Thatcher's First Term: Monetarism and the Falklands 1979–1983

Margaret Thatcher's election on 3 May 1979 is widely regarded as a watershed in post-war British history. She came to power with a programme that explicitly repudiated the post-war consensus: monetarism would replace Keynesianism; market forces would replace state intervention; individual responsibility would replace collective provision. Yet her first term was characterised by severe recession, soaring unemployment, and the political salvation provided by the Falklands War.

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Thatcher's Background and Ideology

Key Fact	Detail
Background	Born Margaret Roberts in Grantham, 1925; daughter of Alfred Roberts, a grocer and local councillor; grammar school and Oxford (chemistry, then law); MP for Finchley from 1959
Ideological influences	Friedrich Hayek (The Road to Serfdom, 1944); Milton Friedman (monetarism); Keith Joseph (who founded the Centre for Policy Studies in 1974); the Institute of Economic Affairs
Leadership	Defeated Heath for the Conservative leadership in February 1975 — the first woman to lead a major British political party

Key Ideological Principles

Principle	Detail
Monetarism	Controlling the money supply (not fiscal policy) was the key to controlling inflation
Reduced state intervention	The state should withdraw from industry, housing, and welfare where possible
Sound money	Balanced budgets, reduced public borrowing, low inflation as the overriding priority
Individual responsibility	Thatcher rejected the concept of "society" as an organising principle — "There is no such thing as society. There are individual men and women and there are families" (1987 interview with Woman's Own)
Strong defence	Committed to NATO, the nuclear deterrent, and robust resistance to Soviet expansionism

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The 1981 Budget and Economic Crisis

Sir Geoffrey Howe's Budgets

Budget	Key Measures
1979	Cut top rate of income tax from 83% to 60%; raised VAT from 8% (12.5% on luxury goods) to a single rate of 15%; began tightening monetary policy
1980	Medium Term Financial Strategy (MTFS) — set targets for reducing the growth of the money supply (Sterling M3) and the Public Sector Borrowing Requirement (PSBR) over four years
1981	Raised taxes during a recession — the most controversial budget of the Thatcher era. 364 economists wrote to The Times denouncing the policy as economically illiterate. The budget raised taxes by £4 billion (equivalent to approximately 2% of GDP) while the economy was contracting

The Recession

Indicator	Data
Unemployment	Rose from 1.3 million (5.3%) in May 1979 to over 3 million (12.5%) by January 1982 — the highest since the 1930s. It remained above 3 million until 1986
Manufacturing	Manufacturing output fell by approximately 15% between 1979 and 1981 — a catastrophic decline. Entire industrial communities were devastated
Inflation	Initially rose (from 10.3% in May 1979 to 21.9% in May 1980, partly due to the VAT increase), but fell steadily thereafter — reaching 3.7% by May 1983
Interest rates	The Minimum Lending Rate reached 17% in November 1979 — devastating for mortgage holders and businesses

The 1981 Riots