The Iron Lady

His appointment inevitably upset the Employment Secretary, Tom King, on whose territory he was set to trespass.¹¹ But Mrs Thatcher would hear not a word against her latest favourite. ‘Others bring me problems,’ she was reported as saying. ‘David brings me solutions.’¹²

At the party conference at Brighton in October – this was the conference overshadowed by the IRA’s bombing of the Grand Hotel – she devoted the longest section of her speech to unemployment. ‘To suggest… that we do not care about it is as deeply wounding as it is utterly false.’ Rejecting ‘Keynesian’ arguments for government stimulation of the economy, she asserted that Keynes’ modern followers misrepresented what he actually believed. ‘It was all set out in the 1944 White Paper on employment. I bought it then. I have it still…I re- read it frequently,’ she claimed. ‘On page one it states, “employment cannot be created by Act of Parliament or by Government action alone”… It was true then. It is true now.’ The White Paper, she said, was full of ‘basic truths’ about the danger of inflation and the importance of enterprise.

She listed some projects for which the Government had – ‘by careful budgeting’ – found money: the M25 motorway, the electrification of British Rail (‘if it can make it pay’), forty-nine new hospitals since 1979. ‘Of course we look at various things like new power stations, and in a year after drought we look at things like more investment in the water supply industry.’ But the overriding message was clear: there would be no massive spending programme to create jobs.¹³ On the contrary, she specifically repeated during the autumn that the road to prosperity lay through tax cuts.

Accordingly the chorus of criticism swelled. Pym, Heath, Walker – the usual dissidents – were joined in December by Harold Macmillan, making his maiden speech in the House of Lords at the age of ninety, twenty years after leaving the Commons. The alarm of these grandees was magnified by the news that for the first time in modern history the UK was about to record a trading deficit on manufactured goods. This, combined with the strength of the dollar, caused a sharp fall in the value of sterling, leading in January 1985 to a full-scale crisis when the pound – from a value of $1.40 twelve months earlier – practically touched parity with the dollar. To show that the Government was not prepared to let sterling fall any further, Lawson raised interest rates by 2 per cent and then had to repeat the dose, to 14 per cent, when a second panic followed at the end of the month; while Mrs Thatcher privately persuaded President Reagan to lend American support and publicly went on television to ‘talk up’ the pound by insisting that its current valuation was too low (and the dollar too high). The medicine worked. By March the pound was back to $1.25, and Lawson was able to start bringing interest rates down again. But it had been a nasty few weeks.

So the pressure was unrelenting. At Mrs Thatcher’s insistence, Lawson was obliged to flag his 1985 budget as ‘a budget for jobs’. This was not at all his real priority. The previous autumn he had declared that unemployment was a social, not an economic problem, and cheerfully told an American journalist that ‘economically and politically, Britain can get along with double-digit unemployment’.¹⁴ His headline priority was sterling, and his real interest was further tax reform. He wanted to finance a further reduction in the basic rate by cutting middle-class tax perks – not only mortgage-interest tax relief but also relief on private pension payments. Lawson believed as a matter of principle in phasing out the accumulated clutter of sticks and carrots in pursuit of a ‘neutral’ tax system. But Mrs Thatcher would not hear of it. ‘Our people won’t stand for it,’ she told him.¹⁵ Second, Lawson wanted to extend VAT to newspapers and magazines and to children’s clothes: the latter was an obvious vote loser, which the Prime Minister was firmly pledged against, while she insisted that it was no time to antagonise the press. All he could do – with patently little enthusiasm – was cut National Insurance contributions, and put another ?400 million into the Youth Training Scheme and the Community Programme. After the plaudits for his first budget twelve months earlier, this lacklustre package pleased nobody.

That spring, for the first time since before the Falklands war, there was talk of a leadership challenge in the autumn. Francis Pym launched a new Tory dissident group, Centre Forward, asserting in a speech at Cambridge that ‘responsible financial management does not itself constitute an economic strategy’.¹⁶ In fact most of the grumblers were still afraid to put their heads above the parapet and the group entirely failed to establish an identity. But the evidence of discontent – focused perhaps more effectively in a new all-party pressure group, the Employment Institute – was sufficient to force Mrs Thatcher to promise, in a radio interview on 24 May, that the Government would take further action if unemployment did not fall within a year.

