Not while I'm alive, he ain't - Part 4

Not while I'm alive, he ain't - Part 4

Presented by Brian Walden

Broadcast on The Westminster Hour, Sunday April 21 2002

The pound's sliding again as world markets worry about who's running the British economy. Mrs Thatcher tells Parliament the Chancellor has her full, unequivocal and generous backing.

When a prime minister has to tell parliament that her chancellor has her full backing, it's a sure sign there's big trouble between them. This was June 1989, and world markets were entitled to be confused about whether the economy was being run by Margaret Thatcher or her chancellor, Nigel Lawson. Inside the government it wasn't clear either. Norman Lamont, himself a future chancellor who eventually was to fall out with his prime minister, was then a Treasury minister.

There was a clash of intellects, and Nigel was determined to stand up for what he thought was right, and Mrs Thatcher was determined to stand up for what she thought was right. And they had very different views on the exchange rate.

This intellectual clash was in some ways surprising. Lawson had been appointed chancellor by Thatcher in 1983 as someone who shared her free market beliefs. But he was becoming disenchanted with the erratic nature of the targets the Treasury had been using to try to control the money supply in order to reduce inflation. Charles, now Lord, Powell saw their relationship develop from his vantage point as a key Thatcher adviser within 10 Downing Street.

Over the years there was an increasing divergence of view on the correct economic and monetary policy. It really concerned quite arcane subjects, I suppose, as to whether you should be targeting the money supply or the exchange rate as the basic determinant of monetary policy. Added to it was the question of whether Britain should join the ERM, the exchange rate mechanism, the predecessor of the single currency I suppose you could call it, and I think on that their views had probably differed right from the beginning of the Thatcher government, but it didn't really become a major issue until about 1987. From then on it was downhill until 1989 and Nigel Lawson's resignation.

The first inkling of the issue that would come between them occurred with a run on the pound in January 1985, which nearly reduced the pound to parity with the dollar. Lawson blamed the worst of the crisis on a media briefing given by Thatcher's press secretary, Bernard Ingham. In this Ingham had repeated his boss's preference for a hands-off policy that allowed the pound to find its own level. Lawson took to calling the affair 'the Ingham run on the pound', and grew keener to implement a policy of managing the exchange rate. Later that year he failed in his first attempt to persuade Thatcher to join the exchange rate mechanism, which would link the value of sterling to other European currencies. But in early 1987 he adopted a policy which had a similar effect - and, according to Thatcher, without even mentioning it to her.

I first found out about that entirely by accident. I used to do an annual, more or less annual, interview with the Financial Times, and one of the questions they put to me on that particular day when they came was: "Why are you shadowing the deutschmark?" And I vigorously denied it. I said "We're not."

According to her account the journalists showed her a graph which convinced her that Lawson was indeed intervening in the foreign exchange markets to make sure the pound stuck to a level around three deutschmarks. But was this really news to her? Andrew Tyrie, now a Tory MP, was then a special adviser to Nigel Lawson.

Margaret Thatcher knew exactly what Nigel Lawson was doing in shadowing the Deutschmark. She may have gone in for bouts of voluntary amnesia about it, but the truth is she knew exactly what was going on. She saw the daily reports of intervention in the summer and autumn of 1987.

Alternatively, this is the view of Charles Powell.

Having worked closely with Margaret Thatcher over many years I believe what she says, I believe she did not appreciate that was happening until then. One can perhaps raise the question - ought she to have realised it was happening? Equally one should say, I suppose, ought Nigel Lawson not to have been more proactive in drawing it to her attention that he had changed policy. After all, a prime minister and a chancellor meet every week. Meeting weekly you would have thought that between them these two powerhouses of the Thatcher government might have communicated exactly what was going on, but I'm afraid it must reflect the rivalry, the lack of trust, which by then was growing between them on this essential subject of running the economy that they didn't communicate with each other.

Whatever the initial position, by the end of 1987 the policy was evident, and Thatcher and Lawson were embroiled in an acrimonious dispute over its wisdom. In March 1988 Lawson had to abandon it, under pressure both from the prime minister and the volume of trading on the international foreign exchange markets. Labour attacked Lawson as a figure who had been humiliated, and Thatcher ostentatiously uttered unhelpful remarks about the futility of restraining the pound. The discomfort of Lawson's position was illustrated by an interview he gave on 'This Week, Next Week' to Vivian White.

It wasn't just the press who addressed themselves to the exchange rate in public, it was the prime minister and First Lord of the Treasury herself. Did she devalue your office by speaking about the exchange rate in public as she did? / I don't think she devalued my office, but I think one needs to be very careful about how one talks about these matters in public. / Was she? / That incident was unfortunate but that's now behind us.

But it turned out that it certainly wasn't behind them - despite some attempts they did make to put it there. Andrew Tyrie.

After the first serious bout of public disagreement which took place in the spring of 1988, they had a meeting, a sort of summit meeting, at which they hammered out an agreed monetary policy just after the 1988 budget, but the trouble was - Nigel's view is - that Margaret Thatcher just didn't stick to the deal. Her description of the government's policy kept slipping back to something that she would like to be doing and which was rather different and which was encapsulated in the phrase, you can't buck the market.

And naturally the Thatcher view was that it was Lawson who didn't stick to the deal. Either way, open disagreement continued to surface. When Thatcher was asked in one radio interview about the cause of rising inflation, it seemed pretty clear who she thought was responsible.

We actually picked up our inflationary tendency during a time when we were trying to hold our pound level with deutschmark 3 marks.

