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Privatization in the United Kingdom
Under the Thatcher Government

Political and Economic Conditions Preceding the Thatcher Government

Although there were specific events in the 1970's that led to Margaret Thatcher's emergence as the leader of the Conservative Party and its victory in the elections of 1979 the long term economic problems of the British economy stem from a history of policy errors that go back at least to the 1920's. In the nineteenth century Britain was the dominant political, military and economic power. Britain was the first country in the world to go through the Industrial Revolution. Starting in the last eighteenth century and continuing into the early part of the nineteenth the British developed the coal and iron industries and mechanized the textile manufacturing processes. James Watt's steam engine revolutionized industry.

The dynamic industrial economy enabled Britain to capture a dominant share of world trade. Although Britain lost thirteen of her North American colonies she went on to build an even more extensive empire. Although she had an empire and might easily have continued the economic policy of mercantilism she adopted the policy of free trade and promoted it around the world.

In the latter part of the nineteenth century Britain was instrumental in major countries around the world accepting the gold standard in which each countries currency represented a specified quantity of gold. The gold standard served to stabilize exchange rates and facilitated international trade.

Britain's dominance in world production and trade was lost as emerging powers such as the United States and Germany surpassed her. But Britain's economic downfall came only with the catastrophe of World War I. World War I left Britain a net creditor nation and her economy crippled, especially relative to that of the United States. During the war the gold standard was abandoned.

After the war British politicians were determined to reinstitute the gold standard. The problem was what should be the relative values of the different currencies after the economic devastations of the war. British politicians, including Winston Churchill, opted for a valuation of the pound at pre-war levels. This meant that the pound would have a value of four to five U.S. dollars, which was quite unrealistic. Nevertheless the British government did try to establish that exchange rate.

The overvaluing of the pound meant that British products were extremely high priced compared to American products for buyers outside of Britain. This drastically hurt British exports which in turn produced a severe economic recession in the mid-1920's.

There were efforts to compensate for the effect of the overvalued pound by holding down or decreasing British wage rates. This led to a general strike of British labor in 1926 which damaged the British economy even more. The Great General Strike was not successful in reversing the economic policies of the Government but it contributed to further economic problems and put a scarc into politicians of what could happen.

Instead of abandoning the overvaluation of the pound the British government continued to try to support it. One way that the monetary authorities of a country can attempt to support an exchange valuation of the currency is to raise interest rates relative to that of other countries. In the situation Britain found herself it was considered unwise to raise interest rates because it would discourage investment further worsening the recession. The British authorities came up with an alternative. If they could not raise British interest rates perhaps they could get other countries to lower their interest rates. There were authorities in the Federal Reserve System in the United States who were willing to do what they could to help the British.

The way the Federal Reserve lowered interest rates in the U.S. was to promote the growth of the money supply. The lower interest rates and the easier credit stimulated a boom in the U.S. stock market. The speculative bubble burst in October of 1929. The subsequent mismanagement of monetary policy produced a banking crisis and deflation. The deflation resulted in high real interest rates even though the nominal interest rates were low. The high real interest rates in the United States resulted in a catastrophic collapse in the investment purchases of equipment and the building of structures. In real terms the level of such investment purchases decreased ninety percent between 1929 and 1933. This was the immediate cause of the Great Depression.

Although the Great Depression started in the U.S. it spread around the world. Unemployment was high and resources were lying idle even though there was an obvious need for production. The conventional economists of the time did not have a satisfactory explanation for depressions. It was the British economist John Maynard Keynes who developed a coherent explanation for depressions and the theory of macroeconomics. Keynes prescription for ending the Depression was to increase aggregate demand for the output of a country even if that involved deficit financing. In fact, according to Keynesian analysis any effective method of increasing aggregate demand necessarily involves the government borrowing the consumer saving that businesses are not borrowing to finance investment purchases.

