Till Time's Last Sand

by David Kynaston

  Even so, added Dow, ‘just as he is always courteous to us, so he, like the Grand Monarch, likes us to be attentive to him, and does not care for disloyalty’. Indeed, analogous again to Norman, the inner steel was never quite absent. ‘You know, the Bank has not always been right,’ the chairman of Barclays remarked to him on one occasion (as observed by the Tory politician Jock Bruce-Gardyne). ‘Oh, when hasn’t it?’ he asked, with a flash of his blue eyes. ‘Well, when you didn’t say that our paper was eligible.’ To which Richardson responded unanswerably: ‘That remains to be seen.’13

  What could not be gainsaid was that July 1973 was an intensely difficult point to become governor. Twice in his first three months he offered ‘directional guidance’ to the clearing banks – pointing out that ‘personal lending, if not controlled, could come to be the Achilles heel of Competition and Credit Control’ – but the underlying economic policy reality was that Heath, Peter Walker and a few other ministers still hoped against hope that, as Heath’s biographer would put it, ‘the Government was on the brink of achieving its breakthrough, despite the commodity price explosion, the alarming trade balance and the sinking pound’. From October, however, all bets were off, following first Egypt’s invasion of Israel and then an alarming rise in the price of oil. At last, on 15 November, Barber informed Richardson that the time had come to rein back the money supply, though with the crucial rider that the prime minister was insistent that this be done without raising interest rates. Orders were orders, but next day, at a meeting at the Treasury, the governor not only argued that ‘monetary policy had pretty much shot its bolt’, but complained of ‘a serious lack of understanding by Ministers of the problems in this field’ and emphasised the difficulty involved in achieving ‘any sizeable decrease in the potential liquidity of the system’. Later that month, having been briefed by Walker to stress ‘the dangers that a further increase in oil prices would present for the world economy’, Richardson paid a visit to Saudi Arabia; but to little avail, with OPEC’s announcement just before Christmas that the price of crude oil would rise from $5.10 a barrel to $11.65, four times what it had been at the start of the Arab–Israeli War.

  By then, the Bank had reluctantly come up with a solution to meet the politicians’ wishes, a solution (largely devised by Charles Goodhart) that Barber announced in his emergency mini-budget on 17 December, itself coming shortly after Heath had announced on television the start of the three-day week in order to conserve electricity supplies. That solution was the so-called ‘Corset’, as coined by the Bank’s Gilbert Wood, recalled Goodhart, ‘to indicate an external constraint to disguise and conceal internal flab’; officially known as the supplementary special deposits scheme, and marking an end after barely two years of the full-tilt CCC period, it required banks to make non-interest-bearing deposits with the Bank if their interest-bearing deposits increased at more than a specified rate. ‘Too primitive an idea’ would be the scornful verdict of Barber’s successor, Denis Healey, but Goodhart probably had a case when he contended – likewise many years later – that it was ‘the best possible answer to a tricky, and unavoidable, problem’.14

  During the closing weeks of 1973, the Corset was the central preoccupation of neither Richardson nor his deputy Jasper Hollom. Instead, it was the increasingly fraught state of the secondary banks – a sector flourishing since the late 1960s but now suddenly vulnerable because of imprudent loans and heavy reliance for funds on the fast-growing, wholesale inter-bank market. The canary in the mine was London and County Securities: run by the self-promoting Gerald Caplan, and including the Liberal leader Jeremy Thorpe on its board, it was in such serious trouble by early December that, via the good offices of the Bank, it had to be rescued, mainly by its bankers NatWest but in part by a more reputable secondary bank, First National Finance. Soon afterwards, another secondary bank was also known to be in dire straits: namely Cedar Holdings, which specialised in second mortgages and whose quality of business had sharply declined after going public in 1971. For all secondary banks, moreover, Barber’s emergency measures of 17 December had – through their combination of immediate credit controls and a pledge to introduce a development gains tax aimed at curbing property speculators, to whom the secondaries had lent so much – potentially lethal implications that were almost immediately recognised. That week before Christmas saw the secondary banking crisis fully under way, a crisis played out, in time-honoured fashion, largely behind closed doors.15

