THE ECONOMY
The price of Mr Lawson's victory
JOCK BRUCE-GARDYNE
With benefit of hindsight it is easy to see that the Great Battle of Downing Street had to end the way it did. For when Mr Lawson enters the ring, it is not in his nature to leave it again until his opponent is laid out on the canvas for one and all to see. The Prime Minister has watched him at it long enough. She should have known better that to don the gloves in the first place.
It was certainly fun while it lasted. The chattering classes, stretching nowadays from Westminster and Whitehall all the way down the Thames to the Isle of Dogs, had a ball. And for all the solemn shaking of heads in the City, no great harm was done.
Except, perhaps, by the denouement. As the anonymous Bank of England spokesman said at the time a half point cut in base rates was 'a less than ideal re- sponse'. He can say that again. He added that this had been 'forced' on the Bank by `the recent strength of sterling'. Fiddles- ticks. It was 'forced' on the Bank by the need to hoist the flag of victory over No. 11 Downing Street. The fact remains that with borrowing, principally in the name of house purchase, going fit to bust, cutting interest rates to the lowest level for ten years was the last thing the doctor should have ordered.
If it is true that, thanks in large measure to the fortuitous revelation of unexpected- ly good trade returns from the US that same afternoon, the British authorities sprang a very nice little 'bull trap' on the sterling speculators: and as the Prime Minister rightly (belatedly) acknowledged, those speculators should not be allowed to think that 'sterling was a one-way bet'. But the official line being peddled by the Treasury involving a magic formula according to which each four per cent rise in sterling merits a one point cut in the interest rates, is tommy rot, as the Treas- ury itself is no doubt well aware. For the rise in sterling puts the frighteners on the manufacturers and purveyors of services in the private sector who have to compete internationally; whereas the cut in interest rates stokes up the flames in the other parts of the engine room where it is already far too hot for comfort.
Indeed one of the messages which may be deciphered from amidst the badinage of recent weeks between the Prime Minister, the Chancellor and the Bank is that all
three now agree that interest rates should urgently be going up not down. In this respect it is the Treasury which has moved into line. (Incidentally I trust the Chancel- lor has learned one little lesson from the fracas: which is that if he wants to speak his mind he should choose the home-grown hacks as his audience, rather than the foreigners. I can still recall how, when I was FT correspondent in Paris in the late Fifties, the newly installed Finance Minis- ter, M. Pinay, summoned me to see him. I was a little surprised by the call. But we had an amiable interview: at the end he started fossicking in his desk, and eventual- ly produced a paper bag. le vous felicite, Monsieur', he told me magisterially, 'de votre francais. Prenez un bonbon.' So I chose a sweetie. That was our last friendly encounter for many months. It soon trans- pired that he had been unwise enough to offer his first ministerial interview to the representative of a foreign newspaper. `Pinay submits the franc to the judgment of the organ of British capitalism,' screamed the headlines in the communist Humanite next morning. M. Pinay did not forgive me in a hurry. Admittedly Mr Lawson has given plenty of interviews to the local journalists over the years. But the brouha- ha aroused by his Wall Street Journal interview may, I suspect, have had at least something to do with the fact that he chose the representative of a foreign daily to receive some otherwise less than earth- shaking comments about the current state of affairs. And, so he suddenly found himself confronted with the headline news that he thought it was high time for one and all to shove their rates of interest up.) The tensions between Prime Minister and Chancellor, with the Bank of England caught uneasily in the middle, are surely likely to remain. The Bank, I suspect, has been somewhat misunderstood. The latest Quarterly Bulletin was interpreted as de- monstrating that Threadneedle Street had come down on the Chancellor's side: accepting the thesis that the rise in the exchange rate has cooled the economy sufficiently to remove the risk of overheat- ing. Surely not. Surely the coded message from the Bank was that it is still, if not dead scared, at least seriously uneasy about the explosive growth of borrowing from the banks and building societies, and therefore convinced that monetary policy was in urgent need of tightening. But the Quarterly Bulletin has for years been sub- ject to the sort of 'advance censorship' which Sir William Rees-Mogg is now to apply to television. The Treasury sees it in draft, and not infrequently requires some programme changes. Hence, I suspect, the rather muddled message which gave the pound such a boost last Friday.
As for the Chancellor himself, he clearly would like his siblings overseas, and parti- cularly the US administration, to take the lead in lifting interest rates. Then he would be able to put ours back up a notch or two without sending the pound rocketing sky- wards (or at any rate that's the hope).
So what about the Prime Minister? One does not have to share Mr Samuel Brittan's conviction that she is unsafe at any speed — one may even share her conviction that cuts in interest rates or massive interven- tion in the foreign exchange markets are far too high a price to pay for currency stability just now — and yet feel that she has a rather funny way of going about her crusade against the money-lenders. Sir Alan Walters and Professor Brian Griffiths surely must have drawn her attention to the inescapable evidence that it is not consumer credit and all those plastic cards which are fuelling the lending explosion. It is all that borrowing on mortgage which she so passionately believes in.
In an ideal world, therefore, it would not be too difficult to construct the basis of a new concordat between No. 10 and No. 11. Mr Lawson would, after all, agree to go quietly along with the flattering — if unwelcome — passion of the foreigners for our pounds, confident in the belief that before we are very much older the sterling fetishists will get their fingers burnt. Mrs Thatcher would agree that the national addiction to lending and borrowing on the basis of ever-escalating housing prices has gone too far, and has got to be halted.
Since we don't live in an ideal world, neither of these two desirable attitudes is likely to materialise. So what is left? Well, as Mr Attlee once remarked to Professor Laski, 'A period of silence would not come amiss'. If they cannot sing in unison, then the Prime Minister and Chancellor should not sing at all. They owe that to each other.
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