T5 Economic

Question 1

The condition of the economy 1987-1992

Answer 1

• The economy was under strain between 1987-1990, meaning that John Major inherited a difficult situation.
• In 1987 the stock market crash following the ‘Big Bang’ - the Conservative policy of deregulation of the City in 1986.
• The policies of the Chancellor of the Exchequer, Nigel Lawson, especially his 1988 budget led to the rapid expansion of the economy in the ‘Lawson boom’, which resulted in balance of payments problems.
• By 1990 inflation had risen to 10.9%, which was higher than it had been in 1980, which meant the Conservatives were open to criticism as low inflation was a key pillar of their economic policy.
• Major also inherited other poor economic indicators: declining manufacturing output, high interest rates, a steep rise in unemployment, and a slump in house prices.
• From mid 1991-early 1992, unemployment rose from 1.6 million to 2.6 million.
• Many homeowners were trapped in ‘negative equity’ (repaying mortgages with a higher value than the house) which led to many homes being repossessed by banks.
• This slump in house prices was particularly difficult for the Tories because it affected their traditional voter support base, rather than previous economic recessions which mainly affected the working class in the North.
• With the 1992 election approaching Major authorised a big increase in public spending – this was needed to pay the rising unemployment benefit bill, but also there was investment in the NHS and subsidies for public transport use.
• These popular measures may partly explain Major’s success in the 1992 election.

Question 2

Black Wednesday and the Exchange Rate Mechanism

Answer 2

• In 1990 Britain joined the Exchange Rate Mechanism (ERM).
• John Major had been in favour of this for a number of years, and eventually Thatcher was persuaded to sanction this development.
• The ERM had been set up in 1979 – it aimed to make the exchange rates between different currencies in the EEC by limiting how much their value could change.
• The ERM pegged currencies against the German mark – a currency that was renowned for stability and the German Bank also had a reputation for maintaining low levels of inflation.
• When Britain joined the ERM the pound was required to be fixed to 2.95 German marks to the pound, within a narrow range of fluctuations.
• By September 1992, Britain, as well as several other currencies like the Italian Lira, had come under pressure.
• On 16th September 1992 (Black Wednesday) the crisis reached a peak.
• Major was determined to avoid Britain crashing out the ERM and having to devalue.
• The issue was foreign exchange speculators had lost confidence in the pound and there was a big wave of speculative selling.
• This forced the value of the pound further down – making it more difficult for the UK to stay in the ERM fixed to the stable German mark.
• In order to try and instill confidence in the economy, Major and the Chancellor Norman Lamont pumped millions into the economy and increased interest rates twice in a day – from 10% up to 12% initially, and then a few hours later a further increase to a staggering 15%.
• These measures smacked of desperation and a government who had lost control of the economy,
  especially when at 7pm in the evening the Chancellor went on TV to announce Britain was leaving the ERM.

Question 3

The impact of Black Wednesday (1992 – 1997)

Answer 3

• The economic consequences of Black Wednesday and leaving the ERM were not actually as bad as was feared in the immediate aftermath of 16th September 1992.
• When the economy stabilised, Britain’s economic indicators actually began to improve.
• The exchange rate floated downwards, which gave exporters a boost.
• Unemployment rates slowed down, and the housing market began to recover – which meant less people were trapped with negative equity.
• This, combined with US economic recovery which stimulated world trade, together with the benefits of deregulation and flexible working practices which the Tories had introduced since 1979 helped economic growth.
• British growth rates were favourable in comparison to Germany.
• By 1997 – most economic indicators were positive – as well as falling unemployment and slightly better productivity, car ownership was on the rise, house prices were also strong with negative equity now extremely unusual.
• However, John Major’s government wasn’t really credited with bringing about a strong economy.
• This was partly due to other failings of the Conservatives that we will cover shortly.
• But also the long-term political impact of Black Wednesday should not be ignored.
• The Conservatives looked inept at managing the economy – something which previously was something associated with the Labour Party – Major’s leadership had looked weak and he was heavily criticised, even in traditionally pro-Tory newspapers.
• John Major himself viewed Black Wednesday as ‘the beginning of the end’.