Cromer also failed to get his way on the home front, certainly once the growth-minded Reginald Maudling had replaced Lloyd at No. 11 in July 1962, just over two years before the latest date of the next general election. ‘He is, of course, obsessed with the idea that the international obligations of sterling act as a direct restraint on economic growth and is therefore somewhat impatient of the argument that external considerations have to be taken into account,’ Parsons regretfully warned his chief in September after an early conversation with the new chancellor. ‘I have been trying to persuade him, and incidentally some of his officials, that no country can ignore the external implications of domestic policy, but he is not altogether convinced.’ That was indeed the case, and over the next seven months or so Maudling made his famous – or infamous – ‘dash for growth’, mainly on the fiscal side but abetted by a falling Bank rate. Ahead of the budget, the governor in March 1963 sent a missive expressing serious concern about the growth in public spending, but Maudling simply ignored him; and in the following month’s boldly tax-cutting budget, the Tory politician breezily announced, ‘I absolutely reject the proposition that a vigorous economy and a strong position for sterling are incompatible.’
Why had the Bank been unable to restrain what, with some reason, it viewed as a policy of reckless expansion? The economic commentator Samuel Brittan would many years later blame ‘the appallingly bad case put up by the advocates of sound money in the Bank and elsewhere’ for having made people like himself temporarily succumb to a belief in ‘growthmanship, i.e. using rapid demand expansion to stimulate industry into more vigorous performance’; and it is a plausible claim, certainly if one puts any weight on a suggestive 1962 diary entry by Roger Alford, an economist from the London School of Economics (LSE) on a two-year secondment at the Bank:
Talked to John Fforde about the Governor. Ff said that he felt he was a typical product of his environment – he has their moral outlook and prejudices. His stress on honest money is one of these, and (with plenty of inflationists about) probably a good thing. At Birmingham [where Cromer had recently made a speech] he stressed that those putting money into the Post Office Savings Bank ought to be able to withdraw the same real value later. (What are the others? Supremacy of London as a financial centre? Growing role for merchant banks/accepting houses? Independence of the Bank of England? Certainly restraint of government expenditure.) But Fforde agreed with me that the moral basis of such assertions is unsophisticated and not strong – it can always be discomfited by the reply: would you prefer honest money and 10% unemployed to 1% p.a. dishonest money and 2½% unemployed? A governor of the Bank of England must have at least this degree of sophistication surely? Also Fforde agreed that since it is hard to pinpoint any substantial amount of individual hardship due to inflation, such moral fervour may be ineffective.
Cromer was further handicapped by his poor – even dysfunctional – relationship with Maudling, who according to his biographer had ‘little personal regard’ for the governor, who in turn had ‘feelings bordering on loathing’ for the chancellor. ‘He was very idle, very opinionated and very conceited’ would be Cromer’s unflattering retrospective verdict; but according to Maudling’s private secretary at the Treasury, Tom Caulcott, the governor’s dislike was caused by resentment of the other man’s obvious intellectual superiority. Something has also to be allowed for the prevailing Zeitgeist. ‘The best thing the Government could do for the country’s future as well as for its own would be to go all out for a faster rate of economic growth,’ announced the Financial Times at the start of 1963; and by that autumn, with only a year at the most to go to polling day, Maudling was still going all out, with Mynors sardonically observing to the discount market that ‘the car was now going downhill fairly rapidly’ and adding that ‘before long the brakes may be rather difficult to apply’.9
The question during 1964 was whether that crash would come before or after the election, in the event held in October. The backdrop throughout was Britain’s rapidly deteriorating balance of payments position and the accompanying pressure on the sterling reserves. As early as February, the opposition leader, Harold Wilson, was only with difficulty persuaded not to go public with allegations that the Bank was ‘cooking the books’, in the sense of deliberately obfuscating the country’s true external situation; by the summer the Bank was not only intervening on a significant scale to support the pound but systematically adjusting the figures in order not to destroy international confidence; Cromer meanwhile continued unavailingly to warn Maudling about his ‘considerable misgivings about the direction in which our financial affairs are going’; in September the Bank substantially extended its swap facilities with other central banks; and at the start of October, a fortnight before polling day on the 15th, Cromer found himself at the centre of a political storm, albeit behind the scenes. In the context of Wilson having declared in a speech on 30 September that the latest gold and currency reserve figures, due to be issued on the afternoon of 2 October, were going to ‘dominate this Election’, the governor rang the office of the prime minister (Sir Alec Douglas-Home) and let it be known that he was ‘worried at the possibility of the adjustment of the September figures to take account of Central Bank support becoming a factor in the political situation’, in that (the office further noted) ‘the extent to which the September figures had been cooked would be clear in due course from the Bank of England Bulletin and the Federal Reserve Bank Review and he might be accused of conniving at a political manoeuvre’. Cromer accepted that ‘it was out of the question to think of publishing the true figure but said that the compromise that he had in mind was disclosing it privately to the Leader of the Opposition’. The matter was left to Maudling, who told Cromer later that day that he must not even think of volunteering ‘the true figure’ to Wilson, and Cromer reluctantly complied. The next day the published figures showed a politically containable fall of £16 million. Perhaps unsurprisingly, when he came a week later to brief the discount market on the general situation, ‘the Governor said he thought the outlook was very difficult to assess and not very convincing’.
