I said to her, ‘You’re going to get one man, one vote, I promise you that, one time.’ It’s true she was going along with the negotiations but she was extremely uncomfortable. I said, ‘Mrs Thatcher, Peter Carrington is not serving you well.’ She said, ‘That is not for you to decide.’ I said, ‘Of course it’s not. I’m a stupid American. I’m here by your grace, but he’s not serving you well. Somebody’s got to tell you about the new clothes they’ve been trying to put on you.’ She said, ‘You shouldn’t have done this.’ I said, ‘Yes ma’am. But thank God it’s a free world this side of the Iron Curtain.’86
If Carbaugh’s account is correct, it shows that Mrs Thatcher was not seriously tempted to follow the Helms way, but the fact that she saw Carbaugh at all is evidence of her alertness to the right-wing threat to Lancaster House and perhaps of her sympathy for it. When the visit by Helms’s aides became known in America there were condemnations on Capitol Hill, and Vance, the Secretary of State, asked Carrington to issue a written complaint about the intervention. This Carrington refused to do ‘for domestic political reasons’.87 For Carrington to criticize Helms’s men would have amounted to an indirect criticism of Mrs Thatcher. When Vance claimed to Helms’s office that London had made a ‘démarche’ saying that Lucier and Carbaugh had broken the law, Carbaugh arranged a telephone call between Helms and Mrs Thatcher: ‘Mrs Thatcher came on the line and I put Helms on the phone. There was silence [after Helms had explained the position] and then she said, “There has been no such démarche.” ’88 Thus she protected Helms. Probably, she was trying to have it both ways. Looking back, Carrington summed up her attitude to the whole thing:
I don’t think that Margaret, in her heart of hearts, was ever convinced about the process – in the sense that if it had gone wrong … [here Carrington made a throat-slitting gesture and laughed], which I can understand and I don’t particularly blame her for it, she wouldn’t have taken the can. It would have been me that was responsible, which in a way was true. She was supportive, but it was rather reluctant support: ‘My mind tells me that this is the right thing to do, but my instinct tells me you’re a pig.’ She did become more supportive as the process looked more and more likely to succeed because I think she realized there was some credit going. And fair enough.89
What happened much later in Zimbabwe, when Robert Mugabe, from the mid-1990s, began the complete repression and impoverishment of his country, was to confirm Mrs Thatcher’s pessimism about the whole enterprise. The once prosperous country conformed to the sad pattern of so many African former colonies and squandered its great initial advantages. On the other hand, her task, on coming into office, was essentially to find an agreed way out to a problem which had consumed vast amounts of British government time for no clear benefit. With such enormous problems at home, and with Britain’s economic and diplomatic reputation at a low ebb, Mrs Thatcher was naturally inclined to seek a quick settlement. The one she chose, under Carrington’s direction, was, given the circumstances, bold. It involved casting aside plans for UN involvement and risking the displeasure of Britain’s closest ally, the United States, which had planned to be part of the solution. It was also threatened by violence. When he went out as governor to supervise the elections and the transfer of power, Lord Soames said privately that he expected 50 per cent casualties among the 350 servicemen who went with him.90 In the event, although there was some factional violence during the election campaign, Soames and his troops were largely unmolested. By the standards which it set itself, the Lancaster House Agreement was an astonishing success, and Mrs Thatcher showed the flexibility and opportunism that leadership requires by letting it happen. David Owen, the former Labour Foreign Secretary who had watched her overturn his own policy towards Rhodesia, noted how closely she resembled Barbara Castle, once his boss at the Department of Health and Social Security, who had warned him, when Mrs Thatcher was first made Tory leader, not to underestimate her: ‘She was very like Barbara – the same hair, dress sense, good ankles, a very similar intelligence. Both would resist right to the end, and then cave in.’91 By adopting the policy which she instinctively disliked, Mrs Thatcher won an international reputation and gained a standing which was to prove crucial as, later in the 1980s, the problems of South Africa came to a climax.
