It has taken twenty years, but good sense is beginning to prevail. For most of the past two decades, those of us who argued in favour of the ERM found it hard to make ourselves heard. It had become the conventional wisdom that the ERM was a disaster; any attempt to argue to the contrary was greeted with bewilderment. The ERM's critics did have a point. In part, it was a disaster: a political disaster. Economically, however, it was good for the country, as Lord Lamont pointed out in his piece for yesterday's ConservativeHome and in the Sunday Telegraph (Norman was right all along on the ERM). There was also an excellent piece by Jeremy Warner in last week's Telegraph, on similar lines: Jeremy is always essential reading.
I would go further. It is impossible to make a sensible case against the decision to join the ERM, and the reason for that is – Margaret Thatcher.
Throughout the 1980s, she was committed to eventual British membership: we would join "when the time was right". By the mid-Eighties, once inflation was under control, she could have altered course. Citing her successes in reducing inflation, she could have argued that as long as the fundamentals were sound, with the government running a credible monetary policy and a sensible fiscal one, while the private sector produced goods and services that people wanted to buy at a price they were prepared to pay, we did not need to worry about the exchange rate. If the bears tried to bounce the pound around, just wait for the moment to crush them in a bear squeeze.
There was a time when that could have been persuasive. But she let the moment pass. Then things began to go wrong. Inflation re-appeared. The Thatcher idolisers try to blame all that on Nigel Lawson, who flattens their arguments in his The VIew from No 11: more essential reading. I have a theory, which has never to my knowledge been crushingly refuted. In 1979, relative to income, the average British household had borrowed half as much as the average American household. Then came the Eighties, which were to permissive borrowing what the Sixties had been to permissive sex. By the end of the decade, the UK had caught up with the Americans (in borrowing, that is). The resulting increase in the money supply was the principal re-igniter of inflation (which was, in turn, the principal reason for Mrs Thatcher's fall).
Anyway, by late 1989, inflation was back. Mrs Thatcher, still banging on about "when the time was right", was confronted by universal scepticism. "The time never will be right" jeered her critics "because you British will never bring inflation under control". Whenever the Financial Times was short of a news story, it could print the latest rumour about the ERM, thus bouncing the pound around with no fear of a bear squeeze. That was why John Major worked to persuade Mrs Thatcher to join the ERM: to eliminate instability.
It worked. When we joined, interest rates were at 15% and inflation was in double figures. Both came down. Certainly, there were casualties, most of them undeserving. In those days, I made a large number of road journeys to the Isle of Dogs. In 1988, there would be lots of hoardings advertising small building firms, with names like FredRon construction. You imagined Fred and Ron, two of Thatcher's children, who had probably been building workers themselves – deciding to give it a go. Scraping together capital, heavily in hock to the banks, personal guarantees to more than the value of their assets, they and others like them dreamt of being the next Wimpey.
Eighteen months later, they could barely afford to eat at Wimpy's. The sites were empty; the streets lined with half-completed buildings. I used to feel very sorry for the Freds and Rons. Whoever had lost control of inflation, it was not them.
That inflation had to be cured, which meant a recession, and misery for lots of Freds and Rons. In the Lady's words, there was no alternative. Once she was out of office, the idolisers started to blame the ERM for the pain. To her discredit, she did not discourage them. But you should not blame the cure for the disease. The high interest rates which were necessary to sustain ERM membership also dealt with inflation – and there was a further factor. Until April 1992, the British people were condemned to pay an interest-rate premium – the 'K' premium – because of the careless way in which they replied to the opinion pollsters. It seemed possible that Neil Kinnock might become Prime Minister. Holders of Sterling did not find that reassuring.
Then came the April 1992 election. There was no more need to worry about Mr Kinnock, while inflation was down to 5% and falling. With German reunification, ERM interest rates were less and less applicable to the UK. So should we have left? It is a hard question to answer. On the one hand, interest rates could have been cut faster, but somewhat lower interest rates between April and September would not have saved that many Freds and Rons.
On the other hand, if we had left the ERM straight after the Election, the world might have concluded that these Brits were not serious about dealing with inflation, As soon as it fell to five percent, they took their foot off the brake. In Whitehall, that view prevailed, so the UK went the distance, and in so doing, defied precedent. Normally, a devaluation is followed by an interest-rate rise. The markets wish to be reassured that the devaluer is still serious about tackling inflation. In Britain, that was not a problem. Even though the counter-inflation policy had collapsed, no-one doubted Britain's firm avowed intent to keep inflation under control. The non-doubters were right. Inflation fell and went on falling, to the extent that everyone was writing about a new post-inflationary paradigm.
So: we joined the ERM for a good reason. While we were members, it did us good, helping to set us on a path to prolonged recovery. It acted as a crutch. For a time, we needed it, while a damaged economic limb was healing. Then we were able to dispense with it. In short, everything worked, except that it was a political disaster.
This was partly because of a malign combination: the ERM and Maastricht. Those who wanted to undermine the government's European policy exploited the ERM degringolade to discredit John Major. He too found it impossible to command a hearing, and gave up, trusting that the economic recovery would make the case for him. Partly because of the behaviour of many Tory MPs, that did not happen. Instead, the party's reputation for economic competence was blighted, and the steady recovery of the early Nineties became the longest voteless recovery in history.
That said, there would always have been a difficulty. Fixed exchange-rate systems create a moral hazard. In order to defend the parity, the government has to lie, right up until the moment of devaluation. If it ever indicates the scintilla of a possibility of doubt, George Soros or his equivalent will make billions while the policy is blown away. But it is virtually impossible to explain that to the electorate. !949, 1967, 1992: the three devaluations since the war all helped to destroy the governments which presided over them.
Although there is no reason to mourn either of the two Labour governments, 1992 should arouse bitter Tory regret. In its aftermath, the party ensured that Tony Blair would reap the harvest of John Major's recovery. Let us hope that the lesson has been learned.