The Downing Street Years (118 page)

But in the autumn of 1988 the figures for the cost of decommissioning the now ageing power stations were suddenly revised sharply upwards by the Department of Energy. These had been consistently underestimated or perhaps even concealed. And the more closely the figures were scrutinized the higher they appeared. By the summer of 1989 the whole prospect for privatizing the main generating company which would have the nuclear power stations started to look in jeopardy. So I agreed that the older Magnox power stations should be taken out of the privatization and remain under government control. This was one of Cecil’s last actions at Energy and it fell to his successor, John Wakeham, to deal with the rest of the nuclear problem.

Alan Walters had been urging from the previous autumn that all the nuclear power stations should be removed from the privatization. As so often, he turned out to be right. It was never a matter of safety, which could perfectly well have been ensured in the private sector, but rather of cost. The figures for decommissioning the other power stations started to look uncertain and then to escalate, just as those for Magnox had done. John Wakeham recommended and I agreed that all nuclear power in England and Wales should be retained in state control. One consequence of this was that Walter Marshall, who naturally wanted to retain the nuclear provinces in his empire, decided to resign, about which I was very sad. But the other consequence was that privatization could now proceed, as it did, with great success, to the benefit of customers, shareholders and the Exchequer.

The result of Cecil Parkinson’s ingenious reorganization of that industry on competitive lines is that Britain now has perhaps the most efficient electricity supply industry in the world. And as a result of the transparency required by privatization we also became the first country in the world to investigate the full costs of nuclear power — and then to make proper financial provision for them.

I have already mentioned the impact electricity privatization would have on the coal industry. Clearly, a privately owned electricity industry would be much more demanding in the commercial terms it expected from the NCB than would a state-owned monopoly. But in any case I always wanted to have the coal industry return to the
private sector. In November 1990, not long before I left Downing Street, John Wakeham and I discussed the prospects for coal privatization, though not the detailed means. I felt that a combination of trade sales to companies with mining interests with special terms for the miners to buy shares would probably be the best way forward. How many of the pits had a long-term commercial future was unclear. We were still mining too much high-cost, deep-mined coal — a situation which had come about because of the protected and monopolistic market the nationalized coal industry had enjoyed. So there would have to be closures.

But — both when Cecil was Energy Secretary and when John succeeded him — I never had regard to the commercial aspects alone. The memories of the year-long coal strike were unforgettably etched on my mind. I kept in touch with Roy Lynk, the Nottinghamshire leader of the UDM, who knew that he could speak to me, if and when he needed, and I made sure that both Cecil and John understood my feelings about the need to protect the interests of his members. First, I felt a strong sense of obligation and loyalty to the Nottinghamshire miners who had stayed at work in spite of all the violence the militants threw at them. And, second, I also knew we might have to face another strike. Where would we be if we had closed the pits at which moderate miners would have gone on working, and kept more profitable but more left-wing pits open?

I also refused to allow the NCB to sidestep the agreed procedure of referring closures to the independent colliery review body, which had been set up as part of the settlement of the miners’ strike. I had learned from hard experience that you must never allow yourself to be manoeuvred into taking drastic action on pit closures when a steady, low-key approach will secure what is needed over a somewhat longer period. In dealing with the coal industry you must have the mentality of a general as much as that of an accountant. And the generalship must often be Fabian rather than Napoleonic.

The other privatization project which I was considering at this time was that of British Rail. BR’s subsidiaries had already been sold. It was the main businesses we had now to consider. Cecil Parkinson and I considered how to proceed in October 1990. Cecil was keen to privatize the separate rail businesses — like Inter-City, Freight, Network South-East. I, for my part, saw attractions in the idea of a national Track Authority which would own all the track, signalling and stations and then private companies would compete to run services. But these were large questions which needed careful thought and economic analysis. So I agreed with Cecil that a working party involving the
Treasury and DTI as well as the Transport Department be set up to study the isuue and report back to me. That was as far as I could take the issue.

There was still much I would have liked to do. But Britain under my premiership was the first country to reverse the onward march of socialism. By the time I left office, the state-owned sector of industry had been reduced by some 60 per cent. Around one in four of the population owned shares. Over six hundred thousand jobs had passed from the public to the private sector. It constituted the greatest shift of ownership and power away from the state to individuals and their families in any country outside the former communist bloc. Indeed, Britain set a worldwide trend in privatization in countries as different as Czechoslovakia and New Zealand. Some £400 billion of assets have been or are being privatized worldwide. And privatization is not only one of Britain’s most successful exports: it has re-established our reputation as a nation of innovators and entrepreneurs. Not a bad record for something we were constantly told was ‘just not on’.

CHAPTER XXIV

A correct economic policy depends crucially upon a correct judgement of what activities properly fall to the state and what to people. The state has to set a framework of laws, regulation and taxes in which businesses and individuals are then free to operate. But there also has to be a financial framework for policy. After a long struggle during my first term, from 1979 to 1983, like-minded ministers and I had largely converted the Cabinet, the Conservative Party and opinion in the worlds of finance, business and even the media to a more restrictive view of what the state’s role in the economy should be. Moreover, as regards the regulatory framework within which business could run its affairs, there was a general understanding that lower taxes, fewer controls and less interference should be the goal. But as regards setting the overall financial framework, within which the real economy generates wealth, there was less common ground. Whereas Nigel Lawson and I agreed strongly about the role of the state in general, we came sharply to differ about monetary and exchange rate policy.

