Perhaps the area of greatest concern to the Select Committee was that of accountability. ‘It helps you to do good by stealth, in other words?’ asked Mikardo, after O’Brien had sought to justify the Bank’s non-publication of accounts on the grounds that this at times enabled it discreetly to ensure the stability of the banking system. ‘Yes, indeed,’ replied the governor, but the MP for Poplar persisted:
But does that not also have the corollary that it helps you to drop clangers by stealth, to make mistakes by stealth, or, to put it another way, this facility of doing good by stealth creates as a corollary a situation in which whatever mistakes and however large they may be the Bank makes, there is no way in which they are ever publicly revealed? – Yes, that is so, but dropping clangers is not a thing which the Bank goes in for.
The Committee’s report in 1970 was predictably critical on this aspect. After noting that ‘the Bank could go on operating inefficiently for years without anyone outside knowing about it’, that indeed ‘for all anybody knows with certainty to the contrary, it may have gone on operating inefficiently for years’, it went on:
Your Committee have no reason to think that this has been the case. But the fact is that any institution which is protected by secrecy and shielded from scrutiny is in danger of becoming unselfcritical and complacent. This danger is greatly increased in the case of the Bank by the fact that, in many areas of its work, it has been reluctant to apply to its performance and methods the types of objective criteria which are used by other large businesses, public and private. The Bank seems ready to fall back on the broad view that an institution that is nearly 300 years old does not need to use other people’s instruments of measurement and control because its longevity indicates that there cannot be much wrong with it: this is a view which Your Committee finds unacceptable. It must be said that there was almost an assumption of institutional infallibility that flavoured much of the Evidence which Your Committee received and the Governor himself was not immune from it.
Various recommendations followed – including not just that the Bank should publish its accounts, but also that in terms of capital expenditure it should be held to the same criteria as other public corporations – but what mattered more was the broad critique. It was a critique in line with Anthony Sampson’s charge eight years earlier in his Anatomy of Britain: ‘The Bank has never accepted the notion of public accountability, and over the past hundred years its activities have become more, not less, clandestine.’ And he quoted an anonymous banker as to why the Bank’s Quarterly Bulletin was so (in Sampson’s phrase) ‘ingeniously obscure’: ‘It isn’t so much that they don’t want to tell you what’s going on; it’s more that they don’t know how to explain it: they’re like a Northumbrian farmer.’ Perhaps in truth it was a bit of both, but either way this absence of transparency was not a helpful contribution to the quality of debate – whether outside or inside the Bank.
Ultimately, like so much else, it came down to culture, and the traditional rather introverted culture of the Bank was very deeply entrenched. Notably revealing testimony, suggestive of a whole mentality, comes from Pen Kent, who joined the Bank in 1961 as a graduate recruit and later that decade was enduring the ‘fairly nerve-wracking exposure’, as he recalled over forty years later, of preparing the figures for the daily morning meeting in the governor’s room. That meeting, attended by the governor and a handful of senior colleagues including the chief cashier, was called ‘Books’; and significantly, the all-important leather-bound book had ‘precisely the right number of pages to cover the weekly returns for our financial year’:
It was this book which you had to complete in manuscript, in special ink made by the printing works, guaranteed not to fade for 200 years. An expensive recipe. And you were not allowed to show or reveal any errors of any kind. Now it’s very difficult to imagine that you can fill this in, (a) that the figures are always right, and (b) that you always transcribe them correctly. So techniques had been developed for scratching this rather high glossy parchment-like paper with a scratcher which was supplied as part of your toolkit, it even had an ivory handle. And then you had to polish the paper because if you tried to write with this kind of ink on paper that’s been roughed up … you can imagine. Now that was a completely artificial constraint on your facility and ability to do this efficiently and quickly. And for a long time it was kept deliberately archaic as I think a sort of testing ground for your nerve and your endurance. And it became a kind of joke. But it also developed this mystique because there was a book kept in which there was a photograph of everyone who had managed the Bank of England’s books, single-handed on their own, having qualified. And this book had photographs going back to the 19th Century …