  On Wednesday, 19 December the Fringe Banks Standing Committee – set up by the Discount Office’s James Keogh on the 14th and comprising representatives of the Bank, the four leading clearing banks and Williams & Glyn’s – met for the fourth time, chaired in Keogh’s absence by his deputy Rodney Galpin. After a discussion about the plight of various of the secondaries (now including First National as well as Cedar), the key moment came when NatWest’s Sidney Wild, almost certainly under instructions from his bold and energetic chief general manager Alex Dibbs, ‘suggested that a support fund should be set up as a means of providing the potentially large amounts of assistance which could be needed for joint rescue operations’ and ‘thought it might be no exaggeration to speak of a total of well over £1,000m’. Such was the genesis of what would become known as the ‘Lifeboat’, some eighty-three years after a similar vessel had rescued Barings. That afternoon, at a secret meeting with the chairmen of the clearers, Richardson mentioned the possibility of a general support operation. Meanwhile, through that Wednesday and long into a memorable night, a series of meetings at the Bank sought specifically to prevent Cedar’s immediate collapse. ‘Both acted magnificently,’ recalled Hugh Jenkins (investment manager of the National Coal Board pension fund, one of Cedar’s four main institutional backers) about Richardson and Hollom. ‘They knew the nature of the problem and their sang froid was remarkable. They were cool but very firm.’ Hollom in particular successfully warned of the domino effect if Cedar went, with the Bank’s overall performance marred only by the tactless serving of ham sandwiches to Cedar’s mainly Jewish directors, as they waited downstairs for several hours to be brought into the discussions. The public announcement of a support package for Cedar was made on Thursday morning – but, far from reassuring the City, it had the effect, as it sank in that a substantial concern like Cedar had been brought low, of fuelling the rumour-mill and causing the share price of many secondaries to plummet.

  Help, however, was at hand. Following meetings at the Bank on 21 and 27 December at which the governor deployed all his formidable powers of persuasion to achieve from the chairmen of the clearers broad acceptance for the principle of a joint support operation, the Lifeboat was launched, with the Bank agreeing to a 10 per cent participation (having initially suggested 7.5 per cent) and the remainder being shared by the clearers. Chaired by Hollom, the first meeting of the Control Committee (as it soon came to be known) took place on the 28th and considered what was to be done in relation to twenty of the secondaries. The Lifeboat may not have been the Bank’s idea – indeed, a Hollom memo dated 20 December on ‘Rescue Operation’ contemplated alternative approaches – but it had rapidly adopted it and given it its imprimatur. ‘We had to support some institutions which did not themselves deserve support on their merits and, indeed, institutions which fell outside the Bank’s established range of supervisory responsibilities,’ publicly explained Richardson five years later:

  But I felt, as I saw the tide coming in, that it was necessary to take the Bank beyond the banking system proper, for which it was responsible, into those deposit-taking institutions, because collapse there was capable of letting the wave come on to the institutions themselves; and the fact that very rapidly we had to extend our support to a wider circle, which included some reputable banking institutions, showed that our instinct that we were on very treacherous ground was sound … I have absolutely no hesitation in saying that, faced with the same circumstances again – regrettable though they were – I would take the same strategic position
and would act in the same way …

  It was a cogent and in many ways convincing rationale, but inevitably there were dissenters. ‘Bolton thought the secondary banks should have been allowed to go to the wall,’ recorded King some months after the Lifeboat’s launch; in October 1974 the Banker noted that ‘some bankers believe that the operation was misconceived from the start and that more of the bad apples should have been allowed to fall to the ground’; while a year later, a Labour MP, Frank Hooley, wrote to the governor declaring that the whole support operation appeared ‘to indicate to the financial “smart Alecs” in this country that they need not worry too much in future about incompetent or shady deals since, at the end of the day, the Bank of England itself will step in and save any outright scandal’.16

