Till Time's Last Sand

by David Kynaston

  A deep, immovable scepticism remained, though, the order of the day in Threadneedle Street. ‘Precise quantitative control has been shown to be unworkable,’ the governor told Howe and Wass in mid-January 1980, adding that MBC ‘would not solve the problem of how you get the price of money to a level which restrains demand’; later that month he observed darkly to the Scottish clearers that ‘certain proponents’ of MBC had ‘put their case in a simplified and therefore superficially attractive way’; the following month, Goodhart frankly reflected in an internal note that, in relation to Treasury ministers, ‘we are demolishing their hopes for monetary base control’; and in early March, shortly before publication of the much delayed green paper on MBC, the new deputy governor, Kit McMahon, warned a foreign visitor against expecting it to ‘spring any great surprises’, given that ‘highly automatic systems are always very difficult’. So it proved. ‘Distinctly cool about MBC’ would be the accurate recollection of the then financial secretary to the Treasury, Nigel Lawson; and although Lawson suspected at the time that the Bank’s ‘root-and-branch opposition’ to MBC was caused at least in part by an atavistic desire to preserve the discount market, he did not deny that ‘given the Bank’s profound antipathy, it would all too likely have proved the disaster they predicted’.1

  Lawson’s own pet project, vigorously pursued, was the Medium-Term Financial Strategy (MTFS) – in effect, a set of strict monetarist rules, to be monitored but not determined by the Bank. To a remarkable extent, notwithstanding its considerable experience during the 1970s in attempting to control the money supply, the Bank was kept out of the loop during the winter of 1979–80, as Lawson, backed by Howe, prepared the new counter-inflationary strategy. Eventually, on 22 February, Richardson was able to say his piece to Howe. Noting that he was ‘anxious to have an opportunity to contribute views and comments’, he went on:

  The medium term financial strategy was of vital concern to the Bank, and he was surprised that the Prime Minister should have been shown a draft before the Bank had been fully consulted. For his part he had serious reservations about the credibility of the sort of document produced and about the wisdom of publishing it; he was particularly concerned that the Government should not adopt a posture of complete inflexibility about the monetary targets to be followed in each successive year.

  The Bank did now start to get more involved, but Richardson was no happier by 3 March, telling Howe that the plan was ‘undesirably dogmatic, mechanical and rigid’; four days later, Thatcher as well as Howe was present to listen to his critique:

  The Governor said that he and his staff had had valuable discussions with the Treasury over the past 10 days, and as a result the draft had been softened and the targets made less rigid. But he still had serious misgivings about the whole exercise … Monetary policy had to be defensible. It was hard enough to set a monetary target for one year ahead: it was much harder for a four-year period. Even with a target range, there was still in his view too much rigidity in the figures. He was concerned at the prospect that wages might not accommodate to the declining monetary path; and that if they did not, the pressure on interest rates and activity might well be intolerable … The Government had already made clear its strong commitment to getting the rate of monetary expansion down: to publish medium-term targets would add little to this commitment.

  At the end of the meeting, summing up, the prime minister said that she ‘understood the Governor’s misgivings’, but stated that she and Howe were ‘convinced that it would be right to publish medium-term targets’, while hoping that Richardson ‘would be able to live with this’. The final act came on 14 March: Howe reported to Richardson that the MTFS had ‘given rise to a very intelligent debate in Cabinet’, in which ‘all the worries, including those expressed by the Bank, had been aired’; but ‘in the end and on balance’, said the chancellor, ‘it had been agreed to go forward’. Accordingly, later that month, the MTFS was duly announced in Howe’s budget.2

