Читать книгу John Major: The Autobiography - John Major, John Major - Страница 13

ON 26 OCTOBER 1989, after the Prime Minister had delivered her Commons statement on the Kuala Lumpur conference, she turned to me on the front bench and invited me to join her for tea in her room behind the Speaker’s Chair. I assumed she wanted to make peace after the fuss over the foreign ministers’ communiqué. Though she never apologised, she could be extraordinarily friendly to colleagues to whom she had caused trouble, sometimes treating them to an informal chat about politics in the stream-of-consciousness way she so enjoyed when she was relaxing. This, however, was to be no such cosy occasion. She had a bombshell to drop.

We had no sooner settled on the sofas in her room than she said without preamble: ‘Nigel is going to resign and I might want you as chancellor.’

This was startling news, with political implications which shocked me even as the drama stirred my blood. ‘When?’ I asked.

‘Today,’ she said.

So far so clear, but the question in my mind was ‘Why?’ The strains between the Prime Minister and her chancellor were well enough known. Equally, however, I had noted in Cabinet how she generally supported Nigel, and sometimes even deferred to him – behaviour so out of character that it was, perhaps, an attempt at peacemaking, though I had not viewed it as such. She certainly never treated him in the cavalier, intolerant and often discourteous style she displayed towards Geoffrey Howe – whose forbearance, in its own way, was as remarkable as her rudeness. In the Commons, where not long before she had described Nigel Lawson’s position as ‘unassailable’, he was accepted as just that, a great figure in the party, one of the long marchers, a fully-paid-up member of the Radical Tendency, and the Chancellor who, a mere eighteen months earlier, had been practically walking on water. Almost nobody, therefore, believed he really would resign – the Prime Minister and myself included.

I learned later that Nigel had demanded that the Prime Minister sack Sir Alan Walters, her old mentor who had returned in May for a second term as her economic adviser. I had never met Walters, but I did know that he had long been undermining the Chancellor in private. His contempt for Nigel was undisguised, and was a common topic of conversation in both the City and Fleet Street. Now he had broken cover with an article in the Financial Times ridiculing as ‘half-baked’ a line of policy Nigel was known to favour and the Prime Minister to oppose, namely joining the European Exchange Rate Mechanism (ERM), which would keep the value of sterling within pre-agreed limits against other European currencies. It is true that the piece had originally appeared in an American journal eighteen months before, but this second airing was accompanied by a note making it clear that Walters had in no way changed his view.

This situation would have been impossible for any chancellor, and Nigel was taunted on account of it both in Parliament and outside. Who was the real chancellor, Lawson or Walters? Who had the Prime Minister’s ear, Lawson or Walters? With whom did she agree? Sadly, the answer to that last question was evident. She agreed with Walters, and for a proud man like Nigel this was intolerable. He demanded that Walters be sent packing, and he was right to do so. But by bluntly stating ‘He goes or I go,’ he placed Margaret in an equally cruel impasse – even if, by appointing Walters, it was of her making. She agreed with Walters and not with her chancellor. She could not back away from that, nor did she wish to. If she sacked Walters it would be clear she had done so with a pistol at her head. She had relied on him far too long for his departure, if it occurred, to be seen as anything other than a climbdown. She remembered the Madrid summit of June 1989, when Nigel and Geoffrey Howe had combined to compel her to agree to join the ERM when certain conditions were met. To capitulate and sack Walters would have destroyed her authority.

All the elements of disaster were assembled, and there was no Willie Whitelaw to mediate. The Prime Minister and the Chancellor had dug themselves into positions which allowed no compromise. For the moment at least, Margaret Thatcher was still the stronger. She refused to dismiss her adviser, and in the afternoon of Thursday, 26 October Nigel Lawson resigned. Ironically, his resignation was swiftly followed by that of Alan Walters.

Recalling the period today, my lack of foreknowledge of these events strikes me as odd. The signals were there, if only we had decoded them. Perhaps I should have done. It was clear to all that Nigel was no longer working in harness with Margaret; by shadowing the exchange rate of the deutschmark and pressing, repeatedly, for our entry into the ERM, he was setting out his own economic stall in competition with his prime minister. Indeed, with Geoffrey Howe he had put his position on the line even before the Madrid summit. Their differences with the Prime Minister became all the greater as the economic clouds gathered in the first half of 1989.

This discontent intermittently boiled over in public. In June 1989, a month after Alan Walters’s return to Number 10, Nigel announced in a television interview that the length of his stay at the Treasury – already, at six years, a near-record – ‘is a matter partly for the Prime Minister and partly for me and it will be resolved in the fullness of time’. Pressed on whether he would stay in office if asked in the coming reshuffle, he could only reply, ‘You’ll have to wait and see.’

These were not the words of an ‘unassailable’ chancellor. Indeed, in the reshuffle that followed, Margaret gave thought to moving Nigel. Even so, I was not alone in my surprise at the events of October 1989. The Prime Minister was just as stunned. There had seemed to be no differences that could not and would not be best worked out with Nigel in the government rather than outside it. Only later, when I had experience of the chancellorship, did I realise just how difficult his position had been. His departure was particularly tragic because he and Margaret agreed on almost everything apart from the management of the pound. They had dominated the government machine and, when working together, had done much to restore the British economy to vitality.

Nigel is unlucky to be remembered as the author of an unsustainable boom, for his radical policies had, with his predecessor Geoffrey Howe, reshaped a ramshackle inheritance into a vigorous economy. His achievements in areas such as privatisation, tax reform and the Public Sector Borrowing Requirement (PSBR) laid some of the foundations for the steady recovery of the 1990s. And, like all the best chancellors, he resisted the temptation to panic in the face of cries from the opposition, the press, the backbenches and, at times, his own prime minister.

After Margaret’s bombshell I returned to the Foreign Office and phoned Norma. She was at Finings preparing to go to a constituency event. ‘Oh, no,’ she said. ‘Another upheaval just as we were beginning to enjoy ourselves. But it is the job you always wanted.’ And it was.

Stephen Wall, my Private Secretary, came in to see me. He knew I had been with the Prime Minister and sat down, pad in hand, for a read-out. I told him I might be leaving the Foreign Office, and he went white, believing the Kuala Lumpur row had escalated. Knowing how irritated I was by the criticism that I was only at the Foreign Office to do the Prime Minister’s bidding, he feared the worst. When I explained what had happened he was relieved on my behalf, but also aghast at the political implications.

Stephen and I had worked well together, and our partnership was about to end. He would have a new foreign secretary – the third in under a hundred days. ‘Careless,’ I suggested, ‘to lose two foreign secretaries in such a short time.’

He grinned but, being the excellent civil servant he was, he was already thinking ahead and calculating who my successor might be.

‘Douglas would be the best choice,’ I said.

‘Is he going to be?’ asked Stephen.

‘I’ve no idea,’ I replied, ‘but I’ll do all I can to see that he is.’

Stephen didn’t comment. For nearly two hours we paced around, considering the options, and regretting what might have been with our plans for Foreign Office reform, reliving the events of the past three months and waiting to see if the phone would ring. It did.

When I arrived at Number 10, Margaret was in her study on the first floor, tense but composed. At times of crisis officials close to prime ministers throw a protective girdle around them. Margaret knew that a storm was brewing, and her remarks were already beginning to take on the character of the response she would make in public to Nigel’s departure. This was a sure sign of preparation for battle. She often convinced herself in private in order to be convincing in public. She told me that Alan Walters would also be resigning, thus ensuring that I did not have to raise this sensitive matter.

I accepted the chancellorship, reflecting that in this same room, only a short time before, I had tried to talk Margaret out of appointing me foreign secretary. I had thought that promotion premature. Now, a mere ninety-four days later, I was again reluctant to accept a glittering prize. I remember thinking gloomily that few people could ever have felt as I did at both such moments. Yet again political Christmas had come early for me and I was to have the job I most coveted, but under the most unhappy circumstances. The Chancellor had resigned because, despite his persistence, he had been prevented from pursuing the economic policy he thought right for Britain. Indeed, it was the only coherent policy on offer. Despite carping at Nigel for wanting to join the ERM, Margaret had no alternative policy of her own to put in place. I was now stepping into the destabilising policy vacuum that had been created.

The Prime Minister and I discussed the politics of Nigel’s resignation. ‘It’s unnecessary. He’s being silly,’ was the view she expressed, but I don’t think she really believed it. Sometimes this remarkable woman could seem very vulnerable, and she did then. I thought she was close to tears at one moment, and briefly took her hand. I would have offered her any support she needed. She seemed to be trying to convince herself that he was resigning because the economy was going wrong and he didn’t know what to do. That seemed to me highly improbable; Nigel Lawson was a battler, not a shirker. We talked briefly about the economy and inflation, but no mention was made by either of us of European monetary union or the ERM. It was not the moment.

As for myself, I had begun to enjoy the Foreign Office. Only later were malicious tongues to say that in fact I had loathed it. And yet here I was being moved before I had had a chance to make any mark on policy, or to leave any lasting legacy. Even worse, the fact that I was being moved so swiftly and in a crisis meant that the canard that I was the Prime Minister’s alter ego would follow me from the Foreign Office to the Treasury. This was no good, either for me or the Prime Minister.

