Till Time's Last Sand

by David Kynaston

  ‘It was the blind leading the blind for a while,’ conceded long afterwards its first secretary (the Bank’s Peter Cooke), and that summer the panel proved itself largely ineffective during the so-called Gallaher Affair – a fierce takeover battle for the Ulster-based tobacco company that saw Morgan Grenfell and its brokers, Cazenove, successfully riding roughshod over the central tenet of the Code that all shareholders in a company being bid for should receive equal treatment. ‘Ultimately,’ declared the Daily Telegraph’s Kenneth Fleet in assessing where the episode left the Takeover Panel, ‘it must be replaced with statutory rules interpreted and administered with statutory authority.’ That, however, was something that O’Brien, and indeed the City at large with its deep, almost atavistic attachment to being left alone to run its affairs, refused to accept; and by early 1969 he was ready to put in place a beefed-up panel with rather more powers. Not everyone was happy, including the top man at Schroders who was also since 1967 a non-executive director at the Bank:

  Mr Gordon Richardson telephoned the Governor to say that he was alarmed at the rumours which were flying round the City about sanctions in support of the Panel on Take-overs. He personally viewed these developments with apprehension, and felt that there would be several people in the City who, while supporting the operations of the Panel, would object in principle to the quasi-legal status of the sanctions proposed. The Governor replied that he understood this feeling, but that the only people he had been able to find to run the Panel were insistent that the Panel be given teeth. The alternative was an SEC.

  O’Brien carried the day, and by spring 1969 the Takeover Panel Mark II was under way, including tough-minded, non-Bank people now running it. Even so, The Times’s headline was still apt: ‘Teeth at last – but how will they bite?’23

  All this coincided with significant takeover or would-be takeover activity on the part of the clearing banks, half a century after it had seemingly been settled for all time that there would be a Big Five of Barclays, Midland, Lloyds, Westminster and National Provincial. In early 1968, with O’Brien and government both supportive, it was announced that the similar-sized last two would be coming together to form National Westminster; soon afterwards, in February, a startled City learned of the intention of Barclays and Lloyds to form a combine, likely to have control of some 48 per cent of joint-stock banking. Again the governor was on board, explaining in due course to the Monopolies Commission (to which reference had been made by government) the key arguments of economies of scale, greater potential for modernisation, less over-banking, and an enhanced size and therefore presence in international banking – at a time, he hardly needed to add, of American banks flexing their muscles, especially in the context of the Euromarkets. What O’Brien was unable to deny was either that the creation of three large banks might well lead in time to a duopoly (that is, if NatWest took over Midland in order to combat the Barclays/Lloyds giant) or, still more damagingly, that (in the words of the eventual report) ‘a duopoly situation would make nationalisation of the banking system easier to achieve and would bring that possibility nearer’. In July, the Commission came out against a merger; and with Jenkins having been told by the governor that although he ‘remained on balance in favour’ he ‘would not feel it necessary to go to the stake about it’, the government accepted that verdict.

  By contrast, where O’Brien did not feel at all relaxed was about major tie-ups between clearing banks and merchant banks, especially after he had been almost entirely by-passed in 1967 when Midland took a 33 per cent stake in Samuel Montagu – to his ‘extreme displeasure’, as he informed Midland’s chiefs. Two years later, in September 1969, he spoke frankly to Hill Samuel’s expansion-minded Sir Kenneth Keith about why he ‘continued to feel that too close an association between individual merchant banks and particular clearing banks was not in the best interests of the City’: partly because such association would make it hard for clearers to access across the merchant banking spectrum ‘the lion’s share of the banking brain power in the City’; and partly because there would be no gain in ‘merchant banking personnel being turned into organisation men of the clearing bank type’.24 In short, the Bank was determined that the City’s barriers – in effect an old-style guild system – would remain intact for the foreseeable future.