  By this time, he and Thatcher had taken a major decision far more to the Bank’s liking. ‘There could be no doubt about the Government’s commitment to a programme of exchange control relaxations as and when circumstances permitted,’ Richardson informed the clearing bank chairmen in June 1979, a fortnight after Howe had announced some minor easing in his first budget. At the same time, ‘the Governor emphasised that it was only prudent to proceed to relax exchange control in stages and particularly in relation to liberalisation of those transactions capable of producing large volatile flows across the exchanges’. Further relaxations followed in July, compelling the Bank – aware that existing staff might need to be redeployed – to withdraw some 200 job offers to new recruits. During the rest of the summer, the most compelling voice within the Bank in favour of total abolition of exchange controls came from Douglas Dawkins, whose fiefdom it was and who headed the Bank part of a small Bank/Treasury team that had been set up by the strongly pro-abolition Lawson. ‘If our experience of the last forty years has taught us anything, it is that exchange control restrictions do not cure problems,’ he reflected in August. ‘It has also shown that restrictive systems usually have a bias towards becoming more restrictive.’ And he concluded: ‘I am therefore much in favour of dispensing with controls and the associated machinery entirely.’

  That autumn, rather belatedly, the Bank’s economists woke up to the possibility that abolition might impinge on the effectiveness of monetary policy; but McMahon by 12 October was taking the robust line that ‘it would be wrong, and indeed self-deceiving, for us to believe that we would be able to rely on exchange controls for any lasting help in managing our monetary policy’. The following week, Richardson was present at the critical meeting with Thatcher and her ministerial colleagues. According to one account by a Bank insider, ‘it was left to the Governor to make the broad connected case – that there would never be a time without risk, nor a better time; that even with exchange control we had been greatly exposed; and that not much money went out on partial abolition’; according to another Bank insider, ‘at the end of the meeting she [Thatcher] turned to Gordon and said: “Now, you are the man who really matters on this, what do you say, do we get rid of it or not?” and Gordon said, “Yes,” and she said “Yes,” and five days later it was announced’. The announcement itself, on 23 October, stunned many – and ‘all evening’, reported the Guardian, ‘the Bank of England was bombarded with calls from people who simply could not believe what Sir Geoffrey had said’.

  At the point of abolition, the Bank employed some 750 staff in exchange control (including 100 in the branches). ‘Your poor people,’ Thatcher said privately to Richardson at the end of their key meeting, ‘two months before Christmas too.’ Some consolation perhaps was the pre-Christmas ‘Valedictory Party for Exchange Control’ for around 170 EC staff. ‘A full bar and light cocktail snacks at five cold pieces per head will be provided,’ noted the governor’s office. ‘No doubt Mr Groombridge will take the usual steps to ensure that the Court Room is cleared soon after 7.30 pm.’ What mattered rather more, though, was the avoidance of compulsory redundancies, through a carefully planned Voluntary Severance Scheme involving resourceful exploitation of the Bank’s close links with other City employers. Moreover, when some years later there occurred the collapse of Norton Warburg, a firm of investment advisers and money managers who had been meant to be looking after the severance pay of some of the exchange controllers, the Bank made good the controllers’ losses. A last word on exchange control itself, 1939 to 1979, goes to Dawkins himself. ‘Now it has all gone,’ he wrote in the Old Lady soon after abolition. ‘What, I wonder, will a future historian make of “matching benefits” or “115% cover” or “switch and surrender”? Will he understand what it was all about and will he detect in the ashes of defunct controversies the fire, passion even, that once animated them? Probably not.’3

