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 He was a little withdrawn, obviously tired, and probably, though irrationally, hurt that the post he had held for so long should have been filled so swiftly – and by one of his former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
