Getting ready for the ERM and the Euro?


            I do not normally dwell on the past. Last week I was phoned about a couple of memos the press had seen as more documents were released under the 25 year rule. As they are of some long term and even topical  interest I will set out some background.

            In the middle 1980s I was both Head of the Policy Unit and Economic Adviser to the Prime Minister. One of the memos they have found is my note on the state of interest rate and currency management in 1984, when I first detected that the Treasury and Bank were moving away from domestic money supply targeting to trying to manage the value of the pound . I strongly supported the stated  policy of money targets.  The Treasury went on  to shadow the DM, a policy I thought would prove damaging. When the government did eventually join the ERM, far from preparing the UK for possible Euro entry, it caused a UK boom and bust which was entirely predictable.

          The memo was just one of many communications sent to the PM to keep her up to date with these big issues, as we fought to grow the economy after the high deficits and inflationary tendencies of the late 1970s. During my time at Number 10 the PM did resist any official policy of shadowing the DM or joining the ERM. She did not want to believe at first that Treasury was managing the pound without that being the express policy, and then became worried when the evidence pointed in that direction.  I with others continued to brief her against the ERM right up the time when her colleagues effectively forced her to allow entry. In the later period Nicholas Ridley was the principal opponent of the ERM from within the Cabinet, who constantly made the case.

            The second memo was a piece about how we were  handling the Stock Exchange. The possibility of an OFT enquiry into the practises of the Exchange furthered the development of thinking in the markets which in due course resulted in Big Bang. I expected Stock Exchange reform to lead to a big expansion of the London markets, with many new entrants and much more capital and talent at work. I also expected it to mean the financial services and banking industries would break out of the narrow confines of the Square Mile, and help with the task of developing and improving the derelict  lands to the East around the old docks. So it proved.

           It is curious that out of all the memos and briefings I wrote with my Policy Unit team these two should be the ones that excite interest or have survived to see the light of day so far. The Policy Unit used to brief the PM on most domestic policy issues which crossed her desk. These briefs were welcomed by the PM who found they combined clear summaries of the different positions being taken around Whitehall with suggested ways of reaching a conclusion or an alternative strategy which might be superior. Most of the memos came back with underlining and notes to show they had been useful. Occasionally, as with the one I wrote  that proposed a major privatisation programme for the new Parliament in 1983 it did not get returned because she wanted to keep hold of it. After leaving office she donated it with other papers to the archives at Churchill College Cambridge.


  1. Alte Fritz
    December 17, 2013

    “I know of no way of judging the future but by the past” – Patrick Henry to the Virginia Convention, 1775.

    1. lifelogic
      December 17, 2013

      This is not a very good strategy for predicting technology advances, say nuclear power, genetic engineering, computers, electronics, cars, modern communication systems, satellites, planes ….. but perhaps works for human nature.

      What has history to say about when we will crack controlled nuclear fusion, or develop GM plants to convert 50% of the suns energy into methane? Better to look at maths, physics and science for these.

  2. Mark B
    December 17, 2013

    I for one do actually enjoy reading about your time in Government, but it must be within the context of events.

    For example: Now that the Mandelathon has finally, like the man himself, come to rest, it was good to actually read letters sent by the PM at the time, Lady Thatcher, urging the release of Nelson Mandela. If this came to light at any other time, I doubt it would have been as widely read and/or acknowledged.

    Similarly, events such as those you describe and the means by which a PM seeks to be informed are quite illuminating. One wonders if these and other useful practices are continued today ?

    Thank you.

  3. lifelogic
    December 17, 2013

    You say “It caused a UK boom and bust which was entirely predictable” indeed it was very predictable indeed by sensible economists. As were the bankrupt businesses, the repossessed houses, the 15%+ mortgages. Yet Major has never even apologised for this mess as Chancellor and wasting billions in attempting to keep us in PM. He just took the Tories unapologetically over the cliff for 3+ terms so far. Cameron set to do the same it seems.

    Why was Lady Thatcher so daft as to appoint someone (words left out ed), to such a position?

    This when she was getting such sound advice from yourself Nicholas Ridley, Alan Walters, Patrick Minford and sensible economists everywhere? Group think lunacy from the EU and civil service one assumes.

    1. arschloch
      December 17, 2013

      In defence of Sir John I seem to remember that the state was helping itself to more of my money when Mrs Thatcher left No 10 than it was in 1979. Not to mention the huge swathes of UK manufacturing that were decimated during her premiership. What about the oil money that was wasted on paying benefits to the subsequently unemployed rather then retraining them for skills that would have increased the UKs competitiveness? Oh yes and what about the massaged unemployment figures? Now we have a belief common amongst lots of the formerly working class that they never need work again because the incapacity benefit that they received confirmed that there was something actually wrong with them. What really peas me off the most were the property bubbles. I am a NHS consultant however after all that training for what I am paid I can just about afford a the same sort of house my parents (a semi skilled factory worker and a full time housewife) live in and I am not in the SE either.