  Within months of the end of its exchange control function, the Bank underwent an even more consequential domestic development.
The intellectual heavy lifting had already been done by George Blunden (especially) and Lord Croham between summer 1978 and spring 1979, before on 16 January 1980 the governor announced, in a message to all Bank staff, that from March the institution was to be organised into three divisions: financial structure and supervision (following the 1979 Banking Act); policy and markets; operations and services. ‘The chief cashier,’ he went on, ‘will in future be responsible only for banking work and will no longer be concerned with monetary policy and its execution, and will cease to exercise administrative responsibilities ranging more widely over the Bank as a whole.’ In effect, although unstated in the announcement, this severe downgrading of the chief cashier’s reach would enable the four executive directors (including the now former chief cashier, John Page) properly to fulfil executive responsibilities; and they would be aided by the newly created posts of associate director (just one, Anthony Loehnis) and – instead of heads of department – assistant director (six of them). Later that month, two bank chairmen (including Sir Jeremy Morse of Lloyds) called on Richardson in order to ask ‘what points of contact’ for their chief executives would ‘principally replace the Chief Cashier’, prompting the explanation that one of the new assistant directors, Eddie George, would become their ‘best friend’. Taken as a whole, the 1980 restructuring marked probably the biggest internal shake-up in the Bank’s history. ‘These changes have, in my view, now made it possible for the Bank to become in due course a modern institution,’ reflected Christopher Dow later that year. ‘The Bank had been run by a dead hand [that is, the chief cashier] from the past, and was certainly by far the most tenaciously conservative institution I have had anything to do with.’ Yet observing how ‘the detail of the reorganisation created a field day for economists’, and even though he was chief economist himself, Dow did have a concern: ‘One could not but feel that there had been over-promotion. At the time there seemed too great an emphasis on intellectual advice, as against intuition, practice and experience, with some danger of dividing the Bank.’4 Almost a quarter of a century after Cobbold had publicly warned that the Bank was not a study group, this was a significant shifting moment.

  Government/Bank relations in the early 1980s were as bad as at any time since the days of Cromer, and this time round Labour was not even in power. Howe subsequently wrote that he had come ‘to rely a good deal’ on Richardson’s ‘impressively measured wisdom’, but no such encomium would appear in Thatcher’s memoirs. Those privileged to watch the two of them in uncomfortable action together – the ‘canine’ politician, the ‘feline’ central banker – were struck by the hopelessness of the personal chemistry, at least after the initial, quasi-honeymoon phase. He found her strident, impatient and almost wholly unwilling to accept that practicalities, not ideology, should determine the workings of monetary policy; she found him patronising and vain, as well as frustratingly unwilling to take a strong, readily comprehensible line, quite apart from his being tainted as a survivor of the old corporatist order. ‘What do you think of Gordon?’ she at one point asked her chief scientist. ‘Gordon who?’ he asked. ‘Oh, you know,’ she replied, ‘that fool who runs the Bank of England.’ Nor did two other things help the larger relationship: that Thatcher tried to prevent the well-qualified McMahon, an unabashed Keynesian, from becoming deputy governor in March 1980; and that Lawson as financial secretary successfully insisted on becoming the ministerial conduit between Bank and Treasury, which (in Lawson’s words) ‘greatly upset Richardson, who felt that, as Governor, his relations should be exclusively with the Chancellor except when he wished to see the Prime Minister’.

  By early 1981, the governor was talking to colleagues about resigning (‘Can you give me one good reason why I should stay in the job?’), but decided against (‘I stay so as to preserve my institution’); and in fact relationships did stabilise over the next couple of years, with instead perhaps greater tensions between Bank and Treasury than between Bank and ministers – tensions not helped by a continuing degree of personal friction between Richardson and the permanent secretary Sir Douglas Wass, both of them alumni of Nottingham High School. Certainly the Treasury was out for its pound of flesh in these years. ‘I have to ask you to make a renewed effort to live within the cash limit [imposed on the Bank’s charges to the Treasury for doing its business] the Chief Secretary has approved,’ Wass wrote to McMahon in April 1982. ‘I find it difficult to believe that this cannot be done.’ Such an approach, reflected McMahon, involved ‘a quite unacceptable analogy between the Bank and a non-departmental body in receipt of a grant’. Not long afterwards, there occurred a notable stand-off over the question of how much the Treasury should know, whether in advance or at the time, about any support operation that the Bank felt compelled to undertake. ‘The Governor was incensed,’ noted Dow about Richardson’s reaction to Wass’s demand for greater knowledge. ‘It touched intimately the Bank’s right to do what it would with its own, and moreover seemed impracticable, since decisions on such matters could have to be made quickly. For many months he refused to reply to, or even acknowledge, Wass’s letter, which made Wass berserk.’ Eventually, persuaded by McMahon and Blunden, he did reply – stating that (in Dow’s summarising words) ‘all our support operations (which in truth had not been large recently) had come out of our reserves, and that our accounts had been audited, and had been presented to Parliament’.5