Our success in bringing down inflation in our first term from a rate of 10 per cent (and rising) to under 4 per cent (and falling) had been achieved by controlling the money supply. ‘Monetarism’ — or the belief that inflation is a monetary phenomenon, i.e., ‘too much money chasing too few goods’ — had been buttressed by a fiscal policy which reduced government borrowing, freeing resources for private investment and getting the interest rate down. This combined approach had been expressed through the Medium Term Financial Strategy (MTFS) — in large measure Nigel Lawson’s brainchild.
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Its implementation depended heavily on monitoring the monetary indicators. These, as I have noted, were often distorted, confusing and volatile. We needed other indicators as well. So, before the end of Geoffrey
Howe’s Chancellorship the value of the pound against other currencies — the exchange rate — was also being taken into account.

It is important to understand what the relationship between the exchange rate and the money supply is — and what it is not. First consider the effect of an increase in the exchange rate; that is, one pound sterling is worth more in foreign currency. Because most import and export prices are fixed in foreign currencies, the sterling prices of these tradeable goods will fall. But this only applies to goods and services which are readily imported and exported, like oil, grain or textiles. Many of the goods and services that comprise our national income are not of this sort: for example, we cannot export our houses or the services provided in our restaurants. The prices of these things are not directly affected by the exchange rate, and the indirect effect — passed on via wages — will be limited. What does more or less determine the prices of houses and other ‘non-tradeables’, however, is the money supply.

If the money supply rises too fast, the prices of non-tradeable domestic goods will rise accordingly, and a strong pound will not prevent that. But the interaction of a strong pound and a loose money supply causes the export sector to be depressed, resources to flow to houses, restaurants and the like. The balance of trade will then go into larger and larger deficits, which have to be financed by borrowing from foreigners. This kind of distortion just cannot last. Either the exchange rate has to come down, or monetary growth has to be curtailed, or both.

This result is of the utmost importance. Either one chooses to hold an exchange rate to a particular level, whatever monetary policy is needed to maintain that rate. Or one sets a monetary target, allowing the exchange rate to be determined by market forces. It is, therefore, quite impossible to control both the exchange rate
and
monetary policy.

A free exchange rate, however, is fundamentally
influenced
by monetary policy. The reason is simple. If a lot more pounds are put into circulation, then the value of the pound will tend to fall — just as a glut of strawberries will cause their value to go down. So a falling pound may indicate that monetary policy has been too loose.

But it may not. There are many factors other than the money supply which have a great influence on a free exchange rate. The most important of these are international capital flows. If a country reforms its tax, regulatory and trade union arrangements so that its after-tax rate of return on capital rises well above that of other countries, then there will be a net inflow of capital and its currency will be in considerable demand. Under a free exchange rate, it would appreciate. But
this would not be a sign of monetary stringency: indeed, as in Britain in 1987 to mid-1988, a high exchange rate may well be associated with a considerable monetary expansion.

It follows from this that if the exchange rate becomes an objective in itself, as opposed to one indicator among others for monetary policy, ‘monetarism’ itself has been abandoned. It is worth repeating the point because it is of such importance to understanding the arguments which took place: you can either target the money supply or the exchange rate, but not both. It is an entirely practical issue. The only effective way to control inflation is by using interest rates to control the money supply. If, on the contrary, you set interest rates in order to stick at a particular exchange rate you are steering by a different and potentially more wayward star. As we have now seen twice — once when, during my time, Nigel shadowed the deutschmark outside the ERM and interest rates stayed too low; once when, under John Major, we tried to hold to an unrealistic parity inside the ERM and interest rates stayed too high — the result of plotting a course by this particular star is that you steer straight on to the reefs.

These questions were not ones for the technicians alone: they went to the very heart of economic policy, which itself lies at the heart of democratic politics. But there was an even more important issue which was raised first by argument about whether sterling should join the ERM and then, in a more acute form, about whether we should accept European Community proposals for Economic and Monetary Union (EMU). This was the issue of sovereignty. Sterling’s participation in the ERM was seen partly as proof that we were ‘good Europeans’ (a phrase which in fact increasingly meant bad Europeans, as the Community adopted a selfish, protectionist stance to liberated eastern Europe). But it was also seen as a way of abdicating control over our own monetary policy, in order to have it determined by the German Bundesbank. This was what was meant when people said we would gain credibility for our policies if we were — to adopt another Euro-metaphor — ‘anchored’ to the deutschmark. Actually, the metaphor is strangely appropriate: for if the tide changes and you are anchored, the only option to letting out more chain as your ship rises is to sink by the bows; and in an ERM where revaluations were ever more
frowned upon there was no more chain to let out. Which leads on to EMU.