Till Time's Last Sand

by David Kynaston

  ‘I am sitting on the fence and I have not reached a hard and fast opinion on what is usually called the independence of the Bank of England,’ the current chancellor told the Committee. But in December 1993, five months after Clarke’s uncharacteristically hesitant words, Watts and his colleagues came off the fence in their report. They wanted ‘the maintenance of price stability’ to be ‘the primary objective of monetary policy’; pronounced in favour of ‘institutional change’, involving ‘the transfer of authority from the Treasury to the Bank’, in turn leading in the latter to ‘the creation of a strong and independent Monetary Policy Committee’; and accepted that, subject to parliamentary approval, the government ‘should have power to override the Bank’s objective of price stability temporarily and in exceptional circumstances’. Critical, insisted the report, was ‘the establishment of clear lines of accountability and answerability to Parliament’, and it offered two instructive comparisons: ‘There is no such provision in the German arrangements and, however acceptable they may be in their own context, we do not believe that they would be acceptable or workable in the United Kingdom. The lack of direct answerability to Parliament, as distinct from the Executive, also seems to us to be a serious drawback in the New Zealand arrangements, which in other respects have clear attractions as a model for the United Kingdom.’26

  The overall direction of travel was becoming clear enough, not only in Britain. ‘The demand for greater independence of the central bank has come to be the most popular answer to the problem of inflation that was once reserved for the ERM,’ the Treasury’s Burns rather tartly observed in print that year, in the context of Belgium and France liberating their central banks, with Spain and Portugal preparing to follow suit; while in his valedictory Financial Times interview, Leigh-Pemberton noted that central bank independence was an idea that was ‘gathering momentum all round the world’. There were two other especially telling indicators, the first being the surprising degree of movement on the Labour side. ‘It is now time to reform radically the Bank of England and the conduct of monetary policy,’ declared the shadow chancellor, Gordon Brown, in the 1993 document Labour’s Economic Approach. ‘The Bank must be made more accountable and its decision-making bodies be made both more open and more representative.’ Here the key influence was the young Ed Balls, who the previous year had written a Fabian Society pamphlet, called Euro-Monetarism, in which he argued that an independent Bank, properly accountable to Parliament, would give a future Labour government anti-inflationary credibility with the financial markets and thereby provide the opportunity to concentrate on fiscal and supply-side policies. The other indicator was the impressive cast – including Charles Goodhart (no longer at the Bank), Sir Peter Middleton and Sir David Walker – that assembled as an independent panel under the chairmanship of Lord (Eric) Roll, president of Warburgs, to produce a report, Independent and Accountable: A New Mandate for the Bank of England, that appeared shortly before the Treasury Committee’s findings. ‘Eventually,’ declared the City’s great and good in their concluding passage, ‘a monetary framework with a stronger foundation will be required. The best time to put that system in place is now.’ But perhaps inevitably, given its importance, the debate was not yet over. ‘An issue that won’t go away’, ‘The smell of a red herring’, ‘Providing a stable framework’, ‘Time to counter the fashionable folly’, ‘Government’s job is to govern’ – such were the titles of some of the articles that appeared in early 1994 in Parliament’s own The House Magazine, with the respective authors being Lord Kingsdown (the former Leigh-Pemberton), Lord Healey, the MPs Alan Beith and Austin Mitchell, and Labour’s chief secretary to the Treasury back in the 1970s. ‘Eddie George, the new Governor of the Bank of England, is a very nice man, and more able and experienced than many of his predecessors,’ began Lord (Joel) Barnett, ‘but should he have control over much of the British economy?’ To which he answered at the end: ‘“Nice” Eddie George must not be given control. That has to be the proper responsibility of government.’27

  Whatever the swirling debate, the government – and Major in particular – remained immovable. ‘He was pretty blunt about how the government would handle the independence question,’ Pennant-Rea reported to George in November 1993 after a conversation with Burns. ‘No real interest; no plans for much of a response to the TCSC [the Treasury and Civil Service Committee, due to report in December]; Ministers hoped and expected that the issue would go away.’ Two months later, when the Treasury Select Committee sponsored a private member’s bill to implement its recommendations, the absence of government support meant that it got nowhere, though there was time for Diane Abbott, who had dissented from the report, to make a fierce anti-independence speech. Soon afterwards, in February 1994, Burns was again the messenger, this time on the phone to George:

  Sir Terry said that it was now the perception of Number 10 that the Governor was actively campaigning on independence. The Bankers Club speech and the Walden Interview [on television] seemed to confirm this. The Governor explained that Walden had been fixed up when he first became Governor and that he had tried very hard indeed to emphasise the importance of stability as the essential end result and not independence per se. He said that he was very sensitive to the issue and that the Bank would now go below the surface on it: it was not in the interests of the Bank or the Governor to campaign for independence. Sir Terry added that the Chancellor was more relaxed than Number 10.

  So he was, with Clarke happy enough at this stage to play his own game, which – in the specific context of a still uncomfortably high PSBR necessitating enhanced market credibility if interest rates were to be brought down – essentially consisted from autumn 1993 of taking incremental steps to increase the Bank’s authority. By the end of the year, not only was the Treasury no longer seeing the Bank’s Inflation Report ahead of publication, but the Bank had been given control over the precise timing of interest rate changes determined by the chancellor; while in April 1994, following months of negotiations and dummy runs, publication began of the minutes of the monthly Clarke/George meeting.

  This was indeed a development with a history. As early as the previous September, the chancellor had told the governor that he was ‘inclined to think publishing minutes would help underline the absence of political motives in monetary policy decisions’, as well as helping to ‘defuse controversy on Bank independence’; the media in early 1994 was full of damaging reports about George being forced to accept an interest rate cut against his better judgement, causing markets to plunge; and in March, a month before implementation, Clarke explained his reasoning to a no doubt sceptical – but ultimately consenting – prime minister:

  Publication of minutes will undoubtedly on occasion be uncomfortable initially. But over time markets and commentators should be reassured by more openness from us about the reasons for monetary policy decisions. This happened at the February discussions in advance of the last cut in interest rates on 8 February. Rumours of disagreement have been widespread in the press. I believe that publishing these minutes would help rather than hinder market sentiment, by giving a fuller background to the decision, and by airing the economic arguments for and against the cut. I think publication would add to the credibility of our monetary policy.

  Accordingly, he proposed a regular process by which ‘the minutes of each meeting would be published about 2 weeks after the subsequent meeting had taken place’; and he assured Major that he would make it publicly clear that ‘this has no implications for the question of Bank independence’. Reaction to the April announcement was broadly positive, while George saw it as a helpful step – in terms of greater transparency and accountability, as well as making the Bank further raise the level of its analytical work – towards independence. Yet whether the change really enhanced the credibility of monetary policy is perhaps a moot point. Right at the outset, one market participant, John Sheppard of Yamaichi International, warned that ‘the risk with this whole process is, if we do get to
the situation where the Bank is pushing for a rate increase and the Treasury is resisting, sterling is going to be vulnerable because of the market’s dislike of political interference’.28 In the old behind-closed-doors days the central banker had often won the argument; now, with the new transparency but no shift of ultimate power, the finance minister had significant personal capital invested in the outcome. Arguably it was the worst of both worlds.

  On 9 June 1994, some seven weeks ahead of the actual tercentenary anniversary, more than 130 governors or former governors from central banks around the world gathered at the Barbican Centre for a symposium, staged by the Bank, on the future of central banking. ‘I would not really be surprised if Montagu Norman were to make a guest appearance,’ remarked John Major as he opened proceedings. ‘It is, I am told, the largest gathering of central bankers ever to meet completely free of the restraining influence of finance ministers.’ As for the question on everyone’s mind, certainly among the home team, he merely observed that ‘the relationship between central bank and government is one in which some tensions are bound to arise, whether or not the Bank has some measure of independence in the discharge of its functions’, adding with little fear of contradiction that ‘what central bankers are for is to work for stable money – for a sound financial system – in whatever constitutional and political framework they find themselves’. Two papers were given, of which that on ‘Modern Central Banking’ by Stanley Fischer, an economist who was about to become the IMF deputy managing director, had the greater immediate impact. An intellectually heavyweight piece of work, claiming that ‘the evidence leaves little doubt that, on average, economic performance is better in countries with more independent central banks’, it concluded with a sentiment that the prime minister was no longer present to hear: ‘On her 300th birthday, it is time to allow the Old Lady to take on the responsibilities of independence.’ Reporting on the symposium, the deputy governor’s old shop remained on the side of the sceptics. ‘Banks such as the Fed and the Bundesbank have shown that a consensus can be established (partly by means of political accountability of one sort or another) to allow them the freedom they need – and the economic benefits look attractive,’ reflected the Economist. ‘Before that was accomplished, an independent Bank of England, taking a tough new line on inflation, could have rioters on its doorstep. That would be some birthday present.’