  By August 1974 the Control Committee, very actively chaired by Hollom, had met over fifty times; by June 1975, a hundred times (occasioning a drink). Predictably enough, the Lifeboat in action was a complicated story, full of resentments and cross-currents as well as nobler motives. After only a few weeks, for instance, Hollom noted Eric Faulkner of Lloyds telling him, in relation to First National, that there existed on the part of Faulkner’s colleagues ‘a good deal of uncertainty about our own [that is, the Bank’s] motives and surprise at our championing of Matthews [Pat Matthews, top man at First National], who was after all an appreciable competitor of theirs and was not everybody’s favourite character – nor on his record did he deserve to be’. Indeed, Faulkner even suspected that the Bank was trying with First National ‘to build up a sixth London clearing bank’. The deputy governor’s response was characteristic: ‘I said that, though I was not an unbridled admirer of Matthews, I thought he was not as black as he was sometimes painted. Much more important was the fact that, since we felt we could not let First National go or be strangled by its rescuers, the clearing banks had effectively forced our hands by their reluctance to back a less aggressive rescue operation.’ And: ‘I emphasised that though we felt bound to head the support operation ourselves and meant to make it go, we would be concerned to withdraw again as soon as our prime objective had been secured.’

  Transcending such concerns was the broadly agreed need, strongly pushed by Hollom, to keep the Lifeboat afloat – especially in the context of the deep crisis during 1974 in the property sector. ‘What it amounted to was really buying time so that the property market could recover’ was how John Quinton of Barclays recalled the situation, and he remembered Hollom saying at one point to the clearing bankers: ‘“Unless we save this bank, then the ripples will hit some of you people round this table”. The temperature dropped about 10 degrees and we all said “Yes”.’ The grumbling persisted of course, though abating somewhat when Hollom in August agreed to an overall limit of commitment being set at £1,200 million – not so far from Wild’s original figure, and a limit that by November the joint support operation was close to reaching. Eventually, the secondary banking crisis receded, with some of the fringe concerns allowed to collapse: the Lifeboat peaked at £1,285 million in March 1975 (the Bank having to meet the excess above the agreed limit), before slowly but surely that figure came down. The financial loss sustained by the Bank is impossible to compute retrospectively but was certainly containable; and the incoming tide had been stemmed, though at one point (late 1974) it lapped alarmingly close to NatWest.17

  Picking up the tab for the febrile early 1970s also involved concerns outside the Lifeboat’s remit. Two in particular warrant mention, the first being the asset-stripping and share-juggling Zeitgeist-reflector that was Slater Walker – up like a rocket, down like a rocket. ‘Slater claimed to be massively liquid,’ Keogh informed the governor on 21 December 1973 after a meeting at Slater’s request, ‘but he was obviously worried and spoke very forthrightly about the need to rescue the “fringe” lest there should be repercussions on his own bank.’ Over the next year and more, Slater publicly stressed the virtues of ‘retrenchment’, but was denied in December 1974 when he requested that Slater Walker be added to the Bank’s list of eligible names. ‘In our view,’ pronounced Hollom, ‘eligibility is a recognition which has to be built up over a considerable period of time and which may only be considered when a house’s acceptance business is judged to be of sufficiently high quality in the eyes of the discount market.’ 1975 proved the decisive year. In March, Slater called on Richardson to tell him that he had had an approach from Tiny Rowland’s Lonrho about purchasing Slater Walker (‘he assumed that we would not accept this and this was confirmed,’ ran the Bank’s note of the meeting); two months later he was still sufficiently persona grata for the deputy chief cashier, Rodney Galpin, to accept his invitation to Slater Walker’s cocktail party at the Dorchester; and in October, having first secured the Bank’s say-so, Slater abruptly announced his retirement from the City, with James Goldsmith to take over the running of the company. Propped up by the Bank, Slater Walker then staggered on for two more years, before in 1977 a major reconstruction saw the Bank (at considerable, much criticised expense) taking over the banking arm and proceeding to run it down, while other parts of the business were reconstituted under a different name. It already seemed a long time since ‘the Master’ (as Slater’s small shareholders liked to call him) might have joined the Court.

