It was, to put it mildly, an unfortunate conjunction: following the introduction of CCC, there took place an explosion of more or less uncontrolled lending. ‘The freedom that was imposed in 1971 was a tremendous spur to the inter-bank market,’ the deputy chief cashier, George Blunden, would recall:
Many institutions conceived the idea that you could always get your deposits in large wholesale numbers. It became a case of liability management. And with that great growth in liquidity in the banking system, they turned to property. And property prices always went up – at least they had always, since the war. Ultimately, in the early 1970s, there were these two great myths around: that you could always get wholesale deposits and that you couldn’t go wrong with investing in property …
They were an extraordinary couple of years. ‘Almost for the first time in the whole history of banking,’ a senior clearing banker remembered, ‘you found your lending business and then scurried round for deposits.’ Between September 1971 and the end of 1973 total sterling bank advances to UK resident borrowers rose by no less than 148 per cent.7 Crucially, and feeding the frenzy, most of that lending was directed not to manufacturing but to property and finance; undeniably, the prime driver, even if much abetted by CCC, was the Heath government’s reckless – however well-intentioned – pursuit of economic growth at all costs. For the Bank, all this meant a loss of control over the money supply, and much else besides, for which it paid a high reputational price. Could it have done more to alter the course of events?
O’Brien would subsequently be criticised for not having fought the Bank’s corner harder, particularly in relation to interest rate policy; but in many ways he was powerless, especially in the context of a weak chancellor and an unusually obstinate, determined prime minister. In the first week of 1972, asking Sir Douglas Allen at the Treasury about the government’s ‘intentions on further reflation’, he was told that the minds of Barber and Heath ‘appeared to be running on divergent lines, with the Chancellor at present very much less concerned about unemployment’; later that January, he was informed by Allen that, in relation to Bank rate, ‘the idea of a reduction had receded for the present’ – an explicit indication of where the whip hand lay; by the spring, the word to King (via John Stevens) was that ‘the Governor can get no answers from the Chancellor and finds it hard to meet Ted’. Heath did in June reluctantly agree to a rise in Bank rate (from 5 to 6 per cent) in order, stated the official record, ‘to curb the rate of increase in the money supply and so damp down inflationary pressures’; but a few days later, responding to a member of the public complaining about inflation, O’Brien’s tone was almost one of helplessness, with the role of monetary policy conspicuous by its absence: ‘Inflation is certainly a very serious problem, but it is, unfortunately, a very difficult one to solve. I agree with you that we will need new initiatives and approaches. However, the Government is, as you know, engaged in discussions with the Confederation of British Industry and the Trades Union Congress, and we must hope that these prove fruitful.’
That same day, in the wake of the floating of the pound, O’Brien saw Heath, who raised ‘the question of bank credit and the disproportionate share of this which appeared to be going to property concerns’:
I explained to him the logic of an easy credit policy in harmony with H.M.G.’s plans for reflation of the economy. I said that inflation was the nigger in the wood-pile. On the one hand, it was holding back the restoration of confidence amongst industrialists, while on the other it was encouraging all and sundry to rush into property as a hedge against inflation. He clearly yearned for the return to qualitative controls. I said that I had seen indications that the banks were feeling that they had put about as much money into the hands of property concerns as they thought prudent. I would, however, take an opportunity of telling the bank chairmen that it would be helpful if they could damp down their property lending as much as possible.
To no avail, even after a formal, old-style request to the banks in August. ‘Money out of control’ was the title of the Banker’s very critical editorial in September marking the unhappy first anniversary of CCC; and the magazine damningly noted that ‘for some time now the City has come to assume that the Bank has meekly implemented the Treasury’s growth policy against its better judgement’, an assumption that was consistent with O’Brien apparently being relaxed, in his conversation with Heath, about ‘an easy credit policy’.8
The autumn of 1972 saw Bank rate being replaced, after 270 years, by a rather different mechanism. Linked to the market rate for Treasury bills, minimum lending rate (MLR) was a mechanism adopted, the chief cashier John Page explained not long afterwards, ‘basically because it was better than having Bank rate completely frozen by Ministers, not because we thought it was technically a superior arrangement’. Inevitably, against a backdrop of deepening industrial as well as economic troubles, a testiness developed in government/Bank relations, epitomised by an episode in November:
The Governor mentioned the Prime Minister’s irritation over the last Bulletin Commentary … Allen said that the sensitivity of Ministers, and particularly the Prime Minister, on matters of presentation could hardly be exaggerated. References in the Bulletin which did not wholly accord with the Government’s own presentation had a serious cost in making Ministers’ minds highly unreceptive to Bank advice on whatever subject … The Governor made it clear that he was not prepared to publish a Bulletin which was subjected to Treasury or Ministerial approval.
As for CCC itself, a beleaguered O’Brien had no alternative by February 1973, with the money supply still out of control and inflation rampant, but to tell the clearing bank chairmen that ‘we must face the fact that it is being widely criticised’.9 He had not, he must have reflected, had the easiest hand to play.
