Till Time's Last Sand

by David Kynaston

  It was not, Lawson stressed subsequently, that he had any ‘illusion that the Bank of England possesses any superior wisdom’. Instead, the benefit lay in ‘the logic of the institutional change itself’, through which an independent central bank would necessarily enjoy a far greater degree of market credibility than a government ever could; and ‘this extra market credibility is what would make the successful conduct of monetary policy less difficult’. Thatcher was appalled:

  My reaction was dismissive … I did not believe, as Nigel argued, that it would boost the credibility of the fight against inflation … In fact, as I minuted, ‘It would be seen as an abdication by the Chancellor …’ I added that ‘it would be an admission of a failure of resolve on our part’. I also doubted whether we had people of the right calibre to run such an institution.

  Faced by Thatcher’s insistence that the control of inflation was ultimately a political problem, not amenable to institutional solutions, Lawson was compelled to let his secret proposal rest.

  Less than a year later, however, the genie was out of the bottle. The context was Lawson’s resignation in October 1989, a resignation that quite apart from the independence issue had two piquant Bank aspects: the day before he went, Thatcher tried in vain to dissuade him by dangling the prospect of becoming in due course the next governor; while when it was clear he was going, but with nowhere to live in London, the present governor generously offered the temporary use of his flat in New Change. On the 31st, five days after resigning, Lawson gave his resignation speech in the Commons, touching briefly on his rejected proposal to the prime minister for an independent Bank as a way in which ‘anti-inflationary credibility might be enhanced in the eyes of the market’. Reaction was mixed. ‘It is an excellent idea,’ pronounced Credit Suisse First Boston’s influential economist Giles Keating. ‘The only tragedy is that it was not considered a long time ago.’ The shadow chancellor, John Smith, took a wholly different view, stating categorically that Labour ‘would not be willing to accept any system of central banks which would be independent of political control, just as we strongly oppose an independent status for the Bank of England’. And somewhere in the middle, but leaning to the positive, The Times devoted an editorial to ‘A Freer Bank?’:

  There is no reason to suppose that it would not rise to the challenge. One cannot judge its capacity by the advice it may have given in the different circumstances of its present enabling role. The exact nature of its obligation would be a matter for careful thought but it would almost certainly need to be a general responsibility for the value of the currency rather than responsibility for any more specific intermediate target such as the money supply.

  Yet there is a conundrum at the heart of the proposal. Why if monetary policy is so important should it be taken out of the hands of elected representatives? Put another way, if monetary policy is too important for the politicians, why not fiscal policy and many other aspects of economic affairs? …

  The answer may be that monetary policy is the rock upon which all economic transactions in a modern economy are founded. Unsound money will undermine all other aspects of economic policy. Ways of improving on our capacity to achieve it cannot be dismissed without the most careful consideration.49

  18

  Welcome and Long Overdue

  By the early 1990s the cult of the central bank was gathering global momentum. ‘By far the most persuasive case for central bank independence was the rise of stateless money and global financial market integration,’ Steven Solomon would convincingly argue in retrospect about the growing trend since the 1987 crash. ‘Broadly put, in a landscape in which tears anywhere in the interwoven financial fabric or abrupt alteration in the direction or size of international capital flows could disrupt prosperity across borders, it served the enlightened self-interest of citizens and capitalists everywhere to pool their sovereignty through the upgraded independence of all central bankers.’ Examples of this new prominence included preparations for an eventual European Central Bank, the creation of authentic central banks in Eastern Europe after the fall of the Berlin Wall, and the well-publicised, fully transparent development in New Zealand, where from 1990 the governor of the central bank was given an inflation target and required to adjust monetary policy to meet it. ‘The Triumph of Central Banking?’ was the bold if necessarily provisional title in September 1990 of Paul Volcker’s Per Jacobsson lecture in Washington. ‘I am convinced,’ declared this fairly recently retired central banker who had won renown as the great inflation-slayer, ‘there is objective reality in my impression that central banks are in exceptionally good repute these days’; and he looked ahead with a reasonable degree of confidence to a time when few would disagree with the proposition that ‘an effective central bank must be a strong central bank, with substantial autonomy in its operations and with insulation from partisan and passing political pressures’.

