5 things we now know about Thatcher and 1981

National Archives files show Thatcher considered arming police during the riots, and pulling out of

1981 saw riots spread across the UK's inner cities, as ethnic minority communities in Liverpool, Manchester and parts of London rose up against police, angry about racial discrimination. It was also the year that 10 IRA hunger strikers, including Bobby Sands, starved themselves to death in protest that they were being treated as criminals, demanding the rights of prisoners of war. It is widely perceived as one of the toughest years of Margaret Thatcher's premiership. Now, confidential government documents from 1981 made available under the 30-year rule reveal details of what was going on behind the scenes.

1. Senior ministers wanted to abandon Liverpool

In the aftermath of the 1981 riots, some of Thatcher's closest ministers came very close to writing off Liverpool entirely, saying that the "unpalatable truth" was that they could not halt Merseyside's decline. While Environment Secretary Michael Heseltine was arguing for money to be spent on regeneration for riot-hit communities, Sir Geoffrey Howe thought it would be a waste of money, writing:

I cannot help feeling that the option of managed decline is one which we should not forget altogether. We must not expend all our limited resources in trying to make water flow uphill.

Howe acknowledged the potentially explosive nature of this suggestion, warning: "This [managed decline] is not a term for use, even privately. It is much too negative." Other close advisers told her that the "concentration of hopelessness" on Merseyside was largely self-inflicted.

2. Thatcher considered arming the police during the riots

The papers give an unusual level of detail about the Prime Minister's response as riots against the police broke out in inner cities across the UK. On the morning of 11 July, the eighth day of the riots, Thatcher talked to her Home Secretary Willie Whitelaw.

They discussed how to obtain better equipment for the police, and briefly touched on the idea of sending in troops, which a Liverpool MP had called for. However, they soon agreed that deploying the army "could not be contemplated", and it would be better to arm the police.

That same evening, Thatcher visited the Metropolitan Police, spending more than seven hours with the commissioner and not leaving Scotland Yard until 3am. The police appealed for a new Riot Act, and gave her a list of riot gear they wanted: shields, protective clothing, water cannon, CS gas, rubber bullets and surveillance helicopters.

The police got the riot equipment -- the first time police were given discretion to use rubber bullets and baton rounds in mainland Britain -- although ministers stopped short of giving them firearms. Tthe new public order law was not passed until 1986.

3. Withdrawal from Northern Ireland was discussed

As hunger strikes in Northern Ireland drew international condemnation for the British, Thatcher's public stance was that she would "not flinch" from keeping the area in the UK. The protest lasted from March until October, with 10 IRA prisoners ultimately starving themselves to death.

Despite the "Iron Lady" public stance, however, a confidential report of a cabinet meeting on 2 July reveals that Thatcher "said that further thought would need to be given to all possible courses of action in regard to Northern Ireland, however difficult or unpalatable." The report says:

Many people in Britain now believed that a settlement of the complex problems of the area would be more easily reached by the Irish on their own and that continued British involvement could only mean the futile sacrifice of further British lives.

Ministers acknowledged that such a course of action could lead to civil war and "massive bloodshed" in Northern Ireland, as well as unrest among the Irish diaspora in the UK.

The papers also reveal that Thatcher took part in drafting proposals aimed at ending the protests, even though her government claimed it was not involved in negotiations.

4. Thatcher had her own expenses scandal

Thatcher very nearly underwent an expenses scandal of her own after an official in the Department of Environment revealed to Parliament -- without permission -- that £1,836 had been spent refitting Downing Street for Thatcher's arrival, including £19 for an ironing board.

In an angry letter, her private secretary Nick Sanders wrote:

This must not happen again. It is all too likely that such information will be picked up and used against the Prime Minister at question time.

A series of memos show attempts to limit the damage. "I will pay for the ironing board," wrote Thatcher in blue felt tip. "I have an excellent ironing board which is not in use at home. I will pay for the new one." She was equally outraged that bed linen had cost £464, while crockery had cost £209. "I could use my own crockery," she wrote. "Bearing in mind we use only one bedroom -- can the rest [of the linen] go back into stock."

Given that she dedicated most of her career to cutting public spending, the information certainly would have caused outrage had it gone public -- the basic dole payment was £20.55 a week, one tenth of the cost of the Downing Street crockery.

The Cameron's showed no such restraint when they claimed £30,000 to do up their kitchen last year.

5. Thatcher went behind ministers' backs on Trident

Two-thirds of Thatcher's first cabinet opposed buying the US Trident missile system. She went ahead with the deal anyway. The cabinet were only told of the decision when details of the secret deal with Jimmy Carter were leaked in the US.

The papers show John Biffen, the trade secretary, privately warning Thatcher in March 1981 that she shouldn't underestimate the electoral damage that the anti-nuclear movement could cause. Correctly, he predicted that CND would grow even bigger than its heyday at Aldermaston in the 1950s.

The level of cabinet resistance to the idea is revealed in a note from the defence secretary, John Nott, who supported the decision. He said that a full debate on nuclear defence policy must be held "since two-thirds of the party and two-thirds of the cabinet were opposed to the procurement of Trident. Even the chiefs of staff were not unanimous."

The foreign secretary, Lord Carrington, was also behind the decision:

Failure to acquire Trident would have left the French as the only nuclear power in Europe. This would be intolerable.

Samira Shackle is a freelance journalist, who tweets @samirashackle. She was formerly a staff writer for the New Statesman.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?