The Sterling Policy and Thatcherism in the UK
How did Thatcherism deal with Britain’s decline after WWII?
One of the long-term themes of British foreign policy in the 20th century was “decline management”. There are two main issues in order to understand it: the sterling policy and the significance of Thatcherism regarding the management of decline.
It is, therefore, essential to explain first what the sterling policy is, namely the British leadership’s commitment to defend the pound sterling. And then look at the major impacts of sterling policy in two key areas of British foreign policy: imperial relations and British engagement with Europe. Only then can one appreciate how Thatcherism dealt with British decline.
Thatcherism provided first a psychological engine that allowed Britain to overcome the 1970s economic defeatism that the repeated pound sterling crises had contributed to creating. Furthermore, Thatcherism brought about structural changes that stimulated the economy and allowed Britain to recover a more assertive foreign policy, successfully reversing its decline.
The Sterling and British Policy
Paying attention to sterling policy implies understanding the political, economic and psychological implications of defending a currency’s international value. There are various reasons why a currency is used internationally. First, as a reflection of the country’s economic leadership, as was the case for Britain in the 18th century.
At this time, Britain was a thriving global empire reliant on free trade. The pound sterling was a “top currency”, as was the dollar in the second half of the 20th century. Alternatively, a currency can be a “master currency” used in a group of countries by virtue of the State’s political or military leadership. The pound sterling was such a master currency within the imperial bloc.
Another case is when a state begins to provide incentives (monetary and non-monetary) to use its money, once a “top currency” or a “master currency”, to avoid “monetary embarrassment”. This is a “negotiated currency”. Britain also went through this phase as a result of progressive decline. It is essential to highlight that the passage from a top currency or a master currency to a “negotiated currency” entails costs for the state where the money is issued, in particular over its balance of payments.
But to truly grasp the significance of sterling policy and its effects on British foreign policy, one must highlight the psychological dimension of monetary policy in Britain. Why were British decision-makers so committed to defending the pound sterling, even against their economic interests? The pound sterling was already unable to perform a top currency role before the Second World War. This was mainly due to Britain’s changed position in the world economy.
Furthermore, despite Britain being a victorious power in the Second World War, the confrontation created a significant balance of payment deficit for the country. If Britain’s economic situation had been problematic before the war, no such euphemism could have been used after it. However, British politicians, mainly for psychological reasons, did not grasp this situation nor its monetary implications. Britain could not come to terms with its decline and failed to adjust accordingly, defending something it could no longer afford given material changes in its economy.
The unique arrangement negotiated for Britain under the Bretton Woods system allowed British policymakers to cling to their illusions for some time. The pound was held as a reserve currency alongside the dollar, despite the British balance of payment deficit after the Second World War. The United States also agreed to intervene to save the pound if there was market speculation against it. However, the Suez Crisis was a clear awakening that relying on foreign guarantees to defend the pound sterling was not a prudent monetary choice. It was also a choice that could negatively affect British foreign policy. Indeed, in 1956, the United States exerted financial pressure on Britain to withdraw its forces from Egypt. With the massive outflow of capital and needing financial assistance, Britain was receptive to that type of leverage.
Therefore, the sterling policy and the pound sterling problems had important limiting effects on British foreign policy. This was the case both directly, as in the case of financial pressure exercised by the United States during the Suez Crisis. It was also the case indirectly due to the negative repercussions of the sterling policy on the domestic economy.
Imperial Relations
Given the importance of the pound sterling to British policymakers, historians have dedicated attention to analysing relations between Britain and its empire bloc. Within the imperial bloc pound sterling had been promoted by Britain as a master currency. This meant monetary conformity, and the territories within the bloc would hold the pound sterling as a reserve currency.
Discriminatory imperial policies were furthered until 1954–55 but became increasingly untenable at the end of the 1950s. Britain had to maintain investment in the sterling area, which it could no longer afford.
Moreover, as countries became independent, Britain no longer dominated the sterling area politically. It had to incentivise these nations to remain in the monetary bloc through development loans or other non-monetary undertakings. In other words, the pound sterling had become a negotiated currency. Furthermore, investors in London were more interested in the Eurodollar market than in the sterling area.
Engagement With Europe
As relationships with the Commonwealth became increasingly problematic for the British domestic economy, the country shifted its focus to the European community, where continental European countries were experiencing economic success. In 1961 Britain applied for membership in the European Economic Community (EEC). British accession, however, was vetoed twice by French President De Gaulle.
It is essential to understand that applications to the EEC represented a shift for Britain: from the leading centre of a monetary area to a country seeking to join a continental union towards which it never had any feeling of belonging.