But the Rhodesian settlement never made her happy. As she stood in the hall of No. 10 on 21 December 1979, to leave to put her initials, as Carrington had requested, to the Lancaster House Agreement, Mrs Thatcher had a last-minute attack of anger. She turned to Clive Whitmore and said, ‘I am not going to shake the hands of terrorists.’ Whitmore held out her coat and said, ‘Put this on, Prime Minister. We’re going to Lancaster House.’ She did so, but with an ill grace.92
As 1979 drew to a close, Mrs Thatcher was in an odd position. She was known as a conviction politician, and admired or reviled accordingly. Her critics said she was rigid, dogmatic, unfeeling. This was a political danger for her. But a much greater problem, for her economic policy, was the suspicion that she was infirm of purpose.
The idea known as ‘monetarism’ was not, in itself, an innovation of Mrs Thatcher’s government. When she came into office, Mrs Thatcher inherited the approach that the Labour government had developed after the intervention of the IMF in 1976. Denis Healey, the Labour Chancellor, had turned to policies of monetary control, not because of any personal monetarist commitment, but out of a political calculation that inflation, for the time being at least, was even more unpopular than unemployment. As early as June 1976 he had announced a money supply growth target (of 12 per cent) for the coming year. This was the first time such a target had been used by a British government. In 1978, after various disasters with trying to achieve a particular sterling exchange rate, Healey more explicitly moved away from Keynesian demand management. The government, he said, was ‘determined to control the growth of public expenditure so that its fiscal policy is consistent with its monetary stance’.93 Mrs Thatcher’s new administration wished to do the same, and Mrs Thatcher, unlike Healey, saw this as a matter of principle as well as of expedience. But according to Peter Middleton, who was the Treasury under-secretary in charge of monetary policy at the time and the official there most sympathetic to monetarism, Geoffrey Howe was ‘more like Denis Healey than you might think’. Unlike the still relatively junior Nigel Lawson, who was ‘a real enthusiast’,94 Howe was more a politician making use of convenient tools than a man with a particular economic vision. Given that the Labour government had demonstrably failed in its objectives during the winter of 1978–9, and given that the idea of British decline was now an accepted fact in political and economic discourse, people were sceptical about whether a new Conservative government could do any better. Markets did not believe the government. What would happen, people wondered, when it reached what Treasury officials privately called ‘sod-off point’ in 1980, and ceased to be under the supervision of the IMF? As Middleton put it, ‘You must make the point that you are serious before you can get relaxed and sophisticated.’95
To make this point, it was not enough to increase interest rates by fearsome amounts, as happened in November 1979. It was a key part of monetarist theory, as set out, for example, by Karl Brunner,* that governments and central banks adhere strictly to monetary rules, rather than merely acting on their own discretion. In the phrase of Nigel Lawson, who was the keenest advocate of the approach and had argued for it publicly in opposition, ‘Rules rule, OK?’96 Instead of the ‘letters of intent’ which the IMF had extracted, under virtual coercion, from the previous government, there should be free-will declarations of financial objectives, with dates. There was a world of difference between temporarily curbing inflation for electoral advantage and a longer-term commitment to squeezing it out of the system. People needed to know not only the current target, but also the intended path in the coming years. Rules would also, Lawson and Howe believed, have a hortatory effect within government, driving doubters in the right direction, and making it harder to ba
ckslide. The idea, which had intellectual support from Milton Friedman, was gradualist, avoiding the shock which other intellectuals, notably Friedrich von Hayek, preferred. Its emphasis on direction was important in the internal workings of the Treasury, where Terry Burns,† a supporter, arrived as chief economic adviser early in 1980. Doubters were led by the more Keynesian Permanent Secretary, Sir Douglas Wass,‡ who was considered by Thatcherites a wet blanket on innovation. As well as rules producing economic benefits, their supporters argued that they would produce political ones, because they could help to explain the absence of jam today by reference to jam tomorrow. They could show how, if public borrowing fell, there would be room for tax cuts, and, just as important, how if it didn’t, there wouldn’t. The name devised for the set of rules was the Medium-Term Financial Strategy (MTFS).