The offer of the chancellorship did put me in a position to argue for Douglas Hurd to succeed me at the Foreign Office, and I did so. I seem to recall the Prime Minister wistfully expressing a preference for Cecil Parkinson, but officials assure me that he had been ruled out of contention. Tom King also got a mention. In any event, she conceded readily that Douglas was the obvious choice. Allowing yourself to be persuaded to do something you intend to do anyway is a useful ploy if you want to win over the persuader. Margaret may have been playing that game – as prime ministers sometimes do – but whatever her motives, the right decision was made, and Douglas, formerly a career diplomat, aware of other countries’ problems but no pushover, got the job for which he was so exceptionally well qualified.

Once Douglas’s appointment was agreed, Kenneth Baker joined us and the Prime Minister briefed him on the changes. As chairman of the party he would have to bear the brunt of the inevitable media onslaught. He rallied quickly from the shock and was practical and supportive. Kenneth’s great strength was his presentational skill. As he braced himself, I reflected that if the Prime Minister had sent Beelzebub himself to the Foreign Office, Ken, with a straight face, would have presented his appointment to the media as that of a man with a wide experience of dealing with problems in a warm climate. Ken, thank God, was without shame.

At the Treasury rumours that ‘John M’ was to be the new chancellor were causing confusion. Did the ‘M’ stand for Major, MacGregor, or Moore? No one knew, but bets were struck. At least they could console themselves with the knowledge that all three Ms had a Treasury background. A ripple was caused when rumour suggested, mistakenly, that the choice was John MacGregor.

When I arrived it was like a homecoming, with a warm welcome extended in an atmosphere of expectation. But this was a crisis, and preparations had to be made in case measures to deal with it were needed. Luckily, the Treasury enjoys a crisis, having had a good deal of experience of them. The immediate decisions were straightforward. I did not wish to change ministers and precipitate a wider reshuffle. I was keen to keep Andrew Tyrie, Warwick Lightfoot and Judith Chaplin, Nigel’s special advisers, all of whom I knew well. They were a good mixture. Andrew – known as ‘Fang’ because he liked to get his teeth into issues – had a rigorous intellect and was relentless in pursuit of his preferred policy; Judith was more detached but equally hawkish; while Warwick was bouncy and an excellent technician. I was also delighted to have John Gieve, a Treasury high-flyer, as my Private Secretary.

It was clear that we needed to reassure the markets that policy would not change, and a statement was issued to make it clear. I decided not to raise interest rates, despite pressure from colleagues and officials to do so. I was told this would demonstrate ‘firmness of purpose’. More cynical voices suggested, ‘Put them up now and blame the crisis. Bring them down later and take the credit.’ But such a move would have been wrong. It would have added to the political turmoil and harmed a business sector that was already crying out for lower interest rates.

I telephoned Nigel to express my regret that he had gone. It was a brief and friendly conversation, but uncomfortable for us both. He was a little withdrawn, obviously tired, and probably, though irrationally, hurt that the post he had held for so long should have been filled so swiftly – and by one of his former junior ministers. I too was embarrassed, believing (though Nigel never hinted at such a thought, and disliked travel) that he would have liked to be appointed foreign secretary instead of myself earlier in the year – and now here I was taking over as chancellor. But none of this surfaced as, with true English decorum, we both said what needed to be said. Nigel wished me well. I silently and sincerely hoped that the manner of his departure would not, in the end, mar his satisfaction in his achievements.

Yet this man, with whom I had enjoyed working, would inevitably be bruised and hurt. The parliamentary party would be split and angry at such a damaging public dispute, and would take sides. A great deal of trouble and unpleasantness would follow. It soon did, and we gravely underestimated its extent.

The following day I was due to speak at a party meeting in Northampton, and I knew that my remarks would set the tone for future policy. The economic inheritance was dismal. The late-1980s boom had ignited inflation, set us on the road to recession, and destroyed even the strategy by which the economy was managed. I decided to concentrate on the objectives of policy rather than the means of achieving them. The principal objective was the destruction of inflation, an insidious demon, always waiting in the wings, that I had every reason to loathe. Inflation is disastrous and morally corrosive, and it destroys lives. Those who can best protect themselves or even gain from it are often those who have most, and the losers are those who have least. It is a tax on the poor and a tax-free benefit for the rich. While my own family’s financial hardships were brought about by other causes, I had had enough experience of inflation’s effects on neighbours and friends to make my detestation of it personal as well as theoretical.

I woke early the following morning and began making notes for the speech. Base rate now stood at 15 per cent, and I knew that defeating inflation would be a long and painful haul. Time after time, rising prices had wrecked the economy and led to a slowdown in growth or a full-blown recession. And each time, the cries for help from business – and the instant demands of politics – had led government after government to engineer a premature reflation that had eased the pain in the short term but led to a repeat of the problems later on.

We had been down this dreary path often, and it was a route I was determined to avoid taking. This time we had to kill inflation even if the cost was high. It would be immoral to shirk the task, and we didn’t. But the measures would hurt. Many businesses and individuals would suffer, and the government would certainly not have an early recovery in the polls.

I decided to signal my intentions unequivocally. ‘If it isn’t hurting, it isn’t working’ seemed to me to sum up what lay ahead, and I made that the theme of the speech. I also made it clear that I was in favour of a firm exchange rate for sterling, and did not agree with letting it fall. The ghost of Alan Walters had to be exorcised and the markets needed to know that I meant what I said about inflation.

My call to arms was well received by the audience in Northampton, and I drew from it in my first speech in the House as chancellor a few days later. I emphasised that we must eliminate inflation, and confirmed that I believed that membership of the ERM would help to achieve that. If the Prime Minister winced, it wasn’t noticed by those in the Chamber. Nor had she cause to, for I confirmed the mantra of the Madrid conditions. I also paid a deserved tribute to Nigel.

Though my tribute was sincere, our instincts were not always the same. I was concerned about the trade gap and had said so in speaking as chief secretary, whereas Nigel wasn’t. Nigel favoured an independent Bank of England, and I didn’t. Nigel had been prepared to shadow the deutschmark, while I had become convinced that this gave us all the disadvantages of ERM membership without the advantages.

Nor were those the only differences. Nigel, I felt, underestimated the importance of manufacturing; I worried about its decline. Nigel had cut back capital allowances; I was prepared to look at paying some of them in the first year. On this last point I was later convinced that some of Nigel’s policy was right and mine wrong. When I looked at the case for reshaping capital allowances I received a Lawsonian lecture from Judith Chaplin and Andrew Tyrie on the folly of this. To my regret they convinced me.

None of these differences diminished my admiration for Nigel as chancellor. He had misjudged inflation in the late 1980s because indicators such as soaring house prices were misread. As a result he left office with inflation rising sharply. Some of this was due to his unwillingness to let the exchange rate take the strain, or to compensate elsewhere. Even so, he did not deserve Nick Ridley’s harsh judgement that ‘He knew the economy was going badly wrong and he knew he was entirely and solely responsible.’ Nigel, like the rest of us, underestimated the depth of the recession to come in Britain and internationally, and believed he could see it out. The argument that he ‘got out just in time’ only came to look plausible much later.

In the first few weeks of my chancellorship my approach to inflation was well received, but months later when the policy really got to grips with the beast it was thought to be callous. Everyone paid lip-service to the principle of cutting inflation, but the hard-edged policies to do so were another matter entirely. But to me, bringing down inflation was pivotal, my constant objective and not an optional extra – and later this was the primary reason for our entry into the ERM. Nigel Lawson had advocated entry as early as 1985, securing the support at the time of Geoffrey Howe, Willie Whitelaw, Leon Brittan and Norman Tebbit. But Margaret – reinforced by Alan Walters’s arguments – said no.

Had there been another route open to us, endorsed, as ERM membership was, by business groups and commentators, I would have been delighted. But there was not. The ERM offered the lodestar we needed and, for all the finger-pointing after ‘Black Wednesday’ in 1992 (see Chapter 14), it worked. I disagree with those who say that inflation would have been tamed successfully by our interest-rate policy alone. But that lay ahead. Now, as chancellor, the problem before me was clear, even if the solution was not. Economic policy was falling apart and needed a new anchor.

Uncertainty over EMU and the ERM was rising, and so was the political temperature within the Conservative Party. The dispute over exchange-rate policy still had the potential to tear the government apart. Europe was a ticking time-bomb. Within days of my appointment as chancellor, Geoffrey Howe, the Deputy Prime Minister – in what Margaret Thatcher later described as a speech of ‘calculated malice’ – stressed that we should honour our obligations to Europe over the ERM. Yet another Cabinet split was signalled. Nigel’s resignation speech attacked the Prime Minister’s whole style of government, reflecting the quiet opinion of a growing number of Tories.

I was also confronted with more immediate problems. The Autumn Statement announcing public spending allocations was only weeks away. The budget would have to be framed in very constrained conditions, and no real work had yet been done on it. And the Community Charge was a millstone that could not be shed, so great was the Prime Minister’s commitment to it. Like every minister I had to make a conscious effort to avoid infuriating Margaret by referring to it as the ‘Poll Tax’. I didn’t always succeed.

