Sir Alan Walters, economic adviser to Margaret Thatcher and leading monetarist, has died at the age of 82.
In the 1960s, his view that the money supply must be strictly controlled if inflation was to be held in check, was hugely unfashionable The postwar ‘Keynesian Consensus’ saw monetary policy as a weak tool. They thought that employment could be boosted at a modest cost in terms of inflation. When inflation and unemployment began to rise together, though, they found this 'stagflation' hard to explain.
Walters knew there was no trade-off between inflation and unemployment. Inflation makes it impossible to see what prices are really doing – the ‘signal’ of real price movements gets lost in the ‘noise’ of general price rises. So people can’t make rational plans, resources are wasted, and unemployment rises. There had to be strict limits on how much money governments created. You could not just spend your way out of a recession.
Margaret Thatcher lured Walters back to Britain as her economic adviser. He provided the intellectual case for bearing down on public spending, even as Britain entered recession. Mainstream economists were shocked – 364 of them wrote to The Times to denounce the policy. But the new policy stabilized prices and laid a solid foundation for economic expansion.
Walters – now Sir Alan – returned to Washington, but continued to advise Thatcher from afar. She brought him back in 1989. But Walters was an academic rather than a politician, and did not conceal his conflicts with her Chancellor Nigel Lawson. When he publicly called the ERM – which Lawson was shadowing – ‘half baked’, the Chancellor walked out. Walters tended his resignation the same day. The affair contributed to Thatcher’s demise.
But Walters was right. John Major went on join the ERM, but the policy exploded on Black Wednesday in 1992, giving the Conservatives a reputation for economic incompetence that they did not shake off for more than a decade. As Walters knew that it would.
- Watch Patrick Minford's dedication here
- Watch a BBC video on Walters here
- Read The Times obituary here