Till Time's Last Sand

by David Kynaston

  Some serious economic history followed – invoking such names as Irving Fisher and Bill Phillips as well as Maynard Keynes – plus a lengthy disquisition on both the explicit and hidden cost of inflation. ‘The simple choice,’ declared the governor, ‘is between a variable and unpredictable inflation rate caused by instability in monetary policy, and a more stable monetary policy framework that delivers price stability.’ His preference was of course for the latter, and near the end, in ringing tones, he committed the Bank to an ‘unwavering effort’ to direct policy towards price stability. Almost a month later, on 10 December at 8.30 am, the first ‘Monthly Monetary Meeting’ between chancellor and governor took place at the Treasury, with Leigh-Pemberton accompanied by Crockett, Coleby, King and Plenderleith; two months later, in February 1993, the Bank’s first publicly available Inflation Report appeared, at this initial stage as part of the regular Quarterly Bulletin.20 It was very much King’s baby: he gave a press conference and privately took satisfaction from the fact that the report’s abundance of charts and suchlike had largely thwarted any potential editorial interference by the Treasury.

  What about independence as such? ‘One cheer for the chancellor’ was the title of the Financial Times’s leader on Lamont’s institutional reforms announced in his Mansion House speech. ‘What is needed is comprehensive reconsideration of the roles of the Treasury and the Bank of England. Mr Lamont wishes to persuade the world that the citadel on Great George Street still knows best. It does not. As the whole world now knows all too well.’ The Bank itself was disinclined to campaign at this point – so soon after BCCI and Black Wednesday – with an internal note shortly before Christmas recording that George had ‘come to the view that the only way to make progress is through an evolutionary (i.e. non-statutory) approach’. Instead, the great – if at this stage covert – champion of the independence cause was Lamont, who despite the opposition of his permanent secretary (Burns) submitted two papers, one in November 1992 and the other in January 1993, that followed Lawson’s example by calling for statutory independence over monetary policy, predominantly on counter-inflationary grounds. Just as in September 1991, when Lamont had made a similar initiative, Major refused to budge. Not only did the prime minister continue to believe that the person responsible for monetary policy should be directly answerable to the Commons, but he (in his subsequent words) ‘also feared that the culture of an independent Bank would ensure that interest rates went up rapidly but fell only slowly’. To which he might have added that he also had no appetite for needlessly vexing his backbench Eurosceptics, inclined to view Bank independence as a sinister step to meeting the Maastricht criteria for monetary union. Moreover, in the here and now of a hostile political climate, Major badly wanted to keep monetary policy in his own hands, not even the chancellor’s – and twice, in October 1992 and January 1993, he unilaterally imposed interest rate cuts, the second time despite that cut’s clash with the Bank’s attempts to hold an important auction of gilt-edged stock. ‘For the future he thought that interest rate moves should be related more closely to the economic events that determined them,’ recorded in guarded language Leigh-Pemberton’s rebuke to Lamont (the innocent party) at their monthly meeting in early February. ‘Any gap between the event and the move leads to suspicion in the markets.’21

  The governor himself was approaching the final months of his second term. Who would succeed him? The fullest account of a tricky, invidious process comes from Lamont’s memoirs, revealing that although he and the Court wanted George to step up from deputy, Major ‘kept repeating that he wanted “a man of stature”’. One of those possible men, as in 1983, was David Scholey – pushed by the Sunday Times as ‘the obvious candidate with the standing, weighty personality and skill to restore the Bank’s credibility’, but in his own mind certain that George was the right man; while Major himself had an inclination for JP Morgan’s Sir Dennis Weatherstone, a British meritocrat after his own heart. In the end, Lamont managed to persuade the prime minister that there was no realistic alternative to George; and the announcement, generally welcomed, was made at the end of January. Even so, Major was insistent that George’s replacement as deputy governor must be an outsider; and between them, Lamont and Sarah Hogg (running the No. 10 office) settled on Rupert Pennant-Rea, who had worked in the Bank’s Economics Division in the 1970s but was now the forty-five-year-old editor of the Economist. ‘He could be a splendid fellow and a fountain of ideas and a breath of fresh or hot air, but that in itself would no more qualify him to be Deputy Governor than to fly a Boeing 747,’ commented a fellow-journalist Christopher Fildes, while Banking World noted that ‘there are some in the Bank who secretly express doubts’. Central Banking’s Robert Pringle was more generous. ‘Why not a journalist?’ he asked, and penned Pennant-Rea an open letter in which he explained how the new deputy governor could not only help the Bank cope with the increasing publicity attendant on being a central bank in the 1990s, but also ‘help them to get onto terms with the baby-boomers who are inheriting the world (the Clintons, Larry Summers, Michael Portillos)’, whom he described as ‘a different breed – and a very strange species to most central bankers, who come from another generation’. Pennant-Rea himself had been given only four hours to accept the job, but apparently had done so readily.22