On the Sunday following Nigel’s resignation the Prime Minister gave an unconvincing interview on Walden, the influential political programme hosted by Brian Walden, a former Labour MP. Nigel appeared on the programme a week later. They flatly contradicted one another while the Labour Party looked on in delight. As Margaret and Nigel set out their different interpretations of events it was an early illustration of the total disregard for the wider Conservative Party interest that was to become commonplace where European policy was concerned, and was to place the government on the rack.

In Cabinet one of my first tasks was to present a paper Nigel Lawson had prepared on ‘competing currencies’, which was an alternative to the Delors plan for EMU. Whereas the Delors plan was prescriptive and involved the arbitrary abolition of traditional currencies, Nigel’s paper advocated a gradualist, market-led coordination of economic policies across Europe. It was ingenious and inventive – and Cabinet readily accepted it – but even at the time, I think, it was clear that it was never going to work, because in a competition between the pound and the deutschmark, the German currency, with its greater depth, liquidity and credibility, was always going to win.

The scheme received a mixed reception when I presented it at my first ‘ECOFIN’, the EU’s regular monthly meeting of economic and finance ministers, on 13 November 1989. Unfortunately it came too late, and was seen in Europe as a wrecking tactic. The episode illustrated the alarm we felt over our European partners’ continuing enthusiasm for a single European currency. EMU was revived in the mid-eighties by Hans-Dietrich Genscher, the German Foreign Minister, and his French counterpart, Roland Dumas. It was then taken up by Jacques Delors, but would have got nowhere without strong German and French support. The ‘competing currencies’ proposal would not be the last time we tried to head off this Delors-inspired initiative, because of what we saw as its destructive power where our own economy was concerned. Nor was it the last time we were rebuffed.

Back in Britain, the party and the press were keen to learn what I intended to do. Their chance came two days later when, on 15 November, I delivered the Autumn Statement – my first substantial parliamentary appearance as chancellor since Nigel’s resignation. The events of the previous month meant that rather more attention was paid to my performance than might normally have been the case, but at least the annual spending round, which culminated in the Statement, was a part of the Treasury’s work I felt fully at home with. As chief secretary, I had worked with Nigel on his Statement. Now I delivered a package largely prepared by my successor in that job, Norman Lamont.

The forecasts in the Autumn Statement were the first acknowledgement that the economy was slowing down, and they attracted a good deal of attention. As it happened, the forecasts were wrong. It is notoriously difficult to make predictions when an economy is turning either to growth or recession, and most of the forecasts, although gloomier than many expected, were less gloomy than they should have been.

In the three weeks since my appointment I had had only a limited chance to put my mark on the Statement. But that didn’t occur to many journalists, who told their readers that by boosting spending and predicting hard times ahead I had single-handedly broken with the Thatcher – Lawson tradition. In fact it was the economic situation which did the breaking, for most of the spending increases were involuntary, being required simply to keep services at their current level as demand grew. I had not gone off in a new direction, but simply responded to circumstances. Indeed, had Nigel not left, he would have delivered a Statement along similar lines. What’s more, had he had his way on entry into the ERM when he first proposed it, the conditions I inherited might have been somewhat less dire.

The biggest increase in expenditure was on the NHS, and this was largely determined by the needs of the NHS reforms (see here). Financing these reforms was later to be cited as an indication that I had uncorked public spending and thus inflation. In fact this expenditure helped to mitigate the effects of the subsequent recession. The further spirals in inflation resulted from the continuing fall in sterling and the inexorable upward rise in prices that was the legacy of the late-1980s boom.

At the time, the Autumn Statement was well received, politically and economically, but soon after it sterling again came under pressure as a result of political and economic events. A Conservative backbencher, Sir Anthony Meyer, roundly attacked Margaret Thatcher in the Queen’s Speech debate after the State Opening of Parliament on 4 December. He announced the following day that if no one else challenged her leadership, then he would.

Tony Meyer was a loner, a fierce pro-European and a paternalist left-of-centre Tory. It was courageous of him to challenge a well-established prime minister with overwhelming parliamentary and national support, but everyone knew that his challenge would fail. And so it proved, as, after a cursory campaign, the Prime Minister romped home with 314 votes to thirty-three against, with twenty-four spoilt ballot papers and three abstentions. But the fact that there was a contest at all was significant. The challenge gave the markets a jolt, too. By late December sterling had fallen steadily to around DM2.72, thus damaging hopes of lower inflation and, as a result, of a reduction in interest rates.

The Autumn Statement was followed by renewed pressure for an increase in interest rates, which Norman Lamont, the Chief Secretary, supported. Economically, the case was finely balanced, but politically I thought there was no argument for it, and I refused. This was not because I subordinated interest-rate decisions to political considerations, but because given the mood in the markets and in Parliament an increase in rates would not have had the economic effects intended. It would add to the atmosphere of crisis, create political panic, ignite yet greater dissatisfaction in Parliament, and so rule out any good it might have done.

Margaret Thatcher knew that an increase would have been seen as the economic price to be paid for her political dispute with Nigel, so she naturally agreed with my decision wholeheartedly. In any event she wanted interest rates down, not up. It was ever thus in the latter years of her premiership – the anti-inflationary ‘Iron Lady’ is a myth.

Nonetheless, our working relationship at this time was very easy and relaxed. I was enjoying the Treasury and she was enjoying having a chancellor with whom she was comfortable. Our conversations were easy ones whereas hers and Nigel’s were not. I was much more open with her than Nigel had been, and she was with me.

But there were differences of emphasis between us. While I thought membership of the Exchange Rate Mechanism would help our anti-inflation policy, Margaret shied away from it. Her instincts – and Alan Walters’s arguments – had made her deeply hostile towards the ERM. Yet neither she nor anyone else was putting forward a serious alternative course of action, and I felt from the outset that she could be persuaded to enter if the decision to do so did not humiliate her.

EMU and the single currency were unpalatable to us both, and we agreed that we should oppose them, although we disagreed on how to do so. The Prime Minister simply wanted to say no. I knew this would be useless. It would not stop our partners going ahead, and would only deprive the UK of any influence over their plans. Margaret was dismissive, even scornful, of this argument. She did not grasp that I was not asking her to change her policy on the single currency – because I agreed with her on that – but to be more subtle in her opposition to it, and less dismissive of those colleagues who thought differently.

I saw also – though Margaret, I think, did not – the extent to which this policy dispute was hurting her with many in the party. It was not so much the policy itself as the dogmatic way she advocated it that was doing her such damage. She was in real danger. My pleas fell on deaf ears. She simply did not take the point. It was magnificent, but it was not politics, as events were to show within a year. In any event we did not begin to engage seriously on either the ERM or the single currency until the early spring of 1990.

Before that came my first budget. One of the attractions of being chancellor is the opportunity to deliver a budget. Iain Macleod once memorably remarked that ‘Money is the root of all progress,’ and he was right. For two years as chief secretary to the Treasury I had negotiated public spending allocations and learned that by releasing – or withholding – money it was possible to change political priorities. But in 1990 the options for making significant changes in the budget were grimly restricted. I was boxed in by the state of the economy.

This was brought home to me vividly in a letter I received from Nigel Lawson early in January 1990 offering some friendly advice for my first budget. The advice was good – even though it was uncomfortable. In essence, Nigel said: don’t put up taxes and don’t reduce them; don’t believe the seductive line that higher taxes will deliver lower interest rates; don’t reduce interest rates for some time; don’t on any account increase the £30,000 limit for mortgage interest relief (a constant demand of Margaret Thatcher’s); but perhaps raise motor car benefit scale rates and play around a little with indexation. All this was good economic advice, but not very exciting. I knew I would not be able to deliver the sort of radical budget I would have wished.

I began to examine the options within days of becoming chancellor. Whereas Nigel had been probably the most technically knowledgeable chancellor since Gladstone, he was not always sensitive to the frailties or needs of others. He did not know what it was like to run out of money on a Thursday evening, whereas I did. Nigel favoured the entrepreneurs who made the economy tick, and he had done much to benefit them. The Prime Minister favoured the hard-working strivers who were succeeding, and wished to help them to greater success. I wished to concentrate now on those who wanted to succeed, were prepared to work, but who were often trapped by circumstances from which they could not break out. They were my main concern, and I shall always regret that throughout my days of power the weakness of the economy – which our priority was to put back on an even keel – prevented me from doing more to help them.

The contribution I was able to make to them was to bring down the inflation by which they were being disproportionately hurt. In effect, this was just like reducing a pernicious and widely-based tax on the poor. But it was also, of course, removing a curse, not bringing a benefit, and had little political resonance. Worse still, the counter-inflationary measures we had to take inevitably hurt people, and often made us seem uncaring, and this, for me, was bitterly frustrating and galling.

