Margaret Thatcher: Power and Personality (79 page)

The first occasion when the Deutschmark-shadowing policy was discussed face to face by the two principals came on 8 December 1987, eighteen days after Margaret Thatcher had been given the evidence by the
Financial Times
. The meeting was a stormy one. The Chancellor found the Prime Minister in ‘an extremely agitated and aggressive mood’.
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Her angry claim that trust had broken down between them was not the only problem. She was also concerned by the £27 billion cost of the intervention since the beginning of the financial year to hold the pound below the DM3 level. She was particularly worried by the inflationary consequences of this action.

Nigel Lawson reassured her that there were no inflationary consequences because it had been his practice to fund the intervention costs not by increasing liquidity but by selling gilt-edged securities – a device known as sterilisation. This explanation had the effect of keeping Margaret Thatcher’s doubts at bay for a few weeks. The episode also highlighted that she remained in awe of his technical mastery of his brief. Because of this, he was usually her superior when it came to a detailed argument about policy.

By March 1988, relations between the occupants of No. 10 and No. 11 Downing Street had deteriorated further. So had the policy of exchange-rate interventions. On Wednesday 2 March and Thursday 3 March, some $1.8bn of intervention funding was required to hold the pound to the DM3 ceiling.
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The following day, the Prime Minister summoned her Chancellor and read him the riot act. Once again, she repeated her worries that the scale of the intervention was too high, and that it would add to the inflationary pressures in the economy. He again insisted that because of his sterilisation activities of gilt edged sales there was no question of the intervention becoming inflationary. This time she did not accept his explanation. Nigel Lawson was effectively given a Prime Ministerial order to uncap the pound. With bad grace he obeyed, although he warned her that further intervention might be necessary if the pound rose too sharply. This caveat infuriated her.

After more strong words had been exchanged, she grudgingly backed away from her view that sterling should be allowed to float to its market level. But she
insisted that any further intervention should be small, and that the Chancellor’s private office should have to report on the situation to her own private office at half-hourly intervals. These commands were interspersed with personalised criticisms of deceit against Nigel Lawson, which he vigorously denied. ‘It was an unpleasant meeting, and I particularly resented her manner’,
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he coldly recalled.

So bad was the blood between the two leading figures in the government at this time that the Prime Minister seriously considered sacking her Chancellor. How close she came to this dramatic execution is vividly illustrated by a story of Denis quarrelling with her in front of a friend.

In late February 1988 Denis took Dick Evans, the Managing Director of British Aerospace, to the East India Club in St James’s Square. A convivial lunch was preceded by several ‘snifters’ at the bar before and after lunch. ‘Denis had a lot to drink and I felt I should see him home,’ recalled Evans, ‘so we went into No. 10 by the back entrance that existed in those days via Horseguards Parade. We got there about 5.30 p.m. and went up to the private flat.’

Denis poured himself a large whisky. A few minutes later Margaret came in. The Prime Minister found her husband in an unusually aggressive mood.

‘Have you done it?’ he demanded. There was no clear reply, so the question was repeated at louder volume.

‘What are you talking about, dear?’ asked Margaret Thatcher.

Denis grew angry at her dissimilation. ‘You know perfectly well what I’m talking about’, he shouted. ‘Have – you – done – it?’ Each word was accompanied by a bang of his fist on the table. Dick Evans made his excuses and tried to leave. Both Thatchers told him to stay.

‘I know what he’s getting at’, admitted the Prime Minister.

‘Well, have you done it?’ came the question for the fourth time of asking.

‘No I haven’t.’

‘I knew you weren’t going to do it. When you agreed to do it at breakfast this morning, I just knew you wouldn’t. So why the hell didn’t you?’

‘Denis, there is a limit to the number of enemies we can afford to make.’

Dick Evans made his second attempt to depart, but the Prime Minister felt that an explanation was needed. Amidst further noises of protest from her spouse she told Evans what ‘it’ was.

‘At breakfast this morning he persuaded me to fire Nigel Lawson’, she explained, ‘and I haven’t done it.’
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The story says as much about Margaret Thatcher’s caution as it does about the breakfast decision she dropped. She had good grounds of being furious with her Chancellor. But she knew he had many supporters in the parliamentary party. Another key factor was the 1988 Budget was due to be presented in eleven days’ time.

