Margaret Thatcher’s determination to resist the almost unanimous recommendation of her Chancellor and her senior colleagues in favour of joining the ERM seems to have been more visceral than logical. She received support for her stance from her new Head of Policy at No. 10, Brian Griffiths; from the Leader of the House, John Biffen, who was a long-standing supporter of floating exchange rates; and from her former adviser, Alan Walters, who had written to her suggesting that an expected fall in oil prices would mean that Britain could enter the EMS at a lower parity in six months time. But their arguments were technical, too. By contrast, Margaret Thatcher’s hostility to the ERM was fundamental, fuelled by deep instincts from the well-springs of her belief in Britain’s freedom to make its own national decisions. Another intuitive source of her opposition may have been her dislike of Germany’s dominant vote in the ERM.
Terry Burns, who was present at the meeting on 13 November as Chief Economic Adviser to the Treasury, sensed that the real reason for the Prime Minister’s apparent intransigence was that ‘she just couldn’t bear to be beholden to other people to determine the destiny of Britain’s interest rates. She did not mind rules, but she always wanted the wriggle room that the ERM would not allow’.7
On his side of the argument, Nigel Lawson was down but by no means out. He regarded his defeat at the 13 November meeting as ‘the saddest event of my time as Chancellor’.8 Lawson overcame his sadness by considerable clandestine activity in preparation for joining the ERM.
This began less than a month after Margaret Thatcher had vetoed the move when on 7 December 1985 the Chancellor authorised a secret mission of senior Treasury officials to the Deutsche Bundesbank in Bonn to discuss contingency planning for Britain’s membership of the ERM. Despite this and other such provisional manoeuvres, the issue of joining the ERM was kept on the shelf for nearly two years. But Nigel Lawson was biding his time. When he felt strong enough to do so he effectively joined the ERM, to use Nicholas Ridley’s words, ‘unilaterally and unofficially’,9 in March 1987. But to do this, he had to act by stealth without declaring his hand to the Prime Minister, using a new policy known as ‘shadowing the Deutschmark’.
SHADOWING THE DEUTSCHMARK
From 1987 onwards, Nigel Lawson was in a position of great strength. Never a modest Chancellor, he believed his policies had delivered a stunning victory for the Tories and an expanding economy for the nation. He was right about the first claim. On the second he did not see that his expansion was turning into overheating. But an even greater worry was that he had become so confident of his own judgement that he launched a major change in exchange-rate policy without the agreement of the Prime Minister or the consent of the cabinet.
From March 1987, in covert furtherance of his long-held view that sterling should join the ERM, Nigel Lawson began using interest rates and interventions in the currency markets to set the pound’s value at DM3. This shadowing of the Deutschmark was his way of operating sterling as if Britain had joined the ERM, even though no decision to join it had been taken by the government.
At face value, this was an act of insubordination by the Chancellor, who appeared to be deliberately deceiving the Prime Minister with this secretive course of action. Nigel Lawson claimed that he did not see it in this light. Conveniently ignoring the fact that Margaret Thatcher was First Lord of the Treasury, he insisted that he was in charge of Britain’s economic policy and was fully entitled to order the Treasury and the Bank of England the carry out his instructions.
His justification was that the official policy of the government, unchanged since the days when Ted Heath was Prime Minister, was that Britain would join the ERM when the time was right. Therefore, he was entitled to prepare the ground for entry by aligning sterling with the Deutschmark immediately, keeping the pound down by instructing the Bank of England to buy other currencies.
The problem with this explanation was that Lawson well knew that Margaret Thatcher’s opposition to joining the ERM was hardening. In her view, the time to sign up was certainly not in the 1980s, and might never be right. In his view, the time was so right that he was already implementing the policy. This disagreement put the Chancellor and the Prime Minister on an inevitable collision course.
Margaret Thatcher claimed to be unaware of this. In her memoirs she asserted that she only discovered her Chancellor was shadowing the Deutschmark at DM3 to the pound on Friday 20 November 1987 when journalists from the Financial Times provided her with chapter and verse.
‘The implications of this were, of course, very serious,’ she wrote. ‘Nigel had pursued a personal economic policy without reference to the rest of the Government. How could I possibly trust him again?’10
By contrast, Nigel Lawson has strenuously denied that the Prime Minister was blindsided by his Deutschmark shadowing policy. He wrote in his memoirs, ‘It was always an implausible insult to her formidable intelligence to suggest that she could possibly have been unaware of it, even if I had wished to keep her in the dark, which, of course, I did not … She was simply not that kind of Prime Minister.’11
Trying to extract the truth from these conflicting accounts is difficult. But Nigel Lawson has now admitted, in an interview for this book, that he never directly told the Prime Minister that he was shadowing the Deutschmark, until after she had been alerted to it by the Financial Times. His case is that she must have known about his policy since she was daily sent the Treasury’s market report recording the figures of intervention by the Bank of England in the foreign-exchange markets required to support sterling.
