Margaret Thatcher’s aides warned as early as 1984 that the Treasury and the Bank of England were trying to undermine her policy of letting the pound float.
Divisions over an unofficial Treasury policy of shadowing the deutsche mark led to the resignation of Chancellor of the Exchequer Nigel Lawson in 1989 and precipitated Thatcher’s downfall as British prime minister. Previously secret government papers from 1984, published today by the National Archives in London, show the argument was running even before Thatcher’s third term.
“The Bank of England is busily unraveling many months of patient work putting clarity into our economic policy,” began a July note to the prime minister from John Redwood, then the head of Thatcher’s policy unit and her economic adviser, and now a Tory lawmaker. “We have labored the point that we do NOT have an exchange-rate target. We have money targets.”
Redwood was contemptuous of the central bank’s decision to issue a statement aimed at reassuring jittery markets. “Nothing undermines a market more quickly than soothing words from rattled authorities,” he wrote.
It is one of two notes in the files with the air of prophecy from Redwood, who entered Parliament in 1987 before becoming a cabinet minister under Thatcher’s successor, John Major, and then challenged the premier for the Conservative leadership in 1995.
Redwood’s other 1984 document, a policy paper on the future of the London Stock Exchange written in the style of a fairy tale, foresaw the results of the 1986 deregulation of financial markets known as “Big Bang.”
Titled “Tilting At Castles,” it began: “Once upon a time -- or about a year ago, to be more precise -- there lived a noble and chivalrous group of knights in a great big castle called the Stock Exchange.”
Redwood portrayed these knights, who “never, never lied when they were executing orders,” as enjoying their “feasting and jousting and pillaging” at the expense of the peasants outside. “And all the nasty peasants who wrote for the newspapers wrote lots and lots of articles saying how rotten the government was, and it was just like all the other bad governments they’d had before.”
In Redwood’s description, an agreement by the chairman of the Stock Exchange, Nicholas Goodison, to allow a partial opening-up of the institution would lead to “a revolution.”
“Slowly it began to dawn on all those who were Stock Exchange knights that not only might they have to lower their drawbridge to let in foreigners and institutional barons and all the rabble they’d kept out for so many years, and let them join in; but even perhaps the peasants -- who’d gone on paying for the feasting and jousting for so long -- would refuse to send any money to Stock Exchange castle ever again,” he wrote.
“I was looking forward to what would happen, and my most likely favorable scenario was the one that happened,” Redwood said in an interview last month. “Suddenly London was transformed from a small group of relatively small partnerships which restricted their growth routes into an international center of capital.”
The note on the Bank of England’s attitude to monetary policy had a less happy outcome, as far as Redwood was concerned. Following Lawson’s resignation, his successor Major signed the U.K. up to the European Exchange Rate Mechanism in 1990. Two years later, the pound crashed out of the ERM on “Black Wednesday,” destroying the government’s economic credibility.
“It was a long-running battle for the soul of the government,” Redwood said last month. “I was absolutely sure that the Treasury were trying to move us onto shadowing the deutsche mark and that if we did, it would destroy the economy. That was the defining battle. When we lost, it destroyed the Tory party as an effective election winning force for 20 years. The stock-exchange fairy tale had a happy ending. The ERM one had a very unhappy ending.”