This memoir by Norman Lamont is, as the title suggests, not the story of his life, but principally of his period in office as Chancellor of the Exchequer from 1990 to 1994. However, it does cover in some detail his period in the backbenches after John Major dismissed him as Chancellor until his defeat in the May 1997 election, and there is a subsequent chapter on his life thereafter, including his appointment to the House of Lords.
It is hard to imagine a political memoir more richly rewarding than this one. It is chock full of insights about economics, politics and life in general. Dr. Johnson said that no man who ever read Paradise Lost ever wished that it were longer. But in many cases, in Lord Lamont's book, one really wishes he would expand on his views, as he must have much more to say. Near the end of the volume, for example, he mentions his work as an advisor to the Romanian government on the privatization of their economy. He writes that "the EU has been criminally indifferent to what is happening there, as it has been in so much of Eastern Europe." One feels that his experience in Romania might be the subject of a short book in itself, one that would be well worth reading.
Arguably, although he only served for four years, Lamont was the seminal British Chancellor of the Exchequer of the modern era. He brought an end to two years of British participation in the European Union's Exchange Rate Mechanism (ERM) and replaced it with an inflation targeting (IT) regime at the Bank of England (BoE) that has remained in place ever since. He instituted the BoE's quarterly inflation reports. He proposed and laid the groundwork for the independence of the BoE that was finally initiated by the Blair government, when Gordon Brown took over as Chancellor. He instituted a unified budget replacing the separate budgets for taxation and expenditures. He did what he could to shift taxation from income to consumption, broadening the coverage of the VAT.
A Eurosceptic, Norman Lamont makes a strong, although not altogether convincing case, against a single currency for Europe. In spite of having free trade with the United States since 1988, Canada still has weaker trade and investment flows with the United States than one would expect if separate currencies were not a substantial impediment. Lord Lamont says that a single currency would require a federal Europe, which is probably true, with at least a monetary union. However, it could be a much looser federation than what now exists in Canada, with much of the powers (e.g. defence and foreign policy) provided at the federal level in North America continuing to be the domain of the nation states in Europe.
In 1991, Lamont promoted the idea of a hard ecu, an idea originally brought forward by John Major a year earlier when he was Chancellor of the Exchequer. It is very well described in his memoir: "Strictly speaking, the hard ecu was not a single European currency but a common, or parallel currency, to be used in competition with national currencies. It would only develop if there was a real need or demand for it. It was called the hard ecu because it could not be devalued. If the value of any of the national currencies making up the ecu increased, then its weighting in the basket that made up the ecu would be increased, making the ecu `hard' and different from the conventional ecu." Lord Lamont writes: "The hard ecu would have been a more realistic evolutionary approach than the rigid, grand blueprint that had been drawn up by the Committee, chaired by Jacques Delors." It is impossible to agree with this assessment. Peter Bofinger, later one of German Chancellor Angela Merkell's leading advisors, described the hard ecu proposal as half-baked. Refusing to let the ecu decline in value against any national currency amounted to an implicit subsidy for the new currency, and an acknowledgement of the benefits of a common currency. It is inconsistent with the notion of a straightforward Darwinian competition of the ecu with the national currencies. However, even with a subsidy, the switch to the ecu probably would have been slight, except in countries with high inflation rates.
Lord Lamont writes that John Major was reluctant to let the hard ecu proposal drop, perhaps because of "pride of authorship", but Mr. Major never the author of the proposal. In fact, it had originally been developed when Nigel Lawson was still Chancellor of the Exchequer and John Major just carried it forward. In 2011 something resembling the hard-ECU proposal was resurrected by Sir Michael Butler, its leading advocate in 1990, in a different form, as a way of allowing a country like Greece to reinstate the drachma without abandoning the euro. As with the hard ECU, the euro would not be allowed to depreciate against any reinstated currency. Initially, at least, the new drachmas would not replace the euros as coins or as paper currency, but there would be bank accounts denominated in new drachmas. Although Butler is more associated with the original hard-ECU proposal than anyone else, he did not originate it even in Britain and Bofinger claims that the German economist Wolfgang Stützel was the first to propose it in 1969.)
