This argument had been rumbling along throughout Mrs Thatcher’s time in No. 10. Gordon Pepper, on whom she had relied heavily in opposition, had seen her on 18 May 1979, and advised switching to monetary base control then. She had told him cautiously that she sympathized with his suggestion, but was worried about the extreme swings it might produce in the figures.23 This was, on one level, a technical argument, and some close to Mrs Thatcher criticized her for bothering her head with a matter which she did not fully understand. Its political importance, however, which grew in 1980, was that, just as the government was being attacked for its harsh ‘monetarism’ and just as Britain moved into sharp recession, at the same time its chosen measure of money supply, M3, took off. Interest rates were punitive. So were exchange rates. The value of the pound to the dollar moved from $1.63 in October 1976 to $2.42 in October 1980. At the end of March 1980, two weeks after approval of the MTFS, Howe told the Cabinet, when he unveiled the Budget to them, that ‘The money supply seems to be coming under control.’24 It did not appear to be so, at least according to the government’s preferred measure. The growth of M3 turned out at 19.4 per cent in the target period of 1980 to 1981.
Part of the reason for this apparent disaster was the enthusiastic reaction of the financial sector to the government’s reforms. As the economist Brian Griffiths put it, ‘People decided she means what she says, so let’s buy pounds.’25 In the Budget of March 1980, Geoffrey Howe announced the removal of the ‘corset’, the system of penalizing the banks for allowing their deposits to expand too rapidly which had now been rendered obsolete by the ending of exchange controls. When the corset was removed in July, sterling M3 immediately jumped by 4–5 per cent. The government also got rid of the old restrictions on mortgage lending by the banks, and this, too, made room for an explosion in the growth of credit. At the same time, high interest rates made people readier than before to hold deposits, in turn adding to the growth of M3. None of these was necessarily a bad thing – all were natural short-term reactions to the lifting of constraints – but none had been fully foreseen, and so the figures looked alarming. When she was informed by an official briefing that ‘The removal of the corset will raise the growth of M3 for a month or two; its underlying trend may be difficult to estimate,’ Mrs Thatcher was rendered, unusually, wordless. Beside this sentence she wrote, ‘!!!’.26
Through the summer of 1980, Mrs Thatcher and her Treasury ministers began to fight a fiercer but still inconclusive battle with the ministers of the spending departments. Finding it very hard to get her way in private, Mrs Thatcher increased, if anything, the passion of her public rhetoric. It was one of her unusual and effective political techniques that she almost always ignored Denis Healey’s ‘First Law of Holes’: ‘If you are in a hole, stop digging.’ She dug furiously. In a speech to the Press Association on 11 June, she declared that ‘The day that I am not causing controversy, I shall not be doing very much.’ She said that she was attacking equality and the economic primacy of government, and returning to ‘old values’. ‘Ministers, Treasury knights, and civil servants’, she said provocatively, ‘can never understand budgeting by cash’ (as opposed to volume), but cash limits were ‘something which every woman knows’. ‘There will be no U-turns along this road,’ she added.27 Two weeks earlier, the government had announced a plan to reduce the number of civil servants from 705,000 to 630,000 over four years. In private discussion within government, the records show a series of occasions on which both sides, though anxious not to give ground, were also reluctant to have a fight so open that one or the other would have to lose. John Hoskyns’s diary for 28 May recorded the mood: ‘David [Wolfson] v. despairing about Margaret at present. Reads papers superficially, treats colleagues very badly, still overexcited by being PM, will not sit down and think about key issues. Prior and Co. simply registering their reservations for the record, but biding their time for a forced U-turn when she will have to resign.’28
At E Committee on 17 June, Mrs Thatcher began the meeting with a little speech indicative of her state of mind at that moment and of her idea of chairmanship in general. As Robert Armstrong noted it, she said:
Indicators of output down, earnings up.
We have nothing to distribute.
If we go on like this in the public sector, we shall be redistributing
wealth from the private sector to the public sector.
Resentment against public sector wage increases enormous.
Devaluing savings to give public sector increases.29
This prelude was by way of supporting Geoffrey Howe in his attempt to impose a cash limit on Civil Service wages which would drive their rate of increase down below the private sector rate. Howe wanted comparability, still in operation, ‘dethroned but not defenestrated’. He provoked Christopher Soames to declare: ‘If we do this, we shall have major industrial strife in the public sector.’30
Not long after this, a last-minute and unsuccessful attempt was made to toughen up Jim Prior’s Employment Bill provisions against secondary blacking. Various right-wing peers introduced an amendment to the Bill, and Mrs Thatcher, even though they were acting against her own Secretary of State’s wishes, encouraged them. She asked Prior and his deputy Patrick Mayhew to come and meet the rebel peers in her room in the Commons. There was a heated argument in which, on one clause, she attacked Mayhew, saying, ‘The clause doesn’t do what you say it does. You’re only saying it to frustrate the idea.’ ‘I won’t take being accused of dishonesty,’ said Mayhew. ‘I’m going home,’ said Prior.31 When the rebellion, which took place in the Commons as well as the Lords, was being organized by Conservative backbench MPs, Mayhew entered the Chamber one night and was surprised to hear Ian Gow calling out to Tory MPs, ‘This way for the PM’s amendment,’32 as he provocatively described it, in support of the rebels against Prior. In fact, the amendment failed. According to Mayhew, Prior, who hated everything about the detail of legislation, was inclined to ‘a bit of “allakeefik” [shrugging of the shoulders to indicate resignation to fate]’ and did not want a full-scale battle, but it was obvious that the relationship between Prime Minister and Employment Secretary was worsening all the time.
