Witness Seminar II: The October 1987 stock market crash

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Witness Seminar II: TheOctober 1987 stock marketcrashMichael David Kandiah aa Institute of Contemporary British History ,LondonPublished online: 25 Jun 2008.

To cite this article: Michael David Kandiah (1999) Witness Seminar II: TheOctober 1987 stock market crash, Contemporary British History, 13:1, 141-165,DOI: 10.1080/13619469908581519

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WITNESS SEMINAR II

The October 1987 Stock Market Crash

Edited by MICHAEL DAVID KANDIAH

This witness seminar, sponsored by the St Peter's College OxfordFoundation, Kleinworth Benson, Merrill Lynch, and Barclays Bank, was theseventh annual Sir Alec Cairncross Seminar. It was held at Barclays Bank,Lombard Street, London, on Tuesday, 14 October 1997. The seminar waschaired by Professor Kathleen Burk of University College London, and theprincipal participants included: Sir Samuel Brittan (Principal EconomicCommentator and Assistant Editor, Financial Times), Anthony Coleby(Chief Monetary Adviser, Bank of England), Sir Alec Cairncross, MichaelJenkins (Chief Executive, LIFFE, 1981-92), Michael Hughes (Barclays deZoete Wedd), Jeffrey Knight (Chief Executive, London Stock Exchange,1982-89), Lord Lawson of Blaby (Chancellor of the Exchequer, 1983-89),and Sir Peter Middleton (Treasury, Permanent Secretary, 1983—91).

BURK: This witness seminar is in honour of Sir Alec Cairncross, who hasbeen not only a man of massive experience in the political public world, butto many of us an academic example and a mentor. It is my personal pleasureto welcome Sir Alec here, and I hope that he enjoys today's exhibition asmuch as the rest of us are going to. I am going to ask first of all thewitnesses around the table to introduce themselves and to state what theirlocus standi was in the 1987 crash.

JENKINS: At the time of the crash I was chief executive at LIFFE (LondonInternational Financial Futures Exchange), and I have just being trying torecall the sequence of what happened! However, there were a number ofinteresting issues raised by the existence of the derivatives industry. Theymay have been regarded as side-issues, in so far as they didn't directly affectthe stock market, but there was an interaction and particularly in the USwhere there was a greater degree of panic, there was recrimination between

Michael David Kandiah, Institute of Contemporary British History, London.

Contemporary British History, Vol.13, No.l (Spring 1999), pp.141-165PUBLISHED BY FRANK CASS, LONDON

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142 CONTEMPORARY BRITISH HISTORY

the futures market and the stock market, as to who was to blame. This didnot exist here, either in the stock market or the futures market, and I thinkthere are some interesting comparisons as to why there was this panic in theStates and probably not here.

KNIGHT: At the time in question I was the chief executive of the LondonStock Exchange. I was responsible for the administration. I neither was thennor am now a market man, and I would not presume to talk about themarket. I could say something about the impact of the futures and optionsmarkets on the operation of the stock market, but I was chiefly anadministrator and responsible for maintaining the system under which thestock exchange ran at the time. We were also at that time, and this I regardas the most relevant part of the stock exchange administration in this regard,the regulator. We were a rather low-key regulator, but I would like to showin the course of the discussion that we were a rather effective regulator, andwe were very far removed from the massed ranks of regulators who marchup and down Threadneedle Street1 today, in columns of four.

COLEBY: At the time I had the title of Chief Monetary Adviser at the Bankof England. That, self-evidently, was not an operational job, though I didwork very closely with my immediate boss at the time, Eddie George,2 andthe significance of that of course is that he was very much involved in theimmediate operational implications of this crash and had to opt out of ameeting in Switzerland, to which I went in his place. So I was not presentat the very hub of the activity and will not be able to say anything with greatprecision on that.

So far as the conduct of monetary policy was concerned, it was in asense relatively easy in the immediate aftermath of the crash, in that themarkets had to be given reassurance. The words of Alan Greenspan3 havebeen quoted in Dr Kandiah's paper," it is always a matter of someuncertainty what a central banker means when he speaks of providingliquidity, but I think we all subscribed to those words at the time, and it wasreflected in an easing of interest rates to help the markets to regainconfidence. The problems for monetary policy came in a sense slightly later,when the decision had to be made for how long this period of nurturing themarkets had to go on, how soon before other considerations had to reassertthemselves.

MIDDLETON: I was Permanent Secretary in the Treasury at the time. TheChancellor of the Exchequer did speak to me a little bit both before and afterthis event! It was a fascinating series of events actually, if one took thehurricane, the crash and the British Petroleum [BP] flotation all together. In

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WITNESS SEMINAR: OCTOBER 1987 STOCK MARKET CRASH 143

many ways the combination was much more difficult to handle than any oneof them would have been singly. Apart from the technical problems ofgetting the BP sale away during these rather difficult circumstances, I thinkone of the more interesting things is the point that Tony Coleby referred to.The immediate reaction was to feel that we'd got a crash maybe on the scaleof the 1929 crash, certainly in size but maybe in implications for theeconomy. The whole thing seriously worried the international community. Iremember we tabled in an emergency OECD5 meeting, in case the measuresthat the governments were taking might not be sufficient. Nevertheless, theinteresting point, as he said, is when this moved over not from concernabout recession, but to concern about the effect on inflation of the measuresthat were being taken to avoid recession.

BURK: Lord Lawson, I do not think you need to be introduced. So what Iam going to do, since I want to ask you to speak first, is to state the structureand then ask you to address the first point, which is that I think we need abit more context, especially international context, for what was by no meansa parochial London happening. Two or three things that spring to mind thatwere taking place over 1987 were the instability of the dollar, the twinbudget and trade deficits of the United States, and the conflict between theBundesbank and the US Treasury especially over international policy. If youcould fill in the context and the background to the crash I would be grateful.

LAWSON: I did not know I was going to be asked to say anything at all,let alone speak first - 1 have no prepared remarks, so if I wander a little bitI hope you will forgive me. Certainly I would just like to put on record thatI think that the account that Dr Kandiah has given is sort of half right/halfwrong. One of the things that I think is certainly a mistake of emphasis here,quite apart from errors of fact, is the very close connection that he seeks todraw between what had been happening in the foreign exchange markets inthe previous years and what happened on the stock market in 1987 andindeed what happened after that. Obviously, in the world of internationaleconomics everything is connected to everything else, and that may beparticularly true when you are talking about the financial sector. But therewas not really this close connection with the problems of the foreignexchange markets, with which we had been grappling at the time,particularly the huge overshoot of the dollar upwards in the early 1980s,which was halted partly by events in the market and partly by the Plazaagreement of 1985 and the aftermath of that which led to the Louvre accord.I do not think myself that that had very much bearing - some bearing ofcourse, but not the bearing that is alleged here - on the great crash of BlackMonday in October 1987.

