Wednesday 7 January 1981
At Admiralty building at 11 am with us [Policy Unit], Alan [Walters], Elizabeth Cotterell [from CPS], Jurg Niehans. Jurg Niehans v. impressive and gave us a full exposition of his analysis and prescription on monetary policy and the exchange rate. To our (or my Policy Unit's) surprise he said we'd over-squeezed, if you look at the monetary base which was static from autumn 79 to Dec 80. We should "normalise" to the point we'd be at if it had been growing at 5% per annum over the same period, and do so by about June. £M3 is a misleading indicator. Peter Middleton joined us for lunch ... and Alan, who agreed with Jurg, recapitulated for Peter at my suggestion. Peter's face was a study. He admitted nothing but I judged he'd been astonished. Both Peter and Alan much less happy with Jurg's suggestion that we say we won't let £ rise much above $2.15 once we're nearly there. They say our reserves could go in no time in such intervention. Jurg disagreed; what alternative? A v interesting and perhaps crucial day. Alan went off to see [Geoffrey Howe]GH and we put Jurg into a car for Heathrow.