Till Time's Last Sand

by David Kynaston

  What about the relationship between Richardson and the often combative chancellor, Denis Healey? In June 1974, barely three months after the first election, a moment of frisson occurred when Healey, ahead of a visit to the Bank, ‘requested meetings with the Dealers, the Chief Cashiers who are in direct touch with the gilt and day-to-day markets’ and ‘the principals of the Discount Office, with respect to both their responsibilities for the discount market and banks in general’, as well as wanting to meet ‘those in the Bank who have direct links with industry’. Reassured, however, by a Treasury mole that the meetings ‘may amount to little more than exhibitions of the Chancellor’s bonhomie’, the governor made no objection, merely letting it be known internally that he ‘would not object if the systems were given an extra polish to dazzle the Chancellor’. In general, moreover, it proved to be an eminently workable relationship: although Healey was unfavourably struck at the outset by the Bank’s determination to uphold what he called ‘the cabbalistic secrecy’ of the Norman era, and although Richardson was disconcerted by Healey’s insistence on cultivating his own contacts with key players elsewhere in the City, there developed a strong mutual respect, perhaps helped in the early stages by each recognising that the other was learning on the job. In any case, with so many enemies to his left, not to mention the extraordinarily difficult macro-economic situation facing him, Healey was hardly looking for unnecessary opponents. ‘Although he could be pretty brutal and rough, throw his punches around, he was a very cautious man when it came to taking on the Governor on a serious matter,’ recalled the Treasury’s Douglas Wass. ‘Time and again he would prefer the Governor’s views on a monetary matter or a capital market matter, a gilt issue, to the Treasury’s not because he felt the Governor was endowed with greater wisdom, [but] I think because he thought this wasn’t worth a fight.’20

  The documentation is somewhat patchy, but one’s sense is of Richardson becoming an increasingly confident and assertive figure in the course of his second year as governor. The turning-point may well have been in mid-December 1974, when in the immediate context of a beleaguered pound (causing the Bank to spend some £1 billion intervening in the foreign exchange market) he frankly told Healey that the time had come for a new economic strategy – which in practice meant a reduced PSBR (public sector borrowing requirement) and the implementation of a statutory incomes policy. Healey had been getting the same message from his advisers at the Treasury and now largely took it on board (involving on his part a conscious repudiation of his Keynesian assumptions), though it took another six months or so for his colleagues more or less to sign up. ‘Everyone now admits that you are the best government that we could hope to have at the moment,’ the governor remarked in March 1975 (with inflation still roaring ahead) to the paymaster general, Edmund Dell, who was in effect Healey’s deputy. ‘Why are you doing so many silly things? The NEB [National Enterprise Board, designed to invest public money in industry] will do no good at all …’ Over the next month or so a series of hugely inflationary pay deals revealed the much vaunted Social Contract (the government’s agreement with the trade unions over voluntary pay restraint) to be in tatters; but by early June the EEC referendum was safely won and the prime minister, Harold Wilson, was at last willing to take on his party’s left wing.

  Conveniently for him, for Healey and indeed possibly for the Bank, a major sterling crisis then blew up over the next few weeks. On the 12th the word to the governor from Bolton was that ‘the centre of activity in the latest attack on sterling’ was ‘the Dresdner Bank in Frankfurt’, with a spokesman for that bank having declared its belief that ‘Britain was crumbling’; the following week, Richardson told the Treasury that ‘what was puzzling to outside observers was why it took the Government so long to act’; soon afterwards, a beer-and-sandwiches session in Downing Street earned the railwaymen a 30 per cent pay settlement; and on the last day of June came the denouement, as sterling nose-dived with at this stage perhaps little impediment from the Bank. ‘Richardson in with Wass,’ crisply noted Healey. ‘“Sterling collapsing.” Tell him to see PM.’ Richardson duly went to No 10 – where, shortly before, Wilson had predicted to an adviser, Bernard Donoughue, that they were reaching the ‘point in the play when the Governor of the Bank of England enters from stage right’. Donoughue now recorded the words of the ‘haughty and patrician’ visitor: ‘This Government’s whole credibility has gone … We must end this nonsense of getting the cooperation and consent of others, the trade unions, the Labour Party. We must act now.’ No doubt there were shades of Cromer in Wilson’s mind; but 1975 was not 1964, and the government did act in accord with Richardson’s wishes, producing on 11 July an anti-inflation White Paper that included an incomes policy.

