More immediately, on holiday in Switzerland, she happened to meet the monetarist economist Karl Brunner and the Swiss central banker Fritz Leutwiler. To both she unburdened herself; from both came the message that the drastic overshoot must be the result of Bank of England mismanagement. Early September saw the denouement, with August’s fast-growing, seemingly out-of-control figures due to be announced on the 9th. Wednesday the 3rd was Richardson’s longest day. At a 9.30 meeting at No. 11, accompanied by John Fforde and Charles Goodhart, he was told by Howe that Thatcher was ‘clearly unhappy that the monetary situation seemed to have gone wrong, and would be looking for reassurance that the Treasury and the Bank had a grip on the situation’; to which he responded by asserting that ‘the markets were clearly inhibited by the fact that they no longer knew where they were on the map’ and noting that ‘the monetary statistics were undoubtedly in disarray’; while Goodhart commented that ‘changes in £M3 were not reliably related to movements in the real economy’ and that ‘£M3 in recent years had been much influenced by structural shifts in the financial sector’. At 6 o’clock the governor was back in Downing Street, this time at No. 10 and on his own. ‘Her strategy was right … it was not being properly operated … the Bank of England was functioning as a lender of first resort, not last resort … the clearing banks were shovelling money out …’ Richardson listened to it all and more, before eventually the meeting was adjourned. Two days later, on Friday, the chancellor’s office rang the governor’s office to say that the prime minister wished to resume ‘the other day’s meeting’ on the 8th at 3 pm, only to be told that Richardson would be in Basel for a BIS meeting. So in the event that Monday afternoon, with McMahon also away, it was Fforde and George who arrived at No. 10 to see Thatcher and Howe. ‘Who are these people?’ she reputedly said on coming into the meeting room, and then gave (according to the record by her office) what Cobbold would have called both barrels:
The Prime Minister said that she understood that the underlying rate of monetary growth was now reckoned to be 15 per cent or higher. This was extremely disturbing – given that the 7–11 per cent target was the centre-piece of the Government’s economic strategy. It seemed to her that the Bank had been pursuing an interest rate policy rather than a policy to control the money supply … As long as the clearers could rely on the Bank to relieve any pressure on their liquidity, they would surely be all too willing to maintain a high level of lending … On monetary control, she was disappointed that it had taken so long to reach a conclusion on the proposals to change over to a monetary base system. Finally she wondered whether more could not have been done to put pressure on the clearing bank chairmen to get them to reduce their lending.
Howe characteristically tried to calm things down. ‘It was easy to be wise after the event,’ he observed. ‘Not only the Treasury and the Bank, but also most outside commentators, had under-estimated the underlying rate of monetary growth.’ And the two Bank men, with George doing most of the talking, apparently did attempt in trying circumstances to mount a defence, noting that the issue of methods of monetary control was ‘extremely complex’, which presumably went down well. The meeting ended with Thatcher stating that ‘it was crucial to get the money supply back under control’. Clearly it was a memorable encounter, naturally mentioned by Dow: ‘I got no coherent account of how it went. There was evidently much ill temper and interruption, before which the chancellor apparently bowed his head; and, in effect, so likewise (if one can imagine his silent fury) must John Fforde have done. Terry Burns [chief economic adviser at the Treasury] said afterwards it was a pity no one spoke up against the tirade since the PM had nothing to do but repeat herself, and was left frustrated.’ As for Fforde, added Dow, he was so shaken that apparently he returned to the Bank saying that he refused to meet Thatcher again; and it was not long before the word was out about the prime minister’s extremely dim view. ‘Now we have Mrs Thatcher buttonholing all and sundry to proclaim that “it’s all the Bank’s fault,”’ wrote Ferdinand Mount in the Evening Standard. ‘Any passing Swiss banker or Cabinet sub-committee is treated to a lecture on the incompetence of the present Governor, Mr Gordon Richardson. He has, she claims, totally messed up the money supply; he never tells her a thing; how can you run a country with a central bank which does not understand the simplest things, and so on, and so on.’7
The closing months of 1980, and early months of 1981, were an extremely difficult time for all concerned, as manufacturing output rapidly declined and mass unemployment became a reality – a grim state of affairs owing much to what the financial historian Duncan Needham has called ‘a misconceived monetary policy’. Indeed, on the final page of his authoritative survey of British monetary policy between the late 1960s and early 1980s, he has this striking passage about Thatcher herself:
If, instead of simply berating Bank officials, she had listened to their advice, she might have learned that it is not possible to control the broad money supply in the UK and, even if it were, that there is no robust relationship between £M3 and real economic objectives such as price stability and growth. If she and her Treasury team had listened to the Bank in 1979, the British economy might not have shrunk by nearly 6 per cent.
