Till Time's Last Sand

by David Kynaston

  The next few weeks provided some brief relief for the Bank if not for the nation’s gardeners or groundsmen. ‘Byatt said Britain’s lack of water now means that sterling can’t float very well in the exchanges,’ noted his counterpart at the Fed in late August shortly before the drought broke. But for most of the rest of 1976 there were few jokes to be had.

  During early September, sterling held steady at around $1.77 only because of heavy Bank support, in turn leading to an increasingly unsustainable drain on the reserves; and by the 10th, against a backdrop of Labour’s proposals to nationalise the banks and news of an impending seamen’s strike (shades of 1966) combining to push sterling southwards by some 3 cents, not only did the government instruct the Bank temporarily to stop spending money on propping up the pound (with Callaghan still hoping to repay the stand-by loan), but Healey raised MLR to an unprecedented 13 per cent in order to try to get gilt sales moving again after the so-called ‘gilts strike’ of the summer. Sterling continued to slide, so that by Friday the 24th it was barely $1.70. ‘The market seems to be falling into the trap of reacting with excessive pessimism to developments in Britain,’ lamented the Bank’s Roger Barnes to the Fed that day about what he saw as the irrationality of foreign exchange dealers. The following week was memorable. On Monday the 27th, as Labour’s conference at Blackpool began by passing a resolution against any further public expenditure cuts, sterling fell to $1.68; and then next day came the drama tersely captured in Healey’s diary entry: ‘Packed in morning. £ still falling heavily. Gordon in just before I left Downing St. £ fell the whole morning. Out to airport. Decided to stay. Back to London. Series of meetings, 3% loss.’ Healey and Richardson had both been intending to fly that day from Heathrow, with the IMF meeting in Manila their ultimate destination, in the chancellor’s case via the Commonwealth finance ministers’ meeting in Hong Kong and in the governor’s case via a visit to Tokyo. In the event, neither man left Heathrow, with Richardson persuading Healey at the airport – before they returned together to the Treasury – that it would be too risky for the chancellor to be out of contact with the markets for as long as seventeen hours. The markets themselves saw sterling at a little below $1.64, having fallen 8 cents in four days of trading and apparently heading irresistibly towards £1.50.27 The following day, the 29th, Healey reluctantly announced a $3.9 billion application to the IMF – at the time, the largest-ever application to that body, and a request bound to involve more explicit and more stringent ‘conditionality’ than that attached to June’s stand-by credit.

  October proved a nervous, confusing month, pending the arrival in London of the IMF negotiating team. On the 7th, taking Richardson’s advice that it was the only way to (in Healey’s retrospective words) ‘sell enough gilts to get money under control’, the chancellor raised MLR to a politically disastrous 15 per cent. This was the somewhat controversial tactic of the Bank’s now coming to be known by sceptical observers as the ‘Grand Old Duke of York’: or in Forrest Capie’s words, seeking ‘to boost flagging sales of gilts by increasing MLR and then hoping that the ensuing rise in yields would attract buyers’, before ‘a falling trend in short-term rates was then engineered by the Bank to maintain the interest of gilt investors’. No observer, however, could have been more sceptical than the Labour backbencher Jeff Rooker, who soon after the MLR rise introduced a Prohibition of Speculation Bill (targeted at both currency and commodity speculation) that accused the Bank of being guilty of ‘treasonable mismanagement of the money markets’. By contrast, Labour’s chancellor and the Bank’s governor gave every appearance of complete harmony at the Mansion House on 21 October, with the former explicitly stating his commitment to a monetary target (for £M3, otherwise known as ‘broad money’, including not just physical money – notes and coins – but also deposits at banks) and the latter warmly supporting him for doing so. This was a carefully orchestrated display, for the benefit of the markets, of what Samuel Brittan in the Financial Times scornfully dismissed as ‘unbelieving monetarism’, declaring that ‘they have belatedly and inefficiently been pursuing a money supply policy at the behest of overseas opinion in which they do not have their hearts and are therefore carrying out badly’. In any case, it was a display soon eclipsed by the so-called ‘Sabbath thunderclap’: this was a Sunday Times story on the 24th claiming that the IMF intended to set sterling at $1.50, resulting next day in sterling falling by no less than 7 cents, to $1.55; and by Thursday the 28th it had hit a new low of $1.53. ‘Turmoil is everywhere, discussion is confusion and exchange rates move over wider and wider ranges as if capable of being blown almost in all directions at once,’ noted without exaggeration an end-October report by Barings.

