THE ECONOMY
Mr Lawson's return to the Mansion House
JOCK BRUCE-GARDYNE
A'good and early guide to changing financial conditions' Chancellor Lawson told the merchants and bankers of the City of London at the Guildhall assembled, 'is the exchange rate. When, as now, signals from the various measures of money be- come difficult to interpret, the exchange rate inevitably assumes an increased weight in monetary policy decisions. . . . Should it at any time become desirable to tighten monetary conditions, that would be achieved — and let there be no doubt about this — by bringing about a rise in short-term interest rates. . .
Yes, I am cheating. That was the Man- sion House address of 17 October 1985. An advance text of the Mansion House speech of 16 October 1986 was not, unfortunately, available as this issue of the Spectator went to press. In its absence I can't help thinking that there may be something to be said for jobbing backwards. It certainly reminds me how times have changed.
In the intervening 12 months the ex- change rate against the all-important deut- schmark has slithered by getting on for a third. On two occasions — in the early spring, as Opec fell apart, and in recent weeks — 'the young Turks who write the brokers' circulars' (as Nigel Lawson apos- trophised them last year) have unani- mously concluded that it had indeed 'be- come desirable to tighten monetary condi- tions. . . by bringing about a rise in short- term interest rates'. On both occasions (well, at the moment of writing) the chan- cellor has contrived to silence them with a modest one per cent.
Now as my colleague Christopher Fildes commented a year or two ago, our Chan- cellor is one of those who will 'cross the road to pick a fight'. His achievement in staring down the market clamour for a substantial rise in the rate of interest twice in a calendar year will have given him considerable satisfaction. But there are sig- nificant distinctions between last spring's trial of wills and the latest one. In the spring the collapse of the Opec cartel pro- vided a logical justification for allowing the pound to slide with but a single point on base rates to steady the fall.
It is not so easy to find consolations for the latest bout of 'turbulence.' The re- serves have been heavily plundered (and the bills for the comradely assistance from the German Bundesbank still await us). And the external reasons for the queasi- ness of our currency are not so readily to hand.
The official line has been that the pound has been caught in the backlash of the spat between US Treasury Secretary Baker and German Central Bank Governor Pohl over German interest rates and the dollar ex- change rate, coupled with the repercus- sions of Mr Kinnock's pledge to release us from the American nuclear umbrella. Well. It is indeed arguable that the as- sumption of office by a Labour govern- ment pledged to become, at best, a semi- detached fellow-traveller in the Nato camp would be a signal for any sane overseas depositor to take to the boats. But by the same token it surely ought to increase the odds against it happening. Besides there there was that awkwardly specific underta- king in the Treasury's 'Red Book' publis- hed at the time of the spring Budget, to the effect that if either the broad or the narrow money indicator got out of step 'the Gover- nment would take action on interest rates unless other indicators — especially the ex- change rate — suggested clearly that mo- netary conditions remained satisfactory'. Since when the broad indicator and its tar- get range have not been in hailing distance of each other, while such 'other indicators' as house prices and bank lending have been almost off the dial. Yet when the exchange rate began to plunge the Govern- ment stayed its hand.
This, however, is where our old friend the European exchange rate club muddies the waters. In the past few days the Chan- cellor has scarcely troubled to disguise his impatience — shared, as we know, by all the Great and the Good — to fill in a membership form. Inevitably there was speculation that he would seize the oppor- tunity of Thursday's dinner at the Mansion House to announce our participation to the plaudits of the multitudes assembled. So when base rates moved on Tuesday the deducation was inevitably drawn that his ambition had been blackballed by 10 Downing Street. As a result, the one-point rise (which would probably have been greeted as 'too little too late' in any case) was received with scepticism.
Now to my mind both the splendours and the miseries of participation in the ex- change rate mechanism have been vastly over-written. But if there was ever a mo- ment when the time was not ripe for us to join, this is surely it. We are told that if the pound signed on it would very likely float straightway to the top of European curren- cy grid, thus inducing not a rise in interest rates, but a cut. Since our nominal interest rates were already about twice as high as those prevailing inside the club, this did indeed seem a possibility. But is a cut in the cost of borrowed money really what the doctor ordered at a time when we are already experiencing the biggest splurge in credit since the 'Barber boom'?
Might we not conceivably be wiser to recognise that, after 15 months of trying to steer our monetary policy (albeit without formally admitting it) by the performance of the exchange rate, it has proved to be a fickle jade? After last year's Mansion House speech I suggested in these pages that Mr Lawson's New Model Financial Strategy seemed to involve a bid to copy `Reaganomics', by encouraging an inflow of funds from abroad with relatively high real rates of interest, to pressurise the CBI into abating wage increases by keeping the exchange rate up, while allowing those in- flowing foreign deposits to help finance a bigger budget deficit. Mr Lawson, I'm sure, lumped me with 'the young Turks who write the brokers' circulars'. Never mind. In any case I was sceptical about the chances of success. I thought the oil price might turn traitor. As indeed it did. I fea- red that the shadow of the next election might begin to scare the overseas investors. As indeed it has. I was doubtful about the Chancellor's ability to keep interest rates and the exchange rate up if neither of these eventualities materialised. Since they did, this was academic.
But because of the special significance attributed in theory to the behaviour of the exchange rate, for which in practice ex- cuses can usually be found or manufactu- red, we have cheerfully ignored the accu- mulating evidence of what Denis Healey used to call (when it was not so evident) 'monetary incontinence'.
In a truly virtuous world it might be logi- cal to predict that Chancellor Lawson would have told us on Thursday night that he was introducing forthwith a good, old- fashioned credit squeeze. Not because the performance of the exchange rate obliged him to. But because never-never land was getting dangerously out of control. Since we do not live in a truly virtuous world I don't imagine for a moment that he has done any such thing.
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