  What did the future hold? ‘The horrible experiences of the past two or three years ought to have given us a unique opportunity not only to see more clearly the monetary problems lying ahead in the recovery phase, but also to obtain and retain governmental and public support for the monetary and fiscal policies that will have to be pursued if the problems are to be overcome,’ reflected Fforde in a note to the governors shortly before the White Paper. ‘None the less,’ he added, ‘although the opportunity may be unique, it may not in practice be at all easy to grasp it and keep hold of it.’21

  Amid the political and economic turmoil, a running sub-plot through the mid- to late 1970s was the City’s troubled relationship with British industry.22 Richardson, who personally knew a wide range of industrialists and maintained his contacts, responded constructively and, like Norman between the wars, did all he could to keep government out of the picture. That constructive response had three main aspects. The first, involving pressure on the often reluctant and sometimes hard-pressed clearing banks, was seeking to expand the role of Finance for Industry (FFI), itself the creation of a recent merger between the Industrial and Commercial Finance Corporation (ICFC) and the Finance Corporation for Industry (FCI); the second, involving in 1975 the recruitment to the Bank of the near-legendary accountant Sir Henry Benson as industrial adviser, was the creation of an Industrial Finance Unit, essentially in its initial stages seeking to improve corporate governance through the influence of the major institutional investors; and the third, also involving Benson, was the launch in 1976 of Equity Capital for Industry (ECI), a Bank baby that struggled to get even the unenthusiastic support of the City. Taken in the round, the evidence is that these three initiatives did between them achieve some useful things, but fell well short of being game-changing. The Bank’s contribution to industrial finance was squarely in the remit of the Wilson Committee, chaired by the former prime minister and eventually reporting in 1980 on the functioning of financial institutions. Reasonably supportive, its main criticism of the Bank was to question whether it was yet ‘adequately’ equipped with ‘staff experience and qualifications to match its increased responsibilities’.23

  For Bank, City and industry alike the scourge of high inflation – never quite Weimar-like, but unprecedented in British living memory – was pervasive and dominant. By September 1975, with inflation running at an annual rate approaching some 25 per cent, a full-scale debate was under way at the Bank about whether the best way to control and check inflation was through targeting monetary aggregates. ‘There is some general feeling that we lack a philosophy about monetary policy,’ observed Christopher Dow, adding that ‘if we could agree on what we did believe in, we could then start to try to put it over in public’. John Fforde, Kit McMahon and Dow himself now all had their say, none of them starting remotely from the position of being convinced monetarists, unlike their colleague Charles Goodhart.

  The major, somewhat anguished contribution came from Fforde. He observed that ‘there are undoubtedly people of some distinction in the field of economic policy who would respond to an acceleration of monetary growth in present circumstances by advocating precisely the kind of action which every enlightened demand manager [that is, Keynesian economists] would totally reject�
��; he noted that the high inflation of recent years had ‘enabled the monetarists to seize and occupy different strategic ground to the demand managers and to accuse/attack the latter for failing to recognise and to tackle the true nature of the inflationary problem’; he called the existing debate between Keynesians and monetarists a ‘dialogue of the deaf’; he accepted that the ultimate ‘economic objective’ was that of ‘preventing inflation from destroying our entire politico-economic structure’; he accepted too that it was impossible to assess the viability in counter-inflationary terms of continuing ‘the prices and incomes/demand-management strategy’; and he acknowledged in conclusion that he was finding himself increasingly ‘sympathetic’ towards ‘the monetarist position’, in the sense anyway of it being ‘a position which the Bank could at least partly adopt, as a means of trying to get what we (and most other people) would want in the prices and incomes and PSBR areas’. Dow in his response then made a pragmatic, not dissimilar ‘non-monetarist case for a monetarist line’; as for McMahon, after noting that ‘there will be risks that monetary policy will prove a brittle instrument’, he asserted that nevertheless he was ‘for taking a deep breath and going for relatively tight control of money supply from now on and for as long as we can maintain it’. That was very far from the end of the internal debate – which continued through the winter of 1975–6 and beyond – but clearly the sands were shifting; and although Richardson declined for the moment to commit himself fully to any set position, it was significant that in March 1976 he specifically requested Healey to include in his forthcoming budget ‘a firm statement on monetary policy’.24