Given that judgement, blessed of course with the benefit of hindsight, it is particularly instructive to look at the memo that McMahon sent to Richardson on 18 September – ten days after the great blow-up, and immediately following another difficult meeting at No. 10 – on ‘The Bank’s Position on Monetary Policy’. He began by considering the suggestion from Goodhart and Dow that the Bank ‘should make some form of apologia to the Prime Minister on monetary policy’:
There is a case for exculpating ourselves from unfair accusations that have been made. Thus we could refer to our record of scepticism and concern about the effects of the corset; the fact that the rollovers and the so-called ‘interest rate policy’ were a firm Government decision; the difficulties the banks have in reducing rates quickly; the difference between experience here and in the US, etc. My feeling in the light of this morning’s meeting, however, is that it might be better not to spend time defending ourselves. The danger is that, to hostile or sceptical eyes, such arguments will indeed look defensive.
Instead, argued McMahon, it was better for the Bank to look ahead constructively to the future and to try to help Thatcher: ‘I read her as seeing quite correctly what a real (quite apart from presentational) jam we are all in and very much wanting to be shown a possible way towards the shore.’ But how? McMahon noted that, at the meeting, she had said, in response to Richardson’s explicit question, ‘that she would like to have the exchange rate lower than it is so long as (a) it was consonant with the continuance of the existing monetary policy and (b) it did not involve a plunge’; and, added McMahon (no doubt entirely accurately), ‘she did not join Lawson’s strong rebuttal of the idea of joining the EMS’. That, however, would not be enough in itself: there was also an urgent need for lower interest rates. And here McMahon contended that the Bank’s policy should be one of encouraging a reduction in the PSBR in order to achieve those lower interest rates – in other words, through public expenditure cuts rather than monetary policy. There may or may not have been a causal link, but in effect that was what would happen. During the autumn the MTFS turned in practice increasingly into something more like a fiscal than a financial strategy; monetarist dogma from the West End started to be toned down, as policy became looser; and Howe’s famous/infamous March 1981 budget savaged the PSBR. McMahon himself was enough of a Keynesian to be having by that time serious misgivings – ‘I believe that history will view fiscal tightening now as very misguided indeed,’ he predicted in February – but the essence of the government’s approach was very much in line with his solution the previous autumn.8
Over the next year and a half, there remained in Threadneedle Street only patchy sympathy with the general thrust of the government’s economic approach. In May 1981, at the first meeting of the deliberatel
y policy-oriented Deputy Governor’s Committee (DGC), McMahon speculated rather wistfully that ‘if there was still no sign of recovery by the autumn, the Government might be more susceptible to suggestions for stimulating action provided they could be presented in a way which did not seem too grossly in conflict with the broad strategy’; later that summer, he and Dow were in favour of pursuing what Dow termed ‘An alternative policy’, essentially reflation through reducing indirect taxes rather than expanding public investment, though with McMahon going somewhat further in wanting to introduce ‘a 12-months freeze’ (or what he wryly called ‘the final heresy’); and in mid-September, Dow was stating frankly that ‘the Government’s central economic strategy is in some disarray’, adding that ‘by mid-October Government policy will probably be seen to be in a critical state’. The chances are that Richardson distanced himself somewhat from these viewpoints, and it is perhaps telling that the chancellor would specifically pay tribute to the governor for his contribution during that autumn’s ‘heavy weather’ as sterling continued to plummet from its dizzying 1979–80 heights. ‘Gordon Richardson’s advice was always measured,’ recalled Howe, ‘tempered by long, front-line experience of the need to act more rather than less decisively, above all sooner rather than later in face of unmistakable signals from the exchange markets.’ By the following summer, most dispassionate observers reckoned that the economy was at last starting to recover, but McMahon at a DGC in July 1982 declared that it was ‘increasingly clear that the UK was on a bad track’, before asking: ‘What sort of forecast would we want before we would advocate remedial action?’ At which point, neither of the Bank’s two rising men were willing to back him. It was, thought Eddie George, ‘difficult to say’, but he ‘certainly did not think that the present forecast was sufficient’; while David Walker ‘cautioned the meeting against premature urgings for fiscal reflation’. Nor was there much joy for grumbling industrialists when they came later that month to see Richardson. The CBI’s Sir Campbell Fraser and Sir Terence Beckett arrived ‘in sombre mood’, a mood that must have darkened after they had listed their complaints about what was still historically a high MLR: ‘The Governor remarked that industry’s focus on interest rates was in reality a reflection of the weakness of profits. The truth of the matter, he said, was that the profitability of industry was lamentable and that improvement must come from within companies. Reductions in interest rates were not the way to sustained gains in profitability.’9
Over this same year and a half or so, monetary policy continued to become less rigid. Thatcher’s favoured monetary base control was by the start already in effect off the table, though August 1981 saw a change to the Bank’s operating techniques in the money market – changes scathingly described by Goodhart retrospectively as ‘a kind of consolation prize for MBC monetarists (for not getting MBC)’, in which ‘the authorities agreed that operations could become somewhat more market-oriented with less reliance on discount-window lending’. Or as he explained further:
The authorities would still set interest rates (with a view to hitting their monetary target), but would, it was suggested, disguise what their interest-rate objective was (the unpublished band), and pretend that it was all the market’s doing. Frankly this was confused and silly. In practice it had little effect, apart from being a pretext for the Bank to introduce some reform and widening of British bill markets, which it wanted to do anyhow for its own purposes. The unpublished bands, etc., never transpired; the authorities went on announcing administered changes in minimum lending rate, and the monetarist overtones in the supposed ‘new methods’ rapidly became a dead letter and forgotten.
MLR was soon abandoned and replaced by the Bank of England repurchase rate. As for the MTFS itself, it was by spring 1982 palpably losing coherence, diluted by an array of rival monetary aggregates: narrow (M1), broad (£M3), broader (PSL2). Indeed, even before then, in December 1981, a piquant conversation took place between Richardson and Wass. ‘He was good enough to say,’ recorded the governor for his deputy’s eyes only, ‘that it was now clear that the reservations that I had expressed two years ago about the MTFS were being shown to have been right.’ And increasingly, by that time, the Bank was pushing hard – and even optimistically – for entry to the EMS. ‘I believe the tide is now beginning to run in favour,’ observed McMahon as early as August 1981, citing the ‘growing disenchantment’ on the part of Lawson (by now very pro-EMS) and ‘to some extent’ Howe with ‘the existing framework of monetary targets’. Nor in this case was McMahon an outlier within the Bank. ‘An exchange rate standard has once again come to seem attractive as a possible alternative anchor for domestic policy,’ noted Dow at about the same time. ‘This is felt as strongly and explicitly by those on the monetary side – John Fforde and Charles Goodhart – as by those more detached like myself.’ The crunch came in January 1982, amid some sudden nervousness. ‘There is still very great resistance to joining EMS, especially from the Prime Minister,’ conceded McMahon on the 18th. Moreover, ‘we should I think have to agree that the present is not a particularly opportune time to join: at around 4.30 the £/DM rate looks too strong’, though he was still hopeful of ‘finally (?some time in the spring) taking the plunge’. Four days later, on the 22nd, Thatcher chaired a meeting with ministers. Howe was opposed, not least because of a concern that the whole European idea might be soured in British eyes if the EMS appeared to cause high British interest rates; and Thatcher agreed, though for a very different reason, with her dominant anxiety instead being loss of ‘freedom to manoeuvre’. Accordingly, to the disappointment of the Bank (including Richardson), the non-decision was taken to continue to wait until the time was ‘ripe’.10 Rather like Thatcher’s premiership itself, this one would run and run.