I wished to bring a different emphasis to our tax and expenditure plans. Nigel’s radical budget of 1988 had dramatically reduced direct income tax for the higher-paid. It now seemed right for me to concentrate most on those who had least. I began to consider what we might do over a longer time-scale. I envisaged tax cuts exclusively at the lower end, aiming initially at a 20p basic rate and a higher threshold of income before tax bit. I favoured tax incentives to encourage self-provision and a radical reform of National Insurance contributions, which I saw as a lop-sided tax that bore only a passing relationship to social security entitlements. This – and much more – was in my mind, but in the prevailing economic conditions it could not go into my budget.

I did ask the Treasury for an in-depth examination of ‘a caring package for the budget’, but nothing very exciting emerged. The tax options they proposed didn’t help really low-income families, because they didn’t pay tax anyway, and public expenditure measures could only be limited as our national accounts swung from an annual repayment of debt to a large annual borrowing requirement. It was obvious even before the Treasury ministers’ and officials’ annual early-January weekend meeting at Chevening that we had no cash for an interesting budget, and would need considerable ingenuity if we were to produce one.

Over Christmas at Finings I closeted myself away from the festivities with papers prepared for the pre-budget discussions at Chevening. When I was reading them on Boxing Day Elizabeth, whose eighteenth birthday we had celebrated the previous month, asked me what I was doing. I explained to her that the Chevening weekend had become something of an institution. ‘So has Christmas,’ she said. ‘Put the papers away.’

The work over the early-January weekend at Chevening is intense, and so is the enjoyment. One traditional feature is the Ministers versus Mandarins snooker game, which in my year was won by Peter Middleton and Terry Burns against Norman Lamont and me. They had been practising at the Reform Club, which Norman and I thought was akin to cheating. ‘They give us boxes to work on while they practise,’ said Norman. Terry and Peter grinned: it was true.

Chevening itself was far from the house of my dreams. I found it austere and unwelcoming, unlike Chequers when I came to know it. Geoffrey Howe had loved it, and spent a great deal of time there. I went there as little as possible. Nevertheless, party games and leisurely strolls around the admittedly beautiful lake that lies to the rear of the house helped lighten our working weekend.

The economic situation was altogether less fun. In early 1990 we were coming out of a boom that had been unprecedented in scale, and driven by the private sector rather than by policy. Domestic consumer demand had far outstripped supply, and forecasts had failed to register the extent of it. Inflation had picked up despite a dramatic rise in interest rates and a tightening of fiscal policy. House prices had risen crazily following the stock market crash of 1987. Credit had risen and savings had fallen. Neither government nor private-sector forecasts had revealed the scale of what had happened. Forecasts were especially uncertain, and we were steering the economy in a fog. It was obvious that we would have to be cautious. The Chevening weekend illustrated that in spades.

Gradually, in meeting after meeting, a series of measures emerged. I knew that mine could not be a ‘big’ budget. The state of the economy meant that I was condemned, broadly speaking, to a fiscally neutral package. To enliven it I looked for some eye-catching innovations. Moreover, as this would be the first budget to be televised live, I wanted to present it in a way that would be understood as easily in the living room as in the foreign exchange dealers’ room. My working instruction to officials was: ‘We need to explain not only what we are doing but why, and also what we expect to come of it.’ I wished the presentation to be human and colourful, but the budget’s real importance lay in the substance, which the discussions at Chevening had largely preordained.

The physical compilation of a budget is daunting. Every day representations on what to do (or not do) come from a thousand sources. The Confederation of British Industry, the Institute of Directors, the Trades Union Congress, chambers of commerce, trade organisations, charities, banks, building societies and many others all want to have their say. So do Cabinet colleagues, all of whom make representations, some of them original, others no more than familiar and hoary perennials. The Health Department usually wants to put up tobacco duty; the Scottish Office to lower whisky duty; the Social Security Department to help the poor; the Department of Trade and Industry to help business; and so on. If there were a Ministry for Weather it would demand more sunshine each year.

On this occasion every representation was considered, though some were speedily discarded. The Financial Secretary Peter Lilley, the Economic Secretary Richard Ryder and the Paymaster General Malcolm Caithness sifted through a huge number of options and made recommendations.

As chancellor, I followed Nigel’s habit of huge meetings at which all Treasury ministers, together with officials – including ones from Customs and Excise and Inland Revenue – pored over ‘budget starters’ to examine them from every perspective. Only the most rigorous proposals survived this scrutiny, unless they were firmly backed by ministers as politically necessary. If officials didn’t like such propositions, they made their view clear. The ultimate dismissal is a smiling: ‘Of course, Chancellor, if you think it’s politically necessary …’ This implies disownership of the proposal, but also surrender.

Officials delivered their advice. Ministers made their decisions. The essential balance between an independent civil service and an elected government was maintained. Gradually, a package emerged. It was workmanlike, with some original touches, but not particularly exciting. Our ‘budget in a nutshell’ description was ‘a budget for savers’. We abolished Composite Rate Tax, an automatic levy on savings interest at source even when the saver’s income was too low to be taxed. This was a long-overdue reform. We encouraged wider share ownership and introduced the concept of Tax Exempt Special Savings Accounts (thenceforth known as TESSAs – the acronym was already in Treasury use, and was picked up by Gus O’Donnell, my Press Officer). It was my idea that we should do something for people with no savings, and offer them a tax-free advantage for saving comparable to those given to Personal Equity Plans (PEPs) by Nigel Lawson to the relatively well-off. I was determined to offer small savers – who had gained little or nothing from previous budgets – a tax advantage of real substance. TESSAs were my answer. I wished to build a savings safety net, and planned for TESSAs to run initially for five years, with individuals able to invest up to £9,000 over that period. They were a huge and instant success, and in due course around £30 billion would be saved in them by millions of small savers.

Tax changes were limited. Many were simply indexed for inflation, but there were increases for cigarettes, spirits, company car users and leaded petrol. There were innovations to encourage share ownership, small- and medium-sized businesses, training and charitable donations.

I decided also to help football. In recent years there had been tragedies at Bradford City and at Hillsborough, Sheffield Wednesday’s stadium, where inadequate safety measures had led to many avoidable deaths. This had registered deeply with a sports-loving nation. After an inquiry, Lord Justice Taylor had recommended some very expensive safety measures which only the top clubs could comfortably afford. I decided to cut Pools Duty by 2½ per cent for five years, provided the £100 million reduction in taxation was passed to the Football Trust for ground improvements. I wished to promote safety as well as more comfortable, less dilapidated grounds to attract families and deter hooligans. This populist measure was widely welcomed – though it only survived against much scepticism in the Treasury, offset by the support of the football enthusiast Terry Burns. Officials and advisers were worried that clubs were being given a tax advantage when they were able to spend millions of pounds on transfer fees. A proposed levy on these fees only fell after careful examination. When it was first suggested no one had any idea about the total value of transfers. Gus O’Donnell was dispatched to buy a copy of Rothmans Football Year Book, which listed all transfers, so that the Treasury could calculate how much the measure would raise. I shall remember for ever that Chris Waddle was transferred from Spurs to Marseilles for £4.5 million, whilst Gary Lineker joined Spurs from Barcelona for £1.5 million. Such is the diversity of information that can cross the desk of a chancellor.

Any chancellor is entitled to feel a twinge of nerves on budget morning as he emerges from Number 11 holding his red dispatch box aloft and makes for the House of Commons to deliver his statement, and as 3.30 p.m. approached I felt the adrenaline begin to pump. But, like all other chancellors, I had been well served by my officials. The final touches to my speech had been completed the night before; now it was printed and ready. I had finalised the text of my broadcast for later that evening – largely written by Anthony Jay, the co-author of the hugely successful television series Yes, Minister – and prepared what I would say at the meeting with backbenchers which takes place after the chancellor has concluded his statement. I checked through the briefings which would shortly be going out to the media, and finally, after lunch, walked around the Downing Street garden to clear my mind and rehearse the speech without the text to make sure I was familiar with it. The tipple in the glass by my side during my speech – the traditional chancellor’s privilege – was Hine brandy and water; Hine has long been a favourite of mine.

The most popular measure in the budget was a proposal to limit the impact of the Poll Tax, which was becoming ever more loathed by the day. I announced a doubling of the level of savings that would be disregarded when calculating Poll Tax rebates, from £8,000 to £16,000. This was wildly cheered, but led immediately to a huge row. The Poll Tax had been introduced a year earlier in Scotland – at the request of Scottish ministers – and I had not backdated the rebate improvement. Scottish Labour backbenchers scented a grievance to be exploited, and created a huge fuss even as I spoke. This was not quite unprecedented, but ran against Commons tradition, since budgets are usually received without interruption. Mine was not. Television had made its mark.

After I had sat down, the Scottish Secretary, Malcolm Rifkind, under pressure from the perennially hostile Scottish media, threatened to resign if he was placed in ‘an impossible situation’ by the rebate not being made retrospective. Since Nigel Lawson had resigned only months earlier, followed by the Employment Secretary Norman Fowler (to ‘spend more time with his family’), the prospect of another resignation was far from attractive. The cost of the concession – £4 million – was tiny, but what the Prime Minister and I took amiss was that we felt we were being bounced. Malcolm got his money, the Scots gloated, and I wiped egg off my face. It had never occurred to me that such a complaint could carry such force – but my education in Scottish politics had barely begun.