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Let me say a few words about that. First of all I will deal with thepolitical side, because I am the only politician here. Although I would notsay it was good for the government politically, I do not think it wasparticularly bad, for the simple reason that it was seen as a storm for whichwe had not been responsible, which had blown up - indeed initially on WallStreet - and which we had weathered successfully. That was the overridingperception. There are very few happy stories, as Edmund Dell6 knows, in theconduct of economic policy, but this was one of the few where people didfeel after the event that it had in fact gone very much better than theyexpected and indeed gone really reasonably well. So I do not think there wasa great political problem.

As early as the spring Interim Committee meeting of 1988 I remembersaying that the crash of 1987 was an economic non-event, so I am notsurprised that Alec Cairncross did not mention it. But although it may haveproved to have been an economic non-event, anybody who lived through itat the time will never forget it, quite apart from the fact that we in thiscountry had the huge drama of the BP flotation, the biggest flotation therehad ever been anywhere in the world, coinciding with the biggest stockmarket crash there had ever been. That was certainly unhappy, and it causedus a little bit of a problem which we had to deal with. However, leavingaside that, any of us who lived through that will never forget the atmosphereat the time. Mr Jenkins of LIFFE says there was no panic - I think that isrelative. There may have been more panic on Wall Street, but my goodnessthere was panic in the City. I remember the lunches I assiduously attendedin the City immediately afterwards. There was absolutely nobody preparedto buy, nobody had any idea how far things were going to fall. Andincidentally it didn't stop just like that: there was a second downturn beforethe market eventually corrected itself, and from then on it went sailingupwards and within eighteen months it had recovered to where it had beenbefore.

Nevertheless, there was absolute panic in the City, there were terror-struck people in the City at the time, and not merely in the City. This wastrue of the boardrooms of the blue chip industrial companies: all investmentplans were put on hold for a short time, because people were afraid that wewere going into the aftermath of the 1929 crash, nearly everyone said 'it's1929 all over again' - William Rees-Mogg wrote that in either the SundayTimes or the Times and he was an infallible bell-wether of mass opinion.That was the wisdom at the time, that that was bound to happen, and peoplefeared it would happen for three reasons. Partly because it had in 1929 andthe 1930s, partly too because it was felt that there would be, which therethreatened to be, a complete cessation of investment spending, spending oncapital investment. And partly because it was feared that in the United

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States, where there is a much wider holding of ordinary shares thananywhere else and where people have a much greater awareness of what ishappening in the stock market than in any other country, there would be acollapse of confidence among ordinary consumers. There would be whateconomists call a wealth effect, people would feel much poorer andtherefore spend less and therefore there would be an indirect effect on thewhole of the rest of the world economy as a result of a recession in theUnited States. That was widely expected.

So as I say there was this sense of acute panic, and the overriding needas I saw it at the time to do two things. To try and restore confidence, but atthe same time to avoid doing anything silly - and all sorts of silly thingswere being proposed at the time, as Peter will recall: we were told we shouldengage in massive public works programmes, in of Keynesian way, to avoida repetition in the 1930s; dramatic reductions in interest rates, far biggerthan we ever made, were called for. I had in fact increased interest rates bya full point in August that year just before the crash because I had beenconcerned about overheating, and all we did after the crash was to reducethem, partly in concert with all the other G77 countries, by one and half percent; so the net reduction at that time was only half a point. We were toldby the Opposition and everybody else that this was just fiddling while Romewas burning, that we should do something far more dramatic than that.

Therefore, it was necessary to restore confidence while avoidinganything silly, and one of the ways of trying to restore confidence is a matterof making speeches. You have to remember that this occurred at a time ofparliamentary recess, and therefore one had to create occasions to makespeeches. I made speeches saying 'you know, markets are like that, therehad been a huge rise, an overshoot, and why are you surprised, the marketis bound to correct itself sooner or later'. Moreover, indeed everybody hadbeen expecting this sort of thing. They had been expecting it more in Tokyoincidentally, because the rise in Tokyo had been considerably higher. In factthe subsequent fall on the Tokyo stock market, if you take a longer period,not just the first day or two, was substantially less than the fall in Wall Streetand London. London, and the continent of Europe, were slavishly driven byWall Street. We were just following Wall Street, there was no leadership inLondon at all and it is illusory to suppose that there was, it was all comingfrom Wall Street. I think that the programme trading there, in fact Iremember I thought it at the time, meant that the correction happened rathermore quickly than would otherwise have occurred. I do not think it made ita bigger correction than it would otherwise have been.

At any rate, there was this panic and one of the elements of restoringconfidence was to show that international co-operation was alive and well.This was something that you could do which was not stupid, like a public

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works programme would have been, and therefore it was sensible to do that.The market had begun to break even before the cash of 19 October, and thatwas why Jim Baker's8 remarks were so unfortunate. Jim had always, for along time - and this was part of what the Louvre agreement was about, totry and stop this - been trying to get his own way on various things bythreatening to drive down the dollar, which European countries didn't like.That was why his spat with the Germans was unfortunate, but to do himcredit he realised this very rapidly, and there was a hurried meeting withGerhard Stoltenberg9 at which he said that the Germans hadn't broken thespirit of the Louvre agreement (which had been his original accusation) andthe Louvre accord was still fully respected by everybody. It wasunfortunate, but that was not the main thing.

As I say, for whatever reason, even at the Treasury we expected there tobe some slight effect on economic activity, and the immediately followingRed Book estimates showed that we thought there might be a half per centreduction in the rate of growth. Everybody said that this was ridiculous, thatit was going to be a far bigger reduction than that. In fact there was noperceptible impact at all: as I said, a complete economic non-event. Whetherthis is because the world's authorities had in an uncustomary way behavedsensibly and averted a disaster that might have happened, I don't know, orwhether it would never have caused any ill effects, who knows. However,certainly it did not.

I think the main effect it had is one that is never spoken about. For a longtime thereafter, certainly a matter of about a year thereafter, the equitymarkets were very, very fragile, and new equity issuance was practicallyimpossible. So public companies, as soon as they had recovered from theshock, and they did recover reasonably quickly, took to financingthemselves through debt instead, and there was a huge burgeoning of debtissues, because the equity markets were so fragile. You saw the great growthof the junk bond business in the United States in particular, but debtissuance generally. Moreover, I think this did make corporate America andcorporate Britain slightly more fragile than would otherwise have been thecase. That is I think an economic consequence, a rather minor economicconsequence, not totally unimportant, but it is the only economicconsequence really I think it is possible to discern.