  The independence question continued to preoccupy during the spring and summer of 1993. ‘The Governor should not pull his punches in making the case’ that ‘operational autonomy for the Bank was the best way to achieve price stability’, argued King at an internal March meeting about how best to proceed; Leigh-Pemberton for his part ‘noted the list of political moves on interest rates – the most recent cut to 6%, cuts made at the time of municipal elections, cuts at the time of the row about coal mines, cuts to coincide with the Conservative Party Conference and with the presentation of the Budget’; while George ‘felt it was not necessary to mount a public campaign for independence, but if asked the Bank should continue to explain its view’, adding that ‘the objective was to persuade the Prime Minister to agree to think about the topic seriously once Maastricht was behind him and before the next election’.

  In late May the prime minister and the governor had a face-to-face on the issue. Major asserted that, while he ‘recognised the arguments for independence on anti-inflationary grounds’, he was ‘not at all sure that Parliament would agree to such a change’; observed that ‘even if it did, it was bound to insist on much more oversight of the Bank’; noted that ‘interest rates were particularly sensitive in the UK because of the link to mortgage rates’; and held out the somewhat distant carrot that ‘if low inflation and economic growth were maintained and the Government were in a stronger position politically, it might be possible to contemplate a change’. After Leigh-Pemberton for his part had pointed to ‘the prospect of Britain becoming the only major country where the markets perceived a risk of short-term political interference in monetary policy and demanded a risk premium accordingly’, the prime minister ‘repeated that greater independence could only be contemplated from a position of strength’:

  The first step was to convince political and market opinion that the Government’s economic policies were credible in their own right and that economic recovery was happening because of these policies, not in spite of them. It needed to be clearly established that recovery had begun before Britain left the ERM – and indeed that recession began before we joined it. The more the Governor and Deputy Governor could do to reinforce the message in speeches and in the Bank of England Quarterly Bulletin, the better the prospects would be.

  Shortly afterwards, Kenneth Clarke replaced Lamont at No. 11, and on 3 June the governor called on the new chancellor for ‘a very relaxed, informal and open discussion’. Specifically on independence, Clarke said that he ‘was not himself particularly opposed to the possibility’, but ‘felt that it was not an issue for him to raise with the Prime Minister in the immediate future’. Six days later, in a notably plain-speaking re
signation speech to the Commons, Lamont à la Lawson publicly revealed his unsuccessful attempts to convince the prime minister of the merits of independence – to which Major almost immediately responded in the chamber by highlighting his ‘very real concern’ about ‘the need for accountability to Parliament for decisions on monetary policy matters’. Back behind closed doors, that left Leigh-Pemberton and Clarke to bat around the issue a second time, on 17 June. ‘The Chancellor said that he was temperamentally inclined to the position that both Norman Lamont and Nigel Lawson held. He believed, however, that the party was evenly divided and that it would therefore be some considerable time before constitutional change could be achieved.’ And the two men agreed that ‘the next step in the process’ was likely to be the Treasury Select Committee’s report on the issue, expected by the end of the year.23

