Downing Street Years - Margaret Thatcher [434]
High real interest rates* do ensure that there is a high real reward for saving. But they discourage risk-taking and self-improvement. In the long run, they are a force for stagnation rather than enterprise. For these reasons I was cautious about putting up interest rates unless it was necessary.
Another reason for caution was the difficulty of judging precisely what the monetary and fiscal position was. The MO figures were volatile from month to month. The other aggregates were worse. We were given figures which underrated economic growth and so caused us to exaggerate the likely size of the PSBR. In these circumstances, making the right judgement about when and whether to cut or raise interest rates was indeed difficult. So at the meetings I had with Nigel, the Bank and Treasury officials to decide on what must be done I would generally cross-examine those involved, give my own reaction and then — when I was sure all the factors had been considered — go along with what Nigel wanted. There were exceptions. But they were very few.
SHADOWING THE DEUTSCHMARK: 1987–1988
It was only from March 1987 — though I did not know it at the time — that Nigel began to follow a new policy, different from mine, different from that to which the Cabinet had agreed, and different from that to which the Government was publicly committed. Its origins lay in the ambitious policy of international exchange rate stabilization. In February Nigel and other Finance ministers agreed on intervention to stabilize the dollar against the deutschmark and the yen by the ‘Louvre Accord’ agreed in Paris. I received reports of the massive intervention this required which made me uneasy. And it was not clear how long this would last.
In July Nigel raised again with me the question of whether sterling should join the ERM. He felt that the first year of a new Parliament would be the right time to join. Membership would give us as much exchange rate stability as it was possible to achieve and help business confidence. I was not unprepared for this and had earlier talked the subject through with Alan Walters and Brian Griffiths, the head of my Policy Unit who in an earlier incarnation had been Director of the Centre for Banking and International Finance at the City University. I said to Nigel that the Government had built up over the last eight years a well-founded reputation for prudence. By joining the ERM we would in effect be saying that we could not discipline ourselves and needed the restraint provided by Germany and the deutschmark. ERM membership would reduce the room for manoeuvre on interest rates which would, at times of pressure, be higher than they would be if we were outside. I had heard the arguments about external discipline before. I recalled that Ted Heath had claimed in the early 1970s that European Community membership would help discipline the trade unions. But this had not happened; and the attempt to use ERM membership to influence the expectations of management and workforces would be an equal failure. Overall, when things were going smoothly membership of the ERM would add nothing to our economic policy-making, and when things were going badly membership would make things worse. Nigel completely rejected this. He said he would want to discuss it all again with me in the autumn. I said that was much too soon: I would not wish to hold a further