Till Time's Last Sand

by David Kynaston

  Six months later, in June 1985, the report of the joint inquiry (chaired by Leigh-Pemberton himself) appeared. Its proposals included ending the 1979 Banking Act’s two-tier system; its replacement with a single authorisation to take deposits, thereby giving the Bank broader powers over all banks; regular dialogue between the Bank and the banks’ auditors; and the Bank’s much criticised supervisory staff (for instance by Euromoney in its recent investigative piece, ‘How the Bank of England Failed the JMB Test’) not only to be increased, but to be given commercial banking experience. Lawson himself, in his accompanying statement to the Commons, did not deny the Bank’s culpability: ‘On this occasion the Bank did not act as promptly as it should have, and to some extent fell down on the job.’ These were carefully measured words, but there was at least one person who wondered whether the Bank should even retain its supervisory role. Leigh-Pemberton the following month recorded a characteristic encounter with Lawson:

  He opened by wishing to speak to me privately and went on to say that he had had a difficult time with the Prime Minister on the question of banking supervision. She was arguing that the function should be taken away from the Bank of England, but he said that he had succeeded in dissuading her from this, largely on the grounds that it would detract from the Bank’s standing. I went on to say that it was not likely to make much difference whether the function was in the Bank or not in terms of the people who had to do it, since there was clearly a limited cadre of qualified personnel. He cut me short and said there was no need to argue the merits of the case since he had dissuaded the Prime Minister, but he wished to emphasise to me the need to ‘sharpen up’ the supervisory function.

  Leigh-Pemberton, thinking about it afterwards, was a little sceptical. ‘I am inclined to wonder just how deeply the Prime Minister’s attack really went,’ he reflected. ‘Information reaching me from No. 10 suggests that the Bank is still held in reasonable esteem there and I think I have to make up my mind about the extent to which the Chancellor may be both using and exaggerating this threat.’ That was probably unfair to Lawson, given that when two months later the governor was given the treatment by the prime minister in her fiery, post-Austria mood, she not only requested ‘a paper on banking supervision’ but ‘seemed to feel that the Bank of England was barely adequately equipped to supervise the City and that we should need “some system of inspection”’.30 In any case, Lawson’s White Paper on Banking Supervision appeared in December 1985, embracing much of the substance of the June report and directly creating the path to the 1987 Banking Act.

  Newly in charge of the Banking Supervision Division by this time, having sorted out JMB, was Galpin. ‘JMB has left its imprint,’ he observed in January 1986 after two months in post, pointing to how ‘particularly among the younger members of the Division there is a desire for more bureaucracy and more ratios with a consequent loss of flexibility – and some danger of eroding one of the strengths of the system’. Other causes of concern were that ‘the search for consensus leads to policy decisions taking far too long to establish’; that ‘there is no clear sense throughout the Division of the direction in which Banking Supervision is moving’; that ‘the records of prudential interviews while generally of high quality do not always comment on those issues which should be of primary concern such as liquidity, capital adequacy and the quality of assets etc’; and that ‘though welcome, the 25% increase [announced the previous September] in staff resources is not, at working level, regarded as sufficient’, with Galpin wanting 160 people, as opposed to the 125 currently budgeted. Just as after the secondary banking crisis, there had, perhaps inevitably, been a post-JMB scapegoat: this time Peter Cooke, moved to concentrate on coordinating international bank supervision, particularly in Basel. Cooke himself, renowned for his objectivity, would in later years recall the difficult hand he had been dealt in the early to mid-1980s. ‘One of the big problems was that the resources simply were not available to do the work, which patently we knew needed to be done, in order to block all the holes up … We were constantly on short rations and constantly really stretched … I think the juxtaposition of “let’s trust management” on the one hand and “let’s be professional about this” on the other was being bridged slightly uneasily at times …’ It was indeed an uneasy bridge, and the fact was that until the JMB disaster there was still, again to quote Cooke, ‘a fairly strong ethos within the Bank, and within banking supervision, which derived from as it were the environment of the 70s, which said that the essential issue for supervisors was good judgements of management’.31 Judging management? Or poring over all the figures? For better or worse, it was now going to be a swing to the latter.

