Taking a pounding
Bruce Anderson
POLITICS AND THE POUND by Philip Stephens Macmillan, £20.00, pp 364 Fixed exchange rates create problems for British politicians. They not only turn the pound's external value into a test of political virility; they oblige chancellors and premiers to economise with the truth. Floaters have an easier life. In January 1985, the pound fell almost to parity with the dollar. Mrs Thatcher felt humiliated of which more below — but it did not dam- age her standing with the public.
Unlike devaluation. Labour's 1949 one helped to discredit the Attlee government, and Harold Wilson was determined not to suffer likewise. Little good it did him. After three years of struggling to sustain the unsustainable, he too was forced into devaluation, and obloquy. His ultimate successors' desire to avoid further stigma as the party of devaluation helps to explain their unethical support for British member- ship of the ERM, but in this case. Labour escaped undamaged, unlike Messrs Major and Lamont. This Government's reputa- tion has never recovered from its enforced departure from the ERM.
There is also the necessity to prevaricate. If ministers were ever to admit that there were problems with a parity, the markets would move against them with irresistible force. So Cripps, Callaghan, Lamont and Major were all obliged to proclaim as immutable a policy they knew to be under almost terminal pressure. But it is not easy to explain to the voters why it is sometimes necessary to lie on their behalf.
As Philip Stephens observes, back in 1979, Margaret Thatcher intended to avoid these difficulties. In those innocent days of prelapsarian monetarism, she and Nigel Lawson believed that as long as the domes- tic money supply was under control, the exchange rate would take care of itself. Mrs Thatcher had never addressed herself to the mechanics of monetary control; it was as if she thought that it would only be nec- essary to march into the Royal Mint and shut down the printing presses. Mr Lawson was more sophisticated, and the failure of attempts to target Sterling M3 plus the dis- inflationary effect of an overvalued pound led him to the conclusion that an effective monetary policy had to be based on the exchange rate. But his Mistress did not agree with him, then or later.
In the late Seventies, one or two Thatcherites such as Nicholas Ridley came gloomily to the conclusion that Britain ought to joint the ERM because no govern- ment could be trusted to deal with inflation. Margaret Thatcher emphatically disagreed; were they implying that she could not be trusted to do her duty? But by the time Mrs Thatcher left office, inflation was in double figures, and Britain had joined the ERM against her instincts; she still blames Mr Lawson for sabotaging her policy.
With some justice, though she can hardly evade her own share of responsibility. As Mr Major may have to discover over Mr Clarke and the referendum, whatever the cost of preventing a chancellor from defy- ing a prime minister, it has to be met.
But Mr Lawson's real error was to mis- apply the lessons he thought he had learned in the early Eighties. A combina- tion of high interest rates and the market's — temporary — bestowal of petro-curren- cy status on sterling pushed it to absurdly high levels; the result was a recession, but also a cure for inflation. In 1987/88, Mr Lawson rightly concluded that the pound was overvalued against the deutschmark but that was not the moment to base an exchange rate policy on an assessment of the relative strengths of the two economies. As in the early Eighties, an overvalued pound could have supplied a necessary cor- rective to domestic monetary growth.
The Thatcherites insist that the illicit shadowing of the deutschmark caused the inflation of the late Eighties. But this is implausible; it ignores cultural factors. Per- missive borrowing was to the 1980s what permissive sex had been in the 1960s. In 1979, relative to income, British indebted- ness per household was at half American levels; by 1990, we had caught up. No mon- etary or exchange-rate policy could have prevented the inevitable inflationary conse- quences, but a stronger pound in 1988/89 would have mitigated them, as would the abolition of mortgage tax relief, another Lawson proposal which his Premier vetoed.
Mr Stephens's book contains some inter- esting snippets. He informs us that the secret intelligence services try to find out what the Bundesbank is going to do; not apparently with much success. He also tells us that in January 1985, Thatcher was so aghast at the collapsing pound that 'she demanded of Lawson why sterling was not already in the ERM "protected from all this." ' La donna e mobile.
But overall, this is a book which docu- ments; it does not cut deep. It is written in a journalistic idiom designed to keep thought at a distance: gaps yawn, secrets are close and crises serious. Mr Stephens enjoys describing the reverses which politi- cians encountered and the ensuing changes of policy — and of mind, in Mr Lawson's case; he is not so effective at analysing the reasons for those reverses. Like some ultra- Thatcherites (not that he is one) he assumes without arguing that there was a less painful alternative to the ERM. But there was no way in which the late-Thatch- er inflation could have been reduced with- out Norman Lamont's 'price worth paying': unemployment and lost output. In the ERM or outside it, interest rates would have had to be much the same, at least until the 1992 election.
Mr Stephens also teases those exponents of the conventional wisdom who claimed that devaluing out of the ERM would lead to higher interest rates. They were indeed proved wrong, but why? Markets have good reason to distrust recently devalued currencies, so what changed their minds in this case? Is it not possible that the Gov- ernment's willingness to go to the utter- most before leaving the ERM convinced them that even if one means of implement- ing it had been abandoned, the commit- ment to counter-inflation would endure?
This is still a controversial subject, and Mr Stephens would not claim to have said the last word. There is only one interim conclusion to be drawn. Politics and the pound sit ill together, and cannot be kept apart.
ve given up smoking, and drinking, and now you look terrible'.
Previous page
