THE ECONOMY
The surprising character of a trimmer
JOCK BRUCE-GARDYNE
By the time these words appear we shall know whether Chancellor Lawson has been rewarded with a standing ovation at the end of his reply to the debate on the economy at the Tory Party Conference. If there's any justice in this world he will have been — regardless of his oratory. For if it was Mrs Thatcher who did the job of giving her Party a third lease of the power it so much enjoys, it was Nigel Lawson who gave her the tools.
Sir Kit MacMahon of the Midland Bank seems to have been a little waspish about his old sparring-partner in the fringes of last week's IMF shindig in Washington. 'He trims', the Sunday Telegraph reported the bank chairman as saying of the Chan- cellor, 'with such panache'. Well of course he does. It is delightful to recall the near-panic which set in on the damper fringes of the Tory Party when Mrs Thatch- er summoned him to the Treasury in 1983. 'Now she's really done it,' one was told. 'Putting that monetarist lunatic in charge. He'll have everybody out of a job — including himself.' Whereas four years later he presides proudly over a credit boom of such vigour that it might have brought a blush to Lord Barber's cheek, and celebrates a third election victory based on good old-fashioned never-had-it- so-good consumer prosperity. The mis- reading of his character was almost action- able.
True, the change of gear from monetary targeting to exchange rate management was so swift and complete that it left some of us who knew him best a little breathless, and Sir Kit's former colleagues at the Bank of England struggling anxiously to keep up. Sir Kit, a long-term advocate of man- aged markets, who occasionally felt the lash of Nigel Lawson's tongue for his indulgence in such Keynesian heresies, naturally feels a bit like the original apos- tles felt about St Paul on his return from Damascus. But this is always the fate of true believers.
Yes, well — Mr Lawson would explain to us — times have changed. It was indeed fatuous to flail about after stable exchange rates in the Seventies and early Eighties: inflation was both far too high and far too volatile. But now we've got inflation down to low single figures in most of the leading countries it's a different matter altogether. Central bankers have demonstrated their clout in this new environment, marching the dollar down in good order under the 'Plaza' agreement in 1985, and then halting it precisely on the white line by the 'Louvre' accord of earlier this year. It is time to move on to the logical next step, with all the major currencies keeping station and only adjusting speed to change position in the convoy from time to time.
In reality his motives are not perhaps quite as internationalist and altruistic as he would like us to believe (and none the worse for that). Assuming that he soldiers on at the Treasury for the rest of this Parliament — and it must be admitted that one begins to feel less sure than one did that another great department such as the Foreign Office would have no appeal — he would presumably like to go down in the history books as the mastermind of yet another Tory triumph. To that end he would like to keep the economy roaring away. A little less hectically than it seems to be at present, no doubt. But still at a spanking, vote-winning pace compared to what we had grown used to. So what are the threats along the way?
The balance of payments? Possibly. The financial markets are becoming less indiffe- rent to trade flows than they were in the early Eighties. But as Mr John Young has pointed out in the latest edition of Lloyds Bank's International Financial Outlook, our trading performance may well turn out to have been — and to be — a good deal better than the statistics would have us believe. Last year's positive 'balancing item' (the polite term for all the trans- actions which the statisticians can't iden- tify) of almost £12 billion can't all have been attributable to capital movements, and it is not unreasonable to suppose that enough unrecorded exports are hidden here to convert a deficit of billion on the latest estimate into an eventual surplus.
Protectionism? That looks more omi- nous. Saving the presence of Mr Alan Clarke as our improbable Trade Minister (and notwithstanding the Prime Minister's occasional enthusiasm for beastliness to- wards the Japanese) it is hard to see us launching a trade war. There is a consider- ably greater danger that we could find ourselves dragged into one by the mercan- tilists in Brussels. But on performance we are entitled to take President Reagan's commitment to an open trading system at face value. So long as he is there.
Interest rate 'rearmament'? Here we are getting warmer. Rates are edging up again internationally. And it is here — or so it seems to me — that we identify the true motivation for the Chancellor's latest con- version to Bretton Woods Mark 2. He is fearful that, in the absence of international commitment to maintain — more or less — the present pattern of exchange rates, the dollar will collapse, thereby obliging the Americans to jack their interest rates up to penal levels, and us to follow.
These are not unreasonable fears. You have to be a veritable Pangloss to swallow — as the IMF annual general meeting eagerly pretended to do — the assurance that by signing the latest version of the Gramm-Rudman rule (according to which Congress and the President are automati- cally obliged' to abate their spending appe- tites) Mr Reagan is committed to budget- ary rectitude. But I still find it rather hard to believe that the Japanese trading houses would stand idly by and watch their US markets vanish because they are not pre- pared to throw the good money of their domestic savers after bad in support of the dollar.
I may be wrong. But whether I am or not, it seems fairly clear after the IMF meeting that the Germans are not minded to copy Mr Lawson's example, or his text, by intervening in the exchange markets to sustain the dollar. They reckon that could be inflationary. Mr Lawson, having con- vinced himself (if not the Bank of England) that the expansion of the credit base of the commercial banks which flows from in- tervention is not potentially inflationary, has no qualms.
Which brings us to what seems to me to be the biggest hazard threatening the Lawson boom: the one that he dismisses. The other day I had an interesting discus- sion with one of the new millionaires of the property industry. What worried him, he told me, was that the market for commer- cial properties was no longer being prop- elled by demand, so much as by 'weight of money': the eagerness of banks to lend. 'I am old enough', he told me — although he didn't look it — 'to remember the last time this happened: in 1973.'
Still, Nigel Lawson is yet to be converted to the legislative control of wages and of prices. Were that to happen, sane men would grab their lifebelts and jump. I don't believe it will. So let's join in the standing ovation. And keep our fingers crossed.
Previous page
