Some appearances notwithstanding, things were about to move. ‘Ed Balls [Brown’s economic adviser] did a good presentation on Bank of England independence,’ recorded Campbell the following month, with Balls in essence rehearsing the credibility-enhancing theme of his 1992 pamphlet; and in early May, during the VE Day 50th-anniversary celebrations, George had a quiet word with Blair that led to ‘a private meeting’ being set up for the 15th between George, Brown and Balls. Blair himself told Campbell on the 12th that he was ‘sure’, in relation to the Bank, that ‘independence was the answer’; but three days later at the Bank, it was a rather cagier affair:
Brown asked the Governor about his objectives for independence and whether there were any further evolutionary steps that could be taken in that direction. The Governor thought that it was difficult now to take a small step without taking the fundamental step of statutory autonomy. He explained that he did not campaign for independence as such but for stability. He said that monetary policy decisions were seldom clearcut – they involved a balancing of risks, but independence would affect where that balance was struck.
Then, after Brown had asked whether the Bank had ‘sufficient sources of advice’ and ‘whether the Governor’s regional advice was adequate’:
Brown said that he wanted to run with the debate about the status of the Bank of England rather than trying to anticipate it. He wanted the Labour Party to accept the changes that had already been made in party policy, and the need for continued change, but he did not want to move faster than he could carry the party. The Bank should look at proposals affecting the Bank of England in the round rather than at specific rhetoric. Some of the proposals might, for example, be couched in terms of ‘reforming the Bank of England’ but the substance was likely to be broadly acceptable to the Bank.
The timing was significant, because two days later Brown was due to give a big-picture speech, ‘Labour’s Macroeconomic Framework’, to his party’s Finance and Industry Group. In it he talked of a ‘prudent’ fiscal strategy, unveiled ‘the golden rule of borrowing’ he would be following in government (‘over the economic cycle, government will only borrow to finance public investment and not to fund public consumption’), committed himself in monetary policy to inflation targeting and enhanced transparency, and declared that he was intending ‘to consider whether the operational role of the Bank of England should be extended beyond its current advisory role’. That tantalising hint came, however, with two riders. First, ‘we are not in the business of depoliticising interest rate decision-making only to personalise it in one independent Governor’; and second, ‘the Bank must demonstrate a successful track record in its advice’.53
Regular contact between the Bank and New Labour continued, and in November 1996, with the election less than half a year away, George gave a positive update to the Governors’ Committee (GOVCO, comprising King, Kent, Plenderleith and Foot as well as Davies and himself):
He believed that the Bank was well plugged into the thinking of the Labour Party. On monetary policy, he interpreted Labour as being clearly committed to having an inflation target, and being prepared to move further towards independence. They had floated the idea of a Monetary Policy Council, although as yet their thinking on this was imprecise. He thought that their ideas were running along the lines of some form of delegation to the Bank which would not require legislation, but on the basis that the Bank would create a Monetary Policy Council. He had made it clear to Gordon Brown that it was not acceptable to have such a Council comprise representatives of interest groups who would be imposed on the Bank. We must have professional people on the Council, and this would mean primarily academics, plus some people with a financial and/or industrial background who did not have a conflict of interest. The Governor said that he thought the Labour Party understood this point. There was clearly a long way to go, but the basic proposition being put forward by Labour was not unreasonable, and it could lead to an outcome anywhere in a range from something along the lines of the current arrangements to at the other extreme a statutory change towards independence.
By January the proposed advisory body was being called the Monetary Policy Committee (MPC), and King and his most senior colleagues were discussing possible external members. ‘Reputation and the absence of any controversy surrounding the name’ were King’s criteria, while in response to Davies wanting at least one woman he countered that ‘we should not compromise on quality, and we should put forward the best names irrespective of their sex’. For his part, Foot ‘wondered whether we could think of any high-quality former politicians, including people who would leave political life at the election’, but ‘admitted that he could not think of any, and GOVCO agreed with him’.
In early February they returned to the subject of the putative MPC. Their working assumption was that Labour envisaged ‘an initial phase of an advisory MPC’, prior to ‘operational autonomy’ for the Bank; but they wanted ‘as a minimum’ during that transitional advisory phase that ‘the Chancellor [that is, post-election Brown] should make a statement clarifying that the advisory phase, including a Monetary Policy Committee, was part of a process intended to lead to operational independence’ – and that ‘this should convey the message that the process involved altering the balance of power between the Bank and the Chancellor’. GOVCO also had a couple of further MPC wishes: not only ‘no voting’, on the grounds that ‘voting would foster division not cohesion, and the outcome of voting would be more likely to leak’, but also that its composition should be four Bank people and three externals. Next day, 6 February, George formally told Brown and Balls that the Bank welcomed the creation of an MPC, to which Brown responded by agreeing that ‘the advisory stage should be a stepping stone to operational independence’ and that ‘it was important to avoid interest group representatives’, while at the same time observing that ‘both sides should be in agreement on the appropriateness of appointees’. By the end of the month he had publicly committed himself to an advisory MPC, and in early March the governor met with King to fine-tune his thoughts:
The Governor said that he was very excited about the prospects for upgrading the presentation of data at the first round Monetary Policy Committee meeting. In fact, he wanted to think about the idea of creating an MPC room which would be fitted out with the necessary technology.