I think probably in hindsight it was a situation where we could not win.I think that we did have to do something, by loosening monetary policyslightly, to restore confidence, which, given what we now know about theunderlying strength of the economy, was inappropriate and did not help. Onthe other hand, had we not done that, the situation could have been verymuch worse. There was certainly a high risk in my judgement at the time,and I would not like to say that if I had been in the same position now I

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would not act in exactly the same way as I did then. Finally, it is worthremembering that even after this one and a half point cut in interest rates inthe UK, real interest rates were still higher than they are today: it was not avery cheap money policy even then. So I think the main comfort I drawfrom all this is that if there is another stock market crash, which seems tome quite possible, it wouldn't be an exact repetition of what happened,nothing ever is, but we don't need to fear that it will have devastating effectson the world economy. That is what people were afraid of in 1987 and ofcourse that was what conspicuously did not happen.

MIDDLETON: A few comments to follow that. The first one I think is tostrongly endorse what Nigel Lawson said, remembering howextraordinarily difficult it is to keep calm when everybody wants you topanic. When I say everyone, the memories, or what people thought werememories, of 1929 loomed very, very large in this. The press undoubtedlywanted to see some violent action of some sort or another. As Nigel said themost amazing things were suggested. I think it is fair to say the internationalcommunity, especially the smaller countries, I think there was a bigdifference between what was happening in the G7 and what, say, washappening at OECD where you have got a lot of smaller countries, whothought they were going to be on the fag end of a major crisis in the rest ofthe world. The level of the stock markets had more than a passing effect onthis crash. I think it was all about the height to which markets had got andthe loss of confidence as a result of that. What I do think had an effect, asNigel Lawson said, was Jim Baker's traditional way of dealing with things,where he just happened to get the timing wrong. In addition, it did give himanother chance to make a series of remarks which no one was taking muchnotice of before, but which began to look as if they might be serious. 1 donot think they were ever meant seriously, but they did contribute towardsthe feeling of general uncertainty.

LAWSON: May I just add one thing, which if I do not do it now I shallforget. I remember at the time thinking how well the Japanese had done. AsI mentioned, the Tokyo market fell very much less than Wall Street andLondon and the rest. The reason it did not was because in Tokyo, unlike inLondon and Wall Street, the authorities intervened heavily to support thestock market, mainly through the banks. I believe that they sowed there theseeds of many of the problems which they have suffered in the 1990s.

BURK: Can I make sure I understand the point you two are making, whichis that there was very little relation between the crash and what had beengoing on in the international monetary situation. London peaked in July,

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New York and Tokyo peaked in September. Now why did it happen inSeptember? Your argument would be that because London follows NewYork it did not happen in July or before September because New York hadnot gone. So why did New York fall when it did? It had nothing to do withJames Baker's fight with the Bundesbank, nothing to do with the shaking ofconfidence by his comments?

MIDDLETON: I think it did have something to do with that, as I have said,but I was trying to say that was a piece of melodramatic politics rather thansomething which was deeply part of the international process. Nevertheless,I do not think it had a lot to do with it. It is very difficult to find a logical tiefor when a market breaks, when it has got seriously overvalued. I think ithappened then because it did happen.

LAWSON: That is right. It is one of the curious things about commentators,if I may say so, that they imagine on the one hand that governments areabsolutely useless, and on the other hand that everything that happens canonly be as the result of some action, adroit or maladroit, of governments.The world is not like that. I entirely agree with what Peter has just said. Thefact was that there had been this most enormous increase, which hadfollowed years of rising markets, and it was particularly acute during thatprevious year. I remember speaking, as Chancellors have to do, at theMansion House banquet of November 1987, in the immediate aftermath ofthe great crash of October. Obviously I sought to give a reassuring speech,and I think because of the circumstances, unusually, people were listening.One of the things I remember pointing out was that, after this huge fall,equity prices were back almost exactly to where they had been the yearpreviously - that's all that had happened. And it had been that year'sincrease which had come at the end of several years of steady increase. Sothere was bound to be a correction at some time or another, and I think thatnobody will know precisely why it happened when it did happen. Sentimentchanged, sentiment was bound to change at some stage. Nor I think, to behonest, does it matter what it was that triggered this sort of psychologicalchange and changed the psychological mood. It was just bound to happen,that is what markets are like. I think to search for causes and to assume thatit must be what Jim Baker said, or what some important politician orminister said at some point, is a false trail.

BURK: Thank you. A slight change of strategy here. Could I ask Tony[Coleby] to comment now.

COLEBY: I do not think I have a great deal to add, because basically I

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agree with all that has gone before. Certainly Nigel Lawson's first point,that there was already an expectation that some adjustment, somecorrection, was needed, was present in the Bank's thinking too. I recall, itmust have been at the press conference launching our September 1987quarterly bulletin, being asked about the previous month's interest rateincrease to 10 per cent, and using the time-honoured expression 'animalspirits' as part of my explanation. And that was partly in relation to whatwas going on, activity in the real economy, but it was also very muchreflecting behaviour of asset markets and stock markets in particular. So wewere feeling that there was some vulnerability in the level at which themarket was then standing, and expecting some sort of correction to come.We were, again as Nigel Lawson said, looking much more to Japan as apossible trigger for this than the United States. However, it is really a matterof indifference what the particular trigger is: there was certainly a feelingthat there could be a problem to come.

The sharpness, the intensity of it, was not something we had orconceivably could have predicted, and that I think entirely justified what Ihave already mentioned: the instant easing of monetary policy to provide acushion to give some restoration of confidence in the markets. I do not thinkanyone in the Bank had any reservations about that. It wasn't until later thatone had to begin to debate the question how closely are we getting back tonormal, does normality justify where we are now, or should we be adjustingback again. In addition there was, I think, both within the Bank and betweenthe Bank and the Treasury, quite a wide range of view and quite a bit ofdebate over the closing months of 1987 and the early months of 1988 aboutwhere we went for the best.

I personally, however one sort of carves it up to provide an explanationof the course of events, think that one has to regard the action taken inresponse to the crash, both here and elsewhere in the globe, as having beenextremely successful. It certainly prevented the dire disaster that a numberof people were fearing from coming about. And the question which I thinkmost interests me is what problems do you store up for the future by beingsuccessful in such circumstances, because that is bound to be an influenceon behaviour of markets in the future. It led, as Nigel Lawson has said, to areadiness, notably in the United States, to gear up equity quite substantially,with the leveraging and in some cases repatriation of equity, and created astructure of corporate financing that was potentially another order of riskgreater than had gone before. And one can see how the more successful andthe more frequently there is success in averting disaster when there is acrash in the markets, the more difficult it becomes to prevent its happeningnext time round.

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BURK: I want to ask one or two people in the audience who were in theCity to comment, and then I will call on Sam Brittan. Michael Hughes,would you like to comment from your vantage point in the City? Explainwhere you were and how you saw it.