      1. lifelogic
        December 17, 2013

        I agree Thatcher did not cut taxes and government waste/expenditure enough but income tax went down from 78% t0 40% did it not?

        The only defence I can find for Major is that he does have the reasonable excuse of (not being up to it? ed).

      2. yulwaymartyn
        December 17, 2013

        arschloch. Your last sentence is particularly meaningful and shows just what a mess we are in.

      3. Nash Point
        December 17, 2013

        So, Mr Arsloch, how’s that Allegro running these days? Margaret Thatcher is totally to blame for “the formerly working class believing that something was wrong with them”. Oh my bleedin’ heart!
        There were huge improvements in the lives of the majority from 1979, and you’re not going to change that with your nonsense. Huge changes in industry had to be made at that time, and she had the guts to do it.
        Are you a Consultant in the NHS or an NHS consultant? I think there’s a difference. My brother in law is the former, recently retired. He didn’t start with much, but he now has a renovated farmhouse, two boats and a camper van, also outside the SE.

        1. arschloch
          December 19, 2013

          Nasher, a medic but I am a lot younger than than your BiL who would have benefited, just like my parents did, from the house price inflation of the 70s and 80s. If you are a regular reader here you will have seen John’s earlier disclosure of state pension/public sector pension liabilities in relation to GDP so I would not get too cock sure about your or his financial future either. When the correction happens you too will realise you were had by Thatcher just as much as by those who followed her

      4. Hope
        December 17, 2013

        Major cost ordinary people to lose their homes, he caused business to go bust and cost the taxpayer a fortune for his fanatical EU superstate dream. Good riddance to him and let is hope good riddance to the EU. Major should have had his title and pension taken away just like the claims for bankers. The Tories would be wise to remember how long they have not won an outright election because of him and the likes of him. Instead of calling people like our host Ba…rads, he should have looked in the mirror.

    2. Hope
      December 17, 2013

      Perhaps she was not fully aware of the traitors a round her. Good to see Europhile Clarke still keeping an eye on Cameron as the EU watchdog.

  4. Figurewizard
    December 17, 2013

    What would be interesting today would be another such memo not just concerning interest rate and currency management but with added suggestions to bear down further on public expenditure deficits and taxes; in particular those arising from Milliband’s 2008 Climate Change act. The latter has is having a disproportionate effect on the less well off I suggest that any chance of seeing a Conservative government from 2015 onwards looks like it is going to very much depend on that.

    1. MickC
      December 17, 2013

      There is no chance whatsoever of the Conservatives winning the next General Election-neither the maths of the seats, nor the mood of the voters is favourable.

      Indeed, it is likely that there will never be a Conservative government again, if the current party can be termed Conservative of course.

      1. lifelogic
        December 17, 2013

        I tend to agree, even if Cameron finally found a working compass, no one could now trust any new promises he makes. This after Cast Iron, IHT and now a (good for once) ratting on Heathrow – it seems.

        1. Hope
          December 17, 2013

          It is far too late in the game for Cameron. Effectively a year to go and there is no chance of him and his Europhile chums being close to getting in power. Perhaps he should consider a coalition with Ed their policies are similar, backed mainly by EU law, regulation and directives. Regional puppets of the EU. No thanks, time for change.

  5. MickC
    December 17, 2013

    Was nationalising the Stock Exchange really a good idea?

    Was Big Bang really a good idea? It allowed the banks to become gamblers with other peoples money-whereas previously the “investment banks” (an oxymoron if there ever was one) had to gamble with their own, at their own risk.

    The consequence of Big Bang was that the US had to compete by rescinding the Glass-Steagall Act.

    We now live with the consequences. They are far from benign.

    1. forthurst
      December 17, 2013

      There did need to be a shakeup of the SE; it was a closed shop with high fixed commission rates and under which banks were required to deal under Rule 212; the settlement system was appropriate to the era of quill pens (actually used by a broker before my employer installed their first computer). As to gambling and then add in conflicts of interest and both were practised by the shiniest star in the City firmament at the time, resulting in my own contact there being transferred to their Jo’burg branch so quickly that when I went round to keep an appointment to discuss his ideas for holding commodities such as gold (money) in their clients’ portfolio management system which I was designing for them, in addition to the usual which were subject to a market crash, he had already gone, the state which the whole business itself (apart from Unit Trust management) found itself in a few months later. I would not be able to distinguish what they were up to overall from a modern ‘Investment’ bank.