  On 1 November the IMF mission arrived in London. It was headed by an Englishman, Alan Whittome, who had been at the Bank between 1951 and 1965, rising to become deputy chief cashier before moving to the IMF; and, befitting a Bank man, he would be evoked in his obituary as ‘elegant, courteous but firm and blessed with a dry humour’. Over the next six weeks, during the negotiations between his team and government, and then within government, the pound remained fairly stable, mainly between $1.62 and $1.67, nudging upwards as it became clear that a package of cuts was going to be agreed in return for the IMF’s massive loan. The Bank seems to have been relatively marginal in the process. ‘Officials in general,’ recalled Dow of both the Bank and the Treasury, ‘cut no ice with ministers at this juncture. There had been so much talk of British officials getting together with those of the IMF and agreeing a package they would jointly sell to ministers – talk, after all, not entirely beside the point – that the PM resolved to keep officials right out of it.’ The Bank’s major formal input came from McMahon, who for all his Keynesian sympathies was adamant that the government had no alternative but to take the IMF medicine and thereby pacify the markets. ‘If the markets do not accept that we have done enough and the rate starts to slide,’ he reflected in late November, ‘there are no shots left in the locker.’ And accordingly, he sent a paper to Healey proposing spending cuts of £2 billion and tax increases of £1 billion.28 In the event, the package of cuts that Healey announced to the Commons on 15 December amounted to £1 billion for 1977–8 and £1.5 billion for 1978–9. Press comment was generally critical, but the markets responded just about enthusiastically enough, with the pound closing the year worth £1.70. Altogether it was, from the Bank’s perspective, a tolerable end to a very long ten months.

  The mid-1970s, from the onset of the secondary banking crisis in late 1973 through to the succession of sterling crises in 1976, had been in their way as tumultuous as any short period in the Bank’s history – and the upshot, perhaps inevitably, was a reputational hit. ‘THE BANK OF ENGLAND’S FALL FROM GRACE’ was the title in March 1977 of a lengthy article in the American magazine Business Week, with the general unflattering thrust being that the Bank had become increasingly aloof, blundering and irrelevant. Among those quoted were the monetarist economist Brian Griffiths and a key figure in the eurobond market, Stanislas Yassukovich. ‘If you take the record of the Bank of England over the last five years in terms of technical expertise,’ declared the former, ‘you have to say that it is incompetent.’ While according to the latter: ‘There has been a clear-cut diminution of the Bank’s independence. In the past, the Treasury set policy, and the Bank set tactics. But now the Treasury even sets the tactics.’ And after noting that ‘for the first time in memory, banks are beginning to ignore the Old Lady and talk directly with government departments in Whitehall’, the article concluded portentously that ‘the decline of the Bank of England as paramount central bank in the West casts a gloomy cloud over the future of The City’. Three months later, on a Saturday in Basle, the head of Business Week’s European Bureau called on Richardson to apologise for the piece: ‘The Governor accepted the apology, commenting only that he had found it a stupid and ignorant article.’