It is unfortunate that Lord Lamont's most enduring achievement, the establishment of an IT regime for the BoE, has not received the acclaim that it deserves. There are three reasons for this. First, it was a policy shift dictated by the failure of Britain to remain in the ERM, so the initiation of the new policy was clouded by the failure of the new one. Second, PM Major, much to Mr. Lamont's annoyance, was unwilling to renounce any plans of rejoining the ERM, even for the duration of the Parliament, so there was no sense that this was the beginning of a regime that would last for decades, as in fact, it has. Third, when he moved to IT, Lamont also adopted targets for monetary aggregates. It was not surprising that some observers were confused, and assumed that this was just a return to the monetarist policies of Margaret Thatcher with a new twist.
Lord Lamont writes that he decided to target "[u]nderlying inflation, that is retail price inflation minus the effects of mortgage interest rates". Underlying inflation is usually treated as synonymous with core inflation, and the RPIX measure adopted as the target inflation indicator was really too broad to be considered a core measure, but moving to this measure was nevertheless an innovation in monetary policy. Although Lord Lamont does not mention it, the two previous central banks that adopted full-fledged IT regimes, the Reserve Bank of New Zealand and the Bank of Canada, both targeted the total CPI, and both included mortgage interest costs in their measures. Much to his credit Mr. Lamont realized that it made little sense to target an inflation indicator that would tend to rise with interest rate hikes meant to dampen inflation. Just two months after the IT regime of the Bank of England was established the Reserve Bank of New Zealand signed a new Policy Targets Agreement between the Minister and the Governor of the RBNZ with the caveat that violations of the target bounds for CPI inflation due to interest rate changes were acceptable, and in December 1997, a new PTA formally targeted a series called CPIX, which, like the British RPIX, excluded mortgage interest cost. However, the Bank of Canada continues to target the CPI All-items, and has not shown any interest in dropping mortgage interest costs from its target indicator.
Lord Lamont writes "I decided to set a range of 1-4 per cent with the aim of reaching the lower half of the range in the second half of the Parliament", which, as he notes, were ambitious targets at the time. Throughout the Major years, IT continued to be defined in terms of target ranges rather than target rates, although under Lamont's successor, Kenneth Clarke, the language was a little fuzzy, and it wasn't always clear if he was referring to bounds or to target rates. It was only when Gordon Brown became Chancellor of the Exchequer that a target inflation rate and symmetrical upper and lower bounds , similar to the IT regime of the Bank of Canada.
As Chancellor, Mr. Lamont strongly advocated an independent central bank. Although he was never able to convince PM Major to commit to one, he did create the framework that made an independent central bank possible. As it was, the New Labour Government implemented an independent central bank almost as soon as they took office in 1997.
There are interesting observations on almost every page of this work. For example, in one passage he writes that the Treasury had overestimated the share of the deficit that was cyclical rather than structural, and why this is easy to do. "In a `short, shallow' recession, unemployment costs will cancel themselves out as the economy recovers, but just as business cannot go on year and year ignoring a prolonged fall in cash flow caused by a recession, so too a government cannot keep on running up debt in the hope that recovery will eventually solve its problems. Even if the debt was originally caused by the recession, the interest on it still has to be paid. What might start off as a cyclical deficit can transform itself into a structural deficit."
His observations on the famous people he met are also always interesting. When Boris Yeltsin visited London and the Chancellor of the Exchequer had lunch with him, Yeltsin had nothing to drink at all! Lord Lamont, like others, was puzzled at why Tony Blair joined the Labour Party, and ascribes it to the influence of his wife, Cherie.
This is a wonderful book, that calls for a sequel and a prequel.