Although she does not mention this in her memoirs, Mrs Thatcher was nervous of the MTFS. She referred to plans of this sort disparagingly as ‘graph-paper economics’97 and ‘numbers marching across the page’.98 She feared that the MTFS would leave no room for political flexibility. Her doubts were encouraged by John Biffen, who was opposed to the MTFS because he believed governments should never impale themselves on hooks. In the minds of Lawson and Howe, however, this was precisely the advantage: the MTFS would prevent faint-hearted ministers from finding what is nowadays called wiggle-room.99 Mrs Thatcher gradually came round to the idea as Howe cleverly exploited her obsessive desire to bring down interest rates. The MTFS would bear down on rates, he argued, and put a straitjacket on big-spending ministers.100 He also told her that the presentation of the 1980 Budget would be ‘greatly enhanced’ by the context that an MTFS would give: ‘This will offer the prospect of more substantial tax reductions when we have surmounted the next two tight years.’101 In the end, the MTFS was agreed by the pre-Budget Cabinet in March 1980 without much fuss, although Prior, Gilmour, Michael Heseltine and others did all express ‘doubts’ about the wisdom of producing figures against which the government in future years would be judged.102 It was a remarkable fact, and one which provoked untypically caustic comment from Howe after his retirement, that the Wet critics within the Cabinet did not take a stand against the MTFS at the time. After all, it directly defied their desire to improve demand in the economy and it set a course to which they were opposed. Perhaps they continued to believe that such plans had little meaning. Perhaps they hoped that, for Mrs Thatcher – to reverse Mr Micawber’s remark – something would turn down.
Howe well knew, however, because he had been part of her plot himself, that Mrs Thatcher had gone to some lengths to avoid a general economic debate in Cabinet of the sort which would have given potential rebels an opportunity. Although she agreed in principle that such general discussion should take place, she decided, at the beginning of November 1979, to prepare the ground by creating an ‘Inner Group’, which included Howe, Joseph, John Nott, Biffen, David Howell, Patrick Jenkin and, as Tim Lankester put it to her, ‘Mr Whitelaw and possibly Lord Soames (the latter two might be counted upon to raise some of the arguments of those who are less sympathetic to the strategy) …’.103 In the event, Soames was not made a member. Robert Armstrong, the Cabinet Secretary, reported to Mrs Thatcher that ‘it is already clear that Mr Prior feels he has been outflanked … He has told the Chancellor … that he disagrees with the whole approach.’ Francis Pym, the Defence Secretary, had also been kept in the dark – ‘The papers have not been copied to him’ – and Howe, Armstrong explained, wanted to leave room open for defence cuts: ‘His paper deliberately does not mention this.’104 The workings of the Inner Group should be linked, Armstrong advised, to the announcement of the MTFS. He warned Mrs Thatcher to beware of the Cabinet claiming a right to make decisions on monetary policy,105 because it would be a usurpation of the Chancellor’s traditional freedom of action. As Howe circulated his paper on the economic outlook and further public spending cuts only to the Inner Group, Robert Armstrong was moved to protest to the Prime Minister: ‘I think it is wrong that Ministers should be asked to take far-reaching policy decisions, involving major political issues, on the basis of two or three lines in the Chancellor’s annual Public Expenditure paper.’ The word ‘wrong’ was a big one for a civil servant to use, even a Cabinet Secretary. Mrs Thatcher scribbled: ‘They don’t. They ought to know their departments and what is going on.’106 By one means or another, a general economic discussion in Cabinet was postponed until after the Budget. And even then, thanks to some cunning handling of the agenda, Mrs Thatcher’s officials managed to decouple Cabinet debate of public expenditure plans from a general discussion of the economy. They broke them into two gatherings in July and thus got rid of the setpiece meeting, originally planned for later in the month, where critics had hoped for a showdown. As Clive Whitmore wrote silkily to Armstrong: ‘If we proceeded in this way, there would be no need for the special meeting of the Cabinet on Wednesday 16 July, though nothing need be said for the time being about cancelling the meeting.’107