  The very next day, however, there appeared in the Observer a major broadside entitl
ed ‘THE LAX OLD LADY OF THREADNEEDLE STREET’, with the two writers, Robert Heller and Norris Willatt, seeking to draw a portrait of an institution that ‘never locks any stable doors until far too many horses have bolted’. The relaxation of controls that had led to the secondary banking crisis, the inflationary expansion of the money supply, sterling’s unhappy experiences on the foreign exchange markets – all these were blamed squarely on the Bank, where because of its lack of accountability ‘no important heads have been seen to fall in public’. Further criticism came in October from the Guardian’s influential political commentator Peter Jenkins, who reacted to Richardson’s monetarist-flavoured Mansion House speech by arguing not only that it was ‘unacceptable in its practical implications and presumptuous in spirit’, but that it highlighted the Bank’s ‘unsatisfactory’ constitutional position. ‘The idea of autonomous control of money supply is impractical and in spirit antidemocratic,’ he declared, invoking the deflationary ghost of Norman, and added that the Bank was ‘too much of a lobbyist on behalf of City interests to perform the more independent role envisaged by the Tories [who had recently been making vague noises to that effect] or to perform effectively as the agent of the Government’. Jenkins did not explicitly touch in his piece on the question of the renewal of Richardson’s governorship for a second five-year term; but later that autumn ‘for a week or two’, in Dow’s words, he ‘ran a very virulent and personal campaign against his reappointment’. It is possible that Healey and Callaghan hesitated, but in early 1978 the governor’s reappointment was duly announced.29

  In fact there is evidence to suggest that the Bank – including Richardson himself – retained during the mid- to late 1970s considerable authority, even if life was made significantly more complicated (and liable to interference-cum-politicisation) by managing a floating rate as opposed to defending a fixed rate. The Orion episode in early 1976 was a good example of the governor’s eyebrows at their most classically raised. The context was a large UK Electricity Council issue, which was being lead-managed by the consortium bank Orion, relied heavily on Arab money and sought to exclude Rothschilds and Warburgs from the underwriting group. Those two Jewish houses complained bitterly to Richardson, who summoned Orion’s William de Gelsey and told him to halt the issue. The latter protested that it was too late, to which Richardson countered, ‘I think that you will find that it is not too late.’ Orion had no alternative but to change the arrangements rapidly, with lenders found elsewhere and Rothschilds and Warburgs reinstated. Or take the sale in June 1977 of the BP shares that had come into public hands following the Burmah Oil rescue. The world’s largest-ever equity offering at the time (£564 million), it hit a serious last-minute obstacle on the afternoon of Monday the 13th, with an underwriting price of 845p settled upon but still needing final government approval. At which point Richardson was asked to go to No. 10, where he was told that some Cabinet members were objecting to the sale. Confronted by this development, Richardson rang the government broker, Tommy Gore Browne, to ask him what the consequences would be of not going ahead. Gore Browne’s uncompromising reply was that even a twenty-four-hour delay might well defer the launch for months. As a thunderstorm over London began to build up that evening, the City’s key figures in the BP sale waited for another call from Richardson, who in turn was also waiting for the phone to ring. Finally, as recorded by his private secretary, ‘the Chancellor called the Governor at 8.30 pm and reported that, with extreme reluctance, the Prime Minister had given his approval for the sale to go forward, at the suggested price of 845’. Richardson duly rang Gore Browne, telling him to proceed, and next day the issue was successfully underwritten by 782 institutions.30

  Yet overall, notwithstanding these episodes as well as the Bank’s successful resistance to index-linked gilts and tender selling (prompting Donoughue’s comment at the No. 10 Policy Unit that ‘it was clear that the Bank considered its own mode of working both to be perfect and nobody else’s business’), there perhaps was some erosion of authority. Within the City, the so-called ‘Sarabex affair’ was a significant pointer, arising in autumn 1977 when a London-based foreign exchange and money broker, dealing mainly for Middle Eastern banks, filed a formal complaint to the EEC about the restrictive practices operating in London, above all the impossible-to-fulfil, Bank-imposed, catch-22 condition that one could not become a member of the Foreign Exchange and Currency Deposit Brokers’ Association (FECDBA) unless one was already providing BBA (British Bankers Association) banks with ‘a full service’ – rather difficult, given that the Bank insisted that members of the BBA and other authorised banks in London solely used members of the FECDBA to conduct their foreign exchange business. The Bank itself, in a public letter to the EEC in November 1977, strongly defended existing arrangements, mainly on the basis that they were necessary to preserve an effective and orderly market; and it now looked to the clearing banks, the main users of the foreign exchange market, for support in this stance. Here, however, it was disappointed, giving the NatWest’s Bill Batt (acting head of the foreign exchange sub-committee of the BBA) a difficult meeting with the Bank’s John Page. ‘I had hoped the clearing banks would support the Bank of England,’ remarked the chief cashier frostily but to no effect, and the following year the Bank retreated from its position, with Sarabex becoming a member.31

