After being accused of ‘an attack on democracy’, Cromer asked if he should resign rather than go against his conscience – to which Wilson adroitly replied that ‘if the Governor resigned, the pound would be a casualty’. Shortly before the meeting broke up, with Cromer asserting that the Bank had ‘a clear statutory responsibility to act independently as well as to advise’, the knowledgeable prime minister riposted that if it tried to do so in the present situation ‘the history of the Bank of England which had begun with Governor Houblon would end with Governor Cromer’. Next day, a Thursday, Bank rate remained unchanged; and Cairncross the following week reflected that Cromer had ‘overplayed his hand’, not least ‘by suggesting adverse market reactions where none had shown themselves’.13
Cromer was by now approaching the end of his five-year term. Late the previous year, following a conversation at Basle about his intentions, he was recorded as ‘waiting to see whether an election will be held this spring and, if so, what the results of the election will be, as this could have quite a bearing on his decision’. By March 1966, with Labour on course for re-election, Cromer had probably made up his mind to go, and in April he informed Callaghan to that effect. Would he have been reappointed anyway? At best it is doubtful, and it is also doubtful whether grief was unconfined among many of his colleagues. ‘I think various of us felt he was playing the hand wrong,’ recalled one of them, John Fforde. ‘He was playing it almost as a Tory politician and not as it should be played, with a Labour Government by the Governor of the Bank of England.’ Jasper Hollom, who had joined the Bank thirty years before Cromer’s departure and was chief cashier during most of his governorship, agreed, reckoning that he had ‘become increasingly incapable of a dialogue with Whitehall’ as he ‘fired off immense amounts of ammunition at them, often actually without cleaning the barrel before he put another round in’.14 The truism about someone being his own worst enemy does perhaps apply in this case.
It is possible that at least six people were, at one point or another, in the frame as likely successor. One, H. C. (‘Nugget’) Coombs, was a Keynesian-minded Australian central banker, well regarded by Wilson and backed by the Economist; another, the Court’s favoured candidate, was John Stevens, a former executive director now in Washington; a third, backed by George Brown, was the highly regarded Sir Eric Roll, currently at Brown’s Department of Economic Affairs; a fourth, at least according to himself, was the press magnate Cecil King, a non-executive director since 1965; a fifth was Cromer’s deputy, O’Brien; and finally, as sounded out by Callaghan, there was Reginald Maudling, recently defeated (with some covert assistance from Cromer) for the Tory leadership. In the end it went to O’Brien. He had, in Callaghan’s admiring retrospective words, ‘entered the Bank of England on the bottom rung without the advantage of family or school’ and was ‘modest, quiet, considerate of the views of others but firm in his own beliefs’, as well as ‘technically proficient’; O’Brien himself was surely correct in judging that his meritocratic background appealed to Callaghan and Wilson, as did the fact that he was not part of the City establishment in the same way as Cromer. The appointment was announced later in April. ‘Good plain cook: won’t argue about the menu’ was reputedly the reaction of Lord Harcourt (that possible alternative to Cromer), while the Economist offered a cautious welcome: ‘He becomes Governor because he has fewer enemies than his rivals. The same negative virtues produced surprising results for the Labour party in 1935 … If Mr O’Brien can be an Attlee of Threadneedle Street, he could find no better model.’ Or more succinctly, as the Fed’s William McChesney Martin would call him: ‘a tough little scrapper’.15
O’Brien took his seat in the governor’s room in the parlours at the start of July 1966 – a month of English footballing glory offset by a major sterling crisis. ‘Sterling has been under speculative pressure in the exchange market, reflecting such diverse factors as the seamen’s strike and its high settlement cost, the heavy loss of exchange reserves reported for June, the rather large trade deficit in June, and a renewed discussion in the press about the possibility of devaluation’: the sober report by the Fed on the 14th summed up the situation well enough. The new governor had already sent Callaghan a six-page memo, calling for deflationary measures but adopting a notably less hectoring and censorious tone than his predecessor; and on the evening of Friday the 15th, after a rise in Bank rate from 6 to 7 per cent had failed to stop the attacks on sterling (the Bank active all day in the foreign exchange market and losing $140 million), he put his case in person to Wilson and Callaghan:
If the British Government were to devalue [recorded the official minute], it would be regarded by overseas countries as a device by the Socialist Government to avoid having to face the real decisions which were essential if our payments were to be brought into balance. This view he restated on three occasions, and he used a graphic phrase, namely that devaluation would be regarded as the Socialist Government’s ‘recipe’ for dealing with a situation which in fact demanded unpleasant internal measures. On the other hand, if a Socialist Government could maintain the parity of the £ in spite of the present pressures by introducing tough measures, it would once and for all demonstrate worldwide its determination to solve the problems without recourse to devaluation. From this he believed the Government would gain enormous benefit.