HUGHES: I was then part of the new BZW,10 which was established in1986, and very much in the thick of it. The two points I would make are thatthe overriding memory I have got of it was that I put my mother-in-law intothe stock market for the first time before the crash, which I can assure youhas proved to be the best investment strategy I have ever done, because shedidn't come to visit us for many years after! But the second, morefundamental, point is (and this has been established already, I think) that ithad a much bigger impact on the City than it did on the economy. One ofthe features of the City in the 60 years prior to 1987 was that we had maderisk into a commodity: we had done so though the futures and the optionmarkets. And there was a major mis-pricing of risk in that period going upto 1987, hence the consequences of it to City institutions that some of theinsurance policies didn't quite work, but more importantly, that there was anasymmetry to those markets. When you make risk into a commodity, youare allowing long-term investors like pension schemes and companies to beable to reduce the degree of risk they are exposed to, and indeedsubsequently that has happened. But at the time, the main players in therisks markets were not themselves professionals, so the degree to which theliquidity in those markets fell away very substantially was a major factorbetween the very large price changes that we had in a very short period oftime, and equally it was a factor in the price increases that we had had in theprevious few months. So I would regard 1987 as a very distinct Cityphenomenon, and I think that any correction that we have now would besomewhat different, because there is a wider range of players and we havelearned something from the mistakes, and the pricing is more efficient, oraccurate, than it was then.

BRITTAN: There are three things I want to ask. First of all I want to ask anobjective question, maybe one for Tony Coleby, or maybe somebody elsewill have to answer this. Is there any difference, and if so what, betweenstanding ready to provide the market with liquidity and reducing interestrates? But the way monetary policy is done, the only thing the authoritiesknow how to do is to increase or reduce short-term interest rates. Now ifGreenspan were here, he would draw a big distinction between the two. Butis there any at all from the operational side here, from the point of view ofmarket observers as well as policy-makers?

The second point I want to make, and dare I say it, it is a philosophical

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one. I spent quite a lot of time looking at the concept of causality as one ofthe many ways of studying the economy without making any money out ofit. One of the conclusions that I drew from it was that causality was a verytricky concept, which should be avoided as far as possible in the socialsciences. May I make a distinction between a trigger and a morefundamental influence? The fundamental influence was that the market wasovervalued. There were people saying one should not argue about it. But itwas fundamentally overvalued, as it is now, Wall Street at least isovervalued. What you do not know is what the trigger is going to be, andsometimes you do not even know after the event what the trigger was.

To take another example, where the trigger is much clearer: the outbreakof the First World War in 1914. Now the assassination of the Archduke wasthe trigger; was the fundamental influence the age of the Austrian Emperor,the international arms race? Or was it that people had been enjoyingprosperity for so long they were getting bored with it? It does not help toask what was the cause.

To relate this to the present, one does not know what the trigger was.Now let me take an example from this afternoon. I have just been in Ireland,and an Irish property writer rang me up to ask about Dublin house prices,which have been rising by 20 per cent p.a. and now even more for severalyears. Now one does know this can't go on, that if the Irish, especiallywithin EMU," succeed in maintaining inflation of 1 or 2 per cent, there isno way that property prices in Dublin can go on rising by 20 per cent p.a.What we also know is that traditionally what would have happened was thatthe Irish central bank would have raised interest rates. But in this case thisaction is not open to them, because they will have to reduce rather than raiseinterest rates as the European Union tries to converge.

Now finally I will say something which is relevant to the journalistic andmedia world. There is an absolute obsession with 1929. Most people do notknow the difference between 1929 and 1932-33, and they are convincedthat the crash of 1929 caused the depression. They don't even know that thecrash of 1929, which was about the same dimensions as the one of 1987,was followed in successive years by secondary crashes almost as great, andwhich cumulatively took the market to much lower levels. Then the wholething was aggravated by the destruction of the US monetary policy. Manypeople do not know this at all. You cannot overestimate the ignorance.Whenever anything happens, not merely 1987, but after lesser events,people ask me 'Is there going to be a 1929?' And I say 'Well, we haveactually had it, and we have lived with it'. Long, long silence, because theydo not realise that at all. Then they say hesitatingly 'Is there going to beanother depression?', and I usually say 'We have problems, pretty bigproblems, but I don't think there is going to be a depression'. Final question,

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'Do you know any other commentator who thinks we are going to haveanother 1929?' End of discussion, and somebody else appears on theprogramme!

COLEBY: Shall I have a go at the first question? I think I do see adifference between these two, largely because the expression 'standingready to provide liquidity' is actually a wholly ambiguous one, and almostdeliberately so. What it carefully does not say is that central banks are goingto rescue insolvent institutions, but it is intended to provide a degree ofcomfort that there will be fewer insolvent institutions. In some respects it isa confidence trick rather than a technical tool, if you like, whereas changinginterest rates is something that is entirely visible and measurable, and I don'tsee how one can quite equate those two.

LAWSON: Can I just add something for the sake of the record to that. WhatTony Coleby says is absolutely right. First, we did actually do somethingelse on that front, in addition to the reductions in short-term interest rates.Deliberately and in a very high-profile way we concerted with the other G7countries. But we also had a temporary cessation of funding, in orderdeliberately to help the market. That is a little bit closer to doing somethingabout liquidity, although we didn't make any great song and dance about it- 1 think I did mention it in the Mansion House speech in November of thatyear. It did not last long, but we thought it would be helpful at the time.

The other aspect of course, was that Greenspan - and it was one of thefirst things he did, he was very new in the job, he had not taken over fromPaul Volcker12 very long - sought to set at rest a folk memory in the UnitedStates, which did not apply so much to the United Kingdom, that what hadhappened was that there had been a whole lot of bank failures in the UnitedStates after 1929. There had been a sequence of events, and in the 1930s itwas of course not the stock market crash which caused problems, in so faras one can use the term cause in economics - 1 think we are all rebuked bySam and possibly rightly rebuked. But in so far as one can talk of causes,the policy response in the early 1930s is generally now thought to have beenperverse, in the sense of (a) the monetary tightening that took place, whichmade the number of bank failures very much greater than it would otherwisehave been, and (b) the lurch into protectionism. The purpose of what wewere doing, Greenspan by his words and what we were doing by ouractions, was to indicate that we were not going down either of those routes.One of the important things about international co-operation - and this doesnot imply an exaggerated idea of what international co-operation canachieve - was that it was important to make it clear that we were not goinginto a sort of beggar-my-neighbour protectionism. And in the same way we

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were not going to engage in the sort of monetary tightening which had madethings in the United States so much worse in the 1930s. Greenspan I thinkrealised that to the Americans that was the greatest bogey of all, the bankfailures, and he was making it clear that there weren't going to be those.

