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conflict between our domestic monetary policy and an exchange rate target — this was brought out clearly in Treasury papers prepared for us now. Second, we were conscious — perhaps over-conscious as Alan Walters would argue — of sterling’s position as a ‘petro-currency’. The pound’s value was affected by the discovery and exploitation of huge quantities of North Sea oil. This had the apparently perverse result that whereas higher oil prices increased the value of the pound, they would generally reduce the value of other western European currencies. But the greatest destabilizing factor was the appalling condition of the British economy in 1979. Until inflation had been brought under control and the public finances restored, it was not, in my view, realistic to consider participation in the ERM.

But in early 1980 Helmut Schmidt was urging me to enter the ERM and I was anxious to be as co-operative as possible to the Germans because I needed their support on the question of our Community budget contributions. So I reopened the question. The more I looked at the papers and the facts they revealed, the more sceptical I became. The Treasury were firmly against our joining. They noted that if we had joined in September 1979 there would have had to be very heavy intervention in the exchange markets — selling pounds — to hold sterling down. I chaired a meeting on the subject in March 1980 at which I opened by saying that domestic monetary policy must remain paramount. After we had argued all the points through, we concluded that we should not join in the immediate future but stick to the line that we intended to join when conditions permitted.

There was further discussion in the autumn of 1981. It will be remembered that this was a difficult time when some of the gains of lower interest rates obtained through our tough 1981 budget looked as if they might be dissipated as a result of international pressures. United States interest rates rose as the Federal Reserve Bank attempted to restrain the inflationary pressure generated during the previous Carter presidency: throughout the world interest rates followed. I asked Geoffrey Howe to bring forward a paper looking once again at the question of whether we should join the ERM. Opinion among Treasury ministers was divided. But both Geoffrey Howe and Leon Brittan (then Chief Secretary) were against our joining. The position of Nigel Lawson, then Financial Secretary, was less clear.

I said that I would need to be convinced that there were positive arguments for joining, not just an insufficiency of arguments against. My caution was reinforced by powerful advice from Alan Walters. His view was that it was wrong to think of the ERM as a force for stability. It did not even have the — arguable — merits of a system of fixed exchange rates. The parities moved within a band. Then, after bumping along against the ceiling or the floor, they would go through a process of periodic realignments in which the rates moved in discrete jumps. These movements, moreover, were the subject of political horse-trading rather than the workings of the market — and the market does a better job.

After several postponements as a result of other pressures on my diary, I eventually chaired another meeting on the subject in January 1982. Geoffrey Howe’s view was still that this was not the right time to join. I agreed. I said that I was not convinced that there would be solid advantage in joining the ERM. I did not believe that in practice it would provide an effective discipline on our economic management. Rather, it removed our freedom of manoeuvre. I accepted, however, that when our inflation and interest rates moved much closer to those of West Germany the case for joining would be more powerful. For the time being, we would maintain our existing position on the issue.

ARGUMENTS ABOUT THE ERM: 1985

There could be no question of our entering the ERM on the eve of a general election, so this was the situation which Nigel Lawson inherited when I made him Chancellor in 1983. At this time the exchange rate was