  That request was on the 30th – at the end of an extraordinary month in sterling’s chequered history. The backdrop was a running Treasury/Bank dispute going back to at least the previous December: in essence, the former wanted to engineer a significant depreciation of the pound in order to make British exports more competitive, while the latter was instinctively resistant. Dow, writing privately a few months later, recalled the tension:

  After a period when the exchange rate seemed to have got stuck on a plateau, the view strengthened, most vocally in the Treasury, that the exchange rate was too high and could with advantage be lower. We [the Bank] should cream off more dollars from the market when the rate was strong, or support it less zealously when it was weak; or we should be less anxious to preserve a favourable interest rate differential against rates abroad. What the external side of the Bank most hated was the Treasury breathing down their necks with the constant cry: ‘Go on, get the rate down’. If we tried to get the rate down we were likely to be seen doing it. For the dealers, to accept a fall brought about by events was one thing, but deliberately to worsen one’s own rate went right against the grain. To the Governor and others in the Bank, it also seemed close to a breach of faith …

  Matters came to a head in early March. On Tuesday the 2nd, following Healey’s lunch at the Bank the day before, Richardson reluctantly consented to the Treasury preparing a depreciation strategy involving a mixture of intervention and interest rate policy to get the exchange rate down; but in the event, before that policy could come into effect, the markets themselves took over, as the pound fell sharply on the afternoon of Thursday the 4th, at one point to a record low of $2.0125, amid what The Times reported as ‘a sudden wave of selling … thought to have largely emanated from London’, with currency dealers describing the sudden movement as ‘inexplicable’. The Bank would subsequently be blamed (including by Healey) for having sold sterling in a falling market and thus unnecessarily precipitating a sterling crisis; its own defence, which few listened to, was that it had started selling on the 4th as it became known that large buying orders from commercial banks were pushing the currency up, which it knew would displease the Treasury. Next day the pound finished trading below $2 for the first time ever, while over the following fortnight the slide continued. ‘Byatt said the Bank of England had done everything it could to steady, to interrupt and to create a sense of hesitation in the decline of sterling’s rate today,’ noted the Fed record on the 15th of a phone update from the Bank’s foreign exchange adviser, Derrick Byatt (subsequent historian of the Bank’s note issue). ‘But no matter what the Bank of England did, it was not believed in the market … Today has been a record in every respect. The drop in the rate is the largest ever, to $1.92 …’ And: ‘Generally speaking, the market is extremely disturbed by the lack of indication that the Bank of England intends to take a firm stand.’ The Treasury, though, had got what it wanted – a substantial depreciation – and could, in Wass’s retrospective words, ‘hardly believe its luck’; as for Healey, who had always had his misgivings about a deliberate fall in sterling, he took the broad view, privately admitting to ‘mixed feelings, like the chap who saw his mother-in-law go over Beachy Head in his new car’. There were few such mixed feelings at the Bank, which felt that its reputation in the foreign exchange market, and accompanying ability to maintain an orderly market, had been seriously compromised.25

  From early April the occupant at No. 10 was James Callaghan, who would recall his first meeting with Richardson:

  It was uncannily like stepping back 12 years and listening to a record of one of my talks with Lord Cromer when he was Governor. The decline in the sterling rate was a direct response to unparalleled uncertainty and loss of confidence. The US was taking a gloomy view of sterling’s future and industrialists were saying that all that appeared to be happening was that a bankrupt nation was selling off its stock. The Government’s borrowing requirement was too high and in due course would crowd out investment by the private sector …