KNIGHT: Well, I can't follow Sam Brittan, but I think for the record, sincewe were given the paper, there are certain things that should be said whichwould make the record a little bit more accurate and to the point. First of all,one of the things that Lord Lawson was saying earlier is that the market inLondon, and then the Continental equity markets, really followed slavishlyand almost as if they had no separate will, the market in New York. I thinkthat can be made even more concrete, if you like, and tangible by justreferring to what was happening in the way the market was operating in theUnited States. All of this has been detailed by Nicholas Brady in a BradyReport which was written very shortly after the crash in America. One veryimportant thing is that in the American financial markets the amount ofactivity in the futures, the options markets and derivatives markets, was fourtimes the volume of the business in the cash market.

JENKINS: In the equity futures market?

KNIGHT: Yes. And so the trading was being driven by what was at thatpoint a highly speculative activity, and there were times when, quitenotoriously as has been written up, the options market in America was rightout of phase with the prices that were being made in the cash market. InLondon, that relationship was one quarter. The amount of business beingdone in the equity options market was a quarter of what was being done inthe cash market, so there wasn't that highly excitable influence upon it.Secondly, the crash was being caused hour by hour, and the intra-dayvolatility happening in the States, due to something which was alreadyprevalent then, which was programme trading, by which is meantarrangements made beforehand to trigger trade which could be done in acentral system at certain points of market levels: when a market level wasreached another tranche of shares were sold without human intervention.

By contrast the London market had come only one year earlier from theold jobbing system and less than one year earlier from the floor system. Wein the stock exchange had made big changes to the dealing systems, but infact had only to some degree created an automated market. The paperspeaks of there being automated trading - there was no such thing, there isno such thing, there will not be automated trading until next week, on 20October, when the system will change. What there was was a screen display,upon which prices the market makers were obliged to deal, and a telephone.

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And what you had to do was pick up the telephone and deal. When PeterHolloway, who was the head of equity at BZW and had been in WeddDurlacher for a time, is quoted as saying that there was no market, I thinkwhat he meant was that it was not easy, because of the amount of tradingthat people were trying to do, to get through to the market makers. Andindeed there were times when we under the rules of the Exchange absolvedthe market makers for short periods of time from the obligation to trade atthe prices they were posting. That may all seem to be very mechanical, butI think it is quite important to just appreciate the nature of the changes inprices and therefore changes in equity dealing prices that were happening.It was possible, still is possible, under the London system to have what PeterHolloway was referring to, which is big volatile price changes with verylittle turnover. During that week there was in fact very heavy turnover bycomparison to what we had been accustomed to in the earlier 1980s, but Ithink nothing like the volume of turnover which was taking place in theUnited States.

I would like to say one or two further things, but this is not so muchabout the market as about what did not happen. As Peter has alreadymentioned, we at the stock exchange were at the very tail-end of thearrangements which had existed for 40 years or so previously, where wewere the regulator, we had a membership who were all bound in together,and the term which has become so customary and well-used since, capitaladequacy, was scarcely thought of. We simply controlled the firms' capitaland made sure that they were able to meet their own obligations. Now, quitea lot has been said today about confidence. I think it is fair to say that hadthere been a failure in the market in the immediate aftermath of the crash,then confidence would have been more badly damaged than it was andmight have been much slower coming back. The fact that there was nofailure is not entirely accidental, and I would attribute it very largely to thefact that our own surveillance division was able to monitor individual firms,having identified those which were in a poor state, those which had got intoa position of a client failure possibly bringing them down. Monitoring wasdone on a daily basis, with very close attention to a few susceptible firms.And the few firms that were particularly susceptible in the first place ofcourse were the market makers. The market makers had suffered very badlosses, in part due to the fact that they couldn't get to their offices on theprevious Friday, the 16th, after the storm, and it was fortunate that by thistime (that is to say after the Big Bang a year earlier) some of the marketmakers were owned by large banks and were re-capitalised, even in the daysafter the crash, which was not known to the public at all. It was known tous, because we required them to be re-capitalised.

So what did not happen in the London market I think is quite interesting

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and significant in that respect. And one last thing just to mention, which isnot much noticed, is that in Wall Street a few large firms in the month or soafter the crash thought to themselves, 'well, what if one of us had gonedown, what might have been the consequences of Morgan Stanley orsomeone like that failing', and they didn't just ponder that in a philosophicalway, they set about things (and indeed Morgan Stanley was the one whichdid). Morgan Stanley did have as their chairman Lord Richardson of DuntisBourne, and he organised a group of eminent people not much knownhitherto, or indeed since, called the Group of Thirty, into stimulating aworld-wide revision of the equity settlement arrangements. Very mundane,very boring, but a failure in equity settlement could have caused a muchworse position in New York, and indeed Lord Richardson mobilised thefirms in the United States and in London to agree upon some standards forsettlement, which were then brought in a number of countries, which camein rather later in this country, which were all based upon a rolling settlementand a much more rapid settlement. So again I am talking about things whichdid not happen, but things which did not happen were quite significant.

BURK: And interesting when it did happen, which I am sure most of us didnot know about. Michael Jenkins?

JENKINS: I do not have a lot to add. I would not disagree with the analysisof the futures market. Incidentally, I did not actually say that London wascalm, I merely said it was not quite as panic-stricken as New York! Therewas undoubtedly a lack of maturity in the equity options and the indexfutures market, so you did get mis-pricing of futures and options onoccasions. We did not experience, for reasons which Jeffrey has mentioned,the extent of programme trading in London. One of the interesting thingsthat happened, which did not get very much publicity in London, was theresult of high activity in the international bond markets. US futures marketsoperate price limits, whereby if there is a movement of so much then themarket closes. Now in London we have never embraced price limits; wefeel that when the market is moving that is the time when people want themarket to be open, and it was quite interesting that on the Monday, theChicago Board of Trade's US T-bonds went limit down, futures contrast hitthe price limit and the market closed. London, who also traded T-bondsfutures - not frightfully successfully - had an avalanche of activity, which Ithink we coped with quite well. But it really opened the eyes of theAmericans, here was a really international market: that actually if themarket in Chicago was closed then there was somewhere else in the worldthat banks could go and trade. This triggered a debate, subsequent to thecrash, as to whether London should have trading halts, and should the

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futures market and the stock market be co-ordinated. After some debate,London decided that no change was needed.

I think the other thing that caused some panic in the US was not so muchthe short-term impact, but whether lack of liquidity would prejudice thesettlement process. Many US futures members had off-setting positions ondifferent exchanges. But they were cleared through different clearing housesaround the States. Therefore it was difficult to establish the real risk ofdefault. In London, the Bank of England ensured close co-operationbetween LIFFE and the stock exchange. It also helped that all the futuresmarkets were cleared through one clearing house, the London ClearingHouse, and therefore it was easier to assess where there were going to beproblems when settlement came up, particularly at the end of the monthwhen the options expired on the stock exchange. On the whole settlementwent pretty well and there were no defaults. I think that since then probablywe have got better mechanisms in place to handle that sort of risk.