  During the turbulent late 1960s – the Vietnam War intensifying pressure on the Bretton Woods system as well as provoking huge protest demonstrations, before one of which Tariq Ali told students, ‘Don’t be surprised if the Bank of England is occupied’ – the most discontented citizens of the square mile were, irrespective of mergers or non-mergers, the clearing bankers. Liquidity ratios, special deposit schemes, ‘ceilings’ for lending: one way and another, they had spent most of the decade with one hand tied behind their backs, seldom free from some sort of quantitative lending restraint, and inevitably they came increasingly to feel that the Bank was not doing enough to protect them against politicians too cowardly to make the cuts in public expenditure that were the real alternative to always turning off the monetary tap. ‘The co-operation of the banks on which we have relied so heavily for so long is sorely strained,’ O’Brien himself warned the Treasury in November 1968, ‘and might break if we try to impose a further restraint on their lending,’ but in vain as yet another round of credit tightening went ahead; and soon afterwards, the chief cashier, Jasper Hollom, recorded a meeting with Sir Archibald Forbes at which Midland’s chairman had ‘made some rather wild remarks, e.g. that we still maintain a pretence in this country of having a private banking system but that it might be all for the best if this façade was torn down without more ado’. Was there a better way of organising things? By the end of the decade, recalls Charles Goodhart (who as a youngish economist had come to the Bank in 1968), ‘the desire to get rid of direct quantitative credit ceilings, generally seen as distortionary and partially ineffective, was widely shared, not only by the banks and the Bank, but also in the Treasury and amongst politicians of all the main parties’. The task then for the early 1970s, he also recalls, would be finding a satisfactory ‘half-way house’ between ‘direct credit controls’ on the one hand and ‘pure reliance on flexible interest rates and open-market mechanisms’ on the other.

  Moreover, complementing this new emphasis on how to implement monetary policy, and perhaps causally related to it, was a new emphasis on that policy itself. ‘Monetary policy suddenly became fashionable last autumn,’ noted the Financial Times’s Samuel Brittan in February 1969; while that same month John Fforde in an internal memo scornfully referred to monetarism (as it was starting to be called by followers of the Chicago economist Milton Friedman) as ‘wishful primitivism, born of exasperation with certain intractable economic problems of modern society’. Still, primitive or not, such views, with their stress on watching monetary aggregates and setting monetary targets, could not be ignored. ‘The Governor said that, despite some dissenting views in the Bank, he was minded to publish Goodhart’s paper in the June Bulletin, with a personal attribution,’ noted Hollom in April 1970 after O’Brien’s meeting with Jenkins and the Treasury’s permanent secretary, Sir Douglas Allen. ‘He thought it a subject on which it would be helpful to put out a study which was of an academic nature rather than a set position taken up by the Bank.’ Allen gave the go-ahead, and Goodhart’s article, ‘The importance of money’, duly appeared in the June issue of the Bank’s Quarterly Bulletin. Forrest Capie has called it ‘a watershed in the Bank’, marking ‘the beginning of some monetary economists’ influence in the Bank’, and so it was. Yet to read it almost half a century later is to be struck by the circumspect tone. ‘Monetary policy is not an easy policy to use,’ conceded Goodhart towards the end. ‘The possibility of exaggerated reactions and discontinuities in application must condition its use.’ His final passage lacked nothing in balance:

  Professor Friedman has argued that the rate of change of the money supply would be a better indicator of the thrust of monetary policy than variations in
the level of nominal rates. To the extent that price stability ceases to be an accepted norm, and expectations of inflation, or even accelerating inflation, become widespread, this claim that the rate of growth of the money stock may be a better indicator of the direction of policy than the level of interest rates takes on a certain merit. As, however, there will always be multiple objectives – for example the balance of payments, the level of employment, the distribution of expenditure, etc – no single statistic can possibly provide an adequate and comprehensive indicator of policy.

  Accordingly, he concluded, ‘basing policy, quasi-automatically, upon the variations in one simple indicator would lead to a hardening of the arteries of judgment’.25

  Large and challenging questions of policy and judgement were sadly outside the remit of the Select Committee on Nationalised Industries at a time when select committees were not yet independent of government. Under the vigorous promptings of the left-wing Labour MP Ian Mikardo, that body had long been itching to scrutinise the Bank, and by 1969 they got their wish from Jenkins – though not without a doughty and successful rearguard action from O’Brien, who, threatening not to co-operate, managed to persuade a reluctant chancellor that it should in essence be a narrowly functional inquiry into how the Bank operated as an institution. Chaired by a Tory MP, Colonel C. G. Lancaster, the Committee began questioning witnesses in April 1969; and between then and March 1970, the governor made nine appearances, stressing throughout the paramount need to retain the Bank’s operational independence, especially if it was to be able to continue to give worthwhile advice to the government of the day. The end-result was an eminently sober report, published in late May 1970 and recommending that the Bank should behave more like other nationalised industries, with the publication each year of a full set of accounts. ‘The Old Lady of Threadneedle Street has been told to strip her bonnet and shawl and put on a see-through dress,’ optimistically declared the Daily Mirror, but O’Brien soon afterwards told the Treasury that he was ‘not too unhappy’ with the report and its reception. Or as he would later recall, his only significant disappointment concerned Mikardo, who had used the report’s publication to displace Colonel Lancaster and chair a press conference. ‘He proceeded to say some pretty rough things about the Bank, not at all in keeping with his courteous behaviour during our long examination. Once again the vulgar political animal had won the day.’

