing that vote forced an election, and Labour lost the election in May.
Working days lost to strikes. Which was worse, this winter or the miners' strike five years later?
A tie counts as correct either way.
For scale. Both are whole calendar years. In a normal year now the figure is under half a million.
You have run out of the usual answers
It is May 1979 and you have just taken office. Britain has tried to hold prices down since the war by agreeing pay limits with the unions.
Every one of those agreements failed the same way. The deal held while it was new, members' pay fell behind prices, and the union that broke first got the rise.
The method has failed four times in fifteen years, the last over the winter just past. Neither party has another that has been tried and worked.
The country had run out of the answer it had used since the war, and the winter just past was the fourth time that answer had broken.
- interest rate
- The price of borrowing money, given as a percentage of the amount borrowed each year. The Bank of England sets one rate that acts as a floor under the rest, so when it moves, mortgages, loans and savings rates move with it.
- International Monetary Fund
- A body funded by its member governments that lends to countries which cannot borrow enough elsewhere. It attaches conditions to what it lends, usually about what the borrowing government may spend.
- public spending
- Everything the state pays for: health, schools, defence, benefits, pensions and the interest on what it has already borrowed.
- government borrowing
- What the state spends in a year beyond what it raises in tax, made up by selling bonds. It rises on its own in a downturn, because tax receipts fall as incomes fall and benefit payments rise as people lose work.
- output
- How much an economy actually produces, in goods and in services. It is the thing growth measures the change in, and the thing a recession is a fall in.
You are the new government. How do you get prices under control?
The government elected in May 1979 stopped trying to bargain over pay altogether. It set out instead to reduce how much was spent in the economy, using interest rates and its own borrowing. It said in advance that it would not turn back when the cost arrived.
What followedThe cost arrived first, and it arrived in work. How large it was, and how long it lasted, is where the next module begins.
Whether there was a cheaper way of getting the same result is still open to debate.
One reading One reading of the record is that four pay policies failed in fifteen years, so no fifth attempt would have held either.
The other reading The other reading is that no fifth pay limit was ever tried, so the case against a fifth pay limit rests on the four that came before it and on nothing else.
Module 1 of 13 in Thatcher's Economic Policy
What this module covered
Out of work at the worst of the 1930s, which is why the promise was made
about 20%in 1960, and what it had become by 1979
2.1% to 5.4%How much better off a household was by the end of the 1960s
25%Inflation in its worst year
24.2% in 1975Why prices and rising together broke the method
the trade-off was goneWorking days lost to strikes, 1967 to 1979
2.8m to 29.5mThe the unions refused in 1978
5%Working days lost in 1979
29.5m, the worst since 1926What was left to try
reduce spending, not bargain over payYou met five terms in this module
, , , ,
- trade union
- An organisation of workers that bargains with employers over pay and conditions on behalf of its members, rather than each worker bargaining alone.
- unemployment
- The number of people who want paid work and cannot find it, usually given as a share of all those working or looking for work. People who are not looking are not counted, so the figure understates how many are out of work.
- in real terms
- A figure adjusted for inflation, so that a rise means more was actually bought rather than that prices went up. Comparing two years without doing this compares two different pounds.
- stagflation
- Prices rising fast at the same time as the economy stops growing and unemployment climbs. It was thought impossible before the 1970s, because the usual assumption was that the two moved in opposite directions.
- pay limit
- A cap on how fast wages may rise, agreed between a government, employers and unions or imposed by law, used to slow price rises without putting people out of work.
Take it further
Where every figure came from
[1] The 1944 commitment: Hansard, Commons, 21 June 1944, Employment Policy. Ernest Bevin, Minister of Labour, moving the motion: the government accepts "the maintenance of a high and stable level of employment after the war" as "one of their primary aims and responsibilities", and "we are turning our back, finally, on past doctrines and past conceptions".
[2] The 1960s: House of Lords Library, The UK economy in the 1960s. Unemployment 2.1% in 1960, rising to 3.5% by 1969, which it calls a post-war high. Growth averaging 3.5% a year. Real disposable household income per head 25% greater by the end of the decade than at the start.
[3] The 1970s: House of Lords Library, The UK economy in the 1970s. Table 1: 1974 inflation 16.0%, unemployment 3.6%, growth minus 2.5%; 1975 inflation 24.2%, unemployment 4.5%, growth minus 1.5%. Working days lost 2.8m in 1967, 11.0m in 1970, 23.9m by 1972. The loan from the International Monetary Fund, January 1977.
[4] Unemployment: ONS series MGSX, unemployment rate, aged 16 and over, seasonally adjusted. 5.4% in 1979. This ONS series is used throughout the modules in preference to the claimant count, which was redefined repeatedly during the 1980s.
[5] Strikes: ONS series BBFW, labour disputes, working days lost, United Kingdom. Thousands of days: 2,772 in 1967, 10,980 in 1970, 23,909 in 1972, 3,284 in 1976, 9,405 in 1978 and 29,474 in 1979, the highest year since 1926. Every strike figure comes from it. NOTE, 16 August: 29.5 million is the CALENDAR YEAR, not the winter of discontent. The winter began in December 1978 and 1978's whole-year total was 9.4 million; the biggest single month of 1979 for days lost was September, after the winter was over. The pair labels below say the year and not the event for that reason. The 1990 figure belongs to module 5 and is not stated here.
[6] Inflation: ONS series CZBH, Retail Prices Index, all items, twelve-month rate. 24.2% in 1975, 10.3% in May 1979. Inflation always means the twelve-month change in the Retail Prices Index, which is the measure the governments of the day used and the one the ONS still publishes.
[7] The winter of discontent: London Museum, What was the Winter of Discontent, 1978 to 1979?. With inflation at 8% in 1978, "a capped 5% increase on wages would mean workers would still get less for their money. Essentially, it would be a pay cut." The striking public service workers were already low paid and were asking for a £60-a-week minimum.
[8] Output: ONS series IHYP, gross domestic product, year on year. The economy shrank in 1974 and again in 1975, and shrank again in 1980 and 1981.
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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