  Robin Leigh-Pemberton, with a life peerage in the Queen’s birthday honours, retired at the end of June. ‘It was generally acknowledged,’ noted Central Banking soon afterwards, ‘that he handed over the Bank in good shape to his successor; it now has a mandate to fight inflation and a more open relationship with the Treasury than at any time in its history.’ Subsequent views of his governorship were mixed. According to someone who worked for him, his gentlemanly approach and predominantly non-executive role made him analogous to the non-playing captain in the Davis Cup; according to someone else, who worked for him more intimately, his outstanding qualities of ‘integrity, dignity, resilience, toughness, decency, good judgement and leadership’ all contributed to a central banker who possessed ‘a deep commitment to stability’ and ‘a strategic cast of mind’ (the latter attribute often overlooked), as well as being ‘an extraordinary team builder’ and ‘an internationalist’. Somewhere in the middle, the verdict recorded in his 2013 Times obituary is perhaps about right, namely that at the end of his ten years ‘it was widely agreed not only that he had comfortably exceeded the experts’ low expectations of him but also that he had in fact coped gracefully with a series of stern challenges’.24

  His successor, Eddie George, was of course an altogether more professional operator, now becoming governor almost thirty-one years after joining the Bank; like Leslie O’Brien he was a lifer who had risen to the top, though in George’s case, as a Cambridge graduate in economics, he did not start from such a lowly position. Technically expert across the field (whether macro-economics or markets or financial institutions or financial infrastructure), possessing formidable policy intelligence as well as remarkable powers of concentration, a skilled chairman of meetings, principled but with a degree of flexibility if circumstances changed, not afraid of tough judgements of people, often charming outside the Bank if more seldom inside – George was in many ways the central banker’s central banker. ‘Part of his success was undoubtedly attributable to the good personal relations he established with bankers, central bankers, and civil servants,’ Forrest Capie would observe. ‘From his time as Assistant Director onwards he would drop in on his counterparts in the Treasury in the evening, drink whiskey, smoke cigarettes and talk about their respective approaches.’25 Perhaps above all, no one could doubt the depth of his attachment to the institution itself – ‘You know,’ he once remarked to a journalist when off duty (relatively speaking), ‘I really love this place.’ At one of the cusp moments in its history, the Bank could hardly have been in more capable hands.

  ‘Would you be in favour of a stronger, more independent role for the Bank of England, together with a specific brief from Parliament to fight inflation?’ George was asked in one of his first interviews as governor. ‘Yes, I would,’ he replied, and the rest of his answer carefully set out what had become the Bank’s studiously crafted official position, a position that in essence held through the mid-1990s:

  I have said very publicly, very often, that the really important thing is stability. That is the big issue and if the present arrangement can achieve that then I shall be entirely happy with that. The institutional question is subordinate to that, because if you don’t have broad public and parliamentary support for the idea of stability and actually having an independent mandate, firstly it is not likely to happen but, secondly, if you were to have it, it could prove to be a poisoned chalice, because the moment you did what was necessary you would run into broadly-based opposition.

  The issue is whether having a change in the institutional arrangements would make it more likely that on balance and over time you would be more successful at controlling inflation, and therefore actually have a more successful economy. There is a presumption that if you had a mandate from Parliament to achieve and maintain price stability, properly defined, and that if you were accountable directly or indirectly to Parliament, then the likelihood is that you would be more successful. This is not because we have any particular expertise that is not available elsewhere, but because policy-making is all about balancing risks on either side.

  With a clear mandate from Parliament actually to deliver price stability, one would always tend to take the risk a little bit in favour of stability and that would produce a more consistent performance over time. The other thing is that with a clear measurable mandate, and pure accountability, there would be nowhere for us to hide if we got it wrong. That concentrates the mind wonderfully and although it wouldn’t be comfortable for the Bank, it would actually be healthy.

