Comprehension

Direction for the questions: Read the passage carefully and answer the given questions accordingly.

The opinion polls had been wrong. Although they were signalling a weakening in Labour’s lead in the days before the general election - which pointed to a hung parliament - many working-class voters had been embarrassed to tell middle-class pollsters that they were intending to vote Labour. The final result on April 9, 1992, which gave Neil Kinnock a working majority of 30, was the turnaround of the century.

As John Major cleared his desk in Downing Street, pundit after pundit lined up to criticise his lackluster campaign. The trouble was, they all agreed, that the conservative party no longer had a message or political purpose. Its representation in the north of England was decimated ; its future as a national party is doubt.

For Kinnock the victory was sweet reward for nine years of Herculean labour in making his party electable. Not only had he a working majority, but the divisions in Conservative ranks between anti-Europeans, free marketers and moderates- threatened to split the party. Having set himself the objective of heading a two-or-three-term government, Kinnock made his cabinet appointments with the long haul in mind. There were few surprises. John Smith, with whom he coexisted uneasily, was made Chancellor ; Roy Hattersley became Home Secretary ; Gerald Kaufmann went to the Foreign office ; inveterate Euro- sceptic Bryan Gould took over environment; and Gordon Brown went to trade. It was, as many commentators conceded, a much more heavy weight cabinet than any the Conservatives could have mustered.

But the new cabinet was to have its first trial of strength very soon, The problem was the foreign exchange markets. Although both Kinnock and Smith had, throughout the election campaign, reaffirmed their commitment to hold the pound’s parity at 2.95DM inside the ERM, the foreign exchange markets simply did not believe them. Every previous Labour government had devalued; what reason was there to suppose this one would be different ?

The pressure built up immediately. On Friday, April 10, the Bank of England managed to hold the line only by spending £4 billion - around a sixth of its total reserves - to support the exchange rate. But late that night, as the New York markets closed, the governor of the bank of England led a deputation to a meeting at 11, Downing Street with Smith and the permanent secretary to the Treasury, Sir Terence Burns. If said the governor, the pound was to survive the coming week inside the ERM, then Smith would have to demonstrate his resolve by raising interest rates - by at least 2 percent. It would also help, added the officials, if the Government were to commit Britain to full monetary union and to meet the Masstricht criteria for single currency. This would mean that both the taxation from Smith’s first budget would have to be used to reduce government borrowing and the manifesto promises to raise child benefit and pensions be postponed.

Smith listened to Eddie-George-number two at the bank of England and the arbiter of British exchange rate policy - explain that, at the current rate of reserve loss, Britain’s reserves would have run out by the following weekend. The markets needed decisive action. And they needed to know, by the night of Sunday, April 12, at the very latest, what the Government would do when the far-eastern markets opened after the weekend. Sir Terence advised that once the markets recognised the Government was resolved to hold the exchange rate, pressure would quickly subside and the interest rate increases could be reversed. The name of the game was earning credibility.

Although Smith had been warned to expect a Treasury / Bank of England move to assert the canons of economic orthodoxy, he had hoped to have been more than a few hours into his chancellorship before the pressures started to mount. As it stood, he felt like the victim of a coup and wondered to what extent the foreign exchange market selling had been prompted by the Bank of England’s ham-fisted intervention-almost designed to manufacture a run on the pound. In any case, he could do nothing without conferring with the Prime Minister.

In fact Kinnock had asked Smith to have the preliminary Bank of England meeting without him. Although he was not at one with his Chancellor over economic policy and distrusted his judgement, he wanted to complete his cabinet appointments - and confer with his own advisers about how to react to what he knew the Bank and Treasury recommendations would be. He was determined to avoid being bounced into decisions before he had decided his line.

The alternative was to apply to the EC for a realignment conference, in which many more currencies would be devalued. But that could hardly be done then; it would have to wait until the following weekend. And it was not clear if the pound would be devalued sufficiently, or it other countries would follow the British lead. Not only might Britain have to devalue alone, it might not secure a devaluation large enough to make a difference; and be accompanied by higher interest rates.

CAT/1995

Question . 332

Why did Kinnock ask Smith to attend the Bank of England meeting without him ?