Overall, the joy-through-austerity merchants in the City – and in the press – were disappointed. They had wanted a ‘tough’ budget, with no increase in personal tax allowances. I didn’t agree, because I was too unsure of the economic forecasts and I feared that a tighter budget would lead towards recession. In retrospect, on this at least I was right and my critics wrong. However, the markets disagreed, and the pound fell on the exchanges. Nor did the Poll Tax assistance ease the anguish of electors. Two days after the budget we lost the Mid-Staffordshire by-election – held after the tragic death of John Heddle, who had entered Parliament on the same day as myself – with a massive 21 per cent swing against the government.

The EU’s regular ECOFIN meetings brought me into close contact for the first time with the Irish Finance Minister Albert Reynolds, later Prime Minister of Ireland, to whom I took immediately. Norma and I had breakfast with Albert and his wife Kathleen at an informal ECOFIN at Ashford Castle in Ireland. It was the first time I spoke about the ‘Irish Question’ with the man with whom I was later to establish the Northern Ireland peace process. Pierre Bérégovoy, who was to become Prime Minister of France, also became a friend, but was by no means an easy touch. I remember giving him breakfast at our Washington Embassy to try to sell him our policy on the ‘hard ecu’ (European currency unit) as an alternative to an abrupt change to a single European currency. Pierre was impressed by our embassy – which he compared to a ‘grand palace’ – but less so by our policy. Tragically, this engaging man later killed himself in sad circumstances.

I also saw the European bureaucracy at work, and witnessed the effectiveness of British representation. Our Permanent Representative at the EC was Sir David Hannay, a fiercely competitive diplomat, and visually almost the double of Nigel Hawthorne, Sir Humphrey Appleby in Yes, Minister. Sir David, however, was more formidable than Sir Humphrey, and the sight of him privately taking aside some hapless Euro-official to tell him the facts of political life was one of the delights of Brussels. I often averted my eyes from these occasions, since I hated the sight of blood.

I enjoyed the ECOFIN meetings. The atmosphere was far more workmanlike, and far more to my taste, than the Foreign Affairs Council, where pertinent observations were often loud with ‘waffle’. The finance ministers also formed a bond, because, unlike foreign ministers, they were excluded from European summits, which they resented. Blame for this absurd ruling is largely to be laid at the door of President Mitterrand of France, who regarded money as merely a means to an end, and finance ministers as ‘accountants’. This explained to me why financial realities were a second-order question for the European Council. At Maastricht we obtained agreement that finance ministers would attend when matters related to economic and monetary union were to be discussed. Ken Clarke’s sharp elbows made full use of this gateway.

There were some clashes in ECOFIN that taught me much about the politics of the European Union. We won battles to restrain tax harmonisation of VAT and to establish the European Bank for Reconstruction and Development in London. This bank was designed to help send investment into Eastern Europe, and was the biggest European institution we had attracted to the UK. It got off to a shaky start under Jacques Attali, President Mitterrand’s former advisor, but rapidly became established under his successor, Jacques de la Rosière.

At ECOFIN it became clear to me that our European partners were much more set on implementing the Delors Report on Economic and Monetary Union – and moving to a single currency – than I had realised. Whilst we regarded the move as a fanciful long-term ambition faced by enormous problems, they were regarding it as more or less a fait accompli. Criticising it was as heinous as spitting in church.

When Britain entered the European Community on 1 January 1973, support for a common currency was growing among member states. But that decade’s rocky economic conditions ensured that no action was taken until 1978, when Roy Jenkins, then President of the European Commission, established the European Monetary System. From then on, monetary union was always a formal ambition of the Community, though one that many thought would never be realised. Britain’s support for the scheme was half-hearted at best. Denis Healey and Jim Callaghan had stayed outside the EMS in 1978, and Margaret Thatcher showed no enthusiasm for it in the early 1980s.

But nor did she oppose it when she had the opportunity. In 1985 European heads of government unanimously agreed the Single European Act, the treaty which established the single market, the Community’s great success story. It also committed Britain to ‘progressive realisation of economic and monetary union’, the first time this undertaking had been given so explicitly. Why Margaret Thatcher accepted this I have never understood. Whatever the answer, she made no attempt to secure an opt-out for the UK. But those words were important. Perhaps Margaret let them through because they appeared in the preamble to the treaty and she regarded monetary union as an unrealistic aspiration. That seems quite possible, but if so it was a bad misjudgement. I remember Nigel Lawson’s concern about the preamble when I was a Treasury whip, and those words were hung around our necks throughout the Maastricht negotiations. We were told we were politically committed by the Act to the progressive realisation of EMU.

The next step to monetary union came three years after the Single European Act, when the Commission President, Jacques Delors, produced his full-blown road-map to monetary union. German reunification a year later moved the scheme to the centre of Euro-politics. In return for French backing for early reunification, then far from certain, the German Chancellor, Helmut Kohl, signed up to President Mitterrand’s pet scheme for monetary union. Margaret Thatcher’s hostility to early German reunification gave a tonic to the Franco – German alliance at precisely the point when we could have benefited from German doubts about the whole single currency project.

Because of this, it was unlikely that political opposition from the UK would stop the process. Whereas our influence on most matters carried weight, we were listened to politely on EMU and then ignored. Everyone knew Margaret’s opinion. We were sidelined. We were not in the ERM. We were not in favour of a single currency. We were out of the debate.

I began to look for a way to give us more influence, so that our warnings over a single currency should be considered. In early 1990 I learned from Nigel Wicks at the Treasury of an idea being worked up by a former Foreign Office official, Sir Michael Butler, who had retired and was now a director of Hambros Bank.

The inventor of the ‘hard ecu’ was Paul Richards from Samuel Montagu, and Michael Butler became its energetic publicist and promoter. Michael Palliser, the Chairman of Samuel Montagu, passed the idea to Peter Middleton, who asked Nigel Wicks to look at it. With the active assistance of Treasury officials, led by Nigel Wicks, Michael Butler sketched out a plan for a ‘common currency’ based on the ecu that would permit ecu notes to be put into circulation.

This had real attractions. A common currency could co-exist with existing currencies, and would not require their immediate abolition. It would give business and consumers a choice, and would let the market determine whether a single currency should evolve. The Delors scheme, by contrast, was prescriptive, and depended upon the abolition of the currency of every country which entered any new currency zone.

The hard ecu had many advantages. It was market-driven, which made it difficult for ideologically-inclined Conservatives to condemn it. It was not prescriptive. It was not Made in Europe. Whilst it might lead to a single currency this was not certain, and would depend on choice exercised by many people over a long period of time. It was imaginative, it was positive, and it would surprise our European partners if we proposed it. It would ease the divisions opening up in the Conservative Party. It would put Britain back in the debate and give us a voice that would be heard as we opposed the unquestioning approach of so many in Europe towards a single currency. All these attractions drew me to the scheme. I knew we needed to enter the crucial debate in Europe, and the hard ecu was a more substantial proposal than Nigel Lawson’s ‘competing currencies’. This was a scheme with real merit that could work.

The Prime Minister was flatly hostile to a single currency, and appeared to me to have no idea of how committed our partners were to it. She was confident it wouldn’t work, and seemed to believe that if she asserted that it would fail, then fail it would. She did not see the need to confront their determination. When, in April, I suggested to her that we should agree to EMU for our partners provided we had an opt-out mechanism to enable the UK to stay out if we wished, she was dismissive. She did not accept that we could not block EMU by using our power of veto because France, Germany and the others were prepared to proceed with a Treaty of Eleven, leaving the UK outside. Later she wrote that I ‘had swallowed the slogans of the European lobby’ and was ‘intellectually drifting with the tide’. I was not. I was confronting reality, while she was letting it pass her by. To believe that the rest of Europe would dance to our tune was pure fantasy.

However, in June she agreed that I could float the hard ecu a few days before the EU summit in Dublin. I did so in a speech to an Anglo – German business dinner that I took over from Norman Lamont. I made it clear that ‘in the long term if people and governments so choose it could develop into a single currency’. To illustrate the seriousness of our intent I dispatched officials and ministers to European capitals to argue our case in the same way as myself.

It all came to nothing. On the day following the launch the Prime Minister announced in the House that our proposal ‘does not mean that we approve of a single currency’. This undercut it badly, since one attraction of the scheme was that if people chose, the hard ecu could lead to a single currency over time. Her comments made people believe that she saw it – quite wrongly so far as I was concerned – as a diversion or wrecking tactic. So, as a result of her statement, did our European partners. The French and Germans were particularly hostile, even though we heard persistent rumours that the Banque de France had suggested something similar to President Mitterrand, only for him to reject it.