BURK: Did any market close apart from Hong Kong?

KNIGHT: New Zealand.

JENKINS: I think quite a number of markets closed temporarily, but notLIFFE.

BURK: And was there any long-term impact or implications for them, ordid people just forget that they had closed?

JENKINS: Not really. But in Hong Kong, where the stock exchange andfutures market closed for a couple of days, there were some real problemswhich took months to sort out.

KNIGHT: The point Michael [Jenkins] is making is about, to use a wordyou did not use, the use of circuit breakers. Circuit breakers are thingswhich the New York stock exchange uses, and they are pre-set limits bywhich a price may move before the system is switched off and you are notallowed to deal. And we have taken always the absolutely opposite view forthe reason, as Michael said, that we think when the price is moving that isthe time when people on both sides get to want to deal and are insistent onmarket making being permitted to deal, so that markets continue to operatecontinuously without being artificially interrupted.

MIDDLETON: And it makes not a blind bit of difference: people just dealon some other market.

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JENKINS: That is the point. You can make an argument that investors needtime, at times of rapid price movement, to take stock calmly, and to facilitatethis it is a good thing to have the market closed. But the problem is that thereis going to be some market in the world that is going to be open, andtherefore closing markets is probably fairly pointless.

LAWSON: One or two observations. One of the interesting things is that,as Tony Coleby said and Sam Brittan said, and they are absolutely right,although many people were thinking that the market had got toextraordinary heights in 1987 - as indeed it has now - and that there wasbound to be a correction, they had been thinking that for some time and itdidn't happen. So they went on buying. And if you look at what the pensionfunds did in the United Kingdom, the biggest professional investors in thewhole of the United Kingdom, pension fund investment in equities, whichhad been very high, was at its highest in the quarter immediately before thestock market crashed in October 1987. So you say if this is howprofessionals operate, what are we going to do about it? I don't think thereis anything you can sensibly do about it, except make people more awarethat that is what financial markets are like and that is what the stock marketis like.

I do believe that, because the foreign exchange market does have abigger distortionary impact on economies for various reasons - bigmovements in the foreign exchange markets are more likely to lead toprotectionist forces if a currency becomes greatly overvalued, and that issomething that always concerns me - there is a case for trying to get somekind of agreement between the authorities of the major countries to exert astabilising influence on the foreign exchange market. Very difficult, but Ithink it is worth trying, particularly if the Americans are prepared to playball: if they are not, you can forget it. And during that time of course JimBaker's position, as we have said, was equivocal.

But as for the stock market - no. I am a strong believer in the marketsystem, because I think it is, for a number of reasons, the least bad systemthat can be devised. But so far from the market being always right, in onesense the market is always wrong. If the market were not wrong, therewould never be any reason to buy a share or sell a share, because the pricewould always be exactly right now. So everybody is betting on the marketbeing wrong. It is the system that is right, not the market, and it is importantnot to confuse what is on the whole a highly beneficent system, which canbe improved mechanically in various ways as has been said round this tabletoday, with the market itself and the market judgements at any particularpoint in time.

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CAIRNCROSS: We have been discussing things as if the London marketwas not susceptible to influences from elsewhere. Equally we have notconsidered whether New York for instance was susceptible to influencesfrom London. Am I right in thinking that what happened in New York wasnot in the least influenced by anything in London?

MIDDLETON: Yes.

LAWSON: I don't think what happened in New York was influenced byanything that happened in London, indeed the New York market is thedominant market, it is easily the biggest market. But of course quite apartfrom sentiment, there is another reason why London follows Wall Street.Many of the same stocks are traded in all the different markets, sosometimes the distinction is artificial anyway, but if you take a view of theeconomy as a global economy (I am sorry, it's a cliché but it is true), itwould be unthinkable for example that you could buy a multinational foodmanufacturing company, if it had fallen tremendously, in New York and sellit at a higher price in London.

CAIRNCROSS: That is not what is in question.

LAWSON: Right, so the markets go together. For the reasons that SamuelBrittan gave it is not terribly fruitful to say what was the cause, but I thinkit is quite clear that the crash occurred initially on Wall Street, and Londonfollowed. There is no doubt about that.

KNIGHT: There is a mechanical thing which can also be added and whichhas been well-documented, which is that the US institutions during the1980s, and very much more so subsequently in my opinion, have beendiversifying out of their own stock market because they find that therewards in the American stock market are too low for their own needs, sothey go abroad in search of higher revenues, and when something happensin their home market as happened on 19 October 1987, they sell the foreignstock first. That is what they did.

LAWSON: That is right, absolutely.

MIDDLETON: I would just like to make a couple of comments on this.First of all, it seems to me that all long runs are a series of short runs, it isnot just in the financial markets. I think it is also true that any long-termtrends are likely to have a certain amount of amplitude about them on a day-to-day basis. And I think the feature of the financial markets is that these

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fluctuations tend to be greater, but that is because they are very muchinternational businesses, with a huge number of players, and you have gottwo influences working at the same time. There is the real economy there,which I suppose is producing the long-term basis, but there are also changesof view between the prices and benefits of different financial instrumentsround the trend, and there is also the fact that people behave the way theybehave. If you are in one of these markets, whether you are a trader orwhether you are actually an investor, you have got the same choice that themarket has got: you can either go with the market, or you can take a contraryview. I don't quite see how you can prevent in these circumstances thingsovershooting and coming back, because this is not pure speculation, it'svery sensible behaviour to go with the market until you sense it is actuallygoing to break. The trouble is, the markets move very quickly when they dobreak, and you have got to be very clever not to be hit.

So I really doubt whether, if you want the system, there is much you cando about it. If you consider the instruments for example that the governmentcould use to deal with it, it has not got all that many. It could fiddle aboutwith interest rates, which is extremely unlikely to achieve the effect andwould probably make it worse. It could fiddle about with fiscal policy,which would almost certainly make it worse. Or it could resort to regulation,of which there has been an immense amount, which does not very obviouslyreduce the volatility of markets at all, because it is very difficult to direct tothat sort of purpose. I think that, at root, I rather agree with Nigel Lawson.I think that this is just a feature of very, very large markets. I do think theyfeed off each other, to answer Alec [Cairncross]'s point, so I do not thinkthey are unconnected with each other. I think that in this case the largestmarket went first.

CAIRNCROSS: The discussion was as if all markets behaved separately,one critical panic in one market, another panic in another market, and thatis not how life goes on.