The Governor added that, as part of the presentation of data and analysis, he wanted to make more of the markets analysis than we do at the moment. He had been very interested by WAA’s [Bill Allen’s] material on the shape of the yield curve …54
Soon afterwards, the date of the election was set – 1 May – and no one expected other than a change of government.
During all this, the main focus on both sides was on the monetary policy aspect – but what about the supervisory? ‘Darling confirmed that Labour was minded in due course to transfer supervision to a separate agency,’ reported Central Banking after interviewing the party’s spokesman on the City in early 1995 (probably before Barings), ‘but emphasised that there would be no “wholesale tearing up” of the regulatory system.’ Definitely post-Barings, Brown told George in May that year that ‘the Labour Party was leaving open for the present the question of the regulatory structure for financial services’; George ‘thought this was wise – there were many aspects to this question’; and the governor ‘explained the advantages for the central bank of having some involvement in supervision to pursue its financial stability objectives’. That sounded reassuring enough, while a year and a half later George still seemed reasonably sanguine. ‘We could see the case for Labour’s suggested consolidation of securities regulation,’ he observed in November 1996 to GOVCO, ‘but he thought that that would be quite enough for them to be going on with. We would resist absorbing banking regulation into securities regulation …’ Three months later, in his February 1997 meeting with Brown, the issue was very much the tailpiece of the dialogue. ‘Finally, Brown mentioned financial regulation,’ noted the govern
or’s private secretary, Andrew Bailey; and the shadow chancellor ‘stressed that Labour did not favour major change’.55 There, to all intents and purposes, the matter apparently rested until the election.
Later that February, on the 20th, Brown was in New York and met, not for the first time, the by now renowned head of the Fed, Alan Greenspan. Brown was accompanied by Balls and Geoffrey Robinson, and the latter would record how all three of them had been struck by Greenspan’s remark that it was ‘unfair’ to expect politicians – as opposed to central bankers – to take unpopular interest rate decisions. The official policy position, however, did not change. Although Blair in January had remarked to Campbell that ‘the way to really fuck the Tories was to announce during the campaign that we would make the Bank of England independent’, Labour’s election manifesto went no further than affirming a commitment to ‘reform the Bank of England to ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation’. On 23 April, just over a week before polling day, Davies reported to colleagues what Deryck Maughan of Salomons had just told him: ‘He [Maughan] had recently talked to Brown … He [Maughan] had argued strongly that he [Brown] should move on Bank independence as quickly as possible. Brown said there was a problem with “public opinion”.’ In fact, perhaps influenced by that conversation, the plates were about to shift. The exact timings are not yet documented, but the probability is that it was on the 28th, the Monday of election week, that Brown in effect said to those around him, ‘Let’s go for independence’; and over the next couple of days, Balls was mainly responsible for drafting a letter to the governor setting out the new government’s plans not only to make the Bank independent, but also to move banking supervision to a new statutory regulator.56 The Bank, meanwhile, continued to assume that what lay ahead, in the short term anyway, was a purely advisory MPC.
New Labour duly won its May Day landslide, and by the afternoon of Friday the 2nd Brown and his men were occupying the Treasury. The new chancellor’s preference was to go for the big-bang approach, announcing simultaneously the following week that the Bank would be gaining independence over monetary policy but losing banking supervision. In many ways regrettably, given what transpired, he was persuaded by his permanent secretary, Burns, to split the draft letter into two, with the supervisory aspect of the announcement to be delayed. Another Treasury official exercising influence over Brown was Gus O’Donnell, who apparently persuaded him to add to the monetary policy part of the original letter the stipulation that debt management would be moved from the Bank to the Treasury – a turf desire deeply entrenched in the latter’s institutional wish-list, while also playing to Brown’s and Balls’s concern that the new Bank did not become an overmighty subject. Meanwhile, the governor was invited to come to the Treasury early on Monday the 5th, a helpfully timed bank holiday; and Brown on the Sunday afternoon checked with the new prime minister that he was content with the proposed arrangements and that there was no need to consult the Cabinet – in both cases, no problem.
On that historic Monday morning, Brown handed over two letters to a much surprised George (expecting to be discussing the composition of the advisory MPC), one that would be for public consumption the following day and the other very much not. The first letter – headed ‘The New Monetary Policy Framework’ and stating that ‘the Government intends to give the Bank of England operational responsibility for setting interest rates’, in order ‘to achieve an inflation target which the Government will determine’ – noted that the governor would be supported by two deputy governors; that ‘operational decisions on interest rate policy will be made by a new Monetary Policy Committee’ (five internals and four externals), meeting monthly; that the Court would be reformed in order to broaden its representativeness; and that ‘the Bank’s role as the Government’s agent for debt management, the sale of gilts, oversight of the gilts market and cash management will be transferred to the Treasury’. The governor apparently took that last aspect wholly on the chin and was delighted by the larger sudden development: for him, control over monetary policy, as the best means of checking inflation and providing stability, had long been the prize.
