John Major, The Autobiography, HarperCollins, 25, pp774.
In Office, Norman Lamont, Little, Brown, 20, pp567.

  

September 16, 1992 is not a date recalled in every pub in the country. But it is still etched into the brains of Britain's economic policy-making and talking classes. For it was the date at which the country was ignominiously forced out of the European Exchange Rate Mechanism - Black Wednesday or White Wednesday according to taste. Yet the Government tried to pretend that nothing much had happened - except the exposure of mythical "structural faults" in the ERM.

Few members of the wider public were turned on by the esoteric arguments about monetary regimes. Even among businessmen the day was remembered mostly for the shock when interest rates were temporarily raised from 10 to 15 per cent in a vain attempt to stop the rout.

Nevertheless the main pillar of economic policy had collapsed; and some sense of this did eventually percolate through to the electorate. It could never be glad confident morning again for the Major Government.

The ERM story is one of the main points of overlap between the major and the Lamont books, which are otherwise quite different. Lamont's is an insider's story of some crucial years in economic policy. Major's is a much more extensive personal and political autobiography.

Lamont is on the whole convincing that he was the first to realise that the UK might have to leave the ERM. Major's main efforts were devoted to a series of sad notes to the German Chancellor Helmut Kohl, pleading with him to lean on the Bundesbank to change policy to help out the UK. This was an area in which Kohl was out of his depth and not even sympathetic.

The speeches of both the prime minister and the chancellor before Black Wednesday went much further out on a limb than the ritual "no devaluation" protestations under a fixed exchange rate regime. It is normal in these circumstances for the chancellor to resign, if only to take over another portfolio. But in this case the policy was first and foremost John Major's. As the former Premier disarmingly remarked when Lamont offered to resign, his chancellor was his "lightning conductor". When he had served that purpose, and the press was making him into a scapegoat for slow economic recovery, he was dismissed. If the Chancellor had gone in September 1992, the Prime Minister would have quite likely have had to go too; and perhaps the reputation of both men would now be higher.

No one came out of this episode with credit. Ministers such as Kenneth Clarke and Michael Heseltine described as "Big Beasts" by sycophantic journalists ... were called in on that fatal day by Major to protect his own flank. They merely succeeded in adding to the reserve loss by insisting on holding out a few hours longer out of misplaced European sentiment.

Why, however did John Major make the original decisions to take Britain into the ERM in 1990, with such ill-fated political results? We need to go back quite a way to understand it. The postwar orthodoxy was that full employment could be secured and growth underwritten by maintaining the level of spending. It was called "Keynesian" - but let us avoid an argument about whether it was what Lord Keynes, who died in 1945, would have meant or approved. Under this doctrine inflation could only be controlled by tackling wages directly, either by exhortation, or a pact with the unions, or legislation or some mixture of all three.

That was the principle. In practice, the link with the dollar, which was then a stable currency, ensured a low rate of creeping inflation. It was, if you like, monetarism by proxy. But by the 1970s this approach was in a shambles. There was a simultaneous deterioration in both employment and inflation, even before the Yom Kippur War triggered off a fivefold increase in the price of oil.

Meanwhile Milton Friedman had shown, on theoretical grounds, that there was no long-term choice between inflation and unemployment; and that inflation had to be tackled by monetary means.

Under the influence of his then son-in-law, Peter Jay, Prime Minister, Prime Minister Callaghan bravely embraced the Friedman doctrine at the Labour Conference of 1976. How far he meant it no one will never be sure. But for the Chancellor, Denis Healey and his Permanent Secretary, the strongly Keynesian Douglas Wass, the new doctrines were mainly hot air, necessary to keep the financial markets at bay. Harold Lever described their attitude as one of "unbelieving monetarism".

When the Thatcher Government came to office in 1979, believing monetarists took over from unbelieving ones. The question still remained: how was monetary policy to be guided to achieve the new aim of low inflation? Under both the last years of Denis Healey and the early ones of Geoffrey Howe (who became Chancellor in 1979), the answer was the pursuit of monetary targets.

The early 1980s witnessed a paradox. If inflation was to be regarded as the judge and jury, Conservative policy had if anything oversucceeded. The economy had been tightly - even excessively - squeezed, sterling had shot up, unemployment soared and inflation plummeted. Yet the professed monetary targets had been overshot and changed many times.

Meanwhile a more theoretically minded chancellor, Nigel Lawson, arrived in 1983 who had been impressed by the way in which countries that had linked themselves to the German Mark - then the currency of a very sound money country - had managed to reduce their inflation rates gradually but dramatically. This was a form of monetarism by proxy linked to the Mark, just as Bretton Woods had been one linked to the dollar.