In order to deal with the problem of how best for the Cabinet to discuss the vital economic questions on which they were so divided, Mrs Thatcher agreed to a presentation by Terry Burns, still fairly new as the Treasury’s chief economic adviser, with a supporting talk by Robin Ibbs, of the CPRS, about the dangers of indexation. There was a jostling among officials about attendance at this meeting which revealed the tensions. At an early stage of its planning, Robert Armstrong wrote to a presumably irritated Douglas Wass at the Treasury, ‘I have little doubt that, if the Chancellor were to take the view that you should come as well as – or even instead of – Terry, the Prime Minister would be perfectly content.’33 She was not content at all. Beside Armstrong’s suggestion a few days later that Wass should attend the meeting, Mrs Thatcher wrote, ‘No.’34 As was usual in such matters, Armstrong, in the role of Sir Humphrey, prevailed, and Wass accompanied Burns to the meeting, but it was Burns, not Wass, who did the talking. The purpose of his ‘talk-in’, which took place in the state dining room on 3 July 1980 and was illustrated by acetate slides, was to give an expert view of the financial situation, illustrating both the gravity of the crisis and the necessity of the government’s monetary policies. Burns pointed out early signs that the inflation rate was beginning to fall. He impressed Hoskyns: ‘Terry’s presentation did the trick, made colleagues realise just how much historical evidence was on the side of monetarism and how little alternative there was to our policies.’35 But, to the more hierarchically minded members of the Cabinet and the mandarinate, there was something irritating about being made to sit down and take instruction from a man still in his thirties. Wass recalled that Burns gave ‘a child’s guide to the economy … I don’t know what good it did.’36 Robert Armstrong began his record of the day in his Cabinet notebook with the mocking he
adline: ‘Burns – his lecture’. Burns remembered the discussion after his talk as ‘quite a rough event’.37
In that discussion, political anxiety centred on the unemployment figures, and where they might end up. Prior, fearing 2.6 million unemployed in the course of 1982,* argued for more measures to help the young unemployed. Burns predicted (wrongly, as it turned out) that unemployment ‘should do better than that’. Peter Walker warned that there would be ‘no British industry to recover’, and Nicholas Edwards,† the Welsh Secretary, who was by no means a paid-up Wet, worried that the downturn was more sustained than the MTFS allowed for and called for more flexibility over interest rates. This gave Howe his cue to tell the meeting that he would announce a 1 per cent cut in interest rates that day. There was so little reaction to the news that Mrs Thatcher said: ‘Did everyone hear that?’ Someone, probably Prior, said: ‘It’s a mistake. People will think it’s just because of this meeting.’38 Howe acknowledged the severity of the situation: ‘Of course we are facing a dangerous spectacle. The alternatives don’t make it any less dangerous … If we relax, it validates high pay and diminishes the return to competitiveness.’ He said that it was not the government’s policies which were doing ‘fundamental damage to the industrial base’, but ‘unchanged attitudes’. He hoped these attitudes would change because of the shock that the policies were administering. Mrs Thatcher came in after him: ‘One thing, and it’s in our control: public spending. If we don’t, interest rates [will go] back up.’39
For Mrs Thatcher and her supporters, the teach-in set the scene for a sterner meeting about public spending the following week. On 10 July, Howe waved in front of colleagues the Financial Times report that 40 per cent of the year’s PSBR had already been used up in three months. Against that background, John Biffen, the Chief Secretary, announced that he wished to maintain the spending total, but with a larger contingency reserve within it to deal with the spending overruns of nationalized industries such as coal, steel and rail. This meant further cuts in spending departments. Jim Prior reacted angrily. ‘Is this right in a recession?’ he asked. ‘Nationalised industries can’t meet their targets in a recession. If we make cuts to compensate, we deepen recession.’ ‘An increase in PSBR’, he added heretically, ‘will not necessarily put up [interest] rates.’ Michael Heseltine attacked from a rather different direction, hankering, as always, for a more coherent strategy for industry. ‘I can’t go on hacking my department to ribbons to finance consumption elsewhere,’ he complained. This provoked Mrs Thatcher to the sort of bluntness which did not endear her to colleagues: ‘We never get the reductions in consumption … People, including you, won’t make the cuts.’ She said that there was, in fact, ‘lots of money for investment. The reason why it does not happen is attitudes of those who use it.’ Tiring of the discussion, she snapped: ‘We must have decisions on [spending] totals this morning. Or no credibility,’ and referred to the Financial Times story about the PSBR. Prior snapped back, in Armstrong’s rendering: ‘Fed up with having Cabinets set up by the press.’40 Prior, however, was not above some hostile briefing of his own. Just five days later he vented his frustration with Mrs Thatcher – unattributably, of course – to Hugo Young of the Sunday Times. ‘She hasn’t really got a friend left in the whole Cabinet,’ Prior said, rather unfairly. ‘One reason she has no friend is that she subjects everyone to the most emotionally exhausting arguments; the other is that she still interrupts everyone all the time. It makes us all absolutely furious.’41 This ill-tempered meeting was the last full discussion of economics and public spending before the House rose for the summer recess. At Chequers in early August, Mrs Thatcher gathered an end-of-term dinner for close advisers, including Hoskyns, Douglas Hague and Norman Strauss. ‘It was’, said Terry Burns, who attended, ‘a very curious event … There was a sense of her against the world’ – the pre-dinner discussion was very ‘gossipy’, with Mrs Thatcher ‘extraordinarily frank’ in her criticism of Jim Prior. Burns remembered being ‘quite shocked’.42