‘All the Bank’s greats,’ added Kent about this ritual which anyone who aspired to high office had to master, ‘it was like the Hall of Fame …’35
15
Entering from Stage Right
The Bank and the Tory government of the early 1970s did not prove to be a love match. At the heart of Edward Heath’s initial economic strategy, after the election of June 1970, was the free-market belief that tax cuts and other stimulants of growth would be enough to discourage organised labour from making inflationary pay claims; but Leslie O’Brien, who had actively supported the prices and incomes policy of the last three years of the Labour government, was unconvinced, flatly declaring at the Mansion House in October that he did not ‘see how we can expect to maintain a fully employed, fully informed and increasingly well-off democracy, in which the development of wages and prices is left entirely to the operation of market forces’ – given that ‘the bodies on both sides of the bargaining tables, the unions and employers in both the public and private sectors, are too big and too powerful for such a process to yield us the result most likely to contribute to our general welfare and prosperity’. Presciently, he added that ‘if we try to rely on the marketplace and on the strict operation of fiscal and monetary policies, we shall find, I think, that we can achieve price stability only at the cost of unemployment that might be on a very large scale indeed’.
Discord was deepened that autumn by Heath’s outright refusal of the governor’s request for Bank rate to rise in order to counter inflation and a rapidly increasing money supply; and over the next few months the general assumption was that the new government would decline to renew O’Brien’s governorship (due to expire in June 1971) for a further term. Cecil King faithfully recorded the gossip about a possible successor. Initially, Gordon Richardson (despite being ‘vetoed by Cromer for health reasons’), Morgan Grenfell’s John Stevens (back on the Court, as a non-executive, since 1968) and – plausibly or not – Cromer himself as the three being bruited as candidates; then the emergence of Heath’s friend Lord Aldington, a politician-turned-banker (‘thinks he has the reversion to the job’); a strong late run from Richardson (‘actively canvassing for the job and may still get it’); and talk at the last of the youngish, energetic merchant banker David Montagu. In the event, there was no vacancy. O’Brien apparently expressed serious regret that he might not be reappointed, claiming it would be viewed as a public humiliation for the Bank; and in early 1971 a compromise was agreed, by which he would step down after a further two years, at the age of sixty-five.1
1971 was also the year that saw the start of what became known as the ‘Barber boom’ – named after the chancellor Anthony Barber, but in practice probably owing much more to Heath. It was certainly a boom cooked up in Downing Street. ‘To his eye,’ noted Jasper Hollom as early as January of Sir Douglas Allen’s views at the Treasury as imparted to O’Brien, ‘everything pointed to a repetition of the 1962/64 situation – in which Treasury and Bank caution would be very uncongenial to Ministers and there would be a strong tendency for them to go for growth.’ Or as the governor himself explained soon afterwards to the clearing bankers: ‘The pressures towards reflation were increasingly to be seen. He made clear his own belief that such moves would not at present be timel
y, but recognised the influence which the unemployment figures were having on Ministers’ thinking.’ Barber’s tax-reforming budget in March (including the abolition of short-term capital gains tax) duly set off a bull market (property as well as stock market), even as unemployment stubbornly continued to rise. There followed in July a mini-budget full of explicitly reflationary measures, marking the real green light for the Barber boom. ‘He was discreet, of course, as usual,’ recorded King later that month after calling on O’Brien. ‘Straws in the wind of conversation were: (1) no reference of any kind to Barber; (2) Heath was described as “unapproachable”. In general terms it became clear that he thought the latest Budget had no economic justification but was forced on the Government by political necessity. Opinion polls had shown the Government in so unfavourable a light that something had to be done, and this was also necessary to get the Common Market [which Britain was moving towards entering] off to a good start.’2