  That was not quite how at least two prominent British politicians saw it. Not only did Thatcher in her last year in office not change her mind about independence, typically pushing through in October 1990 an interest rate cut against explicit Bank advice, but she kept as tight a grip as ever on Bank appointments. ‘I think that the Chancellor really has battled hard on our behalf to secure an industrialist,’ noted Leigh-Pemberton in February 1990 after lunch with Nigel Lawson’s successor, John Major. ‘The Prime Minister, however, has decided that she would like to have an economist on the Court and Mervyn King is her choice. I said that I was content to accept this …’ Moreover, despite his help on this occasion, Major when it came to the bigger question was on the other side. ‘He said that he doubted whether there was much support in the House of Commons for an independent Central Bank,’ the governor also recorded after that meeting with the chancellor; while in his autobiography Major would be bluntness itself: ‘I considered giving the Bank of England independence over interest rate policy, as Nigel had wished to do … I dismissed the idea because I believed the person responsible for monetary policy should be answerable for it in the House of Commons.’ Nor was there any sign of that adamantine stance altering after he succeeded Thatcher at No. 10 in November 1990, albeit by the second half of 1991 his own successor at No. 11, Norman Lamont, was picking up on the New Zealand model and starting to try to engage him on the independence issue.1

  At the Bank itself, much discussion naturally ensued after Lawson’s resignation speech had revealed his unsuccessful initiative. From the start, there were some vexed, difficult aspects to consider, and not only the obvious ones of remit and accountability. ‘Would greater autonomy over monetary policy make it likely/possible that some functions would be taken away from the Bank?’ asked the governor’s private secretary Paul Tucker on his behalf in February 1990. ‘Specifically, would we lose the debt management function and/or the industrial finance or bank supervision functions, or anything else?’ And beyond that, really drilling down to fundamentals: ‘Do we believe that greater autonomy would be a good thing?’ Over the next half-year, at least three intense meetings sought to get to grips with what was at stake.

  At the first, an informal Court discussion, the main voice was George Blunden’s, essentially a warning one. The Bank, he argued, not only in practice already enjoyed considerable operational autonomy, but ‘was almost unique in that its functions were not laid down in statute’. Nor could it be automatically assumed, he went on, that ‘placing a central bank under a mandate to pursue price stability would guarantee a better inflation performance’; while crucially the British public did not yet share the ‘strong aversion to inflation’ felt in Germany and Switzerland, ‘the two obvious countries where success was combined with considerable independence’ – indeed, ‘on the contrary, public opinion probably regarded a bit of inflation as no bad thing’, given that ‘a wage offer of less than five per cent was widely viewed as insulting’. Blunden as it happened was about to step down as deputy governor, and it was the deputy designate, Eddie George, who later at that meeting took a
strongly pro-independence line, especially on the grounds of clarity of both objectives and responsibility. ‘Who,’ he asked, ‘was responsible for the policy mistakes of the past few years – Bank or Treasury officials, the Chancellor, the Prime Minister or the Cabinet?’ And he declared: ‘Placing the central bank under a mandate to pursue price stability would resolve both these difficulties.’

  The second meeting, two months later in April 1990, saw a continuation of the Court’s informal discussion. Sir David Scholey, by now one of the senior non-executives, was ‘inclined to think that it was better for the Bank to settle for something short of independence and statutory accountability for monetary policy, and rather to continue to work behind the scenes’; Leigh-Pemberton, like George, reflected on ‘the unsatisfactory position whereby it was unclear who was responsible for determining monetary policy in the UK’; a pair of non-execs, the trade unionist Gavin Laird and the industrialist Brian Corby, tended to agree with Scholey, with the latter warning that ‘it would be the worst of all worlds for the Bank if it were given responsibility for bringing down inflation but could not succeed because of public attitudes’; David Walker (no longer an executive director, but still on the Court) deemed it ‘important that the Bank should not be constrained from continuing with its present wide range of roles and that, in consequence, careful consideration should be given to any prospective trade-offs before pressing for a change’, as well as noting that he ‘thought it inconceivable that government (any government) would give up ultimate responsibility for monetary policy’; the new boy, Mervyn King, ‘said that there was no doubt at all that a greater role for the Bank in monetary policy was definitely on the agenda’, pointing out that ‘it was quite something when the Economics Editor of the Guardian and the IEA [the free-market Institute of Economic Affairs] shared an economic policy objective’; and George concurred, reflecting that he had been ‘quite surprised by the extent of support for the idea of making the Bank statutorily accountable for monetary policy, both in the City and in Parliament’, where a recent survey had ‘suggested that seven out of ten Conservative MPs would support a change’.