Keynesian theory surplanted neoclassical economic theory first in the academic world and later in policy making in governments.

In Britain coalitions of the Conservative and Labour Parties governed during the Depression years. During World War II Britons accepted central planning as necessary to cope with the needs of the war effort. Winston Churchill was prime minister during World War II and he expected a victory for his Conservative Party after the war in the election of 1946. He was disappointed, Labour won instead.

The Labour Party of Britain was originally Marxist but in the early part of the twentieth century it dropped its Marxist orientation and rhetoric but it remained ideologically committed to a socialist program of control of production by the State. This was still the orientation of the Labour Party when it came to power in 1946. Furthermore the Labour leaders and some large component of the general public thought that the planned operation of the British economy during World War II demonstrated that planning and socialism worked.

During the period of 1946 to 1950 the Labour Government did quite a bit. It brought about one fifth of the means of production into State ownership. It created the British version of the welfare state. It began the liquidation of the Empire. It participated in the creation of the North Atlantic Treaty Organization (NATO). It instituted the National Health Program of socialized medicine. It nationalized coal, iron and steel, electricity, gas, railways, canals, road transport and civil aviation. It continued price controls and rationing. One example of a fiasco the Labour government was responsible for was what was known as the Tanganyikan Groundnut Scheme. But the State budget was becoming more and more difficult to finance.

The experience of 1946 to 1951 convinced the enough of the voting public that classical socialism was not working and in the election of 1951 the Conservative Party under the leadership of Winston Churchill was returned to power. The fear of another depression led the Conservatives to accept the Keynesian concept of demand management for economic policy. The Labour Party had not given up hope of implementing a full version of classical socialism but accepted Keynesian management of the economy as a useful tool. Some felt that a type of ratchet effect was operating in British economic policy. A Labour government would gain some measure of their program and the next Conservative government would accept that measure as a fait accompli and not attempt to reverse it. By the 1960's Britain had a welfare state combined with a program of labor union rights that gave labor union leaders an unprecedented power in the economy.

The Conservative Government of 1970 to 1974 under Edward Heath was done in by labor strikes and turmoil. This government passed the Industrial Relations Act of 1973 that pre-strike balloting of union membership and mandated cooling off periods similar what was required under the U.S.'s Taft-Hartley Act. Labor leaders resented and opposed this legislation. In 1972 there was a six-week strike of coal miners which was ended only by a 22 percent wage increase. In 1973-74 the coal miners union instituted a ban on overtime work which hurt production and finally there was a shutdown of production. The short supplies of coal led to the declaration of a three-day workweek by the Government. The Conservative Government engaged in a good deal of intervention in the economy even the labor trouble. In 1971 the nationalized Rolls-Royce and heavily subsidized Upper Clyde Shipbuilders to keep them in production.

In the February 1974 general elections the Conservative Party lost seats to Labour but Labour did not achieve an absolute majority and another general election was called in October of 1974. Labour managed to settle the miners strike and the electorate gave them a slight majority in Parliament.

Conservative leaders saw labor unions as being out of control and responsible for bringing down the Heath government. The curbing of labor union power remainded high on the agenda of Conservative leaders.

Margaret Thatcher, Prime Minister of the United Kingdom

In 1975 Margaret Thatcher challenged Edward Heath for the leadership of the Conservative Party and won. She did not have the opportunity to take on the Labour Party in a national election until 1979.

The winter of 1978-79, known as the winter of discontent was a diffult time for the Labour government. There had been wide spread strikes over many issues, including a proposed government limit of wage increases to five percent. Garbage was not collected and with grave diggers on strike the dead were not buried.

Margaret Thatcher's party called for labor union reforms, less government intervention in the economy, less government spending and lower taxes. The election brought a resounding victory for the Conservative Party. Although she was harshly criticized it seems clear that the judgment of History is that her accomplishments were of heroic proportions. She was a Heroine of the the Ages. Notable among her accomplishments were:

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