  Restrictive practices also operated on the Stock Exchange; and though the Bank added its lobbying support to the Stock Exchange’s efforts to avoid having its rule book referred to the Restrictive Practices Court, it was to no avail, with the Labour minister Roy Hattersley formally making the reference in February 1979 – a crucial step on the eventual road to the Big Bang of 1986. Then of course there was the rumbustious Healey:

  I did introduce an innovation when I was Chancellor [he told a Select Committee in the 1990s] because before I became Chancellor the Bank would not allow Chancellors to talk to people in the City because it regarded itself as God’s appointed ambassador on earth from the City to the Treasury. It is one of the few things I had an argument with Gordon Richardson about … I said I wanted to hear not from the chairmen of the banks, who are usually time servers, but from the chief executives who are often very, very able indeed like Alex Dibbs who was at NatWest in my time … I said I wanted to have them in myself and talk to them about their problems. ‘Oh, no; this has never happened before’. In the end they agreed but only on condition that I had a spy from the Bank of England, Charles Goodhart, who I like to hope was perhaps a double agent in the end.

  The Bank’s influence was possibly even waning when it came to honours. ‘I said that we were grateful for the work that Mr Goldsmith was doing with Slater Walker,’ noted Richardson in early April 1976 after speaking with Wass about the proposed knighthoods in Harold Wilson’s resignation honours list, ‘but I was very positive that it would be quite unsuitable, and indeed embarrassing for us, for him to be recognised in this way at this particular time.’ Sir James, however, it was.

  At a more elevated level, these years also saw an agreement, reached between central banks in Basle in early 1977, to run down the sterling balances – an agreement over which, according to Healey, the prime minister was ‘unfairly grudging’ in his thanks to Richardson for securing it. In effect this meant the running down of sterling as a reserve currency, only two months after the Bank had issued a notice prohibiting the use of sterling as a finance medium for non-UK-related (that is, third-country) trade.32 Would the demise of sterling’s international role handicap London as an international financial centre? It was a sign of how much had changed in the past two decades that most informed people, including at the Bank, were justifiably confident that it would not.

  Monetarism, meanwhile, continued to come into increasingly close focus. ‘Reflections on the conduct of monetary policy’ was the title of the inaugural Mais lecture, given by Richardson in February 1978; and in it he endorsed the phrase of Paul Volcker (soon to be his American counterpart) about the need for ‘practical mone
tarism’ and observed that ‘formulating a line of practical policy and trying to stick to it, while yet remaining appropriately flexible amid the uncertainties of day-to-day affairs, feels very different from devising ideal solutions in the seclusion of a study’. So no doubt it did, but by this time Fforde, one of the unbelieving monetarists, had already done much to improve the quality of monetary data and their regular monitoring and assessment. Was there a hidden agenda behind Richardson’s monetarism? Certainly he believed that Keynesianism and an acceptable rate of inflation were no longer compatible; but there was also a significant phrase in his lecture, where he described monetary targets as representing ‘a self-imposed constraint, or discipline, on the authorities’. Presumably ‘the authorities’ was code for the politicians, and behind them the inflationary demands of a mass electorate. Even so, after Reginald Maudling had written to him following the lecture to express scepticism about monetarist dogma, he was at pains to call the former chancellor and reassure him:

  The Governor took the opportunity to touch on a couple of points arising from the lecture. He said that the emphasis in discussion of monetary policy was invariably in terms of restraint, but pointed out that in each year there had been a planned expansion in the money supply. The stance of monetary policy was thus not directed solely to deflationary ends. He touched also on the inter-relation of the growth in the monetary stock and inflation: the relationship was not mechanistic, but there was clearly an equivalence in the longer run between high rates of growth in the monetary aggregates and high inflation. He stressed the importance the Bank attached to restraining inflation but indicated that the Bank differed from pure monetarists in believing that all means available should be used in tackling inflation – including incomes policy.