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John Major & Black Wednesday

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Didn't see this on here yesterday

Interesting piece from the Observer follows, bit of a blind spot about the obvious link between credit-generated "growth" and inflation though.

Currency crisis

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Major's new take on Black Wednesday

As the 15th anniversary of the great sterling debacle nears, William Keegan looks at the former Prime Minister's attempt to set the score straight

Sunday June 17, 2007

The Observer

Sir John Major, Chancellor of the Exchequer (1989-1990) and Prime Minister (1990-1997), has been back in the news recently - not so much for political reasons as for his widely acclaimed book on cricket, More Than a Game: The Story of Cricket's Early Years. He has also been prominently sighted at Test matches.

In the preface to his book, he takes a nice swipe at new Labour when he recalls the arrangement by which he and Kenneth Clarke would be kept up to date on the Test score at Cabinet meetings: 'When I was Prime Minister, Cabinet met on Thursday mornings at the same time as Test matches began. In those days, Cabinet debated policy and took decisions so the meeting stretched on to lunchtime.' (My italics.)

Currency crisis

--------------------------------------------------------------------------------

Major's new take on Black Wednesday

As the 15th anniversary of the great sterling debacle nears, William Keegan looks at the former Prime Minister's attempt to set the score straight

Sunday June 17, 2007

The Observer

Sir John Major, Chancellor of the Exchequer (1989-1990) and Prime Minister (1990-1997), has been back in the news recently - not so much for political reasons as for his widely acclaimed book on cricket, More Than a Game: The Story of Cricket's Early Years. He has also been prominently sighted at Test matches.

In the preface to his book, he takes a nice swipe at new Labour when he recalls the arrangement by which he and Kenneth Clarke would be kept up to date on the Test score at Cabinet meetings: 'When I was Prime Minister, Cabinet met on Thursday mornings at the same time as Test matches began. In those days, Cabinet debated policy and took decisions so the meeting stretched on to lunchtime.' (My italics.)

Article continues

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When he passed the note of the score to the Cabinet Secretary, Sir Robin Butler, and Clarke, the Deputy Prime Minister, Michael Heseltine, would be driven 'to distraction'. As he says, Heseltine would see notes going to 'Prime Minister, Cabinet Secretary, Chancellor... was sterling crashing? Was there a crisis? A ministerial resignation? No, they were the Test scores: disbelievingly, Michael filched the notes from my blotter for the Heseltine Papers.'

Well, there might not have been sterling crises and dramatic ministerial resignations during the Clarke chancellorship (1993-1997), but it was in the aftermath of one dramatic ministerial resignation (Nigel Lawson's from the Treasury in 1989) that Major became Chancellor and another, that of Sir Geoffrey Howe from the Cabinet in 1990, that propelled Major to Number 10. And it was the crash in sterling, on Black Wednesday that became one of the main folk memories of Major's premiership.

It is now 10 years since Major left office and almost 15 years since Black Wednesday, and one can detect a certain amount of frustration at the way the history of that period has been quietly rewritten. It was under Major's chancellorship that the pound entered the exchange rate mechanism (ERM) in October 1990 and it was under his premiership that the ignominious exit took place almost two years later.

One of the myths is that Margaret Thatcher was against entry. But, as the Independent's political columnist, Steve Richards, recently reported, Major, in a rare public (non-cricket-related) appearance, told an audience at the London School of Economics in April that Thatcher had been 'extremely keen' to join the ERM because of the seriousness of the economic situation and, in particular, the recrudescence of inflation.

It is true that Thatcher had ruled out ERM entry many times during the 1980s. But, by 1990, the Cabinet felt it had run out of options. Ministers had tried everything else - assorted monetary targets, shadowing the Deutschmark - and failed. The recession of the early 1980s brought the inflation rate down from more than 20 per cent to around 3.5 per cent, but it took off again with a vengeance during what became known as the 'Lawson boom'.

Major himself felt passionately about inflation. He thought that even the Treasury, where he had worked for two years as Chief Secretary - then a powerful job negotiating annual public spending limits with departments - did not understand how affected he was by childhood memories of hardship, which he associated with inflation.

In his memoirs, he complains that Lawson 'was not always sensitive to the frailties or needs of others. He did not know what it was like to run out of money on a Thursday evening, whereas I did.' The memory is still there in his new book. He refers to his regrets that his aged parents never saw him play cricket at school, with 'the struggle to make modest ends meet when the week outran the money'. For Major in his childhood, those who had no savings and did not own their own homes were the ones whose living standards suffered from inflation.

With inflation rising in the spring and summer of 1990 - the year-on-year increase in the retail prices index was 7.7 per cent in January, 9.4 per cent in April and 10.9 per cent in September - the discipline of the ERM had become the latest panacea. Those most closely involved recall that, when inflation reached 9.8 per cent in June and July, Thatcher changed her view. Indeed, one senior official recalls that, every time he saw the Prime Minister, she excitedly asked him when they were going to take the plunge.

It is difficult these days to meet anyone who does not claim that we entered the ERM 'at the wrong rate, at the wrong time and for the wrong reasons'. Yet polls showed a huge surge of opinion in favour at the time and Major's recollection is that Thatcher wanted an even higher rate than the DM2.95 chosen. Also, that John Smith, the shadow Chancellor, was twitting him week after week for not joining and that one Gordon Brown was also firmly in favour.