The decisions were taken in the background of frequent crises of the pound sterling, acknowledgement of the non-viability of the sterling area and a strained domestic economy. Therefore, the application to the EEC was a “defeat” for Britain, or at least it was felt as such in the national psyche, as underlined by authors who focus on the relationship between Europe and Britain. Britain finally acceded to the EEC in 1973, hoping to improve the situation of its domestic economy, which was bearing, among other things, the costs of defending the international value of the pound sterling.
Thatcherism’s Effects
Against this depressive situation, Thatcherism gave Britain the psychological push to reverse its decline. Indeed, the contribution of Thatcherism is foremost in the set of beliefs promoted by Margaret Thatcher, highlighting hard work and personal responsibilities as a belief in the capacities of human beings. Her leadership was resolute and, in the words of Jackson and Saunders, “one of Thatcher’s most striking characteristics was her capacity to inflame the imagination”. Was this for the best or the worst? Given the sluggishness and defeatism of political leadership, it was a much-needed characteristic.
Indeed, this capacity might explain how Margaret Thatcher managed to earn an “ism” after her name in a highly pragmatic nation such as Britain. Thatcher believed that only a radically different path could rescue Britain. In the domestic sphere, this entailed radical economic restructuring. Thatcherism dismantled the post-war consensus, or Butskellism, which relied upon Keynesian ideas of a vital role for the government in the market economy, a welfare state, high taxes and powerful trade unions. Thatcherism reorganized each of these aspects of the domestic economy.
Firstly, in praise of individual rights and responsibilities, Thatcherism committed to fundamentally reducing the state’s role in the market economy. Deregulation and privatisation were promoted. Income and corporate taxes were also lowered. Secondly, Thatcher engaged in a strength trial with the trade unions. In 1984 the Trade Union Act was passed, which required trade unions to hold secret ballots before calling for a strike.
For strikes organised without such a requirement, the legal immunity was lifted. Thatcher’s to curb organised labour power also became evident during the 1984 miners’ strike, organised in response to the Government’s pit closure program. The miners were defeated, and the union faced a trial for striking without a ballot. Another policy promoted by Thatcherism was financial deregulation, a liberalised financial market.
This greatly boosted the role of the City of London, still a global financial centre today and a major contributor to the British economy. All these domestic policies successfully stimulated the economy. They allowed Britain to break out of 1970s defeatism, leaving a legacy both in British society and in the organisation of the British economy.
In foreign policy, Thatcherism was equally assertive, to some extent also due to increased confidence in the domestic economy. While a small state was to be kept at home, Britain had a strong role to play in global affairs. Thatcher believed, for instance, that Britain should play a more significant part in the Cold War. She fostered relations with American President Ronald Reagan, which revived the Anglo-American relationship. But she also had the correct political intuition in considering that Gorbachev, a Soviet leader who had emerged after a period of deep uncertainty, was somebody she could “do business with”. In this sense, Thatcher must be given some credit at the end of the Cold War.
A second example is the 1982 Falklands War, which captures, in a nutshell, Thatcherism’s psychological element. The war broke out due to Argentina’s invasion and occupation of the Falklands Islands, which were British Overseas Territories over which Argentina claimed sovereignty. In response, Thatcher quickly decided to dispatch military force. She successfully led a ten-week war that proved her decisiveness as the nation’s leader and earned her the electoral support needed for re-election in 1983. The war also had critical psychological consequences. Britain could again believe that she had a role to play as a major power.
In conclusion, one can say that the sterling policy had its psychological roots in the failure of the British leadership to accept the decline and the changing British position in the global economy. The sterling policy had the impact of limiting the scope of British foreign policy. Furthermore, the commitment to maintain a sterling area, where the pound sterling would operate as the vehicle currency, prompted Britain to favour relations with Commonwealth countries until the end of the 1950s.
However, when Britain realised that it was impossible to redirect trade flows towards those countries and that it could no longer provide investment in the sterling area, the focus shifted towards Europe. Britain approached the EEC amid repeated crises and the devaluation of the pound sterling, which also fostered the idea in the national psyche that engagement with Europe was a “defeat”. Britain was no longer the centre of a monetary zone but only a member of a continental union to which it never felt it belonged. The Sterling policy contributed to creating economic stagnation that had psychological effects. Economic defeatism seemed to have paralysed British policymakers.
Against this backdrop, Thatcherism provided a decisive contribution. Indeed, Thatcherism was not only a revolutionary force in the domestic economy and foreign policy, lifting Britain out of economic stagnation and regaining, to some extent, an important role for the country in the international scene. It was most notably a psychological engine, a “shook”, which, albeit at some costs, succeeded in reversing the decline.
