JOHN Major was not chosen to lead his party because it believed he would reshape the country. Mrs Thatcher had done that. Mr Major’s job was to keep the Conservative Party electable.

When he defeated Neil Kinnock in April 1992, he seemed to be set fair for success. But after five months his premiership was in tatters. He hung on until the 1997 election, suffering all the indignities of appearing to be in office, but not in power.

The root cause was the Conservative Party’s sudden collective mental breakdown over relations with Europe. Having backed entry into the Common Market in the 1970s, and having seen the single market project in the 1980s as a great opportunity for British revival, many Conservative politicians began to see the European Union as remote, bureaucratic, and undemocratic. Ever closer integration threatened the sovereignty of the Westminster Parliament.

That’s a story which still hasn’t reached a conclusion – Scotland achieving independence, and deciding to pool sovereignty with the other members of the EU could well be one of the last chapters.

Going back to that story’s beginning, and concentrating on the economic situation, Britain in 1990 faced a deteriorating economic position. The “Lawson Boom” of the late 1980s had collapsed; inflation was increasing, and growth was weak. Seeing a tendency to inflation as a traditional weakness of the UK economy, the government reintroduced punitive interest rates to try to squeeze inflation out of the economy. That led to the collapse of the housing market, as overextended borrowers had to sell or face repossession.

As chancellor, Major fully accepted the Treasury’s policy, first developed under Nigel Lawson, that as well as high interest rates, countering inflation required a managed, stable exchange rate. In 1990, finally overcoming Thatcher’s opposition, the UK joined the European Exchange Rate Mechanism. For most members, this was one of the first moves towards monetary union. For the UK, membership lasted less than two years, ending on Black Wednesday, with the government humiliated.

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It was consistent with the UK’s policy towards Europe that it joined the ERM a decade after other countries primarily to solve an internal policy problem. Membership gave a structure to UK policy, which had been lacking in the previous attempts to “shadow the Deutschemark”. Critically for what followed, the UK joined the ERM at a central exchange rate of DM2.95 to a pound, with the exchange rate able to fluctuate by up to 6% from that central rate.

Whenever the exchange rate approached the floor of DM2.777, the Bank of England would sell foreign reserves and buy sterling, placing upward pressure on the exchange rate.

These formal arrangements represented a clear commitment to the policy. Its credibility was enhanced through mutual support arrangements among European central banks to co-ordinate their activities should there be a speculative attack against any currency.

In some ways, the policy only had to be successful for 18 months. In October, 1990, the Treasury believed there was an immediate challenge of maintaining exchange rate discipline, while applying a contractionary fiscal policy, and persuading business and trade unions that there would be neither a dash for growth, nor any devaluation in the run-up to the 1992 General Election.

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AGAINST these criteria, the policy held up well. By spring 1992, inflation had fallen from 11% to 4%. Interest rates started to drop. The Treasury started to talk about how attitudes to inflation had changed. And the Conservatives won the General Election.

Then things fell apart. An exchange rate is simply the relative price of two currencies. Governments can agree any exchange rates that they want. Markets can ignore their agreements.

Throughout the summer of 1992, sterling’s market value fell. By the beginning of September, it was trading at about DM2.79 per pound, with markets repeatedly testing the government’s commitment to support the exchange rate. On September 16, after losing £6 billion in foreign reserves, the government folded. The UK left the ERM, and the Conservative Party began its long civil war.

The problem for a government which is committed to a rule is that when circumstances change, the rule should change too. But a rule which is perfectly flexible is no rule.

A well-timed devaluation of about 10% in August would probably have satisfied the markets. The government could have demonstrated its commitment to this being a “final” devaluation by moving to the “narrow” band in the ERM, allowing the exchange rate to vary from the new central rate by only 2.5%.

There was active consideration of the move to the narrow band in the summer of 1992. But the government was so committed to squeezing inflation that it set its face against devaluation. That rigidity of thinking caused it to squander its reputation for competence.

There are many important lessons in this for the government of Scotland, facing novel challenges in managing external accounts.

The UK government failed to act virtuously. It should have applied practical wisdom, understanding what was feasible, and presenting policy so that it seemed credible.

While it was right to be bold, in joining the ERM, and then pursuing its goals with steely determination, it should not have been so rash or doctrinaire.

And it needed greater patience, as it worked to achieve financial stability by persistent efforts to change the structure of the economy.