LAWSON: I do not think any of us were talking in that way.

CAIRNCROSS: Okay, but that was not the argument before.

BURK: I didn't want to break the flow of what I found an extremelyinteresting discussion, but I know the paper was asking questions aboutpolicy-making, inter-relationships between the markets and the Bank ofEngland, the Bank of England and the government, and so forth. I think theway we can usefully approach this is perhaps looking at the separate butequal and connected incident of the BP share flotation, in which many of

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these elements were involved. Lord Lawson, if you could give an outlinefrom the political point of view, and it would be nice to have the Bank ofEngland's view on this as well.

LAWSON: Let me just say briefly to Alec Cairncross that I am glad hemade his intervention, because if any of us did create the impression that wethought there were a whole lot of totally separate events which by purecoincidence happened to occur at the same time, that was certainly not whatI think any of us intended to convey. It would have been a ludicroussuggestion, which none of us would make. There is indeed a single worldfinancial market, and if anybody did not realise that before October 1987they certainly realised it afterwards.

The BP flotation which you asked me to say a few words about wasperhaps peculiarly British, although even that had an internationaldimension as well. I will be very brief, as I have given a full account in mymemoirs. We had decided on this huge share offering in BP; it was not aprivatisation in one sense, because BP was already independent in policyterms of government and was technically in the private sector, neverthelessthe government had a huge residual shareholding which at that time wasworth in excess of £5 billion. At the same time BP thought it might be agood idea to have a rights issue and raise another £1.5 billion for its ownpurposes, so there was a total of something like a £6.5 billion share offering,which was the biggest aspidistra in the world at that time. The short story isthat we did the pricing before the crash ...

BURK: 14 October.

LAWSON: and had it fully underwritten and - in the United Kingdom,because we have a better system here in that respect - sub-underwritten aswell, all completely before the crash, and the only complaints I had at thetime were from those who had been told that they couldn't be in on theunderwriting party.

MIDDLETON: That is quite right, much to his credit.

LAWSON: And the underwriting commission was the lowest there has everbeen for any new issue, because everybody wanted to underwrite this greatBP issue and therefore we didn't offer a fixed commission, we had anauction and took the lowest tender. Then of course the stock market crashhappened and the issue was beached. The price at which it was underwrittenwas the price at which it was offered to the public, on a part-paid basis, butthe point was that this was of course significantly higher than the price

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rating in the market. The question then was whether the issue should bepulled. I took the view that there was no reason on earth to pull it, you don'ttake out an insurance policy and then not claim on the insurance policywhen the thing you are worried about, the risk that you are insuring against,actually occurs. But I did feel that because of the fragile state of the marketit would be sensible to have, and I remember discussing this with Peter atthe time, some sort of arrangement to put a floor under where the marketthen was, so that if it went any lower than it had gone following the crash,then the authorities in the guise of the estimable Bank of England acting onbehalf of the government, would buy in stock.

And the whole thing worked. But we were under tremendous pressure topull the issue, we had enormous legal complications, the underwriters triedto get out of their legal obligations. The pressure came from across theAtlantic, the Americans and the Canadians, because they don't have thesystem of sub-underwriting there, therefore the underwriters themselveshadn't laid off any of the risk and they had a much heavier risk, and so someof the institutions were sitting on quite big losses. In one case in Canada itled to the collapse of the institution, which had to be then taken over. Therewere a lot of crocodile tears from the Americans, who came over here andsaw Peter (I didn't want to see anybody at all, that's what you havePermanent Secretaries for, he was far better at handling these people than Iam!) and said how terrible it had been. Quite apart from the principle of thematter, I felt that it would have been very, very bad for the standing of Cityof London, and I felt this very strongly, if it seemed that it could not weathera crisis of this kind. It was very important, it seemed to me, to save thereputation of the City of London, and it was saved. But anyhow, what the USunderwriters had also done, immediately following the crash when there wasa big move out of equities into bonds, and this goes for pretty well all the bigAmerican houses, Goldman Sachs and Salomons and the rest of them, wasthat they had all very sensibly taken big positions in the bond market andthey had made huge profits on their positions in the bond market. So theywere far less financially threatened than they pretended to be.

Not that it anyhow would have influenced me greatly had they beenthreatened, because I felt that so long as the floor was put under the pricethat was as much as could be expected and that would solve the problem.Mike Wilson, who was then the Finance Minister of Canada, who had goneon Canadian television to say 'this issue must be pulled, it is a crisis, thewhole Western finance system will go down in flames if it isn't',subsequently wrote to me and thanked me for what we had done in theUnited Kingdom and said it was all fine and we were quite right. TheAmericans tried extraordinarily hard to put pressure on us. Having failed onthe official Treasury net Jim Baker rang me, and I liked Jim Baker very

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much, but I said 'sorry, I am not going to do this'. They then used the WhiteHouse net behind my back and got in touch with Margaret Thatcher throughthe White House and said 'the whole Anglo-American relationship is injeopardy' and all the usual things. So I had an interesting meeting with thethen Prime Minister, but I am glad to say that after we had gone over thething together she took the view that this was my business and she didn'twant to get involved, so we remained where we were.

But it was an interesting time. The Bank of England, for whom I have ahigh regard, a high respect, did not I think cover itself with glory on thisparticular occasion, if I may say so Tony [Coleby]. The Bank of Englandlistened too much to the eloquent advocacy of Michael Richardson13 ofRothschild's, acting as head of the underwriting syndicate, and the Bankgave me the advice, which was rather embarrassing legally at the time forreasons that Peter well knows, that ideally the issue should be pulled andthat if it was not pulled there should be not the floor price I had in mind buta buy-in price well above where the shares were, which seemed to me to bevery improper and indeed I think it was Peter's view as Accounting Officerat the time that that use of taxpayers' money was not something which hecould possibly sanction. And I was very glad to hear him say that.

Anyhow, it all ended happily, except we had the problem that there wasone institution which could see a bargain when nobody else could, and thatwas the Kuwait Investment Authority. The Kuwait Investment Authority,acting on behalf of the government of Kuwait, bought up a huge chunk ofover 20 per cent of BP, by just going into the market and buying at the highlydepressed price following the crash. So we exchanged one problem foranother, but I am glad to say we were eventually able to solve that one too.

MIDDLETON: It was extremely difficult to get BP out of the room forquite a long while. Just to add one point to that. There was one very, veryinteresting issue in all this, which is really about the nature of underwriting.We regarded these premiums that we were paying for the underwriting, eventhough it was a fairly low one in the case of BP simply because of thecompetition to get into the deal - 1 got some of the nicest letters from peoplewho had written me furious letters before about not being in this deal, abouthow wise I was to turn them down! But the interesting thing is, in theunderwriting contract there was a force majeure clause, and the question is:is a market crash force majeure! It never occurred to us it might be, becausethat is what we thought the insurance was against, but the market actually,at least the underwriters certainly, took really a very different view. So therewas an interesting philosophical issue, about why on earth you underwrotethese things in the first place. I can never quite understand why thegovernment did it, because we do not insure much bigger risks than that,

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like someone dropping an atomic bomb on us. In fact we very rarely insureanything. We just did this, because it seemed normal market practice, and itis fairly astonishing to be told that it is also normal market practice not topay up! So there was this difference.