None of which, moreover, helped his or the Bank’s standing in the City, with things probably at their worst during the difficult summer of 1972. ‘Bank of England resisting pleas to revise gilts policy though jobbers withdraw’ was The Times’s headline in late July, recording discontent in the gilt-edged market about the aspect of CCC that involved the government broker (traditionally the senior partner of Mullens & Co) no longer supporting the market. The August issue of the Banker then drew attention to how, during the June weeks of flight from sterling and the floating of the pound, in turn creating intense pressure on the money markets, the Bank had ‘not handled the matter with particular efficiency’, not least being guilty of having ‘spoken with more than one voice at a critical moment’; while on 9 August, after O’Brien had asked the banking system to ‘make credit less readily available to property companies and for financial transactions not associated with the maintenance and expansion of industry’, the Daily Telegraph’s City editor (Kenneth Fleet) described the Bank as ‘tucking her skirt between her ageing knees and trying a handstand’, given the obvious contradiction between that request and the precepts of CCC, thereby putting the latter’s ‘credibility’ under ‘severe strain’.
A week later, O’Brien circulated to a handful of senior colleagues one of the most heartfelt governor’s memos in the Bank’s entire history:
I have become extremely disturbed by the growing volume of criticism of the Bank in the daily and Sunday newspapers, in other responsible journals, e.g. Richard Fry in the Banker this month, and from what we know of unhappiness in various quarters – the discount market and accepting houses, and the gilt-edged market to look no further.
I would not want anyone here to discount these developments as the inevitable process of the central bank being tarred with the brush of failure of Government policies, particularly in the field of inflation. Certainly the inflationary background is the principal enemy with which we have to contend, but against that background we are failing in various respects, not least as the market see it, to give that firm lead and guidance which they expect from us and, indeed, without which they feel as lost as a child whose parents falter in their authority.
Compet
ition and credit control is partly the cause. It was welcomed by the press and embraced by the banking community who then, in some instances, proceeded to let it go to their heads. The market consequences have not been wholly satisfactory. Added to which the monetary authorities appear to have lost their grip of the situation and to have fostered, by allowing an undue expansion of the money supply, the inflation which frightens us all.
Altogether, he concluded, ‘I do not think it too alarmist to say that the Bank’s whole authority in the City is in some jeopardy … We pride ourselves on the lack of banking law and specific regulations, and on the superior merits of the Governor’s eyebrows. This is only justified if the latter are used with firmness to give clear and unmistakeable messages which are accepted as just and fair by all concerned.’
Those final three words begged a salient question. The Bank had long enjoyed a significant degree of authority over the clearing banks; but towards the secondary banks its stance was largely one of remoteness, with instead the main responsibility for their supervision resting with the Department of Trade and Industry, which during the Barber boom continued to hand out certificates to ‘fringe’ banks like confetti, even as their lending increased by three or four times as much as the clearers. Perhaps the sole exception to this detachment was Slater Walker, whose celebrated financial wizard, Jim Slater, fascinated O’Brien, even to the extent of wanting him (before being dissuaded) to join the Court. The consequences of the prevailing detachment would be played out in due course, but during the final phase of O’Brien’s governorship it was the Bank’s chequered relationship with the traditional City that preoccupied observers, among them the Telegraph’s Fleet in February 1973. After noting that ‘dissatisfaction’ in the City with CCC was ‘marked and probably growing’, and citing the discount market as a prime example, he went on:
The real trouble there is that the Bank, despite its apparent conversion to modern ‘scientific’ credit management, still loves its traditional ways too. It clings to the ancient rituals of ‘nod nod, wink wink’ but whereas in the good old days a nod was a nod and a wink a wink, now a nod may turn out to be a wink, a wink a nod, a nod ‘good morning’, and a wink no more than a ‘hello darling’. What is more, you can’t learn this sign language: it is liable to change every week.