  In another area altogether, but of equally pressing concern to the Bank, the mid-1980s confirmed that the question of Britain’s membership of the ERM (the Exchange Rate Mechanism, the operating arm of the European Monetary System) was coming to matter more than the arcane shibboleths of monetary policy. ‘Monetary targets were adopted in the belief that the relationship between the monetary aggregates and nominal incomes, the velocity of money, would be reasonably stable and predictable,’ recalled Leigh-Pemberton in an important lecture at the University of Kent in October 1984. However, he went on, ‘the hopes of those who looked for a simple, close and reliable relationship, that would hold even in the short term, have not been fulfilled’. What, then, was the alternative ‘in place of a monetary domestic target’? Noting that ‘the adoption of an exchange rate objective, through a pegged relationship with a foreign currency, or in earlier times with gold’, had ‘tradition’ behind it, the strongly pro-Europe governor wondered aloud whether ‘for the United Kingdom with its close political and economic ties with our European neighbours, there could be a number of attractions in taking a full part in the exchange rate mechanism of the EMS’. Within the Bank, he had support from McMahon and Loehnis; and from early 1985, if only on a provisional basis, from the hitherto sceptical George, for whom the sterling crisis that January – threatening to create the one-dollar pound and causing a serious hike in interest rates – may perhaps have been a signal of the desirability of a collective attempt to tame the financial markets. On 6 February, ahead of a ‘seminar’ at No. 10 the following week, McMahon put the case on paper – for internal consumption. Acknowledging that the question of joining the ERM was ‘a complex one, which has been argued back and forth in the Bank for more than five years, and on which a very large number of complex considerations can be adduced on both sides’, he nevertheless argued unambiguously that ‘we should join now’, noting that ‘it is hard to believe that, whatever happens after joining, developments in our exchange rate would be less welcome than they have been from time to time in the past’. Among the positives he cited were that ‘we would be linking ourselves with a demonstrably anti-inflationary bloc’ and that ‘the public at large understand better the anti-inflationary constraint of holding the exchange rate than they do one of holding the money target’. Moreover: ‘Floating exchange rates seem to me demonstrably getting out of control and producing economic disequilibria and policing difficulties for the world’s major economies which by now are surpassing those distortions and difficulties provided by the Bretton Woods system in its late and damaging phase.’32 The understandable desire, in short, was to return to the once familiar certainties of a more orderly framework.

  At the 15 February seminar – the first of the three ERM political set-pieces during 1985 – both Lawson and Leigh-Pemberton argued for joining, though not necessarily immediately, while Thatcher for her part (recalled Lawson) ‘chose to dwell on the consensus that now was not the right time to join, and ignored the majority feeling that the right time was not far off’. Ironically, in the weeks that followed, Leigh-Pemberton then became anxious – with the ERM question in abeyance – about Lawson ditching prematurely in the MTFS the significance of the broad aggregates as monetary indicators. ‘While we wholly understand the present discomfort over broad money,’ he wrote to him in Marc
h, ‘we do not think that broad money can be simply set aside’; and he warned against anything that could be seen as ‘a significant weakening in commitment to monetary discipline with potentially substantial adverse market consequences at a time when we need to do all that we can to re-enforce credibility’. Some four months later, in July, McMahon expressed similar anxiety. ‘The Chancellor wished to discard £M3 as a target,’ he told a briefing meeting at the Bank, and accordingly he was ‘concerned that targets for the monetary aggregates would lapse without an alternative discipline being in place, such as joining the ERM’. But lapse they would: in October, in his Mansion House speech, Lawson announced that he was dropping the £M3 target, declared that henceforth ‘the inflation rate is judge and jury’, and in effect abandoned monetarism. Leigh-Pemberton at the same dinner made tactfully sympathetic noises – ‘real life is far too complex for absolute rules’ – but no mention of the ERM as a possible alternative anchor.

