My lasting memory of Alan Walters is a meeting in the Prime Minister's study in 10 Downing Street in July 1989. It was a typically relaxed and informal meeting, Margaret Thatcher, Alan and me, sitting in comfortable armchairs. Mrs Thatcher was being pestered by Nigel Lawson and Geoffrey Howe to join the exchange-rate mechanism; we were there to provide intellectual ammunition for the case against. Mrs Thatcher would constantly interrupt with probing questions - but she totally accepted the economic analysis on which Alan's judgment was based. None of us imagined the immense political drama that would follow from that small private scene.

I first met Alan when he was appointed to a chair at the London School of Economics in 1967. I was an assistant lecturer in the economics department at the time and for a number of years our rooms were next to each other. He was a first-class monetary economist with an instinctive sense of how markets worked. He had published numerous articles that were highly critical of Edward Heath's inflationary policy. He with others (including myself) published in 1973 a critique which infuriated Heath but did not go unnoticed by Geoffrey Howe, Keith Joseph or Margaret Thatcher, all of whom were members of the Heath Cabinet.

Soon after becoming Leader of the Opposition in 1975, Mrs Thatcher asked Alan and myself to stage a debate for the Shadow Cabinet on the pros and cons of incomes policy - he against and me for. He argued that on the basis of the evidence of previous incomes policies this was a futile way of controlling inflation: what was needed - and was later adopted - was a medium-term financial strategy in which government controlled the money supply, curbed public spending and reduced taxes.

From 1981-84 he was chief economic adviser to the Prime Minister and someone whose judgment she came to trust totally. She valued him because of the clarity of his thinking and the fact that he would always speak his mind, regardless of the politics involved. He was someone she could totally trust because he had no hidden agenda of his own. More than that, time and again, whether on inflation, the 1981 Budget, handling the Bank of England, or economic recovery in the 1980s, he was proved right.

Even when he was at the World Bank from 1984 to 1988, Mrs Thatcher was eager to fix up a meeting and hear his views whenever he visited the UK. I never knew her once to disagree with his judgment. The most spectacular manifestation of her confidence in him was over the 1981 Budget. If it had gone wrong, it could have been her downfall.

His reappointment as an official adviser in May 1989 was a less happy period. His advice was trenchant as ever but the press mischievously used old statements he had made about the ERM to sound as if they had been made since his return to Downing Street. Nigel Lawson, the Chancellor, became increasingly frustrated and infuriated and forced the Prime Minister to choose between himself and Walters. She said that was unnecessary and asked him to remain. But on October 26, 1989, Lawson resigned.

I went to the study immediately I heard and found a shaken Mrs Thatcher. It was clear to me that an unelected adviser could not remain in post while an elected representative holding one of the high offices of state had resigned. I argued strongly that Alan should stand down before the nine o'clock news. She agreed and asked me to phone him. It was a difficult conversation. Alan was a friend whose professional judgment I respected greatly. He found the decision hard to accept. I still think, however, that although sad it was the right one.

One can only speculate what advice Alan might have given today in the light of the resurrection of Keynes. I suspect he would have laid the responsibility for sterling's collapse - a reflection of the loss of investor confidence in the currency - firmly at the Treasury's door; in particular because it allowed public expenditure to grow out of control. He would reluctantly have rescued banks but not with such penal costs of borrowing. He may well have felt that the Bank of England has dragged its feet ever since Northern Rock and could be more creative in increasing credit.

Although he was a Manchester liberal at heart, he wasn't ideological when it came to giving advice. I think he could have accepted the need at present for a modicum of Keynesianism or for allowing public spending to rise provided there was a medium-term framework through which the economy could be returned to stability.

Finally, there was Alan the person. He was never arrogant, pompous or vain but invariably modest, courteous and self-deprecating. In argument he always played the ball and never the man. I never once heard him speak ill of Geoffrey Howe or Nigel Lawson. He was totally devoted to Mrs Thatcher and I once remember him telling me: “We'll never see the likes of her as Prime Minister again!”

Although he was the last to acknowledge it, part of the reason for that was his own personal influence.

Lord Griffiths of Fforestfach was Head of the Prime Minister's Policy Unit, 1985-90

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