Readers of biographical memoirs -- or even readers of reviews of them -- will know of the struggles between Lawson, who wanted the ERM discipline for the UK and Margaret Thatcher who hated the idea of British policy being run by what she sometimes called "Belgium". The faute de mieux policy of "taking everything into account" which guided events in the second half of the 1980s, did not convince anyone. By 1990 Lawson and Thatcher had fought each other to a standstill. The former resigned in 1989, followed a year later by the Iron Lady herself.

Major, who became chancellor after Lawson, inherited the problem of how to set monetary policy. He also inherited a resurgence of inflation - exaggerated by absurd price indices - but nevertheless there, and ultimately due to an unforeseen surge of bank lending and the associated boom in property prices. As Major candidly admits, this was a boom about which everyone was wise after the event.

The highly unpopular 15 per cent base rate which Lawson had left behind was in fact squeezing out inflation pretty effectively. But how was the new Chancellor to convince the markets that sound money was here for keeps? He saw no alternative to taking up Lawson's policy of joining the ERM. He succeeded in getting membership past a by-then demoralised Margaret Thatcher, six weeks before she left office herself; and it became the flagship of his own economic policy for the next two years.

What else could he have done? There are a few dedicated technical monetarists who still believe that all that was necessary was to reaffirm monetary targets. But as their professed allegiance was to different measures of the money supply which moved in dazzlingly different directions, they were easily - perhaps too easily - brushed aside.

A reader at the turn of the 20th century might ask why inflation targets - which stated a clear goal but left the authorities with discretion on technical means - were not considered. The brief answer is that they had not yet become fashionable and there was perhaps one country - New Zealand - which had them at the centre of its policy during the time that John Major was steering Britain into ERM. Moreover many Treasury and Bank officials would argue that an inflation target could only be credible once inflation was already down to low single figures.

Lamont, who had run Major's campaign for the Conservative leadership in November 1980 and then became Chancellor, had a different orientation. Although he had spent much of his Ministerial career in the Treasury, he had not been involved in the exchange rate battles; and he writes that he himself would not have taken the decision to join the ERM .

But once Chancellor, he soon came to see the ERM's value as an anti-inflationary constraint. Indeed, in 1991, the first full year of membership, it seemed to bring the best of both worlds. It was helping to bring down inflation; and, because it was partially credible, British interest rates could be cut. By 1992 the situation had changed dramatically. The earlier high interest rate policy had begun to work with a vengeance and the British economy was clearly in recession. Lamont had no doubt that on domestic grounds base rates needed to be reduced a good deal lower than the 10 per cent to which they had by then been cut. Not surprisingly, he began to see the ERM as an unwelcome constraint, probably well before Major did.

The fundamental reason why the ERM policy failed so dismally lay in the way in which Germany handled the economics of reunification. Just as the US could no longer be the anchor for a world system of semi-fixed exchange rates after the inflationary financing of the Vietnam war, so Germany could not be such an anchor in the years following the fall of the Berlin Wall.

This should have been obvious not merely by 1992, but by 1990. In the summer of that year, well before the UK entered the ERM, the East and West German marks were unified at the ludicrous rate of one for one. Worse still the German employers and unions had committed themselves, with government encouragement, to a levering upwards of East German wages and social security benefits to West German levels, way ahead of any conceivable reduction in the productivity gap. To cap it all Chancellor Kohl insisted that the budgetary costs of unification could be met without any substantial rise in taxes or cuts in West German spending.

The Berlin Wall came down a fortnight after Lawson had resigned; and the ill-fated currency unification announcement was made over three months before Britain's entry into the ERM. With hindsight all of us who urged entry, not as a step towards some federalist goal but as a practical monetary arrangement, should have seen the writing on the wall and shelved the idea. This applies to Major, Lawson and, I hasten to add, myself, as I became a staunch adherent of sticking to ERM membership at the initial entry rate. My main reason was similar to that of Terry Burns, long-time chief government economic adviser, who asked what it would say for the determination of the British Government, if after less than two years of a policy about which it had argued for ten years, it simply abandoned it.

By 1992, there was no strategy which could have kept Britain in the ERM without prolonging the recession, which - perhaps because it hit the talking classes in the South-East harder than any of its predecessors - provoked ferocious resentment.