  For the moment Callaghan would try to shrug this off as ‘Governor’s Gloom’, but in truth the foreign exchange markets had been thoroughly rattled by sterling’s debacle in early March. Over much of the next two months – with not only Bank and Treasury mutually failing to communicate effectively, but there developing within the Bank an atmosphere that Dow described as ‘one of collective hysteria’ – sterling took a battering, so that by Thursday, 3 June, it was down to a new low of barely $1.70. The immediate upshot, as initiated by the BIS and arranged by telephone over the following weekend (largely by the Bank), was a $5.3 billion stand-by credit to enable the Bank to support the pound, with a handful of central banks chipping in as well as the BIS and the US Treasury. Tellingly, Richardson’s preference would have been to go in the first place to the IMF for assistance, as the surest way of imposing greater discipline on government policy. Healey duly announced the package on the afternoon of Monday, 7 June, a day with a piquant aspect: the first visit to the Bank of the newish (from February 1975) leader of the Tory opposition, Margaret Thatcher. She came to lunch and it was, recalled Dow, a ‘disastrous’ encounter: ‘We were of course polite but did not take to her, because she spoke her mind in very broad and sweeping terms and gave little opening for anyone to tell her things which we could have told her and which would in fact have been useful for her to know. She sensed we did not like her: “I saw them smiling,” the Governor reported her as saying afterwards …’ Nor did it help her mood when she discovered later in the day that she had not been told by the Bank about the imminent stand-by announcement.

  The announcement itself just about did its job in terms of stabilising sterling, which gradually rose during the summer to the higher $1.70s. Intrinsic, however, to the massive loan was the assumption on the part of the lenders – and the international financial community at large – that the government would use the breathing space to reduce substantially its projected PSBR for 1976–7 from the £12 billion figure that Healey had given in his recent budget. Richardson for one now pressed that point implacably, visiting the Treasury at least twice later in June in order to demand that £3 billion of public expenditure cuts be made immediately. It was during such a visit that the Court had one of its relatively rare substantive (albeit inconclusive) discussions about a matter of high policy – appropriately enough, given that Richardson’s demand was
so dramatically at variance with the whole post-1945 social democratic ‘welfare’ settlement. Dow, by instinct an unashamed Keynesian, recorded the episode:

  The Governor missed that meeting: he was with the Chancellor arguing that spending should be cut. Maurice Laing [an industrialist], as senior Director present, asked that the wishes of the Court for his success in these endeavours should be conveyed to him. Sidney Greene [Lord Greene, a trade unionist] looked unhappy and asked a muddled question. Since some dissent had been voiced, I felt I could not stand aside. Though normally it would not have seemed proper for an executive director to criticise the Governor in open session, I raised my hand and said that, as the Deputy Governor (who was in the chair) knew, I had difficulty in fully associating myself with what Maurice Laing had just proposed. The Deputy then invited me – which I had not expected – to explain my view. Eric Roll then spoke up, starting by saying that he agreed with me, though perhaps ending more equivocally; to be followed by Adrian Cadbury [another industrialist], who seemed to be half agreeing, or was it agreeing with everybody? Jasper Hollom then thanked everyone.

  Eventually, after protracted haggling between ministers, Healey on 22 July announced cuts of just under £1 billion: appreciably less than the governor had wanted, but still a historic surrender on Labour’s part to the power of the financial markets. The chancellor in his speech also touched on the question of controlling the money supply. ‘In our judgement,’ a Bank paper sent to him three days earlier had asserted (in another clear defeat for Keynesianism in Threadneedle Street), ‘a publicly-announced target would do much to allay the generalised fear of excessive monetary expansion, by giving the public a clearer idea of the commitments of policy and greater confidence that action as necessary be taken to achieve the intentions of policy.’ In the event, Healey said that, for the financial year as a whole, ‘money supply growth should amount to about 12 per cent’. Was that a target or merely a forecast? Or somewhere in between? Theological debate raged – but, whatever precisely it was, undeniably it was another step in the monetarist direction.26