  As it happened, the report coincided with a torrent of vulgar politics: the 1970 general election. The Bank of course stayed studiously above the fray, but it was still a resonant moment when on 1 June, just over a fortnight before polling day, Cromer appeared on Panorama in order to dispute Jenkins’s claim that Britain now had one of the world’s strongest balance of payments positions. ‘There’s no question,’ he insisted, ‘that any government that comes into power is going to find a much more difficult financial situation than the new Government found in 1964.’ Next day, publicly responding to Cromer’s comments, Wilson understandably compared the current surplus with the £800 million deficit he had inherited in October 1964. ‘I do not see’, he declared, ‘how the most committed politician could describe that as a worsening of the situation.’26 Did the former governor’s intervention make a significant difference to the outcome? Probably not; but, all things considered, he was presumably less than dismayed as it became clear on the night of 18 June that his old foe would be packing his bags and leaving Downing Street.

  ‘I have never been to the Bank of England before,’ recorded one of Wilson’s colleagues in his diary earlier that year, ‘and one really did have to go through about five great iron gates as if one were entering a prison.’ Tony Benn was there for lunch with O’Brien:

  We then went up to the most beautiful dining room. He is a nice man, very agreeable but totally out of touch because he has worked for the Bank all his life and doesn’t understand the attacks on him from outside … He said the usual stupid things about trade unions and wished the shareholders would play a larger part in companies. He lives in a dream world. It occurred to me with a great sort of flash of lightning that this is what is wrong with the City: the people in it don’t make any effort to broaden their interests.

  Almost a decade earlier, in the early 1960s, another diarist-outsider, in his case on secondment to the Bank, might have broadly agreed. This was Roger Alford, who was particularly struck by the deputy governor, Humphrey Mynors: ‘His interest in genealogy and cosy trivia (the holding of Bank of England stock by the professors of divinity in the University of Utrecht) all point to a very limited outlook; but to great capability within those limits. The limits seem to exclude any willingness to really search for the truth or for sound opinions; if it is familiar and satisfies appearances, this is enough.’ There was also the question of imaginative sympathy. In November 1966, the financial journalist William Davis wrote in Punch an open letter to O’Brien. Noting that the recently appointed governor had had, unlike his two Etonian predecessors, an unassuming suburban school education, Davis then singled out for criticism a passage in O’Brien’s first speech as governor, at the lord mayor’s dinner, in which he had declared the necessity of having ‘to maintain continuously some margin of spare resources until we find out how to keep the economy on an even keel without it’ – Bankspeak, observed Davis, for half a million out of work, at which point ‘you didn’t sound a bit like a suburban school product who understands what happens to men in their fifties (your age group) during high unemployment’. And more generally, added Davis, although ‘the Bank has already become a good deal less stuffy’ and ‘you are less secretive than in the past’, nevertheless ‘on several major issues your approach seems to be far from progressive’, not least the Bank’s deeply ‘emotional’ attachment ‘to the word “sterling”, and to its role on the world stage’. Empathy was not the concern of Thomas (now Lord) Balogh, the economist closest to Wilson, when he submitted to the Lancaster/Mikardo inquiry a memorandum entitled ‘The Bank of England – Some Defects in Organisation and Functioning’. One passage perhaps gave particular offence in Threadneedle Street:

  Until the present incumbent [O’Brien], the decisive (almost dictatorial) Governorship was filled from the outside, without any recognisable training either in what has become a recognised economic administratorship. In the U.S., Germany, France, Italy, Australia, Canada and the Netherlands, to name but a few countries, it would be difficult to imagine a non-expert’s appointment to this particular function. The present Governor rose from the ranks of the Bank without any general training so much needed by a Central Banker. While perhaps less obviously politically partisan than some of his predecessors he has strongly biased views on the management of the economy.