  Finally, in July, a handful of senior executives assembled. They began with Leigh-Pemberton and George accepting that no fundamental change was likely in the near future, but with George stating that he ‘nevertheless believed that the Bank could help to improve the climate as regards the Bank’s constitutional position by continuing to press the point that price stability was an absolutely essential pre-condition of stable long-term growth and the proper functioning of the economy’. Attention then turned to various possible models for the Bank/Treasury relationship, as well as the question of whether enhanced responsibility on the monetary side might lead to the removal of other Bank functions, including bank supervision. Two of those present, Andrew Crockett and the economist John Flemming, agreed that this might well be the case; but George for his part ‘did not believe there was a logical case for removing functions from the Bank’, and Leigh-Pemberton broadly concurred, adding that the Bank should ‘resist’ any attempt to remove functions. There was, in short, all still to play for.

  Publicly, of course, the Bank played a pretty straight bat on the whole issue. ‘Talking about an independent central bank may not be the best way of describing it,’ the governor told an interviewer that summer. Instead:

  The question to think about is rather whether the central bank as a free-standing body should have some sort of statutory accountability for monetary policy. Is there something about the operation of monetary policy that makes it quite different from other elements of economic policy or indeed other elements of government policy? If you believe this is true, it is a highly political question. This is something politicians will have to make up their minds about.

  Indeed, he seems to have gone to some pains at this stage to ensure that the Bank was seen not to be canvassing for independence – whatever that word meant – too blatantly, especially after a steer to that effect in 1991 from the broadly sympathetic Lamont, well aware of sensitivities at No. 10. Even so, for both governor and deputy that was now the goal. ‘In some senses,’ Leigh-Pemberton revealingly observed to George in March 1992 a fortnight before Major’s somewhat unexpected election victory over Labour’s Neil Kinnock, ‘the most unsatisfactory outcome would be a hung Parliament, but in a narrow sense I think that it could actually create an important situation and even an opportunity for us, as there may be a need in those circumstances for the politicians to announce that the monetary reins had been placed in our hands …’2

  Increasingly the pivotal day-to-day figure at the Bank during these years was Eddie George, deputy governor from March 1990. Reputedly the Treasury was not keen, taking the line that his appointment should not be viewed as automatically presaging his governorship, while Leigh-Pemberton would have preferred Crockett; but the probability is that Thatcher and her economic adviser Sir Alan Walters pushed it through, encouraged by the pro-George lobbying of her confidant at the Bank, the non-executive director Sir Hector Laing; while Blunden had already paved the way for George by ensuring that David Walker was safely parked at the SIB. Undoubtedly the old deputy recognised in the new deputy not only a hugely capable operator but also, like himself, a Bank man to his core; and in his first message to staff, George wrote wholly sincerely of his pride in working for ‘an institution with a long tradition of solid values as well as solid achievements’. He went on:

  Those values must not change. The trust essential to all our dealings has been built up over years on the basis of integrity and discretion: without that it could be rapidly destroyed. The authority we enjoy, and sometimes need to exercise with firmness, can only be effective if it has at least the tacit support of those it affects: this we will retain only if we are prepared to consult, listen and understand, and to persuade rather than dictate. And it is our style to seek to further the public good by stealth rather than self-promotion.

  The new order at the Bank coincided with the protracted and painful recession of the early 1990s, but prompting little support from George for what he saw as soft, politically motivated options. ‘There was no way of curing cost-push inflation other than severe pressure on margins and thus an increase in unemployment,’ he told the clearers in September 1990, adding that ‘he conceded that this was a hard approach but he thought it had been proved to be the only way’. Similarly, almost two years later, in the context of possible fiscal-stimulus action, he observed to the Treasury’s Alan Budd that ‘while, to date, most emphasis in the public debate had been on actions specifically targeted at the housing market, he felt that the distress in the housing market was a symptom rather than a cause of the problem and it made no economic sense to focus relief on house owners’. As usual with a government in an economic hole, the prime minister of the day (now Major) sought to blame the banks; and in his memoirs, Lamont recorded No. 10 putting pressure on him in 1991 to put pressure on Leigh-Pemberton to put pressure in turn on the clearers to change their lending practices. ‘I have to say the Governor was not very pleased with me, since he felt the banks should not be made scapegoats for the recession. He did not know that I very much sympathised with his view.’3