Perhaps what irks Major most is the widely held view (including in the modern Conservative Party) that membership of the ERM caused the high level of interest rates associated with the 1990-1992 recession. Interest rates were already at 15 per cent before entry and had been at that level for a year. In his memoirs, Major cites the verdict of the highly respected former Bank of England economist, Christopher Dow, that the recession was the result, not of the ERM, but 'the rebound from the previous boom psychology... collective, manic euphoria which pushed up prices and encouraged many to go into debt left the economy exhausted'.

Major likes to draw attention to the fact that interest rates actually came down during most of the period of ERM membership, from 14 per cent (entry had been accompanied by a one percentage point cut at Thatcher's insistence) to 10 per cent. On Black Wednesday itself, they were raised to 12 per cent, but the much-quoted increase to 15 per cent never actually took place. It was scheduled for the following day, but, of course, by that time, the reserves had been exhausted and the white flag hoisted.

In Major's view, previous governments' periodic successes in curbing inflation had collapsed in the face of political cowardice or, more politely, political reality. He has written: 'We entered the ERM to general applause and left it to general abuse. Yet membership turned Britain into a low-inflation economy...' He acknowledges that 'high interest rates and a weakening economy played a part in the fall of inflation and would have done so had we been in or out of the system. But the ERM gave credibility that our policy would otherwise have lacked.'

In effect, while believing the ERM has been wrongly blamed for the recession, he concedes that membership prolonged and deepened that recession and that this helped to contain inflationary pressures. But at what social costs! It was early in his chancellorship that Major said: 'If it isn't hurting, it isn't working', and the anger with the way the Conservatives managed to preside over not one but two major (no pun intended) recessions between 1980 and 1992 understandably and justifiably lingers on, even if the years, selective memory and self-justification have clouded the circumstances.

Perhaps Major, in common with Lawson, always saw membership as a temporary affair? What seems clear is that he did not see it as Britain's route to the eurozone. Indeed, he fought long and hard in incredibly difficult circumstances to obtain Britain's 'opt-out' at the Maastricht meeting of December 1991. He saw and bargained with every other European leader in advance. It was probably only because the other leaders feared he would block the Treaty that he secured an opt-out that has proved very useful indeed to Gordon Brown.

My impression is that Major never really wished to join the eurozone, whatever the eurosceptics thought, but he did not rule out the possibility that, if the financial markets had really taken against sterling, circumstances might have changed.

Black Wednesday was never forgotten or forgiven. My own view back in 1990 was the minority one that entry was a mistake. German unification and the associated problems with German inflation meant that it was just the wrong time to subject this country to the whims of the Bundesbank. Major himself is reputedly still very sore about the German central bank's disruptive tactics during the run-up to Black Wednesday. And many other things went wrong around the same time, such as the uncertainty about the outcome of the French referendum, which made the markets very jittery.

But Major remains just as sore about having been, in effect, in charge of a minority government - so great was the disruption from the old Thatcherites, led by the lady herself as a back-seat driver, opposing policies of which she had once approved, and the new eurosceptical intake who had no folk memory of the Second World War and did their damnedest to wreck his efforts to be as close to 'the very heart of Europe' as British economic interests permitted.

In retirement, Major remains extremely busy - he has banking and business interests and is quietly involved in many charities. He was always a compassionate Tory and regrets not having faced up more to his right wing. He has strong views on the way the country was taken to war on a false premise and worries that new Labour has lost its soul. Major believes that, whatever the embarrassment of Black Wednesday, Blair and Brown had a much better economic inheritance than they have acknowledged. But one doubts whether Labour has given up on reminding the Tories about that humiliating episode 15 years ago.

ยท Our series on the Chancellors resumes next month with Norman Lamont

The ERM

The European exchange rate mechanism (ERM) was the precursor to the European single currency - and still is for those countries that haven't joined the eurozone but whose governments wish to. It originated in a plan conceived in the 1970s by European leaders who wished to form 'a zone of monetary stability' after the breakdown of the Bretton Woods system of fixed (but adjustable) exchange rates.

The ERM was the exchange rate mechanism of the European Monetary System (EMS), inaugurated in 1979. The British government's classic compromise was that Britain joined the EMS, but not its principal manifestation, the ERM - until 1990.

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Perhaps what irks Major most is the widely held view (including in the modern Conservative Party) that membership of the ERM caused the high level of interest rates associated with the 1990-1992 recession. Interest rates were already at 15 per cent before entry and had been at that level for a year. In his memoirs, Major cites the verdict of the highly respected former Bank of England economist, Christopher Dow, that the recession was the result, not of the ERM, but 'the rebound from the previous boom psychology... collective, manic euphoria which pushed up prices and encouraged many to go into debt left the economy exhausted'.

What an important paragraph. It seems that no one really learnt the lessons from the last boom - prevention rather than cure is what's needed...

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Bump - this is dead interesting, if a bit of a long read.

Indeed.

I didn't realise the interest rate peak on black Wednesday never came into effect, I guess that's why those rates are not mentioned on the BoE historical interest rates.

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