      There needs to be laws for businesses that hold client monies and either lose it or abuse it, to parallel the laws for bad driving, equivalent to “without due care and attention”, “recklessly” and “dangerously” as well as those for outright market rigging and fraud which also seem not to be pursued in the City. It may be time to revisit the way the City does business in some areas to ensure the primacy of the interests of clients.

    2. REPay
      December 17, 2013

      The UK would be massively poorer without Big Bang…the Balls/Brown Bust and Glass-Steagall has little to do with London’s awakening from slumbers. Of course, the sector has been mismanaged by systemic risk taking but all this was clearly visible at the time. Politicians just liked the tax take too much to intervene.

  6. outsider
    December 17, 2013

    Dear Mr Redwood, History has proved you right in principle over joining the ERM. Even at the time, however, it was obvious to anyone who thought it through that sterling entered at far too high a parity. Interest rates were at emergency 12-14 per cent and the pound would clearly not be worth as much when rates returned to normal levels. Yet the CBI wanted an even higher fixed exchange rate to “cure” inflation. How can so many intelligent people be so myopically one-eyed?
    I sense that we are again pursuing a lethally myopic monetary policy, though in the opposite direction. Few seem to have thought through how we can return to normal levels of Bank Rate, say 3.5 – 5 per cent, without going through another boom and bust.

    It was much harder to foresee the consequences of the City Big Bang. For that reason, Government should have been watching closely with the aim of channeling the energy released to benefit British industry and investment. Instead, the City made mincemeat of UK quoted companies, dividing them up, bottling them in fancy jars and selling them to the highest bidder (most often to rivals in countries that did not allow such nonsense). In the end, banks made mincemeat of themselves. Put the two together and we are condemned to slow trend growth for a generation. And on the way, your own fine vision of a mass share-owning democracy was shattered.

  7. stred
    December 17, 2013

    Presumably, the practise of civil servants working quietly to their own agenda goes on today, but without any naughty boys like young JR in government to rumble them. I noticed that most of the backstabbers turned up to Mrs T’s funeral but didn’t see you. Were you invited by the organisers?

    Reply Yes

    1. stred
      December 17, 2013

      I turned the funeral off after noticing most of the politicians who got her out on the front rows. At least you can do the rumbling on your blog. Unfortunately,not much notice seems to be taken. Keep up the good work.

    2. Lifelogic
      December 17, 2013

      Most of the backstabbers were indeed there, many (even now) still causing huge damage to the nation, some even employed by Cameron and many regularly on the BBC talking drivel.

    3. Chris S
      December 17, 2013

      “Civil servants working quietly to their own agenda”

      I suspect that this was the root cause of the disastrous ERM venture and is why the current government has made a lot less progress than we would have hoped.

      Advice to ministers clearly stays the same whatever parties are in power and therefore it takes a very determined minister to buck the system.

      It’s also why the same mistakes keep being made over IT and many of the infrastructure projects that have gone wrong. Nothing will alter until we get radical change at the top of the Civil Service such as ditching Permanent Secretaries in favour of Ministers bringing in their choice of external managers

    4. Max Dunbar
      December 17, 2013

      Luckily, I was able to attend Thatcher’s funeral. I invited myself. It was an event not to be missed and as unforgettable as her coming to power in 1979.
      And what a relief it was to have someone of her calibre and undoubted patriotic conviction leading the country at that time.
      Even from the cheap seats (hemmed in by the crowds in Fleet Street) the funeral procession was a formidable display by our superb armed forces and a demonstration, oath of allegiance notwithstanding, of loyalty to her.

  8. Bert Young
    December 17, 2013

    Your reflections show that as PM Margaret Thatcher was a resolute and determined manager of our affairs . She did make mistakes – as one of your responders has pointed out , however , she kept her priorities in place and led the country out of a deplorable mess . The situation of our leadership today is different ; there are not challenging voices and minds around the PM ; he has made the error of using friends and like minded individuals who go along with his ego driven inexperience . The present is a transparency of the past and those who lead cannot afford to ignore the value of challenges .

    1. zorro
      December 17, 2013

      All very shallow and no real depth of thought or intellectual challenge….


    2. Martyn G
      December 17, 2013

      I agree and wonder if I am alone in viewing the PM as a sound-bite spinner of whatever he perceives to be the latest hot topic. And as for PM question time, he seems to think that he who shouts the loudest is the winner. Does he not know that in an argument he/she who first raises their voice to make a point is usually the loser?
      He ought to take heed of Churchill, who rarely raised his voice in the HOC and could destroy or at least win over opposition by force of character and with grasp of facts, again without raising his voice. Would that all members of the HOC would also heed that lesson – it resembles a bear pit at times, rather than a place of rational debate and does nothing to endear it to the public unfortunate enough to see or listen to the house in operation.

      1. yulwaymartyn
        December 17, 2013

        Martyn G. Totally agree. PMQ’s is excrutiating and getting worse. It is becoming a national embarrassment.

