Known at his peak as the “monetarist in residence” at Margaret Thatcher’s Downing Street, Sir Alan Walters was one of the most influential academic advisers to enter British political life. His first spell as Thatcher’s full-time economic adviser between 1981 and 1983 expanded the frontiers of influence for public servants of his type, and maintained the first Thatcher Government’s adherence to monetarism for longer than would otherwise have been the case.

Walters described himself as not so much a right-winger as “an unreconstructed Manchester liberal with a notably small ‘l’, believing in light government and unilateral free trade”. He could be extremely blunt, especially in areas of core belief, and about those who didn’t see the world similarly. One bête noire, Kenneth Clarke, had barely become Chancellor of the Exchequer before Walters described him as lacking “spine, knowledge and drive” in economic policy.

Walters’s habit of expressing often unhindered intellectual honesty established him as one of the most controversial and intermittently pivotal figures of the Thatcher era. Few powerful people in politics or the Civil Service enjoy being told what to do, and Walters — a thoughtful man who disdained the “quick, quack remedies” that he said were too often offered as solutions to Britain’s decline — ruffled feathers.

His second period as full-time Downing Street adviser, lasting just five months, from May to October 1989, proved so contentious that it hastened the resignation of the Chancellor, Nigel Lawson. It was an event so seismic that it portended the departure of Thatcher herself.

His transition from full-time academic to government adviser began in the 1970s, when he briefly advised Edward Heath. But disillusion came rapidly: Walters soon departed and in July 1972 he published a paper showing how he had demonstrated to Heath (as events proved, correctly) that monetary growth forewarned that the UK would suffer 15 per cent inflation two years later.

When Thatcher became Tory leader, Walters, despite decamping to Johns Hopkins University, Maryland,maintained contact with opposition frontbenchers, also advising the World Bank on investment projects. He visited Chile, where General Augusto Pinochet’s ministers had begun deregulatory reforms that Walters called “the greatest experiment in liberal economics”. By contrast, 1970s Britain was bleak. While a democracy, it had “no freedom”.

Once Thatcher won power Walters’s life changed. “There’s a lot of wham-bang quick-fire argument with her,” he said. “I love that, too.” She applauded his “clear and persuasive analysis”.

He arrived at Downing Street full-time only in January 1981, but had already played a major part in discussions that almost caused Geoffrey Howe’s monetary targets for sterling M3, the Government’s chosen measure, to be replaced by a purer variant, known as monetary base control.

Walters argued that sterling M3 misrepresented economic performance, unintentionally intensifying policy. In stormy debates his advocacy of controlling the monetary base directly — which when tested in the US had pushed interest rates over 20 per cent — almost prevailed. It was only Thatcher’s fears for middle-class mortgage payers that prevented his plan’s implementation.

In 1981 he sought, again, to embolden the Government’s stance yet further. With the economy in deep recession, that year’s Budget was commonly seen as an almost foolhardy attempt to reduce expenditure yet further, by an amount never before witnessed in peacetime Britain. Walters’ proposal of most unThatcherite increases in income tax to help to balance national accounts was parried by the Prime Minister, her eyes again more sharply focused on political consequences than purity of economic theory. But, through a sleight of hand, the extra revenue Walters wished to raise was secured by freezing income tax thresholds — and this meant he had, in effect, won the argument. As it turned out, the budget deficit and inflation did fall, and future policy rows never returned to the intensity of the 1979-81 period.

After leaving his full-time Downing Street post in 1983, Walters resumed a position at the World Bank. He also accepted a senior fellowship at the American Enterprise Institute, Washington, while continuing to advise Thatcher on an informal basis.

But his moment of greatest historical note was yet to come. Facing heightened opposition from Howe and Lawson over her refusal to consider British membership of Europe’s exchange-rate mechanism, Thatcher asked Walters to take up what had been a longstanding open invitation to return once again as her full-time adviser. The result was interpersonal conflagration. As onlookers recalled, Thatcher’s well-known closeness to Walters soon prompted questions about whether he or Lawson was the real Chancellor. Walters, almost from the day of his arrival, was accused of showing insufficient circumspection, making remarks undermining Lawson’s position.

The catalyst was Lawson’s sympathy for the ERM. Walters’s views on it were well documented in his academic and other published remarks: he once called it “an anathema and seriously flawed”. Some speculated that he wished to provoke Lawson into resignation with his comments.

