Origins and Implementation

The apparent failure of the post-war Keynesian economic settlement on both sides of the Atlantic during the 1970s meant that the Thatcher and Reagan administrations together sought an alternative economic paradigm to reverse stagflation. Thatcher and Reagan argued that their monetary policy would address the crippling levels of inflation, which were preventing real economic growth. Monetarism, the economic theory espoused by the Nobel Laureate Milton Friedman, was viewed as the necessary policy prescription. Indeed, Thatcher’s early dogmatic persistence with her monetary policy, and Reagan’s support for the monetary policy implemented by Paul Volcker, Chairman of the Federal Reserve System (the Fed), defined the period. In short, monetarists argue that inflation is caused by an uncontrolled increase in the money supply. ‘Monetarist’ policies are typically associated with high interest rates. For instance, interest rates were the blunt instrument utilised by the Thatcher government to control the money supply. In the United States, interest rates were the result of monetary-based control (MBC), which sought to control the quantity of available bank reserves. ‘Monetarism’ lent itself as a label to describe an extraordinarily difficult period for the Thatcher and Reagan administrations.