  The tercentenary celebrations were naturally extensive. Quite apart from the symposium on central banking, they included a conference on the Bank’s own history (a boiling day in the Oak Room), the release of a new £50 note carrying a portrait of Sir John Houblon, and on 27 July itself a service of thanksgiving at St Paul’s – where a packed congregation, including the Queen, listened to the governor reading the lesson from Mark chapter 10 (‘Go sell all you have and give it to the poor’). The press that day also accorded the Bank the full treatment, inevitably with the main focus on the independence issue. ‘The chances must be,’ predicted Philip Coggan in the Financial Times, ‘that it will take another failure of economic policy – for example, a long period in which inflation exceeds the present 1–4 per cent target – before there is a real chance of the Bank getting its wish.’ The present author, at the end of a historical piece in the Daily Telegraph, offered another prediction: ‘Gladstone’s ghost stirs uneasily. The conduct of monetary policy cannot but have profound political and social implications. Whatever the inbuilt safeguards for accountability, unelected central bankers will not be immune from coping with those implications.’ In short: ‘The Bank’s fourth century may be its most testing yet.’29

  The Bank had long been proud of its history, but for many years its Museum, sited in the Rotunda designed between the wars by Herbert Baker, was accessible only by appointment. ‘Except for visitors on a guided tour of the Bank,’ noted a memo in 1965, ‘we have made no provision so far for members of the general public to view the museum; nor do I think it right to allow casual visitors to the Bank to be admitted there.’ Even so, the memo suggested that a certain opening up would be in order, provided that all visits were authorised in advance; and a scribble on the memo agreed that this was ‘a good idea, as long as the casual rubberneck is kept out of the museum’. Two decades later, the decision was taken to construct a much expanded, up-to-date (interactive video screens et al), fully accessible museum – a museum that would retain the Rotunda but in which the outstanding architectural feature would be a meticulous reconstruction of Soane’s Stock Office of the 1790s. By early August 1988, just over three months ahead of opening, concerns had moved on from the architectural. ‘We are going to have to steer a clever course between making the Museum popular and a success without belittling the dignity of the Bank,’ Leigh-Pemberton observed to Blunden, adding that he had been ‘rather horrified’ by the proposed list of items to be sold in the Museum shop. ‘The only thing I have agreed from the shop while you have been away,’ the deputy governor reported back later that month, ‘is to approve some very nice chocolate bars reproducing a traditional Britannia which Terrys will make for sale in gold paper – not, I think, undignified.’ The governor annotated this reply with ‘Good!’ The Queen undertook the opening ceremony in November, and the following summer a very positive assessment of the work of the curator, John Keyworth, appeared in Country Life. ‘The Bank’s history is presented instructively in a popular style, using both Victorian display techniques (as in the tableau of the Bank ablaze) and advanced technology,’ noted Giles Waterfield. ‘An ingenious sequence of “period” interiors – looking, it must be said, rather like film sets – compresses considerable information into a restricted area.’ His only anxiety, given the Stock Office’s marvellous austerity, was that ‘the gift shop which has insinuated itself into a corner of the room (presumably as a contribution to the reduction of the national debt) should not be allowed to spread further’.30