Throughout all this, and despite mounting evidence that Britain was faced by a fundamental external disequilibrium, one critical issue only occasionally broke cover: was $2.80 to the pound still a realistically sustainable exchange rate without doing major and long-lasting damage to the productive economy? The Bank’s position remained unyielding. ‘The devaluation of the currency of a major trading nation may be a necessity,’ Parsons asserted bluntly in April 1964 to the governor and others, ‘but only as a confession of ineptitude and irresponsibility’; in June, when Alec Cairncross (since 1961 the government’s economic adviser) did a hypothetical exercise about the consequences of a 10 per cent devaluation, Leslie O’Brien wrote unsympathetically on his first version, ‘Not a very happy effort’; and responding in July to a Treasury paper on ‘The Next Five Years’, the governor himself insisted that, whichever party won the election, the Bank’s fundamental priority would remain unchanged: ‘Let us be quite clear that the international standing and use of sterling is an inherent and essential part of our external economic relationships, and not merely some out-dated slogan exclusive to “The City” …’ A new recruit to the Bank in September was the youngish Australian-cum-Oxford economist Christopher (‘Kit’) McMahon, who a quarter of a century later would recall the prevailing temperature: ‘It was rather an emotional place then, and merely to mention devaluation was like saying a four-letter word in church.’10 If that emotion was understandable, so too was any outsider’s impatience with the limits of reason.
After Labour had narrowly won the election – a narrowness prompting the Bank’s George Preston to reassure the Fed on the afternoon of 16 October that ‘no sweeping changes might be expected’ – the new government’s first and most cardinal decision was not to devalue, notwithstanding the increasingly serious balance of payments situation and accompanying pressure on sterling. After all, Labour did not w
ant to be seen, following 1949, as the party of devaluation. It was, Wilson told President Lyndon Johnson soon afterwards, a decision made not only for ‘now’ but ‘for all time’. Even so, relations between the Labour government and the Bank were seldom easy almost from the start, with Cromer later in October expressing his displeasure to the new chancellor, James Callaghan, after the foreign secretary had unilaterally told Washington that there would be no raising of Bank rate in the near future. The clearest sign of trouble ahead came on 3 November. That day, the government announced its intention to abolish prescription charges and increase pensions; that evening, at the annual Mansion House bankers’ dinner, Callaghan urged the City to ‘harmonise’ its ‘interests’ with ‘the needs of the nation as a whole’, as part of a ‘joint effort to create a fairer, a more productive and more progressive society’; while at the same dinner the governor set out a rather different stall: ‘I am convinced that the future prosperity of this country at home and its power in the world abroad depends above all on the strength of the pound, and the strength of the pound depends today, as it always has, on wise and prudent husbandry of our resources so that they may grow and fructify.’ And accordingly: ‘We must reduce expenditure in this country which distracts resources from contributing to the top priority of closing the payments gap.’11
A week later on 11 November, Callaghan’s emergency budget – immediately viewed by international financial opinion as inadequate – led to as dramatic a fortnight in Bank/government relations as anything since 1931 and arguably even since the days of Cunliffe. On Friday the 13th, with sterling under severe pressure and the Bank’s reserves losses starting to run at their highest since 1961, Cromer strongly urged Callaghan to raise Bank rate from 5 to 6 per cent in order to ‘mitigate the danger of a further serious fall in confidence’; on the 16th, Wilson publicly declared his unshakeable determination to keep the pound ‘riding high’, an apparent signal to the markets that the rate would rise on Thursday the 19th; but that Wednesday evening, after telling Cromer to his face that ‘the present difficulties’ were due to ‘the deflationary prejudices’ of central bankers, Wilson overrode Callaghan and refused to sanction the rise (partly because of anxiety about American reaction). ‘£ under immense pressure,’ noted Bolton on Friday the 20th. ‘Roly trying to educate Wilson & Co about life.’ Indeed the governor was, writing that day to Callaghan in the strongest possible terms:
The situation of sterling is deteriorating disturbingly quickly … I must emphasise once again to you, Mr Chancellor, that I do not consider that by borrowing alone can we get through this present phase of strain on sterling no matter how much we borrow … The facts speak for themselves that the Budget has not created the degree of confidence necessary to sustain sterling … In my opinion, unilateral devaluation of sterling, even due to force majeure, could easily precipitate a world financial crisis for which this country would be held responsible and which could have far-reaching consequences both political and economic …
That weekend the government gave way, to the extent of agreeing to raise the rate on Monday not just to 6 but to 7 per cent. It was not enough, however, for the markets; and Tuesday the 24th saw an intense and sustained run on the pound, with sterling’s spot rate falling to $2.786 despite huge support from the Bank (the chain-smoking Bridge as ever to the fore), by now starting to be in serious danger of exhausting its cash reserves.