As a parting shot before she went on holiday in August, Mrs Thatcher deployed a phrase for which, in another context, she would become famous. Would she relax the squeeze, asked her interviewer Hugo Young in the Sunday Times? ‘No, no, no!’ she cried. And she went on: ‘Deep in their instincts … they [the British people] find what I am saying and doing right … if I give up, we will lose.’43 In a comparison which risked vainglory, she told an American interviewer: ‘If we had ever looked at Dunkirk as a kind of balance sheet, as sometimes I am asked to look economically at this country, well I don’t think we would have gone on at that time. If you looked at it as a matter of the spirit of the people then it is totally different.’44 Her belief that she naturally intuited ‘the spirit of the people’ was taken by some as a sign almost of insanity, but it sustained her when mere statistics, headlines and opinion polls offered gloom.
One who wanted her to give up her policies was the first Prime Minister under whom she had served, Harold Macmillan. At her invitation, he had visited her at Chequers early in August, and he followed up their conversations there with a memorandum. Because of the world oil situation, he told her, ‘All the circumstances … would demand … not restriction and deflation, but powerful reflationary measures.’ He went on: ‘The so-called “money supply” policy may be useful as a guide to what is happening just as a speedometer is in a car; but like the speedometer it cannot make the machine go faster or slower.’* Macmillan’s remedy, if a wages policy were ruled out, was a productivity drive, possibly through an ‘industrial parliament’ of the sort for which, he said, Churchill had once argued. If everyone discussed productivity, he said, ‘we may hope to obtain a return to “consensus” politics, sneered at by some, but the essence of Tory democracy. Devisive [sic] politics in a democratic system are not likely to be applied for sufficient length of time to become effective even if such methods were desirable.’45 Although courteous in tone, Macmillan’s memo said, in essence, that Mrs Thatcher was completely wrong. It also contained the implication, which was keeping the Wets going through what they saw as the dark night of Thatcherism, that her policies were bound to fail. There is no record that she replied to it.
Mrs Thatcher always disliked holidays. She found their break with what she called ‘rhythm’ unsettling, and she did not know what to do with them. Once, when she was Education Secretary, she and Denis went on holiday to Corsica for ten days. After four days, her secretary Alison Ward was surprised to receive a telephone call from her: ‘Hello, dear. We’re at Heathrow.’ ‘Oh,’ said Alison, ‘has something dreadful happened?’ ‘Oh no, dear. We’ve done Corsica.’46 In her first summer as Prime Minister, Mrs Thatcher had joined the Morrison clan for her second stay with them on the Hebridean island of Islay. Ted Heath had also stayed there as party leader and had even shot a stag. Mrs Thatcher was a more popular guest than Heath, joining in activities with gusto, but it was ‘not easy to get her into a pair of walking shoes’ and she went for her first walk in patent leather.47 In the summer of 1980, she went to stay, as she had done in 1978 and was to do on several subsequent occasions, with Sir Douglas and Lady Glover at Schloss Freudenberg in the Zug canton of Switzerland. Douglas Glover had been a long-standing backbench Conservative MP, and was now retired. His wife, Eleanor, was the rich and clever widow of a Swiss industrialist. Lady Glover was an active-minded woman who liked to advise Mrs Thatcher on how to look her best and tried to bring interesting people to meet her. She provided her with a lady’s maid and a hairdresser and, for five days in August, would scour Switzerland and neighbouring countries for people of sufficient brainpower and eminence to come to the daily lunches and dinners given for the Thatchers. According to Lord Gowrie, who was sometimes a fellow guest with the Thatchers, these meals could be ‘slightly nightmaric’.48 Otherwise, there was not much to do at Schloss Freudenberg except admire the magnificent views and walk, which Mrs Thatcher always did in a skirt, up the nearest little mountain.49 On one of these occasions in 1980,
Mrs Thatcher met Karl Brunner, the Swiss-born, American-based monetarist economist (Yehudi Menuhin added artistic tone to the luncheon), and, on another, Fritz Leutwiler, the President of the Swiss National Bank. They told her, as Friedman was arguing, that her government’s reliance on sterling M3 was undermining its attempt to conquer inflation and suggested that the Bank of England was mishandling the management of the money supply.
Margaret Thatcher: The Authorized Biography Page 71