  The second concern, also with its element of controversy, was the Crown Agents: ill managed, ill advised, and by 1974 having staggering amounts lent out to suddenly floundering property companies, above all the Stern Group run by the Hungarian-born Willie Stern. The ensuing collapse – necessitating a government rescue – inevitably triggered the blame game. ‘We appreciate that the Bank is independent of government,’ noted the 1977 report of a committee of inquiry chaired by Judge Edgar Fay, ‘but it is government’s major contact with the City, and we think it would not have been unreasonable for the Bank to have played a greater part in this affair than it did.’ Hollom, however, was unrepentant. After calling the report ‘a horror story of the way the Crown Agents swam out of their depth into every kind of speculative venture’, his typewritten memo ended flatly: ‘To us, throughout, the Crown Agents were part of the Government machine which it was for the Ministry and the Treasury to manage and monitor.’ To which, with feelings clearly running strong, the deputy governor added a handwritten sentence: ‘The Bank are not to be regarded (as the Committee at times seems to do) as just another part of the Government machine.’18

  The events of 1973–4 could not but have significant supervisory implications. In June 1974 the governor explained to the Treasury’s permanent secretary, Douglas Wass, that his aim was ‘to move quietly and steadily since rush and drama would be bad for confidence’; and the following month, the historic Discount Office was closed down – with Keogh, in many ways unfairly given his poorly supported attempts to monitor the fringe banks, made the scapegoat – and replaced by a new Banking Supervision Division, under the ruggedly pragmatic George Blunden and much more heavily staffed. Within weeks, reflecting ultimately a shift away on the Bank’s part from the time-honoured virtues of trust, informality and personal judgement, it was insisting on regular prudential returns from all banks. ‘A tremendous relief to them, they were delighted – all except one bank … The oldest bank, Hoares Bank,’ recalled Blunden. ‘The chairman of Hoares phoned me up, when he had the letter saying we were going to be supervising them, and said, “This is quite absurd, we don’t want to fill in forms, and you don’t want to waste time looking at forms, and we don’t want to come down to the Bank of England to be interviewed. Why don’t you agree to come and have lunch with us once a quarter?”’ Under the new dispensation, no dice – and indeed there was by now also a changing international dimension to supervision, following the collapse in June 1974 of a leading German private bank Herstatt, prompting Richardson to seize the initiative and, at the following month’s Basle meeting of the BIS, persuade his fellow central bankers to adopt the principle of ‘parental responsibility’, whereby each central bank assumed responsibility for the superv
ision of foreign branches established by its domestic banks. The final, Treasury-led piece in the new supervisory jigsaw, though it took a considerable time to complete, was the eventual Banking Act of 1979, formally embodying a two-tier system of regulation under the Bank that in effect distinguished between ‘proper banks’ and licensed deposit takers. Almost certainly, Richardson’s preference would have been for the established banks to be excluded from the legislation; but as the chancellor of the day, Healey, realistically said to him, ‘Look, I cannot do it, I would like to but you cannot have it.’19

  1979 seemed a distant date indeed during 1974, a year of intense crisis management – and accompanying political-cum-economic drama – in Britain plc. Rampant inflation, a savage bear market, Labour winning two general elections were just some of the features of twelve months that culminated in the announcement on New Year’s Eve, the day after Aston Martin had gone into liquidation, that Burmah Oil was going to have to be rescued by the Bank on behalf of the government. Motivated in part by considerations of sterling plus the City’s standing as an international financial centre, it was an involvement that exposed the Bank to significant if misplaced criticism, on the grounds that its purchase of almost £78 million of BP shares hitherto held by Burmah Oil had been unfair to existing Burmah shareholders, with the shadow energy minister Patrick Jenkin even declaring in the Commons that ‘lasting damage’ had been done ‘to the credibility and independence of the Bank of England as a lender of last resort’. During the mid-1970s, however, most of the political flak concerned Labour, whose hostility to the City was matched only – and perhaps even exceeded – by the City’s hostility to it. The Bank sought to calm passions. In July 1974 the Stock Exchange’s chairman showed Hollom his proposed riposte to Labour’s consultative green paper on the reform of company law: ‘It was, of course, for them to decide on the tone of the document but I expressed my feeling that a cooler reply might have been more effective.’