  By this time, in fact, the second ERM summit at No. 10 had already taken place: on 30 September, with the governor accompanied by McMahon, Loehnis and George. After Lawson had made his case for joining, above all in terms of reinforcing the government’s anti-inflationary strategy, ‘Robin strongly supported me, claiming that the need to make subjective judgements about the interpretation of the monetary indicators, coupled with our resistance to the increasing pressure from the market to disclose an exchange rate “target”, were undermining the credibility of policy.’ Thatcher, however, remained unconvinced, though agreeing to a further meeting on the subject; following a post-mortem lunch with Lawson, the governor reflected that ‘it seems that we [Bank and Treasury] may have overplayed our hand at the last meeting and appeared to be “ganging up” on the PM’. The final summit, involving a broader spread of ministers, was on 13 November, with Leigh-Pemberton again present, this time flanked by George. As usual, Lawson put forward his pro-joining arguments; other ministers now had their say, on the whole in favour of joining; and Leigh-Pemberton asserted that (in Lawson’s words) ‘the difficulties of sterling outside the ERM were greater than they would be inside the ERM’. The crunch came at the end. ‘If the Chancellor, the Governor and the Foreign Secretary are all agreed that we should join the EMS then that should be decisive,’ declared the deputy prime minister, Lord Whitelaw. ‘It has certainly decided me.’ To which Thatcher instantly responded: ‘On the contrary: I disagree. If you join the EMS, you will have to do so without me.’ End of meeting – and, according to Lawson’s retrospective account, end of ‘an historic opportunity’, when ‘the time really had been right’.33

  All this, with the JMB episode starting to recede, probably brought chancellor and governor rather closer together; and during the next sterling crisis, in January 1986, the two men were allies as they tried to persuade Thatcher that there was no alternative to an interest rate rise:

  I told her [recalled Lawson] that the pound was under severe pressure, and I was afraid that if we did not act that day the bottom might fall out of the market. She insisted that it was quite unnecessary, that it would be a positive disaster, and much else in the same vein. Eventually, after a particularly unpleasant harangue, she concluded, ‘Go ahead if you insist, but on your own head be it’. After we had left her room, Robin said to me, ‘I don’t know how you put up with this sort of thing’. I explained that she had a great deal on her mind.

  As it happened, it was all for nothing. Leigh-Pemberton returned to the Bank, discovered that pressure on sterling had eased, and rang Lawson to tell him, leaving the chancellor to inform a ‘suitably pleased’ prime minister that they would not now be going ahead with the interest rate hike.34

  By this time there was a new deputy governor. In September 1985 it was announced that McMahon would be leaving at the end of the year to go to Midland – in effect, to try to dig it out of its deep hole – and that his successor would be George Blunden, who had retired in 1984 as an executive director but was still on the Court. Why Blunden? There were perhaps three main reasons. Firstly, because of the impossibility of choosing between David Walker and Eddie George – the former the Bank’s principal architect of the City revolution and manifestly energetic, capable and ambitious, the latter increasingly respected by the Treasury for his technical expertise and calm judgement, with Lawson by now asking the governor to bring him along to meetings at which interest rates and the money markets were under discussion. Secondly, because one of the more influential non-executive directors, Sir Hector Laing, who was close to Thatcher, pushed hard for the appointment. And thirdly, above all, because Blunden was generally seen as the man, following the JMB trauma, ‘to impose discipline and restore morale’ (as Stephen Fay put it in his 1987 study of the Bank, Portrait of an Old Lady). Certainly Blunden’s qualities were considerable: a silver-haired, avuncular look hiding a tough, thick-skinned operator; a dry sense of humour; a ferocious disciplinarian; a good, pragmatic mind; and a Bank man through and through. ‘He will bring authority, entangling humour (he is a gladiator who prefers the net and trident), and banking skills and experience which have long earned him a position of respect among bankers, central or commercial,’ commented Fildes at the time of his appointment, and all that proved to be the case.35 His return to Threadneedle Street proved a particular boon for Leigh-Pemberton, who had not warmed to the more overtly intellectual McMahon; and together, during the second half of the decade, they formed an increasingly effective double act, starting the long haul of restoring the Bank’s rather battered (fairly or unfairly) standing.