Lamont's own view at the time was that the combination of two years inside the ERM, followed by departure, was beneficial. Inflation would have been unlikely to come down, so far and so credibly, without the period in the ERM; but recovery from recession was earlier and more vigorous in the UK than in those countries which remained inside the system. The combination of entry, followed by forced exit, was nevertheless politically disastrous.

The former Chancellor should be given more credit than he usually receives for announcing an alternative within weeks of Black Wednesday. Indeed most of the key features providing for transparency and accountability of which Gordon Brown now boasts were put in place by Lamont. It was he who installed the inflation target and the quarterly Bank of England Inflation Report, which lie at the heart of present policy. He would have gone the whole hog towards Bank of England operational independence - like Lawson before him - if the Prime minister had allowed him to do so. The contribution of his successor, Clarke was mainly to publish the Minutes of the Bank-Treasury meetings - which have now been replaced by the deliberations of the Bank's Monetary Policy Committee.

Unfortunately the story can not end there. A common failing of both books is that they are too reticent and kind about the official advice that their authors received. This is explained, but not justified, by their need of Whitehall help in gaining access to documents after they left office. Is it unfair to expose the advice of officials who cannot answer back? Can't they just? A good deal of high level economic commentary consists of unnattributed comments by officials on the politicians whom they are supposed to serve.

In some instances a franker account would have been to the credit of official economists. The switch to an inflation target could not have come so quickly after the ERM departure unless officials had been thinking about it beforehand. And for all Gordon Brown's bluster to the contrary, the present inflation target of 2.5 per cent, with a permissible range of one percentage point either side, is as near as makes no difference to the original Lamont target of 1 to 4 per cent.

Other episodes show officials in a less favourable light. If there is one matter on which tactics are suggested by officials rather than politicians, it is it is contingency planning against a run on the currency .The excuse for the undignified panic departure from the ERM was that the selling pressure on sterling took everyone by surprise. Surely, if there is one lesson that should have learned from past crises is that the selling pressure when a fixed parity comes under speculative strain is dozens of times higher than any advance estimate. The standby credit which the Bank of England negotiated was enormous in terms of the kind of money with which normal people deal, but chicken-feed in the context of a far-from-surprising currency run.

At the time, the remarks of the president of the Bundesbank president, Helmut Schlesinger, about the need for realignment, given in a press interview which was "not confirmed", were more than a bit gauche and were blamed for the debacle. But the British side had no excuse for being surprised. In all my own contacts with the Bundesbank, long before Black Wednesday, the pressure for realignment was made quite clear.

It is of course likely that the best of tactics could not have prevented sterling's forced departure. But at the very least wiser officials could have insisted hat the only way of staying inside the system was to raise interest rates much earlier -probably by a good deal more than the one percentage point which Lamont had proposed and Major refused.

The biggest official deficiency of all was in the reliance on forecasts. Again and again in the period of nearly two years up to Black Wednesday an upturn was predicted but never materialised. In fact output stagnated in 1990, fell in 1991 and stagnated again in 1992. The "green shoots of recovery" for which Lamont was so mercilessly castigated, did not really appear until 1993, about the time that he was sacked.

This over-reliance on short term forecasts has been the bane of economic feature of policy for getting on for 55 post-war years; and it has led governments down again and again. Lamont kindly quotes a prescient remark which I made, while the UK was still in the ERM, that officials put up hard line speeches to the Chancellor "in the knowledge that the official Treasury would not hesitate to leave him as a scapegoat if it changed its mind about the appropriate policy."

The usual defense of these forecasting fiascoes - and Burns himself has said that these forecasts do not improve with time - is to say that forecasts are inevitable in human affairs. This is just a debating point. If I have to make plans for holidays in January or February it would be best to assume that the weather will be reasonably cold, but with a wide range of variation; and I might be better advised to prepare myself for this variation by taking a range of clothing rather than rely on long range weather forecasts.

There are alternatives to the obsession with forecasts. The obvious one is to assume that something like present trends will continue, unless there is a shock such as an oil price explosion or a Wall Street collapse - and even then there will be much uncertainty on the effects of such shocks. Living with uncertainty is both an art and a science which need to be developed far more.

When I wrote my first book on the Treasury, several decades ago, I was taken to task for commenting on "advice given by officials to ministers", as if I were revealing the secrets of the Confessional. Supposed measures to make government more transparent, both under the Conservatives and under New Labour, have been careful to protect the secrecy of such advice. The Whitehall establishment has always wanted to maintain power without responsibility, the privilege of the harlot down the ages. While this attitude persists it is difficult to weep too many tears about complaints that the Civil Service is being politicised.