For whatever reason, Walters’s return swiftly had this precise effect. Lawson, already pressurised by adverse economic data, found the flow of comments and advice circulated in Walters’s name too much to bear. Most tellingly, Walters’s fierce aversion to fixed exchange-rate regimes were felt by financial market traders to represent Thatcher’s own views, a perception which itself put sterling under direct pressure, worsening the overall economic position. In October 1989 he opposed Lawson’s move of raising interest rates to 15 per cent. Quotes from an article he had written before his return to Downing St also showed him to believe the ERM “half-baked” and unsustainable. Lawson demanded Walters’s dismissal, and failing to force Thatcher’s hand, departed.

Walters, his own position now untenable, also left his job. Ironically, given his sometimes caricatured position as an economic hardliner, he had argued that Lawson’s interest-rate rises were risking an unnecessarily sharp UK recession, which later transpired. Critically, in terms of British political destinies, Walters’s arguments had made Thatcher’s opposition to ERM and EMU membership almost final. The views were so heartfelt that they led, at least in part, towards her own ousting 13 months later.

Alan Arthur Walters was born in 1926, the son of James Arthur Walters, a grocer’s clerk, and Claribel Walters. His father suffered unemployment during the 1930s, and the son’s upbringing was consequently tough. The family lived in slum conditions: he once recalled a welfare officer coming to the house and asking where the bathroom was. “Hanging on the nail,” said Walters’s father, pointing to the tin bath outside the back door.

He was educated at Alderman Newton’s School, Leicester, although he failed his 11-plus, which dashed early hopes of being a draughtsman. It needed the luck of his father finding work and thus funding extra schooling, and sympathetic teachers to buttress Walters’s education to the age of 15. Thereafter he worked as an errand boy and machine operator, before being called up as a private for three years’ wartime service.

After a struggle, he secured a place to read statistics at what was then University College, Leicester, and finally attained academic distinction, topping a field of thousands of internal and external candidates in University of London examinations. He progressed to postgraduate studies at Nuffield College, Oxford.

In 1951 he became an econometrics lecturer at Birmingham University, and moved towards the mainstream of the economics discipline. Soon he flourished, with spells at Northwestern University, Illinois, and MIT. This helped him to observe the British economy during its postwar decline. It was blunted, he felt, by nationalisation and restrictive practices. He began to campaign for Milton Friedman’s school of free market economics.

Awarded his own chair at Birmingham in 1961, Walters became Cassel Professor at the LSE seven years later. His expertise in cost benefit analysis, which he applied to transport, assisted his early career. He advocated road tolls as early as 1952.

In 1968 he published the Economics of Road User Charges, and sat on the Roskill Commission considering a third London airport. In 1974 he published Noise and Prices, a look at the economic consequences of people’s desire to live free of sound pollution. He invariably applied tough criteria to transport decision-making; later, in Downing Street, he helped to prevent plans to electrify British Rail. But his capacity for mainstream excellence was underscored when, in 1978, he published, with Richard Layard, Microeconomic Theory, a student text recognised as world class.

After leaving Downing Street, Walters became associated with the Washington consulting firm Putnam, Hayes and Bartlett, and advised, among others, the Polish Government. He continued lobbying against ERM membership. When stories emerged that he was still attending meetings with Thatcher, she described him as “a family friend”.

After her fall he became vicechairman of AIG Trading, an arm of the US insurance group. His opposition to John Major’s premiership grew. Just weeks after Major’s surprise election victory in April 1992, Walters expressed forebodings about the new Prime Minister’s yearning for “consensus” politics.

Those fears were soon greatly expanded. All the gains of the Thatcher era faced destruction, he said: “All that work, all that revolution, and that renaissance, so much pain and all for nothing.” In 1997 he stood as a parliamentary candidate for James Goldsmith’s Referendum Party.

Into the new millennium he continued to offer views on economic topics, including the single currency and potential pitfalls in Third World debt forgiveness plans. To the latter he was particularly opposed — bestowing a specific poignancy upon the timing of his death, which followed the enormous use of public funds to enable banking bailouts in leading developed economies, including the UK, amid the 2008 financial crisis.

Walters was an iconoclast, someone who appealed to Thatcher possibly because, in common with her, he never felt comfortable as an Establishment insider. In his spare time he enjoyed music and collecting Thai porcelain; he also kept his figure and health long into what others might have considered old age with disciplined regimes of jogging and tennis.

Walters is survived by his wife, Paddie, and a daughter from a previous marriage. He was knighted in 1983.

Sir Alan Walters, personal economic adviser to Margaret Thatcher, 1981-83 and 1989, was born on June 17, 1926. He died on January 3, 2009, aged 82