  The banks were closely involved, albeit mainly behind the scenes, in what became known during the early 1990s as the ‘London Approach’ – a significant Bank initiative, largely driven by Pen Kent and inevitably with echoes of the Bank’s activities in industrial finance during the mid-1970s and early 1980s. Against a deteriorating economic background (including an increasingly troubled UK corporate sector), and well aware that the Bank no longer necessarily possessed quite the same feudal authority in the City that it had once commanded, Kent in July 1990 argued that the Bank now needed formally to promulgate some rules about collaborative rescue action for struggling companies that were nevertheless essentially sound. ‘I have to say I take an extremely cautious view of this,’ observed a somewhat sceptical George; but that autumn, in a speech to the annual di
nner of the Equipment Leasing Association, Leigh-Pemberton set out the three key principles:

  The first is that, when difficulties arise, a lending standstill should be considered so that a proper analysis can be made of whether continuing support – and particularly additional financing – is justifiable. Secondly, the fullest possible information should be gathered to support that analysis and the subsequent judgement. And thirdly, there is a very important role for the lead bank. Whatever its size or home base, the lead bank needs to ensure that all interested bank creditors are informed of the company’s position at the earliest possible stage, and are kept informed. This is of help to all creditors, and particularly the smaller banks. No one should be – or feel – disadvantaged through lack of information.

  The governor added that while the Bank was willing in principle to act as ‘a neutral chairman’, depending on the circumstances, it would not ‘seek to protect or favour any particular group of banks or other creditors’ nor would it ‘dictate that a rescue must be agreed’, given that ‘it is the creditors’ money that is at stake’. Even so, the Bank now found itself actively engaged in a whole range of support-cum-restructuring cases – as many as fifty new ones between January 1991 and March 1992, including such names as Nissan UK, Vestey Group and Maxwell Communications. By November 1992, looking back on almost three years of sustained corporate workouts, Kent felt able to conclude that the London Approach continued to enjoy ‘widespread acceptance in the banking community because it is seen to be fair and flexible’; and that ‘a large number of companies owe their survival to their banks, and thus, indirectly, to the London Approach’.4

  Predating that initiative but overlapping with it, probably nothing on the corporate front occupied more of the Bank’s time than the Eurotunnel saga. Back in the early days, following the Anglo-French treaty of February 1986 that established the project, it was Walker who made much of the running, not only getting a grip on the equity financing but seeking to strengthen the Eurotunnel board and management; crucially, it was his suggestion to bring in the determined if sometimes abrasive Alastair Morton. Progress, though, was seldom straightforward, not least in the company’s relationships with banks and contractors. ‘At times our discussion, which lasted an hour, became rather sharp,’ noted Leigh-Pemberton in January 1990 after a difficult meeting with Morton, ‘and I told him that, while I did not take it upon myself to make judgments in the matter, I thought it would be useful for him to give due consideration to the impressions I had formed as a result of my discussions with the other parties.’ The following month saw a heads-being-banged-together summit, chaired by the governor and featuring one moment of lightish relief. ‘Sir Robert Scholey [chairman of British Steel and a Eurotunnel director] commented, apropos of nothing in particular, that it was bizarre to be in the Bank of England discussing management structures and organograms. The governor responded that he quite understood the point but sadly it was not trivial. A great deal turned on the intentions of the parties and the understandings between them.’ Finally, an agreement was signed – ‘there is only one copy of this in existence (i.e. no photocopies) and this is held in the GPS safe’, noted the governor’s private secretary – but soon afterwards Morton was back to playing hardball with the contractors. ‘A plague on both their houses – I ought not to allow myself such a sentiment but it is tempting,’ Leigh-Pemberton found himself expostulating to Kent. ‘I agree with you that this latest issue is not for us: but how can we generate good will or good faith in such people!’ Further dramas lay ahead – including later in 1990 a decisive intervention with the Japanese banks, in 1993 some tricky arbitration manoeuvres overseen by Kent, in 1994 a quiet but timely governor’s word with Salomon Brothers to ensure completion of underwriting – before eventually the project was brought to full fruition.5