  In short, Balogh’s overall impression, looking at the Bank, was one of ‘inadequate intellectual ability and political bias’.27

  Benn, Alford, Davis, Balogh – how fair or accurate was the largely unflattering picture that they drew? Indeed, how ripe for fundamental change was, by the start of the 1970s, the Bank in its higher echelons, both in themselves and in relation to the outside world?

  The classical exposition of the Bank’s world-view was set out in 1962 by Mynors and the economic adviser Maurice Allen. In the context of an internal course being devised on central banking, they assembled a list of propositions called, with deliberate modesty, ‘Opinions Attributed to Central Bankers’, propositions that undoubtedly they endorsed:

  A central banker needs a sense of smell. Analysis is only theorising but may be encouraged when it confuses critics.

  No civil servant understands markets.

  Politicians do not sufficiently explain the facts of life to the electorate.

  Central bankers should always do what they say and never say what they do.

  Taxes are too high.

  Bankers are people who do, in the main, what you wish. The rest are fringe institutions. They do not exist.

  Wave the big stick if you like, but never use it; it may break in your hand.
Better still, try wagging your finger.

  In banking, the essence of solidity is liquidity.

  Never spit into the wind.

  Always lean against the wind.

  As for economic policy specifically, a handful of maxims revealed how little, in a supposedly Keynesian age, the Bank’s verities had shifted since Norman’s time:

  All expenditure is inflationary, but government expenditure most of all.

  A foreign exchange rate is sacred, to be touched only when all other corrective measures are seen to have failed.

  Stability in the value of money helps economic growth.

  Confidence in a currency is the first requisite for its stability; weakened confidence can be restored only by policies of a Gladstonian kind.

  Other countries do not owe us a living.

  None of this would have surprised Anthony Sampson, who had recently spent some time anatomising the Bank and being struck by the rarity of graduates, the profusion of ‘inarticulate but confident’ market operators, and the way in which the institution embodied ‘the unquestioning regimental spirit of the public school proletariat’. Not long afterwards, in the mid-1960s, when an aspiring financial journalist, Christopher Fildes, wrote a piece about how London would soon have a market in dollar-denominated bills of exchange, the rebuke came on high from Hilton Clarke: ‘Young man, I would trouble you to remember that this institution has a branded product of its own.’28

  Nothing, of course, stood entirely still – and, looking at the top personnel, as the Bank passed from the uncertainties of the 1960s into the turbulence of the 1970s, it is tempting to divide them into old school and rather less old school. Undeniably in the former camp were O’Brien, the authoritative but increasingly afflicted Maurice Parsons (deputy governor, 1966–70), and the extraordinarily industrious Jasper Hollom (executive director, 1966–70, then deputy governor). Among the younger generation they were joined by John Page, who rose to become chief cashier in 1970, which in effect made him the Bank’s chief executive, with extensive managerial and operational responsibilities. ‘He took a very old-style clearing bank Chief Executive approach, very tough, aggressive, down to earth, no nonsense, bugger it kind of line,’ recalled a colleague not altogether fondly. Arguably somewhere between old and new schools was the economist John Fforde, an executive director from 1970 (having been Page’s predecessor as chief cashier) and possessed of a formidable intellectual grasp, though also susceptible to strong tugs of emotion. Finally, there were the two youngish manifest high-flyers, Jeremy Morse and Kit McMahon, both in their different ways impatient with the Bank’s apparent lack of sophistication. Already celebrated as the first winner of the maximum prize of £1,000 on the TV crossword programme Take a Letter, and the quintessential cerebral Wykehamist, Morse had become an executive director in 1965, working mainly on the overseas side and winning his spurs above all through his leading role in settling the post-devaluation claims of fifty-six sterling area countries. McMahon (like Fforde an executive director from 1970) was also cerebral, but with a bit more edge, befitting an Australian who, shortly before coming to the Bank in 1964, had written a challenging book called Sterling in the Sixties. ‘His approach is critical without getting over-doctrinal,’ reckoned the Economist on his original appointment as an adviser, and that would be a just assessment of his Bank career as a whole.29