  ‘I claim no monopoly of wisdom for central bankers,’ George wrote during his first month to one of his predecessors. ‘I do believe, however, that on balance and over time the cumulative decisions of an autonomous central bank are more likely to lead to stability than those taken by the government of the day whose decisions would be more likely to lean towards exploiting the short-run trade-off between inflation and growth.’ Lord O’Brien, though not disagreeing with the principle, was understandably sceptical. ‘My doubt,’ he replied, ‘is whether, when it comes to the crunch, Ministers will be able to surrender control over this important part of economic policy.’ Another sceptic, but for a different reason, was Sir John (‘Chips’) Keswick, chairman of Hambros and recently appointed to the Court. ‘I would like to make a plea with regard to the independence debate which is hard to articulate,’ he wrote to the new governor in late July:

  I am concerned that the executive [of the Bank], in a very civilised way, underestimates its cohesive strength and diverse achievements. I believe it would be very foolish to abandon some parts of the Bank, i.e. Supervision, International and Industrial, as part of a package to secure independence. The quality of economic analysis, in my judgement, is only as good as the quality of real activities which it rubs against. Please do not be persuaded that apparent flying buttresses should be dispensed with – you would be less effective in the round without them.

  It was a resonant plea. But when, three months later, Pennant-Rea reported to the executive about the state of play in the Court’s discussions on the independence issue, he noted ‘fairly widespread agreement that a Bank with full responsibility for conducting monetary policy might find some of its current functions a distraction, and might want to give them up to concentrate on the crucial task the Bank had been given’.

  During much of 1993 the Treasury Committee, chaired by John Watts, heard evidence on ‘The Role of the Bank of England’. ‘You do take the point,’ one of the MPs, Diane Abbott, put it to George (the day before he became governor), ‘that one of the reasons people are slightly wary of the Bank of England, which has no democratic controls at all, is that you do lead relatively cloistered lives, you do earn these huge salaries and do not appear to be quite in touch with the effects of your policies on people who earn slightly less than a quarter of a million a year?’ ‘I would dispute a great deal of that with the greatest possible respect,’ answered George. ‘Our contacts with industry and business are very strong at every level, from the Court down through our agencies, to our contacts here in London. We understand just as much as anybody else the impact that it has on people who lose their homes and lose their j
obs. As a matter of fact I think many of us are affected in terms of our own families. So I rather resent the suggestion that simply because we work in the Bank we are not sensitive to the impacts of the policies that we pursue.’ Later, he emphasised the importance that the Bank attached to the phrase ‘statutory accountability’ – in order ‘to try’, as he put it, ‘to get rid of this idea that independence, which is the popular name for the debate, is about a lot of appointed bureaucrats exercising arbitrary powers’; and he added that he would have no problem at all with a statutory provision giving the chancellor of the day the ultimate power of over-ride, as long as that provision was ‘open and explicit’. O’Brien did not give evidence, but his successor did. ‘I am not quite certain from your evidence so far whether or not you are in favour of a more independent central bank,’ a mildly exasperated Giles Radice observed at one point, but in the fullness of time Lord Richardson did explain that he was indeed in favour of greater Bank autonomy in the operation of monetary policy: ‘If it could be established, if it could gain a reputation and you really built through time that deeper and more intense consensus about inflation, then I think it would be vital.’ By contrast, the definitively retired Sir George Blunden stuck to his by now well-established line that the Bank already enjoyed a considerable degree of autonomy and that it might lose influence and freedom of action more broadly if it demanded that its role be rigidly defined by statute.

  Two former chancellors also gave evidence. ‘I think the markets are going to feel that there is something sinister almost about any government that does not confer independence on its central bank,’ declared Lord Lawson, adding that under the present system the Bank had ‘much too easy a time’, enjoying ‘considerable influence’ but subject to ‘virtually no accountability at all’. ‘There really is no point,’ he argued moreover, ‘in saying we have an inflationary culture so there is nothing we can do. You have to ask what the best institutional arrangement is that we can have … You will not create a Bank of England which has the credibility and public esteem of the Bundesbank overnight but you have to make a start somewhere.’ His predecessor but one could hardly have disagreed more strongly. Lord Healey began his typically trenchant evidence by asserting that the fashion for independent central banks was essentially a gimmick; attacked the Bank’s recent record (not only failing to control ‘the explosion of irresponsible lending and borrowing’ that had led to the Lawson boom and bust, but also the previous September throwing away ‘a large part of our reserves in a clearly doomed attempt to save sterling’); and finished with a stirring defence of the need not to be enslaved by the markets, which ‘we talk about as though they were God in heaven, but they are numerous men in red braces in dealing rooms who talk Cockney working for a lot of men in grey suits with red bow ties’.