On Tuesday the 19th, following the prime minister’s return from Moscow, the Cabinet voted by seventeen to six against devaluation. Next day, Wilson announced a heavily deflationary package – ‘perhaps the biggest deflationary package that any advanced industrial nation has imposed on itself since Keynesian economics began’, reckoned the Economist – and the pressure on sterling began to ease. Wilson would subsequently pay tribute to how, during the crisis, O’Brien’s ‘calm and reasoned advice’ had ‘made a deep impression on my colleagues and myself’; and at this critical moment in Labour’s history, three and a half months after it had won a commanding majority for the first time since 1945, the governor’s apparently not unsympathetic stance – so different in feel if not necessarily substance from his predecessor – may well have been decisive in stiffening ministerial resolve to place the needs of sterling above those of economic expansion.16
Through the winter of 1966–7, although O’Brien intermittently succumbed to bouts of governor’s gloom (‘he harped on the rising tide of Government expenditure,’ noted Cecil King in December in his tell-all diary), the balance of payments improved, interest rates fell, and there was less talk of devaluation. Then in the early summer of 1967, not a summer of love in Threadneedle Street, the mood music changed decisively, against a backdrop of sharply deteriorating trade figures, the justified expectation that Britain’s application to join the European Economic Community (EEC) would fail, and the Six-Day War, accompanied by the closure of the Suez Canal. ‘The press openly discusses devaluation and some of the papers are strongly pressing for it,’ observed Cairncross in May, while not long afterwards in Paris, safely away from the Bank for an OECD meeting, Kit McMahon confided in Jeremy Morse (an executive director), ‘You know, I think we ought to be devaluing now.’
More generally at the Bank, as the summer wore on and doubts steadily increased about the government’s political determination to defend the pound, there existed perhaps three schools of thought: those (exemplified by Parsons, now deputy governor, and Bridge) who, on moral grounds as much as anything, remained implacably opposed to devaluation; those who thought that the time had come to devalue before being forced to do so; and the middle group, which preferred to hold to the parity as long as possible. The governor himself oscillated between the ditchers and the hedgers. ‘O’Brien drew me aside after Court to talk about the political situation,’ recorded King on 3 August. ‘He is acutely unhappy, living from day to day … He is afraid that the idea of devaluation has gathered so much momentum that it may prove irresistible.’ O’Brien was no less pessimistic, even fatalistic, by the end of the month, not least following the government’s de
cision to relax hire-purchase restrictions. ‘I think he has given up hope of maintaining the exchange value of the pound,’ recorded King after ‘a long talk’ with him. ‘He thinks under pressure ministers are thinking more of full employment and less of our financial position.’ The autumn brought little relief. Bad trade figures, a dock strike in London and elsewhere, an EEC report questioning sterling’s long-term future as a reserve currency – it was all too apparent that sterling was now on an irreversible one-way ride towards devaluation. Even so, when O’Brien saw Wilson on 1 November, with sterling being sold heavily, he was still unwilling to recommend that fateful step.17 Given his perspective on the politicians and what he saw as their lack of will-power, he wanted them to make the call.