The argument is special pleading after the event. It is correct to say that if a foreign-exchange expert had studied the confidential figures sent every evening from the Treasury to No. 10 which detail the costs of UK intervention in the currency markets, then it would have been possible to detect that the Deutschmark was being shadowed as a matter of undisclosed policy. But the Prime Minister did not know this. Her two most relevant officials at No. 10, Robin Butler, her Principal Private Secretary, and Brian Griffiths, her Head of Policy concerned with Treasury and Bank of England affairs, also did not know it.12 It is hard to escape the conclusion that concealment took place.
So why was the Chancellor not transparent with No. 10? Why in nine months of bi-laterals did he hold back from telling the Prime Minister that he had instructed the Bank to shadow the Deutschmark? Nigel Lawson explained:
I am not a gushing person. She has half a point when she says she was not told. But I never withheld the information from her. It was all there in her red boxes with the figures sent by my Private Secretary to her Private Secretary every night.13
The first occasion when the Deutschmark-shadowing policy was discussed face to face by the two principals came on 8 December 1987, eighteen days after Margaret Thatcher had been given the evidence by the Financial Times. The meeting was a stormy one. The Chancellor found the Prime Minister in ‘an extremely agitated and aggressive mood’.14 Her angry claim that trust had broken down between them was not the only problem. She was also concerned by the £27 billion cost of the intervention since the beginning of the financial year to hold the pound below the DM3 level. She was particularly worried by the inflationary consequences of this action.
Nigel Lawson reassured her that there were no inflationary consequences because it had been his practice to fund the intervention costs not by increasing liquidity but by selling gilt-edged securities – a device known as sterilisation. This explanation had the effect of keeping Margaret Thatcher’s doubts at bay for a few weeks. The episode also highlighted that she remained in awe of his technical mastery of his brief. Because of this, he was usually her superior when it came to a detailed argument about policy.
By March 1988, relations between the occupants of No. 10 and No. 11 Downing Street had deteriorated further. So had the policy of exchange-rate interventions. On Wednesday 2 March and Thursday 3 March, some $1.8bn of intervention funding was required to hold the pound to the DM3 ceiling.15
After more strong words had been exchanged, she grudgingly backed away from her view that sterling should be allowed to float to its market level. But she insisted that any further intervention should be small, and that the Chancellor’s private office should have to report on the situation to her own private office at half-hourly intervals. These commands were interspersed with personalised criticisms of deceit against Nigel Lawson, which he vigorously denied. ‘It was an unpleasant meeting, and I particularly resented her manner’,16 he coldly recalled.
So bad was the blood between the two leading figures in the government at this time that the Prime Minister seriously considered sacking her Chancellor. How close she came to this dramatic execution is vividly illustrated by a story of Denis quarrelling with her in front of a friend.
In late February 1988 Denis took Dick Evans, the Managing Director of British Aerospace, to the East India Club in St James’s Square. A convivial lunch was preceded by several ‘snifters’ at the bar before and after lunch. ‘Denis had a lot to drink and I felt I should see him home,’ recalled Evans, ‘so we went into No. 10 by the back entrance that existed in those days via Horseguards Parade. We got there about 5.30 p.m. and went up to the private flat.’
Denis poured himself a large whisky. A few minutes later Margaret came in. The Prime Minister found her husband in an unusually aggressive mood.
‘Have you done it?’ he demanded. There was no clear reply, so the question was repeated at louder volume.
‘What are you talking about, dear?’ asked Margaret Thatcher.
Denis grew angry at her dissimilation. ‘You know perfectly well what I’m talking about’, he shouted. ‘Have – you – done – it?’ Each word was accompanied by a bang of his fist on the table. Dick Evans made his excuses and tried to leave. Both Thatchers told him to stay.
‘I know what he’s getting at’, admitted the Prime Minister.
‘Well, have you done it?’ came the question for the fourth time of asking.
‘No I haven’t.’
‘I knew you weren’t going to do it. When you agreed to do it at breakfast this morning, I just knew you wouldn’t. So why the hell didn’t you?’
‘Denis, there is a limit to the number of enemies we can afford to make.’
Dick Evans made his second attempt to depart, but the Prime Minister felt that an explanation was needed. Amidst further noises of protest from her spouse she told Evans what ‘it’ was.
‘At breakfast this morning he persuaded me to fire Nigel Lawson’, she explained, ‘and I haven’t done it.’17
The story says as much about Margaret Thatcher’s caution as it does about the breakfast decision she dropped. She had good grounds of being furious with her Chancellor. But she knew he had many supporters in the parliamentary party. Another key factor was the 1988 Budget was due to be presented in eleven days’ time.
Those days were difficult for the two protagonists. Press reports of their split made damaging reading. Sterling rose as high as DM3.18, and would have gone higher but for a half-point reduction of interest rates to 7.5 per cent. Margaret Thatcher believed that this cut was unwise, but accepted it as ‘the price of tolerable relations with my Chancellor’.18
Nigel Lawson did not share the view that their relationship was becoming more tolerable. He resented the unhelpfully candid comments made by the Prime Minister to Parliament about exchange-rate policy, such as ‘there is no way in which one can buck the market’.19 He also resisted but eventually accepted a redraft originating from No. 10 of crucial paragraphs in his Budget speech on exchange-rate policy. These humiliations, as he saw them, left scars on the proud Lawson. He was seething.