As fas as the ERM was concerned, I was not, personally, a determined advocate in principle, but I believed its potential advantages were substantial. I considered, as Nigel Lawson had done, that our membership would stabilise the value of sterling and help bring down inflation. I thought this case was strengthened as I recalled our search for the Holy Grail of price stability over two decades or so through the maze of formal and informal prices and incomes policies, M0, M3, M4, exchange rate shadowing and more. I did not favour the ERM as part of the preparation for a single currency. Nor did I see it as a European plot to lead our virtuous UK policy off course. I was, no doubt, ideologically unsound in not automatically assuming that foreigners were up to no good, but such a thought never occurred to me. I was simply bent on eliminating the pernicious effects of rising prices. The record of the deutschmark and Germany in doing so was certainly one of which we would have been proud. Nor did I accept blindly that membership of the ERM was inevitable. One of my first acts as chancellor was to commission a paper on alternative approaches to the exchange rate. I had not gone native at the Foreign Office, as Margaret Thatcher later liked to claim, but I recognised that the pro-ERM tide was strong. Most political opinion favoured entry. So did economic commentators. So did business opinion. A poll of the corporate sector in Financial Weekly revealed that 97 per cent of executives wanted sterling to join the ERM, and 66 per cent did not care at what rate we went in.

As at home, so it was abroad. Both the Foreign Secretary Douglas Hurd and I were repeatedly pressed to join by our European partners. Their pleas echoed concern about the domination of the deutschmark. Bonn and Paris were seen as too close – ‘two threats in a single skin’, as one Italian minister put it to me – and sterling’s entry into the ERM would weaken this domination. More true, however, was the fact that only Britain and France in tandem could counter-balance Germany, and although the French always chatted amicably with the British, they invariably ended up siding with Germany, largely because the Germans so often capitulated to French demands. Nevertheless, the European pressure for entry was there. I gradually warmed to membership because logic was pushing inexorably in that direction.

Meanwhile, the economy was slowing down, and our economic difficulties, together with European disputes and the Poll Tax, were sapping confidence in the government and the Prime Minister. The pound was almost continually under pressure as speculation ebbed and flowed in accordance with the likelihood or otherwise of our joining the ERM. We had no alternative anchor for economic policy. One after another, the possibilities had been knocked away. Following the boom of the late 1980s, the monetarist orthodoxy and the Medium Term Financial Strategy had lost credibility. The money-supply targets were no longer credible; we could hardly shadow the deutschmark as Nigel had done – even he had abandoned this approach. We examined credit controls only to confirm their uselessness. I considered giving the Bank of England independence over interest rate policy, as Nigel had wished to do, and as Gordon Brown has since done. I dismissed the idea because I believed the person responsible for monetary policy should be answerable for it in the House of Commons.

If we let the exchange rate float freely, it was clear that the value of the pound would fall and push up inflation. If that happened, our choices would be bleak. We could raise interest rates, or we could raise taxes. Neither appealed. We were dangerously fettered. I knew that we had to re-establish economic credibility if we were to bring down inflation – and win the next general election, which, as we were now in mid-term, was already on the horizon. The ERM, with its emphasis on exchange rate stability, was no panacea, but it looked to me like the best – if not the only – way forward. Each morning at Number 11, I woke up between 4 and 5 a.m. and lay awake wondering how sterling would perform that day. Each hour I received market reports. The foreign exchange screen became a focal point of the day. A pfennig up or down influenced thinking far too much. I knew this could not go on.

The Prime Minister was as frustrated as I was over rising inflation and sky-high interest rates. No prime minister likes these twin horrors, and Margaret Thatcher was no exception. She feared the impact they had on her natural constituency of homeowners and small businesses, but she had no policy to combat them. Perversely, she opposed policies necessary to bring inflation down – whether higher interest rates, or exchange rate management, or tax increases. She knew what she disliked, but had no coherent strategy for achieving what she wanted – a strong pound and low interest rates. This, however, was a horse and carriage that did not go well together. Economic management was adrift.

Margaret Thatcher was always a mixture of shrewd political calculation and emotional responses. When her political judgement was to the fore, she recognised that we might have little choice but to join the ERM. But when her emotions took over, she tried to delay our joining. As emotion battled with judgement, policy-making was often two steps forward and one back. It was very debilitating, and my year as chancellor was to be peppered with reassuring briefings and statements, confirming that the Prime Minister really did agree with her own government’s policies. Her deepest hostility was to a single currency and the political implications of surrendering monetary authority. Her opposition to sharing authority in the ERM, though acute, was less, and could, I sensed, be overcome by her wish for a stable economic environment. But not easily – especially as the powerful voices of Nicholas Ridley and Alan Walters still urged her not to yield. She was also intransigent because she felt she had been bounced into a commitment to join the ERM by Geoffrey Howe and Nigel Lawson before the Madrid summit. She would never forgive this.

In early February 1990, Nick Ridley learned that I was warming to the ERM. He did not approve, and sought to buttress the Prime Minister’s opposition. He put to her the argument that German reunification, which she strongly opposed but which was now a certainty, provided a good excuse for abandoning our undertaking to join the ERM. The Prime Minister was very fond of Nick and agreed with him that Germany was dangerously powerful, but she did not fall for his argument, and stuck to her existing position. Nor did she encourage him to hope that she would change her mind, although he went away with a sense that he could raise their shared doubts in Cabinet, but not in public, unless they were cleared directly with her.

By early March, when inflation had risen above 8 per cent, I was convinced that entry to the ERM was a sensible option. I asked for a checklist to be established of how close we were to the Madrid criteria for entry. I recognised that if we went in, we could not do so at the expense of the Prime Minister’s credibility. We had to be able to argue that her conditions had been met. The March assessment of this was encouraging, but there was still a long way to go. I also commissioned papers on the risks of early entry, as well as the advantages. If we were to go in, I had to be convinced it was right, and that I could advocate entry to the Prime Minister, in good faith, and defend it with conviction.

Discussion about European policy came increasingly to dominate my discussions not only with Margaret, but with Douglas Hurd. My working relationship with Douglas had always been very easy. We had begun meeting regularly at Mijanou’s restaurant in Ebury Street for lunch when he was home secretary and I was first at the Treasury as chief secretary. When Douglas became foreign secretary, we met at his official residence in Carlton Gardens for breakfast, where Judy Hurd would fend off the children while we talked.

Douglas looked instinctively towards improving our European relationships, rather than simply using them for domestic advantage. We both believed the Prime Minister needed to be coaxed, and not browbeaten. We knew she could not afford to lose another chancellor or a foreign secretary but we never considered playing that card. We wished to convince her of the merits of entry into the ERM, and we believed persuasion and logic would achieve what an ultimatum would not. Nevertheless, Nick Ridley, remembering the Howe – Lawson axis, was deeply suspicious of us, and thought that our breakfasts were ‘mysterious’. The only real mystery was how we managed to do any work as Douglas’s children got ready for school.

On 29 March 1990, my forty-seventh birthday, I set about the task of talking round the Prime Minister. I knew it would not be straightforward, but I now saw entry as inevitable. Douglas agreed with me that Margaret would have to be persuaded on economic grounds. With his wry sense of humour, he joked that Napoleon had conquered most of Europe, so getting the Prime Minister to enter a small part of it should not be too difficult.

My first discussion with her launched the process, but resulted in a stand-off. I was fortunate in that so far as the ERM was concerned, I was far closer to her thinking than Nigel Lawson had been. I argued that we should not publish a future date for joining, since that would put us at the complete mercy of the markets. I also argued that we should enter within wide bands for rate fluctuation, and not confined in a narrow straitjacket. She agreed. I also made it clear that the pound was very vulnerable, and that the foreign exchange markets were getting used to high interest rates to sustain it. This was dangerous, and had a real impact on Margaret, who wished to reduce interest rates as soon as possible.

At this meeting we also discussed the forthcoming Inter-Governmental Conference on EMU, due in December, at which many propositions unpalatable to Britain would be discussed. Our exclusion from the ERM was making us bystanders in this debate. The Prime Minister did not like this argument, not least because it was true. Yet it did register with her. I felt I was making more progress than I had expected, when she broke off the conversation, saying she did not have time to pursue it further that morning. This was not to be the last occasion on which she would shy away from the topic. At least she did not dismiss it out of hand. I said I would return to the matter.

At the Treasury, although I put work in hand on possible entry dates, officials were very sceptical about the likelihood of getting a political decision to go ahead. We began looking at specific dates for entry, on the assumption that it would need to be at a weekend, to enable the markets to absorb the change before trading began. This exercise narrowed the choices dramatically, but fortunately commentators did not realise how limited they were. Had they done so, the speculation about whether, and when, we would enter would have been even more frenetic. Even as it was, the press couldn’t resist playing a guessing game.

The first window was April to July, which was unlikely, because we would not by then have met the Madrid conditions. More promising was early September to late October. November and December were unattractive, being too close to the Inter-Governmental Conference. Entry that late would have been seen by our European partners as a belated attempt to buy influence at the conference, and if that were the case it would fail. If we wanted influence – and we certainly needed it – entry would have to be earlier, because there would be a great deal of discussion on many of the most prickly decisions before the conference began.

On 17 April, at a seminar on the economy, Peter Middleton was invited to prepare a paper on the mechanics of entry into the ERM. I sent it to the Prime Minister a few days after the dreadful local election results across the country on 3 May had made it evident that our economic problems, together with disputes in the party over European policy, were eroding our political support. The case for entry was strengthening both politically and economically.