The European question was intimately connected to the perceived stagnation and even decline of British industry – a perception already sharpened by the Rolls-Royce debacle. By September 1970 that hugely symbolic company was in serious financial difficulties, resulting in heated negotiations at the highest level over the next two months. ‘The initiative in Rolls-Royce now lay very much with Whitehall because of the unwillingness of the City to put up any money,’ O’Brien told Lord Poole of Lazards in late October, and increasingly the governor found himself the nut in the nutcracker: trying to get support from government, trying to get support from banks, getting thanks from no one. King recorded in early November the scathing verdict of George Bolton, no longer on the Court and as forthright as ever: ‘He said what remained to O’Brien of his prestige had vanished with his clumsy attempts to raise money for Rolls-Royce. He said there is nobody now at the Bank who is taken seriously in the City …’ Eventually, promises of help were secured – £42 million from government, £8 million from the Bank, £5 million each from Midland and Lloyds, plus a revolving £20 million credit from merchant banks – but they failed to prevent the company’s collapse in early February 1971, in turn leading to nationalisation. Almost at once, seeing the bigger picture, Heath started pushing for the Bank to reprise its constructive inter-war role in relation to industry. O’Brien responded in character:
I said [to the Bank person who had informed him of the prime minister’s steer] that this yearning to go back to the 1930s was unrealistic. Nevertheless we were considering what might be done to mobilise City views and investment strength, to secure improvement in industrial management, and possibly facilitate the raising of funds in suitable cases …
This, however, was very much a matter for the Governor, who would be personally identified with any move which might be made. I was not prepared to be pushed from any quarter into what I thought was an inappropriate initiative. My own feeling was that in the matter of Rolls-Royce I had come very near to impairing my influence in the City.
It all took time, and encountered significant resistance from some of the big insurance companies and pension funds, but by 1972 the Bank-sponsored Institutional Shareholders’ Committee was at last in existence. In practice, it punched well below its weight in terms of intervening collectively to improve the quality of industrial management. ‘Largely unsuccessful’, reckoned The Times the following year, while John Plender, in his 1982 study of the rise of the institutional investor, would frankly call it ‘an emasculated organisation’.3
Any pretence of business as usual was unavailing when it came to the international monetary order, as the early 1970s saw the collapse of the post-war Bretton Woods system of fixed exchange rates – the system that had tied the whole world to the US dollar. In May 1971 both the deutschmark and the Dutch guilder were floated; in August the US itself suspended the dollar’s convertibility into gold; and although shortly before Christmas the world’s finance ministers tried to put together a new system of broadly fixed exchange rates (the Smithsonian Agreement), it soon became clear during 1972 that a static approach was no longer appropriate for an increasingly uncertain world, not least with the inflationary consequences of the Vietnam War. Emblematically, the first financial futures market, enabling the hedging of currency fluctuation risks, began in Chicago in May 1972; and just over a month later its founder, Leo Melamed of the Chicago Mercantile Exchange, was in London trying to encourage participation in it. During his visit to the Bank, he suggested (probably to Hollom, in O’Brien’s absence on holiday in the south of France) that if the Bank really wanted to help the new market it would kindly float the pound. A strained smile greeted the wisecrack – and the next day, 23 June, the newspaper headlines announced (including to O’Brien) that this was what the British authorities had indeed decided temporarily to do, though for different motives. The trade balance had been deteriorating rapidly, and the probability of an imminent docks strike had led to such pressure on sterling that the government decided that floating was preferable to another ignominious forced devaluation. ‘IT IS RIGHT TO FLOAT THE POUND’ confidently declared The Times’s main editorial next day. Some in the Bank saw the move as the soft option, a political evasion of the financial discipline of a fixed exchange rate, but by this time the governor was not among them.4 In February 1973 the yen was floated, soon afterwards the dollar was further devalued, and on 19 March the major central banks formally abandoned their commitment to maintaining their exchange rates within a predetermined band in relation to the dollar. The era of flexible exchange rates – accompanied by the rise and rise of the almighty financial markets – had conclusively arrived.