    3. Lifelogic
      December 17, 2013

      She did make mistakes – indeed very big ones, she appointed John Major as Chancellor and even listened to him. Also Mrs Thatcher (as she then was) signed away more grammar schools between 1970 and 1974 than any other education secretary before or since and she largely failed to cut back the state or the system of lifetime benefits for the feckless. Oh and allowed the BBC to push lefty drivel and global warming exaggeration drivel to the nation.

      1. lifelogic
        December 18, 2013

        Also she continued Heath’s giving away of our democracy to the EU.

      2. Bazman
        December 18, 2013

        Who are the feckless? Do tell us or are they just some figment of your imagination like elves and fairies are that cannot be measured? Righty drivel and a sort of religious fake quackery that exists on FOX News that only applies to poor people and not the idle rich and their often scrounging, benefit cheat companies.

  9. Leslie Singleton
    December 17, 2013

    John–The Tories floundering around on the EU continues to be not a pretty sight and as ever I struggle to understand how they can be so pusillanimous. They are putting far too much faith in the hope that voters will be impressed by the idea of the best deal that can be negotiated (at an ill-defined time in the future) being put to them but I for one am underwhelmed. They should stop shilly shallying around and state now what they want out of the negotiations else they face (even more) humiliation next year but best I gather that is not the plan nor even close. No wonder they make no headway in the polls–“Trust us” just is not going to cut it. The Liberals cannot stop them doing this, right? And it would give the EU time to get used to it.

  10. Denis Cooper
    December 17, 2013

    This is what genuinely puzzles me, JR, and maybe you have an answer.

    If Margaret Thatcher was not in favour of Economic and Monetary Union, why in June 1983 did she put her name to the Stuttgart Declaration?

    By which she expressed her support for:

    “3.1.3 Strengthening of the European Monetary System, which is helping to consolidate an area of monetary stability in Europe and to create a more stable international economic environment, as a key element in progress towards Economic and Monetary Union and the creation of a European Monetary Fund.”

    She was a barrister and should have known better than most that if you disagree with something then you should not willingly put your name to a document expressing your agreement with it, even if that document is only a declaration and strictly speaking not legally binding.

    Reply Why indeed? Maybe she thought it would not apply to the UK.

  11. margaret brandreth-j
    December 17, 2013

    Yes this is the way it goes with many things. Many see the consequenes , but travel along the road of here and now , I want and I am right. The warnings can be voiced and as in your case looked back upon , but the conceited know it alls continue and then blame others for their lack of understanding of issues and their pig -headedness.

    1. margaret brandreth-j
      December 18, 2013


  12. Rods
    December 17, 2013

    The shadowing of the DM and entry into the ERM caused much damage to the UK economy. When overnight interest rates went up I knew it was the end for our membership and the resultant high interest rate driven recession. It was a fortunate escape from the clutches of the Euro and all of its problems, where it is the LMU Mk2 with all the same inherent flaws of a common currency with no overall control and fiscal union.

    Although things are quiet on the Euro front at the moment, deflationary pressures seem to be building, with this being reinforced by Basel III requirements and the bank stress test next year, which I hope will be more realistic than the last round! The Dutch and French economies along with most of the other Euro countries are diverging from Germany, so their economy is increasingly in a club of one. I think in 2014 bank losses in the Eurozone will come to the fore again with shipping loans by German banks one to watch.

    I’ve recently been looking at the money supply graphs for the Weimar Republic in the 1920’s and the current US monetary expansion graphs. Why will it be different this time?

    With our current growth mainly based on debt expansion with wages still falling in real terms. Will we see wages increase considering the European free movement of people and a vast pool of youth unemployment looking for jobs or will the recovery be based on debt which is future spending brought forward so our current positive growth fizzles out?

    1. Max Dunbar
      December 17, 2013

      The Weimar Republic is well worth a look at. It only lasted for just over a decade, but the consequences of its monetary policy and the inextricably connected and intermittent political turmoil at that time in Germany have shaped the Europe we deal with today. I believe that the German government moved to Weimar because Berlin was considered to be too dangerous for the politicians.

  13. Lindsay McDougall
    December 20, 2013

    Sometimes a pricipled resignation is necessary to head off folly. I wonder what would have happened had you and Nicholas Ridley resigned the moment that our joining the ERM was announced.

    Reply Margaret Thatcher would probably have been forced out of office and we would have been worse off from her departure. I stayed having complained in person to her about the ERM, and hearing her attitude towards it.

  14. Wireworm
    December 21, 2013

    It’s curious that there is no mention of Nigel Lawson in either your post or the comments. How he managed to remain entirely untarnished by the ERM fiasco is one of history’s great mysteries. Perhaps one just needs enough chutzpah.

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