In sum: ‘The dilemma for the Bank is between going completely modern, which it has not yet the will to do, and going back, which it can’t do. It should face up to it soon.’10
Later that month came the announcement that O’Brien would be stepping down at the end of June. Despite the earlier agreement, he had probably hoped to stay on a little longer, until the work had been completed of the IMF’s Committee of Twenty, set up the previous year to recalibrate the international financial framework and chaired by Jeremy Morse, who had left the Bank to take on the job. O’Brien had support from Barber, but the prime minister was adamant that the governor had to go, with King subsequently informed by both John Stevens and George Bolton that he had been ‘sacked’ by Heath. O’Brien himself favoured Morse as his successor – in effect the Bank’s ‘inside’ candidate, having been an executive director from 1965 to 1972 – but instead it was Gordon Richardson (a non-executive director since 1967) whom Heath chose, apparently consulting O’Brien and the Court only after he had reached his decision. Richardson’s broad-based experience (including on Neddy) made him, according to The Times following the announcement, ‘well attuned to the Government’; but in the Spectator ‘Skinflint’s City Diary’ was more sceptical, calling him ‘hardly the bright new dawn of an economic Renaissance’. For Richardson himself, who had long wanted the position, it was a case of waiting for a few more months. ‘Mr Hugh Seccombe of Seccombe, Marshall and Campion Limited, who are, as you know, the Bank’s bill brokers, telephoned me today to enquire whether you would like to have lunch with them before you become Governor’ was the message in early April from the governor’s office. ‘He told me that, after you become Governor, they cannot invite you.’11
O’Brien’s final day in post included a haircut at Geoffrey’s, the barber’s at the Royal Exchange; and soon afterwards he was on the front cover of the Economist, with the accompanying, somewhat hyperbolic words ‘A Great Governor’. The largely laudatory assessment inside included a notable, historically informed passage:
Lord O’Brien [as he had recently become] has brought the Bank into its proper role as alternative brains trust and away from any role as emotional right-wing banshee. The role of banshee is still one after which central banks can hanker. Less than 50 years ago, in the aftermath of the First World War, central banks felt so indignant at the risk of being dominated by the swaying financial policies of their governments that an international conference which discussed the subject actually advocated their private ownership. Today, the ultimate political sovereignty of governments over central banks is not in doubt. Even the German Bundesbank, on paper the most unfettered of central banks, knows that it can go so far and no farther. But the idea of alternative brains trusts for policy is gaining in importance and influence …
Did the Bank in 1973 quite have the brainpower, allied to independence of mind, to fulfil that demanding role? The Economist thought so – ‘for the first time the Bank’s senior executive staff outdo the Treasury in economic sophistication and liveliness; its executive directors are a remarkable team of original, often slightly unorthodox, happily eclectic, and always stimulating turn of mind’ – but arguably such claims were exaggerated. ‘I was surprised at the absence of economic expertise which I found in the Bank,’ recalled Christopher Dow of his arrival as chief economist shortly before O’Brien’s departure; while in his congratulatory letter Bolton offered Richardson a robust analysis that may not have been wholly fair but was in essence probably true:
You have taken over the responsibilities of the Governor of the Bank at a time when few men would welcome the challenge and your position is all the more exposed because, in recent years, the Bank has lost a great deal of power and influence in the City – the reasons being many and varied. Leslie O’Brien did a most remarkable job in helping to restore some of the lost internal morale [following Cromer’s governorship] but he never had the experience or the imagination to build up around him a group of independent-minded men who could make an impact both on Whitehall and the outside world.
‘The tendency,’ added Bolton with salutary intent, ‘has been to promote from within and import the ready-made academic mind.’12
‘It is thought in the City that Gordon is not a good administrator, and not really a banker, but a very intelligent lawyer and a brilliant draughtsman,’ noted King after Richardson’s appointment was announced. ‘Not really a banker’ was at most only half fair. Born in Nottingham in 1915, the son of a well-off local provision merchant, he had read law at Cambridge before becoming a successful London barrister specialising in company law. In 1955 he decided to try his luck in the City, going two years later to Schroders and becoming the top man there in 1962. Over the rest of the decade he proceeded to turn it into (in the words of a client and close observer of City matters, Charles Gordon) ‘one of the smoothest, best-operated merchant banks in the City’, with the general tenor being ‘overall expansion, little publicity, less fanfare, superb results’. Befitting an essentially self-made man, he had little time for the Etonian aspect of the City and enjoyed saying things like ‘I look at Morgan Grenfell’s clients today and say they will be ours tomorrow.’ Striving consciously for excellence (with a particular focus on attracting qualified recruits), and developing a wide range of contacts with leading people in politics and industry, he was increasingly seen as the City’s coming man, just the right sort of meritocrat. ‘Richardson is a highly professional banker, ruthless but fair, opposed to nepotism, and his directorships range from the Royal Ballet to Lloyds Bank,’ noted Anthony Sampson admiringly in 1965. Undeniably he was a class act, helped by a handsome, commanding face and bearing, which made him seem significantly taller than
he actually was.
The main downside, all his colleagues agreed, was a lawyer’s unwillingness to reach a decision that was not on the basis of full information and equally full deliberation. One colleague at the Bank would even compare him to Thomas Hardy’s Bathsheba – ‘she had to consult her clergyman on financial affairs, her lawyer on medical matters, her doctor on business, and so on, and Gordon normally consulted a tremendous range of the top of the Bank on any issue’. The ultimate upside, comparable in its way to Norman, was the sheer authority-cum-charm of his presence, suggestively evoked by Christopher Dow, writing privately about halfway through Richardson’s governorship:
When one first sees him in the morning, almost without fail, however preoccupied or hurried, he smiles and says, ‘Good morning, Christopher’. This may seem a small thing; but most of us nod and go on with our trains of thought; I am sure such consistent courtesy does not come without conscious effort and training. I remember the Governor once saying to me, ‘I am constantly finding irritation aroused in me by X and Y, and then interrupting myself and saying, “If I ever allowed myself to feel irritation, this would irritate me profoundly.”’ When he has an address to make, however small, as after a lunch or dinner where an important visitor is present, his words are always carefully chosen, and caressingly enunciated. In working hours he does not drop his courtly manner. When he introduces a subject for discussion at a meeting, or sums up what he wishes to be the conclusion of a discussion that has just taken place, his words are always balanced and elegant – not inarticulate and halting as with most of us; and this elegance, which carries a sensation of his having command over events, increases his authority, like a man who has a good seat on a horse.
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