Over the next few weeks, events moved swiftly – more swiftly, and unpredictably, than anticipated by the Bank/Treasury group (code-name FU, short for ‘follow up’ but accurately reflecting official feelings) that since spring 1965 had been preparing the detailed mechanics in the event of devaluation. ‘After three years of incessant borrowing and ever-rising debt Jim Callaghan felt he had come to the end of the road and I agreed with him,’ was how O’Brien would recall his key meeting with Callaghan on Saturday, 4 November. At Basle over the following weekend, the governor managed to persuade his fellow central bankers to accept the principle of a 15 per cent devaluation without any retaliatory devaluation by themselves. On Thursday the 16th, after the final political decision had been taken to devalue on Saturday the 18th, and after O’Brien had told the Court that (in King’s words) ‘money had been pouring out since May’ and ‘we had got to the end of our present resources’, a question in the Commons from a Labour backbencher called Robert Sheldon about a possible $1 billion loan from abroad made it obvious to the rest of the world, from Callaghan’s evasive reply, that devaluation was about to happen, giving speculators an easy killing next day. The Fed’s memo recorded graphic telephone conversations with those in the thick of the action at the Bank:
6.55 a.m. (New York time). Robson said that they were holding the rate at 2.7824 with heavy selling going on all day. He said they had been supporting the forwards to a small extent but had been backing away as the pressure built up. He said that so far they had lost something close to $300 million.
8.45 a.m. Sangster said the money was still going out with the spot total now $600 million and forwards $100 million.
8.55 a.m. Bridge said that gold was now up another $7 million, bringing a total for the day to $43 million. He said that a great deal of sterling was being sold that he was sure people did not have.
10.25 a.m. Sangster said the total was now $800 million spot and $47 million on gold.
Altogether, according to Forrest Capie’s account, the Bank spent some $1,450 million defending the rate, for the last time, on this long bad Friday – a day on which Bridge’s market report was just one word: ‘Crucifixion’. ‘The pound was under siege in the world’s foreign exchange markets yesterday,’ began The Times’s patriotic front-page report next day. ‘In London, the Bank of England battled courageously, non-stop, in an attempt to beat off the biggest selling wave ever seen.’
On Saturday evening, the Treasury announced the pound’s devaluation to $2.40; on Sunday evening, Wilson made his ill-fated broadcast declaring that devaluation did not mean that ‘the pound here in Britain, in your pocket or purse or in the bank, has been devalued’; on Monday afternoon, Callaghan announced the accompanying package of measures, involving expenditure cuts significantly smaller than O’Brien had wanted. It was just over eighteen years since the previous devaluation – and, writing to an American correspondent a week or so later, the deputy governor Maurice Parsons, who had been in a state of virtual denial almost up to the announcement, expressed himself ‘acutely embarrassed’ and ‘deeply regretful’. Could the Bank have played its hand better? Quite apart from the larger question of whether it would have been more sensible to have recommended devaluation in July 1966 or even in October/November 1964, which it probably would, ‘the immediate timing’, reflects Capie in his authoritative account of the devaluation saga, ‘was poor even apart from the mess of the Chancellor’s response to the parliamentary question’ and ‘the end of October would have allowed a more orderly process’, whereas ‘by mid-November it was increasingly costly and difficult to stick to the planned timetable’. His overall verdict, moreover, is damning:
One of the principal failings in the operation as far as the Bank was concerned was their obsession with psychological warfare. Their pride in market skills and the lack, for so long, of serious economic input contributed to a concentration on manipulating the market. There was no economic model employed in the discussion of devaluation in the Bank. There was no mention of the monetary approach to the balance of payments. The analysis used was the elasticities and absorption approach that had been used in the analysis for the 1949 devaluation.18
Or put another way, if the Bank of 1949 had still been recognisably Norman’s Bank, the Bank of 1967 was still recognisably Cobbold’s Bank.