The second letter – headed ‘Banking Supervision’, dated 6 May (like the first letter), and signed by Brown in red Biro – took rather a lot for granted:
As you know, our Business Manifesto commits us to restructuring the regulation of financial services. It is the Government’s intention to introduce the necessary legislation at an early date. I stated that it was the Government’s intention to consider transferring part of the Bank of England’s responsibility for banking supervision to another statutory body.
I am pleased that you agreed that consultation will now start on this basis.
A brief exchange between governor and chancellor about the implications of the second letter then apparently ensued. What we know for certain is that George left the meeting not only jubilant that the supreme prize had been secured, but believing that the Bank would be fully consulted about the issue of its supervisory role – a belief arguably at some variance, surprising in such a realist, with the letter itself, but perhaps at less variance with Brown’s oral assurance, unless of course that assurance was actually more ambiguous (‘shifty’, according to one unsympathetic observer) than George heard it to be. Given his presumably heightened emotional state, that may well have been what happened. In any event, later that day senior colleagues were summoned to the Bank to be told the great but still confidential news, while on the supervisory side George assured them that the Bank would have a proper opportunity to make its case before a final decision was reached.57
Remarkably, there were no leaks. ‘The effect was electric,’ recalled the Observer’s William Keegan about the impact of Brown’s announcement of Bank independence at the press conference on the Tuesday morning. ‘I want British economic success,’ declared Brown himself before turning to the specific Bank aspect, ‘to be built on the solid rock of prudent and consistent economic management, not the shifting sands of boom and bust’; after spelling out the changes, he characterised them as ‘British solutions, designed to meet British domestic needs for long-term stability’. During the questions that followed, he was asked, ‘Can we assume that the Bank’s supervisory role will now be hived off to a new organisation?’ To which Brown replied: ‘There will be further discussion, as we said in our manifesto, about regulatory responsibilities generally and the conclusions of these discussions will be reported at the appropriate time.’ That exchange received little attention, but the granting of monetary policy independence received a great deal – most of it positive. ‘GB,’ recorded Campbell next day, ‘got a terrific press re Bank of England independence, deservedly, though there was too much “it was Ed Balls’ idea” around.’ The Independent set the tone (‘Welcome to the modern world’), while from opposing flanks came obliging noises from the Daily Telegraph (‘a cautious welcome’) and the Guardian’s Will Hutton (looking ahead optimistically to ‘a Bank of England that is more distant from the “gentlemanly capitalist” culture of the financial system than any we have so far experienced’). Critics included Keegan (‘I believe, with only modest reservations, that Labour has taken leave of its senses’) and The Times’s Anatole Kaletsky (claiming that Brown was ‘locking the pound in a golden casket and throwing away the key’). Perhaps the weightiest of the early verdicts was the Economist’s. ‘The move is welcome and long overdue,’ reflected its editorial about what it called ‘an astonishingly bold start for the chancellor’. But in practice, it warned, ‘the Bank will be engaged in the highly political task of choosing how many jobs to sacrifice in order to hit the inflation target quickly rather than slowly’; and accordingly, ‘the true case for independence is not that there is no democratic loss, but that the loss is more than matched by the economic gain’.58
In the Bank itself during the week and a half after Brown’s bombshell, some very mixed feelings were
almost certainly in the air. As early as that Tuesday afternoon, when George chaired a meeting of senior officials to discuss the way forward, one participant was struck by the depressed body language of quite a few of those present, especially among ‘the generalists’. Nor is it psychologically impossible that the governor himself, with his beloved Bank on the cusp of fundamental change, was coming down from his high. When he heard the following week that the Monetary Analysis Division ‘wished to host an academic conference associated with the work on openness and growth (which was going very well)’, and that ‘as a part of this they wished to hold a dinner in the Court Room’, it was perhaps telling that his reaction was that ‘this was inappropriate’ and that indeed ‘he was not sure that a dinner was necessary at all’. Unsurprisingly, given his own particular background in the Bank, his main focus was on debt management and related activities, where it seems that his initial acceptance of what Brown and the Treasury were proposing soon became quite heavily qualified. At a meeting with Burns on 9 May – which included the nugget that ‘Burns had mentioned to the Chancellor the possibility of changing the Bank’s name, but the Chancellor’s initial response had been that Bank of England was a good brand name’ – he observed that he ‘could not think of another central bank that did not act as government banker’; while at GOVCO a week later he took a forceful line: ‘It was important that we began by considering which functions and activities we thought were the key to preserving the Bank’s status as an institution. A key element was a presence in the markets. And there were links between debt management and monetary policy which we should not ignore …’
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