  Much of 1986 was dominated by the looming Big Bang. On the gilts side, all proceeded reasonably smoothly: over two dozen market makers, many of them non-British, limbering up for what was anticipated as a highly competitive marketplace, possibly a bloodbath; and in the Bank itself, the successful completion of a state-of-the-art dealing room, where from March the Bank conducted its own gilt-dealing operation and thereby, after 200 years, took over from the government brokers Mullens the conduct of official business. More generally, the process continued of gearing up intellectually for the new world – not least the vital and sensitive question of whether the Bank would be content in that new world to see foreign ownership of British banks. In terms of the clearers, Leigh-Pemberton reminded an internal meeting in January, the Bank was already publicly committed to opposing any foreign takeover, whereas Lawson was seemingly more relaxed. ‘The Chancellor’s view might not be widely shared by the electorate,’ argued Blunden, adding that ‘to the “man in the street” the ownership of an industrial conglomerate was usually immaterial, but if the High Street bank came under foreign control, he might feel very differently’. Walker likewise ‘disagreed with the Chancellor’s argument that a bank should not be treated differently from an industrial company, as the systemic influence of a major bank in the economy was very much greater’; but George ‘said that he was not entirely persuaded that there were no circumstances in which foreign ownership could be envisaged’. What about the merchant banks? ‘It would be sad if the five largest all became foreign-owned,’ remarked Blunden, but again it was George who took the less protectionist stance: ‘The larger Accepting Houses were in a quandary. They were neither sufficiently small simply to be specialists in a particular area, nor big enough to compete globally … It was therefore arguable that their prime need was for more capital … So a “British-only” policy might not be in the Houses’ best interests.’

  The whole ownership debate still had a way to run, but more immediate was the necessity of calming the politicians’ nerves. Thatcher called for a pre-Big Bang seminar at No. 10 in early June, and the governor a week before asked Lawson what her purpose was:

  He said quite simply, ‘What is likely to go wrong between Big Bang and the General Election?’ I told him that my main anxiety would be operators dropping out of the market as a result of competitive pressure, lack of volume and, I hoped least likely, bad judgement. The Chancellor said that the important thing would be that the loser
s should not be widows and orphans … I said that I was also anxious that large operators from overseas might adopt a loss-leading policy which could have serious effects on UK operators, but I had not been able to think of any means whereby this could be checked. Discriminatory restrictions would hardly be consistent with our philosophy and would be extremely difficult to operate.

  The seminar itself, attended by Leigh-Pemberton and Walker, was notable for Lawson’s frankness. After agreeing with the prime minister ‘that the Big Bang posed risks’, he went on: ‘Some things were bound to go wrong. But the changes were inevitable if the City was to maintain its competitiveness.’36

  The final stages had their moments. ‘The Times had a very silly and totally incorrect article about gilt-edged market unpreparedness for Big Bang,’ Blunden updated Leigh-Pemberton in late August. ‘We are trying to feed correcting stories to the FT and Telegraph.’ A month later saw a devastating fire at the Bank, starting in contractors’ huts and gutting much of the east side, including the International Divisions area on the third floor. And on 16 October, the governor in his Mansion House speech solemnly declared that ‘it will be vital for all market participants to exercise a degree of restraint’. The following week, his internal message was also heartfelt:

  After some three years of intensive efforts on the part of so many different departments and divisions in the Bank and so many individual members of staff, we completed the second dress rehearsal of the new gilt-edged market arrangements very successfully on Saturday. Big Bang is now only a few days away. Whatever now happens I cannot think that there is anything more we could have done to have been better prepared for the change …