There was no shortage of alarums and excursions during the year after devaluation – starting with the tumultuous gold crisis of March 1968, as the gold pool (which the Bank had been operating since 1961 on behalf of most Western governments) came under intolerable strain from speculators convinced that the dollar was no longer strong enough to hold gold’s price at $35 an ounce.19 During the week beginning the 11th, so much gold had to be flown from Fort Knox to London that eventually the floor of the Bank’s weighing room collapsed; and that Friday, following a request from the Fed supported by O’Brien (but not by Bridge), the new post-devaluation chancellor, Roy Jenkins, agreed to the temporary closure of the London gold market – eventually reopened at the start of April after a meeting of central bankers in Washington, attended by O’Brien, had agreed to a two-tier system for gold, in effect creating an artificial distinction between official and private transactions.20
Then, for light relief, came Cecil King’s attempted coup d’état in May. A manifestly political appointee to the Court, resented from the start by Cromer and then O’Brien, that non-executive director had become convinced by the spring that there was a conspiracy afoot to conceal the gravity of the financial situation facing the country, specifically in relation to the state of the Bank’s reserves. On 9 May, the day before he tried to overthrow the Wilson government via revelations in the Daily Mirror about what he claimed was the true position, he tendered his unmourned resignation as a Bank director. ‘His scorn for everyone was lofty and unending,’ recalled O’Brien. ‘Not by a long chalk one of Winchester’s most attractive products.’ Even so, and despite the almost capital crime of disclosing what had been reported in confidence to Court, King was correct in his allegation that the reserves figures were fixed, especially by the non-reporting of forward transactions which could be huge. Indeed, it was said during this period that at any one time there were at least five versions in play: the position in the dealing room; the position as reported to the chief cashier; the position as reported to the governor; the position as reported to the chancellor; and the position as published.21
O’Brien himself, as the summer unfolded, was increasingly preoccupied by the problem of how to run down in as orderly and honourable a fashion as possible the sterling area, whose belated demise had been made inevitable by devaluation. Australia was identified as the key country; and, fortified by the recent Basle Agreement (in effect involving the world’s central banks giving the UK a $2 billion credit to enable her in turn to give exchange rate guarantees to all the official sterling holders), the governor set out in late August for secret negotiations, travelling under a false name and smuggled on board a Qantas flight via the freight-loading room at London Airport. The negotiations did the job, with the Australian authorities agreeing not to dump sterling wholesale, and other countries in the sterling area soon followed their example – in effect pledging to keep an agreed proportion of their reserves in sterling and t
hus allowing the Basle Agreement to come into operation. As for the British economy, in some sense the cause of all these difficulties, it did during 1968 – under the notably harsher regime of Jenkins, much encouraged and applauded by O’Brien – very gradually start to give the appearance of improving. Eventually, by the autumn of 1969, it was reasonably clear that the balance of payments situation had, in Jenkins’s retrospective words, ‘fairly firmly turned’. And he also remembered an exchange at around that time with O’Brien: ‘I said, “Leslie, I think there might be some balance of payments honours. Would you like to be a peer or a privy councillor?” I always treasured the reply. He said, “I’d rather be a privy councillor, I’ll get a peerage anyway when I retire.”’22
Honours aside, O’Brien was not just concerned in these years with the travails of sterling. A growing preoccupation was the increasingly vexed area of contested takeovers, which since 1959 had been conducted, in theory anyway, in accordance with the City Code on Takeovers and Mergers, itself the fruit of a working party set up by Cobbold after the Aluminium War. By 1967 it was looking a distinctly threadbare set of guidelines, prompting Wilson that July publicly to demand that the City promulgate ‘formal and clear ground rules’ about takeover battles and ensure that those rules were carried out. O’Brien responded by rapidly getting the merchant bankers into line, telling one that ‘if the City were not capable of putting their own house in order it would be open to me to advise HMG that there was no alternative but to introduce a securities and exchange commission on the American model’. The outcome was a somewhat tougher City Code and the start in March 1968 of what was generally known as the Takeover Panel, both funded and staffed (as well as Mynors being its first chairman) by the Bank.
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