I met regularly with Robin Leigh-Pemberton, the Governor of the Bank of England, to discuss the issue. He was an engaging man with whom to do business, jovial, well-mannered, a great cricket-lover and as English as they come. On one occasion we chuckled over a newspaper cartoon of Margaret and myself rowing together down the river past a signpost to the European Monetary System, with Margaret intoning ‘Out, out’ with each stroke while I intoned ‘In, in,’ supported by Nigel Lawson and Robin, who was bouncing up and down on the bank. Robin and I tossed a coin to see which of us would buy the original of this brilliantly spot-on drawing. He won, but a copy still hangs on my wall. Robin and I were as one on the need to join the ERM, if not in the level of our enthusiasm. He believed in it as a matter of principle, I, as I have said, as an anti-inflationary weapon.

By early June, it was apparent that the exchange rate was being propped up by the markets through their firm belief that we would enter the ERM. Treasury officials advised me that in their view we could join at any time, provided we did so with the flexibility to move 6 per cent up or down from the central rate at entry. They added that whilst it would be better if we could enter while inflation was falling, this was not essential. But politically the matter was different. The Madrid conditions that Margaret Thatcher had set called for inflation to be falling; at the very least we needed to be sure inflation had peaked.

June was a crucial month. Treasury opinion was hardening in favour of early entry. The markets were restless and difficult, and good government required a decision. I asked Treasury ministers their views. No one argued for sterling to stay out, though Andrew Tyrie suggested I consider delaying membership.

I again minuted the Prime Minister on the ‘windows for entry’, and set out the reasons for an early decision. Somewhat tongue in cheek, I proposed 20 July as a possible early date. I knew she would balk at this, but hoped it would encourage her to accept September or October.

At our next bilateral, on 14 June, the Prime Minister said, in terms, for the first time, that she no longer had reservations about entry. But she did favour further delay. She wished to see inflation falling, and she was concerned about the impact of German monetary union. She told me she hoped also to take a ‘bonus’ on entry, of either a higher exchange rate or a cut in interest rates. I knew then that her mind was moving to the advantages we could obtain from entry, and how to justify it. I agreed to consider the timing again, and to report back to her.

When I had done so, I proposed entry in September, or – depending on how the economy performed – a little later. The question of entry was now when, not if.

On 2 July, I minuted the Prime Minister suggesting that we join before the Conservative Party Conference in October. It was evident that, without a decision, it would be politically difficult to get through the conference and other set-piece occasions like the Lord Mayor’s Banquet, held in November. If there was still uncertainty, speculation would build up before each of these occasions, as the markets anticipated an announcement. We needed a definite decision – yes or no.

I was sure we should grasp the nettle and join. A positive decision to enter would enable us to use major speeches in the autumn to spell out the implications. Still the Prime Minister hesitated until her self-imposed Madrid conditions could more easily be said to be met. The July option, never my favourite, but possible, was lost.

On 4 July, American Independence Day, the Prime Minister agreed to consider specific dates for entry to the ERM. The two likeliest dates were 14 September and 5 October. To ensure that the rate of entry would put the squeeze on inflation, the Prime Minister asked me to consider the practicalities of only a 4 per cent band around the central rate, rather than the 6 per cent we had previously agreed. This was a bewildering change of tack by her, but one that would be worthwhile if it made entry possible. Business remained hugely enthusiastic about entry, and at a meeting with the CBI the Director-General Howard Davies said they were ‘still firmly committed to entry and against unilateral devaluation’.

Even at this late stage, further alarms lay ahead. In July, Germany set a rate for monetary reunion of one ostmark to the deutschmark – a politically-driven and unrealistic rate which put pressure on interest rates across Europe. Then, in early August, Iraq invaded the neighbouring state of Kuwait. As a result the price of oil shot up, boosting the pound, which was seen in the City as a ‘petro-currency’ because of our North Sea oil reserves. This market movement did not reflect the real economy, and we risked excessive deflation as exports suffered. Worried by the Gulf crisis and a possible war involving Britain – and, I think, because she sensed a good case for further delaying a decision she knew was necessary but didn’t relish – Margaret once again considered deferring ERM entry.

I wondered myself if this might be wise, but decided it was not. It seemed to me that much depended on how things turned out in the Gulf. If it became a long-drawn-out affair, then the case for early ERM entry was strong, since we would be better placed to handle turbulence within the protection of the mechanism than on our own. But if the war was to be short, then I felt we would be right to stay out until it ended. Margaret agreed: since there was no immediate solution in sight, the crisis in the Gulf would not stop us joining, and we were back on course. Even the publication of a new book by Alan Walters did not unsettle her unduly – somewhat to my surprise.

On 3 September, I summarised the position in a lengthy minute. (‘It’s the day war broke out,’ my Private Office warned. ‘Is it the right day to send that out?’ I sent it.) Earlier in the summer we had worried that sterling might be too low at entry for membership of the ERM to be a disinflationary discipline. Later, we were concerned that entry would push up the exchange rate so much that we might have to reduce interest rates when to do so would be inappropriate on domestic grounds. This fear never surfaced publicly, but by early September we were considering an entry rate around DM3, with the full agreement of the Bank of England.

The Prime Minister and I met on 4 September. We agreed that, while we could not yet cut interest rates, we would soon be able to do so without damaging our counter-inflation policy. But we both saw the danger of cutting rates before ERM entry, because it would look as though we were massaging the exchange rate downwards. That was emphatically not what we wanted.

We were not yet sure when inflation would peak – the obvious peg for entry and, if appropriate, an interest rate cut. At this meeting the Prime Minister raised for the first time the possibility of simultaneous entry and a reduction in interest rates – adding, on her own behalf, sugar to a pill she knew was good for her but which she did not want to take. I did not demur at the time, because I did not want an argument that would distract her from thinking positively about entry. Afterwards, I realised that this was a mistake. In due course the Prime Minister would impose that interest rate cut, and it would be harmful.

The pace now began to quicken, and despite poor economic statistics in September we decided to press on. I noted in a meeting with Peter Middleton that there was a growing feeling that a recession was looming, and that therefore the pressure for interest rate reductions would grow. I wished for the discipline of the ERM to ensure that these were justified, and not snatched at for purely political reasons. The Bank of England also reported that the markets were more fractious and difficult to manage. Robin Leigh-Pemberton warned me that this would worsen in the run-up to the Inter-Governmental Conference in December.

On 11 September I reported to the Prime Minister that the markets were expecting entry, and that public opinion would welcome it. I added that a decision to delay would weaken the exchange rate, raise inflation and delay interest rate reductions. I set out yet again the pros and cons of the possible entry dates, noting that 5 October was the last opportunity before the party conference.

We met the next day. Margaret reiterated her wish for an interest rate reduction at the time of entry. She also felt we could not delay entry beyond December, and asked me to come forward with a firm proposal for a date. The long journey was nearly at an end.

At the Treasury I assembled key officials – Peter Middleton, Terry Burns, Nigel Wicks, Michael Scholar and Paul Gray – and we set out a timetable for entry on 12 October, the day of the Prime Minister’s conference speech, whilst being careful not to rule out the fifth. Two days later, officials advised me that inflation should peak in September (the announcement would be made in October) at 10.9 per cent, and that we could justify an interest rate cut within a fortnight of that. There were three possible timings for the cut: independently of entry and before it (which no one favoured); simultaneously (which the Prime Minister was determined upon); and post-entry (which the Bank and the Treasury favoured). Despite my knowledge of the Prime Minister’s preference I thought post-entry was right, and recommended this to her.

The next day the same group of officials, with the addition of Eddie George, the Deputy Governor of the Bank of England (in the absence of Robin Leigh-Pemberton, who was abroad), assembled at Number 10. After a spirited discussion on the interest rate cut, which everyone else opposed, the Prime Minister’s desire prevailed: no cut, no entry. We had no choice but to defer to her.

I still had three fears. First, that even at the last minute the Prime Minister might change her mind, or that some unexpected event would intervene. Unlikely, but possible. Second, that a week’s delay after a firm decision to join might lead to a leak. The media were in pursuit of a date each day. Third, that entry on 12 October had one huge drawback. The Prime Minister’s speech at the Conservative Party Conference always generated massive – and usually favourable – coverage. But if she sat down at 3.30 p.m. and I announced ERM entry at 4 o’clock, her speech would be wiped off the news. I suggested to the meeting that we should therefore examine entry the following day – 5 October. There was a pause. The advantage of not waiting a week was obvious. ‘Do it,’ said the Prime Minister. ‘Do it tomorrow.’

At 5 p.m. we trooped back to the Treasury. At 7.15 we were back at Number 10. The text of the announcement was prepared. The detailed advice on timing for the next day was ready. The arrangements for the Monetary Committee were in hand. Media packages were being prepared. It was decided who had to be contacted. We did not seek to wreck the Labour leader Neil Kinnock’s speech to his party conference, which was taking place the next day, but neither did we see any reason to delay on that account. We were ready to go. Eddie George went off to talk to European Bank governors. Nigel Wicks spoke to Mario Sarcinelli, the Chairman of the Monetary Committee, who warmly welcomed the decision.

