Eamonn Butler: Alan Walters provided an intellectual underpinning for Margaret Thatcher's economic policies

Sir Alan Walters, economic adviser to Margaret Thatcher and leading monetarist, has died at the age of 82.  Eamonn Butler, Director of the Adam Smith Institute - a pro-freedom policy think-tank based in London, pays tribute to him below.

Walters was a testament to Thatcherite self-help. His education was disrupted by army service, but he pressed on and obtained an external degree from the University of London. He became Professor of Econometrics and Statistics at the University of Birmingham, and then Cassel Professor of Economics at the London School of Economics. He was economic adviser to the World Bank in Washington DC, and a Professor of Economics at Johns Hopkins University, before being recalled by Margaret Thatcher in 1981 to serve as her economic adviser.

At Birmingham in the 1960s, Walters emerged as a strong proponent of monetarism – the view that the money supply must be strictly controlled if inflation was to be held in check. It was a decidedly unfashionable view. The postwar ‘Keynesian Consensus’ thought monetary policy was a weak tool, and boosting output more important than inflation. But as government spending expanded, inflation grew alarmingly. Then unemployment began to rise too – creating ‘stagflation’, something the Keynesians found hard to explain.

Like the American monetarist Milton Friedman, 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.

Through papers for the Institute of Economic Affairs and others, Walters insisted that money was actually a hugely powerful instrument. 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 was familiar with Walters’s views and the rigorous thinking behind them, and lured him back to Britain as her economic adviser. Alongside Chancellor Sir Geoffrey Howe, 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 monetary stability did what Walters predicted. It stabilized prices and laid a solid foundation for future business expansion.

Walters – now Sir Alan – returned to his post of economic adviser to the World Bank in Washington, but continued to advise Thatcher from afar. She brought him back in 1989, worried at Chancellor Nigel Lawson’s policy of shadowing the European Exchange Rate Mechanism. But Walters was an academic rather than a politician, and did not conceal his conflicts with Lawson. When he publicly called the ERM ‘half baked’, Lawson walked out. Walters tended his resignation the same day. It was one of the events that contributed to Thatcher’s demise.

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 Alan Walters, a lifelong critic of the ERM and the Euro, knew that it would.

> Times obituary

> BBC video of Patrick Minford paying tribute to Sir Alan Walters