A few weeks after this Lawson was questioned about the same subject on On the Record by Johnathan Dimbleby.

You said quite clearly that it was not a consequence of shadowing the deutschmark. As you know the prime minister in an interview the other day said that's when we picked up our inflation, by trying to shadow the deutschmark. She doesn't seem to be getting it right / You'll have to ask the prime minister to elaborate on that if you want to. / She said we were shadowing it very closely and that's where we picked up inflation. That's not your view, is it? / I think it's much more complex than that.

Lawson had by now united with the pro-European Foreign Secretary Sir Geoffrey Howe in a new campaign to persuade Thatcher to go into the European exchange rate mechanism. The climax of their joint efforts occurred just before the European summit in Madrid in June 1989, as Charles Powell recalls.

Early on a Sunday morning both the Chancellor and the Foreign Secretary, Nigel Lawson and Geofrrey Howe, came to see her in Downing Street on the very day of her departure for the European concil in Madrid, where these issues of economic and monetary union were to be discussed, and said that she must give a date by the end of 1992 by when Britain would join, otherwise they would resign. Now that is holding a pistol to the head of the prime minister and is an unacceptable thing to do. She went to the Madrid European council and she decided that rather than give a date, she set the conditions on which she would eventually be prepared to join, and they were stringent conditions. When she came back, she had not done what they demanded, and they did not resign. So I think you have to say that whatever gloss Nigel Lawson and Geoffrey Howe subsequently tried to put on it, she prevailed on that.

Thatcher was utterly furious with Howe and Lawson for their conspiracy, a fury intensified by newspaper reports which presented the new policy - of joining subject to specified conditions - as a triumph for them against her. The situation was further complicated by her decision to appoint as a personal economic adviser within Downing Street Sir Alan Walters, an economist well-known for his caustic criticism of the exchange rate mechanism. He had advised her in the past, and she trusted him as someone whose theoretical arguments fully tallied with her gut instincts. Walters was looking forward to the opportunity to discuss these arguments with the chancellor.

I arranged to see the Chancellor, one on one. So I went down to see him. Hello Nigel, come back to advise Margaret. He said, what you must do is beware of the media, they're out to put a wedge between us, mainly on exchange rate policy. I'd like to discuss that with you if I may. He says there's nothing to discuss really, is there. From then on I could never get him to talk about exchange rate policy. I had a number of meetings with Lawson, but he wouldn't engage in a discussion.

This icy welcome was an accurate indicator of Lawson's attitude to Walters and his position in Downing Street. He had already told Thatcher of his objections to Walters, according to his adviser Andrew Tyrie.

Immediately on Alan Walters' appointment, in fact I think even before he was appointed but when it became known that he might, they had a meeting in which I gather Nigel Lawson said, because he's been so active in the few months prior to that meeting in opposing and contradicting economic policy, he will be seen as a serious irritant to the conduct of economic policy if he comes back and furthermore I'm not confident he won't carry on with that.

And indeed the disparity between Lawson's and Walters's views of the exchange rate mechanism continued to feature in the media. The final straw for Lawson was the publication in an economics journal of an article in which Walters described the ERM, also known as the European Monetary System or EMS, as 'half-baked'. Lawson did not enjoy having to explain things away in the House of Commons.

Sir Alan Walters is a part-time adviser and his views on the EMS are not the views of the government. I hope that's absolutely plain.

Lawson increasingly felt that this would be not absolutely plain as long as Walters remained in post. On Thursday the 26th of October 1989 he met Thatcher and told her that if she did not get rid of Walters he would resign. She refused. Lawson resigned as chancellor and left the government. According to Walters, there was an important point of principle at stake.

The right to choose her advisers was the thing which she would not give up. If she'd fired me on his say-so, then he would be determining her staff. The substantive content was ERM and so on, but the break point as far as the distribution of power is concerned, and that's what politics is about after all, is that she would not give him power to determine her advisers.

And possibly Thatcher thought that the position of Walters could not seriously be a resigning issue for Lawson. Charles Powell.

The scale of the Alan Walters issue was minuscule compared to the issues of exchange rate policy, the ERM, and so on, and I know that Mrs Thatcher took the view that really Nigel Lawson was by then pretty pessimistic about his own policies and the fact that interest rates were rising pretty steeply, that he was increasingly bearing the brunt of unpopularity within the Conservative party, within the country, for his policies and that Alan Walters's position was almost an excuse for him, not a serious issue, and that is why she fundamentally couldn't believe that a man who held one of the great offices of state was going to resign over the indiscreet comments of an adviser who had no constitutional standing.

Even those close to events were surprised by the news. Norman Lamont, one of Lawson's Treasury ministers.

I was absolutely flabbergasted and astonished, and I actually took the time to write him a long letter begging him not to resign because I had a very high regard for him and I thought that he and Thatcher stood together. I was just taken aback that this rift had got to the point where he wanted to resign, and I just could not believe that Mrs Thatcher was going to let him go.

Nevertheless, she did. As it happens I had an interview already arranged with Margaret Thatcher on London Weekend Television for the Sunday after Lawson's resignation. I wondered if she would cancel, but she didn't, and she came on with two prepared messages which she famously kept repeating:

Advisers are there to advise, ministers are there to decide.

and

Nigel was Chancellor. Nigel's position was unassailable, unassailable.

Whatever Lawson's situation had been, the whole affair, and her disputes with Lawson, helped to make her assailable. She had been prime minister for over a decade, but a year later she was ousted by her own parliamentary colleagues.