Late that afternoon, Cromer and his deputy (Leslie O’Brien, who had succeeded Mynors earlier in the year) were at the Treasury to see Callaghan, who asked them what needed to be done to re-establish confidence on the part of holders of sterling. The governor did not stint himself:
(a) credit squeeze;
(b) demonstrable action on incomes policy, in particular in relation to restrictive practices on both sides of industry;
(c) the fixing of a date for the beginning of a reduction in the level of the import charges;
(d) the naming of a specific figure in the reduction which the Government would bring about in public expenditure;
(e) the deferment of what foreign opinion would regard as some of the more doctrinal elements in the Government’s legislative programme;
(f) the provision of more specific information about the Government’s intentions on corporation tax and capital gains tax.
The denouement came that evening, at a 10.30 meeting at No. 10 attended by Wilson, Callaghan, Cromer and O’Brien, with prime minister and governor – two men both in their mid-life prime but from very different backgrounds – the key actors:
Commenting on the suggestion that there might be difficulty in getting central bank assistance the Prime Minister said that if central banks and their governors were going to impose a situation in which a democratically elected government was unable to carry out its election programme then he would have no alternative but to go to the country. He would expect to win overwhelmingly on that xenophobic issue and would then be free to do anything he liked – devaluation included. Mr Governor said that the rest of the world did not believe that the policies so far put into effect were sufficient to put the economy straight and this was the real issue.
Later in the meeting, Wilson again raised the possibility of ‘seeking a mandate for devaluation’, to which Cromer replied that ‘to go to the country on that issue would mean putting Party before country’. It was a historic stand-off – a stand-off in which ultimately, and perhaps inescapably, the governor blinked first. To quote from Wilson’s own account, Cromer expressed himself ‘doubtful’ whether he could hope successfully to send round the begging bowl to the world’s central bankers ‘unless he was able to convey to them news of major changes of policy’; but Wilson was adamant that he would not ‘sacrifice the constitutional rights of a newly-elected Government’.
In fact, the governor’s bowl had already begun to do the rounds, and at 7 pm on Wednesday, 25 November, after another terrible day for sterling, the Bank was able to announce that it had raised a £3 billion credit from foreign central banks – a huge achievement on Cromer’s part, involving many phone calls. Or as Cairncross (still the government’s economic adviser) nicely put it in his diary, ‘it was the old firm that did its stuff’, in that ‘the Governor delivered the goods, and but for him the Government would have been in a sad way with devaluation inevitable’. So it would; but, as Cairncross recalled many years later, the Bank received ‘small thanks’ from ministers, despite having put its ‘neck on the block’. Over the next few weeks, rumours of imminent devaluation still swirled about and sterling still had some bad days – with an unrepentant Cromer warning Wilson shortly before Christmas that ‘we are close to the brink of the abyss’ and vainly demanding that he make an immediate TV broadcast announcing major cuts in public expenditure – but by the start of 1965 the worst of the crisis was over.12
Over the next fifteen months, as the economy improved sufficiently for Labour to be re-elected at the end of March 1966 with a much increased majority, there remained little love lost. ‘I find his speeches tedious, inappropriate and designed to create the maximum embarrassment for Ministers!’ George Brown at the newly created Department of Economic Affairs complained to Callaghan in February 1965 after Cromer had publicly urged the government to follow the fiscally prudent policies of some of the countries from which Britain was now borrowing so heavily, even if those necessarily ‘disagreeable’ policies involved ‘deferment of the level of public services they would like to have’. Cairncross observed the resentment at first hand: in March, at a dinner at the Italian Embassy, he watched as Brown ‘ragged Cromer unmercifully at the table and passed messages to Lady C. comparing her with Mata Hari’, unsurprisingly making the governor ‘very annoyed’; while in relation to the late-evening meetings at No. 10 to enable ministers and officials to enjoy uninhibited discussion, he noted that ‘the Bank of England are rigorously excluded so that rude comments about the Governor can be freely made’.
There were even two more direct confrontations betw
een Wilson and Cromer. In August 1965, with sterling yet again under significant pressure and the governor demanding an immediate wages and prices freeze as the unavoidable price of other central banks continuing to support the pound, Wilson warned him that ‘if the Government were required to abandon normal methods of consultation and to take arbitrary unilateral action of a kind which no other democratic Government had ever taken, they might be forced to consider that it would be wiser to devalue sterling, to let the rate float and to appeal to the Country’; and then in March 1966, three weeks before polling day, Wilson flatly refused Cromer’s request that Bank rate be raised in order to protect sterling. ‘Deliberate interference with politics,’ declared Wilson during another memorable late-night encounter at No. 10, before going on:
Since the Government were going to win the election anyhow, they would thereafter have to take steps to ensure that a situation of this kind could never arise again. Mr Governor asked how this would help sterling. The Prime Minister replied that, just as the Bank had to try to cope with irrational people in the money market, so he had to try to cope with irrational people in politics. The plain fact of the matter was that the Government’s will must prevail and that, if the Government clashed with the Court, the latter would have to be overruled. Mr Governor observed that in that event this country could never again command any international credit.
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