Just before Cabinet approval of the MTFS, John Hoskyns sent a note to Mrs Thatcher about the Budget. He recalled the objection by the Governor of the Bank of England, at a meeting the previous week, to the introduction of the MTFS, and attributed it to the ‘subconscious desire to avoid announcing that you’re going to do something difficult, in case you fail’. Hoskyns supported the MTFS because it helped with what he thought should be the ‘main message’ of the Budget – ‘the commitment, over time, to ending inflation’ – but he complained that ‘Our scope here is limited by our failure to de-index [that is, to remove the automatic upward adjustment of wages and benefits to keep pace with inflation] on an adequate scale in public expenditure.’ This weakness on public expenditure had decelerated the private sector but not the government sector: ‘we have tackled it completely the wrong way round.’ He warned, not for the first time, that the government would have to do ‘something else on more Hayekian lines some time in the next year (i.e. along the lines of the “shock package” I suggested in January)’.108
Geoffrey Howe, by contrast, was rather more optimistic than his Eeyorish countenance, or the facts, suggested. Prompted by Nigel Lawson, who was very suspicious of what he called ‘nonsensical forecasts’,109 he told Mrs Thatcher privately that he thought the Treasury’s forecast which predicted ‘a larger drop in output in 1980 than any other forecasting body is expecting’ was too gloomy. He thought, too, that the PSBR would be smaller than expected, but promised not to publish an ‘unduly optimistic’ forecast.110 Perhaps subconsciously, he was using the idea of the MTFS as a way of postponing one or two tough decisions. He warned her that his range for the growth of sterling M3 could not come below 7–11 per cent: ‘I know that this will be a disappointment to you,’ but otherwise interest rates would have to be so high as to be ‘out of the question’.111 The MTFS, which Howe announced in the Budget, set out a path by which the range would fall by 1 per cent annually, reaching a growth rate of 4–8 per cent for sterling M3 in 1983–4. The PSBR would fall from 4 per cent of GDP in 1980–81 to 1.5 per cent in 1983–4. The Treasury published a green paper entitled Monetary Control in March, and later, in June, its Memorandum on Monetary Policy. The MTFS did not, in itself, change the policy already being pursued, but it did formalize the position and hold the government to its course. The monetarist government now had a monetarist strategy.
But, as Keith Joseph had long before said, ‘Monetarism is not enough.’ Sound money was a necessary but not a sufficient condition of recovery. The successful control of inflation would be a cold comfort unless it was accompanied by a transformation of economic and industrial attitudes and opportunities. As John Hoskyns kept complaining, Clegg’s awards, and the failure to contain public spending at a time when interest rates and the sterling exchange rate were soaring, attacked the private sector ferociously. In June 1980, he backed up his view with a paper submitted to Mrs Thatcher by Douglas Hague, called ‘The Central Problem of Public Expenditure’. Hague wrote: ‘Even
if we hold the proportion of output coming from the public sector constant, if private sector productivity rises faster than public, then any “comparability” means that tax rates will rise exponentially … We have designed an arrangement for destroying the British economy.’112 Hoskyns saw the process of economic recovery as having three legs – the attack on inflation, the ending of indexing and other privileges of the state sector, and the curbing of the power of the trade unions. The MTFS had been introduced, but little else had happened. The stool had only one leg to stand on.
The sharpest internal disagreement was about the trade union leg. When the Conservatives had come into office in May 1979, Jim Prior had found it relatively easy to carry the day for his cautious Employment Bill. On 14 May he wrote to Mrs Thatcher, saying that ‘it is absolutely crucial to our whole Administration to get this right,’ and continued, ‘it would be fatal to follow the 1970 pattern and rush things too much. We must live up to our promises to consult.’113 Despite the promise in the Conservative manifesto to review the legal immunities of trade unions to ‘ensure that the protection of the law is available to those not concerned in the dispute but who at present can suffer severely from secondary action (picketing, blacking and blockading)’, Prior was firmly opposed to doing anything which would ‘put at risk the support we must seek to win from moderate opinion in the trade union movement itself and more generally’.114 In the view of Lord Gowrie,* one of Prior’s junior ministers at this time, ‘The civil servants [in the Department of Employment] were counting the days until a return to incomes policy.’115 Prior had no objection in principle to such a return. To make it easier if it did come, he wanted relations with union leaders to be on a friendly footing.
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