The early 1980s were an exceptionally troubled time for British industry, which for the Bank meant not just intense debates about high policy but also a notably active role for its Industrial Finance Division under the restlessly energetic David Walker.11 ‘In the past four years,’ he recorded in early 1984, ‘the Bank has been concerned with more than 150 mainly listed companies, some 50 very closely, where lending bankers were reluctant to increase facilities and, in some cases, disposed to withdraw those already in place.’ A flavour comes through in a catch-up note that McMahon sent to the returning Richardson in November 1981. ‘We have leapt from crisis to crisis on this,’ he wrote about the drama surrounding Sir Freddie Laker and his airline. ‘As I have always half expected, the Prime Minister, after taking a ruthless line in the abstract, did a volte face when it suddenly looked as if he was going to have to go. However heroic work by D.A.W. has probably managed to see him through the immediate crisis without any significant Government contribution. The underlying situation of course remains grave.’ So it did, with the company conclusively collapsing in early 1982, and inevitably there were mixed fortunes overall. ‘Good progress had been made over the last two months towards establishing satisfactory financing arrangements in three important cases,’ Richardson told the clearers that summer, ‘although others were in worse shape’; and he added that ‘the Bank was now continuously involved in an array of smaller cases, the problems of many of which were likely to persist for a long time’. Successes in these years included Turner & Newall, John Brown and Weir Group, while failures included the textile machinery group Stone-Platt Industries as well as Laker. Throughout, the Bank’s principles of action remained largely consistent: banging together the heads of the troubled company’s creditor banks and sometimes institutional shareholders; if necessary, bringing in new management to the company; and making it clear there would be no government or Bank bail-out. Looking further ahead, the Bank had become increasingly convinced that industry would be on a much sounder footing if it had an improved corporate governance model, resulting in the launch in early 1982 under Bank auspices of Pro Ned (Promotion of Non-Executive Directors). Its brief was to promote the wider use of non-executive directors, and under the leadership of Jonathan
Charkham, a skilled networker recruited from the Civil Service, it made significant progress. ‘What matters in business is the strength of direction and management,’ Walker crisply informed an audience of West Midlands industrialists two years after Pro Ned began. ‘This transcends every other consideration …’ But as he was also at pains to emphasise, the non-executive director was in himself (very occasionally herself) ‘neither magician nor panacea’.12
One episode in the early 1980s was well out of the normal run of Bank activities. This involved a key role in the US/Iran hostage deal of January 1981, by which the release of fifty-two captured US personnel in Iran was secured against some $8 billion in cash, gold and securities. The Foreign Office naturally welcomed the Bank’s participation in helping to execute the complex plan, unlike the financial secretary. ‘How much profit,’ Lawson aggressively asked McMahon, ‘are you going to make on this deal?’ Shortly afterwards, McMahon himself, accompanied by the chief cashier David Somerset, flew to Algiers, where the Algerian government was acting as an intermediary between the two countries; and over a very long weekend of difficult negotiations, they waited to release the Americans’ money when the moment was judged safe. ‘There were in practice,’ recalled McMahon, ‘many problems to solve’:
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