When he went to Buckingham Palace for the Chancellor’s traditional eve of Budget audience with the Queen, he told the Monarch that he thought it would be his last such speech, ‘because the Prime Minister was making the conduct of policy impossible’.20
THE BOOM OR BUST BUDGET
‘A provocative Budget’21 was how Nigel Lawson himself described the radical proposals he announced to Parliament on 15 March 1988. It certainly provoked his political opponents. His Budget speech caused chaos in the House of Commons, with the sitting having to be suspended twice. The Labour Party were fierce in their denunciation of the Lawson strategy, which they said would hurt the poor and help the rich.
By contrast the Conservative Party greeted the Budget with near rapture. It reduced the basic rate of income tax to 25 per cent, and brought down the higher rate from 60 per cent to 40 per cent. All intermediate tax rates were abolished. The Chancellor sat down at the end of his speech to wave upon wave of Tory cheers after he announced in his peroration that he had delivered a balanced Budget and intended to bring income tax down to 20 per cent.
Margaret Thatcher was publicly effusive but privately doubtful about her Chancellor’s strategy. Before the Budget, she warned him against announcing the future goal of a 20 per cent tax rate. She would have been content to leave the top rate at 50 per cent. Her biggest worry was the overall looseness of the financial situation and monetary policy, which she feared might lead to inflation. But she kept these doubts under wraps and joined in the chorus of praise for the Budget, which she described as ‘a Humdinger … the obituary for the doctrine of high taxation … the epitaph for Socialism’.22
Despite these laudatory words, it soon became apparent that something was rotten in the state of the relationship between Prime Minister and Chancellor. Iron had entered Nigel Lawson’s soul as a result of their quarrels over the ERM. Even when she flattered him in public or sent him handwritten notes of congratulations in private, he spurned her olive branches. ‘It was never praise that I sought from her: just trust, honesty and the loyalty she expected of others’ was his dismissive comment on her attempts at rapprochement.23
Lawson was right to complain of the Prime Minister’s disloyalty, which became embarrassingly transparent during parliamentary exchanges in mid-May. This was a period when the pound was again rising against the Deutschemark despite cuts in interest rates to 8 per cent.
At Prime Minister’s Questions on 12 May, she was wounded by Neil Kinnock attacking her evasiveness on exchange-rate policy. After a fusillade of blows, he cornered her with the simple question: ‘Can the right hon. Lady give us a straight answer? Does the Prime Minister agree with her Chancellor of the Exchequer?’24
Instead of replying in the affirmative, Margaret Thatcher conspicuously avoided the question in a cloud of waffle about high living standards, growth and social services. It was a deeply damaging performance, which unsettled the markets, the financial commentators and her back-benchers.
With weekend press speculation at fever pitch about the possibility of Lawson being moved to the Foreign Office, remedial action became imperative. So Chancellor and Prime Minister met to agree a damage-limitation exercise. It consisted of cutting interest rates again to 7.5 per cent, and working out a form of words that would put sticking plaster on the perceived split that had so unnecessarily been exposed by her last answers in Parliament.
Neil Kinnock found it easy to continue his winning streak at Prime Minister’s Questions. ‘May I warmly welcome today’s cut in interest rates and the Chancellor’s victory over the Prime Minister?’ was his opening line. Of course, Margaret Thatcher did not admit that she had been defeated. But her one word assent, ‘Yes’, to a later qu
estion about whether there was ‘complete and utter unanimity’ between herself and the Chancellor told its own story.25 It was more of a self-inflicted wound for her than a victory for Lawson, but she had been badly wrong-footed.
Within a matter of weeks it was the Chancellor who was stumbling. His Budget unravelled as his tax-cutting judgement turned out to have been based on inaccurate forecasts. Unexpectedly bad export figures made the trade deficit balloon to £2.2 billion in July. Inflation doubled to 6.6 per cent and kept rising. Interest rates had to be raised by a succession of upward moves from 7.5 per cent on 17 May to 11 per cent on 8 August, and to 12 per cent on 25 August.26 It soon became clear that Britain had moved into a nightmare scenario of overheating domestic demand, rising inflation, runs on the pound and crushingly high interest rates.
Nigel Lawson had wanted to leave the government in the warm glow of success that the first reactions to his Budget had produced. He talked to friends about his plan to retire in the expected autumn reshuffle. But the sudden crisis in the economy hit his reputation so hard that he felt he must stay at the helm.
The voices that had praised the Lawson boom in the spring were sharply criticising the Lawson bust by the autumn. Among the sharpest critics, struggling somewhat unsuccessfully to keep her comments private, was the Prime Minister.
Margaret Thatcher had been instinctively opposed to some of her Chancellor’s strategic moves since the beginning of her third term. She thought he was loose on monetary policy, wrong about the ERM and incompetent in failing to keep inflation down. These opinions found their way into the press in the latter months of 1988, a development for which Lawson blamed Bernard Ingham.
Margaret Thatcher: Power and Personality Page 69