  The Museum’s screens mirrored the inexorable rise and rise of information technology across the Bank as a whole during the 1980s and 1990s. Two particular projects, in both cases responding to failure elsewhere in the City, saw the Bank in notable high-tech action. The first, following the demise of LondonClear (administered by a panel of market representatives), was the creation in October 1990 of the Central Moneymarkets Office (CMO) – in essence, a computerised settlement system for sterling treasury bills, certificates of deposit, bank bills and other money market instruments. Earlier that year, a City messenger had been robbed in the street of £292 million of bearer securities, though in fact the decision to develop CMO had already been taken; and during the early 1990s, the daily physical carrying of £30 billion worth of money market instruments around the square mile was gradually phased out. The other project involved the Stock Exchange, which back in 1981 had started work on a computerised share-settlement system called TAURUS – a system that had still not come to fruition by March 1993, when the Exchange at last pulled the plug. That allowed the Bank to step in; and it successfully developed a paperless system, known as CREST, which became operational in August 1996. ‘What the Bank brings to the party is benign dictatorship,’ aptly commented Gordon Midgley, head of Management Services Division, in 1994. ‘Someone has to sit there and say no, without necessarily having strong reasons to do so.’ More generally, he also noted how the Bank’s IT philosophy had by then radically shifted: away from mainframe economies of scale, and instead towards cost savings through distributed computing. ‘Traditionally it was always the information technology department that had to justify how much was being spent,’ reflected Midgley. ‘Now it is the business managers. The information technology department will pay for the running costs, but that is all.’ The mid-1990s also of course saw the arrival of the Internet. ‘Now anybody anywhere in the world with a PC connected to a telephone line and the right software program can call us up and learn all about the Bank,’ helpfully explained the Old Lady in June 1996 in the context of the Bank’s first stab at a website. ‘But the Internet is not simply an ency
clopaedia – it is also a communications channel,’ added the magazine. ‘You can send messages around the world for the price of a local telephone call using the “net”. We had hardly been on the “net” a day before the first e-mail arrived.’ Appropriately, it came from California, home of the micro-computer revolution. ‘Our enquirer was puzzled by the concept of legal tender. Public Enquiries Group promptly e-mailed back a reply. Those in Public Enquiries Group are now becoming adept at answering all sorts of questions across cyberspace.’31

  There were changes too during these decades in the nation’s money. In November 1984, just over a year and a half after the introduction of the £1 coin, the Printing Works at Debden produced the final £1 note – a moment accompanied by plenty of ceremony (noisy ‘banging out’; printers wearing top hats, black ties and armbands; a coffin and wreath on display), but causing some 300 redundancies. Four years later, in the context of new printing technology offering a compelling combination of enhanced security and significant savings, it was announced that the ‘D’ Series notes would be phased out and replaced by an ‘E’ Series, sticking to the four existing denominations but in reduced size. The new notes would also feature a fresh portrait of the Queen. ‘She had been disappointed, though prepared to live with it as a matter of duty,’ had earlier, in late 1987, been the word from the Palace after she had been shown a proof; and in their discussion Leigh-Pemberton and Sir William Heseltine had agreed that ‘the photograph itself was not unflattering, but both the likeness and charm had deteriorated with each stage of the process’, in other words between the photograph and the engraving. Happily, in the event, veteran engraver Harry Eccleston was brought back from retirement, the plate was re-engraved, and the new portrait gave general satisfaction. The series was steadily rolled out in the new decade: the £5 note (George Stephenson succeeding the Iron Duke) in June 1990; the £20 note (Faraday replacing Shakespeare) in June 1991; the £10 note (Dickens for Nightingale) in April 1993; and a year later, ahead of the July tercentenary, Wren making way on the £50 note for the Bank’s first governor. All this was rather happier than the story of the so-called Debden Four – a quartet of employees who, working in the incinerator plant, conspired between 1988 and 1992 to steal more than £600,000 worth of banknotes that were due to be destroyed. After unwisely big-number cash deposits at the Ilford branch of the Reliance Mutual Insurance Society, arrests soon followed; ‘Banknotes “stuffed in woman’s underwear”’ was one of the more graphic headlines coming out of the ensuing judicial process; and the story was the subject of the 2008 feature film Mad Money, starring a well-known Essex girl, Diane Keaton.32