  The Bank’s most uncomfortable year, by some distance, was 1980. In March, even as the world learned of the government’s Medium-Term Financial Strategy, the Bank was starting to think about trying to shift some of the focus away from monetary policy and towards the exchange rate – notwithstanding the warning from Thatcher’s favourite economist, the hard-line monetarist Milton Friedman, at a No. 10 seminar the previous month attended by Richardson, that it was incompatible simultaneously to pursue targets for the money supply and the exchange rate. Conveniently for the Bank, in terms of seeking to move the focus, there already existed the European Monetary System (EMS), linking the exchange rates of EEC currencies, that had begun in March 1979 without British participation. Now, a year later, McMahon argued that it had ‘proved a flexible mechanism’ and was ‘likely to go on doing so’. He then spelled out the particular attraction:

  I think it is fair to say that many of us fear that in due course the overriding position given by the present Government to £M3 targets as the anti-inflationary engine will be weakened by disappointing economic, social and political developments. If this were to occur there could be a strong case for at least complementary support in bringing down inflation through linking our exchange rate to those of a less inflationary group of countries. Some of us would feel that such a constraint would have at least as much a beneficent effect on wage bargaining as the monetary targets. None of us, it should be emphasised, would in this way be looking for an exchange rate constraint as a ‘softer’ discipline – rather as a possibly more effective one.

  A few days later, Richardson told Howe that ‘the Bank had always been more favourably disposed towards EMS than the Treasury’, adding that he ‘thought it inevitable that, sooner or later, the UK would have to join’; while by May, in the context of what had become a punitively high exchange rate for British industry, as well as broader government policy ‘obviously coming under great strain’, McMahon was raising the possibility that the Bank should ‘abandon our hands-off policy and intervene heavily in an attempt at least to prevent further increases in the rate’, not least given that an ‘incidental advantage might be that this could be a half-way stage towards entry to EMS which I think may turn out to be a useful option for us in the not-too-distant future’.6 All this was in practice looking ahead to what would unfold over the next ten years or more. But for the moment it was monetarism or bust at No. 10.

  On that all-consuming front, the subject at times of intense theological debate, the cardinal fact during the summer of 1980 was that, as an inevitable if delayed consequence of the abolition of exchange co
ntrols, the Corset – the Bank’s supplementary special deposits scheme that had been reluctantly introduced back in the even darker days of December 1973 as an instrument of monetary control – no longer operated from July, immediately causing a dramatic and unwelcome spike in the money supply, as measured by £M3. ‘First guess’ figures for July itself were available by the 29th of that month, with Eddie George warning Richardson and McMahon that once they became public they would ‘come as a severe shock to the markets, abruptly extinguishing current hopes for a further cut in MLR in the next 2–3 months’. Even so, looking at the larger picture, he argued that it would be ‘premature to think in terms of more strategic policy reaction’, whether fiscal correction or more direct lending controls. And George concluded: ‘I believe, on the present information, we need to sit tight.’ Thatcher herself became aware on the 31st that there was a serious problem. ‘The removal of the corset,’ ran the briefing to her from the Central Statistical Office, ‘will raise the growth of M3 for a month or two; its underlying trend may be difficult to estimate.’ Next to which she simply wrote ‘!!!’. And by 5 August, the ominous message coming through, in a direct phone call from her private secretary to Richardson, was that ‘the Prime Minister wished to see the Governor more regularly’.