Those days were difficult for the two protagonists. Press reports of their split made damaging reading. Sterling rose as high as DM3.18, and would have gone higher but for a half-point reduction of interest rates to 7.5 per cent. Margaret Thatcher believed that this cut was unwise, but accepted it as ‘the price of tolerable relations with my Chancellor’.
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Nigel Lawson did not share the view that their relationship was becoming more tolerable. He resented the unhelpfully candid comments made by the Prime Minister to Parliament about exchange-rate policy, such as ‘there is no way in which one can buck the market’.
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He also resisted but eventually accepted a redraft originating from No. 10 of crucial paragraphs in his Budget speech on exchange-rate policy. These humiliations, as he saw them, left scars on the proud Lawson. He was seething.

When he went to Buckingham Palace for the Chancellor’s traditional eve of Budget audience with the Queen, he told the Monarch that he thought it would be his last such speech, ‘because the Prime Minister was making the conduct of policy impossible’.
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THE BOOM OR BUST BUDGET

‘A provocative Budget’
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was how Nigel Lawson himself described the radical proposals he announced to Parliament on 15 March 1988. It certainly provoked his political opponents. His Budget speech caused chaos in the House of Commons, with the sitting having to be suspended twice. The Labour Party were fierce in their denunciation of the Lawson strategy, which they said would hurt the poor and help the rich.

By contrast the Conservative Party greeted the Budget with near rapture. It reduced the basic rate of income tax to 25 per cent, and brought down the higher rate from 60 per cent to 40 per cent. All intermediate tax rates were abolished. The Chancellor sat down at the end of his speech to wave upon
wave of Tory cheers after he announced in his peroration that he had delivered a balanced Budget and intended to bring income tax down to 20 per cent.

Margaret Thatcher was publicly effusive but privately doubtful about her Chancellor’s strategy. Before the Budget, she warned him against announcing the future goal of a 20 per cent tax rate. She would have been content to leave the top rate at 50 per cent. Her biggest worry was the overall looseness of the financial situation and monetary policy, which she feared might lead to inflation. But she kept these doubts under wraps and joined in the chorus of praise for the Budget, which she described as ‘a Humdinger … the obituary for the doctrine of high taxation … the epitaph for Socialism’.
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Despite these laudatory words, it soon became apparent that something was rotten in the state of the relationship between Prime Minister and Chancellor. Iron had entered Nigel Lawson’s soul as a result of their quarrels over the ERM. Even when she flattered him in public or sent him handwritten notes of congratulations in private, he spurned her olive branches. ‘It was never praise that I sought from her: just trust, honesty and the loyalty she expected of others’ was his dismissive comment on her attempts at rapprochement.
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Lawson was right to complain of the Prime Minister’s disloyalty, which became embarrassingly transparent during parliamentary exchanges in mid-May. This was a period when the pound was again rising against the Deutschemark despite cuts in interest rates to 8 per cent.

At Prime Minister’s Questions on 12 May, she was wounded by Neil Kinnock attacking her evasiveness on exchange-rate policy. After a fusillade of blows, he cornered her with the simple question: ‘Can the right hon. Lady give us a straight answer? Does the Prime Minister agree with her Chancellor of the Exchequer?’
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Instead of replying in the affirmative, Margaret Thatcher conspicuously avoided the question in a cloud of waffle about high living standards, growth and social services. It was a deeply damaging performance, which unsettled the markets, the financial commentators and her back-benchers.

With weekend press speculation at fever pitch about the possibility of Lawson being moved to the Foreign Office, remedial action became imperative. So Chancellor and Prime Minister met to agree a damage-limitation exercise. It consisted of cutting interest rates again to 7.5 per cent, and working out a
form of words that would put sticking plaster on the perceived split that had so unnecessarily been exposed by her last answers in Parliament.