The traditional response to party jitters is a Cabinet reshuffle; so at the beginning of September Mrs Thatcher rearranged her pack to bring on some fresh faces – mainly from the Heathite wing of the party. ‘I generally found’, she wrote in her memoirs, ‘that the Left seemed to be best at presentation’.¹⁷ Better presentation was what the Government badly needed at this moment. First she moved David Young to the Department of Employment, with the rumbustious Kenneth Clarke to represent him in the Commons; then she replaced Patrick Jenkin with the smooth-tongued Kenneth Baker at Environment; and finally she moved Norman Tebbit from the DTI to replace Gummer as party chairman. In another populist touch she appointed the millionaire novelist Jeffrey Archer – a former Tory MP – to be deputy chairman to help re-enthuse the faithful in the constituencies. Mrs Thatcher never trusted Archer very far, but she thought he could do no serious harm, and might possibly raise morale, as a cheerleader.

Tebbit’s replacement at the DTI was Leon Brittan, woundingly removed from the Home Office where he had never looked convincing. Douglas Hurd, a much safer pair of hands, stepped up from Belfast to be the new Home Secretary, while Tom King took over Northern Ireland. The old wets had been severely culled since 1979, and the Thatcherite true believers had begun to take their places in September 1981; but September 1985 marked a third stage in the evolution of the Thatcher Cabinet, with the advance of a new generation who – though happy to serve her – were not instinctive Thatcher supporters. As it happened, the Westland imbroglio forced yet another reshuffle only four months later, in January 1986.The effect of the rapidly changing personnel around her was to focus attention more than ever on Mrs Thatcher herself.

The autumn of 1985 brought no relief. In September and early October another wave of rioting broke out. The spark in every case was tension between black youths and the police. But despair arising from unemployment, not race, was clearly the underlying cause. Soon afterwards a House of Lords select committee published a report warning of the irreparable loss of industrial capacity since 1979 and challenging the Government’s belief that expanding service industries would fill the gap. Services could not bridge the looming balance-of-payments deficit for the simple reason that they were not exportable. As the Observer’s William Keegan put it, ‘A proliferation of part-time barmaids was not enough.’¹⁸ Again at the party conference Mrs Thatcher insisted that there was ‘no problem which occupies more of my thinking’ than unemployment.¹⁹ But still unemployment went on rising. In December the Church of England joined in the chorus of concern with a report on social breakdown and demoralisation in the inner cities, entitled Faith in the City. An unnamed Cabinet Minister’s attempt to dismiss the report as ‘Marxist’ was ridiculed as ludicrously wide of the mark.

A significant divide now began to open between the Prime Minister and her Chancellor over monetary policy. In a speech in the City of London in October Lawson signalled his abandonment of formal monetarism. In its pure form, at the time of the Medium Term Financial Strategy, monetary targets – ?M3 – had been the ‘judge and jury’. Hit those, Lawson had then believed, and low inflation would inevitably follow. Now he had lost faith in ?M3. Inflation had fallen since 1982 even though ?M3 had far exceeded its target. Seeking a more reliable indicator, he had started targeting the exchange rate instead, believing that a stable pound would keep inflation under control.

It was the traumatic plunge and recovery of sterling at the beginning of 1985 which converted Lawson to the idea that the time had come to join the Exchange Rate Mechanism of the European Monetary System. Initially sceptical of international cooperation, he had become fascinated – Lady Thatcher would later say seduced – at meetings of the G7 finance ministers by the flattering delusion that a handful of wise men could manage the money markets. The first fruit of this international action was the Plaza Agreement – signed in the Plaza Hotel, New York – in September 1985, by which the Americans agreed to try to drive the dollar down by 10 per cent. As part of this process Lawson was ready to recommend to Mrs Thatcher that Britain should sign up to the ERM. He was supported by all his senior officials, by his predecessor Geoffrey Howe, now converted to the Foreign Office line, and by the Governor of the Bank. But Mrs Thatcher was resolutely opposed.

‘I knew they were ganging up on me,’ she later declared on television.²⁰ So on 13 November she convened a carefully chosen meeting of colleagues whom she thought she could count on to support her: Leon Brittan, Norman Tebbit, John Biffen and Willie Whitelaw. Contrary to her expectations, however, Brittan and Tebbit