The declassified dossier also reveals how Mrs Thatcher defended Sir James' right to voice his opinions - although she did not indicate whether or not she backed his views - and brushed off calls for a public inquiry.
In a note to the Home Office, her private secretary wrote: "The Prime Minister has commented that it would be outrageous if the Chief Constable were required to seek clearance for all his public speaking engagements." Sir James was also president of the police chiefs' association Acpo and his inflammatory comments also raised the ire of his colleagues.
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Sir Lawrence Byford, the chief inspector of constabulary, described a hastily convened meeting of chief constables from other forces.
"Mr Anderton was told that some of his recent public statements had brought ridicule upon both the association and the police service and had helped fuel the case of left wing militants." He added: "He is his own worst enemy.
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The council, he wrote, was used to the chief constable expressing his "unusual personal views" but "on this occasion James Anderton has just gone too far".
"The chief constable is irresponsible and must be brought to task for what should be seen as a serious breach of discipline," he wrote.
and in the long term the position is untenable." And, while primarily concerned with smoothing over the row, Home Office staff also considered what action they might have to take.
Sir Brian Cubbon, a senior Home Office civil servant, wrote: "The private message to Ms Anderton should be, after much concern for his position, that the Secretary of State is bound to be concerned ...
Although the authority did not have the formal power to sack the chief constable - a vote of no confidence would make it impossible for him to continue.
A memo drafted by the police authority clerk Roger Rees warned that if the chief constable did not reassure authority members then a vote of no confidence would take place.
Meeting with the Home Office in January 1987, Mr Murphy said the authority wanted Mr Anderton in future to seek clearance before he undertook public speaking engagements.