Treasury orthodoxy and Black Wednesday

As published in Telegraph:

The new Prime Minister and Chancellor are clear that we need to challenge Treasury orthodoxy. They want to do so not because they want more inflation, or care less about the prudent management of the public finances than those who went before. They recognise that the current orthodoxy has failed. It has given us 10 per cent inflation and put us through several violent cycles in the past few decades that could have been avoided.
Indeed, yesterday marked the 30th anniversary of Black Wednesday, when the UK crashed out of the European Exchange Rate Mechanism (ERM). Part of today’s orthodoxy is derived from the self-same Maastricht Treaty thinking on debt and deficits which caused our grief in 1992, allied to the exchange rate requirements to prepare us for the euro.
The ERM was a case study in Treasury groupthink. It recommended joining the ERM strongly to successive chancellors. John Major finally drove the policy through against a prime minister who knew it was wrong. I had advised Mrs Thatcher that the ERM would be destabilising, lurching from creating too much money and credit to too little. Nicholas Ridley was a lone voice in the Cabinet making the case against joining. I wrote a pamphlet describing the possible difficulties. I took the listed company I chaired out of the CBI in protest at the group backing the ERM policy, telling them it was bound to damage business and the rest of the country. And so it proved.
But the ERM disaster was not unique among official advice in the last 50 years. There was the early 1970s secondary banking crash, made worse by the Opec oil price hike. There was the end of 1970s policy depression meant to purge the high inflation that loose monetary policy and Labour’s fiscal policy caused. There was the great banking crash of 2008-9, which followed a period of over-easy money when we were told by government that banks could lend far more without bad consequences. These were all boom-bust cycles like the ERM one, all of which harmed us and slowed the longer term growth rate.
Treasury orthodoxy has evolved as it has drifted from one bad international fashion to another. If there is a single leaden thread, however, it has been an unwillingness to take money and credit growth seriously, ending in them each time expanding excessively and then contracting too far and too fast in shock at the error.
Today the orthodoxy that needs changing is the one which said it would not be inflationary to carry on creating money and buying bonds. The Treasury throughout the last 13 years ignored inflation in financial assets. It was only a matter of time before asset inflation spread into general inflation. I assume the new team will rightly rule out any more special bond buying . The Treasury also needs to grasp that lurching from excessively easy money as in 2020-21 to excessively tight money is the way to bring on a slump.
Steering the economy to achieve lower future debt ratios when forecasts are often wildly out on tax revenues and inflation is also not a good model. In the last two years, revenues have outperformed the official forecasts, meaning we borrowed a lot less and worried needlessly about the deficit. In the recession which official policy now seems to favour, the opposite is likely to happen with revenues falling short and the deficit rising. The new policy needs to take money and credit seriously. But it also needs to set tax rates that help grow revenue, not stifle it, as well as removing obstacles to growth throughout the private sector, which the old rules failed to do.
Leaving the ERM allowed us to reduce interest rates and get out of the recession it created. Today, we have to see off the recession the Bank is forecasting. That requires new thinking. The only way to work our way out of our present difficulties is to produce more energy, make more, and sell more.


  1. Lifelogic
    September 20, 2022

    Indeed. But Truss’s approach to energy is equally mad trying to fight markets rather than let the markets match supply and demand. Net zero is insane too.

    1. IanT
      September 20, 2022

      I’m not sure she has any choice politically.
      We are where we are, not where we could have been if energy security had been prioritised over green fashion.
      Any change of tack is going to take time but the sooner we start, the sooner we can get back on a sustainable (but viable) energy policy that makes sense for both our planet and our economy.
      I’m afraid that there is so much creative (carbon) accounting when it comes to these things, that it’s very hard to see the wood from the trees. But clearly we need a transition period and we will be reliant on gas during that period. So until an affordable, efficient way is found to store renewable energy, or we can build sufficient nuclear, there is no alternative.

  2. Mark B
    September 20, 2022

    Good morning.

    The ERM was a blessing in disguise. It highlighted how dangerous it would be to adopt what would become the EURO and further EEC / EU integration. It provided the bedrock on which much Euroscepticism was built as people, rightly, saw the ERM and later Maastricht as the building blocks for a Federal Europe. Something we neither were told about and wanted.

    The seeds of BREXIT were sown back then and, I for one, am happy to have seen the Europhiles folly bare fruit.

    Every cloud has a silver lining.

    1. Shirley M
      September 20, 2022

      + many, Mark B.

    2. Denis Cooper
      September 20, 2022

      In the decade or so before the ERM fiasco I was beginning to have first reservations, and then growing concerns, about the way our involvement with the EEC/EC was going. Black Wednesday was the eye opener for me. I do not expect that Brexit will bring us great riches or much improved government, but it has taken us off the pathway to a European federation which we had joined in 1972, notwithstanding the repeated deceitful reassurances from advocates of the so-called “Common Market”. I am serious when I say that the only reason why some of those people should not be tried and punished for treason is that they committed those offences with the legal backing of Parliament with duly elected MPs, and in fairness it would be necessary to arraign most parliamentarians alongside them even if only for lesser offences. As for those eurofederalists who still contaminate Parliament, and who are especially numerous in the unelected chamber, they should be removed from our national legislature and banned from any sensitive public positions, and the best way to proceed with that it to demand a new Oath of Abjuration expressly rejecting the EU and any similar pretended supranational organisation as well as the normal Oath of Allegiance.

  3. formula57
    September 20, 2022

    It is important the Chancellor succeeds, clearly.

    We have been ill-served by H.M. Treasury. Do the people who staff it not maintain connections to academic economists and those in private research institutions to obtain critiques and exposure to new thinking that can then inform their own?

  4. oldwulf
    September 20, 2022


    HM Treasury does not have a good track record. As far back as the mid 1970’s the Labour Chancellor (Denis Healey) went to the IMF for a loan to bail out the UK. Mr Healey said that excessively pessimistic Treasury forecasts were the main reason for requesting the loan. Apparently, only half the loan was drawn down and it was repaid very quickly.

    “Some believe the sterling crisis and IMF bailout may have contributed significantly to Margaret Thatcher’s 1979 Conservative victory.” Every cloud ….. etc.

    Maybe HM Treasury is constantly looking for a regime change so as to ensure that Governments remain ephemeral.

  5. Pauline Baxter
    September 20, 2022

    Totally agree with you today, Sir John.
    I sincerely hope Truss’s administration CAN overcome the Civil Service ‘Group Think’ on all issues.
    For one thing it is undemocratic, as well as being harmful.

  6. Am
    September 20, 2022

    Treasury orthodoxy is essentially globalism. Whatever is recommended by the international institutions and similarly minded think tanks, they follow.
    Not what is best for Britain.

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