I phoned a delighted Robin Leigh-Pemberton and Karl Otto Pöhl, the President of the Bundesbank, who congratulated me on a ‘brave and courageous decision’. He was very supportive, and made no adverse comments at all about the exchange rate at which we intended to enter.

At 4 p.m. on Friday, 5 October, after the close of the foreign exchange markets, I made the formal announcement of Britain’s entry into the Exchange Rate Mechanism. The Prime Minister made a brief statement in Downing Street, saying: ‘We have done it because the policy is right.’

The press widely welcomed the decision. ‘The time was right,’ said the Financial Times. ‘Both politically and economically, entry is shrewdly-timed,’ said the Financial Times. Most other papers also took an approving view:

‘Major plays ERM ace – shares soar as government seize political and economic initiative’ – Independent

‘No soft option’ – Daily Telegraph

‘Thank God – now down to some strong discipline’ – Sunday Telegraph

‘Business hails Britain’s entry into ERM’ – Sunday Times

‘Tories take ERM gamble. Shares rocket in market euphoria’ – Guardian

Two years later, when we were swept out of the ERM by turbulent market conditions, some of these newspapers would take a very different line. Defenders of our entry could scarcely be found, while those who claimed to have warned of the inevitability of disaster bobbed up everywhere. It was the golden age of hindsight.

Neil Kinnock welcomed the decision as ‘momentous’, while John Smith, his shadow Chancellor, attacked the fact that the Madrid conditions were not met (humbug, since he didn’t support them anyway), but heralded ‘the potential benefit that a more stable exchange rate could bring to the process of Britain’s much-needed economic recovery’. Labour supported the rate of entry, but seemed to forget this two years later, when we pulled out. John Smith, who had taunted the government for not entering, called the Tories ‘the only architects, the sole constructors, of our present dismal situation’. It was not what he had said at the time. But there were some dissidents. My PPS, Tony Favell, who had first joined me at the DHSS, resigned in protest – an unexpected departure and no doubt a straw in the wind.

In the Commons I made a statement following entry, and opened a debate on the decision a few days later. In my statement I said: ‘The mechanism has a proven record of success over recent years in producing greater stability of exchange rates and lower inflation. The government believes that Britain, too, will benefit from membership. The Exchange Rate Mechanism will reinforce our counter-inflationary policies, help to provide the stability and certainty that industry needs, and set the right framework for a resumption of soundly-based and non-inflationary growth.’ In winding up the later debate, Norman Lamont reinforced the fact that joining had become inevitable by saying it would have been ‘sheer masochism’ to wait any longer. He was right.

Whilst entry received overwhelming support, long-term European critics in the Conservative Party like John Biffen attacked the decision. Teddy Taylor raised questions about options to withdraw if necessary. Bill Cash said, ‘Thus far and no farther.’ Nick Budgen advocated a floating pound. Norman Tebbit, once in favour, now pronounced himself ‘agnostic’ on ERM entry. Later, ‘agnostic’ would seem a mild way to describe his opposition.

One commentator, the genial Bill Keegan of the Observer – who had been a constant thorn in Nigel Lawson’s side – was very prescient. He said outright that we had entered at too high a rate. When we left the mechanism two years later he, at least, was one of the few entitled to say ‘I told you so.’ He did not set out, however, how we could have negotiated entry at a lower rate.

We entered the mechanism at the market rate – DM2.95 to the pound. There was no real option of much divergence from this, though it later became politically useful for critics to claim that there was. If we had sought to enter at a markedly lower rate we would have been rebuffed by our European partners. They would not have allowed us to gain a competitive advantage upon entry by an artificial devaluation. Even if we had got away with it, the upward pressures on the pound would have been dramatic and we would have had to cut interest rates substantially to resist them, long before it would have been economically safe to do so. Any suggestion that we could have entered at a significantly lower rate is utterly unrealistic. Nor was it proposed by anyone closely connected with the negotiations. The Bundesbank favoured entry at the marginally lower rate of DM2.90, while others actually favoured a higher rate. The Banque de France wanted DM3.00. So did the CBI. And the Prime Minister and the Bank of England wanted a firm rate, so that interest rates could fall. DM2.95 was around the average rate for the previous decade, and, according to the OECD’s calculation of the pound’s ‘purchasing power’, actually a 17 per cent undervaluation of sterling’s worth.

We did ruffle a few feathers by not ‘negotiating’ our entry rate with the Monetary Committee in Brussels. Mario Sarcinelli wanted us to say ‘We are not going against the tide of the market,’ rather than specify an entry rate. This might have been polite, but there was nothing to negotiate, because no real flexibility in our rate at entry was possible. Two years later, after our exit from the ERM, with inflation driven from the system, the pound found its value well within the original margins at which we had entered.

We didn’t get it all right. The decision to cut interest rates at the time of entry was certainly a mistake. It was fiercely attacked by Nigel Lawson in the House and by commentators outside. ‘For reasons best known to himself – one can guess at them –’ said Nigel, ‘my right honourable friend’ – he meant me – ‘did not address the possibility of joining the ERM before reducing interest rates … This is not a small point because sadly the conjunction of the two has led to a degree of cynicism in the financial markets for which we will have to pay a price.’ Ken Baker wrote that the cut in interest rates was Margaret’s ‘fig leaf’ for entry, and there is some truth in this. It is, however, not the whole truth – she was desperately keen to see interest rates fall, and no one was prepared to give her a guarantee that they would do so shortly after entry. The Bank of England expressly refused to commit itself on this, so she took the comfortable option of a cut when she knew she could get it.

I was more concerned when the Prime Minister privately began telling colleagues critical of entry that we could easily realign, and that she wouldn’t use significant reserves to defend the exchange rate. This was not credible: a realignment – in essence a devaluation – would not be easy to obtain, and we would have no choice but to use our foreign-exchange reserves to defend our exchange rate if it began to fall too far. The Prime Minister’s remarks showed a startling lack of commitment (or understanding) of the system she had just agreed we should enter. It was not even consistent with her own objectives: she had urged a high rate of entry to curb inflation (and hasten cuts in interest rates). She could hardly therefore be a ready devaluer, cutting the value of sterling at the first hint of difficulty and undermining our anti-inflation policy. Nonetheless, her remarks did raise a doubt in my mind about whether she would stick with the policy when it began to hurt – which it was likely to do as it squeezed inflation out of the economy – or whether she would distance herself from it and let it be known that it had been forced upon her. I dismissed such thoughts, as the pound remained strong and my concerns seemed academic.

During the year there had been some pleasant interludes. In September I attended the Commonwealth Finance Ministers’ meeting in Trinidad – my first visit to the West Indies. I took the opportunity to visit the Test cricket ground at Port of Spain. Alas, there was no play at the time, but as usual the sight of a cricket pitch put me in a very sunny mood. So did an enjoyable afternoon with David Saul, the Finance Minister of Bermuda, who introduced me to rum punch. ‘The second one is better than the first,’ he joked, and it certainly seemed so.

The main business of the meeting was for me to launch a debt initiative for the world’s very poorest countries that I had been working on for nearly six months. Many of these countries were in dire poverty, and the rise in the price of oil as a result of Iraq’s invasion of Kuwait had dealt them a further blow. I proposed a substantial package of relief: a rescheduling of the whole stock of debt; a doubling in the amount of relief from one-third to two-thirds; the capitalisation of interest due on the debt, with no further payment for five years; and an increase in the repayment period to twenty-five years.

The Commonwealth finance ministers were delighted, and the package was endorsed later by the IMF Conference in Washington and warmly welcomed by the Secretary General of the United Nations. The net effect was to write off over US$18 billion in debt from the poorest and most highly indebted countries at a UK ‘cost’ of US$900 million – which was, of course, largely nominal, as it was highly unlikely it would ever be repaid. Britain had a good record in debt relief. Nigel Lawson had set the trend some years earlier, and later Ken Clarke and Gordon Brown would bring forward further debt alleviation. I hope it gave them as much satisfaction as it gave me: these poor countries need help, and it is unforgivable to let them fall further and further behind the rest of the world.

Despite all the difficulties, political and economic, I was enjoying my time as chancellor. Against a challenging background of high inflation and interest rates, an uncertain pound and a static economy, I felt I had picked up the pieces which had been broken and scattered in October 1989, and had put together an effective economic policy.

I delivered my second Autumn Statement on 8 November 1990, though the event rather lost out, in terms of press coverage, to the guessing game underway about the Prime Minister’s future. If the party was hoping for early tidings of economic spring, it was disappointed. I forecast slightly increased growth for the year ahead, though I suspected that recession might also be on the cards. But this was not certain, and no advantage could accrue to anyone from a forecast that could only make it more likely. Meanwhile the impact of rising unemployment and a slowing economy had pushed up expenditure on social security by £3 billion, while the voracious demands of the NHS reforms added a similar sum.

Twenty-five days after ERM entry Geoffrey Howe resigned from the Cabinet. The combination of dissatisfaction with the Poll Tax and widening splits in the Cabinet over European policy were about to create an explosion that would sweep Margaret Thatcher from Downing Street. By the end of the month I had succeeded her as prime minister.