Nothing, though, defined O’Brien’s last years as governor more than four fateful words: Competition and Credit Control (CCC). This new framework for the banking system had its immediate origins in a self-confessedly ‘curious and emotional’ note to O’Brien and Hollom sent by the executive director John Fforde on Christmas Eve 1970. ‘Our responsibility for ensuring, or failing to ensure, the proper evolution of the banking industry is more direct than that of H.M. Treasury,’ he declared. ‘It is our job to make the running in this field and actively to seek the required over-riding political decision that will govern the future shape of monetary controls. With six years of ceilings behind us, and a new Government in office, this is a responsibility that we cannot put to one side.’ As the Bank firmed up its proposals over the next few months, it took care not only deliberately to involve the Treasury at a relatively late stage, but to seek to avoid frightening the horses. ‘It does not look likely that anything like the theoretical possible expansion of credit under the new approach would occur if it were introduced,’ reassuringly predicted Kit McMahon in March 1971 as he passed the details on to the Treasury.
Overall, the Bank seems to have had four principal motives in mind: first, producing a healthier set of arrangements (‘the quantitative restriction of advances imposed on the banking system proper turned good bankers into non-bankers, forced on grounds of public policy to turn away business they would dearly have liked to do,’ recalled O’Brien of ‘the bad effects on the banking system of the repeated and prolonged periods of harsh credit restraint which had been necessary ever since 1957’); second, encouraging a more level playing field between the hamstrung Big Four and their more liberated competitors, including the increasingly active and barely supervised ‘fringe’ or secondary banks – with the Bank quite possibly hoping that that would enable Barclays et al to put the pesky secondaries out of business; third, the ambition that a single, indivisible market for credit would encourage those trusted Big Four to get into such critical, almost unregulated areas as the wholesale sterling market; and finally, most important of all, the underlying belief that the interest rate weapon was in every way preferable to ceiling controls as the way of maintaining tight control of the money supply, itself an increasingly high priority. But, observes the financial historian Duncan Needham of this last motive behind the new dispensation, the awkward political fact was that Heath was ‘impl
acably opposed to higher Bank rate’. And therefore, he adds in his persuasive analysis, ‘the Bank had to dress its proposal up in the language of competition’ – in order to ‘lull’ the Heath government, strong at this stage on such rhetoric, ‘into believing it was all about a more competitive banking sector’.5
Competition and Credit Control, a four-page consultative document, was published by the Bank on 15 May 1971. It proposed, as far as the clearing banks were concerned, the end of both quantitative ceilings on lending and the interest rate cartel; while all banks would maintain the same minimum liquidity ratio, at 12.5 per cent a ratio less than half of the prudential ratio that had previously been required from the clearers. In essence, the deal for the clearers was that in return for agreeing to the abandonment of their cosy, familiar cartel, they would be free to compete on level terms with the secondary banks and others. The document received a generally warm welcome. ‘A Keener Edge to Banking’ applauded The Times, arguing that ‘nothing has done more to stifle enterprise than the present system of controls and agreements’; ‘Yes, at last, revolution for the City’ was the Economist’s jubilant headline; and the Banker looked forward to ‘the habits of the last decade’ being ‘well and truly buried’. Over the next three months the clearing bankers signified their willingness to accept the thrust of the proposals, while managing to persuade the Bank that building societies and savings banks should not be protected from competition for deposits. At the end of the summer session, Heath addressed his party’s 1922 Committee and explained the new policy. ‘I looked around the room and wondered how many of the MPs present fully comprehended what he was talking about,’ recalled Edward du Cann, a City man as well as a prominent Tory politician. ‘I doubt whether more than half a dozen had the least idea.’6 On 16 September, only a matter of weeks after Barber had pushed hard on the reflationary button, the new arrangements came into force.
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