Downing Street Years - Margaret Thatcher [448]
As for the central rate of sterling against the deutschmark, this was influenced by several factors. First, the rate chosen had to be credible in the light of recent exchange rate movements. Second, it should not be so low that it weakened the fight against inflation, by requiring imprudently low interest rates to keep sterling down. Third, and by contrast, it must not be so high that it imposed unnecessary pressure on industry, both through high interest rates which made borrowing expensive and a high exchange rate which made our goods uncompetitive.
It would, of course, test the wisdom of Solomon to settle on the ‘right’ rate: indeed, I doubt if Solomon in his wisdom would ever have set himself such a task. This is because ultimately there can be no ‘right’ level of sterling apart from what the market says it is. To search for such a thing is in a sense to fall into the trap of believing in the old precapitalist concept of a ‘just price’. Had Nigel Lawson managed to persuade me to have sterling enter the ERM in November 1985 the sterling/deutschmark rate would have been about DM3.75. A year later the pound was down to DM2.88. In November 1987 it was up to DM2.98. In November 1988 it was right up to DM3.16. In November 1989 it was back down to DM2.87. When we entered it was at a central parity of DM2.95, which was the rate at which the London market closed that day. What this shows on even a cursory glance is that revaluations and/or heavy intervention and very large shifts in interest rates would have been necessary to keep sterling in the mechanism throughout this period. It is, in fact, a demonstration that Alan Walters had been right all along in his view that the ERM ensured not stability, but rather the kind of instability which comes from movement in large leaps rather than by the more gradual accommodation of the market.
Only at my meeting with John Major on Wednesday 13 June did I eventually say that I would not resist sterling joining the ERM. But the timing was for debate. Although the terms I had laid down had not been fully met, I had too few allies to continue to resist and win the day. There are limits to the ability of even the most determined democratic leader to stand out against what the Cabinet, the Parliamentary Party, the industrial lobby and the press demand — particularly when you have lived for so long, as I had, with a thoroughly unsatisfactory form of words (‘joining when the time is right’), since qualified further by the Madrid conditions. By this stage all my advisers were telling me — though on political rather than economic grounds — that I should have sterling enter. Almost my only ally in the Cabinet was Nick Ridley — who was shortly to resign: together we were not a strong enough combination to have done what we would have had to do — that is to state that on grounds of principle we would not have sterling enter the ERM now or in the future.
But my willingness to join the ERM was qualified by a crucial condition. I was not prepared to keep to any particular parity at the expense of domestic monetary conditions. I insisted that we enter the wide band — 6 per cent on either side. Even then I made it very clear to John Major that if sterling came under pressure, I was not going to use massive intervention, either pouring in pounds and cutting interest rates to keep sterling down or raising interest rates to damaging levels and using precious reserves to keep sterling up. For me, willingness to realign within the ERM — as other countries had done — if circumstances warranted it, was the essential condition for entry. This makes nonsense