The costly legacy of Margaret Thatcher’s monetarism

Post-war British economic history is littered with failed policy panaceas. Keynesian demand management would solve the unemployment problem; the Exchange Rate Mechanism would provide an anchor for stability and end sterling’s perennial weakness; the Barber and Kwarteng budgets – separated by 50 years – would throw off the shackles of Treasury orthodoxy and put the country on a path to higher growth.

On the face of it, monetarism – the theory that if you control the money supply, you control inflation – fits squarely into this paradigm. As soon as government sought to control the money supply, the historic relationship between money and inflation broke down. But partly because inflation did come down, albeit at the cost of high unemployment, and partly because its politics remains a dividing line between left and right, monetarism still represents disputed territory – the more so because of the Bank of England’s recent experiment in so-called quantitative easing.