KNIGHT: What you were doing was selling a large stake of a company inwhich you had a large holding.

LAWSON: We were selling our entire holding.

KNIGHT: Every time there is a market downturn, somebody is caught withan issue in midstream. But it is usually the company, and the company thenhas a different aspect on whether it should pull the issue or not, and veryoften an issue does get pulled. In this case you were the vendor. Everythingyou say about the right under the contract is undoubtedly true, but you didnot have the same sort of standpoint in relation to your own future shareprice which a company making an issue at a crucial time does.

LAWSON: I do not think actually there is the difference you state, for tworeasons. First of all the force majeure clause in the underwriting contract wasnothing peculiar to us, in fact maybe we should not have had it. It wasexactly the standard force majeure clause in any underwriting contract, so itis all on all fours with that. And secondly, we did have to consider verycarefully, because we had an ongoing privatisation programme. We did haveto consider very carefully whether by letting the issue go forward and theunderwriters taking a big hit on these particular shares (although as I say onother things they made a profit), whether this would jeopardise the rest of theprivatisation programme. So we did have to think in a rather analogous way.

COLEBY: Can I come in briefly here. It was the BP problem that causedEddie to be kept at base and me to go and stand in his shoes in Switzerland,so I did not see this at all close to and I was not aware of some of the thingsthat have been spoken of. But what I do recall about it was that severalminds were addressing this possible solution of some sort of stop-lossarrangement, including some at the Bank, and that one of the problems thatarose after that had been successfully applied was whose brilliant idea itwas, and the trouble is it was multiple. That I think was one of the thingsthat got picked up in the media and was a source of friction.

BURK: One thing that was interesting was that the Bank not preciselychanged sides in your terms, but that it reverted almost to its old style ofbeing a spokesman for the City, in a sense.

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COLEBY: Well, I am somewhat unsighted on that. I think that the Bankwould certainly have wanted to find ways of addressing the problem thatwould be created if this UK operation were to be the source of a substantialfailure of financial institutions elsewhere. We could not be indifferent.

LAWSON: I do not think the Bank was acting so much, and maybe I wasresponsible for injecting that notion, as spokesman for the City. It did listenof course to Michael Richardson of Rothschild's, who was the chairman ofthe underwriting group, but the City was very divided. The underwritinggroup was divided, they were not unanimous on having it pulled. NicholasGoodison, the chairman of the stock exchange, was extremely robust insaying the issue should go ahead. Again, the Association of British Insurers,who spoke for a lot of the sub-underwriters, came out publicly, and I wasextremely grateful to them, saying 'this issue must go ahead, we can take itand should'. I think that the Bank was much more, although there was alittle of that old-fashioned City spokesman role going on, in another of itstraditional roles, and that is being a member of the fraternity of centralbankers. It was influenced by what the chairman of the Fed said, it wasinfluenced by what other central bank governors said - 'we've got problemshere, if the government goes ahead with the issue it might make ourproblems worse, so can you lean on the government and get them to pull it'.I think it was much more that. And I was very conscious too of whetherthere was a risk of exacerbating the effects of the stock market crash, but wejust took a different view from the view of the Bank of England on that, andI think that, if I may say so, events proved us right.

COLEBY: I think the Bank was very happy with the outcome.

MIDDLETON: The point I was going to make was the last one. The Bankof course is part of an international central bank network and very, verysensitive to what was quite a lot of pressure coming down that route. Thesecond thing is, I don't find it old-fashioned or all that surprising that theBank should be closer to the City and more likely to represent its view andto a degree want to protect it. It seems to me that is part of its remit and youwould expect that. At the end of the day, by this process, we more or less gotit right, and as that doesn't happen all that often it was really quite pleasant.

BURK: Perhaps on that rather nice note I might ask participants if theyhave one final comment about any of the aspects of the discussion today.

KNIGHT: There are numerous other aspects that one could have broughtin. I will just say that the system which we created to follow the old stock

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exchange system, when Big Bang took place the year before, although it hadthe appearance of a great change, had a lot of points about it which werecloser to the old system and it has proved robust and has continued until thepresent. Another such seminar could have examined more closely the eventsof 1986, and the implications of what I consider to be the greatest event ofthe middle of the 1980s, which was the integration of the London StockExchange with the American houses in London. There is your next seminar.

MIDDLETON: I think the BP thing led to an extra element of fascinationhere, but I actually think Alec was quite right, as Nigel Lawson said, not togive it a very prominent place in his book.

LAWSON: I think that is right, and I think the reason for that is what wehave said before. If someone says 'is there going to be a similar crash onOctober 19, 1997' - maybe there will be, maybe there won't be, I do notknow. Some time or other the market is obviously going to correct itself -we are talking about the world market, the stock markets, not just Londonhere. But the important lesson of 1987 should be that it is not unimportant,but that it has a great deal less bearing on whether the world economy issound or healthy and whether there is going to be a world recession or not,than people seem to imagine. It is not an unimportant event, but I think 1987should have shown that there is not - there certainly wasn't then and I don'tbelieve there is now - this direct link between what happens in the stockmarket and what happens in the world economy.

NOTES

1. The Bank of England is located on Threadneedle Street.2. Eddie George, Executive Director, Bank of England. 1982-90.3. Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System since 1987.4. Michael David Kandiah, 'The October 1987 Stock Market Crash - Ten Years On',

Contemporary British History, Vol.13, No.1 (1999), pp.133-40.5. Organisation for Economic Co-operation and Development.6. Edmund Dell, The Chancellors : A History of the Chancellors of the Exchequer, 1945-90

(London: HarperCollins, 1997).7. Group of Seven (G7) industrialised nations consisting of Canada, France, Germany, Italy,

Japan, the United Kingdom and the United States of America.8. James Baker, Secretary of US Treasury, 1985-88.9. Gerhard Stoltenberg, Federal Republic of Germany's Minister of Finance, 1982-89.

10. Barclays de Zoete Wedd.11. European Monetary Union.12. Paul Volcker, Chairman, American Federal Reserve Board, 1979-87.13. Sir Michael Richardson, Managing Director, N.M. Rothschild and Sons, 1981-90.

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Witness Seminar II: The October 1987 stock market crash

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Transcript of Witness Seminar II: The October 1987 stock market crash