Neil Kinnock found it easy to continue his winning streak at Prime Minister’s Questions. ‘May I warmly welcome today’s cut in interest rates and the Chancellor’s victory over the Prime Minister?’ was his opening line. Of course, Margaret Thatcher did not admit that she had been defeated. But her one word assent, ‘Yes’, to a later question about whether there was ‘complete and utter unanimity’ between herself and the Chancellor told its own story.
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It was more of a self-inflicted wound for her than a victory for Lawson, but she had been badly wrong-footed.

Within a matter of weeks it was the Chancellor who was stumbling. His Budget unravelled as his tax-cutting judgement turned out to have been based on inaccurate forecasts. Unexpectedly bad export figures made the trade deficit balloon to £2.2 billion in July. Inflation doubled to 6.6 per cent and kept rising. Interest rates had to be raised by a succession of upward moves from 7.5 per cent on 17 May to 11 per cent on 8 August, and to 12 per cent on 25 August.
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It soon became clear that Britain had moved into a nightmare scenario of overheating domestic demand, rising inflation, runs on the pound and crushingly high interest rates.

Nigel Lawson had wanted to leave the government in the warm glow of success that the first reactions to his Budget had produced. He talked to friends about his plan to retire in the expected autumn reshuffle. But the sudden crisis in the economy hit his reputation so hard that he felt he must stay at the helm.

The voices that had praised the Lawson boom in the spring were sharply criticising the Lawson bust by the autumn. Among the sharpest critics, struggling somewhat unsuccessfully to keep her comments private, was the Prime Minister.

Margaret Thatcher had been instinctively opposed to some of her Chancellor’s strategic moves since the beginning of her third term. She thought he was loose on monetary policy, wrong about the ERM and incompetent in failing to keep inflation down. These opinions found their way into the press in the latter months of 1988, a development for which Lawson blamed Bernard Ingham.

Just as worrying as the policy disagreements was the increasingly personalised animosity between Chancellor and Prime Minister. She took to referring to him
among members of her inner circle as ‘a riverboat gambler’ to which she added, ‘and I won’t let him gamble with the British economy’.
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Her line was that he had gone off to the ERM casino, placed the wrong bet on inflation and lost her hard-won reputation for good economic management.

‘Nigel has cost us two years’, she told David Hart.
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These and other pejorative comments were made in anger, not humour. Nigel Lawson was hurt by them: ‘She was in a permanent state of resentment with me for having – as she saw it – allowed inflation to rise’, he recalled, ‘and she was determined to rub my nose in it.’
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One part of that determination involved a controversial new appointment to the staff at No. 10. The appointee was Alan Walters, whom Margaret Thatcher chose to be her personal economic adviser in July 1988. He had been in this position before, from 1981 to 1983. At that time he had quietly given her discreet advice from his low-profile post. Five years on, quietness and discretion were no longer part of the Walters style, for he had become something of a celebrity in the world of academic commentators. Some of his fame derived from his outspoken public criticism of Nigel Lawson’s policies.

Margaret Thatcher brought Alan Walters back into her team as a deliberate counter-weight to the Chancellor. He took up his post in May 1989 on a two-year contract. She never seems to have understood what an insult to Nigel Lawson this appointment would be, and how likely it was to blow up into big trouble. What it meant was that the Prime Minister would have two sources of advice on the management of the economy, which on past form would often be in conflict. The potential for discord was enormous.

Realising the dangers posed by Alan Walters’ appointment, the Chancellor argued strenuously against it. Margaret Thatcher, displaying a side of her personality that enjoyed dividing and ruling, refused to listen to his objections. She had lost confidence in Nigel Lawson, and was determined to have an alternative source of advice within her inner circle.

In the short term, the Alan Walters’ appointment won considerable sympathy and support for Nigel Lawson. Among Tory MPs, sentiments of outrage were expressed against it.

I recall attending a stormy meeting of the back-bench finance committee at which it was said that the Prime Minister ‘had gone off her rocker’, and that Walters was ‘a Trojan horse’, ‘far too big for his boots’ and even ‘a fifth
columnist’. This last description was amusingly qualified by the Member who made it, Nicholas Budgen. ‘I call him that because he seems to write five columns a week, most of them critical of the Chancellor.’
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